Real Estate: Using Lis Pendens to Secure and Interest in Real Estate

     In prior 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 lis pendens in litigation cases to aid in the collection of your debt. 

     A lis pendens is a legal memorandum which places parties on notice that litigation is pending which affects the title or ownership of real estate. The lis pendens is filed in the circuit court of the county or city in which real estate lies. 

     Virginia Code §8.01-268 B states that “No memorandum of lis pendens shall be filed unless the action on which the lis pendens is based seeks to establish an interest by the filing party in the real property described in the memorandum…”.

     Virginia Code § 8.01-268 A provides that a lis pendens does not affect a subsequent bona fide purchaser of real estate for valuable consideration until actual notice of such lis pendens is properly filed with the required information. Requirements include: the title of the cause, the general object thereof, the court wherein it is pending, the amount of the claim asserted, a description of the property, the name of the person whose estate is intended to be affected thereby.

     We have experienced attorneys and staff who can examine title, file lis pendens, and litigate to enforce the same.

Bankruptcy: Lien Avoidance - Homestead Exemption in Chapter 7

     In the case of In Re Saeed, the United States Bankruptcy Court in Norfolk, Virginia ruled that the bankruptcy debtors were not entitled to avoid a judgment lien of a distributing company on their Chesapeake, Virginia residence, which the debtors asserted (on motion made two years after the closing of the case, even though the debtors had knowledge of the lien while the case was open) was titled solely in the debtor husband’s name and was actually worth less than the debt owned on the property. 

     In Saeed the debtors contended that the judgment lien impaired the debtor husband’s claimed exemption in the property. The creditor argued that the doctrine of laches should bar the debtors’ motion and that the judgment lien did not impair the homestead exemption. The court found as fact that the debtors were aware of the lien before they filed their bankruptcy petition. The debtors did not move to avoid the lien while the case was open, and the only excuse that the debtors’ offered for the delay in bringing their motion to avoid the lien was that they had been unable to refinance the property because of the lien. The court stated that because the debtors failed to offer any extenuating circumstances that would justify an almost two year delay in bringing their motion to avoid the lien, the delay was not excusable. The creditor alleged that the delay would cause it to face the additional expense and difficulty of attempting to appraise the value of the property as of the petition date two years prior. The court ruled that because the debtors’ delay was inexcusable and the creditor was prejudiced, the creditor met its burden of proving the doctrine of laches. 

     The court stated that a debtor seeking to amend its schedules after its case is closed bears the burden of establishing that the failure to amend the schedules before the case closed was the result of excusable neglect, and, that cause exists to amend the schedules. The court found that the debtors in Saeed failed to prove that the original schedules were entered by mistake, inadvertence, or excusable neglect. The court found as fact that the debtors offered no plausible explanation at all. In addition, the court found that the creditor suffered prejudice because it relied on debtors’ original schedules when determining how to proceed with respect to their judgment lien during the bankruptcy proceeding. The court found that the amended schedules would eliminate the debtors’ equity cushion in the property, and, therefore, eliminate the judgment lien. The court found that for the debtors to delay almost two years from the close of their case to amend their schedules, and to do so without mistake or excusable neglect, would cause the creditor to suffer undue prejudice.

     The court stated that although Bankruptcy Code Section 522(f) provides that a court may avoid a judgment lien to the extent that the lien impairs the equity the debtor has exempted in the property, the court need not even reach the issue of whether the judgment lien impaired the debtor’s claimed exemption and may be avoided. The court noted that under the original bankruptcy schedules the debtors claimed the property as tenancy by the entirety. The creditor’s judgment lien was against husband only and could not attach to entireties property. In their amended schedules the debtors claimed that the property was owned by husband, not tenants by the entireties. Thus, the judgment lien would attach to the property, the lien would impair the claimed exemption, and the lien could be avoided. The court stated that because the debtors offered no plausible explanation for the need to change their schedules and, because of the prejudice to the creditor in relying to its detriment on the original schedules as filed by the debtors, the court denied the debtors’ motion to avoid the lien.

Collections: The Fair Debt Collection Practices Act

     It is time again to review the Fair Debt Collections Practices Act (FDCPA), Title 15 U.S. §1692. This is a federal law designed to protect consumer debtors from "unscrupulous" collection activities. It defines the practices, the people who are protected, and the people who are restricted. 

     The most damaging part of the act is the definition of "collector" (as only collectors are covered), and attorneys are included in the definition. 

     The FDCPA requires collectors to send a demand letter thirty (30) days prior to commencing suit. The letters must contain information including: 

     1. The principal amount remaining on the debt; 

     2. The name of the creditor to whom the debt is owed; and 

     3. The specific language that follows: 

     Unless you, within thirty days after you have received this notice, dispute the validity of this debt, or any portion thereof, I will assume the debt to be valid. 

     If you notify me, in writing, within thirty days after you have received this notice, that the debt or any portion thereof, is disputed, I will obtain verification of the debt and mail you a copy of that verification to you. 

     Upon your written request within thirty days after you have received this notice, I will provide you with the name and address of the original creditor, if different from the current creditor.

     The FDCPA further restricts the jurisdictions in which suit can be brought to the city or county in which the debtor resides. In certain circumstances, the matter can be sued upon where the debt was incurred. To eliminate the ambiguity, one idea that I always suggest is that creditors stamp ("this document executed in [name of city or county], Virginia") adjacent to the original signatures of the executed documents, prior to their execution.

     The jurisdiction restriction of the FDCPA can be the most costly provision for the creditor, as attorneys, attempting to pass on the economies of consolidating cases, may be unable to do so. Additional trips to court result in additional costs which will, in one way or another (higher percentage fees), be passed on to the creditor. Hence, a wise creditor should invest in an appropriately worded stamp for each site executing such documents.

Foreclosure: Deed in Lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt. 

     Considerations - Before accepting the deed in lieu of foreclosure, the lender must consider many matters: 

     · Value of the property vs. the amount of the debt. 

     · Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.