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.