Monday, May 11, 2015


I am happy to report that the tide is turning in favor of the borrowers in two ways when it comes to cleaning up the foreclosure mess.  First, there have been a number of successful claims related to botched (whether intentionally or unintentionally) loan modifications.  Second, claims for breach of fiduciary duties against deed-of-trust trustees (or substitute trustees) have now been allowed to proceed in Virginia.

In a recent case in Hampton Roads, where this firm is working in association with local counsel, the judge overruled a demurrer and allowed to proceed eight out of nine claims asserted on behalf of the borrower against the alleged creditor and the substitute trustee.  This happened in spite of some adverse precedent that was put on the books in Virginia during the past few years.

Since at least 2010, federal district courts in Virginia were quick to dismiss breach of fiduciary duty claims related to improper foreclosures on the basis that the trustee "does not owe any fiduciary duties" to borrowers or "only owes those duties listed in the deed of trust", etc.  This "reasoning" was employed in spite of more than a dozen Virginia Supreme Court opinions pronouncing that the trustee is a fiduciary for both debtor and creditor and must act impartially between them, as well as that a trustee must not permit the urgency of the creditor to result in a sale under circumstances injurious to the borrower.

But the federal courts instead grabbed on to one or two cases where the same Supreme Court said that the trustee's duties, if any, are limited to those listed in the deed of trust.  Of course, the federal courts did not bother to check, or chose to ignore, the fact that this seemingly contradictory position of no fiduciary duties owed to borrowers arose out of a case involving a third party guarantor, not a borrower.  It is to the guarantor, who is not a party to the deed of trust, that the trustee's duties are limited to those specifically listed in the deed of trust.

Thankfully, the Fourth Circuit, who supervises the federal district courts, at some point began to shed some light on the issue and admonished that, in disputes involving borrowers and not some third parties, it is the line of cases recognizing fiduciary duties and requiring neutrality of the trustee that is controlling.  Additionally, the Virginia Supreme Court has since decided at least one case where it permitted a claim against a deed-of-trust trustee for breach of fiduciary duty based on a botched foreclosure.  Its rationale was again the long-standing (since at least the late 1800s) precedent recognizing fiduciary duties and the duty of impartiality on the part of the trustee toward the borrower.

Therefore, the legal landscape is changing.  Courts may slow to act, but they do act with time.  Judges are beginning to realize that the whole point of inserting a trustee between the borrower and the lender is to have a NEUTRAL FIDUCIARY to insure the protection of BOTH parties in case of a dispute.

If you are facing a foreclosure and suspect that it may be improper, it is time to send a letter to the substitute trustee advising them of the possibility of legal action against them should they "steamroll" the borrower and proceed to sale without first insuring that the alleged creditor has the right to take the property and has complied with all required pre-conditions.  Not to mention that in most cases the borrower has a slew of other claims not only against the substitute trustee, but against the alleged creditor as well.