Fraudulent Conversion or Removal of Property Subject to Lien or Title

If a creditor is a lien holder, that creditor should be aware of a lesser known remedy available if a debtor fraudulently sells, removes, or hides the property subject to the lien. Virginia Code §18.2-115 states that a debtor is guilty of larceny if he/she fraudulently sells, pledges, pawns, removes from the premises agreed upon, removes from Virginia, disposes of, or hides the property subject to a lien without the written consent of the owner or lienor or the person in whom the title is, or, if the writing is a deed of trust, without the written consent of the trustee or beneficiary in such deed of trust. Unlike civil fraud, this statute’s fraud contemplates an act by a debtor intended to deprive a secured creditor of his collateral by appropriating it to the debtor’s own use. 

There must be proof that the debtor’s fraudulent intent was directed against the lienor or person in whom the title is.  The statute also states that failure or refusal to disclose the location of the property or surrender the property shall be prima facie evidence of a violation of this statute.  In Lewis v. First National Bank, the Fourth Circuit clarified that even the existence of written permission to remove the collateral is immaterial under this section, as the creditor need not show the lack of such permission to make out a prima facie case.

The final provision of the statute provides that the venue of prosecution against persons fraudulently removing any such property, including motor vehicles, from the Commonwealth shall be the county or city in which such property or motor vehicle was purchased or in which the accused last had a legal residence.

Debtors may argue that the debtor did not actually receive the demand for return of the collateral; however, in Lewis, failure to leave a functional forwarding address or contact with the creditor constituted a waiver of the debtor’s right to deny that the demand was made.

Debtors have also argued that criminal charges such as these cause emotional distress or are extreme and outrageous.  In Lewis¸ The Fourth Circuit stated that creditors should not be fearful of a debtor’s claim that these charges cause emotional distress.  To hold such would render the statute useless, which was not intended by the legislature.  The court held that the initiation of criminal proceedings against someone under this section with probably cause is not extreme or outrageous as a matter of law. 

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 Sale Accounting

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.” 

Making Owners and General Contractors Personally Liable to Subcontractor, Laborer or Materialman

            Virginia Code §43-11 provides a way for owners or general contractors to be made personally liable to subcontractor, laborer or materialman if notice is appropriately given, and if the payer makes payment to the owing party without paying the notifying creditor.  Specifically, §43-11 (2) states that: 

“…if such subcontractor, or person furnishing labor or material shall at any time after the work is done or material furnished by him and before the expiration of thirty days from the time such building or structure is completed or the work thereon otherwise terminated furnish the owner thereof or his agent and also the general contractor, or the general contractor alone in case he is the only one notified, with a second notice stating a correct account, verified by affidavit, of his actual claim against the general contractor or subcontractor, for work done or materials furnished and of the amount due, then the owner, or the general contractor, if he alone was notified, shall be personally liable to the claimant for the actual amount due to the subcontractor or persons furnishing labor or material by the general contractor or subcontractor, provided the same does not exceed the sum in which the owner is indebted to the general contractor at the time the second notice is given or may thereafter become indebted by virtue of his contract with the general contractor, or in case the general contractor alone is notified the sum in which he is indebted to the subcontractor at the time the second notice is given or may thereafter become indebted by virtue of his contract with the general contractor. But the amount which a person supplying labor or material to a subcontractor can claim shall not exceed the amount for which such subcontractor could file his claim.

The notices referred to in this code section are commonly referred to in the industry as “42-11 letters”.  We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same.  If you have a need, please call us. 

Lien Avoidance Case Review: Avoidance of Exemptions Impaired by a Judicial Lien

In the case of Massie v. Yambrose the United States District Court at Harrisonburg, Virginia, decided that where a creditor had obtained a judgment lien that was docketed against real property that the debtor owned with her non-debtor spouse as tenants by the entirety, that lien impaired the debtor's exemption and may be avoided.  This decision reversed a bankruptcy court decision.  In summary, the District Court decided that although the creditor's judgment lien would not have been enforced against the debtor's property unless and until the tenancy by the entirety dissolved, the lien nevertheless impaired the exemption.  The focus of the exception granted in Bankruptcy Code §522(b)(2)(B) was the property itself, not the tenancy.  If it was not avoided, the lien could be enforced against the property after the tenancy by the entirety dissolved.  This would constitute an impairment of the debtor's exemption; therefore, the District Court ruled that the debtor may avoid the lien pursuant to Bankruptcy Code §522(f)(1).  The issue before the Court in Massie was whether the creditor's docketed judgment was a "judicial lien" that "impaired" an exemption to which the debtor would be entitled as a tenant by the entirety, even though the lien could not be enforced while the tenancy survived.  Although this was a judgment lien pursuant to Virginia law, that did not determine whether it was a judicial lien as defined by the bankruptcy code.  The interest held by the creditor was obtained pursuant to Virginia Code §8.01-458, which clearly qualified as being obtained by judgment or other legal process.  The core issue, therefore, was whether there truly was "a charge against or interest in" the property held by debtor and her non-debtor spouse given the invalidity of any lien against property held by tenants by the entirety.  For all practical purposes, this question was the same as whether the lien impaired the exemption.  If the creditor did not have a charge against or interest in the property, then nothing existed that could impair the exemption.  Conversely, if the lien (assuming that it was one) did impair the exemption, then it must have been a charge against or an interest in the property.  As a result, for the purposes of the issue involved in this case, the Court assumed that the creditor held a judicial lien in order to decide whether such lien impaired the debtor's exemption.  The determinative issue was whether a lien "impaired" an exemption pursuant to Bankruptcy Code §522(f) if it was not capable of being enforced until the basis of the exemption itself disappeared.  In this case, the creditor's lien was completely ineffective against the property held by the debtor and her non-debtor spouse as tenants by the entirety, unless and until the tenancy itself dissolved and the debtor was left with an interest in the property other than as a tenant by the entirety.  The District Court stated that it was guided in its decision by the 4th Circuit Court of Appeals case of In re Opperman.  As applied to Massie, Opperman suggested that the proper question was not whether the basis for the exemption was impaired, but whether the property currently subject to the exemption could become impaired by the lien.  This implication was buttressed by the language granting the exemption in Bankruptcy Code §522(b).  That section allowed the debtor to exempt from property of the estate the property specified in the remainder of the section.  Bankruptcy Code §522(b) further states that such exempt property was any interest in property in which the debtor had, immediately before the commencement of the case, as a tenant by the entirety.  In Massie the exemption was granted to the property itself, rather than to the tenancy by the entirety, and the relevant date in determining the exemption was the date that the debtor filed the bankruptcy petition.  The exemption was granted to the debtor's interest in the property because on the date that debtor filed her bankruptcy petition, the property was owned by tenants by the entirety, and this was not dependent on how it is owned at any time in the future.  As the 4th Circuit implied in Opperman, therefore, the question was whether the creditor's lien could attach to the property, not to the tenancy, thereby impairing the exemption to which the debtor currently is entitled.  Absent avoidance of the lien pursuant to Bankruptcy Code §§522(f)(1), the lien could attach to the property if the tenancy by the entirety dissolved.  If the unity of husband and wife is broken, the tenancy by the entirety would be lost along with it.  The debtor's husband could die, or she could divorce him and retain an individual interest in the property.  If either of these events occurred, the creditor then would be able to enforce the lien against the property.  Although the tenancy could never be impaired, the exemption surely could be. The Court therefore ruled that the creditor's lien impaired an exemption to which the debtor would be entitled but for the lien.  Pursuant to Bankruptcy Code §522(f)(1), the Court held that the debtor may avoid the lien.

Perfection of Vehicle Liens

In almost all circumstances, courts will recognize a lien as being valid only when it has been "perfected".  Perfected means registered with the appropriate governmental agency - DMV, Board of Inland Game and Fisheries, etc.; language on a promissory note that the loan is secured by the vehicle is not enough.  Although the result of failed perfection could be harsh (a lost lien), it makes sense; without a registration, no one could ever know who has liens.  Understanding this, it is important to have someone in your creditor organization be designated to follow-up on lien perfection to ensure that it is done, to ensure that it is done promptly, and to ensure that it is done right.

What happens when your debtor moves to another state?  As long as the creditor holds the original certificate of title reflecting the lien, the creditor will usually be protected.  If the vehicle is taken to another state but is never re-registered or re-titled, the original secured creditor who is listed as lienholder on the original certificate of title maintains its perfection.  The original secured creditor also maintains its lien if the debtor moves and obtains a new certificate of title with the creditor's name on it.  However, what happens if the debtor moves, obtains a new certificate without the lien recorded?  There could be a problem.  To avoid the possible problem, follow up on your transient debtors like you do your new liens.

Notice of Sale

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.

Criminal Liability for Misuse of Construction Funds

Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.

The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.

Lien Avoidance Case Review: Judicial Liens that Impair a Homestead Exemption

In the case of  Payne v. Crossroads of Hillsville Assoc., Ltd. the United States Bankruptcy Court at Abington, Virginia, ruled that a judgment creditor's lien was avoided because it impaired a debtor's homestead exemption.  In summary, the Court found as fact that although the creditor docketed its judgment lien against the debtor prior to the debtor's filing of a bankruptcy petition and amended bankruptcy schedule that claimed an exemption in "any future equity" in his home, there were several other liens ahead of the judgment lien, and there was no equity left in the property, which had been sold.  In particular, the Court found that at the time of filing the petition, local tax appraisals valued the debtor's property at $147,500.  The evidence also showed that the creditor's judicial lien was subordinate to numerous prior liens, namely: a first deed of trust to a bank in the amount of $88,362; a second deed of trust to a bank in the amount of $52,000; a judgment lien in favor of another creditor in the amount of $2,513; and a judgment lien in favor of yet another creditor in the amount of $115,473.  Also, at the time of filing, this property was subject to past-due taxes in the amount of $4,500.  The total amount of liens, including taxes, senior to that of the creditor's was $262,848, thus rendering no equity in the debtor's property to support the plaintiff creditor's lien.  The debtor sold this real estate for $185,000.  Despite the automatic stay, the creditor's lis pendens caused approximately $10,000 of the proceeds from the sale to be held by the buyer's attorney pending resolution of this matter.  The Court further stated that to aid the debtor in his "fresh start," the bankruptcy code provides that a debtor may avoid the fixing of a judicial lien on an interest of the debtor in property to the extent that the lien impairs an exemption to which the debtor would otherwise have been entitled.  Thus, a judicial lien must be avoided if it impairs a debtor's exemption.  The Court in Payne found that the creditor's judgment lien was not supported by any equity in the debtor's property at the time of the filing of the debtor's petition.  To allow such a lien to remain in place would not only impair any exemptions to which the debtor would have been entitled, thus violative of Bankruptcy Code §522(f), but would also undermine the "fresh start" secured to the debtor by the provisions of the bankruptcy code.  The Court stated that to the extent the creditor's judicial lien impaired the debtor's exemption, it must be avoided, for, if not, the intended benefit of the homestead exemption itself would be lost.  Any remaining portion of the creditor's lien must also be avoided as lacking the supportive equity needed at the time of the filing of the debtor's petition and the debtor's opportunity for a "fresh start" would be frustrated unless he was entitled to avoid the creditor's judicial lien in its entirety.  The Court also found it appropriate to note that an alleged lien upon property of a debtor without equity supporting same as of the date the petition is filed was a general unsecured claim discharged by the debtor's discharge order under Bankruptcy Code §727 and enjoined therein from collection.  A discharge order provides that any judgment obtained heretofore or hereafter is void as a determination of personal liability of a debtor.  A judgment docketed as a lien, not supported by equity, is a judgment only of personal liability, and the dischargeability order specifically enjoins all creditors whose claims are such from seeking collection.  The Court also stated the issue of exemptions or exempt property is not the only remedy available to debtors in the area of lien avoidance and nullification.  If a judgment or lien on debtors' property has no property or equity support, it is unsecured and discharged by the order of discharge.

Sanctions on Improper Fair Debt Claim

In the case of Guidry v. Clare, a United States District Court in Northern Virginia granted an award of $16,000.00 in sanctions against a debtor who was a plaintiff in a Fair Debt Practices Collection Act (FDCPA).  The Court held that the debtor’s case, which also included state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment, was filed wholly without merit. 

The Court found that the dispute arose when the debtor wrote the plaintiff, a company that provided cheerleading training, a check for $62.50 for the debtor’s daughter’s class.  The check was returned for insufficient funds.  The company’s office manager (Clare) contacted the debtor to make the check good.  The debtor did not respond.  Over the next several months the company made several other efforts to collect on the check, including a letter from the company’s attorney and from a collection agency.  The company’s office manager also advised the debtor that the company would seek a warrant for the debtor’s arrest if the debt was not paid within seventy two hours.  When the debtor did not respond, the company filed a criminal complaint for misdemeanor larceny by check.  A few days later, a policeman served the warrant on the debtor at the same time he served a warrant from another creditor for felony larceny by check.  The debtor was arrested and released on her own recognizance on both charges.  She paid the face amount of the company’s check, plus a $30.00 bank service charge.  As a result of this, the prosecutor withdrew the bad check charge.

A few months later the debtor filed her FDCPA action.  After much litigation, the case was dismissed, without prejudice, because the case was not served within 120 days.  The complaint was refiled.  The company’s attorneys sought dismissal and sanctions for filing a frivolous lawsuit.  The Court dismissed the case, scheduled a hearing on sanctions, and ordered the parties to prepare briefs.  After reviewing the briefs the Court concluded that the debtor’s case was “meritless, indeed flatly frivolous”.  The meritless claims included allegations that the company’s manager had failed to make a meaningful disclosure of her identity and debt collection purpose in her telephone calls to the debtor, that a debt collector was barred from filing a criminal complaint, that the company’s manager had made false representations to authorities in order to disgrace the debtor, and that the collection letters failed to disclose their debt collection purpose.  The Court ruled that the letters contained the required disclosures and the purpose of the phone calls were clear.  The Court further ruled that the law prohibits only the threat of criminal action if there is no intent to follow through on the threat.  In this case the intent to follow through was evident from the fact that a warrant was issued, and there was no evidence that the representations to authorities were false or made with an intent to disgrace the debtor.  The Court found that there was also no basis for the state law claims of intentional infliction of emotional distress, malicious prosecution and false imprisonment.  The Court wrote that “it cannot be forgotten or overlooked” that the case “was spawned by Guidry’s failure to pay a $62.50 debt, or rather by her attempt to pay it with a bad check”.

Creditors take heart - there is still some common sense in this world!

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. 

Perfecting Mechanic’s Liens

In recent editions of Creditor News 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. 

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

Lien Avoidance Case Review: Judicial Liens Larger than Available Exemptions

In the case of Andrews Distributing Co. v. Stanley the United States District Court at Big Stone Gap, Virginia, held that a creditor's lien must be avoided in the amount of the debtors' homestead exemption, but the amount not avoided would remain a lien against the debtors' real property.  The District Court's decision overruled a bankruptcy court's decision avoiding the entire lien.  The Bankruptcy Court had concluded that the debtors' homestead exemption was impaired by the presence of the creditor's lien, and thus avoided the lien in full.  The creditor, on appeal to the District Court, contended that the Bankruptcy Court erred, in that the clear language of Bankruptcy Code §522(f) mandated that the lien be avoided only to "the extent that" it impaired the exemption.  The District Court agreed with the creditor and ruled that under the plain meaning of Bankruptcy Code §522(f), only the amount of the judicial lien which impaired the exemption should be avoided.  The District Court stated that the Court of Appeals for the 4th Circuit, in strongly worded dicta, had addressed this issue in the case of In re Opperman.  The Court of Appeals in Opperman concluded that a lien larger in amount than the exemption available to the debtor did not impair that exemption.  Thus, in Andrews the District Court found for the creditor and decided that only that part of a lien which actually interfered with the debtor's homestead exemption may be avoided. 

Child Support Exemption for Garnishment

In the case of General Electric Capital Auto Lease, Inc. v. Turner, the City of Richmond Circuit Court denied a debtor's exemption to garnishment claim.

In Turner the debtor claimed an exemption based on the amount of monthly child support the debtor owed.  The Court noted that the specific exemption claimed by the debtor on the garnishment form was the exemption created by Virginia Code §55-165.  The judgment creditor argued that this code section only applied to assignments of wages executed and approved by a judge under the procedure specifically set out in Virginia Code §55-161 through 167.  That procedure included notice to and consent of the debtor's creditors, the appointment of a trustee, and so on.  The Court found as fact that none of those things were done in this case.  Therefore, the Court ruled that an exemption under Virginia Code §55-165 did not apply.  The Court also considered all the other exemptions from garnishment listed in Virginia Code §8.01-512.4, and none of those exemptions applied either.  Accordingly, the debtor's claim of exemption was denied.

Trustees in Foreclosure

Trustee under a deed of trust are agents for both the lender and the borrowers.  Accordingly, a trustee must act fairly and impartially.  The lender must not let either the lender or the borrower influence the manner in which a trustee carries out the terms of the deed of trust, especially if this would be detrimental to either party.  If any question arises as to the existence of the default or the amount in default, a trustee should seek the aid and direction of the court.  The powers and duties of a trustee are governed by the deed of trust and Virginia Code Section 55-59.1 et seq.  The code provides when the deed of trust does not.  A trustee has no right to exercise the power of sale or to obtain possession until such time as the borrower defaults under the note or deed of trust, and, then, only for the purpose of selling the property at foreclosure or preserving the property until sale.  When a default occurs, there is no change in title – the property merely becomes eligible to be sold under the powers originally conferred to the trustee by the owner.  Thus, the noteholder has the right to have the property sold and the proceeds of the sale applied to the debt.

Using Mechanic’s Liens to Secure an Interest in Real Estate

In recent editions of Creditor News 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 begin a review of the benefits of using mechanic’s liens to aid in the collection of your debt.

Virginia Code §43-3 et. seq. provides for special procedures for the collection of unpaid bills related to work performed on, or products supplied for, real estate.  §43-3 A states:

“All persons performing labor or furnishing materials of the value of $150 or more … for the construction, removal, repair or improvement of any building or structure permanently annexed to the freehold … shall have a lien, if perfected as hereinafter provided, upon such building or structure, and so much land therewith as shall be necessary for the convenient use and enjoyment thereof … subject to the provisions of § 43-20. But when the claim is for repairs or improvements to existing structures only, no lien shall attach to the property repaired or improved unless such repairs or improvements were ordered or authorized by the owner, or his agent.”

Virginia Code §43-3 B provides for special rules regarding condominiums.

Virginia Code §§43-4, 43-7 and 43-9 provide for the perfection of the lien by general contractors, subcontractors, and laborers and suppliers.  We will explore this more in next month’s edition. 

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

Lien Avoidance Case Review: Judicial Liens

Bankruptcy Code §522(f) provides that debtors may avoid judgment liens if the liens impair an exemption to which the debtor would be entitled under Bankruptcy Code §522(b).  Bankruptcy Code §522(b) allows debtors to exempt property pursuant to state homestead provisions.

Although opinions vary in different jurisdictions, in the Fourth Circuit, Eastern District of Virginia, to avoid judgment liens, debtors must claim the subject property as an exemption on Schedule B-4 of their bankruptcy petition, and then must also file their homestead exemption in a timely manner. The case of In Re Wall, decided by the United States Bankruptcy Court, Eastern District of Virginia, demonstrates that debtors can lose their rights by failing to properly claim the avoidance.

Parties Liable for Credit Card Debts

The Richmond Circuit Court, in the case of Chevy Chase Savings Bank v. Strong, ruled that a husband who was only an “authorized user” on a bank credit card issued to his wife was not liable to the bank for a $5,024 cash advance check he wrote on the credit card; only the wife was liable.

In Virginia Code §11-31, Virginia has codified the rule that use by an authorized agent of a cardholder shall be the equivalent of use by the cardholder.  That rule, however, does not address the question of the liability of the agent.  The court reasoned that while it does not appear that any Virginia Court has addressed the issue, the language used in the statute and case law from other jurisdictions led the Court to believe that the issue was governed by agency law.

The Court stated that it was well established in Virginia that when an agent contracts for a disclosed principal, credit is extended to the principal, and the benefits of the contract are accepted by the principal, there is no personal liability on the agent.  In this case, the bank was well aware that the principal was the wife.  It extended credit to her based on her application for a card.  They were aware that no contract was ever made with husband individually and, therefore, they knew that he was simply an authorized agent.

The Court found that there was no indication in this case that husband exceeded his authority in executing the check against the account, or that he agreed to be personally liable for any debt incurred on his wife’s account.  Accordingly, the court ruled that the liability for the debts belonged only to wife.  The court ruled that the husband was not liable for any portion of the outstanding balance, including the amount of the check that he personally wrote.

The lesson from Strong - do not confuse guarantors with authorized users.

Deeds of Trust

It all starts with the deed of trust.  The deed of trust is the primary method of acquiring a lien against real estate in Virginia.  With a deed of trust, the owner of the real estate conveys legal title to a trustee, in trust, to secure the noteholder’s indebtedness.  A deed of trust establishes a lien on the subject real estate upon execution by the grantor and recordation in the land records of the Circuit Court for the jurisdiction (County or City) in which the property is located.  While recording the deed of trust is not essential to the validity of the deed of trust between the parties, an unrecorded deed of trust does not establish a lien on the subject real estate as to other creditors and purchasers of the grantor.  An unrecorded deed of trust will not provide the beneficiary of the deed of trust with a priority position against other creditors with recorded liens, even if they are subsequent in time.

Using Lis Pendens to Secure an Interest in Real Estate

In recent editions of Creditor News 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 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.

"Tools of the Trade" Exemption

Virginia Code §34-26, the "Poor Debtor's Exemption" section, allows a debtor to claim tools used in the course of his trade or occupation and keep them from creditors in bankruptcy cases.  This exemption also applies to collection cases, as the debtor may use this exemption to prohibit post judgment collection by execution on the asset.

In the case of Monticello Arcade L. P. v. Lyall, the United States Bankruptcy Court at Newport News reviewed §34-26 in regard to an architect's Acura automobile.  The Bankruptcy Court denied the exemption based upon the classification of the car as a "luxury" car.  The Appeals Court reversed and remanded the case with instructions that the Bankruptcy Court focus not upon whether the car is a "luxury" car, but upon whether the car is an "absolute requirement for [debtor] to efficiently and competently perform his work as an architect."  Upon the Bankruptcy Court’s review, the Court ruled that the architect had demonstrated with his daily calendar and his testimony that the car was used to visit clients, job sites and government offices. The debtor was a self-employed architect in Hampton Roads, had practiced architecture on his own for six years as owner an president of his company.  The debtor testified that although he used the vehicle to commute to and from work, the vast majority of the time he used the vehicle for non-commuting business purposes.  The debtor also testified that he had to visit job sites in order to interpret plans and in order to understand the scope of the project.  The Court noted that there was no evidence that there were alternate means of transportation available for the debtor to accomplish these requirements.  Accordingly, the Court, this time around, found that the vehicle was "necessary", and therefor was exempt under Virginia Code §34-26(7).

In the case of White v. Central Fidelity Bank the United States Bankruptcy Court at Roanoke, Virginia, reviewed the language of Virginia Code §34-26 and held that the plain meaning is that property which is "necessary for use in the course of the householder's occupation or trade" qualifies as a "tool" for purposes of exemption.  In White the Court noted that in regard to automobiles, the particular facts surrounding the occupation and the necessity of the automobile must be examined.  In White, the debtor had both a day and an evening job as a nursing assistant providing home health care in patients' homes, and whose employment contract required that she have an auto as a condition of her employment.  Based upon these facts, proof that the creditor's lien was a nonpossessory, non-purchase money lien, and the fact that the creditor's lien impaired the debtor's exemption, the Court held that the lien was avoidable under Bankruptcy Code §522(f).

In the civil/collection case of Hunn v. Zettel the Fairfax County Circuit Court had occasion to review a debtor's claim for an exemption for his BMW car as a "tool of the trade".  Unlike the evidence obtained in Lyall which demonstrated the "absolute requirement", in Zettel, no such evidence was presented.  Accordingly, the Court denied the debtor's exemption claim in Zettel.

Looking at another case involving tools of the trade, the United States Bankruptcy Court at Newport News, in the case of In re Aldrich, upheld the debtors' motion to exempt various items of property, including an inoperable photo enlarger and two photo processors, as "tools of the trade" under Virginia Code §34-26.  The Court concluded that these items were exempt under Virginia Code §34-26 and under Bankruptcy Code §522.  The Court in Aldrich stated that it reached its conclusion from the plain meaning of Virginia Code §34-26, and from the obvious intention of the Virginia legislature, which substantially broadened the scope of the relevant  definitions when it amended Virginia Code §34-26 in 1990.  The Court in Aldrich found from the unrebutted testimony that the photo processing equipment was necessary for use in the debtors' occupation involving the family photo processing lab.  There was no doubt that the debtors had been in the photo processing business for some time and, in the case of the husband, almost continuously since his retirement from the Air Force.  It was likewise absolutely clear from the evidence that the wife was engaged in the photo processing business of a third party at the time of the filing of the petition, and that she too awaited the startup of the family business in order to utilize the exempted tools of the trade, which she was currently utilizing on a part-time basis.  Therefore the Court found that both debtors were, or intended to be engaged, in an occupation and trade at the time of the filing of the petition.  The Court found it to be sufficient that the husband had the intention of returning to his occupation as a photo processor at the time of the bankruptcy filing, even though he had been precluded from doing so by the contractual relationship with the objecting creditor, who bought out the debtor's earlier photo processing business and implemented a non compete agreement.