Consumer Finance Litigation
On October 22, 2013, in Bushell v. JPMorgan Chase Bank, N.A., the California Court of Appeal for the Third District (Placer, California) reversed a trial court's order sustaining the demurrer of defendant JPMorgan Chase Bank, N.A. ("Chase"), without leave to amend, and ordered the case remanded with instructions to overrule the demurrer. The Court held that a trial period plan under the Home Affordable Modification Program ("HAMP") may constitute an actionable promise for purposes of causes of action sounding in contract and fraud.
In Bushell, Chase offered the borrowers a Trial Period Plan ("TPP") under HAMP in May 2009. The TPP required the borrowers to submit documents and make four trial payments and, if the borrowers otherwise complied with the terms of the TPP, Chase would modify their loan. According to the allegations of the first amended complaint, the borrowers submitted all documents as requested by Chase and made a total of 26 trial modification payments between June 2009 and August 2011, but were denied a permanent loan modification on the stated basis that the investor did not approve of the modification. The borrowers then filed a lawsuit against Chase in the Superior Court of the State of California for the County of Placer, and asserted causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, and fraud (based on false promise and on intentional misrepresentation).
Chase demurred to the original and amended complaints filed by the borrowers. The trial court ultimately sustained Chase's demurrer to the first amended complaint without leave to amend, stating that a TPP was not, on its face, a binding contract for a loan modification (and, thus, there could be no breach of contract or breach of the implied covenant of good faith and fair dealing); that the borrowers failed to allege that they qualified under HAMP; that the alleged promise to modify the borrowers' loan was conditional rather than a clear and unambiguous promise as is required under California law; that fraud was not pleaded with the specificity required by California precedent; and that the borrowers could not allege damages because they were already under a duty to make mortgage payments under the original terms of their loan.
The California Court of Appeal reversed the order sustaining the demurrer without leave to amend, stating that the trial court could not dismiss a complaint alleging such HAMP violations at the pleading stage. The Court first explained that the borrowers already qualified for a modification under HAMP by merely being offered a TPP because, under HAMP Supplemental Directive 09-01, "...when a lender offers a TPP to a distressed borrower, the lender effectively has already determined that the borrower qualifies for HAMP, assuming that the borrower's representations on which modification is based remain true and correct." From there, the Court of Appeal, relying heavily on the language of the opinion in Wigod, stated that a permanent modification is mandatory where the borrower has complied with the terms of the TPP (i.e. submitting documents, making trial payments), because of the language of Supplemental Directive 09-01, which states at Page 18 that "[i]f the borrower complies with the terms and conditions of the [TPP], the loan modification will be effective on the first day of the month following the trial period."
Chase argued that the TPP was nothing more than an "agreement to agree." The Court rejected this argument, explaining that the conditional language of the TPP itself provided for a permanent loan modification if the borrowers complied with the stated conditions. Relying on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), and West v. JPMorgan Chase Bank, N.A., 214 Cal. App. 4th 780 (Cal. Ct. App. 2013) (both holding that banks must offer permanent loan modifications where borrowers comply with the terms set forth in the TPP), the Court held that a breach of contract cause of action was properly stated, as the borrowers alleged that they had fully complied with each component of the TPP. Second, the Court of Appeal held that the borrowers sufficiently stated a cause of action for breach of the implied covenant of good faith and fair dealing because, contrary to the promises alleged to have been made by Chase in the TPP, the borrowers were denied a permanent modification. The Court also found that there was a sufficiently clear promise to modify the borrowers' loan such that a cause of action for promissory estoppel was stated (despite being conditional). Fourth, the Court held that a fraud cause of action (based on false promise, only) was properly stated because Chase was uniquely positioned to know who specifically at Chase prepared the TPP and made allegedly fraudulent representations to the borrowers regarding whether a permanent modification was forthcoming.
The Court of Appeal's decision is significant because it affirms the rejection by California courts of challenges to HAMP-based causes of action based on the conditional contractual language contained in standard TPP agreements. Further, the ruling increases litigation risks for banks who offer TPPs to borrowers in default, who may then file a lawsuit seeking injunctive relief and/or damages based on Bushell and West when they are denied a permanent loan modification (despite the issue of compliance with its terms). The Bushell decision (like West and Wigod) was certified for publication, so borrowers may rely on citable case law in responding to demurrers and motions to dismiss. It is not known whether Chase intends to appeal the Court of Appeal's decision, but there is a high likelihood that such lawsuits will continue given the decision in Bushell.
Mr. Streibich would like to thank Christopher J. Donewald, for his assistance in developing this Alert.
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