Real Estate: Perfecting Mechanic's Liens

     In prior blogs we have been discussing the benefits of using real estate to improve creditors’ positions. Last month we began a discussion of the benefits of using mechanic’s liens to aid in the collection of your debt. 

     Virginia Code §§43-4, 43-7 and 43-9 provide for the perfection of the lien by general contractors, subcontractors, and laborers and suppliers. In each section the creditor must file a memorandum of lien at any time after the work is commenced or material furnished, but not later than 90 days from the last day of the month in which he last performs labor or furnishes material, and in no event later than 90 days from the time such building, structure, etc., is completed, or the work thereon otherwise terminated. The memorandum must contain specific information as set forth in the code (and there are forms in the code), and must be filed in the clerk's office in the county or city in which the building, structure etc., or any part thereof is located. The memorandum shall show the names of the owner of the property sought to be charged, and of the claimant of the lien, the amount and consideration of his claim, and the time or times when the same is or will be due and payable, verified by the oath of the claimant, or his agent, including a statement declaring his intention to claim the benefit of the lien, and giving a brief description of the property on which he claims a lien. 

      In a future blog we will explore suits to enforce the lien. 

     We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same. 

Bankruptcy: Voluntary Payments & Claimed Exemptions in Chapter 7 Cases

     The United States Bankruptcy Court in Roanoke, Virginia, sustained a bankruptcy trustee’s objections to two claimed exemptions for funds paid to creditors within ninety days prior to the bankruptcy filing. The case was In Re: Conley. In Conley the court found that two separate debtors, in two separate but consolidated cases, voluntarily paid certain of their creditors from either an income tax refund or a 401k distribution. The debtors disclosed these payments in their petitions and schedules and sought to exempt them in Schedule C of their respective schedules.The court found that the basis for the Trustee’s objection in the first case, involving the tax refund, was that the debtors had not exempted the entire value of the property, and that the debtors could not exempt voidable preference payments under Virginia Code Section 34-4. The court found that the Trustee’s objection in the second case, involving the 401k distribution, described the property in question as a “$3,000.00 voidable preference payment to Coalfield Services”, but failed to note any specific legal or factual basis for the objection. The court found that there was no factual dispute between the parties.

     The debtors claimed in Conley that they were entitled under Bankruptcy Code Section 522(b) to claim exemptions in these payments because the Virginia homestead exemption should be interpreted literally for the benefit of hard-pressed debtors. The Court noted that the assertion raised the question whether the Virginia homestead exemption permitted one to claim an exemption in property which he owned, but which he had since used to pay a valid debt. The court further noted that there was certainly nothing improper under Virginia law for a debtor to choose among his creditors which of them would be paid and to prefer payment of certain creditors over others, assuming that he did not do so with any intent to hinder, delay or defraud his non-preferred creditors. However, the court also noted that it would be strange to uphold an exemption claim in property which the distressed debtor no longer owned to the potential prejudice of other property, either then owned or which might be acquired later, which might be of some actual current or future benefit to him. The court found that there was no Virginia case authority precisely on point, probably because, outside of bankruptcy, there is no apparent reason for a debtor to claim an exemption for property which he has used previously to pay a legally enforceable debt, assuming the lack of any intent on his part to hinder, delay or defraud other creditors.

     The court in Conley cited its agreement with the ruling in the case analysis in In Re: Duty, and concluded that there was no right under Virginia law to claim an exemption in property no longer owned by the exemption’s claimant.

     The court ruled that the debtors’ claims of exemptions for their voluntary pre-petition payments to creditors failed for two additional reasons flowing from the Bankruptcy Code. First, for a debtor to properly claim an exemption in the original schedules, the property claimed as exempt must be part of the bankruptcy estate on the date of the filing. Second, if the preferential payments made by the debtors were to be recovered by the trustee, as to the debtors they would still be preserved under Bankruptcy Code Section 551 for the benefit of the bankruptcy estate and their creditor’s generally. Even if the transfers were avoided as far as the recipients of the preferential payments were concerned, they were preserved to the extent that such preservation confers a benefit upon the bankruptcy estate and the creditors generally. If the payments in question had been obtained by the creditors involuntarily from the debtors, the debtors might successfully claim exemptions in them to the extent allowable under Virginia law. Because they were made voluntarily, however, the court found that Bankruptcy Code Section (g)(1)(A) precluded the claimed exemptions. 

     The court also found that the use of 401k plan assets to pay the second debtor’s debt to his employer did not authorize a claim of exemption in bankruptcy for the payment so made. When the debtor used these proceeds to pay his employer and certain other obligations, including his legal fees in this bankruptcy case, he received value in connection with their disposition and waived any possible right to continue to claim them as exempt. 

     The lesson of Conley: check all claims for exemptions and do not assume that they are valid.

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.

Bankruptcy: Contract Default, Interest Rates and Attorney's Fees

     The United States District Court at Abingdon, in the case of Florida Asset Financing Corp. v. Dixon, ruled that a contractual default interest rate of 36 percent was available to an oversecured creditor as part of its claim against a debtor. The Bankruptcy Court decision denying such interest was reversed. 

     The District Court ruled that the Bankruptcy Code provides that, in general, a claim must be oversecured in order to recover postpetition interest in addition to reasonable fees, costs and charges as part of its secured claim. As to the appropriate rate of interest applicable to an oversecured creditor’s principal claim, however, Bankruptcy Code §506 and the accompanying legislative history are silent. The District Court reported that a great majority of courts to have considered the issue of postpetition interest have concluded that the contract rate of interest applies. Default rates of interest generally do not enjoy, however, the same straight-forward treatment that postpetition interest claims for basic interest do. The Supreme Court noted in the case of Rake v. Wade that postpetition interest may be claimed up to the extent of the value of the collateral.
     The District Court ruled that entitlement to default interest is generally determined by a reliance on equitable principles or the cure rationale evoked by the 9th Circuit Court of Appeals in the case of In re Entz-White Lumber & Supply, Inc. The District Court, unlike the Bankruptcy Court, found that the debtor in this case had not “essentially…cured” his default. The District Court noted that the majority of jurisdictions allow, or at least give “a presumption to the allowability of default rates of interest, provided that the rate is not unenforceable under applicable nonbankruptcy law”. The facts and equities specific to each case prove determinative in the analysis of default rates. Within this analysis, the contract default rate is neither irrelevant nor predictive.
     The District Court decided that the question presented by this case was just how far the Bankruptcy Court’s equitable powers extended under a modern reading of Bankruptcy Code §506(b). The rule governing the District Court’s consideration of this case was as follows: where the circumstances necessitating an equitable deviation are plainly absent and the contract interest rate does not violate state usury laws, function as a penalty or exceed the value of the collateral, the presumption in favor of the contract rate has not been rebutted. The District Court noted that to do otherwise is to impinge on a creditor’s statutory rights under Bankruptcy Code §506b). The District Court decided that in Dixon the presumption was in favor of the contract default rate. In order to discover what equitable considerations may support the Bankruptcy Court’s decision to deviate from this contract rate, the District Court turned to an analysis of the case law. The District Court found that those cases presenting equitable circumstances necessitating a deviation from the contract default rate were distinguishable on their facts. In this case, the contract default rate of interest in question violated neither state nor federal law, and there was a notable lack of circumstances which would encourage an equitable deviation from the stated contractual default rate.
     The District Court stated that it seemed clear as well that the Bankruptcy Court erred when it deemed the default rate to be a penalty. No evidence existed on the record to support the Bankruptcy Court’s characterization. The default rate was within the bounds of state usury law, and merely calling the rate exorbitant, or noting its large departure from the non-default rate, did not suffice to render it unconscionable.
     In summary, the District Court ruled that the contractual default interest rate in Dixon had not been rebutted by equitable considerations. The District Court ruled that the Bankruptcy Court’s decision to reject the default interest rate and apply the nondefault interest rate was therefore erroneous. The Bankruptcy Code and applicable case law, facts of the case and equitable principles of distribution compelled that the debtor should have been held to the contract default rate of interest provided in the note. The District Court stated that to find otherwise would render a windfall to the debtor. While a 36-percent interest rate is high, the courts do not have plenary power to alter commercial contracts or to substitute their judgment for that of the parties. The District Court found it necessary to remand the attorney’s fees portion of the case to the Bankruptcy Court for reconsideration, as the increased recovery available to the creditor altered the context for analyzing the reasonableness of the fee request.

Collections: Fifth Amendment Claim Denied in Civil Action

     The Hanover County Circuit Court, in the case of EVB v. Strum, denied a defendant’s motion to quash a summons for debtor’s interrogatories and subpoena duces tecum, in which the debtor asserted his Fifth Amendment right against self-incrimination.

     The court ruled that there is no blanket Fifth Amendment right to refuse to answer questions in noncriminal proceedings. The privilege must be specifically claimed on a particular question in the debtor’s interrogatories, and the matter submitted to the court for its determination of the validity of the claim. Further, a defendant must assert his Fifth Amendment right in regard to each specific document in regard to a subpoena duces tecum, and the court must assess the claim as to each individual document.

Real Estate: Making Owners and General Contractors Personally Liable to Subcontractor, Laborer or Materialman

     Virginia Code §43-11 provides a way for owners or general contractors to be made personally liable to subcontractor, laborer or materialman if notice is appropriately given, and if the payer makes payment to the owing party without paying the notifying creditor. Specifically, §43-11 (2) states that:
     “…if such subcontractor, or person furnishing labor or material shall at any time after the work is done or material furnished by him and before the expiration of thirty days from the time such building or structure is completed or the work thereon otherwise terminated furnish the owner thereof or his agent and also the general contractor, or the general contractor alone in case he is the only one notified, with a second notice stating a correct account, verified by affidavit, of his actual claim against the general contractor or subcontractor, for work done or materials furnished and of the amount due, then the owner, or the general contractor, if he alone was notified, shall be personally liable to the claimant for the actual amount due to the subcontractor or persons furnishing labor or material by the general contractor or subcontractor, provided the same does not exceed the sum in which the owner is indebted to the general contractor at the time the second notice is given or may thereafter become indebted by virtue of his contract with the general contractor, or in case the general contractor alone is notified the sum in which he is indebted to the subcontractor at the time the second notice is given or may thereafter become indebted by virtue of his contract with the general contractor. But the amount which a person supplying labor or material to a subcontractor can claim shall not exceed the amount for which such subcontractor could file his claim.”
     The notices referred to in this code section are commonly referred to in the industry as “42-11 letters”. We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same. If you have a need, please call us.

Collections: Mechanics Lien voided by Old Work

     Mechanic’s liens are strictly governed by statutory law. This fact is well illustrated in the case of Johnson v. Tadlock. In Johnson the Fairfax County Circuit Court ruled that a mechanic's lien that included work performed before the 150-day statutory window was invalid in its entirety. Under the mechanic's lien statute, a memorandum of lien should not include any sums due for labor and materials furnished more than 150 days prior to the last day of work. However, the Court's decision in Johnson appears to be the first in which a Circuit Court has struck an entire lien based on the inclusion of stale work.
     In Johnson, the Court found as fact that a workman filed a mechanic's lien for $15,500 for various work, including lot clearance, removal of trees and installation of a storm drainage system and caissons. The property owner sought to have the lien released based on its inclusion of stale work. A portion of the lien (amounting to at least $1,500) was for work clearly performed within the 150-day statutory period. The property owner asserted that all or a part of the remainder of the work was performed more than 150 days prior to the workman's last day on the job.
     The Court ruled that the inclusion of a stale claim tainted the entire lien. The Court cited language in the mechanic's lien statute "no memorandum... shall include ....," to support his position. The Court pointed out that mechanic's liens are "creatures of statute" and therefore need to conform strictly to their statutory requirements. Accordingly, the court refused to remove the improper portions of the claim and rule on the proper portion of the claim - it survived or perished in its totality.
     The lesson of Johnson, as the lesson is in so many cases, obtain competent legal advise and representation in pursuing mechanic's lien claims.

Real Estate: Using Mechanic's Liens to Secure an Interest in Real Estate

     In recent editions of Creditor News 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 begin a review of the benefits of using mechanic’s liens to aid in the collection of your debt.
    Virginia Code §43-3 et. seq. provides for special procedures for the collection of unpaid bills related to work performed on, or products supplied for, real estate. §43-3 A states:
    “All persons performing labor or furnishing materials of the value of $150 or more … for the construction, removal, repair or improvement of any building or structure permanently annexed to the freehold … shall have a lien, if perfected as hereinafter provided, upon such building or structure, and so much land therewith as shall be necessary for the convenient use and enjoyment thereof … subject to the provisions of § 43-20. But when the claim is for repairs or improvements to existing structures only, no lien shall attach to the property repaired or improved unless such repairs or improvements were ordered or authorized by the owner, or his agent.”
     Virginia Code §43-3 B provides for special rules regarding condominiums.
     Virginia Code §§43-4, 43-7 and 43-9 provide for the perfection of the lien by general contractors, subcontractors, and laborers and suppliers. We will explore this more in next month’s edition.
     We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same.