Elizabeth Sperling, Daniel Dubin and Daniel Seabolt of Alston & Bird. Courtesy photos.
On March 7, the California Supreme Court, in Sheen v. Wells Fargo Bank, limited the tort liability of lenders and servicers. The court held that lenders and servicers do not owe borrowers a duty of care to “process, review and respond carefully and completely to” a borrower’s loan modification application so as to avoid causing borrowers pure monetary loss through a lack of care in handling the application. This opinion provides a collective sigh of relief to those in the corner of lenders and servicers, but they should continue to tread lightly in the loss mitigation process because it is unlikely that this case will mark the end of similar, but more artfully crafted, complaints if certain additional facts are present.
The facts of Sheen are fairly straightforward. The borrower, Kwang Sheen, purchased a home in 1998 in Los Angeles using a first-lien mortgage loan secured by the property. Seven years later, he obtained two junior loans from Wells Fargo, both secured by the same property. After Sheen missed payments on the second and third loans, Wells Fargo recorded notices of default and scheduled a foreclosure sale of the property. In an attempt to stave off foreclosure, Sheen submitted applications to modify the junior loans and, shortly thereafter, Wells Fargo canceled the foreclosure sale.
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