Court Confirms Common Law Limitations Upon Trustees In Foreclosure

03.05.2019

The Virginia Supreme Court’s December 20, 2018 decision in Crosby v. ALG Trustee, LLC, 822 S.E.2d 185 (Va. 2018) raises the ethical bar for trustees seeking to foreclose on deeds of trust, making it clear that going forward, foreclosure sales may be subject to challenge where the property’s assessed value substantially exceeds the sale price.  The opinion clearly recognizes the existence of an implied duty of impartiality in deeds of trust in Virginia.  As such, a trustee’s duties extend beyond those set forth in the Virginia Code and the four corners of the deed of trust, obligating the trustee to act as a fiduciary for both the debtor and the creditor.

In Crosby, the debtor, who owned real property in Albemarle County, took out a $60,000 loan evidenced by a promissory note and secured by deed of trust encumbering the property.  At the point the debtor subsequently defaulted, there remained $18,313.05 due on the note.  The trustee subsequently notified the debtor of the foreclosure sale, at which only two entities appeared, having previously submitted two separate bids.  Those same entities then submitted a single, combined bid of $20,903.77, which the trustee accepted even though the property had a tax assessed value of $436,800.

The debtor ultimately reached an agreement to repurchase the property and then filed suit against the trustee, alleging that the trustee breached its fiduciary duty under the deed of trust by (i) failing to act impartially when it sold the property at a price whose inadequacy was “so gross as to shock the conscience”, (ii) failing to conduct the sale in a manner that would generate more than a de minimis bid, (iii) not canceling the sale when it only received the single bid, and (iv) not timely responding to the debtor’s request for the amount required to reinstate the loan.  The trustee demurred on the grounds that it owed no fiduciary duties to the debtor beyond those set forth in the deed of trust, and since there was no allegation that the trustee had failed to comply with any requirement set forth therein or in the relevant statutes governing trustees, no such duties existed.  The trial court ultimately agreed and sustained the demurrer.

In her opinion for the 5-2 majority reversing the lower court’s decision, Justice Powell confirmed the Court’s recognition that trustees under deeds of trust are fiduciaries for both a debtor and creditor, owing each a common law duty pursuant to which the trustee must act impartially in furtherance of the interests of each.  As such, the common law duties under a deed of trust include an implied duty of impartiality which requires that a trustee balance the conflicting positions of debtor and creditor to ensure that neither benefits disproportionately at the expense of the other.  And, while the General Assembly has codified and regulated certain aspects of trustee duties under a deed of trust, nothing in the Virginia Code in that respect abrogates any of a trustee’s other common law duties.  Concluding her opinion, Justice Powell found that the debtor sufficiently alleged a cause of action for breach of the trustee’s common law fiduciary duties where the foreclosure sale overwhelmingly benefited the creditor at the debtor’s expense and there was a significant discrepancy between the sale price and value of the property. 

In light of the Court’s explicit recognition that deeds of trust include a common law duty of impartiality as an implied term, lenders are on notice that the duty of impartiality is not satisfied by merely complying with the requirements of the Virginia Code and relevant loan documents.  As such, foreclosure sales at which only very low bids are submitted may be subject to challenge.  As stated in a footnote in Crosby, where the only bids received are woefully inadequate, a trustee has a “duty to forbear to sell, and to ask the aid and instructions of a court.”  What is less clear from the opinion is what constitutes a “woefully inadequate” bid.  Crosby did not lay out a bright-line rule; rather, while the case provides an obvious example, most likely the analysis will depend on the circumstances of each individual case.  Therefore, when conducting foreclosure sales, trustees under a deed of trust must ensure that proper notice and advertising are given, and, in the event only de minimis bids are received, should consider delaying the sale and seeking advice from the court.  Should you have any questions about the conduct of foreclosure sales, please contact us.