Print Friendly

Are All Your Subs In Line?

Substitutions.  Not subs by the Code, but just straight Substitutions of Trustee.  Couldn’t be simpler, right?  Well, not necessarily, depending on how your Substitutions line up.

Take the case of Mr. Dimock, who was the Trustor on a 1993 $80,000.00 Deed of Trust on his residential property in San Diego.  The assignee beneficiary was Bankers Trust Co.; the Trustee was Commonwealth Trust Deed Services, Inc. (“Commonwealth”); and Commonwealth’s agent was T.D. Service Company.  Simple enough, so far.

In January, 1996, the Trustee’s agent, on Commonwealth’s instructions, recorded a Notice of Default on Dimock’s Deed of Trust.  Bankers’ agent and Dimock then made a forbearance agreement by which the foreclosure would be stopped and Dimock would bring the loan current.  However, Dimock also defaulted on the forbearance agreement. 

On August 15, 1996, Bankers recorded a Substitution of Trustee, prepared by the Trustee’s agent which replaced Commonwealth with Calmco Trustee Services, Inc. (“Calmco”).  The Trustee’s agent also recorded a new NOD as Calmco’s agent.  The agent, however, was evidently unaware of the prior NOD and foreclosure begun by it on the same property.  However, once a title company told the agent of the prior NOD, it abandoned the later NOD and foreclosure and proceeded with the first NOD and foreclosure.  The Trustee’s agent never recorded a Rescission of the NOD nor a new Substitution putting Commonwealth back in as Trustee. 

 Dimock was never sent notice of the second NOD or of the Calmco Substitution and did not know of them until he filed this case (Dimock v. Emerald Properties, LLC (4^th Dist. 2000)  ____ Cal.App.4^th ____).

 On August 27, 1996, the Trustee’s agent recorded a Notice of Sale, stating that Commonwealth would be selling the property at a sale set for September 18, 1996.  Dimock received a copy of the NOS.  Emerald Properties, LLC (“Emerald”) was the third-party buyer at the foreclosure sale and recorded its Trustee’s Deed on October 1, 1996.  The day after it received the Trustee’s Deed, Emerald filed an unlawful detainer action against Dimock and obtained possession of the property.  Dimock responded by filing his action.  The Trustee’s agent filed a cross-complaint in interpleader, since the sale had netted $9,829.02 in surplus funds.  It was ordered to pay them to Dimock.

The appeal covered the issue of whether the sale by the original Trustee was valid, since a Substitution of Trustee had been recorded and the selling Trustee was no longer the Trustee of record.

The appellate court looked at Civil Code §2934a, which allows the beneficiary of a Deed of Trust to substitute the Trustee by recording a Substitution of Trustee and provides that “the new Trustee shall succeed to all the powers, duties, authority, and title granted and delegated to the Trustee named in the deed of trust”.  The only way to avoid the effect of a recorded Substitution is to record a new Substitution.  The Court stated it was “not disposed to create any nonstatutory means” of avoiding the effect of a recorded Substitution of Trustee.  Since the beneficiary had recorded such a Substitution, only the substituted Trustee had the power to sell the secured property at a foreclosure sale.  Because that Trustee did not sell the property, the foreclosure sale was void. 

Section 2934a, which was enacted in 1935, plainly grants the power of sale to the substituted Trustee.  Therefore, Calmco had the power to sell the property since it had been substituted in as Trustee.  Only one Trustee can hold that power.  The alternative would be “confusion, litigation, and chaos” if multiple trustees held the power of sale, the Court said.  The Trustee’s agent was not allowed to simply “abandon” its later Substitution and proceed with the original sale as if the Substitution had never happened.  Practically, the provision of marketable title would be “severely hampered” if that were allowed.

Thus, since Commonwealth had no power to convey the property to Emerald because it was not the record Trustee, the sale to Emerald was void, not voidable.

While the title theory of liens applies to deeds of trust in California, requiring their title to be conveyed from the borrower to the buyer at a nonjudicial foreclosure sale by the Trustee, “the particular circumstances which have permitted other courts to save defective foreclosure sales as voidable rather than void, do not exist here”.  Only where recitals of regularity appear in the deed and no contrary recitals are made have notice defects been found to make a deed voidable, rather than void.  (Little v. CFS Service Corp. (1987) 188 Cal.App.3d 1354, 1359, 233 Cal.Rptr. 923.)  In addition, to overcome a voidable sale, the borrower must do equity by tendering any amounts due under a deed of trust.  (Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 117, 92 Cal.Rptr. 851.)

 In this case, the Trustee’s Deed made no recital that Commonwealth’s power to act as Trustee had survived any recorded Substitution.  It just contained the standard recitals that the foreclosure had been conducted in compliance with the requirements of Civil Code §§2924, et seq.  Therefore, the deed to Emerald “did not create any conclusive presumption that Commonwealth continued to act as trustee”. 

In addition, Dimock was not required to make any tender because the matter was not in equity.  He had only to rely on the fact of the recorded Substitution to show that Commonwealth’s Trustee’s Deed to Emerald was void. 

The Court quieted title in Dimock, subject to liens existing on the property at the time of the foreclosure sale.

This case points up a good procedure which Trustees should use – tracking foreclosures of particular deeds of trust and particular properties.  Had the Trustee or its agent in this case had a database it could refer to to see if there were any existing foreclosures begun on the particular deed of trust or property, it should not have recorded the second Notice of Default and could have investigated the facts surrounding the requested Substitution.  Even if it had recorded the second NOD and the Substitution, when the Trustee requested it to recommence the original foreclosure on the first NOD, it would have seen that a second NOD and Substitution existed.  In investigating those facts, it could easily have averted this lawsuit.

The lesson:  Keep track of the Substitutions on the particular deeds of trust and properties.