March 11, 2022

Sheen v. Wells Fargo Bank, N.A., (Mar. 7, 2022, S258019)

After foreclosure on plaintiff’s home, plaintiff sued Wells Fargo Bank for negligence, alleging that, although Wells Fargo never responded to his loan modification applications, its subsequent conduct led him to believe, incorrectly, that his loans had been modified and his house would not be placed into foreclosure. Plaintiff alleged that once he submitted the application, the bank owed him “a duty of care to process, review and respond carefully and completely to the loan modification applications plaintiff submitted” and its breach of that duty caused him to forego alternatives to foreclosure resulting in economic damages. The trial court granted Wells Fargo’s demurrer on the grounds that it did not owe plaintiff such a duty.

The Court of Appeal affirmed but noted a split in California courts about “whether a tort duty exits for mortgage modifications.” The California Supreme Court granted review to address whether a lender owes a borrower a duty to process his loan modification carefully and completely and whether a breach of this duty can create liability for purely economic loss.

The Supreme Court affirmed, holding that plaintiff’s common law negligence claim arising from the loan contract is barred by the economic loss rule. Under the economic loss rule, negligent performance or negotiation of a contract cannot be the basis for recovering purely economic losses. Here, plaintiff’s claim was not independent of the loan contract because the duty he sought to impose was contrary to Wells Fargo’s right under the contract to foreclose without having to consider a borrower’s modification application.