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.

Foreclosure: Trustees in Foreclosure

Trustee under a deed of trust are agents for both the lender and the borrowers. Accordingly, a trustee must act fairly and impartially. The lender must not let either the lender or the borrower influence the manner in which a trustee carries out the terms of the deed of trust, especially if this would be detrimental to either party. If any question arises as to the existence of the default or the amount in default, a trustee should seek the aid and direction of the court. The powers and duties of a trustee are governed by the deed of trust and Virginia Code Section 55-59.1 et seq. The code provides when the deed of trust does not. A trustee has no right to exercise the power of sale or to obtain possession until such time as the borrower defaults under the note or deed of trust, and, then, only for the purpose of selling the property at foreclosure or preserving the property until sale. When a default occurs, there is no change in title – the property merely becomes eligible to be sold under the powers originally conferred to the trustee by the owner. Thus, the noteholder has the right to have the property sold and the proceeds of the sale applied to the debt.

Real Estate: The Virginia Property Owners’ Association Act – An Introduction

The Virginia Property Owners’ Association Act provides homeowner’s associations with additional protections when homeowners fail to pay their dues; it also defines responsibilities of the association. Accordingly, homeowner’s associations should be knowledgeable of the Act and its provisions. The Act applies to developments subject to a declaration recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act. In the next issue of Creditor News, I will briefly introduce this Act and some of the special duties it imposes on homeowner’s associations.  Subsequent issues will address memorandum of liens and foreclosures.

Bankruptcy: Award of Attorneys Fees Against Creditors

A debtor sought to recover attorney's fees from a creditor who unsuccessfully challenged the debtor's dischargeability. The creditor had alleged that the items listed on the debtor's statement of financial affairs were materially false, but was unable to convince the Bankruptcy Court. The Bankruptcy Court, however, denied the debtor's request for attorney's fees because there was not evidence that the creditor pursued the complaint frivolously or without substantial justification. The case was In Re: Louise Reynolds Freeman, decided by Judge Tice for the United States Bankruptcy Court, Eastern District of Virginia, at Alexandria.

The United States Bankruptcy Court for the Eastern District of Virginia also held that debtor's counsel are not entitled to recover attorney's fees from a creditor where the creditor loses a suit objecting to debtor's discharge unless it is proven that the suit was filed vexatiously, wantonly, in bad faith, or for oppressive reasons in the case of In Re Gecowetts. In Gecowetts the debtor's estranged wife filed an action objecting to the debtor's dischargeability of a debt. After a full trial on this issue, the Court allowed the debtor a discharge of all debts. Relying on the "American Rule," the Court found that although the creditor was unsuccessful in the dischargeability proceeding, the action was not filed vexatiously, wantonly, in bad faith, or for oppressive reasons. Therefore, no fees were awarded.