Loan Modification Law in California

• Publication year: 2014
• Author: By Harold Justman, Scott D. Rogers, and Henry Chuang

LOAN MODIFICATION LAW IN CALIFORNIA

A Review of Recent Loan Modification Cases and Their Impact on the Federal Home Affordable Modification Program

By Harold Justman, Scott D. Rogers, and Henry Chuang

©2014 All Rights Reserved.

I. INTRODUCTION

In 2008, more than two million different properties received foreclosure notices and banks repossessed more than 900,000 properties.¹ In February of 2009, President Obama announced a mortgage modification program and promised that it would help three to four million homeowners modify the terms of their mortgage to avoid foreclosure.² That same day, the Treasury Department released some details of the mortgage modification program.³ The Treasury would provide fifty billion dollars and Fannie Mae and Freddie Mac would provide twenty-five billion dollars to fund the program.⁴

In the summer of 2009, the Treasury set a goal of 500,000 trial modifications by November 1, 2009.⁵ This goal was not to be met. To meet the goal, the Treasury permitted undocumented, verbal trial modifications.⁶ Additionally, the Treasury permitted lenders to take preliminary legal steps to foreclose on properties while the trial modifications were being processed.⁷ This dual tracking resulted in some homeowners being foreclosed upon only weeks after being told that their loans would not be modified.⁸ Dual tracking was subsequently barred by California's Homeowner Bill of Rights.⁹

During 2009, another approximately 2,800,000 properties received foreclosure notices, and banks repossessed another approximately 900,000 properties.¹⁰ By the end of 2009, only approximately 70,000 permanent loan modifications had been completed.¹¹ In October 2010, the Treasury released a report stating that nearly 700,000 trial modifications had failed and only about 460,000 permanent modifications were successfully ongoing.¹² By the end of 2010, the successful ongoing permanent modifications reached a little more than 500,000, but another approximately 2,900,000 properties had gone into foreclosure, and bank repossessions numbered more than one million.¹³ By the end of 2011, the Treasury had spent only three billion of the fifty billion originally allocated to the mortgage modification program.¹⁴ Even by March 31, 2012, there were fewer than 800,000 ongoing permanent mortgage modifications.¹⁵

In the face of a federal mortgage modification program that was being poorly executed and not accomplishing its stated goal,¹⁶ homeowners in foreclosure in California turned to the courts for meaningful relief. This article will provide a brief summary of recent case decisions that have provided judicial precedents forming a foundation for meaningful contract rights entitling California homeowners to permanent modifications of their home loans. As is discussed in more detail in the case summaries that follow, some recent cases have expanded upon established contract law in order to use extrinsic evidence in the form of Treasury regulations issued under the Home Affordable Modification Program to interpret the conditional terms of forbearance agreements and loan modification agreements and find a binding contract modifying loans that were in foreclosure.

II. THE STATUTE OF FRAUDS AS A BAR TO RELIEF

A. Rossberg v. Bank of America

One of the primary obstacles to seeking judicial enforcement of a loan modification is that the statute of frauds bars enforcement of an oral loan modification. The case of Rossberg v. Bank of America¹⁷ demonstrates this impediment to judicial relief. In February 2007, Alan and Brenda Rossberg (the "Rossbergs") borrowed $600,000 from Bank of America ("B of A"), secured by a deed of trust against their home in Irvine.¹⁸ Later, the Rossbergs could not make the payments on the loan.¹⁹ The Rossbergs and B of A negotiated for more than two years regarding a modification of the loan against the home.²⁰ Finally, in September of 2009, B of A recorded a notice of default and election to sell the home.²¹ In June 2010, B of A recorded a notice of sale of the home.²² In April 2011, the Rossbergs sued B of A, claiming that B of A had fraudulently promised to modify the loan against the home and then failed to do so.²³ Nonetheless, B of A completed the foreclosure sale and then in July 2013, B of A obtained a judgment of eviction against the Rossbergs.²⁴

The Rossbergs continued to pursue the fraud and breach of contract actions against B of A.²⁵ The trial judge finally dismissed the Rossbergs' complaint on the ground that it failed to state facts constituting a cause of action.²⁶

The Court of Appeal affirmed the judgment of dismissal, holding that the Rossbergs had failed to allege sufficient facts to constitute a cause of action.²⁷ Regarding the Rossbergs' breach of contract cause of action, the Court of Appeal held that a loan modification agreement must comply with the statute of frauds.²⁸ Because the Rossbergs failed to allege that a written agreement to modify the loan had been signed by B of A, the breach of contract cause of action failed as a matter of law.²⁹ Regarding the fraud cause of action, the Court of Appeal held that fraud must be pled specifically; general and conclusory allegations do not suffice.³⁰ The Court of Appeal pointed out that the Rossbergs failed to allege specific facts showing that they justifiably relied on B of A's alleged misrepresentation that the loan had been modified and that the alleged misrepresentation caused them damage.³¹ Moreover, the Court of Appeal questioned whether or not false promises regarding a loan modification that induce a borrower to make payments on a loan which is undisputedly owed can ever constitute damages for fraud, especially when the debtor continues to reside in the home as a result of the continued loan payments.³² (Further discussion of the heightened pleading requirement for fraud appears in Section III below.)

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However, the recent case of Chavez v. Indymac Mortgage Services³³ holds out some hope that the doctrine of equitable estoppel can overcome the bar of the statute of frauds.

B. Chavez: Equitable Estoppel as an Antidote to the Statute of Frauds

In 1999, Angelica Chavez ("Chavez") purchased a home in San Diego.³⁴ In 2006, she refinanced the home and obtained a new loan in the amount of $380,000.³⁵ In November 2009, Indymac Mortgage Services ("Indymac") recorded a notice of default and election to sell pursuant to Indymac's deed of trust.³⁶ At Chavez's request, Indymac sent a Home Affordable Modification Agreement ("Loan Modification") to her.³⁷ Chavez signed the Loan Modification and returned it to Indymac.³⁸ In October 2010, Indymac held a foreclosure sale of the home and in February 2011, evicted Chavez.³⁹ Chavez then sued Indymac for breach of the Loan Modification and wrongful foreclosure.⁴⁰ The trial judge dismissed Chavez's complaint on the ground that it failed to state facts constituting a cause of action.⁴¹

The Court of Appeal reversed the judgment of dismissal, holding that it was reasonably possible that Chavez could add new allegations to the complaint that would state a cause of action for breach of contract and equitable estoppel preventing Indymac from relying on the defense of the statute of frauds.⁴² While acknowledging that a forbearance agreement altering a note and deed of trust is covered by the statute of frauds, the Court of Appeal held that, liberally construed, the complaint sufficiently alleged facts supporting a claim that Indymac should be equitably estopped to rely on the statute of frauds defense.⁴³ Although the Court of Appeal was not prepared to hold that merely making payments on a debt that a borrower is obligated to pay could raise an estoppel, the Court of Appeal did rule that the fact that the loan modification provided that the unpaid and deferred interest would be added to the outstanding principal, and that interest would then accrue on the unpaid interest, could raise grounds for an estoppel.⁴⁴ However, in order for a borrower to prove detrimental reliance justifying a holding of equitable estoppel, the damages suffered by the borrower must be more than nominal.⁴⁵

III. HEIGHTENED PLEADING REQUIREMENT AS A BAR TO RELIEF

A. Aspiras: An Illustration of the Requirement

Another obstacle to judicial relief where a trial loan modification has failed is that a fraud claim is subject to a heightened pleading requirement, as was seen in the Rossberg case discussed in Section II.A. above. Aspiras v. Wells Fargo Bank, N.A.⁴⁶ demonstrates the application of this doctrine.

In April 2008, Henry Aspiras and Gloria Aspiras (the "Aspiras") refinanced the loan against their home in San Diego.⁴⁷ In January 2009, a notice of default and election to sell the home was recorded.⁴⁸ In April 2009, a notice of trustee's sale of the home was recorded.⁴⁹ On March 9, 2010, Wells Fargo Bank ("Wells Fargo"), then the holder of the loan on the Aspiras's home, notified the Aspiras by letter that the home loan would not be modified.⁵⁰ Mrs. Aspiras claimed that on March 11, 2010 a Wells Fargo employee told her that her loan modification application would be re-opened.⁵¹ On March 18, 2010, the Aspiras had a conversation with Shannon Gordon, a representative of Wells Fargo, who told them the home loan was under review to re-open a loan modification.⁵² On the next day, March 19, Wells Fargo sold the home to a third party at a nonjudicial foreclosure sale.⁵³ The Aspiras promptly sued for fraud, negligent misrepresentation, and violation of the unfair competition law.⁵⁴ The trial judge dismissed the Aspiras's complaint, ruling that there were insufficient facts to constitute a cause of action.⁵⁵

The Court of Appeal affirmed the judgment of dismissal.⁵⁶ The Court of Appeal gave the Aspiras's fraud claim short shrift by strictly enforcing the heightened pleading standard for fraud claims.⁵⁷ Specifically, the Court of Appeal found the complaint fatally defective for failing to identify by name the Wells Fargo employee who allegedly said on March 11, 2010 that...