Bankruptcy. Prof. Ware
Chapter 2. State Law Debt Collection
A. Collection Remedies.
I. Introduction to Judgment collection . p.33 – 48 (post judgment devices)
A. D and Creditor relationship arise in various contexts. (contracts, tort, family, divorce, employment) civil side in terms of money damages
i. D has some duty and court can reduce to judgment
ii. D can be client (of lawyer) or owner that services are provided to
iii. Plaintiff is creditor and tortfeasor is debtor
iv. Also employment relationship
v. Seller is Creditor as she didn’t deliver goods or delivered defective goods, then court will reduce to damages
B. How should the law treat independent who doesn’t pay the judgment? What tools should law give the P who get troubled getting judgment?
i. Garnishment –
a. deduct from wages and bank account (child support)
1. wage or bank account, employer or bank ordered to pay it to creditor
2. bailment – D owns something but no possession of it, then state law varies, but generalization is call garnishment, bailee ordered to send it to creditor not bailor.
b. exempt floor – usually lesser of 25% of income
C. Execution (sheriff levies/seizes/takes). Judgment gives judgment creditor no interest and no priority in any of D’s property or income. à remains an unsecured creditor until “execution” is obtained on the judgment
i. 1) Creditor file lawsuit
ii. 2) Court renders a judgment and execution is obtained (if successful) on the judgment
iii. 3) collection process begins with a “execution writ,” court order. Issued routinely by the court clerk upon request of the judgment creditor and is delivered to sheriff for execution
a. Execution writ. Order sheriff to look for non exempt property of judgment debtor, to seize, to sell and to pay the proceeds to judgment creditor.
iv. 4) sheriff goes out and take physical possession (for small property) and lock it up at courthouse. For big property, its seized by posting notice of seizure and sale
a. Entire process of seizure is called a levy (act of seizure), and the sheriff levies upon the property
b. Entire process, from writ issuance to seizure – execution
1. execution (whole process from whatever happened to being paid)
v. 5) once levied upon, judgment creditor becomes a “judicial lien creditor” as to that property
vi. BUT, ISSUE of Exempt property
D. Turnover orders. P. 34 (when states have turnover statutes)
i. JD ordered to turn over property he possesses or if the property subject to his control under threat of contempt and jail
ii. Easier way to do than levy.
iii. Sit the D under oath and ask where your assets are located. Sheriff and Creditor chase down the assets with investigator
iv. Increasingly common way to chase D
E. Judgment liens by recordation. P. 36 – quick and simple – real property only
i. Real property. Major states. Recording a judgment in county land records where deeds of sale and mortgages are filed.
ii. Personal property. Minor states
iii. Benefits. 1) secure the D’s assets cause no one would buy it with judgment lien and 2) priority over later judgment creditor
F. Debt collection by the federal govt. p. 37
i. Federal Debt Collection Procedures Act, 28 USCA § 3001 – 3308
G. Family debts. P. 38. alimony, child support.
i. Imprisonment. Wage garnishment exception
H. Voluntary liens. P. 38
i. Involuntary lien system. Judgment lien creditor
ii. Voluntary liens. Consensual liens
a. On real property. mortgage
b. On other property. Security interest
c. Notice giving è Writing, Public notice, perfection by recordation, possession, entering interest on certificate of title for automobile
d. Purchase money lines. P.40
e. Creditor with consensual lien seize collateral more quickly and cheaply than a judgment creditor who has to go thru all steps of suit and execution before sheriff sells the goods.
1. self help repossession or retain in satisfaction. P. 41
I. Statutory liens and trust funds. P. 41
i. By operation of law. Landlord’s lien, artisan’s lien, mechanic to keep a car
J. Property exempt from collection process. Family home and household goods p.42
II. The Struggle Among Creditors: Priorities
A. Background p.48
i. General rule in state collection law: First in time, first in right. à the first creditor to levy on has right from sale proceeds
a. Key is who made some required legal move first à perfection
ii. Unsecured Creditor vs. Unsecured creditor
a. Must first get a judgment and execute or “levy on” that judgment à levy PERFECT the judgment lien on that property
1. item by item execution
b. when two writs levied same time.
1. many states: perfection (priority) backdated to the date sheriff got the writ (Because writ is delivered to sheriff when requested by the creditor)
2. some states: date of judgment or the date of sheriff’s levy controlling
i. if levied at the same time, then pro rata share
c. judgment lien by recordation (real state) wins
d. More than one creditors. If sheriff sell property, how to divide proceeds?
1. dividing proceeds?
ii. Pro rata.
iii. First in time: incentive to act. How does it connect with justice?
a. As for tie: there is tie breaker. Relate back to the
1. date of levy – sheriff
2. date writ to sheriff – creditor (when creditor requests, it’s delivered)
3. date of judgment – court
i. if judgment is precondition to get writ and levy, then creditor not really have control over it
4. date suit filed
b. should control be deciding factor?
iii. Unsecured judgment creditor vs. secured creditor p.50
a. First to perfect wins.
b. SC or mortgagee perfects when it records (by filing, by notation on a certificate of title, or other means) consensual lien according to statutory prescription
1. Exception. PMSI. Where SC finances coll, 20 day grace period
c. Bank get consensual lien and C get judicial lien
1. bank has to perfect SI before judicial lien happens, then bank wins
2. C judicial lien get judgment and takes sheriff to property and sold it at sale and give proceeds to C, and Bank never objected. After coll sold at sheriff’s sale, then what can bank do. the rule is forced sale like sheriff sale extinguish the lien forcing the sale and liens of a lower priority. Any secured creditor with a higher priority lien has their liens surviving a forced sale
i. buyer bought the goods subject to the bank’s lien. Bank can repossess the goods from the party who bought it from sheriff, but not from C
iv. Judgment creditors and SC vs. Buyers.
a. First in time, first in right. Measured by perfection through recordation system
v. Statutory liens and trust funds. P.51
a. As a matter of law in favor of certain creditors (landlords and subcontractors)
b. Tax lien and mechanic’s lien
1. even if they are in later in time, they have priority.
i. Ex. Lawyers lien client’s recovery. Client owes lawyer with contingent fees.
ii. Support creditors (support payments)
iii. State taxing authority
iv. Construction: multiple parties involved
a. Get your money upfront (you can borrow it)
v. Warehouse line.
c. Landlord. Most states failed to answer who has priority between these, statutory lien and judicial lien
1. B LL statutory lien creditor (Debtor owed 10k)
2. C judicial lien creditor (car accident) Debtor owed 10k
vi. Unsecured judgment creditor and SP vs. TIB
B. Competing unsecured creditors. P.52
i. Where two competing judgments have been recorded (docketed)
a. Recording or registration of judgment deemed to give notice to other parties creating priority
ii. When two judgments recorded before D acquires real estate
a. Majority: priority to judgment recorded first once D acquire property
b. Minority: NY, In re ESTATE OF ROBBINS
1. Robbins got real estate from mom on April 24, 1967 when she died
2. warrant of State Tax docketed as a judgment on Oct. 18, 1965 & May 10, 1968
3. judgment for Bank of Commerce obtained on Sep 28, 1962
4. priority considered beginning with date of decedent’s death
5. for newly acquired interest in estate, neither judgment had priority of lien
6. when a D has several judgments, become liens on AA property simultaneously even though docketed different times
7. State Tax Commission, priority under rule giving priority to claims of State as sovereign over other general liens unless creditor obtained priority specific lien
iii. Weaver v. Weaver: inactive person may lose vitality.
a. Three judgment creditors. Dudas has judicial lien (with judgment) for 5 years after filed, but judgment not revived, lien lapsed and lost priority.
C. Execution p.56
i. Levy usually judgment creditor’s perfection (often relation back to delivery of writ).
ii. Dispute when a judgment creditors’ levy actually occurred. à what must sheriff do to complete a priority conferring levy.
iii. Credit Bureau of Broken Bow v. Moninger Neb (1979)
a. Credit Bureau: writ of execution issued on June 27, 1978. July 7, 1978. sheriff served Moninger with a copy of writ, informed he was executing on pickup. M informed officer bank had title to the vehicle. Sheriff proceeded to vehicle, grabbed ahold of pickpup and stated “I execute on pickup for County of Custer). Didn’t take possession, no
an the debt allegedly owed to the D (because of writ of garnishment, garnishees owes debt to creditor)”
d. 4) cap each garnishment and require many payments
e. 5) JD keeps minimum income (percentage minimum level)
1. §1673 Restriction on Garnishment. (a) maximum allowable garnishment lesser of 25 percent of disposable earnings or amount by which his disposable earnings for that week exceed thirty times the Federal minimum hourly wage prescribed by 6(a)(1) of Fair Labor Standards Act of 1938 in effect at the time the earnings are payable, whichever is less
f. what if other creditors who want to garnish CD’s wages, who has burden (not sure)
v. Priority issues. The date writ delivered to sheriff or date sheriff served the writ
vi. Temporal net : the time btw service of writ of garnishment and the answer by garnishee – any money Bank get during this time, creditor gets it.
a. Bank usually must answer the writ on the date garnishment is due.
b. Money bank gets after answer but before due date à goes to creditor
c. Bank has setoff right.
C. Garnishee’s defense
i. Garnishee would assert a defense to the writ in form of some superior right in D’s property
ii. Garnishee may argue property is leased to him. à might be sham lease and creditor need to prove it’s fraud
iii. Even if court decided it’s okay, not fraud, JC can garnish lease payment to D
a. 3.2. Oct 15. JC delievered to marshal garnishment writ against Nic. On Nov 4, Nic answered writ saying he leased equipment belonging to JD and showed a copy of lease. Lease date on paper is Oct 1, but neighbor says lease executed on Oct 20.
1. Nicholson (Garnishee) would say I don’t hold property owed to JD, it’s leased property to me
2. This might be a Deal btw D and garnishee
3. To get a court order for garnishee to deliver the property to JC, what should do?
i. JC Should prove there is no lease, it’s fraud, claiming its lease
ii. If can prove no lease, then it’s sham transaction, sham lease, then garnishee would be ordered to deliver the office equipment
4. Even if it’s lease, JC can garnish lessee (Nic: garnishee)’s payment (Nic’s owed money to JD) to lessor (JD)
5. down side is there might not be enough lessee payment (like sham payment) $1 per month
D. Garnishee (ER)’s laying off Debtor (EE) because of garnishment
i. 3.3 1674. (a) no ER may discharge any EE by reason of fact that his earnings have been subjected to garnishment for any one indebtedness (b) fined not more than 1k or imprisoned not more than one year or both
ii. KSA 60-2311. “No ER may discharge any EE by reason of the fact that the EE’s earnings have been subjected to wage garnishment”
iii. Federal statute 1674. “for any one indebtedness” added last part of the above sentence
a. for two indebtedness, it’s okay to fire employee – KS doesn’t have it
b. 1674(b) set forth Administrative remedies with fines or imprisonment. No cause of action by EEs
1. BUT KS doesn’t have any correspondent rule – we can presume EE can bring cause of action against ER in KS, Prof. didn’t see it, but it’s possible
E. Restrictions on wage Garnishment
i. Consumer Credit Protection Act. 15 USC 1671 = less than 25% of disposable income.
a. Restricted the access of all creditors to wages of any D
ii. Commonwealth Edison v. Denson p.66 à support order garnishment > other garnishment in Illinois
a. According to IL statute, as btw judgment creditor garnishments and support order garnishments, IL gives priority to those for support regardless of the timing of those garnishments.
1. Usually first in time rule applies. But some get favorable treatment
1673 (b)(2) For support order, in a case supporting spouse or dependent child, 50% of disposable