The Statute of Frauds and Loss Mitigation: The Requirement for a Signed Writing

The Statute of Frauds dates back to 1677, when it was enacted by the Parliament of England as "An Act for Prevention of Frauds and Perjuries." The Act requires that certain kinds of agreements be in writing and signed in order to be enforceable.  Contracts for the transfer of interests in land, such as deeds or mortgages, constitute one of the categories of agreements for which such a writing is required. 

Does an agreement to settle a mortgage foreclosure action require a signed writing in order to be enforceable? This issue arose in an Ohio case decided by the Ohio Supreme Court on March 4, 2014.¹

The Facts of the Case

The borrowers defaulted on their promissory note, and the lender initiated foreclosure proceedings. The note stated "No amendment, modification, recession, waiver or release of any provision of this Agreement shall be effective unless the same shall be in writing and signed by the parties hereto." 

After two written standstill agreements and a forbearance agreement expired, the court entered a judgment of foreclosure and ordered a sale.  Approximately 2 months before the sale date, the borrowers asked the lender for terms upon which the lender would release its mortgage.  Five days before the sale date, the lender sent the borrowers a term sheet, stating that it would cancel the sale and hold the foreclosure in abeyance for 45 days, upon delivery of a $200,000 deposit and an executed forbearance agreement, and that upon receipt of various other payments by specified dates, it would release the mortgage.  The term sheet also stated in bold print that until the lender executed a written agreement providing for forbearance, there would be no forbearance granted.

The borrowers claimed that they informed the lender two days before the scheduled sale date that they could only raise $150,000 for the deposit required for the forbearance, and that the lender advised that it was "doable." However, the lender claimed that the borrowers were only told that the lender "might consider" a lower deposit.  The lender then sent a draft forbearance agreement to the borrowers, which stated that the original $200,000 deposit was still required.  The borrowers responded in writing, stating that they would deliver a $150,000 deposit amount the next day.  The lender responded after the close of business the day before the sale, stating that it was too late to make the payment, and therefore, the sale proceeded as scheduled.  As a result, the borrowers were faced with a sizable deficiency.

The borrowers then filed a motion for relief from the judgment, claiming that they had a defense to present, because they had reached an oral settlement agreement with the lender. The trial court denied the motion based on the Statute of Frauds, without actually adjudicating whether any agreement was, in fact, reached.   The Court of Appeals reversed the decision, and the borrowers appealed to the Ohio Supreme Court. 

The Issues

Can the Statute of Frauds bar evidence of an oral agreement raised as a defense in a motion for relief from judgment?  If so, was the alleged agreement for an interest in land, and therefore barred by the Statute of Frauds?

The Court's Analysis

Ordinarily, it is the plaintiff who claims the existence of an oral agreement, and it is the defendant who argues that the oral agreement is a type that is barred by the Statute of Frauds.  In this case, however, it was the defendant claiming the existence of an oral agreement as a defense against the enforcement of the prior written agreements.

Ohio's Statute of Frauds² states: "No action shall be brought whereby to charge the defendant… upon a contract for sale of lands… or interest in or concerning them… unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith… ." 

The defendants argued that their allegation was not barred by the Statute of Frauds because they were not bringing an action, but rather, were raising a defense.  However, citing precedents dating back to the 1800's, the court rejected this argument and held that the Statute of Frauds applies regardless of whether the existence of an oral agreement is being asserted as a defense.

The court then turned its attention to whether the alleged oral settlement agreement falls within the purview of the Statute of Frauds.  The court explained that the alleged oral agreement included terms which, if fulfilled, would result in a release of the lender's mortgage, and that just as a mortgage is deemed to be a transfer of land, the release of the mortgage is also deemed to be a transfer of land. Therefore, the court held that the alleged oral agreement falls within the Statute of Frauds and the borrowers are precluded from asserting the oral agreement.

The Implications for Loss Mitigation

The court's decision that the borrowers are barred from even asserting the existence of the oral agreement appeared to be based on the fact that the alleged oral agreement included terms for the release of the mortgage.  Because a release of a mortgage was deemed to be a transfer of real property, the Statute of Frauds applied.  Hence, it seems clear that the Statute of Frauds will also apply not only to an oral workout agreement that includes terms for the release of the mortgage, but to other kinds of oral loss mitigation agreements involving a transfer of real property as well, such as agreements for a deed-in-lieu of foreclosure, a short sale, a substitution of collateral, a loan modification agreement involving a new or additional mortgage, or a short payoff.

The dispute in this case was a classic "he said – she said" situation.  The borrowers claimed that the lender said that the borrowers' proposal for a reduced deposit of $150,000 was "doable," and that it therefore constituted an agreement. The lender claimed that it only said that it "might consider" the $150,000 deposit, and that therefore it did not constitute an agreement. 

It is easy for a busy loss mitigation representative to unintentionally say an ambiguous word, and it is easy for distressed borrowers who are operating with wishful thinking, to hear what they want to hear.  This underscores the importance for both parties, following substantive oral discussions, to send a written confirmation to memorialize what was discussed or agreed to. 

By citing this case, the lender should be able to invoke the Statute of Frauds to bar evidence of certain alleged oral agreements.  However, why not avoid litigation altogether, or more easily prevail, by having a written memorialization? 

The lender's position in the case was reinforced by the provision in the note that: "No amendment, modification, recission, waiver or release of any provision of this Agreement shall be effective unless the same shall be in writing and signed by the parties hereto," and the provision in its written proposal stating in bold print that "Until the lender executes a written agreement providing for forbearance, there is no forbearance granted." 

These kinds of unambiguous written statements are very valuable in avoiding or defending the kind of dispute that arose in this case, and should be part of the loss mitigators' protocol. 

What About Ordinary Payment Plans or Forbearance Agreements?

Ordinary payment plans or forbearance agreements might not fall within the Statute of Frauds if they only involve curing the delinquency and do not modify the terms of the original note or mortgage for a release of the mortgage.  Nevertheless, oral negotiations for a payment plan or forbearance agreement should also be memorialized in writing.  Even though the borrower might not be barred by the Statute of Frauds from alleging that there was an oral agreement for a payment plan or forbearance, even a borrower-friendly judge would likely agree that the written memorialization showing that there was no final agreement thwarts the borrower's claim.