Parker: Mending Broken Promises

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Mending Broken Promises: Allowing Homeowners to Pursue Claims of

Promissory Estoppel Against Lenders when Denied Loan Modifications

AMY B. PARKER*

ABSTRACT

Over the past five years, nearly four million families lost their homes to

foreclosure. Despite government efforts to overcome this problem, the mortgage crisis continues to plague the United States. Amidst this crisis,

lenders inform homeowners seeking a loan modification that they do not

qualify and advise them to stop making payments on their mortgage loan. Relying on this advice, homeowners stop making such payments and

comply with the lender ’s requirements, only to find that the lender

subsequently initiated foreclosure proceedings against them. A number of homeowners defended such foreclosure proceedings on the basis of

promissory estoppel—arguing that they reasonably relied on the lender’s

promise to negotiate a loan modification. While courts traditionally have not granted relief to homeowners on the basis of promissory estoppel, a

trend is developing among many states and an increasing number of courts

are allowing homeowners to pursue such claims.

This Note argues that the trend favoring homeowners ’ claims of promissory estoppel against lenders who promised to negotiate loan

modifications provides an equitable result. First, this Note examines the

government’s role in encouraging loan modifications in contrast to mortgage lending industry servicers’ disincentives to provide loan

modifications. In addition, this Note explains how homeowners’ claims

meet all the necessary elements of promissory estoppel and why such claims should be allowed.

* Candidate for Juris Doctor, New England Law|Boston (2013). B.A., Communication,

University of Texas at Arlington (2000). I would like to thank the editors and associates of

volumes 46 and 47 of New England Law Review for their suggestions and assistance.


982 Ne w E ng la nd La w Re vie w v. 47 | 981

INTRODUCTION

pproximately four million families lost their homes to

foreclosure between 2007 and early 2012.1 During the first half of 2012, one out of every 126 homes in the United States

received a foreclosure filing.2 The United States is plagued by a mortgage

crisis that occurred over the past several years, and amidst this crisis a number of issues have surfaced regarding foreclosure and the loan

modification process.3 Many homeowners found themselves in trying

circumstances and attempted to work with their lenders for loan modification agreements to reduce the interest rate, payment amount, or

modify other terms of their mortgage loan so that they could continue to

make payments toward their mortgage loans, rather than default.4

The loan modification qualification and application process is stressful, time consuming, tedious, and confusing, with differing goals for

homeowners and lenders.5 In some circumstances, lenders informed

homeowners that they would not qualify for a modification unless they stopped making payments on their mortgage loan.6 Relying on this advice,

homeowners stopped making such payments and complied with the

lender’s requirements, only to find that the lender subsequently initiated foreclosure proceedings against them.7

A number of homeowners defended such foreclosure proceedings on the basis of promissory estoppel—arguing that their actions were based on

their reasonable reliance on the lender ’s promise to negotiate a loan modification.8 Traditionally, courts refused to grant homeowners relief on

1 Les Christie, Foreclosures Fall to Lowest Level Since 2007 , CNNMONEY (Jan. 12, 2012),

http://money.cnn.com/2012/01/12/real_estate/foreclosures/index.htm. 2 1 Million Properties with Foreclosure Filings in First Half of 2012, REALTYTRAC.COM (July 10,

2012), http://www.realtytrac.com/content/foreclosure -market-report/midyear-2012-us-

foreclosure-market-report-7291. The states with the highest rates of foreclosures included

Nevada, California, Arizona, Georgia, and Florida. Id. 3 See Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan

Modifications, 86 WASH. L. REV. 755, 758 (2011).

4 See Explore Programs, MAKINGHOMEAFFORDABLE.GOV, http://www

.makinghomeaffordable.gov /programs/Pages/default.aspx (last visited Jan. 14, 2012).

5 See Ann Carrns, After Long Ordeal, a Homeowner Can Stay Home, N.Y. TIMES, Nov. 8, 2011,

at F8, available at http://www.nytimes.com/2011/11/09/your-money/a-difficult-journey-to-a-

mortgage-modification.html?pagewanted=all.

6 See, e.g., Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 339 (D. Mass. 2011). 7 See id. 8 See, e.g., id. at 340; Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 511 (Cal. Ct. App.

A


2013 Me nd i ng B ro k en P ro mises 983

promissory estoppel grounds.9 However, a trend is developing, and courts in a number of states have held, that homeowners may pursue such claims

against lenders on grounds of promissory estoppel.10

This Note argues that the trend favoring homeowners ’ claims of promissory estoppel against lenders who promised to negotiate loan modifications provides an equitable result. Part I of this Note provides

background information concerning loan modifications, including the U.S.

Government’s role in promoting loan modifications as a way to prevent foreclosures and stabilize the housing market. In addition, Part I examines

how the structure of the mortgage lending industry creates disincentives

for servicers to provide loan modifications. Part II of this Note describes the two contrasting views of whether to afford homeowners relief pursuant

to promissory estoppel—the traditional view is that homeow ners may not

pursue such claims; and the emerging view is that homeowners are entitled to pursue such claims on the basis of promissory estoppel. Finally,

Part III of this Note examines the required elements of a promissory

estoppel claim and explores how homeowners’ claims supplant the necessary facts to satisfy each of the elements.

I. Background

A. Loan Modifications

A loan modification is a change to one or more terms of a loan in order

to cure a default or avoid imminent default.11 Loan modification

agreements may include a reduction in the interest rate or monthly payments or an extension of the loan term.12 Political leaders have called

for lenders and servicers to grant more at -risk homeowners loan

modifications to avoid unnecessary foreclosures and prevent unnecessary

2011). 9 See Dixon, 798 F. Supp. 2d at 349-50 & n.4 (citing several cases from other jurisdictions

with similar facts that denied claims based on promissory estoppel).

10 See id. at 349-50 (noting Massachusetts federal district court cases that have upheld

homeowners’ c laims on the basis of promissory estoppel); Bradley D. Scheick, Did Someone Say

Estoppel? – Courts Show Greater Acceptance of Applying Equitable Principles to Enforce Oral

Forbearance Agreements, 22 MILLER & STARR, REAL ESTATE NEWSALERT 1, no. 2, 2011, at 1, 1,

available at http://www.msrlegal.com/article/did-someone-say-estoppel-courts-show-greater-

acceptance-of-applying-equitable-principles-to-enforce-oral-forbearance-agreements/ (last

visited March 16, 2013) (observing subtle trend in California courts to favor borrowers’ claims

on the basis of promissory estoppel).

11 Julie T. Moran, Recent Developments in Residential Foreclosure Avoidance & Loan

Modification, in DRAFTING & NEGOTIATING LOAN WORKOUT AGREEMENTS 17, 19 (MCLE, Inc .

ed., 2010).

12 Id.



damage to the economy.13

1. The Home Affordable Modification Program

In 2008, the Troubled Asset Relief Program (“TARP”) was initiated to

prevent the collapse of the U.S. financial system.14 Under TARP, the

Secretary of the Treasury announced the Making Home Affordable program in February of 2009 as an effort to stabilize the U.S. housing

market.15 The largest part of this program was the Home Affordable

Modification Program (“HAMP”), which provided an incentive to investors and servicers of home loans to work with borrowers to modify

their mortgages so that distressed borrowers could continue to afford their

mortgage payments and avoid foreclosure.16 The government committed seventy-five billion dollars to HAMP, with the goal of assisting at least

three-to-four million struggling homeowners.17 HAMP provided an

incentive for loan modifications of first -lien mortgages secured by the

13 See FACT SHEET: President Obama’s Plan to Help Responsible Homeowners and Heal the

Housing Market, WHITEHOUSE.GOV (Feb. 1, 2012), http://www.whitehouse.gov/the -press-

office/2012/02/01/fact-sheet-president-obama-s-plan-help-responsible-homeowners-and-heal-h

(setting forth plan that would require a reasonable time for homeowners to seek modifications

and prevent lenders from foreclosing unless the homeowner has shown no interest in

pursuing alternatives to foreclosure); Jenifer B. McKim, Attorney General Martha Coakley Tells

Fannie Mae and Freddie Mac to Reduce Loan Debt for More Struggling Homeowners, BOSTON GLOBE

(Feb. 3, 2012, 6:26 PM), http://www.boston.com/Boston/businessupdates/2012/02/attorney -

general-martha-coakley-says-fannie-mae-and-freddie-mac-should-reduce-loan-debt-for-

struggling-

homeowners/M51KtgTsIGGdMdTRyq51tJ/index.html?s_campaign=MobAppShare_EM

(calling for Fannie Mae and Freddie Mac to set an example for the industry by lowering the

principal on mortgage loans for distressed homeowners in order to “get the economy [on the

right] track”).

14 TARP Oversight: Evaluating Returns on Taxpayer Investments: Hearing Before the S. Comm.

on Banking, Housing, and Urban Affairs, 112th Cong. 1, at 5 (2011) (written testimony of Timothy

G. Massad, Acting Assistant Secretary of the United States Department of Treasury), available

at http://www.gpo/gov/fdsys/pkg/CHRG-112shrg67400/pdf/CHRG-112shrg67400.pdf.

Congress authorized over $700 billion to aid financial institutions under TARP. Id. 15 Programs: Making Home Affordable, U.S . DEP’T OF THE TREASURY (last updated Mar. 12,

2013), http://www.treasury.gov/initiatives/financial-stability/programs/housing-

programs/mha/Pages/default.aspx.

16 Jean Braucher, Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First

Year of the Home Affordable Modification Program (HAMP), 52 ARIZ. L. REV. 727, 748 (2010). 17 Id. at 729. As of November 2011, nearly 910,000 homeowners had received loan

modifications under HAMP with a median savings of $530 per month per loan. U.S . DEP’T OF

THE TREASURY, MAKING HOME AFFORDABLE: PROGRAM PERFORMANCE REPORT THROUGH

NOVEMBER 2011, at 1 (2012), http://www.treasury.gov/initiatives/financial-

stability/results/MHA-Reports/Documents/FINAL_Nov%202011%20MHA%20Report.pdf.

http://www.treasury.gov/initiatives/financial-stability/programs/housing-programs/mha/Pages/default.aspx

http://www.treasury.gov/initiatives/financial-stability/programs/housing-programs/mha/Pages/default.aspx



borrower’s principal residence that originated prior to January 1, 2009.18 Investors and servicers could receive up to six thousand dollars for each

successful loan modification.19 Among the many requirements set forth

under HAMP, the borrower had to be in default of the loan or at imminent risk of default.20 During the loan modification application process and t rial

period, the program prohibited a servicer of a mortgage loan from

foreclosing on the borrower ’s home.21

In June 2010, the Treasury Department issued a new directive that required servicers to contact and solicit borrowers who may be eligible for

loan modifications under HAMP.22 Servicers presented many obstacles and

borrowers seeking to move forward with the loan modification application process were confronted with long delays in getting responses to their

applications, lost paperwork by servicers, and lack of communication from

servicers regarding reasons for denial of their application.23

2. Industry Disincentives for Loan Modifications

Most mortgage loans are connected to a number of parties rather than

just one “lender.”24 In reality, a “lender” may refer to an originating lender

and broker who initiates the loan process, a trust comprised of multiple investors, and a servicer that collects payments and holds general decision-

making power over the loan.25 Investors in such loans have little control

over modification decisions; rather, the servicer of the loan retains the

18 Braucher, supra note 16, at 748. 19 See id. at 752 (noting that HAMP provided a one-time payment of $1,500 to investors for

loan modifications and up to $4,500 for servicers of modified loans that proved successful for

three years). In addition, borrowers were entitled to incentives of $1,000 per year for up to five

years for staying current on modified loan payments. Id. at 753.

20 Id. at 749. 21 Id. at 774. 22 Id. at 773. A number of supplemental directives have been issued with regard to the

HAMP servicers to provide “a uniform loan modification process” to achieve home loan

affordability through interest rate and principal amount reductions; these directives have

been compiled in a handbook that is periodically updated. See, e.g., MAKING HOME

AFFORDABLE PROGRAM: HANDBOOK FOR SERVICERS OF NON-GSE MORTGAGES VERSION. 3.3, at

12-16 (2011), available at

https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhahandbook_33.pdf.

23 Braucher, supra note 16, at 773. 24 Thompson, supra note 3, at 764. Over the past decade, many mortgage loans have been

packaged into pools (generally in the form of trusts) and sold on the secondary market; these

pools then engaged servicers to service the pool of loans pursuant to a Pooling Service

Agreement (“PSA”). MORAN, supra note 11, at 21-22. Restrictions in some PSAs have limited a

servicer’s ability to modify loans on terms such as interest rate reduction or loan term

extensions. Id. at 22.

25 Thompson, supra note 3, at 764.



power to make decisions regarding loan modifications and foreclosures.26

The servicer has the most contact with the borrower, receives monthly mortgage payments, provides billing and tax statements to homeowners,

and addresses homeowners’ questions and needs for loan modifications.27

Servicers make money from monthly service fees that are based on the principal balance of the loan, as well as interest income and miscellaneous

fees from borrowers.28 In addition, servicers profit from fees incurred by

delinquent homeowners, such as late fees and default -related fees.29 The longer the loan is delinquent, the more fees the servicer can charge against

the borrower.30 For example, in 2011, nearly twenty percent of the revenue

earned from servicing residential loans by one prominent loan servicer consisted of late charges, loan collection fees, and process management

fees.31

Servicers tend to disfavor permanent loan modifications because they are costly, time consuming, and not as profitable as foreclosures.32 Although government programs, such as HAMP, provide servicer

incentives to negotiate loan modifications, these incentives are outweighed

by a host of other factors disfavoring modifications.33 First, servicers are

26 Id. 27 Id. at 765. Servicers make decisions regarding collection activities for default and

initiation of foreclosure proceedings. MORAN, supra note 11, at 21.

28 Thompson, supra note 3, at 802. 29 Id. at 803. 30 Peter S . Goodman, Lucrative Fees May Deter Efforts to Alter Loans, NYTIMES.COM (July 29,

2009), http://www.nytimes.com/2009/07/30/business/30services.html?pagewanted=all (noting

a conflict between the financial advantages to servicers from delinquent loans and the

responsibilities of servicers to recoup money for investors).

31 Ocwen Financial Corp., Annual Report 36-37 (Form 10-K) (Feb. 29, 2012),

http://files.shareholder.com/downloads/ABEA-6F4AAO/1738046336x0xS1019056-12-

280/873860/filing.pdf (listing a breakdown of the total $453,627,000 revenue earned for

servicing residential loans, which included: $38,555,000 for late charges; $11,223,000 for loan

collection fees; and $34,233,000 for process management fees). According to the Annual

Report, “process management fees” are revenues related to commissions for the sale of

foreclosed homes and for preparation of foreclosure documents. Id. at 39. In contrast, only

nine percent of the servicer’s revenue came from the HAMP modifications. Id. at 37. 32 Thompson, supra note 3, at 776-77 (noting late fees and other default-related fees add

significantly to the servicers’ profits, and the longer a homeowner is delinquent, the more

these fees add up).

33 See generally id. at 776-825 (describing the increased costs associated with modifications,

accounting rules and investor contracts that discourage modifications, a dual-track system

that requires servicers to process both foreclosures and loan modifications at the same time,

poor communication among multiple departments and with homeowners, servicer

compensation associated with delinquent loans and foreclosures, the streamlined foreclosure

process as opposed to the complex modification process, and a lack of highly trained

http://www.nytimes.com/2009/07/30/business/30services.html?pagewanted=all



deterred from making principal reductions to mortgage loans because it would reduce their main source of income—the monthly servicing fee that

is based on the principal balance of the loan.34 Second, the costs incurred by

the servicer to perform a modification are more than the initial costs associated with a foreclosure sale.35 Third, servicers benefit from pursuing

foreclosure due to the guaranteed recovery of all foreclosure-related costs

as well as the accumulation of default fees assessed to borrowers upon the post-foreclosure sale.36 Finally, a dual-track system employed by servicers

permits the foreclosure process to proceed while the homeowner is

negotiating a loan modification agreement, resulting in some homeowners having to defend foreclosure actions while complying with loan

modification requirements.37 As such, the current environment in the

mortgage industry limits the genuine availability of loan modification negotiations that would allow distressed homeowners to avoid foreclosure

and keep their homes.38

B. The Common Law Doctrine of Promissory Estoppel

The common law doctrine of promissory estoppel can be traced back to the nineteenth century as an equitable remedy employed by courts where a

promisee detrimentally relied on a representation of a promisor.39 The

contract doctrine of promissory estoppel descended from the tort doctrine of equitable estoppel.40 In the mid-twentieth century, the doctrine of

promissory estoppel began to flourish as an equitable remedy and was

employees capable of negotiating permanent loan modifications).

34 Id. at 780. 35 Id. at 829. 36 Id. at 828. Upon a foreclosure sale, servicers are guaranteed to recover all their costs and

fees before investors receive any recovery. Id. at 816. 37 See Donna Gerhke-White, Under New Rules, Loan Modification Won’t Protect You From

Foreclosure, SUNSENTINEL.COM (Aug. 10, 2011), http://articles.sun-sentinel.com/2011-08-

10/business/fl-foreclosure-modify-20110810_1_loan-modification-modification-program-

foreclosure-proceedings (recounting the story of a Florida school teacher who sought a loan

modification when his salary was reduced due to state budget cutbacks and found himself

simultaneously defending a foreclosure on his home while complying with the lender’s loan

modification requirements). 38 See Thompson, supra note 3, at 840. 39 4 RICHARD A. LORD, WILLISTON ON CONTRACTS § 8:4 (4th ed. 2008). 40 DAWSON ET AL., CONTRACTS: CASES AND COMMENT 283 (9th ed. Thomson/Foundation

Press 2008); see Dickerson v. Colgrove, 100 U.S . 578, 580 (1879) (“The vital principle [of

equitable estoppel] is that he who by his language or conduct leads another to do what he

would not otherwise have done, shall not subject such person to loss or injury by

disappointing the expectations upon which he acted.”).



recorded under Section 90 in the Restatement (First) of Contracts.41 Today, all American jurisdictions apply some form of promissory estoppel.42

The promissory estoppel remedy, as set forth in the Restatement, involves detrimental reliance on a promise:

A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.43

Stated differently, a valid claim for promissory estoppel must meet the following criteria: (1) a promise; (2) that induces reasonably foreseeable

reliance by the promisee; (3) to the detriment of the promisee; (4) may be

remedied where injustice can only be prevented by the application of the doctrine of promissory estoppel.44

The principle of promissory estoppel is that a promise made without consideration may be enforceable to prevent injustice if t he promisor

should have reasonably expected that the promisee would rely on the promise and the promisee did rely on such promise to his or her

detriment.45 Such detrimental reliance extends to both oral and written

promises.46 A promisee’s action or inaction as a result of a promisor’s promise may constitute detrimental reliance.47

A promise requires “a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in

understanding that a commitment has been made.”48 A promise of future, rather than present, intention is justified as long as the promisor’s intention

41 LORD, supra note 39, at § 8:4; RESTATEMENT (FIRST) OF CONTRACTS § 90 (1932). 42 Eric Mills Holmes, The Four Phases of Promissory Estoppel, 20 S EATTLE U. L. REV. 45, 47

(1996). American courts differ in determining when and how to apply the remedy. Id. at 67.

For example, a number of courts apply the doctrine as a consideration substitute, while the

majority of courts apply the doctrine as an equitable remedy not confined to contract theory.

Id. 43 RESTATEMENT (S ECOND) OF CONTRACTS § 90 (1981). 44 Id. 45 BLACK’S LAW DICTIONARY 631 (9th ed. 2009). 46 Holmes, supra note 42, at 58. 47 See Glitsos v. Kadish, 418 P.2d 129, 131 (Ariz. Ct. App. 1966) (finding detrimental

reliance where a party failed to initiate foreclosure proceedings within the statutory time

period as a result of a promise of the other party); Mercanti v. Persson, 280 A.2d 137, 142

(Conn. 1971) (finding detrimental reliance where a party failed to procure liability insurance

as a result of another party’s promise).

48 RESTATEMENT (S ECOND) OF CONTRACTS § 2 (1981).



to be legally bound is clear.49 Generally, a promise must not be too vague or indefinite on its terms in order to be enforceable.50 However, some

courts recognize a right to rely on statements, assurances, and

representations made by a party where it was reasonably foreseeable that such party may rely on those representations.51

At the heart of the doctrine of promissory estoppel are the principles of good faith, equity, and conscience.52 The doctrine of promissory estoppel

“is an attempt by the courts to keep remedies abreast of increased moral consciousness of honesty and fair representations in all business

dealings.”53 Indeed, the basis of any promissory estoppel claim is the

prevention of injustice.54 “The doctrine of promissory estoppel is . . . explained as promoting the same purposes as the tort of misrepresentation:

punishing or deterring those who mislead others to their detriment and

compensating those who are misled.”55 Courts employ the doctrine of promissory estoppel on a case-by-case basis, and any relief afforded is

discretionary with “no mechanical bright line rule.”56

Hoffman v. Red Owl Stores, Inc.57 is a well-studied case regarding the theory of promissory estoppel.58 In Red Owl Stores, the plaintiff, Mr.

49 Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 340 (D. Mass. 2011). 50 Id. at 341. Compare LORD, supra note 39, at § 4:29 (“[I]f an essential element is reserved for

the future agreement of both parties, as a general rule, the promise can give rise to no legal

obligation until such future agreement.”), with Aceves v. U.S. Bank, 120 Cal. Rptr. 3d 507, 514

(Cal. Ct. App. 2011) (noting that a promise that is conditional or ambiguous is not

enforceable).

51 Holmes, supra note 42, at 68, 78 (“[P]romissory estoppel recognizes the promisee’s right

reasonably to rely on the expectations created by the promisor.”). See also Bercoon, Weiner,

Glick & Brook, an Ill. P’ship v. Mfrs. Hanover Trust Co., 818 F. Supp. 1152, 1160 (N.D. Ill.

1993) (observing that “the promise necessary to invoke promissory estoppel does not have to

be express to be enforceable; it may also be inferred from the words and conduct of the

defendant”); Franklin v. Stern, 858 P.2d 142, 145 n.1 (Or. Ct. App. 1993) (“[A] person can

reasonably and foreseeably rely on a promise that is not sufficiently definite to be enforced.”)

(citing Bixler v. First Nat’l Bank of Or., 619 P.2d 895, 898 n.4 (Or. Ct. App. 1980)) .

52 Holmes, supra note 42, at 67. The basis of promissory estoppel has been described as

“good faith and conscience to promote equity and corrective justice in an individual case.” Id.

at 58.

53 Id. at 73 (citing Peoples Nat’l Bank of Little Rock v. Linebarger Constr. Co., 240 S .W.2d

12, 16 (Ark. 1951)).

54 CLAUDE D. ROHWER & ANTHONY M. S KROCKI, CONTRACTS IN A NUTSHELL 175 (6th ed.

2006). 55 Avery Katz, When Should an Offer Stick? The Economics of Promissory Estoppel in

Preliminary Negotiations, 105 YALE L.J. 1249, 1254 (1996).

56 Holmes, supra note 42, at 51. 57 133 N.W.2d 267 (Wis. 1965). 58 See, e.g., Whitford & Macaulay, Hoffman v. Red Owl Stores: The Rest of the Story,



Hoffman, entered into negotiations with an agent of the Red Owl Stores franchise chain in order to open a grocery store.59 The agent encouraged

Mr. Hoffman to take certain actions, including: selling the bakery store he

operated; moving to a new town; purchasing a building site for the new grocery store; and incurring significant financial expenses toward opening

a new grocery store.60 After Mr. Hoffman took all of these actions in

reliance on the agent’s promise of a franchise agreement, the negotiations collapsed due to misrepresentations made by Red Owl’s agent regarding

the financing of the business.61 In applying the doctrine of promissory

estoppel, the court held that Mr. Hoffman reasonably relied on the promises made by the agent to his detriment and that injustice could only

be prevented by granting him relief.62 The court noted that no other theory

would permit the plaintiff to recover, though the facts most closely resembled an action for fraud or deceit.63

II. Availability of Promissory Estoppel to Homeowners Aggrieved by Lenders’ Failure to Fulfill Promises

Many homeowners are now turning to the courts for relief when faced with the prospect of foreclosure as a result of their reliance on promises

made by lenders.64 These homeowners claim that their foreclosing lenders

promised to work with them toward modification of their home loans if they stopped making payments on their loans or took other actions that

were detrimental to their legal rights.65 Such claims are grounded in the

theory of promissory estoppel.66 Disputes concerning lenders’ promises to borrowers to negotiate loan modification agreements tend to be very fact -

reprinted in CONTRACT AND RELATED OBLIGATION: THEORY, DOCTRINE, AND PRACTICE 114, 114-

15 (6th ed. 2011) (claiming that Hoffman is the “best known . . . leading early American case to

allow recovery for precontractual reliance); JEFFREY FERRIELL & MICHAEL NAVIN,

UNDERSTANDING CONTRACTS 142 (2004) (explaining that Hoffman is commonly studied by first

year law students).

59 Id. at 269. 60 Id. at 270. 61 See id. at 271. 62 Id. at 275. 63 Id. at 273. 64 See, e.g., Mendez v. Bank of America Home Loans Servicing, LP, 840 F. Supp. 2d 639,

642-46 (E.D.N.Y. 2012); Senter v. JPMorgan Chase Bank, N.A., 810 F. Supp. 2d 1339, 1342-44

(S .D. Fla. 2011); Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 338-40 (D. Mass. 2011);

Jackson v. Ocwen Loan Servicing, LLC, No. 2:10-cv-00711-MCE-GGH, 2011 U.S . Dist. LEXIS

12816, at *2-4, 9-10 (E. D. Cal. Feb. 9, 2011); Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507,

511 (Cal. Ct. App. 2011).

65 See cases cited supra note 64. 66 See cases cited supra note 64.



sensitive and courts have considerable discretion over whether to apply doctrines such as promissory estoppel.67 Although traditionally courts in

the United States rejected claims on the grounds of promissory estoppel by

distressed homeowners’,68 a number of courts permit such claims.69

A. The Traditional View: Denying Relief to Homeowners

The case Adams v. JPMorgan Chase Bank provides a common fact

pattern in cases involving a loan modification dispute.70 In Adams, a

homeowner facing financial difficulties contacted his mortgage lender and was approved for a forbearance agreement.71 The agreement provided that

the homeowner make reduced payments for six months and after the six-

month period, the lender would agree to consider a permanent loan modification.72 The homeowner made all payments as scheduled and

upheld his end of the agreement.73 Nevertheless, five months after the date

of the agreement, the lender initiated foreclosure proceedings against the homeowner with the intent to foreclose after the six-month period of the

agreement.74 Despite having initiated foreclosure proceedings, the lender

represented to the homeowner that he might be able to keep his home.75 At the end of the six-month period, the lender moved forward with the

foreclosure and the homeowner sought relief in court on a number of

grounds, including promissory estoppel.76

The federal district court in Georgia denied the homeowner relief, finding that any promise made by the lender was too vague and indefinite

67 Scheick, supra note 10, at 6-7, 10. 68 See, e.g., Pennington v. HSBC Bank USA, Nat’l Ass’n, No. A-10-CA-785 LY, 2011 U.S .

Dist. LEXIS 147411, at *31 (W.D. Tex. Dec. 22, 2011); Tharaldson v. Ocwen Loan Servicing,

LLC, No. 11-1392 (DWF/AJB), 2011 U.S. Dist. LEXIS 144815, at *13-14 (D. Minn. Dec. 15, 2011);

George-Baunchand v. Wells Fargo Home Mortg., Inc., No. H-10-3828, 2011 U.S . Dist. LEXIS

143788, at *23 (S.D. Tex. Dec. 14, 2011); Adams v. JPMorgan Chase Bank, No. 1:10 -CV-04226-

RWS, 2011 WL 2532925, at *1 (N.D. Ga. June 24, 2011).

69 See cases cited supra note 64. 70 See Adams, 2011 WL 2532925, at *1. 71 Id. at *1. A forbearance agreement consists of a lender’s promise to forbear from

enforcing the default provisions of a loan for a specified period of time during which

foreclosure or other collections actions are suspended so that the borrower may work with the

lender to develop options to avoid foreclosure. MORAN, supra note 11, at 19.

72 Adams, 2011 WL 2532925, at *1. 73 Id. 74 Id. 75 Id. 76 Id. In addition to promissory estoppel, the homeowner brought claims of wrongful

foreclosure, negligence, and fraud in the inducement against the lender. Id. This Note will not

address the homeowner’s other claims.



to justify reasonable reliance by the borrower.77 According to the court, the lender’s promise to review the borrower’s application was not a binding

promise to save the borrower ’s home.78 In addition, the court found that

the borrower’s reliance was not “detrimental.”79 Detrimental reliance required the borrower to make a substantial change in his position.80 The

court stated that the borrower did not make a substantial change in

position by making reduced payments on the mortgage loan because he was already obligated to make payments toward the note.81 Furthermore,

the agreement did not prevent the borrower from seeking alternatives for

housing or to avoid foreclosure.82 As such, the claim failed to meet the elements of promissory estoppel and the court denied any relief to the

homeowner.83

B. The Emerging View: Granting Relief to Homeowners

An increasing number of courts have allowed homeowners to pursue claims on the basis of promissory estoppel against a lender where the

homeowner has reasonably and detrimentally relied on the lender ’s

promise to negotiate a loan modification agreement.84 In allowing a homeowner to pursue relief on grounds of promissory estoppel, one judge

in Massachusetts noted that “[d]istressed homeowners are turning to the

77 Id. at *3. 78 Adams, 2011 WL 2532925, at *3. See also Pennington v. HSBC Bank USA, No. A-10-CA-

785LY, 2011 U.S . Dist. LEXIS 147411, at *9 (W.D. Tex. Dec. 22, 2011) (noting that the TPP was

not a guarantee of a loan modification, and to the extent plaintiffs relied on the promise of a

loan modification, they did so “at their own peril”). 79 Adams, 2011 WL 2532925, at *3. 80 Id. 81 Id. See also Lawther v. OneWest Bank, FSB, No. C-10-00054JCS, 2012 U.S . Dist. LEXIS

12062, at *57 (N.D. Cal. Feb. 1, 2012) (finding that homeowner did not establish detrimental

reliance by making reduced payments as part of a temporary modification program because

the homeowner was required to make payments toward the note anyway). 82 Adams, 2011 WL 2532925, at *3. 83 Id. 84 See Lacey v. BAC Home Loans Servicing, LP, 2012 WL 2872050, at *24 -25 (Bankr. D.

Mass. 2012) (allowing claim of promissory estoppel where homeowner forewent bankruptcy

proceedings in reliance on lender’s promise not to foreclose while evaluating HAMP loan

modification); Senter v. JPMorgan Chase Bank, N.A., No. 11-60308-CIV-DIMITROULEAS,

2011 U.S . Dist. LEXIS 105414, at *64-65 (S .D. Fla. Aug. 9, 2011) (recognizing claim for

promissory estoppel against lender that foreclosed on plaintiffs ’ homes after plaintiffs had

complied with TPP payments and documentation requirements for loan modification); Dixon

v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 349-50 (D. Mass. 2011) (noting Massachusetts

federal district court cases that have upheld homeowners’ c laims on the basis of promissory

estoppel); Scheick, supra note 10, at 1 (observing subtle trend in California courts to favor

borrowers’ claims on the basis of promissory estoppel).

https://advance.lexis.com/Auth/Replay?targetUrl=/ContentViewExternalAccess%3FdocId%3D%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A8371-6X81-652H-F2NC-00000-00%26Hcsi%3D6421%26title%3D%20Senter%20v.%20JPMorgan%20Chase%20Bank%2C%20N.A.%2C%202011%20U.S.%20Dist.%20LEXIS%20105414%20%26vendorreportId%3D

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courts in droves, hoping for relief . . . for misconduct by the mortgage lenders,” and that the “type of life situation” in which this case arises is “a

devastating and nationwide foreclosure crisis that is crippling entire

communities.”85

The case Dixon v. Wells Fargo Bank, N.A., illustrates a resolution of a loan modification dispute that favors homeowners rather than lenders.86 In

Dixon, homeowners entered into an oral agreement with their lender to

take the steps necessary to enter into a loan modification agreement.87 As part of the agreement, their lender instructed the homeowners to stop

making payments on their mortgage loan and to forward certain financial

documents.88 The homeowners complied with the agreement by stopping payments on their mortgage loan and forwarding the requested

documentation.89 Within months, the lender foreclosed on their home and

the homeowners filed suit, seeking relief on grounds of promissory estoppel.90 The homeowners argued that they reasonably relied on the

lender’s oral promise to engage in negotiations for a loan modification if

they complied with the agreement terms and that reliance was detrimental because it left them susceptible to foreclosure.91

The court agreed with the homeowners, finding that the lender specifically promised to consider the homeowners ’ eligibility for a loan

modification if they stopped making payments on their loan a nd forwarded certain documentation.92 According to the court, the legal

detriment suffered by the homeowners “was a direct consequence of their

reliance on [the lender]’s promise.”93 Therefore, the court held that the homeowners stated a claim for promissory estoppel where the lender had

promised to negotiate a loan modification if the homeowners defaulted on

their mortgage loan.94 Furthermore, the homeowners reasonably relied on this promise, and such reliance was detrimental in light of the fact that the

lender took advantage of their default status by initiating foreclosure

proceedings.95

85 Dixon, 798 F. Supp. 2d at 349. 86 See id. at 340. 87 Id. at 339. 88 Id. It was agreed by the parties that the missed payments would be applied to the loan

as modified. Id.

89 Id. 90 Id. 91 Dixon, 798 F. Supp. 2d at 340. 92 Id. at 343. 93 Id. 94 Id. at 348. 95 Id.



ANALYSIS

III. Allowing Homeowners to Pursue Claims on the Basis of Promissory

Estoppel

A. A Lender Agreeing to Negotiate Constitutes a Definite and

Unambiguous Promise

Homeowners’ claims against lenders based on reasonable, detrimental

reliance satisfy all the necessary elements for a claim of promissory

estoppel.96 When lenders agree to negotiate with homeowners, they promise to make a reasonable effort to negotiate in good faith.97 The

promise must be clear, unambiguous, and definite; such as promising to

take a specific action.98 Similar to Red Owl Stores, where the agent of Red Owl Stores promised to open a grocery store franchise if the plaintiff took

certain actions, lenders promised to negotiate potential loan modification

agreements with homeowners if they take certain actions.99

The promise need not be a guarantee of a loan modification.100 Rather, “a promise need only be ‘definite enough that a court can determine the

scope of the duty’” and have “limits of performance [that are] sufficiently

defined to provide a rational basis for the assessment of damages.”101

Lenders argue that even upon the fulfillment of certain conditions, homeowners were not promised or guaranteed a loan modification or that

such promise was indefinite or conditional; therefore, the lack of a clear

and unambiguous promise defeats a claim for promissory estoppel.102

96 See infra Parts III.A.-D. 97 See Aceves v. U.S. Bank, N.A., 120 Cal. Rptr. 3d 507, 514 (Cal. Ct. App. 2011) (finding a

lender’s agreement to negotiate with a homeowner for a loan modification to be a clear and

unambiguous promise). 98 See, e.g., Dixon, 798 F. Supp. 2d at 341; Aceves, 120 Cal. Rptr. 3d at 514. 99 Compare Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267, 270 (Wis. 1965) (promising to

open a grocery store franchise if plaintiff sold his bakery store, moved to a new town, and

purchased a building site), with Dixon, 798 F. Supp. 2d at 339 (promising to negotiate a loan

modification agreement if homeowners stopped making payments on their current mortgage

loan and forwarded certain documentation), and Aceves, 120 Cal. Rptr. 3d at 514 (promising to

negotiate a loan modification if homeowner no longer pursued bankruptcy proceedings).

100 Aceves, 120 Cal. Rptr. 3d at 514; Garcia v. World Savings, FSB, 107 Cal. Rptr. 3d 683, 696

(Cal. Ct. App. 2010). 101 Aceves, 120 Cal. Rptr. 3d at 514 (quoting Garcia , 107 Cal. Rptr. 3d at 696) (internal

quotation marks omitted).

102 See, e.g., Mendez v. Bank of America Home Loans Servicing, LP, 840 F. Supp. 2d 639,

646-47 (E.D.N.Y. 2012); Senter v. JPMorgan Chase Bank, N.A., 810 F. Supp. 2d 1339, 1362 -63

(S .D. Fla. 2011); In re Bank of America Home Affordable Modification Program (HAMP)

Contract Litigation, No. 10 md 02193 RWZ, 2011 WL 2637222, at *4 (D. Mass. July 6, 2011);



Lenders further argue that even if the lender promised to agree to a loan modification, it would not be enforceable because parties cannot “agree to

agree.”103

While there is merit to the theory that parties cannot agree to agree, some courts have recognized that parties can agree to negotiate.104 Agreements to negotiate obligate parties to make r easonable efforts to

negotiate in good faith.105 In the instance of a lender ’s promise to consider a

homeowner for a loan modification if the homeowner complies with certain conditions imposed by the lender, the lender agreed to either

negotiate or undertake steps necessary to determine whether the

homeowner meets the criteria for a loan modification.106 As such, the lender has not merely agreed to agree, but rather, promised to take specific

action—negotiation or consideration—upon the homeowner ’s compliance

with its conditions.107 Therefore, the lender has made a definite and

Aceves, 120 Cal. Rptr. 3d at 514. 103 Dixon, 798 F. Supp. 2d at 342 (noting that plaintiff’s allegation that the parties had

entered into “an agreement to enter into a loan modification agreement” would appear to fail

to state a claim because an agreement to agree does not impose obligations on the parties, but

finding that an agreement to negotiate had been made). 104 Id. at 342-43 (stating that promise to negotiate occurred when the lender “made a

specific promise to consider the [borrower’s] eligibility for a loan modification if they

defaulted on their payments and submitted certain financial information”); Aceves, 120 Cal.

Rptr. 3d at 514 (noting that a promise to negotiate with borrower for a loan modification had

been established when lender promised it would consider borrower for a loan modification if

she forwent bankruptcy proceedings).

105 Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and

Failed Negotiations, 87 COLUM. L. REV. 217, 265-66 & n.201-06 (1987) (citing a number of cases

where courts have enforced agreements to negotiate found in letters of intent, lease

agreements, and options to renew contracts).

106 Dixon, 798 F. Supp. 2d at 342-43; Aceves, 120 Cal. Rptr. 3d at 514. 107 Mendez v. Bank of America Home Loans Servicing, LP, 840 F. Supp. 2d 639, 655

(E.D.N.Y. 2012) (finding a clear and unambiguous promise in agreement provided by lender

that homeowner qualified for a loan modification for ten years when homeowner satisfied

numerous conditions precedent); Senter v. JPMorgan Chase Bank, N.A., 810 F. Supp. 2d 1339,

1364 (S.D. Fla. 2011) (finding that TPP agreement provided by lender promised to “reasonably

take steps to determine whether the [homeowners were] qualified” and if so, the lender

“would enter into a permanent loan modification with them”); Dixon, 798 F. Supp. 2d at 342-

43 (noting that lender “made a specific promise to consider the [homeowners’] eligibility for a

loan modification if they defaulted on their payments and submitted certain financial

information”); Jackson v. Ocwen Loan Servicing, LLC, No. 2:10 -cv-00711-MCE-GGH, 2011

U.S . Dist. LEXIS 12816, at *9-10 (E. Dist. Cal. Feb. 9, 2011) (finding lender’s promise to provide

a loan modification upon homeowners’ compliance with conditions imposed by HAMP was

clear and unambiguous); Aceves, 120 Cal. Rptr. 3d at 514 (observing that lender agreed to

“‘work with [homeowner] on a . . . loan modification’ if she no longer pursued relief in the

bankruptcy court”).



unambiguous promise to the homeowner satisfying the first element of promissory estoppel.108

B. The Promisee-Homeowner’s Reliance on the Promise is Reasonably Foreseeable by the Promisor-Lender

While homeowners, as competent contracting parties, are charged with making as good a deal or as bad a deal as they are able, courts have found

reliance on lenders’ promises of this nature reasonably foreseeable.109

Furthermore, the nature of the lender-homeowner relationship provides ample reason to foresee that an unsuspecting homeowner would rely on

representations made by their mortgage lenders.110

The duty of good faith owed by lenders to homeowners, as well as the inequality of bargaining power between the parties, gives rise to reasonably foreseeable reliance.111 General contract principles provide that

the mortgage loan agreements entered into by homeowners and lenders

create a duty of good faith and fair dealing between the parties.112 The duty of good faith “is particularly well-suited to situations where one party has

discretionary power affecting the rights of another.”113 The obligation of

good faith prevents a party from interfering with another party’s performance of a condition in such a way that would either bring about the

occurrence of a condition or prevent the condition from being satisfied.114

As the Supreme Court stated in an early case:

108 See cases cited supra note 107 and accompanying text. 109 Senter, 2011 U.S . Dist. LEXIS 105414, at *64 (finding homeowner’s reliance was

reasonable where lender promised in TPP agreement to make a determination regarding

whether homeowner qualified for loan modification); Dixon, 798 F. Supp. 2d at 346 (finding

that lender should have known that homeowners would take steps to fulfill conditions

required by lender for a loan modification); Jackson, 2011 U.S . Dist. LEXIS 12816, at *10

(finding reliance on lender’s promise reasonable where homeowners “acted in conformity

with the express terms of the [TPP agreement]”); Aceves, 120 Cal. Rptr. 3d at 515-16 (finding

that homeowner’s reliance was reasonable where lender’s promise to reinstate and modify

terms of mortgage loan was preferable to homeowner than moving forward with bankruptcy

proceedings).

110 See infra Part III.D.1.Unequal Bargaining Power of the Parties Provides the Need for an

Equitable Remedy

111 See RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981) (“Every contract imposes upon

each party a duty of good faith and fair dealing in its performance and its enforcement.”); see

infra Part III.D.1. (describing the inequality of bargaining power between lenders and

homeowners).

112 RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981) (“Every contract imposes upon

each party a duty of good faith and fair dealing in its performance and its enforcement”). 113 Jackson, 2011 U.S . Dist. LEXIS 12816, at *8. 114 HOWARD O. HUNTER, MODERN LAW OF CONTRACTS § 10:8 (2011) (“This includes the

obligation not to do anything calculated to prevent the occurrence of a condition”).



There is no rule more necessary to enforce good faith than that which compels a person to abstain from asserting claims which he has induced others to suppose he would not rely on. The rule does not rest on the assumption that he has obtained any personal gain or advantage, but on the fact that he has induced others to act in such a manner that they will be seriously prejudiced if he is allowed to fail in carrying out what he has encouraged them to expect.115

In a number of cases where lenders have foreclosed on homeowners after promising to consider modifying their loans, the homeowners were

persuaded by the lenders to default on their loan in some way—to stop

making payments or make reduced monthly payments as part of a TPP—before they would even be considered for a modification.116 Essentially,

lenders in these cases induced homeowners to default on their current

mortgage loan contract as a prerequisite to entering into a loan modification agreement.117 This default triggered the acceleration clause in

the mortgage, which enabled to lender to foreclose.118 In effect, these

lenders interfered with the homeowners’ performance of the contract in such a way that caused the occurrence of a condition that benefited the

lender and harmed the homeowner.119 Such interference violated the duty

of good faith.120

Similarly, in many instances, lenders have interfered with the homeowners’ performance of conditions necessary to qualify for a loan

modification.121 Interfering with the homeowner ’s performance of

115 Dickerson v. Colgrove, 100 U.S. 578, 581 (1879) (citing Faxton v. Faxon, 28 Mich. 159,

161 (1873)). 116 See, e.g., Mendez v. Bank of America Home Loans Servicing, LP, No. 11 -cv-1516

(ADS)(GRB), 2012 U.S. Dist. LEXIS 4595, at *39 (E.D.N.Y. Jan. 14, 2012); Senter v. JPMorgan

Chase Bank, N.A., No. 11-60308-CIV-DIMITROULEAS, 2011 U.S. Dist. LEXIS 105414, at *62-63

(S .D. Fla. Aug. 9, 2011); Dixon v. Wells Fargo, N.A., 798 F. Supp. 2d 336, 342 -43 (D. Mass.

2011); Jackson, 2011 U.S. Dist. LEXIS 12816, at *10; Aceves v. U.S. Bank, N.A., 120 Cal. Rptr. 3d

507, 526 (Cal. Ct. App. 2011).

117 See cases cited supra note 116. 118 See FANNIE MAE/FREDDIE MAC, STANDARD MORTGAGE, available at

https://www.efanniemae.com/sf/formsdocs/documents/secinstruments/#standard (last visited

Feb. 19, 2012). The standard mortgage security instrument contains an acceleration clause

which provides that if the borrower breaches any covenants of the mortgage, such as failure to

make timely or complete payments resulting in default of the loan, the lender may invoke a

power of sale. Id.

119 See cases cited supra note 116. 120 See HOWARD O. HUNTER, MODERN LAW OF CONTRACTS § 10:8 (2011). 121 See In re Bank of America Home Affordable Modification Program (HAMP) Contract

Litigation, 2011 WL 2637222, at *5 (D. Mass. July 6, 2011) (finding that borrowers’ allegations

were sufficient to state a claim of bad faith where lender failed “to properly train and

supervise its agents” and “encourage[ed] and/or allow[ed] employees to make inaccurate



conditions necessary to qualify for a loan modification in a way that prevents the occurrence of such conditions violates the duty of good

faith.122 This is even more problematic given that the lender has the

discretionary power to decide whether or not to grant the loan modification.123

Finally, courts have recognized that the duty of good faith imposed on lenders requires that the interests of the homeowner be protected.124

Lenders are expected to act in good faith and to protect the interests of homeowners.125 Given this expectation of good faith, it is reasonably

foreseeable that homeowners would rely on promises made by lenders.126

Therefore, the nature of the relationship between the lender and the homeowner and the requirement of good faith satisfies an element of

promissory estoppel—reasonable foreseeable reliance.127

C. The Promisee-Homeowner’s Reliance on the Promisor-Lender’s Promise is Detrimental

Homeowners’ reliance on the acts and representations of lenders is

detrimental where such reliance has caused a worsening of the

homeowners’ position.128 In relying on the promises of lenders, homeowners unsuspectingly give up various legal rights.129 A homeowner

representations”); Jackson, 2011 U.S. Dist. LEXIS 12816, at *8-9 (noting that lender’s refusal to

accept homeowners’ payment constituted lack of good faith); Braucher, supra note 16, at 773

(noting evidence of long wait times for borrowers seeking to speak with lenders via telephone

and multiple instances of lost documentation previously supplied by borrowers).

122 See HUNTER, supra note 120, at § 10:8. 123 See Jackson, 2011 U.S . Dist. LEXIS 12816, at *8. 124 U.S . Bank Nat’l Ass’n. v. Ibanez, 941 N.E.2d 40, 50 n.16 (Mass. 2011) (“[A] mortgage

holder must not only act in strict compliance with its power of sale but must also ‘act in good

faith and . . . use reasonable diligence to protect the interests of the mortgago r,’ and this

responsibility is ‘more exacting’ where the mortgage holder becomes the buyer at the

foreclosure sale . . . .”) (citing Williams v. Resolution GGF OY, 630 N.E.2d 581, 584 (Mass.

1994)). 125 Id. 126 See supra notes 109-23 and accompanying text. 127 See RESTATEMENT (SECOND) OF CONTRACTS § 90 (1981). 128 See BLACK’S LAW DICTIONARY 1404 (9th ed. 2009) (“Detrimental reliance” occurs when

one party relies “on the acts or representations of another, causing a worsening of the first

party’s position.”).

129 See, e.g., Senter v. JPMorgan Chase Bank, N.A., 810 F. Supp. 2d 1339, 1343-44 (S .D. Fla.

2011) (discussing the bank’s unwillingness to approve homeowners’ loan mo dification

applications); Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 340 (D. Mass 2011)

(describing how the plaintiffs stopped paying their mortgage loan based on the bank’s

promise to enter into negotiations to modify the loan when in reality the bank had initiated

foreclosure against the plaintiff); Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 515 -17 (Cal.



can argue that he or she detrimentally relied on a lender ’s promise to consider a loan modification if that homeowner made reduced payments as

part of a trial modification plan, or foregoes a short sale of the home, or

agrees to incur additional mortgage servicing and late fees, only to subsequently be foreclosed upon by the lender.130 Because detrimental

reliance requires a change in one’s position or status, whether by action or

inaction, as a result of a promisor ’s promise, a homeowner ’s change from owner to non-owner as a result of foreclosure equates to such definition.131

Similarly, a homeowner ’s position worsens when she abandons

bankruptcy proceedings—which would have allowed her to keep her home—based in reliance on a lender ’s promise to modify her current

mortgage if she forwent such proceedings.132

Lenders have argued that no substantial change in position to constitute detrimental reliance occurs when a homeowner makes reduced payments pursuant to a trial modification plan because homeowners are

bound to make payments toward the note anyway.133 This argument fails

to consider the legal rights the homeowner has sacrificed in reliance on the lender’s promise.134 Where homeowners made reduced payments or

stopped making payments altogether, their loans went into default.135 Once

a mortgage loan is in default, certain terms of the mortgage take effect and the homeowner becomes vulnerable to foreclosure.136 Foreclosure of the

mortgage by the lender terminates the homeowner ’s rights to the home.137

Termination of the homeowner ’s rights to the home is a substantial legal detriment; and where homeowners have taken certain actions (or inaction)

Ct. App. 2011) (discussing how the plaintiff did not file for chapter 13 bankruptcy based on

the bank’s promise to work with her to modify her loan and, as a result, she did not have

access to chapter 13 protections).

130 See Senter, 810 F. Supp. at 1363. 131 See 4 AM. JUR. 2D Proof of Facts § 1, at 644 & § 4, at 650 (1975). 132 See, e.g., Aceves, 120 Cal. Rptr. 3d at 515-17; Lacey v. BAC Home Loans Servicing, LP (In

re Lacy), 480 B.R. 13, 44-45 (Bankr. D. Mass. 2012) (allowing claim of promissory estoppel

where homeowner forewent bankruptcy proceedings in reliance on lender’s promise not to

foreclose while evaluating HAMP loan modification).

133 See, e.g., Adams v. JPMorgan Chase Bank, N.A., No. 1:10-CV-04226-RWS, 2011 WL

2532925, at *3 (N.D. Ga. June 24, 2011) (finding no substantial change in position to constitute

detrimental reliance where homeowners made reduced payments pursuant to trial

modification agreement because he remained in his home, was bound to make payments on

Note anyway, and could have continued to seek alternatives to save his house).

134 See infra text accompanying notes 135-138 . 135 U.S . DEP’T OF HOUSING AND URBAN DEV., FORECLOSURE PROCESS, HUD.GOV,

http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure/foreclosureprocess

(last visited Mar. 20, 2013). See, e.g., Senter, 810 F. Supp. 2d at 1343.

136 See id. (describing when acceleration begins in the foreclosure process). 137 See id.



as a result of a lender ’s promise to consider them for a loan modification, those homeowners have relied on this promise to their detriment.138 Thus,

detrimental reliance occurs where homeowners give up legal rights as a

result of unfulfilled promises made by lenders.139

The plight faced by homeowners who have complied with the requirements of their lenders with the expectation that such compliance

would result in a modification of their home loan is akin to that

experienced by Mr. Hoffman in the oft-studied promissory estoppel case Red Owl Stores, who relied on the representations made by an agent of the

grocery franchise with the expectation that he would be able to open a

grocery store.140 Many homeowners, who are unfamiliar with the complexities in the mortgage industry, reasonably rely upon the advice

given to them about their mortgage loan as an appropriate instr uction on

the steps they must take in order to modify their current home loans.141 Like Mr. Hoffman in Red Owl Stores, who took certain steps that were

detrimental—including selling his bakery, moving to a new town, and

incurring significant financial expense—in compliance with Red Owl’s requirements for opening a grocery store,142 these homeowners took certain

detrimental steps—steps that caused them to lose the legal rights to their

homes—in anticipation of meeting the requirements for a loan modification.143 For many, the loss of one’s home can be both financially

and psychologically devastating.144 Perhaps no better example of

detrimental reliance exists than that in which a homeowner loses his home as the result of reliance on the representations of his lender.145 Therefore,

homeowners who reasonably relied to their detriment on the

representations of their lenders must be permitted to pursue claims of promissory estoppel against such lenders.146

138 See Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 343, 346 (D. Mass. 2011);

Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 515-17 (Cal. Ct. App. 2011).

139 See Dixon, 798 F. Supp. 2d at 343, 346. 140 See supra notes 57-61 and accompanying text. 141 See Carrns, supra note 5. 142 Compare notes 57-61 and accompanying text, with Dixon 798 F. Supp. 2d. at 343, 346. 143 See supra notes 134-139 and accompanying text. 144 Amanda Michel, People’s Panel: The Psychological Cost of US Foreclosure, THE GUARDIAN

(May 29, 2012), http://www.guardian.co.uk/commentisfree/2012/may/29/us-foreclosures-

peoples-panel (recounting stories of those who have lost their home to foreclosure and

describe the experience as destroying or ruining their lives).

145 See Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 346 (D. Mass. 2011). 146 See supra notes 128-31 and accompanying text.



D. Promissory Estoppel is Necessary to Avoid Injustice

1. Unequal Bargaining Power of the Parties Provides the

Need for an Equitable Remedy.

There is a disparity in bargaining power between lenders and

borrowers.147 In the residential setting, borrowers are generally precluded from negotiating conditions of the terms of their mortgage loan.148 In

addition, lenders tend to be more sophisticated than borrowers of

residential mortgage loans.149

Bargaining power is derived from a number of characteristics, including status, wealth, size of organization, education, business

sophistication, and the subject matter of the transaction.150 In the legal

context, the doctrine of inequality of bargaining power may be analyzed as one element of unconscionable contracts or as a reason to refuse to enforce

private agreements as objectionable to public policy.151 The doctrine of

inequality of bargaining power is subject to judicial discretion, and “there is no predictable judicial standard for determining inequality of bargaining

power.”152 In determining whether there is an inequality of bargaining

power, courts may look to whether there was opportunity to negotiate and meaningful choices available to the parties.153

147 See, e.g., Prepared Statement of the Federal Trade Commission on Predatory Lending Practices

in the Home-Equity Lending Market, 2000 WL 1268757, at *6 (2000) (statement of Peggy Twohig,

Assistant Director for Financial Practices, Federal Trade Commission’s Bureau of Consumer

Protection) [hereinafter Predatory Lending Practices] (recognizing the unequal bargaining

positions between lenders and borrowers); John Mixon & Ira B. Shepard, Antideficiency Relief

for Foreclosed Homeowners: ULSIA Section 511(b), 27 WAKE FOREST L. REV. 455, 461 (1992)

(observing the lack of bargaining power possessed by consumers entering into loan contracts

with lenders); Emily Gildar, Comment, Arizona’s Anti-Deficiency Statutes: Ensuring Consumer

Protection in a Foreclosure Crisis, 42 ARIZ. ST. L.J. 1019, 1024-26 (2010) (describing the unequal

bargaining power of lenders over borrowers).

148 Gildar, supra note 147, at 1024-25. 149 Id. at 1025. 150 Daniel D. Barnhizer, Inequality of Bargaining Power, 76 U. COLO. L. REV. 139, 169-70

(2005). Further situational characteristics that contribute to bargaining power include: the

degree of necessity, perceptions of the other party’s power, the skill and expertise of a party,

access to information, and legitimate alternatives to a negotiated outcome. Id. at 170-71. In the

housing context, courts observe that tenants have no bargaining power with landlords when

entering into residential lease agreements. Id. at 170 n.130.

151 Id. at 144. 152 See id. at 199-01 (noting that while some courts consider situational characteristics,

others rely upon a “we-know-it-when-we-see-it” approach).

153 See id. at 202; Pardee Constr. Co. v. Superior Co urt, 123 Cal. Rptr. 2d 288, 292-93 (Cal.

Ct. App. 2002) (holding that buyers of entry-level home had no meaningful alternatives to the

contract presented by the developer where the subject matter concerned the “uniqueness of a



Given the disparity of bargaining power between lenders and borrowers in mortgage loan transactions, public policy weighs in favor of

protecting homeowners from unfair lending practices.154 Indeed,

lawmakers across the country have recognized the need to protect homeowners facing foreclosure as a result of unfair lending practices.155

Unfair lending practices may include informing a promisee-homeowner

that in order to qualify for a new and better contract, the promisee-homeowner must act in a way that causes a loss of the homeowner ’s rights

(i.e., encouraging the homeowner to stop making payments on the current

mortgage loan resulting in default and triggering the acceleration clause in the mortgage).156 Such conditions for loan modifications, when imposed by

the lender with greater bargaining power, give an unfair advantage over

distressed homeowners and exemplify the need for an equitable remedy.157

2. Motivations of Servicers Create a Conflict of Interest

Which May Be Remedied by Promissory Estoppel

There is an inherent conflict of interest between loan servicers ,

borrowers, and investors—so much so that political leaders have urged “that loan servicers be separated from the institutions that hold a

borrower’s loan.”158 In response to this conflict, agencies set forth proposals

and government regulations were passed in an effort to increase the transparency of servicer activities to investors.159 Lenders across the

home,” and “the biggest purchase [the buyers] will ever make in their life”).

154 See, e.g., Predatory Lending Practices (calling for increased safeguards to protect

borrowers from predatory lending practices in part due to the unequal bargaining positions

between lenders and borrowers); Nelson D. Schwartz & Shaila Dewan, States Negotiate $26

Billion Agreement for Homeowners, NYTIMES.COM (FEB. 8, 2012),

http://www.nytimes.com/2012/02/09/business/states-negotiate-25-billion-dollar-deal-for-

homeowners.html?pagewanted=all (describing $26 billion settlement reached with five major

lenders in lawsuit brought by states across the country concerning unfair lending practices of

robo-signing, forged documents, and possible fraud).

155 See Heather Morton, Foreclosures 2011 Legislation, NCSL.ORG (Feb. 20, 2012),

http://www.ncsl.org/issues-research/banking/foreclosures-2011-legislation.aspx (noting that in

2011, lawmakers in forty-four jurisdictions introduced legislation regarding foreclosures).

156 See supra Part III.C. 157 See Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 346 (D. Mass. 2011); Gildar,

supra note 147, at 1024-26.

158 Gretchen Morgenson, A Mortgage Nightmare’s Happy Ending, NYTIMES.COM, (Dec. 25,

2010), http://www.nytimes.com/2010/12/26/business/26mod.html?pagewanted=all (quoting

House Representative Brad Miller, who observed the servicer/lender relationship “creates

conflicts of interest, [] puts the servicers in the position of controlling information and allows

[the servicer] to protect itself at the expense of homeowners and investors”). 159 See MAKING HOME AFFORDABLE PROGRAM: HANDBOOK FOR SERVICERS OF NON-GSE

MORTGAGES VERSION. 3.3, supra note 22, at 12-16; see a lso U.S. GEN. ACCOUNTING OFFICE, GAO-

http://www.ncsl.org/issues-research/banking/foreclosures-2011-legislation.aspx



country have been subject to investigations and sanctions by the Securities and Exchange Commission for engaging in deceptive or misleading

practices that contributed to the current mortgage crisis.160

In early 2012, Massachusetts, along with forty-eight other states, settled a $26 billion lawsuit against five large banks for various alleged deceptive acts and practices.161 Among these practices were alleged deceptions of

homeowners regarding the details and availability of loan modification

programs and failure to disclose the status of foreclosure proceedings against homeowners.162 It is not surprising that such deceptive or

misleading practices have been alleged, given the monetary incentives for

servicers to prolong the delinquency of mortgage loans leading to eventual foreclosure.163 The interests of servicers conflict with the interests of

homeowners—servicers make money via default and foreclosure related

fees, while homeowners seek to avoid default and foreclosure by asking servicers to modify their loans.164

Given the unequal bargaining power between the parties and the conflict of interest inherent in the motivations of servicers, promissory

04-280, CONSUMER PROTECTION: FEDERAL AND STATE AGENCIES FACE CHALLENGES IN

COMBATING PREDATORY LENDING 3 (2004), available at

http://www.gao.gov/new.items/d04280.pdf. 160 See U.S . S EC. & EXCH. COMM’N, SEC ENFORCEMENT ACTIONS: ADDRESSING MISCONDUCT

THAT LED TO OR AROSE FROM THE FINANCIAL CRISIS, SEC.GOV (Feb. 1, 2013),

http://www.sec.gov/spotlight/enf-actions-fc .shtml.

161 Jennifer Liberto , Housing Settlement Details Due Out This Week, CNNMONEY (Feb. 28,

2012), http://money.cnn.com/2012/02/28/news/economy/mortgage_settlement/ index.htm. The

settlement provided for immediate aid to homeowners in need of loan modifications,

payment to borrowers who lost their homes to foreclosure, payment to states to help fund

consumer-protection efforts, and reformation of servicing standards, including ending the

dual-track foreclosure system and providing for better communication with borrowers. See

About the Settlement, NATIONAL MORTGAGE SETTLEMENT,

http://www.nationalmortgagesettlement.com /about (last visited Feb. 12, 2012). 162 See Complaint at 52, Commonwealth v. Bank of America, N.A., No. 11-4363 (Mass.

Super. Ct. Dec. 1, 2011), available at http://www.mass.gov/ago/docs/press/ag-complaint-

national-banks.pdf. In the Commonwealth’s Complaint were allegations that the bank

defendants’ misrepresentations regarding the requirements and implementation of loan

modifications were “deceptive and misleading, and result[ed] in harm to borrowers.” Id. at

34. Such alleged misrepresentations included: communicating to borrowers that they must be

over sixty days delinquent on their loan before they may qualify for a modification, when

that is not required; informing borrowers that only if they are over ninety days delinquent

will they receive priority status for a modification; and discouraging borrowers from applying

for modifications based on the seasonal nature of their income, when such factors do not

affect the determination of eligibility for a loan modification. Id. at 33.

163 See supra Part I.A.2. 164 See supra notes 29-31 and accompanying text.

http://www.mass.gov/ago/docs/press/ag-complaint-national-banks.pdf

http://www.mass.gov/ago/docs/press/ag-complaint-national-banks.pdf



estoppel is necessary to prevent injustice.165 Relief must be awarded where “injustice would result if the promise were not binding.”166 Homeowners

are entitled to relief in cases where they have suffered foreclosure due to

the reasonably foreseeable detrimental reliance on promises by lenders to negotiate loan modifications—promises which gave such lenders an

“upper hand” by making those homeowners vulnerable to foreclosure.167

CONCLUSION

The trend favoring homeowners’ claims of promissory estoppel against

lenders who promised to negotiate loan modifications provides an

equitable and just result. The doctrine provides a way for homeowners to seek relief when they suffered because of their reasonable reliance on

promises made by lenders. Furthermore, public policy favors keeping

homeowners in their homes and preventing lenders from engaging in unfair lending practices. “Loss of homes hurts not only the individual

homeowner but also the family, the neighborhood and the community at

large.”168 As one journalist described:

Foreclosures blight neighborhoods, put financial pressures on families and drive down local real estate values. Investors . . . are also hurt by foreclosures, because recoveries on these properties are low. And consumers, made more cautious by a crippled housing market, spend less freely, curbing the economy ’s growth.169

Application of the doctrine of promissory estoppel is appropriate in this

“type of life situation” where homeowners caught in the middle of a

foreclosure crisis are turning to the courts for relief.170

165 See Union Mut. Life Ins. Co. v. Mowry, 96 U.S. 544, 547-48, (1877) (observing that where

a representation has led to an “abandonment of an existing right, and is made to influence

others, and by which they have been induced to act . . . [t]he doctrine of estoppel is applied . . .

to prevent [those representations] operating as a fraud upon one who has been led to rely

upon them”); RESTATEMENT (SECOND) OF CONTRACTS § 90 (1981). 166 Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 346-47 (D. Mass. 2011). 167 Id. at 346, 352. 168 Aceves v. U.S . Bank, N.A., 120 Cal. Rptr. 3d 507, 516 (Cal. Ct. App. 2011). 169 Gretchen Morgenson, A Mortgage Nightmare’s Happy Ending, N.Y. TIMES, Dec. 25, 2010,

available at http://www.nytimes.com/2010/12/26/business/26mod.html?pagewanted=all.

170 Dixon v. Wells Fargo Bank, N.A., 798 F. Supp. 2d 336, 349, 352 (D. Mass. 2011).