Monday, October 29, 2012

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.

Monday, October 22, 2012

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.

Monday, October 15, 2012

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.

Monday, October 8, 2012

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.

Monday, October 1, 2012

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.