Why It Is Important to Obtain and Serve an Order for Examination of a Judgment Debtor

As any experienced workout professional knows, getting a judgment against a recalcitrant borrower is only the halfway point in the collection process. Some borrowers would rather fight their lender than pay back the money they borrowed. To collect, the lender must persevere and take a number of steps to perfect its judgment lien and put itself in a position of priority over others.

My partner, Joe Demko, is a senior trial lawyer on the JMBM Special Assets Team™, who knows the ropes well. In this article, Joe passes along an important tip: it is critical for a lender who gets a judgment to take the next step and schedule a judgment debtor exam. As Joe points out, the simple act of serving notice of a judgment debtor exam creates a secret lien that enables the judgment creditor to collect money that has been transferred by the judgment debtor to a third party.

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IMPORTANCE OF SCHEDULING AND SERVING NOTICE TO APPEAR AT JUDGMENT DEBTOR EXAMINATION

by Joseph N. Demko

The California District Court of Appeal, in the recent case of Credit Suisse First Boston Mortgage Capital v. Danning, Gill, Diamond & Kolitz, held that the lien created by the service of an Order to Appear at Judgment Debtor Examination continues as against a subsequent transferee of the money to a third party even though the third party did not know about the lien.

Under California Code of Civil Procedure § 708.110, a judgment creditor may serve on a judgment debtor an order to appear at an examination where the creditor can ask questions about assets of the debtor. Many people do not realize that a judgment creditor gets a lien on the personal property of the judgment debtor merely by serving a Notice to Appear at a Judgment Debtor Examination. Under subdivision (d) of that section, the lien attaches the judgment debtor’s personal property whether or not the property is described in the Notice to Appear in sufficient detail to be reasonably identifiable.

In Credit Suisse First Boston Mortgage Capital v. Danning, Gill, Diamond & Kolitz, Credit Suisse obtained a judgment against Anson. Anson transferred money which he held in a deposit account to the defendant bankruptcy law firm Danning, Gill, Diamond & Kolitz (“Law Firm”) after Anson was served with a Notice to Appear at a Judgment Debtor Examination.

The Law Firm contended the $200,000 it received was not subject to the lien created by the statute. Credit Suisse disagreed. The Law Firm argued it took the money free of the lien because under California Code of Civil Procedure Section 697.740(j), a transfer without notice of a lien takes “letters of credit, advices of credit, or money” free of the judgment lien. That section provides that liens, including the lien created by serving the Notice to Appear, do not apply to “a person who acquires any right or interest in letters of credit, advices of credit or money.” The Court rejected that argument and reasoned that the word “money” in the exception, was to be read in conjunction with the terms “letter of credit” or “advices of credit” but did not apply solely to money.

This case is good news for judgment creditors. It illustrates the importance of noticing a Judgment Debtor Examination and serving the judgment debtor with a Notice to Appear, since doing so creates a lien on the personal property of the judgment debtor. This is a secret lien in that there is nothing recorded with the Secretary of State. Therefore, even an innocent party who receives money from the judgment debtor after the Notice to Appear has been served takes subject to that lien. This allows the judgment creditor to force the third party – innocent or complicit – to disgorge money received from the judgment debtor since those sums are subject to this secret lien. This is a powerful tool in the enforcement of any judgment.
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Joe Demko’s advice is well-taken. It is an unfortunate fact of life that some borrowers choose to fight rather than reason. While an experienced workout professional always prefers to reach a deal that makes sense, it is not always possible to do so. If circumstances require the lender to chase the borrower through court to judgment, it is important to finish the task by perfecting abstracts of judgment and other judgment liens, such as those that Joe describes here.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.