Reversing the lower court's ruling, the California Court of Appeal, Fourth District, recently held that a borrower's claim that a foreclosing bank failed to perform under the terms of a trial loan modification agreement adequately alleged claims for breach of contract and wrongful foreclosure, rejecting the lender's statute of frauds defense based upon the modification agreement not having been signed by the lender, and finding that the borrower's allegations qualified for an exception to the tender rule.
A copy of the opinion is available at http://www.courts.ca.gov/opinions/documents/D061997.PDF.
A bank and its servicer (collectively, the "bank") recorded a notice of default and election to sell as to a borrower's property, and also offered the borrower a trial modification. The trial modification agreement provided that if the borrower is in "compliance with this Trial Period Plan...then the [bank] will provide me with a Home Affordable Modification Agreement."
The borrower alleged that she fully complied with the terms of the trial modification plan. She further alleged that the bank provided her with a document titled "Home Affordable Modification Agreement (Step Two of a Two-Step Documentation Process)" (the "Modification Agreement") following the conclusion of the trial plan period. That document allegedly provided (1) that after the borrower executed and returned the Modification Agreement, the bank would provide her with a signed copy of same; and (2) that if the borrower's material representations were accurate, and if the preconditions to the modification were met, the "Loan Documents will automatically become modified on 7/1/10."
The borrower alleged that she performed as required under the terms of the Modification Agreement, but never received a copy of same executed by the bank. She further alleged that the bank refused to cash a subsequent loan payment, on the grounds that the check was not certified. The property was then sold at foreclosure, and the borrower was served with a unlawful detainer summons.
The borrower then filed suit against the bank, alleging breach of the Modification Agreement and wrongful foreclosure. The bank filed a demurrer, arguing that the statute of frauds barred enforcement of the contract. The lower court sustained the bank's demurrer and entered judgment in favor of the bank. The borrower appealed.
On appeal, the borrower pressed her claims for breach of contract and wrongful foreclosure. The Court considered each in turn.
The Court began by noting that, although an agreement to modify a contract is subject to the statute of frauds, equitable estoppel may preclude the use of a statute of fraud defense "where such use would constitute fraud." Juran v. Epstein (1994) 23 Cal.App.4th 882, 895.
The Court next recited the requirements to apply the doctrine of equitable estoppel: "(1) the party to be estopped must be apprised of the facts; (2) he must intend that his conduct shall be acted upon, or must so act that the party asserting the estoppel has a right to believe it was so intended; (3) the other party must be ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury. Driscoll v. City of Los Angeles (1967) 67 Ca.2d 297, 305.
With that standard in place, the Court concluded that the borrower sufficiently alleged facts supporting a claim that the bank should be equitably estopped from its statute of fraud defense.
To reach that conclusion, the Court emphasized that under the terms of the modification agreement, the bank was required to either send the borrower a signed copy of the trial period plan, or send her notice that she did not qualify. Because the bank instead sent the borrower a copy of the Modification Agreement, the Court reasoned that that action suggested that the bank "concluded that [the borrower] qualified for a permanent modification..."
The Court did acknowledge that the Modification Agreement provided that the loan documents would not be modified unless and until the borrower received a copy of the agreement from the bank, which did not take place in this case.
However, the Court found this provision to be inconsistent with the bank's "promises" that the loan would "automatically become modified" if the relevant preconditions were satisfied. The Court rejected the idea that if the borrower did everything required to obtain a permanent modification, the bank could nevertheless "avoid the contract by refusing to send [the borrower] a signed copy of the Modification Agreement for any reason whatsoever."
Accordingly, the Court determined that the bank's alleged conduct, combined with the language of the Modification Agreement, "could be construed as an implied representation that the statute of frauds would not be relied upon."
Next, the Court considered the borrower's claim of wrongful foreclosure. It noted that, generally, the plaintiff must either tender the amount of the secured indebtedness or be excused from doing so. However, the Court recited several exceptions to the tender rule, noting that a recognized exception exists where the foreclosure sale is void, or where specific circumstances make it inequitable to enforce the debt against the party challenging the sale. See Pfeifer v. Countrywide Home Loans, Inc. (2012) 211 Cal.App.4th 1250, 1280-1281.
Here, the Court determined that the borrower sufficiently alleged an exception to the tender rule, in that she argued that the foreclosure sale was void due to the bank's alleged conduct in connection with her loan modification, described above. Accordingly, the Court held that "[b]ecause [the borrower] sufficiently alleged a recognized exception to the tender rule, the trial court erred by sustaining the demurrer to her wrongful foreclosure cause of action."
The Court therefore reversed the judgment of the lower court.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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