Dear Readers:  This is an important case with commentary by Professor Dan Schechter, Loyola School of Law.  Note his commentary about how the courts may be angry with the banks for their faux pas, but they are also growing weary of homeowners who are unwilling to pay.  Keep this in mind.

Best to you all:

Shuster vs. BAC Home Loans Servicing, LP, 2012 Westlaw – – (Cal.App.):

            Facts:  Two individuals borrowed $670,000 to purchase a home.  The deed of trust named Mortgage Electronic Registration Systems, Inc. ("MERS") as the beneficiary, but the deed of trust failed to name a trustee.

            Four years later, the borrowers defaulted.  MERS named a substituted trustee, which recorded a notice of default.  Following a nonjudicial foreclosure, the borrowers filed a complaint for quiet title, arguing that the deed of trust was a "mortgage" requiring judicial foreclosure, rather than nonjudicial foreclosure, since it failed to name a trustee.  The trial court ruled in favor of the lender, and the appellate court affirmed.    

            Reasoning:  The court noted that although this was an issue of first impression in California, courts in other states have uniformly held that the omission of a trustee does not preclude nonjudicial foreclosure.  On appeal, the borrowers argued that a conveyance that fails to name the grantee is void.  But the court rejected that argument:

A grantee is not the same as a trustee.  The character of "title" provided by a grant deed differs substantially from that provided by a deed of trust.  A grant deed conveys a fee simple title to the grantee for all purposes . . . . In contrast, a trustee under a deed of trust "carries none of the incidents of ownership of the property, other than the right to convey upon default . . . ."

            The court went on to hold that the foreclosing party did not have to produce the original promissory note and that the borrowers' failure to tender the balance due stripped them of standing to challenge the foreclosure sale.  The court concluded with the following observation:

We are mindful that foreclosures are a far too frequent occurrence in today's difficult financial times.  But the hardship must not become a haven for those who, as here, do not appear to make any good faith effort to resolve the issue but, instead, seek shelter in minor ministerial omissions or speculative acts that neither misled nor prejudiced them.

            Author’s Comment: This is almost certainly the right result.  If the deed of trust had utterly failed to name a beneficiary, that would have been more analogous to a grant deed that names no grantee.  But a trustee under a deed of trust is nothing like a grantee under a grant deed.  In fact, a trustee under a deed of trust is something less than a true trustee.  See Stephens, Partain & Cunningham v. Hollis, 196 Cal.App.3d 948, 955, 955 242 Cal.Rptr. 251, 255 (1987):  "Just as a panda is not an ordinary bear, a trustee of a deed of trust is not an ordinary trustee." The Stephens court in footnote 4 speculated: "With luck, this passage will end up as the following headnote in some legal digest: 'Trustee under deed of trust held to be panda bear.'”  Although I can't quite fulfill the court's prediction, it seems that a trustee under a deed of trust is an odd creature, one that (in this case) magically arose like a Phoenix from the empty ashes of the blank trust deed.

            Taking a step back, however, one has to ask: how could any lender ever draft and record a deed of trust without naming any trustee?  Admittedly, it is very easy to change trustees and to substitute one for another.  But it would seem obvious that the transaction should begin with someone nominally occupying that role.  The court rescued the transaction from this defect, but it should never have happened in the first place.

            The court's world-weary observation about borrowers who "seek shelter in minor ministerial omissions" is telling:  although the courts are disgusted with the financial industry's shoddy practices, they are also losing patience with borrowers who cannot pay and who simply seek to delay the inevitable.