California real estate and deed of trust disputes | courtroom war stories and lessons learned

Lenders Have No Duty to “Process, Review, and Respond Carefully and Completely” to Loan Modification Applications

One of the unresolved issues over the past several years in the realm of lender liability law is whether lenders owe tort duties to borrowers in connection with loan modification applications.  Until now, case law has been all over the map on that issue.

The California Supreme Court has spoken on the issue in a recently published opinion — Sheen v. Wells Fargo Bank, N.A.

Facts: loan modification application gets no response from lender, followed by foreclosure

Plaintiff Kwang Sheen purchased a home, which he later used as collateral for two loans obtained from Wells Fargo Bank, N.A.  The loans fell into default.

Sheen submitted applications to modify the loans, but Wells Fargo did not respond to those applications.  Instead, Wells Fargo sent letters to Sheen informing him of various actions it might take because of the loan defaults.  The letters did not specifically mention foreclosure.

Sheen alleged that because Wells Fargo did not provide him with a written determination regarding his eligibility for modification of the loans before sending him the letters, he believed the letters meant the loans had been modified and his house could not be sold at a foreclosure auction.

Wells Fargo sold the loans, and the new lender foreclosed.

Trial court and Court of Appeal: no duty, no dice

Sheen sued Wells Fargo, alleging negligence.  Sheen claimed that Wells Fargo owed him a tort duty of care to process, review, and respond carefully and completely to the loan modification applications he submitted, and that Wells breached that duty.

Wells Fargo filed a demurrer to the complaint, arguing that it owed no such duty to Sheen as a matter of law.

The trial court sustained the demurrer and dismissed the action.

The Court of Appeal affirmed, but noted that the “issue of whether a tort duty exists for mortgage modifications has divided California courts for years.”

Supreme Court: lender has no duty to process, review, and respond to modification application

The Supreme Court agreed with the trial court and the Court of Appeal, holding that Wells Fargo owed no duty as alleged by Sheen.

The Court focused on the “economic loss rule,” under which there is no recovery in tort for negligently inflicted “purely economic losses,” meaning financial harm unaccompanied by physical or property damage.  A sub-set of that rule called the “contractual economic loss rule” bars negligence claims for pure economic losses in deference to a contract between the litigating parties.  The Court explained: “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.”

Applying that rule to Sheen’s case, the Court held that Sheen and Wells Fargo had a contract in the form of a deed of trust, which “specified the parties’ rights and obligations with respect to the mortgage loan and the collateral securing the loan.”  The deed of trust specified that the parties agreed Wells Fargo had the right to foreclose upon default.  There was nothing in the contract indicating that Wells Fargo agreed to “process, review, and respond carefully and completely” to any loan modification application by Sheen before foreclosing.

As such, imposing the tort duty that Sheen alleged “would dictate terms that are contrary to the parties’ allocation of rights and responsibilities” in their contract.  The Court held: “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.”


Under the California Supreme Court’s holding in Sheen, “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.”

The Court clarified that it was expressing no opinion regarding whether Sheen could have stated claims under theories of negligent misrepresentation of promissory estoppel, as Sheen had not asserted those theories in the trial court.