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.

Bankruptcy: Dischargeability of Debts - Reliance on Financial Statement

     In the case of Paterno Imports Ltd. v. McBee, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, sitting in Richmond, held that a plaintiff/creditor, a wine import company who had obtained a judgment against the debtor and his business, failed to prove that it required or relied on the alleged material misrepresentations in a financial statement provided to the debtor company. Accordingly, the judgment the import company ultimately obtained against the debtor and his business was not exempt from discharge. 

     The Court ruled that the case hinged upon the events surrounding a meeting between the debtor, the debtor's counsel, the plaintiff and the bank official. Each party presented evidence in diametric opposition to the other party's claims. The oral testimony presented by the parties at trial was, in its most important aspect, conflicting and irreconcilable. 

     The Court pointed out that in a dischargeability case, the burden of proof is on the plaintiff. The Court found that the plaintiff failed in its burden. Despite the fact that the plaintiff's counsel prepared extensive documentation which the debtor was required to sign both personally and for his company, the debtor's guaranty did not mention a financial statement, and no other writing presented at trial suggested that the guaranty was conditioned upon the plaintiff's approval or acceptance of the debtor's financial statement. 

     In summary, the Court found that the plaintiff failed to establish (1) that the plaintiff and the debtor entered into an agreement under which the plaintiff would forbear from pursuing further collection efforts against the debtor's business and give it time to resolve its financial difficulties, in exchange for the debtor's personal guaranty of the company's debt to the plaintiff; (2) that any transaction between the plaintiff and the debtor was conditioned upon the plaintiff's acceptance or approval of the debtor's personal financial statement; or (3) that at the meeting of the parties the debtor produced a personal financial statement or that there was any discussion of such a statement. The Court stated that these findings required the Court to conclude that the plaintiff did not rely upon the debtor's personal financial statement or any other statement. Therefore, the debt was discharged.

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. 

Collections: Equal Opportunity Credit Act - Continued

       In a previous blog we began a review of The Equal Opportunity Credit Act.

     There are also many potential defenses that have been raised by lenders; listed below are those which have been cited most frequently.
     1. Voluntary signatures are okay. Although a spouse cannot be required to co-sign a note, voluntary signatures are okay. Thus, the lender can win if it can show that the spouse's signature was voluntary.
     2. One spouse was not enough. A lender can argue that the applicant's spouse did not satisfy it's credit criteria all alone, and the other spouse's assets figured into his loan decision, which is why the other spouse's signature was required.
     3. Both spouses are principals. If both spouses are principals in a business, the lender can argue that it required both of their signatures because of their business relationship rather than their marital status.
     4. Pre-1986 guarantors. ECOA regulations were expanded to include guarantors as of October 1, 1986. Courts have been split as to whether they apply to guarantors if a bank violated the Act before that date but renewed the note after it.
     5. Good Faith. A lender is not liable if it acted in good faith compliance with the Federal Reserve Board's "official staff interpretation" of the ECOA, which can be found at 12 C.F.R. §202.
     The City of Richmond Circuit Court denied an ECOA defense pled by a wife who had signed a broad release when the loan was refinanced. The case was Richmond Lotco L.P. v. Perrowville Dev. Corp.
     In Perrowville the lender obtained a guaranty and general release of claims from four directors of a real estate development company and their wives. The release was included in the modification of an existing loan that the lender had purchased from the Resolution Trust Corp. after the original lender, a bank, went into receivership. The release stated that the borrowers and guarantors would release the note holders "from any and all claims, losses, liabilities, causes of action of any king whatsoever, if any, whether existing or contingent, known or unknown, matured or unmatured, that the borrowers or guarantors may now have or have had in whatever capacity against the noteholder...".
     When the successor lender brought a collection suit under the modification, the wives claimed that they were not involved in the business and that their guaranties had been required solely as a result of their marital status, in violation of the ECOA. The wives argued that the ECOA gave them both a defense to the collection action and a counterclaim against the lender. The lender argued that the release was part of the consideration that the lender received for continuing to finance the development project under the modification. The Court ruled in favor of the lender, stating that the modification agreement did not constitute a violation of the ECOA and that therefore the wives could not pursue either a defense or a counterclaim.
     The litigation that has arisen gives good cause to review lending policies for ECOA compliance. Please call me at 545-6250 if you have any questions. Eddie.

Collections: Liability for Charges above the Credit Limit

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

     I will review this situation with four varying fact patterns in two separate issues.
     Fact Pattern One: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". During the next several years the credit limit was increased to $6,000. Normally no notification is sent of the increase, but in this case a letter was sent to the customer notifying the customer of the credit limit increase. Customer makes charges up to $6,000, but fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. Customer’s attorney does not have a copy of the letter increasing the credit limit, but produces the original letter opening the account with a $4,000 credit limit. Customer’s attorney argues that the retailer was the one who set the credit limit at $4,000, and by not exercising due diligence of his business, allowed the credit limit to be exceeded. Customer’s attorney argues that his client's liability should not exceed $4,000, while the retailer argues that the liability should be $6,000. In what amount should the retailer be able to judgment against the customer?
     In an actual case in Seattle, Washington, the trial judge was ready to grant the request for a reduction in liability to $4,000. However, since the retailer had his customer's file folder with him and found the letter increasing the credit limit to $6,000, the judge granted the retailer judgment in the amount of $6,000.
     Fact Pattern Two: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer is allowed to makes charges over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?
     In Ingram Micro Inc. v. ABC Management Technology Solutions, LLC, the United States District Court for the Eastern District of Virginia held that a creditor was entitled to recover payment of an unpaid debt because the debt was within the scope of the continuing guaranty agreement. The agreement clearly included a guaranty of all debts. Further, the court reiterated a contractual principal that when an agreement is complete, clear, and unambiguous on its face, it must be enforced according to the plain meaning of its terms and the intent of the contracting parties.
     In this fact pattern, the original agreement stated that the applicant agrees “to pay any and all sums that may become payable under this account”. This agreement was intended to cover credit up to $4,000. However, the agreement is also likely to cover any and all other debts over the original credit limit if it can be shown that the intent of the contracting parties as expressed through the contractual language was to include any debts incurred after the credit application was accepted.
     A future blog will address the next two fact patterns.

Collection: 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.