Tuesday, March 13, 2018

Deed of Trust: Historical View

Gazette and Roanoke Advertiser, 31 July 1830
Deed of Trust: Historical View

Gazette and Roanoke Advertiser, 31 July 1830.1

Here, a "deed in trust" (deed of trust/trust deed) was used to secure a debt created by a promissory note. By virtue of the promissory note, the borrower contractually was obligated to repay to the lender the amount borrowed (and interest if applicable). Without the deed of trust, the lender would be forced to sue the borrower in the event of a default on the note. However, the deed of trust provided a means of recovery by selling certain assets pledged under the deed of trust. And, often this was not real estate.

Here is how it worked. The borrower/debtor conveyed legal title to certain assets (including slaves in this instance) to the trustee (third party) to hold for the beneficiary (the lender) until the debt was satisfied. The trustee was able to sell the property if the borrower/debtor defaulted on the underlying promissory note. Of course, the borrower/debtor had the right to demand the return of the legal title when the debt was paid. Note, legal title to the trustee gave the lender a beneficial (equitable) interest in the property without right of possession.

You also will see in these older documents the creditor/lender/beneficiary referred to as the "cestui que trust" -- the person for whose benefit a trust is created. Although legal title of the trust was vested in the trustee, the cestui que trust was the beneficiary who was entitled to all benefits from the trust. Thus, "cestui que trust" = "beneficiary" = "lender".

While both a mortgage and a deed of trust were used to provide security for a debt, they were different. A mortgage did not involve the third-party trustee, and usually was enforced through judicial process in a court of law. A deed of trust involved the third-party trustee and could be enforced outside the judicial process. See the newspaper notice below where the trustee advertised sale of the property securing the debt. No court need be involved. Simply, a mortgage created a lien on the pledged property that must be enforced, while a deed of trust actually transferred title to the property.

By virtue of the powers conferred in a certain deed of trust, executed to me by J. Y. Fox and wife Rosa, on the 21st day of April, 1892, and duly recorded in Register's office of Person county, Book LL, page 322, I will, on the first Monday in July, 1896, sell at the court house door, in Roxboro, to the highest bidder for cash, the following described land and premises to wit: A certain tract of land lying and being in Person county, Olive Hill township, immediately on the public road leading from Roseville to Leasburg, and bounded by the lands of William Horton, Mary J. Fox, Jennie Thomas, Buck Childress and others, containing 120 acres more or less. The sale being to satisfy a claim of Mrs. Aniva Dixon, the cestui que trust.

This 29th day of May, 1896.
C. S. Winstead, Trustee.
Winstead & Brooks, Attorneys.

The Roxboro Courier (Roxboro, North Carolina), 1 July 1896, Wednesday, Page 5.

Note that this 1892 deed of trust allowed the trustee, without judicial involvement, to sell "at the court house door" the tract of land with respect to which legal title had been transferred to the trustee. Pursuant to the terms of the deed of trust, the trustee had legal title (in fee simple absolute) to the tract of land, and was able to convey good title without the involvement of any court.

Albert Atkinson Pattillo 1869 Deed of Trust

Here is another interesting 19th century deed of trust (click link). This arose as a result of a judgment against Albert Atkinson Pattillo in the 1868 Caswell County Court of Pleas and Quarter Sessions. To satisfy the judgment, Pattillo provided a deed of trust.

Deed of Trust Sale: Milton, NC 1855. Note that no real estate is involved.

The Milton Chronicle (Milton, NC), 10 October 1855.

Deed of Trust in 19th Century Railroad Bond Sales

Those who study the history of railroads (in North Carolina and elsewhere) will see attempts to finance various 19th century projects. This often was by the issuance of bonds. The document that defined the relationship between the bond issuer (borrower) and bondholder (creditor) was (and is) called an indenture. However, alone, the indenture relied only upon the general creditworthiness of the bond issuer (railroad company). But, to entice investors more was needed.

Here is where the deed of trust came in. A deed of trust often was used to secure the payment of principal and interest promised by the indenture. It transferred legal title to certain railroad property (and even income) to a trustee for the benefit of the bondholders. And, should the railroad company default on the bonds (not make interest and principal payments), the trustee could sell railroad assets for the benefit of the bondholders -- and without court proceedings.

One might question the seemingly absolute power of the trustee pursuant to a 19th century deed of trust. For example, who determined that the underlying debt was in default? First, the trustee had a legal fiduciary duty to the other parties to the deed of trust, and a breach of this duty could be challenged in court by the debtor or the creditor. And, as the deed of trust was in essence a contract, the usual principles of contract law applied. No party to the deed of trust was left without judicial recourse. Moreover, around the "foreclosure/sale" concept arose the redemption period right of the debtor.

However, none of this negates the fact that a 19th century deed of trust in most jurisdictions, including North Carolina, transferred legal title to the trustee.

But, with respect to modern jurisprudence, see Shuster v. BAC Home Loans Servicing, L.P., 149 Cal. Rptr. 3d 749, 753 (Ct. App. 2012) (the deed of trust is not void despite its failure to name a trustee); see also NEV. REV. STAT. ANN. § 107.028(5) (West 2012) (“The trustee does not have a fiduciary obligation to the grantor or any other person having an interest in the property which is subject to the deed of trust.”); Spires v. Edgar, 513 S.W.2d 372, 378-79 (Mo. 1974) (en banc) (in the absence of unusual circumstances, the trustee has no duty to verify that default has occurred). Compare Cox v. Helenius, 693 P.2d 683, 686 (Wash. 1985) (en banc) (the trustee has fiduciary duties to borrower and lender), with Monterey S.P. P’ship v. W.L. Bangham, Inc., 777 P.2d 623, 628 (Cal. 1989) (en banc) (the trustee is not bound by the fiduciary duties that characterize a true trustee).

"North Carolina is considered a title theory state with respect to mortgages, where a mortgagee does not receive a mere lien on mortgaged real property, but receives legal title to the land for security purposes. In North Carolina, deeds of trust are used in most mortgage transactions, whereby a borrower conveys land to a third-party trustee to hold for the mortgagee-lender, subject to the condition that the conveyance shall be void on payment of debt at maturity. Thus, in North Carolina, the trustee holds legal title to the land."

Neil Realty Co. v. Medical Care, Inc., 110 N.C.App. 776, 778, 431 S.E.2d 225, 226–27 (1993); Countrywide Home Loans, Inc. v. Reed, 220 N.C. App. 504, 725 S.E.2d 667 (2012).

Note that the Bank of Newbern referenced in the above 1830 newspaper notice once had a branch in Milton, North Carolina. The debtor apparently is James (Hops) Lea (1781-1834) who owned an operated a tavern at the intersection of Highway 62N and the Blanch Road. The trustee, Samuel Watkins (1880-1868), may have been the Milton businessman by that name.

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