The DirtLaw Blog

Deadbeat Debtors and The Games They Play

Most creditors feel comfortable after they have recorded an Abstract of Judgment against a debtor.  In circumstances where the debtor has a house or other real property asset, the Abstract of Judgment is a notice to all other creditors that you have a lien against that asset.

In theory, when the debtor goes to refinance his house, he must pay off your judgment lien before the loan can be placed.

However, we are seeing instances of debtors wriggling out of these obligations.  How is that possible??

Through the collaboration of brokers and escrow officers, debtors sometimes manage to defraud a lender into making the loan without paying off the judgment.

Here's a real life example that we experienced:  Company X obtained a judgment against Debtor.  Company X recorded an abstract of judgment against Debtor's house.  Debtor's house was owned with Debtor's Spouse.  Debtor's house in California has risen in value and now he has some equity he wants to borrow against. 

Debtor and Spouse apply for a loan.  Broker finds a Lender who will lend the funds to Debtor.  Escrow is opened at TitleCo.  Lender gives instructions to Escrow Officer, "Insure that my loan is in first position and pay off all pre-existing liens." 

Escrow officer runs a preliminary title report and sees Judgment Lien in favor of Company X.  Uh oh. 

Broker calls Escrow officer, "how is the close coming along?" 

Escrow officer replies, "not good, your borrower has a judgment lien."

Broker calls Debtor, "We've got a problem.  Your loan can't close because you have a judgment lien."

In the meantime, if Escrow officer is doing his or her job, Escrow officer phones CreditorX, "hello, has this judgment been paid off.  No? I see."

The next thing you know, Debtor has quit claimed the house to his Spouse and since she is judgment free, the loan closes in her name only. The judgment did not get paid!

The situation above is essentially a fraudulent transfer--an act committed with intent to hinder or delay the creditor.  California adopted the Uniform Fraudulent Transfer Act and it is codified in Cal. Civ. Code § 3439.04 et seq.  Who are the potential defendants? Debtor and Debtor's Spouse, the Broker, possibly the TitleCo and the Lender.

While the Lender may not have known or participated in the fraudulent transfer, they may have to be named as a party due to Company X's claim for declaratory relief that their judgment retains priority over the new loan.

Seems like a lot of work, right?  It is. Especially now that a lender and title company are involved.  They have significant resources to mount a hefty defense.  However, if you had an attorney fee provision in your original action, and the debtor is solvent, it can be worth the effort to pursue.  In the case of Company X above, the creditor was paid and we recovered the attorney fees and interest on judgment as well.  How long did it take? From the commencement of the original action to the actual receipt of money--over two years.

California Judgments - The Real Deal on Enforcement and Collection

Today, a topic near and dear to my heart - making deadbeats pay up. Many attorneys who do not handle sophisticated collection and enforcement will routinely record an Abstract of Judgment and then tell you to sit tight.  However, Abstracts can be lost to foreclosure, wiped out by the senior lienholders, or expire after 10 years. You may want to be more aggressive.  Further, of all the enforcement measures around, Orders to Appear for Debtor's Examination (OEX), and Wage Garnishments--a Levy on real property or seizure of personal property tends to be the most effective.  It is however, the most complex and expensive method of collection.

Eric writes:

Trying to Collect on Your Judgment?

You can paint the hypothetical anyway you want to. You sue someone, your trial attorney gets a judgment against them, and then, lo and behold, when you go to collect your judgment there is nothing there. The debtor does not pay you. Nobody at the Court will do anything more.  Now it's all your responsibility to collect.  How do you make the collection on your judgment?

If your judgment debtor owns real property in California: Hopefully, your attorney has already had an Abstract of Judgment recorded in all counties that you thought the judgment debtor might own property. Presuming that an Abstract of Judgment has been recorded in the county where the subject real property sits, you are now in position to go through the levying process, more commonly known as a "sheriff’s sale."

The first step is obtain a Writ of Execution from the Court. With a Writ of Execution in hand, the next step is to levy the property (California Code of Civil Procedure §§700.010, 700.015). Generally, this requires you give letters of instruction to the levying officer of the county. In the instruction, you tell the levying officer of a county important facts regarding the subject property and to whom the recorded notices of the levy and the copies of the issued Writ of Execution must be served on. However, please note that different counties have different requirements for what the levying officer must be provided.

Once the property has been levied, the judgment creditor is required to file an Application for Order for sale within a certain time frame. There will then be a hearing on the matter. The real property will then be ordered to sale. However, even if you get this far, there are minimum bidding requirements that must be met before the forced sale can be completed.

All these steps can be made more complicated by the particular facts of your situation. For example, the property could be subject to a homestead exemption (CCP 704.710 et seq.). The judgment debtor also might own the property with a third party. Additionally, the property could be in a county where the Sheriff’s Office for that county, the normal levying officer, delegates part of their duties to registered process servers.

The above information is NOT a checklist for one to handle a levy on their own, it is merely meant as a general overview of the process. There are many legal details that must be attended to to complete the levying process and obviously there are a great number of complications that can arise going through the process. As always, you will be better served by hiring a skilled attorney who handles and is familiar with the levying of property.