Business Solutions Alert: Unsigned Loan Modification Agreement Enforceable by Homeowner on Equitable Grounds

An agreement to modify a deed of trust comes within the statute of frauds and is therefore invalid unless it is memorialized by a writing subscribed by the party to be charged. Last week, a California Court of Appeal ruled that a lender that failed to sign and return a loan modification agreement to a borrower was equitably estopped from relying on the lack of executed agreement as a basis for dismissing a breach of contract action. (Chavez v. IndyMac Mortgage Services (No. D061997, filed September 19, 2013.)

Chavez had refinanced residential real property by executing a promissory note, secured by a deed of trust encumbering the real property. Thereafter, an assignment of the deed of trust was executed, which transferred all beneficial interest to IndyMac Mortgage Services (a division of OneWest Bank, FSB) (collectively, “IndyMac”).

Chavez then defaulted on her monthly payments, and a notice of default and election to sell was executed and recorded. Chavez failed to cure the default, and a notice of trustee’s sale was recorded. IndyMac and Chavez then entered into negotiations for a loan modification, whereby IndyMac offered Chavez a “Trial Period Plan,” which required her to make three monthly payments in exchange for IndyMac suspending any scheduled foreclosure sale and agreeing to review Chavez’s financial information to determine whether she qualified for a loan modification. Chavez fully complied by making all the payments. Thereafter, IndyMac sent Chavez a Home Affordable Modification Agreement (the “Agreement”), which stated that the loan would be automatically modified if Chavez continued to live in the property as her principal residence and she received from IndyMac a copy of the Agreement signed by it.

Chavez alleged that she believed that her loan had been permanently modified after she fully performed and returned the signed Agreement to IndyMac. IndyMac contended that Chavez did not qualify for the modification because she did not live in the property as her principal residence; consequently, IndyMac never sent Chavez a copy of the Agreement signed by it. Chavez was later served with an unlawful detainer summons after a trustee’s deed upon sale was executed, prompting her action for breach of the Agreement and wrongful foreclosure.

The issue before the Court of Appeal was whether Chavez sufficiently pleaded around the statute of frauds. The court found that in light of the language of the Trial Period Plan and Agreement and the facts alleged in the complaint, IndyMac was equitably estopped to assert the statute of frauds.

The court noted that the express language of the Trial Period Plan required IndyMac to either (a) send Chavez a signed copy of the Trial Period Plan if she qualified for the modification, or (b) send her a notice that she did not qualify. IndyMac did neither, and instead skipped to sending Chavez a copy of the Agreement. The court found that this suggested that IndyMac had concluded that Chavez qualified for a permanent modification.

Further, the court found that the express language of the Agreement suggested that even if Chavez satisfied all other conditions, IndyMac had no obligation to permanently modify the loan until it mailed a signed copy of the Agreement. Such an interpretation, the court held, would go against the parties’ intent. Instead, the court found that the words of the Agreement (particularly, “automatically become modified”) and IndyMac’s conduct after Chavez sent a signed copy, suggested that IndyMac intended to stand by the Agreement.

While the decision appears to weaken any statute of frauds defense for lenders, the court did note that the issue of whether Chavez adequately pleaded facts to allege equitable estoppel was “a close one.” Indeed, in Secrest v. Security National Mortgage Loan Trust 2002-2 (2008) 167 Cal.App.4th 544, the court reached the opposite conclusion: The homeowner’s mere payment of money, a down payment in reliance on a forbearance agreement that was not signed by the lender, was insufficient to raise estoppel.

The takeaway from Chavez is that with agreements to modify a deed of trust, lenders should adhere to their procedural steps, notice requirements, and other contractual obligations. Otherwise, the court may be inclined to read into the actions taken by lenders, in order to allow a borrower to proceed with an equitable estoppel claim to enforce a loan modification agreement.

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September 26, 2013