Virginia Legal Trends and More: With No Interest In Debt, Bank Can’t Foreclose

Interesting article from VLW:

By Deborah Elkins
Published: February 3, 2011

Although the record is clear that defendant bank cannot enforce the missing note as a negotiable instrument due to its violation of Va. Code § 8.3A-309, this does not extinguish plaintiff’s debt or prohibit foreclosure; but the Fairfax Circuit Court says plaintiff can proceed with his claim that defendant bank cannot foreclose on his home because it has no interest in his separate debt obligation.

Virginia law clearly recognizes that enforcement of a promissory note and enforcement of a security instrument are separate and distinct remedies governed by different laws.

In October 1997, plaintiff Anthony Benkahla executed a promissory note for $194,000 payable to LL Funding Corp. On the same date, plaintiff encumbered his single family home with a deed of trust securing the note. The deed of trust also names LL Funding as the beneficiary. According to plaintiff, a succession of entities has attempted to collect on the note since 1997, and all have claimed plaintiff is in default under the note, and they are entitled to payment.

In January 2010, defendant Samuel White PC contacted plaintiff claiming that defendant Deutsche Bank(DB) is the current owner and beneficiary of the note and deed of trust and that DB has appointed them trustee under the deed of trust. White also notified plaintiff he was in default and that DB would be foreclosing on the property in accordance with Va. Code § 55-59.1B. White informed plaintiff the original note evidencing indebtedness had been lost, misplaced or destroyed and is unavailable.

Plaintiff filed suit in this court seeking an injunction to stop the foreclosure and an accounting of the amount owed on the note. Plaintiff claims 1) DB cannot foreclose because they are in violation of Va. Code § 8.3A-309; 2) DB is not the beneficiary of the note or deed of trust and thus has no authority to foreclose on the property; and 3) DB’s foreclosure action is outside the five-year statute of limitations period.

On the first claim, DB concedes it is not in possession of the note. It is clearly in violation of Code § 8.3A-309. However, plaintiff wrongly concludes that because DB cannot enforce the note pursuant to Code § 8.3A-309, they are also unable to foreclose under the deed of trust.

A mortgage or deed of trust secures a debt and not the note or underlying security. No change in the form of a debt, short of repayment, will operate to discharge a security interest. A violation of Code § 8.3A.-309 does not extinguish a borrower’s debt obligation, it merely precludes the creditor from enforcing a security as a negotiable instrument under the UCC. A violation of Code § 8.3A-309, by itself, has no effect on a creditor’s foreclosure action under Virginia’s foreclosure laws. A creditor’s foreclosure on a security property is governed by Virginia’s foreclosure statutes.

Although the record is clear that DB cannot enforce the note as a negotiable instrument due to their violation of Code § 8.3A-309, this does not extinguish plaintiff’s debt or prohibit foreclosure. Plaintiff’s first argument is without merit.

Plaintiff’s second claim, however, states a claim for which the court can grant injunctive relief. A deed of trust is enforceable only by a beneficiary of the underlying debt, and no person without an interest in the debt has authority to foreclose. Allegations that DB is not the owner of the debt obligation make a valid claim that DB is not the beneficiary of plaintiff’s debt obligation and any foreclosure by DB is invalid. Such a claim, if proven true, is undoubtedly entitled to equitable relief.

DB is correct that the complaint fails to directly allege DB does not own the loan. However, the complaint repeatedly questions whether DB has a proper interest in the note that enables them to foreclose.

DB’s attempt to foreclose is not time-barred, as the proper limitations period under Code § 8.01-241(A) is 10 years.

Finally, plaintiff has alleged sufficient facts to request an accounting.

Benkahla v. Samuel I. White (Thacher, J.) No. CL 2010-4955, Jan. 18, 2011; Fairfax Cir.Ct.; Henry S. Fitzgerald for plaintiff; John S. Hubbard for defendant. VLW 011-8-004, 7 pp.