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2016 Legislative Session Updates

Added by Hawley Troxell in Banking Law, News on June 28, 2016

During the 2016 legislative session, the legislature passed House Bill No. 503, which revised the definition of “trustee” in current Idaho Code § 45-1502(4). Currently, Section 45-1502 reads as follows:

(4) “Trustee” means a person to whom the legal title to real property is conveyed by trust deed, or his successor in interest.

As of July 1, 2016, Section 45-1502 will read as follows:

(4) “Trustee” means a person to whom title to real property is conveyed by trust deed, or his successor in interest for the limited purpose of the power of sale contained in this chapter upon the occurrence of certain contingencies set forth in such trust deed, and the obligation to reconvey the deed of trust pursuant to section 45-1514, Idaho Code. All other incidents of ownership of such real property shall remain with the grantor. For the purpose of section 45-1506(2)(c), Idaho Code, a trustee is not a party requiring notice of sale.

The Statement of Purpose provides that the legislation “aims to (1) close the gap and resolve any conflicts between the trust deed statutes and the mechanics’ lien statutes by clarifying that a trustee under a deed of trust is not the “owner or reputed owner” of the property subject to the deed of trust, and (2) resolve the title industry’s remaining concerns about the scope of title held by the trustee by codifying the limited conveyance of title to the trustee”.

The reason for the change to Section 45-1502 is a continued interest by the title insurance industry in responding to the Idaho Supreme Court decision in Parkwest Homes, LLC v. Julie G. Barnson, et al, 154 Idaho 678, 302 P.3d 18 (2013), and to the implications raised by the decision in that case. In Parkwest Homes, a homebuilder brought an action to foreclose a mechanic’s lien with respect to property that was encumbered by deed of trust. The homebuilder named the borrower and the beneficiary as party-defendants, but did not name the trustee title company.

Idaho Code § 45-510 allows a court to enforce a mechanic’s lien only when the action is commenced within six months after recording of the lien, after which the lien is lost as to any party not named in a foreclosure action. The court in Parkwest Homes reasoned that, because a trustee to a deed of trust holds “legal title” to the property, the trustee must be named in a foreclosure action within the time period required by Idaho Code § 45-510 or the a subsequent holder of legal title to the property will take the property free and clear of the mechanic’s lien. Because the homebuilder only named the borrower and the beneficiary in the foreclosure action, and not the trustee title company, the subsequent purchaser took the property free and clear of the mechanic’s lien.

The legislature has since amended Idaho Code § 45-510 to provide that a trustee of a deed of trust does not need to be included in an action to foreclose on a mechanic’s lien. However, there was additional concern that the language in Idaho Code § 45-1506, providing for the foreclosure of a deed of trust was similar to the language that the court in Parkwest Homes found to require a trustee to be named in a foreclosure action. If so, title companies that serve as trustees would be required to constantly defend themselves against deed of trust foreclosure actions.

The newly amended Section 45-1502 will ensure that the Parkwest Homes decision will not impact the trustee in a proceeding for the foreclosure of deeds of trust by reaffirming that the trustee merely holds title in the property in order to convey the property, and that all other incidents of ownership remain with the grantor. A party seeking to foreclose on a deed of trust therefore need not name the trustee as a party-defendant, and title companies may continue to serve as trustees without defending against a barrage of foreclosure actions.