NYLJ “Settlement Agreement Default Leads Magistrate Judge to Recommend Entry of Money Judgment and Collateral Turnover”

By Thomas E.L. Dewey and Christopher P. DeNicola

When a borrower defaults under a loan agreement and enters into a settlement agreement with its lender requiring payments—which the borrower then fails to make—the lender may seek to enforce the settlement agreement.

In order for a court to have jurisdiction over the enforcement claim, the consideration for the settlement agreement must include, at least in part, dismissal of the lender’s earlier claims.

In addition, where the lender seeks to enforce its rights to entry of a money judgment and a collateral turnover order, the settlement agreement must be valid and binding.

In Bank of America, N.A. v. Madwell LLC, Magistrate Judge Joseph Marutollo considered several questions related to this scenario after the defendants failed to make payments under a settlement agreement that authorized entry of judgment and a turnover order.

First, the defendants argued that the court lacked jurisdiction because it did not issue a “formal order” dismissing the action and instead stayed it at the parties’ request.

After reviewing the court’s order, in which it “so ordered” the parties’ motion to stay and stipulation of settlement, Marutollo recommended finding that the court had jurisdiction because the stipulation expressly authorized the court to “retain jurisdiction”.

Second, the defendants contended that the settlement agreement lacked consideration, but Marutollo recommended finding it valid and binding because the plaintiff agreed to refrain from collecting the collateral and the defendants accepted the negotiated settlement on counsel’s advice.

Third, the defendants raised several challenges to the settlement agreement, but Marutollo recommended finding their defenses waived as a result of their decision to file a motion to stay and stipulation of settlement instead of an answer. In addition, he recommended finding their defenses released by the settlement agreement.

Thus, Marutollo recommended granting the plaintiff’s motion to enforce the settlement agreement and entry of a money judgment and turnover order.

Background

On May 6, 2019, plaintiff entered into a loan agreement with Madwell (Loan Agreement) in which plaintiff provided Madwell with a $4 million line of credit (Working Capital Loan) and a loan of $500,000 (Leasehold Improvement Loan). Madwell agreed to repay those amounts with interest.

Plaintiff reserved certain rights in the event of a default by Madwell, including that, without prior notice, plaintiff could “declare [Madwell] in default,” stop making additional credit available, and require Madwell to “repay its entire debt immediately.”

Plaintiff and Madwell concurrently entered into a security agreement (Security Agreement) in which Madwell granted plaintiff a “first priority blanket security interest upon all” of Madwell’s assets.

On Nov. 16, 2023, plaintiff and Madwell signed the fourth amendment to the Loan Agreement, in which Get in Get Out LLC (“GIGO”), Millwright LLC (Millwright), and Maple Syrup and Jam LLC (MSJ) (collectively, the Guarantors, and together with Madwell, defendants) each signed a guaranty in which they agreed to “absolutely and unconditionally guarantee[]” Madwell’s performance under the Loan Agreement.

The Guarantors also signed a security agreement (Guarantor Security Agreement) under which they granted plaintiff a “first priority blanket security interest” on all of their assets.

Madwell failed to repay the Working Capital Loan and the Leasehold Improvement Loan by the maturity date.

On July 9, 2024, plaintiff sent Madwell a notice of the default demanding payment in full of the amounts due within ten days. Defendants did not pay those amounts by that deadline.

Later that month, plaintiff demanded that defendants turn over the collateral in the Security Agreement and the Guarantor Security Agreement within six days. Defendants did not turn over any collateral.

On Aug. 27, 2024, plaintiff filed its complaint, asserting numerous claims against defendants, including a breach of contract claim against Madwell under the Loan Agreement and breach of contract claims against the Guarantors.

Instead of filing an answer, defendants—along with plaintiff—filed a stipulation of settlement and joint motion to stay the action after executing a settlement agreement (Settlement Agreement).

The Settlement Agreement required defendants to make payments to plaintiff and provided that defendants’ failure to make any of them would be an “event of termination”, upon which the court was authorized to enter judgment and a “turnover” order.

In the stipulation of settlement, the parties agreed that the action would be “stayed” until the earlier of (i) March 7, 2025, or (ii) any event of termination.

The parties further agreed that the court “shall retain jurisdiction over this matter to enforce the terms of the Settlement Agreement and to grant such other relief as may be necessary to enforce plaintiff’s rights and remedies, including but not limited to entry of a judgment.”

On Nov. 20, 2024, Marutollo “so ordered” the stipulation of settlement and retained jurisdiction to enforce the Settlement Agreement.

Less than a month later, on Dec. 19, 2024, the parties informed the court that defendants had failed to make a payment—an “Event of Termination”. Plaintiff reserved its rights.

Eight days later, the parties told the court that defendants represented that they would make the missed payment by Dec. 31, 2024 and the payment originally due on Dec. 31, 2024 two weeks later. Plaintiff again reserved its rights.

On Jan. 3, 2025, the parties informed the court that defendants had failed to make the Dec. 31, 2024 payment and that plaintiff would seek to enforce its rights under the Settlement Agreement.

On Jan. 20, 2025, plaintiff filed a motion for judgment based on the Settlement Agreement, seeking a money judgment of more than $4.1 million and an order directing defendants to turn over collateral.

In their opposition, defendants asserted for the first time that their former 50% owner and CFO, David Eisenman had “repeatedly expanded the credit line and debt presently in dispute without the knowledge or consent of Christopher Sojka, then a 50% owner of defendants.”

Defendants also asserted that Mr. Eisenman “improperly wired” “unilateral distributions” from Madwell’s account with plaintiff to his personal account in violation of Madwell’s operating agreement, that he “barred” Mr. Sojka from accessing or initiating transactions with Madwell’s account, and that plaintiff declined several requests from Mr. Sojka for “assistance stopping” Mr. Eisenman.

Defendants also asserted that the Loan Agreement was unenforceable because it was signed by Mr. Eisenman but concealed from Mr. Sojka and that Mr. Eisenman had obtained the credit line by making “false statements and material misrepresentation[s]”.

In addition, defendants asserted that Madwell’s operating agreement “prohibited the Loan Agreements plaintiff seeks to enforce” because it “proscribes a single [m]anaging [m]ember from unilaterally ‘Transferring’ an ‘Interest’ in or pledging a security interest”.

Further, defendants argued that the agreements—including the Settlement Agreement—lack consideration and that defendants “extract[ed]” Mr. Sojka’s signature under “duress”.

Judge Ann Donnelly referred plaintiff’s motion to Marutollo on March 18, 2025.

In its reply, plaintiff argued that defendants’ response merely sought to “delay” entry of judgment and that it raised arguments “released” in the Settlement Agreement.

On April 30, 2025, plaintiff informed the court that Mr. Sojka had informed plaintiff’s counsel that Madwell would “cease operations” by midnight that day.

Marutollo issued his report and recommendation (R&R) on plaintiff’s motion to enforce the settlement agreement on June 10, 2025. Defendants filed an objection to the R&R on June 25, 2025, and plaintiff filed a reply on July 9, 2025. As of the date of publication, Donnelly has not yet ruled on defendants’ objection.

The Recommendation on Jurisdiction

Marutollo began his analysis by noting that a motion to enforce a settlement agreement is fundamentally “a claim for breach of a contract, part of the consideration of which was dismissal of an earlier federal suit,” which “requires its own basis for jurisdiction”. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 381, 378 (1994).

To retain jurisdiction, a district court’s dismissal order must either “(1) expressly retain jurisdiction over the settlement agreement, or (2) incorporate the terms of the settlement agreement”.

Even though the court did not issue a “formal order” dismissing the action, he recommended finding that the court had jurisdiction to enforce the Settlement Agreement because the court “so ordered” the parties’ motion to stay proceedings and stipulation of settlement, which expressly authorized the court to “retain jurisdiction over this matter to enforce the terms of the Settlement Agreement.”

By “explicitly reserv[ing]” its right to enforce that agreement and “incorporat[ing] the parties’ stipulated terms”, the court “necessarily ma[de] compliance with the terms of the [settlement] agreement” part of its order, such that a breach of that agreement would violate the order, and the court could enforce the agreement with its “ancillary jurisdiction”. StreetEasy, Inc. v. Chertok, 752 F.3d 298, 305 (2d Cir. 2014).

The Recommendation on the Request to Enforce the Settlement Agreement

As to plaintiff’s request to enforce the Settlement Agreement, Marutollo began by reviewing basic contract law principles, including that the consideration requirement is not an “exacting” one because each party must simply receive “something of value” for a contract to exist.

Here, the Settlement Agreement was based on “valuable consideration”, including “an alternative and extended payment schedule” and plaintiff’s agreement to “refrain from exercising its right to collect” collateral while enabling defendants not to “relinquish” it.

Thus, Marutollo recommended that the court find that the parties entered into a “valid and binding agreement” that defendants would make payments on an “expedited basis.” In addition, he recommended finding that defendants “accepted and signed” the Settlement Agreement on counsel’s advice following “lengthy” negotiations.

Marutollo also recommended finding defendants’ challenges to the Settlement Agreement and the Loan Agreement meritless.

First, he recommended finding that defendants “waived” their defenses because they “opted to enter into the Settlement Agreement in lieu of answering the [c]omplaint.”

In addition, “unpleaded” affirmative defenses should only be considered where there is no “undue prejudice to the plaintiff”, but plaintiff would be “prejudice[d]” if defendants were permitted to assert “untimely defenses” because Madwell had ceased operations and a further “delay” could preclude collection of the collateral.

Second, he recommended finding that defendants “released” their defenses in the Settlement Agreement. Section 5 of that agreement expressly stated that defendants “release and forever discharge” plaintiff of any and all “defense”—a “broad and ambiguous” release.

He also noted that defendants failed to show that the Settlement Agreement or the release was void, offering only “speculative and conclusory assertions” of “duress” insufficient to overcome defendants’ voluntary acceptance of that agreement while represented by counsel.

Next, Marutollo examined whether the Settlement Agreement’s default provision—which defined an “Event of Termination” as, among other things, defendants’ failure to make “any payment” required under that agreement—should be enforced.

Because it was “undisputed” that defendants had failed to make all required payments, he recommended that the court enter a money judgment for plaintiff and turnover order.

Conclusions

In this report and recommendation, Marutollo made clear that a court has jurisdiction to enforce a settlement agreement even absent a “formal” dismissal order where the court “so orders” a motion to stay and stipulation of settlement that expressly authorizes the court to “retain jurisdiction”.

In addition, he emphasized that the consideration required for a settlement agreement to be enforceable as to repayment-related claims may include the lender’s agreement to provide an “alternative and extended payment schedule” and to refrain from collecting the collateral—particularly where the borrower and guarantors have accepted a negotiated agreement on counsel’s advice.

Moreover, where defendants choose to file a motion to stay and stipulation of settlement instead of an answer to a complaint, their defenses to the underlying claims are waived. A broad and unambiguous release in the settlement agreement also releases their defenses to the settlement agreement.

Going forward, parties should keep in mind that a “formal” order is not required for a court to have jurisdiction to enforce a settlement agreement—as long as it expressly retains jurisdiction—and that the agreement will be enforceable where the plaintiff provides consideration and defendants voluntarily accept it.

Defendants should also exercise caution when filing a motion to stay and stipulation of settlement instead of an answer to a complaint because doing so could result in a waiver of their defenses.

This article first appeared in the New York Law Journal on August 8, 2025.

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