DEED OF TRUST ACT 2013 UPDATE

By David Leen & Sheila O’Sullivan

The courts have been busy this year with Deed of Trust Act (DTA) issues.

On February 28, 2013, the Supreme Court decided two very important cases dealing

with wrongful foreclosures, Schroeder v. Excelsior Management Group, LLC.1 And Klem v.

Washington Mutual Bank.2.

Schroeder owned land near Colville, Washington on which he raised cattle and grew

timber. He borrowed money from Excelsior Management Group, LLC (Excelsior) in 2007

and secured the loan by a deed of trust on the property. He became delinquent and the

trustee commenced nonjudicial foreclosure proceedings. In 2009, he re-negotiated a new

loan secured by a new deed of trust in which he agreed to "knowingly waives his right,

pursuant to RCW 61.24.030(2), to judicial foreclosure on the subject property on the

grounds it is used for agricultural purposes." Schroeder again became delinquent and

nonjudicial foreclosure proceedings were commenced and the property was sold at a

trustee's sale. Schroeder sued Excelsior for damages and to vacate the sale. The trial court

dismissed the lawsuit on summary judgment, holding that Schroeder had waived his right

to a judicial foreclosure; this ruling was affirmed by the Court of Appeals. The Supreme

Court, however, reversed the lower courts holding that the judicial foreclosure requirement

in the DTA may not be waived and that the “the act of a loan servicer or other beneficiary to

proceed with a nonjudicial foreclosure on land it knows or should know to be agricultural

land in clear violation of the statute has the capacity to be unfair or deceptive,” giving rise

to a potential Consumer Protection Act (CPA) claim. This case further clarifies that (1) the

invalidation of a foreclosure sale is required where a trustee has conducted the sale without

statutory authority; (2) the foreclosing trustee has a duty to inquire rather than merely

acquiesce to a borrower’s assertions and also has a duty of fairness to the borrower and the

beneficiary that is “fiduciary”; and (3) most importantly, the court held that the statutory

requirements to foreclose (such as a non-agricultural clause) were "pre-conditions" that

could not be waived. A foreclosure that does not satisfy all “pre-conditions” would be void.

As to these prerequisites (and there will be some debate as to which ones make the list), the

waiver defense is now gone.3

Also, the Schroeder court in footnote 3, citing to Klem, issued a strong warning:

We are uncomfortable reciting these facts without making an observation

concerning the multiple roles played by [the trustee, Phillip Haberthur] lest

we seem to be tacitly approving of an attorney for a party acting as the

trustee.”

1 Schroeder v. Excelsior Management Group, LLC, 177 Wn.2d 94, P.3d 677 (2013) 2 Klem v. Washington Mutual Bank, 121 Wn.2d 771, 295 P.3d 1179 (2013). 3 Brown v. Household Realty Corp., 146 Wn.App. 157, P.3d 233 (2008).

The deed of trust act does not specifically permit or prohibit an attorney for a party

acting as a trustee but imposes a duty of good faith on the trustee that may, at least

in contested foreclosure actions, be difficult for a party’s attorney to execute. RCW

61.24.010(4). We note the act specifically states that the trustee “shall have no

fiduciary duty or fiduciary obligation to the grantor or other persons having an

interest in the property subject to the deed of trust.” RCW 61.24.010(3).4

However, we also note this court has stated that to prevent property from being

wrongfully appropriated through nonjudicial means and to avoid constitutional and

equitable concerns, at a minimum, a foreclosure trustee must be independent and

“owes a duty to act in good faith to exercise a fiduciary duty to act impartially to

fairly respect the interests of both the lender and debtor. [Klem cite] The

relationship between lawyer and client is a fiduciary one in which the lawyer

occupies the highest position of trust and confidence.” RPC 1.8 cmt 17. [A]ttorneys

owe an undivided duty of loyalty to the client. Mazon v. Krafchick, 158 Wn.2d 440,

448-49, 144 P.3d 1168 (2006).”

The court’s tone suggests practitioners in this area review their ethical obligations

in view of these comments as well as WSBA Informal Opinion 926 (1986) issued after Cox v.

Helenius 5 was decided.

Also on February 28, 2013, the Washington Supreme Court issued its decision in

Klem v. Washington Mutual Bank, 176 Wn.2d 771,790; 295 P.3rd 1179 (2013). There, the

court held that it is a violation of the CPA for the trustee of a deed of trust to fail to

exercise its independent authority to decide whether to delay a foreclosure sale and

deferring to the lender on that issue. Also the court held that the practice of falsely

notarizing a Notice of Trustee’s Sale (NOTS) is a violation of the CPA. The court defined

the foreclosing trustee’s duty to both borrower and beneficiary to “act in good faith to

exercise a fiduciary duty to act impartially to fairly respect the interest of both the lender

and debtor”

Dorothy Halstein, the homeowner in Klem suffered from dementia. Because of the

cost of her care, Klem, her guardian, did not have the funds to pay her mortgage. The loan

went into default with an outstanding balance of about $75,000. Klem found a buyer

willing to purchase the home for $235,000, and asked the trustee to delay the foreclosure in

order to give her time to complete the sale. Quality Loan Service (“QLS”), the trustee,

refused because it was under instructions from Washington Mutual (WaMu) not to continue

the sale; the contract between QLS and WaMu stated “Your office is not authorized to

postpone a sale without authorization from … Washington Mutual.” The home was sold at

the foreclosure sale for just over $83,087.67, which was just $1 more than the amount due

the lender, including foreclosure fees. The buyers promptly resold the house for $235,000.

4 Klem v. Wash. Mutual Bank, No. 87105-1, slip op. at 20 (Wash. Feb. 28, 2013). 5 Cox v. Helenius, 103 Wash.2d 383, 389, 693 P.2d 683 (1985)

A notary employed by QLS had falsely notarized the notice of sale by predating the

notary acknowledgement. The falsification permitted the sale to take place a few days

earlier than it could have had the notice of sale been dated when it was actually signed.

The Supreme Court noted that “[l]ocal, interstate, and international transactions involving

individuals, banks, and corporations proceed smoothly because all may rely upon the

sanctity of the notary's seal.” Citing to WSBA’s amicus brief, the court stated that the legal

system depends on the integrity of the seal and although the legislature hasn’t called false

notarization a per se unfair or deceptive act, it’s a crime in both Washington and California

(where this one was signed, and over which a Washington court would have criminal

jurisdiction when the harm occurred in Washington), “and allowing them to be deployed to

validate false information strikes at the bedrock of our system.” Thus, “the act of false

dating by a notary employee of the trustee in a nonjudicial foreclosure is an unfair or

deceptive act or practice and satisfies the first three elements under the Washington CPA.”

A jury found that the trustee was negligent, that the trustee’s acts violated the CPA,

and that the trustee breached its contractual obligations. The Court of Appeals reversed all

but the negligence claim. Upon review, the Supreme Court reversed the Court of Appeals

in part, and restored the award based on the CPA holding that QLS failed to act in good

faith to exercise its fiduciary duty to both sides and merely honored an agency relationship

with one by deferring to the lender on whether to postpone a foreclosure sale rather than

exercising its independent discretion as an impartial third party with duties to both parties.

On August 5, 2013, the Court of Appeals, Division One, issued three important

opinions: Walker v. Quality Loan Service6 (published), Rucker v. Novastar Mortgage and Quality Loan Servicing of Washington 7(unpublished) and Leipheimer v. Recontrust Company, N.A.8 (unpublished). Since Leipheimer is an unpublished opinion with

substantially similar facts and decision to Walker, it will not be discussed here.

In its decision in Walker, Division One clarified that Washington does, in fact,

recognize a claim for wrongful attempted foreclosure which the court characterized as a

“claim for damages” arising from DTA violations, embracing traditional tort claims. The

court reasoned that although the DTA does not include specific remedies for pre-sale

violations of the statute, the legislature amended the DTA to provide that claims for

damages are not waived by failing to bring a civil action to enjoin a foreclosure sale, thus,

explicitly recognizing a cause of action for damages for failure to comply with the DTA.

6 Walker v. Quality Loan Service Corp. No. 65975-8-I, slip op. (Wash.App. Aug. 5,

2013)(Modified Aug. 26, 2013). 7 Rucker v. Novastar Mortgage and Quality Loan Servicing of Washington, No. 67770-5-I,

slip op. (Wash.App. Aug. 5, 2013). 8 Leipheimer v. ReconTrust Co., N.A.. No. 67005-1-I, slip op. (Wash.App. Aug. 5, 2013).

The Walker court also explicitly rejected Vawter v. Quality Loan Service Corp. of

Washington,9 which was found "unpersuasive" in Bain v. Metro. Mortg. Group, Inc.,10 which

may be a death knell for the numerous Federal District Courts which followed the Vawter

holding that there is no pre-sale remedy for wrongful foreclosure.

Walker also takes the position that a servicer is not a debt collector unless the loan

was in default when it was acquired. Therefore, “at least insofar as defendant confines

itself to actions necessary to effectuate a nonjudicial foreclosure, only § 1692f(6) of the Fair

Debt Collection Practices Act (FDCPA) applies.”

The court went on to clarify that foreclosure proceedings do not constitute “debt

collection” within the meaning of the FDCPA but, as to the purported beneficiary and

trustee, a claim under 15 US.C. § 1692f may endure if neither entity had a right to possess

the property through nonjudicial foreclosure because they never held the note or underlying

debt and were not lawfully appointed under the DTA.

In analyzing Walker’s CPA claim, the court found that the deceptive documents

caused Walker to incur investigative expenses thus satisfying the “injury” element of the

CPA.

The court, however, rejected Walker’s quite title action finding that notwithstanding the

invalidity of the assignment from MERS to Select, Walker does not allege a claim to quiet

title based upon the strength of his own title but instead asks the court, without authority,

to void a consensual lien because of a defect in the instrument. On August 26, 2013, the

Court of Appeals made a slight modification to the original opinion, replacing the last

sentence with: “If Walker is able to prove these underlying DTA violations, he may also be able to

show that Quality and Select violated §1692f(6) by threatening nonjudicial foreclosure.”

Rucker is an unpublished opinion (but motion to publish, pending) in which the

court ordered the trustee’s sale vacated because the trustee was not statutorily authorized

to conduct a trustee’s sale because it had been appointed by NovaStar, which had had

previously conveyed the beneficial interest in the note and deed of trust and was therefore

not the true beneficiary. This was true notwithstanding that NovaStar, as servicer,

claimed entitlement to act as an agent for the beneficiary. However, citing to Bain, the

court noted that “a prerequisite of an agency is control of the agent by the principal” and

the servicing agreement clearly stated NovaStar was not a partner or agent. The court

again rejected the argument (by NovaStar) that failure to restrain the sale divested Rucker

of the ability to challenge the sale citing equitable grounds where Rucker reasonably relied

upon the trustee’s employee’s representation that the sale would not take place.

9 Vawter v. Quality Loan Service Corp. of Washington,707 F.Supp.2d 1115 (W.D. Wash

2010). 10 Bain v. Metro Mortg. Group, Inc., 175 Wn.2d 83, 285 P.3d 34 (2012).