The DirtLaw Blog

Collecting on the Deficiency Judgment.

Below is an excerpt of an article that was published in the Winter 2008 Points of Interest for California Mortgage Broker Association members:

Sold Out Junior Lienholder With a Deficiency Judgment? Now It’s Time To Collect
by Julia M. Wei, Esq, The Law Office of Peter N. Brewer

If you were the prevailing party, the attorney who handled your litigation will usually prepare and record an Abstract of Judgment for you.  However, that is as far as their collection efforts often go.  It is then up to the judgment creditor to engage a collection specialist to enforce the judgment against the judgment debtor.

1.  The Sit and Wait Method Recording an Abstract of Judgment is a passive means of judgment enforcement.  It is a lien against the debtor’s real property in a particular county.  Accordingly, if the debtor owns property in multiple counties, a creditor should have multiple Abstracts of Judgment issued by the Court and record them in all the counties the debtor is believed to own real property.

TIP Abstracts are good for as long as the Judgment.  A judgment expires after 10 years if not renewed.  Accordingly, if the creditor knows the debtor has relatives that he or she may inherit real property from, the creditor should also record in that county because the abstract of judgment will attach to the new property at the time the conveyance.  The creditor should also set up a calendaring reminder to RENEW the judgment in a timely fashion.

Back in the heyday of refinance loans, creditors were often paid because the debtor eventually would take some equity out of their home and the new loan paid off the liens.  These days, that scenario is less likely.

Additionally, abstracts can be lost to foreclosure, wiped out by the senior lienholders, or expire after 10 years. Judgment creditors may want to be more aggressive. 

 

2. Examining the Debtor and Taking the Money Out of Their Wallet A judgment creditor can have the Court issue an Order to Appear for Debtor’s Examination (OEX) and serve post-judgment discovery regarding the debtor’s financial accounts. 

Service of the OEX and post-judgment discovery is also a way to get the Debtor to start calling the creditor, rather than the Debtor avoiding the creditor’s phone calls.

The OEX is challenging to execute because it must be personally served on the debtor and the debtor may be an expert at dodging service.  However, assuming service is accomplished, two things could happen.  1) the debtor could appear; or 2) the debtor could fail to appear and the Judge can issue a bench warrant.

TIP   If the debtor does appear (the OEX is conducted at the courthouse), then creditor’s counsel can slap a Turnover Order on the debtor and get whatever assets are present that day – i.e., debtor’s watch, car, cash in their wallet. 

3.  Seize Their Car and/or Boat This only works if the debtor actually owns their car.  However, once you have a judgment, you may also have grounds to have a licensed personal investigator make inquiries of the DMV records.  The first step in any seizure is to obtain a Writ of Execution from the Court after the asset report is obtained from an investigator.

The seizure method is costly but effective.  Seizure of personal property requires the Sheriff to get involved, and requires up front deposits with the Sheriff’s department.

TIP When the car is garaged, the creditor must obtain a seizure order that allows the deputy to enter private property (garage or marina) to seize the vehicle.

FOR THE FULL TEXT - GO HERE.

Mortgage Pool in Bankruptcy - What Can Investors Do?

For those of monitoring the Cedar Funding implosion, it was not surprising to see that Cedar Funding, Inc. filed for Chapter 11 bankruptcy last week.

Cedar Funding is now a Debtor-in-Possession (DIP), and no doubt David Nilsen will seek to remain in control of the organization, and avoid the receiver recently appointed by a California Superior Court judge. 

What can creditors do?

In cases of fraud or wrongdoing, creditors can seek to appoint a Chapter 11 Trustee.  This would prevent the DIP (in this case Nilsen) from having ongoing control and management of the business.  However, many creditors should recognize that there is a cost associated with this, much the same as having a receiver in place.

Additionally, for unsecured creditors, the US Trustee will circulate a request that a creditor's committee be formed.

All of these steps are to part of evaluating the DIP's ultimate plan for reorganization.  The committee has voting rights, and in addition to the Trustee can object to a plan that is unlikely to be successful or in the best interest of creditors.

More aggressive steps? Creditors can determine if they should bring a motion to convert the bankruptcy to a Chapter 7.  Upon a conversion, the bankruptcy estate is controlled by the Chapter 7 Trustee and the goal of the Chapter 7 is a liquidation of assets rather than an a "re-organization."  While it can seem draconian, in reality, most Chapter 11 bankruptcies fail and the sooner the debtor liquidates, the higher likelihood of some recovery before the estate is eaten away.

How can a creditor decide?  A DIP has the obgliation to prepare operating reports and in this case, the operating reports may be more detailed than the reports that the investors may have sporadically received in the past.  The failure to supply these reports can be an indication that there is something to hide or that the debtor lacks the ability to satisfy the requirements of remaining in a Chpater 11 bankruptcy.

At a bare minimum, creditors will need to prepare their proof of claim and can decide to take a wait and see approach.

What We Learned about Subprime Lending in 2007

Back in March of 2007, I noted on here at The DirtLaw blog that a domino effect was occurring, with local Californian company Central Pacific Mortgage getting little press.

Well, when Countrywide began imploding, it seems that national papers began to pay attention.

Things We Learned in 2007:

-  the bad underwriting practices of 2005 are coming back to haunt the industry.  Time to revert to tighter underwriting policies.

- when lenders are under water, likely scenarios include

1. the short sale,
2. the deed-in-lieu
3. the judicial foreclosure plus deficience judgment and
4. debtors surrendering collateral in bankruptcy
5. debtors walking away from the property and not bothering to file bankruptcy

All in all, we've had a busy year at the firm, and I expect to see an increase in the number of judicial foreclosure lawsuits and deficiency judgment activity as well as more loan modifications.

Let's see if my other predictions come to pass about legislation trying to:

a) craft stricter penalties for "predatory lending" (only now vaguely defined by the California Finance Code)

b) modify the anti-deficiency statutes to include re-finance and HELOC loans as well as purchase money loans (possibly with a sunset provision)

c) abridge or abolish the availability of the stated-income loan (think this is already happening, so score 1 for the DirtLaw Blog.)

Commercial Leasing - When a Tenant files bankruptcy

Recently I spoke at a Commercial leasing seminar in San Jose.  My portion dealt mainly with the scenario of the tenant filing bankruptcy.  A copy of my outline can be found here.  I hope you will find it useful, though it is not intended as a primer on bankruptcy law.

In a room full of property managers, not a one had experienced a tenant filing bankruptcy.  I thought that was interesting.

Instead, the hot topics were unlawful detainers and my personal favorite, enforcement of judgments.  Though not in my outline, I spoke a bit on the Order for Debtor's Examination (OEX), post-judgment discovery, and the power of a turnover order and the Writ of Execution to authorize the sheriff (or deputy) to levy or garnish wages.

Many law firms can take you to judgment, but without the success of collection, it is merely academic.