Bankruptcy Debtor who refrained from filing chapter 13 based on promises of loan modification assistance has a case


Yet another case regarding a lying Bank (people, please, please, please do not believe a word your bank or loan servicer tells you, they want to make money and they will lie to you). Who should be surprised anymore? Anyway, in the case of Aceves v. U.S. Bank as Ttrustee, etc., a borrower was in a Chapter 7 bankruptcy and was contemplating converting her bankruptcy to a Chapter 13 to try to save her house from foreclosure. AS WE HAVE TALKED ABOUT ON OTHER WEBSITES, FILING FOR CHAPTER 13 BANKRUPTCY PROTECTION GIVES YOU A CHANCE TO SAVE YOUR HOME BY MAKING LOAN PAYMENTS AND CATCHING UP ON ARREARS. The Chapter 7 bankruptcy is a liquidation and is tougher to try to save your home from foreclosure.

At any rate, the borrower was in the Chapter 7 and considering converting the case to a chapter 13. During the Bankruptcy case, the bank informed the debtor that if she refrained from converting the case to a chapter 13, that “we would work with you” (on loss mitigation and loan modification). Based on that statement, the debtor did not fight the motion to lift the automatic stay in bankruptcy court, and the stay was lifted and the house was sold. Thereafter, U.S. Bank as trustee for a securitized loan trust, refused to work with the borrower following the foreclosure sale, and instead followed through with a eviction (unlawful detainer action). Welcome to the friendly face of banking.

The borrower brought suit for quiet title, slander of title, fraud, promissory estoppel, and declaratory relief. U.S. Bank did what all banks do, they filed a demurrer (which basically is there way of saying you have no case and trying to get the judge to dismiss the case without leave to amend).

The Court discussed the Bank’s legal argument:

“U.S. Bank filed a demurrer separately attacking each cause of action and the requested remedies. Aceves filed opposition. At the hearing on the demurrer, Aceves’s attorney argued that Aceves and her husband “could have saved their house through bankruptcy,” but “due to the promises of the bank, they didn’t go those routes to save their house. That’s the whole essence of promissory estoppel. Prior to [American Home’s November 12, 2008] letter, there’s numerous phone contacts and conversations with [American Home], which was the agent for U.S. Bank, regarding, ‘Yes, once we get leave, we will work with you, … and they did not work with her at all.’ ” The trial court replied: “The foreclosure took place. There’s no promissory fraud or anything that deluded [Aceves] under the circumstances.” On October 29, 2009, the trial court entered an order sustaining the demurrer without leave to amend and a judgment in favor of U.S. Bank. Aceves filed this appeal.”

At the end of the day, the Court did not go along for the ride agreeing with the Bank’s B.S. Instead, the Court laid down the applicable law of fraud and promissory estoppel as it relates to loan modifications:

A. Promissory Estoppel“ ‘The elements of a promissory estoppel claim are “(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.” (Advanced Choices, Inc. v. State Dept. of Health Services (2010) 182 Cal.App.4th 1661, 1672, 107 Cal.Rptr.3d 470.)1. Clear and Unambiguous Promise “ ‘[A] promise is an indispensable element of the doctrine of promissory estoppel. The cases are uniform in holding that this doctrine cannot be invoked and must be held inapplicable in the absence of a showing that a promise had been made upon which the complaining party relied to his prejudice. The promise must, in addition, be ‘clear and unambiguous in its terms.’ ” (Garcia v. World Savings, FSB (2010) 183 Cal.App.4th 1031, 1044, 107 Cal.Rptr.3d 683, citation omitted.) “To be enforceable, a promise need only be ‘ “definite enough that a court can determine the scope of the duty and the limits of performance must be sufficiently defined to provide a rational basis for the assessment of damages.” ’ … It is only where ‘ “a supposed ‘contract’ does not provide a basis for determining what obligations the parties have agreed to, and hence does not make possible a determination of whether those agreed obligations have been breached, [that] there is no contract.” ‘ ” (Id. at p. 1045, 107 Cal.Rptr.3d 683, citation omitted.) “[T]hat a promise is conditional does not render it unenforceable or ambiguous.” (Ibid.)5 U.S. Bank agreed to “work with [Aceves] on a mortgage reinstatement and loan modification” if she no longer pursued relief in the bankruptcy court. This is a clear and unambiguous promise. It indicates that U.S. Bank would not foreclose on Aceves’s home without first engaging in negotiations with her to reinstate and modify the loan on mutually agreeable terms.U.S. Bank’s discussion of Laks v. Coast Fed. Sav. & Loan Assn. (1976) 60 Cal.App.3d 885, 131 Cal.Rptr. 836 misses the mark.

There, the plaintiffs applied for a loan and relied on promissory estoppel in arguing that the lender was bound to make the loan. The Court of Appeal affirmed the dismissal of the case on demurrer, explaining that the alleged promise to make a loan was unclear and ambiguous because it did not include all of the essential terms of a loan, including the identity of the borrower and the security for the loan. In contrast, Aceves contends U.S. Bank promised but failed to engage in negotiations toward a solution of her loan problems. Thus, the question here is simply whether U.S. Bank made and kept a promise to negotiate with Aceves, not whether, as in Laks, the bank promised to make a loan or, more precisely, to modify a loan. Aceves does not, and could not, assert she relied on the terms of a modified loan agreement in forgoing bankruptcy relief. She acknowledges that the parties never got that far because U.S. Bank broke its promise to negotiate with her in an attempt to reach a mutually agreeable modification. While Laks turned on the sufficiency of the terms of a loan, Aceves’s claim rests on whether U.S. Bank engaged in the promised negotiations. The bank either did or did not negotiate. Further, U.S. Bank asserts that it offered Aceves a loan modification, referring to the offer it made the day before the auction.

That assertion, however, is of no avail. Aceves’s promissory estoppel claim is not based on a promise to make a unilateral offer but on a promise to negotiate in an attempt to reach a mutually agreeable loan modification. And, even assuming this case involved a mere promise to make a unilateral offer, we cannot say the bank’s offer satisfied such a promise in light of the offer’s terms and the circumstances under which it was made. 2. Reliance on the Promise8 Aceves relied on U.S. Bank’s promise by declining to convert her chapter 7 bankruptcy proceeding to a chapter 13 proceeding, by not relying on her husband’s financial assistance in developing a chapter 13 plan, and by not opposing U.S. Bank’s motion to lift the bankruptcy stay. 3. Reasonable and Foreseeable Reliance9 “ ‘Promissory estoppel applies whenever a “promise which the promissor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance” would result in an “injustice” if the promise were not enforced….’ ” (Advanced Choices, Inc. v. State Dept. of Health Services, supra, 182 Cal.App.4th at pp. 1671-1672, 107 Cal.Rptr.3d 470, citation omitted, italics added.) “[A] party plaintiff’s misguided belief or guileless action in relying on a statement on which no reasonable person would rely is not justifiable reliance…. ‘If the conduct of the plaintiff in the light of his own intelligence and information was manifestly unreasonable, … he will be denied a recovery.’ ” (Kruse v. Bank of America (1988) 202 Cal.App.3d 38, 54, 248 Cal.Rptr. 217, citation omitted.) A mere “hopeful expectation cannot be equated with the necessary justifiable reliance.” (Id. at p. 55, 248 Cal.Rptr. 217.) We conclude Aceves reasonably relied on U.S. Bank’s promise; U.S. Bank reasonably expected her to so rely; and it was foreseeable she would do so. U.S. Bank promised to work with Aceves to reinstate and modify the loan. That would have been more beneficial to Aceves than the relief she could have obtained under chapter 13.

The bankruptcy court could have reinstated the loan-permitted Aceves to cure the default, pay the arrearages, and resume regular loan payments-but it could not have modified the terms of the loan, for example, by reducing the amount of the regular monthly payments or extending the life of the loan. (See 11 U.S.C. § 1322(b)(2), (3), (5), (c)(1); 8 Collier on Bankruptcy, supra, 1322.06[1], 1322.07[2], 1322.09 [1]-[6], 1322.16 & fn. 5, pp. 23-24, 31-32, 34-42, 55-56.) By promising to work with Aceves to modify the loan in addition to reinstating it, U.S. Bank presented Aceves with a compelling reason to opt for negotiations with the bank instead of seeking bankruptcy relief. (See Garcia v. World Savings, FSB, supra, 183 Cal.App.4th at pp. 1041-1042, 107 Cal.Rptr.3d 683 [discussing justifiable reliance].)We emphasize that this case involves a long-term loan secured by a deed of trust, one in which the last payment under the loan schedule would be due after the final payment under a bankruptcy plan. (See 11 U.S.C. § 1322(b)(5).) Aceves had more than 28 years left on the loan, and a bankruptcy plan could not have exceeded five years. In contrast, if a case involves a short-term loan, where the last payment under the original loan schedule is due before the final payment under the bankruptcy plan, the bankruptcy court has the authority to modify the terms of the loan. (See 11 U.S.C. § 1322(c)(2); In re Paschen (11th Cir.2002) 296 F.3d 1203, 1205-1209; 8 Collier on Bankruptcy, supra, 1322.17, pp. 57-58; March et al., Cal. Practice Guide: Bankruptcy (The Rutter Group 2010) 13:396, p. 13-45; compare id. 13:385 to 13:419, pp. 13-42 to 13-48 [discussing short-term debts] with id. 13:440 to 13:484, pp. 13-49 to 13-54 [discussing long-term debts].)

The modification of a short-term loan may include “lienstripping,” that is, the bifurcation of the loan into secured and unsecured components based on the value of the home, with the unsecured component subject to a “cramdown.” (See In re Paschen, supra, 296 F.3d at pp. 1205-1209; 8 Collier on Bankruptcy, supra, 1322.17, pp. 57-58; see also March et al., Cal. Practice Guide: Bankruptcy, supra, 13:370 to 13:371.1, p. 13-41 [discussing lienstripping].) If a lien is “stripped down,” the lender is “only assured of receiving full [payment] for the secured portion of the [bankruptcy] claim.” (In re Paschen, supra, 296 F.3d at p. 1206.)4. DetrimentU.S. Bank makes no attempt to hide its disdain for the protections offered homeowners by chapter 13, referring disparagingly to Aceves’s bankruptcy case as “bad faith.” But “Chapter 13’s greatest significance for debtors is its use as a weapon to avoid foreclosure on their homes. Restricting initial … access to Chapter 13 protection will increase foreclosure rates for financially distressed homeowners. Loss of homes hurts not only the individual homeowner but also the family, the neighborhood and the community at large. Preserving access to Chapter 13 will reduce this harm.“Chapter 13 bankruptcies do not result in destruction of the interests of traditional mortgage lenders. Under Chapter 13, a debtor cannot discharge a mortgage debt and keep her home. Rather, a Chapter 13 bankruptcy offers the debtor an opportunity to cure a mortgage delinquency over time-in essence it is a statutorily mandated payment plan-but one that requires the debtor to pay precisely the amount she would have to pay to the lender outside of bankruptcy. Under Chapter 13, the plan must provide the amount necessary to cure the mortgage default, which includes the fees and costs allowed by the mortgage agreement and by state law. Mortgage lenders who are secured only by an interest in the debtor’s residence enjoy even greater protection under 11 U.S.C. § 1322(b)(2)…. Known as the ‘anti-modification provision,’ [section] 1322(b)(2) bars a debtor from modifying any rights of such a lender-including the payment schedule provided for under the loan contract…. [Cf. 11 U.S.C. § 1322(c)(2) [bankruptcy court has authority to modify rights of lender, including payment schedule, in cases involving short-term mortgages]; see pt. II.A.3, ante.]“Even though a debtor must, through reinstatement of her delinquent mortgage by a Chapter 13 repayment plan …, pay her full obligation to the lender, Chapter 13 remains the only viable way for most mortgage debtors to cure defaults and save their homes.

Mortgage lenders are extraordinarily unwilling to accept repayment schedules outside of bankruptcy. There is no history to support any claim that lenders will accommodate the need for *517 extended workouts without the pressure of bankruptcy as an option for consumer debtors. Reducing the availability of [C]hapter 13 protection to mortgage debtors is most likely to result in higher foreclosure rates, not in greater flexibility by lenders.” (DeJarnatt, Once Is Not Enough: Preserving Consumers’ Rights To Bankruptcy Protection (Spring 1999) Ind. L.J. 455, 495-496, fn. omitted.)“It is unrealistic to think mortgage companies will do workouts without the threat of the debtor’s access to Chapter 13 protection. The bankruptcy process is still very protective of the mortgage industry. To the extent that the existence of Chapter 13 protections increases the costs of mortgage financing to all consumers, it can and should be viewed as an essential form of consumer insurance….” (DeJarnatt, Once Is Not Enough: Preserving Consumers’ Rights To Bankruptcy Protection, supra, Ind. L.J. at p. 499 13 We mention just a few of the rights Aceves sacrificed by deciding to forgo a chapter 13 proceeding. First, although Aceves initially filed a chapter 7 proceeding, “a chapter 7 debtor may convert to a case[ ] under chapter 13 at any time without court approval, so long as the debtor is eligible for relief under the new chapter.” (1 Collier on Bankruptcy, supra,1.06, p. 24, italics added; accord, March et al., Cal. Practice Guide: Bankruptcy, supra, 5:1700 to 5:1701, 5:1715 to 5:1731, pp. 5(II)-1, 5(II)-3 to 5(II)-5; see 11 U.S.C. § 706(a).) In addition, Aceves could have “cured” the default, reinstating the loan to predefault conditions. (See In re Frazer (9th Cir. BAP 2007) 377 B.R. 621, 628; In re Taddeo (2d Cir.1982) 685 F.2d 24, 26-28; 11 U.S.C. § 1322(b)(5); March et al., Cal. Practice Guide: Bankruptcy, supra, 13:450, p. 13-50.) She also would have had a “reasonable time”-a maximum of five years-to make up the arrearages. (See 11 U.S.C. § 1322(b)(5), (d); 8 Collier on Bankruptcy, supra, 1322.09[5], pp. 39-40; March et al., Cal. Practice Guide: Bankruptcy, supra,13:443, p. 13-49.) And, by complying with a bankruptcy plan, Aceves could have prevented U.S. Bank from foreclosing on the property. (See 8 Collier on Bankruptcy, supra, 1322.09[1] to 1322.09[3], 1322.16, pp. 34-37, 55-56.).

“Indeed, the bottom line of most Chapter 13 cases is to preserve and avoid foreclosure of the family house. (In re King (Bankr.N.D.Fla.1991) 131 B.R. 207, 211; see also March et al., Cal. Practice Guide: Bankruptcy, supra, 8:1050, 8:1375 to 8:1411, pp. 8(II)-1, 8(II)-42 to 8(II)-47 [discussing automatic stay]; In re Hoggle (11th Cir.1994) 12 F.3d 1008, 1008-1012 [affirming district court order denying lender’s motion for relief from automatic stay]; Lamarche v. Miles (E.D.N.Y.2009) 416 B.R. 53, 55-62 [affirming bankruptcy court order denying landlord’s motion to set aside automatic stay]; In re Gatlin (Bankr.W.D.Ark.2006) 357 B.R. 519, 520-523 [denying lender’s motion for relief from automatic stay].)U.S. Bank maintains that even if Aceves had pursued relief under chapter 13, she could not have afforded the payments under a bankruptcy plan. But the complaint alleged that, with the financial assistance of her husband, Aceves could have saved her home under chapter 13. We accept the truth of Aceves’s allegations over U.S. Bank’s speculation. (See Hensler v. City of Glendale, supra, 8 Cal.4th at p. 8, fn. 3, 32 Cal.Rptr.2d 244, 876 P.2d 1043.)5. Absence of Consideration141516 U.S. Bank argues that an oral promise to postpone either a loan payment or a foreclosure is unenforceable. We have previously addressed that argument, stating: “ ‘[I]n the absence of consideration, a gratuitous oral promise to postpone a sale of property pursuant to the terms of a trust deed ordinarily would be unenforceable under [Civil Code] section 1698.’ (Raedeke v. Gibraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665, 673 [111 Cal.Rptr. 693, 517 P.2d 1157], italics added.) The same holds true for an oral promise to allow the postponement of mortgage payments. (California Securities Co. v. Grosse (1935) 3 Cal.2d 732, 733 [46 P.2d 170] [applying Civil Code section 1698].) However, the doctrine of promissory estoppel is used to provide a substitute for the consideration which ordinarily is required to create an enforceable promise.

“The purpose of this doctrine is to make a promise binding, under certain circumstances, without consideration in the usual sense of something bargained for and given in exchange….” ’ (Raedeke, supra, 10 Cal.3d at p. 672 [111 Cal.Rptr. 693, 517 P.2d 1157].) ‘ “Under this doctrine a promisor is bound when he should reasonably expect a substantial change of position, either by act or forbearance, in reliance on his promise, if injustice can be avoided only by its enforcement….” ’ ” (Sutherland v. Barclays American/Mortgage Corp. (1997) 53 Cal.App.4th 299, 312, 61 Cal.Rptr.2d 614; accord, Garcia v. World Savings, FSB, supra, 183 Cal.App.4th at pp. 1039-1041, 107 Cal.Rptr.3d 683.) We further commented: “When Raedeke and California Securities Co. were decided, Civil Code section 1698 provided in its entirety: ‘A contract in writing may be altered by a contract in writing, or by an executed oral agreement, and not otherwise.’ … In 1976, a new section 1698 was enacted which states in part: ‘A contract in writing may be modified by a contract in writing … [or] by an oral agreement to the extent that the oral agreement is executed by the parties…. Nothing in this section precludes in an appropriate case the application of rules of law concerning estoppel ….’ ” (Sutherland v. Barclays American/Mortgage Corp., supra, 53 Cal.App.4th at p. 312, fn. 8, 61 Cal.Rptr.2d 614, citations omitted.) Our earlier analysis in Sutherland applies here.1718

Finally, a promissory estoppel claim generally entitles a plaintiff to the damages available on a breach of contract claim. (See Toscano v. Greene Music (2004) 124 Cal.App.4th 685, 692-693, 21 Cal.Rptr.3d 732.) Because 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. (See Garcia v. World Savings, FSB, supra, 183 Cal.App.4th at p. 1047, 107 Cal.Rptr.3d 683, distinguishing Bank of America v. La Jolla Group II (2005) 129 Cal.App.4th 706, 711-714, 28 Cal.Rptr.3d 825.)B. Remaining Claims. 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.

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