Enforcement of judgment

     To better understand consensual secured debt, it is useful to be equipped with a basic understanding of the process by which unsecured creditors collect debt through use of the judicial process.  We offer a brief introduction to that process.

     The unsecured creditor, whether consensual (e.g. by agreement) or non-consensual (e.g. by tort), may not simply grab a debtor's money or other property in satisfaction of debt. Such self-help would be conversion, subjecting the creditor to tort liability. Instead, absent an agreed resolution, the creditor must sue the debtor for a money judgment and, once judgment is obtained, seek to enforce the money judgment against property of the debtor through appropriate process, generally known as execution. Apparently an angry unsecured dentist in Idabel, Oklahoma was not familiar with this legal principle when, in 1981, according to news reports, he went to his patient's home and yanked out her dentures because she had failed to pay for them.

     There are a couple of exceptions. Under limited circumstances, Article 2 of the Commercial Code offers sellers of goods a right to reclaim goods from a buyer who has not paid for them. Where a seller who has sold on unsecured credit discovers that its buyer has received those goods at a time when the buyer was insolvent, the seller may reclaim the goods sold upon demand made within stated time periods. U.C.C. 2-702(1). Or, when the seller has taken the buyer's check in payment of goods delivered under a contract calling for payment at the time of delivery, the seller may reclaim the goods from the buyer if the check bounces. U.C.C. 2-507(2); 2-511(3). However, it is not clear from either those statutes or the cases interpreting them whether the seller with a right to reclaim may attempt self-help in the face of a debtor's refusal to honor the seller's demand for reclamation. Resort to the judicial process may still be required.

     Generally a creditor with a judgment must enforce a money judgment against property of the debtor through execution. The judgment itself does not give the creditor any interest in the debtor's property. The creditor remains unsecured until it obtains an interest in the debtor's property through the execution process.  If the judgment creditor is unaware of the nature and value of property in which the debtor has an interest, the judgment creditor may obtain a court order that the judgment debtor appear in court for an examination about assets (see sample California Order to Appear for Examination), may conduct Lexis or WestLaw asset searches, or may hire experts specializing in the discovery of assets (see, e.g. the web site of TracingAmerica). Judgments are enforceable for a specified period of time. For example, in California, a judgment may be enforced for a period of ten years from the time it is entered, subject to timely renewal for successive ten year periods.

     Execution begins with a writ, issued by a court following judgment. The writ, typically referred to as a writ of execution (see sample California Writ of Execution), orders a levying officer, typically a sheriff, to seize specific property of the debtor and, upon appropriate notice and advertisement of sale, sell the property at auction to the highest bidder. Proceeds from the sale of property seized are applied first to payment of costs incurred by the levying officer and are then paid to the judgment creditor (i.e. the creditor who obtained the judgment) in partial or total satisfaction of the judgment. If the sale does not produce enough proceeds to satisfy the debt, the creditor may repeat the process with respect to other property of the debtor. The judgment creditor may bid at the execution sale, at which there may or may not be other bidders. It would be silly, of course, for the judgment creditor to take money out of one of its pockets to pay the levying officer who would then return the money to the creditor's other pocket. Thus, the judgment creditor interested in bidding will typically bid in some or all of its judgment.

     For a variety of reasons, execution sales will rarely, if ever, generate third party bids equal to the fair market value of the property (the amount that a willing seller would pay a willing buyer if the seller were not compelled to sell and the buyer were not compelled to buy).  The sheriff makes no warranties of quality or title with respect to the property, offers the property subject to existing liens, and cannot offer prospective purchasers access to real property for purposes of inspection.   In addition, third party purchasers must pay cash for the property at the time of sale (or, in some cases, a deposit at the time of sale with the balance due shortly thereafter) and, in the case of real property, will be responsible for evicting tenants.   Finally, in many jurisdictions, the debtor may redeem the property from the purchaser for a short period of time following the sale. 

     In many cases, a debtor is owed a debt by another. If the debtor is a wage earner, the employer owes her wages. If the debtor has a checking account, the bank owes her the amount of funds credited to the account. If the debtor has a tort judgment against a tortfeasor, the tortfeasor owes the debtor the amount of the judgment. If the debtor is a manufacturer, the purchasers of its products owe for goods purchased on credit. A judgment creditor of a debtor may satisfy its judgment by garnishing these debts owed to the debtor by another. Garnishment procedure varies among states.

     In most jurisdictions, the sheriff's levy of a writ of execution or garnishment writ creates an execution lien on the property identified in the writ. Thus, a judgment creditor becomes secured through levy of the writ.  In some jurisdictions the execution lien arises earlier, either upon issuance of the writ by a court official or upon the judgment creditor's delivery of the writ to the sheriff for purposes of levy, although the lien is said to be inchoate until the levying officer actually levies.  Article 9 of the Uniform Commercial Code uses the phrase "lien creditor" to refer to a creditor that becomes secured through the judicial process.  Such a creditor, as of the time of creation of the lien, has the same advantages of security that characterize creditors who are secured by voluntary agreement or by statute. Of course, the lien creditor is likely to have expended a considerably greater amount of resources, both time and money, getting to this point than creditors that become secured by voluntary agreement or by the terms of a statute.

    In some situations, varying among states, an unsecured creditor using the judicial process may obtain a lien on property prior to judgment by procuring and having a levying officer levy a writ of attachment (see sample California Writ of Attachment) on some of the debtor's property or an attachment of debts owed the debtor. In California, for example, a creditor with a contract claim exceeding $500.00 may seek an attachment. In other states, irrespective of the nature of the claim, the creditor may be able to seek an attachment only upon a showing of risk to the debtor's property (e.g. concealment or destruction) pending judgment, or in other limited circumstances.

     As should be obvious, a judgment creditor's use of pre-judgment attachment, execution or garnishment can seriously threaten the debtor's ability to conduct its affairs. Thus, the process will often be aborted by one of two events: (1) the debtor will offer full or partial payment, or a payment schedule acceptable to the judgment creditor, perhaps secured by a consensual security interest in some of the debtor's property; or, (2) the debtor will seek the protection of federal bankruptcy law by filing a voluntary bankruptcy petition. And if the bankruptcy petition is filed within 90 days of the date on which the lien was created, the lien may be avoided as a "preference" and the judgment creditor's time and expense will have been wasted. We consider the power to avoid preferences in bankruptcy in Commentary. Avoidance of liens in bankruptcy.

     If a debtor has an interest in real property (whether fee simple, shared tenancy, or leasehold), a judgment creditor may also obtain a lien on that real property, either before or without pursuing the execution process, by recording suitable evidence of the judgment in the appropriate land record's office.   Such a lien, a form of judicial lien, is typically referred to as a judgment lien. If the debtor has an interest in more than one parcel of real property in a county, the lien will attach to all real property in the county in which the debtor has an interest. If the debtor does not have an interest in real property, the recordation will cause a lien to attach to real property immediately upon the debtor's acquisition of an interest in real property located in the county of recordation.

     In California a judgment creditor can also obtain a judgment lien on certain types of personal property (equipment, inventory, farm products, accounts receivable, chattel paper, negotiable documents of title) by filing a Notice of Judgment Lien with the Secretary of State.  Cal. Code Civ. Pro. 697.510 - 697.670.   An analagous remedy is available in only a few other states. In most states, a judgment lien may be obtained only with respect to real property.  Like the judgment lien on real property, the judgment lien on personal property is passive, that is, unlike the execution lien, it does not disturb the debtor's possession and use of property. Accordingly, judgment liens, where possible, may better serve the interests of both judgment creditor and judgment debtor than execution or garnishment because they establish priority and are less likely to precipitate the filing of a bankruptcy petition by the judgment debtor.   

     Judgment lien in hand, the now secured creditor may simply wait, all the while interest accruing on the unpaid judgment.  If and when the debtor wishes to sell or refinance property subject to the judgment lien, the buyer or the refinancing lender, unwilling to take interests subject to the judgment lien, will typically require that the proceeds of the sale or refinancing be first applied to satisfaction of the judgment (including accrued interest) secured by the judgment lien. However, an impatient judgment creditor, especially one not concerned about the prospect of the debtor's bankruptcy, is free to pursue both procedures seriatum, recording first to create a judgment lien and thereafter executing on the same or other property.

     State law may provide other means of obtaining a lien through the judicial process. For example, in California, the judgment creditor obtains a lien on all of the debtor's personal property through service upon the judgment debtor of an Order of Examination; this lien is effective for a period of one year from the date of the Order. Cal. Code Civ. Pro. 708.110(d). This lien, like the judgment lien on real or personal property, does not disturb the debtor's possession or use of the property and thus is less likely to precipitate the filing of a bankruptcy petition by the judgment debtor.

     Some debtors seek to place their property beyond the reach of the processes described here by conveying property to others. Some of these conveyances will be fraudulent and may be undone or ignored by the judgment creditor under state law provisions governing fraudulent conveyances. Examination of fraudulent conveyance law is beyond the scope of these materials. Sophisticated asset protection strategies, such as the use of foreign trusts, are also beyond the scope of these materials.