ContractsProf Blog

Strategery or Immorality? Underwater Home Borrower’s Quandry: Should I Stay or Should I Go?

Over 5 million U.S. homes are under deep water – that is, the borrowers have outstanding mortgage debt that exceeds the home’s current value by more than 20%.  A homeowner in this situation that can afford to make mortgage payments faces a tough choice: stay and continue to pay *or* stop making loan payments and walk away.  A default is bad for the borrower’s credit score; but why stay when you could rent a much better crib for a lot less dough?

The Wall Street Journal explains:

A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

As the article reminds, the “standard mortgage-loan document reads, ‘I promise to pay’ the amount borrowed plus interest.”  Does this promise have a moral element? Lenders and others say there is an obligation to continue to pay, even if it has become inconvenient to do so:

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

But others would say it is quite ironic for the mortgage lenders to cry “morality”: 

Brent White, an associate law professor at the University of Arizona who has written about this issue, says homeowners should make the decision on whether to keep paying based on their own interests, "unclouded by unnecessary guilt or shame." He says borrowers can take a cue from lenders that "ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility."

What do you think, is walking away from your mortgage immoral or just (to borrow a word) common sense strategery?  Now who’s the sucker?

[Meredith R. Miller]

What Happens When the Buyer of an Apartment Dies Between the Contract of Sale and Closing?

Here’s a worst-case-scenario story to take into account when contracting to purchase real estate.  Buyer of a $2,300,000 Manhattan co-op apartment dies after contract of sale and approval by the co-op’s board of directors, but before closing.  The buyer's estate does not want to consummate the deal.  Do the sellers get to keep the $230,000 deposit?  New  York's Appellate Division (First Department) recently held: yes, the sellers are entitled to keep the $230,000.

The court reasoned: 

The crux of this matter lies in contract paragraph 15.2, which expressly makes the contract binding on the parties' "heirs, personal and legal representatives and successors in interest." The inclusion of this provision indicates that the parties explicitly contemplated, and provided for, the possibility of either party's death before closing, by specifying that the death would not terminate the contract, but that the contract would survive, to be performed by the successors or heirs of the deceased party. This provision makes the contract binding on [the buyer's] estate.

While a contract for personal services is terminated by the death of the servant (see Minevitch v. Puleo, 9 AD2d 285, 287 [1959]), a contract of sale is not terminated by the death of the purchaser. On the contrary, as a general rule,

"[w]here the proposed purchaser dies before the closing of title, his executor or administrator may pay the balance of the purchase price and take the deed in his own name holding it in trust for the heirs at law or devisees. It is the duty of the fiduciary for a deceased vendee to complete payments under a contract entered into by such vendee for the purchase of real property" (4-35 Warren's Weed New York Real Property §35.24 [2009] [footnote omitted]; see Di Scipio v. Sullivan, 30 AD3d 660 [2006]).

What about frustration of purpose?  No dice:

We also reject [the estate's] contention that [buyer's] death before closing justifies nonperformance under the defense of either impossibility or frustration of contract.

"Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract" (Kel Kim Corp. v. Central Mkts., 70 NY2d 900, 902 [1987]). Paragraph 15.2 of the contract conclusively disproves the theory's applicability here. [The estate relies] on a case in which the very subject matter of the contract was destroyed, making performance impossible (see Stewart v. Stone, 127 NY 500 [1891]). However, where performance is possible, albeit unprofitable, the legal excuse of impossibility is not available (see 407 E. 61st Garage v. Savoy Fifth Ave. Corp., 23 NY2d 275, 282 [1968]). The other cases [the estate relies] on for application of the impossibility defense are also not on point.

Similarly, although at first blush the general definition of "frustration of contract purpose" would seem to suit these circumstances, closer examination reveals that the defense cannot be applied here. "In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense" (22A NY Jur 2d, Contracts §375). Since it is agreed that [the buyer] was purchasing the apartment solely for her own residence, her death would, by this definition, frustrate the purpose of the contract. However, "the doctrine of frustration of purpose…is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence" (Matter of Rebell v. Trask, 220 AD2d 594, 598 [1995], citing 407 E. 61st Garage, 23 NY2d at 282). Since the contract actually made explicit provision for the event of either party's death, the doctrine is not available here.

Looks like the sellers ended up getting $2,125,000 from another buyer.  

Warner v. Kaplan (N.Y. App. Div. 1st Dep't Dec. 10, 2009).

[Meredith R. Miller]

Weekly Top Ten

Lots of movement this week as last weeks top three fall from the list!  Eric Posner is enjoying another #1 smash hit, Adam Levitin leapfrogs from fifth to second, and James Ely debuts at #6, but the others are hot on his heals, with only 11 downloads separating sixth from tenth place..  Oh, it's been an exciting week!!

 TOP 10 Papers for Journal of Contracts & Commercial Law 
October 17, 2009 to December 16, 2009

Rank	Downloads	Paper Title
1	155	ProCD v. Zeidenberg and Cognitive Overload in Contractual Bargaining  Eric A. Posner,  University of Chicago - Law School,
2	139	A Critique of Evans and Wright’s Study of the Consumer Financial Protection Agency Act  Adam J. Levitin,  Georgetown University - Law Center,
3	132	Conflict of Laws and Choice of Law  Erin A. O'Hara, Larry E. Ribstein,  Vanderbilt University School of Law, University of Illinois College of Law,
4	111	Fannie Mae, Freddie Mac, and the Home Mortgage Foreclosure Crisis  Christopher Lewis Peterson,  University of Utah - S.J. Quinney College of Law,
5	110	Duress in Contracts: An Economic Analysis  Péter Cserne,  Tilburg Law and Economics Center (TILEC)
6	92	Whatever Happened to the Contract Clause?  James W. Ely,  Vanderbilt University - School of Law,
7	90	Repeal the Safe Harbors  Stephen J. Lubben,  Seton Hall University - School of Law,
8	87	The Role of International Law Firms and Multijural Human Capital in the Harmonization of Legal Regimes  Gillian Hadfield,  USC Law School and Department of Economics,
9	84	Contract Interpretation Redux  Alan Schwartz, Robert E. Scott,  Yale Law School, Columbia University - Law School,
10	81	Law and Morality in the Regulation of Contracts: Lessons from Ancient Rome  Péter Cserne, Gergely Deli,  Tilburg Law and Economics Center (TILEC) , New York University - School of Law,  [Jeremy Telman]

The New Nexus of Contracts: Assisted Reproduction

 In light of the Baby M case, we have posted before on the subject of advanced assisted reproduction.  Sunday’s New York Times had a lengthy report on page A1 about the tragically confused state of the law in this area.  The report begins with the story of  Amy Kehoe, who has clearly adopted the nexus of contracts approach to reproduction:

“We paid for the egg, the sperm, the in vitro fertilization,” Ms. Kehoe said as she showed off baby pictures at her home near Grand Rapids, Mich. “They wouldn’t be here if it weren’t for us.”

Ms. Kehoe’s story highlights the difficult issues raised by assisted reproduction.  After her surrogate, Laschell Baker, whose medical bills related to the pregnancy Ms. Kehoe covered, learned that Ms. Kehoe had a history of paranoid schizophrenia, Baker demanded the return of the twins she had carried but to whom she had no genetic link. 

A Michigan court has granted temporary custody of the twins to Ms. Baker and her husband, who already have four children (Ms. Baker has also served as a surrogate mother to two other couples).  Under Michigan law, surrogacy agreements are unenforceable on public policy grounds.  The Kehoes have abandoned their attempts to get custody of the babies, citing the difficulty of the task under Michigan law.

 Applicable law in other states ranges from the permissive to the non-existent.  Surrogacy contracts have been upheld in California courts.  In other states, the law is silent on the subject, leaving courts without guidance when faced with a parentage and custody dispute.  Sometimes, the transactions might involve a sperm donor in one state, an egg donor in another, a surrogate in a third and an adopting couple in a fourth.  The IVF clinic might bring in a fifth state.  The jurisdictional issues alone raise significant challenges. 

The New York Times article illustrates the complexities with two law stories.  The first involves a single, New Jersey man in his 60s who attempted to pick up his twins in Indiana.  While he appears to have settled matters with the New Jersey courts, Indiana courts are still adjudicating the status of the twins.  Frances Watson from the Indiana University School of Law served briefly as the children’s appointed legal representative.  The Times quotes her as follows: “You should not be able to come from out of state on some contract and order up some babies and then go about your business.”

The other story involves Donald Robinson and Sean Hollingsworth, a gay couple residing in New Jersey and married in California in 2008.  Mr. Hollingsworth served as a sperm donor and the couple used a donated egg.  The fertilized egg was then implanted in Mr. Robinson’s sister, who was to act as surrogate and as a doting aunt.  But Ms. Robinson’s relationship with her brother unraveled during the pregnancy, which was a difficult one, which produced twins.  The court in Baby M’s state has temporarily awarded shared custody of the children, with a trial slated for April.

Help is on the way, it is to be hoped, as the ABA has developed a model surrogacy act that could provide needed guidance to courts.   One helpful provision would be a requirement that all parties undergo psychological screening before entering into a surrogacy agreement.  Still, one would hope that people with a history of mental illness would not be legally precluded from entering into surrogacy agreements, assuming full disclosure and a willing partner.  We do not want the law to be in the position of determining ex ante who has a right to be a parent 

There  are already 152 comments on the New York Times website, so I will refrain from piling on.

[Jeremy Telman]

Now in Print (Low-Calorie Alternatives to Grading Exams)

Benjamin Alarie, Mutual Misunderstanding in Contract, 46 Am. Bus. L.J. 531 (2009).

Justin L. Browder, Note, The 2007 Private Equity Bust: Re-contextualizing Material Adverse Change Clauses in a Credit-Stricken Market, 63 U. Miami L. Rev. 1151 (2009).

J. Robert Brown, Jr. & Sandeep Gopalan, Opting Only In: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom, 42 Ind. L. Rev. 285 (2009).

Mark Cantora, Note, The CISG after Medellin v. Texas: Do U.S. Businesses Have It? Do They Want It?, 8 J. Int'l Bus. & L. 111 (2009).

W. Ashley Hess & Alexander L. Ewing, Thou Shalt Not Lie: Enforcement of Non-reliance Clauses under Kentucky Law, 35 N. Ky. L. Rev. 157 (2008).

V. Niranjan, A Software Transfer Agreement and its Implications for Contract, Sale of Goods and Taxation, [2009] J. Bus. L. 799.

Nathan B. Oman, A Pragmatic Defense of Contract Law, 98 Geo. L.J. 77 (2009).

Nick Piška, Hopes, Expectations and Revocable Promises in Proprietary Estoppel, 72 Modern L. Rev. 998 (2009).

Gregory C. Shaffer, How Business Shapes Law: A Socio-Legal Framework, 42 Conn. L. Rev. 147 (2009).

Nathan Somogie, Note, Failure of a "Basic Assumption": The Emerging Standard for Excuse under MAE Provisions, 108 Mich. L. Rev. 81 (2009).

Debra Pogrund Stark & Jessica M. Choplin, A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, 5 N.Y.U. J.L. & Bus. 617 (2009).

Eric L. Talley, On Uncertainty, Ambiguity, and Contractual Conditions, 34 Del. J. Corp. L. 755 (2009).

[Keith A. Rowley]

Can Tiger Renegotiate His Pre-Nup?!?

 I would have thought that the answer would be clearly no, but I admit that I am not sufficiently on top of developments in family law and marital agreements to feel at all confident of my gut instinct.  In any case, rumors are flying (for example at TheHollywoodGossip.com (HG), and at AssociatedContent.com (AC) and at ABC News (ABC)) that a renegotiation is in process, which suggests that some people think it is possible.  Please note, that what follows is simply based on my reading of the above-mentioned reports.  I make no more claims to special insight into the relationship between Tiger Woods and Elin Nordegren than I do to expertise in family law.

Accounts of the couple's agreement vary widely.  While AC reports that the two entered into a pre-nuptial agreement before their 2004 marriage that provides for a $300 million payment to Elin Nordegren in case of a divorce, HG reports that the prenup provides that Elin would be entitled only to $20 million after ten years of marriage and to an up-front payment of $5 million. ABC concurs on the $20 million figure.

These reports suggest that Elin is seeking an additional $55-60 million on top of the $20 million already negotiated and that she would be entitled to the full amount -- now in the $75-80 million range -- so long as the marriage lasts a total of seven, rather than the original ten years.  This strikes me as a deal in which Elin would get more for doing less.

It seems that the parties are trying to provide for some sort of consideration going from Elin to Tiger to justify the modification of an existing agreement.  That would consist, according to HG of "a behavioral component": Elin must play the role of "dutiful wife," by showing up for social events and by signing a confidentiality agreement (which may or may not be related to the role of dutiful wife).  I have a hard time seeing this promise (if that is indeed the deal) as constituting some new consideration in the marital context.  In any case, it seems hopelessly vague.  Are they going to negotiate how often Elin must be seen in public with Tiger and how fawningly affectionate or nordically respectful of him she must appear?  Is Tiger in effect promising to pay his wife an extra $55-60 million to act like his wife for two years?

I don't know what jurisdiction governs the pre-nup or would govern the amended pre-nup, but the Restatement's provisions on modification of an executory contract could be relevant here:

89. MODIFICATION OF EXECUTORY CONTRACT

A promise modifying a duty under a contract not fully performed on either side is binding 
 (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or
 (b) to the extent provided by statute; or
 (c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.

Subsection (a) could not be applicable as marital infidelity could not have been unanticipated by the parties.  I suppose the nature or extent of the infidelity might be unanticipated, but isn't the purpose of a pre-nup to provide for liquidated damages in the case of a broad range of unexpected events that the parties could have anticipated but did not want to contemplate or name at the time they tied the knot?

Subsection (b) may apply, but it seems unlikely.

That leaves us with subsection (c), but there the public policies that have long led courts to refuse to enforce marital promises would cut against enforcement. 

So, I welcome any input from readers more learned than the author in this area of the law. . . .

[Jeremy Telman]