North Carolina Bans Conflict of Interest on Deed of Trust

On August 30, 2017, an amendment to North Carolina’s foreclosure statutes took immediate effect.  The amended statute, Section 45-10, concerns substitute trustees under a deed of trust.  As amended, Section 45-10 now prohibits an attorney who serves as trustee or substitute trustee from representing the noteholder or the borrower while “initiating” a foreclosure proceeding.  Before the amendment, a lender often could rely on its counsel simultaneously to conduct the foreclosure and represent its interests.  With the new amendment, the takeaway for lenders is that non-judicial foreclosure under the power-of-sale provision in a deed of trust now requires two parties—a substitute trustee and lender’s counsel—and this may increase the time and expense of foreclosure.

Non-Judicial Foreclosure and Substitute Trustees

There are three parties to a deed of trust:  (1) grantor (borrower), (2) trustee, and (3) beneficiary (lender).  Typically, the first step in foreclosure is to replace, or substitute, the trustee under the deed of trust.  The substitute trustee initiates the foreclosure through a special proceeding before the clerk of court.

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THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

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see http://www.jdsupra.com/legalnews/your-foreclosure-hearing-just-got-more-73757/

The legislature of North Carolina finally caught up with a piece of the puzzle that has driven homeowners and their attorneys to near madness. Virtually all documetns filed as “Substitution of Trustee” consist of one simple premise — substituting an impartial Trustee on the Deed of Trust with a party with an obvious bias. This results in unquestioning obedience to the “new” self-proclaimed beneficiary.

Any such trustee on a Deed of Trust has a duty of fair dealing and a duty to ascertain whether the facts given to him/her/it are true. Otherwise they are probably negligent and perhaps grossly negligent after years of being appointed by parties whom they know, when challenged, have often lost cases based upon the fact that they were not a new beneficiary.

I have long encouraged people to record an objection to the substitution of trustee on the basis of false premises and lack of foundation. Objections are probably a good idea as to the notice of default and notice of sale. This sets the record for the application for a TRO. But it also creates a problem about which I have previously written.

Assuming the “substitute trustee” was “appointed” by a party that did not meet the statutory definition of a beneficiary, then the appointment is void. If the appointment is void, the original trustee on the deed of trust probably has a duty to set the record straight. But in any event, the void substitution of trustee results in a situation where there is no change for the original trustee, who simply remains as Trustee on the Deed of Trust despite the “wild deed” masquerading as a substitution of trustee.

If the original trustee receives notice of improper activity from the filing of the false substitution of trustee, then the original trustee probably needs to file an action called interpleader — in which the “new beneficairy” and the homeowner square off and must plead their cases — something the banks definitely don’t want to do. By pleading their case they must prove it. By failing to file the interpleader the original trustee may be admitting that it too is a controlled entity of the fake new beneficiary.

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