Volume 13, No. 1
The Provisional & Post-Judgment Remedies Section strives to provide its members with programs and educational material crafted to enhance an attorney's daily practice. We continue to focus on programs which provide our section members with information and practice tips for use in their day-to-day practice.
To that end, in November 1997, our section presented a dinner program entitled "Winning at the Beginning: Nuts and Bolts of Attachment and Claim and Delivery". The program was well attended and a great success. The program highlighted the proper use of judicial forms, evidence pitfalls, recent statutory and case law developments and Department 66 practice tips. Our Section's Program Chair, Jason Wallach, moderated a distinguished panel of practitioners which included Executive Committee members Grant Riley and Alan Mirman, as well as Commissioner Arnold Levin. The presentation and written materials were outstanding and certainly helpful to anyone practicing in this area. The materials were included as part of the recent Los Angeles Superior Court Walk-Thru Program for newly admitted attorneys.
Our section recently presented its traditional Breakfast With the Experts program, which was the best attended in the history of our section (even if it meant getting up at the crack of dawn!). Once again, Jason Wallach mastered the role of moderator of our distinguished panel - Judge Robert O'Brien (Dept. 86), Judge David Yaffe (Dept. 85) and Commissioner Bruce Mitchell (Dept. 59). We extend our sincere thanks to each of them for their candid insight and words of wisdom, imparted to those of us who practice before them. We recognize that they continue to generously donate their time and effort on our section's behalf, and we are very grateful. As is always the case, the topics of this program were covered in an informal question and answer format, and focused on local rule changes and receivership issues. Videotapes are available from the Bar Association. See the related article by Edythe Bronston in this newsletter.
As the Executive Committee of this section devotes substantial effort in response to our members' educational needs, we solicit your input in the types and topics of the programs and activities you would like us to offer. Please feel free to send us your comments, suggestions and ideas.
Our newsletter is designed to provide our members with information to assist in effective use of the various provisional and post-judgment remedies. We are certain that you will find valuable information in this issue, including articles on judgment liens, assignments of rent and attachment.
We believe that this year has been a productive and enriching one for our section and its members. We will strive to keep our members informed of recent case and legislative developments through our programs and newsletter. We look forward to seeing all of you at our programs this year.
Scott O. Smith, Chair
Breakfast With The Experts: February 26, 1998
By: Edythe L. Bronston
Edythe L. Bronston is a member and past President of the Provisional & Post-Judgment Remedies Section of the Los Angeles County Bar Association. She practices in the area of provisional remedies and commercial bankruptcy and is a principal with the Law Offices of Edythe L. Bronston in West Los Angeles.
On February 26, 1998, the Provisional & Post-Judgment Remedies Section (APPJR) of the Los Angeles County Bar Association held its Breakfast with the Experts Program. This is an early morning breakfast meeting, where the judges and commissioners who deal with provisional remedies are questioned by members of our section and attendees. The Honorable David Yaffe joined Judge Robert O'Brien and Commissioner Bruce Mitchell in a lively question and answer session attended by a standing room only crowd of almost 100 early risers. A large portion of the program was devoted to the new California Rules of Court, which have expressly pre-empted and declared void any and all local rules dealing with "form and format". The Local Rule review process is just starting. Judge Yaffe chairs the subcommittee which is going through all of the Local Rules, one by one, to see if CRC 302 applies. After the review, there will be an opportunity for public comment, followed by a vote of all the judges. The rule changes are extremely important to our practice, in several distinct areas.
Ex Parte Procedures
CRC 359 addresses the timing of notice and filing of papers regarding an ex parte hearing. This is an extremely cumbersome rule. In all but "exceptional circumstances," notice of TROs and OSCs must be given at least 24 hours prior to the hearing and all TRO and OSC papers must be served at least 24 hours in advance of the hearing. In addition, however, a proof of service must be actually filed in the applicable department 24 hours before the hearing. Since the Los Angeles Superior Court intends to continue hearing ex parte applications at 8:30 a.m., rather than returning to the old 1:30 p.m. hearing time, this means that a significantly longer lead time is required for ex parte hearings on TROs and OSCs. Commissioner Mitchell will accept a waiver of the 24 hour notice, provided that an attorney's declaration of such is filed. Even if a proof of service is not filed 24 hours before the hearing, if no one objects, Judge O'Brien will hear the matter. All of the judges hope that we will be getting some relief from this rule. Attorneys are attempting to get around the 24 hour notice requirement by leaving after-hour voice mail messages. While we do not have a definitive answer as to whether a late night message is acceptable, all of the judges stated that a notice given Friday afternoon for a Monday morning hearing will suffice, although the Rule does not state whether 24 hours' notice refers to court days or calendar days.
The foregoing is of great interest to plaintiffs who are moving ex parte for appointment of a receiver, as such complaints as a matter of course also request a temporary restraining order. In such cases, Judge O'Brien believes that CRC 359(d) and (e) apply, while Commissioner Mitchell believes that the Rule is inapplicable. Discretion being the better part of valor, it is suggested that CRC 359 be complied with when moving ex parte for application of a receiver.
Commissioner Mitchell, along with Commissioner Levin, met with several bankruptcy judges on these issues and has revised his form order. As a result, a receiver may continue in possession for ten days to preserve the status quo, so long as a motion for relief from the automatic stay is filed with the bankruptcy court within that time. Commissioner Mitchell (and presumably Commissioner Levin) will rule on a receiver's accounting which covers the time period during which the bankruptcy case is still pending, so long as the plaintiff has obtained a USC 543(d) order excepting turnover and an order granting relief from the automatic stay. Judge O'Brien disagrees, as he does not believe that a state court can or should review the accounting of a receiver who is, after all, still acting under the aegis of the bankruptcy court. Judge O'Brien stated, however, that if the bankruptcy court grants relief from the automatic stay within a short time, he may rule on the accounting and activities of the receiver during the bankruptcy period.
Enforcement of Judgment Receivers
Such receivers, appointed under CCP 564(b)(3), are heard in Departments 85 and 86. Judge Yaffe referred to CCP 708.620, the enforcement of judgments statute, and requested that plaintiffs carefully read that statute as the court must be satisfied that such a receiver is the only fair and practical way to proceed. Commissioner Mitchell concurred, stating that a receiver is to be used only with reference to a particular asset and is not to act as a collection agency for a plaintiff.
There was discussion as to the enforceability of receivership orders in other states. Judge O'Brien believes that any type of receiver can take possession of property in another state, so long as that state's sister state procedures are followed. Commissioner Mitchell does not believe that rents, issues and profits receivers can take possession of properties in other states, or even in other California jurisdictions.
Stays of Mandamus Actions
Both Judge O'Brien and Judge Yaffe stated that the criteria for proving that a stay is in the public interest and not adverse to a public agency, if the agency has already ruled in an administrative hearing, are ad hoc, although it is certainly easier to obtain a stay for procedural rather than substantive matters. A factor to be taken into consideration is the length of delay by administrative agencies.
How Many Times Do I Have To Tell You . . . ?
By: Mel Aranoff, Esq.
Mel Aranoff is a partner at Horgan, Rosen, Beckham & Coren, specializing in the representation of financial institutions, including banks, thrifts and leasing companies in commercial litigation, bankruptcy and workout matters.
Notes and trust deeds secured by commercial real property often contain assignments of rents that state that they are "absolute and unconditional." After a default, lenders may repeatedly advise their borrowers that the assignment was absolute, by demanding a turn over of the rents. Will such provisions and demands always insure that the lender will be able to recover rents from defaulting borrowers?
A recent California appellate decision, from the Fourth District, held that a secured creditor is only entitled to recover rents paid after a creditor's post-default written demand for rent. The lender, of course, was entitled to rents after a receiver was appointed. Federal National Mortgage Association v. Bugna (Kent) 57 Cal.App.4th 529 (1997).
The case involved a $5 million loan made in 1986 on an apartment building, with a note and trust deed securing the obligation. The trust deed contained standard language regarding the absolute assignment of rents. The provision allowed the borrower to collect rents until a written demand by the lender. After the borrowers filed a bankruptcy petition without notice to the lender, in December 1992, the lender made written demand for the rents. When the lender was advised of the bankruptcy, it made demand on the bankruptcy trustee. The lender obtained relief from stay in October 1993. The trustee abandoned the property in November 1993. The lender then had a state court receiver appointed. The battle in that case was over the $337,000 that the bankruptcy trustee turned over to the receiver.
The receiver was appointed October 28, 1993. The confirmation hearing, set for November 8, 1993, went off calendar for lack of timely service. The receivership was terminated November 15, 1993. The lender then got an order reappointing the receiver nunc pro tunc to November 8, 1993. The borrower challenged the lender's right to the rents before November 8, 1993. The lower court had agreed with the lender, but the Court of Appeal reversed.
Surprisingly, the lender did not maintain, on appeal, that its demands sufficed, since it failed to argue that a demand was needed. The lender's counsel must have believed that its position conclusively established that no demand was legally required. Counsel therefore decided not to make an alternative argument of compliance. Since the lender failed to argue that its demand sufficed, the Court of Appeal did not consider whether the lender's actions before the receivership satisfied the prior demand requirement.
The lender nonjudicially foreclosed in March 1994, with a $1.3 million underbid. The borrower opposed the motion for final distribution of the rents to the lender. The Court of Appeal ruled that since the trust deed required a written demand, an additional step had to be taken before the lender could be entitled to the rents. The Court of Appeal cited with approval the often criticized case of In re GOCO Realty Fund I, 151 B.R. 241 (Bankr. N.D. Cal. 1993), to the effect that an additional "enforcement step," beyond default, is needed before a creditor can collect rents.
It may seem strange that a state court might find its authority in a bankruptcy court case, which, in turn, had to rely on state law. Ironically, the GOCO court gave no citation to state precedent. However, the additional step of prior demand is now also required, by statute, with respect to contracts entered into starting January 1, 1997. Since that step is now required by statute, it is unlikely that the California Supreme Court will overrule the Bugna decision.
Lenders should now routinely make written demand for the rents before seeking a receiver, if they wish to preserve their right to rents collected before the appointment of a receiver. This is especially true where the prior rents might be turned over to lenders, such as by an abandoning bankruptcy trustee. How many times does a lender have to tell the borrower to turn over the rents? Obviously, as with voting, early and often.
Judgment Liens on Homesteaded Property: Recent Developments
By Alexander Litvak
Alexander Litvak is the principal of Alexander Litvak, A Law Corporation, emphasizing creditor's rights in bankruptcy and commercial litigation.
The California Legislature has established two methods to protect specified amounts of equity accumulated in a homestead. The first method, the homestead exemption, governed by 704.710, et seq., is self executing. 704.720(a). When executing on a dwelling as defined by 704.710(a), the judgment creditor has the burden of disclosing, inter alia, whether the dwelling is a homestead and the amount of exemption, if any. 704.760. The other, the declared homestead, is governed by 704.910 et seq. and requires affirmative action on the part of the homeowner, i.e., recordation of a homestead declaration. 704.920.
While there are differences in the extent of protection offered and their means of creation, both methods offer protection to the same amount of equity in property which qualifies as a homestead. The base exemption for property which qualifies as a homestead of the judgment debtor is $50,000. 704.730(a)(1). This exemption rises to $75,000 when two of the same family unit reside in the same dwelling and are not over 65. 704.730(a)(2). Finally, as of January 1, 1998, the amount of exemption for equity in qualified real property is $125,000 for persons who are 65 or older, or are physically or mentally disabled or for persons who are 55 or older and fall within income levels specified in the statute. 704.730(a)(3)(A) and (B).
A judgment lien on real property is created by recording an abstract with the county recorder. The lien continues for ten years from the date of entry of judgment. 697.310(a) and (b).As a general rule a judgment lien on real property attaches automatically to all interest in real property in the county where the lien is created or any interest in real property acquired after the judgment. 697.340(a) and (b). However, when the real property in question qualifies as a declared homestead, this general rule does not apply. '697.340 and 704.950.
Code of Civil Procedure 704.950(c) provides: AA judgment lien attaches to a declared homestead in the amount of any surplus over the total of the following: (1) All liens and encumbrances on the declared homestead at the time the abstract of judgment or certified copy of the judgment is recorded to create the judgment lien. (2) The homestead exemption is set forth in section 704.730. [Emphasis added.] Prior to 1997, there was no reported opinion in California which addressed the issue of what happens to the judgment lien if the real property subject to a "declared homestead" had no "surplus equity" at the time the judgment lien is created. In 1997, however, two cases took strikingly different approaches to this issue.
The first to consider this issue was the Ninth Circuit Court of Appeals in In re Jones (Jones vs. Heskett et a1.) (9th Cir., 1997)106 F.3d 923. The facts of Jones are relatively simple. In 1976 Virginia and Brian Jones purchased a home in Berkeley, California. The home was encumbered by a purchase money first deed of trust in December 1976. Thereafter, four more deeds of trust were recorded on this property. In November 1986, the Joneses recorded a declaration of homestead. At that time, 704.920 allowed the Joneses to claim an exemption in the amount of $45,000 under 704.730(2).In January 1987, Kelleher Lumber Co. ("Kelleher") recorded a writ of attachment incident to a state court action against Mr. Jones. Kelleher was awarded a judgment in May 1987 for $29,882.50 and recorded its abstract of judgment in June 1987. At the time the writ of attachment and the abstract of judgment were recorded the home was valued at $250,000, while the voluntary liens (i.e., deeds of trust) totaled $313,800. In 1989 the Joneses divorced, and Mr. Jones quit-claimed his community property interest to Virginia Jones. In November 1990, Virginia Jones filed a Chapter 7 case. At the time the Chapter 7 was filed, the home was valued at $325,000 and the amount of prior liens was $248,000.
In April 1993, alleging that the Kelleher judgment lien did not attach to her home, Virginia Jones filed a complaint with the Bankruptcy Court to determine the validity and the extent of the Kelleher judgment lien. The Bankruptcy Court ruled the Kelleher judgment lien valid. The BAP affirmed. Both courts concluded that the date of the bankruptcy filing (November 1990) was the appropriate date for determining whether there was surplus equity in the home to which a judgment lien could attach.
On appeal, the Ninth Circuit reversed. Relying on 697.340, which excludes 704.950, the court held that in order for a judgment lien to attach to what the court refers to as "homesteaded property," 704.950(c) requires that surplus equity exist "... on the date the abstract is recorded..." The court found that in June 1987, when the Kelleher $29,882.50 abstract of judgment was recorded, the voluntary liens and the declared homestead totaled $358,800 ($313,800 and $45,000 respectively), while the homesteaded property was worth only $250,000. The court concluded that at the time the Kelleher abstract of judgment was recorded there was not surplus equity in the Jones property. Without a California case to guide it, the Ninth Circuit further concluded that in California a judgment lien does not attach to a homestead property if there is no "surplus equity" at the time the abstract of judgment is recorded. The Ninth Circuit did not address the issue of what happened to the lien created under 697.310(a) when Kelleher recorded the abstract of judgment.
In effect, the majority concluded that a lien which does not attach when created ceases to exist. If the property appreciated in value after the date the abstract of judgment was recorded, the judgment creditor could not take advantage of such appreciation. This is contrary to 704.800(a), which allows the judgment creditor to renew the application for sale of the homestead on an annual basis. Section 704.800 was not considered by the court in In re Jones.
Under the rule of In re Jones, a judgment lien recorded later in time (when equity exists) could attach to a declared homestead, while an earlier recorded judgment lien (when no equity exists) would not. Not only does the judgment debtor benefit from increased value of the property, but the same benefit accrues to a judgment creditor who was less diligent or who obtained a judgment later in time. Such an outcome is contrary to California's "first in time - first in right" priority statutes. See Civil Code 2897 and C.C.P. 697.380(c) and (d). This is particularly poignant in today's real estate market, with California property values rising after a prolonged and deep recession.
In December 1997, 704.950 was considered by the Second District Court of Appeal in Charles Teaman v. Herbert Wilkinson, et al. (1997) 59 Cal.App.4th 1259, where the state court reached a different and better reasoned conclusion. The Teamans purchased residential property in December 1993 for $365,000. The property was encumbered by two deeds of trust totaling $328,500. In January 1994, the Teamans recorded a homestead declaration which created a $75,000 homestead exemption. In June 1994, the Wilkinsons recorded an abstract of judgment in the amount of $127,000. In August 1994, the Teamans sold this property to the Goldhills for $362,500. In 1995, the Wilkinsons sought to sell the real property which was now owned by the Goldhills.
At the time the Wilkinsons recorded their abstract of judgment, the Teamans' property was valued at $360,000. The sum of the $328,500 in liens on the property, together with the Teamans' $75,000 exemption, was $403,500, thus there was no surplus to which the judgment lien could attach under 704.950(c)(1). The court, however, rejected the argument that the lien ceased to have any value for all time as urged by the Goldhills and as concluded in In re Jones. Rather, the court concluded that when an increase in the value of the property creates or increases the surplus equity, the judgment creditor is entitled to reach the appreciation in satisfaction of its judgment. Thus the creditor may force the sale of the homestead in satisfaction of the judgment lien if surplus equity accrues at some later time while the debtor owns the property. The court reasoned as follows:
Pursuant to sections 704.780, subdivision (b) and 704.800, subdivision (a), a court may not order the sale of homestead property nor may the property be sold at a court-ordered sale when there is no surplus equity in the property. Significantly, 704.800, subdivision (a) further provides that if the homestead is not sold because of the lack of surplus equity, it "is not thereafter subject to a court order for sale upon subsequent application by the same judgment creditor for a period of one year." (Italics added.) The italicized language can be read only as an expression of legislative intent that a judgment creditor whose lien did not initially attach because there was no surplus equity when its abstract of judgment was recorded be given additional opportunities to execute on the lien if surplus equity does develop. The creditor merely has to wait at least a year between each attempt to levy execution." Teaman, at 1267.
Although it is not mentioned in the opinion, it is clear that 704.800 applies to a "declared homestead" just as it does to a "homestead exemption". 704.970(b). The court also concluded, however, that the sale of the property may not be forced after the debtor voluntarily sold the property to a third party even if "surplus equity" accrued after the sale.
The Teaman case represents a more realistic outcome, while preserving the "first in time - first in right" doctrine. It takes into consideration, and addresses, the distinction between the creation of a judgment lien and the attachment of such a lien when dealing with real property, and incorporates within its analysis the provisions of 704.800(a). The actual impact of In re Jones, however, may be limited, for the following reasons:
In re Jones arose in the context of a "declared homestead" under 704.910, et seq., and turned on the court's interpretation of 704.950(c). California's automatic homestead exemption, 704.710 et seq., does not contain a provision similar to 704.950(c). Thus, a different outcome would likely result if a homestead declaration had not been recorded by the judgment debtor.
The outcome could also have been different had there been surplus equity at the time Kelleher recorded its attachment lien. Under 697.020, a judgment lien relates back to the date the attachment lien is created. In cases where the property declines in value after creation of an attachment lien, the judgment creditor could argue that the judgment lien attached to the surplus equity as of the date of the attachment lien. See 488.500.
Since In re Jones relied on the absence of any state court precedent, the Teaman case may place the validity of In re Jones in doubt.
In re Jones is not binding on California courts. See In re Jones, 106 F.3d at 928; Teaman, 59 Cal.App.4th at 1266, fn 5. However, until Teaman and IN RE JONES are reconciled, different outcomes may result under the same facts depending on whether the issue arose in state court or in Bankruptcy Court.