Judgment Liens for Federal Judgments

CLIENT ALERTS Judgment Liens for Federal Judgments

FIRST TUESDAY UPDATE July 6, 2021 Authors Steven K. Davidson, Michael J. Baratz, Emma Marshak

Overview First Tuesday Update is our monthly take on current issues in judgment enforcement. This month we discuss obtaining a judgment lien from a federal court judgment. You may think that a federal court judgment automatically creates a judgment lien on real property within the district where the federal court sits or perhaps within the county. Perhaps you litigate in a state where judgment liens are automatically created by virtue of obtaining a judgment. As a result, many judgment- creditors fail to realize that a federal judgment needs to be created by filing a certified copy of the abstract of judgment with the relevant state authority (typically the county clerk). A judgment-creditor may assume that since Rule 69 of the Federal Rules of Civil Procedure provides that the procedure on execution—and in proceedings supplementary to and in aid of judgment or execution—must accord with the procedure of the state where the court is located, that state procedure would govern the issue of creating a judgment lien. But Rule 69 also provides that "a federal statute governs to the extent it applies." 28 U.S.C. § 3201 expressly provides for judgment liens and thus governs the creation of a lien. 28 U.S.C. § 3201(a) provides as follows: "[a] judgment in a civil action shall create a lien on all real property of a judgment debtor on filing a certified copy of the abstract of the judgment in the manner in which a notice of tax lien would be filed under paragraphs (1) and (2) of section 6323(f) of the Internal Revenue Code of 1986. A lien created under this paragraph is for the amount necessary to satisfy the judgment, including costs and interest." The relevant Internal Revenue Code, 26 U.SC. § 6323(f), directs that "[i]n the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated . . . ." unless "the State has not by law designated one office which meets the requirements of subparagraph (A)" then "[i]n the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated." In other words, if state law directs where a lien is to be filed, follow state law. But if state law does not so direct, then filing a notice of a judgment lien in the federal district court clerk’s office suffices. We have seen many cases where practitioners assume that a federal court judgment automatically creates a lien on the real property in the state where the court is located. Not only is this incorrect, but failing to take the extra steps can impact priority vis-a-vis other creditors. 28 U.S.C. § 3201(b) makes clear that a "lien created under [this statute] shall have priority over any other lien or encumbrance which is perfected later in time." Thus, first in time will be first in right but only if perfected by recording notice of the judgment in the relevant local state office. Additionally, the duration of the federally created judgment lien is 20 years, which can be renewed with court approval for another 20-year period. While many states follow the 20-year rule, not all of them do. Several states have a lien duration of six, ten, 12 or 15 years. So, a federal court judgment lien may very well be longer than the one provided for by state law. A few practical points. First, although the judgment itself cannot be executed or enforced during the automatic stay period, some courts have allowed judgment creditors to record an abstract of judgment during the Rule 62(a) stay period even though it creates a judgment lien against the debtor in that state. See, e.g., Yusov v. Yusuf, 892 F.2d 784, 785 n.1 (9th Cir. 1989) ("Recording of a judgment is generally not held to be prohibited by [Rule] 62(a)."); Anastos v. M. J. D. M. Truck Rentals, Inc., 521 F.2d 1301, 1303, 21 Fed. R. Serv. 2d 649 (7th Cir. 1975) (stay did not prevent recording); In re Vanden Bossche, 125 B.R. 571, 573–574 (N.D. Cal. 1991) (interpreting "a proceeding to enforce a judgment” to include actions "taken to convert the judgment into money,” such as foreclosure or attachment, rather than those merely creating a lien); J. Moore & J. Lucas, 7 Moore’s Federal Practice ¶ 62.03, at 62–12 n.6 (2d ed. 1987) ("[t]he stay prevents execution but does not prevent recording of the judgment for purposes of preserving a lien...."); but see In re Professional Air Traffic Controllers, Etc., 18 B.R. 894 (Bkrtcy.D.D.C.1982) ("PATCO") (finding that Rule 62(a) prohibits the filing of an abstract of judgment). Given the conflicting authorities, one should research this issue carefully before proceeding during the automatic stay. Second, even though the federal law discusses filing a certified copy of the abstract of a judgment; some state law (and some county clerks) will prefer that a certified copy of the judgment—not just the abstract, is filed. Third, even though 28 U.S.C. § 3201(f) authorizes, on proper allocation to the court, to order the federal marshals to sell any real property subject to the judgment lien, in our experience, most marshals prefer that the local state or county perform the execution sale. The local authorities are more experienced with the local law and have more resources for sales. To accomplish that, the federal judgment may need to be recognized as a judgment of the state court system, which can be accomplished in many states through an expedited procedure. One potential drawback is the state or county officials often charge a "poundage" fee to be deducted from the proceeds of the sale; an amount which typically exceeds any charges from the federal marshals. Also remember that the creation of a judgment lien may or may not attach the real property depending on the state law. There are states where the judgment lien precludes the sale or transfer of the property until the lien is satisfied. In other states, the judgment lien does not preclude the transfer of the property but the new owner takes the property subject to the judgment lien, which is an obviously risky proposition for the new owner of the land. Whatever your specific circumstances, we can help enforce a judgment. Feel free to contact us directly with any questions.

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