Knowing When to Walk Away
In Parker v. Kentucky Housing Corporation, the Kentucky Court of Appeals affirmed an order of sale in a foreclosure action. Mrs. Parker first defaulted on her obligations in 2001 and again in 2004. Kentucky Housing Corporation modified her loan in March 2005 by reducing the interest rate for two years. DMM, as agent for KGC, processed the modification. In accordance with the written modification, Mrs. Parker's interest rate had reverted back in March 2007. She defaulted again and KHC agreed to two subsequent forbearance agreements. Finally, KHC determined it could no longer offer payment assistance to Mrs. Parker and decided to foreclose in January 2011. Mrs. Parker offered the deposition testimony of DMM's Joseph Smith to prove an oral modification that the reduced rate would become permanent if her financial situation had not improved between 2005 and 2007. The trial court struck the deposition based on Mrs. Parker failing to notify KHC of the planned discovery. The trial court confirmed the master commissioner's report recommending summary judgment for KHC and ordered the sale of the property. Kentucky's Statute of Frauds (KRS 371.010) requires that modification of agreements which must be in writing must also be in writing.
Mrs. Parker raised three issues on appeal: 1) The Statute of Frauds does not prohibit raising an oral agreement as a defense; 2) The Statute of Frauds does not bar enforcement of oral contracts in cases of fraud; and 3) The Statute of Frauds does not bar promissory or equitable estoppel. In order to find that the oral modification prevented the current foreclosure, the court would have to hold it to be an enforceable agreement. The Statute of Frauds prevented such an enforcement because reducing the interest rate and payment requires a writing signed by the party to be charged. With regards to fraud, Mrs. Parker failed to establish in the record any intent on the part of KHC to deceive her. Without intent, there could not be fraud. Finally, equitable estoppel did not bring this alleged oral agreement outside the Statute of Frauds because Mrs. Parker made the original payments for more than a year after the temporary modification terminated.
The Parker court correctly held that the Statute of Frauds bars the enforcement of the alleged oral modification. Parker, however, is a prime example of the importance of an effective forbearance agreement. From the borrower's perspective, a forbearance agreement gives an opportunity to recover. From the lender's perspective, a forbearance agreement does give this breathing room to the borrower but it also provides the opportunity to cure any potential defects in the loan documents. The two subsequent forbearance agreements should have made clear that the terms of the original note were enforceable and the borrower waived any defenses. While ultimately successful, the lender could have prevented a thirty-month delay with a forbearance agreement that better protected its interests.