Collections: Liability for Charges above the Credit Limit - Part I

     A client recently asked me to write about situations where a customer makes retail purchases for products in an amount greater than the customer’s established credit limit – specifically, if the customer later fails to pay for the product, can he be successfully sued for payment.
     I will review this situation with four varying fact patterns in two separate issues.
     Fact Pattern One: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". During the next several years the credit limit was increased to $6,000. Normally no notification is sent of the increase, but in this case a letter was sent to the customer notifying the customer of the credit limit increase. Customer makes charges up to $6,000, but fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. Customer’s attorney does not have a copy of the letter increasing the credit limit, but produces the original letter opening the account with a $4,000 credit limit. Customer’s attorney argues that the retailer was the one who set the credit limit at $4,000, and by not exercising due diligence of his business, allowed the credit limit to be exceeded. Customer’s attorney argues that his client's liability should not exceed $4,000, while the retailer argues that the liability should be $6,000. In what amount should the retailer be able to judgment against the customer?
     In an actual case in Seattle, Washington, the trial judge was ready to grant the request for a reduction in liability to $4,000. However, since the retailer had his customer file folder with him and found the letter increasing the credit limit to $6,000, the judge granted the retailer judgment in the amount of $6,000.
     Fact Pattern Two: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer is allowed to makes charges over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?
     In Ingram Micro Inc. v. ABC Management Technology Solutions, LLC the United States District Court for the Eastern District of Virginia held that a creditor was entitled to recover payment of an unpaid debt because the debt was within the scope of the continuing guaranty agreement. The agreement clearly included a guaranty of all debts. Further, the court reiterated a contractual principal that when an agreement is complete, clear, and unambiguous on its face, it must be enforced according to the plain meaning of its terms and the intent of the contracting parties.
     In this fact pattern, the original agreement stated that the applicant agrees “to pay any and all sums that may become payable under this account”. This agreement was intended to cover credit up to $4,000. However, the agreement is also likely to cover any and all other debts over the original credit limit if it can be shown that the intent of the contracting parties as expressed through the contractual language was to include any debts incurred after the credit application was accepted.
     Next week's Blog will address the next two fact patterns.

Foreclosure: Obtaining Possession After Foreclosure

     Upon purchasing property at a foreclosure sale, it is not uncommon to have a “holdover tenant”. If this occurs, you can obtain possession of the property by filing a Summons for Unlawful Detainer in the appropriate General District Court. The applicable statute requires that the plaintiff prove “a right to the possession of the premises at the time of the commencement of the suit.” The only evidence that is usually required is (a) a copy of the recorded trustee’s deed, since the facts recited therein are prima facie evidence of their truth, and (b) a copy of the notice to vacate sent to the occupant(s).
     On the date of the initial return, if the defendant fails to appear, possession will be granted. If the matter is contested, most courts set a new date for trial. In contested cases, issues are usually related to notice and service, so the trustee should be prepared to present evidence that the foreclosure sale was properly advertised, noticed and conducted.
     The judgment for possession is not final until 10 days after it is entered, and most courts will not issue a writ of possession during that 10-day pendency. If an appeal is noted within the 10-day period, the defendant must perfect the appeal by posting an appeal bond and paying within 30 days of the date of the judgment the applicable writ and service fees for the circuit court. Most judges are sympathetic to require significant appeal bonds equating with the former mortgage payments.
     Eviction is accomplished using a “Request for Writ of Possession.” A writ of possession may be issued on an unlawful detainer for up to one year from the date of judgment. When requesting the writ of possession, provide contact information for both the Sheriff and the person who will supervise the eviction of the new owner; the Sheriff will coordinate a date and time to serve the writ of possession and maintain the peace while the owner physically evicts the personal property of the occupant(s) and secures the property.

Real Estate: Using Deeds of Trust to Secure Your First, Second, Equity Line or Refinance Home Loans

     In the last edition of Creditor News we began a discussion of 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 securing your first, second, equity line or refinance home loans with a deed of trust.
     Real estate liens provide important security for your debt. Since real estate is the largest investment and asset for most individuals, they will usually make every effort to pay debts secured by their real estate first. However, you need to know the chain of title in order to make an informed decision about your loan. Specifically, in what position will your lien be? Are there any “clouds” on the title? You will not know the answer to these questions without a proper title search and review.
     Once you know your position you will need to examine the available equity to cover your loan. What is the value? What are the balances due on the liens ahead of your anticipated position? Beyond the business decision of determining when the equity is sufficient for your risk tolerance, in order to take advantage of the “$1.00 rule” in the bankruptcy code for chapter 13 cases (should your debtor decide to later file bankruptcy), you need to ensure that there is at least $1.00 in equity to cover the loan. You should take into consideration that property values may go down (e.g., 2008 to present).
     If the deal is made and the real estate closing occurs, immediate and proper recording of your deed of trust is essential to preserve your position. If the debtor defaults, foreclosure on the property can occur. If the debtor seeks reorganization of his debt in chapter 13, you can seek full payment of the debt.
     We have experienced attorneys and staff who can examine title and properly represent your interests in real estate closings.

Bankruptcy: Fighting Chapter 7 Abuse

     The Eight Circuit Court of Appeals in U.S. Trustee v. Ronald M. and Rhonda J. Harris holds that debtors filing for bankruptcy under Chapter 7 may be disqualified from filing if they have the ability to repay all or part of their debts pursuant to a Chapter 13 plan. The Appellate Court held that a bankruptcy court may dismiss a Chapter 7 filing under the substantial abuse provision of the bankruptcy code if the debtor could qualify to file under Chapter 13.
     Creditors should utilize this in the fight to curb abusive filings of Chapter 7 petitions, and in the pursuit of debt reaffirmations.

Foreclosure: Foreclosure Sale Deficiency Actions

     Frequently there will be a deficiency balance after the sale is completed and the accounting is done. The account of sale will set forth the distribution of the sale proceeds and also establish any amounts remaining due on the indebtedness following application of the net proceeds from the foreclosure sale. This deficiency amount is usually recovered by a personal judgment against the maker of the promissory note or other obligors on the indebtedness that was secured by the deed of trust. An action to recover the deficiency balance remaining after a foreclosure sale need not be brought on the chancery side of the court, and may properly be brought as an action at law. A plaintiff’s action to recover on an assumed promissory note may be maintained as an action at law even though the plaintiff is not named in the deed of trust.

Real Estate: Using Real Estate to Secure Your Debt

     Many fail to recognize the benefit of using real estate to improve their position as creditors. Properly securing debts through real estate could make the difference between collecting the funds and incurring a loss.
    Securing debt with real estate can occur in several ways: deeds of trust, judgment liens, homeowner association liens, mechanic’s liens and lis pendens in litigation cases, just to name a few. In the upcoming issues of Creditor News we will explore these, as well as the ways that I can assist you.
      We have experienced attorneys and staff who can examine title, do real estate closings, seek judgment and docket and enforce the same, and prepare and enforce statutory liens, such as those for litigation, homeowner’s associations and mechanic’s lien situations.

Bankruptcy: Objection to Discharge - Willful and Malicious Injury by Depriving Access to Secured Collateral

       A couple of years ago I tried a case that will be of interest to many lenders who hold a security for their loan. The case was Dominion Credit Union v. Kristle Hembrick, tried in the United States Bankruptcy Court, Eastern District of Virginia Richmond Division, Judge Huennekins.
      The factual scenario is as follows: the Credit Union had made a $30,000.00 loan to the debtor in March, 2006 to purchase a pickup truck from Chambers Auto. The loan was secured by this pickup truck. There was no co-signer for the loan, nor was the debtor married. The debtor’s loan application made no reference for the purpose for which the loan was sought. The debtor listed no other owner or user. Within two months the debtor became delinquent. The Credit Union ordered repossession of the truck. The repossession company could not find the truck, and the debtor offered minimal cooperation, claiming only that another person had the vehicle and took it out of state. The debtor referenced the name of the person, Michael Chambers (this name became important years later, but note that the name of the company from which she purchased the vehicle was Chambers Auto). The debtor did provide a telephone number for Michael Chambers. The repossession company made several attempts to repossess the truck, checking at the debtor’s residence on various days and at various times, but to no avail. Calls were also made to Michael Chambers. On one occasion Mr. Chambers said that he was out of state, and, that he was also in the repossession business. With no luck at repossession, the Credit Union retained me to obtain judgment against the debtor and try collection. While judgment was obtained for over $29,000.00 plus costs, interest and attorney’s fees, collection was difficult, as the debtor was constantly in school and working only part-time. Finally in early 2010 I found the debtor working a sufficient number of hours to garnish, and issued the garnishment. As a result of the garnishment, the debtor filed a Chapter 7 bankruptcy case in March, 2010, seeking discharge of all of her financial obligations – at this point in her life the debtor had accumulated some other debt as well, and was finally about to complete her schooling to become a full time nurse. I advised the debtor’s attorney that I would be objecting to the discharge of this debt based upon the fact that we had been unable to obtain the truck since May, 2006, and that we had obviously lost money due to the debtor’s willful and malicious injury to the Credit Union by depriving it access to and repossession of the collateral securing its loan pursuant to Bankruptcy Code Section 523(a)(6). The debtor’s attorney responded by stating that the truck would be surrendered. Weeks passed without the debtor surrendering the truck, so I filed an objection to the dischargeability of the debt. Subsequently the truck was returned, but in horrible condition, having limited value, resulting in a substantial loss to the Credit Union.
      To prepare for the trial of the case I conducted written discovery and scheduled depositions of the debtor and Michael Chambers. Depositions were scheduled on several dates. On the first date both parties appeared (although almost an hour late), even though I had only subpoenaed the debtor. I excluded Mr. Chambers from the debtor’s deposition – important because Mr. Chambers tried to “control” the proceedings. At the debtor’s deposition she stated, for the first time, that the truck was purchased as a business deal with her brother (although not an actual blood brother, but someone just like a brother, named “John Jones”). She and Mr. Jones had a “falling out” and he left with the truck, never to have contact with him again, and not knowing where either he or the truck was. The debtor denied telling the Credit Union or the repossession company that Michael Chambers had it. The debtor admitted that she and Mr. Chambers were now boyfriend and girlfriend, although she was not sure when this relationship commenced, although probably within six months of the loan. The debtor admitted that Chambers Auto was a family business, but that Michael Chambers’ father ran it. The debtor stated that when it became apparent that she would not be able to get a bankruptcy discharge without surrendering the vehicle to the Credit Union, Mr. Chambers (who had a “questionable” past and had “questionable” connections) “put the word out on the street”, and magically the vehicle was returned to Mr. Chambers. The debtor also stated that they tried their best to put the vehicle back in decent shape, but ran out of time. Following the debtor’s deposition, I tried to immediately take Mr. Chambers’ deposition, but he and the debtor said that they had no time and had a child care problem. A new date was set for Mr. Chambers’ deposition. However, he failed to show on that date. I advised the Court of this lack of cooperation, asked for a continuance to obtain the necessary evidence to prove my case. The Court granted the continuance and set a new trial date. I then set a new deposition date for Mr. Chambers, who, this time did show up, although about an hour late again. Mr. Chambers’ testimony was similar, but somewhat inconsistent with that of the debtor in some key areas.
     On the trial date Mr. Chambers’ failed to appear in Court despite subpoena. His deposition was submitted into evidence, and the Court issued a Show Cause summons against him for his non-appearance. After hearing all of the evidence, the Court ruled that the debtor did willfully and maliciously injure the Credit Union by depriving it access to and repossession of the collateral securing its loan pursuant to Bankruptcy Code Section 523(a)(6), and awarded non-dischargeability to the extent of the Credit Union’s reasonable loss based upon the debtor’s conduct.
     The lesson of Hembrick: be diligent about repossession efforts, document all events, and if the debtor deprives you of the security and attempts to discharge the debt in a Chapter 7 bankruptcy case, object!

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.

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: Statute of Limitations Enforced on Challenge to Bylaws Amendment

     The Virginia Condominium Act, specifically Virginia Code Section 55-79.71(C), provides for a statute of limitations in regard to challenging amendments to governing documents. The section provides, in part:
     “An action to challenge the validity of an amendment adopted by the unit owners' association pursuant to this section may not be brought more than one year after the amendment is recorded.”
      In the case of Godwin v. Bay Point Association Board of Directors, a Norfolk Circuit Court was faced with a homeowner challenge to bylaw amendments. The homeowner, Godwin, had sued the association alleging that it breached its governing documents by taking actions four years earlier and three years earlier that increased her assessment for insurance premiums. The association filed a motion to dismiss Godwin’s complaint on the ground that it was time-barred pursuant to Virginia Code Section 55-79.71(C).

     Four years earlier the association’s board of directors signed a resolution regarding physical damage and flood insurance. Three years earlier it drafted and signed a bylaw amendment relating to insurance premiums.  The association argued that challenging either of these actions was time-barred under the statute of limitations. 

    The court ruled that the resolution was not an amendment to the condominium governing documents within the meaning of the act. The court found that, at most, the resolution represented a statement of the board’s opinion that the bylaws should be amended to revise the way insurance premiums were assessed against the unit owners. In the resolution, the board acknowledged the need to amend the bylaws and stated that the amendment process was lengthy and inconsistent with the budget preparation schedule for the upcoming fiscal year. Because the resolution was not an amendment adopted by the unit owners pursuant to the act, the court found that the act’s statute of limitations did not apply. However, the court ruled that the bylaws amendment was an amendment to the governing documents within the definition contemplated by the act. Accordingly, the one-year statute of limitations applied.
    Godwin argued that because the association violated mandatory procedures for amending the bylaws, the amendment was null and void, and thus, the statute of limitations did not apply. The court, however, in examining the statute, noted that nothing in the statute suggested that only valid bylaw amendments are subject to the one-year statute of limitations. The court noted that any amendment, not just valid ones, may be challenged within one year. Accordingly, Godwin’s claim was barred by the statute of limitations.
    Godwin then tried to argue that there was a breach of fiduciary duty (the legal duty of the board to act in the best interests of the residents). Godwin and the association agreed that an action for such breach must be filed within two years from the date of breach. Godwin argued that, although the association initially breached its fiduciary duty four and three years earlier “when in bad faith it knowingly and willfully” adopted the resolution and the bylaws amendment, there were renewed breaches when the annual budgets were adopted in the last two years, which reflected the change made to assessments for insurance premiums. The court disagreed, finding that any breach of fiduciary duty relating to the change in the insurance premium assessment took place when the association acted four and three years ago to adopt the resolution and bylaw amendment. The latest of these actions occurred over two years prior to Godwin’s filing suit. Therefore, the claim was time-barred.

Bankruptcy: Retention of Collateral in Chapter 7 Cases

     The United States Bankruptcy Court at Richmond, in the case of Tidewater Finance Co. v. Cooper, ruled that where the debtors had fallen behind in their payments but were not in default in paying for their vehicle at the time they filed their petition or at the date of a hearing on relief from stay, the creditor on the vehicle was not entitled to relief from the stay, and that the debtors could retain the collateral and continue to make payments pursuant to the contract.
      In Cooper Judge Tice noted that there was a split among the U.S. Circuit Courts regarding the correct interpretation of 11 U.S.C. §521 (2). Some Circuits have held that a debtor who desires to retain exempt or abandoned property has only two choices: redemption or reaffirmation. While most Circuit Courts have determined that relief from automatic stay should be denied and that creditors could not compel debtors to redeem the collateral or reaffirm the debt as long as the debtors are current on their payments.
      Judge Tice stated that our Circuit Court (the 4th Circuit Court) follows the majority view and has decided that a debtor who is not in default can retain collateral after discharge without reaffirming, redeeming, or surrendering the collateral. Judge Tice stated that the 4th Circuit Court determined that Bankruptcy Code §521 (2)(A) is a procedural provision merely to inform the lien creditor of the debtor’s intention. Judge Tice noted that in the case of In Re: Belanger the Court did not specify from which date the debtor's default is to be measured – the filing date, the date of the creditor’s motion, the hearing date, or simply default at any time.
      Judge Tice further noted that in the case of Am. Nt’l Bank & Trust Co. v. DeJournette, arising out of the U.S. District Court for the Western District of Virginia, the Court determined that a defaulted debtor should be treated differently, and that a debtor who defaulted after filing does not have the option to retain the collateral, and must choose among the Bankruptcy Code §521 (2)(A) options of surrender, redeem or reaffirm.
      Judge Tice opined that the situation in DeJournette could be distinguished from that in Cooper. In DeJournette, the debtors were delinquent at the date of the filing of their bankruptcy petition. As of the date of the hearing, the DeJournette debtors had paid payments to bring them current on their loan; however, the debtors did not pay the late charges or legal fees and costs associated with their prior arrearage.
      In Cooper the debtors were not in default when they filed their Chapter 7 bankruptcy petition because they were within the contractual grace period, nor were they in default on the date of the preliminary hearing on relief from stay. While there was a time in between debtor’s bankruptcy filing and the date of the hearing where the debtors fell behind in their payments, they were current as of the hearing date.
      In Cooper Judge Tice found that the creditor failed to demonstrate any real harm or risk of financial loss resulting from the continuation of the stay. The debtors were current in their monthly payments and had adequate insurance on the vehicle. Thus, allowing the debtors to remain in possession of the vehicle in exchange for payment of the monthly installment placed the parties in the same position as they were prior to the debtors’ bankruptcy filing. Further, if the debtors failed to make their monthly payments, the creditor could elect to repossess.
      The result of Cooper is a bitter one for creditors – unless the debtor is in default at the time of the bankruptcy filing, or, sometime thereafter, the debtor can retain the collateral and simply keep paying without the requirement of a reaffirmation agreement. This could result in the debtor using the collateral for a number of years, diminishing its value, and then walking away from the debt and leaving the creditor with worthless collateral.

Collections: Garnishments Out-of-State

     While I have had good results in issuing garnishments out of state, especially when the garnishee is a bank that operates nationwide, success is not always guaranteed. Diversity in jurisdiction does create some issues. Recently a United States District Court granted a debtor’s motion to quash a garnishment summons after finding that the debtor’s wages were not located in Virginia. The garnishment summons had been issued by a Virginia creditor Virginia hospital. The debtor was a Pennsylvania resident doctor. The garnishee was an Ohio company. The court ruled that the garnishment summons issued by the court was ineffective to garnish the wages not located in Virginia.

Foreclosure: Sale Price and Delays in Sale

     The trustee is under a duty to “use all reasonable diligence to obtain the best price.”  

     If the trustee determines that in order to fulfill his fiduciary duty to realize the highest price for the property, a recess is necessary, he or she should recess the sale. Arguably, the recess is within the scope of the discretion afforded trustees in the conduct of the foreclosure sale. For example, if a bidder who previously advised the trustee of his interest in bidding on the property is delayed, the trustee, in his discretion, may recess the sale to a later hour on the same day to allow the bidder to attend the sale. If the trustee fails to accommodate the bidder and the property is sold for a price less than the bidder was willing to pay, the trustee may have breached his duty to “use all reasonable diligence to obtain the best price.” A decision by the trustee to recess the sale, however, should not impair the sale by making it impossible or impracticable for the bidders to appear and bid at the recessed sale.
     The postponement of a foreclosure sale to a different day is not a recess and is governed by statute. Virginia Code §55-59.1(D) provides that the trustee, in his discretion, may postpone the sale to a different day, and no new or additional “notice” must be given. Presumably, the “notice” referred to in this section is notice of the postponement. The trustee needs only to announce at the sale that it has been postponed. §55-59.2(D) provides that if the sale is postponed, the trustee must advertise the “new” sale in the same manner as the original advertisement. Read in conjunction, these sections require the trustee who postpones the foreclosure to re-advertise the sale in the same manner as the original sale was advertised. Although the secured obligation will not need to be accelerated again, all other aspects of the foreclosure must be completed. Effectively, a postponed sale is a new sale in which the trustee must complete all acts that he or she completed in the first sale.

Collections: Former Homeowners' Association President's Emails were Defamatory

      In the Fairfax Circuit Court case of Cornwell v. Ruggieri, the trial judge and jury found that the plaintiff homeowner was defamed by four emails written and published by a former association president and awarded $9,000.00 in damages.  These emails alleged that the homeowner had stolen association funds five years earlier.  The former association president tried to defend the case on the basis that the statements were simply a matter “of opinion”, not a matter of fact (as required under Virginia case law to recover damages), but the trial judge disagreed.
      The trial judge instructed the jury that under Virginia law the defendant, in his role as association president, had a "limited privilege" to make defamatory statements without being liable for damages.  However, if it was proved by "clear and convincing evidence" that the defendant had "abused" the privilege, the defamatory statements were not protected.  The trial judge instructed the jury that there were six possible ways that the homeowner could prove that the former association president abused the limited privilege.

    The homeowner presented evidence that the defendant made statements (1) with reckless disregard; (2) that were unnecessarily insulting; (3) that the language was stronger than was necessary; (4) were made because of hatred, ill will, or a desire to hurt the homeowner rather than a fair comment on the subject; and (5) were made because of personal spite, or ill will, independent of the occasion on which the communications were made.
     The jury was given a specific interrogatory with regard to each of the four defamatory statements: 

(1)  Did the defendant make the following statements?

(2)  Were they about the plaintiff?

(3)  Were they heard by someone other than the plaintiff?

(4)  Are the statements false? 
(5)  Did the defendant make the statements knowing them to be false, or, believing them to be true, did he lack reasonable grounds for such belief or act negligently in failing to ascertain the facts on which the statements were based?

(6)  Did the defendant abuse a limited privilege to make the statement? 
     For each question as to all four emails, the jury answered “yes”.  After a three-day trial, the verdict was rendered in favor of the plaintiff -- $9,000.00 in damages. 
  This case gives a good reminder that homeowner association board members must be knowledgeable, professional and well-advised when serving their communities.

Bankruptcy: What can we do for you

     Creditors need to know that having aggressive representation in bankruptcy cases is just as important as having a good plan.  We can help.  We have aggressive counsel and trained support staff.  We would be pleased to meet with you to review your representation needs.  Our work can be done on a flat fee basis, an hourly fee basis, or pursuant to a retainer agreement.

     In Chapter 7 cases, even in supposedly "no asset" cases, there are concerns about security interests, homestead deeds, fraud and abuse, and reaffirmation agreements.  Our "second opinion" and review of your cases could result in new hope for otherwise hopeless cases.

     In Chapter 13 cases there are concerns about amount of assets, manner of funding, percentage payments for unsecured debts and allowable expenses.  Do not assume that the debtor's first plan is set in stone - let us assert your interest.

Collections: Foreign Judgment Enforceable in Virginia

    The Richmond U.S. District Court found that the plaintiff, a British developer of computer and video games, may enforce a judgment from a United Kingdom court finding a breach of a settlement agreement by defendant, a Virginia company, that agreed to distribute the British company’s video game and then failed to pay the company.

     Plaintiff, Codemasters Group Holdings Ltd., stated that it issued invoices for the video products it shipped to defendant, SouthPeak Interactive Corp., but SouthPeak failed to pay. The parties subsequently entered into a settlement agreement in which defendant agreed to pay plaintiff $2 million. Plaintiff contended that defendant failed to make all payments and breached the settlement agreement, leaving an outstanding balance of $1,265,000 plus interest and late fees.

     Plaintiff filed suit in the UK and a court there ordered default judgment against defendant. Plaintiff subsequently sued to enforce the UK judgment in Virginia.

     The court noted that Virginia has adopted the Uniform Foreign Money-Judgments Recognition Act, which allows for the enforcement of a foreign country money judgment that is final and conclusive and enforceable where rendered.

     Two issues were raised in the Richmond court: whether the UK court had personal jurisdiction over SouthPeak, and, whether Southpeak had received notice of the UK action in sufficient time to enable it to defend.

     The settlement agreement contained a forum selection clause designating the UK as the forum for resolution of the parties’ dispute. The agreement established the acquiescence of SouthPeak to the jurisdiction of the UK court.  Thus, because prior to the commencement of the UK action SouthPeak agreed to submit to the jurisdiction of the UK court, the UK had personal jurisdiction over SouthPeak.

     SouthPeak argued that proper service of process did not occur pursuant to Virginia law, so enforcement of the foreign judgment should not be allowed. The court disagreed. The court determined that a plain reading of the Uniform Foreign Money-Judgments Recognition Act simply requires notice, and, SouthPeak had actual notice of the proceedings in the UK. Accordingly, the foreign judgment could be enforced.

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: Homeowners' Association Wins Damages on Owner Violations

     There has been much litigation over HOA violations in the last few years.  Circuit Courts have been scrutinizing HOA violation claims very carefully.  Enforcement and damages for violations can be won.  The December 2011 Loudon County Circuit Court case of Lee’s Crossing Homeowners’ Association v. Zinone is a good example of such enforcement.  In Lee’s Crossing, the court found that in building her home, the homeowner committed multiple violations of the plan approved by the Architectural Review Board.   Ultimately, the court assessed damages in favor of the homeowners’ association on the basis of “one overriding violation,” the failure to comply with the ARB-approved application.

Bankruptcy: Finance Company Lien - Mobile Home

      In the case of American General Finance Co. v. Hoss, the United States District Court at Abingdon, Virginia, overruled a Bankruptcy Court decision avoiding a creditor’s lien on the debtor’s mobile home. While all agreed that the creditor’s lien was a nonpossessory, non-purchase money security interest, there was a dispute as to whether Bankruptcy Code §522(f)(1) allowed for the avoidance of the lien. The Bankruptcy Court concluded that the lien on the mobile home could be avoided as the Bankruptcy Code permits the avoidance of certain liens which would impair an exemption to which a debtor is entitled to pursuant to Bankruptcy Code §522(b). Virginia Code §34-4 permits a debtor householder to exempt up to $5,000 of property as a homestead exemption. The $4,000 homestead deed filed by debtor qualified for this exemption in the instant case. Property claimed as exempt pursuant to Bankruptcy Code Bankruptcy Code §522(b) is not liable for any debt of debtor which arose before the commencement of a bankruptcy case, but an exception under §522 (c)(2)(A)(I) allowed such exempted property to remain liable for the preexisting debts of a debtor if the debt is secured by a lien which could not be avoided under Bankruptcy Code §522(f).
     The Bankruptcy Court found that Bankruptcy Code §522(f)(1)(B)(i) provides for avoidance of nonpossessory, non-purchase money security interests on household furnishings or households goods that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor.
     Citing its prior decision in the case of In re: Goad the Bankruptcy Court implicitly found that a mobile home is either a household furnishing or good under Bankruptcy Code §522(f)(1)(B)(i).
     The District Court, on appeal, decided that a mobile home was in no manner a household good or furnishing, as required under that subsection. Neither of those terms is defined by the Bankruptcy Code. The 4th Circuit Court of Appeals has explained that household goods under this subsection are those items of personal property that are typically found in or around the home and are used by debtor or his dependents to support and facilitate day-to-day living within the house. The District Court stated that it was clear that a mobile home is virtually incapable of itself being contained within a home. In addition, a mobile home was not the type of thing used “around the home” which facilitates … living within the home.”
     The District Court examined several cases from across the country dealing with this same issue and discovered only one other court which had agreed with the Bankruptcy Court that a mobile home is a household good. Thus, the District Court concluded that the Bankruptcy Court improperly applied Bankruptcy Code §522(f) and that a proper application of that subsection resulted in the lien in question being unavoidable. The Goad case was overruled in that district and is no longer good law before that District Court.
     In summary, the debtor was not entitled to avoid the lien on her mobile home held by the finance company.

Collections:  Sanctions on Improper Fair Debt Claim

      In the case of Guidry v. Clare, a United States District Court in Northern Virginia granted an award of $16,000.00 in sanctions against a debtor who was a plaintiff in a Fair Debt Practices Collection Act (FDCPA).  The Court held that the debtor’s case, which also included state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment, was filed wholly without merit. 

     The Court found that the dispute arose when the debtor wrote the plaintiff, a company that provided cheerleading training, a check for $62.50 for the debtor’s daughter’s class.  The check was returned for insufficient funds.  The company’s office manager (Clare) contacted the debtor to make the check good.  The debtor did not respond.  Over the next several months the company made several other efforts to collect on the check, including a letter from the company’s attorney and from a collection agency.  The company’s office manager also advised the debtor that the company would seek a warrant for the debtor’s arrest if the debt was not paid within seventy two hours.  When the debtor did not respond, the company filed a criminal complaint for misdemeanor larceny by check.  A few days later, a policeman served the warrant on the debtor at the same time he served a warrant from another creditor for felony larceny by check.  The debtor was arrested and released on her own recognizance on both charges.  She paid the face amount of the company’s check, plus a $30.00 bank service charge.  As a result of this, the prosecutor withdrew the bad check charge.

     A few months later the debtor filed its FDCPA action.  After much litigation, the case was dismissed, without prejudice, because the case was not served within 120 days.  The complaint was refiled.  The company’s attorneys sought dismissal and sanctions for filing a frivolous lawsuit.  The Court dismissed the case, scheduled a hearing on sanctions, and ordered the parties to prepare briefs.  After reviewing the briefs the Court concluded that the debtor’s case was “meritless, indeed flatly frivolous”.  The meritless claims included allegations that the company’s manager had failed to make a meaningful disclosure of her identity and debt collection purpose in her telephone calls to the debtor, that a debt collector was barred from filing a criminal complaint, that the company’s manager had made false representations to authorities in order to disgrace the debtor, and that the collection letters failed to disclose their debt collection purpose.  The Court ruled that the letters contained the required disclosures and the purpose of the phone calls were clear.  The Court further ruled that the law prohibits only the threat of criminal action if there is no intent to follow through on the threat.  In this case the intent to follow through was evident from the fact that a warrant was issued, and there was no evidence that the representations to authorities were false or made with an intent to disgrace the debtor.  The Court found that there was also no basis for the state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment.  The Court wrote that “it cannot be forgotten or overlooked” that the case “was spawned by Guidry’s failure to pay a $62.50 debt, or rather by her attempt to pay it with a bad check”.

     Creditors take heart - there is still some common sense in this world!

Real Estate: Criminal Liability for Misuse of Construction Funds

     Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.
      The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.

Bankruptcy: Amended Proof of Claim for Added Interest and Fees Disallowed in a Chapter 13 Case

     In the case of In re: Michael K. Hedrick, the United States Bankruptcy Court at Alexandria held that in a Chapter 13 case, converted from a Chapter 7 case, a credit union may not amend its proof of claim for a debt from an auto loan.

     Prior to filing for bankruptcy, the debtors defaulted on their auto loan.  The vehicle was repossessed and sold.  There was a deficiency balance due after the sale.  The credit union filed a proof of claim for the joint deficiency claim of $5,693.00, as of the date the case was filed.  Three months after the confirmation of the debtor’s modified chapter 13 plan, the credit union filed an amended proof of claim, increasing its claim by $2,430.00, for post petition interest and attorney’s fees.

     The credit union argued that a Chapter 13 plan must pay unsecured creditors at least as much as under the Chapter 13 plan as they would receive if the case were under Chapter 7.  If this case had been under Chapter 7, joint unsecured creditors - but not individual unsecured creditors - would be paid in full together with interest because of the equity in the jointly owned house.  The credit union used the contract rate of interest.  It treated its post petition attorney’s fees the same as post petition interest.

     The Court noted that even though the proper allowed claim is the original claim filed by the credit union, the credit union may actually be paid more than its allowed claim if the estate is a solvent estate.  The Court “shall confirm” a Chapter 13 plan if all of the requirements of Bankruptcy Code Section 1325(a) are satisfied.  One requirement is that the distribution to unsecured creditors must be at least as much as they would have received had the case been a Chapter 7 case.  The provision for interest on allowed claims in solvent estates is a part of this calculation.

     The Court ruled, though, that the interest rate is the federal judgment rate, not the contract rate or the applicable state rate.  There is no similar statutory provision for attorney’s fees or for other reasonable fees, costs or charges provided for under the agreement which the claim arose.

     The Court ruled that the credit union’s first proof of claim is the proper proof of claim.  The allowed claim of an unsecured creditor in a solvent estate is the same as in an insolvent estate.  It is determined as of the date of the filing of the petition and does not include post petition interest, attorney’s fees costs or other contractual charges.

     The Court ruled that if the terms of a confirmed Chapter 13 plan include post petition interest, the Chapter 13 trustee will pay that interest as provided in the plan.  If the plan does not provide for post petition interest, the trustee may not pay post petition interest.  In this case, the confirmed plan contains no such provision.

     The Court concluded that the proper construction of the Chapter 13 plan was that the allowed joint unsecured claims would be paid 100 percent of the amount allowed joint unsecured claim without interest.  Had the matter been brought to the Court’s attention at the confirmation hearing, the plan would not have been confirmed without a provision for payment of post petition interest on allowed joint unsecured claims.  It was not and the plan was confirmed.

     The lesson of Hedrick: read Chapter 13 plans very carefully and object timely.

Foreclosure: Deposits

     Virginia Code §55-59.4(A)(2) permits the trustee to require of any bidder at any sale a deposit of as much as ten percent of the sales price, unless the deed of trust specifies a higher or lower amount.  However, because the statute is not mandatory, the trustee is given the right to waive the deposit if he deems it appropriate, unless the deed of trust requires a specific deposit.  The trustee should also consider using a fixed amount as the deposit rather than a percentage of the sales price.  Using a percentage of the sales price as the method of determining the required deposit often results in confusion, and the successful bidder has either too much or too little money to deposit.  A fixed deposit avoids the confusion and allows all potential buyers to know exactly how much money to bring to the sale to deposit.  The fixed deposit should not be excessive, but should be of a sufficient amount to ensure that the successful bidder completes the closing of the sale.

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.

Foreclosure: Advertisements of Sale

      The Code of Virginia provides specific guidance as to advertisements for foreclosure sales. The sale must be properly advertised or it will be void upon order of the court.

      Virginia Code §55-59.2 states that if the deed of trust provides for the number of publications of the advertisements, no other or different advertisement shall be necessary, provided that: if the advertisement is inserted on a weekly basis, it shall be published not less than once a week for two weeks, and, if such advertisement is inserted on a daily basis, it shall be published not less than once a day for three days, which may be consecutive days. If the deed of trust provides for advertising on other than a weekly or daily basis, either of these statutory provisions must be complied with in addition to the provisions of the deed of trust. If the deed of trust does not provide for the number of publications for the advertisement, the trustee shall advertise once a week for four consecutive weeks; however, if the property, or a portion of the property, lies in a city or county immediately contiguous to a city, publication of the advertisement may appear five different days, which may be consecutive. In either case, the sale cannot be held on any day which is earlier than eight days following the first advertisement or more than thirty days following the last advertisement.

     Advertisements must be placed in the section of the newspaper where legal notices appear, or, where the type of property being sold is generally advertised for sale. The trustee must comply with any additional advertisements required by the deed of trust.

Foreclosure: Notice of Sale

     The Code of Virginia provides specific guidance as to giving notice of a foreclosure sale.
     §55-59.1 requires that the written notice of sale contain the time, date and place of the proposed sale, as well as either (i) the instrument number, or, deed book and page number, of the instrument of appointment filed pursuant to §55-59-59 (appointment of substitute trustee), or, (ii) a copy of the executed and notarized appointment of substitute trustee. Personal delivery or mailing a copy of the advertisement by certified or registered mail is sufficient.
      §55-59.1 requires the trustee to send written notice of the time, date and place of the sale to (i) the present owner of the property … (ii) any subordinate lienholder … (iii) any assignee of such note … (iv) any condominium unit owner’s association that has filed a lien … (v) any property owner’s association that has filed a lien … (vi) any proprietary lessees’ association that has filed a lien.
     It is important to know that in addition to the notice required by statute, the note or the deed of trust may contain additional notice requirements. Accordingly, the trustee should examine both of these documents.
     §55-59 provides that the notice can be sent by either the trustee or the lender.

Bankruptcy: Accidental Release Forfeits Security

     Being careful when filing releases is even more evident in light of the decision rendered by the 4th U. S. Circuit Court of Appeals in In Re Kitchen Equipment Company of Virginia, Inc. In Kitchen the secured creditor, a bank, accidentally checked the "termination" box instead of the "partial release" box on a multipurpose security form. The creditor had intended to release only two items of the debtor's collateral. The two items were specified in the description block. The Court ruled, however, that by filing the release checked "termination," the creditor lost its entire security interest when the debtor filed for bankruptcy protection under Chapter 11. The bank argued that the interest should be honored under equitable principles and under the Virginia form of the Uniform Commercial Code. Nevertheless, the Court refused to allow the bank's financing statement to prevail over the bankruptcy trustee's statutory lien.

Collections: Motion to Set aside Judgment - Timely Filing

     Timing can be everything.  A prime example of this is the case of Trimark Partners v. HST L.L.C.  In Trimark the Fairfax Circuit Court ruled that a debtor cannot move to set aside a confessed judgment because he failed to file a motion within twenty one days of learning of the judgment.

     In Trimark the Court initially entered a judgment against three defendants based on a confession-of-judgment provision in a note. Two of the defendants had executed the note containing the confession-of-judgment terms. A third defendant later had signed an allonge, or attachment to the note, by which he consented to the note obligations. All three defendants later moved to set aside the judgment.

     Under Virginia Code §8.01-433, a defendant must move to set aside a confessed judgment within twenty one days following notice to him that the judgment has been entered. The judgment can be set aside "on any ground which would have been an adequate defense or set off in an action at law...".

     The Court found as a matter of fact that on a certain date the debtors were advised by the creditor of the entry of a judgment. A couple weeks later the judgment order was actually served on the debtors. More than twenty one days from the date on which the creditor advised the debtors of the entry of judgment, but not more than twenty one days from the date the judgment order was served on the defendants, the defendants filed a motion to set aside the judgment. The judgment creditor objected to the motion because it was not made within twenty one days of notice.

      The Court ruled in favor of the creditor, ruling that notice was proven by the creditor's evidence of notice (advising by letter); the Court found that notice was not proven only by the serving of the judgment on the defendants.

     The lesson of Trimark, as is the lesson in so many cases, is to create a paper trail of all transactions, and act promptly.  It will usually reap dividends.

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.  Last month we discussed perfection of liens.  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.

Collections: Construction Case Garnishments

     The United States District Court in Alexandria has reviewed a matter important to many supplier and contractor creditors: the garnishment of funds due their debtors from another party.  The case was U.S. v. Harkins Builders Inc.  In Harkins a material supplier was pursuing a garnishment proceeding against a builder who owed money to the judgment debtor, a drywall subcontractor.  The Court ruled that the supplier was not bound by a mandatory arbitration clause in a separate contract between the builder and the drywall sub.

     In Harkins a materials company supplied drywall materials to drywall subcontractors.  When the drywall subs failed to pay for the materials, the supplier obtained a federal court judgment for $278,520.  The supplier then initiated a garnishment proceeding against a builder to attach monies owed by the builder to the drywall sub under a contract between them.  As garnishee, the sub confessed assets but argued that the amount it owed to the drywall sub should be reduced by setoffs totaling $50,853 allegedly owed by the sub to the builder under their contract.  The garnishee also argued that any dispute about these setoffs must be resolved through arbitration, as provided in the contract between the drywall sub and the builder.

     The Court rejected the contention that the resolution of the amount of money owed by the builder to the drywall sub and subjected to garnishment must be accomplished through arbitration.  As a judgment creditor of the drywall sub, the supplier was not a party to the contract between the sub and the builder, and its interest was limited to the drywall sub's property interest in the builder's hands.  The parties to the drywall builder contract agreed to arbitration as an efficient procedural mechanism for resolving contractual disputes, including disputes over amounts owed.  The agreement to arbitrate, however, does not add or subtract value in the calculus for determining the value of the contract right.  The Court ruled that since the judgment creditor was afforded court procedures for determining the value, the fact that the property before the court was created by a contract containing an arbitration clause did not require a non-party to the contract to follow the contract's procedural mechanisms for dispute resolution.

Bankruptcy: Protecting your Security in "Workouts"/ Lien Avoidance: Non-Purchase Money Security Interest

     Creditors sometimes assist debtors who are struggling to meet their obligations by refinancing their debt.  This could be a good collection strategy, and it could also be a good plan to keep the debtor out of bankruptcy.  In doing "workouts", however, be careful not to jeopardize your lien.

     As we have previously discussed, debtors may avoid non-purchase money security interests under Bankruptcy Code §522(f).  Remember, this Code Section provides that debtors may avoid a creditor's interest in personal property subject to homestead exemption if such interest is not a purchase money security interest.

     Example #1:  A debtor borrows $5,000.00 to purchase a car from a seller.  Debtor executes the lender's promissory note which designates the debtor's car as security for the loan.  A valid lien is then perfected on the vehicle title.

     Question: Can the debtor avoid the lender's security interest?  Answer: No. The lender's interest is a purchase money security interest.

     Example #2: A debtor borrows $5,000.00 to pay off old loans. The debtor executes the lender's promissory note which designates the debtor's existing car as security for the loan. A valid lien is then perfected on the vehicle title.

     Question: Can the debtor avoid the lender's security interest?  Answer:  Yes.  Since the security interest was not for the current purchase of goods and/or services, the interest is not a purchase money security interest.

     When a lien is "reworked", the purchase money security interest is extinguished according to some courts, thus transferring it into an ordinary security interest whose priority is determined according to the time of filing or perfection.  Thus, if the debtor files bankruptcy within 90 days of the refinance, the creditor may loose his lien.

     Keep this in mind when doing "workouts".  Sometimes you can feel comfortable that the debtor will not file bankruptcy due to your efforts - most times you cannot be sure.