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: Suit to Enforce Mechanic’s Liens

In recent editions of Creditor News we have been discussing the benefits of using real estate to improve creditors’ positions. This month we will discuss suit to enforce mechanic’s liens.

Virginia Code §43-17 provides that no suit to enforce a mechanic’s lien can be brought:

“…after six months from the time when the memorandum of lien was recorded or after sixty days from the time the building, structure or railroad was completed or the work thereon otherwise terminated, whichever time shall last occur; provided, however, that the filing of a petition to enforce any such lien in any suit wherein such petition may be properly filed shall be regarded as the institution of a suit under this section; and, provided further, that nothing herein shall extend the time within which such lien may be perfected.”

Virginia Code §43-17.1 provides that:

“Any party, having an interest in real property against which a lien has been filed, may, upon a showing of good cause, petition the court of equity having jurisdiction wherein the building, structure, other property, or railroad is located to hold a hearing to determine the validity of any perfected lien on the property. After reasonable notice to the lien claimant and any party to whom the benefit of the lien would inure and who has given notice as provided in §43-18 of the Code of Virginia, the court shall hold a hearing and determine the validity of the lien. If the court finds that the lien is invalid, it shall forthwith order that the memorandum or notice of lien be released from record.”

Virginia Code §43-18 provides:

“The perfected lien of a general contractor on any building or structure shall inure to the benefit of any subcontractor, and of any person performing labor or furnishing materials to a subcontractor who has not perfected a lien on such building or structure, provided such subcontractor, or person performing labor or furnishing materials shall give written notice of his claim against the general contractor, or subcontractor, as the case may be, to the owner or his agent before the amount of such lien is actually paid off or discharged.”

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

Bankruptcy: Reaffirmation Required for Certain Abandoned Collateral

In the case of American National Bank & Trust Co. v. DeJournette, the United States District Court in Danville ruled that where the debtors defaulted on their debt secured by a car and a tractor prior to filing for bankruptcy, the Bankruptcy Court erred in not requiring the debtors to reaffirm their obligation or redeem the underlying debt in order to retain the secured property.

The District Court ruled that whether by means of abandonment or claimed exemption, the property at issue was no longer part of the estate. Therefore, the termination of the automatic stay is governed by Bankruptcy Code §362(c)(2), as opposed to Bankruptcy Code §362(c)(1). Pursuant to §362(c)(2), the automatic stay was lifted upon the earlier of the closing of the case and the discharge. Since the automatic stay had already been terminated by operation of §362(c), the District Court ruled that it was incapable of granting the bank's motion to modify the stay. Nevertheless, the District Court determined that it was capable of providing the bank other "effectual" relief. Underlying the bank's request for modification pursuant to §362(d)(1) was a claim that the Bankruptcy Court misapplied Bankruptcy Code §521(2) by not requiring the defaulting debtor to either reaffirm of redeem their obligation in order to retain the secured property. The District Court ruled that the Bankruptcy Court erred in ruling that the debtors did not either have to redeem or reaffirm. In making its decision the District Court noted that the various circuit courts are split on the issue on whether a non-defaulting debtor must reaffirm or redeem his obligation when he seeks to retain secured collateral, or whether following a Chapter 7 filing, a non-defaulting debtor may simply hold on to the collateral securing the loan and continue making payments under the original loan agreement.

The District Court concluded that where debtors have defaulted on a secured debt prior to filing a bankruptcy petition, they must reaffirm their obligation or redeem the underlying debt in order to retain the secured property.  The District Court noted that one bankruptcy court in this District, in In Re Doss, disagreed with its conclusion and has extended the holding in In Re Belanger, to a situation involving a defaulting debtor. The District Court found that in a situation where the debtor had defaulted on a secured debt prior to filing for bankruptcy, the most efficient and fair remedy is to require the debtor to either surrender the collateral, or, if he desires to retain the collateral, redeem or reaffirm the obligation. Therefore, despite the ruling in Doss, the District Court found that other relevant case law supported its position.

In conclusion, the District Court found that the appropriate relief in this case was to compel the debtors to either surrender the collateral, or, if they chose to retain the collateral, compel them to either redeem the debt or reaffirm their obligation. Accordingly, the debtors were ordered to file a new statement of intention either to surrender or retain the secured property. If they chose to retain the secured property, the debtors would likewise be ordered to state an intention to either redeem the debt pursuant to Bankruptcy Code §722 or reaffirm their obligation pursuant to Bankruptcy Code §524(c).

Collections: Mechanics Lien voided by Old Work

Mechanic’s liens are strictly governed by statutory law. This fact is well illustrated in the case of Johnson v. Tadlock.  In Johnson the Fairfax County Circuit Court ruled that a mechanic's lien that included work performed before the 150-day statutory window was invalid in its entirety. Under the mechanic's lien statute, a memorandum of lien should not include any sums due for labor and materials furnished more than 150 days prior to the last day of work. However, the Court's decision in Johnson appears to be the first in which a Circuit Court has struck an entire lien based on the inclusion of stale work.

In Johnson, the Court found as fact that a workman filed a mechanic's lien for $15,500 for various work, including lot clearance, removal of trees and installation of a storm drainage system and caissons. The property owner sought to have the lien released based on its inclusion of stale work. A portion of the lien (amounting to at least $1,500) was for work clearly performed within the 150-day statutory period. The property owner asserted that all or a part of the remainder of the work was performed more than 150 days prior to the workman's last day on the job.

The Court ruled that the inclusion of a stale claim tainted the entire lien. The Court cited language in the mechanic's lien statute "no memorandum... shall include ....," to support his position. The Court pointed out that mechanic's liens are "creatures of statute" and therefore need to conform strictly to their statutory requirements. Accordingly, the court refused to remove the improper portions of the claim and rule on the proper portion of the claim - it survived or perished in its totality.

The lesson of Johnson, as the lesson is in so many cases, obtain competent legal advise and representation in pursuing mechanic's lien claims.

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: Using Real Estate to Secure Your Debt

Many fail to recognize the benefit of using real estate to improve their position as creditors. Properly securing debts through real estate could make the difference between collecting the funds and incurring a loss.

Securing debt with real estate can occur in several ways: deeds of trust, judgment liens, homeowner association liens, mechanic’s liens and lis pendens in litigation cases, just to name a few. In the upcoming issues of Creditor News we will explore these, as well as the ways that I can assist you.

We have experienced attorneys and staff who can examine title, do real estate losings, 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.

Bankruptcy: Preferential Transfer - Purchase Contract

In the case of Sigmon, Trustee v. Royal Cake Co. the United States District Court at Charlotte, North Carolina, reviewed a Bankruptcy Court ruling granting a trustee's objection to the return of a down payment on a purchase contract as an improper preferential transfer.

The District Court found as fact that the debtor was the seller of certain machines who returned to a buyer corporation that corporation's down payment on a contract for the purchase of machines.

The buyer corporation claimed that the down payment was collateral held in trust by the debtor on the buyer's behalf, and that, under North Carolina property law and federal bankruptcy law, the seller of the goods does not hold a property interest in such collateral.

The District Court concluded that the Bankruptcy Court made a proper finding that the debtor did have a property interest in the down payment, and that the return of the payment was made on account of an antecedent debt for the benefit of the creditor. The District Court further concluded that the buyer corporation's claim that the payment was mere collateral or a deposit was flawed because the payment was actually the first payment for the machines purchased. By sending the payment check, the buyer was fulfilling its obligation under the sales contract, not merely guaranteeing future performance of its payment obligations. Once the debtor deposited the buyer's check into its own bank account, commingling the money with its other funds, the debtor had a right to withdraw, transfer or otherwise use the payment funds in any way it wanted.  The debtor's ability to exercise complete dominion and control over the funds was sufficient to demonstrate an interest in property under the preferential transfer provision. Therefore, the Court concluded, the return of the down payment was a transfer of an interest of the debtor in the property.

Collections: Post Judgment Collection - A Focus on Debtor's Interrogatories

Once judgment is entered, what is next? Although all creditors would like for the judgment amount to "fall from the sky", it does not. Sometimes debtors will pay, either in full or in incremental payments. Sometimes creditors can garnish wages or accounts, or issue a levy on property. Sometimes creditors can bring a creditor's bill to sell real estate. But what can be done when the above listed remedies are not, or at least are not yet, options, or when there is no information about the debtor from which to devise a post judgment collection plan? Virginia Code §8.01-506 provides a good start - Debtor's Interrogatories. For the price of a summons to answer interrogatories (usually $44.00 plus service charges) an attorney can summon the debtor to appear before the court granting the judgment (or other court should the matter be transferred by the judgment court) or a Commissioner in Chancery (a lawyer appointed by the court to serve in this capacity) to examine the debtor's personal estate, specifically, to answer questions about income, assets and the debtor's general ability to pay in order to attempt to satisfy the judgment. The summons is enforceable by a capias (arrest warrant) which is issued through the court.

The interrogatory procedure is summary in nature. No pleadings are required. No trial by jury is available.  Under recent amendment to Virginia Code §8.01-506, the creditor may, as part of the interrogatory system, require the production of account books or other writings that contain evidence of the judgment debtor's estate, provided that the creditor gives an affidavit stating that he believes the books exist and identifies them with reasonable certainty.

Virginia Code §8.01-506 allows a debtor 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.

It is important to note that a creditor cannot conduct debtor's interrogatories - only an attorney can. This certainly can be frustrating for creditors who take their own uncontested judgments and file their own garnishments, but it is a reminder as to why creditors are better served by turning all accounts over to counsel for collection prior to seeking judgments so that counsel can assess the attorney's fee provided in the contract or note, and can keep the entire process moving.

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

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

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

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

Bankruptcy: Homeowners’ Association Assessments and the Chapter 13 Automatic Stay

The United States Bankruptcy Court in Alexandria, Virginia, in the case of Montclair Property Owner’s Association, Inc. v. Reynard, ruled that a homeowner’s association may collect post-petition assessments from a Chapter 13 debtor’s property that is not property of the bankruptcy estate.

In making its decision, the bankruptcy court noted that courts have taken different approaches with respect to the extent of the bankruptcy estate after confirmation of a Chapter 13 plan and, indeed, whether there is an estate after confirmation. The bankruptcy court ruled, however, that Bankruptcy Code §1306(a) includes in the Chapter 13 estate all property acquired by the debtor after confirmation, including future earnings. If the Chapter 13 estate did not have these assets, it could not pay pursuant to the plan.

In this case, no relief from the automatic stay was necessary, as there was no judgment yet obtained to execute upon. However, the court did rule that no relief from the automatic stay is necessary to collect post-petition homeowner’s assessments from property that is not property of the estate. Collection activities may only be directed to property of the debtors, not property of the estate. All post-confirmation earnings are property of the estate.

Collections: Secured Transaction Proceeds

In the case of Orix Credit Alliance Inc. v. Sovran Bank, N.A., the United States District Court at Baltimore, Maryland, reviewed a case where Sovran Bank, which had provided the debtor with a line of credit and several bank accounts, one of which was a depository "cash collateral" account routinely applied against draws on the line of credit, signed an agreement with Orix, a finance company, to subordinate the bank's security interest in a crane (purchased by the debtor with funds from the finance company) to the finance company's interest in the crane. The Court ruled, however, that the bank was entitled to use the proceeds from the sale of the crane to reduce the debtor's obligation under the line of credit. The Court's decision was based upon a finding that the bank's transfer of the proceeds occurred in the debtor's ordinary course of business under Virginia Code §8.9-306, comment 2(c), which extinguished the finance company's interest in the proceeds from the sale of the crane.

This case serves as another example as to why competent legal advice should be sought before relying upon a recorded security interest.

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: Criminal Liability for Misuse of Construction Funds

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

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

Bankruptcy: Unperfected Purchase Money Lien

In the case of In re Johnson the United States Bankruptcy Court, Eastern District of Virginia, at Richmond, ruled that a Chapter 7 debtor's claim of homestead and poor debtor's exemptions in her automobile should be denied because the debtor had not paid the purchase price of the car, and thus the car was subject to a debt to the credit union that made the loan for the purchase price. Had the car been non-purchase money security interest, the result would have been different.

In determining the facts the Court found that the debtor purchased the car using credit union loan proceeds, that the debtor intended to grant a security interest in the vehicle to the credit union, and that the credit union's lien was not recorded on the vehicle's certificate of title.

The debtor claimed a $5,500 homestead exemption under Virginia Code §34-4, and a $2,000 poor debtor's exemption under Virginia Code § 34-26. The credit union that loaned the debtor the money to buy the car had a purchase money security interest pursuant to Virginia Code §8.9-107(b).

Although a purchase money security interest had attached to the vehicle, a second step of perfection is required for the interest to be enforceable as to third parties -- a notation must appear on the vehicle's certificate of title. Testimony was given that no notation of a security interest appeared upon the title to the car. The credit union, therefore, held an unperfected purchase money security interest in the vehicle.

The Court ruled the credit union's unperfected interest was subordinate to the rights of a lien creditor, and that the statutory definition of "lien creditor" under the Virginia Code included a trustee in bankruptcy.

The Court was left with the question whether the debtor could exempt property in which the credit union held an unperfected purchase money security interest, and in which the value of the property was exceeded by the debt owed on the property. Exemptions under both Virginia Code §§ 34-4 and 34-26 cannot be claimed against debts for the purchase price of the property, or for any part of the purchase price.

The debt created in Johnson was for the purchase price of the car, as the loan application, note and security agreement clearly illustrated. Many of the cases in which Virginia Code §34-5 have been applied have involved a merchant creditor, or an actual seller of the goods for which the purchase price was not paid, rather than a third-party creditor.

The Court held that the debtor's claimed exemptions were improper because they were for property, the purchase price of which had not been paid, and the property was subject to a debt for the purchase price. The Court further held that a third-party creditor could prevail under Virginia Code §34-5 if the creditor successfully showed that its loan proceeds were used to acquire the collateral, and that is had a valid purchase money security interest.

As an alternative basis for its holding that the debtor's claimed exemption of $4,500 was improper, the Court looked to the language of Virginia Code §34-4, which allows an exemption of personal property up to $5,000 "in value", plus personal property of $500 "in value", for each dependent. Even if the exemption were properly claimed, the debtor in Johnson had no equity in the car. The credit union held a purchase money security interest, which was valid between it and the debtor. The value of the car was stated by the debtor to be $18,000 and the loan balance was approximately $19,000. The Court has held on prior occasions, as it did in this instance, that where the debtor has no equity in the exempted property, no exemption exists.

Further, the Court held that because the debt on the car exceeded its claimed value, there was no amount to be claimed exempt under Virginia Code §34-26(8). Finally, the Court noted that if it were to allow the claimed exemptions, the debtor would retain the property exempted, subject to the security interest of the credit union. This would result in the improper outcome in which a creditor holding an unperfected security interest would be placed ahead of the trustee.

The lesson in Johnson - perfect your liens.  Remember that had this been a non-purchase money security interest case, the result would have been different there would have been no lien. Set up systems to ensure lien protection.

Collections: No Debt Cure from Extra Payments

In the case of W. Harold Tulley I LLC v. North Richmond Investments Inc., the City of Richmond Circuit Court addressed a case involving an alleged cure of a default by payments made after default.

The Court ruled in Tulley that Plaintiff lender is entitled to a deficiency judgment after foreclosure on real estate that secured a commercial loan. The Court rejected Defendant guarantors’ contention that their additional payments after default cured the default, as such was not provided for under the parties’ contract.

Defendants asserted that the Third-Party Defendant trustees and Plaintiff breached their obligations and duties because they knew or should have known Defendants were not in default. Defendants claimed that the trustees violated their duties under the loan documents, failed to act impartially, failed to acquire the best price upon the sale, sold the property at an inadequate sale price, and as they were never in default, should not have conducted the sale. Defendants contended that the trustees conducted the sale on a sham bid, knowing that Defendants were not in default.

The Court noted that neither the deed of trust and guaranty agreement nor the applicable statute, Virginia Code Section 55-59, lists any of the duties Defendants would have imposed on the trustees in foreclosure sales.

The Court found that both the deed of trust and the guaranty agreement describe default as failure to pay the agreed upon amounts at the agreed upon time on a timely basis. The guarantor stated that upon his tender of the two advance interest payments, there was no agreement regarding how the payments were to be applied, and that he understood they were not required under the financing and deed of trust documents. The Court ruled that Defendants were held properly in default, the amounts due accelerated triggering foreclosure.

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:

a.       Value of the property vs. the amount of the debt.

b.     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: 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.

In next month’s edition we will explore suits to enforce the lien.

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

Bankruptcy: Cross Collateralization Prevails

In another case pursued by the Virginia League Central Union, In Re: Martin, an important precedent was set in regard to the enforceability of cross collateralization.

In Martin the debtors filed a Chapter 13 bankruptcy case. At the time of the filing the debtors were obligated on three loans to the credit union:

(1)  $1,200.00 open end credit agreement (initial loan);

(2)  $3,401.01 open end credit agreement for a truck loan (truck loan); and,

(3)  $1,386.94 Visa card credit account (Visa loan).

The initial loan documents and the truck loan documents had cross collateralization language stating that collateral given as security for these loans, or for any other loan, would secure all amounts owed to the credit union now or in the future. The Visa application did not contain cross collateralization language. The debtor argued that because the Visa application did not have cross collateralization language and did not refer to the truck, that the truck should not stand as collateral for the Visa loan. The credit union argued that the truck should stand for all three loans.

The Court found the cross collateralization language to be enforceable and effective as to all three loans. The Court held that confirmatory language was not required in the Visa application so long as the original agreement contained cross collateralization language.

One would have to wonder, however, if the result would have been different if the Visa loan had been executed first.

Collections: Promissory Note - Acceleration of Balance

The case of Atlas Rooter Co. v Atlas Enterprise, Inc., decided by the City of Richmond Circuit Court, serves as an excellent review of creditor's acceleration rights upon late payment on a promissory note.

In Atlas the undisputed facts were that the debtors mailed their loan payment within the ten-day grace period provided for in the promissory note (as they routinely did), but the payment was received after the ten-day grace period. The creditor moved to accelerate the balance due on the note. The debtors argued that the usual course of dealing between the parties authorized the use of the mails for payment. The debtors claimed that because payment by mail was permitted in the past, payment was made when the letter containing the payment was deposited in the mail, and that the risk of late payment was assumed by the note holders. The note, however, did not specify this.

The Court ruled that under Virginia law, payment of a debt is made upon receipt by the creditor, rather than by mailing by the debtor. The Court further reasoned that Virginia Code §8.3A - 602 provides that tender of payment of a negotiable instrument must be made "to a person" entitled to enforce the instrument. Payment or satisfaction discharges the liability of a party only if made to the holder of the instrument. The Court stated that to allow the mailing of an installment as timely payment would act to qualify the U.S. Postal Service as an agent of the note holder.

There is a lesson for creditors in Atlas even though the creditor prevailed. Keep detailed records of payments, do not waive payment due dates, and create a "paper trail" regarding late payment reminders. Creditors prevail best when they do not have to pay the cost for enforcing their rights.

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

In recent editions of Creditor News we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will begin a review of the benefits of using mechanic’s liens to aid in the collection of your debt.

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

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

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

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

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

Bankruptcy: Dischargeability of Debts - False Pretenses

In the case of Slonim v. Marineau the United States District Court confirmed a Bankruptcy Code ruling that a debt was non-dischargeable pursuant to Bankruptcy Code §523(a)(2)(A), as it was obtained by false pretenses. The Bankruptcy Court had made a factual finding that the debtor's loan agreement with the creditor, who was an individual investor, provided that the $90,000.00 loaned by the creditor would be used to construct pre-sold homes in Albermarle and Greene Counties, but instead the debtor had used the loan to pay personal expenses.

The debtor had argued that his statements did not "qualify" as misrepresentations under Bankruptcy Code §523(a)(2)(A) because the statements concerned future performance. Most courts, however, have held that when such statements are accompanied by the present intention not to perform as promised. The statement of present intention at issue in this case involved the use to which the debtor would put the money. The Court ruled that where money is entrusted to a debtor for a specific purpose, the debtor impliedly represents that it will be used for that specific purpose constitutes a misrepresentation of the debtor's intention.

The debtor's own testimony established that he never intended to use the funds for that purpose. He testified at trial that he always intended to use the loan to reimburse himself and his partner for expenses incurred in building the house for the partner. Thus, the debtor's representation that the money would be used for a specific purpose was knowingly false when he made it. Furthermore, his intent to deceive could be inferred from his immediate depletion of the funds and statements aimed at making the investor believe that there was less risk involved than which truly existed. Accordingly, the debt was ruled non-dischargeable pursuant to Bankruptcy Code §523(a)(2)(A).

Collections: Interest on Accounts

Virginia Code §8.01-382 addresses pre-judgment and post-judgment interest, and provides that:

In any action at law or equity, the verdict of the jury or judgment by the court may provide for interest on the entire principal sum awarded or any part of that sum, and fix the period at which the interest is to commence.

The judgment order entered provides for the accrual of interest until the principal sum is paid. This code section further provides that if no interest is provided on a judgment, the statutory rate of interest shall be applied as of the date of entry of such verdict or judgment. The statutory judgment rate of interest is presently set at an annual rate of six percent, unless otherwise provided by a written contract, agreement or note.

Foreclosure: Default

Question: When is a loan in default? Answer: Under one or more of several circumstances. The most common way that a borrower is in default is monetary – e.g., the borrower fails to make a required payment. However, default can be for a non-monetary reason as well, such as:

1. Failure to pay taxes.
2. Failure to pay insurance.
3. Failure to remove or bond over mechanic’s liens.
4. Failure to perform requirements unique to the loan.

If you have questions about default, please call us at 545-6251.

Real Estate: Using Lis Pendens to Secure an Interest in Real Estate

In recent editions of Creditor News we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of using lis pendens in litigation cases to aid in the collection of your debt.

A lis pendens is a legal memorandum which places parties on notice that litigation is pending which affects the title or ownership of real estate. The lis pendens is filed in the circuit court of the county or city in which real estate lies.

Virginia Code §8.01-268 B states that “No memorandum of lis pendens shall be filed unless the action on which the lis pendens is based seeks to establish an interest by the filing party in the real property described in the memorandum…”. 

Virginia Code § 8.01-268 A provides that a lis pendens does not affect a subsequent bona fide purchaser of real estate for valuable consideration until actual notice of such lis pendens is properly filed with the required information. Requirements include: the title of the cause, the general object thereof, the court wherein it is pending, the amount of the claim asserted, a description of the property, the name of the person whose estate is intended to be affected thereby.

We have experienced attorneys and staff who can examine title, file lis pendens, and litigate to enforce the same.

Bankruptcy: Chapter 7 Case Dismissed Due to Substantial Abuse

In the case of In Re Norris, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, ruled that although the debtors, a married couple, did not lead a lavish lifestyle and saw their financial woes mount over a ten year period before they filed their Chapter 7 petition, which was filed in good faith, their petition was nevertheless dismissed for "substantial abuse" under Bankruptcy Code §707(b).

Judge Tice found as fact that the debtors did not lead an extravagant or excessive lifestyle, at least not in the terms of acquiring large amounts of personal property. The Debtors did, however, remain in a large and expensive home which they have managed to retain, rejecting the prospect of moving to a smaller abode that would have been less costly to keep. Also, the debtors testified that some credit card debt resulted from dining out. Significantly, Judge Tice found that the debtors used their 401(k) plans to create a reserve for future expenses, thus diverting funds that could have otherwise been used to pay to creditors.

In evaluating all the factors for determining substantial abuse pursuant to the 4th Circuit Court of Appeals case Green v. Staples, Judge Tice stated that the Court must consider more than just the debtor's ability to fund a Chapter 13 plan. In evaluating all the Green factors together, Judge Tice stated that he was left with a rather close decision. The debtors certainly had the ability to repay a substantial portion of their debts, and this is the primary factor to be considered. Their ability to repay, however, was mitigated in part by the debtors' good faith and forthrightness, the relative accuracy of their bankruptcy schedules, and their lack of intent to deceive the Court. Judge Tice stated, on the other hand, that the debtors clearly took on debts while being unable to repay them, were not forced into bankruptcy due to a sudden, unexpected turn of events, and have included unreasonable expenses in their budget (including the deduction for income for deposit in their respective 401(k) plans, totaling nearly $500 per month) in order to make funds unavailable to their creditors. Judge Tice found that the debtors lived far beyond their means and could easily fund a significant Chapter 13 plan to discharge their debts and provide their creditors with some payout. Instead, the debtors propose by filing Chapter 7 to maintain their more-than-adequate lifestyle at the expense of their creditors. In addition, the debtors continue to try to retain money for future expenses to their creditors' detriment. The debtors' actions smack of the "unfair advantage" over creditors sought to be proscribed by Bankruptcy Code §707(b). Judge Tice stated that while the Court was sympathetic to the debtors' plight, and even taking into account the prescription of granting the debtors the relief they seek, the Court found that the debtors' Chapter 7 case should be dismissed for substantial abuse.

The lesson in Green - look closely at a debtor’s available assets in a Chapter 7 case, especially retirement benefits.

Collections: Electronic Signatures and the Effect on Collections

Electronic signatures on loans and other credit agreements are becoming increasingly the norm for many of our clients. However, like all contracts that are eventually turned over for collection by a third-party, our clients need to consider evidence of where the contract was signed. 

Under the FDCPA, a suit may be filed either: where a defendant lives, OR where the contract was signed. The attorneys at LAW are licensed in Virginia and can only file suits in Virginia. Generally, this is not an issue. For example: if your defendant lived in Virginia, and still lives in Virginia, then this is likely not going to be an issue. However, if your defendant lived in Virginia when the contract was signed but then moved out of state, the suit would need to be filed in the new state unless you can sue where the contract was signed in Virginia. That is where the catch comes in. If your member lives outside of Virginia, but they signed the contract outside of Virginia or you do not know where the contract was signed, LAW will need to refer your case to an attorney who practices in another state.  

Prior to electronic signatures, it was easier for our clients to tell us where a contract was signed. Generally, wherever our client’s office was located, was the venue for a future suit. That has changed for many of our clients with the ability to email contracts for signature. If your member happens to be vacationing in the Outer Banks when they sign for their loan or credit card, you may run into a venue issue down the line. Or, if your member lives outside of Virginia when you turn the account over for collections and you do not know where the contract was signed, we also would not be able to file suit in Virginia. So, what do you do?

The first line of defense is going to add proof of where your contract was signed to every document signed by your members. There are several options for achieving this. First, you can add an affidavit of venue to your contracts. This is a simple signed document stating the date signed, name of your member(s), account/loan number, and a statement that the document was signed in the following county, city, and state. The second option is to work with your electronic document provider to add language at the end of your signed documents with a similar statement for your members to fill in when they sign. 

But, what about IP addresses? Many of our clients have stated that their electronic document provider provides an IP address sheet at the end of the loan. The problem with relying on IP addresses is that they are often not accurate. Internet security is vitally important, and many security systems prevent sharing of actual IP addresses and locations. 

We have helped many clients navigate proof of venue at the time of signing and would be happy to discuss your current processes. Additionally, we review every case to determine venue and can assist clients when issues arise. 

Foreclosure: Sale Price and Delays in Sale

The trustee is under a duty to “use all reasonable diligence to obtain the best price.”  

If the trustee determines that in order to fulfill his fiduciary duty to realize the highest price for the property, a recess is necessary, he or she should recess the sale. Arguably, the recess is within the scope of the discretion afforded trustees in the conduct of the foreclosure sale. For example, if a bidder who previously advised the trustee of his interest in bidding on the property is delayed, the trustee, in his discretion, may recess the sale to a later hour on the same day to allow the bidder to attend the sale. If the trustee fails to accommodate the bidder and the property is sold for a price less than the bidder was willing to pay, the trustee may have breached his duty to “use all reasonable diligence to obtain the best price.” A decision by the trustee to recess the sale, however, should not impair the sale by making it impossible or impracticable for the bidders to appear and bid at the recessed sale.

The postponement of a foreclosure sale to a different day is not a recess and is governed by statute. Virginia Code §55-59.1(D) provides that the trustee, in his discretion, may postpone the sale to a different day, and no new or additional “notice” must be given. Presumably, the “notice” referred to in this section is notice of the postponement. The trustee needs only to announce at the sale that it has been postponed. §55-59.2(D) provides that if the sale is postponed, the trustee must advertise the “new” sale in the same manner as the original advertisement. Read in conjunction, these sections require the trustee who postpones the foreclosure to re-advertise the sale in the same manner as the original sale was advertised. Although the secured obligation will not need to be accelerated again, all other aspects of the foreclosure must be completed. Effectively, a postponed sale is a new sale in which the trustee must complete all acts that he or she completed in the first sale.

Real Estate: Foreclosing on 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. Last month we reviewed the special procedures for the collection of homeowners association dues under Virginia Code §55-516. We will now review the procedures for suits to foreclose on the lien.

Suits must be brought within thirty six months of filing, but after the perfection of the lien. The Homeowner’s Association may sell the lot at a public sale, subject to prior liens. There are detailed requirements in the code, a brief summary of which include the following:

1. The association shall give notice to the lot owner prior to advertisement as required in the code.

2. After expiration of the 60-day notice period, the association may appoint a trustee to conduct the sale.

3. If the lot owner meets the conditions specified in this subdivision prior to the date of the foreclosure sale, the lot owner shall have the right to have enforcement of the perfected lien discontinued prior to the sale of the lot. Those conditions are that the lot owner: (i) satisfy 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.

4. In addition to the advertisement requirements, the association shall give written notice of the time, date and place of any proposed sale in execution of the lien, and include certain information required in the code.

5. The advertisement of sale by the association shall be in a newspaper having a general circulation in the city or county wherein the property to be sold, with certain information requirements as set forth in the code.

6. Failure to comply with the requirements for advertisement contained in this section shall, upon petition, render a sale of the property voidable by the court.

7.  In the event of a sale, the code sets forth bidding and proceeds application procedures.

8. After sale, the trustee shall deliver to the purchaser a trustee's deed conveying the lot with special warranty of title.

9. After completion, the trustee shall file an accounting of the sale with the commissioner of accounts.

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

Bankruptcy: Dischargeability of Debt - False Financial Statement in Chapter 7 Case

Judge Tice, United States Bankruptcy Court at Richmond, denied discharge of a debt in a Chapter 7 case. The case was Global Express Money Orders, Inc. v. Davis. In Davis the debtor previously had a convenience store that sold the creditor’s money orders through the store. The debtor still owed the creditor ($71,168.55) for some of these money orders. At issue was the debtor’s financial statement provided to the creditor at the commencement of the business between them

The Court found that the debtor’s financial statement was materially false. In fact, at trial the debtor did not seriously question the inaccuracy of the statement. Rather, he tried to distance himself from its preparation and delivery to the creditor. In the financial statement the debtor provided false information as to cash in a checking account, the value of his personal residence and a beach condominium, the value of his equity in certain investments, value of mutual funds and an expected federal tax refund.

The Court further found that the creditor required the personal financial statement of debtors as a condition precedent of the business arrangement; that the debtor, with intent to deceive, published the materially false financial statement and caused it to be delivered to the creditor; and that in contracting with the creditor and allowing the entity to incur substantial indebtedness, the creditor reasonably relied upon materially false asset entries in the financial statement, which debt was indemnified by the debtor personally.

The Court rejected the debtor’s argument that the creditor failed to prove that he prepared the financial statement and authorized its delivery, i.e., publication with intent to deceive, to the creditor. The Court determined that the evidence showed that in the debtor’s presence and with his knowledge, the financial statement was delivered to the creditor by an (unknown) employee of the debtor’s business. The Court ruled that this evidence was sufficient to require some better explanation from the debtor than he provided. The Court stated that it did not believe the debtor’s evasive testimony that he was too busy to be bothered, and knew nothing about the contents of the financial statement or the circumstances surrounding its delivery to the creditor. The Court determined that at the very least, the debtor recklessly allowed his financial statement to be used by the creditor for its consideration of the business transaction, and his reckless indifference was sufficient to satisfy the publication with intent to deceive element of Bankruptcy Code §523(a)(2)(B).

As to damages, the debtor argued that the loss of payment of the trust balance due was not damage or loss resulting from his publication of the false financial statement, as required by the statute. Rather, the debtor stated that the loss resulted from the failure of store employees to separate money order sales. Moreover, according to the debtor, his stores were not generating enough revenue to pay the current liabilities, and there was no evidence that he personally took funds or caused the shortage. However, the Court found it ironic that the debtor could argue that it was his employees who failed to comply with the trust agreement requirement for segregating trust fund receipts of the creditor. The debtor agreed to indemnify the creditor for his business’s indebtedness under the trust agreement, and his inability to make good on the indemnity was a direct result of his financial problems and ensuing bankruptcy. Although the Court stated that causation was not a necessary or proper element of the false financial statement issue, the Court simply found that the debtor’s false financial statement was a proximate cause of the loss.

Collections: Ensure Good Faith in Pleadings

Virginia Code §8.01-271.1, and its federal equivalent Rule 11, provide for sanctions against litigants and\or attorneys who file frivolous pleadings or motions. Under the Virginia Code and the Federal Rule, a signature attached to a pleading or motion constitutes a certificate that:

           1.        The signatory has reasonably inquired into the facts and that the claim is well founded in fact, and warranted by existing law, or that there is a good faith argument for the extension, modification or reversal of existing law, and

           2.        The pleading or motion is not interposed for an improper purpose (i.e. delay or harassment).

Sanctions include the payment of reasonable attorney fees and expenses incurred as a result of the frivolous pleading or motion. So, be sure of what you sign when you sign it!

Foreclosure: Foreclosure Sale Accounting

The Code of Virginia requires that the trustee’s accounting be filed with the appropriate commissioner of accounts “within six months after the date of a sale.” The Manual for Commissioners of Accounts states that “although the Commissioner does not have specific statutory authority to extend the six month filing date, some courts allow the Commissioner to extend the deadline for good cause shown in advance of the filing date.”

Real Estate: Common Area Parking Spaces Must be Assigned Equally

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

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

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

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

Bankruptcy: Dischargeability of Debt - False Financial Statement

In the case of I. H. Mississippi Valley Credit Union v. O'Connor the United States Bankruptcy Court at Richmond, Virginia, reviewed the creditor's complaint objecting to dischargeability pursuant to two sections of Bankruptcy Code §523.

In O'Connor the debtor was involved in a scheme with a car dealer to buy and sell "grey market" Mercedes Benz in Germany and then bring them to the United States to be refitted for sale at a profit, after which the dealer would pay off the credit union loan and split the profits with the debtor. During the conduct of this business, the debtor provided to the credit union an inaccurate vehicle identification number (VIN) on a loan application and also failed to list a loan from another credit union on an application.

The Court found as fact that the debtor made misrepresentations as to the vehicle identification number and the existence of the Mercedes, and that the credit union relied on the existence of such an automobile in making the loan to the debtor. However, the Court found that the credit union did not meet its burden to show that the debtor knew that the representations were false when made. The debtor gave the loan officer the VIN appearing on the bill of sale from the car dealer, and although the insurance company requested from the debtor a corrected VIN for insurance purposes, the credit union presented no other relevant evidence that would show that the debtor knew that the VIN was false at the time he applied for the loan.

The credit union argued that the debtor showed reckless disregard for the truth in not checking to verify that the VIN provided by the car dealer was accurate or that there existed a Mercedes Benz automobile. The Court, however, was not inclined to find reckless disregard for the truth. In regard to the VIN, the Court noted that in a majority of automobile purchases the buyer does not compare the VIN written on the bill of sale against the VIN on the automobile itself, nor does the buyer call the VIN in to the manufacturer's corporate headquarters for verification. In regard to the Mercedes, the Court found that there was no reason for the debtor to have doubted the existence of the vehicle. The debtor's only interest in the vehicle was that it could be refitted by the car dealer and then resold at a profit. Further, the debtor had already successfully conducted two such transactions with the credit union without seeing either of the cars involved in these transactions.

The Court ruled that the debtor's representations regarding the VIN and the existence of the Mercedes Benz automobile were not made in reckless disregard to the truth. Further, the Court ruled that the credit union had failed to show any intent to deceive on the part of the debtor in making such representations. Accordingly, the Court ruled that Bankruptcy Code §523 (a)(2)(A) did not render the debt nondischargeable.

The Credit Union also raised the issue on nondischargeability based upon material false financial statements pursuant to Bankruptcy Code §523 (a)(2)(B). The Court took evidence from the credit union regarding information written by a loan officer on the loan request form as well as the written deposition of that officer. The Court found as fact that a loan to another credit union was not included on the loan request forms to the plaintiff credit union. The Court noted that in deciding the issue of materiality the Court must determine whether the credit union would have made the loan knowing of the outstanding obligation to another credit union, considering what weight the plaintiff credit union gives to its debt-to-income ration limit. The Court noted that the evidence by the credit union was not clear as to what debt-to-income ratio would have disqualified the debtor. The Court observed that a limit of 35 percent appeared on the form, but the debtor was approved with a debt-to-income ration higher than 35 percent. The Court decided that it was more probable than not that under the totality of circumstances of this particular fact situation that the credit union relied not on the debt-to-income ration, but instead on the debtor's high professional salary, low living expenses, and an established relationship in which during the past ten months two $20,000 "grey market" loans were paid off about the time of the due date of the first monthly installment. The Court concluded that the credit union's reliance on the debtor's false financial statement was not reasonable. Accordingly, the Court ruled that Bankruptcy Code §523 (a)(2)(B) did not render the debt nondischargeable.

Collections: Bank Denied Lawyer Fees Due to Problem in the Guaranty

In the case of Jefferson National Bank v. Estate of Frogale, a Loudoun County Circuit Court Judge denied the award of attorney's fees to a bank because the guaranty agreement did not have a provision for attorney's fees even though the promissory note clearly provided for 25% attorney's fees. The Loudoun Court found that the guaranty referred only to collection of "charges or costs" upon default. The Court ruled that this language was ambiguous, and as such, construed the ambiguity against the bank because they drafted the documents.

In Frogale a corporation defaulted in the payment of a note and the bank sued the note's guarantor. The guarantor filed a motion for summary judgment regarding the question of the guarantor's liability for attorney's fees. The Loudoun Court reviewed the Virginia Supreme Court case of Mahoney v. Nationsbank. In Mahoney the Virginia Supreme Court ruled that a note and guaranty are two separate agreements, but each must be construed in the light of the other. In doing so, the Loudoun Court stated that it was "crucial that the bank chose to distinguish in the Note between 'all other applicable fees, costs and charges' and attorney's fees; and that it chose not to place a specific attorney fee obligation in the guaranty." The Loudoun Court pointed out that the bank could have placed an attorney's fee provision in the guaranty just as it had done in the note.

The lesson of Frogale is that you should be careful that when you have guaranties you ensure that the language in the guaranty "mirrors" the language in the promissory note - without mirror language, there can be a problem, with mirror language, ambiguity should not be an issue.

Foreclosure: Notice of Sale

The Code of Virginia provides specific guidance as to giving notice of a foreclosure sale.

§55-59.1 requires that the written notice of sale contain the time, date and place of the proposed sale, as well as either (i) the instrument number, or, deed book and page number, of the instrument of appointment filed pursuant to §55-59-59 (appointment of substitute trustee), or, (ii) a copy of the executed and notarized appointment of substitute trustee. Personal delivery or mailing a copy of the advertisement by certified or registered mail is sufficient.

§55-59.1 requires the trustee to send written notice of the time, date and place of the sale to (i) the present owner of the property … (ii) any subordinate lienholder … (iii) any assignee of such note … (iv) any condominium unit owner’s association that has filed a lien … (v) any property owner’s association that has filed a lien … (vi) any proprietary lessees’ association that has filed a lien.

It is important to know that in addition to the notice required by statute, the note or the deed of trust may contain additional notice requirements. Accordingly, the trustee should examine both of these documents.

§55-59 provides that the notice can be sent by either the trustee or the lender.

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

The Virginia Property Owners’ Association Act specifically provides for remedies outside of the more common remedy of filing suit for the amount owed and receiving a judgment. A memorandum of lien to a holder of a credit line deed of trust under the Act is given in the same fashion as if the association’s lien were a judgment. Under the Act, the association can file for and perfect a lien against the homeowner that is prior to all other subsequent liens and encumbrances except real estate tax liens, liens and encumbrances recorded prior to the recordation of the declaration, and sums unpaid on and owing under any mortgage or deed of trust recorded prior to perfection of this lien.

To perfect the memorandum of lien, the association must file with the clerk of the circuit court in the county or city in which the development is situated a memorandum verified by the oath of the principal officer of the association or another officer provided for in the declaration. The memorandum must be filed within 12 months from the first assessment became due and payable. Additionally, prior to filing a memorandum of lien, a written notice must be sent to the property owner by certified mail, at the owner’s last known address, informing the owner that the lien will be filed in the circuit court clerk’s office at least 10 days before the actual filing date of the lien. The memorandum must name the development, describe the lot, name the person(s) constituting the owners of the lot, list the amount of unpaid assessments currently due or past due relative to such lot together with the date when each fell due, list the date of issuance of the memorandum, name the association with a name and address of the contact for the person to contact to arrange for payment or release of the lien, and state that the association is obtaining a lien in accordance with the provisions of the Virginia Property Owners’ Association act as set forth in Chapter 26 (section 55-508 et seq.) of Title 55.

The Act provides that a judgment or decree in this action must include, without limitation, reimbursement for costs and reasonable attorney’s fees for the prevailing party. Also, if the association prevails, it may also recover interest at the legal rate for the sums secured by the lien from the time each sum became due and payable. If the owner then satisfies the debt, the lien must be released, and failure to release the lien results in a penalty.

Once a lien has been perfected, the association must enforce the lien within 36 months from the time when the memorandum of lien was recorded. This time period cannot be extended.

Bankruptcy: ERISA Funds, the Bankruptcy Estate and Homestead Exemptions

In the case of Philips v. Bottoms Judge Payne of the United States District Court at Richmond, Virginia, upheld a Bankruptcy Court ruling that the Virginia homestead exemption, Virginia Code §34-34, was not preempted by ERISA, and that the bankruptcy trustee could claim a portion of an individual retirement account (IRA) not funded by the debtor’s funds from an ERISA-qualified plan.

In Phillips it was disputed that the IRA was not an ERISA-qualified plan. However, because the debtors used funds from an ERISA-qualified plan to create the IRA, the debtors contended that the exemption applicable to an ERISA-qualified plan exempted the IRA because it was created by funds having their origin in such a plan. The Bankruptcy Court held that the IRA was property of the bankrupt estate and that Virginia Code §34-34 was not preempted by ERISA. The Court further held that the debtor’s claimed exemption should be allowed in the amount of $21,532.

In the Bankruptcy Court the trustee sought to thwart the claim that the IRA funds were partially exempt by arguing that Virginia Code §34-34 was preempted by ERISA and therefore was not available to protect any part of the IRA from the claims of creditors. The Bankruptcy Court allowed $21,532 of the $48,858 in interest in the IRA because the parties had agreed that if an exemption was allowable at all, that was the correct amount.

The District Court, in its review, found that although the federal bankruptcy provisions permitted exemption of a payment under a pension to the extent reasonably necessary for the support of the debtor and any dependent, Virginia had enacted an alternative exemption provision, found in Virginia Code §34-34. The state provision, like the federal one it replaced, limited the exemption of retirement benefits. However, rather than limiting the exemption to the extent reasonably necessary for the support of the debtor and his dependents, the Virginia law provided instead that the exemption should not apply to the extent that the interest of the individual in the retirement plan would provides annual benefit in excess of $17,500. The District Court concluded that given the legislative intent underlying the Bankruptcy Code, it was logical to conclude that the limit on pension plan exemptions was Virginia’s attempt to set an exemption level appropriate for the Commonwealth, precisely as was envisioned by Congress when it revised the Bankruptcy Code.

The District Court affirmed the Bankruptcy Court’s decisions that the debtor’s interest in the IRA was part of the bankruptcy estate and that Virginia Code §34-34, even if theoretically preempted by §514(a) of ERISA, was saved from preemption by §514(d) of ERISA.

Collections: The IRS Can Be Helpful in Commercial Collections

Can you imagine using the IRS to help in collections? I can! I have an interesting technique that I have recommended for over twenty two years – I first ran an article on this in the May, 1992 (the 4th Edition) of Creditor’s News! Since recently others have also begun recommending this technique I thought that I would review it again.

After a sufficient amount of time has passed to consider a commercial credit account "uncollectible," the creditor should consider writing off the debt as a potentially tax-deductible bad debt. The creditor's loss may then become the debtor's gain and, as such, may be reported to the IRS on Form 1099 as income to that debtor.

Before actually writing off the debt, attempts should be made to contact the debtor and advise him of the intended action. If you do not have the debtor's social security number, try including a W-9 form with your letter. This could evoke some favorable response.

I have a form letter that I recently revised to accomplish all of this. The letter (written from the perspective of the creditor itself) advises the debtor that his account is seriously past due despite repeated attempts to make arrangements for payment. The debtor is further advised that unless the debt is paid in full within fifteen (15) days from the date of the letter, the creditor will, at its option, report the loss to the IRS on their form 1099c. This reporting will result in taxable income to the debtor (reference IRS Regulation S1.61-12). This reporting will result in an IRS audit risk to the debtor, as the IRS routinely runs computer matches of the 1099’s filed against tax returns actually filed to insure that all income is reported; there are severe penalties if not. The letter further states that the creditor is demanding the debtor’s tax identification information; the debtor is asked to do so within fifteen (15) days. The debtor must provide this information to the creditor under penalty of federal law. I recommend that you send with the letter a copy of the IRS form W-9 evidencing the unpaid debt, and advise the debtor that if you do not receive the W-9, the creditor will, at its option, file an IRS form 1099c incomplete. This will further increase the debtor’s chances of an audit.

Many debtors will wish to resolve the debt as a result of these actions. After all, who wants the IRS checking them out?

Special Edition: Meet the LAW Creditors' Rights Team

 

Meet the Team!

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Foreclosure: 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.

Real Estate: The Virginia Property Owners’ Association Act – General Provisions

In the last issue of Creditor News I began a review of the Virginia Property Owners’ Act. Under the Act, sellers are required to disclose in their sales contract that the property is located within a development subject to the Act. The Act also requires the seller to retrieve the Disclosure Packet in the Act and provide it to the purchaser. The Disclosure Packet includes the following information: association documents, the name of the association, state of incorporation, register agent’s name and address, any other entity/facility to which the owner may owe fees or charges, budget or summary, income/expenses statement or balance sheet for last fiscal year, statement of balance due of outstanding loans, nature/status of pending lawsuits, unpaid judgments (with material impact on association or members or relating to lot being purchased), insurance coverage provided for lot owners including fidelity bond maintained by association, and much more.

The purchaser may cancel the contract within three days if delivered by hand or email, or six days if sent by mail, after receiving the Disclosure Packet or being notified that it is “not available” (meaning: a current annual report has not been filed by the Association with either the SCC or the CICB; or the seller has requested in writing that the packet be provided and it is not received within 14 days; or the association has provided written notice that the Disclosure Packet is not available). Additionally, if the Disclosure Packet is not delivered or the association does not indicate that it is not available, the purchaser may cancel the sale any time prior to closing. If the purchaser received the Disclosure Packet, the owner also has the right to request an update. However, the rights to receive and cancel the contract are waived conclusively if not exercised before settlement.

Failure to provide a Disclosure Packet after a written request for it has been made results in a waiver of any claim to delinquent assessments or violations of association documents up to that point, and the association will be liable to the seller for actual damages sustained up to $1,000 if the association is managed by a CIC Manager or up to $500 if it is self-managed.

In the next two issues of Creditor News, I will discuss the provisions of the Virginia Property Owners’ Association Act that provide a memorandum of lien and foreclosure in the event of an owner’s default.  

Bankruptcy: The Automatic Stay

Federal Bankruptcy law provides for an automatic stay (injunction) to take effect immediately upon filing for bankruptcy. The stay prevents creditors from taking any further action against debtors without court approval. The stay can stop a foreclosure or vehicle auction, even if notice of the filing is given moments before the sale is to occur. The automatic stay, unless lifted by the Bankruptcy Judge, or in some cases the trustee, remains in effect until it is terminated at the time of discharge, at which time it is replaced by a permanent injunction.

 

Violation of the automatic stay is a serious offense. A willful violation can result in a finding of contempt of court. Sanctions for violating the stay can be awarded as well. These sanctions can include a fine and/or an assessment of attorney’s fees. A finding of contempt of court is also punishable by a jail sentence. Attorney consultation is always recommended when action against bankrupt debtors is contemplated.

 

The automatic stay may be lifted upon proper motion and argument by creditor's counsel. Reasons for making such a motion include, among others, lack of insurance on the property, or other similar reasons resulting in the creditor being unprotected while his rights are being determined.

Collections: Notice of Sale of Security Interest

The case of The State Bank of the Alleghenies v. Hundall, decided by the United States District Court at Roanoke, Virginia, serves as a good example of what happens where a creditor sells items pledged as security for a loan without making proper notice to all parties

In Hundall, the defendant guaranteed the bank's loan to his brother for a dry-cleaning business, but the defendant guarantor never received notice of how, when and by what manner of sale the bank intended to sell motor vehicles belonging to the brother's business. The evidence taken clearly proved that the bank failed to send notice of the sale of the motor vehicles, which had a fair wholesale value of approximately $8,500.00 in the aggregate. The District Court ruled that this violated the provisions of Virginia Code §8.9-504(3); however, the Code does not provide a remedy for the failure to comply with the statutory provisions for resale, and the appropriate remedy had not been ruled upon by the Virginia Supreme Court. The District Court, in its ruling, cited that courts which have addressed this appropriate remedy for failure to provide notice have adopted one (1) of the following three (3) rules:

1.        The debtor must prove that he has suffered an injury in order to obtain any recovery against the secured party;

2.        The secured party is absolutely barred from recovering a deficiency, even if the debtor suffered no injury; and

3.        A rebuttable presumption is that the collateral was worth the amount of the debt which requires the secured party to prove that the debtor suffered no injury.

Virginia Code §8.9-507(1) entitles the debtor, or any person entitled to notification, "to recover from the secured party any loss caused by the failure to comply with the provision of this part".

The Court elected the third of the three remedies listed above, and forced the creditor to prove the fair value of the collateral.

The lesson of Hundall: creditors should send notice to all parties to the transaction -- the principal debtors, guarantors and the owners of the collateral.

Foreclosure: Trustees in Foreclosure

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

Real Estate: The Virginia Property Owners’ Association Act – An Introduction

The Virginia Property Owners’ Association Act provides homeowner’s associations with additional protections when homeowners fail to pay their dues; it also defines responsibilities of the association. Accordingly, homeowner’s associations should be knowledgeable of the Act and its provisions. The Act applies to developments subject to a declaration recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act. In the next issue of Creditor News, I will briefly introduce this Act and some of the special duties it imposes on homeowner’s associations.  Subsequent issues will address memorandum of liens and foreclosures.

Bankruptcy: Award of Attorneys Fees Against Creditors

A debtor sought to recover attorney's fees from a creditor who unsuccessfully challenged the debtor's dischargeability. The creditor had alleged that the items listed on the debtor's statement of financial affairs were materially false, but was unable to convince the Bankruptcy Court. The Bankruptcy Court, however, denied the debtor's request for attorney's fees because there was not evidence that the creditor pursued the complaint frivolously or without substantial justification. The case was In Re: Louise Reynolds Freeman, decided by Judge Tice for the United States Bankruptcy Court, Eastern District of Virginia, at Alexandria.

The United States Bankruptcy Court for the Eastern District of Virginia also held that debtor's counsel are not entitled to recover attorney's fees from a creditor where the creditor loses a suit objecting to debtor's discharge unless it is proven that the suit was filed vexatiously, wantonly, in bad faith, or for oppressive reasons in the case of In Re Gecowetts. In Gecowetts the debtor's estranged wife filed an action objecting to the debtor's dischargeability of a debt. After a full trial on this issue, the Court allowed the debtor a discharge of all debts. Relying on the "American Rule," the Court found that although the creditor was unsuccessful in the dischargeability proceeding, the action was not filed vexatiously, wantonly, in bad faith, or for oppressive reasons. Therefore, no fees were awarded.

Collections: Collection Accounts - What We Can Do For You

We can assist you by handling all seriously delinquent accounts from start to finish - no other collection alternative that you have can do this.

I also want to thank all of you who are clients. You helped make this year our most successful ever. I look forward to an ever better 2024.

For those of you who are not yet clients, please know that I am always ready and willing to meet with you. At Lafayette, Ayers & Whitlock, PLC, we have a diverse general practice of law. We focus on Creditor’s Rights. We are unique amongst Creditor’s Rights law firms as we represent you in all areas: collections, bankruptcy, foreclosure and real estate.

In collection matters, we can assist you by handling all seriously delinquent accounts from start to finish - no other collection alternative that you have can do this.

If you hire an additional staff employee, you are paying salary and benefits for collections. This amount is non-recoverable from your debtors, even though they caused the expenditure. Further, since the employee is not an attorney, they cannot try contested cases, or file Motions for Judgment in Circuit Court, or conduct debtor's interrogatories (without interrogatories many collection cases will sit inactive).

If you employ a collection agency, you may incur a flat fee cost for accounts. This cost is not recoverable under Virginia law, despite the fact that your loan documents say that the debtor will pay all costs of collection. In addition to these nonrecoverable costs, you will also have percentage costs that you cannot recover. A collection agency is frequently your worst option because they can do less for you than you can do for yourself. In reviewing the Collection Alternatives Comparison Charts, you will see that if a debtor does not respond to the collection agency's letters, the agency is sunk. The agency cannot file any court papers on your behalf, and they cannot perform any judgment executions. In the end, all a collection agency does is provide a threatening third party voice.

If you choose Lafayette, Ayers & Whitlock, PLC, we can handle your accounts from beginning to end. We can accept all cases on a one-third contingency fee of all amounts collected. We will assess the court-allowed fee the moment the account is turned over for collection, and this amount is recoverable from the debtor. We have trained and experienced support staff and an aggressive approach to collections. In reviewing the Course of Action Chart (below) you will see that we will aggressively pursue your recovery. Virginia District Court judgments are good for ten years, twenty in the Circuit Court. If the judgment is docketed (we docket all judgments unless the value is very small or you instruct otherwise), the lien is enforceable for twenty years. We provide detailed monthly accounting. At the beginning of each month you will receive a report outlining significant matters, a computer generated financial accounting, by debtor, dollar for dollar. You will also receive a case status report detailing current status and action.

In bankruptcy matters, we can assist you by handling all of your needs. We can review bankruptcy schedules, review and object to chapter 13 plans, file proofs of claim, attend hearings and more.

In foreclosure matters, we can assist you by handling all of your foreclosure cases from demand to final accounting in all counties and cities across the Commonwealth.

In real estate matters, we can assist you by preparing loan documents for first, second, equity line and refinances, as well as conducting closings, recordings and coordinating title examination and title insurance.

Please call me at 545-6251 for a free consultation.