Court: Court of Appeals for the Ninth Circuit; July 15, 1997; Federal Appellate Court
Reuben Lynn Hilde and Maureen McDowell Hilde are Chapter 7 bankruptcy debtors in California. Southern California Bank, a judgment creditor, appeals a Bankruptcy Appellate Panel (BAP) decision that allowed the bankruptcy trustee to avoid the Bank’s lien on the Hildes’ nonexempt personal property due to the Bank's failure to perfect its lien before the bankruptcy filing. Both the bankruptcy court and the BAP agreed that the avoidability of the lien depended on whether it was 'perfected' under state law. Under 11 U.S.C. § 544, the trustee's avoidance powers hinge on state law. The court analyzed California’s Code of Civil Procedure section 708.110, determining it does not require perfection of the Bank's lien. Consequently, the Bank's reliance on the lien created by serving an order to appear (ORAP) was unfounded. The BAP concluded that the ORAP lien was not perfected, thus allowing the trustee to avoid it. However, the Circuit Judge ultimately reversed the BAP's decision, asserting that the trustee cannot avoid the lien because perfection is not a requisite under California law. The Bank had previously obtained a judgment of $213,607.83 against the Hildes, and although it served the order to appear, the court never ordered the Hildes to turn over property. Following the Hildes’ bankruptcy filing, the trustee sold certain personal property, prompting the Bank to claim proceeds under its ORAP lien. The bankruptcy court initially upheld the Bank’s claim, but the BAP’s ruling led to this appeal.
California's Code of Civil Procedure section 708.110, enacted in 1982 as part of the Enforcement of Judgments Law, establishes the creation of liens relevant to a judgment debtor's examination. A lien attaches to all nonexempt personal property of a debtor upon service of an order for the debtor to appear for examination (Cal. Civ. Proc. Code § 708.110(d)). Additionally, a lien is created on the debtor's personal property held by a third party when that third party is served with a notice (Cal. Civ. Proc. Code § 708.120), collectively referred to as 'ORAP' liens. A further lien arises upon the issuance of a turnover order by the court post-examination (Cal. Civ. Proc. Code § 708.205(a)), which relates back to the original ORAP lien.
The statute clarifies that the service of the order to appear creates a lien on the debtor's property from that date, without any reference to 'perfection' or additional acts required by the creditor or court. California Civil Code section 2897 states that priority among liens is determined by their creation time. The Bankruptcy Appellate Panel (BAP) acknowledged the Bank’s lien was created upon serving the order but erroneously required a turnover order for 'perfection,' which is not mandated by the statutes. Consequently, the BAP ruled that the Bank's lien lacked priority over the Trustee's claim due to the absence of a turnover order. However, this interpretation is incorrect; the Bank's lien existed at the time the orders were served and retained priority over the Trustee's claim when the debtors filed for bankruptcy, aligning with California's statutory framework regarding the creation of judgment liens.
Chapter 2 of the EJL outlines five articles: General Provisions, Judgment Liens on Real Property, Judgment Liens on Personal Property, Execution Liens, and Other Liens, all referencing the 'creation' of liens without mentioning 'perfection.' Legislative changes in 1982 to California Code of Civil Procedure section 486.110 removed the term 'perfects,' indicating that perfection is not necessary under California law unless explicitly stated. This is further supported by the absence of a perfection requirement for ORAP liens. Section 697.920 clarifies that property under an ORAP lien remains encumbered even after a transfer, unless the transferee qualifies for an exception. In the case of the Hildes, their assets transferred to the Trustee remain subject to the Bank's ORAP lien, as the Trustee does not qualify for any exceptions. Legislative intent highlights the EJL's purpose to provide judgment creditors a quick and efficient means to secure priority while offering debtors less disruptive enforcement options. The Law Revision Commission noted that judgment liens on personal property also incentivize debtors to settle with creditors.
If a judgment lien does not lead to voluntary payment or settlement, a judgment creditor may need to initiate an execution levy for enforcement. Creditors can use liens, such as the ORAP lien, as leverage without immediately seeking possession of the debtor's property. The Trustee and BAP reference *Imperial Bank v. Pim Elec., Inc.*, arguing that California Code of Civil Procedure section 708.205 serves as the perfecting mechanism for an ORAP lien under section 708.110. However, it is clarified that *Imperial Bank* pertains to an already issued turnover order rather than an ORAP lien and does not imply that a turnover order is necessary to perfect an ORAP lien. The Trustee's argument based on the comment to section 708.120(c), which discusses the relation back of a turnover order lien, is also disputed. This comment merely reinforces the principle that the latest lien relates back to the first lien's creation.
The BAP's comparison of ORAP liens to charging order liens is deemed incorrect, as ORAP liens are established upon service of the order to appear and last for one year, without requiring a court order for perfection. The omission of such a requirement in the ORAP lien statute suggests intentional exclusion, as supported by case law. Judge Alan M. Ahart’s commentary in the Rutter Group’s guide indicates that ORAP liens do not disturb debtor possession and may lead to a senior lien on all nonexempt personal property, taking precedence over priority creditors in bankruptcy.
The BAP dismissed the argument regarding the ORAP lien, labeling it a "practice pointer" and non-dispositive. Despite this, Judge Ahart's comments on the matter were deemed persuasive. The Trustee argued against upholding the Bank's ORAP lien, claiming it operates as a "secret" lien that other creditors and bankruptcy trustees cannot easily discover, which could lead to improper recovery of property by the lien holder. While the BAP accepted this viewpoint, it was rejected here. The responsibility for any issues arising from the ORAP lien lies with the California legislature, not the court. The Trustee has various options to investigate the existence of such liens, including asking the debtor about orders served and checking court records. The emphasis is on applying California's lien statutes as written, particularly California Code of Civil Procedure section 708.110, which establishes that an ORAP lien is created by serving a debtor with an order to appear and that this lien takes precedence over a bankruptcy trustee's claim if filed more than ninety days after the lien's creation. Since the Bank served the Hildes with ORAP orders over ninety days prior to their bankruptcy petition, the Trustee cannot invalidate the Bank's lien, which is attached to the Hildes' nonexempt personal property. Consequently, the BAP's decision is reversed, and the case is remanded to the bankruptcy court to rule in favor of the Bank.
Section 708.110(d) of the California Code was revised in 1993, clarifying service methods, but this alteration is not pertinent to the current matter. References to California statutes reflect their 1992 wording unless specified otherwise. Bankruptcy trustees are unable to void liens as preferential transfers after ninety days per section 547 of the Bankruptcy Code (11 U.S.C. § 547(b)(4)). A 'lien' is defined as a charge on specific property serving as security for an obligation (Cal. Civ. Proc. Code § 1180), while a 'judicial lien' arises from legal processes (Cal. Civ. Proc. Code § 1800(a)(4)), and a 'security interest' is a lien formed by agreement (Cal. Civ. Proc. Code § 1800(a)(8)).
Section 708.110 allows judgment creditors to seek court orders for debtors to provide information for enforcing money judgments, requiring personal service of orders at least ten days prior to the examination date, thus creating a one-year lien on the debtor's personal property (Cal. Civ. Proc. Code § 708.110(a, d)). Additionally, Section 708.205 permits courts to apply a debtor's interests in property or debts owed to them toward satisfying a money judgment, also creating a lien (Cal. Civ. Proc. Code § 708.205(a)).
Judgment liens on real property are established by recording an abstract of a money judgment (Cal. Civ. Proc. Code § 697.310(a)), and on personal property by filing a notice of judgment lien with the Secretary of State (Cal. Civ. Proc. Code § 697.510(a)). An execution lien is created through a levy under a writ of execution (Cal. Civ. Proc. Code § 697.710). The service of an order for examination (ORAP) generates a lien on the debtor's personal property (Cal. Civ. Proc. Code § 708.110(d)). The Trustee's argument that no lien applied to the Hildes' stock or partnership interests due to improper levy procedures is dismissed, as the existence of specific enforcement provisions for corporate stock and partnership interests does not negate the validity of the ORAP lien.
