Sheen v. Wells Fargo Bank
This California Supreme Court appeal involves home owners who were victimized by a mortgage lender’s mishandling of a mortgage modification application that resulted the sudden loss of their home to an unexpected bank foreclosure.
The decision on appeal held that a mortgage lender and servicer (here, Wells Fargo Bank) does not owe a borrower a duty to handle a mortgage modification application with ordinary care. The plaintiff in this case, Kwang Sheen, who lost his small business and suffered severe financial difficulties as a result of the financial crisis of 2008-09, lost his home to foreclosure due to Wells’ egregious mishandling of his request for a loan modification, leaving Mr. Sheen and his wife homeless.
Mr. Sheen sued Wells and others in 2016. He alleged Wells owed him a duty of care to process, review, and respond carefully and completely to the loan modification applications he submitted to Wells. He further argued that Wells owed him a duty to refrain from engaging in unfair and offensive business practices that confused Mr. Sheen and prevented him from pursuing all options to avoid foreclosure.
His lawsuit alleges that Wells breached its duty by failing to respond to Mr. Sheen’s loan applications, by sending two letters suggesting loans had been modified and his house would not be sold, by phoning his wife to say there would be no foreclosure sale of his home, by confirming Mr. Sheen’s interpretation of these letters with a further letter that read like it was sent in connection with an unsecured debt rather than a secured mortgage loan, and by assigning a loan without notifying the assignor that Mr. Sheen’s modification application was pending. On the heels of all these acts, Wells foreclosed on Mr. Sheen’s and his wife’s home.
The trial court granted Wells’ motion to dismiss, and the court of appeals affirmed, holding that “a lender does not owe a borrower a tort duty of care during a loan modification negotiation.” In doing so, the court of appeals relied in part on case argued by Public Justice, Southern California Gas Co. v. Superior Court of Los Angeles County, which held that the “economic loss rule” bars negligence claims against a gas utility that caused a huge environmental catastrophe, resulting in ruinous economic losses by local businesses.
Even though SoCalGas should, by its own terms, have no application in a setting involving an underlying financial transaction where—as here—there is a “special relationship” between the parties, the court of appeals held that SoCalGas wipes out all economic-loss-based negligence claims in this context—leaving Mr. Sheen and his wife without any remedy at all against Wells. Public Justice took on this case to correct this serious error, limit the reach of the decision in SoCalGas, and protect consumers from unfair tactics such as those engaged in by Wells.