Va. Holds Trustee’s Fiduciary Duty May Be Breached Where Foreclosure Sale Price Grossly Inadequate

In Crosby v. ALG Trustee, LLC, the Supreme Court of Virginia held that a Borrower under a mortgage loan stated a claim for breach of fiduciary duty against the substitute trustee who conducted the foreclosure sale, where the sale price was 5% of the property’s tax assessment.  In reversing the trial court’s dismissal, the Supreme Court determined that the trustee’s duties went beyond the four corners of the deed of trust, to include a common law duty of impartiality.  The Borrower stated a breach of the duty of impartiality because the property was sold at a grossly inadequate price, at a disproportionate expense to the Borrower, given that the lender’s loan was paid in full.  Op. at 10.  In a footnote, the Court suggested that, where the sale price is woefully inadequate, “[i]t is the trustee’s duty to forebear to sell, and ask the aid and instructions of a court . . . .”  Op. at pp. 10-11, n. 5.

 A copy of the opinion is available here.

Background

 Substitute Trustee conducted a non-judicial foreclosure sale under a deed of trust securing a mortgage loan having an outstanding balance of $18,313.05.  The tax-assessed value, of which the substitute trustee was aware, was $436,800.00, and at a sale where a single third-party bid was made, the property was sold for $20,903.77.

 Borrower filed a lawsuit against the Substitute Trustee, lender and purchasers seeking to have the sale set aside, and seeking to enjoin eviction proceedings.  After Borrower settled his claims against the lender and purchasers, whereby he repurchased the property for $78,058.63, Borrower amended his lawsuit to assert a claim for breach of fiduciary duty against the Substitute Trustee.

 Specifically, Borrower alleged that Substitute Trustee breached its fiduciary duty by failing to act impartially when it sold the property with a tax assessed value of $436,800 for only $20,903.77, by failing to conduct the sale so as to generate more than a de minimis bid, by failing to cancel the sale after receiving only one inadequate bid, and by failing to timely respond to Borrower’s request for a reinstatement amount.  Borrower claimed that the sale amount was “so gross as to shock the conscience.”

 The trial court dismissed the claim, explaining that the “the trustee’s duties are limited to the four corners of the contract and there is no duty by the trustee under the common law.”  The trial court further held that, although a trustee’s fiduciary duties are incorporated into the deed of trust such that the trustee must act “with perfect fairness and impartiality” to both debtor and creditor, this does not create a common law duty.  Borrower thereafter appealed.

 Discussion

 In a majority decision, the Supreme Court reversed the dismissal of the lawsuit.  The Court first explained that the claim was based in contract, and not negligence.  As Borrower had alleged that the fiduciary relationship with Substitute Trustee was based entirely on the deed of trust, his claim sounded in contract, not tort.  Op. at 6.

 However, the Court rejected the argument that a trustee’s duties under the deed of trust are limited to the four corners of the contract.  “A trustee under a deed of trust is a fiduciary for both debtor and creditor.”  Op. at 6.  These duties “arise under the common law and have been recognized both explicitly and implicitly for more than 200 years.”  Op. at 6.  Further, “the requirement of impartiality means that a trustee under a deed of trust must balance the conflicting positions of the creditor and debtor such that a benefit to one cannot come at a disproportionate expense of the other.”  Op. at 7.  “So important is the requirement of impartiality, the Court explained, that a trustee’s failure to remain impartial by selling the property at a price that is ‘so grossly inadequate as to shock the conscience’ will ‘raise a presumption of fraud.’”  Op. at 7 (citations omitted).

 The Court then distinguished Powell v. Adams, 179 Va. 170, 174 (1942), which the Substitute Trustee relied upon to claim that a trustee’s duties are “limited and defined by the instrument under which he acts.”  Op. at 8 (quoting Powell).  The Court determined that the Powell Court did not abrogate the implied common law fiduciary duties of a trustee under a deed of trust, noting that the Powell Court had gone on to state that “[i]t is incumbent upon [a trustee] to act toward [both debtor and creditor] with perfect fairness and impartiality.”  Op. at 8 (quoting Powell).  The Court also determined that the statutory scheme for foreclosure did not abrogate the trustee’s common law fiduciary duties, particularly where the common law and statutory enactments were not irreconcilably opposed. “The mere fact that the General Assembly has extensively regulated certain aspects of a trustee’s duties does not translate to a broad abrogation of the trustee’s fiduciary duties imposed under the common law.”  Op. at 9.

 The majority of the Court held that Borrower sufficiently alleged a breach by Substitute Trustee of its common law fiduciary duty of impartiality.  Given that the property was sold for only 5% of its assessed value, allowing the noteholder to recover the amount due while Borrower lost all equity in the property, “the clear implication of [Borrower’s] allegations is that [Substitute Trustee] favored [the noteholder] at [Borrower’s] expense by selling the property at a grossly inadequate price.”  Op. at 10. 

 The Court further explained that “situations may arise where, through no fault of the trustee, the only bids received are woefully inadequate. . . .  in such a situation, ‘[i]t is the trustee’s duty to forbear to sell, and to ask the aid and instructions of a court of equity . . . when, for any reason, a sale is likely to be accompanied by a sacrifice of the property, which, at the cost of some delay, may be obviated.’ Op. at 10-11, n. 5 (quoting Morriss v. Virginia State Ins. Co., 90 Va. 370 (1893)). 

 A dissenting opinion noted that the trustee did all of the things required under the deed of trust, but stated that the “majority makes the trustee under a deed of trust a guarantor by implication of the price that a foreclosed property sells for at auction, when the parties to the deed of trust expressly agreed both (1) to a number and frequency of advertisements intended to draw buyers to the auction, and (2) that the property will be sold to the highest bidder so drawn.”  Op. at p. 14 (dissenting opinion).

 Nevertheless, the Supreme Court reversed the trial court’s dismissal of the case, and remanded the case for further proceedings.