Title Insurance Customer Alert – The Fourth Circuit Denies Borrower’s Claim for Breach of Fiduciary Duty Against Indenture Trustee. Tayal c. Bank of NY Mellon, Case No. 20-1790 | Kaufman & Canoles
Recently, a unanimous panel of the United States Circuit Court for the Fourth Circuit issued an unpublished opinion dismissing a borrower’s claim that the substitute trustee of his trust deed breached his fiduciary duties by n not stopping a sale with foreclosure based on a dispute over money owed to the lender until the borrower has retained an attorney and filed suit. After “scour[ing] nearly 250 years of Virginia Supreme Court opinions,” the court said it could “find no authority to support [the borrower]the expansive interpretation of a fiduciary’s implied fiduciary duties in the circumstances of this case. » Op. slip at 9 o’clock.
The borrower granted a trust deed in 2005 against property in Fairfax County securing the principal amount of $920,000. In 2017, the borrower defaulted on the loan. The lender purchased the property in a foreclosure sale conducted in 2017. Subsequently, the parties entered into a loan modification agreement (“LMA”), pursuant to which the lender returned the property to the borrower . However, the borrower defaulted on payments under the loan modification shortly thereafter and disputed liability for certain insurance premiums while the lender had title.
A year after the LMA, the acting trustee noticed a foreclosure sale. The borrower responded by notifying the trustee that he disputed the amount claimed by the lender. The trustee refused to void the sale, and the borrower sued in Virginia state court seeking to prevent the foreclosure sale and asserted that the trustee was “responsible for [his] attorney’s fees” for the litigation because it “fails[ed] to cancel [the foreclosure] sale when a legitimate dispute is presented by the borrower”, Slip Op. at 5, thus violating its duty of impartiality. The defendants went to federal court and argued that the trustee was fraudulently joined because the borrower had no viable claim against the trustee (who was not miscellaneous).
The district court agreed, removed the trustee, and denied the borrower’s motion to remand to state court. On appeal, the Fourth Circuit reviewed Virginia law regarding duties owed by trust deed, including Hudson vs. Barham43 SE 189 (Virginia 1903); Crosby v. ALG Tr., LLC, 822 SE2d 185, 190 (Virginia 2018), Young-Allen vs. Bank of Am., NA839 SE2d 897 (Va. 2020), and a case often cited by debtors’ attorneys since it was decided in 1996, Bremer vs. Bitner, 44 Will. Cir. 505 (Fairfax Cnty. 1996) (holding that trustee breached duty of liability by proceeding with foreclosure sale despite dispute between creditor and debtor of amount owed).
The court concluded that the trustee does have a duty of impartiality, but that there is “no obligation for a trustee to proceed on its own initiative to seek judicial relief simply because the debtor and creditor dispute the amount of the debt”. Hudson43 SE at 190. The court held that even if such an obligation existed, there could be no default or damages in the absence of an allegation that the borrower could remedy its default. Young-Allen839 SE2d at 902. Thus, the borrower has not alleged any fact on the basis of which it could conclude a breach of obligation or damages.
The court noted that in reality, Tayal was asking the court to impose an obligation to bias unconditionally favoring him as an unpaid debtor at the expense of all others, which the court rejected. Slip Op. to 10. Finally, among other reasonings, the court noted Bremer was “an outlier” that “diverges from current Virginia law,” Slip Op. at 11 (citing Willner v. Dimon849 F.3d 93, 113 n.6 (4th Cir. 2017)), and accepted the disavowal of Bremer. Accordingly, the court upheld the district court’s decision dismissing the trustee and the claims against him.
Although unpublished, this opinion provides additional guidance on the scope of a fiduciary’s duty of impartiality in a trust indenture. A copy of the notice is available here: https://www.ca4.uscourts.gov/opinions/201790.U.pdf.