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.

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: 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.

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 Eddie at 545-6251. 

Real Estate: The Virginia Property Owners' Association Act - General Provisions

     In a prior blog, 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 future blogs, 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. 

Collections: Note Guarantee Upheld

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

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

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

Bankruptcy: Collateral Estoppel - Default Judgment in State Court

     Two cases illustrate how courts will handle default judgments being argued as collateral estoppel in bankruptcy court. 

     The United States District Court at Norfolk, Virginia, in the case of L&R Assoc. v. Curtis, reviewed the question as to whether a creditor's default judgment in state court collaterally estopped a debtor from relitigating in Bankruptcy Court whether his debt was nondischargeable because of the debtor's alleged fraud. 

     In Curtis the Bankruptcy Court found that the creditor advanced funds to the debtor for the purchase of automobiles at auction. The debtor was to be compensated in the form of half of the profits from the subsequent sale of the automobiles. The creditor apparently charged in state court that the debtor had fraudulently converted some of the purchase money to his own personal use. 

     The Bankruptcy Court found in Curtis that the issue of fraud, as alleged by the creditor, was not the subject of actual litigation in the state court action which resulted in the entry of the default judgment. The Bankruptcy Court held that because it had no evidence before it that the state court had decided this issue of fraud with "particular care", the doctrine of collateral estoppel did not apply to the judgment. Subsequently, the Bankruptcy Court dismissed the complaint upon a full trial on the merits. The United States District Court, upon appeal, agreed with the result of the Bankruptcy Court's decision, but stated that the emphasis for reaching the decision should have been on whether the state court had actually litigated the issue of fraud. The District Court recognized that counsel for the creditor represented to the Bankruptcy Court that it had presented witnesses and evidence before the state court. The judgment order indicated that the plaintiff/creditor and witnesses for the plaintiff appeared before the state trial court. Yet the creditor presented no other information to the Bankruptcy Court to indicate that the issue actually had been litigated and was necessary to the decision. 

     The Bankruptcy Court gave the creditor in Curtis more than one opportunity at the hearing on its motion for summary judgment and at trial to present evidence concerning prior litigation. The creditor presented no transcript of the proceeding before the state court or anything else to suggest that the state court entered more than a standard default judgment. 

     The District Court agreed with the Bankruptcy Court in Curtis that more had to be submitted than the state court default judgment by testimony at trial to establish that the issue was actually litigated and that the determination of the issue was necessary to the judgment of the state court. The District Court found that the Bankruptcy Court determined "with particular care" that the state court's default judgment should not collaterally estop debtor from relitigating the issue of fraud as it relates to the dischargeability of this debt.

     In Neese the creditor, a video store, had obtained a default judgment in state court against a husband and wife, who had contracted to use store material and services in a nightclub. The wife filed a bankruptcy petition. The Creditor filed a proof of claim in order to collect from the debtor's bankruptcy estate.

     The District Court in Neese found that the Bankruptcy Court evaluated the validity of the State Court judgment for reasons other than fraud. Accordingly, the District Court found that this was an error. The District Court ruled that under Bankruptcy Code §502, a creditor's proof of claim is deemed allowed unless a party in interest objects to that claim. The validity of a creditor's claim that is based on a State Court judgment may be attacked in Bankruptcy Court by an objection to a proof of claim only upon the grounds that there was a lack of jurisdiction over the parties or subject matter of the suit (which was not alleged in this case) or that the judgment was the product of fraud (which was initially raised but not pursued). The trial conducted in the Bankruptcy Court, however, focused upon whether judgment was proper against the debtor individually.

     In regard to the facts in Neese, the District Court found that the debtor had properly been served with the State Court suit, that she failed to respond to that claim, and that she failed to contest the claim on appeal even after judgment was entered. Nothing in the record indicated that the judgment was obtained fraudulently, and it was clear that the default judgment was fully enforceable in State Court.

     Accordingly, the District Court ruled that the Bankruptcy Court did not have the authority to look beyond the validity of the State Court judgment. The doctrine of res judicata applied. The creditor's claim should have been allowed.

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: 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.

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 Eddie at 545-6251.

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 by first deeds of trust, second or subsequent deeds of trust, refinances or credit lines, a certain amount of default is to be expected. Being prepared to react to default is imperative. 

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

Bankruptcy: Repossessed Collateral - Notice of Private Sale

     The case of In Re Phelps, decided by the United States Bankruptcy Court, serves as a good example of what creditors should do when conducting a private sale of repossessed collateral. 

     The Court examined Virginia Code §8.9-504 to determine if the creditor gave the debtors "reasonable notification" of the private sale of the collateral because the debtors objected to the creditor's claim for the deficiency amount following the sale.

     The Court found that in selling the collateral, Virginia Code §8.9-504(3) requires 1) that the sale must be conducted in a commercially reasonable manner and 2) that the debtor receive reasonable notice of the sale unless the debtor signed a waiver after default. The purpose of the notice provision is to give the debtor and any other interested parties sufficient time to take appropriate steps to protect their interests by taking part in the sale if they so desired. Failure to provide any notice of sale makes it commercially unreasonable. The reasonable notice required by Virginia Code §8.9-504(3) is not defined in the statute.

     The debtors asserted that 1) they did not receive actual notice of the sale, and 2) even if they had received the creditor's letter, it failed to reasonably notify them of the private sale because it did not list the time, place or terms of the sale.

     The Court found that the notice was properly sent because it was sent to the address provided by the debtors, and, because the certified mail receipt was signed.

     The Court found that Virginia Code §8.9-504(3) only requires that the creditor reasonably notify the debtors of the time after which the sale is to be made. In this case, the creditor's letter advised the debtors of the sale and that they had ten days to cure their default or they would be liable for any deficiency after the sale. Judge Tice further found that although the method, time, place and terms of the sale must be commercially reasonable, the creditor was not required to give the debtors specific notice of the method, manner, time, place or terms of the private sale.

     Although this case supports creditors' rights, and the need for only minimum compliance with the statutory requirements, I always recommend that notification be as thorough as possible to avoid later costly challenges in court.

Bankruptcy: Debtors Retaining Collateral

     The Fourth Circuit Court of Appeals case of Home Owners Funding v. Belanger stands for the proposition that Chapter 7 bankruptcy debtors may retain their collateral after discharge if they are current in their consumer loan installment payments.

     In Belanger the debtors, who had remained current on their payments, filed for Chapter 7 relief and filed a statement of intent under Bankruptcy Code §521 (2) (a) indicating that they wanted to retain possession of their mobile home. The creditor moved the Bankruptcy Court to compel the debtors to reaffirm the debt, redeem the collateral, or surrender it. The creditor, relying on Bankruptcy Code §522 (2) (a), was obviously concerned that the collateral would depreciate to a value less than the balance due, and would be barred from recovering the deficiency. The Court noted that the creditor is presumed to have structured the risk of depreciation into its loan.
     The Court noted that it has held (in the case of Riggs National Bank v. Perry) that a "default-on-filing clause" in an installment loan contract was unenforceable as a matter of law. Therefore, the creditor could not ask for the collateral merely based on the filing. Note, however, that not all courts take this position; see Dominion Bank v. Koons.
     The Court in Belanger denied the creditor's motion and discharged the debtors, holding that the debtor's had complied with Bankruptcy Code §521 (2) (a) by giving notice of their intent to retain the property while continuing to make payments in accordance with their contract with the creditor.
     Attorneys representing debtors can use this opinion against creditors by urging them to remain current with their loans, but not to sign reaffirmation agreements. Many of you have already run into this problem with debtor's counsel.

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.

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 Eddie at 545-6251.

Collections: Acceleration of Demand Notes

     The Twentieth Judicial Circuit examined a debtor's assertion that the note's "detailed enumeration of events consisting default was inconsistent with a demand note", and that since the note was not a demand note, the creditor must demonstrate "good faith" in accelerating repayment of the note. The case was NationsBank of Virginia, N.A. v Barnes. The Court examined Virginia Code §8.3A - 108(a), which states that a note is payable "on demand" if it says it is payable on demand or states no time for payment. The Court found that the note in this case was a form with a box "on demand" checked, with no time set for repayment, only a provision requiring monthly payments of interest. The Court ruled that the note was unambiguous and clearly a demand note, and that no showing of "good faith" was required before requesting payment on the note.

     Despite the favorable result for the creditor, great care should always be taken to clearly identify payment demand terms.

Collection: 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: 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.

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 me.

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).