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In Nungaray et al. v. Litton Loan Servicing, L.P. et al., No. B230580, filed 11/22/11, the court held that the efforts of borrowers to complete a loan modification agreement did not bar the trustee under a deed of trust from following through with foreclosure proceedings when no loan modification agreement was reached.

After the plaintiffs defaulted on their loan, the bank recorded a notice of foreclosure. The plaintiffs retained a third party to obtain a Home Affordable Mortgage Program (HAMP) loan modification. They executed a “Loan Workout Plan” that required the plaintiffs to make four reduced payments while the modification was under consideration. The agreement required them to produce adequate financial information, a condition of the agreement they did not satisfy. The first payment was returned and two subsequent payments were retained. The bank and loan servicer ultimately terminated the plan and the property was then sold in a nonjudicial foreclosure sale.

The court concluded the statute of frauds precludes relief because the defendants were not signatories to a final loan modification agreement. The court expressly rejected the plaintiffs’ contention that the retained payments constituted partial performance, an exception to the statute of frauds. Rather, the court found these were forbearance payments paid in exchange for delay in the foreclosure sale. The court further provided that such money paid as part of a forbearance agreement does not invoke the one-form-of-action or security-first rules of California Code of Civil Procedure section 726.

This case illustrates the exceptions to the statute of frauds are narrow, and doctrines such as partial performance will only be applicable where equitable considerations strongly favor the party in default. Otherwise, an enforceable HAMP loan modification agreement is only enforceable upon execution by the bank or lender holding the secured interest.

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