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

     In prior blogs 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 blog, 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. 

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

     In prior blogs 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 blog, 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.

Collections: Interest on Accounts

      It seems to happen more and more often. You are able to obtain your judgment against your debtor, but when you go to collect, he has recently transferred his assets. Can you pursue the assets to the transferee? Under the right circumstances, yes. 

     The case of Price v. Hawkins, from the Newport News Circuit Court, appealed to the Virginia Supreme Court, stands for the position that a court may enter personal judgments against a transferee to provide a creditor with a remedy when, due to fraud, there is no other remedy.

     In Price the Court found that the debtor, a father, enlisted the help of his son and his son's girlfriend in the debtor's scheme to defraud his creditors. Specifically, the son and his girlfriend, who were not legitimate creditors of the debtor, assisted the debtor in hiding assets ($14,058.77) that the creditor would have otherwise reached in his judgment collection efforts. The transfers occurred after the judgment order was entered, and $10,000.00 was transferred to the son and the girlfriend three months later while the creditor was attempting to collect on the judgment.

     The Court found that simply declaring the fraudulent transfer "void" pursuant to Virginia Code §55-80 would be meaningless, as the conveyance was of money. In cases involving the fraudulent conveyance of real estate, title to the real estate is restored by a declaration, thus, subjecting the property to a creditor's bill. The Court ruled in Price that unless the money was delivered to the Court for the creditor to attach, then personal judgments were the only remedy.

     Perhaps the lesson of Price is: Ask questions! When your debtor is under oath for interrogatories, ask what assets have been conveyed to whom, when, and for what consideration.

Collections: Arbitration - A Collection Alternative

     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.

Real Estate: Foreclosing on Homeowner Association Liens to Secure an Interest in Real Estate

     In recent blogs 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. In a previous blog 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.

Real Estate: Using Homeowner Association Liens to Secure an Interest in Real Estate

     In previous blogs, 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. 

   Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in the next issue. 

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

Bankruptcy: Bank's Security Interest - Stocks pledged as Security

     In the case of Winters v. George Mason Bank the United States District Court, reviewing a case from the United States Bankruptcy Court at Alexandria, Virginia, affirmed a ruling for the creditor bank which enforced the bank's security interest against stocks held jointly by a mother and daughter and pledged as collateral for the bank's loan (actually a series of loans) to the daughter and her husband (which were in default), even though the daughter and her husband had declared bankruptcy. 

     The District Court found that from over the course of three years the plaintiff signed a total of three commercial pledge agreements pledging as collateral her interest in the stocks. In the second of three years the daughter and her husband filed a bankruptcy petition. The plaintiff argued that because she and her daughter jointly owned the stocks, those stocks were part of the bankruptcy estate. The plaintiff also argued that the second pledge agreement was an act to create or perfect a lien against that property, and thus violated the automatic stay provision of the Bankruptcy Code. The District Court ruled, however, that the automatic stay did not apply to non-bankrupt codebtors, nor did the automatic stay prevent actions against guarantors of loans. The District Court further stated that even if the agreement violated the stay as to the debtors, the agreement did not violate the stay as to the plaintiff. The District Court found that the plaintiff's attempt to use the automatic stay to her own benefit contradicted the purpose behind the stay provision. The plaintiff sought to use the automatic stay to avoid an agreement that was beneficial to the bankruptcy estate, and an agreement that she and the debtors had voluntarily entered into. Accordingly, the District Court upheld the bank's lien.

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

    In recent blogs 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 blog, 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 a future blog.

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

Collections: Bank Loses Without Aggressive Action

     The need for aggressive action was again proven when a bank lost a priority in assets due to the bank's non-action. 

     In the case of First Union National Bank of Virginia v Craun, a federal court found that the bank obtained a consent judgment from the debtor (a limited partner in a Virginia limited partnership), but took no further action. A year later the limited partnership perfected a security interest in the debtor's partnership interest by filing a financing statement with the state corporation commission. The partnership's security interest was to perfect a loan by the debtor from the partnership. 

     Eventually a dispute arose on the priority of liens on the proceeds between the bank, based on its judgment, the partnership, and on its perfected assignment. 

     The partnership had priority, the court ruled, because the bank had not sought to enforce the judgment or levy on the limited partner before the assignment was perfected. The Court stated: 

     "… had a writ of execution issued, and had such a writ been delivered into the hands of the marshal, defendant's inchoate intangible rights in distributions from the limited partnerships could have subjected to the lien of the writ....Plaintiff could then argue the writ of execution would have taken priority over a security interest perfected after the writ was issued and placed in the hands of the serving official, assuming the secured lienor was provided notice of the issuance of execution...But, that is not the case here.  Plaintiff did not cause a writ of execution to issue. Instead, it merely sought the entry of a charging order armed only with what may be best described as a "naked" final judgment...Therefore, until a charging order entered, the judgment debtor...virtually was free, as against the instant plaintiff, to encumber intangible property, including here interests to discretionary distributions of a limited partnership."

     The lesson of Craun is simple - take aggressive action and consult with counsel early in the process.

Real Estate: Foreclosing on Homeowner Association Liens to Secure an Interest in Real Estate

     In prior blogs 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 blog, we will review the benefits of using homeowner association liens to aid in the collection of your debt. In a prior blog 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: Liquidating Secured Property

     The order discharging a bankruptcy debtor will allow a creditor holding a pre-petition claim secured by a security interest in property belonging to the debtor to pursue his or her interest in the collateral without the need to file pleadings or to further consult the Bankruptcy Court, as long as the property is not property of the estate. More secured creditors are simply waiting until the bankruptcy case is closed before acting to liquidate property because motions for relief from the stay are expensive. In a no asset consumer case, the wait involved is usually not exceptionally long.

Bankruptcy: Exemption - Ownership of Realty by Tenants by the Entirety

     In In Re Scialdore, the United States Bankruptcy Court, Eastern District of Virginia, Judge Tice sustained a creditor's objection to a debtor's claimed exemption of real estate as "tenants by the entirety" under Bankruptcy Code §522 (b)(2)(B). The creditors objected on the ground that the debtor and his wife did not own the property as tenants by the entirety. 

     Under Virginia law, creditors of one spouse may not attach property held by the entirety; only joint creditors of both spouses may reach entireties property. If property owned by an individual debtor and nondebtor spouse is not held by the entirety then the debtor's interest is an asset of the bankruptcy estate. 

     In Virginia, estates by the entirety are abolished except where the deed or will manifests an intent of survivorship. When real property is conveyed to a husband and wife, the deed must specify that a tenancy by the entirety is intended, or this intent must otherwise appear in the deed. 

     In Scialdore, the objecting creditor claimed that the deed did not create a tenancy by the entirety because the grantors did not acknowledge the tenancy by the entirety language inserted by the debtor, nor was the deed re-executed by the grantors after the insertion. Consequently, the debtor's interest was not exempt under Virginia law and not entitled to exemption under Bankruptcy Code §522(b)(2)(B). The debtor argued that the deed, although altered, specifically conveyed a tenancy by the entirety and is thus exempt under Virginia Law. 

     In Allen v. Parkey, the Virginia Supreme Court held that an unsigned memorandum, attached to a deed that was complete and duly signed, had no effect. The facts in Parkey are substantially similar to Scialdore. 

     In Scialdore, the debtor altered the delivered deed, seeking to establish a tenancy by the entirety which was not specified originally. Accordingly, the language added by the debtor, "as tenants by the entirety with right of survivorship as at common law," had no effect on the type of estate conveyed to the grantees. The Court ruled, "Once the tenancy by the entirety language is removed, the deed does not manifest intent to create a survivorship estate. To the contrary, the deed unequivocally states that the conveyance was made to the debtor as his sole and separate estate free of any interest of his wife." 

     The creditor's objection to the exemption was therefore sustained.

Bankruptcy: IRA Accounts and Exemptions

     The United States Bankruptcy Court, in Smith v. Bryant, ruled that the debtor’s IRA funds were not excluded from the bankruptcy estate. In doing so, the Court examined and explained that there are significant differences between IRA's and ERISA-qualified retirement plans, the provision in Bankruptcy Code §541(c)(2) exempting qualified funds from the bankruptcy estate does not apply to the IRA funds in this case.

     In Smith the debtor, after her termination of employment from a bank, rolled over her interest in a stock and thrift plan at the bank into her own individual retirement account. The debtor argued that the IRA should have been excluded from her bankruptcy estate because the assets used to fund the IRA had been accumulated in an ERISA-qualified retirement plan.
     In reviewing the differences between ERISA-qualified retirement plans and IRAs, the Court noted that IRAs are subject to almost complete control by its owner and do not contain the same anti-assignation and non-alienation provisions required under ERISA-qualified plans. The Court stated that if the debtor had an interest in a trust that contained an anti-alienation provision that was created under Virginia law, such an interest would also be excluded from her bankruptcy estate under Bankruptcy Code §541(c)(2). Nevertheless, because the debtor created her IRA and had complete control over the funds in it, the funds were not exempt from the bankruptcy estate, and the debtor was ordered to turn the funds over to the trustee.
     The Court's ruling in Smith clarifies the issue regarding IRA accounts and exemptions, and with debtors frequently changing jobs, the issue is likely to resurface in many instances.

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

     In recent blogs 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 blog, 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, laborers and suppliers. We will explore this more in future blogs.
     We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same.

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

     In recent blogs 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 blog, 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.

Real Estate: Using Homeowner Association Liens to Secure an Interest in Real Estate

         In recent blogs 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 blog, we will review the benefits of using homeowner association liens to aid in the collection of your debt.

     Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in a future blog.
     We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Real Estate: Docketing Judgments to Secure an Interest in Real Estate

     In previous blogs 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 blog, we will review the benefits of docketing judgments to aid in the collection of your debt.

     Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection.
     Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge.
     If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462:
     Jurisdiction to enforce the lien of a judgment shall be in equity. If it appears to the court that the rents and profits of all real estate subject to the lien will not satisfy the judgment in five years, the court may decree such real estate, any part thereof, to be sold, and the proceeds applied to the discharge of the judgment.
     Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment.
     We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.

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

     In prior editions of Creditor News (you can view these at www.lawplc.com) 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 blog, 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 another blog.
     We have experienced attorneys and staff who can examine title, file mechanic’s liens, and litigate to enforce the same.

Collection: 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.

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 provide an 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.