Bankruptcy: Lien Avoidance: Household Goods

     Bankruptcy Code §522(f)(2)(A) provides debtors with the means to avoid a creditors lien on household goods. A good example is the case of McGreevy v. ITT Financial Services, decided by the United States District Court at Baltimore, Maryland. 

     In McGreevy the debtors lived in a town house and attempted to claim a shotgun and a rifle as household goods. The Court concluded that the firearms were not household goods because they were used primarily for recreation, not for the protection of the home. The Court ruled that there must be a functional nexus between the goods claimed and the household. The Court defined household goods as "those items of personal property that are typically found in or around the home, and used by the debtor or his dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself". Therefore, it may be reasonable to conclude that if firearms are maintained primarily for home protection, a connection would exist, and the goods would be covered under Bankruptcy Code §522(f)(2)(A).

     In the case of Fulton v. American General Finance, decided by the United States Bankruptcy Court at Harrisburg, Virginia, the Court was asked by the debtor to avoid the creditor/finance companies' liens with respect to a personal computer and a pistol and a rifle. The Court in Fulton had to first determine what was the definition of "household goods". The Court applied the definition rendered by the Fourth Circuit in McGreevy, which, as we discussed, requires a functional nexus between the goods and the household. In Fulton the Court found in regard to the personal computer, a nexus between 1) the keeping of the expenses of the family, 2) the writing of checks for the family, and 3) education for the debtor's child, and, life within the household. In regard to the pistol and the rifle, however, the Court did not find a nexus between the weapons and daily life within the household. The Court found that the weapons were not used to support and facilitate daily life within the household. The best that the debtor's testimony could have established was that the debtor had some desire to have these weapons on hand to protect his household and family from potential threats of bodily harm to person or injury to property. Accordingly, the Court in Fulton avoided the lien on the computer, but not the lien on the pistol and the rifle. I still think that it is reasonable to conclude that if firearms are maintained primarily for home protection, a connection would exist, and the goods would be covered under Bankruptcy Code §522(f)(2)(A).

Bankruptcy: Pre Default Waiver of Notice of Sale is Void

     In the case Woodward v. Resource Bank, from the Circuit Court, City of Virginia Beach, the Virginia Supreme Court reviewed provisions in a promissory note that provided for the debtors' waiver of notice of the default sale of the collateral securing the loan. In Woodward, a married couple operated a gas station and convenience store in Portsmouth and desired to expand. The couple obtained the financing necessary to purchase a store in Virginia Beach (the Pavilion Store) from a bank. In doing so the couple executed a note for $80,000.00 which was secured by a second deed of trust on their home, as well as with security interests in the inventory and equipment at the Pavilion Store. Later the couple decided to purchase a third store in Virginia Beach. They obtained financing from the same bank by executing a note in the amount of $90,900.00, and by signing a security agreement which granted the bank a security interest in the equipment and inventory of all three stores. The bank required the principal shareholders of the corporation to sign a guaranty for $45,000.00 of the $90,900.00 note. The guarantee agreement stated that the liability of the guarantors would not be affected by "any failure to ... give any required notices" by the bank. 

     The couple defaulted on the note and the bank demanded that the guarantors honor their respective guaranties. Thereafter, the bank sold the collateral securing the notes without formal notice. The collateral was sold at prices far below the stated value. The shareholders argued that they were entitled to notice of the sale, notwithstanding that they had signed pre-default waivers of notice, because they were "debtors" within the meaning of Virginia Code §8.9-105(1)(d) and §8.9-504(3). The Virginia Beach Circuit Court agreed with the bank that the waivers precluded the necessity of giving notice, but the Virginia Supreme Court ruled that since the shareholders were "debtors" within the meaning of the statutes, they were entitled to notice of the disposition of the collateral. Applying the plain language of Virginia Code §8.9-504(3), the Virginia Supreme Court held that the notice provision contained therein may not be waived before the occurrence of a default.

     The Virginia Supreme Court further ruled that a rebuttable presumption arose that the value of the collateral that the bank sold equaled the amount of the debt because the bank failed to give notice to the guarantors, and because the sale was thus "commercially-unreasonable". Virginia Code §8.9-504(3) requires that every aspect of the disposition of collateral, including "the method, manner, time, place and terms must be commercially reasonable". Because the bank failed to rebut this presumption by putting on evidence to the contrary, the Court ruled that the indebtedness was extinguished, and the creditor was precluded from further collection. 

     The lesson of Woodward is simple: always obtain a legal opinion regarding sales of reclaimed security, and always follow the requirements of the applicable statutes.

Collections: Garnishing Joint Accounts

     Can a creditor with a judgment against one party to a joint bank account garnish the account? Yes, but the judgment creditor is entitled only to that portion of the account which is attributable to the deposits of the judgment debtor. Virginia Code §6.1-125.3 holds that if the joint account holders are married, then the judgment creditor is entitled to half of the funds in the account, unless one of the married parties proves a different intent by clear and convincing evidence. Upon learning that the bank account is jointly held, the creditor must serve notice to the non-judgment account holder, as well as to the judgment debtor. Courts have ruled, however, that married account holders could attempt to protect bank accounts by asserting that the accounts were exempt from execution if they were held as tenants by the entireties. 

Foreclosure: Be Prepared to Conduct Foreclosures

     While foreclosure may not be a topic that debtors (or even creditors) want to discuss, like all other aspects of proper business planning, you should. 

     With more creditors engaging in loans secured by real estate (which I strongly advocate), be by first deeds of trust, second or subsequent deeds of trust, refinances or credit lines, a certain amount of default is to be expected. Being prepared to react to default is imperative. 

     At the law firm of Lafayette, Ayers & Whitlock, PLC, we represent creditors - from start to finish. We are a full-service creditor’s rights firm. While many attorneys do “collections”, few attorneys have the trained expertise and staff to represent creditors in all four areas of Creditor’s Rights—Collections, Bankruptcy, Real Estate and Foreclosure. WE DO FORECLOSURES. We will handle foreclosure proceedings from demand to final accounting.