Monday, June 27, 2022

Common Area Parking Spaces Must be Assigned Equally

The Court of Appeals of Virginia recently issued an opinion affirming a Circuit Court decision holding that common area parking spaces must be assigned equally.  The case involved a suit by a homeowner, Patrick Batt, against Manchester Oaks subdivision in Fairfax County.  The subdivision contained 57 townhouses, 30 of which were constructed with a garage and driveway (garaged lots) and 27 of which were constructed with an additional bedroom and bathroom in lieu of a garage (ungaraged lots). The subdivision included a common area with 72 parking spaces.

The subdivision was subject to a declaration, administered by the homeowners association that gave the association the right to designate a maximum of two parking spaces for the exclusive use of each lot owner.  However, the association was not required to ensure that parking spaces were available to any particular owner or to oversee use of the parking spaces.  Batt had purchased a garaged lot in 1990, before the subdivision was complete.  At that time, residents parked wherever they chose.  In 1993 or 1994, the developer began assigning two parking spaces to each ungaraged lot.  The remaining 18 parking spaces were designated as “visitor” parking, available to all lot owners on a first-come, first-served basis.

In 2009, the association issued one visitor parking permit to each lot owner and posted a parking policy on its website.  Any vehicle not displaying a permit while parked in the visitor parking spaces would be towed.  In December 2009, the association amended the declaration to provide that the association had the right to designate two parking spaces exclusively to each of the ungaraged lot owners on a non-uniform and preferential basis.  In June 2010, Batt sued the association, claiming that the unequal treatment of owners over parking space assignments violated the declaration.  The association argued that Batt’s suit was barred by the December 2009 amendment to the declaration.

The circuit court ruled in Batt’s favor, finding that the amendment was invalid for six reasons.  The association appealed.  The Court of Appeals ruled, in summary, that equality is inherent in the definition of “common area.”  A “common area” is defined as, “[a]n area owned and used in common by residents of a condominium, subdivision, or planned-unit development.”  Black’s Law Dictionary defines “in common” to mean “[s]hared equally with others, undivided into separately owned parts.”  Accordingly, the court held that the association must assign common area parking spaces to all lot owners equally, if at all, unless the declaration expressly provided otherwise.  In this case, the court did not find that unequal assignment was authorized.

Monday, June 20, 2022

Security Interest Protected in Future Advances

Virginia Code §8.9A-232 provides that a security agreement may provide for collateral securing future advances. Subsection (a) clarifies the result when the initial advance is paid and a future advance is subsequently made. Specifically, subsection (a) of this section replaced and clarified former §8.9-312(7) discussed in In re Enfolinc, Inc. The former section provided that the priority of a new advance turned on whether it was made “while a security interest is perfected.”  The code as it is written today resolved the ambiguity by omitting that requirement.

In the bankruptcy case In re Enfolinc, Inc., the United State Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, was requested to make a determination of the priority of three competing claims of creditors in a debtor’s bankruptcy case.  The debtor filed under Chapter 11, and the court ordered the sale of assets, but the proceeds did not satisfy all of the liens.  Three creditors then asserted a senior claim in the proceeds of the sale.

One of the creditors had a security agreement with the debtor to secure a promissory note.  The creditor renewed and refinanced the original loan with some modification in the terms and with additional collateral to secure the increased amount owned several times after the original promissory note was made.  The creditor contended that the original security agreement contained a future advance clause that included all debts owed to the creditor under the original security agreement.  A future advance clause was codified in Virginia Code §8.9-312(7), and is now codified in Virginia Code §8.9A-323.  The former section provided that “if future advances are made by a secured creditor to the debtor while a security interest is perfect, the security interest has the same priority with respect to future advances as it does with respect to the original advance.”  The creditor’s original security agreement was found to have had sufficient language to constitute a future advance clause as defined in the case of In re Brice, so the court held that the later renewals and refinancing done by the creditor was not another loan, but an advance of the original transaction.  The court granted the creditor a first priority security interest in the remaining funds generated from the sale of the debtor’s assets. 

Monday, June 13, 2022

Pre Default Waiver of Notice of Sale is Void

In the case Woodward v. Resource Bank, from the Circuit Court, City of Virginia Beach, the Virginia Supreme Court reviewed provisions in a promissory note that provided for the debtors' waiver of notice of the default sale of the collateral securing the loan.  In Woodward, a married couple operated a gas station and convenience store in Portsmouth and desired to expand.  The couple obtained the financing necessary to purchase a store in Virginia Beach (the Pavilion Store) from a bank.  In doing so the couple executed a note for $80,000.00 which was secured by a second deed of trust on their home, as well as with security interests in the inventory and equipment at the Pavilion Store.  Later the couple decided to purchase a third store in Virginia Beach.  They obtained financing from the same bank by executing a note in the amount of $90,900.00, and by signing a security agreement which granted the bank a security interest in the equipment and inventory of all three stores.  The bank required the principal shareholders of the corporation to sign a guaranty for $45,000.00 of the $90,900.00 note.  The guarantee agreement stated that the liability of the guarantors would not be affected by "any failure to ... give any required notices" by the bank. 

The couple defaulted on the note and the bank demanded that the guarantors honor their respective guaranties.  Thereafter, the bank sold the collateral securing the notes without formal notice.  The collateral was sold at prices far below the stated value.  The shareholders argued that they were entitled to notice of the sale, notwithstanding that they had signed pre-default waivers of notice, because they were "debtors" within the meaning of Virginia Code §8.9-105(1)(d) and §8.9-504(3).  The Virginia Beach Circuit Court agreed with the bank that the waivers precluded the necessity of giving notice, but the Virginia Supreme Court ruled that since the shareholders were "debtors" within the meaning of the statutes, they were entitled to notice of the disposition of the collateral.  Applying the plain language of Virginia Code §8.9-504(3), the Virginia Supreme Court held that the notice provision contained therein may not be waived before the occurrence of a default.

The Virginia Supreme Court further ruled that a rebuttable presumption arose that the value of the collateral that the bank sold equaled the amount of the debt because the bank failed to give notice to the guarantors, and because the sale was thus "commercially-unreasonable".  Virginia Code §8.9-504(3) requires that every aspect of the disposition of collateral, including "the method, manner, time, place and terms must be commercially reasonable".  Because the bank failed to rebut this presumption by putting on evidence to the contrary, the Court ruled that the indebtedness was extinguished, and the creditor was precluded from further collection.

The lesson of Woodward is simple: always obtain a legal opinion regarding sales of reclaimed security, and always follow the requirements of the applicable statutes.

Construction Case Garnishments

The United States District Court in Alexandria has reviewed a matter important to many supplier and contractor creditors: the garnishment of funds due their debtors from another party.  The case was U.S. v. Harkins Builders Inc.  In Harkins a material supplier was pursuing a garnishment proceeding against a builder who owed money to the judgment debtor, a drywall subcontractor.  The Court ruled that the supplier was not bound by a mandatory arbitration clause in a separate contract between the builder and the drywall sub.

In Harkins a materials company supplied drywall materials to drywall subcontractors.  When the drywall subs failed to pay for the materials, the supplier obtained a federal court judgment for $278,520.  The supplier then initiated a garnishment proceeding against a builder to attach monies owed by the builder to the drywall sub under a contract between them.  As garnishee, the sub confessed assets but argued that the amount it owed to the drywall sub should be reduced by setoffs totaling $50,853 allegedly owed by the sub to the builder under their contract.  The garnishee also argued that any dispute about these setoffs must be resolved through arbitration, as provided in the contract between the drywall sub and the builder.

The Court rejected the contention that the resolution of the amount of money owed by the builder to the drywall sub and subjected to garnishment must be accomplished through arbitration.  As a judgment creditor of the drywall sub, the supplier was not a party to the contract between the sub and the builder, and its interest was limited to the drywall sub's property interest in the builder's hands.  The parties to the drywall builder contract agreed to arbitration as an efficient procedural mechanism for resolving contractual disputes, including disputes over amounts owed.  The agreement to arbitrate, however, does not add or subtract value in the calculus for determining the value of the contract right.  The Court ruled that since the judgment creditor was afforded court procedures for determining the value, the fact that the property before the court was created by a contract containing an arbitration clause did not require a non-party to the contract to follow the contract's procedural mechanisms for dispute resolution.  Accordingly, the federal courts assumed jurisdiction to make the decision. 

Monday, June 6, 2022

Obtaining Possession after Foreclosure

Upon purchasing property at a foreclosure sale, it is not uncommon to have a “holdover tenant”.  If this occurs, you can obtain possession of the property by filing a Summons for Unlawful Detainer in the appropriate General District Court.  The applicable statute requires that the plaintiff prove “a right to the possession of the premises at the time of the commencement of the suit.”  The only evidence that is usually required is (a) a copy of the recorded trustee’s deed, since the facts recited therein are prima facie evidence of their truth, and (b) a copy of the notice to vacate sent to the occupant(s).

On the date of the initial return, if the defendant fails to appear, possession will be granted.  If the matter is contested, most courts set a new date for trial.  In contested cases, issues are usually related to notice and service, so the trustee should be prepared to present evidence that the foreclosure sale was properly advertised, noticed and conducted.

The judgment for possession is not final until 10 days after it is entered, and most courts will not issue a writ of possession during that 10-day pendency.  If an appeal is noted within the 10-day period, the defendant must perfect the appeal by posting an appeal bond and paying within 30 days of the date of the judgment the applicable writ and service fees for the circuit court.  Most judges are sympathetic to require significant appeal bonds equating with the former mortgage payments. 

Eviction is accomplished using a “Request for Writ of Possession.”  A writ of possession may be issued on an unlawful detainer for up to one year from the date of judgment.  When requesting the writ of possession, provide contact information for both the Sheriff and the person who will supervise the eviction of the new owner; the Sheriff will coordinate a date and time to serve the writ of possession and maintain the peace while the owner physically evicts the personal property of the occupant(s) and secures the property.