North Carolina: Amendment to the Substitute Trustee Statute
by Terry Hutchens | Hutchens Law Firm LLP – USFN Member (North Carolina, South Carolina)
and Jim Bonner | Brock & Scott, PLLC – USFN Member (North Carolina)
In response to questions concerning the recent amendment to N.C.G.S. § 45-10: Substitution of trustees in mortgages and deeds of trust, the following overview and guidance are provided.
North Carolina House Bill 770 (Session Law 2017-206) was passed on August 30, 2017, amending N.C.G.S. § 45-10 immediately. [View the tracked content in the House Bill here; scroll to Part VI, Section 6 for the specific amendment discussed in this article.]
The amendment’s purpose is to codify existing ethics opinions adopted by the North Carolina State Bar (the Bar), including 2004 Formal
Ethics Opinion 3 adopted in 2004 (the Ethics Opinion).
Ethics Opinion — The opinion states that it would be a violation of the Rules of Professional Responsibility, and otherwise unethical, for an attorney to represent either the noteholder or the borrower in a foreclosure proceeding while also serving as the trustee (substitute trustee) in that foreclosure proceeding. The language of the new law tracks the operative part of this opinion.
Foreclosure Statute — Chapter 45 of the N.C. General Statutes sets forth the power of sale foreclosure procedure and provides that a trustee must be impartial, unbiased, and fair to all parties. The amendment makes it not only unethical but also unlawful for a lawyer to represent the foreclosing noteholder while serving as the trustee. Specifically, the new statute can be read to make it unlawful for a lawyer/law firm who has signed an agreement to provide legal services to a servicer (or Fannie Mae/Freddie Mac/HUD/VA) to also serve as the trustee in a Chapter 45 power of sale foreclosure proceeding in which that servicer/investor is the holder, owner, or agent for the holder or owner.
In Practice — For many years, in order to comply with the applicable ethics opinions of the Bar, these authors’ firms have contracted with third-party North Carolina corporations to serve as trustee in any power of sale foreclosure proceeding filed by their respective firms. It is not certain, however, what the proper procedure is for those lawyers/law firms who are currently serving as both the trustee and attorney for the noteholder (servicer/agent/owner) in a North Carolina power of sale foreclosure proceeding pending as of August 30, 2017, the effective date of the statutory amendment.
At a minimum, it is expected that debtors’ counsel will assert that these lawyers/law firms must be removed as either the trustee or the attorneys for the noteholder. It is possible that a clerk of court at the hearing, or a Superior Court judge on appeal, will hold that the foreclosure itself is sufficiently defective and will dismiss the proceeding with instructions to re-file with a proper substitute trustee. Without question, no lawyer should file a new foreclosure proceeding after August 30, 2017 in which the lawyer (or the law firm) is the substitute trustee and the lawyer (or the lawyer’s firm) represents the noteholder.
Published by Terry Hutchens and Jim Bonner on November 2, 2017