On Jan. 27, a California appeals court ruled that U.S. Bank conned Claudia Aceves out of her home. Specifically, the court found that U.S. Bank (USB) told Aceves that if she gave up bankruptcy court protection on her home, it would negotiate a loan modification with her. But, the court found, the bank had no intention of negotiating. Instead, as soon as the bankruptcy court protection was removed, the bank foreclosed. As a result, the court ruled, Aceves can sue U.S. Bank for damages and fraud.

What she can't do, unfortunately, is get her house back. The court found the foreclosure, once Aceves was duped into allowing it, was done legitimately. In further bad news for Aceves, the opinion contains enough information to make it likely that U.S. Bank didn't have standing to foreclose when it did. But her lawyers did not raise those issues at trial, and weren't asked by the court to raise them on appeal, so the court refused to consider them.

One of her attorneys, Nick Alden, says because of that, he considers the case a loss despite the ruling against the bank. Still, he notes: "As to damages for fraud, Aceves would be entitled to damages suffered and punitive damages."

If the proper arguments were made at the trial court, Alden points out, it could possibly have reversed the foreclosure. He adds: "When the case is remanded to the lower court, Aceves will be given a chance to amend her complaint. At that time, she will allege facts showing wrongful foreclosure. If the trial court accepts her argument, and because the house was purchased by the bank and not by a bona fide purchaser, one of the possible outcomes is a reversal of the foreclosure."

Key to the appeals court's decision was the bank's promise, and Aceves's reliance on that promise to her significant detriment. Specifically, the bank promised to negotiate a mortgage loan modification, and relying on that promise, Aceves gave up her bankruptcy protections, so she was significantly damaged when the bank reneged. For the fraud claim, the court found that the bank not only failed to keep its promise, but it also never had any intent of keeping it.

As Aceves's other attorney, Dennis Moore, puts it: "Borrowers should be able to rely on the banks when negotiating."

Stringing Homeowners Along


Aceves lost her house, but she may have won a victory for other homeowners. Both Alden and Moore say they're representing clients in other, very similar, cases who could be helped by this decision. Soon, we'll learn whether or not this appellate rule can be applied to other types of bank misrepresentations relating to modifications.

For example, could the decision help Los Angeles area homeowners like the Galvans?

The Galvans, relying on what their bank, JPMorgan Chase (JPM) told them, defaulted on their mortgage in order to qualify for a loan modification. Then they made trial modification payments and otherwise complied with their bank's demands for additional paperwork for the official three-month trial period. Next, they relied on the bank's statements that a permanent modification was still possible, and they continued making trial payments and meeting other bank demands for many more months. That is, until they were told their house would be foreclosed on within a matter of weeks.

While Moore and Alden believed it was possible the Aceves decision could be helpful, depending on the details of each situation, the difficulty is in proving how the Galvans -- or other such homeowners -- were hurt by relying on the modification promises. For example, the banks could argue that the modified payments delayed foreclosure, and thus benefited the homeowner. Aceves's case is much easier to make because she gave up very specific protections that could have saved her house.

Nonetheless, the behavior of the banks in all of these cases feels very much the same -- stringing along homeowners with promises of permanent loan modifications that always hover just out of reach, a carrot tied to a stick, until, wham! -- the bank forecloses.

With so many foreclosures to litigate, I'm sure we will find out soon how widely applicable the Aceves ruling will be.


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