A Blog for individuals and businesses concerned with Creditor’s Rights
The Twentieth Judicial Circuit examined a debtor's
assertion that the note's "detailed enumeration of events consisting
default was inconsistent with a demand note", and that since the note was
not a demand note, the creditor must demonstrate "good faith" in
accelerating repayment of the note. The
case was NationsBank of
Despite the favorable result for the creditor, great care should always be taken to clearly identify payment demand terms.
Question: Once a borrower is in default, can he “reinstate the loan”, or, “cure the default” and stop the foreclosure sale?
Answer: yes. In general, most deeds of trust contain language that allows a borrower the opportunity to reinstate, or cure, the loan after the due date set out in the note. If the deed of trust contains this language, the note cannot be placed into default and accelerated until the cure period has expired. Government loans such as Fannie Mae and Freddie Mac have very specific requirements. In fact, a borrower can always cure a monetary default and stop a foreclosure up to the time of sale by paying in full, in good funds, the deficient amount, including all costs of the sale.
Townes at Grand Oaks Townhouse Association, Inc. v. Baxter is case from Richmond Circuit Court that illustrates the importance of carefully drafted HOA agreements. The HOA sought to recover expenses for removing a tree that fell from common area onto a homeowner’s condo. The Richmond Circuit Court held that the HOA agreement did not exempt the HOA from paying removal costs because a portion of the tree remained on the common area. The court noted that there was no Virginia authority for these facts, but stated that the Supreme Court of Virginia ruled that in cases of fallen trees between adjoining properties in the absence of negligence, there is no liability for property damages on the landowner from where the tree fell. However, the HOA agreement is a contract that created the obligation for the HOA. The agreement had a provision requiring the HOA to maintain and replace trees, and another provision exempting the HOA from liability to an owner for repairing or replacing any portion of the lot or the improvements provided the homeowner has insurance as required by the agreement. The HOA relied on the first provision, but the court determined that that reliance was misplaced as it did not cover this situation. The HOA relied on the second provision because the homeowner did not have the required insurance for “the structure of each lot”, but only insurance for the inside of the home. However, the court heard evidence from the homeowner that he understood the language to only require internal insurance. The court noted three primary reasons for holding for the homeowner:
(1) “Removal of the tree from the lot is not a repair or replacement, but merely something necessary before the physical work of restoration of the damaged structure can begin.”
(2) “The exemption from liability applies when the homeowner has "fire and extended coverage insurance" with applicable coverage. Considering the varying types of insurance that the market may provide, there is no evidence that the insurance required under the contract terminology must cover trees removal. Whether such a policy would is left to speculation.”
(3) “The tree removal would necessarily involve removal of a portion of the tree from the common area as well as from Defendant's lot and home. I question whether, in any event, the total removal cost should be assigned to the defendant rather than some prorated amount.”
It is important to ensure that HOA agreements include provisions that would govern a broad spectrum of potential issues and disputes. The law firm of Lafayette, Ayers & Whitlock, PLC has experience in drafting, reviewing, and amending HOA documents, as well as, representing HOAs in court.
In the case of In Re: James H. Harris the United States Bankruptcy Court for the Eastern District of Virginia showed a willingness to assist creditors in clear abuse cases. In Harris Judge Tice determined that a debt which resulted from the debtor's conversion of a stolen Mack Truck was exempt from discharge pursuant to the Bankruptcy Code, and determined that the amount of damages excepted from discharge was $11,620.47. The Bankruptcy Court also entered a money judgment for the creditor in that excepted amount, even though at least one Federal District Court has held that a Bankruptcy Court does not have jurisdiction to enter a money judgment in a Bankruptcy Code §523 proceeding.
Judge Tice stated that every determination by a Bankruptcy Court of the validity of a claim is a determination of whether a creditor is entitled to monetary damages from the debtor. The issues raised regarding the validity or existence or amount of a debt are inextricably interwoven with the determination of dischargeability, and are therefore within the equitable jurisdiction of the Bankruptcy Court.
Last month we began a review of The Equal Opportunity Credit Act. This month we will look at many potential defenses that have been raised by lenders; listed below are those which have been cited most frequently.
1. Voluntary signatures are okay. Although a spouse cannot be required to co-sign a note, voluntary signatures are okay. Thus, the lender can win if it can show that the spouse's signature was voluntary.
2. One spouse was not enough. A lender can argue that the applicant's spouse did not satisfy it's credit criteria all alone, and the other spouse's assets figured into his loan decision, which is why the other spouse's signature was required.
3. Both spouses are principals. If both spouses are principals in a business, the lender can argue that it required both of their signatures because of their business relationship rather than their marital status.
4. Pre-1986 guarantors. ECOA regulations were expanded to include guarantors as of October 1, 1986. Courts have been split as to whether they apply to guarantors if a bank violated the Act before that date but renewed the note after it.
5. Good Faith. A lender is not liable if it acted in good faith compliance with the Federal Reserve Board's "official staff interpretation" of the ECOA, which can be found at 12 C.F.R. §202.
The City of Richmond Circuit Court denied an ECOA defense pled by a wife who had signed a broad release when the loan was refinanced. The case was Richmond Lotco L.P. v. Perrowville Dev. Corp.
In Perrowville the lender obtained a guaranty and general release of claims from four directors of a real estate development company and their wives. The release was included in the modification of an existing loan that the lender had purchased from the Resolution Trust Corp. after the original lender, a bank, went into receivership. The release stated that the borrowers and guarantors would release the note holders "from any and all claims, losses, liabilities, causes of action of any king whatsoever, if any, whether existing or contingent, known or unknown, matured or unmatured, that the borrowers or guarantors may now have or have had in whatever capacity against the noteholder...".
When the successor lender brought a collection suit under the modification, the wives claimed that they were not involved in the business and that their guaranties had been required solely as a result of their marital status, in violation of the ECOA. The wives argued that the ECOA gave them both a defense to the collection action and a counterclaim against the lender. The lender argued that the release was part of the consideration that the lender received for continuing to finance the development project under the modification. The Court ruled in favor of the lender, stating that the modification agreement did not constitute a violation of the ECOA and that therefore the wives could not pursue either a defense or a counterclaim.
The litigation that has arisen gives good cause to review lending policies for ECOA compliance. Please call me at 545-6250 if you have any questions. Eddie.
Question: When is a loan in default? Answer: Under one or more of several circumstances. The most common way that a borrower is in default is monetary – e.g., the borrower fails to make a required payment. However, default can be for a non-monetary reason as well, such as:
Failure to perform requirements unique to the loan.
If you have questions about default, please call Eddie at 545-6251.
Collecting money owed can be a job. Having more tools to do the work is good! Securing your debt with real estate is a great tool. In future weeks we will explore ways that use this tool. Articles will include such topics as: Deeds of Trust, Foreclosure, Docketing Judgments, Lis Pendens, Recording Mechanic’s Liens, Suits to Enforce Mechanic’s Liens, Foreclosing on Mechanic’s Liens, Recording Homeowners Association Liens, Foreclosing on Homeowners Association Liens and more.
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. Please call me so that we can discuss how we can help you.
Creditors need to know that having aggressive representation in bankruptcy cases is just as important as having a good plan. We can help. We have aggressive counsel and trained support staff.
In Chapter 7 cases, even in supposedly "no asset" cases, there are concerns about security interests, homestead deeds, fraud and abuse, and reaffirmation agreements. Our "second opinion" and review of your cases could result in new hope for otherwise hopeless cases.
In Chapter 13 cases there are concerns about amount of assets, manner of funding, percentage payments for unsecured debts and allowable expenses. Do not assume that the debtor's first plan is set in stone - let us assert your interest.
We would be pleased to meet with you to review your representation needs. Our work can be done on a flat fee basis, an hourly fee basis, or pursuant to a retainer agreement.
In the next weeks we will begin a review of The Equal Opportunity Credit Act. Over the last few years debtors have been utilizing the Equal Opportunity Credit Act, 15 U.S.C. §1691 ("the ECOA" or "the Act"), to avoid adverse action against them on seemingly valid creditor suits. The litigation that has arisen gives good cause to review lending policies for ECOA compliance.
The ECOA was enacted in 1974 to prohibit discrimination by lenders on the basis of race, color, national origin, sex, marital status, age, religion and welfare status. The statute was originally aimed at discrimination against married women who were often denied credit unless they could get their husband's signatures. The statute, in many respects, has been taken to many illogical extremes.
Lenders who violate the statute can be sued for actual damages, punitive damages up to $10,000, and costs and attorney's fees. Punitive damages can be awarded even if there are no actual damages, and even if the lender did not have a specific intention to discriminate. In practice, this means that the Act could be used in a counterclaim, not just a defense. In regard to a counterclaim, there is a two year statute of limitations for suits under the Act, which will usually have passed by the time a legal action by the creditor has begun. Most courts have ruled that the two year statute of limitations does not apply when the Act is raised as a defense.
There are many potential issues that have been raised under the Act; listed below are those which have been cited most frequently.
1. Requiring the signature of a spouse. Under federal regulations, "[A] creditor shall not require the signature of an applicant's spouse ... on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested."(12 C.F.R. §202.7(d)(1).). There have been many cases litigated regarding this. The Virginia Supreme Court found that a bank violated the Act when a husband sought a loan for his construction company and the bank required his wife's signature as a guarantor, even though the husband was individually creditworthy, the wife had no interest in the company and was not a joint applicant, and the bank made no inquiry into her credit standing. The Court made these factual findings, but the company, ultimately, did not have assets to cover the debt. When the husband's construction company defaulted on the loan, after the husband died, the bank sought recovery from the wife and the husband's estate. When the Court found that this violated the Act, it ruled that there could be no recovery against the wife, as "Contracts executed in violation of law cannot be enforced....To deny [the wife] the right to use the ECOA violation defensively would be to enforce conduct that is forbidden by the Act." Debtor's attorneys are using this defense in foreclosure proceedings to prevent summary judgment on the foreclosure, stall for time, release a spouse from liability, and force the lender to defend against a complex and expensive federal claim.
2. Asking for information about a spouse or former spouse, unless the applicant is relying on the spouse's income or lives in a community property state (Virginia is not - it is a Common Law state).
3. Asking for sources of an applicant's income without saying that the applicant does not have to mention alimony or child support unless he or she wants the lender to consider it when it decides whether to extend credit.
4. Taking race, sex or national origin into account when making a credit decision (although a bank can consider immigration status).
5. Using statistics to judge the reliability of income from alimony, child support, pensions or welfare. Even if child support payments are statistically unreliable, a bank must consider whether the individual applicant has consistently received payments in the past.
6. Ascribing a negative value to an applicant's age unless it relates to a "pertinent element of creditworthiness," such as the length of time the applicant has until retirement or the adequacy of security where a mortgage term exceeds the applicant's life expectancy.
7. Requiring certain types of life insurance before issuing a loan.
8. Basing a credit decision on the area in which the applicant lives, such as the fact that a white applicant lived in a largely black area.
9. Changing the terms of a credit account without notifying the borrower within 30 days and including a boiler plate notice concerning the borrower's rights under the ECOA.
10. Asking about an applicant's intentions to have children.
11. Asking for the applicant's title (Mr., Mrs., Ms., etc.) without stating that providing this information is optional.
In the next weeks we will look at potential defenses that have been raised by lenders.
The trustee is under a duty to “use all reasonable diligence to obtain the best price.”
If the trustee determines that in order to fulfill his fiduciary duty to realize the highest price for the property, a recess is necessary, he or she should recess the sale. Arguably, the recess is within the scope of the discretion afforded trustees in the conduct of the foreclosure sale. For example, if a bidder who previously advised the trustee of his interest in bidding on the property is delayed, the trustee, in his discretion, may recess the sale to a later hour on the same day to allow the bidder to attend the sale. If the trustee fails to accommodate the bidder and the property is sold for a price less than the bidder was willing to pay, the trustee may have breached his duty to “use all reasonable diligence to obtain the best price.” A decision by the trustee to recess the sale, however, should not impair the sale by making it impossible or impracticable for the bidders to appear and bid at the recessed sale.
The postponement of a foreclosure sale to a different day is not a recess and is governed by statute. Virginia Code §55-59.1(D) provides that the trustee, in his discretion, may postpone the sale to a different day, and no new or additional “notice” must be given. Presumably, the “notice” referred to in this section is notice of the postponement. The trustee needs only to announce at the sale that it has been postponed. §55-59.2(D) provides that if the sale is postponed, the trustee must advertise the “new” sale in the same manner as the original advertisement. Read in conjunction, these sections require the trustee who postpones the foreclosure to re-advertise the sale in the same manner as the original sale was advertised. Although the secured obligation will not need to be accelerated again, all other aspects of the foreclosure must be completed. Effectively, a postponed sale is a new sale in which the trustee must complete all acts that he or she completed in the first sale.
In previous weeks I discussed the provisions related to filing a memorandum of lien under the Virginia Property Owners’ Association Act.
The Act provides: “At any time after perfecting the lien pursuant to this section, the property owners' association may sell the lot at public sale, subject to prior liens.” In order to conduct a nonjudicial foreclosure, the association must comply with the statutory requirements.
The association must give notice to the lot owner prior to advertising the sale. The notice must include notice of: “(i) the debt secured by the perfected lien; (ii) the action required to satisfy the debt secured by the perfected lien; (iii) the date, not less than 60 days from the date the notice is given to the lot owner, by which the debt secured by the lien must be satisfied; and (iv) that failure to satisfy the debt secured by the lien on or before the date specified in the notice may result in the sale of the lot.” The notice must also inform the lot owner of the right to bring a court action in the circuit court of the county or city where the lot is located to assert the nonexistence of a debt or any other defense of the lot owner to the sale.
If the lot owner (i) satisfies the debt secured by lien that is the subject of the nonjudicial foreclosure sale and (ii) pays all expenses and costs incurred in perfecting and enforcing the lien, including but not limited to advertising costs and reasonable attorneys' fees, then the sale is discontinued. However, if after 60 days and the lot owner has not made those payments, the association may appoint a trustee for the sale and advertise the sale. In addition to advertising the sale, the association must give written notice of the time, date and place of any proposed sale in execution of the lien, and including the name, address and telephone number of the trustee. That notice must be at least given to the owner, lienholders and their assigns by certified or registered mail 14 days prior to the sale.
The association must advertise the sale in a newspaper in the city or county where the property will be sold. The advertisement must be in a section with legal notices or where the property being sold is generally advertised for sale. The advertisement must describe the property by address and general location and have information for the representative or an attorney who can respond to inquiries about the property with their name, address, and telephone number. The advertisement must be in the newspaper for four successive weeks, but if the lot is located in a city or county immediately contiguous to a city, publication of the advertisement for five different days is sufficient. The sale then must be held on any day after the last advertisement but not earlier than 8 days after the first advertisement and not more than 30 days after the last advertisement.
Failure to comply with these and other requirements in the statute will render the sale of the property voidable by the court. The law firm of Lafayette, Ayers & Whitlock, PLC, represents homeowner’s associations and can handle memorandums of lien and foreclosure procedures.
The U.S. District Court in Charlottesville, in the case of Pearson v. Bank of America affirmed a bankruptcy court decision which held that the bank did not violate the discharge injunction against creditor action under bankruptcy code section 524(a) by sending monthly statements.
In Pearson, although the debtor had obtained a Chapter 7 discharge for her debt with the bank, she continued to receive a routine monthly statement from her Bank of America mortgage that provided principal balances, estimated payments, payment instructions and information on how payments would be posted.
The language in the opening section of the Mortgage Statement clearly stated that the debtor’s loans had been discharged, that such discharge insulated debtor from any efforts by anyone to collect this discharged debt as a personal liability, and that the debtor could not be pressured to pay this debt. The Mortgage Statement’s opening section referenced the fact that some homeowners become concerned after receiving statements and therefore assured the debtor that such letters were sent as a courtesy, and were not a demand for payment.
The statements also provided that no monthly statements would be sent in the future if the debtor would simply make one toll-free telephone call to an identified number.
Considering all of the facts, the court held that the statements did not represent a violation of the discharge injunction.
If the creditor has obtained a judgment in the General District Court, the creditor should ensure that an abstract is recorded in the Circuit Court where the debtor's real property is located. Docketing perfects a lien against the debtor's real estate in that jurisdiction. Docketing also provides creditors with the right to force the sale of the real property to satisfy the debt. Judgments obtained in the Circuit Court, however, are automatically docketed, but only in that locality, pursuant to Virginia Code §8.01-446. If the debtor owns realty in another jurisdiction, the creditor should have the abstract of the judgment docketed in the Circuit Court of that jurisdiction in order to perfect a lien.
The Georgia Court of Appeals, in Fulton v. Anchor Savings Bank, ruled that a bank could be sued for an auto repossessor's "breach of peace" even though the repossessor was an independent contractor who worked for a company hired by the bank. Although there is apparently no Virginia case on point, several state courts have so ruled.
The Georgia Court of Appeals, in the case of General Finance Corp. v. Smith, relied upon a legal principal from the Restatement (Second) of Torts. §424 of the Restatement holds that a principal cannot delegate to a contractor "the manner of performance of duties imposed by the contract, ordinance or statute". In Georgia, the state statute prohibited intimidation during a self-help repossession.
The problem with this ruling for creditors is obvious: creditors must be very careful in who they choose to do their work - at least until Virginia adopts a different ruling.
The Code of Virginia requires that the trustee’s accounting be filed with the appropriate commissioner of accounts “within six months after the date of a sale.” The Manual for Commissioners of Accounts states that “although the Commissioner does not have specific statutory authority to extend the six month filing date, some courts allow the Commissioner to extend the deadline for good cause shown in advance of the filing date.”
In the previous editions of Creditor News we began a discussion of 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 securing your first, second, equity line or refinance home loans with a deed of trust.
Real estate liens provide important security for your debt. Since real estate is the largest investment and asset for most individuals, they will usually make every effort to pay debts secured by their real estate first. However, you need to know the chain of title in order to make an informed decision about your loan. Specifically, in what position will your lien be? Are there any “clouds” on the title? You will not know the answer to these questions without a proper title search and review.
Once you know your position you will need to examine the available equity to cover your loan. What is the value? What are the balances due on the liens ahead of your anticipated position? Beyond the business decision of determining when the equity is sufficient for your risk tolerance, in order to take advantage of the “$1.00 rule” in the bankruptcy code for chapter 13 cases (should your debtor decide to later file bankruptcy), you need to ensure that there is at least $1.00 in equity to cover the loan. You should take into consideration that property values may go down (e.g., 2008 to present).
If the deal is made and the real estate closing occurs, immediate and proper recording of your deed of trust is essential to preserve your position. If the debtor defaults, foreclosure on the property can occur. If the debtor seeks reorganization of his debt in chapter 13, you can seek full payment of the debt.
We have experienced attorneys and staff who can examine title and properly represent your interests in real estate closings.
In the case of American General Finance Co. v. Hoss, the United States District Court at Abingdon, Virginia, overruled a Bankruptcy Court decision avoiding a creditor’s lien on the debtor’s mobile home. While all agreed that the creditor’s lien was a nonpossessory, non-purchase money security interest, there was a dispute as to whether Bankruptcy Code §522(f)(1) allowed for the avoidance of the lien. The Bankruptcy Court concluded that the lien on the mobile home could be avoided as the Bankruptcy Code permits the avoidance of certain liens which would impair an exemption to which a debtor is entitled to pursuant to Bankruptcy Code §522(b). Virginia Code §34-4 permits a debtor householder to exempt up to $5,000 of property as a homestead exemption. The $4,000 homestead deed filed by debtor qualified for this exemption in the instant case. Property claimed as exempt pursuant to Bankruptcy Code Bankruptcy Code §522(b) is not liable for any debt of debtor which arose before the commencement of a bankruptcy case, but an exception under §522 (c)(2)(A)(I) allowed such exempted property to remain liable for the preexisting debts of a debtor if the debt is secured by a lien which could not be avoided under Bankruptcy Code §522(f).
The Bankruptcy Court found that Bankruptcy Code §522(f)(1)(B)(i) provides for avoidance of nonpossessory, non-purchase money security interests on household furnishings or households goods that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor.
Citing its prior decision in the case of In re Goad the Bankruptcy Court implicitly found that a mobile home is either a household furnishing or good under Bankruptcy Code §522(f)(1)(B)(i).
The District Court, on appeal, decided that a mobile home was in no manner a household good or furnishing, as required under that subsection. Neither of those terms is defined by the Bankruptcy Code. The 4th Circuit Court of Appeals has explained that household goods under this subsection are those items of personal property that are typically found in or around the home and are used by debtor or his dependents to support and facilitate day-to-day living within the house. The District Court stated that it was clear that a mobile home is virtually incapable of itself being contained within a home. In addition, a mobile home was not the type of thing used “around the home” which facilitates … living within the home.”
The District Court examined several cases from across the country dealing with this same issue and discovered only one other court which had agreed with the Bankruptcy Court that a mobile home is a household good. Thus, the District Court concluded that the Bankruptcy Court improperly applied Bankruptcy Code §522(f) and that a proper application of that subsection resulted in the lien in question being unavoidable. The Goad case was overruled in that district and is no longer good law before that District Court.
In summary, the debtor was not entitled to avoid the lien on her mobile home held by the finance company.
The Richmond U.S. District Court found that the plaintiff, a British developer of computer and video games, may enforce a judgment from a United Kingdom court finding a breach of a settlement agreement by defendant, a Virginia company, that agreed to distribute the British company’s video game and then failed to pay the company.
Plaintiff, Codemasters Group Holdings Ltd., stated that it issued invoices for the video products it shipped to defendant, SouthPeak Interactive Corp., but SouthPeak failed to pay. The parties subsequently entered into a settlement agreement in which defendant agreed to pay plaintiff $2 million. Plaintiff contended that defendant failed to make all payments and breached the settlement agreement, leaving an outstanding balance of $1,265,000 plus interest and late fees.
Plaintiff filed suit in the UK and a court there ordered default judgment against defendant. Plaintiff subsequently sued to enforce the UK judgment in Virginia.
The court noted that Virginia has adopted the Uniform Foreign Money-Judgments Recognition Act, which allows for the enforcement of a foreign country money judgment that is final and conclusive and enforceable where rendered.
Two issues were raised in the Richmond court: whether the UK court had personal jurisdiction over SouthPeak, and, whether Southpeak had received notice of the UK action in sufficient time to enable it to defend.
The settlement agreement contained a forum selection clause designating the UK as the forum for resolution of the parties’ dispute. The agreement established the acquiescence of SouthPeak to the jurisdiction of the UK court. Thus, because prior to the commencement of the UK action SouthPeak agreed to submit to the jurisdiction of the UK court, the UK had personal jurisdiction over SouthPeak.
SouthPeak argued that proper service of process did not occur pursuant to Virginia law, so enforcement of the foreign judgment should not be allowed. The court disagreed. The court determined that a plain reading of the Uniform Foreign Money-Judgments Recognition Act simply requires notice, and, SouthPeak had actual notice of the proceedings in the UK. Accordingly, the foreign judgment could be enforced.
The Code of Virginia provides specific guidance as to giving notice of a foreclosure sale.
§55-59.1 requires that the written notice of sale contain the time, date and place of the proposed sale, as well as either (i) the instrument number, or, deed book and page number, of the instrument of appointment filed pursuant to §55-59-59 (appointment of substitute trustee), or, (ii) a copy of the executed and notarized appointment of substitute trustee. Personal delivery or mailing a copy of the advertisement by certified or registered mail is sufficient.
§55-59.1 requires the trustee to send written notice of the time, date and place of the sale to (i) the present owner of the property … (ii) any subordinate lienholder … (iii) any assignee of such note … (iv) any condominium unit owner’s association that has filed a lien … (v) any property owner’s association that has filed a lien … (vi) any proprietary lessees’ association that has filed a lien.
It is important to know that in addition to the notice required by statute, the note or the deed of trust may contain additional notice requirements. Accordingly, the trustee should examine both of these documents.
§55-59 provides that the notice can be sent by either the trustee or the lender.
Cases involving HOA powers are frequently fact specific and governing document specific. Recently, the Frederick County Circuit Court decided a case in which a homeowners association was held in violation of the homeowners association’s restrictive covenants and liable for compensatory damages and attorneys’ fees because it removed a wall on a homeowner’s property. The homeowner spent a considerable amount of time and effort improving a portion of a shared roadway that was on his property. He cleared the land, widened the pathway, and built an eight foot retention wall along the pathway. The HOA notified the homeowner that the wall was encroaching on the right of way and told the homeowner that it must be removed at the homeowner’s expense. There was no board of directors hearing or meeting before the decision was made. Without further notice, the wall was removed but the homeowner refused to pay. In addition to tearing down the wall, the HOA installed drainage culverts in the right of way which resulted in silt flowing into the property’s septic system. The HOA filed suit and obtained a General District Court judgment for the expense of removing the wall. The homeowner then appealed the judgment to the Frederick County Circuit Court and filed a complaint against the HOA. The homeowner claimed that the HOA acted outside its authority under the restrictive covenants, which constituted trespass. The HOA filed a counterclaim, alleging breach of contract and violation of the Property Owners’ Association Act (Va. Code Section 55-508). The court held in favor of the homeowner and found that the HOA exceeded its authority under the restrictive covenants. The HOA did not have authority to remove the wall or to install the drainage culverts. In addition, the HOA did not have the ability to charge the homeowner for either the removal of the wall or the installment of the drainage culverts. The court awarded the homeowner compensatory damages of $28,500 (the value of the wall and cost of returning the property to its prior condition) and attorneys’ fees of $48,844.
It is important to ensure that HOA covenants provide for the powers necessary to take self-help to effect repairs and remove violations. It is also important for HOAs to work through the proper channels and act within its authority granted by restrictive covenants. Failing to do so can be costly for an HOA. The law firm of Lafayette, Ayers & Whitlock, PLC has experience in drafting, reviewing, and amending HOA documents, as well as, representing HOAs in court.
Payroll deduction is still an excellent way to ensure timely payments. Debtor payments become virtually painless, and the debt is reduced without the debtor having to write a separate check.
Traditional payroll deductions (from company to employee's credit union) are not the only way to achieve this result. Voluntary wage assignments can be prepared and submitted through almost any payroll office.
In the case of In re: Michael K. Hedrick, the United States Bankruptcy Court at Alexandria held that in a Chapter 13 case, converted from a Chapter 7 case, a credit union may not amend its proof of claim for a debt from an auto loan.
Prior to filing for bankruptcy, the debtors defaulted on their auto loan. The vehicle was repossessed and sold. There was a deficiency balance due after the sale. The credit union filed a proof of claim for the joint deficiency claim of $5,693.00, as of the date the case was filed. Three months after the confirmation of the debtor’s modified chapter 13 plan, the credit union filed an amended proof of claim, increasing its claim by $2,430.00, for post petition interest and attorney’s fees.
The credit union argued that a Chapter 13 plan must pay unsecured creditors at least as much as under the Chapter 13 plan as they would receive if the case were under Chapter 7. If this case had been under Chapter 7, joint unsecured creditors - but not individual unsecured creditors - would be paid in full together with interest because of the equity in the jointly owned house. The credit union used the contract rate of interest. It treated its post petition attorney’s fees the same as post petition interest.
The Court noted that even though the proper allowed claim is the original claim filed by the credit union, the credit union may actually be paid more than its allowed claim if the estate is a solvent estate. The Court “shall confirm” a Chapter 13 plan if all of the requirements of Bankruptcy Code Section 1325(a) are satisfied. One requirement is that the distribution to unsecured creditors must be at least as much as they would have received had the case been a Chapter 7 case. The provision for interest on allowed claims in solvent estates is a part of this calculation.
The Court ruled, though, that the interest rate is the federal judgment rate, not the contract rate or the applicable state rate. There is no similar statutory provision for attorney’s fees or for other reasonable fees, costs or charges provided for under the agreement which the claim arose.
The Court ruled that the credit union’s first proof of claim is the proper proof of claim. The allowed claim of an unsecured creditor in a solvent estate is the same as in an insolvent estate. It is determined as of the date of the filing of the petition and does not include post petition interest, attorney’s fees costs or other contractual charges.
The Court ruled that if the terms of a confirmed Chapter 13 plan include post petition interest, the Chapter 13 trustee will pay that interest as provided in the plan. If the plan does not provide for post petition interest, the trustee may not pay post petition interest. In this case, the confirmed plan contains no such provision.
The Court concluded that the proper construction of the Chapter 13 plan was that the allowed joint unsecured claims would be paid 100 percent of the amount allowed joint unsecured claim without interest. Had the matter been brought to the Court’s attention at the confirmation hearing, the plan would not have been confirmed without a provision for payment of post petition interest on allowed joint unsecured claims. It was not and the plan was confirmed.
The lesson of Hedrick: read Chapter 13 plans very carefully and object timely.
