Bank’s Promise To Work With Borrower To Reinstate And Modify Home Loan Was Enforceable

In Aceves v. U.S. Bank, N.A.,, (— Cal.Rptr.3d —-, Cal.App. 2 Dist., January 27, 2011), a court of appeal considered whether a borrower could state a cause of action against a bank that allegedly breached its promise to work with her to reinstate and modify her home loan if she would forgo bankruptcy protection under chapter 13 of the Bankruptcy Code. The court of appeal held the borrower stated causes of action for promissory estoppel and fraud against the bank and that the trial court erred in dismissing her complaint.

Facts

Claudia Jacqueline Aceves (“Aceves”) obtained an $845,000 home loan from Option One Mortgage Corporation in 2006, who later transferred its interest to U.S. Bank, National Association (“Bank”). In January 2008, Aceves could no longer afford the $4,857.09 monthly payments. A notice of default was filed in March 2008 and shortly thereafter Aceves filed for bankruptcy protection under chapter 7 of the United States Bankruptcy Code. Bank told Aceves “that, once her loan was out of bankruptcy, the bank ‘would work with her on a mortgage reinstatement and loan modification.'” Bank asked Aceves to submit documents for its consideration.

Aceves intended to covert her bankruptcy case from a chapter 7 to a chapter 13 “and to rely on the financial resources of her husband ‘to save her home’ under chapter 13.” Chapter 13 allows a homeowner who is “in default to reinstate the original loan payments, pay the arrearages over time, avoid foreclosure, and retain the home.” Chapter 7 does not allow a debtor who discharges an unpaid home loan to keep his or her home.

Bank filed a motion in the bankruptcy court to lift the stay so Bank could go forward with nonjudicial foreclosure. However, the company servicing the loan for Bank later contacted Aceves’ attorney and asked for the attorney’s permission to allow the servicing company “to contact Aceves directly to ‘explore Loss Mitigation possibilities.'” When Aceves contacted counsel for the servicing company, she was informed “they could not speak to her before the motion to lift the bankruptcy stay had been granted.”

Aceves relied on Bank’s promise to work with her to reinstate and modify her home loan and did not oppose Bank’s motion to lift the stay. Aceves also decided not to seek relief under chapter 13 because of Bank’s promise to work with her. The bankruptcy court lifted the stay but neither Bank nor the servicing company contacted Aceves to discuss reinstatement and modification of the loan. Instead, Bank scheduled Aceves’ home for public auction on January 9, 2009, and the home was in fact sold on that date.

Aceves filed a lawsuit alleging Bank never intended to work with her to reinstate and modify her home loan. Aceves claims Bank only promised to reinstate and modify her loan to convince her to forgo further bankruptcy proceedings so Bank could lift the automatic stay and foreclose on the property. The trial court dismissed Aceves’ lawsuit.

Decision

The court of appeal found the trial court erred in dismissing the lawsuit because Aceves alleged facts sufficient to state causes of action for promissory estoppel and fraud. In order to successfully state a claim for promissory estoppel, a plaintiff must show the following: “(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.”

The court found that Bank’s promise to work on a loan reinstatement and modification if Aceves did not seek relief under chapter 13 was clear and unambiguous. Aceves could have reasonably relied on the promise made by Bank that it would work on a loan reinstatement and modification. Bank’s promise to reinstate and modify the loan “was sufficiently concrete to be enforceable.” Also, Aceves’ decision to forgo relief under chapter 13 “was detrimental because it allowed the bank to foreclose on the property.” Therefore, Aceves alleged facts sufficient to state a claim for promissory estoppel.

“The elements of fraud are similar to the elements of promissory estoppel, with the additional requirements that a false promise be made and that the promisor know of the falsity when making the promise.” The court concluded Aceves adequately alleged facts sufficient to state a claim for fraud. Accordingly, the court of appeal reversed the decision of the trial court which dismissed Aceves’ claims for promissory estoppel and fraud.

Questions

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