UPDATE: New Case Law -- Borrower Reliance On Lender Promises

                        In a 2010 California Court of Appeal case, Garcia v. World Savings, FSB (183 Cal.App.4th 1031, April 9, 2010), the court held that a borrower could sue its former lender following the completion of a non-judicial foreclosure sale after the lender broke an oral promise to postpone the foreclosure sale. Recently, in another Court of Appeal case, Aceves v. U.S. Bank National Association (192 Cal.App.4th 218, as modified February 9, 2011), the court once again held that a borrower could sue her former lender under the doctrine of promissory estoppel. In Aceves, the court found that the lender promised to work with a borrower on a reinstatement and workout of her loan and in reliance on this promise the borrower elected to forego further bankruptcy proceedings. The lender then foreclosed on the borrower’s residence without first negotiating with her to reinstate and modify the loan, breaking its promise.   

 Case History

                         In 2006, Claudia Aceves (the “Borrower”) obtained a loan to purchase real property (the “Loan”) secured by a deed of trust (the “Deed of Trust”) on her residence. The Loan was later transferred to U.S. Bank National Association (the “Lender”). In January 2008, the Borrower could no longer make her monthly payments on the Loan, and the Lender began to foreclose on the Borrower’s home. The Borrower then filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code, which imposed an automatic stay on the foreclosure proceedings. 

                         After filing her Chapter 7 bankruptcy, the Borrower contacted the Lender and was told by the Lender’s representative that the Lender would “work with her on a mortgage reinstatement and loan modification” after her Loan was out of bankruptcy. The Lender then filed a motion in the bankruptcy court to lift the automatic stay so it could proceed with a non-judicial foreclosure. 

                         In November 2008, the Lender’s representative wrote to the Borrower’s counsel requesting permission to contact the Borrower directly to discuss “Loan Mitigation possibilities.” When the Borrower then contacted the Lender’s representative, she was told that he could not speak with her until the motion to lift the bankruptcy stay filed by the Lender had been granted.

                         The Borrower intended to convert her Chapter 7 bankruptcy case to a Chapter 13 bankruptcy case, which, unlike Chapter 7, would have allowed her to reinstate the loan, avoid foreclosure and keep her residence. After the Lender promised to work with the Borrower to reinstate and modify the loan, the Borrower decided not to convert her bankruptcy case and did not oppose the Lender’s motion to lift the bankruptcy stay. 

                         The bankruptcy court lifted the stay on December 4, 2008, and on December 9, 2008, the Lender scheduled a non-judicial foreclosure on the Borrower’s home for January 9, 2009. On December 10, 2008, the Borrower contacted the Lender’s representative in writing seeking to negotiate a reinstatement and modification of the Loan. Between December 23, 2008 and January 8, 2009, the Borrower received multiple telephone calls from the Lender’s representative, none of which conveyed any proposals for reinstating or modifying the Loan. On the day before the scheduled foreclosure, the Borrower’s counsel received a telephone call from the Lender’s representative offering a loss mitigation proposal, which the Lender’s representative refused to put in writing and which the Borrower did not accept. The Borrower’s house was sold at a trustee’s sale on January 9, 2009. 

                         In April 2009, the Borrower sued the Lender for promissory estoppel, fraud, quiet title, slander of title and declaratory relief. The Borrower also sought to set aside the trustee’s sale. The Lender filed a demurrer to all causes of action. The trial court sustained the demurrer completely. The Borrower appealed.

                         The appellate court held that the Borrower stated adequate claims for promissory estoppel and for fraud. In considering the Borrower’s promissory estoppel claim, the appellate court found that the Borrower relied to her detriment on the Lender’s “clear and unambiguous promise” to work with the Borrower on a reinstatement and modification of her Loan “if she no longer pursued relief in the bankruptcy court.” The appellate court viewed the communications of the Lender’s representatives with the Borrower as a promise to negotiate with the Borrower before foreclosing on the Borrower’s home. The court also found that the Borrower’s reliance on this promise was reasonable. The court observed that the Borrower gave up real opportunities for relief when she declined to convert her Chapter 7 bankruptcy case to a Chapter 13 bankruptcy case. 

                         The court also noted that the elements of a claim for fraud are similar to those of promissory estoppel and held that the Borrower adequately alleged facts to support these elements, so she was also entitled to pursue a claim for fraud against the Lender. 

Conclusion

                         The Aceves case reinforces the Garcia holding and underscores just how critical it is for lenders to ensure that communications with a borrower are consistent and how important it is for lenders to establish formal procedures for employees, servicers, trustees and others who may be communicating with a borrower. 

                         In light of the foregoing, lenders should consider adopting the following internal procedures: 

1.      Maintain a single point of contact for all communications with the borrower;

2.      Require a carefully crafted prenegotiation agreement (including the borrower’s confirming that it or they cannot rely on any oral communication from the lender, and that any changes in the loan terms or delay in enforcement proceedings are not binding unless those terms are part of a written agreement signed by both parties) prior to the commencement of any discussions with the borrower requesting any deviation from the loan documents or delay in the loan enforcement proceedings;

3.      Develop a streamlined but effective process for senior management to meet or speak with foreclosure/special assets managers to approve trustee’s sales prior to the sales;

4.      Carefully communicate internally so that decisions by employees on the front lines are consistent with senior management and other departments; and

5.      Educate employees that their oral promises or assurances can result in binding obligations for lenders if reasonably relied on by borrowers to their detriment, and that not returning phone calls, emails or facsimiles can in certain cases be viewed as an affirmative response. Employees should be reminded that not only what they say is critical but also critical is what the borrower reasonably expects.

For more information regarding this topic, please contact Robert S. Stein or Richard B. Caine.  

This posting is intended to summarize recent developments in the law for informational purposes only. It is not intended, and does not constitute, legal advice. We make no warranties of its completeness or accuracy. Because questions regarding the application and interpretation of these and other laws require qualified legal analysis, we ask that you direct any such questions to us following an appropriate, formal retention.