Judgment Creditors: Rights to Foreclosure Proceeds

By February 24, 2010 Blog, Litigation, Real Estate Law

After winning a lawsuit, a creditor is faced with collecting the money awarded in the judgment.  If there is any chance the debtor owns real property in California, the judgment creditor will often record an Abstract of Judgment in the official records of the county or counties where the property is located.  This then creates a lien on the property that can be foreclosed, or which must be paid off upon sale if, as is usually the case, the buyer wants its title to the property unencumbered by creditors of the seller.
There is a hole in the creditor’s security, however, as illustrated in the recent case of Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, Inc.  (09 C.D.O.S. 181, December 11, 2009).  BofA held a judgment against Christopher Wong.  Mr. Wong owned property in Costa Mesa, so BofA recorded an abstract of judgment in Orange County.  At the time the abstract was recorded, Mr. Wong was in default under a loan secured by the property, and the lender had recorded a notice of default and a notice of foreclosure sale.  The foreclosure sale occurred, with the sale resulting in excess proceeds of over $100,000 after the foreclosing lender had been fully paid.  The trustee that conducted the foreclosure sale, 3 Arch, paid the entire amount of excess proceeds to Mr. Wong, with nothing going to BofA despite its recorded abstract.  BofA was displeased with this result, and sued 3 Arch for failing to check the  public records and paying the excess proceeds to the junior lien holder (BofA).  The trial court agreed with BofA, but the result was overturned by the appellate court.
The appellate court carefully considered the entire structure of non-judicial foreclosure procedures in California.  It concluded that a foreclosing trustee has no duty to give notice of a pending or completed foreclosure proceeding to a junior judgment creditor unless the creditor has recorded, in addition to or as part of the abstract of judgment, a special request for notice.  The request for notice must be recorded after the foreclosing lender records the deed of trust being foreclosed, and before the notice of default is recorded commencing foreclosure.  BofA argued that this places an unreasonable burden on judgment creditors, who will need to continually check and recheck the public records in the counties where the debtor may acquire or refinance property after the abstract is recorded.  The court acknowledged that this places a significant burden on judgment creditors, but left it to the legislature to deal with.
The takeaway from this case is that judgment creditors should always record a special request for notice together with their abstract of judgment, and should run a title check on any known properties owned by the debtor to determine if a notice of default has been recorded.  If a notice of default has been recorded, the creditor should immediately submit a written claim to the foreclosing trustee, under penalty of perjury, specifying the amount of the claim and otherwise meeting the requirements of Civil Code Section 2924.
Thomas B. Jacob, Real Estate Group