Friday, April 12, 2019

FYI: Cal App (4th Dist) Confirms Limited Liability for Foreclosure Trustees

The Court of Appeal for the Fourth District of California recently held that a trustee conducting a non-judicial foreclosure is not subject to tort liability unless it violated duties established by the deed of trust and governing statutes, or if the trustee has effectively taken on a different or modified duty by its actions.

A copy of the opinion is available at:  Link to Opinion

A commercial developer purchased real property and obtained a loan to fund construction.  The loan was secured by a deed of trust on the property.

The lender sent a notice of default stating that the payments required under the loan had not been made and demanded payment of the total payoff balance.  A title company recorded a substitution of trustee, which substituted the title company as a the new trustee under the deed of trust. 

When the developer failed to pay off the loan, the title company (Trustee) recorded the notice of default and a notice of trustee’s sale.  The property was sold at a public auction.

The developer filed a lawsuit.  The operative second amended complaint asserted claims for wrongful foreclosure, wrongful disseisin and ouster, and conspiracy.

The trial court sustained the Trustee’s demurrer to the developer’s second amended complaint without leave to amend, and it subsequently entered judgment in favor of the title company.  

This appeal followed.

On appeal, the developer argued that each of the three causes of action it asserted against the Trustee were adequately pleaded to survive demurrer. 

As you may recall, in California, “[a] beneficiary or trustee under a deed of trust who conducts an illegal, fraudulent or willfully oppressive sale of property may be liable to the borrower for wrongful foreclosure.”  Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929.  However, “[t]he trustee of a deed of trust is a not a true trustee with fiduciary obligations, but acts merely as an agent for the borrower-trustor and lender-beneficiary.”  Id., at p. 927.

The trustee’s “only duties are: (1) upon default to undertake the steps necessary to foreclose the deed of trust; or (2) upon satisfaction of the secured debt to reconvey the deed of trust.”  Heritage Oaks Partners v. First American Title Ins. Co. (2007) 155 Cal. App. 4th 339, 345.

The Appellate Court observed that neither the deed of trust nor the governing statutes created a duty on the part of the Trustee to verify that beneficiary received a valid assignment of the loan or verify the authority of the person who signed the substitution of trustee. 

“Such an inquiry is beyond the scope of the trustee’s duties,” the Appellate Court explained, “and there is no appropriate basis for imposing tort liability on [the Trustee] for failing to take actions that are beyond the scope of its duties.”

The developer argued in Lupertino v Carbahal (1973) 35 Cal.App.3d 742, the court found that the trustee was equitably estopped from asserting that it complied with the notice requirements of the non-judicial foreclosure statutes.  There, the trustee mailed the notice of trustee’s sale to only the borrowers’ address of record, and because the borrowers had moved, they did not receive actual notice in time to cure the default.

The Appellate Court explained that the trustee in Lupertino had previously been in communication with the borrowers at their then-current address.  “[B]y its actions, the trustee effectively took on the duty of communicating with the borrowers at their then-current address, regardless of the borrowers’ failure to update their address of record.”  The Court noted that the developer did not raise any similar issues against the Trustee’s actions in this case.

Additionally, to successfully challenge a foreclosure, the Appellate Court noted that a plaintiff must show both a failure to comply with the procedural requirements for the foreclosure sale and that the irregularity prejudiced the plaintiff.  Knapp v. Doherty (2004) 123 Cal.App.4th 76, 96.

The developer alleged that the trustee’s sale was noticed for March 3, 2015, but the property was not sold until March 5, 2015, and the sale price was less than the outstanding principal balance due on the loan.  In the Appellate Court’s view, these facts, without more, do not support the developer’s assertions that the Trustee failed to properly notice and conduct the foreclosure sale. 

The developer also argued that the notice of default contained “irregularities” including, among other things, that it was signed by an agent of the beneficiary and listed an incorrect address and phone number for the beneficiary. 

The Appellate Court observed that Civil Code ' 2924(a)(1) permits the trustee, mortgagee, or any of their authorized agents to record the notice of default.  It further observed that the developer did not plead any facts demonstrating prejudice flowing from the purported defects in the notice.  Specifically, that the defect impaired its ability to protect its interest in the property. 

Thus, the Appellate Court concluded that the Trustee’s demurrer  to the wrongful foreclosure claim was properly sustained. 

The Appellate Court then turned to the developer’s remaining causes of action for “wrongful disseisin and ouster” and “conspiracy.” 

Noting that both of these claims were derivative of the wrongful foreclosure claim, and that the developer did not argue how these claims might still be viable even if the wrongful foreclosure cause of action was not, the Appellate Court concluded that Trustee’s demurrer as to the remaining claims was also properly sustained. 

Accordingly, the Appellate Court affirmed the trial court’s order sustaining without leave to amend the Trustee’s demurrer to the second amended complaint.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
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Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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