By: Edward L. Kelly
Many settlement agreements contain mutual releases by the parties of claims against each other. For institutional lenders, workouts of defaulted loans often result in the execution of such agreements by the parties. When drafting any release language, lenders would be wise to include language restricting the effect of the release to the subject matter at issue. Failure to do so may result in unintended consequences, potentially discharging a borrower not only from its obligations relating to the loan transaction in question, but from all debts and obligations of the borrower to the lender. As discussed in Wells Fargo Bank v. Gonzalez , but for a procedural error by two homeowners, one lender nearly learned a hard lesson by executing a general release.
In Gonzalez , the lender filed a foreclosure complaint against a pair of homeowners who had executed a mortgage on their Broward County, Florida, home. The homeowners in turn filed an answer, asserting a series of affirmative defenses. Two years later, the homeowners moved for an involuntary dismissal of the foreclosure action, claiming for the first time that the parties previously settled all existing claims against each other through the execution of a general mutual release contained in a settlement agreement involving two completely unrelated loans. The default in the case involving the Broward County property predated the date of the settlement agreement, and the language in the settlement agreement released each party from any cause of action in law or equity in favor of the other arising prior to the date of the release.
Despite the argument by the lender that the mutual release made no reference to the Broward County property and was therefore irrelevant to the foreclosure action, the trial court nonetheless granted the homeowner’s motion for an involuntary dismissal, based upon the clear language of the mutual release. The trial court refused to entertain the lender’s request that one of the homeowners be called to testify as to the release’s intent, limiting the court’s review to the four corners of the release. On appeal, Florida’s Fourth District Court of Appeal reversed the lower court’s decision; however, the reversal was not based on the lower court’s interpretation of the mutual release, but rather on procedural grounds. If not for the homeowners’ procedural misstep, the trial court’s dismissal may have carried the day.
Institutional lenders, especially banks, credit unions and savings associations, may have multiple relationships with a borrower or guarantor, including, for example, other loans, credit cards and deposit accounts. Every clause included in a release granted by an institutional lender should have a specific purpose, and such lender should ensure that each release is narrowly tailored to the matter at hand. As evidenced by the Gonzalez decision, a general mutual release clause has the potential to trump other limiting language included in the document. Relying on a form release can spell trouble, and thought must be given to each transaction prior to putting pen to paper.