Friday, April 25, 2014

FYI: Cal App Ct Reverses Dismissal of Borrowers' Contract Claims Alleging Breach of HAMP TPP Where No Permanent Mod Was Offered

Saturday, November 9, 2013

The California Court of Appeal, Third Appellate District, recently held that the borrower plaintiffs stated a claim for breach of contract and related causes of action, by alleging that they had complied with all of the terms of their HAMP Trial Period Plan ("TPP") but did not receive a permanent modification.  According to the Court, the lender or servicer must offer the borrower a permanent loan modification in such cases.

A copy of the opinion is available at:

After the plaintiffs ("Borrowers") defaulted on their mortgage loan, they received and signed a trial modification plan, or Trial Period Plan ("TPP"), from the defendant ("Lender"), which stated:

If you qualify under the federal government's Home Affordable Modification [P]rogram [(HAMP)] and comply with the terms of the [trial modification plan], we will modify your mortgage loan and you can avoid foreclosure.

Shortly thereafter, Borrowers received a confirmation letter from Lender, which stated that if Borrowers made all three trial period payments and complied with all of the applicable HAMP guidelines, they "will have qualified for a final [permanent] modification."

Between June 2009 and August 2011, Borrowers allegedly made twenty-six (26) trial modification payments, as Lender allegedly advised.  In November, 2010, Borrowers received a letter requesting updated information, which they subsequently provided.  On January 27, 2011, they received a notice of trustee's sale regarding their property.

Borrowers sued, alleging breach of contract (as well as breach of implied covenant of good faith and fair dealing), promissory estoppel, and fraud, based on supposed intentional misrepresentations and false promises.  The trial court sustained Lender's demurrer without leave to amend, and dismissed the case.  Borrowers appealed.

As you may recall, to allege a cause of action for breach of contract in California, a plaintiff must allege, "(1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff."  Reichert v. General Ins. Co., 68 Cal,2d 822, 830 (1968).

The Appellate Court relied on two recent appellate opinions addressing similar issues.  See West v. JPMorgan Chase Bank, N.A., 214 Cal.App.4th 780 (2013); Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012).  According to the Court, those rulings provided that "when a borrower has alleged that he or she has complied with all the terms of a trial modification plan offered under HAMP – including making all required payments and providing all required documentation – and if the borrower's representations on which the modification is based remain true and correct, the lender or loan servicer (collectively, hereafter, the lender) must offer the borrower a food faith permanent modification."  Bushell v. JPMorgan Chase Bank, N.A., slip op. at 2 (emphasis added).  If the lender fails to do so, "the borrower may sue the lender, under state law, for breach of contract of the trial modification plan, among other causes of action."  Id.

Applying these rulings to the breach of contract claim, the Appellate Court held that Borrowers had alleged a cause of action for breach of contract under the TPP.  According to the Court, the cause of action turned on whether Borrowers had alleged performance of the conditions precedent to forming the TPP contract to permanently modify the terms of their loan – namely, compliance with the TPP's terms and HAMP.

Based upon its interpretation of certain Treasury HAMP regulations, the Court held that, "when a lender offers a TPP to a distressed borrower, the lender effectively has already determined that the borrower qualifies for HAMP," assuming that the borrower's representations are true and correct.  Bushell, slip op. at 9.  Further, if the borrower has complied with all terms of the TPP, "including making all required trial payments and providing all required documentation," then the lender "must offer" the borrower a permanent loan modification.  Id. at 10 (citing West, 214 Cal.App.4 at 768, 788; Wigod, 673 F.3d at 557).

In support of its ruling, the Court noted that "similar TPP language in Wigod, and even less contractually certain TPP language in West, yielded similar conclusions."  Bushel, slip op. at 13; see also West, 214 Cal.App.4 at 789, 97-98; Wigod, 673 F.3d at 558.  Notably, the Court rejected Lender's contention that the TPP was a mere promise to consider Borrowers for a permanent modification, as well as Lender's argument that Borrowers cannot allege damages because they were merely making monthly mortgage payments which they were already obligated to make.

Additionally, the Appellate Court held that Borrowers adequately alleged a claim for breach of covenant of good faith and fair dealing, stating that Lender was "required to act in accord with the TPP and HAMP regulations."  Bushell, slip op. at 16. 

As to the promissory estoppel claim, the Court held that the Borrowers' allegations were sufficient because they had shown a "clear and unambiguous promise" – the TPP contract – and damage caused by their detrimental reliance.  Id. at 17.  Finally, the Court held that Borrowers also sufficiently stated a fraud claim for false promise, noting that they had met the specificity and damages elements.

Accordingly, the Court reversed as to the claims for breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel, and fraud based on false promise, but affirmed the dismissal of the fraud claim based on intentional misrepresentation.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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