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).