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What Happens to an Abstract of Judgment When the Debtor Files Bankruptcy?

August 7th, 2013 · No Comments · California Judgment Enforcement/Collection, Creditor's Rights in Bankruptcy, Residential Real Estate

 By: Julia M. Wei, Esq.

Normally when a party wins at trial, all the prevailing party has is a judgment. It takes more than the issuance of a judgment to get paid on it if the debtor is being evasive.

In order to “perfect” the judgment, the judgment creditor can and should request the court clerk issue the Abstract of Judgment. A creditor can then record it in any county that the debtor owns property. If the debtor owns anything in that county, the abstract will attach to the property, even after acquired property and then the judgment becomes a lien against the property. California statutes in the Enforcement of Judgment section are pretty clear – the lien remains until the judgment is satisfied.

If the debtor then files bankruptcy, perfected judgment liens would NOT be extinguished through sections 550 and 551 of the Bankruptcy Code.

In the recent case of Daff v. Wallace (In re Cass), the debtor transferred her house to her daughter and reserved a life estate for herself. Debtor and daughter also had an agreement to transfer the house back to the Debtor later—clearly a fraudulent transfer, solely for the purpose of hinder or evading creditors. Creditors sued on the fraudulent transfer and obtained a judgment, and recorded the Abstract of Judgment.

Here is the first twist—the Debtor didn’t actually own any thing in the county where the abstract was recorded since she had fraudulently transferred it to her daughter.

Here’s the second twist – the Debtor filed for Chapter 7 bankruptcy and the Chapter 7 Trustee got involved in the litigation and entered into a stipulated judgment avoiding the fraudulent transfer—bringing the asset back into the bankruptcy estate.

Naturally, the creditors and the trustee’s disagreed as to how sale proceeds of the asset should be paid. Judgment creditors claimed the lien attached to the sale because the fraudulent transfer was voided. The trustee claimed that the lien was invalid because the transfer to the daughter took place before the abstract of judgment was recorded.

Victory for the Judgment Creditor:
Clearly, California law supports the creditors here and the bankruptcy court agreed. The trustee appealed and the Ninth Circuit BAP agreed with the creditors too. The transfer to the daughter was void as if it had never happened, therefore the creditor’s lien was properly attached and the creditor was entitled to the sales proceeds.

Pyrrhic Victory?
The creditors litigated this matter through two state court actions and one bankruptcy adversary proceeding and appeal. That is essentially four stages of litigation. The number of years and the amount of attorney’s fees to chase down this debtor must have been tremendous.
 

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