California Court Finds Deed of Trust Enforceable Despite Failure to Name a Trustee

Can there be a trust without a trustee? If the trust instrument is a California deed of trust, the answer is now yes.

In Shuster v. BAC Home Loans Servicing, LP (2012) WL 5984222, the plaintiff/borrowers had borrowed the sum of $670,000, executing a deed of trust as security for the loan. The deed of trust failed to name a trustee. After the borrowers defaulted, the beneficiary recorded a substitution of trustee "substituting" a new corporate trustee. The substituted trustee held a non-judicial foreclosure sale of the property. The borrowers then filed suit, seeking to set aside the sale. The borrowers argued in their lawsuit that the failure to name a trustee in the deed of trust converted the deed of trust to a mortgage and, therefore, the beneficiary could foreclose, if at all, only by means of a court-supervised judicial foreclosure. The trial court and the Court of Appeal disagreed, finding that "the naming of the trustee is irrelevant to the creation of the deed of trust, so long as a trustee is named prior to the foreclosure."

The Shuster decision is consistent with prior California case law and commentary adhering to the view that a deed of trust is nothing like an ordinary, express trust. In fact, the California courts previously have held that the trustee under a deed of trust is not a true trustee at all and, therefore, is not subject to the general legal principles governing express trusts. ( See Lupertino v. Carbajal (1973) 35 Cal.App.3d 742, 747.) Among other things, a trustee under a deed of trust does not act in a fiduciary capacity and is considered the common agent of both parties. Other courts and commentators have characterized the duties of a trustee under a deed of trust as being purely ministerial in nature. ( See Pro Value Properties, Inc. v. Quality Loan Servicing Corp. (2009) 170 Cal.App.4th 579, 583.) Moreover, as a matter of convenience, the appointed trustee is typically the title company whose form document is being used to create the deed of trust, even though the title company typically has not consented to being named as trustee. It makes sense, then, that the court in Shuster would find the parties' initial failure to appoint a trustee to be without legal consequence, so long as a trustee was properly named prior to the foreclosure proceedings.

The Shuster decision is also another example of the courts' general willingness to uphold a non-judicial foreclosure sale against a legal challenge, perhaps in recognition of the fact that the borrowers defaulted after all and, in many cases, would likely default again if the sale were set aside. In short, it is only the rare defect of substance, and not mere form, that will justify the remedy of setting aside an otherwise properly-conducted sale.