• March 26, 2015
"A Tough Knot to Crack" (photo by Jay Fanelli)

“A Tough Knot to Crack” (photo by Jay Fanelli)

Normally, when one party brings a motion to enforce a settlement agreement against another party, it is a matter of “buyer’s remorse.” In other words, one party to the deal wants to back out or re-neg. (Last year, I covered a particularly beloved dispute in which a litigant sought to weasel out of a settlement agreement because his name had been misspelled.)

But what happens when a litigant agrees to a particular transaction in a settlement (like the transfer of property) but, in the mean time, something happens and the litigant simply cannot do the deal (like he loses the property)? Can the disappointed counter-party sue to enforce the settlement when it’s become impossible for the other side? If the plaintiff is the one who cannot perform its part of the deal, does the defendant get to just walk away and pay nothing?

In Wells Fargo v. First Medallion Mortgage Co., Wells Fargo sued another lender taking the position that 1st Medallion had sold two bad loans to Wells Fargo. This kind of lawsuit is commonly known as “mortgage repurchase litigation” because, if a loan has not gone into default, the buyer of the loan (Wells Fargo, in this case) sues the seller (1st Medallion) and seeks to force the seller to buy the loan back.

After agreeing on a price to buy/sell one of the two loans at issue back, U.S. Mag. Judge Jeffrey J. Keyes explained that Wells Fargo:

discovered a problem. It turned out that the …Loan [that Wells Fargo had agreed to sell back to 1st Medallion] no longer existed, as the loan had gone into default during the settlement negotiations, and the property securing the loan had been sold through a ‘short sale’ for $80,000, thus eliminating the loan. In a short sale the mortgage property is sold for less than the value of the loan secured by the mortgage on the property. In this case, Wells Fargo would have been paid approximately $80,000 of the short sale proceeds, and the remaining obligations of the borrower on the $112,731.70 […Loan that Wells Fargo had agreed to sell back to 1st Medallion] would have terminated. It is not clear from the record how, at the same time that Wells Fargo was negotiating a settlement that involved conveying [a] Loan back to Defendants, it was also liquidating the … Loan in the short sale transaction.

But “It is axiomatic that this Court cannot order a party to perform an impossible task,” the Court reasoned, so it could not issue an order enforcing a settlement agreement on terms that are impossible to fulfill.

The decision is a little frustrating (certainly for 1st Medallion, at least). The settlement is only “impossible” because of Plaintiff Wells Fargo’s inexplicable “short sale” at a time when Wells Fargo had agreed to sell the secured loan to 1st Medallion. That is, the “impossibility” in this case was self-inflicted. On the other hand, 1st Medallion had advocated to the Court that “Wells Fargo should be required to dismiss all claims against them, without any payment at all, because [one of the two loans at issue could] no longer be tendered back to the defendants.” Defendants over-reached there. That was too greedy.

We’ll see if Defendants 1st Medallion and River Bancorp take a run at the issue again with U.S. District Court Judge Patrick J. Schiltz (D. Minn.) to whom they have a right of “appeal” (or, more accurately, a right to object to the Magistrate Judge’s order). I am not so sure I’d go for that if I were 1st Medallion’s lawyers. It’s a deferential standard and the case does not concern a very large pile of money. There was and is little left to fight over in this case…

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