Sheen v. Wells Fargo Bank
12 Cal.5th 905
| Cal. | 2022Background
- Sheen obtained two junior loans from Wells Fargo secured by his home, later missed payments and applied for loan modifications in Jan 2010.
- Wells Fargo cancelled an imminent foreclosure sale but did not provide a written determination on the modification applications; it sent March 17, 2010 letters warning of collection steps (not explicitly mentioning foreclosure).
- Sheen alleges he relied on those communications (and a call to his wife) to believe the loans had been modified and the home would not be foreclosed; Wells Fargo later sold the loan in 2010.
- In 2014 the assignee foreclosed and Sheen sued Wells Fargo for negligence for failing to "process, review and respond" to his modification applications, seeking purely economic damages tied to loss of the home.
- Trial court sustained Wells Fargo’s demurrer; Court of Appeal affirmed. The Supreme Court granted review and held no tort duty in negligence to process loan-modification applications for purely economic loss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a lender owes a common-law negligence duty to "process, review and respond carefully and completely" to a borrower’s loan-modification application | Sheen: receipt of the application creates a tort duty to handle it with reasonable care; breach that causes economic loss is actionable | Wells Fargo: no such duty exists; disputes belong to contract or statutory regimes; economic-loss rule bars tort recovery | No duty recognized; negligence claim for pure economic loss was barred |
| Whether statutes/regulations (e.g., HBOR) impose or support a broader tort duty | Sheen: seeks a judicially recognized duty independent of statutes | Wells Fargo: HBOR and other statutes regulate first-lien servicing but do not create a general tort duty here (junior loans not covered) | No statutory basis shown; HBOR applies to first liens and does not justify the claimed tort duty |
| Whether the Biakanja multifactor test supports recognizing a duty between contracting parties | Sheen: Biakanja factors favor imposing a duty in the mortgage-modification context (borrower dependence, foreseeability) | Wells Fargo: Biakanja applies to third parties not in privity; using it here would erode contract law and the economic-loss rule | Biakanja inapplicable to disputes between contracting parties for these purposes; economic-loss rule governs |
| Policy: should courts create the duty or leave reform to the Legislature? | Sheen/AG amici: market failures, borrower vulnerability, servicer incentives justify judicially imposed duty | Wells Fargo/industry amici: imposing a broad tort duty would raise costs, disrupt contractual allocation of risks, and chill lending; Legislature is better suited | Court declines judicially to create such a duty and defers to legislative/regulatory solutions |
Key Cases Cited
- Biakanja v. Irving, 49 Cal.2d 647 (Cal. 1958) (multifactor test for duty to third parties not in privity)
- Southern California Gas Leak Cases, 7 Cal.5th 391 (Cal. 2019) (economic-loss rule limits negligence recovery for pure economic loss)
- Robinson Helicopter Co. v. Dana Corp., 34 Cal.4th 979 (Cal. 2004) (contract/tort boundary; economic-loss rule protects contractual allocation)
- Nymark v. Heart Fed. Sav. & Loan Assn., 231 Cal.App.3d 1089 (Cal. Ct. App. 1991) (financial institution generally owes no duty when acting within conventional lender role)
- Aas v. Superior Court, 24 Cal.4th 627 (Cal. 2000) (limits on extending tort remedies in contractual contexts)
- Seely v. White Motor Co., 63 Cal.2d 9 (Cal. 1965) (foundational statement of the economic loss rule)
- Erlich v. Menezes, 21 Cal.4th 543 (Cal. 1999) (tort recovery allowed only when duty independent of contract or conduct is intentional)
- Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012) (applying economic-loss rule to bar negligence claim based on loan-modification processing)