Posting for

Wednesday, August 19, 1998

by: Bert Rush

brush@firstam.com

JUDGMENT LIENS/RECORDING ACTS/UNRECORDED INTERESTS

Here's another "race to the courthouse" story--with a bad finish for some homeowners.

Helmuth and Beverley Prochaska were residents of South Carolina visiting the Pacific Northwest. In Whatcom County, Washington, they found a lot on which they decided to build their retirement home.

The owner of the lot was John Oldfin, a resident of Florida. On August 11, 1988, Oldfin and the Prochaskas entered into a purchase and sale agreement whereby the Prochaskas agreed to purchase the lot for $95,000. An escrow was opened with Select Escrow.

Unbeknownst to the Prochaskas, Oldfin was involved in a Florida lawsuit brought against him by Midwest Title Guarantee Company of Florida. This suit resulted in a judgment against Oldfin in the amount of $122,210, which was entered by the Florida court on September 7, 1988.

On September 8, 1988, the Prochaskas signed loan docs and returned them to Select Escrow, along with a cashier's check for $45,415. The balance of their purchase price would be financed by a new loan from Community State Bank.

The next day (September 9), Oldfin signed docs--including a warranty deed--and returned them to Select Escrow.

The loan from Community State Bank was deposited with Select Escrow on September 13. On September 14, at 10:05 A.M., a certified copy of the Midwest Title judgment against Oldfin was filed with the Whatcom County Clerk--in order to perfect a judgment lien. Nine minutes later, at 10:14, the deed from Oldfin to the Prochaskas was filed with the Clerk. These filings were indexed several days later.

Years later, in April 1994, Midwest Title caused a writ of execution to be issued--seeking to collect their judgment by a sheriff's sale of the Prochaska property. This, said the Prochaskas, was their first notice that the judgment lien existed.

Litigation ensued and ultimately the Prochaskas were successful in having the property declared free of the judgment lien. Midwest Title appealed.

The Court of Appeal reversed, based on a strict interpretation of the Washington recording statutes. First, the Court noted that under RCW (Revised Code of Washington) section 6.36.025(1) a copy of a foreign judgment, properly authenticated, is entitled to be treated "in the same manner as a judgment of the superior court of this state" when filed in the office of the County Clerk.

More to the point, the Court said that "the commencement" of judgment liens in Washington is governed by RCW section 4.56.200, which provides (under subparagrah [1]) that judgments rendered by a court in the county where property is located commence as a lien "from the time of entry," and that (under subparagraph [2]) other judgments commence as a lien "from the time of filing of a duly certified abstract of...judgment with the county clerk of the county" where property is located. Since it was filed nine minutes before the Prochaska deed, the Midwest Title judgment lien enjoyed priority.

The Court disagreed with the Prochaskas' argument that the lien commenced when entered upon the "execution docket" (which, I take it, is the Clerk's indexing system), saying the statute clearly provides otherwise. Likewise, the Court distinguished decisions from other states holding that some sort of indexing or docketing is required for a lien to commence, noting that the statutes of other jurisdictions require indexing or docketing to perfect the lien, whereas the Washington statute does not.

Another argument made by the Prochaskas was that Oldfin's interest in the property had passed to them at the time the judgment was filed--so there was nothing for the lien to attach to. Again the Court disagreed, saying:

Finally, the Prochaskas argued that they should have the protection of the bona fide purchaser doctrine--they should not be charged with constructive notice of the judgment lien because it could not have been discovered by them at the time their deed was recorded. But the Court concluded that the filing of the judgment itself served to perfect the lien and impart constructive notice--again, indexing or docketing not required.

The official citation is Prochaska v. Midwest Title Guarantee Co. of Florida, 85 Wash. App. 256, 932 P.2d 172 (1997).

Comment: I suspect this case turned on the presence of title insurance coverage for the Prochaska's loss. A major clue is the short shrift which the Court gives to the second issue: whether title (or some lesser property interest) was acquired by the Prochaskas before the judgment was filed, leaving Oldfin with little or no interest in the property to which the Midwest Title lien could attach.

This issue has been visited at least twice by California appellate courts in recent years, and it's recognized that a judgment lien will not attach to real property where the judgment creditor's interest has been previously transfered to a third party by an unrecorded deed. (See Barisich v. Lewis [1990] 226 Cal.App.3d 12, 275 Cal.Rptr. 331; and Casey v. Gray [1993] 13 Cal.App.4th 611, 16 Cal.Rptr.2d 538.) In Casey, it is said:

The question of whether delivery of a deed to escrow is sufficient to pass title has been considered in lots of reported decisions, and in many contexts. Generally, the cases hold this to be a question of fact--turning upon the intentions of the parties and existence (or non-existence) of conditions precedent to the transfer.

The Prochaska Court's decision indicates that this issue wasn't considered by the trial court, but was briefed and argued pretty much for the first time on appeal--at least sufficiently so that the Court felt it could dispose of the issue with its "conditions precedent" analysis.

But (seems to me) that analysis was shaky. All four "conditions precedent" listed appear to be more fairly characterized as conditions subsequent. Assuming nothing unusual in the escrow instructions, all true conditions precedent were satisfied when the new loan funded on September 13.

I'm not sure the result was wrong, but the reasoning of the Prochaska Court glosses over a very strong argument for priority over a first-recorded lien. A fine point--no question--but an important one for understanding the interplay between recording acts, involuntary liens, and equitable interests in land.

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Following Wednesday's posting Lillian Eyrich (New Orleans) writes:

If you add one fact, I believe the result would be the same in Louisiana as it was in Washington. If the judgment creditor had followed Louisiana's rules of civil procedure and had the Florida judgment made executory in Louisiana, and then recorded it --even if only one minute before the warranty deed--, the judgment would have primed the purchasers' interests, even though it was only recorded and not yet indexed. The indices are not legally a part of the public records and the recordation is enough to put third parties on notice. Scary, isn't it, in these days when we have less and less confidence in the indexing?

Reply to Lillian: Correct me if I'm wrong, but I think Louisiana is a pure "race" recording act state. So whoever wins the footrace to the recorder's office enjoys priority, without regard to actual knowledge of a competing interest. In light of this, as a matter of public policy Louisiana courts might not even recognize this concept that an judgment lien attaches only to whatever interest the judgment debtor has at the time the lien is recorded--just speculating.

Most other states, WA and CA included, are "race-notice" states--which suggests an expression of public policy that the recording acts must not operate in an inequitable manner vis-a-vis unrecorded interests.

Ben Knittel (Houston) writes:

These races to the courthouse are sometimes decided based on the doctrine of "equitable conversion." The theory basically is that upon execution of the contract for purchase, the buyer becomes the equitable owner of the property, with naked legal title remaining in the seller (who holds legal title as trustee for the buyer, and as security for full payment of the purchase price). See, e.g., Martin v. Marquardt, 111 S.W.2d 285 Tex.Civ.App.. 1937), and DeShields v. Broadwater, 659 A.2d 300 (Md. 1995).

I have successfully used this theory a couple of times to defend against the effect of a lis pendens that was recorded in the gap; but in the states where I've handled claims, it doesn't appear to apply to intervening judgment liens.

Reply to Ben: You're hitting on what I was fishing for--support for the argument that on September 13 (the day before the offending judgment lien was recorded) the Prochaskas were entitled to equitable ownership of the PIQ, and seller Oldfin had only naked legal title. So the Prochaskas should take title free of the lien.

I don't know if any of our claims folk have used such an argument in the past, but in an appropriate case I'd like to see it tried. It should, at least, give us added leverage in settlement talks with the judgment creditor's counsel.

Another way to make--or embellish--this argument is to cite the rule that an unrecorded contract is binding between the parties--enforceable by specific performance where unique real estate is involved--and the recording of a judgment (or other involuntary) lien should not operate to diminish or destroy this status of enforceability.

Meanwhile, Alan Rubin (Uniondale, NY) writes:

While I was with Security Title back in 1989, I was involved with a claim, the facts of which were as follows:

The closing on a purchase/sale from A to B (the insured) took place at 10:00 A.M. A judgment creditor of A walked into the "closing room" waving a copy of the judgment (which was not as yet docketed with the County Clerk of the county in which the real property in question was situated). The creditor announced to all--including the purchaser and the purchaser's attorney--that he had a judgment against the seller which he would seek to enforce against the property being conveyed at the closing.

Although the judgment had not yet been docketed (and, therefore, under New York law not yet a lien that would attach to the subject premises), the title closer insisted on taking an escrow from the seller for the amount of the judgment. The deed was delivered to the purchaser at approximately 11:00 A.M., the judgment was docketed at 1:00 P.M., and the deed was recorded at approximately 2:30 P.M. Subsequently, the seller demanded a return of the escrow, arguing, quite correctly, that the judgment lien never attached to the property. The title company returned the escrow. Several months later, the judgment creditor sought to enforce the judgment out of the property insured by Security. We retained counsel to intervene in the "enforcement proceedings", and to specifically raise the argument that under New York Law, a judgment is not a "conveyance", and, therefore, the creditor does not get the benefit of the recording act (Real Property Law, Section 291--a "race/notice" statute). Since the property was conveyed at 11:00 A.M. and the judgment was not docketed until after that time, the lien never attached to the property.

What we thought was a simple issue resulted in heavy motion practice and a hearing. Ultimately, the court ruled that the purchaser (Security's insured) purchased free of the lien of the judgment. By that time, however, Security had spent nearly $20,000 in attorneys' fees.

Lesson from this claim: The judgment creditor should have run right to the County Clerk's Office at 9:00 A.M. to docket the judgment without "passing GO" or the "closing room".

Reply to Alan: I agree with you--if it's a choice between going to the recorder's office or showing up at a closing, they're better off going to the recorder's office. The judgment creditor might also have covered his or her behind by attempting to execute upon the sale proceeds in possession of the closing officer. Can you say "malpractice?"

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Following up on Wednesday's posting, Lillian Eyrich (New Orleans) adds:

Bert, you're right, LA is a pure race state, not a race-notice state. Even though the deed is executed, and therefore title has changed hands as between the seller and buyer, it does not affect third parties until recorded, so the judgment creditor would still prime the purchasers' interests.