A recent opinion from the North Carolina Court of Appeals
addresses some common borrower defenses within the context of
foreclosure and statute of frauds issues: compromise and
settlement, accord and satisfaction, the covenant of good faith and
fair dealing, equitable estoppel and offset.
We're talking about Macon Bank, Inc. v. Gleaner, et al. , Nos.
COA14-809, COA14-810 (March 17, 2015).
We'll simplify the facts and posture.
The Case
Borrowers defaulted on two loans, which secured a home and
undeveloped land in Highlands, North Carolina. One of the
borrowers testified that an employee of the lending bank told
borrowers to "stop making any payments on the loans", and
that he told the lending bank employee "that he would give
[lending bank] the Highlands property 'in lieu of any
foreclosure or any other judgment or losses'". These
discussions were not in writing, but borrowers contend these
statements constitute a modification that satisfied any outstanding
debt. Borrower "eventually" gave the house keys to
the lending bank.
Bank later sued to foreclose and pursue deficiency. The
trial court granted summary judgment to the lending bank in both
lawsuits -- the reason for two suits is not important for our
purposes -- which were consolidated on appeal.
The Court of Appeals affirmed summary judgment in the bank's
favor. In doing so, the Court addressed some of the
borrowers' defenses.
Let's review.
Statute of Frauds Applicable to Certain "Commercial Loans"
Certain loans (and loan modifications) governed by North Carolina law must be in writing, such as "commercial loans" that are "in excess of fifty thousand dollars ($50,000)" subject to certain exceptions. N.C. Gen. Stat. § 22-5 (2009).
Accord and Satisfaction versus Compromise and Settlement
"The doctrines of accord and satisfaction and compromise and settlement carry the following two distinctions: (1) performance is necessary to complete an accord and satisfaction but is not necessary to complete a compromise and settlement; and (2) an accord and satisfaction may be based upon an undisputed or liquidated claim, whereas a compromise and settlement must be based upon a disputed claim."
Accord and Satisfaction and the Statute of Frauds
An accord and satisfaction as to a loan must satisfy the statute of frauds, if the statute of frauds is applicable to the loan.
The Covenant of Good Faith and Fair Dealing and the Statute of Frauds
The covenant of good faith and fair dealing, which is arguably implied in "every contract" governed by North Carolina law, cannot be breached where the alleged contract does not comply with the statute of frauds. This is because there is no contract from which to imply the covenant.
Equitable Estoppel and Statute of Frauds
"[E]quitable estoppel may override the statute of frauds so as to enforce an otherwise unenforceable agreement" but only where "where the party seeking to invoke the statute of frauds has engaged in "plain, clear and deliberate fraud." However, in this case, defendant "did not aver in his affidavit that [lender bank] intended to deceive him and thus defendants have not proffered any evidence of actual fraud".
Offset and Mortgagee-In-Possession
Borrower defendants assert that the lending bank owes them lost
rent from the date the lending bank received the keys to the rental
house through to the date of foreclosure -- an amount that must
offset from the debt owed to the lending bank --"because, as a
mortgagee-in-possession, [the lending bank] had a duty to account
for rent."
As to a mortgagee-in-possession of real property, the duty is
clear in terms of rents and the application of rents to the
indebtedness: "When he takes possession he becomes liable to
keep such premises in usual repair and to account for the rents and
profits received, in a settlement of the mortgage debts. The rents
with which a mortgagee or trustee in possession is chargeable are
applicable as credits on the debt secured by the
mortgage."
But what is the amount of rent applicable, where the mortgagor is
"over a barrel": "A mortgagee-in-possession
must pay the 'highest fair rent' and becomes responsible
for 'all such acts or omissions as would . . . constitute
claims on an ordinary tenant, because by entry and possession he
makes himself 'tenant of the
land[.]''""
But how do we determine if a mortgagee is a
mortgagee-in-possession? The Court articulates the standard:
"[A] mortgagee must exercise more than mere constructive
possession to become a mortgagee-in-possession."
Here, although defendants arguably have proffered some evidence
that plaintiff had constructive possession of the rental house upon
delivery of the keys, defendants proffer no evidence that plaintiff
exercised actual possession of the rental house or that they were
excluded from the rental house. Thus, the lending bank was not a
mortgagee-in-possession.
Therefore, no offset applies in this context.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.