Chapter 13

AMENDED MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY COURT.

Before the Court is the Complaint filed by Patricia L. Cruickshanks (the "Debtor") to determine the validity, priority, or extent of liens asserted by The Pemberton Oaks Townhouse Association, Inc. (the "Defendant"). The Debtor seeks the release of Defendant's judgment liens and assessment liens against Debtor's property.

On December 12, 2012, the Debtor filed a voluntary petition for relief under Chapter 13 of Title 11 of the United States Code (the "Petition Date"). 11 U.S.C. § 101 et. seq. (the "Bankruptcy Code"). The Debtor's bankruptcy estate includes an interest in real property known as 3061 Montfort Loop, Henrico, VA (the "Property"). The Property is a townhome located in the Pemberton Oaks subdivision. The Defendant is the property owners' association for the subdivision (the "Association"). The Debtor acquired the Property on October 30, 1995.1 At the time the Debtor became the fee simple owner of the Property, and at all times since, the Property was subject to a declaration of various real covenants dated October 8, 1992, and recorded in the Clerk's Office of the Henrico County Circuit Court in deed book 2429 at page 256 (the "Declaration").

The parties do not dispute that the real covenants set forth in the Declaration run with the land. Such covenants are enforceable if there exists: "(1) horizontal privity; (2) vertical privity; (3) intent for the restriction to run with the land; (4) that the restriction touches and concerns the land; and (5) that the covenant is in writing." Barner v. Chappell, 266 Va. 277, 283, 585 S.E.2d 590 (2003) (citing Waynesboro Village, L.L.C. v. BMC Properties, 255 Va. 75, 496 S.E.2d 64 (1998); Sloan v. Johnson, 254 Va. 271, 491 S.E.2d 725 (1997)). Defendant contends that the Declaration "creates a valid lien that burdens and benefits the [Property]."2

The Property is encumbered by a duly recorded first deed of trust securing indebtedness held by HSBC Bank USA National Association as Trustee for GSMPS 2005-RPI ("HSBC"). The deed of trust for the benefit of HSBC is dated November 29, 1993, and is recorded in the Clerk's Office of the Henrico County Circuit Court in deed book 2447 at page 728 ("First Deed of Trust"). As of the Petition Date, the indebtedness secured by the First Deed of Trust had an approximate balance of $76,881.95.

The Property is further encumbered by a duly recorded second deed of trust securing indebtedness held by the Henrico County Federal Credit Union (the "Credit Union"). The deed of trust for the benefit of the Credit Union is dated April 1, 2003, and is recorded in the Clerk's Office of the Henrico County Circuit Court in deed book 3423 at page 1324 (the "Second Deed of Trust"). As of the Petition Date, the indebtedness secured by the Second Deed of Trust had an approximate balance of $76,842.83.

Between 2009 and 2011, the Defendant docketed five (5) judgment liens against the Property totaling $14,401.00 plus interest.3 Prior to the Petition Date, the Defendant levied monthly assessments against the Property in the amount of $8,083.90, as well as $33,076.53 in legal fees. The total amount claimed by the Defendant is $41,160.43.4 As of April 10, 2013, the Defendant had failed to file a proof of claim in the Debtor's Chapter 13 bankruptcy case.5

The Debtor commenced this adversary proceeding on May 3, 2013, by filing a complaint against the Defendant for a determination as to the priority and extent of the liens asserted by Defendant against the Property. The Defendant filed an answer and counterclaim on June 5, 2013.6 By order entered January 10, 2014, the Court permitted the parties to waive trial in this adversary proceeding and to submit the matter for resolution on stipulated facts following briefing on the merits. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.7

The Court has subject-matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O). Venue is appropriate pursuant to 28 U.S.C. § 1409. Venue is appropriate pursuant to 28 U.S.C. § 1409.

The parties have stipulated for purposes of this matter that the value of the Property is $139,300.8 The indebtedness secured by First and Second Deeds of Trust encumbering the Property totals $153,724.78. Accordingly, the Debtor has no equity in the Property. The Debtor claims that Defendant's asserted liens are third in priority behind the First and Second Deeds of Trust. Given the value of the Property and the prior encumbrances, Debtor contends that Defendant's liens are wholly unsecured and should be removed from the Property.

The Fourth Circuit Court of Appeals recently affirmed the decision it had previously issued in its unpublished opinion, Suntrust Bank v. Millard (In re Millard), 404 Fed.Appx. 804 (4th Cir.2010), that a debtor in a case under Chapter 13 of the Bankruptcy Code may remove wholly unsecured liens that may encumber the debtor's property. See In re Davis, 716 F.3d 331 (4th Cir.2013). The Fourth Circuit noted that a claimant's secured status is determined by the value of its collateral. 11 U.S.C. § 506(a).9 Accordingly, it concluded that a completely valueless lien should be classified as an unsecured claim. The Fourth Circuit acknowledged that:

In re Davis, 716 F.3d at 335-36.

Defendant counters that its liens are inferior only to the First Deed of Trust on the Property. Virginia is a "race-notice" real estate lien jurisdiction. As such, it adheres to a first in time, first in right priority scheme. The first to properly record a lien against real property with the Clerk's Office of the applicable jurisdiction has priority over subsequently recorded liens. Duty v. Duty, 276 Va. 298, 661 S.E.2d 476, 479-80 (2008); see also Va. Code Ann. § 55-96(A)(1); Hart v. Pace, 49 Va. Cir. 434, 435 (1999) ("In Virginia, the priority for liens and conveyances depends upon a race to the courthouse. The person recording an interest in real estate first, absent a fraud of some sort, has priority over all those who record later."). The First Deed of Trust was recorded against the Property in November 1993. The Second Deed of Trust was recorded against the Property in April 2003. The assessments that the Defendant claims constitute liens on the Property were not accrued until 2009-2011. Accordingly, the Defendant's liens would appear to be third in priority. Defendant, as the entity asserting the second priority interest in the Property, has the burden of proof on the issue of the validity, priority, or extent of its liens. 11 U.S.C. § 363(p)(2). A "preponderance of the evidence" standard is applicable in this adversary proceeding. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see, e.g., In re Santaella, 298 B.R. 793, 799-800 (Bankr.S.D.Fla.2002); see also In re Galanis, 334 B.R. 685 (Bankr.D.Utah 2005).

Defendant asserts that the Declaration was recorded in 1992 prior to recordation of both the First and the Second Deeds of Trust. Defendant argues that it is the Declaration that establishes the valid liens for its assessments against the Property. The covenants set forth in the Declaration expressly subordinate the assessment liens arising thereunder only to real estate tax liens and to duly recorded first deeds of trust.10 As the Second Deed of Trust does not fall under either of these two excepted categories and as the Declaration was recorded prior to the Second Deed of Trust, Defendant argues that its liens arising thereunder have priority over the Second Deed of Trust.11 Defendant concludes that its second priority liens are fully secured by the value of the Property and, accordingly, are not subject to removal under In re Davis.12

Property owners' associations and subdivisions are governed by statute in Virginia. The Virginia Property Owners' Act (the "Act"), which is set forth in Chapter 26 of Title 55 of the Code of Virginia,13 applies to all developments subject to a declaration, as defined [in the Act], initially recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act."14 Va. Code § 55-508(A). The Act authorizes homeowners' associations to levy both general and special assessments against lots included in a development. The Act further provides the mechanism for homeowners' associations to obtain liens on lots for unpaid assessments. The Act strictly adheres to Virginia's "race-notice" priority lien structure governing real property. According to Section 55-516(A) of the Code of Virginia, an assessment lien "shall be prior to all other subsequent liens and encumbrances" (emphasis added). No lien for an assessment exists until it is perfected. Section 55-516(A) of the Code of Virginia reads, in pertinent part:

Va. Code Ann. § 55-516(A). The Act details specific requirements for perfecting such a lien:

Va. Code Ann. § 55-516(B). The Defendant has provided no evidence that a memorandum of lien was ever filed in Henrico County in order to perfect the liens it asserts against the Property for its assessments. As the Defendant has failed to follow the procedures outlined in the Act, it does not have a properly perfected lien against the Property.

Had the Defendant properly perfected its lien in accordance with the requirements set forth in § 55-516 of the Code of Virginia, Defendant's lien would still be inferior to the First and Second Deeds of Trust. The lien does not relate back to the date of the Declaration, but arises, as would any other lien, on and after the date of perfection.16 The First Deed of Trust was recorded on the Property in November 1993. The Second Deed of Trust was recorded in April 2003. The assessments for which the Defendant claims it has liens on the Property were not levied until 2009-2011. Had Defendant's liens been properly perfected, they would have arisen subsequent in time to the First and Second Deeds of Trust and be inferior thereto consistent with Virginia's "race-notice" priority scheme and Section 55-516(A) of the Code of Virginia.

Defendant concocts a misguided argument about why its Declaration should not be subject to the Act. Defendant quotes the following passage from Section 55-508(A) of the Code of Virginia in support of this proposition:

Va. Code § 55-508(A). As Defendant's Declaration was recorded in October of 1992, Defendant reasons that the Act should not be construed to invalidate the "Creation of the Lien and Personal Obligation of Assessments" provision in its Declaration.17 But the Act does nothing to invalidate the authority conferred on Defendant by the Declaration to levy or enforce maintenance assessments. Rather, it complements the Declaration by providing the mechanism for creating and perfecting such liens. Defendant cannot employ language in the Declaration to supersede established Virginia law. The version of the Act that was in effect on the date Defendant's Declaration was recorded had the same requirements for perfecting assessment liens as exist under the present statutory scheme. See Virginia Acts of Assembly, Property Owners' Association Act — 1992 Virginia Laws Ch. 677 (H.B. 227).

The passage quoted by Defendant was not intended to release the Defendant from its obligation to comply with the Act. It merely clarifies that the 1998 amendment to the Act did not serve to invalidate the lawful provisions contained in prior declarations. The Act, itself, was established in 1989, four years prior to the recordation of Defendant's Declaration. A separate sentence from the same section quoted by Defendant clarifies that the Act "shall apply to developments subject to a declaration ... initially recorded after January 1, 1959." That includes the Declaration at bar.

The Court concludes that Defendant's liens against the Property were never perfected and, therefore, do not encumber the Property. Had the Defendant properly perfected the liens, they, nevertheless, would be subordinate to the First and Second Deeds of Trust. As the value of the Property is $139,900 and the indebtedness secured by First and Second Deeds of Trust aggregates over $153,724 as of the Petition Date, the Defendant's assessment liens would be wholly unsecured. Accordingly, to the extent any such assessment liens do arise, they may be removed against the Debtor's Property. In re Davis, 716 F.3d 331 (4th Cir.2013); Suntrust Bank v. Millard (In re Millard), 404 Fed.Appx. 804 (4th Cir.2010). Judgment will be entered in favor of the Debtor.

A separate order shall issue.