June 18, 2014
Can a homeowner block a foreclosure by filing for bankruptcy protection immediately after the bank-appointed trustee auctions the property? On June 2, 2014, a bankruptcy court judge ruled that Rachel Ulrey’s Roanoke property was not excluded from the bankruptcy estate because the foreclosure trustee completed the memorandum of sale prior to the court filing. The court opinion is of interest to homeowners facing foreclosure, mortgage investor or buyers at foreclosure sales. The case illustrates what can happen when a borrower is contesting foreclosure in bankruptcy court.
Rachel Sue Ulrey lives in Roanoke, Virginia. She fell behind on her payments to Suntrust Mortgage. Suntrust instituted foreclosure. Timothy Spaulding, the foreclosure trustee, conducted the sale on the steps of Roanoke Circuit Courthouse at 9:45 A.M on April 18, 2013. Suntrust submitted the only bid of $98,275.52. To memorialize the sale to Suntrust, Spaulding inscribed the details on the bidding instructions form.
About 45 minutes later, Ms. Ulrey filed for protection from creditors pursuant to Chapter 13 of the Bankruptcy Code. Unlike a Chapter 7 where the debtor’s estate is liquidated and the unsatisfied debts are discharged, in Chapter 13 the debtor has the opportunity to present a plan to reorganize and pay off existing debts according to a plan approved by the bankruptcy judge. This presents an opportunity to keep significant assets such as cars and homes.
Ulrey put Suntrust on notice of the bankruptcy case and presented a plan which the Court confirmed by an order entered July 12, 2013. Ulrey wanted to work out her arrearage with Suntrust and keep her home. Ulrey even made electronic mortgage payments in May – July 2013 to Suntrust. The bank returned these payments into Ulrey’s checking account.
Suntrust and Ulrey litigated in Bankruptcy Court over the validity of the foreclosure sale and whether the homeowner could make keeping the home part of her Chapter 13 Plan. The Court decided that because Suntrust never contested Ulrey’s bankruptcy plan, the bank is bound by that order. However, there is a catch – Ulrey must make sufficient payment to the bank to bring her plan current within 30 days. Otherwise, the Bank can proceed against the Ulrey house. Ulrey is both protected and bound by her reorganization plan. How can the Court find the foreclosure sale to be valid and then go on to enforce the bankruptcy plan treating the property as part of Ulrey’s estate? Doesn’t it have to validate one and void the other? The answer provides an expansive vision of bankruptcy jurisdiction:
Formality Requirement for a Written Memorandum of Foreclosure Sale: The Memorandum of Sale in foreclosure is comparable to a Regional Sales Contract in an ordinary deal. They both give the buyer a contractual right to later exchange the purchase price for a title deed. However, most Memoranda of Sale do not contain detailed contractual provisions. The one in Ulrey was a one page form containing the basic identifying facts of the sale and the bank’s bidding instructions. Ulrey challenged the validity of this document on the grounds that it did not contain enough terms. The sufficiency of the memorandum is legally significant. Contracts for sale of real property generally must be in writing to be enforceable. The Court suggests that Spaulding actually included more information in the Memorandum than was necessary to make it enforceable. The terms of the Memorandum of Sale are the business of the trustee and the buyer in foreclosure because they set a framework for going to closing. Whether the memorandum contains particular warranties or descriptions is not the prior owner’s issue.
Legal Rights of Homeowner Post-Foreclosure: If the foreclosure sale produced an enforceable contract between the trustee and the buyer, how does Ulrey have standing to put the property into her Chapter 13 Plan? The Court observed that post-foreclosure there were litigatible issues over the validity of the sale and Ulrey’s continued occupation of the premises. Without filing for bankruptcy, Ulrey could have tried to sue Suntrust challenging the foreclosure or opposing the eviction proceeding. These “residual” legal rights brought the dispute over the property into the jurisdiction of the bankruptcy court. The Court does not discuss whether Ulrey could have properly set forth a nonfrivolous claim contesting the foreclosure proceeding. It is one thing to have a lawsuit that could be filed and it is another to have one that could go to trial and possibly win. The Court implies that Suntrust waived that issue.
Power of Bankruptcy Court Orders Confirming Chapter 13 Plans: Although the memorandum of sale was valid, Ulrey succeeded in putting the ball back in Suntrust’s side of the court by filing a bankruptcy plan that included keeping the home. Ulrey got another opportunity to keep the home, because Suntrust failed to object to the bankruptcy plan. Ulrey succeeded not because she discovered a legal trick to successfully block a foreclosure. Rather, she got another bite at the apple because Suntrust failed to pay attention to her bankruptcy case. Ulrey’s case stands as a warning to mortgage investors to not ignore the owner’s post-sale bankruptcy filing, even when the foreclosure is conducted properly.
Hopefully for Ulrey she can come current on her bankruptcy plan and continue to make her mortgage payments. However, the Court states that Ulrey suffered a job loss and drained her bank accounts to pay living expenses. Her case illustrates the fleeting nature of successful foreclosure contests.
If Ulrey doesn’t come current, does Suntrust proceed with eviction or does the bank have to conduct a foreclosure sale again beforehand? Since the Court found the sale to be valid, perhaps re-auctioning the property would be unnecessary.
Case Citation: In Re Ulrey, 511 B.R. 401 (Bankr. W.D. Va. 2014).
June 3, 2014
An engineer must obtain and maintain a Professional Engineer’s license from the APELSCIDLA Board to practice in the Commonwealth of Virginia. Pursuant to professional regulations, when an engineer, or other design professional, completes a set of drawings, he affixes his professional seal with the date and signature. His seal displays his professional license number. This finishing touch assures the reader, especially the owner and the builder, that the plans are ready to go.
If the project built according to the stamped plans fail, one would expect a claim against the engineering firm. With smaller design firms, the customer may only interact with one representative who handles everything. In such a case, what about engineer personal liability? On May 20, 2014, a federal judge in southwest Virginia issued an opinion in a case where the owner of a collapsing feed barn filed suit against an engineer after a barn he designed fell apart. The opinion shows the tension between the interests of freedom of contract and consumer protection in professional malpractice cases.
Ken McConnell hired Servinsky Engineering, PLLC to design a foundation for a barn on his farm. Mark Servinsky, a Virginia Professional Engineer, was its principal. The foundation constructed according to Servinsky’s plans failed, damaging the structure and tearing the fabric roof. The barn cannot be used safely. McConnell sued both the Servinsky firm and Mr. Servinsky personally. The engineering firm filed for bankruptcy protection. Mr. Servinsky filed a motion to have the personal claims against him dismissed.
McConnell alleged that Mr. Servinsky was personally liable for negligently performing the engineering work that resulted in an unusable barn. McConnell argued for liability on the grounds that Virginia law requires an engineer to affix his professional seal, signature and date to his drawings. Judge James Jones ruled that only the firm, and not the personal defendant, could be liable under the contract with McConnell. Here are a few takeaways in this judicial opinion:
- Privity of Contract: This is a legal principle whereby (except in limited situations) only the parties to a contract may sue other parties to the contract. Whether contractual privity is required in malpractice cases varies by profession and jurisdiction. If the customer sues for an engineer’s failure to meet the expectations set by the contract, then only the parties to the contract may be sued. Judge Jones does not address any arguments that McConnell’s contract was with anyone other than the engineering firm.
- Professional Regulations: Unless they specifically provide for personal liability, laws governing design professionals create duties surrounding licensure, not liability to consumers. The state board decides who can or cannot have a license.
- Professional Standards: If personal liability is difficult to prove and bankruptcy is available, what assurances does working with a professional provide to consumers? Judge Jones observed that in malpractice cases, the professional standards are implicit terms to any contract for services with a professional engineer. The professional standards fill in gaps as to the duty of care in performance of the contract. That is why negligence is discussed in these types of cases. The professional services firm cannot hide behind the absence of a specific term in the contract when there is a professional standard that articulates that duty.
Judge Jones dismissed McConnell’s claims against Mr. Servinsky personally, finding that the professional seal did not create professional duties to the customer above & beyond the professional services contract.
The Bankruptcy Court allowed McConnell’s suit against the engineering firm to proceed, since it was covered by insurance. That case is set to go to trial later this year. Servinsky’s engineer license provided McConnell with a potential remedy, but not by personal liability. The license was the prerequisite by which Servinsky to obtain a professional liability policy that may cover McConnell’s claim.