Mortgages: Failure to Honor Promise to Negotiate Viewed as Potential Fraud

By Alvin Arnold

A common allegation heard from defaulted homeowners and their attorneys is that lenders are promising to negotiate modifications, then foreclosing without following through on the promised negotiations. In a recent decision, a California Appellate Court has held that such allegations may provide a basis for a claim of fraud or promissory estoppel. Aceves v. U.S. Bank, N.A., 2011 WL 242426 (Cal. Ct. App. 2d Dist. 2011)

Default and Bankruptcy

The following facts are those alleged in the Aceves complaint (taken as true for the purpose of determining whether the trial court was correct in dismissing the case on the pleadings). Claudia Aceves took out a mortgage loan for $845,000 in 2006, with initial monthly payments of $4,857. She defaulted on that loan, and on March 26, 2008, she was served with a notice of default and intent to foreclose nonjudicially. She then filed for Chapter 7 bankruptcy and, as a result, the lender's enforcement actions were stopped by the automatic stay.

Aceves then contacted the lender and was told that once her loan was out of bankruptcy, the bank "would work with her on a mortgage reinstatement and loan modification." The bank asked her to submit documents for its consideration, which she did. Meanwhile, the bank filed a motion to lift the automatic stay and proceed with its foreclosure. In reliance on the lender's promise to work with her on a loan modification, Aceves did not oppose the motion to lift the stay and decided not to convert her Chapter 7 case to a Chapter 13 (under which she could have tried to reinstate the mortgage). As a result, the bankruptcy court lifted the automatic stay and the bank scheduled the foreclosure sale.

Aceves attempted to negotiate a loan modification but was told that no modification was possible because the "file" had been "discharged" in bankruptcy. The lender contacted her shortly thereafter, stating that it had mistakenly believed the loan was discharged and the bank would in fact consider a loss mitigation proposal. The day before the foreclosure sale, the lender contacted her bankruptcy attorney and offered to reinstate the loan with a current balance of $965,926 and a new payment of more than $7,200 per month. The lender refused to put this offer in writing, and Aceves rejected the offer. The next day, the home was sold in foreclosure.

Promissory Estoppel and Fraud

According to the complaint, the lender never intended to work with Aceves to modify the loan and only promised to negotiate so she would forgo the bankruptcy proceedings, enabling them to foreclose. The trial court dismissed the complaint. On appeal, the court reinstated Aceves's complaint with respect to two causes of action: promissory estoppel and fraud. Promissory estoppel requires a clear and unambiguous promise, on which the other party reasonably relies, and injury caused by that reliance. The court held that the promise to work with her on a mortgage reinstatement and loan modification if she dropped her bankruptcy case was clear and unambiguous. She reasonably and foreseeably relied on the promise by not opposing the motion to lift stay and by not seeking a Chapter 13 bankruptcy plan.

The lender argued it was not bound by its gratuitous oral promise to postpone the sale and negotiate under a California statute that provides a written contract can only be modified in writing or by an executed oral agreement. However, the court noted that the statute did not preclude a claim for promissory or equitable estoppel, where detrimental reliance serves as a substitute for the consideration ordinarily required to create an enforceable promise.

Having reinstated the claim for promissory estoppel, the court allowed a course of action for fraud. The elements of fraud are basically the same as promissory estoppel, with the additional requirement that the promissory had to know of the falsity of its promise when it made that promise. Here, those facts were alleged. Notwithstanding its determination that the plaintiff had viable claims for relief, the court held that the foreclosure sale itself could not be invalidated because there were no significant irregularities in the foreclosure sale, nor had she paid the funds needed to reinstate the loan before foreclosure. The plaintiff would be limited to monetary damages if she proved her claims. One defense offered by the lender was that it had honored its promise by the offer of reinstatement it made the day before the sale. The court rejected this defense, finding that a unilateral offer would not satisfy the alleged promise to negotiate in an attempt to reach a mutually agreeable loan modification.

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