Balancing “the interests of homeowners in default against those seeking affordable home loans,” the Supreme Court in Sheen v. Wells Fargo Bank today holds a lender does not “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.” The court settles a conflict in Court of Appeal case law and notes a similar divide in federal district court rulings.
The court’s unanimous opinion by Chief Justice Tani Cantil-Sakauye says the plaintiff’s claim is governed by the economic loss doctrine, which “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.” The court doesn’t consider whether a plaintiff might succeed in suing for negligent misrepresentation or promissory estoppel.
Although signing the court’s opinion, Justices Goodwin Liu and Martin Jenkins issue separate concurrences.
Justice Liu writes that the case “calls our attention to an important area that may warrant further consideration by the Legislature. As many reported decisions detail, borrowers seeking mortgage loan modifications may be strung along by loan servicers’ incompetence, pursuit of fees, or improper incentives over the course of years, leading borrowers to forgo other remedies.” He also describes conduct other than alleged in this case that might require recognizing a duty of care and says a different case could cause the court “to grapple with the boundaries of the [economic loss] rule and its application to contexts where parties cannot ‘reliably be counted on to protect their interests.’ ”
Justice Jenkins’s opinion focuses on his concurrence in a 2014 First District, Division Three, Court of Appeal decision when he served on that court, a decision today’s opinion disapproves. He says that the appellate court decision didn’t address certain threshold issues and that, “[i]n light of the parties’ arguments here that crystalize the significance of these important preliminary questions, I agree with the resolution the court reaches today.”
The court affirms the published opinion of the Second District, Division Eight, and finds support in other jurisdictions’ opinions. It disapproves 2017 and 2020 Third District decisions (the latter is a grant-and hold for today’s case (see here)), a 2016 Sixth District decision, and the 2014 First District, Division Three decision in which Justice Jenkins had concurred. Besides the disapproved 2020 Third District case, there are five other Sheen grant-and-holds. (See here, here, here, here, and here.)