North Carolina Bans Conflict of Interest on Deed of Trust

On August 30, 2017, an amendment to North Carolina’s foreclosure statutes took immediate effect.  The amended statute, Section 45-10, concerns substitute trustees under a deed of trust.  As amended, Section 45-10 now prohibits an attorney who serves as trustee or substitute trustee from representing the noteholder or the borrower while “initiating” a foreclosure proceeding.  Before the amendment, a lender often could rely on its counsel simultaneously to conduct the foreclosure and represent its interests.  With the new amendment, the takeaway for lenders is that non-judicial foreclosure under the power-of-sale provision in a deed of trust now requires two parties—a substitute trustee and lender’s counsel—and this may increase the time and expense of foreclosure.

Non-Judicial Foreclosure and Substitute Trustees

There are three parties to a deed of trust:  (1) grantor (borrower), (2) trustee, and (3) beneficiary (lender).  Typically, the first step in foreclosure is to replace, or substitute, the trustee under the deed of trust.  The substitute trustee initiates the foreclosure through a special proceeding before the clerk of court.

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The legislature of North Carolina finally caught up with a piece of the puzzle that has driven homeowners and their attorneys to near madness. Virtually all documetns filed as “Substitution of Trustee” consist of one simple premise — substituting an impartial Trustee on the Deed of Trust with a party with an obvious bias. This results in unquestioning obedience to the “new” self-proclaimed beneficiary.

Any such trustee on a Deed of Trust has a duty of fair dealing and a duty to ascertain whether the facts given to him/her/it are true. Otherwise they are probably negligent and perhaps grossly negligent after years of being appointed by parties whom they know, when challenged, have often lost cases based upon the fact that they were not a new beneficiary.

I have long encouraged people to record an objection to the substitution of trustee on the basis of false premises and lack of foundation. Objections are probably a good idea as to the notice of default and notice of sale. This sets the record for the application for a TRO. But it also creates a problem about which I have previously written.

Assuming the “substitute trustee” was “appointed” by a party that did not meet the statutory definition of a beneficiary, then the appointment is void. If the appointment is void, the original trustee on the deed of trust probably has a duty to set the record straight. But in any event, the void substitution of trustee results in a situation where there is no change for the original trustee, who simply remains as Trustee on the Deed of Trust despite the “wild deed” masquerading as a substitution of trustee.

If the original trustee receives notice of improper activity from the filing of the false substitution of trustee, then the original trustee probably needs to file an action called interpleader — in which the “new beneficairy” and the homeowner square off and must plead their cases — something the banks definitely don’t want to do. By pleading their case they must prove it. By failing to file the interpleader the original trustee may be admitting that it too is a controlled entity of the fake new beneficiary.


3 Responses

  1. Reblogged this on California freelance paralegal and commented:
    That is good news for homeowners in North Carolina. Other non-judicial foreclosure states such as California need to pass similar legislation.

  2. How do you serve a trustee who’s gone bankrupt? CWRC is no longer in business in California.

  3. I will be serving “Subpoenas” to all “Original Trustees” who were “substituted” by other trustees, for properties I own(ed) that have been threatened with non-judicial-foreclosure, to ascertain whether or not they were aware of their being substituted, and, to determine their level of responsibility whenever a “substitution” takes place without their knowledge or approval.

    Of course, I anticipate the rhetorical-response of the original trustee to be along the lines of the fact that nowhere in the deed of trust does it state that the original trustee must approve of, or, even be aware of the substitution, because the “Beneficiary” of the Note is the person making the substitution, and, not the original trustee.

    However … I have always felt that the original trustee SHOULD have some responsibility for its own proper substitution, but, they would deny such liability, I’m sure.

    I’ve always believed (and complained to the substituted trustees), that an “Interpleader Action” should be filed on behalf of the Trustor, as well as the beneficiary, since the trustee was “Originally” appointed by the Trustor, for the benefit of the “Beneficiary” in case of a default. In other words, the original trustee was to be a neutral-third-party acting for the benefit of [both] parties, and, whenever a dispute arises over the default or over who is the beneficial owner of the Note and DOT … an interpleader action is warranted, every time!!!

    In other words … the trustee has lost jurisdiction to foreclose non-judicially, because the trustee lacks the authority of a state judge, who can render a ruling over the disputed default and/or who the current beneficiary is. The “Substituted Trustee” simply denies that [he’s] lost jurisdiction over the foreclosure, and, continues to foreclose with impunity?!?

    Lets find out what being questioned under oath may reveal about this, as possibly being their responsibility, and, liability, too?!?

    What say you???

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