Recent Appellate Decision Is Favorable to Foreclosing Note Holder and Its Law Firm But Leaves Open Whether Discovery Is Permissible in a Foreclosure
Recent opinions issued by the North Carolina Court of Appeals have raised concerns among foreclosure trustees and their attorneys about the extent to which North Carolina’s Rules of Civil Procedure apply to power-of-sale foreclosure proceedings. For example, in Lifestore Bank v. Mingo Tribal Pres. Trust, 235 N.C.App. 573, 577, 763 S.E.2d 6, 9 (2014), review denied, ––– N.C. ––––, 771 S.E.2d 306 (2015), in upholding the application of N.C. R. Civ. P. 41(a) (the voluntary dismissal rule) the Court held that “[a] foreclosure under power of sale is a type of special proceeding, to which our Rules of Civil Procedure apply.”
Practitioners see mixed blessings in the recent decision, In re Goddard & Peterson, PLLC, 2016 WL3585841 (N.C.App. July 5, 2016). In that case the note holder, Beal Bank, S.S.B., petitioner in the foreclosure proceeding, substituted in Rogers, Townsend & Thomas (a law firm) as trustee to the deed of trust executed by Lillian Cain. RTT later sent a foreclosure notice to Cain, followed by a letter informing her it had been retained to foreclose the property and including the debt validation notice required by 15 U.S.C. § 1692g. Following an unexplained lengthy delay in the foreclosure proceedings, Cain served RTT with a request to petitioner, Beal Bank, for admissions pursuant to N.C. R. Civ. P. 36. The Request for Admissions to Beal Bank that it was not the note holder went unanswered, beyond the time period to respond contained in Rule 36. Shortly thereafter, Beal Bank substituted the law firm Goddard & Peterson for RTT as trustee, and RTT commenced representation of Beal Bank in the contested foreclosure proceedings before the superior court.
At the hearing before the superior court following the appeal de novo of the clerk’s order authorizing RTT to proceed with foreclosure sale, Cain served an unfiled motion to dismiss the petition supported by the petitioner’s purported failure to answer the Request for Admissions. The judge orally denied the motion. No written order was entered. The judge also overruled Cain’s objection to the petitioner’s introduction of an Affidavit of Indebtedness executed by a bank employee.
Do the Discovery Rules Apply in Foreclosure Special Proceedings?
On appeal, the Court of Appeals could have taken the opportunity to narrow the holding in Mingo by ruling that discovery is not permissible in a power-of-sale foreclosure special proceeding, or at least to find that service of discovery on attorneys employed by the trustee does not constitute service on the petitioner. It did neither. Instead, it took the path of least resistance and held that because the superior court had not entered a written order denying the motion to dismiss, then no appeal could be taken from it. An order is enforceable only when written, signed by the court and entered by the clerk. West v. Marko, 130 N.C.App. 751, 756, 504 S.E.2d 571, 574 (1998); N.C. Gen. Stat. §1A-1, Rule 58. While undoubtedly correct from a procedural standpoint, the Court certainly could have struck the Request for Admissions on the grounds it was served only on two RTT attorneys at a time when RTT was acting solely as substitute trustee. Surely service of legal documents on RTT (a neutral and a fiduciary, see discussion below) of materials intended for the petitioner and with potentially dispositive effect, cannot be permissible?
From Substitute Trustee to Creditor’s Advocate
On the positive side, the Court upheld the superior court’s decision overruling Cain’s objection to RTT appearing as counsel for petitioner in the de novo hearing. Cain contended RTT owed her a fiduciary duty when the case was in front of the superior court, and violated that duty by advocating for Beal Bank. The Court acknowledged the fiduciary nature of a trustee’s role in the context of the enforcement of a deed of trust:
In deed of trust relationships, the trustee is a disinterested third party acting as the agent of both [parties].” In re Proposed Foreclosure of McDuffie, 114 N.C.App. 86, 88, 440 S.E.2d 865, 866 (1994). As such, in a typical foreclosure proceeding, trustees have a long-recognized fiduciary duty to both the debtor and the creditor. In re Foreclosure of Vogler Realty, Inc., 365 N.C. 389, 397, 722 S.E.2d 459, 465 (2012). “Upon default [a trustee's] duties are rendered responsible, critical and active and he is required to act discreetly, as well as judiciously, in making the best use of the security for the protection of the beneficiaries .” Id. (quoting Mills v. Mut. Bldg. Loan Ass'n, 216 N.C. 664, 669, 6 S.E.2d 549, 552 (1940)). More specifically, “the trustee ... is required to discharge his duties with the strictest impartiality as well as fidelity, and according to his best ability.” Hinton v. Pritchard, 120 N.C. 1, 3, 26 S.E. 627, 627 (1897).
In re Goddard & Peterson, at *5.
The Court disagreed with Cain’s contention, however, finding that RTT was removed as substitute trustee well before the superior court hearing, and noted that Cain had not explained how RTT’s representation of petitioner at the hearing either violated a legal obligation or was done in bad faith. Moreover, Cain had not alleged any injury proximately caused by RTT’s actions, observing that “[t]his Court has held that breach of fiduciary duty is a species of negligence or professional malpractice. Consequently, [such] claims require[ ] proof of an injury proximately caused by the breach of duty.” Farndale Co., LLC v. Gibellini, 176 N.C.App. 60, 68, 628 S.E.2d 15, 20 (2006) (citations and internal quotation marks omitted).” In re Goddard & Peterson, at *4.
Invoking the authority of the State Bar’s ethics opinions, the Court remarked that this matter had been addressed in N.C. CPR 220 (1979), when the State Bar opined “that if a lawyer who is acting as a trustee for a deed of trust resigns his position as trustee, the lawyer may represent the petitioner bringing the foreclosure claim “as long as no prior conflict of interest existed because of some prior obligation to the opposing party.”” In re Goddard & Peterson, at *5. In 1990, the Bar found that “former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust.” Id. quoting N.C. RPC 82 (1990). “N.C. RPC 90 (1990) ties it all together, and provides that:
[i]t has long been recognized that former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust. CPR 220, RPC 82. This is true whether the attorney resigns as trustee prior to the initiation of foreclosure proceedings or after the initiation of such proceedings when it becomes apparent that the foreclosure will be contested.
Id. at *6.
The Court last cited the most recent ethical opinion “which more specifically defined RPC 90, by stating:
[A] lawyer/trustee must explain his role in a foreclosure proceeding to any unrepresented party that is an unsophisticated consumer of legal services; if he fails to do so and that party discloses material confidential information, the lawyer may not represent the other party in a subsequent, related adversarial proceeding unless there is informed consent.
N.C. Formal Opinion 5 (2013).”
Id. at 6. Given that Cain was represented by counsel in proceedings lasting more than three years, and that she had failed to argue that she had disclosed any material confidential information to RTT when it was acting as trustee, the Court found nothing in the record indicating the superior court had erred in overruling Cain’s objection to RTT acting as counsel for petitioner. Id.
Admissibility of Business Records
The opinion provides further support for the use of affidavits to satisfy the superior court in a de novo hearing with respect to the enumerated findings the court must make under N.C.G.S. § 45-21.16(d) in order to authorize the trustee to sell the secured property. Records that meet the definition of the business records exception to the hearsay rule (N.C. R. Evid. 801(c)) may be introduced by a witness when the proper foundation has been laid to qualify that witness. Petitioner produced an affidavit from a bank employee in support of the introduction of loan account records. In the affidavit the employee “specifically stated that her averments were “based upon [her] review of [petitioner's] records relating to [respondent's] loan and from [her] own personal knowledge of how they are kept and maintained.” As a result, [the employee] was a qualified witness under Rule 803(6) and petitioner's records regarding respondent's default on her loan account were properly introduced through [the employee’s] affidavit.” Id. at 8.
The Court also rejected Cain’s argument that the affiant’s statement that Beal Bank “is the holder of the loan” was inadmissible hearsay. Firstly, the foreclosure statute explicitly requires the clerk to consider the evidence of the parties and may consider ... affidavits and certified copies of documents. N.C. Gen.Stat. § 45–21.16(d).” Id, at *8. The Court extended that requirement to de novo hearings in In re Foreclosure of Brown, 156 N.C.App. 477, 486–87, 577 S.E.2d 398, 404 (2003), on the basis that because “[a] power of sale provision in a deed of trust is a means of avoiding lengthy and costly foreclosures by action[,]” this Court held that “the ‘necessity for expeditious procedure’ substantially outweigh[ed] any concerns about the efficacy of allowing [the secretary] to testify by affidavit, and the trial court properly admitted her affidavit into evidence.” Id. at 486, 577 S.E.2d at 404–05 (citation omitted).” In re Goddard & Peterson, at *8. The Court acknowledged that whether Beal Bank was the holder was ultimately a question of law for the superior court to decide, and the fact the affiant purported to make such a legal conclusion did not result in the affidavit being admitted in error. Id. at *9.
Trustees, their counsel and loan servicers should be aware of the Rules of Civil Procedure and should not ignore papers served on them by borrowers and others connected to the foreclosure proceeding. Strenuous objection should be made to attempts to conduct discovery and to force other procedural and substantive activity contradictory or ill-suited to the power-of-sale foreclosure process.
Counsel acting as substitute trustees, or representing substitute trustees, who wish to advocate for the petitioner or note holder should refrain from soliciting or receiving confidential information or materials from the borrower and should relieve themselves of the trustee’s duties as soon as possible.
Servicers should be mindful of the rules of evidence concerning the use of business records and the qualification of witnesses in court hearings. Given that the vast majority of foreclosure proceedings in North Carolina involve the use of servicer employee affidavits and of business records entered into the servicer’s computerized filing systems by someone other than the person signing the foreclosure debt affidavit, selecting the right person to execute the affidavit and working closely with counsel to ensure the affidavit will pass court muster, is essential.
Published by Hutchens Law Firm on August 9, 2016