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.

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.

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.

Bankruptcy: Bankruptcy Exemption - Sale of Tenants by the Entirety Property

     In the case of In Re Zella, the United States Bankruptcy Court at Alexandria, Virginia ruled that a deed that conveyed the Virginia marital home to the debtor and his wife "as joint tenants with the full common law right of survivorship" created a tenancy by the entirety and proceeds from the sale of the property is exempt from claims on non-joint creditors in Bankruptcy Court.

     In Zella a creditor challenged a claim of exemption. The Bankruptcy Court determined that the key issue of the case was whether, in Virginia, a deed to parties described in the deed as husband and wife, and who are in fact husband and wife, as "joint tenants with the full common law right of survivorship," creates a tenancy by the entirety in accordance with Virginia Code §55-20, and thus makes the property exempt from the claims of non-joint creditors under Bankruptcy Code §522(b)(2)(B). The Bankruptcy Court concluded that the deed in question did create a tenancy by the entireties, notwithstanding the lack of language using those specific words, as the deed specifically contained the language "with the full common law right of survivorship". The Bankruptcy Court cited two Virginia Supreme Court cases which support such a finding: Allen v. Parkey and Burroughs v. Gorman. The Bankruptcy Court ruled that the language in the deed explicitly evidenced the intent to preserve the common-law right of survivorship.

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.

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:

     a. Value of the property vs. the amount of the debt.
     b. 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.

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:
     1. Value of the property vs. the amount of the debt.
     2. 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.