Publication

April 28, 2010Client Alert

Enforcing a Judgment Lien Against Real Estate

Litigation/Land & Resources Law Update

The lawsuit has been filed. A judgment has been entered awarding money. How does the winning party collect? One possible source of recovery is the equity in real estate owned by the judgment debtor.

Once a person or business (the “judgment creditor”) gets a judgment against another person or business (the “judgment debtor”), and dockets the judgment in the county clerk of courts office, it becomes a lien on all real estate (the “Property”) owned on and after the docketing date by the judgment debtor in the county in which it is docketed. To turn the judgment lien into cash requires “execution” against the Property subject to the judgment lien. The legal procedure for execution against Property subject to a judgment lien is straightforward. However, the amount recoverable depends upon (a) the amount due on mortgages, liens and other encumbrances superior to the judgment lien and (b) the value of the Property.

The first step to execute against the Property is to file a petition for and writ of execution with the court (the same court in which judgment is obtained) and deliver copies of the same to the sheriff for service on the judgment debtor. As a condition of serving the execution papers on the judgment debtor, the sheriff will require the judgment creditor to post a bond equivalent to two- or three-times the value of the Property. It is usually appropriate to use the current tax assessed value of the Property to determine the bond amount. For example, if the current tax assessed value of the Property is $74,000, then the judgment creditor will need a bond of approximately $148,000 to $222,000.

After the sheriff has served the execution papers, the Property’s legal description is “indorsed” on the writ of execution and filed with the register of deeds.

Next, the judgment creditor and the sheriff will agree on a sale date, and notice of the sale given. Notice consists of publishing in the local newspaper for six consecutive weeks prior to the sale (the responsibility of the judgment creditor) and also posting a notice in three public places for three weeks prior to the sale (the responsibility of the sheriff). The sale is a sheriff’s auction held at the county courthouse. Any person, including the judgment creditor, may bid on the Property. Just as with a purchase of property in a mortgage foreclosure sale, a judgment creditor interested in purchasing the Property should obtain and review a Phase I Environmental Report on the property before bidding.

The purchasing party must pay the purchase price to the sheriff on the date of sale. After costs of sale (sheriff’s fees and publishing costs) are deducted from the purchase price, the sale proceeds are turned over to the clerk of court.

Upon order from the court, the clerk will distribute the sale proceeds to creditors that claim an interest in the proceeds, in the order determined by law. The judgment creditor foreclosing on the judgment lien should have an idea of how many prior liens and interests will be paid, and in what amounts.

However, even if there would not be enough value in the Property to pay all claims, the threat of a sheriff’s sale of the property might be sufficient to induce someone – the judgment debtor, a prior or subsequent mortgage holder, etc. – to pay the judgment creditor to either buy or settle the judgment creditor’s interest.

There is no guaranty as to what price will prevail at auction. In many (if not most) cases, an auction brings in less than the fair market value of the property.

There are additional procedures after sale involving the Property. From the date of sale, the judgment debtor has one year to “redeem” the Property from the purchaser by paying the purchase price plus interest from the time of the sale. (This can have a significant, depressing impact on the sale price.) If the judgment debtor redeems the Property, the Property reverts back to the judgment debtor. If the judgment debtor does not redeem within one year, then within three months of the expiration of the one-year redemption period, any of the judgment debtor’s creditors can unilaterally acquire the property from the purchaser by paying the purchase price plus interest from the date of sale. By law, the executing judgment creditor who is forcing the sale is not allowed to acquire the Property by these means. The executing judgment creditor can only acquire the Property by making the highest bid at auction.

Following the expiration of fifteen months from the date of sale (twelve month redemption period plus three month period for creditors to acquire the property), the judgment debtor’s interest in the Property would be finally extinguished, and the sheriff would provide the appropriate purchasing party with the deed.

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