Real Estate: Perfecting Mechanic's Liens

     In prior blogs we have been discussing the benefits of using real estate to improve creditors’ positions. Last month we began a discussion of the benefits of using mechanic’s liens to aid in the collection of your debt. 

     Virginia Code §§43-4, 43-7 and 43-9 provide for the perfection of the lien by general contractors, subcontractors, and laborers and suppliers. In each section the creditor must file a memorandum of lien at any time after the work is commenced or material furnished, but not later than 90 days from the last day of the month in which he last performs labor or furnishes material, and in no event later than 90 days from the time such building, structure, etc., is completed, or the work thereon otherwise terminated. The memorandum must contain specific information as set forth in the code (and there are forms in the code), and must be filed in the clerk's office in the county or city in which the building, structure etc., or any part thereof is located. The memorandum shall show the names of the owner of the property sought to be charged, and of the claimant of the lien, the amount and consideration of his claim, and the time or times when the same is or will be due and payable, verified by the oath of the claimant, or his agent, including a statement declaring his intention to claim the benefit of the lien, and giving a brief description of the property on which he claims a lien. 

      In a future blog we will explore suits to enforce the lien. 

     We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same. 

Bankruptcy: Marital Obligation Discharged in Bankruptcy

     The United States Bankruptcy Court in Richmond, in the case of Nelson v. Nelson, ruled that a wife’s obligation to husband was discharged. The Court found that although a Virginia Circuit Court held that the wife had to pay a husband $5,6535 for a car debt under a “hold harmless” clause in their divorce agreement, the Bankruptcy Court ruled that the State Circuit Court order was void. 

     The parties’ separation agreement, incorporated into their final divorce decree, provided that an auto was the wife’s exclusive property, that she would be responsible for debt, taxes, insurance and licensing fees on the vehicle, and that she would “indemnify and hold the Husband harmless for the same.” The wife, who received a Chapter 7 discharge in bankruptcy, contends the obligation was discharged. The husband brought a show cause proceeding in a Virginia Circuit Court seeking an order that wife remained liable for the debt secured by the auto and that she was in contempt for violating the separation agreement. The State Circuit Court entered an order stating that the wife was liable to the husband for the debt secured by the auto, or $5,635 with interest. Although the State Circuit Court found that the debtor still had an obligation to indemnify the husband, it lacked the jurisdiction to determine whether this debt had been discharged because the Bankruptcy Court has exclusive jurisdiction in discharging a pre-petition debt included in Bankruptcy Code §523 (c). In any event, the Circuit Court order was silent as to its findings on the dischargeability of the debt. The parties therefore could not argue that the Circuit Court order prevented the relitigation of the dischargeability issue based on the principle of collateral estoppel; nor could the parties argue that this matter was barred by res judicata.

     The Bankruptcy Court ruled that the debtor’s obligation to discharge the husband for the indebtedness secured by the auto was discharged by operation of Bankruptcy Code §523 (c)(1). Accordingly, Bankruptcy Code § 524(a)(1) voided the judgment the husband obtained in State Circuit Court and the discharge injunction in Bankruptcy Code §524(a)(2) further enjoined the husband from taking any action to collect this debt as a personal liability of the debtor.

Collections: No Debt Cure from Extra Payments

     In the case of W. Harold Tulley I LLC v. North Richmond Investments Inc., the City of Richmond Circuit Court addressed a case involving an alleged cure of a default by payments made after default. 

     The Court ruled in Tulley that Plaintiff lender is entitled to a deficiency judgment after foreclosure on real estate that secured a commercial loan. The Court rejected Defendant guarantors’ contention that their additional payments after default cured the default, as such was not provided for under the parties’ contract.

    Defendants asserted that the Third-Party Defendant trustees and Plaintiff breached their obligations and duties because they knew or should have known Defendants were not in default. Defendants claimed that the trustees violated their duties under the loan documents, failed to act impartially, failed to acquire the best price upon the sale, sold the property at an inadequate sale price, and as they were never in default, should not have conducted the sale. Defendants contended that the trustees conducted the sale on a sham bid, knowing that Defendants were not in default.

     The Court noted that neither the deed of trust and guaranty agreement nor the applicable statute, Virginia Code Section 55-59, lists any of the duties Defendants would have imposed on the trustees in foreclosure sales.

     The Court found that both the deed of trust and the guaranty agreement describe default as failure to pay the agreed upon amounts at the agreed upon time on a timely basis. The guarantor stated that upon his tender of the two advance interest payments, there was no agreement regarding how the payments were to be applied, and that he understood they were not required under the financing and deed of trust documents. The Court ruled that Defendants were held properly in default, the amounts due accelerated triggering foreclosure.

Collections: Secured Transaction Proceeds

     In the case of Orix Credit Alliance Inc. v. Sovran Bank, N.A., the United States District Court at Baltimore, Maryland, reviewed a case where Sovran Bank, which had provided the debtor with a line of credit and several bank accounts, one of which was a depository "cash collateral" account routinely applied against draws on the line of credit, signed an agreement with Orix, a finance company, to subordinate the bank's security interest in a crane (purchased by the debtor with funds from the finance company) to the finance company's interest in the crane. The Court ruled, however, that the bank was entitled to use the proceeds from the sale of the crane to reduce the debtor's obligation under the line of credit. The Court's decision was based upon a finding that the bank's transfer of the proceeds occurred in the debtor's ordinary course of business under Virginia Code §8.9-306, comment 2(c), which extinguished the finance company's interest in the proceeds from the sale of the crane. 

     This case serves as another example as to why competent legal advice should be sought before relying upon a recorded security interest.