CA App Allows Borroer's Allegations of Loan Modification Misrepresentation to Proceed

The California Court of Appeal, Second District, recently held that a borrower stated claims for promissory estoppel and fraud, in connection with alleged loan modification representations. However, the Court rejected the borrower's efforts to void the related foreclosure sale.


A copy of the opinion is available at:

http://www.courtinfo.ca.gov/opinions/documents/B220922.PDF

The plaintiff borrower filed for bankruptcy, first as a Chapter 7 but then sought to convert to a Chapter 13. She contacted the defendant bank, which allegedly promised to work with her on a loan reinstatement and modification if she would forgo further bankruptcy proceedings. In reliance on that alleged promise, the borrower claimed she did not convert her bankruptcy case to a chapter 13 proceeding or oppose the bank's motion to lift the bankruptcy stay. While the bank was promising to work with borrower, the bank allegedly was simultaneously complying with the notice requirements to conduct a sale under the power of sale in the deed of trust.

The bankruptcy court lifted the stay. But the bank allegedly did not work with borrower in an attempt to reinstate and modify the loan. Rather, it completed the foreclosure.

The borrower filed this action against the bank, asserting a cause of action for promissory estoppel and fraud, among others. She argued the bank's promise to work with her in reinstating and modifying the loan was enforceable, she had relied on the promise by forgoing bankruptcy protection under Chapter 13, and the bank subsequently breached its promise by foreclosing. The trial court dismissed the case on demurrer.

The California appellate court reversed in part, holding: (1) the borrower could have reasonably relied on the bank's promise to work on a loan reinstatement and modification if she did not seek relief under chapter 13; (2) the promise was sufficiently concrete to be enforceable; and (3) the borrower's decision to forgo Chapter 13 relief was detrimental because it allowed the bank to foreclose on the property. The Court therefore allowed the promissory estoppel and fraud claims to survive.

However, the appellate court also held that the borrower's complaint did not allege any irregularities in the foreclosure process that would permit the trial court to void the deed of sale or otherwise invalidate the foreclosure.

The bank argued that an oral promise to postpone either a loan payment or a foreclosure is unenforceable. However, the Court noted that "the doctrine of promissory estoppel is used to provide a substitute for the consideration which ordinarily is required to create an enforceable promise." The Court further noted that a promissory estoppel claim generally entitles a borrower to the damages available on a breach of contract claim.

However, the Court also held that, "[b]ecause this is not a case where the homeowner paid the funds needed to reinstate the loan before the foreclosure, promissory estoppel does not provide a basis for voiding the deed of sale or otherwise invalidating the foreclosure."

The Court also rejected the borrower's allegations that: (1) the trustee under the deed of trust was defective because the "Substitution of Trustee" was signed by the bank's attorney-in-fact; and (2) the foreclosure sale was void because the notice of default mistakenly the wrong beneficiary.