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Last Rev. 10/29/16 10:50am

Substance of Memorandum of Law to Declare Prenegotiation Agreement Invalid and Unenforceable

WARNING: Don't Sign Pre-Negotiation Agreements with Defense Waivers

FREE CONSULTATION FOR ANYONE CONSIDERING WHETHER TO SIGN A PRE-NEGOTIATION AGREEMENT OR DEFENSE WAIVER IN CASH COLLATERAL STIPULATION

The waiver of your defenses as to a mortgage foreclosure action, or mortgage foreclosure and sale, is or could be a singularly most devastating event for the client. To make sure that you understand how serious this defense waiver provision could be, I am willing to provide FREE CONSULTATION for anyone (i.e., the client, his/her/its lawyer or both) who is considering the approval of a document containing such a provision. The document could be called a "Pre-Negotiation Agreement", or a "Stipulation for use of Cash Collateral", or something as bold as "Stipulation Waiving All Defenses". A telephone call to me and a 10-minute conversation could save you your property, family, well-being and even your life. So, please give me a call. It's for FREE, with no strings attached.

Extracts from Memorandum of Law in Federal Court to Declare Pre-Negotiation Agreement Invalid and Unenforceable

C. Rebuttal Facts

1. The Pre-Negotiation Agreement (a copy of which is annexed as an appendix to the Appellants’ opening brief) does not contain any promise by the Bank to negotiate. The Pre-Negotiation Agreement states on page 1 (JA-75) that “Borrower has requested that Lender participate in negotiations” and that “As a condition to participating in the negotiations, Borrower has requested, Borrower and Lender have each required written confirmation and agreement as, the following:” (page 1, JA-75). But there is no agreement by the Bank to negotiate.

III. THE PRE-NEGOTIATION AGREEMENT WAS A TRANSFER OF PROPERTY INTEREST OF DEBTORS

See Point VI below.

IV. THE PRE-NEGOTIATION AGREEMENT IS A CONTRACT OF ADHESION

1. Agreement Concerns a “Necessity of Life” for the Mortgagor

More than 20 years of the Mortgagor’s life were spent in creating, improving and managing the Debtors’ four properties. His life has been spent with these properties, from a business and social standpoint, and the loss of these properties would be the loss of his self employment, business, assets for retirement, daily business and social activities centered around the four building, and further destroy his family through the economic devastation. Whether this was a “necessity of life” for the Mortgagor is a triable issue of fact.

2. Agreement is for the Excessive Benefit of the Lender

The Bank’s argument that “the Bank already possessed a valid lien on Debtors’ Properties” is false and misleading. The Bank did not have a valid lien on Debtors’ Properties. The lien was created by the unauthorized act of an unauthorized person, and there was no ratification of the unauthorized act by the Debtors. Thus, the Pre-Negotiation Agreement created (or purported to create) a valid lien for the Bank at a time when the Bank had no valid lien according to the allegations in the Amended Adversary Complaint. The Bank is wrong in assuming that it has a valid lien because this is what is at issue in the Amended Adversary Complaint. Activities subsequent to the execution of the Pre-Negotiation Agreement do not change the fact that at the execution of the agreement the Bank did not have a valid lien (as alleged in the Amended Adversary Complaint). The Bank cannot use the terms of the invalid agreement to prove anything.

The issue of invalidity of the Bank’s lien is an issue of fact.

3. The Bank Had an Economic or Other Unfair Advantage

The Bank had an economic and other unfair advantage by pursuing foreclosure on an invalid note and mortgage and being one day away from taking over the Debtors’ properties in the state action through a court-appointed receiver. This would have created major obstacles for the Debtors to obtain any relief from the consequences of the unauthorized note and mortgage, which were in an amount that the Debtors could never pay, and (as alleged) intended to result in a default by the Debtors and takeover of their properties by the Bank.

The issue of economic or other unfair advantage centers around the factual issue of invalidity of the Bank’s lien.

4. The Agreement was Offered on a Take-it-or-Leave-it Basis

The agreement was non-negotiable. The Debtors’ only choice was to have its properties taken by the court-appointed receiver who was getting set to take over the properties, upon his filing of the required undertaking. The Debtors’ attorneys filed for bankruptcy before this occurred and notified the receiver of the filing so that he would not spend any money on the undertaking unnecessarily.

The issue of a take-it-or-leave-it basis for the offering of the Pre-Negotiation Agreement if not decided immediately in the Debtors’ favor is at least a triable issue of fact.

5. The Agreement was a Product of Economic Coercion and Duress

By reason of an invalid note and mortgage, the Bank was one day away from taking over the Debtors’ properties and their revenues, with a note calling for a monthly payment of more than $89,000 (note rate) or $160,000 (default rate then applicable), both amounts well exceeding the amount that the Debtors could pay. Settlement was the only way to stop these payments from running quickly enough so that the Debtors’ equity was not wiped out by the monthly payments the Bank was claiming. This was the duress and coercion that prompted the Debtors to sign the agreement, to avoid the immediate loss of their properties, income and the life’s work of the Mortgagor, as to an agreement that had not been authorized by or known to the Debtors. The receiver had already been appointed and was ready to file his undertaking, at which point he would have taken over the Debtors’ properties.

This constitutes economic coercion and duress, and is a triable issue of fact.

V. THE PRE-NEGOTIATION AGREEMENT LACKS CONSIDERATION, IS ILLUSORY AND IS NOT ENFORCEABLE

The Pre-Negotiation lacks consideration. See Point I above. There was no fair consideration for the agreement because there was no agreement by the Bank to negotiate. The Pre-Negotiation Agreement was no more than part of the settlement negotiations which followed the agreement and not admissible under F.R.E.408(a).

In footnote 9 (page 16) of their brief, the Bank stated that the Pre-Negotiation Agreement considered by the court in U.S. Bank Nat’l Ass’n v. 23rd Street Dev., L.L.C., 2009 WL 3337595, at *3 (N.Y. Sup. Ct. Aug. 27, 2009) had “very similar terms to the one at issue here”. This is not the case, as the court in such case referred to the agreement and its “acknowledged ‘promise to negotiate’”.

Subsequent negotiation by the Bank and the Debtors does not change the terms of the alleged agreement. The agreement did not obligate the Bank to negotiate and therefore was an illusory contract, lacking consideration, and unenforceable.

VI. THE PRE-NEGOTIATION AGREEMENT IS A FRAUDULENT CONVEYANCE

The Pre-Negotiation Agreement was not a binding agreement to negotiate and constituted no more than settlement discussions, excluded under F.R.Ev. 408(a).

Whether the Bank’s Note and Mortgage are valid was the issue before the Bankruptcy Court. Invalidity was asserted because of the lack of authorization of the Note and Mortgage by the Debtors. Prior instances of misconduct by the unauthorized person, were at best issues of fact as to his apparent authority to bind the Debtors.

The fact that the prior Sovereign Bank loan was paid off using part of the proceeds of the Bank’s $8,000,000 loan does not mean that the Bank’s loan was valid. There may or may not be any right of the Bank to credit for such payment in whole or in part. Assuming there was no apparent authority or actual authority of the unauthorized person to bind the Debtors to the Bank’s loan, the Bank’s voluntary pay-off of the Sovereign Bank loan caused the Debtors to lose a highly favorable loan, at 6.125% interest, with a monthly payment of only $30,380 [JA-226], and be saddled with the Bank’s loan of 12.5% interest (24% default interest) with a monthly payment of $89,834.35 [JA-226] (and monthly default rate of $160,000). The Bank’s terms were substantially higher than the Debtors could pay and necessarily would result in a default by the Debtors. For such reason, paying off of the Sovereign Bank loan by the Bank was not a benefit to the Debtors and the Bank should not receive credit for all or a substantial part of its $5,000,000 payment to Sovereign Bank.

The Pre-Negotiation Agreement is invalid and is not a ratification of the Bank’s Note and Mortgage.

The Bank’s Note and Mortgage were usurious and void, and it is against public policy for a criminally usurious loan to be capable of ratification.

The Bank did not hold a valid senior claim against the Debtors’ property at the execution of the Pre-Negotiation Agreement. The Bank secured claim was invalid for lack of authorization by the Debtors, and the Pre-Negotiation Agreement was, in effect, a confession of judgment, containing all of the language and signatures required of a confession of judgment. The Pre-Negotiation Agreement, executed by the Mortgagor’s principal, stated (at JA-76):

7. Borrower hereby acknowledges and agrees that the Loan Documents contain and constitute all of the agreements among Lender and Borrower. Borrower hereby acknowledges and agrees that the Loan Documents continue to constitute legal and enforceable obligations of Borrower, without any defenses, counterclaims or offsets, including any such defenses, counterclaims, or offsets raised by Borrower or Guarantor in the foreclosure Action.

Having signed a document entitling the Bank to obtain a judgment against the Debtors on the Bank’s Note and Mortgage, the Debtors have consented to the entry of a judgment against them, which is the equivalent of a confession of judgment or consent judgment. The Debtors gave up their interests in the secured property through this document (if the document is valid), which amounted to a conveyance to the Bank of the Debtors’ interest in the properties, just as if there had been a confession of judgment, or consent judgment, signed and filed.

There was no fair consideration given to the Debtors by the Bank. Paying off the Sovereign Bank loan ($5,000,000) resulted in the loss of a mortgage requiring payment of $30,380 per month and replacing it with a monthly obligation to the Bank of $89,834.35, which could not be done because the Debtors were only taking in about $90,000 per month and could not pay more than about $50,000 per month for loan service [JA-226]. As a result, the Bank’s loan had to go into default and was not fair consideration for loss of the Sovereign Bank loan.

Debtors have pleaded fraudulent conveyance with particularity. The fraudulent conveyance was the entering into the Pre-Negotiation Agreement. See ¶¶ 72-73 of the Amended Adversary Complaint (JA-70).

The Debtors at page 8 of their opening brief, ¶ 18, refer to illegal preference. There was no waiver of the Debtors’ claim and argument that the Pre-Negotiation Agreement constituted an illegal preference. At page 13 of their opening brief, the Debtors stated: “The Pre-Negotiation Agreement was for the excessive benefit of the Bank and of no benefit to the Debtors and other creditors.”

VII. DEBTORS STATE A CLAIM FOR EQUITABLE SUBORDINATION BY ALLEGING WRONGFUL CONDUCT BY THE BANK

The wrongful conduct alleged by the Debtors in their Amended Adversary Complaint (¶¶ 72-73, JA-70) was “soliciting the execution and delivery of the Pre-Negotiation Agreement … for the purpose of creating a preference and fraudulent conveyance for the benefit of the Bank, at the expense of the Debtors and the other creditors” (¶ 72, JA-70), requiring “the Debtors’ estates … to spend money in an effort to undo the fraudulent conveyance and preference … [with] a reduced estate out of which [the creditors] are to receive payment or partial payment of the indebtedness to them” (¶ 73, JA-70). The Pre-Negotiation Agreement was not a binding agreement by the Bank to negotiate and was no more than part of the Debtors’ settlement discussions with the Bank, and the Bank has used it in Bankruptcy Court in violation of F.R.Ev. 408(a).

The Bank’s actions concerning the Pre-Negotiation Agreement have caused considerable additional, unnecessary expense to the Debtors in defending against the Bank’s alleged secured claim, and are threatening to deprive the Debtors’ other creditors of payment of the amounts owed to them, either in whole or in substantial part.

The fact that the Debtors’ counsel in the state foreclosure action advised Debtors to sign the Pre-Negotiation Agreement does not make the agreement binding, and did not authorize the Bank to disclose the document to the Bankruptcy Court, in violation of F.R.Ev. 408(a).

Debtors’ main point in citing 9821 Shore Road Owners Corp. v. Seminole Realty Co. (In re 9821 Shore Road Owners Corp.), 187 B.R. 837 (E.D.N.Y. 1995) was to point out the Debtors’ need to file for bankruptcy (instead of continuing to defend the Bank’s foreclosure action in state court), to be able to make its claim for equitable subordination, which is a claim that can be made only in Bankruptcy Court. There is no state jurisdiction to hear the equitable subordination claim.

VIII. THE PRE-NEGOTIATION AGREEMENT IS NOT A BINDING AGREEMENT BY THE BANK TO NEGOTIATE AND IS INVALID TO GET AROUND THE RULES OF EVIDENCE THAT EXCLUDE SETTLEMENT DISCUSSIONS

The Bank argues that it can find no cases holding invalid an agreement prior to actual negotiations to have settlement discussions. This argument is not in point because the Pre-Negotiation Agreement at issue in the instant case does not bind the Bank to negotiate. There is no agreement by the Bank to negotiate, or any agreement by the Bank to negotiate in good faith. Accordingly, the Pre-Negotiation Agreement is no more than a part of settlement discussions, and is to be excluded under F.R.Ev. 408(a). Alternatively, there is an issue of fact as to whether any agreement to negotiate existed under the Pre-Negotiation Agreement. F.R.Ev. 104(b) (“Relevancy conditioned on fact”).

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[END OF MEMORANDUM OF LAW]

In Summary

In summary, be very careful as a real estate company when going into bankruptcy. If you are highly leveraged, the property cannot be sold (i.e., liquidated) without a substantial loss to all concerned, except the tax people. The Chapter 11 reorganization probably cannot be achieved, either because of the restrictive SARE provisions or because of the difficulties and high cost of trying to push through reorganization, and because the bank may use bankruptcy as a way to obtain a waiver of all defenses to the foreclosure action either through a "prenegotiation" agreement or through a cash collateral stipulation in which there is a waiver of defenses while the bankrupt's attorney receives a significant payment of legal fees with the bank's approval.

If you have any questions about any of this, please give me a call. This could be one of the most worthwhile calls you could ever make.

I can be reached at 212-307-4444. I look forward to hearing from you.