Collections: Notice of Sale of Security Interest

     The case of The State Bank of the Alleghenies v. Hundall, decided by the United States District Court at Roanoke, Virginia, serves as a good example of what happens where a creditor sells items pledged as security for a loan without making proper notice to all parties. 

     In Hundall, the defendant guaranteed the bank's loan to his brother for a dry-cleaning business, but the defendant guarantor never received notice of how, when and by what manner of sale the bank intended to sell motor vehicles belonging to the brother's business. The evidence taken clearly proved that the bank failed to send notice of the sale of the motor vehicles, which had a fair wholesale value of approximately $8,500.00 in the aggregate. The District Court ruled that this violated the provisions of Virginia Code §8.9-504(3); however, the Code does not provide a remedy for the failure to comply with the statutory provisions for resale, and the appropriate remedy had not been ruled upon by the Virginia Supreme Court. The District Court, in its ruling, cited that courts which have addressed this appropriate remedy for failure to provide notice have adopted one (1) of the following three (3) rules: 

       1. The debtor must prove that he has suffered an injury in order to obtain any recovery against the secured party; 

   2. The secured party is absolutely barred from recovering a deficiency, even if the debtor suffered no injury; and 

     3. A rebuttable presumption is that the collateral was worth the amount of the debt which requires the secured party to prove that the debtor suffered no injury. 

     Virginia Code §8.9-507(1) entitles the debtor, or any person entitled to notification, "to recover from the secured party any loss caused by the failure to comply with the provision of this part". 

     The Court elected the third of the three remedies listed above, and forced the creditor to prove the fair value of the collateral. 

     The lesson of Hundall: creditors should send notice to all parties to the transaction -- the principal debtors, guarantors and the owners of the collateral. 

Bankruptcy: Garnished Wages - Execution of Lien - Recovery of Funds

     In the case of In Re Wilkinson, the United States Bankruptcy Court at Alexandria, Virginia denied the debtor's motion to avoid the creditor's execution lien; the debtor's wages had been garnished in execution of a judgment lien more than 90 days before the debtor filed his Chapter 7 petition. The Bankruptcy Court ruled that the debtor could not recover the garnished wages from the judgment creditor even though the order directing payment of the garnished wages to the creditor was entered within the 90-day period.

     The Bankruptcy Court stated that the issue was not whether a debtor could recover funds withheld from his wages more than 90 days before he filed his Chapter 7 petition, but whether the order of payment requiring the employer to pay those funds to the judgment creditor was entered within 90 days of the bankruptcy filing.

     The Bankruptcy Court concluded that the debtor could not succeed under the lien avoidance provisions of Bankruptcy Code §522 (f) because he no longer had an interest in the garnished funds as of the date he filed his petition. The Bankruptcy Court also concluded that the debtor could not succeed by stepping into the trustee's shoes under Bankruptcy Code §522 (h) and recovering the funds paid over to the judgment creditor as a preference because the judgment creditor's execution lien became fixed outside the 90-day preference period, and the payment within the preference period did not enable the creditor to obtain more than it would in a Chapter 7 liquidation.

     Accordingly, the Bankruptcy Court denied the debtor's motion to avoid the execution lien.

Collections: Notice of Sale of Security Interest

     The case of The State Bank of the Alleghenies v. Hundall, decided by the United States District Court at Roanoke, Virginia, serves as a good example of what happens where a creditor sells items pledged as security for a loan without making proper notice to all parties.

     In Hundall, the defendant guaranteed the bank's loan to his brother for a dry-cleaning business, but the defendant guarantor never received notice of how, when and by what manner of sale the bank intended to sell motor vehicles belonging to the brother's business. The evidence taken clearly proved that the bank failed to send notice of the sale of the motor vehicles, which had a fair wholesale value of approximately $8,500.00 in the aggregate. The District Court ruled that this violated the provisions of Virginia Code §8.9-504(3); however, the Code does not provide a remedy for the failure to comply with the statutory provisions for resale, and the appropriate remedy had not been ruled upon by the Virginia Supreme Court. The District Court, in its ruling, cited that courts which have addressed this appropriate remedy for failure to provide notice have adopted one (1) of the following three (3) rules:
     1. The debtor must prove that he has suffered an injury in order to obtain any recovery against the secured party;
     2. The secured party is absolutely barred from recovering a deficiency, even if the debtor suffered no injury; and
     3. A rebuttable presumption is that the collateral was worth the amount of the debt which requires the secured party to prove that the debtor suffered no injury.
     Virginia Code §8.9-507(1) entitles the debtor, or any person entitled to notification, "to recover from the secured party any loss caused by the failure to comply with the provision of this part".
     The Court elected the third of the three remedies listed above, and forced the creditor to prove the fair value of the collateral.
     The lesson of Hundall: creditors should send notice to all parties to the transaction -- the principal debtors, guarantors and the owners of the collateral.