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Court of Appeals Holds that Trial Court Erred in Dismissing Claims Based on Parol-Evidence Rule and Statute of Frauds

On March 13, 2014, the District of Columbia Court of Appeals decided Stancil v. First Mount Vernon Industrial Loan Association, No. 12-CV-1382, slip op. (D.C. Mar. 13, 2014), in which it considered whether the trial court erred in dismissing common law claims for fraudulent misrepresentation, wrongful foreclosure, and breach of contract. Id. at 1-3.

The facts as alleged in the plaintiffs’ complaint are as follows: The plaintiffs borrowed $500,000 from the defendant “to purchase a property in the District of Columbia.” Id. at 2. “After concluding that [the plaintiffs] were in default [on the loan], [the defendant] took steps to foreclose on the property.” Id. However, the plaintiffs and the defendant subsequently “entered into an oral contract pursuant to which [the plaintiffs] paid [the defendant] $170,000 and [the defendant] agreed to modify the terms of the note [for the loan] and to forbear from foreclosing on the property.” Id. at 2-3. The payment “reflected a $100,000 charge for attorney’s fees, a $20,000 fee to [the defendant], and [a] $50,000 payment as consideration for the forbearance agreement.” Id. at 3. “Before [the plaintiffs] made the $170,000 payment, [the defendant] promised to reduce the forbearance agreement to writing, and [the plaintiffs] relied on that promise in making the payment.” Id. “Despite its promise, [the defendant] failed to reduce the forbearance agreement to writing,” and “later foreclosed on the property.” Id.

The plaintiffs’ complaint alleged the following claims: “(1) fraudulent misrepresentation with respect to the $100,000 charge for attorney’s fees . . .; (2) fraudulent misrepresentation with respect to the $50,000 payment for foreclosure forbearance . . . ; (3) wrongful foreclosure [based, inter alia, on breach of the oral forbearance agreement] . . . ; (4) breach of the oral forbearance agreement; and (5) fraudulent misrepresentation [based on the allegation that the defendant] . . . never intended to honor the oral forbearance agreement.” Id. at 3-4. The trial court dismissed all of the plaintiffs’ claims for failure to state a claim upon which relief may be granted. Id. at 4-5. The plaintiffs appealed. Id. at 2.

With respect to the first claim, the Court of Appeals affirmed the trial court’s decision. It held that “the trial court correctly concluded that [the plaintiffs] did not identify any fraudulent misrepresentation upon which they detrimentally relied.” Id. at 6. On the contrary, the $100,000 charge for attorney’s fees was expressly provided for by a provision in the note for the loan which stated that the plaintiffs would be responsible, in the event of a default, for attorney’s fees of not less than twenty percent of the outstanding indebtedness. Id.

With respect to the other claims, however, the Court of Appeals reversed the trial court’s decision because the trial court erroneously concluded that the claims were barred by the parol-evidence rule and the statute of frauds. Id. at 9. The Court of Appeals explained that the parol-evidence rule “precludes introduction of extrinsic or parol evidence which tends to contradict, vary, add to, or subtract from the terms of a written contract.” Id. at 5 (ellipse and internal quotation marks omitted). However, it “does not preclude proof of a subsequent oral modification of a written contract, which is what [the plaintiffs] allege occurred in this case.” Id. at 10.

The Court of Appeals further explained that “[t]he statue of frauds mandates that certain agreements, including those concerning real estate, must be in writing to guard against perjury and protect against unfounded and fraudulent claims.” Id. at 11 (internal quotation marks omitted). However, a person may be estopped from invoking the statute of frauds where its own fraud caused the nonexistence of the required writing. Id. at 11-12. The Court of Appeals concluded that the plaintiffs adequately alleged an estoppel claim because they alleged “that [the defendant] promised to reduce the oral forbearance agreement to writing, that [the plaintiffs] relied on that promise in making the $170,000 payment . . . , and that [the defendant] fraudulently failed to reduce the forbearance agreement to writing.” Id. at 12.

Accordingly, the Court of Appeals reversed in part and remanded for further proceedings. Id. at 17. However, one judge dissented in part because he would have affirmed the trial court’s decision to dismiss all of the plaintiffs’ claims. Id. at 18-23. To view the majority and dissenting opinions, click here.