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TRUSTEES ARE NOT REQUIRED TO GIVE IRS NOTICE OF TRUSTEE’S SALE: BUT WATCH OUT IF THEY DON’T

By:  Phillip M. Adleson, Esq.
Adleson, Hess & Kelly

In the case of Diediker v. Peelle (1997) 60 Cal.App.4th 288, 70 Cal.Rptr.2d 442 (mod'f'd. Jan. 16, 1998), the issue presented to the court of appeal was whether a trustee under a deed of trust is liable to a subsequent purchaser of the property where the trustee failed to give the IRS notice of trustee’s sale.

In 1984, Peelle Financial Corporation (“Peelle”) was the trustee under a Deed of Trust held by Beneficial Mortgage Co. (“Beneficial”).  In 1991 the IRS recorded a $146,223.09 tax lien against the Spendloves, who were then the owners of the secured property.  In June of 1992, the trustee conducted a nonjudicial foreclosure sale and conveyed the property by trustee’s deed to Diversified Properties (“Diversified”). The trustee's deed stated the grant was "without covenant or warranty of any kind, express or implied, regarding title to said property or any encumbrances thereon [and that] [a]fter complying with all the requirements of law regarding the mailing of copies of the Notice of Default or the publication or delivery of same, the mailing, posting and publication of copies of the Notice of Trustee's Sale, and the recording of the Notice of Default and the Notice of Sale, the trustee sold the . . . property at a public auction . . . to the highest bidder."

The TSG did not mention the IRS lien and the trustee, having no actual knowledge of the IRS lien, did not provide notice of the trustee’s sale to the IRS.

In March of 1993, Diversified sold the property to Elmer J. Diediker, Jr. for $225,000.  Southland Title Co., as agent for Transamerica Title Co., issued a policy of title insurance to Diediker.  Southland knew of the IRS lien but did not show it on its preliminary report or as an exception to its title policy.  In August 1994 the IRS attempted to seize the property and Transamerica, in response to a claim by Diediker, paid the IRS $200,000.00 to remove its lien. 

Transamerica and Diediker then sued Peelle for negligent misrepresentation and negligence based on the representations in the trustee’s deed that Peelle had complied "... with all the requirements of law regarding the mailing of copies of the Notice of Default or the publication or delivery of the same, the making, posting and publication of copies of Notice of Trustee's Sale". The complaint also alleged that Peelle breached a duty owed to appellants to locate any existing IRS liens and notify the IRS of the nonjudicial foreclosure prior to the sale of the property.

Transamerica and Diediker moved for summary judgment and the court treated the motion as being made by both sides.  The trial court granted summary judgment in favor of Peelle. Transamerica and Diediker appealed. 

The Court of Appeal affirmed the trial court' s decision.  The appellate court agreed with the trial court, noting that Civil Code § 2924b(c)(2) specifically sets forth a list of persons to whom the trustee under a deed of trust must give notice of default and foreclosure sale (e.g., original trustors, successors in interest, beneficiaries under junior deeds of trust etc.)  The IRS is not enumerated as being entitled to notice in Civil Code § 2924b!

Civil Code § 2924 states: "... A recital in the deed executed pursuant to the power of sale of compliance with all requirements of law regarding the mailing of copies of notices or the publication of a copy of the notice of default or the personal delivery of the copy of the notice of default or the posting of copies of the notice of sale or the publication of a copy thereof shall constitute prima facie evidence of compliance with these requirements and conclusive evidence thereof in favor of bona fide purchasers and encumbrancers for value and without notice."  The court noted that these presumption are limited to notice required by state law and do no extend further.

The IRS is not entitled to notice from the trustee under state law. Title 26 United States Code § 7425 (hereafter § 7425) provides that when a property on which there is an IRS lien is transferred pursuant to a nonjudicial sale, the sale is "made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1).  ..." Under § 7425(c)(1), notice of sale is to be given to the Secretary in accordance with regulations prescribed by the Secretary, "in writing, by registered or certified mail or by personal service, not less than 25 days prior to the sale."

The Court of Appeal held that all § 7425 was intended to do was to give the IRS notice (and a chance to protect its interest) or leave its lien on the property. Nothing in § 7425 requires the trustee to give notice to the IRS.  This conclusion is supported by the legislative history behind § 7425.  The Court of Appeal concluded that: "[s]ince notice is not required, [the trustee] did not violate a duty owed under law by failing to give it.”

Transamerica and Diediker also argued that “the courts should impose a duty on the trustee owed to all future purchasers of property and their title insurers to locate all IRS liens of record and give notice to the IRS prior to conducting a foreclosure sale.” The Court of Appeal rejected this approach, observing “that the Supreme Court has said that the Legislature intended to cover the entire subject area of nonjudicial foreclosures by statute and leave nothing for the courts” (Citing I.E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281, 216 Cal.Rptr. 438).

The California Supreme Court decision in I.E. Associates further held that:  "The rights and powers of trustees in nonjudicial foreclosure proceedings have long been regarded as strictly limited and defined by the contract of the parties and the statutes.  [Citations.]  No case holding that trustee of a deed of trust has any additional common law duties with respect to notice has been cited or found. . . ..¶ [P]ersuasive policy reasons which militate against a judicial expansion of those duties ... The nonjudicial foreclosure statutes--an alternative to judicial foreclosure--reflect a carefully crafted balancing of the interests of beneficiaries, trustors, and trustees. Beneficiaries, of course, want quick and inexpensive recovery of amounts due under promissory notes in default.  Trustors, on the other hand, need protection against the forfeiture of valuable property rights.  Trustees, the middlemen, need to have clearly defined responsibilities to enable them to discharge their duties efficiently and to avoid embroiling the parties in time- consuming and costly litigation.  In taking all of these concerns into account, the statutes strike an overall balance favoring the protection of trustors. [Citations.]"  (Id. at p. 288, 216 Cal.Rptr. 438.)

The Court of Appeal observed subsequent cases support the Supreme Court’s opinion in  I.E. Associates.  However, even if the Court of Appeal ignored the Supreme Court's position in the I.E. Associates case, the Court of Appeal held it could not impose liability in this case as the plaintiffs' damage is not reasonably foreseeable.  That is, while it may be foreseeable that a trustee's failure to locate an IRS lien and give notice to the IRS will harm the initial purchaser at the foreclosure sale--usually the beneficiary of the trust--it is not at all foreseeable that subsequent purchasers will be impacted.  The Court of Appeal bases this conclusion on the fact that each purchaser of property acquires his own title insurance. The issuer in each such case can discover the IRS lien, disclose it and except it from its policy. If the IRS lien is disclosed or excepted from the policy the purchaser can negotiate a new price that takes the lien into account or he can cancel the transaction.  If the title company fails to locate the lien, or for other reasons choose not to except it from coverage, the purchaser will be protected by the policy.

The Court of Appeal also rejected as nonsense Transamerica’s argument that a decision in favor of the trustee will impose new burdens on title insurers to conduct independent investigations. The Court of Appeal observed that title insurers regularly identify liens that appear to affect title prior to issuing its preliminary title report and title policy.  The Court of Appeal suggested that “[I]t is the responsibility of the seller to come forward with facts to prove that the lien has been extinguished or risk losing the sale.”   The Court of Appeal noted that: "Trustees and the parties who conduct title searches on behalf of the trustees are already highly motivated by their own self interest to locate and extinguish all IRS liens.”

Finally, since there is no state or federal law requiring the trustee to notify the IRS of the trustee’s sale, the representations in the trustee’s deed regarding compliance with the notice mailing, posting and publication requirements can hardly constitute a misrepresentation.

While the Court of Appeal’s analysis is probably correct, some care should be taken in applying the Court of Appeal’s opinion.  The result may be different: (1) where the foreclosing beneficiary is the plaintiff who is damaged by the trustee’s failure to give the IRS notice; or, (2) where the trustee had actual knowledge of the IRS lien and failed to give the IRS notice of the trustee’s sale.