Sheen v. Wells Fargo Bank, N.A.

CourtUnited States State Supreme Court (California)
Citation12 Cal.5th 905,505 P.3d 625,290 Cal.Rptr.3d 834
Docket NumberS258019
Parties Kwang K. SHEEN, Plaintiff and Appellant, v. WELLS FARGO BANK, N.A., Defendant and Respondent.
Decision Date07 March 2022

Los Angeles Center for Community Law and Action, Noah Grynberg ; Public Justice, Leslie A. Brueckner and Adrienne H. Spiegel for Plaintiff and Appellant.

Huddleston & Sipos Law Group and Robert A. Huddleston, Walnut Creek, for John A. Phillips as Amicus Curiae on behalf of Plaintiff and Appellant.

Xavier Becerra, Attorney General, Nicklas A. Akers, Assistant Attorney General, Michele Van Gelderen and Amy Chmielewski, Deputy Attorneys General, for Attorney General as Amicus Curiae on behalf of Plaintiff and Appellant.

Arbogast Law, David M. Arbogast ; Smoger & Associates and Gerson H. Smoger, Oakland, for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Lisa Sitkin ; Law Office of Eric Andrew Mercer and Eric Mercer for National Housing Law Project and Eric Mercer as Amici Curiae on behalf of Plaintiff and Appellant.

Kutak Rock, Jeffrey S. Gerardo, Steven M. Dailey, Irvine; Munger, Tolles & Olson, David H. Fry, Benjamin J. Horwich, San Francisco, and Rachel G. Miller-Ziegler for Defendant and Respondent.

Fred J. Hiestand, Sacramento, for the Civil Justice Association of California, the California Chamber of Commerce and the Western Bankers Association as Amici Curiae on behalf of Defendant and Respondent.

Wright, Finlay & Zak, Jonathan D. Fink, T. Robert Finlay, Newport Beach; Kirby & McGuinn, Martin T. McGuinn, San Diego, and Michael R. Pfeifer, Orange, for California Mortgage Association, California Mortgage Bankers Association, Mortgage Bankers Association and United Trustees Association as Amici Curiae on behalf of Defendant and Respondent.

Justice Liu filed a concurring opinion.

Justice Jenkins filed a concurring opinion.

Opinion of the Court by Cantil-Sakauye, C.J.

Several years after purchasing his house, plaintiff Kwang K. Sheen used the home as collateral for two loans he took from defendant Wells Fargo Bank, N.A. (Wells Fargo). Plaintiff subsequently suffered financial setbacks and missed payments on these junior loans. He submitted applications to Wells Fargo to modify the loans, but Wells Fargo did not respond. Instead, it sent plaintiff letters informing him of the actions it might take because of the delinquency of his accounts. The letters did not specifically mention foreclosure. Plaintiff alleges that because "Wells Fargo did not provide [him] with a written determination regarding his eligibility for modification" of the loans prior to sending him the letters, plaintiff "believed the letters meant that the ... Loans had been modified such that they were unsecured loans" and his house "would never be sold at a foreclosure auction." Eventually, Wells Fargo sold plaintiff's debt. Four years later, the owner of the debt foreclosed on plaintiff's home. Plaintiff sued Wells Fargo.

Specifically, plaintiff asserted a negligence claim against Wells Fargo, alleging that the bank "owed Plaintiff a duty of care to process, review and respond carefully and completely to the loan modification applications Plaintiff submitted." Plaintiff alleged that Wells Fargo breached this duty, causing him to "forgo alternatives to foreclosure," and hence Wells Fargo is liable for monetary damages relating to the loss of his house, including the value of the home, the hotel and storage costs plaintiff incurred when he had to vacate the property, and the damage to his credit rating. Wells Fargo demurred, arguing that it owed plaintiff no such duty. The Court of Appeal affirmed the lower court's decision to sustain the demurrer but noted that "[t]he issue of whether a tort duty exists for mortgage modification has divided California courts for years." ( Sheen v. Wells Fargo Bank, N.A. (2019) 38 Cal.App.5th 346, 348, 250 Cal.Rptr.3d 677 ( Sheen ).)

In this case, we address the issue dividing the lower courts: Does a lender owe the borrower a tort duty sounding in general negligence principles to (in plaintiff's words) "process, review and respond carefully and completely to [a borrower's] loan modification application," such that upon a breach of this duty the lender may be liable for the borrower's economic losses — i.e., pecuniary losses unaccompanied by property damage or personal injury? (See, e.g., Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 398, 247 Cal.Rptr.3d 632, 441 P.3d 881 ( Gas Leak Cases ).) We conclude that there is no such duty, and thus Wells Fargo's demurrer to plaintiff's negligence claim was properly sustained.

Neither plaintiff's assertion of a "special relationship" between himself and Wells Fargo nor his invocation of the factors articulated in Biakanja v. Irving (1958) 49 Cal.2d 647, 650, 320 P.2d 16 ( Biakanja ) provides a compelling basis to recognize such a duty. Plaintiff's claim arises from the mortgage contract he had with Wells Fargo, and as such, falls within the ambit of the economic loss doctrine. That judicially created doctrine bars recovery in negligence for pure economic losses when such claims would disrupt the parties’ private ordering, render contracts less reliable as a means of organizing commercial relationships, and stifle the development of contract law. (See, e.g., Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988–989, 22 Cal.Rptr.3d 352, 102 P.3d 268 ( Robinson ); Rest.3d Torts, Liability for Economic Harm (June 2020) § 3, com. b., p. 3 (Restatement).)

There is good reason to adhere to the economic loss rule in this case, given the nature of the parties’ contractual relationship and how that relationship might be disrupted by recognition of the duty plaintiff advances. In addition, we recognize the role of the Legislature, which is better positioned to act in this extensively regulated area. Plaintiff's rationale for imposing a duty cannot easily be cabined to the mortgage context and there are real costs associated with the duty plaintiff proposes — costs that, among other things, pit the interests of homeowners in default against those seeking affordable home loans. Such a balancing of interests, and more generally of the "social costs and benefits" ( Aas v. Superior Court (2000) 24 Cal.4th 627, 652, 101 Cal.Rptr.2d 718, 12 P.3d 1125 ( Aas )) implicated by plaintiff's contentions, is best performed by the Legislature.

Meanwhile, because plaintiff does not assert an action for negligent misrepresentation nor one for promissory estoppel, we have no reason to consider whether either or both of these claims might be viable given the facts he alleges. More generally, nothing we say in this opinion should be understood to categorically preclude those claims in the mortgage modification context.

The Court of Appeal came to the same conclusion that we do — there is no duty of the sort pressed by plaintiff. We therefore affirm the judgment below.

I. BACKGROUND

Because this case comes to us after the trial court sustained Wells Fargo's demurrer, we take as true all properly pleaded material facts, but not conclusions of fact or law asserted in the complaint. (See, e.g., Gas Leak Cases , supra , 7 Cal.5th at p. 395, 247 Cal.Rptr.3d 632, 441 P.3d 881 ; Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125, 271 Cal.Rptr. 146, 793 P.2d 479.)

Plaintiff alleges that in 1998, he purchased a home ("the Property") in Los Angeles using a "first-lien mortgage loan ... secured by the Property." That loan is not at issue in this case. Seven years later, plaintiff obtained two loans from Wells Fargo secured by the same property. These two loans, which the complaint refers to as the "Second Loan" and the "Third Loan," were in the amounts of $167,820 and $82,037.14, respectively.

Beginning in 2008 or 2009, plaintiff missed a number of payments on the Second and Third Loans because of financial difficulties he experienced "in the wake of the global financial crisis." Wells Fargo recorded notices of default in connection with the loans and scheduled a foreclosure sale of the Property for early February 2010.

Plaintiff and his legal representative subsequently contacted Wells Fargo "regarding the possibility of cancelling the foreclosure sale ... so that Plaintiff could apply and be considered for modification for the Second and Third Loans." In late January 2010, plaintiff submitted applications to modify the Second and Third Loans. About a week thereafter, Wells Fargo cancelled the February foreclosure sale date.

Plaintiff alleges that "Wells Fargo never contacted Plaintiff about the status of his mortgage applications" nor informed him "whether his applications for modification of the Second and Third Loans had been approved or rejected." On or about March 17, 2010 — a month and a half after plaintiff submitted his applications — Wells Fargo sent plaintiff two almost identical letters, one in connection with each of the loans. Although the complaint does not attach a copy of the letters, it does quote a paragraph from the communications, which reads:

"Due to the severe delinquency of your account, it has been charged off and the entire balance has been accelerated. Accordingly, your entire balance is now due and owing. In addition, we have reported your account as charged off to the credit reporting agencies to which we report. As a result of your account's charged off status, we will proceed with whatever action is deemed necessary to protect our interests. This may include, if applicable, placing your account with an outside collection agency or referring your account to an attorney with instructions to take whatever action is necessary to collect this account. Please be advised that if Wells Fargo elects to pursue a legal judgment against you and is successful, the amount of the judgment may be further increased by court costs and attorney fees."

Also pursuant to the complaint, the letters advised plaintiff "to call Wells Fargo...

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