Two recent lawsuits, in Washington and California, use "promissory estoppel" (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure. 

The Washington Case: Promissory Estoppel as a Cause of Action

Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while. 

Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i'ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance. 

You can't hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred. 

In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.

You might wonder why this isn't a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it's arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.

Promissory Estoppel in a Recent California Foreclosure Case

The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn't pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).

In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank's promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank's promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house. 

The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that "U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property."

As long as this case remains published (and isn't ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can't find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody's Guide to Small Claims Court, by Ralph Warner.

While you may be invited to join a class action, those types of cases usually are much more  beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. . 

Recently, homeowners are having more success in preventing mortgage lenders from continuing with a foreclosure (by lifting the "automatic stay") after the homeowner has filed for bankruptcy.

Bankruptcy's Automatic Stay

When you file bankruptcy your creditors must stop all activities related to collecting a debt, with a few exceptions (usually involving child support and taxes). The prohibition against collection activities is part of what's called the automatic stay, meaning that collection activity is stayed while your bankruptcy case is pending, and that this stay occurs automatically upon your filing. In some situations creditors can file a document known as a "motion to lift the automatic stay" which requests the bankruptcy court to give them permission to proceed with the desired activity listed in the motion.

The most common reasons for requesting that the court lift the stay are:

• when a landlord is attempting to evict a tenant
• when a mortgage lender is attempting to proceed with foreclosure activities, and
• when a lender on a car note is seeking to repossess the car because of non-payment.

As a general rule the bankruptcy court will lift the stay as to a particular creditor when the bankruptcy filer (the debtor) has no equity in the property (for instance when premises are being rented) or when the creditor will suffer economic harm regarding the property at issue if the stay is not lifted (as in the case of a foreclosure or car repossession).

Change in How Courts Treat Motions to Lift the Stay in Foreclosures

Until recently, courts routinely granted motions to lift the automatic stay and there wasn't any reason for the bankruptcy debtor to show up at the scheduled hearing. However, in the last year or so, bankruptcy attorneys are having some degree of success in fighting motions brought by mortgage lenders on the ground that the lender can't establish who owns the mortgage and therefore has no legal right to ask the bankruptcy court for relief (this is called "lack of standing."). The main reason why ownership can't be established is that during the housing boom many mortgages were transformed into securities that could be sold on the bond market and then sold and resold so many times that proof of ownership became lost or unavailable.

What Happens if the Motion is Denied?

In a Chapter 7 bankruptcy, success in fighting a motion to lift the stay would typically mean a one or two month extra delay in implementing foreclosure proceedings (which without the stay being lifted couldn't proceed until you received your discharge). In a Chapter 13 bankruptcy, however, successfully fighting a motion to lift the stay might mean that the mortgage may not be enforceable at all--although the more common outcome is for the lender and homeowner to settle the dispute on terms greatly favorable to the homeowner. 

Other Ways to Raise Ownership Issues and Fight the Foreclosure

The ownership issues that can be raised in a hearing on the motion to lift the stay can also be raised in state court after you receive your Chapter 7 discharge. That is, if you are in a state where the foreclosures go through state court, you can use the failure to prove ownership as a defense that may stall your foreclosure indefinitely--or produce a favorable settlement. And if you live in a state where foreclosures occur outside of court (as in California and about half of the other states), you can file an action in the state court challenging the foreclosure on the same grounds, and with the same outcome. (To learn more about challenging foreclosure in state court, see Nolo's article False Affidavits in Foreclosure: What the Robo-Signing Mess Means for Homeowners.)

Because bankruptcy is a federal court, and because federal courts often have different "standing" rules than state courts, you may not have as much success in the state court as would be true in federal court.

Get Help From a Lawyer

Obviously this can all get pretty complex in a hurry and you would be well advised to shop for a lawyer who knows this stuff inside and out. But beware paying a lawyer (or anyone else) very much money up front to fight your foreclosure in state court. At the very least, negotiate a fee agreement with the lawyer that will give you a healthy refund if the case is not successful. And make sure the lawyer you choose knows the likelihood of your case being successful, however success is defined.

In earlier blogs I've mentioned some of the ways that homeowners can resist foreclosures. For at least a year some state and federal courts have favorably entertained homeowner arguments regarding shoddy paperwork, robo-signings, and the inability of those bringing the foreclosure action to "show me the note."

As I've noted these decisions I've cautioned that it's too early to know whether these decisions will be widely followed by other courts or whether these cases will be upheld--or tossed out--on appeal. This can be a problem when you are paying an attorney megabucks to advance your argument. Few of us want to sacrifice thousands of dollars to a lost cause.

Massachusetts Supreme Judicial Court Refuses to Give Clear Title to Improperly Foreclosed Homes

Suddenly things have changed a whole lot--for the better from the homeowners' perspective. Late last week the Massachusetts Supreme Judicial Court--the highest court in that state--unanimously decided that the foreclosures in the cases before it were improper because the all important notice of foreclosure was recorded and published before the banks bringing the foreclosures actually owned the mortgages by way of legal assignments from the original issuers of the mortgage.

In the Massachusetts cases, foreclosures had already occurred and the homeowners had moved out after the bank bought the property at the foreclosure auction. When the banks initiated the foreclosures, they had no proof of the chain of title showing that they now were the mortgage owners.  For example, in one of the cases the original mortgage traveled through six different institutions including the initial issuer and the foreclosing bank.

After the banks decided to clean up their act--and after the foreclosures--they recorded what they alleged was proof of ownership with the local land records office. They then filed actions requesting that a judge issue a "quiet title" order--an order stating that the banks had proven clear title to the properties. Much to the surprise of the banks, the court refused to award them clear title, given that the foreclosure was legally deficient. The fact that the banks tried to correct the record after the foreclosures could not retroactively legitimize the foreclosures themselves or the titles to the property taken by the bank as a result.

The banks appealed this decision to the Massachusetts Supreme Judicial Court, which affirmed the lower court and also ruled that the title held by the banks in the improperly foreclosed property was not clear title--that is, the banks had no legal claim on the property.

This Case Will Likely Affect Foreclosures Nationwide

The potential implications of this decision are staggering. It means, in essence, that an unknown number of homes that have been improperly foreclosed on by the nation's mortgage lenders have title problems that may be difficult or impossible to clear up. This can only result in a brand new real estate crash of gargantuan proportions.

How important is the Massachusetts case? The way law works in the United States, once a major state's highest court decides a new point of law, that decision quickly travels to other states where lawyers use it to achieve the same or similar result. Homeowners who are called on to invest in litigating their foreclosure will be much more willing to part with their money knowing that they have a Massachusetts Supreme Court arrow in their quiver. While every state's foreclosure laws are at least somewhat unique, the basic premise of the Massachusetts case will likely be upheld by most courts that consider it--that is, a bank can't legally foreclose on a mortgage if it can't prove it owns it, and a bank can't go back in time and undo an illegal foreclosure  by obtaining a judicial declaration of clear title.

But in many cases litigation may not be necessary. Banks throughout the country are now on notice that the houses they still own as a result of foreclosure might well be worthless in that they won't be able to prove ownership at the time the foreclosure was initiated and therefore won't be able to pass clear title to prospective purchasers. And future foreclosures may be impossible given the chaotic state of mortgage-related records caused by the mortgage securitization process and sloppy bank practices. The only value banks may be able to glean from their huge stock of houses--whether before or after foreclosure--is whatever they can negotiate with the current owners.

Banks also will likely face class actions brought by thousands or hundreds of thousands of former homeowners who have been illegally foreclosed on. Investors are also likely to sue the banks for illegally jeopardizing their investments, and while banks may be forced to cut fire sale deals with homeowners, investors are unlikely to settle for anything less than they think they are owed. Undecided at present is what will happen to illegally foreclosed homes that have been subsequently purchased by buyers who had no reason to doubt the validity of their title. Will the invalid foreclosure apply to their title or will a doctrine known as "bona fide purchaser for value" invest the buyer with clear title? One thing for sure, the title to these properties is not as secure as was once thought, and the value of these properties may plummet even further because of a possible shaky title.

In closing, I offer a brief quote by concurring Justice Cordy:

"I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that this legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it....."