Collections: Bank Deposits -- for Deposit Only

     The United States District Court at Alexandria reviewed a liability question regarding a bank's treatment of a check marked "for deposit only". In the case of Qatar v. First Am. Bank of Va., the Court ruled that a depositary bank violated a restrictive endorsement stating "for deposit only" when it deposited a check into an account other than the account belonging to the named payee of the check. In Qatar, a foreign embassy employee defrauded the embassy over a six-year period by various methods, including depositing checks written to other parties into his own personal accounts with defendant banks. After the embassy discovered this fraudulent scheme, it sued the depositary bank for conversion. The bank succeeded on summary judgment in establishing that it was not liable as a matter of law with respect to two categories of checks in dispute, and it prevailed on a factual issue at trial that relieved it from liability for yet another category of checks. 

     Only one category of checks remained in dispute. These checks all bore the forged endorsement of the payee named on the face of the check, followed by a stamped "for deposit only" restriction. At trial, the depositary bank raised no defenses, but instead challenged for the first time the Court's assumption that the phrase "for deposit only," without further specification, directs a depositary bank to deposit the funds only into the account of the named payee. The Court reasoned that the question then presented was whether the bank complied with the restrictive endorsement "for deposit only" when it deposited the check bearing that restriction into any person's account, or whether that restriction requires the bank to deposit the check's proceeds only into the account of the named payee. The Court held that the unqualified language "for deposit only" following an endorsement on the back of a check required the bank to place the check's proceeds into the payee's account, and the bank violated that restrictive endorsement when it credited the check to another account. In this cases, specifically, the bank violated the restrictive endorsement in depositing into the employees account checks made payable to others and restrictively endorsed "for deposit only", and thus was liable to the plaintiff for the money converted.

Collections: Parties Liable for Credit Card Debts

     The Richmond Circuit Court, in the case of Chevy Chase Savings Bank v. Strong, ruled that a husband who was only an “authorized user” on a bank credit card issued to his wife was not liable to the bank for a $5,024 cash advance check he wrote on the credit card; only the wife was liable. 

     In Virginia Code §11-31, Virginia has codified the rule that use by an authorized agent of a cardholder shall be the equivalent of use by the cardholder. That rule, however, does not address the question of the liability of the agent. The court reasoned that while it does not appear that any Virginia Court has addressed the issue, the language used in the statute and case law from other jurisdictions led the Court to believe that the issue was governed by agency law. 

     The Court stated that it was well established in Virginia that when an agent contracts for a disclosed principal, credit is extended to the principal, and the benefits of the contract are accepted by the principal, there is no personal liability on the agent. In this case, the bank was well aware that the principal was the wife. It extended credit to her based on her application for a card. They were aware that no contract was ever made with husband individually and, therefore, they knew that he was simply an authorized agent. 

     The Court found that there was no indication in this case that husband exceeded his authority in executing the check against the account, or that he agreed to be personally liable for any debt incurred on his wife’s account. Accordingly, the court ruled that the liability for the debts belonged only to wife. The court ruled that the husband was not liable for any portion of the outstanding balance, including the amount of the check that he personally wrote.

     The lesson from Strong - do not confuse guarantors with authorized users.

Bankruptcy: Post-Discharge Injunction - New Note with Credit Union

     The United States Bankruptcy Court, Western District of Virginia, Harrisonburg, ruled in the case of Mickens v. Waynesboro Dupont Employees Credit Union, Inc. that a credit union that facilitated a discharged debtor’s cosigning of a new promissory note that covered the credit union debt that previously was discharged was liable for a violation of the bankruptcy law’s post-discharge injunction statute, and the debtor had no liability for the note and was entitled to damages and attorney’s fees.

     The Court decided that the issue was whether the fact that the credit union obtained a new note signed by the debtor for his discharged obligation constituted an “act to collect, recover or offset” the discharged debt in violation of the post-discharge injunction under Bankruptcy Code §524 (a)(2).
     The Court in Mickens decided that the credit union’s act, permitting the debtor to cosign the new note, expressly placed the debtor in the same state of personal liability for the exact debt which was discharged. The notice to the cosigner stated this fact. Bankruptcy Code § 524 (c) lays out detailed requirements which must be met for a debtor to reaffirm a pre-petition debt and thereby remain obligated to pay such a debt in spite of the discharge injunction. The Court ruled that the credit union’s actions would be subject to Bankruptcy Code §524 (c). Therefore, they must fall within the definition of “an act” for the purposes of the discharge injunction, however narrowly that phrase may be defined.
     The Court ruled that while no cases with identical facts were readily apparent at the time it ruled, it concluded that the cases which most closely resembled the fact pattern for this case were those which involved “ clumsy attempts to avoid the injunction.” In these cases the creditors’ attempt to circumvent the requirements in the Bankruptcy Code §524 (c) and (d) through a reliance on the voluntary repayment provision in Bankruptcy Code §524 (f).
     The Court in Mickens ruled that the credit union could not make any serious argument that its actions or new note even attempted to comply with the requirements of Bankruptcy Code §524 (c) and (d). There could be no doubt the credit union was aware of the injunction and intentionally permitted and facilitated the debtor’s signing a new note which returned him to his pre-petition position of personal liability for the pre-petition debt. Such action constituted a willful violation of the post-discharge injunction of Bankruptcy Code §524 (a)(2).
     The Court ruled that the credit union was in violation of Bankruptcy Code §524 (a)(2) and the liability of debtor on the note he cosigned with a friend was void ab initio. The credit union also was liable for damages and attorney’s fees.

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.

Real Estate: Homeowner Association - Easements

     Cases involving HOA powers are frequently fact specific and governing document specific. Recently, the Frederick County Circuit Court decided a case in which a homeowners association was held in violation of the homeowners association’s restrictive covenants and liable for compensatory damages and attorneys’ fees because it removed a wall on a homeowner’s property. The homeowner spent a considerable amount of time and effort improving a portion of a shared roadway that was on his property. He cleared the land, widened the pathway, and built an eight foot retention wall along the pathway. The HOA notified the homeowner that the wall was encroaching on the right of way and told the homeowner that it must be removed at the homeowner’s expense. There was no board of directors hearing or meeting before the decision was made. Without further notice, the wall was removed but the homeowner refused to pay. In addition to tearing down the wall, the HOA installed drainage culverts in the right of way which resulted in silt flowing into the property’s septic system. The HOA filed suit and obtained a General District Court judgment for the expense of removing the wall. The homeowner then appealed the judgment to the Frederick County Circuit Court and filed a complaint against the HOA. The homeowner claimed that the HOA acted outside its authority under the restrictive covenants, which constituted trespass. The HOA filed a counterclaim, alleging breach of contract and violation of the Property Owners’ Association Act (Va. Code Section 55-508). The court held in favor of the homeowner and found that the HOA exceeded its authority under the restrictive covenants. The HOA did not have authority to remove the wall or to install the drainage culverts. In addition, the HOA did not have the ability to charge the homeowner for either the removal of the wall or the installment of the drainage culverts. The court awarded the homeowner compensatory damages of $28,500 (the value of the wall and cost of returning the property to its prior condition) and attorneys’ fees of $48,844.
     It is important to ensure that HOA covenants provide for the powers necessary to take self-help to effect repairs and remove violations. It is also important for HOAs to work through the proper channels and act within its authority granted by restrictive covenants. Failing to do so can be costly for an HOA. The law firm of Lafayette, Ayers & Whitlock, PLC has experience in drafting, reviewing, and amending HOA documents, as well as, representing HOAs in court.