Real Estate: Foreclosing on Homeowner Association Liens to Secure an Interest in Real Estate

     In recent blogs 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 using homeowner association liens to aid in the collection of your debt. Previously we reviewed the special procedures for the collection of homeowners association dues under Virginia Code §55-516. We will now review the procedures for suits to foreclose on the lien.

     Suits must be brought within thirty six months of filing, but after the perfection of the lien. The Homeowner’s Association may sell the lot at a public sale, subject to prior liens. There are detailed requirements in the code, a brief summary of which include the following:
     1. The association shall give notice to the lot owner prior to advertisement as required in the code.
     2. After expiration of the 60-day notice period, the association may appoint a trustee to conduct the sale.
     3. If the lot owner meets the conditions specified in this subdivision prior to the date of the foreclosure sale, the lot owner shall have the right to have enforcement of the perfected lien discontinued prior to the sale of the lot. Those conditions are that the lot owner: (i) satisfy the debt secured by lien that is the subject of the nonjudicial foreclosure sale and (ii) pays all expenses and costs incurred in perfecting and enforcing the lien, including but not limited to advertising costs and reasonable attorneys' fees.
     4. In addition to the advertisement requirements, the association shall give written notice of the time, date and place of any proposed sale in execution of the lien, and include certain information required in the code.
     5. The advertisement of sale by the association shall be in a newspaper having a general circulation in the city or county wherein the property to be sold, with certain information requirements as set forth in the code.
     6. Failure to comply with the requirements for advertisement contained in this section shall, upon petition, render a sale of the property voidable by the court.
     7. In the event of a sale, the code sets forth bidding and proceeds application procedures.
     8. After sale, the trustee shall deliver to the purchaser a trustee's deed conveying the lot with special warranty of title.
     9. After completion, the trustee shall file an accounting of the sale with the commissioner of accounts.
     We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Bankruptcy: Debtor can contribute for Retirement in Chapter 13 Case

     In the case of In re: Ricardo Cantu, Jr., the United States Bankruptcy Court at Alexandria ruled that a debtor in a Chapter 13 case can contribute for retirement under 11 U.S.C. Section 541 (b)(7).
     In Cantu the Chapter 13 trustee objected to the debtor making voluntary retirement contributions. The Court, in its review, noted that the issue of voluntary contributions has been the subject of some debate in the case law in recent years. The Court stated that there are essentially three divergent lines of cases. The first line holds that the debtor is not entitled to any deduction for voluntary contributions, whether or not he was making voluntary contributions pre-petition. The second line is that voluntary retirement contributions may be continued as long as they are consistent with the debtor’s pre-petition history of contributions. The third line, which the Court noted was the majority view, concludes that the bankruptcy code allows for the deduction, whether or not the debtor was making voluntary contributions prior to the bankruptcy filing, but subject to a determination of the debtor’s good faith.
     The Court noted that the bankruptcy trustee urged the Court to adopt the second line of cases, but the Court adopted the third, deciding that the bankruptcy code does not limit the debtor’s ability to make contributions post-petition, nor is there any distinction between pre-petition contributions and post-petition contributions. The Court held that the use of the term “any amount”, without limitations, followed by the term “contributions”, compelled the conclusion that Congress meant no such distinction.
     The Court further decided that there was no evidence that the debtor proceeded in anything other than good faith. Accordingly, the Court overruled the Chapter 13 trustee’s objection.

Collections: Arbitration - A Collection Alternative

     Arbitration has become an increasingly popular way of resolving disputes. For those readers unfamiliar with the concept, arbitration is a process in which parties agree to submit the issues in controversy for determination by a party that they choose. The purpose behind the decision to arbitrate is usually to reach a resolution to the dispute in a quicker and cheaper manner than court action. Although most parties to the arbitration retain counsel to represent them, costs are normally less than court action because the rules of evidence are more relaxed, and the proceedings are less formal.
     Virginia law recognizes the arbitration process and provides for the legal enforcement of arbitration awards.
     The American Arbitration Association has developed standard rules, procedures, and panels of trained professionals to serve as arbitrators - the finders of fact.
     The structure of the arbitration hearing is similar to a regular court hearing. A party has the right to representation by an attorney. Both parties also have an opportunity to make an opening statement, discuss the remedy they are seeking, introduce and cross-examine witnesses, and make a closing statement. Unlike a regular court proceeding, neither party in arbitration has the burden of proof because each party must persuade the arbitrator that its position is correct.
     Virginia Code §8.01-577 to §8.01-581.016 establishes Virginia's rule for arbitration. First, both parties must agree in a written agreement to submit a case for arbitration. The parties then select an arbitrator from a list of names. The court also may appoint an arbitrator.
     An arbitrator has several duties. The first and foremost is to preside over the arbitration hearing. An arbitrator in Virginia may issue subpoenas for witnesses to appear. Lastly, the arbitrator issues and signs the award.
     The court then confirms, modifies or vacates the award. The reasons for modification or vacation vary from a mistake in calculation to the arbitrators exceeding their powers (see Virginia Code §8.01-581.010 and §8.01-581.011). The court proceeds to enter a judgment or decree on the award. A party may appeal an award as one would in a civil action.
     The California Court of Appeals has ruled on the enforceability of arbitration clauses. In Bell v. Congress Mortgage Co., Inc., the California Court held that an arbitration clause in a contract must be highlighted in bold type or the consumer needs to initial beside the specific clause. These methods should make the consumer aware of the arbitration clause in the contract, as previously a consumer might waive his right to a jury trial without realizing it because, the California Court stated, an arbitration clause is not within the reasonable expectations of the consumer. There is no such requirement in Virginia law for the arbitration clause to be highlighted.  However, until the issue is litigated in Virginia, initials next to the clause would be a good measure of caution.
     I have litigated several arbitration cases, each to positive results, once to an amount higher than initially requested by the client.

Creditors, Let's Talk about Foreclosures!

     Foreclosures. This is not a topic that most creditors wish to discuss. After all, if you get to this point your loan is delinquent and you are not having success getting your borrower to pay. When to take action and what action to take – these are important matters to discuss. We can help!

     At Lafayette, Ayers & Whitlock PLC we represent holders of deeds of trust and help our clients evaluate their order of priority and equity cushion, as well as explore bankruptcy implications and collection strategies. We do this for first, second and subsequent deeds of trust, as well as equity lines and judgment liens (the last of which can be enforced through a Creditor’s Bill).
     We do foreclosures all across the Commonwealth of Virginia.
     Even if we are not your specified trustee in your deed of trust, we can prepare and record a deed of appointment of substitute trustee and protect your interests.
     I invite you to please call me so that we can discuss your questions.
Eddie

LAW Business work

     Many of you have inquired about my availability to do business work and attend corporate, credit union, and homeowner’s association meetings. I do this, and, I am available.

     When it comes to board work, I recognize that most board members are volunteers. Having experienced counsel available to provide advice, guidance and continuity as boards change is crucial for productive and efficient boards, as well as for avoiding potential board member liability in lawsuits.
     When it comes to larger meetings (stockholders, credit union members, or homeowner’s associations), having experienced counsel available to explain rights and options, as well as analyze courses of action and provide advice can be invaluable.
     If you think that you may have a need, please call me so that we can discuss. I can structure a reasonable rate to fit your needs.
Eddie

LAW Real Estate Matters

     Many of you have recently asked if I handle real estate work. The answer is YES! I do residential and commercial transactions – especially for Credit Unions. I handle first and second loans, as well as refinances, equity lines of credit, and foreclosures. I have three very experienced real estate paralegals (Donna Dunn, Dwen Jenkins, and Sandra Milburn), who have been working in the real estate field for many years.
     Unlike other attorneys and real estate settlement companies, I will always provide you with the real cost of your transaction in advance, not have “hidden costs” with different names buried in the settlement statement.
     I invite you to please call me so that we can discuss your real estate needs.
Eddie

Creditors, Let’s Talk about Bankruptcy!

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk!

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed.
     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you.
     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem.
     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of one normal one hour billing rate ($250.00). Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively.
     I invite you to please call me so that we can discuss your questions.
Eddie

Creditors, Let's Talk about Post Judgment Collections

       Post Judgment Collections. Frequently this is the time that you will collect most of your money.

     While at Lafayette, Ayers & Whitlock PLC we represent creditors from beginning to end in the collection process, we recognize that some creditors either still file some of their own suits, or, have done so in the past. After taking that judgment, and if collection does not come easy, all too frequently judgments are “put on the shelf” and eventually forgotten. Do not let this happen to you! At Lafayette, Ayers & Whitlock PLC we can help you collect judgments that you have already taken. Your General District Court judgments are good for ten years, but can be docketed in a Circuit Court to extend the life of the judgment to twenty years. These judgments can even be renewed for an additional twenty years. We can work your old judgments. We have the most up-to-date programs, resources and methods. We do all of this on a percentage of collections fee basis – in other words, if we do not collect, you do not pay us a fee. Accordingly, our incentive is to collect! I take pride in the fact that at Lafayette, Ayers & Whitlock PLC our experience, staff, responsiveness and resources have made our post judgment collections superior to other collectors.
     I invite you to please call me so that we can discuss your questions.
Eddie

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: Common Area Parking Spaces Must be Assigned Equally

     The Court of Appeals of Virginia recently issued an opinion affirming a Circuit Court decision holding that common area parking spaces must be assigned equally. The case involved a suit by a homeowner, Patrick Batt, against Manchester Oaks subdivision in Fairfax County. The subdivision contained 57 townhouses, 30 of which were constructed with a garage and driveway (garaged lots) and 27 of which were constructed with an additional bedroom and bathroom in lieu of a garage (ungaraged lots). The subdivision included a common area with 72 parking spaces.
      The subdivision was subject to a declaration, administered by the homeowners association that gave the association the right to designate a maximum of two parking spaces for the exclusive use of each lot owner. However, the association was not required to ensure that parking spaces were available to any particular owner or to oversee use of the parking spaces. Batt had purchased a garaged lot in 1990, before the subdivision was complete. At that time, residents parked wherever they chose. In 1993 or 1994, the developer began assigning two parking spaces to each ungaraged lot. The remaining 18 parking spaces were designated as “visitor” parking, available to all lot owners on a first-come, first-served basis.
     In 2009, the association issued one visitor parking permit to each lot owner and posted a parking policy on its website. Any vehicle not displaying a permit while parked in the visitor parking spaces would be towed. In December 2009, the association amended the declaration to provide that the association had the right to designate two parking spaces exclusively to each of the ungaraged lot owners on a non-uniform and preferential basis. In June 2010, Batt sued the association, claiming that the unequal treatment of owners over parking space assignments violated the declaration. The association argued that Batt’s suit was barred by the December 2009 amendment to the declaration.

     The circuit court ruled in Batt’s favor, finding that the amendment was invalid for six reasons. The association appealed. The Court of Appeals ruled, in summary, that equality is inherent in the definition of “common area.” A “common area” is defined as, “[a]n area owned and used in common by residents of a condominium, subdivision, or planned-unit development.” Black’s Law Dictionary defines “in common” to mean “[s]hared equally with others, undivided into separately owned parts.” Accordingly, the court held that the association must assign common area parking spaces to all lot owners equally, if at all, unless the declaration expressly provided otherwise. In this case, the court did not find that unequal assignment was authorized.

Bankruptcy: Poor Debtor's Exemption - Objection in a Chapter 13 Plan

     In the case of In re Bonner, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, ruled that a credit union, which did not perfect its lien on a car the debtor purchased with a credit union loan, could not prevent confirmation of the debtor's Chapter 13 plan. The Court did, however, sustain the credit union's objection to the debtor's claim of a $2,000 "poor debtor's exemption" in the car under Virginia Code §34-5.

     In Bonner the credit union maintained that its purchase money security interest, though not perfected as to third parties, could be enforced in a Chapter 13 case notwithstanding Bankruptcy Code §544(a). The Court ruled, though, that the avoidance powers under §544 extend to trustees in Chapter 13. The Court cited the case of In re Freeman, where another court had held that a Chapter 13 debtor shares the trustee's status as a hypothetical lien creditor under §544. Accordingly, the Court ruled that since either the debtor or trustee is deemed to have exercised the hypothetical lien creditor's rights at the time of filing, the transfer of the security interest by the debtor to the credit union had been nullified. The claim filed by the credit union was therefore unsecured, and the debtor had properly provided for it under the plan.
     Nevertheless, the Court ruled that pursuant to Virginia Code §34-5, the poor debtor's exemption could not be claimed against a debt for the purchase of such property or any part thereof. Unlike the exception included in Virginia Code §34-26(8), which provides only a valid purchase money security interest with priority over the exemption, the restriction in §34-5 is not conditioned on the creditor possessing an enforceable lien. Therefore, the Court reasoned that the credit union's failure to perfect its security interest simply had no bearing. Accordingly, the Court sustained the credit union's objection to the poor debtor's exemption.

Collection: Mechanics Lien voided by Old Work

     Mechanic’s liens are strictly governed by statutory law. This fact is well illustrated in the case of Johnson v. Tadlock. In Johnson the Fairfax County Circuit Court ruled that a mechanic's lien that included work performed before the 150-day statutory window was invalid in its entirety. Under the mechanic's lien statute, a memorandum of lien should not include any sums due for labor and materials furnished more than 150 days prior to the last day of work. However, the Court's decision in Johnson appears to be the first in which a Circuit Court has struck an entire lien based on the inclusion of stale work.

     In Johnson, the Court found as fact that a workman filed a mechanic's lien for $15,500 for various work, including lot clearance, removal of trees and installation of a storm drainage system and caissons. The property owner sought to have the lien released based on its inclusion of stale work. A portion of the lien (amounting to at least $1,500) was for work clearly performed within the 150-day statutory period. The property owner asserted that all or a part of the remainder of the work was performed more than 150 days prior to the workman's last day on the job.
     The Court ruled that the inclusion of a stale claim tainted the entire lien. The Court cited language in the mechanic's lien statute "no memorandum... shall include ....," to support his position. The Court pointed out that mechanic's liens are "creatures of statute" and therefore need to conform strictly to their statutory requirements. Accordingly, the court refused to remove the improper portions of the claim and rule on the proper portion of the claim - it survived or perished in its totality.
     The lesson of Johnson, as the lesson is in so many cases, obtain competent legal advise and representation in pursuing mechanic's lien claims.

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: The Virginia Property Owners' Association Act - Foreclosing on Memorandums of Lien

       In a previous blog, I discussed the provisions related to filing a memorandum of lien under the Virginia Property Owners’ Association Act.

     The Act provides: “At any time after perfecting the lien pursuant to this section, the property owners' association may sell the lot at public sale, subject to prior liens.” In order to conduct a nonjudicial foreclosure, the association must comply with the statutory requirements.
     The association must give notice to the lot owner prior to advertising the sale. The notice must include notice of: “(i) the debt secured by the perfected lien; (ii) the action required to satisfy the debt secured by the perfected lien; (iii) the date, not less than 60 days from the date the notice is given to the lot owner, by which the debt secured by the lien must be satisfied; and (iv) that failure to satisfy the debt secured by the lien on or before the date specified in the notice may result in the sale of the lot.” The notice must also inform the lot owner of the right to bring a court action in the circuit court of the county or city where the lot is located to assert the nonexistence of a debt or any other defense of the lot owner to the sale.
     If the lot owner (i) satisfies the debt secured by lien that is the subject of the nonjudicial foreclosure sale and (ii) pays all expenses and costs incurred in perfecting and enforcing the lien, including but not limited to advertising costs and reasonable attorneys' fees, then the sale is discontinued. However, if after 60 days and the lot owner has not made those payments, the association may appoint a trustee for the sale and advertise the sale. In addition to advertising the sale, the association must give written notice of the time, date and place of any proposed sale in execution of the lien, and including the name, address and telephone number of the trustee. That notice must be at least given to the owner, lienholders and their assigns by certified or registered mail 14 days prior to the sale.
     The association must advertise the sale in a newspaper in the city or county where the property will be sold. The advertisement must be in a section with legal notices or where the property being sold is generally advertised for sale. The advertisement must describe the property by address and general location and have information for the representative or an attorney who can respond to inquiries about the property with their name, address, and telephone number. The advertisement must be in the newspaper for four successive weeks, but if the lot is located in a city or county immediately contiguous to a city, publication of the advertisement for five different days is sufficient. The sale then must be held on any day after the last advertisement but not earlier than 8 days after the first advertisement and not more than 30 days after the last advertisement.
     Failure to comply with these and other requirements in the statute will render the sale of the property voidable by the court. The law firm of Lafayette, Ayers & Whitlock, PLC, represents homeowner’s associations and can handle memorandums of lien and foreclosure procedures. 

Bankruptcy: Homestead & Poor Debtor Exemptions, Rental Property

          In the case of In re: Latham, the United States Bankruptcy Court at Roanoke, Virginia ruled that Virginia debtors who had a North Carolina beach house could not claim their beach house furniture in North Carolina exempt under the "household furnishings" provision of the Virginia poor debtor's exemption in Virginia Code §34-26.

     The Bankruptcy Trustee had filed an objection to the debtor's exemption claim that the furniture had a value of $9,200.00. The Bankruptcy Trustee took the position that the miscellaneous beach furniture was not household furniture because it was not located in the debtors' household and constituted personal property located on a property used by the debtors to generate income.
     The Bankruptcy Court in Latham found that the miscellaneous beach furniture did not fall within the statutory phrase "household furnishings" found in Virginia Code §34-26 (4a). The Bankruptcy Court noted that there were no published decisions that defined the term "household furnishings" from Virginia Code §34-26 (4a). The Bankruptcy Court stated that the meaning could be determined by the examination both of the statute itself and the definition of household furnishings in Black's Law Dictionary. In regard to the statute, the Bankruptcy Court noted that the statute gives examples of household furnishings which the legislature intended to set aside for the benefit of the debtors and their families. The examples cited by the legislature in the statute point toward items that debtors can retain and use in order to facilitate their fresh start. The common definitions indicate a necessity that the furnishings be in the household and used by the householder or his family. The Bankruptcy Court noted that the purpose of the pertinent statute is to protect debtors and their families from being destitute by the creditor process. Accordingly, the Bankruptcy Court found that the term "household furniture" in Virginia Code §34-26 (4a) meant "those items of furniture which are typically found in or around the home of debtors and are used by debtors and their dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself." With this being the case, the Bankruptcy Court found that the debtors in Latham intended to use their beach house as a place to go on vacation only when it was not rented. In order to finance construction, the debtors built the house with the primary intent to rent it out during peak season. The Bankruptcy Court found that the beach house was not the type of "home of the debtors" contemplated by the definition. Accordingly, the Bankruptcy Court sustained the Bankruptcy Trustee's objection to this claimed exemption.
     The Bankruptcy Trustee also objected to the debtor's claim for $3,000.00 in rental income on the property. As to this property, the Bankruptcy Trustee took the position that the debtors were required to file their homestead deed in North Carolina at the situs of the real property in order to perfect their claimed exemption in the rental income. The Bankruptcy Trustee was unable to cite authority in support of his position, however. Accordingly, the Bankruptcy Court ruled that the income was properly claimed and the exemption was properly perfected by the recordation of the homestead deed in Washington County, Virginia, and the Bankruptcy Trustee's objection to the claimed exemption was denied.

Collection: Child Support Exemption for Garnishment

     In the case of General Electric Capital Auto Lease, Inc. v. Turner, the City of Richmond Circuit Court denied a debtor's exemption to garnishment claim.

     In Turner the debtor claimed an exemption based on the amount of monthly child support the debtor owed. The Court noted that the specific exemption claimed by the debtor on the garnishment form was the exemption created by Virginia Code §55-165. The judgment creditor argued that this code section only applied to assignments of wages executed and approved by a judge under the procedure specifically set out in Virginia Code §55-161 through 167. That procedure included notice to and consent of the debtor's creditors, the appointment of a trustee, and so on. The Court found as fact that none of those things were done in this case. Therefore, the Court ruled that an exemption under Virginia Code §55-165 did not apply. The Court also considered all the other exemptions from garnishment listed in Virginia Code §8.01-512.4, and none of those exemptions applied either. Accordingly, the debtor's claim of exemption was denied.

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.

Real Estate: The Virginia Property Owners' Association Act - Memorandums of Lien

      In a previous blog, I began discussing the Virginia Property Owners’ Association Act.

     The Act specifically provides for remedies outside of the more common remedy of filing suit for the amount owed and receiving a judgment. A memorandum of lien to a holder of a credit line deed of trust under the Act is given in the same fashion as if the association’s lien were a judgment. Under the Act, the association can file for and perfect a lien against the homeowner that is prior to all other subsequent liens and encumbrances except real estate tax liens, liens and encumbrances recorded prior to the recordation of the declaration, and sums unpaid on and owing under any mortgage or deed of trust recorded prior to perfection of this lien.
     To perfect the memorandum of lien, the association must file with the clerk of the circuit court in the county or city in which the development is situated a memorandum verified by the oath of the principal officer of the association or another officer provided for in the declaration. The memorandum must be filed within 12 months from the first assessment became due and payable. Additionally, prior to filing a memorandum of lien, a written notice must be sent to the property owner by certified mail, at the owner’s last known address, informing the owner that the lien will be filed in the circuit court clerk’s office at least 10 days before the actual filing date of the lien. The memorandum must name the development, describe the lot, name the person(s) constituting the owners of the lot, list the amount of unpaid assessments currently due or past due relative to such lot together with the date when each fell due, list the date of issuance of the memorandum, name the association with a name and address of the contact for the person to contact to arrange for payment or release of the lien, and state that the association is obtaining a lien in accordance with the provisions of the Virginia Property Owners’ Association act as set forth in Chapter 26 (section 55-508 et seq.) of Title 55.
     The Act provides that a judgment or decree in this action must include, without limitation, reimbursement for costs and reasonable attorney’s fees for the prevailing party. Also, if the association prevails, it may also recover interest at the legal rate for the sums secured by the lien from the time each sum became due and payable. If the owner then satisfies the debt, the lien must be released, and failure to release the lien results in a penalty.
     Once a lien has been perfected, the association must enforce the lien within 36 months from the time when the memorandum of lien was recorded. This time period cannot be extended.
     In a future blog, I will discuss foreclosure on a lien.

Bankruptcy: Bankruptcy Exemption - Sale of Tenants by the Entirety Property

     In the case of In Re Zella, the United States Bankruptcy Court at Alexandria, Virginia ruled that a deed that conveyed the Virginia marital home to the debtor and his wife "as joint tenants with the full common law right of survivorship" created a tenancy by the entirety and proceeds from the sale of the property is exempt from claims on non-joint creditors in Bankruptcy Court.

     In Zella a creditor challenged a claim of exemption. The Bankruptcy Court determined that the key issue of the case was whether, in Virginia, a deed to parties described in the deed as husband and wife, and who are in fact husband and wife, as "joint tenants with the full common law right of survivorship," creates a tenancy by the entirety in accordance with Virginia Code §55-20, and thus makes the property exempt from the claims of non-joint creditors under Bankruptcy Code §522(b)(2)(B). The Bankruptcy Court concluded that the deed in question did create a tenancy by the entireties, notwithstanding the lack of language using those specific words, as the deed specifically contained the language "with the full common law right of survivorship". The Bankruptcy Court cited two Virginia Supreme Court cases which support such a finding: Allen v. Parkey and Burroughs v. Gorman. The Bankruptcy Court ruled that the language in the deed explicitly evidenced the intent to preserve the common-law right of survivorship.

Collection: No Debt Cure from Extra Payments

     In the case of W. Harold Tulley I LLC v. North Richmond Investments Inc., the City of Richmond Circuit Court addressed a case involving an alleged cure of a default by payments made after default.

     The Court ruled in Tulley that Plaintiff lender is entitled to a deficiency judgment after foreclosure on real estate that secured a commercial loan. The Court rejected Defendant guarantors’ contention that their additional payments after default cured the default, as such was not provided for under the parties’ contract.
     Defendants asserted that the Third-Party Defendant trustees and Plaintiff breached their obligations and duties because they knew or should have known Defendants were not in default. Defendants claimed that the trustees violated their duties under the loan documents, failed to act impartially, failed to acquire the best price upon the sale, sold the property at an inadequate sale price, and as they were never in default, should not have conducted the sale. Defendants contended that the trustees conducted the sale on a sham bid, knowing that Defendants were not in default.
     The Court noted that neither the deed of trust and guaranty agreement nor the applicable statute, Virginia Code Section 55-59, lists any of the duties Defendants would have imposed on the trustees in foreclosure sales.
     The Court found that both the deed of trust and the guaranty agreement describe default as failure to pay the agreed upon amounts at the agreed upon time on a timely basis. The guarantor stated that upon his tender of the two advance interest payments, there was no agreement regarding how the payments were to be applied, and that he understood they were not required under the financing and deed of trust documents. The Court ruled that Defendants were held properly in default, the amounts due accelerated triggering foreclosure.

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: The Virginia Property Owners' Association Act - General Provisions

     In a previous blog I began a review of the Virginia Property Owners’ Act. Under the Act, sellers are required to disclose in their sales contract that the property is located within a development subject to the Act. The Act also requires the seller to retrieve the Disclosure Packet in the Act and provide it to the purchaser. The Disclosure Packet includes the following information: association documents, the name of the association, state of incorporation, register agent’s name and address, any other entity/facility to which the owner may owe fees or charges, budget or summary, income/expenses statement or balance sheet for last fiscal year, statement of balance due of outstanding loans, nature/status of pending lawsuits, unpaid judgments (with material impact on association or members or relating to lot being purchased), insurance coverage provided for lot owners including fidelity bond maintained by association, and much more.

     The purchaser may cancel the contract within three days if delivered by hand or email, or six days if sent by mail, after receiving the Disclosure Packet or being notified that it is “not available” (meaning: a current annual report has not been filed by the Association with either the SCC or the CICB; or the seller has requested in writing that the packet be provided and it is not received within 14 days; or the association has provided written notice that the Disclosure Packet is not available). Additionally, if the Disclosure Packet is not delivered or the association does not indicate that it is not available, the purchaser may cancel the sale any time prior to closing. If the purchaser received the Disclosure Packet, the owner also has the right to request an update. However, the rights to receive and cancel the contract are waived conclusively if not exercised before settlement.
     Failure to provide a Disclosure Packet after a written request for it has been made results in a waiver of any claim to delinquent assessments or violations of association documents up to that point, and the association will be liable to the seller for actual damages sustained up to $1,000 if the association is managed by a CIC Manager or up to $500 if it is self-managed.
     In upcoming blogs, I will discuss the provisions of the Virginia Property Owners’ Association Act that provide a memorandum of lien and foreclosure in the event of an owner’s default.

Bankruptcy: IRA Exemption in Chapter 7

     The United States Bankruptcy Court in Alexandria, in the case of In Re Hasse, ruled that a federal employee who participated in the federal thrift savings plan may claim an unlimited exemption in an individual retirement account, despite the objection of the Chapter 7 trustee.

     The IRA, valued at $100,000, was claimed exempt under Virginia Code §34-34. Virtually all the debtor’s other assets were either encumbered by liens or were exempt, with the result that the IRA was the only asset potentially available for the payment of creditor claims. At issue in this case was the Virginia General Assembly’s decision to amend Virginia Code §34-34 in 1999 by adding subsection H, which provided that an individual who claimed an exemption under federal law for any retirement plan established pursuant to §§ 401, 403(a), 403(b), 409 or 457 of the Internet Revenue Code (“IRC”) shall not be entitled to claim the exemption under this subsection for a retirement plan established pursuant to §408 or §408 A of the IRC. The thrust of the amendment was to give a debtor who had no other tax-qualified retirement plan the right to an unlimited IRA exemption but to deny the unlimited exemption to a person who was covered by such a plan. By giving a person who was not covered by an ERISA-qualified plan the right to an unlimited IRA exemption, such a person would be put on an equal footing with an employee who was a participant in an ERISA-qualified plan.
     The Bankruptcy Court found that a federal thrift savings plan account, while it is similar to, and for tax purposes is treated exactly like a private employer 401(k) plan - was nevertheless not subject to all the regulations governing §401(k) plans. The question was therefore whether, for the purpose of applying §34-34(H), a thrift savings plan account should be treated as a “retirement plan established pursuant to” §401 of the IRC. If so, the debtor was not entitled to a further exemption for his IRA; otherwise, he could exempt it in full.  
     The trustee took the position that Congress, by treating the thrift savings plan for tax purposes in the same fashion as 401(k) plans, sufficiently equated the two for the purposes of applying Virginia Code §34-34(H). Debtor took strenuous exception to that argument and points out that 5 U.S.C. §8440 only governed the tax treatment of thrift savings plan contributions and distributions. The Bankruptcy Court noted that not only did the enabling statute mandate compliance with the “requirements” of §401(k), it expressly exempted it from compliance with two of those requirements.
     The Bankruptcy Court found that the trustee’s argument ignored the words chosen by the Virginia General Assembly. Those words were very precise. The Bankruptcy Court ruled that a debtor was entitled to an unlimited exemption in an IRA unless the debtor was a participant in, or beneficiary of, a plan that is “intended to satisfy the requirements of” and is “established pursuant to” certain specific sections of the IRC. Although the thrift savings plan operates like, and enjoys the tax benefits of, a 401(k) plan, it was not a 401(k) plan and was not subject to all the “requirements” of a 401(k) plan. The Bankruptcy Court stated that for whatever reason, the General Assembly chose not to define “retirement plan” in such a way as to embrace, not only plans “established” under the enumerated sections of the IRC, but also plans treated for tax purposes like such plans.
     Prior the enactment of Virginia Code §34-34(H), only a limited exemption was available in Virginia for IRAs. The Bankruptcy Court found that the statute plainly intended to expand that exemption. The ability of people to provide adequately for their old age is obviously a matter of great public importance, and it is certainly reasonable that the General Assembly would want, as a matter of sound public policy, to protect savings set aside for that purpose.
     Accordingly, the trustee’s objection was overruled and the debtor’s exemption was allowed.

Collection: 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.

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: The Virginia Property Owners' Association Act - An Introduction

    The Virginia Property Owners’ Association Act provides homeowner’s associations with additional protections when homeowners fail to pay their dues; it also defines responsibilities of the association. Accordingly, homeowner’s associations should be knowledgeable of the Act and its provisions. The Act applies to developments subject to a declaration recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act. In upcoming blogs, I will briefly introduce this Act and some of the special duties it imposes on homeowner’s associations. Subsequent issues will address memorandum of liens and foreclosures.

Bankruptcy: Relief from Automatic Stay - Lack of Adequate Protection

     In the case of Equitable Life Assurance Society of U.S. v. James River Associates, the United States District Court at Newport News upheld a Bankruptcy Court ruling that where a creditor held a note executed by a debtor and secured by a first deed of trust on a hotel and a conference center in Williamsburg, Virginia, the creditor was entitled to relief from the automatic stay in order to foreclose because the creditor's "equity cushion" in the property was only two percent.

     In the trial of this case, the Bankruptcy Court found that the creditor was not adequately protected because 1) its equity cushion was deteriorating as interest accrued, 2) real estate taxes were delinquent, 3) the creditor had not received payments on the note for numerous months and 4) the priming lien necessary for the debtor to reorganize would further deteriorate the creditor's security position.
     On appeal to the District Court the debtor argued that the Bankruptcy Court erred in its finding that the creditor's equity cushion was deteriorating due to the accumulation of unpaid interest. The District Court opined that under the "equity cushion" theory if a debtor has equity in a property sufficient to shield the creditor from either the declining value of the collateral or an increase in the claim from accrual of interest or expenses, then the creditor is protected. The District Court ruled that the Bankruptcy Court's conclusion that the creditor was inadequately protected because of the deterioration of its equity cushion from accumulating interest was not in error. The District Court noted that although several courts had previously rejected the equity cushion theory, it did not need to decide the merits of the equity cushion theory since the Bankruptcy Court found that there were other sufficient justifications for finding a lack of adequate protection. These are detailed in the following paragraphs:
     First, the Bankruptcy Court found that the real estate taxes were delinquent for two tax years in a total amount of $264,624. The District Court ruled that the failure to pay real estate taxes may constitute a basis for finding lack of adequate protection.
     Second, the Bankruptcy Court found that there was a lack of payments to the creditor for several months, including, no payments since the bankruptcy petition. The District Court ruled that a continued failure to make monthly payments under loan documents can constitute cause for granting relief from the automatic stay. The District Court ruled that there was no error in granting relief from the automatic stay for failure to make payments.
     Third, the Bankruptcy Court found that the creditor's security position would be deteriorated by the proposed priming lien which the debtor needed to reorganize. Given the lack of an equity cushion and the speculative nature of the repayment plan, the District Court ruled that there was no error in granting relief from the automatic stay because of the deterioration of the creditor's security position due to the priming loan.
     In conclusion, the District Court concluded that the Bankruptcy Court did not err in granting the creditor's motion for relief from the automatic stay. The Bankruptcy Court properly found that the diminishing equity cushion, the delinquent real estate taxes, the lack of payments on the note for several months, and the deterioration of the creditor's security position under the priming lien constitute, both independently and together, a lack of adequate protection for the creditor.

Collections: The IRS Can be Helpful in Commercial Collections

     Can you imagine using the IRS to help in collections? I can! I have an interesting technique that I have recommended for over twenty-two years – I first ran an article on this in the May, 1992 (the 4th Edition) of Creditor’s News.  Since recently others have also begun recommending this technique, I thought that I would review it again.

     After a sufficient amount of time has passed to consider a commercial credit account "uncollectible," the creditor should consider writing off the debt as a potentially tax-deductible bad debt. The creditor's loss may then become the debtor's gain and, as such, may be reported to the IRS on Form 1099 as income to that debtor.
     Before actually writing off the debt, attempts should be made to contact the debtor and advise him of the intended action. If you do not have the debtor's social security number, try including a W-9 form with your letter. This could evoke some favorable response.
     I have a form letter that I recently revised to accomplish all of this. The letter (written from the perspective of the creditor itself) advises the debtor that his account is seriously past due despite repeated attempts to make arrangements for payment. The debtor is further advised that unless the debt is paid in full within fifteen (15) days from the date of the letter, the creditor will, at its option, report the loss to the IRS on their form 1099c. This reporting will result in taxable income to the debtor (reference IRS Regulation S1.61-12). This reporting will result in an IRS audit risk to the debtor, as the IRS routinely runs computer matches of the 1099’s filed against tax returns actually filed to insure that all income is reported; there are severe penalties if not. The letter further states that the creditor is demanding the debtor’s tax identification information; the debtor is asked to do so within fifteen (15) days. The debtor must provide this information to the creditor under penalty of federal law. I recommend that you send with the letter a copy of the IRS form W-9 evidencing the unpaid debt, and advise the debtor that if you do not receive the W-9, the creditor will, at its option, file an IRS form 1099c incomplete. This will further increase the debtor’s chances of an audit.
     Many debtors will wish to resolve the debt as a result of these actions. After all, who wants the IRS checking them out?
     If you have any questions of wish to discuss this, please call us at 545-6250. Eddie & Jennifer.

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: 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: Contract Default, Interest Rates and Attorney's Fees

     The United States District Court at Abingdon, in the case of Florida Asset Financing Corp. v. Dixon, ruled that a contractual default interest rate of 36 percent was available to an oversecured creditor as part of its claim against a debtor. The Bankruptcy Court decision denying such interest was reversed. 

     The District Court ruled that the Bankruptcy Code provides that, in general, a claim must be oversecured in order to recover postpetition interest in addition to reasonable fees, costs and charges as part of its secured claim. As to the appropriate rate of interest applicable to an oversecured creditor’s principal claim, however, Bankruptcy Code §506 and the accompanying legislative history are silent. The District Court reported that a great majority of courts to have considered the issue of postpetition interest have concluded that the contract rate of interest applies. Default rates of interest generally do not enjoy, however, the same straight-forward treatment that postpetition interest claims for basic interest do. The Supreme Court noted in the case of Rake v. Wade that postpetition interest may be claimed up to the extent of the value of the collateral.
     The District Court ruled that entitlement to default interest is generally determined by a reliance on equitable principles or the cure rationale evoked by the 9th Circuit Court of Appeals in the case of In re Entz-White Lumber & Supply, Inc. The District Court, unlike the Bankruptcy Court, found that the debtor in this case had not “essentially…cured” his default. The District Court noted that the majority of jurisdictions allow, or at least give “a presumption to the allowability of default rates of interest, provided that the rate is not unenforceable under applicable nonbankruptcy law”. The facts and equities specific to each case prove determinative in the analysis of default rates. Within this analysis, the contract default rate is neither irrelevant nor predictive.
     The District Court decided that the question presented by this case was just how far the Bankruptcy Court’s equitable powers extended under a modern reading of Bankruptcy Code §506(b). The rule governing the District Court’s consideration of this case was as follows: where the circumstances necessitating an equitable deviation are plainly absent and the contract interest rate does not violate state usury laws, function as a penalty or exceed the value of the collateral, the presumption in favor of the contract rate has not been rebutted. The District Court noted that to do otherwise is to impinge on a creditor’s statutory rights under Bankruptcy Code §506b). The District Court decided that in Dixon the presumption was in favor of the contract default rate. In order to discover what equitable considerations may support the Bankruptcy Court’s decision to deviate from this contract rate, the District Court turned to an analysis of the case law. The District Court found that those cases presenting equitable circumstances necessitating a deviation from the contract default rate were distinguishable on their facts. In this case, the contract default rate of interest in question violated neither state nor federal law, and there was a notable lack of circumstances which would encourage an equitable deviation from the stated contractual default rate.
     The District Court stated that it seemed clear as well that the Bankruptcy Court erred when it deemed the default rate to be a penalty. No evidence existed on the record to support the Bankruptcy Court’s characterization. The default rate was within the bounds of state usury law, and merely calling the rate exorbitant, or noting its large departure from the non-default rate, did not suffice to render it unconscionable.
     In summary, the District Court ruled that the contractual default interest rate in Dixon had not been rebutted by equitable considerations. The District Court ruled that the Bankruptcy Court’s decision to reject the default interest rate and apply the nondefault interest rate was therefore erroneous. The Bankruptcy Code and applicable case law, facts of the case and equitable principles of distribution compelled that the debtor should have been held to the contract default rate of interest provided in the note. The District Court stated that to find otherwise would render a windfall to the debtor. While a 36-percent interest rate is high, the courts do not have plenary power to alter commercial contracts or to substitute their judgment for that of the parties. The District Court found it necessary to remand the attorney’s fees portion of the case to the Bankruptcy Court for reconsideration, as the increased recovery available to the creditor altered the context for analyzing the reasonableness of the fee request.

Collections: Notice of Sale of Security Interest

     The case of The State Bank of the Alleghenies v. Hundall, decided by the United States District Court at Roanoke, Virginia, serves as a good example of what happens where a creditor sells items pledged as security for a loan without making proper notice to all parties.

     In Hundall, the defendant guaranteed the bank's loan to his brother for a dry-cleaning business, but the defendant guarantor never received notice of how, when and by what manner of sale the bank intended to sell motor vehicles belonging to the brother's business. The evidence taken clearly proved that the bank failed to send notice of the sale of the motor vehicles, which had a fair wholesale value of approximately $8,500.00 in the aggregate. The District Court ruled that this violated the provisions of Virginia Code §8.9-504(3); however, the Code does not provide a remedy for the failure to comply with the statutory provisions for resale, and the appropriate remedy had not been ruled upon by the Virginia Supreme Court. The District Court, in its ruling, cited that courts which have addressed this appropriate remedy for failure to provide notice have adopted one (1) of the following three (3) rules:
     1. The debtor must prove that he has suffered an injury in order to obtain any recovery against the secured party;
     2. The secured party is absolutely barred from recovering a deficiency, even if the debtor suffered no injury; and
     3. A rebuttable presumption is that the collateral was worth the amount of the debt which requires the secured party to prove that the debtor suffered no injury.
     Virginia Code §8.9-507(1) entitles the debtor, or any person entitled to notification, "to recover from the secured party any loss caused by the failure to comply with the provision of this part".
     The Court elected the third of the three remedies listed above, and forced the creditor to prove the fair value of the collateral.
     The lesson of Hundall: creditors should send notice to all parties to the transaction -- the principal debtors, guarantors and the owners of the collateral.

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.

Real Estate: Using Homeowner Association Liens to Secure an Interest in Real Estate

         In recent blogs 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 using homeowner association liens to aid in the collection of your debt.

     Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in a future blog.
     We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Bankruptcy: Homestead Exemptions - Household Furnishings

     In the case of In Re: John W. Haynes, Jr., the United States Bankruptcy Court at Alexandria, Virginia, ruled that the debtor was entitled to claim as "poor debtor's" exemption from the bankruptcy estate two TV's, a VCR and a stereo as part of his "household furnishings" exempt under Virginia Code §34-26.
     In Haynes, the creditor, a bank, argued that the items claimed as exempt by the debtor were not the type of property that was necessary to run a household, unlike beds, dressers, stoves, eating utensils and other items listed in the statute.
     The Bankruptcy Court, however, stated that it did not read Virginia Code §34-26 so narrowly. In interpreting the statute, the Bankruptcy Court stated that it looked first to the statute's plain language; the Bankruptcy Court noted that the language of the statute was quite broad. The statute allows debtors to exempt from creditor process "all household furnishings", including the items listed in the statute, so long as their value does not exceed $5,000. The term "furnishings" does not necessarily exclude televisions, stereos and VCR's, and the statute includes "non-furniture" items -- such as eating utensils and plates -- as examples of "household furnishings." The Bankruptcy Court also noted that the statute did not contain the term "necessary," which was once included in an earlier version of the statute. The Bankruptcy Court stated that it did not view exceptions under the current statute as being limited to items necessary for maintaining a household. In addition, the Bankruptcy Court noted that longstanding Virginia precedent established that exemption statutes are to be construed liberally. Accordingly, the Bankruptcy Court overruled the creditor's objection concerning the electronic equipment.

Collection: Attacking Fraudulent Conveyances

      It seems to happen more and more often. You are able to obtain your judgment against your debtor, but when you go to collect, he has recently transferred his assets. Can you pursue the assets to the transferee? Under the right circumstances, yes.

     The case of Price v. Hawkins, from the Newport News Circuit Court, appealed to the Virginia Supreme Court, stands for the position that a court may enter personal judgments against a transferee to provide a creditor with a remedy when, due to fraud, there is no other remedy.
     In Price the Court found that the debtor, a father, enlisted the help of his son and his son's girlfriend in the debtor's scheme to defraud his creditors. Specifically, the son and his girlfriend, who were not legitimate creditors of the debtor, assisted the debtor in hiding assets ($14,058.77) that the creditor would have otherwise reached in his judgment collection efforts. The transfers occurred after the judgment order was entered, and $10,000.00 was transferred to the son and the girlfriend three months later while the creditor was attempting to collect on the judgment.
     The Court found that simply declaring the fraudulent transfer "void" pursuant to Virginia Code §55-80 would be meaningless, as the conveyance was of money. In cases involving the fraudulent conveyance of real estate, title to the real estate is restored by a declaration, thus, subjecting the property to a creditor's bill. The Court ruled in Price that unless the money was delivered to the Court for the creditor to attach, then personal judgments were the only remedy.
     Perhaps the lesson of Price is: Ask questions: what assets have been conveyed to whom, when, and for what consideration.

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.

Real Estate: Homeowner Associations - Damages Caused by Common Area Tree

     Townes at Grand Oaks Townhouse Association, Inc. v. Baxter is a case from Richmond Circuit Court that illustrates the importance of carefully drafted HOA agreements. The HOA sought to recover expenses for removing a tree that fell from a common area onto a homeowner’s condo. The Richmond Circuit Court held that the HOA agreement did not exempt the HOA from paying for removal costs because a portion of the tree remained on the common area. The court noted that there was no Virginia authority for these facts, but stated that the Supreme Court of Virginia ruled that in cases of fallen trees between adjoining properties in the absence of negligence, there is no liability for property damages on the landowner from where the tree fell. However, the HOA agreement is a contract that created the obligation for the HOA. The agreement had a provision requiring the HOA to maintain and replace trees, and another provision exempting the HOA from liability to an owner for repairing or replacing any portion of the lot or the improvements provided the homeowner has insurance as required by the agreement. The HOA relied on the first provision, but the court determined that that reliance was misplaced as it did not cover this situation. The HOA relied on the second provision because the homeowner did not have the required insurance for “the structure of each lot”, but only insurance for the inside of the home. However, the court heard evidence from the homeowner that he understood the language to only require internal insurance. The court noted three primary reasons for holding for the homeowner:
     (1) “Removal of the tree from the lot is not a repair or replacement, but merely something necessary before the physical work of restoration of the damaged structure can begin.”
     (2) “The exemption from liability applies when the homeowner has "fire and extended coverage insurance" with applicable coverage. Considering the varying types of insurance that the market may provide, there is no evidence that the insurance required under the contract terminology must cover trees removal. Whether such a policy would is left to speculation.”
     (3) “The tree removal would necessarily involve removal of a portion of the tree from the common area as well as from Defendant's lot and home. I question whether, in any event, the total removal cost should be assigned to the Defendant rather than some prorated amount.
     It is important to ensure that HOA agreements include provisions that would govern a broad spectrum of potential issues and disputes. The law firm of Lafayette, Ayers & Whitlock, PLC has experience in drafting, reviewing, and amending HOA documents, as well as, representing HOAs in court. 

Bankruptcy: Dischargeability Determination: Willful & Malicious Injury v. Embezzlement

     In the case of Robbins v. The Chase Manhattan Bank, N.A., the United States District Court at Harrisonburg affirmed a bankruptcy court's ruling that a debt was non-dischargeable under Bankruptcy Code §523(a)(6) as willful and malicious injury. The District Court found that the debtor held a 98 percent interest in a limited partnership which owned a shopping center. The partnership had granted to a bank a second deed of trust on the shopping center and assigned to the bank the rents from the shopping center as security for portions of two loans made by the bank. The debtor, however, under a workout agreement, later began receiving rent distributions from the partnership in his capacity as a limited partner, and he used nearly $71,000 of the distributions for personal expenses.  

     The District Court noted from the Bankruptcy Court's finding that the debtor made the determination on his own to take the money without consideration of the workout agreement or of the bank's rights to the rents. The District Court found that the Bankruptcy Court correctly applied the malice standard as established in that circuit.
     Although the Bankruptcy Court did not explicitly state that it found malice, malice could be inferred from debtor's actions in receiving the distributions, placing the rents in his own account and making personal expenditures. The debtor took such actions all in disregard of and without benefit to the bank's security interest in the rents and at a time when he was suffering financially.
     The District Court ruled that the bank needed only to show that the debtor's conversion was in deliberate and intentional disregard of its rights. Even if the debtor's subjective intent was relevant, the defendant's assertion that the Bankruptcy Court failed to consider his state of mind was without merit considering the debtor's own testimony relating to the receipt of the distributions, deposit of the money into his personal account and subsequent expenditures on personal items.
     The District Court ruled that the Bankruptcy Court's finding that debtor's receipt of the rent distributions injured the bank was not clearly erroneous. In receiving the distributions the debtor knowingly disregarded the bank's interest in the rents and breached the workout agreement. The debtor's use of the cash for personal purposes did not benefit but injured the bank to the tune of $297,000. The bank could not exercise control over its collateral at a time when the debtor was experiencing serious financial troubles. Consequently, the District Court found the debt was non-dischargeable as a willful and malicious injury to the bank because the debtor knowingly took the money without concern for the bank's rights.
     The bank, in its cross-appeal, argued that the Bankruptcy Court erred in rejecting its claim that the debt was non-dischargeable as an embezzlement under Bankruptcy Code §523(a)(4).
     The parties treated the bank's interest in the rents assignment and the deed of trust as security for the debt on two loans. That interest did not defeat the partnership's interest in the rents. As a limited partner in the partnership, the debtor was entitled to cash distributions made to partners. Thus, the rents did not constitute property of another which debtor could appropriate, and debtor's embezzlement claim failed. Further, the District Court ruled that the bank failed to sustain its burden of proving debtor acted with fraudulent intent.