Top Ten Real Property Cases of 2022

• Publication year: 2023
• Citation: Vol. 41 No. 1
• Author: Written by Star Lightner

TOP TEN REAL PROPERTY CASES OF 2022

Written by Star Lightner^*

Each year, it is a real challenge to select the top 10 real estate cases for our annual overview. As was seen last year, however, the impact of COVID-19 on courts again resulted in fewer real estate cases overall than in past years, resulting in a smaller number that might be deemed truly significant. Thus, while narrowing the list down to 10 cases was still difficult, we have fewer "related cases" and "honorable mentions" this year.

With a couple of exceptions, the cases this year continued to represent a broad offering of real estate issues, as opposed to highlighting a concentration in any given area. Although housing, liquidated damages, and unenforceable penalties were big topics this year, this article includes cases involving easements, deeds of trust, inverse condemnation, tort liability of a lender, and the recreational immunity exemption from landowner's liability.

Two California Supreme Court cases addressed the tort liability of a lender in the context of a loan modification, and the recreational immunity exemption from landowner's liability. The state courts of appeal also provided many important decisions, including:

• a CEQA case addressing an agency's discretion in the face of "legal factors";
• a right of first refusal case where the property in question was part of a larger parcel; and
• a case determining the existence of a conservation easement.

Also included is an "honorable mention" case in which the Ninth Circuit addressed zoning in the context of Religious Land Use and Institutionalized Persons Act (RLUIPA).

While selecting cases for this top ten list is inevitably subjective, the cases addressed below, including the "related cases" and "honorable mention," meet our standard for inclusion: widespread significance for the practice of real property law in California. Accordingly, we offer the following as the most significant real estate cases of 2022.¹

1. SHEEN V. WELLS FARGO BANK²

The California Supreme Court has finally ended a very long saga concerning the duty of a lender to a borrower in the context of a loan modification and the ability of a borrower to bring tort claims against the lender, thus resolving a years-long conflict among the appellate circuits.

Kwang Sheen had three mortgages with Wells Fargo Bank but had financial troubles in 2008 and sought to modify all three mortgages in 2010 after Wells Fargo recorded a notice of default on his second loan. Although Sheen had successfully modified his first loan, Wells Fargo sold Sheen's defaulted second loan to Mirabella

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Investment Groups in November 2013. Mirabella then recorded a notice of default on the second loan in April 2014. Sheen made several modification requests to Mirabella, filed for bankruptcy, and continued to seek a loan modification. Although Mirabella told Sheen's legal aid representative that the loan was no longer in "active foreclosure" and rejected Sheen's loan modification applications, his home was sold at auction in October 2014. The bankruptcy court dismissed Sheen's case on October 24, 2014. Five days later, on October 29, 2014, Mirabella purchased the home at auction and sold it to Equity Investment Group, Inc.

Sheen sued Wells Fargo and others for negligence, intentional infliction of emotional distress, and violations of the unfair competition law. Sheen did not allege fraud or breach of contract. As to the negligence claim, Sheen alleged that Wells Fargo "owed him a duty of care to process, review, and respond carefully and completely to loan modification applications," and "to refrain from engaging in unfair and offensive business practices that confused Sheen and prevented him from pursuing all options to avoid foreclosure."³ The trial court sustained Wells Fargo's demurrer and Sheen appealed. The court of appeal framed the question thusly: "The issue of whether a tort duty exists for mortgage modification has divided California courts for years. The California Supreme Court has yet to resolve this division. We must take sides."⁴ Influenced by the Restatement of Torts and the fact that 23 other state jurisdictions have found no duty of care in the context of mortgage modifications, the court of appeal affirmed, holding that a lender does not owe a borrower a common law duty to offer, consider, or approve a loan modification.⁵

On Sheen's appeal to the California Supreme Court, the court promptly announced that that there is no "tort duty of care sounding in general negligence principles to ... 'process, review, and respond carefully and completely to [a borrower's] loan modification application,' such that upon a breach of that duty the lender may be liable in tort for the borrower's economic losses—i.e., pecuniary losses unaccompanied by property damage or personal injury."⁶ This holding is based on the "economic loss rule," which bars recovery in tort for economic losses by one party to a contract against the other party, and precludes the conversion of a mere breach of contract into a tort claim absent other factors.⁷ The court rejected a "special relationship" between a borrower and a mortgage lender that would give rise to such a duty of care, or provide grounds to assert a general tort duty of care under the multi-factor test of Biakanja v. Irving.⁸

When parties are in contractual privity, for example, a mortgage borrower and the mortgage lender, their duties and responsibilities are governed by the terms of the contract. Absent a contractual provision requiring the lender to accept, consider, and act on the request for a loan modification, the economic loss rule precluded the creation of a tort duty of care that the parties had not agreed upon in their contractual negotiations.⁹ Thus, the court rejected Sheen's argument that a "special relationship" exists between a lender and a borrower giving rise to a heightened duty of care specifically in the context of a consumer's request for a loan modification.¹⁰ The court cited Nymark v. Heart Federal Sav. & Loan Assn.¹¹ in holding that a financial institution owes no duty of care to a borrower when the institution's involvement does not exceed the scope of its conventional role as a mere lender of money. It disapproved cases that found a duty of care specifically in the loan modification context under Biakanja on the theory that Nymark is limited to the loan origination context and that the loan modification process falls outside the conventional role of a lender.¹²

The court also rejected the argument that the Biakanja factors for imposing tort duties should govern, since the multi-factor test articulated in Biakanja only applies where a third party not in contractual privity with the plaintiff is charged with a general tort duty of care; it does not apply "where the plaintiff and defendant are in contractual privity," and it "does not displace the contractual economic loss rule when that rule squarely applies."¹³ The court also observed that courts had never used Biakanja "to impose a tort duty on a contracting party to avoid negligently causing monetary harm to another party to that contract."¹⁴ Reiterating that a lender owes a borrower no tort duty in the context of a loan modification, the court affirmed the judgment.

Comment: Certain types of relationships, such as between an insurer and insured or an attorney and client, constitute the narrow and exceptional types of contractual relationships in which a tort duty may exist, but the court here found no particular characteristic of the mortgage modification process to justify an exception from the usual economic loss rule. It rejected arguments that a borrower is particularly reliant on the lender or that the servicing aspect of the borrower-lender relationship creates special duties, emphasizing that the existing contractual relationship between the parties creates no such obligations or duties on the part of the lender when a borrower seeks to alter that relationship. Nevertheless, the court spent the last part of its opinion discussing mortgage service industry reform and giving the Legislature, which it deemed the appropriate body to enact such reform, suggestions on ways to do so.

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While this case should dampen any expectation that further inroads on the economic loss rule will be allowed where the parties are in contractual privity, the court was careful to limit its holding to the claim of general negligence on the part of the lender, observing that Sheen was not pursuing a claim of promissory estoppel or negligent misrepresentation, neither of which would be barred by the economic loss rule. In addition, several other legal grounds for a tort claim by a borrower arising out of the loan modification process might still exist in a given case, including the California Homeowners Bill of Rights, the California Foreclosure Prevention Act, or the Federal Real Estate Settlement Procedures Act or Home Affordable Modification Program, some of which apply only to first mortgage loans or were otherwise deemed inapplicable here.

2. CANYON VINEYARD ESTATES I, LLC V. DEJORIA¹⁵

Does verbiage in a grant deed expressing the intent that land be preserved as open space in perpetuity create a conservation easement in the absence of the term "easement"? That is what the court in this case held, despite subsequent foreclosure on the deed of trust by the lender.

In 1990, John Paul DeJoria purchased an area called Tuna Canyon, which was comprised of 417 acres of undeveloped land in the Santa Monica Mountains along the Pacific coastline. Instead of developing it, he dedicated the land to the Mountains Restoration Trust ("MRT"). DeJorja and MRT executed a purchase agreement requiring Tuna Canyon to be preserved as "[o]pen [s]pace in [p]erpetuity" where "no development of any kind shall take place...." DeJorja then "sold" a partial interest in the property to MRT for $1,060,000 and "donated" the remainder to MRT, recouping a $11,400,000 tax deduction...