VOLUME XXXII, NUMBER 1
NOVEMBER 2011
In Memory of…
Minerva Wilson Andrews
February 1, 1925 – September 4, 2011
TABLE OF CONTENTS
Chairperson’s Message ................................................................................................................................ 1
Paul H. Melnick
Minerva Wilson Andrews, February 1, 1925 – September 4, 2011 .............................................................. 2
John David Epperly
Foreclosure Defense: Tilting at Windmills ................................................................................................... 5
Christopher E. Brown and R. Michael Smith
Examining Virginia’s Public Private Transportation Act Experience:
History, Procedures & Issues Regarding Acquisition of Real
Property Interests under the Act .................................................................................................... 26
James Webb Jones
“It’s a Bird; It’s a Plane; It’s … (What Is It?)” ......................................................................................... 35
John A. Dezio
The Peculiarities of Single Asset Real Estate Bankruptcy Cases ............................................................... 48
John H. Maddock III and Bryan A. Stark
A Basic Guide to Closing Protection Letters for Real Estate Practitioners ............................................... 55
F. Lewis Biggs
Closing Protection Letters .......................................................................................................................... 67
Lisa K. Tully
An Overlooked Option for Financing Multi-Family Affordable Housing:
Obtaining Tax-Exempt Housing Bonds from a Local Redevelopment
and Housing Authority and 4% Low-Income Housing Tax Credits from VHDA .......................... 76
William L. Nusbaum and H. David Embree
Committee Reports:
From the Cluttered Desk (and Mind) of the Co-Editor.................................................................. 81
Stephen C. Gregory
Commercial Real Estate ................................................................................................................ 82
Whitney Jackson Levin
Residential ..................................................................................................................................... 83
Eric V. Zimmerman
Technology ..................................................................................................................................... 84
Douglass W. Dewing
Title Insurance ............................................................................................................................... 87
Brian O. Dolan
Board of Governors .................................................................................................................................... 88
Area Representatives .................................................................................................................................. 91
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Committee Chairpersons and
Other Section Contacts .................................................................................................................. 99
Subject Index:
November 1987-May 2011 ........... http://www.vsb.org/docs/sections/realproperty/subjectindex.pdf
The FEE SIMPLE is published semiannually for distribution to members of the Real Property Section of
the Virginia State Bar. Anyone interested in publishing an article in the FEE SIMPLE is invited to contact the
Editors. Articles generally should be submitted by email as Word documents. Your submission will also be
consent to the posting of the article on the Real Property Section web site, http://www.vsb.org/
sections/rp/index.htm. The FEE SIMPLE has the authority to edit materials submitted for publication. Authors
are responsible for the accuracy of the content of their article(s) in the FEE SIMPLE and the views expressed
in them are solely the views of the author(s).
The Board of Governors gratefully acknowledges the dedication and the hard work of the Assistant to the
Editors, Felicia A. Burton ((757) 221-3813, (email) faburt@wm.edu), of the College of William and Mary
School of Law.
Co-Editors
Lynda L. Butler, Esquire
Chancellor Professor of Law
The College of William and Mary
School of Law
Williamsburg, Virginia 23185
(757) 221-3843; (757) 221-3261 (fax)
(email) llbutl@wm.edu
Stephen C. Gregory, Esquire
1334 Morningside Drive
Charleston, WV 25314
(703) 850-1945
(email) 75cavalier@gmail.com
SPRING SUBMISSION DEADLINE: APRIL 6, 2012
The next meeting of the Board of Governors of the Real Property Section of the Virginia State Bar
will be held on Friday, January 20, 2012 at 2:00 p.m.
in the Rockefeller Room at the Williamsburg Inn in Williamsburg, VA.
Real Property Section member resources website log in:
User name: realpropertymember
Password: Lg8g4h22
Visit the section web site at
http://www.vsb.org/sections/rp/register.htm
for the Real Property Section Membership form
And
http://www.vsb.org/sections/rp/index.htm
for articles from the FEE SIMPLE and a whole lot more!
Vol. XXXII, No. 1
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CHAIRPERSON’S MESSAGE
by Paul H. Melnick*
“Keep Minerva’s Torch Burning Bright”
I have a print hanging in my office of a man talking intently with a wise looking attorney
who appears to be examining a legal document (a deed, e.g.). At the bottom of the picture there
is written a famous saying of Abraham Lincoln: “An attorney’s time and advice is his stock in
trade.” In my career, I have seen the truth of that saying. Regardless of the size of your office,
the size of your staff, or the number of technical gadgets that you have, what you have to offer to
clients is your time and advice.
Since I have been a member of the Real Property Section, I have seen that the saying not
only applies to attorneys serving their clients, but also to attorneys serving other attorneys.
Never before have I seen a group of attorneys who are as amicable and willing to share their
expertise and knowledge for the betterment of our profession as those in our Section. This issue
of the FEE SIMPLE is dedicated to Minerva Andrews, a lady who epitomized the idea of an
attorney sharing time and advice with other attorneys. In reading the dedication to her in this
issue, her mentoring spirit and genuine interest in assisting other attorneys is almost palpable. It
is my hope that our Section can carry on that tradition so wonderfully demonstrated in Minerva’s
life and career.
This year, our Section will continue to lay a course for this tradition. A new committee
has been formed which will be called the Law School Liaison Committee. The committee’s
purpose will be to coordinate and plan outreach to law students. Such outreach may include
panel discussions at law schools about life as a real estate attorney, locating real estate attorneys
to teach real estate courses not presently being offered at the law schools, and mentoring
programs for students interested in real estate. Paul Bellegarde, our immediate Past-Chair, has
graciously agreed to lead this committee.
Other ways, among many, that our Section’s attorneys will further this tradition in the
coming year include discussion threads via email, writing articles for our November and May
FEE SIMPLE publications, presenting topics at our three seminars (the Advanced Real Estate
Seminar, the Annual Real Estate Seminar, and the Virginia State Bar Annual Meeting Seminar),
and serving in leadership positions in the Section such as on the Board of Governors or as an
Area Representative. We are also fully engaging our Area Representatives so that they can
meaningfully connect with other attorneys in their localities to further the activities of our
Section. In addition to assisting real estate attorneys in their practices, our Section also places
great emphasis on educating the public concerning real estate law. For example, the Eminent
Domain Committee is preparing a pamphlet for public dissemination containing useful
information about eminent domain law.
The attorneys in our Section should be very proud still to be carrying the torch of
congeniality and camaraderie in the practice of real estate law, originally lit by Minerva Andrews
and other founders of our Section, like Courtland L. Traver, a former co-editor of this
publication. We need to keep that torch bright, however, and we can do that by generously
giving of our time and advice to each other in the coming year and beyond.
*
Paul H. Melnick is a principal at the law firm of Melnick & Melnick, PLC in the City of Falls
Church, Virginia and has been practicing law since 1990. Mr. Melnick is a graduate of James Madison
University and received his law degree from the University of Dayton School of Law where he graduated
summa cum laude. He concentrates his practice on real estate, estate planning, and estate and trust
administration.
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MINERVA WILSON ANDREWS
February 1, 1925 – September 4, 2011
A Tribute from John David Epperly*
When Minerva Wilson Andrews, former Chair of the Real Property Section, died on September
4, 2011, at the age of 86, she left innumerable colleagues and friends to mourn her passing, and perhaps to
note the end of an era. Many of our younger colleagues did not have the privilege of working with or even
knowing Minerva, but she was part of the heritage of the Real Property Section, and it was largely due to
her efforts and of others such as Court Traver that the Section thrives today. So it is left to us all who
knew her and lost a dear friend, a colleague, a mentor, and an inspiration, to celebrate her extraordinary
life and career.
Minerva began her legal career as a trial attorney in the antitrust division of the U.S. Department
of Justice in Washington D.C. She then became an associate attorney with Bauknight, Prichard,
McCandlish & Williams (1963-72) which became Boothe, Prichard & Dudley in 1972. She concentrated
her practice in real estate, and was elected partner in 1980. The firm then merged into and became
McGuire, Woods, Battle and Boothe, and she served in the McLean office until her retirement in 1992.
Her life is marked by many professional and personal accomplishments: Chair of the Real Estate
Section of the Virginia Bar Association and the Fairfax Bar Association; National President of the
National Society of Arts and Letters (1994-96); Board of Directors of the McLean Citizens Association
(1968-2000); Fairfax/Falls Church United Way (1988-2001); and Life Elder, Lewinsville Presbyterian
Church (1980-2003). In 1997 she was named Citizen of the Year by the Washington Post and the Fairfax
County Federation of Citizens Associations. In 2001 she was awarded the William B. Spong, Jr.
Professionalism Award.
Born in Rock Hill, South Carolina, to York Lowry and Minnie deFoix Long Wilson, Minerva
received her A.B. from the University of South Carolina in 1945 and, true to her dauntless spirit, took an
unusual path for a young lady from the South, heading north to attend law school at the University of
Virginia. She had inspiration for this—her Aunt Fannie Wilson was the first woman attorney licensed to
practice in the state of South Carolina. Continuing that tradition, in 1948 Minerva became one of the first
female graduates of the law school at the University.
The trip north from Columbia to Charlottesville in 1945 was the stuff of Minerva legend and the
story was told by family and friends for decades. Minerva’s family, never really rich and certainly not
very prosperous after the depression, nevertheless owned a 1920’s vintage Rolls Royce. So, it was in that
family car that Minerva and best friend Liz Norton (my mother; full disclosure: Minerva and Mama were
best friends) headed to Charlottesville. Liz describes the trip as follows: “There was Minerva, perched
high up on the cushions so she could see over the steering wheel, using all these complicated pedals and
dials – it looked like flying a plane to me! And we’d drive up in front of a hotel and out would run the
staff – sure they would get a huge tip helping these rich people with their luggage. And there instead we
would be – two little bitty gals with their cardboard suitcases and a picnic basket. Lordy! How we would
*
John David Epperly, Jr. is a former Chair of the Real Property Section. He was an associate at
McGuire Woods Battle & Boothe from 1987 to 1991. He is currently Virginia State Counsel for the
Fidelity National Title Group family of title insurance companies (Fidelity National Title Insurance
Company, Chicago Title Insurance Company, and Commonwealth Land Title Insurance Company).
I would like to thank the following for their recollections of Minerva: Courtland L. and Jerri
Traver; Michael T. Bradshaw; Susan M. Pesner; Randy Howard; Neil S. Kessler; Charles Lollar; Edward
R. Waugaman; Priscilla Daniels Okay; Edmund Harllee; Carolyn Paschall; Kathleen Geddes; Elizabeth R.
Epperly; Carolyn Minerva Epperly; Elizabeth R. Larsen; and Susan Andrews Wiles.
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laugh later on!” Minerva’s partner, Stanley Franklin, later acquired the Rolls and restored it, even using it
to chauffer the bride and groom at Minerva’s daughter Susan’s wedding.
Minerva was truly a Southern woman, her manners impeccable, her sense of occasion perfect.
But she was formidable in her way, and not to be underestimated. My sister Betsy says it best:
I think Minerva epitomized Southern ladyhood at its generous and generative best.
Always gracious, she knew how to make others feel that they, too, could take the time to
be more considerate. When Aunt Minerva was around, even Mama, a best friend, sat up
a little straighter and spoke a little more carefully, and at the same time enjoyed herself in
a rich, deep, comfortable way no one else quite made her feel. [Minerva’s thoughtfulness]
is emblematic of the quality of attention Minerva focused on family and friends
generally. She made so many of us feel fully seen, rightly understood, and then valued
anyway. Minerva’s brand of Southern ladyhood meant that no matter how gently
abstracted she might sometimes appear to be, she saw with extreme clarity as well as with
compassion and humour.
Others recall these qualities of Minerva’s as well. When one of her partners was a first-year
associate in the firm, he was in a serious car accident that banged up his face. “Minerva came into my
office to view the injury and instead of the usual pleasantries and expressions of sorrow she matter-offactly said, ‘My, you’re going to have some very interesting scars.’” A colleague recalls one of the
weekly meetings where new cases and clients were discussed, and the name of new developer client came
up. Minerva, aware of the client’s reputation for sharp dealings, firmly but politely asked, “Why are we
representing someone like that?” Silence ensued. She expected the same good character and behavior
from clients that she expected from everyone else. Minerva was right of course. Not long after that, the
developer went broke and left creditors and friends alike with an empty feeling.
Minerva’s office was famous for the floor-to-ceiling curtains, with the Williamsburg pattern
matching the upholstery on the chairs and sofa, and its homey atmosphere, where she brewed her twicedaily pot of tea and served it in China cups. There she calmly untangled the mysteries of titles, like that of
the Reston property, Byzantine in its complexity and nuances, which she came to know like the faces of
her children. Colleagues would come to Minerva’s office with questions, and there they got the answers,
and perhaps a cup of tea as well. They always received a warm smile, and her full attention. A visit to her
office warmed the body and the soul.
She handled all situations with equanimity and aplomb. She was never flustered. When her
husband Bob joined the Republican Party and ran for the state legislature, Minerva, a life-long Democrat,
accepted it with her usual grace. She dutifully hosted dinners for staff members, supporters, and
constituents. Of course events at the Andrews house often started late, and on-time arrivers often found
themselves helping in the kitchen, where Minerva bustled about, directing activities. Her tardiness
extended beyond the home as well, and Minerva often ran late to the office and meetings. Her partner
Court Traver, a former Navy pilot, occasionally flew a local traffic helicopter on the early-morning run.
He would sometimes fly over the house in McLean that Minerva and Bob shared for 54 years, and blare
over the loudspeaker: “Wake up, Minerva!”
Minerva was unfailingly polite, and placed a high value on manners. Yet she was never stuffy.
Another family story illustrates the point. When time wouldn’t allow a home-cooked dinner, on rare
occasions the family would resort to the local McDonald’s. But Minerva insisted on bringing the food
home, and she would serve it on the good China. I think this story perfectly captures Minerva. We can’t
always be cultured and refined, and if you aren’t, that’s just fine. But even if you’re just plain old humble
McDonald’s, there’s no reason you can’t present yourself on the good China.
My Mama and Minerva were best friends in college, and for the rest of her life. She set up my
parents on a blind date, and when that marriage ended after 20 years, another blind date for Mama,
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another marriage. They just celebrated their 40th anniversary. EHarmony would envy that record. So,
naturally she was “Aunt” Minerva to me in childhood. She was family to my sisters and me. Later she
helped me find my way as a lawyer. She encouraged and she inspired. I sat up a little straighter, I behaved
a little better, I thought a little more clearly. Just as Minerva did. There are many others just like me. So it
is fitting that we dedicate this issue of the FEE SIMPLE to Minerva. She is gone but she will continue to
inspire us and encourage us to do things the way they should be done, and to treat others the way they
should be treated. We will all miss her.
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FORECLOSURE DEFENSE: TILTING AT WINDMILLS
by Christopher E. Brown* and R. Michael Smith**
“Foreward!”
Perhaps defending Virginia homeowners against foreclosures is not as hopeless as Don Quixote
tilting at windmills, but it is equally quixotic and, at least to the defended and the defenders, it is equally
righteous.1 In part because Virginia is a non-judicial foreclosure state and in part because the
Commonwealth’s caselaw and statutes have such a pro-creditor bias,2 there appears on the surface to be
no defense; no civil action is required of the creditor to obtain a judicial imprimatur to foreclose.
Nevertheless, Virginia precedent and foreclosure statutes, as well as commonly used deed of trust forms,
suggest that borrowers have property and due process rights that should be defended in the foreclosure
process.
In this article, we hope to present to real estate lawyers—those primarily doing residential
settlements and transactional work, and not litigation—some avenues to pursue in representation of
clients facing foreclosure. Primarily, we intend to emphasize that modern foreclosure practice favors
creditor’s rights’ legal theories and not those of real property. The basic, and dividing, point was stated
by title attorney Ron Wiley of Charlottesville (formerly with Southern Title and a former Chairman of
this Section) when speaking on foreclosures at the 2011 Virginia continuing legal education seminar,
Annual Real Estate Update: “As title attorneys know, foreclosure of the lien of the deed of trust is by the
party secured by the deed of trust.” Creditor’s rights’ counsel have pushed the courts to adopt a more
*
Christopher E. Brown is the principal of Brown, Brown & Brown, P.C. He has practiced
foreclosure defense since 2008. He obtained a B.A. from Duke University and a J.D. from Georgetown
University Law Center. He is a member of the Virginia State Bar and the District of Columbia Bar and
can be contacted at brownfirm@lawyer.com.
**
R. Michael Smith is an associate at Brown, Brown & Brown, P.C., a firm emphasizing a
foreclosure defense practice. He obtained a B.A. from the University of Virginia and a J.D. from the
University of Virginia School of Law. He is a member of the Virginia State Bar, and its Real Property
(formerly an Area Representative) and Construction Law Sections. Previously he has served as an
underwriting counsel for Chicago Title Insurance Company, Stewart Title Guaranty Company, and the
title insurance companies of LandAmerica Financial Group.
He can be contacted at
brownfirm@lawyer.com.
1
Just then they came in sight of thirty or forty windmills that rise from that plain. And
no sooner did Don Quixote see them that he said to his squire, “Fortune is guiding our
affairs better than we ourselves could have wished. Do you see over yonder, friend
Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them.
With their spoils we shall begin to be rich for this is a righteous war and the removal of
so foul a brood from off the face of the earth is a service God will bless.” . . .
“Take care, sir,” cried Sancho. “Those over there are not giants but windmills. Those
things that seem to be their arms are sails which, when they are whirled around by the
wind, turn the millstone.”
MIGUEL DE CERVANTES, DON QUIXOTE, Pt. 1, Ch. VIII (1607) (Of the valourous Don Quixote’s success
in the dreadful and never before imagined Adventure of the Windmills, with other events worthy of happy
record).
2
The Co-Editor of this newsletter, Stephen C. Gregory, has commented in a 2009 article,
Foreclosures—Part I, 29 THE FEE SIMPLE 40, 40 n. 3 (May 2009): “Except, of course, here in the Fourth
Circuit, one of the most pro-business, anti-consumer jurisdictions in the federal system.”
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commercially friendly position that a foreclosure may be pursued by the mere physical holder of the
negotiable promissory note, without producing evidence that it is the party secured by the deed of trust.
This article will discuss the confusion surrounding “foreclosure defense” in the Commonwealth
of Virginia. It will initially discuss foreclosure law in Virginia and whether homeowners have the right to
challenge foreclosures in our non-judicial forum. This will lead to a discussion regarding the entity with
the authority to foreclose, how that determination is made, and how the Uniform Commercial Code
relates to a Virginia foreclosure. Finally, the article will address the place of Mortgage Electronic
Registration Systems, Inc., in the foreclosure process, and close with a review of the post-foreclosure
unlawful detainer process. We hope these issues inform you about the recent events and caselaw that
have impacted foreclosure law in Virginia and assist you in serving your clients’ needs. With that said,
On with the Tournament at a gallop! Foreward!
I.
THE MORAL/LEGAL MÊLÉE3
The object for the skilled Lenders has been to capture Homeowners in default. Lenders
essentially hold the borrowers’ homes ransom, accelerating the entire debt. When Homeowners are
unable to satisfy the debt in full and attempt to challenge Lenders’ morals and rights in court, they are
tainted by their “default” status. Challenges by homeowners have been often met with a statement along
the lines of “If you do not pay your mortgage, you lose your house. That is how it works.” In truth, that is
not what the contract says.
Following the September 2008 failure of Lehman Brothers and the taxpayer bailout to banking
and non-banking entities, it was the financial institutions along with the Treasury Department that
repeatedly relied upon the “sanctity of the contract” mantra when opposing limits on compensation of
executives of banks bailed out by taxpayers4 and 100% payouts by American Insurance Group to various
firms on credit default swaps and other exotic instruments.5 It is not surprising, however, that the
“sanctity of the contract” is ignored by the financial institutions when that mantra benefits the
homeowner. Reread the very clear provision of the FNMA-FHLMC uniform Note at ¶11: “The Deed of
Trust . . . protects the Note Holder from losses which might result if I do not keep the promises which I
make in this Note.” This provision makes clear that a borrower did not agree to “give up” the house if
he/she defaulted; rather, the borrower put up the home as collateral to cover any “losses” suffered by
Lender. This affirms the fact that one must be the party secured by the Deed of Trust to enforce its terms,
as only a bona fide purchaser of the note would have losses.
Homeowners in default have been pilloried by their lenders and/or servicers.6 Most homeowners
are not deadbeats. Many suffer common tragedies of divorce, illness, natural catastrophe, or
3
During the Middle Ages, tournaments often contained a mêlée consisting of knights fighting one
another on foot or while mounted, either divided into two sides or fighting as a free-for-all. The object
was to capture opposing knights so that they could be ransomed. This could be a very profitable business.
See http://en.wikipedia.org/wiki/Melee. When a melee ensues, groups become locked together in combat
with no regard to group tactics or fighting as an organized unit as each participant fights as an individual.
In the mortgage foreclosure battle, this disorderly combat has worked to the disservice of homeowners,
who have no opportunity for a unified voice.
4
“We are a country of law. There are contracts. The government cannot just abrogate contracts.”
http://abcnews.go.com/blogs/politics/2009/03/summers-on-aig/.
5
“Payments to AIG’s counterparties are justified with an appeal to the sanctity of contract.”
http://www.slate.com/id/2213942/.
6
Interview with Atty. Gen. Biden of Delaware (Oct. 9, 2011) (http://stopforeclosurefraud
.com/2011/10/11/video-ag-beau-biden-totally-gets-it-one-of-the-greatest-fraud-in-the-courts-of-americanhistory/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ForeclosureFraudByDi
nsfla+%28FORECLOSURE+FRAUD+%7C+by+DinSFLA%29).
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unemployment. Many were encouraged, if not enticed in the early to mid-2000s to buy or refinance
homes with inflated appraisals and the promise that, “because the real estate market will never decline”
they could refinance in six months. Instead, the real estate bubble burst, home values collapsed, and one
in every four American homeowners owes more on the mortgage than the home is worth.7 Since many of
the mortgages written at the same time were subprime loans with unique features to garner easy approvals
(e.g., initial payment terms that were interest only, below-market teaser rates, negative amortization, etc.),
but without concern for ability-to-pay when installments adjusted one to five years out, a perfect storm
occurred: Payments reset at stunningly higher amounts, property values declined thereby sharply
eliminating refinancing options and triggering additional monthly mortgage costs (e.g., mortgage
insurance based on declining loan to value ratios could not be eliminated), and wages were squeezed.
Debtors who had never defaulted, or ever expected to default, began to struggle with their payments.
Most homeowners, however, stayed current on their mortgages by dipping into retirement accounts,
college funds, and other household savings to do so. Defaulting homeowners did this “as a result of two
emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over
the perceived consequences of foreclosure.”8 Thus, many homeowners “did the right thing” even though
their economic self-interest would dictate another path.9
Lenders emphasized the negative impact of default by equating a bad credit score with
immorality. Borrowers who defaulted were “bad people.” Effectively, many borrowers were “shamed”
into staying current, which economically benefited the lenders. Modifications of loans were not offered
even when doing so would benefit homeowners economically and would benefit the overall economy and
society. As summarized by Professor Brent T. White:
These emotional constraints are actively cultivated by the government,
the financial industry, and other social control agencies in order to induce
individual homeowners to act in ways that are against their own self
interest, but which are—wrongly this article contends—argued to be
socially beneficial. Unlike lenders who seek to maximize profits
irrespective of concerns of morality or social responsibility, individual
homeowners are encouraged to behave in accordance with social and
moral norms requiring that individuals keep promises and honor
financial obligations. … Lenders, on the other hand, have generally
resisted calls to modify underwater mortgages despite the fact that it
would be both socially beneficial and morally responsible for them to do
so. This norm asymmetry has lead to distributional inequalities in which
individual homeowners shoulder a disproportionate burden from the
housing collapse.10
7
Lucia Graves, Learning To Walk: Fear, Shame And Your Underwater Mortgage, HUFFINGTON
POST, available at http://www.huffingtonpost.com/2011/02/03/learning-to-walk-underwater-mortgages
_n_818315.html.
8
Brent T.White, Underwater and Not Walking Away: Shame, Fear and the Social Management
of the Housing Crisis, Arizona Legal Studies, Discussion Paper No. 09–35, at 2 (Nov. 2009) (also
Retrieved from http://papers.ssrn
available at 45 WAKE FOREST L. REV. 971 (2010)).
.com/sol3/papers.cfm?abstract_id=1494467.
9
We do not suggest that non-payment of the mortgage is legally excused conduct as a result of
micro or macro events. We do join in Professor White’s conclusion that the economic, emotional, and
moral burdens of the financial crisis have fallen disproportionately on the homeowners/taxpayers.
10
White, supra note 8, at 2.
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Indeed, lenders’ indifference to “doing the right thing” in post-default situations has led to the
failure of various government initiatives sponsored by FNMA and FHLMC.11 Virginia’s non-judicial
“foreclosure process” does nothing to correct that imbalance. Its “foreclosure law,” on the other hand,
provides homeowners an opportunity to level the playing field.
II.
THE JUDICIAL/NON-JUDICIAL PAS D’ARMES12
In the Age of the Mortgage Foreclosure Crisis, we have the Lenders to our right, and the
Homeowners occupying the left. Unlike Connecticut,13 Maryland,14 and other states where loan mediation
hearings are required prior to foreclosure, Virginia does not host à plaisance where the homeowner and
bank combatants can meet to exchange pleasantries and test their skills against one another. Defaulting
homeowners and their advocates were not surprised when financial institutions raised a number of
objections to actions challenging the validity of a foreclosure, but the nature thereof was surprising. The
most frequent objection leveled like a lance at homeowners is that the Commonwealth is a non-judicial
forum. As such, the foreclosing entities allege that the claims brought by homeowners are in violation of
the General Assembly’s intent, whereby the actions challenging a foreclosure effectively “turn Virginia
into a judicial foreclosure state.”15 Despite those arguments, lenders have not completely succeeded in
efforts to unhorse homeowners with challenges to foreclosures.
A.
An Historical Invocation16
While the current mortgage crisis may seem wholly new and unprecedented, the process for
Homeowner’s response (or lack of a process) to an alleged mortgage default has long existed in Virginia.
Indeed, strong arguments can be made that the process is antiquated and unfair, and that the law has not
kept pace or is not in tune with the modern, highly sophisticated financial products that were sold to
Virginia mortgage borrowers—financial products whose features were projected to cause a default.17 On
the other hand, Virginia Foreclosure Law is uniquely set up to protect against abuses that are all too
commonplace in the industry.18
Virginia is a deed of trust state. The use of the deed of trust allows the enforcement process to be
non-judicial, as the trustee, in effect, becomes an arbiter of sorts regarding the differences between the
parties to the contract. The trustee is an agent coupled with an interest, holding the legal title to real
11
Consider the lack of success of HAMP (http://www.huffingtonpost.com/2011/09/01/hampmortgage-modifications_n_945290.html), HAFA, FNMA-FHLMC greater than 80% LTV refinance
program, and The Emergency Homeowners’ Loan Program (http://www.usatoday.com/money/
economy/housing/story/2011-10-06/foreclosure-aid-program/50680758/1).
12
A form of tournament where combatants met to test their prowess against one another.
13
CONN. GEN. STAT. ch. 846 (on Mortgages), § 49–31e et. seq.
14
Ovetta Wiggins, Maryland bill provides foreclosure mediation for homeowners, WASHINGTON
POST, Apr. 15, 2010, at http://www.washingtonpost.com/wp-dyn/content/article/2010/04/14/AR2010
041404602.html.
15
See Peter Veith, Fighting Foreclosures, 24 VIRGINIA LAWYERS WEEKLY, No. 37 (Feb. 15,
16
The ceremony used to start a tournament.
2010).
17
See Joe Nocera, Sheila Bair’s Bank Shot, NY TIMES, July 9, 2011 (“The lenders didn’t care
because they sold the loans to Wall Street, which bundled them into mortgage-backed bonds and resold
them to investors.”), available at http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exitinterview.html?page wanted=all.
18
Fraudulent Mortgage Documents fill County Files, ASSOCIATED PRESS, Sept. 11, 2011,
http://www.pittsburghlive.com/x/pittsburghtrib/business/s_756088.html#ixzz1Xgy45TOY.
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property and bearing the power of sale. Although in this modern day the concept is confused (and may be
irrelevant), Virginia remains a title theory state.19 Despite the move from a mortgage or indenture to the
deed of trust which took hold in the nineteenth century in Virginia, the underlying concept still remains
that the deed of trust lien exists to protect the party advancing funds to a debtor-owner of property (or a
guarantor-owner of property) by collateralizing the promise to repay with the property.
Historically, the mortgage (and, later, the deed of trust) developed in law (and, later, in equity) to
secure the party deferring receipt of purchase money with an interest in the land. The earliest gages were
often leases for years, with the purchaser/tenant in possession being under threat of defeasance or
reversion of the land. Possession often remained in the seller, however, as that was the only certain way
to protect the seller’s interest in the land until full payment. It was late in the sixteenth century (i.e., only
a few years before the settlement at Jamestown) that the equity of redemption and possession by the
mortgagor were established principles of real estate finance. Also, “(c)onveyancers themselves made the
valuable addition (which the legislature subsequently developed) of the power of sale which has made the
modern mortgage so effective an instrument, originally prompted, it seems, by a desire to avoid the slow
and costly foreclosure proceedings in Chancery.”20 By the end of the seventeenth century, the concepts of
clogging the equity of redemption and successive mortgagees were being litigated.21
The common law of England was continued in Virginia, except as superseded by statute or
caselaw.22 The General Assembly has continued to enact legislation which supports the premise that the
mortgage or deed of trust exists to protect the party secured thereby. VA. CODE § 55–59 states the
obvious: Any “beneficiary” of the deed of trust may request the trustee to invoke the power of sale (subsection 7), and “the party secured by the deed of trust” may appoint a substitute trustee (sub-section 9).
Although “beneficiary” is not otherwise defined, it has to mean the party secured by the deed of trust,
because the deed of trust only has three parties: Trustee, Mortgagor/Grantor, and Beneficiary of the trust.
Until standard deed of trust forms from FNMA and FHLMC began naming Mortgage Electronic
Registration Systems, Inc. as “Beneficiary,” the lender or purchase money seller was always beneficiary
of the trust, and thereby the party secured by the deed of trust.
Much of the current debate about § 55–59(9) is over the meaning of “or the holders of greater
than fifty percent of the monetary obligations secured thereby.” The courts have come to read this to
mean the sole holder of the single mortgage note endorsed in blank, without any showing that the holder
is the party secured by the deed of trust. (There is more discussion on this issue below.) Legislative
history, when viewed alongside caselaw, suggests this is an incorrect interpretation. VA. CODE § 55–59,
together with VA. CODE §§ 55–59.1, 55–59.2, 55–59.3, and 55–59.4, were part of a major restatement of
Virginia’s foreclosure statutes in 1979. Even though this was after adoption of the UCC in Virginia, there
is nothing that suggests that the General Assembly intended to incorporate UCC terminology such as
Article 3 “holder” into the foreclosure law. Part of § 55–59 finds root in the 1919 VIRGINIA CODE §
4167, including sub-section nine (9). VA. CODE § 55–60, which has the same root section in the 1919
Code, was not amended in 1979. Note the language in its sub-section 9:
19
Smith v. Credico Industrial Loan Company, 234 Va. 514, 362 S.E.2d 735, 738 (1987) (“As to
the purchaser at the trustee’s foreclosure sale, there is no question. He receives all the title, for better or
worse, that the mortgagor enjoyed, and consequently he can recover in ejectment against the mortgagor
and those claiming through him by descent or purchase. … (I)t seems clear that legal title remains in the
mortgagor under the deed of trust, and passes from him only when the trustee sells upon default.”
Whiting, J., dissenting.)
20
THEODORE F. T. PLUCKNETT, A CONCISE HISTORY OF THE COMMON LAW 608 (Little, Brown
& Co. 5th ed. 1956). See generally id. at 603–609 (on mortgages).
21
Id. at 690.
22
VA. CODE § 1–200 (which had its original adoption during the Revolutionary War).
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The words “substitution of trustee permitted,” or words of like purport, shall be construed
as if the deed set forth: “Grantor grants unto the beneficiary or beneficiaries or to a
majority in amount of the holders of the obligations secured hereunder and to their
assigns the right and power, under the provisions of § 55–59, to appoint a substitute
trustee or trustees.”
This section makes clear that the beneficiary/party secured by the deed of trust, or, if there be more than
one beneficiary/party secured by the deed of trust, then all of them acting together or a majority of them,
may appoint the substitute trustee. Concerning VA. CODE § 55–59(9), the General Assembly omitted the
“parties secured by the deed of trust” language most likely because it believed not only that such an
assumption was obvious, but statutory and caselaw history supported the assumption. The 1919 VA.
CODE provision (§ 4167) was written in an era when one deed of trust often secured more than one note,
such as a succession of notes payable at yearly installments. As different notes could have different
lenders and/or be assigned to different parties, more than one party would be secured by the deed of trust.
Since each secured party was pari passu as to the others, a majority of the interests represented by the
secured parties as holders of proof of their interests could act.23
B. Foreclosure Tilts24
Foreclosure challenges have continued because “Virginia provides comprehensive avenues of
attack for debtors seeking to set aside foreclosure sales: the deeds of trust themselves; an entire article of
the VIRGINIA CODE, VA. CODE ANN. Secs. 55–58 to 55–66.6; and the common law.”25 Every state,
whether judicial or non-judicial, has enacted “foreclosure law” to prevent collisions during foreclosure
tournaments. For instance, in Michigan the owner of the debt or the servicer may foreclose.26 In
Massachusetts there must be an assignment in recordable form or an entitlement to said assignment when
the foreclosure process begins.27 In Maryland, among other requirements, an affidavit of debt ownership
must be filed.28 In North Carolina only the “holder” of the note may foreclose.29
Foreclosure is primarily the province of real property law, and, as necessary, the UCC 30 may
assist in legal determinations central to the administration and enforcement of the foreclosure
23
See Williams v. Gifford, 139 Va. 779, 124 S.E. 403 (1924) (which involves at least three notes
secured by one deed of trust). The case is often cited to support the principle that the deed of trust follows
the assignment of the note (a principle with which we do not disagree). It is not cited for its further
principle that a non-bona fide assignee has no power in equity to enforce the note or, consequently, the
deed of trust.
24
A tilt was a barrier introduced in the 14th century to prevent jousting collisions; lists were
barriers defining the field of combat.
25
Estate Const. Co. v. Miller & Smith Holding Co., Inc., 14 F.3d 213, n. 10 (4th Cir. 1994).
26
See MICH. COMP. LAWS § 600.3204(1)(d); Residential Funding Co. LLC v. Saurman, No.
290248 and Bank of New York Trust Company v. Messner, No. 291443 (consolidated, State of Michigan
Court of Appeals, Apr. 21, 2011) (no authority for MERS to foreclose as it is neither owner nor servicer).
27
US Bank, N.A., v. Ibanez, 2011 WL 38071 (Mass. Sup. Ct., March 2011) (foreclosing entity
had no evidence it was entitled to an assignment when foreclosure proceedings began). Massachusetts,
like Virginia, is a deed of trust state; “an entitlement to said assignment when the foreclosure process
begins” is another way of saying the party secured by the Deed of Trust.
28
MD. Rules Tit. 14, § 207.
29
N.C. GEN. STAT. § 45–21.16(c)(2).
30
VA. CODE § 8.3A (hereinafter “Article 3”); VA. CODE § 8.9A (hereinafter “Article 9”).
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process.31 Virginia’s “foreclosure law” is determined by the terms of the Deed of Trust, a contract.32
“The guiding light . . . is the intention of the parties as expressed by them in the words they have used,
and courts are bound to say that the parties intended what the written instrument plainly declares.”33
Where those terms are clear and unambiguous, they are to be construed according to their plain meaning,
and without adding any terms that were not included by the parties.34
III.
DEFENSES TO FORECLOSURE—TREE OF SHIELDS35
The parties to the contract defined the barriers of their battlefield within the deed of trust.36
Specifically, a Lender is required to present infinite colored shields from which the challenging
homeowner is allowed to choose for combat. When notice of the right to cure is sent to a homeowner,
“the notice [from the Lender] shall inform the Borrower of the right to bring a court action to assert the
non-existence of a default or any other defense to invoking the power of sale.”37 In most cases recently
seen in Northern Virginia, Homeowners have begun to assert their right to bring a court action based not
on the non-existence of default but on other defenses to invoking the power of sale. Just as a foreclosure
pursuant to a deed of trust is an equitable remedy, challenging a foreclosure begins with an equitable
claim—for example, to remove a cloud on title pursuant to VA. CODE § 55–153.38 The homeowner is
seeking to remove unauthorized documents from the land records as violating the terms of the deed of
trust. If successful, legal title reverts back to the foreclosed homeowner.39
31
Id. § 8.9A–201(c). Other applicable law controls. In case of conflict between this title and a rule
of law, statute, or regulation described in subsection (b), the rule of law, statute, or regulation controls.
32
Id. § 55–59 (the Deed of Trust is a contract and its terms control unless otherwise provided for
therein); Accord id. § 8.9A–201(a) (General effectiveness. Except as otherwise provided in the Uniform
Commercial Code, a security agreement is effective according to its terms between the parties, against
purchasers of the collateral, and against creditors.).
33
Wilson v. Holyfield, 227 Va. 184, 187, 313 S.E.2d 396, 398 (1984).
34
Id.
35
The place where several colored shields were hung for a pas d’armes. Challenging knights
could choose the combat they required by hitting the shield.
36
All references to terms within the “Deed of Trust” (“DoT”) and “Note” / “Promissory Note”
refer to the Fannie/Freddie uniform note and deed of trust executed for the vast majority of mortgage
loans for the past ten (10) years or more.
37
DoT at ¶ 22 (emphasis added).
38
As opposed to a full quiet title claim to remove all encumbrances from the property. We do not
mean to suggest this is the only way to challenge an unlawful foreclosure. See supra note 25.
39
Caveat emptor applies to a purchaser at a foreclosure sale. See Feldman v. Rucker, 201 Va. 11,
109 S.E.2d 379 (1959); Federal Land Bank v. Parks, 170 Va. 240, 196 S.E. 627 (1938); Smith v.
Woodward, 122 Va. 356, 94 S.E. 916 (1918).
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A.
The “Party Secured by the Deed of Trust” À la toille40
The parties explicitly state41 that the “Lender”42 may invoke the power of sale.” (See DoT at ¶
16(c) “may” is defined as “giv[ing] sole discretion without any obligation to take any action.”) The
limitation being clear and definite,43 it is an age-old axiom that it is to be applied according to its ordinary
meaning.44 Furthermore,
[i]t is [] true that where the deed of trust authorizes the trustee to sell the property upon
the request of the beneficiary or creditor therein secured, such request is a condition
precedent of the trustee’s right to sell, and in the absence of such request the sale may be
set aside in a court of equity.
Wills v. Chesapeake Western Ry., 178 Va. 314 (1941). Thus, a defense is clearly present when an entity
without sole discretion invokes the power of sale.
But, who is the Lender or how does an entity acquire Lender status? In the deed of trust Lender
is the “secured party.” The contract indicates that, other than the original lender, the Lender is the entity
that has purchased the Note45 as the “Lender” would be the same entity entitled to recovery from
“Mortgage Insurance.”46 A purchase of the Note is, therefore, a prerequisite to obtaining Lender status,
and thus creates a barrier between the Property and the party attempting to foreclose.47 Upon sale and
transfer48 of rights49 in the note, the purchaser becomes entitled to payment and is further “entitled to
enforce” the deed of trust50 if necessary to protect itself from losses.51
40
A jousting event À la toille was held on either side of a barrier. Prior to the 15th century,
jousting events were conducted in the open rather than on either side of a barrier, which made the event
much more dangerous.
41
DoT at ¶ 22.
42
Citations to language in the Deed of Trust referencing “Lender” have led to significant
confusion. See Horvath v. Bank of N.Y., No. 10–1528, at 12 (4th Cir. 2011) (compare to discussion on p.
13). Herein it should be well understood that “Lender” means the originator of the loan, or purchaser of
the secured debt obligation.
43
Eliminating any doubt regarding the parties’ intent is the interpretative canon that “expressing
one item of a commonly associated group or series excludes another left unmentioned.” United States v.
Vonn, 535 U.S. 55, 65 (2002). See DoT at ¶ 7(“Lender or agent”); DoT at ¶ 22, second paragraph
(“Lender or trustee”); DoT at ¶ 22, last sentence of 2nd paragraph (“Lender or designee”); Compare with
¶ 22 (“Lender may invoke the power of sale”) and ¶ 24 (“Lender may . . . appoint substitute trustee.”).
44
Smith v. Smith, 3 Va. App. 510, 513, 351 S.E.2d 593, 595 (1986).
45
The note may be sold multiple times. DoT at ¶ 22; Note at ¶ 1
46
DoT at ¶ (N) (“Mortgage Insurance means insurance protecting Lender against the nonpayment
of, or default on, the Loan”); DoT at ¶ 10 (“Mortgage insurance reimburses Lender (or any entity that
purchases the Note) for certain losses it may incur if Borrower does not repay the Loan as agreed.”)
(emphasis added).
47
Accord VA. CODE § 8.9A–102(a)(72)(D) (“Secured Party” means a person to which . . .
promissory notes have been sold).
48
Noteholder is one who takes by transfer and is entitled to payment. Note at ¶ 1.
49
Accord VA. CODE § 8.9A–203(b) (would govern transfer of a note sold by its payee, and would
further determine whether the purchaser obtains a property right in the secured obligation pursuant to a
mandatory prerequisite—notably that value was given—that creates a security interest).
50
See Williams v. Gifford, 139 Va. 779 (1924) (“whenever the debt is assigned, the Deed of Trust
is assigned or transferred with it.” Williams further said “. . . the rule of law invoked [that the Deed of
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“The answer to the position that the debts were purchased is two-fold.”52 First, the allegation that
the debt was purchased must be stated in the original or amended bills. Second, there must be proof in the
record to support that allegation.53 The burden is on that entity to produce an “instrument of assignment,”
i.e., evidence of an assignment of the right to enforce the Deed of Trust.
When supporting proof is in the form of an original note with a specific endorsement, or there’s a
recorded instrument of assignment evidencing a clear chain of title,54 the determination of whether the
debt was purchased is an easy task.55 Since the Stimpson decision was rendered in 1886, the production of
proof has become more complicated by transactions in the secondary market. Public information
regarding the parties and specific securities involved in those transactions is often limited or non-existent.
B.
The Holder Coup de Grace56
In most instances when the Homeowner has already been mortally wounded by the financial
tactics of his opponent, the final death-blow has often been a blank endorsed note, coupled with the
argument that the recording of assignments is not required. In fact, while the law in Virginia is that
mortgage assignments need not be recorded, the statute suggests an “instrument of assignment,” in fact,
exists.57 More importantly, since Virginia is a race-notice jurisdiction, failure to record an assignment or
an interest in real property is done at one’s own peril.58 If we were to assume the entity purporting to be
assignee with authority to act under the deed of trust is, indeed, acting in good faith, that entity must still
be burdened with the risk of peril which follows from its decision to not record the purported assignment
Trust follows the Note] relates only to bona fide purchasers of the notes”); Accord VA. CODE § 8.9A–
203(g) (attachment of a security interest in a right to payment or performance secured by a security
interest or other lien on personal or real property is also attachment of a security interest in the security
interest, mortgage, or other lien).
51
Note at ¶ 11.
52
Stimpson v. Bishop, 82 Va. 190, 195, 1886 WL 2987 (1886).
53
Id. See also Nevada’s Supreme Court sides with homeowners over required documentation to
foreclose, at http://www.dsnews.com/articles/nevadas-supreme-court-sides-with-homeowners-in-foreclo
sure-cases-2011-07-13; Massachusetts Supreme Court rules unauthorized foreclosures void ab initio, at
http://www.boston.com/business/articles/2011/10/19/sjc_puts_foreclosure_sales_in_doubt/?page=1.
54
The assignment must be of the Note and Deed of Trust, as assigning the latter without the
former is a nullity. Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 21 L. Ed. 313 (1872); Williams v.
Gifford, 139 Va. 779 (1924).
55
Clerk certified court records (e.g., land records) are entitled to a rebuttable presumption of
truth. VA. CODE § 8.01–389(C).
56
The death-blow a knight gave to his mortally wounded opponent.
57
See VA. CODE § 55–66.01, providing
Whenever a debt or other obligation secured by a deed of trust, mortgage or vendor’s lien
on real estate has been assigned, the assignor or the assignee, at its option, may cause the
instrument of assignment to be recorded in the clerk’s office of the circuit court where
such deed of trust, mortgage or vendor’s lien is recorded provided such instrument is
otherwise in recordable form, or may cause a certificate of transfer signed by the assignor
to be recorded in such clerk’s office, and such instrument of assignment or certificate of
transfer, upon recordation, shall operate as a notice of such assignment.
(emphasis added).
58
Duty v. Duty, 661 S.E.2d 477, 479 (Va. 2008).
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proving its right and entitlement to enforce the Deed of Trust. The burden is on that entity to produce an
“instrument of assignment” executed prior to its commencement of foreclosure proceedings.59
The VIRGINIA CODE makes clear that an endorsement on the Note is evidence of an assignment. 60
That position is consistent with the Commonwealth of Virginia’s longstanding preference that evidence of
transfers of interest in land be in writing. Opinions rendered by the Supreme Court of Virginia have
caused Homeowners to assert that the Code could not logically include instances where the only
muniment of title is a “blank endorsement,” as that would create a great potential for fraud.61 While an
assignment of rights to enforce a Deed of Trust is not a transfer of interest in the land, actions of the
purported assignee result in a transfer of said interest—foreclosure of the property. When the only
“muniment of title” (evidence of the right to take said actions) is a blank endorsed note, parol evidence is
required to establish the foreclosing entity’s right to invoke the power of sale.
Courts have understandably approached this argument with great skepticism, essentially asking
“Fraud against whom? They are holding the original Note.” Homeowners assert the argument is sound
on the basis that fraud is committed against the land records, actual owners of the debt (often securitized
mortgage pools), and homeowners who are denied an opportunity to deal with the true owner of the debt
as its identity is often undisclosed.62 Furthermore, the foreclosure and challenge thereto, both being
actions in equity,63 the question should be whether or not the entity is, in fact, the owner of the debt; not
59
As foreclosure is an equitable remedy, Virginia foreclosure law is similar to Massachusetts,
also a Deed of Trust state. In the absence of an assignment, one must have been entitled to said
assignment when initiating the foreclosure process (i.e., is the foreclosing entity the bona fide purchaser)
See supra note 27.
60
VA. CODE § 55–66.01. See also Kelly Health Care, Inc. v. Prudential Insurance Co. of
America, Inc., 266 Va. 376, 309 S.E.2d 305 (1983), citing RESTATEMENT (SECOND) OF CONTRACTS §
317(1) (1981) (“[a]n Assignment is a transfer, but a transfer is not necessarily an assignment. If the
transfer is less than absolute, it is not an assignment; the obligee must have intended, at the time of the
transfer, to dispossess himself of an identified interest, or some part thereof, and to vest indefeasible title
in the transferee”). Accord VA. CODE § 8.9A–203(b)(1) (a security interest is enforceable against the
debtor ... only if value has been given); id. § 8.9A–102(a)(28) (“Debtor” means: (A) a person having an
interest, other than a security interest or other lien, in the collateral, whether or not the person is an
obligor) (i.e., the homeowner).
61
For example, in Thomas v. Ribble, 24 S.E. 241, 242 (Va. 1896), the Court stated:
where the instrument rises to the dignity and importance of a muniment of title every
principle of public policy demands that the proof of its former existence its loss and its
contents should be strong and conclusive before the courts will establish a title by parol
testimony to property which the law requires shall pass only by deed or will. That courts
of equity have jurisdiction to set up lost deeds or wills and to establish titles under them
can certainly not be denied but it is a dangerous jurisdiction and so pregnant with
opportunities of fraud and injustice that it will not be lightly exercised, nor except upon
the clearest and most stringent proof . . . It is the policy of the law, adopted with a view to
prevent frauds, that title to lands shall pass only by written instruments; and the
difference is more in name than in fact between giving effect to a parol conveyance of
lands and establishing a title to lands under an alleged lost deed, upon parol testimony of
its contents and loss, unless the proof be clear and conclusive. Certainly, the opportunities
for fraud are just as great in the one case as in the other.
See also Barley v. Byrd, 95 Va. 316, 28 S. E. 329 (1897).
62
Servicers act in their own interest, not those of the homeowner or the owner of the loan. See
http://www.huffingtonpost.com/2011/03/07/foreclosure-settlement-protect-homeowners_n_832699.html.
63
Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S. Ct. 2150, 115 L.Ed.2d 66 (1991) (“Even
after the debtor’s personal obligations have been extinguished, the mortgage holder still retains a “right to
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whether it has a piece of paper in its possession.64 For example, a servicer who executes and records
documents stating it is owner and holder of the Note, but, in fact, is an entity merely in possession for
servicing purposes65 does not make itself the owner (party secured by the deed of trust) by mere
possession of the Note. Just because such incorrect statements may be made in a recorded document,
giving rise to a presumption that the statements are true, does not, in fact, make them true. Virginia law
does not condone the foreclosing entity’s desired assumptions66 to be irrefutable fact.
Financial institutions heavily rely upon an opinion recently rendered by the Fourth Circuit. In
Horvath v. Bank of N.Y., No. 10–1528, 2011 U.S. App. LEXIS 10152 (4th Cir., 2011), the court held that
the Note is a negotiable instrument subject to UCC Article 3 and that possession of a blank endorsed Note
entitles its holder to enforce the terms of the Deed of Trust. Opinions from the federal Fourth Circuit are
not controlling on state courts and are merely advisory.67 Upon analysis and scrutiny, it can be justly
argued that the Horvath opinion relies on legal conclusions contrary to Virginia law. Specifically, the
court in Horvath held that separate laws do not apply to the Note and Deed of Trust, (Horvath, slip op. at
9-10) and that the holder of the blank endorsed Note is, as a matter of Virginia law, the party secured by
the Deed of Trust (id. at 8).
In General Electric Credit Corp. v. Lunsford, 209 Va. 743, 747, 167 S.E.2d 414, 418 (1969), the
Virginia Supreme Court held that “[c]ommercial law governs enforcement of notes, real property law and
equitable principles govern enforcement of the Deed of Trust.” The fact the Note and Deed of Trust are
governed by separate laws is clearly illustrated by actions following bankruptcy, as the Note is
extinguished, but the equitable remedy of foreclosure survives,68 and the statute of limitations for
payment” in the form of its right to the proceeds from the sale of the debtor’s property. Alternatively, the
creditor’s surviving right to foreclose on the mortgage can be viewed as a “right to an equitable remedy”
for the debtor’s default on the underlying obligation.”) (emphasis added).
64
In Stimpson v. Bishop, the Supreme Court of Virginia recognized that the purchase of a secured
debt carries with it the security, but “[a] mortgage secures a debt, and not the note, or bond, or other
evidence.” 82 Va. 190, 195 (1886). This is because “[a] court of equity [] looks to substance, not to form,
it looks to the debt which is to be paid, not to the hand which may happen to hold it.” Id. at 196. (internal
citations omitted) (emphasis in original). See also Williams v. Gifford, 139 Va. 779 (1924) (“. . . the rule
of law invoked [that the Deed of Trust follows the Note] relates only to bona fide purchasers of the
notes”); DoT at ¶ (G) ([T]he Deed of Trust defines “Loan” as “mean[ing] the debt evidenced by the Note .
. .”) (emphasis added).
65
Pursuant to 15 USC 1641(f)(2):
A servicer of a consumer obligation arising from a consumer credit transaction shall not
be treated as the owner of the obligation for purposes of this section on the basis of an
assignment of the obligation from the creditor or another assignee to the servicer solely
for the administrative convenience of the servicer in servicing the obligation.
See also supra note 60.
66
“‘Artificial presumptions, made by the law itself, are not in general used as rules of evidence
for the purpose of ascertaining doubted facts, but are, in effect, mere arbitrary rules of law, which,
according to the policy of the law, operate in some instances conclusively, and which in other instances
again, where a peremptory and absolute operation would be attended with inconvenience, may be
answered and rebutted.’ 3 Starkie, Ev. marg. P. 1241. See also 1 Greenl. Ev. §§ 14, 17, 39.” Tunstall’s
Adm’r. v. Withers, 80 Va. 892, 11 S.E. 565, 567 (1890).
67
See Maxey v. Am. Cas. Co, 23 S.E.2d 221, 223 (Va. 1942) (undoubtedly sound is the contention
that a federal court’s construction of a statute is not binding upon the Supreme Court of Virginia although
it may have a persuasive influence); Anderson v. Commonwealth, No. 0528–10–4 (Va. Mar. 8, 2011)
(federal cases cited by appellant are not binding upon this Court).
68
See Johnson v. Home State Bank, 501 U.S. 78 (1991).
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enforcement of the Note after a default is six (6) years,69 but the Deed of Trust can be enforced up to ten
years past its maturity date (up to forty (40) years when securing a 30-year note).70
While the Note is a negotiable instrument, UCC Article 9 governs notes (negotiable or not71)
secured by a lien on real property,72 but does so subject to state law.73 The UCC itself makes a clear legal
distinction between the UCC Article 3 “holder” of a blank endorsed “negotiable instrument” and the UCC
Article 9 “secured party,” defined as one who purchased the secured note—gave value.74 Further, UCC
Article 9 provides steps that may be taken by the “secured party” to enforce a Deed of Trust nonjudicially.75 In the event of a conflict between UCC Articles 3 and 9, the latter governs.76 These citations
strongly suggest that rights to enforce a secured note are, in fact, not synonymous with person in
possession.77 This nuanced but important distinction was overlooked in Horvath.
The effects of the Horvath opinion are seen in cases subsequently decided by the Fourth Circuit.
In Tapia v. U.S. Bank, N.A., No. 10–1856 (4th Cir. 2011), there was no evidence of an assignment,
possession of the original note, nor an affidavit of lost note. In Bernardo v. Nat’l City Real Estate Serv.
LLC., No. 10–1803 (4th Cir. 2011) and Larota-Florez v. Goldman Sachs Mortg. Co., No. 10–1523 (4th
Cir. 2011), the servicer appointed the substitute trustee claiming to be owner and holder of the note,
despite having conceded on the record it was not the owner of the note. All three challenges to the
respective foreclosures were dismissed by the Eastern District of Virginia court (Tapia and Bernardo on
12(b)(6) motions, Larota-Florez on summary judgment) and affirmed on appeal in unpublished per
curiam opinions citing Horvath.78
69
VA. CODE § 8.3A–118(a).
70
Id. § 8.01–241(A)
71
Id. § 8.9A–102(a)(47) (“‘Instrument’ means a negotiable instrument or any other writing that
evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and
is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement
or assignment”).
72
Id. § 8.9A–102(a)(47) (55) (“‘Mortgage’ means a consensual interest in real property, including
fixtures, which secures payment or performance of an obligation”).
73
Id. § 8.9A–201 (c). See supra note 31.
74
Id. § 8.3A–301 (“‘Person entitled to enforce an instrument means (i) the holder of the
instrument … [A] person may be a person entitled to enforce the instrument even though the person is not
the owner of the instrument or is in wrongful possession of the instrument”) (thus the phrase, “even a
thief can enforce a blank endorsed note”); id. § 8.9A–102(a)(72)(D) (“‘Secured Party means a person to
which ... promissory notes have been sold”).
75
VA. CODE § 8.9A–607(b) (non-judicial enforcement of mortgage) provides that “if necessary to
enable a secured party to exercise ... the right to enforce the mortgage nonjudicially,” the secured party
may record in the land records for the County where the Deed of Trust is recorded the secured party’s
affidavit stating default has occurred and that the secured party is entitled to enforce the Deed of Trust
non-judicially.
76
VA. CODE § 8.3A–102(b) (“if there is a conflict between this title and . . . Title 8.9A, . . . Title
8.9A govern[s]”).
77
See supra note 65.
78
Tapia aside, had the servicer executed documents as agent for the owner, as opposed to
misrepresenting its status as owner and holder of the Note, then the recorded documents would be
truthful, legal title would pass to substitute trustee, and homeowner would have no objection thereto. See
Horvath v. Bank of N.Y., No. 10–1528, slip op. at 13 (4th Cir. 2011) (“if you sell it you no longer have
those rights”); accord VA. CODE § 8.9A–318 (No interest retained in right to payment that is sold; rights
and title of seller of account or chattel paper with respect to creditors and purchasers. (a) Seller retains no
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Requiring that one be the owner of the mortgage note/Deed of Trust is not unique to Virginia, as
many states foreclosure laws require the same. As noted above, Maryland requires that the foreclosing
entity file an affidavit of debt ownership; the financial entities foreclosing in Maryland are not objecting
to that requirement based on possession of a blank endorsed note. Rather, they comply with it and swear
they own the debt, just as they must strictly comply with the terms of a Virginia Deed of Trust and be the
owner of the debt.79
C. The Lost Note Atteint80
VA. CODE § 55–59.1 states if the trustee has the original Note, or an affidavit of lost note, it may
proceed to sell the property. Frequently the first written notice a homeowner receives from a foreclosing
trustee is a letter announcing that the note is lost, misplaced, destroyed, or otherwise unavailable at this
time. The letter further says that notwithstanding the unavailability of the note, the “lender,” “creditor,”
“servicer,” or some other party will request the trustee to begin foreclosure within fourteen days. The
trustee advises the homeowner that, if the homeowner believes the loan is owed to another party other
than the party named by the trustee, then the homeowner should seek adequate protection from the Circuit
Court pursuant to VA. CODE § 55–59.1. Nearly unanimously, homeowners ignore this letter because it
does not announce an imminent foreclosure sale. That is unfortunate.
This statutory provision was also first adopted in the 1979 foreclosure procedures restatement.
Along with the next three provisions, the principal intent of the legislature was to clarify rules on
publication. Nevertheless, the ameliatory language in VA. CODE § 55–59.1 (making the result of an
inadvertent error in the required mailed notifications a voidable, not void, foreclosure) was not present in
VA. CODE § 55–59.2 (making a failure of published notice result in a void foreclosure).81 Sub-section B
of § 55–59.1 is a notice requirement intended to protect the trustee from liability to homeowner in the
event that the trustee is not itself in possession of the note at the foreclosure sale. At least that was its
original intent. Now putative noteholders use the sub-section to proceed to foreclose when, in fact, the
original note has been lost in the complicated sale and resale process of securitization, and cannot ever be
produced. A reasonably acting trustee will not foreclose until it knows where the note is located, and, in
fact, exists. On the other hand, “the fact that the instrument is lost or cannot be produced shall not affect
the authority of the trustee to sell or the validity of the sale,” if the trustee proceeds. To proceed without
evidence of the note or a lost note affidavit, as the section describes, would imply that the trustee might be
liable to the homeowner.
Various issues have been litigated concerning VA. CODE § 55–59.1.B., but none have been
resolved by the Virginia Supreme Court. The Supreme Court did grant an emergency injunction stopping
interest. A debtor that has sold an account, chattel paper, payment intangible, or promissory note does not
retain a legal or equitable interest in the collateral sold).
79
This is consistent with other areas of the law. See, e.g., Fair Debt Collections Practices Act, 15
U.S.C. § 1692(a)(4) (“‘Creditor’ does not include persons who receive an assignment or transfer of a debt
in default solely for purpose of facilitating collection of debt for another”); Real Estate Settlement
Procedures Act, 15 U.S.C. § 1641(f)(2) (servicer will not be treated as owner of obligation on basis of an
assignment from creditor or another assignee solely for administrative convenience in servicing the
obligation); May 2009 amendment to Truth In Lending Act requiring homeowners to be notified when
mortgage loan is sold (see Federal Reserve advisory opinion, 12 C.F.R. 226, on the giving of notice when
the loan appears on your “books and records,” as well as the Note at ¶ 11, which reads “the Deed of Trust
protects the Noteholder from possible losses” in the event of default (only the bona fide purchaser would
have any losses).
80
Atteint was a common term used to determine a hit in a joust.
81
See Deep v. Rose, 234 Va. 631, 364 S.E.2d 228 (1988) (which contains a thorough history of
notice requirements’ statutes in Virginia).
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a foreclosure and directing the trial court to consider the application of a UCC provision defining the
provisions of an adequate lost note affidavit to the requirements of this section.82 In later proceedings in
the same case, the trial judge determined the remedy of “adequate protection” provided in the section is
not the sole remedy available to homeowner.83 Other issues pending a future resolution include whether a
servicer that is claiming to be attorney-in-fact for the beneficiary can provide and execute the affidavit of
lost note,84 what is “adequate protection,”85 and is the homeowner entitled to the affidavit as part of the
required notice.86
None of these issues are fairly addressed. The routine nature of those letters is to determine if
there is going to be a challenge and, if not, the note does not have to be produced until the
Commissioner’s report post-sale (and, for that, a copy, even from the loan closing agent, will probably
suffice).
D.
Appointment of Substitute Trustee—Nail Money87
Applying the terms according to their plain meaning, Virginia's “Foreclosure Law” (the terms of
the Deed of Trust) is fairly clear: the Lender, or its successor in interest—the party secured by the Deed of
Trust—may invoke the power of sale or appoint a substitute trustee. If one other than the party secured
by the Deed of Trust takes said actions, the foreclosure may be set aside. Consistent with the parties
having the ability to determine the terms which will govern in the event of default/foreclosure, the
Virginia Supreme Court has held that the appointment of a substitute trustee must conform precisely to
the trust document.88 The intent to limit who may appoint a substitute trustee is explicit. Paragraph ¶ 24
of the Deed of Trust states the “Lender may appoint a substitute trustee.” (See DoT at ¶ 16(c) (“may” is
defined as “giv[ing] sole discretion without any obligation to take any action”).)
Those terms in the Deed of Trust are of great importance as “[i]t is [] true that where the deed of
trust authorizes the trustee to sell the property upon the request of the beneficiary or creditor therein
secured, such request is a condition precedent of the trustee's right to sell, and in the absence of such
request the sale may be set aside in a court of equity.”89 The terms and conditions “being a part of the
82
Tiemeyer v. Residential Credit Solutions, Inc., No. 100733 (Va. Apr. 19, 2010).
83
Tiemeyer v. Residential Credit Solutions, Inc., Case No. CL10002173 (Alexandria, Va. Cir. Ct.,
Oct. 14, 2010).
84
Giving testimony for the principal is not an ordinary power of an attorney-in-fact and, if not
prohibited by the common law, such power can only be exercised by a specific grant in the written power
of attorney.
85
The statute seems to suggest that it is something that the beneficiary can provide—e.g., cash—
making an injunction unnecessary, but an injunction seems like the most effective remedy.
86
As written, the statute only protects the trustee when proceeding to foreclose without the note
but with the defined affidavit. Without evidence to the homeowner, the resultant situation is that it is far
easier to foreclose than it is to collect any post-foreclosure deficiency. This is particularly true in the not
uncommon scenarios of a failed bank (whose loan documentation may have passed through an MBS trust
and the FDIC) or sale of pooled loans to another MBS trust at a discount, the result of which being that
the successor entity never received the original note and is now asserting that it is lost.
87
The money paid to a tournament herald for nailing on a tree the challenging knight’s shield.
88
Frazer v. Millington, 252 Va. 195, 475 S.E.2d 811 (1996). See also Little v. Ward, 250 Va. 3,
10, 458 S.E.2d 586, 590 (1995) (when a substitute trustee of a trust is not validly appointed, a court
properly strips the substitute trustee of its powers); Washington, Alexandria & Georgetown R.R. Co. v.
Alexandria & Washington R.R.Co., 60 Va. (19 Gratt.) 592, 1870 WL 3568 (Mil. Ct. App. Feb. 14, 1870)
(appointment of trustee that does not strictly comply with the trust document is void).
89
Wills v. Chesapeake Western Ry., 178 Va. 314 (1941).
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contract of the parties, which neither could violate without the consent of the other, and over which the
court would have no control,” all actions under the contract must be in compliance with those terms and
conditions.90 An explicit limitation clearly creates a defense when a party without the required sole
discretion appoints a substitute trustee and then immediately thereafter invokes the power of sale.
Scrutiny of the Appointment of Substitute Trustee document often evidences a break in the chain
of title as there is no indication that the right to enforce the Deed of Trust was assigned by the original
Lender to the entity executing the document. If the appointment of substitute trustee is executed by an
entity that is not the party secured by the Deed of Trust, the substitute trustee in fact has no authority to
act as legal title has not been transferred, the appointment document is void and of no legal effect, and
any resulting foreclosure sale would be void, or at least voidable. This is no different than a party to a
contract for the sale of real estate executing said contract when that party is not, in fact, the owner able to
transfer title. It has no legal effect on the title to the property.
The vast majority of substitute trustee appointment documents contain language that is not in
compliance with the terms of the Deed of Trust. Three examples of the most commonly used language
are highlighted below:
x
“WHEREAS, SECTION 55–59(9) of the code of Virginia provides that the
Noteholder may remove the trustee(s) of the Deed of Trust and appoint successor
trustee(s) for any reason;”
But VA. CODE section 55–59(9) is inapplicable because the terms of the contract—the Deed of Trust—
control, and the Deed of Trust does not reference the “Noteholder.”
x
“WHEREAS, the aforesaid Deed of Trust provides that the holder of the note secured
thereby may remove the Original Trustee(s) and appoint successor trustees;”
But the Deed of Trust does not mention the “holder of the note secured [by the Deed of Trust].”
x
“WHEREAS,[Bank], as Trustee for the [ABC TRUST 2006–1] is the present holder
or authorized agent of the holder of the Note secured by the below described Deed of
Trust (hereafter referred to as ‘Noteholder’).”
This language is insufficient. Foreclosing entities want to attach the UCC Article 3 definition of “holder”
to the term “Noteholder” and avoid or circumvent the term as defined in the Note itself at ¶ 1—one who
takes by transfer and is entitled to payment.91 A thief is not “entitled to payment,” nor is the servicer
which is collecting the payment for another. The definition in the Note parallels the “mortgage-note
holder” definition governed by UCC Article 9, requiring that evidence of an assignment entitling one to
payment exist as a condition precedent to invoking the foreclosure process.
Virginia law requires that one be a resident/corporation of the Commonwealth to serve as trustee
to a Deed of Trust.92 Despite this requirement, an entity known as Recontrust Company, N.A., a Bank of
America subsidiary, is a foreign entity with no principal office in the Commonwealth and is regularly
appointed as a co-substitute trustee to conduct foreclosures in Virginia. In Fairfax and Prince William
Counties alone, Recontrust conducted more than 1000 foreclosures in the month of October 2011. Not
only is VA. CODE § 55–58.1(2) violated, all requests for information about the loan made by a
homeowner to the Virginia co-trustee are forwarded to Recontrust. In Virginia, a trustee is to act
90
Tabet v. Goodman, 118 S.E. 230 (Va. 1923).
91
Apt Investment & Mgmt. v. National Loan, 518 S.E.2d 627 (Va. 1999) (the parties are bound by
the definition of “Noteholder” in the note)
92
VA. CODE § 55–58.1(2).
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impartially in the conduct of its duties with regard to the deed of trust. When a bank subsidiary acts
unilaterally, it is not acting impartially and the conflict of interest is clear. In an attempt to address those
issues, the States of Washington and Utah, which have a similar limitation on who can serve as trustee,
recently filed suit against Recontrust for this violative activity.93
When the original trustee to the Deed of Trust is not substituted out, homeowners face a difficult
challenge identifying the entity which is “invoking the power of sale.” The request to foreclose was more
than likely sent by the servicer. There is no document appointing a substitute trustee, so the next best
place to look is the Fair Debt Collection Practices Act Notice, which must identify the current secured
creditor in the first communication, or within five (5) days thereafter.94 This rarely occurs, and when it
does it often erroneously identifies the servicer.95 A Qualified Written Request, citing 15 U.S.C. §
1641(f)(2) might yield a response from the servicer identifying the current secured creditor, but responses
often give the same erroneous information as the FDCPA notice, or worse:
Your client’s loan is not owned by a single investor whose identity is easily ascertained.
Instead, their loan is part of a private securitization we service, meaning it has been
“pooled” with other similar mortgages that comprise the underlying assets in a mortgage
backed security. Mortgage backed securities are freely and frequently traded on the open
market through various channels and are accounted for as pooled loans, not individual
loans. The pool their loan is tied to could be owned by an individual investor or it could
be owned by several investors and it could be bought and sold on the open market several
times per week. Once the pool is traded on the open market, individual owner
information is not given to IndyMac Mortgage Services.
Other problematic foreclosure issues include disregard for long standing principles of agency law.
While there is no objection to an agent acting on behalf of its principal, basic agency law requires that the
principal as the proper party be identified and that the agent be authorized to act pursuant to some type of
power of attorney or agency agreement. Further, as the document appointing the substitute trustee is put
to record,96 the recitations therein must be truthful and complete to ensure an unbroken and accurate chain
of title. Again, this is no different than a party to a contract for the sale of real property executing said
contract when that party is, in fact, not the owner able to transfer title to the property. It has no legal
effect on the title to the property. Lastly, imagine selling a home as “attorney-in-fact” for the owner, but
not mentioning the owner's name in the contract; or buying a home and executing the Note and Deed of
Trust only as “authorized agent of the purchaser.” No one would even suggest that the document has any
legal import. Yet, ignoring agency law principles, this appears to be the norm in the Commonwealth at
93
See Bank of America’s Recontrust sued by Washington State over Foreclosures, at http://
www.bloomberg.com/news/2011-08-05/bofa-s-recontrust-unit-sued-by-washington-state-over-foreclosure
-practices.html. See also Bank of America v. Fowlke, Case No. 2:11–CV–828 CW (D. Utah Sept. 16,
2011), remanding the case of Washington v. Recontrust Co., 11–26867–5 (Sup. Ct. King County, Wash.)
(Seattle) to state court after removal. It is anticipated that Recontrust will rely on its status as a “National
Association,” putting it under the jurisdiction of federal banking laws, but acting as a substitute trustee is
not a “banking activity.” It remains to be seen whether or not this insulates it from compliance with state
statutes when serving as trustee to a Deed of Trust.
94
15 U.S.C. § 1692(g)(A)(2) (Within five days after the initial communication with a consumer
in connection with the collection of any debt, a debt collector shall, unless the following information is
contained in the initial communication or the consumer has paid the debt, send the consumer a written
notice containing the name of the creditor to whom the debt is owed).
95
Claims for violation of the FDCPA have been similarly unsuccessful in the Eastern District of
Virginia based on the servicer’s possession of the blank endorsed Note. See supra note 60, 79.
96
VA. CODE § 55–59(9) (The instrument of appointment shall be recorded in the office of the
clerk wherein the original deed of trust is recorded prior to or at the time of recordation of any instrument
in which a power, right, authority or duty conferred by the original deed of trust is exercised).
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this time with respect to assignment of mortgages and appoint documents. This issue is best illustrated by
the industry's use of Mortgage Electronic Registration Systems, Inc.
IV.
THE MERS RECESS97
Mortgage Electronic Registration Systems, Inc. (“MERS”) is an electronic registry that
purportedly tracks ownership of the note/mortgage. As created by the founding financial institutions,
MERS circumvents the county land recording systems throughout Virginia and the country in general.98
In the Deed of Trust it is asserted that MERS “holds bare legal title;” yet the trustee holds legal title in a
Deed of Trust state, so the actual role and authority of MERS is confusing at best, non-existent at worse.
While many Courts across the country are closely scrutinizing the actions of MERS and finding it has no
authority to assign the Note and Deed of Trust or to appoint a substitute trustee,99 thus far Circuit Courts
in Virginia have ruled otherwise. In a recent Fairfax case, Graves v. MERS, Case No. CL–2010–17101
(Fairfax Cir. Ct., June 29, 2011) MERS appointed a substitute trustee identifying itself in the document as
“Beneficiary” and as “holder of the Deed of Trust,” both untruthful designations. As in Graves, courts
ruling that an assignment of the mortgage or an appointment of a substitute trustee by MERS is valid
usually state the following as grounds: MERS is named as “Beneficiary” in the Deed of Trust (DoT, first
page), is acting “solely as nominee for Lender and Lender's assigns” (DoT, ¶ E Definitions) (emphasis
added), and “MERS holds only legal title to the interests granted by Borrower in this security instrument,
but, if necessary to comply with law or custom, MERS, as nominee for Lender and Lender’s successors
and assigns, has the right” to take any and all actions on behalf of the Lender, including foreclosure (DoT,
¶ following the legal description). But such assertions ignore the fact that:
1) The Deed of Trust has very specific covenants addressing who can take certain actions
(invoke the power of sale & appoint a substitute trustee) which are in conflict with
general language in the preamble of the Deed of Trust concerning MERS. Further, it is
well established in Virginia that “where there is a repugnancy, a general provision in a
contract must give way to a special one covering the same ground.”100
2) The Deed of Trust—a uniform instrument used in all 50 states—provides that MERS
may act as nominee for Lender “if necessary to comply with law or custom.”101 While
the laws vary greatly from state to state, there is no “law or custom” in Virginia that
97
A recess was a safe area where horsemen and knights could gather and rest without fear of
98
See supra note 6.
capture.
99
Landmark National Bank v. Kesler, 40 Kan. App. 2d 325, 192 P.3d 177 (2008); In re: Ferrel L.
Agard, Case 8–10–77338–reg (Bankr. Ct. E.D. N.Y., Feb. 10, 2011); MERS v. Southwest Homes of
Arkansas, 2009 WL 723182 (Ark.); Consolidated cases Residential Funding Co, LLC, f/k/a Residential
Funding Corporation v. Gerald Saurman and Bank of New York Trust Company v. Corey Messner, No.
290248 (Kent Cir. Ct.) and No. 291443 (Jackson Cir. Ct.), respectively, (Mich. Ct. App. Apr. 21, 2011).
100
Bott v. N. Snellen Burg & Co., 14 S.E.2d 372, 374–75 (Ga. 1941) (internal citations omitted);
Berry v. Klinger, 225 Va. 201, 208, 300 S.E.2d 792 (1983) (court must give effect to all language of a
contract if its parts can be read together without conflict [and, where] possible, meaning must be given to
every clause); Donnelly v. Donatelli & Klein, Inc., Record No. 982204 (Va. Sept. 17, 1999) (where
general and specific provisions do not cover the same ground there is no basis for conflict and the terms
must be given the meaning intended by the parties).
101
When MERS executes documents in its proper capacity—“as nominee for [original lender]”—
the “if necessary to comply with law or custom” language would still preclude MERS from acting. Wills
v. Chesapeake, 178 Va. 314 (1941) (where a provision within the deed of trust contains a condition
precedent, the parties must strictly comply therewith) (relating to condition precedent prior to sale).
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allows an entity such as MERS to assign the Note102 and Deed of Trust, to assign the
deed of trust but not the note,103 or to appoint a substitute trustee. Even were MERS
granted this authority under Virginia law, it would have to act as “nominee for [current
secured creditor],” not in its own name as it has no interest of its own to transfer. Despite
what appears to be a clear limitation on MERS’ authority to act, the financial institutions
have thus far persuaded courts in Virginia to ignore that language.
“Why does this matter?” is the position of the financial institutions, and at times the courts
themselves. If MERS executes as “beneficiary,” as opposed to “nominee for [current secured party],” the
land records accept that as true—MERS was the beneficiary, which creates a very different (and
untruthful) chain of title. Clearly, if the representation is not true, then the document has no legal effect.
Again, this is no different from any other agency relationship—the capacity with which the agent
executes documents is of significant importance. While MERS is designated as “Beneficiary” in the
Deed of Trust, in fact, it is not the beneficiary104 of either the Note or the Deed of Trust and failing to
question its designation places more emphasis on form while ignoring substance. Despite the potential
for creating confusion and inaccurate land records, the financial institutions persist in executing
documents with false statements as to ownership or agency and continue to suggest that “it does not
matter” when conducting their foreclosure activities. Title companies should anticipate the problems that
will undoubtedly befall the industry in coming years.
While the financial institutions may have established an industry practice, that does not allow
them to ignore the laws of the Commonwealth. Virginia’s Supreme Court has been quite clear that
Virginia’s laws addressing loans are to be enforced even when those laws invalidate a wide-spread
industry practice and that lenders cannot ask the Court to grant the financial industry exemptions from
existing statutes.105
V.
THE UNLAWFUL DETAINER BERFROIS106
Defense against foreclosure does not end with a foreclosure sale or the termination of litigation to
set aside the foreclosure. Often, the foreclosure defense lawyer is not retained until after the foreclosure
and at the time of service of an unlawful detainer summons on the homeowner. As this process is
judicial, many homeowners approach the unlawful detainer/eviction court thinking this is their
opportunity to have a judge adjudicate their grievances with the lender, the government, even the system.
Whether due to denial, despair, or lack of funds, the defaulting homeowner ignores the notices of
foreclosure or relies upon the oral promise of a stayed foreclosure from a shady loan modification
company or a misleading servicer to the homeowner’s detriment. Subsequent to foreclosure the
homeowner will receive a notice to quit the premises from the purchaser at the foreclosure sale. 107
Drawing upon the five-day pay or quit notice from landlord-tenant law, the notice is usually five days. At
102
MERS is not mentioned in a uniform Note and has no interest therein.
103
This violates Virginia law. See supra note 54.
104
If MERS were the beneficiary of the Deed of Trust, this would mean the Deed of Trust was
split from the Note, as the beneficiary of the Note certainly is not MERS, a quandary that MERS, and
many courts, refuse to even acknowledge. RESTATEMENT (THIRD) OF THE LAW, PROPERTY—
MORTGAGES, § 5.1, at 327 (The American Law Institute, 1997) (split allowed if intended by the parties).
105
Taylor v. Roeder, 360 S.E.2d 191, 234 Va. 99 (1987).
106
Grandstand which housed the ladies and nobility while watching the jousting tournament.
107
Although the notice is normally given, unlike the landlord-tenant law, there does not appear to
be a statutory requirement for the notice to quit. General District judges expect one to be given, however,
and might deny an order for possession without the notice having been given. But see VA. CODE § 55–
225 (which does require such notice if damages are sought in an unlawful detainer brought under VA.
CODE § 8.01–126).
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the end of the five days, assuming no abandonment of the property by the foreclosed homeowner, a
Summons for Unlawful Detainer will be filed in the General District Court by the purchaser, served, and
made returnable for about 21 days later.108
Post-foreclosure defense, then, begins with advising the homeowner how much lawful occupancy
time the family has. Since a valid foreclosure effects a transfer of title from the homeowner to the
foreclosure purchaser, the homeowner has become a tenant at sufferance of the purchaser, now landlord
by operation of law. The landlord, however, cannot recover possession of the property without an
appropriate court order. Self-help eviction is not authorized.109 The landlord must pursue the unlawful
detainer process. The homeowner must appear at “the first return” and advise the judge if the eviction is
contested. If it is, the case will be set down for a trial date, with a Bill of Particulars, and Answer and
Grounds of Defense filed, if requested and ordered by the court. Some courts have such a heavy docket
of unlawful detainer cases that they are assigned specific trial and first return dates. Prince William
General District Court, for example, hears unlawful detainer cases every Friday afternoon at 1:30PM;
City of Fredericksburg on the second and fourth Mondays of each month at 8:30AM. Fairfax General
District Court hears unlawful detainer cases arising from foreclosures on the second and fourth Thursday
of each month at 2:00PM.110 Depending on the court’s docket, the trial of the unlawful detainer may not
be for several weeks. Until the trial is held and the judge awards possession to the foreclosure purchaser,
the homeowner may lawfully continue to occupy the residence. Time of possession after the foreclosure
can be reasonably projected at one to two months depending on local General District Court trial
scheduling.
If the homeowner does not appear at the first return, the judge can grant “immediate possession”
of the property to the purchaser at the foreclosure. If, however, there is a contest, a writ of possession
may not issue for ten days after entry of an order of possession.111 During that ten days, an appeal can be
noted and perfected to the Circuit Court for a trial de novo. Of course, an appeal bond may not be
feasible for every homeowner,112 but, if one can be posted, the new trial may be weeks or months down
the road. If there will be an extended delay, purchaser’s counsel may move for summary judgment, an
increase in the amount sued for (or to include a claim if one was not originally sought), and/or an increase
in the appeal bond. If these costs can be absorbed, the homeowner may lawfully maintain possession for
several months after foreclosure. In exchange for shortening that possession, purchasers, particularly
lender-purchasers with REO inventory to move, may offer financial incentives (often called “cash-forkeys”) for quick and orderly vacating of the premises.
108
VA. CODE § 16.1–77(3). Original jurisdiction of unlawful detainer actions is concurrent with
the Circuit Court. See VA. CODE §§ 8.01–124, et seq. As provisions in Title 8.01 concerning unlawful
detainer seem to conflict with General District Court procedural provisions—e.g., VA. CODE § 8.01–129
pertaining to appeal bonds—there are opportunities for counsel to minimize the financial impact of
displacement or to extend occupancy for counsel’s client by diligent study and application of all pertinent
unlawful detainer statutes.
109
VA. CODE §§ 8.01–126, 55–248.26, 55–248.36.
110
This information is generally available on the “Virginia’s Court System” page (where each
General District Court has a page with its calendar posted) at http://www.courts.state.va.us/main.htm.
111
VA. CODE § 8.01–129 provides: “Unless otherwise specifically provided in the court’s order,
no writ of execution shall issue on a judgment for possession until the expiration of this 10–day period,
except in cases of judgment of default (i) wherein the case arises out of a trustee’s deed following
foreclosure…”
112
Unless damages have been sought on the initial Summons for Unlawful Detainer, the appeal
bond appears to be limited to three months fair market rent by VA. CODE § 8.01–129. This provision may
conflict with—but we believe trumps—VA. CODE §§ 16.1–106 and 16.1–107. There are also
implications for VA. CODE § 16.1–107.
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The outcome in the vast majority of unlawful detainer cases is an award of possession to the
foreclosure purchaser. On occasion the servicer brings the unlawful detainer action in its name but the
grantee on the Trustee’s Deed is usually another party (a mortgage-backed securities trust or its Trustee).
Such an error cannot be corrected even by amendment of the initial pleading, because it is an action by a
wrong party (and not merely one misnamed).113 The complexities of title transfers among servicers, trusts,
and trustees can give rise to variations on this defense. For example, consider the scenario in which a
national bank brings the action for unlawful detainer in its own name, but the Trustee’s Deed names the
national bank as trustee for an MBS trust for which another unrelated lender is the beneficiary.
Title to the property is not an issue in an unlawful detainer case; the greater right of possession is
the only issue. The judges do recognize that a right of possession is one of the bundle of rights inherent
in ownership of property. Consequently, while title might not be an issue, the plaintiff must have at least
a facially valid title in order to proceed. A common evidentiary limitation in unlawful detainer cases was
stated by Fairfax Circuit Judge Jonathan C. Thacher in Bank of New York Mellon v. Nguyen, CL2009–
16787 (Fairfax County, Va. Cir. Ct., March 30, 2010): “The parties may introduce any evidence at trial
that is probative as to who holds a facially valid title to the Property. No evidence may be admitted,
however, which would serve only to attack a facially valid title.” Consequently, the only evidence
received at many of these trials is a clerk-certified copy of the Trustee’s Deed, because it tends to
establish a facially valid title in favor of the foreclosure purchaser (who is the grantee on that deed). 114
That the homeowner could produce a clerk-certified copy of the homeowner’s deed of conveyance would
also appear admissible as it also tends to establish a facially valid title.
The idea that title is not involved in an unlawful detainer case appears solidly established in
Virginia.115 Nevertheless, fraud or mistake on the part of a landlord in obtaining title can be set up as a
defense in an unlawful detainer action.116 Since many grantees of Trustee’s Deeds were also the
appointers of the substitute trustees who executed those deeds and conducted the foreclosures, and given
that there is common knowledge of and often specific evidence of robo-signings, unauthorized attorneysin-fact, questionable corporate relationships, etc., by those grantees, the potential fraud on the land
records by an unlawful detainer plaintiff ought to be a defense to a homeowner.117
Arguments against inclusion of title evidence in an unlawful detainer case rest more on the
limited subject matter jurisdiction of the General District Court (no jurisdiction to try title) and less on the
limitation of the issues in an unlawful detainer case to possession only, whether in the General District or
Circuit Court. Often cited to support the limited subject matter jurisdiction of the General District Courts
and the consequent limited review by Circuit Courts upon appeal is a string of Virginia cases.118 If an
113
Harmon v. Sadjadi, 273 Va. 184, 639 S.E.2d 294 (2007).
114
It appears necessary to produce a clerk-certified copy of the Trustee’s Deed to prove the case
if the right of possession is challenged. VA. CODE § 8.01–389(C) is relied upon to provide prima facie
truth of the representations in the deed, including vested ownership in the grantee. An uncertified copy is
not entitled to judicial notice, and, consequently, a facially valid title is not established.
115
See, e.g., Emerick v. Tavener, 50 Va. (9 Gratt.) 220, 1852 WL 2891, 58 Am. Dec. 217 (1852).
116
Alderson v. Miller, 56 Va. (15 Gratt.) 279, 1859 WL 4566 (1859).
117
Consider Rule 7B:3(a) of the Rules of the Supreme Court of Virginia which applies to General
District Court civil procedure: “A party asserting either a claim, counterclaim, cross-claim or a defense
may plead alternative facts or theories of recovery against alternative parties, provided that such claims,
defenses, or demands for relief so joined arise out of the same transaction or occurrence.”
118
Hirschkop v. Commonwealth, 209 Va. 678, 166 S.E.2d 322 (1969); Hoffman v. Stuart, 188 Va.
785, 51 S.E.2d 239, 6 A.L.R.2d 247 (1949); Stacy v. Mullins, 185 Va. 837, 40 S.E.2d 265, 168 A.L.R.
636 (1946); Addison v. Salyer, 185 Va. 644, 40 S.E.2d 260 (1946). Only Addison dealt with title to real
estate; the others deal with plaintiffs’ attempts to expand the jurisdiction of the court not of record after
appeal or removal by the defendants.
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unlawful detainer case were originally filed in a Circuit Court, given its greater equitable and legal
jurisdiction, a homeowner might be able to assert a defense based on a fraud-induced title. That
foreclosure purchasers choose the General District Court route to move the cases along summarily ought
not to be held against homeowners. Consider this language:
…After removal the defendants may proceed as if plaintiffs had filed a notice of
motion against them in the circuit court. The defendants have not chosen the trial justice
as the tribunal in which to assert their claim, with the avowal implicit in that act that that
court has jurisdiction of their claim. On the contrary, they have removed the case to the
circuit court to assert there a cross-claim which section 6097a expressly prohibits them
from asserting in the trial justice court. Not having invoked the jurisdiction of the trial
justice court, their claim is not subject to the limitation on the jurisdiction of that court.
There is no reason that we can think of why it should be.
Hoffman v. Stuart, 188 Va. 785, 794–795, 51 S.E.2d 239, 6 A.L.R. 2d 247 (1949). Given that the right to
remove a case to the Circuit Court was repealed by the General Assembly in 2007, homeowners should be
allowed to assert the defense of title in the General District Court, or, after having posted an appeal bond
just to get to the Circuit Court, at least be able to present that defense in the Circuit Court with its
enlarged jurisdiction.119
Finis
Virginia foreclosure law is governed by the terms of the Deed of Trust, or, if incomplete, by the
applicable statutes of Title 55 of the Code of Virginia. Therefore, the UCC does not govern a foreclosure,
but can assist in making legal determinations, such as “who is the party secured by the Deed of Trust.”
The Deed of Trust is quite clear: only the Lender, or its successor in interest may invoke the power of sale
and appoint a substitute trustee. If one other than the secured party appoints the substitute trustee or
invokes the power of sale, then title flowing from the transactions carried out by said substitute trustee
may be void, and an action to remove unauthorized documents in the land records will succeed causing
title to revert to the foreclosed homeowner.
It is our hope that this article will assist you in ensuring a return to protecting the sanctity of the
land records, and provide you with the tools useful in protecting homeowners threatened with foreclosure
or eviction. Despite what appears to be clear caselaw, the aging of that caselaw requires a statement from
the Virginia Supreme Court that, in fact, the terms of the Deed of Trust control, and, if those terms are
violated, the foreclosure can be set aside.
Counsel who routinely handle foreclosures often consult with one another. They talk informally
outside court on Motions Day and before unlawful detainer dockets. They share experiences, court
rulings, and trial tactics. On the other hand, counsel who represent homeowners are as isolated as the
homeowners they represent. Counsel doing foreclosure defense should be sharing statewide trial and
judicial experiences. Please contact us if you would be interested in an e-mail network to exchange
decisions and theories.
119
Appealing a Circuit Court decision to the Supreme Court of Virginia is also an option for the
unlawful detainer case. Doing so, however, is most likely not a deterrent to the issuance of a writ of
possession. Staying the issuance of the writ will probably be a burden for the homeowner, including
requesting and posting a supersedeas bond. See VA. CODE § 8.01–676.1.
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EXAMINING VIRGINIA’S PUBLIC PRIVATE TRANSPORTATION ACT EXPERIENCE:
HISTORY, PROCEDURES & ISSUES REGARDING ACQUISITION OF REAL PROPERTY
INTERESTS UNDER THE ACT
James Webb Jones*
INTRODUCTION
Real estate lawyers – and especially those engaged in eminent domain litigation or negotiations
for the acquisition of real property interests under the threat of eminent domain – need to be aware of the
trend to finance and build transportation infrastructure as often as possible using Public Private
Partnerships [PPP or P3] in Virginia in the place of traditional methods of funding.
This paper examines the experience in Virginia of utilizing a state Public Private Transportation
Act [PPTA or the Act]1 to promote funding for and enable construction of new infrastructure and
improvements to existing facilities. Virginia’s Act is an initiative that federal highway officials have held
out as a model for public private partnership legislation.2 Federal highway researchers have performed an
exhaustive 28-point analysis of Virginia’s PPTA and found it to be extremely flexible.3 Across the United
States, especially in the current decade, transportation professionals have begun to turn to Public Private
Partnerships [P3 or PPP] to fund infrastructure in the face of “growing concerns about the size of federal
and state budget deficits, the long-term viability of financing the nation’s highway and transit systems
through motor-fuel taxes… future mandatory commitments to Social Security and Medicare…
[recognizing the] need to … ensure that transportation investments maximize the benefits of each federal
dollar invested.”4 Virginia has been able to accelerate some substantial projects without the use of federal
highway construction funds by converting federal projects to PPP status. Virginia’s pioneer use of
legislation to draw the private sector into building highway infrastructure dating back to 1988 for
construction of the Dulles Toll Road5 should afford the Commonwealth some advantage in the market for
*
This paper represents only the personal views and research of the author as a transportation
studies scholar and researcher, and in no way represents an official position or opinion of either the
Virginia Department of Transportation or the Office of the Attorney General of Virginia as agencies
served by the author’s law firm.
Jim Webb Jones is a former Senior Assistant Attorney General who served as Staff Counsel for
VDOT’s Southeast Region, completed the VDOT Executive Institute and holds a Graduate Certificate in
Transportation Policy, Operations & Logistics from George Mason University after 2 years of graduate
study. He has served VDOT as counsel in private practice and government service for a combined period
of 18 years and has been involved in eminent domain litigation representing condemnors and/or
landowners for 43 years. He currently is Counsel in the PPP, Eminent Domain & Workers Compensation
Practice Groups at the firm of Pender & Coward, P.C. His blog—“The Roads Scholar™”—can be found
at www.pendercoward-pppgroup/blog.
1
See VA. CODE § 56–556 et seq. (1950, as amended, first effective in 1995).
2
Letter from Hon. Norman Y. Mineta, Secretary of Transportation, to Hon. Thomas E. Petri,
Chair, Subcommittee on Highways, Transit & Pipelines of Committee on Transportation Infrastructure,
U.S. House of Representatives 1 (May 24, 2006) [hereinafter cited as Mineta Letter].
3
PPP Legislation, Analysis for State of Virginia, available at http://www.fhwa.dot.gov/ppp/legis
_virginia.htm.
4
Government Accountability Office, Report to Congressional Committees, Highway and Transit
Investments, Options for Improving Information on Projects’ Benefits & Costs & Increasing
Accountability for Results, GAO–05–172 (Jan. 2005) [hereinafter cited as GAO–05–172].
5
Benjamin G. Perez & James W. March, Public-Private Partnerships and the Development of
Transport Infrastructure: Trends on Both Sides of the Atlantic, First International Conference on Funding
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P3 investments. In the United States growth accompanied by competition in the P3 market is expected.
Experience with investors likely is an asset since then federal Transportation Secretary Mineta, as far
back as 2006, stated that in the future “every highway project in the planning phases [in the United States
costing] over $500 million [is] expected to be a toll road.”6
This article reviews Virginia’s PPTA project history. It will briefly review use of the PPP concept
and tolls in the United States. The paper will then focus on recent PPTA developments in Virginia,
including the $548 million concession arrangement concluded in June 29, 2006 with an Australian toll
operator to manage and maintain the Pocahontas Parkway 8.8-mile tolled highway near Richmond.7 The
article also will note other PPTA projects underway, under contract or expected in the near future.
Finally, this paper will present some conclusions about the Virginia P3 experience and provide
information about a new agency and new procedures within the Virginia Department of Transportation
[VDOT] that intend to promote PPTA project growth, provide adequate project oversight and retain
responsibility for initiating and handling right of way eminent domain litigation within VDOT for P3
ventures.
THE HISTORY OF PUBLIC PRIVATE PARTNERSHIPS IN VIRGINIA
Virginia was a pioneer in promoting Public-Private Partnerships: it conceived the Dulles
Greenway project and enacted the Highway Corporation Act of 1988 to enable its birth.8 Some would
argue that this early effort to draw private capital into building a tolled highway was not a PPP in the
purest sense. In the early years the Greenway experienced a financial crisis but survived “after
restructuring its debt … and has since seen revenues grow steadily.”9 The Dulles Greenway “was the first
purely private toll road in the United States in over 100 years.”10 Currently there are projects underway
for the Dulles Road’s improvement, maintenance and toll operations11 as well as an extensive new 23mile light rail project known as Dulles Metrorail extending the D.C. Metro Orange Line from East Falls
Church Station along a Tyson’s Corner-Reston-Herndon-Dulles Airport-Eastern Loudon County
Corridor.12 As far back as April 28, 2005, then VDOT Commissioner Philip Shucet signed a
Comprehensive Agreement for a PPTA project to provide High-Occupancy Toll (HOT) lanes for I-495 on
the Capital Beltway “between Springfield and the Dulles Toll Road.”13
Since 2002 Virginia has completed three PPTA projects: (1) Route 288 extends approximately 30
miles with several interchanges running from I-95 south of Richmond northwest through heavily
Transportation Infrastructure, Institute of Public Economics, University of Alberta, Banff Centre, August
2–3, 2006.
6
Mineta Letter, supra note 2, at 2.
7
FHWA Case Study, Virginia Route 895 (Pocahontas Parkway), available at http://www.fhwa
.dot.gov/PPP/pocahontas.htm.
8
Government Accountability Office (then known as General Accounting Office), Report to
Congressional Requesters, Highways and Transit, Private Sector Sponsorship of and Investment in Major
Projects Has Been Limited, GAO–04–419 (Mar. 2004) [hereinafter cited as GAO–04–419].
9
Interview with senior VDOT Central Office Management (upon agreement not to reveal
identities). See also Perez and March, supra note 5, at 10.
10
Perez & March, supra note 5, at 10.
11
Dulles Toll Road, available at http://www.virginiadot.org/projects/dullesHome.asp.
12
Dulles Metrorail, available at http://www.dullesmetro.com/about/index.cfm.
13
VDOT website, available at http://www.vdot.virginia.gov/projects/ppta-defaultHOTLANES
CapitalBeltway.asp.
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populated Chesterfield and Henrico Counties to I-64 West of Richmond; (2) the 8.8 mile Pocahontas
Parkway with a high bridge over the James River; and (3) Jamestown 2007 or Route 199, a five-phase
$31.8 million PPP converted from a federal project in order to build the project well before the traffic
anticipated for the 400th Celebration of the Jamestown Settlement.14
Other projects currently either under procurement, under contract or under construction include:
the Route 28 freeway in Northern Virginia with a combined commitment in excess of $200 million with
six interchanges that will be expanded to ten; the I-95 & 395 HOT Lanes; the Coalfields Expressway in
the Bristol District; Route 58, a 36-mile design/build job between Hillsville and Stuart; I-81
improvements to separate car and truck traffic; and the Downtown Tunnel/Mid-Town Tunnel/MLK
extension between Portsmouth and Norfolk. VDOT also has five major P3 projects “under research and
development.”15 The financing for the Route 28 Project is provided by state highway funds and proceeds
from revenue bonds. These bonds will be repaid by taxes assessed to residents and properties in the
Special Route 28 tax district that benefit from this construction.16
The Pocahontas Parkway near Richmond was a major project valued in excess of $318 million,
with $300 million of that amount funded by a revenue bond issue not encumbering the credit of the state
to be repaid from tolls.17 The cost of the Pocahontas project accelerated when the design called for a
bridge over the James River high enough to accommodate ships without stopping traffic by opening a
draw and tolls proved in the short run to be inadequate to service the bond debt.18 On June 29, 2006
following 18 months of negotiations, a 99-year concession was awarded to Transurban USA, a private
Australian toll operator for a price of $548 million.19 A consortium of banks from Ireland, Spain and
Germany provided new Pocahontas financing and upon the award of a $150 million federal TIFIA20 loan,
Transurban will construct a new 1.58 mile four-lane road connecting the project to Richmond
International Airport, refinance $95 million long-term debt and upgrade electronic tolling systems.21
Pocahontas P3 is the first project where TIFIA funds have been used to refinance long-term debt,22 but
Congress established “the TIFIA Credit Program… to leverage Federal funds by attracting substantial
private and other non-Federal co-investment in critical improvements to the nation’s surface
transportation system.”23
14
See VDOT website, at www.vdot.virginia.gov/business/ppta-CompletedProjects.asp (PPTA
Completed Projects). The author was involved deeply in acquisition of right of ways for routes 288 and
199 and has also worked on some aspects of right of way acquisition for the new Richmond Airport road
connection between Richmond International Airport and the Pocahontas Parkway.
15
See Virginia Office of P3 website, at www.vappta.org/projects.asp (PPTA Active Projects).
16
See Route 28 PPP Website, at http://www.28freeway.com/index.html.
17
See National Council for Public-Private Partnerships website, at http://www.ncppp.org/cases/
pocahontas.shtml. The NCPPP is a trade organization promoting the merits of PPP operations and awards
of contracts and did not report the lagging tolls for this project that encouraged VDOT to look for an
investor toll operator to take over the facility.
18
Interview with senior VDOT Management (Nov. 8, 2006).
19
Federal Highway Administration (FHWA), PPP Case Studies, at http://www.fhwa.dot.gov/
PPP/pocahontas.htm.
20
Transportation Infrastructure Finance and Innovation Act of 1998, 23 U.S.C. §§ 601–609.
21
See FHWA, PPP Case Studies, http://www.fhwa.dot.gov/PPP/pocahontas.htm.
22
See FHWA, PPP Case Studies, http://www.fhwa.dot.gov/PPP/pocahontas.htm.
23
FHWA, Manual for Using Public-Private Partnerships on Highway Projects 10 (2005). See also
http://www.fhwa.dot.gov/ipd/tifia.
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VDOT24 continues actively to seek PPTA projects, and a number of possible projects are shown
in the footnotes.25 These projects in current dollars are estimated to cost in the range of $6–$12 billion if
they could be built today. (The Mid-Town/Downtown Tunnel project between Norfolk & Portsmouth is
now under contract.)
FUNDING INFRASTRUCTURE THROUGH PPP INNOVATIONS:
THE POLITICAL & ECONOMIC CLIMATE AT THE NATIONAL LEVEL
AND ITS INFLUENCE ON THE VIRGINIA EXPERIENCE
Beginning in 1792, when Pennsylvania chartered the Philadelphia and Lancaster Turnpike,
private investors financed many roads by tolls until about half way through the 19th century.26 A 2004
GAO compilation of statistics shows our most recent data on tolling:
(a) 4 million total miles of roads;
(b) Approximately 437,000 arterial miles of roads;
(c) 4,611 miles of public-owned toll roads—about 1% of arterial mileage;
(d) 15 privately owned toll roads—only 111 miles (10 of these for property/vacation area access);
(e) 15 privately owned toll bridges.27
From the above, it is obvious that America has little infrastructure that is publicly or privately tolled.
While 2,102 miles of in-place toll roads were allowed to be a part of the Interstate System in 1956, when
“construction of the Interstate System began, proposals for additional toll roads languished.… [In] 1963
the last of the toll roads planned before the Interstate System … opened, and few additional proposals
were seriously considered for many years.”28
P3 projects in the U. S. often have not involved tolled facilities but have been “Design-Build or
Management Contract” approaches.29 However, with Secretary Mineta’s admonition announcing the
24
VDOT stands for the Virginia Department of Transportation.
25
See VDOT website, at www.vdot.virginia.gov/business/ppta-UpcomingProjects.asp. The
Southeastern Parkway and Greenbelt proposes to extend from the interchange of Interstates 64 and 464 in
Chesapeake easterly to a point on I-264 near Oceana Naval Air Station. The Midtown Tunnel Corridor
features a new Norfolk-Portsmouth tunnel serving the congested area near the large Portsmouth Marine
Terminal and the even larger Maersk Marine Terminal and is now under contract. The proposed Route
460 toll road running westerly from Suffolk to I-95 would provide: a safer limited access road, an
additional emergency evacuation route from Hampton Roads in the event of a severe hurricane or a
coordinated terrorist attack on the area’s port facilities or Armed Forces bases, and a route to mitigate the
projected doubling of truck traffic from new port capacity; it is now under procurement. See also supra
note 16.
26
U.S. DOT, Report to Congress on Public-Private Partnerships 15 (Dec. 2004).
27
GAO–04–419, supra note 8, at 7–8.
28
U.S. DOT, Report to Congress 16 (Dec. 2004). The writer recalls the celebrations in Hampton
Roads when tolls were removed from the Elizabeth River tunnels and the Virginia Beach Expressway.
29
U.S. DOT, Federal Highway Administration, Synthesis of Public-Private Partnership Projects
for Roads, Bridges & Tunnels From Around The World – 1985–2004, at 31–36 (Aug. 30, 2005)
(prepared by AECOM Consult, Inc.) [hereafter cited as FHWA, PPP Around the World Synthesis].
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current decade as a new era when large projects likely will be tolled,30 the market nationally for PPP
tolled infrastructure has been expanding and is expected to continue to increase. Virginia can hope to be a
P3 leader on a larger scale in such expansion as a growing federal deficit and other demands remain a
major concern for transportation professionals competing for available resources.31 With the support of
Governor Robert McDonnell’s administration to promote and advance the use of P3s, Virginia has
established a new agency under its Secretary of Transportation that began operations in the summer of
2011 as the Office of Transportation Public-Private Partnerships.32
VIRGINIA’S PPP PERSPECTIVE
Turning now to transportation funding in Virginia, this state’s motor fuel tax is among the lowest
in the nation at 17.5 cents per gallon, has not been raised since 1986, and in the intervening 25 years
“these revenues have lost 40% of their purchasing power as a result of inflation.”33 In light of this
declining purchasing power of fuel taxes, the VDOT Fiscal Year 2007 Business Plan enunciated by then
Acting Commissioner Gregory Whirley34 accepted the call of Virginia’s political leaders to engage the
private sector and reported on the strength of the Agency’s Innovative Project Delivery Unit that
promotes and shepherds PPTA projects from conception through completion.35 VDOT’s Innovative
Project Delivery Unit has been involved with P3 projects for some years now and will work closely with
the new Office of Transportation P3s under the Secretary of Transportation.36 Since the unveiling of its
FY 2007 Business Plan, VDOT has been committed to remaining “nimble and flexible as a business to
respond to changing conditions” (i.e. declines in funding or effects of inflation) to deliver the best
transportation programs, systems and management possible with the resources at hand.37
Striving to utilize the PPP concept to the fullest, VDOT in May 2005 signed its first PPTA
Comprehensive Agreement to include the contribution of private equity38 (HOT Lanes, I-495) and
announced on January 6, 2006 the execution of nine comprehensive agreements for PPTA projects valued
at $2 billion.39 VDOT’s former Commissioner, David Ekern, appointed in late September 2006,
announced early in his administration that he held as a top priority working “with the private sector and
… federal, state and local partners to speed innovative 21st century traffic management improvements to
30
Mineta Letter, supra note 2, at 2–6. Every project currently planned for “more than $500
million [is] expected to be a toll road.” See also supra note 3.
31
GAO–05–172, supra note 4, at 2. The nation must deal with servicing the debt the federal
deficit represents, managing increasing Medicare and Social Security benefits for an aging population, the
aftermath of natural and environmental disasters, the ground wars in Iraq and Afghanistan, domestic
security measures and the effects of inflation on static fuel taxes.
32
See www.vappta.org/about_the _office.asp.
33
VDOT website, Funding Trends, www.virginiadot.org/about/resources/FactBookFunding
Trends.pdf. See also Motor Fuel Excise Tax Rates, Federation of Tax Administrators, http://www.tax
admin.org/FTA/rate/motor_fl.html.
34
Whirley is now the permanent VDOT CEO and known by the new title “Commissioner of
Highways” after legislation from the 2011 Session of the General Assembly.
35
VDOT Business Plan Overview 7, 22–24 (Sept. 2006).
36
Interviews with VDOT management (summer 2011).
37
VDOT Business Plan Overview 5 (Sept. 2006).
38
Emphasis added.
39
VDOT Agency Strategic Plan 3 (Jan. 2006).
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the congested areas of the state” at the same time announcing that he had signed an interim PPTA
agreement “to bring innovative high-occupancy toll (HOT) lanes to Interstates 95 and 395.”40
ANALYSIS AND CONCLUSIONS
With several billion dollars in infrastructure in place or proceeding through the PPTA process and
the prospect of projects in the billions presently under future consideration, Virginia stands on the
threshold as ready as any state to use PPPs to deliver and finance transportation infrastructure. Because
Virginia has had significant experience with PPPs, it has dealt with problems and met challenges. Elliott
Sclar, one of the best known American scholars on privatization, has noted that “[o]versight is a classic
problem in public contracting… [and] the terms of the contract itself… [can make]… the nature of
oversight vague.”41 At least partly because of lack of experience with P3 oversight, VDOT had to defend
a substantial counterclaim in a lawsuit that arose from the Route 199 PPTA project in Williamsburg
where VDOT allowed a project corporate property owner to build a privately-owned sound barrier on
VDOT owned right of way land.42 In the early days before conversion to P3 status when Route 199 had
been a federal project, FHWA was requiring VDOT to construct certain sound barriers that were not
required when Route 199 became a PPP.43 Such litigation arising from changing conditions can be
avoided in the future with better attention to contract terms and keener oversight. To this end VDOT has
created a new Chapter 10 in the Right of Way Manual of Instructions for Right of Way Acquisition that
includes a helpful matrix and attachments detailing the handling of P3 land acquisition for both
Design/Build PPTA Projects and Concession Projects that will be tolled. The VDOT Special Projects
Section, which was expanded in 2009 as the Right of Way & Utilities Division was reorganized, will now
have teams in the field as well as in VDOT’s Central Office operating under the guidelines of the new
Chapter 10 and assisting with Design Build and PPTA toll facility concessionaires as well as Urban
Construction Initiatives of local governments. 44
Under the new acquisition procedures for P3 projects whether the mode is design/build or
concessionaire, VDOT retains the ultimate responsibility to determine if settlement is appropriate or
whether to file suit to condemn the property rights required in the event that an amicable settlement is not
reached with any landowner. The new procedures have been approved by the FHWA and stipulate that
VDOT retains sole authority to provide notices to FHWA that P3 project right of way has been cleared.
For P3 projects, VDOT provides the funds for land or property rights acquired by eminent domain since
the Private Partners – as the concession operators that will collect tolls – have no interest in assuming the
risk involved in contested land value litigation. Within the past 12 years, land acquisition costs generally
for all highway construction are conceded to have averaged approximately 50% of the cost of every major
transportation project in Virginia.45 Because land acquisition is such a significant part of transportation
infrastructure costs and recouping land costs would require much higher tolls, the Private Partners do not
wish to assume the risk that higher tolls might reduce traffic and revenue for their project.
40
VDOT Press Release CO-0655, available at http://www.virginiadot.org/infoservice/news/
newsrelease.asp?ID=CO-0655.
41
ELLIOTT D. SCLAR, YOU DON’T ALWAYS GET WHAT YOU PAY FOR/THE ECONOMICS OF
PRIVATIZATION 34 (Cornell University Press paperback ed. 2001).
42
CTC v. Williamsburg Landing, Inc., Civil Action No. 10736 (Williamsburg/James City
County, Va. Cir. Ct.).
43
Id.
44
See VDOT Right of Way & Utilities Division, Manual of Instructions, Right of Way
Acquisition ch. 10 (3d ed. Jan. 1, 2011) (Special Projects Section).
45
Interviews with various transportation consultants in Virginia and VDOT Managers from
2006–2011.
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VDOT senior managers have, with the benefit of hindsight, considered whether the design of the
extremely high bridge feature of the original Pocahontas toll road may have pushed project costs and debt
to limits that contributed to the financial problems that were resolved only by the current P3 concession
awarded to Transurban USA.46 One sees where experience with contract administration opens minds, and
the Virginia experience is burgeoning.
Prior to the PPP innovations contained in the SAFETEA-LU47 federal legislation, recent federal
research had concluded that nationally “active private sector sponsorship and investment seem unlikely to
stimulate significant increases in the funding available for highways and transit.” 48 Before SAFETEALU the federal toll emphasis was on “pricing” to control congestion. With its new allocation of federal
funds for tolled infrastructure construction costs, SAFETEA-LU has prompted transportation scholars to
suggest that “the federal government is beginning to recognize the need … to use tolling to undertake new
highway … expansions.”49 In Virginia the PPP concept has not yet attracted new private capital to the
extent that officials hope to generate over time—although the I-495 HOT Lanes did bring, for the first
time, significant private money for construction. The Pocahontas Parkway lease of June 29, 2006 also
brought significant private capital investment to the state. Critics who say that the PPTA in Virginia has
so far offered nothing new in the way of infrastructure finance50 need to consider the HOT Lanes and
Pocahontas examples.
Any analysis of state PPP infrastructure funding must address the fact that the Virginia
experience with PPP finance has been typically American. One cannot ignore that “the United States …
has a strong appetite for public debt and has structured its tax code … [to create incentives for] the use of
tax-free municipal bonds to develop public infrastructure.”51 In the past the desirability of tax-free bonds
has added a dimension to American infrastructure finance that distinguishes the American experience
from that of Europe and is likely the chief reason why American PPPs had not attracted significant private
capital when GAO–04–419 was published. The tax exempt bonds held by Virginians that have so far been
a main source of funding for PPP highway projects have admittedly cost Virginia amounts ranging from
$1–$3 million in lost tax revenue.52 However, as far back as 2006, Virginia’s PPP experience included
more than $2 billion in new infrastructure that would have been deferred but for VDOT’s goal shared
with the General Assembly to make Virginia a leader in PPP infrastructure building.
Under the strain of the current national budget crisis in the United States, the future of state and
municipal bonds for transportation infrastructure is in doubt. State and local governments struggle to fund
operations with the reduced and shrinking federal and/or state funds available. With fewer state and
46
Interview with Senior VDOT Manager (Nov. 7, 2006). See also supra note 20.
47
Safe, Accountable, Flexible, Efficient Transportation Act: A Legacy for Users, Pub. L. No.
109–59, 119 Stat. 1144 (signed by the President on Aug. 10, 2005).
48
GAO–04–419, supra note 8, at 30.
49
Perez & March, supra note 5, at 15. See also FHWA Manual for Using Public-Private
Partnerships on Highway Projects 38–43 (2005) (explaining new provisions for bonds and flexibility for
toll use, broadened TIFIA funding, State Infrastructure Bank provisions, Toll Pilot Programs, Express
Lanes Demonstration Program, etc., all designed to make “it easier and more attractive for the private
sector to participate in highway infrastructure projects”).
50
James J. Regimbal, Jr., An Analysis of the Evolution of the Public-Private Transportation Act of
1995 (Southern Environmental Law Center, Jan. 2005). Regimbal’s analysis is for an environmental
advocacy group and at the time of publication did not have the advantage of later published data cited
herein.
51
Perez & March, supra note 5, at 15. See also FHWA, PPP Around the World Synthesis, supra
note 29, at 35–36.
52
GAO–04–419, supra note 8, at 18.
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federal funds available to balance budgets and make bond payments, local governments in the future may
find it more difficult to obtain bond ratings that make their bonds desirable investments even though tax
free.
Scholars who have examined various public-private partnerships have seen “movement toward
closer partnerships, involving joint financing and responsibility… [in the fields of] transportation, energy
and applied technology research.”53 If, as expected, there is a decline in traditional sources of funding for
transportation infrastructure, this movement will likely intensify. Caution from a writer who reviewed
extensive literature directs attention to the possibility that “when partnerships fail through bankruptcy,
inability to meet goals [etc.] … government is the provider of last resort … [and] when partnering
involves essential services… is expected to fulfill the … responsibilities of failed private sector partners
[references omitted].”54 Virginia’s public employee transportation professionals appear aware of the
state’s ultimate responsibility for essential services and the need for strong private partners.55
Virginia can point to several billion dollars of PPP projects completed, under construction or
under contract. Its rising PPTA experience is significant among the 50 states because from 1985:
PPP projects represent a $104 billion investment in infrastructure… of which $42 billion
is for roads, bridges and tunnels. This [$42 billion] represents 13 percent of the total PPP
funding for highway-related projects worldwide… [but] what is new is the growing
interest in and variety of funding, financing, and project delivery approaches that are
emerging under the guise of public private partnerships. … Even in the United States,
where a substantial dedicated funding mechanism long supported a robust highway
development program, there is growing recognition that traditional infrastructure funding
and delivery approaches are inadequate to meet the increasing economic development
and mobility needs of citizens and businesses alike, while keeping the existing highway
system in a state of good repair.56
Some transportation scholars, consultants and lawyers are in quandary over the proposed
amendment to Section 11 of Article 1 of the CONSTITUTION OF VIRGINIA about whether it will affect the
future use of the P3 vehicle for infrastructure financing and development.57 The proposed amendment
allows eminent domain to be used to acquire private property only for “public use,” but in the present
form of the Amendment, public use does not include any situation where “the primary use is for private
gain, private benefit, private enterprise.”58 Some argue that tolled P3 highway facilities are essentially for
private gain, benefit or enterprise of the Private Partner and thus do not meet the definition of “public
use.” A secondary argument is that toll roads are not truly open to the “public” – because the facilities are
only open for those persons who can afford the tolls.
53
Pauline Vaillancourt Rosenau, The Strengths and Weaknesses of Public-Private Policy
Partnerships, 43 AMERICAN BEHAVIORAL SCIENTIST, No. 1, at 26 (Sept. 1999).
54
Id. at 21.
55
See www.virginiadot.org/business/ppta-Guidelines.asp. Virginia’s Pocahontas PPP experience
has also demonstrated the need for strong partners.
56
FHWA, PPP Around the World Synthesis, supra note 29, at 35–36.
57
Informal discussions at the 2010 & 2011 CLE International Eminent Domain Annual Seminars
at Tides Inn & Richmond, respectively. See H.J. Res. 693, Ch. 757, 2011 Gen. Assem., Reg. Sess (Va.)
(agreed to by the Virginia House of Delegates, Feb. 23, 2011 and agreed to by the Virginia Senate, Feb.
22, 2011, 2011).
58
H.J. Res. 693, 2011 Gen. Assem., Reg. Sess. (Va.). See supra note 57.
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The author has interviewed, face-to-face, three knowledgeable and senior elected officials in
Virginia government; two of them have said that there is no danger that transportation infrastructure P3
projects would be subject to challenge as not being “public uses” “since the General Assembly wishes to
see an expanded use of P3s in Virginia and had no intention to restrict or hamper P3 projects.” These two
officials are confident that no Virginia court would hold that the “primary use” of a P3 is for private gain
or profit. The third elected official interviewed said that he was aware of the concern that if the
Amendment remains in its present form some might advance a legal argument that a P3 model for a tolled
facility is not a “public use.” The same official stated that the final form of the proposed amendment, if
and when it goes to the voters, will make it clear that P3 transportation projects for toll roads are to be
considered “public uses” in Virginia. If the proposed Amendment to the Virginia Bill of Rights became
law in its present form, then motions to dismiss might be filed in some eminent domain proceedings by
landowners whose property is needed for a P3 project where the landowners are tempted to use any
defense available wish to stop a project from causing them to give up any property or property rights. 59
The 2012 Session of the Virginia General Assembly may address the issue directly, as the third official
cited above has stated will be the case. Transportation officials, consultants, lawyers for condemnors and
landowners and indeed landowners themselves will be following this proposed change to the law of
Virginia.
Virginia’s challenge is to dedicate and appropriate sufficient state funds so as fully “to promote
PPPs for new infrastructure under the … SAFETEA-LU reauthorization of the Federal-Aid Highway
Program.”60 The Virginia experience thus far suggests that the widest, most ambitious use of P3
relationships will still require significant transportation monies from the state treasury because the Private
Partners will look to government—the Public Partner—to provide all funds for acquisition of land or
other real property rights needed for any tolled project.61
59
The National Conference of State Legislatures has now provided a 106-page Public-Private
Partnerships for Transportation Toolkit for Legislators that gives access online to a wealth of material that
will prove helpful to legislators and others involved with PPPs facing issues that will arise. The Toolkit
can be accessed at www.ncsl.org.
60
FHWA, PPP Around the World Synthesis, supra note 29, at 36.
61
Eric Weiss, WASHINGTON POST, Oct. 23, 2006, available at http://www.washingtonpost
.com/wp-dyn/content/article/2006/10/22/AR2006102201081_pf.html. For example, this article entitled,
Rising Costs Strain Private Partners, about HOT Lanes between Springfield and Georgetown Pike on the
Virginia portion of the Capital Beltway explains the likely need for $100 million in state funds for this
PPP to succeed.
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“IT’S A BIRD; IT’S A PLANE; IT’S . . . (WHAT IS IT?)”
by John A. Dezio*
FACTUAL BACKGROUND
Wilkins Investment Group, LLC, a Virginia limited liability company (“Wilkins”), and Old
Oceanfront, LLC, a Virginia limited liability company (“Old Oceanfront”), were the owners, respectively
of two adjacent parcels of oceanfront property on the east side of Sandpiper Road in the City of Virginia
Beach at the south end of Sandbridge. The Old Oceanfront property is the southernmost privately owned
oceanfront parcel in Virginia, and the Wilkins property lies immediately north of the Old Oceanfront
property.
Snug Harbor, LLC (“Snug Harbor”), a Virginia limited liability company, was at that time an
experienced developer of real property in Virginia Beach. After significant and protracted negotiations,
Wilkins and Old Oceanfront, as sellers, and Snug Harbor, as purchaser, contracted for a sale of the parcels
by a Purchase Agreement dated October 6, 2003.
The contract in relevant part provided:
3.1
In addition to the Purchase Price as set forth in Section 2, Purchaser
shall, following the First Closing, provide the following additional consideration
to Seller as a material inducement to Seller to sell the North Oceanfront Parcel:
(b) In addition, with respect to the South Oceanfront Parcel, Old
Oceanfront shall be entitled to receive one of the following three
(3) options depending on the type of units and development on
the Property:
(ii)
In the event that Purchaser or its
successor(s) does not elect to sell time-shares in
connection with the South Oceanfront Parcel, in
lieu thereof, Old Oceanfront shall be entitled, as
Old Oceanfront may elect within thirty (30) days
after receipt of (i) complete architectural plans
for the Project (ii) detailed financial projections
for timeshare sales and projections and for unit
gross sales, as applicable (including sales prices
and timing models) and (iii) marketing plans and
models: either to receive (A) * of the gross sales
proceeds (net after actual real estate
commissions not to exceed (X) * for “site” sales
which may be by an affiliated company of
Purchaser and (Y) * for co-brokered sales with a
real estate company unaffiliated, directly or
indirectly, with Purchaser) from the sale of all
units constructed on the South Oceanfront Parcel
or (B) to receive * (net after actual real estate
commissions not to exceed (X) * for “site” sales
*
John A. Dezio received his undergraduate and law degrees from the University of Virginia. He
is a former Commonwealth's Attorney for the County of Albemarle and an Assistant Commonwealth's
Attorney for the City of Charlottesville. He has served on the Mid-Year Seminar Committee and has been
a member, as well as Chairman, of the Virginia State Bar Disciplinary Committee.
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which may be by an affiliated company of
Purchaser and (Y) * for co-brokered sales with a
real estate company unaffiliated , directly or
indirectly, with Purchaser) from the sale of all
units constructed on the South Oceanfront Parcel
plus the right to select from either the North
Oceanfront Parcel (to the extent that there may
be a unit then available) or from the South
Oceanfront Parcel, an additional penthouse unit
of its choosing and the selection, conveyance
and build-out of such unit shall be in the same
manner as provided in Section 3(a) above; or
(e) The provisions of this Section 3 shall survive each of the
respective Closings, be binding on successors to the Property and
shall, at the option of Seller, be memorialized in a written
instrument to be prepared by Seller, reasonably consistent with
the foregoing and to be executed and recorded at the First
Closing as an enforceable encumbrance running with the land.
*Percentages are on file with the parties.
By Agreement dated April 30, 2004, of record in the Clerk’s Office of the Circuit Court of the
City of Virginia Beach, Wilkins, Old Oceanfront and Sanctuary at False Cape, L.P., RLLP, a Virginia
registered limited liability company (“SFC”), as Assignee of the rights of Snug Harbor in the Wilkins
contract, executed a document styled Easement With Covenants And Restrictions Affecting Land
(“ECR”). In the document Wilkins and Old Oceanfront as Owner and SFC agreed (in relevant part) as
follows:
RECITALS:
E.
SFC has made certain economic commitments to Owner as provided below
which commitments shall be binding on the current owner and any future owner of all or
a part of the Property; and
NOW, THEREFORE, for and in consideration of the premises, easements,
covenants, conditions, restrictions and encumbrances contained herein, the sufficiency of
which is hereby acknowledged, Owner and SFC do hereby agree as follows:
1.
Economic Provisions. The additional Consideration Provisions
embodied in Section 3.1 of the Purchase Agreement (together with a
redacted set of relevant definitions from the Purchase Agreement)
attached hereto as Exhibit C and incorporated herein shall be binding
upon SFC and any successor owner of the Property.
The pertinent parts of said Exhibit C are the portions of the contract set out above.
By deed dated April 13, 2005, recorded April 21, 2005, Old Oceanfront conveyed its oceanfront
property to SFC, which deed provided in part: “This conveyance is also made expressly subject to the
unexpired covenants, conditions, restrictions, reservations and easements, if any, lawfully affecting the
Property, duly of record and constituting constructive notice.” There was no mention in the deed of any
deferred purchase money or additional compensation being owed to Old Oceanfront, nor was there any
specific reference to the Economic Provisions of the ECR.
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As set out in the Purchase Agreement incorporated into the ECR, Old Oceanfront would be
entitled to a commission on the sale of each condominium unit constructed at the South Oceanfront Parcel
of the Property in an amount equal to 3.5% of the gross sale proceeds (net after actual real estate
commissions). The Purchase Agreement specifically provided that the foregoing provision would survive
closing of the sale of the Property and would be binding on successors to the Property.
The express intent of the recordation of the ECR was to create an encumbrance against the
Property to provide notice to all prospective buyers and lenders and to create a lien in favor of Old
Oceanfront against the Property which was subsequently developed into condominium units.
By Credit Line Deed of Trust dated February 9, 2006, SFC conveyed the Property in favor of
Wachovia Bank, as agent for several participating banks which had agreed to make loans against the
Property, naming Wachovia Bank, National Association, Community Bankers Bank, and Townebank as
secured note holders.
By Credit Line Deed of Trust dated August 7, 2007, SFC conveyed the Property in favor of
Community Bankers Bank.
By Amendment to the Credit Line Deed of Trust Towne purchased Wachovia Bank’s Note on the
Property, and succeeded to any interest Wachovia Bank held in the February 9, 2006, Credit Line Deed of
Trust. Further, under the Amended Deed of Trust, Wachovia Bank resigned as agent for the other
participating banks.
thereon.
SFC has developed the Property by constructing all of the contemplated condominium units
The ECR was reported as an exception under a mortgage title policy issued by Lawyers Title
Insurance Company for the benefit of Wachovia Bank and Towne, and Lawyers Title provided
affirmative coverage against monetary loss for violations of the ECR.
None of the Purchasers of units received a release of the lien of the ECR as to his unit, and no
funds were paid on any closing by SFC to Old Oceanfront.
The overwhelming majority of Purchasers obtained owner’s title insurance coverage from
Lawyers Title with the ECR being an exception without affirmative coverage. The mortgage policies had
the same provisions.1
Old Oceanfront was aware of the sales and sought payment. SFC refused to pay the percentages
set out in the Purchase Agreement and threatened litigation if Old Oceanfront attempted to collect.
Significantly, all of the net sales proceeds from each sale were applied to payment on the Credit Line
Deeds of Trust.
After approximately one hundred and three of the units were sold, SFC began to advertise sale of
twenty-five of the remaining forty-five units and expressed its intent not to pay Old Oceanfront until the
debts secured by the Credit Line Deeds of Trust were paid in full.
Old Oceanfront then filed suit against SFC alleging breach of contract for failure to pay funds
allegedly due from the sales of the one hundred and three units and anticipatory breach of contract with
respect to future sales; requesting a temporary injunction preventing distribution of the sales revenue by
SFC to someone other than Old Oceanfront; and asking the Court to determine the priority of liens. Old
1
This statement is based upon unverified information. The author made multiple attempts to
contact the closing attorney who handled the overwhelming majority of the transactions without receiving
information to the contrary.
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Oceanfront, LLC, v. Sanctuary at False Cape, L.P., R.L.L.P., Case No. CL09-5608 (Va. Beach, Va. Cir.
Ct. 2009).
DEFENDANTS’ RESPONSES
Motion to Compel
CBB filed its Answer asserting, among other things, that because Old Oceanfront claimed that all
units in the Property were subject to the lien reserved in the ECR, and because no purchasers of such units
received a release of the purported lien of the ECR, such unit owners and their secured creditors must be
considered as necessary parties without whom the Court could not proceed. If the lien were valid, each
purchaser and his secured creditors would be in the same position as CBB, Towne and SFC, respectively,
for the sold and unsold units, respectively.
CBB also filed a two-part counterclaim seeking: (i) a declaratory judgment that the ECR did not
create a lien or encumbrance on the Property in favor of Old Oceanfront and that the secured interests of
CBB and Towne were superior to any rights that Old Oceanfront may assert by virtue of the ECR or
otherwise; and (ii) an Order removing the cloud on the title created by Old Oceanfront’s assertions of the
ECR and the purported lien created thereby, thus confirming that title to all units would pass free and
clear of all interests asserted by Old Oceanfront.
CBB argued in part that the current owners of the Property are necessary parties because they
own a property interest in their respective units that may be defeated or diminished as a result of Old
Oceanfront’s asserted lien claims. The ECR was recorded prior to the sale of any of these units to Third
Party Purchasers. At each of the respective closings, however, upon information and belief, none of these
purchasers received a release of the purported lien of the ECR, which, if valid, would affect their
properties as well as the unsold units of the project still owned by SFC. Old Oceanfront asserts as much in
its Complaint, claiming that the obligations of SFC contained in the Purchase Agreement and ECR are
binding “upon any successor owner of the Property,” and that the obligations constitute “a lien and an
encumbrance against the units at the Property.” Under Old Oceanfront’s theory of the case, any current
unit owners are bound and encumbered by the lien claimed by Old Oceanfront.
Further, because many, if not all, of these Third Party Purchasers obtained loans, secured by
deeds of trust, to finance their respective purchases, any and all lienholders and trustees of the Third Party
Purchasers are necessary parties. If Old Oceanfront’s assertions of the ECR and the purported lien created
thereby are valid, the results of this litigation could adversely affect the secured property interests of these
lienholders and trustees, as their lien could be subordinate to the alleged lien created by the ECR and,
further, the value of the units, and, thus, their security, could decrease.
Third Party Purchasers and their respective lienholders and trustees must be given the opportunity
to challenge Old Oceanfront’s assertions that the ECR creates a lien on their property. Otherwise, the
court could encounter a multiplicity of litigation brought by these Third Party Purchasers and lienholders,
possibly asserting claims against their respective closing attorneys, title insurers, and the like based on
Old Oceanfront’s assertions of the ECR and the purported lien created thereby. Requiring that these
parties be joined in this litigation, however, will allow any controversies associated with Old Oceanfront’s
assertion of its purported lien to be addressed in a single case.
In short, the interests of the Third Party Purchasers and their respective lienholders and trustees
are so bound up with that of the other parties in this litigation that their legal presence as parties to this
proceeding is an absolute necessity without which the court cannot, and should not, proceed. Should Old
Oceanfront claim that the owners and their respective lienholders and trustees are not necessary parties to
this action, because the ECR was meant only to bind successor owners of the Property as a whole and not
owners of individual condominium units thereon, Old Oceanfront’s claim that the ECR creates a “lien, an
equitable lien, an encumbrance, a restriction on land, or otherwise” must fail.
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Old Oceanfront responded that its claims for breach of contract, anticipatory breach and a
temporary injunction to prevent distribution of sales revenue by SFC to someone other than Old
Oceanfront did not require the addition of other parties for the court to grant complete relief among the
present parties.
It continued by concluding that the simple fact that Old Oceanfront had asserted that the debt
owed to it by SFC was secured by a lien against the entirety of the Property, including the units already
sold, did not make the joinder of the Third Party Purchasers either necessary or proper. The absence of
these parties in no way impeded the Court’s ability to give complete relief to the existing parties, and the
relief Old Oceanfront sought, to wit: a money judgment against SFC, and the imposition of a constructive
trust with respect to escrowed proceeds from the auction sales, and from future sales of condominium
units owned by SFC, did not, as a practical matter impair or impede the Third Party Purchasers’ ability to
protect their interests, or leave any of them subject to a substantial risk of incurring double, multiple or
otherwise inconsistent obligations.
The Motion to Compel was denied.
Motion for Summary Judgment
CBB and Towne also moved the court for Summary Judgment on the following grounds:
A. Old Oceanfront Failed Expressly to Reserve Its Vendor’s Lien on the Face of the
Conveyance and, Therefore, Has No Lien on the Property.
In order to perfect a lien on the Property, Old Oceanfront was required to reserve its lien
on the face of the document that conveyed the property. The purpose of this requirement is self
evident: the purchaser and any subsequent purchasers must be able to determine what liens are
claimed on the property. The General Assembly codified this requirement in VIRGINIA CODE
section 55-53, which is entitled “Vendor’s equitable lien abolished.” Section 55-53 provides that
“[i]f any person hereafter convey any real estate and the purchase money or any part thereof
remain unpaid at the time of the conveyance, he shall not thereby have a lien for such unpaid
purchase money, unless such lien is expressly reserved on the face of the conveyance.” VA.
CODE ANN. § 55-53 (1950) (emphasis added). Because it failed properly to reserve the claimed
lien anywhere on the face of the deed, Old Oceanfront has no lien on the Property.
1. The 3.5% of the Gross Sales Proceeds To Which Old Oceanfront Asserts It Is
Entitled Constitutes Unpaid Purchase Money for the Property.
There can be no dispute that the 3.5% of gross sales proceeds to which Old Oceanfront
claims it is entitled based on the Purchase Agreement constitutes unpaid purchase money for the
sale of the Property to SFC. The Purchase Agreement describes the consideration paid by SFC to
obtain the Property at Section 2, titled “Purchase Price,” and in Section 3, titled “Additional
Consideration.” The provision allegedly entitling Old Oceanfront to 3.5% of the gross sales
proceeds from the sale of all condominium units located on the Property is set forth among the
“Additional Consideration” recited in the Purchase Agreement. The express language of the
“Additional Consideration” section indicates that the money sought by Old Oceanfront in the
Complaint, 3.5% of the gross sales proceeds from the condominium sales, or $2,524,418.76, can
only be characterized as additional, though deferred, payment of purchase money for the
Property:
3.1
In addition to the Purchase Price as set forth in Section 2,
Purchaser [SFC] shall, following the First Closing, provide the following
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additional consideration to Seller [Old Oceanfront] as a material inducement to
Seller [Old Oceanfront] to sell the North Oceanfront Parcel:
(b)
In addition, with respect to the South Oceanfront Parcel,
Old Oceanfront shall be entitled to receive one of the following
three (3) options depending on the type of units and development
on the Property:
Old Oceanfront admitted that the money sought was “for additional consideration due
Old Oceanfront from its sale of the Property to SFC.” The money sought by Old Oceanfront
clearly constituted unpaid purchase money. Therefore, pursuant to VIRGINIA CODE section 55-53,
Old Oceanfront was required to expressly reserve any lien for those monies on the face of the
deeds conveying the Property to Sanctuary in order to perfect its lien. Old Oceanfront failed to do
so.
2. Old Oceanfront Failed Expressly To Reserve its Lien on the Face of the Deed
Conveying the Parcel to SFC.
The language in the Deed relied upon by Old Oceanfront to reserve its lien states, “[t]his
conveyance is also made expressly subject to the unexpired covenants, conditions, restrictions,
reservations and easements, if any, lawfully affecting the Property, duly of record and
constituting constructive notice.” While this language may be sufficient to ensure that
conveyance of the Property was subject to prior easements, such as those providing access to the
beach, it does not constitute an express reservation of a vendor’s lien for any portion of an unpaid
purchase price. The language in those deeds therefore fails to create a lien on the Property for the
3.5% condominium sales proceeds.
Over 150 years ago, Virginia law allowed an implied vendor’s lien to arise on property
for purchase money remaining unpaid, even though the vendor conveyed the property to the
purchaser without expressly reserving a lien thereon in the conveyance instrument and without
taking a mortgage or deed of trust on the property. See Patton v. Hoge, 64 Va. 443, 447 (1872).
“There were many inconveniences and uncertainties attending this implied lien, which induced
the legislature to abolish it [in 1849].” Id. at 448. The reason for the change is obvious.
None of the evils growing out of the vendor’s implied lien resulted from a lien
expressly reserved on the face of the conveyance. Being set forth in the very first
link of the vendee’s chain of title, purchasers from him had just as much notice of
it as they would have had of a lien upon the land by deed of trust or mortgage.
Id. VIRGINIA CODE § 55-53 therefore requires that, to be effective, a lien must be a matter of
record and must furnish to all persons dealing with the property the necessary information
concerning all liens and encumbrances thereon. Id. In Patton, the Court held that language in the
deed that “[t]he said William Zimmerman and Sallie E. his wife, do hereby retain a lien on the
property hereby conveyed, as security for the payment of the above receipted notes received in
payment of their interest,” was sufficient to reserve a vendor’s lien on the property at issue.
Numerous other courts in Virginia have examined the creation of vendor’s liens in the
decades following the change to the statutory requirements. In Coles v. Withers, 74 Va. 186, 195
(1880), the Supreme Court of Virginia held that the following language was sufficient to reserve a
lien for unpaid purchase money: “The said Elizabeth D. Coles, hereby expressly reserves a lien
on said land for securing the payment of the purchase money, and the interest that may thereon
accrue; and the said Miller hereby agrees that the land shall be bound for the same.” 74 Va. at
197. Similarly, in Patterson v. The Grottoes Co., 93 Va. 578, 583 (1896), the Supreme Court of
Virginia found language in a deed stating that “the vendor’s lien is hereby expressly retained
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upon the land conveyed, to secure the four bonds of the Grottoes Company . . . given for deferred
payments of purchase money,” was sufficient to expressly reserve a vendor’s lien. Conversely, in
Harris v. Shield’s Executor, 111 Va. 643, 646 (1911), the plaintiff claimed that language in its
deed stating “the sum of five hundred dollars secured to be paid,” created a lien on the property in
plaintiff’s favor. The Court found that such language “[c]learly [did] not constitute an express
reservation of a lien on the land on the face of the deed to secure its payment,” despite use of the
word “secured.” Id. In Patton, Coles, and Patterson, the word “lien” is in the language relied on
to create the lien, whereas in Harris the word “lien” was not written on the face of the instrument.
None of the language relied on by Old Oceanfront, or any other language in the deed,
comes close to the clarity of the language found in Patterson, Coles, and Patton. The parties did
not intend that a vendor’s lien would arise because the deed does not even reference the word
“lien.” The deed makes specific reference to the “Recreation Easement,” the “Constitution
Easement,” and the “Access Easement,” all of which pertain to the easements and rights of
previous owners of the Property pertaining to the development of retained land. Clearly, these
retained rights were significant enough to warrant express mention in the deed. Old Oceanfront’s
reliance on the catch-all language in the deed related to the conveyance is misplaced to support a
claim of a lien. The deed simply states that the conveyance “is also made expressly subject to the
unexpired covenants, conditions, restrictions, reservations and easements, if any, lawfully
affecting the Property, duly of record and constituting constructive notice” to assert its lien. As in
Harris, this language, found in the deed, “clearly . . . does not constitute an express reservation of
a lien on the land on the face of the deed.” Harris, 111 Va. at 646. Accordingly, Old Oceanfront
has no lien on the Property for any unpaid purchase money owed by SFC.
Old Oceanfront appears to assert in its Complaint, and the Exhibits attached thereto, that
it has complied with VIRGINIA CODE section 55-53 because a redacted version of a portion of the
Purchase Agreement was recorded as part of the ECR. This argument lacks merit because the
express language of VIRGINIA CODE section 55-53 requires that a vendor’s lien for the unpaid
purchase price of real property be reserved on the face of the instrument conveying the property,
and the ECR was not the document that conveyed the Property to Sanctuary. At best, the ECR
merely serves to memorialize the agreement entered into between Old Oceanfront and SFC
concerning various aspects of the Property.
Furthermore, the redacted version of the Purchase Agreement, which was included with
the recorded ECR, inexplicably omits the percentages of all profits and proceeds to which Old
Oceanfront claims it is entitled. Therefore, even if the ECR could be considered a document that
reserves any lien to Old Oceanfront, the failure to include the information that would inform a
purchaser or subsequent purchaser as to the amount of the claimed lien defeats the purpose of
VIRGINIA CODE section 55-53. Simply put, no one reading the face of the recorded ECR would be
able to determine the amount of any lien that Old Oceanfront had purportedly reserved for itself.
See Shaheen v. County of Mathews, 265 Va. 462, 477, 79 S.E.2d 162, 172 (2003) (“To constitute
constructive notice, the registered or recorded instrument must . . . be such that, if a subsequent
purchaser or incumbrancer should examine the instrument itself, he would obtain thereby actual
notice of all the rights which were intended to be created or conferred by it.”)
If the Court permits Old Oceanfront to assert lien rights in this situation, all of the evils,
inconveniences, and uncertainties associated with the vendor’s implied lien, which was statutorily
abolished over 150 years ago, will resurface. Entities such as CBB and Towne will lack
confidence with the property recording and filing system in Virginia and begin to fear that their
duly recorded deeds of trust are somehow insufficient. This Court should therefore grant the
Lenders summary judgment on Count I of CBB’s Counterclaim and declare that Old Oceanfront
has no lien on the property.
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B. The ECR Does Not Constitute a Restrictive Covenant Running with the Land or Any Other
Valid Restriction on the South Oceanfront Parcel
The undisputed facts conclusively demonstrate that the ECR does not constitute a
restrictive covenant running with the land or any similar encumbrance. A restrictive covenant that
runs with the land, or a real covenant, is enforceable upon proof of the following elements: (1) an
intent evidenced by the original covenanting parties in the document that the burdens and benefits
of the covenant will run with the land; (2) privity between the original parties to the covenant, or
horizontal privity; (3) privity between the original parties to the covenant and their successors in
interest, or vertical privity; (4) the covenant must “touch and concern” the land; and (5) the
covenant must be in writing. Beeren & Barry Investments, LLC v. AHC, Inc., 227 Va. 32, 37-38,
61 S.E.2d 147, 150 (2009). For the purpose of this Motion for Summary Judgment, the only
element as issue is whether the ECR “touches and concerns” the land.
1. The ECR Does Not Touch and Concern the Property.
For a covenant to “touch and concern” the land, it must affect the physical use and
enjoyment of the land. Carneal v. Kendig, 196 Va. 605, 611, 85 S.E.2d 235, 238 (1955); Oliver v.
Hewitt, 191 Va. 163, 166-67 (1950). The Supreme Court of Virginia has held that a limitation on
the number of houses that could be constructed on a particular parcel of land is a covenant that
touches and concerns the land. See Sloan v. Johnson, 254 Va. 271, 277 (1997). The Supreme
Court likewise has held that a prohibition on constructing improvements on a parcel of land
within certain proximity of an existing structure touches and concerns the land. See Sonoma Dev.,
Inc., v. Miller, 258 Va. 163 (1999). Furthermore, the Supreme Court has upheld a restriction on
the development of property surrounding a parcel of land dedicated as a park as a covenant that
touches and concerns the land. See Barner v. Chappell, 266 Va. 277 (2003). It is well settled,
however, that personal covenants between the parties to a contract do not run with the land. See,
e.g., Tardy v. Creasy, 81 Va. 553, 562 (1886) (finding restraints on trade “are not covenants
which can be held to be of such a nature as to impress themselves on the land burdened, for the
benefit of some other property; they are covenants collateral to the land merely – personal
covenants which cannot be annexed to the land”).
The portion of the Purchase Agreement relied upon by Old Oceanfront and incorporated
into the ECR has no impact on the physical use or enjoyment of the Property; it is merely a
personal covenant between the purchaser and seller. When a covenant is contingent upon events
personal to the original covenanting parties, or when the covenant is for the original parties’
personal benefit only, the covenant is merely personal in nature and does not touch and concern
the land. Beeren & Barry Investments, 277 Va. at 39. Several decisions from Virginia courts have
held that personal covenants do not touch and concern the land. The Supreme Court held that a
restriction imposed to protect the grantor’s business from injurious competition was a personal
covenant and not a covenant running with the land, because the restriction was for the grantor’s
benefit only and was not intended to affect the natural use and enjoyment of any land retained by
the grantors. See Carneal, 196 Va. 611, 85 S.E.2d at 238. The Court has also held that a covenant
for the purpose of protecting a business operated by the grantor was a personal covenant for the
grantor’s sole benefit as distinguished from a covenant running with the land. See Oliver, 191 Va.
at 166-67. The Circuit Court for the City of Richmond held, in Harrison & Bates v. F.R.
Associates, Ltd., 47 Va. Cir. 468 (1998), that an agreement to pay a real estate agency
commissions, as a percentage of rent, in a lease recorded in the land records was unenforceable as
a restrictive covenant. In its holding, the Richmond Circuit Court determined that a restriction
must affect the physical use of the land to “touch and concern” the land so as to be considered a
covenant running with the land. Id. at 470. The ECR in this case cannot, under any standard, be
deemed to “touch and concern” the land.
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When courts examine restrictive covenants, any doubt or ambiguity is to be resolved
against the restriction and in favor of the free use of the property, as such covenants are not
favored and must be strictly construed. Barris v. Keswick Homes, LLC, 268 Va. 67, 71, 597
S.E.2d 54, 57 (2004), Here, it cannot be disputed that any obligation of SFC to pay Old
Oceanfront 3.5% of the proceeds of the condominium unit sales is nothing more than a personal
covenant between Old Oceanfront and SFC. Old Oceanfront’s purported rights under Section 3.1
of the Purchase Agreement are entirely contingent on events personal to SFC, and SFC’s sole
obligation is to pay unpaid purchase money to Old Oceanfront. The present factual situation is
very similar to the facts from Harrison & Bates. Here, the amount of additional consideration
allegedly payable to Old Oceanfront is expressed as a percentage of the sale price of particular
units and depends entirely on which of the three options (all time share units, all condominium
units, or a combination of both) were ultimately developed by SFC on the South Oceanfront
Parcel. For instance, Section 3.1(b)(ii) provides that if SFC builds all condominium units, Old
Oceanfront is entitled to 3.5% of the gross sale proceeds from the sale of all condominium units
constructed on the South Oceanfront Parcel. If, however, SFC had built only time share units, the
percentage of unpaid purchase money payable to Old Oceanfront would have been different. In
Harrison & Bates, the amount to be paid to the plaintiff was a percentage of the rent owed on the
subject property; the Richmond Circuit Court held that the recorded lease with the commission
percentages explicitly set forth in the document could not touch and concern the land because that
obligation did not affect the physical use of the land. 47 Va. Cir. at 470. Any obligation to pay the
3.5% gross sale proceeds in this case must only be characterized as a personal covenant between
SFC and Old Oceanfront which was meant to benefit the original covenanting parties. Under well
settled law, that obligation does not run with the land because it does not affect the physical use
of the land and therefore does not “touch and concern” the land.
2. The Language of the ECR Does Not Automatically Create a Restrictive
Covenant Running with the Land.
Old Oceanfront relies on language from the portion of the Purchase Agreement that was
attached to the ECR in its attempt to persuade the Court that the ECR creates a covenant running
with the land. Section 3.1(e) of the Purchase Agreement states:
The provisions of this Section 3 shall survive each of the respective Closings, be
binding on successors to the Property and shall, at the option of the Seller, be
memorialized in a written instrument to be prepared by Seller, reasonably
consistent with the foregoing and to be executed and recorded at the First Closing
as an enforceable encumbrance running with the land.
This statement, however, is insufficient to create a restrictive covenant where one does
not actually exist because it is well settled in Virginia that a mere declaration that a covenant runs
with the land does not make the covenant touch and concern the land when the covenant itself
plainly does not do so. As a matter of law, if a covenant is not, in nature and kind, a real covenant
that touches and concerns the land, the mere self-serving declaration of the parties that it shall run
with the land will not make it a real covenant despite language in the actual document. See
Harrison & Bates, 47 Va. Cir. at 470 (“It is the court’s view also that the requirement of ‘touch
and concern’ cannot be overcome by a mere declaration that a covenant runs with the land.”) As
stated above, there can be no dispute that the obligation to pay 3.5% of the proceeds from the
condominium sales is a personal covenant between Old Oceanfront and SFC, and the statement in
the Purchase Agreement that purports to make this obligation run with the land is ineffective.
Old Oceanfront did not reserve any lien on the face of the instrument conveying the
Property; therefore, there is no lien that could affect title to the Property. (See supra section
IV.A.) Furthermore, the ECR does not create a covenant running with the land or any other valid
restriction on the Property. Accordingly, the Court should grant summary judgment in favor of
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the Lenders on Count II of CBB’s Counterclaim and declare that the ECR does not create any
interest that would affect title to the Property.
RESPONSE
Old Oceanfront argued in response that many issues were generally in dispute and that summary
judgment was not appropriate.
A.
The Lien of the ECR Constitutes an Equitable Lien Under Virginia Law
Count I of CBB’s Counterclaim seeks a Declaratory Judgment that the ECR does not
constitute a lien or encumbrance. In their Joint Memorandum, CBB and Towne argue that the
undisputed facts demonstrate conclusively that the lien asserted by Old Oceanfront against the
Property constitutes a vendor’s lien that was not expressly reserved on the face of the deed
conveying the Property to SFC. Old Oceanfront agrees that its lien was not reserved on the face
of the deed to SFC. However, Old Oceanfront disputes the efforts of CBB and Towne to label the
lien of the ECR a “vendor’s lien” in an effort to bring it within the ambit of §55-53 of the
VIRGINIA CODE. That section provides that one who conveys real estate under circumstances
where part of the purchase money is unpaid at the time of the conveyance will not “thereby”
have a lien unless the lien is reserved on the face of the deed. VA. CODE § 55-53. The section
reflects abolition in 1849 of the common law implied vendor’s lien which could be effective,
even without notice. Except for the implied vendor’s lien, §55-53 does not prohibit other means
of securing monetary obligations. Deeds of trust are most commonly used for that purpose.
Virginia also recognizes equitable liens, without restrictions as to purpose. As noted by the
Virginia Supreme Court:
The subject of equitable liens has been dealt with in several cases in
which this statement by Pomeroy (Pomeroy’s Equity Jurisprudence, 5th ed.,
§1235) has been approved:
‘The doctrine may be stated in its most general form,
that every express executory agreement in writing, whereby the
contracting party sufficiently indicates an intention to make
some particular property, real or personal, or fund, therein
described or identified, a security for a debt or other obligation,
***creates an equitable lien upon the property so indicated
which is enforceable against the property***.’ (Citations
omitted) Hoffman v. First National Bank of Boston, 205 Va. 232
135, 236, S.E.2d 818, 821 (1964)
From the language of the ECR, the clear intent of the SFC and Old Oceanfront was to
fashion a flexible mechanism for providing additional consideration to Old Oceanfront depending
upon the method chosen by SFC to develop the property. (Although the word “commission” was
used in the Complaint in an effort to describe the nature of the intended payment, that term is
incorrect, and the words “additional consideration” are those employed by the parties in the
Purchase Agreement and the ECR.) The additional consideration was something beyond the
Purchase Price. Old Oceanfront’s determination which one of several options to choose for
measurement of additional consideration depended upon development decisions made by SFC,
the furnishing of books and records, architectural plans, financial projections, marketing plans,
and models. SFC specifically agreed to the encumbrance of the Property to assure payment of the
additional consideration. Old Oceanfront is entitled to offer proof of the manner in which it
sought to exercise its rights with respect to the lien of the ECR, rights which in retrospect were
undermined by CBB, Towne and by Wachovia, as Agent for the lenders under the February 9,
2006 Deed of Trust.
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Although not alleged in Defendants’ Joint Summary Judgment Motion/Memorandum,
CBB specifically alleges in its Joinder Motion, paragraph 7, and its Memorandum in Support,
paragraph 13, that more than one hundred condominium units were sold to Third Party
Purchasers “[p]rior to Defendants obtaining knowledge of Old Oceanfront’s assertions of the
ECR and the purported lien created thereby.” This factual claim of lender innocence is disputed
by Old Oceanfront. The knowledge and conduct of CBB, Towne and their Agent, Wachovia, with
respect to the rights of Old Oceanfront under the ECR, as well as other material facts, are
genuinely in dispute and must be brought into sharp focus. If allowed to do so, Old Oceanfront
will offer the following evidence at trial:
1.
2.
3.
4.
5.
6.
7.
The ECR was recorded May 20, 2004.
Both CBB and Towne first acquired interests in the Property as secured lenders
by virtue of the February 9, 2006 Deed of Trust.
The February 9, 2006 Deed of Trust refers to and incorporates a certain Credit
Agreement, also dated February 9, 2006, among Towne, CBB and Wachovia
(which then served as Agent for all three lenders), and SFC as Borrower (the
“2006 Credit Agreement”.)
The 2006 Credit Agreement defines the term “Lien” to include “any lien, claim
. . . other encumbrance.” At page 9, definition is given to the term “Permitted
Liens” to include “. . . (vi) easements, covenants, and other customary
restrictions on the use of real property and other title exceptions disclosed to
Agent in the Mortgage Policies that do not interfere in any material respect with
the ordinary course of business . . .”
Through the Agent, Wachovia, under the 2006 Credit Agreement, if not directly,
both CBB and Towne knew of the ECR, which was reported as an exception
under the Mortgage Policy, Lawyers Title Insurance Corporation, Loan Policy Of
Title Insurance, Policy No. G52-0569023.
Either directly or through the Agent, Wachovia, CBB and Towne obtained
affirmative coverage against monetary loss for violations of the ECR.
Despite actual knowledge of the terms of the ECR, its recordation, and its status
as a lien, as defined under the Credit Agreement, Wachovia, CBB and Towne
imposed terms for release payments under the Credit Agreement which rendered
it practically impossible that the terms of the ECR could be satisfied from the
proceeds of sale of each condominium unit.
The evidence alluded to demonstrates that CBB and Towne, either directly, or through
their Agent, Wachovia, under the Credit Agreement, “treated the ECR as a Lien.” Accordingly, a
genuine issue of material fact exists concerning these matters.
Concerning the sales to Third Party Purchasers, CBB alleges in paragraph 14 of its
Counterclaim that Old Oceanfront did not demand payment for any amounts arising out of these
sales. This allegation is denied in Old Oceanfront’s Answer, and is a matter of fact genuinely in
dispute. Old Oceanfront did seek to obtain payment but was forestalled by threats of litigation.
These demands were made not only to counsel for SFC, but to the settlement agent who was
responsible for settling each and every one of the Third Party sales. Despite the demand, the
settlement agent closed the transactions and disbursed all available proceeds for the benefit of
Wachovia, Towne, or CBB under the Credit Agreement. If allowed to do so, Old Oceanfront will
present evidence through the settlement agent and other witnesses concerning the settlement of
these transactions.
B.
The ECR As Recorded Constitutes Constructive Notice Of Old Oceanfront’s Lien
The ECR was duly recorded on May 20, 2004. The language of Exhibit C to the ECR
makes it abundantly clear that the rights asserted are rights to receive percentages of sales
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proceeds dependent upon the type of transaction. The precise percentages are left blank and the
reader is directed to a note that the *Percentages are on file with the parties. (emphasis supplied.)
The Defendants claim the absence of the stated percentages is such an omission of information as
to render the recordation of the ECR useless as constructive notice, citing Shaheen v. county of
Mathews, 265 Va. 462, 579 S.E.2d 162 (2003). To support their contention, Defendants have
quoted a single sentence from the Court’s opinion, without regard to later limiting language, and
indeed, without regard to the eventual holding in the case. The Defendants overlook, for example,
the Court’s statement that a purchaser “must look to the title papers under which he buys, and is
charged with notice of all the facts appearing upon their face, or to the knowledge of which
anything there appearing will conduct him.” 265 Va. 462, 477, 579 S.E.2d 162, 172. Nor did
Defendants mention the Court’s extensive analysis of Chavis v. Gibbs, 198 Va. 379, 381, 94
S.E.2d 195, 197 (1956), culminating with the following quotation from 66 C.J.S., Notice §11, p.
642:
A person who has sufficient information to lead him to a fact is deemed
conversant with it, and a person who has notice of facts which would cause a
reasonably prudent person to inquire as to further facts is chargeable with notice
of the further facts discoverable by proper inquiry.
265 Va. 462, 480, 579 S.E. 172, 173.
A thorough reading of Shaheen leads ineluctably to the conclusion that the provisions of
the ECR are more than adequate to constitute constructive notice to the Defendants of the terms
of Old Oceanfront’s equitable lien.
CBB and Towne certainly had no need for constructive notice. Either directly or through
their designated Agent, Wachovia, CBB and Towne had actual knowledge of the ECR,
recognized it as a “lien” under the terms of their very own Credit Agreement, understood that it
carried economic risk, and addressed that risk by requiring affirmative title insurance coverage
against monetary loss in the event the ECR was violated. The Defendants and their co-lender and
Agent, Wachovia, also had in their complete control the ability to anticipate the amount of
additional consideration to be paid from the proceeds of sale of each unit, because such sales
could only take place at prices permitted under the terms of the Credit Agreement.
Effectively, on February 9, 2006, the die was cast. CBB, Towne and Wachovia made
certain that Old Oceanfront would never see a dime of the additional consideration to which it
was entitled from proceeds of sale under the ECR.
Old Oceanfront respectfully submits that the ECR constitutes an equitable lien securing
the obligation of Sanctuary, as intended, to provide additional consideration to Old Oceanfront
upon the terms specified in Exhibit C attached to the ECR recorded on May 20, 2004. By virtue
of its prior recordation, constituting constructive notice, the ECR takes priority over the liens of
the Towne Deed of Trust and the CBB Deed of Trust, both recorded later.
RESOLUTION
At this point the parties settled the matter, so we have no decision as to whether the lien asserted
by Old Oceanfront is an Equitable Lien or a Vendor’s Lien; its priority as to lenders and whether the
asserted lien affected sold units.
COMMENTARY
In reading the pleadings one might conclude that the attorney for Old Oceanfront should have
used the simple, direct and obvious approach to assert the lien of his client, such as a vendor’s lien or
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deferred purchase money Deed of Trust. One might also conclude that to do otherwise might constitute
actionable negligence by the Old Oceanfront attorney.
Such conclusions would be imprudent, however, unless one understood the “significant and
protracted” negotiations mentioned at the beginning of this article. Knowing the plans of Snug Harbor
(later SFC) for development of the property, Old Oceanfront knew that the acquisition, development and
construction lenders would require a first lien on the property and would require that all net proceeds
from unit sales be applied to the Deed of Trust obligations. Subordinate financing in the traditional
manner would be problematic since no funds from sales would be available to apply to the subordinate
lien for partial releases.
If sales were active, there would be sufficient funds to pay Old Oceanfront. If the market
collapsed, Old Oceanfront would be in a second lien position, which for all intents and purposes, was no
position.
How could counsel for Old Oceanfront protect his client when a secured lien was not available
and when an unsecured lien was not desirable should the market collapse? Snug Harbor and SFC had no
other assets, and no personal guarantees, letters of credit or other assurances of payment were available.
The answer: put a restriction on the property in the nature of an equitable lien that in effect would
be a cloud on the title that would have to be addressed during foreclosure processes. The “cloud” would
be clearly set out in the ECR so that all purchasers and lenders would have notice and could act
accordingly.
The author speculates that there could have been other reasons for this approach, such as
determining at the time of closing the fixed dollar amount of the additional consideration, which were
considered by counsel, but since the pleadings and arguments of record do not disclose such other
reasons, these remain as conjecture only.
Old Oceanfront had, therefore, as good a lien as was pragmatically feasible.
What about unit purchasers and their lenders? Assuming that the closing attorneys read the ECR,
they should have taken steps to protect their clients, as deemed necessary. To the extent that the closing
attorneys did not, imagine the position of their clients who could have faced a potential lien on their units
had there not been sufficient funds from sales or foreclosures to pay Old Oceanfront—and no coverage
from their title insurance policies.
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THE PECULIARITIES OF SINGLE ASSET REAL ESTATE BANKRUPTCY CASES
by John H. Maddock III and Bryan A. Stark*
As real estate practitioners know all too well, over the past several years, the real estate market
has endured a significant downturn. So much so that many real estate practitioners with little or no
experience in bankruptcy law have found themselves maneuvering their way through the BANKRUPTCY
CODE1 due to an increase in the number of real estate based companies filing bankruptcy petitions in an
effort to fend off creditors.
The operations of many of these real estate based companies consist of a single building or a
single project (i.e. “single asset real estate”). As such, these cases are subject to special provisions under
the BANKRUPTCY CODE. This article discusses the peculiarities of single asset real estate bankruptcy
cases and the key issues of which all practitioners should be aware.
I.
WHAT IS SINGLE ASSET REAL ESTATE?
The BANKRUPTCY CODE defines “single asset real estate” as:
[R]eal property constituting a single property or project, other than residential real
property with fewer than 4 residential units, which generates substantially all of the gross
income of a debtor who is not a family farmer and on which no substantial business is
being conducted by the debtor other than the business of operating the real property and
activities incidental.2
Thus, to satisfy the BANKRUPTCY CODE’s definition and qualify as a single asset real estate
debtor, a debtor must satisfy three criteria.3 First, the real estate must be a single property or a single
project. Second, the single property or single project must generate substantially all of the debtor’s
revenue. Third, the debtor must not conduct business on the single asset real estate other than operating
the real property and activities incidental thereto.
With regard to the first requirement, although one may easily conclude what comprises a single
property, some clarification may be needed to determine what comprises a single project.4 The term
“single project” recognizes that real estate development projects often involve several tracts or parcels of
land.5 Thus, to provide guidance on what may comprise a single project, courts have found that “in order
for two or more separate properties to constitute a single project within [sic] meaning of Code §§ [sic]
101(51B), the properties must be linked together in some fashion in a common plan or scheme involving
*
John H. Maddock III (partner) and Bryan A. Stark (associate) are members of McGuireWoods
LLP’s Restructuring & Insolvency Department, specializing in restructuring and insolvency, state
creditors’ rights law and commercial litigation.
1
11 U.S.C. § 101 et seq.
2
Id. § 101(51B).
3
In addition to satisfying the statutory definition of “single asset real estate,” a debtor may elect
to identify itself as a single asset real estate debtor by checking the appropriate box on its bankruptcy
petition. If a debtor makes such an election, the debtor is deemed a single asset real estate debtor without
further order or determination by the presiding bankruptcy court.
4
See, e.g., In re The McGreals, 201 B.R. 736, 741 (Bankr. E.D. Pa. 1996) (“Precisely what
Congress intended the meaning of [single project] to be, however, is not made clear by the statute or its
legislative history.”).
5
In re Golf Club Partners, L.P., Case No. 07–40096–BTR–11, 2007 Bankr. LEXIS 1225, at *13
(Bankr. E.D. Tex. Feb. 15, 2007).
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their use.”6 Importantly, so long as the separate properties are involved in a common plan or scheme
involving their use, such properties need not border or be geographically proximate. 7 Thus, whether a
real estate project satisfies the first criteria of single asset real estate depends solely on whether the
properties comprising the single project are involved in a common plan or scheme with regard to their
use.
The second requirement is that the real property must generate substantially all of the debtor’s
gross income. While it is generally accepted that apartment buildings and residential developments are
single asset real estate projects for purposes of the BANKRUPTCY CODE,8 other real estate projects may
not satisfy this second prong if such projects include activities that generate revenues from other sources.
Specifically, courts have held that real estate projects do not satisfy this second prong when all or a
portion of the revenue is generated by the efforts of management and workers on the land.9 In holding
that a golf club, which operated a golf course, tennis courts, driving range, and a casual dining restaurant,
did not satisfy the second prong, one court determined that the debtor’s revenue resulted from the
management and workers’ efforts bringing in and selling goods and services to customers, and not from
the real estate itself.10 Thus, “the property itself, not the fruit of workers’ labor and management
services” must be responsible for substantially all of the debtor’s gross income.11 Lastly, real property
that fails to generate any income may still qualify as single asset real estate under the BANKRUPTCY
CODE. For example, courts have held that a vacant apartment complex12 and raw land held for future
development13 satisfy the second prong.
The last criteria for meeting the BANKRUPTCY CODE’s definition of single asset real estate is that
the debtor may not conduct business on the real estate other than to operate the real property and activities
incidental thereto. Thus, when a debtor is actively engaged in various income producing activities, rather
than holding the real property as a passive investment, such property does not satisfy the third criteria for
single asset real estate.14 Indicia that real property is being held as an investment includes such passive
activities as the receipt of rent, arranging maintenance for the property, and marketing activities.15
Alternatively, due to their close nexus to the property, courts have held that the construction, marketing,
6
McGreals, 201 B.R. at 742.
7
See Golf Club Partners, 2007 Bankr. LEXIS, at *13 (finding that the phrase “single project”
may comprise several parcels of land that “may not be contiguous”) (emphasis added); cf. McGreals, 201
B.R. at 742–43 (finding that properties with a common owner and a common border but without “any
common link in usage” were not a single project pursuant to section 101(51B) of the BANKRUPTCY
CODE).
8
In re Kkemko, 181 B.R. 47, 50 (Bankr. N.D. Ohio 1996).
9
See Golf Club Partners, 2007 Bankr. LEXIS, at *14.
10
Id.
11
Id.
12
In re Syed, 238 B.R. 133, 140 (Bankr. N.D. Ill. 1999) (“It seems clear, however, from the
relevant case law, that ‘single asset real estate’ includes property formerly used and intended to be used in
the future as income producing property.”).
13
In re Pensignorkay, Inc., 204 B.R. 676, 681–82 (Bankr. E.D. Pa. 1997) (“[A] tract of
undeveloped land consisting of two adjacent parcels of real property . . . that the Debtor acquired with the
intention of creating subdivided parcels suitable for building and development . . . constitutes a ‘single
property or project’ within meaning of the statute.”).
14
In re Prairie Hills Gold & Ski Club, Inc., 255 B.R. 228, 230 (Bankr. D. Neb. 2000).
15
In re Scotia Dev., LLC, 375 B.R. 764, 778 (Bankr. S.D. Tex. 2007).
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and sale of newly constructed homes are merely activities incidental to operating the real property.16
When applying an active versus passive analysis to particular real estate projects, courts have held that
golf courses,17 hotels,18 and marinas,19 fail to satisfy the third criteria because the debtors operating such
businesses provide services in addition to, and not incidental to, the passive operation of the real estate.
II. SINGLE ASSET REAL ESTATE CASES AND THE ADDITIONAL
GROUND FOR RELIEF FROM THE AUTOMATIC STAY
The determination that a debtor is a single asset real estate debtor expedites the debtor’s
bankruptcy case because in single asset real estate cases, a debtor’s secured creditors are provided with an
additional ground for relief from the automatic stay. Specifically, relief from the automatic stay can be
obtained if the debtor does not take specific actions within ninety days of filing its bankruptcy petition.
As a result, single asset real estate debtors must quickly address the issue or issues that forced the debtor
into bankruptcy or lose the benefit of the automatic stay.
A.
against:
What is the Automatic Stay?
The automatic stay provided for in section 362 of the BANKRUPTCY CODE operates as a stay
(1) [T]he commencement or continuation, including the issuance or employment of
process, of a judicial, administrative, or other action or proceeding against the debtor that
was or could have been commenced before the commencement of the case under this title
. . . ; [and]
...
(3) any act to obtain possession of the property of the estate or of property from the estate
or to exercise control over property of the estate.20
“The automatic stay is the most fundamental protection afforded a debtor in bankruptcy,”21 and
Congress intended the automatic stay to have broad application.22 “The main purpose of the automatic
16
Kara Homes, Inc. v. National City Bank (In re Kara Homes, Inc.), 363 B.R. 399, 404 (Bankr.
D.N.J. 2007).
17
See, e.g., Larry Goodwin Golf, Inc., 219 B.R. 391, 393 (Bankr. M.D.N.C. 1997) (finding that
because in addition to operating and maintaining its golf course, the debtor rents golf carts, operates a
pool, and provides concessions, it operates a business on the real property).
18
In re Centofante v. CBJ Dev, Inc. (In re CBJ Dev., Inc.), 202 B.R. 467, 472 (B.A.P. 9th Cir.
1996) (finding that operating a full service hotel is more than the mere operation of the property); see also
In re Whispering Pines Estate, Inc., 341 B.R. 134, 136 (Bankr. D.N.H. 2006). But see NationsBank, N.A.
v. LDN Corp. (In re LDN Corp.), 191 B.R. 320, 326 (Bankr. E.D. Va. 1996) (parties agreed that a hotel
was single asset real estate).
19
In re Kkemko, 181 B.R. 47, 52 (Bankr. N.D. Ohio 1996) (finding that because the marina
stores, repairs, and winterizes boats, provides showers and a pool, and sells gas and concessions at the
marina, the marina conducts activities over and above operating the real property).
20
11 U.S.C. §§ 362(a)(1), (3).
21
Cohen v. UN-Ltd. Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790, 810 (Bankr. E.D. Va. 1999).
22
See H.R. Rep. No. 95–595. 95th Cong., 340–42 (1978), reprinted in 1978 U.S.C.C.A.N. 5963,
6296–97; S. Rep. No. 95–989, at 49–51 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840–41.
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stay is to give the debtor a breathing spell from [its] creditors, to stop all collection efforts, harassment
and foreclosure actions.”23
Thus, the automatic stay precludes a secured creditor from initiating or continuing a foreclosure
action (or any action) against single asset real estate and provides the debtor with an opportunity to
reorganize and successfully emerge from bankruptcy.
B.
Single Asset Real Estate Debtors and Relief From the Automatic Stay Pursuant to Section
362(d)(3)
Despite the automatic stay enjoining any action against the debtor or property of the debtor’s
bankruptcy estate, creditors may request the court to grant relief from the automatic stay if the creditor
can satisfy certain criteria. In addition to the grounds available to all creditors,24 secured creditors who
have a security interest in single asset real estate are afforded an additional basis upon which to obtain
relief from the automatic stay. The BANKRUPTCY CODE provides, in pertinent part:
(d) On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section . . . –
....
(3) with respect to a stay of an act against single asset real estate under
subsection (a), by a creditor whose claim is secured by an interest in such real estate,
unless, not later than the date that is 90 days after the entry of the order for relief (or such
later date as the court may determine for cause by order entered within the 90-day period)
or 30 days after the court determines that the debtor is subject to this paragraph,
whichever is later –
(A) the debtor has filed a plan of reorganization that has a reasonable
possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that –
(i) may, in the debtor’s sole discretion, notwithstanding section
363(c)(2), be made from rents or other income generated before, on, or after the
commencement of the case by or from the property to each creditor whose claim is
secured by such real estate (other than a claim secured by a judgment lien or by an
unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable
nondefault contract rate of interest on the value of the creditor’s interest in the real
estate.25
23
In re Atlas Machine & Iron Works, 239 B.R. 322, 328 (Bankr. E.D. Va. 1998) (citation
omitted); see also In re Avis, 178 F.3d 718, 720–21 (4th Cir. 1999); In re A.H. Robins Co., 788 F.2d 994,
998 (4th Cir. 1985) (stating that a key purpose of section 362 is “to provide the debtor and its executives
with a reasonable respite from the protracted litigation, during which they may have an opportunity to
formulate a plan of reorganization for the debtor”).
24
See 11 U.S.C. §§ 362(d)(1) (for “cause”) and (d)(2) (the debtor has “no equity” in the property
and property is “not necessary for an effective reorganization”).
25
Id. § 362(d)(3).
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By including section 362(d)(3) in the 1994 amendments to the BANKRUPTCY CODE, “Congress
expressly attempted to avoid the usual delays experienced in Chapter 11 in single asset real estate cases,
which historically have been filed to avoid a foreclosure and in the hope that the debtor can come up with
some form of a miracle in order to formulate an acceptable plan.”26 Indeed, “the purpose of section
362(d)(3) is to address perceived abuses in single asset real estate cases, in which debtors have attempted
to delay mortgage foreclosures even when there is little chance that they can reorganize successfully.”27
Although, section 362(d)(3) “was enacted to assist secured creditors in single asset real estate
cases,”28 the single asset real estate provisions also provide the “debtor an opportunity to create a
workable plan of reorganization.”29 Importantly, however, single asset real estate debtors must strictly
comply with the requirements set forth in section 362(d)(3). If a single asset real estate debtor fails to
comply with any element set forth therein, section 362(d)(3) requires the court to grant the secured
creditor relief from the automatic stay.30
Accordingly, within ninety days of a debtor’s bankruptcy filing or thirty days after the court
determines that the debtor is a single asset real estate debtor, the debtor must either file a plan of
reorganization with a reasonable possibility of confirmation in a reasonable time or commence payments
to the secured creditor equal to the amount of nondefault interest or risk losing the protections afforded by
the automatic stay.
1. Plan of Reorganization with a Reasonable Possibility of Confirmation in a Reasonable Time
A single asset real estate debtor can prevent a secured creditor’s obtaining relief from the
automatic stay pursuant to section 362(d)(3)(A) if within the ninety-day period the debtor files a plan of
reorganization that has a reasonable possibility of confirmation within a reasonable time.
The determination as to whether a plan of reorganization is reasonably confirmable is not
paramount to a “mini confirmation hearing.”31 Rather, because the burden of proof rests on the creditor’s
shoulders,32 the creditor must demonstrate that proposed plan does not have a reasonable possibility of
confirmation, which is a higher standard than that required for confirmation.33 To prove that the plan
does not have a “reasonable possibility” of being confirmed, the creditor must demonstrate that (1) the
debtor is not proceeding to propose a plan of reorganization; (2) the proposed plan does not have a
realistic chance of being confirmed; or (3) the proposed or contemplated plan is patently unconfirmable.34
26
NationsBank, N.A. v. LDN Corp. (In re LDN Corp.), 191 B.R. 320, 326 (Bankr. E.D. Va.
27
3 COLLIER ON BANKRUPTCY ¶ 362.07[5][b] (Alan N. Resnick & Henry J. Sommers eds., 16th
1996).
ed. 2011).
28
Id.
29
S. Rep. No. 168, 103d Cong., 1st Sess. (1993).
30
LDN Corp., 191 B.R. at 326; cf. Condor One v. Archway Apartments Ltd. (In re Archway
Apartments Ltd.), 206 B.R. 463, 465 (Bankr. M.D. Tenn. 1997) (requiring that the court grant relief to the
secured creditor, but the termination of the automatic stay is not required).
31
See LDN Corp., 191 B.R. at 325.
32
In re Cascadia Partners, Case No. 10–63442–LYN, slip op. at 5 (Bankr. W.D. Va. June 30,
2011).
33
See In re Windwood Heights, Inc., 385 B.R. 832, 838 (Bankr. N.D. W. Va. 2008) (finding that
the debtor has a lower burden to defend a motion for relief than when seeking plan confirmation).
34
Cascadia Partners, slip op. at 5.
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A debtor can demonstrate that it is proceeding to propose a plan of reorganization merely by
filing a plan of reorganization within the applicable statutory timeframe.35 The second basis for
demonstrating that a proposed plan does not have a reasonable possibility of confirmation requires the
bankruptcy court to analyze the proposed plan and determine whether the plan has a realistic chance of
being confirmed. Such analysis requires the court to examine the proposed plan and determine whether it
meets the requirements for confirmation set forth in section 1129(a) of the BANKRUPTCY CODE.36
Lastly, as stated, a creditor can obtain relief from the automatic stay under section 362(d)(3) if the
creditor can satisfy the court that the plan is patently unconfirmable. Whether a plan is “patently
unconfirmable” may require a court to consider the requirements for plan confirmation under the
BANKRUPTCY CODE. For example, in In re Cascadia Partners,37 the United States Bankruptcy Court for
the Western District of Virginia granted a secured creditor’s motion for relief pursuant to section
362(d)(3) because the court concluded that the single asset real estate debtor’s plan was “patently
unconfirmable.” After analyzing Cascadia Partners’ plan of reorganization, the court concluded that the
plan lacked adequate means for implementation and, therefore, failed to satisfy section 1123(a)(5) and, in
turn, section 1129(a).38
2.
Commence Payments Equal to Amount of Non-Default Interest
Alternatively, to the extent a single asset real estate debtor does not or cannot file a plan of
reorganization with a reasonable possibility of being confirmed within a reasonable time, the debtor may
prevent a secured creditor from obtaining relief from the automatic stay under section 362(d)(3)(B) by
commencing monthly payments to the secured creditor equal to the amount of non-default interest.
Payments made to satisfy section 362(d)(3)(B) may be made from rents collected or from other
income generated before, on or after the commencement of the debtor’s bankruptcy case. The practical
effect of requiring payments in the “amount of interest” is to reduce the debtor’s monthly payments to the
extent the debtor’s regular monthly payments include payments of principal. For a debtor whose monthly
payments comprise only interest, section 362(d)(3)(B) likely affords little or no relief.
Additionally, “the payments are not necessarily payments of interest, but are in an amount ‘equal
to’ interest at the then applicable nondefault contract rate of interest.”39 Thus, at least one court has
determined a debtor’s adequate protection payments pursuant to interim cash collateral orders that are in
an amount equal to interest satisfy section 362(d)(3)(B).40 Moreover, because the payments are merely in
the amount of interest, such payments may be applied to principal or interest and reduce the debtor’s
obligation to the secured creditor, thereby increasing the debtor’s likelihood of reorganization.41
3. Debtors Must Strictly Comply with the Requirements of Section 362(d)(3)
Whether a debtor has complied with the conditions set forth in section 362(d)(3) must be strictly
construed. The leading case enunciating the proposition that a debtor must strictly comply with section
35
See In re Harmony Holdings, LLC, 393 B.R. 409, 422 (Bankr. D.S.C. 2008).
36
See In re RIM Development, LLC, 448 B.R. 280, 289 (Bankr. D. Kan. 2010).
37
Case No. 10–63442–LYN, slip op. (Bankr. W.D. Va. June 30, 2011).
38
Id. at 6–7.
39
3 COLLIER, supra note 27, ¶ 362.07[5].
40
See In re Cambridge Woodbridge Apartments, L.L.C., 292 B.R. 832, 840 (Bankr. N.D. Ohio
41
3 COLLIER, supra note 27, ¶ 362.07[5].
2003).
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362(d)(3) is NationsBank, N.A. v. LDN Corp. (In re LDN Corp.).42 In LDN Corp., the United States
Bankruptcy Court for the Eastern District of Virginia determined that when a debtor fails to meet the
conditions set forth in section 362(d)(3), “[t]he unequivocal language of the statute mandates relief from
the stay.”43 Specifically, the court noted that section 362(d)(3) states that “the court shall grant relief”
unless the debtor files a plan with a reasonable possibility of being confirmed in a reasonable time or has
commenced monthly payments in the amount of interest within the applicable timeframe.44 Thus,
because the statute unambiguously requires strict compliance with the words of the statute, the court
determined that the debtor’s failure to file a plan within ninety days of the debtor’s petition date and
failure to commence monthly payments in the amount of interest mandated relief in favor of the secured
creditor.45
C.
“Cause” for Extension of the Ninety-Day Period
Although generally a single asset real estate debtor must file a plan that has a reasonable
possibility of confirmation within a reasonable time or commence monthly payments in the amount of
interest at the nondefault rate within ninety days of filing its bankruptcy petition, such date may be
extended for “cause.” A motion to extend the ninety-day deadline may be filed at any time, but the
BANKRUPTCY CODE requires that the order granting any extension “be entered within the 90-day
period.”46 Thus, considering the expedited track of a single asset real estate case, a debtor must quickly
determine whether it requires an extension of the ninety-day time frame to comply with section 362(d)(3)
and act promptly to ensure adequate time to file a motion so a hearing may be held and an order entered
within the original ninety-day window.
To the extent a debtor files a motion to extend the ninety-day period, it must show “cause.”
Although “cause” is not defined in the BANKRUPTY CODE, one court determined that “[c]ause would
consist of something extraordinary in the circumstances” and the debtor must show something more than
just the “global goals of bankruptcy relief.”47 Therefore, although case law is unclear on exactly what
constitutes “cause” to extend the ninety-day period, it is clear that a debtor must show something more
than the routine pressures facing all debtors in bankruptcy.
42
191 B.R. 320 (Bankr. E.D. Va. 1996).
43
Id. at 326.
44
Id.
45
Id. at 326–27.
46
11 U.S.C. § 362(d)(3).
47
In re Heather Apartments Ltd. P’ship, 366 B.R. 45, 47–48 (Bankr. D. Minn. 2007).
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A BASIC GUIDE TO CLOSING PROTECTION LETTERS
FOR REAL ESTATE PRACTITIONERS
by F. Lewis Biggs*
One of the things that distinguishes real estate practice from many other transactional practices is
the complexity of closings and, in particular, the use of third-party settlement agents to handle closings.
Real estate lawyers often rely on settlement agents to perform vital closing functions such as running
down title, recording deeds, deeds of trust and other instruments, obtaining documents from other parties,
conforming counterparts into fully executed documents, and handling settlement funds. Many things can
go wrong with settlement, and those problems are sometimes caused by a settlement agent’s fraud,
dishonesty, negligence or failure to follow closing instructions.
Settlement problems can result in significant loss and injury to parties to real estate transactions,
particularly upon real estate lenders and buyers. Consider a few examples, among many, from the real
world. In Bluehaven Funding, LLC v. First American Title Ins. Co., 594 F.3d 1055 (8th Cir. 2010), the
claimant was a lender who loaned $2.4 million to a developer over a period of several years in order to
fund the acquisition and redevelopment of real estate. The claimant provided funds to a title agency for
closings, and directed the title agency to pay off prior liens and to record first lien deeds of trust to secure
the loans. Rather than paying off prior liens, the title agency colluded with the borrower and diverted
escrow money to the borrower, resulting in a loss to the claimant of the full $2.4 million. In First
American Title Ins. Co. v. First Alliance Title, Inc., 718 F. Supp. 2d 669 (E.D. Va. 2010), an owner of
residential real estate refinanced his existing mortgage loan with SunTrust Mortgage. A title agency
handled settlement and, instead of using loan proceeds to payoff prior deeds of trust, as instructed by the
SunTrust Mortgage, the title agency diverted the funds elsewhere. Following the owner’s bankruptcy, the
beneficiary of one of the unreleased prior deeds of trust foreclosed, wiping out SunTrust Mortgage’s deed
of trust.
An important role of lawyers engaging in real estate transactions is to recognize the risks that
settlement poses for clients and to use the tools at their disposal to minimize those risks. When title
insurers themselves act as settlement agents, lawyers and their clients can take some comfort in knowing
that the settlement agent is probably sufficiently creditworthy to satisfy a claim based on the fraud,
dishonesty or negligence of a title insurer’s employee or its failure to follow closing instructions. As a
result, many national commercial lenders require closings to be conducted by approved national title
insurers.
In day-to-day practice, however, lawyers do not always have control over where settlement will
occur or who will conduct it. A lawyer is often requested to (or must) use another law firm or a title agent
as the settlement agent, and that other law firm or title agent may be completely unfamiliar to the lawyer.
Whether we admit it to ourselves or not, law firms, title agents and their staff acting as settlement agents
may or may not have the level of competency that we expect or sufficient funds or insurance coverage to
pay a claim arising out of a settlement problem, particularly with respect to large commercial
transactions. A lawyer should never assume that a title insurer is liable for a closing attorney’s or a title
agent’s fraud, dishonesty, negligence or failure to follow closing instructions, even in cases where the title
insurance commitment and/or policy is issued out of the settlement agent’s office. Title insurers
uniformly limit the scope of a title agent’s authority to the issuance of title insurance commitments,
*
Mr. Biggs is a managing member of the firm of Kepley Broscious & Biggs, PLC in Richmond,
Virginia. He practices in the area of commercial real estate with a focus on real estate lending, nonjudicial foreclosures, workouts and problem loans. He currently serves as a member of the Board of
Governors of the Real Property Section of the Virginia State Bar and as chairman of that section’s
Creditors’ Rights and Bankruptcy Committee. Mr. Biggs received a B.S. from the Hampden-Sydney
College and a J.D. from the Washington and Lee University School of Law.
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policies and endorsements.1 Efforts by claimants to establish a title insurer’s vicarious liability for acts or
omissions of closing attorneys or title agents usually fail absent a specific written indemnity agreement
from the title insurer.2
The title insurance industry has developed a type of indemnity agreement called a “closing
protection letter” in order to facilitate the use of closing attorneys and title agents as settlement agents.
Closing protection letters are issued by the title insurer rather than the settlement agent or attorney, and
they afford real estate buyers and lenders indemnification from the title insurer itself for specified injuries
caused by the fraud, dishonesty or negligence of a settlement agent or by the settlement agent’s failure to
follow closing instructions.
The ALTA form of closing protection letter3 applicable to specific transactions in Virginia is
attached to this article as Exhibit A. At its core, this form of closing protection letter provides the
following coverage, subject to certain conditions and exceptions set forth therein:
(i) [The failure] of the [title agent or closing attorney] to comply with your
written closing instructions to the extent that they relate to (a) the status of the title … or
the validity, enforceability and priority of the [deed of trust], or (b) the obtaining of any
other document, specifically required by you, but only to the extent the failure to obtain
the other document affects the status of the title … or the validity, enforceability and
priority of the [deed of trust], or
(ii) Fraud, dishonesty or negligence of the [title agent or closing attorney] in
handling your funds or documents in connection with the closings to the extent that fraud,
dishonesty or negligence relates to the status of the title … or to the validity,
enforceability, and priority of the [deed of trust].
The core coverage provided by the ALTA form of closing protection letter applies only to the
extent that the fraud, dishonesty, negligence or failure to following closing instructions affects the status
of the title and/or the validity, enforceability and priority of the deed of trust. It does not provide
coverage for all damages that may arise from settlement. For instance, settlement agents are often
charged with collecting, printing and conforming counterparts of documents and with collecting and
disbursing settlement funds. A failure of a settlement agent to attach the correct legal description to a
deed of trust in accordance with closing instructions probably would trigger coverage under a closing
protection letter. On the other hand, a failure of a settlement agent to properly collect and conform
counterparts of an unrecorded agreement probably would not trigger coverage, no matter how important
that agreement is to the overall transaction, unless the failure directly affects title or the enforceability of a
deed of trust. A failure of a settlement agent to collect and disburse settlement funds probably would
1
The standard agency agreement between a title insurer and its agent provides, in relevant part:
“Principal appoints Agent its agent solely for the purpose of issuing, on Principal’s forms, title insurance
commitments, policies and endorsements on real estate located in Virginia.” Lisa K. Tully, Closing
Protection Letters, 16 VLTA EXAMINER, No. 3, at 17 (2010) (emphasis supplied). See also Wells Fargo
Bank, N.A. v. Old Republic Title Ins. Co., No. 10–1087, slip op. at 4-5 (4th Cir. 2011) (interpreting
agency agreement that expressly excludes from the scope of agency “any escrow, closing or settlement
services”).
2
See, e.g., Wells Fargo Bank, N.A., v. Old Republic Title Ins. Co., No. 10-1087, slip op. at 11–12
(4th Cir. 2011) (stating “[c]ourts throughout the country, including those interpreting Virginia law, agree
that [an express exclusion of escrow, closing or settlement services from the scope of agency] controls”);
First American Title Ins. Co. v. First Alliance Title, Inc., 718 F. Supp. 2d 669 (E.D. Va. 2010), aff’d by
First American Title Ins. Co. v. Western Surety Co., No. 10–1802 (4th Cir. 2011); Bluehaven Funding,
LLC v. First American Title Ins. Co., 594 F.3d 1055 (8th Cir. 2010).
3
Copyright 2006-2009 American Land Title Association. Used by permission.
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trigger coverage under a closing protection letter if the disbursement is necessary to remove a prior lien or
deed of trust from title. On the other hand, a failure to collect and disburse other funds, such as closing
costs and money paid as consideration for some tangential aspect of the transaction, probably would not
trigger coverage because it does not directly affect title or the enforceability of the deed of trust.
Because closing protection letters do not cover all damages that may arise from settlement,
lawyers engaging in a real estate transactions should be mindful of (and may wish to inquire about) the
competency and creditworthiness of settlement agents even when the lawyers are obtaining a closing
protection letter. The best practice when representing real estate buyers or lenders, particularly for larger
transactions, is to evaluate closing risks on a case-by-case basis and to discuss settlement risks with
clients when appropriate.
Although coverage can arise under a closing protection letter based on a settlement agent’s fraud,
dishonesty or mistake per se, the most direct and robust way to establish coverage is to provide clear and
complete closing instructions setting out every material condition to closing and every task that the
settlement agent is to undertake. The fact that coverage can be defined by a lawyer’s own closing
instructions is beneficial in that, in essence, it lets the lawyer craft insurance coverage for his or her client
tailored to the specific transaction. That benefit has an edge that can cut the other way, however. If the
lawyer’s closing instructions are not worded well, or if he or she fails to appropriately tailor form closing
instructions to a particular transaction, then the lawyer could end up compromising (or at least failing to
avail himself or herself of) coverage that would otherwise be available to the client at almost no cost.
This is one of the many areas of real estate practice where an unsuspecting lawyer can easily inherit
liability arising from a third-party’s fraud or mistake. If a lawyer is not willing or able to articulate in a
closing instruction letter precisely what steps a settlement agent must take to close a real estate transaction
and to satisfy all requirements for issuance of title insurance, then the lawyer probably should not be
handling real estate transactions for purchasers or lenders. I have seen parties send documents into
escrow with instructions, or a mere expectation, that the settlement agent should essentially do whatever it
is that they do to close. Do not expect insurance coverage, or an injured client’s sympathy, if you do that
and something goes wrong with the closing.
An example of a long-form of a closing instruction letter for commercial loans is attached as
Exhibit B. This form can easily be adapted to acquisitions, and can probably be simplified and shortened
for many transactions. Closing protection letters should, as applicable, include the following key
provisions for establishing coverage: (i) a requirement that all title requirements must be satisfied prior to
or simultaneously with closing, (ii) a requirement that specified title exceptions must be deleted prior to
or simultaneously with closing, and (iii) a requirement that certain disbursements must be made to release
prior liens. No two transactions are alike, and form closing instructions should be tailored to each
transaction based on the transaction, the status of title and your client’s needs and expectations.
ALTA form closing protection letters also contain other conditions and exclusions. First, closing
protection letters must be issued by the title insurer in connection with a title insurance commitment. The
commitment must be binding, signed by the title insurer or its agent, and issued by the same title insurer
that issued the closing protection letter. If you elect to escrow closing items or money prior to the
issuance of a binding title insurance commitment, then you are doing so without the protection of a
closing protection letter. Second, closing protection letters do not cover liability for the failure of a
settlement agent to comply with closing instructions that require changes to insurance coverage, with the
exception of the removal of specific title exceptions or the satisfaction of requirements specified in the
title insurance commitment. Thus, accordingly, the best practice is to perform full due diligence on title
in advance and to have the title insurance commitment issued in final form prior to placing any closing
items or funds into escrow. Third, closing protection letters do not cover losses to closing funds that are
on deposit with a bank as a result of the bank’s failure unless the loss results from a failure on the part of
the settlement agent to follow closing instructions that require deposit at a specified bank or banks.
Lawyers should consider inquiring about how and where a settlement agent is holding closing funds and
the extent to which FDIC coverage applies. This risk increases with the size of the transaction and the
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length of the escrow period. If appropriate in light of circumstances, lawyers should consider specifying
in closing instructions how and where funds are to be deposited.
Closing protection letters, by their terms, can cover a “(i) lender secured by a mortgage (including
any other security instrument) of an interest in land, its assignees or a warehouse lender, (ii) purchaser of
an interest in land, or (iii) lessee of an interest in land.” Closing protection letters are not available for
(and provide no coverage for) sellers of real estate even though settlement imposes risks upon sellers,
particularly in regard to the handling and disbursement of proceeds immediately after closing.4
Presumably, this coverage is not available for sellers because the risk is not sufficiently title-related.
Coverage does extend to a real estate lender’s assignees, but in representing post-origination
buyers of real estate loans, you should not allow comfort derived from the closing protection letter
coverage to influence what due diligence should be done. A successor noteholder will inherit whatever
defenses the title insurer has against the predecessor noteholder(s). These defenses barred the claimant’s
recovery in Wells Fargo Bank, N.A. v. Old Republic Title Ins. Co., No. 10–1087, slip op. at 10 (4th Cir.
2011), where a successor noteholder was injured due to the fraudulent collusion between the originating
lender and the settlement agent (affirming the district court’s holding that “Old Republic could assert the
same defenses against Wells Fargo [(i.e., the successor noteholder)] as it could against the [original
noteholder], and one such defense – fraud, shielded it from contractual liability”).
For real estate lawyers who also practice outside of Virginia, please note that there are variations
among states with respect to closing protection letters. The form currently used in Virginia is called the
ALTA Closing Protection Letter – Single Transaction Limited Liability,” last revised on January 1, 2008.
Because title insurance companies in Virginia may not issue more than one class of insurance pursuant to
VA. CODE § 38.2–135, the Virginia Bureau of Insurance prohibits closing protection letters issued in
Virginia from providing any coverage other than title insurance. Historically, the language discussed
above—limiting coverage to the extent that the fraud, dishonesty, negligence or failure to follow closing
instructions affects the status of the title and/or the validity, enforceability and priority of the deed of
trust—was adopted by ALTA in order to address such regulatory concerns by Virginia and other states.
The same form is used in other states as well, but some states may permit title insurers to issue the
broader coverage provided for in earlier versions of the ALTA form closing protection letter. New York
and Kansas prohibit the use of closing protection letters altogether due to regulatory concerns about
whether the coverage provided is title insurance.5
Lawyers should not assume that a title insurer issuing coverage in Virginia will use the ALTA
form verbatim. You will probably not obtain coverage any broader than the ALTA form attached to this
article. However, a title insurer may alter the language to narrow coverage. You should consider
comparing a title insurer’s closing protection letter against the ALTA form in order to identify any
substantive differences. For example, the ALTA form of closing protection letter provides coverage for
the “fraud, dishonesty or negligence” of the settlement agent. At least one major title insurer omits
“dishonesty” and “negligence.” I doubt that the omission of “dishonesty” materially affects coverage in
light of how I read “fraud,” but the omission of “negligence” could be significant.6 Also, the ALTA form
4
See, e.g., Fidelity National Title Ins. Co. v. Mussman, 930 N.E.2d 1160, 1164 (Ind. App. 2010)
(where, after closing a real estate sale, a settlement agent stole $1.6 million of settlement proceeds as part
of a “Ponzi-like scheme to loot millions of dollars from real estate escrow accounts maintained” by the
agent and its affiliates. The sellers had purchased a title insurance policy for the benefit of the buyer, but
title coverage was not applicable because the purchasers had paid full consideration and received the deed
and marketable title. The sellers received no settlement proceeds, and an ALTA form closing protection
letter would not have provided coverage over this risk.).
5
See Lisa K. Tully, Closing Protection Letters, 16 VLTA EXAMINER, No. 3, at 17 (2010).
6
Arguably, coverage for negligence is immaterial in cases where lawyers follow the
recommendation above by providing clear and complete closing instructions.
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of closing protection letter gives the claimant an option to submit a claim below $2,000,000 to arbitration.
At least one major title insurer omits that option. Because closing protection letters are filed forms in
Virginia, it is unlikely that a title insurer will be able to address substantive comments as to its form in the
context of a particular transaction; however, the quality of coverage can influence a title insurance
consumer’s selection among insurers in the marketplace.
A checklist to assist you and your staff with closing protection letters is attached as Exhibit C.
For more information about closing protection letters, please see (i) Lisa K. Tully, Closing Protection
Letters, 16 VLTA EXAMINER, No. 3, at 17 (2010) and (ii) James Bruce Davis, The Law of Closing
Protection Letters, 36 TORT & INS. L.J., No. 3 (Spring 2001).
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EXHIBIT A
Closing Protection Letter — Single Transaction Limited Liability7
[TITLE INSURER LETTERHEAD]
Name and Address of Addressee: [________________________________]
Date:
[________________________________]
Name of Issuing Agent or Approved Attorney (hereafter, “Issuing Agent” or “Approved Attorney”, as the
case may require):
[________________________________]
Transaction (hereafter, “the Real Estate Transaction”): [________________________________]
Re:
Closing Protection Letter
Dear [________________________________]:
[________________________________] (the “Company”) agrees, subject to the Conditions and
Exclusions set forth below, to reimburse you for actual loss incurred by you in connection with the
closing of the Real Estate Transaction conducted by the Issuing Agent or Approved Attorney, provided:
(A) title insurance of the Company is specified for your protection in connection with
the closing of the Real Estate Transaction;
(B) you are to be the (i) lender secured by a mortgage (including any other security
instrument) of an interest in land, its assignees or a warehouse lender, (ii) purchaser of an interest in land,
or (iii) lessee of an interest in land; and
(C) the aggregate of all funds you transmit to the Issuing Agent or Approved
Attorney for the Real Estate Transaction does not exceed [$________________________________]
and provided the loss arises out of:
1.
Failure of the Issuing Agent or Approved Attorney to comply with your written closing
instructions to the extent that they relate to (a) the status of the title to that interest in land or the
validity, enforceability and priority of the lien of the mortgage on that interest in land, including
the obtaining of documents and the disbursement of funds necessary to establish the status of title
or lien, or (b) the obtaining of any other document, specifically required by you, but only to the
extent the failure to obtain the other document affects the status of the title to that interest in land
or the validity, enforceability and priority of the lien of the mortgage on that interest in land, and
not to the extent that your instructions require a determination of the validity, enforceability or the
effectiveness of the other document, or
2.
Fraud, dishonesty or negligence of the Issuing Agent or Approved Attorney in handling your
funds or documents in connection with the closing to the extent that fraud, dishonesty or
negligence relates to the status of the title to that interest in land or to the validity, enforceability,
and priority of the lien of the mortgage on that interest in land.
㻣
Copyright 2006-2009 American Land Title Association. Used by permission.
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If you are a lender protected under the foregoing paragraph, your borrower, your assignee and your
warehouse lender in connection with a loan secured by a mortgage shall be protected as if this letter were
addressed to them.
Conditions and Exclusions
1.
The Company will not be liable to you for loss arising out of:
A.
Failure of the Issuing Agent or Approved Attorney to comply with your closing
instructions which require title insurance protection inconsistent with that set forth in the
title insurance binder or commitment issued by the Company. Instructions which require
the removal of specific exceptions to title or compliance with the requirements contained
in the binder or commitment shall not be deemed to be inconsistent.
B.
Loss or impairment of your funds in the course of collection or while on deposit with a
bank due to bank failure, insolvency or suspension, except as shall result from failure of
the Issuing Agent or Approved Attorney to comply with your written closing instructions
to deposit the funds in a bank which you designated by name.
C.
Defects, liens, encumbrances or other matters in connection with the Real Estate
Transaction if it is a purchase, lease or loan transaction except to the extent that
protection against those defects, liens, encumbrances or other matters is afforded by a
policy of title insurance not inconsistent with your closing instructions.
D.
Fraud, dishonesty or negligence of your employee, agent, attorney or broker.
E.
Your settlement or release of any claim without the written consent of the Company.
F.
Any matters created, suffered, assumed or agreed to by you or known to you.
2.
If the closing is conducted by an Approved Attorney, a title insurance binder or commitment for
the issuance of a policy of title insurance of the Company must have been received by you prior
to the transmission of your final closing instructions to the Approved Attorney.
3.
When the Company shall have reimbursed you pursuant to this letter, it shall be subrogated to all
rights and remedies which you would have had against any person or property had you not been
so reimbursed. Liability of the Company for such reimbursement shall be reduced to the extent
that you have knowingly and voluntarily impaired the value of this right of subrogation.
4.
The Issuing Agent is the Company’s agent only for the limited purpose of issuing title insurance
policies. Neither the Issuing Agent nor the Approved Attorney is the Company’s agent for the
purpose of providing other closing or settlement services. The Company’s liability for your
losses arising from those other closing or settlement services is strictly limited to the protection
expressly provided in this letter. Any liability of the Company for loss does not include liability
for loss resulting from the negligence, fraud or bad faith of any party to a real estate transaction
other than an Issuing Agent or Approved Attorney, the lack of creditworthiness of any borrower
connected with a real estate transaction, or the failure of any collateral to adequately secure a loan
connected with a real estate transaction. However, this letter does not affect the Company’s
liability with respect to its title insurance binders, commitments or policies.
5.
Either the Company or you may demand that any claim arising under this letter be submitted to
arbitration pursuant to the Title Insurance Arbitration Rules of the American Land Title
Association, unless you have a policy of title insurance for the applicable transaction with an
Amount of Insurance greater than $2,000,000. If you have a policy of title insurance for the
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applicable transaction with an Amount of Insurance greater than $2,000,000, a claim arising
under this letter may be submitted to arbitration only when agreed to by both the Company and
you.
6.
You must promptly send written notice of a claim under this letter to the Company at its principal
office at [________________________________]. The Company is not liable for a loss if the
written notice is not received within one year from the date of the closing.
Any previous closing protection letter or similar agreement is hereby canceled with respect to the Real
Estate Transaction.
BLANK TITLE INSURANCE COMPANY
By: __________________________________
(The words “Underwritten Title Company” maybe inserted in lieu of Issuing Agent)
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EXHIBT B
Long-Form of Closing Instruction Letter (Real Estate Lending)
[LAW FIRM LETTERHEAD]
File No.: [Insert File No.]
____________ __, 2011
[Insert name of Title Agent or Approved
Attorney – see Closing Protection Letter]
[Insert Address]
[Insert Address]
[Insert Address]
Attn: [Insert Contact Name]
Re:
$[Insert Loan Amount] loan from [Insert Lender Name] to [Insert Borrower Name] (the “Loan”)
Dear
[Insert Contact Name]:
We represent [Insert Lender Name] in connection with the Loan. This closing instruction letter
constitutes Lender’s escrow instructions to [Insert name of Title Agent or Approved Attorney] (“Escrow
Agent”) in connection therewith, and the following terms in this closing instruction letter have the
associated meanings:
Lender:
Lender’s Representative:
Lender’s Counsel:
Borrower:
Guarantors:
Borrower’s Counsel:
Property:
Loan Amount:
Title Commitment:
Settlement Agent:
Title Insurer
Settlement Statement:
[Insert Lender Name]
[Insert Lender Contact]
[Insert Your Law Firm]
[Insert Borrower Name]
[Insert Guarantor Name]
[Insert Borrower Counsel Name]
[Insert Brief Legal Description or Address] ([Insert Tax Parcel Nos.])
$[Insert Loan Amount]
Commitment No. [Insert Title Commitment No., as revised]
[Insert name of Title Agent or Approved Attorney]
[Insert Title Insurer Name]
The settlement and disbursement statement attached hereto as Exhibit C.
1.
Deliveries. I enclose herewith execution versions of the documents listed on Exhibit A
attached hereto (collectively, the “Loan Documents”), the Loan Agreement having been executed by
Lender. All defined terms on Exhibit A are hereby incorporated into this closing instruction letter by this
reference. The Loan Documents and all funds disbursed to Settlement Agent by Lender (“Escrowed
Funds”) are being provided in trust, and must be held in escrow in strict accordance with this closing
instruction letter.
All Loan Documents must either be executed by or on behalf of Borrower, Guarantors and the other
applicable parties in the presence of one or more attorneys employed by Settlement Agent, or duplicate
counterparts of the Loan Documents must be executed outside of the offices of Settlement Agent by such
parties and delivered to Settlement Agent. In the latter event, Settlement Agent must (i) confirm that such
parties’ counterparts, as executed, are in exactly the form delivered to Settlement Agent by us without
addition, deletion, or other change, and (ii) conform Lender’s and Borrower’s counterparts into original,
fully executed duplicate counterparts using Lender’s counterparts as surviving counterparts where
applicable. None of the Loan Documents is to be executed, in whole or in part, under a power of attorney
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without my prior written consent. All Loan Documents are to be signed by the persons and in the
capacities indicated therein.
2.
Conditions Precedent to Funding Into Escrow. Only upon satisfaction of the following
conditions may Settlement Agent proceed in accordance with the instructions contained in Section 3
below:
(A)
The terms and conditions set forth in Section 1 above are satisfied, and
Settlement Agent possesses all of the Loan Documents, all of which must be undated, but otherwise fully
completed and duly executed by all parties thereto.
(B)
Settlement Agent executes this closing instruction letter to evidence its
agreement to abide by the terms of escrow set forth herein, and Settlement Agent transmits to me by
facsimile or electronic mail a copy of this closing instruction letter (with all exhibits attached thereto)
executed on behalf of Settlement Agent.
(C)
Settlement Agent receives all approvals from parties other than Lender required
to release the fully executed counterparts of the Loan Documents from escrow, to disburse funds in
accordance with this closing instruction letter, and to otherwise carry out all the other terms of this closing
instruction letter.
(D)
[Insert other pre-closing conditions applicable to the transaction]
3.
Conditions Precedent to Recording. Upon satisfaction of the terms and conditions set
forth in Section 1 and 2 above, Settlement Agent shall send me a notice by facsimile or electronic mail
that the terms and conditions set forth in Section 1 and 2 of this closing instruction letter are satisfied (a
“Funding Notice”).
4.
Recording and Filing. Upon satisfaction of the following terms and conditions,
Settlement Agent shall date the Deed of Trust as of the recording date (and fill in all blanks in the
property description thereof with the appropriate recording information) and shall thereafter record the
Deed of Trust in the applicable records in the Clerk’s Office of the Circuit Court of the [Insert name of
locality], Virginia (the “Clerk’s Office”), disbursing such Escrowed Funds as are required to effect
recordation:
(A)
The terms and conditions set forth in Sections 1 and 2 above are satisfied, and
Settlement Agent sends the Funding Request.
(B)
Settlement Agent receives Escrowed Funds from Lender in an amount no less
than that provided for on the Settlement Statement.
(C)
Each of the “Requirements” set out in on Schedule B – Section I of the Title
Commitment (or otherwise required for issuance of the coverage) is satisfied, and Settlement Agent is in a
position to certify the same to the Title Insurer.
(D)
The title exceptions marked for deletion on Exhibit B attached hereto (the
“Removed Exceptions”) have been removed from the Title Commitment, and you and the Title Insurer
are bound to issue the title policy without those exceptions.
(E)
Settlement Agent runs down title as of the date and time of closing, and confirms
(i) that no liens or encumbrances appear of record other than those specifically described on Schedule B,
Section 2 of the Title Commitment, excluding the Removed Exceptions (collectively, the “Permitted
Exceptions”), (ii) that the Deed of Trust, upon recordation, will be a valid first lien on the Property
subject only to Permitted Exceptions and (iii) that indefeasible fee simple title to the Property described in
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the Deed of Trust is vested in the trustor of the Deed of Trust. In the event that Settlement Agent
discovers that any defects, liens, encumbrances, adverse claims, or other matters have appeared of record
or have attached subsequent to effective date of the Title Commitment (the “New Title Matters”), then it
shall immediately notify us of the same and shall not record or disburse Escrowed Funds until the New
Title Matters have been removed or specifically accepted by us in writing.
Immediately after recordation in the [Insert name of locality], Settlement Agent shall notify us by
facsimile or electronic mail that the Deed of Trust has been recorded shall provide recordation
information (the “Notice of Recordation”).
5.
Closing. After delivery of the Notice of Recordation to us, Settlement Agent shall take
the following actions:
(A)
Date the remaining Loan Documents as of the date of recordation of the Deed of
Trust and fill in all blanks in the Loan Documents’ property descriptions (as applicable).
(B)
Disburse the remaining Escrowed Funds in accordance with the Settlement
Statement, including, without limitation [specifically list all payoffs that are required to release prior
liens].
(C)
recording or filing.
Deliver to us by courier the original Loan Documents, other than those sent for
Within 30 days after closing, Settlement Agent shall provide to us with the original title policy and
original recording receipts. In addition, in the event that Settlement Agent receives the original recorded
Deed of Trust, then it shall immediately provide the same to us.
We reserve the right to withdraw any or all items escrowed by or on behalf of Lender from escrow upon
written or electronic notice to Settlement Agent given before closing, in which case Settlement Agent
shall immediately return all such requested items to us by courier. We also reserve the right to amend
these escrow instructions in writing (including by facsimile or electronic mail) from time to time.
Sincerely,
SEEN AND AGREED:
[Insert name of Settlement Agent]
By:
Name:
Its:
Date of Execution:
Attachments:
Exhibit A - List of Loan Documents
Exhibit B - Schedule B-2 (with any deletions marked)
Exhibit C - Settlement Statement
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EXHIBIT C
Closing Protection Letter Checklist
□
Perform due diligence on title.
□
Ensure that title insurance commitment is in final form, signed and issued. Note any particular
exceptions that must be removed at closing. Best practice is to remove those exceptions prior to
closing and have the title insurance commitment revised.
□
Identify all items that settlement agent must collect and all other tasks that settlement agent must
perform, particularly in connection with the payoff of prior liens.
□
Ensure that closing protection letter is issued by the insurance company that issued title insurance
commitment, is signed and is on insurance company letterhead.
□
Ensure that closing protection letter is addressed to the insured.
□
Ensure that closing protection letter specifies the settlement agent as “Issuing Agent” or
“Approved Attorney,” and defines the applicable term correctly.
□
Ensure that any cap specified in the closing protection letter on the dollar-amount of funds that
may be transmitted into escrow is sufficient.
□
Ensure that all other blanks in closing protection letter are filled in appropriately.
□
Prepare and finalize written escrow instructions that comply with the following:
□
Address escrow instructions to the Issuing Agent or an Approved Attorney, as defined in
the closing protection letter.
□
Specifically reference the issued title insurance commitment, as revised, in the escrow
instructions.
□
Specify all title requirements that must be satisfied (usually all requirements).
□
Specify all title exceptions that must be removed.
□
Specify all other items that settlement agent must collect and all other tasks that
settlement agent must perform, particularly in connection with the payoff of prior liens.
□
If closing protection letter was not obtained directly from title insurer, contact the title insurer
directly to confirm that it issued the closing protection letter.
□
Compare closing protection letter against ALTA form to identify substantive differences.
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CLOSING PROTECTION LETTERS
by Lisa K. Tully*
A Closing Protection Letter (“CPL”) is designed to cover a funding lender’s loss caused by the
settlement agent or approved attorney’s failure to comply with closing instructions. Neither a title agent
nor an approved attorney is an agent of the title insurance company with respect to settlement issues.
Without the coverage provided by a CPL, the lender and borrower bear the risk of loss caused by
settlement agent or approved attorney’s misconduct. The CPL clearly defines the responsibility of title
insurer with respect to settlement issues.
“The purpose of the closing service letter is to provide indemnity against loss due to a closing
attorney’s defalcation or failure to follow lender’s closing instructions.” Metmore Financial, Inc. v.
Commonwealth Land Title Ins. Co., 645 So. 2d 295, 297 (Ala. 1993).
The principles of agency law apply. The standard agency agreement between title insurer and
agent provides:
Appointment and territory. PRINCIPAL appoints AGENT its agent solely for the
purpose of issuing, on PRINCIPAL’S forms, title insurance commitments, policies and
endorsements on real estate located in [Virginia].
Many lenders and practitioners are under the mistaken belief that a title agent is the insurer’s
agent for all purposes and that the insurer is responsible for all matters related to settlement. In fact, the
insurer is responsible only for the commitment, policy and endorsement activities of its agent. Under a
standard agency agreement with an underwriting company, an agent has no authority to act as settlement
agent for its underwriter. Wells Fargo Bank, N.A. v. Old Republic Title Insurance Company, 413 Fed.
Appx. 569 (4th Cir. Mar 1, 2011) (unpublished opinion). See also First American Title Ins. Co. v. First
Alliance Title, Inc., 718 F. Supp. 2d 669 (E.D. Va. June 14, 2010) (in which the court noted that a closing
protection letter is issued because the insurance company is not liable for the acts of its agent).
In Universal Bank v. Lawyers Title Ins. Corp., 73 Cal. Rptr. 2d 196 (Cal. App. 1997), the escrow
contract between lender and Southland Title, which performed escrow services for the purchase and loan
closing, required that the escrow agent disclose any deeds transferring title to parties other than the
borrower. In fact, there were such deeds and the borrower was artificially inflating the value of the
*
Lisa Tully is Vice President – Underwriting Counsel for the Fidelity National Title Group of
underwriters, which includes Fidelity National Title Insurance Company, Chicago Title Insurance
Company and Commonwealth Land Title Insurance Company. She received a Bachelor of Arts from the
University of Richmond in 1982 and a Juris Doctor from its law school in 1985.
Lisa began her career in the title insurance industry in 1987 with Lawyers Title Insurance
Corporation prior to its merger with Fidelity National. She is currently underwriting counsel for the
company’s Virginia operations. In this capacity she provides legal advice to employees regarding
underwriting, title examination and commercial transactions, and handles complex underwriting issues for
agents and their customers. She is also assistant state counsel for the Fidelity National companies in
Virginia, handling claims, regulatory and insurance compliance issues.
Lisa speaks regularly to title insurance industry groups, agents, lending organizations and real
estate attorneys on property issues including water rights, church property transfer, foreclosure, title
insurance coverage and claims, and RESPA compliance. She is an officer of the Virginia Land Title
Association and a member of VLTA’s education and legislative committees. Lisa is admitted to practice
law in Virginia and the U.S. District Court for the Eastern District of Virginia. Outside the office she
enjoys skiing, reading, cooking and participation as a board member of several non-profit organizations.
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property by setting up a sham transaction. The borrower later defaulted and lender suffered a loss. No
CPL had been issued by Lawyers Title and the court refused to find that Southland Title was the agent of
Lawyers Title for the provision of escrow services. The court, looking at both the agency agreement and
the question of apparent agency, found that the sophisticated lender knew of the availability of and the
coverage provided by a CPL and could not claim apparent agency due to this knowledge.
If a CPL is issued for a specific transaction and names the settlement agent or approved closing
attorney, the insurer will acknowledge certain additional responsibilities with respect to the transaction.
The coverage under a CPL is in addition to the coverage under any issued policy. The title policy and the
closing protection letter are intended to cover separate risks, and the addressee of a CPL can assert a
claim independent of a related title policy claim. JP Morgan Chase Bank, N.A. v. First American Title
Insurance Company, 2011 WL 2413438 (E.D. Mich. June 10, 2011).
Regulatory Restrictions. In Virginia title insurers are limited to the use of a CPL which covers
only those matters related to title to the insured real estate. By Administrative Letter 1995-8, issued
September 4, 1995, the Bureau of Insurance restricted title insurers’ use of the CPL, stating that it may
cover only those matters related to the condition of title to real estate. A copy of Administrative Letter
1995-8 is attached as Exhibit A.
By statute, title insurers licensed in Virginia are monoline insurance companies. VA. CODE §
38.2-135 prohibits insurers licensed to write title insurance from obtaining a license to write any other
line of insurance.
§ 38.2-135. Classes of insurance companies may be licensed to write.
Except as otherwise provided in this title and subject to any conditions and restrictions
imposed therein, any insurer licensed to transact the business of insurance in this
Commonwealth, other than life insurers and title insurers, may be licensed to write one or
more of the classes of insurance enumerated in Article 2 (§ 38.2-101 et seq.) of this
chapter . . .
Insurers in Virginia use a form of CPL developed by the American Land Title Association called
“Closing Protection Letter – LIMITATIONS,” last revised January 1, 2008, and often referred to as “the
regulatory form.” It was originally developed in 1998 in response to various states’ insurance regulations,
including those in Nebraska, Washington and Wisconsin, as well as Virginia.
The regulatory form limits coverage to loss arising out of:
1. Failure of the Issuing Agent or Approved Attorney to comply with your written closing
instructions to the extent that they relate to (a) the status of the title to that interest in land
or the validity, enforceability and priority of the lien of the mortgage on that interest in
land, including the obtaining of documents and the disbursement of funds necessary to
establish the status of title or lien, or (b) the obtaining of any other document, specifically
required by you, but only to the extent the failure to obtain the other document affects the
status of the title to that interest in land or the validity, enforceability and priority of the
lien of the mortgage on that interest in land, and not to the extent that your instructions
require a determination of the validity, enforceability or the effectiveness of the other
document, or
2. Fraud, dishonesty or negligence of the Issuing Agent or Approved Attorney in handling
your funds or documents in connection with the closing to the extent that fraud,
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dishonesty or negligence relates to the status of the title to that interest in land or to the
validity, enforceability, and priority of the lien of the mortgage on that interest in land.1
An example of the difference in coverage between the standard form CPL and the regulatory
form can be found in a claim handled by Lawyers Title Insurance Corporation. The agency was
physically located in Maryland but was an agent of Lawyers Title for the purpose of issuing policies in
both Maryland and Virginia. Claims were made related to the agent’s settlement activities. Lawyers Title
suffered losses in Maryland under its standard closing protection letter that were not covered under
Virginia’s regulatory form of CPL, which limits loss to matters related to the status of title only.
The North Carolina Department of Insurance has taken a different view and has found that the
coverage provided by the CPL is “title insurance.” Insurers may issue the standard form letter, but must
charge additional premium. The insurance commissioner has found that the additional coverage provided
by the CPL requires additional premium.
Issuance of a CPL is prohibited in New York. The Insurance Department issued Circular Letter
No. 18 on December 14, 1992 stating that title insurance companies lack authority to issue a closing
protection letter ("CPL") to a lender regarding the acts of the closing attorney because the protection
offered is beyond the scope of the monoline title insurance company’s license.
Lenders protect
themselves in New York by having their own attorneys disburse loan proceeds. Kansas prohibits the
issuance of a CPL for similar reasons.
Coverage. A copy of the regulatory form of CPL is attached as Exhibit B. The coverage is
conditional and the letter must be read in its entirety to determine the extent of coverage.
Specific provisions include:
(1) The title insurer will reimburse actual loss. “[The company] agrees, subject to the Conditions
and Exclusions set forth below, to reimburse you for actual loss . . .”
(2) The closing must be handled by an Issuing Agent or Approved Attorney of the company. “ .
. . incurred by you in connection with closings of real estate transactions conducted by the
Issuing Agent or Approved Attorney . . .”
(3) The coverage is conditioned on the lender having been issued a title insurance commitment.
“. . . provided: (A) title insurance of the Company is specified for your protection in
connection with the closing . . .”
(4) The loss must arise out of the “failure of the Issuing Agent or Approved Attorney to comply
with your written closing instructions . . . or (b) the obtaining of any other document,
specifically required by you . . .”
(5) Or the loss must arise out of the “fraud, dishonesty or negligence of the Issuing Agent or
Approved Attorney in handling your funds or documents in connection with the closings
. . . .”2
Liability under a CPL is not conditioned on the actual issuance of a title insurance policy. In fact,
a closing attorney’s failure to make a payoff would preclude issuance of a policy but coverage under the
CPL would remain. Lawyers Title Insurance Corp. v. Edmar Constr. Co., Inc., 294 A.2d 865 (D.C.
1972).
1
Copyright 2006-2011 American Land Title Association. Used by permission.
2
All excerpts are copyright 2006-2011 American Land Title Association. Used by permission.
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The insurer is often liable under a CPL when the closing attorney absconds with loan funds. No
policy is issued because no final application and certification is provided by the attorney. The lender’s
claim is under the CPL. An example is Old Republic Nat’l Title Ins. Co. v. Dameron, Case No. 97-01088
(Bankr. E.D. Va. 1997), where the closing attorney allegedly embezzled closing funds. Under their CPL
obligations, three title insurers purchased notes from unpaid lenders and then sought to except their debts
from discharge.
A title insurer is not liable for losses incurred by a lender due to a title agency employee’s theft of
closing money when no policy or CPL was invoked. Escrow funds held by a title agency not in relation
to a closing for which a CPL or policy was issued, and stolen by an employee of the agency, do not fall
under the agency agreement or a CPL. Bluehaven Funding, LLC v. First American Title Insurance Co.,
594 F.3d 1055 (8th Cir. 2010).
There is no coverage under the CPL related to the creditworthiness of the borrower. Where the
agent insured over judgment liens and the lender argued it would not have made the loan had it known of
the liens, coverage under the CPL is denied.
Where the settlement agent failed to properly complete terms on the note as directed by the
lender, and there is no loss of enforceability or priority of the insured deed of trust, there is no coverage
under the policy or CPL for settlement agent’s error.
In a claim where title to the real estate was vested in husband and wife but the loan was to
husband only, the settlement agent properly had wife sign the deed of trust, but inadvertently had her also
sign promissory note. The lender was unable to sell the loan due to failure of wife to apply to be a
borrower. The title company determined that the error had no effect on title to real estate and lender’s
loss was not covered under the policy or CPL.
In another claim the written closing instructions to the settlement agent required a survey which
was not procured. The loan policy took exception for “such state of facts as would be disclosed by a
current accurate survey of the premises.” After default by the borrower, the lender had a survey prepared
which revealed that 50% of the house was located on the next door neighbor’s property. The lender had a
legitimate claim under the CPL because its instructions to obtain a survey had not been followed resulting
in a title defect.
Although an attorney agent issued a Fidelity National closing protection letter to a lender for a
closing, the letter was not in effect because the policy was written on another underwriter’s paper.
Capital Mortgage Associates, LLC v. Hulton (Conn. Super. Ct. 2009) (unpublished opinion).
Measure of damages. The CPL is an indemnity agreement. It covers actual loss suffered by the
lender. The lender’s full credit bid at foreclosure is a waiver of the right to demand the balance of the
loan amount from any party and therefore prevents the lender from demanding the deficiency from the
title insurer under a closing protection letter. New Freedom Mortgage Corp. v. Globe Mortgage Corp.,
281 Mich. App. 63, 761 N. W. 2d 832 (2008).
The measure of damages is generally considered to be determinable in the same manner as policy
coverage. However, damages under the CPL may be greater than the title insurance policy. In American
Title Ins. Co. v. Variable Annuity Life Ins. Co. (1996 Tex App. Houston 14th Dist., Sept. 26, 1996)
(unpublished), the closing agent failed to pay off the existing deed of trust in the amount of $697,798.
Despite the new policy amount of $353,194, the court found the title insurer liable under its closing
protection letter for full satisfaction of the prior lender’s payoff of $697.798.
Other courts have based a coverage determination on equitable principles, such as whether the
title insurer was in a position to prevent the loss. See First American Title Insurance Co. v. Vision
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Mortgage Corp., 689 A. 2d 154 (N.J. Sup. Ct. App. Div. 1997); Sears Mortgage Corp. v. Rose, 134 N.J.
326 (1993).
Subrogation. Under an older form of CPL, the court in Sears Mortgage Corp. v. Rose, 134 N.J.
326 (1993), found that the CPL is integrated into and is a part of the title insurance policy, with all terms
and conditions including subrogation. The current version of CPL specifically provides that the insurer is
subrogated to the rights available to the lender.
When the Company shall have reimbursed you pursuant to this letter, it shall be
subrogated to all rights and remedies which you would have had against any person or
property had you not been so reimbursed. Liability of the Company for such
reimbursement shall be reduced to the extent that you have knowingly and voluntarily
impaired the value of this right of subrogation.
However, the right of subrogation is limited. In American Title Insurance Co. v. Burke &
Herbert Bank & Trust Co., 813 F. Supp. 423 (E.D. Va. 1993), the court ruled that a title insurer which
reimbursed the lender for loan funds stolen by the settlement agent could not sue the agent’s bank for
failure to timely return bad checks, finding that if the bank had dishonored the checks as it should have
done, the title insurer would have been obligated to reimburse the payees for loss caused by the agent’s
embezzlement. This case was decided prior to Virginia’s imposed use of the regulatory form of CPL.
Rights of third parties. Coverage under the CPL runs to the addressee, its assignees, its
warehouse lender, and the purchaser or a lessee. In GMAC Mortg., LLC v. Flick Mortg. Investors, Inc.,
2011 WL 841409 (W.D. N.C. Mar. 7, 2011), the court discussed the rights of an assignee of the addressee
to assert rights under the CPL and found that a clear assignment of mortgage by Flick to GMAC did
entitle GMAC to maintain an action under a CPL issued by Chicago Title.
Two provisions in the CPL address the rights of third parties to coverage:
“[The company agrees to reimburse your actual loss provided] you are to be the (i) lender
secured by a mortgage (including any other security instrument) of an interest in land, its
assignees or a warehouse lender, (ii) purchaser of an interest in land, or (iii) lessee of an
interest in land”
and,
“If you are a lender protected under the foregoing paragraph, your borrower, your
assignee and your warehouse lender in connection with a loan secured by a mortgage
shall be protected as if this letter were addressed to them.”
See Proctor v. Metropolitan Money Store Corp., 579 F. Supp. 2d 724 (D. Md. 2008) (where plaintiffborrowers claimed the benefit of the CPL in alleging loss recoverable from Chicago Title and Southern
Title for acts of the insurers’ agents).
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EXHIBIT A
September 4, 1995
TO:
All Companies Licensed to Write Title Insurance in Virginia
RE:
Closing Protection Letters
Administrative Letter 1995-8
The State Corporation Commission Bureau of Insurance is issuing this administrative letter to
advise title insurers licensed in Virginia that closing protection letters may not be used to indemnify
lenders for losses which are unrelated to the condition of the title to property or the status of any lien on
property. Section 38.2–123 of the Code of Virginia defines title insurance as “...insurance against loss by
reason of liens and encumbrances upon property, defects in the title to property, and other matters
affecting the title to property or the right to the use and enjoyment of property. ‘Title insurance’ includes
insurance of the condition of the title to property and the status of any lien on property.”
By statute, title insurers are monoline insurance companies. Section 38.2–135 prohibits insurers
licensed to write title insurance from obtaining a license to write any other lines of insurance. By issuing a
closing protection letter that indemnifies lenders for losses which are unrelated to the condition of the title
to property or the status of any lien on property, a title insurance company is exceeding its license
authority.
Closing protection letters used by title insurance companies licensed in Virginia must, therefore,
limit coverage to matters affecting the condition of the title to property or the status of any lien on
property. Coverage (whether on an individual or blanket basis) provided beyond this will be considered a
violation of § 38.2–135. Any closing protection letter issued in the past on a blanket basis which
indemnifies lenders for losses unrelated to the condition of the title to property or the status of any lien on
property should be rescinded.
Please be advised that title insurance companies are permitted under § 38.2–4615 to act in concert
with each other and with others with respect to any or all matters pertaining to the preparation of forms of
title insurance policies. Section 38.2–4615 also states that title insurers may exchange information,
consult, and cooperate with each other with respect to policy forms and contracts. Therefore, title
insurance companies licensed in Virginia may work together to develop a revised closing protection letter
or endorsement that limits coverage to matters affecting the condition of the title to property or the status
of any lien on property. Any revisions to existing closing protection letters or endorsements must be filed
with the Bureau of Insurance as required by § 38.2–4606.
Sincerely,
Steven T. Foster
Commissioner of Insurance
STF:jgs
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EXHIBIT B
ALTA CLOSING PROTECTION LETTER – LIMITATIONS
BLANK TITLE INSURANCE COMPANY
Name and Address of Addressee:
Date:
Name of Issuing Agent or Approved Attorney (hereafter, “Issuing Agent” or “Approved Attorney”, as the
case may require):
[Identity of settlement agent and status as either Issuing Agent or Approved Attorney appears
here.]
Re:
Closing Protection Letter
Dear
Blank Title Insurance Company (the “Company”) agrees, subject to the Conditions and Exclusions set
forth below, to reimburse you for actual loss incurred by you in connection with closings of real estate
transactions conducted by the Issuing Agent or Approved Attorney, provided:
(A) title insurance of the Company is specified for your protection in connection with the closing; and
(B) you are to be the (i) lender secured by a mortgage (including any other security instrument) of an
interest in land, its assignees or a warehouse lender, (ii) purchaser of an interest in land, or (iii) lessee
of an interest in land
and provided the loss arises out of:
1.
Failure of the Issuing Agent or Approved Attorney to comply with your written closing
instructions to the extent that they relate to (a) the status of the title to that interest in land or the
validity, enforceability and priority of the lien of the mortgage on that interest in land, including
the obtaining of documents and the disbursement of funds necessary to establish the status of title
or lien, or (b) the obtaining of any other document, specifically required by you, but only to the
extent the failure to obtain the other document affects the status of the title to that interest in land
or the validity, enforceability and priority of the lien of the mortgage on that interest in land, and
not to the extent that your instructions require a determination of the validity, enforceability or the
effectiveness of the other document, or
2.
Fraud, dishonesty or negligence of the Issuing Agent or Approved Attorney in handling your
funds or documents in connection with the closings to the extent that fraud, dishonesty or
negligence relates to the status of the title to that interest in land or to the validity, enforceability,
and priority of the lien of the mortgage on that interest in land.
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If you are a lender protected under the foregoing paragraph, your borrower, your assignee and your
warehouse lender in connection with a loan secured by a mortgage shall be protected as if this letter were
addressed to them.
Conditions and Exclusions
1.
The Company will not be liable to you for loss arising out of:
A.
Failure of the Issuing Agent or Approved Attorney to comply with your closing
instructions which require title insurance protection inconsistent with that set forth in the
title insurance binder or commitment issued by the Company. Instructions which require
the removal of specific exceptions to title or compliance with the requirements contained
in the binder or commitment shall not be deemed to be inconsistent.
B.
Loss or impairment of your funds in the course of collection or while on deposit with a
bank due to bank failure, insolvency or suspension, except as shall result from failure of
the Issuing Agent or the Approved Attorney to comply with your written closing
instructions to deposit the funds in a bank which you designated by name.
C.
Defects, liens, encumbrances or other matters in connection with your purchase, lease or
loan transactions except to the extent that protection against those defects, liens,
encumbrances or other matters is afforded by a policy of title insurance not inconsistent
with your closing instructions.
D.
Fraud, dishonesty or negligence of your employee, agent, attorney or broker.
E.
Your settlement or release of any claim without the written consent of the Company.
F.
Any matters created, suffered, assumed or agreed to by you or known to you.
2.
If the closing is to be conducted by an Approved Attorney, a title insurance binder or
commitment for the issuance of a policy of title insurance of the Company must have been
received by you prior to the transmission of your final closing instructions to the Approved
Attorney.
3.
When the Company shall have reimbursed you pursuant to this letter, it shall be subrogated to all
rights and remedies which you would have had against any person or property had you not been
so reimbursed; Liability of the Company for reimbursement shall be reduced to the extent that
you have knowingly and voluntarily impaired the value of this right of subrogation.
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4.
The protection herein offered shall not extend to any transaction in which the funds you transmit
to the Issuing Agent or Approved Attorney exceed $_________. The Company shall have no
liability of any kind for the actions or omissions of the Issuing Agent or Approved Attorney in
that transaction except as may be derived under the Company's commitment for title insurance,
policy of title insurance or other express written agreement. Please contact the Company if you
desire the protections of this letter to apply to that transaction. This paragraph shall not apply to
individual mortgage loan transactions on individual one-to-four-family residential properties
(including residential townhouse, condominium and cooperative apartment units).
5.
The Issuing Agent is the Company’s agent only for the limited purpose of issuing title insurance
policies. Neither the Issuing Agent nor the Approved Attorney is the Company’s agent for the
purpose of providing other closing or settlement services. The Company’s liability for your
losses arising from those other closing or settlement services is strictly limited to the protection
expressly provided in this letter. Any liability of the Company for loss does not include liability
for loss resulting from the negligence, fraud or bad faith of any party to a real estate transaction
other than an Issuing Agent or Approved Attorney, the lack of creditworthiness of any borrower
connected with a real estate transaction, or the failure of any collateral to adequately secure a loan
connected with a real estate transaction. However, this letter does not affect the Company’s
liability with respect to its title insurance binders, commitments or policies.
6
Either the Company or you may demand that any claim arising under this letter be submitted to
arbitration pursuant to the Title Insurance Arbitration Rules of the American Land Title
Association, unless you have a policy of title insurance for the applicable transaction with an
Amount of Insurance greater than $2,000,000. If you have a policy of title insurance for the
applicable transaction with an Amount of Insurance greater than $2,000,000, a claim arising
under this letter may be submitted to arbitration only when agreed to by both the Company and
you.
7.
You must promptly send written notice of a claim under this letter to the Company at its principal
office at _____________________________________________. The Company is not liable for
a loss if the written notice is not received within one year from the date of the closing.
8.
The protection herein offered extends only to real property transactions in [State].
Any previous closing protection letter or similar agreement is hereby cancelled, except for closings of
your real estate transactions for which you have previously sent (or within 30 days hereafter send) written
closing instructions to the Issuing Agent or Approved Attorney.
BLANK TITLE INSURANCE COMPANY
By: _____________________________
(The name of a particular issuing agent or approved attorney may be inserted in lieu of reference to
Issuing Agent or Approved Attorney contained in this letter and the words "Underwritten Title Company"
may be inserted in lieu of Issuing Agent.)
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AN OVERLOOKED OPTION FOR FINANCING
MULTI-FAMILY AFFORDABLE HOUSING:
OBTAINING TAX-EXEMPT HOUSING BONDS FROM A
LOCAL REDEVELOPMENT AND HOUSING AUTHORITY
AND 4% LOW-INCOME HOUSING TAX CREDITS FROM VHDA
by William L. Nusbaum* and H. David Embree**
One of the very few bright spots in the struggling world of commercial real estate has been the
strength of the multi-family rental market. While the construction of shopping centers, office buildings
and industrial properties ground to an almost complete stop during the past three years, rising
unemployment and foreclosures, the collapse of the single-family housing market, and the reluctance of
many who could afford to buy a home to make such a sizable investment in this fragile economy have
combined to shrink multi-family vacancy rates in existing properties and strengthen the pro forma bottom
lines of proposed projects. As a result, developers of multi-family rental projects have been busy the last
few years with both acquisition/rehabilitation deals and the construction of new apartment complexes.
Both construction and permanent financing have generally been available for these projects.
One challenge for these multi-family developers has been to match up the best mode of financing
with their project. In the past, this has often meant obtaining a privately originated loan backed by some
form of federal government sponsored credit support (e.g., Fannie Mae, Freddie Mac or GNMA), but
since the financial setbacks at Fannie Mae and Freddie Mac, developers have become interested in
exploring other alternatives. Some sophisticated developers have pursued HUD-insured 221(d)(4)
financing, notable for its fixed rate, 40-year amortization schedule. However, the HUD 221(d)(4)
program typically takes a year or longer from the pre-application stage through closing the financing, and
many real estate sellers are not willing to wait that long to close their sale.
Other multi-family rental housing developers have flocked to state-supported financing, provided
in Virginia through the Virginia Housing Development Authority (“VHDA”). VHDA’s long-standing
AAA bond rating (as of October 1, 2011) and well-established multi-family bond financing loan
programs1 enable developers of both market-based and affordable (i.e., for low- and moderate-income
tenants) rental projects to obtain financing. The loans for market-based properties are financed with
taxable bonds issued by VHDA for multiple projects, while the loans for the affordable housing properties
are typically financed with tax-exempt VHDA bonds and accordingly bear a lower interest rate than the
loans for market-based projects.
*
William L. Nusbaum is a shareholder at Williams Mullen, practicing in its Norfolk office. His
practice focuses on municipal bonds, economic development incentives, commercial real estate and
alcoholic beverage licensing. He graduated with an A.B. from Harvard College in 1977 and received his
J.D. from the University of Virginia School of Law in 1980. He is Secretary/Treasurer of the Board of
Governors of the Real Property Section of the Virginia State Bar, and a former Chair of its Commercial
Real Estate Committee, and served as bond counsel on the transaction discussed below.
**
H. David Embree is a shareholder at Williams Mullen, practicing in its Norfolk office. His
practice focuses on commercial real estate, and in particular, low-income housing tax credits and multifamily housing, as well as retail and commercial property acquisition and financing. He graduated with a
B.A. from Michigan State University in 1971 and received his J.D. from the University of Virginia
School of Law in 1974. He is a former Chair of the Taxation Section of the Virginia State Bar, and
represented the developer in the sale of the Low-Income Housing Tax Credits in the transaction discussed
below.
1
See the VHDA website at http://www.vhda.com/BusinessPartners/MFDevelopers/MFFinancing/
Pages/MF-Financing-Overview.aspx.
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But VHDA does more than sell its bonds to fund multi-family rental housing loans. It also serves
as allocation administrator for the Commonwealth’s share of federal Low-Income Housing Tax Credits
(“LIHTCs”), uniquely positioning it as a “one-stop shop” for financing affordable housing projects. To
VHDA’s credit, it operates a well-oiled machine, accessing the credit markets with large bond issues
which fund its making loans for individual projects, and it has reduced the highly detailed application
process for LIHTCs to a science.2 Through VHDA’s LIHTC program, a developer may apply for either
(a) 9% LIHTCs (rationed according to a nation-wide annual cap on the dollar amount of LIHTCs that can
be granted through a competitive once-yearly application process) or (b) the less lucrative 4% LIHTCs
(available for projects financed with tax-exempt bonds). With an award and subsequent sale of LIHTCs
to an investor limited partner, the developer can raise substantial equity for injection into its project.
But how do LIHTC’s work, and what makes them so attractive to the developer of a multi-family
affordable housing project? While a complete explanation (232 pages!) of the program is available from
the Internal Revenue Service’s web site,3 the key aspects of the LIHTC program can be briefly
summarized as follows.
For the competitive 9% LIHTC’s, VHDA allocates the available credits among several pools,
some of which are geographic and others of which are sponsor defined (i.e., non-profit organizations and
local Redevelopment and Housing Authorities (“RHAs”)). The 9% credit allows the investor to subtract
from its tax liability, each year for ten years after completion and occupancy, 9% of the qualified basis in
the project, which is roughly the cost to develop the project, less land cost (land cannot make up any part
of the tax credit base). For rehab projects, the acquisition of existing buildings will also qualify for credit,
but at the 4% rate rather than 9%. The 4% credit is indexed against the federal funds rate; at the present
time, the 4% credit actually yields 3.26%.
The tax credit investor, which typically “buys” the credit by contributing capital and becoming a
limited partner in a limited partnership, or a non-managing member of a limited liability company, pays a
discounted amount for the credits because of the time value of using the credits over the ten year period.
Other benefits of owning an equity interest in the project, such as cash flow from operations and residual
value on sale or refinancing, are negotiable between the developer and the tax credit investor. The
developer can expect to make personal guarantees to the investor that the credits will be received and the
project operated free of deficits at least for some initial period. Now about twenty years old, the tax credit
program has matured, with a number of national syndicators as potential investors.
What’s the quid pro quo for this tax benefit? To qualify for LIHTC’s, the project must (a) rent
not less than 40% of its units to residents making not more than 60% of the HUD-established area median
income (subject to adjustments for family size), and (b) fix its rent for its tax credit units at 30% of the
metropolitan statistical area (“MSA”) median income. MSA median incomes and allowable rents can be
found on the VHDA website.4 Since tax credits (and equity dollars) flow only for qualified units, more
often than not developers choose to apply the tax credit restrictions to 100% of the project. Finally, the
tax credit restrictions must remain on the project for a minimum of thirty (30) years.
Thus, the tax credit program provides an indirect subsidy for affordable housing. The higher
equity investment reduces the amount of project debt, and with lower debt service costs, the project can
still prosper at the restricted tax credit rents. The program does, however, require diligent property
2
See VHDA website, at http://www.vhda.com/BusinessPartners/MFDevelopers/LIHTCProgram/
Pages/LIHTCProgram.aspx.
3
See U.S. Dept. Treas., Internal Revenue Service Market Segment Specialization Program, Low
Income Housing Credit, Training Publication 3123-006 (6-99), TPDS No. 89018M, at
http://unclefed.com/SurviveIRS/MSSP/lihc.pdf.
4
See VHDA, Maximum LIHTC Gross Rents – VHDA, at http://www.vhda.com/Business
Partners/PropertyOwnersManagers/Income-Rent-Limits/Pages/Maximum-LIHTC-Gross-Rents.aspx.
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management, because failure to maintain occupancy by income-qualified tenants will result in recapture
of credits during the first fifteen years after the project’s completion.
But even the finely-tuned programs which VHDA offers for its multi-family rental housing loans
and 9% LIHTCs have some drawbacks. Because of the federal volume cap on 9% LIHTCs, the
application process for the 9% credits is very competitive, and most projects which apply fail to receive
an award of 9% credits.5 Moreover, for those developers seeking 9% LIHTCs, news of the failure to
receive an award of 9% credits comes after a five to six-month long application preparation, submission
and review process, at which point they then have to retool their numbers and turn to “Plan B.”
Developers who also choose to use VHDA’s multi-family rental housing loan program may find the cost
of those funds somewhat expensive. While the transaction costs are cheaper than obtaining bond
financing from an RHA, other factors run up the cost. Because the VHDA loan pool is fully funded at
closing, interest costs are higher, and because VHDA structures the loan to bear a single interest rate to
maturity, there is no opportunity to take advantage of the lower, short-term interest rates which could be
accessed during construction or rehabilitation if the financing featured a subsequent conversion to a longterm interest rate after completion and stabilization. Finally, while there are many variables which enter
into long-term interest rate pricing (e.g., loan-to-value ratio, term to maturity, projected occupancy rates,
pro forma financials, competition in the project’s market, etc.), the authors’ recent experience involving
the alternative financing structure described below found that when comparing “apples to apples,”
VHDA’s interest rate was about thirty (30) basis points higher than the post-conversion long-term interest
rate offered in a bank private placement.
In a recently closed transaction, our client signed a purchase contract on February 14, 2011 for
the purchase of an existing 180 unit apartment complex in a Hampton Roads city. The contract gave the
buyer until June 30, 2011 to obtain its financing and close on the purchase. As there was no time to apply
for and wait out the 9% LIHTC award process at VHDA, and because the client was projecting an
approximately 16 month, phased rehabilitation of the project’s buildings (along with the construction of a
new clubhouse), it decided to seek other alternatives. In this case, a bank offered to purchase tax-exempt
bonds issued by a local RHA, and to structure the bond issue on a draw-down basis in which interest
would accrue during a two-year construction period at a cheaper, LIBOR-based floating rate, and only
accrue on the actual principal amount advanced to date. When paired with the 4% LIHTCs that could be
obtained from the state volume cap as a matter of right and sold to an investor limited partner, the
financing structure became quite attractive, notwithstanding the fact that the associated legal fees would
be greater. (The higher legal fees were due to the need for the developer to retain its own bond counsel,
together with the presence of bank counsel and counsel for the local RHA. VHDA closes its loans with a
trained staff of in-house counsel at no cost to the borrower.)
What cinched the deal was the prospect that the tax-exempt multi-family housing bonds could be
issued and the 4% LIHTCs could be sold in roughly four months’ time, starting from the contract date. In
early March, we began the bond issue public approval process, drafting and submitting to the local
newspaper the Notice of Public Hearing,6 which had to run once a week for the two weeks before the
RHA’s meeting at which the issuance of the bonds would be considered. The following week, we
prepared and submitted the bond financing application package to the RHA. In addition to the RHA’s
application form, the package also included an “official action” resolution of the RHA,7 a “public
approval” resolution for adoption by the City Council of the City in which the project was located,8 and a
5
See VHDA, 2011 Low Income Housing Tax Credit Program: Final Rankings, at
http://www.vhda.com/BusinessPartners/MFDevelopers/LIHTCProgram/LowIncome%20Housing%20Tax
%20Credit%20Program/2011%20Final%20Rankings-WEB.pdf.
6
See Treas. Reg. § 5f.103-2(g)(2), (3); VA. CODE § 15.2-4906 (1950, as amended).
7
See I.R.C. § 147(f)(2); Treas. Reg. §§ 5f.103-2(c)(2), 1.150-2.
8
See I.R.C. § 147(f)(2); Treas. Reg. § 5f.103-2(d), (e).
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Fiscal Impact Statement in the form required by Virginia law.9 In late March, the official action
resolution was adopted by the RHA, and in late April, the public approval resolution was approved by
City Council, positioning the project to apply to the Virginia Department of Housing and Community
Development (“DHCD”) for an allocation from Virginia’s multi-family housing bond allocation, in its
capacity as the multi-family housing bond allocation administrator for the Commonwealth.10
While the local bond approval process was moving forward, the client and our law firm were also
preparing the VHDA 4% LIHTC application book and negotiating with prospective investor limited
partners to buy the 4% LIHTCs, as well as supplying due diligence requirements to the bank and the
ultimately selected LIHTC investor limited partner. Operating on such a tight closing schedule, we were
vulnerable to the slightest delays, and ultimately, the slowness with which some of the bank-ordered third
party reports (appraisal, environmental & engineering) were delivered became problematic. Additionally,
we suffered delays in obtaining our bond allocation from DHCD, due to the one condition precedent to
the bond allocation award which was beyond our control – VHDA’s approval of LIHTCs for the project.
Due to our unfortunate timing, VHDA’s personnel were focused exclusively on wrapping up the separate,
but parallel, competitive application process for 9% LIHTCs, and so our 4% LIHTCs application, and
hence our bond allocation application, both were delayed to the very end of June. Consequently, due to
the imminent June 30 contract closing date, a short-term bridge loan from the bank for the acquisition of
the project was obtained so the purchase could be concluded on schedule, and the bridge loan was then
taken out at the closing of the bonds and LIHTCs two weeks later. From signed contract to final closing,
exactly five months elapsed.
But notwithstanding the higher transaction costs compared to VHDA, the speed with which the
financing could be concluded and the all-in cost of the financing still left the developer satisfied that the
financing structure was, on a long-term basis, the best option for financing the acquisition and
rehabilitation of the apartment complex. In addition, this structure allowed a greater degree of negotiation
of financing covenants than would have been the case in a VHDA or HUD-insured affordable housing
loan program.
Because developers have ties to different banks, we have surveyed our contacts at some of the
leading national, regional and community banks in the Commonwealth as to whether they either have, or
would be willing to structure, a multi-family housing project finance program such as the one described
above, and found the following results (some lenders asked that their names not appear in the list or failed
to respond to our inquiry):
Bank of America
M&T Bank
Monarch Bank
TowneBank
Union First Market Bank
Wells Fargo Bank
-
Yes
No
No
Yes
No
Yes (starting early 2012)
Multi-family rental housing developers are fortunate that during this time of high demand for
their product, there are multiple attractive financing vehicles from which they can choose. As each
project is unique, the determining factors which dictate the selection and availability of financing vehicle
9
See VA. CODE § 15.2-4907 (1950, as amended) (made applicable to multi-family housing bonds
by 1983 Va. Acts ch. 514, § 2).
10
See Va. Dept. Housing & Community Dev., Virginia Private Activity Bond Allocation
Guidelines, at http://www.dhcd.virginia.gov/PrivateActivityBonds/PAB_ Guidelines.doc. While multifamily housing bonds are subject to the state-by-state federal volume cap for private activity bonds under
Internal Revenue Code § 146, in recent years, Virginia RHAs have not come close to using up the portion
of the Virginia volume cap reserved for multi-family housing bonds issued by local housing authorities.
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(including whether the project will provide affordable housing) will vary greatly from project to project.
Given developers’ preference to control as many of the factors in their financing as possible, however, we
believe that in the case of affordable housing projects involving either new construction or substantial
rehabilitation, the use of tax-exempt, draw-down multi-family housing bonds issued by a local RHA in a
direct placement to a bank, together with 4% LIHTCs, can produce outstanding results for the developer
in the critical areas of speed, flexibility of financing covenants, and most importantly, all-in cost.
Affordable housing developers and their counsel should give thoughtful consideration to this underutilized combination of financing vehicles as they begin to explore their financing alternatives.
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FROM THE CLUTTERED DESK (AND MIND) OF THE CO-EDITOR
by Stephen C. Gregory
Because I am reasonably confident this page is not the first to which you turned upon receipt of
this issue, by now you are aware of the tribute we are paying to Minerva Wilson Andrews. My thanks to
all who contributed to remembering one of the pioneers of the Real Property Section.
In 1977, while still in law school, I was hired to be a title examiner by Boothe, Prichard and
Dudley. At that time, in the old office next to the fire house in Fairfax, the main part of the real estate
department was in the basement, with R. Dennis McArver, Courtland L. Traver, Michael T. Bradshaw,
and the incomparable F. Sheild McCandlish. Mrs. Andrews was “upstairs,” so I had few opportunities to
work directly for or with her. From however much or little interaction I may have had with Mrs.
Andrews, I can emphatically concur with the opinions expressed herein. She was unfailingly polite and
gentle but one of the most accomplished and respected practitioners of either gender.
(She was always “Mrs. Andrews” to me (and I suspect others), even after I became a member of
the bar and a colleague. There was something about her mien that commanded that kind of respect, even
though she seemed never to seek nor require that degree of deference.)
It is difficult to measure, much less enumerate, the contributions Mrs. Andrews made to the
profession in general and this section in particular. The Bar is richer for her existence, and she will be
missed.
*
*
*
Elsewhere in this issue is a letter from Eric Zimmerman, who chairs the Residential Property
subsection. The gist of his letter is that the real estate market as we have known it is gone forever, and
practitioners who invested their entire (or nearly so) practice in real estate would be well advised to seek
other avenues to supplement that diminishing market.
Eric and I have both been doing this for longer than we would care to admit, and we have
survived the cyclical nature of real estate law. When I entered practice, interest rates were upward of
14%, buyers needed 20% down (or would have to pay a hefty mortgage insurance premium), and creative
financing (wrap-around mortgages, e.g.) was popular. Then came a short-lived refinancing boom in the
early 90s, followed by another recession, followed another boom, etc., etc. I am enough of a cockeyed
optimist to believe that this, too, shall pass, but Eric’s advice is sound. Relying on a career that has, over
the years, been unpredictably cyclical is shortsighted at best.
Perhaps some of you have already undertaken this adjustment. If so, we’d like to hear from you.
Let us know what you have done to compensate for the economic downturn and lack of real estate
business. Have you started taking bankruptcy clients, collections clients? Are you using social media,
other networking? What has worked and what hasn’t? Send us an article or a letter to share with your
fellow section members.
Finally, to reprise my entreaty from last issue, this magazine is your magazine. Let us hear from
you. Tell us what you like and what you don’t like (even if it’s this letter!), and what we can do to make
it better. The Real Property Section exists to serve you; help us do that.
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REPORT OF THE COMMERCIAL REAL ESTATE COMMITTEE
MINUTES OF A MEETING OF THE COMMERCIAL REAL ESTATE COMMITTEE OF THE
VIRGINIA STATE BAR REAL PROPERTY SECTION
HELD BY CONFERENCE CALL ON
SEPTEMBER 8, 2011, AT 12:00 P.M.
by Whitney Jackson Levin
Pursuant to e-mailed notice to the members of the Commercial Real Estate Committee, a conference call
meeting of the Committee was convened by Committee Chair Whitney Jackson Levin (Wharton Aldhizer & Weaver
PLC) on September 8, 2011 at 12:00 p.m. Also participating in the call were Jean Mumm (LeClairRyan), Bill
Nusbaum (William Mullen) and Rick Chess (Chess Law Firm, PLC).
The meeting opened with a plea from the Chair for commercial real estate articles for the November issue
of the FEE SIMPLE. Bill Nusbaum generously offered to draft an article on financing multi-family housing using tax
exempt bonds and low income housing using tax credits. Rick Chess said that he may have an idea for a possible
article related to raising funds to buy out partnership interests and to follow up with him in a few months.
The Committee then discussed prospective topics for the Section’s Advanced Real Estate Seminar in
March, 2012, at Kingsmill Resort, in Williamsburg. Topics suggested (without any ranking by the Committee),
were:
x
x
x
x
Economic Development Incentives from the LGA perspective
Recent Developments in Legal Opinions presented by a panel of attorneys representing each side of a
transaction
Working Around typical lender provisions in loan documents
Update on recent developments in foreclosures
There being no other business to come before the Committee, the meeting was adjourned.
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LETTER FROM THE CHAIRMAN OF THE RESIDENTIAL COMMITTEE
by Eric V. Zimmerman
The economic downturn and financial crash that occurred over the past four years have created a
major dilemma for the attorney who handled residential real estate transactions. Indeed, for some of us it
seems the work dried up overnight. Our plight is partially our profession’s fault. We have known for
years, with the invasion of settlement agencies, that the use of attorneys to handle closings was on
borrowed time. My introduction to the Real Property Section of the Virginia State Bar two decades ago
was to spend a weekend in Tysons Corner with other members discussing the impact of allowing lay
persons to conduct closings.
So here we are; the future is now. The question is not to whom to complain, but to determine
what alternatives we do have. The purpose of this brief epistle is to suggest some steps that you can take
to “reinvent” your practice. I know this is frustrating, especially if you have spent the better part of your
professional career building your expertise and practice, but it’s not coming back.
A beautiful aspect of practicing law, especially in a relatively suburban/rural area where I live and
work (Loudoun County), is that there is plenty of work to be had. The question is how to pick and choose
the subject area that is to your liking and what suits your background. One reason why I enjoy
transactional real estate so much is that it allows me to relate to and counsel the clients. Rarely do I
handle a closing where, after all the pens are set aside, I have not learned what the client does for a living
and what the family composition is. From that information I can easily transition into questions about
joys and problems associated with their line of work and, at least in my case, whether or not the client has
an estate plan in place. People are desperate to find someone who takes an interest in their lives, even if
superficial in the beginning. Perhaps with the exception of a physician or a minister, who has more
opportunity to empathize with a client than an attorney? We assure confidentiality, and our
professionalism bestows a sense of understanding of problems.
I encourage all attorneys, especially those whose real estate practice is suffering, to audit your
strengths and interests. Not all attorneys should leap into trial practice, nor should they toss a hat in the
ring to return to family or criminal law. But until you ask yourself, “Okay, if not this [real estate law],
what?,” you may find yourself disillusioned with the practice. Don’t be afraid to ask for help from other
attorneys or even other professionals, such as what are now called “life coaches.” Don’t view the move
as a step back in your career; it is merely an adjustment to allow you to grow even more.
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REPORT OF THE TECHNOLOGY COMMITTEE
by Douglass W. Dewing
Mobile applications for smart phones and tablet computers make it easier to practice away from
the desk, but attorneys should be aware that such applications may open their mobile devices to security
risks. See http://www.abajournal.com/magazine/article/app-solutely_perilous_security_of_mobile_apps
_spurs_concern/?utm_source=maestro&utm_medium=email&utm_campaign=tech_monthly. As Sharon
Nelson in Fairfax noted in her blog, just because “you CAN download something doesn’t mean you
SHOULD.” http://ridethelightning.senseient.com/2010/12/keeping-em-honest-mobile-phone-apps-andsecurity.html.
As many Virginia lawyers discovered in August, cell phones are more likely to connect calls
during a hurricane than immediately after an earthquake. Although last month’s earthquake was
relatively minor by West Coast standards, the suddenly felt widespread tremor led to a massive spike in
phone calls, saturating network capacity. The industry is expected to push for the sale of more frequency
spectrum. See http://money.cnn.com/2011/08/26/technology/hurricane_cell_phone_service/index.htm?hpt
=te_bn10. For cell phone apps that can help you track hurricanes, see http://www.cnn.com/
2011/TECH/mobile/08/26/hurricane.apps.web/index.html.
Verizon recently launched Droid Bionic for its 4G network. Phones are starting to sound like
computers: this phone has dual core processors; 16Gb of onboard storage and a 16Gb microSD card
(each of those holds more data than my first computer). Front and rear facing cameras (for video
conferencing) are also standard. Adobe Flash is pre-loaded; it has a port that allows display on larger
screens, a cloud storage app to access files remotely, and a horde of accessories (not included in the
already rather steep base price). See http://www.pcworld.com/article/239676/motorola_droid_bionic
_launch_day_briefing.html#tk.rss.
Another thing smart phones can do was revealed in an e-mail blast circulated in late August –
check scanning and electronic deposit. The unfortunate element stemming from such convenience was
afterwards; the check was then returned to the settlement agent with a request that it be replaced with a
wire transfer. Suggestions to prevent an occurrence (or re-occurrence) include: implementing a positive
pay system and actively monitoring it; promptly removing any returned check from the positive pay
authorization list; putting a stop payment request on the check even though it is back in your possession;
inquiring with your bank about whether a current day report is available showing the check as presented
for clearing; and waiting at least a full business day to replace the check. Extending a concept from the
example of detective, spy or journalist books/movies comes the final reminder: to keep all checks in your
possession until they are delivered . . . if you leave the closing, even briefly, consider the possibility that a
check can be scanned and electronically deposited even while the closing is still taking place. See Stewart
Bulletin SLS2011015.
A more “traditional” form of theft was revealed in a trio of thematically related articles recently
encountered. The headlines say it all: “As Hackers Steal Up to $1B Annually from Biz Bank Accounts,
Victims May Have No Recourse,” “Almost 20% of Home Computers, 7% of Corporate Ones are Botnet
Slaves, Expert Says,” and “Law Firm Loses $78K in Massive Malware Scheme.” The latter article
mentions that federal authorities took “command” of the malware network (the article did not specify if
that was “physical” or “electronic” control) in order to turn it off. A business’ deposit agreement
(including law firms within the category of business) with a bank which absolves the bank of liability for
simple negligence, combined with the “user cooperation” necessary to allow the malware into the system
in the first place, may be sufficient grounds for imposing the loss of funds upon the business (law firm).
Business accounts, unlike individual accounts, are not protected from such internet fraud. See
http://www.abajournal.com/news/article/up_to_300m_stolen_annually_from/?utm_source=maestro
&utm_medium=email&utm_campaign=tech_monthly; http://www.abajournal.com/news/article/almost
_20_of_home_computers_7_of_corporate_computers_are_botnet_slaves_expe/; http://www.abajournal
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.com/news/article/doj_says_massive_decade-old_botnet_helped_web_thieves_steal_millions/;
http://www.bloomberg.com/news/2011-08-04/hackers-take-1-billion-a-year-from-company-accounts-bankswon-t-indemnify.html.
Under the “OK, I found it on the internet, so maybe it isn’t real . . . but I’m glad I’m not that
lawyer” category . . . everything I need to know I learned in kindergarten.
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Very rudimentary fact checking suggests that that is a real judge, and he is a “no nonsense” enforcer of
the procedural rules.
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REPORT OF THE TITLE INSURANCE COMMITTEE
by Brian O. Dolan
The Title Insurance Committee held a telephone conference at 3:30 p.m. on June 10, 2011. The
following members were in attendance: Brian Dolan, Ed Waugaman, Larry McElwain, Lisa Graziano
and Kay Creasman. The meeting began with a discussion of foreclosure issues recently encountered or
brought to the attention of the various committee members. Foreclosure issues discussed included the
following:
1. Whether a substitution of trustee by a new lender, recorded before assignment of the deed of
trust, is valid and the implications of early recording on the foreclosure process.
2. To avoid unpleasant surprises, bidders (or their counsel) need to closely examine foreclosure
sale notices for items such as who is responsible for delinquent real estate taxes or whether it
is a second deed of trust being foreclosed.
3. Successful bidders should arrange for property insurance coverage immediately upon
completion of a foreclosure sale.
4. There are numerous reports of property description errors with REO properties. Trustees need
to obtain better quality or more thorough title reports prior to sale to avoid problems.
The committee did not have ready answers to all these issues and believed it would be worthwhile
combining the above topics, along with others, into a future FEE SIMPLE article on foreclosure pointers.
In addition to foreclosure issues, the committee explored other issues that could be addressed in
the FEE SIMPLE or serve as topics for upcoming seminars. Those included:
1. Explaining the differences between quiet title and partition actions, as well as whether one or
the other may be better in certain situations or whether to request both as alternative theories
of relief. Also discussed was whether title policy exceptions may be utilized if any party in
such a suit is served by publication.
2. In Horvath v. Bank of New York, N.A., 641 F.3d 617 (4th Cir. 2011), the court rejected a claim
that only the original lender named in a deed of trust can foreclose in Virginia. The deed of
trust identified MERS as the beneficiary and had been securitized. Numerous courts
throughout the country have split on this issue.
3. How do you resolve old judgments in light of limitations imposed by privacy laws, i.e., what
happens when you do not have personally identifying information to provide to the creditor
or it refuses to speak with you? What do you do if you are unable to locate the creditor, it is
no longer in business, or it doesn't have records of the debt?
4. Some of the same issues that arise in trying to resolve old judgments also arise with unreleased
deeds of trust.
At the conclusion of the meeting, it was agreed to schedule the next quarterly committee
teleconference for some time in either September or October.
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BOARD OF GOVERNORS
REAL PROPERTY SECTION
VIRGINIA STATE BAR
(2011-2012)
Officers
Chair
Paul H. Melnick, Esquire
Melnick & Melnick, P.L.C.
711 Park Avenue
Falls Church, VA 22046
(703) 276-1000 (703) 536-8880 (fax)
email: paul.melnick@melnickandmelnick.com
Term Expires: 2013 (2)
Vice-Chair
J. Philip Hart, Esquire
Senior Real Estate Counsel
Genworth Financial, Inc.
6620 West Broad Street
Building #1, 3rd Floor
Richmond, VA 23230
(804) 922-5161 (804) 662-2596 (fax)
email: philip.hart@genworth.com
Term Expires: 2014 (2)
Secretary/Treasurer
William L. Nusbaum, Esquire
Williams Mullen
Dominion Tower
Suite 1700
P.O. Box 3460
Norfolk, VA 23514-3460
(757) 629-0612 (757) 629-0660 (fax)
email: wnusbaum@williamsmullen.com
Term Expires: 2012 (2)
Board Members
*
Paul A. Bellegarde, Esquire
8284 Spring Leaf Court
Vienna, VA 22182
(301) 537-0627 (cell) (703) 749-8306 (fax)
email: bellslaw@aol.com
Term Expires: 2014 (3)
Fred Lewis Biggs, Esquire
Kepley Broscious & Biggs, PLC
2211 Pump Road
Richmond, VA 23233
(804) 741-0400 (804) 741-6175 (fax)
Email: flbiggs@kbbplc.com
Term Expires: 2014 (1)
Kenneth L. Dickinson, Esquire
Stewart Title
1802 Bayberry Court
Suite 305
Richmond, VA 23226
(804) 897-0000 (804) 897-0001 (fax)
email: kdickins@stewart.com
Term Expires: 2014 (2)
Barbara Wright Goshorn, Esquire
203 Main Street
P.O. Box 177
Palmyra, VA 22963
(434) 589-2694 (434) 589-6262 (fax)
email: office22963@earthlink.net
Term Expires: 2013 (2)
*
Indicates former Chair of the Section
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J. Philip Hart, Esquire
Senior Real Estate Counsel
Genworth Financial, Inc.
6620 West Broad Street
Building #1, 3rd Floor
Richmond, VA 23230
(804) 922-5161 (804) 662-2596 (fax)
email: philip.hart@genworth.com
Term Expires: 2014 (2)
*
Christina E. Meier, Esquire
Christina E. Meier, P.C.
4768 Euclid Road
Suite 102
Virginia Beach, VA 23462
(757) 313-1161 (757) 313-1162 (fax)
email: cmeier@cmeierlaw.com
Term Expires: 2013 (3)
Paul H. Melnick, Esquire
Melnick & Melnick, P.L.C.
711 Park Avenue
Falls Church, VA 22046
(703) 276-1000 (703) 536-8880 (fax)
email: paul.melnick@melnickandmelnick.com
Term Expires: 2013 (2)
William L. Nusbaum, Esquire
Williams Mullen
Dominion Tower
Suite 1700
P.O. Box 3460
Norfolk, VA 23514-3460
(757) 629-0612 (757) 629-0660 (fax)
email: wnusbaum@williamsmullen.com
Term Expires: 2012 (2)
Susan Stringfellow Walker, Esquire
Jones & Walker, P.C.
128 S. Lynnhaven Road
Suite 100
Virginia Beach, VA 23452
(757) 486-0333 (757) 340-8583 (fax)
email: swalker@jonesandwalker.com
Term Expires: 2014 (2)
Randy C. Howard, Esquire
Senior Vice President
Marketing Director & Commercial Counsel
5516 Falmouth Street, Suite 200
Richmond, VA 23230
(800) 552-2442 ext. 737 (toll free)
(804) 521-5737 (direct) (804) 521-5756 (fax)
(804) 337-1878) (cell)
email: randy.howard@ctt.com
Term Expires: 2014 (3)
Charles Cooper Youell, IV, Esquire
Whitlow & Youell, P.L.C.
26 West Kirk Avenue
Roanoke, VA 24011
(540) 904-7836 (540) 684-7836 (fax)
email: cyouell@whitlowyouell.com
Term Expires: 2012 (2)
Ex Officio
Academic Liaison
Lynda L. Butler, Esquire
Chancellor Professor of Law
Marshall-Wythe School of Law
College of William and Mary
613 South Henry Street
Williamsburg, VA 23185
or
P.O. Box 8795
Williamsburg, VA 23187-8795
(757) 221-3843 (757) 221-3261 (fax)
email: llbutl@wm.edu
Vol. XXXII, No. 1
Immediate Past Chair
*
Paul A. Bellegarde, Esquire
8284 Spring Leaf Court
Vienna, VA 22182
(301) 537-0627 (cell) (703) 749-8306 (fax)
email: bellslaw@aol.com
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VSB Executive Director
Karen A. Gould, Esquire
Virginia State Bar
707 E. Main St., Suite 1500
Richmond, VA 23219
(804) 775-0550 (804) 775-0501 (fax)
email: gould@vsb.org
VBA Real Estate Council Chair
*
Larry J. McElwain, Esquire
Parker, McElwain & Jacobs, P.C.
2340 Commonwealth Drive
Charlottesville, VA 22906
(434) 973-3331 (434) 973-9393 (fax)
email: lmcelwain@pmjlawfirm.com
Judicial Liaison
The Honorable Rodham Tulloss Delk, Jr.
Suffolk Circuit Court
P.O. Box 1814
Suffolk, VA 23439-1814
(757) 514-4804 (757) 514-4815 (fax)
email: rdelk@courts.state.va.us
Other Liaisons
Virginia CLE Liaison
Nancy Kern, Esquire
Virginia C.L.E.
105 Whitewood Road
Charlottesville, VA 22901
(800) 223-2167 ext. 145 (434) 984-0311 (fax)
email: nkern@vacle.org
Vol. XXXII, No. 1
VSB Liaison
Dolly C. Shaffner
Special Projects Administrative Assistant
Virginia State Bar
707 East Main Street
Suite 1500
Richmond, VA 23219-2800
(804) 775-0518 (804) 775-0501 (fax)
email: shaffner@vsb.org
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AREA REPRESENTATIVES
Central Region
Steven W. Blaine, Esquire
LeClairRyan, P.C.
P.O. Box 2017
123 Main Street
8th Floor
Charlottesville, VA 22902-2017
(434) 971-7771 (434) 296-0905 (fax)
email: sblaine@leclairryan.com
Richard B. "Rick" Chess, Esquire
Chess Law Firm
9211 Forest Hill Ave.
Suite 201
Richmond, VA 23235
(804) 241-9999 (cell) (866) 596-9908 (fax)
email: rick@chesslawfirm.com
Kay M. Creasman, Esquire
Associate Counsel
Old Republic National Title Insurance Company
1245 Mall Drive
Richmond, VA 23235
(804) 897-5499 (804) 475-1765 (cell)
(804) 897-9679 (fax)
email: kcreasman@oldrepublictitle.com
*
Lisa M. Graziano, Esquire
Republic Title Services
409 Park Street
Charlottesville, VA 22902
(434) 979-1136 (434) 979-0580 (fax)
email: lgraziano@republictitle.biz
*
*
Neil S. Kessler, Esquire
Troutman & Sanders, L.L.P.
P.O. Box 1122
Richmond, VA 23218-1122
(804) 697-1450 (804) 698-6002 (fax)
email: neil.kessler@troutmansanders.com
*
*
*
C. Grice McMullan, Jr., Esquire
Thompson & McMullan, P.C.
100 Shockhoe Slip
3rd Floor
Richmond, VA 23219-4140
(804) 698-6203 (804) 780-1813 (fax)
email: cgmcmullan@t-mlaw.com
Vol. XXXII, No. 1
Douglass W. Dewing, Esquire
Fidelity National Title Group
Virginia National Business Unit
Vista II - Suite 200
5516 Falmouth Avenue
Richmond, VA 23230-1819
(804) 643-5404 (office) (804) 521-5743 (direct)
(804) 521-5756 (fax) (800) 552-2442 (toll free)
email: douglass.dewing@fnf.com
Randy C. Howard, Esquire
Senior Vice President
Marketing Director & Commercial Counsel
5516 Falmouth Street, Suite 200
Richmond, VA 23230
(800) 552-2442 ext. 737 (toll free)
(804) 521-5737 (direct) (804) 521-5756 (fax)
(804) 337-1878) (cell)
email: randy.howard@ctt.com
Larry J. McElwain, Esquire
Parker, McElwain & Jacobs, P.C.
2340 Commonwealth Drive
Charlottesville, VA 22906
(434) 973-3331 (434) 973-9393 (fax)
email: lmcelwain@pmjlawfirm.com
Joseph W. (“Rick”) Richmond, Jr., Esquire
Richmond & Fishburne
214 East High Street
Charlottesville, VA 22902
(434) 977-8590 (434) 296-9861 (fax)
email: jwr@richfish.com
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Louis J. Rogers, Esquire
CEO
Rogers Realty Advisors, L.L.C.
4121 Cox Road
Suite 107
Glen Allen, VA 23060
(804) 290-7900 (804) 290-0086 (fax)
email: lrogers@rogersna.com
*
John W. Steele, Esquire
Hirschler & Fleischer
Federal Reserve Bank Building
701 East Byrd Street
Richmond, VA 23219
or
P. O. Box 500
Richmond, VA 23218-0500
(804) 771-9565 (804) 644-0957 (fax)
email: jsteele@hf-law.com
Albert W. Thweatt, II, Esquire
The Law Offices of Albert W. Thweat, II, P.C.
106 North Eighth Street
Suite 1
Richmond, VA 23219
(804) 644-1964 (804) 644-1770 (fax)
email: athweatt@thweattlaw.com
Ronald D. Wiley, Jr., Esquire
Of Counsel
MartinWren, P.C.
1228 Cedars Court
Charlottesville, VA 22903
(434) 817-3100 (434) 817-3110 (fax)
Email: ronwileyjr@gmail.com
J. Page Williams, Esquire
Feil, Pettit & Williams, P.L.C.
P.O. Box 2057
530 East Main Street
Charlottesville, VA 22902-2057
(434) 979-1400 (434) 977-5109 (fax)
email: jpw@fpwlaw.com
Susan H. Siegfried, Esquire
5701 Sandstone Ridge Terrace
Midlothian, VA 23112
(804) 739-8853
email: shs5701@comcast.net
Stephen B. Wood, Esquire
Bierman, Geesing & Ward, L.L.C.
81200 Three Chopt Road
Room 240
Richmond, VA 23229-4833
(804) 282-0463 (804) 282-0541 (fax)
email: Stephen.Wood@bgw-llc.com
Northern Region
Dianne Boyle, Esquire
Chicago Title Insurance Company
1129 20th Street, N.W.
Suite 300
Washington, DC 20036
(202) 263-4745 (202) 955-5769 (fax)
email: boyled@ctt.com
Vol. XXXII, No. 1
Todd E. Condron
Leggett, Simon, Freemyers & Lyon, P.L.C.
100 East Street, SE
Vienna, VA 22180
(703) 537-0800 (888) 448-3556 (fax)
email: tcondron@ekkotitle.com
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Lawrence A. Daughtrey, Esquire
Kelly, Mayne & Daughtrey
10605 Judicial Drive
Suite A-3
Fairfax, VA 22030
(703) 273-1950 (703) 359-5198 (fax)
email: ldaught@aol.com
Dorothea W. Dickerman, Esquire
McGuire Woods, L.L.P.
1750 Tysons Boulevard
Suite 1800
McLean, VA 22102-3892
(703) 712-5000 (703) 712-5242 (fax)
email: ddickerman@mcguirewoods.com
James P. Downey, Esquire
Downey and Mayhugh, P.C.
82 Main Street
Warrenton, VA 20186
(540) 347-2424 (540) 349-1705 (fax)
email: jd@jdgmlaw.com
Russell S. Drazin
Pardo & Drazin
4400 Jenifer Street, NW
Suite 2
Washington, DC 20015
(202) 223-7900 (202) 686-7223 (fax)
Email: rdrazin@pardodrazin.com
*
John David Epperly, Esquire
Fidelity National Title Insurance Company
10300 Eaton Place
Suite 270
Fairfax, VA 22030
(703) 279-1701 or (888) 465-0406 (ext. 701)
(703) 691-2258 (fax)
email: jepperly@fnf.com
Craig C. Erdmann, Esquire
Attorney Advisor
Treasury/CFPB
Consumer Financial Protection Bureau
1801 L Street, 5th Floor
Washington, DC 20036
(202) 435-7322
email: craig.erdmann@treasury.gov
Pamela B. Fairchild, Esquire
9501 Ferry Harbour Court
Alexandria, VA 22309
(703) 360-6690
email: optimistpl@aol.com
Mark W. Graybeal, Esquire
Pesner‫פ‬Kawamoto‫פ‬Conway, P.L.C.
7926 Jones Branch Drive
Suite 930
McLean, VA 22102-3303
(703) 506-9440 (703) 506-0929 (fax)
email: mgraybeal@pkc-law.com
*
Susan M. Pesner, Esquire
Pesner‫פ‬Kawamoto‫פ‬Conway, P.L.C.
7926 Jones Branch Drive
Suite 930
McLean, VA 22102-3303
(703) 506-9440 (703) 506-0929 (fax)
email: spesner@pkc-law.com
Jordan M. Samuel, Esquire
Asmar, Schor & McKenna, P.L.L.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, DC 20015
(202) 244-4264 (202) 686-3567 (fax)
email: jsamuel@asm-law.com
*
Pamela Heflin Sellers, Esquire
Assistant County Attorney
Spotsylvania County Attorney’s Office
P.O. Box 308
Spotsylvania, VA 22553-0308
(540) 507-7020 (540) 507-7028 (fax)
email: psellers@spotsylvania.va.us
Lawrence M. Schonberger, Esquire
Sevila, Saunders, Huddleston & White, P.C.
30 North King Street
Leesburg, VA 20176
(703) 777-5700 (703) 771-4161 (fax)
email: LSchonberger@sshw.com
Vol. XXXII, No. 1
93
November 2011
the FEE SIMPLE
Neil I. Title, Esquire
Karpoff & Title
1804 Wilson Boulevard
Suite 205
P.O. Box 990
Arlington, VA 22216
(703) 841-9600 (703) 358-9458 (fax)
email: nititle@hotmail.com
David W. Stroh, Esquire
Assistant County Attorney for Fairfax County
Office of the County Attorney
12000 Government Center Parkway
Suite 549
Fairfax, VA 22035
(703) 324-2421(main) (703) 324-2663 (direct)
(703) 324-2665 (fax)
email: david.stroh@fairfaxcounty.gov
John H. Toole, Esquire
Cooley Godward, L.L.P.
One Freedom Square
Reston Town Center
11951 Freedom Drive
Reston, VA 20190-5601
(703) 456-8651 (703) 456-8100 (fax)
email: jtoole@cooley.com
Lucia Anna Trigiani, Esquire
MercerTrigiani
112 South Alfred Street
Alexandria, VA 22314
(703) 837-5000 (703) 703-837-5001 (fax)
(703) 837-5008 (direct)
(703) 835-5040 (direct fax)
email: Pia.Trigiani@MercerTrigiani.com
Eric V. Zimmerman, Esquire
Miller Zimmerman, P.L.C.
50 Catoctin Circle, NE
Suite 201
Leesburg, VA 20176
(703) 777-8850 (703) 777-8854 (fax)
email: ezimmerman@mzlaw.com
Southside Region
*
Walter R. Beales, III, Esquire
157 Madison Street
P.O. Box 239
Boydton, VA 23917
(434) 738-6180 (434) 738-0105 (fax)
email: info@bealeslaw.com
Robert E. Hawthorne, Esquire
Hawthorne & Hawthorne
P.O. Box 603
Kenbridge, VA 23944
(434) 676-3275 (434) 676-2286 (fax)
(Kenbridge Office)
(434) 696-2139 (434) 696-2537 (fax)
(Victoria Office)
email: rehawthorne@hawthorne-hawthorne.com
Robert E. Hawthorne, Jr., Esquire
Hawthorne & Hawthorne
P.O. Box 603
Kenbridge, VA 23944
(434) 676-3275 (434) 676-2286 (fax)
(Kenbridge Office)
(434) 696-2139 (434) 696-2537 (fax)
(Victoria Office)
email: rehawthornejr@hawthorne-hawthorne.com
Vol. XXXII, No. 1
94
November 2011
the FEE SIMPLE
Tidewater Region
Robert C. Barclay, IV, Esquire
Cooper, Spong & Davis, P.C.
P.O. Box 1475
Portsmouth, VA 23705
(757) 397-3481 (757) 391-3159 (fax)
email: rbarclay@portslaw.com
*
Kathryn Byler, Esquire
Pender & Coward, P.C.
222 Central Park Avenue
Suite 400
Virginia Beach, VA 23462-3062
(757) 490-6292 (757) 497-1914 (fax)
email: kbyler@pendercoward.com
*
Paula S. Caplinger, Esquire
Vice President, Manager & Counsel
Chicago Title Insurance Company
The Atrium Bulding
11832 Rock Landing Drive
Suite 204
Newport News, VA 23606
(757) 873-0499 (ext. 305) (757) 873-3740 (fax)
email: CaplingerP@CTT.com
Christian H. Chiles, Esquire
Williams Mullen
222 Central Park Avenue
Suite 1700
Virginia Beach, VA 23462-3035
(757) 473-5349 (757) 473-0395 (fax)
email: cchiles@williamsmullen.com
Rosalie K. Doggett, Esquire
410 North Center Drive
Suite 200
Norfolk VA 23502
(757) 217-3702 (757) 490-7403 (fax)
Email: rdoggett@siwpc.com
Brian O. Dolan, Esquire
Kaufman & Canoles, P.C.
11817 Canon Boulevard
Suite 408
Newport News, VA 23606
(757) 873-6311 (757) 873-6359 (fax)
email: bodolan@kaufcan.com
John F. Faber, Jr., Esquire
Wolcott Rivers Gates
Convergence Center IV
301 Bendix Road, Suite 500
Virginia Beach, VA 23452
(757) 497-6633 (757) 497-7267 (fax)
email: jfaber@wolriv.com
*
Howard E. Gordon, Esquire
Williams Mullen
999 Waterside Drive
Suite 1700
Norfolk, VA 23510
(757) 629-0607 (757) 629-0660 (fax)
email: hgordon@williamsmullen.com
Ray W. King, Esquire
LeClairRyan, P.C.
999 Waterside Drive
Suite 2100
Norfolk, VA 23510
(757) 624-1454 (main) (757) 441-8929 (direct)
(757) 624-3773 (fax)
email: rking@leclairryan.com
*
*
Michael E. Barney, Esquire
Kaufman & Canoles, P.C
P.O. Box 626
Virginia Beach, VA 23451-0626
(757) 491-4040 (757) 491-4020 (fax)
email: mebarney@kaufcan.com
Charles (Chip) E. Land, Esquire
Kaufman & Canoles, P.C.
P.O. Box 3037
Norfolk, VA 23514-3037
(757) 624-3131 (757) 624-3169 (fax)
email: celand@kaufcan.com
Vol. XXXII, No. 1
Charles M. Lollar, Esquire
Waldo & Lyle, P.C.
301 West Freemason Street
Norfolk, VA 23510
(757) 622-5812 (757) 622-5815 (fax)
email: cml@emdomain.com
95
November 2011
the FEE SIMPLE
*
James B. (J.B.) Lonergan, Esquire
Pender & Coward, P.C.
222 Central Park Avenue
Virginia Beach, VA 23462
(757) 490-6281 (757) 497-1914 (fax)
email: jlonerga@pendercoward.com
James Magner, Esquire
160 Brambleton Avenue
Norfolk, VA 23510
(757) 622-5000 (757) 623-9198 (fax)
email: jmagner@ruttermills.com
Jeffrey A. Maynard, Esquire
Troutman & Sanders, L.L.P.
222 Central Park Avenue
Suite 2000
Virginia Beach, VA 23462
(757) 687-7500 (757) 687-7510 (fax)
email: jeff.maynard@troutmansanders.com
*
Jean D. Mumm, Esquire
LeClair Ryan
999 Waterside Drive
Suite 2100
Norfolk VA 23510
(757) 441-8916 (direct) (757) 681-5302 (cell)
(757) 441-8976 (fax)
email: Jean.Mumm@leclairryan.com
Lisa M. Murphy, Esquire
LeClairRyan, P.C.
999 Waterside Drive
Suite 2100
Norfolk VA 23510
(757) 624-1454 (main) (757) 217-4537 (direct)
(757) 624-3773 (fax)
email: lmurphy@leclairryan.com
Cynthia A. Nahorney, Esquire
Lawyers Title Insurance Corporation
Commonwealth Land Title Insurance Company
150 West Main Street
Suite 1615
Norfolk, VA 23510
(757) 628-5902 ext. 11 (757) 625-0293 (fax)
email: cnahorney@ltic.com
Harry R. Purkey, Jr., Esquire
303 34th Street
Suite 5
Virginia Beach, VA 23451
(757) 428-6443 (757) 428-3338 (fax)
email: hpurkey@hrpjrpc.com
*
Elliot M. Schlosser, Esquire
Office of Elliot M. Schlosser Attorney at Law, P.C.
47 W. Queens Way
Hampton, VA 23669-3968
(757) 723-0545 (757) 723-2578 (fax)
email: N/A
William W. Sleeth, III, Esquire
LeClairRyan, P.C.
5388 Discovery Park Boulevard
Third Floor
Williamsburg, VA 23188
(757) 941-2821 (757) 941-2879 (fax)
email: william.sleeth@leclairryan.com
Stephen R. Romine, Esquire
LeClairRyan, P.C.
999 Waterside Drive
Suite 2100
Norfolk, VA 23510
(757) 624-1454 (main) (757) 441-8921 (direct)
(757) 624-3773 (fax)
email: sromine@leclairryan.com
Allen C. Tanner, Jr., Esquire
690 J. Clyde Morris Boulevard
Newport News, VA 23601
(757) 595-9000 (757) 595-2961 (fax)
email: altan688@aol.com
Amanda A. Smith, Esquire
703 Thimble Shoals Boulevard
Suite C-2
Newport News, VA 23606
(757) 595-5500 (757) 595-4999 (fax)
email: Amanda@aasmithlaw.com
Vol. XXXII, No. 1
96
November 2011
the FEE SIMPLE
*
Courtland L. Traver, Esquire
1620 Founders Hill North
Williamsburg, VA 23185
(757) 564-6177 (tel and fax)
email: ctraver@mcguirewoods.com
Philip R. Trapani, Jr. Esquire
Philip R. Trapani, Jr., P.L.C.
740 Duke Street
Suite 500A
Norfolk, VA 23510-1515
(757) 961-5525 (757) 625-4133 (fax)
email: ptrapani@prtlaw.com
Susan Stringfellow Walker, Esquire
Jones & Walker, P.C.
128 South Lynnhaven Road
Suite 100
Virginia Beach, VA 23452
(757) 486-0333 (757) 340-8583 (fax)
email: swalker@jonesandwalker.com
Edward R. Waugaman, Esquire
1114 Patrick Lane
Newport News, VA 23608
757-897-6581
email: edward.waugaman@verizon.net
Mark D. Williamson, Esquire
McGuire Woods, L.L.P.
World Trade Center
Suite 9000
101 W. Main Street
Norfolk, VA 23510
(757) 640-3713
(757) 640-3973 or (757) 640-3701 (fax)
email: mwilliamson@mcguirewoods.com
Valley Region
K. Wayne Glass, Esquire
Vellines, Cobbs, Goodwin & Glass
P.O. Box 235
Staunton, VA 24402-0235
(540) 885-1205 (540) 885-7599 (fax)
email: wayne@vcgg.com
Whitney Jackson Levin
Wharton Aldhizer & Weaver, P.L.C.
125 South Augusta Street, Suite 2000
Staunton, VA 24401
(540) 213-7456 (direct) (540) 885-0199 (main)
email: Wlevin@wawlaw.com
Paul J. Neal, Esquire
122 West High Street
Woodstock, VA 22664
(540) 459-4041 (540) 459-3398 (fax)
email: neallaw@shentel.net
Mark N. Reed, Esquire
Reed & Reed, P.C.
16 S. Court St.
P.O. Box 766
Luray, VA 22835
(540) 743-5119 (540) 743-4806 (fax)
email: lawspeaker@earthlink.net
Western Region
*
Stephen C. Gregory, Esquire
Steptoe & Johnson, P.L.L.C.
707 Virginia Street, East
Charleston, WV 25301
(304) 353-8185 (office) (703) 850-1945 (cell)
email: 75cavalier@gmail.com
Vol. XXXII, No. 1
David C. Helscher, Esquire
Osterhoudt, Prillaman, Natt, Helscher, Yost,
Maxwell & Ferguson, P.L.C.
3140 Chaparral Drive
Suite 200 C
Roanoke, VA 24018
(540) 725-8182 (540) 772-0126 (fax)
email: dhelscher@opnlaw.com
97
November 2011
the FEE SIMPLE
*
Michael K. Smeltzer, Esquire
Woods, Rogers & Hazlegrove, L.C.
P.O. Box 14125
Roanoke, VA 24038
(540) 983-7652 (540) 983-7711 (fax)
email: smeltzer@woodsrogers.com
Vol. XXXII, No. 1
Charles Cooper Youell, IV, Esquire
Whitlow & Youell, P.L.C.
26 West Kirk Avenue
Roanoke, VA 24011
(540) 904-7836 (540) 684-7836 (fax)
email: cyouell@whitlowyouell.com
98
November 2011
the FEE SIMPLE
COMMITTEE CHAIRPERSONS AND OTHER SECTION CONTACTS
COMMITTEE CHAIRPERSONS
Standing Committees
Fee Simple
Co-Chairs
Lynda L. Butler, Esquire
Chancellor Professor of Law
Marshall-Wythe School of Law
College of William and Mary
613 South Henry Street
Williamsburg, VA 23185
or
P.O. Box 8795
Williamsburg, VA 23187-8795
(757) 221-3843 (757) 221-3261 (fax)
email: llbutl@wm.edu
Membership
Co-Chairs
*
Larry J. McElwain, Esquire
Parker, McElwain & Jacobs, P.C.
2340 Commonwealth Drive
Charlottesville, VA 22906
(434) 973-3331 (434) 973-9393 (fax)
email: lmcelwain@pmjlawfirm.com
J. Philip Hart, Esquire
Genworth Financial, Inc.
Senior Real Estate Counsel
6620 West Broad Street, Building #1
Richmond, VA 23230
(804) 922-5161 (804) 662-2596 (fax)
email: philip.hart@genworth.com
Stephen C. Gregory, Esquire
Steptoe & Johnson, P.L.L.C.
707 Virginia Street, East
Charleston, WV 25301
(304) 353-8185 (office) (703) 850-1945 (cell)
email: 75cavalier@gmail.com
Publication Committee members
Committee members:
*Douglass W. Dewing, Esquire
Trevor B. Reid, Esquire
Lawrence M. Schonberger, Esquire
Lucia Anna Trigiani, Esquire
Programs
Co-Chairs
*
Paul A. Bellegarde, Esquire
8284 Spring Leaf Court
Vienna, VA 22182
(301) 537-0627 (cell) (703) 749-8306 (fax)
email: bellslaw@aol.com
Technology
*Douglass W. Dewing, Esquire
Fidelity National Title Group
Virginia National Business Unit
Vista II - Suite 200
5516 Falmouth Avenue
Richmond, VA 23230-1819
(804) 643-5404 (office) (804) 521-5743 (direct)
(804) 521-5756 (fax) (800) 552-2442 (toll free)
email: douglass.dewing@fnf.com
*
Larry J. McElwain, Esquire
Parker, McElwain & Jacobs, P.C.
2340 Commonwealth Drive
Charlottesville, VA 22906
(434) 973-3331 (434) 973-9393 (fax)
email: lmcelwain@pmjlawfirm.com
Committee members:
Vol. XXXII, No. 1
Craig C. Erdmann, Esquire
*
Randy C. Howard, Esquire
*
C. Grice McMullan, Jr., Esquire
Harry R. Purkey, Jr., Esquire
David W. Stroh, Esquire
Edward R. Waugaman, Esquire
Mark D. Williamson, Esquire
Stephen B. Wood, Esquire
Eric V. Zimmerman, Esquire
Committee members:
Christian H. Chiles, Esquire
John David Epperly, Esquire
Ray W. King, Esquire
Jeffrey A. Maynard, Esquire
James M. McCauley, Esquire
*
*
*
Paul A. Bellegarde, Esquire (Advanced CLE)
Richard B. Chess, Esquire
*
Howard E. Gordon, Esquire
Mark W. Graybeal, Esquire
J. Philip Hart, Esquire (Summer CLE)
*
Randy C. Howard, Esquire
*
Neil S. Kessler, Esquire
*
Larry J. McElwain, Esquire
*
C. Grice McMullan, Esquire
Christina E. Meier, Esquire
Paul H. Melnick, Esquire (Annual CLE)
*
Jean D. Mumm, Esquire
Cynthia A. Nahorney, Esquire
*
Stephen R. Romine, Esquire
C. Cooper Youell, IV, Esquire
99
November 2011
the FEE SIMPLE
Substantive Committees
Creditors’ Rights and Bankruptcy
F. Lewis Biggs, Esquire
Kepley Broscious & Biggs, P.L.C.
2211 Pump Road
Richmond, VA 23233
(804) 741-0400 ext. 203 (804) 740-6175 (fax)
email: flbiggs@kbbplc.com
Commercial Real Estate
Whitney Jackson Levin, Esquire
Wharton Aldhizer & Weaver PLC
125 South Augusta St. Suite 2000
Staunton, Virginia 24401
(540) 213-7456 (direct) (540) 885-0199 (main)
(540) 213-0390 (fax)
email: wlevin@wawlaw.com
Committee members:
Committee members:
*
Michael E. Barney, Esquire
Paul A. Bellegarde, Esquire
Dianne Boyle, Esquire
Richard B. Chess, Esquire
Lucy G. Davis, Esquire
James Downey, Esquire
*
Howard E. Gordon, Esquire
*
Ray W. King, Esquire
*
Jean D. Mumm, Esquire
Cynthia A. Nahorney, Esquire
*
Stephen R. Romine, Esquire
David W. Stroh, Esquire
C. Cooper Youell, IV, Esquire
Mark D. Williamson, Esquire
*
Eminent Domain
Charles M. Lollar, Esquire
Waldo & Lyle, P.C.
301 West Freemason Street
Norfolk, VA 23510
(757) 622-5812 (757) 622-5815 (fax)
email: cml@emdomain.com
Committee members:
Vol. XXXII, No. 1
Edmund M. Amorosi, Esquire
David L. Arnold, Esquire
Nancy C. Auth, Esquire
Josh E. Baker, Esquire
James E. Barnett, Esquire
Stanley G. Barr, Esquire
Douglas K. Baumgardner, Esquire
Robert J. Beagan, Esquire
James C. Breeden, Esquire
Barbara H. Breeden, Esquire
Lynda L. Butler, Esquire
Christi A. Cassel, Esquire
Michael S. J. Chernau, Esquire
Francis A. Cherry, Jr., Esquire
Stephen J. Clarke, Esquire
Charles R. Cranwell, Esquire
Christianna Dougherty-Cunningham, Esquire
Joseph M. DuRant, Esquire
Lawrence S. Emmert, Esquire
Jerry K. Emrich, Esquire
Matthew D. Fender, Esquire
Gifford R. Hampshire, Esquire
Henry E. Howell, Esquire
Hon. Philip J. Infantino, III, Esquire
Thomas M. Jackson, Jr., Esquire
James W. Jones, Esquire
Brian G. Kunze, Esquire
Steven L. Micas, Esquire
Michael E. Ornoff, Esquire
Sharon E. Pandak, Esquire
Rebecca B. Randolph, Esquire
Kelly L. Daniels Sheeran, Esquire
Mark A. Short, Esquire
Bruce R. Smith, Esquire
Rhysa G. South, Esquire
Paul B. Terpak, Esquire
Joseph T. Waldo, Esquire
Scott Alan Weible, Esquire
100
Paula S. Beran, Esquire
James E. Clarke, Esquire
J. Philip Hart, Esquire
Christopher A. Jones, Esquire
John H. Maddock, III, Esquire
Richard C. Maxwell, Esquire
Lynn L. Tavenner, Esquire
Stephen B. Wood, Esquire
Ethics
*
Susan M. Pesner, Esquire
Pesner‫פ‬Kawamoto‫פ‬Conway, P.L.C.
7926 Jones Branch Drive
Suite 930
McLean, VA 22102-3303
(703) 506-9440 (703) 506-0929 (fax)
email: spesner@pkc-law.com
Committee members:
David B. Bullington, Esquire
Lawrence A. Daughtrey, Esquire
James M. McCauley, Esquire
*
Larry J. McElwain, Esquire
Cynthia A. Nahorney, Esquire
Lawrence M. Schonberger, Esquire
Lucia Anna Trigiani, Esquire
Eric V. Zimmerman, Esquire
November 2011
the FEE SIMPLE
Land Use and Environmental
*
Stephen R. Romine, Esquire
LeClairRyan, P.C.
999 Waterside Drive
Suite 2100
Norfolk, VA 23510
(757) 624-1454 (main) (757) 441-8921 (direct)
(757) 624-3773 (fax)
email: sromine@leclairryan.com
Committee members:
Residential Real Estate
Co-Chairs
Barbara Wright Goshorn, Esquire
203 Main Street
P.O. Box 177
Palmyra, VA 22963
(434) 589-2694 (434) 589-6262 (fax)
email: office22963@earthlink.net
Eric V. Zimmerman, Esquire
Miller Zimmerman, P.L.C.
50 Catoctin Circle, NE
Suite 201
Leesburg, VA 20176
(703) 777-8850 (703) 777-8854 (fax)
email: ezimmerman@mzlaw.com
Alan D. Albert, Esquire
Michael E. Barney, Esquire
Steven W. Blaine, Esquire
Andrew W. Carrington, Esquire
Richard B. Chess, Esquire
John M. Mercer, Esquire
R. J. Nutter, II, Esquire
Jonathan Stone, Esquire
David W. Stroh, Esquire
*
Committee members:
David B. Bullington, Esquire
Craig C. Erdmann, Esquire
Christina E. Meier, Esquire
Paul H. Melnick, Esquire
Dan L. Robinson, Esquire
David W. Stroh, Esquire
Ronald D. Wiley, Jr. Esquire
Title Insurance
Brian O. Dolan, Esquire
Kaufman & Canoles, P.C.
11817 Canon Boulevard
Suite 408
Newport News, VA 23606
(757) 873-6311 (757) 873-6359 (fax)
email: bodolan@kaufcan.com
Committee members:
*
Paula S. Caplinger, Esquire
Kay Creasman, Esquire
Lisa M. Graziano, Esquire
Stephen C. Gregory, Esquire
Larry J. McElwain, Esquire
*
Albert W. Thweat, II, Esquire
Edward R. Waugaman, Esquire
Ronald D. Wiley, Jr. Esquire
Section Contacts
Liaison to Bar Counsel
Ray W. King, Esquire
LeClairRyan, P.C.
999 Waterside Drive
Suite 2100
Norfolk, VA 23510
(757) 624-1454 (757) 441-8929 (direct)
(757) 624-3773 (fax)
email: rking@leclairryan.com
Vol. XXXII, No. 1
101
November 2011
VIRGINIA STATE BAR
Real Property Section
Membership Application
Please enroll me in the Real Property Section. Please send me copies of the section's newsletter and notices of
section events at the following address:
NAME:_______________________________
VSB MEMBER NUMBER: _________________
FIRM NAME/EMPLOYER:______________________________________________________
OFFICIAL ADDRESS OF
RECORD:_____________________________________________________________________
______________________________________________________________________________
TELEPHONE NUMBER: ( ___ ) __________________ FACSIMILE NUMBER: ( ___ )_____________________
E-MAIL ADDRESS: _________________________
DUES: $25.00 (Payable to the Virginia State Bar) (membership effective until next June 30)
Subcommittee Selection - I would like to serve on the following subcommittee:
Standing
Substantive
( ___ ) Fee Simple Newsletter
( ___ ) Commercial Real Estate
( ___ ) Creditors Rights and Bankruptcy
( ___ ) Programs
( ___ ) Residential Real Estate
( ___ ) Land Use and Environmental
( ___ ) Membership
( ___ ) Ethics
( ___ ) Title Insurance
( ___ ) Technology
( ___ ) Eminent Domain
Print this application and return with dues to:
Dolly C. Shaffner, Section Liaison
Real Property Section
Virginia State Bar
707 East Main Street, Suite 1500
Richmond, Virginia 23219-2803
Virginia State Bar
Eighth & Main Building
Suite 1500
707 East Main Street
Richmond, VA 23219
PRST STD
U.S. Postage
PAID
Richmond, VA
Permit No. 709