Bankruptcy: Garnished Wages - Execution of Lien - Recovery of Funds

     In the case of In Re Wilkinson, the United States Bankruptcy Court at Alexandria, Virginia denied the debtor's motion to avoid the creditor's execution lien; the debtor's wages had been garnished in execution of a judgment lien more than 90 days before the debtor filed his Chapter 7 petition. The Bankruptcy Court ruled that the debtor could not recover the garnished wages from the judgment creditor even though the order directing payment of the garnished wages to the creditor was entered within the 90-day period.

     The Bankruptcy Court stated that the issue was not whether a debtor could recover funds withheld from his wages more than 90 days before he filed his Chapter 7 petition, but whether the order of payment requiring the employer to pay those funds to the judgment creditor was entered within 90 days of the bankruptcy filing.

     The Bankruptcy Court concluded that the debtor could not succeed under the lien avoidance provisions of Bankruptcy Code §522 (f) because he no longer had an interest in the garnished funds as of the date he filed his petition. The Bankruptcy Court also concluded that the debtor could not succeed by stepping into the trustee's shoes under Bankruptcy Code §522 (h) and recovering the funds paid over to the judgment creditor as a preference because the judgment creditor's execution lien became fixed outside the 90-day preference period, and the payment within the preference period did not enable the creditor to obtain more than it would in a Chapter 7 liquidation.

     Accordingly, the Bankruptcy Court denied the debtor's motion to avoid the execution lien.

Collections: Liability for Charges above the Credit Limit - Part 2

    In a previous blog, we looked at two fact patterns involving situations where a customer makes retail purchases for products in an amount greater than the customer’s established credit limit – specifically, if the customer later fails to pay for the product, can he be successfully sued for payment. In those situations, we found that a court will likely hold a customer liable for charges that exceed the originally agreed upon credit limit. The credit terms require the customer to pay any and all sums that become payable because of the express terms of the contract and the intentions of the contracting parties. The next two fact patterns present new issues. 

     Fact Pattern Three: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer sends one of his employees to retailer to make a purchase, with customer knowing what the cost of the purchase will be. Retailer allows the purchase over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer? 

     In addition to the contract issue discussed in the previous patterns, this fact pattern presents an agency law issue. The Circuit Court of the City of Richmond dealt with a similar issue in Chevy Chase Savings Bank v. Strong. In this case, the bank issued a credit card. A card user then incurred charges on the credit card but the card user was the card owner’s husband. The court held that the wife was liable for the charges because she gave her husband authority to use the card. The husband was an agent, and was therefore only liable if the wife was able to prove that her husband exceeded his authority or that he agreed to become personally liable.

     In this fact pattern, the customer has given his employee authority to act on his behalf so the employee is his agent and the customer is the principal. As principal, the customer is liable for all charges. The credit was given to the customer, so he is liable for the charges, unless he is able to prove that the employee exceeded his authority or agree to become personally liable. In this case, the employee did not act outside of his authority and did not agree to become personally liable, so the customer will be liable for a balance incurred. 

     Fact Pattern Four: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, one of customer’s employees goes to retailer to make a purchase, without customer’s knowing what the cost of the purchase will be. Retailer allows the purchase over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?

     Although there was not express authority to spend a specific amount like the previous situation, the same rule applies. The employee acted as an agent for the customer. The customer is liable for the debt unless the customer is able to prove that the employee acted outside the authority given. However, similar to Chevy Chase Savings Bank v. Strong¸ evidence that the customer did not specify an amount to spend is not likely to be sufficient evidence to prove that the agent acted beyond to scope of authority given. 

Foreclosure: Substitute Trustees

     Question: What happens if the trustee under your deed of trust is either unavailable, or, is no longer the person you desire to serve as trustee? Answer: You can appoint a substitute trustee. Under Virginia Code Section 55-59(9), the noteholder, or, the holders of greater than fifty percent of the monetary obligation secured by the deed of trust, have the right and the power to appoint a substitute trustee or trustees for any reason, regardless of whether such right is expressly granted in the deed of trust. The timing of your action is important. The trustee must be empowered before taking action – this occurs when the instrument of appointment has been executed. You do not have to wait for recording. However, as Virginia Code Section 55-59(9) states that the appointment of a substitute trustee shall be recorded before, or at the time of, the recording of the deed conveying the property (such as after a foreclosure). 

     Question: Can a lender appoint their counsel as trustee? Answer: Yes. Virginia Code Section 26-58 holds that a trustee is not disqualified merely because he is a stockholder, member, employee, officer or director or counsel to the lender. 

Real Estate: Docketing Judgments to Secure an Interest in Real Estate

     In previous 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 edition, we will review the benefits of docketing judgments to aid in the collection of your debt. 

     Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection. 

     Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge. 

     If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462: 

     

     Jurisdiction to enforce the lien of a judgment shall be in equity. If it appears to the court that the rents and profits of all real estate subject to the lien will not satisfy the judgment in five years, the court may decree such real estate, any part thereof, to be sold, and the proceeds applied to the discharge of the judgment. 

     

     Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment. 

     We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.

Bankruptcy: Payment of Debt Incurred in the Ordinary Course of Business is not a Voidable Preference

     The 6th Circuit Court of Appeals, in the case of In Re Finn, upheld a finding that an otherwise preferential transfer is not avoidable if it was payment of a debt incurred in the ordinary course of the debtor's business or financial affairs. The Court held that even the incurring of long-term consumer debt satisfies the Bankruptcy Code §547 (c) (2) (A) exception from avoidance rules, as long as it is a normal financial relationship. The Court held that a transfer can be in the ordinary course of financial affairs even if it is the first of such transactions undertaken by the debtor.

     It should be noted however, that a majority of courts hold that interest payments on long term debts are not covered by the ordinary course of business exception. See Wolas v. Union Bank and In Re ZZZZ Best Co., Inc.