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Calif. App. Court (2nd Dist) Holds Creditor’s Application for Sale Must Include Unrecorded Liens on Property

tax lienThe Court of Appeals of the State of California, Second Appellate District, recently affirmed a trial court’s denial of a judgment creditor’s application for sale of the debtor’s dwelling to satisfy the creditor’s money judgment, finding the application was deficient.

In so ruling, the Second District held that a judgment creditor’s application for sale of the judgment debtor’s dwelling to satisfy the money judgment must include a description of the liens on the property for unpaid real estate taxes, even if those liens are not recorded and come into being by operation of law.

A copy of the opinion in Meyer v. Sheh is available at:  Link to Opinion.

After a creditor (“Creditor”) was awarded a money judgment in an underlying lawsuit brought against one joint tenant of a four-dwelling unit (“Debtor”), Creditor recorded an abstract of judgment with the county recorder’s office and filed a request for the trial court to issue a writ of execution on the judgment. The writ was issued and Creditor was served with a notice that a levy was made on the property pursuant to the writ.

Creditor subsequently filed an application for the court to order the sale of Debtor’s one-fourth interest in the property to satisfy the outstanding judgment. In the application Creditor stated “[o]ther than [Creditor’s] judgment lien and execution lien…, there [were] no actual or purported liens or encumbrances on [Debtor’s] interest in the Property.” The trial court denied the application finding that it did not contain the lien information required by California Code Civ. Proc., § 704.760 in that it did not list the property tax liens on the property. Creditor appealed.

As you may recall, California’s Enforcement of Judgment Law “authorizes a creditor holding a ‘money judgment’ to ‘enforce’ that judgment against ‘all property of the judgment debtor…’” O’Brien v. AMBS Diagnostics, LLC., (2016) 246 Cal. App. 4th 942, 947, quoting §§ 695.010, subd. (a), 669.710.

If the creditor is enforcing the money judgment against the real property that a debtor uses as his “dwelling” the creditor must follow certain steps. In addition to other procedures, the Creditor must also apply for a court order authorizing the sheriff or other levying officer to sell the dwelling. §§ 704.750, subd. (a), 704.760; Amin v. Khazindar (2003) 112 Cal. App. 4th 582, 589.)

The application must include certain information, including “the amount of any liens or encumbrances on the dwelling, the name of each person having a lien or encumbrance on the dwelling, and the address of such person used by the county recorder for the return of the instrument creating such person’s lien or encumbrance after recording.” California Code Civ. Proc., § 704.760, subd. (c).

The question before the Second District here was whether an unrecorded property tax lien falls within the definition of “any lien[] or encumbrance[] on [a] dwelling” that must be set forth in a judgment creditor’s application to sell the dwelling under section 704.760.

The Court held the answer was yes, for two reasons.

First, the Second District ruled that the plain text of section 704.760 dictated this result as it requires the judgment creditor to set forth “the amount of any liens or encumbrances on the dwelling.” (California Code Civ. Proc., § 704.760, subd (c).) The Court found that since a property tax lien is a lien and encumbrance and there was no requirement of recording the lien in the county recorder’s office, an unrecorded property tax lien is a “lien or encumbrance on a dwelling” that must be disclosed in the creditor’s application.

The Second District also held that reading section 704.760 to include the disclosure of unrecorded property liens was also consistent with the purpose of the statute. The Court noted that a key purpose of the statute is to ensure “senior liens and encumbrances would be paid” and that purchasers at the sale “will own the property free and clear of all liens and encumbrances.” (Rourke, supra, 17 Cal.App.4th at p. 885; Little, supra, 234 Cal.App.3d at p. 360.).

Creditor argued that the statute applies only to recorded liens but the Second District disagreed. The Court reiterated that the subdivision requires a creditor to disclose “any liens on encumbrances on the dwelling.” The Court added that the clauses referencing the name and address of the recording party only require that the name and address information be disclosed as to those liens that happen to be recorded. In addition, the Court ruled that because a tax lien is imposed by a public entity with an easily ascertainable name and address, the information would be wholly unnecessary.

Creditor also argued that his application did disclose the tax lien as it was mentioned in the preliminary title report which accompanied the application for an order to sell the property. However, the Second District found this insufficient as section 704.760 requires the judgment creditor to state, “under oath,” the “liens or encumbrances on the dwelling.” (California Code Civ. Proc., § 704.760, subd.(c)). Thus, the Court held merely including the liens or encumbrances somewhere in the application for the court to find on its own was insufficient.

Accordingly, the Second District affirmed the trial court’s order denying the application for sale on the property.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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