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: Docketing Judgments to Secure an Interest in Real Estate

In previous 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 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: Relief from Automatic Stay - Lack of Adequate Protection

In the case of Equitable Life Assurance Society of U.S. v. James River Associates, the United States District Court at Newport News upheld a Bankruptcy Court ruling that where a creditor held a note executed by a debtor and secured by a first deed of trust on a hotel and a conference center in Williamsburg, Virginia, the creditor was entitled to relief from the automatic stay in order to foreclose because the creditor's "equity cushion" in the property was only two percent.

In the trial of this case the Bankruptcy Court found that the creditor was not adequately protected because 1) its equity cushion was deteriorating as interest accrued, 2) real estate taxes were delinquent, 3) the creditor had not received payments on the note for numerous months and 4) the priming lien necessary for the debtor to reorganize would further deteriorate the creditor's security position.

On appeal to the District Court the debtor argued that the Bankruptcy Court erred in its finding that the creditor's equity cushion was deteriorating due to the accumulation of unpaid interest. The District Court opined that under the "equity cushion" theory if a debtor has equity in a property sufficient to shield the creditor from either the declining value of the collateral or an increase in the claim from accrual of interest or expenses, then the creditor is protected. The District Court ruled that the Bankruptcy Court's conclusion that the creditor was inadequately protected because of the deterioration of its equity cushion from accumulating interest was not in error. The District Court noted that although several courts had previously rejected the equity cushion theory, it did not need to decide the merits of the equity cushion theory since the Bankruptcy Court found that there were other sufficient justifications for finding a lack of adequate protection. These are detailed in the following paragraphs.

First, the Bankruptcy Court found that the real estate taxes were delinquent for two tax years in a total amount of $264,624. The District Court ruled that the failure to pay real estate taxes may constitute a basis for finding lack of adequate protection.

Second, the Bankruptcy Court found that there was a lack of payments to the creditor for several months, including, no payments since the bankruptcy petition. The District Court ruled that a continued failure to make monthly payments under loan documents can constitute cause for granting relief from the automatic stay. The District Court ruled that there was no error in granting relief from the automatic stay for failure to make payments.

Third, the Bankruptcy Court found that the creditor's security position would be deteriorated by the proposed priming lien which the debtor needed to reorganize. Given the lack of an equity cushion and the speculative nature of the repayment plan, the District Court ruled that there was no error in granting relief from the automatic stay because of the deterioration of the creditor's security position due to the priming loan.

In conclusion, the District Court concluded that the Bankruptcy Court did not err in granting the creditor's motion for relief from the automatic stay. The Bankruptcy Court properly found that the diminishing equity cushion, the delinquent real estate taxes, the lack of payments on the note for several months, and the deterioration of the creditor's security position under the priming lien constitute, both independently and together, a lack of adequate protection for the creditor. 

Collections: Confessed Judgment Set Aside

The United States District Court at Alexandria, Virginia, set aside a confessed judgment in the case of Benton Land Fund, L.P. v. NvMercure Ltd Partnership because the entry of the judgment was by a party not specifically authorized to confess judgment. The Court found that the provisions in the note at issue stated that judgment may be confessed by "any attorney admitted to practice in any jurisdiction or any vice president or senior vice president of the bank". The Court found that this language was not sufficiently specific to allow the plaintiff limited partnership to confess judgment because of certain ambiguities among the documents in identifying the "Bank" referred to in the note. Further, the language in the note did not entitle the person who actually confessed judgment to act as the attorney-in-fact for that purpose.

This case serves as another reminder as to why competent legal advice should be sought, and why loan documents and contracts should be carefully read and strictly followed.