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 55.1-320 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 – Foreclosing on Memorandums of Lien

In previous issues of Creditor News, I discussed the provisions related to filing a memorandum of lien under the Virginia Property Owners’ Association Act. 

The Act provides: “At any time after perfecting the lien pursuant to this section, the property owners' association may sell the lot at public sale, subject to prior liens.” In order to conduct a nonjudicial foreclosure, the association must comply with the statutory requirements. 

The association must give notice to the lot owner prior to advertising the sale. The notice must include notice of: “(i) the debt secured by the perfected lien; (ii) the action required to satisfy the debt secured by the perfected lien; (iii) the date, not less than 60 days from the date the notice is given to the lot owner, by which the debt secured by the lien must be satisfied; and (iv) that failure to satisfy the debt secured by the lien on or before the date specified in the notice may result in the sale of the lot.” The notice must also inform the lot owner of the right to bring a court action in the circuit court of the county or city where the lot is located to assert the nonexistence of a debt or any other defense of the lot owner to the sale.

If the lot owner (i) satisfies 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, then the sale is discontinued. However, if after 60 days and the lot owner has not made those payments, the association may appoint a trustee for the sale and advertise the sale. In addition to advertising the sale, the association must give written notice of the time, date and place of any proposed sale in execution of the lien, and including the name, address and telephone number of the trustee. That notice must be at least given to the owner, lienholders and their assigns by certified or registered mail 14 days prior to the sale. 

The association must advertise the sale in a newspaper in the city or county where the property will be sold. The advertisement must be in a section with legal notices or where the property being sold is generally advertised for sale. The advertisement must describe the property by address and general location and have information for the representative or an attorney who can respond to inquiries about the property with their name, address, and telephone number. The advertisement must be in the newspaper for four successive weeks, but if the lot is located in a city or county immediately contiguous to a city, publication of the advertisement for five different days is sufficient. The sale then must be held on any day after the last advertisement but not earlier than 8 days after the first advertisement and not more than 30 days after the last advertisement. 

Failure to comply with these and other requirements in the statute will render the sale of the property voidable by the court. We represent homeowner’s associations and can handle memorandums of lien and foreclosure procedures.

Bankruptcy: Dischargeability Determination: Willful & Malicious Injury v. Embezzlement

In the case of Robbins v. The Chase Manhattan Bank, N.A. the United States District Court at Harrisonburg affirmed a bankruptcy court's ruling that a debt was non-dischargeable under Bankruptcy Code §523(a)(6) as willful and malicious injury. The District Court found that the debtor held a 98 percent interest in a limited partnership which owned a shopping center. The partnership had granted to a bank a second deed of trust on the shopping center and assigned to the bank the rents from the shopping center as security for portions of two loans made by the bank. The debtor, however, under a workout agreement, later began receiving rent distributions from the partnership in his capacity as a limited partner, and he used nearly $71,000 of the distributions for personal expenses. 

The District Court noted from the Bankruptcy Court's finding that the debtor made the determination on his own to take the money without consideration of the workout agreement or of the bank's rights to the rents. The District Court found that the Bankruptcy Court correctly applied the malice standard as established in that circuit.

Although the Bankruptcy Court did not explicitly state that it found malice, malice could be inferred from debtor's actions in receiving the distributions, placing the rents in his own account and making personal expenditures. The debtor took such actions all in disregard of and without benefit to the bank's security interest in the rents and at a time when he was suffering financially.

The District Court ruled that the bank needed only to show that the debtor's conversion was in deliberate and intentional disregard of its rights. Even if the debtor's subjective intent was relevant, the defendant's assertion that the Bankruptcy Court failed to consider his state of mind was without merit considering the debtor's own testimony relating to the receipt of the distributions, deposit of the money into his personal account and subsequent expenditures on personal items.

The District Court ruled that the Bankruptcy Court's finding that debtor's receipt of the rent distributions injured the bank was not clearly erroneous. In receiving the distributions the debtor knowingly disregarded the bank's interest in the rents and breached the workout agreement. The debtor's use of the cash for personal purposes did not benefit but injured the bank to the tune of $297,000. The bank could not exercise control over its collateral at a time when the debtor was experiencing serious financial troubles. Consequently, the District Court found the debt was non-dischargeable as a willful and malicious injury to the bank because the debtor knowingly took the money without concern for the bank's rights.

The bank, in its cross-appeal, argued that the Bankruptcy Court erred in rejecting its claim that the debt was non-dischargeable as an embezzlement under Bankruptcy Code §523(a)(4).

The parties treated the bank's interest in the rents assignment and the deed of trust as security for the debt on two loans. That interest did not defeat the partnership's interest in the rents. As a limited partner in the partnership, the debtor was entitled to cash distributions made to partners. Thus, the rents did not constitute property of another which debtor could appropriate, and debtor's embezzlement claim failed. Further, the District Court ruled that the bank failed to sustain its burden of proving debtor acted with fraudulent intent.