Real Property – Foreclosure – Trustee – Final Report – Attorney’s Fees – Clerk’s Authority

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In re Foreclosure of Vogler Realty Inc. (Lawyers Weekly No. 10-07-1159, 24 pp.) (Linda M. McGee, J.) (Robert N. Hunter Jr., J., dissenting) Appealed from Alamance County Superior Court (Ronald L. Stephens, J.) N.C. App. Click here for the full text of the opinion.

Holding: The clerk of superior court lacked statutory authority to assess the reasonableness of the payments set out in the trustee’s final report of foreclosure, namely the trustee’s $33,574 attorney’s fee disbursed to himself.

The clerk’s order is vacated.

Facts

 Stedman was the trustee under a deed of trust executed by Vogler Realty. Vogler defaulted, and Stedman filed a foreclosure action acting both as trustee and as the trustee’s attorney. The clerk entered an order authorizing the trustee to proceed with the foreclosure sale. After the sale was completed, the trustee filed a final report and account of foreclosure sale for audit and approval.

The trustee made disbursements to himself in the form of a trustee’s commission in the amount of $16,813 and an attorney’s fee in the amount of $33,574.

CommunityOne Bank, a junior lien-holder, filed a motion and objection to disbursements pursuant to the final report and account of foreclosure. The bank argued that the trustee’s final report authorized a disbursement of additional attorney’s fees beyond that which was justified, and the trustee failed to properly support the amount of the attorney’s fees.

The clerk entered an order disapproving the final report and ordering the trustee to submit an amended final report with an attorney fee amount of $4,727. The trustee appealed the clerk’s order to the superior court, which affirmed.

The trustee appealed.

Analysis

The trustee argued that the trial court erred in affirming the clerk’s order because neither the superior court nor the clerk had authority to make determinations of reasonableness when auditing the trustee’s final report.

G.S. § 45-21.31(a) sets forth the procedure for distributing the proceeds of a sale from a foreclosure action, while G.S. § 45-21.33 provides for the final report of sale of real property and an audit by the clerk of superior court.

A clerk of superior court, conducting an audit of a final report and account of sale pursuant to G.S. § 45-21.33, lacks the statutory authority to make determinations of the reasonableness of expenses listed on the report.

Any entitlement to and the amount of attorneys’ fees required for the conduct of the foreclosure sale are controlled by the terms of the deed of trust and are subject to deduction from the sale proceeds.

The deed of trust in this case specifically provided that the trustee could retain an attorney to represent him in such proceedings under power of sale and that the proceeds of the sale, after the trustee retained his commission, together with reasonable attorneys fees incurred by the trustee in such proceeding, be applied to the costs of sale.

The trustee’s payment of attorney’s fees and his own compensation fall within the costs, expenses, and other obligations listed in subsection (a) of G.S. § 45-21.31, and were within the sole province of the trustee.

The bank argued that the trustee’s attorney’s fee was prohibited by G.S. § 32-61 and by the court’s holding in In re Foreclosure of Newcomb, 112 N.C. App. 67 (1993).

In Newcomb, the court addressed the clerk of superior court’s authority, under former G.S. § 32-51, to review the reasonableness of an attorney-trustee’s payment to himself of attorney’s fees incurred during an incomplete foreclosure sale that was terminated pursuant to G.S. § 45-21.20. The current G.S. § 32-61 contains substantially the same provisions as in the former G.S. § 32-51.

The bank’s reliance on Newcomb is misplaced with respect to its argument that the clerk may review a trustee-attorney’s payment of fees when auditing a final report. Newcomb and its application of G.S. § 32-51 dealt solely with a foreclosure sale that was incomplete and terminated pursuant to G.S. § 45-21.20, which was a different context than the one that faces us now.

Under G.S. § 45-21.33, the clerk is merely authorized to determine whether the entries in the report reflect the actual receipts and disbursements made by the trustee. Nothing in our holding affects the right of an aggrieved party to challenge the actions of a trustee in a separate action against the trustee focused on the propriety of the trustee’s actions.

Because the clerk lacked statutory authority to assess the reasonableness of the payments set out in the trustee’s final report, the clerk’s order must be vacated. We therefore vacate the clerk’s order and the trial court’s order affirming it.

Vacated.

Dissent

(Hunter, J.) The majority addresses two lines of conflicting authority, one from In re Foreclosure of Newcomb and the second from In re Foreclosure of Ferrell Brothers Farms, 118 N.C. App. 458 (1995) and In re Foreclosure of Webber, 148 N.C. App. 158 (2001).

Newcomb recognizes that the clerk of superior court and the superior court have discretion in determining the reasonableness of an attorney-trustee’s request for disbursement of fees to himself.

I cannot agree with the majority that Newcomb limits the clerk’s or the trial court’s discretion in determining “reasonable attorneys’ fees” to only those situations in which the foreclosure was arrested by payment of the underlying debt pursuant to G.S. § 45-21.20.

When a trustee also serves as the attorney for a foreclosure proceeding, self-dealing makes the exercise of fiduciary duty problematic for the trustee, and the determination of a “reasonable” fee under G.S. § 32-61 is given to the clerk.

The note and deed of trust should be read to allow an attorney, or a trustee collecting on the note for the holder, to collect reasonable counsel fees “not to exceed 15 percent” of the note. When an instrument does not provide for calculation of the amount of “reasonable” attorneys’ fees, as in this case, our courts have held such calculation to be subject to judicial determination. The amount of the fee ordinarily lies with the discretion of the court.

It is clear, whether the foreclosure is complete or partial, that a trustee is a fiduciary within the context of G.S. § 32-61.

Furthermore, the prompt judicial review of attorneys’ fees is routine in probate and special proceedings matters and is a procedure familiar to both clerks and the practicing bar.

Permitting a trustee to set his own attorney’s fees when the fee is not established by the instruments is inherently a conflict of interest. When a trustee self-deals with regard to fees he is charging a beneficiary, it would be difficult, if not impossible, for him to subsequently show he acted openly, honestly and fairly, taking no advantage of his beneficiary.

On the other hand, when a fiduciary seeks judicial approval for his “reasonable” fees in advance, any interested party may object openly and have the matter promptly resolved by a neutral decision maker.

Our statutes and case law hold that trustees are fiduciaries. Clerks are allowed to use discretion in the audit procedures contained in G.S. § 45-21.33 and § 32-61 for review of “reasonable” attorneys’ fees when the instruments do not provide a method of calculating those sums and when a trustee is also serving as his own attorney.