The District of Columbia Court of Appeals recently reversed the dismissal of borrowers’ allegations seeking damages against a commercial lender for alleged fraudulent misrepresentations, wrongful foreclosure, and breach of contract related to an oral agreement to forbear from foreclosure.
Specifically, the Court reasoned that the lender could not invoke a statute of frauds defense, where its own alleged fraud was supposedly responsible for the non-existence of the required writing.
A copy of the opinion is available at: http://www.dccourts.gov/internet/documents/12-CV-1382.pdf
Following a default on a $500,000 commercial loan, plaintiffs (“Borrowers”) alleged that they entered into an oral agreement, whereby defendant (“Lender”) would forbear from foreclosure on the property and modify the loan. In return, Borrowers paid $170,000, which reflected a $20,000 fee to the lender, $50,000 in consideration for the forbearance agreement, and $100,000 for attorneys’ fees. Concerning the attorney’s fees, the promissory note provided that, in the event of default, Borrowers were responsible for “all costs of collections, including… attorney’s fees of at least 20% of the outstanding indebtedness…”
Before Borrowers made the $170,000 payment, Lender allegedly promised to reduce the forbearance agreement to writing. Borrowers asserted that they relied on that promise in tendering payment. However, the forbearance agreement was never reduced to writing and Lender later foreclosed on the Property.
Borrowers filed suit, alleging, in relevant part: (1) misrepresentation related to the attorneys’ fee provision, claiming there was no evidence that the fees were actually incurred; (2) misrepresentation related to the $50,000 forbearance fee, claiming Lender refused to acknowledge receipt of payment; (3) wrongful foreclosure, as it violated various statutes and breached the oral forbearance agreement; (4) breach of the oral forbearance agreement; and (5) misrepresentation, asserting that Lender never intended to honor the forbearance agreement.
Upon Lender’s motion, the trial court dismissed the complaint for failure to state claim, determining that there was no misrepresentation upon which Borrower relied relating to the charges for attorney’s fees. As to the remaining claims, the trial court determined that enforcement of an alleged oral agreement was barred by the statute of frauds, and determined that the fraudulent misrepresentation claims were barred by the parole evidence rule.
On appeal, in addition to noting that the borrower abandoned his statutory claims, the Court of Appeals affirmed the dismissal of the misrepresentation claims related to the charges for attorneys’ fees. The Court explained that there was no fraud because the charge for such fees was based upon the express language of the note. Although the Court observed that there was support for Borrowers’ argument that Lender could not recover more than it actually incurred, it determined that this issue was not properly preserved for appeal, and refused to consider it.
However, the Court reversed the dismissal of the remaining claims, determining that the trial court erred in its application of the parole evidence rule and statute of frauds.
As you may recall, under the District of Columbia’s parol evidence rule, terms “set forth in a writing intended by the parties as a final expression of their agreement… may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement[,] but may be explained or supplemented…” D.C. Code, §28:2-202 (2012 Repl.).
Further, “[t]he statute of frauds mandates that certain agreements, including those concerning real estate, must be in writing to guard against perjury and protect against unfounded and fraudulent claims.” Railan v. Katyal, 766 A.2d 998, 1007 (D.C. 2001); see generally D.C. Code § 28-3502 (2012 Repl.). However, there are “several situations where courts may refuse to allow the defendant to interpose a statute of frauds defense… [, including] where his own fraud was responsible for the nonexistence of the required signed memorandum…” Railan, 766 A.2d at 1007-08 (internal quotation marks omitted).
Disagreeing with the trial court, the appellate court held that the parol evidence rule “does not preclude proof of a subsequent oral modification of a written contract, which is what the [Borrowers] allege occurred in this case.” See Clark v. Clark, 535 A.2d 872, 876 (D.C. 1987).
Additionally, the Court disagreed with the trial court’s reliance on the statute of frauds, based on Borrowers’ argument that Lender was estopped from invoking such a defense. According to the appellate court, the “critical aspect” of Borrowers’ allegations is “that [Lender] promised to reduce the oral forbearance agreement to writing, that [Borrowers] relied on that promise in making the $170,000 payment in connection with the forbearance agreement, and that [Lender] fraudulently failed to reduce the forbearance agreement to writing.”
Notably, the Court rejected Lender’s argument that detrimental reliance on the underlying oral agreement is a prerequisite to an estoppel claim. As detrimental reliance on an oral agreement is an independent basis to invoke an estoppel claim, Lender’s argument would, according to the Court, make that category of cases superfluous. Instead, it cited the Railan decision which stated “without qualification that a defendant cannot invoke the statute of frauds if the defendant’s fraud is responsible for the non-existence of the required writing.” See Railan, 766 A.2d at 1007-08.
In any event, the Court observed that it need not decide whether proof of detrimental reliance on the underlying oral argument is required to assert an estoppel claim. Here, Borrowers alleged detrimental reliance, claiming that they made the $170,000 payment to Lender in reliance on their oral agreement to forbear.
Accordingly, the Court of Appeals affirmed the trial court’s dismissal of the claim of fraudulent misrepresentation of the $100,000 attorney’s fee charge, and reversed the trial court’s dismissal based on the parol evidence rule and the statute of frauds, and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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