Judgment Creditors - More Work For Collection, Request That Notice!

When a judgment creditor has gone all the way to verdict, has obtained the Judgment, the first thing the Judgment creditor does is record an Abstract of Judgment in the counties where the creditor thinks or knows that the debtor owns real estate.

For example if the judgment creditor is the prevailing party in a litigation Santa Clara County, and the debtor owns real property in Santa Clara County, then that is the logical place to record the Abstract.

A judgment is an unsecured obligation.  Once an abstract of judgment is recorded in the county where the debtor owns property, then it attaches to the debtor's asset and actually becomes a secured lien.

This means the judgment creditor would be treated differently in bankruptcy, as a secured creditor as opposed to an unsecured creditor and is generally paid more in a reorganization.  Secured obligations are also not discharged by the bankruptcy.

However, now the judgment creditor must do more than just record the Abstract of Judgment, under a recent California Appellate court ruling, the creditor must also record a Request for Notice.  [BANC OF AMERICA LEASING & CAPITAL, LLC, Plaintiff and Respondent, v. 3 ARCH TRUSTEE SERVICES, INC., Defendant and Appellant. (2009) 180 Cal. App. 4th 1090; 103 Cal. Rptr. 3d 397]

Let me explain:

Say you have a judgment against Joe Smith.  He owns a house in Palo Alto or Mountain View.  You record your abstract of judgment for $50k in Santa Clara County.  You request a title search or property profile from your buddy in customer service at the title company to verify that your abstract is showing up in the title search.  Turns out Mr. Smith has a big loan from Wells Fargo for $600k and another home equity line of credit in the amount of $100k from Chase bank.  Your judgment goes behind those two mortgage trust deeds.

Smith defaults on his loan.  Wells Fargo starts the foreclosure and records a Notice of Default, they order their Trustee's Sale Guarantee and your abstract does NOT show up as someone Wells Fargo must notify.  They do not notify you and they conduct the sale.  There are many bidders, the final bid is $785k, which would have been enough to pay all mortgages off and satisfy your judgment lien.  Except--you were not notified of the sale, you did not get notified of a surplus and you did not submit a claim for the overbid amounts.  Debtor Smith has his homestead exemption and receives the $85k.

What went wrong?  Why weren't you notified of the foreclosure sale and overbid? Answer - because the Trustee is only required to notify other mortgage holders and those who record a Request for Special Notice.  That means judgment creditors, tax lien claimants, mechanic's lien claimants, easement holders and lessees are not protected.

 The Court concluded that the Trustee did not have any obligation to further search public records or do anything more than was required under the California Civil Code Section 2924 et seq.  The fact pattern of the case had a lot to do with timing, since in the BofA case, the creditor actually recorded his Abstract of judgment just one month before the sale had been conducted, so they were not included in the Trustee's Sale Guaranty and the Trustee did not get an update before sending out the notice of surplus claims.

When should it be recorded? Technically, the Code allows the creditor to record it anytime after the lien and anytime before the Notice of Default. That means, do it the same time that you record your Abstract and just ask the recorder to make the Notice second.

 

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