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The Foreclosure
James R. Stillman
For a settlement agreement to
work, it has to be more than
an afterthought.
FORECLOSURE DISPUTES are difficult for
the borrower and lender alike. By their nature,
however, they not uncommonly settle on the
courthouse steps. As both the lender and borrower realize, the chief object of any settlement
agreement they reach is to resolve all issues pertaining to liability for the debt. But in the rush to
bring the matter to resolution there is always a
danger that something can be overlooked.
Parties forgo completing formal settlement doc-
umentation at their mutual peril. Costly litigation may follow over the enforceability of a stipulation between attorneys without the party’s
signature, an unwritten settlement read in open
court, during a judicially supervised settlement
conference, or before an arbitrator. So the lesson
is fairly clear: The terms of the settlement agreement have to be clear and complete if the parties
want to resolve the matter. This article will discuss how to do it.
James R. Stillman is a partner with Murphy Sheneman Julian & Rogers, P.C., in San Francisco.
The Practical Real Estate Lawyer
AGREEMENT • The aim of the settlement
agreement is to document clearly which claims
are released and which claims, if any, will be
preserved against third parties or additional
1. Describe The Agreement In General
In a written settlement agreement accompanying the borrower’s deed, the parties should
describe the general intent of the transaction,
state what value the parties are attributing to
the property and why, and include appropriate
representations regarding:
• Their understanding of the circumstances;
• Their appreciation of different options; and
• That counsel was consulted in deciding to
enter into the agreement.
2. State Release Of Claims Against Lender
If the release is in favor of the lender, the settlement agreement should contain an explicit
release by the borrower of all “lender liability”
claims if those are involved. See, e.g., In re Mann
Farms, Inc., 917 F.2d 1210, 1213-1214 (9th Cir.
1990) (borrower’s agreement “not to contest validity of note” did not waive tort suit against
lender); Welborn & Reynolds, Lender Liability in
California: A 1990 Update (Part II), 13 CEB Real
Prop. L. Rptr. 185, 193 (1990).
3. Use The Covenant Not To Sue
For a release in favor of the borrower, lenders
often prefer to grant debt relief in the form of a
“covenant not to sue” or, if necessary, a “release
of deficiency liability” in favor of the borrower
personally, rather than a satisfaction or release
of the mortgage indebtedness itself. See Clark v.
Fed. Land Bank, 423 N.W.2d 220 (Mich. Ct. App.
1987); Michael Madison, Use of Deeds in Lieu of
Foreclosure in Defaults and Workouts, 20 Real Est.
L.J. 247, 253 (1992).
July 2005
4. Be Specific Regarding
Continued Existence Of The Debt
The lender/grantee may be deemed to have
surrendered its unsecured claim for a deficiency
in the mortgagor’s bankruptcy case upon acceptance of the conveyance, unless the deed-inlieu agreement explicitly covers the point. In re
Fox, 808 F.2d 552, 554 (7th Cir. 1986); Bank
Independent v. Byars, 538 So. 2d 432 (Ala. 1988)
(settlement agreement had the effect of “superceding the debt”); compare 1 Grant S.
Nelson & Dale A. Whitman, Real Estate Finance
Law §6.16 at 586-87 (West 4th ed. 2005) (“up to
the value of the land, the mortgagor has a defense to any enforcement of the debt against
him regardless of whether it is technically alive
by agreement”).
5. Be Specific Regarding The
Right To A Deficiency Judgment
Avoid litigation over whether acceptance of
the deed in lieu extinguished the right to a deficiency judgment. See, e.g., PNC Bank, Nat’l.
Ass’n. v. Balsamo, 634 A.2d 645 (Pa. Super. Ct.
1993); compare Abrams v. Fed. Deposit Ins. Corp.,
944 F.2d 307 (6th Cir. 1991) (settlement stated
borrower would continue to be liable for deficiency). For sample language by which the note
is kept alive while the borrower’s personal liability is released, see, e.g., Jacobson, Drafting a
Deed in Lieu of Foreclosure Agreement (with Form),
10 Prac. Real Est. Law. 37, 61 (Sept. 1994).
6. Pay Special Attention
To Third-Party Claims
The lender should not give the borrower a
full “release of liability,” if third parties have
outstanding claims, arising from the borrower’s
operation of the property, for which the lender
does not wish to be solely responsible. Compare
Beasley v. Mellon Fin. Services Corp., 569 So. 2d
389 (Ala. 1990) (construction claims levied
against deed in lieu grantee).
Foreclosure Settlement
7. Do Not Make The Release So Sweeping
That The Debtor Becomes a Prevailing Party
Cover specifically the question whether, by
obtaining a release, the borrower is entitled to
claim “prevailing party” status for purposes of
seeking attorneys’ fees. See Heather Farms Homeowners Ass’n v. Robinson, 26 Cal. Rptr. 2d 758
(Cal. Ct. App. 1994); compare Pender v. Radin, 29
Cal. Rptr. 2d 36 (Cal. Ct. App. 1994) (settlement
not a basis for malicious prosecution claim),
with Ogle v. Price, Postel & Parma, 12 Cal. Rptr.
2d 199 (Cal. Ct. App. 1992) (order unpublished)
(settlement was “final judgment” for malicious
prosecution purposes).
8. Describe The Property
A clear description of what is being conveyed should be provided. Settlement parties
commonly bargain over whether the borrower
will be required to give some (or any) of the representations and warranties found in the usual
real estate purchase and sale agreement. In any
event, the well-represented lender must be able
to understand exactly what it is accepting, in
terms of title, condition, personal property, operating payables, and the like. The lender
should consider all the expenses and potential
liabilities associated with holding the property.
Do not wait until the closing of the settlement to
line up property management.
9. Plan For The “Taken Advantage
Of” Borrower Argument
A borrower who demonstrated considerable
negotiating acumen during the work-out may
re-appear in subsequent litigation prosecuted
by new management, or in the bankruptcy
court, as necessitous and taken advantage of.
The settlement agreement should recite that the
borrower has made an independent investigation of all circumstances, has been advised by
competent counsel, and has had a fair opportunity to review the calculation of the indebted-
ness or other matters contained in the agreement. See In re Venice Western Motel, Ltd., 67 B.R.
777, 781 (Bankr. M.D. Fla. 1986) (borrower “had
his attorney with him” and “had ample opportunity to conduct a thorough investigation”);
Sprunk v. First Bank Western Montana Missoula,
741 P.2d 766 (Mont. 1987) (settlement agreement
accompanying deed in lieu upheld).
In the commercial context, courts are generally unsympathetic toward the defense of “economic duress.” See, e.g., Sanders v. First Nat’l Bank
& Trust Co., 936 F.2d 273 (6th Cir. 1991) (not
duress for bank to demand additional collateral); Dahl v. Federal Land Bank Ass’n., 572 N.E.2d
311 (Ill. App. Ct. 1991) (deed in lieu not given
under duress); Gruver v. Midas Int’l Corp., 925
F.2d 280 (9th Cir. 1991) (franchise termination
agreement not a result of “economic duress”); see
also Goode v. Burke Town Plaza, Inc., 436 S.E.2d 450
(Va. 1993); Mellon v. Norwest Bank, 493 N.W.2d
700 (N.D. 1992). The refusal to negotiate a workout is not duress. See Racine & Laramie, Ltd. v.
California Dept. of Parks & Recreation, 14 Cal. Rptr.
2d 335 (Cal. Ct. App. 1992); Channel Home Centers
v. Grossman, 795 F.2d 291 (3d Cir. 1986).
10. Avoid Certain Waivers
A lender should refrain from demanding
that the borrower waive statutory protections
that implicate important state law policies, such
as the fair value defense, if not essential to the
settlement bargain, lest such waivers taint the
deal. See generally Jones, Contractual Waivers of
One-Action and Antideficiency Protections by
Debtors in Workouts, 15 CEB Real Prop. L. Rptr.
131, 136 (1992) (form).
11. Anticipate The Need For Potential
Review Of The Settlement Agreement
By A Regulatory Successor To The Lender
A settlement agreement (or commitment to
settle) must be “approved by the board of directors of the depositary institution or its loan com-