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: Using Real Estate to Secure Your Debt

     Many fail to recognize the benefit of using real estate to improve their position as creditors. Properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. 

     Securing debt with real estate can occur in several ways: deeds of trust, judgment liens, homeowner association liens, mechanic’s liens and lis pendens in litigation cases, just to name a few. In upcoming blogs we will explore these, as well as the ways that I can assist you.

     We have experienced attorneys and staff who can examine title, do real estate closings, seek judgment and docket and enforce the same, and prepare and enforce statutory liens, such as those for litigation, homeowner’s associations and mechanic lien situations.

Bankruptcy: Collateral Estoppel - Default Judgment in State Court

     Two cases illustrate how courts will handle default judgments being argued as collateral estoppel in bankruptcy court. 

     The United States District Court at Norfolk, Virginia, in the case of L&R Assoc. v. Curtis, reviewed the question as to whether a creditor's default judgment in state court collaterally estopped a debtor from relitigating in Bankruptcy Court whether his debt was nondischargeable because of the debtor's alleged fraud. 

     In Curtis the Bankruptcy Court found that the creditor advanced funds to the debtor for the purchase of automobiles at auction. The debtor was to be compensated in the form of half of the profits from the subsequent sale of the automobiles. The creditor apparently charged in state court that the debtor had fraudulently converted some of the purchase money to his own personal use. 

     The Bankruptcy Court found in Curtis that the issue of fraud, as alleged by the creditor, was not the subject of actual litigation in the state court action which resulted in the entry of the default judgment. The Bankruptcy Court held that because it had no evidence before it that the state court had decided this issue of fraud with "particular care", the doctrine of collateral estoppel did not apply to the judgment. Subsequently, the Bankruptcy Court dismissed the complaint upon a full trial on the merits. The United States District Court, upon appeal, agreed with the result of the Bankruptcy Court's decision, but stated that the emphasis for reaching the decision should have been on whether the state court had actually litigated the issue of fraud. The District Court recognized that counsel for the creditor represented to the Bankruptcy Court that it had presented witnesses and evidence before the state court. The judgment order indicated that the plaintiff/creditor and witnesses for the plaintiff appeared before the state trial court. Yet the creditor presented no other information to the Bankruptcy Court to indicate that the issue actually had been litigated and was necessary to the decision. 

     The Bankruptcy Court gave the creditor in Curtis more than one opportunity at the hearing on its motion for summary judgment and at trial to present evidence concerning prior litigation. The creditor presented no transcript of the proceeding before the state court or anything else to suggest that the state court entered more than a standard default judgment. 

     The District Court agreed with the Bankruptcy Court in Curtis that more had to be submitted than the state court default judgment by testimony at trial to establish that the issue was actually litigated and that the determination of the issue was necessary to the judgment of the state court. The District Court found that the Bankruptcy Court determined "with particular care" that the state court's default judgment should not collaterally estop debtor from relitigating the issue of fraud as it relates to the dischargeability of this debt.

     In Neese the creditor, a video store, had obtained a default judgment in state court against a husband and wife, who had contracted to use store material and services in a nightclub. The wife filed a bankruptcy petition. The Creditor filed a proof of claim in order to collect from the debtor's bankruptcy estate.

     The District Court in Neese found that the Bankruptcy Court evaluated the validity of the State Court judgment for reasons other than fraud. Accordingly, the District Court found that this was an error. The District Court ruled that under Bankruptcy Code §502, a creditor's proof of claim is deemed allowed unless a party in interest objects to that claim. The validity of a creditor's claim that is based on a State Court judgment may be attacked in Bankruptcy Court by an objection to a proof of claim only upon the grounds that there was a lack of jurisdiction over the parties or subject matter of the suit (which was not alleged in this case) or that the judgment was the product of fraud (which was initially raised but not pursued). The trial conducted in the Bankruptcy Court, however, focused upon whether judgment was proper against the debtor individually.

     In regard to the facts in Neese, the District Court found that the debtor had properly been served with the State Court suit, that she failed to respond to that claim, and that she failed to contest the claim on appeal even after judgment was entered. Nothing in the record indicated that the judgment was obtained fraudulently, and it was clear that the default judgment was fully enforceable in State Court.

     Accordingly, the District Court ruled that the Bankruptcy Court did not have the authority to look beyond the validity of the State Court judgment. The doctrine of res judicata applied. The creditor's claim should have been allowed.

Collections: Garnishment/Arbitration

     The Richmond Circuit Court case of Va. Builder's Supply, Inc. v. Brooks & Co. Gen Contractors Inc. serves as a good example of judicial recognition of the rights of judgment creditors in arbitration proceedings. 

     In Va. Builders, the creditor, a building supply company, issued a garnishment summons upon a general contractor for sums due from the general contractor to the judgment debtor, a subcontractor. The contracts between the contractor and the subcontractor, under which the judgment creditor sought to garnish the sums due the subcontractor, included clauses for mandatory arbitration. The garnishee sought arbitration after being served with the garnishment. The garnishee refused to allow the judgment creditor to participate. The garnishee received a garnishment award indicating that it owed the subcontractor no sums. The garnishee answered the garnishment that no sums were due. The Richmond General District Court agreed. The Richmond Circuit Court disagreed, and sent the case back for further review. The Richmond Circuit Court reasoned that the garnishee should not be able to affect the potential funds due the judgment creditor while prohibiting the judgment creditor from participating in the proceedings.