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Substitute trustee’s foreclosure sale violated automatic stay

Where the substitute trustee’s sale of real property failed to comply with provisions required by the deeds of trust, the foreclosure sale was invalid, so that, when the substitute trustee recorded the deed, she violated the automatic stay. The amount of damages, and possible punitive damages, will be determined at trial.

Background

On Sept. 16, 2019, the trustee filed a three-count complaint against Nancy Ann Rogers and Nancy Rogers PC. Before the court is the trustee’s motion for partial summary judgment as to liability under Count One (breach of fiduciary duty) and under Count Two (violation of the automatic stay).

The trustee alleges that the foreclosure sale was void because Rogers failed to comply with certain provisions required by the deeds of trust. If the foreclosure sale was invalid, the property became property of O. Lawrence’s bankruptcy estate upon the petition date. If the property was property of O. Lawrence’s bankruptcy estate, then the defendants violated the automatic stay when they recorded the substitute trustee’s deed after the petition date.

Foreclosure sale

The trustee alleges the foreclosure was invalid because the notice of foreclosure was not mailed to O. Lawrence at the address listed in the deeds of trust and because the notice of foreclosure contained the incorrect date of the foreclosure sale. The defendants argue that these deficiencies are without moment.

Defendants argue the mailing address was sufficient as a matter of law because Rogers sent the notice of foreclosure by mail to O. Lawrence at his last known address as it appears in the records of K. Lawrence. While this may have satisfied the requirements of section 55.1-321(A) of the Virginia Code, however, that does not, by itself, mandate that notice was sufficient as a matter of law.

Rather, compliance with that Virginia Code provision merely creates “a rebuttable presumption that the lienholder has complied with any requirement to provide notice of default contained in a deed of trust.” Here, the trustee has rebutted that presumption.

Rogers was required to act in strict compliance with the terms of the deeds of trust to the extent the deeds of trust imposed duties in addition to the requirements of the Virginia Code. As such, Rogers failed to provide notice of the proposed foreclosure sale as required by the deeds of trust.

Because Rogers failed to mail the notice of foreclosure as required by the deeds of trust, the contents of the notice of foreclosure are immaterial. However, the contents of the notice of foreclosure were defective. The notice of foreclosure failed to provide the correct date and time of the foreclosure sale. And, separate and apart from the defective notice of the foreclosure, Rogers also failed to meet the condition precedent of acting at the direction and behest of the beneficiary under the deeds of trust as required by state law. Accordingly, the court concludes that the foreclosure sale was invalid.

Automatic stay

The trustee alleges the defendants violated the automatic stay by recording the substitute trustee’s deed after the invalid foreclosure sale and after the petition date. The court agrees.

Because the defendants knew about the bankruptcy cases and intentionally recorded the substitute trustee’s deed, the defendants violated the automatic stay. Rogers’ mistaken belief that the foreclosure sale may have been valid is no defense. The court will determine the appropriate quantum of damages and will consider any request for punitive damages at trial.

Breach of fiduciary duty

The defendants’ breach of their fiduciary duty damaged O. Lawrence’s bankruptcy estate by purporting to sell an asset which would have been otherwise available for administration by the trustee for the benefit of O. Lawrence’s creditors. That alone was not acting in the best interests of O. Lawrence to maximize value and, as such, the defendants breached their fiduciary duty.

However, given the history among the parties, Rogers’ extensive experience as a real estate attorney and Rogers’ prior knowledge that O. Lawrence, K. Lawrence and their affiliates had transferred property to avoid legal or administrative actions by a creditor or government entity, at best, Rogers was willfully blind to a scheme to place the property outside of the reach of creditors; at worst, Rogers was complicit in a scheme to defraud, hinder or delay creditors.

Trustee’s motion for partial summary judgment granted.

Barrett v. Rogers, No. 19-03082, May 14, 2020. EDVA Bankr. at Richmond (Huennekens). VLW No. 020-4-007. 19 pp.

VLW 020-4-007

Virginia Lawyers Weekly