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: Suit to Enforce Mechanic’s Liens

In recent editions of Creditor News we have been discussing the benefits of using real estate to improve creditors’ positions. This month we will discuss suit to enforce mechanic’s liens.

Virginia Code §43-17 provides that no suit to enforce a mechanic’s lien can be brought:

“…after six months from the time when the memorandum of lien was recorded or after sixty days from the time the building, structure or railroad was completed or the work thereon otherwise terminated, whichever time shall last occur; provided, however, that the filing of a petition to enforce any such lien in any suit wherein such petition may be properly filed shall be regarded as the institution of a suit under this section; and, provided further, that nothing herein shall extend the time within which such lien may be perfected.”

Virginia Code §43-17.1 provides that:

“Any party, having an interest in real property against which a lien has been filed, may, upon a showing of good cause, petition the court of equity having jurisdiction wherein the building, structure, other property, or railroad is located to hold a hearing to determine the validity of any perfected lien on the property. After reasonable notice to the lien claimant and any party to whom the benefit of the lien would inure and who has given notice as provided in §43-18 of the Code of Virginia, the court shall hold a hearing and determine the validity of the lien. If the court finds that the lien is invalid, it shall forthwith order that the memorandum or notice of lien be released from record.”

Virginia Code §43-18 provides:

“The perfected lien of a general contractor on any building or structure shall inure to the benefit of any subcontractor, and of any person performing labor or furnishing materials to a subcontractor who has not perfected a lien on such building or structure, provided such subcontractor, or person performing labor or furnishing materials shall give written notice of his claim against the general contractor, or subcontractor, as the case may be, to the owner or his agent before the amount of such lien is actually paid off or discharged.”

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

Bankruptcy: Reaffirmation Required for Certain Abandoned Collateral

In the case of American National Bank & Trust Co. v. DeJournette, the United States District Court in Danville ruled that where the debtors defaulted on their debt secured by a car and a tractor prior to filing for bankruptcy, the Bankruptcy Court erred in not requiring the debtors to reaffirm their obligation or redeem the underlying debt in order to retain the secured property.

The District Court ruled that whether by means of abandonment or claimed exemption, the property at issue was no longer part of the estate. Therefore, the termination of the automatic stay is governed by Bankruptcy Code §362(c)(2), as opposed to Bankruptcy Code §362(c)(1). Pursuant to §362(c)(2), the automatic stay was lifted upon the earlier of the closing of the case and the discharge. Since the automatic stay had already been terminated by operation of §362(c), the District Court ruled that it was incapable of granting the bank's motion to modify the stay. Nevertheless, the District Court determined that it was capable of providing the bank other "effectual" relief. Underlying the bank's request for modification pursuant to §362(d)(1) was a claim that the Bankruptcy Court misapplied Bankruptcy Code §521(2) by not requiring the defaulting debtor to either reaffirm of redeem their obligation in order to retain the secured property. The District Court ruled that the Bankruptcy Court erred in ruling that the debtors did not either have to redeem or reaffirm. In making its decision the District Court noted that the various circuit courts are split on the issue on whether a non-defaulting debtor must reaffirm or redeem his obligation when he seeks to retain secured collateral, or whether following a Chapter 7 filing, a non-defaulting debtor may simply hold on to the collateral securing the loan and continue making payments under the original loan agreement.

The District Court concluded that where debtors have defaulted on a secured debt prior to filing a bankruptcy petition, they must reaffirm their obligation or redeem the underlying debt in order to retain the secured property.  The District Court noted that one bankruptcy court in this District, in In Re Doss, disagreed with its conclusion and has extended the holding in In Re Belanger, to a situation involving a defaulting debtor. The District Court found that in a situation where the debtor had defaulted on a secured debt prior to filing for bankruptcy, the most efficient and fair remedy is to require the debtor to either surrender the collateral, or, if he desires to retain the collateral, redeem or reaffirm the obligation. Therefore, despite the ruling in Doss, the District Court found that other relevant case law supported its position.

In conclusion, the District Court found that the appropriate relief in this case was to compel the debtors to either surrender the collateral, or, if they chose to retain the collateral, compel them to either redeem the debt or reaffirm their obligation. Accordingly, the debtors were ordered to file a new statement of intention either to surrender or retain the secured property. If they chose to retain the secured property, the debtors would likewise be ordered to state an intention to either redeem the debt pursuant to Bankruptcy Code §722 or reaffirm their obligation pursuant to Bankruptcy Code §524(c).

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.