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From Banking and Finance Law Daily, November 10, 2014

Supreme Court declines to consider preemption of Utah foreclosure authority

By Richard A. Roth, J.D.

The Supreme Court will not review whether a Utah law restricting who may act as a trustee in a nonjudicial mortgage foreclosure is preempted by the National Bank Act or by Office of the Comptroller of the Currency regulations. A Utah Supreme Court decision that the NBA does not preempt the state law and that the OCC regulations are an unreasonable interpretation of the NBA will remain standing (Fannie Mae v. Sundquist, discussed in Banking and Finance Law Daily, July 24, 2013). However, the Court’s denial of the petition means the decision will have precedential effect only within the state of Utah.

Fannie Mae’s appeal arose after it lost an eviction suit. The homeowner had defaulted on her mortgage loan payments, and the trust deed beneficiary appointed ReconTrust as the successor trustee to carry out the foreclosure. According to the Utah Supreme Court, ReconTrust is a wholly-owned national bank subsidiary of Bank of America.

ReconTrust used the Utah nonjudicial foreclosure process to foreclose on the trust deed, then deeded the property to Fannie Mae. When the homeowner refused to leave her home, Fannie Mae sued her for possession. The homeowner parried with the claim that ReconTrust could not lawfully have foreclosed on the mortgage and thus could not have transferred the property to Fannie Mae. As a result, Fannie Mae did not own the property and could not evict her, she said.

Conflicting trustee provisions. Utah law restricts who may act as a trustee in a nonjudicial foreclosure to two groups: Utah attorneys, and title insurance companies doing business in Utah. ReconTrust is neither.

However, Fannie Mae claimed that ReconTrust’s authority to act as a trustee came from the NBA, which preempts the state law. The relevant portion of the NBA, as quoted by the state Supreme Court, says that the OCC has the authority to grant national banks “the right to act as trustee … under the laws of the State in which the national bank is located” (12 U.S.C. Sec. 92a).

Bank location. As a result, the state Supreme Court said the question came down to where ReconTrust was located. Fannie Mae contended that ReconTrust was located in Texas and that, under Texas law, it had the authority to act as a trustee. The OCC regulation supported that position. The homeowner, on the other hand, claimed that the bank was located in Utah.

The court concluded that the NBA unambiguously stated that the bank was located in the state in which it performed the relevant duties and, in the case of a foreclosure, that was the state where the property was located, the notice of default was filed, and the foreclosure sale was held.

Unreasonable regulations. If the NBA’s provisions on the location issue were ambiguous, the OCC would have the authority to adopt an interpreting regulation, the state high court conceded. However, the interpreting regulation had to be reasonable, and the OCC regulation in question failed the test.

The regulation said that, when acting as a trustee, a national bank was located in the state where it engaged in three specific activities: accepting the fiduciary relationship, executing the documents creating the relationship, and making investment or distribution decisions. However, the NBA provided no basis to prefer these three activities over other fiduciary activities, the Utah Supreme Court said. Also, the three described activities could be carried out anywhere, regardless of where the property was located.

The regulation gave out-of-state national banks an advantage over Utah banks, which could not act as trustees, the state high court also noted.

The appeal was No. 13-852.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting decision in the 2014 term.

Attorneys: Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for Fannie Mae. J. Kent Holland for Loraine Sundquist.

Companies: Fannie Mae; ReconTrust

MainStory: TopStory GovernmentSponsoredEnterprises Mortgages Preemption UtahNews

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