Monday, May 27, 2013

Real Estate: Using Lis Pendens to Secure an Interest in Real Estate

     In recent 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 using lis pendens in litigation cases to aid in the collection of your debt.
     A lis pendens is a legal memorandum which places parties on notice that litigation is pending which affects the title or ownership of real estate. The lis pendens is filed in the circuit court of the county or city in which real estate lies.
     Virginia Code §8.01-268 B states that “No memorandum of lis pendens shall be filed unless the action on which the lis pendens is based seeks to establish an interest by the filing party in the real property described in the memorandum…”.
     Virginia Code § 8.01-268 A provides that a lis pendens does not affect a subsequent bona fide purchaser of real estate for valuable consideration until actual notice of such lis pendens is properly filed with the required information. Requirements include: the title of the cause, the general object thereof, the court wherein it is pending, the amount of the claim asserted, a description of the property, the name of the person whose estate is intended to be affected thereby.
     We have experienced attorneys and staff who can examine title, file lis pendens, and litigate to enforce the same.

Monday, May 20, 2013

Foreclosure: Substitute Trustees

     Question: What happens if the trustee under your deed of trust is either unavailable, or, is no longer the person you desire to serve as trustee? Answer: You can appoint a substitute trustee. Under Virginia Code Section 55-59(9), the noteholder, or, the holders of greater than fifty percent of the monetary obligation secured by the deed of trust, have the right and the power to appoint a substitute trustee or trustees for any reason, regardless of whether such right is expressly granted in the deed of trust. The timing of your action is important. The trustee must be empowered before taking action – this occurs when the instrument of appointment has been executed. You do not have to wait for recording, however, as Virginia Code Section 55-59(9) states that the appointment of a substitute trustee shall be recorded before, or at the time of, the recording of the deed conveying the property (such as after a foreclosure).
     Question: Can a lender appoint their counsel as trustee? Answer: Yes. Virginia Code Section 26-58 holds that a trustee is not disqualified merely because he is a stockholder, member, employee, officer or director or counsel to the lender.


Monday, May 13, 2013

Bankruptcy: Security Interest Protected in Future Advances

     Virginia Code §8.9A-232 provides that a security agreement may provide for collateral securing future advances. Subsection (a) clarifies the result when the initial advance is paid and a future advance is subsequently made. Specifically, subsection (a) of this section replaced and clarified former §8.9-312(7) discussed in In re Enfolinc, Inc. The former section provided that the priority of a new advance turned on whether it was made “while a security interest is perfected.” The code as it is written today resolved the ambiguity by omitting that requirement.
     In the bankruptcy case In re Enfolinc, Inc., the United State Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, was requested to make a determination of the priority of three competing claims of creditors in a debtor’s bankruptcy case. The debtor filed under Chapter 11, and the court ordered the sale of assets, but the proceeds did not satisfy all of the liens. Three creditors then asserted a senior claim in the proceeds of the sale.
     One of the creditors had a security agreement with the debtor to secure a promissory note. The creditor renewed and refinanced the original loan with some modification in the terms and with additional collateral to secure the increased amount owned several times after the original promissory note was made. The creditor contended that the original security agreement contained a future advance clause that included all debts owed to the creditor under the original security agreement. A future advance clause was codified in Virginia Code §8.9-312(7), and is now codified in Virginia Code §8.9A-323. The former section provided that “if future advances are made by a secured creditor to the debtor while a security interest is perfect, the security interest has the same priority with respect to future advances as it does with respect to the original advance.” The creditor’s original security agreement was found to have had sufficient language to constitute a future advance clause as defined in the case of In re Brice, so the court held that the later renewals and refinancing done by the creditor was not another loan, but an advance of the original transaction. The court granted the creditor a first priority security interest in the remaining funds generated from the sale of the debtor’s assets.

Monday, May 6, 2013

Collections: Attorney's Fees on Collection Accounts

     Creditors rightfully expect their debtors to pay the attorney's fees that result from collection procedures. Courts, however, normally refuse an award of attorney's fees unless the debtor has executed a document awarding such costs in the event the account is turned over to an attorney for collection. Many creditors utilize a standard form contract, or note, which has such a provision. Because many forms are multi-state, and because states' laws vary, most standard forms provide for "reasonable attorney's fees." Traditionally, most courts in Central Virginia have interpreted "reasonable" to be the equivalent of 25% of the principle amount of the judgment, regardless of the actual legal fees charged, whether hourly or contingency. However, these days may be coming to an end due to court rulings!
     The Virginia Supreme Court, in the case of Coady v. Strategic Resources, Inc., ruled that an award of attorney’s fees rests within the sound discretion of the trial court. In the case of J. R. Mullins, et al. v. Richlands National Bank, the Virginia Supreme Court ruled that the trial court must determine the reasonableness of attorney's fees when disputed. In the case of Chawla v. BurgerBusters, Inc., the Virginia Supreme Court ruled that a party requesting an award of attorney’s fees must establish a prima facie case that the fees requested are reasonable. In the case Schlegel v. Bank of America, N.A., et al., the Court denied the request for attorney’s fees, citing the “test” to be used. It is as follows: In determining whether a party has shown the reasonableness of the fees, the fact finder may consider the time and effort expended by the attorney, the nature of the services rendered, the complexity of the services, the value of the services to the client, the results obtained, whether the fees incurred were consistent with those generally charged for similar services, and whether the services were necessary and appropriate.
     With all of this said, you could win a contested trial on the merits, but be forced to present an “expert witness” (i.e., another attorney) to testify to the reasonableness of your attorney’s fees! To avoid this problem, and, to insure at least a fighting chance of obtaining at least the 25%, or even 33 1/3rd % (which most attorneys charge in percentage collection cases), creditors should make certain that their forms specify "____% attorney's fees", or amend the standard form to "____%" and have the debtor initial adjacent to the change.
     It is important to note that the judicial award of attorney's fees is made upon the entry of judgment. If creditors take their own judgment, no attorney's fees will be awarded, even though the judgment may eventually be turned over to an attorney for collection. In this case creditors, not the debtor, will bear the full cost of collection. Accordingly, I recommend that creditors timely turn over all accounts to their attorney for prompt action.