$50,000 in commissions, fees upheld for trustee-attorney in foreclosure

By PAUL THARP, Staff Writer

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An attorney who was both a trustee and the attorney for the trustee in a foreclosure proceeding can disburse himself $50,387 in fees and commissions, the Court of Appeals has ruled.

The attorney, Charles N. Stedman of Burlington, wrote in an affidavit in In re Foreclosure of Vogler Realty, Inc. (Lawyers Weekly No. 10-07-1159, 24 pp.) that a $33,574 attorney’s fee was reasonable.

“In my experience, a reasonable attorney’s fee for the attorney representing the trustee in a foreclosure special proceeding of fifteen percent (15%) of the outstanding balance due on a note immediately prior to the filing of a foreclosure special proceeding is a fair and reasonable fee and is supported by the statutory and case law of North Carolina,” Stedman wrote.

The balance of the note immediately prior to the filing of the foreclosure in Vogler was $223,825. As trustee, Stedman also earned a 5 percent commission on the final resale amount of the foreclosed property, or $16,813.

No one disputed the commission, but Winston-Salem attorney Michael D. Phillips told Lawyers Weekly that he thought the attorney’s fee was a windfall to Stedman.

Phillips represented a junior lien-holder, CommunityOne Bank. The bank filed a motion and objection to Stedman’s disbursements after it received a copy of his final report and account of foreclosure.

“This was a windfall to an attorney who was double-dipping in the trustee’s fee and the attorney’s fee to the detriment of the mortgagor and junior lien-holders,” Phillips said.

He called the attorney’s fee outrageous and said it increased the amount of the deficiency debt that the mortgagor owed to junior lien-holders.

While a foreclosure eliminates junior liens against real property, it does not extinguish the debtor’s personal obligation to repay debts to junior lien-holders, Phillips said. Junior lien-holders can bring suit against the debtor after the foreclosure proceeding to collect the deficiency debt.

“The more [Stedman] takes in attorney’s fees, the less surplus funds are available to apply to junior lien-holders,” Phillips said. “The more he takes, the more the debtor is on the hook for the deficiencies.”

An Alamance County clerk agreed with Phillips and CommunityOne and refused to approve Stedman’s final report and account. The clerk referenced Stedman’s own fee affidavit, which provided that he spent 71.8 hours working on the case at a rate of $300 per hour.

Based on that, the clerk ordered Stedman to submit an amended final report and account reflecting receipt of the trustee’s commission as well as an attorney’s fee in the amount of $4,727, or a total of $21,540.

“The clerk compensated the trustee for 71.8 hours at a generous hourly rate of $300. [Stedman] was made whole for all the time he spent on the case,” Phillips said.

Superior Court Judge Ronald L. Stephens affirmed the clerk’s order in its entirety. Stedman appealed.

In a Dec. 7 decision, a divided Court of Appeals panel held that the clerk and the superior court lacked the authority to “make determinations of the reasonableness of expenses listed” on the final report and account under G.S. § 45-21.33.

In an e-mail to Lawyers Weekly, Stedman wrote that “the legislative intent of the foreclosure statutes is to limit the role of the clerk of superior court in uncontested, completed foreclosures to determining if the statutory elements of the foreclosure have been proven and then to determine whether the entries in the trustee’s final report reflect the actual receipts and disbursements made by the trustee.”

He said that G.S. § 6-21.2(5) authorized the payment of an attorney’s fee at 15 percent of the outstanding balance due on a note immediately prior to the filing of the foreclosure proceeding.

Phillips said that the statute applies only when a creditor is suing to collect on a note, and is not intended to compensate a foreclosure trustee or the attorney for the foreclosure trustee.

Phillips said Judge Robert N. Hunter Jr.’s dissent illustrated the “clash between self-dealing on the one hand and the fiduciary obligations of the trustee on the other. The trustee owes fiduciary duties to creditor and debtor,” Phillips said. “The majority opinion appears to remove boundaries that clerks of court have customarily imposed on trustees seeking both trustee fees and attorney fees.”

Judge Hunter wrote that “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.

“When a trustee self-deals with regard to fees he is charging a beneficiary,” Hunter noted, “it would be difficult, if not impossible, for him to subsequently show he acted openly, honestly and fairly, taking no advantage of his beneficiary.”

That is why, he intimated, clerks should be allowed to use their discretion to review the reasonableness of attorney’s fees under G.S. § 45-21.33.

“[W]hen 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,” Hunter wrote.

Phillips said that while the dissenting opinion provides for an appeal as of right to the Supreme Court, he had not yet discussed that option with CommunityOne.

OPINION BRIEF

Case name: In re Foreclosure of Vogler Realty, Inc.

Court: N.C. Court of Appeals

Judges: Judge Linda M. McGee; Judge Donna S. Stroud, concurring; Judge Robert N. Hunter Jr., dissenting

Date: Dec. 7, 2010

Plaintiff-appellant’s attorney: Charles N. Stedman (Burlington).

Defendant-appellee’s attorney: Michael D. Phillips and Michael A. Myers of Bell, Davis & Pitt (Winston-Salem)

Issue: Did the clerk of superior court and the superior court have the authority in the context of a foreclosure proceeding to reject a trustee’s report of sale on the basis that an attorney’s fee paid to himself as attorney for the trustee was not reasonable?

Holding: No. 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.

Opinion digest: Click here.