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.

Bankruptcy: Note Loan Bankruptcy Clauses

     The Fairfax County Circuit Court, in the case of Dominion Bank, NA. v. Koons, ruled that certain "bankruptcy acceleration clauses" in promissory notes are not over broad, and are, indeed, enforceable. 

     The provisions in controversy are standard to note loans. A clause in the promissory note stated: "the borrower shall be in default upon the happening of ... commencement of any proceeding in bankruptcy by or against a party." The guarantee agreement provided another common bankruptcy clause: "filing of any petition in bankruptcy or for the relief under the Bankruptcy Act by the borrower or the guarantor." 

     Creditors should utilize bankruptcy acceleration clauses to enforce cosigner obligations upon bankruptcy by the principal.

Bankruptcy: Direct Payments are not a Voidable Preference

     The 6th Circuit Court of Appeals, in the case of In Re Arnold, upheld a finding that payments made by the contractor directly to the subcontractor/debtor's material men were not a voidable preference because the payments were not part of the bankruptcy estate. The Court held that the payments were not property of the estate because the general contractor had an independent contractual obligation to pay the material man if the debtor did not. In so ruling the Court rejected the Trustee's argument that the money used for the payment was effectively the debtor's money, in the sense that ordinarily it would have been paid by the general contractor to the debtor, and the debt to the material men was the debtor's debt.