A cautious investor will always check the public records to see what liens the investment property has against it, prior to acquisition. In some cases, investors may obtain a preliminary title report from a title company. That is half the battle of identifying what is on public record. The other half is understanding the implications of the lien(s) that crop up.
How is the judgment lien created?
In California, the judgment lien is governed by statute. If the title search reveals a judgment lien, it means that the judgment creditor has recorded an Abstract of Judgment in the county where the debtor (homeowner) resides. [Pursuant to California Code of Civil Procedure Section 697.310].
What is the duration of the judgment lien?
California Code of Civil Procedure is clear – unless satisfied or released, the judgment lien continues until 10 years from the date of entry of the judgment, after which it may be renewed. Often times the preliminary title report does not have the date of Judgment itself. Instead, the report often provides the date of the recordation of the Abstract of Judgment only. This means it is important to obtain a copy of the Judgment itself.
A simple hypothetical to demonstrate how the dates work – Chris Creditor sues Dan Debtor in Superior Court. Judgment is issued on May 1, 1997. Dan does not pay.
After a couple months, Chris begins collection action by requesting the Court issue an Abstract of Judgment. This is a form that is certified by the Court Clerk and states the amount of the judgment, the name of the judgment debtor and his or her address and the date the judgment was issued. The Abstract is issued shortly thereafter. Chris knows that Dan lives in the city of San Francisco so Chris requests an Abstract of Judgment be recorded in San Francisco County. The San Francisco County Recorder records the Abstract on October 10, 1997.
A title report will show that the Abstract of Judgment was recorded on October 10, 1997, but the operative date of the Judgment was May 1, 1997. The ten year expiration of the Judgment would in fact be in May of 2007.
In some cases, the Abstract of Judgment is recorded long before the debtor even owns property in that County. The judgment lien only attaches to the property when the debtor purchases in the County that the Abstract of Judgment was recorded.
How is the judgment lien satisfied?
If the Judgment is still in effect, there is generally only one way the judgment lien can be released and that is by Satisfaction of Judgment. The judgment creditor must record a Satisfaction of Judgment or alternative form of release of the lien. (The form for the Satisfaction of Judgment is available free of charge from the Judicial Council website.)
In California, there is no statutory right to bring a motion to expunge an Abstract of Judgment.
However, as the law of lien priority in California is essentially “first in time, first in right” [California Civil Code Section 2897] a senior deed of trust (mortgage) will have priority over the later-recorded judgment lien. Accordingly, a foreclosure sale of the senior deed of trust will usually wipe out the junior liens such as a judgment lien.
How much is owed on the Judgment?
In California, the judgment accrues interest at the statutory rate of 10% per annum. That adds up quickly. After ten years, upon renewal – the amount of the judgment is effectively doubled.
How can the investor obtain a Satisfaction of Judgment?
If the judgment debtor had intended to re-finance their home, the proceeds from the new lender would have to pay off the Judgment. That would be a condition of funding the loan because the bank wants to make sure it is in first priority.
However, an equity purchaser steps into the shoes of the borrower since they are acquiring the property subject to the liens against the property and not as bona fide purchasers for value. Additionally, while there may be enough equity to make the property interesting to an investor, it may not be enough to satisfy the full amount of the judgment.
Accordingly, the investor should consider offering a short payoff to the judgment creditor in exchange for a release of the judgment lien.
To increase the chance of success in negotiating with the judgment creditor, the investor could present the creditor with some of following scenarios:
- Speedy and easy payment is worth the discount. (A bird in hand is worth two in the bush.)
- If the debtor was in default with the lender, the judgment creditor would have lost their lien through the foreclosure sale.
- In order to stop the foreclosure sale, the debtor might file for bankruptcy to seek the protection of the automatic stay. Once that happened, under a successful discharge, the creditor would have lost the power to renew the Judgment (though the lien would remain against the property until the original expiration date of the Judgment).
- If the judgment creditor were to actually levy on his own judgment, the procedures for a sheriff’s sale are extremely burdensome, especially since if the debtor used the property as his primary residence.
- California has homestead exemptions that would have made it difficult for the creditor to reach the debtor’s equity in the property, unless there was a substantial amount of equity in the property.
- To do any active collection on the judgment, the creditor would have to advance more costs.
Of course, the creditor may realize that he has better odds of collecting the judgment against the investor since the investor does not have the protection of the homestead exemptions, nor is the investor as likely to file bankruptcy. That is why when the investor is evaluating the equity in the property, the investor should treat the lien as if needs to be fully paid off.
If the Judgment is very old, the other option to consider is to do nothing and see if the Creditor actually renews the Judgment. For most investors, this is usually not an option because they intend to re-sell the property and then lien has to be addressed.
Not all liens are the same, and while judgment liens are more straight forward than other liens (such as mechanic’s liens or construction loans with subordination clauses), even judgment liens can have some curveballs. Namely the “installment” judgment, wherein the judgment amount increases each month such as in the case of the child support payments. Negotiation of these liens takes patience and persistence.