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University of Denver Sturm College of Law

Legal Research Paper Series

Working Paper No. 13-22

Can We Trust Trustees?

Proposals for Reducing Wrongful Foreclosures

John Campbell

University of Denver Sturm College of Law

This paper can be downloaded without charge from the Social Science Research NetworkElectronic Paper Collection


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Can We Trust Trustees?Proposals for Reducing Wrongful Foreclosures

John Campbell∗

ABSTRACTOver 10 million foreclosures have been initiated in the United

States since 2008. In almost half of these, there is no court review.Instead, the only safeguard to ensure that foreclosure is merited is a“trustee.” As such, the trustee is a central figure in foreclosure and has the potential to serve as a true failsafe against reckless or overtly fraudulent foreclosures. There is one problem; the trusteeis not neutral. Instead, the modern trustee is unregulated and

almost always financially and legally tied to the banks that initiateforeclosure. These banks are known bad actors that created theworldwide economic collapse through non-existent underwriting,rampant and reckless securitization, forged documents, and sloppy payment collection leading to over $33 billion dollars insettlements to date.

With these facts in mind, how is it that the law allows a bank tohand-pick a neutral? Who are these “neutrals” that are being picked? And what is the result of trusting the bank’s right-hand man to look out for homeowners? This article answers thesequestions by detailing the current role of trustees, telling the stories

of real homeowners who are losing their homes despite beingcurrent on their payments, and analyzing the current system’sflaws. It then proposes a detailed set of reforms that will transformthe trustee from a potential shill for banks into a meaningfulgatekeeper who guards against wrongful foreclosure.

∗ John Campbell is a Lawyering Process Professor at the University of Denver

Sturm College of Law. I’d like to thank everyone who contributed to this piece,including: Chris Peterson, Elizabeth Renuart, Bruce Neas, Erich Vieth, AliciaCampbell, Justin Pidot, Nantiya Ruan, Nancy Leong, Justin Marceau, and AlanChen.


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TABLE OF CONTENTS INTRODUCTION .......................................................................... 1 I. THE FORECLOSURE CRISIS................................................. 10

A. Wrongful Foreclosures Abound ......................................... 121. Ron Meehow Loses His Home Despite Making All His

Payments ........................................................................ 132. Ron’s Story Is Not Unique: Widespread Reports of

Wrongful Foreclosure .................................................... 18II. THE MODERN MORTGAGE ERA AND NON-JUDICIAL

FORECLOSURE .................................................................... 21 A. How Things Have Changed ............................................... 22

1. The Modern Mortgage Era ............................................. 25a. The Rise of Subprime Lenders ................................... 25 b. The Rise of Mass Loan Securitization ........................ 28

c. The Rise of Private Recording and the Resulting Lossof Transparency in Land Recordings: MERS ........... 30

d. The Rise of Foreclosure Rates and the Collapse of theWorld Economy ........................................................ 33

e. Conclusions Regarding the Modern Mortgage Era .... 34III. NON-JUDICIAL FORECLOSURE AND THE ROLE OF

TRUSTEES ............................................................................. 35 A. Non-Judicial Foreclosure .................................................. 35 B. The Current Role of Many Trustees in Non-Judicial

Foreclosures .. …………………………………………….401. The Structural Dynamics that Prevent Trustees from

Remaining Neutral ......................................................... 47IV. R E-E NVISIONING THE R OLE OF THE TRUSTEE ........................ 52

A. Legislation.......................................................................... 541. A Six Prong Reform Proposal ........................................ 55

a. Require records ........................................................... 55 b. Insulate from other parties .......................................... 58c. Prohibit foreclosure when legal or factual disputes

arise ........................................................................... 58d. Penalties ...................................................................... 59e. Licensing .................................................................... 60f. Educate ....................................................................... 61

2. The Promise of a Trustee Reform Statute and theChallenges that Must be Addressed ............................... 61



B. Using Litigation to Reform the Role of Trustees ............... 64

1. California ........................................................................ 64

a. Could Ron Meehow’s Claim Survive in California? .. 662. Missouri .......................................................................... 67

a. Missouri Law .............................................................. 67 b. Could Ron Meehow’s Claim Survive in Missouri?.... 69

3. Washington..................................................................... 69a. Washington Law ......................................................... 69 b. Could Ron Meehow’s Claim Survive in

Washington………………………………………….744. What Specific Factual Scenarios Are Ripe for

Pursuit? .......................................................................... 74C. Ethics Complaints Can Give Rise to Changes in Lawyer

Behavior ...... ………………………….………………….751. Ethical Rules that Might Be Implicated ......................... 762. A Real Example to Build On.......................................... 803. How Would Ethical Decision Impact Ron Meehow’sCase? ...................................................................................... 81

CONCLUSION ............................................................................. 81



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INTRODUCTION

A homeowner sends a check to her mortgage company everymonth. Nonetheless, she receives a notice from the mortgagecompany that it is initiating a foreclosure proceeding. The proceeding does not require a judge, jury, or court. Rather, adesignated trustee is the only neutral who stands between thehomeowner and an illegal, wrongful foreclosure. There is one problem: as things stand today, the trustee is unregulated and almost always financially connected to the very bank who errantlyinitiated foreclosure. The result is almost always the same: thehomeowner loses her home.

This practice, sometimes referred to by advocates as“housejacking,” occurs when banks make mistakes and theexisting foreclosure system provides no meaningful investigationinto their claims.1 It can occur when banks mishandle files, lose payments or even engage in mass perjury2 to produce documentssupporting illegal foreclosures. These occurrences are welldocumented. Yet, in the face of a history of gross negligence and outright fraud, over half of all states still allow banks to forecloseon homes without ever going to court or offering any proof that theforeclosure is valid. 3 In the majority of these “non-judicialforeclosures,” a trustee stands in for the judicial system and is

supposed to act as a “neutral” in the transaction to assess the

1 Telephone Interview with Erich Vieth, Consumer Attorney, Simon Law Firm(Aug. 15, 2012) (on file with author).2 See Pettey, infra note 12.3 See JOHN R AO & GEOFF WALSH, FORECLOSE A DREAM: STATE LAWS DEPRIVE

HOMEOWNERS OF BASIC PROTECTIONS, 12 (Nat’l Consumer Law Ctr. Inc.2009), available at http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/foreclosing-dream-report.pdf. The article suggests 30 states are non-judicial; however, this

depends to some degree on how states are counted and what the common practice actually is in the state. Some states are hard to count, such asLouisiana, that has multiple foreclosure processes that involve the court invarying ways. Id.



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legitimacy of the bank’s claim.4 This dependence on a “trustee” asthe only potential safeguard to prevent wrongful foreclosures iscurrently a problem, not a solution, because trustees present no

meaningful safeguard against wrongful foreclosure.5

4 See generally id. I have not set out the law of the trustees in any detail at theoutset. This article rests upon the idea that trustees should be neutral. The lawgenerally recognizes this principle; however, this article does not rest upon alegal analysis of existing trustee law. Instead, it suggests that there is too littlelaw about trustees and that the law that does exist is difficult to follow. To thatend, my proposal section touches on legislative and litigation methods to alter the role of the trustee. However, to establish that at a minimum, most statesalready agree that trustees should, at least in theory be neutral, I see out someexamples here. See e.g. Bonilla v. Roberson, 918 S.W.2d 17, 21 (Tex. App.1996) (“When exercising a power contained in a deed of trust, the trustee

becomes a special agent for both parties, and he must act with absoluteimpartiality and with fairness to all concerned. . . .”); Cox v. Helenius, 693 P.2d 683, 686 (Wash. 1985) (“[A] trustee of a deed of trust is a fiduciary for both themortgagee and mortgagor and must act impartially between them”); Perry v. Va.Mortg. & Inv. Co., 412 A.2d 1194, 1197 (D.C. 1980) (“In this jurisdiction ‘atrustee under a deed of trust owes fiduciary duties both to the noteholder and tothe borrower.’”); McHugh v. Church, 583 P.2d 210, 214 (Alaska 1978) (“Thetrustee under a deed of trust generally is regarded as owing a fiduciary duty to both the trustor and the beneficiary and is required to perform his dutiesimpartially.”); Smith v. Haley, 314 S.W.2d 909, 913 (Mo. 1958) (“The trusteesustains a fiduciary relationship to the debtor and the creditor. Reason and justice exact of him the most scrupulous fidelity in transferring one man's property to another.”); Lake Hillsdale Estates, Inc. v. Galloway, 473 So. 2d 461,

465 (Miss. 1985) (“In a deed of trust the trustee is under a duty to perform hisduties in good faith and act fairly to protect the rights of all parties equally.”). Itis also worth noting that even in states that don’t use the word “neutral” todescribe the duty of a trustee, the language may still approximate this duty. See,e.g,. Russell v. Lundberg, 120 P.3d 541, 546 (Utah Ct. App. 2005) (“While atrustee's primary duty and obligation is to the beneficiary of the trust, ‘thetrustee's duty to the beneficiary does not imply that the trustee may ignore thetrustor's rights and interests.’”). There are, however, a few states that do notexplicitly recognize a duty of neutrality, such as Arizona. However, evenArizona recognizes that a trustee can be named in an action if the trustee ranafoul of the statutory requirements for a trustee. ARIZ. R EV. STAT. A NN. § 33-807 (2012). The law seems unclear in Arizona whether this could include proceeding with a sale in the face of evidence that there was no default.5

There are two legal regimes in which foreclosure can occur. The first is lientheory and the second is title theory. It is unnecessary to discuss both at length inthis article. What is essential to note is that in title theory states, a deed of trustis typically used. That document names a trustee who holds bare legal title, and



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This is especially troubling because of what is at stake. At thecenter of the American dream is the American home. The home isalso the center of much of American jurisprudence. No piece of

property is treated as more sacred or more worthy of protectionfrom intrusion. In many states, homeowners can quite literallyshoot someone who enters their home unlawfully, 6 and in allstates, the police must behave differently if they wish to search a person’s home.7 How then, did it come to be true in America, thatin over half the states, a bank can take person’s home in

in the event of default, is called on to initiate foreclosure, provide notice, and carry out the foreclosure sale. See Elizabeth Renuart, Property Title Trouble in Non-Judicial Foreclosure States: The Ibanez Time Bomb, 4 WM & MARY BUS.

L. R EV. 111 (2013). There are 19 states and the District of Columbia that are both non-judicial and have a trustee. This article is most applicable in thosestates. Importantly, two of these states rank as the two most populous states inthe country – Texas and California. The others are Alaska, Arizona, District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, NewMexico, Nevada, North Carolina, Oregon, Tennessee, Utah, Virginia,Washington and West Virginia. See Security Instruments, FREDDIEMAC.COM,http://www.freddiemac.com/uniform/unifsecurity.html (last visited Mar. 6,2013), the Fannie Mae site that lists the standard security instruments for eachstate. Any state that allows a deed of trust at least has the potential for trustees to be involved. Together, these states account for roughly 125 million Americans,or about 40% of the population. U.S. Dep’t of Commerce, 2010 Census: United States Profile, U NITED STATES CENSUS BUREAU (May 30, 2012, 2:06 PM),

http://www.census.gov/2010census/.6 See, e.g., COLO. R EV. STAT. § 18-1-704.5. Many states have enacted “Make myDay” immunity laws providing an affirmative defense to a homeowner whoshoots, or uses other physical force against, an intruder. See also ChristineCatalfamo, Stand Your Ground: Florida's Castle Doctrine for the Twenty-First Century, 4 R UTGERS J.L. & PUB. POL'Y 504, 530 (2007) (describing the castledoctrine in Florida); People v. Tomlins, 107 N.E. 496, 497 (N.Y. 1914). JusticeCardozo wrote, “[i]n case a man is assailed in his own house, he need not flee asfar as he can, as in other cases of se defendendo, for he hath the protection of hishouse to excuse him from flying, as that would be to give up the protection of his house to his adversary by flight. Flight is for sanctuary and shelter, and shelter, if not sanctuary, is in the home.” Id. (internal quotes omitted).7 See, e.g., Steagald v. United States, 451 U.S. 204, 212 (1981) (holding that

“[i]n terms that apply equally to seizures of property and to seizures of persons,the Fourth Amendment has drawn a firm line at the entrance to the house.Absent exigent circumstances, that threshold may not reasonably be crossed without a warrant.”).



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foreclosure without ever going to court at all? 8 And how did itcome to be that the only neutral in such an extrajudicial proceedingcan actually be the attorney for the bank?

These questions are especially salient in light of the behavior of national banks in the last two decades.9 During that time, theyhave participated in, or in many cases caused, the subprime crisis, the worldwide market collapse due to mortgage securitization,10 the creation of shell recording companies to avoid the cost of public recording of property ownership,11 robo-signing12 (which issimply perjury in relation to foreclosures), widespread servicingabuse leading to a $25 billion settlement with the United States,13 and rampant questionable foreclosures - including in someespecially egr egious cases – foreclosures on homes that never had loans at all.14 These myriad of problems demonstrate that banks,

at least as currently formulated, cannot police themselves. Yetthese same banks have initiated in excess of 10 millionforeclosures since 2008.15

8 Molly F. Jacobson-Greany, Setting Aside Nonjudicial Foreclosure Sales: Extending the Rule to Cover Both Intrinsic and Extrinsic Fraud or Unfairness,23 EMORY BANKR . DEV. J. 139, 145 (2006).9 Vieth, infra note 18, at 4:26.10 Renuart, supra note 5 at 118.11 Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory, 53 WM. & MARY L. R EV. 111, 149

(2011).12 For a description of the various actions the term “robo-signing” is used todescribe see Louis S. Pettey, Ethics in Foreclosure, 26 PROB. & PROP. 47(Nov./Dec. 2012).13 David E. Woolley & Lisa D. Herzog, MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners, 8 HASTINGS BUS. L.J. 365, 373 (2012).14 Joshua Rhett Miller, Bank of America to Pay Florida Couple in MistakenForeclosure Case, FOXNEWS.COM (June 6, 2011),http://www.foxnews.com/us/2011/06/06/bank-america-pays-florida-couple-in-mistaken-foreclosure-case; Harriet Johnson Brackery, Lauderdale Man’s HomeSold Out from Under Him in Foreclosure Mistake, SUN SENTINEL (Sept. 23,2010), http://articles.sun-sentinel.com/2010-09-23/business/fl-wrongful-foreclosure-0922-20100921_1_foreclosure-defense-attorney-foreclosure-case-

jumana-bauwens.15 Record 2.9 Million U.S. Properties Receive Foreclosure Filings in 2010 Despite 30-Month Low in December , R EALTYTRAC (Jan. 12, 2011),http://www.realtytrac.com/content/press-releases/record-29-million-us-



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As mentioned, in many states, standing between these banksand the homeowner are “trustees.”16 These private parties are theonly neutral in a non-judicial foreclosure; they ar e on the only

potential failsafe to prevent wrongful foreclosures.17 Because of this vital role, it has been the role of courts to watch the“proceedings [of trustees] with a jealous and scrutinizing eye,”18 inorder to require of the trustee “the most scrupulous fidelity.” 19 Yet,this article reveals that in reality, this is not happening. Instead,the truth is that trustees are almost never held accountable for carrying out their functions.20 This is despite the fact that trusteesare routinely untrained, unregulated and many times closely tied tothe banks that initiate foreclosures. 21 Indeed, states do not even provide minimum requirements for who may serve as a trustee,thereby allowing almost anyone to be named.22 As a result, in the

best cases, trustees are unprepared to handle the complex questionsthat securitization has created. In the worst, trustees are financiallyincentivized to push foreclosures through as fast as possible,regardless of what evidence there may be that fraud or negligence

properties-receive-foreclosure-filings-in-2010-despite-30-month-low-in-december-6309.16 Peter W. Salsich, Homeownership—Dream or Disaster?, 21 J. AFFORDABLE

HOUSING & COMMUNITY DEV. L. 17, 33 (2012).17 Vieth, supra note 1.18 West . v. Axtell , 17 S.W.2d 328, 334 (Mo.1929).19

See, e.g., Edwards v. Smith, 322 S.W.2d 770, 777 (Mo. 1959) (“Trustees areconsidered as the agents of both parties—debtor and creditor—and their actionin performing the duties of their trust should be conducted with the strictestimpartiality and integrity. They are entrusted with the important function of transferring one man's property to another, and therefore both reason and justicewill exact of them the most scrupulous fidelity.”).20 Vieth, supra note 1.21 Erich Vieth, Mortgage Crisis in a Nutshell – Presented by John Campbell,YOUTUBE, 26:06 (Apr. 21, 2012),http://www.youtube.com/watch?v=YBbwb6Sv4PM (This video was created bythe author of this article, with the help of his colleague, Erich Vieth. In less thanhour, it lays out the root causes of the modern mortgage crisis. Much of thisinformation is summarized in this article; however, the video provides a more

in-depth understanding to fundamental changes in the mortgage industry thatmake the role of the trustee even more vital. The video has been featured on the National Consumer Law Center’s cite as well as on Public Citizen’s blog).22 Vieth, supra note 1.



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has occurred. 23 And in reality, these two problems, lack of regulation and financial ties to banks, combine to cause even moreserious problems. 24

These problems are unique to our times. In the past, althoughthe role of trustee was critical, it was not always complicated. In atypical lending situation, everyone knew who owed what towhom. 25 As such, the fundamental things that needed to beestablished in order for foreclosure to be legal - that defaultoccurred and that the party foreclosing had standing to foreclose -were not in question. Today, things are fundamentally different.The mortgage crisis has revealed that the world is awash in

23 My own experiences confirm that the trustee is often the attorney for the bank.Similarly, courts make reference to this fact, see, e.g., In re Vogler Realty, Inc.,722 S.E.2d 459, 460 (N.C. 2012), as do various law review articles cited herein.Finally, I’ve interviewed Bruce Neas, who works for a legal servicesorganization in Washington State. He explains that although the attorneys for the banks are not usually the trustees in Washington, the relationship is still veryclose. Interview with Bruce Neas, Legislative Coordinator, Columbia LegalServices (July 24, 2012). The firm that represents most banks who foreclose onhomeowners in Washington also has ownership interests in the largest trusteecompany in the region, known as Northwest Trustee Corporation. Company

Profile, Northwest Trustee Services Inc.,http://www.northwesttrustee.com/profile.aspx (last visited Feb. 10, 2013)[hereinafter Northwest Company Profile].24 In this paragraph, I’ve identified two potential problems with trustees. First,I’ve suggested that they have a hard job, that they are untrained, and that theyare unregulated. Second, I’ve suggested that many of the trustees may be atleast tempted to be unfair because they work for the banks and stand to profit byshoving foreclosures through. Although I considered structuring this article toaddress these problems separately, I ultimately rejected this idea. Instead, Ichose to talk about both problems at the same time. I did this because, with theexception of public trustees in Colorado, I have not uncovered another trusteewho is truly free of ties to the banks. As a result, although I don’t mean thatevery trustee seeks to be unfair, I do believe that the lack of training and

regulation, coupled with the gravitational pull of the banks, who pay the trusteesa number of ways, means that the lack of regulation and the potential for biaswork in concert and must be discussed together.25 Id. at 35:30.



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questionable foreclosures.26 Indeed it is often unclear who owns the note,27 who is secured, what is owed and whether it was paid.28

One may at this point wonder why these problems are not

being discussed more often, why courts are not carefullyscrutinizing the work of trustees, and why legislators are notresponding to these problems. There are a number of reasons the problem has gone largely unexplored. First, homeowners are oftenvulnerable when the foreclosure occurs. They spend energy packing up and finding a new place to live. They don’t have timeor money to wage a fight.29 Second, there are very few attorneyswho represent homeowners in such matter s and since no court isdirectly involved, there is no oversight.30 Third, the problem isnew and complex, so a relatively small people in the country have pierced the veil of the modern mortgage era sufficiently to detail it

and identify problems. Finally, implicating trustees asunregulated and often outright unfair actors is, by definition inmost cases, an assertion that attorneys are engaged in wrongdoing.This is unpopular, as many attorneys believe it is uncouth to sue or otherwise criticize other attorneys.

The result of the confluence of the modern mortgage era withineffectual trustees is that at present the fox is in charge of thechicken coop; banks, that by any measure, have had their credibility called into question, are directing foreclosures with littleto no supervision. To say that this is producing tragic results for homeowners is to understate the problem. In many cases, there is

absolutely no certainty that the homeowner failed to pay nor isthere certainty that the party who is foreclosing is the party withthe legal right to do so. In the more egregious cases, the facts areeven more troubling. In those cases there is solid proof that thehomeowner was current on their payments but their house was

26 Aletra P. Williams, Foreclosing Foreclosure: Escaping the Yawning Abyss of the Deep Mortgage and Housing Crisis, 7 NW. J.L. & SOC. POL’Y 455, 457(2012).27 Tanya Marsh, Foreclosures and the Failure of the American Land Title

Recording System, 111 COLUM. L. R EV. 19 (2011).28 Williams, supra note 26, at 467.29 Id .30 Vieth, supra note 1.



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taken anyway. 31 This is theft, plain and simple – theft of theAmerican dream.

This article is a response both to the need for exposition of the

problem and for constructive suggested solutions. It is meant to bea marriage of storytelling (about the real people who are sufferingharm), investigative journalism regarding the role of trustees(because it draws from interviews with practitioners who are in thefray to reveal facts that don’t appear in books or articles), diagnosisand analysis of the fundamental problems with the current trusteestructure, and finally, a prescriptive piece that suggests meaningfuland realistic reform

To these ends, the remainder of this article unfolds as follows.Part I sets the table, providing background regarding the scope of the current foreclosure problem. It begins with the recounting of

one story about one specific homeowner. That story is based on adetailed lawsuit on file at this time. It also tracks some of themedia reports and scholarly literature chronicling the wave of wrongful foreclosures sweeping the country. Part II considers howthe modern mortgage era differs from the way things used tooperate. Part III discusses how the current non-judicial foreclosureregime works and the role of the trustee in this process. Itconcludes by identifying a number of specific problems that relateto the role, or non-role, of trustees. Part IV proposes solutions byreforming the role of trustees. It proposes effectuating thesereforms through a combination of strategic legislation, litigation,

and ethical inquiries and complaints. Part V concludes.I note at the outset that it is beyond the scope of this article to

address every question and present every solution to what is amultifaceted, institutional failure. There is undoubtedly a need for true reform of home lending, the securitization process, and therecord keeping that occurs both publicly and internally. There arealso multiple solutions that can be tried to avoid wrongfulforeclosure, including mediation programs such as the ones beingcarried out in a number of states today, including Massachusetts, New York, Washington, Nevada and Illinois. 32 Another

31 Brackery, supra note 14.32 See generally Geoff Walsh, The Finger in the Dike: State and Local LawsCombat the Foreclosure Tide, 44 SUFFOLK U. L. R EV. 158 (2011) (discussing a



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interesting solution proposes a unified electronic recording systemand the mer ger of the note and mortgage into one viewabledocument. 33 Finally, the proposed Uniform Nonjudicial

Foreclosure Act (UNFA) contains some novel suggestions for addressing the hodgepodge of divergent state substantive and procedural rules relating to foreclosure.34 These are all worthy of consideration. I also note that this article is not meant to endorsecurrent lending practices, or even to endorse non-judicialforeclosure as the best way to carry out foreclosures. Instead, it ismeant to recognize that homeowners are experiencing real harmright now, and there is a pressing need for solutions which can beimplemented quickly within existing structures.

As such, the remainder of this article presumes that non- judicial foreclosure is unlikely to be abolished, and therefore works

in the context of reforming non-judicial foreclosure in the simplestway possible. The article also rests upon the premise that it is far better to keep people in their homes and avoid wrongfulforeclosures altogether than it is to attempt to remedy the problem post-foreclosure through judicial challenges, as some havesuggested.35 This article suggests that at least the most egregious

variety of state initiatives to curb wrongful foreclosure and foreclosures ingeneral); see also Williams, supra note 19, at 458 (summarizing a variety of responses by state legislatures to the foreclosure crisis).33 Alan M. White, Losing the Paper - Mortgage Assignments, Note Transfers

and Consumer Protection, 24 LOY. CONSUMER L. R EV. 468, 498 (2012).34 Grant S. Nelson & Dale A. Whitman, Reforming Foreclosure: The Nonjudicial Foreclosure Act, 53 DUKE L.J. 1399, 1401 (2004).35 There is a persistent meme from some critics of foreclosure defense thathomeowners are simply trying to game technicalities in order to obtain freehomes. See, e.g., Kelly Green McConnell, No Free Houses: Few Mortgages Have Fatal Flaws, IDAHO ST. B. ADVOCATE, Jan. 2012, at 30 (asserting thatsome homeowners are “clearly just trying to win the free house lottery.”).Although I disagree with the idea that it is common for homeowners to try towin free homes - and the implicit idea that lawyers are taking such cases in anysignificant numbers - my proposals should be palatable to those who shareMcConnell’s views. By involving the trustee prior to foreclosure in order to prevent wrongful foreclosures, there is no need for an action to quiet title to the

homeowner or to challenge standing to foreclose. Instead the problem is averted;the homeowner remains in the home and continues to make payments in somecases, and in any case in which there is legitimate default, the trustee checks the bona fides and carries out a solid, enforceable sale.



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foreclosure problems can be averted simply by making the trusteea true neutral with clearly defined duties. In doing this, the mosttroubling foreclosures would be routed to court, where facts could

be considered fully, or if the foreclosing entity determined it wasunwise to proceed to court, the likely result is that the note holder would have new incentive to work out new terms with thehomeowner. The results are salutary for homeowners and for society as a whole - fewer wrongful foreclosures, more home loanworkouts (modifications) and increased confidence that homessold after foreclosure have clear title.

I. THE FORECLOSURE CRISIS

Throughout the twentieth century, homeownership increased to

the point that by 2000, over two-thirds of people owned their homes.36 Homeowners took out larger loans because the rates wereconducive to an affordable lifestyle; however, when home values began to drop, suddenly these homeowners had loans that far exceeded the value of the home itself.37 In fact, the rate at whichhome values dropped when the housing bubble burst in 2008 wasfaster than the rate at which home prices dropped during the GreatDepression.38 At the same time, the rates on many of the loans began to r atchet up, consuming more and more of the homeownersincome.39 As a result, homeowners began to default on loans, butsince their loans were "underwater,”40 they could not refinance.

The results were, and continue to be, staggering. The percentage of homeowners who were seriously delinquent on their mortgage stood at 2.23% (about 980,000 loans) at the beginning of 2007.41 This percentage rose to 9.67% (4.3 million loans) by the

36 Salsich, supra note 16, at 25.37 Id. at 28.38 Id. at 24.39 Vieth, supra note 18, at 8:45.40

Salsich, supra note 16, at 20.41 Renuart, supra note 5, at 116. The survey defines “seriously delinquent”mortgage loans as those that are ninety days or more delinquent or are inforeclosure; Id. at 2 n.3.



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end of 2009.42 And by the end of the second quarter of 2012, therate was still 7.58%.43

These delinquencies are leading to a crushing number of

foreclosures. In 2008 there were 2.3 million properties inforeclosure.44 In 2009, as the mortgage crisis continued to build,there was an estimated 2.9 million properties in foreclosures.45 In2010 the number was roughly the same.46 In 2011 there were 2.7 million more, and in 2012 there were roughly 1.8 million. 47 Although there may be some overlap in the properties that were inforeclosure from year to year, the number of completed foreclosures is equally shocking. There have been in excess of 3.4million families who have actually been foreclosed and displaced.48

The loss of these homes not only affected the families; the

foreclosures impacted the global community. For example,foreclosures damaged the property value of nearby property,resulting in over $1.86 trillion in losses to property values during

42 MORTGAGE BANKERS ASSOCIATION, NATIONAL DELINQUENCY SURVEY: FOURTH QUARTER 2009 2 (2009), available at http://media.oregonlive.com/frontporch/other/NDS_Q409.pdf. 43 Mortgage Delinquencies Increase in Latest MBA Survey, MORTGAGE

BANKERS ASSOCIATION (Aug. 9, 2012),http://www.mortgagebankers.org/NewsandMedia/PressCenter/81589.htm. 44 Foreclosure Activity Increase 81 Percent in 2008 , R EALTYTRAC (Jan, 15,2009), http://www.realtytrac.com/content/press-releases/foreclosure-activity-

increases-81-percent-in-2008-4551.45 Record 2.9 Million U.S. Properties Receive Foreclosure Filings in 2010 Despite 30-Month Low in December , R EALTYTRAC (Jan. 12, 2011),http://www.realtytrac.com/content/press-releases/record-29-million-us- properties-receive-foreclosure-filings-in-2010-despite-30-month-low-in-december-6309.46 Id .47 2011 Year-End Foreclosure Report: Foreclosures on the Retreat ,R EALTYTRAC (Jan. 9, 2012), http://www.realtytrac.com/content/foreclosure-market-report/2011-year-end-foreclosure-market-report-6984; 1.8 Million U.S.Properties with Foreclosure Filings in 2012, R EALTYTRAC (Jan. 14, 2013),http://www.realtytrac.com/Content/foreclosure-market-report/2012-year-end-foreclosure-market-report-7547.48

Chris Guldi, 3.4 Million Completed Foreclosures Since Sept. 2008, CoreLogic Reports, GULDI GROUP (Apr. 10, 2012), http://www.guldigroup.com/2012/04/3-4-million-completed-foreclosures-since-sept-2008-corelogic-reports/ (thisnumber is low because it measured from 2008 until April of 2012).



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the recovery years. 49 These foreclosures also cripple people’scredit and can lead to bankruptcy. 50 The r esult is thathomeownership is becoming increasingly difficult. 51 Meanwhile,

communities are struggling to recover , the economy was crushed due to the burst of the housing bubble,52 and the data suggests thatmillions of additional foreclosures are still to come.53

In addition, the risky loans and predatory terms that are leadingto foreclosure in many cases, apply for the life of the loan.Although some of these terms are being modified, modification has proven to be a far from perfect fix.54 The result is that foreclosuresare likely to remain high in the future. It is also likely that theunderlying challenges that securitization present for identifyingwho can foreclose and who is in default will persist indefinitely, asall of the practices continue to remain legal and common place.

This suggests that a solution which would curb wrongfulforeclosures is needed immediately and will also pay dividends for decades to come.

A. Wrongful Foreclosures Abound

The data above is a reminder how vast the foreclosure crisis is.However, the problem becomes more real when put in humanterms. The two sections below are intended to do just that in twodifferent ways. The first section tells the real story of onehomeowner and his family. The second section discusses a few

media reports about foreclosures and reviews some of the scholarlyliterature that details the breadth of the current problem.

49 Alexander Bader, Truly Protecting the Consumer in Light of the Subprime Mortgage Crisis: How Generally Applicable State Consumer Protection Laws Must be a Key Tool in Keeping Lending Institutions Honest , 25 J. CIV. R TS. &

ECON. DEV. 767, 768 (2011).50 Williams, supra note 23, at 470 (noting the correlation between foreclosurefilings and bankruptcy filings).51 Salsich, supra note 16, at 21.52 Renuart, supra note 5, at 117.53

Williams, supra note 26 at 456.54 Approximately 5.7 million loans have been modified since 2007. HOPE NOW

BROCHURE (2012), available at http://www.hopenow.com/pdf/HN%20Brochure%20Final_spreads.pdf.



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I note at the outset that the media reports and scholarly work address both judicial and non-judicial foreclosures. I have notdistinguished between the two because the same errors relating to

record keeping, standing, and outright fraud exist in both settings.The only difference is that in judicial foreclosure states, the courthas at least some opportunity to examine the bona fides of foreclosures.55 Although this is far from perfect due to the massivenumber of such foreclosures, there is reason to believe that theinvolvement of a neutral makes a difference. For example, inFlorida, some egregious foreclosures occurred due to fraudulent,robo-signed documents. 56 However, after courts caught wind of this through litigation, new rules were promulgated that required attorneys to verify the authenticity of documents supportingforeclosure. 57 It is my operating assumption, then, that 1) if

wrongful foreclosures can occur under the watchful eye of a court,the problems in states in which there is no meaningful neutral areat least as bad, and probably worse, and 2) that much like Floridacourts who began to require proof and in doing so slowed downrobo-signing, interjecting a meaningful neutral in non-judicialforeclosure will not stop all wrongful foreclosures, but it will serveas a way to reduce that number.

1. Ron Meehow Loses His Home Despite Making All HisPayments

Ron Meehow obtained a refinanced loan from LoanQuest, asubprime lender who is now out of business.58 Within months, he

55 Vieth, supra note 1.56 Brackery, supra note 14.57 Vieth, supra note 1.58 Ron Meehow and the other names used in this account are fictitious, but thestory included below is based almost entirely on a case that is currently on file.The only part that has been added is the discussion of what happened after Ron’shome was foreclosed. I note that although I did not think it was necessary or appropriate to repeatedly use the name of the actors, the case is on file in St.Charles County, Missouri and with the author . See Rippy v. Chase Bank, 1111-

CV-06677 (St. Charles Cnty. Ct. Dec. 1, 2011) (St. Charles Cnty. Cir. Ct., Ct.File). The case is only one of countless others on file throughout the country thatallege that a foreclosure was carried out in the absence of default and/or in directconflict to the promises made by a bank to modify a loan. Id. These same



14

received notice that he should begin making payments to NationalBank and Trust, a servicer of the loan.59 Ron did not know why heshould pay someone who didn’t make the loan, but he made the

payments any way. He did not want to lose his home. R on madehis payments for six years, and he was never delinquent.60 About ayear later, he received a notice from yet another bank, AmericanBank, that he was behind on his payments. 61 Ron wondered whatAmerican had to do with his loan, but since they were the onesending the letter, he called them.62 Ron was detail oriented. Hehad electronic confirmation of every single payment. He told American this fact. American could not explain its mistake, but itsuggested that there would be no problem. It would fix it. A fewdays later Ron received a packet in the mail saying that Ron could refinance his loan.63 He would have lower payments. Ron had not

requested a modification, but the deal sounded fair.64 Ron immediately signed the paper work and returned it to

American at the address on the letter.65 A bout a week later hereceived a signed copy of the modification.66 He began makingthe new payment.67 Things seemed fine, and Ron quit worryingabout his house and went back to his life. His wife, who had beenstressed out about the notice of default, felt much better with asigned contract from American and a lower monthly payment.

Then, three months into making the new payment, Ronreceived a letter from a law firm called Huck & Fole. The letter said that Huck was attempting to collect a debt for American.68 It

said that he was in default on his home loan and at risk of

allegations, along with many others, gave rise to the $25 billion settlementreferenced throughout this article that was entered into between five of thelargest national servicers and the United States. 59 First Amended Petition at ¶15, Rippy, 1111-CV-06677.60 Id. at ¶16.61 Id. at ¶17.62 Id. at ¶¶18-19.63 Id. at ¶2064 Id. at ¶2.65

Id. at ¶1.66 Id. at ¶¶2, 22.67 Id.68 Id. at ¶28.



15

foreclosure. Ron was furious, and, a little afraid.69 He called American. When the first customer service representative couldn’thelp, he asked to be transferred to another representative. That

representative couldn’t help either, and transferred him to theforeclosure department. They couldn’t help either. Ron, frustrated after two hours of calls, hung-up. He called several more days ina row, but no one could explain exactly what was going on. Somerepresentatives suggested it was all a clerical error and that itwould soon be resolved.70 Then Ron got another letter from theHuck.71 This one said that Huck was the successor trustee, and that it was giving him notice that his house would be sold atforeclosure in three weeks.72 Ron didn’t know what a trustee was, but after googling it, he learned that a trustee was supposed to be aneutral party who carried out a foreclosure if default occurred.

Ron wondered how the firm that sent him letters saying theyrepresented American could now be the neutral.

Ron got a lawyer, and he gave the lawyer everything he had toshow what he was su pposed to pay and that he was paying it, ontime, every month. 73 The lawyer didn’t specialize in mortgagelaw, but said this shouldn’t be too difficult. It seemed like a clear mistake.

The lawyer called an attorney at Huck since it was thetrustee.74 Ron’s attorney didn’t know a great deal about mortgagelaw, but he knew that a foreclosure couldn’t occur if thehomeowner was making his payments. He told them the story and

offered to send proof of the signed modification and Ron’s payments.75 He figured this would end the problem. Certainly, assoon as another lawyer heard how confused things were, reasonwould win the day. But he was wrong. The lawyer at Huck told him that “we just do what American tells us to do.”76 The lawyer was shocked and pointed out that Huck was required to be neutral

69 Id.70 Id. at ¶¶29-34.71 Id. at ¶35.72 Id. at ¶43.73

Id. at ¶¶36-37.74 Id. at ¶¶41-44.75 Id.76 Id. at ¶44.



16

and even had a fiduciary duty to Ron under state law. The lawyer at Huck reiterated that he could not stop a foreclosure unless hisclient gave him permission.

He said that Ron’s lawyer needed to call American directly.77 Ron’s lawyer did, and he wrote American too. It seemed to work at first. American suggested the modification just needed to besent to the “Fulfillment Center.” 78 The foreclosure wascancelled.79 But, then, new notice was sent that foreclosure would proceed.80 Ron made more calls.81 So did his lawyer. 82 Theforeclosure was postponed again, but then a new date was set. Inthe end, no matter what Ron or his lawyer said or did, Americancontinued to move forward with the foreclosure, and Huck helped them every step of the way.83 The foreclosure took place, and Ronlost his home.84

Ron never got to go to court to be heard because Americandidn’t have to file anything in court, and Ron couldn’t afford to pay the attorney to file a lawsuit of his own. The trustee thatcarried out the sale was the same law firm that ignored Ron and hislawyer. Under the law, Ron could be held responsible for thedifference between what the house sold for at the sale and what heowed. This “deficiency” could bankrupt Ron.

In an effort to reduce the deficiency, state law required thetrustee, Huck, to get the highest price it could at the sale. Despitethis, the trustee published the notice of default in a paper that had less than a thousand readers and that was specifically for lawyers

only. This was despite the fact that there was a paper in town thathad a circulation of over 500,000 people. Then, at the sale, Huck sold the house to the only bidder, Government MortgageCorporation (“Govie Mo”). Govie Mo was also the trustee’slongtime client. Govie Mo bought the house for $120,000, about$30,000 less than what Ron owed.

77 Id.78 Id. at ¶46.79 Id. at ¶47.80 Id. at ¶56.81

Id. at ¶50.82 Id. at ¶51.83 Id. at ¶¶48-49.84 Id. at ¶60.



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Five days later, a notice was posted on Ron’s door. It said thatRon was living in Govie Mo’s house illegally and that he had getout of the house before the sheriff got involved. The notice was

from Huck. Ron told his wife and son they had to move. Ron’swife and son cried. Ron’s son asked if he would have to leave hisfriends and change schools. His wife asked what they would telltheir family and friends. She wanted to know what the foreclosurewould do their credit. How would they afford a deposit? They’d spent the little extra money they had on an attorney. Ron felt like afailure, he felt powerless, and he felt enraged. He yelled at hiswife when she kept asking questions, and she yelled back. Despitethe notice, Ron’s family didn’t move out right away because theyhad nowhere to go.

A few days later they received some papers from the Sheriff.

These papers said that since Ron didn’t leave, he was unlawfullydetaining his home. They said, as best Ron could tell, that he was being sued by Govie Mo and there was a court date in three weeks.Govie Mo wanted $1,000 in rent per month, and they were askingthe court double that amount to punish Ron for illegally living inhis home. Ron noticed that the attorneys who represented GovieMo were from Huck, his former “trustee.”

Ron went to court. It was over quickly, and he and his familywere ordered out of their home – a home on which they weremaking their payments. A month later he got an order from thecourt. It said he owed $4,800 in back rent. The foreclosure

promptly appeared on Ron’s credit too. Less than two weeks later the sheriff showed up to tell Ron and his family to get out. Ronmoved his family to a small apartment in a bad part of town wherethey didn’t seem to care much about credit. Some of their stuff had to be thrown out. There wasn’t room in the apartment. Thekids had to change schools.

Ron’s son was upset, but he was keeping his head up. Ron’swife was crushed and embarrassed, and Ron wondered if she blamed him. Ron was depressed, really depressed, for the first timein his life. He kept going to work, but he stopped talking tofriends. He didn’t return calls from family. He was embarrassed

and he felt like a failure.



18

Then, Ron received notice that Govie Moe would be garnishinghis wages. His boss asked him about it, and all Ron could do wasdespair.

2. Ron’s Story Is Not Unique: Widespread Reports of WrongfulForeclosure

As the number of home foreclosures rises, so does the number of wrongful foreclosures.85 A few have brought media attention, but many often go unnoticed by the general public for an extended period of time, if not permanently. A couple of examples drivehome just how bad things can go wrong.

One of the most shocking foreclosures to receive presscoverage involved a foreclosure on a home that was bought in

cash. After purchasing a home in a short sale, a Florida man found out a few months later that Bank of America foreclosed on thehome. 86 This was especially surprising because the individual had no loan at all from Bank of America. 87 The homeowner never learned of the foreclosure on his home until after it wascomplete. 88By then, title had been transferred to a government- backed agency.89 The man ultimately got his home back, but itrequired a lawsuit to do so.90 The story is especially troubling because it occurred in a judicial foreclosure state, where Bank of America had to file documents supporting its right to foreclosure.91 How did Bank of America produce documents that, by definition,

could not have existed? The answer appears to be robo-signing. 92 In a similar case in Florida, a couple purchased a foreclosed

home and presumed that, because they had purchased the home in full, that there would be no further interactions with the bank.93

85 Elizabeth Renuart, Toward A More Equitable Balance: Homeowner and Purchaser Tensions in Non-Judicial Foreclosure States, 24 LOY. CONSUMER L. R EV. 562, 562-63 (2012).86 Brackery, supra note 14.87 Id.88 Id .89 Id.90

Vieth, supra note 1.91 Id .92 Vieth, supra note 1.93 Miller, supra note 15.



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However, a year after the purchase, the couple was notified of a pending foreclosure.94 After taking the matter to court, Bank of America acknowledged that it had mistakenly foreclosed upon this

home. However, the battle continued, as Bank of America wasreluctant to pay the attorney’s fees. 95 In a humorous twist, theambitious attorney for the homeowners went to a Bank of America branch with law enforcement and enforced a lien, threatening toclose down the branch by seizing the physical assets. Bank of America finally paid up.96

Problems like those in Florida have also been chronicled by theAcademy. Katy Porter examined some of the “harms of abusiveservicing” in an article that examines various fraudulent pr acticesrelating to mortgage claims that occur in bankruptcy. 97 Porter writes:

Two cases illustrate the problems that incorrect or inaccurate mortgage servicing imposes on borrowers. In Rawlings v. Dovenmuehle Mortgage, Inc.,49 the servicer repeatedly asserted that thehomeowners had failed to make payments eventhough the servicer itself had erred by applying the payments to the wrong account. After the servicer sent notices of default and imposed late fees, thehomeowners spent over seven months attempting toresolve the servicer's error. In another instance, Islam v. Option One Mortgage Corp., the borrowers

refinanced, but the prior servicer continued tothreaten to foreclose on the borrowers' home and toreport adverse information to credit bureaus. Thisyear, the Boston Globe reported that mortgagecompanies typically include projected foreclosurecosts in payoff amounts given to borrowers indefault. These fees are estimates for anticipated services, which may never be rendered. While a

94 Id .95

Id. 96 Id .97 See generally Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 TEX. L. R EV. 121, 131-32 (2008).



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consumer advocate described the practice as a“license to steal from homeowners,” an industryrepresentative conceded that it was “pretty much

industry standard.”98 Porter’s reports are consistent with the writing of many others

who study and report on the mortgage crisis.99 In fact, interviewswith attorneys, reviews of press reports, a review of the scholarlyliterature, and my own personal experiences as a practicingconsumer attorney all point to the same conclusion: wrongfulforeclosures happen every day.

Porter’s conclusions, and the information relayed by attorneysin the trenches, are backed up by actions taken by the Federalgovernment. On January 7, 2013, the Office of the Comptroller of Currency (OCC) reported that 10 servicing companies (those who

collect payments on mortgages) have agreed to pay $8.5 billion toover 3.8 million borrowers to provide compensation for servicingerrors.100 This program emerged from a previous program, called the Independent Foreclosure Review, in which the OCC required servicers like Bank of America, Citibank, JPMorgan Chase, U.S.Bank and Wells Fargo to pay to audit every single foreclosure theycarried out for a period of roughly two years.101 This enforcementaction is hard evidence that there are potential problems with

98 Id. (citing Rawlings v. Dovenmuehle Mortg., Inc., 64 F. Supp. 2d 1156 (D.M.D. Ala. 1999) and Islam v. Option One Mortg. Corp., 432 F. Supp. 2d 181

(D. Mass. 2006)).99 See, e.g., Williams, supra note 26, at 467 (asserting that “[i]rrespective of whether a jurisdiction is a judicial or non-judicial foreclosure system, theforeclosure process seems to be riddled with systemic flaws. Commonforeclosure errors include: a) a mortgage servicer's inadvertent misapplication of a debtor's mortgage payments; b) failure to recognize a debtor's exemption fromforeclosure under the Service members Civil Relief Act; c) failure to prove aforeclosing party's title to a promissory note; d) improper endorsements of mortgage notes; e) backdating paperwork or assignments; f) affidavits withoutsignatures filed or personal knowledge of its contents; g) claiming inflated legalfees associated with foreclosure; or h) lost or missing promissory notes.”).

100 Independent Foreclosure Review to Provide $3.3 Billion in Payments, $5.2 Billion in Mortgage Assistance, OFFICE OF COMPTROLLER OF THE CURRENCY,

http://www.occ.gov/news-issuances/news-releases/2013/nr-ia-2013-3.html (lastvisited Mar. 6, 2013).101 Id.



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millions of foreclosures in all states, including those that usetrustees.

The remaining parts seek to answer these foundational

questions. Part III illuminates how the mortgage industry haschanged. Part IV discusses non-judicial foreclosure and the role of trustees in non-judicial foreclosure and the role trustees currently play in the widespread foreclosure crisis. Part V provides what I believe are detailed and workable suggestions to improve thematter considerably.

II. THE MODERN MORTGAGE ERA AND NON-JUDICIAL FORECLOSURE

The mortgage industry has become immensely complex and

operates vastly differently than it did in the past. The difference between the way things worked in America for close to 200 years,and the way they work now is astounding. 102 Understanding thedifferences is essential to understanding why the current non- judicial foreclosure model, with its use of unregulated and untrained trustees, is ineffective. Specifically, the sections belowdetail the transformation of the mortgage industry from atransparent system with only a few moving parts to an immenselycomplicated system with more actors, more documents, moretransfers of notes, more questions about record keeping, and as aresult, far less certainty and transparency.103 It is this increasing

102 Marsh, supra note 27, at 21 (describing the differences in recording in recentyears).103 For an interesting way to conceptualize the changes in the mortgage field, seegenerally James Charles Smith, The Structural Causes of Mortgage Fraud , 60SYRACUSE L. R EV. 473, 480 (2010) (suggesting that there is geographicdistance, transaction distance and financial distance in the new home lendingmodel). Put simply, loans are made by companies further away (geographicaldistance) and this limits appraisals and underwriting to paper reviews, making itfar more likely the lender fails to understand property values and/or catchfraudulently high appraisals. Loans are also brokered by one party, made byanother, and then held by yet another party (transactional distance). This reduces

the incentives and ability of the original lender to ensure performance of theloan. Finally, the holders of loans have less incentive to research and resolve potential payment problems when they own fractional interests in loans (due totranches from securitization) than they did when they held an interest in the



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uncertainty that requires trustees to be trained, careful, and mostimportantly, fair.

A. How Things Have Changed

Thirty years ago, almost every home loan originated from alocal bank and was made to a local borrower.104 The bank madethe loan only if 1) it believed the borrower could repay; 105 2) the bank was convinced that the house that was being bought wasworth more than the loan it was making;106 and 3) the terms werefavor able so that the bank could earn a profit over the life of theloan.107 If the loan didn’t work out, the bank’s only recourse wasto foreclose.108 This was not considered an especially profitableoutcome,109 as it meant the bank did not get to collect thirty years

of interest, the bank inevitably incurred costs to foreclose,110 and the bank became responsible for the property until it sold.111 As aresult, banks typically investigated the ability of the borrower torepay by checking the borrower’s credit and/or references,analyzing the borrower’s debt to income ratio, etc.112 The bank had the home appraised in order to ascertain its real value, or insome cases, a bank employee would actually walk through thehome himself to assess the value of the property.113 Then the bank would require 10% or more down on the home, just to make surethe loan was less than the house value.114 Finally, the bank would

entire note (financial distance). These three “distances” lead to more fraud,more negligence, less work-outs, and more foreclosures. Id. 104 Vieth, supra note 1.105 Vieth, supra note 18, at 46:00.106 Vieth, supra note 1.107 Id. at 47:05.108 Vieth, supra note 1.109 Vieth, supra note 18, at 47:05.110 Sally Pittman, Arms, but No Legs to Stand on: “Subprime” Solutions Plaguethe Subprime Mortgage Crisis, 40 TEX. TECH L. R EV. 1089, 1100 (2008) (notingthat banks report the average cost of a home foreclosure is $60,000).111 Vieth, supra note 1.112

Juliet M. Moringiello, Mortgage Modification, Equitable Subordination, and the Honest but Unfortunate Creditor, 79 FORDHAM L. R EV. 1599, 1600 (2011).113 Vieth, supra note 18, at 45:30.114 Id. at 46:10.

https://a.next.westlaw.com/Link/Document/FullText?findType=h&pubNum=176284&cite=0142973201&originatingDoc=I271affa15c3f11e08b05fdf15589d8e8&refType=RQ&originationContext=document&transitionType=DocumentItem&contextData=(sc.Search)

https://a.next.westlaw.com/Link/Document/FullText?findType=h&pubNum=176284&cite=0142973201&originatingDoc=I271affa15c3f11e08b05fdf15589d8e8&refType=RQ&originationContext=document&transitionType=DocumentItem&contextData=(sc.Search)



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contract for a reasonable interest rate that would result in paymentsthe bank hoped the borrower could pay for the next thirty years.115

The transaction was simple too. The bor rower gave the bank

security in the house in return for the loan.116 The borrower knewexactly who to pay and exactly what would happen if he didn’t.Payments were made to the bank, often in person or by mail.117 If a payment was missed, the bank called the borrower.118 If the bank was wrong, the borrower gave the bank proof of payment.119 The borrower had an incentive to let the bank know if he or sheexperienced any problems or disruption in income, and the bank had an interest in working things out with the borrower if it could,to avoid foreclosure and keep the payments coming.120 To makesure everything was crystal clear, the bank recorded its securityinterest at the recor der of deeds office. 121 The note was often

attached to the deed.122 The recording was public and accessibleto anyone who cared.123

In this setting, the interests of the borrower and the bank werelargely aligned. If the borrower paid, the borrower and bank werehappy. If the borrower didn’t pay, the borrower and bank wereunhappy. The bank had no interest in making a loan a borrower could not afford.124 It had no interest in overstating the value of thehome, and it had no interest in having someone else collect themoney on the loan.

115 Vieth, supra note 1.116

Id. at 46:40; see also Renuart, supra note 85, at 565 (explaining that a“mortgage loan” consists of two distinct documents, a note and a securityagreement).117 Vieth, supra note 1.118 Vieth, supra note 18, at 47:45.119 Vieth, supra note 1.120 Vieth, supra note 18, at 48:00; Sally Pittman, Arms, but No Legs to Stand on:“Subprime” Solutions Plague the Subprime Mortgage Crisis, 40 TEX. TECH L. R EV. 1089, 1099 (2008).121 Vieth, supra note 1.122 Id .123 Id .124 Vieth, supra note 18, at 48:30; Roy D. Oppenheim and Jacquelyn K. Trask-

Rahn, Deconstructing the Blackmagic of Securitized Trusts: How the Mortgage-backed Securitization Process is Hurting the Banking Industry’s Ability toForeclose and Proving the Best Offense for a Foreclosure Defense , 41 STETSON

L. R EV. 745, 751 (2012).



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This was how it worked not that long ago in America, and inlarge part, this is how it had worked for over 100 years. 125 It isworth noting it is still how it works at many local, community

banks.126 In fact, the first home loan I ever received was in 2002,and the process worked exactly as described above.

The role of the trustee in this setting was often simple and did not present a conflict between the bank and the homeowner. Thetrustee was notified by the bank of default. 127 The trustee stood togain only a nominal fee for overseeing the foreclosure and typically had a full-time job unrelated to foreclosures.128 If thehomeowner really was in default, the sale proceeded. 129 If thehomeowner wasn’t in default, the trustee had no desire to push aforeclosure through, and the bank, which was local and accessible,was similarly disinclined to foreclose if it could instead preserve

the revenue stream.130 If a sale occurred, the bank wanted the house to sell for as

much as possible so it could recover the loan debt. 131 Thehomeowner wanted the same thing so she could avoid the potentialdeficiency.132 The trustee owed a duty to both parties, but sincethere was no real conflict in those interests, the trustee could fulfillits duties.133

As discussed below, this is no longer the case. The trusteeshould not rely upon the representations of the bank, the publicrecords don’t support the foreclosure in many cases, the trusteecannot assume the homeowner could work out errors with the

bank, and the trustee is now financially interested in seeing asmany foreclosures move forward as possible. As such, the role of the trustee is now a serious, complex and important one,134 and the

125 Vieth, supra note 1.126 Id .127 Id .128 Id .129 Id .130 Id .131 Id .132

Id .133 Id .134 Timothy J. Peterkin, Getting to the Arguments: How Legitimate Defenses toForeclosure are Raised , 3 CHARLOTTE L. R EV. 253, 261 (2012).



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likelihood that the conflict between a duty to the homeowner and aduty to the bank will arise is exponentially higher.

1. The Modern Mortgage Era

The modern mortgage era bears almost no resemblance to theway home lending used to work. Instead, subprime lending, masssecuritization, opaque recording of transfers and thefractionalization of responsibilities for loan servicing and foreclosure have fundamentally altered how and when foreclosureoccurs and what is required to ensure those foreclosures areappropriate.

a. The Rise of Subprime Lenders

The mortgage industry began to change dramatically in the late1990s, and by the early 2000s,135 the changes were everywhere. No longer were loans made only by traditional banks. Instead,some of the largest lenders in the country were non-traditionallenders.136 Companies like Ameriquest, Countrywide and othersgot into the lending business.137 They made loans in large part to“subprime” borrowers.138

Loans were issued by the hundreds of thousands, and manyloans were made by people with little to no experience inlending. 139 People were often steered to lenders by mortgage

brokers, who cold called borrowers to entice them to either buy ahouse or refinance a loan they already had, and would continue toreturn to them to encourage further refinancing.140 The mortgage brokers were paid commission based on the size of the loan,141 and they often received kickbacks from the lender if they could steer

135 Vieth, supra note 18, at 4:26.136 Id. at 4:30.137 Id. at 5:00.138 Id. at 5:07; Pittman supra note 108, at 1092.139 Vieth, supra note 1.140

See Baher Azmy & David Reiss, Modeling a Response to Predatory Lending:The New Jersey Home Ownership Security Act of 2002, 35 R UTGERS L.J. 645,656 (2004); see also Smith, supra note 2, at 200-01.141 Id . at 653.



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their own customers into higher interest rate loans that the borrower qualified for.142

Meanwhile the lenders were no longer local; instead, they

operated national oper ations that were often headquartered inCalifornia or Illinois.143 The lender appraised properties through“desk appraisals” 144 which consisted of running a list of comparable sales for the neighborhood and entering basic information about the age, condition and size of the home. 145 Underwriting was reduced to requiring lower credit scores and reliance upon “no doc” 146 or “liar’s loans.” 147 These loans nolonger required proof of income. 148 And even if the loan did require income and borrower’s income didn’t pass the standardsset by the lender, the agent would list a “home business” or other source of income to inflate the numbers. 149 The borrower often

didn’t see the final numbers until the time of closing. Since theloan was often being given by a company that, at best, had a localoffice, the loans were closed at restaurants, and in people’shomes.150 In many cases, the loan documents were taken to the borrower by a notary with no knowledge of the documents. Loanswere closed quickly, and consisted of dozens or even hundreds of pages.151

All of this led to seriously flawed loans that were destined toresult in increased foreclosures.

But it wasn’t just the underwriting or appraisals or sales pitchesthat were different. The loans were different too. Instead of fixed

rates, or even adjustable rates that varied up or down with marketforces, these new loans were what many now call “exotic

142 Id . at 653.143 Smith, supra note 101, at 485-6.144 Vieth, supra note 18, at 50:15.145 Id. at 7:35.146 Bader, supra note 49, at 773.147 Smith, supra note 101, at 201. (chronicling a variety of loans, including whatwas referred to as the NINJA, a loan that required no assets, no income and no job); see also Vieth, supra note 18, at 6:40.148 Azmy & Reiss, supra note 138, at 657.149

Id . at 657; see also Smith, supra note 101, at 207-09 (chronicling the totalabsence of quality control for loans).150 Vieth, supra note 18, at 9:20.151 Vieth , supra note 1.



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mortgages.”152 Some had adjustable rates that could go up, butcould never fall below the original rate. 153 The rates werescheduled to adjust in two or three years. 154 These were often

called “explod ing ARMS,” short for exploding Adjustable RateMortgages. 155 Other loans required the borrower to pay the“interest only” for the first two years, meaning that the paymentswere artificially low, and that the principal was not reduced for thefirst two years of payments. 156 Still other loans were negativeamortization loans in which a person paid for two or three years, and at the end of that time, owed more than when they started.157 All these loans, and many other types, had one thing in common. The payments could increase dramatically in only a few years.158 This meant that even if a borrower could afford the first two yearsof payments, there was no guarantee they could afford the new

payments when the adjustment occurred.159 In Who Stole the American Dream, the Pulitzer Prize winning

journalist, Hendrick Smith, quotes Kathryn Keller, a mortgage broker. In a few sentences she captures how loans changed, howdangerous the new loans are, and how they relate to the foreclosurecrisis. She said:

The banks are playing to brokers who specialize indriving people into loans that people don’tunderstand . . . . They take a product that was

152 Smith, supra note 101, at 193.153

Vieth, supra note 18, at 8:45.154 Smith, supra note 101, at 202-03 (explaining that these are often called 2/28ARMs); see also Vieth, supra note 18, at 8:55.155 Pittman, supra note 108, at 1090.156 Id. at 1096.157 Azmy & Reiss, supra note 138, at 662.158 Pittman, supra note 108, at 1095 (identifying four common characteristics of predatory mortgage loans and suggesting that all predatory loans have at leastone of the characteristics). The four characteristics are 1) the loans includehigher interest and fees than required to cover the added risk of lending to borrowers with credit problems; 2) they contain abusive terms and conditionsthat trap borrowers and lead to increased indebtedness; 3) they fail to consider the borrower’s ability to repay the loan, or 4) the loans violate fair lending laws

by targeting women, minorities or the elderly. Id. 159 Peter W. Salsich, National Affordable Housing Trust Fund Legislation: TheSubprime Mortgage Crisis Also Hits Renters, 16 GEO. J. ON POVERTY L. &

POL'Y 11, 32 (2009).



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exotic and move it to the category of a weapon – seriously. These loans go from being an exotic product to a hand grenade . . . . 160

As the loans explode, the foreclosure crisis grows, thecasualties mount, and the need for neutral trustees is amplified.

b. The Rise of Mass Loan Securitization

Meanwhile, the non-traditional lenders were less motivated tomake sure loans would actually pay for 30 years.161 This was in large part due to an increase in mortgage securitization. 162 Mortgage securitization was a process by which notes on homeswere bundled together, rated, and sold to investor s.163 From 1990to 2007, most mortgage loans were securitized. 164 The lenders

received a cash payment, often hundreds of millions of dollars, for the loans. Wall Street, for a variety of reasons beyond the scope of this article, gobbled up the notes and called for more. 165 Thegrowth of securitization and its eventual scope are jaw dropping.In 1994, $11.05 billion worth of subprime loans weresecuritized.166 In 2005 and 2006, the total value of securitized loans reached roughly $990 billion.167

This growth was facilitated by hungry investment banks and bythe false sense that the investments were solid. In most cases, therating agencies rated the bundles AAA, the highest score available,indicating that the bundles were safe investments. 168 The result

was that non-traditional lenders had an incentive to make as manyloans as they could, for as much money as they could. 169 Thismade making exotic loans attractive because such loans ensured

160 Smith, supra note 101, at 192-93.161 See Azmy & Reiss, supra note 138, at 653, 657.162 Oppenheim and Trask-Rahn, supra note 122, at 752 (explaining the appeal tosecuritization as it eliminated risk from the lenders by selling the loans toinvestors).163 Bader, supra note 49, at 774; see also Renuart, supra note 5, at 16-17. 164 White, supra note 33, at 471-72.165 Woolley & Herzog, supra note 14, at 380.166

Renuart, supra note 5, at 118 (citing Eggert, supra note 2).167 Id.168 Woolley & Herzog, supra note 13, at 380.169 Bader, supra note 49, at 774-75.



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initial payments were lower so people could and would borrowmore.170 The lenders had no intention of collecting the loans for 30 years, the lender’s agents had an incentive to play fast and loose

with the little underwriting that remained, and even the loan brokers had a financial incentive to put people in expensiveloans.171

Wall Street came up with sophisticated ways to tur n notes intosecurities, and these innovations led to new problems.172 In order to avoid a variety of regulations that would limit what any one bank or company could earn, the responsibilities for bundles of notes were split.173

The result of all of this was, in many cases, mass confusion.As Alan White chronicles, there is evidence that endorsements of notes were often mishandled, resulting in a number of practices,

including the forgery of necessary assignments (robo-signing).174 In fact, there is evidence that during the height of subprime lending between 2004 and 2007, many notes were neither endorsed or delivered to the parties who were supposed to “hold the note.”175 Other cases involve banks suing other banks because the first bank believes the second bank foreclosed on a property for which thefirst bank held the note.

The net result was that mass securitization took a problem(risky loans made without underwriting) and exacerbated it by 1)reducing the likelihood anyone would look into the bona fides of the loan, and 2) making it more likely that problems would occur

related to note transfers and collection of payments.

170 Salsich, supra note 16, at 19.171 Smith, supra note 101, at 222-23 (deftly explaining that “When Risk IsEverywhere, It’s Nowhere.”). He explains that since the original lenders did notretain risk, they did not care about the risk of default. Similarly, since theinvestment bank who bought the loans sold the returns to investors, they did notcare about the risk either. Id.172 Vieth, supra note 18, at 12:00.173 Renuart, supra note 5, at 118-9. In a traditional deal, the notes would begathered together by a depositor who put the notes in a trust. The trust was

managed by a trustee, often a large bank. A separate bank, the servicer,collected the payments, another bank, the trust custodian, held the notes.174 White, supra note 33, at 474-75.175 Id.



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c. The Rise of Private Recording and the Resulting Loss of Transparency in Land Recordings: MERS

Securitization also affected how or if notes and deeds wererecorded.176 Whereas it was traditional to record the transfer of adeed from one party to another, this required a fee be paid to thelocal r ecorder of deeds office.177 This fee, which averages about$35,178 was never seen as much by local banks. However, whendeeds could conceivably pass from a lender to a subsequent buyer to a depositor to a trust, this could cost hundreds of dollars per borrower. Also, since notes were pooled into bundles of thousands, or tens of thousands, and those loans could be from 30,40 or even all 50 states, representing hundreds of counties,recording was not only expensive, but it was also complex. The

result was that the industry commissioned studies to figure out howmuch could be saved if a private recording system was created.Financial industries began to save billions of dollars by usingMERS.179

Although a full discussion of MERS is outside the scope of thisarticle, it suffices here to repeat what Christopher Peterson,Associate Acad emic Dean at S.J. Quinney School of Law, wrote ina recent article.180 Peterson explains:

In the mid-1990s, some mortgage bankers decided they no longer wanted to pay recording fees for assigning mortgages. Securitization-a process of

pooling many mortgages into a trust and sellingincome from the trust to investors on Wall Street-drove this decision. . . . To avoid the hassle and expense of paying county recording fees, thesemortgage bankers formed a plan to create a singleshell company that would pretend to own all themortgages in the country. According to the plan,the mortgage bankers would never have to record

176 Peterson, supra note 11, at 116.177 Id. at 114.178 Id. at 115.179 See Peterson, supra note 11, at 114.180 See generally id.



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assignments again because the same companywould always “own” all the mortgages. Theyincorporated the shell company in Delaware and

called it Mortgage Electronic Registration Systems,Inc.

. . . Because the new system cut out payment of county recording fees, recording was significantlycheaper for intermediary mortgage companies and the investment banks that packaged mortgagesecurities. Acting on the impulse to maximize profits by avoiding payment of fees to countygovernments, much of the national residentialmortgage market shifted to the new proxy recording

system in only a few years.181

MERS is pervasive. About 60 percent of the nation’sresidential mortgages are recorded in the name of MERS Inc.rather than the bank, trust, or company that actually has ameaningful economic interest in the repayment of the debt.182 Theuse of MERS means that homeowner s are unable to track whoowns their mortgage in a public office;183 instead that informationis restricted to private members of MERS, and kept away from thehomeowner. 184 People in the Northeast, for example, prior toMERS could often track their property back to the 1700s, but if

they have a home they bought in 2007 or 2008, they probably can’teven trace who holds the note today.185 As Peterson points out,“For the first time in the nation’s history, there is no longer anauthoritative, public record of who owns land in each county.”186

The fact that MERS is not transparent is a serious problem, butit could perhaps be avoided in part if MERS private records were

181 Id. at 116 (original footnotes omitted).182 Peterson, supra note 11, at 1373.183 Salsich, supra note 16, at 35.184 Id. at 132.185

Id. at 114-15 (noting that “since the founding of the American Republic, eachcounty in the United States has maintained records of who owns the land withinthat county.” ).186 Id. at 117.



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accurate.187 Unfortunately, it is clear they aren’t. Both Petersonand White have studied MERS extensively. White surveyed 396foreclosure cases in six judicial foreclosure states.188 White found

MERS was the mortgagee of record in 50% of the foreclosures,and in those cases, the plaintiff asserting the right to foreclose asthe actual principal of MERS only matched MERS’ internalrecords 20% of the time.189 In a separate study, it was revealed that MERS electronic records of who holds the note and deed of trust only match public records about 12% of the time.190 In stillanother study conducted by the San Francisco Office of theAssessor-Recorder, it was revealed that the identity of the deed of trust beneficiary in the public records only matched the investor identified in the MERS database 42% of the time. 191 Petersonuncovers an explanation for why there is a disconnect between

MERS internal records and the public recordings.192 He notes thatMERS does not actually gather and supervise its internaldatabase.193 Instead, it simply grants access to members to record transfers if they wish.194

187 Marsh, supra note 27, at 24 (proposing a new system that encouragestransparency in a new type of recording system).188 White, supra note 33, at 486.189 Id.190 Id. at 502.191 See LOU PIZANTE ET AL., FORECLOSURE IN CALIFORNIA: A CRISIS OF

COMPLIANCE 13 (Aequitas Compliance Solutions, Inc. 2012), available at http://

aequitasaudit.com/images/aequitas_sf_report.pdf (finding that in 27% of sampled foreclosure cases, the mortgage assignment was signed by the servicer or trustee rather than the original lender, 11% of assignments were signed for theassignor by the assignee, and identifying other evidence of doubtful mortgageassignments).192 Id. at 127.193 Id.194 Id. Compounding the problem is the fact that MERS private records are notonly inaccurate, they are opaque. Although the MERS database can be searched,doing so often reveals the following message: “Investor: This investor haschosen not to display their information. For assistance, please contact theservicer.” 194 As a result, many of MERS records are truly private.Compounding the problem, MERS keeps no physical copy of any documents

that support the entry. The result is an unreliable recording system.Interestingly, MERS doesn’t really dispute this characterization. MERS givesthe following disclaimer on all search results obtained from its system:



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All this information points to the same conclusion: theinclusion of MERS in the vast majority of loans leads toconfusion regarding who has standing to foreclose. This

makes the job of a trustee both more critical and moredifficult.

d. The Rise of Foreclosure Rates and the Collapse of the World Economy

By now, the impact of reckless lending and poor record keeping is well-known. As the rates adjusted on the notes, fewer and fewer borrowers could repay. They were forced torefinance. 195 However, as home values stagnated, no lenderswanted to refinance, as it would have left them holding the bag on

a property that was worth in many cases less than the note. These“under water” notes became common, and defaults hit historichighs. 196 The results were crushing for more than justhomeowners.

By early 2008, the financial industry was particularly hard hit.197 Morgan Stanley, Washington Mutual, UBS, Freddie Mac,Bank of America, Wachovia, Bear Sterns, Countrywide, MerrillLynch and Wells Fargo all reported decreased earnings and record breaking write downs.198 Since then, many of these companies

DISCLAIMER: MERS makes no representations or

warranties regarding the accuracy or reliability of theinformation provided. MERS disclaims responsibility or liability for errors, omissions, and the accuracy of anyinformation provided. MERS does not input any of theinformation found on the MERS System, but rather the MERSMembers have that responsibility regarding mortgage loans inwhich they hold an interest. Users of this information have theresponsibility to verify the accuracy, currency and completeness of the information. The information does notconstitute the official legal record and is for informational purposes only. The servicer listed should be contacted for further information.

195

Vieth, supra note 18, at 18:45.196 Salsich, supra note 16, at 20.197 Pittman, supra note 108, at 1103.198 Id.



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have gone under completely. The broader market’s collapse washistoric. After the Dow Jones Industrial Average hit a record highof 14,164.43 on October 9, 2007, it fell to below 7,000 on March

2, 2009. 199 This decline, although not as deep as the GreatDepression (which was a roughly 90% loss in value), was actuallysteeper, occurring in less than 18 months while the GreatDepression’s decline took over three years. The reasonableconclusion is that mortgage securitization coupled with subprimelending and poor analysis of risk by lenders and investors singlehandedly drove the global economy into recession.200

As a result of the market collapse, the insurers who insured themess often went under, several major banks and lenders failed, and those who didn’t required a bailout to stay afloat. Meanwhile,millions of families faced foreclosure. 201 Despite government

efforts to encourage modifications, foreclosures hit historic highsand continue to occur at staggering rates.202

e. Conclusions Regarding the Modern Mortgage Era

Due to the changes described above, there exists a multitude of potential problems with foreclosures, and all of them make the jobof the trustee more difficult. Trustees are faced with loans thatmight have been fraudulent from the outset, lost documents,servicers who collect payments but are not note holders, opaquerecording, and much more. 203 The result is that there are

fundamental questions that should be asked about any foreclosure

199DOW JONES I NDUSTRIAL AVERAGE BROCHURE (S&P Dow Jones Indices LLC2011), available at http://www.djindexes.com/mdsidx/downloads/brochure_info/Dow_Jones_Industrial_Average_Brochure.pdf.200 Renuart, supra note 5, at 115.201 Id. at 4. 202 Vieth, supra note 18, at 19:35.203 There is no reason to believe these problems are going away anytime soon.Instead, they have proven relatively intractable. Recently, the Consumer

Financial Protection Bureau has created more rigorous standards for foreclosures, focusing on the servicer’s role, but if past governmental programsin the mortgage industry are any indication, the industry will struggle to complyand problems will persist.



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because of the likelihood that problems exist. 204 All of these problems have given rise to cases like Ron Meehow’s story and theBank of America phantom foreclosure.

III. NON-JUDICIAL FORECLOSURE AND THE ROLEOF TRUSTEES

This part first considers how non-judicial foreclosures arecarried out in title theory states. 205 Understanding non-judicialforeclosure procedure highlights why the role of the trustee isimportant and why it is likely that the most egregious foreclosureabuses are occurring in non-judicial foreclosure states – states inwhich literally no one is currently watching the shop. This is setout below. The second half of this part discusses how trustees

currently operate in many states.

A. Non-Judicial Foreclosure

The first time borrowers learn that foreclosure might occur isusually in a debt collection notice.206 The notice, usually a letter,states that the homeowner is behind on the loan and if they do not pay a specified amount, foreclosure will be initiated.207

The actual foreclosure process begins with specific notice, asdescribed under that state’s law, that the homeowner is in defaultand foreclosure pr oceedings are beginning.208 The notice is often

sent by the trustee.209 The trustee is usually not the original trustee

204 Renuart, supra note 85, at 564. Renuart notes the non-exhaustive list of problems as including “the failure to provide contractually or legally required notices; lack of authority to foreclose; fraud in the process; rigging the sale;grossly inadequate sale price; and other irregularity or unfairness.”205 For a far more detailed review of non-judicial foreclosure and its contrastwith judicial foreclosure, see Renuart, supra note 5, at 139-41.206 Jacobson-Greany, supra note 8, at 147.207 Renuart, supra note 5, at 140.208 Jacobson-Greany, supra note 8, at 147; see also Mark S. Pecheck & KelseyM. Lestor, The ABCS of California Foreclosure Law, L.A. LAW., Jan. 2012, at

13 (although specific to California, the article provides an overview of how non- judicial foreclosure that is comparable to non-judicial foreclosure in moststates).209 Renuart, supra note 5, at 140.



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named in a deed of trust. 210 Instead, the trustee is typicallyappointed by the lender pursuant to its power, also contained in thedeed of trust, to appoint a successor trustee. 211 This handpicked

trustee is then asked to initiate the foreclosure process.212 The type of notice, and how much time must elapse after the

notice before a foreclosure sale can occur, differs from state tostate. Most states require some form of publication notice inaddition to mailed notice to the borrower.213 Notice periods differ drastically.214 Depending on state law, notice can be provided and a foreclosure sale completed in twenty to one hundred twentydays. 215 California has one of the longest notice periods threemonths216 while Missouri has one of the shortest notice periods inthe country at twenty days.217

Homeowners in every non-jud icial foreclosure state struggle to

find lawyers to represent them.218 This is true both because of thefinancial realities of many homeowners and because there is agenuine deficit of consumer lawyers who can navigate foreclosurelaw.219 The shorter the notice period is, the more likely it is that ahomeowner will be unable to take any meaningful steps to stop aforeclosure. For example, in Missouri, where a 20 day notice is allthat is required,220 homeowners almost never obtain representation prior to the foreclosure sale. Even non-profit organizations areoften forced to turn people away because by the time notice isreceived, read and the borrower realizes they need help, there may be ten days or less before the sale. It is not uncommon for

homeowners to call or write trustees in order to ask for more time,contest the amount owed, or to inquire into who the party is that isforeclosing. 221

210 Vieth, supra note 18, at 25:30.211 Id. at 26:45.212 Id. at 27:40.213 Jacobson-Greany, supra note 8, at 148.214 Id .215 Renuart, supra note 85, at 564.216 CAL. CIV. CODE § 2924 (a)(2) (West 2012).217 In re Hoffman, Bkrtcy.W.D.Mo.2002, 280 B.R. 234.218

Vieth, supra note 1.219 Williams, supra note 26, at 468.220 In re Hoffman, Bkrtcy.W.D.Mo.2002, 280 B.R. 234.221 Jacobson-Greany, supra note 11, at 148.



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The homeowner can stop foreclosure in only a few ways.222 The homeowner can reinstate the loan by paying a specified amount that is owed, the homeowner can get a lawyer and seek a

temporary restraining order or preliminary injunction, 223 thehomeowner can file bankruptcy,224 the homeowner can convincethe lender to delay or cancel the f oreclosure,225 or the homeowner can get the trustee to delay the sale226.

If one of these things does not happen, the foreclosure proceedsto sale, often referred to as “auction.” 227 The precise type of auction most often used is sometimes referred to as an “Englishauction” in which people gather in a common, public place to bid.228 At the sale, the trustee is charged with the duty of gettingthe highest price for the home.229 In theory, it is in the best interestof both the bank who is foreclosing and the homeowner to do so.

For the bank, a high sales price helps it recover most or all of whatwas loaned. For the homeowner, a high sales price avoid or limits adeficiency in states that allow them.230 The trustee is charged withtaking bids at the foreclosure sale and then ultimately entering atrustee’s deed that conveys the property to new buyer. 231 After this, depending on the state, the homeowner may have up to oneyear to attempt to redeem the property via statutory redemption.232 If the homeowner does not redeem, in many states, the homeowner is liable for the deficiency (the difference between the sale price

222 See also Pecheck & Lestor, supra note 185, at 13.223 Peterkin, supra note 132, at 261.224 Williams, supra note 26, at 470-71 (describing the parallel between the risein foreclosure filings and bankruptcy filings).225 Peterkin, supra note 132, at 268.226 See also Pecheck & Lestor, supra note 185, at 13. 227 Nelson & Whitman, supra note 34, at 1413.228 Id. at 1416.229 Jacobson-Greany, supra note 11, at 148.230 Nelson & Whitman, supra note 34, at 1404-5.231 Id. at 149-50.232 A concept commonly termed “statutory redemption” allows the mortgagor-

debtor--and, in many states, junior lienholders--up to a year or longer to regaintitle after the foreclosure sale by paying the foreclosure purchaser the sale price plus accrued interest and other expenses. Nelson & Whitman, supra note 34, at1404.



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homeowner.242 This truly adds insult to injury.243 The homeowner loses his home, has his credit destroyed, and then faces crushingdebt as he attempts to move on. Other states limit the deficiency to

the difference between the fair market value (as opposed to theactual sales price) and the amount owed. 244 Still other states prohibit deficiencies entirely, ensuring that if homeowners areforeclosed upon, they can at least start over without debt hangingover their head.245

After a foreclosure sale, a homeowner will often receive notice by mail or posted on their door that they just vacate.246 If they donot, either because they do not believe the foreclosure was just or because they have nowhere to go, the new buyer (who is often theold lender) initiates an unlawful detainer action. 247 This istypically a summary proceeding in which the new owner asks a

court to evict the homeowner and to award damages for theamount of time the homeowner held over.248 As a result, in non- judicial foreclosure states, the first time a homeowner who defaultson a loan is likely to deal with a court is when they are sued for living in what was once their home. 249 Unlawful detainers posesignificant hurdles for homeowners. 250 In some states,homeowners are quite literally prohibited from asserting that theforeclosure was wrongful and therefore void. 251 In other stateshomeowners can challenge title, but this presumes the homeowner can find and afford a qualified lawyer. 252 The most common result is that homeowners are tossed from their homes by local sheriffs253

242 Nelson & Whitman, supra note 34, at 1404-5.243 Nelson & Whitman, supra note 34, at 1429.244 Walsh, supra note 32 at 144.245 Vieth, supra note 1.246 Id .; See generally Brief for Appellant, Wells Fargo v. Smith, (2013) (No.92649).247 Id . at 20.248 Vieth, supra note 1.249 Id .250 See generally, Brief for Appellant, Wells Fargo v. Smith, (2013) (No.

92649).251 Vieth, supra note 1.252 Id .253 Williams, supra note 26, at 472.



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under a court order that requires them to pay damages for living inwhat was once their home.254

With this overview in mind, the role of the trustee in a non-

judicial foreclosure state is now considered.

B. The Current Role of Many Trustees in Non-JudicialForeclosures

In many states, trustees are deeply imbedded in every step of the foreclosure process. The trustee is a sort of chameleon whotakes on multiple roles, many of which are contradictory, all whilethe law requires the trustee to act as a neutral. 255 In any giventransaction, it is not uncommon for the trustee to serve as a debtcollector, the attorney for the bank,256 the party with the power to

appoint a successor trustee, the successor trustee, an agent for MERS who assigns mortgage documents during the foreclosure,the attorney who opposes the homeowner if he or she seeks to stopthe foreclosure, the coordinator and direct or indirect provider of title services, the attorney who represents the new buyer after foreclosure in the lawsuit to remove the homeowner, and thecoordinator of “default services – the process of removing thehomeowner from the home, cleaning up the home, and preparing itfor sale.257 This is a staggering number of hats to wear, and one can probably already sense that the inherit conflicts are legion.258 These conflicts are at the heart of some of the most egregious

foreclosure problems and are precisely what this article seeks tohighlight and then cure.

254 Vieth, supra note 1.255 Much credit is due to Timothy Peterkin. From my review of the literature, heis the only author who has clearly suggested that the trustee is a central part of the foreclosure problem. Peterkin undoubtedly discovered this fact in his practice at the Foreclosure Defense Project. Peterkin dedicates almost two three pages to the role of trustees. He proposes a mild solution to the problem: that borrowers should be informed of the role of the trustee as a neutral who mayhave conflicts of interest with the borrower because the trustee is also a

representative of the foreclosing entity. See generally Peterkin, supra note 132.256 Id. at 274.257 Vieth, supra note 18, at 41:50.258 Peterkin , supra note 132, at 275.



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The first time a homeowner hears from someone besides thelender/servicer about their loan is usually when the homeowner receives a debt collection notice.259 This notice is often sent by a

law firm who is either 1) a trustee too, or 2) owns a trusteecorporation. 260 If the homeowner does not dispute the debt or reinstate, the next document the homeowner receives is oftenforeclosure notice from the trustee.261 Ironically, in many cases,the trustee and the debt collector are the same law firm.

How can the attorney for the bank possibly become the trustee?Things get even more bizarre. A deed of trust, which is created atthe time a loan is made, lists a third party trustee.262 That is thetrustee that homeowner and the lender agreed to at the time of contract. However, that trustee almost never oversees theforeclosure. Instead, the deed of trust also contains a provision that

allows the lender to appoint a successor trustee.263 As mentioned,this power is often delegated to the bank’s attorney, who thenappoints itself the trustee.264 Accordingly, the successor trustee isalmost always either 1) the foreclosure attorney for the bank whoworks for a foreclosure mill,265 or 2) a trustee who works for atrustee company that is wholly owned by the attorneys for the bank. In either case, the conflict is obvious. But in the modern

259 Jacobson-Greany, supra note 11, at 147.260 Interview with Bruce Neas, Legislative Coordinator, Columbia LegalServices (July 24, 2012).261

Vieth, supra note 1.262 Renuart, supra note 85, at 575.263 Brief for Appellant at 15, Wells Fargo v. Smith, (2013) (No. 92649).264 Vieth , supra note 18, at 26:45.265 “Foreclosure mill” is an increasingly common term. It describes large firmsthat handle foreclosures in bulk and who have been shown to regularly file or produce inaccurate or incomplete documentation to support foreclosures. SeeRenuart , supra note 5, at 122 (referring to “foreclosure mills”); see also, ADAM

J. LEVITIN, R OBO-SIGNING, CHAIN OF TITLE, LOSS MITIGATION, AND OTHER

ISSUES IN MORTGAGE SERVICING 18 (2010), available at http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf (statement of Adam J. Levitin, Professor of Law at Georgetown University LawCenter, at a hearing before the Subcommittee on Housing and Community

Opportunity of the House Financial Services Committee in which Levitintestified that in one survey of foreclosure filings in Pennsylvania (a judicialforeclosure state), the note was not filed with the complaint in over 60% of thecases. Levitin suggested this made the filings facially defective).



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mortgage era, things get even stranger. Not only does the bank hand pick the trustee who is supposed to be “neutral” in carryingout foreclosure, the bank in some cases provides the successor

trustee the power to appoint itself. This is accomplished by givingthe law firm a limited power of attorney which includes the power to self-appoint. The law firm then, as attorney for the bank, files adocument appointing itself the successor trustee.

Included in the footnote is an example of a document in whichthe successor trustee is self-appointed. In the document, the“attorney in fact” who signed for Wells Fargo is also an employeeof Kozeny & McCubbin, the entity being appointed successor



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trustee. Coincidentally, Kozeny & McCubbin is also a regular attorney for Wells Fargo.266

In preparing for the sale of a home in foreclosure, there is title

work that is needed. Similarly, title work is required when theforeclosed property is deeded to the new buyer. There is at leastsome evidence that in some states, foreclosure mills who serve astrustees are involved in the title work too. For example, inMissouri, one of the largest foreclosure mills and successor

266



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trustees is Millsap & Singer. That firm is owned by Vern Singer.Another large foreclosure mill and successor trustee outfit inMissouri is South & Associates, owned by Allen South. A public

records search reveals Allen South and Vern Singer own a titlecompany together.267 This company provides services relating toforeclosures. 268

If a homeowner believes that the foreclosure is improper either because the homeowner does not believe he or she is in default or because the homeowner does not believe the party foreclosing has the right to do so, they often raise these concerns to the trustee.269 Yet, since the trustee works for the bank, the calls often gounreturned, letters are unanswered, and serious factual complaintsare ignored.270 In fact, in the case of Ron Meehow, it is alleged inthe lawsuit that the trustee affirmatively told Ron’s attorney that

they “do what the bank tells them.” This is a questionablestatement from the only neutral in a non-judicial foreclosure.

In even more extreme cases, trustees have actually advocated against homeowners who have filed for temporary restrainingorders with courts.271 The homeowners affirmatively assert thatthe foreclosure is wrongful, often because the homeowners assertthat they were current on their payments or were promised amodification that they never received. In this setting, it is hard tounderstand how a trustee, who owes a duty of neutrality, would show up and oppose the temporary restraining order. But they doshow up in many states.

267 See 2012 Annual Registration Report , MISSOURI SECRETARY OF STATE,available at https://www.sos.mo.gov/BusinessEntity (search for “ContinentalTitle Holding Co.”). The report lists Vernon D. Singer as the secretary of thecompany and Alan E. South as the President. Similarly, searching the same citefor Millsap & Singer reveals that Vern D. Singer is the President of Millsap &Singer, P.C., one of the largest foreclosure mills in the Midwest. And a searchof South & Associates, another foreclosure mill in Missouri, reveals that Alan E.South is the President. Id. 268 Information for Borrowers, MILLSAP & SINGER , LLC,http://web.archive.org/web/20101218074117/http://msfirm.com (last visited Jan.

25, 2013) [hereinafter Information for Borrowers].269 Vieth, supra note 1.270 Id .271 Peterkin, supra note 132, at 261.



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The result is that the homeowner is sometimes paying the trusteefor being both an attorney and for being the trustee.

After foreclosure, the new buyer of the foreclosed property

typically retains a law firm to file a lawsuit to evict thehomeowner.282 It isn’t difficult to guess who is routinely retained.The new owner, often a large bank and sometimes the same bank that foreclosed, hires the same attorney that served as the trustee(or in some cases just owned the trustee company).283 The result:the trustee who owed a duty of neutrality to the homeowner is nowrepresenting the new buyer (often the old lender) against thehomeowner.

The former trustee turned new buyer attorney shows up incourt, seeks to evict the homeowner, and then asks the court for damages against the homeowner for living in the home. This

routinely occurs despite the fact that the homeowner may havecomplained to the trustee, prior to foreclosure, that the foreclosurewas unjustified and illegal. It occurs even if the trustee was givenaffirmative information that should have called any number of fundamental of foreclosure into questions, including whether default occurred, whether the lender induced the default, and whether the lender has standing to foreclose at all.

When the court orders the homeowner to vacate, someforeclosure firms then provide “default servicing” which involvescoordinating with companies who remove any remaining belongings from the home and prepare the house for sale.284 This

often includes throwing out whatever the homeowner did not havethe time or money to remove.

282 Vieth, supra note 1.283 See, e.g., Eviction, MILLSAP & SINGER , LLC, http://web.archive.org/web/20101218074434/http://msfirm.com/EvictionMO.ht

ml (last visited Feb. 10, 2013) (detailing that “Millsap & Singer, LLC routinelyhandles eviction related matters for mortgage lenders after foreclosure.”). Theseare the same “mortgage lenders” that appoint Millsap as a “neutral” trustee.284 Vieth, supra note 1.



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1. The Structural Dynamics that Prevent Trustees fromRemaining Neutral

The current behavior of trustees reveals that they are bothunregulated by any governmental agency and, even under theexisting law, potentially unfair because courts have rarely beenasked to consider their behavior. At a minimum, the currentstructure makes it highly unlikely that trustees will serve as anysort of true neutral that provides a check on the sometimesunreliable representations of the banks.

There are several reasons the trustee is ineffective.First, there is the repeat player effect. Trustees, even if they

didn’t work for banks, regularly see the banks and deal with them.For the homeowners, their relationship with the trustee is one and

done. It is widely accepted in cognitive science that repetition builds trust.285

Second, trustees are unregulated and untrained. Since no lawdescribes what they must review in order to proceed with aforeclosure, since no one is watching what they do, and since theyare not formally trained, it is unlikely that even a well-meaningtrustee could or would ask the right questions. As documented inthe sections describing the modern mortgage era, foreclosure is nolonger a simple matter. It involves complex transfers of notes and deeds of trust,286 complicated servicing records, and a variety of other matters.

Third, the economic structure as it exists today does notencourage careful work as a trustee. It doesn’t encourage fair work either. Instead, all the economic incentives encourage down-and-dirty foreclosures in the absence of documented proof.287 All theincentives encourage ignoring complaints from homeowners and

285 This is true even for words and phrases. As Daniel Kahneman explains,“repetition induces cognitive ease and a comfortable feeling of familiarity. . .The link between positive emotion and cognitive ease . . . has a longevolutionary history.” Daniel Kahneman, Thinking, Fast and Slow, 66-67….286

For perhaps the most comprehensive footnote in history regarding thesignificant number of cases that have revealed problems with the transfer of notes and/or the security instrument, see Renuart, supra note 5, at 7 n.17-18.287 Peterkin, supra note 132, at 275-76.



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the obvious conflicts that arise when one firm tries to be all thingsto all people.

There are both external and internal financial pressures.

Externally, the bank is paying the foreclosure firm. The bank wants fast, easy foreclosures. It wants to reduce cost. It also knowsthat there are often a number of foreclosure firms available. It hasthe option of firing one and hiring another. In addition, the bank pays the foreclosure mill for the debt collection work, theappointment of successor trustee work, the trustee work itself, and for unlawful detainer work. In addition, the foreclosure mill may be receiving payment for title work and default servicing. All of this is built on a model that requires volume. Foreclosure millsopenly advertise bulk rates for foreclosures. These costs aresurprisingly low. For example, a conventional foreclosure was

quoted as costing $650 and an unlawful detainer might cost$350.288 The attorneys won’t get rich doing one foreclosure, butthey are getting rich doing thousands. If the firm were to startasking hard questions of banks, such as, “Where is the proof thatthis note was transferred to you,” or “Why is the homeowner providing payment records that don’t match yours,” or “Whyaren’t you the party that appears in the recording records,” or “Areyou sure that using MERS is appropriate,” they would risk losingthe repeat business that is making them millions. As a result, their interests align with the banks at the expense of homeowners.

Internally, there are additional pressures. Foreclosure firms,

often called “foreclosure mills” because of their bulk work, 289 function on a model that has a relatively low number of attorneysand a larger support staff.290 The foreclosure process is meant to

288 Fees and Expenses Schedule, MILLSAP & SINGER , LLC, http://web.archive.org/web/20101218074634/http://msfirm.com/FeesAndCosts.html (last visited Feb. 11, 2013).289 Woolley & Herzog, supra note 14, at 372.290 Millsap & Singer’s structure is instructive for this too, and based on theauthor’s experience, is representative of a typical foreclosure mill. Before thewebpage was taken down, Millsap provided a directory of its staff. Directory,MILLSAP & SINGER , LLC,

http://web.archive.org/web/20101218074901/http://msfirm.com/Directory.pdf (last visited Feb. 10, 2013). The directory lists 16 attorneys and 80 support staff. Id. The titles are also interesting, as people at a firm that provides trusteeservices along with representation to banks are identified under categories such

http://web.archive.org/web/20101218074901/http:/msfirm.com/Directory.pdf

http://web.archive.org/web/20101218074901/http:/msfirm.com/Directory.pdf



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be form driven and the unlawful detainer work is largely a matter of taking defaults. Many foreclosure firms hire attorneys withlimited experience in other fields of law, and young attorneys

hungry for work, are often assigned to attend the bulk docketcalls 291 related to evictions. These attorneys lack the time,inclination, incentives, and resources to investigate eachforeclosure and to consider factual disputes raised byhomeowners. 292 In fact, based on personal experience, theseattorneys often lack the time and inclination to even return calls tohomeowners or their attorneys when foreclosure is imminent.

I have chronicled the third party evidence that suggests biasexists in some cases. I now turn to what some might view asadmissions by the foreclosure firms themselves. Some foreclosuremills make no secret of the fact that they are bulk practices which

seeks to expedite foreclosures for banks. As an example, included in the footnote is the former homepage of Millsap & Singer 293, oneof the largest foreclosure mills in the Midwest.294 Note that the

as “sales,” “evictions,” and “title,” revealing the true one-stop-shop nature of many foreclosure firms. Id. 291 Bulk dockets are court dockets that can contain hundreds of cases, all set for the same time. The docket works because most of the defendants don’t show up

or they are talked into consent judgments by the attorneys who represent the plaintiffs. These are especially common in debt collection cases and unlawfuldetainers because one plaintiff, such as a large bank that buys homes atforeclosure, might have dozens of cases on the docket that relate to the samesubject matter but different defendants. These cases are filed all at once so thatthey will be set on the same day, thereby reducing the expense to the plaintiff since one attorney can cover them all.292 Peterkin, supra note 132, at 275-6.293 In fairness to Millsap, I note that there is a Millsap & Singer, P.C. and aMillsap & Singer, LLC. These firms may claim to be distinct, with onehandling foreclosures and one being a trustee. However, research indicates thatthe firms have the same website, the same leadership, the same address, thesame employees, and the same phone numbers. As such, at a minimum, the

firms are closely affiliated.294 Information for Borrowers, MILLSAP & SINGER , LLC,http://web.archive.org/web/20101218074117/http://msfirm.com (last visited Jan.25, 2013) [hereinafter Information for Borrowers].



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homepage proudly asserted that Millsap “provides comprehensivedefault servicing” and has done so for the “mortgage bankingindustry since 1970.”295 The website goes on to note that Millsap

“actively and aggressively pursu[es] all possible avenues to reducetimeframe and expenses”296 when foreclosing or removing peoplefrom their homes. The website also contained prices for many of the services the firm engaged in and included reference to thefirm’s captive title company, owned by Vern Singer, the “Singer”of Millsap and Singer.297

The Millsap story is not unique. In the American West, Northwest Trustee Services, Inc. is a separate trustee company thatconducts foreclosures in Alaska, Arizona, California, Idaho,

295 Id. 296 Id. 297 Id.



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With all this information about trustees, it should be clear thatthe current system is inadequate to protect homeowners and toensure society as a whole that rule of law is governing

foreclosures. The bad news is that the problem is immense, but thegood news is that there are some simple solutions that canimmediately improve things. Because the trustee is essential and has the potential to be a true neutral who weeds out offensiveforeclosures, the final section of this article presents real-world solutions that could convert trustees from being a significant partof the problem to an integral part of the solution.

IV. R E-E NVISIONING THE R OLE OF THE TRUSTEE

In this part, I propose changes and clarification to the existing

role of the trustee in order to make the trustee a meaningful neutralthat can prevent many wrongful foreclosures. I suggest thesechanges can be brought about in three separate, but not mutuallyexclusive ways. I propose detailed legislative reform, impactlitigation to define the role of trustees in the modern mortgage era,and ethics inquiries when appropriate to curb the potentiallyabusive behavior of some attorneys/trustees.

The role of the trustee in non-judicial foreclosures is central, but almost no cases or literature examine it in the modernmortgage context. This is probably because until recently,foreclosures were rarely controversial. Given the realities

described herein, it is time to rethink the current role of a trustee.The trustee is a gatekeeper who, if marshaled for the cause, canserve as a stop-gap for the current abuses that occur. This will notreplace the need for pre-foreclosure mediation 305 or the need to

Id.; see also Jeff Manning, Northwest Trustee Services Squeezes More ProfitsFrom Home Foreclosures with One-stop Model, OREGON BUSINESS NEWS (Jan. 14, 2012),http://www.oregonlive.com/business/index.ssf/2012/01/northwest_trustee_squeezes_mor.html. Interestingly, the author of the blog criticizing Routh and Northwest includes a simple declarative statement that has some implications for

the role of trustees. It reads: “Foreclosure should not be able to be initiated,facilitated, perpetuated or adjudicated by ANY entity who PROFITS from it.Period.” The Face of Evil, supra.305 Renuart, supra note 85, at 576; Renuart, supra note 5, at 166-67.



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reform and regulate the bad loans, sloppy recording keeping306 and robo-perjury that are creating the foreclosure crisis, but it will provide immediate relief for people like Ron Meehow.

Empowering the trustee to verify the bona fides of foreclosures isalso valuable because it enlists an already existing third party,thereby answering the concerns of some critics who suggest thatexisting programs that require a foreclosing entity to talk withhomeowners about modification before foreclosure, but do notrequire a third party to be involved, leave homeownersvulnerable.307

Put more concretely, in the case of Ron, who lost his homedespite making payments, the trustee could have stopped the entire problem by asking basic questions about who had the right toforeclose, what evidence of default there was, and by listening to

Ron. My proposals are aimed at requiring and empowering thetrustee to do those things.

Reforming the role of the trustee can be accomplished in threeways that are distinct, but can be combined when appropriate.These methods are: 1) legislative reform, 2) impact litigation and 3) ethical complaints.

Legislation can be introduced and passed that would maketrustees real gatekeepers who require essential proofs, ask basicquestions, and when factual disputes arise between the foreclosing party and the homeowner, refer those questions to courts. Thechallenge is that legislation in some states is simply not an option.

This does not mean there isn’t a solution. There are selectstates in which the courts may be ready to consider legalarguments that challenge the current behavior of trustees. Suchcases would be aimed at providing courts factual scenario’s likeRon’s, and asking them to apply the existing law to these new,challenging modern mortgage dilemmas.

Finally, even in states in which legislation and litigation mightnot work, the ethical concerns that arise when an attorney

306 Renuart, supra note 5, at 173.307

For example, Walsh mentions that programs in California, Michigan,Massachusetts and Oregon do not involve third parties and are thereforeinsufficient. Walsh, supra note 32, at 160.



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represents a bank versus a homeowner can be addressed. They can be considered by the state’s legal ethical bodies, both throughadvisory opinions and, when appropriate, specific complaints

about attorneys who have engaged in potentially unethical behavior.

A. Legislation

Legislation is the most comprehensive and desirable way tochange the role of the trustee. It would allow for clear standards,clear regulation, and clear penalties for violators. Outlined beloware the central tenets that are necessary in any legislation that is passed. The specific language of any bill would need to be crafted to fit the nuances that exist state to state. It is my position that

legislation relating to trustees would create a ripple effect in theforeclosure world, causing banks to more carefully consider whenthey should initiate foreclosure and providing homeownersmeaningful rights to raise questions when a foreclosure issuspect.308 In the end, every valid foreclosure would still proceed,as the proposal provides a mechanism from resolving difficultcases in which homeowners and banks disagree. It is only theinappropriate foreclosures that would be avoided - those thatcannot be documented, do not involve legitimate default, or inwhich the party seeking to foreclose doesn’t have standing. Inthese situations, and in close calls, banks would have an incentive

to carefully consider whether a loan modification or dropping thematter entirely is both more appropriate and more profitable.309

308 It should be noted that one state, and only one state, already has some of theframework in place to provide truly neutral trustees who have no financialincentive to obey the bank and who have the training and oversight necessary toensure they can do their jobs. This state is Colorado, the only state with a publictrustee system. In a future article, I plan to study how effective the Colorado public trustee system is at reducing wrongful foreclosures and use it to continueto flesh out the legislative solution I propose in this article. For a detailed discussion of how the Colorado public trustee system came to be and anoverview of how it works, see Willis Carpenter, A Brief History of Colorado’s

Public Trustee System, COLO. LAW., Feb. 2002, at 67.309 The National Conference of Commissioners on Uniform State Laws iscurrently developing a Proposed uniform body of law for foreclosures. Thedocument is currently a draft titled “Residential Real Estate Mortgage



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1. A Six Prong Reform Proposal

In the sections that follow, I describe each prong of my

proposed trustee reform statute. After working through the prongs,I discuss the predicted improvements that will result.

a. Require records

As discussed in Part II, relating to the modern mortgage era,there are multiple problems relating to records that can give rise toquestionable or overtly illegal foreclosures. The first problemrelates to sloppy record keeping when notes were transferred intosecuritized trusts.310 In some cases, original notes were destroyed,in other cases the transfers were botched, giving rise to real

questions about who has the right to foreclose. 311 In thousands of other cases, documents were falsified.312 In these cases, documentsthat were missing from files were often created, and affidavitsattesting to the fact that all the documents were in order weresigned by employees with no training and no personalknowledge.313

Second, in addition to the systemic internal document problemsthat exist, there are also the public recording problems relating toMERS.314 Similarly, even when MERS was not involved, the pace of foreclosures has led to a multitude of troubling fact patterns. 315 It is not uncommon for the party foreclosing to magically appear in

Foreclosure Process and Protections.” The committee consists of a variety of individuals including consumer advocates, lender advocates and others. The proposed reforms are under discussion and a current draft is available athttp://www.uniformlaws.org/shared/docs/Residential%20Real%20Estate%20Mortgage%20Foreclosure%20Process%20and%20Protections/2013feb4_RREMFPP_MtgDraft.pdf. However, a review of the draft indicates that the trustee problem is currently not being addressed. Draft Section 601 also states that a borrower in a non-judicial foreclosure state would need to seek an injunction inorder to stop a sale. It does not utilize the trustee as a gatekeeper.310 Renuart, supra note 5, at 119.311 See generally Renuart, supra note 85, at 564.312

Woolley & Herzog, supra note 13, at 373.313 Id. at 372-73.314 Vieth, supra note 1.315 Id .



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the land records, with no chain of title explaining how they cameto be the secured party.316

In other cases, the records themselves reveal inconsistencies. In

some cases, the appointment of the successor trustee has occurred after the foreclosure was carried out.317 In still other cases, thereare serious concerns that the trustee who is self-appointing had no power of attorney to do so. 318 These problems, and thousandsmore, mean that in some foreclosures, there are no recordsindicating that the party who is seeking to foreclose actually hasstanding to do so.319 Nonetheless, trustees rarely if ever ask for any proof at all. They simply take the bank’s word for it.320

Finally, in addition to internal and external record problemsrelating to who has standing to foreclose, there are also serious problems with record keeping relating to payments. As mentioned,

the federal government recently alleged the largest servicers wereengaging in negligent and unfair practices that included losing payments, refusing to provide information about how much wasowed, dual-tracking (in which on department promises amodification while the other forecloses) 321 and failing to followthrough on valid modification requests, just to name a few. Theservicers agreed to pay $25 billion to settle the claims. 322 However,no one believes that this will resolve all the problems. As a result,there are still grave questions about whether people the bank saysare in default actually are. In some cases, they were promised modifications, made the trial period payments, then were not

offered the permanent modification they were promised. In other cases, the party may be current on payments, but due to changes inservicers, the current servicer may not have the payments or therecords.

As a result of the myriad of problems relating to who canforeclose and whether payment is owed, the first thing a trusteereform statute must do is explicitly require trustees to receive

316 Id .317 Id .318 Id .319

Id .320 Id .321 Williams, supra note 26, at 468 (generally describing the dual-track process).322 National Mortgage Settlement, supra note 171.



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physical records that verify these essential facts. Specifically, astatute would require:

1. Proof of the transfer of the original note from the

original lender to the current party who seeks toforeclose, including any and all interveningassignments. The foreclosing party should be required to produce a copy of the original note and attest in asworn affidavit that the original note exists in itsoriginal form. 323

2. Proof that the party who seeks to foreclose is the partywho is recorded in the public records as the secured party, along with all the recordings that show how that party came to be secured.

3. Detailed financial records that show when default

occurred and precisely how much money thehomeowner currently owes.324

4. Documents detailing any modification discussions thatoccurred and documents showing the results of eachmodification review.

5. Documents proving that the bank had the power toappoint the successor trustee.

If the trustee were required by law to demand these documents, itwould be a simple task. Trustee firms could train employees toreview document packets presented by the party seeking toforeclose. If they are deficient, they would be sent back to the

lender with instructions to cure.This simple requirement would stop the most egregious

foreclosures. Ron, discussed earlier in the article, would still be inhis home because the bank could not have produced records of missed payments, given that Ron made each payment. Two things

323 Nevada has enacted a law that has similar requirements. It provides for voluntary pre-foreclosure mediation. If the mediation is demanded by thehomeowner, the foreclosing entity must provide 1) the original or certified copyof the deed of trust, the loan note and each assignment or transfer of the deed of trust and the note. Renuart, supra note 85, at 576 (citing Nev. Foreclosure

Mediation R. 11 and listing the documentation requirements).324 This would be similar to the data the CFPB has recently indicated it will soonrequire servicers to provide to homeowners. Consumer Financial ProtectionBureau, 12 C.F.R. § 1070.40 (2013).



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would have happened: either the trustee would have rejected the bank’s paperwork, or as the bank learned the system, the bank would never have initiated foreclosure in the first place.

b. Insulate from other parties

The checklist described above is most effective if the partyacting as trustee is truly neutral. Otherwise, close questions (whichcould always arise), will be resolved in favor of the banks.Insulation is relatively easy to achieve. A trustee reform statuteshould prohibit any attorney who has served as counsel for either party in the foreclosure from serving as trustee. This ensures thatthe party who serves as trustee does not have a dog in the fight. Itleaves a vast array of attorneys who can do the job. This statutory

requirement could well give rise to trustee firms who make solid livings overseeing foreclosures. They could still handle them in bulk, but they would now have clear requirements for whatdocumentation is required.

c. Prohibit foreclosure when legal or factual disputes arise

Requiring trustees to cease foreclosure activity when legal or factual disputes arise should be common sense, but there are veryfew cases, and no statutes, that explicitly require this result.Trustees are not trained to resolve disputes that arise between the

parties, but in reality, trustees do it every time they select the bank’s version of the story over the borrowers.325

In a common situation, a homeowner states they were promised a modification and that they made the requisite payments, but the bank says it has no records of it. This presents both a legalquestion (is the promise to modify a binding contract) and factualquestion (did the bank even make the promise and did thehomeowner accept). If the bank breached its promise to thehomeowner and that promise was binding, foreclosure isinappropriate. Conversely, if the homeowner is wrong, foreclosureis appropriate. What currently happens in most cases is that the

trustee proceeds with the foreclosure, ignoring the homeowner’s

325 Vieth, supra note 1.



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complaint. In response to criticisms about this behavior, trusteesoften say they have no duty to investigate.326 This too may be true, but the minute one party’s story is believed over the other party’s

story, the trustee has certainly ceased to be neutral.Thankfully, there is an easy fix. A trustee reform statute

should require that if there is a dispute between the parties as to theright to foreclose, the trustee must file a document in the publicrecord stating that the foreclosure cannot proceed non-judicially because it would require the resolution of disputes. The bank retains the right to foreclose, as a foreclosure can always be carried out judicially even in non-judicial states. The bank will be forced to consider whether its claim is valid, as will the homeowner. If the bank determines it has a legal right to foreclose, it can file in court.If the bank prevails, the statute should allow the bank to recover

damages for the time the homeowner remained in the home. Thiswill discourage frivolous claims from homeowners filed only tocause delay. This solution puts legal and factual disputes wherethey belong: in courts who have considerable expertise in decidingsuch matters.327

d. Penalties

The first three prongs of the trustee reform statute carefully prescribe and proscribe what a trustee must and must not do.Prong two also insulates the trustee from the other parties.

However, there is always the potential for a rogue trustee. As aresult, a trustee reform statute should include a provision that provides for statutory penalties for any violation of the statute.328 The statute should also allow the recovery of attorney’s fees to a prevailing homeowner, for actual damages and for punitive

326 Id .327This portion of my proposal bears some resemblance to one of the moreinteresting rescue measures put in place during the Great Depression, an era inwhich many state legislators sought to curb foreclosures. In some states,homeowners were given the power to convert non-judicial foreclosures to

judicial foreclosures. In my proposal, the trustee triggers this change in order toavoid factual disputes about a person’s home being resolved extra-judicially.Walsh, supra note 22, at 140.



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much state licensing and regulating is built into a particular trusteereform statute, the private right of action should be preserved. It isthe author’s experience that a combination of public and private

enforcement is critical to enforcing statutes. This is played out infields as varied as employment law, debt collection, environmental protection and securities.

f. Educate

Education applies both to trustees and to the public. Whenstates create minimal requirements for trustees, and preferablylicensing structures, the market will almost certainly create classesand courses to train trustees. The education of trustees is essential.This education can be measured, as discussed above, by requiring

licensing through a basic test.The more important education piece relates to public

education. A trustee statute will only be effective if homeownersunderstand their rights. An ideal trustee reform statute would specifically provide for the implementation of basic publiceducation campaigns to let homeowners know of their new protections.

2. The Promise of a Trustee Reform Statute and the Challengesthat Must be Addressed

A trustee reform statute like the one described above would almost immediately alter the landscape of foreclosures. Theminute that banks could not hand pick a trustee to ram foreclosuresthrough, things would improve. When trustees act as true neutrals,disputed foreclosures will no longer be decided in the shadows bya trustee who is untrained and/or unfair. Instead, the dispute would be sent to court, where we have developed sophisticated mechanisms for resolving factual and legal disputes. Similarly, if atrustee requires from the banks the essential documents that allowit to foreclose, it keeps banks honest. If the bank has a problemwith its records, it will need to correct the error (if it can) or

contact the homeowner and try to work out a modification. And tomake sure the statute works, it builds in public and private and



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enforcement as well as a licensing and education system meant tomake sure all the concerned parties understand the law.

There is little doubt that the statute would reduce the number of

illegal foreclosures, and in some cases, it would cause foreclosuresto take longer. I suggest this is a good thing. Government programs, lawsuits, and any number of other efforts have beenaimed at keeping people in homes. This is good for thehomeowner, but it is also good for the broader economy. Home prices plummeted due to a market meltdown and due to a surplusof empty homes due to unprecedented foreclosures. Requiring the banks who caused the problem in the first place to carefullyconsider whether they should remove people from homes, instead of allowing them to use their own attorneys to do it quickly, is afair result. And when the bank is right and the homeowner isn’t

paying, the courts can resolve the matter and provide damages tothe bank. As a result, there is no downside to making trustees trueneutrals. The only possible result is a reduction in wrongfulforeclosures, an increase in modifications, and overall increase inthe certainty that property rights are being appropriately protected.

Going forward, the challenges to a trustee reform statute aremany. First, educating lawmakers about the problems thatcurrently exist is essential. It is my hope this article helps with thattask.

Second, the ability to attract competent trustees to the job must be considered. Currently, trustees are compensated in most states

by receiving a percentage of the sale price. 332 This structure

332 One might think that since trustees are paid based on the sales price at theforeclosure sale, there would be incentive to sell the house for the highest price.First, as discussed, the problems with the auction system discourage competitionand thereby reduce the sales price. Second, trustees make far more for the other services they provide the bank than they do for selling the home. For example, atrustee in Missouri receives “a commission on the amount of sales not exceedingtwo percent on the first one thousand dollars, and one percent on all sums over that amount and under five thousand dollars, and one-half of one percent on allsums over that amount.” MO. A NN. STAT. § 443.360 (West). In other words, ahome that sells for $100,000 at a foreclosure sale would produce a return of

$535. This law also creates another problem discouraging a trustee from seekingto maximize the sales price. Namely, as the bid goes up, the return to the trusteeis proportionally less, so that increased effort results in decreased gains. For example, if the trustee made a special effort, and sold the house for $150,000



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rewards foreclosing and discourages asking real questions. One possibility would be to establish a trustee pay structure thatrequires trustee compensation by the bank any time a foreclosure

does not proceed but is initiated, and requiring payment by thehomeowner (from the proceeds of the sale) anytime the foreclosuredoes proceed. The rates of pay would need to be established state by state, based on what the market requires. I suspect it will meanthat trustee fees will need to be increased some since trustees willno longer double, triple or quadruple dip as today’s trustees do. Afinal possibility is to have trustees become public employees, asthey are in Colorado. It is beyond the scope of this article toexamine all the possible payment structures. It is my hope that 1)others will begin to write about this possibility and to examine itmore closely and 2) that I can, in a future article about the

Colorado system and my proposed legislation, examine creativeoptions or for enticing true neutrals to serve as trustees.

Finally, some may argue that my proposals will increase thelength of foreclosure and the overall costs to banks. A critic mightargue that these costs will be passed onto consumers. I suggest inresponse that currently banks are not fully internalizing the cost of the system, and instead, are foreclosing haphazardly, therebyskirting costs they should bear. At a macroeconomic level, the glutof foreclosed homes, the ever present specter of litigation over theforeclosures, and the economic harm foreclosed familiesexperience have proven devastating to the economy. 333 Reducing

wrongful foreclosure could have a number of positive impacts onthe economy as a whole.

instead of $200,000, the increased return would be $250. This same effort could instead be invested in taking on another case for a bank, in which the trusteewould be paid for debt collection, for the foreclosure (as an attorney), for unlawful detainer work (after the sale) and, in some cases, for default servicing,

title work, and the profits from the publication of notice. For all these reasons,the current system is not incentivizing trustees to seek the highest bid, especiallyif doing so would risk a steady, lucrative stream of businesses from banks.333 Pittman, supra note 108, at 1104.



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B. Using Litigation to Reform the Role of Trustees

In many states, the possibility of passing a trustee reform

statute is slim. However, those same states may have law and courts that would allow for partial reform through litigation. It is beyond the scope of this article to document the law of every state;however, considering the law of a few different states is helpful.To that end, the basic laws of California, Washington and Missouriare reviewed below. These states were chosen because theyrepresent some of the different positions states have takenregarding trustees.

I conclude that California and Missouri, to differing degrees,are ripe for litigation to define the role of the trustee and curbabuse. I conclude with Washington because it is the only state that,

as of February 2013, has law that specifically requires trustees to be truly neutral, exercising independent discretion and as a realthird party. Washington provides a model for future litigation, and the Washington Supreme Court’s recent holding supports many of the fundamental assertions made in this article.

1. California

Of the four states surveyed, California demands the least of trustees. It is unique because it 1) doesn’t hold that a trustee has afiduciary duty to both parties, and 2) because it has provided

limited statutory immunity for trustees.334 One case in particular,demonstrates the limited claims that can be pursued againsttrustees in California. The case is also illustrative because itreveals that there is still a window for claims, especially those thatindicate genuine bias by the trustee. The case is Kachlon v. Markowitz,335 a case in which a homeowner sued the trustee and the note holder, alleging that the trustee recorded of notice of

334 Arizona has a similar limited immunity statute. See ARIZ. R EV. STAT. A NN. §33-807 (2012).“If the trustee is joined as a party in any [action other than one alleging the

trustee breached its duties under the statutory scheme] the trustee is entitled to be immediately dismissed and to recover costs and reasonable attorney feesfrom the person joining the trustee.” Id. 335 Kachlon v. Markowitz, 168 Cal. App. 4th 316 (Cal. Ct. App. 2008).



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default when no default existed. 336 The homeowners further alleged that they provided proof to the trustee that the $53,000 promissory note at issue had been satisfied. 337 In response, the

trustee refused to proceed with the foreclosure and refused towithdraw the notice of default. 338 In essence, the trustee froze,refusing to take sides.339 The Plaintiffs brought a slander of titleclaim and a negligence claim.340 The Court ultimately upheld adirected verdict in favor of the trustee. 341 In reaching itconclusion, the Court laid out the current status of California law.It began by discussing the duties of a trustee.

The trustee in nonjudicial foreclosure is not a truetrustee with fiduciary duties, but rather a commonagent for the trustor and beneficiary. The scope and nature of the trustee's duties are exclusively defined

by the deed of trust and the governing statutes. Noother common law duties exist.342

It then explored the statutory “privilege” that was granted totrustees by CAL. CIV. CODE § 2924 (West 2012). The section provides at least some privilege for trustees when they engage intheir ordinary duties, such as mailing, publication and the deliveryof notice.343 After wrestling with the nature of the privilege or immunity, the Court concluded that it provided a limited privilegethat did not reach to malice.

Obviously, the 1996 amendment was intended togive trustees some measure of protection from tort

liability arising out of the performance of their statutory duties. The overall balance of interestsreflected in the statutory scheme, however, favors protection of trustors' property rights, thussuggesting that trustors should not be entirelydeprived of the ability to vindicate their property

336 Id. at 343.337 Id.338 Id. at 344.339 Id.340

Id. at 343.341 Id.342 Id. at 335.343 CAL. CIV. CODE § 2924 a-f (West 2012).



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rights if wrongfully violated by the trustee. Grantingabsolute immunity from such wrongdoing would wholly sacrifice the trustor's interest in favor of the

trustee. The qualified common interest privilege, onthe other hand, would provide a significant level of protection to trustees, leaving them open to liabilityonly if they act with malice. At the same time, it preserves the ability of trustors to protect against thewrongful loss of property caused by a trustee'smalicious acts.344

The Court also concluded that “mere negligence in making asufficient inquiry into the facts on which the statement [a boutdefault] was based does not, of itself, relinquish the privilege.”345

The Court’s decision is instructive. Although it makes clear

that a trustee will not be held liable for negligence, it leaves openthe possibility that a claim in California against a trustee who isclearly working for the bank, and who is clearly disregarding anyinformation provided by the homeowner, may state a claim. Assuch, although a claim in California to curb the practices by someabusive trustees may be difficult, it does not seem impossible.

a. Could Ron Meehow’s Claim Survive in California?

In Kachlon, the court noted that the trustee stopped theforeclosure procedure when provided some evidence that default

did not occur. The court relied heavily upon this behavior to find the trustee did not act with malice. In Ron’s case, despite evidencethat default did not occur, the trustee plowed ahead. The trusteeeven affirmatively explained its behavior, suggesting it was because it worked for the bank. This statement, coupled with proceeding with foreclosure, would likely be sufficient to establishmalice in California.

As a result, California law leaves room for claim’s like Ron’s.Such claims would serve the high purpose of defining the parameters for trustees and curbing some of the behavior discussed in this article.

344 168 Cal. App. 4th 316, 340 (Cal. Ct. App. 2008).345 Id. at 344.



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2. Missouri

Missouri is an example of a state that is ripe for litigation.

Claims against trustees could clarify the role of the trustee and prevent some of the abuses discussed in this article, and Missourihas law that is almost identical to Washington law, which, asdiscussed in the next section, has held trustees liable for a breachof their duties.

a. Missouri Law

Missouri also meets the second half of a test to determine if litigation is wise. The law relating to trustees in Missouri is alsoripe for a claim. Although trustees have only rarely been held

accountable for illegal behavior, this is in large part because caseshave not been pursued in the modern mortgage era. The law itself is similar to the law of many states, and it provides language thatshould support claims against trustees like the ones described inthis article. For example, Missouri case law contains the following:

An early, typical Missouri case describes the role of the trusteeas follows:

Trustees are considered as the agents of both parties-debtor and creditor-and their action in performing the duties of their trust should beconducted with the strictest impartiality and

integrity. They are intrusted with the importantfunction of transferring one man's property toanother, and therefore both reason and justice willexact of them the most scrupulous fidelity. Courtsof equity have always watched their proceedingswith a jealous and scrutinizing eye; and where it isclearly shown that they have abused their trust, or combined with one party to the detriment of theother, relief will be granted. Not that a sale made bythem will be set aside on slight and frivolousgrounds; but where it appears that substantial injury

has resulted from their action, where, in pursuanceof their powers, they have failed or neglected toexercise a wise and sound discretion, equity will



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interfere. It is impossible in the very nature of things to lay down any precise rule applicable aliketo all cases which may arise, but every case must be

decided on the especial facts and circumstanceswhich surround it and upon which it is founded.346

Other Missouri court opinions seem to suggest that a trusteehas, at least in some cases, a duty to conduct a “reasonableinvestigation” into default.347 And since at least 1846, Missouricourts have roundly denounced allowing a trustee to act as themere agent of the lender, to the exclusion of the trustee’s duties.

Neither the law nor the parties intend that thetrustee shall be a nose of wax, a mere figure-head,in the hands of the creditor and of the auctioneer.He is placed in a position to act fairly by all

interested, and when he fails in his duty in thisregard, the sales he makes will be set aside . . . .348

All of these cases, and many more, describe the role of thetrustee as a sacred one. These descriptions of duties line up closelywith my suggestions about what a trustee should be in the modernmortgage era. The language of the decisions seems to suggest thata trustee could never openly promote itself as an agent for thelender nor could a trustee choose to ignore information from thehomeowner regarding fraud or negligence by the lender. Thissuggests that if a claim is pursued against a trustee who has donethese things, liability should exist.349 But whether or not the law

will produce these results remains to be seen.

346 Axtell, 17 S.W.2d at 334.347 Smith, 322 S.W.2d at 777 (noting in that case that there was no evidence thata reasonable investigation would have turned up a reason not to foreclose, butseeming to suggest that the trustee could have been liable had such evidenceexisted).348 Vail v. Jacobs, 62 Mo. 130, 133-34 (1876).349 Because I continue to work “Of Counsel” in Missouri, I am aware of several

such claims that will be making their way to the Missouri Court of Appeals and perhaps the Missouri Supreme Court. These cases put in action my theory thatlitigation can be used in some states to curb the harmful behavior of sometrustees.



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b. Could Ron Meehow’s Claim Survive in Missouri?

As discussed, a case very similar to Ron’s was filed in

Missouri. It survived a motion to dismiss. This is appropriateunder Missouri law and suggests that Missouri is ripe for claimsagainst trustees when those claims contain facts that demonstrateovert bias. These claims would be beneficial to Missourians facingforeclosure because they would define the parameters of thetrustee and serve to curb some of the more offensive and troubling behaviors.

3. Washington

Washington law provides an unusual amount of detail and

precedent regarding trustees. However, there are few cases thathave tested that law in the modern mortgage era. This fact,coupled with the fact that Washington is home to NorthwestTrustee Services, a company that raises serious questions about therelationship between trustees and foreclosure attorneys, mean thatclaims in Washington might be especially effective in defining therole of the trustee more fully and preventing some of the problemsdescribed in this article.

a. Washington Law

Washington is unique because it has clear precedent aboutwhat principles should guide the interpretation of its deed of truststatute and because it has two cases, separated by over 20 years,that hold trustees liable for breaching their duty of neutrality. Theguiding principles established for interpreting the deed of truststate can be summarized as follows:

Washington's deed of trust act should be construed to further three basic objectives. First, thenonjudicial foreclosure process should remainefficient and inexpensive. Second, the processshould provide an adequate opportunity for

interested parties to prevent wrongful foreclosure.



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Third, the pr ocess should promote the stability of land titles.350

In keeping with this, Washington law makes clear that a trustee is a

fiduciary to both the lender and the borrower.Washington courts do not require a trustee to makesure that a grantor is protecting his or her owninterest. However, a trustee of a deed of trust is afiduciary for both the mortgagee and mortgagor and must act impartially between them.351

Based on these principles, Washington has developed a body of law that requires trustees to be truly neutral. These cases establishthat if the trustee is merely an agent for the lender, the trustee can be individually liable for the breach of its duties. For example, inCox v. Helenius, a trustee was also the attorney for the foreclosing

bank. The court held that:The trustee breached his fiduciary duties byinitiating foreclosure proceedings and holding anonjudicial foreclosure sale of the home of thegrantors of the deed of trust, where trustee knewthat an action for damages and reconveyance of thedeed to grantors was pending against the granteeand knew that the grantors believed such action had halted foreclosure proceedings.352

Interestingly, the Court noted that the breach may have been asa result of the dual role of the trustee as both trustee and attorney

for the bank. And the court went further, suggesting that whensuch a conflict arises, the party should either be the trustee or theattorney, but not both. The Court wrote:

It appears that the dual responsibility of trustee and attorney for the beneficiary precipitated at leastsome of the trustee's breaches. Although the dualrole this trustee had troubles us, the Legislaturespecifically amended the statute in 1975 to allow anemployee, agent or subsidiary of a beneficiary toalso be a trustee. The amendment furthers the

350 Helenius, 693 P.2d at 685-86.351 Id. at 686.352 Id. at 684.



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general intent of the act that nonjudicial foreclosure be efficient and inexpensive, and in the ordinarycase would present no problem. However, the

statute may not allow attorneys to do that which theCode of Professional Responsibility prohibits. Thespirit of CPR DR 5–105(B) would seem to condemnaction of the nature that occurred here. Where anactual conflict of interest arises, the person servingas trustee and beneficiary should prevent a breach by transferring one role to another person.

Although some wondered if Cox was still good law, thequestion was answered in February 2013 in Klem v. Washington Mutual Bank . The facts and law of the case are related in detail below because the case is 1) representative of the types of claims

that could be pursued in other states, and 2) is the most explicit judicial support for many of the positions asserted in this article.In Klem v. Washington Mutual Bank , Ms. Halstien, through her legal guardian, filed claims for negligence, breach of contract, and violation of Washington’s Consumer Protection Act (“CPA”.)353 The jury returned a verdict for the plaintiff on all three counts. 354 The facts established at trial are discussed below, followed by theWashington Supreme Court’s consideration of whether the lawsupported the verdict.

Dorothy Halstien suffered from dementia. She owned a homeworth approximately $235,000 on which she owed roughly

$75,000.355 Due to the cost of her care, her guardian was unable to pay her mortgage. 356 Washington Mutual (“WaMu”) held the noteand Quality Loan Services was the trustee (“Quality).357 WaMuinstructed Quality to initiate foreclosure.358 It did, and on the firstday the law allowed, sold the home for $84,087.67, a dollar morethan Ms. Halstien owed in principle, fees and costs. 359 Toaccomplish the sale, a notary employed by Quality false notarized

353 Klem v. Washington Mutual Bank, No. 87105-1, 1 (Wash. Feb. 28, 2013).354 Id .355 Id . 356

Id .357 Id . 358 Id . at 2.359 Id .



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the notice of sale by predating it.360 This allowed the sale to occur earlier than it should have.361

Before the sale, Halstien’s guardian secured a signed purchase

and sale agreement for the home from a buyer who committed to pay $235,000. 362 The sale could not be closed prior to thescheduled foreclosure sale. 363 The guardian requested a postponement of the sale. 364 Washington law gave the trustee authority to postpone the sale without consulting with anyone.365 However, the trustee declined, stating that it would not postponethe sale without WaMu’s permission. 366 Evidence revealed thetrustee, in confidential document between it and WaMu, promised never to postpone a foreclosure unless WaMu agreed.367 And theCOO of Quality confirmed that Quality did what “WaMu told it todo . . . .”368

The Washington Supreme Court considered whether the lawsupported the claims pursued and won by Halstien’s guardian.369 It concluded that the Washington Consumer Protection Act applied to trustees and that a trustee could be held responsible for actingunfairly. 370 It also affirmed the intermediate ap pellate court’sholding that a trustee could be liable for negligence. 371

In reaching its conclusions, the Washington Supreme Courtexplicitly endorsed a number of the premises in this article and established a solid rationale for why states should hold trusteesaccountable. The Court noted that “the power to sell another person’s property, often the family home, is a tremendous power to

vest in anyone’s hands.”372 As a result, “common law and equityrequire[] [a] trustee[] to be evenhanded to both sides and to strictly

360 Id .361 Id .362 Id .363 Id . 364 Id . 365 Id . 366 Id . 367 Id . at 5-6.368 Id . at 6.369

Id . at 11.370 Id . at 22.371 Id . at 2.372 Id . at 19.



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follow the law.”373 The Court also noted that lenders, servicersand their affiliates routinely appoint trustees.374 And that “trusteeshave considerable financial incentive to keep those appointing

them happy and very little financial incentive to show homeownersthe same solicitude.”375 The Court noted that trustees sit in placeof courts, as a neutral, and that nothing in the law of Washingtonallows the “theft” of a person’s home by a lender “under the guiseof nonjudicial foreclosure.”376 The Court explicitly rejected thetrustee’s argument that there was nothing wrong with following the beneficiary’s direction.377 It held that, “if the trustee acts only atthe direction of the beneficiary, then the trustee is a mere agent of the beneficiary and a deed of trust no longer embodies a three partytransaction.” 378 Finally, the Court made clear that a trustee’sfailure to exercise “independent discretion as an impartial third

party” is an unfair or deceptive practice. 379 To support itsconclusion and to prevent further abuse, the Court also held that aninjunction was appropriate and remanded to the trial court tofashion an appr opr iate injunction to stop Quality from violationWashington law.380

The takeaway from Washington’s two leading trustee cases isimportant. The cases lay out fundamental principles that, if accepted in other states, would change the way foreclosureshappen. The most important principles are 1) the deed of trustlaws should be construed in favor of the borrower, 2) trustees arerequired to exercise independent discretion as a true third party,

and 3) a trustee’s close ties to the lender give rise to seriousconcerns about impartiality, requiring careful scrutiny by courts.Together, Klem and Cox support the assertions throughout thisarticle, and in particular, lend credence to the conclusion thatcourts will begin to establish real limits on what trustees can do if attorneys bring compelling factual claims.

373 Id.374 Id .375 Id .376 Id . at 20.377

Id . at 21.378 Id . at 22.379 Id . 380 Id . at 27.



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b. Could Ron Meehow’s Claim Survive in Washington?

Although the ultimate question of whether Ron’s claim would

survive turns on a multitude of factors, including the venue, the judge and the attorneys, it seems almost certain that Ron’s claimwould survive in Washington. The Washington Supreme Courtexplicitly concluded that failure to act as an independent decisionmaker exposes a trustee to liability. Like the trustee in Klem,Ron’s trustee explicitly asserted it does what the bank tells it to.This is a breach of the trustee’s duty.

Overall, Washington stands as the clearest example of thevalue of bringing claims against trustees who are tethered to banksand unwilling to act as a true third party. If advocates bring similar claims in other states that have similar law, such as Missouri, it is

likely that courts can play a role in curbing the harmful behavior of many modern day trustees.

4. What Specific Factual Scenarios Are Ripe for Pursuit?

Lawyers in trustee states will have a better sense of what fact patterns would best invite courts to consider the role of the trusteein the modern mortgage era; however, there are some basic issues Isuggest are ripe for consideration. They include:

• close financial ties between trustees and banks,including potential indemnity agreements;

• the conflict between advocating zealously for a bank (required under most ethical rules) and the legal duty to becompletely neutral

• a trustee’s willingness to actually advocate against ahomeowner in a TRO setting or bankruptcy

• the trustee’s failure to require any actual proof of the right to foreclose, including documents that would provestanding, security, and default;

• a trustee’s decision to resolve factual or legaldisputes about standing or default in favor of the bank;

• a trustee’s refusal to talk with a homeowner;

• a trustee’s decision to provide advice tohomeowners, which could create an attorney/client relationship.



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Pursuing these types of issues will have a number of salutaryeffects. First, it will provide much needed guidance and answers.Second, to the extent that some of the common practices by

trustees run afoul of the law, it will curb that behavior. Third, itwill allow for discovery that could better illuminate therelationship between banks and trustees. And fourth, it will likelycause those who are acting as both attorneys for the banks and astrustees to more carefully scrutinize their own practices.

I note that this process is already beginning. In the real case of Ron Meehow, the trustee was named, and the claim survived amotion to dismiss. That case, and others like it, could providemuch needed answers about what a trustee’s duties really are in themodern era.381

In sum, pursuing claims against trustees can achieve much of

the reform that a trustee reform statute would produce. Successfullawsuits could produce holdings that prohibit attorneys for the banks from serving concurrently as a trustee. Decisions could giverise to prohibitions on the trustee picking sides in factual disputes,and as trustees begin to be held liable for their behavior, thelawsuits could quickly cause foreclosure mills to rethink their approach. One class action verdict or settlement could undue allthe profiteering that occurred in the past, and in doing so, removethe primary driving force that leads to attorneys disregardingcommon sense, decency and their own ethical duties.

C. Ethics Complaints Can Give Rise to Changes in Lawyer Behavior

Because most trustees are also lawyers, they are subject to theRules of Professional Conduct in their state. In addition, moststates allow for attorneys to seek advisory opinions about potentialunethical situation. These two facts make filing appropriate ethicalcomplaints and ethical inquiries a last resort that may be necessaryto curb the most overt forms of abuse by trustee attorneys.

381 As a matter of full disclosure, I am putting into practice the litigation strategy

laid out in this article. Along with my colleague Erich Vieth, I filed a classaction against the largest foreclosure firm in Missouri. It is our hope that either through the trial court or the appellate courts, the trustee issue can be considered by a thoughtful court on a complete record.



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1. Ethical Rules that Might Be Implicated

The Cox decision from Washington State hints at one of the

potential problems. The Court points out that althoughWashington allows attorneys for banks to also serve as the trustee,“the statute may not allow attorneys to d o that which the Code of Professional Responsibility prohibits.”382 The Court suggests thatthe trustee in that case, who seemed to put the interest of the bank above a debtor who believed that the foreclosure sale had successfully been stopped when it had not, may have run afoul of the ABA Model Rule of Professional Conduct 5-105. That sectionaddresses when a lawyer must refuse to accept or continueemployment if the interests of another client may impair theindependent professional judgment of the Lawyer. Specifically, 5-

105(B) states:A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, or if it would be likely to involvehim in representing differing interests . . . .

The Court’s language and reference to the section above suggestsan interesting possibility. The Court implies that when an attorneyelects to become a trustee, and thereby takes on a legal fiduciaryduty to a borrower, the attorney enters into representation of the

borrower.Although the Court’s analysis stops short of explaining when

an attorney/client relationship might exist between a borrower and an attorney/trustee, there is some guidance available. Although it is beyond the scope of this article to cover how attorney/clientrelationships can form, including through implication, it is worthnoting here that one learned scholar suggests that “many courtsand the Restatement adopt the approach that it is the intent of the client that primarily controls the activation of the relationship.”383

382 Helenius, 693 P.2d at 687.

383 Douglas K. Schnell, Don't Just Hit Send: Unsolicited E-Mail and the Attorney-Client Relationship, 17 HARV. J.L. & TECH. 533, 540 (2004).



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If this is true, then a borrower who contacts a trustee knowing that1) the trustee is a lawyer, and 2) the trustee is supposed to helpthem, may well have a reasonable expectation that the trustee acts

as their lawyer.Another model rule is implicated even if the borrower is never

the trustee’s attorney. Namely, Model Rule of ProfessionalConduct 4.3. It addressed how lawyers should talk tounrepresented parties. It states:

In dealing on behalf of a client with a person who isnot represented by counsel, a lawyer shall not stateor imply that the lawyer is disinterested. When thelawyer knows or reasonably should know that theunrepresented person misunderstands the lawyer'srole in the matter, the lawyer shall make reasonable

efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know thatthe interests of such a person are or have areasonable possibility of being in conflict with theinterests of the client.

Under this rule, if the homeowner is not represented,what should an attorney/trustee do? If they have the trusteehat on, then they are supposed to be neutral and in somestates even owe a fiduciary duty to the homeowner. If they

have the attorney hat on, their interests are adverse to thatof the homeowner. If the homeowner is represented, thetrustee probably should not talk to them. Yet, they owe aduty under the law to talk to them. If the person isunrepresented, the trustee needs to make clear that theycannot help (at least with the attorney hat on) and that thereinterests are adverse. Then, the only advice they could give, is for the homeowner to seek counsel. Telling thehomeowner to reinstate the loan by paying the back dueamounts, if the homeowner does not believe he is indefault, could be giving legal advice (and bad legal advice

at that). Telling the homeowner to call the bank seemsequally inappropriate. This scenario, of the ethical dutiesrelated to talking to an unrepresented party, is perhaps the

http://www.law.cornell.edu/ethics/aba/current/ABA_CODE.HTM#know

http://www.law.cornell.edu/ethics/aba/current/ABA_CODE.HTM#reasonably_should_know

http://www.law.cornell.edu/ethics/aba/current/ABA_CODE.HTM#reasonable

http://www.law.cornell.edu/ethics/aba/current/ABA_CODE.HTM#reasonable

http://www.law.cornell.edu/ethics/aba/current/ABA_CODE.HTM#reasonably_should_know

http://www.law.cornell.edu/ethics/aba/current/ABA_CODE.HTM#know



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best illustration of the untenable schizophrenia that existswhen an attorney for the bank is also charged with beingthe neutral trustee in a disputed matter.

If an attorney/client relationship is formed in even someinteractions between borrowers and attorney/trustees, this would have wide ranging implications. For example, if the debtor becomes the attorney/trustee’s client, does this mean that theattorney/trustee breaches the duty of confidentiality if it sharesinformation from the borrower with the bank?384 Similarly, if theattorney/trustee fails to provide advice to the borrower when asked,does this constitute malpractice? And does the fact that an“attorney fee” or a “trustee fee” or both are routinely added to thedebt of the homeowner when calculating the deficiency support the proposition that the attorney/trustee is the borrower’s attorney?

Interestingly, the most obvious conflict the attorney/trusteemay have is with the bank. The attorney is required to representthe bank “zealously” so long as it is “within the bounds of thelaw.”385 At the same time, the attorney/trustee is required by moststate law to be neutral as between the bank and the borrower. If the attorney/trustee took this duty seriously, it would have todisclose this conflict to the bank. By disclosing that it could notadvocate for the bank, or even take the bank’s story as true if challenged by a homeowner, the attorney/trustee would likelyconvince the bank it needed new counsel. Interestingly, there isno evidence any attorney/trustee has ever made such a disclosure

to any bank. This speaks to the fact that most trustees either 1)don’t see the conflict, or 2) don’t care.

All of the questions above can and should be addressed. Thiscan be done without calling into question the ethics of any specificattorney. Most state ethics boards allow for advisory opinions to be issued in response to ethical inquiries. I propose that attorneys begin to pose ethical questions to these boards in order to definewhat an attorney/trustee may do and what they cannot. Here aresome questions that could be asked:

384

See generally MODEL CODE OF PROF’L R ESPONSIBILITY DR 4-101 (1980).385 MODEL CODE OF PROF’L R ESPONSIBILITY EC 7-1 (1980), available at http://www.americanbar.org/content/dam/aba/migrated/cpr/mrpc/mcpr.authcheckdam.pdf.



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1. Can a trustee who is an attorney and is required by law to be neutral, decide an issue in favor of its client and againsta homeowner to whom the attorney owes a fiduciary duty if

there is a dispute between the parties as to law or fact?2. Can an attorney hold a duty of zealous advocacy for one

party while simultaneously owing a duty of neutrality to a party whose interests are adverse to the attorney’s client?Would this require written disclosure to one or both parties?

3. Can a trustee for a homeowner in a foreclosure also appear in court to advocate against the homeowner and in favor of foreclosure?

4. Does an attorney who serves as a trustee and has a legallyrecognized fiduciary duty to a borrower enter into an

attorney/client relationship when 1) the borrower sharesinformation with the trustee, or 2) if the borrower seeksadvice from the trustee because the borrower believes thetrustee is 1) an attorney and 2) supposed to be fair to the borrower?

5. If an attorney agrees to serve as a trustee in a foreclosure,and in the process of that foreclosure, obtains informationfrom a borrower to whom the trustee owes a fiduciary duty,is the trustee prohibited from later using that information ina subsequent action against the borrower?

6. If an attorney agrees to serve as a trustee in a foreclosure,

and in the process of that foreclosure, obtains informationfrom a borrower to whom the trustee owes a fiduciary duty,is the trustee prohibited from later representing another party against the borrower in a related transaction?

In addition to advisory opinions, if there are attorneys who arecommitting palpable violations of the ethical cannons, thesespecific attorneys could be reported. Adverse opinions in thissetting could have an immense chilling effect on future bad acts.Similarly, if attorneys continue to engage in practices prohibited byadvisory rulings, there would be little reason for them to escape punishment. Overall, it seems likely that some states would issue

advisory opinions that would be inconsistent with some current practices, and that similarly, some lawyers are already crossing the



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line. These opinions, if issued, would curb the currentquestionable ethical practices by some attorney/trustees.

2. A Real Example to Build On

I note that this is more than theory. In the not too distant past,at least one state issued an opinion that specifically dealt withtrustees. In North Carolina, an ethics inquiry was filed. Itssubstance is below:

Inquiry #2:If foreclosure proceedings have been instituted against a debtor,may Attorney A, who serves as Substitute Trustee in theforeclosure, file a motion in the Bankruptcy Court to set aside theautomatic stay?

Opinion #2:• No. See CPR 94. So long as the attorney serves as trustee,he may not be involved in any proceeding arising from or connected with the deed of trust.386

This opinion was later explained further in CPR 166, whichsaid in part:

The proper rule is that the trustee/attorney cannotethically represent either the lender or the borrower in a role of advocacy at any state of the foreclosure proceeding. The trustee in his fiduciary capacity ischarged with the duty of preserving the interests of

both, and in that sense he represents both. If, duringthe existence of the fiduciary relationship, he should act in an adversary capacity for either, he would violate his fiduciary duty to the owner, and thiswould offend the Code provision against conflict of interest.387

The problem is that the clarification was issued on July 14,1978. As a result, there is a pressing need for the ethics of the dual

386 NORTH CAROLINE R EAL PROPERTY ETHICS HANDBOOK 53 (Ethics Committeeof the North Carolina State Bar 2012), available at

http://nc.invtitle.com/sites/nc.invtitle.com/files/resource/ethics-manual/upload/ethicshandbook20120523.pdf.387 North Carolina State Bar, Ethics Op. CPR 166, available at http://www.ncbar.com/ethics/ethics.asp?id=695.



role of attorney and trustee to be examined in light of the modernmortgage era. Clear inquiries and precise answers could be thefastest way to immediately impact the behavior of trustees.388

3. How Would Ethical Decision Impact Ron Meehow’s Case?

It is difficult to predict what ethics boards will say in responseto questions about relatively new, sometimes poorly understood situations. However, it seems likely that a minimum, ethicsdecisions could serve as a check on the most egregious behaviorsof some attorney/trustees.

CONCLUSION

Presently, the very banks that collapsed the world economy are being trusted to, with no judicial oversight and no meaningfulneutral, remove people from their homes. The same companieswho brought us robo-signing, derivatives, MERS, the bailout and exotic loans that were designed to fail are being trusted to do theright thing when it comes to foreclosure. The banks’ actions areunchecked because trustees are unregulated and in some casesunfair. There is no doubt this system doesn’t work, and the humanand financial costs of wrongful foreclosures are immense.Fortunately, there are some simple solutions that can converttrustees from potential accomplices in wrongful foreclosures to

meaningful parts of the solution. Legislation, litigation, and ethicalinquiries are all means to accomplish this goal, and it is a goalworth fighting for. Reforming the role of the trustee protects property rights, promotes certainty, reduces wrongful foreclosure,and encourages modifications of loans. These results are good for homeowners, but more importantly, they are net positives for the broader economy and society as a whole.