Oral and Electronic Confirmations and Agreements to Sell Mortgage Loans Are Enforceable In New York
May 2017

Approximately 2 minute reading time.  The New York Court of Appeals recently held that a seller's acceptance of an auction bid for the sale of a mortgage loan can constitute a binding and enforceable agreement, even where there is language indicating that the agreement is “subject to” the execution of a mutually acceptable, written contract.  The case is Stonehill Capital Management, LLC, et al. v. Bank of the West, decided on December 20, 2016.
 
In this case, Bank of the West (“BOTW”) hired a Mission Capital Advisors, LLC (“Mission”) to manage a competitive online sealed-bid auction of certain nonperforming mortgage loans.  Mission issued a memorandum to prospective buyers, which announced its solicitation of indicative bids for the purchase of the loans, and invited non-contingent final offers. Following an initial expression of interest, Stonehill Capital Management, LLC (“Stonehill”) submitted a final bid to Mission to purchase a loan. Mission notified Stonehill by telephone that it had submitted the winning bid for the loan, and confirmed in a follow-up email that “subject to the mutual execution of an acceptable Loan Sale Agreement,” BOTW had accepted Stonehill’s bid.
 
The parties then exchanged drafts of a proposed final agreement by email. Before a final agreement was signed, Mission told Stonehill that BOTW had decided not to proceed with the sale.
Stonehill sued BOTW and Mission, alleging breach of contract and other claims. The trial court granted Stonehill’s motion for summary judgment on the breach of contract action, finding that there was a valid and enforceable contract.  The Appellate Division reversed, holding that Stonehill had failed to establish BOTW's acceptance of the contract to sell the loan.
The Court of Appeals found that the totality of the parties’ actions and communications demonstrated an agreement to trade, and unanimously reversed the Appellate Division's order. The Court held that BOTW’s and Mission’s telephone and electronic communications with Stonehill established that the parties intended to enter into a binding agreement. The Court rejected BOTW’s argument that an agreement was not formed because the transaction was “subject to” the execution of a final, written agreement.  “To adopt BOTW’s argument,” according to the Court, “would mean that the auction was neither final nor binding – in direct contravention of the auction sales terms and the usual manner in which reserve auctions proceed.”
Stonehill is an important decision because it establishes that ordinary contract principles apply equally to the sale of debt and equity instruments. Moreover, it reinforces the legal requirement that trial courts should analyze the “totality of the parties’ actions and communications” in deciding if an enforceable agreement concerning the sale of a mortgage loan exists.
 
Stonehill also instructs mortgage loan buyers, sellers, their advisors, and their lawyers that the use of the language “subject to” will not automatically and absolutely permit a party to withdraw from a binding agreement.  Stronger and more precise language will certainly be required to preserve a party's ability to cancel the agreement.
 
 
- David A. Gabay
www.gabaylawgroup.com