VIRGINIA COMMERCIAL LENDING LAW - … COMMERCIAL LENDING LAW A Guide for Commercial Lenders and Businesses Wilson R. Trice, Director ThompsonMcMullan, P.C. Richmond, Virginia TABLE

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 .............................................................................. 2

1. Virginia Rules of Court.................................................................................................. 2

2. 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

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B. General Rule – No Usury Limits ................................................................................... 5

C. Acceleration. ................................................................................................................... 5

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 ................................................................................... 8

1. Married Borrowers ........................................................................................................ 8

2. Property Exempt From Claims of General Creditors ................................................ 8

3. Age of Majority............................................................................................................... 9

F. Trusts and Estates .......................................................................................................... 9

VI. REAL ESTATE ................................................................................................................ 10

A. Property Rights ............................................................................................................ 10

B. Deeds of Trust ............................................................................................................... 10

C. Recordation/Formal Requirements ............................................................................ 11

D. Recording Fees and Taxes ........................................................................................... 12

E. Assignment of Leases, Rents and Profits ................................................................... 13

F. Transfer of Deed of Trust ............................................................................................ 13

G. Cancellation of Deed of Trust ..................................................................................... 13

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H. Default and Foreclosure Remedies ............................................................................. 13

1. Foreclosure. ................................................................................................................... 14

2. Deed in Lieu of Foreclosure......................................................................................... 15

I. Mechanic’s Liens .......................................................................................................... 15

J. Title Insurance .............................................................................................................. 16

VII PERSONAL PROPERTY LENDING AND EQUIPMENT LEASING ..................... 16

A. UCC Article 9 (State Variations) ................................................................................ 16

B. UCC Filing Rules .......................................................................................................... 18

C. As-extracted Collateral, Timber To Be Cut............................................................... 18

D. Fixture Filings ............................................................................................................... 18

E. Local Filings .................................................................................................................. 18

F. Financing Statement Formalities ................................................................................ 18

G. Filing and Other Fees ................................................................................................... 18

H. Titled Motor Vehicles and Watercraft ....................................................................... 18

I. Security Interests in Life Insurance ........................................................................... 19

J. Priority Versus Secret Liens (Statutory and Common Law) ................................... 19

K. Equipment Leasing ...................................................................................................... 20

VIII GUARANTIES AND SURETYSHIP ............................................................................. 20

A. General .......................................................................................................................... 20

B. Waiver of Suretyship Defenses.................................................................................... 20

C. Guaranties ..................................................................................................................... 20

D. Other Suretyship Situations ........................................................................................ 21

E. Reimbursement, Subrogation and Contribution Rights .......................................... 21

IX INSOLVENCY LAWS .................................................................................................... 21

iv

A. Receivership .................................................................................................................. 21

B. Assignment for Benefit of Creditors ........................................................................... 22

C. Fraudulent and Voluntary Conveyances ................................................................... 22

X MISCELLANOUS LENDING TOPICS ....................................................................... 23

A. Loan Commitments ...................................................................................................... 23

B. Statute of Frauds .......................................................................................................... 23

C. Accord and Satisfaction ............................................................................................... 23

D. Setoff and Recoupment ................................................................................................ 24

E. State Assignment of Claims Statute ............................................................................ 24

XI LITIGATION AND ARBITRATION ........................................................................... 24

A. Lender Liability ............................................................................................................ 24

1. Duty of Good Faith ....................................................................................................... 24

2. Fiduciary Duty .............................................................................................................. 25

3. Virginia Consumer Protection Act ............................................................................. 25

B. Recovery of Attorney Fees ........................................................................................... 25

C. Statutes of Limitations ................................................................................................. 25

1. Applicable Periods of Limitations .............................................................................. 25

2. Extension by Voluntary Payment ............................................................................... 27

3. Use of Time-Barred Claim as a Defense..................................................................... 27

4. Effect on Collateral for Time-Barred Claim ............................................................. 27

5. Agreements to Extend or Shorten Limitations Period ............................................. 27

D. Choice of Law Provisions/Conflicts of Laws. ............................................................ 28

E. Forum Selection and Venue Selection Provisions. .................................................... 28

F. Jury Trial Waivers. ...................................................................................................... 28

G. Arbitration Agreements ............................................................................................... 28

H. Pre-Judgment Remedies .............................................................................................. 29

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I. Judgments ..................................................................................................................... 30

1. Confession of Judgment ............................................................................................... 30

2. Interest on Judgments .................................................................................................. 30

3. Survival of Judgments ................................................................................................. 30

4. Execution and Enforcement of Judgments ................................................................ 30

5. Assignment of Judgments ............................................................................................ 31

6. Enforcement of Foreign Judgments ........................................................................... 31

XII OTHER LAWS OF INTEREST .................................................................................... 31

A. Virginia Environmental Laws and Regulations ........................................................ 31

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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 8.1-8.11 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.

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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

§ 8.01-4 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

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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 § 16.1-89, 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. §§ 13.1-757 et seq., with respect to foreign corporations, §§ 13.1-1051 et seq.

with respect to foreign limited liability companies, §§ 13.1-1241 et seq., with respect to foreign

business trusts, and §§ 50-73.53 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,

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maintain a registered office in Virginia, and designate a registered agent in Virginia. An out-of-

state 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. §§ 13.1-757, -758 (foreign corporations); id. §§ 13.1-

1052, -1057 (foreign limited liability companies); id. §§ 13.1-1241, -1247 (foreign business

trusts); id. §§ 50-73.54, -73.59 (foreign limited partnerships); and id. §§ 50-73.138, -73.140

(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. §§ 6.2-1500 et seq;; a mortgage lender or broker per Va.

Code Ann. §§ 6.2-1600 et seq.; a mortgage loan originator per Va. Code Ann. §§ 6.1-1700 et

seq.; a payday lender per Va. Code Ann. §§ 6.1-1800 et seq.; or a motor vehicle title lender per

Va. Code Ann. §§ 6.2-2200 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.

§ 58.1-302 (definition of “income and deductions from Virginia sources”); id. §§58.1-320 et

seq.; id. §§ 58.1-400 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. § 58.1-418; 23

Va. Admin. Code § 10-120-150.

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.

§§ 58.1-1200 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. §§ 58.1-600 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 pass-

through) in Virginia as they have for federal income tax purposes. Va. Code Ann. § 58.1-390.1

(definition of pass-through entity).

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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. §§ 6.2-308, -317.

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. §§ 6.2-308, -317. 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. § 6.2-400B. 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. § 6.2-421B 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. § 6.2-422. 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. § 6.2-420.

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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. §§ 13.1-601 et seq. Virginia nonstock corporations are subject to the Virginia's Nonstock

Corporation Act, Va. Code Ann. §§ 13.1-801 et seq. Professional corporations are also governed

by a separate chapter in the Code. Va. Code Ann. §§ 13.1-542.1 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

7

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. § 50-73.96. 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. §§ 13.1-1000 et seq. Professional limited liability companies are governed by the

Virginia Professional Limited Liability Company Act, Va. Code Ann. §§ 13.1-1100 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.

8

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. §§ 13.1-

1200 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. § 59.1-69.

1. 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. §§ 1691 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 $5,000.00 per individual, or, if the individual is 65 years or older, $10,000.00,

plus $500.00 for each dependent. Va. Code Ann. § 34-4. In addition, individuals may exempt

certain heirlooms, certain ordinary household items, tools of the trade, and medically prescribed

health aids. Va. Code Ann. §§ 34-26 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.

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3. Age of Majority

The age of majority in Virginia is eighteen (18) years of age. Va. Code Ann. § 1-204.

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. §8.01-278.

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. § 64.2-777 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 17.1-249 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).

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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. §§ 55-1 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. § 55-96.

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. § 55-58.1.

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. § 55-58.2.

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. § 55-

58.2(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. § 55-58.2(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. § 55-58.2(E).

11

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. § 55-59.

C. Recordation/Formal Requirements

Although Va. Code Ann. § 55-58 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.

§ 55-58. 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. § 55-106.

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. § 47.1-16. 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. § 47.1-15. The notarial certificate must recite the date that

the notary’s commission expires and the notary’s registration number. Va. Code Ann. § 47.1-2.

Virginia has adopted the Uniform Recognition of Acknowledgments Act, Va. Code Ann. §§ 55-

118.1 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. § 55-118.4.

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. § 55-58.1(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. § 17.1-252.

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

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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. § 17.1-2239(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. § 17.1-223(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. § 17.1-

227.1. 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. §§ 42.1-82, 55-108;17 Va.

Admin. Code § 15-70-10 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 § 15-

70-10 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 $100.00 of indebtedness secured or fraction thereof. In the case of an open-

end 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. §§ 58.1-803 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. § 58.1-814.

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. §§ 58.1-

803,-809.

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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. § 55-220.1.

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. § 58.1-809 and § 58.1-807 (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. § 55-66.01.

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. § 55-58.2(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. §§ 55-66.3(A)(1).

If the debt secured has been assigned or transferred, the subsequent holder is subject to

the same requirements. Va. Code Ann. § 55-66.3 (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. § 55-66.3(E).

H. Default and Foreclosure Remedies

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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. §§ 55-59 through 55-59.4. 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. § 55-59(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. § 55-59.4(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

15

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. § 55-59.4(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. § 64.2-1217.

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. § 43-2.

Though the mechanic’s lien statutes are generally strictly construed, the terms “labor”

and “materials” have generally liberal definitions. The term “materials” includes surveying,

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grading, clearing, and earth moving required for the improvement of the grounds upon which

such building or structure is situated. Va. Code Ann. § 43-2. 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. § 43-4. 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. § 43-7 and

§ 43-9.

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. § 43-21.

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)

17

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-204.1.

3. 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. §§ 59.1-475 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. 8.9-503(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-615.

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10. The Virginia statute does not allow statutory damages for noncompliance with

Article 9. Va. Code Ann. § 8.9A-625.

B. UCC Filing Rules

If the local law of Virginia governs perfection, UCC-1 financing statements must be filed

with only the State Corporation Commission of Virginia, unless collateral is as-extracted

collateral or timber to be cut or the financing statement is filed as a fixture filing, in which case

the UCC-1 financing statement must be filed locally (see below).

C. As-extracted Collateral, Timber To Be Cut

When collateral is timber to be cut or as-extracted collateral (oil, gas, minerals and

accounts arising out of their sale at the well head or minehead), then a UCC-1 must be filed in

the circuit court of the county or city where the related real estate is located.

D. Fixture Filings

When goods are or are to become fixtures, the UCC-1 may be filed as a “fixture filing” in

the circuit court of the county or city where the related real estate is located in order to protect

the secured party’s interest vis a vis competing real estate interests.

E. Local Filings

In Virginia, cities are independent of surrounding counties. Accordingly, care must be

exercised when filing financing statements locally and conducting lien searches to insure that the

appropriate jurisdiction is identified, particularly when a debtor is located in a county contiguous

to an independent city, because mailing addresses can be misleading.

F. Financing Statement Formalities

The national form of the UCC-1 financing statement is effective in Virginia. Whenever a

financing statement covers timber to cut, or as-extracted collateral or is made as a fixture filing,

in addition to the standard information on the UCC-1 form, the form should contain a detailed

real estate description similar to that used with a mortgage or deed of trust. Local court clerks

sometimes require a legal description to be exhibited in addition to the UCC-1 AD form. A

mortgage or deed of trust is effective as a financing statement filed as a fixture filing from the

date of recordation if the goods are described in the instrument by item or type, the secured party

is identified in the instrument, the instrument satisfies non-UCC Virginia law governing the

instrument, and the instrument is duly recorded. Va. Code Ann. § 8.9A-502(b).

G. Filing and Other Fees

The basic fee for filing any UCC-1 financing statement is $20.00.

H. Titled Motor Vehicles and Watercraft

19

The ownership of motor vehicles and watercraft (other than inventory held for sale) in

Virginia is evidenced by a certificate of title issued by the Department of Motor Vehicles in the

case of motor vehicles, or the Department of Game and Inland Fisheries, in the case of boats.

Security interests in such collateral cannot be perfected by filing financing statements but can be

perfected only by noting the lien on the certificate of title.

I. Security Interests in Life Insurance

A security interest in the cash surrender value and/or the proceeds of a life insurance

policy is not subject to Article 9 of the Virginia UCC. A lender to a Virginia debtor should (i)

obtain a written assignment from the debtor assigning the policy, (ii) the possession of the

original policy, and (iii) obtain a written acknowledgment of the assignment from the insurer.

J. Priority Versus Secret Liens (Statutory and Common Law)

In Virginia, the common law landlord's lien on the goods of a tenant has been codified.

Va. Code Ann. §§ 55-230 et seq. The landlord's lien has priority over a perfected security

interest in the goods unless the security interest was perfected when the goods were carried onto

the premises. It is not clear in Virginia whether a purchase money security interest in goods

other than inventory which is perfected by filing during the 20-day grace period after the debtor

takes possession but after arriving on the premises, would have a priority over the landlord's lien.

With respect to inventory, while it seems that the language of the statute awards priority to the

landlord's lien in inventory on hand when the inventory financer perfects its lien, and

subordinates the landlord's lien to new inventory that turns over after the security interest is

perfected, the landlord's lien statute predates the UCC and its concept of a floating lien.

Accordingly, secured creditors typically seek to have the landlord's lien expressly subordinated

to their UCC security interest in all circumstances rather than rely on the statute.

Section 43-32 awards a storage lien on aircraft and boats to aircraft hangar owners and

marinas. The statute provides that the storage lien has a priority of up to $300 against competing

liens, and if efforts are made to contact the secured party of record at the Department of Game

and Inland Fisheries a priority up to $500. Anyone incurring charges for providing towing or

recovery services for a boat or aircraft has a lien with a priority over competing creditors to the

full extent of those charges and secured parties of record are notified within seven business days

of taking possession of the aircraft.

Similar provisions apply to garage keepers with respect to motor vehicles. Va. Code

Ann. § 46.2-644.01.

Section 43.33 of the Virginia Code provides a lien on personal property in the possession

of a repairman with a priority up to $800.00. A similar lien with like priority is expressly

afforded to an automobile repair facility. Va. Code Ann. § 46.2-644.02.

In addition to the specific statutes mentioned, there exists a common law lien in favor of

bailees (other than those expressly addressed in the statute) in possession of personal property.

20

The possessory lien of a bailee would have priority over a security interest perfected under the

UCC by virtue of Section 8.9A-333(b) of the Virginia Code.

K. Equipment Leasing

Virginia has adopted Article 2A of the UCC (which governs leases of goods) without any

material variation from the Uniform Act, except that Virginia has adopted its own version of

§ 2A-216, extending the express and implied warranties of manufacturers to lessees. Va. Code

Ann. § 8.2A-216.

VIII GUARANTIES AND SURETYSHIP

A. General

General principles of the law of suretyship and guaranty, as set forth in the Restatement

(Third) of Suretyship and Guaranty, apply in Virginia. The principles apply whether a person is

a surety, which is a primary obligor, or a secondary obligor such as a guarantor or an endorser of

a negotiable instrument.

B. Waiver of Suretyship Defenses

While there are no Virginia state court cases directly on point, the waiver of suretyship

defenses and consents to action which might otherwise discharge guarantors and sureties (such

as impairment of recourse to collateral) have been given effect by federal courts in Virginia in

the absence of bad faith or willful misconduct by the creditor. See, e.g., United States v. Houff,

202 F. Supp. 471 (W.D. Va. 1962), aff'd. on other grounds, 312 F.2d 6 (4th Cir. 1962). Likewise,

§ 8.3A-605(i) of the Virginia UCC recognizes that endorsers and accommodation parties to

negotiable instruments may by agreement waive rights to discharge conferred by the statute in

the same fashion.

Virginia has a statute which requires that a creditor sue the primary debtor upon written

demand of the surety. The creditor's failure to bring such an action within 30 days will discharge

the surety. Va. Code Ann. §§ 49-25 and 49-26. It is customary in Virginia for the surety to

expressly waive rights under the statute.

C. Guaranties

Virginia courts will interpret a guaranty as they would any other contract, although the

effect of a guaranty will be strictly construed in favor of the guarantor. Open-ended guaranties

of a series of transactions in the future will be given effect if the intention of the parties is

apparent from the language of the contract and the circumstances existing when it was made. If

no duration is stated in an open-ended guaranty, a court will enforce it for a reasonable period.

Nevertheless, if an open-ended guaranty confers a right of revocation as to future indebtedness, a

court will not impose a limitation of the duration. See Bank of Southside Va. v. Candelario, 238

Va. 635, 385 S.E.2d 601 (1989).

21

D. Other Suretyship Situations

In addition to guarantors, accommodation makers and endorsers of negotiable

instruments have suretyship status under the common law. Moreover, the UCC confers certain

rights on accommodations makers and endorsers of negotiable instruments to be discharged from

their obligations in circumstances similar to those conferred on sureties at common law. The

statute allows accommodation parties to waive the benefit of this statute. Va. Code Ann. § 8.3A-

605(i).

E. Reimbursement, Subrogation and Contribution Rights

Virginia common law provides that sureties who perform their obligations under their

contract in whole or in part are entitled to reimbursement from the principal obligor. A surety

which fully satisfies the obligations of a primary obligor to a creditor may be subrogated to the

rights of the creditor with respect to collateral securing the obligation. See Aetna Cas. & Surety

Co. v. Whaley, 173 Va. 11, 3 S.E.2d 395 (1939). If there is more than one surety for an

obligation, any co-surety who pays more than his proportionate share of the principal obligation

has rights to contribution from his co-surety. See Sacks v. Tavss, 237 Va. 13, 375 S.E.2d 719

(1989).

G. Equal Credit Opportunity Act

Under the Federal Equal Credit Opportunity Act, (“ECOA”) , 15 U.S.C. 1691 et seq. and

its implementing Federal Reserve Regulation B, 12 C.F.R 202.7, it is a violation of ECOA to

require the spouse of an applicant for credit to guarantee a loan if the applicant independently

qualifies for credit under the creditor’s standards of creditworthiness. The Virginia Supreme

Court has held that a spousal guaranty required in violation of ECOA is a defense to enforcement

of the guaranty. Eure v. Jefferson National Bank, 248 Va. 245, 448 S.E.2d 417 (1994). The

United States Court of Appeals for the 4th

Circuit has not dealt with the question whether the

spouse whose guaranty is required in violation of ECOA is an “applicant” with standing to assert

a claim or defense under the statute. See Hawkins v. Community Bank of Raymore, 761 F.3d

937 (8th

Cir., 2014). Compare RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp, 754

F. 3d 380 (6th

Cir. 2014). The lower Federal courts within the 4th

Circuit have generally favored

the view that a guarantor is an “applicant” under ECOA, allowing both claims and counterclaims

to be brought by a guarantor spouse, although several courts have resisted allowing an ECOA

violation as an affirmative defense. See, e.g., CMF Virginia Land, LP v. Brinson, 807 F. Supp.

90 (E. D Va. 1992).

IX INSOLVENCY LAWS

A. Receivership

Virginia law provides for the appointment of a special receiver: "[w]henever the

pleadings in any suit make out a proper case" for such appointment. Va. Code Ann. § 8.01-591.

The statute is silent on what constitutes a proper case. In determining whether to appoint a

22

receiver, courts generally look to see if the property that is the subject matter of the lawsuit is in

jeopardy of loss, waste, misappropriation or destruction. The principal purposes of a receiver are

to preserve, protect and conserve property, sometimes to sell or liquidate property and with

respect to a business entity, sometimes to manage and wind down the business. Certain powers

and duties of a receiver, generally notice provisions, are set forth in the statutes. Va. Code Ann.

§§ 8.01-591 through -599. Mostly, the powers and duties of a receiver are set forth in the court

order appointing the receiver. The creditor or plaintiff seeking a receiver will have wide latitude

in suggesting to the court the receiver’s powers, duties and compensation. Receivers also may

be appointed in shareholder derivative and corporate and limited liability company dissolution

suits.

B. Assignment for Benefit of Creditors

Virginia’s little-used assignment for the benefit of creditors statute is found in §§ 55-156

through -167 of the Code of Virginia. The statute provides a mechanism for the assignment of

property and/or the assignment of wages to a trustee to pay creditors.

A property assignment is accomplished by recorded deed. Va. Code Ann. §§ 55-156

through -160. Creditors are provided with notice of the terms of sale of the property and

conditions, instructions, timetable for acceptance, etc. Creditors may replace the trustee. The

mechanism allows for creditor claims to be challenged by other creditors and for creditor claims

to be discharged as to creditors who accept payment under this mechanism.

A wage assignment is accomplished by assignment filed with the court and court order

appointing a trustee. Va. Code Ann. §§ 55-161 through 167. A majority of creditors in both

amount and number must approve the assignment. In addition, the debtor’s employer must

consent. The trustee receives and distributes the debtor’s wages according to statutorily

prescribed priorities and subject to exemption claims. All listed creditors are subject to the

process and may not garnish or levy against the debtor. Further, the assignment has priority over

subsequently obtained liens. The court may terminate or revoke the assignment.

C. Fraudulent and Voluntary Conveyances

Virginia has adopted neither the Uniform Fraudulent Transfers Act nor the Uniform

Fraudulent Conveyances Act. The Virginia fraudulent conveyance statute is found in Va. Code

§ 55-80. This statute provides for the avoidance of transfers, transactions, etc. that were made

with the intent to delay, hinder or defraud creditors, purchasers and others. Fraudulent intent

must be proven by clear and convincing evidence. See In re Decker, 295 F. Supp. 501 (W.D. Va.

1969). Fraudulent intent may be proven through circumstantial evidence often referred to as

“badges of fraud”. See In re Tarangelo, 378 B.R. 128, 134 (Bankr. E.D. Va. 2007) (quoting In re

Porter, 37 B.R. 56, 63 (Bankr. E.D. Va. 1984). There is no statute of limitations for bringing

such an action. The only limitation is the doctrine of laches. See Flame S.A. Indus. Carriers,

Inc., 24 F. Supp.3d 493 (E.D. Va. 2014); In re Massey, 225 B.R. 887 (Bankr. E.D. Va. 1998)).

The Virginia voluntary conveyance statute is found in § 55-81 of the Virginia Code. This

statute provides for the avoidance of transfers, transactions, etc. which are not based upon

consideration deemed valuable at law by an insolvent transferor or which renders the transferor

https://www.lexis.com/research/buttonTFLink?_m=8a7d86e6aa20a7bf28a578056b183f34&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b378%20B.R.%20128%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=71&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b37%20B.R.%2056%2c%2063%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzB-zSkAA&_md5=dbc0e2f22c4b6891e90d799f1a0bb3c7

https://www.lexis.com/research/buttonTFLink?_m=8a7d86e6aa20a7bf28a578056b183f34&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b378%20B.R.%20128%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=71&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b37%20B.R.%2056%2c%2063%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLzVzB-zSkAA&_md5=dbc0e2f22c4b6891e90d799f1a0bb3c7

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insolvent. Avoidance is accomplished for the benefit of existing creditors at the time of the

avoided transfer or transaction. A five (5) year statute of limitations applies. Va. Code Ann.

§ 8.01-253.

X MISCELLANOUS LENDING TOPICS

A. Loan Commitments

Virginia has enacted a special statute of frauds which provides that no claim can be

brought on any agreement or promise to lend money in excess of $25,000.00 unless the

agreement is in writing and signed by the party to be charged. Va. Code Ann. § 11-2. This

statute would also apply to agreements to modify a loan.

B. Statute of Frauds

In addition to A above, Virginia's statute of frauds requires that the following agreements

must be in writing and signed by the party to be charged:

a) A contract to pay the debt of another (i.e., a guaranty)

(Va. Code Ann. 11-2)

b) An agreement to pay a debt discharged in bankruptcy

(Va. Code Ann. 11-2.01).

Security agreements in personal property (other than pledges) must be in writing and

signed by the debtor. Va. Code Ann. § 8.9A-203(b).

C. Accord and Satisfaction

Virginia has a statute which provides that part performance of an obligation, either before

or after default thereof, will extinguish the obligation if the part performance is "expressly"

accepted by the creditor in satisfaction and rendered in pursuance of an agreement to that effect.

Va. Code Ann. §11-12. No new consideration is required for such an agreement to be made.

Express acceptance of part performance by the creditor and the agreement of the parties to settle

the obligation for less that the full amount thereof can be implied from the circumstances.

Accordingly, it is customary in Virginia loan documents to stipulate that acceptance of partial

payments will not excuse payment in full.

Section 8.3A-311 of the Virginia UCC sets forth the circumstances under which an

accord and satisfaction of an "unliquidated" claim can be settled by the acceptance and collection

of a check bearing, or accompanied by, a conspicuous notice that it is tendered in full satisfaction

of the claim. One bar to reaching an accord and satisfaction by check is if the creditor proves

that the check was not received in a specified office of which the debtor had notice prior to

sending the check. Some lenders in Virginia indicate "conspicuous" notices specifying an office

for this purpose in their loan documents.

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Section 11-10 of the Virginia Code provides that the release of one joint obligor does not

release the other joint obligor. The statute applies to settlement with a co-surety. See Yuillie v.

Wimbish, 77 Va. 308 (1883). The statute does not affect or impair any right of contribution. Va.

Code Ann. § 11-13.

D. Setoff and Recoupment

Virginia law recognizes distinctions between the defenses of setoff and recoupment.

Setoff is an equitable defense to a plaintiff's claim arising out of transactions or circumstances

extrinsic to the plaintiff's claim. Recoupment is an equitable plea for recovery over against a

plaintiff on a claim arising out of the same transaction that gave rise to the plaintiff’s action. See,

e.g., Dexter- Portland Cement Co. v. Acme Supply Co., 147 Va. 758, 133 S.E. 788 (1926)

(superseded by Rule 3:8 of the Rules of the Supreme Court of Virginia on other grounds).

Recoupment is now governed by statute in Virginia. Va. Code Ann. § 8.01-422. The distinction

between setoff and recoupment still exists, particularly regarding the effect of the running of the

statute of limitations on a defendant's claim of a setoff or recoupment. See § XI.C.3 of this

chapter. The recoupment statute also allows an award to a defendant in excess of the plaintiff’s

claim.

In Virginia there is a well-recognized common law right of setoff which permits

depository institution to set off against a customer’s account to satisfy indebtedness owed to the

institution by the customer. See Twentieth Street Bank v. Gilmore, 71 F.2d 594 (4th Cir. 1934).

At common law, the obligations must be mutual and matured. Accordingly, at common law,

setoff against a joint account to pay the debts of one of the joint account holders, or setoff against

a time deposit before its maturity, is not permitted. Neither will setoff be permitted against a

special account such as a trust account or escrow account. The common law right is often

supplemented by an agreement in Virginia loan documents which purports to enable a broader

reach than the common law allows.

E. State Assignment of Claims Statute

Virginia has not enacted a law similar to the Federal Assignment of Claims Act

restricting the ability to assign the proceeds of government contracts.

XI LITIGATION AND ARBITRATION

A. Lender Liability

1. Duty of Good Faith

Section 8.1A-304 of the Virginia UCC imposes an obligation of good faith in the

performance and enforcement of every contract or duty arising under the UCC. The Virginia

Supreme Court has held that violation of this duty is not an independent tort, but only gives rise

to a breach of contract. See Charles E. Brauer Co., Inc. v. NationsBank of Va., 251 Va. 28, 466

S.E.2d 382 (1996). The Virginia Supreme Court has also held that when the parties to a contract

have created valid and binding rights, the UCC's implied duty of good faith and fair dealing

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cannot be violated by exercising those rights. See Ward Equipment, Inc. v. New Holland N.

Am., Inc., 254 Va. 379, 493 S.E.2d 516 (1997). Virginia does not recognize an implied covenant

of good faith and fair dealing outside of the UCC. See Greenwood Assocs. v. Crestar Bank, 248

Va. 265, 448 S.E. 2d 399 (1994).

2. Fiduciary Duty

The relationship of debtor and creditor is a contractual relationship and does not give rise

to a fiduciary relationship. See Deal’s Adm’r v. Merchant & Mechanics Savings Bank, 120 Va.

297, 91 S.E. 135 (1917). Virginia courts have consistently rejected efforts to portray the debtor-

creditor relationship as a fiduciary relationship that would lower the bar for lender liability. See,

e.g., Daisy J., Inc. v. First Bank & Trust Co., 50 Va. Cir. 596 (Va. Cir. Ct. Oct. 30 1998) (County

of Washington).

3. Virginia Consumer Protection Act

There are no reported decisions of a Virginia court extending the protections afforded to

commercial loan transactions.

B. Recovery of Attorney Fees

Virginia generally adheres to the “American rule,” which provides that a prevailing party

ordinarily cannot recover attorney’s fees from a losing party. See W. Square, LLC v. Commc’n

Techs., Inc., 274 Va. 425, 433, 649 S.E.2d 698, 702 (2007). But a prevailing party may recover

reasonable attorney’s fees where such remedy is provided by contract as recognized in Mullins v.

Richlands Nat’l Bank, 241 Va. 447, 449, 403 S.E.2d 334, 335 (1991); upon a finding of fraud by

clear and convincing evidence as recognized in Prospect Dev. Co. v. Bershader, 258 Va. 75, 92,

515 S.E.2d 291, 301 (1999); as sanctions for violating Virginia Code§ 8.01-271.1, which is

Virginia’s equivalent to Rule 11 of the Federal Rules of Civil Procedure; or as otherwise

provided by statute. Examples of such fee-shifting statutes include the Virginia Consumer

Protection Act, Va. Code Ann. § 59.1-204(B); the Virginia Residential Landlord and Tenant Act,

Va. Code Ann. §§ 55-248.9, -248.10:1, -248.21, -248.22, -248.31; the Virginia UCC, Va.Code

Ann. § 8.2A-108 (providing fee shifting upon a finding of unconsionability); and Va. Code Ann.

§ 8.01-221.2 (providing fee shifting in certain actions for rescission of a deed, contract or other

instrument). Attorney’s fees must be demanded in accordance with Rule 3:25 of the Rules of the

Supreme Court of Virginia or the remedy is waived.

C. Statutes of Limitations

1. Applicable Periods of Limitations

Written contracts in Virginia are subject to a five-year limitations period, and oral or

implied contracts are subject to a three-year limitations period. Va. Code Ann. § 8.01-246. The

limitations period for an action on both negotiable and non-negotiable notes payable at a definite

time under Virginia law is six years from the accrual of the cause of action. Va. Code Ann. §

8.3A-118(a). The statute of limitations on demand notes is discussed in Section IV(G), supra.

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All actions for personal injuries and fraud are generally governed by a two-year

limitations period from accrual of the cause of action. Va. Code Ann. § 8.01-243(A) (subject to

stated exceptions). Where fraud, concealment or intentional misrepresentation prevents

discovery of a cause of action, the limitations period is one year from the date when such action

was discovered or should have been discovered. Va. Code Ann. § 8.01-243(C)(2). Actions for

injury to property are governed by a more generous five-year limitations period. Va. Code Ann.

§ 8.01-243(E). All actions for libel, slander, insulting words, and defamation are subject to a

one-year statute of limitations. Va. Code Ann. § 8.01-247.1.

Deeds of trust, mortgages, and other liens securing purchase money obligations are

subject to a ten-year limitations period from the date the secured obligation became due and

payable without regard to any acceleration terms. Va. Code Ann. § 8.01-241. This time period

may be extended by filing a certificate with the clerk of court in the jurisdiction wherein the

property is situated in the form provided under §§ 8.01-241.1 of the Virginia Code. Any deed(s)

executed pursuant to the foreclosure of any mortgage or the conveyance of any deed of trust

must be recorded in the appropriate jurisdiction within one year of the expiration of the

limitations period or such deeds are void. Va. Code Ann. § 8.01-241(C). Once the applicable

limitations period has run, any duly recorded liens securing such purchase money obligations

become unenforceable. Id.

Notwithstanding the foregoing, any deed of trust (other than a credit line deed of trust)

which does not state a date certain for its maturity, will not be enforced after twenty (20) years

from its date. Va. Code Ann. § 8.01-242. The statute of limitations may be extended as

described in the preceding paragraph. A credit line deed of trust without a stated maturity cannot

be enforced after forty (40) years from its date. Id.

Judgments rendered in the circuit courts of Virginia are subject to a limitations period of

twenty years from the date of such judgment, except that this period may be extended for an

additional twenty years in the manner provided under § 8.01-251 of the Virginia Code.

Judgments rendered in the general district courts are subject to a ten-year limitations period

pursuant to § 16.1-94.1 of the Virginia Code, except that such judgments may be docketed with

the clerk of the circuit court, in which event the judgment is treated the same as a circuit court

judgment under § 8.01-251 of the Virginia Code.

There are various statutory provisions for the suspension or tolling of the statutes of

limitations, the majority of which are set forth in § 8.01-229 of the Virginia Code. Upon the

taking of a nonsuit, the limitations period is tolled for a period of six months from the date such

nonsuit was granted, and the plaintiff may recommence the action within the greater of six

months or the expiration of the statute of limitations. Va. Code Ann. § 8.01-229(E)(3).

Execution or written affirmation of an accord tolls the accrual of a cause of action to the date of

the accord, and upon breach of such accord, the plaintiff may elect to sue upon the original

promise or the accord. Va. Code Ann. § 8.01-229(G). Infancy and incapacity at the time a cause

of action accrues generally tolls the limitations period until the disability is removed. Va. Code

Ann. § 8.01-229(A). Incapacity occurring after the accrual of the cause of action tolls the

limitations period from the time of incapacity until either (i) the disability is removed or (ii) a

27

fiduciary is appointed to manage the incapacitated person’s affairs. Va. Code Ann. § 8.01-

229(A)(2)(b). Death of either a would-be plaintiff or defendant tolls the limitations period for

one year from the qualification of a personal representative. Va. Code Ann. § 8.01-229(B).

2. Extension by Voluntary Payment

Other than the receipt of a payment of interest or principal on a demand note as outlined

in Section IV. G of this chapter, there are no statutes or reported decisions in Virginia which

provide that receipt of a payment tolls the running of the statute of limitations or extends the

period of limitations on a payment obligation and the weight of authority is contrary. See,e.g,

Guth v. Hamlett Associates, 230 Va. 64, 331 S.E.2d 558 (1985).

3. Use of Time-Barred Claim as a Defense

The law in Virginia is not settled on this issue. But this much is clear: pursuant to

Virginia’s statutory recoupment scheme, Va. Code Ann. § 8.01-422, if a defendant asserts a true

claim in recoupment in the form of an equitable plea, the plaintiff is denied the benefit of any

legal defenses to the defendant’s equitable plea of recoupment, including the statute of

limitations defense. See Cummings v. Fulghum, 261 Va. 73, 80, 540 S.E.2d 494, 498

(2001). This rule has potentially harsh consequences because Virginia’s recoupment statute

permits a defendant to recover an amount in excess of plaintiff’s demand. Id. at 80 n.3, 540

S.E.2d at 498 n.3. The procedural device used to assert a claim in recoupment is likely of great

consequence; an equitable plea in recoupment would invoke the benefit of the statute while a

counterclaim asserting the same matter presumably would not. Moreover, the statute appears to

make a distinction between true claims in recoupment and mere setoff, though no Virginia

appellate court appears to have settled this issue. See Williams v. Kinser, No. 125461, 64 Va.

Cir. 128 (Va. Cir. Ct. Feb. 24, 2004) (County of Fairfax) (holding that § 8.01-422 of the Virginia

Code has no application to a plea of setoff as opposed to a claim in recoupment).

4. Effect on Collateral for Time-Barred Claim

Under Virginia law, the running of the statute of limitations on a note secured by a deed

of trust does not affect the creditor’s right to file an action on a covenant arising under the deed

of trust. See Holcomb v. Webley, 185 Va. 150, 37 S.E.2d 762 (1946). Consequently, the fact

that the statute of limitations has run on the note secured by the deed of trust is no defense to a

foreclosure sale or other legal action on the covenant. Rather, the action on the covenant is

governed by the limitations period stated in §§ 8.01-241 and -242 of the Virginia Code

(discussed in §m XI.C.1 of this chapter), and any remedies arising by virtue of a deed of trust

may be exercised within these limitations notwithstanding the fact that the statute of limitations

has run on the note secured.

5. Agreements to Extend or Shorten Limitations Period

The parties to a contract governed by the Virginia Commercial Code may agree to reduce

the limitations period to not less than one year. Va. Code Ann. § 8.2-725. Similarly, parties may

agree to shorten the limitations period governing common law contracts, so long as the contract

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limitations period is not “unreasonably short.” See Massie v. Blue Cross & Blue Shield of Va.,

256 Va. 161, 164, 500 S.E.2d 509, 511 (1998). A written promise not to plead the statute of

limitations is enforceable when made in furtherance of settlement. Va. Code Ann. § 8.01-232.

Unwritten promises not to plead the statute of limitations are generally unenforceable. Id.

However, a promisor is estopped from asserting the statute of limitations whenever the failure to

enforce a promise not to plead the statute of limitations would operate as a fraud on the

promisee, without regard to whether the promise is written or unwritten, or whether such promise

is made in furtherance of settlement negotiations. Id. Section 8.01-229 (G) of the Virginia Code

provides that a new promise of payment will extend the period of limitations

D. Choice of Law Provisions/Conflicts of Laws.

Virginia adheres to the traditional rule that a contract is governed by the law of the

jurisdiction where the contract was made. Virginia courts will enforce choice of law provisions

expressed in a contract if the state whose law is chosen bears a reasonable relationship to the

purpose of the contract and the application of the chosen law would not violate the policy of

Virgina See, e.g., Union Central Life Ins. Co. v. Pollard, 94 Va. 146, 26 S.E. 461 (1896). See

Hooper v. Mussolino, 234 Va. 558, 364 S.E.2d 207 (1988). See also Willard v. Aetna Casualty

& Surety Co., 213 Va. 481, 193 S.E.2d 776 (1973).

If a transaction is subject to the UCC, the applicable choice of law rules are found in

§ 8.1A-301 of the Virginia Code. Generally, the parties may agree that the law of any state or

nation shall control the rights and duties if that state bears a reasonable relationship to the

transaction. The law governing the perfection, the effect of perfection or nonperfection, and the

priority of security interests cannot be changed by agreement.

E. Forum Selection and Venue Selection Provisions.

Virginia has adopted the modern rule that forum selection clauses are prima facie value

unless they are unfair or unreasonable, or affected by fraud or unequal bargaining power. See

Paul Business Systems, Inc. v. Canon U.S.A., Inc., 240 Va. 337, 397 S.E.2d 804 (1990).

F. Jury Trial Waivers.

Virginia courts will uphold a contractual provision waiving the right to a jury trial in a

civil action. See Azalea Drive-In Theater, Inc. v. Sargoy, 215 Va. 714, 214 S.E.2d 131 (1975).

G. Arbitration Agreements

Virginia is one of thirty-two jurisdictions to adopt the Uniform Arbitration Act. Under

the Act, written agreements to submit “any existing controversy” to arbitration is “valid,

enforceable and irrevocable.” Va. Code Ann. § 8.01-581.01. Upon the institution of a civil

action in Virginia, any party may tender an agreement to arbitrate and move the court for an

order directing the parties to submit the matter to arbitration. Va. Code Ann. § 8.01-581.02. If

the non-moving party denies the validity of an agreement to arbitrate, the court “shall proceed

summarily to the determination of the issue of the existence of an agreement.” Id. An

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arbitration award may be vacated within 90 days upon a finding by a court that the arbitration

proceedings suffered from any of the deficiencies enumerated in § 8.01-581.010 of the :Virginia

Code. Under Virginia Code § 8.01-262.1, agreements to arbitrate certain construction projects in

Virginia must identify Virginia as the arbitration forum.

H. Pre-Judgment Remedies

There are several pre-judgment remedies in Virginia for the protection of a plaintiff’s

interests during the pendency of litigation. In an action for detinue, a claimant may petition for

pretrial seizure of the personal property placed at issue in the litigation. Va. Code Ann. § 8.01-

114. Such seizure must be secured by a bond whose value is at least twice the estimated fair

market value of the property. Va. Code Ann. § 8.01-115. A defendant may have possession of

the property returned by posting an identical bond. Va. Code Ann. § 8.01-116.

Under § 8.01-533 of the Virginia Code, prejudgment attachment may be had of a

defendant’s assets upon a showing of any of the grounds enumerated in § 8.01-534 of the

Virginia Code, (e.g. defendant is a foreign corporation or not a Virginia resident, the defendant

or its property is absconding or being removed from Virginia, etc.). The form of a petition for

attachment is prescribed under § 8.01-537 of the Virginia Code, and a sufficient bond must be

posted as security for the attachment at the time of filing the petition for attachment pursuant to

§ 8.01-537.1 of the Virginia Code. Where the object of the attachment is real property, notice of

such attachment may be provided by filing a memorandum with the clerk of court in the

jurisdiction wherein such property is situated in the manner provided under § 8.01-268 of the

Virginia Code. Where specific real property is the object of litigation, a memorandum of lis

pendens may be recorded pursuant to § 8.01-268 of the Virginia Code without first seeking

prejudgment attachment.

Preliminary injunctive relief is available under circumstances to freeze the status quo

during the pendency of litigation. Va. Code Ann. § 8.01-620 et seq. The Supreme Court of

Virginia has acknowledged that injunctive relief is an “extraordinary remedy, available only in

equity,” and that such relief is only available upon a showing that the plaintiff would “suffer

irreparable harm if the injunction were not granted and that he did not have any adequate remedy

at law.” See Wright v. Castles, 232 Va. 218, 224, 349 S.E.2d 125, 129 (1986). Beyond this

limited guidance, neither the Court nor the General Assembly has specifically identified the

plaintiff’s burden in seeking preliminary injunctive relief. Many circuit courts confronted with a

petition for preliminary injunctive relief have employed the federal standard. See, e.g., Newell

Indust. Corp. v. Lineal Techs., Inc., No. CH96-439, 43 Va. Cir. 412, 413 (Va. Cir. Ct. Oct. 2,

1997) (City of Roanoke) (following Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189

(4th Cir. 1977)). However, the federal “balancing of the hardships” test was recently abrogated

in part by the Supreme Court of the United States’ opinion in Winter v. Natural Res. Def.

Council, Inc., 555 U.S. 7 (2008), and the impact of this decision on Virginia law is as yet

undetermined.

Virginia courts are empowered to appoint special receivers in appropriate cases in the

manner provided under Va. Code Ann. § 8.01-591 et seq.

30

I. Judgments

1. Confession of Judgment

Agreements to confess judgment are valid and enforceable in Virginia pursuant to § 8.01-

432 et seq., of the Virginia Code, which will be strictly construed. Any bond, note or other

evidence of debt providing for confession of judgment must contain a conspicuous notice of

confession of judgment set forth on the face of the instrument in accordance with § 8.01-433.1 of

the Virginia Code.

In the instrument or contract evidencing an obligation, the debtor may appoint an

attorney-in-fact to confess judgment in the clerk's office of a designated Virginia court. Unless

the instrument is a note or bond, the signature of the debtor must be notarized. The creditor may

substitute an attorney-in-fact by recording an instrument in the court where judgment may be

confessed. If the instrument is a note or bond and it contains a notice of the right to substitute an

attorney-in-fact, no separate notice of substitution is required. In all other cases, including that

of a guarantee, notice to the debtor or guarantor is required within ten (10) days after the

recording of a substitution of attorney-in-fact. Va. Code Ann. § 8.01-435.

When judgment is confessed by an attorney-in-fact for the debtor, the clerk of court will

cause a copy of the judgment order to be sent to the debtor. Within twenty-one days of notice,

the debtor may move to set aside a confessed judgment under § 8.01-433 of the Virginia Code on

any ground that would constitute an adequate defense or setoff. Upon confession of judgment,

the clerk is required to record a lien that becomes effective immediately, except where credit was

extended for personal, family or household purposes, in which case no lien is effective until the

expiration of the twenty-day period provided under § 8.01-433 of the Virginia Code. Va. Code

Ann. § 8.01-434.

2. Interest on Judgments

Both pre-judgment and post-judgment interest may be awarded by a court upon entry of

any verdict, judgment or decree. Va. Code Ann. § 8.01-382. The judgment rate of interest is six

percent, unless the contract or instrument fixes a higher rate of interest, in which case the higher

rate is applied. Va. Code Ann. § 6.2-302. Negotiable instruments are excluded from Code

section 8.01-382, and interest on such instruments is instead governed by § 8.3A-112 of the

Virginia Code.

3. Survival of Judgments

A judgment entered by a Virginia court can be enforced for a period of twenty (20) years.

Va. Code Ann. § 8.01-251.

4. Execution and Enforcement of Judgments

The basic device for levying a debtor’s property to satisfy a judgment for money damages

is the writ of fieri facias issuing from the clerk of court. Va. Code Ann. § 8.01-466.

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Alternatively, a writ of possession may issue upon judgments for specific personal property. Va.

Code Ann. § 8.01-470. A creditor may conduct debtor’s interrogatories under oath to ascertain

the nature and location of the debtor’s assets. Va. Code Ann. §§ 8.01-506 et seq.

The debtor’s property in the hands of a third party may be levied upon by issuing a

suggestion in garnishment in the manner provided by §§ 8.01-511 et seq. of the Virginia Code.

A charging order may be issued against the transferable interest of a debtor in a limited liability

company or partnership in the manner provided by §§ 13.1-1041.1 and 50-73.46:1 of the

Virginia Code, respectively. A charging order entitles the judgment creditor to any distributions

from such interests, and constitutes a lien against the debtor’s transferable interest.

Virginia homestead, poor debtor’s and wage exemptions are provided by Title 34 of the

Virginia Code. For judgments against a deceased debtor, additional exemptions are provided for

surviving family members pursuant to §§ 64.2-309 et seq. of the Virginia Code.

5. Assignment of Judgments

It is generally the rule that judgments are assignable under Virginia law. See Selden v.

Williams, 108 Va. 542, 549–550, 62 S.E. 380, 382 (1908). An assignee of a judgment in Virginia

is subject to all defenses available to the judgment debtor at the time of the assignment, without

regard to whether the assignee had notice of such defenses. Id. An assignee’s interest in a

judgment is subject to the maxim of nemo dat, i.e. an assignee “can take no rights which his

assignor did not possess, and generally make no defense he could not make.” Id. at 550, 62 S.E.

at 382. Assignment of judgments may be recorded in the manner provided by § 8.01-452 of the

Virginia Code.

6. Enforcement of Foreign Judgments

The Virginia General Assembly has adopted the Uniform Enforcement of Foreign

Judgments Act, Va. Code Ann. §§ 8.01-465.1 et seq. Upon compliance with the procedures

provided under this uniform act, a judgment docketed with the clerk of court “has the same effect

and is subject to the same procedures” as judgment issuing from a Virginia court. Va. Code

Ann. § 8.01-456.2. The Virginia General Assembly has also adopted the Uniform Foreign

Country Money-Judgments Recognition Act, Va. Code Ann. §§ 8.01-465.6 et seq., as well as the

Uniform Foreign-Money Claims Act, Va. Code Ann. §§ 465.14 et seq. for judgments rendered

outside the United States and judgments denominated in foreign currencies, respectively.

XII OTHER LAWS OF INTEREST

A. Virginia Environmental Laws and Regulations

Virginia has extensive laws and regulations governing environmental matters. Unlike

some states, Virginia does not confer upon itself a super-priority lien to enforce the state's right

to environmental cleanup costs.

Documents

VIRGINIA COMMERCIAL LENDING LAW - … COMMERCIAL LENDING LAW A Guide for Commercial Lenders and Businesses Wilson R. Trice, Director ThompsonMcMullan, P.C. Richmond, Virginia TABLE