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Docket Number

Record No. 970924, 970946

Attorney(S)

Carl F. Bowmer (Christian Barton, on briefs), for appellant. (Record No. 970924) Michael F. Urbanski; Frank K. Friedman (M. Caldwell Butler; Woods, Rogers Hazlegrove, on brief), for appellee. (Record No. 970924) William K. Lewis (Beale, Balfour, Davidson Etherington, on brief), for appellant. (Record No. 970946) Michael F. Urbanski; Frank K. Friedman (M. Caldwell Butler; Woods, Rogers Hazlegrove, on brief), for appellee. (Record No. 970946)

Judges

Lawrence L. Koontz

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Smart Summary

Virginia Housing Development Authority v. Fox Run Limited Partnership (Supreme Court of Virginia, Feb. 27, 1998)

Factual and Procedural Background

On November 23, 1987, the Virginia Housing Development Authority (VHDA) loaned Fox Run Limited Partnership (Fox Run) a total of $11,737,000 evidenced by three identical notes secured by a single deed of trust to finance construction of a 274-unit multi-family housing project and the acquisition of certain personal property (primarily appliances).

The notes included (1) an acceleration clause allowing VHDA, upon default, at its option to declare the entire unpaid principal and accrued interest due immediately, and (2) a provision that a prepayment fee (6%) could, at VHDA's option, become due and payable if VHDA exercised its acceleration right, and that any such fee would be secured by the deed of trust. The deed of trust described collateral to include real property and "all items of personal property ... now or hereafter used on or in connection with the Development," and contained waiver and delay provisions regarding notice and exercise of options.

Following default, VHDA provided notices of election to accelerate the debt (December 4, 1991, and again December 10, 1992 after the bankruptcy stay was lifted). Fox Run filed for bankruptcy on December 10, 1991, which stayed foreclosure; the stay was later terminated by the bankruptcy court. After failed restructuring negotiations, VHDA directed the substitute trustee to foreclose. The trustee advertised a foreclosure sale to be held June 18, 1993; the advertisement stated the trustee would offer "all of the property with any improvements thereon," referred readers to the deed of trust for a particular description, and stated that "The Real Property shall be conveyed by special warranty deed and the Personal Property shall be conveyed by Bill of Sale."

Upon Fox Run's request for payoff figures, VHDA computed and communicated (June 11, 1993) a payoff that included a 6% prepayment fee of $698,104.59, bringing VHDA's calculated balance to $13,576,596.85. Fox Run questioned whether a prepayment penalty would be required by the foreclosure; VHDA responded that the documents authorized such a fee but that VHDA might not include it in any bid. VHDA ultimately was the sole bidder at the foreclosure sale and bid an amount that included the prepayment fee. After the sale, VHDA paid Fox Run $110,136.85 as the surplus by VHDA's subsequent calculation.

Fox Run later claimed certain personal property (appliances) remained its property and that VHDA and the trustee improperly sold or transferred that property. On August 27, 1993 Fox Run filed a motion for declaratory judgment asserting (1) VHDA had not properly exercised its option to impose the prepayment fee (or had not done so timely) and therefore was not entitled to the fee, creating an excess from the foreclosure sale in Fox Run's favor, and (2) the trustee had not properly sold Fox Run's personal property. The chancellor found VHDA had not made the election to impose the prepayment fee prior to foreclosure and that the trustee's advertisement did not disclose the sale of personal property; the chancellor entered summary judgment for Fox Run in the amounts of $698,104.59 (prepayment fee) and $113,921.28 (conversion of personal property). VHDA and the trustee appealed to the Supreme Court of Virginia; the Supreme Court reversed and entered final judgment for VHDA and the trustee.

Legal Issues Presented

Whether the note-holder/purchaser (VHDA) was entitled to collect the prepayment fee provided for in the notes secured by the deed of trust as part of the debt collected at foreclosure.
Whether the trustee's advertisement of the foreclosure sale adequately disclosed that certain personal property encumbered by the deed of trust would be sold along with the real property.

Arguments of the Parties

VHDA's Arguments

VHDA contended the chancellor erred in finding VHDA had not elected to impose the prepayment fee; evidence showed McKellar (VHDA's General Counsel) and other VHDA officers made a group decision to include the prepayment fee in "the maximum amount owed" and that VHDA thereafter communicated the calculated fee to Fox Run (June 11, 1993).
VHDA argued that the notes and deed of trust constitute a single contract for construction purposes and, since the deed of trust contains waivers of notice and delay provisions, those provisions apply to the notes as well; therefore Fox Run waived any right to notice of VHDA's election to assess the fee as part of the debt to be collected at foreclosure.
VHDA maintained it was under no obligation to bid the full amount of the debt at foreclosure and that its initial statement that it might not include the prepayment fee in a bid did not negate its election to include the fee.
Regarding the sale advertisement, VHDA and the trustee asserted the advertisement substantially complied with Code § 55-59.3 because it referred to the deed of trust for a description and explicitly stated personal property would be conveyed by bill of sale.

Fox Run's Arguments

Fox Run asserted VHDA was not entitled to the prepayment fee because VHDA had not properly exercised its option to impose the fee or had not done so in a timely manner — specifically arguing that any election to impose such a fee should have been included in notices of acceleration or otherwise timely communicated.
Fox Run contended the trustee's advertisement failed to disclose that freestanding appliances and other personalty in the apartment units owned by Fox Run were subject to the foreclosure sale, and therefore the trustee did not properly sell Fox Run's personal property.
Fox Run relied on authority that a notice of acceleration must be clear and unequivocal (citing Florence v. Friedlander) and argued, by analogy or implication, that such clarity was required here for the fee to be imposed as part of the debt collected at foreclosure.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jim Carpenter Company v. Potts, 255 Va. 147, 495 S.E.2d 828 (1998)	That deeds of trust and their underlying notes are "separate and distinct" documents.	The Court recognized the general proposition but then explained that, in appropriate circumstances, contemporaneous instruments may be construed together; it used the concept as a starting point for analysis of the relationship between the notes and deed of trust in this case.
Richmond Postal Credit Union v. Booker, 170 Va. 129, 195 S.E. 663 (1938)	That notes and contemporaneous written agreements executed as part of the same transaction will be construed together as forming one contract, so long as they do not contradict each other.	The Court applied this rule to construe the notes and the deed of trust as representing one contract, permitting application of waiver and delay provisions in the deed of trust to the notes.
Florence v. Friedlander, 209 Va. 520, 165 S.E.2d 388 (1969)	The principle that a notice of acceleration must be clear and unequivocal that the creditor is exercising its option to accelerate.	The Court acknowledged the rule but held that inclusion of the prepayment fee was not required to be part of the notice of acceleration because acceleration of principal is a condition precedent to assessing the fee; the Court therefore rejected Fox Run's argument that notice of acceleration needed to explicitly state the prepayment fee would be imposed at foreclosure.
Deep v. Rose, 234 Va. 631, 364 S.E.2d 228 (1988)	The holding that time periods for advertising foreclosure sales contained in Code § 55-59.2 are mandatory (as to timing requirements).	The Court explained that Deep v. Rose's holding was limited to timing under § 55-59.2 and that the present case concerns content under § 55-59.3; the Court therefore did not extend Deep to make content requirements equally mandatory.
Bailey v. Pioneer Federal Savings and Loan Association, 210 Va. 558, 172 S.E.2d 730 (1970)	The principle that, for advertisement content in foreclosure sales, substantial compliance is sufficient so long as the rights of the parties are not materially affected.	The Court applied the substantial-compliance principle to hold that the trustee's advertisement — which referred to the deed of trust for a description and stated personal property would be conveyed by bill of sale — sufficiently informed parties and prospective bidders that personal property would be sold.

Court's Reasoning and Analysis

The Court's analysis proceeded in two main parts corresponding to the two central issues: (A) whether VHDA properly elected to impose and collect the prepayment fee as part of the debt at foreclosure, and (B) whether the trustee's advertisement adequately disclosed sale of personal property.

A. Prepayment Fee — Election, Notice, and Contractual Waiver

The Court first treated the notes and the deed of trust as a single contract for interpretation purposes because they were contemporaneous instruments executed as part of the same transaction and did not contradict one another (citing Richmond Postal Credit Union). This permitted application of deed-of-trust provisions to the notes where appropriate.
The Court reviewed evidence that VHDA officers (McKellar, with others) decided to include the prepayment fee in the "maximum amount owed" and that VHDA computed and communicated the fee to Fox Run on June 11, 1993. On that factual basis, the Court concluded VHDA had elected to exercise its option to assess the prepayment fee as part of Fox Run's debt prior to foreclosure.
Addressing Fox Run's contention that election to impose the fee had to be stated in the notice of acceleration (relying on Florence's rule that notices of acceleration must be clear and unequivocal), the Court held that the prepayment fee is not part of the principal and interest that are the immediate subject of an acceleration notice. Instead, acceleration of the principal debt is a condition precedent to the ability to assess the prepayment fee; therefore VHDA was not required to include notice of the prepayment fee in the acceleration notice.
Because the notes did not themselves require notice of an election to assess the fee, and because the deed of trust contained explicit waiver and delay provisions (including a waiver of notice of election of options and a provision that delay in exercising rights would not operate as a waiver), the Court held those deed-of-trust provisions could be applied to the notes (under the single-contract construction) and thus Fox Run waived any right to notice of VHDA's election to assess the fee as part of the foreclosure debt.
The Court also explained that VHDA's statements that it might not include the fee in a bid, and its initial bid plan to include only part of the fee, did not negate VHDA's right to include the fee or amount ultimately bid; VHDA had no obligation to bid the full debt amount at foreclosure.

B. Advertisement of Sale — Statutory Content and Substantial Compliance

The Court examined Code § 55-59.3, which prescribes required contents for an advertisement of sale under a deed of trust (description of property, street address or general location, time/place/terms of sale, trustee's name(s), and contact information for inquiries).
The Court distinguished statutory timing requirements under Code § 55-59.2 (which it had previously held mandatory in Deep v. Rose) from content requirements under § 55-59.3. It stated that while timing is mandatory, prior cases support that substantial compliance suffices for advertisement content so long as parties' rights are not materially affected (citing Bailey).
Applying that standard, the Court found the trustee's advertisement — which referenced the deed of trust for a particular description of property and expressly stated the personal property would be conveyed by bill of sale — adequately notified Fox Run and potential bidders that personal property used in connection with the project would be sold. The Court therefore concluded the advertisement substantially complied with § 55-59.3.

Holding and Implications

Holding: The Supreme Court of Virginia reversed the chancellor's judgment and entered final judgment for VHDA and the trustee. The Court concluded (1) VHDA had elected to exercise its option to assess the prepayment fee as part of the debt to be collected at foreclosure and Fox Run had waived any right to notice of that election through the combined application of the notes and the deed of trust, and (2) the trustee's advertisement of the foreclosure sale substantially complied with Code § 55-59.3 with respect to disclosure of personal property.

REVERSED AND FINAL JUDGMENT FOR VHDA AND THE TRUSTEE.

Implications: As a direct effect of the Court's decision, the chancellor's awards to Fox Run for the prepayment fee ($698,104.59) and for conversion of personal property ($113,921.28) were vacated, and VHDA and the trustee prevailed on the appealed issues. The Court's reasoning stresses (a) that contemporaneous notes and deeds of trust may be construed as one contract where they are consistent, permitting the application of waiver/delay provisions across instruments, (b) that acceleration of principal operates as a condition precedent to assessment of a contractual prepayment fee and need not be separately stated in the notice of acceleration, and (c) that substantial compliance with the statutory content requirements for foreclosure-sale advertisements is sufficient where the advertising does not materially prejudice parties' rights. The opinion resolves these parties' disputes on the record presented; the Court did not announce that it was establishing a novel or broader rule beyond the application of existing contract and foreclosure-advertisement principles discussed above.

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VIRGINIA HOUSING DEVELOPMENT AUTHORITY v. FOX RUN LIMITED PARTNERSHIP STUART A. SIMON, TRUSTEE

Creditors' Rights — Foreclosure Sales — Real Property — Deeds of Trust — Prepayment Fees — Personal Property Sales — Advertisements

Because the chancellor erred in finding that prior to a foreclosure the public housing authority had not made an election to impose a prepayment fee authorized under the deed of trust on a multi-family housing project, and the trustee's advertisement of the sale substantially complied with the requirements of Code § 55-59.3, the trial court's judgment is reversed and final judgment is entered on appeal.

The Virginia Housing Development Authority (VHDA) made a loan to a partnership to finance construction of a 274-unit housing project and acquisition of appliances for units. The notes secured by the deed of trust provided that upon default the entire obligation would become due, and that the authority had the right to impose a prepayment fee. After default, VHDA gave notice of its election to exercise its right of acceleration, declaring the entire principal, accrued interest and late charges to be immediately due and payable. It reserved its right to "any remedies . . . at law [or] in equity, under the Notes [and] the Deed of Trust." The trustee gave notice that a foreclosure sale would be held. The published advertisement of the sale stated that the trustee would "offer for sale . . . all of the property with any improvements thereon. . . . Reference is made to the . . . Deed of Trust for a more particular description." The notice further provided that "[t]he Real Property shall be conveyed by special warranty deed and the Personal Property shall be conveyed by Bill of Sale." In response to a request for a pay-off figure, VHDA calculated the balance due, including a 6% prepayment fee of $698,104.59, and communicated the figures by letter. The parties had a series of communications about the amount of the indebtedness and the election to implement a prepayment fee. A dispute arose concerning personal property on the premises of the complex. The partnership filed a motion for declaratory judgment asserting that VHDA is not entitled to the prepayment fee because it had not properly exercised its option to assess such a fee, and alleging the trustee had not "properly sold" the personal property belonging to the partnership. The chancellor found that "the evidence fails to establish that prior to foreclosure at auction that VHDA or anyone with the authority to do so . . . [made] an election to impose [the prepayment fee]." The chancellor further found that "[t]he Trustee did not advertise that any personal property . . . located on the premises was to be subject to the foreclosure sale." The chancellor granted summary judgment for the partnership, awarding it $698,104.59 relating to the prepayment fee and $113,921.28 for conversion of personal property. VHDA and the trustee appeal.

1. Although deeds of trust and their underlying notes are separate and distinct documents, in appropriate circumstances notes and contemporaneous written agreements executed as part of the same transaction will be construed together as forming one contract.

2. So long as neither document varies or contradicts the terms of the other, terms of one document which clearly contemplate application of terms in the other may be viewed together as representing the complete agreement of the parties, and this is the case with respect to the notes and deed of trust at issue here.

3. Here nothing contained within the express language of the notes or the deed of trust requires VHDA to provide notice to the partnership of its election to impose the prepayment fee at foreclosure.

4. A notice of acceleration must be clear and unequivocal that the creditor is exercising its option to accelerate.

5. The fact that the notes and deed of trust expressly provide for the prepayment fee to be included in the indebtedness secured by the deed of trust does not make the prepayment fee a part of the principal and interest subject to notice of acceleration. Here it is clear that acceleration of the principal debt is a condition precedent to VHDA's ability to exercise its option to assess the prepayment fee following a default. Accordingly, VHDA was not required to include notice of its election to assess the prepayment fee as a part of the debt owed upon notice of acceleration of the principal debt.

6. Since in this case the notes and the deed of trust represent a single contract and there is no express provision within the notes requiring notice of VHDA's election to assess the prepayment fee, the waiver and delay provisions of the deed of trust may be applied to the notes without varying or contradicting any terms therein. Thus, the partnership waived the right to notice of VHDA's election to assess the fee as part of the debt to be collected at foreclosure.

7. Code § 55-59.3 sets forth required contents for an advertisement of sale under a deed of trust, including a description of the property to be sold, street address, the time, place and terms of sale, the name or names of the trustee or trustees, and the name, address and telephone number of persons able to respond to inquiries concerning the sale.

8. Time periods for advertising foreclosure sales contained in Code § 55-59.2 are mandatory. In other matters concerning advertisement of foreclosure sales under deeds of trust, substantial compliance is sufficient so long as the rights of the parties are not affected in any material way.

9. Here the notes and deed of trust clearly make reference to the real and personal property as collateral for the loan. The advertisement refers to the deed of trust for a description of the property to be sold and expressly states that the personal property will be conveyed by bill of sale. This was adequate notice to the partnership and to any potential third-party bidder that the personal property "used on or in connection with" this housing project would be sold as part of the foreclosure. Accordingly, the trustee's advertisement of the sale substantially complied with the requirements of Code § 55-59.3.

JUSTICE KOONTZ delivered the opinion of the Court.

These two appeals arise from a foreclosure sale of a multi-family housing project. In the first appeal, we consider whether the note-holder and purchaser at that sale is entitled to collect the "prepayment fee" provided for by the terms of the notes secured by the deed of trust. The second issue we consider, raised in both appeals, is whether the advertisement of the foreclosure sale by the trustee adequately disclosed that certain personal property, also encumbered by the deed of trust, was to be sold along with the real property.

BACKGROUND

The parties do not dispute the principal facts. On November 23, 1987, the Virginia Housing Development Authority (VHDA) made a loan, evidenced by three notes in the total amount of $11,737,000, to Fox Run Limited Partnership (Fox Run) to finance the acquisition of land and the construction thereon of a 274-unit multi-family housing project in Prince William County. Additionally, the acquisition of certain items of personalty, generally consisting of appliances for individual units, was also financed by the loan.

The three notes, secured by a single deed of trust, are identical in their terms. Relevant to this appeal, each note provides as follows:

D. Upon failure of [Fox Run] to perform or comply with any of the terms or conditions of this Note or upon the occurrence of any event of default under the Deed of Trust hereafter described securing this Note, the entire unpaid principal hereof, together with all accrued interest thereon, shall, at the option of [VHDA], become at once due and payable (and no failure by [VHDA] to exercise such option shall be deemed or construed as a waiver of the right to exercise the same in the event of any subsequent or continuing default or breach).

. . . .

F. . . . In the event that [VHDA] shall exercise its right under Section D hereinabove . . ., a prepayment fee shall, at the option of [VHDA], become at once due and payable. . . . Any prepayment fee which shall become due and payable under this Section F shall be secured by the Deed of Trust. . . .

In addition to the real property, the deed of trust describes the property encumbered thereby as "equipment and fixtures . . . and all items of personal property . . . now or hereafter used on or in connection with the Development." (Emphasis added.) It further provides that "[t]he Secured Indebtednesses consist of . . . [a]ll obligations under three certain deed of trust notes of even date . . . [and] [a]ll other indebtednesses of [Fox Run] to [VHDA]." (Emphasis added.)

The deed of trust provides that upon default, as defined therein, acceleration of "all of the Secured Indebtednesses shall, at the option of [VHDA], become at once due and payable" and provides for the sale of all secured property by the trustee to satisfy the debt. The deed of trust also contains waivers of delay and notice:

No delay by [VHDA] or the Trustees in exercising any right or remedy hereunder or otherwise afforded by law shall operate as a waiver thereof or preclude the exercise thereof during the continuance of any default hereunder.

. . . .

Unless required by law, notice of the exercise of any option granted to [VHDA] herein need not be given, and [Fox Run] hereby waives, to the extent permitted by law, any notice of the election of [VHDA] to exercise any such option.

On December 4, 1991, following default by Fox Run on the notes, VHDA gave notice by letter to Fox Run of its election to exercise its right of acceleration under the notes and the deed of trust, declaring the entire principal, accrued interest and late charges to be immediately due and payable. While not addressing the prepayment fee, VHDA expressly reserved its right to "any remedies . . . at law [or] in equity, under the Notes [and] the Deed of Trust."

Fox Run filed a bankruptcy petition on December 10, 1991, staying any effort at foreclosure by VHDA. On November 6, 1992, the bankruptcy court terminated the automatic stay, and, on December 10, 1992, VHDA again informed Fox Run that it had exercised its option to accelerate the debt. Again, there was no express mention of the prepayment fee in this notice, but the same reservation of remedies was made.

Fox Run and VHDA entered into negotiations in an effort to restructure the loan and cure the default. When the negotiations failed, VHDA directed Stuart A. Simon, the substitute trustee under the deed of trust (the trustee), to institute foreclosure proceedings. The trustee notified Fox Run on May 26, 1993 that the foreclosure sale would be held on June 18, 1993. The published advertisement of the sale stated that the trustee would "offer for sale . . . all of the property with any improvements thereon. . . . Reference is made to the . . . Deed of Trust for a more particular description." The notice further provided that "[t]he Real Property shall be conveyed by special warranty deed and the Personal Property shall be conveyed by Bill of Sale." (Emphasis added.)

Fox Run then began considering the possibility of paying off the loan or of bidding on the property at the foreclosure sale, and requested that VHDA supply it with the payoff terms. In response to this request, VHDA calculated the balance due on the notes to be $13,576,596.85, including a 6% prepayment fee of $698,104.59. These figures, setting out the amount of the principal, interest, late charges, legal fees and the prepayment fee in express terms, were communicated to Fox Run by letter on June 11, 1993.

By letter dated June 16, 1993 and delivered via telefacsimile, Fox Run notified VHDA of the "contingency" that Fox Run might submit a bid at the foreclosure sale, and asked VHDA to confirm that "[n]o prepayment penalty will be required by the foreclosure." Fox Run further asked VHDA to confirm" [t]he amount required by VHDA to discharge its indebtedness in full," setting out the amount of principal and interest, but excluding the prepayment fee, late charges, and legal fees which had been previously supplied by VHDA.

On the same day, VHDA responded to Fox Run. It confirmed the amount of principal and interest owed, and expressly noted that late charges, legal fees, and costs incident to the sale had not been included in Fox Run's inquiry, referring Fox Run to the June 11, 1993 letter. With respect to the prepayment fee, VHDA stated "[t]he deed of trust notes representing the outstanding debt clearly provide that a prepayment [fee] may be required upon acceleration by [VHDA]. However, this is not to say that [VHDA] will necessarily include, in any bid it may put forward, all or any part of the prepayment [fee]."

VHDA, in expectation that Fox Run would have funds available in its reserve accounts to pay a possible deficiency resulting from foreclosure, initially prepared its foreclosure bid without including the full prepayment fee. However, after reviewing this bid on the morning of the sale, VHDA decided to increase its bid to include the full amount it had calculated was due, including the prepayment fee. VHDA was the sole bidder at the foreclosure sale, submitting a bid of $13,670,000, the amount VHDA had calculated was the whole indebtedness including the prepayment fee.

The parties do not dispute that VHDA failed to consider certain credits due Fox Run for its reserve accounts or that there was a slight deficiency between VHDA's bid and the actual amount due under VHDA's calculations. Accordingly, following the sale VHDA determined that Fox Run was due $110,136.85 from the sale after all debts and fees were satisfied, and paid that sum to Fox Run.

On August 16, 1993, Fox Run informed VHDA that it claimed ownership of certain "personal property remaining on the premises, including appliances and other items," and submitted an inventory of those items. On August 25, 1993, VHDA responded that the personal property "was transferred [to VHDA] by the trustee as part of the trustee's sale." After Fox Run disputed VHDA's ownership of the personal property located on the premises, VHDA provided Fox Run with a copy of the bill of sale which transferred to VHDA "all right title and interest to the personal property."

The personal property consisted generally of appliances such as stoves, refrigerators, washers, and dryers used in the individual apartments. The parties do not dispute that certain other appliances used at Fox Run were the property of Fralin Waldron, the developer that had formed the Fox Run Partnership. Fralin Waldron was permitted to remove its appliances following the foreclosure sale.

On August 27, 1993, Fox Run filed a motion for declaratory judgment against VHDA and the trustee asserting that VHDA is not entitled to the prepayment fee because VHDA "has not properly exercised its option to impose a prepayment [fee] or done so in a timely manner." Thus, the pleading asserts that the sale price of the property at foreclosure exceeded the indebtedness secured by the lien of the deed of trust by the amount of the prepayment fee. Continuing, the pleading further asserts that the trustee had not "properly sold" the personal property belonging to Fox Run. Accordingly, Fox Run sought a declaratory judgment that VHDA is not entitled to the prepayment fee, creating an excess from the foreclosure sale in that amount in Fox Run's favor, and that title to the personal property remains vested in Fox Run.

A further claim concerning pre-foreclosure rents was settled by the parties and is not a part of this appeal.

VHDA and the trustee responded to the suit with general denials. Extensive discovery proceedings followed, with agents and employees of the parties being deposed.

Nina B. Nolley, a VHDA employee, testified at her deposition that the prepayment fee had not been calculated until Fox Run requested payoff figures on June 9, 1993. She further testified, however, that the prepayment fee "always existed in the [loan] documents," and that she always included prepayment fees in her loan calculations if one was provided for in the loan documents. Nolley testified that in every instance that she could recall, VHDA assessed a prepayment fee for any payoff that was subject to such a fee.

J. Judson McKellar, Jr., General Counsel for VHDA, and Paul M. Brennan, Senior Counsel for VHDA, both testified that following Fox Run's request for payoff figures, McKellar, whose responsibilities at VHDA included such matters, determined that the prepayment fee would be included as part of Fox Run's debt. According to McKellar, the decision to impose the prepayment fee was "a group decision . . . involv[ing] Hunter Jacobs [Deputy Director of Housing Management], Paul Brennan, myself . . . Nina Nolley . . . [and] . . . later . . . Conrad Sterrett."

Sterrett, the Director of Finance for VHDA, actually prepared VHDA's foreclosure bid. He testified that in discussing the matter within VHDA, the prepayment fee "was owed us and therefore should be included in the maximum amount owed us." This, Sterrett testified, was the "[g]eneral philosophy of the finance division" of the VHDA.

The parties submitted the case to the chancellor on the depositions, stipulations of fact, and cross-motions for summary judgment. Following review of the evidence and upon written and oral argument of the parties, the chancellor issued a letter opinion. In that opinion, the chancellor found that "the evidence fails to establish that prior to foreclosure at auction that VHDA or anyone with the authority to do so . . . [made] an election to impose [the prepayment fee]." The chancellor further found that "[t]he Trustee did not advertise that any personal property of Fox Run located on the premises was to be subject to the foreclosure sale. . . . [N]o one (neither the parties nor interested outside bidders) had a clue from the newspaper advertisement as to what freestanding appliances or personalty in the apartment units was owned by Fox Run." Based upon these findings, the chancellor granted summary judgment for Fox Run, awarding it $698,104.59 as the excess of the foreclosure sale proceeds without the prepayment fee and $113,921.28 for the conversion of the personal property. We awarded appeals to both VHDA and the trustee.

We also accepted assignments of cross-error by Fox Run related to rulings by the chancellor on its claim for pre-judgment interest. Our resolution of the main issues of these appeals renders the assignments of cross-error moot.

DISCUSSION

VHDA contends that the chancellor erred in finding that prior to foreclosure it had not made an election to impose the prepayment fee. We agree. The evidence showed that McKellar, an officer of VHDA authorized to make such determinations, in consultation with other officers and employees made the election to exercise VHDA's option to assess the prepayment fee as part of "the maximum amount owed" by Fox Run, and not merely as a condition of avoiding foreclosure by prepayment. Following that determination, Nolley calculated the exact amount of the prepayment fee and this figure was communicated to Fox Run in the June 11, 1993 letter. At that time, VHDA clearly had elected to exercise its option to assess the fee as part of Fox Run's debt prior to foreclosure.

Since the notes precluded Fox Run from making payoff prior to ten years and four months after the first unit was rented, VHDA further contends that its election to assess the prepayment fee was clearly applicable to the debt to be collected by foreclosure. While the notes contain this limitation, it is apparent from the record that VHDA and Fox Run had entered into negotiations to restructure or compromise the debt after default and that the amount of the prepayment fee could have been included in such a negotiated payoff.

Fox Run concedes that the June 11, 1993 letter placed it on notice that VHDA would impose the prepayment fee as a condition or penalty of Fox Run's paying off the debt to avoid foreclosure. For purposes of this opinion, we will assume without deciding that neither VHDA's June 11, 1993 letter, nor its June 16, 1993 letter, was adequate notice of VHDA's intent to assess the prepayment penalty as a cost of foreclosure.

The fact that VHDA subsequently advised Fox Run that VHDA's foreclosure bid might not include the prepayment fee, and that VHDA initially had determined that it would include only a portion of the fee in its bid, is not relevant. VHDA was under no obligation to bid the full amount of the debt at the foreclosure sale, especially if, in its estimation, the debtor had assets that could satisfy any deficit remaining after the sale.

However, the determination that VHDA had elected to exercise its option to assess the prepayment fee does not resolve the dispositive issue presented by this appeal. This is so because that determination leaves unanswered the contention of Fox Run, as originally asserted in the motion for declaratory judgment, that VHDA's election was not "properly exercised . . . or done so in a timely manner." Therefore, we will assume that the chancellor's ruling contemplated that VHDA had not properly exercised its election because it had not notified Fox Run of that election with respect to foreclosure. Thus we must consider what duty, if any, VHDA owed under the notes or the deed of trust to give Fox Run notice of VHDA's intent to assess the prepayment fee as part of the debt to be collected by foreclosure.

[1-2] We begin by noting that deeds of trust and their underlying notes are "separate and distinct" documents. Jim Carpenter Company v. Potts, 255 Va. 147, 156 n.5, 495 S.E.2d 828, 833 n.5 (1998). However, in appropriate circumstances, we have recognized that "notes and contemporaneous written agreements executed as part of the same transaction will be construed together as forming one contract." Richmond Postal Credit Union v. Booker, 170 Va. 129, 134, 195 S.E. 663, 665 (1938) (citation omitted). So long as neither document varies or contradicts the terms of the other, terms of one document which clearly contemplate the application of terms in the other may be viewed together as representing the complete agreement of the parties. Id. Such is the case with respect to the notes and deed of trust at issue here, and, accordingly, we will construe these documents as representing one contract.

[3-4] Nothing contained within the express language of the notes or the deed of trust requires VHDA to provide notice to Fox Run of its election to impose the prepayment fee at foreclosure. Fox Run contends, however, that in order for VHDA to exercise its option to assess the prepayment fee as part of the debt to be collected at foreclosure, that election must have been included in the notices of acceleration or given within a reasonable time thereafter. Relying, in part, upon our decision in Florence v. Friedlander, 209 Va. 520, 523, 165 S.E.2d 388, 391 (1969), Fox Run correctly points out that a notice of acceleration must be clear and unequivocal that the creditor is exercising its option to accelerate. Thus, under the circumstances of the present case, Fox Run asserts that VHDA was required, but failed, to give Fox Run notice in clear and unequivocal terms in the notice of acceleration that the fee would be imposed at foreclosure. We disagree.

With respect to the question of timeliness. Fox Run asserts that VHDA's actions should be judged from the time of the first notice of acceleration immediately prior to Fox Run's filing of its bankruptcy petition in 1991. We disagree. Having filed for bankruptcy and received the benefit of the automatic stay imposed on the foreclosure action, Fox Run cannot now assert VHDA was nonetheless required to continue actively to pursue the foreclosure during that stay, other than through the normal procedures of the bankruptcy court. Moreover, our resolution of the notice issue renders any issue of timeliness moot.

While it is true that the notes and the deed of trust expressly provide for the prepayment fee to be included in the indebtedness secured by the deed of trust, this does not make the prepayment fee a part of the principal and interest subject to notice of acceleration. To the contrary, it is clear that acceleration of the principal debt is a condition precedent to VHDA's ability to exercise its option to assess the prepayment fee following a default. Accordingly, we hold that VHDA was not required to include notice of its election to assess the prepayment fee as a part of the debt owed upon notice of acceleration of the principal debt.

We are left to consider then whether notice of VHDA's election to assess the prepayment fee as part of the debt to be collected at foreclosure was an independent requirement fairly implied in the contract represented by the notes and the deed of trust. The deed of trust contains express provisions for waiver of "notice of any option granted [VHDA] herein" and that "[n]o delay by [VHDA] in exercising any right or remedy hereunder . . . shall operate as a waiver thereof or preclude the exercise thereof." Fox Run asserts that the use of the terms "herein" and "hereunder" limits the application of these two provisions to options exercised under the deed of trust, and, thus, implicitly requires timely notice for options exercised under the notes. We disagree.

As we have noted above, the notes and the deed of trust represent a single contract. Since there is no express provision within the notes requiring notice of VHDA's election to assess the prepayment fee, the waiver and delay provisions of the deed of trust may be applied to the notes without varying or contradicting any terms therein. Richmond Postal Credit Union, 170 Va. at 134, 195 S.E. at 665. Thus, we hold that Fox Run waived the right to notice of VHDA's election to assess the fee as part of the debt to be collected at foreclosure.

We now turn to the issue of the adequacy of the trustee's advertisement of sale with regard to the personal property. Code 55-59.3 provides the required contents for an advertisement of a sale under a deed of trust:

The advertisement of sale under any deed of trust, in addition to such other matters as may be required by such deed of trust or by the trustee, in his discretion, shall set forth a description of the property to be sold, which description need not be as extensive as that contained in the deed of trust, and shall identify the property by street address, if any, or, if none, shall give the general location of the property with reference to streets, routes, or known landmarks. Where available, tax map identification may be used but is not required. The advertisement shall also include the time, place and terms of sale and shall give the name or names of the trustee or trustees. It shall set forth the name, address and telephone number of such person (either a trustee or the party secured or his agent or attorney) as may be able to respond to inquiries concerning the sale.

We have not previously addressed the application of this statute. Fox Run relies upon our decision in Deep v. Rose, 234 Va. 631, 636, 364 S.E.2d 228, 231 (1988), wherein we held that the time periods for advertising foreclosure sales contained in Code § 55-59.2 are mandatory. Relying on this holding, Fox Run asserts that the same principle should apply to the content of the advertisement. We disagree.

In Deep v. Rose, we expressly stated that our holding was limited to the effect of Code § 55-59.2. 234 Va. at 638, 364 S.E.2d at 232. In other matters concerning advertisement of foreclosure sales under deeds of trust, we have held that substantial compliance is sufficient so long as the rights of the parties are not affected in any material way. See, e.g., Bailey v. Pioneer Federal Savings and Loan Association, 210 Va. 558, 562-63, 172 S.E.2d 730, 734 (1970).

Here, the notes and deed of trust clearly make reference to the real and personal property as the collateral for the loan. The advertisement refers to the deed of trust for a description of the property to be sold and expressly states that the personal property will be conveyed by bill of sale. This was adequate notice to Fox Run, and to any potential third-party bidder, that the personal property "used on or in connection with" Fox Run's housing project would be sold as part of the foreclosure. Accordingly, we hold that the trustee's advertisement of the sale substantially complied with the requirements of Code § 55-59.3.

For these reasons, we will reverse the judgment of the chancellor and enter final judgment for VHDA and the trustee.

Reversed and final judgment.

VIRGINIA HOUSING DEV. AUTH. v. FOX RUN LTD