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Over the past decade, California courts (both State and Federal) have
struggled with the question of whether, and to what extent, a lender or loan
servicer could be liable for negligence handling a borrower's loan. Nowhere
has this struggle been more aggressive than in connection with loan
modifications. e California Supreme Court, in a hotly contested case
(for which Wright, Finlay & Zak was pleased to submit an amicus brief on
behalf of several industry groups) has just resolved that struggle in favor of
the lenders and servicers.
In the case of Sheen v. Wells Fargo
Bank, N.A., (2019) 38 Cal. App. 5th 346, a
borrower complained that its original lender
had negligently handled his application for
modification of his two junior lien loans back
in 2010. In 2016, the borrower sued the lender;
but the trial court granted the lender's demurrer
without leave to amend. On the borrower's
appeal from that judgment, the appellate court
affirmed the judgment, definitively coming
down on the side of the rule that a lender,
acting in the normal course and scope of its
business, should not be held liable under a
negligence duty. Specifically, the court relied
on Southern California Gas Leak Cases, (2019)
7 Cal. 5th 391 ("Gas Leak Cases"), noting
that: "One fundamental consideration was
that economic losses flowing from 'a financial
transaction gone awry' are 'primarily the
domain of contract and warranty law or the law
of fraud, rather than of negligence."'… Here
we have a financial transaction gone awry and
nothing more: Sheen suffered neither personal
injury nor property damage." Sheen, supra, at
353-54. at decision placed a dire risk to the
potential claims of consumers—and not just as
to disputes over loan modifications.
Unsurprisingly, the plaintiffs' bar, who
handle such cases, were eager to eliminate such
Feature By: Jonathan D. Fink
DUTY FREE
With Sheen v. Wells Fargo Bank, the California Supreme Court limits borrower
negligence claims.
