The Washington Supreme Court recently held that a borrower could sue under Washington's Consumer Protection Act for a foreclosure trustee's failure to exercise impartial judgment as to whether to postpone a foreclosure sale, and for falsely notarizing a notice of sale and pre-dating foreclosure documents.
The Court also ruled that, in the context of a non-judicial foreclosure: (1) a trustee under a trust deed is not merely a lender's agent, but a fiduciary to both the mortgagor and mortgagee owing a duty to act impartially toward each; (2) as an equitable remedy, the right to enjoin a foreclosure sale does not operate to waive claims based on the foreclosure process; and (3) waiver applies only to actions to vacate a trustee's sale but does not apply to damages actions.
A copy of the opinion is available at: https://www.courts.wa.gov/index.cfm?fa=controller.managefiles&filePath=Opinions&fileName=871051.pdf
An elderly woman, confined to a nursing home and under the guardianship of a court-appointed guardian ("Guardian"), was unable to make the payments on her home mortgage loan to her lender ("Bank"). She defaulted on the loan. The property, subject to a deed of trust, was appraised at almost four times the amount the borrower owed on the loan.
After the borrower's default, the trustee ("Trustee") under the trust deed executed a notice of trustee sale that was allegedly improperly pre-dated using a supposedly false notarization. The alleged false notarization supposedly allowed the trustee's sale to occur earlier than would have otherwise. The notice of sale in this case was allegedly one of many such foreclosure documents that Trustee falsely notarized in a supposed "robo-signing" operation in order to expedite the foreclosure process.
Ten days before the scheduled trustee's sale, and having received permission from the court to sell the borrower's property to help pay for her health care, Guardian secured a contract for the sale of the house to a buyer willing to pay full value. Nevertheless, despite repeated attempts to work with Trustee in an effort to postpone the foreclosure sale, Trustee allegedly refused to cooperate with Guardian, citing its agreement with Bank not to delay trustee's sales without Bank's express authorization to do so.
On the scheduled sale date, Trustee sold the property to a third party for just a dollar more than what was owed on the borrower's loan. The property subsequently was re-sold for almost the full appraised value.
Guardian sued Trustee for damages based on negligence, breach of contract, and violations of the Washington Consumer Protection Act ("CPA"), contending that Trustee's alleged acts and practices of deferring to Bank and falsifying dates on notarized documents were unfair and deceptive, and that Trustee was negligent in failing to delay the sale.
In response, Trustee argued that Guardian's causes of action were barred because Guardian had failed to seek to enjoin the sale. Although the lower court dismissed certain claims based on Guardian's failure to seek an injunction, the lower court allowed the negligence, breach of contract, and CPA claims to go forward.
After a jury determined that both parties were 50% negligent, and that Trustee violated the CPA and breached its contractual obligations, the court awarded damages against Trustee for over $150,000 (the difference between the foreclosure sale price and the price at which the property ultimately re-sold). The lower court also awarded attorney's fees on the CPA claim.
The parties each challenged the trial court's decision, appealing to the Court of Appeals, which reversed all but the negligence claim. Guardian sought review by the Supreme Court of Washington, which affirmed in part and reversed in part.
As you may recall, to prevail on a Washington state CPA action, the plaintiff must prove an: (1) unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; (5) causation. Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 780, 719 P.2d 531 (1986). See also RCW 19.86.020 ("[U]nfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful); and RCW 19.86.090 ("any person who is injured in his or her business or property by a violation of RCW 19.86.020 . . . may bring a civil action in superior court.").
In addition, certain violations of Washington's Deed of Trust Act are unfair or deceptive acts or practices for purposes of the CPA, such as paying someone not to bid or to reduce a bid at a trustee's sale. See RCW 61.24.135 (1998).
Addressing Guardian's CPA claim, the Washington Supreme Court examined the role of trustees in non-judicial foreclosures. In so doing, the Court rejected Trustee's assertion that only acts or practices statutorily deemed to be "unfair" are unfair for purposes of the CPA, ruling instead that a CPA claim may be based on a "per se" statutory violation or on "an act or practice that has the capacity to deceive substantial portions of the public, or an unfair or deceptive act or practice not regulated by statute but in violation of the public interest."
Pointing to numerous prior opinions, the Washington Supreme Court observed how the definitions of "unfair" and "deceptive" have evolved through case law over time and, further, that an act or practice may be "unfair" without being deceptive, thereby constituting a valid CPA claim. See, e.g., Saunders v. Lloyd's of London, 113 Wn.2d 330, 344, 779 P.2d 249 (1989)(noting evolution of meaning because CPA does not provide the definitions of "unfair" or "deceptive"); State v. Kaiser, 161 Wn. App. 705, 721, 254 P.3d 850 (2011)(finding that act of "falsely offer to help" avoid foreclosure was unfair and deceptive act under CPA without reference to specific CPA provision); Magney v. Lincoln Mut. Sav. Bank, 34 Wn. App. 45, 57, 659 P.2d 537 (1983)(act is unfair under CPA if it offends public policy); Panag v. Farmers Ins. Co of Wash., 166 Wn.2d 27, 48, 204 P.3d 885 (2009)(discussing both per se and "unregulated" unfair or deceptive acts, noting that it "is impossible to frame definitions which embrace all unfair practices.").
Citing with approval a court ruling that the trustee under a deed of trust is a fiduciary for both the mortgagee and the mortgagor and must therefore act accordingly, the Washington Supreme Court stressed that equity and due process concerns require trustees to be "evenhanded to both sides and to strictly follow the law." See Cox v. Helenius, 103 Wn. 2d 383, 389, 693 P.2d 683 (1985)(voiding a foreclosure because the trustee had failed to properly restrain the sale, trustee's actions, and grossly inadequate purchase price). As the Court explained: "An independent trustee who owes a duty of good faith to exercise a fiduciary duty to act impartially to fairly respect the interests of both the lender and the debtor is a minimum to satisfy the statute, the constitution, and equity, at the risk of having the sale voided, title quieted in the original homeowner, and subjecting itself and the beneficiary to a CPA claim."
Accordingly, rejecting Trustee's assertion that it had a legal obligation to respect the instructions of the beneficiary under the deed of trust, the Washington Supreme Court concluded that Trustee was not a mere agent of the beneficiary, and had "abdicated its duty to act impartially toward both sides" in failing to exercise independent discretion.
Turning specifically to the predated notice of sale, the Court pointed out that while it is not a per se unfair or deceptive act for purposes of the CPA, falsely notarizing a document in the context of a non-judicial foreclosure constitutes a crime and a breach of the public trust, a practice which, according to the Court, therefore satisfies the first three elements under the CPA.
With respect to Guardian's request for injunctive relief, the Washington Supreme Court found unreliable Trustee's assurances that it would no longer engage in improper document notarizations and that revisions to Washington's Deed of Trust Act would prevent further improper conduct. Instead, the case was remanded to the trial court to fashion an appropriate injunctive remedy.
The Washington Supreme Court thus reversed the rulings of the court of appeals with respect to the CPA and breach of contract claims, reinstated the jury's award, and affirmed as to the negligence claim.
Ralph T. Wutscher
McGinnis Wutscher LLP
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