Mortgagor Did Not Violate the Implied Duty of Good Faith and Fair Dealing by Using Mortgagee’s Pre-Signed Partial Releases to Obtain Funds for Operating Expenses
 
February 15, 2007
 
Michael Weissman - Chicago

In Y-O Investments v. Emken, 142 P.3d 1127 (Wyo. 2006) Rose Emken held a mortgage on real estate owned by Y-O. She was granted the mortgage to secure payment of a promissory note she received when she sold her equity interest in Y-O in 1997.

In July of 2004 Emken declared the note in default, and filed suit to foreclose the mortgage. She claimed that Y-O had not made the payments required by the note.

The principal issue before the court, however, was whether Y-O had misused partial releases that Emken had pre-signed and left with Y-O. There was also the matter of note payments not having been made in a timely fashion.

The court denied Emken’s request for foreclosure. It noted that following the execution of the promissory note Emken had signed 35 to 40 partial releases – none of which contained a legal description. The purpose of this arrangement was to give Y-O a partial release on hand to facilitate the closing after it sold a lot. But Y-O did not use the partial releases solely to facilitate closings on various lots; it also used them to obtain financing from other lenders that it used for operating expenses. Emken contended that this violated the terms of the mortgage.

The court did not see it that way. It said it could find nothing in either the note or mortgage that prohibited Y-O from using the partial releases to obtain operating funds. It also said that by accepting monthly payments other than on the date called for in the note, Emken had waived her right to use that as a basis for declaring a default.

 

What’s the Point?

Lenders that are willing to deposit executed partial releases with a borrower selling lots should insert appropriate restrictions on the use of the partial releases in the loan documents if it is intended that they be used only to facilitate closings. In addition, an anti-waiver clause should be inserted in the loan documents to prevent a court from holding that failure to require timely payment waives all right to use that as a basis for a later declaration of default.

For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.