On November 19, the United States Court of Appeals for the Eighth Circuit affirmed dismissal of plaintiff borrowers’ claims against a foreclosure trustee and held that the trustee did not breach fiduciary duties by proceeding to foreclosure over borrowers’ objections.
The case centered on an oft-repeated scenario in which plaintiff borrowers were discussing a potential loan modification with the creditor and the creditor allegedly represented to plaintiffs that no foreclosure would take place during loan modification review. Despite these alleged representations, the creditor engaged defendant foreclosure trustee who scheduled a sale. Borrowers contacted the foreclosure trustee on various occasions requesting that the trustee cancel the sale because they were negotiating a loss mitigation scenario with the creditor and expressing their “frustrations” and “concerns” with the creditor’s conduct. The foreclosure trustee foreclosed on the property as scheduled. Plaintiffs sued, and the United States District Court for the Western District of Missouri to which the case was removed dismissed the plaintiffs’ claims. An appeal to the Eighth Circuit followed.
The Eighth Circuit considered and rejected all of the plaintiffs’ allegations regarding the foreclosure trustee’s alleged breach of its fiduciary duties, emphasizing the limited nature of such duties. Namely, the plaintiffs’ claim that the foreclosure trustee breached a fiduciary duty of impartiality by representing that it “worked for” the creditor was insufficient to state a viable claim because the fact that the creditor’s agent, attorney, or employee is the trustee does not invalidate the sale, and the plaintiffs did not allege that the trustee represented that it worked only for the creditor or that it did not also “work for” the borrowers. Therefore, the trustee’s alleged representation was not inconsistent with its dual agency relationship contemplated by Missouri law. The Court of Appeals also summarily rejected the plaintiffs’ allegations as contrary to the law that the trustee violated its fiduciary duties by accepting the trustee’s fees in the sale.
The Court then analyzed in more detail and rejected the plaintiffs’ claims that the trustee should have stopped the sale because the plaintiffs communicated their objections to the trustee. Relying on an earlier decision by the state’s high court, the Court of Appeals held that when requested by the creditor to foreclose, the trustee may proceed without making any affirmative investigation unless the trustee has actual knowledge “of anything which should legally prevent the foreclosure.” The information allegedly provided by the plaintiffs to the foreclosure trustee regarding the bank’s actions was insufficient to place the trustee on actual notice of a legal reason preventing foreclosure. Moreover, none of the plaintiffs’ alleged communications with the creditor regarding the forbearing effect of a modification request was ever reduced to a written agreement. Yet, the deed of trust expressly provided that oral agreements or commitments to forbear from enforcing repayment of debt are not enforceable. Therefore, the district court did not err in dismissing the plaintiffs’ claims for breach of fiduciary duties against the foreclosure trustee.
The Eighth Circuit’s decision is an important reiteration on a federal appellate level of the limited duties that the foreclosure trustee owes borrowers, as well as a trustee’s right to proceed with foreclosure without going behind the creditor’s back to conduct an independent investigation into the validity of the creditor’s instructions to foreclose.