In states using deeds of trust, a trustee is a third party who holds legal title to a property until the homebuyer or commercial developer pays off a loan associated with the parcel—or until the borrower defaults.
When a state’s law allows for deeds of trust as instruments to hold legal title to a property:
- A lender financing the sale or development can easily exercise the right to foreclose.
- Foreclosure occurs not through the court, but under the power of sale clause in the deed of trust. (This allowance for non-judicial foreclosure differentiates deeds of trusts from mortgages and some land contracts.)
The main thrust is to lower risk for lenders. Perhaps it’s no wonder that deed of trust states rarely go to bat for a borrower fighting foreclosure.
In this analysis, we’ll look at the trustee’s narrow liability under the deed of trust (not to be confused with a living trust, in which a trustee must comport with exacting fiduciary duties.)
We’ll also review a recent case in point, involving a commercial borrower in California.
Finally, we’ll look at the exception that proves the rule: North Carolina.
Scope of Duties Under a Deed of Trust
Following state law, a trustee might be a bank, a title company, or an individual. In theory, the trustee is an impartial third party. Following the customary practice in most states, though, the lender selects the trustee, so it’s typically a lawyer representing the lender.
Where that custom prevails, the trustee under a deed of trust is simply an agent, holding title on behalf of the lending company.
Under a deed of trust, courts have held, the trustee has one job.
- If the borrower satisfies the loan: reconvey the deed of trust to the borrower.
- If the borrower defaults: foreclose.
Foreclosure can, of course, be met with resistance from the borrower. Yet the trustee cannot be liable for wrongful foreclosure based on supposed duties that no state law and no contract has created.
Recent Case Law Illustrates The Limits of the Trustee’s Obligations
Recent case law in California—specifically Citrus El Dorado, LLC v. Chicago Title Co.—illustrates just how narrow the trustee’s duties are under a deed of trust.
Now, who is Citrus El Dorado, and why did they sue the Chicago Title Company?
Citrus El Dorado, LLC was the real estate developer that bought a parcel of open land in California. To cover construction costs, First Heritage Bank lent Citrus more than $13 million, accessible in partial draws as construction progressed.
The money was secured by a deed of trust on the land.
Heritage began funding the project. Construction started as planned. Alas, First Heritage was an unsuccessful bank. It ended up in a Federal Deposit Insurance Corporation (FDIC) receivership. The FDIC funded several Citrus construction draws and reassigned the loan to Stearns Bank.
Instead of funding the draws as expected, Stearns Bank in 2009 issued a Notice of Default against Citrus El Dorado, demanding a payoff, and stating that the developer had no right to cure the default. The Chicago Title Company, as the new trustee, recorded a Substitution of Trustee and named a new lender and beneficiary of the trust deed: FNBN Rescon I, LLC.
In 2014, the Chicago Title Company recorded a new default notice, followed by a Notice of Sale. Nonjudicial foreclosure took place in March 2015. The Chicago Title Company then recorded the Trustee’s Deed and conveyed the property to Rescon.
Wrongful Foreclosure? Tell It to the Judge.
Citrus El Dorado went to court, to sue Chicago Title for wrongful foreclosure.
- The trustee, Chicago Title, failed to verify Rescon as a valid loan assignee.
- Chicago Title failed to verify the authority of the person who signed the Substitution of Trustee form—under which Chicago Title became the trustee.
The court decided against the developer on both counts. It held that the trustee for a deed of trust has no obligation to verify the validity of a loan assignment or to check that an authorized party signed for a Substitution of Trustee before foreclosing.
Citrus El Dorado decided to appeal—and lost again.
Cases Holding the Trustee Liable are Few and Far Between
California case law holds trustees and loan beneficiaries responsible for wrongful foreclosure if they use a deed of trust to effect an “illegal, fraudulent, or willfully oppressive” sale. Yet cases that hold the trustee liable are few and far between.
The California Courts’ reluctance to hold the trustee responsible in Citrus El Dorado is based on these stated reasons:
- The trustee in a deed of trust scenario is not a “true trustee” with fiduciary duties.
- The trustee’s role under a deed of trust is passive.
- The trustee for a deed of trust simply performs an agency role for the parties.
Yet the Citrus El Dorado case did indicate certain responsibilities that the trustee should be mindful not to breach:
- The deed of trust should recite its compliance with all state statutory requirements, including notice, for the process of foreclosure.
- If a trustee by its own actions effectively assumes duties (such as communication with the borrower), the trustee should not drop those duties.
Winds of Change? In North Carolina, Trustees May Not Represent Lenders
In 2017, North Carolina passed a law that makes life just a little harder for lenders. The lender’s attorney may not serve as foreclosure trustee. The trustee must be neutral and diligent when carrying out a foreclosure. That idea is supported where the foreclosure trustee and the lender’s attorney are two different parties.
“An attorney who serves as trustee or substitute trustee,” the new law directs, shall represent neither the lender nor the borrower.
In short, the duties of a trustee under a deed of trust are a study in minimalism—except when a state bar ethics committee shifts the playing field, as North Carolina’s did.
Time will tell if North Carolina is a trendsetter in foreclosure law.