Virginia Housing Development Authority v. Fox Run Ltd. Partnership

PRESENT: All the Justices

VIRGINIA HOUSING DEVELOPMENT AUTHORITY

v. Record No. 970924

FOX RUN LIMITED PARTNERSHIP

OPINION BY
JUSTICE LAWRENCE L. KOONTZ, JR.
February 27, 1998

STUART A. SIMON, TRUSTEE

v. Record No. 970946

FOX RUN LIMITED PARTNERSHIP

FROM THE CIRCUIT COURT OF ROANOKE COUNTY
Kenneth E. Trabue, Judge

These two appeals arise from a foreclosure sale of a multi-

family housing project. In the first appeal, we consider

whether the noteholder 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 . . . .[ 1 ]

1
This section provides for alternate calculations to
determine the amount of the prepayment fee. However, for
purposes of this appeal the parties agree that the fee is six
percent of the outstanding balance of the loan, which amounts to
$698,104.59.

2
 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

3
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

4
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

5
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. 2

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

2
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.

6
an inventory of those items. 3 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.”

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

3
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.

7
Fox Run’s favor, and that title to the personal property remains

vested in Fox Run. 4

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

4
A further claim concerning pre-foreclosure rents was
settled by the parties and is not a part of this appeal.

8
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

9
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. 5

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. 6 Following that

determination, Nolley calculated the exact amount of the

prepayment fee and this figure was communicated to Fox Run in

5
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.
6
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.

10
the June 11, 1993 letter. 7 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.

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

7
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.

11
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.

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, ___ S.E.2d ___, ___ 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.

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.

12
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. 8 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.

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

8
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.

13
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

14
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

15
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.

16