Monday, July 25, 2016

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.

Monday, July 18, 2016

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.

Monday, July 11, 2016

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.

Monday, July 4, 2016

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.