Tuesday, October 11, 2011

Sneaky Lender Uses Loan Modification 'Pre-Negotiation' Agreement To Dupe Borrower Into Inadvertently Ratifying Void Mortgage, Waiving All Rights

Lexology reports on the use of loan modification pre-negotiation agreements that lenders use to screw over property owners:
  • The son and wife of the sole shareholder of an entity owning real property arranged for a mortgage loan to be made to the entity without the shareholder's knowledge or consent.


  • The son and wife represented to the lender that they had the authority to enter into the financing transaction in the borrower's name. After the mortgage loan went into default, the lender filed a foreclosure action.


  • In an effort to avoid foreclosure and reach a settlement or modification of the mortgage loan, the shareholder, on behalf of the borrower, signed a pre-negotiation agreement required by the lender, which:

    a) confirmed that the borrower's obligations were legal and enforceable;
    b) waived the borrower's defences, counterclaims and offsets; and
    c) acknowledged that the lender waived none of its rights or remedies under the mortgage loan documents.

  • After the parties failed to reach agreement on a modification of the mortgage loan terms, the borrower filed for bankruptcy and argued that the mortgage loan transaction was unenforceable because the son and wife lacked authority to enter into the transaction in the name of the borrower.

***

  • [For various reasons discussed in the story], the court held that the pre-negotiation agreement was enforceable.


  • The court also held that the mortgage loan transaction was enforceable because, among other reasons, the pre-negotiation agreement evidenced a ratification of the underlying mortgage loan by the shareholder of the borrower despite the fact that the mortgage loan was originally entered into by parties which lacked authority to enter into the mortgage loan transaction.

For more, see Enforceability of distressed mortgage loan pre-negotiation agreements (may require subscription; if no subscription, GO HERE; or TRY HERE - then click the appropriate link for the story).

See also, Borrower’s inaction ratifies unauthorized corporate loan (may require subscription; if no subscription, GO HERE; or TRY HERE - then click the appropriate link for the story).

For the court ruling, see In re Vargas Realty Enterprises, Inc., 440 BR 224 (S.D. N.Y. 2010).

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