Sheen v. Wells Fargo Bank, N.A.

• Decision Date: 05 August 2019
• Docket Number: B289003
• Citation: 38 Cal.App.5th 346,250 Cal.Rptr.3d 677
• Court: California Court of Appeals Court of Appeals
• Parties: Kwang K. SHEEN, Plaintiff and Appellant, v. WELLS FARGO BANK, N.A., Defendant and Respondent.

38 Cal.App.5th 346

250 Cal.Rptr.3d 677

Kwang K. SHEEN, Plaintiff and Appellant,

v.WELLS FARGO BANK, N.A., Defendant and Respondent.

B289003

Court of Appeal, Second District, Division 8, California.

Filed August 5, 2019

Los Angeles Center for Community Law and Action, Noah Grynberg, Los Angeles, for Plaintiff and Appellant.

Kutak Rock, Jeffrey S. Gerardo, and Steven M. Dailey, Irvine, for Defendant and Respondent.

WILEY, J.

Homeowners in mortgage trouble may try to negotiate a better deal. If mortgage modification negotiations fail and the borrower falls behind, the lender may foreclose, sell the house, and evict the homeowner. In a nutshell, this happened to borrower Kwang Sheen with his lender Wells Fargo Bank, N.A. (Wells). Sheen sued Wells in tort for negligent mortgage modification and other claims. The trial court sustained Wells's demurrer, partly because Wells did not owe Sheen a duty in tort during contract negotiation.

The issue of whether a tort duty exists for mortgage modification has divided California courts for years. The California Supreme Court has yet to resolve this division. We must take sides.

We join with the old rule: no tort duty during contract negotiations. Our small contribution to this extensive debate is to use the general approach of the recent Supreme Court decision in Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 247 Cal.Rptr.3d 632, 441 P.3d 881 ( Gas Leak Cases ). The Gas Leak Cases decision was not about mortgage modifications, but it gives us guiding sources of law about whether to extend tort duties when, as here, there is no personal injury or property damage. Seeking wisdom, the Supreme Court considered decisions from other states as well as the Restatement of Torts. We do likewise.

These sources of law decisively weigh against extending tort duties into mortgage modification negotiations. The majority of other states are against it, and the most recent Restatement counsels against this extension because other bodies of law—breach of contract, negligent misrepresentation, promissory estoppel, fraud, and so forth—are better suited to handle contract negotiation issues. We therefore affirm.

I

We recount Sheen's allegations from the operative pleading: his second amended complaint, which was skillfully drafted and is 26 pages long. Sheen attached no documents to this unverified complaint. In the trial court, able counsel represented Sheen. The same counsel appeared for oral argument in this court.

Sheen's complaint tells of a homeowner who borrowed money on his house three times, defaulted on all three loans after the subprime meltdown, sought loan modifications, declared bankruptcy, and emerged from bankruptcy. In the end, Sheen lost his house to foreclosure.

The complaint begins with Sheen's home purchase in 1998. Sheen got a $500,000 loan secured by a deed of trust. This first loan is not at issue here.

In 2005, Sheen obtained two junior loans from Wells, in the amounts of $167,820 and $82,037. Sheen had financial troubles during the 2008 financial crisis and missed payments on the second and third loans. In September 2009, Wells recorded a notice of default on the second loan. The beneficiary of the first loan recorded a notice of default a few months later.

Sheen sought to modify all his home loans. Sheen's previous representative contacted Wells in January 2010 seeking forbearance and modifications to the second and third loans. Sheen himself submitted loan modification requests about both loans on January 29, 2010.

Wells sent Sheen two letters on March 17, 2010. One letter concerned the second loan. It stated Wells was accelerating Sheen's payments due under the second loan. Sheen alleges this letter led him to believe his mortgages were converted into unsecured loans because the letter stated Wells may "plac[e] your account with an outside collection agency." Around this time, a Wells representative called Sheen's wife and told her there would be no foreclosure sale. Instead, the representative allegedly explained, Wells was simply trying to recover money through standard collections practices.

Sheen received an additional letter from Wells on April 23, 2010 concerning the second loan in which Wells offered to charge off 50% of the balance if Sheen and Wells could come to a satisfactory arrangement. This letter reinforced Sheen's belief Wells had converted his mortgage into an unsecured loan because the letter did not explicitly mention a possible foreclosure sale.

In November 2010, Wells sold Sheen's defaulted second loan in the secondary market for distressed mortgage debt. After the second loan passed through two investment entities, Mirabella Investments Group, LLC (Mirabella) ultimately bought it in November 2013.

Meanwhile, Argent Mortgage Company, LLC, the holder of the first loan, recorded a notice of trustee sale in April 2012. Sheen succeeded in modifying this loan and Argent rescinded its notice of default in August 2013.

Wells ultimately cancelled the third loan in March 2014.

Mirabella moved forward on the second loan and recorded a notice of default in April 2014. Sheen began making modification requests to Mirabella in August 2014, but Mirabella did not tell Sheen whether it would modify this loan. Instead Mirabella wrote Sheen in August 2014 stating it sold its servicing rights for the second loan to FCI Lender Services, LLC (FCI).

Sheen made another modification request directly to FCI that month, but it rejected the application because Sheen had too little income. Ten days later Sheen filed for Chapter 7 bankruptcy relief. Sheen made two more requests for modification while his bankruptcy was pending. FCI rejected each of these applications, again citing Sheen's low income.

Sheen made a third modification request in October 2014 with the assistance of a legal aid society representative. FCI allegedly informed this representative it considered Sheen's second loan to no longer be in "active foreclosure." Sheen also contacted Mirabella directly. Mirabella allegedly told Sheen and his wife it would consider modification in lieu of foreclosure.

The bankruptcy court dismissed Sheen's bankruptcy case on October 24 and vacated the bankruptcy stay. Sheen got a phone call five days later that his home would be sold that day. Surprised, Sheen immediately followed up with FCI, which confirmed the news.

Mirabella bought Sheen's home at the auction later that day. Mirabella then sold the home to Equity Investments Group, Inc. and Compass Alternative Investments, LLC. Sheen then lost an unlawful detainer action.

II

We describe this case's procedural posture.

Sheen sued Wells and others in 2016. Sheen's first count was for negligence. He alleged Wells owed him a duty of care to process, review, and respond carefully and completely to the loan modification applications he submitted to Wells. Additionally, Wells allegedly owed him a duty to refrain from engaging in unfair and offensive business practices that confused Sheen and prevented him from pursuing all options to avoid foreclosure. Sheen alleged Wells breached its duty by failing to respond to his applications, by sending two letters suggesting loans had been modified and his house would not be sold, by phoning his wife to say there would be no foreclosure sale of his home, by confirming Sheen's interpretation of these letters with a further letter that read like it was sent in connection with an unsecured debt rather than a secured mortgage loan, and by assigning a loan without notifying the assignor that Sheen's modification application was pending.

Sheen also sued Wells for intentional infliction of emotional distress, alleging Wells knew he was in a state of financial difficulty. Yet Wells failed to respond to his modification application, sent him misleading letters, and suggested to Sheen's wife the house would not be sold in foreclosure. Wells further confirmed Sheen's understanding of the letter with a further letter that made no mention of a foreclosure sale. These alleged actions, Sheen claimed, stated a claim for intentional infliction of emotional distress.

Sheen's final claim against Wells was for violating the unfair competition law, Business & Professions Code section 17200 et seq. ( section 17200 ). Sheen alleged that, under section 17200, Wells's acts violated the laws against negligence and intentional infliction of emotional distress. Sheen claimed Wells's conduct had been unfair because it was immoral, unethical, and unscrupulous. Finally, Sheen alleged Wells's conduct was fraudulent because it was likely to have deceived members of the public.

Wells demurred to Sheen's second amended complaint.

Sheen's counsel stressed to the trial court that "we are not alleging fraud, and we are not alleging breach of contract ...." Rather, Sheen limited his claims against Wells to three counts described above: negligence, intentional infliction of emotional distress, and violations of section 17200.

The trial court sustained Wells's demurrer against Sheen's three causes of action without leave to amend. The court dismissed the negligence cause of action because Sheen had not pleaded facts supporting a tort duty of care by Wells to Sheen regarding loan modification. The court dismissed the intentional infliction of emotional distress claim for failure to plead outrageous conduct. And the court dismissed Sheen's section 17200 claim for want of an underlying claim. The court entered judgment for Wells.

Wells's successful demurrer did not affect Sheen's suit against other defendants, which proceeded. Sheen appealed the trial court's judgment for Wells. Wells is the lone defendant in this court, and Sheen is the lone plaintiff.

III

The trial court was right to sustain the demurrer.

We independently review an order dismissing a complaint. ( Lazar v. Hertz Corp. (1999) 69 Cal.App.4th 1494, 1500–1501, 82 Cal.Rptr.2d 368.)

We begin by noting the claims Sheen did not bring. Sheen did not sue Wells for common law:

1. Breach of

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