Peoples Mortgage Co. v. Federal National Mortgage Ass'n
1994 U.S. Dist. LEXIS 6594, 1994 WL 317816, 856 F.Supp. 910 (1994)
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Rule of Law:
A settlement agreement negotiated by parties represented by counsel to resolve a bona fide contract dispute is enforceable and will not be voided for economic duress. The presence and active involvement of counsel during negotiations negates a claim of duress, and the resolution of the good-faith dispute itself serves as valid consideration for the new agreement.
Facts:
- In July 1987, Peoples Mortgage Company ('Peoples') entered into a Mortgage Selling and Servicing Contract ('Contract') with Federal National Mortgage Association ('Fannie Mae').
- The Contract allowed Fannie Mae to terminate its business relationship with Peoples with or without cause.
- On May 17, 1991, Fannie Mae terminated the Contract with Peoples for cause, demanding the immediate return of all mortgage files.
- Peoples disputed the basis for the for-cause termination and refused to return the mortgage files.
- Over the next two weeks, Peoples and Fannie Mae, with their respective legal counsel, engaged in extensive negotiations to resolve the dispute.
- On May 30, 1991, both parties signed a Letter Agreement, which stated that Fannie Mae would withdraw the termination and replace it with a suspension.
- The Letter Agreement set new terms, including allowing Peoples a period of time to sell its servicing rights to an approved third party.
- For eighteen months, Peoples operated under the Letter Agreement, sought and received extensions to its deadlines, but was ultimately unable to sell the servicing rights.
Procedural Posture:
- Peoples Mortgage Company sued Federal National Mortgage Association in the Court of Common Pleas of Montgomery County, a state trial court.
- Fannie Mae removed the action to the United States District Court for the Eastern District of Pennsylvania.
- Fannie Mae filed an Amended Counterclaim against Peoples.
- Fannie Mae moved for summary judgment on all of Peoples' claims.
- Peoples moved for summary judgment on Count IV of Fannie Mae's Amended Counterclaim.
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Issue:
Is a settlement agreement resolving a disputed contract termination enforceable when the party seeking to void it claims economic duress, lack of consideration, and unconscionability, despite having been represented by counsel throughout the negotiations?
Opinions:
Majority - Giles, District Judge.
Yes, the settlement agreement is enforceable. A subsequent agreement negotiated with the assistance of counsel to resolve a disputed contract termination is valid and binding, and claims of duress, lack of consideration, and unconscionability will fail under such circumstances. The court rejected Peoples' claim of economic duress based on the controlling Pennsylvania Supreme Court precedent in Carrier v. William Penn Broadcasting Co., which holds that no duress exists where a contracting party is free to consult with counsel. It was undisputed that Peoples' counsel was actively involved in negotiating and drafting the Letter Agreement. Furthermore, Peoples had the option to seek immediate legal remedies, such as an injunction, instead of signing the agreement. Even if duress had existed, Peoples ratified the agreement by accepting its benefits and operating under its terms for eighteen months before challenging its validity. The court found valid consideration in Fannie Mae's promise to withdraw the 'termination' and substitute a 'suspension,' which was a bargained-for benefit that helped Peoples maintain its line of credit. The settlement of the parties' bona fide dispute over the for-cause termination also constituted sufficient consideration. Finally, the agreement was not unconscionable, as it was a commercial transaction between sophisticated parties who were both represented by counsel, meaning there was no absence of meaningful choice.
Analysis:
This decision reinforces the finality of settlement agreements in commercial disputes, particularly when sophisticated parties are represented by counsel. It establishes a high bar for successfully asserting economic duress, making the opportunity to consult with counsel a nearly insurmountable defense to such a claim under Pennsylvania law. The case also strictly applies the economic loss doctrine, precluding parties from recasting a breach of contract claim as a tort to recover different damages. This serves to maintain a clear distinction between contract and tort law and ensures that remedies for commercial disputes are governed by the terms the parties themselves negotiated.
