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Calif. App. Court (2nd Dist) Holds Alleged Oral Promise of Refinance Not Enforceable

HELOCThe Court of Appeal of the State of California, Second Appellate District, recently held that an alleged oral agreement to refinance a home equity loan is subject to the statute of frauds and is unenforceable.

A copy of the opinion in Reeder v. Specialized Loan Servicing LLC is available at:  Link to Opinion.

A homeowner obtained a home equity line of credit (HELOC) for his property in March 2005. The homeowner alleges that before he accepted the HELOC, the loan officer for the lender promised him in an oral discussion that the 2005 line of credit “would provide a 10-year draw or advance period, subject to a balloon payment at maturity, but [the homeowner] could refinance or re-amortize the loan into a 20-year amortized, principal and interest repayment period.”

In early 2015 a new loan servicer took over the HELOC, but the borrower did not receive demand for the balloon payment on April 1, 2015. Later in 2015, the homeowner learned of his default on the HELOC when three of the homeowner’s monthly payments were returned. The homeowner pursued loss mitigation seeking “to proceed on the correct loan terms as he understood them.”  Eventually the servicer offered a trial loan modification, but the homeowner rejected it “because it was not in accordance with the terms he was verbally promised” in 2005. Eventually, in November 2017, the property was sold to a third party at a trustee sale.

In March 2018, the homeowner sued the lender, its assignee, and the loan servicer, alleging breach of contract, wrongful foreclosure and three fraud claims, all founded on the alleged oral commitment from the loan officer. The trial court sustained the defendants’ demurrer to the homeowner’s claims without leave to amend. The homeowner appealed.

The Appellate Court began its review by first addressing the homeowner’s breach of contract claim. The Court noted the statute of frauds provides that certain contracts are invalid unless they, or some of them, are in writing and signed by the party to be charged. (Civ. Code, § 1624, subd. (a).) “An agreement for the sale of real property or an interest in real property comes within the statute of frauds. That includes a promissory note and a deed of trust securing performance under the note.” (Rossberg v. Bank of America, N.A. (2013) 219 Cal.App.4th 1481, 1503; Secrest v. Security National Mortgage Loan Trust 2002-2 (2008).

In addition, “[a]n agreement to modify a contract that is subject to the statute of frauds is also subject to the statute of frauds.” (Secrest, at p. 553; ibid. [a forbearance agreement was subject to the statute of frauds because it modified the original promissory note and deed of trust the borrowers executed].

The homeowner argued the statute of frauds was not applicable because the oral agreement preceded the loan and trust deed and therefore did not and could not modify those documents. The Appellate Court disagreed, finding it is “incontrovertible that the alleged oral agreement changes — indeed, eliminates — an important term of the parties’ written agreement. To be valid, it had to be in writing, and it was not.”

In addition to the statute of frauds, the Appellate Court also found the oral agreement unenforceable because it was too uncertain and indefinite to be enforced. “Where a contract is so uncertain and indefinite that the intention of the parties in material particulars cannot be ascertained, the contract is void and unenforceable.” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1174.) Here, the oral agreement lacked many basic material terms such as the loan amount, interest rate, and amortization schedule, without which the intention of the parties could not be ascertained.

The Appellate Court next addressed the homeowner’s fraud claims by noting the elements of fraud are misrepresentation, knowledge of falsity, intent to induce reliance on the misrepresentation, justifiable reliance on the misrepresentation, and resulting damages. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) Here, the homeowner’s fraud claims all centered on a false promise by a loan officer. The Court found the allegations insufficient to state a fraud claim as they were too general and further, the homeowner provided no allegation that it was the defendants’ intent not to perform the alleged promise when it was made.

The homeowner attempted to argue the oral agreement “is admissible as parole evidence to establish fraud in inducing [the homeowner] to enter into the 2005 [HELOC] under the guise of false promises.”

As you may recall, the parole evidence rule is a rule of substantive law, providing that “when parties enter an integrated written agreement, extrinsic evidence may not be relied upon to alter or add to the terms of the writing.” (Riverisland, supra, 55 Cal.4th at p. 1174; see also Code Civ. Proc., § 1856.) There is an exception, however, for evidence of fraud.

However, the Court noted the fraud exception to the parole evidence rule does not come where the only question is whether the plaintiff has sufficiently alleged a fraud claim in the first place. (Cf. Julius Castle Restaurant, Inc. v. Payne (2013) 216 Cal.App.4th 1423, 1442 [“A party claiming fraud in the inducement is still required to prove they relied on the parole evidence and that their reliance was reasonable.”].)

Finally, the Appellate Court rejected the homeowner’s wrongful foreclosure claim noting because the alleged oral agreement is not an enforceable contract, its breach cannot support a claim of wrongful foreclosure. The Court also rejected the homeowner’s argument that the trial court abused its discretion in failing to grant leave to amend by noting the homeowner did not provide the Court with the “further details” the homeowner claimed he had to show the oral agreement was not subject to the statute of frauds.

Accordingly, the judgment of the trial court was affirmed.

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Ryan Grotz practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in all phases of commercial litigation, including motion practice, written discovery, depositions, mediations, and bench and jury trials. Ryan received his Juris Doctor from the Chicago-Kent College of Law, where he was an associate editor on the Access to Justice Student Editorial Board. He was awarded his Bachelor of Business Administration degree from the University of Iowa. Ryan is licensed to practice law in Illinois and the U.S. District Court for the Northern District of Illinois. For more information, see https://mauricewutscher.com/attorneys/ryan-grotz/

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