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February 27, 1998
Record No. 970924




Record No. 970946





Kenneth E. Trabue,

PRESENT: All the

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.


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).

. . . .

. . . 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 . . . .

In addition to the
real property, the deed of trust describes the property
encumbered thereby as "equipment and fixtures
. . . and
all items of personal
. . . 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 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 conveyed by special warranty deed
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 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.

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 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 Fox Run's favor, and that
title to the personal property remains vested in Fox Run.

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 Director
of Housing Management], Paul Brennan, myself
. . . Nina Nolley . . . [and] . . . later . . . Conrad

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 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.


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 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 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."
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. 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

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 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 the deed of trust may be
applied to the notes without varying or contradicting any terms
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 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.
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






[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] 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.

[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.

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

[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

[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.

[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

[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.

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