January 16, 2015
Federal Regulation of Nonjudicial Residential Foreclosure
Foreclosure of residential real estate is traditionally based on state law and agreements between the borrower and lender in the loan documents themselves. Each state has its own rules governing whether foreclosure should occur in or out of a court proceeding. In Virginia, the vast majority of foreclosures occur in bank-appointed trustee’s sales. State and federal courts review and supervise this activity through lawsuits brought by one or more of the parties, usually borrowers seeking to set aside trustee’s sales. However, they resist efforts to transform the foreclosure process into a judicial one, ruling on various motions brought early in cases.
The mortgage crisis is a national concern involving federal policies promoting home ownership. Is there a federal regulation of nonjudicial residential foreclosure? Through supervision of the mortgage giants Fannie Mae, Freddie Mac, and other administrative programs, the federal government is invested in the mortgage origination process. In some cases, a federal agency takes direct title to distressed home loans or the foreclosed real estate itself. I have written about some of those cases in the past few months. For example, Fannie Mae and Freddie Mac enjoy property recording tax exemptions. Also, in states like Nevada that allow homeowners associations to foreclose, government agencies find themselves in title litigation when properties are assigned to them pursuant to the terms of federal mortgage programs. In the event of default of a loan tied to a federal program, the government may find its interests aligned more on the creditor’s side.
Foreclosure is one of many remedies available to lenders to collect on defaulted home loan debt. For over 30 years, Congress has come to the aid of consumers in debt collection matters. In 1977, Congress enacted the Fair Debt Collections Practices Act to curb abusive practices by the debt collection industry against consumers. The FDCPA also has the effect of benefiting non-abusive debt collectors harmed by violating competitors. Since its enactment, Congress and the federal courts have clarified the FDCPA’s role in regulating debt collection law firms’ activity obtaining foreclosure sales and deficiency money judgments. Since an attorney’s sale of distressed Virginia real estate in a trustee’s auction is an activity outside of the traditional perception of debt collection, the role of the FDCPA in foreclosure practice has been relatively unclear until the past few years, when a slew of foreclosure contest lawsuits have tested the utility of the statute.
The FDCPA applies to lawyers collecting on home loan debts, not just non-attorney debt collection agencies. Federal courts in Virginia have recognized that the Act also applies when lawyer debt collectors act as trustees in residential foreclosures where the notices include a demand for payment. These consumer protection laws regulate, among other things, the communications between the debt collector and the consumer. In order to conduct a foreclosure practice, the attorney must send notices to the borrower. The FDCPA may provide independent causes of action against the attorney found to have engaged in abusive practices. FDCPA issues thus pervade residential foreclosure matters. Consumers, lenders, and their attorneys must be aware of how this Act affects a contested foreclosure matter. There are many ways the FDCPA may be violated in a foreclosure matter, including the following:
False Representations. Under ordinary circumstances, it is difficult for a party to prove that they are entitled to relief because their opponent is allegedly lying, cheating or stealing. These are weighty accusations; the standard for proof is high, and the defenses are many. In 15 U.S.C. § 1692e, the FDCPA changes the rules of the game in the consumer debt collection context. The consumer doesn’t need to prove that he was actually deceived by the misleading communication. Instead, the consumer must show that false representations in a debt collection communication materially affects a consumer’ ability to make intelligent decisions with respect to the alleged debt. The courts apply a “least sophisticated consumer” standard to alleged false representations. This tends to prevent application of 20/20 hindsight in the interpretation of correspondence. The court will consider whether the correspondence is susceptible to more than one interpretation, one of which is misleading. Between the FDCPA, the Deed of Trust and state law, the debt collection law firm and attorney foreclosure trustee have multiple compliance obligations in preparing correspondence to the borrower.
Validation Notices. The FDCPA goes beyond prohibiting false representations. In 15 U.S.C. § 1692g, Congress mandates that disclosures be put into debt collection correspondence. In nonjudicial foreclosure, notices to the borrower are an essential element of the process. The initial communication must contain several messages, including, but not limited to:
[A] statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector[.]
If the debtor asks for verification of the debt, the collector must cease all collections activity until the verification is made. This not only means ceasing telephone calls, letters and collections lawsuits; it also includes the nonjudicial foreclosure activity.
Since foreclosures are typically conducted by law firms that exclusively pursue debt collection activity, these provisions of the FDCPA have served as the basis for class action lawsuits. Through the FDCPA, the federal government is heavily involved in regulation of nonjudicial, residential foreclosures. Borrowers, banks and their attorneys must be cognizant of the government’s role as regulator of collection of home loans and sometimes as assignee of mortgage debt or foreclosed real estate. Ironically, consumer protection attorneys are litigating FDCPA claims in federal courts against attorneys for their debt collection work on behalf of federally subsidized mortgage giants.
Case: Townsend v. Fed. Nat’l. Mortg. Ass’n, 923 F. Supp. 2d 828 (W.D.Va. 2013).
Photo Credit: taberandrew via photopin cc (to my knowledge, this property is not the subject of the cases referenced herein or any other foreclosure or debt collection proceeding)
January 8, 2015
Attempt to Relitigate Foreclosure in Bankruptcy Sanctioned by Judge
In Virginia, borrowers have several options of where to bring a legal challenge to a foreclosure trustee’s sale. The shortest commute is usually the Virginia circuit court for the city or county where the property is located. Alternatively, the facts may allow suit to be brought in a federal district courthouses. Another common venue is federal bankruptcy court.
On June 18, 2014, I posted an article about a borrower, Rachel Ulrey, who managed to keep her foreclosed real estate because the lender, SunTrust Bank, failed to object to the plan in time. Ulrey’s case is a cautionary tale to lenders. Other cases show why borrowers cannot rely on lender inattention as a legal strategy. On November 12, 2014, U.S. Bankruptcy Judge Kevin Huennenkens issued an opinion illustrating why parties and their attorneys may not bring the same claim in bankruptcy court after they fail to achieve their desired result in a Virginia state court. The borrower and his attorney found their attempt to relitigate foreclosure in bankruptcy sanctioned by the judge.
Michael Pintz owned property in Sussex County, Virginia, in the name of Michael’s Enterprises of Virginia, Inc. In June 2008, he took out a $200,000 mortgage from Branch Banking & Trust. After he defaulted on payment, BB&T obtained a money judgment in Hanover Circuit Court. When BB&T sent Michael’s Enterprises a Notice of Foreclosure, he filed a request in Sussex Circuit Court to block the threatened sale. That court denied the motion. BB&T later purchased the property at a November 2013 Trustee’s Sale. In February 2014, Michael’s Enterprises filed for Chapter 11 reorganization in the U.S. Bankruptcy Court. The petition claimed the Sussex property as an asset of the corporation.
You may be wondering whether bankruptcy petitions can be used this way. When a court finds that someone filed something for an improper purpose, it may award litigation sanctions. State and federal courts in Virginia have similar rules prohibiting parties and their attorneys from advancing legal claims and defenses for improper purposes and not to vindicate the rights described in the court filing. Improper purposes include but are not limited to harassment, unnecessary delay or needless increase in the cost of litigation.
BB&T brought a Motion for Sanctions for Violation of Bankruptcy Rule 9011. The Bankruptcy Court initially deferred BB&T’s request for sanctions. Judge Huennenkens gave Michael’s Enterprises an opportunity to submit a proper bankruptcy reorganization plan before ruling on the sanctions request. The conditions imposed were not met. In October 2014, the bankruptcy court dismissed Michael’s Enterprises’ petition.
The court granted the lender’s renewed motion for sanctions. Judge Huennenkens observed that Michael’s Enterprises had had an opportunity in Virginia state court to litigate the same objectives sought in the bankruptcy petition. The court saw the new lawsuit as an attempt to attack the Virginia court’s decision and the nonjudicial foreclosure. The bankruptcy opinion doesn’t mention this, but if a party believes that a trial court made an erroneous decision, their recourse is to file a motion to reconsider and/or appeal it to the Supreme Court of Virginia. A bankruptcy court may be able to discharge or reorganize debts reduced to court judgments. However, they usually do not allow parties a do-over of unfavorable results of a state court case. Michael’s failure to present a proper reorganization plan in the face of a sanctions request made a poor impression. Judge Huennenkens found the case to be for an improper purpose and awarded BB&T $10,000 in sanctions against Michael’s Enterprises, Michael Pintz, individually, and his attorney. As of the date of this blog post, this result is currently on appeal before the U.S. District Court for the Eastern District of Virginia.
A common mistaken belief about litigation sanctions is that they are proper whenever a party or attorney loses in court. However, it is common for borrowers in foreclosure contest lawsuits have their cases dismissed on the merits or procedural grounds. Usually, the cases are brought as good faith attempts to obtain relief on the facts and circumstances of the foreclosure proceedings. In Michael’s Enterprises, however, the record of the state court actions together with the absence of a reorganization plan added up to an award of attorney’s fees, not only against the property owner but also its sole shareholder and the attorney. The facts of each case are different and require investigation and research before employing a legal strategy.
Case Citation: Branch Banking & Trust Co. v. Michael’s Enterprises of Virginia, Inc., et al, No. 14-30611-KRH (Bankr. E.D. Va. Nov. 12, 2014).
Photo Credit: taberandrew via photopin cc
December 9, 2014
Resolutions for Homeowners Dealing with Construction Defects
A good home provides a safe, comfortable and enjoyable place to live. When a contractor makes mistakes in construction, renovation or repair, the owner or tenant has to live with those defects every day until the problem is resolved. The coming New Year is a good time for homeowners to prioritize addressing contractor defects. In 2015, devise a strategy for relief from construction defects and feel love for your home again.
The key to efficiently realizing a goal is outlining the steps needed to realize it. This gives the owner a “to-do” list that can be tackled step-by-step over time. This may include a warranty claim against the contractor. Many contractors stand by their work and will honor well-founded warranty claims. It’s difficult to build a business from a base of disgruntled former customers. With some contractors, legal assistance may be necessary to obtain relief under a warranty. No two construction defect cases are the same. In each case, the contracts, warranties, physical conditions and defects are different. However, there are strategies that can make the process easier for the homeowner. The following are 7 New Year’s resolutions for homeowners dealing with construction defects:
- Investigate Defects Fully: Examine and photograph the physical appearance of the defects. Obtain copies of the manufacturer’s installation instructions. Research online reviews or other information about the materials used. Wise homeowners focus first on any safety or health concerns. In some cases, taking temporary action to limit future damage may be necessary. Discovering the truth about the defect is a solid foundation for dealing with it.
- Organize Warranty Information. The contractor likely provided contracts, correspondence, warranties and invoices. Usually installers do not warranty the materials used. The warranties for materials may have been provided in the packaging or available from the manufacturer. These items must be reviewed together and can become easily misplaced if not organized.
- Consult Regarding Implied Warranties. Many homeowners are not aware that a written set of terms is not the only way that products and installation may be covered by a warranty. In Virginia, there are certain contractor warranties that arise under operation of law. Consult with a qualified attorney about how coverage may arise under implied or written warranties. Unfortunately, warranties are easily waived if claims are not timely pursued.
- Consult Regarding Obtaining Expert Reports About Defects. In order to fix the defect, ultimately a qualified person will need to do further work on the house. To prove a warranty claim in court, the owner may need an expert witness to testify regarding the breach of duties or the proper figure of damages. Depending on the needs of the case, that expert may be a home inspector, licensed contractor, engineer, tradesperson or professional estimator. Hiring an expert to provide assistance in a lawsuit, reports or court testimony is not like hiring a professional to work on the house. If an expert is being engaged to provide legal support or trial testimony, the owner’s lawyer is the proper representative to work directly with the expert. One of the most important characteristics in retaining an expert in these types of cases is independence. A homeowner is not well served by an inspector or other contractor who will not be able to testify against the interests of the contractor who committed the defects. It’s best to go completely outside of the referral network of the builder.
- Consider Goals for the Property. When a dispute with a contractor erupts, sometimes even smart homeowners may struggle to maintain focus on how the project fits in to their goals for maintaining and developing the property. The homeowner may need to adjust their goals to fit new circumstances.
- Preserve Copies of Contractor’s Representations: If the contractor used intentional concealment, fraud or misrepresentation in the course of selling his services, the owner may have a claim for enhanced damages. Fraud cases are very difficult to prove, and the facts of most cases don’t support them. However, sometimes misrepresentations can be found in e-mail, text message or social media communications. Savvy owners take care to preserve any electronic communications with the contractor’s representatives.
- Consult with Counsel About Pursuing Claims. Once the case has been properly investigated with the assistance of legal counsel, the homeowner is in the best position to go back to the contractor about the warranty claim and, if necessary, pursue a legal remedy.
Whether a homeowner’s best interests lie in simply fixing the problem on their own or pursuing a legal claim against the contractor depends upon the unique circumstances of the case. Homeowners have the benefit of control over the property where key evidence may be preserved. The New Year is a good time for families to take necessary action to protect their physical, financial and legal aspects of home ownership.
photo credit: ungard via photopin cc (I am not aware of any defects with the house depicted in this photo, which was chosen for its seasonal characteristics)
December 4, 2014
Litigation over Property After the Foreclosure Law Firm Goes Out of Business
On January 31, 2012, F&M Services, L.C., conducted a foreclosure sale in Hampton, Virginia. F&M was the foreclosure trustee affiliate of the Richmond law firm Friedman & MacFadyen. Freedom Mortgage Corporation appointed F&M as successor trustee for the foreclosure of Hampton property owned by Ms. Gloria J. Harris. At the sale, Freedom Mortgage purchased the property. Subsequently, Freedom assigned the property to the U.S. Department of Veterans Affairs. Ms. Harris had a VA loan on the property.
In October 2012, Friedman & MacFadyen shut down their operations. That law firm was the target of class action litigation arising out of their debt collection and foreclosure practices, including “robo-signing” and violations of federal debt collection law. This law firm was the subject of an October 25, 2012 article on RichmondBizSense.com. In 2008, Diversified Lending Group, a company owned by Bruce Friedman made an undocumented $6 Million loan to his brother Mark Friedman’s law firm. In 2010, the appointed receiver for DLG entered into an agreement with the Friedman law firm for repayment of the $6 Million. A few months later, Bruce was arrested on investment scam charges. This same foreclosure operation was conducting sales and filing foreclosure accountings for many distressed properties in Virginia.
This did not stop litigation over property after the foreclosure law firm went out of business. Ms. Harris decided to bring a lawsuit in federal court to reverse F&M’s foreclosure sale. Rather than sue the law firm or the successor trustee, she decided to bring suit against the federal government and Freedom Mortgage. Ms. Harris’s suit does not focus on the debt collection rules or “robo-signing.” She alleged that a 30-day notice sent to her by LoanCare Servicing Center, Inc. failed to include information specifically required by the loan documents. For example, the amount demanded in the notice was over-stated by one-third. She also pleads that she made an October 2010 payment that was not credited in the notice amount.
Both the government and the mortgage company brought motions to dismiss the lawsuit. District Court Judge Henry Coke Morgan, Jr. denied their motions. The Court showed appreciation of the fact that the 30-day cure notice did not comply with the specific requirements of the loan documents. Of course, on an initial motion to dismiss, the court does not entertain proof of disputed facts. Later in the litigation the Court would consider the exact amount owed at the time of the notice and Ms. Harris ability to cure the payment default if she had received an accurate and compliant cure notice.
In the continuing fallout from the mortgage crisis beginning in late 2008, the federal government frequently finds itself as a party to complex foreclosure litigation. Previously, I discussed the tax advantages Fannie Mae and Freddie Mac enjoy in recording deeds in land records. In other states, such as Nevada, the federal government finds itself as a party to lien priority disputes between banks and community associations. The collapse of foreclosure operations such as Friedman & MacFadyen may prevent them from continuing their scrutinized practices. However, the homeowners, mortgage investors and even the government may find themselves in title litigation over the sale anyway.
Many lawsuits brought by borrowers after foreclosure sales never survive the initial motions filed by the defendant lenders. Although the October 17, 2014 opinion does not mention the law firm, I wonder if F&M’s role in Ms. Harris’ foreclosure afforded her case closer attention.
If you have interest in real property that has in the title report a trustee’s deed from an now out-of-business debt collection law firm, contact a qualified attorney in order to protect your rights.
Case Citation: Gloria J. Harris v. U.S. & Freedom Mortgage Corp., No. 4:14cv56 (E.D.Va. Oct. 17, 2014)(Morgan, J.)
photo credit (does not depict any properties discussed): Mike Licht, NotionsCapital.com via photopin cc
November 21, 2014
Wrongful Foreclosure Claims for Robo-Signing
Among the controversies of the mortgage foreclosure crisis is that of “Robo-Signing.” A homeowner may receive notice that the original mortgage lender assigned their rights under the loan documents to another financial institution. When a representative of a lender signs paperwork to foreclose on a property, how does the borrower (or anyone else) know whether that company has authority from the originating lender to foreclose?
Janis O’Connor owned real estate near the Appomattox-Buckingham Virginia State Forest. On March 31, 2011, Deutsche Bank foreclosed on her property for nonpayment. After the foreclosure sale, Ms. O’Connor filed suit, alleging that the foreclosure was not valid because the bank lacked the authority of a proper successor to the mortgage company that originated her loan. O’Connor filed suit on her own, without an attorney representing her.
Can a Borrower Sue for “Wrongful Foreclosure?”
Janis O’Connor sued her lender (and others) on a number of legal theories, including “Wrongful Foreclosure.” She alleges that unknown persons forged assignments of her mortgage in a fraudulent scheme to foreclose on her home. She writes that this robo-signing was exposed on the television program, “60 Minutes.” The bank brought a Motion to Dismiss. On October 6, 2014, the U.S. District Court for the Western District of Virginia found that Virginia law does not recognize a claim called “Wrongful Foreclosure.” Judge Moon observed that the borrower must be able to allege a claim for breach of loan documents, fraud, or some other recognized legal theory. Judge Moon expressed a concern that Ms. O’Connor inadequately alleged any causal relationship between the “robo-signing” and her losses.
On May 14, 2014, I posted an article to this blog about legal challenges to the validity of foreclosures on the grounds that the lender committed technical errors in navigating the loan default through the trustee’s auction. Courts are reluctant to set aside a completed foreclosure sale. The technical breaches must have a strong connection to the relief requested by the borrower.
“Show Me the Note”
The Code of Virginia addresses situations where the lender struggles to come up with documents evidencing its authority to proceed with the foreclosure. Va. Code § 55-59.1(B) requires the lender to submit to the trustee what’s called a Lost Note Affidavit. These provisions also require the lender to notify the borrower in writing that the promissory note is lost and that it will request the trustee to proceed after 14 days. The lender must include language notifying the borrower that if she believes that some other party is the true holder of the note, she must file a lawsuit asking the local circuit court to order the foreclosing bank to post bond or make some other protection against any conflicting claims. That Court would then decide whether a bond or some other security must be posted to protect the borrower. The mere absence of the original note cannot serve as a basis to reverse a foreclosure: “If the trustee proceeds to sale, 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.” Va. Code § 55-59.1(B). These provisions require borrowers to file suit before the foreclosure takes place in order to litigate over “show me the note” issues. Ms. O’Connor did not file suit until almost two years after the foreclosure sale. From the borrower’s perspective, she hasn’t been damaged until the foreclosure is complete. From the Court’s perspective, it is sometimes easier to evaluate matters prospectively than to undo the completed transaction.
Judge Moon remarks that this statute does not actually require the lender to provide the borrower with the lost note affidavit itself. The failure to provide this item cannot serve as the legal basis to reverse a bank foreclosure. Technical breaches of the notice requirements cannot, on their own, serve as a basis to invalidate a completed foreclosure sale.
Judge Moon dismissed Ms. O’Connor’s complaint, giving her leave to amend her claims for Breach of Contract and Fraud. Ms. O’Connor has filed an Amended Complaint, and the sufficiency of the amended lawsuit has not been decided by the court as of this blog post. Regardless as to how Ms. O’Connor’s case is resolved, it provides some important reminders about foreclosure contests:
- Timing of Foreclosure Contest: If a borrower wants to challenge the validity of a foreclosure, their best interests may be served in filing suit after the foreclosure notice is submitted and before the auction occurs. This does not guarantee that the “show me the note” allegation will provide a remedy for the borrower, but it does preserve the issue.
- Value of Title Insurance: Investors who desire to purchase a property in foreclosure without obtaining title insurance run the risk of being made a party to a lawsuit like Ms. O’Connor’s which may go on for months or years.
- Duties of Foreclosure Trustees: An attorney acting in the capacity as a foreclosure trustee under the loan documents may owe duties to parties other than the bank. I discuss this issue in a related May 21, 2014 blog post. However, he doesn’t have an attorney-client relationship with non-clients.
Lenders and borrowers are not the only parties that may have a property interest challenged by title problems from a past, present or future foreclosure. The purchaser in the foreclosure sale, the spouse of the borrower or purchaser, an investor in a real estate company, or a tenant may have rights at stake in foreclosure title litigation. If your property rights are threatened by such an action, contact a qualified attorney.
case citation: O’Connor v. Sand Canyon Corp., No. 6:14-CV-00024 (W.D. Va. Oct. 6, 2014)
November 11, 2014
Association Attempting to Foreclose on Home of a Veteran for Flying the Flag
Today, on Veterans Day, I would like to honor veterans who have served our country. Many of them return to civilian life and make additional, substantial contributions to their communities. A few go on to struggle to protect the property rights of themselves and others. In some cases, HOA’s may even attempt to foreclose on home of a veteran for flying the flag of the United States.
Larry Murphree’s Experience in Florida with Association Flower Pot Rules:
Larry Murphree is a U.S. military veteran who owns a residential unit in the Tides Condominium at Sweetwater in Florida. In 2011, he began to display a small 11″ x 17″ flag in a flower-pot outside his front door. His Association asserted fines against Mr. Murphree and the parties found themselves in litigation. The parties reached a settlement wherein Murphree agreed to display the flag in accordance with the condominium instruments. I first heard Mr. Murphree’s story on an October 18, 2014 interview by Shu Bartholomew on her radio show and podcast, “On the Commons.”
After the settlement, the Association adopted new guidelines which permitted display of one american flag, but only in a bracket near the street number plate. The new rules prohibited owners from displaying the flag during bad weather or at night. The military and other U.S. government facilities have more rigorous etiquette for display of the American flag than what is required of private citizens. The new rules the Tides Condominium may have been an attempt to shame Mr. Murphree for not following the military flag etiquette, which a private citizen is not ordinarily required to observe.
The Association also adopted new rules for potted plants. The Association only allowed one pot, which may only contain plants and a maximum of three self-watering devices. This Association found it is necessary to regulate what items may be placed in flower-pots on the doorstep of unit owners. Undoubtedly, there are cases where neighbors erect obstructions which infringe upon the rights of their neighbors. However, Mr. Murphree’s flag does not appear to be an albatross. At Mr. Murphree’s website, http://letmeflytheflag.com, you can see the small flag display from the street view.
Mr. Murphree decided to continue to display the American flag in the flower-pot. The Association began to assess fines a $100.00 per day. They now want to foreclose on his property for the unpaid fines. The parties are in litigation again. On March 32, 2014, the U.S. District Court for the Middle District of Florida published an opinion deciding, among other things, that the First Amendment protections do not apply against non-governmental entities like a homeowner’s association. The Court also ruled that the Freedom to Display the American Flag Act of 2005 does not provide for a right to sue a property association. It is my understanding that the litigation currently continues in Florida state court.
What About Virginia?:
In 2009, retired army veteran Colonel Van Thomas Barfoot’s association ordered him to remove a 21-foot flagpole that he used to fly the American flag. Mr. Barfoot earned the Medal of Honor and served in World War II, Korea and Vietnam. Barfoot won his dispute, but not without help from two senators and a former governor. Ted Strong discusses Mr. Barfoot’s story in a November 2, 2014 article in the Richmond Times-Dispatch.
In Virginia, both the Property Owners Association Act and the Condominium Act contain provisions relating to the federal Freedom to Display the American Flag Act of 2005. These state laws disallow associations from prohibiting owners, “from displaying upon property to which the unit owner has a separate ownership interest or a right to exclusive possession or us of the flag of the United States” where such display complies with federal law. However, the statutes do allow the association to:
In condominiums, balconies, patios and doorways are usually what’s called “limited common elements.” This would limit the usefulness of these legal protections to a homeowner desiring to display the flag in such areas.The statute does not define what “substantial interests” an association may have that would need to be protected from display of the American flag. The provisions state that the association bears the burden of proving the legitimacy of the restrictions. It is remarkable that the same government that authorize a HOA’s exercise of power would allow them to restrict or forbid a citizen’s right to display that government’s flag. The Richmond Times-Dispatch article does not discuss what federal or state statutes played a role in the outcome of Mr. Barfoot’s case.
Associations become more prevalent each year. Kirk Turner, Director of Planning of Chesterfield County told Mr. Strong that around 100% of new developments of at least 20 lots have mandatory associations: “From our standpoint, we actually encourage the creation of an HOA.” Henrico County Attorney Joseph Rapisarda explained: “To me, the HOA is like a mini-government.” If a HOA is indeed a “mini-government,” then a homeowner might expect constitutional protections normally provided against governmental intrusion. From the owner’s perspective, if the HOA has the authority of a mini-government but not the legal restrictions, that makes homes subject to association covenants less valuable. In her interview of Mr. Murphree, Ms. Bartholomew observed that to the owner, the value of property is what the owner does with the property, not what it would sell for. I can see how difficult it might be for a comparable sales analysis to account for the exercise of association powers.
If your association is taking action against you for display of the American flag or any other political or religious symbols, contact a qualified attorney.
photo credit (photo does not display any of the properties discussed in this post): PatrickMcNally via photopin cc
November 4, 2014
The Future in Virginia of Foreclosure of Condominium Association Liens
Today’s blog post is the third installment in a series on the emerging trend of foreclosure of condominium association liens on private property owners. In a previous article, I discussed a new appellate court decision, Chase Plaza Condominium v. Wachovia Bank, recognizing the right of an association under the D.C. Code to sell a condo unit in foreclosure to satisfy unpaid assessments, thereby extinguishing the much larger bank mortgage. This installment examines how future, similar attempts may be viewed under the Virginia Condominium Act.
Presently, Lenders Have Priority over Association Liens in Virginia:
In 2003, the Supreme Court of Virginia heard a case involving similar facts as in the Chase Plaza case under the corresponding portion of the Virginia Condominium Act. Va. Code Sect. 55-79.84 provides that a properly recorded Condo assessment lien has priority over other encumbrances except for:
- Real Estate Tax Liens;
- Liens Recorded Before the Condominium Declaration;
- First Mortgages or First Deeds of Trusts Recorded Before the Assessment Lien.
That same code section provides for the distribution of the proceeds of the association foreclosure sale, differing materially from the aforesaid lien priorities:
- Reasonable Expenses of the Sale & Attorney’s Fees;
- Taxes;
- Lien for Unit Owner’s Assessments;
- Any Remaining Inferior Claims of Record;
- The Unit Owners Themselves.
Since the statute provides for differing priorities for liens and distribution, I’m not surprised that this issue was litigated. At the Virginia Supreme Court, Colchester Towne Condominium Council argued that these provisions permitted foreclosure of a unit for its owner’s failure to pay assessments. This Association asserted that before the bank received anything, the proceeds would first be paid for expenses, taxes or the assessments.
Wachovia Bank argued that it had a priority over the Condominium Association for both the lien and payment. In a narrow 4-3 decision, the majority agreed with the bank. Justice Lawrence Koontz found that the General Assembly intended for the first mortgage to get paid before the association assessment liens. The Court observed that purchase money mortgages are the “primary fuel that drives the development engine in a condominium complex.” Justice Koontz remarked that a contrary result (the D.C. and Nevada cases come to mind as examples) would not adequately protect the lender’s interests.
Justice Elizabeth Lacy wrote for the three justice minority, which included now-incumbent Chief Justice Cynthia Kinser and Chief Justice-elect Donald Lemons. They favored permitting the association to conduct the foreclosure sale and give the unpaid assessments priority over the mortgage. However, they would permit the lender’s lien to survive the foreclosure process, burdening the property purchased at the auction. None of the justices on the Supreme Court at that time published an opinion that would give an Association powers like those found in the Chase Plaza case.
As of the date of this article, the conventional wisdom followed by many owners of distressed condominium properties in Virginia has a legal basis on this 4-3 decision from 11 years ago. I predict that in a matter of months or years, this same issue will resurface in the General Assembly or the Supreme Court. I don’t know to what extent the national sea change will have a ripple effect in Virginia. It is not possible to predict to what extent, if any, associations may acquire greater rights against banks and homeowners. However, local governments rely on associations to pay to maintain certain common areas and services. Cities and counties continue to seek ways to avoid budget shortfalls. New land development brings the prospect of additional tax dollars. These associations have a financial crisis of their own for the reasons I spoke of in my prior post. The financial crisis is greater today than 11 years ago, and so are the challenges to private property rights.
Where Does All This Leave Property Owners and Their Advisors?
For a homeowner, keeping one’s home and paying bills is a more immediate human concern than ending the larger rescission. What do these storm clouds mean to Virginia condominium owners? A few thoughts:
- Escrow Accounts. Courts and pundits suggest bank escrow of HOA dues may be the answer. Writer Megan McArdle points out, a “vast regulatory thicket surrounds mortgage lending.” Throwing association governance and budget issues into that thicket does not seem like an attractive option to owners, who don’t always find themselves aligned with their association’s decisions. Making banks party to disputes between Associations and owners would complicate matters further.
- Banks Shy From Financing Condos. The Wall Street Journal Reports that David Stevens, president of the Mortgage Bankers Association, expects mortgage rates to rise in Nevada. The Mortgage Bankers Association also reports that sometimes HOAs won’t accept payments from them or even tell them the amount due. I expect banks to strengthen due diligence of a condominium association’s governing documents, policies and financials before agreeing to lend on a property subject to its covenants.
- Home Buyer’s Focus on Contingency. In purchasing a condominium or another type of property in an association, a buyer has a window of time to review the association disclosures and either get out of the deal or move forward. If the banks start escrowing association fines, etc., this may become a greater focus in the home-buying process.
- Cash Only Trend Prevails in Condominium Sales. In many condominiums, unit sales are conducted in all cash. The cash only option certainly cuts out the problem of the purchase money-lender. This also cuts most owner-occupants out of the house hunt, and decreases the number of owner-occupants in the association, making the place less attractive to lenders. This does not seem to be a solution.
One option that I haven’t seem discussed elsewhere is this: What if, when unit owners default on their obligations, the property is put up for foreclosure, and the lender, association (or any other investor), could submit competing bids to a trustee? The HOA would get paid, and the lender could get the collateral property. I doubt this would work under the existing statutory framework, but perhaps it would work better than an escrow.
If you own a property that is subject to the covenants of a condominium or homeowners association, and the association has threatened to enforce its lien against your property, contact a qualified real estate attorney to protect your rights. In order to protect your rights, you may need to prepare for a sea change in the balance of powers in home ownership.
If you are considering an opportunity to purchase a property at an association assessment lien foreclosure sale, retain qualified counsel to advise you regarding related risks, and carefully consider purchase of title insurance.
Case opinions discussed: Colchester Towne Condominium Council v. Wachovia Bank, 266 Va. 46, 581 S.E.2d 201 (2003)
Photo Credit: (photo of Richmond, Va. condos, not property discussed in blog post): rvaphotodude via photopin cc
October 29, 2014
Can A Condominium Association Foreclosure Extinguish a Mortgage Lien?
On October 16, 2014, I asked in a blog post, “What Rights Do Lenders and Owners Have Against Property Association Foreclosure?” In that installment, I discussed a Nevada foreclosure case that was not between the borrower and the lender. It reflected a litigation trend between the lender, homeowners association and the federal government. Today’s article continues exploration of this legal development emerging in some states. Some courts are finding that homeowners associations have the right to foreclosure on private property for failure to pay fines, dues and special assessments. Several recent court rulings found that HOA foreclosures can extinguish the lien of the bank who financed the purchase of the property. Owners, banks and federal housing agencies find this trend an alarming sea change in the home mortgage markets.
Evaluating Competing Foreclosure Rights:
Today’s blog post focuses on where all of these legal developments put lenders when an Association attempts to enforce a lien for nonpayment of fines, assessments and dues. In a mortgage, the borrower agrees to put the property up as collateral to finance the purchase. The loan documents received at closing outline the payment obligations and the rights of foreclosure. Association obligations, on the other hand, are determined by the governing body of the Association according to the Bylaws. In many states, statutes provide for Associations to record liens in land records for unpaid assessments. Some statutes also allow Associations to conduct foreclosure sales to satisfy unpaid assessments by following certain procedures. Where state law allows, the Association’s authority to foreclose isn’t based on the owner’s agreement to make the property collateral. The statutes and recorded covenants put the buyer on notice of these Association rights.
Journalist Megan McArdle discusses on BloombergView how in about 20 states, HOAs can put homes up for auction (without the permission of the lender) and sell them to satisfy little more than outstanding dues (perhaps a four figure amount) to an investor, and the bank’s mortgage lien (six or seven figures, likely) is extinguished from the real estate. Ms. McArdle remarks that this doesn’t make a huge amount of sense, and I tend to agree with her. Some adjustment must come to the regulatory landscape in order to preserve both property rights and market liquidity.
Personal Experience with Northern Virginia Condominium Ownership:
Before I got married, I owned and lived in a condominium in Northern Virginia for over nine years. I remember hearing discussions, whether at the annual meeting or in the elevators, that some owners in the building fell on hard times and had kept on paying their taxes and mortgages but had stopped paying their condo association dues. Those distressed homeowners felt confident that while the association might consider other collection activity, it would not be able to sell their unit in foreclosure, to the prejudice of both the mortgage lender and the owner. At that time, the right to occupy the unit had a unique value to them.
This made sense to me, because the mortgage lender usually has more “skin” in the game in terms of the dollars invested. Can this strategy continue to hold up in light of new national trends in HOA foreclosure? Changes have already reached the opposite shores of the Potomac in an August 28, 2014 District of Columbia Court of Appeals decision.
Bank and Association Battle in D.C. Courts Over Priority of Liens on Condo Unit:
Two months ago, the Court of Appeals published an opinion that will likely change the lending environment for D.C. condominiums. In July 2005, Brian York financed $280,000.00 to purchase a unit in the Chase Plaza Condominium in Washington, D.C.. Unfortunately, he became unable to continue making payments on his mortgage and Association dues after the mortgage crisis began in 2008. In April 2009, the Association recorded a lien of $9,415 in land records. The Association foreclosed, selling the entire home to an investor for only $10,000.00. The Association deducted its share and then forwarded the $478.00 balance to the lender. The bank and Association found themselves in Court over whether the Association had the right to wipe off the bank’s six figure mortgage lien in the five-figure sale to the investor.
The Court of Appeals found that under the D.C. condominium association foreclosure statute, the lender gets paid from the left-over proceeds, and to the extent the lien is not fully satisfied, it no longer attaches to the real estate. (It then becomes an unsecured debt against Mr. York, who went into bankruptcy).
J.P. Morgan, the successor in interest to the original lender, pointed out that such a conclusion, “will leave mortgage lenders unable to protect their interests, which in turn will cripple mortgage lending in the District of Columbia.” The Association and investor responded that the alternative leaves HOAs often unable to enforce their liens or find buyers in foreclosure sales. The Court suggested that lenders can protect their own liens by escrowing the HOA dues, like property taxes.
The decisions of Nevada, the District of Columbia and other jurisdictions do not control the Supreme Court of Virginia or the General Assembly. However, the same economic and human forces exert pressure on lending and home ownership in Virginia as they do in the District of Columbia. What is the current law in Virginia? How are owners and lenders to react to these changes here? The answer will come in the next installment in this series on Community Association Foreclosure.
If you are the beneficiary or servicer of a loan on distressed real estate subject to a lien of a community association, contact qualified legal counsel to protect your interest in the collateral.
Case opinion discussed: Chase Plaza Condominium Ass’n, Inc., et al. v. J.P. Morgan Chase Bank, 98 A.3d 166 (2014).
Photo credit: To my knowledge, the featured photo does not depict any of the property specifically discussed in this blog post. The credit is here: c.schuyler@verizon.net via photopin cc
October 16, 2014
What Rights Do Lenders and Owners Have Against Property Association Foreclosure?
How are Virginia homeowners to evaluate competing threats from their mortgage bank and property association foreclosure? For many years, owners unable to pay their bills associated with their homes have focused on the threat of foreclosure from their mortgage lender.
Homeowners’ Varying Obligations to Lenders and Property Associations:
The conventional wisdom, in Virginia at least, is that homeowners should focus on keeping bills paid in the following priority: (1) local property taxes (have priority as liens, and are non-dischargable in bankruptcy), (2) mortgage lenders (monthly payments largest) (3) the monthly dues and special assessments of the homeowners association or condominium unit owners association. These notions are reinforced by mortgage lenders who escrow property taxes but not association assessments. Should owners continue to follow this in making decisions in the face of risk of payment default? Tax liens will certainly continue to enjoy a super-priority. However, a unit owner’s rights and responsibilities to their community association are of a different nature than bank mortgages. The rights of Associations to fix dues, special assessments and fines change. The General Assembly can amend the statutes. Courts make new legal interpretations. The owners can vote to change the Association Bylaws. Although the Association has significant influence over a unit owner’s rights, its lien is often overlooked to the detriment of many owners. What foreclosure, rights, if any, may an Association use to enforce its assessments? Florida and Nevada tend to be bellwethers of national trends in property associations because of their extraordinary number of condominiums and other associations. One recent case illustrates the chaos that may arise from these competing claims.
Las Vegas Foreclosure Contest Between HOA, Bank and U.S. Government:
On September 25, 2014, Judge Gloria Navarro of the U.S. District Court for Nevada issued an opinion providing clues to how Virginia homeowners may one day find themselves caught up in legal crossfires between banks and HOA’s. Emiliano & Martha Renteria owned a single-family home in Las Vegas that was a part of the Washington & Sandhill Homeowners Association (“HOA”). This is not a condominium but the issues are analogous. In September 2009, they defaulted on their Bank of America mortgage. Like Virginia, Nevada allows non-judicial foreclosure proceedings wherein title is transferred transactionally. The Court becomes involved if there is a dispute. In July 2012, the Bank-appointed Trustee foreclosed on the property. Five months later they rescinded that foreclosure. In May 2013, the Bank completed a foreclosure (in a do-over), claiming title to the property. On May 17, 2013 the Bank conveyed the home to the U.S. Department of Housing & Urban Development in a claim under the Single Family Mortgage Insurance Program.
To make matters more confusing, the HOA pursued its own foreclosure proceedings on the property at the same time to enforce its lien for the Renteria’s failure to pay their assessments. Most of the procedural aspects of Nevada condominium foreclosures are substantially different from Virginia. The HOA purchased the Renteria property at its own foreclosure sale in May 23, 2012, before the Bank’s first foreclosure sale. In July 2012, the HOA filed a release of its lien. A couple of months later, the HOA resumed its foreclosure, asserting an unpaid assessment lien of $4,983.00, this time against the Bank as owner. In October 2012, the HOA reacted to the Bank’s conveyance of the property to HUD, asserting a lien of $1,250.00 against the government. Note that this association foreclosed on a single-family home in an urban area to satisfy only $1,000-$5,000. When those demands went unpaid, the HOA abandoned this position. On October 9, 2013, the Association filed a federal lawsuit claiming ownership pursuant to the May 23, 2012 sale. In the lawsuit, the HOA disputed the Bank and HUD’s claims of title.
On September 18, 2014, the Supreme Court of Nevada ruled in a similar case that a HOA foreclosure extinguishes a mortgage lien such as that held by the Bank. Local readers may be interested that on August 28, 2014, the D.C. Court of Appeals reached a similar decision. In Nevada, Judge Navarro discussed how it is illogical for the HOA to simultaneously claim to be the rightful owner of a property and also assert an assessment claim against another party as owner. She found that under Nevada law, the Association was not permitted to waive its right to extinguish the Bank’s prior lien through foreclosure. The Court decided that the HOA’s subsequent release of the lien against the Renterias and new liens against the Bank and HUD were not valid because it had no right to change course. Had an individual investor purchased the property from the Bank’s foreclosure following the HOA’s release, he would have found himself caught up in this mess. The Court did not discuss whether these latter actions also created unwaivable rights. Judge Navarro ultimately decided that the HOA claim of title violated the U.S. Constitution. She dismissed of the Association’s lawsuit on the grounds that the HUD enjoyed an interest in the property under the Single Family Mortgage Insurance Program that could only be released under federal law. The Property Clause of the Constitution states that, only “Congress has the Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” Since the Bank’s mortgage was HUD-insured, a HOA cannot violate the government’s rights as insurer. This case is currently on appeal.
All of this caught my attention because it illustrates how HOA’s and Banks may use nonjudicial foreclosure procedures to duel over residual rights in distressed real estate. This case illustrates, if nothing else, why title examination and insurance are valuable investments to individual investors who may find themselves caught up in such a case. Well-advised home buyers must study the association bylaws and other disclosures carefully before waiving the contingency. If legal developments like this continue, associations will likely require a substantial legal reform. Otherwise, property values, especially condominiums will be in jeopardy, banks may restrict financing in fear of HOA lien priority, and investors may lose interest.
Will a Reordering of Rights of Banks and HOA’s Come to Virginia?
The competing rights of HOA’s and Banks is a critical aspect of the foreclosure crisis. On October 2, 2014, Nevada real estate attorney Bob Massi was interviewed on cable news about trends in HOA foreclosures. He predicted that lenders will start requiring borrowers to make their HOA payments into a bank escrow so that the lender’s foreclosure rights are not prejudiced by unpaid assessments.If this becomes a reality, mortgage servicers will become collection agents for associations. What remedies will owners have with respect to the escrow if they have disputes with the association over a fine? Will lenders change their underwriting guidelines to make loans more difficult for property subject to association covenants?
I expect that the issue of HOA lien priority will soon return to the Virginia Supreme Court and General Assembly. What responses to these trends can homeowners expect in Virginia? In a later installation in this new blog series about Association Foreclosure, I will discuss how a 2003 Supreme Court of Virginia decision presently limits a Condominium Association’s remedies for unpaid assessments. This Virginia opinion limits the rights of Virginia’s community association to disturb a lender’s rights under a purchase money mortgage. Given these new developments in Nevada and D.C., this 11-year-old opinion is important to every owner, association and lender with an interest in Virginia condominiums.
If you are a lender and have questions whether an association’s lien has priority over your own mortgage, contact qualified legal counsel. If you are an owner and have questions whether an attempt by your association to enforce a lien on your property runs afoul of the law or your condominium instruments, contact a real estate attorney to protect your rights.
Case citation: Washington & Sandhill Homeowners Association v. Bank of America, et al., No. 2:13-cv-01845-GMN-GWF (D.Nev. Sept. 25, 2014)(Navarro, J.).
Thanks to Shu Bartholomew, host of the weekly property rights radio show “On the Commons,” for letting me know about the Bob Massi interview.
Photo credit (photo does not depict the property discussed in this post): JoeInSouthernCA via photopin cc
October 1, 2014
We Built this City: Homeowner Associations and Traffic Stops
The classic image of a homeowners association is a neighborhood with stately homes or attractive townhouses. Owners occupy their own properties. Neighbors socialize with one another, perhaps around a park, golf course, tennis court or swimming pool. The common areas make the development an attractive place to live. Common values of commitment and neighborly respect inform stewardship of common areas and management of the association’s business. Desire to achieve this ideal motivates many land development and home buying decisions. According to Virginia Lawyers Weekly, there are 5,645 registered community associations in Virginia, and several thousand more unregistered ones. That’s a lot of roads and other common areas that are neither individually owned nor maintained by local governments. If someone recklessly drives their car on those association-owned roads, who has the authority to pull them over?
On August 13, 2014, Mark R. Herring, Attorney General of Virginia released an official advisory opinion addressing the question of homeowner associations and traffic stops. State Senator Bryce Reeves asked Mr. Herring whether a HOA may enforce violations of state or local traffic laws on its private streets and whether and how a HOA may adopt and enforce its own rules regulating traffic (Sen. Reeves’ district includes Fredericksburg, Orange County, and some surrounding areas). The Attorney General’s opinion is about the intersection between HOA law and traffic law. Mr. Herring outlines two options for associations: (1) ask the city or county in which their community is located to police the streets, or (2) they may use private security qualified as Special Conservators of the Peace.
Why is this issue coming up in 2014? The economic collapse beginning in 2008 affected homeowners associations in several ways:
- Many homeowners stopped paying their association dues along with their mortgage. This hit HOA’s in the wallet.
- Foreclosures negatively affected the property values, slowing down sales of neighboring properties.
- Renting became a way of life for many people struggling to save for 20% on a down payment for a home. For Associations, this means that many residents are tenants, who take a different perspective from owner-occupants regarding common areas and their neighbors.
What better words to describe such a dystopia than lyrics from one of the worst pop songs of the 1980’s:
Say you don’t know me or recognize my face
Say you don’t care who goes to that kind of place
Knee deep in the hoopla, sinking in your fight
Too many runaways eating up the night.
– Starship, “We Built this City” (1985)
Developers sought to create oases where children could safely play and parents could develop long relationships with neighbors. Now in some HOA’s, security patrols are chasing residents, tenants and guests for traffic violations.
The Attorney General Opinion describes an unnamed association (within Sen. Reeves’ district) that directed its safety patrol to stop moving vehicles and issue citations for traffic infractions such as speeding, reckless driving and failure to obey highway signs. The safety patrol even uses vehicles with flashing lights to pull over drivers over. Through the safety patrol, the association holds property owners responsible for their infractions and those of their guests. This association has its own “court” in the form of a Violations Review Panel where homeowners may appear to contest citations.
Do associations have the authority to enforce traffic rules in this way? How much do HOA’s resemble local governments? In commenting on this opinion, community associations lawyer Lucia Anna “Pia” Trigiani of Alexandria told Virginia Lawyers Weekly that, “community associations exist in some respects to relieve demands for local government services such as traffic enforcement and road maintenance.” No doubt these developments ease cities and counties burdens to provide key infrastructure in many residential neighborhoods. Attorney General Herring’s opinion appears to disagree with Ms. Trigiani in a critical aspect. He observes that the Virginia Property Owners Association Act does not grant associations the authority to enforce violations of state or local traffic laws that occur on community property. Private persons may only enforce traffic laws if they have been appointed as a Special Conservator of the Peace (“SCOP”). To qualify as an SCOP, one must undergo substantial training. Otherwise, attempts to pull over or stop drivers could be deemed an “unlawful detention” by misrepresentation of authority to conduct police-like activities. Associations may ask the city or county in which their community is located to police the streets, or they may use private security qualified as SCOP’s. Virginia Lawyers Weekly‘s Peter Veith notes that extensive use of SCOPs may produce its own controversies, since the extent of an SCOP’s authority may be misunderstood by the security guard or the drivers on association roads. If someone produces a SCOP credential, what does that mean to an individual driver?
Attorney General Herring makes an important point about the statutory authority of HOA’s to enforce their rules and regulations over their common areas. “Rules and regulations may be enforced by any method normally available to the owner of private property in Virginia.” Real estate legal remedies are not tailored to enforcing traffic laws. Private property owners do not have the authority to conduct arrests or stops of vehicles for violation of traffic rules. That authority is reserved to law enforcement and SCOP’s. This limitation may also apply to other quasi-governmental activities undertaken by HOA’s.
In the Lake of the Woods Association in Orange County, the reaction to this Attorney General Opinion was swift. The Free Lance-Star reports that this large community went to the County Board of Supervisors which adopted an ordinance designating the LOWA roads as highways for law enforcement purposes. This will allow LOWA SCOPs to issue traffic citations and broaden the authority of local law enforcement in the community. I expect that similar decisions will be made in HOA’s around the state that have extensive systems of community roads.
If you or your Association seek to navigate safely through the regulatory landscape now coming into focus regarding the enforcement of traffic laws in community associations, contact qualified attorneys having experience in both real estate and traffic law matters to review your association’s legal instruments. Communities with extensive networks of roads should take precautions to get ahead of avoidable situations where HOA roads become hazardous or private security unlawfully detains drivers.
photo credit: Phil’s 1stPix via photopin cc (apparently one of the toy cars is a W. Va. police vehicle)
September 17, 2014
Real Estate Decisionmaking in the Face of the Unknown
Eight months ago, I posted about a January 10, 2014 Supreme Court of Virginia opinion interpreting ambiguous words of conveyance in a Southwest Virginia coal severance deed. In CNX Gas Company, LLC v. Rasnake, the Court decided that CNX had the right to continue to extract the Coal Bed Methane from a tract of land in Russell County. The Court interpreted language limiting words of conveyance in a 1918 deed so as not to include CBM. A land conveyance represents real estate decisionmaking in the face of the unknown future.
On September 12, 2014, the Supreme Court of Virginia issued another opinion relating to CNX’s extraction of CBM from Russell County coal fields. Swords Creek Land Partnership v. Dollie Belcher, et al., interprets words of conveyance and the difference between CBM and coal. This case caught my attention because it discusses the Rasnake case. It also so happens that in the past year, “Words of Conveyance” was the most common term entered by all of you into the search feature of this blog.
Like Rasnake, the Belcher case concerns an (1) 1887 conveyance of coal, (2) from a land in Russell County, (3) to Joseph Doran and W.A. Dick, (4) whose successors in interest leased the CBM extracting rights to CNX Gas. Despite the factual similarities, the outcome of the two cases is different, because each deed contains different granting language.
On February 7, 1887, Christopher & Amanda Richardson executed a severance deed conveying:
. . . all of the coal, in, upon or underlying a certain tract of land and the timber and privileges hereinafter specified as appurtenant to said tract of land [metes and bounds description follows] to enter on, over, upon, and through said tract of land for the purpose of digging, mining, or otherwise securing the coal and other things in and on said tract of land hereinbefore specified, and removing the same from off said land . . . .
Ms. Belcher and two others are the successors in interest to the Richardsons. Swords Creek entered into a lease in 1991, granting the CBM to CNX’s predecessor in interest. Swords Creek receives 12.5% royalties from CNX.
Belcher and the other surface owners brought suit claiming rights to the CBM. In September 2013, the Circuit Court of Russell County entered an order finding that Swords Creek only had rights to coal, not to the CBM. Nine years before, the Supreme Court of Virginia decided that the term “coal” as used in the 19th century unambiguously referred to the mineral coal. In Virginia deeds from the 1800’s, CMB is a separate mineral estate from coal.
In upholding the Circuit Court’s decision, the Court discussed the Rasnake case, in which the granting language was deemed ambiguous. In Belcher, the Court found the words of conveyance to unambiguously convey only coal and timber, not including CMB. The Court found Belcher, et al., entitled to all of the royalties from the CBM.
What do Rasnake and Belcher add to what we know about words of conveyance in Virginia? My previous post discussed some of the key technical rules for construction of deeds. Today’s post adds two considerations at a higher-level of analysis:
- Managing What You Don’t Know. When Messrs. Doran and Dick went around Russell County, acquiring coal severance deeds from landowners, they engaged in real estate decisionmaking in the face of an unknown future. They knew that coal and timber fueled the national economic engine. They didn’t know that one day CBM would later be big business. They can’t really be faulted for that. There is an aphorism attributed to Confucius: “What you know, you know, what you don’t know, you don’t know. This is true wisdom.” This Chinese sage’s advice could well apply to everyday strategic real estate decisionmaking. What Doran & Dick did know was that the wording of deeds has the power to spawn or avoid future legal conflict. Severing out certain natural resource extraction rights from the surface owners can maximize the use and value of a parcel. It also heightens the risk that the interests of the parties will fall out of alignment. Perhaps Confucius would advise us to be healthily aware of such risks. Sometimes efforts to simplify a transaction can reap dividends.
- Drafting or Litigating over Property Instruments. The words in a land instrument granting property are facts that Courts feel comfortable interpreting without deference to findings by a jury. Even the threshold question of whether the language in a deed is ambiguous is a legal one. The Supreme Court of Virginia took two of these similar cases and published opinions on them in a 8-month time frame. In title cases where no facts are in dispute, the appellate court will be less reluctant to disturb a decision of the trial court. The language of the instruments needs to make sense, to a general audience but especially a judge if necessary. The choice of language that agreed to in a deed requires careful consideration by a qualified real estate attorney. In a dispute between parties claiming adverse interests to the same real estate, a wise investor consults with an experienced title litigator.
case citation: Swords Creek Land P’ship v. Belcher, 762 S.E.2d 570 (Supr. Ct. Va. Sept. 12, 2014)
photo credit: jimmywayne via photopin cc
September 8, 2014
Court Confirms Border Between Maryland and Virginia is Changing
The boundary between Maryland and Virginia has been the subject of legal disputes for hundreds of years. On August 29, 2014, the Maryland Court of Special Appeals added another chapter to this “meandering” tale. The Court issued an opinion in a dispute over rights to certain waterfront property near Harper’s Ferry, West Virginia. River Riders, Inc., is a fishing, tubing and rafting tour company doing business in the “Potomac Wayside” area (pictured) along the southern bank of the upper Potomac River. Potomac Shores, Inc. claims the Potomac Wayside tract through their Washington County, Maryland, deed describing the south side of the Potomac as a boundary line. Potomac Shores asserts the parcel is in Maryland, because that geographic area was in the Potomac River before gradual accretion of the shoreline. From Potomac Shores’s perspective, that accretion is their windfall, not River Rider’s. Potomac Shores brought their title lawsuit in Washington County, Maryland. River Riders moved to dismiss on the grounds that the Potomac Wayside land is located in Loudoun County, Virginia, not Maryland.
I became interested in Maryland history during my undergraduate years in Annapolis. In 1996, I had a summer internship with the National Park Service in Sharpsburg, a small town in Washington County, Maryland. Harper’s Ferry remains one of my favorite day excursions, a beautiful spot where the Shenandoah River flows into the Potomac. This is where Maryland, West Virginia and Virginia meet. Along the Maryland side, the C&O Canal towpath offers a flat, scenic hiking and biking trail. Certainly an attractive area for entrepreneurs to base a river tourism business.
The historic Maryland-Virginia border disputes cover a spectrum of issues. Before this latest Maryland lawsuit, most disputes focused on use of oyster beds in Bay tidal areas. The passion for shellfish amid confusingly defined property rights repeatedly escalated into violence between Maryland and Virginia watermen. In 1874, Maryland and Virginia agreed to submit the boundary dispute to arbitration to resolve the matter peacefully.
The Potomac River is part of Maryland and the state boundary runs along the low-water mark on the Virginia side. What happens when this line moves? The Maryland Court of Special Appeals articulated the legal question as follows: “Does the boundary between Maryland and Virginia shift as the south bank of the Potomac alters because of time and the forces of nature? Or is the boundary fixed and immutable?” Potomac Shores argues that the boundary was set in the past and the gradual process of accretion, erosion and relection resulted in “new” land formed on the south bank of the Potomac.
Note that it has long been settled that the Potomac River is freely navigable by the citizens of the states, and that the waterfront property owners have rights to build docks and wharfs out into the river, as permitted under land use restrictions.
The conclusion reached by the Maryland Court of Special Appeals runs contrary to our modern preference towards “precision.” The Court rejected the “fixed boundary” approach requested by Potomac Shores. The Court upheld the Circuit Court decision, finding that, for the non-tidal portion of the Potomac River, the boundary shifts as time and the forces of nature gradually re-shape the low water-mark of the river’s “southerly shore.” This implies that the border between Maryland and Virginia is changing, by acts of nature, not government. This also means that those private landowners along the Maryland-Virginia border also have potentially shifting boundaries. Virginia’s Potomac waterfront landowners above Washington, D.C., may loose or gain waterfront property as the currents withdraw, add or relocate the shoreline.
The court’s decision avoids the problem of defining the water line boundaries as those that existed at a certain point of time in the past, such as a land grant or other legally significant document.
The new court opinion observes that the result of the case may be different if the accretion of the Potomac Wayside property was man-made. The opinion does not discuss waterfront landowners planting vegetation, constructing sea walls and laying rip-rap to protect their properties from natural change.
The Court analogizes state boundary lines and individual property boundary lines, quoting Justice Kennedy’s dissent in an older Virginia v. Maryland boundary case: “No court acts differently in deciding on Boundary between states, than on lines between separate tracts of land.” For example, the arbitrators in 1874 observed that, “Virginia’s prescriptive use of the river’s south bank had changed the boundary to the south bank’s low-water mark for the course of the entire river.” What is prescriptive use of real estate? Professor Minor defined it in his 1908 treatise as, “based upon the presumption of a grant, arising after long-continued, adverse, uninterrupted, notorious, exclusive enjoyment of a right in the land of another, under a claim of title.” The presumption becomes conclusive after twenty years. Was the arbitrator’s reference to the doctrine of prescriptive easements appropriate? Or is it a red herring?
The border between Maryland and Virginia is changing – is your boundary meandering as well? If you are currently experiencing a dispute with one of your neighbors concerning a property boundary defined by a river, stream, lake or other waterway, consult with a qualified attorney in order to explore your options to protect your rights.
Case Citation: Potomac Shores, Inc. v. River Riders, Inc., 219 Md. App. 29 (Ct. Spec. App. Md. Aug. 29, 2014)(Koehoe, J.)
Treatise Citation: Raleigh C. Minor, The Law of Real Property, Sect. 108 (1908).
Photo Credit: Camera John via photopin cc (apparently taken at Potomac Wayside, Purcellville, Virginia)
