Dixon v. Wells Fargo - D. Mass - July 22, 2011 -
The gravamen of the complaint is that Wells Fargo promised to engage in negotiations to modify plaintiffs'loan, provided that they took certain “steps necessary to enter into a mortgage modification.” On the basis of Wells Fargo’s representation, plaintiffs stopped making payments on their loan and submitted the requested financial information - only to learn subsequently that the bank had initiated foreclosure proceedings against them. They contend that Wells Fargo ought have anticipated their compliance with the terms of its promise to consider them for a loan modification. Not only was it reasonable that they would rely on the promise, but also their reliance left them considerably worse off, for by entering into default they became vulnerable to foreclosure.
Plaintiffs have made clear that they do not seek specific performance of a promised loan modification. They admit that there was no guarantee of a modification by Wells Fargo, only a verbal commitment to determine their eligibility for a modification if they followed the bank’s prescribed steps. Thus, the plaintiffs’ request that Wells Fargo be held to its promise to consider them for a loan modification is not a covert attempt to bind the bank to a final agreement it had not contemplated. There is no risk that this Court, were it to uphold the promissory estoppel claim, would be “trapping” Wells Fargo into a vague, indefinite, and unintended loan modification masquerading as an agreement to agree.
Furthermore, because the parties had not yet begun to negotiate the terms of a modification, the Court questions whether Wells Fargo’s promise ought even be characterized as a preliminary agreement to agree. Instead, it more closely resembles an “agreement to negotiate.” . . . . (“[T]he question here is simply whether U.S. Bank made and kept a promise to negotiate with Aceves, not whether . . . the bank promised to make a loan or, more precisely, to modify a loan.”).
Wells Fargo made a specific promise to consider the plaintiffs’ eligibility for a loan modification if they defaulted on their payments and submitted certain financial information. . . . See Burton & Andersen, supra §8.2.2, at 332-33 (recognizing that, while there is no general duty to negotiate in good faith, public policy favors imposing noncontractual liability “when one person wrongfully harms another” by making a promise intended to induce reliance); Lucian Arye Bebchuk & Omri Ben-Shahar, Precontractual Reliance, 30 J. Legal Stud. 423, 424 (2001) (“A party may be liable for the other party’s reliance costs on three possible grounds: if it induced this reliance through misrepresentation, if it benefited from the reliance, or if it made a specific promise during negotiations.”); Farnsworth, supra at 236 (referring to the “specific promises that one party makes to another in order to interest the other party in the negotiations” as a “common basis for precontractual liability”).
Importantly, it was not a promise made in exchange for a bargained-for legal detriment, as there was no bargain between the parties; rather, the legal detriment that the plaintiffs claim to have suffered was a direct consequence of their reliance on Wells Fargo’s promise. . . . Under the theory of promissory estoppel, “[a] negotiating party may not with impunity break a promise made during negotiations if the other party has relied on it.” Farnsworth, supra at 236. Promissory estoppel has developed into “an attempt by the courts to keep remedies abreast of increased moral consciousness of honesty and fair representations in all business dealings.” . . . . While it began as “a substitute for (or the equivalent of) consideration” in the context of an otherwise binding contract,. . . . “promissory estoppel has come to be a doctrine employed to rescue failing contracts where the cause of the failure is not related to consideration,” . . .. It now “provides a remedy for many promises or agreements that fail the test of enforceability under many traditional contract doctrines,” . . . but whose enforcement is “necessary to avoid injustice,” Restatement (Second) of Contracts § 90, comment (b).
Admittedly, the courts of Massachusetts have yet to formally embrace promissory estoppel as more than a consideration substitute.. . . Nonetheless, without equivocation, they have adopted section 90 of the Restatement (Second) of Contracts, which reads, “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.” . . . .Nowhere in the comments to section 90 nor in section 2 of the Restatement, which defines the word “promise,” is there an explicit “requirement that the promise giving rise to the cause of action must be so comprehensive in scope as to meet the requirements of an offer that would ripen into a contract if accepted by the promisee.” . . . In fact, the Restatement “has expressly approved” promissory estoppel’s use to protect reliance on indefinite promises. . . .
Massachusetts’s continued insistence that a promise be definite - at least to a degree likely not met in the present case - is arguably in tension with its adoption of the Restatement’s more relaxed standard. This tension is not irreconcilable, however. Tracing the development of promissory estoppel through the case law reveals a willingness on courts’ part to enforce even an indefinite promise made during preliminary negotiations where the facts suggest that the promisor’s words or conduct were designed to take advantage of the promisee. The promisor need not have acted fraudulently, deceitfully, or in bad faith. . . . Rather, “[f]acts falling short of these elements may constitute conduct contrary to general principles of fair dealing and to the good conscience which ought to actuate individuals and which it is the design of courts to enforce.” . . . As the Supreme Judicial Court remarked in an early promissory estoppel case:
[I]t is not essential that the representations or conduct giving rise to [the doctrine’s] application should be fraudulent in the strictly legal significance of that term, or with intent to mislead or deceive; the test appears to be whether in all the circumstances of the case conscience and duty of honest dealing should deny one the right to repudiate the consequence of his representations or conduct; whether the author of a proximate cause may justly repudiate its natural and reasonably anticipated effect; fraud, in the sense of a court of equity, properly including all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and are injurious to another or by which an undue and unconscientious advantage is taken of another. Id. at 525 . . . .
Typically, where the Massachusetts courts have applied the doctrine of promissory estoppel to enforce an otherwise unenforceable promise, “there has been a pattern of conduct by one side which has dangled the other side on a string.”
In the present case, Wells Fargo convinced the plaintiffs that to be eligible for a loan modification they had to default on their payments, and it was only because they relied on this representation and stopped making their payments that Wells Fargo was able to initiate foreclosure proceedings. While there is no allegation that its promise was dishonest, Wells Fargo distinctly gained the upper hand by inducing the plaintiffs to open themselves up to a foreclosure action. In specifically telling the plaintiffs that stopping their payments and submitting financial information were the “steps necessary to enter into a mortgage modification,” Wells Fargo not only should have known that the plaintiffs would take these steps believing their fulfillment would lead to a loan modification, but also must have intended that the plaintiffs do so. The bank’s promise to consider them for a loan modification if they took those steps necessarily “involved as matter of fair dealing an undertaking on [its] part not to [foreclose] based upon facts coming into existence solely from” the making of its promise.
As the cases reveal, where, like here, the promisor opportunistically has strung along the promisee, the imposition of liability despite the preliminary stage of the negotiations produces the most equitable result. This balancing of the harms “is explicitly made an element of recovery under the doctrine of promissory estoppel by the last words of [section 90 of the Restatement], which make the promise binding only if injustice can be avoided by its enforcement.” . . . Binding the promisor to a promise made to take advantage of the promisee is also the most efficient result.. . . . In cases of opportunism, “[the] willingness to impose a liability rule can be justified as efficient since such intervention may be the most cost-effective means of controlling opportunistic behavior, which both parties would seek to control ex ante as a means of maximizing joint gains. Because private control arrangements may be costly, the law-supplied rule may be the most effective means of controlling opportunism and maximizing joint gain.”. . . .
[R]eliance-based recovery in such instances offers the most equitable and efficient result without “distort[ing] the incentives to enter negotiations” in the first place. . . . This Court, therefore, holds that the complaint states a claim for promissory estoppel: Wells Fargo promised to engage in negotiating a loan modification if the plaintiffs defaulted on their payments and provided certain financial information, and they did so in reasonable reliance on that promise, only to learn that the bank had taken advantage of their default status by initiating foreclosure proceedings. Assuming they can prove these allegations by a preponderance of the evidence, their damages appropriately will be confined to the value of their expenditures in reliance on Wells Fargo’s promise.
Without question, this is an uncertain result. But the “type of life-situation” out of which the plaintiffs' case arises - a devastating and nationwide foreclosure crisis that is crippling entire communities - cannot be ignored. . . . Distressed homeowners are turning to the courts in droves, hoping for relief for what they perceive as misconduct by their mortgage lenders. Many of these cases are factually similar, if not identical to, the plaintiffs’ case. Yet, with the notable exception of three Massachusetts federal district court cases, virtually no other court has upheld a claim for promissory estoppel premised on such facts. . . .To the extent that today’s result is an anomaly, this Court has sought to explain its decision “openly and with respect for precedent, not by sleight of hand.” . . . . It is the view of this Court that “[f]oreclosure is a powerful act with significant consequences,” Ibanez, 458 Mass. at 655 (Cordy, J., concurring), and where a bank has obtained the opportunity to foreclose by representing an intention to do the exact opposite - i.e., to negotiate a loan modification that would give the homeowner the right to stay in his or her home - the doctrine of promissory estoppel is properly invoked under Massachusetts law to provide at least reliance-based recovery.
Without guidance from another court within the First Circuit and without clear direction from other federal and state courts across the nation, this Court agrees with Judge Posner’s conclusion that, especially because the Home Owners’ Loan Act (“HOLA”), 12 U.S.C. §§ 1461-1700 (HOLA), and its implementing regulations, 12 C.F.R. §§ 500-99, does not give a private right of action, Congress could not have intended to deny all traditional state-law avenues of recourse to consumers who are harmed by the unseemly conduct of lenders. This Court, therefore, holds that the Dixons’ promissory estoppel claim, rooted in the common law and with no ambition of regulating lending, is not barred by HOLA.
Plaintiffs' counsel Gerald A. Phelps, Law Office of Gerald A. Phelps, 11 Lamppost Drive, Halifax, MA 02338 781-754-0825 lawgap@verizon.net
