The California Supreme Court recently upheld the dismissal of a borrower’s negligence lawsuit relating to a mortgage agent’s handling of the borrower’s loan modification request.
In that decision, the Court held that: (1) under the law in other states, borrower negligence claims here were barred by the doctrine of economic loss; and (2) a loan servicing agent does not owe the borrower a tort-like common law duty of care to carefully and completely process, consider, and respond to the borrower’s loan modification request. .
A copy of the notice in Sheen c. Wells Fargo Bank is available on: Link to Reviews.
The plaintiff borrower (“Borrower”) obtained two loans from the same company (“Lender”) which were secured by his house. After the borrower defaulted on both loans, the lender registered notices of default in connection with the loans and scheduled a foreclosure sale of the collateral property for February 2010.
The borrower contacted the lender about the possibility of canceling the foreclosure sale so that the borrower could submit loan modification requests. The borrower submitted his applications in January 2010. Shortly after, the lender canceled the foreclosure sale.
In March 2010, the lender sent the borrower two identical letters, one for each loan, advising the borrower that the loans had been written off and accelerated and that the lender “would pursue any action [was] deemed necessary to protect [Lender’s] interest.” The borrower believed the letters meant that his loans had been changed to unsecured loans and therefore the property would never be sold at a foreclosure auction in connection with those loans. As the lender n had not yet responded to the borrower’s change requests, the borrower believed the letters were the lender’s response.
In November 2010, one of the loans was sold to another entity (“new owner”). Four years later, the new owner seized the property.
The borrower brought an action against the new owner, the lender and the entity that acted as service agent at the time of the foreclosure (“Service Agent”) alleging negligence, promissory estoppel, l intentional infliction of emotional distress and violation of unfair competition law.
Defendants objected and the trial court granted the lender’s objection to the negligence claim. The Court of Appeal affirmed in concluding that competent authorities “weigh decisively against the extension of tort obligations to mortgage modification negotiations”.
The Supreme Court granted the review. The specific question addressed by the Court was whether the lender owed the borrower an obligation “to deal with, consider and respond carefully and completely to [his] loan modification requests” in order to avoid causing the borrower pure monetary loss through negligent lack of care in processing their requests.
The borrower asserted that the obligation arose in law upon submission of a loan application to a lender, and that the failure of the lender to “carefully and completely process, consider and respond” to the application is liable to tort. The California Supreme Court noted that the existence of such a duty is a matter on which state appellate courts were divided.
“A duty of care may arise by statute” or from the application of the common law. I Aire Corp. vs. Gregory(1979) 24 Cal.3d 799, 803. The Supreme Court focused its review on the common law, in which the Borrower based its action for negligence.
The Supreme Court first found that the Borrower’s argument had failed in light of the doctrine of economic loss. The doctrine of economic loss prohibits recovery in tort for “pure economic loss” inflicted through negligence or financial damage unaccompanied by physical or property damage. Southern California gas leak case (2019) 7 Cal. 5th 391, 400. One circumstance in which the doctrine of economic loss operates to bar a claim is a negligence claim for pure economic loss out of respect for a contract between the parties. To see Robinson Helicopter Co., Inc. v. Dana Corp. (2004), 34 Cal.4th 979, 988.
Although not all tort claims for pecuniary loss between contracting parties are statute barred, such claims are statute barred when they arise from the parties’ underlying contracts. To see Robinson, 34 Cal.4th at p. 991. The Supreme Court concluded that the Borrower’s claim arose from the mortgage loan agreement and was not independent of it. Thus, the Court held that the Borrower’s negligence claim was excluded by the economic loss rule.
The Supreme Court noted that the deed of trust entered into by the parties specified their rights and obligations with respect to the loan and the security securing the loan. Thus, according to the Court, imposing the obligation alleged by the Borrower would not only create obligations which were not negotiated or agreed to by the parties, but would in fact be contrary to the allocation of rights and responsibilities in the deed. of trust. Given the deference to the agreement and consistent with contractual doctrines, the Court could not allow tort liability in these circumstances.
The Supreme Court also noted that its decision is consistent with decisions of other state supreme courts as well as the well-established principle of state law that “a financial institution owes no duty of care to a borrower.” when the institution’s involvement in the loan transaction does not go beyond its conventional role as a simple money lender. Nymark v. Heart Fed. savings and credit association (1991) 231 Cal.App.3d 1089.
The borrower argued that Nymark did not apply because the decision was “limited to the lending context”. However, the Court considered that the central issues relevant to Nymark’s the applicability is whether the processing of loan modification requests fell within the lender’s role as lender. The Court concluded yes. Thus, the Supreme Court found that such involvement, if not otherwise, had not “exceeded the scope of [an institution’s] conventional role of mere moneylender. Nymark, 231 Cal.App.3d at p. 1096.
The Court further noted that, although some cases involving insurance policies and professional services contracts allowed recovery of tort liability, these were distinguishable from mortgage loan and modification cases in that they did not share the unique characteristics associated with contexts exempt from the economic loss rule.
The Borrower further argued that Nymark and the economic loss rule did not apply.
The borrower first argued that since it was not claiming a breach of contract, the doctrine of economic loss did not apply. However, the Court concluded that the economic loss rule does not only apply where there is a viable claim for breach of contract.
The Borrower then argued that at the modification stage, borrowers are “captive” because they cannot choose who manages their loans or manages their modification requests. However, the Court found that the borrower was only captive insofar as he could not now ask another bank or an agent to rewrite the terms of his contract with the lender. Alvarez c. BAC Home Loans Servicing, LP (2014), 228 Cal.App.4th 941, 494.
The borrower also argued that “[i]f the court of first instance had considered the [Biakanja v. Irving (1958), 49 Cal.2d 647, 650] factors he would have seen point to a duty of care in the context of mortgage servicing. However, the Court found that the multifactorial approach to determining a duty of care set out in biakanja did not apply in the context of servicing mortgages, as this approach is only applicable where the plaintiff is an “unrelated third party” with the defendant. Biakanja v. Irving (1958), 49 Cal.2d 647, 650. The Supreme Court also held that biakanja did not supersede the contractual economic loss rule where it clearly applied.
Finally, the Court disagreed with the Borrower’s arguments that the “prevention of future damage policy” (biakanja, 49 Cal.2d at p. 650) and the “‘”total sum”‘” (Goonewardene v ADP, LLC (2019) 6 Cal.5th 817, 841) political considerations necessitated recognition of his claim.
The Court noted that there were viable claims the Borrower could make other than negligence. Further, the Court found that instead of seeking to fill a gap in the law, the Borrower sought to create a new and sweeping cause of action for negligence above all existing statutes. The Court concluded that the imposition of such an obligation was a political decision best left to the legislator.
Thus, the Supreme Court held that when a borrower requests a loan modification, the lender has no tort obligation under general principles of negligence to “carefully and completely treat, consider and respond” to the borrower’s request. borrower and affirmed the judgment of the lower court.