Monday, November 28, 2011

FYI: Cal App Says Servicer Not Estopped By Partial Performance on Loan Mod, Did Not Violate "One Form of Action" Rule

The California Court of Appeal for the Second District recently held that
a servicer's acceptance of reduced payments did not constitute acceptance
of a loan modification agreement proposed by borrowers, and further held
that the servicer did not violate the "one form of action" rule.

A copy of the opinion is available at:

After the borrowers defaulted on their home loan, they executed a document
titled "Loan Workout Plan" (the "Workout Plan"), which provided that it
would not be effective absent execution by the lender. The lender never
executed the plan. The Workout Plan required, among other things, that
the borrowers submit various financial information to the lender.

The borrowers made four payments pursuant to the Workout Plan. Two of
these payments were accepted by the servicer, and two were returned to the
borrowers after they failed to submit required financial information.

The servicer notified the borrowers that the Workout Plan was terminated,
and foreclosed on the property. The borrowers challenged the foreclosure
sale, and the lower court entered an order of summary judgment in favor of
the servicer and lender. The borrowers appealed.

As you may recall, the so-called "one form of action" rule in California
provides that "[t]here can be but form of action for the recovery of any
debt or the enforcement of any right secured by mortgage upon real
property." Cal. Code of Civ. Proc. Sec. 726(a).

On appeal, the borrowers contended that the Workout Plan was an
enforceable contract, and that the servicer and lender were equitably
estopped from raising a statute of frauds defense, due to the fact that
the servicer accepted the reduced payments the Workout Plan provided for.
The borrowers further contended that the servicer and bank violated the
"one form of action" rule, by accepting the reduced payments and applying
them to the unpaid principal balance of the loan.

The Court rejected both arguments. It noted that neither the servicer nor
the lender executed the Workout Plan, and further noted that the borrowers
failed to provide the bank with their financial information, as required
by the Workout Plan. The Court also placed emphasis on the fact that the
lender and servicer requested financial information from the borrowers'
counsel on three separate occasions, without receiving any response.

The Court held that under these circumstances, "principles of equitable
estoppel do not apply because neither [the servicer] nor [the lender] led
the [borrowers] to believe that a permanent loan modification was

The Court also rejected the borrowers' argument that the servicer and
lender violated the "one form of action" rule. The Court based its
decision on the fact that the borrowers "voluntarily paid monthly hopes of obtaining a loan modification," and that in exchange
for these payments, the servicer and lender "suspended further foreclosure
periods for approximately six months." Therefore, the Court stated that
"[w]e do not consider the payments a set-off manifesting an election to
not foreclosure pursuant to the one-form-of-action rule," and affirmed the
judgment of the lower court.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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