If It’s Not In Writing, It Didn’t Happen: Oral Promises To Modify A Loan Are Not Enforceable

A recent decision issued by the California Court of Appeal will make it more difficult for plaintiffs seeking to avoid foreclosure.  In Rossberg v. Bank of America, N.A., 219 Cal.App.4th 1481 (4th Dist. 2013), the California Court of Appeal affirmed a trial court’s dismissal of plaintiffs’ claims of oral promises to modify a loan.

In Rossberg, the plaintiffs obtained multiple loans secured by their residence.  Eventually, the plaintiffs fell behind in their mortgage payments and inquired about a possible loan modification with Bank of America. The plaintiffs specifically pled that, on several occasions, Bank of America orally represented that the plaintiffs had been granted a permanent loan modification.  The plaintiffs, however, never received documents confirming the loan modification and the modification was never implemented.  During these discussions, Bank of America executed a substitution of trustee.  The new trustee recorded a notice of default.  Thereafter, a notice of trustee’s sale was recorded.  The plaintiffs brought an action to halt the foreclosure sale alleging that their lender failed to comply with the statutory requirements for  a nonjudicial foreclosure and breached the purported oral loan modification agreement.  The trial court rejected the plaintiffs’ claims and dismissed the action.  The plaintiffs, in turn, appealed.

The Court of Appeal held that the statute of frauds barred the plaintiffs’ action for breach of the purported oral loan modification agreement because there was no written agreement signed by the lender.  In Secrest v. Security National Mortgage Loan Trust 2002-2, 167 Cal.App.4th 544, 552 (2008), the Court previously held that an agreement in which the lender agreed not to foreclose on a borrower’s home was subject to the statute of frauds because it modified the promissory note and deed of trust (e.g. agreements subject to the statute of frauds).  Thus, consistent with the Court of Appeal’s reasoning in Secrest, the Rossberg plaintiffs’ oral modification agreement was also subject to the statute of frauds.

The Court also rejected the plaintiffs’ fraud claims based on the lender’s alleged promises of a loan modification.  The plaintiffs argued that the lender’s promises induced them to continue making payments on their loan instead of obtaining a loan replacement.  The Court, however, failed to see how making the payments the plaintiffs had already agreed to make as part of the loan agreement caused them to sustain damages.  The Court also rejected the plaintiffs’ allegations of reliance in connection with a purported refinance loan and/or the sale of the property because the plaintiffs failed to plead facts showing that either of these options was a realistic possibility for plaintiffs as defaulted borrowers.

The Court also rejected the plaintiffs’ claim that a substituted trustee lacked authority to record a notice of default.  The Court held that, to state a claim based on a substituted trustee’s lack of authority to record a notice of default, the plaintiffs must allege facts showing that the new trustee was not the trustee under the deed of trust and was also not an agent of the trustee or beneficiary.  Regardless, the Court found that a substituted trustee is authorized by Civil Code section 2934a to record a notice of default before a substitution of trustee is notarized or recorded.

The Rossberg decision limits many of the garden variety claims plaintiffs in mortgage-related cases allege in an effort to stave off foreclosure.  This decision is merely the latest iteration of the common theme that a borrower must allege real “prejudice” in connection with a purported “wrongful foreclosure” to proceed with his or her claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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