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.