Title Insurance Client Alert – Recent U.S. District Court of Virginia, Western Division Case Regarding in rem Rights Under a Deed of Trust By a Lender

    By Lisa Hudson Kim, James L. Windsor, Real Estate Claims & Title Insurance Solutions

    Recently, Hon. Elizabeth K. Dillon of the U.S. District Court for the Western District of Virginia, Harrisonburg Division affirmed the ruling of the U.S. Bankruptcy Court for the Western District of Virginia, Harrisonburg Division allowing JP Morgan Chase Bank, N.A. to pursue its in rem rights under a deed of trust. See Hall v. JP Morgan Chase Bank, N.A., No. 5:18-cv-00106, 2020 U.S. Dist. LEXIS 20775 (W.D. Va. Feb. 7, 2020).

    The case was an appeal from the U.S. Bankruptcy Court for the Western District of Virginia, Harrisonburg Division’s Order dated July 24, 2018, denying the Halls’ motions for an injunction, contempt, and sanctions against JP Morgan Chase Bank, N.A. (“Chase”) for violating the Bankruptcy Court’s discharge order and injunction under 11 U.S.C. § 524(a). Ultimately, the District Court affirmed the Bankruptcy Court’s Order, with findings and holdings in its Memorandum Opinion which span key state and federal laws, including bankruptcy.

    The Halls’ property was owned as tenants by the entirety during their marriage; however, only Mr. Hall signed the note and deed of trust for the property. The Halls later filed bankruptcy. Chase tried to reform the deed of trust or have the state court declare the deed of trust valid notwithstanding Mrs. Hall’s missing interest. Chase further tried to foreclose but the Halls reopened their bankruptcy to pursue a discharge injunction violation. The state court held the deed of trust was unenforceable and invalid due to the missing interest and would not reform it.  

    The Halls thereafter divorced, converting the property into one held as tenants in common by operation of state law. Chase again tried to foreclose, asserting the deed of trust was valid due to Mr. Hall’s after-acquired property interest in the trust. See VA. CODE § 55-52 [now § 55.1-310] (after-acquired title provision). The Halls reopened their bankruptcy and pursued a discharge injunction violation and contempt proceedings against Chase for its foreclosure attempt. The Bankruptcy Court denied the Halls’ motions and the Halls filed the instant appeal.

    At the crux of the case on appeal, the Halls and Chase disagreed over whether the deed of trust was void ab initio or simply void under the state court’s ruling when the deed trust was signed by one spouse only but owned as tenants by the entirety by both spouses. To the Halls, the deed of trust was void ab initio and Chase lacked in rem rights against the property secured by the deed of trust to commence foreclosure. By foreclosing, to the Halls, Chase violated the Bankruptcy Court’s discharge order. However, Chase argued the deed of trust survived the Halls’ bankruptcy discharge and attached to Mr. Hall’s after-acquired interest in the property as a tenant in common after his divorce. To Chase, the couple’s divorce cured the missing interest defect in the deed of trust when coupled with Virginia’s after-acquired title statute.

    The Bankruptcy Court reserved to the state court the issue of Chase’s deed of trust validity under state law with regard to Mr. Hall’s property interest. In the pivotal analysis, either Chase’s lien is void ab initio, Chase may no longer assert an in rem interest in the property, and is enjoined by the discharge order from collecting on the debt against the Halls. Or, Chase’s deed of trust is invalid only as to the entireties property, remains valid as to Mr. Hall’s individual interest in the property, and Chase may pursue in rem rights against the property (i.e., by foreclosure). The District Court ultimately agreed with Chase that the lender was free to pursue in rem rights against the deed of trust through foreclosure as to Mr. Hall’s interest in the property and partition by sale, thereby affirming the Bankruptcy Court’s ruling. From missing interest and tenancy by the entireties to after-acquired title and in rem relief, the Hall opinion presents valuable practice insights for the real estate lawyer.

    If you have any questions regarding this significant opinion or title and real property issues in general, please contact Jim Windsor at (757) 873.6308 or or Lisa Hudson Kim at (757) 491-4017 or  

    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 2024.