Hidden Liens Report, a project of the Commercial Transactions Committee of the Business Law Section of The State Bar of California
II. List and Discussion of Hidden Liens
C. Liens Arising in Litigation

1. Attachment of farm products or inventory of a going business by taking possession through a "keeper" under Code of Civil Procedure Section 488.395.

[TO BE ADDED IN SUBSEQUENT DRAFT]

2. Judgment and Execution Orders Arising Under California Code Of Civil Procedure Sections 708.110, 708.120 and 708.205.29

How the Enforcement Liens Arise/Attach:

California's Enforcement of Judgments Law (the "EJL"), codified at CCP §§ 680.010 through 724.260, contains three provisions that create liens relating to the procedure for conducting an examination of the judgment debtor's property to aid the court in enforcement of many monetary judgments. A lien cannot be created for a monetary judgment that is payable in installments unless all of the installments have become due and payable or a court has ordered otherwise pursuant to CCP § 697.540(b). Each lien lasts for one year after the order.

The first type of lien attaches to the personal property of a judgment debtor before the conduct of the examination (referred to herein as the "Pre-Examination Lien"). This lien is created automatically under CCP § 708.110 when the judgment creditor serves the judgment debtor with a copy of the court order for examination. The second lien attaches to the personal property of a judgment debtor that is being held by a third party or to the judgment debtor's interest in a debt owed to it by a third party (referred to herein as the "Pre-Examination Third Party Lien"). This lien is created automatically under CCP § 708.120 if (1) the judgment creditor demonstrates to the court that a third party has possession or control of property in which the judgment debtor has an interest or that a third party is indebted to the judgment debtor in an amount greater than $250 and (2) the judgment creditor serves the order of examination on the judgment debtor and the third party along with fees for the third party's mileage necessary to attend the examination proceeding. The two pre-examination liens are against all of the debtor's property. The third lien is created under CCP § 708.205 against those items of the debtor (whether held by the debtor or a third party) that the court determines after examination shall be applied to satisfy the judgment (referred to herein as the "Post-Examination Lien"). These three liens are collectively referred to herein as the "Examination Liens."

Perfection of the Enforcement Liens:

The EJL does not mention or require perfection of an Examination Lien; the only requirement is that the lien be "created." See In re Hilde, 120 F.3d 950, 954 (9th Cir. 1997).

Priority of the Enforcement Liens:

The EJL contains a limited number of provisions addressing the priority of execution liens including the Examination Liens but does specifically address the extent to which Examination Liens remain in effect as to property that is subsequently transferred.

The EJL provides that priority of the Pre-Examination Third Party Liens will date from the service of the examination order on the judgment debtor if that order described the property in the hands of the third party. CCP § 708.120(c). If a lien is created on property pursuant to the EJL while an earlier lien under the EJL is still in effect, the priority of the later lien relates back to the date the earlier lien was created. CCP § 697.020(b). This application of the "relation back" doctrine preserves the judgment creditor's priority as of the time of creation of the first in a series of overlapping liens on the same property.

Other than application of the "relation back" doctrine, the EJL is silent on the subject of priority of Examination Liens. The California Law Revision Commission Report recommending the EJL's adoption refers to the provisions in Civil Code §§ 2897-2899 concerning the priority of liens. 16 Cal.L.Rev.Comm. Reports 1273 (1982) (comment to CCP § 697.020). Civil Code § 2897 provides that "[other] things being equal, different liens upon the same property have priority according to the time of their creation ... ." However, the Civil Code is not the only California statutory authority on the issue of priority. Commercial Code § 9317(a)(2) states that an execution lien, such as an Examination Lien, on personal property takes priority over an unperfected security interest but is subordinated to a security interest that is perfected before the creation of the Examination Lien. In addition, Commercial Code § 9323(b) states that a security interest is subordinate to the rights of a person who becomes a lien creditor to the extent that the security interest secures an advance made more than 45 days after such person becomes a lien creditor. However, there are three circumstances in which the security interest securing the advance would not be subordinated to the Examination Lien (or other execution lien): (1) if the advance was made without knowledge of the Examination Lien, (2) if the advance was made pursuant to a commitment that was entered into without knowledge of the Examination Lien, or (3) the security interest was held by a consignor or a buyer of accounts, chattel paper, payment intangibles or promissory notes. Commercial Code §§ 9323(b) and (c).

The Examination Liens, like other execution liens, take priority over federal tax liens unless proper notice of the federal tax lien was filed before the Examination Lien was created. 26 U.S.C. § 6323(a). The EJL does not address the relative priority of state tax claims over the Enforcement Liens. But the pre-EJL rule was that the priority as between state tax claims and execution liens such as the Examination Liens depended on the particular statute under which the state tax claim was authorized. 6 Cal. Proc. (4th), Provisional Remedies, § 187. It is not clear whether that pre-EJL rule still applies, although there is no reason to believe that it does not.

Under the EJL property that becomes subject to an Examination Lien remains subject to that Examination Lien after a transfer or encumbrance unless that transfer or encumbrance was made to one of the following persons (CCP § 697.740):

(1) A person who acquires an interest in the property for reasonably equivalent value without knowledge of the lien;

(2) A buyer in the ordinary course of business who would take free of a security interest under Commercial Code § 9320;

(3) A lessee or licensee in the ordinary course of business who would take free of a security interest under Commercial Code § 932I;

(4) A holder in due course (as defined in Commercial Code § 3302) of a negotiable instrument within the meaning of Commercial Code § 3104;

(5) A holder to whom a negotiable document of title has been duly negotiated within the meaning of Commercial Code § 7501;

(6) A protected purchaser of a security as defined in Commercial Code § 8303 or a person entitled to the benefits of Commercial Code §§ 8502 or 8510;

(7) A purchaser of chattel paper or an instrument who gives new value and takes possession of the chattel paper or instrument in the ordinary course of business;

(8) A holder of a purchase money security interest under Commercial Code § 9103;

(9) A collecting bank holding a security interest in items being collected, accompanying documents and proceeds pursuant to Commercial Code § 4210;

(10) A person who acquires any right or interest in letters of credit, advices of credit or money; or

(11) A person who acquires any right or interest in property subject to a certificate of title statute of another jurisdiction under the law of which indication of a security interest on the certificate of title is required as a condition of perfection of the security interest.

The Obligations Secured by the Lien:

The Examination Liens secure the amount of the underlying monetary judgment. See CCP § 708.205 (referring to the amount secured by a Post-Examination Lien). The Pre-Examination Lien and Pre-Examination Third Party Lien will expire one year from the date of the court's order of examination (not the date of service) unless extended or sooner terminated by the court. CCP §§ 708.110(d), 708.120(c).

The Collateral Subject to the Lien:

Any personal property could be subject to an Examination Lien unless such personal property falls within an exemption. CCP §§ 704.010 through 704.210 exempt various types of property of natural persons from the Examination Liens to allow the judgment debtor to protect himself and his family and the court also may grant an exemption based upon need. CCP § 703.115. The enumerated exemptions include the first $2300 in value of motor vehicles, household furnishings at the judgment debtor's principal residence, the first $6,075 in value of jewelry, heirlooms and works of art and life, health, disability, unemployment, workers' compensation and insurance benefits. See CCP §§ 704.010-704.210. The dollar thresholds in the various enumerated exemptions are subject to triennial adjustments based upon changes in the California Consumer Price Index for All Urban Consumers. CCP § 703.150(b), (c). The enumerated exemptions are not intended to be exclusive. See 703.030(a) (referring to exemptions under other statutes); See also 703.050 (regarding the effective date of exemption statutes that exemptions may be claimed under). Exemptions may be waived by the judgment debtor at the time the exemption can be claimed but contractual or other prior waivers of the exemptions are invalid. CCP §§ 703.030, 703.040.

An assignor for the benefit of creditors is entitled to the exemptions that could be used against the Examination Liens. CCP §1801.

Property subject to a public trust is not subject to execution. El Camino Irr. Dist. v. El Camino Land Corp., (1938) 12 C.2d 378, 382.

The Classes of Secured Party/Debtor Subject to the Lien:

Any personal property could be subject to an Examination Lien unless such personal property falls within an exemption. CCP §§ 704.010 through 704.210 exempt various types of property of natural persons from the Examination Liens to allow the judgment debtor to protect himself and his family and the court also may grant an exemption based upon need. CCP § 703.115. The enumerated exemptions include the first $2300 in value of motor vehicles, household furnishings at the judgment debtor's principal residence, the first $6,075 in value of jewelry, heirlooms and works of art and life, health, disability, unemployment, workers' compensation and insurance benefits. See CCP §§ 704.010-704.210. The dollar thresholds in the various enumerated exemptions are subject to triennial adjustments based upon changes in the California Consumer Price Index for All Urban Consumers. CCP § 703.150(b), (c). The enumerated exemptions are not intended to be exclusive. See 703.030(a) (referring to exemptions under other statutes); See also 703.050 (regarding the effective date of exemption statutes that exemptions may be claimed under). Exemptions may be waived by the judgment debtor at the time the exemption can be claimed but contractual or other prior waivers of the exemptions are invalid. CCP §§ 703.030, 703.040.

An assignor for the benefit of creditors is entitled to the exemptions that could be used against the Examination Liens. CCP §1801.

Property subject to a public trust is not subject to execution. El Camino Irr. Dist. v. El Camino Land Corp., (1938) 12 C.2d 378, 382.

The Classes of Secured Party/Debtor Subject to the Lien:

Any debtor could become subject to the Examination Liens including state or municipal entities. In addition, as discussed above natural persons and assignors for the benefit of creditors are entitled to exempt various types of property from the Examination Lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party can protect itself to some extent by searching for judgments prior to making any new loans or additional advances. If a judgment is discovered, the secured party can require the borrower to make a representation that neither it nor any third party in possession of its property has not been served with any orders to appear at a post-judgment examination. A covenant requiring the borrower to report any judgments and the service of post-judgment examination orders may also provide some protection.

3. Liens arising in creditor's suit under Code of Civil Procedure Section 708.250.30

How the Lien Arises/Attaches:

The statutory provisions in California for the enforcement of judgments not only authorize a levy by a judgment creditor against a third person indebted to or in possession of property of the judgment debtor, but also authorize the judgment creditor to bring suit against those third persons, if necessary or appropriate. If a judgment creditor elects to file a creditor suit against a third party to recover either property of the judgment debtor held by this third party or a debt owed to the judgment debtor by the third party, Section 708.250 of the California Code of Civil Procedure provides that an equitable lien is created on the property or debt which is the subject of the action upon the service of a summons on the third party. Wardley Development, Inc. v. The Superior Court of Los Angeles County, 213 Cal. App. 3d 391, 395 (App. Ct. CA 1989).

Perfection of the Lien:

The service of the summons creates the statutory lien and California law does not provide for any additional step to perfect this lien.

Priority of Lien:

Although the service of the summons in a creditor suit creates a statutory lien on the property which is the subject of that action and no further action is required by the judgment creditor to establish or perfect that lien, there is no indication in the statute that would give that lien any priority over an existing perfected security interest in that property.

A creditor who acquires a lien under Section 708.250 "acquires only an equitable lien on such assets and a priority over general creditors" who have not served a summons of the type covered by Section 708.250. Wardley, 398. The equitable lien "is superior to general creditors or assignees of the property subject to the lien ... [but] the lien does not give the judgment creditor an immediate right to compel transfer of the subject property to him." Id. Wardley states that it would be unjust to allow a Section 708.250 lien "to set lien priority over other creditors who must establish the validity or probable validity of their claims before they are entitled to establish lien priority of record," suggesting that such liens may not have priority over subsequent secured liens. Id.

Obligation Secured by the Lien:

The obligations secured by the lien created pursuant to Section 708.250 are the amount of debt owed by such third party to the judgment debtor and/or the amount of property of the judgment debtor held by such third party.

The lien prevents the third party from distributing assets in derogation of the lien, as such action makes the third party personally liable to the lienholder for the amount of such distribution, up to the amount of the lienholder's claim. See Wardley, 398.

The Collateral Subject to the Lien:

The lien created pursuant to Section 708.250 covers the interest of the judgment debtor in the property or on the debt owed to the judgment debtor that is the subject of the creditor action.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

From the standpoint of a secured creditor of the judgment debtor with a perfected security interest in the assets of the judgment debtor, this statutory lien does not prime the existing perfected security interest. Even if the prior security interest is unperfected, Section 2897 of the Civil Code generally provides that, all other things being equal, different liens on the same property have priority according to the time of their creation and therefore the prior secured creditor should have priority over the judgment creditor's lien.

Although a Section 708.250 lien creditor might claim priority over subsequent secured creditors, the language of Wardley renders such a claim of priority suspect, due to the extreme weakness of the Section 708.250 lien.

If a secured creditor of the judgment debtor learns of any such creditor action, or a levy by the judgment creditor on any asset of the judgment debtor, the secured creditor may want to consider filing a third party claim under California law (Code of Civil Procedure §§ 720.010 et seq.) in order to establish its priority in the asset.

From the standpoint of a secured creditor of the third party defendant in this creditor action, that is the entity that holds property in which the judgment debtor has an interest, or owes a debt to the judgment debtor, there should not be any adverse impact since the basis of the creditor action is that this is property of the judgment debtor and not the person holding the asset. In some instances property may be owned not only by the judgment debtor but also by the third person holding the asset and in that situation, a secured creditor of the third party may want to file a third party claim to establish its lien position with respect to the interest of its debtor.

4. Liens arising under charging order under Code of Civil Procedure Section 708.320 and Corporations Code Sections 16504 and 17302.31

How the Lien Arises/Attaches:

General Partnership. Under the Uniform Partnership Act of 1994, a partner is not a co-owner of partnership property and has no transferable interest in the property. Corporations Code § 16501. A partner's only transferable interest is that partner's personal property interest in a share of the partnership's profits and losses and the right to receive distributions. Corporations Code § 16502. In order to reach a debtor's partnership interest, the judgment creditor must obtain a court order charging that interest with the amount of the judgment. Code of Civil Procedure §§ 699.720(a)(2); 708.310. The charging order replaces the levy of execution as a remedy for reaching a partnership interest.

Corporations Code § 16504 provides the exclusive remedy by which a judgment creditor of a partner or partner's transferee may satisfy a judgment out of the judgment debtor's transferable interest in the partnership. Corporations Code § 16504(e). Corporations Code § 16504(a) provides:

On application by a judgment creditor of a partner or of a partner's transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or that the circumstances of the case may require.

A charging order constitutes a lien on the judgment debtor's transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee. Corporations Code § 16504(b). The partner is not deprived of its rights under exemption laws with respect to the partner's interest in the partnership. Corporations Code § 16504(d).

Service of a notice of motion for a charging order on the judgment debtor and all partners or the partnership creates a lien on the judgment debtor's partnership interest. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court's charging order until the judgment becomes unenforceable. The lien also continues notwithstanding the transfer or encumbrance of the partnership interest, unless the transfer or encumbrance is made to a person listed in Code of Civil Procedure § 697.740. But, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Limited Partnership. Under the California Uniform Limited Partnership Act of 2008, a limited partnership is an entity distinct from its partners. Corporations Code § 15901.04(a). The only interest of a partner which is transferable is the partner's right to receive distributions. Corporations Code § 15907.01. In order to reach a debtor's limited partnership interest, the judgment creditor must obtain a court order charging that interest with the amount of the judgment. Code of Civil Procedure §§ 699.720(a)(2); 708.310. The charging order replaces the levy of execution as a remedy for reaching a limited partnership interest.

Corporations Code § 15903.03 provides the exclusive remedy by which a judgment creditor of a limited partner or limited partner's transferee may satisfy a judgment out of the judgment debtor's transferable interest in the partnership.

Under the California Uniform Limited Partnership Act of 2008, a charging order on a limited partnership interest only gives the judgment creditor the rights of an assignee of the interest. Corporations Code § 15907.03(a). The limited partnership is not dissolved; nor is the judgment creditor entitled to become a limited partner or exercise any rights of a limited partner. No creditor of a partner has any right to obtain possession or otherwise exercise legal or equitable remedies with respect to the property of a limited partnership. Corporations Code § 15907.03(f).

A charging order constitutes a lien on the judgment debtor's limited partnership interest in the partnership. Code of Civil Procedure § 708.320.

Service of a notice of motion for a charging order on the judgment debtor and all partners or the partnership creates a lien on the judgment debtor's limited partnership interest. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court's charging order until the judgment becomes unenforceable. The lien also continues notwithstanding the transfer or encumbrance of the partnership interest, unless the transfer or encumbrance is made to a person listed in Code of Civil Procedure § 697.740. But, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Limited Liability Company Interest. Under the Beverly-Killea Limited Liability Company Act, a membership interest and an economic interest in a limited liability company constitute personal property of the member or assignee. Corporations Code § 17300. A member or assignee has no interest in specific limited liability company property. Corporations Code § 17300. In order to reach a debtor's limited liability interest, the judgment creditor must obtain a court order charging that interest with the amount of the judgment. Code of Civil Procedure §§ 699.720(a)(2); 708.310. The charging order replaces the levy of execution as a remedy for reaching a membership interest.

Corporations Code § 17302 provides the exclusive remedy by which a judgment creditor of a member or member's assignee may satisfy a judgment out of the judgment debtor's transferable interest in the limited liability company. Corporations Code § 17302(e). Corporations Code § 17302(a) provides:

On application by a judgment creditor of a member or of a member's assignee, a court having jurisdiction may charge the assignable membership interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect to the limited liability company and may make all other orders, directions, accounts, and inquiries that the judgment debtor might have made or that the circumstances of the case may require.

A charging order constitutes a lien on the judgment debtor's assignable interest in the limited liability company, and the court may order a foreclosure of the interest subject to the charging order at any time. Corporations Code § 17302(b). The purchaser at the foreclosure sale has the rights of an assignee. Corporations Code § 17302(b). The member is not deprived of its rights under exemption laws with respect to the member's interest in the limited liability company. Corporations Code § 17302(d).

Service of a notice of motion for a charging order on the judgment debtor and all of the members of the limited liability company creates a lien on the judgment debtor's membership interest. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court's charging order until the judgment becomes unenforceable. The lien also continues notwithstanding the transfer or encumbrance of the membership interest, unless the transfer or encumbrance is made to a person listed in Code of Civil Procedure § 697.740. But, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Perfection of the Lien:

A lien on a judgment debtor's interest in a partnership or limited liability company is created by service of a notice of motion for a charging order on the judgment debtor and either (a) all partners or the partnership; or (b) all members or the limited liability company. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court's charging order until the judgment becomes unenforceable; however, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Priority of the Lien:

A lien arising under Code of Civil Procedure § 708.320 is subject to a prior perfected security interest in a partnership or limited liability company interest. The Legislative Committee Comments to Code of Civil Procedure § 697.020 state that Section 697.020 provides "the general rule regarding the relation back of liens to preserve the judgment creditor's priority as of the time of the creation of the first in a series of overlapping liens on the same property." Thus, "Subdivision (c) of Section 697.020 makes clear that the relation back doctrine does not affect the priority or rights of a third person established while the earlier lien was in effect."

The Obligations Secured by the Lien:

The lien created under Code of Civil Procedure § 708.320 secures the amount necessary to satisfy the money judgment. Code of Civil Procedure § 697.010.

The Collateral Subject to the Lien:

The lien created under Code of Civil Procedure § 708.320 is applicable to the judgment debtor's interest in a partnership or limited liability company, i.e. a share of the partnership's profits and losses and the right to receive distributions, and a share of the distributions due or to become due to the judgment debtor in respect to the limited liability company.

The Classes of Secured Party/Debtor Subject to the Lien:

Secured parties who take as collateral a debtor's interest in either a partnership or a limited liability company are subject to the hidden lien under Code of Civil Procedure § 708.320.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Secured lenders can protect themselves against the hidden lien created under Code of Civil Procedure § 708.320 by (a) performing a judgment lien search prior to funding its loan to confirm that there are no other liens on the partnership or limited liability company interest; and (b) require the debtor to represent and warrant that the debtor is not a party to any litigation, nor has a judgment been entered against the debtor that has not been satisfied in full.

Miscellaneous:

The interest of a partner in a partnership or member in a limited liability company is not subject to execution if the partnership or the limited liability company is not a judgment debtor. Code of Civil Procedure § 699.720(a)(2). The exclusive remedy by which a judgment creditor of a partner or member may satisfy a judgment out of the judgment debtor's transferable interest in the partnership or limited liability company is a charging order.

5. Liens for money owed to judgment debtor by public entity under Civil Procedure Section 708.780.32

Statutory Framework:

Code of Civil Procedure § 708.780, subdivision (a) provides as follows:

Filing of the abstract or certified copy of the judgment and the affidavit pursuant to this article creates a lien on the money owing and unpaid to the judgment debtor by the public entity in an amount equal to that which may properly be applied to the satisfaction of the money judgment under this article.

How the Lien Arises/Attaches:

If a public entity owes money to a judgment debtor, the obligation of the public entity may be applied to the satisfaction of the money judgment against the judgment debtor only in the manner provided by CCP Article 8 (CCP §§ 708.710 through 708.795). CCP § 708.720(a). "Public entity" means the State of California, any county, city, district, public authority, public agency, and any other political subdivision in the State of California. CCP § 708.710. CCP Article 8 does not apply to the garnishment of wages of a public officer or employee or if the obligation of the public entity to pay money to the judgment debtor is the subject of a pending action or special proceeding. CCP § 708.720. Except as to sums due and unpaid under a judgment of support, CCP Article 8 does not authorize a filing against an overpayment of tax, penalty or interest, or interest allowable with respect to an overpayment, under the Revenue and Taxation Code or the Unemployment Insurance Code. CCP § 708.795.

If money is owing and unpaid to the judgment debtor by a public entity, the judgment creditor may file, in the manner described in the next paragraph, an abstract of the money judgment or a certified copy of the money judgment, together with an affidavit that states that the judgment creditor desires the relief provided by CCP Article 8 and states the exact amount then required to satisfy the judgment. The judgment creditor may state in the affidavit any fact tending to establish the identity of the judgment creditor. CCP § 708.730(a). Promptly after filing the abstract or certified copy of the judgment and the affidavit with the public entity, the judgment creditor shall serve notice of the filing on the judgment debtor. Service shall be made personally or by mail. CCP § 708.730(b).

If money is owing and unpaid to the judgment debtor by a state agency (defined in CCP § 708.710(d)), the judgment creditor shall file the abstract or certified copy of the judgment and the affidavit with the state agency owing the money to the judgment debtor prior to the time the state agency presents the claim of the judgment debtor to the Controller. CCP § 708.740(a). If money is owing and unpaid to the judgment debtor by a public entity other than a state agency, the judgment creditor shall file the abstract or certified copy of the judgment and the affidavit with the auditor of the public entity or, if there is no auditor, with the official whose duty corresponds to that of auditor. CCP § 708.750. Upon filing the abstract or certified copy of the judgment and the affidavit, the judgment creditor shall pay a fee of $6 to the public entity with which it is filed. CCP § 708.785. Additional special procedures apply if the lien of the judgment creditor is created against a lottery prize to be paid in annual installments (CCP § 708.755) or if the judgment debtor is a contractor upon a public work (CCP § 708.760).

The Controller (in the case of a state agency) or auditor (in the case of other public entities) shall deposit with the court the amount due the judgment debtor (after deducting an amount sufficient to reimburse the public entity for any amounts advanced to the judgment debtor or owed by the judgment debtor to the public entity) required to satisfy the money judgment as shown by the affidavit in full or to the greatest extent, and pay the balance thereof, if any, to the judgment debtor. CCP § 708.740(c); CCP § 708.750. Promptly after deposit with the court by the public entity, the court clerk shall cause a notice of deposit to be served on the judgment debtor. Within 10 days after service of the notice of deposit, the judgment debtor may file with the court a claim of exemption. CCP § 708.770.

Different procedures apply where the judgment is for support. See, e.g., CCP § 708.730(c).

Perfection of the Lien:

CCP § 708.780 provides that filing the judgment and affidavit pursuant to CCP Article 8 "creates" a lien. The statute does not provide for any additional steps to be taken to perfect the lien.

Priority of the Lien:

Priority of the lien may be governed by Commercial Code § 9317, which provides generally that a security interest is subordinate to the rights of a person that becomes a lien creditor before the time the security interest is perfected. Under Commercial Code § 9102(a)(52), "lien creditor" includes a creditor that has acquired a lien on the property involved by attachment, levy or the like. It is uncertain whether a judgment creditor who has acquired a lien under CCP § 708.780 is a "lien creditor" because the judgment creditor acquires the lien by filing with the public entity rather than through a judicial process. If the judgment creditor is not a "lien creditor," then it may achieve priority under the common law's "time of creation" principle codified in Civil Code § 2897 (under this principle, where there are conflicting liens that are in all other respects equal, the priority given to a lien is based on when it was created).

Obligations Secured by the Lien:

The lien created under CCP § 708.780 secures the amount required to satisfy the money judgment in full, as shown by the affidavit filed with the public entity.

The Collateral Subject to the Lien:

The lien created under CCP § 708.780 attaches to the money owing and unpaid to the judgment debtor by the public entity, subject to the limitations set forth in CCP Article 8. For example, the lien does not attach to tax refunds, unless the judgment is for support.

The Classes of Secured Party/Debtor Subject to the Lien:

All classes of secured parties and all classes of debtors are subject to the lien created under CCP § 708.780.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured creditor can obtain priority over the lien created under CCP § 708.780 and protect itself against this hidden lien by (a) properly perfecting its security interest in accordance with Revised Article 9 of the Commercial Code, (b) performing a search of the applicable Secretary of State's Commercial Code filing records and each county where the borrower owns or leases any real property or fixtures prior to funding its loan to confirm that there are no judgments of record against the borrower, (c) requiring the borrower to represent and warrant that there are no outstanding judgments against it, and (d) requiring the borrower to represent and warrant that no public entity owes any money to the borrower, or if a public entity owes money to the borrower, requiring the borrower to provide a list of each such public entity including contact information. The secured creditor should then contact each such public entity to confirm that no judgment creditor of the borrower has made a filing pursuant to CCP Article 8.

Miscellaneous:

Unless there is a definite sum owing and unpaid by the public entity to the judgment debtor, there can be nothing upon which the lien can attach. However, provided that the existence of liability and the amount thereof is fixed and determined beyond the possibility of further dispute, such sum does not have to be fixed and established by a final judgment against the public entity. Department of Water and Power of City of Los Angeles v. Inyo Chemical Co., 16 Cal.2d 744, 108 P.2d 410 (1940).

6. Liens in pending actions or proceedings under Code of Civil Procedure Section 491.410.

[TO BE ADDED IN SUBSEQUENT DRAFT]

7. Execution liens under Code of Civil Procedure Section 697.710.

[TO BE ADDED IN SUBSEQUENT DRAFT]

Endnotes

29 This analysis last updated 5/1/2008. Back

30 This analysis last updated on 5/1/2008 Back

31 This analysis last updated 5/1/2008. Back

32 This analysis last updated on 5/1/2008. Back

II-D. Agricultural Liens / Table of Contents