Deed of Un-Trust

The deed of trust is an interesting instrument that appears to establish a trust. There are some basic requirements for a trust to exist. There must be a trust corpus (legal description). There must be at least 3 parties – the creator, the trustee, and the beneficiary. These parties should be different. One party shouldn’t fill two positions. The creator appoints a trustee to hold in trust, the trust property for the benefit of the beneficiary. The trust can have more parties besides the mandatory three. The creator can also be the borrower/trustor (the one who puts the property into the trust), as well as the grantor (if the trust is intended to be a grantor trust). The creator, as trustor, can put the property into the trust without the trust being a grantor trust. You will notice on some deeds of trust, the words “trustor” and “grantor” are use interchangeably. You would generally not want a trust to be a grantor trust, as the tax liability stays with the grantor. Deeds of trust are grantor trust. That explains why the creator/ borrower/trustor/grantor is always responsible for the property taxes. The only one who signs on a deed of trust is the creator/borrower/trustor/grantor. Improprieties in the composition of the trust are attributed against him – not the bank, even though it is the bank that actually provides the written papers. Usually, the borrower just shows up at closing to sign the papers, without ever knowing what he is signing. He cannot claim fraud on the part of the lender, because he is the one who is creating the trust.



The deed of trust functions as a security agreement to guarantee the debt on an associated promissory note will be paid. Instead of filing a UCC-1 financing statement with the Secretary of State, the bank records the deed of trust with the county recorder in the county where the real property is located. The county recorder is the right place to file a claim against real property, while the Secretary of State is the right place to file a claim against personal property located within that SOS’s jurisdiction. A security instrument on real property must be filed in the county where the real property is located.



Some deeds of trust do not meet the principles of trust law. This is an unwritten law for the most part – there must be no fewer than three parties on the trust. Some trusts have a trustee that is also the beneficiary. That means the beneficiary is directly holding the trust corpus for its own benefit. That arrangement totally defeats the purpose for the creation of the trust. In some cases this defect is somewhat overcome by having one corporation with two different business locations fill the two trust offices. Technically, this does not cure the defect, but it suffices in every case, because only the trustor would raise the defect, and he is the creator who appointed the trustee and granted the beneficial interest. He is the source of the problem. The time to correct this defect is at the closing before the papers are signed. If you were to try to choose a different trustee to fill that position, he possibly would have to meet some statutory qualification: real estate broker, corporation approved by the State etc.



In deed of trust states, the promissory note is separate from the security agreement. The debt is the subject matter (not object) of an associated note if there is a deed of trust. The recording number is the reference used to identify the security interest a lender or beneficiary has in the subject real property. It is that recording number that supports the bank’s claim of an interest in the real property. It is that recording number that must be nullified to regain control of the legal description.

As long as the bank appears as the unpaid lender or beneficiary of a deed of trust, on the public records, all courts will uphold its petitions. If you can nullify the bank’s interest in the real property, the bank will have no capacity to state a claim upon which relief can be granted by a public court. The court must rule in favor of the owner of record IF properly asked. Since the creator/borrower/ trustor is the grantor on the security agreement, he has the power to terminate his grant, if the grantee (bank) fails to perform according to the terms of the agreement. Whether it is expressed in the deed of trust, or not ---- the grantee/beneficiary has a duty to relinquish its interest in the real property when the associated debt is satisfied. The unpaid promissory note is the source of its right to retain an interest in the real property. If it refuses to reconvey the deed after the debt is satisfied, it is in breach of its contract with the creator/ borrower/trustor/grantor, regardless of whether the actual reconveyance requirement is expressed in the security instrument or not!



The bank can “foreclose” on a deed of trust for non-performance, which is considered by them and re-enforced by you, to be a “breach of contract”. Since the banks do this action thousands of times a day, most people think that only the borrower can breach the contract. But, is that really true?



What action is the bank required to do to fulfill its agreement with the borrower? The note and deed of trust both meet the minimal requirements of a contract. They have a starting date. They have a consideration. They both have at least two parties, even though the bank is an implied party in some situations -- the borrower and the lender, the grantor and the grantee, or the trustor and the trustee and beneficiary. The title of these instruments may not say “Contract”, but sufficient elements are there to establish the contractual obligations that can be enforced by a court. The bank’s signature is not on the note, or deed of trust, but it is on the note when it is deposited. The typical bank notation is “Without recourse, Pay to the Order of [name of lender]”, followed by a handwritten signature of a bank officer. This is an endorsement of an offer and acceptance. Incumbent in the offer and acceptance is a duty by both parties to perform some act. The bank agrees to reconvey the deed or to notify the trustee that the deed can be reconveyed, when the associated obligation has been satisfied. This clause is often called a defeasance clause in the deed of trust.



All deeds of trust have some form of a “defeasance clause”, expressed or implied, where the bank has agreed to “release any interest in the real estate” once you have “discharged or paid the debt”.



As you know, with a deed of trust, the bank suggested a title company or another corporation or even an individual person as the trustee to hold the legal title to the trust corpus for the trustor and beneficiary (the bank) until the obligation established by the note has been satisfied. If the contract is breached by the borrower for nonpayment to the bank, the bank starts a private remedy to allow the trustee to pass the title to the top bidder at a Trustee’s Sale. This action results in a “right of property” for that top bidder.



Even when the bank and its trustee go through their foreclosure process, they do not have a “right of possession” to the property at the time they hold their foreclosure sale. Even the highest bidder at the bank’s foreclosure sale does not have a right of possession when he gets legal title. This is the same problem the highest bidder of property at a mortgage foreclosure sale has. The reason these buyers have no right to the house is they did not buy the house at the foreclosure sale. The bank or trustee did not have an interest in the house at the time of the sale. You will notice in the deeds these buyers get at foreclosure sales, there is always wording to the effect that the deed being granted to these buyers is granted “without warranty expressed or implied”, and “subject to matters of record”. These buyers are getting no warranty, and their granted right in the real estate being transferred is subject to matters of record.



Since the trust corpus consists only of a legal description and a legal description is a piece of paper, the trustee only holds legal title to a legal description. Since the trustee only holds legal title, in all reality the top bidder at a Trustee’s Sale only purchases legal title to a legal description of the real property, not the house.



Think about it. Prior to executing a deed of trust, a real property owner has legal and equitable title. After execution of it the property owner still has equitable title, however legal title is held by the trustee in trust for the benefit of the bank (lender). Upon default, via the “power of sale clause”, that which is held in trust, the legal title is sold to the top bidder at a Trustee’s Sale. Even though the top bidder purchased legal title, he did not purchase equitable title or the right of possession. That is why he has to first establish record title (record his trustee’s deed) then file an unlawful detainer action (eviction) against the equitable owner (defaulted borrower) to establish his right of possession. However there is a defense against eviction that always works.



Darryle-CA