Title: Warner v. The Money Store Investment Corp.
Citation: N/A
Docket Number: 970243
State: Virginia
Issuer: Virginia Supreme Court
Date: October 31, 1997

Present:  Carrico, C.J., Compton, Lacy, Hassell, Keenan, and 
Kinser, JJ., and Poff, Senior Justice  
 
JOHN D. WARNER, JR., ET AL. 
                                              OPINION BY 
  v.  Record No. 970243 
CHIEF JUSTICE HARRY L. CARRICO 
                                          October 31, 1997 
LEWIS H. CLEMENTSON 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF HAMPTON 
 
Christopher W. Hutton, Judge 
 
 
The question for decision in this case is whether a trustee 
under a deed of trust owes a fiduciary duty to the guarantors of 
the debt secured by the deed of trust.  The question stems from 
the filing on July 2, 1996, of an amended bill of complaint by 
John D. Warner, Jr., and Mary T. Warner (the Warners) against 
Lewis H. Clementson (Clementson) and several other defendants. 
 
In Count II of the amended bill, the Warners alleged that 
Clementson owed them a fiduciary duty in the handling of a 
foreclosure sale he conducted as substitute trustee and that he 
had breached that duty in several respects.  The trial court 
sustained demurrers filed by Clemenston and the other defendants 
and dismissed the amended bill of complaint.  We awarded the 
Warners an appeal limited to the question whether the court erred 
in sustaining Clementson's demurrer with respect to Count II of 
the amended bill of complaint.
1
 
"'A demurrer admits the truth of all material facts properly 
                     
    
1In addition to Lewis H. Clementson, the defendants 
in the case were The Money Store Investment Corporation, 
Fox Two Acquisitions, L.C., and Sorry Sara's, Ltd.  
Because this appeal is limited to consideration of Count 
II of the amended bill of complaint and that count 
involves only Clementson, the other defendants are not 
before the Court. 
pleaded.  Under this rule, the facts admitted are those  
expressly alleged, those which fairly can be viewed as impliedly 
alleged, and those which may be fairly and justly inferred from 
the facts alleged.'"  CaterCorp., Inc. v. Catering Concepts, 
Inc., 246 Va. 22, 24, 431 S.E.2d 277, 279 (1993) (quoting Rosillo 
v. Winters, 235 Va. 268, 270, 367 S.E.2d 717, 717 (1988)). 
 
In their amended bill of complaint, the Warners alleged the 
following set of facts.  Sorry Sara's, Ltd. (Sorry Sara's) is the 
record owner of certain real property located at 13 E. Queens Way 
in the City of Hampton.  John D. Warner, Jr., owns 45% of the 
issued and outstanding shares of the corporation's stock.  The 
property has been used since 1993 for the operation of a 
restaurant. 
 
On June 23, 1994, Sorry Sara's executed a promissory note in 
the principal amount of $327,000 and also executed a deed of 
trust on the Queens Way property to secure the note.  At all 
relevant times, The Money Store Investment Corporation (the Money 
Store) has been the holder of the note. 
 
Also on June 23, 1994, the Warners executed an instrument 
guaranteeing payment of Sorry Sara's' obligations under the note. 
 To secure payment of their obligations under the guaranty 
agreement, the Warners executed a deed of trust encumbering 
certain property they owned in North Carolina.  This deed of 
trust was recorded among the land records of Dare County, North 
Carolina. 
 
By letter dated September 15, 1995, the Money Store advised 
the Warners that the note was in default and that the default 
began in January 1995.  The Money Store appointed Clementson, a 
Richmond attorney, as substitute trustee under the deed of trust 
executed by Sorry Sara's, and he scheduled a foreclosure sale for 
February 14, 1996.  However, this sale was canceled, and 
Clementson rescheduled the sale for April 18, 1996.  At an 
auction held on that date, the property was sold to Fox Two 
Acquisitions, L.C. for $177,000.  The property had been appraised 
in 1994 as having a value of $525,000, with $450,000 attributable 
to the realty, provided certain renovations were made, and 
$75,000 attributable to furniture, fixtures, and equipment. 
 
The Warners alleged in their amended bill of complaint that 
the auction resulted in a commercially unreasonable bid price and 
that its acceptance by Clementson and the Money Store was 
improper.  Addressing Clementson specifically, the Warners 
alleged in Count II that he had breached the fiduciary duty he 
owed them by failing to secure the property and the furniture, 
fixtures, and equipment "contained within and/or existing as a 
part" of the property; to determine, compromise, and settle the 
liens on the furniture, fixtures, and equipment; and to sell the 
furniture, fixtures, and equipment as part of the foreclosure 
sale. 
 
The Warners also alleged that Clementson violated his 
fiduciary duty by stating during the foreclosure sale that the 
Money Store had a pre-determined bid figure and that he would 
"advise all present when that figure was reached, which he 
proceeded in fact to do."  Finally, the Warners alleged that 
Clementson had participated, both as counsel to the Money Store 
and as substitute trustee, in the Money Store's decision 
concerning the amount to be bid at the foreclosure sale and that 
this conduct violated Code § 26-58.
2  The Warners prayed that 
they be granted judgment against Clementson "in an amount to be 
shown at trial, but at a minimum for any deficiency obligations 
that the [Warners] may have under the Note and the Guarantee."  
 
On appeal, the Warners contend that the allegations of their 
amended bill of complaint state an actionable claim against 
Clementson for breach of fiduciary duty and that the trial court 
erred, therefore, in sustaining Clementson's demurrer.  The 
Warners argue that, as substitute trustee, Clementson owed them, 
as guarantors, a fiduciary duty to obtain the best possible price 
for the property at the foreclosure sale, that he breached this 
duty, and that they have been damaged by his conduct.   
 
For the purposes of this discussion, we will assume, without 
deciding, that the Warners, as guarantors, have standing to 
complain about Clementson's alleged misconduct as trustee.  As 
the case is presented to us, however, the Warners are entitled to 
recover for Clementson's alleged misconduct only if such 
shortcomings violated some duty of a fiduciary nature that he 
owed to the Warners.  The dispositive question, therefore, is 
whether Clementson owed a fiduciary duty to the Warners in the 
                     
    
2Code § 26-58 provides in part that a foreclosure 
sale by a trustee under a deed of trust securing a debt 
owed to a corporation is not rendered voidable because 
of the "mere fact" that the trustee is counsel to the 
corporation "so long as he did not participate in the 
corporation's decision as to the amount to be bid at the 
sale of the trust property." 
first place.   
 
The Warners have not cited a single decision of this or any 
other court on the question whether a trustee under a deed of 
trust owes a fiduciary duty to a guarantor of the debt secured by 
the deed of trust.
3  Our own research discloses that only one 
court has recognized that a guarantor is owed a fiduciary duty in 
a credit transaction.  First NH Mortg. Corp. v. Greene, 653 A.2d 
1076, 1078 (N.H. 1995); Numerica Sav. Bank v. Mountain Lodge Inn 
Corp., 596 A.2d 131, 134 (N.H. 1991).  However, in those cases, 
the fiduciary duty was imposed upon a mortgagee under a mortgage 
instrument rather than upon a trustee under a deed of trust.
4  
Even then, the New Hampshire court indicated that a breach of the 
                     
    
3The Warners cite a number of this Court's prior 
decisions wherein we set aside foreclosure sales for 
trustee misconduct, but all are inapposite.  The first 
three cases involve claims by debtors, not guarantors, 
against trustees.  Smith v. Credico Indus. Loan Co., 234 
Va. 514, 362 S.E.2d 735 (1987) (substitute co-trustee 
under deed of trust, although not acting as trustee at 
foreclosure sale, bid on property for another); Whitlow 
v. Mountain Trust Bank, 215 Va. 149, 207 S.E.2d 837 
(1974) (trustee conducting foreclosure sale was owner of 
stock in and officer of corporation that purchased 
property; 
trustee 
notified 
representative 
of 
the 
corporation that sale would be held; sale made at price 
advantageous to corporation); Smith v. Miller, 98 Va. 
535, 37 S.E. 10 (1900) (one of trustees conducting 
foreclosure sale purchased property for himself).  The 
Warners also cite Patterson v. Old Dominion Trust Co., 
139 Va. 246, 123 S.E. 549 (1924), and Patterson v. Old 
Dominion Trust Co., 149 Va. 597, 140 S.E. 810 (1927), 
but both cases involved the duties of a testamentary 
trustee. 
    
4We need not decide whether the duties of a trustee 
differ from the duties of a mortgagee, but we would 
point out that a mortgagee is both the creditor and the 
holder of legal title to the property mortgaged while a 
trustee is the holder of legal title only and the 
creditor is someone else, so differing duties might 
result from the different relationships. 
fiduciary duty owed by a mortgagee to a guarantor may be used for 
defensive purposes only.  Numerica, 596 A.2d at 134.  Here, the 
Warners seek to use Clementson's alleged breach of fiduciary duty 
alternatively as the basis for a cause of action. 
 
Other out-of-state decisions are contrary to the views 
expressed in the New Hampshire cases.  One court has held that 
ordinarily a mortgagee under a mortgage instrument owes no duty 
of a fiduciary nature to a guarantor, but the court indicated 
that, "under certain circumstances," i.e., when there is evidence 
of a confidential relationship between a guarantor and a lender, 
a fiduciary duty may arise.  United States ex rel. Small Bus. 
Admin. v. Edwards, 765 F. Supp. 1215, 1221 (M.D. Pa. 1991).  
Here, Clementson is a trustee, not a lender, and, in any event, 
the allegations of the Warners' amended bill of complaint do not 
support the existence of a confidential relationship between the 
Warners, as guarantors, and Clementson, as trustee. 
 
Additionally, in a related line of cases, the courts have 
held that a bank owes no duty of a fiduciary nature to a 
guarantor.  Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 
310, 318 (2d Cir. 1993); Village on Canon v. Bankers Trust Co., 
920 F. Supp. 520, 532 (S.D.N.Y. 1996); Farmer City State Bank v. 
Guingrich, 487 N.E.2d 758, 763 (Ill. App. Ct. 1985); Bank Leumi 
Trust Co. v. Block 3102 Corp., 580 N.Y.S.2d 299, 301 (App. Div. 
1992); Miller v. U.S. Bank of Washington, 865 P.2d 536, 543 
(Wash. Ct. App. 1994). 
 
In our opinion, the better rule is that no fiduciary duty is 
owed to a guarantor by a trustee under a deed of trust.  "The 
powers and duties of a trustee in a deed of trust, given to 
secure the payment of a debt, are limited and defined by the 
instrument under which he acts."  Powell v. Adams, 179 Va. 170, 
174, 18 S.E.2d 261, 262-63 (1942).  Nothing in the allegations of 
the Warners' amended bill of complaint suggests that the deed of 
trust executed by Sorry Sara's in this case imposed any duty upon 
the trustee with respect to putative guarantors. 
 
Moreover, a guarantor is ordinarily not a party to a deed of 
trust, and often a trustee does not know whether a guarantor even 
exists.  To hold that a trustee owes a fiduciary duty to a 
guarantor might impose upon the trustee, under penalty of an 
award of damages, the obligation to inquire into whether a 
guarantor exists, who he or she might be, and where he or she 
might be found.  Such a duty would be overly burdensome for 
trustees as well as disruptive of credit transactions in this 
Commonwealth. 
 
We hold that the trial court did not err in sustaining 
Clementson's demurrer to Count II of the Warners' amended bill of 
complaint and in dismissing the amended bill.  Accordingly, we 
will affirm the judgment appealed from. 
 
Affirmed.