DIRT DEVELOPMENT for Wedmesdau, February 25, 2009
Daniel B. Bogart
Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law, Orange, California

MORTGAGES; DEEDS OF TRUST; TRUSTEES; DUTIES:  Trustee of first deed of trust is not under a duty to verify that default has been cured, or even that the party allegedly the beneficiary of the deed of trust continues in that status, before acting on instruction to cancel notice of default.

RJW Media, Inc. v. The CIT Group/Consumer Finance, Inc., 2008 WL 5376546 (Utah Ct. App. Dec. 26, 2008)

This is a convoluted set of facts, but they can be pared down to their essentials as follows:  Squires borrowed money from IndyMac on August 30, 2002, secured by his residence.  He gave a first deed of trust and a note to the lender.  The court does not say so, but we can reliably assume that the deed of trust was properly recorded.  Fairly quickly afterwards, IndyMac assigned its interest in the loan to Deutsche Bank.  IndyMac continued to act as loan servicer.  First Southwestern Title Agency of Utah (“FSWT”) was named the trustee of the IndyMac deed of trust, and Deutsche Bank was the beneficiary.

Squires then did what everyone was doing in 2002; he obtained a second loan secured by his residence.  On August 30, 2002, he executed a note and entered into second deed of trust in favor of CIT. Again, we can assume that the lender duly recorded its deed of trust.

Little over a year later, Squires defaulted on the first loan on the IndyMac note.  As a result, the trustee of the deed of trust, FSWT, recorded a notice of default on October 8, 2003.

On July 28, 2004, (nearly a half year after Squire defaulted on his first deed of trust loan), RJW Media (“RJW”) purchased Deutsche Bank’s position as holder of the indebtedness and beneficiary under the first deed of trust.  Deutsche Bank’s assignment to RJW of the IndyMac deed of Trust was recorded on August 9, 2004. The local recording office mailed the original back to RJW’s lawyers.  FSWT, the trustee, was apparently unaware that Deutsche Bank had sold its position, and that RJW was the new beneficiary to the deed of trust.

Only after purchasing Deutsche Bank’s position did RJW learn of the default on the note.  RJW discovered the problem in a title report it obtained on September 9, 2004.

But here is where it gets interesting: On September 22, 2004, FSWT, as trustee, unilaterally issued a notice of cancellation of default.  FSWT did not inform RJW that it was doing so; of course, FSWT claimed to be unaware that RJW was the beneficiary.  Why did FSWT cancel the notice of default? Apparently, Deutsche Bank, the assignor of the first deed of trust, instructed the trustee to do so.

In the words of the late Strother Martin, “what we’ve got here is a failure to communicate.”

 From this point, things proceed towards non judicial foreclosure of the first deed of trust. CIT, the beneficiary of the second deed of trust, did not learn of cancellation of notice until November 9, 2004.  Three days later, on the 12th of November, RJW scheduled a trustee’s sale of the first deed of trust, to take place on December 13, 2004. On November 16 and 18, after scheduling the trustee’s sale, RJW formally offered to buy CIT’s second deed of trust, but CIT refused. RJW then went ahead with the sale, and not surprisingly won the auction.

A trustee’s sale of a senior deed of trust wipes out junior encumbrances, including deeds of trust. Presumably, this would occur with respect to CIT’s second deed of trust.  However, CIT determined that the loan to CIT was in default and recorded a notice of default. This action would lead, eventually, to a trustee’s sale of the property. CIT and RJW communicated (the case opinion does not state whether by letter or personally) but the gist of the communication was RJW’s demand that CIT remove the notice of default.  RJW pointed out that CIT’s lien had been extinguished.  CIT refused.

RJW therefore filed complaints against both FSWT and CIT.  RJW claimed that the trustee of the first deed of trust, FSWT, breached its fiduciary obligation to RJW when FSWT followed the instructions of Deutsche Bank and negligently cancelled the notice of default.  RJW claimed also that CIT’s filing of notice of default (which is the first step towards the trustee’s sale) was a slander of title. 

The trial court held for RJW in its action against CIT, the holder of the second deed of trust, specifically stating that CIT was equitably estopped from challenging the trustee’s sale because it was aware of the sale and failed to act to stop it.  However, the trial court held against RJW in its action against FSWT, stating that there is nothing in Utah statutes requiring that the trustee meet a standard of care when responding to instructions from the purported beneficiary, if the trustee is unaware that the party giving the instructions is not the deed of trust beneficiary at all.

On Appeal, the Utah Court of Appeals affirmed the trial court’s determination that the trustee did not breach a duty of care to the beneficiary.  However, the court reversed the trial court with respect to CIT, holding that that the junior lien holder was not estopped from challenging the validity of the trustee’s sale.

The more interesting issue is the former – the obligation of the trustee when receiving instructions from the deed of trust beneficiary.

Both the trial court and the court of appeal examine Utah statutes governing cancellation of notices of default.  Although the wording varies from state to state, state statutes require mortgagees and holders of deeds of trust or deeds to secure debt to record instruments showing that the underlying indebtedness has been paid and satisfied when the note has been paid in the normal course.  Similarly, if, prior to foreclosure, the borrower defaults but then comes up with the money, state statutes require the lenders to take steps necessary to acknowledge the payment, if a notice of default has been recorded.  

In Utah, the controlling statute is Utah Code Section 57-1-31.  It requires in subsection (1) that, after payment of the debt and cure of the default, “the obligation and trust deed shall be reinstated as if no acceleration had occurred.”  In subsection (2) the statute provides that if the default is cured as described in subsection (1), then “the trustee shall execute, acknowledge, and deliver a cancellation of the recorded notice of default under the trust deed; and any trustee who refuses to execute and record this cancellation within 30 days is liable to the person curing the default for all actual damages resulting from this refusal.”

On its face, Section 57-1-31 does not speak at all to the relative obligations of the trustee to investigate the demand of the trust beneficiary that a default notice be cancelled.  In other words, if the beneficiary says the default is cured, the statute does not demand that the trustee verify the cure.  Both the trial court and the appellate court agree that the statute fails to “articulate” any standard at all.  If anything, the statute tells the trustee that if the trustee fails to record a cancellation, it does so at its peril – that the trustee may be liable in damages. 

The fact that the legislature does not establish a standard of care for the trustee under a deed of trust does not mean there is no standard.  Indeed, some behavior of a trustee must be so unsound as to be “negligent” and actionable. In the absence of a standard of care fixed by statute, the court looks to industry practice.  Unfortunately, RJW failed to provide evidence at trial of the standard practice in the industry or how trustees act in Utah under similar circumstances.

Comment 1:  The opinion does not explain why Deutsche Bank gave instructions to FSWT to cancel the notice of default.  This means that Deutsche Bank believed the default to have been cured.  But at this point in time, Deutsche Bank had already unloaded the loan to RJW.  Deutsche Bank received consideration for the paper and first deed of trust, and RJW was saddled with the borrower’s indebtedness. RJW named CIT and FSWT as parties to the suit, but what about RJW’s assignor?  It seems to the author that the actionable behavior here (negligence or perhaps material non disclosure) belongs to Deutsche Bank.

Comment 2: It appears that the ordinary rule is that the trustee is under no duty to conduct “an affirmative investigation to determine whether the debt is in default ….” § 7.21, Grant S. Nelson and Dale A. Whitman, Real Estate Finance Law at 652-53 (citing Killon v. Bank Midwest, N.A., 987 S.W. 2d 801 (Mo. App. 1998); Spires v. Edgar, 513 S.W. 2d 372 (Mo. 1974).

Comment 3:  The author is nevertheless curious about industry standards for a trustee under a deed of trust.  Just how careful must and should the trustee be in exercising its powers after receiving an instruction from the purported beneficiary?  Essentially, the court is able to avoid this question by noting that the plaintiff failed to offer evidence on the issue.  There was therefore no need “for the fact finder to determine the standard of care on this matter.”  It is as though the parties stipulated that the standard of care, whatever it may be, was met.  The court says as much: “Because RJW materially agreed with FSWT’s presentation of the applicable industry standard of care, did not otherwise dispute the standard, and did not offer evidence to demonstrate a breach of the articulated standard of care, we conclude that RJW did not meet its burden to present specific facts” to take to trial.  The court’s statement is its wonderfully circular.  The court refers to RJW’s failur

e to provide evidence that the trustee did not meet the articulated standard, but the court nowhere articulates the standard.  Is there even a standard in Utah?  The author cannot tell from the opinion. Perhaps a reader in Utah can fill in this gap. 

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