Foreclosure: 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.

Real Estate: Homeowners’ Association Wins Damages on Owner Violations

There has been much litigation over HOA violations in the last few years. Circuit Courts have been scrutinizing HOA violation claims very carefully. Enforcement and damages for violations can be won. The December 2011 Loudon County Circuit Court case of Lee’s Crossing Homeowners’ Association v. Zinone is a good example of such enforcement. In Lee’s Crossing, the court found that in building her home, the homeowner committed multiple violations of the plan approved by the Architectural Review Board. Ultimately, the court assessed damages in favor of the homeowners’ association on the basis of “one overriding violation,” the failure to comply with the ARB-approved application.

Bankruptcy: Dischargeability of Student Loans

In the last edition of Creditor News I reviewed the first case examining the application of Bankruptcy Code §523(a)(8) concerning the dischargeability of student loans.

The second case is Jones v. National Payment Center, which was heard by the United States Bankruptcy Court in Richmond. In Jones the Court held that the debtor had the ability to repay $13,000 of her $16,000 in student loans, and $3,000 was thus determined to be dischargeable in bankruptcy under Bankruptcy Code §523(a)(8)(b), because of the “undue hardship” arising from debtor’s medical condition of chronic fatigue. This was the Court’s second decision in this case - the first decision in favor of full discharge was overturned on the creditor’s appeal. In this remanded trial, the creditor argued that all of the debt was non-dischargeable. However, the Court allowed a partial discharge.

The Court ruled that simply because the debtor earned a higher wage ($5 per hour more than at the time of the Court’s earlier opinion), and had a higher net income than she did when she first came before the Court, did not mean that she was not entitled to a partial hardship discharge. While it was true that she had over $700 left over each month after paying for necessary expenses, the Bankruptcy Court found that this was largely due to the fact that she was dependent at that time upon her parents. In considering whether a debtor could maintain a minimal standard of living based on current income and expenses, courts differ as to how they treat the fact that a debtor relies on parental support. The Court found that it would be inappropriate to treat all of the savings the debtor realized by living with her parents as available to pay her student loan debt. The debtor testified that she planned to move out of her parents’ home sometime in the coming year, at which time her expenses would increase drastically. More of her net income would be needed to maintain a minimal standard of living as her parents would no longer be providing her with shelter and transportation. The Court found that there was no reason not to consider these facts in the minimal standard of living calculus.

The Court ruled that to hold the debtor’s student loan nondischargeable would penalize her for simply doing the best she could under the circumstances. The debtor’s parents were retired and on a fixed income and they could not support her indefinitely. It was therefore prudent for the debtor to build her savings and prepare for the day when she would no longer be able to live with her parents.

The Bankruptcy Court allowed the debtor to continue building her savings so that she would become self-sufficient by discharging all but $13,000 of her student loans and giving her approximately six years to repay this amount with interest on the unpaid balance of 8.25 percent.

The third case is Commonwealth of Va., State Educ. Assistance Auth. v. Gibson. In Gibson the Court ruled that under Bankruptcy Code §523(a)(8)(A), a student loan is not dischargeable in bankruptcy unless the loan became due more than seven years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition. Therefore, the seven-year nondischargeability period is calculated by determining the amount of time between the date the loan became due and the date the borrower filed bankruptcy, then subtracting the amount of time during which any "applicable suspension" periods were in effect.

In Gibson the debtor filed her current Chapter 13, slightly more than seven years after the loan became due. However, during the debtor's previous Chapter 7 bankruptcy, an automatic stay was in effect and prevented the Commonwealth from taking any action to collect the student loan, and the debtor did not make any payments on the loan during the period. The Court held that the previous automatic stay was an "applicable suspension of the repayment period" that tolled the nondischargeability period. Accordingly, upon applying the formula listed above, the debtor did not have the equivalent of seven years payments on her loans, and therefore, the loans were not dischargeable.

Collections: Liability for Charges above the Credit Limit

Last month we looked at two fact patterns involving situations where a customer makes retail purchases for products in an amount greater than the customer’s established credit limit – specifically, if the customer later fails to pay for the product, can he be successfully sued for payment. In those situations, we found that a court will likely hold a customer liable for charges that exceed the originally agreed upon credit limit. The credit terms require the customer to pay any and all sums that become payable because of the express terms of the contract and the intentions of the contracting parties. The next two fact patterns present new issues.

 

Fact Pattern Three: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer sends one of his employees to retailer to make a purchase, with customer knowing what the cost of the purchase will be. Retailer allows the purchase over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?

In addition to the contract issue discussed in the previous patterns, this fact pattern presents an agency law issue. The Circuit Court of the City of Richmond dealt with a similar issue in Chevy Chase Savings Bank v. Strong. In this case, the bank issued a credit card. A card user then incurred charges on the credit card but the card user was the card owner’s husband. The court held that the wife was liable for the charges because she gave her husband authority to use the card. The husband was an agent, and was therefore only liable if the wife was able to prove that her husband exceeded his authority or that he agreed to become personally liable.

In this fact pattern, the customer has given his employee authority to act on his behalf so the employee is his agent and the customer is the principal. As principal, the customer is liable for all charges. The credit was given to the customer, so he is liable for the charges, unless he is able to prove that the employee exceeded his authority or agree to become personally liable. In this case, the employee did not act outside of his authority and did not agree to become personally liable, so the customer will be liable for a balance incurred.

Fact Pattern Four: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, one of customer’s employees goes to retailer to make a purchase, without customer’s knowing what the cost of the purchase will be. Retailer allows the purchase over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?

Although there was not express authority to spend a specific amount like the previous situation, the same rule applies. The employee acted as an agent for the customer. The customer is liable for the debt unless the customer is able to prove that the employee acted outside the authority given. However, similar to Chevy Chase Savings Bank v. Strong¸ evidence that the customer did not specify an amount to spend is not likely to be sufficient evidence to prove that the agent acted beyond to scope of authority given.

Foreclosure: Foreclosure Basics

While foreclosure may not be a topic that debtors (or even creditors) want to discuss, like all other aspects of proper business planning, you should.

With more creditors engaging in loans secured by real estate (which I strongly advocate), be that first deeds of trust, second or subsequent deeds of trust, refinances or credit lines, a certain amount of default is to be expected. Being prepared to react to default is imperative.

At the law firm of Lafayette, Ayers & Whitlock, PLC, we represent creditors - from start to finish. We are a full-service creditor’s rights firm. While many attorneys do “collections”, few attorneys have the trained expertise and staff to represent creditors in all four areas of Creditor’s Rights—Collections, Bankruptcy, Real Estate and Foreclosure. WE DO FORECLOSURES. We will handle foreclosure proceedings from demand to final accounting.

Bankruptcy: Dischargeability of Student Loans

Student loans generally are non-dischargeable debts and pass through the bankruptcy process unaffected. Congress has provided that government-guaranteed student loans are nondischargeable in bankruptcy unless the debtor can demonstrate that the repayment of such student loans would constitute an undue hardship under Bankruptcy Code 523(a)(8). However, there are exceptions that allow for dischargeability. In the next edition of Creditor News we will review three cases to examine the application of Bankruptcy Code §523(a)(8) concerning the dischargeability of student loans.

The first case is Murphy v. CEO/Manager, Sallie Mae, heard by the United States Bankruptcy Court at Norfolk, Virginia. In Murphy the court found as fact that the debtor’s nine year old daughter was permanently disabled, as she suffered from Pfeiffer syndrome. This disability caused the debtor to discontinue her medical education. It also impeded the debtor’s ability to work. The loans in question totaled $58,000.00, on which no payments were ever made. However, the debtor’s husband earned $82,000.00 annually. Further, the debtor’s evidence illustrated a monthly family disposable income of $400.00. The debtor argued that the family’s net disposable income was not available to repay her student loans because she and her husband had a savings account in the event that he was laid off. At the time of the bankruptcy, the account had $2,500.00. The court further noted that based upon the debtor’s testimony that her son was changing from private school to public school, it was logical to presume that there was an additional $507.00 per month available from the savings in private school tuition plus an extra $109.00 per month paid on an automobile that would be available for student loans. Eliminating these household expenses and adding these to the $400.00 already noted as per month disposable net income to pay toward the student loan debt.

The Court stated that it was doubtless that the debtor’s burden of caring for her disabled child was immeasurable, and her disappointment in her inability to complete her medical education immense. However, discharge of a student loan must be founded on more than notions of fairness or sympathy. Because of the debtor’s husband’s successful employment, the debtor and her dependents enjoyed an income well in excess of nearly all who seek undue hardship discharge, and a substantially more comfortable lifestyle than the minimal one contemplated by the criteria for a hardship discharge. Accordingly, the court found that the student loans were non-dischargeable, and thus denied the debtor’s motion to discharge her student loans due to hardship under Bankruptcy Code §523(a)(8).

Real Estate: Using Homeowner Association 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 review the benefits of using homeowner association liens to aid in the collection of your debt.

Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in the next issue.

We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Collections: Liability for Charges above the Credit Limit

A client recently asked me to write about situations where a customer makes retail purchases for products in an amount greater than the customer’s established credit limit – specifically, if the customer later fails to pay for the product, can he be successfully sued for payment.

I will review this situation with four varying fact patterns in two separate issues.

Fact Pattern One: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". During the next several years the credit limit was increased to $6,000. Normally no notification is sent of the increase, but in this case a letter was sent to the customer notifying the customer of the credit limit increase. Customer makes charges up to $6,000, but fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. Customer’s attorney does not have a copy of the letter increasing the credit limit, but produces the original letter opening the account with a $4,000 credit limit. Customer’s attorney argues that the retailer was the one who set the credit limit at $4,000, and by not exercising due diligence of his business, allowed the credit limit to be exceeded. Customer’s attorney argues that his client's liability should not exceed $4,000, while the retailer argues that the liability should be $6,000. In what amount should the retailer be able to judgment against the customer?

In an actual case in Seattle, Washington, the trial judge was ready to grant the request for a reduction in liability to $4,000. However, since the retailer had his customer file folder with him and found the letter increasing the credit limit to $6,000, the judge granted the retailer judgment in the amount of $6,000.

Fact Pattern Two: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer is allowed to makes charges over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?

In Ingram Micro Inc. v. ABC Management Technology Solutions, LLC the United States District Court for the Eastern District of Virginia held that a creditor was entitled to recover payment of an unpaid debt because the debt was within the scope of the continuing guaranty agreement. The agreement clearly included a guaranty of all debts. Further, the court reiterated a contractual principal that when an agreement is complete, clear, and unambiguous on its face, it must be enforced according to the plain meaning of its terms and the intent of the contracting parties.

In this fact pattern, the original agreement stated that the applicant agrees “to pay any and all sums that may become payable under this account”. This agreement was intended to cover credit up to $4,000. However, the agreement is also likely to cover any and all other debts over the original credit limit if it can be shown that the intent of the contracting parties as expressed through the contractual language was to include any debts incurred after the credit application was accepted.

Next month’s issue of Creditor News will address the next two fact patterns.

Foreclosure: Foreclosure Basics

Foreclosure law is a creature of state statute. Accordingly, each state’s laws are different. Because the statute controls, courts will enforce strict adherence to the exact words and requirements. Failing to fully comply with statutory mandates will likely result in defective foreclosures and costly work.

In the upcoming issues of Creditor News we will explore foreclosures from beginning to end. From the preparation of the deed of trust, to final accounting after sale.

Real Estate: Docketing Judgments to Secure an Interest in Real Estate

In previous 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 docketing judgments to aid in the collection of your debt.

Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection.

Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge.

If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462:

Jurisdiction to enforce the lien of a judgment shall be in equity. If it

appears to the court that the rents and profits of all real estate subject

to the lien will not satisfy the judgment in five years, the court may

decree such real estate, any part thereof, to be sold, and the proceeds

applied to the discharge of the judgment.

Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment.

We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.

Bankruptcy: Redemption – Exercising the Right of Redemption

Can debtors exercise the right of redemption after discharge has been ordered?

 

A decision by Judge Krumm for the Western District of Virginia appears to have answered this question. The case was In Re Hawkins. The debtors sought to reaffirm the bank loan secured by their Dodge Colt. The debtors later learned of Bankruptcy Code §722 redemption rights, and sought to redeem instead of reaffirm. Before redemption was achieved, the chapter 7 discharge was granted. The creditor opposed the motion and alleged that debtors' right of redemption expired when they were discharged in bankruptcy. The court found for the debtors and held that the debtors' discharge did not bar their motion for redemption under § 722. Debtors were clearly entitled to reaffirm debts after discharge under 11 U.S.C.S. § 524. While 11 U.S.C.S. § 722 was silent on whether they were allowed to redeem property after discharge, the court found that it was Congress' intent to consider the concepts of reaffirmation and redemption together. The court reasoned that although the Code is silent as to when debtors may exercise their right to redeem, since concepts from reaffirmation and redemption were considered by Congress together, the time frame for exercising one option should be applicable to the other option. Therefore, the time frame for exercising redemption rights was the same as that for exercising reaffirmation rights.

Right to redeem / repossess property in Chapter 13 cases:

In the case of Tidewater Finance Co. v. Moffett, the Fourth Circuit Court of Appeals ruled that a Chapter 13 debtor was entitled to the return of her car, which had been repossessed by a finance company. This decision affirmed the original bankruptcy court decision, as well as the appellate decision of the District Court.

In Moffett, the debtor, in her reorganization plan, exercised her right to redeem under the Virginia Uniform Commercial Code (“UCC”); the plan provided for full payment of her debt to the finance company, plus interest on the delinquent payments.

The debtor worked at the Federal Emergency Management Agency, forty miles from her home. A couple of years prior to the bankruptcy filing she had bought a previously owned, three year old Honda Accord from a dealer in Woodbridge, which assigned its loan to the finance company creditor. The car was the debtor’s only means to get to work each day. The debtor made her payments in a timely fashion for a year, and then missed two payments. This prompted the finance company to repossess the car. Later that same day the debtor filed for Chapter 13 bankruptcy. A week after that the debtor’s lawyer demanded that the finance company return the car. The finance company filed a motion for relief from the automatic stay so that it could sell the vehicle. The bankruptcy court denied the motion, however, and ordered the finance company to return the car. In doing so, the bankruptcy judge required adequate protection for the creditor in the debtor’s Chapter 13 plan. The debtor’s Chapter 13 plan provided for full payment of the loan. The finance company returned the car, but appealed to the District Court.

The District Court Judge found that the debtor had a statutory right of redemption, and also found that the finance company was required to turn over the car once its interest was adequately protected in the Chapter 13 plan.

The finance company appealed again, this time to the Fourth Circuit Court of Appeals. In his opinion, the Fourth Circuit Court Judge cited that pursuant to the federal bankruptcy code, once a petition is filed, an automatic stay goes in effect. Any party with property that the trustee can use, sell or lease must turn it over to the trustee, after that party’s interest is protected. The district judge said the question in this case was whether the finance company and the car at issue were subject to the referenced code provisions. The judge looked at the UCC as controlling, since the case involved default on a purchase agreement with a secured creditor. The UCC allows the creditor the right of repossession, but within limits. The debtor also has rights upon repossession, including the right to redeem the property under UCC Section 8.9A-623 (c)(2). The Judge ruled that the debtor’s right to redemption becomes one of the “legal or equitable interests” of her bankruptcy estate.

The 4th Circuit agreed with the lower courts that if the creditor’s interest is protected in the plan, then it must turn over the car. UCC Section 8.9-623(b) allows a debtor to redeem collateral by tendering in full its obligations to the creditor. In this case, the Judge noted that the debtor’s plan did just that. The plan even provided interest to the finance company for the delinquent payments. The Judge wrote: “[T]he bankruptcy plan here provided for the payment of all future installments, the curing of all delinquent payments, and the payment of all applicable interest over the course of the plan”. “Such a flexible approach to repaying claims is precisely what the Bankruptcy Code allows in order to facilitate a debtor’s successful rehabilitation.” The Judge affirmed the lower court’s decision.

Collections: Timeliness of Mechanic's Lien

The Supreme Court of Virginia reviewed several interesting issues regarding mechanic's liens in the case of American Standard Homes Corp. v. Reinecke, 425 S.E.2d 515, 245 Va. 113 (1993).

In American Standard some of the replacement materials for the prefabricated homes were delivered to each of the six projects more than 90 days after the materials and "extras" designated in the respective material order contracts had been delivered, the time limitation for filing memoranda of mechanic's liens, specified in Virginia Code §43-4. The Court ruled that time began to run upon delivery of the material designated in the material order contracts and not from delivery of the replacement materials. The Court, in making its ruling, determined that the materials delivered under the purchase orders were not materials last furnished within the intendment of the perfection statute, thus, the six liens were not timely filed.

The seller of the prefab homes had argued that the material order contracts were "open-ended devices" and that, because "each contract contemplated both extras and multiple purchase orders," the materials acquired under purchase orders were, for purposes of the filing limitation prescribed by the perfection statute, materials last furnished under those contracts. The Court disagreed though, finding that each material order contract contained blank spaces beneath the word "Extras" in which the buyer listed the materials to be added to those designated in the "dry-in" and "trim" packages. Unlike the "Extras" listed in the material order contracts and included in the invoices issued when the two material packages were delivered, the "Extras" to be shipped C.O.D. under particularized purchase orders were articles which were "replacement materials" for those materials that after delivery, had been lost, damaged or stolen and were reordered. Neither the basic contract nor the material order contract required the buyer to purchase such "extras" from the seller; the buyer was free to contract with other materialmen for materials needed to replace those delivered earlier by the seller. In its purchase orders, the buyer offered to buy replacement parts from the seller. The seller accepted that offer by delivering the materials.

The Court found that this was a contract, one separate and apart from the material order contract. The latter expressly provided that it was "THE COMPLETE AGREEMENT BETWEEN THE PARTIES." When the seller delivered the materials designated as extras listed in the contract, it delivered all it had contracted to deliver. What it delivered under the contract were the materials last furnished within the intendment of the 90-day statutory limit for filing memorandum of mechanic's lien. The Court found that the record showed with respect to each of the six liens at issue that the limitation period had expired before the seller filed its memoranda. Accordingly, the liens were unenforceable.

The lesson of American Standard - enforcement of creditor’s rights in construction law matters is a very complex and requires experienced counsel.

Foreclosure: 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.

Real Estate: Homeowner Associations – Damages Caused by Common Area Tree

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.

Bankruptcy: Redemption – An Introduction

In general. Bankruptcy Code §722 provides debtors with the right to redeem property. The redemption option is being exercised more often (as opposed to reaffirmation) because collateral loan balances are frequently much greater than the value of the underlying collateral, and, because redemption financing options are growing. The code states:

[a]n individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempt under section 522 of this title or had been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.

Financing options. In the past redemption has been rare, as what debtor in bankruptcy has the ability to raise money for a lump sum purchase price, and what lender would make such a loan? There is, however, an option available for debtors, and debtor attorneys are aware of it. The option is to borrow the redemption price from “specialized” lenders, such as the company called “722 Redemption Funding, Inc.” This company is based in Cincinnati, Ohio. The company has been in business for a number of years and has expanded into other states - Virginia is one of them. Once the loan is made, this company takes a non-purchase money security interest in the vehicle and has first priority since the debtor has redeemed from (and therefore extinguished) the lien if the prior lender. To add insult to injury, this company uses another Cincinnati company (Collateral Valuation Services, L.L.C.) to prepare a vehicle condition report in an effort to determine the lowest possible value for the vehicle. If you have yet to see redemption by this method, I am sure that you will see one soon.

How do you value the collateral? This is a good question that does not always have a clear answer. To make it complicated, the method for determining redemption value differs in Chapters 7 and 13.

To determine collateral value in Chapter 7 cases, the case law is clear that the retail value should be used. The law is not so clear, however, in Chapter 13 cases. In 2004 I tried two cases before Judge Tice in the United States Bankruptcy Court, Eastern District of Virginia, Richmond Virginia, involving this very issue. The debtors’ attorneys filed motions for redemption proposing to pay the trade-in value rather than the retail value. I objected to the motions, arguing that they were not proposed in good faith based upon these proposed values, and, that the creditors would be irreparably harmed. In doing the legal research it became clear that there was no preexisting Virginia decision controlling the decision, and that different states were taking different positions – some states use the wholesale value, some use the retail value, and, some use something other value determined by either an average of the two or utilizing other factors, such as the expected return to the creditor from a disposal of the collateral in a commercially reasonable manner. Of course I argued that it is unfair to place the entire burden and the risk of loss on the creditor, especially since it was the debtor who was in default! Ultimately, Judge Tice, having reviewed all of the tests applied across the country, wrote a detailed opinion. Judge Tice ruled that debtors should not be forced to redeem at retail valuation because the purpose of Bankruptcy Code §722 is to allow debtors to avoid having to pay the cost for replacing a vehicle. He ruled that a close approximation to the wholesale or liquidation value would be fair to creditors given the fact that creditors will save the cost of repossession and resale – that the redemption value should resemble an amount which the secured creditor would expect to recover upon the repossession and reasonable commercial disposition of the property.

Since these decisions, the law has not become clearer. Judge Tice was presented with a similar issue in In re Hutchinson, where the court found that the fair redemption value was to be determined after considering the varying appraisals submitted. The court did not choose the trade in appraisal or the retail appraisal, but stated that debtors should not have been forced to redeem their car at a retail valuation (replacement value) of the property. Further, a close approximation to the wholesale or liquidation value was fair to the creditor in light of the fact that the repossession and resale costs would not have been incurred in light of the redemption. The court held that the redemption value should resemble an amount which the secured creditor would expect to recover upon repossession and reasonable commercial disposition of the property. The fair redemption value ultimately was determined to be a value between the trade in appraisal and the retail appraisal.

Collections: Note Guarantee Upheld

In the case of NationsBank v. Mahoney, the Fairfax County Circuit Court upheld a note and guarantee agreement, as well as the sale of collateral pursuant to the terms of these documents.

The guarantor in Mahoney argued that the creditor acted in bad faith. The guarantor asked the Court to imply in the note and guarantee agreement additional terms from the commercial good faith provision of Virginia Code §8.1-203. The Court, however, found that the note and guarantee agreement's provisions were "within the preview of the Uniform Commercial Code as adopted in Virginia", and that each alleged act of bad faith was expressly authorized in the terms of the note and guarantee agreement. The Court ruled that it could not imply the terms requested because the result would be to negate or materially alter the explicit terms freely agreed upon by the parties.

The lesson from Mahoney is that properly prepared notes are the key to collection should the loan become sour. Legal review of loan documents prior to execution can be more cost effective than legal representation after default.

Foreclosure: Lost Notes

Virginia Code §55-59.1(B) addresses the situation where the noteholder has lost the original note. With the frequency of sales of notes on the secondary market, the loss of the original note documents occurs more often than might be expected. The Code provides that if the note or other evidence of indebtedness secured by a deed of trust cannot be produced, and, the beneficiary submits to the trustee an affidavit to that effect, the trustee may proceed to foreclosure. However, the beneficiary must send written notice to the person required to pay the instrument stating that the instrument is unavailable and that a request for sale will be made of the trustee upon the expiration of fourteen days from the date of the mailing of the notice. The notice must be sent by certified mail, return receipt requested, to the last known address of the person required to pay the instrument, as reflected in the records of the beneficiary, and shall include the same and the mailing address of the trustee. The notice must also advise the borrower if the borrower believes that he may be subject to claim by a person other than the beneficiary to enforce the instrument, the debtor may petition the circuit court of the county or city whether the property lies for an order requiring the beneficiary to provide adequate protection against any such claim. Failure to give the notice does not affect the validity of the sale.

Real Estate: Using Real Estate as a Collection Tool

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. Each month in Creditor News 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.

Bankruptcy: Chapter 7 Petition - Substantial Abuse

The United States Bankruptcy Court at Harrisonburg, Virginia, in the case of In Re: Rodriguez, dismissed a debtor’s Chapter 7 petition for “substantial abuse” pursuant to Bankruptcy Code §707(b) where the debtor’s voluntary monthly contribution of $286 to his 401(k), as well as his post-petition purchase of a Ford pickup truck, clearly indicated that the had the ability to fully fund a Chapter 13 plan without incurring undue hardship.

The Bankruptcy Court found that the debtors’ post-petition purchase of the new truck resulted in a net increase in monthly transportation-related expenses of $220. This voluntary increase indicated that the debtor felt that he had the ability to pay at least that amount to his creditors. The increase in transportation-related expenses and the contribution to the 401(k) alone total over $500 per month that the debtor could have used to pay his creditors. In doing so, the debtor could have paid his creditors 100 percent in less than 10 months. Conversely, if the debtor remained in Chapter 7, the majority of his creditors would receive nothing.

The debtor’s Schedule I indicated that he enjoyed steady employment with the same employer for eight years, and expected to earn $38,000 in that current year. Nothing in the other schedules filed with the debtor’s petition indicated a sudden illness or calamity which might have necessitated filing for Chapter 7 protection.

The Bankruptcy Court found that the debtor’s post-petition truck purchase, made with the knowledge that a short-term 100 percent Chapter 13 plan was feasible, constituted the kind of egregious abuse that Bankruptcy Code §707(b) was intended to prevent.

The lesson of Rodriguez - review Chapter 7 schedules for the ability to pay.

Collections: Arbitration - A Collection Alternative

Arbitration has become an increasingly popular way of resolving disputes. For those readers unfamiliar with the concept, arbitration is a process in which parties agree to submit the issues in controversy for determination by a party that they choose. The purpose behind the decision to arbitrate is usually to reach a resolution to the dispute in a quicker and cheaper manner than court action. Although most parties to the arbitration retain counsel to represent them, costs are normally less than court action because the rules of evidence are more relaxed, and the proceedings are less formal.

Virginia law recognizes the arbitration process and provides for the legal enforcement of arbitration awards.

The American Arbitration Association has developed standard rules, procedures, and panels of trained professionals to serve as arbitrators - the finders of fact.

The structure of the arbitration hearing is similar to a regular court hearing. A party has the right to representation by an attorney. Both parties also have an opportunity to make an opening statement, discuss the remedy they are seeking, introduce and cross-examine witnesses, and make a closing statement. Unlike a regular court proceeding, neither party in arbitration has the burden of proof because each party must persuade the arbitrator that its position is correct.

Virginia Code §8.01-577 to §8.01-581.016 establish Virginia's rule for arbitration. First, both parties must agree in a written agreement to submit a case for arbitration. The parties then select an arbitrator from a list of names. The court also may appoint an arbitrator.

An arbitrator has several duties. The first and foremost is to preside over the arbitration hearing. An arbitrator in Virginia may issue subpoenas for witnesses to appear. Lastly, the arbitrator issues and signs the award.

The court then confirms, modifies or vacates the award. The reasons for modification or vacation vary from a mistake in calculation to the arbitrators exceeding their powers (see Virginia Code §8.01-581.010 and §8.01-581.011). The court proceeds to enter a judgment or decree on the award. A party may appeal an award as one would in a civil action.

The California Court of Appeals has ruled on the enforceability of arbitration clauses. In Bell v. Congress Mortgage Co., Inc., the California Court held that an arbitration clause in a contract must be highlighted in bold type or the consumer needs to initial beside the specific clause. These methods should make the consumer aware of the arbitration clause in the contract, as previously a consumer might waive his right to a jury trial without realizing it because, the California Court stated, an arbitration clause is not within the reasonable expectations of the consumer. There is no such requirement in Virginia law for the arbitration clause to be highlighted, however, but until the issue is litigated in Virginia, initials next to the clause would be a good measure of caution.

I have litigated several arbitration cases, each to positive results, once to an amount higher than initially requested by the client.

Foreclosure: Foreclosure Sale Deficiency Actions

Frequently there will be a deficiency balance after the sale is completed and the accounting is done. The account of sale will set forth the distribution of the sale proceeds and also establish any amounts remaining due on the indebtedness following application of the net proceeds from the foreclosure sale. This deficiency amount is usually recovered by a personal judgment against the maker of the promissory note or other obligors on the indebtedness that was secured by the deed of trust. An action to recover the deficiency balance remaining after a foreclosure sale need not be brought on the chancery side of the court and may properly be brought as an action at law. A plaintiff’s action to recover on an assumed promissory note may be maintained as an action at law even though the plaintiff is not named in the deed of trust.

Real Estate: The Virginia Property Owners’ Association Act – Foreclosing on Memorandums of Lien

In the previous editions of Creditor News 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.

Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

In the last issue of Creditor News I began a multi-issue review of cases that address the dischargeability of debts regarding property damage-malice. The relevant bankruptcy code provision is §523(a)(6). I briefly established the standard used by courts to determine dischargeability of debts involving property damage and discussed how the court applied the standard to two cases involving rented property and withheld payments.

In the case of Ford Motor Credit Co. v. Rose, the United States Bankruptcy Court at Big Stone Gap, Virginia, denied a creditor's motion to declare a debt nondischargeable as a malicious injury based upon withholding payments.

In Rose, a Ford automobile dealership deliberately withheld payments to the creditor, a credit company, in order for the debtor to cover the dealership's operating expenses.

The Court held that the critical determination is whether the debtor's actions satisfy the "maliciousness" requirement of Bankruptcy Code §523(a)(6). The leading case in the 4th Circuit on the maliciousness requirement is Vaughn, in which the Court used an objective test for determining "maliciousness", but did not clearly define the limits of that test.

The Court ruled that both parties acknowledged that the debtor sold twenty-five vehicles, with a value of approximately $240,000, and failed to submit the proceeds to Ford Credit pursuant to the financing agreement. This was deliberate and intentional and so the willfulness requirement of the Bankruptcy Code §523(a)(6) was met. The Court found that the creditor failed to establish that the debtor was malicious, however.

While it was undisputed that the debtor knew that he was breaching the financing agreement, it was not clear that his actions would necessarily be expected to cause harm. The debtor asserted that the dealership had more than enough assets to adequately secure Ford Credit when he used the unremitted funds in violation of the financing agreement. The debtor was only acting to keep the business afloat and applied all of the funds to that purpose, even forsaking any salary for ten months. Further, the debtor appeared to have given total cooperation to the liquidation effort and did not personally benefit from any of the money belonging to Ford Credit. Therefore, the Court denied the creditor's motion based upon its failure to prove maliciousness.

As seen in the cases reviewed over the past few issues, property damage cases may appear simple, but they are not. Creditors frequently have the burden of proof, and, elements unproven can lose a case. Experienced counsel is needed.

Collections: Motion to Set aside Judgment - Timely Filing

Timing can be everything. A prime example of this is the case of Trimark Partners v. HST L.L.C. In Trimark the Fairfax Circuit Court ruled that a debtor cannot move to set aside a confessed judgment because he failed to file a motion within twenty one days of learning of the judgment.

In Trimark the Court initially entered a judgment against three defendants based on a confession-of-judgment provision in a note. Two of the defendants had executed the note containing the confession-of-judgment terms. A third defendant later had signed an allonge, or attachment to the note, by which he consented to the note obligations. All three defendants later moved to set aside the judgment.

Under Virginia Code §8.01-433, a defendant must move to set aside a confessed judgment within twenty one days following notice to him that the judgment has been entered. The judgment can be set aside "on any ground which would have been an adequate defense or set off in an action at law...".

The Court found as a matter of fact that on a certain date the debtors were advised by the creditor of the entry of a judgment. A couple weeks later the judgment order was actually served on the debtors. More than twenty one days from the date on which the creditor advised the debtors of the entry of judgment, but not more than twenty one days form the date the judgment order was served on the defendants, the defendants filed a motion to set aside the judgment. The judgment creditor objected to the motion because it was not made within twenty one days of notice.

The Court ruled in favor of the creditor, ruling that notice was proven by the creditor's evidence of notice (advising by letter); the Court found that notice was not proven only by the serving of the judgment on the defendants.

The lesson of Trimark, as is the lesson in so many cases, is to create a paper trail of all transactions, and act promptly. It will usually reap dividends.

Foreclosure: Deposits

Virginia Code §55-59.4(A)(2) permits the trustee to require of any bidder at any sale a deposit of as much as ten percent of the sales price, unless the deed of trust specifies a higher or lower amount. However, because the statute is not mandatory, the trustee is given the right to waive the deposit if he deems it appropriate, unless the deed of trust requires a specific deposit. The trustee should also consider using a fixed amount as the deposit rather than a percentage of the sales price. Using a percentage of the sales price as the method of determining the required deposit often results in confusion, and the successful bidder has either too much or too little money to deposit. A fixed deposit avoids the confusion and allows all potential buyers to know exactly how much money to bring to the sale to deposit. The fixed deposit should not be excessive but should be of a sufficient amount to ensure that the successful bidder completes the closing of the sale.

Real Estate: Using Deeds of Trust to Secure Your First, Second, Equity Line or Refinance Home Loans

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.

Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

In the last issue of Creditor News I began a multi-issue review of cases that address the dischargeability of debts regarding property damage-malice. The relevant bankruptcy code provision is §523(a)(6). I briefly established the standard used by courts to determine dischargeability of debts involving property damage and discussed how the court applied the standard to a case involving rented property.

In the case of First Nat'l Bank of Md. v. Stanley, the United States Bankruptcy Court at Baltimore, Maryland, ruled that a debtor, whose creditor bank mistakenly extended his line of credit, and who used that windfall to purchase property that he speculated would shortly rise in value, converted the bank's money, despite his "good intentions" toward repayment, and discharge of the debt to the bank was denied as "willful and malicious" injury to the creditor under Bankruptcy Code §523(a)(6).

The Court ruled that the act or conduct at issue in Stanley was conversion - an unauthorized exercise of dominion or control over property belonging to another that seriously interferes with the owner's rights. Although a person need not know that someone else has superior ownership rights in the property to be technically liable for the tort of conversion, the Court held that the test for malice under Vaughn requires such knowledge on the debtor's part before discharge will be denied - in other words, the debtor must have engaged in a "wrongful" conversion.

In this case, the Court found that conversion was wrongful. The debtor knew that something was amiss when his credit limit on his line of credit was suddenly increased by a factor of ten. His explanation that he thought the bank had granted him a $73,000 "unsecured" line of credit was wholly irreconcilable with his knowledge that, just three months earlier, he had been approved for $2,000 less than the relatively modest secured line that they had requested. The Court pointed out that the debtor, though not a loan officer, was an accountant with one year of graduate school education; he was, by no means, unsophisticated.

The proper focus in this case was not on debtor's "good intentions", but simply on his exercise of dominion and control over funds that he knew belonged to another. The debtor's deliberate conversion of the funds is the intentional, wrongful act that prevented the discharge of this debt to the bank.

The Court found that the debtor inflicted willful and malicious injury on the bank; thus, he was not entitled to be discharged from the resultant debt.

The next issue of Creditor News will apply the standard used by courts to determine dischargeability of debts involving property damage to another case involving withheld payments.

Collections: Post Judgment Collection

Various methods are available to collect judgment debts. Every collector is aware of the option of garnishment of wages and bank accounts. Most collectors are aware of sheriff's levies on personal property. However fewer collectors are aware of perfecting judgment liens against real estate owned by the debtor.

When judgment is entered in the General District Court, unless appealed, it becomes final in ten days; Circuit Court judgments become final after thirty days. Once final, judgment creditors can request abstracts of the judgment from that Court (free for some counties and cities, $.50 cents per abstract in others). These abstracts can then be recorded (for $10.00 per abstract) in the Circuit Court in any county or city in which the debtor may own real estate. District Court judgments are good for ten years; Circuit Court judgments are good for twenty years. Each, upon motion to the court, can be renewed for an additional period of time. Since docketed judgment liens are good for twenty years, this docketing can provide a long-term hope for recovery. Once such a lien attaches, creditors may be able to bring suit to enforce the lien, or simply wait until such lien is paid at the sale of the property.

These liens can sometimes survive bankruptcy as well. If the lien is docketed for at least ninety days prior to a filing for bankruptcy, the lien should survive, and may eventually be paid. Note, however, that the real estate must be owned by the identical parties against whom judgment was taken. Thus, judgment against one of the tenants by the entirety does not entitle the creditor to the benefits described.

What can be done when there is no information about your debtor from which to devise a post judgment collection plan? Virginia law provides for a good start -- Debtor's Interrogatories. For the price of a summons (usually $41.00) an attorney can Summons the debtor to appear before a Commissioner in Chancery (a lawyer appointed by the court) to answer questions about income, assets and the debtor's general ability to pay. This Summons is enforceable by a Capias (arrest warrant) which is issued through the court. This statute does allow debtors to request that the interrogatories be held at a court most convenient for the debtor. Therefore, if the debtor moves far from the creditor's area, it may not be cost effective to pursue the interrogatories.

The law firm of Lafayette, Ayers & Whitlock, PLC aggressively pursues all collection cases from initial demand through final payment. We account to our clients with monthly statements and reports, and immediate responses to client questions. We are willing to assist in client collection matters piecemeal as well. If our assistance is needed just to proceed with interrogatories, an hourly fee can be arranged. Please call us at 545-6250 for a free initial consultation.

Foreclosure: Advertisements of Sale

The Code of Virginia provides specific guidance as to advertisements for foreclosure sales. The sale must be properly advertised or it will be void upon order of the court.

Virginia Code §55-59.2 states that if the deed of trust provides for the number of publications of the advertisements, no other or different advertisement shall be necessary, provided that: if the advertisement is inserted on a weekly basis, it shall be published not less than once a week for two weeks, and, if such advertisement is inserted on a daily basis, it shall be published not less than once a day for three days, which may be consecutive days. If the deed of trust provides for advertising on other than a weekly or daily basis, either of these statutory provisions must be complied with in addition to the provisions of the deed of trust. If the deed of trust does not provide for the number of publications for the advertisement, the trustee shall advertise once a week for four consecutive weeks; however, if the property, or a portion of the property, lies in a city or county immediately contiguous to a city, publication of the advertisement may appear five different days, which may be consecutive. In either case, the sale cannot be held on any day which is earlier than eight days following the first advertisement or more than thirty days following the last advertisement.

Advertisements must be placed in the section of the newspaper where legal notices appear, or, where the type of property being sold is generally advertised for sale. The trustee must comply with any additional advertisements required by the deed of trust.

Virginia Code §55-59.3 requires advertisements to describe the property to be sold at foreclosure; however, the description does not have to be as extensive as in the deed of trust – substantial compliance is sufficient so long as the rights of the parties are not affected in any material way. The statute does require the property to be described by street address, and, if none, the general location of the property with reference to streets, routes, or known landmarks. A tax map number may be used, but is not required

Virginia Code §55-59.2 requires the advertisement to state the time, place and terms of the sale. If the deed of trust provides for the sale to be conducted at a specific place, the trustee must comply with this term. If there is no mention in the deed of trust, §55-59(7) provides that the auction may take place at the premises, or, in front of the circuit court building, or, such other place in the city or county in which the property or the greater part of the property lies. In addition, the sale could be held within the city limits of a city surrounded by, or contiguous to, such county. If the land is annexed land, the sale could be held in the county of which the land was formerly a part.

The statute provides that the advertisement shall give the name or names of the trustee or trustees. In addition to naming the trustee, the advertisement must give the name, address and telephone number of the person who may be contacted with inquiries about the sale. The contact person can be the trustee, the secured party, or his agent or attorney.

Real Estate: Homeowner Associations – Easements

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. 

Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

In the last issues I began a multi-issue review of cases that address the dischargeability of debts regarding property damage-malice. The relevant bankruptcy code provision is §523(a)(6). I briefly established the standard used by courts to determine dischargeability of debts involving property damage. The standard is very fact specific so reviewing cases will shed light on how the standard is applied. 

In Appalachian Equipment & Supply Co. v. McDaniel, the United States Bankruptcy Court at Harrisonburg, Virginia, determined that the creditor/plaintiff, a rental company, had satisfied all of the elements necessary to prove its case under Bankruptcy Code §523(a)(6), and thus, its claim for damages from the improper use of the forklift was declared exempt from discharge.

The Court in McDaniel ruled that the physical evidence was the most reliable evidence offered. That evidence showed that the forklift was delivered to the debtor in normal operable condition. It also showed that when the creditor picked up the forklift, it was damaged and displayed light blue paint on the bottom of the carriage. The debtor's evidence showed that one of the vehicles which was placed on the tractor trailer was a light-blue car. To the Court, it appeared more likely than not that the bottom portion of the carriage of the forklift was used in conjunction with attempting to crush the light-blue car such that paint flecks from the car attached themselves to the underside of the carriage. The Court indicated that it was satisfied that the expert testimony of the witness for the creditor established that more likely than not that the carriage of the forklift was used to apply hydraulic pressure in a downward direction with such force that the carriage boon and forks of the forklift were damaged. In conclusion, the Court found that the debtor used the carriage to accomplish his intent to crush cars, such use was inconsistent with the normal usage of the forklift, and such usage led to the damage of the forklift. The Court further found that the creditor proved by a preponderance of the evidence that the debtor's actions in using the forklift were intentional. 

The Court in McDaniel found that the debtor knew that a forklift should not be used to crush cars. The physical evidence and the expert evidence offered by the creditor were more persuasive than the debtor's attempts to deflect blame to another person. It showed that the debtor applied the boon portion of the forklift to employ downward hydraulic pressure to the crush the cars. The Court ruled that it was satisfied that the debtor used the forklift in an improper manner to crush the cars in order to load them onto his flatbed trailer. The Court found that the debtor was an experienced forklift operator. He brought equipment to the site which could have been used to safely crush the cars. He used the forklift in a manner inconsistent with the generally accepted practice for the usage of this type of forklift. In light of these surrounding circumstances, the Court ruled that the debtor knew, or should have known, that his acts would cause damage to the forklift and resulting harm to the creditor. Thus, the Court ruled that the debtor's actions fit the definition of malice as set forth in the case of St. Paul Fire & Marine Ins. Co. v. Vaughn, the standard for denial of discharge.

Collections: Garnishment of Domain Name

The Fairfax County Circuit Court ruled in favor of a creditor in a unique garnishment action. The case was Umbro International, Inc. v. 3263851 Canada Inc. and Network Solutions, Inc. The Court in Umbro ruled that Umbro, an international sporting goods company that won a judgment against a “cybersquatter” who had staked a claim to the Internet domain name “umbro.com”, could garnish other domain names owned by the judgment debtor.

The issue in this case was whether the domain names registered by the judgment debtor with Network Solutions, Inc. (“NSI”) are the kind of property that is subject to garnishment. The court noted that Virginia Code §8.01-501 clearly states that a writ of fieri facias is a lien on all the intangible property of the judgment debtor. The lien, however, only attaches to the extent that the judgment debtor has a possessory interest in the intangible property subject to the writ. The Court, as a result, noted that it was required to determine if the judgment debtor had a possessory interest in the domain names it registered with NSI.

NSI argued that a writ of fieri facias could not extend to domain names because the contract rights set forth in the registration agreement were dependent on unperformed conditions. These conditions included NSI’s rights to indemnification and the registrant’s continuing obligation to maintain an accurate registration record. The Court found that this argument failed on several grounds. First, in the dispute policy NSI undertook to abide by any court order.  Such orders have included mandatory injunctions that a registrant takes all actions necessary to transfer a disputed domain name to a third party. Thus in the dispute policy NSI had agreed to subject to other liens that affect the value of the property. There was no unperformed condition under the registration agreement that could prevent a registrant from the full use of the domain name registration.

NSI also argued that the contract right to the performance of a service was not garnishable because, among other things, it would force NSI to perform services for those with whom it may not desire to do business. The Court found that this assertion was entitled to little weight, as in the short time of its existence, NSI had registered some 3.5 million domain names, and registration applications were made by e-mail without human intervention in 90 percent of registration transactions.

The Court noted that until Umbro, domain names apparently had not been subjected to garnishment. Nevertheless, the court ruled that there was no reason to conclude that this new form of intellectual property was thus immune. The Court found no reason why a judgment creditor should be precluded from satisfying a valid judgment just because its creditor had a possessory interest in intangible intellectual property resulting from technology of recent vintage.

The lesson of Umbro - sometimes you have to be inventive and think outside the box in order to collect on judgments.

Foreclosure: Deed in lieu of Foreclosure

In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.

Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters:

• Value of the property vs. the amount of the debt.
• Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.

Real Estate: Former Homeowners’ Association President’s Emails were Defamatory

In the Fairfax Circuit Court case of Cornwell v. Ruggieri, the trial judge and jury found that the plaintiff homeowner was defamed by four emails written and published by a former association president and awarded $9,000.00 in damages. These emails alleged that the homeowner had stolen association funds five years earlier. The former association president tried to defend the case on the basis that the statements were simply a matter “of opinion”, not a matter of fact (as required under Virginia case law to recover damages), but the trial judge disagreed.

The trial judge instructed the jury that under Virginia law the defendant, in his role as association president, had a “limited privilege” to make defamatory statements without being liable for damages. However, if it was proved by “clear and convincing evidence” that the defendant had “abused” the privilege, the defamatory statements were not protected. The trial judge instructed the jury that there were six possible ways (outlined below) that the homeowner could prove that the former association president abused the limited privilege.

The homeowner presented evidence that the defendant made statements (1) with reckless disregard; (2) that were unnecessarily insulting; (3) that the language was stronger than was necessary; (4) were made because of hatred, ill will, or a desire to hurt the homeowner rather than a fair comment on the subject; and (5) were made because of personal spite, or ill will, independent of the occasion on which the communications were made.

The jury was given a specific interrogatory with regard to each of the four defamatory statements:

(1) Did the defendant make the following statements?

(2) Were they about the plaintiff?

(3) Were they heard by someone other than the plaintiff?

(4) Are the statements false?

(5) Did the defendant make the statements knowing them to be false, or, believing them to be true, did he lack reasonable grounds for such belief or act negligently in failing to ascertain the facts on which the statements were based?

(6) Did the defendant abuse a limited privilege to make the statement?

For each question as to all four emails, the jury answered “yes”. After a three-day trial, the verdict was rendered in favor of the plaintiff -- $9,000.00 in damages.

This case gives a good reminder that homeowner association board members must be knowledgeable, professional and well-advised when serving their communities.

Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

Several cases illustrate well the dischargeability of debts involving property damage. In all cases, the trial and appellate courts are required to adhere to Bankruptcy Code §523(a)(6), which states that a debt causing willful and malicious injury to another entity is not exempt from discharge.

The standard established by the courts to prove willful and malicious injury is described by the court in St. Paul Fire & Marine Ins. Co. v. Vaughn. In Vaughn, the Court of Appeals for the Fourth Circuit stated that the debtor must be shows by contradicted and unimpeached evidence to have committed a willful and malicious injury to the creditor’s property. There is no requirement of specific malice on the part of the debtor, however. The court held that “willful and malicious” injury means injury that is wrongful and without cause or excuse, but the debtor does not necessarily need to have ill will. 

However, this is a very general definition. Courts have applied this standard to many different situations and it is clear that this standard is very fact specific. 

Collections: Garnishment/Arbitration

The Richmond Circuit Court case of Va. Builder's Supply, Inc. v. Brooks & Co. Gen Contractors Inc. serves as a good example of judicial recognition of the rights of judgment creditors in arbitration proceedings.

In Va. Builders, the creditor, a building supply company, issued a garnishment summons upon a general contractor for sums due from the general contractor to the judgment debtor, a subcontractor. The contracts between the contractor and the subcontractor, under which the judgment creditor sought to garnish the sums due the subcontractor, included clauses for mandatory arbitration. The garnishee sought arbitration after being served with the garnishment. The garnishee refused to allow the judgment creditor to participate. The garnishee received a garnishment award indicating that it owed the subcontractor no sums. The garnishee answered the garnishment that no sums were due. The Richmond General District Court agreed. The Richmond Circuit Court disagreed and sent the case back for further review. The Richmond Circuit Court reasoned that the garnishee should not be able to affect the potential funds due the judgment creditor while prohibiting the judgment creditor from participating in the proceedings.

Foreclosure: Right to Cure a Default

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.

Real Estate: Statute of Limitations Enforced on Challenge to Bylaws Amendment

The Virginia Condominium Act, specifically Virginia Code Section 55-79.71(C), provides for a statute of limitations in regard to challenging amendments to governing documents. The section provides, in part:

“An action to challenge the validity of an amendment adopted by the unit owners’ association pursuant to this section may not be brought more than one year after the amendment is recorded.”

In the case of Godwin v. Bay Point Association Board of Directors, a Norfolk Circuit Court was faced with a homeowner challenge to bylaw amendments. The homeowner, Godwin, had sued the association alleging that it breached its governing documents by taking actions four years earlier and three years earlier that increased her assessment for insurance premiums. The association filed a motion to dismiss Godwin’s complaint on the ground that it was time-barred pursuant to Virginia Code Section 55-79.71(C).

Four years earlier the association’s board of directors signed a resolution regarding physical damage and flood insurance. Three years earlier it drafted and signed a bylaw amendment relating to insurance premiums. The association argued that challenging either of these actions was time-barred under the statute of limitations.

The court ruled that the resolution was not an amendment to the condominium governing documents within the meaning of the act. The court found that, at most, the resolution represented a statement of the board’s opinion that the bylaws should be amended to revise the way insurance premiums were assessed against the unit owners. In the resolution, the board acknowledged the need to amend the bylaws and stated that the amendment process was lengthy and inconsistent with the budget preparation schedule for the upcoming fiscal year. Because the resolution was not an amendment adopted by the unit owners pursuant to the act, the court found that the act’s statute of limitations did not apply. However, the court ruled that the bylaws amendment was an amendment to the governing documents within the definition contemplated by the act. Accordingly, the one-year statute of limitations applied.

Godwin argued that because the association violated mandatory procedures for amending the bylaws, the amendment was null and void, and thus, the statute of limitations did not apply. The court, however, in examining the statute, noted that nothing in the statute suggested that only valid bylaw amendments are subject to the one-year statute of limitations. The court noted that any amendment, not just valid ones, may be challenged within one year. Accordingly, Godwin’s claim was barred by the statute of limitations.

Godwin then tried to argue that there was a breach of fiduciary duty (the legal duty of the board to act in the best interests of the residents). Godwin and the association agreed that an action for such breach must be filed within two years from the date of breach. Godwin argued that, although the association initially breached its fiduciary duty four and three years earlier “when in bad faith it knowingly and willfully” adopted the resolution and the bylaws amendment, there were renewed breaches when the annual budgets were adopted in the last two years, which reflected the change made to assessments for insurance premiums. The court disagreed, finding that any breach of fiduciary duty relating to the change in the insurance premium assessment took place when the association acted four and three years ago to adopt the resolution and bylaw amendment. The latest of these actions occurred over two years prior to Godwin’s filing suit. Therefore, the claim was time-barred.

Bankruptcy: Dischargeability of Debts Regarding Property Damage-Malice

Several cases illustrate well the dischargeability of debts involving property damage. In all cases, the trial and appellate courts are required to adhere to Bankruptcy Code §523(a)(6) which states that a debt causing willful and malicious injury to another entity is not exempt from discharge.

If you have cases involving property damage that may fall within this code section, please let me know. 

Collections: Bank Deposits - for Deposit Only

 The United States District Court at Alexandria reviewed a liability question regarding a bank's treatment of a check marked "for deposit only". In the case of Qatar v. First Am. Bank of Va., the Court ruled that a depositary bank violated a restrictive endorsement stating "for deposit only" when it deposited a check into an account other than the account belonging to the named payee of the check. In Qatar, a foreign embassy employee defrauded the embassy over a six-year period by various methods, including depositing checks written to other parties into his own personal accounts with defendant banks. After the embassy discovered this fraudulent scheme, it sued the depositary bank for conversion. The bank succeeded on summary judgment in establishing that it was not liable as a matter of law with respect to two categories of checks in dispute, and it prevailed on a factual issue at trial that relieved it from liability for yet another category of checks.

Only one category of checks remained in dispute. These checks all bore the forged endorsement of the payee named on the face of the check, followed by a stamped "for deposit only" restriction. At trial, the depositary bank raised no defenses, but instead challenged for the first time the Court's assumption that the phrase "for deposit only," without further specification, directs a depositary bank to deposit the funds only into the account of the named payee. The Court reasoned that the question then presented was whether the bank complied with the restrictive endorsement "for deposit only" when it deposited the check bearing that restriction into any person's account, or whether that restriction requires the bank to deposit the check's proceeds only into the account of the named payee. The Court held that the unqualified language "for deposit only" following an endorsement on the back of a check required the bank to place the check's proceeds into the payee's account, and the bank violated that restrictive endorsement when it credited the check to another account. In this cases, specifically, the bank violated the restrictive endorsement in depositing into the employees account checks made payable to others and restrictively endorsed "for deposit only", and thus was liable to the plaintiff for the money converted.