IN THE SUPREME COURT OF
CALIFORNIA
KWANG K. SHEEN,
Plaintiff and Appellant,
v.
WELLS FARGO BANK, N.A.,
Defendant and Respondent.
S258019
Second Appellate District, Division Eight
B289003
Los Angeles County Superior Court
BC631510
March 7, 2022
Chief Justice Cantil-Sakauye authored the opinion of the
Court, in which Justices Corrigan, Liu, Kruger, Groban,
Jenkins, and McConnell* concurred.
Justice Liu filed a concurring opinion.
Justice Jenkins filed a concurring opinion.
*
Administrative Presiding Justice of the Court of Appeal,
Fourth Appellate District, Division One, assigned by the Chief
Justice pursuant to article VI, § 6 of the California Constitution.
SHEEN v. WELLS FARGO BANK, N.A.
S258019
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
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
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 (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 (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 (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)
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
34 Cal.4th 979, 988–989 (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 (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
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
asserted in the complaint. (See, e.g., Gas Leak Cases, supra,
7 Cal.5th at p. 395; Moore v. Regents of University of California
(1990) 51 Cal.3d 120, 125.)
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.
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
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 immediately if he had any questions.”
Plaintiff alleges he “believed the letters meant that the
Second and Third Loans had been modified such that they were
unsecured loans . . . and that the Property would never be sold
at a foreclosure auction in connection with either the Second or
the Third Loan as a result of these modifications.” Plaintiff
based this belief not just on the letters themselves, but also on
the fact that they had been sent when Wells Fargo had not yet
responded to his mortgage modification applications. According
to plaintiff, he “received the March 17, 2010 letters while his
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
applications for mortgage modification were still pending, as
Wells Fargo did not provide Plaintiff with a written
determination regarding his eligibility for modification of the
Second and Third Loans prior to March 17, 2010. [¶] Plaintiff
therefore believed that Wells Fargo sent the March 17, 2010
letters in response to the applications for mortgage modification
that he had submitted to Wells Fargo in or about January 2010.
He believed that the letters meant that the Second and Third
Loans had been modified such that . . . the Property would never
be sold at a foreclosure auction.”
Plaintiff alleges that subsequent events corroborated his
understanding of the letters. First, sometime in March 2010,
Wells Fargo called plaintiff’s wife. According to plaintiff,
“During this phone call, a Wells Fargo representative told Ms.
Sheen that there would be no . . . foreclosure sale of Plaintiff’s
home but that Wells Fargo would continue to attempt to collect
money Plaintiff owed to Wells Fargo.” Second, Wells Fargo sent
plaintiff a letter offering to reduce by half the amount owing on
the Second Loan if plaintiff would pay the entire amount.
Because the letter “made no direct mention of a possible
foreclosure sale and instead referred directly to the intervention
of a collection agency in connection with the Second Loan,” it
“further confirmed Plaintiff’s understanding that the Second
Loan had been modified such that it was now unsecured.” Third,
five years after these communications — in November 2015 —
Wells Fargo informed plaintiff that it had cancelled (discharged)
the Third Loan. Per the complaint, “The November 16, 2015
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
letter . . . indicated to Plaintiff that . . . the Second Loan, like the
Third Loan, had been modified in some way.”1
In November 2010, Wells Fargo sold plaintiff’s Second
Loan to another entity. Specifically, it assigned away both its
beneficial (ownership) interest and servicing rights.2 Plaintiff
makes no further allegations of improper conduct by Wells
Fargo after it sold the loan.
In 2014, four years after Wells Fargo sold plaintiff’s
Second Loan, the new owner of the loan — Mirabella
Investment Group, LLC — foreclosed on the Property. Plaintiff
sued, naming both Mirabella and the entity servicing the loan
at the time of foreclosure — FCI Lender Services, Inc. (FCI) —
as defendants, along with Wells Fargo. In addition to his
1
Wells Fargo had cancelled the Third Loan a year prior, in
March of 2014, and informed plaintiff of the fact at that time. It
conveyed the same message again in 2015 “in response to a
complaint Plaintiff had submitted to the Consumer Financial
Protection Bureau.” Plaintiff offers no explanation concerning
how a letter that was sent after plaintiff’s house was foreclosed
upon (see post) corroborated his belief that both the Second and
Third Loans had become unsecured.
2
The entity holding the servicing rights to a mortgage loan
is known as a servicer. A servicer is “responsible for account
maintenance activities such as sending monthly statements to
mortgagors, collecting payments from mortgagors, keeping
track of account balances, handling escrow accounts, calculating
interest-rate adjustments on adjustable-rate mortgages,
reporting to national credit bureaus, and remitting funds
collected from mortgagors to the [owners of the beneficial
interest in the loans].” (Levitin & Twomey, Mortgage Servicing
(2011) 28 Yale J. on Reg. 1, 23 (Levitin).) “Servicers also are
responsible for handling defaulted loans, including prosecuting
foreclosures and attempting to mitigate investors’ losses.”
(Ibid.)
7
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
negligence claims, plaintiff advanced causes of action for
promissory estoppel (against Mirabella and FCI), intentional
infliction of emotional distress, and violation of the unfair
competition law (Bus. & Prof. Code, § 17200 et seq.).
Defendants demurred. The trial court sustained Wells
Fargo’s demurrer to plaintiff’s negligence claim, finding that
there was no duty on the part of the bank to “respond timely to
[plaintiff’s] request to modify the second trust deed.”
The Court of Appeal affirmed. The court concluded that
the relevant authorities “decisively weigh against extending tort
duties into mortgage modification negotiations.” (Sheen, supra,
38 Cal.App.5th at p. 348.) It found instructive the position taken
by other states and the fact that “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.” (Ibid.)
We granted review.
II. DISCUSSION
As previously explained, the specific question we address
in this case is whether Wells Fargo owes plaintiff a duty “to
process, review and respond carefully and completely to [his]
loan modification applications” so as to avoid causing plaintiff
pure monetary loss through a lack of care in handling his
applications. Plaintiff does not point to any specific language in
his contract — which evidently contains no provisions obligating
Wells Fargo to review or respond to plaintiff’s modification
application — as the source of this duty. Instead, he claims that
the duty arises as a matter of law when a borrower submits a
loan modification application to a lender, and that a lender’s
8
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
failure “to process, review and respond carefully and completely”
to the application is actionable in tort.
Whether such a tort duty exists is an issue upon which the
Courts of Appeal are divided. (Compare Sheen, supra,
38 Cal.App.5th at p. 358, and Lueras v. BAC Home Loans
Servicing, LP (2013) 221 Cal.App.4th 49, 68 (Lueras)
[concluding that the defendants “did not have a common law
duty of care to offer, consider, or approve a loan modification”]
with Weimer v. Nationstar Mortgage, LLC (2020) 47 Cal.App.5th
341, 347–348 (Weimer) [recognizing a duty of care in handling a
loan modification application]; Rossetta v. CitiMortgage, Inc.
(2017) 18 Cal.App.5th 628, 641 (Rossetta) [same, at least when
the lender allegedly is “making default a condition of being
considered for a loan modification”]; Daniels v. Select Portfolio
Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1183 (Daniels)
[recognizing a duty of care]; Alvarez v. BAC Home Loans
Servicing, L.P. (2014) 228 Cal.App.4th 941, 944, 948 (Alvarez)
[recognizing a duty owed by the defendant financial institutions
to “exercise reasonable care in the review of [the borrower’s] loan
modification applications” when the “defendants allegedly
agreed to consider modification of the plaintiffs’ loans”]; see also,
e.g., Hernandez v. Select Portfolio Servicing, Inc. (C.D.Cal., June
25, 2015, No. CV 15-01896 MMM (AJWx)) 2015 U.S.Dist. Lexis
82922, pp. *54–*56 [documenting a similar split within the
federal district courts applying California law]; see also Jolley v.
Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 901–906
(Jolley) [in a construction loan appeal, court expressed in dicta
skepticism regarding “a no-duty rule” within the home
residential lending context].)
“Duty is not universal; not every defendant owes every
plaintiff a duty of care. A duty exists only if ‘ “the plaintiff’s
9
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
interests are entitled to legal protection against the defendant’s
conduct.” ’ [Citation.] Whether a duty exists is a question of law
to be resolved by the court.” (Brown v. USA Taekwondo (2021)
11 Cal.5th 204, 213 (Brown).) “A duty of care may arise through
statute” or by operation of the common law. (J’Aire Corp. v.
Gregory (1979) 24 Cal.3d 799, 803 (J’Aire).) Below, we consider
whether either of these sources of law recognizes a duty “to
process, review and respond carefully and completely to . . . loan
modification applications” as urged by plaintiff.
A. Statutory Law
Plaintiff does not identify any statute or regulation that
requires Wells Fargo to treat his modification applications with
due care. Plaintiff does not rely on the language of Civil Code
section 1714, which sets out the “ ‘general rule’ governing duty”
(Brown, supra, 11 Cal.5th at p. 213), as establishing this duty.
Despite its broad language, section 1714 does not impose a
general duty to avoid purely economic losses. In relevant part,
that provision states, “Everyone is responsible, not only for the
result of his or her willful acts, but also for an injury occasioned
to another by his or her want of ordinary care or skill in the
management of his or her property or person . . . .” (Civ. Code,
§ 1714, subd. (a).) As we have recently explained, “liability in
negligence for purely economic losses . . . is ‘the exception, not
the rule,’ under our precedents. [Citation.] And that holds true
even though Civil Code section 1714 does not, by its terms,
‘distinguish among injuries to one’s person, one’s property or
one’s financial interests.’ ” (Gas Leak Cases, supra, 7 Cal.5th at
p. 400 [so observing in the context of local businesses’ suit for
damages reflecting the income lost due to the defendant’s
alleged negligence in allowing a massive gas leak to occur,
driving away the businesses’ customers]; see also id. at p. 399
10
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
[“What Civil Code section 1714 does not do is impose a
presumptive duty of care to guard against any conceivable harm
that a negligent act might cause”]; accord, Quelimane Co. v.
Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 58
(Quelimane).)
Nor does plaintiff identify any other statute or regulation
as imposing the duty he asks us to recognize. He does not
ground such a duty in the extensive body of state and federal
legislation and regulations that address mortgage servicing and,
more specifically, the process mortgage servicers must follow
with regard to handling modification applications, including the
California Homeowner Bill of Rights (HBOR). (Civ. Code,
§ 2923.4 et seq.) As Wells Fargo points out, “where they apply,”
HBOR and complementary federal legislation specify various
affirmative actions a servicer is obligated to take when receiving
modification applications. For example, HBOR specifies that
upon receiving certain modification applications, “the mortgage
servicer shall provide written acknowledgment of the receipt of
the documentation” and must include in that acknowledgement
“an estimate of when a decision on the loan modification will be
made,” “deadlines to submit missing documentation,” “[a]ny
expiration dates for submitted documents,” and “[a]ny
deficiency in the . . . modification application.” (Civ. Code,
§ 2924.10, subd. (a)(1)–(4); see also 12 C.F.R.
§ 1024.41(b)(2)(i)(B), (c)(3) (2013).) In addition, the servicer is
required to apprise the borrower of any foreclosure prevention
alternative it offers before foreclosing, cannot foreclose while a
modification application is pending (Civ. Code, §§ 2924.9, subd.
(a), 2923.6, subd. (c)), and must give “written notice to the
borrower identifying the reasons” for denying an application if
it does so (Civ. Code, § 2923.6, subd. (f)).
11
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Yet neither HBOR nor any other state or federal statute
or regulation applies here to impose a duty along the lines
sketched by plaintiff. By its plain terms, HBOR’s provisions
apply only to first lien mortgages. (See Civ. Code, § 2924.15,
subd. (a) [“Unless otherwise provided, paragraph (5) of
subdivision (a) of Section 2924, and Sections 2923.5, 2923.55,
2923.6, 2923.7, 2924.9, 2924.10, 2924.11, and 2924.18 shall
apply only to a first lien mortgage or deed of trust that meets
either of the following criteria”]; see also, e.g., Civ. Code,
§ 2924.10, subd. (a) [specifying requirements applicable “[w]hen
a borrower submits a complete first lien modification application
or any document in connection with a first lien modification
application”].) Because the loans at issue in this case were
junior loans — the second and third loans that plaintiff secured
using the Property as collateral — HBOR does not apply.
Likewise, plaintiff does not bring a claim under any other state
or federal law governing mortgage loan modifications, such as
the California Foreclosure Prevention Act (Civ. Code, § 2924 et
seq.), the Real Estate Settlement Procedures Act (12 U.S.C.
§ 2601 et seq.), or the Home Affordable Modification Program
(12 U.S.C. § 5201 et seq.). Plaintiff has determined that these
laws “did not or could not offer him the type of relief he wanted”
(Sheen, supra, 38 Cal.App.5th at p. 352), and we have no reason
to revisit this assessment.
B. Common Law
Rather than focusing on any statute, plaintiff grounds his
negligence claim in the common law. We conclude that this
effort fails in light of the economic loss rule. Nor can a duty to
“process, review, and respond carefully and completely to
Plaintiff’s loan modification applications” be justified by
reference to the Biakanja factors. Those factors are commonly
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
employed to ascertain whether a court should recognize a duty,
but are useful and appropriate for that purpose only in
situations involving parties that are not in privity with one
another. Finally, the policy justifications plaintiff advances for
the recognition of a duty are unpersuasive — and in any event,
the policy considerations implicated here are better left to the
Legislature.
1. Economic Loss Rule
We begin with a review of the contours of the economic loss
rule. The rule itself is deceptively easy to state: In general,
there is no recovery in tort for negligently inflicted “purely
economic losses,” meaning financial harm unaccompanied by
physical or property damage. (Gas Leak Cases, supra, 7 Cal.5th
at p. 400; see also Aas, supra, 24 Cal.4th at p. 636 [“In actions
for negligence, a manufacturer’s liability is limited to damages
for physical injuries; no recovery is allowed for economic loss
alone. [Citation.] This general principle [is] the so-called
economic loss rule”]; Seely v. White Motor Co. (1965) 63 Cal.2d
9, 18 (Seely) [similar]; Rest., § 1 [“An actor has no general duty
to avoid the unintentional infliction of economic loss on
another”].)
The economic loss rule has been applied in various
contexts. First, it carries force when courts are concerned about
imposing “ ‘liability in an indeterminate amount for an
indeterminate time to an indeterminate class.’ ” (Gas Leak
Cases, supra, 7 Cal.5th at p. 414, quoting Ultramares Corp. v.
Touche (N.Y. 1931) 174 N.E. 441, 444.)
In another recurring set of circumstances, the rule
functions to bar claims in negligence for pure economic losses in
deference to a contract between litigating parties. (See
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Robinson, supra, 34 Cal.4th at p. 988 [“Quite simply, the
economic loss rule ‘prevent[s] the law of contract and the law of
tort from dissolving one into the other’ ”]; Aas, supra, 24 Cal.4th
at pp. 635–636; accord, Erlich v. Menezes (1999) 21 Cal.4th 543,
550–551 (Erlich); Bily v. Arthur Young & Co. (1992) 3 Cal.4th
370, 398 (Bily); Foley v. Interactive Data Corp. (1988) 47 Cal.3d
654, 683 (Foley).) Regarding this latter branch of the doctrine,
one scholar has stated, “Using contract law to govern
commercial transactions lets parties and their lawyers know
where they stand and what they can expect to follow legally from
the words they have written. But if a disappointed buyer has
the option of abandoning the contract and suing in tort, the
significance of the contract is diminished and the doctrines that
protect the integrity of the contractual process are reduced in
importance. Parties wrangle over integration clauses to make
clear that their obligations are the ones stated in the contract
and nothing else; the point of bothering about such matters
becomes unclear if a disappointed party can later invoke an
outside set of obligations that are imposed on the promisor and
defined by the law of tort.” (Farnsworth, The Economic Loss
Rule (2016) 50 Val.U. L.Rev. 545, 553–554 (Farnsworth).) The
Restatement states this form of the economic loss rule thusly:
“[T]here is no liability in tort for economic loss caused by
negligence in the performance or negotiation of a contract
between the parties.” (Rest., § 3.)
Because it involves parties who are in contractual privity,
this strand of the economic loss rule is sometimes referred to as
the “contractual economic loss rule,” “contractual rule,” or
“consensual paradigm.” (See, e.g., Sharkey, In Search of the
Cheapest Cost Avoider: Another View of the Economic Loss Rule
(2018) 85 U.Cin. L.Rev. 1017, 1018–1019 (Sharkey); Dobbs, An
14
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Introduction to Non-Statutory Economic Loss Claims (2006)
48 Ariz. L.Rev. 713, 714.) The Restatement offers an
illuminating explanation of this form of the economic loss rule.
According to the Restatement, the principle that “there is no
liability in tort for economic loss caused by negligence in the
performance or negotiation of a contract between the parties”
(Rest., § 3 at p. 2) “serves several purposes.” (Id., com. b., p. 3.)
For one, it “protects the bargain the parties have made against
disruption by a tort suit.” (Ibid.) For another, “the rule allows
parties to make dependable allocations of financial risk without
fear that tort law will be used to undo them later.” (Ibid.)
“Viewed in the long run,” therefore, “the rule prevents the
erosion of contract doctrines by the use of tort law to work
around them.” (Ibid.)
Not all tort claims for monetary losses between
contractual parties are barred by the economic loss rule. But
such claims are barred when they arise from — or are not
independent of — the parties’ underlying contracts. (See
Robinson, supra, 34 Cal.4th at p. 991 [holding that “the
economic loss rule does not bar [the plaintiff’s] fraud and
intentional misrepresentation claims because they were
independent of [the defendant’s] breach of contract”]; Erlich,
supra, 21 Cal.4th at pp. 551, 552 [explaining that “[t]ort
damages have been permitted in contract cases” when “the duty
that gives rise to tort liability is either completely independent
of the contract or arises from conduct which is both intentional
and intended to harm”].) Plaintiff’s claim here arises from, and
is not independent of, the mortgage contract.
15
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
a. The Economic Loss Rule Bars Plaintiff’s
Negligence Claim
Plaintiff and Wells Fargo had a contract. Plaintiff’s
complaint alleges that he “obtained a second-lien residential
mortgage from Wells Fargo” that was “secured by the Property
pursuant to a deed of trust.”3 Plaintiff thus had an agreement
with Wells Fargo that specified the parties’ rights and
obligations with respect to the mortgage loan and the collateral
securing the loan. In particular, the fact that the mortgage was
“secured by the Property pursuant to a deed of trust” (impliedly
with the power of sale) means the parties agreed that Wells
Fargo would have the right to seize and sell the property in
satisfaction of the debt should plaintiff stop making payments
on the loan. (See, e.g., Trustors Security Service v. Title Recon
Tracking Service (1996) 49 Cal.App.4th 592, 595; 5 Miller &
Starr, Cal. Real Estate (4th ed.) Deeds of Trusts and Mortgages,
§ 13.1, p. 13-16.) These were the terms of the parties’
agreement.
Plaintiff and Wells Fargo did not agree that should
plaintiff default and attempt to renegotiate his loan by
submitting a modification application, Wells Fargo would
“process, review and respond carefully and completely to the . . .
applications Plaintiff submitted,” and could foreclose only after
discharging such obligations.4 (Accord, Copeland, supra, 96
3
Plaintiff makes similar allegations with respect to the
Third Loan, but we focus here on the Second Loan because the
Third Loan ultimately was discharged.
4
Plaintiff’s briefs at times appear to argue that even if
Wells Fargo had no initial obligation to handle the requested
loan modifications with due care, such an obligation arose once
16
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Cal.App.4th at pp. 1257–1259 [discussing and upholding the
validity of a contract to negotiate, or an agreement to negotiate
the terms of a future contract].)5 To impose a tort duty in such
Wells Fargo “agree[d] to consider a modification of an
applicant’s loan.”
Plaintiff’s complaint, however, is devoid of any allegation
that Wells Fargo actually agreed to consider his applications.
Plaintiff’s pleading merely alleges that he submitted the
applications and then did not receive a response or a “written
determination” from Wells Fargo. These allegations do not give
rise to a reasonable inference that Wells Fargo agreed to
“consider a modification of [the] applicant’s loan.”
Furthermore, even if Wells Fargo did accept the
applications for consideration, it is unclear why mere acceptance
of the applications would give rise to a tort duty to “process,
review, and respond carefully and completely to the loan
modification applications.” As the Restatement makes clear,
even when parties are actively negotiating a contract, “there is
no liability in tort for economic loss caused by negligence” during
such negotiations. (Rest., § 3; see also id., com. b., p. 2; accord,
Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251,
1260 (Copeland) [“When two parties, under no compulsion to do
so, engage in negotiations to form or modify a contract neither
party has any obligation to continue negotiating or to negotiate
in good faith. Only when the parties are under a contractual
compulsion to negotiate does the covenant of good faith and fair
dealing attach”]; Racine & Laramie, Ltd. v. Department of Parks
& Recreation (1992) 11 Cal.App.4th 1026, 1031 [explaining that,
absent an express agreement to the contrary, a defendant had
no contractual obligation to “negotiate new terms of the
concession contract, [and] that its commencement and
continuance of negotiations over a long period of time had no
effect upon this lack of obligation”].)
5
In part II.B.2.b, post, we address the Attorney General’s
argument that due to imperfect rationality, understanding, or
attention, a borrower is unlikely to bargain regarding terms that
17
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
circumstances would go further than creating obligations
unnegotiated or agreed to by the parties; it would dictate terms
that are contrary to the parties’ allocation of rights and
responsibilities. The proposed duty would impede Wells Fargo’s
right to foreclose by permitting foreclosure only after Wells
Fargo discharges a tort duty to “process, review and respond
carefully and completely to [a borrower’s] loan modification
application[s].”
Put differently, plaintiff’s claim here is not independent of
the original mortgage contract, not because his claim merely
relates to the subject of that agreement, but because it is based
on an asserted duty that is contrary to the rights and obligations
clearly expressed in the loan contract. If we are to give deference
to the parties’ agreement — and more generally to accord
respect to contract doctrines — we cannot sustain a tort duty in
such circumstances. (Accord, e.g., Robinson, supra, 34 Cal.4th
at pp. 992–993 [“ ‘ “[W]hen two parties make a contract, they
agree upon the rules and regulations which will govern their
relationship; the risks inherent in the agreement and the
likelihood of its breach. . . . Under such a scenario, it is
appropriate to enforce only such obligations as each party
would become relevant only in the event the borrower needed to
modify a loan. We note, however, that this is different from an
argument that a borrower could not as a matter of law have
negotiated over such terms. As the Copeland court explained,
there is “no reason why in principle the parties could not enter
into a valid, enforceable contract to negotiate the terms” of
contract that is neither “illegal [n]or immoral.” (Copeland,
supra, 96 Cal.App.4th at p. 1257.) A mortgage contract is
obviously legal, as are modifications of such contracts.
18
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
voluntarily assumed, and to give him only such benefits as he
expected to receive; this is the function of contract law” ’ ”].)
b. Opinions from Other Jurisdictions Support the
Approach We Adopt Today
The application of the economic loss rule to bar plaintiff’s
asserted tort claim is consistent with well-reasoned decisions
from other federal and state courts, including the views of other
state supreme courts that have addressed the issue before us.
In Wigod v. Wells Fargo Bank, N.A. (7th Cir. 2012) 673
F.3d 547, 558 (Wigod), the plaintiff homeowner applied to
modify her mortgage loan. The defendant bank “determine[d]
that Wigod was eligible” for modification under the federal
Home Affordable Mortgage Program (HAMP) and sent her an
agreement known as a Trial Period Plan (TPP). (Ibid.) When
the bank ultimately failed to offer Wigod a loan modification,
Wigod sued in contract and in tort. The circuit court, applying
Illinois law, held that Wigod had stated a valid breach of
contract claim under the TPP.6
The court rejected Wigod’s negligence claim, however,
concluding that it was foreclosed by the economic loss rule.
(Wigod, supra, 673 F.3d at pp. 555, 567.) Wigod had argued that
the bank had a duty to hire qualified customer service
employees and train them to implement HAMP effectively. (See
6
In part II.B.1.e., post, we discuss the significance — or
lack thereof — of whether plaintiff has a viable contract claim
against Wells Fargo. Here, we note that Wigod’s contract cause
of action was based on an asserted breach of the TPP, and not of
the original mortgage agreement. (Wigod, supra, 673 F.3d at
pp. 558–561.) With regard to the original mortgage contract,
therefore, Wigod’s position was not materially different from
plaintiff’s.
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Wigod, at p. 567.) The court disagreed, explaining that “[t]o the
extent Wells Fargo had a duty to service Wigod’s loan
responsibly and with competent personnel, that duty emerged
solely out of its contractual obligations.” (Id. at p. 568.) “Wigod’s
rights,” continued the court, “are contractual in nature. If [the
defendant bank] failed to honor their agreement — whether by
hiring incompetents or simply through bald refusals to
perform — contract law provides her remedies.” (Ibid.) That
contract itself, the court continued, “ ‘cannot give rise to an
extra-contractual duty without some showing of a fiduciary
relationship between the parties,’ and no such relationship
existed here.” (Ibid.) Because Wigod had alleged only economic
injury and the bank’s duty did not exist “independent of the
contract,” Wigod’s negligence claim was barred by the economic
loss rule. (Id. at p. 567.)
The Supreme Court of Connecticut has similarly declined
to “recognize a common-law duty requiring a loan servicer to use
reasonable care in the review and processing of a mortgagor’s
loan modification applications.” (Cenatiempo v. Bank of
America, N.A. (Conn. 2019) 219 A.3d 767, 791 (Cenatiempo).)
The court’s analysis began with the premise that “the law does
not impose a duty on lenders to use reasonable care in its
commercial transactions with borrowers because the
relationship between lenders and borrowers is contractual and
loan transactions are conducted at arm’s length.” (Id. at p. 792.)
It then reasoned there was no “ ‘strong showing of policy
reasons’ ” to warrant different treatment of “a relationship
between an investor’s loan servicer and a mortgagor [due to] the
former’s review and processing of a loan modification
application.” (Id. at pp. 795, 793.) Accordingly, the court
20
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
concluded the servicer owed no “common-law duty of care to the
plaintiff[] [borrowers].” (Id. at p. 795.)
Likewise, in House v. U.S. Bank Nat. Association (Mont.
2021) 481 P.3d 820, 828, the Montana Supreme Court reiterated
that “[u]nless otherwise provided by contract, a lender generally
has no duty to modify, renegotiate, waive, or forego enforcement
of the terms of a mortgage loan in order to assist a borrower to
avoid a default or foreclosure.” Therefore, “[a]lleged errors or
omissions by a lender in the servicing or administration of a
mortgage loan [are] . . . generally compensable only in
contract . . . .” (Ibid.; see also Flagstaff Housing v. Design
Alliance (Ariz. 2010) 223 P.3d 664, 670 [stating that in the
construction defect context “if the parties do not provide
otherwise in their contract, they will be limited to contractual
remedies” for pure economic loss].) The Montana high court did
note that “if the lender gives extraordinary advice . . . beyond
that customary in arms-length lending and loan servicing
transactions,” such “extraordinary circumstances . . . may . . .
independently give rise to a special common law fiduciary duty
of care.” (House, at pp. 828–829; see also id. at p. 829 [“However,
. . . merely offering, administering, or providing general
information regarding program eligibility, requirements, or
process for a distressed loan modification . . . is insufficient
alone to give rise to a special fiduciary relationship or duty
between a lender and borrower”].) As we explain below, such a
rule — which may be restated as “a lender owes no duty of care
to a borrower when the lender’s involvement in the loan
transaction does not exceed its customary role in arms-length
21
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
lending and servicing” — is consistent with case law from our
Courts of Appeal.7
c. Our Courts of Appeal Have Recognized the
Economic Loss Rule Within the Lender-
Borrower Context
Our rejection of plaintiff’s arguments as incompatible with
the economic loss rule also harmonizes with a well-established
principle of state law commonly attributed to Nymark v. Heart
Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089
(Nymark). In Nymark, the court stated a “general rule”
precluding certain tort claims in the lender-borrower context:
“[A] financial institution owes no duty of care to a borrower
when the institution’s involvement in the loan transaction does
not exceed the scope of its conventional role as a mere lender of
money.” (Id. at p. 1096.) We understand this general principle
(which is distinct from Nymark’s additional assessment that
Biakanja “support[ed] [its] conclusion that [the] defendant did
not owe a duty of care to [the] plaintiff” (Nymark, at p. 1099)) as
a refinement of the contractual economic loss rule in the lender-
borrower context, which asks in the first instance whether the
alleged negligence occurred within the scope of the parties’
contractual relationship. In the time since Nymark articulated
this rule, it has been uniformly accepted among our Courts of
Appeal, even by those that have held financial institutions owe
7
In contrast to the above views, plaintiff points to no state
supreme court that has embraced the duty he now urges upon
us. Although a minority few opinions by state intermediate
courts may have recognized a duty within the loan modification
context (see, e.g., Sheen supra, 38 Cal.App.5th at pp. 355–356
[collecting out-of-state and federal cases]), we regard those
decisions declining to do so as more persuasive.
22
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
their borrowers a duty of care in the loan modification context.
(See Weimer, supra, 47 Cal.App.5th at pp. 355–356; Rossetta,
supra, 18 Cal.App.5th at p. 637; Daniels, supra, 246 Cal.App.4th
at pp. 1180–1182; Alvarez, supra, 228 Cal.App.4th at pp. 945–
946; accord, Jolley, supra, 213 Cal.App.4th at p. 898.)
None of these courts, however, have regarded the general
rule stated in Nymark, supra, 231 Cal.App.3d 1089 as
compelling in the loan modification context, concluding instead
that Biajanka sets the appropriate standard to determine
whether a duty of care exists in this setting. (See Weimer, supra,
47 Cal.App.5th at pp. 355–356; Rossetta, supra, 18 Cal.App.5th
at p. 637; Daniels, supra, 246 Cal.App.4th at pp. 1180–1182;
Alvarez, supra, 228 Cal.App.4th at pp. 945–946, 948; Jolley,
supra, 213 Cal.App.4th at pp. 899–902.) We shall turn to
Biakanja and its application below. For now, we note that the
Nymark general rule ordinarily applies “when the institution’s
involvement in the loan transaction does not exceed the scope of
its conventional role as a mere lender of money.” (Nymark,
supra, 231 Cal.App.3d at p. 1096.)
Plaintiff maintains that the affirmative duty to act — to
process, review, and respond to the loan modification
applications — is outside Nymark’s reach because that
decision’s holding “is limited to the loan origination context.”
Yet, plaintiff evades the central question relevant to the
applicability of Nymark’s general principle: whether the
handling of a loan modification application is within the scope
of Wells Fargo’s role as a lender. We believe it is. A lender’s
handling of a modification application is part of a process by
which the lender decides whether it should adhere to the
existing contract or offer a new agreement (and if so, under what
terms). It is a step in the lender’s determination concerning how
23
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
best to collect the money it had dispersed under the loan,
whether that be by foreclosing (seizing and selling the collateral
to pay back the loan) or offering new terms that are less
favorable to the lender than the original contract but that
potentially improve the odds of the borrower paying. In short, a
lender’s involvement in the loan modification process —
specifically whether it “process[es], review[s] and respond[s]
carefully and completely to the loan modification applications [a
borrower] submitted” — is part and parcel of its assessment
regarding how best to recoup the money it is owed.
Such involvement, without more, does not “exceed the
scope of [an institution’s] conventional role as a mere lender of
money.” (Nymark, supra, 231 Cal.App.3d at p. 1096; see Lueras,
supra, 221 Cal.App.4th at p. 67 [“a loan modification is the
renegotiation of loan terms, which falls squarely within the
scope of a lending institution’s conventional role as a lender of
money”]; Armstrong v. Chevy Chase Bank, FSB (N.D.Cal., Oct.
3, 2012, No. 5:11-cv-05664 EJD) 2012 U.S.Dist. Lexis 144125,
pp. *11–*12 [“a loan modification . . . is nothing more than a
renegotiation of loan terms. . . . Outside of actually lending
money, it is undebatable that negotiating the terms of the
lending relationship is one of the key functions of a money
lender. For this reason, ‘[n]umerous cases have characterized a
loan modification as a traditional money lending activity’ ”];
Carbajal v. Wells Fargo Bank, N.A. (C.D.Cal., Apr. 10, 2015, No.
CV 14-7851 PSG (PLAx)) 2015 U.S.Dist. Lexis 47918, p. *13 [“In
a modification application mishandling case, there is no ‘active
participation’ in the borrower’s financed enterprise that
demonstrates that the lender is acting outside the scope of
conventional arms-length lending activity”].) In sum, although
“ ‘ “Nymark does not support the sweeping conclusion that a
24
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
lender never owes a duty of care to a borrower” ’ ” (e.g., Rossetta,
supra, 18 Cal.App.5th at p. 637), it does support the conclusion
that a lender owes no duty to a borrower in its processing of a
loan modification application.
d. Cases Not Applying the Economic Loss Rule
Are Inapposite
It is true that we have, in certain contexts, allowed tort
actions to proceed even though they arise from, and are not
independent of, a contract, despite the economic loss rule.
Specifically, we have allowed for tort recovery in some cases
involving insurance policies and contracts for professional
services. (See, e.g., Jonathan Neil & Assoc., Inc. v. Jones (2004)
33 Cal.4th 917, 923 (Jonathan Neil) [“The remedy for breach of
[the implied] covenant [of good faith and fair dealing] is
generally limited to contract damages, but we have recognized
an exception to this rule when the breach occurs in the context
of an insurance company’s failure to properly settle a claim
against an insured, or to resolve a claim asserted by the
insured”]; Neel v. Magana, Olney, Levy, Cathcart & Gelfand
(1971) 6 Cal.3d 176, 180–181 (Neel) [“Legal malpractice” “gives
rise to an action in tort”].) But there are good reasons for
treating modification negotiations between mortgage lenders
and borrowers differently.
(i) Mortgage lending and modification do not
share the special characteristics associated
with contexts exempted from the reach of the
economic loss rule
As we have recognized, “[t]he insurance cases . . . were a
major departure from traditional principles of contract law.”
(Foley, supra, 47 Cal.3d at p. 690; see also Cates Construction,
Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 43 (Cates
25
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Construction).) We therefore must “consider with great care
claims that extension of the exceptional approach taken in those
cases is automatically appropriate if certain hallmarks and
similarities can be adduced in another contract setting.” (Foley,
at p. 690.) Exercising the necessary care, we have rejected
arguments that employment contracts, performance bonds, or
even “an insurance company’s breach of the covenant [of good
faith and fair dealing] when it retroactively overcharges a
premium it knows is not owed” are sufficiently analogous to the
core insurance cases to warrant extension of tort remedies into
those areas. (Jonathan Neil, supra, 33 Cal.4th at p. 923; see also
Foley, at p. 693 [concluding that “the employment relationship
is not sufficiently similar to that of insurer and insured to
warrant judicial extension of the proposed additional tort
remedies”]; Cates Construction, at p. 60 [holding that tort
recovery is inappropriate “for a breach of the implied covenant
of good faith and fair dealing in the context of a construction
performance bond” because “a construction performance bond is
not an insurance policy”].)
We come to the same conclusion here regarding mortgage
contracts and modification applications. In examining the
“particular characteristics” of insurance policies that justify the
“exceptional approach” we have taken in the insurance setting
(Cates Construction, supra, 21 Cal.4th at pp. 45, 46), we see that
a number of those characteristics do not inhere in the mortgage
modification context. Within the insurance context, these
special characteristics include the fact that “when an insurer in
bad faith refuses to pay a claim or to accept a settlement offer
within policy limits,” “the insured cannot turn to the
marketplace to find another insurance company willing to pay
for the loss already incurred.” (Foley, supra, 47 Cal.3d at p. 692.)
26
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Moreover, “insurance policies are not purchased for profit or
advantage; rather, they are obtained for peace of mind and
security in the event of an accident or other catastrophe” (Cates
Construction, at p. 44), thus making the role of the insurance
companies “with whom individuals contract specifically in order
to obtain protection from potential specified economic harm”
quasi-public in nature. (Foley, at p. 692; see also Egan v. Mut.
of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819 (Egan); Love v. Fire
Ins. Exchange (1990) 221 Cal.App.3d 1136, 1148 (Love)
[“Insurance contracts are unique in nature and purpose. . . .
Because peace of mind and security are the principal benefits
for the insured, the courts have imposed special obligations,
consonant with these special purposes, seeking to encourage
insurers promptly to process and pay claims”].) In addition, “the
insurer’s and insured’s interest are financially at odds,” because
paying a claim directly harms an insurer’s bottom line. (Foley,
supra, 47 Cal.3d at p. 693.) Because of these characteristics, the
insurer and insured are said to be in a “special” or quasi-
fiduciary relationship. (See, e.g., Egan, supra, 24 Cal.3d at
p. 820; McCormick v. Sentinel Life Ins. Co. (1984) 153
Cal.App.3d 1030, 1050 (McCormick) [“the considerations
involved in imposing liability on an insurer for unreasonably
and in bad faith denying coverage under a policy” include “the
quasi-public nature of the insurance industry, the quasi-
fiduciary relationship between insurer and insured, and
significantly, the purpose of purchasing insurance — ensuring
that the insured will be protected against losses incident to a
disability or other catastrophe”].)
For present purposes, lenders are not akin to insurers
when they contract with consumers for mortgage loans.
Although in extending mortgage loans banks may be facilitating
27
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
home ownership in a broad sense, they are not providing
protection or insurance. Mortgage loans (especially non-
purchase or junior loans like those at issue in this case) are not
typically taken “for peace of mind and security in the event of an
accident or other catastrophe” but for “profit or advantage” —
the lender gets paid interest and the borrower gets access to
money. (Cates Construction, supra, 21 Cal.4th at p. 44.) This
difference means that as compared to the quasi-public nature of
insurance, mortgage contracts more closely resemble “a typical
commercial contract.” (Foley, supra, 47 Cal.3d at p. 692; see also
Voris v. Lampert (2019) 7 Cal.5th 1141, 1162 [rejecting a
conversion claim for nonpayment of wages when the availability
of such a claim would “transform a category of contract claims
into torts, and pile additional measures of tort damages on top
of statutory recovery”].)
Given the mutual advantages of mortgage loans, lenders
and borrowers are not “financially at odds” to the same degree
as insurers and insureds. (Foley, supra, 47 Cal.3d at p. 693.)
Even within a modification context, the relationship between
the borrower and lender is more analogous to that of an
employee and employer. Similar to how paying salary typically
benefits both the worker being paid and the employer who gets
work done (see Foley, at p. 693), a loan modification benefits
both the borrower, who receives a lower payment obligation, and
the lender, who receives repayment that may not otherwise be
forthcoming. True, not every modification application results in
a successful modification, but the possibility of benefiting from
the transaction means a lender normally has an incentive to
engage in the negotiation. As such, “there is less inherent
relevant tension between the interests of [lenders and
borrowers] than exists between that of insurers and insureds,”
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
and “the need to place disincentives on [a lender’s] conduct in
addition to those already imposed by law simply does not rise to
the same level as that created by the conflicting interests at
stake in the insurance context.” (Ibid.)
(ii) Plaintiff’s claim is not similar to those in
which tort recovery has been allowed
despite the existence of a contract
Even when tort relief is available within the insurance
and professional service contexts, we have limited recovery to
specific claims intended to ensure the consumer receives the
benefits or services for which he or she has contracted. It would
therefore constitute a significant extension of the law to
recognize a negligence claim in the mortgage modification
context when, as here, the loan agreement does not specify that
the lender must duly engage with the borrower’s attempt to
renegotiate the contract.
To elaborate, one rationale offered for recognizing tort
claims in the insurance context is that insurers, who act as
gatekeepers to a benefit owed to insureds, should not be allowed
to use that power to unreasonably withhold those benefits. (See
Love, supra, 221 Cal.App.3d at pp. 1151–1153.) This
justification recognizes the vulnerability of the insured in
receiving the benefits for which the insured has contracted. In
other words, we recognize the bad faith tort as a tool to
effectuate the purpose of insurance contracts. (See McCormick,
supra, 153 Cal.App.3d at p. 1050.) Fittingly, we have denied
tort relief when insureds’ claims are not closely tied to this
vulnerability. (See Jonathan Neil, supra, 33 Cal.4th at p. 941
[declining to extend tort recovery against excessive retroactive
premium charges because the plaintiffs were “not in the same
vulnerable position as those who suffer from the insurer’s bad
29
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
faith claims and settlement practices [because] they were not
denied the benefits of the insurance policy”].)
As especially relevant here, lower courts have denied bad
faith tort actions for processing delays in the insurance context
when benefits were not otherwise due to the insured. (See Love,
supra, 221 Cal.App.3d at p. 1152 [explaining that a processing
delay was not “an independent ground for recovery of
damages”].) Yet, this is precisely the nature of plaintiff’s claim
in the present case. As discussed, plaintiff is seeking only a
processing duty with regard to his loan modification
applications. He does not urge us to recognize a duty to process,
review and respond carefully and completely to his loan
modification application in order to secure the benefit of a
bargained-for provision of his loan agreement. He pursues such
a duty as an extra-contractual obligation, all the while
conceding that his agreement with Wells Fargo confers upon
him no right to receive either a loan modification or a specific
standard of care in the handling of any modification application.
It does not appear that courts have recognized this sort of
freestanding process-related duty, even in the insurance bad
faith context. To permit tort recovery when it may not be
available in the analogous insurance scenario would extend
even farther the “major departure from traditional principles of
contract law” represented by the insurance cases. (Foley, supra,
47 Cal.3d at p. 690.)
Similar considerations distinguish this case from the
recognized exception to the economic loss rule for consumers
who contract for certain kinds of professional services. In that
context, as in the insurance setting, a cause of action for
negligence ensures that the consumer receives the services the
professional agreed to provide. In such settings, professionals
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
generally agree to provide “careful efforts” in rendering
contracted-for services, but “most clients do not know enough to
protect themselves by inspecting the professional’s work or by
other independent means.” (Rest., § 4, com. a, p. 22; see also
Neel, supra, 6 Cal.3d at p. 188.) Given this disparity, a claim for
professional negligence can serve the important purpose of
ensuring that professionals render the “careful efforts” they
have contracted to provide. (Rest., § 4, com. a, p. 22.)
In the present case, again, plaintiff is not simply asking to
receive a benefit or service he has contracted for. Instead, he
seeks a duty that appears to cover everything the lender does
during the pendency of a loan modification application — from
how it manages paperwork to how clearly it communicates with
borrowers — that would be difficult to adjudicate in any clear
and consistent way across cases. To recognize a duty of this
indefiniteness and breadth seems out of step with our previous
exceptions to the contractual economic loss rule, which permit
much more cabined relief to ensure, in effect, that contracting
parties get what they have contracted for.
In sum, our precedents in the insurance and professional
services field do not justify recognition of the duty pressed by
plaintiff, which is both more expansive and less well justified
than the limited duties answerable in negligence that have been
imposed in other spheres.
e. Plaintiff’s Efforts to Distinguish Nymark and
the Economic Loss Rule Are Unpersuasive
Plaintiff advances two arguments why neither Nymark
nor the economic loss rule applies in this case. First, he asserts
that because he is not claiming a breach of contract, the
economic loss doctrine is inapplicable. According to plaintiff,
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SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
because Wells Fargo did not “breach its underlying loan
agreements with [plaintiff],” his tort claim is not precluded by
the economic loss rule. Under plaintiff’s framing, the economic
loss rule applies only when there is a breach of the underlying
contract.
The better view, however, is that there does not need to be
a viable breach of contract claim for the economic loss rule to
apply. This is the view endorsed by the Restatement. The
Restatement recognizes that when a contract claim fails because
of, say, the parol evidence rule or an integration clause,
“[p]ressure to find a tort claim arises because the stakes are high
and the plaintiff’s position is sympathetic.” (Rest., § 3, com. d.,
p. 4.) Yet, “[u]sing tort law to bypass [the parol evidence rule or
other doctrines of contract law] weakens and retards their
development.” (Ibid.) It also “interferes with the ability of
others to make reliable agreements in the future.” (Ibid.) The
better alternative, suggests the Restatement, is to “reconsider
the application of the parol-evidence rule or other doctrines of
contract law” or to look for statutory solutions that “impose
responsibility on sellers for certain risks without distorting
widely applicable legal principles to reach the desired outcome.”
(Ibid.; see also Farnsworth, supra, 50 Val.U. L.Rev. at p. 558.)
In this case, plaintiff has no viable contract claim against
Wells Fargo because the mortgage contract between plaintiff
and Wells Fargo did not obligate the bank to review or respond
to plaintiff’s modification application as a precondition to
foreclosure. Plaintiff argues that recognition of a tort claim thus
would not infringe on the parties’ bargain and so would not
implicate the economic loss rule’s rationale of protecting private
ordering. Plaintiff’s premise fails. Contrary to his assertion,
permitting him to bring a tort claim on the theory that Wells
32
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Fargo owes him a duty to carefully process his modification
applications would tend to “ ‘disrupt’ the bargain [Wells Fargo
and plaintiff] made when they entered into the original loan
agreement.” Specifically, it would distort Wells Fargo’s
bargained-for contractual right to foreclose by rendering
foreclosure permissible only after Wells Fargo has discharged a
tort duty to review, process, and respond to plaintiff’s
modification application(s). In other words, plaintiff’s tort
claim — premised on a duty to “process, review, and respond
carefully and completely” to a borrower’s modification
application — is not “independent of the [underlying] contract
arising from principles of tort law.” (Erlich, supra, 21 Cal.4th
at p. 551.) Rather, because the imposition of such a duty would
impede the bank’s contractual right to foreclose, plaintiff’s claim
arises from the original mortgage contract.
Plaintiff’s second argument concerning why the economic
loss rule (and Nymark) do not apply in this case fares no better.
His contention is that at the loan modification stage, borrowers
are “captive,” meaning they “cannot choose who will service
their loans” or handle their requested loan modifications.
Moreover, plaintiff’s argument goes, borrowers depend “entirely
on information from the servicer about whether the loan is likely
to be modified, and on the status of the modification.” Yet, at
the point at which borrowers need to modify their loans, i.e.,
when they have either defaulted or are on verge of default, they
are without the bargaining power to force servicers to provide
the information or the level of service they need. Moreover,
servicers have their own incentives — for example, cost
minimization — which may not align with those of borrowers.
These factors, according to some courts, “provide a moral
imperative that those with the controlling hand [i.e., the lender
33
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
or servicer] be required to exercise reasonable care in their
dealings with borrowers seeking a loan modification.” (Alvarez,
supra, 228 Cal.App.4th at p. 949; see also Weimer, supra, 47
Cal.App.5th at pp. 362–363 [adopting Alvarez’s reasoning];
Rossetta, supra, 18 Cal.App.5th at p. 642 [same].)
The difficulty with the argument is that the duties these
courts have identified arise precisely because the parties are in
a preexisting contractual relationship, one in which their
agreement presumably outlined each party’s risks, benefits, and
obligations to their mutual satisfaction at the time the contract
was made. The reason plaintiff is completely dependent on
Wells Fargo is because Wells Fargo is his counterparty to the
mortgage loan contract. As such, only Wells Fargo has the
power to release plaintiff from his existing contractual
obligations on the loans plaintiff took from the bank.8 Having
taken a loan from Wells Fargo, plaintiff is “ ‘captive,’ ” as he puts
it, to the extent that he now cannot ask another bank or servicer
to rewrite the terms of his contract with Wells Fargo. (Alvarez,
supra, 228 Cal.App.4th at p. 949 [quoting from an amicus curiae
brief the argument that “ ‘borrowers are captive, with no choice
of servicer’ ” and “ ‘cannot pick their servicers or fire them’ ”].)
Similarly, plaintiff has no power “ ‘to hire [or] fire’ ” Wells Fargo
after submitting his loan modification applications, because
8
To the extent Wells Fargo has assigned such rights to
another entity by selling its beneficial interest or servicing right,
thus giving the assignee the power to modify (or not) plaintiff’s
loan terms, it is the mortgage contract itself that gives Wells
Fargo the ability to do so. In other words, plaintiff, by that
contract, agreed that Wells Fargo was free to assign its interests
thusly. (See, e.g., Levitin, supra, 28 Yale J. on Reg. at p. 83
[observing that “[f]ree assignability is a standard term” in
mortgage loan contracts].)
34
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
when he entered into a mortgage loan with Wells Fargo, he
agreed to have it — or its choice of assignees — service the loan.9
(Ibid.) Having so agreed, plaintiff lacks the power to fire Wells
Fargo in favor of another servicing entity. In short, parties find
themselves in this position because of the contract.
None of this is to deny the difficulties borrowers face in the
loan modification context. One such difficulty is that, if
borrowers have agreed that lenders may freely assign loans,
borrowers are not thereafter entitled to choose if, when, to
whom, and to what extent lenders may assign rights to those
loans. In particular, borrowers do not choose who may
subsequently service their loans, and thus who will be the
entities with which they will interact in any loan modification
attempt. (See, e.g., Alvarez, supra, 228 Cal.App.4th at p. 949.)
To compound the problem, a borrower may face bargaining or
information asymmetries in the loan modification process. (See,
e.g., Jolley, supra, 213 Cal.App.4th at p. 900 [in applying the
Biakanja factors, asserting that the borrower’s “ability to
protect his own interests in the loan modification process was
practically nil”].)
Yet, without denying the quandary of borrowers in
distress, we see no sound basis for recognizing a tort duty
limited to this situation. Plaintiff’s rationale for bypassing the
economic loss rule has no apparent endpoint. Plaintiff does not
articulate any persuasive basis for treating mortgage contracts
(and particularly junior-lien loans) differently from various
other types of agreements. (Accord, Foley, supra, 47 Cal.3d at
pp. 693, 696 [despite recognizing “[t]he potential effects on an
9
Plaintiff does not argue that the assignability provision
contained in his contract was nonnegotiable.
35
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
individual caused by termination of employment,” holding that
“contractual remedies should remain the sole available relief for
breaches of the implied covenant of good faith and fair dealing
in the employment context”]. He has offered no guidance
concerning how the modification attempts at issue are to be
distinguished from, say, renegotiations of existing employment
contracts. (Accord, id. at p. 693.) Regardless of the
circumstances, whenever parties attempt to modify an existing
contract, they cannot choose with whom to bargain, because the
only persons with whom to negotiate are the signatories to the
original contract (or their choice of assignees, if the contract
permits reassignments). Thus, to embrace plaintiff’s proposed
duty would open the door to a potentially enormous expansion
of tort law. Plaintiff has not persuaded us to take such a leap.
2. Biakanja
Plaintiff also argues that “[i]f the lower court had
considered the Biakanja factors, it would have seen that they
squarely point toward a duty of care in the mortgage servicing
context.” This argument presumes the multifactor approach
articulated in Biakanja for ascertaining a duty of care applies in
this context. We conclude it does not.
a. Biakanja Does Not Apply Here
We begin with Biakanja itself. That case involved a will,
through which the plaintiff’s brother sought to “bequeath[] all
his property to [the] plaintiff.” (Biakanja, supra, 49 Cal.2d at
p. 648.) But because the defendant notary public failed to have
the will properly attested, the brother’s estate passed by
intestate succession. (Ibid.) The plaintiff, upon receiving “only
one-eighth of the estate,” sued to recover “the difference between
the amount which she would have received had the will been
36
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
valid and the amount distributed to her.” (Ibid.) “The principal
question” raised by the case, we said, “is whether [the]
defendant was under a duty to exercise due care to protect [the]
plaintiff from injury and was liable for damage caused [the]
plaintiff by his negligence even though they were not in privity
of contract.” (Ibid.) After reviewing case law bearing on this
question, we articulated the following rubric for resolving the
issue: “The determination whether in a specific case the
defendant will be held liable to a third person not in privity is a
matter of policy and involves the balancing of various factors,
among which are the extent to which the transaction was
intended to affect the plaintiff, the foreseeability of harm to him,
the degree of certainty that the plaintiff suffered injury, the
closeness of the connection between the defendant’s conduct and
the injury suffered, the moral blame attached to the defendant’s
conduct, and the policy of preventing future harm.” (Id. at
p. 650, italics added.)
Biakanja itself thus makes clear that its multifactor test
finds application only when the plaintiff is a “third person not
in privity” with the defendant. (Biakanja, supra, 49 Cal.2d at
p. 650.) Under its terms, Biakanja does not apply when the
plaintiff and defendant are in contractual privity for purposes of
the suit at hand. (Cf. Brown, supra, 11 Cal.5th at p. 218 [in
holding that the largely similar multifactor test set forth in
Rowland v. Christian (1968) 69 Cal.2d 10 “serve[s] to determine
whether an exception to [Civil Code] section 1714’s general duty
of reasonable care is warranted,” observing that “Rowland itself
referred to this multifactor test as a guide for determining
whether to recognize an ‘exception’ to the general duty of care”].)
This limitation makes sense, because as Wells Fargo
explains, the Biakanja framework does “nothing to pinpoint
37
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
whether imposing a general duty of care would upset the parties’
contractual expectations and ‘dissolv[e]’ the boundary between
tort and contract.” Put differently, Biakanja does not displace
the contractual economic loss rule when that rule squarely
applies. (See Stop Loss Ins. Brokers, Inc. v. Brown & Toland
Medical Group (2006) 143 Cal.App.4th 1036, 1042 [“Contrary to
[the plaintiff’s] assumption, courts have not applied the
Biakanja factors to create broad tort duties in arms-length
business dealings whenever it is convenient to resort to the law
of negligence”]; Body Jewelz, Inc. v. Valley Forge Ins. Co.
(C.D.Cal. 2017) 241 F.Supp.3d 1084, 1093 (Body Jewelz);
Elsayed v. Maserati N. Am., Inc. (C.D.Cal. 2016) 215 F. Supp.3d
949, 963 (Elsayed); United Guar. Mortg. Indem. Co. v.
Countrywide Fin. Corp. (C.D.Cal. 2009) 660 F.Supp.2d 1163,
1180; City & Cty. of San Francisco v. Cambridge Integrated
Servs. Grp., Inc. (N.D.Cal., Nov. 29, 2006, No. C 04-1523 VRW)
2006 U.S.Dist. Lexis 103853, pp. *9–*12; Department of Water
Los Angeles v. ABB Power T&D (C.D.Cal. 1995) 902 F.Supp.
1178, 1189; see also Rest., § 1, com. c, p. 3.)
Subsequent to Biakanja, we have repeatedly stated that
its factors are used to determine whether persons must exercise
reasonable care to avoid negligently causing economic loss to
others with whom they were not in privity (sometimes referred
to as third parties). (See, e.g., Centinela Freeman Emergency
Medical Associates v. Health Net of California, Inc. (2016)
1 Cal.5th 994, 1013–1014 (Centinela) [“ ‘[r]ecognition of a duty
to manage business affairs so as to prevent purely economic loss
to third parties in their financial transactions is the exception,
not the rule, in negligence law’ . . . . The test for determining
the existence of such an exceptional duty to third parties is set
forth in the seminal case of Biakanja” (citation omitted)]; Aas,
38
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
supra, 24 Cal.4th at pp. 643–644 [“In Biakanja, we held that a
defendant’s negligent performance of a contractual obligation
resulting in damage to the property or economic interests of a
person not in privity could support recovery if the defendant was
under a duty to protect those interests”]; Quelimane, supra, 19
Cal.4th at p. 58 [discussing Biakanja in the context of “existence
of a duty to third parties”]; Bily, supra, 3 Cal.4th at p. 397 [“We
have employed a checklist of factors [laid out in Biakanja] to
consider in assessing legal duty in the absence of privity of
contract between a plaintiff and a defendant”]; J’Aire, supra, 24
Cal.3d at p. 804 [“Where a special relationship exists between
the parties, a plaintiff may recover for loss of expected economic
advantage through the negligent performance of a contract
although the parties were not in contractual privity. Biakanja
. . . [so] held”]; Connor v. Great Western Sav. & Loan Assn.
(1968) 69 Cal.2d 850, 865 (Connor) [“The fact that Great
Western was not in privity of contract with any of the plaintiffs
except as a lender does not absolve it of liability for its own
negligence in creating an unreasonable risk of harm to them [for
the role it played in the construction of the properties]. . . . The
basic tests for determining the existence of such a duty are
clearly set forth in Biakanja”]; cf. Brown, supra, 11 Cal.5th at
pp. 217–218 [in holding the multifactor test set forth in Rowland
was intended “as a means for deciding whether to limit a duty
derived from other sources” finding relevant the fact that “in
numerous cases since Rowland, we have repeated that the
Rowland factors serve to determine whether an exception to
[Civil Code] section 1714’s general duty of reasonable care is
warranted”].)
In contrast, we have never done what plaintiff now asks
us to do: rely on Biakanja to impose a tort duty on a contracting
39
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
party to avoid negligently causing monetary harm to another
party to that contract. (Cf. Brown, supra, 11 Cal.5th at p. 219
[in rejecting a litigant’s argument, finding significant the fact
that no “decision of this court has done what [the litigant] asks
us to do”].) Neither Connor, supra, 69 Cal.2d 850, nor Aas,
supra, 24 Cal.4th 627, reaches a contrary conclusion. Plaintiff
relies heavily on this pair of cases, arguing they show that
Biakanja “is not limited to ‘stranger’ cases where the parties are
not in privity.” A careful reading of these authorities reveals
they do not bear the weight plaintiff places on them.
In Connor, the defendant Great Western Savings and
Loan Association (Great Western) was involved in both the
construction of a residential tract development and lending
funds to eventual buyers of the residences. (Connor, supra,
69 Cal.2d at pp. 857–862.) When the buyers of the homes —
some of whom were in contractual privity with Great Western
in its capacity as a mortgage lender — discovered “serious
damages from cracking caused by ill-designed foundations,”
they sued Great Western along with other parties. (Id. at
p. 856.) In determining whether Great Western could be held
liable for its negligence in connection with the construction of
defective homes, we emphasized: “Great Western voluntarily
undertook business relationships with [a development company]
to develop the Weathersfield tract and to develop a market for
the tract houses in which prospective buyers would be directed
to Great Western for their financing. In undertaking these
relationships, Great Western became much more than a lender
content to lend money at interest on the security of real
property. It became an active participant in a home
construction enterprise. It had the right to exercise extensive
control of the enterprise.” (Id. at p. 864.) We also stressed
40
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
aspects of Great Western’s role as a construction lender, i.e., its
function as a lender of funds to the developing company, “which
made the enterprise possible.” (Ibid.) In contrast, we had little
to say about Great Western’s loans to the eventual home
buyers — the individuals with whom Great Western had a
contractual relationship — other than that Great Western
extracted certain concessions from the development company to
ensure that its loans to the buyers would be profitable. (Ibid.)
We proceeded to apply the Biakanja factors and concluded
from this exercise that Great Western owed a duty to the home
buyers “to exercise reasonable care to protect them from
damages caused by major structural defects.” (Connor, supra,
69 Cal.2d at p. 866.) “The fact that Great Western was not in
privity of contract with any of the plaintiffs except as a lender,”
we said, “does not absolve it of liability for its own negligence in
creating an unreasonable risk of harm to them.” (Id. at p. 865.)
Seizing on the language within Connor, supra, 69 Cal.2d
850 acknowledging that Great Western was “in privity of
contract with [some] of the plaintiffs . . . as a lender” (id., at
p. 865) plaintiff argues that Biakanja is applicable even when
the litigating parties are contracting partners. Plaintiff ignores
the fact that Great Western was not sued for conduct it engaged
in as a residential lender, but for its role in developing the tract
housing. In other words, the Connor plaintiffs’ claim was
independent of the lending contract they had with the
defendant. For the purpose of the suit, the plaintiffs and the
defendant in Connor were economic strangers. It is for this
reason that we have since characterized Connor as a case in
which “[w]e found that a construction lender had a duty to third
party home buyers . . . .” (Quelimane, supra, 19 Cal.4th at p. 58,
italics added [“We found that a construction lender had a duty
41
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
to third party home buyers in Connor . . . , because the lender
had control over the quality of construction but failed to prevent
major construction defects in the homes whose construction it
financed”].) In such cases, there is no reason that Biakanja,
under its plain terms, would be inapplicable.
Aas is likewise unhelpful to plaintiff, although for a
different reason. In Aas, the question was “whether
homeowners and a homeowners association may recover
damages in negligence from the developer, contractor and
subcontractors who built their dwellings for construction defects
that have not caused property damage.” (Aas, supra, 24 Cal.4th
at p. 632.) The litigants in Aas were contracting parties for the
purposes of the suit. Because they were contracting parties, Aas
recognized a concern that counseled against allowing the
plaintiffs to recover in tort — namely, such recovery would
result in an expansion of tort at the expense of contract
principles. (See id. at pp. 635–636.) This was the same concern
underlying Seely, supra, 63 Cal.2d 9, the matter in which we
first articulated the contractual economic loss rule, and the Aas
court discussed Seely and its progeny at length. (See Aas, supra,
24 Cal.4th at pp. 639–643.) Based on Seely, Aas concluded that
the economic loss rule barred the plaintiffs’ tort claim. (Aas, at
p. 632 [“Applying settled law limiting the recovery of economic
losses in tort actions (Seely . . .), we answer the question
[presented] in the negative”]; id. at p. 636.)
In addition to explaining that the plaintiffs were
precluded from recovering in tort by the economic loss rule, the
Aas court engaged the plaintiffs’ contentions on their own terms.
The plaintiffs in Aas asserted that J’Aire, a decision for which
Biakanja served as the “acknowledged basis” (Aas, supra, 24
Cal.4th at p. 638), “displace[d] the general rule” of Seely. (Aas,
42
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
at p. 645.) In grappling with this argument, Aas noted that
“[w]hile the court in J’Aire purported only to address duties
owed to persons not in contractual privity with the defendant
[citation], [California appellate] courts subsequently have
applied J’Aire to cases in which privity did exist.” (Aas, at
p. 645.) Although Aas was critical of the “subjective”
“multifactor balancing test set out in J’Aire,” it nonetheless
explained why even if that test — identical to that found in
Biakanja — applied “to cases in which privity did exist,” no duty
would be found. (Aas, at pp. 646, 645.)
Thus, in addressing and ultimately rejecting the plaintiffs’
negligence theory, Aas did consider, in a belt-and-suspenders
fashion, how the Biakanja factors applied to the facts before it.
(Aas, supra, 24 Cal.4th at pp. 646–649; see also Brown, supra,
11 Cal.5th at p. 219 [explaining that although a case from this
court may have considered a set of factors in a “belt-and-
suspenders fashion” to “ ‘explain further why we should not
impose a duty,’ ” this does not mean that those factors constitute
the sole mode of analysis to determine whether a duty exists].)
But Aas never squarely addressed the proper role of Biakanja in
a case involving contractual parties. Its engagement with the
Biakanja factors simply responded to the plaintiffs’ argument,
as well as a separate opinion embracing that argument, rather
than amounting to a reasoned extension of Biakanja to a new
context. (See Aas, at pp. 665–673 (conc. & dis. opn. of George,
C. J.).) Indeed, Aas itself offers no explanation regarding why
Biakanja ought to “address duties owed to persons . . . in
contractual privity with the defendant.” (Aas, at p. 645.)
Furthermore, no subsequent case has interpreted Aas as
sanctioning an expansion of the Biakanja factors to determine
whether one contractual party owes another a tort duty. Aas
43
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
therefore cannot be properly understood as endorsing the
Biakanja factors as applicable to fact patterns such as the one
before us.
Finally, there is good reason that our precedents have
applied the Biakanja multifactor test to find liability only when
the parties to a proceeding are contractual strangers. Recall
that the six (nonexclusive) Biakanja factors are: “[1] the extent
to which the transaction was intended to affect the plaintiff, [2]
the foreseeability of harm to him, [3] the degree of certainty that
the plaintiff suffered injury, [4] the closeness of the connection
between the defendant’s conduct and the injury suffered, [5] the
moral blame attached to the defendant’s conduct, and [6] the
policy of preventing future harm.” (Biakanja, supra, 49 Cal.2d
at p. 650.) The first, second, and fourth Biakanja factors are
heavily skewed in favor of liability in cases where the litigants
are contractual partners and the alleged duty arises from the
underlying contract. (See Elsayed, supra, 215 F.Supp.3d at
p. 963 [“The first, second, and fourth [Biakanja] factors would
almost always find a special relationship between directly-
contracting parties: the transaction would always be intended
to affect the plaintiff, the harm would nearly always be
foreseeable, and the connection between the defendant’s conduct
and the injury would always be close”]; Body Jewelz, supra, 241
F.Supp.3d at p. 1093 [same]; Sharkey, supra, 85 U.Cin. L.Rev.
at p. 1034.) Applying Biakanja in this and other similar
contexts thus would unduly tip the scale in favor of finding a tort
duty and subvert the economic loss rule in a class of cases in
which that principle clearly applies. (See, e.g., Seely, supra, 63
Cal.2d at p. 18; Sharkey, supra, 85 U.Cin. L.Rev. at p. 1034.)
Even in the present case, in which the negligence claim
arises out of a contract between the parties if not from the
44
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
breach of an obligation provided for in the contract, the Biakanja
test cannot be coherently applied. Consider, for example, the
first of the Biakanja factors, “the extent to which the transaction
was intended to affect the plaintiff.” (Biakanja, supra, 49 Cal.2d
at p. 650.) What is the relevant transaction between plaintiff
and Wells Fargo for purposes of this factor? None of our prior
cases applying Biakanja had to confront such an issue because
in those cases, the defendants had a preexisting duty to fulfill
specified responsibilities and the question before the courts was
whether a failure to satisfy these obligations allowed the
plaintiffs to sue the defendants in tort. For instance, in
Biakanja, the defendant notary was under an obligation to the
plaintiff’s brother to properly prepare his will and the issue was
whether the plaintiff could sue in light of the notary’s negligence
in failing to have the will attested. (See Biakanja, at p. 648
[“The court found that defendant agreed and undertook to
prepare a valid will”].) In Bily, the accounting firm owed to a
client company a “duty of care in the preparation of an
independent audit of [the] client’s financial statements,” and we
determined whether individuals other than the client may sue
the firm when it allegedly botched the audit. (Bily, supra,
3 Cal.4th at p. 375.) In J’Aire, the defendant contractor
undertook “construction work pursuant to a contract with the
owner of premises” that it had to finish “within a reasonable
time,” and the inquiry was whether the contractor “may be held
liable in tort for business losses suffered by a lessee when the
contractor negligently fails to complete the project with due
diligence.” (J’Aire, supra, 24 Cal.3d at p. 802.) Similarly, in Aas,
the issue was whether the plaintiffs “may recover damages in
negligence from the developer, contractor and subcontractors
45
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
who built their dwellings for construction defects that have not
caused property damage.” (Aas, supra, 24 Cal.4th at p. 632.)
The “transaction” in all of the aforementioned cases was
thus the task — the preparation of a will, an audit of a client’s
business, the construction of a dwelling, etc. — that the
defendants already were lawfully obligated to carry out. Here,
the analogous agreement is the original mortgage contract
between plaintiff and Wells Fargo. But plaintiff is not making
an argument that Wells Fargo’s failure to fulfill its duties under
that agreement entitles him to sue it in tort; indeed, he disavows
any reliance on the mortgage contract, repeating that he (the
counterparty to the agreement) has no contract claim. He
argues instead that a loan modification, if it had been agreed
upon, would have been intended to benefit him. Plaintiff offers
no explanation why the loan modification he sought is the
relevant “transaction” for purposes of the first Biakanja factor.
This uncertainty illustrates how Biakanja, as we have
understood and applied it, is a poor framework for assessing
whether there is a duty in a situation such as this.
Therefore, on both doctrinal and pragmatic grounds, we
conclude that the Biakanja factors are not applicable when, as
here, the litigants are in contractual privity and the plaintiff’s
claim is not “independent of the contract arising from principles
of tort law.” (Erlich, supra, 21 Cal.4th at p. 551.)
b. Policy Considerations
As previously discussed, the rationales behind the
economic loss rule provide a compelling basis to reject “a duty of
care to process, review and respond carefully and completely to
. . . loan modification applications.” Plaintiff, however, argues
that the “policy of preventing future harm” (Biakanja, supra,
46
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
49 Cal.2d at p. 650) — and more generally the “ ‘ “sum total” ’ ”
of policy considerations (Goonewardene v. ADP, LLC (2019)
6 Cal.5th 817, 841) — require the recognition of his claim. We
cannot agree.
Plaintiff raises two broad policy arguments. First, he
argues that without the ability to bring a negligence claim, he
would be left “without any remedy at all” and as such, a viable
tort claim is needed to prevent injury to borrowers like himself.
Yet there are causes of action other than a general claim of
negligence for failing to exercise reasonable care in processing,
reviewing, and responding to a borrower’s loan modification
application that may offer recourse to borrowers who suffer
injury due to missteps by a lender (or loan servicer) in
connection with the handling of a mortgage modification
application.10 Two such causes of action are negligent
misrepresentation and promissory estoppel. (See, e.g., Apollo
Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158
10
And of course, in situations when a borrower has been
injured by a lender’s intentional conduct during the loan
modification process, the borrower may pursue various
intentional tort theories, such as fraud and intentional
misrepresentation. (See, e.g., Robinson, supra, 34 Cal.4th at
p. 984 [holding that the economic loss rule does not apply to
claims for intentional misrepresentation or fraud]; see also
Meixner v. Wells Fargo Bank, N.A. (E.D.Cal. 2015) 101
F.Supp.3d 938, 955–957 [finding that the plaintiff had properly
pleaded an intentional misrepresentation claim against a bank
for conduct taken in a loan modification process]; McGee v.
Citimortgage (D.Nev., May 31, 2013, No. 2:12-CV-2025 JCM
(PAL)) 2013 U.S.Dist. Lexis 76675, pp. *14–*15 [finding that the
plaintiff had stated a fraud claim].)
47
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
Cal.App.4th 226, 243; C & K Engineering Contractors v. Amber
Steel Co. (1978) 23 Cal.3d 1, 6.)
Regarding the former, although plaintiff purports to bring
only a negligence claim, his allegations to some degree focus on
alleged misrepresentations. He pleads, for example, that Wells
Fargo called and spoke to his wife, informing her “there would
be no . . . foreclosure sale of Plaintiff’s home.” He also alleges
that the telephone call further convinced him that his “home
was no longer collateral for any debt Plaintiff owed to Wells
Fargo” and the debt had been “modified such that it was now
unsecured.” Based on such a belief, plaintiff allegedly forwent
pursuing alternatives to foreclosure and, as a result, eventually
lost his house to foreclosure. Because “[n]egligent
misrepresentation is a separate and distinct tort” from
negligence (Bily, supra, 3 Cal.4th at p. 407), plaintiff is not
estopped from asserting a negligent misrepresentation claim
merely because his negligence claim fails.
As for promissory estoppel, plaintiff argues that he could
not bring such a claim because the elements of that claim “are
difficult to establish in the mortgage modification context.” Yet,
plaintiff did assert a claim for promissory estoppel against the
entities that foreclosed on his home, Mirabella and FCI, and we
perceive no reason why such claims would be generally
unavailable to borrowers in the modification context. (Cf.
Wigod, supra, 673 F.3d at p. 566 [holding that a borrower has
“adequately alleged her claim of promissory estoppel” by
pleading that the bank promised her that “if she made timely
payments and accurate representations during the trial period,
she would receive an offer for a permanent loan modification
calculated using [certain] methodology”]; accord, Sheen, supra,
38 Cal.App.5th at p. 348 [court below concludes that extension
48
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
of “tort duties into mortgage modification negotiations” is
unwarranted, in part, because “other bodies of law — breach of
contract, negligent misrepresentation, promissory estoppel,
fraud, and so forth — are better suited to handle contract
negotiation issues”]; Rest., § 3, com. e, p. 4 [“A party may be
injured by reliance on another’s negligent statements in the
course of negotiating a contract that is never concluded. . . .
Detailed doctrines in the law of contract, of restitution, and of
estoppel have developed to provide relief in such cases where
necessary”].)
Furthermore, even taking at face value plaintiff’s
argument that “no other source of law addresses the harm that
[he] identifies,” plaintiff is not limiting the sought-for tort duty
to only those instances when other sources of law fall short. As
plaintiff acknowledges, he is asking this court to “recognize a
negligence-based duty of care that would cover all types of
mortgage loans,” “including . . . those [already] covered by
[HBOR].” “That duty,” stresses plaintiff, “would be broader than
the narrow affirmative duties imposed by HBOR.” In essence,
even if plaintiff has identified a gap in the law, he is not
proposing to fill that gap. Instead, he seeks to layer a new and
expansive negligence cause of action atop all existing laws,
imposing a tort duty with indefinite boundaries.
We are unpersuaded that such a remedy should be created
by judicial fiat. Plaintiff recognizes that lawmakers at both the
state and federal levels have been active in regulating the
mortgage loan modification process. As one amicus curiae
observes, during the past 10 years, “[t]here has been an
extraordinary profusion of new, robust and still-expanding
consumer laws, regulations and enforcement authority” in the
mortgage service industry, especially with regard to the
49
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
regulation of “the conduct of mortgage servicers in distressed
loan situations.” To be sure, these laws and regulations do not
occupy the field and preclude us from acting. (See, e.g., Civ.
Code, § 2924.12, subd. (g) [specifying that “[t]he rights,
remedies, and procedures provided by [HBOR] are in addition to
. . . any other rights, remedies, or procedures under any other
law”].) Nonetheless, they counsel against our taking action
merely because we may. (Cf. Connor, supra, 69 Cal.2d at p. 868
[“There is no assurance, however, that the Legislature will
undertake such a task [to regulate the challenged industry]. In
the absence of actual or prospective legislative policy, the court
is free to resolve the case before it . . . in terms of common law”].)
This is especially so given that each time that Congress or our
state Legislature has acted, it has passed detailed regulations
specifying in minutia the obligations of lenders who handle
mortgage modification applications. In contrast with such
detailed schemes, tort liability — with a yet-to-be articulated
standard of care — is ill defined and amorphous. We remain
uncertain how such differing regulatory and statutory
frameworks will function in practice, much less that they might
operate together to better serve the interests of borrowers,
lenders, or the public at large. The vagueness and breadth of
plaintiff’s proposed duty thus counsel against imposing that
duty to correct for the problems he contends exist.
Plaintiff’s second argument, that allowing his tort claim to
go forward will “prevent[] future harm,” relies on asserted
market failures within the mortgage industry. (Biakanja,
supra, 49 Cal.2d at p. 650.) The main alleged market failure on
which plaintiff focuses is a principal-agent problem whereby
servicers (the agents) do not act in the best interests of the loan
owners (their principals) and in the process, cause harm to
50
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
borrowers. Plaintiff’s argument is as follows. Unlike
“[t]raditional mortgage lending” in which a single bank would
both originate the loan and service it, “[i]n modern mortgage
servicing,” “these tasks have been dispersed among different
actors.” Now, plaintiff asserts, it is frequently the case that an
entity that services a loan does not own the loan. And as
“modern mortgage servicing has become divorced from loan
ownership,” the servicer develops interests that diverge from the
loan owner’s. Because the fee a servicer collects “does not
depend on loan performance, nor on maximizing net present
value through a modification,” servicers seek neither to ensure
that loans perform nor to modify the loans when doing so would
be profitable to the loan owners (i.e., when it would “maximiz[e]
[the] net present value” of the loan). Instead, “servicers have
incentives to charge borrowers unnecessary fees and to extend
default,” presumably because such actions inflate the servicing
fees. Such market failures, plaintiff argues, justify judicial
intervention.
We observe at the outset that insofar as plaintiff has
identified a problem, he is not proposing to tailor his proposed
solution to the problem in any way. Here, Wells Fargo was the
originator, owner, and servicer of plaintiff’s loans at the time of
the challenged conduct. There could be no principal-agent
problem in such circumstances because Wells Fargo was both
the principal (owner) and agent (servicer) in managing
plaintiff’s loans. (Accord, e.g., Levitin, supra, 28 Yale J. on Reg.
at p. 11 [“A traditional portfolio lender has an undivided
economic interest in the loan’s performance and therefore fully
internalizes the costs and benefits of its management decisions,
such as whether to restructure or foreclose on a defaulted
loan”].) Despite the fact that Wells Fargo was behaving much
51
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
as banks involved in “[t]raditional mortgage lending” do,
plaintiff would have us impose a duty on Wells Fargo regardless.
It is difficult to see how doing so would be justified when the
asserted basis for the duty is that servicers do not act in the
owners’ interests.
Moreover, even taking the principal-agent problem at face
value, plaintiff has not supplied a convincing reason why tort
law is the right approach to correct such a problem. Some of the
problems plaintiff perceives have been anticipated and (at least
partially) addressed by the principals and agents themselves.
For example, although plaintiff claims that servicers have
incentives to “extend default” because such extensions generate
additional fees for servicers, he does not mention that as long as
the borrowers are in default, the servicers are obligated by their
agreements with loan owners to advance the payments that the
borrowers are missing. (See Odinet, Foreclosed: Mortgage
Servicing and the Hidden Architecture of Homeownership in
America (2019) pp. 53–54 (Odinet) [“The mortgage middlemen
pick up the tab when homeowners default, meaning that the
servicer is responsible for making principal and interest
payments to the [loan owners] when monthly mortgage
payments from borrowers are not forthcoming”].) Plaintiff does
not explain why such private ordering is inadequate or
unsatisfactory.11 And it is unclear how allowing borrowers to
11
Nor does plaintiff satisfactorily explain how imposing the
duty he presses here would encourage servicers to engage in the
modification process rather than simply foreclose. After all, if a
servicer proceeds immediately to foreclosure instead of
accepting or processing a modification application, it (and the
lender) presumably cannot be held negligent for having failed to
52
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
bring lawsuits against servicers and lenders indiscriminately is
likely to properly adjust the incentives between those entities.
The Attorney General, in his briefing in support of
plaintiff, points to another source of asserted market failure. He
argues that residential borrowers suffer from optimism bias and
therefore do not bargain over obligations that would arise only
when they default. But if the problem is undue optimism, then
legislation requiring information to temper that optimism — or
a new mandatory insurance scheme, whereby all homeowners,
no matter how optimistic, are forced to pay for the cost of “help
from their servicers to avoid foreclosure” — would seem more
appropriate and directly responsive than tort liability.
C. The Role of the Legislature
This brings us to the fact that recognizing a duty of the
sort plaintiff presses for here would impose real costs — and
challenging decisions to be made about who should bear those
costs. As one commentator reports, “the cost of servicing a
default mortgage loan was 15 times higher than the cost of
managing one that was not in default ($2,537 compared to
$156).” (Odinet, supra, at pp. 119–120.) Any changes to the
mortgage industry that require servicers to raise the level of the
service they provide — to “process, review and respond [more]
carefully and completely to the loan modification applications”
than they are currently doing — will likely raise the cost of
exercise a specific standard of care in handling any such
application. (Accord, Cenatiempo, supra, 219 A.3d at p. 793 [“If
the court were to recognize a common-law duty of care, . . . it
could result in loan servicer liability for isolated violations or far
less consequential violations of the loan modification process,
which would hinder servicer participation in the modification
process”].)
53
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
providing that service as well. (Levitin, supra, 28 Yale J. on Reg.
at p. 89 [“It bears emphasis that changes to the servicing market
could result in higher mortgage costs”].) “This reality is a policy
tradeoff . . . .” (Ibid.) In particular, “[a]ny reform of mortgage
servicing to make it more conducive to loss mitigation via loan
restructuring could add to the cost of mortgage finance and
thereby discourage new homeownership. Thus, any mortgage
servicing reform must be considered as part of a trade-off
between making home purchases more affordable and ensuring
sustainable, long-term homeownership levels.” (Id. at p. 8.)
This is far from suggesting that reforms to the mortgage
service industry would not be worthwhile. Instead, it is to
emphasize the tradeoffs and policy judgments underlying such
reforms. These are policy choices that the judiciary is poorly
positioned to make. The Legislature, on the other hand, “has at
its disposal a wider range of options and superior access to
information about the social costs and benefits of each” policy.
(Aas, supra, 24 Cal.4th at p. 652 [“ ‘Legislatures, in making such
policy decisions, have the ability to gather empirical evidence,
solicit the advice of experts, and hold hearings at which all
interested parties may present evidence and express their
views’ ”]; see also Gas Leak Cases, supra, 7 Cal.5th at p. 413
[“[T]he Legislature can bring to bear a mix of expertise while
considering competing concerns to craft a solution in tune with
public demands”].) With these tools at its disposal and acting
“through the democratic process” (Gas Leak Cases, at p. 413),
the Legislature can best decide what additional protection
homeowners in California should be afforded. (See Aas, at
pp. 652, 653 [observing “[h]ome buyers in California already
enjoy protection” under various bodies of law for the harms
alleged and concluding that “the Legislature may add whatever
54
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
additional protections it deems appropriate” but that we should
not “preempt the legislative process with a judicially created
rule of tort liability”].) In particular, should it choose to the
Legislature can both prescribe whether a lender must act
“reasonably” and (in some detail, if it chooses) what constitutes
“reasonable” behavior within this sphere. Because such
decisions carry “[t]he potential for . . . broad-ranging economic
consequences,” including the possibility of “increas[ing] the
already prohibitively high cost of housing in California,”
“affect[ing] the availability of” cheap financing options for
would-be homeowners, and “greatly diminish[ing] the supply of
affordable housing,” the task of making such policy decisions
“should be left to the Legislature.” (Erlich, supra, 21 Cal.4th at
p. 560; see also Cates Construction, supra, 21 Cal.4th at pp. 60–
61; Foley, supra, 47 Cal.3d at p. 694.)
In sum, the Legislature is better situated than we are to
tackle the “[s]ignificant policy judgments affecting social policies
and commercial relationships” implicated in this case. (Foley,
supra, 47 Cal.3d at p. 694; see also Aas, supra, 24 Cal.4th at
p. 652.) In recognition of the institutional competence of our
coequal branch of government, we decline plaintiff’s invitation
to become the first state high court to create a judicial rule
imposing a duty on lenders to exercise due care in processing,
reviewing and responding to loan modification applications.12
12
To the extent they are inconsistent with our opinion, we
disapprove of Weimer v. Nationstar Mortgage, LLC, supra,
47 Cal.App.5th 341; Rossetta v. CitiMortgage, Inc., supra,
18 Cal.App.5th 628; Daniels v. Select Portfolio Servicing, Inc.,
supra, 246 Cal.App.4th 1150; and Alvarez v. BAC Home Loans
Servicing, L.P., supra, 228 Cal.App.4th 941. We have no
55
SHEEN v. WELLS FARGO BANK, N.A.
Opinion of the Court by Cantil-Sakauye, C. J.
III. CONCLUSION
We hold that when a borrower requests a loan
modification, a lender owes no tort duty sounding in general
negligence principles to “process, review and respond carefully
and completely to” the borrower’s application. Because the
Court of Appeal’s decision is in accord, we affirm the judgment
below.
CANTIL-SAKAUYE, C. J.
We Concur:
CORRIGAN, J.
LIU, J.
KRUGER, J.
GROBAN, J.
JENKINS, J.
McCONNELL, J. *
occasion to consider the viability of claims other than the
negligence cause of action presented in these cases. In
particular, nothing we say should be understood to address
whether some of the conduct considered by the Courts of Appeal
would support negligent misrepresentation or promissory
estoppel claims.
*
Administrative Presiding Justice of the Court of Appeal,
Fourth Appellate District, Division One, assigned by the Chief
Justice pursuant to article VI, section 6 of the California
Constitution.
56
SHEEN v. WELLS FARGO BANK, N.A.
S258019
Concurring Opinion by Justice Liu
The question in this case is whether defendant Wells
Fargo Bank owed plaintiff Kwang K. Sheen a “duty of care to
process, review and respond carefully and completely to the loan
modification applications” Sheen submitted. The court answers
no to this question, and I concur with this limited holding.
Sheen sought modification of two junior loans from Wells Fargo,
a lender that made no representations or assurances regarding
the modification. Wells Fargo had no obligation to accept,
consider, or approve the modification, and mere receipt of
Sheen’s application did not give rise to a tort duty of care in the
circumstances here.
But this 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.
According to Sheen, the California Homeowner Bill of Rights
(HBOR), designed “to ensure that . . . borrowers are considered
for, and have a meaningful opportunity to obtain, available loss
mitigation options” (Civ. Code, § 2923.4), “imposes a narrow set
of duties on servicers”; its “protections are insufficient to cover
the myriad ways in which a servicer’s negligence can injure
borrowers when it comes to loan modification.” The frequency
with which these issues are making their way through the
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
courts — along with what the Civil Justice Association of
California, California Chamber of Commerce, and Western
Bankers Association as amici curiae call the “Damoclean repeat
of the 2008–2012 foreclosure crisis [that] looms on the
horizon” — suggests that legislative action may be warranted.
I.
Today’s opinion holds that Wells Fargo owed Sheen no
“ ‘duty of care to process, review and respond carefully and
completely to the loan modification applications’ ” he submitted.
(Maj. opn., ante, at p. 1.) Sheen alleged that “Wells Fargo never
contacted [him] about the status of his mortgage modification
applications, or to inform his as to whether his applications for
modification . . . had been approved or rejected.” He did not
allege that Wells Fargo made the type of representations or
exhibited the affirmative conduct relating to modification that
courts have relied on in finding a duty in related contexts. (See,
e.g., Weimer v. Nationstar Mortgage, LLC (2020) 47 Cal.App.5th
341, 348–350, 359, 362 (Weimer) [borrower alleged Nationstar,
in order to continue collecting fees from servicing a delinquent
account, forced him to submit the same applications and
documents on multiple occasions and instructed him to apply for
a program he was ineligible for]; Rossetta v. CitiMortgage, Inc.
(2017) 18 Cal.App.5th 628, 643 (Rossetta) [borrower alleged
CitiMortgage told her that she needed to be at least three
months delinquent for it to assist her and required her to submit
the same documents over and over again, lost or mishandled
documents, misstated the status of various applications, and
ultimately denied them for “bogus reasons”]; Daniels v. Select
Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1158
[borrowers alleged Bank of America advised them to miss
payments to qualify for modification, told them to make reduced
2
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
monthly payments, assured them they would be granted a
modification if they complied with the bank’s instructions, and
required them to submit duplicative documentation after
assuring them that the necessary documents had been received];
Alvarez v. BAC Home Loans Servicing, L.P. (2014) 228
Cal.App.4th 941, 944–945, 948–949 (Alvarez) [borrowers alleged
servicers agreed to consider their modification applications,
relied on incorrect information and mishandled submitted
documents, prevented the applications from being processed in
a timely manner, and deterred borrowers from seeking other
remedies]; see also Jolley v. Chase Home Finance, LLC (2013)
213 Cal.App.4th 872, 881 (Jolley) [borrower testified that Chase
reassured him on many occasions that there was a high
likelihood it would be able to modify the loan, which he relied on
in borrowing heavily to finish the project].)
Instead, Sheen alleged that because Wells Fargo failed to
respond to his applications, subsequent communication
concerning the delinquency on his accounts led him to believe
that his loans had been modified. (Maj. opn., ante, at pp. 4–6.)
Sheen also alleged that Wells Fargo told his wife “there would
be no more foreclosure sale” of the home. While these
allegations may support a claim for negligent misrepresentation
(maj. opn., ante, at p. 48), failure to respond to an application
falls short of the type of affirmative conduct and ongoing
interaction with lenders or servicers regarding modification that
lead borrowers to believe they just need to keep working with
servicers to secure modification and avoid foreclosure.
Recognizing a duty of care may well be justified where a
lender or servicer makes assurances that an application is being
considered or advises an applicant on a certain course of action,
and then proceeds to mishandle documents, misstate the
3
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
application’s status, require an applicant to submit duplicate or
nonexistent documents, or otherwise string the applicant along
and cause the applicant to forgo alternative remedies. (See
Rossetta, supra, 18 Cal.App.5th at p. 645 (conc. opn. of Mauro,
Acting P. J.) [emphasizing that the duty of care arose not from
the “lender’s mere receipt or review of [the] borrower’s loan
modification application” but from the allegations concerning
CitiMortgage’s conduct]; Jolley, supra, 213 Cal.App.4th at
p. 898 [“where specific representations were made by a Chase
representative as to the likelihood of a loan modification, a cause
of action for negligence has been stated that cannot be properly
resolved based on lack of duty alone”].) But such allegations are
not before us in this case. While disapproving Weimer, Rossetta,
Daniels, and Alvarez “to the extent they are inconsistent with”
today’s opinion (maj. opn., ante, at p. 55, fn. 12), the court does
not address whether a lender’s or servicer’s affirmative conduct
may give rise to a duty to process the application with due care.
Today’s opinion also leaves for another day the
applicability of other causes of action to servicer misconduct and
the scope of related doctrines. The court highlights that
negligent misrepresentation and promissory estoppel “may offer
recourse to borrowers who suffer injury due to missteps by a
lender (or loan servicer) in connection with the handling of a
mortgage modification application.” (Maj. opn., ante, at p. 47.)
While Sheen did not seek leave to amend his complaint to state
either of these causes of action, today’s opinion makes clear that
“nothing we say . . . should be understood to categorically
foreclose those claims in the mortgage modification context.”
(Id. at p. 3; see id. at p. 48 [“we perceive no reason why such
claims would be generally unavailable to borrowers”].) Nor does
today’s opinion consider whether the doctrine of promissory
4
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
estoppel or negligent misrepresentation may require
clarification or reform to respond effectively in this context. (See
Rest.3d Torts, Liability for Economic Harm (June 2020) § 3,
com. d., p. 4 (Restatement) [“if denying relief to the plaintiff
seems to produce an injustice,” it may be necessary “to
reconsider the application” of doctrines “responsible for the
result”]; maj. opn., ante, at p. 32 [reciting the Restatement’s
view].)
Today’s opinion also restates the “ ‘general rule’ ” that “ ‘a
lender owes no duty of care to a borrower when the lender’s
involvement in the loan transaction does not exceed its
customary role in arms-length lending and servicing.’ ” (Maj.
opn., ante, at pp. 21–22; see Nymark v. Heart Fed. Savings &
Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.) The court states
that “without more,” a “lender’s handling of a modification
application” “does not ‘exceed the scope of [an institution’s]
conventional role as a mere lender of money.’ ” (Maj. opn., ante,
at p. 24, italics added.) But the court expresses no view on what
constitutes “ ‘extraordinary advice . . . beyond that customary in
arms-length lending and loan services transactions’ ” (id. at
p. 21) such that it may give rise to a duty of care. (See, e.g.,
Rossetta, supra, 18 Cal.App.5th at p. 646 (conc. opn. of Mauro,
Acting P. J.) [“agree[ing] with the majority that CitiMortgage
engaged in acts and omissions that went beyond the scope of
conventional lending”]; Weimer, supra, 47 Cal.App.5th at p. 362
[concluding that the type of lender activity alleged places it
“beyond the mere consideration of [the borrower’s] loan
modification applications”]; see also Jolley, supra, 213
Cal.App.4th at p. 902 [“ ‘Nymark . . . do[es] not purport to state
a legal principle that a lender can never be held liable for
negligence in its handling of a loan transaction within its
5
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
conventional role as a lender of money.’ ”]; Nymark, at pp. 1098–
1099.)
The court today also restates the so-called economic loss
rule. In a future case, we may need to grapple with the
boundaries of the rule and its application to contexts where
parties cannot “reliably be counted on to protect their interests.”
(Farnsworth, The Economic Loss Rule (2016) 50 Val.U. L.Rev.
545, 546 (Farnsworth); see Rest., § 3, com. c., p. 3 [“the purpose
of this Section is to protect the bargain the parties made”].)
Private ordering through contracts as an alternative to
negligence liability through tort is generally more compelling
with a “ ‘more sophisticated class of plaintiffs . . . e.g., business
lenders and investors,’ ” as opposed to “the average home buyer
[who] is more akin to ‘the “presumptively powerless
consumer” ’ ” with little to no means to alter the agreement in
the first place. (Beacon Residential Community Assn. v.
Skidmore, Owings & Merrill LLP (2014) 59 Cal.4th 568, 579,
584, quoting Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370,
398, 403.) But today’s opinion does not state a broad rule
against recovery for pure economic loss in tort in the context of
a contractual relationship (maj. opn., ante, at p. 15), and courts
should not invoke the rule without considering the basis for its
application. (See Farnsworth, supra, 50 Val.U. L.Rev. at p. 550
[“Stating a broad rule against recovery for pure economic loss in
tort has [a] worrisome consequence . . . [:] It creates a
presumption against liability in cases that don’t fit into one of
the well-defined exceptions. This can cause legitimate claims to
be snuffed out inadvertently by the sweep of the rule in the
background. Trouble predictably results when a rule is recited
and extended without attention to its rationale.”]; see also, e.g.,
Tiara Condo. Ass’n. v. Marsh & McLennan Co. (Fla. 2013) 110
6
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
So.3d 399, 407 [“limit[ing] the application of the economic loss
rule to cases involving products liability” in light of “the
unprincipled extension of the rule” to new domains].)
Moreover, in restating these general rules, today’s opinion
takes care to consider the policy concerns at play. (Maj. opn.,
ante, at pp. 46–53.) After recognizing that the factors set out in
Biakanja v. Irving (1958) 49 Cal.2d 647, 650, do not provide the
proper framework for considering the policy concerns present in
this case (maj. opn., ante, at p. 46), the court proceeds to consider
the relevant concerns, as we must in any case claiming a duty of
care in tort. (See, e.g., Southern California Gas Leak Cases
(2019) 7 Cal.5th 391, 399 [“the inquiry hinges . . . on a
comprehensive look at ‘ “the sum total” ’ of the policy
considerations at play in the context before us”]; Erlich v.
Menezes (1999) 21 Cal.4th 543, 552 [“ ‘ “Whether a defendant
owes a duty of care is a question of law. Its existence depends
upon the foreseeability of the risk and a weighing of policy
considerations for and against imposition of liability.” ’ ”]; see
also Flagstaff Housing v. Design Alliance (Ariz. 2010) 223 P.3d
664, 669 [“The economic loss doctrine may vary in its application
depending on context-specific policy considerations.”].)
II.
Importantly, today’s opinion recognizes that while
“lawmakers at both the state and federal levels have been active
in regulating the mortgage loan modification process” (maj.
opn., ante, at p. 49), borrowers continue to face serious
difficulties with servicers and the loan modification process (id.
at p. 35).
When borrowers first seek a loan, they are generally able
to choose among various lenders. But, practically speaking,
7
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
they have little ability to negotiate terms. As the Attorney
General appearing as amicus curiae states, “[m]ost homeowners
do not have the technical knowledge of mortgage servicing that
would be necessary to request meaningful, consumer-protective
contract terms.” And “[e]ven if homeowners are knowledgeable
and concerned about management of their loan upon default,
they cannot know or choose whether their loan will be
securitized, who will be the servicer, and what contractual
provisions will govern the servicing of their loan.” (Levitin &
Twomey, Mortgage Servicing (2011) 28 Yale J. on Reg. 1, 83
(Levitin).)
In this context, “ ‘borrowers are captive, with no choice of
servicer, little information, and virtually no bargaining power.
. . . Borrowers cannot pick their servicers or fire them for poor
performance. The power to hire and fire is an important
constraint on opportunism and shoddy work in most business
relationships. But in the absence of this constraint, servicers
may actually have positive incentives to misinform and under-
inform borrowers. Providing limited and low-quality
information not only allows servicers to save money on customer
service, but increases the chances they will be able to collect late
fees and other penalties from confused borrowers.’ ” (Alvarez,
supra, 228 Cal.App.4th at p. 949.)
As Sheen describes, “[d]uring the modification process, the
homeowner has to rely entirely on information from the servicer
both about whether the loan is likely to be modified, and on the
status of the modification, to make life-changing decisions such
as whether to file for bankruptcy, sell the home, or give up the
home through foreclosure or deed in lieu of foreclosure.”
Alternatives to foreclosure may include obtaining alternate
funding, refinancing, or receiving modification of other loans
8
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
under other programs or with other servicers. Some
alternatives may also present less damage to a borrower’s credit
report than a foreclosure. But these alternatives can become
more difficult or impossible to obtain if a servicer mishandles
the modification application process. Borrowers have reported
accruing “additional arrears, penalties, fees, and harm to [their]
credit,” potentially affecting their eligibility for alternatives
they otherwise would have qualified for. (Weimer, supra, 47
Cal.App.5th at p. 361.) And at some point, it simply becomes too
late to pursue alternatives. (See Lueras v. BAC Home Loans
Servicing, LP (2013) 221 Cal.App.4th 49, 59 [borrower alleged
Bank of America continued to make representations regarding
modification within just two weeks of the foreclosure sale].)
It is questionable whether the relationship between
lenders or investors and servicers is sufficient to ensure that
servicers exercise due care and avoid “unnecessary home
foreclosures, to the detriment of homeowners and mortgage
investors alike.” (Levitin, supra, 28 Yale J. on Reg. at p. 4; see
id. at p. 1 [describing servicers’ cost and income structure as
“skewed toward foreclosure” and the dysfunctional nature of the
loss mitigation component of servicing]; Thompson, Foreclosing
Modifications: How Servicer Incentives Discourage Loan
Modifications (2011) 86 Wash. L.Rev. 755, 761 [“the incentive
structure for the servicers . . . generally favors foreclosures over
modifications”]; Note, Mortgage Loan Modification: Barriers to
Use (2009) 28 Rev. Banking & Fin. L. 426, 429–430 [describing
servicers’ and investors’ incentives as not always aligned,
leading to a suboptimal number of loan modifications even
where there is an agreement requiring a servicer to take actions
to maximize the net present value of a securitized portfolio].)
Moreover, the loss to the lender or investor fails to reflect the
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SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
magnitude of the potential harm foreclosure can have on the
individual and broader community. (See, e.g., Sen. Rules Com.,
Off. of Sen. Floor Analyses, Conf. Rep. on Sen. Bill No. 900
(2011–2012 Reg. Sess.) as amended June 27, 2012, p. 14
[“Foreclosures blight neighborhoods, put financial pressure on
families and drive down local real estate values, and consumers,
made more cautious by a crippled housing market, spend less
freely, curbing the economy’s growth.”].) Private ordering does
not fully account for these externalities.
HBOR provides a number of procedural protections in the
context of first-lien mortgage servicing. It prevents “dual-
tracking” of foreclosure and loan modification, and requires
servicers to assign applicants a single point of contact who must
communicate the process to apply for loan modification, notify
the borrower of missing documents, adequately inform the
borrower of the status of her or his application, and ensure the
borrower is considered for all alternatives to foreclosure, if any,
offered by the servicer. (Civ. Code, §§ 2923.6, 2923.7, 2924.18.)
A servicer must also identify in writing reasons for a denial and
give an applicant a chance to appeal before proceeding with a
foreclosure. (Id., § 2923.6.) The Legislature may wish to
consider whether any of these standards should be extended to
servicers of second- or third-lien mortgages. (See Sen. Rules
Com., Off. of Sen. Floor Analyses, Conf. Rep. on Sen. Bill 900
(2011–2012 Reg. Sess.) as amended April 26, 2012, p. 26; U.S.
Dept. of Treas., Making Home Affordable: Program Update
(Apr. 28, 2009) p. 2, available at “Second Lien Program Fact
Sheet” [as of Mar. 7, 2022] [“Even if a first lien is
modified to create an affordable payment, second liens can
contribute to much higher foreclosure rates if not addressed.”];
10
SHEEN v. WELLS FARGO, N.A.
Liu, J., concurring
the Internet citation in this opinion is archived by year, docket
number, and case name at .)
In sum, numerous cases demonstrate “the difficulties
borrowers face in the loan modification context.” (Maj. opn.,
ante, at p. 35.) These difficulties have particular salience as
pandemic relief programs wane and foreclosure rates rise. In
some instances, a judicial remedy may be available. But given
the limitation on common law negligence claims explained in
today’s opinion, whether the mortgage market and affected
communities would benefit from additional protections for
borrowers against manipulative practices and “bargaining or
information asymmetries” (ibid.) continues to be ripe for
legislative consideration.
LIU, J.
11
SHEEN v. WELLS FARGO BANK, N.A.
S258019
Concurring Opinion by Justice Jenkins
I write separately to address my participation in Alvarez
v. BAC Home Loans Servicing, L.P. (2014) 228 Cal.App.4th 941
(Alvarez), a Court of Appeal opinion I joined, but which the court
now, following a robust discussion of the economic loss rule and
the scope of Biakanja v. Irving (1958) 49 Cal.2d 647, partially
disapproves.
In Alvarez, plaintiff borrowers alleged their loan servicers
owed them “a duty to exercise reasonable care in the review of
their loan modification applications once they had agreed to
consider them.” (Alvarez, supra, 228 Cal.App.4th at p. 944.) The
servicers, after they “undertook to review” loan modifications
available under the federal Home Affordable Modification
Program (HAMP), allegedly breached a duty of care by “(1)
failing to review plaintiffs’ applications in a timely manner, (2)
foreclosing on plaintiffs’ properties while they were under
consideration for a HAMP modification and (3) mishandling
plaintiffs’ applications by relying on incorrect information.”
(Alvarez, at p. 945.) “Much of th[is]” was “conduct now regulated
by the HBOR” — that is, the then recently enacted California
Homeowner Bill of Rights. (Alvarez, at p. 951; see maj. opn.,
ante, at pp. 11–12.)
Alvarez recognized a duty of care. In doing so, it first
restated the general rule of Nymark v. Heart Fed. Savings &
Loan Assn. (1991) 231 Cal.App.3d 1089, that “a financial
institution owes no duty of care to a borrower when the
1
SHEEN v. WELLS FARGO BANK, N.A.
Jenkins, J., concurring
institution’s involvement in the loan transaction does not exceed
the scope of its conventional role as a mere lender of money.”
(Alvarez, supra, 228 Cal.App.4th at p. 945.) After citing Nymark
and Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th
872, Alvarez noted an exception to the general no-duty rule if
the factors set forth in Biakanja pointed towards a duty.
(Alvarez, at p. 945; see Nymark, at p. 1098 [California’s “test for
determining whether a financial institution owes a duty of care
to a borrower-client ‘ “involves the balancing of [the Biakanja]
factors” ’ ”]; see maj. opn., ante, at p. 22.) Alvarez concluded the
Biakanja factors, given the plaintiffs’ allegations, favored a
duty. (Id. at p. 948–951.)
Alvarez discussed the Biakanja factors at length but did
not scrutinize on what basis that multifactor test should apply,
if at all, in determining a lender’s or servicer’s duties towards
borrowers. Critically, Alvarez did not have occasion to address
the contractual economic loss rule or Biakanja’s relationship to
that rule. In light of the parties’ arguments here that crystalize
the significance of these important preliminary questions, I
agree with the resolution the court reaches today.
Furthermore, the duty Kwang K. Sheen here seeks to
impose on Wells Fargo Bank, N.A. — to reasonably “process,
review, and respond” to loan modification applications — is not
premised on a lender or servicer first agreeing to do those things,
which was part of the analysis in Alvarez. (Alvarez, supra, 228
Cal.App.4th at p. 948 [“because defendants allegedly agreed to
consider modification of the plaintiffs’ loans, the Biakanja
factors clearly weigh in favor of a duty”].) The court, today, does
not address what liability might ensue, whether for negligence
or some other theory such as negligent misrepresentation or
promissory estoppel, if a lender or servicer more than merely
2
SHEEN v. WELLS FARGO BANK, N.A.
Jenkins, J., concurring
agrees to consider a loan modification. (Maj. opn., ante, at pp.
16–17, fn. 4, 47–48.)
With these observations, I concur in the well-reasoned
majority opinion.
JENKINS, J.
3
See next page for addresses and telephone numbers for counsel who
argued in Supreme Court.
Name of Opinion Sheen v. Wells Fargo Bank, N.A.
__________________________________________________________
Procedural Posture (see XX below)
Original Appeal
Original Proceeding
Review Granted (published) XX 38 Cal.App.5th 346
Review Granted (unpublished)
Rehearing Granted
__________________________________________________________
Opinion No. S258019
Date Filed: March 7, 2022
__________________________________________________________
Court: Superior
County: Los Angeles
Judge: Robert Leslie Hess
__________________________________________________________
Counsel:
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 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 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; Munger, Tolles &
Olson, David H. Fry, Benjamin J. Horwich and Rachel G. Miller-
Ziegler for Defendant and Respondent.
Fred J. Hiestand 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; Kirby &
McGuinn, Martin T. McGuinn and Michael R. Pfeifer for California
Mortgage Association, California Mortgage Bankers Association,
Mortgage Bankers Association and United Trustees Association as
Amici Curiae on behalf of Defendant and Respondent.
Counsel who argued in Supreme Court (not intended for
publication with opinion):
Leslie A. Brueckner
Public Justice, P.C.
475 14th Street, Suite 610
Oakland, CA 94612
(510) 622-8205
Benjamin J. Horwich
Munger, Tolles & Olson LLP
560 Mission Street, 27th Floor
San Francisco, CA 94105
(415) 512-4066