VIRGINIA COMMERCIAL LENDING LAW

Transcription

1 VIRGINIA COMMERCIAL LENDING LAW A Guide for Commercial Lenders and Businesses Wilson R. Trice, Director ThompsonMcMullan, P.C. Richmond, Virginia TABLE OF CONTENTS I. INTRODUCTION... 1 II. BASIC LEGAL STRUCTURE... 1 A. General Law... 1 B. Administrative Law... 1 C. Local Law... 1 D. The Virginia Court System... 2 E. Court Rules and Rules of Evidence Virginia Rules of Court Virginia Rules of Evidence... 3 III. AUTHORITY TO DO BUSINESS... 3 A. Required Qualifications to Do Business... 3 B. Licensing Requirements... 4 C. Taxation... 4 IV. INTEREST AND USURY; PROMISSORY NOTES... 5 A. Compound Interest... 5

2 B. General Rule No Usury Limits... 5 C. Acceleration D. Late Payment Fees... 5 E. Prepayment and Penalties... 5 F. Virginia Promissory Notes... 6 G. Demand Notes... 6 V. TYPES OF BORROWERS... 6 A. Corporations... 6 B. Partnerships... 6 C. Limited Liability Companies... 7 D. Business Trusts... 8 E. Proprietorships and Individuals Married Borrowers Property Exempt From Claims of General Creditors Age of Majority... 9 F. Trusts and Estates... 9 VI. REAL ESTATE A. Property Rights B. Deeds of Trust C. Recordation/Formal Requirements D. Recording Fees and Taxes E. Assignment of Leases, Rents and Profits F. Transfer of Deed of Trust G. Cancellation of Deed of Trust ii

3 H. Default and Foreclosure Remedies Foreclosure Deed in Lieu of Foreclosure I. Mechanic s Liens J. Title Insurance VII PERSONAL PROPERTY LENDING AND EQUIPMENT LEASING A. UCC Article 9 (State Variations) B. UCC Filing Rules C. As-extracted Collateral, Timber To Be Cut D. Fixture Filings E. Local Filings F. Financing Statement Formalities G. Filing and Other Fees H. Titled Motor Vehicles and Watercraft I. Security Interests in Life Insurance J. Priority Versus Secret Liens (Statutory and Common Law) K. Equipment Leasing VIII GUARANTIES AND SURETYSHIP A. General B. Waiver of Suretyship Defenses C. Guaranties D. Other Suretyship Situations E. Reimbursement, Subrogation and Contribution Rights IX INSOLVENCY LAWS iii

4 A. Receivership B. Assignment for Benefit of Creditors C. Fraudulent and Voluntary Conveyances X MISCELLANOUS LENDING TOPICS A. Loan Commitments B. Statute of Frauds C. Accord and Satisfaction D. Setoff and Recoupment E. State Assignment of Claims Statute XI LITIGATION AND ARBITRATION A. Lender Liability Duty of Good Faith Fiduciary Duty Virginia Consumer Protection Act B. Recovery of Attorney Fees C. Statutes of Limitations Applicable Periods of Limitations Extension by Voluntary Payment Use of Time-Barred Claim as a Defense Effect on Collateral for Time-Barred Claim Agreements to Extend or Shorten Limitations Period D. Choice of Law Provisions/Conflicts of Laws E. Forum Selection and Venue Selection Provisions F. Jury Trial Waivers G. Arbitration Agreements H. Pre-Judgment Remedies iv

5 I. Judgments Confession of Judgment Interest on Judgments Survival of Judgments Execution and Enforcement of Judgments Assignment of Judgments Enforcement of Foreign Judgments XII OTHER LAWS OF INTEREST A. Virginia Environmental Laws and Regulations v

6 I. INTRODUCTION This chapter provides an overview of the many laws governing or affecting commercial loans in the Commonwealth of Virginia. It is not intended to deal with all of the issues which may arise in a commercial loan transaction in Virginia. It does not deal with laws governing consumer lending or federal law which affects commercial loan transactions. II. BASIC LEGAL STRUCTURE A. General Law The Commonwealth of Virginia is a "common law" state, which means that much of its law is based on doctrines that have been developed through reported judicial decisions rather than legislation. Much of the law affecting commercial credit is now statutory and is set forth in the Code of Virginia (1950). The Code consists of numerous titles, among which the following are the most relevant: Title 6.2 Financial Institutions and Services Title 8.01 Civil Remedies and Procedure Title Uniform Commercial Code (hereinafter the "UCC") Title 11 Contracts Title 13.1 Corporations Title 38.2 Insurance Title 43 Mechanic's and Certain Other Liens Title 46.2 Motor Vehicles Title 49 Oaths, Affirmations and Bonds Title 50 Partnerships Title 55 Property and Conveyances Title 58.1 Taxation B. Administrative Law A number of Virginia state agencies and boards have rule-making and regulatory authority. These agencies and boards include the Bureau of Financial Institutions (regulating banks, savings institutions, credit unions, industrial loan associations and small loan companies), the State Corporation Commission of Virginia (regulating securities issuers, brokers and dealers and public utilities), the Bureau of Insurance (regulating insurance companies, insurance agents and brokers), the Department of Environmental Quality and the Department of Taxation. Administrative rules and regulations are published in the Virginia Administrative Code. C. Local Law There are 95 counties and 38 independent cities in Virginia, each with its own governmental authorities and ordinances, although several counties and cities share records. Aside from zoning ordinances, local ordinances are generally not relevant to commercial lenders. 1

7 Virginia is one of the few states which has cities which are independent of surrounding counties. This distinction is relevant when searching for and filing local financing statements under Article 9 of the Uniform Commercial Code since mailing addresses can be misleading. D. The Virginia Court System Each Virginia county and independent city has its own courts. There are 31 judicial circuits and districts within the Commonwealth. A judicial circuit or district may embrace several contiguous counties and cities. The general district court in each district is a "court not of record" with limited small claims (up to $25,000) jurisdiction and from which there is an automatic right of appeal to the Circuit Court for a new trial. An intermediate Court of Appeals hears appeals of certain types of civil cases, although generally not cases relevant to commercial finance. The Court of Appeals sits in Richmond but hears cases throughout the state. The Supreme Court of Virginia hears appeals from the circuit courts and from the Court of Appeals. The Supreme Court sits in Richmond. Virginia has two federal district courts. The United States District Court for the Eastern District of Virginia, located in Richmond, Alexandria, Newport News and Norfolk, and the United States District Court for the Western District of Virginia, located in Abingdon, Big Stone Gap, Charlottesville, Danville, Harrisonburg, Lynchburg and Roanoke. The United States Court of Appeals for the 4th Circuit (with jurisdiction over Maryland, Virginia, North Carolina, South Carolina and West Virginia) is headquartered in Richmond. E. Court Rules and Rules of Evidence 1. Virginia Rules of Court Every Virginia court is governed by the Rules of the Supreme Court of Virginia ( the Rules ). The Rules appear as Volume 11 to the Code of Virginia, and are available via the Supreme Court of Virginia s website in.pdf format. Part I of the Rules sets forth general rules applicable to all proceedings. Several of the Rules contained in Part I have both jurisdictional and substantive legal significance, including Rule 1:1 (jurisdiction) and Rule 1:6 (Virginia preclusion doctrine). Rule 1:15 and Virginia Code describe the authority of Virginia courts to promulgate local rules, and the duties of attorneys to ascertain the [local] rules of... court and abide thereby. Finally, Rule 1:18 provides the authority of Virginia courts in any civil case to enter a pretrial scheduling order imposing additional duties on the parties. A Uniform Pretrial Scheduling Order appears in the Appendix to the Rule, and is pervasively relied upon by Virginia courts to govern discovery, the designation of experts, and pretrial matters even in cases where no pretrial order has been entered by the Court. Part III(A) governs pleading practice before Virginia circuit courts, and Part IV governs discovery in civil actions before Virginia circuit courts. Part IV is largely derived from the Federal Rules of Civil Procedure, and though there remain many differences between Part IV of the Rules and the federal counterpart, the federal discovery rules and interpretive case decisions 2

8 have expressly influenced much of the case law surrounding the application and interpretation of Virginia discovery rules. E.g., Am. Surety Safety Cas. v. C.G. Mitchell Constr., 268 Va. 340, 352, 601 S.E.2d 633, 640 (2004). Practice before Virginia general district courts is guided by Parts VII(A) and (B). Discovery in civil actions pending in Virginia general district courts is very limited. The most significant discovery device available is found under Virginia Code , which expressly incorporates Rule 4:9A by reference, and permits the issuance of subpoenas duces tecum to both parties and non-parties to the extent permitted by this Rule. 2. Virginia Rules of Evidence It was for many years the case in Virginia that the rules of evidence were scattered throughout the Virginia Code and case decisions from Virginia s appellate courts. That changed effective September 12, 2011 with the promulgation of the Virginia Rules of Evidence. The Virginia Rules of Evidence appear as Part II of the Rules of the Supreme Court of Virginia, and are numbered in a manner analogous to the Federal Rules of Evidence. But a litigant should be mindful that significant differences exist between the Virginia Rules of Evidence and their federal counterpart. For instance, Virginia has never adopted the standard for the admissibility of expert testimony espoused in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). Though the Virginia Rules of Evidence provide broad coverage of the statutory and common law rules of evidence in Virginia as developed throughout the centuries, they are by no means exhaustive. See Rule 2:102. III. AUTHORITY TO DO BUSINESS A. Required Qualifications to Do Business It is generally not necessary for institutional commercial lenders based outside Virginia to qualify to do business in Virginia in order to: Solicit business by mail or in person so long as the contract is accepted outside Virginia. Maintain, defend or settle a legal proceeding. Make loans or extensions of credit to Virginia debtors or create or acquire security interests in real or personal property located in Virginia. Collect debts owed by Virginia debtors or enforce deeds of trust and security interests with respect to property located in Virginia. Own, without more, real or personal property in Virginia. Maintain bank accounts. See Va. Code Ann et seq., with respect to foreign corporations, et seq. with respect to foreign limited liability companies, et seq., with respect to foreign business trusts, and et seq., with respect to foreign limited partnerships. Legal entities (other than general partnerships) which otherwise transact business in Virginia are required to qualify or register with the State Corporation Commission of Virginia, 3

9 maintain a registered office in Virginia, and designate a registered agent in Virginia. An out-ofstate lender or business which transacts business in Virginia but which fails to qualify or register may not maintain any proceeding in any Virginia court. Moreover, the officers, directors and employees of foreign corporations; the members, managers and employees of foreign LLCs; and the trustees, officers and employees of foreign business trusts who knowingly do any business in Virginia without a certificate of authority are liable for a money penalty of not less than $500 and not more than $5,000. Va. Code Ann , -758 (foreign corporations); id , (foreign limited liability companies); id , (foreign business trusts); id , (foreign limited partnerships); and id , (foreign registered limited liability partnerships). B. Licensing Requirements Out-of-state commercial lenders and equipment lessors transacting business in Virginia are not subject to any special licensing requirements in Virginia. Licenses are required to operate as a consumer finance company making consumer loans bearing interest in excess of 12 percent per annum; per Va. Code Ann et seq;; a mortgage lender or broker per Va. Code Ann et seq.; a mortgage loan originator per Va. Code Ann et seq.; a payday lender per Va. Code Ann et seq.; or a motor vehicle title lender per Va. Code Ann et seq. C. Taxation Out-of-state lenders and equipment lessors extending credit or leasing equipment in Virginia are subject to Virginia income tax on income from Virginia sources. Va. Code Ann (definition of income and deductions from Virginia sources ); id et seq.; id et seq. For corporate lenders which derive more than 70 percent of their gross income from providing financial services, gross income is apportioned to Virginia in the same proportion as costs of performance are incurred in Virginia. Va. Code Ann ; 23 Va. Admin. Code Out-of-state banks with permitted branches in Virginia are subject to bank franchise taxes but are not subject to Virginia income tax and certain other state and local taxes. Va. Code Ann et seq. Out-of-state businesses are responsible for the collection and remittance of sales and use taxes in Virginia in connection with the sale or rental of tangible personal property in Virginia (Va. Code Ann et seq.), subject to federal constitutional restrictions. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Generally, organizations have the same income tax status (i.e., corporation or passthrough) in Virginia as they have for federal income tax purposes. Va. Code Ann (definition of pass-through entity). 4

10 IV. INTEREST AND USURY; PROMISSORY NOTES A. Compound Interest The Virginia common law disallows the compounding of interest on loans except where a clear agreement to charge interest on past due interest is clear. Compound interest is permitted by agreement. See Blanchard v. Dominion Nat l Bank, 130 Va. 633, 108 S.E. 649 (1921). By statute in Virginia, compound interest is permitted by agreement on commercial loans made to an individual or entity of $5,000 or more for business or investment purposes, and loans in any amount made to any corporation, partnership, limited liability company, business trust, or a joint venture organized for the purpose of holding, developing and managing real estate for profit. Va. Code Ann , B. General Rule No Usury Limits Generally, commercial loans are exempt from Virginia's usury laws and any law relating to the compounding of interest. Va. Code Ann , Agricultural loans are deemed to be business loans for purposes of this rule. C. Acceleration. Virginia law does not restrict the ability of a commercial lender to accelerate a commercial loan as set forth in the loan contract. D. Late Payment Fees A late charge in an amount not to exceed 5 perenct of the amount of any payment, installment or single maturity, which is delinquent in excess of 7 days is enforceable if specified in the loan contract. Va. Code Ann B. Commercial loans are likely exempt from this restriction as stated above. E. Prepayment and Penalties Virginia adheres generally to the common law rule that a lender may strictly enforce the loan contract and need not permit prepayment of an obligation before it is due. An exception exists with respect to loans made in an initial amount less than $75,000 secured by a first deed of trust or first mortgage on real estate, although a lender may assess a prepayment fee of up to 1 percent of the unpaid principal balance. Va. Code Ann B et seq. Prepayment fees on other loans secured by a mortgage or deed of trust on a home occupied by the borrower cannot exceed 2 percent of the amount prepaid. Va. Code Ann Most commercial loans are not regulated as to prepayment or prepayment fees. Prepayment fees may not be assessed upon the acceleration of any loan secured by real property comprised of one to four family residential units. Va. Code Ann

11 F. Virginia Promissory Notes The Virginia law applicable to promissory notes is found in revised Article 3 of the Virginia UCC. Va. Code Ann. 8.3A-101 et seq. Promissory notes in Virginia customarily include provisions regarding the recovery of reasonable attorney s fees, late charges, delinquency fees, default interest, prepayment penalties and the like since they must be expressly contracted for in order to be recoverable. G. Demand Notes Notes payable on demand are valid in Virginia. Demand notes which are negotiable instruments are governed by Article 3 of the UCC. In Virginia, the statute of limitations on a negotiable or non-negotiable demand note is six (6) years from the date of demand. If no demand for payment is made, action to enforce a demand note is barred if neither principal nor interest on the note has been paid for a continuous period of ten (10) years. Va. Code Ann. 8.3A-118. V. TYPES OF BORROWERS A. Corporations Virginia stock corporations are subject to the Virginia Stock Corporation Act, Va. Code Ann et seq. Virginia nonstock corporations are subject to the Virginia's Nonstock Corporation Act, Va. Code Ann et seq. Professional corporations are also governed by a separate chapter in the Code. Va. Code Ann et seq. The Virginia Stock Corporation Act is derived from the Revised Model Business Corporation Act. It is advisable to obtain a good standing certificate from the State Corporation Commission of Virginia when making a loan to a corporation organized under Virginia law. It is also advisable to obtain a corporate borrowing resolution certified by the borrower's secretary or assistant secretary. If a corporate borrower doing business in Virginia is incorporated under the laws of another state, it is prudent to obtain a certificate of qualification to do business in Virginia from the State Corporation Commission of Virginia in addition to appropriate certification from the corporation s home state. B. Partnerships There are three types of partnerships recognized in Virginia: (1) ordinary business partnerships (general partnerships), (2) limited partnerships and (3) registered limited liability partnerships, which may be either limited liability partnerships or limited liability limited partnerships. The law governing these entities is found in Title 50 of the Virginia Code. A lender to any partnership should obtain a copy of the partnership agreement. Generally speaking, all of the general partners of any partnership should execute the loan documents and any instruments affecting partnership property. If fewer than all general partners execute a loan document or an instrument, the lender should obtain the consent of all partners or a certified 6

12 copy of the partnership s statement of partnership authority, if any, from the State Corporation Commission of Virginia in order to determine who may bind the partnership. When lending to a limited partnership or a registered limited liability partnership, a lender should obtain a certified copy of the partnership s certificate of limited partnership or registration statement from the State Corporation Commission of Virginia. In the case of a foreign limited partnership or foreign registered limited liability partnership doing business in Virginia, the lender should require a certified copy of the limited partnership s or registered limited liability partnership s certificate of registration from the State Corporation Commission in addition to appropriate certificates from the limited partnership s home state. The general partners in a partnership, except for a registered limited liability partnership, are jointly and severally obligated for the debts of the partnership which are incurred while they are general partners. Va. Code Ann Nevertheless it may be advisable to require personal guarantees of individual partners when making a loan to a Virginia partnership in order to specify remedies and waive certain defenses. C. Limited Liability Companies Virginia law authorizes limited liability companies (LLCs). An LLC is a hybrid between a partnership and a corporation, having many of the attributes of both. An LLC may be taxed like a partnership, while providing limited liability to its members or owners similar to a corporation. Virginia LLCs are subject to the Virginia Limited Liability Company Act, Va. Code Ann et seq. Professional limited liability companies are governed by the Virginia Professional Limited Liability Company Act, Va. Code Ann et seq. LLC Articles of Organization must be filed with the State Corporation Commission of Virginia. A Virginia LLC is required to have a registered office in Virginia as well as a registered agent for service of process. When making a loan to a Virginia LLC, it is advisable to obtain a copy of the certificate of organization issued by the State Corporation of Commission of Virginia as well as a certified copy of the LLC's Articles of Organization and a certificate of fact (the equivalent of certificates of good standing for corporations). If an LLC has an Operating Agreement, it is prudent to obtain a copy as the Operating Agreement is the company s organizational document and will set out the manner in which the company is organized and the manner in which its business is conducted. The Virginia LCC statutes allow an LLC to be managed by its members or by a manager or managers, who may or may not be members. The Operating Agreement will outline the authority of members or managers to borrow money, pledge assets or guarantee indebtedness. If less than all of the members or managers of an LLC sign the loan documents, an authorizing resolution signed by all of the members or managers, as applicable, should be delivered to the lender. Individual members and managers of an LLC are not liable for company debts. Consequently, it is generally advisable to obtain personal guarantees from LLC members when making a loan to a Virginia LLC. 7

13 An LLC organized under the laws of another state is required to register with the State Corporation Commission of Virginia in order to transact business in Virginia. Accordingly, the lender should obtain a copy of a certificate of registration from the Commission in such circumstances in addition to appropriate certification from the company s home state. D. Business Trusts Business trusts are governed by the Virginia Business Trust Act, Va. Code Ann et seq. A lender to a business trust should obtain a copy of the business trust s certificate of trust issued by the State Corporation Commission, as well as a copy of the business trust s governing instrument. A business trust organized under the laws of another state is required to register with the State Corporation Commission of Virginia in order to transact business in Virginia. Accordingly, the lender should obtain a copy of a certificate of registration from the Commission in such circumstances in addition to appropriate certification from the trust s home state. E. Proprietorships and Individuals Loans to proprietorships are treated in the same manner as loans to individual owners of the businesses. Proprietorships which operate under assumed business names must file a certificate in the local court where the business is conducted. Va. Code Ann Married Borrowers Virginia is not a community property state. Real property held by married persons as tenants by the entireties cannot be reached by a creditor of only one of the spouses. Accordingly, if an interest in such property represents a significant asset of an individual borrower or guarantor, then either (i) both spouses must be obligated to repay unsecured indebtedness in order for a creditor to reach the property in the event of default, or (ii) both spouses must have conveyed the property to secure the indebtedness. Lenders should be mindful of the rules set forth in the Federal Equal Credit Opportunity Act, 15 U.S.C et seq., and regulations promulgated thereunder, which restrict the ability of lenders to require the signature of nonapplicant spouses on loan documents. 2. Property Exempt From Claims of General Creditors Certain assets of individual debtors in Virginia are exempt from seizure to satisfy claims of general unsecured creditors. These include, by way of example, any real or personal property up to the value of $5, per individual, or, if the individual is 65 years or older, $10,000.00, plus $ for each dependent. Va. Code Ann In addition, individuals may exempt certain heirlooms, certain ordinary household items, tools of the trade, and medically prescribed health aids. Va. Code Ann et seq. Virginia has "opted out" of the federal preemption scheme under the Bankruptcy Code, so that only Virginia exemptions may be asserted in bankruptcy. 8

14 3. Age of Majority The age of majority in Virginia is eighteen (18) years of age. Va. Code Ann The Virginia common law provides that contracts made by persons under the age of 18 are voidable unless they are contracted to provide "goods or services which are necessary to sustain the well-being of the minor, such as food, clothing and education," in which case there is an implied contract that the minor must pay the fair market value of the goods or services contracted. See Zelnick v. Adams, 263 Va. 601, 561 S.E.2d 711 (2002). There is also a statute which bars a claim of infancy (i) by an infant doing business as a trader unless certain public notice is given and (2) to repudiate a student loan. Va. Code Ann F. Trusts and Estates The authority of a fiduciary of a Virginia trust or estate to borrow, pledge assets or guaranty the indebtedness of others is determined primarily with reference to the instrument creating the trust or estate. Unless limited by the instrument, a fiduciary may borrow money and pledge assets for proper trust purposes. Va. Code Ann et seq. When there is doubt about the authority of a fiduciary to assume liability on a contract or encumber estate assets, leave of court should be obtained. When a trust or estate is a party to a loan document, the appropriate reference to that party is the fiduciary's name, followed by an appropriate fiduciary title and the nature of the representation, e.g. John Jones, Executor of the Estate of Sam Smith, Deceased, or John Jones, Trustee U/W Sam Smith, Deceased, or John Jones, Trustee u/a of Sam Smith dated mm/dd/yyyy. In any case, the loan documents should always be executed by the fiduciary in the appropriate fiduciary capacity. Section of the Virginia Code requires that a recorded instrument made in a representative capacity is to be indexed in the fiduciary's name and in the name of the former record owner, which needs to be listed in the first clause of the instrument. Article 9 of the UCC in Virginia requires that a UCC financing statement with respect to collateral being administered by a decedent's estate name the decedent as a debtor, with an indication elsewhere in the form that the collateral is being administered by a personal representative. If the debtor is a trust that specifies a name for the trust in the instrument creating the trust, then that name is the proper name of the debtor for filing purposes. If the instrument creating the trust does not specify a name, then the name of the debtor is the name of the settlor of the trust or the testator and a notation must be made elsewhere on the form that the collateral is held in trust. Va. Code Ann. 8.9A-503(a)(2) and (a)(3). 9

15 VI. REAL ESTATE A. Property Rights Property rights in Virginia real estate are generally governed by Title 55 of the Virginia Code entitled "Property and Conveyances" (Va. Code Ann et seq.) and Virginia case law. The coverage of Title 55 includes liens on and leases of real property, as well as the recordation of instruments relating to real property. B. Deeds of Trust In Virginia, the common instrument for obtaining a lien on real property is a deed of trust, under which the property is conveyed to a trustee with a power of sale which enables the trustee to sell the property upon default without judicial action. (Although mortgages remain valid and enforceable in Virginia, mortgages are not commonly used as they require judicial foreclosure.) To be effective against purchasers for value without notice and lien creditors, a deed of trust must be in writing (Va. Code Ann. 11-1) and be recorded in the county or independent city in which the property encumbered thereby is located. Va. Code Ann Unless the secured debt is also secured by real estate outside Virginia, trustees under deeds of trust must be residents of Virginia. Similarly, a corporation, limited liability company, partnership or other entity serving as a trustee must be organized under the laws of Virginia or the laws of the United States. Va. Code Ann Virginia law provides a specific statutory mechanism, the credit line deed of trust, by which real property in Virginia may be encumbered to secure payment of indebtedness that includes advances or extensions of credit to be made in the future by the noteholder named therein. Compliance with the requirements of the statute ensures that such future advances or extensions of credit will take priority over most (but not all) liens on the real property arising after the credit line deed of trust is recorded. Va. Code Ann To comply with the statute, a credit line deed of trust must: 1. Include the language "THIS IS A CREDIT LINE DEED OF TRUST" on the front page thereof, either in capital letters or in underscored type. Va. Code Ann (A); 2. Specify the maximum aggregate principal amount to be secured by the credit line deed of trust at any one time. Va. Code Ann (A); 3. Set forth the name of the noteholder secured by the credit line deed of trust and the address at which communications may be mailed or delivered to such noteholder. Va. Code Ann (E). 10

16 Every deed of trust in Virginia will be construed in accordance with its terms to the extent not in conflict with the law and, unless otherwise provided therein, will be construed to impose certain duties, rights and obligations on the parties thereto which are set forth in detail in Va. Code Ann C. Recordation/Formal Requirements Although Va. Code Ann provides a general form of deed of trust which may be followed, no specific form of deed of trust is required in Virginia. There are, however, a number of formal requirements with which a deed of trust should comply in order to ensure that it will be accepted for recordation by the clerk of court. Each deed of trust must name in the first clause each (i) grantor, (ii) trustee and, if applicable, (iii) grantee under whose names the deed of trust is to be indexed. Va. Code Ann It is common practice in Virginia to describe each beneficiary under a deed of trust as a "grantee" for indexing purposes. Acknowledgment is necessary for recordation. Va. Code Ann Acknowledgement of an instrument is ordinarily performed by a notary public. Every notarization by a notary public must include the date of the act, the county or city where the act was performed and the notary s official seal must be affixed to the notarial certificate. Va. Code Ann The notarial certificate must appear on the same page as the signature which has been notarized unless the notarial certificate includes the names of the persons whose signatures are being notarized. Va. Code Ann The notarial certificate must recite the date that the notary s commission expires and the notary s registration number. Va. Code Ann Virginia has adopted the Uniform Recognition of Acknowledgments Act, Va. Code Ann et seq., which generally validates notarial acts performed outside of Virginia as if performed by a notary public of Virginia, provided that the form of the certificate of acknowledgment (i) is prescribed by the law of Virginia, (ii) is prescribed by the law of the place where the acknowledgment is taken, or (iii) contains the words acknowledged before me (or their substantial equivalent). Va. Code Ann Each deed of trust must include the full residence or business address (including street address and zip code) of each trustee named therein. Va. Code Ann (B). Any deed of trust relating to real property located in a locality with a unique parcel identification system must also bear, on the first page thereof, the tax map reference number or numbers, or the parcel identification number (PIN) or numbers, of the affected parcel or parcels. Va. Code Ann In addition to these specific requirements for deeds of trust, a deed of trust must meet certain general requirements applicable to all documents submitted for recordation. For example, the clerk may refuse to accept any document for recordation unless (i) each individual's surname only, where it first appears in the document, is underscored or written entirely in capital letters, (ii) each page of the writing is numbered consecutively, (iii) the Virginia Code section under which any exemption from recordation taxes is claimed is clearly stated on the face of the 11

17 document and (iv) the names of all grantors and grantees are listed as required by Virginia law (as discussed above with respect to deeds of trust) and if a cover sheet is used (as discussed below) the names are the same as those listed on the cover sheet. Va. Code Ann (A). The clerk may refuse to record any document that includes the social security number of any grantor, grantee or trustee, and the attorney or other party who prepares the document has responsibility for ensuring that any social security number is removed prior to recordation. Va. Code Ann (B). Clerks may require any document conveying an interest in real property to be filed with a cover sheet setting forth the information required to record the document. This cover sheet, if required, would not be construed to convey any interest in real property or purport to be a document in the chain of title conveying any interest in real property. Va. Code Ann Each jurisdiction must be contacted as to whether it has such a requirement and as to how to prepare the required cover sheet. Finally, deeds of trust, as other documents, need to meet certain archival standards promulgated by the Virginia State Library Board. Va. Code Ann , ;17 Va. Admin. Code et seq. Such standards include requirements such as: only white paper, size no less than 8-½ x 11 and no more than 8-½ x 14 inches, signatures in only dark blue or black ink, print size no less than 9 points, and margins no less than one (1) inch on the top, bottom and left margins and no less than ½ inch on the right margin. 17 Va. Admin. Code et seq. D. Recording Fees and Taxes In addition to various clerk's fees totaling approximately $30-$70, depending on the number of pages in the deed of trust, Virginia imposes a state recordation tax of $0.25 on every $100 or fraction thereof of the principal amount secured by the deed of trust up to $10,000,000, with a decreasing rate schedule for principal amounts over $10,000,000. If a deed of trust secures a loan which refinances an existing loan secured by the property, the rate schedule begins at $0.18 on every $ of indebtedness secured or fraction thereof. In the case of an openend or revolving debt, the amount of the obligation for purposes of calculating the tax is the maximum amount which may be outstanding at any one time. If the amount of the indebtedness secured exceeds the fair market value of the property, the tax may be calculated on the fair market value of the property. Va. Code Ann et seq. The deed of trust should bear a notice to this effect if the fair market value is to be used. Clerks of Court ordinarily accept the tax assessed value of real estate for this purpose. In addition to the state recordation tax, the county or city in which the deed of trust is being recorded is entitled to impose a recordation tax in an amount equal to one-third (1/3) of the amount of the state recordation tax. Va. Code Ann There are some exceptions to having to payment of the full recordation tax on instruments related to deeds of trust, e.g., supplemental instruments. Va. Code Ann ,

18 E. Assignment of Leases, Rents and Profits The assignment by a property owner of its interest in the leases, rents or profits arising from real property is permitted in Virginia and the provisions with respect to such assignment may be included in a deed of trust or in a separate document. Recordation of a deed of trust or separate document containing such provisions will fully perfect the interest of the assignee as to the assignor and all third parties without the necessity of (i) furnishing notice to the assignor or lessee, (ii) obtaining possession of the real property, (iii) impounding the rents, (iv) securing the appointment of a receiver, or (v) taking any other affirmative action. Va. Code Ann Though, as noted above, it is not necessary to do so, it is common in Virginia to record a separate assignment of leases, rents and profits. An assignment which is supplemental to a recorded deed of trust is exempt from recordation tax. Va. Code Ann and (C). F. Transfer of Deed of Trust Virginia follows the common law rule that the security "follows" the debt upon assignment or transfer without the need to record an assignment. The Virginia Code, however, specifically allows an assignee of debt secured by a deed of trust to cause the instrument of assignment or a certificate of transfer (in the form set forth in the statute) to be recorded to operate as a notice of such assignment. Va. Code Ann If the note or indebtedness secured by a credit line deed of trust is assigned or transferred, the name and address of the new noteholder should be set forth in the certificate of transfer or, in lieu of doing so, the credit line deed of trust itself should be modified by a duly recorded instrument. Va. Code Ann (E). G. Cancellation of Deed of Trust Once the debt secured by a deed of trust has been fully satisfied, and in certain circumstances when the debt has been partially satisfied, the creditor must issue a certificate of satisfaction (or certificate of partial satisfaction) in recordable form; provided, however, that in the case of a credit line deed of trust, the creditor must do so only upon request after payment in full of the debt secured. The creditor must either record the certificate of satisfaction with the appropriate clerk s office, or, if requested to do so by the settlement agent before such recordation has occurred, deliver to the settlement agent such certificate of satisfaction, in either case within ninety (90) days after payment of the debt. Failure to do so within the 90-day period could result in a $500 forfeiture by the creditor to the obligor. Va. Code Ann (A)(1). If the debt secured has been assigned or transferred, the subsequent holder is subject to the same requirements. Va. Code Ann (A)(2). Note, too, that the settlement agent, subject to certain requirements (and the risk of liability for a wrongful or erroneous release), also may release the creditor s lien by recording a certificate of satisfaction. Va. Code Ann (E). H. Default and Foreclosure Remedies 13

19 1. Foreclosure. Although judicial foreclosure is available in Virginia, the most common method of foreclosure is by public sale of the property by the trustee, more specifics of which are discussed below. With regard to trustee foreclosures, in addition to any requirements that may be in the deed of trust, the Virginia Code provides specific guidelines for conducting a sale of the property by the trustee under a deed of trust. Va. Code Ann through For example, the trustee must notify in writing the record owner of the property and particular subordinate lienholders of the impending foreclosure. In addition, the trustee must advertise the sale in a newspaper with a general circulation in the city or county in which the property is located, in the section of the newspaper where legal notices appear or where the type of property being sold is generally advertised for sale. The instrument may provide that the sale may be advertised for as few as three (3) consecutive days. In the absence of an express provision in the deed of trust, the statute provides for a minimum advertising requirement of once a week for four (4) successive weeks unless the property is in a city or a county contiguous to a city, in which case, advertising may occur once a day for five (5) days, which may be consecutive. The sale may not be held sooner than eight days after the first advertisement is published or more than 30 days after the last advertisement is published. Failure to advertise the sale properly is grounds for judicial voiding of the sale. As a consequence, trustees often advertise more frequently than the instrument might permit. The advertisements of sale must include, among other things, a description of the property; the time, place and terms of sale; the name of the trustee(s); the name and telephone number of a person to contact for more information; and anything else which the deed of trust specifically directs that the advertisement include. The sale must take place at the premises or in the front of the circuit court building or at such other place in the city or county in which the property or the greater part thereof lies, or in the corporate limits of any city surrounded by or contiguous to such county, or in the case of annexed land, in the county of which the land was formerly a part, as the trustee may select upon such terms and conditions as the trustee may deem best. Va. Code Ann (7). The trustee may require from any bidder at the sale a cash deposit of as much as 10% of the sale price before his bid is received. Va. Code Ann (A)(2). If the deed of trust encumbers more than one parcel of land, unless the deed of trust clearly states to the contrary, the trustee may sell only so much of the property as is necessary to pay the debt. See Smith v. Woodward, 122 Va. 356, 94 S.E. 916 (1918). Although there is no statutory right of redemption in Virginia, borrowers do have the right to pay off the debt secured by a deed of trust at any time before the property is sold at foreclosure (i.e., before the bidding is closed). A trustee conveys the property to the purchaser subject to prior liens, leases, easements, encumbrances and other matters of record. The purchaser at a trustee's sale can require a deed from the trustee with only a special warranty of title. The trustee is not responsible for 14

20 conveying good title, because the trustee may only sell the interest that was conveyed to him by the deed of trust. The proceeds of sale must be applied as follows: (i) first, to discharge the expenses of executing the trust, including a reasonable commission to the trustee; (ii) second, to discharge all taxes, levies, and assessments, with costs and interest if they have priority over the lien of the deed of trust, including the due pro rata thereof for the current year; (iii) third, to discharge in the order of their priority, if any, the remaining debts and obligations secured by the deed of trust, and any liens of record inferior to the deed of trust under which sale is made, with lawful interest; and (iv) fourth, the residue of the proceeds is paid to the defaulting debtor or his assigns. Va. Code Ann (A)(3). Within six months of the date of sale, the trustee must provide an account of sale to the commissioner of accounts of the court wherein the deed of trust was recorded. The commissioner will then state, settle and report to the court an account of the transactions of such trustee. Failure of the trustee to submit such account may result in a forfeiture by the trustee of its commissions on such sale. Va. Code Ann A creditor may also, of course, maintain any action at law or in equity otherwise available to it for the collection of debts in Virginia. Deficiency judgments may be obtained in Virginia. 2. Deed in Lieu of Foreclosure. In contrast with a foreclosure sale, which results in a conveyance of the subject property free of liens which are subordinate to the lien of the deed of trust, a deed in lieu of foreclosure conveys the property to the lender subject to all encumbrances, including those which are subordinate to the lien of the deed of trust. Ordinarily the doctrine of merger would operate to terminate the lien of the deed of trust. In Virginia, the parties may expressly agree to preserve the lien of the deed of trust to avoid a merger if the parties wish to preserve the ability to pass title to a purchaser free of all liens and encumbrances subordinate to the lien of the deed of trust. See Allen v. Patrick, 97 Va. 521, 34 S.E. 451 (1899). I. Mechanic s Liens In Virginia, all persons performing labor or furnishing materials with a value of one hundred fifty dollars ($150.00) or more for the construction, removal, repair or improvement of any building or structure permanently annexed to the freehold may claim a mechanic's lien upon such building or structure and so much land therewith as is necessary for the convenient use and enjoyment thereof. Va. Code Ann. 43-3(A). The term structure permanently annexed to the freehold includes, among other things, sidewalks, driveways, parking lots, water systems, septic systems and swimming pools. Va. Code Ann Though the mechanic s lien statutes are generally strictly construed, the terms labor and materials have generally liberal definitions. The term materials includes surveying, 15

21 grading, clearing, and earth moving required for the improvement of the grounds upon which such building or structure is situated. Va. Code Ann The term labor includes architect s fees, see Cain v. Rea, 159 Va. 446, 166 S.E. 478 (1932), and the Virginia Supreme Court's broad interpretation of the term labor could probably include claims for labor such as engineering work or construction management work, provided that such work was necessary for the construction, removal, repair, or improvement of a building or structure. To perfect a mechanic's lien, the claimant must record in the land records a "memorandum of lien" at any time after the claimant begins to provide labor or materials but no later than 90 days after the last day of the month in which the claimant last provided labor or materials, and in no event later than 90 days after the day the building or structure is completed or all work is otherwise terminated. Furthermore, the memorandum may not include sums for labor or materials furnished more than 150 days prior to the last day on which labor was performed or materials furnished to the job preceding the filing of the memorandum. Va. Code Ann In addition to the memorandum of lien, claimants below the level of general contractors must give notices of the memorandum to certain parties. Va. Code Ann and With respect to priority, mechanic s liens enjoy some preferential treatment. For example, with respect to the construction of a building for which the labor or materials were provided, a properly perfected mechanic's lien will take priority over the lien of a deed of trust on the building recorded prior to the commencement of the work for which the mechanic's lien is claimed. With respect to the land on which the building is situated, a properly perfected mechanic's lien related to the construction of a building will take priority over the lien of a deed of trust on the land that was recorded after the work commences. Va. Code Ann Given this possible loss of priority, lenders in Virginia generally protect themselves from mechanic's liens in two ways: (1) by obtaining waivers from providers of labor and materials of their right to file and/or enforce a mechanic's lien, which waivers may be obtained at any time, even before work commences (Va. Code Ann. 43-3(C)); and (2) by obtaining affirmative mechanic's lien title insurance coverage. J. Title Insurance "Mortgagee" title insurance coverage is generally available in Virginia, and has almost entirely superseded attorney title opinions as the means by which a lender obtains assurance that the lien of its deed of trust has priority. Unlike some other states, Virginia does not limit the availability or mandate the forms of title insurance endorsements. The title insurance companies that transact business in Virginia will, if requested, generally provide the standard endorsements used nationwide, as well as negotiated endorsements in certain circumstances. VII PERSONAL PROPERTY LENDING AND EQUIPMENT LEASING A. UCC Article 9 (State Variations) 16

22 Virginia variations to the current version of Article 9 (the Uniform Act ) include: 1. Article 9 is not applicable to a transfer of an interest in or assignment of a claim under an annuity contract. Va. Code Ann. 8.9A-109(d) (8). 2. Dragnet and cross-collateral provisions in consumer credit sale documents are limited. Va. Code Ann. 8.9A The concept of free assignability of accounts, chattel paper, payment intangibles, healthcare insurance receivables and promissory notes is not applicable to rights to receive compensation for personal injuries or sickness arising out of Virginia s worker s compensation act, claims or rights to receive benefits under special needs trusts created under the Social Security Act, and rights to payments under structured settlements pursuant to Virginia s Structured Settlement Protection Act, Va. Code Ann et seq. Va. Code Ann. 8.9A-408(e). 4. Local real estate related filings must contain a description of the real estate similar to that used with a mortgage or deed of trust. Va. Code Ann. 8.9A-502(b)(3). Local court clerks sometimes insist on exhibited legal descriptions attached to the prescribed UCC-1 AD form. 5. The proper name for the filing in the name of an individual debtor holding an unexpired driver's license or identification card issued by the Division of Motor Vehicles is that name indicated on the driver's license or identification card. Va. Code Ann (4). 6. Virginia has adopted the less stringent alternatives with respect to information required to be included in amendment, continuation, termination, and correction statements. Va. Code Ann. 8.9A-512(a), - 518(b), -519(f) and -522(a). 7. Virginia filing offices are required to file and index financing statements within five (5) business days after receipt of the record and to communicate a refusal to file within the same time frame. Va. Code Ann. 8.9A-519(h), -520(b). Likewise, the filing office must respond to requests for information within five (5) business days. Va. Code Ann. 8.9A-523(e). 8. In Virginia, whether notification of the disposition of collateral is timely is a question of law, not fact. Moreover, the 10-day "safe harbor" provision of 9A- 612 is applicable to both consumer and commercial transactions. 9. A junior secured party that receives the cash proceeds of a disposition of collateral in good faith and without knowledge of a conflicting senior security interest does not necessarily take free of that conflicting security interest. Va. Code Ann. 8.9A