No
general principles are better settled than, a trustee is the agent of both parties
and must consult impartially the interests of each. . . . He is supposed to be
the common friend and agent
of both parties impartial and disinterested, whose duty it is to act justly
and discretely towards those in interest.
Spencer and Miller v. Lee, 19 W.Va. 179, 187-88 (1881). As Justice Cardozo
noted, the fiduciary duty of a trustee carries a responsibility to behave with “[n]ot
honesty alone, but the punctilio of an honor the most sensitive.” (See
footnote 2)
I dissent, however, to the rest of the opinion. I do so because the questions certified from the circuit court concerned the breadth of a trustee's duties under the common law, but the majority opinion reformulated those questions so as to only construe W.Va. Code, 38-1-3. The result is that, while the majority opinion contains numerous scholarly citations to the centuries-old common law duties of a trustee, the opinion ignores these citations in reaching its ultimate, and wrong, conclusion: A trustee only has the duties defined by statute and no more.
For at least 128 years, this Court has utilized the common law to empower trustees to deeds of trust to “do the right thing.” The Court, not the Legislature, required trustees to approach each deed of trust with an open mind and do the fair thing for both the lender and the landowner.
But the
majority opinion's holding that trustees can only do those acts contained in W.Va.
Code, 38-1-3, and no others, overrules centuries of common law,emasculates
trustees and makes them virtual automatons working at the sole behest of
lenders. Furthermore, W.Va. Code, 38-1-3 is a skeletal statute. It has
no provisions setting forth what a creditor has to transmit to the trustee
to initiate a foreclosure. It has no verification requirements. It also has
no process for the borrower to raise legitimate objections. As the majority
opinion correctly notes, “the present statute governing sales under trust
deeds . . . may well be inadequate to address the complexities of the modern
state of the home loan mortgage industry as it relates to trust deed transactions.”
I
cannot so blithely turn my back on the common law in favor of a hollow statute
which even the majority admits is inadequate.
A trustee is nothing more than a third-party middleman who holds and manages property, which belongs to one person, for the benefit of another person. The trustee mechanism was born half a millennium ago in English courts of equity as a fair and fast mechanism to convey and manage interests in real and personal property, and is a mechanism that remains with us to this day. But the use of the trustee mechanism in the context of loans and mortgage deeds did not begin in America until approximately 200 years ago.
In Middle English times, money systems were weak and credit information was primitive. Laws against usury prohibited lenders from charging interest on loans. Land was a large part of the nation's wealth, and people turned to land as security for loans. To bypass the usury laws and obtain credit, landowners would give lenders a mortgage deed for their land in exchange for a loan. The lender took immediate possession of the debtor's land, and would collect the rents and profits from the land _ instead of collecting interest on the loan _ until the loan was paid. At some future date established in the mortgage deed the landowner would repay the principal of the loan, the deed would (hopefully) be returned, and the lender would (hopefully) allow the landowner to reenter the land. But not always; unfortunately, many landowners were bilked out of their property by unscrupulous lenders.
And, of course, if payment was not made by the maturity date of the loan, then the lender's ownership of the land became absolute.
Inevitably, landowners and lenders hired lawyers and turned to the court system for a remedy. To prevent unfair behavior by lenders, in the sixteenth century courts of equity were asked by landowners to compel lenders to convey the land back to the landowners. The English courts of Chancery began to recognize what was called the “equity of redemption,” and the landowner was allowed, even after the maturity date of the loan, to repay the lender and get his land back.
Over time, lenders began a custom of allowing landowners to retain possession of their mortgaged land until there was a default on the loan. When the landowner defaulted, courts of equity were again asked to respond, and developed the system of equitable foreclosure. The landowner's failure to repay the loan no longer resulted in an automatic forfeiture of their ownership interest in the land to the lender. Instead, the lender would have a right to petition a court for a decree of foreclosure, the granting of which would bar the landowner's right to the equity of redemption. The lender would thereby recoup his investment by taking title and possession of the property if the landowner failed to repay the loan within a time fixed by the court. The equitable foreclosure system was slow but fair: the lender could petition the court to give ownership of the land to the lender to repay the loan, but the landowner would have a chance to remedy the default or explain the default when the lender had not behaved reasonably.
By the end of the seventeenth century, mortgages had essentially evolved into a cumbersome, inefficient mechanism more akin to a lien rather than a deed of an interest in property. Both lenders and landowners suffered. Lenders could not take possession of the land in case of a default without first dispensing with the landowner's right to the equity of redemption by pursuing a decree of foreclosure. Conversely, little by little a custom developed such that lenders would allow landowners to retain possession of their land; the end result was that lenders could only seize possession of the land during the loan through an action at law for ejectment. If after default a landowner offered to repay the lender the loan amount and was refused, the landowner had to bring a special bill in equity for redemption; unfortunately, the landowner could not assert this equitable right as a defense to an action at law, such as to an action for ejectment brought by the lender.
Furthermore, at the end of the seventeenth century the most common type of foreclosure in England was the “strict foreclosure,” whereby the lender, without a sale of the land, was decreed the full owner of the property. As one commentator noted, “[t]he action of strict foreclosure entailed a resort to Chancery proceedings which were notoriously protracted and expensive.” (See footnote 4) Only in limited cases would courts decree that the land be sold at a public auction, and the lender could not bid on the property. In other words, lenders had only two options: either possession and title to the property, or if the court deemed it necessary, the proceeds of the sale of the property to a third party and a claim for the deficiency.
As the English common law was transplanted to the American colonies, it was modified to reflect the needs of settlors for improved, more efficient means of financing growth. Mortgages were used in the colonies, but the remedy of foreclosure was modified by the courts to meet domestic needs. As time went on, strict foreclosure was supplanted by foreclosure followed by a judicial or public sale, and by the 1830s strict foreclosure had virtually vanished from the American legal landscape. Further, American courts allowed the lenders to bid on the property at the judicially-ordered public auction, and to later make a claim against the debtor for the difference between the auction sale price and the balance of the debt due.
Lenders, however, still wanted to bypass the delays and costs associated with lawsuits to force a judicial sale of mortgaged property. Lenders took the next step in history, and with the help of lawyers added contractual language to mortgages by which landowners waived their equitable rights of redemption and right to a judicially-ordered sale of the land. When signed by the landowner, the language expressly gave the lender the authority to seize and privately sell the property without court action, and without the equity of redemption. Unfortunately, this private sale process, which is still used in many states today, is open to many abuses:
[F]or
example, the mortgagee may not make a good faith effort to realize any more than
the amount of the debt, despite the fact that the mortgagor has considerable
equity in the property; the mortgagee may foreclose through the power of sale
for only a technical default, which a court might overlook; the mortgagee may
foreclose because of factual errors, having failed to secure the proof of default
that would be necessary in judicial foreclosure; the mortgagee may sell the property
after a default that is the product of fraudulent or near-usurious terms in the
mortgage contract, terms that a court would refuse to enforce in judicial foreclosure.
The efficiency and savings that are possible through the use of power of sale
foreclosures are, therefore, at least partially offset by the potential for injustice
that seems to be inherent in nonjudicial remedies.
Comment, “Power of Sale Foreclosure after Fuentes,” 40 U.Chi.L.Rev.
206, 212 (1974).
The common-law private power of sale mechanism predates the United States Constitution, as do its abuses. But it was not until the early 1800s that the mechanism became popular in the United States. With this growing popularity, states began enacting statutes establishing conditions of advertisement and sale that had to be met before the private sale power could be validly exercised. Many courts, however, viewed private powers of sale “with jealously, as an invasion of their sphere” (See footnote 5) and began imposing limits. For example, courts concluded that lenders were not permitted to buy the property at the sale.
Some southern states _ including our mother state of Virginia _ took an even more extreme view, and concluded outright that a private power of sale given to a lender was wholly invalid. See Taylor's Adm'r v. Chowning, 3 Leigh 654, 30 Va. 654 (Va. 1832) (“[I]f a mortgage be made to secure a debt, and power be thereby given to the mortgagee to sell the subject to pay the debt, the mortgagee cannot execute the power, the character of creditor and trustee, in such case, being incompatible[.]”). These courts held that no one could grant a private power of sale to a mortgagee-lender.
It was precisely because of the confluence of these historical events that lenders and landowners, through courts of equity, merged the common-law concepts of trustees, mortgages and private powers of sale, and thereby created deeds of trust as a fair tool to secure debts. A trustee to a deed of trust has, therefore, rights and duties based upon centuries of precedent in equity. Such a trustee is an intermediary who must act to protect both the lender's investment and the landowner's opportunity to remedy a default when the lender is behaving unreasonably or usuriously.
I
concede that my summary of several centuries of common law is exceptionally brief,
but this history teaches us two principles that are relevant to the instant case
but that were quickly forgotten by the majority opinion: this “mortgage” system
involving trustees developed over the years primarily because of abuses by lenders;
and the evolution occurred in courts of equity, not through legislative action.
But the
majority opinion's bookish excursion into the common law has nothing to do with
the majority opinion's final holding. The majority opinion states that because “we
find nothing in the language of W.Va. Code § 38-1-3 to suggest that a trustee
has a duty to
consider objections to the foreclosure sale,” (See
footnote 9) then a trustee can and must ignore a party's objections
and proceed with a sale of the property. In the eyes of the majority opinion,
a trustee is powerless to consider a party's legitimate objections. In other
words, if the duty to consider an objection isn't set out in a statute, then
there is no duty. Forget five centuries of application of the common law to
facts; the majority opinion says that because the Legislature has spoken on
this topic, the common law has ceased to exist.
The majority opinion is, therefore, a classic example of “dual personalities.” On the one hand, quoting the common law, it says trustees “may and ought” to do things to remove impediments to a fair sale. On the other hand, it says trustees don't have to remove impediments to a fair sale because the statute doesn't explicitly give them the power to do so. If practitioners of the law come away from the majority opinion confused about the true responsibilities of a trustee, I wouldn't blame them.
I have read the statute at hand, W.Va. Code, 38-1-3, and common-law cases interpreting that statute stretching back to 1879. I have far more faith in the sensibilities of trustees than the majority opinion, and believe this Court has amply set forth the powers and duties of trustees in the deed of trust context, in general, and in the context of W.Va. Code, 38-1-3, in particular. Put simply, I do not believe that W.Va. Code, 38-1-3 obliterated the common law responsibilities of a trustee to ensure that a foreclosure sale is conducted properly and fairly, for both the lender and the landowner.
W.Va. Code, 38-1-3, parsed down into its constituent parts, says this:
1. The
trustee in any trust deed given as security by a grantor,
2.
Shall:
A.
Whenever required by any creditor secured by the deed,
AND
B.
After the debt due to such creditor:
(i).
Shall have become payable by the grantor and
(ii)
Default shall have been made by the grantor
(a)
in the payment thereof, or
(b)
any part thereof,
AND
C.
If all other conditions precedent to sale by the trustee, as expressed in the
trust deed, shall have happened,
3.
Sell the property conveyed by the deed, or so much thereof as may be necessary,
at public auction, having first given notice of such sale.
The majority
opinion gives the statute a minimalist construction, construing it to read “the
trustee shall, whenever required by any creditor, sell the property
conveyed by the deed” and leaves it at that. Unlike the majority
opinion, when I read this statute, I see that it carries a lot of hidden baggage
for a trustee. The statute doesn't just say the property has to be sold
the moment a creditor demands a sale; it also says that, before there is a sale,
there must be evidence that (a) the debt to the creditor is payable, and (b)
the debtor has made a default in payment, in whole or in part. The statute also
doesn't say that the entire property must be sold; it says the trustee must sell “so
much thereof as may be necessary,” which tells me that the trustee must
ascertain how much is owed by the debtor and whether the property can be sold
off in smaller parcels.
Now, what should happen if a trustee knows that a creditor is pretty sleazy and “loose with the truth” when it says a debtor is in default in paying a mortgage, (See footnote 10) or a debtor notifies the trustee that the debt has been satisfied, or notifies the trustee that there has been no default in payment? The majority opinion acts like this is a question of first impression under W.Va. Code, 38-1-3, and finds that the trustee has one duty: sell the property, regardless of the facts. If the ejected landowner has a problem with the sale, they can file a lawsuit to set aside the sale or stop the sale.
However, this is not question of first impression. The Court examined just such a situation in Machir v. Sehon, 14 W.Va. 777 (1879). A landowner, Joseph S. Machir, essentially borrowed $1,875.00 in 1868, payable within two years without interest, from William H. Machir, and secured the debt with a deed of trust to land in Mason County. Eight years later, in 1876, William demanded that the trustee sell the land because the debt had never been repaid. The landowner (actually, his wife because Joseph had died) insisted that the debt had been fully paid off and discharged. Sitting between the two parties was the trustee. He refused William's command that the land be sold, and demanded that William produce documentation showing that the debt had not been paid. William pointed to the deed of trust as evidence of the debt. The trustee, unsure as to the existence of a debt, again refused to sell the land.
William then went to circuit court and sought an order to remove the trustee because of his refusal to act. The circuit court _ like the majority opinion in the instant case _ found that the trustee had no choice but to sell the property upon the demand of a creditor. The circuit court therefore removed the trustee from his position, and another person was appointed to sell the property. On appeal, however, the circuit court was reversed and the trustee was reinstated.
This Court began its opinion by looking to the common law of trusts, and found that a trustee in a deed of trust must act “as the agent of all parties in such a way as would promote the interests of all, and not be prejudicial to the rights of either party[.]” (See footnote 11) When a trustee to a deed of trust encounters an issue that interferes with the fair administration of the trust _ such that the rights of either party will be prejudiced _ then at common law the trustee is empowered to do whatever it takes to ensure a fair outcome. As the Court stated,
A trustee in a deed of trust is the agent for both parties, and bound to act impartially between them; nor ought he to permit the urgency of the creditor to force the sale under circumstances injurious to the debtor at an inadequate price. He is 'bound to bring the estate to the hammer,' as has been said by Lord Eldon, 'under every possible advantage to his cestui que trust,' and he should use all reasonable diligence to obtain the best price. He may and ought of his own motion, to apply to a court of equity to remove impediments to a fair execution of his trust; to remove any cloud hanging over the title; and to adjust accounts if necessary, in order to ascertain the actual debts which ought to be raised by the sale or the amount of prior encumbrances.
And he will be justified in delaying for these preliminary purposes the sale
of the property, until such resort may be had to a court of equity. If he should
fail however to do this, the party injured by his default has an unquestionable
right to do it; whether such party be the creditor secured by the deed, or
a subsequent incumbrancer or the debtor himself or his assigns.
14 W.Va. at 783 (emphasis in original) (with citations omitted). In other words,
at common law a trustee to a deed of trust has the power to delay selling the
property, and to consider the objections of a party (including objections regarding
the actual amount of the debt due).
Like the instant case, the Court in Machir v. Sehon was asked to take the next step and determine the effect that W.Va. Code, 38-1-3 had upon these common-law duties. (See footnote 12) Unlike the instant case, the Court found that W.Va. Code, 38-1-3 merely set out a general rule for trustees to a deed of trust. The Court found that the statute acted in conjunction with the common law, not as a replacement for the common law. The Court said:
The
object of this [] section seems to be to provide a general rule for the government
of trustees, except where it is otherwise provided in the deed of trust. From
this [] section I think it may
be fairly deduced: 1st. That the trustee should not sell unless
default be made in payment; 2d. If the debt secured has been paid, he should
not sell.
.
. . And if the debt has not been paid in full, but it is necessary that there
should be an adjustment of accounts in order to ascertain the actual debt which
ought to be raised by the sale, or the amount of prior incumberances [sic], or
where the creditor named in the deed of trust has assigned the debt secured,
or part thereof, and the debt or part thereof has been paid to the assignee by
the debtor and there is controversy as to such assignment and the validity of
such payment under such circumstances as to render it doubtful whether the debt
has in fact been properly paid in whole or part to such assignee, and who is
entitled to the debt, the trustee ought not proceed to sell, until these matters
are adjudicated and settled; and he is justifiable in delaying a sale for this
preliminary purpose.
14 W.Va. at 785-86. The Court then went on to make clear that the statute preserves
a trustee's common-law fiduciary discretion to do what is right by all parties.
This Court found, in 1879, that neither the common law nor W.Va. Code,
38-1-3 mandates that a trustee apply to a court for a declaratory judgment
every time a creditor or a debtor raises an objection to a foreclosure. Instead,
under the common law and the statute, the trustee must do what the trustee
sees is necessary to fairly execute the trust.
I
do not mean to say, that it is the absolute duty of the trustee of his own motion
to apply to a court of equity in all such cases to remove such impediments to
a fair execution of his trust; for in some cases the party, who may have or claim
to have an interest in the subject of the trust and its execution by a sale thereunder,
and who demands a sale to be made by the trustee, may be insolvent, or the demand
of sale by such person may be made simply for frivolous and vexatious purposes
without any real propriety for a sale to be made. What I do mean to say is, that
where such impediments exist to a fair execution of the
trust, the trustee ought not to proceed to sell the property, until such impediments
are removed, or he is authorized so to do by a court of equity.
14 W.Va. at 786-87.
The majority opinion holds that a trustee to a deed of trust not only has no duty, but even has no right, to consider legitimate objections by a debtor/homeowner to a foreclosure sale, because that duty is not included in W.Va. Code, 38-1-3. Instead, the majority opinion holds that only the debtor homeowner has a right “to seek an injunction or to file an action to have the foreclosure sale set aside.” (See footnote 13) That holding is absolutely contrary to the common law, to the language of W.Va. Code, 38-1-3, and this Court's study of the statute in 1879 in Machir v. Sehon.
I firmly believe that under the common law, even after the enactment of W.Va. Code, 38-1-3, trustees have the right and duty to consider the legitimate objections of the parties to the trust, and to make inquiry where necessary. By enacting W.Va. Code, 38-1-3, the Legislature intended to supplement, not supplant, the common law, as this Court has made clear since 1879.
I therefore dissent to the majority opinion's reformulation of the certified questions. By reformulating the questions to only discuss W.Va. Code, 38-1-3, the majority opinion has failed to inform trustees of their rights and duties under a deed of trust.
Furthermore, I am authorized to state that Chief Justice Albright joins me in this separate opinion.