Bankr. L. Rep. P 77,447, 97 Cal. Daily Op. Serv. 5592, 97 Daily Journal D.A.R. 9053 in Re Reuben Lynn Hilde, Jr. Maureen McDowell Hilde Dr. Lynn Hilde, Jr. Maureen Hilde, Debtors. Southern California Bank v. Patricia J. Zimmerman, Chapter 7 Trustee
Docket: 95-56841
Court: Court of Appeals for the Ninth Circuit; July 15, 1997; Federal Appellate Court
Reuben Lynn Hilde and Maureen McDowell Hilde are Chapter 7 debtors, with Southern California Bank as a judgment creditor appealing a Bankruptcy Appellate Panel (BAP) decision. The BAP determined that the bankruptcy trustee could avoid the Bank's lien on the Hildes' nonexempt personal property, as the Bank failed to perfect its lien before the Hildes filed for bankruptcy. The appeal concerns whether the Bank's lien was "perfected" under state law, specifically California Code of Civil Procedure section 708.110, which the court concluded does not require perfection for the Bank's lien to be valid.
In August 1992, the Bank secured a judgment against the Hildes for $213,607.83. Following this, the Bank served orders for the Hildes to appear for a debtor's examination, which purportedly created a lien on their personal property. However, there was no court order requiring the Hildes to turn over property, and the Bank's claim of an ORAP lien was contested post-bankruptcy filing. The bankruptcy court initially ruled in favor of the Bank, but the BAP reversed, stating the ORAP lien was not perfected, allowing the trustee to avoid it under 11 U.S.C. § 544. The appeal ultimately seeks to reverse the BAP's decision.
California's Enforcement of Judgments Law (EJL), established in 1982 under Code of Civil Procedure section 708.110, delineates how certain liens are created during a judgment debtor's examination. A lien is established on a debtor's nonexempt personal property upon service of an order for the debtor to appear (Cal. Civ. Proc. Code. 708.110(d)), and similarly, a lien is created on property held by a third party when that party is served with notice (Cal. Civ. Proc. Code. 708.120). These are termed 'ORAP' liens. Additionally, a third lien arises following a court-issued turnover order post-examination, which relates back to the initial ORAP lien (Cal. Civ. Proc. Code. 708.205(a); Cal. Civ. Proc. Code. 697.020).
The statute specifies that service of the appearance order creates a lien from the date of the order (Cal. Civ. Proc. Code. 708.110(d)), and liens are prioritized based on their creation time (Cal. Civ. Code. 2897). The statutes do not mention 'perfection' of the lien, nor do they require further action by the creditor or court for the ORAP lien to be established. The lien has the same effect as execution liens when the property is not under a levying officer's custody.
In a related case, the Bankruptcy Appellate Panel (BAP) acknowledged that the Bank's lien was created when the order to appear was served but erroneously asserted that a turnover order was necessary for lien perfection, concluding that the Bank's failure to obtain such an order meant its lien lacked priority over the Trustee's claim. However, this interpretation is inconsistent with the statutory provisions, which clearly state that the Bank's lien was effective upon service of the order. The lien remained valid and prioritized over the Trustee's claim even after the Hildes filed for bankruptcy. California's statutory framework consistently emphasizes lien 'creation' rather than 'perfection,' as reflected throughout the EJL's structure and related provisions.
Prior to 1982, California Civil Procedure Code section 486.110 stated that a writ of attachment would perfect the lien created by a temporary protective order. In 1982, this language was modified and relocated to section 488.500(e), clarifying that an attachment lien's priority relates back to the date of the earlier lien's creation, indicating that "perfection" of a lien is not mandated by California law unless specified by statute. The legislature did not impose a perfection requirement for ORAP liens, and consequently, such a requirement does not exist under the Bankruptcy Code.
California Code of Civil Procedure section 697.920 specifies that property under an ORAP lien remains subject to the lien post-transfer unless the transferee qualifies for an exception listed in section 697.740. Since the Hildes transferred their assets to the Trustee during bankruptcy and the Trustee does not claim an exception, the ORAP lien remains enforceable against the Trustee's interest in the Hildes' nonexempt personal property.
The legislative intent behind the EJL (which includes the ORAP lien statute) is to provide judgment creditors with a swift, cost-effective means to gain priority over other creditors while also offering debtors options that minimize disruption to their business operations. Lien statutes aim to encourage voluntary compliance from debtors, allowing creditors to use liens for negotiation rather than immediate possession.
The argument that California Code of Civil Procedure section 708.205 serves as the perfecting mechanism for ORAP liens relies on a misinterpretation of the case Imperial Bank v. Pim Elec., Inc., which addressed a turnover order rather than an ORAP lien. The Imperial Bank decision discussed the relation back of a turnover order but did not establish that a turnover order is necessary to perfect an ORAP lien.
The Trustee references the Comment to California Code of Civil Procedure section 708.120(c), which states that a turnover order creates a lien that relates back to the service of the order to appear. The Trustee argues that a creditor must obtain a turnover order to perfect an ORAP lien, but this is contested. The Comment merely reiterates that in overlapping liens, the latest lien relates back to the first. The BAP compared California’s debtor examination liens to charging order liens, noting that a charging order lien is extinguished if the order is denied, and thus, it perfects at issuance and relates back to the motion's service. However, the BAP's analogy is flawed; ORAP liens arise upon service of the order to appear and last for one year without needing a court order for perfection. California law indicates that omission of a requirement in one statute, while included in another, implies legislative intent to exclude it.
A treatise by Bankruptcy Judge Alan M. Ahart supports the position that ORAP liens do not disturb a debtor's possession and thus remain effective against nonexempt personal property, even in bankruptcy. Although the BAP dismissed Ahart's view as non-dispositive, it is considered persuasive. The Trustee further argues that ORAP liens are "secret" liens, asserting that other creditors and bankruptcy trustees may be unaware of such liens, potentially leading to conflicts. While the BAP accepted this perspective, it is rejected here, with the assertion that any resulting issues should be addressed by the California legislature.
The trustee in bankruptcy has several options to address the situation regarding the debtor. These include inquiring whether the debtor has been served with an order for a debtor's examination, examining court records for any unsatisfied judgments against the debtor, checking the register of actions for any issued orders for examination, and contacting the debtor's judgment creditors to identify any liens that existed at the time of the bankruptcy petition.
The legal interpretation of California's lien statutes, particularly California Code of Civil Procedure section 708.110, indicates that (1) an ORAP lien is established upon service of an order to appear for a debtor's examination, and (2) this lien takes precedence over a bankruptcy trustee's claims if the bankruptcy petition is filed more than ninety days after the lien is created. In this case, since the Bank served the Hildes with ORAP orders over ninety days before their bankruptcy filing, the Trustee cannot nullify the Bank's ORAP lien, which extends to all of the Hildes' nonexempt personal property.
The decision of the Bankruptcy Appellate Panel (BAP) is reversed, and the case is remanded to the BAP, instructing it to direct the bankruptcy court to issue a judgment in favor of the Bank as per this ruling. The order is also noted to be reversed and remanded by Judge James M. Fitzgerald from the District of Alaska.
