Tuesday, February 1, 2011

FYI: Cal App Allows Borrower's Allegations of Loan Modification Misrepresentations 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:

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

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

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

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.

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
Email: RWutscher@kw-llp.com

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