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WARNER, ET AL. v. CLEMENTSON (59734)


WARNER, ET AL. v.
CLEMENTSON


October 31, 1997

Record No. 970243

JOHN D. WARNER, JR., ET AL.

v.

LEWIS H. CLEMENTSON

OPINION BY CHIEF JUSTICE HARRY L. CARRICO

FROM THE CIRCUIT COURT OF THE CITY OF HAMPTON

Christopher W. Hutton, Judge

Present: Carrico, C.J., Compton, Lacy, Hassell, Keenan, and
Kinser, JJ., and Poff, Senior Justice


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 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
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 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.

 

 

FOOTNOTES:

[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.

[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."

[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.

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