Court Opinion

ID: 1059976
Source: CourtListenerOpinion
Date Created: 2013-10-09 18:41:09.331505+00
Date Added: 2024-06-11T12:36:53.918939
License: Public Domain

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
                                 1
the amended bill of complaint.
       "'A demurrer admits the truth of all material facts properly

   1
     In 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

    2
     Code § 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
    3
     The 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.
    4
     We 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.