On November 29, 2012, the California Court of Appeal in Shuster v. BAC Home Loans Servicing LP, Case No. B235890, decided an issue of first impression in California, namely, whether a substituted trustee has the authority to commence a nonjudicial foreclosure under Civil Code section 2924 pursuant to a deed of trust that failed to designate a trustee. As a matter of first impression, the Court of Appeal held that the omission of the trustee from a deed of trust did not prevent the enforcement of the deed of trust. As a result, the substitute trustee had authority to initiate a nonjudicial foreclosure action.
In 2006, the Shusters borrowed $670,000 from WMC Mortgage Corp. (“WMC”) to purchase a residence. WMC recorded a deed of trust against the property to secure the debt. The deed of trust did not name a trustee, but designated Mortgage Electronic Registration Systems, Inc. (“MERS”) as beneficiary. In 2010, the Shusters defaulted. MERS substituted ReconTrust as trustee, and assigned its beneficial interest in the deed of trust to BAC. BAC, in turn, assigned its beneficial interest in the deed of trust to Arch Bay, which acquired the property at the foreclosure sale.
The Shusters filed a complaint for quiet title, wrongful foreclosure and breach of contract, alleging respondents had no right to foreclose under the deed of trust. The trial court sustained BAC’s demurrer and concluded that the omission of naming a trustee “was no impediment to enforcement of the Trust Deed.”
As an issue of first impression in California, the Court of Appeal looked to authority from sister jurisdictions for direction in reaching its decision. Relying primarily on In re Bisbee (1988) 754 P.2d 1135, the Court affirmed the trial court’s dismissal of the Shusters’ claim to set aside the sale, reasoning that the mere failure to designate a trustee does not render the deed of trust invalid as between the parties to the trust deed instruments, so long as a trustee is named prior to the foreclosure. The court noted that while the original deed of trust did not name a trustee, the beneficiary substituted a trustee after the borrower, and the trustee thereafter recorded a notice of default and commenced nonjudicial foreclosure proceedings. The court ruled that the deed’s initial failure to name a trustee did not transform the deed of trust into a mortgage which would be enforceable only through judicial foreclosure. Recognizing that equity will not allow a trust to fail for lack of a trustee, the court held that the omission of a trustee did not prevent enforcement of the deed of trust. The Court also found that under Civil Code section 2924, subdivision (a)(1), a foreclosing party does not have to have a beneficial interest in or physical possession of the note. The Court further noted that despite any irregularities in the trust documents, the Shusters’ claim also failed because they did not tender the amount due and owed under the loan.
Shuster illustrates that courts will not allow borrowers to seek shelter in minor ministerial omissions that neither mislead nor prejudice borrowers.
This document is intended to provide you with information about business solutions law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.