Monday, June 30, 2014

Collection: Bank Loses Without Aggressive Action

     The need for aggressive action was again proven when a bank lost a priority in assets due to the bank's non-action.
     In the case of First Union National Bank of Virginia v Craun, a federal court found that the bank obtained a consent judgment from the debtor (a limited partner in a Virginia limited partnership), but took no further action. A year later the limited partnership perfected a security interest in the debtor's partnership interest by filing a financing statement with the State Corporation Commission. The partnership's security interest was to perfect a loan by the debtor from the partnership.
     Eventually a dispute arose on the priority of liens on the proceeds between the bank, based on its judgment, and the partnership, based on its perfected assignment.
     The partnership had priority, the court ruled, because the bank had not sought to enforce the judgment or levy on the limited partner before the assignment was perfected. The Court stated:
 "… had a writ of execution issued, and had such a writ been delivered into the hands of the marshal, defendant's inchoate intangible rights in distributions from the limited partnerships could have subjected to the lien of the writ....Plaintiff could then argue the writ of execution would have taken priority over a security interest perfected after the writ was issued and placed in the hands of the serving official, assuming the secured lienor was provided notice of the issuance of execution...But, that is not the case here. Plaintiff did not cause a writ of execution to issue. Instead, it merely sought the entry of a charging order armed only with what may be best described as a "naked" final judgment...Therefore, until a charging order entered, the judgment debtor...virtually was free, as against the instant plaintiff, to encumber intangible property, including interests to discretionary distributions of a limited partnership."
     The lesson of Craun is simple - take aggressive action and consult with counsel early in the process.

Monday, June 23, 2014

Foreclosure: Deed of Trust

     It all starts with the deed of trust. The deed of trust is the primary method of acquiring a lien against real estate in Virginia. With a deed of trust, the owner of the real estate conveys legal title to a trustee, in trust, to secure the noteholder’s indebtedness. A deed of trust establishes a lien on the subject real estate upon execution by the grantor and recordation in the land records of the Circuit Court for the jurisdiction (County or City) in which the property is located. While recording the deed of trust is not essential to the validity of the deed of trust between the parties, an unrecorded deed of trust does not establish a lien on the subject real estate as to other creditors and purchasers of the grantor. An unrecorded deed of trust will not provide the beneficiary of the deed of trust with a priority position against other creditors with recorded liens, even if they are subsequent in time.

Monday, June 16, 2014

Real Estate: Docketing Judgments to Secure an Interest in Real Estate

     In previous editions of Creditor News (which you can find at www.lawplc.com) 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 blog, we will review the benefits of docketing judgments to aid in the collection of your debt.
     Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection.
     Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge.
     If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462:
     Jurisdiction to enforce the lien of a judgment shall be in equity. If it appears to the court that the rents and profits of all real estate subject to the lien will not satisfy the judgment in five years, the court may decree such real estate, any part thereof, to be sold, and the proceeds applied to the discharge of the judgment.
     Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment.

    We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.
    

Monday, June 9, 2014

Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

     In the last issues of Creditor News I began a multi-issue review of cases that address the dischargeability of debts regarding property damage-malice. The relevant bankruptcy code provision is §523(a)(6). I briefly established the standard used by courts to determine dischargeability of debts involving property damage and discussed how the court applied the standard to two cases involving rented property and withheld payments.
     In the case of Ford Motor Credit Co. v. Rose, the United States Bankruptcy Court at Big Stone Gap, Virginia, denied a creditor's motion to declare a debt nondischargeable as a malicious injury based upon withholding payments.
     In Rose, a Ford automobile dealership deliberately withheld payments to the creditor, a credit company, in order for the debtor to cover the dealership's operating expenses.
     The Court held that the critical determination is whether the debtor's actions satisfy the "maliciousness" requirement of Bankruptcy Code §523(a)(6). The leading case in the 4th Circuit on the maliciousness requirement is Vaughn, in which the Court used an objective test for determining "maliciousness", but did not clearly define the limits of that test.
     The Court ruled that both parties acknowledged that the debtor sold twenty-five vehicles, with a value of approximately $240,000, and failed to submit the proceeds to Ford Credit pursuant to the financing agreement. This was deliberate and intentional and so the willfulness requirement of the Bankruptcy Code §523(a)(6) was met. The Court found that the creditor failed to establish that the debtor was malicious, however.
     While it was undisputed that the debtor knew that he was breaching the financing agreement, it was not clear that his actions would necessarily be expected to cause harm. The debtor asserted that the dealership had more than enough assets to adequately secure Ford Credit when he used the unremitted funds in violation of the financing agreement. The debtor was only acting to keep the business afloat and applied all of the funds to that purpose, even forsaking any salary for ten months. Further, the debtor appeared to have given total cooperation to the liquidation effort and did not personally benefit from any of the money belonging to Ford Credit. Therefore, the Court denied the creditor's motion based upon its failure to prove maliciousness.
     As seen in the cases reviewed over the past few issues, property damage cases may appear simple, but they are not. Creditors frequently have the burden of proof, and, elements unproven can lose a case. Experienced counsel is needed.
     Please review past issues of Creditor News on our website at www.lawplc.com.

Monday, June 2, 2014

Collections: Promissory Note - Acceleration of Balance

     The case of Atlas Rooter Co. v Atlas Enterprise, Inc., decided by the City of Richmond Circuit Court, serves as an excellent review of creditor's acceleration rights upon late payment on a promissory note.
     In Atlas the undisputed facts were that the debtors mailed their loan payment within the ten-day grace period provided for in the promissory note (as they routinely did), but the payment was received after the ten-day grace period. The creditor moved to accelerate the balance due on the note. The debtors argued that the usual course of dealing between the parties authorized the use of the mail for payment. The debtors claimed that because payment by mail was permitted in the past, payment was made when the letter containing the payment was deposited in the mail, and that the risk of late payment was assumed by the note holders. The note, however, did not specify this.
     The Court ruled that under Virginia law, payment of a debt is made upon receipt by the creditor, rather than by mailing by the debtor. The Court further reasoned that Virginia Code §8.3A - 602 provides that tender of payment of a negotiable instrument must be made "to a person" entitled to enforce the instrument. Payment or satisfaction discharges the liability of a party only if made to the holder of the instrument. The Court stated that to allow the mailing of an installment as timely payment would act to qualify the U.S. Postal Service as an agent of the note holder.
     There is a lesson for creditors in Atlas even though the creditor prevailed. Keep detailed records of payments, do not waive payment due dates, and create a "paper trail" regarding late payment reminders. Creditors prevail best when they do not have to pay the cost for enforcing their rights.