985 PARKER .FI NAL O R.

DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

Mending Broken Promises: Allowing Homeowners to Pursue Claims of Promissory Estoppel Against Lenders when Denied Loan Modifications

AMY B. PARKER*

ABSTRACT
Over the past five years, nearly four million families lost their homes to foreclosure. Despite government efforts to overcome this problem, the mortgage crisis continues to plague the United States. Amidst this crisis, lenders inform homeowners seeking a loan modification that they do not qualify and advise them to stop making payments on their mortgage loan. Relying on this advice, homeowners stop making such payments and comply with the lender s requirements, only to find that the lender subsequently initiated foreclosure proceedings against them. A number of homeowners defended such foreclosure proceedings on the basis of promissory estoppel arguing that they reasonably relied on the lender s promise to negotiate a loan modification. While courts traditionally have not granted relief to homeowners on the basis of promissory estoppel, a trend is developing among many states and an increasing number of courts are allowing homeowners to pursue such claims. This Note argues that the trend favoring homeowners claims of promissory estoppel against lenders who promised to negotiate loan modifications provides an equitable result. First, this Note examines the government s role in encouraging loan modifications in contrast to mortgage lending industry servicers disincentives to provide loan modifications. In addition, this Note explains how homeowners claims meet all the necessary elements of promissory estoppel and why such claims should be allowed.

* Candidate for Juris Doctor, New England Law|Boston (2013). B.A., Communication, University of Texas at Arlington (2000). I would like to thank the editors and associates of volumes 46 and 47 of New England Law Review for their suggestions and assistance.

981

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

982

Ne w E ng la n d La w Re vie w

v. 47 | 981

INTRODUCTION
pproximately four million families lost their homes to foreclosure between 2007 and early 2012. 1 During the first half of 2012, one out of every 126 homes in the United States received a foreclosure filing.2 The United States is plagued by a mortgage crisis that occurred over the past several years, and amidst this crisis a number of issues have surfaced regarding foreclosure and the loan modification process.3 Many homeowners found themselves in trying circumstances and attempted to work with their lenders for loan modification agreements to reduce the interest rate, payment amount, or modify other terms of their mortgage loan so that they could continue to make payments toward their mortgage loans, rather than default.4 The loan modification qualification and application process is stressful, time consuming, tedious, and confusing, with differing goals for homeowners and lenders.5 In some circumstances, lenders informed homeowners that they would not qualify for a modification unless they stopped making payments on their mortgage loan.6 Relying on this advice, homeowners stopped making such payments and complied with the lender s requirements, only to find that the lender subsequently initiated foreclosure proceedings against them.7 A number of homeowners defended such foreclosure proceedings on the basis of promissory estoppel arguing that their actions were based on their reasonable reliance on the lender s promise to negotiate a loan modification.8 Traditionally, courts refused to grant homeowners relief on

1 Les Christie, Foreclosures Fall to Lowest Level Since 2007 , CNNM ONEY (Jan. 12, 2012), http://money.cnn.com/2012/01/12/real_estate/foreclosures/index.htm. 2 1 Million Properties with Foreclosure Filings in First Half of 2012 , REALTYTRAC. COM (July 10, 2012), http://www.realtytrac.com/content/foreclosure -market-report/midyear-2012-usforeclosure-market-report-7291. The states with the highest rates of foreclosures included Nevada, California, Arizona, Georgia, and Florida. Id. 3 See Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 WASH. L. REV . 755, 758 (2011). 4 See Explore Programs, M AKINGHOME A FFORDABLE .GOV , http://www .makinghomeaffordable.gov /programs/Pages/default.aspx (last visited Jan. 14, 2012). 5 See Ann Carrns, After Long Ordeal, a Homeowner Can Stay Home, N.Y. T IMES , Nov. 8, 2011, at F8, available at http://www.nytimes.com/2011/11/09/your-money/a-difficult-journey-to-amortgage-modification.html?pagewanted=all. 6 7 8

See, e.g., Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 339 (D. Mass. 2011). See id. See, e.g., id. at 340; Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 511 (Cal. Ct. App.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

983

promissory estoppel grounds.9 However, a trend is developing, and courts in a number of states have held, that homeowners may pursue such claims against lenders on grounds of promissory estoppel. 10 This Note argues that the trend favoring homeowners claims of promissory estoppel against lenders who promised to negotiate loan modifications provides an equitable result. Part I of this Note provides background information concerning loan modifications, including the U.S. Government s role in promoting loan modifications as a way to prevent foreclosures and stabilize the housing market. In addition, Part I examines how the structure of the mortgage lending industry creates disincentives for servicers to provide loan modifications. Part II of this Note describes the two contrasting views of whether to afford homeowners relief pursuant to promissory estoppel the traditional view is that homeow ners may not pursue such claims; and the emerging view is that homeowners are entitled to pursue such claims on the basis of promissory estoppel. Finally, Part III of this Note examines the required elements of a promissory estoppel claim and explores how homeowners claims supplant the necessary facts to satisfy each of the elements. I. Background A. Loan Modifications A loan modification is a change to one or more terms of a loan in order to cure a default or avoid imminent default. 11 Loan modification agreements may include a reduction in the interest rate or monthly payments or an extension of the loan term. 12 Political leaders have called for lenders and servicers to grant more at -risk homeowners loan modifications to avoid unnecessary foreclosures and prevent unnecessary

2011). 9 See Dixon, 798 F. S upp. 2d at 349-50 & n.4 (citing several cases from other jurisdictions with similar facts that denied claims based on promissory estoppel).
10 See id. at 349-50 (noting Massachusetts federal district court cases that have upheld homeowners claims on the basis of promissory estoppel); Bradley D. Scheick, Did Someone Say Estoppel? Courts Show Greater Acceptance of Applying Equitable Principles to Enforce Oral Forbearance Agreements, 22 M ILLER & S TARR, REAL ESTATE NEWSALERT 1, no. 2, 2011, at 1, 1, available at http://www.msrlegal.com/article/did-someone-say-estoppel-courts-show-greateracceptance-of-applying-equitable-principles-to-enforce-oral-forbearance-agreements/ (last visited March 16, 2013) (observing subtle trend in California courts to favor borrowers claims on the basis of promissory estoppel). 11 Julie T. Moran, Recent Developments in Residential Foreclosure Avoidance & Loan Modification, in DRAFTING & NEGOTIATING LOAN WORKOUT A GREEMENTS 17, 19 (MCLE, Inc . ed., 2010). 12

Id.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

984

Ne w E ng la n d La w Re vie w

v. 47 | 981

damage to the economy.13 1. The Home Affordable Modification Program

In 2008, the Troubled Asset Relief Program ( TARP) was initiated to prevent the collapse of the U.S. financial system. 14 Under TARP, the Secretary of the Treasury announced the Making Home Affordable program in February of 2009 as an effort to stabilize the U.S. housing market.15 The largest part of this program was the Home Affordable Modification Program ( HAMP), which provided an incentive to investors and servicers of home loans to work with borrowers to modify their mortgages so that distressed borrowers could continue to afford their mortgage payments and avoid foreclosure. 16 The government committed seventy-five billion dollars to HAMP, with the goal of assisting at least three-to-four million struggling homeowners.17 HAMP provided an incentive for loan modifications of first -lien mortgages secured by the

13 See FACT SHEET: President Obamas Plan to Help Responsible Homeowners and Heal the Housing Market, WHITE HOUSE .GOV (Feb. 1, 2012), http://www.whitehouse.gov/the -pressoffice/2012/02/01/fact-sheet-president-obama-s-plan-help-responsible-homeowners-and-heal-h (setting forth plan that would require a reasonable time for homeowners to seek modifications and prevent lenders from foreclosing unless the homeowner has shown no interest in pursuing alternatives to foreclosure); Jenifer B. McKim, Attorney General Martha Coakley Tells Fannie Mae and Freddie Mac to Reduce Loan Debt for More Struggling Homeowners , BOSTON G LOBE (Feb. 3, 2012, 6:26 PM), http://www.boston.com/Boston/businessupdates/2012/02/attorney general-martha-coakley-says-fannie-mae-and-freddie-mac -should-reduce-loan-debt-forstrugglinghomeowners/M51KtgTsIGGdMdTRyq51tJ/index.html?s_campaign=MobAppS hare_EM (calling for Fannie Mae and Freddie Mac to set an example for the industry by lowering the principal on mortgage loans for distressed homeowners in order to get the economy [on the right] track). 14 TARP Oversight: Evaluating Returns on Taxpayer Investments: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 112th Cong. 1, at 5 (2011) (written testimony of Timothy G. Massad, Acting Assistant S ecretary of the United S tates Department of Treasury), available at http://www.gpo/gov/fdsys/pkg/CHRG-112shrg67400/pdf/CHRG-112shrg67400.pdf. Congress authorized over $700 billion to aid financial institutions under TARP. Id. 15 Programs: Ma king Home Affordable, U.S . D EPT OF THE T REASURY (last updated Mar. 12, 2013), http://www.treasury.gov/initiatives/financial-stability/programs/housingprograms/mha/Pages/default.aspx.

Jean Braucher, Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First Year of the Home Affordable Modification Program (HAMP) , 52 A RIZ. L. REV . 727, 748 (2010). 17 Id . at 729. As of November 2011, nearly 910,000 homeowners had received loan modifications under HAMP with a median savings of $530 per month per loan. U.S . D EPT OF THE TREASURY, M AKING HOME A FFORDABLE : P ROGRAM P ERFORMANCE REPORT THROUGH NOVEMBER 2011, at 1 (2012), http://www.treasury.gov/initiatives/financialstability/results/MHA-Reports/Documents/FINAL_Nov%202011%20MHA%20Report.pdf.

16

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

985

borrower s principal residence that originated prior to January 1, 2009. 18 Investors and servicers could receive up to six thousand dollars for each successful loan modification.19 Among the many requirements set forth under HAMP, the borrower had to be in default of the loan or at imminent risk of default.20 During the loan modification application process and t rial period, the program prohibited a servicer of a mortgage loan from foreclosing on the borrower s home.21 In June 2010, the Treasury Department issued a new directive that required servicers to contact and solicit borrowers who may be eligible for loan modifications under HAMP.22 Servicers presented many obstacles and borrowers seeking to move forward with the loan modification application process were confronted with long delays in getting responses to their applications, lost paperwork by servicers, and lack of communication from servicers regarding reasons for denial of their application. 23 2. Industry Disincentives for Loan Modifications

Most mortgage loans are connected to a number of parties rather than just one lender.24 In reality, a lender may refer to an originating lender and broker who initiates the loan process, a trust comprised of multiple investors, and a servicer that collects payments and holds general decision making power over the loan.25 Investors in such loans have little control over modification decisions; rather, the servicer of the loan retains the
Braucher, supra note 16, at 748. See id. at 752 (noting that HAMP provided a one -time payment of $1,500 to investors for loan modifications and up to $4,500 for servicers of modified loans that proved successful for three years). In addition, borrowers were entitled to incentives of $1,000 per year for up to five years for staying current on modified loan payments. Id. at 753.
19 18

Id. at 749. Id. at 774. 22 Id. at 773. A number of supplemental directives have been issued with regard to the HAMP servicers to provide a uniform loan modification process to achieve home loan affordability through interest rate and principal amount reductions; these directives have been compiled in a handbook that is periodically updated. See, e.g. , M AKING HOME A FFORDABLE P ROGRAM: HANDBOOK FOR SERVICERS OF NON-GSE M ORTGAGES V ERSION. 3.3, at 12-16 (2011), available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhahandbook_33.pdf.
21

20

Braucher, supra note 16, at 773. Thompson, supra note 3, at 764. Over the past decade, many mortgage loans have been packaged into pools (generally in the form of trusts) and sold on the secondary market; these pools then engaged servicers to service the pool of loans pursuant to a Pooling S ervice Agreement (PS A). M ORAN, supra note 11, at 21-22. Restrictions in some PSAs have limited a servicers ability to modify loans on terms such as interest rate reduction or loan term extensions. Id. at 22.
24 25

23

Thompson, supra note 3, at 764.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

986

Ne w E ng la n d La w Re vie w

v. 47 | 981

power to make decisions regarding loan modifications and foreclosures. 26 The servicer has the most contact with the borrower, receives monthly mortgage payments, provides billing and tax statements to homeowners, and addresses homeowners questions and needs for loan modifications. 27 Servicers make money from monthly service fees that are based on the principal balance of the loan, as well as interest income and miscellaneous fees from borrowers.28 In addition, servicers profit from fees incurred by delinquent homeowners, such as late fees and default -related fees.29 The longer the loan is delinquent, the more fees the servicer can charge against the borrower.30 For example, in 2011, nearly twenty percent of the revenue earned from servicing residential loans by one prominent loan servicer consisted of late charges, loan collection fees, and process management fees.31 Servicers tend to disfavor permanent loan modifications because they are costly, time consuming, and not as profitable as foreclosures. 32 Although government programs, such as HAMP, provide servicer incentives to negotiate loan modifications, these incentives are outweighed by a host of other factors disfavor ing modifications.33 First, servicers are

Id. Id. at 765. S ervicers make decisions regarding collection activities for default and initiation of foreclosure proceedings. M ORAN, supra note 11, at 21.
27

26

Thompson, supra note 3, at 802. Id. at 803. 30 Peter S . Goodman, Lucrative Fees May Deter Efforts to Alter Loans, NYT IMES. COM (July 29, 2009), http://www.nytimes.com/2009/07/30/business/30services.html?pagewanted=all (noting a conflict between the financial advantages to servicers from delinquent loans and the responsibilities of servicers to recoup money for investors).
29 31 Ocwen Financial Corp., Annual Report 36-37 (Form 10-K) (Feb. 29, 2012), http://files.shareholder.com/downloads/ABEA-6F4AAO/1738046336x0xS 1019056-12280/873860/filing.pdf (listing a breakdown of the total $453,627,000 revenue earned for servicing residential loans, which included: $38,555,000 for late charges; $11,223,000 for loan collection fees; and $34,233,000 for process management fees). According to the Annual Report, process management fees are revenues related to commissions for the sale of foreclosed homes and for preparation of foreclosure documents. Id. at 39. In contrast, only nine percent of the servicers revenue came from the HAMP modifications. Id. at 37. 32 Thompson, supra note 3, at 776-77 (noting late fees and other default-related fees add significantly to the servicers profits, and the longer a homeowner is delinquent, the more these fees add up).

28

See generally id. at 776-825 (describing the increased costs associated with modifications, accounting rules and investor contracts that discourage modifications, a dual-track system that requires servicers to process both foreclosures and loan modifications at the same time, poor communication among multiple departments and with homeowners, servicer compensation associated with delinquent loans and foreclosures, the streamlined foreclosure process as opposed to the complex modification process, and a lack of highly trained

33

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

987

deterred from making principal reductions to mortgage loans because it would reduce their main source of incomethe monthly servicing fee that is based on the principal balance of the loan. 34 Second, the costs incurred by the servicer to perform a modification are more than the initial costs associated with a foreclosure sale.35 Third, servicers benefit from pursuing foreclosure due to the guaranteed recovery of all foreclosure-related costs as well as the accumulation of default fees assessed t o borrowers upon the post-foreclosure sale.36 Finally, a dual-track system employed by servicers permits the foreclosure process to proceed while the homeowner is negotiating a loan modification agreement, resulting in some homeowners having to defend foreclosure actions while complying with loan modification requirements.37 As such, the current environment in the mortgage industry limits the genuine availability of loan modification negotiations that would allow distressed homeowners to avoid foreclosure and keep their homes.38 B. The Common Law Doctrine of Promissory Estoppel The common law doctrine of promissory estoppel can be traced back to the nineteenth century as an equitable remedy employed by courts where a promisee detrimentally relied on a represent ation of a promisor.39 The contract doctrine of promissory estoppel descended from the tort doctrine of equitable estoppel.40 In the mid-twentieth century, the doctrine of promissory estoppel began to flourish as an equitable remedy and was

employees capable of negotiating permanent loan modifications). Id. at 780. Id. at 829. 36 Id. at 828. Upon a foreclosure sale, servicers are guaranteed to recover all their costs and fees before investors receive any recovery. Id. at 816. 37 See Donna Gerhke-White, Under New Rules, Loan Modification Wont Protect You From Foreclosure, S UNS ENTINEL .COM (Aug. 10, 2011), http://articles.sun-sentinel.com/2011-0810/business/fl-foreclosure-modify-20110810_1_loan-modification-modification-programforeclosure-proceedings (recounting the story of a Florida school teacher who sought a loan modification when his salary was reduced due to state budget cutbacks and found himself simultaneously defending a foreclosure on his home while complying with the lenders loan modification requirements). 38 See Thompson, supra note 3, at 840. 39 4 RICHARD A. L ORD, WILLISTON ON CONTRACTS 8:4 (4th ed. 2008). 40 D AWSON ET AL ., CONTRACTS : CASES AND COMMENT 283 (9th ed. Thomson/Foundation Press 2008); see Dickerson v. Colgrove, 100 U.S . 578, 580 (1879) ( The vital principle [of equitable estoppel] is that he who by his language or conduct leads another to do what he would not otherwise have done, shall not subject such person to loss or injury by disappointing the expectations upon which he acted.).
35 34

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

988

Ne w E ng la n d La w Re vie w

v. 47 | 981

recorded under Section 90 in the Restatement (First) of Contracts. 41 Today, all American jurisdictions apply some form of promissory estoppel. 42 The promissory estoppel remedy, as set forth in the Restatement, involves detrimental reliance on a promise:
A promise which the promisor should re asonably e xpe ct to induce action or forbe arance on the part of the promise e or a third pe rson and which doe s induce such action or forbearance is binding if injustice can be avoide d only by e nforce me nt of the promise . The re medy granted for bre ach may be limite d as justice re quire s.43

Stated differently, a valid claim for promissory estoppel must meet the following criteria: (1) a promise; (2) that induces reasonably foreseeable reliance by the promisee; (3) to the detriment of the promisee; (4) may be remedied where injustice can only be prevented by the application of the doctrine of promissory estoppel.44 The principle of promissory estoppel is that a promise made without consideration may be enforceable to prevent injustice if t he promisor should have reasonably expected that the promisee would rely on the promise and the promisee did rely on such promise to his or her detriment.45 Such detrimental reliance extends to both oral and written promises.46 A promisees action or inaction as a result of a promisors promise may constitute detrimental reliance. 47 A promise requires a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made .48 A promise of future, rather than present, intention is justified as long as the promisors intention

LORD, supra note 39, at 8:4; RESTATEMENT (FIRST) OF CONTRACTS 90 (1932). Eric Mills Holmes, The Four Phases of Promissory Estoppel, 20 S EATTLE U. L. REV . 45, 47 (1996). American courts differ in determining when and how to apply the remedy. Id. at 67. For example, a number of courts apply the doctrine as a consideration substitute, while the majority of courts apply the doctrine as an equitable remedy not confined to contract theory. Id. 43 RESTATEMENT (S ECOND) OF CONTRACTS 90 (1981). 44 Id. 45 B LACKS L AW D ICTIONARY 631 (9th ed. 2009). 46 Holmes, supra note 42, at 58. 47 See Glitsos v. Kadish, 418 P.2d 129, 131 (Ariz. Ct. App. 1966) (finding detrimental reliance where a party failed to initiate foreclosure proceedings within the statutory time period as a result of a promise of the other party); Mercanti v. Persson, 280 A.2d 137, 142 (Conn. 1971) (finding detrimental reliance where a party failed to procure liability insurance as a result of another partys promise).
42 48

41

RESTATEMENT (S ECOND) OF CONTRACTS 2 (1981).

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

989

to be legally bound is clear.49 Generally, a promise must not be too vague or indefinite on its terms in order to be enforceable. 50 However, some courts recognize a right to rely on statements, assurances, and representations made by a party where it was reasonably foreseeable that such party may rely on those representations. 51 At the heart of the doctrine of promissory estoppel are the principles of good faith, equity, and conscience.52 The doctrine of promissory estoppel is an attempt by the courts to keep remedies abreast of increased moral consciousness of honesty and fair representations in all business dealings.53 Indeed, the basis of any promissory estoppel claim is the prevention of injustice.54 The doctrine of promissory estoppel is . . . explained as promoting the same purposes as the tort of misrepresentation: punishing or deterring those who mislead others to their detriment and compensating those who are misled.55 Courts employ the doctrine of promissory estoppel on a case-by-case basis, and any relief afforded is discretionary with no mechanical bright line rule.56 Hoffman v. Red Owl Stores, Inc.57 is a well-studied case regarding the theory of promissory estoppel.58 In Red Owl Stores, the plaintiff, Mr.

Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 340 (D. Mass. 2011). Id. at 341. Compare LORD, supra note 39, at 4:29 ([I]f an essential element is reserved for the future agreement of both parties, as a general rule, the promise can give rise to no legal obligation until such future agreement.), with Aceves v. U.S. Bank, 120 Cal. Rptr. 3d 507, 514 (Cal. Ct. App. 2011) (noting that a promise that is conditional or ambiguous is not enforceable).
50 51 Holmes, supra note 42, at 68, 78 ([P]romissory estoppel recognizes the promisees right reasonably to rely on the expectations created by the promisor.). See also Bercoon, Weiner, Glick & Brook, an Ill. Pship v. Mfrs. Hanover Trust Co., 818 F. S upp. 1152, 1160 (N.D. Ill. 1993) ( observing that the promise necessary to invoke promissory estoppel does not have to be express to be enforceable; it may also be inferred from the words and conduct of the defendant); Franklin v. S tern, 858 P.2d 142, 145 n.1 (Or. Ct. App. 1993) ([A] person can reasonably and foreseeably rely on a promise that is not sufficiently definite to be enforced.) (citing Bixler v. First Natl Bank of Or., 619 P.2d 895, 898 n.4 (Or. Ct. App. 1980)) .

49

Holmes, supra note 42, at 67. The basis of promissory estoppel has been described as good faith and conscience to promote equity and corrective justice in an individual case. Id. at 58.
53 Id. at 73 (citing Peoples Natl Bank of Little Rock v. Linebarger Constr. Co., 240 S .W.2d 12, 16 (Ark. 1951)). 54 CLAUDE D. ROHWER & A NTHONY M. S KROCKI, CONTRACTS IN A NUTSHELL 175 (6th ed. 2006). 55 Avery Katz, When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations, 105 YALE L.J. 1249, 1254 (1996). 56 57 58

52

Holmes, supra note 42, at 51. 133 N.W.2d 267 (Wis. 1965). See, e.g., Whitford & Macaulay, Hoffman v. Red Owl S tores : The Rest of the Story ,

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

990

Ne w E ng la n d La w Re vie w

v. 47 | 981

Hoffman, entered into negotiations with an agent of the Red Owl Stores franchise chain in order to open a grocery store. 59 The agent encouraged Mr. Hoffman to take certain actions, including: selling the bakery store he operated; moving to a new town; purchasing a building site for the new grocery store; and incurring significant financial expenses toward opening a new grocery store.60 After Mr. Hoffman took all of these actions in reliance on the agents promise of a franchise agreement, the negotiations collapsed due to misrepresentations made by Red Owls agent regarding the financing of the business.61 In applying the doctrine of promissory estoppel, the court held that Mr. Hoffman reasonably relied on the promises made by the agent to his detriment and that injustice could only be prevented by granting him relief.62 The court noted that no other theory would permit the plaintiff to recover, though the facts most closely resembled an action for fraud or deceit.63 II. Availability of Promissory Estoppel to Homeowners Aggrieved by Lenders Failure to Fulfill Promises Many homeowners are now turning to the courts for relief when faced with the prospect of foreclosure as a result of their reliance on pr omises made by lenders.64 These homeowners claim that their foreclosing lenders promised to work with them toward modification of their home loans if they stopped making payments on their loans or took other actions that were detrimental to their legal rights.65 Such claims are grounded in the theory of promissory estoppel.66 Disputes concerning lenders promises to borrowers to negotiate loan modification agreements tend to be very fact -

reprinted in CONTRACT AND RELATED O BLIGATION: THEORY, D OCTRINE, AND PRACTICE 114, 11415 (6th ed. 2011) (claiming that Hoffman is the best known . . . leading early American case to allow recovery for precontractual reliance ); JEFFREY FERRIELL & M ICHAEL NAVIN, UNDERSTANDING CONTRACTS 142 (2004) (explaining that Hoffman is commonly studied by first year law students). Id. at 269. Id. at 270. 61 See id. at 271. 62 Id. at 275. 63 Id. at 273. 64 See, e.g. , Mendez v. Bank of America Home Loans S ervicing, LP, 840 F. S upp. 2d 639, 642-46 (E.D.N.Y. 2012); Senter v. JPMorgan Chase Bank, N.A., 810 F. S upp. 2d 1339, 1342-44 (S .D. Fla. 2011); Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 338 -40 (D. Mass. 2011); Jackson v. Ocwen Loan Servicing, LLC, No. 2:10-cv-00711-MCE-GGH, 2011 U.S . Dist. LEXIS 12816, at *2-4, 9-10 (E. D. Cal. Feb. 9, 2011); Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 511 (Cal. Ct. App. 2011).
60 65 66 59

See cases cited supra note 64. See cases cited supra note 64.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

991

sensitive and courts have considerable discretion over whether to apply doctrines such as promissory estoppel.67 Although traditionally courts in the United States rejected claims on the grounds of promissory estoppel by distressed homeowners ,68 a number of courts permit such claims.69 A. The Traditional View: Denying Relief to Homeowners The case Adams v. JPMorgan Chase Bank provides a common fact pattern in cases involving a loan modification dispute. 70 In Adams, a homeowner facing financial difficulties contacted his mortgage lender and was approved for a forbearance agreement.71 The agreement provided that the homeowner make reduced payments for six months and after the six month period, the lender would agree to consider a permanent loan modification.72 The homeowner made all payments as scheduled and upheld his end of the agreement.73 Nevertheless, five months after the date of the agreement, the lender initiated foreclosure proceedings against the homeowner with the intent to foreclose after the six-month period of the agreement.74 Despite having initiated foreclosure proceedings, the lender represented to the homeowner that he might be able to keep his home. 75 At the end of the six-month period, the lender moved forward with the foreclosure and the homeowner sought relief in court on a number of grounds, including promissory estoppel.76 The federal district court in Georgia denied the homeowner relief, finding that any promise made by the lender was too vague and indefinite

S cheick, supra note 10, at 6-7, 10. See, e.g., Pennington v. HSBC Bank US A, Natl Assn, No. A -10-CA-785 LY, 2011 U.S . Dist. LEXIS 147411, at *31 (W.D. Tex. Dec. 22, 2011); Tharaldson v. Ocwen Loan S ervicing, LLC, No. 11-1392 (DWF/AJB), 2011 U.S. Dist. LEXIS 144815, at *13-14 (D. Minn. Dec. 15, 2011); George-Baunchand v. Wells Fargo Home Mortg., Inc., No. H-10-3828, 2011 U.S . Dist. LEXIS 143788, at *23 (S.D. Tex. Dec. 14, 2011); Adams v. JPMorgan Chase Bank, No. 1:10 -CV-04226RWS , 2011 WL 2532925, at *1 (N.D. Ga. June 24, 2011).
68

67

See cases cited supra note 64. See Adams, 2011 WL 2532925, at *1. 71 Id. at *1. A forbearance agreement consists of a lenders promise to forbear from enforcing the default provisions of a loan for a specified period of time during which foreclosure or other collections actions are suspended so that the borrower may work with the lender to develop options to avoid foreclosure. M ORAN, supra note 11, at 19.
70

69

Adams, 2011 WL 2532925, at *1. Id. 74 Id. 75 Id. 76 Id. In addition to promissory estoppel, the homeowner brought claims of wrongful foreclosure, negligence, and fraud in the inducement against the lender. Id. This Note will not address the homeowners other claims.
73

72

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

992

Ne w E ng la n d La w Re vie w

v. 47 | 981

to justify reasonable reliance by the borrower. 77 According to the court, the lender s promise to review the borrower s application was not a binding promise to save the borrower s home.78 In addition, the court found that the borrower s reliance was not detrimental.79 Detrimental reliance required the borrower to make a substantial change in his position. 80 The court stated that the borrower did not make a substantial change in position by making reduced payments on the mortgage loan because he was already obligated to make payments toward the note. 81 Furthermore, the agreement did not prevent the borrower from seeking alternatives for housing or to avoid foreclosure.82 As such, the claim failed to meet the elements of promissory estoppel and the court denied any relief to the homeowner.83 B. The Emerging View: Granting Relief to Homeowners An increasing number of courts have allow ed homeowners to pursue claims on the basis of promissory estoppel against a lender where the homeowner has reasonably and detrimentally relied on the lender s promise to negotiate a loan modification agreement. 84 In allowing a homeowner to pursue relief on grounds of promissory estoppel, one judge in Massachusetts noted that [d]istressed homeowners are turning to the

Id. at *3. Adams, 2011 WL 2532925, at *3. See also Pennington v. HS BC Bank US A, No. A-10-CA785LY, 2011 U.S . Dist. LEXIS 147411, at *9 (W.D. Tex. Dec. 22, 2011) (noting that the TPP was not a guarantee of a loan modification, and to the extent plaintiffs relied on the promis e of a loan modification, they did so at their own peril). 79 Adams, 2011 WL 2532925, at *3. 80 Id. 81 Id. See also Lawther v. OneWest Bank, FS B, No. C-10-00054JCS , 2012 U.S . Dist. LEXIS 12062, at *57 (N.D. Cal. Feb. 1, 2012) (finding that homeowner did not establish detrimental reliance by making reduced payments as part of a temporary modification program because the homeowner was required to make payments toward the note anyway). 82 Adams, 2011 WL 2532925, at *3. 83 Id. 84 See Lacey v. BAC Home Loans S ervicing, LP, 2012 WL 2872050, at *24 -25 (Bankr. D. Mass. 2012) (allowing claim of promissory estoppel where homeowner forewent bankruptcy proceedings in reliance on lenders promise not to foreclose while evaluating HAMP loan modification); S enter v. JPMorgan Chase Bank, N.A., No. 11-60308-CIV-DIMITROULEAS , 2011 U.S . Dist. LEXIS 105414, at *64-65 (S .D. Fla. Aug. 9, 2011) (recognizing claim for promissory estoppel against lender that foreclosed on plaintiffs homes after plaintiffs had complied with TPP payments and documentation requirements for loan modification); Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 349-50 (D. Mass. 2011) (noting Massachusetts federal district court cases that have upheld homeowners claims on the basis of promissory estoppel); S cheick, supra note 10, at 1 (observing subtle trend in California courts to fav or borrowers claims on the basis of promissory estoppel).
78

77

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

993

courts in droves, hoping for relief . . . for misconduct by the mortgage lenders, and that the type of life situation in which this case arises is a devastating and nationwide foreclosure crisis that is crippling entire communities.85 The case Dixon v. Wells Fargo Bank, N.A., illustrates a resolution of a loan modification dispute that favors homeowners rather than len ders.86 In Dixon, homeowners entered into an oral agreement with their lender to take the steps necessary to enter into a loan modification agreement. 87 As part of the agreement, their lender instructed the homeowners to stop making payments on their mortgage loan and to forward certain financial documents.88 The homeowners complied with the agreement by stopping payments on their mortgage loan and forwarding the requested documentation.89 Within months, the lender foreclosed on their home and the homeowners filed suit, seeking relief on grounds of promissory estoppel.90 The homeowners argued that they reasonably relied on the lender s oral promise to engage in negotiations for a loan modification if they complied with the agreement terms and that reliance was detrimental because it left them susceptible to foreclosure.91 The court agreed with the homeowners, finding that the lender specifically promised to consider the homeowners eligibility for a loan modification if they stopped making payments on their loan a nd forwarded certain documentation.92 According to the court, the legal detriment suffered by the homeowners was a direct consequence of their reliance on [the lender] s promise.93 Therefore, the court held that the homeowners stated a claim for promissory estoppel where the lender had promised to negotiate a loan modification if the homeowners defaulted on their mortgage loan.94 Furthermore, the homeowners reasonably relied on this promise, and such reliance was detrimental in light of the fact that the lender took advantage of their default status by initiating foreclosure proceedings.95

Dixon, 798 F. S upp. 2d at 349. See id. at 340. 87 Id. at 339. 88 Id. It was agreed by the parties that the missed payments would be applied to the loan as modified. Id.
86 89 90 91 92 93 94 95

85

Id. Id. Dixon, 798 F. S upp. 2d at 340. Id. at 343. Id. Id. at 348. Id.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

994

Ne w E ng la n d La w Re vie w

v. 47 | 981

ANALYSIS
III. Allowing Homeowners to Pursue Claims on the Basis of Promissory Estoppel A. A Lender Agreeing to Negotiate Constitutes a Definite and Unambiguous Promise Homeowners claims against lenders based on reasonable, detrimental reliance satisfy all the necessary elements for a claim of promissory estoppel.96 When lenders agree to negotiate with homeowners, they promise to make a reasonable effort to negotiate in good faith.97 The promise must be clear, unambiguous, and definite; such as promising to take a specific action.98 Similar to Red Owl Stores, where the agent of Red Owl Stores promised to open a grocery store franchise if the plaintiff took certain actions, lenders promised to negotiate potential loan modification agreements with homeowners if they take certain actions. 99 The promise need not be a guarantee of a loan modification. 100 Rather, a promise need only be definite enough that a court can determine the scope of the duty and have limits of performance [that are] sufficiently defined to provide a rational basis for the assessment of damages. 101 Lenders argue that even upon the fulfillment of certain conditions, homeowners were not promised or guaranteed a loan modification or that such promise was indefinite or conditional; therefore, the lack of a clear and unambiguous promise defeats a claim for promissory estoppel.102

See infra Parts III.A.-D. See Aceves v. U.S. Bank, N.A., 120 Cal. Rptr. 3d 507, 514 (Cal. Ct. App. 2011) (finding a lenders agreement to negotiate with a homeowner for a loan modification to be a clear and unambiguous promise). 98 See, e.g. , Dixon, 798 F. S upp. 2d at 341; Aceves, 120 Cal. Rptr. 3d at 514. 99 Compare Hoffman v. Red Owl S tores, Inc., 133 N.W.2d 267, 270 (Wis. 1965) (promising to open a grocery store franchise if plaintiff sold his bakery store, moved to a new town, and purchased a building site), with Dixon, 798 F. S upp. 2d at 339 (promising to negotiate a loan modification agreement if homeowners stopped making payments on their current mortgage loan and forwarded certain documentation), and Aceves, 120 Cal. Rptr. 3d at 514 (promising to negotiate a loan modification if homeowner no longe r pursued bankruptcy proceedings).
97

96

Aceves, 120 Cal. Rptr. 3d at 514; Garcia v. World S avings, FSB, 107 Cal. Rptr. 3d 683, 696 (Cal. Ct. App. 2010). 101 Aceves, 120 Cal. Rptr. 3d at 514 (quoting Garcia , 107 Cal. Rptr. 3d at 696) (internal quotation marks omitted).
102 See, e.g. , Mendez v. Bank of America Home Loans S ervicing, LP, 840 F. S upp. 2d 639, 646-47 (E.D.N.Y. 2012); Senter v. JPMorgan Chase Bank, N.A., 810 F. S upp. 2d 1339, 1362 -63 (S .D. Fla. 2011); In re Bank of America Home Affordable Modification Program (HAMP) Contract Litigation, No. 10 md 02193 RWZ, 2011 WL 2637222, at *4 (D. Mass. July 6, 2011);

100

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

995

Lenders further argue that even if the lender promised to agree to a loan modification, it would not be enforceable because parties cannot agree to agree.103 While there is merit to the theory that parties cannot agree to agree, some courts have recognized that parties can agree to negotiate.104 Agreements to negotiate obligate parties to make r easonable efforts to negotiate in good faith.105 In the instance of a lender s promise to consider a homeowner for a loan modification if the homeowner complies with certain conditions imposed by the lender, the lender agreed to either negotiate or undertake steps necessary to determine whether the homeowner meets the criteria for a loan modification. 106 As such, the lender has not merely agreed to agree, but rather, promised to take specific action negotiation or consideration upon the homeowner s compliance with its conditions.107 Therefore, the lender has made a definite and

Aceves, 120 Cal. Rptr. 3d at 514. 103 Dixon, 798 F. S upp. 2d at 342 (noting that plaintiffs allegation that the parties had entered into an agreement to enter into a loan modification agreement would appear to fail to state a claim because an agreement to agree does not impose obligations on the parties, but finding that an agreement to negotiate had been made). 104 Id. at 342-43 (stating that promise to negotiate occurred when the lender made a specific promise to consider the [borrowers ] eligibility for a loan modification if they defaulted on their payments and submitted certain financial information); Aceves, 120 Cal. Rptr. 3d at 514 (noting that a promise to negotiate with borrower for a loan modification had been established when lender promised it would consider borrower for a loan modification if she forwent bankruptcy proceedings).
105 Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 COLUM. L. REV. 217, 265-66 & n.201-06 (1987) (citing a number of cases where courts have enforced agreements to negotiate found in letters of intent, lease agreements, and options to renew contracts).

Dixon, 798 F. S upp. 2d at 342-43; Aceves, 120 Cal. Rptr. 3d at 514. Mendez v. Bank of America Home Loans S ervicing, LP, 840 F. S upp. 2d 639, 655 (E.D.N.Y. 2012) (finding a clear and unambiguous promise in agreement provided by lender that homeowner qualified for a loan modification for ten years when homeowner satisfied numerous conditions precedent); Senter v. JPMorgan Chase Bank, N.A., 810 F. Supp. 2d 1339, 1364 (S.D. Fla. 2011) (finding that TPP agreement provided by lender promised to reasonably take steps to determine whethe r the [homeowners were] qualified and if so, the lender would enter into a permanent loan modification with them); Dixon, 798 F. S upp. 2d at 34243 (noting that lender made a specific promise to consider the [homeowners] eligibility for a loan modific ation if they defaulted on their payments and submitted certain financial information); Jackson v. Ocwen Loan S ervicing, LLC, No. 2:10 -c v-00711-MCE-GGH, 2011 U.S . Dist. LEXIS 12816, at *9-10 (E. Dist. Cal. Feb. 9, 2011) (finding lenders promise to provi de a loan modification upon homeowners compliance with conditions imposed by HAMP was clear and unambiguous); Aceves, 120 Cal. Rptr. 3d at 514 (observing that lender agreed to work with [homeowner] on a . . . loan modification if she no longer pursued relief in the bankruptcy court).
107

106

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

996

Ne w E ng la n d La w Re vie w

v. 47 | 981

unambiguous promise to the homeowner satisfying the first element of promissory estoppel.108 B. The Promisee-Homeowner s Reliance on the Promise is Reasonably Foreseeable by the Promisor-Lender While homeowners, as competent contracting parties, are charged with making as good a deal or as bad a deal as they are able, courts have found reliance on lenders promises of this nature reasonably foreseeable. 109 Furthermore, the nature of the lender -homeowner relationship provides ample reason to foresee that an unsuspecting homeowner would rely on representations made by their mortgage lenders. 110 The duty of good faith owed by lenders to homeowners, as well as the inequality of bargaining power between the parties, gives rise to reasonably foreseeable reliance.111 General contract principles provide that the mortgage loan agreements entered into by homeowners and lenders create a duty of good faith and fair dealing between the parties. 112 The duty of good faith is particularly well -suited to situations where one party has discretionary power affecting the rights of another.113 The obligation of good faith prevents a party from interfering with another partys performance of a condition in such a way that would either bring about the occurrence of a condition or prevent the condition from being satisfied. 114 As the Supreme Court stated in an early case:
See cases cited supra note 107 and accompanying text. Senter, 2011 U.S . Dist. LEXIS 105414, at *64 (finding homeowners reliance was reasonable where lender promised in TPP agreement to make a determination regarding whether homeowner qualified for loan modification); Dixon, 798 F. S upp. 2d at 346 (finding that lender should have known that homeowne rs would take steps to fulfill conditions required by lender for a loan modification); Jackson, 2011 U.S . Dist. LEXIS 12816, at *10 (finding reliance on lenders promise reasonable where homeowners acted in conformity with the express terms of the [TPP ag reement]); Aceves, 120 Cal. Rptr. 3d at 515-16 (finding that homeowners reliance was reasonable where lenders promise to reinstate and modify terms of mortgage loan was preferable to homeowner than moving forward with bankruptcy proceedings).
109 110 See infra Part III.D.1.Unequal Bargaining Power of the Parties Provides the Need for an Equitable Remedy 108

See RESTATEMENT (SECOND) OF CONTRACTS 205 (1981) (Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.) ; s ee infra Part III.D.1. (describing the inequality of bargaining power between lenders and homeowners).
112 RESTATEMENT (S ECOND) OF CONTRACTS 205 (1981) (Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforce ment). 113 Jackson, 2011 U.S . Dist. LEXIS 12816, at *8. 114 HOWARD O. HUNTER, M ODERN L AW OF CONTRACTS 10:8 (2011) (This includes the o bligation not to do anything calculated to prevent the occurrence of a condition).

111

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s The re is no rule more ne ce ssary to e nforce good faith than that which compe ls a pe rson to abstain from asse rting claims which he has induce d othe rs to suppose he would not re ly on. The rule doe s not re st on the assumption that he has obtaine d any pe rsonal gain or advantage , but on the fact that he has induce d othe rs to act in such a manne r that the y will be se rio usly pre judice d if he is allowe d to fail in carrying out what he has e ncourage d the m to e xpe ct. 115

997

In a number of cases where lenders have foreclosed on homeowners after promising to consider modifying their loans, the homeowners were persuaded by the lenders to default on their loan in some way to stop making payments or make reduced monthly payments as part of a TPP before they would even be considered for a modification. 116 Essentially, lenders in these cases induced homeowners to default on their current mortgage loan contract as a prerequisite to entering into a loan modification agreement.117 This default triggered the acceleration clause in the mortgage, which enabled to lender to foreclose. 118 In effect, these lenders interfered with the homeowners performance of the contract in such a way that caused the occurrence of a condition that benefited the lender and harmed the homeowner.119 Such interference violated the duty of good faith.120 Similarly, in many instances, lenders have interfered with the homeowners performance of conditions necessary to qualify for a loan modification.121 Interfering with the homeowner s performance of
115 Dickerson v. Colgrove, 100 U.S. 578, 581 (1879) (citing Faxton v. Faxon, 28 Mich. 159, 161 (1873)). 116 See, e.g. , Mendez v. Bank of America Home Loans S ervicing, LP, No. 11 -c v-1516 (ADS )(GRB), 2012 U.S. Dist. LEXIS 4595, at *39 (E.D.N.Y. Jan. 14, 2012); S enter v. JPMorgan Chase Bank, N.A., No. 11-60308-CIV-DIMITROULEAS, 2011 U.S. Dist. LEXIS 105414, at *62-63 (S .D. Fla. Aug. 9, 2011); Dixon v. Wells Fargo, N.A., 798 F. S upp. 2d 336, 342 -43 (D. Mass. 2011); Jackson, 2011 U.S. Dist. LEXIS 12816, at *10; Aceves v. U.S. Bank, N.A., 120 Cal. Rptr. 3d 507, 526 (Cal. Ct. App. 2011).

See cases cited supra note 116. See FANNIE M AE /FREDDIE M AC, S TANDARD M ORTGAGE , available at https://www.efanniemae.com/sf/formsdocs/documents/secinstruments/#standard (last visited Feb. 19, 2012). The standard mortgage security instrument contains an acceleration clause which provides that if the borrower breaches any covenants of the mortgage, such as failure to make timely or complete payments resulting in default of the loan, the lender may invoke a power of sale. Id.
118

117

See cases cited supra note 116. See HOWARD O. HUNTER, M ODERN LAW OF CONTRACTS 10:8 (2011). 121 See In re Bank of America Home Affordable Modification Program (HAMP) Contract Litigation, 2011 WL 2637222, at *5 (D. Mass. July 6, 2011) (finding that borrowers allegations were sufficient to state a claim of bad faith where lender failed to properly train and supervise its agents and encourage[ed] and/or allow[ed] employees to make inaccurate
120

119

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

998

Ne w E ng la n d La w Re vie w

v. 47 | 981

conditions necessary to qualify for a loan modification in a way that prevents the occurrence of such conditions violates the duty of good faith.122 This is even more problematic given that the lender has the discretionary power to decide whether or not to grant the loan modification.123 Finally, courts have recognized that the duty of good faith imposed on lenders requires that the interests of the homeowner be protected.124 Lenders are expected to act in good faith and to protect the interests of homeowners.125 Given this expectation of good faith, it is reasonably foreseeable that homeowners would rely on promises made by lenders. 126 Therefore, the nature of the relationship between the lender and the homeowner and the requirement of good faith satisfies an element of promissory estoppel reasonable foreseeable reliance.127 C. The Promisee-Homeowner s Reliance on the Promisor-Lenders Promise is Detrimental Homeowners reliance on the acts and representations of lenders is detrimental where such reliance has caused a worsening of the homeowners position.128 In relying on the promises of lenders, homeowners unsuspectingly give up various legal rights. 129 A homeowner
representations); Jackson, 2011 U.S. Dist. LEXIS 12816, at *8-9 (noting that lenders refusal to accept homeowners payment constituted lack of good faith); Braucher, supra note 16, at 773 (noting evidence of long wait times for borrowers seeking to speak with lenders via telephone and multiple instances of lost documentation previously supplied by borrowers). See HUNTER, supra note 120, at 10:8. See Jackson, 2011 U.S . Dist. LEXIS 12816, at *8. 124 U.S . B ank Natl Assn. v. Ibanez, 941 N.E.2d 40, 50 n.16 (Mass. 2011) ([A] mortgage holder must not only act in strict compliance with its power of sale but must also act in good faith and . . . use reasonable diligence to protect the interests of the mortgago r, and this responsibility is more exacting where the mortgage holder becomes the buyer at the foreclosure sale . . . .) (citing Williams v. Resolution GGF OY, 630 N.E.2d 581, 584 (Mass. 1994)). 125 Id. 126 See supra notes 109-23 and accompanying text. 127 See RESTATEMENT (S ECOND) OF CONTRACTS 90 (1981). 128 See B LACKS L AW D ICTIONARY 1404 (9th ed. 2009) (D etrimental reliance occurs when one party relies on the acts or representations of another, causing a worsening of the first partys position.).
123 122

See, e.g., S enter v. JPMorgan Chase Bank, N.A., 810 F. S upp. 2d 1339, 1343 -44 (S .D. Fla. 2011) (discussing the banks unwillingness to approve homeowners loan mo dification applications); Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 340 (D. Mass 2011) (describing how the plaintiffs stopped paying their mortgage loan based on the banks promise to enter into negotiations to modify the loan when in reality the bank had initiated foreclosure against the plaintiff); Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 515 -17 (Cal.

129

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

999

can argue that he or she detrimentally relied on a lender s promise to consider a loan modification if that homeowner made reduced payments as part of a trial modification plan, or foregoes a short sale of the home, or agrees to incur additional mortgage servicing and late fees, only to subsequently be foreclosed upon by the lender. 130 Because detrimental reliance requires a change in ones position or status, whether by action or inaction, as a result of a promisor s promise, a homeowner s change from owner to non-owner as a result of foreclosure equates to such definition. 131 Similarly, a homeowner s position worsens when she abandons bankruptcy proceedings which would have allowed her to keep her homebased in reliance on a lender s promise to modify her current mortgage if she forwent such proceedings.132 Lenders have argued that no substantial change in position to constitute detrimental reliance occurs when a homeowner makes reduced payments pursuant to a trial modification plan because homeowners are bound to make payments toward the note anyway. 133 This argument fails to consider the legal rights the homeowner has sacrificed in reliance on the lender s promise.134 Where homeowners made reduced payments or stopped making payments altogether, t heir loans went into default.135 Once a mortgage loan is in default, certain terms of the mortgage take effect and the homeowner becomes vulnerable to foreclosure. 136 Foreclosure of the mortgage by the lender terminates the homeowner s rights to the home.137 Termination of the homeowner s rights to the home is a substantial legal detriment; and where homeowners have taken certain actions (or inaction)
Ct. App. 2011) (discussing how the plaintiff did not file for chapter 13 bankruptcy based on the banks promise to work with her to modify her loan and, as a result, she did not have access to chapter 13 protections). See Senter, 810 F. S upp. at 1363. See 4 A M . JUR. 2 D Proof of Facts 1, at 644 & 4, at 650 (1975). 132 See, e.g. , Aceves, 120 Cal. Rptr. 3d at 515-17; Lacey v. BAC Home Loans Servicing, LP ( In re Lacy), 480 B.R. 13, 44-45 (Bankr. D. Mass. 2012) (allowing claim of promissory estoppel where homeowner forewent bankruptcy proceedings in reliance on lenders promise not to foreclose while evaluating HAMP loan modification).
131 133 See, e.g. , Adams v. JPMorgan Chase Bank, N.A., No. 1:10-CV-04226-RWS , 2011 WL 2532925, at *3 (N.D. Ga. June 24, 2011) (finding no substantial change in position to constitute detrimental reliance where homeowners made reduced payments pursuant to trial modification agreement because he remained in his home, was bound to make payments on Note anyway, and could have c ontinued to seek alternatives to save his house). 130

See infra text accompanying notes 135-138 . U.S . D EPT OF HOUSING AND URBAN D EV ., FORECLOSURE P ROCESS , HUD.G OV , http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure/foreclosureprocess (last visited Mar. 20, 2013). See, e.g., Senter, 810 F. S upp. 2d at 1343.
135 136 137

134

See id. (describing when acceleration begins in the foreclosure process). See id.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

1000

Ne w E ng la n d La w Re vie w

v. 47 | 981

as a result of a lender s promise to consider them for a loan modification, those homeowners have relied on this promise to their detriment.138 Thus, detrimental reliance occurs where homeowners give up legal rights as a result of unfulfilled promises made by lenders. 139 The plight faced by homeowners who have complied with the requirements of their lenders with the expectation that such compliance would result in a modification of their home loan is akin to that experienced by Mr. Hoffman in the oft-studied promissory estoppel case Red Owl Stores, who relied on the representations made by an agent of the grocery franchise with the expectation that he would be able to open a grocery store.140 Many homeowners, who are unfamiliar with the complexities in the mortgage industry, reasonably rely upon the advice given to them about their mortgage loan as an appropriate instr uction on the steps they must take in order to modify their current home loans. 141 Like Mr. Hoffman in Red Owl Stores, who took certain steps that were detrimentalincluding selling his bakery, moving to a new town, and incurring significant financial expensein compliance with Red Owls requirements for opening a grocery store,142 these homeowners took certain detrimental steps steps that caused them to lose the legal rights to their homes in anticipation of meeting the requirements for a loan modification.143 For many, the loss of ones home can be both financially and psychologically devastating.144 Perhaps no better example of detrimental reliance exists than that in which a homeowner loses his home as the result of reliance on the representations of his lender.145 Therefore, homeowners who reasonably relied to their detriment on the representations of their lenders must be permitted to pursue claims of promissory estoppel against such lenders.146

138 See Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 343, 346 (D. Mass. 2011); Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 515-17 (Cal. Ct. App. 2011).

See Dixon, 798 F. S upp. 2d at 343, 346. See supra notes 57-61 and accompanying text. 141 See Carrns, supra note 5. 142 Compare notes 57-61 and accompanying text, with Dixon 798 F. S upp. 2d. at 343, 346. 143 See supra notes 134-139 and accompanying text. 144 Amanda Michel, Peoples Panel: The Psychological Cost of US Foreclosure, T HE G UARDIAN (May 29, 2012), http://www.guardian.co.uk/commentisfree/2012/may/29/us -foreclosurespeoples-panel (recounting stories of those who have lost their home to foreclosure and describe the experience as destroying or ruining their lives).
140 145 146

139

See Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 346 (D. Mass. 2011). See supra notes 128-31 and accompanying text.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

1001

D. Promissory Estoppel is Necessary to Avoid Injustice 1. Unequal Bargaining Power of the Parties Provides the Need for an Equitable Remedy.

There is a disparity in bargaining power between lenders and borrowers.147 In the residential setting, borrowers are generally precluded from negotiating conditions of the terms of t heir mortgage loan.148 In addition, lenders tend to be more sophisticated than borrowers of residential mortgage loans.149 Bargaining power is derived from a number of characteristics, including status, wealth, size of organization, education, business sophistication, and the subject matter of the transaction. 150 In the legal context, the doctrine of inequality of bargaining power may be analyzed as one element of unconscionable contracts or as a reason to refuse to enforce private agreements as objectionable to public policy.151 The doctrine of inequality of bargaining power is subject to judicial discretion, and there is no predictable judicial standard for determining inequality of bargaining power.152 In determining whether there is an inequality of bargaining power, courts may look to whether there was opportunity to negotiate and meaningful choices available to the parties. 153

147 See, e.g. , Prepared Statement of the Federal Trade Commission on Predatory Lending Practices in the Home-Equity Lending Market, 2000 WL 1268757, at *6 (2000) (statement of Peggy Twohig, Assistant Director for Financial Practices, Federal Trade Commissions Bureau of Consumer Protection) [hereinafter Predatory Lending Practices] (recognizing the unequal bargaining positions between lenders and borrowers); John Mixon & Ira B. S hepard, Antideficiency Relief for Foreclosed Homeowners: ULSIA Section 511(b) , 27 WAKE FOREST L. REV . 455, 461 (1992) (observing the lack of bargaining power possessed by consumers entering into loan contracts with lenders); Emily Gildar, Comment, Arizonas Anti-Deficiency Statutes: Ensuring Consumer Protection in a Foreclosure Crisis, 42 A RIZ. ST. L.J. 1019, 1024-26 (2010) (describing the unequal bargaining power of lenders over borrowers).

Gildar, supra note 147, at 1024-25. Id. at 1025. 150 Daniel D. Barnhizer, Inequality of Bargaining Power, 76 U. C OLO. L. REV . 139, 169-70 (2005). Further situational characteristics that contribute to bargaining power include: the degree of necessity, perceptions of the other partys power, the skill and expertise of a party, access to information, and legitimate alternatives to a negotiated outcome. Id. at 170-71. In the housing context, courts observe that tenants have no bargaining power with landlords when entering into residential lease agreements. Id. at 170 n.130.
149

148

Id. at 144. See id. at 199-01 (noting that while some courts consider situational characteristics, others rely upon a we -know-it-when-we-see-it approach).
152 153 See id. at 202; Pardee Constr. Co. v. Superior Co urt, 123 Cal. Rptr. 2d 288, 292-93 (Cal. Ct. App. 2002) (holding that buyers of entry -level home had no meaningful alternatives to the contract presented by the developer where the subject matter concerned the uniqueness of a

151

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

1002

Ne w E ng la n d La w Re vie w

v. 47 | 981

Given the disparity of bargaining power between lenders and borrowers in mortgage loan transactions, public policy weighs in favor of protecting homeowners from unfair lending practices. 154 Indeed, lawmakers across the country have recognized the need to protect homeowners facing foreclosure as a result of unfair lending practices. 155 Unfair lending practices may include informing a promisee-homeowner that in order to qualify for a new and better contract, the promiseehomeowner must act in a way that causes a loss of the homeowner s rights (i.e., encouraging the homeowner to stop making payments on the current mortgage loan resulting in default and triggering the acceleration clause in the mortgage).156 Such conditions for loan modifications, when imposed by the lender with greater bargaining power, give an unfair advantage over distressed homeowners and exemplify the need for an equitable remedy.157 2. Motivations of Servicers Create a Conflict of Interest Which May Be Remedied by Promissory Estoppel

There is an inherent conflict of interest between loan servicers , borrowers, and investors so much so that political leaders have urged that loan servicers be separated from the institutions that hold a borrower s loan.158 In response to this conflict, agencies set forth proposals and government regulations were passed in an effort to increase the transparency of servicer activities to investors. 159 Lenders across the
home, and the biggest purchase [the buyers] will ever make in their life).
154 See, e.g. , Predatory Lending Practices (calling for increased safeguards to protect borrowers from predatory lending practices in part due to the unequal bargaining positions between lenders and borrowers); Nelson D. S chwartz & S haila Dewan, States Negotiate $26 Billion Agreement for Homeowners, NYTIMES .COM (FEB . 8, 2012), http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-dollar-deal-forhomeowners.html?pagewanted=all (describing $26 billion settlement reached with five major lenders in lawsuit brought by states across the country concerning unfair lending practices of robo-signing, forged documents, and possible fraud). 155 See Heather Morton, Foreclosures 2011 Legislation, NCS L. ORG (Feb. 20, 2012), http://www.ncsl.org/issues-research/banking/foreclosures-2011-legislation.aspx (noting that in 2011, lawmakers in forty -four jurisdictions introduced legislation regarding foreclosures).

See supra Part III.C. See Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 346 (D. Mass. 2011); Gildar, supra note 147, at 1024-26.
157

156

Gretchen Morgenson, A Mortgage Nightmares Happy Ending , NYTIMES.COM , (Dec. 25, 2010), http://www.nytimes.com/2010/12/26/business/26mod.html?pagewanted=all (quoting House Representative Brad Miller, who observed the servicer/lender relationship creates conflicts of interest, [] puts the servicers in the position of controlling information and allows [the servicer] to protect itself at the expense of homeowners and investors). 159 See M AKING HOME A FFORDABLE P ROGRAM : HANDBOOK FOR S ERVICERS OF NON-GS E M ORTGAGES VERSION. 3.3, supra note 22, at 12-16; see also U.S . G EN. ACCOUNTING O FFICE, GAO-

158

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

2013

Me nd i ng B ro k e n P ro mis e s

1003

country have been subject to investigations and sanctions by the Securities and Exchange Commission for engaging in deceptive or misleading practices that contributed to the current mortgage crisis. 160 In early 2012, Massachusetts, along with forty-eight other states, settled a $26 billion lawsuit against five large banks for various alleged deceptive acts and practices.161 Among these practices were alleged deceptions of homeowners regarding the details and availability of loan modification programs and failure to disclose the status of foreclosure proceedings against homeowners.162 It is not surprising that such deceptive or misleading practices have been alleged, given the monetary incentives for servicers to prolong the delinquency of mort gage loans leading to eventual foreclosure.163 The interests of servicers conflict with the interests of homeowners servicers make money via default and foreclosure related fees, while homeowners seek to avoid default and foreclosure by asking servicers to modify their loans.164 Given the unequal bargaining power between the parties and the conflict of interest inherent in the motivations of servicers, promissory

04-280, CONSUMER P ROTECTION: FEDERAL AND S TATE A GENCIES FACE CHALLENGES IN COMBATING P REDATORY LENDING 3 (2004), available at http://www.gao.gov/new.items/d04280.pdf. 160 See U.S . S EC. & E XCH. COMM N, S EC ENFORCEMENT A CTIONS : ADDRESSING M ISCONDUCT THAT LED TO OR A ROSE FROM THE FINANCIAL CRISIS, S EC. GOV (Feb. 1, 2013) , http://www.sec.gov/spotlight/enf-actions-fc.shtml.
161 Jennifer Liberto , Housing Settlement Details Due Out This Week, CNNM ONEY (Feb. 28, 2012), http://money.cnn.com/2012/02/28/news/economy/mortgage_settlement/ index.htm. The settlement provided for immediate aid to homeowners in need of loan modifications, payment to borrowers who lost their homes to foreclosure, payment to states to help fund consumer-protection efforts, and reformation of servicing standards, including ending the dual-track foreclosure system and providing for better communication with borrowers. See About the Settlement, NATIONAL M ORTGAGE S ETTLEMENT, http://www.nationalmortgagesettlement.com /about (last visited Feb. 12, 2012). 162 See Complaint at 52, Commonwealth v. Bank of America, N.A., No. 11 -4363 (Mass. S uper. Ct. Dec. 1, 2011), a vailable at http://www.mass.gov/ago/docs/press/ag -complaintnational-banks.pdf. In the Commonwealths Complaint were allegations that the bank defendants misrepresentations re garding the requirements and implementation of loan modifications were deceptive and misleading, and result[ed] in harm to borrowers. Id. at 34. S uch alleged misrepresentations included: communicating to borrowers that they must be over sixty days delinquent on their loan before they may qualify for a modification, when that is not required; informing borrowers that only if they are over ninety days delinquent will they receive priority status for a modification; and discouraging borrowers from applying for modifications based on the seasonal nature of their income, when such factors do not affect the determination of eligibility for a loan modification. Id. at 33. 163 164

See supra Part I.A.2. See supra notes 29-31 and accompanying text.

985 PARKER .FI NAL O R. DOC (DO NOT D EL ETE)

11/13/2013 1:58 PM

1004

Ne w E ng la n d La w Re vie w

v. 47 | 981

estoppel is necessary to prevent injustice.165 Relief must be awarded where injustice would result if the promise were not binding.166 Homeowners are entitled to relief in cases where they have suffered foreclosure due to the reasonably foreseeable detrimental reliance on promises by lenders to negotiate loan modifications promises which gave such lenders an upper hand by making those homeowners vulnerable to foreclosure. 167

CONCLUSION
The trend favoring homeowners claims of promissory estoppel against lenders who promised to negotiate loan modifications provides an equitable and just result. The doctrine provides a way for homeowners to seek relief when they suffered because of their reasonable reliance on promises made by lenders. Furthermore, public policy favors keeping homeowners in their homes and preventing lenders from engaging in unfair lending practices. Loss of homes hurts not only the individual homeowner but also the family, the neighborhood and the community at large.168 As one journalist described:
Fore closure s blight ne ighborhoods, put financial pre ssure s on familie s and drive down local re al e state value s. Investors . . . are also hurt by fore closures, because re coveries on the se prope rtie s are low. And consume rs, made more cautious by a cripple d housing marke t, spe nd le ss fre e ly, curbing the e conomy s growth.169

Application of the doctrine of promissory estoppel is appropriate in this type of life situation where homeowners caught in the middle of a foreclosure crisis are turning to the courts for relief. 170

See Union Mut. Life Ins. Co. v. Mowry, 96 U.S. 544, 547-48, (1877) (observing that where a representation has led to an abandonment of an existing right, and is made to influence others, and by which they have been induced to act . . . [t]he doctrine of estoppel is applied . . . to prevent [those representations] operating as a fraud upon one who has been led to rely upon them); RESTATEMENT (S ECOND) OF CONTRACTS 90 (1981). 166 Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 346 -47 (D. Mass. 2011). 167 Id. at 346, 352. 168 Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 516 (Cal. Ct. App. 2011). 169 Gretchen Morgenson, A Mortgage Nightmares Happy Ending, N.Y. T IMES , Dec. 25, 2010, available at http://www.nytimes.com/2010/12/26/business/26mod.html?pagewanted=all.
170

165

Dixon v. Wells Fargo Bank, N.A., 798 F. S upp. 2d 336, 349, 352 (D. Mass. 2011).