Court Opinion

ID: 4127424
Source: CourtListenerOpinion
Date Created: 2017-02-18 00:27:13.996025+00
Date Added: 2024-06-11T14:31:32.476799
License: Public Domain

TO BE PUBLISHED IN THE OFFICIAL REPORTS

                         OFFICE OF THE ATTORNEY GENERAL

                               State of California

                               JOHN K. VAN DE KAMP

                                 Attorney General

                          ------------------------------
                                         :

                     OPINION             :
                                         :
                       of                 :    No. 87-1002
                                         :
               JOHN K. VAN DE KAMP      :      DECEMBER 1, 1988
                Attorney General        :
                                         :
                JACK R. WINKLER         :
          Assistant Attorney General    :
                                         :
          -------------------------------------------------------------

            THE HONORABLE ELIHU M. HARRIS, MEMBER OF THE CALIFORNIA ASSEMBLY, has

requested an opinion on the following questions: 

            Does the practice by a lender making loans secured by deeds of trust

on real estate of designating on its defaulted loans only those foreclosure

trustees who agree to charge as a trustee fee for a foreclosure sale on its FHA

or VA secured loans only the amount the federal government will reimburse the

lender for such sale and allowing the foreclosure trustee to charge the maximum

fee allowed by state law on its other defaulted loans violate:

             (a) the anti-rebate or anti-kickback provisions of Civil Code section

2924d(c)?

             (b) the Cartwright Act prohibiting combinations in restraint of

trade?

             (c) the Unfair Practices Act prohibiting unfair business practices?

                                   CONCLUSIONS

            The practice by a lender making loans secured by deeds of trust on

real property of designating on its defaulted loans only those foreclosure

trustees who agree to charge as a trustee fee for a foreclosure sale on its FHA

and VA secured loans only the amount the federal government will reimburse the

lender for such fees and allowing the foreclosure trustee to charge the maximum

fee allowed by state law on its other loan foreclosures does not violate Civil

Code section 2924(c) or the Cartwright Act but does violate the Unfair Business

Practices Act.

                                     ANALYSIS

            This opinion involves the practices of banks and other lenders

regarding services rendered by trustees of deeds of trust on real estate which

secure the loans made by such lenders. A trust deed is an instrument in common

use in California by which the repayment of a loan is secured by real property.

It is a three party instrument by which the borrower or "trustor" conveys real

property to the "trustee" in trust with the power of sale. The trustee will sell

the property if the trustor defaults in the payments on the loan and pay the sale

proceeds to the lender or "beneficiary" or will reconvey the property to the

borrower when the loan has been repaid in full. The lender has the power to

substitute trustees under the provisions of the trust deed and under Civil Code

section 2934a.

             The procedures for non-judicial foreclosure of trust deeds are

governed by Civil Code sections 2924 et seq.        Foreclosure is commenced by

recording a "notice of default." Not less than three months after the notice of

default is recorded, a "notice of sale" must be given which must be at least

twenty days before the "sale." The trustor may cure the default and "reinstate"

the loan during the "reinstatement period" which extends from the time the notice

of default is filed until five days before the sale. The default is cured by

paying all delinquent and current installments due on the loan secured by the

trust deed "other than the portion of principal as would not then be due had no

default occurred" plus costs and fees. (§ 2924c(a)(1).) 1/

            Civil Code sections 2924c(d) and 2924d(a)(b) govern the fees which

a trustee may charge for services in non-judicial foreclosure of a trust deed.

Three different limits are prescribed whose application depends on how far the

foreclosure procedure has progressed. When the foreclosure terminates before the

notice of sale is mailed the trustee's fee may "not exceed" $200 when the unpaid

balance is $50,000 or less. (§ 2924c(d).) When the foreclosure terminates after

notice of sale is mailed but before the sale the trustee's fee may "not exceed"

$300 when the unpaid balance is $50,000 or less. (§ 2924d(a).) When the unpaid

balances exceed $50,000 these limits are increased by fractional percentages of

increments of the unpaid balance. When the foreclosure extends through sale the

trustee's fee may "not exceed" $300 or 1 percent of the unpaid balance, whichever

is larger. (§ 2924d(b).) For an unpaid balance of $100,000 the maximum trustee's

fee for foreclosure would be $450 before notice of sale, $800 before sale and

$1000 after the sale.

            We are advised that lending institutions often name a subsidiary as

the trustee in trust deeds securing their loans. We are also advised that when

the borrower defaults the lender often contracts out the foreclosure procedures

to a "foreclosure trustee", a business specializing in foreclosures. A number

of such businesses have been established which customarily charge the maximum

fees allowed by Civil Code sections 2924c and 2924d for their trustee services.

Once the services are contracted for the lender substitutes the foreclosure

trustee for the trustee named in the trust deed.

            The lender and the foreclosure trustee are free to negotiate the

amount of the trustee's fees subject to the maximums fixed by sections 2924c and

2924d.   While the lender negotiates the amount of the trustee's fees on

foreclosures it is not always the lender who ultimately bears their cost. If the

trustor reinstates the loan after notice of default he must pay to the

beneficiary, not only the amount due on the loan but also costs and the trustee's

fee.2/ On the other hand when there is no reinstatement and the property is sold

     1.   All section references are to the Civil Code unless otherwise noted.

     2.   Civil Code section 2924c(a)(1) provides in part:

           "(a)(1) Whenever all or a portion of the principal sum of any

      obligation secured by deed of trust . . . has, prior to the

      maturity date fixed in such obligation, become due or been

      declared due by reason of default in payment of interest or of any

      installment of principal, . . . the trustor . . . may pay to the

      beneficiary . . . the entire amount then due under the terms of

      such deed of trust . . . and the obligation secured thereby

      (including reasonable costs and expenses . . . and trustee's . .

      . fees, subject to subdivision (d) [which establishes maximum

      limits for such fees]), other than the portion of principal as

      would not then be due had no default occurred, and thereby cure

                                       2.                                87-1002

the trustee may deduct its fee from the proceeds of the sale.3/ Since the lender

is often the purchaser at the sale it is often the lender who bears he cost of

the trustee's fees on a foreclosure completed by sale. 

            On those loans which are insured by the Federal Housing

Administration ("FHA" herein) or guaranteed by the Veterans Administration ("VA"

herein), federal regulations limit the amount the federal government will

reimburse the lender for trustee's fees on foreclosure. (See 24 C.F.R. § 203.552

and 38 C.F.R. § 36.4313.)    The federal limits are materially lower than the

maximums fixed by state law. For example, 38 Code of Federal Regulations section

36.4313(a)(6) governing VA secured loans reads in part: "In no event may the

combined total of the amounts claimed for trustee's fees and legal services . .

. exceed $350."

            We understand that it is the practice of some lenders in their

negotiations with foreclosure trustees on the amounts to be paid for trustee's

fees to insist that the foreclosure trustee limit its fees to the amounts allowed

by federal regulations on foreclosure of FHA and VA loans which culminate in a

sale and allow the foreclosure trustee to charge the maximum trustee's fee

allowed by state law on the other foreclosure services performed on the lender's

defaulted loans.    It is this practice which prompted the request for this

opinion.   We are asked whether the practice violates any of three separate

statutes. We deal with each statute in turn. 

                     The Rebate and Kickback Prohibitions

            We noted above that section 2924d imposes limits on the fees which

a trustee may charge for services in foreclosing trust deeds. Subdivision (c)

of that section prohibits any rebate or kickbacks of such fees as follows:

            "(c)(1) No person shall pay or offer to pay or collect any

      rebate or kickback for the referral of business involving the

      performance of any act required by this article."

The statute does not define the terms "rebate," "kickback" or "referral" for

purposes of the nonjudicial foreclosure article.      Nor have these terms been

construed by the courts for purposes of that article. The statutory proscription

is against paying or collecting any rebate or kickback for the "referral" of

certain business including that of a trust deed foreclosure trustee. In the

transaction in question the lender names the trustee to perform foreclosure

services on its defaulted trust deeds after agreeing on some of the fees the

trustee will charge for these services. The lender appoints the trustee in the

transactions in question and therefore is an integral part of those transactions.

Payments made to the trustee are for the services, not for referral of the lender

to the trustee. In the transaction in question there is no referral of any

business within the meaning of the statute. (Compare Schleimer v. McMillan

      the default theretofore existing . . . and the obligation and deed

      of trust . . . shall be reinstated . . . the same as if no such

      acceleration had occurred. . . ."

     3.   Civil Code section 2924d(b) provides in part:

           "(b) Upon the sale of property pursuant to a power of sale, a

      trustee, . . . may demand and receive from a beneficiary, or his

      or her agent or successor in interest, or may deduct from the

      proceeds of the sale, those reasonable costs and expenses . . .

      which are actually incurred . . . and trustee's or attorney's fees

      which are hereby authorized to be in an amount which does not

      exceed three hundred dollars ($300) or one percent of the unpaid

      principal sum secured, whichever is greater. . . . " 

                                       3.                                87-1002

(1974) 361 N.Y.S.2d 799 in which a contract provided for payment of an attorney's

fee when the amount due under the contract was "referred to an attorney" for

collection. The court held that since the attorney claiming the fee was involved

with the contract at the outset he was an integral part of transaction so the

contract was never referred to an attorney for collection within the meaning of

the contract.)

            The amounts of trustee's fees mentioned in Civil Code sections 2924c

and 2924d are maximums imposed by those statutes.     Since they are stated as

maximums the statute contemplates that the parties are free to negotiate the

amounts of such fees up to and including the statutory maximum. When they agree

on a trustee's fee less than the maximum there is no rebate or kickback of the

difference between the agreed fee and the statutory maximum within the meaning

of Civil Code section 2924c.

            It has been suggested that the insistence by a lender that a

foreclosure trustee accept as the trustee's fee only the amount of federal

reimbursement on foreclosure sales of FHA or VA secured loans is the equivalent

of an agreement to pay the maximum trustee fee allowed by state law with a rebate

of the difference between the federal reimbursement and the state maximum. But

this could be said of any trustee's fee negotiated by the lender which was less

than the statutory maximum. If the lender and foreclosure trustee agreed on a

trustee fee of 90 percent of the state maximum for all trustee services the 10

percent would not be a "rebate or kickback" under section 2924d(c)(1) quoted

above. Negotiating a fee for all or a part of a foreclosure trustee's services

at something less than the state maximum is not a "rebate or kickback" under that

section.

            We conclude that the practice of a lender making loans secured by

deeds of trust of designating on its loans only those trustees who agree to

charge as a trustee fee for a foreclosure sale on its FHA or VA secured loans

only the amount the federal government will reimburse the lender for such sale

does not violate the rebate or kickback provisions of Civil Code section

2924d(c).

                               The Cartwright Act

            The Cartwright Act, Business and Professions Code ("B&P") section

16600 et seq. (the "Act") is California's anti-trust statute. It is designed to

promote competition by prohibiting those agreements and actions which restrain

trade. B&P section 16726 provides that "every trust is unlawful, against public

policy and void " except as provided in the Act. B&P section 167204/ defines a

     4.   B&P section 16720 provides in full as follows:

      "A trust is a combination of capital, skill or acts by         two or more

persons for any of the following purposes:

           "(a) To create or carry out restrictions in a trade or

      commerce. 

           "(b) To limit or reduce the production, or increase the price

      of merchandise or of any commodity.

           "(c) To prevent competition in manufacturing, making,

      transportation, sale or purchase of merchandise, produce or any

      commodity.

           "(d) To fix at any standard or figure, whereby its price to

      the public or consumer shall be in any manner controlled or

      established, any article or commodity of merchandise, produce or

                                       4.                                 87-1002

trust as "a combination of capital, skill or acts by two or more persons" for

designated purposes including:

            "(a) To create or carry out restrictions in a trade or

      commerce. 

            "(d) To fix at any standard or figure, whereby its price to

      the public or consumer shall be in any manner controlled or

      established, any article or commodity of merchandise, produce or

      commerce intended for sale, barter, use or consumption in this

      State."

            The Cartwright Act was enacted for the same basic purposes as the

Sherman Act (15 U.S.C. § 1 et seq.) and decisions under the latter act are

applicable to the former. Corwin v. Los Angeles Newspaper Service Bureau (1971)

4 Cal. 3d 842, 852. "Although the Sherman Act and the Cartwright Act by their

express terms forbid all restraints on trade, each has been interpreted to permit

by implication those restraints found to be reasonable." (Id. at p. 853.) Thus

to establish a violation of the Cartwright Act it must appear that the agreement

or practice in question not only creates or carries out restrictions in trade but

also that such restrictions are unreasonable. (Corwin, supra, at p. 853.) This

is called the "rule of reason."

            "However, there are certain agreements or practices which

      because of their pernicious effect on competition and lack of any

      redeeming virtue are conclusively presumed to be unreasonable and

      therefore illegal without elaborate inquiry as to the precise harm

      they have caused or the business excuse for their use. . . . Among

      the practices which the courts have heretofore deemed to be unlawful

      in and of themselves ["pro se"] are price fixing [citation];

      division of markets [citation]; group boycotts [citation]; and tying

      arrangements. [Citation.]" (     Corwin v. Los Angeles Newspaper

      Service Bureau, supra, at p. 853 quoting from Northern Pac. R. Co.

      v. United States (1958) 356 U.S. 1, 5.)

      commerce intended for sale, barter, use or consumption in this

      State.

           "(e) To make or enter into or execute or carry out any

      contracts, obligations or agreements of any kind or description,

      by which they do all or any or any combination of any of the

      following:

           "(1) Bind themselves not to sell, dispose of or transport any

      article or any commodity or any article of trade, use,

      merchandise, commerce or consumption below a common standard

      figure, or fixed value.

           "(2) Agree in any manner to keep the price of such article,

      commodity or transportation at a fixed or graduated figure.

           "(3) Establish or settle the price of any article, commodity

      or transportation between them or themselves and others, so as

      directly or indirectly to preclude a free and unrestricted

      competition among themselves, or any purchasers or consumers in

      the sale or transportation of any such article or commodity.

           "(4) Agree to pool, combine or directly or indirectly unite

      any interests that they may have connected with the sale or

      transportation of any such article or commodity, that its price

      might in any manner be affected." 

                                       5.                                 87-1002

            The practice considered in this opinion is that of a lender making

loans secured by deeds of trust on real estate of employing the services of only

those who specialize in acting as trust deed trustees during foreclosures who

agree to charge as a trustee fee for a foreclosure sale on its FHA or VA insured

loans only the amount the federal government will reimburse the lender for such

sale and allowing the trustee to charge the maximum fee allowed by state law on

all other foreclosures of its defaulted loans secured by trust deeds. It is

suggested that this practice constitutes price fixing or a tying arrangement

which is prohibited by the Cartwright Act. We examine each suggestion in turn.

            We note first that the Cartwright Act applies to sales of services,

such as those of a foreclosure trustee, as well as the sale of products. (See

Marin County Board of Realtors v. Palsson (1976) 16 Cal. 3d 920, 925.)

            Under both California and federal law, agreements fixing or tampering

with prices are illegal "per se." (Oakland-Alameda County Builders' Exchange v.

Lathrop Construction Co. (1971) 4 Cal. 3d 354, 363.) The "per se" doctrine means

that a particular practice and the setting in which it occurs is sufficient to

compel the conclusion that competition is unreasonably restrained and the

practice is consequently illegal. ( Id. at p. 361.) But not every agreement

which sets or "fixes" a price comes within the per se doctrine. Every sale

involves fixing a price for the thing sold but this does not make every sale void

under the Act. Traditional price fixing which constitutes a per se violation of

antitrust laws is an agreement between a seller and buyer fixing the price at

which the buyer will resell the product or services to others in other

transactions. The California Supreme Court stated the distinction in People v.

Building Maintenance Etc. Assn. (1953) 41 Cal. 2d 729, 728 as follows:

            "In the commonly accepted sense of the term, however, a price

      fixing agreement is not one whereby one party merely agrees to

      supply goods or services to another at a given price, but one

      whereby the parties seek to determine the price at which goods or

      services shall be offered to third parties. (Citations.)"

            The practice in question involves a single transaction in which a

foreclosure trustee agrees to perform all the foreclosure work on a lender's

defaulted loans secured by trust deeds. With respect to fees, they agree that

the trustee's fee on the foreclosures of FHA or VA secured loans which culminate

in sale will be the amount of federal reimbursement for trustees fees. There is

no agreement on the amount of the trustee's fees on the rest of the foreclosures.

This leaves the trustee free to charge its usual fee for its trustee services on

the other foreclosures subject only to the limits fixed by state law. 

The agreement simply fixes the amount of the fee the lender will pay the trustee

for its services as trustee in foreclosing some of its defaulted loans secured

by trust deeds. It does not seek to determine the price at which the trustee

services will be offered to third parties. We conclude that the agreement is not

a price fixing agreement prohibited by the Cartwright Act. (People v. Building

Maintenance Etc. Assn., supra, 41 Cal. 2d 729.)

            It has been suggested that the practice described is a tying

arrangement which is also illegal under the pro se doctrine. The suggestion is

that by the practice in question the lender "ties" its purchases of trustee

services on defaulted loans not secured by FHA or VA to its purchase of trustee

services on defaulted loans secured by FHA or VA at much lower trustees fees.

However, this is not one of the kinds of "tying arrangements" which the courts

have held to have a pernicious effect on competition bringing it within the per

se doctrine. 

            For purposes of the Cartwright Act:

            ". . . a tying arrangement may be defined as an agreement by

      a party to sell one product but only on the condition that the buyer

                                       6.                                87-1002

      also purchases a different (or tied) product, or at least agrees

      that he will not purchase that product from any other supplier.

      Where such conditions are successfully exacted competition on the

      merits with respect to the tied product is inevitably curbed.

      Indeed tying agreements serve hardly any purpose beyond the

      suppression of competition. They deny competitors free access to

      the market for the tied product, not because the party imposing the

      tying requirements has a better product or a lower price but because

      of his power of leverage in another market. At the same time buyers

      are forced to forego their free choice between competing products.

      For these reasons tying arrangements are illegal per se whenever a

      party has sufficient economic power with respect to the tying

      product to appreciably restrain free competition in the market for

      the tied product [citation] and when a total amount of business,

      substantial enough in terms of dollar-volume so as not to be merely

      de minimis, is foreclosed to competitors by the tie. [Citation.]"

      (Corwin v. Los Angeles Newspaper Service Bureau , supra, pp. 856­
      857.)

            Under this test it is the seller which imposes the condition or "tie"

requiring the buyer to buy something he would not otherwise have purchased. In

the arrangement in question it is the buyer of foreclosure trustee services who

imposes the condition on the seller of those services to sell a specified portion

of those services at a price which he would not have otherwise considered. We

are aware of no case which has extended the per se rule against tying to

conditions imposed by a buyer on an unwilling seller.

            Further under the arrangement in question it is not the tie which is

coerced.   Foreclosure trustees would presumably be happy to provide trustee

services on FHA and VA secured loans which result in sales for their usual fees.

It is their agreement to provide such services at a reduced fee that is coerced

by the lender. The arrangement results in a form of price discrimination, that

is, the same service is provided some customers at a different price than it is

provided to others.    It is not the tie, the condition that the foreclosure

trustee provide services on the FHA and VA secured loans, which is objectionable

but that such services must be performed at a reduced price which the foreclosure

trustee objects to. Does such price discrimination violate the Cartwright Act?

            Nothing in the Sherman Act prohibiting combinations in restraint of

trade prohibits a seller from charging different customers different prices for

the same product. (Union Pacific Coal Co. v. U.S. (1909) 173 F. 737, 739.) The

Robinson-Patman Antidiscrimination Act (15 U.S.C. § 13) does prohibit

discrimination in price between different purchasers of commodities of like grade

and quality but it does not apply to services since they are not commodities.

There is no price discrimination prohibition similar to the Robinson-Patman Act

in California's Cartwright Act. Thus the fact that under the arrangement in

question the lender is charged much less for trustee fees for sales of FHA and

VA secured loans than other customers are charged for the same services is not

prohibited by the Cartwright Act.

            We conclude that the practice of a lender making loans secured by

deeds of trust on real estate of designating on its loans only those trustees who

agree to charge as a trustee fee for a foreclosure sale on its FHA or VA secured

loans only the amount the federal government will reimburse the lender for such

sale does not violate the Cartwright Act.

                            The Unfair Practices Act

            The Unfair Practices Act (B&P § 17,000 et seq.) was enacted "to

safeguard the public against the creation or perpetuation of monopolies and to

foster and encourage competition, by prohibiting unfair, dishonest, deceptive,

                                       7.                                87-1002

destructive, fraudulent and discriminatory practices by which fair and honest

competition is destroyed or prevented." (B&P § 17,001.)

            B&P section 17203 provides that any person performing or proposing

to perform an act of unfair competition within this state may be enjoined in any

court of competent jurisdiction. B&P section 17200 provides:

            "As used in this chapter, unfair competition shall mean and

      include unlawful, unfair or fraudulent business practice and unfair,

      deceptive, untrue or misleading advertising and any act prohibited

      by Chapter 1 (commencing with Section 17500) [concerning advertising

      practices] of Part 3 of Division 7 of the Business and Professions

      Code." 

            In permitting the restraining of all "unfair" business practices

these statutes (formerly Civ. Code, § 3369) establish a wide standard to guide

courts of equity in redressing conduct that violated the "fundamental rules of

honesty and fair dealing." ( Barquis v. Merchants Collection Assn. (1972) 7
Cal. 3d 94, 112.) In People v. Casa Blanca Convalescent Homes, Inc. (1984) 159
Cal. App. 3d 509, 530 the court concluded that "an 'unfair' business practice

occurs when it offends an established public policy or when the practice is

immoral, unethical, oppressive, unscrupulous or substantially injurious to

consumers." This definition has been used by the Federal Trade Commission and

approved by the United States Supreme Court in evaluating whether a practice is

unfair under the Federal Trade Commission Act. (See FTC v. Sperry & Hutchinson

Co. (1972) 402 U.S. 233, 244.)

            The request for this opinion did not mention any advertising

practice.   We therefore assume that the question is directed at whether the

practice described may be enjoined as unfair competition. Thus the question is

whether a lender's practice in designating on its defaulted loans only those

foreclosure trustees who agree to charge as a trustee fee for a foreclosure sale

on its FHA and VA secured loans only the amount the federal government will

reimburse the lender for such sale and allowing the foreclosure trustee to charge

the maximum fee allowed by state law on all other defaulted loans of the lender

which are secured by a trust deed constitutes an "unlawful, unfair or fraudulent

business practice" within the meaning of B&P section 17200. 

            Under the arrangement in question, the trustee's charge to the

beneficiary for conducting a foreclosure sale of property securing a VA or FHA

loan is set at the amount which the VA or FHA will reimburse to the beneficiary.

The amount charged to a purchaser other than the beneficiary is unaffected by the

arrangement between the beneficiary and the trustee: the trustee will charge its

normal fee, usually the statutory maximum, which is considerably higher than the

amount reimbursed by the VA and FHA. The amount of trustee's fees charged to the

trustor or a junior lienholder to reinstate a defaulted loan is also unaffected

by the arrangement between the beneficiary and the trustee: the trustee will

charge its normal reinstatement fee, usually the statutory maximum, which will

often be considerably higher than the sale amount reimbursed by the VA and FHA.

Thus under the lender-beneficiary's and trustee's arrangement, the trustee could

charge the trustor or junior lienholder higher fees during the reinstatement

period than the trustee would charge the beneficiary after a sale even though the

trustee had to perform significantly more work to complete the sale.

             The fee arrangement which results in lower fees for sales to the

beneficiary than reinstatements by the trustor and, hence, higher fees to the

trustor for less work appears inconsistent with the statutory fee structure which

is based, in part, on the amount of work performed by the trustee. Civil Code

section 2924c and 2924d establish three sets of fee limitations tied to different

stages in the foreclosure process, and greater fees are permitted as a

foreclosure progresses and more work is performed.    The trustee is permitted to

enter fee payment arrangements based on work performed with agents and subagents

                                       8.                                87-1002

as long as the total fee charged does not exceed the statutory maximum.

(§ 2924d(d).) However, as we noted above, fee arrangements involving kickbacks

and rebates for the referral of business are illegal even if the total fee

charged is below the statutory maximum. (§ 2924d(c).) The rebate component of

the fee is obviously not a charge for work performed, and the statute protects

borrowers from being forced to pay consideration for the referral of business

disguised in the form of a trustee's fee even though the amount of the fee might

otherwise be lawful.

            The fee arrangement in question contravenes public policy because the

trustee's fees to all parties are not commensurate with the work the trustee

performs. If a trustee is able and willing to conduct a sale for a charge equal

to the VA and FHA reimbursement rate, the trustee should demand less, not more,

for performing fewer services during the reinstatement period.

             The fee arrangement, which may permit the trustee to charge a higher

fee at the time of reinstatement than at the time of sale, also operates unfairly

against trustors and junior lienholders.     If a trustee charges a trustor or

junior lienholder a higher fee than is commensurate with the level of the

trustee's services to reinstate the loan, the trustee impairs the trustor's and

junior lienholder's ability to reinstate because they must pay more than

necessary to cure the default. The frustration of reinstatement is antithetical

to the public policy expressed in Civil Code section 2924c which encourages

reinstatements to prevent foreclosure sales.

             Moreover, the trustee's charge of its full fee to a third party

purchaser at the sale but not to the beneficiary may have the effect of depriving

the trustor or a junior lienholder of surplus sale proceeds. The trustee has the

duty to account for surplus sale proceeds (see, e.g., Arneill Ranch v. Petit

(1976) 64 Cal. App. 3d 277) and to pay the surplus to junior lienholders and the

trustor. (See, e.g., Pacific Loan Management Corp. v. Superior Court (1987) 196
Cal. App. 3d 1485, 1491.) If a third party had to pay higher foreclosure fees than

the lender for the same trustee service, the excess amount of phantom fees is,

in effect, surplus sale proceeds which rightfully belong to the trustor or junior

lienholders.

             Furthermore, the trustee has a duty to act fairly and reasonably in

the conduct of the sale to protect the trustor's rights and to use all reasonable

efforts to obtain the best possible or a reasonable price for the property.

(See, e.g., Baron v. Colonial Mortgage Service Co. (1980) 111 Cal. App. 3d 316,

323; Kleckner v. Bank of America (1950) 97 Cal. App. 2d 30, 33.) The trustee also

may not act to reduce the pool of bidders. (See Bank of Seoul & Trust Co. v.

Marcione (1988) 198 Cal.App.3d 113,119.) These duties are subverted by the fee

arrangement in question. Under the arrangement, the minimum opening bid, which

includes the trustee's charges, would be higher for every prospective bidder than

for the beneficiary. The fee arrangement, thus, may provide the beneficiary with

a competitive advantage in bidding, may discourage the participation of bidders,

and may enable the beneficiary to acquire the property at a lower price than any

other prospective bidder.

            A court may conclude that the beneficiary and trustee violate the

implied covenant of good faith and fair dealing to the trustor by entering into

the fee arrangement in question. The covenant of good faith and fair dealing is

implied in every contract including a deed of trust. (See, e.g., Schoolcraft v.

Ross (1978) 81 Cal. App. 3d 75; Milstein v. Security Pac. Nat. Bank (1972) 27
Cal. App. 3d 482.) That covenant prohibits any party from conduct which would

impair the benefits of the agreement to another party. We see nothing wrong with

a lender's bargaining for trustee's fees below the maximum allowed by state law.

However, the particular fee agreement in question would disadvantage the trustor

in the manner described above.    We think that a court would hold that with the

beneficiary's power to negotiate fees and unilaterally substitute trustees (see

Section 2394a) goes an implied duty to negotiate a fair fee structure

                                       9.                                87-1002

commensurate with services rendered regardless of who ultimately bears their

cost. We think a court would also hold that a trustee has a duty not to enter

a fee arrangement which would compromise the trustee's obligation to act fairly

and reasonably to obtain the best possible price for property at a fully

competitive auction. We believe that the fee arrangement in question does not

fulfill these duties.

      An additional unfairness of the practice in question lies in its impact on

the fees foreclosure trustees charge for services on the lenders defaulted loans

which are not subject to the federal reimbursement limits. These are the fees

charged for trustee services in foreclosure of loans not secured by FHA or VA and

those for the foreclosure of FHA or VA secured loans which do not culminate in

a sale of the property. The inevitable result of charging low fees for part of

the services contracted for is to charge more for the other services to maintain

the same profit margin. This pressure to charge higher fees for the rest of the

foreclosure trustee's services caused by the practice in question makes the

practice unfair to those who must pay the higher fees. It is analogous to the

loss leader pricing of merchandise prohibited by section 17044 of the Unfair

Practices Act.

            Accordingly, we conclude that a lender's practice of designating on

its defaulted loans only those foreclosure trustees who agree to charge as a

trustee fee for a foreclosure sale on its FHA or VA secured loans only the amount

the federal government will reimburse the lender for such sale and allowing the

foreclosure trustee to charge the maximum fee allowed by state law on its other

defaulted loans is an unfair business practice under the Unfair Business

Practices Act.

             It has been suggested that the conclusive presumptions of Civil Code

sections 2924c(d) and 2924d(a) might have some bearing upon our conclusions. As

we have noted those subdivisions fix the maximum fees that a trustee may charge

upon foreclosure proceedings.       After prescribing the maximum fees both

subdivisions add the following sentence: "Any charge for trustee's or attorney's

fees authorized by this subdivision shall be conclusively presumed to be lawful

and valid where such charge does not exceed the amounts authorized herein." We

reject the notion that this language authorizes a trustee to charge the statutory

maximum fee regardless of other laws or an agreement to perform trustee services

for a lesser fee. The quoted language means that if the trustee's fee is within

the limits fixed in these subdivisions of the statute and is not otherwise

unlawful, the amount of the fee cannot be challenged as excessive. However, this

does not mean that the trustee's fees may not be challenged on the ground that

they violate some other law such as the Cartwright Act or the Unfair Business

Practices Act. Thus the conclusive presumptions do not affect the conclusions

we have reached in this opinion. 

                                   * * * * *

                                      10.                                87-1002