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Docket Number

Bankruptcy No. 93-24171-T.

Attorney(S)

Glenn R. Tankersley, Regency Legal Clinic, Virginia Beach, VA, for debtors. E. Leslie Cox, Cox Cox, Virginia Beach, VA, for creditor. David R. Levin, Chapter 13 Trustee, Portsmouth, VA.

Acts

Bankruptcy — Creditors, The Debtor, And The Estate — Creditors And Claims — Allowance Of Claims Or Interests

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Smart Summary

Memorandum Opinion Summary: In re Wilkinson, Bankruptcy No. 93-24171-T (Bankr. E.D. Va. Dec. 23, 1994)

Factual and Procedural Background

On May 10, 1991, William J. Wilkinson and Sandra Wilkinson (the debtors) executed a promissory note secured by real estate located at 2636 Vincent Avenue, Norfolk, Virginia. The promissory note was held by E. Leslie Cox acting as Special Commissioner for William F. Durham, Jr., deceased. The sole heirs of William F. Durham, Jr. were identified as Virginia D. Morris and Mildred Byrd.

The debtors filed a Chapter 13 petition on August 16, 1993. On November 17, 1993, the debtors executed a deed in lieu of foreclosure conveying the subject property to the creditor "in partial satisfaction of the [promissory] note secured by the above-mentioned deed of trust." Thereafter, on May 20, 1994, the creditor filed a proof of claim for $15,792.12 alleging a deficiency on the debt. The debtors objected to the proof of claim on July 29, 1994, contending that the deed in lieu of foreclosure constituted a full release of the creditor's claim. A hearing on the objection was held on September 29, 1994; the court took the matter under advisement and issued this memorandum opinion.

The opinion includes findings of fact made solely for disposition of the objection to the proof of claim and states these findings are not binding in future proceedings.

Legal Issues Presented

Whether the debtors' execution of a deed in lieu of foreclosure constituted a full release of the creditor's claim and thereby invalidated the creditor's proof of claim for a deficiency.
Whether the debtors overcame the prima facie validity of the creditor's proof of claim under Bankruptcy Rule 3001(f) and 11 U.S.C. § 502(a) such that the burden of production shifted back to the creditor.

Arguments of the Parties

Debtors' Arguments

The debtors argued that by executing the deed in lieu of foreclosure the creditor's claim was fully released and therefore the creditor's proof of claim for a deficiency is invalid.

Creditor's Position

The creditor filed a proof of claim for $15,792.12 asserting a deficiency on the debt following the deed in lieu of foreclosure. (The opinion does not set out further detailed argumentation by the creditor in the text.)

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In re Tidewater Memorial Hosp., Inc., 106 B.R. 885, 888-89 (Bankr. E.D. Va. 1989)	Supports the proposition that a proof of claim constitutes prima facie evidence of the validity of the claim and sets out the burden-shifting framework.	The court relied on this case to describe the initial prima facie validity of the proof of claim and the requirement that an objecting party overcome that presumption to shift the burden of production to the claimant.
C-4 Media Cable South, L.P. v. Reds T.V and Cable, Inc. (In re C-4 Media Cable South, L.P.), 150 B.R. 374, 376-77 (Bankr. E.D. Va. 1992)	States that the mere filing of an objection to a proof of claim does not itself satisfy the objecting party's burden to overcome the prima facie validity.	The court used this authority to reinforce that the debtors' mere objection was insufficient without supporting evidence or authority to rebut the proof of claim.
Karras v. Hansen (In re John Karras), 165 B.R. 636, 637 (N.D. Ill. 1994)	Explains that a litigant who fails to support a point with appropriate authority or reasoning loses that point.	The court cited this case to support the proposition that the debtors' failure to present supporting authority or reasoning undermined their objection to the proof of claim.
Ameribanc Savings Banks, F.S.B. v. Resolution Trust Corp., 858 F. Supp. 576, 582 (E.D. Va. 1994)	Analyzed the effect of Virginia recording and notice statutes on partial releases of liens and emphasized these statutes are designed to protect creditors and subsequent purchasers.	The court relied on Ameribanc to explain that analogous Virginia statutes serve to protect creditors and subsequent purchasers and thus do not provide debtors the protection they sought absent explicit language releasing personal liability.
Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844, 263 S.E.2d 408, 413 (1980)	Discussed in Ameribanc as authority on statutory protections designed to protect creditors against deceptive appearances of ownership.	Referenced (via Ameribanc) to show the background purpose of Virginia notice statutes — protection of creditors and purchasers — supporting the court's view that recording statutes favor creditor protection.

Court's Reasoning and Analysis

The court proceeded in several analytically distinct steps:

Legal standard for proof of claim: The court began by stating the governing evidentiary rule — under Bankruptcy Rule 3001(f) and 11 U.S.C. § 502(a), a properly filed proof of claim is prima facie evidence of the validity and amount of the claim. The court cited In re Tidewater Memorial Hosp., Inc. to explain the burden-shifting framework and cited In re C-4 Media Cable South to emphasize that merely filing an objection does not satisfy the objecting party's obligation to rebut the prima facie case.
Burden on the objector: The court found that the debtors failed to present evidence or pertinent legal authority to rebut the prima facie validity of the creditor's proof of claim. The court also cited Karras to note that unsupported assertions without authority are insufficient to carry the objector's burden.
Statutory context regarding releases and recording: The court reviewed relevant Virginia statutory provisions regarding releases of liens. It noted that Va. Code Ann. § 55-66.4 permits partial releases of liens if properly recorded and that the illustrative release form provided by statute does not require a property description for partial satisfaction releases (citing Va. Code Ann. § 55-66.4:1). The court observed it could not find authority directly on point interpreting a deed in lieu as a release of personal liability.
Purpose of notice statutes: Turning to analogous authorities, the court relied on Ameribanc (and Graves Constr. Co. as cited therein) to explain that Virginia notice and recording statutes are designed primarily to protect creditors and subsequent purchasers by requiring the disclosure of interests affecting title. The court emphasized that those statutes' protective purpose benefits creditors and purchasers rather than debtors seeking to extinguish personal liability.
Contractual specificity required to release personal liability: The court reasoned that if debtors intended to obtain a release of personal liability they should have expressly negotiated or documented such a release (for example, as part of a settlement agreement or in explicit language in the deed). The court cited a secondary source (John C. Murray, Deeds in Lieu of Foreclosure: Practical and Legal Considerations) for the proposition that releases of personal liability are matters that should be explicitly stated.
Conclusion based on the foregoing: Because the debtors neither presented evidence to rebut the prima facie proof of claim nor demonstrated that they had been specifically released from personal liability, the court concluded the debtors remained liable for the deficiency and that the creditor's proof of claim should be allowed as an unsecured claim in the amount asserted.

Holding and Implications

The court overruled the debtors' objection to the creditor's proof of claim and allowed the creditor's claim as an unsecured claim in the amount of $15,792.12.

Implications:

The immediate and direct effect is that the creditor's deficiency claim in the amount of $15,792.12 is allowed as an unsecured claim in the debtors' Chapter 13 case.
The court concluded that execution of the deed in lieu, standing alone and absent an explicit release of personal liability, did not discharge the debtors' personal liability for the deficiency.
The opinion does not announce or state the creation of any new legal precedent beyond applying existing authorities and statutes to the facts; the decision resolves the parties' dispute as to the particular proof of claim before the court.

A separate order implementing this ruling was to be entered by the court, as noted in the opinion.

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IN RE WILKINSON Faye Wilkinson, Debtors.

MEMORANDUM OPINION

DOUGLAS O. TICE, Jr., Bankruptcy Judge.

Hearing was held on September 29, 1994, on debtors' objection to a proof of claim filed by creditor who had obtained a deed in lieu of foreclosure on certain property in partial satisfaction of a promissory note secured by a deed of trust on the property. Debtors allege that creditor's execution of this deed in lieu of foreclosure "constitutes a full release of the creditor's claim against debtor," and therefore, the creditor's proof of claim is invalid. The court took the matter under advisement. For reasons stated in this memorandum opinion, debtors' objection to creditor's proof of claim is overruled, and creditor's claim will be allowed in the amount of $15,792.12 as an unsecured claim.

Findings of Fact

The findings of fact are made solely for disposition of the Objection to the Proof of Claim and are not binding on the parties in future proceedings.

On May 10, 1991, debtors William J. Wilkinson and Sandra Wilkinson executed a promissory note secured by real estate known as 2636 Vincent Avenue, Norfolk, Virginia. The promissory note is held by E. Leslie Cox, Special Commissioner for William F. Durham, Jr., deceased. The sole heirs of William F. Durham, Jr., are Virginia D. Morris of Virginia Beach, Virginia, and Mildred Byrd of Pensacola, Florida.

On August 16, 1993, debtors filed a Chapter 13 bankruptcy petition. On November 17, 1993, debtors executed the deed in lieu of foreclosure conveying the property at 2636 Vincent Avenue, Norfolk, Virginia, to creditor "in partial satisfaction of the [promissory] note secured by the above-mentioned deed of trust." On May 20, 1994, creditor filed its proof of claim in the amount of $15,792.12 for the deficiency on the debt. On July 29, 1994, debtors filed an objection to the claim on the grounds that their obligation to repay creditor was fully satisfied upon execution of the above-mentioned deed in lieu of foreclosure.

Discussion and Conclusions of Law

Under Bankruptcy Rule 3001(f) and 11 U.S.C. § 502(a), a proof of claim constitutes prima facie evidence of the validity of a claim. An objection must overcome the prima facie validity of a claim to shift the ultimate burden of production to the creditor who filed the claim. In re Tidewater Memorial Hosp., Inc., 106 B.R. 885, 888-89 (Bankr. E.D.Va. 1989). The mere filing of an objection does not satisfy this requirement. C-4 Media Cable South, L.P., v. Reds T.V and Cable, Inc. (In re C-4 Media Cable South, L.P.), 150 B.R. 374, 376-77 (Bankr.E.D.Va. 1992). Furthermore, a litigant who fails to support a point with appropriate authority or fails to show why the point is sound despite a lack of supporting authority loses the point Karras v. Hansen an re John Karras), 165 B.R. 636, 637 (N.D.Ill. 1994).

Debtors have failed to offer evidence to overcome the prima facie validity of creditor's claim, and have further failed to support their position with any pertinent authority. Therefore, they have not sufficiently met their burden of proof to shift the burden of production to the creditor.

A lien may be partially released if properly recorded. See Va. Code Ann. § 55-66.4 (Michie 1986). The code provides an example of an acceptable release certificate form which describes the requisite elements to be included in a release. This form does not require any description of the property to be released in partial satisfaction. See Va. Code Ann. § 55-66.4:1 (Michie Supp. 1994).

Although the court could not find any cases directly on point, under similar Virginia code sections, analogous property cases have afforded protection only to creditors. See Ameribanc Sav. Banks, F.S.B. v. Resolution Trust Corp., 858 F. Supp. 576, 582 (E.D.Va. 1994). Under section 55-96 of the Virginia Code, contracts affecting title to real estate should be properly recorded to protect interested parties from losing priority to subsequent purchasers. See Va. Code Ann. § 55-96 (Michie Supp. 1994). In other words, the code requires owners or holders of an interest in property to disclose this interest.

In Ameribanc Savings Banks, the court analyzed the import of this provision on partial releases of liens. The court noted that this provision and others like it were designed to protect creditors against misreading a deceptive appearance of ownership, such as when a debtor retains possession of property after title has passed to another party. Ameribanc, 858 F. Supp. at 582 (citing Graves Constr. Co. v. Rockingham Nat'l Bank, 220 Va. 844, 263 S.E.2d 408, 413 (1980)) (emphasis added). While this case is not directly on point here, it does demonstrate that the notice statutes were designed to benefit creditors and subsequent purchasers.

The Wilkinsons, debtors, executed the deed in lieu of foreclosure. Debtors allege that this released all of their liability under the loan. However, the court reads statutes such as Va. Code Ann. § 55-66.4 as protection for creditors and not as a shield behind which debtors may hide. Furthermore, had debtors desired to release personal liability, they should have stated so as consideration in a settlement agreement or in the deed. See John C. Murray, Deeds in Lieu of Foreclosure: Practical and Legal Considerations, 26 Real Prop.Prob. Tr.J. 456 (Fall 1991). Because the debtors were not specifically released from personal liability, they remain liable for the deficiency suffered by the creditor when the property was later sold. Id.

Because the court finds that debtors have failed to rebut the presumption of validity of creditor's proof of claim, the claim will be allowed as an unsecured claim in the amount of $15,792.12.

A separate order will be entered.

IN RE WILKINSON, (Bankr.E.D.Va. 1994)