Foreclosure: Deeds of Trust

It all starts with the deed of trust. The deed of trust is the primary method of acquiring a lien against real estate in Virginia. With a deed of trust, the owner of the real estate conveys legal title to a trustee, in trust, to secure the noteholder’s indebtedness. A deed of trust establishes a lien on the subject real estate upon execution by the grantor and recordation in the land records of the Circuit Court for the jurisdiction (County or City) in which the property is located. While recording the deed of trust is not essential to the validity of the deed of trust between the parties, an unrecorded deed of trust does not establish a lien on the subject real estate as to other creditors and purchasers of the grantor. An unrecorded deed of trust will not provide the beneficiary of the deed of trust with a priority position against other creditors with recorded liens, even if they are subsequent in time.

Real Estate: Homeowners’ Association Wins Damages on Owner Violations

There has been much litigation over HOA violations in the last few years. Circuit Courts have been scrutinizing HOA violation claims very carefully. Enforcement and damages for violations can be won. The December 2011 Loudon County Circuit Court case of Lee’s Crossing Homeowners’ Association v. Zinone is a good example of such enforcement. In Lee’s Crossing, the court found that in building her home, the homeowner committed multiple violations of the plan approved by the Architectural Review Board. Ultimately, the court assessed damages in favor of the homeowners’ association on the basis of “one overriding violation,” the failure to comply with the ARB-approved application.

Bankruptcy: Dischargeability of Student Loans

In the last edition of Creditor News I reviewed the first case examining the application of Bankruptcy Code §523(a)(8) concerning the dischargeability of student loans.

The second case is Jones v. National Payment Center, which was heard by the United States Bankruptcy Court in Richmond. In Jones the Court held that the debtor had the ability to repay $13,000 of her $16,000 in student loans, and $3,000 was thus determined to be dischargeable in bankruptcy under Bankruptcy Code §523(a)(8)(b), because of the “undue hardship” arising from debtor’s medical condition of chronic fatigue. This was the Court’s second decision in this case - the first decision in favor of full discharge was overturned on the creditor’s appeal. In this remanded trial, the creditor argued that all of the debt was non-dischargeable. However, the Court allowed a partial discharge.

The Court ruled that simply because the debtor earned a higher wage ($5 per hour more than at the time of the Court’s earlier opinion), and had a higher net income than she did when she first came before the Court, did not mean that she was not entitled to a partial hardship discharge. While it was true that she had over $700 left over each month after paying for necessary expenses, the Bankruptcy Court found that this was largely due to the fact that she was dependent at that time upon her parents. In considering whether a debtor could maintain a minimal standard of living based on current income and expenses, courts differ as to how they treat the fact that a debtor relies on parental support. The Court found that it would be inappropriate to treat all of the savings the debtor realized by living with her parents as available to pay her student loan debt. The debtor testified that she planned to move out of her parents’ home sometime in the coming year, at which time her expenses would increase drastically. More of her net income would be needed to maintain a minimal standard of living as her parents would no longer be providing her with shelter and transportation. The Court found that there was no reason not to consider these facts in the minimal standard of living calculus.

The Court ruled that to hold the debtor’s student loan nondischargeable would penalize her for simply doing the best she could under the circumstances. The debtor’s parents were retired and on a fixed income and they could not support her indefinitely. It was therefore prudent for the debtor to build her savings and prepare for the day when she would no longer be able to live with her parents.

The Bankruptcy Court allowed the debtor to continue building her savings so that she would become self-sufficient by discharging all but $13,000 of her student loans and giving her approximately six years to repay this amount with interest on the unpaid balance of 8.25 percent.

The third case is Commonwealth of Va., State Educ. Assistance Auth. v. Gibson. In Gibson the Court ruled that under Bankruptcy Code §523(a)(8)(A), a student loan is not dischargeable in bankruptcy unless the loan became due more than seven years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition. Therefore, the seven-year nondischargeability period is calculated by determining the amount of time between the date the loan became due and the date the borrower filed bankruptcy, then subtracting the amount of time during which any "applicable suspension" periods were in effect.

In Gibson the debtor filed her current Chapter 13, slightly more than seven years after the loan became due. However, during the debtor's previous Chapter 7 bankruptcy, an automatic stay was in effect and prevented the Commonwealth from taking any action to collect the student loan, and the debtor did not make any payments on the loan during the period. The Court held that the previous automatic stay was an "applicable suspension of the repayment period" that tolled the nondischargeability period. Accordingly, upon applying the formula listed above, the debtor did not have the equivalent of seven years payments on her loans, and therefore, the loans were not dischargeable.

Collections: Liability for Charges above the Credit Limit

Last month we looked at two fact patterns involving 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. In those situations, we found that a court will likely hold a customer liable for charges that exceed the originally agreed upon credit limit. The credit terms require the customer to pay any and all sums that become payable because of the express terms of the contract and the intentions of the contracting parties. The next two fact patterns present new issues.

 

Fact Pattern Three: 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 sends one of his employees to retailer to make a purchase, with customer knowing what the cost of the purchase will be. Retailer allows the purchase 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 addition to the contract issue discussed in the previous patterns, this fact pattern presents an agency law issue. The Circuit Court of the City of Richmond dealt with a similar issue in Chevy Chase Savings Bank v. Strong. In this case, the bank issued a credit card. A card user then incurred charges on the credit card but the card user was the card owner’s husband. The court held that the wife was liable for the charges because she gave her husband authority to use the card. The husband was an agent, and was therefore only liable if the wife was able to prove that her husband exceeded his authority or that he agreed to become personally liable.

In this fact pattern, the customer has given his employee authority to act on his behalf so the employee is his agent and the customer is the principal. As principal, the customer is liable for all charges. The credit was given to the customer, so he is liable for the charges, unless he is able to prove that the employee exceeded his authority or agree to become personally liable. In this case, the employee did not act outside of his authority and did not agree to become personally liable, so the customer will be liable for a balance incurred.

Fact Pattern Four: 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, one of customer’s employees goes to retailer to make a purchase, without customer’s knowing what the cost of the purchase will be. Retailer allows the purchase 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?

Although there was not express authority to spend a specific amount like the previous situation, the same rule applies. The employee acted as an agent for the customer. The customer is liable for the debt unless the customer is able to prove that the employee acted outside the authority given. However, similar to Chevy Chase Savings Bank v. Strong¸ evidence that the customer did not specify an amount to spend is not likely to be sufficient evidence to prove that the agent acted beyond to scope of authority given.