The U.S. Court of Appeals for the Eleventh Circuit recently affirmed summary judgment in favor of a mortgage loan servicer, holding that the trial court correctly refused to enforce the servicer’s acceptance of a short sale offer that contained an obvious clerical error in the form of a “bargain basement price.”

A copy of the opinion is available at:  Link to Opinion.

A borrower defaulted on a $550,000 mortgage loan in 2008 and wanted to sell his house to a third party through a short sale. The servicer made clear in the short sale payoff letter that it would have to receive “a net payout that was greater than the expected proceeds from a foreclosure sale.”

The prospective buyer made three escalating offers.  The servicer intended to accept the third offer, but the servicer’s response to the offer contained an error — namely, the net payout amount was more than $300,000 less than the correct amount the servicer found acceptable.

The servicer only realized its mistake when the closing agent disbursed the incorrect lesser amount. The servicer’s attorney promptly rejected and returned the funds, explaining that the lesser amount was a clerical error. The following day, the third party buyer demanded that the servicer accept the lesser amount.

The servicer took no action for more than two years, and then filed a foreclosure action in December 2010. The former owner and buyer responded by filing a complaint in state court, asserting claims for wrongful foreclosure, breach of contract, and tortious interference with contractual relationship, and sought damages and other equitable relief.

The defendant servicer and mortgagee removed the case to federal district court and later moved for summary judgment, which the district court granted on all claims. The plaintiffs appealed.

On appeal, the Eleventh Circuit noted that the “dispositive issue is whether [the servicer’s] unilateral mistake … about the amount of the net payout it was seeking, prevented the parties from forming a valid contract.”

The Court first rejected the third party buyer’s argument that testimony about the circumstances leading up to the clerical error was barred by the parol evidence rule because, under Georgia law, parol evidence is admissible “to show no valid agreement ever went into existence” or “to prove that a written term in a contract was a mistake.”

The Eleventh Circuit also rejected the third party buyer’s argument that the clerical error did not prevent the formation of a valid contract because a unilateral mistake cannot form the basis for rescission of a contract. The Court reasoned that, although “Georgia courts will often refuse to save contracting parties from their own unilateral mistakes that could have been avoided through the exercise of due diligence,” “it is equally true, if not more so, that Georgia courts will not permit a party to take unfair advantage of an offer that contains an obvious, unilateral mistake.”

The Court found that given the parties’ course of dealing and escalating offers, the servicer’s mistake was obvious and the third party buyer “knew or should have known it was a mistake.”  In the words of the Eleventh Circuit, “[n]o rational person would believe [the servicer’s mistaken response letter] was anything but a mistake because rational persons and mortgage companies do not counteroffer for less—in this case nearly $300,000 less—than the latest and highest and still outstanding offer.”

The Eleventh Circuit concluded that the breach of contract claims failed because neither the third party buyer nor mortgagor would suffer any “injustice under Georgia law because they will only be deprived of what Georgia law does not allow them to have—in [the buyer’s] case the opportunity to take advantage of another’s obvious unilateral mistake; in [the mortgagor’s] case the opportunity to retain mortgaged property after he defaulted on the underlying loan.”

The Court found that the third party buyer and mortgagor abandoned their claims for tortious interference with contractual relations and other forms of relief because they “failed to flesh out any argument about those issues.” It also rejected the remaining claim for wrongful foreclosure, reasoning that because the only source of the mortgagee’s alleged duty not to foreclose was the mistaken response letter and such letter did not lead to the formation of a valid contract, the mortgagee “did not have any duty not to foreclose on the property.”

Accordingly, the district court’s summary judgment was affirmed.