Daily Development for
Thursday,August 15, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; DEEDS IN LIEU OF FORECLOSURE; FRAUD: Fact that mortgagee's oral agreement to accept a deed in lieu of foreclosure was not binding due to the Statute of Frauds does not preclude an action for wrongful foreclosure, misrepresentation, fraud, or unfair trade practice.

Labarre v. Shepard and Parks, (No. 95-2095)(1st Cir. 1996).

In a prior action, a court had established the value of the secured claim as $230,000, but had not at that time ordered a foreclosure. Subsequently, lender initiated a foreclosure action. Lender's counsel verbally agreed with buyer's counsel that lender would accept a deed in lieu of foreclosure and give a credit for the "drive by appraisal" value of $150,000. Later, lender wrote borrowers that it had altered its appraisal of the property. It concluded that the value was only $127,000, and that it would give the borrowers a credit for only 70% of that. Borrowers refused this arrangement, and lender subsequently foreclosed and bought the property for $87,000.

At trial the jury found that the lender's counsel did make an agreement for a deed in lieu at the $150,000, and the court awarded damages based upon the theory that there had been "part performance" of the contract and that it had come "out of" the Statute of Frauds. On appeal, the First Circuit rejected that line of reasoning, but nevertheless concluded that the damages judgment should stand because the same damages were awardable on the fraud, misrepresentation and wrongful foreclosure claim. Then came the real bite. The court trebled damages for the unfair trade practice claim under the New Hampshire Consumer Protection Act and also awarded costs and attorney's fees.

The lender claimed that the court had gutted the protection to which it was entitled by the Statute of Frauds. The court saw the issue as "cut and dried" under New Hampshire law. State law, it held, was clear that the Statute of Frauds is only a bar to the enforcement of certain oral contracts; it is not a rule of evidence. The consequence is that the fact of the agreement is relevant to various other remedies.

Comment: This is not new law. But it is law that, in the author's experience, real estate professionals sometimes do not take into account. A clear oral agreement may give rise to numerous remedies notwithstanding the fact that it is not itself enforceable. In the words of a Contracts professor at the editor's school: "If a party enters into an agreement knowing that it is invalid under the Statute of Frauds, that party is liable for fraud to the same degree it would have been liable on the contract."

Needless to say, problems of proof in oral contracts cases often dissuade parties from pursuing their claims. But recourse to consumer protection acts like New Hampshire's might warrant a second look at these issues. The game may be worth the rather large candle.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

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