The Phantom Trustee – Not a Problem on a Deed of Trust

Those of us involved in real estate loans, debt financing, and problem loans or loan workouts have sometimes wondered whether a deed of trust can be valid if no trustee is identified. I am often asked this question and, surprisingly, the issue was never been directly addressed by California courts until the end of 2012! In a decision handed down a few months ago, a California Court of Appeals ruled that the omission of a named trustee on a deed of trust at the time it is executed and recorded does not preclude enforcement of the deed of trust through a foreclosure sale of the secured property.

The facts of the case are straightforward. A real estate loan was made and secured by a deed of trust on the property being purchased. The lender designated Mortgage Electronic Registration Systems, Inc., or MERS, as the beneficiary and simply omitted naming a trustee. Later, the borrowers defaulted on the loan and MERS then recorded a substitution of trustee naming ReconTrust Company, N.A. (ReconTrust) as trustee, and assigned its beneficial interest under the deed of trust to a loan servicer who further assigned the beneficiary’s rights to Arch Bay Holdings, LLC – Series 2010B (Arch Bay). As newly appointed trustee, ReconTrust filed the required notice of default and notice of sale, and eventually conducted a trustee’s sale at which Arch Bay purchased the property. After the sale, the borrowers filed a lawsuit asserting, among other things, that the failure to designate a trustee in the original deed of trust was a fatal flaw and precluded any trustee’s sale under the power of sale in the deed of trust. See, Shuster v. BAC Home Loans Servicing, LP, et al. 211 Cal.App.4th 505 (2012).

The court first noted that this issue had never been addressed in prior California rulings. After wading through some technical arguments, the court ruled in favor of the lender or creditor and against the borrower, stating that the essential validity of the deed of trust is not affected because a trustee is omitted in the original deed of trust, as long as a trustee is named prior to a foreclosure. The court reasoned that the very limited powers granted to a trustee under a deed of trust – to convey the property at an out of court sale – are insufficient incidents of ownership or control to make the actual naming of a trustee critical to the validity of the document.

Caveat: This decision is strictly limited to deeds of trust and does not apply to any other types of trusts.

If you are involved in a real estate loan or other financing, perhaps in Silicon Valley, San Jose or elsewhere in California, we still advise that the deed of trust contain the name of a trustee, as it avoids the risk that other critical information will accidentally be omitted. However, if the trustee name is for any reason not specified, there no longer is any doubt that the lien remains valid and enforceable.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

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