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. Most of the law affecting commercial credit is 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 6.1 Banking and Finance

• Title 8.01 Civil Remedies and Procedure

• Title 8.1-8.11 Uniform Commercial Code

• 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

Title 8.01 of the Code of Virginia governs civil (non-criminal) actions, including actions for the recovery of money or property, garnishment, attachment, execution of judgments and judgment liens.

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.

There are 95 counties and 39 independent cities in Virginia, each with its own governmental authorities and ordinances. Aside from zoning ordinances, local ordinances are generally not relevant to commercial lenders. 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.

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 $15,000) 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.

Required Qualifications to Do Business – Foreign (Non-Virginia) Business Entities

It is not generally necessary for institutional lenders that are not based in 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, 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 and members, managers and employees of foreign LLCs and 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 with respect to foreign corporations, §§ 13.1-1052, -1057 with respect to foreign limited liability companies; §§ 13.1-1241, -1247 with respect to foreign business trusts, §§ 50-73.54, -73.59 with respect to foreign limited partnerships, and §§ 50-73.138, -73.140 with respect to foreign registered limited liability partnerships).

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 small loan company under the Small Loan Act (Va. Code Ann. §§ 6.1-244 et seq.) or a mortgage lender or broker under the Mortgage Lender and Broker Act. (Va. Code Ann. §§ 6.1-408 et seq.).

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. § 58.1-325; §§ 58.1-400 et seq.). For corporate lenders which derive more than 70% 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. (Virginia Administrative Code § 23VAC10-120-150; Va. Code Ann. § 58.1-418).

Out-of-state banks with permitted branches in Virginia are subject to bank franchise 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, 112 S.Ct. 1904, 119 L.Ed.2d 91 (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)).

Virginia Contract Law

Basic contract law in Virginia derives from common law principles and is similar to the law of other common law states. As is the case in most states, the Uniform Commercial Code ("UCC") establishes basic rules in the areas of the sale and leasing of goods and secured transactions. Virginia has adopted all of the UCC, including the most recent revisions of Articles 1, 3, 4, 5, 7, 8 and 9, with only slight variations from the uniform laws.

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.

INTEREST AND USURY

General Rule – No Usury Limits

Generally, loans to an individual or entity of $5,000 or more for business or investment purposes, and loans in any amount to any corporation, partnership, limited liability company, or real estate investment trust, or a joint venture organized for the purpose of holding, developing and managing real estate for profit, are exempt from Virginia's usury laws and any law relating to the compounding of interest. (Va. Code Ann. §§ 6.1-330.75 and 6.1-330.76). Agricultural loans are deemed to be business loans for purposes of this rule.

Late Payment Fees

A late charge in an amount not to exceed 5% 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. § 6.1-330.80).

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% of the unpaid principal balance. (Va. Code Ann. §§ 6.1-330.81 et seq.). Prepayment fees on other loans secured by a mortgage or deed of trust on an owner-occupied home cannot exceed 2% of the amount prepaid. Most commercial loans are not regulated as to prepayment or prepayment fees.

CONFLICTS OF LAWS RULES

Choice of Law Covenants

Virginia courts generally will enforce contractual choices of law covenants whereby the parties agree that the substantive laws of another state will govern the transaction, unless the laws of that state conflict with the public policy of Virginia.

Choice of law covenants apply only to substantive law and do not extend to laws governing procedure, remedies and enforcement of rights.

When the UCC is applicable, the parties may agree that the law of any state or nation bearing a reasonable relation to the transaction shall govern their rights and duties unless other provisions of the UCC otherwise expressly provide for the application of a particular state's laws, e.g., the perfection provisions of Article 9 of the UCC. (Va. Code Ann. § 8.1A-301).

Real Property

Real estate located in Virginia is subject exclusively to the laws and jurisdiction of the Virginia courts. Accordingly, matters involving the conveyance of Virginia real estate, title, and the creation and enforcement of mortgages and liens are all matters for determination pursuant to Virginia law, much of which is statutory.

TYPES OF BORROWERS

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.

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 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.

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. If less than all of the members of an LLC sign the loan documents, an authorizing resolution signed by all of the members should be delivered to the lender.

Individual members 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.

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.

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.

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).

Loans to proprietorships for business, commercial or agricultural purposes in the amount of $5,000 or more are exempt from the usury laws or any law relating to the compounding of interest. (Va. Code Ann. § 6.1-330.75).

Married Borrowers

Real Property held by married person 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 both spouses must be obligated to repay unsecured indebtedness in order for a creditor to reach the property in the event of default, or 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 Federal Reserve Regulation B (12 C.F.R. §§ 202.1 et seq.) which restrict the ability of lenders to require the signature of nonapplicant spouses on loan documents.

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 per individual. (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.

REAL ESTATE

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.

Deeds of Trust

In Virginia, the common instrument for obtaining a lien on real property is a deed of trust, under which the property may be sold by the trustee upon default without judicial action. (Although mortgages remain valid and enforceable in Virginia, mortgages are not commonly used.)

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).

Trustees under deeds of trust must be residents of Virginia. A corporate trustee must (a) be a Virginia corporation or a corporation chartered under the laws of the United States and (b) maintain its principal office within Virginia. (Va. Code Ann. § 55-58.1(2)).

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 to be made in the future by the noteholder named therein. Compliance with the requirements of the statute ensures that such future advances 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(2));

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(2)); and

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(5)).

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.

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.

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(3)).

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, (iii) the Virginia Code section under which any exemption from recordation taxes is claimed is clearly stated on the face of the document, (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 (v) the first page of the document shows the name of either the person or entity that drafted the document, except that documents prepared outside of Virginia will be recorded without such information. (Va. Code Ann. § 17.1-223). 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. § 17.1-227).

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). The use of cover sheets in Virginia is relatively new, but more jurisdictions are adopting the cover sheet requirement, each with specific rules as to how such cover sheets must be created. Accordingly, 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. § 55-108 and § 42.1-82, and Virginia Administrative Code §§ 17VAC15-70-10 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. (Virginia Administrative Code §§ 17VAC15-70-10 et seq.).

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. In the case of an open 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 secured under a deed of trust is not ascertainable, the tax is based on the fair market value of the property conveyed.

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 pay the full recordation tax on all deeds of trust, e.g., same lender refinancings and supplemental instruments.

Assignment

Virginia follows the common law rule that the security "follows" the debt upon assignment or transfer. 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(5)).

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.

Releases

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)).

Remedies on Default

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. A less common method of foreclosure is a voluntary surrender of the property and a full conveyance thereof by the debtor to the beneficiary in consideration for the cancellation of the whole or any agreed part of the debt (a "deed in lieu of foreclosure").

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 a 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 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. § 26-15).

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.

Mechanic’s Liens

In Virginia, all persons performing labor or furnishing materials with a value of fifty dollars 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, 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, 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.

Title Insurance

"Mortgagee" title insurance coverage is generally available to lenders in Virginia, and has almost entirely superceded attorney title opinions as the means by which lenders obtain assurances that the lien of their 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.

PERSONAL PROPERTY LENDING

UCC Article 9

Virginia adopted Revised Article 9 effective July 1, 2001. 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)).

5. 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).

6. 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 six (6) business days. (Va. Code Ann. § 8.9A-523(c)).

7. 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.

8. Virginia has not omitted Revised § 9-615 (g). Accordingly, 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.

9. The Virginia statute does not allow statutory damages for noncompliance with Revised Article 9. (Va. Code Ann. § 8.9A-625).

10. Virginia has a nonconforming amendment to the Uniform Act which deals with amendments and continuations of pre effective-date financing statements filed in Virginia. (Va. Code Ann. § 8.9A-707).

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).

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.

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.

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.

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. 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)).

Filing and Other Fees

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

Titled Motor Vehicles and Watercraft

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.

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.

EQUIPMENT LEASING

UCC Article 2A

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).

OTHER LAWS OF INTEREST

Virginia Suretyship Law

General principles of the common law of suretyship apply in Virginia. Guarantors, endorsers and co-makers all are sureties. The common law has been supplemented by statute in certain respects.

• The surety may require a lender to sue the principal debtor and all other parties to the loan as a condition of the surety's liability. (Va. Code Ann. §§ 49-25, -26). The surety customarily waives rights under the statutes in instruments used in Virginia.

• Sections 11-10 through 11-13 of the Virginia Code affect settlements between and among a creditor and one or more co-obligors, including co-sureties. As a general rule, a creditor can settle with one co-obligor without releasing the liability of the other co-obligor(s) to the creditor.

Virginia Fraudulent Conveyance Law

Virginia law applicable to fraudulent conveyances is found in Va. Code Ann. §§ 55-80 and 55-81. Section 55-80 permits creditors to set aside transfers of property made with the intent to delay, hinder or defraud creditors. Section 55-81 allows existing creditors to set aside transfers, including security interests, made by an insolvent debtor without recovering valuable consideration. The Uniform Fraudulent Transfer Act has never been adopted in Virginia.

Virginia Environmental Laws and Regulations

Virginia has extensive laws and regulations governing environmental matters. Unlike some states, Virginia does not confer upon itself a superpriority lien to enforce the state's right to environmental cleanup costs.

Lender Liability Legislation

Virginia has 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 unless the agreement or promise is in writing. (Va. Code Ann. § 11-2).