Borrower Not Authorized to Accept Offer for Deed in Lieu of Foreclosure

Coast Plaza LLC v. RCH Capital LLC, 281 So.3d 1125 (Miss. Ct. App. 2019). Coast Plaza, a Mississippi limited liability company, was owned equally by two members, Thompson and Gagnon. Coast Plaza’s sole asset was a strip mall in Waveland, Mississippi (the “property”). Coast Plaza entered into a promissory note secured by a deed of trust on the property. Thompson and Gagnon signed the note as personal guarantors. RCH subsequently purchased the note from the original lender. Gagnon then passed away. After Gagnon’s death, RCH issued a notice of default to Coast Plaza and then issued a notice of intent to foreclose on the property. RCH sent an email to Thompson offering a deed in lieu of foreclosure provided there were no liens or other debts on the property. Thompson responded that he would meet with Gagnon’s estate to discuss but did not anticipate any problems. Thompson sent another email that same day accepting the offer. RCH responded by email that it had ordered a title search and that if the property was clear of other liens, RCH would provide Thompson with what was needed to allow RCH to accept a deed in lieu of foreclosure. RCH’s email also contained a list of other items that it would need to accept a deed in lieu, a statement that RCH has not agreed to modify or waive any of its rights, and a statement that RCH intended to move toward foreclosure until a written agreement was executed. About one week later, RCH emailed Thompson notifying him that the title search showed a title issue that would need to be cleared up before a deed in lieu could occur. RCH noted that there was “a lot to get done before a [d]eed in [l]ieu can be accepted” and provided a list of other needed items. Over the next few days, RCH sent emails to Thompson advising that it had not heard back from Gagnon’s estate or received most of the requested information. Thompson responded that the estate was still collecting information. Thompson also advised that under Louisiana law, the estate had five years to open succession and that probate would take several years after succession. A few weeks later, Thompson on behalf of Coast Plaza emailed a letter to RCH objecting to foreclosure on the property. The next day, RCH responded to Thompson retracting RCH’s offer to accept a deed in lieu of foreclosure. In its response, RCH stated that RCH and Coast Plaza never had a binding agreement for RCH to accept a deed in lieu, but that RCH had only emailed an offer contingent on the condition that there were no other existing liens on the property. RCH noted that the title search had identified another lien. Coast Plaza subsequently filed suit to enforce the purported agreement of RCH to accept a deed in lieu. RCH filed a motion to dismiss arguing that Coast Plaza could not have executed a deed in lieu of foreclosure in part because the Gagnan estate had not indicated its willingness to enter into an agreement with RCH to execute the deed. After a trial, the chancellor entered a final judgment finding that the parties had not reached an agreement and denying all relief sought by Coast Plaza. On appeal, the Mississippi Court of Appeals, in a decision by Justice Cory Wilson, affirmed the chancellor’s finding that no settlement agreement had been reached by the parties because Coast Plaza lacked the authority to dispose of its only asset via a deed in lieu of foreclosure. The Court of Appeals relied on the Revised Mississippi Limited Liability Company Act (because Coast Plaza had no operating agreement) which requires the approval of both Thompson and Gagnon to enter into the agreement. The Court of Appeals noted that the Act also addresses the death of a LLC member and provides a procedure for obtaining the consent of that member’s interest. Coast Plaza failed to obtain the vote of Gagnon’s member interest under the terms of the Act. The Court found “no evidence to indicate that the LLC’s members timely complied with the Act’s clear requirements necessary to authorize the LLC to agree with RCH to dispose of the LLC’s sole asset via a deed in lieu of foreclosure.” The Court of Appeals determined that Coast Plaza could not have validly accepted RHC’s offer and therefore there was no agreement. The Court of Appeals further noted that even if the parties had reached an agreement, it would have been frustrated by Coast Plaza’s admission that it would not be able to timely provide RCH with a deed because of the probate process.

Note 1: While the Court of Appeals based its decision on the lack of authority of Coast Plaza to accept RCH’s offer, the Court noted that an issue existed about whether an valid offer was made. In a footnote, the Mississippi Court of Appeals recognized that “RCH’s initial emails with Thompson contain contingencies and caveats that belie a firm contractual offer, and our review of the record raises questions about whether the parties ever satisfied the conditions precedent to forming an enforceable contract.” Therefore, even if the Court of Appeals had determined that Coast Plaza had the authority to accept the agreement, it is still unlikely that the Court would have found an enforceable contract.

Note 2: In questioning whether RCH ever made a valid offer to accept a deed in lieu, the chancellor stated that “to me you have a whole host of blanks that haven’t been filled in.” In the editors’ experience, if a lender is willing to accept a deed in lieu, the lender usually requires a written agreement with the borrower in which the lender agrees to accept a deed in lieu only if a list of conditions is met, including clear title, an inspection by the lender of the condition of the property for deferred maintenance and needed repairs, an updated Phase 1 environmental inspection, a waiver of any claims by the borrower against the lender, and the borrower’s agreement to pay the lender’s costs, and further contains a prominent reservation of rights and remedies.

Note 3: One lesson from this case is the need for a basic operating agreement for limited liability companies with real estate assets that allows the company to continue to function if a member dies. Once the borrower inserted the black hole of Louisiana succession and probate law into the picture, the prospect of a deed in lieu was eliminated as a practical matter. As stated by the chancellor, “That ends it. There’s nothing else to talk about.”

To learn more about the co-authors, Rod Clement and Lindy Brown, visit Rod’s member profile or firm profile or Lindy’s firm profile.