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California: The Decision in the Aceves Case re Promissory Estoppel

by Thomas N. Abbott
Pite Duncan, LLP – USFN Member (CA)

On February 9, 2011, the California Court of Appeal clarified the pleading requirement for a promissory estoppel claim based on an alleged oral promise to postpone a pending foreclosure sale. In the case, the borrower contested a completed trustee’s sale, alleging that U.S. Bank orally promised to postpone foreclosure and negotiate a loan modification if the borrower would forbear from exercising two rights relating to her pending bankruptcy: (1) the right to oppose U.S. Bank’s motion for relief from stay; and (2) the right to convert her petition from chapter 7 to chapter 13. Aceves v. U.S. Bank, N.A, 192 Cal. App. 4th 218; 120 Cal. Rptr. 3d 507, 514 (2011). The Aceves decision is important because it clarifies the pleading requirements for stating a claim of promissory estoppel with respect to a purported oral promise to postpone foreclosure.

California law generally holds that in the absence of consideration, an oral promise to postpone a foreclosure sale is unenforceable. Raedeke v. Gibraltar Sav. & Loan Ass’n, 10 Cal. 3d 665, 673 (1974); Karlsen v. Am. Sav. & Loan Ass’n, 15 Cal. App. 3d 112, 117 (1971). It is a common allegation in complaints contesting nonjudicial foreclosure that the secured party orally promised to postpone the foreclosure, but nonetheless proceeded to sale. The allegation is often conclusionary and subject to a demurrer in state court or a motion to dismiss in federal court. However, in a recent trend, borrowers have claimed they reasonably relied on the secured party’s oral promise to postpone and, therefore, they contend that the doctrine of promissory estoppel should apply as a substitute for consideration.

As set forth in Aceves, the essential elements of a claim of promissory estoppel are: “(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.” The doctrine of promissory estoppel is used to provide a substitute for the consideration ordinarily required to create an enforceable agreement. Moreover, a promissory estoppel claim generally entitles a prevailing plaintiff to damages available on a breach of contract claim.

The borrower in Aceves argued that promissory estoppel should provide a substitute for consideration because the borrower agreed to forbear from converting her bankruptcy petition from chapter 7 to chapter 13. The borrower contended that by doing so, she suffered a legal detriment because she otherwise could have used her husband’s income (he was not a borrower on the loan) to help repay the arrears through an organized repayment plan. Stating that “Chapter 13’s greatest significance for debtors is its use as a weapon to avoid foreclosure on their homes,” the court concluded that by forgoing the conversion and not opposing U.S. Bank’s motion for relief from stay, the borrower satisfied the reliance and injury elements of promissory estoppel.

Although Aceves provides guidance on the pleading requirements for a promissory estoppel claim, the case is not a panacea for defaulting borrowers. First, the trial court ruling at issue was an order sustaining a challenge to the pleadings. As such, the Court of Appeal was required to accept the factual allegations in the complaint as true. Second, the appellate court affirmed the trial court’s order pertaining to most of the plaintiff’s claims, including the claim of wrongful foreclosure. The court concluded that without paying the funds necessary to reinstate the loan before the foreclosure, promissory estoppel does not provide a basis for voiding the trustee’s deed or otherwise invaliding the foreclosure. Thus, Aceves does not elevate promissory estoppel; rather, it reiterates well-settled California law that a defaulting borrower must tender in order to state a claim to set aside the foreclosure sale.

Finally, and importantly, the appellate court also affirmed that a secured party’s agent may execute foreclosure notices (such as the substitution of trustee) and that errors on the notice of default that do not result in prejudice to the borrower do not warrant relief.

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