On August 29, 2013, in Jaldin v. Bank of America, N.A. and ReconTrust Company, N.A., the Fourth Circuit found that Virginia Code §55.58.1(2), which allows only Virginia-based banks or national banks that have their principal place of business in Virginia to act as trustees on Deeds of Trust recorded in Virginia, is pre-empted under the National Banking Act, 12 U.S.C. §92a.

In Jaldin, ReconTrust Company, N.A. (“ReconTrust”)—a national bank that did not have its principal place of business in Virginia—was appointed as a substitute trustee under the Deed of Trust that the borrowers executed on their property. At issue was Virginia Code §55.58.1(2), which allows Virginia-based banks to be named as trustees on Virginia deeds of trust, but prevents non-Virginia-based national banks from exercising those same powers. In contrast, the National Banking Act prevents states from favoring their own banks over national banks.

The borrowers argued that ReconTrust, as a non-Virginia bank, was prohibited from instituting foreclosure proceedings on their Virginia property because it was improperly named substitute trustee, as a result of this statute. The trial court dismissed this challenge, holding that §55.58.1(2) was pre-empted by the National Banking Act. On appeal, the Fourth Circuit affirmed.

The Fourth Circuit explained that being named as a substitute trustee allows a national bank to foreclose on borrowers in default, which coincides with the ability of a national bank to exercise its mortgage lending powers. The court therefore concluded that “...Virginia law ‘substantially interferes’ with ReconTrust’s ability to execute a power incidental to its express mortgage lending powers under the NBA.” The Fourth Circuit further explained that although states may prohibit banks from taking certain actions, a state cannot discriminate between state-based banks and national banks. As a result, the Fourth Circuit found that Virginia Code §55.58.1(2) is pre-empted.

This holding is significant because it clarifies that national banks appointed as substitute trustees in Virginia may institute foreclosure proceedings, notwithstanding the fact that they may not be registered as a Virginia bank. Further, the decision may have an impact in other deed of trust states that may have similar prohibitions against national banks. The issue is one of first impression in the Fourth Circuit. It is not yet known whether the borrower will seek to have the case heard by the entire Fourth Circuit or will appeal to the United States Supreme Court.

Joseph J. Patry