Credit Union Legal Update – Summer 2013

    By Credit Union

    Mortgage Lien Takes Priority Over Renewed Judgment Lien

    Borrowers in Indiana entered into a credit agreement (the 2001 Credit Agreement) with Finance Center Federal Credit Union (Finance Center). To secure payment of the loan, the borrowers executed a mortgage (the 2001 Mortgage) secured by their residence, which they owned as tenants by the entireties. The 2001 Mortgage was recorded in the land records. Prior to the 2001 Mortgage, however, National City Bank of Indiana (National City Bank) had obtained a judgment (the Prior Judgment) against the borrowers in the amount of $729,755.56. In 2002, the borrowers entered into another credit agreement with Finance Center and executed a mortgage (the 2002 Mortgage), using the loan to satisfy, in full, the 2001 Credit Agreement and the 2001 Mortgage. PNC Bank, N.A. (PNC), successor to National City Bank, renewed the Prior Judgment (the Renewed Judgment) nine years later. The borrowers promptly filed a Chapter 13 bankruptcy petition. In the bankruptcy proceeding, a dispute arose between Finance Center and PNC as to which of their liens had priority. PNC argued that its lien had priority because it obtained the Prior Judgment prior to the 2001 Mortgage. The bankruptcy court disagreed with PNC, concluding that the Prior Judgment was junior to Finance Centers 2002 Mortgage. Under Indiana law, the Renewed Judgment was actually a new judgment as of the date it was obtained. It did not relate back to the date of the Prior Judgment. Therefore, because the 2002 Mortgage preceded the Renewed Judgment, the 2002 Mortgage had priority. In Re Callahan.

    Post-Repossession Presale Notice Sufficient to Allow Pursuit of Deficiency

    A mother and her son obtained a vehicle loan from First Community Credit Union (First Community) in Missouri. Two years later, they defaulted and First Community repossessed the vehicle. After receipt of individual notice letters, the borrowers did not redeem the vehicle and First Community sold it resulting in a $20,000.00 deficiency. First Community then filed a breach of contract claim against both borrowers. The trial court dismissed the lawsuit because First Communitys presale notice failed to comply with the requirements of Missouris version of the Uniform Commercial Code. In particular, the court found that the notices sent to each debtor did not name the co-debtor, failed to specify the phone number for the debtor to call to obtain information about redeeming the vehicle, and did not inform the debtors what telephone number or address to use to discover information regarding the vehicles disposition. The Court of Appeals of Missouri reversed the trial courts decision and reinstated the case. It determined that there was no requirement for First Communitys notice letters to include the name of the co-debtor and that, by listing a phone number and address on the notice, it had complied with all the statutory requirements. There was no requirement for First Community to specifically state that the debtor could call the listed telephone number or write to the listed address for further information. First Community Credit Union v. Levison.

    Credit Union Not Liable for One Account Holder Removing Other Account Holder and Withdrawing All Funds

    Christine Bush formed a limited liability company, naming herself as a member and her boyfriend as the manager. The pair then opened a business checking account and a savings account with Desert Schools Federal Credit Union (Desert Schools). Both signed a certification of identity and authority (the Certification). A year later, the boyfriend removed Bushs name from both accounts and withdrew the $107,000 balance. Bush then sued Desert Schools for breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court dismissed the suit and Bush appealed.

    The Court of Appeals of Arizona noted that the Certification authorized Bush and her boyfriend individually, without the other, to transact business with Desert Schools. Nothing in the Certification required Desert Schools to first check with one member if another member tried to modify the account. The account master application also allowed Bushs boyfriend to remove her unilaterally. Therefore, Desert Schools did not breach its contract with Bush. For the same reasons, there was no basis to claim that Desert Schools breached any implied covenant. Accordingly, the appellate court upheld the trial courts decision to dismiss the lawsuit. Bush v. Desert Schools Federal Credit Union.

    Bankruptcy Trustee Wins Windfall for Estate, Avoids Refinance Deed of Trust Lien on Wife’s One-Half Interest

    The Herters, who owned a home in Idaho, prepared their own stipulated divorce decree. The decree provided that their home, which was community property, would be sold and the proceeds split equally. Before the court entered the decree, the Herters filed separate bankruptcy petitions and both listed the home on their bankruptcy schedules. Midland Mortgage had a senior lien on the property and Idaho State University Credit Union (ISUCU) had a junior lien against the home. Mr. Herter claimed a homestead exemption whereas Ms. Herter indicated that she would surrender the property. The bankruptcy trustee stipulated in both cases that the automatic stay would terminate as to the home because there was no equity in it. Midland then began foreclosure proceedings. Before the foreclosure sale, Mr. Herters bankruptcy closed and he refinanced both loans through ISUCU. Ms. Herter then conveyed her interest in the property to Mr. Herter by quitclaim deed.

    The trustee then sought to avoid Ms. Herters quitclaim deed and ISUCUs refinance deed of trust lien on her share of the property. The bankruptcy court sided with the trustee, who recovered the wifes one-half interest in the property free of any lien from the new ISUCU refinance deed of trust.

    On appeal, the United States District Court for the District of Idaho ruled that because Mr. Herter filed bankruptcy first, and before the divorce decree was entered, the entire home had been brought into Mr. Herters bankruptcy estate. Ms. Herters bankruptcy estate did not include any part of the home. Although the automatic stay prevented the divorce decree from dividing the property, it did not prevent the decree from terminating the Herters marriage. Thus, while Mr. Herters bankruptcy proceeding was pending, the home could not be divided. When the divorce decree was entered and then his bankruptcy proceeding terminated, his ex-wife acquired a one-half tenant-in-common interest in the home. Property interests acquired as result of a property settlement with a debtors spouse within 180 days of filing for bankruptcy become property of the bankruptcy estate. Thus, although Ms. Herters bankruptcy estate did not initially include any interest in the home, it did as soon as her ex-husbands bankruptcy case closed and they became tenants in common. As a result, the trustee was able to recover the wifes one-half interest in the property free and clear of any liens, resulting in a significant windfall for her bankruptcy estate. The court noted that this result could have been avoided if ISUCU or Ms. Hester had filed a motion to deem the property abandoned before she executed the quitclaim deed. Herter v. Idaho State University Credit Union.

    Automobile Lien Avoidable in Bankruptcy if Tool of Debtor’s Trade

    A real estate agent obtained a loan from Orange Countys Credit Union (Orange County), using her Mercedes as collateral. She later filed a Chapter 7 bankruptcy petition and claimed that the Mercedes was exempt from her bankruptcy estate under California law and the bankruptcy code. The bankruptcy court ruled against the debtor. On appeal, the United States Court of Appeals for the Ninth Circuit noted that under federal law a state can provide its own list of exemptions from a debtors bankruptcy estate. California allows a debtor to exempt up to $18,350 in any property, and fancy cars are not excluded. The Court of Appeals also ruled that, under the bankruptcy code, a vehicle lien can be avoided if it is a non-possessory, non-purchase money lien and a tool of the debtors trade. The case was sent back to the bankruptcy court for it to determine whether the Mercedes was a tool of the real estate agents trade. In re: Garcia.

    Inadequate Redemption Notice Bars Credit Union from Recovering Vehicle Loan Deficiency

    Adam Noels vehicle was repossessed and sold by Vermont Federal Credit Union (VFCU). VFCU later filed an action against Noel for a deficiency in the amount of $11,443.54. Noel, in response to that lawsuit, filed affirmative defenses and counterclaims, alleging that VFCU violated Vermonts Uniform Commercial Code (UCC) by failing to provide adequate notices before and after his vehicle was sold. The Vermont UCC, in relevant part, states that the debtor is entitled to an accounting of the unpaid indebtedness and a statement of the charge, if any, for an accounting. Noel primarily contended that the redemption notification that was sent to him was inadequate, because it did not include an accounting.

    The Superior Court of Vermont noted that VFCU did not follow the safe-harbor form printed in the Vermont UCC. It further concluded that VFCUs notice, which merely included a recitation of the amount of the delinquency, did not qualify as a statutorily required accounting. Therefore, VFCU failed to comply with the Vermont UCC. The court then addressed the consequences of such noncompliance. It applied the absolute-bar rule and held that VFCU was prevented from obtaining a deficiency judgment from Noel. The court further held that Noel was entitled to recover statutory damages from VFCU.

    Worth Watching Recently Filed Articles

    Executive Compensation – whether federal law preempts lawsuit asserting state law claims for termination of executives deferred compensation plan – Kirkindoll v. Texans Credit Union.

    Recall vote – Election to recall members of board of directors challenged for counting ineligible votes. Knebel v. St. Helens Community Federal Credit Union (Dist. Ore. Feb 6, 2013).

    ATM Patent Violation Litigation – Automated Transactions LLC has filed suit against numerous credit unions and banks alleging that their ATMs violate its patents.

    Class Action Waivers vs. Arbitration Agreements – Recently, the United States Supreme Court held that a contractual waiver of class action in arbitration clauses in contracts is enforceable.

    Marc Darnell concentrates his practice in the area of commercial litigation. Specifically, Marc has counseled clients in product-related defense, consumer fraud and deceptive trade practices defense, class action defense, director and officer liability defense, insurance coverage disputes, and contract disputes. As a member of the firms nationally recognized Credit Union Team, Marc assists credit union clients with various litigation matters, including consumer-related litigation.

    Brian Dolan is a member of the firms Newport News office and his practice includes civil litigation, with an emphasis on advising and representing banks, credit unions, private lenders, loan servicers, property owners and developers in residential and commercial title and other real estate matters, including mechanics liens, easements, boundary lines, breach of contract, missing interests, partition, legal description errors, unreleased liens and judgments, zoning compliance, fraud and forgery, adverse possession, bona fide purchaser status, lien priority, foreclosure and bankruptcy.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.