The Supreme Court of California handed down a big win to mortgage lenders and servicers on March 7, 2022, when it issued a decision in Sheen v. Wells Fargo Bank, National Association et al., No. S258019, 2022 WL 664722, at *1 (Cal. Supreme Ct. March 7, 2022), ruling that lenders owe no tort duty sounding in general negligence principals to borrowers when reviewing loan modification requests. Going forward, this decision will impact litigation of negligence claims against mortgage lenders and servicers in California because it debunks the often-asserted claim for negligence based on allegations that the loan servicer “negligently” processed a loan modification application.
In the Sheen case, the borrower sued a lender alleging various claims, including negligence, on the premise that the lender did not exercise sufficient care in the processing of the borrower’s loan modification application. The Supreme Court found that “[n]either plaintiff’s assertion of a “special relationship” between himself and [the lender] nor his invocation of the factors articulated in Biakanja v. Irving (1958) 49 Cal.2d 647, 650 provides a compelling basis to recognize such a duty.” Sheen, at *2. The Court found that the plaintiff’s claims arising from the mortgage contract at issue fall within the ambit of the economic loss doctrine, which bars recovery in negligence for pure economic losses when such claims would disrupt the parties’ private ordering, render contracts less reliable as a means of organizing commercial relationships, and stifle the development of contract law. Id.
While mortgage lenders and servicers can expect to escape negligence claims brought under similar fact patterns going forward, it’s worthwhile noting that the Court specifically declined to rule on negligent misrepresentation and promissory estoppel claims. Plaintiffs’ attorneys are expected to continue to pursue these negligence-adjacent claims when asserting that lenders and servicers failed to carefully and completely process loan modification applications.