Sheen v. Wells Fargo Bank

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.)

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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

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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

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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

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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)).

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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

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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.

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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.

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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

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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

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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.

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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

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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

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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.)

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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

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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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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

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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.

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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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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

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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

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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

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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

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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

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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,

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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

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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

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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,

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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

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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,

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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

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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” <https://www.treasury.gov/press-center/press-releases/

Pages/tg108.aspx> [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.”];

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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 <http://www.courts.ca.gov/

38324.htm>.)

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

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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

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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