Lawsuits Allege Banks Broke Promises to Homeowners Facing Foreclosure
Posted on February 7th, 2011
Two recent lawsuits, in Washington and California, use “promissory estoppel” (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure.
The Washington Case: Promissory Estoppel as a Cause of Action
Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while.
Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i’ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance.
You can’t hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred.
In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.
You might wonder why this isn’t a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it’s arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.
Promissory Estoppel in a Recent California Foreclosure Case
The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn’t pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).
In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank’s promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank’s promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house.
The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that “U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property.”
As long as this case remains published (and isn’t ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can’t find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody’s Guide to Small Claims Court, by Ralph Warner.
While you may be invited to join a class action, those types of cases usually are much more beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. .
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Robo-signing Mess Means More Leverage for Homeowners in Foreclosure
Posted on October 20th, 2010
It’s been all over the news — courts are halting foreclosures and banks are freezing their foreclosure processes due to allegations of “robo-signing.” This mess creates negotiation opportunities for homeowners in foreclosure.
What is “Robo-signing”?
To get a foreclosure through court, the lender has to submit proof of ownership and default on the mortgage. This proof typically consists of copies of various documents and a written statement under oath (affidavit) that the documents are true and accurate. To make such a statement, the individual signing the affidavit must not only review the documents but also have some personal basis for believing them to be true. Not just anyone can sign.
It turns out that the major mortgage lenders have assigned the “statement under oath” task to clerks who not only don’t review the documents but who have no personal knowledge of the facts set out in them. The media has called them “robo-signers.”
In other words, it looks like lots of court-ordered foreclosures have been based on false affidavits, and it’s that fact that has led the major lenders to put a hold on foreclosures in states where foreclosures go through the courts.
Even in states where foreclosures happen out of court, affidavits of ownership and default in payments must typically be officially recorded before foreclosure proceedings can begin, and to the extent that these affidavits suffer from the same defect as those headed towards court, the foreclosures based on them are similarly faulty. The only real difference is that the homeowner must affirmatively sue the lender (in an action for injunctive relief) in order to have the judge rule on whether the paperwork is deficient.
What Happens if the Lender Can’t Foreclose?
For all practical purposes, the only way to enforce the terms of a mortgage is to foreclose on the property. It’s true that in many states the lender can sue the homeowner for breach of contract if he or she falls behind on the payments, but the expense and uncertainty of that remedy pretty much dictates foreclosure as the lender’s remedy of choice. In foreclosure the lender gains ownership of the property and the right to force the (now ex) homeowner to move out. If the homeowner decides to stop paying on the mortgage and the lender is unable to use the foreclosure remedy, the only remedy left is a lawsuit for money.
In California and a few other states, the first mortgage is what’s known as a non-recourse loan, meaning the lender can’t sue for breach of contract. And in those states where the lender could sue, the likelihood of collecting is small. Further, bankruptcy would wipe out the homeowners personal liability and the lender would have no remedy at all — again, assuming that for one reason or another they can’t foreclose.
The bottom line: If the lender can’t foreclose because of fraudulent affidavits, the lender may be up a creek.
Fraudulent Affidavits Means More Opportunities to Negotiate
The fact is, foreclosure paperwork in any given case may be faulty, and judges may be more inclined to reach this conclusion than previously — based on the mounting evidence of robo-signing and banks’ sloppy paperwork. To the extent that a homeowner facing foreclosure can create an aura of uncertainty around the required paperwork, he or she will have a great opportunity to negotiate a mortgage modification that includes a substantial reduction of principle to (or near) the value of the property.
If the lender refuses to come to some settlement with you and you can later convince a judge that proof of ownership is lacking, or that robo-signing occurred, the lender may be permanently deprived of the foreclosure remedy, which will mean the mortgage is effectively unenforceable. Given this threat, more and more lenders may be inclined to knock down the principal and reduce your payments to an affordable remedy. As the old saw goes, half a loaf is better than none.
Your ability to use potential problems with the mortgage and foreclosure processing in your negotiations will obviously be strengthened if you can point to the deficiencies, but it may be enough to simply allege the possibility of bad paperwork and let the lender decide whether they are able to prove the opposite. Also, it would probably be advantageous if you had an attorney negotiating for you, but to do that you’d have to raise some money for the attorney fees, which is often done by rerouting some or all of your mortgage payment to the attorney — which can be a really good deal in the long run.
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