The Fee Simple - The Newsletter of the Virginia State Bar Real ...

NOVEMBER 2011

In Memory of…

Minerva Wilson Andrews

February 1, 1925 – September 4, 2011

VOLUME XXXII, NUMBER 1

Vol. XXXII, No. 1 i November 2011

TABLE OF CONTENTS Chairperson’s Message ................................................................................................................................ 1 Paul H. Melnick Minerva Wilson Andrews, February 1, 1925 – September 4, 2011 .............................................................. 2 John David Epperly Foreclosure Defense: Tilting at Windmills ................................................................................................... 5 Christopher E. Brown and R. Michael Smith Examining Virginia’s Public Private Transportation Act Experience: History, Procedures & Issues Regarding Acquisition of Real Property Interests under the Act .................................................................................................... 26 James Webb Jones “It’s a Bird; It’s a Plane; It’s … (What Is It?)” ......................................................................................... 35 John A. Dezio The Peculiarities of Single Asset Real Estate Bankruptcy Cases ............................................................... 48 John H. Maddock III and Bryan A. Stark A Basic Guide to Closing Protection Letters for Real Estate Practitioners ............................................... 55 F. Lewis Biggs Closing Protection Letters .......................................................................................................................... 67 Lisa K. Tully An Overlooked Option for Financing Multi-Family Affordable Housing: Obtaining Tax-Exempt Housing Bonds from a Local Redevelopment and Housing Authority and 4% Low-Income Housing Tax Credits from VHDA .......................... 76 William L. Nusbaum and H. David Embree Committee Reports: From the Cluttered Desk (and Mind) of the Co-Editor.................................................................. 81 Stephen C. Gregory Commercial Real Estate ................................................................................................................ 82 Whitney Jackson Levin Residential ..................................................................................................................................... 83 Eric V. Zimmerman Technology ..................................................................................................................................... 84 Douglass W. Dewing Title Insurance ............................................................................................................................... 87 Brian O. Dolan Board of Governors .................................................................................................................................... 88 Area Representatives .................................................................................................................................. 91

Vol. XXXII, No. 1 ii November 2011

Committee Chairpersons and Other Section Contacts .................................................................................................................. 99 Subject Index: November 1987-May 2011 ........... http://www.vsb.org/docs/sections/realproperty/subjectindex.pdf

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for articles from the FEE SIMPLE and a whole lot more!

The FEE SIMPLE is published semiannually for distribution to members of the Real Property Section of the Virginia State Bar. Anyone interested in publishing an article in the FEE SIMPLE is invited to contact the Editors. Articles generally should be submitted by email as Word documents. Your submission will also be consent to the posting of the article on the Real Property Section web site, http://www.vsb.org/ sections/rp/index.htm. The FEE SIMPLE has the authority to edit materials submitted for publication. Authors are responsible for the accuracy of the content of their article(s) in the FEE SIMPLE and the views expressed in them are solely the views of the author(s).

The Board of Governors gratefully acknowledges the dedication and the hard work of the Assistant to the Editors, Felicia A. Burton ((757) 221-3813, (email) [email protected]), of the College of William and Mary School of Law.

Co-Editors

Lynda L. Butler, Esquire Chancellor Professor of Law The College of William and Mary School of Law Williamsburg, Virginia 23185 (757) 221-3843; (757) 221-3261 (fax) (email) [email protected]

Stephen C. Gregory, Esquire 1334 Morningside Drive Charleston, WV 25314 (703) 850-1945 (email) [email protected]

SPRING SUBMISSION DEADLINE: APRIL 6, 2012

The next meeting of the Board of Governors of the Real Property Section of the Virginia State Bar will be held on Friday, January 20, 2012 at 2:00 p.m.

in the Rockefeller Room at the Williamsburg Inn in Williamsburg, VA.

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Vol. XXXII, No. 1 1 November 2011

CHAIRPERSON’S MESSAGE

by Paul H. Melnick*

“Keep Minerva’s Torch Burning Bright”

I have a print hanging in my office of a man talking intently with a wise looking attorney who appears to be examining a legal document (a deed, e.g.). At the bottom of the picture there is written a famous saying of Abraham Lincoln: “An attorney’s time and advice is his stock in trade.” In my career, I have seen the truth of that saying. Regardless of the size of your office, the size of your staff, or the number of technical gadgets that you have, what you have to offer to clients is your time and advice.

Since I have been a member of the Real Property Section, I have seen that the saying not only applies to attorneys serving their clients, but also to attorneys serving other attorneys. Never before have I seen a group of attorneys who are as amicable and willing to share their expertise and knowledge for the betterment of our profession as those in our Section. This issue of the FEE SIMPLE is dedicated to Minerva Andrews, a lady who epitomized the idea of an attorney sharing time and advice with other attorneys. In reading the dedication to her in this issue, her mentoring spirit and genuine interest in assisting other attorneys is almost palpable. It is my hope that our Section can carry on that tradition so wonderfully demonstrated in Minerva’s life and career.

This year, our Section will continue to lay a course for this tradition. A new committee has been formed which will be called the Law School Liaison Committee. The committee’s purpose will be to coordinate and plan outreach to law students. Such outreach may include panel discussions at law schools about life as a real estate attorney, locating real estate attorneys to teach real estate courses not presently being offered at the law schools, and mentoring programs for students interested in real estate. Paul Bellegarde, our immediate Past-Chair, has graciously agreed to lead this committee.

Other ways, among many, that our Section’s attorneys will further this tradition in the coming year include discussion threads via email, writing articles for our November and May FEE SIMPLE publications, presenting topics at our three seminars (the Advanced Real Estate Seminar, the Annual Real Estate Seminar, and the Virginia State Bar Annual Meeting Seminar), and serving in leadership positions in the Section such as on the Board of Governors or as an Area Representative. We are also fully engaging our Area Representatives so that they can meaningfully connect with other attorneys in their localities to further the activities of our Section. In addition to assisting real estate attorneys in their practices, our Section also places great emphasis on educating the public concerning real estate law. For example, the Eminent Domain Committee is preparing a pamphlet for public dissemination containing useful information about eminent domain law.

The attorneys in our Section should be very proud still to be carrying the torch of congeniality and camaraderie in the practice of real estate law, originally lit by Minerva Andrews and other founders of our Section, like Courtland L. Traver, a former co-editor of this publication. We need to keep that torch bright, however, and we can do that by generously giving of our time and advice to each other in the coming year and beyond.

* Paul H. Melnick is a principal at the law firm of Melnick & Melnick, PLC in the City of Falls Church, Virginia and has been practicing law since 1990. Mr. Melnick is a graduate of James Madison University and received his law degree from the University of Dayton School of Law where he graduated summa cum laude. He concentrates his practice on real estate, estate planning, and estate and trust administration.

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MINERVA WILSON ANDREWS February 1, 1925 – September 4, 2011

A Tribute from John David Epperly*

When Minerva Wilson Andrews, former Chair of the Real Property Section, died on September 4, 2011, at the age of 86, she left innumerable colleagues and friends to mourn her passing, and perhaps to note the end of an era. Many of our younger colleagues did not have the privilege of working with or even knowing Minerva, but she was part of the heritage of the Real Property Section, and it was largely due to her efforts and of others such as Court Traver that the Section thrives today. So it is left to us all who knew her and lost a dear friend, a colleague, a mentor, and an inspiration, to celebrate her extraordinary life and career.

Minerva began her legal career as a trial attorney in the antitrust division of the U.S. Department of Justice in Washington D.C. She then became an associate attorney with Bauknight, Prichard, McCandlish & Williams (1963-72) which became Boothe, Prichard & Dudley in 1972. She concentrated her practice in real estate, and was elected partner in 1980. The firm then merged into and became McGuire, Woods, Battle and Boothe, and she served in the McLean office until her retirement in 1992.

Her life is marked by many professional and personal accomplishments: Chair of the Real Estate Section of the Virginia Bar Association and the Fairfax Bar Association; National President of the National Society of Arts and Letters (1994-96); Board of Directors of the McLean Citizens Association (1968-2000); Fairfax/Falls Church United Way (1988-2001); and Life Elder, Lewinsville Presbyterian Church (1980-2003). In 1997 she was named Citizen of the Year by the Washington Post and the Fairfax County Federation of Citizens Associations. In 2001 she was awarded the William B. Spong, Jr. Professionalism Award.

Born in Rock Hill, South Carolina, to York Lowry and Minnie deFoix Long Wilson, Minerva received her A.B. from the University of South Carolina in 1945 and, true to her dauntless spirit, took an unusual path for a young lady from the South, heading north to attend law school at the University of Virginia. She had inspiration for this—her Aunt Fannie Wilson was the first woman attorney licensed to practice in the state of South Carolina. Continuing that tradition, in 1948 Minerva became one of the first female graduates of the law school at the University.

The trip north from Columbia to Charlottesville in 1945 was the stuff of Minerva legend and the story was told by family and friends for decades. Minerva’s family, never really rich and certainly not very prosperous after the depression, nevertheless owned a 1920’s vintage Rolls Royce. So, it was in that family car that Minerva and best friend Liz Norton (my mother; full disclosure: Minerva and Mama were best friends) headed to Charlottesville. Liz describes the trip as follows: “There was Minerva, perched high up on the cushions so she could see over the steering wheel, using all these complicated pedals and dials – it looked like flying a plane to me! And we’d drive up in front of a hotel and out would run the staff – sure they would get a huge tip helping these rich people with their luggage. And there instead we would be – two little bitty gals with their cardboard suitcases and a picnic basket. Lordy! How we would

* John David Epperly, Jr. is a former Chair of the Real Property Section. He was an associate at

McGuire Woods Battle & Boothe from 1987 to 1991. He is currently Virginia State Counsel for the Fidelity National Title Group family of title insurance companies (Fidelity National Title Insurance Company, Chicago Title Insurance Company, and Commonwealth Land Title Insurance Company).

I would like to thank the following for their recollections of Minerva: Courtland L. and Jerri Traver; Michael T. Bradshaw; Susan M. Pesner; Randy Howard; Neil S. Kessler; Charles Lollar; Edward R. Waugaman; Priscilla Daniels Okay; Edmund Harllee; Carolyn Paschall; Kathleen Geddes; Elizabeth R. Epperly; Carolyn Minerva Epperly; Elizabeth R. Larsen; and Susan Andrews Wiles.

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laugh later on!” Minerva’s partner, Stanley Franklin, later acquired the Rolls and restored it, even using it to chauffer the bride and groom at Minerva’s daughter Susan’s wedding.

Minerva was truly a Southern woman, her manners impeccable, her sense of occasion perfect. But she was formidable in her way, and not to be underestimated. My sister Betsy says it best:

I think Minerva epitomized Southern ladyhood at its generous and generative best. Always gracious, she knew how to make others feel that they, too, could take the time to be more considerate. When Aunt Minerva was around, even Mama, a best friend, sat up a little straighter and spoke a little more carefully, and at the same time enjoyed herself in a rich, deep, comfortable way no one else quite made her feel. [Minerva’s thoughtfulness] is emblematic of the quality of attention Minerva focused on family and friends generally. She made so many of us feel fully seen, rightly understood, and then valued anyway. Minerva’s brand of Southern ladyhood meant that no matter how gently abstracted she might sometimes appear to be, she saw with extreme clarity as well as with compassion and humour.

Others recall these qualities of Minerva’s as well. When one of her partners was a first-year associate in the firm, he was in a serious car accident that banged up his face. “Minerva came into my office to view the injury and instead of the usual pleasantries and expressions of sorrow she matter-of-factly said, ‘My, you’re going to have some very interesting scars.’” A colleague recalls one of the weekly meetings where new cases and clients were discussed, and the name of new developer client came up. Minerva, aware of the client’s reputation for sharp dealings, firmly but politely asked, “Why are we representing someone like that?” Silence ensued. She expected the same good character and behavior from clients that she expected from everyone else. Minerva was right of course. Not long after that, the developer went broke and left creditors and friends alike with an empty feeling.

Minerva’s office was famous for the floor-to-ceiling curtains, with the Williamsburg pattern matching the upholstery on the chairs and sofa, and its homey atmosphere, where she brewed her twice-daily pot of tea and served it in China cups. There she calmly untangled the mysteries of titles, like that of the Reston property, Byzantine in its complexity and nuances, which she came to know like the faces of her children. Colleagues would come to Minerva’s office with questions, and there they got the answers, and perhaps a cup of tea as well. They always received a warm smile, and her full attention. A visit to her office warmed the body and the soul.

She handled all situations with equanimity and aplomb. She was never flustered. When her husband Bob joined the Republican Party and ran for the state legislature, Minerva, a life-long Democrat, accepted it with her usual grace. She dutifully hosted dinners for staff members, supporters, and constituents. Of course events at the Andrews house often started late, and on-time arrivers often found themselves helping in the kitchen, where Minerva bustled about, directing activities. Her tardiness extended beyond the home as well, and Minerva often ran late to the office and meetings. Her partner Court Traver, a former Navy pilot, occasionally flew a local traffic helicopter on the early-morning run. He would sometimes fly over the house in McLean that Minerva and Bob shared for 54 years, and blare over the loudspeaker: “Wake up, Minerva!”

Minerva was unfailingly polite, and placed a high value on manners. Yet she was never stuffy. Another family story illustrates the point. When time wouldn’t allow a home-cooked dinner, on rare occasions the family would resort to the local McDonald’s. But Minerva insisted on bringing the food home, and she would serve it on the good China. I think this story perfectly captures Minerva. We can’t always be cultured and refined, and if you aren’t, that’s just fine. But even if you’re just plain old humble McDonald’s, there’s no reason you can’t present yourself on the good China.

My Mama and Minerva were best friends in college, and for the rest of her life. She set up my parents on a blind date, and when that marriage ended after 20 years, another blind date for Mama,

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another marriage. They just celebrated their 40th anniversary. EHarmony would envy that record. So, naturally she was “Aunt” Minerva to me in childhood. She was family to my sisters and me. Later she helped me find my way as a lawyer. She encouraged and she inspired. I sat up a little straighter, I behaved a little better, I thought a little more clearly. Just as Minerva did. There are many others just like me. So it is fitting that we dedicate this issue of the FEE SIMPLE to Minerva. She is gone but she will continue to inspire us and encourage us to do things the way they should be done, and to treat others the way they should be treated. We will all miss her.

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FORECLOSURE DEFENSE: TILTING AT WINDMILLS

by Christopher E. Brown* and R. Michael Smith**

“Foreward!”

Perhaps defending Virginia homeowners against foreclosures is not as hopeless as Don Quixote tilting at windmills, but it is equally quixotic and, at least to the defended and the defenders, it is equally righteous.1 In part because Virginia is a non-judicial foreclosure state and in part because the Commonwealth’s caselaw and statutes have such a pro-creditor bias,2 there appears on the surface to be no defense; no civil action is required of the creditor to obtain a judicial imprimatur to foreclose. Nevertheless, Virginia precedent and foreclosure statutes, as well as commonly used deed of trust forms, suggest that borrowers have property and due process rights that should be defended in the foreclosure process.

In this article, we hope to present to real estate lawyers—those primarily doing residential

settlements and transactional work, and not litigation—some avenues to pursue in representation of clients facing foreclosure. Primarily, we intend to emphasize that modern foreclosure practice favors creditor’s rights’ legal theories and not those of real property. The basic, and dividing, point was stated by title attorney Ron Wiley of Charlottesville (formerly with Southern Title and a former Chairman of this Section) when speaking on foreclosures at the 2011 Virginia continuing legal education seminar, Annual Real Estate Update: “As title attorneys know, foreclosure of the lien of the deed of trust is by the party secured by the deed of trust.” Creditor’s rights’ counsel have pushed the courts to adopt a more

* Christopher E. Brown is the principal of Brown, Brown & Brown, P.C. He has practiced

foreclosure defense since 2008. He obtained a B.A. from Duke University and a J.D. from Georgetown University Law Center. He is a member of the Virginia State Bar and the District of Columbia Bar and can be contacted at [email protected].

** R. Michael Smith is an associate at Brown, Brown & Brown, P.C., a firm emphasizing a foreclosure defense practice. He obtained a B.A. from the University of Virginia and a J.D. from the University of Virginia School of Law. He is a member of the Virginia State Bar, and its Real Property (formerly an Area Representative) and Construction Law Sections. Previously he has served as an underwriting counsel for Chicago Title Insurance Company, Stewart Title Guaranty Company, and the title insurance companies of LandAmerica Financial Group. He can be contacted at [email protected].

1 Just then they came in sight of thirty or forty windmills that rise from that plain. And no sooner did Don Quixote see them that he said to his squire, “Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless.” . . .

“Take care, sir,” cried Sancho. “Those over there are not giants but windmills. Those things that seem to be their arms are sails which, when they are whirled around by the wind, turn the millstone.”

MIGUEL DE CERVANTES, DON QUIXOTE, Pt. 1, Ch. VIII (1607) (Of the valourous Don Quixote’s success in the dreadful and never before imagined Adventure of the Windmills, with other events worthy of happy record).

2 The Co-Editor of this newsletter, Stephen C. Gregory, has commented in a 2009 article, Foreclosures—Part I, 29 THE FEE SIMPLE 40, 40 n. 3 (May 2009): “Except, of course, here in the Fourth Circuit, one of the most pro-business, anti-consumer jurisdictions in the federal system.”

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commercially friendly position that a foreclosure may be pursued by the mere physical holder of the negotiable promissory note, without producing evidence that it is the party secured by the deed of trust.

This article will discuss the confusion surrounding “foreclosure defense” in the Commonwealth

of Virginia. It will initially discuss foreclosure law in Virginia and whether homeowners have the right to challenge foreclosures in our non-judicial forum. This will lead to a discussion regarding the entity with the authority to foreclose, how that determination is made, and how the Uniform Commercial Code relates to a Virginia foreclosure. Finally, the article will address the place of Mortgage Electronic Registration Systems, Inc., in the foreclosure process, and close with a review of the post-foreclosure unlawful detainer process. We hope these issues inform you about the recent events and caselaw that have impacted foreclosure law in Virginia and assist you in serving your clients’ needs. With that said, On with the Tournament at a gallop! Foreward! I. THE MORAL/LEGAL MÊLÉE3

The object for the skilled Lenders has been to capture Homeowners in default. Lenders

essentially hold the borrowers’ homes ransom, accelerating the entire debt. When Homeowners are unable to satisfy the debt in full and attempt to challenge Lenders’ morals and rights in court, they are tainted by their “default” status. Challenges by homeowners have been often met with a statement along the lines of “If you do not pay your mortgage, you lose your house. That is how it works.” In truth, that is not what the contract says.

Following the September 2008 failure of Lehman Brothers and the taxpayer bailout to banking

and non-banking entities, it was the financial institutions along with the Treasury Department that repeatedly relied upon the “sanctity of the contract” mantra when opposing limits on compensation of executives of banks bailed out by taxpayers4 and 100% payouts by American Insurance Group to various firms on credit default swaps and other exotic instruments.5 It is not surprising, however, that the “sanctity of the contract” is ignored by the financial institutions when that mantra benefits the homeowner. Reread the very clear provision of the FNMA-FHLMC uniform Note at ¶11: “The Deed of Trust . . . protects the Note Holder from losses which might result if I do not keep the promises which I make in this Note.” This provision makes clear that a borrower did not agree to “give up” the house if he/she defaulted; rather, the borrower put up the home as collateral to cover any “losses” suffered by Lender. This affirms the fact that one must be the party secured by the Deed of Trust to enforce its terms, as only a bona fide purchaser of the note would have losses. Homeowners in default have been pilloried by their lenders and/or servicers.6 Most homeowners are not deadbeats. Many suffer common tragedies of divorce, illness, natural catastrophe, or

3 During the Middle Ages, tournaments often contained a mêlée consisting of knights fighting one another on foot or while mounted, either divided into two sides or fighting as a free-for-all. The object was to capture opposing knights so that they could be ransomed. This could be a very profitable business. See http://en.wikipedia.org/wiki/Melee. When a melee ensues, groups become locked together in combat with no regard to group tactics or fighting as an organized unit as each participant fights as an individual. In the mortgage foreclosure battle, this disorderly combat has worked to the disservice of homeowners, who have no opportunity for a unified voice.

4 “We are a country of law. There are contracts. The government cannot just abrogate contracts.” http://abcnews.go.com/blogs/politics/2009/03/summers-on-aig/.

5 “Payments to AIG’s counterparties are justified with an appeal to the sanctity of contract.” http://www.slate.com/id/2213942/.

6 Interview with Atty. Gen. Biden of Delaware (Oct. 9, 2011) (http://stopforeclosurefraud .com/2011/10/11/video-ag-beau-biden-totally-gets-it-one-of-the-greatest-fraud-in-the-courts-of-american-history/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ForeclosureFraudByDinsfla+%28FORECLOSURE+FRAUD+%7C+by+DinSFLA%29).

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unemployment. Many were encouraged, if not enticed in the early to mid-2000s to buy or refinance homes with inflated appraisals and the promise that, “because the real estate market will never decline” they could refinance in six months. Instead, the real estate bubble burst, home values collapsed, and one in every four American homeowners owes more on the mortgage than the home is worth.7 Since many of the mortgages written at the same time were subprime loans with unique features to garner easy approvals (e.g., initial payment terms that were interest only, below-market teaser rates, negative amortization, etc.), but without concern for ability-to-pay when installments adjusted one to five years out, a perfect storm occurred: Payments reset at stunningly higher amounts, property values declined thereby sharply eliminating refinancing options and triggering additional monthly mortgage costs (e.g., mortgage insurance based on declining loan to value ratios could not be eliminated), and wages were squeezed. Debtors who had never defaulted, or ever expected to default, began to struggle with their payments. Most homeowners, however, stayed current on their mortgages by dipping into retirement accounts, college funds, and other household savings to do so. Defaulting homeowners did this “as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure.”8 Thus, many homeowners “did the right thing” even though their economic self-interest would dictate another path.9 Lenders emphasized the negative impact of default by equating a bad credit score with immorality. Borrowers who defaulted were “bad people.” Effectively, many borrowers were “shamed” into staying current, which economically benefited the lenders. Modifications of loans were not offered even when doing so would benefit homeowners economically and would benefit the overall economy and society. As summarized by Professor Brent T. White:

These emotional constraints are actively cultivated by the government, the financial industry, and other social control agencies in order to induce individual homeowners to act in ways that are against their own self interest, but which are—wrongly this article contends—argued to be socially beneficial. Unlike lenders who seek to maximize profits irrespective of concerns of morality or social responsibility, individual homeowners are encouraged to behave in accordance with social and moral norms requiring that individuals keep promises and honor financial obligations. … Lenders, on the other hand, have generally resisted calls to modify underwater mortgages despite the fact that it would be both socially beneficial and morally responsible for them to do so. This norm asymmetry has lead to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.10

7 Lucia Graves, Learning To Walk: Fear, Shame And Your Underwater Mortgage, HUFFINGTON

POST, available at http://www.huffingtonpost.com/2011/02/03/learning-to-walk-underwater-mortgages _n_818315.html.

8 Brent T.White, Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis, Arizona Legal Studies, Discussion Paper No. 09–35, at 2 (Nov. 2009) (also available at 45 WAKE FOREST L. REV. 971 (2010)). Retrieved from http://papers.ssrn .com/sol3/papers.cfm?abstract_id=1494467.

9 We do not suggest that non-payment of the mortgage is legally excused conduct as a result of micro or macro events. We do join in Professor White’s conclusion that the economic, emotional, and moral burdens of the financial crisis have fallen disproportionately on the homeowners/taxpayers.

10 White, supra note 8, at 2.

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Indeed, lenders’ indifference to “doing the right thing” in post-default situations has led to the failure of various government initiatives sponsored by FNMA and FHLMC.11 Virginia’s non-judicial “foreclosure process” does nothing to correct that imbalance. Its “foreclosure law,” on the other hand, provides homeowners an opportunity to level the playing field. II. THE JUDICIAL/NON-JUDICIAL PAS D’ARMES12

In the Age of the Mortgage Foreclosure Crisis, we have the Lenders to our right, and the Homeowners occupying the left. Unlike Connecticut,13 Maryland,14 and other states where loan mediation hearings are required prior to foreclosure, Virginia does not host à plaisance where the homeowner and bank combatants can meet to exchange pleasantries and test their skills against one another. Defaulting homeowners and their advocates were not surprised when financial institutions raised a number of objections to actions challenging the validity of a foreclosure, but the nature thereof was surprising. The most frequent objection leveled like a lance at homeowners is that the Commonwealth is a non-judicial forum. As such, the foreclosing entities allege that the claims brought by homeowners are in violation of the General Assembly’s intent, whereby the actions challenging a foreclosure effectively “turn Virginia into a judicial foreclosure state.”15 Despite those arguments, lenders have not completely succeeded in efforts to unhorse homeowners with challenges to foreclosures.

A. An Historical Invocation16 While the current mortgage crisis may seem wholly new and unprecedented, the process for Homeowner’s response (or lack of a process) to an alleged mortgage default has long existed in Virginia. Indeed, strong arguments can be made that the process is antiquated and unfair, and that the law has not kept pace or is not in tune with the modern, highly sophisticated financial products that were sold to Virginia mortgage borrowers—financial products whose features were projected to cause a default.17 On the other hand, Virginia Foreclosure Law is uniquely set up to protect against abuses that are all too commonplace in the industry.18

Virginia is a deed of trust state. The use of the deed of trust allows the enforcement process to be non-judicial, as the trustee, in effect, becomes an arbiter of sorts regarding the differences between the parties to the contract. The trustee is an agent coupled with an interest, holding the legal title to real

11 Consider the lack of success of HAMP (http://www.huffingtonpost.com/2011/09/01/hamp-mortgage-modifications_n_945290.html), HAFA, FNMA-FHLMC greater than 80% LTV refinance program, and The Emergency Homeowners’ Loan Program (http://www.usatoday.com/money/ economy/housing/story/2011-10-06/foreclosure-aid-program/50680758/1).

12A form of tournament where combatants met to test their prowess against one another. 13 CONN. GEN. STAT. ch. 846 (on Mortgages), § 49–31e et. seq. 14 Ovetta Wiggins, Maryland bill provides foreclosure mediation for homeowners, WASHINGTON

POST, Apr. 15, 2010, at http://www.washingtonpost.com/wp-dyn/content/article/2010/04/14/AR2010 041404602.html.

15 See Peter Veith, Fighting Foreclosures, 24 VIRGINIA LAWYERS WEEKLY, No. 37 (Feb. 15, 2010).

16 The ceremony used to start a tournament. 17 See Joe Nocera, Sheila Bair’s Bank Shot, NY TIMES, July 9, 2011 (“The lenders didn’t care

because they sold the loans to Wall Street, which bundled them into mortgage-backed bonds and resold them to investors.”), available at http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit-interview.html?page wanted=all.

18 Fraudulent Mortgage Documents fill County Files, ASSOCIATED PRESS, Sept. 11, 2011, http://www.pittsburghlive.com/x/pittsburghtrib/business/s_756088.html#ixzz1Xgy45TOY.

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property and bearing the power of sale. Although in this modern day the concept is confused (and may be irrelevant), Virginia remains a title theory state.19 Despite the move from a mortgage or indenture to the deed of trust which took hold in the nineteenth century in Virginia, the underlying concept still remains that the deed of trust lien exists to protect the party advancing funds to a debtor-owner of property (or a guarantor-owner of property) by collateralizing the promise to repay with the property.

Historically, the mortgage (and, later, the deed of trust) developed in law (and, later, in equity) to secure the party deferring receipt of purchase money with an interest in the land. The earliest gages were often leases for years, with the purchaser/tenant in possession being under threat of defeasance or reversion of the land. Possession often remained in the seller, however, as that was the only certain way to protect the seller’s interest in the land until full payment. It was late in the sixteenth century (i.e., only a few years before the settlement at Jamestown) that the equity of redemption and possession by the mortgagor were established principles of real estate finance. Also, “(c)onveyancers themselves made the valuable addition (which the legislature subsequently developed) of the power of sale which has made the modern mortgage so effective an instrument, originally prompted, it seems, by a desire to avoid the slow and costly foreclosure proceedings in Chancery.”20 By the end of the seventeenth century, the concepts of clogging the equity of redemption and successive mortgagees were being litigated.21

The common law of England was continued in Virginia, except as superseded by statute or caselaw.22 The General Assembly has continued to enact legislation which supports the premise that the mortgage or deed of trust exists to protect the party secured thereby. VA. CODE § 55–59 states the obvious: Any “beneficiary” of the deed of trust may request the trustee to invoke the power of sale (sub-section 7), and “the party secured by the deed of trust” may appoint a substitute trustee (sub-section 9). Although “beneficiary” is not otherwise defined, it has to mean the party secured by the deed of trust, because the deed of trust only has three parties: Trustee, Mortgagor/Grantor, and Beneficiary of the trust. Until standard deed of trust forms from FNMA and FHLMC began naming Mortgage Electronic Registration Systems, Inc. as “Beneficiary,” the lender or purchase money seller was always beneficiary of the trust, and thereby the party secured by the deed of trust. Much of the current debate about § 55–59(9) is over the meaning of “or the holders of greater than fifty percent of the monetary obligations secured thereby.” The courts have come to read this to mean the sole holder of the single mortgage note endorsed in blank, without any showing that the holder is the party secured by the deed of trust. (There is more discussion on this issue below.) Legislative history, when viewed alongside caselaw, suggests this is an incorrect interpretation. VA. CODE § 55–59, together with VA. CODE §§ 55–59.1, 55–59.2, 55–59.3, and 55–59.4, were part of a major restatement of Virginia’s foreclosure statutes in 1979. Even though this was after adoption of the UCC in Virginia, there is nothing that suggests that the General Assembly intended to incorporate UCC terminology such as Article 3 “holder” into the foreclosure law. Part of § 55–59 finds root in the 1919 VIRGINIA CODE § 4167, including sub-section nine (9). VA. CODE § 55–60, which has the same root section in the 1919 Code, was not amended in 1979. Note the language in its sub-section 9:

19 Smith v. Credico Industrial Loan Company, 234 Va. 514, 362 S.E.2d 735, 738 (1987) (“As to

the purchaser at the trustee’s foreclosure sale, there is no question. He receives all the title, for better or worse, that the mortgagor enjoyed, and consequently he can recover in ejectment against the mortgagor and those claiming through him by descent or purchase. … (I)t seems clear that legal title remains in the mortgagor under the deed of trust, and passes from him only when the trustee sells upon default.” Whiting, J., dissenting.)

20 THEODORE F. T. PLUCKNETT, A CONCISE HISTORY OF THE COMMON LAW 608 (Little, Brown & Co. 5th ed. 1956). See generally id. at 603–609 (on mortgages).

21 Id. at 690. 22 VA. CODE § 1–200 (which had its original adoption during the Revolutionary War).

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The words “substitution of trustee permitted,” or words of like purport, shall be construed as if the deed set forth: “Grantor grants unto the beneficiary or beneficiaries or to a majority in amount of the holders of the obligations secured hereunder and to their assigns the right and power, under the provisions of § 55–59, to appoint a substitute trustee or trustees.”

This section makes clear that the beneficiary/party secured by the deed of trust, or, if there be more than one beneficiary/party secured by the deed of trust, then all of them acting together or a majority of them, may appoint the substitute trustee. Concerning VA. CODE § 55–59(9), the General Assembly omitted the “parties secured by the deed of trust” language most likely because it believed not only that such an assumption was obvious, but statutory and caselaw history supported the assumption. The 1919 VA. CODE provision (§ 4167) was written in an era when one deed of trust often secured more than one note, such as a succession of notes payable at yearly installments. As different notes could have different lenders and/or be assigned to different parties, more than one party would be secured by the deed of trust. Since each secured party was pari passu as to the others, a majority of the interests represented by the secured parties as holders of proof of their interests could act.23

B. Foreclosure Tilts24

Foreclosure challenges have continued because “Virginia provides comprehensive avenues of attack for debtors seeking to set aside foreclosure sales: the deeds of trust themselves; an entire article of the VIRGINIA CODE, VA. CODE ANN. Secs. 55–58 to 55–66.6; and the common law.”25 Every state, whether judicial or non-judicial, has enacted “foreclosure law” to prevent collisions during foreclosure tournaments. For instance, in Michigan the owner of the debt or the servicer may foreclose.26 In Massachusetts there must be an assignment in recordable form or an entitlement to said assignment when the foreclosure process begins.27 In Maryland, among other requirements, an affidavit of debt ownership must be filed.28 In North Carolina only the “holder” of the note may foreclose.29

Foreclosure is primarily the province of real property law, and, as necessary, the UCC30 may

assist in legal determinations central to the administration and enforcement of the foreclosure

23 See Williams v. Gifford, 139 Va. 779, 124 S.E. 403 (1924) (which involves at least three notes

secured by one deed of trust). The case is often cited to support the principle that the deed of trust follows the assignment of the note (a principle with which we do not disagree). It is not cited for its further principle that a non-bona fide assignee has no power in equity to enforce the note or, consequently, the deed of trust.

24 A tilt was a barrier introduced in the 14th century to prevent jousting collisions; lists were barriers defining the field of combat.

25 Estate Const. Co. v. Miller & Smith Holding Co., Inc., 14 F.3d 213, n. 10 (4th Cir. 1994). 26 See MICH. COMP. LAWS § 600.3204(1)(d); Residential Funding Co. LLC v. Saurman, No.

290248 and Bank of New York Trust Company v. Messner, No. 291443 (consolidated, State of Michigan Court of Appeals, Apr. 21, 2011) (no authority for MERS to foreclose as it is neither owner nor servicer).

27 US Bank, N.A., v. Ibanez, 2011 WL 38071 (Mass. Sup. Ct., March 2011) (foreclosing entity had no evidence it was entitled to an assignment when foreclosure proceedings began). Massachusetts, like Virginia, is a deed of trust state; “an entitlement to said assignment when the foreclosure process begins” is another way of saying the party secured by the Deed of Trust.

28 MD. Rules Tit. 14, § 207. 29 N.C. GEN. STAT. § 45–21.16(c)(2). 30 VA. CODE § 8.3A (hereinafter “Article 3”); VA. CODE § 8.9A (hereinafter “Article 9”).

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process.31 Virginia’s “foreclosure law” is determined by the terms of the Deed of Trust, a contract.32 “The guiding light . . . is the intention of the parties as expressed by them in the words they have used, and courts are bound to say that the parties intended what the written instrument plainly declares.”33 Where those terms are clear and unambiguous, they are to be construed according to their plain meaning, and without adding any terms that were not included by the parties.34

III. DEFENSES TO FORECLOSURE—TREE OF SHIELDS35

The parties to the contract defined the barriers of their battlefield within the deed of trust.36 Specifically, a Lender is required to present infinite colored shields from which the challenging homeowner is allowed to choose for combat. When notice of the right to cure is sent to a homeowner, “the notice [from the Lender] shall inform the Borrower of the right to bring a court action to assert the non-existence of a default or any other defense to invoking the power of sale.”37 In most cases recently seen in Northern Virginia, Homeowners have begun to assert their right to bring a court action based not on the non-existence of default but on other defenses to invoking the power of sale. Just as a foreclosure pursuant to a deed of trust is an equitable remedy, challenging a foreclosure begins with an equitable claim—for example, to remove a cloud on title pursuant to VA. CODE § 55–153.38 The homeowner is seeking to remove unauthorized documents from the land records as violating the terms of the deed of trust. If successful, legal title reverts back to the foreclosed homeowner.39

31 Id. § 8.9A–201(c). Other applicable law controls. In case of conflict between this title and a rule

of law, statute, or regulation described in subsection (b), the rule of law, statute, or regulation controls. 32 Id. § 55–59 (the Deed of Trust is a contract and its terms control unless otherwise provided for

therein); Accord id. § 8.9A–201(a) (General effectiveness. Except as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.).

33 Wilson v. Holyfield, 227 Va. 184, 187, 313 S.E.2d 396, 398 (1984). 34 Id. 35 The place where several colored shields were hung for a pas d’armes. Challenging knights

could choose the combat they required by hitting the shield. 36 All references to terms within the “Deed of Trust” (“DoT”) and “Note” / “Promissory Note”

refer to the Fannie/Freddie uniform note and deed of trust executed for the vast majority of mortgage loans for the past ten (10) years or more.

37 DoT at ¶ 22 (emphasis added). 38 As opposed to a full quiet title claim to remove all encumbrances from the property. We do not

mean to suggest this is the only way to challenge an unlawful foreclosure. See supra note 25. 39 Caveat emptor applies to a purchaser at a foreclosure sale. See Feldman v. Rucker, 201 Va. 11,

109 S.E.2d 379 (1959); Federal Land Bank v. Parks, 170 Va. 240, 196 S.E. 627 (1938); Smith v. Woodward, 122 Va. 356, 94 S.E. 916 (1918).

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A. The “Party Secured by the Deed of Trust” À la toille40 The parties explicitly state41 that the “Lender”42 may invoke the power of sale.” (See DoT at ¶ 16(c) “may” is defined as “giv[ing] sole discretion without any obligation to take any action.”) The limitation being clear and definite,43 it is an age-old axiom that it is to be applied according to its ordinary meaning.44 Furthermore,

[i]t is [] true that where the deed of trust authorizes the trustee to sell the property upon the request of the beneficiary or creditor therein secured, such request is a condition precedent of the trustee’s right to sell, and in the absence of such request the sale may be set aside in a court of equity.

Wills v. Chesapeake Western Ry., 178 Va. 314 (1941). Thus, a defense is clearly present when an entity without sole discretion invokes the power of sale.

But, who is the Lender or how does an entity acquire Lender status? In the deed of trust Lender is the “secured party.” The contract indicates that, other than the original lender, the Lender is the entity that has purchased the Note45 as the “Lender” would be the same entity entitled to recovery from “Mortgage Insurance.”46 A purchase of the Note is, therefore, a prerequisite to obtaining Lender status, and thus creates a barrier between the Property and the party attempting to foreclose.47 Upon sale and transfer48 of rights49 in the note, the purchaser becomes entitled to payment and is further “entitled to enforce” the deed of trust50 if necessary to protect itself from losses.51

40 A jousting event À la toille was held on either side of a barrier. Prior to the 15th century,

jousting events were conducted in the open rather than on either side of a barrier, which made the event much more dangerous.

41 DoT at ¶ 22. 42 Citations to language in the Deed of Trust referencing “Lender” have led to significant

confusion. See Horvath v. Bank of N.Y., No. 10–1528, at 12 (4th Cir. 2011) (compare to discussion on p. 13). Herein it should be well understood that “Lender” means the originator of the loan, or purchaser of the secured debt obligation.

43 Eliminating any doubt regarding the parties’ intent is the interpretative canon that “expressing one item of a commonly associated group or series excludes another left unmentioned.” United States v. Vonn, 535 U.S. 55, 65 (2002). See DoT at ¶ 7(“Lender or agent”); DoT at ¶ 22, second paragraph (“Lender or trustee”); DoT at ¶ 22, last sentence of 2nd paragraph (“Lender or designee”); Compare with ¶ 22 (“Lender may invoke the power of sale”) and ¶ 24 (“Lender may . . . appoint substitute trustee.”).

44 Smith v. Smith, 3 Va. App. 510, 513, 351 S.E.2d 593, 595 (1986). 45 The note may be sold multiple times. DoT at ¶ 22; Note at ¶ 1 46 DoT at ¶ (N) (“Mortgage Insurance means insurance protecting Lender against the nonpayment

of, or default on, the Loan”); DoT at ¶ 10 (“Mortgage insurance reimburses Lender (or any entity that purchases the Note) for certain losses it may incur if Borrower does not repay the Loan as agreed.”) (emphasis added).

47 Accord VA. CODE § 8.9A–102(a)(72)(D) (“Secured Party” means a person to which . . . promissory notes have been sold).

48 Noteholder is one who takes by transfer and is entitled to payment. Note at ¶ 1. 49 Accord VA. CODE § 8.9A–203(b) (would govern transfer of a note sold by its payee, and would

further determine whether the purchaser obtains a property right in the secured obligation pursuant to a mandatory prerequisite—notably that value was given—that creates a security interest).

50 See Williams v. Gifford, 139 Va. 779 (1924) (“whenever the debt is assigned, the Deed of Trust is assigned or transferred with it.” Williams further said “. . . the rule of law invoked [that the Deed of

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“The answer to the position that the debts were purchased is two-fold.”52 First, the allegation that

the debt was purchased must be stated in the original or amended bills. Second, there must be proof in the record to support that allegation.53 The burden is on that entity to produce an “instrument of assignment,” i.e., evidence of an assignment of the right to enforce the Deed of Trust.

When supporting proof is in the form of an original note with a specific endorsement, or there’s a

recorded instrument of assignment evidencing a clear chain of title,54 the determination of whether the debt was purchased is an easy task.55 Since the Stimpson decision was rendered in 1886, the production of proof has become more complicated by transactions in the secondary market. Public information regarding the parties and specific securities involved in those transactions is often limited or non-existent.

B. The Holder Coup de Grace56 In most instances when the Homeowner has already been mortally wounded by the financial

tactics of his opponent, the final death-blow has often been a blank endorsed note, coupled with the argument that the recording of assignments is not required. In fact, while the law in Virginia is that mortgage assignments need not be recorded, the statute suggests an “instrument of assignment,” in fact, exists.57 More importantly, since Virginia is a race-notice jurisdiction, failure to record an assignment or an interest in real property is done at one’s own peril.58 If we were to assume the entity purporting to be assignee with authority to act under the deed of trust is, indeed, acting in good faith, that entity must still be burdened with the risk of peril which follows from its decision to not record the purported assignment

Trust follows the Note] relates only to bona fide purchasers of the notes”); Accord VA. CODE § 8.9A–203(g) (attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien).

51 Note at ¶ 11. 52 Stimpson v. Bishop, 82 Va. 190, 195, 1886 WL 2987 (1886). 53 Id. See also Nevada’s Supreme Court sides with homeowners over required documentation to

foreclose, at http://www.dsnews.com/articles/nevadas-supreme-court-sides-with-homeowners-in-foreclo sure-cases-2011-07-13; Massachusetts Supreme Court rules unauthorized foreclosures void ab initio, at http://www.boston.com/business/articles/2011/10/19/sjc_puts_foreclosure_sales_in_doubt/?page=1.

54 The assignment must be of the Note and Deed of Trust, as assigning the latter without the former is a nullity. Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 21 L. Ed. 313 (1872); Williams v. Gifford, 139 Va. 779 (1924).

55 Clerk certified court records (e.g., land records) are entitled to a rebuttable presumption of truth. VA. CODE § 8.01–389(C).

56 The death-blow a knight gave to his mortally wounded opponent. 57 See VA. CODE § 55–66.01, providing Whenever a debt or other obligation secured by a deed of trust, mortgage or vendor’s lien on real estate has been assigned, the assignor or the assignee, at its option, may cause the instrument of assignment to be recorded in the clerk’s office of the circuit court where such deed of trust, mortgage or vendor’s lien is recorded provided such instrument is otherwise in recordable form, or may cause a certificate of transfer signed by the assignor to be recorded in such clerk’s office, and such instrument of assignment or certificate of transfer, upon recordation, shall operate as a notice of such assignment.

(emphasis added). 58 Duty v. Duty, 661 S.E.2d 477, 479 (Va. 2008).

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proving its right and entitlement to enforce the Deed of Trust. The burden is on that entity to produce an “instrument of assignment” executed prior to its commencement of foreclosure proceedings.59

The VIRGINIA CODE makes clear that an endorsement on the Note is evidence of an assignment.60

That position is consistent with the Commonwealth of Virginia’s longstanding preference that evidence of transfers of interest in land be in writing. Opinions rendered by the Supreme Court of Virginia have caused Homeowners to assert that the Code could not logically include instances where the only muniment of title is a “blank endorsement,” as that would create a great potential for fraud.61 While an assignment of rights to enforce a Deed of Trust is not a transfer of interest in the land, actions of the purported assignee result in a transfer of said interest—foreclosure of the property. When the only “muniment of title” (evidence of the right to take said actions) is a blank endorsed note, parol evidence is required to establish the foreclosing entity’s right to invoke the power of sale.

Courts have understandably approached this argument with great skepticism, essentially asking “Fraud against whom? They are holding the original Note.” Homeowners assert the argument is sound on the basis that fraud is committed against the land records, actual owners of the debt (often securitized mortgage pools), and homeowners who are denied an opportunity to deal with the true owner of the debt as its identity is often undisclosed.62 Furthermore, the foreclosure and challenge thereto, both being actions in equity,63 the question should be whether or not the entity is, in fact, the owner of the debt; not

59 As foreclosure is an equitable remedy, Virginia foreclosure law is similar to Massachusetts,

also a Deed of Trust state. In the absence of an assignment, one must have been entitled to said assignment when initiating the foreclosure process (i.e., is the foreclosing entity the bona fide purchaser) See supra note 27.

60 VA. CODE § 55–66.01. See also Kelly Health Care, Inc. v. Prudential Insurance Co. of America, Inc., 266 Va. 376, 309 S.E.2d 305 (1983), citing RESTATEMENT (SECOND) OF CONTRACTS § 317(1) (1981) (“[a]n Assignment is a transfer, but a transfer is not necessarily an assignment. If the transfer is less than absolute, it is not an assignment; the obligee must have intended, at the time of the transfer, to dispossess himself of an identified interest, or some part thereof, and to vest indefeasible title in the transferee”). Accord VA. CODE § 8.9A–203(b)(1) (a security interest is enforceable against the debtor ... only if value has been given); id. § 8.9A–102(a)(28) (“Debtor” means: (A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor) (i.e., the homeowner).

61 For example, in Thomas v. Ribble, 24 S.E. 241, 242 (Va. 1896), the Court stated: where the instrument rises to the dignity and importance of a muniment of title every principle of public policy demands that the proof of its former existence its loss and its contents should be strong and conclusive before the courts will establish a title by parol testimony to property which the law requires shall pass only by deed or will. That courts of equity have jurisdiction to set up lost deeds or wills and to establish titles under them can certainly not be denied but it is a dangerous jurisdiction and so pregnant with opportunities of fraud and injustice that it will not be lightly exercised, nor except upon the clearest and most stringent proof . . . It is the policy of the law, adopted with a view to prevent frauds, that title to lands shall pass only by written instruments; and the difference is more in name than in fact between giving effect to a parol conveyance of lands and establishing a title to lands under an alleged lost deed, upon parol testimony of its contents and loss, unless the proof be clear and conclusive. Certainly, the opportunities for fraud are just as great in the one case as in the other.

See also Barley v. Byrd, 95 Va. 316, 28 S. E. 329 (1897). 62 Servicers act in their own interest, not those of the homeowner or the owner of the loan. See

http://www.huffingtonpost.com/2011/03/07/foreclosure-settlement-protect-homeowners_n_832699.html. 63 Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S. Ct. 2150, 115 L.Ed.2d 66 (1991) (“Even

after the debtor’s personal obligations have been extinguished, the mortgage holder still retains a “right to

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whether it has a piece of paper in its possession.64 For example, a servicer who executes and records documents stating it is owner and holder of the Note, but, in fact, is an entity merely in possession for servicing purposes65 does not make itself the owner (party secured by the deed of trust) by mere possession of the Note. Just because such incorrect statements may be made in a recorded document, giving rise to a presumption that the statements are true, does not, in fact, make them true. Virginia law does not condone the foreclosing entity’s desired assumptions66 to be irrefutable fact.

Financial institutions heavily rely upon an opinion recently rendered by the Fourth Circuit. In Horvath v. Bank of N.Y., No. 10–1528, 2011 U.S. App. LEXIS 10152 (4th Cir., 2011), the court held that the Note is a negotiable instrument subject to UCC Article 3 and that possession of a blank endorsed Note entitles its holder to enforce the terms of the Deed of Trust. Opinions from the federal Fourth Circuit are not controlling on state courts and are merely advisory.67 Upon analysis and scrutiny, it can be justly argued that the Horvath opinion relies on legal conclusions contrary to Virginia law. Specifically, the court in Horvath held that separate laws do not apply to the Note and Deed of Trust, (Horvath, slip op. at 9-10) and that the holder of the blank endorsed Note is, as a matter of Virginia law, the party secured by the Deed of Trust (id. at 8).

In General Electric Credit Corp. v. Lunsford, 209 Va. 743, 747, 167 S.E.2d 414, 418 (1969), the Virginia Supreme Court held that “[c]ommercial law governs enforcement of notes, real property law and equitable principles govern enforcement of the Deed of Trust.” The fact the Note and Deed of Trust are governed by separate laws is clearly illustrated by actions following bankruptcy, as the Note is extinguished, but the equitable remedy of foreclosure survives,68 and the statute of limitations for

payment” in the form of its right to the proceeds from the sale of the debtor’s property. Alternatively, the creditor’s surviving right to foreclose on the mortgage can be viewed as a “right to an equitable remedy” for the debtor’s default on the underlying obligation.”) (emphasis added).

64 In Stimpson v. Bishop, the Supreme Court of Virginia recognized that the purchase of a secured debt carries with it the security, but “[a] mortgage secures a debt, and not the note, or bond, or other evidence.” 82 Va. 190, 195 (1886). This is because “[a] court of equity [] looks to substance, not to form, it looks to the debt which is to be paid, not to the hand which may happen to hold it.” Id. at 196. (internal citations omitted) (emphasis in original). See also Williams v. Gifford, 139 Va. 779 (1924) (“. . . the rule of law invoked [that the Deed of Trust follows the Note] relates only to bona fide purchasers of the notes”); DoT at ¶ (G) ([T]he Deed of Trust defines “Loan” as “mean[ing] the debt evidenced by the Note . . .”) (emphasis added).

65 Pursuant to 15 USC 1641(f)(2): A servicer of a consumer obligation arising from a consumer credit transaction shall not be treated as the owner of the obligation for purposes of this section on the basis of an assignment of the obligation from the creditor or another assignee to the servicer solely for the administrative convenience of the servicer in servicing the obligation.

See also supra note 60. 66 “‘Artificial presumptions, made by the law itself, are not in general used as rules of evidence

for the purpose of ascertaining doubted facts, but are, in effect, mere arbitrary rules of law, which, according to the policy of the law, operate in some instances conclusively, and which in other instances again, where a peremptory and absolute operation would be attended with inconvenience, may be answered and rebutted.’ 3 Starkie, Ev. marg. P. 1241. See also 1 Greenl. Ev. §§ 14, 17, 39.” Tunstall’s Adm’r. v. Withers, 80 Va. 892, 11 S.E. 565, 567 (1890).

67 See Maxey v. Am. Cas. Co, 23 S.E.2d 221, 223 (Va. 1942) (undoubtedly sound is the contention that a federal court’s construction of a statute is not binding upon the Supreme Court of Virginia although it may have a persuasive influence); Anderson v. Commonwealth, No. 0528–10–4 (Va. Mar. 8, 2011) (federal cases cited by appellant are not binding upon this Court).

68 See Johnson v. Home State Bank, 501 U.S. 78 (1991).

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enforcement of the Note after a default is six (6) years,69 but the Deed of Trust can be enforced up to ten years past its maturity date (up to forty (40) years when securing a 30-year note).70 While the Note is a negotiable instrument, UCC Article 9 governs notes (negotiable or not71) secured by a lien on real property,72 but does so subject to state law.73 The UCC itself makes a clear legal distinction between the UCC Article 3 “holder” of a blank endorsed “negotiable instrument” and the UCC Article 9 “secured party,” defined as one who purchased the secured note—gave value.74 Further, UCC Article 9 provides steps that may be taken by the “secured party” to enforce a Deed of Trust non-judicially.75 In the event of a conflict between UCC Articles 3 and 9, the latter governs.76 These citations strongly suggest that rights to enforce a secured note are, in fact, not synonymous with person in possession.77 This nuanced but important distinction was overlooked in Horvath. The effects of the Horvath opinion are seen in cases subsequently decided by the Fourth Circuit. In Tapia v. U.S. Bank, N.A., No. 10–1856 (4th Cir. 2011), there was no evidence of an assignment, possession of the original note, nor an affidavit of lost note. In Bernardo v. Nat’l City Real Estate Serv. LLC., No. 10–1803 (4th Cir. 2011) and Larota-Florez v. Goldman Sachs Mortg. Co., No. 10–1523 (4th Cir. 2011), the servicer appointed the substitute trustee claiming to be owner and holder of the note, despite having conceded on the record it was not the owner of the note. All three challenges to the respective foreclosures were dismissed by the Eastern District of Virginia court (Tapia and Bernardo on 12(b)(6) motions, Larota-Florez on summary judgment) and affirmed on appeal in unpublished per curiam opinions citing Horvath.78

69 VA. CODE § 8.3A–118(a). 70 Id. § 8.01–241(A) 71 Id. § 8.9A–102(a)(47) (“‘Instrument’ means a negotiable instrument or any other writing that

evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment”).

72Id. § 8.9A–102(a)(47) (55) (“‘Mortgage’ means a consensual interest in real property, including fixtures, which secures payment or performance of an obligation”).

73 Id. § 8.9A–201 (c). See supra note 31. 74 Id. § 8.3A–301 (“‘Person entitled to enforce an instrument means (i) the holder of the

instrument … [A] person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument”) (thus the phrase, “even a thief can enforce a blank endorsed note”); id. § 8.9A–102(a)(72)(D) (“‘Secured Party means a person to which ... promissory notes have been sold”).

75 VA. CODE § 8.9A–607(b) (non-judicial enforcement of mortgage) provides that “if necessary to enable a secured party to exercise ... the right to enforce the mortgage nonjudicially,” the secured party may record in the land records for the County where the Deed of Trust is recorded the secured party’s affidavit stating default has occurred and that the secured party is entitled to enforce the Deed of Trust non-judicially.

76 VA. CODE § 8.3A–102(b) (“if there is a conflict between this title and . . . Title 8.9A, . . . Title 8.9A govern[s]”).

77 See supra note 65. 78 Tapia aside, had the servicer executed documents as agent for the owner, as opposed to

misrepresenting its status as owner and holder of the Note, then the recorded documents would be truthful, legal title would pass to substitute trustee, and homeowner would have no objection thereto. See Horvath v. Bank of N.Y., No. 10–1528, slip op. at 13 (4th Cir. 2011) (“if you sell it you no longer have those rights”); accord VA. CODE § 8.9A–318 (No interest retained in right to payment that is sold; rights and title of seller of account or chattel paper with respect to creditors and purchasers. (a) Seller retains no

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Requiring that one be the owner of the mortgage note/Deed of Trust is not unique to Virginia, as

many states foreclosure laws require the same. As noted above, Maryland requires that the foreclosing entity file an affidavit of debt ownership; the financial entities foreclosing in Maryland are not objecting to that requirement based on possession of a blank endorsed note. Rather, they comply with it and swear they own the debt, just as they must strictly comply with the terms of a Virginia Deed of Trust and be the owner of the debt.79

C. The Lost Note Atteint80

VA. CODE § 55–59.1 states if the trustee has the original Note, or an affidavit of lost note, it may

proceed to sell the property. Frequently the first written notice a homeowner receives from a foreclosing trustee is a letter announcing that the note is lost, misplaced, destroyed, or otherwise unavailable at this time. The letter further says that notwithstanding the unavailability of the note, the “lender,” “creditor,” “servicer,” or some other party will request the trustee to begin foreclosure within fourteen days. The trustee advises the homeowner that, if the homeowner believes the loan is owed to another party other than the party named by the trustee, then the homeowner should seek adequate protection from the Circuit Court pursuant to VA. CODE § 55–59.1. Nearly unanimously, homeowners ignore this letter because it does not announce an imminent foreclosure sale. That is unfortunate. This statutory provision was also first adopted in the 1979 foreclosure procedures restatement. Along with the next three provisions, the principal intent of the legislature was to clarify rules on publication. Nevertheless, the ameliatory language in VA. CODE § 55–59.1 (making the result of an inadvertent error in the required mailed notifications a voidable, not void, foreclosure) was not present in VA. CODE § 55–59.2 (making a failure of published notice result in a void foreclosure).81 Sub-section B of § 55–59.1 is a notice requirement intended to protect the trustee from liability to homeowner in the event that the trustee is not itself in possession of the note at the foreclosure sale. At least that was its original intent. Now putative noteholders use the sub-section to proceed to foreclose when, in fact, the original note has been lost in the complicated sale and resale process of securitization, and cannot ever be produced. A reasonably acting trustee will not foreclose until it knows where the note is located, and, in fact, exists. On the other hand, “the fact that the instrument is lost or cannot be produced shall not affect the authority of the trustee to sell or the validity of the sale,” if the trustee proceeds. To proceed without evidence of the note or a lost note affidavit, as the section describes, would imply that the trustee might be liable to the homeowner. Various issues have been litigated concerning VA. CODE § 55–59.1.B., but none have been resolved by the Virginia Supreme Court. The Supreme Court did grant an emergency injunction stopping interest. A debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold).

79 This is consistent with other areas of the law. See, e.g., Fair Debt Collections Practices Act, 15 U.S.C. § 1692(a)(4) (“‘Creditor’ does not include persons who receive an assignment or transfer of a debt in default solely for purpose of facilitating collection of debt for another”); Real Estate Settlement Procedures Act, 15 U.S.C. § 1641(f)(2) (servicer will not be treated as owner of obligation on basis of an assignment from creditor or another assignee solely for administrative convenience in servicing the obligation); May 2009 amendment to Truth In Lending Act requiring homeowners to be notified when mortgage loan is sold (see Federal Reserve advisory opinion, 12 C.F.R. 226, on the giving of notice when the loan appears on your “books and records,” as well as the Note at ¶ 11, which reads “the Deed of Trust protects the Noteholder from possible losses” in the event of default (only the bona fide purchaser would have any losses).

80 Atteint was a common term used to determine a hit in a joust. 81 See Deep v. Rose, 234 Va. 631, 364 S.E.2d 228 (1988) (which contains a thorough history of

notice requirements’ statutes in Virginia).

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a foreclosure and directing the trial court to consider the application of a UCC provision defining the provisions of an adequate lost note affidavit to the requirements of this section.82 In later proceedings in the same case, the trial judge determined the remedy of “adequate protection” provided in the section is not the sole remedy available to homeowner.83 Other issues pending a future resolution include whether a servicer that is claiming to be attorney-in-fact for the beneficiary can provide and execute the affidavit of lost note,84 what is “adequate protection,”85 and is the homeowner entitled to the affidavit as part of the required notice.86 None of these issues are fairly addressed. The routine nature of those letters is to determine if there is going to be a challenge and, if not, the note does not have to be produced until the Commissioner’s report post-sale (and, for that, a copy, even from the loan closing agent, will probably suffice).

D. Appointment of Substitute Trustee—Nail Money87 Applying the terms according to their plain meaning, Virginia's “Foreclosure Law” (the terms of

the Deed of Trust) is fairly clear: the Lender, or its successor in interest—the party secured by the Deed of Trust—may invoke the power of sale or appoint a substitute trustee. If one other than the party secured by the Deed of Trust takes said actions, the foreclosure may be set aside. Consistent with the parties having the ability to determine the terms which will govern in the event of default/foreclosure, the Virginia Supreme Court has held that the appointment of a substitute trustee must conform precisely to the trust document.88 The intent to limit who may appoint a substitute trustee is explicit. Paragraph ¶ 24 of the Deed of Trust states the “Lender may appoint a substitute trustee.” (See DoT at ¶ 16(c) (“may” is defined as “giv[ing] sole discretion without any obligation to take any action”).)

Those terms in the Deed of Trust are of great importance as “[i]t is [] true that where the deed of

trust authorizes the trustee to sell the property upon the request of the beneficiary or creditor therein secured, such request is a condition precedent of the trustee's right to sell, and in the absence of such request the sale may be set aside in a court of equity.”89 The terms and conditions “being a part of the

82 Tiemeyer v. Residential Credit Solutions, Inc., No. 100733 (Va. Apr. 19, 2010). 83 Tiemeyer v. Residential Credit Solutions, Inc., Case No. CL10002173 (Alexandria, Va. Cir. Ct.,

Oct. 14, 2010). 84 Giving testimony for the principal is not an ordinary power of an attorney-in-fact and, if not

prohibited by the common law, such power can only be exercised by a specific grant in the written power of attorney.

85 The statute seems to suggest that it is something that the beneficiary can provide—e.g., cash—making an injunction unnecessary, but an injunction seems like the most effective remedy.

86 As written, the statute only protects the trustee when proceeding to foreclose without the note but with the defined affidavit. Without evidence to the homeowner, the resultant situation is that it is far easier to foreclose than it is to collect any post-foreclosure deficiency. This is particularly true in the not uncommon scenarios of a failed bank (whose loan documentation may have passed through an MBS trust and the FDIC) or sale of pooled loans to another MBS trust at a discount, the result of which being that the successor entity never received the original note and is now asserting that it is lost.

87 The money paid to a tournament herald for nailing on a tree the challenging knight’s shield. 88 Frazer v. Millington, 252 Va. 195, 475 S.E.2d 811 (1996). See also Little v. Ward, 250 Va. 3,

10, 458 S.E.2d 586, 590 (1995) (when a substitute trustee of a trust is not validly appointed, a court properly strips the substitute trustee of its powers); Washington, Alexandria & Georgetown R.R. Co. v. Alexandria & Washington R.R.Co., 60 Va. (19 Gratt.) 592, 1870 WL 3568 (Mil. Ct. App. Feb. 14, 1870) (appointment of trustee that does not strictly comply with the trust document is void).

89 Wills v. Chesapeake Western Ry., 178 Va. 314 (1941).

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contract of the parties, which neither could violate without the consent of the other, and over which the court would have no control,” all actions under the contract must be in compliance with those terms and conditions.90 An explicit limitation clearly creates a defense when a party without the required sole discretion appoints a substitute trustee and then immediately thereafter invokes the power of sale.

Scrutiny of the Appointment of Substitute Trustee document often evidences a break in the chain

of title as there is no indication that the right to enforce the Deed of Trust was assigned by the original Lender to the entity executing the document. If the appointment of substitute trustee is executed by an entity that is not the party secured by the Deed of Trust, the substitute trustee in fact has no authority to act as legal title has not been transferred, the appointment document is void and of no legal effect, and any resulting foreclosure sale would be void, or at least voidable. This is no different than a party to a contract for the sale of real estate executing said contract when that party is not, in fact, the owner able to transfer title. It has no legal effect on the title to the property.

The vast majority of substitute trustee appointment documents contain language that is not in

compliance with the terms of the Deed of Trust. Three examples of the most commonly used language are highlighted below:

“WHEREAS, SECTION 55–59(9) of the code of Virginia provides that the

Noteholder may remove the trustee(s) of the Deed of Trust and appoint successor trustee(s) for any reason;”

But VA. CODE section 55–59(9) is inapplicable because the terms of the contract—the Deed of Trust—control, and the Deed of Trust does not reference the “Noteholder.”

“WHEREAS, the aforesaid Deed of Trust provides that the holder of the note secured thereby may remove the Original Trustee(s) and appoint successor trustees;”

But the Deed of Trust does not mention the “holder of the note secured [by the Deed of Trust].”

“WHEREAS,[Bank], as Trustee for the [ABC TRUST 2006–1] is the present holder or authorized agent of the holder of the Note secured by the below described Deed of Trust (hereafter referred to as ‘Noteholder’).”

This language is insufficient. Foreclosing entities want to attach the UCC Article 3 definition of “holder” to the term “Noteholder” and avoid or circumvent the term as defined in the Note itself at ¶ 1—one who takes by transfer and is entitled to payment.91 A thief is not “entitled to payment,” nor is the servicer which is collecting the payment for another. The definition in the Note parallels the “mortgage-note holder” definition governed by UCC Article 9, requiring that evidence of an assignment entitling one to payment exist as a condition precedent to invoking the foreclosure process.

Virginia law requires that one be a resident/corporation of the Commonwealth to serve as trustee

to a Deed of Trust.92 Despite this requirement, an entity known as Recontrust Company, N.A., a Bank of America subsidiary, is a foreign entity with no principal office in the Commonwealth and is regularly appointed as a co-substitute trustee to conduct foreclosures in Virginia. In Fairfax and Prince William Counties alone, Recontrust conducted more than 1000 foreclosures in the month of October 2011. Not only is VA. CODE § 55–58.1(2) violated, all requests for information about the loan made by a homeowner to the Virginia co-trustee are forwarded to Recontrust. In Virginia, a trustee is to act

90 Tabet v. Goodman, 118 S.E. 230 (Va. 1923). 91 Apt Investment & Mgmt. v. National Loan, 518 S.E.2d 627 (Va. 1999) (the parties are bound by

the definition of “Noteholder” in the note) 92 VA. CODE § 55–58.1(2).

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impartially in the conduct of its duties with regard to the deed of trust. When a bank subsidiary acts unilaterally, it is not acting impartially and the conflict of interest is clear. In an attempt to address those issues, the States of Washington and Utah, which have a similar limitation on who can serve as trustee, recently filed suit against Recontrust for this violative activity.93

When the original trustee to the Deed of Trust is not substituted out, homeowners face a difficult challenge identifying the entity which is “invoking the power of sale.” The request to foreclose was more than likely sent by the servicer. There is no document appointing a substitute trustee, so the next best place to look is the Fair Debt Collection Practices Act Notice, which must identify the current secured creditor in the first communication, or within five (5) days thereafter.94 This rarely occurs, and when it does it often erroneously identifies the servicer.95 A Qualified Written Request, citing 15 U.S.C. § 1641(f)(2) might yield a response from the servicer identifying the current secured creditor, but responses often give the same erroneous information as the FDCPA notice, or worse:

Your client’s loan is not owned by a single investor whose identity is easily ascertained. Instead, their loan is part of a private securitization we service, meaning it has been “pooled” with other similar mortgages that comprise the underlying assets in a mortgage backed security. Mortgage backed securities are freely and frequently traded on the open market through various channels and are accounted for as pooled loans, not individual loans. The pool their loan is tied to could be owned by an individual investor or it could be owned by several investors and it could be bought and sold on the open market several times per week. Once the pool is traded on the open market, individual owner information is not given to IndyMac Mortgage Services. Other problematic foreclosure issues include disregard for long standing principles of agency law.

While there is no objection to an agent acting on behalf of its principal, basic agency law requires that the principal as the proper party be identified and that the agent be authorized to act pursuant to some type of power of attorney or agency agreement. Further, as the document appointing the substitute trustee is put to record,96 the recitations therein must be truthful and complete to ensure an unbroken and accurate chain of title. Again, this is no different than a party to a contract for the sale of real property executing said contract when that party is, in fact, not the owner able to transfer title to the property. It has no legal effect on the title to the property. Lastly, imagine selling a home as “attorney-in-fact” for the owner, but not mentioning the owner's name in the contract; or buying a home and executing the Note and Deed of Trust only as “authorized agent of the purchaser.” No one would even suggest that the document has any legal import. Yet, ignoring agency law principles, this appears to be the norm in the Commonwealth at

93 See Bank of America’s Recontrust sued by Washington State over Foreclosures, at http:// www.bloomberg.com/news/2011-08-05/bofa-s-recontrust-unit-sued-by-washington-state-over-foreclosure -practices.html. See also Bank of America v. Fowlke, Case No. 2:11–CV–828 CW (D. Utah Sept. 16, 2011), remanding the case of Washington v. Recontrust Co., 11–26867–5 (Sup. Ct. King County, Wash.) (Seattle) to state court after removal. It is anticipated that Recontrust will rely on its status as a “National Association,” putting it under the jurisdiction of federal banking laws, but acting as a substitute trustee is not a “banking activity.” It remains to be seen whether or not this insulates it from compliance with state statutes when serving as trustee to a Deed of Trust.

94 15 U.S.C. § 1692(g)(A)(2) (Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing the name of the creditor to whom the debt is owed).

95 Claims for violation of the FDCPA have been similarly unsuccessful in the Eastern District of Virginia based on the servicer’s possession of the blank endorsed Note. See supra note 60, 79.

96 VA. CODE § 55–59(9) (The instrument of appointment shall be recorded in the office of the clerk wherein the original deed of trust is recorded prior to or at the time of recordation of any instrument in which a power, right, authority or duty conferred by the original deed of trust is exercised).

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this time with respect to assignment of mortgages and appoint documents. This issue is best illustrated by the industry's use of Mortgage Electronic Registration Systems, Inc.

IV. THE MERS RECESS97

Mortgage Electronic Registration Systems, Inc. (“MERS”) is an electronic registry that

purportedly tracks ownership of the note/mortgage. As created by the founding financial institutions, MERS circumvents the county land recording systems throughout Virginia and the country in general.98 In the Deed of Trust it is asserted that MERS “holds bare legal title;” yet the trustee holds legal title in a Deed of Trust state, so the actual role and authority of MERS is confusing at best, non-existent at worse. While many Courts across the country are closely scrutinizing the actions of MERS and finding it has no authority to assign the Note and Deed of Trust or to appoint a substitute trustee,99 thus far Circuit Courts in Virginia have ruled otherwise. In a recent Fairfax case, Graves v. MERS, Case No. CL–2010–17101 (Fairfax Cir. Ct., June 29, 2011) MERS appointed a substitute trustee identifying itself in the document as “Beneficiary” and as “holder of the Deed of Trust,” both untruthful designations. As in Graves, courts ruling that an assignment of the mortgage or an appointment of a substitute trustee by MERS is valid usually state the following as grounds: MERS is named as “Beneficiary” in the Deed of Trust (DoT, first page), is acting “solely as nominee for Lender and Lender's assigns” (DoT, ¶ E Definitions) (emphasis added), and “MERS holds only legal title to the interests granted by Borrower in this security instrument, but, if necessary to comply with law or custom, MERS, as nominee for Lender and Lender’s successors and assigns, has the right” to take any and all actions on behalf of the Lender, including foreclosure (DoT, ¶ following the legal description). But such assertions ignore the fact that:

1) The Deed of Trust has very specific covenants addressing who can take certain actions (invoke the power of sale & appoint a substitute trustee) which are in conflict with general language in the preamble of the Deed of Trust concerning MERS. Further, it is well established in Virginia that “where there is a repugnancy, a general provision in a contract must give way to a special one covering the same ground.”100 2) The Deed of Trust—a uniform instrument used in all 50 states—provides that MERS may act as nominee for Lender “if necessary to comply with law or custom.”101 While the laws vary greatly from state to state, there is no “law or custom” in Virginia that

97 A recess was a safe area where horsemen and knights could gather and rest without fear of

capture. 98 See supra note 6. 99 Landmark National Bank v. Kesler, 40 Kan. App. 2d 325, 192 P.3d 177 (2008); In re: Ferrel L.

Agard, Case 8–10–77338–reg (Bankr. Ct. E.D. N.Y., Feb. 10, 2011); MERS v. Southwest Homes of Arkansas, 2009 WL 723182 (Ark.); Consolidated cases Residential Funding Co, LLC, f/k/a Residential Funding Corporation v. Gerald Saurman and Bank of New York Trust Company v. Corey Messner, No. 290248 (Kent Cir. Ct.) and No. 291443 (Jackson Cir. Ct.), respectively, (Mich. Ct. App. Apr. 21, 2011).

100 Bott v. N. Snellen Burg & Co., 14 S.E.2d 372, 374–75 (Ga. 1941) (internal citations omitted); Berry v. Klinger, 225 Va. 201, 208, 300 S.E.2d 792 (1983) (court must give effect to all language of a contract if its parts can be read together without conflict [and, where] possible, meaning must be given to every clause); Donnelly v. Donatelli & Klein, Inc., Record No. 982204 (Va. Sept. 17, 1999) (where general and specific provisions do not cover the same ground there is no basis for conflict and the terms must be given the meaning intended by the parties).

101 When MERS executes documents in its proper capacity—“as nominee for [original lender]”—the “if necessary to comply with law or custom” language would still preclude MERS from acting. Wills v. Chesapeake, 178 Va. 314 (1941) (where a provision within the deed of trust contains a condition precedent, the parties must strictly comply therewith) (relating to condition precedent prior to sale).

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allows an entity such as MERS to assign the Note102 and Deed of Trust, to assign the deed of trust but not the note,103 or to appoint a substitute trustee. Even were MERS granted this authority under Virginia law, it would have to act as “nominee for [current secured creditor],” not in its own name as it has no interest of its own to transfer. Despite what appears to be a clear limitation on MERS’ authority to act, the financial institutions have thus far persuaded courts in Virginia to ignore that language. “Why does this matter?” is the position of the financial institutions, and at times the courts

themselves. If MERS executes as “beneficiary,” as opposed to “nominee for [current secured party],” the land records accept that as true—MERS was the beneficiary, which creates a very different (and untruthful) chain of title. Clearly, if the representation is not true, then the document has no legal effect. Again, this is no different from any other agency relationship—the capacity with which the agent executes documents is of significant importance. While MERS is designated as “Beneficiary” in the Deed of Trust, in fact, it is not the beneficiary104 of either the Note or the Deed of Trust and failing to question its designation places more emphasis on form while ignoring substance. Despite the potential for creating confusion and inaccurate land records, the financial institutions persist in executing documents with false statements as to ownership or agency and continue to suggest that “it does not matter” when conducting their foreclosure activities. Title companies should anticipate the problems that will undoubtedly befall the industry in coming years.

While the financial institutions may have established an industry practice, that does not allow

them to ignore the laws of the Commonwealth. Virginia’s Supreme Court has been quite clear that Virginia’s laws addressing loans are to be enforced even when those laws invalidate a wide-spread industry practice and that lenders cannot ask the Court to grant the financial industry exemptions from existing statutes.105

V. THE UNLAWFUL DETAINER BERFROIS106

Defense against foreclosure does not end with a foreclosure sale or the termination of litigation to set aside the foreclosure. Often, the foreclosure defense lawyer is not retained until after the foreclosure and at the time of service of an unlawful detainer summons on the homeowner. As this process is judicial, many homeowners approach the unlawful detainer/eviction court thinking this is their opportunity to have a judge adjudicate their grievances with the lender, the government, even the system. Whether due to denial, despair, or lack of funds, the defaulting homeowner ignores the notices of foreclosure or relies upon the oral promise of a stayed foreclosure from a shady loan modification company or a misleading servicer to the homeowner’s detriment. Subsequent to foreclosure the homeowner will receive a notice to quit the premises from the purchaser at the foreclosure sale.107 Drawing upon the five-day pay or quit notice from landlord-tenant law, the notice is usually five days. At

102 MERS is not mentioned in a uniform Note and has no interest therein. 103 This violates Virginia law. See supra note 54. 104 If MERS were the beneficiary of the Deed of Trust, this would mean the Deed of Trust was

split from the Note, as the beneficiary of the Note certainly is not MERS, a quandary that MERS, and many courts, refuse to even acknowledge. RESTATEMENT (THIRD) OF THE LAW, PROPERTY—MORTGAGES, § 5.1, at 327 (The American Law Institute, 1997) (split allowed if intended by the parties).

105 Taylor v. Roeder, 360 S.E.2d 191, 234 Va. 99 (1987). 106 Grandstand which housed the ladies and nobility while watching the jousting tournament. 107 Although the notice is normally given, unlike the landlord-tenant law, there does not appear to

be a statutory requirement for the notice to quit. General District judges expect one to be given, however, and might deny an order for possession without the notice having been given. But see VA. CODE § 55–225 (which does require such notice if damages are sought in an unlawful detainer brought under VA. CODE § 8.01–126).

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the end of the five days, assuming no abandonment of the property by the foreclosed homeowner, a Summons for Unlawful Detainer will be filed in the General District Court by the purchaser, served, and made returnable for about 21 days later.108 Post-foreclosure defense, then, begins with advising the homeowner how much lawful occupancy time the family has. Since a valid foreclosure effects a transfer of title from the homeowner to the foreclosure purchaser, the homeowner has become a tenant at sufferance of the purchaser, now landlord by operation of law. The landlord, however, cannot recover possession of the property without an appropriate court order. Self-help eviction is not authorized.109 The landlord must pursue the unlawful detainer process. The homeowner must appear at “the first return” and advise the judge if the eviction is contested. If it is, the case will be set down for a trial date, with a Bill of Particulars, and Answer and Grounds of Defense filed, if requested and ordered by the court. Some courts have such a heavy docket of unlawful detainer cases that they are assigned specific trial and first return dates. Prince William General District Court, for example, hears unlawful detainer cases every Friday afternoon at 1:30PM; City of Fredericksburg on the second and fourth Mondays of each month at 8:30AM. Fairfax General District Court hears unlawful detainer cases arising from foreclosures on the second and fourth Thursday of each month at 2:00PM.110 Depending on the court’s docket, the trial of the unlawful detainer may not be for several weeks. Until the trial is held and the judge awards possession to the foreclosure purchaser, the homeowner may lawfully continue to occupy the residence. Time of possession after the foreclosure can be reasonably projected at one to two months depending on local General District Court trial scheduling. If the homeowner does not appear at the first return, the judge can grant “immediate possession” of the property to the purchaser at the foreclosure. If, however, there is a contest, a writ of possession may not issue for ten days after entry of an order of possession.111 During that ten days, an appeal can be noted and perfected to the Circuit Court for a trial de novo. Of course, an appeal bond may not be feasible for every homeowner,112 but, if one can be posted, the new trial may be weeks or months down the road. If there will be an extended delay, purchaser’s counsel may move for summary judgment, an increase in the amount sued for (or to include a claim if one was not originally sought), and/or an increase in the appeal bond. If these costs can be absorbed, the homeowner may lawfully maintain possession for several months after foreclosure. In exchange for shortening that possession, purchasers, particularly lender-purchasers with REO inventory to move, may offer financial incentives (often called “cash-for-keys”) for quick and orderly vacating of the premises.

108 VA. CODE § 16.1–77(3). Original jurisdiction of unlawful detainer actions is concurrent with

the Circuit Court. See VA. CODE §§ 8.01–124, et seq. As provisions in Title 8.01 concerning unlawful detainer seem to conflict with General District Court procedural provisions—e.g., VA. CODE § 8.01–129 pertaining to appeal bonds—there are opportunities for counsel to minimize the financial impact of displacement or to extend occupancy for counsel’s client by diligent study and application of all pertinent unlawful detainer statutes.

109 VA. CODE §§ 8.01–126, 55–248.26, 55–248.36. 110 This information is generally available on the “Virginia’s Court System” page (where each

General District Court has a page with its calendar posted) at http://www.courts.state.va.us/main.htm. 111 VA. CODE § 8.01–129 provides: “Unless otherwise specifically provided in the court’s order,

no writ of execution shall issue on a judgment for possession until the expiration of this 10–day period, except in cases of judgment of default (i) wherein the case arises out of a trustee’s deed following foreclosure…”

112 Unless damages have been sought on the initial Summons for Unlawful Detainer, the appeal bond appears to be limited to three months fair market rent by VA. CODE § 8.01–129. This provision may conflict with—but we believe trumps—VA. CODE §§ 16.1–106 and 16.1–107. There are also implications for VA. CODE § 16.1–107.

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The outcome in the vast majority of unlawful detainer cases is an award of possession to the foreclosure purchaser. On occasion the servicer brings the unlawful detainer action in its name but the grantee on the Trustee’s Deed is usually another party (a mortgage-backed securities trust or its Trustee). Such an error cannot be corrected even by amendment of the initial pleading, because it is an action by a wrong party (and not merely one misnamed).113 The complexities of title transfers among servicers, trusts, and trustees can give rise to variations on this defense. For example, consider the scenario in which a national bank brings the action for unlawful detainer in its own name, but the Trustee’s Deed names the national bank as trustee for an MBS trust for which another unrelated lender is the beneficiary. Title to the property is not an issue in an unlawful detainer case; the greater right of possession is the only issue. The judges do recognize that a right of possession is one of the bundle of rights inherent in ownership of property. Consequently, while title might not be an issue, the plaintiff must have at least a facially valid title in order to proceed. A common evidentiary limitation in unlawful detainer cases was stated by Fairfax Circuit Judge Jonathan C. Thacher in Bank of New York Mellon v. Nguyen, CL2009–16787 (Fairfax County, Va. Cir. Ct., March 30, 2010): “The parties may introduce any evidence at trial that is probative as to who holds a facially valid title to the Property. No evidence may be admitted, however, which would serve only to attack a facially valid title.” Consequently, the only evidence received at many of these trials is a clerk-certified copy of the Trustee’s Deed, because it tends to establish a facially valid title in favor of the foreclosure purchaser (who is the grantee on that deed).114 That the homeowner could produce a clerk-certified copy of the homeowner’s deed of conveyance would also appear admissible as it also tends to establish a facially valid title. The idea that title is not involved in an unlawful detainer case appears solidly established in Virginia.115 Nevertheless, fraud or mistake on the part of a landlord in obtaining title can be set up as a defense in an unlawful detainer action.116 Since many grantees of Trustee’s Deeds were also the appointers of the substitute trustees who executed those deeds and conducted the foreclosures, and given that there is common knowledge of and often specific evidence of robo-signings, unauthorized attorneys-in-fact, questionable corporate relationships, etc., by those grantees, the potential fraud on the land records by an unlawful detainer plaintiff ought to be a defense to a homeowner.117 Arguments against inclusion of title evidence in an unlawful detainer case rest more on the limited subject matter jurisdiction of the General District Court (no jurisdiction to try title) and less on the limitation of the issues in an unlawful detainer case to possession only, whether in the General District or Circuit Court. Often cited to support the limited subject matter jurisdiction of the General District Courts and the consequent limited review by Circuit Courts upon appeal is a string of Virginia cases.118 If an

113 Harmon v. Sadjadi, 273 Va. 184, 639 S.E.2d 294 (2007). 114 It appears necessary to produce a clerk-certified copy of the Trustee’s Deed to prove the case

if the right of possession is challenged. VA. CODE § 8.01–389(C) is relied upon to provide prima facie truth of the representations in the deed, including vested ownership in the grantee. An uncertified copy is not entitled to judicial notice, and, consequently, a facially valid title is not established.

115 See, e.g., Emerick v. Tavener, 50 Va. (9 Gratt.) 220, 1852 WL 2891, 58 Am. Dec. 217 (1852). 116 Alderson v. Miller, 56 Va. (15 Gratt.) 279, 1859 WL 4566 (1859). 117 Consider Rule 7B:3(a) of the Rules of the Supreme Court of Virginia which applies to General

District Court civil procedure: “A party asserting either a claim, counterclaim, cross-claim or a defense may plead alternative facts or theories of recovery against alternative parties, provided that such claims, defenses, or demands for relief so joined arise out of the same transaction or occurrence.”

118 Hirschkop v. Commonwealth, 209 Va. 678, 166 S.E.2d 322 (1969); Hoffman v. Stuart, 188 Va. 785, 51 S.E.2d 239, 6 A.L.R.2d 247 (1949); Stacy v. Mullins, 185 Va. 837, 40 S.E.2d 265, 168 A.L.R. 636 (1946); Addison v. Salyer, 185 Va. 644, 40 S.E.2d 260 (1946). Only Addison dealt with title to real estate; the others deal with plaintiffs’ attempts to expand the jurisdiction of the court not of record after appeal or removal by the defendants.

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unlawful detainer case were originally filed in a Circuit Court, given its greater equitable and legal jurisdiction, a homeowner might be able to assert a defense based on a fraud-induced title. That foreclosure purchasers choose the General District Court route to move the cases along summarily ought not to be held against homeowners. Consider this language:

…After removal the defendants may proceed as if plaintiffs had filed a notice of motion against them in the circuit court. The defendants have not chosen the trial justice as the tribunal in which to assert their claim, with the avowal implicit in that act that that court has jurisdiction of their claim. On the contrary, they have removed the case to the circuit court to assert there a cross-claim which section 6097a expressly prohibits them from asserting in the trial justice court. Not having invoked the jurisdiction of the trial justice court, their claim is not subject to the limitation on the jurisdiction of that court. There is no reason that we can think of why it should be.

Hoffman v. Stuart, 188 Va. 785, 794–795, 51 S.E.2d 239, 6 A.L.R. 2d 247 (1949). Given that the right to remove a case to the Circuit Court was repealed by the General Assembly in 2007, homeowners should be allowed to assert the defense of title in the General District Court, or, after having posted an appeal bond just to get to the Circuit Court, at least be able to present that defense in the Circuit Court with its enlarged jurisdiction.119

Finis

Virginia foreclosure law is governed by the terms of the Deed of Trust, or, if incomplete, by the applicable statutes of Title 55 of the Code of Virginia. Therefore, the UCC does not govern a foreclosure, but can assist in making legal determinations, such as “who is the party secured by the Deed of Trust.” The Deed of Trust is quite clear: only the Lender, or its successor in interest may invoke the power of sale and appoint a substitute trustee. If one other than the secured party appoints the substitute trustee or invokes the power of sale, then title flowing from the transactions carried out by said substitute trustee may be void, and an action to remove unauthorized documents in the land records will succeed causing title to revert to the foreclosed homeowner.

It is our hope that this article will assist you in ensuring a return to protecting the sanctity of the

land records, and provide you with the tools useful in protecting homeowners threatened with foreclosure or eviction. Despite what appears to be clear caselaw, the aging of that caselaw requires a statement from the Virginia Supreme Court that, in fact, the terms of the Deed of Trust control, and, if those terms are violated, the foreclosure can be set aside.

Counsel who routinely handle foreclosures often consult with one another. They talk informally

outside court on Motions Day and before unlawful detainer dockets. They share experiences, court rulings, and trial tactics. On the other hand, counsel who represent homeowners are as isolated as the homeowners they represent. Counsel doing foreclosure defense should be sharing statewide trial and judicial experiences. Please contact us if you would be interested in an e-mail network to exchange decisions and theories.

119 Appealing a Circuit Court decision to the Supreme Court of Virginia is also an option for the

unlawful detainer case. Doing so, however, is most likely not a deterrent to the issuance of a writ of possession. Staying the issuance of the writ will probably be a burden for the homeowner, including requesting and posting a supersedeas bond. See VA. CODE § 8.01–676.1.

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EXAMINING VIRGINIA’S PUBLIC PRIVATE TRANSPORTATION ACT EXPERIENCE: HISTORY, PROCEDURES & ISSUES REGARDING ACQUISITION OF REAL PROPERTY

INTERESTS UNDER THE ACT

James Webb Jones*

INTRODUCTION

Real estate lawyers – and especially those engaged in eminent domain litigation or negotiations for the acquisition of real property interests under the threat of eminent domain – need to be aware of the trend to finance and build transportation infrastructure as often as possible using Public Private Partnerships [PPP or P3] in Virginia in the place of traditional methods of funding.

This paper examines the experience in Virginia of utilizing a state Public Private Transportation Act [PPTA or the Act]1 to promote funding for and enable construction of new infrastructure and improvements to existing facilities. Virginia’s Act is an initiative that federal highway officials have held out as a model for public private partnership legislation.2 Federal highway researchers have performed an exhaustive 28-point analysis of Virginia’s PPTA and found it to be extremely flexible.3 Across the United States, especially in the current decade, transportation professionals have begun to turn to Public Private Partnerships [P3 or PPP] to fund infrastructure in the face of “growing concerns about the size of federal and state budget deficits, the long-term viability of financing the nation’s highway and transit systems through motor-fuel taxes… future mandatory commitments to Social Security and Medicare… [recognizing the] need to … ensure that transportation investments maximize the benefits of each federal dollar invested.”4 Virginia has been able to accelerate some substantial projects without the use of federal highway construction funds by converting federal projects to PPP status. Virginia’s pioneer use of legislation to draw the private sector into building highway infrastructure dating back to 1988 for construction of the Dulles Toll Road5 should afford the Commonwealth some advantage in the market for

* This paper represents only the personal views and research of the author as a transportation

studies scholar and researcher, and in no way represents an official position or opinion of either the Virginia Department of Transportation or the Office of the Attorney General of Virginia as agencies served by the author’s law firm.

Jim Webb Jones is a former Senior Assistant Attorney General who served as Staff Counsel for VDOT’s Southeast Region, completed the VDOT Executive Institute and holds a Graduate Certificate in Transportation Policy, Operations & Logistics from George Mason University after 2 years of graduate study. He has served VDOT as counsel in private practice and government service for a combined period of 18 years and has been involved in eminent domain litigation representing condemnors and/or landowners for 43 years. He currently is Counsel in the PPP, Eminent Domain & Workers Compensation Practice Groups at the firm of Pender & Coward, P.C. His blog—“The Roads Scholar™”—can be found at www.pendercoward-pppgroup/blog.

1 See VA. CODE § 56–556 et seq. (1950, as amended, first effective in 1995). 2 Letter from Hon. Norman Y. Mineta, Secretary of Transportation, to Hon. Thomas E. Petri,

Chair, Subcommittee on Highways, Transit & Pipelines of Committee on Transportation Infrastructure, U.S. House of Representatives 1 (May 24, 2006) [hereinafter cited as Mineta Letter].

3 PPP Legislation, Analysis for State of Virginia, available at http://www.fhwa.dot.gov/ppp/legis _virginia.htm.

4 Government Accountability Office, Report to Congressional Committees, Highway and Transit Investments, Options for Improving Information on Projects’ Benefits & Costs & Increasing Accountability for Results, GAO–05–172 (Jan. 2005) [hereinafter cited as GAO–05–172].

5 Benjamin G. Perez & James W. March, Public-Private Partnerships and the Development of Transport Infrastructure: Trends on Both Sides of the Atlantic, First International Conference on Funding

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P3 investments. In the United States growth accompanied by competition in the P3 market is expected. Experience with investors likely is an asset since then federal Transportation Secretary Mineta, as far back as 2006, stated that in the future “every highway project in the planning phases [in the United States costing] over $500 million [is] expected to be a toll road.”6

This article reviews Virginia’s PPTA project history. It will briefly review use of the PPP concept and tolls in the United States. The paper will then focus on recent PPTA developments in Virginia, including the $548 million concession arrangement concluded in June 29, 2006 with an Australian toll operator to manage and maintain the Pocahontas Parkway 8.8-mile tolled highway near Richmond.7 The article also will note other PPTA projects underway, under contract or expected in the near future.

Finally, this paper will present some conclusions about the Virginia P3 experience and provide information about a new agency and new procedures within the Virginia Department of Transportation [VDOT] that intend to promote PPTA project growth, provide adequate project oversight and retain responsibility for initiating and handling right of way eminent domain litigation within VDOT for P3 ventures.

THE HISTORY OF PUBLIC PRIVATE PARTNERSHIPS IN VIRGINIA

Virginia was a pioneer in promoting Public-Private Partnerships: it conceived the Dulles Greenway project and enacted the Highway Corporation Act of 1988 to enable its birth.8 Some would argue that this early effort to draw private capital into building a tolled highway was not a PPP in the purest sense. In the early years the Greenway experienced a financial crisis but survived “after restructuring its debt … and has since seen revenues grow steadily.”9 The Dulles Greenway “was the first purely private toll road in the United States in over 100 years.”10 Currently there are projects underway for the Dulles Road’s improvement, maintenance and toll operations11 as well as an extensive new 23-mile light rail project known as Dulles Metrorail extending the D.C. Metro Orange Line from East Falls Church Station along a Tyson’s Corner-Reston-Herndon-Dulles Airport-Eastern Loudon County Corridor.12 As far back as April 28, 2005, then VDOT Commissioner Philip Shucet signed a Comprehensive Agreement for a PPTA project to provide High-Occupancy Toll (HOT) lanes for I-495 on the Capital Beltway “between Springfield and the Dulles Toll Road.”13

Since 2002 Virginia has completed three PPTA projects: (1) Route 288 extends approximately 30 miles with several interchanges running from I-95 south of Richmond northwest through heavily

Transportation Infrastructure, Institute of Public Economics, University of Alberta, Banff Centre, August 2–3, 2006.

6 Mineta Letter, supra note 2, at 2. 7 FHWA Case Study, Virginia Route 895 (Pocahontas Parkway), available at http://www.fhwa

.dot.gov/PPP/pocahontas.htm. 8 Government Accountability Office (then known as General Accounting Office), Report to

Congressional Requesters, Highways and Transit, Private Sector Sponsorship of and Investment in Major Projects Has Been Limited, GAO–04–419 (Mar. 2004) [hereinafter cited as GAO–04–419].

9 Interview with senior VDOT Central Office Management (upon agreement not to reveal identities). See also Perez and March, supra note 5, at 10.

10 Perez & March, supra note 5, at 10. 11 Dulles Toll Road, available at http://www.virginiadot.org/projects/dullesHome.asp. 12 Dulles Metrorail, available at http://www.dullesmetro.com/about/index.cfm. 13 VDOT website, available at http://www.vdot.virginia.gov/projects/ppta-defaultHOTLANES

CapitalBeltway.asp.

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populated Chesterfield and Henrico Counties to I-64 West of Richmond; (2) the 8.8 mile Pocahontas Parkway with a high bridge over the James River; and (3) Jamestown 2007 or Route 199, a five-phase $31.8 million PPP converted from a federal project in order to build the project well before the traffic anticipated for the 400th Celebration of the Jamestown Settlement.14

Other projects currently either under procurement, under contract or under construction include: the Route 28 freeway in Northern Virginia with a combined commitment in excess of $200 million with six interchanges that will be expanded to ten; the I-95 & 395 HOT Lanes; the Coalfields Expressway in the Bristol District; Route 58, a 36-mile design/build job between Hillsville and Stuart; I-81 improvements to separate car and truck traffic; and the Downtown Tunnel/Mid-Town Tunnel/MLK extension between Portsmouth and Norfolk. VDOT also has five major P3 projects “under research and development.”15 The financing for the Route 28 Project is provided by state highway funds and proceeds from revenue bonds. These bonds will be repaid by taxes assessed to residents and properties in the Special Route 28 tax district that benefit from this construction.16

The Pocahontas Parkway near Richmond was a major project valued in excess of $318 million, with $300 million of that amount funded by a revenue bond issue not encumbering the credit of the state to be repaid from tolls.17 The cost of the Pocahontas project accelerated when the design called for a bridge over the James River high enough to accommodate ships without stopping traffic by opening a draw and tolls proved in the short run to be inadequate to service the bond debt.18 On June 29, 2006 following 18 months of negotiations, a 99-year concession was awarded to Transurban USA, a private Australian toll operator for a price of $548 million.19 A consortium of banks from Ireland, Spain and Germany provided new Pocahontas financing and upon the award of a $150 million federal TIFIA20 loan, Transurban will construct a new 1.58 mile four-lane road connecting the project to Richmond International Airport, refinance $95 million long-term debt and upgrade electronic tolling systems.21 Pocahontas P3 is the first project where TIFIA funds have been used to refinance long-term debt,22 but Congress established “the TIFIA Credit Program… to leverage Federal funds by attracting substantial private and other non-Federal co-investment in critical improvements to the nation’s surface transportation system.”23

14 See VDOT website, at www.vdot.virginia.gov/business/ppta-CompletedProjects.asp (PPTA

Completed Projects). The author was involved deeply in acquisition of right of ways for routes 288 and 199 and has also worked on some aspects of right of way acquisition for the new Richmond Airport road connection between Richmond International Airport and the Pocahontas Parkway.

15 See Virginia Office of P3 website, at www.vappta.org/projects.asp (PPTA Active Projects). 16 See Route 28 PPP Website, at http://www.28freeway.com/index.html. 17 See National Council for Public-Private Partnerships website, at http://www.ncppp.org/cases/

pocahontas.shtml. The NCPPP is a trade organization promoting the merits of PPP operations and awards of contracts and did not report the lagging tolls for this project that encouraged VDOT to look for an investor toll operator to take over the facility.

18 Interview with senior VDOT Management (Nov. 8, 2006). 19 Federal Highway Administration (FHWA), PPP Case Studies, at http://www.fhwa.dot.gov/

PPP/pocahontas.htm. 20 Transportation Infrastructure Finance and Innovation Act of 1998, 23 U.S.C. §§ 601–609. 21 See FHWA, PPP Case Studies, http://www.fhwa.dot.gov/PPP/pocahontas.htm. 22 See FHWA, PPP Case Studies, http://www.fhwa.dot.gov/PPP/pocahontas.htm. 23 FHWA, Manual for Using Public-Private Partnerships on Highway Projects 10 (2005). See also

http://www.fhwa.dot.gov/ipd/tifia.

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VDOT24 continues actively to seek PPTA projects, and a number of possible projects are shown in the footnotes.25 These projects in current dollars are estimated to cost in the range of $6–$12 billion if they could be built today. (The Mid-Town/Downtown Tunnel project between Norfolk & Portsmouth is now under contract.)

FUNDING INFRASTRUCTURE THROUGH PPP INNOVATIONS: THE POLITICAL & ECONOMIC CLIMATE AT THE NATIONAL LEVEL

AND ITS INFLUENCE ON THE VIRGINIA EXPERIENCE

Beginning in 1792, when Pennsylvania chartered the Philadelphia and Lancaster Turnpike, private investors financed many roads by tolls until about half way through the 19th century.26 A 2004 GAO compilation of statistics shows our most recent data on tolling:

(a) 4 million total miles of roads;

(b) Approximately 437,000 arterial miles of roads;

(c) 4,611 miles of public-owned toll roads—about 1% of arterial mileage;

(d) 15 privately owned toll roads—only 111 miles (10 of these for property/vacation area access);

(e) 15 privately owned toll bridges.27

From the above, it is obvious that America has little infrastructure that is publicly or privately tolled. While 2,102 miles of in-place toll roads were allowed to be a part of the Interstate System in 1956, when “construction of the Interstate System began, proposals for additional toll roads languished.… [In] 1963 the last of the toll roads planned before the Interstate System … opened, and few additional proposals were seriously considered for many years.”28

P3 projects in the U. S. often have not involved tolled facilities but have been “Design-Build or Management Contract” approaches.29 However, with Secretary Mineta’s admonition announcing the

24 VDOT stands for the Virginia Department of Transportation. 25 See VDOT website, at www.vdot.virginia.gov/business/ppta-UpcomingProjects.asp. The

Southeastern Parkway and Greenbelt proposes to extend from the interchange of Interstates 64 and 464 in Chesapeake easterly to a point on I-264 near Oceana Naval Air Station. The Midtown Tunnel Corridor features a new Norfolk-Portsmouth tunnel serving the congested area near the large Portsmouth Marine Terminal and the even larger Maersk Marine Terminal and is now under contract. The proposed Route 460 toll road running westerly from Suffolk to I-95 would provide: a safer limited access road, an additional emergency evacuation route from Hampton Roads in the event of a severe hurricane or a coordinated terrorist attack on the area’s port facilities or Armed Forces bases, and a route to mitigate the projected doubling of truck traffic from new port capacity; it is now under procurement. See also supra note 16.

26 U.S. DOT, Report to Congress on Public-Private Partnerships 15 (Dec. 2004). 27 GAO–04–419, supra note 8, at 7–8. 28 U.S. DOT, Report to Congress 16 (Dec. 2004). The writer recalls the celebrations in Hampton

Roads when tolls were removed from the Elizabeth River tunnels and the Virginia Beach Expressway. 29 U.S. DOT, Federal Highway Administration, Synthesis of Public-Private Partnership Projects

for Roads, Bridges & Tunnels From Around The World – 1985–2004, at 31–36 (Aug. 30, 2005) (prepared by AECOM Consult, Inc.) [hereafter cited as FHWA, PPP Around the World Synthesis].

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current decade as a new era when large projects likely will be tolled,30 the market nationally for PPP tolled infrastructure has been expanding and is expected to continue to increase. Virginia can hope to be a P3 leader on a larger scale in such expansion as a growing federal deficit and other demands remain a major concern for transportation professionals competing for available resources.31 With the support of Governor Robert McDonnell’s administration to promote and advance the use of P3s, Virginia has established a new agency under its Secretary of Transportation that began operations in the summer of 2011 as the Office of Transportation Public-Private Partnerships.32

VIRGINIA’S PPP PERSPECTIVE

Turning now to transportation funding in Virginia, this state’s motor fuel tax is among the lowest in the nation at 17.5 cents per gallon, has not been raised since 1986, and in the intervening 25 years “these revenues have lost 40% of their purchasing power as a result of inflation.”33 In light of this declining purchasing power of fuel taxes, the VDOT Fiscal Year 2007 Business Plan enunciated by then Acting Commissioner Gregory Whirley34 accepted the call of Virginia’s political leaders to engage the private sector and reported on the strength of the Agency’s Innovative Project Delivery Unit that promotes and shepherds PPTA projects from conception through completion.35 VDOT’s Innovative Project Delivery Unit has been involved with P3 projects for some years now and will work closely with the new Office of Transportation P3s under the Secretary of Transportation.36 Since the unveiling of its FY 2007 Business Plan, VDOT has been committed to remaining “nimble and flexible as a business to respond to changing conditions” (i.e. declines in funding or effects of inflation) to deliver the best transportation programs, systems and management possible with the resources at hand.37

Striving to utilize the PPP concept to the fullest, VDOT in May 2005 signed its first PPTA Comprehensive Agreement to include the contribution of private equity38 (HOT Lanes, I-495) and announced on January 6, 2006 the execution of nine comprehensive agreements for PPTA projects valued at $2 billion.39 VDOT’s former Commissioner, David Ekern, appointed in late September 2006, announced early in his administration that he held as a top priority working “with the private sector and … federal, state and local partners to speed innovative 21st century traffic management improvements to

30 Mineta Letter, supra note 2, at 2–6. Every project currently planned for “more than $500

million [is] expected to be a toll road.” See also supra note 3. 31 GAO–05–172, supra note 4, at 2. The nation must deal with servicing the debt the federal

deficit represents, managing increasing Medicare and Social Security benefits for an aging population, the aftermath of natural and environmental disasters, the ground wars in Iraq and Afghanistan, domestic security measures and the effects of inflation on static fuel taxes.

32 See www.vappta.org/about_the _office.asp. 33 VDOT website, Funding Trends, www.virginiadot.org/about/resources/FactBookFunding

Trends.pdf. See also Motor Fuel Excise Tax Rates, Federation of Tax Administrators, http://www.tax admin.org/FTA/rate/motor_fl.html.

34 Whirley is now the permanent VDOT CEO and known by the new title “Commissioner of Highways” after legislation from the 2011 Session of the General Assembly.

35 VDOT Business Plan Overview 7, 22–24 (Sept. 2006). 36 Interviews with VDOT management (summer 2011). 37 VDOT Business Plan Overview 5 (Sept. 2006). 38 Emphasis added. 39 VDOT Agency Strategic Plan 3 (Jan. 2006).

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the congested areas of the state” at the same time announcing that he had signed an interim PPTA agreement “to bring innovative high-occupancy toll (HOT) lanes to Interstates 95 and 395.”40

ANALYSIS AND CONCLUSIONS

With several billion dollars in infrastructure in place or proceeding through the PPTA process and the prospect of projects in the billions presently under future consideration, Virginia stands on the threshold as ready as any state to use PPPs to deliver and finance transportation infrastructure. Because Virginia has had significant experience with PPPs, it has dealt with problems and met challenges. Elliott Sclar, one of the best known American scholars on privatization, has noted that “[o]versight is a classic problem in public contracting… [and] the terms of the contract itself… [can make]… the nature of oversight vague.”41 At least partly because of lack of experience with P3 oversight, VDOT had to defend a substantial counterclaim in a lawsuit that arose from the Route 199 PPTA project in Williamsburg where VDOT allowed a project corporate property owner to build a privately-owned sound barrier on VDOT owned right of way land.42 In the early days before conversion to P3 status when Route 199 had been a federal project, FHWA was requiring VDOT to construct certain sound barriers that were not required when Route 199 became a PPP.43 Such litigation arising from changing conditions can be avoided in the future with better attention to contract terms and keener oversight. To this end VDOT has created a new Chapter 10 in the Right of Way Manual of Instructions for Right of Way Acquisition that includes a helpful matrix and attachments detailing the handling of P3 land acquisition for both Design/Build PPTA Projects and Concession Projects that will be tolled. The VDOT Special Projects Section, which was expanded in 2009 as the Right of Way & Utilities Division was reorganized, will now have teams in the field as well as in VDOT’s Central Office operating under the guidelines of the new Chapter 10 and assisting with Design Build and PPTA toll facility concessionaires as well as Urban Construction Initiatives of local governments. 44

Under the new acquisition procedures for P3 projects whether the mode is design/build or concessionaire, VDOT retains the ultimate responsibility to determine if settlement is appropriate or whether to file suit to condemn the property rights required in the event that an amicable settlement is not reached with any landowner. The new procedures have been approved by the FHWA and stipulate that VDOT retains sole authority to provide notices to FHWA that P3 project right of way has been cleared. For P3 projects, VDOT provides the funds for land or property rights acquired by eminent domain since the Private Partners – as the concession operators that will collect tolls – have no interest in assuming the risk involved in contested land value litigation. Within the past 12 years, land acquisition costs generally for all highway construction are conceded to have averaged approximately 50% of the cost of every major transportation project in Virginia.45 Because land acquisition is such a significant part of transportation infrastructure costs and recouping land costs would require much higher tolls, the Private Partners do not wish to assume the risk that higher tolls might reduce traffic and revenue for their project.

40 VDOT Press Release CO-0655, available at http://www.virginiadot.org/infoservice/news/

newsrelease.asp?ID=CO-0655. 41 ELLIOTT D. SCLAR, YOU DON’T ALWAYS GET WHAT YOU PAY FOR/THE ECONOMICS OF

PRIVATIZATION 34 (Cornell University Press paperback ed. 2001). 42 CTC v. Williamsburg Landing, Inc., Civil Action No. 10736 (Williamsburg/James City

County, Va. Cir. Ct.). 43 Id. 44 See VDOT Right of Way & Utilities Division, Manual of Instructions, Right of Way

Acquisition ch. 10 (3d ed. Jan. 1, 2011) (Special Projects Section). 45 Interviews with various transportation consultants in Virginia and VDOT Managers from

2006–2011.

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VDOT senior managers have, with the benefit of hindsight, considered whether the design of the extremely high bridge feature of the original Pocahontas toll road may have pushed project costs and debt to limits that contributed to the financial problems that were resolved only by the current P3 concession awarded to Transurban USA.46 One sees where experience with contract administration opens minds, and the Virginia experience is burgeoning.

Prior to the PPP innovations contained in the SAFETEA-LU47 federal legislation, recent federal research had concluded that nationally “active private sector sponsorship and investment seem unlikely to stimulate significant increases in the funding available for highways and transit.”48 Before SAFETEA-LU the federal toll emphasis was on “pricing” to control congestion. With its new allocation of federal funds for tolled infrastructure construction costs, SAFETEA-LU has prompted transportation scholars to suggest that “the federal government is beginning to recognize the need … to use tolling to undertake new highway … expansions.”49 In Virginia the PPP concept has not yet attracted new private capital to the extent that officials hope to generate over time—although the I-495 HOT Lanes did bring, for the first time, significant private money for construction. The Pocahontas Parkway lease of June 29, 2006 also brought significant private capital investment to the state. Critics who say that the PPTA in Virginia has so far offered nothing new in the way of infrastructure finance50 need to consider the HOT Lanes and Pocahontas examples.

Any analysis of state PPP infrastructure funding must address the fact that the Virginia experience with PPP finance has been typically American. One cannot ignore that “the United States … has a strong appetite for public debt and has structured its tax code … [to create incentives for] the use of tax-free municipal bonds to develop public infrastructure.”51 In the past the desirability of tax-free bonds has added a dimension to American infrastructure finance that distinguishes the American experience from that of Europe and is likely the chief reason why American PPPs had not attracted significant private capital when GAO–04–419 was published. The tax exempt bonds held by Virginians that have so far been a main source of funding for PPP highway projects have admittedly cost Virginia amounts ranging from $1–$3 million in lost tax revenue.52 However, as far back as 2006, Virginia’s PPP experience included more than $2 billion in new infrastructure that would have been deferred but for VDOT’s goal shared with the General Assembly to make Virginia a leader in PPP infrastructure building.

Under the strain of the current national budget crisis in the United States, the future of state and municipal bonds for transportation infrastructure is in doubt. State and local governments struggle to fund operations with the reduced and shrinking federal and/or state funds available. With fewer state and

46 Interview with Senior VDOT Manager (Nov. 7, 2006). See also supra note 20. 47 Safe, Accountable, Flexible, Efficient Transportation Act: A Legacy for Users, Pub. L. No.

109–59, 119 Stat. 1144 (signed by the President on Aug. 10, 2005). 48 GAO–04–419, supra note 8, at 30. 49 Perez & March, supra note 5, at 15. See also FHWA Manual for Using Public-Private

Partnerships on Highway Projects 38–43 (2005) (explaining new provisions for bonds and flexibility for toll use, broadened TIFIA funding, State Infrastructure Bank provisions, Toll Pilot Programs, Express Lanes Demonstration Program, etc., all designed to make “it easier and more attractive for the private sector to participate in highway infrastructure projects”).

50 James J. Regimbal, Jr., An Analysis of the Evolution of the Public-Private Transportation Act of 1995 (Southern Environmental Law Center, Jan. 2005). Regimbal’s analysis is for an environmental advocacy group and at the time of publication did not have the advantage of later published data cited herein.

51 Perez & March, supra note 5, at 15. See also FHWA, PPP Around the World Synthesis, supra note 29, at 35–36.

52 GAO–04–419, supra note 8, at 18.

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federal funds available to balance budgets and make bond payments, local governments in the future may find it more difficult to obtain bond ratings that make their bonds desirable investments even though tax free.

Scholars who have examined various public-private partnerships have seen “movement toward closer partnerships, involving joint financing and responsibility… [in the fields of] transportation, energy and applied technology research.”53 If, as expected, there is a decline in traditional sources of funding for transportation infrastructure, this movement will likely intensify. Caution from a writer who reviewed extensive literature directs attention to the possibility that “when partnerships fail through bankruptcy, inability to meet goals [etc.] … government is the provider of last resort … [and] when partnering involves essential services… is expected to fulfill the … responsibilities of failed private sector partners [references omitted].”54 Virginia’s public employee transportation professionals appear aware of the state’s ultimate responsibility for essential services and the need for strong private partners.55

Virginia can point to several billion dollars of PPP projects completed, under construction or under contract. Its rising PPTA experience is significant among the 50 states because from 1985:

PPP projects represent a $104 billion investment in infrastructure… of which $42 billion is for roads, bridges and tunnels. This [$42 billion] represents 13 percent of the total PPP funding for highway-related projects worldwide… [but] what is new is the growing interest in and variety of funding, financing, and project delivery approaches that are emerging under the guise of public private partnerships. … Even in the United States, where a substantial dedicated funding mechanism long supported a robust highway development program, there is growing recognition that traditional infrastructure funding and delivery approaches are inadequate to meet the increasing economic development and mobility needs of citizens and businesses alike, while keeping the existing highway system in a state of good repair.56

Some transportation scholars, consultants and lawyers are in quandary over the proposed amendment to Section 11 of Article 1 of the CONSTITUTION OF VIRGINIA about whether it will affect the future use of the P3 vehicle for infrastructure financing and development.57 The proposed amendment allows eminent domain to be used to acquire private property only for “public use,” but in the present form of the Amendment, public use does not include any situation where “the primary use is for private gain, private benefit, private enterprise.”58 Some argue that tolled P3 highway facilities are essentially for private gain, benefit or enterprise of the Private Partner and thus do not meet the definition of “public use.” A secondary argument is that toll roads are not truly open to the “public” – because the facilities are only open for those persons who can afford the tolls.

53 Pauline Vaillancourt Rosenau, The Strengths and Weaknesses of Public-Private Policy

Partnerships, 43 AMERICAN BEHAVIORAL SCIENTIST, No. 1, at 26 (Sept. 1999). 54 Id. at 21. 55 See www.virginiadot.org/business/ppta-Guidelines.asp. Virginia’s Pocahontas PPP experience

has also demonstrated the need for strong partners. 56 FHWA, PPP Around the World Synthesis, supra note 29, at 35–36. 57 Informal discussions at the 2010 & 2011 CLE International Eminent Domain Annual Seminars

at Tides Inn & Richmond, respectively. See H.J. Res. 693, Ch. 757, 2011 Gen. Assem., Reg. Sess (Va.) (agreed to by the Virginia House of Delegates, Feb. 23, 2011 and agreed to by the Virginia Senate, Feb. 22, 2011, 2011).

58 H.J. Res. 693, 2011 Gen. Assem., Reg. Sess. (Va.). See supra note 57.

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The author has interviewed, face-to-face, three knowledgeable and senior elected officials in Virginia government; two of them have said that there is no danger that transportation infrastructure P3 projects would be subject to challenge as not being “public uses” “since the General Assembly wishes to see an expanded use of P3s in Virginia and had no intention to restrict or hamper P3 projects.” These two officials are confident that no Virginia court would hold that the “primary use” of a P3 is for private gain or profit. The third elected official interviewed said that he was aware of the concern that if the Amendment remains in its present form some might advance a legal argument that a P3 model for a tolled facility is not a “public use.” The same official stated that the final form of the proposed amendment, if and when it goes to the voters, will make it clear that P3 transportation projects for toll roads are to be considered “public uses” in Virginia. If the proposed Amendment to the Virginia Bill of Rights became law in its present form, then motions to dismiss might be filed in some eminent domain proceedings by landowners whose property is needed for a P3 project where the landowners are tempted to use any defense available wish to stop a project from causing them to give up any property or property rights.59 The 2012 Session of the Virginia General Assembly may address the issue directly, as the third official cited above has stated will be the case. Transportation officials, consultants, lawyers for condemnors and landowners and indeed landowners themselves will be following this proposed change to the law of Virginia.

Virginia’s challenge is to dedicate and appropriate sufficient state funds so as fully “to promote PPPs for new infrastructure under the … SAFETEA-LU reauthorization of the Federal-Aid Highway Program.”60 The Virginia experience thus far suggests that the widest, most ambitious use of P3 relationships will still require significant transportation monies from the state treasury because the Private Partners will look to government—the Public Partner—to provide all funds for acquisition of land or other real property rights needed for any tolled project.61

59 The National Conference of State Legislatures has now provided a 106-page Public-Private

Partnerships for Transportation Toolkit for Legislators that gives access online to a wealth of material that will prove helpful to legislators and others involved with PPPs facing issues that will arise. The Toolkit can be accessed at www.ncsl.org.

60 FHWA, PPP Around the World Synthesis, supra note 29, at 36. 61 Eric Weiss, WASHINGTON POST, Oct. 23, 2006, available at http://www.washingtonpost

.com/wp-dyn/content/article/2006/10/22/AR2006102201081_pf.html. For example, this article entitled, Rising Costs Strain Private Partners, about HOT Lanes between Springfield and Georgetown Pike on the Virginia portion of the Capital Beltway explains the likely need for $100 million in state funds for this PPP to succeed.

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“IT’S A BIRD; IT’S A PLANE; IT’S . . . (WHAT IS IT?)”

by John A. Dezio*

FACTUAL BACKGROUND

Wilkins Investment Group, LLC, a Virginia limited liability company (“Wilkins”), and Old Oceanfront, LLC, a Virginia limited liability company (“Old Oceanfront”), were the owners, respectively of two adjacent parcels of oceanfront property on the east side of Sandpiper Road in the City of Virginia Beach at the south end of Sandbridge. The Old Oceanfront property is the southernmost privately owned oceanfront parcel in Virginia, and the Wilkins property lies immediately north of the Old Oceanfront property. Snug Harbor, LLC (“Snug Harbor”), a Virginia limited liability company, was at that time an experienced developer of real property in Virginia Beach. After significant and protracted negotiations, Wilkins and Old Oceanfront, as sellers, and Snug Harbor, as purchaser, contracted for a sale of the parcels by a Purchase Agreement dated October 6, 2003. The contract in relevant part provided:

3.1 In addition to the Purchase Price as set forth in Section 2, Purchaser shall, following the First Closing, provide the following additional consideration to Seller as a material inducement to Seller to sell the North Oceanfront Parcel:

(b) In addition, with respect to the South Oceanfront Parcel, Old Oceanfront shall be entitled to receive one of the following three (3) options depending on the type of units and development on the Property:

(ii) In the event that Purchaser or its successor(s) does not elect to sell time-shares in connection with the South Oceanfront Parcel, in lieu thereof, Old Oceanfront shall be entitled, as Old Oceanfront may elect within thirty (30) days after receipt of (i) complete architectural plans for the Project (ii) detailed financial projections for timeshare sales and projections and for unit gross sales, as applicable (including sales prices and timing models) and (iii) marketing plans and models: either to receive (A) * of the gross sales proceeds (net after actual real estate commissions not to exceed (X) * for “site” sales which may be by an affiliated company of Purchaser and (Y) * for co-brokered sales with a real estate company unaffiliated, directly or indirectly, with Purchaser) from the sale of all units constructed on the South Oceanfront Parcel or (B) to receive * (net after actual real estate commissions not to exceed (X) * for “site” sales

* John A. Dezio received his undergraduate and law degrees from the University of Virginia. He

is a former Commonwealth's Attorney for the County of Albemarle and an Assistant Commonwealth's Attorney for the City of Charlottesville. He has served on the Mid-Year Seminar Committee and has been a member, as well as Chairman, of the Virginia State Bar Disciplinary Committee.

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which may be by an affiliated company of Purchaser and (Y) * for co-brokered sales with a real estate company unaffiliated , directly or indirectly, with Purchaser) from the sale of all units constructed on the South Oceanfront Parcel plus the right to select from either the North Oceanfront Parcel (to the extent that there may be a unit then available) or from the South Oceanfront Parcel, an additional penthouse unit of its choosing and the selection, conveyance and build-out of such unit shall be in the same manner as provided in Section 3(a) above; or

(e) The provisions of this Section 3 shall survive each of the respective Closings, be binding on successors to the Property and shall, at the option of Seller, be memorialized in a written instrument to be prepared by Seller, reasonably consistent with the foregoing and to be executed and recorded at the First Closing as an enforceable encumbrance running with the land.

*Percentages are on file with the parties. By Agreement dated April 30, 2004, of record in the Clerk’s Office of the Circuit Court of the City of Virginia Beach, Wilkins, Old Oceanfront and Sanctuary at False Cape, L.P., RLLP, a Virginia registered limited liability company (“SFC”), as Assignee of the rights of Snug Harbor in the Wilkins contract, executed a document styled Easement With Covenants And Restrictions Affecting Land (“ECR”). In the document Wilkins and Old Oceanfront as Owner and SFC agreed (in relevant part) as follows: RECITALS:

E. SFC has made certain economic commitments to Owner as provided below which commitments shall be binding on the current owner and any future owner of all or a part of the Property; and

NOW, THEREFORE, for and in consideration of the premises, easements,

covenants, conditions, restrictions and encumbrances contained herein, the sufficiency of which is hereby acknowledged, Owner and SFC do hereby agree as follows:

1. Economic Provisions. The additional Consideration Provisions embodied in Section 3.1 of the Purchase Agreement (together with a redacted set of relevant definitions from the Purchase Agreement) attached hereto as Exhibit C and incorporated herein shall be binding upon SFC and any successor owner of the Property.

The pertinent parts of said Exhibit C are the portions of the contract set out above.

By deed dated April 13, 2005, recorded April 21, 2005, Old Oceanfront conveyed its oceanfront property to SFC, which deed provided in part: “This conveyance is also made expressly subject to the unexpired covenants, conditions, restrictions, reservations and easements, if any, lawfully affecting the Property, duly of record and constituting constructive notice.” There was no mention in the deed of any deferred purchase money or additional compensation being owed to Old Oceanfront, nor was there any specific reference to the Economic Provisions of the ECR.

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As set out in the Purchase Agreement incorporated into the ECR, Old Oceanfront would be entitled to a commission on the sale of each condominium unit constructed at the South Oceanfront Parcel of the Property in an amount equal to 3.5% of the gross sale proceeds (net after actual real estate commissions). The Purchase Agreement specifically provided that the foregoing provision would survive closing of the sale of the Property and would be binding on successors to the Property. The express intent of the recordation of the ECR was to create an encumbrance against the Property to provide notice to all prospective buyers and lenders and to create a lien in favor of Old Oceanfront against the Property which was subsequently developed into condominium units. By Credit Line Deed of Trust dated February 9, 2006, SFC conveyed the Property in favor of Wachovia Bank, as agent for several participating banks which had agreed to make loans against the Property, naming Wachovia Bank, National Association, Community Bankers Bank, and Townebank as secured note holders. By Credit Line Deed of Trust dated August 7, 2007, SFC conveyed the Property in favor of Community Bankers Bank. By Amendment to the Credit Line Deed of Trust Towne purchased Wachovia Bank’s Note on the Property, and succeeded to any interest Wachovia Bank held in the February 9, 2006, Credit Line Deed of Trust. Further, under the Amended Deed of Trust, Wachovia Bank resigned as agent for the other participating banks. SFC has developed the Property by constructing all of the contemplated condominium units thereon. The ECR was reported as an exception under a mortgage title policy issued by Lawyers Title Insurance Company for the benefit of Wachovia Bank and Towne, and Lawyers Title provided affirmative coverage against monetary loss for violations of the ECR. None of the Purchasers of units received a release of the lien of the ECR as to his unit, and no funds were paid on any closing by SFC to Old Oceanfront.

The overwhelming majority of Purchasers obtained owner’s title insurance coverage from

Lawyers Title with the ECR being an exception without affirmative coverage. The mortgage policies had the same provisions.1

Old Oceanfront was aware of the sales and sought payment. SFC refused to pay the percentages set out in the Purchase Agreement and threatened litigation if Old Oceanfront attempted to collect. Significantly, all of the net sales proceeds from each sale were applied to payment on the Credit Line Deeds of Trust. After approximately one hundred and three of the units were sold, SFC began to advertise sale of twenty-five of the remaining forty-five units and expressed its intent not to pay Old Oceanfront until the debts secured by the Credit Line Deeds of Trust were paid in full. Old Oceanfront then filed suit against SFC alleging breach of contract for failure to pay funds allegedly due from the sales of the one hundred and three units and anticipatory breach of contract with respect to future sales; requesting a temporary injunction preventing distribution of the sales revenue by SFC to someone other than Old Oceanfront; and asking the Court to determine the priority of liens. Old

1 This statement is based upon unverified information. The author made multiple attempts to contact the closing attorney who handled the overwhelming majority of the transactions without receiving information to the contrary.

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Oceanfront, LLC, v. Sanctuary at False Cape, L.P., R.L.L.P., Case No. CL09-5608 (Va. Beach, Va. Cir. Ct. 2009).

DEFENDANTS’ RESPONSES

Motion to Compel CBB filed its Answer asserting, among other things, that because Old Oceanfront claimed that all units in the Property were subject to the lien reserved in the ECR, and because no purchasers of such units received a release of the purported lien of the ECR, such unit owners and their secured creditors must be considered as necessary parties without whom the Court could not proceed. If the lien were valid, each purchaser and his secured creditors would be in the same position as CBB, Towne and SFC, respectively, for the sold and unsold units, respectively.

CBB also filed a two-part counterclaim seeking: (i) a declaratory judgment that the ECR did not

create a lien or encumbrance on the Property in favor of Old Oceanfront and that the secured interests of CBB and Towne were superior to any rights that Old Oceanfront may assert by virtue of the ECR or otherwise; and (ii) an Order removing the cloud on the title created by Old Oceanfront’s assertions of the ECR and the purported lien created thereby, thus confirming that title to all units would pass free and clear of all interests asserted by Old Oceanfront.

CBB argued in part that the current owners of the Property are necessary parties because they

own a property interest in their respective units that may be defeated or diminished as a result of Old Oceanfront’s asserted lien claims. The ECR was recorded prior to the sale of any of these units to Third Party Purchasers. At each of the respective closings, however, upon information and belief, none of these purchasers received a release of the purported lien of the ECR, which, if valid, would affect their properties as well as the unsold units of the project still owned by SFC. Old Oceanfront asserts as much in its Complaint, claiming that the obligations of SFC contained in the Purchase Agreement and ECR are binding “upon any successor owner of the Property,” and that the obligations constitute “a lien and an encumbrance against the units at the Property.” Under Old Oceanfront’s theory of the case, any current unit owners are bound and encumbered by the lien claimed by Old Oceanfront.

Further, because many, if not all, of these Third Party Purchasers obtained loans, secured by deeds of trust, to finance their respective purchases, any and all lienholders and trustees of the Third Party Purchasers are necessary parties. If Old Oceanfront’s assertions of the ECR and the purported lien created thereby are valid, the results of this litigation could adversely affect the secured property interests of these lienholders and trustees, as their lien could be subordinate to the alleged lien created by the ECR and, further, the value of the units, and, thus, their security, could decrease. Third Party Purchasers and their respective lienholders and trustees must be given the opportunity to challenge Old Oceanfront’s assertions that the ECR creates a lien on their property. Otherwise, the court could encounter a multiplicity of litigation brought by these Third Party Purchasers and lienholders, possibly asserting claims against their respective closing attorneys, title insurers, and the like based on Old Oceanfront’s assertions of the ECR and the purported lien created thereby. Requiring that these parties be joined in this litigation, however, will allow any controversies associated with Old Oceanfront’s assertion of its purported lien to be addressed in a single case. In short, the interests of the Third Party Purchasers and their respective lienholders and trustees are so bound up with that of the other parties in this litigation that their legal presence as parties to this proceeding is an absolute necessity without which the court cannot, and should not, proceed. Should Old Oceanfront claim that the owners and their respective lienholders and trustees are not necessary parties to this action, because the ECR was meant only to bind successor owners of the Property as a whole and not owners of individual condominium units thereon, Old Oceanfront’s claim that the ECR creates a “lien, an equitable lien, an encumbrance, a restriction on land, or otherwise” must fail.

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Old Oceanfront responded that its claims for breach of contract, anticipatory breach and a temporary injunction to prevent distribution of sales revenue by SFC to someone other than Old Oceanfront did not require the addition of other parties for the court to grant complete relief among the present parties. It continued by concluding that the simple fact that Old Oceanfront had asserted that the debt owed to it by SFC was secured by a lien against the entirety of the Property, including the units already sold, did not make the joinder of the Third Party Purchasers either necessary or proper. The absence of these parties in no way impeded the Court’s ability to give complete relief to the existing parties, and the relief Old Oceanfront sought, to wit: a money judgment against SFC, and the imposition of a constructive trust with respect to escrowed proceeds from the auction sales, and from future sales of condominium units owned by SFC, did not, as a practical matter impair or impede the Third Party Purchasers’ ability to protect their interests, or leave any of them subject to a substantial risk of incurring double, multiple or otherwise inconsistent obligations. The Motion to Compel was denied. Motion for Summary Judgment CBB and Towne also moved the court for Summary Judgment on the following grounds:

A. Old Oceanfront Failed Expressly to Reserve Its Vendor’s Lien on the Face of the Conveyance and, Therefore, Has No Lien on the Property.

In order to perfect a lien on the Property, Old Oceanfront was required to reserve its lien on the face of the document that conveyed the property. The purpose of this requirement is self evident: the purchaser and any subsequent purchasers must be able to determine what liens are claimed on the property. The General Assembly codified this requirement in VIRGINIA CODE section 55-53, which is entitled “Vendor’s equitable lien abolished.” Section 55-53 provides that “[i]f any person hereafter convey any real estate and the purchase money or any part thereof remain unpaid at the time of the conveyance, he shall not thereby have a lien for such unpaid purchase money, unless such lien is expressly reserved on the face of the conveyance.” VA. CODE ANN. § 55-53 (1950) (emphasis added). Because it failed properly to reserve the claimed lien anywhere on the face of the deed, Old Oceanfront has no lien on the Property.

1. The 3.5% of the Gross Sales Proceeds To Which Old Oceanfront Asserts It Is

Entitled Constitutes Unpaid Purchase Money for the Property.

There can be no dispute that the 3.5% of gross sales proceeds to which Old Oceanfront claims it is entitled based on the Purchase Agreement constitutes unpaid purchase money for the sale of the Property to SFC. The Purchase Agreement describes the consideration paid by SFC to obtain the Property at Section 2, titled “Purchase Price,” and in Section 3, titled “Additional Consideration.” The provision allegedly entitling Old Oceanfront to 3.5% of the gross sales proceeds from the sale of all condominium units located on the Property is set forth among the “Additional Consideration” recited in the Purchase Agreement. The express language of the “Additional Consideration” section indicates that the money sought by Old Oceanfront in the Complaint, 3.5% of the gross sales proceeds from the condominium sales, or $2,524,418.76, can only be characterized as additional, though deferred, payment of purchase money for the Property:

3.1 In addition to the Purchase Price as set forth in Section 2,

Purchaser [SFC] shall, following the First Closing, provide the following

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additional consideration to Seller [Old Oceanfront] as a material inducement to Seller [Old Oceanfront] to sell the North Oceanfront Parcel:

(b) In addition, with respect to the South Oceanfront Parcel, Old Oceanfront shall be entitled to receive one of the following three (3) options depending on the type of units and development on the Property:

Old Oceanfront admitted that the money sought was “for additional consideration due

Old Oceanfront from its sale of the Property to SFC.” The money sought by Old Oceanfront clearly constituted unpaid purchase money. Therefore, pursuant to VIRGINIA CODE section 55-53, Old Oceanfront was required to expressly reserve any lien for those monies on the face of the deeds conveying the Property to Sanctuary in order to perfect its lien. Old Oceanfront failed to do so.

2. Old Oceanfront Failed Expressly To Reserve its Lien on the Face of the Deed

Conveying the Parcel to SFC.

The language in the Deed relied upon by Old Oceanfront to reserve its lien states, “[t]his conveyance is also made expressly subject to the unexpired covenants, conditions, restrictions, reservations and easements, if any, lawfully affecting the Property, duly of record and constituting constructive notice.” While this language may be sufficient to ensure that conveyance of the Property was subject to prior easements, such as those providing access to the beach, it does not constitute an express reservation of a vendor’s lien for any portion of an unpaid purchase price. The language in those deeds therefore fails to create a lien on the Property for the 3.5% condominium sales proceeds.

Over 150 years ago, Virginia law allowed an implied vendor’s lien to arise on property

for purchase money remaining unpaid, even though the vendor conveyed the property to the purchaser without expressly reserving a lien thereon in the conveyance instrument and without taking a mortgage or deed of trust on the property. See Patton v. Hoge, 64 Va. 443, 447 (1872). “There were many inconveniences and uncertainties attending this implied lien, which induced the legislature to abolish it [in 1849].” Id. at 448. The reason for the change is obvious.

None of the evils growing out of the vendor’s implied lien resulted from a lien expressly reserved on the face of the conveyance. Being set forth in the very first link of the vendee’s chain of title, purchasers from him had just as much notice of it as they would have had of a lien upon the land by deed of trust or mortgage.

Id. VIRGINIA CODE § 55-53 therefore requires that, to be effective, a lien must be a matter of record and must furnish to all persons dealing with the property the necessary information concerning all liens and encumbrances thereon. Id. In Patton, the Court held that language in the deed that “[t]he said William Zimmerman and Sallie E. his wife, do hereby retain a lien on the property hereby conveyed, as security for the payment of the above receipted notes received in payment of their interest,” was sufficient to reserve a vendor’s lien on the property at issue.

Numerous other courts in Virginia have examined the creation of vendor’s liens in the

decades following the change to the statutory requirements. In Coles v. Withers, 74 Va. 186, 195 (1880), the Supreme Court of Virginia held that the following language was sufficient to reserve a lien for unpaid purchase money: “The said Elizabeth D. Coles, hereby expressly reserves a lien on said land for securing the payment of the purchase money, and the interest that may thereon accrue; and the said Miller hereby agrees that the land shall be bound for the same.” 74 Va. at 197. Similarly, in Patterson v. The Grottoes Co., 93 Va. 578, 583 (1896), the Supreme Court of Virginia found language in a deed stating that “the vendor’s lien is hereby expressly retained

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upon the land conveyed, to secure the four bonds of the Grottoes Company . . . given for deferred payments of purchase money,” was sufficient to expressly reserve a vendor’s lien. Conversely, in Harris v. Shield’s Executor, 111 Va. 643, 646 (1911), the plaintiff claimed that language in its deed stating “the sum of five hundred dollars secured to be paid,” created a lien on the property in plaintiff’s favor. The Court found that such language “[c]learly [did] not constitute an express reservation of a lien on the land on the face of the deed to secure its payment,” despite use of the word “secured.” Id. In Patton, Coles, and Patterson, the word “lien” is in the language relied on to create the lien, whereas in Harris the word “lien” was not written on the face of the instrument.

None of the language relied on by Old Oceanfront, or any other language in the deed,

comes close to the clarity of the language found in Patterson, Coles, and Patton. The parties did not intend that a vendor’s lien would arise because the deed does not even reference the word “lien.” The deed makes specific reference to the “Recreation Easement,” the “Constitution Easement,” and the “Access Easement,” all of which pertain to the easements and rights of previous owners of the Property pertaining to the development of retained land. Clearly, these retained rights were significant enough to warrant express mention in the deed. Old Oceanfront’s reliance on the catch-all language in the deed related to the conveyance is misplaced to support a claim of a lien. The deed simply states that the conveyance “is also made expressly subject to the unexpired covenants, conditions, restrictions, reservations and easements, if any, lawfully affecting the Property, duly of record and constituting constructive notice” to assert its lien. As in Harris, this language, found in the deed, “clearly . . . does not constitute an express reservation of a lien on the land on the face of the deed.” Harris, 111 Va. at 646. Accordingly, Old Oceanfront has no lien on the Property for any unpaid purchase money owed by SFC.

Old Oceanfront appears to assert in its Complaint, and the Exhibits attached thereto, that

it has complied with VIRGINIA CODE section 55-53 because a redacted version of a portion of the Purchase Agreement was recorded as part of the ECR. This argument lacks merit because the express language of VIRGINIA CODE section 55-53 requires that a vendor’s lien for the unpaid purchase price of real property be reserved on the face of the instrument conveying the property, and the ECR was not the document that conveyed the Property to Sanctuary. At best, the ECR merely serves to memorialize the agreement entered into between Old Oceanfront and SFC concerning various aspects of the Property.

Furthermore, the redacted version of the Purchase Agreement, which was included with

the recorded ECR, inexplicably omits the percentages of all profits and proceeds to which Old Oceanfront claims it is entitled. Therefore, even if the ECR could be considered a document that reserves any lien to Old Oceanfront, the failure to include the information that would inform a purchaser or subsequent purchaser as to the amount of the claimed lien defeats the purpose of VIRGINIA CODE section 55-53. Simply put, no one reading the face of the recorded ECR would be able to determine the amount of any lien that Old Oceanfront had purportedly reserved for itself. See Shaheen v. County of Mathews, 265 Va. 462, 477, 79 S.E.2d 162, 172 (2003) (“To constitute constructive notice, the registered or recorded instrument must . . . be such that, if a subsequent purchaser or incumbrancer should examine the instrument itself, he would obtain thereby actual notice of all the rights which were intended to be created or conferred by it.”)

If the Court permits Old Oceanfront to assert lien rights in this situation, all of the evils,

inconveniences, and uncertainties associated with the vendor’s implied lien, which was statutorily abolished over 150 years ago, will resurface. Entities such as CBB and Towne will lack confidence with the property recording and filing system in Virginia and begin to fear that their duly recorded deeds of trust are somehow insufficient. This Court should therefore grant the Lenders summary judgment on Count I of CBB’s Counterclaim and declare that Old Oceanfront has no lien on the property.

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B. The ECR Does Not Constitute a Restrictive Covenant Running with the Land or Any Other Valid Restriction on the South Oceanfront Parcel

The undisputed facts conclusively demonstrate that the ECR does not constitute a

restrictive covenant running with the land or any similar encumbrance. A restrictive covenant that runs with the land, or a real covenant, is enforceable upon proof of the following elements: (1) an intent evidenced by the original covenanting parties in the document that the burdens and benefits of the covenant will run with the land; (2) privity between the original parties to the covenant, or horizontal privity; (3) privity between the original parties to the covenant and their successors in interest, or vertical privity; (4) the covenant must “touch and concern” the land; and (5) the covenant must be in writing. Beeren & Barry Investments, LLC v. AHC, Inc., 227 Va. 32, 37-38, 61 S.E.2d 147, 150 (2009). For the purpose of this Motion for Summary Judgment, the only element as issue is whether the ECR “touches and concerns” the land.

1. The ECR Does Not Touch and Concern the Property.

For a covenant to “touch and concern” the land, it must affect the physical use and enjoyment of the land. Carneal v. Kendig, 196 Va. 605, 611, 85 S.E.2d 235, 238 (1955); Oliver v. Hewitt, 191 Va. 163, 166-67 (1950). The Supreme Court of Virginia has held that a limitation on the number of houses that could be constructed on a particular parcel of land is a covenant that touches and concerns the land. See Sloan v. Johnson, 254 Va. 271, 277 (1997). The Supreme Court likewise has held that a prohibition on constructing improvements on a parcel of land within certain proximity of an existing structure touches and concerns the land. See Sonoma Dev., Inc., v. Miller, 258 Va. 163 (1999). Furthermore, the Supreme Court has upheld a restriction on the development of property surrounding a parcel of land dedicated as a park as a covenant that touches and concerns the land. See Barner v. Chappell, 266 Va. 277 (2003). It is well settled, however, that personal covenants between the parties to a contract do not run with the land. See, e.g., Tardy v. Creasy, 81 Va. 553, 562 (1886) (finding restraints on trade “are not covenants which can be held to be of such a nature as to impress themselves on the land burdened, for the benefit of some other property; they are covenants collateral to the land merely – personal covenants which cannot be annexed to the land”).

The portion of the Purchase Agreement relied upon by Old Oceanfront and incorporated

into the ECR has no impact on the physical use or enjoyment of the Property; it is merely a personal covenant between the purchaser and seller. When a covenant is contingent upon events personal to the original covenanting parties, or when the covenant is for the original parties’ personal benefit only, the covenant is merely personal in nature and does not touch and concern the land. Beeren & Barry Investments, 277 Va. at 39. Several decisions from Virginia courts have held that personal covenants do not touch and concern the land. The Supreme Court held that a restriction imposed to protect the grantor’s business from injurious competition was a personal covenant and not a covenant running with the land, because the restriction was for the grantor’s benefit only and was not intended to affect the natural use and enjoyment of any land retained by the grantors. See Carneal, 196 Va. 611, 85 S.E.2d at 238. The Court has also held that a covenant for the purpose of protecting a business operated by the grantor was a personal covenant for the grantor’s sole benefit as distinguished from a covenant running with the land. See Oliver, 191 Va. at 166-67. The Circuit Court for the City of Richmond held, in Harrison & Bates v. F.R. Associates, Ltd., 47 Va. Cir. 468 (1998), that an agreement to pay a real estate agency commissions, as a percentage of rent, in a lease recorded in the land records was unenforceable as a restrictive covenant. In its holding, the Richmond Circuit Court determined that a restriction must affect the physical use of the land to “touch and concern” the land so as to be considered a covenant running with the land. Id. at 470. The ECR in this case cannot, under any standard, be deemed to “touch and concern” the land.

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When courts examine restrictive covenants, any doubt or ambiguity is to be resolved against the restriction and in favor of the free use of the property, as such covenants are not favored and must be strictly construed. Barris v. Keswick Homes, LLC, 268 Va. 67, 71, 597 S.E.2d 54, 57 (2004), Here, it cannot be disputed that any obligation of SFC to pay Old Oceanfront 3.5% of the proceeds of the condominium unit sales is nothing more than a personal covenant between Old Oceanfront and SFC. Old Oceanfront’s purported rights under Section 3.1 of the Purchase Agreement are entirely contingent on events personal to SFC, and SFC’s sole obligation is to pay unpaid purchase money to Old Oceanfront. The present factual situation is very similar to the facts from Harrison & Bates. Here, the amount of additional consideration allegedly payable to Old Oceanfront is expressed as a percentage of the sale price of particular units and depends entirely on which of the three options (all time share units, all condominium units, or a combination of both) were ultimately developed by SFC on the South Oceanfront Parcel. For instance, Section 3.1(b)(ii) provides that if SFC builds all condominium units, Old Oceanfront is entitled to 3.5% of the gross sale proceeds from the sale of all condominium units constructed on the South Oceanfront Parcel. If, however, SFC had built only time share units, the percentage of unpaid purchase money payable to Old Oceanfront would have been different. In Harrison & Bates, the amount to be paid to the plaintiff was a percentage of the rent owed on the subject property; the Richmond Circuit Court held that the recorded lease with the commission percentages explicitly set forth in the document could not touch and concern the land because that obligation did not affect the physical use of the land. 47 Va. Cir. at 470. Any obligation to pay the 3.5% gross sale proceeds in this case must only be characterized as a personal covenant between SFC and Old Oceanfront which was meant to benefit the original covenanting parties. Under well settled law, that obligation does not run with the land because it does not affect the physical use of the land and therefore does not “touch and concern” the land.

2. The Language of the ECR Does Not Automatically Create a Restrictive

Covenant Running with the Land.

Old Oceanfront relies on language from the portion of the Purchase Agreement that was attached to the ECR in its attempt to persuade the Court that the ECR creates a covenant running with the land. Section 3.1(e) of the Purchase Agreement states:

The provisions of this Section 3 shall survive each of the respective Closings, be binding on successors to the Property and shall, at the option of the Seller, be memorialized in a written instrument to be prepared by Seller, reasonably consistent with the foregoing and to be executed and recorded at the First Closing as an enforceable encumbrance running with the land.

This statement, however, is insufficient to create a restrictive covenant where one does not actually exist because it is well settled in Virginia that a mere declaration that a covenant runs with the land does not make the covenant touch and concern the land when the covenant itself plainly does not do so. As a matter of law, if a covenant is not, in nature and kind, a real covenant that touches and concerns the land, the mere self-serving declaration of the parties that it shall run with the land will not make it a real covenant despite language in the actual document. See Harrison & Bates, 47 Va. Cir. at 470 (“It is the court’s view also that the requirement of ‘touch and concern’ cannot be overcome by a mere declaration that a covenant runs with the land.”) As stated above, there can be no dispute that the obligation to pay 3.5% of the proceeds from the condominium sales is a personal covenant between Old Oceanfront and SFC, and the statement in the Purchase Agreement that purports to make this obligation run with the land is ineffective. Old Oceanfront did not reserve any lien on the face of the instrument conveying the Property; therefore, there is no lien that could affect title to the Property. (See supra section IV.A.) Furthermore, the ECR does not create a covenant running with the land or any other valid restriction on the Property. Accordingly, the Court should grant summary judgment in favor of

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the Lenders on Count II of CBB’s Counterclaim and declare that the ECR does not create any interest that would affect title to the Property.

RESPONSE

Old Oceanfront argued in response that many issues were generally in dispute and that summary judgment was not appropriate.

A. The Lien of the ECR Constitutes an Equitable Lien Under Virginia Law

Count I of CBB’s Counterclaim seeks a Declaratory Judgment that the ECR does not constitute a lien or encumbrance. In their Joint Memorandum, CBB and Towne argue that the undisputed facts demonstrate conclusively that the lien asserted by Old Oceanfront against the Property constitutes a vendor’s lien that was not expressly reserved on the face of the deed conveying the Property to SFC. Old Oceanfront agrees that its lien was not reserved on the face of the deed to SFC. However, Old Oceanfront disputes the efforts of CBB and Towne to label the lien of the ECR a “vendor’s lien” in an effort to bring it within the ambit of §55-53 of the VIRGINIA CODE. That section provides that one who conveys real estate under circumstances where part of the purchase money is unpaid at the time of the conveyance will not “thereby” have a lien unless the lien is reserved on the face of the deed. VA. CODE § 55-53. The section reflects abolition in 1849 of the common law implied vendor’s lien which could be effective, even without notice. Except for the implied vendor’s lien, §55-53 does not prohibit other means of securing monetary obligations. Deeds of trust are most commonly used for that purpose. Virginia also recognizes equitable liens, without restrictions as to purpose. As noted by the Virginia Supreme Court:

The subject of equitable liens has been dealt with in several cases in

which this statement by Pomeroy (Pomeroy’s Equity Jurisprudence, 5th ed., §1235) has been approved:

‘The doctrine may be stated in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, ***creates an equitable lien upon the property so indicated which is enforceable against the property***.’ (Citations omitted) Hoffman v. First National Bank of Boston, 205 Va. 232 135, 236, S.E.2d 818, 821 (1964)

From the language of the ECR, the clear intent of the SFC and Old Oceanfront was to fashion a flexible mechanism for providing additional consideration to Old Oceanfront depending upon the method chosen by SFC to develop the property. (Although the word “commission” was used in the Complaint in an effort to describe the nature of the intended payment, that term is incorrect, and the words “additional consideration” are those employed by the parties in the Purchase Agreement and the ECR.) The additional consideration was something beyond the Purchase Price. Old Oceanfront’s determination which one of several options to choose for measurement of additional consideration depended upon development decisions made by SFC, the furnishing of books and records, architectural plans, financial projections, marketing plans, and models. SFC specifically agreed to the encumbrance of the Property to assure payment of the additional consideration. Old Oceanfront is entitled to offer proof of the manner in which it sought to exercise its rights with respect to the lien of the ECR, rights which in retrospect were undermined by CBB, Towne and by Wachovia, as Agent for the lenders under the February 9, 2006 Deed of Trust.

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Although not alleged in Defendants’ Joint Summary Judgment Motion/Memorandum, CBB specifically alleges in its Joinder Motion, paragraph 7, and its Memorandum in Support, paragraph 13, that more than one hundred condominium units were sold to Third Party Purchasers “[p]rior to Defendants obtaining knowledge of Old Oceanfront’s assertions of the ECR and the purported lien created thereby.” This factual claim of lender innocence is disputed by Old Oceanfront. The knowledge and conduct of CBB, Towne and their Agent, Wachovia, with respect to the rights of Old Oceanfront under the ECR, as well as other material facts, are genuinely in dispute and must be brought into sharp focus. If allowed to do so, Old Oceanfront will offer the following evidence at trial:

1. The ECR was recorded May 20, 2004. 2. Both CBB and Towne first acquired interests in the Property as secured lenders

by virtue of the February 9, 2006 Deed of Trust. 3. The February 9, 2006 Deed of Trust refers to and incorporates a certain Credit

Agreement, also dated February 9, 2006, among Towne, CBB and Wachovia (which then served as Agent for all three lenders), and SFC as Borrower (the “2006 Credit Agreement”.)

4. The 2006 Credit Agreement defines the term “Lien” to include “any lien, claim . . . other encumbrance.” At page 9, definition is given to the term “Permitted Liens” to include “. . . (vi) easements, covenants, and other customary restrictions on the use of real property and other title exceptions disclosed to Agent in the Mortgage Policies that do not interfere in any material respect with the ordinary course of business . . .”

5. Through the Agent, Wachovia, under the 2006 Credit Agreement, if not directly, both CBB and Towne knew of the ECR, which was reported as an exception under the Mortgage Policy, Lawyers Title Insurance Corporation, Loan Policy Of Title Insurance, Policy No. G52-0569023.

6. Either directly or through the Agent, Wachovia, CBB and Towne obtained affirmative coverage against monetary loss for violations of the ECR.

7. Despite actual knowledge of the terms of the ECR, its recordation, and its status as a lien, as defined under the Credit Agreement, Wachovia, CBB and Towne imposed terms for release payments under the Credit Agreement which rendered it practically impossible that the terms of the ECR could be satisfied from the proceeds of sale of each condominium unit.

The evidence alluded to demonstrates that CBB and Towne, either directly, or through their Agent, Wachovia, under the Credit Agreement, “treated the ECR as a Lien.” Accordingly, a genuine issue of material fact exists concerning these matters.

Concerning the sales to Third Party Purchasers, CBB alleges in paragraph 14 of its

Counterclaim that Old Oceanfront did not demand payment for any amounts arising out of these sales. This allegation is denied in Old Oceanfront’s Answer, and is a matter of fact genuinely in dispute. Old Oceanfront did seek to obtain payment but was forestalled by threats of litigation. These demands were made not only to counsel for SFC, but to the settlement agent who was responsible for settling each and every one of the Third Party sales. Despite the demand, the settlement agent closed the transactions and disbursed all available proceeds for the benefit of Wachovia, Towne, or CBB under the Credit Agreement. If allowed to do so, Old Oceanfront will present evidence through the settlement agent and other witnesses concerning the settlement of these transactions.

B. The ECR As Recorded Constitutes Constructive Notice Of Old Oceanfront’s Lien

The ECR was duly recorded on May 20, 2004. The language of Exhibit C to the ECR

makes it abundantly clear that the rights asserted are rights to receive percentages of sales

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proceeds dependent upon the type of transaction. The precise percentages are left blank and the reader is directed to a note that the *Percentages are on file with the parties. (emphasis supplied.) The Defendants claim the absence of the stated percentages is such an omission of information as to render the recordation of the ECR useless as constructive notice, citing Shaheen v. county of Mathews, 265 Va. 462, 579 S.E.2d 162 (2003). To support their contention, Defendants have quoted a single sentence from the Court’s opinion, without regard to later limiting language, and indeed, without regard to the eventual holding in the case. The Defendants overlook, for example, the Court’s statement that a purchaser “must look to the title papers under which he buys, and is charged with notice of all the facts appearing upon their face, or to the knowledge of which anything there appearing will conduct him.” 265 Va. 462, 477, 579 S.E.2d 162, 172. Nor did Defendants mention the Court’s extensive analysis of Chavis v. Gibbs, 198 Va. 379, 381, 94 S.E.2d 195, 197 (1956), culminating with the following quotation from 66 C.J.S., Notice §11, p. 642:

A person who has sufficient information to lead him to a fact is deemed

conversant with it, and a person who has notice of facts which would cause a reasonably prudent person to inquire as to further facts is chargeable with notice of the further facts discoverable by proper inquiry.

265 Va. 462, 480, 579 S.E. 172, 173.

A thorough reading of Shaheen leads ineluctably to the conclusion that the provisions of the ECR are more than adequate to constitute constructive notice to the Defendants of the terms of Old Oceanfront’s equitable lien.

CBB and Towne certainly had no need for constructive notice. Either directly or through

their designated Agent, Wachovia, CBB and Towne had actual knowledge of the ECR, recognized it as a “lien” under the terms of their very own Credit Agreement, understood that it carried economic risk, and addressed that risk by requiring affirmative title insurance coverage against monetary loss in the event the ECR was violated. The Defendants and their co-lender and Agent, Wachovia, also had in their complete control the ability to anticipate the amount of additional consideration to be paid from the proceeds of sale of each unit, because such sales could only take place at prices permitted under the terms of the Credit Agreement.

Effectively, on February 9, 2006, the die was cast. CBB, Towne and Wachovia made

certain that Old Oceanfront would never see a dime of the additional consideration to which it was entitled from proceeds of sale under the ECR.

Old Oceanfront respectfully submits that the ECR constitutes an equitable lien securing

the obligation of Sanctuary, as intended, to provide additional consideration to Old Oceanfront upon the terms specified in Exhibit C attached to the ECR recorded on May 20, 2004. By virtue of its prior recordation, constituting constructive notice, the ECR takes priority over the liens of the Towne Deed of Trust and the CBB Deed of Trust, both recorded later.

RESOLUTION

At this point the parties settled the matter, so we have no decision as to whether the lien asserted by Old Oceanfront is an Equitable Lien or a Vendor’s Lien; its priority as to lenders and whether the asserted lien affected sold units.

COMMENTARY In reading the pleadings one might conclude that the attorney for Old Oceanfront should have used the simple, direct and obvious approach to assert the lien of his client, such as a vendor’s lien or

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deferred purchase money Deed of Trust. One might also conclude that to do otherwise might constitute actionable negligence by the Old Oceanfront attorney. Such conclusions would be imprudent, however, unless one understood the “significant and protracted” negotiations mentioned at the beginning of this article. Knowing the plans of Snug Harbor (later SFC) for development of the property, Old Oceanfront knew that the acquisition, development and construction lenders would require a first lien on the property and would require that all net proceeds from unit sales be applied to the Deed of Trust obligations. Subordinate financing in the traditional manner would be problematic since no funds from sales would be available to apply to the subordinate lien for partial releases. If sales were active, there would be sufficient funds to pay Old Oceanfront. If the market collapsed, Old Oceanfront would be in a second lien position, which for all intents and purposes, was no position. How could counsel for Old Oceanfront protect his client when a secured lien was not available and when an unsecured lien was not desirable should the market collapse? Snug Harbor and SFC had no other assets, and no personal guarantees, letters of credit or other assurances of payment were available.

The answer: put a restriction on the property in the nature of an equitable lien that in effect would be a cloud on the title that would have to be addressed during foreclosure processes. The “cloud” would be clearly set out in the ECR so that all purchasers and lenders would have notice and could act accordingly. The author speculates that there could have been other reasons for this approach, such as determining at the time of closing the fixed dollar amount of the additional consideration, which were considered by counsel, but since the pleadings and arguments of record do not disclose such other reasons, these remain as conjecture only. Old Oceanfront had, therefore, as good a lien as was pragmatically feasible. What about unit purchasers and their lenders? Assuming that the closing attorneys read the ECR, they should have taken steps to protect their clients, as deemed necessary. To the extent that the closing attorneys did not, imagine the position of their clients who could have faced a potential lien on their units had there not been sufficient funds from sales or foreclosures to pay Old Oceanfront—and no coverage from their title insurance policies.

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THE PECULIARITIES OF SINGLE ASSET REAL ESTATE BANKRUPTCY CASES

by John H. Maddock III and Bryan A. Stark*

As real estate practitioners know all too well, over the past several years, the real estate market has endured a significant downturn. So much so that many real estate practitioners with little or no experience in bankruptcy law have found themselves maneuvering their way through the BANKRUPTCY CODE1 due to an increase in the number of real estate based companies filing bankruptcy petitions in an effort to fend off creditors.

The operations of many of these real estate based companies consist of a single building or a single project (i.e. “single asset real estate”). As such, these cases are subject to special provisions under the BANKRUPTCY CODE. This article discusses the peculiarities of single asset real estate bankruptcy cases and the key issues of which all practitioners should be aware.

I. WHAT IS SINGLE ASSET REAL ESTATE?

The BANKRUPTCY CODE defines “single asset real estate” as:

[R]eal property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by the debtor other than the business of operating the real property and activities incidental.2

Thus, to satisfy the BANKRUPTCY CODE’s definition and qualify as a single asset real estate debtor, a debtor must satisfy three criteria.3 First, the real estate must be a single property or a single project. Second, the single property or single project must generate substantially all of the debtor’s revenue. Third, the debtor must not conduct business on the single asset real estate other than operating the real property and activities incidental thereto.

With regard to the first requirement, although one may easily conclude what comprises a single property, some clarification may be needed to determine what comprises a single project.4 The term “single project” recognizes that real estate development projects often involve several tracts or parcels of land.5 Thus, to provide guidance on what may comprise a single project, courts have found that “in order for two or more separate properties to constitute a single project within [sic] meaning of Code §§ [sic] 101(51B), the properties must be linked together in some fashion in a common plan or scheme involving

* John H. Maddock III (partner) and Bryan A. Stark (associate) are members of McGuireWoods LLP’s Restructuring & Insolvency Department, specializing in restructuring and insolvency, state creditors’ rights law and commercial litigation.

1 11 U.S.C. § 101 et seq. 2 Id. § 101(51B). 3 In addition to satisfying the statutory definition of “single asset real estate,” a debtor may elect

to identify itself as a single asset real estate debtor by checking the appropriate box on its bankruptcy petition. If a debtor makes such an election, the debtor is deemed a single asset real estate debtor without further order or determination by the presiding bankruptcy court.

4 See, e.g., In re The McGreals, 201 B.R. 736, 741 (Bankr. E.D. Pa. 1996) (“Precisely what Congress intended the meaning of [single project] to be, however, is not made clear by the statute or its legislative history.”).

5 In re Golf Club Partners, L.P., Case No. 07–40096–BTR–11, 2007 Bankr. LEXIS 1225, at *13 (Bankr. E.D. Tex. Feb. 15, 2007).

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their use.”6 Importantly, so long as the separate properties are involved in a common plan or scheme involving their use, such properties need not border or be geographically proximate.7 Thus, whether a real estate project satisfies the first criteria of single asset real estate depends solely on whether the properties comprising the single project are involved in a common plan or scheme with regard to their use.

The second requirement is that the real property must generate substantially all of the debtor’s gross income. While it is generally accepted that apartment buildings and residential developments are single asset real estate projects for purposes of the BANKRUPTCY CODE,8 other real estate projects may not satisfy this second prong if such projects include activities that generate revenues from other sources. Specifically, courts have held that real estate projects do not satisfy this second prong when all or a portion of the revenue is generated by the efforts of management and workers on the land.9 In holding that a golf club, which operated a golf course, tennis courts, driving range, and a casual dining restaurant, did not satisfy the second prong, one court determined that the debtor’s revenue resulted from the management and workers’ efforts bringing in and selling goods and services to customers, and not from the real estate itself.10 Thus, “the property itself, not the fruit of workers’ labor and management services” must be responsible for substantially all of the debtor’s gross income.11 Lastly, real property that fails to generate any income may still qualify as single asset real estate under the BANKRUPTCY CODE. For example, courts have held that a vacant apartment complex12 and raw land held for future development13 satisfy the second prong.

The last criteria for meeting the BANKRUPTCY CODE’s definition of single asset real estate is that the debtor may not conduct business on the real estate other than to operate the real property and activities incidental thereto. Thus, when a debtor is actively engaged in various income producing activities, rather than holding the real property as a passive investment, such property does not satisfy the third criteria for single asset real estate.14 Indicia that real property is being held as an investment includes such passive activities as the receipt of rent, arranging maintenance for the property, and marketing activities.15 Alternatively, due to their close nexus to the property, courts have held that the construction, marketing,

6 McGreals, 201 B.R. at 742. 7 See Golf Club Partners, 2007 Bankr. LEXIS, at *13 (finding that the phrase “single project”

may comprise several parcels of land that “may not be contiguous”) (emphasis added); cf. McGreals, 201 B.R. at 742–43 (finding that properties with a common owner and a common border but without “any common link in usage” were not a single project pursuant to section 101(51B) of the BANKRUPTCY CODE).

8 In re Kkemko, 181 B.R. 47, 50 (Bankr. N.D. Ohio 1996). 9 See Golf Club Partners, 2007 Bankr. LEXIS, at *14. 10 Id. 11 Id. 12 In re Syed, 238 B.R. 133, 140 (Bankr. N.D. Ill. 1999) (“It seems clear, however, from the

relevant case law, that ‘single asset real estate’ includes property formerly used and intended to be used in the future as income producing property.”).

13 In re Pensignorkay, Inc., 204 B.R. 676, 681–82 (Bankr. E.D. Pa. 1997) (“[A] tract of undeveloped land consisting of two adjacent parcels of real property . . . that the Debtor acquired with the intention of creating subdivided parcels suitable for building and development . . . constitutes a ‘single property or project’ within meaning of the statute.”).

14 In re Prairie Hills Gold & Ski Club, Inc., 255 B.R. 228, 230 (Bankr. D. Neb. 2000). 15 In re Scotia Dev., LLC, 375 B.R. 764, 778 (Bankr. S.D. Tex. 2007).

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and sale of newly constructed homes are merely activities incidental to operating the real property.16 When applying an active versus passive analysis to particular real estate projects, courts have held that golf courses,17 hotels,18 and marinas,19 fail to satisfy the third criteria because the debtors operating such businesses provide services in addition to, and not incidental to, the passive operation of the real estate.

II. SINGLE ASSET REAL ESTATE CASES AND THE ADDITIONAL GROUND FOR RELIEF FROM THE AUTOMATIC STAY

The determination that a debtor is a single asset real estate debtor expedites the debtor’s bankruptcy case because in single asset real estate cases, a debtor’s secured creditors are provided with an additional ground for relief from the automatic stay. Specifically, relief from the automatic stay can be obtained if the debtor does not take specific actions within ninety days of filing its bankruptcy petition. As a result, single asset real estate debtors must quickly address the issue or issues that forced the debtor into bankruptcy or lose the benefit of the automatic stay.

A. What is the Automatic Stay?

The automatic stay provided for in section 362 of the BANKRUPTCY CODE operates as a stay against:

(1) [T]he commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title . . . ; [and]

. . .

(3) any act to obtain possession of the property of the estate or of property from the estate or to exercise control over property of the estate.20

“The automatic stay is the most fundamental protection afforded a debtor in bankruptcy,”21 and Congress intended the automatic stay to have broad application.22 “The main purpose of the automatic

16 Kara Homes, Inc. v. National City Bank (In re Kara Homes, Inc.), 363 B.R. 399, 404 (Bankr.

D.N.J. 2007). 17 See, e.g., Larry Goodwin Golf, Inc., 219 B.R. 391, 393 (Bankr. M.D.N.C. 1997) (finding that

because in addition to operating and maintaining its golf course, the debtor rents golf carts, operates a pool, and provides concessions, it operates a business on the real property).

18 In re Centofante v. CBJ Dev, Inc. (In re CBJ Dev., Inc.), 202 B.R. 467, 472 (B.A.P. 9th Cir. 1996) (finding that operating a full service hotel is more than the mere operation of the property); see also In re Whispering Pines Estate, Inc., 341 B.R. 134, 136 (Bankr. D.N.H. 2006). But see NationsBank, N.A. v. LDN Corp. (In re LDN Corp.), 191 B.R. 320, 326 (Bankr. E.D. Va. 1996) (parties agreed that a hotel was single asset real estate).

19 In re Kkemko, 181 B.R. 47, 52 (Bankr. N.D. Ohio 1996) (finding that because the marina stores, repairs, and winterizes boats, provides showers and a pool, and sells gas and concessions at the marina, the marina conducts activities over and above operating the real property).

20 11 U.S.C. §§ 362(a)(1), (3). 21 Cohen v. UN-Ltd. Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790, 810 (Bankr. E.D. Va. 1999). 22 See H.R. Rep. No. 95–595. 95th Cong., 340–42 (1978), reprinted in 1978 U.S.C.C.A.N. 5963,

6296–97; S. Rep. No. 95–989, at 49–51 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840–41.

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stay is to give the debtor a breathing spell from [its] creditors, to stop all collection efforts, harassment and foreclosure actions.”23

Thus, the automatic stay precludes a secured creditor from initiating or continuing a foreclosure action (or any action) against single asset real estate and provides the debtor with an opportunity to reorganize and successfully emerge from bankruptcy.

B. Single Asset Real Estate Debtors and Relief From the Automatic Stay Pursuant to Section 362(d)(3)

Despite the automatic stay enjoining any action against the debtor or property of the debtor’s bankruptcy estate, creditors may request the court to grant relief from the automatic stay if the creditor can satisfy certain criteria. In addition to the grounds available to all creditors,24 secured creditors who have a security interest in single asset real estate are afforded an additional basis upon which to obtain relief from the automatic stay. The BANKRUPTCY CODE provides, in pertinent part:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section . . . –

. . . .

(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within the 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later –

(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or

(B) the debtor has commenced monthly payments that –

(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and

(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor’s interest in the real estate.25

23 In re Atlas Machine & Iron Works, 239 B.R. 322, 328 (Bankr. E.D. Va. 1998) (citation

omitted); see also In re Avis, 178 F.3d 718, 720–21 (4th Cir. 1999); In re A.H. Robins Co., 788 F.2d 994, 998 (4th Cir. 1985) (stating that a key purpose of section 362 is “to provide the debtor and its executives with a reasonable respite from the protracted litigation, during which they may have an opportunity to formulate a plan of reorganization for the debtor”).

24 See 11 U.S.C. §§ 362(d)(1) (for “cause”) and (d)(2) (the debtor has “no equity” in the property and property is “not necessary for an effective reorganization”).

25 Id. § 362(d)(3).

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By including section 362(d)(3) in the 1994 amendments to the BANKRUPTCY CODE, “Congress expressly attempted to avoid the usual delays experienced in Chapter 11 in single asset real estate cases, which historically have been filed to avoid a foreclosure and in the hope that the debtor can come up with some form of a miracle in order to formulate an acceptable plan.”26 Indeed, “the purpose of section 362(d)(3) is to address perceived abuses in single asset real estate cases, in which debtors have attempted to delay mortgage foreclosures even when there is little chance that they can reorganize successfully.”27

Although, section 362(d)(3) “was enacted to assist secured creditors in single asset real estate cases,”28 the single asset real estate provisions also provide the “debtor an opportunity to create a workable plan of reorganization.”29 Importantly, however, single asset real estate debtors must strictly comply with the requirements set forth in section 362(d)(3). If a single asset real estate debtor fails to comply with any element set forth therein, section 362(d)(3) requires the court to grant the secured creditor relief from the automatic stay.30

Accordingly, within ninety days of a debtor’s bankruptcy filing or thirty days after the court determines that the debtor is a single asset real estate debtor, the debtor must either file a plan of reorganization with a reasonable possibility of confirmation in a reasonable time or commence payments to the secured creditor equal to the amount of nondefault interest or risk losing the protections afforded by the automatic stay.

1. Plan of Reorganization with a Reasonable Possibility of Confirmation in a Reasonable Time

A single asset real estate debtor can prevent a secured creditor’s obtaining relief from the automatic stay pursuant to section 362(d)(3)(A) if within the ninety-day period the debtor files a plan of reorganization that has a reasonable possibility of confirmation within a reasonable time.

The determination as to whether a plan of reorganization is reasonably confirmable is not paramount to a “mini confirmation hearing.”31 Rather, because the burden of proof rests on the creditor’s shoulders,32 the creditor must demonstrate that proposed plan does not have a reasonable possibility of confirmation, which is a higher standard than that required for confirmation.33 To prove that the plan does not have a “reasonable possibility” of being confirmed, the creditor must demonstrate that (1) the debtor is not proceeding to propose a plan of reorganization; (2) the proposed plan does not have a realistic chance of being confirmed; or (3) the proposed or contemplated plan is patently unconfirmable.34

26 NationsBank, N.A. v. LDN Corp. (In re LDN Corp.), 191 B.R. 320, 326 (Bankr. E.D. Va.

1996). 27 3 COLLIER ON BANKRUPTCY ¶ 362.07[5][b] (Alan N. Resnick & Henry J. Sommers eds., 16th

ed. 2011). 28 Id. 29 S. Rep. No. 168, 103d Cong., 1st Sess. (1993). 30 LDN Corp., 191 B.R. at 326; cf. Condor One v. Archway Apartments Ltd. (In re Archway

Apartments Ltd.), 206 B.R. 463, 465 (Bankr. M.D. Tenn. 1997) (requiring that the court grant relief to the secured creditor, but the termination of the automatic stay is not required).

31 See LDN Corp., 191 B.R. at 325. 32 In re Cascadia Partners, Case No. 10–63442–LYN, slip op. at 5 (Bankr. W.D. Va. June 30,

2011). 33 See In re Windwood Heights, Inc., 385 B.R. 832, 838 (Bankr. N.D. W. Va. 2008) (finding that

the debtor has a lower burden to defend a motion for relief than when seeking plan confirmation). 34 Cascadia Partners, slip op. at 5.

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A debtor can demonstrate that it is proceeding to propose a plan of reorganization merely by filing a plan of reorganization within the applicable statutory timeframe.35 The second basis for demonstrating that a proposed plan does not have a reasonable possibility of confirmation requires the bankruptcy court to analyze the proposed plan and determine whether the plan has a realistic chance of being confirmed. Such analysis requires the court to examine the proposed plan and determine whether it meets the requirements for confirmation set forth in section 1129(a) of the BANKRUPTCY CODE.36

Lastly, as stated, a creditor can obtain relief from the automatic stay under section 362(d)(3) if the creditor can satisfy the court that the plan is patently unconfirmable. Whether a plan is “patently unconfirmable” may require a court to consider the requirements for plan confirmation under the BANKRUPTCY CODE. For example, in In re Cascadia Partners,37 the United States Bankruptcy Court for the Western District of Virginia granted a secured creditor’s motion for relief pursuant to section 362(d)(3) because the court concluded that the single asset real estate debtor’s plan was “patently unconfirmable.” After analyzing Cascadia Partners’ plan of reorganization, the court concluded that the plan lacked adequate means for implementation and, therefore, failed to satisfy section 1123(a)(5) and, in turn, section 1129(a).38

2. Commence Payments Equal to Amount of Non-Default Interest

Alternatively, to the extent a single asset real estate debtor does not or cannot file a plan of reorganization with a reasonable possibility of being confirmed within a reasonable time, the debtor may prevent a secured creditor from obtaining relief from the automatic stay under section 362(d)(3)(B) by commencing monthly payments to the secured creditor equal to the amount of non-default interest.

Payments made to satisfy section 362(d)(3)(B) may be made from rents collected or from other income generated before, on or after the commencement of the debtor’s bankruptcy case. The practical effect of requiring payments in the “amount of interest” is to reduce the debtor’s monthly payments to the extent the debtor’s regular monthly payments include payments of principal. For a debtor whose monthly payments comprise only interest, section 362(d)(3)(B) likely affords little or no relief.

Additionally, “the payments are not necessarily payments of interest, but are in an amount ‘equal to’ interest at the then applicable nondefault contract rate of interest.”39 Thus, at least one court has determined a debtor’s adequate protection payments pursuant to interim cash collateral orders that are in an amount equal to interest satisfy section 362(d)(3)(B).40 Moreover, because the payments are merely in the amount of interest, such payments may be applied to principal or interest and reduce the debtor’s obligation to the secured creditor, thereby increasing the debtor’s likelihood of reorganization.41

3. Debtors Must Strictly Comply with the Requirements of Section 362(d)(3)

Whether a debtor has complied with the conditions set forth in section 362(d)(3) must be strictly construed. The leading case enunciating the proposition that a debtor must strictly comply with section

35 See In re Harmony Holdings, LLC, 393 B.R. 409, 422 (Bankr. D.S.C. 2008). 36 See In re RIM Development, LLC, 448 B.R. 280, 289 (Bankr. D. Kan. 2010). 37 Case No. 10–63442–LYN, slip op. (Bankr. W.D. Va. June 30, 2011). 38 Id. at 6–7. 39 3 COLLIER, supra note 27, ¶ 362.07[5]. 40 See In re Cambridge Woodbridge Apartments, L.L.C., 292 B.R. 832, 840 (Bankr. N.D. Ohio

2003). 41 3 COLLIER, supra note 27, ¶ 362.07[5].

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362(d)(3) is NationsBank, N.A. v. LDN Corp. (In re LDN Corp.).42 In LDN Corp., the United States Bankruptcy Court for the Eastern District of Virginia determined that when a debtor fails to meet the conditions set forth in section 362(d)(3), “[t]he unequivocal language of the statute mandates relief from the stay.”43 Specifically, the court noted that section 362(d)(3) states that “the court shall grant relief” unless the debtor files a plan with a reasonable possibility of being confirmed in a reasonable time or has commenced monthly payments in the amount of interest within the applicable timeframe.44 Thus, because the statute unambiguously requires strict compliance with the words of the statute, the court determined that the debtor’s failure to file a plan within ninety days of the debtor’s petition date and failure to commence monthly payments in the amount of interest mandated relief in favor of the secured creditor.45

C. “Cause” for Extension of the Ninety-Day Period

Although generally a single asset real estate debtor must file a plan that has a reasonable possibility of confirmation within a reasonable time or commence monthly payments in the amount of interest at the nondefault rate within ninety days of filing its bankruptcy petition, such date may be extended for “cause.” A motion to extend the ninety-day deadline may be filed at any time, but the BANKRUPTCY CODE requires that the order granting any extension “be entered within the 90-day period.”46 Thus, considering the expedited track of a single asset real estate case, a debtor must quickly determine whether it requires an extension of the ninety-day time frame to comply with section 362(d)(3) and act promptly to ensure adequate time to file a motion so a hearing may be held and an order entered within the original ninety-day window.

To the extent a debtor files a motion to extend the ninety-day period, it must show “cause.” Although “cause” is not defined in the BANKRUPTY CODE, one court determined that “[c]ause would consist of something extraordinary in the circumstances” and the debtor must show something more than just the “global goals of bankruptcy relief.”47 Therefore, although case law is unclear on exactly what constitutes “cause” to extend the ninety-day period, it is clear that a debtor must show something more than the routine pressures facing all debtors in bankruptcy.

42 191 B.R. 320 (Bankr. E.D. Va. 1996). 43 Id. at 326. 44 Id. 45 Id. at 326–27. 46 11 U.S.C. § 362(d)(3). 47 In re Heather Apartments Ltd. P’ship, 366 B.R. 45, 47–48 (Bankr. D. Minn. 2007).

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A BASIC GUIDE TO CLOSING PROTECTION LETTERS FOR REAL ESTATE PRACTITIONERS

by F. Lewis Biggs*

One of the things that distinguishes real estate practice from many other transactional practices is the complexity of closings and, in particular, the use of third-party settlement agents to handle closings. Real estate lawyers often rely on settlement agents to perform vital closing functions such as running down title, recording deeds, deeds of trust and other instruments, obtaining documents from other parties, conforming counterparts into fully executed documents, and handling settlement funds. Many things can go wrong with settlement, and those problems are sometimes caused by a settlement agent’s fraud, dishonesty, negligence or failure to follow closing instructions.

Settlement problems can result in significant loss and injury to parties to real estate transactions, particularly upon real estate lenders and buyers. Consider a few examples, among many, from the real world. In Bluehaven Funding, LLC v. First American Title Ins. Co., 594 F.3d 1055 (8th Cir. 2010), the claimant was a lender who loaned $2.4 million to a developer over a period of several years in order to fund the acquisition and redevelopment of real estate. The claimant provided funds to a title agency for closings, and directed the title agency to pay off prior liens and to record first lien deeds of trust to secure the loans. Rather than paying off prior liens, the title agency colluded with the borrower and diverted escrow money to the borrower, resulting in a loss to the claimant of the full $2.4 million. In First American Title Ins. Co. v. First Alliance Title, Inc., 718 F. Supp. 2d 669 (E.D. Va. 2010), an owner of residential real estate refinanced his existing mortgage loan with SunTrust Mortgage. A title agency handled settlement and, instead of using loan proceeds to payoff prior deeds of trust, as instructed by the SunTrust Mortgage, the title agency diverted the funds elsewhere. Following the owner’s bankruptcy, the beneficiary of one of the unreleased prior deeds of trust foreclosed, wiping out SunTrust Mortgage’s deed of trust.

An important role of lawyers engaging in real estate transactions is to recognize the risks that settlement poses for clients and to use the tools at their disposal to minimize those risks. When title insurers themselves act as settlement agents, lawyers and their clients can take some comfort in knowing that the settlement agent is probably sufficiently creditworthy to satisfy a claim based on the fraud, dishonesty or negligence of a title insurer’s employee or its failure to follow closing instructions. As a result, many national commercial lenders require closings to be conducted by approved national title insurers.

In day-to-day practice, however, lawyers do not always have control over where settlement will occur or who will conduct it. A lawyer is often requested to (or must) use another law firm or a title agent as the settlement agent, and that other law firm or title agent may be completely unfamiliar to the lawyer. Whether we admit it to ourselves or not, law firms, title agents and their staff acting as settlement agents may or may not have the level of competency that we expect or sufficient funds or insurance coverage to pay a claim arising out of a settlement problem, particularly with respect to large commercial transactions. A lawyer should never assume that a title insurer is liable for a closing attorney’s or a title agent’s fraud, dishonesty, negligence or failure to follow closing instructions, even in cases where the title insurance commitment and/or policy is issued out of the settlement agent’s office. Title insurers uniformly limit the scope of a title agent’s authority to the issuance of title insurance commitments,

*Mr. Biggs is a managing member of the firm of Kepley Broscious & Biggs, PLC in Richmond,

Virginia. He practices in the area of commercial real estate with a focus on real estate lending, non-judicial foreclosures, workouts and problem loans. He currently serves as a member of the Board of Governors of the Real Property Section of the Virginia State Bar and as chairman of that section’s Creditors’ Rights and Bankruptcy Committee. Mr. Biggs received a B.S. from the Hampden-Sydney College and a J.D. from the Washington and Lee University School of Law.

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policies and endorsements.1 Efforts by claimants to establish a title insurer’s vicarious liability for acts or omissions of closing attorneys or title agents usually fail absent a specific written indemnity agreement from the title insurer.2

The title insurance industry has developed a type of indemnity agreement called a “closing protection letter” in order to facilitate the use of closing attorneys and title agents as settlement agents. Closing protection letters are issued by the title insurer rather than the settlement agent or attorney, and they afford real estate buyers and lenders indemnification from the title insurer itself for specified injuries caused by the fraud, dishonesty or negligence of a settlement agent or by the settlement agent’s failure to follow closing instructions.

The ALTA form of closing protection letter3 applicable to specific transactions in Virginia is attached to this article as Exhibit A. At its core, this form of closing protection letter provides the following coverage, subject to certain conditions and exceptions set forth therein:

(i) [The failure] of the [title agent or closing attorney] to comply with your written closing instructions to the extent that they relate to (a) the status of the title … or the validity, enforceability and priority of the [deed of trust], or (b) the obtaining of any other document, specifically required by you, but only to the extent the failure to obtain the other document affects the status of the title … or the validity, enforceability and priority of the [deed of trust], or

(ii) Fraud, dishonesty or negligence of the [title agent or closing attorney] in handling your funds or documents in connection with the closings to the extent that fraud, dishonesty or negligence relates to the status of the title … or to the validity, enforceability, and priority of the [deed of trust].

The core coverage provided by the ALTA form of closing protection letter applies only to the extent that the fraud, dishonesty, negligence or failure to following closing instructions affects the status of the title and/or the validity, enforceability and priority of the deed of trust. It does not provide coverage for all damages that may arise from settlement. For instance, settlement agents are often charged with collecting, printing and conforming counterparts of documents and with collecting and disbursing settlement funds. A failure of a settlement agent to attach the correct legal description to a deed of trust in accordance with closing instructions probably would trigger coverage under a closing protection letter. On the other hand, a failure of a settlement agent to properly collect and conform counterparts of an unrecorded agreement probably would not trigger coverage, no matter how important that agreement is to the overall transaction, unless the failure directly affects title or the enforceability of a deed of trust. A failure of a settlement agent to collect and disburse settlement funds probably would

1The standard agency agreement between a title insurer and its agent provides, in relevant part:

“Principal appoints Agent its agent solely for the purpose of issuing, on Principal’s forms, title insurance commitments, policies and endorsements on real estate located in Virginia.” Lisa K. Tully, Closing Protection Letters, 16 VLTA EXAMINER, No. 3, at 17 (2010) (emphasis supplied). See also Wells Fargo Bank, N.A. v. Old Republic Title Ins. Co., No. 10–1087, slip op. at 4-5 (4th Cir. 2011) (interpreting agency agreement that expressly excludes from the scope of agency “any escrow, closing or settlement services”).

2See, e.g., Wells Fargo Bank, N.A., v. Old Republic Title Ins. Co., No. 10-1087, slip op. at 11–12 (4th Cir. 2011) (stating “[c]ourts throughout the country, including those interpreting Virginia law, agree that [an express exclusion of escrow, closing or settlement services from the scope of agency] controls”); First American Title Ins. Co. v. First Alliance Title, Inc., 718 F. Supp. 2d 669 (E.D. Va. 2010), aff’d by First American Title Ins. Co. v. Western Surety Co., No. 10–1802 (4th Cir. 2011); Bluehaven Funding, LLC v. First American Title Ins. Co., 594 F.3d 1055 (8th Cir. 2010).

3Copyright 2006-2009 American Land Title Association. Used by permission.

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trigger coverage under a closing protection letter if the disbursement is necessary to remove a prior lien or deed of trust from title. On the other hand, a failure to collect and disburse other funds, such as closing costs and money paid as consideration for some tangential aspect of the transaction, probably would not trigger coverage because it does not directly affect title or the enforceability of the deed of trust.

Because closing protection letters do not cover all damages that may arise from settlement, lawyers engaging in a real estate transactions should be mindful of (and may wish to inquire about) the competency and creditworthiness of settlement agents even when the lawyers are obtaining a closing protection letter. The best practice when representing real estate buyers or lenders, particularly for larger transactions, is to evaluate closing risks on a case-by-case basis and to discuss settlement risks with clients when appropriate.

Although coverage can arise under a closing protection letter based on a settlement agent’s fraud, dishonesty or mistake per se, the most direct and robust way to establish coverage is to provide clear and complete closing instructions setting out every material condition to closing and every task that the settlement agent is to undertake. The fact that coverage can be defined by a lawyer’s own closing instructions is beneficial in that, in essence, it lets the lawyer craft insurance coverage for his or her client tailored to the specific transaction. That benefit has an edge that can cut the other way, however. If the lawyer’s closing instructions are not worded well, or if he or she fails to appropriately tailor form closing instructions to a particular transaction, then the lawyer could end up compromising (or at least failing to avail himself or herself of) coverage that would otherwise be available to the client at almost no cost. This is one of the many areas of real estate practice where an unsuspecting lawyer can easily inherit liability arising from a third-party’s fraud or mistake. If a lawyer is not willing or able to articulate in a closing instruction letter precisely what steps a settlement agent must take to close a real estate transaction and to satisfy all requirements for issuance of title insurance, then the lawyer probably should not be handling real estate transactions for purchasers or lenders. I have seen parties send documents into escrow with instructions, or a mere expectation, that the settlement agent should essentially do whatever it is that they do to close. Do not expect insurance coverage, or an injured client’s sympathy, if you do that and something goes wrong with the closing.

An example of a long-form of a closing instruction letter for commercial loans is attached as Exhibit B. This form can easily be adapted to acquisitions, and can probably be simplified and shortened for many transactions. Closing protection letters should, as applicable, include the following key provisions for establishing coverage: (i) a requirement that all title requirements must be satisfied prior to or simultaneously with closing, (ii) a requirement that specified title exceptions must be deleted prior to or simultaneously with closing, and (iii) a requirement that certain disbursements must be made to release prior liens. No two transactions are alike, and form closing instructions should be tailored to each transaction based on the transaction, the status of title and your client’s needs and expectations.

ALTA form closing protection letters also contain other conditions and exclusions. First, closing protection letters must be issued by the title insurer in connection with a title insurance commitment. The commitment must be binding, signed by the title insurer or its agent, and issued by the same title insurer that issued the closing protection letter. If you elect to escrow closing items or money prior to the issuance of a binding title insurance commitment, then you are doing so without the protection of a closing protection letter. Second, closing protection letters do not cover liability for the failure of a settlement agent to comply with closing instructions that require changes to insurance coverage, with the exception of the removal of specific title exceptions or the satisfaction of requirements specified in the title insurance commitment. Thus, accordingly, the best practice is to perform full due diligence on title in advance and to have the title insurance commitment issued in final form prior to placing any closing items or funds into escrow. Third, closing protection letters do not cover losses to closing funds that are on deposit with a bank as a result of the bank’s failure unless the loss results from a failure on the part of the settlement agent to follow closing instructions that require deposit at a specified bank or banks. Lawyers should consider inquiring about how and where a settlement agent is holding closing funds and the extent to which FDIC coverage applies. This risk increases with the size of the transaction and the

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length of the escrow period. If appropriate in light of circumstances, lawyers should consider specifying in closing instructions how and where funds are to be deposited.

Closing protection letters, by their terms, can cover a “(i) lender secured by a mortgage (including any other security instrument) of an interest in land, its assignees or a warehouse lender, (ii) purchaser of an interest in land, or (iii) lessee of an interest in land.” Closing protection letters are not available for (and provide no coverage for) sellers of real estate even though settlement imposes risks upon sellers, particularly in regard to the handling and disbursement of proceeds immediately after closing.4 Presumably, this coverage is not available for sellers because the risk is not sufficiently title-related.

Coverage does extend to a real estate lender’s assignees, but in representing post-origination buyers of real estate loans, you should not allow comfort derived from the closing protection letter coverage to influence what due diligence should be done. A successor noteholder will inherit whatever defenses the title insurer has against the predecessor noteholder(s). These defenses barred the claimant’s recovery in Wells Fargo Bank, N.A. v. Old Republic Title Ins. Co., No. 10–1087, slip op. at 10 (4th Cir. 2011), where a successor noteholder was injured due to the fraudulent collusion between the originating lender and the settlement agent (affirming the district court’s holding that “Old Republic could assert the same defenses against Wells Fargo [(i.e., the successor noteholder)] as it could against the [original noteholder], and one such defense – fraud, shielded it from contractual liability”).

For real estate lawyers who also practice outside of Virginia, please note that there are variations among states with respect to closing protection letters. The form currently used in Virginia is called the ALTA Closing Protection Letter – Single Transaction Limited Liability,” last revised on January 1, 2008. Because title insurance companies in Virginia may not issue more than one class of insurance pursuant to VA. CODE § 38.2–135, the Virginia Bureau of Insurance prohibits closing protection letters issued in Virginia from providing any coverage other than title insurance. Historically, the language discussed above—limiting coverage to the extent that the fraud, dishonesty, negligence or failure to follow closing instructions affects the status of the title and/or the validity, enforceability and priority of the deed of trust—was adopted by ALTA in order to address such regulatory concerns by Virginia and other states. The same form is used in other states as well, but some states may permit title insurers to issue the broader coverage provided for in earlier versions of the ALTA form closing protection letter. New York and Kansas prohibit the use of closing protection letters altogether due to regulatory concerns about whether the coverage provided is title insurance.5

Lawyers should not assume that a title insurer issuing coverage in Virginia will use the ALTA form verbatim. You will probably not obtain coverage any broader than the ALTA form attached to this article. However, a title insurer may alter the language to narrow coverage. You should consider comparing a title insurer’s closing protection letter against the ALTA form in order to identify any substantive differences. For example, the ALTA form of closing protection letter provides coverage for the “fraud, dishonesty or negligence” of the settlement agent. At least one major title insurer omits “dishonesty” and “negligence.” I doubt that the omission of “dishonesty” materially affects coverage in light of how I read “fraud,” but the omission of “negligence” could be significant.6 Also, the ALTA form

4See, e.g., Fidelity National Title Ins. Co. v. Mussman, 930 N.E.2d 1160, 1164 (Ind. App. 2010)

(where, after closing a real estate sale, a settlement agent stole $1.6 million of settlement proceeds as part of a “Ponzi-like scheme to loot millions of dollars from real estate escrow accounts maintained” by the agent and its affiliates. The sellers had purchased a title insurance policy for the benefit of the buyer, but title coverage was not applicable because the purchasers had paid full consideration and received the deed and marketable title. The sellers received no settlement proceeds, and an ALTA form closing protection letter would not have provided coverage over this risk.).

5See Lisa K. Tully, Closing Protection Letters, 16 VLTA EXAMINER, No. 3, at 17 (2010). 6Arguably, coverage for negligence is immaterial in cases where lawyers follow the

recommendation above by providing clear and complete closing instructions.

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of closing protection letter gives the claimant an option to submit a claim below $2,000,000 to arbitration. At least one major title insurer omits that option. Because closing protection letters are filed forms in Virginia, it is unlikely that a title insurer will be able to address substantive comments as to its form in the context of a particular transaction; however, the quality of coverage can influence a title insurance consumer’s selection among insurers in the marketplace.

A checklist to assist you and your staff with closing protection letters is attached as Exhibit C. For more information about closing protection letters, please see (i) Lisa K. Tully, Closing Protection Letters, 16 VLTA EXAMINER, No. 3, at 17 (2010) and (ii) James Bruce Davis, The Law of Closing Protection Letters, 36 TORT & INS. L.J., No. 3 (Spring 2001).

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EXHIBIT A

Closing Protection Letter — Single Transaction Limited Liability7

[TITLE INSURER LETTERHEAD]

Name and Address of Addressee: [________________________________]

Date: [________________________________]

Name of Issuing Agent or Approved Attorney (hereafter, “Issuing Agent” or “Approved Attorney”, as the case may require):

[________________________________]

Transaction (hereafter, “the Real Estate Transaction”): [________________________________]

Re: Closing Protection Letter

Dear [________________________________]:

[________________________________] (the “Company”) agrees, subject to the Conditions and Exclusions set forth below, to reimburse you for actual loss incurred by you in connection with the closing of the Real Estate Transaction conducted by the Issuing Agent or Approved Attorney, provided:

(A) title insurance of the Company is specified for your protection in connection with the closing of the Real Estate Transaction;

(B) you are to be the (i) lender secured by a mortgage (including any other security instrument) of an interest in land, its assignees or a warehouse lender, (ii) purchaser of an interest in land, or (iii) lessee of an interest in land; and

(C) the aggregate of all funds you transmit to the Issuing Agent or Approved Attorney for the Real Estate Transaction does not exceed [$________________________________]

and provided the loss arises out of:

1. Failure of the Issuing Agent or Approved Attorney to comply with your written closing instructions to the extent that they relate to (a) the status of the title to that interest in land or the validity, enforceability and priority of the lien of the mortgage on that interest in land, including the obtaining of documents and the disbursement of funds necessary to establish the status of title or lien, or (b) the obtaining of any other document, specifically required by you, but only to the extent the failure to obtain the other document affects the status of the title to that interest in land or the validity, enforceability and priority of the lien of the mortgage on that interest in land, and not to the extent that your instructions require a determination of the validity, enforceability or the effectiveness of the other document, or

2. Fraud, dishonesty or negligence of the Issuing Agent or Approved Attorney in handling your funds or documents in connection with the closing to the extent that fraud, dishonesty or negligence relates to the status of the title to that interest in land or to the validity, enforceability, and priority of the lien of the mortgage on that interest in land.

Copyright 2006-2009 American Land Title Association. Used by permission.

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If you are a lender protected under the foregoing paragraph, your borrower, your assignee and your warehouse lender in connection with a loan secured by a mortgage shall be protected as if this letter were addressed to them.

Conditions and Exclusions

1. The Company will not be liable to you for loss arising out of:

A. Failure of the Issuing Agent or Approved Attorney to comply with your closing instructions which require title insurance protection inconsistent with that set forth in the title insurance binder or commitment issued by the Company. Instructions which require the removal of specific exceptions to title or compliance with the requirements contained in the binder or commitment shall not be deemed to be inconsistent.

B. Loss or impairment of your funds in the course of collection or while on deposit with a bank due to bank failure, insolvency or suspension, except as shall result from failure of the Issuing Agent or Approved Attorney to comply with your written closing instructions to deposit the funds in a bank which you designated by name.

C. Defects, liens, encumbrances or other matters in connection with the Real Estate Transaction if it is a purchase, lease or loan transaction except to the extent that protection against those defects, liens, encumbrances or other matters is afforded by a policy of title insurance not inconsistent with your closing instructions.

D. Fraud, dishonesty or negligence of your employee, agent, attorney or broker.

E. Your settlement or release of any claim without the written consent of the Company.

F. Any matters created, suffered, assumed or agreed to by you or known to you.

2. If the closing is conducted by an Approved Attorney, a title insurance binder or commitment for the issuance of a policy of title insurance of the Company must have been received by you prior to the transmission of your final closing instructions to the Approved Attorney.

3. When the Company shall have reimbursed you pursuant to this letter, it shall be subrogated to all rights and remedies which you would have had against any person or property had you not been so reimbursed. Liability of the Company for such reimbursement shall be reduced to the extent that you have knowingly and voluntarily impaired the value of this right of subrogation.

4. The Issuing Agent is the Company’s agent only for the limited purpose of issuing title insurance policies. Neither the Issuing Agent nor the Approved Attorney is the Company’s agent for the purpose of providing other closing or settlement services. The Company’s liability for your losses arising from those other closing or settlement services is strictly limited to the protection expressly provided in this letter. Any liability of the Company for loss does not include liability for loss resulting from the negligence, fraud or bad faith of any party to a real estate transaction other than an Issuing Agent or Approved Attorney, the lack of creditworthiness of any borrower connected with a real estate transaction, or the failure of any collateral to adequately secure a loan connected with a real estate transaction. However, this letter does not affect the Company’s liability with respect to its title insurance binders, commitments or policies.

5. Either the Company or you may demand that any claim arising under this letter be submitted to arbitration pursuant to the Title Insurance Arbitration Rules of the American Land Title Association, unless you have a policy of title insurance for the applicable transaction with an Amount of Insurance greater than $2,000,000. If you have a policy of title insurance for the

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applicable transaction with an Amount of Insurance greater than $2,000,000, a claim arising under this letter may be submitted to arbitration only when agreed to by both the Company and you.

6. You must promptly send written notice of a claim under this letter to the Company at its principal office at [________________________________]. The Company is not liable for a loss if the written notice is not received within one year from the date of the closing.

Any previous closing protection letter or similar agreement is hereby canceled with respect to the Real Estate Transaction.

BLANK TITLE INSURANCE COMPANY

By: __________________________________

(The words “Underwritten Title Company” maybe inserted in lieu of Issuing Agent)

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EXHIBT B

Long-Form of Closing Instruction Letter (Real Estate Lending)

[LAW FIRM LETTERHEAD]

File No.: [Insert File No.]

____________ __, 2011

[Insert name of Title Agent or Approved Attorney – see Closing Protection Letter] [Insert Address] [Insert Address] [Insert Address] Attn: [Insert Contact Name]

Re: $[Insert Loan Amount] loan from [Insert Lender Name] to [Insert Borrower Name] (the “Loan”)

Dear [Insert Contact Name]:

We represent [Insert Lender Name] in connection with the Loan. This closing instruction letter constitutes Lender’s escrow instructions to [Insert name of Title Agent or Approved Attorney] (“Escrow Agent”) in connection therewith, and the following terms in this closing instruction letter have the associated meanings:

Lender: [Insert Lender Name] Lender’s Representative: [Insert Lender Contact] Lender’s Counsel: [Insert Your Law Firm] Borrower: [Insert Borrower Name] Guarantors: [Insert Guarantor Name] Borrower’s Counsel: [Insert Borrower Counsel Name] Property: [Insert Brief Legal Description or Address] ([Insert Tax Parcel Nos.]) Loan Amount: $[Insert Loan Amount] Title Commitment: Commitment No. [Insert Title Commitment No., as revised] Settlement Agent: [Insert name of Title Agent or Approved Attorney] Title Insurer [Insert Title Insurer Name] Settlement Statement: The settlement and disbursement statement attached hereto as Exhibit C.

1. Deliveries. I enclose herewith execution versions of the documents listed on Exhibit A attached hereto (collectively, the “Loan Documents”), the Loan Agreement having been executed by Lender. All defined terms on Exhibit A are hereby incorporated into this closing instruction letter by this reference. The Loan Documents and all funds disbursed to Settlement Agent by Lender (“Escrowed Funds”) are being provided in trust, and must be held in escrow in strict accordance with this closing instruction letter.

All Loan Documents must either be executed by or on behalf of Borrower, Guarantors and the other applicable parties in the presence of one or more attorneys employed by Settlement Agent, or duplicate counterparts of the Loan Documents must be executed outside of the offices of Settlement Agent by such parties and delivered to Settlement Agent. In the latter event, Settlement Agent must (i) confirm that such parties’ counterparts, as executed, are in exactly the form delivered to Settlement Agent by us without addition, deletion, or other change, and (ii) conform Lender’s and Borrower’s counterparts into original, fully executed duplicate counterparts using Lender’s counterparts as surviving counterparts where applicable. None of the Loan Documents is to be executed, in whole or in part, under a power of attorney

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without my prior written consent. All Loan Documents are to be signed by the persons and in the capacities indicated therein.

2. Conditions Precedent to Funding Into Escrow. Only upon satisfaction of the following conditions may Settlement Agent proceed in accordance with the instructions contained in Section 3 below:

(A) The terms and conditions set forth in Section 1 above are satisfied, and Settlement Agent possesses all of the Loan Documents, all of which must be undated, but otherwise fully completed and duly executed by all parties thereto.

(B) Settlement Agent executes this closing instruction letter to evidence its agreement to abide by the terms of escrow set forth herein, and Settlement Agent transmits to me by facsimile or electronic mail a copy of this closing instruction letter (with all exhibits attached thereto) executed on behalf of Settlement Agent.

(C) Settlement Agent receives all approvals from parties other than Lender required to release the fully executed counterparts of the Loan Documents from escrow, to disburse funds in accordance with this closing instruction letter, and to otherwise carry out all the other terms of this closing instruction letter.

(D) [Insert other pre-closing conditions applicable to the transaction]

3. Conditions Precedent to Recording. Upon satisfaction of the terms and conditions set forth in Section 1 and 2 above, Settlement Agent shall send me a notice by facsimile or electronic mail that the terms and conditions set forth in Section 1 and 2 of this closing instruction letter are satisfied (a “Funding Notice”).

4. Recording and Filing. Upon satisfaction of the following terms and conditions, Settlement Agent shall date the Deed of Trust as of the recording date (and fill in all blanks in the property description thereof with the appropriate recording information) and shall thereafter record the Deed of Trust in the applicable records in the Clerk’s Office of the Circuit Court of the [Insert name of locality], Virginia (the “Clerk’s Office”), disbursing such Escrowed Funds as are required to effect recordation:

(A) The terms and conditions set forth in Sections 1 and 2 above are satisfied, and Settlement Agent sends the Funding Request.

(B) Settlement Agent receives Escrowed Funds from Lender in an amount no less than that provided for on the Settlement Statement.

(C) Each of the “Requirements” set out in on Schedule B – Section I of the Title Commitment (or otherwise required for issuance of the coverage) is satisfied, and Settlement Agent is in a position to certify the same to the Title Insurer.

(D) The title exceptions marked for deletion on Exhibit B attached hereto (the “Removed Exceptions”) have been removed from the Title Commitment, and you and the Title Insurer are bound to issue the title policy without those exceptions.

(E) Settlement Agent runs down title as of the date and time of closing, and confirms (i) that no liens or encumbrances appear of record other than those specifically described on Schedule B, Section 2 of the Title Commitment, excluding the Removed Exceptions (collectively, the “Permitted Exceptions”), (ii) that the Deed of Trust, upon recordation, will be a valid first lien on the Property subject only to Permitted Exceptions and (iii) that indefeasible fee simple title to the Property described in

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the Deed of Trust is vested in the trustor of the Deed of Trust. In the event that Settlement Agent discovers that any defects, liens, encumbrances, adverse claims, or other matters have appeared of record or have attached subsequent to effective date of the Title Commitment (the “New Title Matters”), then it shall immediately notify us of the same and shall not record or disburse Escrowed Funds until the New Title Matters have been removed or specifically accepted by us in writing.

Immediately after recordation in the [Insert name of locality], Settlement Agent shall notify us by facsimile or electronic mail that the Deed of Trust has been recorded shall provide recordation information (the “Notice of Recordation”).

5. Closing. After delivery of the Notice of Recordation to us, Settlement Agent shall take the following actions:

(A) Date the remaining Loan Documents as of the date of recordation of the Deed of Trust and fill in all blanks in the Loan Documents’ property descriptions (as applicable).

(B) Disburse the remaining Escrowed Funds in accordance with the Settlement Statement, including, without limitation [specifically list all payoffs that are required to release prior liens].

(C) Deliver to us by courier the original Loan Documents, other than those sent for recording or filing.

Within 30 days after closing, Settlement Agent shall provide to us with the original title policy and original recording receipts. In addition, in the event that Settlement Agent receives the original recorded Deed of Trust, then it shall immediately provide the same to us.

We reserve the right to withdraw any or all items escrowed by or on behalf of Lender from escrow upon written or electronic notice to Settlement Agent given before closing, in which case Settlement Agent shall immediately return all such requested items to us by courier. We also reserve the right to amend these escrow instructions in writing (including by facsimile or electronic mail) from time to time.

Sincerely,

SEEN AND AGREED: [Insert name of Settlement Agent] By: Name: Its: Date of Execution: Attachments: Exhibit A - List of Loan Documents Exhibit B - Schedule B-2 (with any deletions marked) Exhibit C - Settlement Statement

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EXHIBIT C

Closing Protection Letter Checklist

□ Perform due diligence on title.

□ Ensure that title insurance commitment is in final form, signed and issued. Note any particular exceptions that must be removed at closing. Best practice is to remove those exceptions prior to closing and have the title insurance commitment revised.

□ Identify all items that settlement agent must collect and all other tasks that settlement agent must perform, particularly in connection with the payoff of prior liens.

□ Ensure that closing protection letter is issued by the insurance company that issued title insurance commitment, is signed and is on insurance company letterhead.

□ Ensure that closing protection letter is addressed to the insured.

□ Ensure that closing protection letter specifies the settlement agent as “Issuing Agent” or “Approved Attorney,” and defines the applicable term correctly.

□ Ensure that any cap specified in the closing protection letter on the dollar-amount of funds that may be transmitted into escrow is sufficient.

□ Ensure that all other blanks in closing protection letter are filled in appropriately.

□ Prepare and finalize written escrow instructions that comply with the following:

□ Address escrow instructions to the Issuing Agent or an Approved Attorney, as defined in the closing protection letter.

□ Specifically reference the issued title insurance commitment, as revised, in the escrow instructions.

□ Specify all title requirements that must be satisfied (usually all requirements).

□ Specify all title exceptions that must be removed.

□ Specify all other items that settlement agent must collect and all other tasks that settlement agent must perform, particularly in connection with the payoff of prior liens.

□ If closing protection letter was not obtained directly from title insurer, contact the title insurer directly to confirm that it issued the closing protection letter.

□ Compare closing protection letter against ALTA form to identify substantive differences.

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CLOSING PROTECTION LETTERS

by Lisa K. Tully*

A Closing Protection Letter (“CPL”) is designed to cover a funding lender’s loss caused by the settlement agent or approved attorney’s failure to comply with closing instructions. Neither a title agent nor an approved attorney is an agent of the title insurance company with respect to settlement issues. Without the coverage provided by a CPL, the lender and borrower bear the risk of loss caused by settlement agent or approved attorney’s misconduct. The CPL clearly defines the responsibility of title insurer with respect to settlement issues.

“The purpose of the closing service letter is to provide indemnity against loss due to a closing

attorney’s defalcation or failure to follow lender’s closing instructions.” Metmore Financial, Inc. v. Commonwealth Land Title Ins. Co., 645 So. 2d 295, 297 (Ala. 1993).

The principles of agency law apply. The standard agency agreement between title insurer and

agent provides:

Appointment and territory. PRINCIPAL appoints AGENT its agent solely for the purpose of issuing, on PRINCIPAL’S forms, title insurance commitments, policies and endorsements on real estate located in [Virginia]. Many lenders and practitioners are under the mistaken belief that a title agent is the insurer’s

agent for all purposes and that the insurer is responsible for all matters related to settlement. In fact, the insurer is responsible only for the commitment, policy and endorsement activities of its agent. Under a standard agency agreement with an underwriting company, an agent has no authority to act as settlement agent for its underwriter. Wells Fargo Bank, N.A. v. Old Republic Title Insurance Company, 413 Fed. Appx. 569 (4th Cir. Mar 1, 2011) (unpublished opinion). See also First American Title Ins. Co. v. First Alliance Title, Inc., 718 F. Supp. 2d 669 (E.D. Va. June 14, 2010) (in which the court noted that a closing protection letter is issued because the insurance company is not liable for the acts of its agent).

In Universal Bank v. Lawyers Title Ins. Corp., 73 Cal. Rptr. 2d 196 (Cal. App. 1997), the escrow

contract between lender and Southland Title, which performed escrow services for the purchase and loan closing, required that the escrow agent disclose any deeds transferring title to parties other than the borrower. In fact, there were such deeds and the borrower was artificially inflating the value of the

* Lisa Tully is Vice President – Underwriting Counsel for the Fidelity National Title Group of underwriters, which includes Fidelity National Title Insurance Company, Chicago Title Insurance Company and Commonwealth Land Title Insurance Company. She received a Bachelor of Arts from the University of Richmond in 1982 and a Juris Doctor from its law school in 1985.

Lisa began her career in the title insurance industry in 1987 with Lawyers Title Insurance Corporation prior to its merger with Fidelity National. She is currently underwriting counsel for the company’s Virginia operations. In this capacity she provides legal advice to employees regarding underwriting, title examination and commercial transactions, and handles complex underwriting issues for agents and their customers. She is also assistant state counsel for the Fidelity National companies in Virginia, handling claims, regulatory and insurance compliance issues.

Lisa speaks regularly to title insurance industry groups, agents, lending organizations and real estate attorneys on property issues including water rights, church property transfer, foreclosure, title insurance coverage and claims, and RESPA compliance. She is an officer of the Virginia Land Title Association and a member of VLTA’s education and legislative committees. Lisa is admitted to practice law in Virginia and the U.S. District Court for the Eastern District of Virginia. Outside the office she enjoys skiing, reading, cooking and participation as a board member of several non-profit organizations.

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property by setting up a sham transaction. The borrower later defaulted and lender suffered a loss. No CPL had been issued by Lawyers Title and the court refused to find that Southland Title was the agent of Lawyers Title for the provision of escrow services. The court, looking at both the agency agreement and the question of apparent agency, found that the sophisticated lender knew of the availability of and the coverage provided by a CPL and could not claim apparent agency due to this knowledge.

If a CPL is issued for a specific transaction and names the settlement agent or approved closing attorney, the insurer will acknowledge certain additional responsibilities with respect to the transaction. The coverage under a CPL is in addition to the coverage under any issued policy. The title policy and the closing protection letter are intended to cover separate risks, and the addressee of a CPL can assert a claim independent of a related title policy claim. JP Morgan Chase Bank, N.A. v. First American Title Insurance Company, 2011 WL 2413438 (E.D. Mich. June 10, 2011).

Regulatory Restrictions. In Virginia title insurers are limited to the use of a CPL which covers

only those matters related to title to the insured real estate. By Administrative Letter 1995-8, issued September 4, 1995, the Bureau of Insurance restricted title insurers’ use of the CPL, stating that it may cover only those matters related to the condition of title to real estate. A copy of Administrative Letter 1995-8 is attached as Exhibit A.

By statute, title insurers licensed in Virginia are monoline insurance companies. VA. CODE §

38.2-135 prohibits insurers licensed to write title insurance from obtaining a license to write any other line of insurance.

§ 38.2-135. Classes of insurance companies may be licensed to write. Except as otherwise provided in this title and subject to any conditions and restrictions imposed therein, any insurer licensed to transact the business of insurance in this Commonwealth, other than life insurers and title insurers, may be licensed to write one or more of the classes of insurance enumerated in Article 2 (§ 38.2-101 et seq.) of this chapter . . .

Insurers in Virginia use a form of CPL developed by the American Land Title Association called

“Closing Protection Letter – LIMITATIONS,” last revised January 1, 2008, and often referred to as “the regulatory form.” It was originally developed in 1998 in response to various states’ insurance regulations, including those in Nebraska, Washington and Wisconsin, as well as Virginia.

The regulatory form limits coverage to loss arising out of: 1. Failure of the Issuing Agent or Approved Attorney to comply with your written closing

instructions to the extent that they relate to (a) the status of the title to that interest in land or the validity, enforceability and priority of the lien of the mortgage on that interest in land, including the obtaining of documents and the disbursement of funds necessary to establish the status of title or lien, or (b) the obtaining of any other document, specifically required by you, but only to the extent the failure to obtain the other document affects the status of the title to that interest in land or the validity, enforceability and priority of the lien of the mortgage on that interest in land, and not to the extent that your instructions require a determination of the validity, enforceability or the effectiveness of the other document, or

2. Fraud, dishonesty or negligence of the Issuing Agent or Approved Attorney in handling

your funds or documents in connection with the closing to the extent that fraud,

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dishonesty or negligence relates to the status of the title to that interest in land or to the validity, enforceability, and priority of the lien of the mortgage on that interest in land.1

An example of the difference in coverage between the standard form CPL and the regulatory

form can be found in a claim handled by Lawyers Title Insurance Corporation. The agency was physically located in Maryland but was an agent of Lawyers Title for the purpose of issuing policies in both Maryland and Virginia. Claims were made related to the agent’s settlement activities. Lawyers Title suffered losses in Maryland under its standard closing protection letter that were not covered under Virginia’s regulatory form of CPL, which limits loss to matters related to the status of title only.

The North Carolina Department of Insurance has taken a different view and has found that the

coverage provided by the CPL is “title insurance.” Insurers may issue the standard form letter, but must charge additional premium. The insurance commissioner has found that the additional coverage provided by the CPL requires additional premium.

Issuance of a CPL is prohibited in New York. The Insurance Department issued Circular Letter

No. 18 on December 14, 1992 stating that title insurance companies lack authority to issue a closing protection letter ("CPL") to a lender regarding the acts of the closing attorney because the protection offered is beyond the scope of the monoline title insurance company’s license. Lenders protect themselves in New York by having their own attorneys disburse loan proceeds. Kansas prohibits the issuance of a CPL for similar reasons.

Coverage. A copy of the regulatory form of CPL is attached as Exhibit B. The coverage is

conditional and the letter must be read in its entirety to determine the extent of coverage. Specific provisions include:

(1) The title insurer will reimburse actual loss. “[The company] agrees, subject to the Conditions

and Exclusions set forth below, to reimburse you for actual loss . . .” (2) The closing must be handled by an Issuing Agent or Approved Attorney of the company. “ .

. . incurred by you in connection with closings of real estate transactions conducted by the Issuing Agent or Approved Attorney . . .”

(3) The coverage is conditioned on the lender having been issued a title insurance commitment.

“. . . provided: (A) title insurance of the Company is specified for your protection in connection with the closing . . .”

(4) The loss must arise out of the “failure of the Issuing Agent or Approved Attorney to comply

with your written closing instructions . . . or (b) the obtaining of any other document, specifically required by you . . .”

(5) Or the loss must arise out of the “fraud, dishonesty or negligence of the Issuing Agent or

Approved Attorney in handling your funds or documents in connection with the closings . . . .”2

Liability under a CPL is not conditioned on the actual issuance of a title insurance policy. In fact,

a closing attorney’s failure to make a payoff would preclude issuance of a policy but coverage under the CPL would remain. Lawyers Title Insurance Corp. v. Edmar Constr. Co., Inc., 294 A.2d 865 (D.C. 1972).

1 Copyright 2006-2011 American Land Title Association. Used by permission. 2 All excerpts are copyright 2006-2011 American Land Title Association. Used by permission.

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The insurer is often liable under a CPL when the closing attorney absconds with loan funds. No

policy is issued because no final application and certification is provided by the attorney. The lender’s claim is under the CPL. An example is Old Republic Nat’l Title Ins. Co. v. Dameron, Case No. 97-01088 (Bankr. E.D. Va. 1997), where the closing attorney allegedly embezzled closing funds. Under their CPL obligations, three title insurers purchased notes from unpaid lenders and then sought to except their debts from discharge.

A title insurer is not liable for losses incurred by a lender due to a title agency employee’s theft of

closing money when no policy or CPL was invoked. Escrow funds held by a title agency not in relation to a closing for which a CPL or policy was issued, and stolen by an employee of the agency, do not fall under the agency agreement or a CPL. Bluehaven Funding, LLC v. First American Title Insurance Co., 594 F.3d 1055 (8th Cir. 2010).

There is no coverage under the CPL related to the creditworthiness of the borrower. Where the

agent insured over judgment liens and the lender argued it would not have made the loan had it known of the liens, coverage under the CPL is denied.

Where the settlement agent failed to properly complete terms on the note as directed by the

lender, and there is no loss of enforceability or priority of the insured deed of trust, there is no coverage under the policy or CPL for settlement agent’s error.

In a claim where title to the real estate was vested in husband and wife but the loan was to

husband only, the settlement agent properly had wife sign the deed of trust, but inadvertently had her also sign promissory note. The lender was unable to sell the loan due to failure of wife to apply to be a borrower. The title company determined that the error had no effect on title to real estate and lender’s loss was not covered under the policy or CPL.

In another claim the written closing instructions to the settlement agent required a survey which

was not procured. The loan policy took exception for “such state of facts as would be disclosed by a current accurate survey of the premises.” After default by the borrower, the lender had a survey prepared which revealed that 50% of the house was located on the next door neighbor’s property. The lender had a legitimate claim under the CPL because its instructions to obtain a survey had not been followed resulting in a title defect.

Although an attorney agent issued a Fidelity National closing protection letter to a lender for a

closing, the letter was not in effect because the policy was written on another underwriter’s paper. Capital Mortgage Associates, LLC v. Hulton (Conn. Super. Ct. 2009) (unpublished opinion).

Measure of damages. The CPL is an indemnity agreement. It covers actual loss suffered by the

lender. The lender’s full credit bid at foreclosure is a waiver of the right to demand the balance of the loan amount from any party and therefore prevents the lender from demanding the deficiency from the title insurer under a closing protection letter. New Freedom Mortgage Corp. v. Globe Mortgage Corp., 281 Mich. App. 63, 761 N. W. 2d 832 (2008).

The measure of damages is generally considered to be determinable in the same manner as policy

coverage. However, damages under the CPL may be greater than the title insurance policy. In American Title Ins. Co. v. Variable Annuity Life Ins. Co. (1996 Tex App. Houston 14th Dist., Sept. 26, 1996) (unpublished), the closing agent failed to pay off the existing deed of trust in the amount of $697,798. Despite the new policy amount of $353,194, the court found the title insurer liable under its closing protection letter for full satisfaction of the prior lender’s payoff of $697.798.

Other courts have based a coverage determination on equitable principles, such as whether the

title insurer was in a position to prevent the loss. See First American Title Insurance Co. v. Vision

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Mortgage Corp., 689 A. 2d 154 (N.J. Sup. Ct. App. Div. 1997); Sears Mortgage Corp. v. Rose, 134 N.J. 326 (1993).

Subrogation. Under an older form of CPL, the court in Sears Mortgage Corp. v. Rose, 134 N.J.

326 (1993), found that the CPL is integrated into and is a part of the title insurance policy, with all terms and conditions including subrogation. The current version of CPL specifically provides that the insurer is subrogated to the rights available to the lender.

When the Company shall have reimbursed you pursuant to this letter, it shall be subrogated to all rights and remedies which you would have had against any person or property had you not been so reimbursed. Liability of the Company for such reimbursement shall be reduced to the extent that you have knowingly and voluntarily impaired the value of this right of subrogation.

However, the right of subrogation is limited. In American Title Insurance Co. v. Burke &

Herbert Bank & Trust Co., 813 F. Supp. 423 (E.D. Va. 1993), the court ruled that a title insurer which reimbursed the lender for loan funds stolen by the settlement agent could not sue the agent’s bank for failure to timely return bad checks, finding that if the bank had dishonored the checks as it should have done, the title insurer would have been obligated to reimburse the payees for loss caused by the agent’s embezzlement. This case was decided prior to Virginia’s imposed use of the regulatory form of CPL.

Rights of third parties. Coverage under the CPL runs to the addressee, its assignees, its

warehouse lender, and the purchaser or a lessee. In GMAC Mortg., LLC v. Flick Mortg. Investors, Inc., 2011 WL 841409 (W.D. N.C. Mar. 7, 2011), the court discussed the rights of an assignee of the addressee to assert rights under the CPL and found that a clear assignment of mortgage by Flick to GMAC did entitle GMAC to maintain an action under a CPL issued by Chicago Title.

Two provisions in the CPL address the rights of third parties to coverage:

“[The company agrees to reimburse your actual loss provided] you are to be the (i) lender secured by a mortgage (including any other security instrument) of an interest in land, its assignees or a warehouse lender, (ii) purchaser of an interest in land, or (iii) lessee of an interest in land”

and,

“If you are a lender protected under the foregoing paragraph, your borrower, your assignee and your warehouse lender in connection with a loan secured by a mortgage shall be protected as if this letter were addressed to them.”

See Proctor v. Metropolitan Money Store Corp., 579 F. Supp. 2d 724 (D. Md. 2008) (where plaintiff-borrowers claimed the benefit of the CPL in alleging loss recoverable from Chicago Title and Southern Title for acts of the insurers’ agents).

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EXHIBIT A

September 4, 1995 Administrative Letter 1995-8

TO: All Companies Licensed to Write Title Insurance in Virginia RE: Closing Protection Letters

The State Corporation Commission Bureau of Insurance is issuing this administrative letter to advise title insurers licensed in Virginia that closing protection letters may not be used to indemnify lenders for losses which are unrelated to the condition of the title to property or the status of any lien on property. Section 38.2–123 of the Code of Virginia defines title insurance as “...insurance against loss by reason of liens and encumbrances upon property, defects in the title to property, and other matters affecting the title to property or the right to the use and enjoyment of property. ‘Title insurance’ includes insurance of the condition of the title to property and the status of any lien on property.”

By statute, title insurers are monoline insurance companies. Section 38.2–135 prohibits insurers

licensed to write title insurance from obtaining a license to write any other lines of insurance. By issuing a closing protection letter that indemnifies lenders for losses which are unrelated to the condition of the title to property or the status of any lien on property, a title insurance company is exceeding its license authority.

Closing protection letters used by title insurance companies licensed in Virginia must, therefore,

limit coverage to matters affecting the condition of the title to property or the status of any lien on property. Coverage (whether on an individual or blanket basis) provided beyond this will be considered a violation of § 38.2–135. Any closing protection letter issued in the past on a blanket basis which indemnifies lenders for losses unrelated to the condition of the title to property or the status of any lien on property should be rescinded.

Please be advised that title insurance companies are permitted under § 38.2–4615 to act in concert

with each other and with others with respect to any or all matters pertaining to the preparation of forms of title insurance policies. Section 38.2–4615 also states that title insurers may exchange information, consult, and cooperate with each other with respect to policy forms and contracts. Therefore, title insurance companies licensed in Virginia may work together to develop a revised closing protection letter or endorsement that limits coverage to matters affecting the condition of the title to property or the status of any lien on property. Any revisions to existing closing protection letters or endorsements must be filed with the Bureau of Insurance as required by § 38.2–4606.

Sincerely, Steven T. Foster Commissioner of Insurance

STF:jgs

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EXHIBIT B

ALTA CLOSING PROTECTION LETTER – LIMITATIONS

BLANK TITLE INSURANCE COMPANY Name and Address of Addressee: Date: Name of Issuing Agent or Approved Attorney (hereafter, “Issuing Agent” or “Approved Attorney”, as the case may require):

[Identity of settlement agent and status as either Issuing Agent or Approved Attorney appears here.]

Re: Closing Protection Letter Dear Blank Title Insurance Company (the “Company”) agrees, subject to the Conditions and Exclusions set forth below, to reimburse you for actual loss incurred by you in connection with closings of real estate transactions conducted by the Issuing Agent or Approved Attorney, provided: (A) title insurance of the Company is specified for your protection in connection with the closing; and (B) you are to be the (i) lender secured by a mortgage (including any other security instrument) of an

interest in land, its assignees or a warehouse lender, (ii) purchaser of an interest in land, or (iii) lessee of an interest in land

and provided the loss arises out of: 1. Failure of the Issuing Agent or Approved Attorney to comply with your written closing

instructions to the extent that they relate to (a) the status of the title to that interest in land or the validity, enforceability and priority of the lien of the mortgage on that interest in land, including the obtaining of documents and the disbursement of funds necessary to establish the status of title or lien, or (b) the obtaining of any other document, specifically required by you, but only to the extent the failure to obtain the other document affects the status of the title to that interest in land or the validity, enforceability and priority of the lien of the mortgage on that interest in land, and not to the extent that your instructions require a determination of the validity, enforceability or the effectiveness of the other document, or

2. Fraud, dishonesty or negligence of the Issuing Agent or Approved Attorney in handling your

funds or documents in connection with the closings to the extent that fraud, dishonesty or negligence relates to the status of the title to that interest in land or to the validity, enforceability, and priority of the lien of the mortgage on that interest in land.

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If you are a lender protected under the foregoing paragraph, your borrower, your assignee and your warehouse lender in connection with a loan secured by a mortgage shall be protected as if this letter were addressed to them. Conditions and Exclusions 1. The Company will not be liable to you for loss arising out of:

A. Failure of the Issuing Agent or Approved Attorney to comply with your closing

instructions which require title insurance protection inconsistent with that set forth in the title insurance binder or commitment issued by the Company. Instructions which require the removal of specific exceptions to title or compliance with the requirements contained in the binder or commitment shall not be deemed to be inconsistent.

B. Loss or impairment of your funds in the course of collection or while on deposit with a

bank due to bank failure, insolvency or suspension, except as shall result from failure of the Issuing Agent or the Approved Attorney to comply with your written closing instructions to deposit the funds in a bank which you designated by name.

C. Defects, liens, encumbrances or other matters in connection with your purchase, lease or

loan transactions except to the extent that protection against those defects, liens, encumbrances or other matters is afforded by a policy of title insurance not inconsistent with your closing instructions.

D. Fraud, dishonesty or negligence of your employee, agent, attorney or broker. E. Your settlement or release of any claim without the written consent of the Company. F. Any matters created, suffered, assumed or agreed to by you or known to you.

2. If the closing is to be conducted by an Approved Attorney, a title insurance binder or

commitment for the issuance of a policy of title insurance of the Company must have been received by you prior to the transmission of your final closing instructions to the Approved Attorney.

3. When the Company shall have reimbursed you pursuant to this letter, it shall be subrogated to all

rights and remedies which you would have had against any person or property had you not been so reimbursed; Liability of the Company for reimbursement shall be reduced to the extent that you have knowingly and voluntarily impaired the value of this right of subrogation.

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4. The protection herein offered shall not extend to any transaction in which the funds you transmit

to the Issuing Agent or Approved Attorney exceed $_________. The Company shall have no liability of any kind for the actions or omissions of the Issuing Agent or Approved Attorney in that transaction except as may be derived under the Company's commitment for title insurance, policy of title insurance or other express written agreement. Please contact the Company if you desire the protections of this letter to apply to that transaction. This paragraph shall not apply to individual mortgage loan transactions on individual one-to-four-family residential properties (including residential townhouse, condominium and cooperative apartment units).

5. The Issuing Agent is the Company’s agent only for the limited purpose of issuing title insurance

policies. Neither the Issuing Agent nor the Approved Attorney is the Company’s agent for the purpose of providing other closing or settlement services. The Company’s liability for your losses arising from those other closing or settlement services is strictly limited to the protection expressly provided in this letter. Any liability of the Company for loss does not include liability for loss resulting from the negligence, fraud or bad faith of any party to a real estate transaction other than an Issuing Agent or Approved Attorney, the lack of creditworthiness of any borrower connected with a real estate transaction, or the failure of any collateral to adequately secure a loan connected with a real estate transaction. However, this letter does not affect the Company’s liability with respect to its title insurance binders, commitments or policies.

6 Either the Company or you may demand that any claim arising under this letter be submitted to

arbitration pursuant to the Title Insurance Arbitration Rules of the American Land Title Association, unless you have a policy of title insurance for the applicable transaction with an Amount of Insurance greater than $2,000,000. If you have a policy of title insurance for the applicable transaction with an Amount of Insurance greater than $2,000,000, a claim arising under this letter may be submitted to arbitration only when agreed to by both the Company and you.

7. You must promptly send written notice of a claim under this letter to the Company at its principal

office at _____________________________________________. The Company is not liable for a loss if the written notice is not received within one year from the date of the closing.

8. The protection herein offered extends only to real property transactions in [State]. Any previous closing protection letter or similar agreement is hereby cancelled, except for closings of your real estate transactions for which you have previously sent (or within 30 days hereafter send) written closing instructions to the Issuing Agent or Approved Attorney. BLANK TITLE INSURANCE COMPANY

By: _____________________________ (The name of a particular issuing agent or approved attorney may be inserted in lieu of reference to Issuing Agent or Approved Attorney contained in this letter and the words "Underwritten Title Company" may be inserted in lieu of Issuing Agent.)

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AN OVERLOOKED OPTION FOR FINANCING MULTI-FAMILY AFFORDABLE HOUSING:

OBTAINING TAX-EXEMPT HOUSING BONDS FROM A

LOCAL REDEVELOPMENT AND HOUSING AUTHORITY AND 4% LOW-INCOME HOUSING TAX CREDITS FROM VHDA

by William L. Nusbaum* and H. David Embree**

One of the very few bright spots in the struggling world of commercial real estate has been the strength of the multi-family rental market. While the construction of shopping centers, office buildings and industrial properties ground to an almost complete stop during the past three years, rising unemployment and foreclosures, the collapse of the single-family housing market, and the reluctance of many who could afford to buy a home to make such a sizable investment in this fragile economy have combined to shrink multi-family vacancy rates in existing properties and strengthen the pro forma bottom lines of proposed projects. As a result, developers of multi-family rental projects have been busy the last few years with both acquisition/rehabilitation deals and the construction of new apartment complexes. Both construction and permanent financing have generally been available for these projects. One challenge for these multi-family developers has been to match up the best mode of financing with their project. In the past, this has often meant obtaining a privately originated loan backed by some form of federal government sponsored credit support (e.g., Fannie Mae, Freddie Mac or GNMA), but since the financial setbacks at Fannie Mae and Freddie Mac, developers have become interested in exploring other alternatives. Some sophisticated developers have pursued HUD-insured 221(d)(4) financing, notable for its fixed rate, 40-year amortization schedule. However, the HUD 221(d)(4) program typically takes a year or longer from the pre-application stage through closing the financing, and many real estate sellers are not willing to wait that long to close their sale.

Other multi-family rental housing developers have flocked to state-supported financing, provided in Virginia through the Virginia Housing Development Authority (“VHDA”). VHDA’s long-standing AAA bond rating (as of October 1, 2011) and well-established multi-family bond financing loan programs1 enable developers of both market-based and affordable (i.e., for low- and moderate-income tenants) rental projects to obtain financing. The loans for market-based properties are financed with taxable bonds issued by VHDA for multiple projects, while the loans for the affordable housing properties are typically financed with tax-exempt VHDA bonds and accordingly bear a lower interest rate than the loans for market-based projects.

* William L. Nusbaum is a shareholder at Williams Mullen, practicing in its Norfolk office. His

practice focuses on municipal bonds, economic development incentives, commercial real estate and alcoholic beverage licensing. He graduated with an A.B. from Harvard College in 1977 and received his J.D. from the University of Virginia School of Law in 1980. He is Secretary/Treasurer of the Board of Governors of the Real Property Section of the Virginia State Bar, and a former Chair of its Commercial Real Estate Committee, and served as bond counsel on the transaction discussed below.

** H. David Embree is a shareholder at Williams Mullen, practicing in its Norfolk office. His practice focuses on commercial real estate, and in particular, low-income housing tax credits and multi-family housing, as well as retail and commercial property acquisition and financing. He graduated with a B.A. from Michigan State University in 1971 and received his J.D. from the University of Virginia School of Law in 1974. He is a former Chair of the Taxation Section of the Virginia State Bar, and represented the developer in the sale of the Low-Income Housing Tax Credits in the transaction discussed below.

1 See the VHDA website at http://www.vhda.com/BusinessPartners/MFDevelopers/MFFinancing/ Pages/MF-Financing-Overview.aspx.

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But VHDA does more than sell its bonds to fund multi-family rental housing loans. It also serves as allocation administrator for the Commonwealth’s share of federal Low-Income Housing Tax Credits (“LIHTCs”), uniquely positioning it as a “one-stop shop” for financing affordable housing projects. To VHDA’s credit, it operates a well-oiled machine, accessing the credit markets with large bond issues which fund its making loans for individual projects, and it has reduced the highly detailed application process for LIHTCs to a science.2 Through VHDA’s LIHTC program, a developer may apply for either (a) 9% LIHTCs (rationed according to a nation-wide annual cap on the dollar amount of LIHTCs that can be granted through a competitive once-yearly application process) or (b) the less lucrative 4% LIHTCs (available for projects financed with tax-exempt bonds). With an award and subsequent sale of LIHTCs to an investor limited partner, the developer can raise substantial equity for injection into its project.

But how do LIHTC’s work, and what makes them so attractive to the developer of a multi-family

affordable housing project? While a complete explanation (232 pages!) of the program is available from the Internal Revenue Service’s web site,3 the key aspects of the LIHTC program can be briefly summarized as follows.

For the competitive 9% LIHTC’s, VHDA allocates the available credits among several pools,

some of which are geographic and others of which are sponsor defined (i.e., non-profit organizations and local Redevelopment and Housing Authorities (“RHAs”)). The 9% credit allows the investor to subtract from its tax liability, each year for ten years after completion and occupancy, 9% of the qualified basis in the project, which is roughly the cost to develop the project, less land cost (land cannot make up any part of the tax credit base). For rehab projects, the acquisition of existing buildings will also qualify for credit, but at the 4% rate rather than 9%. The 4% credit is indexed against the federal funds rate; at the present time, the 4% credit actually yields 3.26%.

The tax credit investor, which typically “buys” the credit by contributing capital and becoming a

limited partner in a limited partnership, or a non-managing member of a limited liability company, pays a discounted amount for the credits because of the time value of using the credits over the ten year period. Other benefits of owning an equity interest in the project, such as cash flow from operations and residual value on sale or refinancing, are negotiable between the developer and the tax credit investor. The developer can expect to make personal guarantees to the investor that the credits will be received and the project operated free of deficits at least for some initial period. Now about twenty years old, the tax credit program has matured, with a number of national syndicators as potential investors.

What’s the quid pro quo for this tax benefit? To qualify for LIHTC’s, the project must (a) rent

not less than 40% of its units to residents making not more than 60% of the HUD-established area median income (subject to adjustments for family size), and (b) fix its rent for its tax credit units at 30% of the metropolitan statistical area (“MSA”) median income. MSA median incomes and allowable rents can be found on the VHDA website.4 Since tax credits (and equity dollars) flow only for qualified units, more often than not developers choose to apply the tax credit restrictions to 100% of the project. Finally, the tax credit restrictions must remain on the project for a minimum of thirty (30) years.

Thus, the tax credit program provides an indirect subsidy for affordable housing. The higher

equity investment reduces the amount of project debt, and with lower debt service costs, the project can still prosper at the restricted tax credit rents. The program does, however, require diligent property

2 See VHDA website, at http://www.vhda.com/BusinessPartners/MFDevelopers/LIHTCProgram/

Pages/LIHTCProgram.aspx. 3 See U.S. Dept. Treas., Internal Revenue Service Market Segment Specialization Program, Low

Income Housing Credit, Training Publication 3123-006 (6-99), TPDS No. 89018M, at http://unclefed.com/SurviveIRS/MSSP/lihc.pdf.

4 See VHDA, Maximum LIHTC Gross Rents – VHDA, at http://www.vhda.com/Business Partners/PropertyOwnersManagers/Income-Rent-Limits/Pages/Maximum-LIHTC-Gross-Rents.aspx.

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management, because failure to maintain occupancy by income-qualified tenants will result in recapture of credits during the first fifteen years after the project’s completion.

But even the finely-tuned programs which VHDA offers for its multi-family rental housing loans

and 9% LIHTCs have some drawbacks. Because of the federal volume cap on 9% LIHTCs, the application process for the 9% credits is very competitive, and most projects which apply fail to receive an award of 9% credits.5 Moreover, for those developers seeking 9% LIHTCs, news of the failure to receive an award of 9% credits comes after a five to six-month long application preparation, submission and review process, at which point they then have to retool their numbers and turn to “Plan B.” Developers who also choose to use VHDA’s multi-family rental housing loan program may find the cost of those funds somewhat expensive. While the transaction costs are cheaper than obtaining bond financing from an RHA, other factors run up the cost. Because the VHDA loan pool is fully funded at closing, interest costs are higher, and because VHDA structures the loan to bear a single interest rate to maturity, there is no opportunity to take advantage of the lower, short-term interest rates which could be accessed during construction or rehabilitation if the financing featured a subsequent conversion to a long-term interest rate after completion and stabilization. Finally, while there are many variables which enter into long-term interest rate pricing (e.g., loan-to-value ratio, term to maturity, projected occupancy rates, pro forma financials, competition in the project’s market, etc.), the authors’ recent experience involving the alternative financing structure described below found that when comparing “apples to apples,” VHDA’s interest rate was about thirty (30) basis points higher than the post-conversion long-term interest rate offered in a bank private placement.

In a recently closed transaction, our client signed a purchase contract on February 14, 2011 for

the purchase of an existing 180 unit apartment complex in a Hampton Roads city. The contract gave the buyer until June 30, 2011 to obtain its financing and close on the purchase. As there was no time to apply for and wait out the 9% LIHTC award process at VHDA, and because the client was projecting an approximately 16 month, phased rehabilitation of the project’s buildings (along with the construction of a new clubhouse), it decided to seek other alternatives. In this case, a bank offered to purchase tax-exempt bonds issued by a local RHA, and to structure the bond issue on a draw-down basis in which interest would accrue during a two-year construction period at a cheaper, LIBOR-based floating rate, and only accrue on the actual principal amount advanced to date. When paired with the 4% LIHTCs that could be obtained from the state volume cap as a matter of right and sold to an investor limited partner, the financing structure became quite attractive, notwithstanding the fact that the associated legal fees would be greater. (The higher legal fees were due to the need for the developer to retain its own bond counsel, together with the presence of bank counsel and counsel for the local RHA. VHDA closes its loans with a trained staff of in-house counsel at no cost to the borrower.)

What cinched the deal was the prospect that the tax-exempt multi-family housing bonds could be

issued and the 4% LIHTCs could be sold in roughly four months’ time, starting from the contract date. In early March, we began the bond issue public approval process, drafting and submitting to the local newspaper the Notice of Public Hearing,6 which had to run once a week for the two weeks before the RHA’s meeting at which the issuance of the bonds would be considered. The following week, we prepared and submitted the bond financing application package to the RHA. In addition to the RHA’s application form, the package also included an “official action” resolution of the RHA,7 a “public approval” resolution for adoption by the City Council of the City in which the project was located,8 and a

5 See VHDA, 2011 Low Income Housing Tax Credit Program: Final Rankings, at

http://www.vhda.com/BusinessPartners/MFDevelopers/LIHTCProgram/LowIncome%20Housing%20Tax%20Credit%20Program/2011%20Final%20Rankings-WEB.pdf.

6 See Treas. Reg. § 5f.103-2(g)(2), (3); VA. CODE § 15.2-4906 (1950, as amended). 7 See I.R.C. § 147(f)(2); Treas. Reg. §§ 5f.103-2(c)(2), 1.150-2. 8 See I.R.C. § 147(f)(2); Treas. Reg. § 5f.103-2(d), (e).

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Fiscal Impact Statement in the form required by Virginia law.9 In late March, the official action resolution was adopted by the RHA, and in late April, the public approval resolution was approved by City Council, positioning the project to apply to the Virginia Department of Housing and Community Development (“DHCD”) for an allocation from Virginia’s multi-family housing bond allocation, in its capacity as the multi-family housing bond allocation administrator for the Commonwealth.10

While the local bond approval process was moving forward, the client and our law firm were also

preparing the VHDA 4% LIHTC application book and negotiating with prospective investor limited partners to buy the 4% LIHTCs, as well as supplying due diligence requirements to the bank and the ultimately selected LIHTC investor limited partner. Operating on such a tight closing schedule, we were vulnerable to the slightest delays, and ultimately, the slowness with which some of the bank-ordered third party reports (appraisal, environmental & engineering) were delivered became problematic. Additionally, we suffered delays in obtaining our bond allocation from DHCD, due to the one condition precedent to the bond allocation award which was beyond our control – VHDA’s approval of LIHTCs for the project. Due to our unfortunate timing, VHDA’s personnel were focused exclusively on wrapping up the separate, but parallel, competitive application process for 9% LIHTCs, and so our 4% LIHTCs application, and hence our bond allocation application, both were delayed to the very end of June. Consequently, due to the imminent June 30 contract closing date, a short-term bridge loan from the bank for the acquisition of the project was obtained so the purchase could be concluded on schedule, and the bridge loan was then taken out at the closing of the bonds and LIHTCs two weeks later. From signed contract to final closing, exactly five months elapsed.

But notwithstanding the higher transaction costs compared to VHDA, the speed with which the

financing could be concluded and the all-in cost of the financing still left the developer satisfied that the financing structure was, on a long-term basis, the best option for financing the acquisition and rehabilitation of the apartment complex. In addition, this structure allowed a greater degree of negotiation of financing covenants than would have been the case in a VHDA or HUD-insured affordable housing loan program.

Because developers have ties to different banks, we have surveyed our contacts at some of the

leading national, regional and community banks in the Commonwealth as to whether they either have, or would be willing to structure, a multi-family housing project finance program such as the one described above, and found the following results (some lenders asked that their names not appear in the list or failed to respond to our inquiry):

Bank of America - Yes M&T Bank - No Monarch Bank - No TowneBank - Yes Union First Market Bank - No Wells Fargo Bank - Yes (starting early 2012) Multi-family rental housing developers are fortunate that during this time of high demand for

their product, there are multiple attractive financing vehicles from which they can choose. As each project is unique, the determining factors which dictate the selection and availability of financing vehicle

9 See VA. CODE § 15.2-4907 (1950, as amended) (made applicable to multi-family housing bonds

by 1983 Va. Acts ch. 514, § 2). 10 See Va. Dept. Housing & Community Dev., Virginia Private Activity Bond Allocation

Guidelines, at http://www.dhcd.virginia.gov/PrivateActivityBonds/PAB_ Guidelines.doc. While multi-family housing bonds are subject to the state-by-state federal volume cap for private activity bonds under Internal Revenue Code § 146, in recent years, Virginia RHAs have not come close to using up the portion of the Virginia volume cap reserved for multi-family housing bonds issued by local housing authorities.

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(including whether the project will provide affordable housing) will vary greatly from project to project. Given developers’ preference to control as many of the factors in their financing as possible, however, we believe that in the case of affordable housing projects involving either new construction or substantial rehabilitation, the use of tax-exempt, draw-down multi-family housing bonds issued by a local RHA in a direct placement to a bank, together with 4% LIHTCs, can produce outstanding results for the developer in the critical areas of speed, flexibility of financing covenants, and most importantly, all-in cost. Affordable housing developers and their counsel should give thoughtful consideration to this under-utilized combination of financing vehicles as they begin to explore their financing alternatives.

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FROM THE CLUTTERED DESK (AND MIND) OF THE CO-EDITOR

by Stephen C. Gregory Because I am reasonably confident this page is not the first to which you turned upon receipt of

this issue, by now you are aware of the tribute we are paying to Minerva Wilson Andrews. My thanks to all who contributed to remembering one of the pioneers of the Real Property Section.

In 1977, while still in law school, I was hired to be a title examiner by Boothe, Prichard and

Dudley. At that time, in the old office next to the fire house in Fairfax, the main part of the real estate department was in the basement, with R. Dennis McArver, Courtland L. Traver, Michael T. Bradshaw, and the incomparable F. Sheild McCandlish. Mrs. Andrews was “upstairs,” so I had few opportunities to work directly for or with her. From however much or little interaction I may have had with Mrs. Andrews, I can emphatically concur with the opinions expressed herein. She was unfailingly polite and gentle but one of the most accomplished and respected practitioners of either gender.

(She was always “Mrs. Andrews” to me (and I suspect others), even after I became a member of

the bar and a colleague. There was something about her mien that commanded that kind of respect, even though she seemed never to seek nor require that degree of deference.)

It is difficult to measure, much less enumerate, the contributions Mrs. Andrews made to the

profession in general and this section in particular. The Bar is richer for her existence, and she will be missed.

* * *

Elsewhere in this issue is a letter from Eric Zimmerman, who chairs the Residential Property

subsection. The gist of his letter is that the real estate market as we have known it is gone forever, and practitioners who invested their entire (or nearly so) practice in real estate would be well advised to seek other avenues to supplement that diminishing market.

Eric and I have both been doing this for longer than we would care to admit, and we have

survived the cyclical nature of real estate law. When I entered practice, interest rates were upward of 14%, buyers needed 20% down (or would have to pay a hefty mortgage insurance premium), and creative financing (wrap-around mortgages, e.g.) was popular. Then came a short-lived refinancing boom in the early 90s, followed by another recession, followed another boom, etc., etc. I am enough of a cockeyed optimist to believe that this, too, shall pass, but Eric’s advice is sound. Relying on a career that has, over the years, been unpredictably cyclical is shortsighted at best.

Perhaps some of you have already undertaken this adjustment. If so, we’d like to hear from you.

Let us know what you have done to compensate for the economic downturn and lack of real estate business. Have you started taking bankruptcy clients, collections clients? Are you using social media, other networking? What has worked and what hasn’t? Send us an article or a letter to share with your fellow section members.

Finally, to reprise my entreaty from last issue, this magazine is your magazine. Let us hear from

you. Tell us what you like and what you don’t like (even if it’s this letter!), and what we can do to make it better. The Real Property Section exists to serve you; help us do that.

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REPORT OF THE COMMERCIAL REAL ESTATE COMMITTEE

MINUTES OF A MEETING OF THE COMMERCIAL REAL ESTATE COMMITTEE OF THE VIRGINIA STATE BAR REAL PROPERTY SECTION

HELD BY CONFERENCE CALL ON SEPTEMBER 8, 2011, AT 12:00 P.M.

by Whitney Jackson Levin

Pursuant to e-mailed notice to the members of the Commercial Real Estate Committee, a conference call meeting of the Committee was convened by Committee Chair Whitney Jackson Levin (Wharton Aldhizer & Weaver PLC) on September 8, 2011 at 12:00 p.m. Also participating in the call were Jean Mumm (LeClairRyan), Bill Nusbaum (William Mullen) and Rick Chess (Chess Law Firm, PLC). The meeting opened with a plea from the Chair for commercial real estate articles for the November issue of the FEE SIMPLE. Bill Nusbaum generously offered to draft an article on financing multi-family housing using tax exempt bonds and low income housing using tax credits. Rick Chess said that he may have an idea for a possible article related to raising funds to buy out partnership interests and to follow up with him in a few months. The Committee then discussed prospective topics for the Section’s Advanced Real Estate Seminar in March, 2012, at Kingsmill Resort, in Williamsburg. Topics suggested (without any ranking by the Committee), were:

Economic Development Incentives from the LGA perspective Recent Developments in Legal Opinions presented by a panel of attorneys representing each side of a

transaction Working Around typical lender provisions in loan documents Update on recent developments in foreclosures

There being no other business to come before the Committee, the meeting was adjourned.

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LETTER FROM THE CHAIRMAN OF THE RESIDENTIAL COMMITTEE

by Eric V. Zimmerman The economic downturn and financial crash that occurred over the past four years have created a major dilemma for the attorney who handled residential real estate transactions. Indeed, for some of us it seems the work dried up overnight. Our plight is partially our profession’s fault. We have known for years, with the invasion of settlement agencies, that the use of attorneys to handle closings was on borrowed time. My introduction to the Real Property Section of the Virginia State Bar two decades ago was to spend a weekend in Tysons Corner with other members discussing the impact of allowing lay persons to conduct closings. So here we are; the future is now. The question is not to whom to complain, but to determine what alternatives we do have. The purpose of this brief epistle is to suggest some steps that you can take to “reinvent” your practice. I know this is frustrating, especially if you have spent the better part of your professional career building your expertise and practice, but it’s not coming back. A beautiful aspect of practicing law, especially in a relatively suburban/rural area where I live and work (Loudoun County), is that there is plenty of work to be had. The question is how to pick and choose the subject area that is to your liking and what suits your background. One reason why I enjoy transactional real estate so much is that it allows me to relate to and counsel the clients. Rarely do I handle a closing where, after all the pens are set aside, I have not learned what the client does for a living and what the family composition is. From that information I can easily transition into questions about joys and problems associated with their line of work and, at least in my case, whether or not the client has an estate plan in place. People are desperate to find someone who takes an interest in their lives, even if superficial in the beginning. Perhaps with the exception of a physician or a minister, who has more opportunity to empathize with a client than an attorney? We assure confidentiality, and our professionalism bestows a sense of understanding of problems. I encourage all attorneys, especially those whose real estate practice is suffering, to audit your strengths and interests. Not all attorneys should leap into trial practice, nor should they toss a hat in the ring to return to family or criminal law. But until you ask yourself, “Okay, if not this [real estate law], what?,” you may find yourself disillusioned with the practice. Don’t be afraid to ask for help from other attorneys or even other professionals, such as what are now called “life coaches.” Don’t view the move as a step back in your career; it is merely an adjustment to allow you to grow even more.

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REPORT OF THE TECHNOLOGY COMMITTEE

by Douglass W. Dewing Mobile applications for smart phones and tablet computers make it easier to practice away from the desk, but attorneys should be aware that such applications may open their mobile devices to security risks. See http://www.abajournal.com/magazine/article/app-solutely_perilous_security_of_mobile_apps _spurs_concern/?utm_source=maestro&utm_medium=email&utm_campaign=tech_monthly. As Sharon Nelson in Fairfax noted in her blog, just because “you CAN download something doesn’t mean you SHOULD.” http://ridethelightning.senseient.com/2010/12/keeping-em-honest-mobile-phone-apps-and-security.html.

As many Virginia lawyers discovered in August, cell phones are more likely to connect calls during a hurricane than immediately after an earthquake. Although last month’s earthquake was relatively minor by West Coast standards, the suddenly felt widespread tremor led to a massive spike in phone calls, saturating network capacity. The industry is expected to push for the sale of more frequency spectrum. See http://money.cnn.com/2011/08/26/technology/hurricane_cell_phone_service/index.htm?hpt =te_bn10. For cell phone apps that can help you track hurricanes, see http://www.cnn.com/ 2011/TECH/mobile/08/26/hurricane.apps.web/index.html. Verizon recently launched Droid Bionic for its 4G network. Phones are starting to sound like computers: this phone has dual core processors; 16Gb of onboard storage and a 16Gb microSD card (each of those holds more data than my first computer). Front and rear facing cameras (for video conferencing) are also standard. Adobe Flash is pre-loaded; it has a port that allows display on larger screens, a cloud storage app to access files remotely, and a horde of accessories (not included in the already rather steep base price). See http://www.pcworld.com/article/239676/motorola_droid_bionic _launch_day_briefing.html#tk.rss. Another thing smart phones can do was revealed in an e-mail blast circulated in late August – check scanning and electronic deposit. The unfortunate element stemming from such convenience was afterwards; the check was then returned to the settlement agent with a request that it be replaced with a wire transfer. Suggestions to prevent an occurrence (or re-occurrence) include: implementing a positive pay system and actively monitoring it; promptly removing any returned check from the positive pay authorization list; putting a stop payment request on the check even though it is back in your possession; inquiring with your bank about whether a current day report is available showing the check as presented for clearing; and waiting at least a full business day to replace the check. Extending a concept from the example of detective, spy or journalist books/movies comes the final reminder: to keep all checks in your possession until they are delivered . . . if you leave the closing, even briefly, consider the possibility that a check can be scanned and electronically deposited even while the closing is still taking place. See Stewart Bulletin SLS2011015. A more “traditional” form of theft was revealed in a trio of thematically related articles recently encountered. The headlines say it all: “As Hackers Steal Up to $1B Annually from Biz Bank Accounts, Victims May Have No Recourse,” “Almost 20% of Home Computers, 7% of Corporate Ones are Botnet Slaves, Expert Says,” and “Law Firm Loses $78K in Massive Malware Scheme.” The latter article mentions that federal authorities took “command” of the malware network (the article did not specify if that was “physical” or “electronic” control) in order to turn it off. A business’ deposit agreement (including law firms within the category of business) with a bank which absolves the bank of liability for simple negligence, combined with the “user cooperation” necessary to allow the malware into the system in the first place, may be sufficient grounds for imposing the loss of funds upon the business (law firm). Business accounts, unlike individual accounts, are not protected from such internet fraud. See http://www.abajournal.com/news/article/up_to_300m_stolen_annually_from/?utm_source=maestro&utm_medium=email&utm_campaign=tech_monthly; http://www.abajournal.com/news/article/almost _20_of_home_computers_7_of_corporate_computers_are_botnet_slaves_expe/; http://www.abajournal

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.com/news/article/doj_says_massive_decade-old_botnet_helped_web_thieves_steal_millions/; http://www.bloomberg.com/news/2011-08-04/hackers-take-1-billion-a-year-from-company-accounts-banks-won-t-indemnify.html. Under the “OK, I found it on the internet, so maybe it isn’t real . . . but I’m glad I’m not that lawyer” category . . . everything I need to know I learned in kindergarten.

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Very rudimentary fact checking suggests that that is a real judge, and he is a “no nonsense” enforcer of the procedural rules.

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REPORT OF THE TITLE INSURANCE COMMITTEE

by Brian O. Dolan

The Title Insurance Committee held a telephone conference at 3:30 p.m. on June 10, 2011. The following members were in attendance: Brian Dolan, Ed Waugaman, Larry McElwain, Lisa Graziano and Kay Creasman. The meeting began with a discussion of foreclosure issues recently encountered or brought to the attention of the various committee members. Foreclosure issues discussed included the following:

1. Whether a substitution of trustee by a new lender, recorded before assignment of the deed of trust, is valid and the implications of early recording on the foreclosure process.

2. To avoid unpleasant surprises, bidders (or their counsel) need to closely examine foreclosure sale notices for items such as who is responsible for delinquent real estate taxes or whether it is a second deed of trust being foreclosed.

3. Successful bidders should arrange for property insurance coverage immediately upon completion of a foreclosure sale.

4. There are numerous reports of property description errors with REO properties. Trustees need to obtain better quality or more thorough title reports prior to sale to avoid problems.

The committee did not have ready answers to all these issues and believed it would be worthwhile combining the above topics, along with others, into a future FEE SIMPLE article on foreclosure pointers.

In addition to foreclosure issues, the committee explored other issues that could be addressed in the FEE SIMPLE or serve as topics for upcoming seminars. Those included:

1. Explaining the differences between quiet title and partition actions, as well as whether one or the other may be better in certain situations or whether to request both as alternative theories of relief. Also discussed was whether title policy exceptions may be utilized if any party in such a suit is served by publication.

2. In Horvath v. Bank of New York, N.A., 641 F.3d 617 (4th Cir. 2011), the court rejected a claim that only the original lender named in a deed of trust can foreclose in Virginia. The deed of trust identified MERS as the beneficiary and had been securitized. Numerous courts throughout the country have split on this issue.

3. How do you resolve old judgments in light of limitations imposed by privacy laws, i.e., what happens when you do not have personally identifying information to provide to the creditor or it refuses to speak with you? What do you do if you are unable to locate the creditor, it is no longer in business, or it doesn't have records of the debt?

4. Some of the same issues that arise in trying to resolve old judgments also arise with unreleased deeds of trust.

At the conclusion of the meeting, it was agreed to schedule the next quarterly committee teleconference for some time in either September or October.

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BOARD OF GOVERNORS REAL PROPERTY SECTION

VIRGINIA STATE BAR (2011-2012)

Officers

Chair Paul H. Melnick, Esquire Melnick & Melnick, P.L.C. 711 Park Avenue Falls Church, VA 22046 (703) 276-1000 (703) 536-8880 (fax) email: [email protected] Term Expires: 2013 (2)

Vice-Chair J. Philip Hart, Esquire Senior Real Estate Counsel Genworth Financial, Inc. 6620 West Broad Street Building #1, 3rd Floor Richmond, VA 23230 (804) 922-5161 (804) 662-2596 (fax) email: [email protected] Term Expires: 2014 (2)

Secretary/Treasurer William L. Nusbaum, Esquire Williams Mullen Dominion Tower Suite 1700 P.O. Box 3460 Norfolk, VA 23514-3460 (757) 629-0612 (757) 629-0660 (fax) email: [email protected] Term Expires: 2012 (2)

Board Members

*Paul A. Bellegarde, Esquire 8284 Spring Leaf Court Vienna, VA 22182 (301) 537-0627 (cell) (703) 749-8306 (fax) email: [email protected] Term Expires: 2014 (3)

Fred Lewis Biggs, Esquire Kepley Broscious & Biggs, PLC 2211 Pump Road Richmond, VA 23233 (804) 741-0400 (804) 741-6175 (fax) Email: [email protected] Term Expires: 2014 (1)

Kenneth L. Dickinson, Esquire Stewart Title 1802 Bayberry Court Suite 305 Richmond, VA 23226 (804) 897-0000 (804) 897-0001 (fax) email: [email protected] Term Expires: 2014 (2)

Barbara Wright Goshorn, Esquire 203 Main Street P.O. Box 177 Palmyra, VA 22963 (434) 589-2694 (434) 589-6262 (fax) email: [email protected] Term Expires: 2013 (2)

* Indicates former Chair of the Section

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J. Philip Hart, Esquire Senior Real Estate Counsel Genworth Financial, Inc. 6620 West Broad Street Building #1, 3rd Floor Richmond, VA 23230 (804) 922-5161 (804) 662-2596 (fax) email: [email protected] Term Expires: 2014 (2)

*Randy C. Howard, Esquire Senior Vice President Marketing Director & Commercial Counsel 5516 Falmouth Street, Suite 200 Richmond, VA 23230 (800) 552-2442 ext. 737 (toll free) (804) 521-5737 (direct) (804) 521-5756 (fax) (804) 337-1878) (cell) email: [email protected] Term Expires: 2014 (3)

Christina E. Meier, Esquire Christina E. Meier, P.C. 4768 Euclid Road Suite 102 Virginia Beach, VA 23462 (757) 313-1161 (757) 313-1162 (fax) email: [email protected] Term Expires: 2013 (3)

Paul H. Melnick, Esquire Melnick & Melnick, P.L.C. 711 Park Avenue Falls Church, VA 22046 (703) 276-1000 (703) 536-8880 (fax) email: [email protected] Term Expires: 2013 (2)

William L. Nusbaum, Esquire Williams Mullen Dominion Tower Suite 1700 P.O. Box 3460 Norfolk, VA 23514-3460 (757) 629-0612 (757) 629-0660 (fax) email: [email protected] Term Expires: 2012 (2)

Susan Stringfellow Walker, Esquire Jones & Walker, P.C. 128 S. Lynnhaven Road Suite 100 Virginia Beach, VA 23452 (757) 486-0333 (757) 340-8583 (fax) email: [email protected] Term Expires: 2014 (2)

Charles Cooper Youell, IV, Esquire Whitlow & Youell, P.L.C. 26 West Kirk Avenue Roanoke, VA 24011 (540) 904-7836 (540) 684-7836 (fax) email: [email protected] Term Expires: 2012 (2)

Ex Officio

Academic Liaison Lynda L. Butler, Esquire Chancellor Professor of Law Marshall-Wythe School of Law College of William and Mary 613 South Henry Street Williamsburg, VA 23185 or P.O. Box 8795 Williamsburg, VA 23187-8795 (757) 221-3843 (757) 221-3261 (fax) email: [email protected]

Immediate Past Chair *Paul A. Bellegarde, Esquire 8284 Spring Leaf Court Vienna, VA 22182 (301) 537-0627 (cell) (703) 749-8306 (fax) email: [email protected]

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VSB Executive Director Karen A. Gould, Esquire Virginia State Bar 707 E. Main St., Suite 1500 Richmond, VA 23219 (804) 775-0550 (804) 775-0501 (fax) email: [email protected]

VBA Real Estate Council Chair *Larry J. McElwain, Esquire Parker, McElwain & Jacobs, P.C. 2340 Commonwealth Drive Charlottesville, VA 22906 (434) 973-3331 (434) 973-9393 (fax) email: [email protected]

Judicial Liaison The Honorable Rodham Tulloss Delk, Jr. Suffolk Circuit Court P.O. Box 1814 Suffolk, VA 23439-1814 (757) 514-4804 (757) 514-4815 (fax) email: [email protected]

Other Liaisons

Virginia CLE Liaison Nancy Kern, Esquire Virginia C.L.E. 105 Whitewood Road Charlottesville, VA 22901 (800) 223-2167 ext. 145 (434) 984-0311 (fax) email: [email protected]

VSB Liaison Dolly C. Shaffner Special Projects Administrative Assistant Virginia State Bar 707 East Main Street Suite 1500 Richmond, VA 23219-2800 (804) 775-0518 (804) 775-0501 (fax) email: [email protected]

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AREA REPRESENTATIVES

Central Region

Steven W. Blaine, Esquire LeClairRyan, P.C. P.O. Box 2017 123 Main Street 8th Floor Charlottesville, VA 22902-2017 (434) 971-7771 (434) 296-0905 (fax) email: [email protected]

Richard B. "Rick" Chess, Esquire Chess Law Firm 9211 Forest Hill Ave. Suite 201 Richmond, VA 23235 (804) 241-9999 (cell) (866) 596-9908 (fax) email: [email protected]

Kay M. Creasman, Esquire Associate Counsel Old Republic National Title Insurance Company 1245 Mall Drive Richmond, VA 23235 (804) 897-5499 (804) 475-1765 (cell) (804) 897-9679 (fax) email: [email protected]

*Douglass W. Dewing, Esquire Fidelity National Title Group Virginia National Business Unit Vista II - Suite 200 5516 Falmouth Avenue Richmond, VA 23230-1819 (804) 643-5404 (office) (804) 521-5743 (direct) (804) 521-5756 (fax) (800) 552-2442 (toll free) email: [email protected]

Lisa M. Graziano, Esquire Republic Title Services 409 Park Street Charlottesville, VA 22902 (434) 979-1136 (434) 979-0580 (fax) email: [email protected]

*Randy C. Howard, Esquire Senior Vice President Marketing Director & Commercial Counsel 5516 Falmouth Street, Suite 200 Richmond, VA 23230 (800) 552-2442 ext. 737 (toll free) (804) 521-5737 (direct) (804) 521-5756 (fax) (804) 337-1878) (cell) email: [email protected]

*Neil S. Kessler, Esquire Troutman & Sanders, L.L.P. P.O. Box 1122 Richmond, VA 23218-1122 (804) 697-1450 (804) 698-6002 (fax) email: [email protected]

*Larry J. McElwain, Esquire Parker, McElwain & Jacobs, P.C. 2340 Commonwealth Drive Charlottesville, VA 22906 (434) 973-3331 (434) 973-9393 (fax) email: [email protected]

*C. Grice McMullan, Jr., Esquire Thompson & McMullan, P.C. 100 Shockhoe Slip 3rd Floor Richmond, VA 23219-4140 (804) 698-6203 (804) 780-1813 (fax) email: [email protected]

*Joseph W. (“Rick”) Richmond, Jr., Esquire Richmond & Fishburne 214 East High Street Charlottesville, VA 22902 (434) 977-8590 (434) 296-9861 (fax) email: [email protected]

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Louis J. Rogers, Esquire CEO Rogers Realty Advisors, L.L.C. 4121 Cox Road Suite 107 Glen Allen, VA 23060 (804) 290-7900 (804) 290-0086 (fax) email: [email protected]

*Susan H. Siegfried, Esquire 5701 Sandstone Ridge Terrace Midlothian, VA 23112 (804) 739-8853 email: [email protected]

John W. Steele, Esquire Hirschler & Fleischer Federal Reserve Bank Building 701 East Byrd Street Richmond, VA 23219 or P. O. Box 500 Richmond, VA 23218-0500 (804) 771-9565 (804) 644-0957 (fax) email: [email protected]

Albert W. Thweatt, II, Esquire The Law Offices of Albert W. Thweat, II, P.C. 106 North Eighth Street Suite 1 Richmond, VA 23219 (804) 644-1964 (804) 644-1770 (fax) email: [email protected]

Ronald D. Wiley, Jr., Esquire Of Counsel MartinWren, P.C. 1228 Cedars Court Charlottesville, VA 22903 (434) 817-3100 (434) 817-3110 (fax) Email: [email protected]

J. Page Williams, Esquire Feil, Pettit & Williams, P.L.C. P.O. Box 2057 530 East Main Street Charlottesville, VA 22902-2057 (434) 979-1400 (434) 977-5109 (fax) email: [email protected]

Stephen B. Wood, Esquire Bierman, Geesing & Ward, L.L.C. 81200 Three Chopt Road Room 240 Richmond, VA 23229-4833 (804) 282-0463 (804) 282-0541 (fax) email: [email protected]

Northern Region

Dianne Boyle, Esquire Chicago Title Insurance Company 1129 20th Street, N.W. Suite 300 Washington, DC 20036 (202) 263-4745 (202) 955-5769 (fax) email: [email protected]

Todd E. Condron Leggett, Simon, Freemyers & Lyon, P.L.C. 100 East Street, SE Vienna, VA 22180 (703) 537-0800 (888) 448-3556 (fax) email: [email protected]

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Lawrence A. Daughtrey, Esquire Kelly, Mayne & Daughtrey 10605 Judicial Drive Suite A-3 Fairfax, VA 22030 (703) 273-1950 (703) 359-5198 (fax) email: [email protected]

Dorothea W. Dickerman, Esquire McGuire Woods, L.L.P. 1750 Tysons Boulevard Suite 1800 McLean, VA 22102-3892 (703) 712-5000 (703) 712-5242 (fax) email: [email protected]

James P. Downey, Esquire Downey and Mayhugh, P.C. 82 Main Street Warrenton, VA 20186 (540) 347-2424 (540) 349-1705 (fax) email: [email protected]

Russell S. Drazin Pardo & Drazin 4400 Jenifer Street, NW Suite 2 Washington, DC 20015 (202) 223-7900 (202) 686-7223 (fax) Email: [email protected]

*John David Epperly, Esquire Fidelity National Title Insurance Company 10300 Eaton Place Suite 270 Fairfax, VA 22030 (703) 279-1701 or (888) 465-0406 (ext. 701) (703) 691-2258 (fax) email: [email protected]

Craig C. Erdmann, Esquire Attorney Advisor Treasury/CFPB Consumer Financial Protection Bureau 1801 L Street, 5th Floor Washington, DC 20036 (202) 435-7322 email: [email protected]

Pamela B. Fairchild, Esquire 9501 Ferry Harbour Court Alexandria, VA 22309 (703) 360-6690 email: [email protected]

Mark W. Graybeal, Esquire Pesner Kawamoto Conway, P.L.C. 7926 Jones Branch Drive Suite 930 McLean, VA 22102-3303 (703) 506-9440 (703) 506-0929 (fax) email: [email protected]

*Susan M. Pesner, Esquire Pesner Kawamoto Conway, P.L.C. 7926 Jones Branch Drive Suite 930 McLean, VA 22102-3303 (703) 506-9440 (703) 506-0929 (fax) email: [email protected]

Jordan M. Samuel, Esquire Asmar, Schor & McKenna, P.L.L.C. 5335 Wisconsin Avenue, N.W. Suite 400 Washington, DC 20015 (202) 244-4264 (202) 686-3567 (fax) email: [email protected]

*Lawrence M. Schonberger, Esquire Sevila, Saunders, Huddleston & White, P.C. 30 North King Street Leesburg, VA 20176 (703) 777-5700 (703) 771-4161 (fax) email: [email protected]

Pamela Heflin Sellers, Esquire Assistant County Attorney Spotsylvania County Attorney’s Office P.O. Box 308 Spotsylvania, VA 22553-0308 (540) 507-7020 (540) 507-7028 (fax) email: [email protected]

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David W. Stroh, Esquire Assistant County Attorney for Fairfax County Office of the County Attorney 12000 Government Center Parkway Suite 549 Fairfax, VA 22035 (703) 324-2421(main) (703) 324-2663 (direct) (703) 324-2665 (fax) email: [email protected]

Neil I. Title, Esquire Karpoff & Title 1804 Wilson Boulevard Suite 205 P.O. Box 990 Arlington, VA 22216 (703) 841-9600 (703) 358-9458 (fax) email: [email protected]

John H. Toole, Esquire Cooley Godward, L.L.P. One Freedom Square Reston Town Center 11951 Freedom Drive Reston, VA 20190-5601 (703) 456-8651 (703) 456-8100 (fax) email: [email protected]

Lucia Anna Trigiani, Esquire MercerTrigiani 112 South Alfred Street Alexandria, VA 22314 (703) 837-5000 (703) 703-837-5001 (fax) (703) 837-5008 (direct) (703) 835-5040 (direct fax) email: [email protected]

Eric V. Zimmerman, Esquire Miller Zimmerman, P.L.C. 50 Catoctin Circle, NE Suite 201 Leesburg, VA 20176 (703) 777-8850 (703) 777-8854 (fax) email: [email protected]

Southside Region

Walter R. Beales, III, Esquire 157 Madison Street P.O. Box 239 Boydton, VA 23917 (434) 738-6180 (434) 738-0105 (fax) email: [email protected]

*Robert E. Hawthorne, Esquire Hawthorne & Hawthorne P.O. Box 603 Kenbridge, VA 23944 (434) 676-3275 (434) 676-2286 (fax) (Kenbridge Office) (434) 696-2139 (434) 696-2537 (fax) (Victoria Office) email: [email protected]

Robert E. Hawthorne, Jr., Esquire Hawthorne & Hawthorne P.O. Box 603 Kenbridge, VA 23944 (434) 676-3275 (434) 676-2286 (fax) (Kenbridge Office) (434) 696-2139 (434) 696-2537 (fax) (Victoria Office) email: [email protected]

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Tidewater Region

Robert C. Barclay, IV, Esquire Cooper, Spong & Davis, P.C. P.O. Box 1475 Portsmouth, VA 23705 (757) 397-3481 (757) 391-3159 (fax) email: [email protected]

*Michael E. Barney, Esquire Kaufman & Canoles, P.C P.O. Box 626 Virginia Beach, VA 23451-0626 (757) 491-4040 (757) 491-4020 (fax) email: [email protected]

Kathryn Byler, Esquire Pender & Coward, P.C. 222 Central Park Avenue Suite 400 Virginia Beach, VA 23462-3062 (757) 490-6292 (757) 497-1914 (fax) email: [email protected]

*Paula S. Caplinger, Esquire Vice President, Manager & Counsel Chicago Title Insurance Company The Atrium Bulding 11832 Rock Landing Drive Suite 204 Newport News, VA 23606 (757) 873-0499 (ext. 305) (757) 873-3740 (fax) email: [email protected]

Christian H. Chiles, Esquire Williams Mullen 222 Central Park Avenue Suite 1700 Virginia Beach, VA 23462-3035 (757) 473-5349 (757) 473-0395 (fax) email: [email protected]

Rosalie K. Doggett, Esquire 410 North Center Drive Suite 200 Norfolk VA 23502 (757) 217-3702 (757) 490-7403 (fax) Email: [email protected]

Brian O. Dolan, Esquire Kaufman & Canoles, P.C. 11817 Canon Boulevard Suite 408 Newport News, VA 23606 (757) 873-6311 (757) 873-6359 (fax) email: [email protected]

John F. Faber, Jr., Esquire Wolcott Rivers Gates Convergence Center IV 301 Bendix Road, Suite 500 Virginia Beach, VA 23452 (757) 497-6633 (757) 497-7267 (fax) email: [email protected]

*Howard E. Gordon, Esquire Williams Mullen 999 Waterside Drive Suite 1700 Norfolk, VA 23510 (757) 629-0607 (757) 629-0660 (fax) email: [email protected]

Ray W. King, Esquire LeClairRyan, P.C. 999 Waterside Drive Suite 2100 Norfolk, VA 23510 (757) 624-1454 (main) (757) 441-8929 (direct) (757) 624-3773 (fax) email: [email protected]

*Charles (Chip) E. Land, Esquire Kaufman & Canoles, P.C. P.O. Box 3037 Norfolk, VA 23514-3037 (757) 624-3131 (757) 624-3169 (fax) email: [email protected]

*Charles M. Lollar, Esquire Waldo & Lyle, P.C. 301 West Freemason Street Norfolk, VA 23510 (757) 622-5812 (757) 622-5815 (fax) email: [email protected]

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*James B. (J.B.) Lonergan, Esquire Pender & Coward, P.C. 222 Central Park Avenue Virginia Beach, VA 23462 (757) 490-6281 (757) 497-1914 (fax) email: [email protected]

James Magner, Esquire 160 Brambleton Avenue Norfolk, VA 23510 (757) 622-5000 (757) 623-9198 (fax) email: [email protected]

Jeffrey A. Maynard, Esquire Troutman & Sanders, L.L.P. 222 Central Park Avenue Suite 2000 Virginia Beach, VA 23462 (757) 687-7500 (757) 687-7510 (fax) email: [email protected]

*Jean D. Mumm, Esquire LeClair Ryan 999 Waterside Drive Suite 2100 Norfolk VA 23510 (757) 441-8916 (direct) (757) 681-5302 (cell) (757) 441-8976 (fax) email: [email protected]

Lisa M. Murphy, Esquire LeClairRyan, P.C. 999 Waterside Drive Suite 2100 Norfolk VA 23510 (757) 624-1454 (main) (757) 217-4537 (direct) (757) 624-3773 (fax) email: [email protected]

Cynthia A. Nahorney, Esquire Lawyers Title Insurance Corporation Commonwealth Land Title Insurance Company 150 West Main Street Suite 1615 Norfolk, VA 23510 (757) 628-5902 ext. 11 (757) 625-0293 (fax) email: [email protected]

Harry R. Purkey, Jr., Esquire 303 34th Street Suite 5 Virginia Beach, VA 23451 (757) 428-6443 (757) 428-3338 (fax) email: [email protected]

*Stephen R. Romine, Esquire LeClairRyan, P.C. 999 Waterside Drive Suite 2100 Norfolk, VA 23510 (757) 624-1454 (main) (757) 441-8921 (direct) (757) 624-3773 (fax) email: [email protected]

Elliot M. Schlosser, Esquire Office of Elliot M. Schlosser Attorney at Law, P.C. 47 W. Queens Way Hampton, VA 23669-3968 (757) 723-0545 (757) 723-2578 (fax) email: N/A

William W. Sleeth, III, Esquire LeClairRyan, P.C. 5388 Discovery Park Boulevard Third Floor Williamsburg, VA 23188 (757) 941-2821 (757) 941-2879 (fax) email: [email protected]

Amanda A. Smith, Esquire 703 Thimble Shoals Boulevard Suite C-2 Newport News, VA 23606 (757) 595-5500 (757) 595-4999 (fax) email: [email protected]

Allen C. Tanner, Jr., Esquire 690 J. Clyde Morris Boulevard Newport News, VA 23601 (757) 595-9000 (757) 595-2961 (fax) email: [email protected]

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Philip R. Trapani, Jr. Esquire Philip R. Trapani, Jr., P.L.C. 740 Duke Street Suite 500A Norfolk, VA 23510-1515 (757) 961-5525 (757) 625-4133 (fax) email: [email protected]

*Courtland L. Traver, Esquire 1620 Founders Hill North Williamsburg, VA 23185 (757) 564-6177 (tel and fax) email: [email protected]

Susan Stringfellow Walker, Esquire Jones & Walker, P.C. 128 South Lynnhaven Road Suite 100 Virginia Beach, VA 23452 (757) 486-0333 (757) 340-8583 (fax) email: [email protected]

Edward R. Waugaman, Esquire 1114 Patrick Lane Newport News, VA 23608 757-897-6581 email: [email protected]

Mark D. Williamson, Esquire McGuire Woods, L.L.P. World Trade Center Suite 9000 101 W. Main Street Norfolk, VA 23510 (757) 640-3713 (757) 640-3973 or (757) 640-3701 (fax) email: [email protected]

Valley Region

K. Wayne Glass, Esquire Vellines, Cobbs, Goodwin & Glass P.O. Box 235 Staunton, VA 24402-0235 (540) 885-1205 (540) 885-7599 (fax) email: [email protected]

Whitney Jackson Levin Wharton Aldhizer & Weaver, P.L.C. 125 South Augusta Street, Suite 2000 Staunton, VA 24401 (540) 213-7456 (direct) (540) 885-0199 (main) email: [email protected]

Paul J. Neal, Esquire 122 West High Street Woodstock, VA 22664 (540) 459-4041 (540) 459-3398 (fax) email: [email protected]

Mark N. Reed, Esquire Reed & Reed, P.C. 16 S. Court St. P.O. Box 766 Luray, VA 22835 (540) 743-5119 (540) 743-4806 (fax) email: [email protected]

Western Region

Stephen C. Gregory, Esquire Steptoe & Johnson, P.L.L.C. 707 Virginia Street, East Charleston, WV 25301 (304) 353-8185 (office) (703) 850-1945 (cell) email: [email protected]

*David C. Helscher, Esquire Osterhoudt, Prillaman, Natt, Helscher, Yost, Maxwell & Ferguson, P.L.C. 3140 Chaparral Drive Suite 200 C Roanoke, VA 24018 (540) 725-8182 (540) 772-0126 (fax) email: [email protected]

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*Michael K. Smeltzer, Esquire Woods, Rogers & Hazlegrove, L.C. P.O. Box 14125 Roanoke, VA 24038 (540) 983-7652 (540) 983-7711 (fax) email: [email protected]

Charles Cooper Youell, IV, Esquire Whitlow & Youell, P.L.C. 26 West Kirk Avenue Roanoke, VA 24011 (540) 904-7836 (540) 684-7836 (fax) email: [email protected]

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COMMITTEE CHAIRPERSONS AND OTHER SECTION CONTACTS COMMITTEE CHAIRPERSONS

Standing Committees

Fee Simple Co-Chairs Lynda L. Butler, Esquire Chancellor Professor of Law Marshall-Wythe School of Law College of William and Mary 613 South Henry Street Williamsburg, VA 23185 or P.O. Box 8795 Williamsburg, VA 23187-8795 (757) 221-3843 (757) 221-3261 (fax) email: [email protected] Stephen C. Gregory, Esquire Steptoe & Johnson, P.L.L.C. 707 Virginia Street, East Charleston, WV 25301 (304) 353-8185 (office) (703) 850-1945 (cell) email: [email protected] Publication Committee members *Douglass W. Dewing, Esquire

Trevor B. Reid, Esquire Lawrence M. Schonberger, Esquire Lucia Anna Trigiani, Esquire

Membership Co-Chairs *Larry J. McElwain, Esquire Parker, McElwain & Jacobs, P.C. 2340 Commonwealth Drive Charlottesville, VA 22906 (434) 973-3331 (434) 973-9393 (fax) email: [email protected] J. Philip Hart, Esquire Genworth Financial, Inc. Senior Real Estate Counsel 6620 West Broad Street, Building #1 Richmond, VA 23230 (804) 922-5161 (804) 662-2596 (fax) email: [email protected] Committee members: Craig C. Erdmann, Esquire *Randy C. Howard, Esquire *C. Grice McMullan, Jr., Esquire Harry R. Purkey, Jr., Esquire David W. Stroh, Esquire Edward R. Waugaman, Esquire Mark D. Williamson, Esquire Stephen B. Wood, Esquire Eric V. Zimmerman, Esquire

Programs Co-Chairs *Paul A. Bellegarde, Esquire 8284 Spring Leaf Court Vienna, VA 22182 (301) 537-0627 (cell) (703) 749-8306 (fax) email: [email protected] *Larry J. McElwain, Esquire Parker, McElwain & Jacobs, P.C. 2340 Commonwealth Drive Charlottesville, VA 22906 (434) 973-3331 (434) 973-9393 (fax) email: [email protected] Committee members: *Paul A. Bellegarde, Esquire (Advanced CLE)

Richard B. Chess, Esquire *Howard E. Gordon, Esquire Mark W. Graybeal, Esquire

J. Philip Hart, Esquire (Summer CLE) *Randy C. Howard, Esquire *Neil S. Kessler, Esquire *Larry J. McElwain, Esquire *C. Grice McMullan, Esquire Christina E. Meier, Esquire Paul H. Melnick, Esquire (Annual CLE) *Jean D. Mumm, Esquire Cynthia A. Nahorney, Esquire *Stephen R. Romine, Esquire C. Cooper Youell, IV, Esquire

Technology *Douglass W. Dewing, Esquire Fidelity National Title Group Virginia National Business Unit Vista II - Suite 200 5516 Falmouth Avenue Richmond, VA 23230-1819 (804) 643-5404 (office) (804) 521-5743 (direct) (804) 521-5756 (fax) (800) 552-2442 (toll free) email: [email protected] Committee members: Christian H. Chiles, Esquire *John David Epperly, Esquire *Ray W. King, Esquire Jeffrey A. Maynard, Esquire James M. McCauley, Esquire

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Substantive Committees

Commercial Real Estate Whitney Jackson Levin, Esquire Wharton Aldhizer & Weaver PLC 125 South Augusta St. Suite 2000 Staunton, Virginia 24401 (540) 213-7456 (direct) (540) 885-0199 (main) (540) 213-0390 (fax) email: [email protected] Committee members: *Michael E. Barney, Esquire *Paul A. Bellegarde, Esquire Dianne Boyle, Esquire Richard B. Chess, Esquire Lucy G. Davis, Esquire James Downey, Esquire *Howard E. Gordon, Esquire *Ray W. King, Esquire *Jean D. Mumm, Esquire

Cynthia A. Nahorney, Esquire *Stephen R. Romine, Esquire David W. Stroh, Esquire C. Cooper Youell, IV, Esquire Mark D. Williamson, Esquire

Creditors’ Rights and Bankruptcy F. Lewis Biggs, Esquire Kepley Broscious & Biggs, P.L.C. 2211 Pump Road Richmond, VA 23233 (804) 741-0400 ext. 203 (804) 740-6175 (fax) email: [email protected] Committee members: Paula S. Beran, Esquire

James E. Clarke, Esquire J. Philip Hart, Esquire Christopher A. Jones, Esquire

John H. Maddock, III, Esquire Richard C. Maxwell, Esquire Lynn L. Tavenner, Esquire Stephen B. Wood, Esquire

Eminent Domain Charles M. Lollar, Esquire Waldo & Lyle, P.C. 301 West Freemason Street Norfolk, VA 23510 (757) 622-5812 (757) 622-5815 (fax) email: [email protected] Committee members: Edmund M. Amorosi, Esquire David L. Arnold, Esquire Nancy C. Auth, Esquire Josh E. Baker, Esquire James E. Barnett, Esquire Stanley G. Barr, Esquire Douglas K. Baumgardner, Esquire Robert J. Beagan, Esquire James C. Breeden, Esquire Barbara H. Breeden, Esquire Lynda L. Butler, Esquire Christi A. Cassel, Esquire Michael S. J. Chernau, Esquire Francis A. Cherry, Jr., Esquire Stephen J. Clarke, Esquire Charles R. Cranwell, Esquire

Christianna Dougherty-Cunningham, Esquire Joseph M. DuRant, Esquire Lawrence S. Emmert, Esquire Jerry K. Emrich, Esquire Matthew D. Fender, Esquire Gifford R. Hampshire, Esquire Henry E. Howell, Esquire Hon. Philip J. Infantino, III, Esquire Thomas M. Jackson, Jr., Esquire

James W. Jones, Esquire Brian G. Kunze, Esquire Steven L. Micas, Esquire Michael E. Ornoff, Esquire Sharon E. Pandak, Esquire Rebecca B. Randolph, Esquire Kelly L. Daniels Sheeran, Esquire Mark A. Short, Esquire Bruce R. Smith, Esquire Rhysa G. South, Esquire Paul B. Terpak, Esquire Joseph T. Waldo, Esquire Scott Alan Weible, Esquire

Ethics *Susan M. Pesner, Esquire Pesner Kawamoto Conway, P.L.C. 7926 Jones Branch Drive Suite 930 McLean, VA 22102-3303 (703) 506-9440 (703) 506-0929 (fax) email: [email protected] Committee members: David B. Bullington, Esquire Lawrence A. Daughtrey, Esquire James M. McCauley, Esquire *Larry J. McElwain, Esquire Cynthia A. Nahorney, Esquire Lawrence M. Schonberger, Esquire Lucia Anna Trigiani, Esquire Eric V. Zimmerman, Esquire

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Land Use and Environmental *Stephen R. Romine, Esquire LeClairRyan, P.C. 999 Waterside Drive Suite 2100 Norfolk, VA 23510 (757) 624-1454 (main) (757) 441-8921 (direct) (757) 624-3773 (fax) email: [email protected] Committee members: Alan D. Albert, Esquire *Michael E. Barney, Esquire Steven W. Blaine, Esquire Andrew W. Carrington, Esquire Richard B. Chess, Esquire John M. Mercer, Esquire R. J. Nutter, II, Esquire Jonathan Stone, Esquire David W. Stroh, Esquire

Residential Real Estate Co-Chairs Barbara Wright Goshorn, Esquire 203 Main Street P.O. Box 177 Palmyra, VA 22963 (434) 589-2694 (434) 589-6262 (fax) email: [email protected] Eric V. Zimmerman, Esquire Miller Zimmerman, P.L.C. 50 Catoctin Circle, NE Suite 201 Leesburg, VA 20176 (703) 777-8850 (703) 777-8854 (fax) email: [email protected] Committee members: David B. Bullington, Esquire Craig C. Erdmann, Esquire Christina E. Meier, Esquire Paul H. Melnick, Esquire Dan L. Robinson, Esquire David W. Stroh, Esquire Ronald D. Wiley, Jr. Esquire

Title Insurance Brian O. Dolan, Esquire Kaufman & Canoles, P.C. 11817 Canon Boulevard Suite 408 Newport News, VA 23606 (757) 873-6311 (757) 873-6359 (fax) email: [email protected] Committee members: *Paula S. Caplinger, Esquire Kay Creasman, Esquire Lisa M. Graziano, Esquire Stephen C. Gregory, Esquire Larry J. McElwain, Esquire *Albert W. Thweat, II, Esquire Edward R. Waugaman, Esquire Ronald D. Wiley, Jr. Esquire

Section Contacts

Liaison to Bar Counsel Ray W. King, Esquire LeClairRyan, P.C. 999 Waterside Drive Suite 2100 Norfolk, VA 23510 (757) 624-1454 (757) 441-8929 (direct) (757) 624-3773 (fax) email: [email protected]

VIRGINIA STATE BAR Real Property Section

Membership Application

Please enroll me in the Real Property Section. Please send me copies of the section's newsletter and notices of section events at the following address:

NAME:_______________________________

VSB MEMBER NUMBER: _________________

FIRM NAME/EMPLOYER:______________________________________________________

OFFICIAL ADDRESS OF RECORD:_____________________________________________________________________

______________________________________________________________________________

TELEPHONE NUMBER: ( ___ ) __________________ FACSIMILE NUMBER: ( ___ )_____________________

E-MAIL ADDRESS: _________________________

DUES: $25.00 (Payable to the Virginia State Bar) (membership effective until next June 30)

Subcommittee Selection - I would like to serve on the following subcommittee:

Standing Substantive

( ___ ) Fee Simple Newsletter ( ___ ) Commercial Real Estate ( ___ ) Creditors Rights and Bankruptcy

( ___ ) Programs ( ___ ) Residential Real Estate ( ___ ) Land Use and Environmental

( ___ ) Membership ( ___ ) Ethics ( ___ ) Title Insurance

( ___ ) Technology ( ___ ) Eminent Domain

Print this application and return with dues to: Dolly C. Shaffner, Section Liaison Real Property Section Virginia State Bar 707 East Main Street, Suite 1500 Richmond, Virginia 23219-2803

U.S. PostagePAID

Richmond, VAPermit No. 709

Virginia State BarEighth & Main BuildingSuite 1500707 East Main StreetRichmond, VA 23219

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