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.
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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