Foreclosure Trustee duties and obligations

26 Apr

Because of the significant increase in defaults and foreclosures, mortgage servicers need to understand the duties and liabilities the law imposes upon foreclosure trustees.

Litigation based upon trustee error can slow, stop or invalidate foreclosures and impair the servicer’s ability to dispose of properties following foreclosure. When borrowers refinance or pay off during foreclosure, trustees are often responsible for the payoffs and reconveyances. After foreclosure, the trustee is responsible for distribution of surplus funds – the funds in excess of the debt due under the foreclosed deed of trust. All these responsibilities are sources of claims against trustees.

Foreclosure litigation plaintiffs often name and seek to hold lenders and servicers responsible for trustee errors on the theory that the trustee is the agent of the lender and servicer. According to Miller & Starr’s “California Real Estate,” this claim is particularly easy to make when the lender or servicer uses an in-house trustee and especially when the trustee acquires the property by credit bid for the lender or servicer at its own foreclosure sale. This article examines a trustee’s liability for damages under California law for conduct of the foreclosure sale, payoffs, reconveyances and distribution of surplus funds. The scope of a trustee’s duties differs for each of these services, and a breach of one of these duties can subject the trustee, lender and servicer to substantial compensatory damages, punitive damages and even criminal sanctions. Foreclosure sales In the I.E. Associates v. Safeco case, the California Supreme Court limited the scope of the trustee’s duties in conducting foreclosure sales. The issue in that case was whether a trustee breached its duty to a trustor by failing to ascertain the current address of the trustor where the current address was different from the address of record. The trustee did not have actual knowledge of the current address, but through reasonable diligence could have discovered it. The Supreme Court held that the trustee did not have a duty to find the current address. The court found that a foreclosure trustee is not a true trustee, such as a trustee of a person or a trustee under a trust agreement. Instead, a foreclosure trustee is merely “a middleman” between the beneficiary and the trustor who only carries out the specific duties that the deed of trust and foreclosure law specifically impose upon it.

The deed of trust and the statute are the exclusive source of the rights, duties and liabilities governing notice of nonjudicial foreclosure sales. Because neither the deed of trust nor the statute required the trustee to search for an address it did not have, the court held that the trustee had no duty to do so. The Stephens v. Hollis case reiterated the rule that a foreclosure trustee is not a true trustee: “Just as a panda is not an ordinary bear, a trustee of a deed of trust is not an ordinary trustee. ‘A trustee under a deed of trust has neither the powers nor the obligations of a strict trustee. He serves as a kind of common agent for the parties.’”

It is critical to recognize, however, that these rules of limited duty only apply to the trustee’s duty to provide proper notice of the sale. The trustee also has a broad common law duty to conduct a sale that is fair in all respects. In Hatch v. Collins, the court noted that “A trustee has a general duty to conduct the sale ‘fairly, openly, reasonably and with due diligence,’ exercising sound discretion to protect the rights of the mortgagor and others…A breach of the trustee’s duty to conduct an open, fair and honest sale may give rise to a cause of action for professional negligence, breach of an obligation created by statute, or fraud.” Examples of such a breach could be conspiring to “chill the bidding” by overstating the debt, thereby dissuading others from appearing and bidding at the sale. California Civil Code Section 2924h(g) states that it is “unlawful for any person, acting alone or in concert with others, (1) to offer to accept or accept from another any consideration of any type not to bid, or (2) to fix or restrain bidding in any manner at a sale of property conducted pursuant to a power of sale in a deed of trust or mortgage.” The code continues: “In addition to any other remedies, any person committing any act declared unlawful by this subdivision or any act which would operate as a fraud or deceit upon any beneficiary, trustor or junior [lien holder] shall, upon conviction, be fined not more than $10,000 or imprisoned in the county jail for not more than one year, or be punished by both that fine and imprisonment.” In addition to imposing criminal penalties, this section also imposes civil liability upon the trustee.

The courts will review foreclosure sale proceedings to make sure they have been fair in all respects. A trustee who violates its contractual duties under the deed of trust or its statutory or common law duties is liable to the trustor or to an affected junior lien holder for such person’s lost equity in the property. This is measured by the difference between the fair market value of the property and the liens senior to the affected person’s interest at the time of the sale. In addition, pursuant to Civil Code Section 3333, the trustee has liability for all other damages proximately caused by its wrongful conduct, whether those damages were foreseeable or not. A willful violation of these duties can subject the trustee to punitive damages under Civil Code Section 3294. Payoffs and reconveyances Civil Code Section 2943(c) requires a beneficiary or its representative, which is frequently the trustee, to provide a payoff statement to an “entitled person” within 21 days after a written request for a payoff demand. An “entitled person” means the trustor, a junior lien holder, their successors or assigns, or an escrow. Failure to provide a timely payoff demand makes the beneficiary or its representative liable to the entitled person for all actual damages such a person may sustain due to a failure to provide a timely payoff demand, plus $300 in statutory damages. Failure to provide an accurate payoff demand can have dire consequences. If the entitled person closes a sale or refinance in reliance upon a payoff demand that understates the payoff, the beneficiary must reconvey its lien. The beneficiary is then left with only an unsecured claim against the entitled person. A trustee who is responsible for such an error could have substantial liability to its beneficiary. After the note and deed of trust are paid off, Civil Code Section 2941 requires the beneficiary to deliver the original note, the deed of trust and a request for reconveyance to the trustee. Within 21 days thereafter, the trustee must record the reconveyance and deliver the original note to the trustor. If the reconveyance has not been recorded within 60 days after the payoff, upon the trustee’s written request, the beneficiary must substitute himself as trustee and record the reconveyance. If the reconveyance is not recorded within 75 days after payoff, any title company may prepare and record a release of the obligation. A person who violates any of these provisions is liable for $500 in statutory damages and all actual damages caused by the violation. These can include damages for emotional distress. A willful violation of these requirements is a misdemeanor which can subject the violator to a $400 fine, plus six months’ imprisonment in the county jail. Surplus funds Civil Code Sections 2924j and 2924k impose upon the trustee a duty to distribute surplus funds that the trustee receives at a sale to lien holders and trustors whose interests are junior to the foreclosed deed of trust. Surplus funds are defined as funds in excess of the debt due to the holder of the foreclosed lien and the costs of the foreclosure sale. As previously referenced in the I. E. Associates and Stephens cases, those courts held that with respect to the conduct of the foreclosure sale, a foreclosure trustee is not a true trustee – only a middleman. Further, in Hatch v. Collins, the court held that a breach of the trustee’s duties in the conduct of the sale does not constitute a breach of a fiduciary duty. While no case holds that a trustee is a fiduciary with respect to surplus funds, a trustee’s surplus funds duties closely resemble those of a fiduciary – a fiduciary is one who holds and manages property for the benefit of another. Fiduciaries are held to a higher standard of care than others in discharging their duties. If a trustee has a fiduciary duty in handling surplus funds, a trustee may have a duty to do more than simply follow the statute with respect to giving notice of and distributing the surplus funds. For instance, a trustee may have a duty to take reasonable steps to find an interested party whose address is unknown to the trustee if the trustee has reason to believe such an address can be found. This is particularly so because the trustee can pay for the expense of the investigation from the surplus funds. Also, a trustee as a fiduciary may face greater exposure to punitive damages, which can be awarded for breach of fiduciary duty when coupled with fraud, malice or oppression. Servicers Using In-House Foreclosure Trustees Must Beware in Mortgage Servicing > Foreclosure by John Clark Brown Jr. on Tuesday 19 June 2007 email the content item print the content item comments: 0 Servicing Management, June 2007. Because of the significant increase in defaults and foreclosures, mortgage servicers need to understand the duties and liabilities the law imposes upon foreclosure trustees. Litigation based upon trustee error can slow, stop or invalidate foreclosures and impair the servicer’s ability to dispose of properties following foreclosure. When borrowers refinance or pay off during foreclosure, trustees are often responsible for the payoffs and reconveyances. After foreclosure, the trustee is responsible for distribution of surplus funds – the funds in excess of the debt due under the foreclosed deed of trust. All these responsibilities are sources of claims against trustees. Foreclosure litigation plaintiffs often name and seek to hold lenders and servicers responsible for trustee errors on the theory that the trustee is the agent of the lender and servicer. According to Miller & Starr’s “California Real Estate,” this claim is particularly easy to make when the lender or servicer uses an in-house trustee and especially when the trustee acquires the property by credit bid for the lender or servicer at its own foreclosure sale. This article examines a trustee’s liability for damages under California law for conduct of the foreclosure sale, payoffs, reconveyances and distribution of surplus funds. The scope of a trustee’s duties differs for each of these services, and a breach of one of these duties can subject the trustee, lender and servicer to substantial compensatory damages, punitive damages and even criminal sanctions. Foreclosure sales In the I.E. Associates v. Safeco case, the California Supreme Court limited the scope of the trustee’s duties in conducting foreclosure sales. The issue in that case was whether a trustee breached its duty to a trustor by failing to ascertain the current address of the trustor where the current address was different from the address of record. The trustee did not have actual knowledge of the current address, but through reasonable diligence could have discovered it. The Supreme Court held that the trustee did not have a duty to find the current address. The court found that a foreclosure trustee is not a true trustee, such as a trustee of a person or a trustee under a trust agreement. Instead, a foreclosure trustee is merely “a middleman” between the beneficiary and the trustor who only carries out the specific duties that the deed of trust and foreclosure law specifically impose upon it. The deed of trust and the statute are the exclusive source of the rights, duties and liabilities governing notice of nonjudicial foreclosure sales. Because neither the deed of trust nor the statute required the trustee to search for an address it did not have, the court held that the trustee had no duty to do so. The Stephens v. Hollis case reiterated the rule that a foreclosure trustee is not a true trustee: “Just as a panda is not an ordinary bear, a trustee of a deed of trust is not an ordinary trustee. ‘A trustee under a deed of trust has neither the powers nor the obligations of a strict trustee. He serves as a kind of common agent for the parties.’” It is critical to recognize, however, that these rules of limited duty only apply to the trustee’s duty to provide proper notice of the sale. The trustee also has a broad common law duty to conduct a sale that is fair in all respects. In Hatch v. Collins, the court noted that “A trustee has a general duty to conduct the sale ‘fairly, openly, reasonably and with due diligence,’ exercising sound discretion to protect the rights of the mortgagor and others…A breach of the trustee’s duty to conduct an open, fair and honest sale may give rise to a cause of action for professional negligence, breach of an obligation created by statute, or fraud.” Examples of such a breach could be conspiring to “chill the bidding” by overstating the debt, thereby dissuading others from appearing and bidding at the sale. California Civil Code Section 2924h(g) states that it is “unlawful for any person, acting alone or in concert with others, (1) to offer to accept or accept from another any consideration of any type not to bid, or (2) to fix or restrain bidding in any manner at a sale of property conducted pursuant to a power of sale in a deed of trust or mortgage.” The code continues: “In addition to any other remedies, any person committing any act declared unlawful by this subdivision or any act which would operate as a fraud or deceit upon any beneficiary, trustor or junior [lien holder] shall, upon conviction, be fined not more than $10,000 or imprisoned in the county jail for not more than one year, or be punished by both that fine and imprisonment.” In addition to imposing criminal penalties, this section also imposes civil liability upon the trustee. The courts will review foreclosure sale proceedings to make sure they have been fair in all respects. A trustee who violates its contractual duties under the deed of trust or its statutory or common law duties is liable to the trustor or to an affected junior lien holder for such person’s lost equity in the property. This is measured by the difference between the fair market value of the property and the liens senior to the affected person’s interest at the time of the sale. In addition, pursuant to Civil Code Section 3333, the trustee has liability for all other damages proximately caused by its wrongful conduct, whether those damages were foreseeable or not. A willful violation of these duties can subject the trustee to punitive damages under Civil Code Section 3294. Payoffs and reconveyances Civil Code Section 2943(c) requires a beneficiary or its representative, which is frequently the trustee, to provide a payoff statement to an “entitled person” within 21 days after a written request for a payoff demand. An “entitled person” means the trustor, a junior lien holder, their successors or assigns, or an escrow. Failure to provide a timely payoff demand makes the beneficiary or its representative liable to the entitled person for all actual damages such a person may sustain due to a failure to provide a timely payoff demand, plus $300 in statutory damages. Failure to provide an accurate payoff demand can have dire consequences. If the entitled person closes a sale or refinance in reliance upon a payoff demand that understates the payoff, the beneficiary must reconvey its lien. The beneficiary is then left with only an unsecured claim against the entitled person. A trustee who is responsible for such an error could have substantial liability to its beneficiary. After the note and deed of trust are paid off, Civil Code Section 2941 requires the beneficiary to deliver the original note, the deed of trust and a request for reconveyance to the trustee. Within 21 days thereafter, the trustee must record the reconveyance and deliver the original note to the trustor. If the reconveyance has not been recorded within 60 days after the payoff, upon the trustee’s written request, the beneficiary must substitute himself as trustee and record the reconveyance. If the reconveyance is not recorded within 75 days after payoff, any title company may prepare and record a release of the obligation. A person who violates any of these provisions is liable for $500 in statutory damages and all actual damages caused by the violation. These can include damages for emotional distress. A willful violation of these requirements is a misdemeanor which can subject the violator to a $400 fine, plus six months’ imprisonment in the county jail. Surplus funds Civil Code Sections 2924j and 2924k impose upon the trustee a duty to distribute surplus funds that the trustee receives at a sale to lien holders and trustors whose interests are junior to the foreclosed deed of trust. Surplus funds are defined as funds in excess of the debt due to the holder of the foreclosed lien and the costs of the foreclosure sale. As previously referenced in the I. E. Associates and Stephens cases, those courts held that with respect to the conduct of the foreclosure sale, a foreclosure trustee is not a true trustee – only a middleman. Further, in Hatch v. Collins, the court held that a breach of the trustee’s duties in the conduct of the sale does not constitute a breach of a fiduciary duty. While no case holds that a trustee is a fiduciary with respect to surplus funds, a trustee’s surplus funds duties closely resemble those of a fiduciary – a fiduciary is one who holds and manages property for the benefit of another. Fiduciaries are held to a higher standard of care than others in discharging their duties. If a trustee has a fiduciary duty in handling surplus funds, a trustee may have a duty to do more than simply follow the statute with respect to giving notice of and distributing the surplus funds. For instance, a trustee may have a duty to take reasonable steps to find an interested party whose address is unknown to the trustee if the trustee has reason to believe such an address can be found. This is particularly so because the trustee can pay for the expense of the investigation from the surplus funds. Also, a trustee as a fiduciary may face greater exposure to punitive damages, which can be awarded for breach of fiduciary duty when coupled with fraud, malice or oppression.

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One Response to “Foreclosure Trustee duties and obligations”

  1. Isabel August 21, 2013 at 9:03 pm #

    Trustee admits property description is wrong on deed of trust, tries to sell anyway:

    In California, if the trustee adds to the text of notice of sale that the property description on the deed of trust is incorrect and then attaches a correct property description to the notice of trustee’s sale, saying it is “more correct” and then proceeds with the sale, in spite of its knowledge the deed of trust is defective, not describing the property being sold, is the trustee liable? If so, what is the trustee liable for and are there any penalties? Can the sale be stopped? On what grounds?

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