Bankruptcy: Dischargeability - False Oath

     In the case of Federal Deposit Insurance Corp. v. McFarland, the United States Bankruptcy Court, sitting in Arlington, Virginia, Judge Tice, denied the debtor, a real estate developer, a discharge in bankruptcy because of false testimony.

     The creditor had brought a complaint objecting to dischargeability because of allegedly false testimony given by the debtor in examinations under oath after the filing of the debtor's bankruptcy petition.
     The Court found as fact that the debtor gave false testimony under oath 1) that he did not receive from a closely held corporation any proceeds of a $440.00 certificate of deposit, when in fact he and his co-shareholder each received $220,000 and 2) that he had no bank accounts in nor made any deposits to offshore banks, when in fact he drew checks in amounts in excess of $300,000 payable to a Cayman Island bank.
     Although the debtor denied that he had any fraudulent intent when he testified, the Court found it "highly implausible" that the debtor forgot about the withdrawal of the $220,000. The debtor also failed to produce any credible evidence refuting the natural presumption that some $300,000 worth of checks admittedly drawn by debtor payable to an offshore bank were transfers of funds to the bank or to an account in the bank.
     Accordingly, Judge Tice found the evidence sufficient to warrant denial of the debtor's discharge.

Collections: Collections: Equal Opportunity Credit Act

     In this and on a future blog we will begin a review of The Equal Opportunity Credit Act. Over the last few years debtors have been utilizing the Equal Opportunity Credit Act, 15 U.S.C. §1691 ("the ECOA" or "the Act"), to avoid adverse action against them on seemingly valid creditor suits. The litigation that has arisen gives good cause to review lending policies for ECOA compliance.
     The ECOA was enacted in 1974 to prohibit discrimination by lenders on the basis of race, color, national origin, sex, marital status, age, religion and welfare status. The statute was originally aimed at discrimination against married women who were often denied credit unless they could get their husband's signatures. The statute, in many respects, has been taken to many illogical extremes.
     Lenders who violate the statute can be sued for actual damages, punitive damages up to $10,000, and costs and attorney's fees. Punitive damages can be awarded even if there are no actual damages, and even if the lender did not have a specific intention to discriminate. In practice, this means that the Act could be used in a counterclaim, not just a defense. In regard to a counterclaim, there is a two year statute of limitations for suits under the Act, which will usually have passed by the time a legal action by the creditor has begun. Most courts have ruled that the two year statute of limitations does not apply when the Act is raised as a defense.
     There are many potential issues that have been raised under the Act; listed below are those which have been cited most frequently.
     1. Requiring the signature of a spouse. Under federal regulations, "[A] creditor shall not require the signature of an applicant's spouse ... on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested."(12 C.F.R. §202.7(d)(1).). There have been many cases litigated regarding this. The Virginia Supreme Court found that a bank violated the Act when a husband sought a loan for his construction company and the bank required his wife's signature as a guarantor, even though the husband was individually creditworthy, the wife had no interest in the company and was not a joint applicant, and the bank made no inquiry into her credit standing. The Court made these factual findings, but the company, ultimately, did not have assets to cover the debt. When the husband's construction company defaulted on the loan, after the husband died, the bank sought recovery from the wife and the husband's estate. When the Court found that this violated the Act, it ruled that there could be no recovery against the wife, as "Contracts executed in violation of law cannot be enforced....To deny [the wife] the right to use the ECOA violation defensively would be to enforce conduct that is forbidden by the Act." Debtor's attorneys are using this defense in foreclosure proceedings to prevent summary judgment on the foreclosure, stall for time, release a spouse from liability, and force the lender to defend against a complex and expensive federal claim.
     2. Asking for information about a spouse or former spouse, unless the applicant is relying on the spouse's income or lives in a community property state (Virginia is not - it is a Common Law state).
     3. Asking for sources of an applicant's income without saying that the applicant does not have to mention alimony or child support unless he or she wants the lender to consider it when it decides whether to extend credit.
     4. Taking race, sex or national origin into account when making a credit decision (although a bank can consider immigration status).
     5. Using statistics to judge the reliability of income from alimony, child support, pensions or welfare. Even if child support payments are statistically unreliable, a bank must consider whether the individual applicant has consistently received payments in the past.
     6. Ascribing a negative value to an applicant's age unless it relates to a "pertinent element of creditworthiness," such as the length of time the applicant has until retirement or the adequacy of security where a mortgage term exceeds the applicant's life expectancy.
     7. Requiring certain types of life insurance before issuing a loan.
     8. Basing a credit decision on the area in which the applicant lives, such as the fact that a white applicant lived in a largely black area.
     9. Changing the terms of a credit account without notifying the borrower within 30 days and including a boiler plate notice concerning the borrower's rights under the ECOA.
     10. Asking about an applicant's intentions to have children.
     11. Asking for the applicant's title (Mr., Mrs., Ms., etc.) without stating that providing this information is optional.
     Next month we will discuss potential defenses that have been raised by lenders.

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: Suit to Enforce Mechanic's Liens

     In prior blogs we have been discussing the benefits of using real estate to improve creditors’ positions. In a previous blog we discussed perfection of liens.  In this blog we will discuss suit to enforce mechanic’s liens.
     Virginia Code §43-17 provides that no suit to enforce a mechanic’s lien can be brought:
     “…after six months from the time when the memorandum of lien was recorded or after sixty days from the time the building, structure or railroad was completed or the work thereon otherwise terminated, whichever time shall last occur; provided, however, that the filing of a petition to enforce any such lien in any suit wherein such petition may be properly filed shall be regarded as the institution of a suit under this section; and, provided further, that nothing herein shall extend the time within which such lien may be perfected.”
     Virginia Code §43-17.1 provides that:
     “Any party, having an interest in real property against which a lien has been filed, may, upon a showing of good cause, petition the court of equity having jurisdiction wherein the building, structure, other property, or railroad is located to hold a hearing to determine the validity of any perfected lien on the property. After reasonable notice to the lien claimant and any party to whom the benefit of the lien would inure and who has given notice as provided in § 43-18 of the Code of Virginia, the court shall hold a hearing and determine the validity of the lien. If the court finds that the lien is invalid, it shall forthwith order that the memorandum or notice of lien be released from record.”
     Virginia Code §43-18 provides:
     “The perfected lien of a general contractor on any building or structure shall inure to the benefit of any subcontractor, and of any person performing labor or furnishing materials to a subcontractor who has not perfected a lien on such building or structure, provided such subcontractor, or person performing labor or furnishing materials shall give written notice of his claim against the general contractor, or subcontractor, as the case may be, to the owner or his agent before the amount of such lien is actually paid off or discharged.”
     We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same.