This article discusses the parties to a trust deed and the nature of a trust deed as a lien, not a trust.
The purpose for the lien
Financing, in its most basic form, involves the borrower signing and delivering a promissory note to the lender or creditor (seller) as evidence of the debt owed for money lent or credit extended.
However, the promissory note itself is only a promise to pay as agreed, not a guarantee or assurance the debt evidenced by the note will be repaid.
In real estate loan transactions, lenders require the borrower to provide real estate as collateral to secure performance of the promise to pay the debt – in case the borrower defaults on the note.
To secure payment of the debt by a parcel of real estate, a trust deed is used as the security device of preference to impose a lien on the real estate.
The trust deed, by its words, purports to convey legal title to a neutral person, called a trustee. In law, it does not.
Title to the property is theoretically held by this middleman in trust for the lender or carryback seller. Enforcement of the trust provisions is permitted by the courts as a legal fiction, unnecessarily employed to invoke the private power-of-sale foreclosure provision in lieu of a judicial foreclosure.
Should the owner ever default on the terms of the note or trust deed, the middleman/trustee can be instructed by the lender to sell the property to satisfy the debt.
A trust deed arrangement consists of:
- the identification of the parties and the real estate given as security;
- the identification of the primary obligation, usually evidenced by a note, which brought about the need for security;
- the terms of the encumbrance, setting out the rights and duties of the parties with regard to the real estate; and
- the borrower’s signature and notary acknowledgments. [See first tuesday Form 450]
Parties to the trust deed
The trust deed involves three parties who all have distinctly separate roles in the secured transaction:
- The owner who voluntarily imposes the trust deed lien on his property, called the trustor;
- The middlemen with the power of sale, called the trustee; and
- The lender or carryback seller for whose benefit the trust deed lien encumbers the property, called the beneficiary.
The trustor signing and delivering a trust deed to a lender or carryback seller must be the owner of the real estate interest encumbered when the trust deed is delivered. Delivery is usually accomplished by recording the trust deed with the county recorder to reflect its priority.
The owner executing a trust deed encumbrance on real estate usually is the borrower of money or buyer on a credit sale. However, an owner can execute a trust deed against his property as security for the performance of any lawful act, or as security for another person’s debt, including a corporation, limited liability company (LLC) or partnership debt. [Everly Enterprises, Inc. v. Altman (1960) 54 C2d 761]
The owner’s real estate interest which is encumbered can be less than the entire fee, such as a fractional ownership or leasehold.
A condominium owner, for example, or any other property owner, can encumber his long-term leasehold interest under which he holds possession even though he is not the fee owner of the real estate. [Calif. Civil Code §§783; 1091; 2947]
Other real estate interests which can be encumbered besides the fee and leasehold, include life estates, beneficial interests in existing trust deeds, as well as equitable ownership rights under land sales contracts and purchase rights under options to buy.
In fact, the owner need not even be the sole owner of an interest in the property to encumber it with a trust deed. For example, one tenant-in-common or joint tenant (except husband or wife) can sell or encumber his individual ownership interest without the consent or signature of his co-owners. [Thompson v. Thompson (1963) 218 CA2d 804]
However, the trust deed lien created by the owner of a fractional interest in the real estate attaches only to the owner’s interest in the property, not to the interests of his co-tenants. [Caito v. United California Bank (1978) 20 C3d 694]
If community property is to be encumbered, both spouses must consent to the encumbrance of a community real estate interest, with the exception of attorney fees agreements in divorce proceedings. [Calif. Family Code §1102]
An off-record spouse who does not consent can have a lien removed from community property. To do so, the action must be filed within one year of the date the trust deed is recorded.
Despite the wording in the trust deed stating the trustor “hereby grants and conveys to trustee…the following real property…,” the trustee receives no security interest and no legal right to the property. The trustee is merely authorized to carry out the activities vested in the trustee by the power-of-sale provision in the trust deed lien held by the beneficiary. [Lupertino v. Carbahal (1973) 35 CA3d 742]
Under the trust deed, the trustee’s only responsibilities concerning the property are:
- to auction the properties at a private sale on notice from the lender of a default and election to sell; and
- to reconvey title to the owner and release the lender’s lien on proper instructions from the beneficiary or the trustor.
Most clearly, the owner’s possessory right (fee, leasehold, or life estate) to the property is not transferred to the trustee. The trustor, as the owner of the real estate, remains free to occupy, sell, lease or further encumber his property, subject to the existing trust deed liens.
Any person other than the owner of the real estate may serve as trustee. This includes the beneficiary of the trust deed. [More v. Calkins (1892) 95 C 435]
Some lenders name their attorney or broker as the trustee. Most often, however, title and escrow companies unknowingly play the role of trustee by virtue of the lender’s use of standard trust deed forms the companies distribute throughout the financing and brokerage industry.
That the trustee may be designated without his knowledge or consent is the key difference between the trust deed’s legal fiction of a trust and a genuine trust, since a true trustee must consent to his appointment. [Calif. Probate Code §15600]
Under a trust deed lien, the trustee is treated as non-existent until the lender elects to foreclose by a private sale or is required to reconvey (release) the beneficiary’s security interest in the property.
The position held by the trustee in a trust deed functions merely as the passive repository of an auctioneer’s power to conduct a private sale as agreed to in the trust deed. The trustee’s conduct is completely controlled by statutes. [Garfinkle v. Superior Court of Contra Costa County (1978) 21 C3d 268; CC §§2924 et seq.]
If ever the trustee is called on by the beneficiary and actually undertakes to carry out its responsibilities under the power-of-sale provision, it is required to act impartially.
Even though the trustee’s instructions (to sell or reconvey) come primarily from the beneficiary, the trustee is regarded as a common agent and bears a relationship to both beneficiary and trustor to follow the strict statutory foreclosure scheme. [Kerivan v. Title Insurance and Trust Company (1983) 147 CA3d 225]
The beneficiary is the person entitled to the performance of the promised activity referenced in the trust deed as the purpose for the security, usually repayment of a debt evidenced by a note.
The beneficiary, like the trustee, receives no ownership interest in the property. But unlike the trustee, the beneficiary is given a security interest in the property, called a lien.
Thus, the beneficiary has the power to instruct the trustee (who could be himself) to sell the secured property on behalf of the beneficiary (himself). In turn, the trustee has authority from the trustor and the beneficiary under the power-of-sale provision in the trust deed to sell the property under the statutory scheme. [Prob C §§16000; 16420(a)(1)]
Trust deed is only a lien
The modern California trust deed gives the beneficiary a lien as a security interest in the real estate. The trust deed authorizes the sale of the property by a trustee’s sale under the power-of-sale provision to enforce collection of the secured debt. With the exception of the power-of-sale provision, the trust deed is identical to its predecessor, the mortgage. [Bank of Italy v. Bentley (1933) 217 C 644]
However, a trust deed is only a lien and does not create a trust relationship between the parties to the trust deed – even though words of trust and conveyancing exist.
For example, a lender is a beneficiary under a trust deed on property which secures a construction loan made to the owner of the property. The owner defaults on loan payments and the lender instructs the trustee under the trust deed to notice the default and proceed to a private foreclosure sale.
Before the trustee’s sale is held, a contractor seeking to foreclose on a mechanic’s lien sues and records a lis pendens against the property, referencing only the trustee’s interest in the real estate.
At the trustee’s sale, the lender acquires title to the property. Later, the contractor, under his mechanic’s lien foreclosure action, obtains a judgment against the trustee’s interest in the property. The contractor, executing on his judgment through a sheriff’s sale, completes his judicial foreclosure and becomes the owner of the trustee’s interest in the secured property at the sheriff’s sale. The contractor does not pursue any lien rights against the lender’s interest in the property.
Does the contractor’s execution of his judgment against the trustee’s interest under the trust deed give the contractor any interest in the property?
No! A trustee under a trust deed has no interest in the property to be attached. The contractor failed to pursue the lender who was the only person with an interest in the property, before and after the trustee’s sale. The contractor’s judgment against the trustee only attached to the trustee’s interest under the trust deed – an interest limited to the power to sell the property at an auction for the benefit of the lender, which it did. [Monterey S.P. Partnership v. W.L. Bangham, Inc. (1989) 49 C3d 454]
A trust deed is merely evidence of a secured lender’s lien on real estate with a private power-of-sale provision. No trust exists – only a lien with a private remedy alternative to a judicial foreclosure should the borrower default.
Under a trust deed, title to the property appears to be held by a “trustee.” But the deed in the purported “trust” is a legal fiction, for the sole purpose of perfecting the lender’s security interest in the property. The trust deed “conveyance,” imposing only a lien on the real estate, carries with it none of the rights of ownership.
Thus, the trustee holds no ownership or security interest in the property.
Extinguishing the relationship
The trust deed ceases to exist when the security purpose of the trust deed ceases.
Thus, once the beneficiary has received the full amount he is entitled to under the note and trust deed, any later claim of the beneficiary to a security interest in the property is invalid.
Removing the trust deed from title to the property on ending the debt relationship between the parties is accomplished in one of three ways:
- foreclosure, by using a trustee’s deed or sheriff’s deed;
- full repayment, by reconveyance; or
- mutual agreement, by a deed-in-lieu of foreclosure.
Foreclosure of the trust deed lien is by a trustee’s sale or sheriff’s sale. The sale proceeds are applied to the debt.
Even if the price bid at the foreclosure sale is insufficient to fully satisfy the note, the foreclosure sale terminates the lien on the property sold by cancelling the trust deed’s effect on title on issuance of the trustee’s or sheriff’s deed.
Full repayment of the debt requires the beneficiary to reconvey the trust deed. Once the note is paid, the beneficiary must deliver the original note to the trustee, together with a request for reconveyance of title.
A trustee who reconveys when the owner is not entitled is liable for the beneficiary’s resulting losses.
The beneficiary’s recovery from the trustee, however, is limited to the market value of the secured property. [Jeanese, Inc. v. Surety Title & Guaranty Co. (1960) 176 CA2d 449]
Thus, the trustee will require the original note be marked paid and demand identification of the beneficiary requesting reconveyance.
After recording the reconveyance, the trustee will deliver the note to the owner at the owner’s request, unless an underbid occurs.
Failure of the beneficiary or trustee to comply with mandatory reconveyance requirements results in a fine of $400 and six months imprisonment. [CC §§2941; 2941.5]
Copies of lost or destroyed originals will be accepted by the trustee if they are accompanied by:
- the beneficiary’s sworn statement;
- an agreement to indemnify; and
- a lost instruments bond. [Huckell v. Matranga (1979) 99 CA3d 471]
As an alternative, the beneficiary may avoid unnecessary fees and bonds by substituting trustees – perhaps even himself – to act as trustee and reconvey.
Where the beneficiary refuses to reconvey on full satisfaction or cannot be located, the owner, as trustor, can take the steps necessary to request the trustee to reconvey the trust deed.
Also, the beneficiary and the trustor may mutually agree to terminate the security interest evidenced by the trust deed lien by:
- a deed-in-lieu of foreclosure and reconveyance; or
- a substitution of security and reconveyance without first paying the debt in full.
Under a deed-in-lieu of foreclosure, the owner conveys his entire interest in the property to the beneficiary in exchange for the beneficiary cancelling any remaining debt and reconveying the trust deed. Thus, the trustor/beneficiary relationship between the owner and the creditor under the trust deed is terminated.