Consumer - mortgage refinancing - existence of contract - estoppel/fraud - statute of frauds
McCloskey v. Novastar Mortgage, Inc. - ED Pa. - August 21, 2007
Plaintiffs were solicited by defendant to refinance their mortgage. Based on a series of conversation and emails with defendant, plaintiffs withdrew their refinancing arrangement with another mortgage company. Defendant ultimately rejected plaintiff's application, allegedly because their income was somewhat less that stated orally during phone conversations. Plaintiffs sued for breach of contract, promissory estoppel and fraud.
The contract cause of action was dismissed, because plaintiffs failed to establish the existence of a legal contract. The documents that they produced were evidence of preliminary negotiations but not a contract. The documents did not contain the "essential terms of the contract." Under Pennsylvania law, a contract exists if a) the parties have manifested an intent to be found by the terms of the agreement, b) the terms are sufficiently definite, and c) there was consideration. Preliminary negotiations do not alone constitute a contract. To ripen into a contract, there must be a manifestation of mutual asset to the terms of a bargain -- which was not the case here. An oral contract can be enforeable, but it must be established by clear and precise evidence - again not the case here.
Plaintiffs' alleged detrimental reliance on defendant's promises about refinancing. Defendant said plaintiff had unclean hands because of misstatements about income. Inequitable conduct by plaintiff must be connect to the matters at issue, and the conduct has to be willful, not negligent. The court held that factual matters still had to be resolved about these issues and refused defendant's motion for summary judgment.
Statute of frauds defense
A mortgage is an interest in property and must satisfy the statute of frauds, as must an oral agreement to lend money in consideration for a mortgage. A party cannot avoid the statute by relying on an estoppel theory of recovery. However, the statute only makes an oral contract for an interest in real property unenforceable. It does not void the contract. Where the oral agreement has been obtained by fraud, the buyer can recover as damages the loss of his bargain. A plaintiff is permitted to pursue a promissory estoppel claim even when the underlying promise is subject to the statute of frauds, but his recovery is limited to reliance damages in the absence of fraud. The statute of frauds may prevent the specific performance of the promise, but it does not bar the promissory estoppel claim itself. The court held that the plaintiff had the right to pursue further discovery on this claim.
Defendant again claimed that plaintiffs' overstatement of income barred this claim. The court rejected this because of defendant's lack of reliance on the statement of income, which was of "minimal importance to the loan approval." The court allowed the claim to proceed and permitted additional discovery by plaintiff.