STATUTE OF FRAUDS KILLS BORROWERS’ SUIT AGAINST BANK

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Banks have been scrutinized for lending practices for years, and particularly so following the market downturn in 2008.  Inappropriate and unmonitored loans went into default in the millions across the United States beginning in that year.  The federal government took numerous, specific actions designed to control and regulate lending institutions.

Borrowers continue to file lawsuits as a result of poor lending practices.  The claims in these suits, while in some instances quite legitimate, are still required to follow the basic parameters of California law.  Sometimes, these lawsuits fail due to hard and fast rules regulating oral promises and the “statute of frauds.”  Such is the result in the recent case of Jones v. Wachovia Bank (2014) H038382; Sixth App. Dist., Santa Clara County.

Plaintiffs Mark and Roberta Jones sought damages after losing their home in a foreclosure sale which they understood from a phone conversation with the bank would be postponed to a date 10 days after the actual sale date.  The Jones further alleged they “had ready funds available to cure the outstanding default within the time prescribed by law and made preparations to timely submit funds to Wachovia. Plaintiffs were prevented from doing so by the advancement of the trustee sale date, which the Jones claim was contrary to the oral representation made by Wachovia on the telephone.

The Court of Appeal reviewed some of the basic principles of agreements for real estate loans and modifications.  They are summarized here.  In California, a real property loan generally involves a promissory note secured by a deed of trust in which the debtor (a home buyer) is the trustor, the creditor (a lending institution) is the beneficiary, and a neutral third party serves as the trustee. When a debtor defaults on a loan, the creditor has the right to invoke the power of sale provided by the deed of trust.

The statute of frauds requires certain agreements involving real property to be in writing.  A deed of trust is covered by the statute of frauds (Civ. Code, § 1624(a)(6)), and an agreement to modify a deed of trust is governed by Civil Code section 1698.  An agreement to postpone a valid sale of property beyond the date when said property may be sold under and according to the terms of a trust deed obviously is an agreement to alter the terms of the instrument, raising the issue of the statute of frauds.

To prevent (“estop”) a defendant from asserting the statute of frauds, a plaintiff must show unconscionable injury or unjust enrichment if the promise is not enforced. The doctrine of estoppel has been applied where an unconscionable injury would result from denying enforcement after one party has been induced to make a serious change of position in reliance on the contract or where unjust enrichment would result if a party who has received the benefits of the other’s performance were allowed to invoke the statute.

Here, the plaintiffs were unable to show injury, much less the unconscionable injury needed to avoid application of the statute of frauds. At a minimum, the Jones would have to show that they changed their legal position in some way, or undertook some act that showed detrimental reliance upon a promise by the Bank.  They could not do so, and their claim thus failed.

This opinion by the Court of Appeal demonstrates that the statute of frauds is still an important legal hurdle that a borrower must overcome if he or she is going to sue a bank on alleged oral promises.  There is considerable work for a lawyer to do when making a claim of this nature.  Worse, most loan documents have attorney fee provisions, meaning that if the borrower makes a claim against a bank and fails, the borrower could end up with a judgment for attorneys’ fees when he or she loses.  Borrowers should be very cautious about pursuing a claim on an oral promise by a bank representative, and a thorough discussion with counsel about whether to pursue a case should include the risk of loss.

 

Stephen Hammers
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