January 13, 2017
Check Your Privilege, HOA
The attorney-client privilege is frequently misunderstood in the community associations context. When many owners request information, sometimes their board, board’s attorney or property manager asserts the attorney-client privilege. This may seem to obstruct their attempts to assess their property rights or how community funds are being spent. I recently had a conversation with a friend about an issue she raised at a HOA meeting. She asked the directors whether certain assessments were valid under the governing documents. The board consulted with their attorney, who answered them by e-mail. My friend suspected that the attorney advised the board that a judge would deem these assessments invalid. When asked, the board and their attorney refused to disclose the email, claiming attorney-client privilege (“ACP”). Since the board answers to the owners and the attorney works for the HOA, are the owners entitled to the attorney’s answering email? Does it make sense for any non-director owners to pursue copies of the attorney’s email?
In Virginia we have a court decision that addresses this issue that I will discuss. But first, let’s cover the basics. Anyone who deals with lawyers must understand how the ACP generally works. If an owner understands the ACP, she can more effectively pursue the information to which she is entitled and side-step unnecessary quarrels over confidentiality. This blog post will focus on the attorney-client privilege as applied by the courts in Virginia. The basic principles are similar in states across the country. Does this doctrine really allow boards to conceal important plans and communications in a shroud of secrecy? Not really, but it is often, baselessly asserted in many disputes, including HOA and condominium matters.
The purpose of the ACP is to encourage clients to communicate with attorneys freely, without fear of disclosure. This way attorneys can give useful legal advice based on the facts and circumstances known to the client. The Supreme Court of Virginia defines the ACP as follows:
Confidential communications between attorney and client made because of that relationship and concerning the subject matter of the attorney’s employment are privileged from disclosure, even for the purpose of administering justice . . . Nevertheless, the privilege is an exception to the general duty to disclose and is an obstacle to the investigation of the truth, and should be strictly construed.
The burden is on the party asserting the attorney-client privilege to show that it is valid and not waived. The privilege can easily be waived by disclosure of the communications to third parties. Waiver may be intentional or negligent, where the disclosing party failed to take reasonable measure to ensure and maintain the document’s confidentiality. Judges will consider waiver of privilege questions on a case by case basis. In general, the courts are reluctant to weaken the privilege by finding waiver in doubtful circumstances.
Contrary to popular belief, the privilege does not apply to every document or communication transmitted between an attorney and client. For example, if the client sends the lawyer corporate or business documents related to the facts of the case, those items would not be protected by the privilege by the mere act of transfer. It is quite possible that only the cover letter would be privileged. Generally, the privilege covers the seeking and delivery of legal advice.
Related to the attorney-client privilege is the “work-product doctrine.” The work product doctrine protects from disclosure the interview notes, office memoranda, internal correspondence, outlines, mental impressions and strategy ideas of the client’s lawyers prepared with an eye towards litigation.
When the client is an incorporated association and not an individual, questions arise as to which people function as the “client” as far as the privilege is concerned. Corporations can only act by means of their human representatives. This will often extend beyond the officers and directors of the corporation. Courts have found the privilege not waived when employees were privy to the communications. While the privilege is sacrosanct, it is narrow in scope and easily waived.
In Batt, et al. v. Manchester Oaks HOA, a group of owners challenged their board’s policy whereby parking spaces were assigned in a community where some townhouses had garages and others didn’t. Parking is a precious commodity. The plaintiff owners sought correspondence between the HOA’s leaders and their attorney. The owners asked the Circuit Court of Fairfax to order Manchester Oaks to produce the documents. They argued that the directors were fiduciaries of the owners and the suit asserted that the board acted inimically to the owner’s interests. In some other states, this is a judicially recognized exception to the ACP in some contexts. Judge Terrence Ney, who was highly respected within the local bar, declined to adopt the “Fiduciary-Beneficiary Exception” because that would “chill” communications between parties and their attorneys for fear the exchanges could be used against them in the future. I think he got this right. Properly understood, this does not infringe upon owners’ rights. Here’s why:
- Owners Need Boards to Act Competently. Owners need their boards to freely share their concerns with their attorney without fear that someone could later obtain the emails and use them against them. Community associations law is complex. For HOAs to work properly, boards need legal counsel to help them accomplish worthy goals while complying with the law and the governing documents. Owners need the HOA’s lawyer to tell the board what they can’t do, so that they can avoid doing bad things.
- The Director’s Fiduciary Duties Are Primarily Defined by the Governing Documents. If a fiduciary-beneficiary exception applies to a communication, that would be shown in the covenants, bylaws or perhaps a statute.
- The Board’s Lawyer is Not the Community’s Judge. When new owners visit HOA meetings and see directors defer to the association’s counsel on legal matters, this may lead to a misconception that the written opinions of the HOA’s lawyer are the “law of the land,” subject only to review by a judge. The opinions of the board’s attorney are simply her advice. Sometimes attorneys are wrong. Trial judges and appeals courts exist to make final determinations on contested legal disputes.
- “What Did the Board’s Attorney Advise” is Not the Best Question. This is really the most important point here. Requesting the HOA to disclose its attorney-client communications is not the best question to ask. Instead, the owner should ask the board to explain its authority to adopt or enforce a resolution. A HOA or condominium’s legal authority is public. It is written in a declaration, covenant, bylaw, statute, etc. The written legal authority and the official policy cannot be privileged. If the owner and board were to end up in litigation, sooner or later this would have to be spelled out in court. Chasing after what the attorney confidentially advised the board is not the direct path to solving the owner’s problem. If the board or its managers object on grounds of privilege when an owner asks them to point to the section in the governing documents that undergirds the policy, then the owner needs a lawyer of her own.
Ultimately the owners challenging the directors’ parking policy in the Manchester Oaks HOA case prevailed in Court, invalidating the board’s parking resolution. They didn’t need the attorney’s advice letter to achieve this. In other cases, owners don’t need to invade the board’s privilege, when it is properly invoked. However, it is very common for corporate parties to try to abuse the attorney client privilege in litigation. When someone invokes the attorney-client privilege in a HOA dispute, that is a good time to retain qualified legal counsel. If a party doesn’t back down when called out on an improper invocation of privilege, the dispute can be put before a judge. This “Check Your Privilege, HOA” blog post is the first in a series about how the attorney-client privilege is used and misused in the community association context. In future installments, I plan on discussing a couple hot topics. Does the Property Manager qualify as the client for purpose of the ACP or is it waived if the manager participates in the discussions with the attorney? Are the HOA’s lawyers’ billing statements protected from disclosure to the owners by the ACP or are they fair game?
For Further Reading:
Batt v. Manchester Oaks Homeowners Ass’n, 80 Va. Cir. 502 (Fairfax Co. 2010)(Ney, J.)(case reversed on appeal on other issues).
Walton v. Mid-Atlantic Spine Specialists, P.C., 280 Va. 113 (2010).
Michael S. Karpoff, “The Ethics of Honoring the Attorney-Client Privilege” (CAL CCAL Seminar Jan. 31, 2009)
April 17, 2015
Valuable Voices of Dissenting Directors in Homeowners Associations
Homeowners often acquire the impression that the HOA Board of Directors and property managers act in unison. However, there are often dissenting directors in homeowners associations. Homeowners seek changes to improve their community. Enough of her neighbors agree to get her elected at the annual meeting. Once they attend their first Board meeting as a director, they discover that the property manager is handling the day-to-day affairs of the association. The volunteer board only meets every so often. The majority of directors may find the property manager’s services and information acceptable. If the new director disagrees with a proposal, she is outvoted by the majority and perhaps informally by the property manager, association attorneys, etc. In the Hebrew Scriptures, the Lord spoke to the prophet Elijah not in an earthquake, hurricane, wind or fire, but in a “still small voice.” 1 Kings 19: 11-13. Dissenting directors in homeowners associations may feel sometimes like a still small voice in the wilderness. Even when it may not be immediately fruitful, small voices may nonetheless be influential voices. The rights to speech, due process and private property are related.
Homeowners frequently hear that they must support increase assessments and fines because the policies “protect property values.” However, the value of a home reflects, in part, the extent to which its use may be maximized by its residents. In my opinion, restrictive covenants can decrease the value of property. Where the covenants are reasonable and the association is well run, the benefits of membership may meet or exceed the “cost” of any restrictions and assessment liability. While potential buyers may notice the appearance of neighboring property, they make their decision primarily on the home on the market. For example, if a neighbor has peeling paint on her deck, that practically affects the value of that property and not its neighbors.
Some might object on the grounds that this reasoning is selfish and that really, “we are all in this together.” However, the individual property rights of one neighbor are precious to all neighbors. An assault to the rights of one threatens the rights of others similarly situated.
In a similar way, when dissenting voices on a Board of Directors represent a genuine concern about the governance of the association, they have great deliberative value even if they don’t carry a majority vote. In the association, the property manager and other advisors serve at the discretion of the board as represented by the majority. Association attorneys can be expected to be competent and professional, but they advocate for the legal entity. A dissenting director cannot reasonably expect the association’s advisors to provide her with independent counsel. So, what rights and responsibilities to dissenting directors have in a Condominium or HOA? Here are a few key considerations:
- Legal vs. Practical Power: While the majority (and by extension the professionals they retain) may enjoy the practical power of control, by law all directors have the same legal duties to the Association. Lawyers, lawmakers and judges usually describe this legal duty as “fiduciary.” Virginia Beach association lawyer Michael Inman explains the fiduciary duty of directors in a July 30, 2007 post on his Virginia Condominium & Homeowner’s Association Blog. He argues that a Board has a fiduciary duty to conduct debt collection against delinquent owners. However, the duty to conduct debt collection is not absolute. The board must not exceed its authority or neglect its other obligations. A director who does not enjoy practical control of the operations must understand her fiduciary duties in order to protect her voice. A director may also enjoy indemnification in the event of a civil lawsuit arising out of board action.
- Identify Potential Conflicts of Interest: A conflict of interest arises when a board member is called to vote on a matter where his personal interests and the interests of the association lead in opposite directions. For example, the director may be a principal for a company the association is considering doing business with, such as a property management company, construction contractor, pavement company, or other vendor. A director must be aware of how a vote on a potential resolution by her or other directors may give rise to a legal claim to undo the disputed transaction. However, the existence of a conflict of interest may nonetheless be acceptable under the circumstances. For example, the Virginia Nonstock Corporation Act provides “safe harbors” where the conflict of interest is disclosed to the board or the owners eligible to vote and they pass the resolution anyway or the transaction is deemed “fair” to the association at trial. The burden is on the director with the conflict of interest to properly disclose it.
- Owners’ Rights vs. Directors’ Rights: A director wears different hats. She is a director, an owner and probably also a resident or a landlord in the community. This presents unique circumstances not usually found in business or nonprofit boards. The director may leave board meetings and then go home in that same community. In a condominium, the director may rely upon the association’s employees for concierge services, HVAC maintenance, etc.
- Document Review Rights: Directors and owners have rights to review association financial statements and other documents as spelled out under Virginia law. Traditionally, a business would store these documents in paper files at its official address. As more and more information moves “on the cloud,” how a director or owner practically exercises her rights to review will evolve. Hopefully cloud computing will translate into convenient, transparent exercise of owners or directors rights to review financials and other documents to which they are entitled.
- Governance Issues: Virginia law and the bylaws impose obligations on the board of directors on how it may go about adopting legally effective resolutions. The board may be required to give notice of a meeting, achieve a quorum and record minutes and written resolutions. However, leadership may desire the flexibility of adopting resolutions without the necessity of an actual meeting. Formal governance requirements allow dissenting directors an opportunity to have their voices heard.
- Human Relationships: Even when leadership and managers disagree about major decisions and policies of the association, it’s important not to lose sight of the values of professionalism, respect and diplomacy. I recently participated in a continuing education seminar where a foreclosure attorney explained how important respect was in his practice. Although his job requires him to foreclose on commercial real estate supporting its owner’s livelihood, he reminds himself that these borrowers are also someone else’s family. Being a resilient advocate of the property rights of oneself and one’s neighbors requires civility. Ultimately, the best directors look at situations from the perspective of leadership.
In most situations, dissenting directors in homeowners associations will not need to retain independent legal counsel. However, if you are a director or committee member experiencing a legal dispute adverse to the association, contact a qualified attorney to protect your rights.
legal citation: Va. Code Section 13.1-871, Virginia Nonstock Corporation Act, Director Conflict of Interests.
photo credit: East Norriton Townhouses via photopin (license)(photo depicts homes in Pennsylvania and not matters discussed in this blog post)
March 18, 2015
Court Scrutinized Role of Foreclosure Law Firm Rating System
Successful law firms cultivate, among other things, professional referral sources and a reputation for responding to client needs. Can these best practices be taken too far? This topic came up in a federal court opinion issued in a class action lawsuit brought by home loan borrowers against Friedman & MacFadyen, a Richmond debt collection law firm and its foreclosure trustee affiliate.
On February 27, 2015, I wrote an entry about the Fair Debt Collection Practices Act claim in this case, Goodrow v. Friedman & MacFadyen. The law firm had a practice of sending letters to borrowers, threatening to file lawsuits. Later correspondence referred to lawsuits. However, the borrowers alleged in their class action that no such lawsuits were ever filed. The FDCPA claim sought money damages for the alleged False Representations. What would motivate a law firm to threaten to sue and later make references to non-existent suits if the goal was foreclosure? Another part of the judge’s opinion suggests an answer.
Fannie Mae and its loan servicers retained Friedman & MacFadyen and F&M Services, Inc., to collect on home loan debts by foreclosing on deeds of trusts in Virginia. The borrowers allege that this specific arrangement incentivized the law firm to complete foreclosures quickly and discouraged delays and loan modification workouts. In the foreclosure, the lender appointed F&M Services, Inc., as substitute trustee under the mortgage documents. A third-party, Lender Processing Services, Inc., played a significant role. LPS maintained a rating system for foreclosure law firms. Timely completion of matters timely would earn a firm a “green” rating. Mixed results earned a “yellow” designation. If matters got bogged down, a “red” rating could result in loss of future referrals (the opinion does not reference any colored cupcakes). This foreclosure law firm rating system played a key role in the facts of the case. LPS required the law firm to pay a referral fee for each case. At the end of each matter, Friedman & MacFayden filed a trustee’s accounting with the local Commissioner of Accounts. According to the plaintiffs, the $600.00 trustee’s commission listed on the accountings included an undisclosed referral disbursement to LPS.
The class action lawsuit accused the defendants of breaching their trustee’s duties in the foreclosures. The borrowers also alleged that the law firm engaged in impermissible “fee-splitting” with the non-lawyer referral company LPS. A foreclosure trustee is forbidden from purchasing the property at the sale. The Trustee’s own compensation is subject to review in the filed accounting. In foreclosure matters, courts in Virginia interpret a foreclosure trustee’s duties to include a duty to act impartially between the different parties who may be entitled to the property or disbursement of the proceeds of the sale, including the lender, borrower and new purchaser. Concurrent with such trustee duties, the defendants had their arrangement with Fannie Mae and LPS.
This is where the representations in the correspondence to the borrowers seem to fit in. If borrowers demanded loan modifications, made repeated inquiries, requested postponement or filed contesting lawsuits, then matters could be delayed. The law firm’s colored rating with LPS might be downgraded and cases might stop coming.
The law firm was not purchasing the properties itself in the sales at a discount. However, they were alleged to be financially benefiting from the disbursement of the proceeds of the sale in a manner not reflected in the trustee’s accounting statements. Further, any amount paid to LPS from the sale went neither to reduction of the outstanding loan amount or for allowable services in the conduct of the sale.
In considering the facts, the federal court denied the defendant’s motion to dismiss the borrowers’ Breach of Fiduciary Duty claim. The court found those claims to adequately state a legal claim that would potentially provide grounds for relief.
Whether a borrower has grounds to contest a real estate foreclosure action in court depends upon the facts and circumstances of each case. The Goodrow case illustrates how many of those circumstances may not be apparent from the face of the loan documents, correspondence or trustee’s accounting statements. If you have questions about the legality of actions taken in a foreclosure, contact a qualified attorney without delay.
case cite: Goodrow v. Friedman & MacFadyen, P.A., No. 3:11-cv-020 (E.D.Va. July 26, 2013).
(I would like to thank the generous staff member who brought in the cupcakes depicted on the featured image. They were delicious and great to photograph!)
January 21, 2015
Sweet Home Chicago: Are Association Property Managers Debt Collectors?
A few days ago, Virginia state senator Chap Peterson introduced new Homeowner Bill of Rights legislation in the 2015 General Assembly. The proposal sets out certain rights of property owners in HOA and condominium communities. For example, SB1008 recites a owner’s right to due process in the association’s rule violation decision-making. I anticipate political debate on whether SB1008 simply restates existing legal protections or contributes to them. Regardless, the introduction of this bill illustrates that rule violations are a hot item in association matters. Who collects on association rule violations? Boards in most associations are comprised of unpaid volunteers. Most of an association’s day-to-day work is done by property managers hired by the board.
Federal Debt Collection Laws.
Generally, the Fair Debt Collection Practices Act (“FDCPA”) protects consumers from abusive debt-collection practices. This Act does more than provide defenses in collection lawsuits or authorize a federal agency to take regulatory action. If debt collection businesses, including law firms, violate the FDCPA, they may be liable in an independent lawsuit. Under the FDCPA, it is easier for debtors to sue collectors for false or misleading statements in correspondence. The Act also requires certain notices in correspondence, such as notifying the consumer of their right to seek verification of the debt. In my previous blog post, I provided some examples of this in the foreclosure context. Where the facts and circumstances allow, class action lawsuits may be brought for FDCPA violations. Broad application of the FDCPA against association property managers would force them to change many of their practices. For example, the Act examines whether a notice would be materially confusing to the least sophisticated consumer. Are association property managers debt collectors for purposes of the FDCPA?
Welnowska v. Westward Management, Inc.
A 2014 court case illustrates the current limitations in applying the FDCPA to association property managers. Anna Welnowska & Jerzy Sendorek owned a residential condominium unit in the Madison Manor 2 Condominium Association in Chicago, Illinois. In July 2012, Madison Manor hired Westward Management, Inc., as its “full service” property manager. Part of Westward’s duties was collection of assessments and fines. Westward mailed collections letters to Welnowska & Sendorek in the name of Madison Manor. The owners disputed the charges. Madison Manor filed a lawsuit seeking a judgment for the unpaid sums and eviction of the owners.
In August 2013, Welnowska’s & Sendorek’s attorneys filed a FDCPA lawsuit against Westward in federal court. The manager filed a motion to dismiss, arguing that it is not a “debt collector.” The FDCPA has an exception for collections activity that is “incidental to a bona fide fiduciary obligation.” 15 U.S.C. Sect. 1692a(6)(F). A fiduciary is someone, such as a trustee or corporate director, who owes a high standard of care in managing someone else’s money or property.
Westward argued that its debt collection activity was only one of many duties it had to the association. The owners argued that this exception did not apply because the debt collection was central to the fiduciary obligation, not incidental. In his July 24, 2014 decision, Judge Edmond Chang rejected the owners’ argument on the grounds that Westward had numerous non-financial, managerial obligations to the association.
Alternatively, the owners argued that the debt collection activity was entirely outside the scope of Westward’s Management Agreement with the association and thus was not “incidental to” the fiduciary obligation. This written agreement specifically excluded collection on delinquent assessments and charges except for FDCPA notices. Westward separately billed the association for the collections activity at issue in the case.
The Court found that if Westward indeed acted outside the scope of the Management Agreement, the incidental-to-a-fiduciary-obligation exception would not apply. This case illustrates why an association’s property manager does not enjoy “automatic” exception from the FDCPA. In each case where the manager asserts this defense, courts will review the Management Agreement and related facts and determine: (a) whether the FDCPA would apply absent the exception; (b) if the manager has a fiduciary obligation to the association; (c) the nature and scope of that fiduciary obligation; and (d) the relationship between the debt collection activity in the case and that fiduciary obligation. The Westward case demonstrates the challenges to homeowners in bringing a successful FDCPA claim against a property manager.
Westward sought refuge from the FDCPA under the “fiduciary” exception. Most service providers try to avoid designation as a fiduciary. Fiduciaries owe strict duties to their beneficiaries. If the court deems that there is more than one beneficiary, the court may apply a duty to the fiduciary to act impartially between them. A fiduciary may be liable to a beneficiary for a claim for Breach of Fiduciary Duty. Over the years, the General Assembly has enacted legislation imposing special duties on other types of fiduciaries, such as trustees in foreclosures and estates.
Foreclosure Trustee as Debt Collectors.
Just because a debt collector is a fiduciary doesn’t mean that he is excepted from FDCPA compliance. For example, the FDCPA applies when lawyer debt collectors act as trustees in residential foreclosures where the communications include a demand for payment. Courts have found that a debt collection attorney’s activity as a foreclosure trustee isn’t incidental to the fiduciary obligation; it is central to it. The foreclosure trustee debt collector must refrain from continuing foreclosure proceedings or litigation activity until the debt verification requirements are met. In a foreclosure sale, the debt collection attorney obtains cash applied in satisfaction of the debt. A foreclosure trustee has fiduciary obligations that go beyond merely collecting the purchase price. A foreclosure trustee has a broad set of duties under the loan documents to prepare for the sale, conduct it, and disburse the proceeds properly. While association property managers and foreclosure trustees are different types of fiduciaries, in both examples the professional has a broad set of obligations impacting more than one party.
Whether debt collection activity conducted by an association’s manager is non-abusive or “incidental to a fiduciary obligation” requires independent analysis in each case. Boards, homeowners and property managers must familiarize themselves with debt collection laws and the management agreement to determine whether the manager must comply with the strict standards of the FDCPA. If an association’s property manager is engaging in improper collections activity against you, contact a qualified attorney to discuss your rights.
Welnowska v. Westward Management, Inc., No. 13C06244 (N.D.Ill. July 24, 2014)
Townsend v. Fed. Nat’l. Mortg. Ass’n, 923 F. Supp. 2d 828 (W.D.Va. 2013)
Photo credit (does not depict property discussed):
May 21, 2014
Dealing With Trust Issues: Fiduciary Duties of Foreclosure Trustees
In Virginia, unlike some other states, a foreclosure is a transaction and not necessarily a court proceeding. A trustee appointed by the lender auctions the property. The proceeds of the sale must be applied to reduce the outstanding loan amount and transaction costs. A Trustee has special duties to the parties as their “fiduciary.” What are the fiduciary duties of foreclosure trustees?
At real estate closings, settlement attorneys present borrowers with a document entitled “Deed of Trust.” In this document, the borrower pledges the purchased property as collateral. The Deed of Trust provides the legal framework for the lender to pursue foreclosure in a default. It also procedurally protects the borrower’s property rights. When the lender records the Deed of Trust in the land records, a lien encumbers the property until the debt is released. The Deed of Trusts names one or more persons as Trustees for the property. It describes the borrower as the creator of the trust and the bank as the beneficiary. If the borrowers avoid falling into persistent default of their loan obligations, this trust language is largely irrelevant.
If the borrower experiences economic hardship and falls behind on their payments, however, they will begin to receive notices referencing the Deed of Trust. The bank may appoint a Substitute Trustee to handle the foreclosure. The culmination of the foreclosure process is the Foreclosure Trustee’s public auction of the property to satisfy the distressed loan. What does the foreclosure process have to do with trusts and trustees? Generally, under Virginia law, a breach of a trustee’s duties gives rise to a Breach of Fiduciary Duty legal claim. Lawyers like to pursue these claims because they may impose duties and remedies not articulated in the contract. Does this trust relationship give the homeowner greater or fewer protections against breaches by the bank’s agents during the process?
On May 16, 2014, I posted an article about the materiality of technical errors committed by the mortgage investors in the foreclosure process. That post focused on two new April 2014 court opinions providing some guidance on what remedies borrowers may have for those errors. Those new court opinions also provide fresh guidance about fiduciary duties of foreclosure trustees. Today’s blog post is about dealing with trust issues in foreclosure.
Bonnie Mayo v. Wells Fargo Bank & Samuel I. White, PC:
The Deed of Trust on Bonnie Mayo’s Williamsburg home listed Wells Fargo Bank as the “beneficiary” and the foreclosure law firm Samuel I. White, PC, as the Trustee. Mayo’s post-foreclosure sale lawsuit alleged that the White Firm breached its fiduciary duties to the borrower. For example, Mayo’s Deed of Trust required the lender to state in written default notices that she may sue to assert her defenses to foreclosure. The lender’s notices did not advise her of this, and she did not sue until after the foreclosure occurred. The Federal Judge considering her claims noted that there is conflicting legal authority on the extent to which a foreclosure Trustee can be sued for Breach of Fiduciary Duty. In his April 11, 2014 opinion, Judge Jackson observed that under Virginia law, a Foreclosure Trustee is a fiduciary for both the borrowing homeowner and the mortgage investor. While courts impose those duties on Foreclosure Trustees set forth in the Deed of Trust, they are reluctant to impose all general trust law principles.
Judge Jackson concluded that in addition to those duties set forth or incorporated into the Deed of Trust, the only other imposed on Trustees is the duty of impartiality. For example a foreclosure sale must be set aside where a trustee failed to refrain from placing himself in a position where his personal interests conflicted with the interests of the borrower and the lender. For example, the Trustee may not purchase the auctioned property himself or assist the bank in setting its bid. The Federal Judge dismissed Ms. Mayo’s Breach of Fiduciary Duty claims against the White Law firm, since impartiality was not adequately pled in the lawsuit.
Squire v. Virginia Housing & Development Authority:
In an April 17, 2014 opinion, the Supreme Court of Virginia focused on the limited nature of a Foreclosure Trustee’s powers. In this case, the Deed of Trust required the lender to try to conduct a face-to-face meeting with the borrower between the default and the foreclosure. The lender’s Trustee foreclosed, even though the lender did not make such an effort. The Court observed that the trustee’s authority to foreclose is set forth in the Deed of Trust. The Trustee’s power to conduct the sale does not accrue until the specified conditions are met. The borrowers’ failure to make monthly payments does not constitute a waiver of their right to expect the lender’s appointee to follow the rules. The fact that the borrower is in default does not authorize the mortgage investor and the trustee to disregard the Borrower’s protections set forth in the Deed of Trust and any incorporated regulations.
This holding is consistent with Virginia’s practice of conducting foreclosures out of court. The procedures set forth in the deed of trust provide the lender with a means of selling the property without the time & expense of a judicial sale. If the procedural nature of those rights is not preserved, then foreclosure disputes will go to court more often, depriving the lenders of the convenience of non-judicial foreclosure.
Ms. King alleged that the Foreclosure Trustee breached its fiduciary duty by conducting the sale prior to a required face-to-face meeting with the borrower. The Supreme Court of Virginia found that the Breach of Fiduciary duty claim was improperly dismissed by the Norfolk judge. The Court sent the case back down for consideration of damages.
These two new court opinions show how breach of fiduciary duty claims against foreclosure trustees require legal interpretation of the deed of trust. If the lender and trustee digress from its procedures, impartiality may be easier to prove.
Discussed Case Opinions:
Mayo v. Wells Fargo Bank, No. 4:13-CV-163 (E.D.Va. Apr. 11, 2014)(Jackson, J.)
Squire v. Virginia Housing Development Authority, 287 Va. 507 (2014)(Powell, J.)
Credits: Trust Arch photo credit: Lars Plougmann via photopin cc Williamsburg photo credit: Corvair Owner via photopin cc (for illustrative/informational purposes only. Depicts colonial Williamsburg, not Ms. Mayo’s home)