Recently, a unanimous panel of the United States Circuit Court for the Fourth Circuit issued an unpublished opinion shooting down a borrower’s claim that the substitute trustee of his deed of trust breached its fiduciary duties by not stopping a foreclosure sale based on a dispute about amounts owing to the lender until after the borrower retained counsel and filed suit. After “scour[ing] the Supreme Court of Virginia’s nearly 250 years of opinions,” the court said it could “find no authority to support [the borrower]’s broad construction of a trustee’s implied fiduciary obligations in the circumstances of this case.” Slip Op. at 9.
The borrower granted a deed of trust in 2005 against property in Fairfax County securing the principal amount of $920,000. In 2017, the borrower defaulted on the loan. The lender purchased the property at a foreclosure sale conducted in 2017. Thereafter, the parties entered into a loan modification agreement (“LMA”), under which the lender conveyed the property back to the borrower. However, the borrower defaulted on the payments under the loan modification shortly thereafter and disputed liability for certain insurance premiums while the lender had title to the property.
A year after the LMA, the substitute trustee noticed a foreclosure sale. The borrower responded by notifying the trustee that he disputed the amount the lender claimed was due. The trustee declined to cancel the sale, and the borrower filed suit in Virginia state court in an effort to prevent the foreclosure sale and asserted that the trustee was “responsible for [his] attorney's fees” for the litigation because it “fail[ed] to cancel [the foreclosure] sale when presented with a legitimate dispute by the borrower,” Slip Op. at 5, thereby violating its duty of impartiality. The defendants removed to federal court and argued that the trustee was fraudulently joined because the borrower had no viable claim against the trustee (who was non-diverse).
The district court agreed, dismissed the trustee, and denied the borrower’s motion to remand to state court. On appeal, the Fourth Circuit surveyed Virginia law regarding duties owed by deed of trust trustees, including Hudson v. Barham, 43 S.E. 189 (Va. 1903); Crosby v. ALG Tr., LLC, 822 S.E.2d 185, 190 (Va. 2018), Young-Allen v. Bank of Am., N.A., 839 S.E.2d 897 (Va. 2020), and a case often cited by counsel for debtors since it was decided in 1996, Bremer v. Bitner, 44 Va. Cir. 505 (Fairfax Cnty. 1996) (holding that a trustee violated its duty of responsibility by conducting a foreclosure sale despite a dispute between the creditor and the debtor of the amount owed).
The court concluded that the trustee indeed owes a duty of impartiality, but there is no “duty on a trustee to proceed on its own to seek judicial relief simply because the debtor and creditor dispute the amount of the debt.” Hudson, 43 S.E. at 190. The court held that even if such a duty existed, there could be no breach or damages in the absence of an allegation that the borrower could cure his default. Young-Allen, 839 S.E.2d at 902. Thus, the borrower alleged no facts from which it could find a breach of duty or damages.
The court noted that in truth Tayal was asking the court to impose a duty of partiality unconditionally favoring him as the unpaying debtor at the expense of all others, which the court rejected. Slip Op. at 10. Finally, among other reasoning, the court noted Bremer was “an outlier” that “diverges from current Virginia law,” Slip Op. at 11 (quoting Willner v. Dimon, 849 F.3d 93, 113 n.6 (4th Cir. 2017)), and agreed with the disavowal of Bremer. Accordingly, the court affirmed the ruling of the district court dismissing the trustee and the claims against it.
While unpublished, this opinion offers additional line-drawing guidance on how far a deed of trust trustee’s obligation of impartiality goes.
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