Property Insurance Customer Warning – Fourth Circle Dismisses Borrower’s Claim of Breach of Fiduciary Duty Against Deed of Trust. Tayal v Bank of NY Mellon Case No. 20-1790 | Kaufman & Canales

Recently, a unanimous panel of the United States Circuit Court for the Fourth Circuit issued an unpublished opinion dismissing a borrower’s allegation that the substitute trustee of his deed of trust violated his fiduciary duties by not holding a foreclosure sale because of a dispute over amounts owed stopped contacting the lender until the borrower hired the attorney and filed a lawsuit. Search for “[ing] the nearly 250-year long advisory opinion of the Virginia Supreme Court,” the court said it “could find no authority to support it [the borrower]broad interpretation of a trustee’s implied fiduciary duties in the circumstances of this case.” Slip-Op. at 9.

The borrower granted a Fairfax County real estate trust deed in 2005 that secured the principal amount of $920,000. In 2017, the borrower defaulted on the loan. The lender acquired the property in a foreclosure sale held in 2017. Thereafter, the parties entered into a Loan Modification Agreement (“LMA”) under which the lender reassigned the property to the borrower. However, the borrower defaulted on payments under the loan modification shortly thereafter and denied liability for certain insurance premiums while the lender had title to the property.

A year after the LMA, the substitute trustee noticed a foreclosure. The borrower responded by telling the trustee that he disputed the amount demanded by the lender. The trustee refused to cancel the sale, and the borrower filed a lawsuit in Virginia state court to prevent the foreclosure, alleging that the trustee was “responsible for [his] Attorneys’ fees” for the lawsuit because it “fails[ed] abort [the foreclosure] Sale when Borrower Faces Legitimate Dispute,” Slip Op. at 5, violating their duty of impartiality. The defendants went to federal court and argued that the trustee joined fraudulently because the borrower had no viable claim against the trustee (who was non-divers).

The district court agreed, dismissing the trustee and denying the borrower’s motion for remand in state court. On appeal, the Fourth Circuit examined Virginia law relating to duties owed to trustees by deeds of trust, including Hudson vs. Barham43 SE 189 (Va. 1903); Crosby v. ALG Tr., LLC, 822 SE2d 185, 190 (Va. 2018), Young-Allen v Bank of Am., NA839 SE2d 897 (Va. 2020), and a case frequently cited by debtor lawyers since its decision in 1996, Bremen v. Bitner, 44 Va.Cir. 505 (Fairfax Cnty. 1996) (finding that a trustee breached its duty of responsibility by conducting a foreclosure sale despite a dispute between the creditor and the debtor over the amount owed).

The court concluded that the trustee does owe a duty of impartiality, but there is no “duty for a trustee to act alone to seek judicial relief simply because the debtor and obligee dispute the amount of the debt.” hudson43 SE at 190. The court ruled that even if there was such a duty, there could be no breach or damages unless it was claimed that the borrower could remedy his default. Young Allen839 SE2d at 902. The borrower has therefore not asserted any facts from which he could derive a breach of duty or compensation.

The court found that Tayal was in fact asking the court to impose a duty partiality unconditionally favoring him as a non-paying debtor at the expense of everyone else, which the court refused to do. slip op. at 10. Finally, the court found, among other things Bremen was “an outlier” that “deviates from current Virginia law,” Slip Op. at 11 (quote Willner v. dimon849 F.3d 93, 113 n.6 (4th Cir. 2017)), and agreed to the waiver Bremen. Accordingly, the court upheld the district court’s order dismissing the trustee and the claims against him.

This Opinion, while unpublished, provides additional guidance as to the extent of a trustee’s duty of impartiality in a Deed of Trust. A copy of the report can be found here: https://www.ca4.‌uscourts.gov/‌‌opinions/201790.U.pdf.

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