U.S. Bank misled the Debtor into abandoning bankruptcy by promising to work with the Debtor on a mortgage reinstatement and loan modification. The case, Aceves v. U.S. Bank, N.A., No. B220922 (Cal.App. Dist.2 01/27/11) the California Court of Appeal for the 2d Appellate Division found that the Debtor could have reasonably relied on the bank’s promises, the promises were sufficiently concrete to be enforceable, and the Debtor’s decision to forgo Chapter 13 relief was detrimental because it allowed the bank to foreclose on the property. Here’s my favorite part:

“Contrary to the bank’s contention that Plaintiff’s use of the Bankruptcy Code was ipso facto bad faith, Chapter 13 is uniquely tailored to protect homeowners’ primary residences from foreclosure,” the appellate court said.

After the debtor abandoned her case, the lender foreclosed.  The trial court entered a judgment in favor of U.S. Bank and the appellate court reversed on the issues of promissory estoppel and fraud. This means that if the lender promises to work with you and then they later foreclose after you have taken action in reliance on their promise, the lender could be liable for their actions.  Unfortunately, this story does not have the happiest of endings because the court found no basis for voiding the deed of sale or otherwise invalidating the foreclosure.

The moral of this story is that you receive valuable rights under Chapter 13 Bankruptcy that will stop the foreclosure sale through the injunction provision of 11 U.S.C. §362 (Automatic Stay). The bankruptcy court can reinstate your loan and will permit you to cure your default through Chapter 13 Plan payments over 3 or 5 years. Since Congress refuses to allow bankruptcy judges to modify the terms of the loan, you’ll have hire an attorney who focuses their practice on predatory lending, mortgage fraud and the securitized mortgage pools to determine whether you have legal claims that could potentially be litigated during the pendency of your bankruptcy case.

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