It just got a little bit harder to enforce judgment liens

LewisQuoteBy:  Ben Reeves

Introduction

As everyone knows, the enactment of the Statute of Westminster II in 1285 ushered the concept of a “judgment lien” into English law.  The statute – for the first time in English legal history – authorized a judgment creditor to obtain a writ of elegit (as opposed to a writ of fieri facias) to take possession of the judgment debtor’s land to pay for the judgment debtor’s debts.  1285 was indeed a very good year for judgment creditors.  Nearly three-quarters of a millennium later, the judgment lien remains an important remedy for judgment creditors.

Judgment Liens in Arizona

Although Arizona law has (for the most part) abandoned the use of fanciful Latin phraseology, Arizona does provide for a “judgment lien” – which (despite the plain, uninspired name) creates a lien against all of the real property then owned or later acquired by the judgment debtor.  In Arizona, judgment creditors create a judgment lien simply by recording a certified copy of a judgment in the county recorder’s office.  The judgment creditor can foreclose on its judgment lien and force the sale of the judgment debtor’s property to satisfy the judgment – even if the judgment debtor transfers the property to a third-person.  See Byers v. Wik, 169 Ariz. 215 (Ct. App. 1991).  Thus, the judgment lien is a pretty powerful tool in the judgment creditor’s arsenal.  That tool just got a little bit harder to use.

Lewis v. DeBord

In Lewis v. DeBord, a judgment creditor recorded a judgment without attaching an “information statement” as technically required by A.R.S. § 33-967.  The Arizona Court of Appeals held that the judgment creditor’s failure to attach this “information statement” effectively rendered the judgment lien worthless vis-à-vis third-party purchasers.

The “information statement” provides very basic information (such as the last known address) about the judgment debtor.  Although a judgment lien is valid even if all of the information is unknown, the statute provides that the judgment lien “has as its priority the date” that the judgment creditor records the aforementioned “information statement”.

In Lewis, a judgment creditor obtained a judgment against the judgment debtor in 2006, and recorded its judgment to create the judgment lien.  The judgment debtor bought some real property in 2008, and the judgment lien automatically attached to that real property as a matter of law.  Before the judgment creditor could execute, however, the judgment debtor sold the property to a third-party.  Only then – after the real property was sold – did the judgment creditor record its “information statement”.

After recording its “information statement” the judgment creditor sued the third-party to foreclose its judgment lien, but the third-party objected – arguing that the judgment lien was invalid due to the failure to attach the “information statement”.

The Court of Appeals disagreed, holding that the failure to attach the “information statement” did not render the judgment lien invalid as a matter of law.  However, the Court of Appeals determined that the absence of the “information statement” affected the “priority” of the judgment lien.  Therefore, because the third-parties purchased the land before the “information statement” was recorded, the Court of Appeals concluded that the third-parties’ interests had “priority” over the judgment lien.  Accordingly, the judgment creditor could not enforce its lien against the “senior” owner of the property.

Take Away Points

In this author’s humble opinion, the Court of Appeals confused the concepts of “priority” and “perfection” in reaching its holding.

Secured creditors generally have “priority” (i.e., take first) over owners.  By holding that judgment liens are valid even in the absence of an “information statement”, the Court of Appeals should have held that the judgment creditor’s lien interest was superior to the third-party owners’ interest.  This outcome would be similar to what would happen if a third-party purchased a house without obtaining a release of the mortgage.  Logically, the mortgage would still constitute a lien against the house notwithstanding the sale, and the secured creditor could foreclose out the third-party purchaser’s newly acquired interest in the home.  The logic of the Court of Appeals’ decision should have led to the same result as to the judgment lien.

The concept of “perfection,” however, deals with the procedure of making a lien enforceable against third-parties.  Here, the holding concludes that the judgment lien was not enforceable (i.e., “perfected”) against the third-party purchaser’s interests.  Thus, the Court of Appeals really decided the case based on the lack of “perfection” of the judgment lien, as opposed to the relative “priority” of the lien interest versus ownership interest.  Indeed, even junior liens can be foreclosed, so the ruling (which prevents the judgment creditor from foreclosing) is actually based on a “perfection” type analysis.

At the end of the day, Lewis is a “bad-facts” case, where one innocent party was going to lose no matter what.  Either the judgment creditor would win and take the property away from the unsuspecting third-party purchasers, or the third-parties would win and deprive the judgment creditor of a means of satisfying the judgment.  Both outcomes present their own policy considerations, and the Court of Appeals cannot be faulted for siding with the third-party owner.  They can be critiqued, however, for applying a seemingly flawed analysis to reach that result.

Update:  The Supreme Court reversed this opinion.  Read about it here.

Author: Ben Reeves | Leave a comment Tagged , , , ,

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