Paul J. Sulla, Jr., Attorney at Law
Comprehensive Legal Representation

Due to precautions related to COVID-19, we expanded our options for remote consultations. Please contact our office to discuss whether a full phone consultation or video conference is appropriate for your situation.

The Bank Wants You to Sign WHAT?

The Bank Wants You to Sign WHAT?

| Feb 3, 2015 | Foreclosure, Real Estate, Settlement Agreements

Have you ever heard of a non-disparagement clause?

For most people, the answer is “no”. However, big banks insert these clauses into settlement agreements frequently. Consumers, unaware of what the clause actually means, unnecessarily sign away First Amendment rights to freedom of speech. In other words, signing a settlement agreement that contains a non-disparagement clause (also known as a “gag order”) may significantly limit your right to tell your story, to anyone (even investigators), for the rest of your life.

Clients often come to us tired of litigation and conflict and scared of losing their case and home.They are desperate for a settlement check to make their nightmare with the lender end. Under these circumstances, it is difficult to advise clients not to sign a settlement agreement.

Also, attorneys usually get paid form the settlement check and that adds another incentive to sign the settlement agreement. Unethical attorneys may advise clients to sign away their rights to free speech because they also wish to receive payment.

This firm recently had a case where a very large national bank tried to force the client to be bound by a non-disparagement clause. We fought back and the bank backed down.

Here’s why.

The agreed settlement and core terms expressed in the “handshake deal” prior to the written agreement had nothing at all to do with disparagement. Of course, these clauses are common in causes of action where disparagement is an issue, including defamation and employment/wrongful termination cases. However, disparagement has nothing to do with a loan modification or Fair Debt Collection Practices Act claim.

Courts, by and large, agree. In Associates Financial Services Co. of Hawai’i, Inc. v. Mijo, 87 Hawai’i 19, 950 P.2d 1219 (1998), the Court enforced the original terms of settlement, finding that the drafter of the actual settlement agreement “was attempting to modify the settlement agreement when it prepared and presented settlement documents containing language not the same as the settlement agreement” and stating that a homeowner “has a right not to sign a document that contained language possibly materially different from the settlement agreement… [when inserted] details are not essential to the proposal and do not change its terms or purpose”.

In other words, if the bank tries to cram down a non-disparagement clause after key terms of settlement have been reached, the court may enforce those terms sans the nondisparagement clause.

In Doi v. Halekulani Corp., 276 F.3d 1131 (9th Cir. 2002) the court allowed a non-disparagement clause only because it had been presented along with key terms at the time of the verbal offer and acceptance of the settlement, stating that “[i]f the [non-disparagement] clause had not been mentioned during oral offer and acceptance, it is not a material term and cannot be imposed after the initial acceptance.” In Son-Gi Han v. Kang, No. 27865 (Haw. App. 11/25/2009) (Haw. App., 2009) the Court found bad faith by imposition of new terms after the settlement agreement was negotiated in principle and advised removal of a non-disparagement clause as it was not a material term.

Courts in other states seem to disapprove of this common practice as well.

In Rubbermaid v. Signalife,  the US District Court in North Carolina enforced a settlement agreement but ignored the non-disparagement clause, stating that Lawyers cannot walk away from the agreement of all material terms by imposing additional non-material terms after the material terms have already been agreed upon. In Platcher v. Health Professionals, Ltd., 549 F.Supp.2d 1040 (2008) the Court found a confidentiality clause not a material term and that it must have been brought up during initial negotiation to be considered a material term.

The use of these clauses by banks wasn’t as common when the banks didn’t have as much wrongdoing to be ashamed of. They got caught with their pants down with the foreclosure crisis, and the PR disaster of homeowners telling heartbreaking story after heartbreaking story took a toll on the banks. Now, instead of just giving good deals, apologizing, and moving forward with integrity, the banks are asking those who were the most victimized to sign away their constitutional right to free speech. However, emerging public policy disfavors nondisparagement clauses in consumer contracts generally.

California has banned nondisparagement clauses in consumer contracts. On September 9, 2014, Governor Jerry Brown of California signed Bill No. 2365 which prohibits a contract or proposed contract for the sale or lease of consumer goods or services from including “non-disparagement clauses” in the contract. There is also a pending bill banning non-disparagement clauses in consumer contracts that are form agreements.The FTC has in past cases prohibited the practice of forcing consumers to sign a non-disparagement clause in order to receive a refund. See: Fed. Trade Comm’n v. Ivy Capital, Inc. (D. Nev., 2012)

Because most settlement agreements are confidential, it has taken a while for the world to realize how prevalent nondisparagement clauses actually are. Investigators have also had trouble with these clauses because, when they were investigating the mortgage crisis, homeowners who had settled with the banks couldn’t talk to the investigators about what the bank did to them. Why? Because of the non-disparagement clause in the settlement agreement that they signed.

After the Attorneys General of several states got upset about this use of private law to create a gag order on wronged consumers and impede their investigation, the bank now generally include wording in their clause providing an exception for talking to law enforcement. Bank of America is one culprit having faced multiple claims and a fraud probe in Arizona and a lawsuit is also emerging in New Haven.

Allowing its customers to talk to investigators is a good start, but perhaps the bank can offer a simpler solution: Delete the clauses entirely! A good business can’t be afraid of their customers telling their story. A good business should encourage it.