BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 121
Assemblymember Hernandez
As Introduced
Hearing Date: June 16, 2009
Code of Civil Procedure
ADM:jd
SUBJECT
Judgment Liens: Continuation of the Lien
DESCRIPTION
Under current law, a judgment lien on personal property
created by filing a notice of judgment lien with the
Secretary of State expires at the end of five years. To
extend the effect of the judgment lien, a judgment creditor
must file a new lien.
This bill would establish a process for the continuation of
a judgment lien on personal property, so that a creditor
would not have to file a new lien at the end of five years.
The process would be patterned after the process for the
continuation of security liens on various types of personal
property that are perfected through the filing of a
financing statement with the Secretary of State.
BACKGROUND
The California Commercial Code provides for the filing of a
financing statement with the Secretary of State to perfect
a security lien on different types of personal property.
Under Section 9322(a) of the Commercial Code, conflicting
security interests perfected by the filing of financing
statements are prioritized based upon priority in time of
filing the financing statement. Through this system,
lenders can safely provide financing secured by personal
property of their borrowers, i.e., the lender is assured of
the priority of its lien even while the personal property
(more)
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remains in productive use in the hands of the borrower.
A filed financing statement is effective initially for only
five years (Commercial Code Sec. 9515(a)), but under
Section 9515(d), the financing arrangement can continue
indefinitely as long as a continuation statement is filed
within six months before the date the financing statement
would otherwise expire.
A similar system exists for judgment liens under Code of
Civil Procedure Section 697.510, which permits a judgment
creditor to record a judgment with the Secretary of State
to create a lien on certain personal property assets of a
judgment debtor. This judgment lien also has a five-year
life but, unlike the perfected security lien under the
Commercial Code, it cannot be continued by the simple
filing of a continuation statement.
This bill intends to cure this discrepancy between the
judgment lien recorded with the Secretary of State and the
security lien against personal property, perfected through
the filing of a financial statement with the Secretary of
State.
CHANGES TO EXISTING LAW
Existing law provides that a judgment lien against
specified personal property of a debtor is created by
filing a notice of judgment lien in the office of the
Secretary of State. The judgment lien expires at the end
of five years from the date of filing, unless the money
judgment is satisfied or the lien is terminated or
released. (Code Civ. Proc. Sec. 697.510.)
This bill would permit the continuation of a notice of
judgment lien filed in the office of the Secretary of State
by the filing of a continuation statement not more than six
months prior to the expiration of the first five-year
period. A continuation statement that is not filed within
the six month period prior to expiration of the five-year
period would be ineffective. A continued notice of
judgment lien is effective for five years commencing on the
day that the notice of judgment lien would have lapsed.
This bill would permit the filing of successive
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continuation statements for five-year periods commencing on
the day on which the notice of judgment lien would have
lapsed absent the filing of the continuation statement.
This bill would define a "continuation statement" to mean
an amendment to the original notice of judgment lien that
contains the identification (file number) of the initial
notice of judgment to which it relates and that indicates
it is a continuation statement.
This bill would provide that the judgment lien created by
the filing of a notice of judgment lien in the office of
the Secretary of State is extinguished at the earliest to
occur of the following: (1) the money judgment is
satisfied; (2) the period or enforceability of the judgment
has terminated; or (3) the judgment lien is terminated or
released. If the lien is extinguished, the judgment
creditor shall file a statement of release within 20 days
after the judgment creditor receives an authenticated
demand from the judgment debtor.
This bill would provide, in the event the judgment creditor
does not file a statement of release after demand was made,
that the person who made the demand may seek an order for
release of the judgment lien upon a noticed motion. If the
court finds that the period of enforceability of the
judgment has terminated, the court shall order the judgment
creditor to file a statement of release or shall itself
order the release of the judgment lien. (See Comment 2c.)
This bill would require the court to award reasonable
attorney's fees to the prevailing party in an action
brought under these provisions.
This bill would provide that Sections 9522 and 9523 of the
Commercial Code shall apply to a notice of judgment lien to
the same extent as to a filed financing statement.
This bill would authorize the Secretary of State to
promulgate appropriate forms and to charge the same fees as
set forth in the case of financing statements under the
Commercial Code.
COMMENT
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1. Need for the bill
The author states:
Under the present law, a judgment lien creditor can
only file a new lien and lose priority because the
new lien does not relate back to the initial lien.
The other alternative for the lien creditor is to
levy on the personal property assets and dismantle
the going concern business. This bill would allow a
judgment creditor to enter into a long term payment
arrangement and allow the judgment debtor to
continue in productive operation.
The Business Law Section of the State Bar, sponsor of AB
121, explains that the current inability of a judgment
creditor to continue a notice of judgment lien "creates a
scenario in which, regardless of the underlying economics,
a judgment creditor may be forced to dismantle a going
concern in order to squeeze whatever value can be had from
the assets while they are still subject to the lien in
order to maintain its priority in distribution of
proceeds." The sponsor suggests that amending the statute
to permit the judgment lien to be continued at the end of
the initial five-year period "would open the opportunity
for the judgment creditor and the judgment debtor to enter
a long term payment plan that may permit a research and
development program to come full circle, or a newly planted
orchard to grow to maturity and bear fruit, or a machine
with a thirty-year lifespan to continue to produce widgets
rather than going to the auction block."
2. Continuation of notice of judgment would place
judgment lien on par with secured liens perfected by
financing statements and judgment liens on real property
Under current law, a judgment lien on real property
initially lasts for ten years from the date of entry of the
judgment (Code Civ. Proc. Sec. 697.310) and may be extended
for an additional ten-year period by renewing the money
judgment (Code Civ. Proc. Sec. 683.180.) A judgment lien
on real property is created by recording an abstract of
judgment with the county recorder. The lien may be renewed
for another 10-year period at any time prior to the end of
the original 10 years by recording a copy of an application
for renewal with the county recorder (assuming the judgment
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itself was renewed).
A secured lien on personal property may be perfected by a
lender by filing a financing statement with the Secretary
of State. For example, a bank that loans a small yogurt
factory $100,000 for equipment purchases generally will
file a financing statement with the Secretary of State to
perfect a lien on the equipment. If the borrower defaults
and decides to close down the factory, he or she cannot
sell the equipment without the lender being paid the loaned
amount or some other amount that the parties may negotiate.
Or, the lender may negotiate a different type of payment
arrangement in order to allow the borrower the opportunity
to keep the business going and make smaller payments so
that, in the long run, the loan will be paid. If the term
of the new financing arrangement lasts longer than five
years from the time the lien was perfected, the lender will
simply file a continuation statement within the six months
prior to the end of the five-year period. The continuation
statement would contain information on the original
financing statement so that the continued lien relates back
to that lien and preserves the priority of the lien. Any
other lien obtained by the borrower (for example, if one
year later the borrower borrows again against the equipment
from a private lender and gives the new lender a lien to
file with the Secretary of State) would be second in
priority to that of the original lender. This procedure is
embodied in Article 9 of the California Commercial Code
(Division 9 - Uniform Commercial Code-Secured Transactions,
commencing with Section 9101).
Assembly Bill 121 would create a similar system for money
judgments that have been converted into judgment liens on
personal property by the filing of a notice of judgment
lien with the Secretary of State.
a. Continuation statement must be filed within 6 months
of expiration date or it is ineffective
This bill would provide that a filed judgment lien lapses
five years from the date of the filing, unless a
continuation statement is properly filed. It would
permit a continuation statement to be filed only within
the six month period prior to the expiration of the
five-year lien. If timely filed, the continuation
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statement would effectively continue the judgment lien
for another five years, at which time the judgment lien
would lapse unless another continuation statement was
properly filed. Each continuation would relate back to
the original judgment lien filed.
The fact that the continuation of the judgment lien would
relate back to the original notice of judgment lien filed
is what makes this bill very valuable to judgment
creditors. Under current Code of Civil Procedure Section
697.510, a judgment creditor can establish a lien on
certain personal property assets of the judgment debtor
and be accorded priority in the same recording system of
record, thereby giving notice of the lien to other
creditors while the personal property remains in
productive use in the hands of the judgment debtor. The
lien attaches to accounts receivable, chattel paper,
equipment, farm products, inventory, and negotiable
documents of title.
Thus, Code of Civil Procedure Section 697.510 provides a
useful alternative to the immediate levy and seizure of a
judgment debtor's assets under a writ of execution. For
example, the debtor may own a manufacturing facility
containing specialized equipment that can create valuable
products over a long period of time. In the case of a
large judgment against a small company, it may be in the
best interest of all concerned - judgment debtor,
judgment creditor, other creditors, employees, suppliers,
landlord, etc.-for the judgment debtor and judgment
creditor to agree to a payment plan lasting many years.
But, without this ability to continue the judgment lien
under Code of Civil Procedure Section 697.510, the
parties negotiating their way out of a lose-lose
situation may not have sufficient time before the
judgment lien lapses. If the lien lapses, it would lose
its priority standing vis-?-vis other liens on personal
property of the debtor, and when filed again, it would
rate at the bottom of the priority list.
Assembly Bill 121 would cure this defect in the Code of
Civil Procedure.
b. When judgment lien is extinguished
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Assembly Bill 121 would provide that the judgment lien is
extinguished at the earliest to occur of the following
events: (1) the money judgment is satisfied; or (2) the
period of enforceability of the judgment, including any
extension, has terminated (i.e., the underlying judgment
was not renewed and allowed to lapse); or (3) the
judgment lien is terminated or released.
This language is taken from existing law on judgment
liens on personal property (current Code Civ. Proc. Sec.
697.510(b)).
c. Procedure for obtaining a statement of release when
lien is extinguished
Generally, when a lien is extinguished (e.g., the
underlying judgment expired and was not renewed, thus its
enforceability has terminated, or the underlying judgment
was satisfied and the judgment was released), the
judgment debtor is entitled to a statement of release
that he or she can then file with the Secretary of State.
The statement of release notifies the public that the
lien has been cleared and frees the judgment debtor from
restraints associated with an outstanding lien. This bill
would establish a process for a judgment debtor to obtain
a statement of release from the judgment creditor if the
lien is extinguished. The process provided in this bill
tracks the process of obtaining an acknowledgement of
satisfaction for judgment liens against real property
that have been extinguished (Code Civ. Proc. Secs.
697.370, 697.380, 697.400, 697.660), and also obtaining a
statement of release under the Commercial Code.
Assembly Bill 121 would require the judgment creditor to
file a statement of release within 20 days after the
judgment creditor receives an "authenticated demand from
the judgment debtor." The bill would define
"authenticated demand" to mean either a signed written
demand or an executed or otherwise encrypted demand
delivered electronically that identifies the judgment
debtor and the demand for a statement of release.
Assembly Bill 121 would provide that if the judgment
creditor does not file a statement of release as
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requested, the person who made the demand may apply to
the court on noticed motion for an order releasing the
judgment lien. Notice of the motion would be required to
be filed in the county where the judgment was rendered
and notice of the motion would be required to be served
on the judgment creditor (personally or by mail). Upon
satisfactory proof to the court that the enforceability
of the judgment has terminated, the court shall order the
judgment creditor to prepare and file the statement of
release, or shall itself order the lien released. The
court's order may then be filed in the Office of the
Secretary of State in the same manner as a filing of a
notice of judgment lien.
The bill also would provide for reasonable attorney's
fees to be awarded to the prevailing party in any
litigation pursuant to this new statute. Presumably the
litigation would involve the action to obtain a statement
of release or the release of the judgment lien if the
judgment creditor did not accede to the judgment debtor's
demand.
d. Nothing in this section is in derogation of any other
relief to which an aggrieved person may be entitled by
law.
This bill would provide that "nothing in this section is
in derogation of any other relief to which an aggrieved
person may be entitled by law." Thus, a judgment debtor
may, instead of pursuing a statement of release under
this section when the lien is extinguished, file a
complaint for slander of title, for example, or seek an
acknowledgment of satisfaction of judgment in the court
where the original judgment was issued, and obtain a
court-ordered release of the judgment lien filed in the
Secretary of State's Office.
3. Secretary of State to prescribe forms, if
cost-efficient
Current law authorizes the Secretary of State to charge
fees for filing and indexing records in its offices. This
bill would authorize the Secretary of State to also
maintain the filings made under its provisions for at least
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one year after the judgment lien had elapsed, just as filed
financing statements are recorded and maintained.
Finally, the bill would authorize the Secretary of State to
prescribe forms, if cost savings would be achieved thereby,
for use by judgment creditors and judgment debtors in
filing and continuing these judgment liens.
Support : None Known
Opposition : None Known
HISTORY
Source : Business Law Section of the State Bar of
California, the Insolvency Law Committee
Related Pending Legislation : None Known
Prior Legislation : AB 3013 (Levine, 2008), which was
virtually identical to AB 121 was amended to reflect
amendments recommended by this committee. Assembly Bill
121 incorporates this committee's recommended amendments.
Assembly Bill 3013 was vetoed, not on the substance of the
bill, but due to the Governor's 2008-2009 Budget
priorities.
Prior Vote :
Assembly Judiciary Committee (Ayes 9, Noes 0)
Assembly Appropriations Committee (Ayes 16, Noes 0)
Assembly Floor (Ayes 74, Noes 0)
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