A California Court of Appeal reinstated a lawsuit against World Savings based on wrongful foreclosure. In Garcia v. World Savings, FSB, No. B214822 (2010), the Court rejected the borrowers’ claim that World had agreed to delay the foreclosure, but permitted their action to proceed on the basis of promissory estoppel. From the lender’s standpoint, the result was essentially the same.

The case discussed the facts in some detail, since they were central to the holding. Evidently the borrowers were in default on their loan. When World commenced foreclosure, they engaged a mortgage broker to assist them in obtaining a loan against other property they owned. The broker spoke with one of the managers of World’s foreclosure department, and obtained World’s agreement to postpone the foreclosure until August 29. The manager subsequently agreed to another extension to August 30, then stated that, if they needed it, he would further extend until the first week of September. (In fact, he said “the first week of August,” but it was clear he must have meant September.) On August 29, the broker left several messages on the manager’s direct line, telling him that the loan would not close for another week. World’s manager did not return these calls.

The property was sold at a foreclosure sale on August 30, but the borrowers and their broker were not aware of this fact. They continued pursuing the refinance loan (to be secured by other property). That loan closed on September 7, a Friday. The escrow company sent a payoff check to World, which was received on September 10. As the foreclosure had already been completed by that time, World returned the check uncashed. Following this, World’s manager told the broker there had been a “mistake,” that the property was not supposed to have been sold, and that the matter would be “cleared up” in a few days. That never happened, and the borrowers sued. The trial court held for World on summary judgment, and the borrowers appealed.

The gist of the borrowers’ action was wrongful foreclosure, based on two separate but similar arguments: that World’s promise to postpone the foreclosure was an enforceable agreement, and its promise was binding on the basis of promissory estoppel.

The Court dealt with the first cause of action by noting that the borrowers had in fact not furnished consideration to support an agreement, since they were merely doing what they had promised originally to do–make monthly payments, plus interest and late fees. The key here seemed to be that the borrowers didn’t actually promise World that they would obtain a refinance loan. If they had actually made such a promise, that might have supported a claim for breach of contract (even if it is hard to see how World could have enforced that promise).

However, the Court did find that the facts alleged by the borrowers, if proven, would support a claim of promissory estoppel. Under this doctrine, a party will be bound by its promise if it should reasonably expect the other party to change position in reliance on that promise, and “injustice can be avoided only by its enforcement.” Thus, since the borrowers proceeded to close a “high cost, high interest” loan against their other property, it would be unjust not to enforce World’s promise to further postpone. The fact that World’s alleged promise was only to delay until September 7, and the check was not received by World until September 10, did not faze the Court. Since World had allegedly “committed a material breach” by failing to postpone the sale, it could not “be heard to complain that [the borrowers’] attempted performance a week later was marginally inadequate.” Nor was the Court bothered by the fact that the new loan was also to be used to pay off other debts of the borrowers–it noted that they might have obtained a more favorable loan, or borrowed a lesser amount, if they had known World was not going to postpone the foreclosure.

World also claimed that any extension beyond the August 29 date was conditioned on the broker’s convincing World’s manager of the need for another postponement, which never happened. However, the Court stated that it could be “fairly implied” that the borrowers only had to notify World of the need, and that World’s silence in this situation could reasonably be viewed as assent.

It’s important to note that the holding simply reinstates the borrowers’ lawsuit. If the borrowers cannot prove the material facts they alleged in their complaint, they may still lose the case. However, given the amount of fees undoubtedly spent to get to this point, and the fact that World will probably not be a sympathetic defendant, World may well feel that the war has been lost, and settle for some significant amount. Either way, the moral is clear–any agreements a lender makes to postpone a foreclosure, or otherwise permit a change in the performance of a borrower’s obligations, should always be documented in writing, signed by both parties. Factual disputes based on what someone allegedly said can rarely be disposed of quickly and easily. Even if a “mistake” was in fact made and World’s manager intended to further postpone but didn’t inform the person handling the foreclosure, taking the time to document that postponement might well have caused the message to filter down to the right person, avoiding the whole mess.

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