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Getting an agreement in writing is an effective way to avoid misunderstandings regarding the terms of the agreement, or whether there actually was an agreement.  In the real estate loan loss mitigation context, various types of agreements, such as loan modifications, short sales, and forbearance agreements, are common.  The case of U.S. Bank vs. Stewart¹ decided by Ohio's Seventh District Court of Appeals on December 28, 2015, illustrates the importance for both borrowers and loan servicers, of ensuring that loss mitigation agreements are in writing and signed by the other party, in order for the agreement to be enforceable under the Statute of Frauds.

The Statute of Frauds, which dates back to an act of the parliament of England in 1677, is a requirement that certain kinds of contracts be in writing, signed by the party to be charged, and have sufficient content to evidence the contract.  An agreement to transfer an interest in land is one type of contract to which the Statute of Frauds applies.  Mortgages and modifications and releases of mortgages are transfers of interests in land, which generally must be in writing and signed in order to be enforceable.

In the Stewart case, the borrowers had a prospective buyer for a proposed short sale for an amount significantly less than the balance due on the mortgage. The mortgage servicer gave the borrower a letter agreeing to release the mortgage in connection with the short sale, on the condition that the closing take place by a certain date and that the servicer receive no less than a specified amount from the proceeds. 

The Statute of Frauds applies to such an agreement, because it provided for the release of the mortgage on terms materially different from the original mortgage. The letter signed by the servicer would be sufficient evidence of the servicer's agreement to the terms of the letter.  However, the short sale did not close as required by the terms of the letter.  Instead, the borrower claimed to have obtained the oral approval of an employee of the servicer for an extension of the deadline to close the short sale and an agreement for the servicer to accept a smaller amount from the proceeds.  When the short sale closed after the deadline imposed by the written letter, the buyer's lender attempted to wire transfer the smaller amount to the servicer, but the servicer rejected the funds.

The servicer subsequently commenced a foreclosure. Both the buyer and the buyer's lender argued that the oral approval by the employee of the servicer was enforceable. The servicer countered with an argument that the alleged oral approval was an agreement to release a mortgage and therefore was covered by the Statute of Frauds. Hence, the servicer took the position that its employee's alleged oral approval was unenforceable because it was not in writing and signed by the servicer, and as a result, the written letter was its only enforceable agreement pertaining to the short sale. Because the short sale did not close by the deadline imposed by the servicer's letter and the proceeds were less than the minimum required by the terms of the letter, the conditions had not been fulfilled.

The court, citing an Ohio Supreme Court case² dealing with an oral forbearance agreement, held that the alleged oral agreement to release the mortgage pertained to an interest in land, and therefore, the Statute of Frauds made the alleged oral agreement inadmissible in evidence. Therefore, the court held that the servicer justifiably rejected the funds because the closing took place after the deadline and the proceeds were less than required by the letter. 

The buyer and the buyer's lender both tried to circumvent the Statute of Frauds by arguing that: (1) the oral agreement was a settlement agreement rather and an agreement for an interest in land;  (2) the oral agreement did not modify an essential or material term of the written agreement; (3) the borrower had partially performed in accordance with the oral modification; and (4) the oral agreement and the delivery of funds in accordance with the oral agreement constituted an accord and satisfaction of the debt.  However, the court rejected all of those arguments.

There are exceptions under which an oral agreement may be enforced even if it does not comply with the Statute of Frauds.  One such exception is where the party who made the oral agreement admits it under oath.  Hence, in the Stewart case, if testimony could have been elicited from the servicer admitting that its employee had made the oral agreement, the case may have been decided differently.  

Because the case had been decided on a motion for summary judgment and affidavits, there was no trial.  The reported decision does not indicate whether the buyer or the buyer's lender had taken a deposition of the servicer or its employee in an attempt to elicit an admission of the oral agreement, but apparently, no evidence of an admission was submitted to the court.

The lesson for both borrowers and loan servicers is that regardless of the type of loss mitigation, both parties should meticulously ensure that any loss mitigation agreement or modification of an agreement is in writing and signed by the other party.  


¹ 2015-Ohio-5469.
² FirstMerit Bank N.A. v. Inks, 2014-Ohio-789