Collections: Pre Default Waiver of Notice of Sale is Void

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

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

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

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

Foreclosure: Deeds of Trust

It all starts with the deed of trust. The deed of trust is the primary method of acquiring a lien against real estate in Virginia. With a deed of trust, the owner of the real estate conveys legal title to a trustee, in trust, to secure the noteholder’s indebtedness. A deed of trust establishes a lien on the subject real estate upon execution by the grantor and recordation in the land records of the Circuit Court for the jurisdiction (County or City) in which the property is located. While recording the deed of trust is not essential to the validity of the deed of trust between the parties, an unrecorded deed of trust does not establish a lien on the subject real estate as to other creditors and purchasers of the grantor. An unrecorded deed of trust will not provide the beneficiary of the deed of trust with a priority position against other creditors with recorded liens, even if they are subsequent in time.

Real Estate: 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: Dischargeability - False Oath

In the case of Federal Deposit Insurance Corp. v. McFarland, the United States Bankruptcy Court, sitting in Arlington, Virginia, Judge Tice, denied the debtor, a real estate developer, a discharge in bankruptcy because of false testimony.

The creditor had brought a complaint objecting to dischargeability because of allegedly false testimony given by the debtor in examinations under oath after the filing of the debtor's bankruptcy petition.

The Court found as fact that the debtor gave false testimony under oath 1) that he did not receive from a closely held corporation any proceeds of a $440.00 certificate of deposit, when in fact he and his co-shareholder each received $220,000 and 2) that he had no bank accounts in nor made any deposits to offshore banks, when in fact he drew checks in amounts in excess of $300,000 payable to a Cayman Island bank. 

Although the debtor denied that he had any fraudulent intent when he testified, the Court found it "highly implausible" that the debtor forgot about the withdrawal of the $220,000. The debtor also failed to produce any credible evidence refuting the natural presumption that some $300,000 worth of checks admittedly drawn by debtor payable to an offshore bank were transfers of funds to the bank or to an account in the bank.

Accordingly, Judge Tice found the evidence sufficient to warrant denial of the debtor's discharge.

Collections: Construction Case Garnishments

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

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

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

Foreclosure: Be Prepared to Conduct Foreclosures

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

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

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

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: Chapter 13 Plan Confirmation - Valuation of a Car

Two bankruptcy cases help clarify the value that Bankruptcy Courts should place upon a vehicle when considering a Chapter 13 plan confirmation.

In the case of In Re Mays, the United States Bankruptcy Court, Western District of Virginia, refused to confirm a plan which did not value a Ford pickup, which the debtors proposed to keep, at the truck's retail value as reflected in the NADA Used Car Guide. The Court found that Bankruptcy Code §325(a)(5) provides that if a debtor in Chapter 13 intends to retain property subject to a lien, then the secured creditor must receive the present value of its allowed secured claim. The Court further found that the retail price, as opposed to the acceptable wholesale price, was the most commercially reasonable price.

In the case of In Re Dews, the United States Bankruptcy Court, Eastern District of Virginia, reached a similar conclusion that retail value is the appropriate value. In doing so, the Court recognized that this valuation was a change to the standard set forth in the case of In Re Jones, which held that the open market between private parties was the appropriate reference point to establish value. The standard was worked out in practice to generally mean somewhere around the average of the wholesale and retail values.

The lesson of these two cases is that Chapter 13 plans should be reviewed to ensure that value is properly assessed. The end result will be, of course, a higher return on creditor claims.

Collections: Garnishing Joint Accounts

Can a creditor with a judgment against one party to a joint bank account garnish the account? Yes, but the judgment creditor is entitled only to that portion of the account which is attributable to the deposits of the judgment debtor. Virginia Code §6.1-125.3 holds that if the joint account holders are married, then the judgment creditor is entitled to half of the funds in the account, unless one of the married parties proves a different intent by clear and convincing evidence. Upon learning that the bank account is jointly held, the creditor must serve notice to the non-judgment account holder, as well as to the judgment debtor. Courts have ruled, however, that married account holders could attempt to protect bank accounts by asserting that the accounts were exempt from execution if they were held as tenants by the entireties.

Foreclosure: Foreclosure Basics

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

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

Real Estate: 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: Chapter 13 Plan Confirmation - Good Faith

Two cases decided by Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, demonstrate a lack of good faith in the debtors' proposed Chapter 13 bankruptcy plans.

In the case of In Re Oliver, Judge Tice denied plan confirmation for several reasons: the low percentage of the repayment of debt (about ten percent to unsecureds), the length of the plan (only three years), the "peculiar nature" of the unsecured claims, and the fact that the petition was filed after another court concluded that a major debt listed in this plan was nondischargeable under the debtors' prior Chapter 7 petition. Each of these reasons went against a finding that the plan was "proposed in good faith" under Bankruptcy Code §1325(a)(3). The matter was brought before Judge Tice upon an objection by a bank, whose claim comprised 80% of the total unsecured debt.

In the case of In Re Kasun, Judge Tice denied plan confirmation for two reasons: a lack of good faith (since the plan discriminated against the debtors' unsecured creditors) and the payment of a nonessential luxury item. The debtors, proceeding in bankruptcy without an attorney, purposed that they retain a sailboat, on which a secured creditor had a $32,000.00 lien, with a $600.00 per month payment, and for which the debtors paid a boat-slip charge of $172.00 per month, while the plan proposed paying unsecured creditors only 34.9% of their claims. The Bankruptcy Trustee filed the objection.

The lesson of Oliver and Kasun - read Chapter 13 plans carefully, do not take proposals for granted, and seek competent legal advice when necessary.

Collections: The Virginia Medical Debt Protection Act

The Virginia Medical Debt Protection Act is a new law effective July 1, 2026 that will likely affect medical practices of all sizes in Virginia. While there was considerable push back from lobbyists and attorneys, many large medical providers agreed with the Act, and it passed in 2025. 

The Act has not gone into effect yet, but medical offices need to start planning now when extending credit to patients. A 120-day notice will be required before we are able open accounts and start collection measures. However, the biggest unknown in this statute is whether there is a prohibition on further collection actions (docketing judgments and garnishments). The language is conflicting in the Act, which will lead to uncertainty as providers pursue unpaid medical debt. 

Dan (current President of the Virginia Creditors' Bar Association) and I (immediate past President of the Virginia Creditors' Bar Association) are keeping an eye on how this Act impacts our clients and our colleagues.

Foreclosure: Obtaining Possession after Foreclosure

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

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

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

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

Real Estate: 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: Discharged Debt Collection - Violation of Bankruptcy Injunction

The United States Bankruptcy Court at Alexandria, in the case of In Re Billy Ray Evans, ruled that a bank and its attorney violated 11 U.S.C. §524 by attempting to collect a discharged debt. As a result of this the Court ordered both the bank and the attorney to pay to the debtor damages in the amount of $1,000.00, as well as attorney’s fees in the amount of $24,954.00, costs in the amount of $1,159.00 and punitive damages in the amount of $2,500.00.

In Evans the Court found that the bank had filed a lawsuit in state court seeking to recover possession of the vehicle leased to debtor, or, in the alternative, to recover the value of the vehicle. The Court, however, found that the lawsuit was a mere subterfuge for the bank’s actual intention to enforce a pre-petition debt in violation of the bankruptcy discharge injunction. Cited by the Court in making this finding was the Court’s feeling that the bank made only minimal effort to determine whether the debtor actually had possession of the vehicle prior to filing its lawsuit. It twice referred the matter to repossession services after the bankruptcy case was closed, but the vehicle could not be located. The Court stated that the referrals, rather than confirming that the debtor had possession of the vehicle, raised questions about the bank’s motives. The Court found that the bank used minimal effort, simply to give the appearance that it was interested in recovering the vehicle. The Court stated that if the bank was truly interested in recovering the vehicle (rather than the debt) that there were many things that it could have done that it did not do. The bank made no effort to confirm that it had an immediate right of possession to the vehicle and that it was a proper party to bring the lawsuit.

Without all of the facts of a particular case I am always reluctant to criticize a court’s decision. However, this decision seems very harsh to me. The lesson for Evans, though, is that creditors must be more aggressive while the debtor is still in bankruptcy court. Creditors must seek non dischargeability motions based upon conversion of property, damage of property, and the like. Also, if post bankruptcy lawsuits for recovery of property become necessary, and, undoubtedly they will, creditors must be certain to use best efforts to reclaim the property, but if unsuccessful in doing so, then to accurately value the property - not simply value the property at the balance due on the debt. 

Collections: Garnishments Out-of-State

While we have had good results in issuing garnishments out of state, especially when the garnishee is a bank that operates nationwide, success is not always guaranteed. Diversity in jurisdiction does create some issues. A good example of this arose in a case in the United States District Court where the Court granted a debtor’s motion to quash a garnishment summons after finding that the debtor’s wages were not located in Virginia. The garnishment summons had been issued by a Virginia creditor that was a Virginia hospital. The debtor was a Pennsylvania resident doctor. The garnishee was an Ohio company. The court ruled that the garnishment summons issued by the court was ineffective to garnish the wages not located in Virginia.

Foreclosure: Lost Notes

Virginia Code §55.1-321 addresses the situation where the noteholder has lost the original note. With the frequency of sales of notes on the secondary market, the loss of the original note documents occurs more often than might be expected. The Code provides that if the note or other evidence of indebtedness secured by a deed of trust cannot be produced, and, the beneficiary submits to the trustee an affidavit to that effect, the trustee may proceed to foreclosure. However, the beneficiary must send written notice to the person required to pay the instrument stating that the instrument is unavailable and that a request for sale will be made of the trustee upon the expiration of fourteen days from the date of the mailing of the notice. The notice must be sent by certified mail, return receipt requested, to the last known address of the person required to pay the instrument, as reflected in the records of the beneficiary, and shall include the same and the mailing address of the trustee. The notice must also advise the borrower if the borrower believes that he may be subject to claim by a person other than the beneficiary to enforce the instrument, the debtor may petition the circuit court of the county or city whether the property lies for an order requiring the beneficiary to provide adequate protection against any such claim. Failure to give the notice does not affect the validity of the sale.

Real Estate: Using 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: Recorded Judgment Honored

The Virginia Supreme Court held in Leasing Service Corp. v. Justice that a judgment creditor, who recorded its judgment prior to the debtor filing its bankruptcy petition, would not be prevented from a post-discharge enforcement of its lien upon the debtor's real property interests in jurisdictions that were acquired before the commencement of the bankruptcy proceedings. Specifically, the Court ruled that the lien was not paid off or discharged in the bankruptcy proceedings, and could not be ordered released pursuant to Virginia Code §8.01-455. Therefore, the judgment continued to be a lien on any interest that debtor may have had in land located within that county, despite his bankruptcy discharge from personal liability in the payment of the judgment.

The lesson of Justice is that you should always promptly docket your judgments where you believe that the debtor owns or may own property.