Facts
- Borrowers Joseph Geremia and his wife took a $2,350.28 loan from East Providence Credit Union, secured by a chattel mortgage on their 1962 automobile.
- The mortgage required the borrowers to maintain specified insurance and allowed the credit union, upon default in maintaining insurance, to pay premiums and add the amount (with interest) to the secured debt.
- The borrowers obtained insurance naming the credit union as loss payee; premiums were payable in installments.
- The insurer sent a cancellation notice for nonpayment of an installment to the borrowers, with a copy to the credit union.
- The credit union wrote the borrowers that if it was not notified of renewal coverage within 10 days, it would renew the policy and charge the premium to the loan.
- The borrowers communicated assent by telephone, approving the credit union’s payment of the premium; the trial court found the credit union was informed of that approval.
- The credit union did not pay; the policy lapsed and was canceled.
- About two months later, the uninsured vehicle was destroyed in an accident, leaving no insurance proceeds.
- The credit union sued for the unpaid balance on the note; the borrowers counterclaimed for losses caused by the credit union’s failure to keep insurance in force after promising to do so.
Issues
- Whether the credit union’s promise to renew/pay the insurance premium, made within the mortgage relationship, formed a binding contract supported by consideration.
- Whether the promise was enforceable under promissory estoppel based on the borrowers’ reliance and resulting detriment.
- Whether the credit union’s breach barred recovery on the note or, at minimum, created a setoff defeating the lender’s claim.
Decision
- The Rhode Island Supreme Court affirmed the superior court’s judgment dismissing the credit union’s complaint and awarding relief on the borrowers’ counterclaim.
- The court held the credit union’s promise to pay the premium was supported by consideration because the mortgage permitted the lender to add the premium to the debt and collect interest, creating a financial benefit to the lender.
- The credit union’s failure to pay after promising to do so was a breach that entitled the borrowers to a claim that, at minimum, offset any amount otherwise due on the loan.
- Alternatively, even if viewed as gratuitous, the promise was enforceable under promissory estoppel because the borrowers reasonably relied on it to their detriment and enforcement was necessary to avoid injustice.
Legal Principles
- A promise made in the course of an existing secured-credit relationship may be supported by consideration when the promisor obtains a bargained-for financial advantage under the governing contract (e.g., adding advances to the debt and charging interest).
- When a promisor makes a clear commitment to act in the future and the promisee reasonably and foreseeably relies to the promisee’s detriment, promissory estoppel may render the promise enforceable to prevent injustice.
- A borrower’s claim arising from a lender’s breach related to collateral protection may operate as a setoff that defeats or reduces the lender’s recovery on the underlying debt.
Conclusion
The court held the credit union was bound by its commitment to keep insurance in force—either as a contract supported by consideration or under promissory estoppel—and its failure to pay the premium after obtaining the borrowers’ assent created a claim that at least offset the loan balance, defeating the lender’s suit on the note.