Virginia law permits a judgment lien creditor to recover the amount due on a money judgment through a judicial sale of real property owned by a judgment debtor and located in the Commonwealth of Virginia. This remedy, referred to as a creditor's suit or creditor's bill (the "Creditor's Suit") can be a very powerful collection tool because there are very limited defenses, provided that the judgment creditor complies with the requirements and procedures under Virginia law.
Application of the Creditor's Suit
A Creditor's Suit can be utilized to force the sale of real property of the judgment debtor to satisfy a claim of a creditor. The judgment debtor does not have to be the sole owner of the real property for the Creditor's Suit to be utilized. It can be applicable when the judgment debtor owns a partial interest as a tenant in common in the specific property or where there are other lienholders (even if the other lien has priority over the judgment creditor). If a creditor does not know if real property is owned by a judgment debtor, it should request a title search to determine if there is real property that could be subject to the lien.
Specific Requirements/Procedures for Creditor's Suits
Once the creditor obtains a money judgment and determines that the judgment debtor(s) own(s) real property in the Commonwealth of Virginia, the judgment creditor will need to ensure the judgment is docketed in the jurisdiction where the specific real property is located. This docketing creates a lien on the real property. Once this is done, a title search and UCC search should be conducted to identify other potential creditors, lienholders or parties with an interest in the real property.
Once the lien is acquired on the real property, the Creditor's Suit is the manner by which the judgment creditor enforces the lien to satisfy the judgment. The Creditor's Suit is commenced by filing a complaint in the circuit court for the city/county where the real property is located. The judgment creditor must name as parties to the suit the judgment debtor(s) plus all other parties who have any interest in the real property. In conjunction with the filing of the Creditor's Suit, the judgment creditor should file a memoranda of lis pendens against the specific property thereby placing all subsequent creditors or lienholders on notice of the pending suit and preventing a transfer of the property to a bona fide purchaser.
Just as in other circuit court proceedings, after the complaint is filed and properly served, the defendants will have 21 days from date of service to respond or will otherwise be in default for failure to respond. Once all defendants have responded or are in default, the court should refer the matter to a commissioner in chancery by entering a decree of reference. The commissioner in chancery is an attorney appointed by the court to review the pleadings and hear evidence regarding the judgment lien, other interests in the property, the priority of interests in the property, the rents or potential rents of the property and any defenses to the sale asserted by the defendants.
It is the role of the commissioner in chancery to determine whether a sale is appropriate and to recommend the manner of sale and order of distribution of proceeds from said sale. Before determining if a sale is necessary, the commissioner in chancery must make a finding that the rents and profits of the property will not, within a period of five years, be sufficient to pay the liens on the property. After the hearing, the commissioner in chancery issues a report with the commissioner's findings and recommendations to the court. Assuming that the commissioner recommends a sale of the property, and there are no objections, the judgment creditor's attorney will then submit an order requesting the court to approve the commissioner's report. The court then appoints a "special commissioner" to sell the real property in the manner recommended by the commissioner in chancery.
Once the court enters the order appointing a special commissioner to sell the real property, the special commissioner will put the property up for sale in the manner set out in the court order. When the property is sold, the special commissioner will submit his or her report to the court stating that the sale was held in accordance with the court's order and what the proceeds were. The special commissioner will also request confirmation from the court of the sale and authority to disburse the proceeds to interested parties as ordered by the court. Proceeds of the sale are generally distributed in the following order (i) to costs of the proceeding (including the commissioner in chancery's fees and special commissioner's fees but not the judgment creditors' attorneys' fees in bringing the Creditor's Suit); (ii) to delinquent property taxes; (iii) to liens against the property according to their priority and (iv) to the judgment debtor if there are sufficient proceeds.
The Creditor's Suit can be a very effective collection tool for recovery of amounts due on a money judgment in appropriate situations. Simply filing the action can often prompt an otherwise stubborn or evasive judgment debtor to come up with assets and/or a plan to resolve the money judgment rather than having their property sold and the proceeds applied to the judgment. As a Creditor's Suit is a complex and fact specific collection remedy, obtaining the advice of the bank's counsel is recommended if and when questions arise. This article represents a broad overview of the law in Virginia and Creditor's Suits and should not be considered an exhaustive review or legal advice.
Timothy G. Moore is an attorney at Spotts Fain PC who works with banks and other creditors on a wide variety of issues including lending, insolvency, workouts, creditors' rights, bankruptcy, and collections.