Written By: Christine E. Howson
The statutory bible governing the enforcement of virtually all types of state court judgments in California, including ordinary money judgments, is the Enforcement of Judgments Law (“EJL”). Judgments are enforceable under the EJL generally upon “entry” of the Judgment.
Under the EJL, various types of liens can be created and attach to personal property following the entry of a judgment. Such liens include: (1) execution liens which are created from the time of levy on property under a writ of execution until the expiration of two years after the issuance of the writ (unless the judgment is satisfied sooner); (2) liens created after the service of an order for examination which expire one year thereafter (unless extended by court order); and (3) liens created by creditors’ suits; and (4) line created by charging orders. This article concerns a fifth type of lien, a Judgment Lien on Personal Property (also referred to as a “JLPP”), which in general should always used when the judgment debtor is doing business regardless of the form of the business.
A JLPP attaches to a debtor’s business personal property, and unlike other liens on personal property, a JLPP will in certain cases preclude transfer of the property to a bona fide purchaser by providing constructive notice to transferees and lenders, thereby avoiding the pitfalls of “secret liens” which arise with liens created by examination orders, charging orders and creditor’s suits. JLPPs are created by the filing of a Notice of Judgment Lien with the Secretary of State, and they can attach to the same type of personal property in which a security interest can be perfected by filing a financing statement with the Secretary of State. Specifically, the types of business personal property to which these liens attach are:
- Accounts receivable;
- Chattel paper;
- Equipment;
- Farm products;
- Inventory (not including retail inventory items with a unit retail value of less than $500); and
- Negotiable documents of title
Conversely, personal property in which a security interest cannot be perfected by filing a financing statement with the Secretary of State, is not subject to a JLPP–such as a deposit account or money (other than identifiable cash proceeds from property listed above that has been sold), rights under letters of credit or a policy of insurance. Moreover, the EJL expressly provides that a JLPP does not attach to a vehicle or vessel required to be registered with the Department of Motor Vehicles, or a mobilehome or commercial coach required to be registered under the Health & Safety Code. Additionally, a JLPP does not attach to inventory of a retail merchant with a unit retail value of less than $500.
The Secretary of State has an official form for the Notice of Judgment Lien which satisfies the statutory information to be provided in the notice and, subject to certain exceptions, the filing of a Notice of Judgment Lien with the Secretary of State gives the judgment creditor priority over most liens created later in time.
In addition, a JLPP continues notwithstanding the sale, exchange or other disposition of property subject to the lien, except that a JLPP is cut off if property subject to the lien is transferred to a buyer or lessee “in ordinary course of business.” Such a buyer or lessee takes free of any security interest in the goods and also of any JLPP. (Other exceptions to the continuation of the lien after disposition of the property are also listed in California Code of Civil Procedure § 697.610.)
Additional advantages of a JLPP over other enforcement liens and procedures, include:
- A JLPP is prepared by the creditor’s attorney (or the judgment creditor if in pro per) and then filed with the Secretary of State — reducing the delay often experienced with liens created by documents issued by a court clerk.
- The JLPP also gives the judgment creditor priority over unsecured creditors without having to levy on the personal property by a writ of execution — saving both time and money to obtain the lien.
- Other procedures available for liening business personal property (e.g., through an examination proceeding or creditors’ suit) do not protect against transfers to bona fide purchasers for value. Moreover, the JLPP lien can continue after the property is transferred, unless inventory is transferred in the ordinary course of business or the transfer is to a person described under CCP § 697.610.
- Similar to a judgment lien on real property, a JLPP is less disruptive than other judgment enforcement methods, and as a result, a JLPP is less likely to motivate the debtor to file bankruptcy before expiration of the 90-day preference period.
Furthermore, unless enforced in combination with a court order such as a seizure order or turnover order, a JLPP does not generally interfere with the debtor’s possession or use of the property, thereby allowing the debtor to continue to use the property if needed to generate funds to pay the judgment.
- A JLPP is also an inexpensive judgment enforcement method. It can be issued by the judgment creditor’s attorney, served by mail on the judgment debtor, and the filing fee to be paid to the Secretary of State is $20.
- Once a JLPP is filed with the Secretary of State (unless the judgment is satisfied or the judgment lien is terminated or released), the JLPP continues for five years from the date of filing of the Notice of Lien with the Secretary of State. In comparison, execution liens which are created from the time of levy on property under a writ of execution only last until the expiration of two years after the issuance of the writ (unless the judgment is satisfied sooner), and liens created after the service of an order for examination expire one year after the order is served (unless extended by court order). However, it should be noted that if property subject to a JLPP (e.g., equipment) is affixed to real property in such a manner that it becomes a “fixture,” the judgment lien on the personal property is automatically extinguished.
As far as the priority of a JLPP, the “first in time” rule ordinarily applies. This means that the lien of the JLPP generally has priority over subsequently filed JLPPs or other security interests. However, there are certain exceptions to this rule which are beyond the scope of this article. (See, California Code of Civil Procedure § 697.590 and California Rev. & Tax Code § 18817.)
It should be noted that a drawback of a JLPP is that there is no method for foreclosing on the JLPP under the EHL; however, there are other enforcement procedures that can be used in conjunction with the JLPP to obtain the personal property and apply it to the outstanding amount due on the judgment. Such enforcement procedures include turnover orders and seizure orders issued by the court, and lien priority will then generally relate back to the fling of the Notice of Lien creating the JJLP even if the personal property of the debtor is not subject to a turnover or seizure order until years later.
Finally, to extinguish a JLPP, the judgment creditor simply files either an acknowledgment of satisfaction of judgment executed by the judgment creditor or a clerk’s certificate of satisfaction by the judgment creditor with the Secretary of State.