N.C. Supreme Court: In re Vogler Realty- Review of Attorney’s Fees for Foreclosure Trustee by Clerk of Court not Authorized

Summary:

In foreclosing on a Deed of Trust, the Trustee was paid  costs and expenses consisting of a commission, pursuant to N.C.G.S. § 45-21.15(a),  of 5% of the highest bid and Trustee’s attorneys fees of 15% of the outstanding promissory note on which behalf he was acting.  This resulted in third lien-holder receiving only partial payment and the fourth lien-holder receiving nothing.  The third lien-holder filed a motion with the Clerk of Superior Court arguing that under N.C.G.S. § 32-61,  the Clerk was authorized to determine the reasonableness of a “fiduciary or trustee” fees.  The Clerk agreed, reducing the Trustee’s fees substantially.

In a divided opinion, the North Carolina Court of Appeals held that the Clerk only had such authority  in foreclosures that were “incomplete and terminated”.  The dissent took the position that there was not even that limitation of the authority of the Clerk to review fees.

The North Carolina Supreme Court, however, rejected both positions, instead holding the N.C.G.S. § 32-61 only applies as defined in the North Carolina Uniform Trust Code, which states that “[t]he term [trustee] does not include trustees in mortgages and deeds of trust.”  N.C.G.S. § 36C-1-103(22) (2009).  In regards to deeds of trust the foreclosure statutes, specifically, Article 2A of Chapter 45 of the North Carolina General Statutes control and this statute does not authorize the clerk to review the distribution of attorney’s fees for reasonableness.  To the extent that the Clerk is to audit such fees, that is merely “a ministerial act that is limited to determining merely ‘whether the entries in the report reflect the actual receipts and disbursements made by the trustee.'”    In re Foreclosure of Webber, 148 N.C. App. 158, 161, 557 S.E.2d 645, 647 (2001).

The North Carolina Supreme Court further held that as the Trustee had a fiduciary duty to the debtor and the first lien-holder.  Based on this the Trustee  was not entitled, under N.C.G.S. § 6-21.2, to a 15% attorney fee, as that is only the amount allowed for the creditor’s attorney.    The Trustee did not, however, have any fiduciary duty to junior lien-holders.    This left the junior lien-holder without standing to allege such a breach.  This “wrong without a remedy” forms the basis for the dissent, which would have allowed a review of fees by the Clerk.

Commentary:

The dissent considers that this is a “wrong that has no remedy.”  This is not, however, accurate.  As the opinion holds that the Trustee has a fiduciary duty to the first lien-holder AND the Debtor, the Debtor could bring an action against the Trustee for breach of fiduciary duty in assessing unreasonable fees.  As North Carolina has only a very limited mortgage anti-deficiency statute,   such an action is not outside the realm of possibility.  In this specific case, if the third lien-holder had been able to overcome the all-to-typical failure of a creditor to recognize when its interests align with the Debtor, it may have instead been able to assist the Debtor (read: pay for and forgive) contesting the reasonableness of the Trustee’s fees.

Possible Bankruptcy Application:

Assuming that the first note holder  bids its balance at a foreclosure (which is, admittedly, not a guaranteed as in the past), a Trustee’s will nearly always be receiving approximately 20% of the balance of the promissory note.

11 U.S.C. § 506(a)(1) provides that the “value is to be determined in light of the purpose of the valuation and the proposed disposition or use of the collateral.”   As applied by the Supreme Court in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), this means that if a Debtor intends to keep property, he must use a replacement and not foreclosure value.

BAPCPA, however, added the provision in 11 U.S.C. § 506(a)(2) that costs of sale or marketing are not to be deducted from the value of personal property.   It could be argued that Congress, by specifically excluding the costs of sale and marketing from only personal property and not real property, indicated that such costs are appropriate in determining the secured status of junior mortgages.

For example, if the first mortgage has a balance of $100,000.00, the junior lien-holder would not see any proceeds, and thus would not be secured under 11 U.S.C. § 506(a), unless the real property had a replacement value of more that $120,000.000.  This would still reflect the “proposed disposition or use” of the real property, but would also reflect the difference between the costs of sale and marketing of personal property, which are generally handled more informally through self-help repossession and quick auction, versus the costs of sale and marketing of real property, which as Vogler shows, are likely to be roughly 20% of the balance of the foreclosing promissory note.

For a copy of the opinion,  please see:

Vogler Realty- Review of Attorney’s Fees for Foreclosure Trustee by Clerk of Court not Authorized.PDF

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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