Creditors, let's talk about bankruptcy.

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk! 

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed. 

     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you. 

     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem. 

     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of $250.00. Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively. 

     I invite you to please call me so that we can discuss your questions. 

Eddie

LAW Real Estate Matters

     Many of you have recently asked if I handle real estate work. The answer is YES! I do residential and commercial transactions – especially for Credit Unions. I handle first and second loans, as well as refinances, equity lines of credit, and foreclosures. I have three very experienced real estate paralegals (Donna Edmondson, Dwen Jenkins, and Sandra Milburn), who have been working in the real estate field for many years. 

     Unlike other attorneys and real estate settlement companies, I will always provide you with the real cost of your transaction in advance, not have “hidden costs” with different names buried in the settlement statement. 

     I invite you to please call me so that we can discuss your real estate needs. 

Eddie

LAW Business work

     Many of you have inquired about my availability to do business work and attend corporate, credit union, and homeowner’s association meetings. I do this, and, I am available. 

     When it comes to board work, I recognize that most board members are volunteers. Having experienced counsel available to provide advice, guidance and continuity as boards change is crucial for productive and efficient boards, as well as for avoiding potential board member liability in lawsuits. 

     When it comes to larger meetings (stockholders, credit union members, or homeowner’s associations), having experienced counsel available to explain rights and options, as well as analyze courses of action and provide advice can be invaluable. 

     If you think that you may have a need, please call me so that we can discuss. I can structure a reasonable rate to fit your needs. 

Eddie

Creditors, Let's Talk about Post Judgment Collections

     Post Judgment Collections. Frequently this is the time that you will collect most of your money. 

     While at Lafayette, Ayers & Whitlock PLC we represent creditors from beginning to end in the collection process, we recognize that some creditors either still file some of their own suits, or, have done so in the past. After taking that judgment, and if collection does not come easy, all too frequently judgments are “put on the shelf” and eventually forgotten. Do not let this happen to you! At Lafayette, Ayers & Whitlock PLC we can help you collect judgments that you have already taken. Your General District Court judgments are good for ten years, but can be docketed in a Circuit Court to extend the life of the judgment to twenty years. These judgments can even be renewed for an additional twenty years. We can work your old judgments. We have the most up-to-date programs, resources and methods. We do all of this on a percentage of collections fee basis – in other words, if we do not collect, you do not pay us a fee. Accordingly, our incentive is to collect! I take pride in the fact that at Lafayette, Ayers & Whitlock PLC our experience, staff, responsiveness and resources have made our post judgment collections superior to other collectors. 

     I invite you to please call me so that we can discuss your questions. 

Eddie

Foreclosure: Foreclosure Sale Accounting

     The Code of Virginia requires that the trustee’s accounting be filed with the appropriate commissioner of accounts “within six months after the date of a sale.” The Manual for Commissioners of Accounts states that “although the Commissioner does not have specific statutory authority to extend the six month filing date, some courts allow the Commissioner to extend the deadline for good cause shown in advance of the filing date.”

Real Estate: Using Lis Pendens to Secure and Interest in Real Estate

     In prior blogs we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this blog, we will review the benefits of using lis pendens in litigation cases to aid in the collection of your debt. 

     A lis pendens is a legal memorandum which places parties on notice that litigation is pending which affects the title or ownership of real estate. The lis pendens is filed in the circuit court of the county or city in which real estate lies. 

     Virginia Code §8.01-268 B states that “No memorandum of lis pendens shall be filed unless the action on which the lis pendens is based seeks to establish an interest by the filing party in the real property described in the memorandum…”.

     Virginia Code § 8.01-268 A provides that a lis pendens does not affect a subsequent bona fide purchaser of real estate for valuable consideration until actual notice of such lis pendens is properly filed with the required information. Requirements include: the title of the cause, the general object thereof, the court wherein it is pending, the amount of the claim asserted, a description of the property, the name of the person whose estate is intended to be affected thereby.

     We have experienced attorneys and staff who can examine title, file lis pendens, and litigate to enforce the same.

Bankruptcy: Lien Avoidance - Homestead Exemption in Chapter 7

     In the case of In Re Saeed, the United States Bankruptcy Court in Norfolk, Virginia ruled that the bankruptcy debtors were not entitled to avoid a judgment lien of a distributing company on their Chesapeake, Virginia residence, which the debtors asserted (on motion made two years after the closing of the case, even though the debtors had knowledge of the lien while the case was open) was titled solely in the debtor husband’s name and was actually worth less than the debt owned on the property. 

     In Saeed the debtors contended that the judgment lien impaired the debtor husband’s claimed exemption in the property. The creditor argued that the doctrine of laches should bar the debtors’ motion and that the judgment lien did not impair the homestead exemption. The court found as fact that the debtors were aware of the lien before they filed their bankruptcy petition. The debtors did not move to avoid the lien while the case was open, and the only excuse that the debtors’ offered for the delay in bringing their motion to avoid the lien was that they had been unable to refinance the property because of the lien. The court stated that because the debtors failed to offer any extenuating circumstances that would justify an almost two year delay in bringing their motion to avoid the lien, the delay was not excusable. The creditor alleged that the delay would cause it to face the additional expense and difficulty of attempting to appraise the value of the property as of the petition date two years prior. The court ruled that because the debtors’ delay was inexcusable and the creditor was prejudiced, the creditor met its burden of proving the doctrine of laches. 

     The court stated that a debtor seeking to amend its schedules after its case is closed bears the burden of establishing that the failure to amend the schedules before the case closed was the result of excusable neglect, and, that cause exists to amend the schedules. The court found that the debtors in Saeed failed to prove that the original schedules were entered by mistake, inadvertence, or excusable neglect. The court found as fact that the debtors offered no plausible explanation at all. In addition, the court found that the creditor suffered prejudice because it relied on debtors’ original schedules when determining how to proceed with respect to their judgment lien during the bankruptcy proceeding. The court found that the amended schedules would eliminate the debtors’ equity cushion in the property, and, therefore, eliminate the judgment lien. The court found that for the debtors to delay almost two years from the close of their case to amend their schedules, and to do so without mistake or excusable neglect, would cause the creditor to suffer undue prejudice.

     The court stated that although Bankruptcy Code Section 522(f) provides that a court may avoid a judgment lien to the extent that the lien impairs the equity the debtor has exempted in the property, the court need not even reach the issue of whether the judgment lien impaired the debtor’s claimed exemption and may be avoided. The court noted that under the original bankruptcy schedules the debtors claimed the property as tenancy by the entirety. The creditor’s judgment lien was against husband only and could not attach to entireties property. In their amended schedules the debtors claimed that the property was owned by husband, not tenants by the entireties. Thus, the judgment lien would attach to the property, the lien would impair the claimed exemption, and the lien could be avoided. The court stated that because the debtors offered no plausible explanation for the need to change their schedules and, because of the prejudice to the creditor in relying to its detriment on the original schedules as filed by the debtors, the court denied the debtors’ motion to avoid the lien.

Collections: The Fair Debt Collection Practices Act

     It is time again to review the Fair Debt Collections Practices Act (FDCPA), Title 15 U.S. §1692. This is a federal law designed to protect consumer debtors from "unscrupulous" collection activities. It defines the practices, the people who are protected, and the people who are restricted. 

     The most damaging part of the act is the definition of "collector" (as only collectors are covered), and attorneys are included in the definition. 

     The FDCPA requires collectors to send a demand letter thirty (30) days prior to commencing suit. The letters must contain information including: 

     1. The principal amount remaining on the debt; 

     2. The name of the creditor to whom the debt is owed; and 

     3. The specific language that follows: 

     Unless you, within thirty days after you have received this notice, dispute the validity of this debt, or any portion thereof, I will assume the debt to be valid. 

     If you notify me, in writing, within thirty days after you have received this notice, that the debt or any portion thereof, is disputed, I will obtain verification of the debt and mail you a copy of that verification to you. 

     Upon your written request within thirty days after you have received this notice, I will provide you with the name and address of the original creditor, if different from the current creditor.

     The FDCPA further restricts the jurisdictions in which suit can be brought to the city or county in which the debtor resides. In certain circumstances, the matter can be sued upon where the debt was incurred. To eliminate the ambiguity, one idea that I always suggest is that creditors stamp ("this document executed in [name of city or county], Virginia") adjacent to the original signatures of the executed documents, prior to their execution.

     The jurisdiction restriction of the FDCPA can be the most costly provision for the creditor, as attorneys, attempting to pass on the economies of consolidating cases, may be unable to do so. Additional trips to court result in additional costs which will, in one way or another (higher percentage fees), be passed on to the creditor. Hence, a wise creditor should invest in an appropriately worded stamp for each site executing such documents.

Foreclosure: Deed in Lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt. 

     Considerations - Before accepting the deed in lieu of foreclosure, the lender must consider many matters: 

     · Value of the property vs. the amount of the debt. 

     · Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens. 

Real Estate: Foreclosing on Homeowner Association Liens to Secure an Interest in Real Estate

     In prior blogs we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this blog, we will review the benefits of using homeowner association liens to aid in the collection of your debt. In a prior blog we reviewed the special procedures for the collection of homeowners association dues under Virginia Code §55-516. We will now review the procedures for suits to foreclose on the lien.

     Suits must be brought within thirty six months of filing, but after the perfection of the lien. The Homeowner’s Association may sell the lot at a public sale, subject to prior liens. There are detailed requirements in the code, a brief summary of which include the following:

   1. The association shall give notice to the lot owner prior to advertisement as required in the code.

     2. After expiration of the 60-day notice period, the association may appoint a trustee to conduct the sale.

     3. If the lot owner meets the conditions specified in this subdivision prior to the date of the foreclosure sale, the lot owner shall have the right to have enforcement of the perfected lien discontinued prior to the sale of the lot. Those conditions are that the lot owner: (i) satisfy the debt secured by lien that is the subject of the nonjudicial foreclosure sale and (ii) pays all expenses and costs incurred in perfecting and enforcing the lien, including but not limited to advertising costs and reasonable attorneys' fees. 

    4. In addition to the advertisement requirements, the association shall give written notice of the time, date and place of any proposed sale in execution of the lien, and include certain information required in the code.

   5. The advertisement of sale by the association shall be in a newspaper having a general circulation in the city or county wherein the property to be sold, with certain information requirements as set forth in the code.

   6. Failure to comply with the requirements for advertisement contained in this section shall, upon petition, render a sale of the property voidable by the court. 

     7. In the event of a sale, the code sets forth bidding and proceeds application procedures.

     8. After sale, the trustee shall deliver to the purchaser a trustee's deed conveying the lot with special warranty of title. 

     9. After completion, the trustee shall file an accounting of the sale with the commissioner of accounts. 

     We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Bankruptcy: Direct Payments are not a Voidable Preference

     The 6th Circuit Court of Appeals, in the case of In Re Arnold, upheld a finding that payments made by the contractor directly to the subcontractor/debtor's material men were not a voidable preference because the payments were not part of the bankruptcy estate. The Court held that the payments were not property of the estate because the general contractor had an independent contractual obligation to pay the material man if the debtor did not. In so ruling the Court rejected the Trustee's argument that the money used for the payment was effectively the debtor's money, in the sense that ordinarily it would have been paid by the general contractor to the debtor, and the debt to the material men was the debtor's debt. 

Collections: Fraudulent Conversion or Removal of Property Subject to Lien or Title

     If a creditor is a lien holder, that creditor should be aware of a lesser known remedy available if a debtor fraudulently sells, removes, or hides the property subject to the lien. Virginia Code §18.2-115 states that a debtor is guilty of larceny if he/she fraudulently sells, pledges, pawns, removes from the premises agreed upon, removes from Virginia, disposes of, or hides the property subject to a lien without the written consent of the owner or lienor or the person in whom the title is, or, if the writing is a deed of trust, without the written consent of the trustee or beneficiary in such deed of trust. Unlike civil fraud, this statute’s fraud contemplates an act by a debtor intended to deprive a secured creditor of his collateral by appropriating it to the debtor’s own use. 

     There must be proof that the debtor’s fraudulent intent was directed against the lienor or person in whom the title is. The statute also states that failure or refusal to disclose the location of the property or surrender the property shall be prima facie evidence of a violation of this statute. In Lewis v. First National Bank, the Fourth Circuit clarified that even the existence of written permission to remove the collateral is immaterial under this section, as the creditor need not show the lack of such permission to make out a prima facie case. 

     The final provision of the statute provides that the venue of prosecution against persons fraudulently removing any such property, including motor vehicles, from the Commonwealth shall be the county or city in which such property or motor vehicle was purchased or in which the accused last had a legal residence.

     Debtors may argue that the debtor did not actually receive the demand for return of the collateral; however, in Lewis, failure to leave a functional forwarding address or contact with the creditor constituted a waiver of the debtor’s right to deny that the demand was made. 

     Debtors have also argued that criminal charges such as these cause emotional distress or are extreme and outrageous. In Lewis¸ the Fourth Circuit stated that creditors should not be fearful of a debtor’s claim that these charges cause emotional distress. To hold such would render the statute useless, which was not intended by the legislature. The court held that the initiation of criminal proceedings against someone under this section with probably cause is not extreme or outrageous as a matter of law. 

Foreclosure: Notice of Sale

     The Code of Virginia provides specific guidance as to giving notice of a foreclosure sale. 

     §55-59.1 requires that the written notice of sale contain the time, date and place of the proposed sale, as well as either (i) the instrument number, or, deed book and page number, of the instrument of appointment filed pursuant to §55-59-59 (appointment of substitute trustee), or, (ii) a copy of the executed and notarized appointment of substitute trustee. Personal delivery or mailing a copy of the advertisement by certified or registered mail is sufficient. 

     §55-59.1 requires the trustee to send written notice of the time, date and place of the sale to (i) the present owner of the property … (ii) any subordinate lienholder … (iii) any assignee of such note … (iv) any condominium unit owner’s association that has filed a lien … (v) any property owner’s association that has filed a lien … (vi) any proprietary lessees’ association that has filed a lien. 

     It is important to know that in addition to the notice required by statute, the note or the deed of trust may contain additional notice requirements. Accordingly, the trustee should examine both of these documents.

Real Estate: Common Area Parking Spaces Must be Assigned Equally

     The Court of Appeals of Virginia recently issued an opinion affirming a Circuit Court decision holding that common area parking spaces must be assigned equally. The case involved a suit by a homeowner, Patrick Batt, against Manchester Oaks subdivision in Fairfax County. The subdivision contained 57 townhouses, 30 of which were constructed with a garage and driveway (garaged lots) and 27 of which were constructed with an additional bedroom and bathroom in lieu of a garage (ungaraged lots). The subdivision included a common area with 72 parking spaces. 

     The subdivision was subject to a declaration, administered by the homeowners association that gave the association the right to designate a maximum of two parking spaces for the exclusive use of each lot owner. However, the association was not required to ensure that parking spaces were available to any particular owner or to oversee use of the parking spaces. Batt had purchased a garaged lot in 1990, before the subdivision was complete. At that time, residents parked wherever they chose. In 1993 or 1994, the developer began assigning two parking spaces to each ungaraged lot. The remaining 18 parking spaces were designated as “visitor” parking, available to all lot owners on a first-come, first-served basis. 

     In 2009, the association issued one visitor parking permit to each lot owner and posted a parking policy on its website. Any vehicle not displaying a permit while parked in the visitor parking spaces would be towed. In December 2009, the association amended the declaration to provide that the association had the right to designate two parking spaces exclusively to each of the ungaraged lot owners on a non-uniform and preferential basis. In June 2010, Batt sued the association, claiming that the unequal treatment of owners over parking space assignments violated the declaration. The association argued that Batt’s suit was barred by the December 2009 amendment to the declaration. 

     The circuit court ruled in Batt’s favor, finding that the amendment was invalid for six reasons. The association appealed. The Court of Appeals ruled, in summary, that equality is inherent in the definition of “common area.” A “common area” is defined as, “[a]n area owned and used in common by residents of a condominium, subdivision, or planned-unit development.” Black’s Law Dictionary defines “in common” to mean “[s]hared equally with others, undivided into separately owned parts.” Accordingly, the court held that the association must assign common area parking spaces to all lot owners equally, if at all, unless the declaration expressly provided otherwise. In this case, the court did not find that unequal assignment was authorized. 

Bankruptcy: Liquidating Secured Property

     The order discharging a bankruptcy debtor will allow a creditor holding a pre-petition claim secured by a security interest in property belonging to the debtor to pursue his or her interest in the collateral without the need to file pleadings or to further consult the Bankruptcy Court, as long as the property is not property of the estate. More secured creditors are simply waiting until the bankruptcy case is closed before acting to liquidate property because motions for relief from the stay are expensive. In a no asset consumer case, the wait involved is usually not exceptionally long.

Collections: Sanctions on Improper Fair Debt Claim

       In the case of Guidry v. Clare, a United States District Court in Northern Virginia granted an award of $16,000.00 in sanctions against a debtor who was a plaintiff in a Fair Debt Practices Collection Act (FDCPA). The Court held that the debtor’s case, which also included state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment, was filed wholly without merit. 

     The Court found that the dispute arose when the debtor wrote the plaintiff, a company that provided cheerleading training, a check for $62.50 for the debtor’s daughter’s class. The check was returned for insufficient funds. The company’s office manager (Clare) contacted the debtor to make the check good. The debtor did not respond. Over the next several months the company made several other efforts to collect on the check, including a letter from the company’s attorney and from a collection agency. The company’s office manager also advised the debtor that the company would seek a warrant for the debtor’s arrest if the debt was not paid within seventy two hours. When the debtor did not respond, the company filed a criminal complaint for misdemeanor larceny by check. A few days later, a policeman served the warrant on the debtor at the same time he served a warrant from another creditor for felony larceny by check. The debtor was arrested and released on her own recognizance on both charges. She paid the face amount of the company’s check, plus a $30.00 bank service charge. As a result of this, the prosecutor withdrew the bad check charge. 

     A few months later the debtor filed her FDCPA action. After much litigation, the case was dismissed, without prejudice, because the case was not served within 120 days. The complaint was refiled. The company’s attorneys sought dismissal and sanctions for filing a frivolous lawsuit. The Court dismissed the case, scheduled a hearing on sanctions, and ordered the parties to prepare briefs. After reviewing the briefs the Court concluded that the debtor’s case was “meritless, indeed flatly frivolous”. The meritless claims included allegations that the company’s manager had failed to make a meaningful disclosure of her identity and debt collection purpose in her telephone calls to the debtor, that a debt collector was barred from filing a criminal complaint, that the company’s manager had made false representations to authorities in order to disgrace the debtor, and that the collection letters failed to disclose their debt collection purpose. The Court ruled that the letters contained the required disclosures and the purpose of the phone calls were clear. The Court further ruled that the law prohibits only the threat of criminal action if there is no intent to follow through on the threat. In this case the intent to follow through was evident from the fact that a warrant was issued, and there was no evidence that the representations to authorities were false or made with an intent to disgrace the debtor. The Court found that there was also no basis for the state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment. The Court wrote that “it cannot be forgotten or overlooked” that the case “was spawned by Guidry’s failure to pay a $62.50 debt, or rather by her attempt to pay it with a bad check”. 

     Creditors take heart - there is still some common sense in this world!

Foreclosure: Substitute Trustees

     Question: What happens if the trustee under your deed of trust is either unavailable, or, is no longer the person you desire to serve as trustee? 

     Answer: You can appoint a substitute trustee. Under Virginia Code Section 55-59(9), the noteholder, or, the holders of greater than fifty percent of the monetary obligation secured by the deed of trust, have the right and the power to appoint a substitute trustee or trustees for any reason, regardless of whether such right is expressly granted in the deed of trust. The timing of your action is important. The trustee must be empowered before taking action – this occurs when the instrument of appointment has been executed. You do not have to wait for recording. However, as Virginia Code Section 55-59(9) states that the appointment of a substitute trustee shall be recorded before, or at the time of, the recording of the deed conveying the property (such as after a foreclosure). 

     Question: Can a lender appoint their counsel as trustee? 

     Answer: Yes. Virginia Code Section 26-58 holds that a trustee is not disqualified merely because he is a stockholder, member, employee, officer or director or counsel to the lender. 

Real Estate: The Virginia Property Owners' Association Act - Memorandums of Lien

          In a previous blog, I began discussing the Virginia Property Owners’ Association Act. 

     The Act specifically provides for remedies outside of the more common remedy of filing suit for the amount owed and receiving a judgment. A memorandum of lien to a holder of a credit line deed of trust under the Act is given in the same fashion as if the association’s lien were a judgment. Under the Act, the association can file for and perfect a lien against the homeowner that is prior to all other subsequent liens and encumbrances except real estate tax liens, liens and encumbrances recorded prior to the recordation of the declaration, and sums unpaid on and owing under any mortgage or deed of trust recorded prior to perfection of this lien. 

     To perfect the memorandum of lien, the association must file with the clerk of the circuit court in the county or city in which the development is situated a memorandum verified by the oath of the principal officer of the association or another officer provided for in the declaration. The memorandum must be filed within 12 months from the first assessment became due and payable. Additionally, prior to filing a memorandum of lien, a written notice must be sent to the property owner by certified mail, at the owner’s last known address, informing the owner that the lien will be filed in the circuit court clerk’s office at least 10 days before the actual filing date of the lien. The memorandum must name the development, describe the lot, name the person(s) constituting the owners of the lot, list the amount of unpaid assessments currently due or past due relative to such lot together with the date when each fell due, list the date of issuance of the memorandum, name the association with a name and address of the contact for the person to contact to arrange for payment or release of the lien, and state that the association is obtaining a lien in accordance with the provisions of the Virginia Property Owners’ Association act as set forth in Chapter 26 (section 55-508 et seq.) of Title 55. 

     The Act provides that a judgment or decree in this action must include, without limitation, reimbursement for costs and reasonable attorney’s fees for the prevailing party. Also, if the association prevails, it may also recover interest at the legal rate for the sums secured by the lien from the time each sum became due and payable. If the owner then satisfies the debt, the lien must be released, and failure to release the lien results in a penalty. 

     Once a lien has been perfected, the association must enforce the lien within 36 months from the time when the memorandum of lien was recorded. This time period cannot be extended. 

     In a future blog, I will discuss foreclosure on a lien.

Bankruptcy: Exemption - Ownership of Realty by Tenants by the Entirety

     In In Re Scialdore, the United States Bankruptcy Court, Eastern District of Virginia, Judge Tice sustained a creditor's objection to a debtor's claimed exemption of real estate as "tenants by the entirety" under Bankruptcy Code §522 (b)(2)(B). The creditors objected on the ground that the debtor and his wife did not own the property as tenants by the entirety. 

     Under Virginia law, creditors of one spouse may not attach property held by the entirety; only joint creditors of both spouses may reach entireties property. If property owned by an individual debtor and nondebtor spouse is not held by the entirety then the debtor's interest is an asset of the bankruptcy estate. 

     In Virginia, estates by the entirety are abolished except where the deed or will manifests an intent of survivorship. When real property is conveyed to a husband and wife, the deed must specify that a tenancy by the entirety is intended, or this intent must otherwise appear in the deed. 

     In Scialdore, the objecting creditor claimed that the deed did not create a tenancy by the entirety because the grantors did not acknowledge the tenancy by the entirety language inserted by the debtor, nor was the deed re-executed by the grantors after the insertion. Consequently, the debtor's interest was not exempt under Virginia law and not entitled to exemption under Bankruptcy Code §522(b)(2)(B). The debtor argued that the deed, although altered, specifically conveyed a tenancy by the entirety and is thus exempt under Virginia Law. 

     In Allen v. Parkey, the Virginia Supreme Court held that an unsigned memorandum, attached to a deed that was complete and duly signed, had no effect. The facts in Parkey are substantially similar to Scialdore. 

     In Scialdore, the debtor altered the delivered deed, seeking to establish a tenancy by the entirety which was not specified originally. Accordingly, the language added by the debtor, "as tenants by the entirety with right of survivorship as at common law," had no effect on the type of estate conveyed to the grantees. The Court ruled, "Once the tenancy by the entirety language is removed, the deed does not manifest intent to create a survivorship estate. To the contrary, the deed unequivocally states that the conveyance was made to the debtor as his sole and separate estate free of any interest of his wife." 

     The creditor's objection to the exemption was therefore sustained.

Collections: Confessed Judgment, Power of Attorney and Required Signatures

     The Fairfax County Circuit Court, in the case of Cardinal Concrete Co. v. White, ruled that where the debtor signed a power of attorney appointing an agent selected by the creditor to confess judgment on a note in the event of default, and the attorney-in-fact did not sign the instrument, the confession of judgment would not be set aside because the debtor ratified the creditor's selection of the agent, and the attorney-in-fact was not required to sign. 

     The facts of White were that the debtor executed a promissory note in favor of the creditor. The note contained a power of attorney stating that the creditor appointed an agent to confess judgment on behalf of the debtor. Only the debtor signed the power of attorney. After the entry of a default judgment, the debtor moved to set aside the confessed judgment on the ground that the creditor selected the attorney-in-fact, and that the attorney-in-fact did not sign the power of attorney. 

     The motion to set aside was denied. The Court ruled that even if the creditor had no authority to designate the attorney-in-fact, the debtor ratified the appointment by executing the power of attorney. Also, the court found that Virginia Code §8.01-435 did not require the attorney-in-fact to execute the instrument. 

Collections: Payroll Deduction

     Payroll deduction is still an excellent way to ensure timely payments. Debtor payments become virtually painless, and the debt is reduced without the debtor having to write a separate check. 

     Traditional payroll deductions (from company to employee's credit union) are not the only way to achieve this result. Voluntary wage assignments can be prepared and submitted through almost any payroll office. 

Foreclosure: Trustees in Foreclosure

     Trustee under a deed of trust are agents for both the lender and the borrowers. Accordingly, a trustee must act fairly and impartially. The lender must not let either the lender or the borrower influence the manner in which a trustee carries out the terms of the deed of trust, especially if this would be detrimental to either party. If any question arises as to the existence of the default or the amount in default, a trustee should seek the aid and direction of the court. The powers and duties of a trustee are governed by the deed of trust and Virginia Code Section 55-59.1 et seq. The code provides when the deed of trust does not. A trustee has no right to exercise the power of sale or to obtain possession until such time as the borrower defaults under the note or deed of trust, and, then, only for the purpose of selling the property at foreclosure or preserving the property until sale. When a default occurs, there is no change in title – the property merely becomes eligible to be sold under the powers originally conferred to the trustee by the owner. Thus, the noteholder has the right to have the property sold and the proceeds of the sale applied to the debt.

Real Estate: The Virginia Property Owners' Association Act - General Provisions

     In a previous blog I began a review of the Virginia Property Owners’ Act. Under the Act, sellers are required to disclose in their sales contract that the property is located within a development subject to the Act. The Act also requires the seller to retrieve the Disclosure Packet in the Act and provide it to the purchaser. The Disclosure Packet includes the following information: association documents, the name of the association, state of incorporation, register agent’s name and address, any other entity/facility to which the owner may owe fees or charges, budget or summary, income/expenses statement or balance sheet for last fiscal year, statement of balance due of outstanding loans, nature/status of pending lawsuits, unpaid judgments (with material impact on association or members or relating to lot being purchased), insurance coverage provided for lot owners including fidelity bond maintained by association, and much more 

     The purchaser may cancel the contract within three days if delivered by hand or email, or six days if sent by mail, after receiving the Disclosure Packet or being notified that it is “not available” (meaning: a current annual report has not been filed by the Association with either the SCC or the CICB; or the seller has requested in writing that the packet be provided and it is not received within 14 days; or the association has provided written notice that the Disclosure Packet is not available). Additionally, if the Disclosure Packet is not delivered or the association does not indicate that it is not available, the purchaser may cancel the sale any time prior to closing. If the purchaser received the Disclosure Packet, the owner also has the right to request an update. However, the rights to receive and cancel the contract are waived conclusively if not exercised before settlement. 

     Failure to provide a Disclosure Packet after a written request for it has been made results in a waiver of any claim to delinquent assessments or violations of association documents up to that point, and the association will be liable to the seller for actual damages sustained up to $1,000 if the association is managed by a CIC Manager or up to $500 if it is self-managed. 

     In future blogs, I will discuss the provisions of the Virginia Property Owners’ Association Act that provide a memorandum of lien and foreclosure in the event of an owner’s default. 

Bankruptcy: Foreclosure Sale Voided due to Violation of Co-debtor Stay

     In the case of Harris v. Margaretten & Co., Judge Spencer of the United States District Court at Richmond, Virginia reviewed and affirmed a bankruptcy court decision to set aside a foreclosure sale due to a mortgage serving agent's violation of the co-debtor stay provisions of Bankruptcy Code §1301. 

     The District Court found that the debt at issue was a consumer debt upon which the debtor's wife, who had previously received a Chapter 7 discharge, owed an enforceable obligation, notwithstanding her Chapter 7 discharge. The District Court further found that the co-debtor stay was in effect. 

     Judge Spencer ruled that the Bankruptcy Code defines "consumer debt" as "debt incurred by an individual primarily for a personal, family or household purpose." Judge Spencer noted that while courts are split over whether a debt secured by real property qualifies as "consumer debt" under the code, the better reasoned view is that a loan secured by realty may indeed be a "consumer debt." By its plain language, Bankruptcy Code §101(8) requires courts to inquire whether the debt was "incurred...primarily for a personal, family or household purpose." Moreover, Congress elsewhere indicated that such a debt plainly could fall within the statutory definition. Thus, a blanket statement that an obligation secured by realty is never "consumer debt" could not stand. 

     Judge Spencer further stated that the statute requires an inquiry into the purpose of the debt. The Bankruptcy Code afforded this case such scrutiny, finding that the debtors used the loan proceeds to purchase their residence. This finding was indisputably correct, and because such a use constituted a "personal, family or household purpose," the obligation at issue was a consumer debt. 

     The creditor also argued that no co-debtor stay was in effect because the wife's personal obligation on the note had been extinguished by her own Chapter 7 discharge. Again, the District Court stated that the creditor ignored the clear language of the statute, for the stay protects any individual who is liable on such debt with the debtor, or that secured the debt. Personal liability on the debt is not required. Hence, the District Court agreed that a co-debtor stay was in effect at the time of the foreclosure sale, and that the sale was a violation of Bankruptcy Code §1301(a). 

     The creditor argued that even if the Bankruptcy Court had properly found a violation of Bankruptcy Code §1301, it erroneously refused to annul the stay under the facts of this case, and erroneously voided the foreclosure sale. This argument was unpersuasive to Judge Spencer. Even assuming that the Bankruptcy Court was empowered to act sua sponte, the record did not suggest that the Bankruptcy Court erred in refusing to annul the sale and in declaring the foreclosure sale void. Judge Spencer ruled that under the facts of this case, he was unable to find any abuse of discretion. The District Court affirmed that portion of the Bankruptcy Court's ruling that the creditor challenged on appeal.

     The lesson in Harris, as in so many cases, is to ensure competent and experienced legal advice.

Collections: A Salute to our Credit Unions

     "People-helping-people". This is the philosophy of our nation's credit unions. Our credit unions quickly tell us that they offer a better means of acquiring reasonably priced financial services for everyone. This philosophy has yielded a great growth in membership. 

     Having worked as counsel for numerous credit unions over the years, I can attest to the positive force that credit unions are. I can also attest to the benefits that credit unions bring their members. Most credit unions are able to provide a full service of savings, checking, ATM, loans (personal, car, mortgages) and much more. 

     Many businesses are unaware that although they may be too small to start their own credit union, they are not too small to associate with an existing credit union. Such an association would provide both the credit union and the business with great benefits. The credit union will receive new members and business. The businesses will receive the membership and services of the credit union. I am pleased to serve as a "facilitator" to such associations. Those who are interested should call me at 545-6251. Together we can all benefit from the credit union movement.

Foreclosure: Deeds of Trust

     It all starts with the deed of trust. The deed of trust is the primary method of acquiring a lien against real estate in Virginia. With a deed of trust, the owner of the real estate conveys legal title to a trustee, in trust, to secure the noteholder’s indebtedness. A deed of trust establishes a lien on the subject real estate upon execution by the grantor and recordation in the land records of the Circuit Court for the jurisdiction (County or City) in which the property is located. While recording the deed of trust is not essential to the validity of the deed of trust between the parties, an unrecorded deed of trust does not establish a lien on the subject real estate as to other creditors and purchasers of the grantor. An unrecorded deed of trust will not provide the beneficiary of the deed of trust with a priority position against other creditors with recorded liens, even if they are subsequent in time.

Real Estate: The Virginia Property Owners' Association Act - An Introduction

     The Virginia Property Owners’ Association Act provides homeowner’s associations with additional protections when homeowners fail to pay their dues; it also defines responsibilities of the association. Accordingly, homeowner’s associations should be knowledgeable of the Act and its provisions. The Act applies to developments subject to a declaration recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act. In another blog, I will briefly introduce this Act and some of the special duties it imposes on homeowner’s associations. Subsequent blogs will address memorandum of liens and foreclosures. 

Bankruptcy: Lien Avoidance: Household Goods

     Bankruptcy Code §522(f)(2)(A) provides debtors with the means to avoid a creditors lien on household goods. A good example is the case of McGreevy v. ITT Financial Services, decided by the United States District Court at Baltimore, Maryland. 

     In McGreevy the debtors lived in a town house and attempted to claim a shotgun and a rifle as household goods. The Court concluded that the firearms were not household goods because they were used primarily for recreation, not for the protection of the home. The Court ruled that there must be a functional nexus between the goods claimed and the household. The Court defined household goods as "those items of personal property that are typically found in or around the home, and used by the debtor or his dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself". Therefore, it may be reasonable to conclude that if firearms are maintained primarily for home protection, a connection would exist, and the goods would be covered under Bankruptcy Code §522(f)(2)(A).

     In the case of Fulton v. American General Finance, decided by the United States Bankruptcy Court at Harrisburg, Virginia, the Court was asked by the debtor to avoid the creditor/finance companies' liens with respect to a personal computer and a pistol and a rifle. The Court in Fulton had to first determine what was the definition of "household goods". The Court applied the definition rendered by the Fourth Circuit in McGreevy, which, as we discussed, requires a functional nexus between the goods and the household. In Fulton the Court found in regard to the personal computer, a nexus between 1) the keeping of the expenses of the family, 2) the writing of checks for the family, and 3) education for the debtor's child, and, life within the household. In regard to the pistol and the rifle, however, the Court did not find a nexus between the weapons and daily life within the household. The Court found that the weapons were not used to support and facilitate daily life within the household. The best that the debtor's testimony could have established was that the debtor had some desire to have these weapons on hand to protect his household and family from potential threats of bodily harm to person or injury to property. Accordingly, the Court in Fulton avoided the lien on the computer, but not the lien on the pistol and the rifle. I still think that it is reasonable to conclude that if firearms are maintained primarily for home protection, a connection would exist, and the goods would be covered under Bankruptcy Code §522(f)(2)(A).

Bankruptcy: Pre Default Waiver of Notice of Sale is Void

     In the case Woodward v. Resource Bank, from the Circuit Court, City of Virginia Beach, the Virginia Supreme Court reviewed provisions in a promissory note that provided for the debtors' waiver of notice of the default sale of the collateral securing the loan. In Woodward, a married couple operated a gas station and convenience store in Portsmouth and desired to expand. The couple obtained the financing necessary to purchase a store in Virginia Beach (the Pavilion Store) from a bank. In doing so the couple executed a note for $80,000.00 which was secured by a second deed of trust on their home, as well as with security interests in the inventory and equipment at the Pavilion Store. Later the couple decided to purchase a third store in Virginia Beach. They obtained financing from the same bank by executing a note in the amount of $90,900.00, and by signing a security agreement which granted the bank a security interest in the equipment and inventory of all three stores. The bank required the principal shareholders of the corporation to sign a guaranty for $45,000.00 of the $90,900.00 note. The guarantee agreement stated that the liability of the guarantors would not be affected by "any failure to ... give any required notices" by the bank. 

     The couple defaulted on the note and the bank demanded that the guarantors honor their respective guaranties. Thereafter, the bank sold the collateral securing the notes without formal notice. The collateral was sold at prices far below the stated value. The shareholders argued that they were entitled to notice of the sale, notwithstanding that they had signed pre-default waivers of notice, because they were "debtors" within the meaning of Virginia Code §8.9-105(1)(d) and §8.9-504(3). The Virginia Beach Circuit Court agreed with the bank that the waivers precluded the necessity of giving notice, but the Virginia Supreme Court ruled that since the shareholders were "debtors" within the meaning of the statutes, they were entitled to notice of the disposition of the collateral. Applying the plain language of Virginia Code §8.9-504(3), the Virginia Supreme Court held that the notice provision contained therein may not be waived before the occurrence of a default.

     The Virginia Supreme Court further ruled that a rebuttable presumption arose that the value of the collateral that the bank sold equaled the amount of the debt because the bank failed to give notice to the guarantors, and because the sale was thus "commercially-unreasonable". Virginia Code §8.9-504(3) requires that every aspect of the disposition of collateral, including "the method, manner, time, place and terms must be commercially reasonable". Because the bank failed to rebut this presumption by putting on evidence to the contrary, the Court ruled that the indebtedness was extinguished, and the creditor was precluded from further collection. 

     The lesson of Woodward is simple: always obtain a legal opinion regarding sales of reclaimed security, and always follow the requirements of the applicable statutes.

Collections: Garnishing Joint Accounts

     Can a creditor with a judgment against one party to a joint bank account garnish the account? Yes, but the judgment creditor is entitled only to that portion of the account which is attributable to the deposits of the judgment debtor. Virginia Code §6.1-125.3 holds that if the joint account holders are married, then the judgment creditor is entitled to half of the funds in the account, unless one of the married parties proves a different intent by clear and convincing evidence. Upon learning that the bank account is jointly held, the creditor must serve notice to the non-judgment account holder, as well as to the judgment debtor. Courts have ruled, however, that married account holders could attempt to protect bank accounts by asserting that the accounts were exempt from execution if they were held as tenants by the entireties. 

Foreclosure: Be Prepared to Conduct Foreclosures

     While foreclosure may not be a topic that debtors (or even creditors) want to discuss, like all other aspects of proper business planning, you should. 

     With more creditors engaging in loans secured by real estate (which I strongly advocate), be by first deeds of trust, second or subsequent deeds of trust, refinances or credit lines, a certain amount of default is to be expected. Being prepared to react to default is imperative. 

     At the law firm of Lafayette, Ayers & Whitlock, PLC, we represent creditors - from start to finish. We are a full-service creditor’s rights firm. While many attorneys do “collections”, few attorneys have the trained expertise and staff to represent creditors in all four areas of Creditor’s Rights—Collections, Bankruptcy, Real Estate and Foreclosure. WE DO FORECLOSURES. We will handle foreclosure proceedings from demand to final accounting. 

Real Estate: Homeowners' Association Wins Damages on Owner Violations

     There has been much litigation over HOA violations in the last few years. Circuit Courts have been scrutinizing HOA violation claims very carefully. Enforcement and damages for violations can be won. The December 2011 Loudon County Circuit Court case of Lee’s Crossing Homeowners’ Association v. Zinone is a good example of such enforcement. In Lee’s Crossing, the court found that in building her home, the homeowner committed multiple violations of the plan approved by the Architectural Review Board. Ultimately, the court assessed damages in favor of the homeowners’ association on the basis of “one overriding violation,” the failure to comply with the ARB-approved application.

Bankruptcy: Repossessed Collateral - Notice of Private Sale

     The case of In Re Phelps, decided by the United States Bankruptcy Court, serves as a good example of what creditors should do when conducting a private sale of repossessed collateral. 

     The Court examined Virginia Code §8.9-504 to determine if the creditor gave the debtors "reasonable notification" of the private sale of the collateral because the debtors objected to the creditor's claim for the deficiency amount following the sale.

     The Court found that in selling the collateral, Virginia Code §8.9-504(3) requires 1) that the sale must be conducted in a commercially reasonable manner and 2) that the debtor receive reasonable notice of the sale unless the debtor signed a waiver after default. The purpose of the notice provision is to give the debtor and any other interested parties sufficient time to take appropriate steps to protect their interests by taking part in the sale if they so desired. Failure to provide any notice of sale makes it commercially unreasonable. The reasonable notice required by Virginia Code §8.9-504(3) is not defined in the statute.

     The debtors asserted that 1) they did not receive actual notice of the sale, and 2) even if they had received the creditor's letter, it failed to reasonably notify them of the private sale because it did not list the time, place or terms of the sale.

     The Court found that the notice was properly sent because it was sent to the address provided by the debtors, and, because the certified mail receipt was signed.

     The Court found that Virginia Code §8.9-504(3) only requires that the creditor reasonably notify the debtors of the time after which the sale is to be made. In this case, the creditor's letter advised the debtors of the sale and that they had ten days to cure their default or they would be liable for any deficiency after the sale. Judge Tice further found that although the method, time, place and terms of the sale must be commercially reasonable, the creditor was not required to give the debtors specific notice of the method, manner, time, place or terms of the private sale.

     Although this case supports creditors' rights, and the need for only minimum compliance with the statutory requirements, I always recommend that notification be as thorough as possible to avoid later costly challenges in court.

Collections: Uniform Enforcement of Foreign Judgments Act

     Virginia and almost all other states have adopted the Uniform Enforcement of Foreign Judgments Act (UEFJA) (Virginia Code §8.01-465.1 et seq.). In so doing, creditors may enforce out-of-state judgments by properly filing the foreign judgment in a Virginia Circuit Court. Virginia Code §8.01-465.2 states: 

      The Clerk must treat the foreign judgment in the same manner as a judgment of the circuit court of any city or county of this Commonwealth. A judgment so filed has the same effect and is subject to the same procedures, defenses, and proceedings for reopening, vacating or staying as a judgment of a circuit court of any city or county of this Commonwealth and may be enforced or satisfied in like manner. 

     As creditors it is important to be aware that out-of-state judgments can be enforced in Virginia, and that Virginia judgments can be enforced in foreign states, provided that the state has adopted the UEFJA. 

     In Virginia, Code §8.01-465.5 allows bringing an action to enforce an out-of-state judgment in lieu of proceeding under the Uniform Act, if you so desire. Virginia Code §8.01-389(B) states: 

     

     Every court of this Commonwealth shall give such records of courts not of this Commonwealth the full faith and credit given to them in the courts of the jurisdiction from whence they come.

     Virginia Code §8.01-252 states that an action brought in Virginia to enforce a judgment rendered in another state shall not be barred by the laws of the other state. The Code bars action upon a judgment rendered more than ten years before the commencement of the suit.

     In the case of Atlantic Funding Corp. v. Peterson, the Fairfax County Circuit Court granted a debtor's motion to quash debtor interrogatories because the creditor had failed to file the federal judgment pursuant to the UEFJA, and thus, the Clerk of the Circuit Court could not treat the federal judgment as a judgment of the Virginia state court.

     Virginia Code §8.01-447 governs the docketing of judgments and decrees of federal district courts in Virginia state courts. That provision clearly requires the Clerk of the Circuit Court to treat it in the same manner all judgments rendered within the Commonwealth when docketing judgments. The statute speaks only to the process of docketing judgments, however. It does not necessarily provide a method of enforcing docketed judgments, and it does not authorize the clerk to treat docketed judgments from local federal courts as docketed judgments of this circuit court.

     In Peterson the Fairfax Circuit Court ruled that unlike Virginia Code §8.01-447, the UEFJA clearly requires identical treatment and enforcement of properly filed federal and state court judgments. Had the judgment creditor properly filed the judgment of the District Court, the Clerk of the Circuit Court would have been compelled to enforce that judgment as a judgment of the Circuit Court. The Fairfax Circuit Court ruled that the record in Peterson, however, revealed that the creditor failed to authenticate the District Court judgment, or to pay the fee prescribed in Virginia Code §14.1-112(22). The Court ruled that since the creditor did not properly file the District Court judgment in Peterson it was not entitled to the benefits of the UEFJA.

Foreclosure: Foreclosure Basics

     Foreclosure law is a creature of state statute. Accordingly, each state’s laws are different. Because the statute controls, courts will enforce strict adherence to the exact words and requirements. Failing to fully comply with statutory mandates will likely result in defective foreclosures and costly work. 

     In upcoming blogs we will explore foreclosures from beginning to end. From the preparation of the deed of trust, to final accounting after sale. 

Real Estate: Using Homeowner Association Liens to Secure an Interest in Real Estate

     In recent blogs we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of using homeowner association liens to aid in the collection of your debt. 

     Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in the next issue.

     We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Bankruptcy: Exemption: Worker's Compensation Award

     In the case of In Re Nelson, the United States Bankruptcy Court at Big Stone Gap, Virginia, ruled that where a debtor used his worker's compensation award, which is exempt from the bankruptcy estate under Virginia Code §65.2-531, to purchase a mobile home and lot, the mobile home and lot are also exempt from the Court's consideration in determining whether the debtor's proposed plan is feasible under Bankruptcy Code §1322(a)(4).

     It was the trustee's position in Nelson that since the workers' compensation benefits had been invested in the mobile home and lot that the funds were no longer exempt under Virginia Code §65.2-531. The Court in Nelson stated that Virginia Code §65.2-531 is explicit and unambiguous. The statute simply states that all compensation and claims shall be exempt from all claims of creditors. It does not say that once the funds are invested in other properties they become nonexempt. The Court stated that such a construction cannot be read into the statute, which could be in violation of the authorities. The Court also concluded that if the Virginia legislature had intended to make the funds nonexempt upon investment, then it would have so provided.

     The Court, in deciding Nelson, stated that it found only one case bearing on this subject matter, which was a New Hampshire case, In Re: Williams; the Court found no prior reported Virginia cases. In the New Hampshire case a debtor was allowed to keep a corvette purchased with a worker's compensation award. The Court in Nelson stated that it would be useless to exempt workers' compensation benefits received by an employee who was injured, and yet that employee could not invest those funds in other properties without losing his exemption status. It is clear that the Virginia legislature in passing Virginia Code §65.2-531 and providing for exemptions therein fully intended that the proceeds from these funds, and the purchase of property from the said funds, would be exempt.

     Therefore, the Court in Nelson held that the mobile home and lot purchased from the proceeds of workers' compensation benefits, pursuant to Virginia Code §65.2-531, were exempt properties and were not to be considered in determining whether the plan of the debtor conforms to Bankruptcy Code §1325(a)(4).

Collections: Attorney's Fees on Collection Accounts

     Creditors rightfully expect their debtors to pay the attorney's fees that result from collection procedures. Courts, however, normally refuse an award of attorney's fees unless the debtor has executed a document awarding such costs in the event the account is turned over to an attorney for collection. Many creditors utilize a standard form contract, or note, which has such a provision. Because many forms are multi-state, and because states' laws vary, most standard forms provide for "reasonable attorney's fees." Traditionally, most courts in Central Virginia have interpreted "reasonable" to be the equivalent of 25% of the principal amount of the judgment, regardless of the actual legal fees charged, whether hourly or contingency. However, these days may be coming to an end due to court rulings! 

     The Virginia Supreme Court, in the case of Coady v. Strategic Resources, Inc., ruled that an award of attorney’s fees rests within the sound discretion of the trial court. In the case of J. R. Mullins, et al. v. Richlands National Bank, the Virginia Supreme Court ruled that the trial court must determine the reasonableness of attorney's fees when disputed. In the case of Chawla v. BurgerBusters, Inc., the Virginia Supreme Court ruled that a party requesting an award of attorney’s fees must establish a prima facie case that the fees requested are reasonable. In the case Schlegel v. Bank of America, N.A., et al., the Court denied the request for attorney’s fees, citing the “test” to be used. It is as follows: In determining whether a party has shown the reasonableness of the fees, the fact finder may consider the time and effort expended by the attorney, the nature of the services rendered, the complexity of the services, the value of the services to the client, the results obtained, whether the fees incurred were consistent with those generally charged for similar services, and whether the services were necessary and appropriate. 

     With all of this said, you could win a contested trial on the merits, but be forced to present an “expert witness” (i.e., another attorney) to testify to the reasonableness of your attorney’s fees! To avoid this problem, and, to insure at least a fighting chance of obtaining at least the 25%, or even 33 1/3rd % (which most attorneys charge in percentage collection cases), creditors should make certain that their forms specify "____% attorney's fees", or amend the standard form to "____%" and have the debtor initial adjacent to the change. 

     It is important to note that the judicial award of attorney's fees is made upon the entry of judgment. If creditors take their own judgment, no attorney's fees will be awarded, even though the judgment may eventually be turned over to an attorney for collection. In this case creditors, not the debtor, will bear the full cost of collection. Accordingly, I recommend that creditors timely turn over all accounts to their attorney for prompt action. 

Collections: Releasing Debts

     Virginia Code §8.01-454 provides that judgments, once satisfied, must be released by the creditor within thirty (30) days from when the satisfaction was made. However, if satisfaction is not made within ninety (90) days, or within ten (10) days’ notice to do so by the judgment debtor or his agent or attorney, the judgment creditor shall be liable to a fine of $100 and shall pay the filing cost of the release. 

Foreclosure: Obtaining Possession after Foreclosure

     Upon purchasing property at a foreclosure sale, it is not uncommon to have a “holdover tenant”. If this occurs, you can obtain possession of the property by filing a Summons for Unlawful Detainer in the appropriate General District Court. The applicable statute requires that the plaintiff prove “a right to the possession of the premises at the time of the commencement of the suit.” The only evidence that is usually required is (a) a copy of the recorded trustee’s deed, since the facts recited therein are prima facie evidence of their truth, and (b) a copy of the notice to vacate sent to the occupant(s).

     On the date of the initial return, if the defendant fails to appear, possession will be granted. If the matter is contested, most courts set a new date for trial. In contested cases, issues are usually related to notice and service, so the trustee should be prepared to present evidence that the foreclosure sale was properly advertised, noticed and conducted.

     The judgment for possession is not final until 10 days after it is entered, and most courts will not issue a writ of possession during that 10-day pendency. If an appeal is noted within the 10-day period, the defendant must perfect the appeal by posting an appeal bond and paying within 30 days of the date of the judgment the applicable writ and service fees for the circuit court. Most judges are sympathetic to require significant appeal bonds equating with the former mortgage payments. 

     Eviction is accomplished using a “Request for Writ of Possession.” A writ of possession may be issued on an unlawful detainer for up to one year from the date of judgment. When requesting the writ of possession, provide contact information for both the Sheriff and the person who will supervise the eviction of the new owner; the Sheriff will coordinate a date and time to serve the writ of possession and maintain the peace while the owner physically evicts the personal property of the occupant(s) and secures the property.

Real Estate: Docketing Judgments to Secure an Interest in Real Estate

     In previous blogs we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of docketing judgments to aid in the collection of your debt. 

     Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection. 

     Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge. 

     If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462: 

     Jurisdiction to enforce the lien of a judgment shall be in equity. If it appears to the court that the rents and profits of all real estate subject to the lien will not satisfy the judgment in five years, the court may decree such real estate, any part thereof, to be sold, and the proceeds applied to the discharge of the judgment. 

     Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment. 

     We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.

Bankruptcy: Health Care Providers Beware

Although credit unions may inform debtors that their membership may continue if they repay their unsecured loan, Brown v. Pennsylvania State Employees Credit Union, a health care provider who sent a letter to a debtor stating that it would not provide further family medical care unless his pre-petition debt was paid, was sanctioned for a violation of the Bankruptcy Code automatic stay. The case was In Re Olsen. 

Collections: Debt Collections: You Need a Plan, From the Beginning

     Any business or lending institution that extends credit to its customers or members will inevitably be faced with bad debts. To insure maximum collection results, creditors should establish credit and collection policies before a problem occurs. 

     Before you extend credit, there are several things that you can do to reduce your risk. 

     1. Obtain full names, addresses, telephone numbers, places of work, social security numbers and dates of birth. 

   2. Obtain the name of the customer's bank, branch, and account number. 

     3. Review a credit report. 

     4. Ensure that all credit terms are clear. 

     5. Have personal guarantees for small businesses. 

     6. Perfect security interest in events of large credit. 

     When accepting personal checks, take the following precautions: 

     1. Insist on two pieces of identification, at least one of which has the customer's photo. A driver's license and a credit card are ideal. 

     2. Require checks to be made out in your presence. 

     3. Compare the signature on the check with that on the ID. 

     4. Limit checks to the exact amount of the sale. 

     5. Accept only checks drawn on local banks. 

   6. Verify the customer's address and phone number on the check. Also notethe customer's social security number and/or driver's license number.

    7. Be cautious when accepting checks with low numbers (indicating that the account was recently opened).

    8. Consider subscribing to a check verifying service. For a modest fee, such a service allows you to call a toll-free number and learn immediately if you can safely accept the check. If a check bounces after being verified using this procedure, the service will cover your loss.

     When the debt is in default, act promptly! The longer you wait, the harder collection will probably be. The firm of Lafayette, Ayers & Whitlock, PLC usually recommends immediate telephone calls, followed by a series of two or three letters. In the final letter, give a definite and short deadline with the promise of attorney action.

     The decision as to when a creditor should deliver its accounts to counsel for collection is not always an easy one. Some creditors deliver collections accounts to counsel after the initial demand has failed to produce results. Some creditors desire to have their credit/collection manager take their judgment and attempt collection by payment plan, garnishment, or even sometimes, sheriff's levy.

     The problem frequently encountered by creditors who pursue their own judgments, however, is that in most cases the ability to collect without the assistance of counsel ends prior to the receipt of payment in full. When this occurs, counsel must normally assume collection activities after the trail is cold. Further, since the creditor was not represented by counsel at the time of judgment, the judgment order does not include attorney's fees; nevertheless, attorney fees will now be charged to the creditor. In addition, if the creditor's credit/collection manager failed to properly docket the judgment, collection could be forever impaired.

     The firm recommends that creditors immediately deliver accounts to counsel upon the failure of the demand for payment. Creditors should ensure that provisions for attorney fees and interest are included in all loan, contract and/or account documents so that counsel can assess these costs upon delivery. The firm further recommends that all accounts be delivered while the "trail" is still warm--no more then sixty days from default.

     The firm has aggressive collection counsel and staff who represent numerous Credit Unions, Homeowner Associations, property management companies, loan companies, businesses, doctor's offices, and private citizens.

Foreclosure: Lost Notes

     Virginia Code §55-59.1(B) addresses the situation where the noteholder has lost the original note. With the frequency of sales of notes on the secondary market, the loss of the original note documents occurs more often than might be expected. The Code provides that if the note or other evidence of indebtedness secured by a deed of trust cannot be produced, and, the beneficiary submits to the trustee an affidavit to that effect, the trustee may proceed to foreclosure. However, the beneficiary must send written notice to the person required to pay the instrument stating that the instrument is unavailable and that a request for sale will be made of the trustee upon the expiration of fourteen days from the date of the mailing of the notice. The notice must be sent by certified mail, return receipt requested, to the last known address of the person required to pay the instrument, as reflected in the records of the beneficiary, and shall include the same and the mailing address of the trustee. The notice must also advise the borrower if the borrower believes that he may be subject to claim by a person other than the beneficiary to enforce the instrument, the debtor may petition the circuit court of the county or city whether the property lies for an order requiring the beneficiary to provide adequate protection against any such claim. Failure to give the notice does not affect the validity of the sale.

Real Estate: Homeowner Associations - Damages Caused by Common Area Tree

     Townes at Grand Oaks Townhouse Association, Inc. v. Baxter is a case from Richmond Circuit Court that illustrates the importance of carefully drafted HOA agreements. The HOA sought to recover expenses for removing a tree that fell from common area onto a homeowner’s condo. The Richmond Circuit Court held that the HOA agreement did not exempt the HOA from paying removal costs because a portion of the tree remained on the common area. The court noted that there was no Virginia authority for these facts, but stated that the Supreme Court of Virginia ruled that in cases of fallen trees between adjoining properties in the absence of negligence, there is no liability for property damages on the landowner from where the tree fell. However, the HOA agreement is a contract that created the obligation for the HOA. The agreement had a provision requiring the HOA to maintain and replace trees, and another provision exempting the HOA from liability to an owner for repairing or replacing any portion of the lot or the improvements provided the homeowner has insurance as required by the agreement. The HOA relied on the first provision, but the court determined that that reliance was misplaced as it did not cover this situation. The HOA relied on the second provision because the homeowner did not have the required insurance for “the structure of each lot”, but only insurance for the inside of the home. However, the court heard evidence from the homeowner that he understood the language to only require internal insurance. The court noted three primary reasons for holding for the homeowner:

     (1) “Removal of the tree from the lot is not a repair or replacement, but merely something necessary before the physical work of restoration of the damaged structure can begin.”
     (2) “The exemption from liability applies when the homeowner has "fire and extended coverage insurance" with applicable coverage. Considering the varying types of insurance that the market may provide, there is no evidence that the insurance required under the contract terminology must cover tree removal. Whether such a policy would is left to speculation.”
     (3) “The tree removal would necessarily involve removal of a portion of the tree from the common area as well as from Defendant's lot and home. I question whether, in any event, the total removal cost should be assigned to the defendant rather than some prorated amount.”
     It is important to ensure that HOA agreements include provisions that would govern a broad spectrum of potential issues and disputes. The law firm of Lafayette, Ayers & Whitlock, PLC has experience in drafting, reviewing, and amending HOA documents, as well as, representing HOAs in court.

Bankruptcy: Post-Discharge Injunction - New Note with Credit Union

     The United States Bankruptcy Court, Western District of Virginia, Harrisonburg, ruled in the case of Mickens v. Waynesboro Dupont Employees Credit Union, Inc. that a credit union that facilitated a discharged debtor’s cosigning of a new promissory note that covered the credit union debt that previously was discharged was liable for a violation of the bankruptcy law’s post-discharge injunction statute, and the debtor had no liability for the note and was entitled to damages and attorney’s fees.

     The Court decided that the issue was whether the fact that the credit union obtained a new note signed by the debtor for his discharged obligation constituted an “act to collect, recover or offset” the discharged debt in violation of the post-discharge injunction under Bankruptcy Code §524 (a)(2).
     The Court in Mickens decided that the credit union’s act, permitting the debtor to cosign the new note, expressly placed the debtor in the same state of personal liability for the exact debt which was discharged. The notice to the cosigner stated this fact. Bankruptcy Code § 524 (c) lays out detailed requirements which must be met for a debtor to reaffirm a pre-petition debt and thereby remain obligated to pay such a debt in spite of the discharge injunction. The Court ruled that the credit union’s actions would be subject to Bankruptcy Code §524 (c). Therefore, they must fall within the definition of “an act” for the purposes of the discharge injunction, however narrowly that phrase may be defined.
     The Court ruled that while no cases with identical facts were readily apparent at the time it ruled, it concluded that the cases which most closely resembled the fact pattern for this case were those which involved “ clumsy attempts to avoid the injunction.” In these cases the creditors’ attempt to circumvent the requirements in the Bankruptcy Code §524 (c) and (d) through a reliance on the voluntary repayment provision in Bankruptcy Code §524 (f).
     The Court in Mickens ruled that the credit union could not make any serious argument that its actions or new note even attempted to comply with the requirements of Bankruptcy Code §524 (c) and (d). There could be no doubt the credit union was aware of the injunction and intentionally permitted and facilitated the debtor’s signing a new note which returned him to his pre-petition position of personal liability for the pre-petition debt. Such action constituted a willful violation of the post-discharge injunction of Bankruptcy Code §524 (a)(2).
     The Court ruled that the credit union was in violation of Bankruptcy Code §524 (a)(2) and the liability of debtor on the note he cosigned with a friend was void ab initio. The credit union also was liable for damages and attorney’s fees.

Bankruptcy: No Discharge After Bankruptcy Fraud

     In the case of Groggins v. Robbins, U.S. Trustee, a Roanoke United States District Court upheld a bankruptcy court decision denying a discharge to a Chapter 7 debtor convicted of bankruptcy fraud. The Court in Groggins agreed with the U.S. Trustee’s argument that the debtor’s bankruptcy fraud conviction collaterally estopped him from contending that he had not made a false oath in connection with his Virginia bankruptcy case, and, thus a discharge was unwarranted. The debtor in Groggins was charged, and pled guilty, to fraud for making a false oath, in that he failed to disclose that he had a prior bankruptcy filing.

Collections: Garnishments Out-of-State

     While I have had good results in issuing garnishments out of state, especially when the garnishee is a bank that operates nationwide, success is not always guaranteed. Diversity in jurisdiction does create some issues. A good example of this arose in a case in the United States District Court where the Court granted a debtor’s motion to quash a garnishment summons after finding that the debtor’s wages were not located in Virginia. The garnishment summons had been issued by a Virginia creditor that was a Virginia hospital. The debtor was a Pennsylvania resident doctor. The garnishee was an Ohio company. The court ruled that the garnishment summons issued by the court was ineffective to garnish the wages not located in Virginia.

Foreclosure: Foreclosure Sale Deficiency Actions

     Frequently there will be a deficiency balance after the sale is completed and the accounting is done. The account of sale will set forth the distribution of the sale proceeds and also establish any amounts remaining due on the indebtedness following application of the net proceeds from the foreclosure sale. This deficiency amount is usually recovered by a personal judgment against the maker of the promissory note or other obligors on the indebtedness that was secured by the deed of trust. An action to recover the deficiency balance remaining after a foreclosure sale need not be brought on the chancery side of the court, and may properly be brought as an action at law. A plaintiff’s action to recover on an assumed promissory note may be maintained as an action at law even though the plaintiff is not named in the deed of trust.