Monday, December 17, 2012
THE LEGAL COMMUNITY
Playing Cards — Protect Yourself: Liens and Schemes
By DAVID J. COOK
(The author is the senior attorney for Cook Collection Attorneys PLC and publisher of CollectionLawReporter.com)
Sixth in a Series
A judgment creditor can secure a lien in the debtor’s real and personal property as follows:
1. Recording of an Abstract of Judgment with the County Recorder. The cost to issue the abstract is $25.00, and cost to record is $35.00 (more or less). Names are everything and misspelled names, American names, missing middle names if part of the defendant’s common name, are an impediment.
2. Filing a personal property line with the Secretary of State (JL-1) creates a lien upon the debtor’s personal property (commercial property).
3. Service of an OEX upon the debtor, or third party, creates a lien upon the debtor’s personal property or the property held by the third party.
4. Service of charging order (for a partnership), creditor’s suit (suing the obligor), or levy upon property, all create liens upon the assets.
Liens are generally inexpensive and secure an interest in the debtor’s property. In many cases, a lien will enhance the creditor’s prospect of payment in the event of a sale or refinance. If the debtor files bankruptcy, the lien, if older than 90 days, will survive the bankruptcy and potentially encumber assets, which if sold, would generate payment to the judgment creditor. The lien also enables the creditor to stake out a bargaining position to resolve the claim. Liens through a recorded Abstract of Judgment or filed JL-1 might appear in a bulk sale or sale of real property and enhance the prospect of payment.
In the recording of an Abstract, the judgment creditor should consider recording in a multi-county area, given the fact that many people work in one county but live in another, which is common for Santa Clara, San Mateo, Alameda Counties, etc.
This hand is precarious. Liens secure a debt. If the property is valueless, the debtor doesn’t care. If the property appreciates, the debtor does care. Old tired an ancient judgment came back from the dead when California real estate exploded in value between 1999 to 2006. Valueless judgment became valuable, but compelled the debtor to hire attorney who claimed that the debtor was not served with the summons and complaint (or other profound defect) and the judgment was void. This was a ruse to negotiate a settlement which sometimes succeeded. More of this round. Keep everything even the phone messages in paper from the debtor complaining that the process served served him late at night, pounded on the door, or threw the papers at his feet.
PAYMENT PROGRAMS—RISK OF LOSS AND GENERAL INSOLVENCY ISSUES.
Payment programs are common in collection settings primarily because the debtor lacks the financial ability to pay the debt at once, or does have an asset which can be easily sold or liquidated. In most cases, a payment program is a usual outcome and may be the only outcome. A creditor who rejects a payment program might inadvertently push the debtor into bankruptcy, in which any recovery is remote, at best. However, a payment program accrues risk. The risks are the following:
A. The debtor defaults and prior to any liens, or levies, sells the home and leaves the area.
B. The debtor files bankruptcy and converts nonexempt assets into exempt asset, and thereby creates a no asset case.
C. The debtor is burdened by other debts, such as tax liens and levies which, if recorded first beats out the judgment creditor.
D. The judgment debtor suffers from “payment fatigue” and declines further payments even with the expectation that enforcement is on the way.
E. The debtor has learned about asset-protection schemes (see below) and determined, correctly or otherwise, that the judgment creditor will decline to spend “good money after bad” in toppling the asset-protection scheme.
F. The debtor just ran out of money or just does not care anymore.
Whatever the reason, the debtor defaulted, and leaves the judgment creditor with a balance to collect. On the one hand, the payment program provided a benefit to the judgment creditor by reducing the balance through payments. On the other hand, the judgment creditor gave up the sense of momentum, or forewent enforcement against vulnerable assets, which are seized by the other creditors. Either way, the judgment creditor might find itself “lower down” on the “pecking order,” of claimants against the common debtor. Moreover, time has passed, and as a result the debtor’s financial condition might have declined.
If the judgment creditor has not recorded liens, the judgment debtor defaults, chances are that other creditor have filed or recorded their liens, or that property is sold or transferred and proceeds are inaccessible.
The character of the debt is important. If the debt is subject to a discharge in bankruptcy court, the debtor is well advised to file bankruptcy to dispose of the debts and emerge from bankruptcy solely with taxes and other nondischargeable debts which never go away.
This round of cards bears enormous risk. If the debtor is offering payments, embrace a default. Don’t expect compliance, expect a default and plan for the worst. If the plan is judgment upon default, the liens will attach to air and not the real estate. If the plan is judgment upon settlement, the lien might sink deep piles in the real estate. If the settlement is for 50% on the dollar, and the judgment is full freight, the debtor will cry penalty and the judge will knock down the judgment to the unpaid balance of the settlement and wipe out the big judgment. Play this round very carefully. If judgment is delayed, any recovery might never exit life support.
ASSET-PROTECTION AND FRAUDULENT CONVEYANCE SCHEMES
Facing collection of a large dollar (or even small dollar) judgment, the defendant can execute an asset-protection strategy consisting of the following basic steps:
A. Relocate bank accounts from known accounts to other banks in CA or move accounts to Nevada through common banks such as Wells Fargo Bank.
B. Re-title real property from community property to joint tenancy, transfer property to family trusts or partnership, or refinance real property in favor of real or imagined lenders; or sell the property and transfer the proceeds offshore.
C. Empty out all safe deposit boxes and relocate contents out-of-state. This is a certainty.
D. Liquidate any personal property of value and deposit proceeds in the hands or names of family members or newly-created entities.
E. Re-title business in new corporate, LLC or limited partnership names, including chopping up the business into separate entities to hold key assets.
This list is illustrative only, and the Internet and book stores, including Amazon.Com (and other online book sellers) have an enormous inventory of titles and information that detail as asset-protection. A common scheme is the conversation of liquid asset into pre-paid credit and debit cards in which the card holder is an out-of-state (preferably Nevada) corporation or LLC, and the issuing bank is likewise out-of-state, or even offshore. American Express, along with others, offer traveler’s checks (passé in today’s digital environment), but better: prepaid credit or debit cards. Call this portable wealth in the digital age.
Asset-protection schemes are cumbersome, expensive and bear risks. The risk is that the debtor files bankruptcy, and has committed a fraudulent conveyance in one year. The act of a fraudulent conveyance within one year might entitle the judgment creditor to sue to bar the discharge. If successful, the debtor would emerge from the bankruptcy still saddled with the debt accrued pre-petition.
Asset-protection schemes create an expense that discourages the creditors from taking action to locate the asset, topple the scheme or sue the third party who has possession of the asset. The asset-protection scheme provides a financial disincentive against any action to topple them. Ultimately the purpose, among others, of asset-protection is to re-title an asset but repose the beneficial interest and access in the hands of the debtor or nominee.
The judgment debtor typically will fraudulently convey property to family members, business associates, or entities formed for the purpose of warehousing the assets. Direct proof of the “intent to hinder, delay and defraud” and other issues are infrequently “direct” and more likely circumstantial. These cases are fact driven, and the fraudulent conveyee and conveyor (the debtor) are aligned with each other. Before pursuing these claims, which can be very contentious (to say the least), the judgment creditor can proceed with an OEX of the debtor and the conveyee to develop an adequate evidentially basis to prove up the case. If supplemental proceedings loom over the horizon, these examinations must be transcribed.
This round is full of jokers. The debtor, the attorneys, the asset protections, the spouses, the kids, the accountants. Be paranoid. You should. The winning hand in a fraudulent conveyance is not the fact of the conveyance but the effort in bumping the conveyance. They are all rotten to the core and with some effort, can be toppled. Every asset protection tome starts with the soliloquy that asset protection scheme will die on the judicial altar, but judgment creditor usually declines to finance the campaign to mount that altar. Seek to set aside a fraudulent conveyance of a single family residence: $5,000 in costs is cheap. Asset protection succeeds in accruing an expense barrier that only a zealot would breach. The asset protection round is real expensive and expect to lose a few hands, rendering the experience very pricey. Call this the “come and get me” strategy. When confronted with the fact of a fraudulent conveyance scheme reposing with her $3 million of unencumbered California real estate, wife responded: “So what.”
Copyright 2012, Metropolitan News Company