1.3 Initial Procedures
Library | Enforcement of Liens and Judgments in Virginia (Virginia CLE) (2019 Ed.) |
1.3 INITIAL PROCEDURES
1.301 Documentation. A trustee who undertakes the foreclosure of real estate should secure certain documents from the noteholder.
A. The Deed of Trust. The deed of trust, as well as applicable law, will determine the manner and terms of sale.
B. The Note. The deed of trust note and a statement of account of the amounts owed under the note will establish the ownership of the secured indebtedness and the status of the debt. If the secured note is unavailable, section 55-59.1(B) [55.1-321(B)] of the Virginia Code requires that the noteholder send written notice to the borrower that: (i) includes the name and address of the trustee; (ii) advises the borrower that the note is unavailable and that the trustee will be requested to proceed with foreclosure 14 days later; and (iii) notifies the borrower that if he or she believes that someone else may assert a claim under the note he or she may petition the circuit court for adequate protection. 14
C. Title Evidence. The trustee must obtain any policy of title insurance or other documentation of title together with a copy of any survey of the property.
D. Correspondence. The trustee will need copies of any corresponddence between the noteholder and the debtor, including notice that the secured debt has been declared to be in default and its balance accelerated and declared due. The noteholder must provide the debtor with clear and unambiguous notice that the debt secured by the deed of trust has been declared in default and accelerated. 15
The trustee should be sure all notices required by the deed of trust have been complied with. In Bayview Loan Servicing, LLC v. Simmons, 16 a borrower was awarded substantial damages resulting from a defective foreclosure sale where the lender was found to have breached a notice requirement under the deed of trust. A 30-day pre-acceleration notice was not given, and as a result, the court found that the trustee had never acquired the right to accelerate the debt and conduct the foreclosure sale.
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Several recent Virginia cases have dealt with the sufficiency of notice. Cases have held that regulations incorporated in the deed of trust are enforceable. 17 Also immaterial differences in language will not nullify a substantially conforming notice of acceleration. 18
E. Mortgage Insurance. The trustee must secure copies of any mortgage insurance or guaranty certificate or agreement.
F. Appraisal. The trustee must have copies of any appraisal of the property.
G. Direction to Proceed. The trustee should receive written direction from the noteholder to proceed with foreclosure.
H. Engagement Letter. An engagement letter should be executed between the noteholder and the trustee outlining the undertakings of the trustee and the basis of the trustee's compensation. The trustee should have the noteholder agree to indemnify the trustee from expenses and liabilities incurred in the discharge of the trustee's duties.
I. Additional Requests. The entire package of documents provided by the noteholder should be carefully reviewed for any special notification or procedural requirements.
1.302 Commissioner of Accounts. The local commissioner of accounts should be contacted regarding fees charged for examining and approving accounts as well as for any local procedures or requirements including appropriate newspapers for publication of the advertisements of sale.
1.303 Due Diligence. While a trustee is only responsible for selling the property encumbered by the deed of trust, before instituting foreclosure proceedings, the noteholder should consider the following matters as they may affect the property being foreclosed:
A. Environmental Issues. An environmental audit of the subject property should be undertaken along with an inquiry about the environmental status of adjacent properties.
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B. Permits. The status of occupancy permits should be verified for compliance with applicable law.
C. Utilities. Utility companies should be contacted to have meters read and service transferred. Many counties and municipalities claim a lien and will not transfer service until all arrearages have been paid.
D. Insurance. Existing physical damage and liability coverage should be examined and additional insurance obtained by the noteholder if necessary to protect its interests.
E. Leases. The status of leases and security deposits should be verified.
F. Agreements. Any maintenance and management agreements affecting the property should be examined.
G. Physical Condition. The property should be physically examined by the noteholder or the noteholder's representative to identify conditions that may affect value and compliance with applicable law.
H. Appraisal. A current appraisal should be obtained to assist the noteholder in formulating a bid for the property.
I. Right of Redemption or Reinstatement. There is no statutory right of redemption in Virginia. However, the borrower does have the right to pay off the secured indebtedness before the sale. Some deeds of trust provide for reinstatement if the debtor cures all defaults and pays all expenses in the manner and time provided for in the deed of trust.
J. Fixtures. If a security agreement covers both personal property and real property, the secured party may proceed against the personal property without prejudicing its rights against the real property. 19 Alternatively, the secured party may proceed against both the personal property and the real property, using the secured party's real property rights. 20 If the secured party pursues the second alternative, the provisions of section 8.9A-601 et seq. of the Virginia Code do not apply to the liquidation of the personal property in conjunction with a foreclosure.
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1.304 Title.
A. In General. While the doctrine of caveat emptor applies in a foreclosure sale, 21 a trustee must be aware of all liens and encumbrances affecting the property. A trustee cannot sell a greater interest in the property than the deed of trust gives him or her authority to sell, and any sale by the trustee will be subject to encumbrances having precedence over the deed of trust. 22 A trustee must be aware of all encumbrances on the property in order to properly notify all interested parties, to exercise proper discretion as to whether a fair sale can be had, and to make a lawful distribution of the proceeds of the sale. Many title insurance companies will provide a title update from the date of the title policy insuring the priority of the lien foreclosed upon. The cost of the title report is a proper cost of executing the trust. The trustee should have a clear understanding with the title company regarding the cost of the title report and the liability of the title company for errors and omissions. The trustee should be the beneficiary of any title commitment.
B. Real Estate Taxes.
1. In General. Section 58.1-3340 of the Virginia Code provides in part that "[t]here shall be a lien on real estate for the payment of taxes and levies assessed thereon prior to any other lien or encumbrance."
2. Discharge of Taxes, Utility Charges, and Nuisance Abatement Liens. Section 55-59.4(A)(3) [55.1-324(A)(3)] of the Virginia Code places a duty upon a trustee to "discharge all taxes, levies, and assessments, with costs and interest if they have priority over the lien of the deed of trust, including the due pro rata thereof for the current year." The Manual for Commissioners of Accounts 23 states that the commissioner of accounts may reject an account presented by a trustee unless it appears that all real estate taxes have been paid.
Charges for sewer and water service and nuisance abatement liens are also required to be discharged under sections 15.2-901 through 15.2-906 of the Virginia Code. 24
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3. Scope of the Lien. The trustee must satisfy real estate taxes before distributing the proceeds of sale. As a practical matter, the trustee should be certain that all delinquent real estate taxes plus the pro rata portion of any current real estate taxes are paid as a part of the settlement to the treasurer of the city or county in which the real estate foreclosed upon is located. 25
C. The Federal Tax Lien. 26 Section 6323 of the Internal Revenue Code 27 provides that a federal tax lien that has been duly filed is not valid against a holder of a security interest who did not have actual notice or knowledge of the lien at the time the security interest came into existence. However, a foreclosure will eliminate a federal tax lien as a lien on the property only if the United States is given at least 25 days' prior notice of foreclosure or if the sale takes place within 30 days of the filing of the federal tax lien. 28 The form of notice to the United States requires the enclosure of a copy of Form 668 (Notice of Federal Tax Lien Under Internal Revenue Laws) docketed by the Internal Revenue Service against the property. 29
In United States v. Craft, 30 the Court held that a federal income tax lien against only one spouse attached to and was enforceable against tenants by the entirety property. Accordingly, a trustee should give the IRS the required notice of the foreclosure sale even if only one spouse is subject to the lien and the property is held by the husband and wife as tenants by the entirety.
If proper notice is given to the United States by the trustee and the United States refuses to release its lien, the United States is still given a period of 120 days from the date of the foreclosure sale to redeem the property by paying to the purchaser the purchase price plus expenses incurred in connection with the operation of the property (less income), together with interest thereon. 31 On the other hand, if the United States consents to the sale of the property free of the federal lien, a foreclosure will
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eliminate the tax lien, even if timely notice is not given. 32 Unless arrangements are made for the release of the federal tax lien, the...
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