Anderson Kill represented a national bank in a novel dispute under Pennsylvania law arising from a mortgagor’s unilateral attempt to record a deed in lieu of foreclosure without the bank’s agreement.

In 2004 the bank made a commercial loan in the approximate amount of $1.5 million, which was secured in part by a mortgage and security agreement on a certain commercial property. The loan went into default, and the bank filed a foreclosure action. At the close of discovery, the bank filed a motion for summary judgment that was not opposed. The borrower tried to negotiate a settlement of the case involving a deed in lieu of foreclosure, but no agreement was reached, and there was no writing of any kind suggesting that a settlement had occurred. While the motion was pending, counsel for the mortgagor mailed a purported deed in lieu of foreclosure to counsel for the bank. Shortly thereafter, the court granted the motion for summary judgment, the order and the purported deed in lieu arriving only several days apart.

The bank filed a motion to reassess damages and proceeded to schedule a sheriff’s sale on the mortgaged property. As the sale date approached, the bank was advised by the sheriff that no sheriff’s sale could occur since the purported deed in lieu had actually been submitted for recording by the mortgagor and recorded by the recorder of deeds. The bank then demanded that the mortgagor have the deed stricken, and after that demand was rejected, the bank filed a petition to strike the deed in lieu, a form of petition that seems not to have been utilized previously.

The case raised an issue that has not been frequently addressed in Pennsylvania, or in many other jurisdictions for that matter. Typically, a deed in lieu of foreclosure is delivered as part of a carefully negotiated agreement between the obligors and the lenders and addresses, among other things, the borrower and/or mortgagor’s obligation for any remaining deficiency. Otherwise, under the application of the so-called “merger” doctrine, acceptance of a deed in lieu may result in the discharge of the underlying mortgage obligation. In a departure from this common practice, this case asked the court to consider whether a mortgagor could require the mortgagee to accept a deed in lieu of foreclosure.

A hearing was held on the petition. The court ruled that no evidence was presented that demonstrated any agreement to accept the deed in lieu had been made and, further, that no single document or combination of documents was introduced into evidence that satisfied the statute of frauds. Thus, no meeting of the minds occurred, no settlement had been reached, and no agreement made. The court ordered the purported deed in lieu stricken from the record.