Judgment
Liens: Challenges for Bankruptcy Trustees and Judgment Creditors |
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| Bankruptcy | |
| I. INTRODUCTION
The bankruptcy trustee is charged with the fiduciary duty of administering
a bankruptcy estate to maximize the return to unsecured creditors. Assets
may initially appear valueless, as the trustee takes a debtor’s
property subject to all liens, exemptions, and any capital gains taxes.
Through creative use of the Bankruptcy Code and case law, a trustee
may be able to create equity in assets. This article discusses strategies
for maximizing the value of assets for the benefit of unsecured creditors
and steps for judgment creditors to take to protect themselves. Conversely,
a judgment lien creditor could find himself without a valid abstract
of judgment if challenged by the trustee. Under the Bankruptcy Code, trustees have two types of rights. First, the trustee owns all legal and equitable interests in property that the debtor had under State law. Second, the trustee has certain additional rights and powers relative to the debtor’s assets as set forth in §§544-551, often called “avoidance power” rights. Trustees may use these “avoidance power” rights to avoid liens, including those created by abstracts of judgment, which fail to comply with statutory requirements under California law. In a Chapter 11, the Debtor-in-Possession may use the trustee’s avoiding powers. A. Failure to Include Driver’s License Number or Social Security Number on Abstract Where Known Several years ago, the State of California amended the Code of Civil Procedure to require that abstracts of judgment contain the driver’s license and social security numbers of the judgment debtor, if known. That statute provides as follows: (a) Except as otherwise provided in Section 4506 of the Family Code,
an abstract of judgment or decree requiring the payment of money shall
be certified by the clerk of the court where the judgment or decree
was entered and shall contain all of the following: The amendment is intended to ensure that one could identify the correct
judgment debtor and minimize the risk that liens against others would
cloud real estate transactions by parties with names similar to a judgment
debtor. The statute provides that a judgment creditor may correct an
abstract recorded after January 1, 1979, that does not comply with subsection
674(a)(6) by filing an “Amendment to Abstract of Judgment.”
An abstract of judgment is void when it does not contain the information
if known by the creditor at the time the abstract is filed. Failure
to include the required information is a common mistake, with major
consequences. Two California bankruptcy courts have considered whether a trustee may avoid an abstract where the creditor knew the judgment debtor’s social security and driver’s license numbers at the time but failed to include the numbers on the abstract. The outcome of the cases turns on whether the judgment creditor has knowledge of the social security and driver’s license numbers. For example, in the case of In Re Kim, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) considered whether an abstract of judgment was avoidable under 11 U.S.C. §544(a) when it stated that the social security and driver’s license numbers were unknown to the creditor but the creditor had that information when it prepared the abstract. The BAP determined that the debtor-in-possession could avoid the lien because under California law, a bona fide purchaser of the property took free and clear of an abstract of judgment that falsely stated that the information was unknown. However, the BAP in the case of In Re Varner held in favor of the judgment creditor because the creditor did not have actual knowledge of the social security or driver’s license numbers at the time it recorded its abstract. The debtor challenged the creditor’s abstract based upon the Keele decision. In Varner, the parties stipulated that the judgment creditor did not have actual knowledge of the judgment debtor’s social security or driver’s license numbers at the time of recordation. The debtor nevertheless contended that the judgment creditor was charged with constructive notice of the social security number from an earlier recorded abstract in the chain of title against the judgment debtor. The BAP determined that Keele applied only where the judgment creditor had actual knowledge of the identifying data at the time of filing. Thus, because it was undisputed that the creditor did not know the identifying information when it prepared the abstract, the BAP reversed the bankruptcy court and directed that judgment be entered in favor of the judgment creditor upholding the lien. An abstract of judgment that is recorded against estate property and that does not contain the debtor’s social security or driver’s license numbers should be investigated. The trustee should inquire if the debtor knows whether the creditor had either piece of information when it recorded the abstract. Debtors often can confirm that the creditor had such knowledge at the time of recordation and, in many instances, can provide documentation proving actual knowledge, such as copies of credit applications, signature cards, or proof that the creditor conducted a credit reporting agency search. Many creditors know the debtor’s social security number from the credit or loan application or may otherwise discover this information during the litigation giving rise to the judgment. For example, Form Interrogatories ask for the driver’s license number. Avoiding and preserving the abstract can increase equity for the bankruptcy estate, sometimes in a higher priority position. As a result, the judgment creditor loses his lien. B. Errors in Debtor’s Name on Abstract An abstract of judgment, which contains minor errors in spelling the debtor’s name, can lead to the abstract not affecting the property. In Orr v. Byers, the California appellate court determined that a typographical misspelling of the debtor’s name on an abstract bars constructive notice thereof. Although the debtor’s name was “William Elliott”, Orr obtained a judgment in the sum of $50,000 against “William Duane Elliot.” The abstract of judgment recorded in Orange County identified the debtor erroneously as both “William Duane Elliot” and “William Duane Eliot.” The court found that the abstract of judgment against “Elliot” and “Eliot” failed to impart constructive notice of the abstract against “Elliott” due to the misspelling. Thus, Orr was not allowed to challenge the payoff of a subsequent encumbrance’s lien. As with the social security and driver’s license numbers, this is a trap for the attorney preparing the abstract or the initial complaint. Although title companies sometimes will pick up similar spellings, the issue is when a person examining the title records at the County Recorder’s Office would pick up the judgment debtor’s name notwithstanding the misspelling. A judgment creditor can obtain a personal property judgment lien by filing a judgment lien form with the Secretary of State’s Office under California Code of Civil Procedure §697.510. It creates a lien on (1) accounts receivable; (2) chattel paper; (3) equipment; (4) farm products; (5) inventory; and (6) negotiable documents of title. Again, it is important to have the correct name of the judgment debtor. This form does not require a social security number or driver’s license number. III. CONCLUSION Correctly preparing judgment liens and abstracts of judgment can make
the difference between being a secured creditor and unsecured creditor.
The same attention to detail must also occur at the time of filing the
Complaint to avoid problems later. |
