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Catjen, LLC v. Hunter Mill West, L.C.

Supreme Court of Virginia

July 26, 2018





         Catjen, LLC ("Catjen") appeals the decision of the Circuit Court of Fairfax County reducing the amount due on a deed of trust note (the "Note") and entering a confessed judgment for the reduced amount without Catjen's agreement.

         I. BACKGROUND

         On November 19, 2008, Hunter Mill West, L.C. ("HMW") executed a deed of trust note (the "Note") in the original principal amount of $1, 000, 000, payable to BDC Capital, Inc. ("BDC Capital"), the predecessor in interest to Catjen. The Note was secured by a deed of trust that created a first priority lien upon 5 acres of real property located in Fairfax, Virginia. The entirety of the amount borrowed under the Note, plus all accrued interest and late fees, was due in full on or before November 19, 2009.

         The Note provided for an interest rate of 14% per annum. In the event that HMW defaulted on the Note, the interest rate increased to 24% per annum. Additionally, the Note included a clause providing for compound interest. Specifically, the clause states:

Borrower hereby expressly acknowledges and agrees that this Note provides for payment of compound interest, and that the principal balance of this loan shall increase whenever, and every time, that a monthly payment due here under is not received by Lender, that month's late fee, as well as interest due and payable for that month, shall be added to the total principal balance of the Loan. The principal balance shall thus increase, and failure to make any subsequent monthly payment(s) shall also have the effect of increasing the principal balance of the debt due hereunder.

         The Note also included a clause appointing an attorney in fact for HMW and permitting that attorney to confess judgment against HMW for the unpaid balance of the Note plus interest, court costs, expenses and reasonable attorney's fees. Additionally, the clause provided that any judgment entered against HMW would bear interest at the highest rate of interest being paid on the Note on the date of the judgment.

         HMW failed to repay the Note in full by November 19, 2009, the date of maturity. On September 24, 2010, BDC Capital sent HMW a notice of default.

         HMW subsequently filed for Chapter 11 bankruptcy protection. During the bankruptcy proceedings, BDC Capital filed a claim for the amount it asserted was due on the Note, which HMW disputed. In calculating the amount due on the Note, BDC Capital and HMW disagreed as to when the interest rate increased to 24%. BDC Capital took the position that the increase occurred on the date of maturity, whereas HMW asserted that the increase occurred when BDC sent the notice of default. Neither party appeared to dispute the fact that the interest continued to compound monthly after the Note matured. Indeed, an amortization schedule HMW purportedly presented to the bankruptcy court indicated that the interest on the Note continued to compound monthly after the date of maturity.

         In its order sustaining HMW's objections to BDC Capital's claims (the "Claim Order"), the bankruptcy court accepted HMW's calculations and "reduced and fixed" BDC Capital's claim on the Note at $1, 504, 998.55.[1] Although HMW's bankruptcy petition was ultimately dismissed, the Claim Order was preserved and remained binding.

         On July 21, 2016, Catjen foreclosed on the property that was used as collateral for the Note. Catjen submitted the final bid at the foreclosure sale in the amount of $1, 300, 000. On August 11, 2016 the attorney in fact confessed judgment against HMW in favor of Catjen in the amount of $2, 402, 838.30[2] plus costs and reasonable attorney's fees.

         On September 9, 2016, citing Code § 8.01-433, HMW moved to set aside the confessed judgment. In its motion, HMW argued that the confessed judgment should be set aside for four reasons: the rate of interest was usurious, the interest was incorrectly calculated and included interest on amounts not due, the judgment was inaccurate and the amount of attorney's fees was unreasonable. In its prayer for relief, HMW sought to have the judgment set aside and to have the trial court "order Catjen LLC to serve a bill [of] particulars on [HMW]" and "set the matter on the Court's docket for trial."

         At the November 8, 2016 hearing on the motion to set aside, HMW abandoned three of the bases presented in its motion and limited its argument to whether Catjen had incorrectly calculated the amount due by compounding the interest that accrued after the date of maturity. According to HMW, after the Note matured, only simple interest applied. Catjen took the position that the interest is contractual and an incident of the debt. Therefore, according to Catjen, upon HMW's default, the contractual interest rate continued until the debt was paid. The parties agreed that the determination of ...

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