Daily Development for
Monday, September 8, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MORTGAGES; DEFAULT; FORBEARANCE: Oral forbearance agreement may be enforceable in equity to bar foreclosure, but lender's breach of such agreement is not tortious.

Sutherland v. Barclay's American/Mortgage Corp., 61 Cal. Rptr. 2d 614 (Cal. App. 1997).

This case involves a purchase money mortgage on a residential condominium that was damaged substantially in the Northridge earthquake of 1994. Earthquake damage rendered the unit uninhabitable, and the borrower was forced to rent alternate accommodations. Further, the value of the unit plunged from around $109,000 to around $51,000.

Borrower contacted her mortgagee and asked for some relief from payments, and was promised orally by a collection specialist that she could have a three month moratorium on payments. This was consistent with moratoria offered by borrower's other creditors. All the other creditors treated this moratorium as a hiatus in payment resulting in an extension of the payment period. Mortgagee, however, had a different view. At the end of the three month period, it demanded payment of the then current payment and the three payments that had been skipped.

When mortgagor protested this policy, mortgagee suggested that she contact HUD, which had provided mortgage insurance (apparently through an FHA program - the case is not clear). It suggested that HUD would take an assignment of the mortgage and permit a restructured payment program. The mortgagee suggested that without HUD cooperation it was concerned that it's authorization of a reworking of the payment schedule would jeopardize its insurance. After mortgagee worked with HUD for a while, HUD determined that it would not take assignment of the mortgages on all the earthquake damages properties, as defaults occasioned by the earthquake were outside of its normal default workout policies. It wrote to the lender requesting that it reinstate the borrower and extend the payment schedule.

Mortgagee refused to extend and threatened foreclosure.

Mortgagor then brought this action for declaratory relief and various tort claims for negligence, infliction of emotional distress, denial of contract, etc.

The trial court (amazingly) found for mortgagee on summary judgment. It ruled that mortgagee had complied with the extension agreement and that, in any event the extension agreement was verbal, without consideration, and unenforceable.

On appeal (with mortgagor appearing in pro per) held: Reversed.

The appeals court held that mortgagor had "relied to her detriment" in withholding payments during the three month "hold" period. This rendered the agreement enforceable as a matter of promissory estoppel. It further found that there was an implied duty of good faith and fair dealing in the mortgagee's behavior regarding this agreement, but that this duty was a contract duty, and not a "tort" duty. Consequently, it upheld the summary judgment ruling on that tort claim of mortgagor, and on all mortgagor's other tort claims as well, for various reasons.

Most importantly, perhaps, it set aside the trial court's summary judgment interpretation of the verbal extension agreement and concluded that there was a triable issue of fact as to what that agreement had been. Thus the case was remanded to see if the mortgagee's employees in fact had agreed that the loan term could be extended by the three month "hold" period. If so, then, apparently, the court is prepared to hold that the lender is estopped, through mortgagor's reliance, from avoiding that agreement.

Comment 1: We have only the printed report of the court's view of the facts, and the editor knows none of the true facts, but on this record it appears we have one more example of incredible callousness on the part of home lenders when they think they can get away with it. Instead of treating its borrower as a human being in extreme distress, the lender saw its borrower as an economic opportunity. It appeared to be treating the borrower as a weapon it could throw at HUD to get HUD to bail it out of the economic loss occasioned by defaults due to the earthquake.

Note that under California law (and ignoring the fact that HUD might preempt such law under its new federal statute), borrower, as a purchase money mortgagee, could have walked away from her $58,000 loss in value on the condo and avoided deficiency liability. Instead, she demonstrated a desire to work with the lender and resume payments after only a three month delay. She deserved a medal, instead of a kick in the teeth. The Meanie Weanie Lender didn't see things that way.

Comment 2: Lender apologists commonly claim that it is always in a lender's interest to help borrowers pay their debts, and not to force defaults and foreclosures. Therefore, they argue, consumer protection statutes that operate to protect borrowers at the moment of foreclosure are unnecessary and create needless expense. The editor has uttered such theories himself, but this case is a definite embarrassment to such arguments. Bad, Bad Boy, Barclays!!!!!

Comment 3: Having said the above, and recognizing that the borrower had a very strong equitable argument, the editor nevertheless is a bit confused by the court's assertion that the oral contract was rendered enforceable by promissory estoppel. Of course, it is possible that the borrower relied to her detriment in diverting money that might have been used to pay the mortgage, but the court does not discuss that kind of reliance. Instead, the court asserts reliance in the fact that the borrower did not pay the mortgage payments during the three month extension. The lender was not seeking to declare a default on the basis of those missed payments. So the borrower suffered no detriment as a consequence of her not paying them.

The court then asserted that the borrower was not liable for failure to pay after the three month extension period because of confusion arising from the attempted "handoff" to HUD. This is plausible, but the court never gets around to explaining how, after all is said and done, the borrower is entitled to the original three month term extension, other than through reliance on the original moratorium. Such reliance, as indicated, was not "detrimental."

In short, the editor can see the grounds for detrimental reliance here, but not on the grounds that the court asserts. The true detriment - diverting funds to other expenditures - is a much sloppier kind of basis for the court to rely upon. The reliance must be foreseeable, to begin with, and it must be shown that borrower really did make such diversion and render herself unable to make the three missed payments. There was no evidence for that, and perhaps the court was concerned that borrower would have a hard time producing it.

This would have been a great case for the intervention of equity at the trial court, so that we don't have to have a relatively weak published opinion clouding up the precedents. But the trial court didn't see things that way, so the court here was faced with a hard case and the risk of making bad law.

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