Virginia Creditors Rights

Transcription

1 Virginia Creditors Rights Professor Nathan B. Oman, William & Mary Law School I. Introduction A. Creditors rights is about how a successful plaintiff turns a victory in a law suit into cash. B. Generally (but not always) the process involves: 1. Getting a judgment. 2. Using the judgment to obtain a lien on a particular piece of property. 3. Foreclosing on the lien to sell the property. C. The lien protects the rights of the creditor in the debtor s property against other creditors. To get this protection, generally the other creditors must be put on notice of the existence of the lien by some public act. II. Prejudgment Attachment (Detinue) A. What will the Commonwealth of Virginia do to help you collect a debt BEFORE you have a judgment? B. You must call I got dibbs on that property if I win my suit! There are costs of calling dibs that the law must balance. Generally, getting a valid lien against property always involves some public act. C. A pre-judgment lien is obtained by petitioning the court for a writ of attachment, also called detinue. 1. Issued ancillary to suit; or, 2. Issued to commence suit and establish jurisdiction. 3. Plaintiff must post bond. D. You must have proper grounds for a writ attachment. They are: 1. Defendant is a non-resident or a foreign corporation. Copyright 2015 by BARBRI, Inc.

2 2. CREDITORS RIGHTS LAW - VIRGINIA 2. Fraudulent conveyance has happened or is about to happen. 3. Defendant is going to move property out of state. 4. Defendant is concealing property. 5. Defendant is leaving state to be domiciled elsewhere. E. How does the lien attach to the property? 1. For personal property there must be a proper levy on personal property in defendant s possession. 2. For personal property in a third party s possession, the third party party must be joined as a co-defendant in the underlying lawsuit. 3. For real property: a. The officer s return, which is the document prepared by the sheriff in response to court s writ of attachment, describes the property. b. Attachment served on the party in possession. F. The creditor now has an unconsummated lien. 1. The lien is consummated when the plaintiff wins a judgment. 2. Consumption gives the creditor priority in the property against third parties back to time of attachment. (H1) D borrows $10,000 from C on January 10. T sues D for tort on February 2, alleging money damages of $20,000. T obtains an attachment lien on D s Blackacre on March 3. C obtains a judgment against D on April 4 and gets a judgment lien on Blackacre. On May 5, T gets a judgment against D. IF THE VALUE OF BLACKACRE IS LESS THAN THE TOTAL AMOUNT OWED TO C AND T, WHO GETS PAID FIRST? (H2) Same facts as (H1) except that the court rules for D in T s tort suit against D.

3 CREDITORS RIGHTS LAW - VIRGINIA Against a bona fide purchaser of the property, in order for the creditor s lien to be good the creditor must file a lis pendens prior to the purchase. A lis pendens is a document placed in the real estate recording office indicating that real property is subject to litigation. (H3) Same facts as (H1) except that B buys Blackacre on March 5. G. To comply with due process, the plaintiff who wants a writ of attachment must: 1. File with a judge 2. Allege specific facts supporting grounds for attachment. No blanket allegations. 3. The judge will then have an ex parte hearing. 4. Defendant has 10 days to challenge lien. She can get the judge to quash the lien if: a. The lien is invalid. Suppose a judge issued the writ because he thought the defendant was untrustworthy. This isn t a proper ground and the lien would be invalid; b. The lien is unsupported. There is a proper ground alleged but in fact the ground does not exist; or, c. The plaintiff is unlikely to prevail in the underlying lawsuit.

4 4. CREDITORS RIGHTS LAW - VIRGINIA III. Exemptions A. Exempt property is property that may not be attached by creditors, either before a judgment or after a judgment. B. Personal injury claims are exempt. Remember a debtor s legal claim against a third party is a form of personal property that might be attached by a creditor. 1. Your body cannot be used to satisfy your creditors; so legal claims that result from damage to your body also cannot be taken by your creditors. 2. Unless, the debt is for medical expenses related to the injury. C. A tenancy by the entirety is exempt. Tenancy by the entirety is not property of husband or of wife, or even property that is half owned by the husband and half owned by the wife. Rather it is property owned by husband-wife.

5 CREDITORS RIGHTS LAW - VIRGINIA The IRS can enforce a tax lien against tenancy by the entirety. 2. A creditor who is owed a debt by husband-wife may attach a tenancy by the entirety, e.g. if husband and wife co-sign a loan. (H4) C has a judgment against H. W and H own Blackacre in tenancy by the entirety. Can C look to the Commonwealth for help in collecting his judgment against H from Blackacre? D. Everyone gets what s called a homestead exemption. This is a misnomer. It s not about one s home. Rather it the right to declare any property up to a certain value as exempt. Think of it as a kind of all purpose get-out-of-jail-free card with a specific value. It consists of: 1. $5,000 plus $500 per dependent 2. Folks over 65 years old get $10, You claim it by filing a homestead deed with clerk of county where real property is located. Can file after a judgment lien attaches. Cool! (H5) C has a judgment against D. C garnishes D s bank account in bank B. Does the homestead provision help D? 4. The homestead exemption cannot be used against: a. Purchase money security interest b. Spousal or child support obligations c. Intentional tort claims d. When waived vis-à-vis the creditor in question e. Against the IRS E. Poor Debtor s Exemption. Again this is a misnomer. It s not just for poor people. Everyone gets it. It s a random list of exempt property. 1. Clothes up to $1000; furnishings up to $5,000

6 6. CREDITORS RIGHTS LAW - VIRGINIA 2. Tools of the trade up to $10, Car up to $2, Heirlooms up to $5,000. Not defined in the statute. Can designate any property as an heirloom. 5. Family bible, wedding and engagement rings, and pets. Save Fido! 6. Burial lot up to $5,000 F. Wages exempt but only for the lesser of: per cent of wages; or, 2. Excess of 40 times the federal hourly minimum wage. IV. Judgments A. A creditor gets a judgment when a court declares A is liable to C for the payment of some sum of money. B. This gives the creditor the right to use coercive process. Ultimately this is how private parties get men with guns to do their bidding and take their debtors wealth. C. Judgments are paid by obtaining a lien on the debtor s property and then converting that lien into money, usually by levying on the property. 1. We do not order debtors to pay debts on pain of contempt, i.e. jail. There are no debtors prisons. 2. Some exceptions in family law for child support obligations. Courts will order parents to pay child support on pain of contempt.

7 D. A judgment rendered by a Virginia court is valid for 20 years. CREDITORS RIGHTS LAW - VIRGINIA A judgment can be extended by filing a motion to extend in the court that issued the original judgment. This makes the judgment good for another 20 years. 2. A judgment is also a cause of action, so you can file a new action based on the old judgment. a. Example: a 15-year-old judgment cannot be registered in State X. Sue in Virginia on the judgment and get a fresh judgment. E. Federal court judgments enjoy all of the remedies of state court judgments under Virginia law. F. Sister state judgments must be domesticated before you can use them in the Commonwealth to attach a debtor s Virginia property. 1. Virginia has adopted the Uniform Enforcement of Foreign Judgments Act. 2. Register the foreign judgment in the court where enforcement is sought. 3. Give written notice to the debtor. V. Judgment Lien in Real Property A. A judgment lien arises when a judgment is docketed in the real estate recording system and becomes visible. This is the public act. 1. A judgment automatically docketed by the clerk of court in the county where judgment is rendered. 2. Judgment from another county is docketed by filing a copy of the judgment with the county clerk where enforcement is sought. B. Note: Virginia has a county by county recording system. The clerk of court should automatically docket a judgment in the county where the court that issued the judgment sits, but a judgment does not automatically create a judgment lien. C. A judgment lien is a floating lien on all non-exempt real property in the county. Attaches automatically to after acquired property. 1. Attaches only to the debtor s interest in property. It does not attach to a tenancy by the entirety.

8 8. CREDITORS RIGHTS LAW - VIRGINIA (H6) In 1990, C obtains a judgment against D and dockets that judgment in Pulaski County. In 2000, D buys Blackacre in Pulaski County. In 2005, S obtains a judgment against D and dockets that judgment in Pulaski County. In 2009, C sues D on her judgment and obtains a new judgment. WHOSE LIEN ON BLACKACRE HAS PRIORITY? D. A lien lasts as long as the judgment. It must be re-docketed after the 20-year extensions. It relates back to original docketing if extended before expiration of the judgment. 1. Exception for real property sold to a third party. The lien lasts only 10 years and cannot be extended. Must file a lis pendens within 10 years to enforce the lien. E. To enforce a lien the creditor must bring a creditor s suit in equity. The chancellor appoints a commissioner to determine ownership and interests in property and conducts a sale of the property. 1. There is no right of redemption for real property in Virginia. The right of redemption is the debtor s right to retain property at any time prior to final sale by paying the debt. In Virginia, however, once the creditor has a lien, the debtor may not prevent its enforcement by paying the debt. 2. No defense of laches against a judgment lien creditor. F. Priority fights between competing liens are governed by the rule of first in time, first in right based on the time of attachment. 1. Sale of property through a creditor s bill in equity cuts off all junior interests. 2. The judgment lien creditor must notify junior lien holders. 3. Purchaser takes property subject to senior liens. 4. Proceeds distributed, in order, to: costs, creditor, juniors, debtor. (H7) D owns Blackacre subject to a recorded mortgage held by M. In 2010, F obtains a $90,000 judgment against D and dockets her judgment in the county in which Blackacre is located. In 2011, S obtains a $20,000 judgment against D and similarly dockets its judgment. In 2010, F brings a creditors suit in equity that results in the sale of Blackacre to B for $100,000. WHO GETS WHAT?

9 CREDITORS RIGHTS LAW - VIRGINIA 9. (H8) D owns Blackacre. In 2010, F obtains a $90,000 judgment against D and dockets her judgment in the county in which Blackacre is located. In 2011, S obtains a $20,000 judgment against D and similarly dockets its judgment. In 2012, S brings a creditors suit in equity that results in the sale of Blackacre to B for $10,000. WHO GETS WHAT? VII. Executing on Tangible Personal Property A. Creditor satisfies a judgment with a writ of execution aka writ of fieri facias aka fi fa. B. The lien is created by a levy on the property by the sheriff. The levy is the public act. C. Writ is issued automatically by clerk 21 days after judgment unless instructed otherwise by creditor. 1. Issued to sheriff, instructing him to levy on tangible personal property in the county. 2. Has a return on the back of the writ. Sheriff describes the property found and what he did with it. The return is then given back to court. 3. The sheriff must get the return back in the time listed by the court, usually 90 days. D. Property must belong to the debtor at the time of the levy. For example, a creditor cannot levy on property leased by the debtor from a third party.

10 10. CREDITORS RIGHTS LAW - VIRGINIA E. Levy by the sheriff requires: 1. Seizure or observation with the power to exercise control or dominion 2. Copy of the writ served on the judgment debtor 3. That the property be described in the return F. The sheriff then conducts a public sale. Judgment Lien Creditor TANGIBLE PROPERTY Creation Scope Priority Duration Enforcement Writ of Execution by 21 days from Judgment; arises on sheriff's levy All personal property in jurisdiction First-in-Time, No notice required Time of levy to time of sale Public Auction VII. Execution on Intangible Personal Property A. Lien commences when a writ of execution is delivered to the sheriff. Applies to all intangible personal property in the Commonwealth. Good for one year. B. Cannot levy on the lien. There is nothing to seize. It s intangible! Generally, enforce the lien by either a writ of garnishment or a creditor s bill. C. What is a good example of intangible personal property? A Bank account, accounts receivable, wages, other debts owed to debtor. D. Virginia provides special protection for certain kinds of intangible personal property: 1. Purchasers of chose in action that take without knowledge of the writ. The chose in action in question is generally accounts recievable. 2. Judgment debtor s debtor who pays the judgment debtor with out written notice of the lien. a. BUT creditors cannot tie up a debtor s salary or wages with a mere written notice. This is an exception to the exception.

11 CREDITORS RIGHTS LAW - VIRGINIA 11. (H9) C has a $10,000 judgment against Dr. D and the court has issued a fi fa. P, a patient of Dr. D, owes Dr. D $2,000. P, not knowing of C s judgment, pays Dr. D. What are C s rights against P? E. Writ of Garnishment 1. Issued by the clerk when there is a live fi fa. The writ is issued to the person who owes the debtor money from whom the creditor is trying to get money. This person is called the garnishee. 2. The return requires garnishee to list property. 3. You must serve the writ on garnishee with copy to the debtor. 4. Garnishee may: a. Admit liability and surrender money or property to the court. b. Assert defenses. Creditor gets not greater rights than debtor. The garnishee gets a mini trial with a jury if she asks for it. c. Fail to appear. Default judgment. (This then gets treated like an ordinary judgment against garnishee.) 5. Once the writ is served, the garnishee may not pay either the debtor or another third party. If you are a garnishee and don t want to pay, go to court and assert defenses. (H10) C has a $100,000 judgment against D. C serves a garnishment summons on B Bank where D has a checking account with a $90,000 balance. D owes B $80,000. After receipt of the garnishment summons, a check for $70,000 drawn on D s account is presented to B Bank for payment. What should B Bank do? 6. Note: The writ applies to debts AND tangible property of the debtor in the possession of third parties, e.g. the contents of safe deposit boxes at a bank. 7. Limits on garnishment:

12 12. CREDITORS RIGHTS LAW - VIRGINIA a. Marital bank accounts. It s assumed that the non-debtor spouse contributed half of contents. This is rebuttable by creditor. The creditor can only garnish half the account unless she can prove that the debtor contributed more than that amount. b. Other joint accounts: Non-debtor account holder bears the burden. c. Cannot garnish negotiable instruments or negotiable stock certificates. They must be seized by the sheriff. d. Remember that there are limitations on the ability to garnish wages, which we just discussed. VIII. Fraudulent Conveyances A. The classic case of a fraudulent conveyance: I give Blackacre to Aunt Bessy to keep my creditors from getting it. B. There are two kinds of conveyances that can be attacked: 1. Conveyances made with the actual intention to frustrate, hinder or delay creditors. These are called a Fraudulent Conveyance or case of Actual Fraud. Note that in this context, fraud doesn t mean what it means in criminal law or tort law.

13 CREDITORS RIGHTS LAW - VIRGINIA Conveyances made for less than fair value while debtor is insolvent or which make the debtor insolvent. Called a Voluntary Conveyance or Constructive Fraud. C. Two kinds of creditors: 1. Present creditors. Their claims arose before the transfer being attacked happened. These guys can attack voluntary or fraudulent transfers. (H11) On February 18, C obtains a judgment against D. On March 3, D transfers equipment to T. What does C have to show to recover the equipment from T? 2. Future creditors. These are creditors whose claims arose after the transfer was made. They can only attack conveyances made with actual fraud. (H12) On January 15, D transfers Blackacre to T. On April 5, C extends credit to D. What does C have to do to recover Blackacre from T? 3. Fraudulent conveyance law is for the benefit of creditors. A debtor cannot use it to attack regretted transfers, even if a creditor might attack those transfers. (H13) While insolvent, D sells Blackacre to T for less than reasonably equivalent value. Can D later use voluntary transfer law to recover Blackacre from T? D. What happens to the transferees? 1. If the transferee took the property with knowledge of that it was made with the intent to hinder creditors? Tough. The transferee may be able to sue the debtor, for example if the property was purchased then the successful fraudulent conveyance action probably means that the debtor is in breach. 2. A bona fide purchaser who pays fair consideration without notice keeps the property. The creditor must go after the money that the bona fide purchaser paid to the debtor which is, presumably, in the hands of the debtor.

14 14. CREDITORS RIGHTS LAW - VIRGINIA 3. What if the bona fide purchaser pays less than fair consideration? The bona fide purchaser must give up the property but gets a lien on it for amount paid to the debtor (plus improvements). E. Preferences are fine under Virginia law. A preference is a transfer of property to a creditor to satisfy a debt that means that other creditors cannot satisfy their debts out of the property. You cannot attack these transfers using fraudulent conveyance law; you can only attack them under federal bankruptcy law. F. How do you show that a transfer was made with the intent to frustrate hinder or delay creditors? Certain fact patterns are deemed Badges of Fraud from which you can infer intent: 1. Renouncing a bequest under a will 2. Transfers between spouses 3. Transfers in consideration of support, e.g. Mom gives Blackacre to Junior in return for Junior s promise to car for Mom to the end of her days. G. There are two procedures for setting aside a conveyances depending on the kind of creditor: 1. A judgment creditor brings a special equity proceeding that inquires only into the transfer. 2. A general creditor, i.e. a creditor whose claim is not yet reduced to a judgment, brings a creditor s bill in equity. IX. Assignment for the Benefit of Creditors a. A writ of attachment and lis pendens against the property must be filed. Priority back to the time of filing of suit. b. The court will then determine validity of creditor s claim; and, c. Determine whether to set aside the conveyance. d. Must join the grantee to any action to set aside. A. A debtor may transfer all of its property to a third party, who then sells the property for the benefit of creditors. This is an action authorized by Virginia statute.

15 CREDITORS RIGHTS LAW - VIRGINIA 15. B. Purpose is to facilitate orderly liquidation of an estate, e.g. an operating company that may be worth more if it is liquidated in a particular order. C. The effect on creditors: 1. Creditors cannot proceed against the property in the hands of the assignee because it is not the debtor s property. 2. They must wait for the assignee to sell all of the property and get cash. D. Unless the debtor continues to use the property, then the transfer can be attacked as a fraudulent conveyance. X. Mechanic s and Materialman s Liens and Repairman s Liens A. Some vocabulary. Mechanic is not a mechanic. Also Mechanic s and Materialsman s Lien is one thing not two things: 1. A mechanic s lien is for those who build, improve, repair, or provide materials to buildings. 2. Repairman s Lien is for those that repair personal property. B. A mechanic s lien may be asserted by general contractor, subcontractor, or subsubcontractor. C. The lien arises by statute and is asserted by filing a Memorandum of Mechanics or Materialmans Lien in the clerk of court s office where the real estate is located within 90 days of the completion or end of work. It must have: 1. Name of the owner of the property 2. Amount of verified claim 3. Intent to claim a lien 4. Description of the property D. The Memorandum must be mailed to the owner of the property. The same is true for subcontractors, who must inform the owners of the property against which they are asserting a lien. (H14) General owes Sub $100,000. Owner owes General $60,000. What does Sub have to do get a mechanic s lien and what does it get?

16 16. CREDITORS RIGHTS LAW - VIRGINIA E. You can only file a mechanic s lien to secure payment for work performed on behalf of owners. You can t file a mechanic s lien for work performed at the request of a leasee. F. A subcontractor s lien is limited to the general contractor s liability. You cannot use a mechanics lien to expand the owner s liability. Subcontractors, however, can make the owner personally liable up to the amount of the general contractor s liability if the subcontractor: 1. Gives notice to owner before work is done; and, 2. Files an affidavit with exact amount due within 30 days. G. No Mechanics liens on public buildings. Includes public universities. Doesn t include churches. H. Owner has a set-off right. Any claim that the owner has against the mechanic may be subtracted from the claim that the mechanic has against the owner. (H15) Same facts as (H14) except that General defaulted and Owner had to pay X $50,000 to finish the building. I. The mechanic s lien is enforced by a creditor s suit in equity. Must bring suit in 6 months or within 60 days of end of work, whichever is later.

17 CREDITORS RIGHTS LAW - VIRGINIA 17. J. Repairman s Lien 1. A lien for just and reasonable charges for work done on a piece of personal property. An actual auto mechanic would be an example. Must be for repairs requested by owner or by a person in rightful possession. 2. The mechanic must be in possession of property. 3. There is no recording requirement. Possession is the public act. 4. The lien against lawful possessor for up to $800. A lawful possessor is the holder of a security interest, so the repairman s lien primes the holder of the security interest. 5. Self-help sale if the value of the property is less than $5,000. The auto mechanic with a repairman s lien can just sell the car. 6. For a repairman s lien for over $5,000 you enforce it by bringing a creditor s suit in equity. The lien holder must join all interest holders as defendants. 7. Owner may sue for possession but must post bond.

18 18. CREDITORS RIGHTS LAW - VIRGINIA K. Priority 1. First in time first in right for mechanics liens. Look to the date of obtaining the lien not to the date of the work. (H16) J has a docketed judgment against D in Washington County. D owns Blackacre in Washington County. D hires G to build a building on Blackacre. D does not pay G. G obtains a mechanic s lien. If D defaults on both its obligations to J and G, who should get what? 2. Two exceptions: a. Liens based on labor have priority over liens based on materials. b. Subcontractors have priority over general contractors. 3. Mechanics liens aren t given priority over prior liens in real-estate: a. But priority over earlier liens if the mechanic s lien secures improvements made prior to earlier lien. 4. For repairman s liens, i.e. liens in personal property: a. Priority is for repairs done in the ordinary course of business. This is NOT a first in time, first in right system.

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