Dixon v. Wells Fargo Bank, N.A

Brief Fact Summary.

The Dixons (Plaintiffs) had a mortgage held by Wells Fargo Bank, N.A. (Defendant). Defendant orally agreed to consider Plaintiffs for a loan modification. In order to proceed with the modification, Defendant advised Plaintiffs to stop making payments on the loan. Defendant then sought to foreclose and Plaintiff sued arguing for promissory estoppel.

Synopsis of Rule of Law.

When a mortgagor, relying on an oral promise from the mortgagee to consider him for a loan modification, takes steps that make the mortgagor worse off, the mortgagor has a claim for promissory estoppel.

Facts.

Plaintiffs had a mortgage with Defendant. Plaintiffs agreed with Defendant that they would take certain steps to be considered for a loan modification and Defendant agreed to consider the modification. Defendant instructed Plaintiffs to stop making payments on the loan, intending to add the unpaid amounts to the modified loan. Plaintiffs also provided certain financial paperwork to Defendant. Defendant did not consider Plaintiff for a loan modification and instead moved to foreclose on the Plaintiff’s house due to the missed payments. Plaintiffs sued seeking an injunction preventing Defendant from foreclosing, specific performance of the oral agreement to modify the loan, and damages. Plaintiffs argued that Defendant should have anticipated their reliance on the oral agreement and that their reliance left them worse off because it caused them to default on their loan and allowed the foreclosure proceeding. Defendant removed the case to federal court and moved to dismiss, arguing that Plaintiffs had not sufficiently invoked promissory estoppel.

Issue.

When a mortgagor relies on an oral promise from the mortgagee and takes steps in reliance on that promise that place him in a worse position than before the promise, does he have a claim for promissory estoppel?

Held.

(Young, J.) Yes. When a mortgagor, relying on an oral promise from the mortgagee to consider him for a loan modification, takes steps that make the mortgagor worse off, the mortgagor has a claim for promissory estoppel. Massachusetts does not use the term “promissory estoppel,” but uses “detrimental reliance” instead. A suit based upon detrimental reliance is treated like a contract suit. The plaintiff must prove all of the elements of a contract except for the element of consideration, which is provided by the detrimental reliance. Even in cases where the detrimental reliance is the consideration for a promise, the promise must be interchangeable with an offer and must show the promisor’s intent to act or refrain from acting in a specific way, so as to justify the promisee’s belief that a promise has been made. Just as with a contract action, the putative promise must be sufficiently definite and certain in its terms in order to be enforceable. Courts will generally not enforce an “agreement to agree” as a contract, finding an agreement to enter into a contract that leaves the terms of that contract to be determined at a later date to indefinite to be enforced. Because the complaint alleges that the parties had an “agreement to enter into a loan modification agreement,” it appears to be unenforceable and that Defendant correctly argues that the complaint fails to state a claim. Plaintiffs argue that they are not asking for specific performance of the loan modification itself, but only of Defendant’s promise to consider them for such a modification. Courts generally don’t enforce agreements to negotiate either since judicial enforcement of such vague agreements would risk imposing obligations on parties that they had never agreed to. However, Defendant made a promise to consider the Plaintiffs for a loan modification if they defaulted on payments and submitted financial information. There was no bargain between the parties, but the legal detriment the Plaintiffs suffered was a direct consequence of their reliance on Defendant’s promise. Promissory estoppel is an equitable remedy that seeks to avoid injustice caused by a party that has made promises during negotiations on which the other party has relied to its detriment. It serves as more than just a substitute for consideration. The Massachusetts state courts have not yet formally held that promissory estoppel is more than a substitute for consideration, but it has adopted § 90 of the Restatement (Second) of Contracts that reflects this principle. State case law reflects a willingness to enforce even indefinite promises made during preliminary negotiations where the evidence show that the promisor intended to take advantage of the promisee. Here, Defendant convinced Plaintiffs to default on their loan in order to be eligible for a loan modification. Only because they relied on this representation and defaulted was Defendant able to begin foreclosure proceedings. Defendant knew that Plaintiffs would follow its instructions in order to obtain the loan modification and intended them to. As a matter of fair dealing, Defendant should not have tried to foreclose upon Plaintiffs’ home based on a situation of their creation. This conduct allows application of promissory estoppel in this case. In order to prevent the creation of a duty to bargain in good faith that is not recognized at common law, thereby restricting parties’ freedom to negotiate, Plaintiff’s recovery will be limited to reliance expenditures. This result may actually promote more efficient bargaining. Further, it is not necessary to inquire into whether Defendant acted in bad faith. If the Plaintiffs can prove their allegations, they will be entitled to the value of their expenditures in reliance on defendant’s promise. Where a bank gets the ability to foreclose as a result of their promise to modify the loan, the doctrine of promissory estoppel is properly invoked to provide a reliance-based recovery. Motion to dismiss is denied.

Discussion.

Other cases also follow the principle that where a promisor strings along a promisee, allowing recovery despite the preliminary stage of the negotiations is the most equitable result. § 90 of the Restatement (Second) of Contracts makes this balancing of the harms an element of recovery in promissory estoppel claims. The promise is binding only if enforcing it will eliminate an injustice. This approach is also the most efficient since such judicial intervention may be the most cost-effective way to control opportunistic behavior and to encourage negotiations that maximize joint gain.