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The Importance of Judgment Debtor Exam

An experienced commercial collections attorney is always interested in watching the interplay between state court creditor remedies and how they are interpreted in federal proceedings. A recent 9th Circuit Bankruptcy Appellate Panel (BAP) ruling has reminded those of us in the industry once again of just how important it is to have a judgment debtor examination issued and personally served on the debtor even if you are unable to ultimately conduct the examination. A judgment debtor examination means that once there is a judgment, the creditor can ask that the debtor appear in court to answer questions under oath to answer questions about his or her assets or property such as paychecks and other sources of income, bank accounts, stocks and other investments, and personal and real property. This procedure may also be used to question a third party who may be in possession of the judgment debtor's assets, or owe debts to the judgment debtor.

It is critical that the collection attorney whom you choose has done an exhaustive, nationwide asset and bank search before applying for a post-judgment debtor examination. Furthermore, since you must expect that the judgment debtor will not tell the truth, event under oath, it is much more advantageous to have conducted third-party debtor examinations before conducting the exam of the judgment debtor so that you effectively know the answers in advance of asking the questions. It is rather like cross examination in pretrial litigation, where every careful practitioner will tell you that you must know the answers to the questions before you ask the questions. Furthermore, lawfully bringing in third parties to attest to their knowledgeable about the judgment debtor's financial history and present state of finances thereof brings a rather large amount of pressure on the judgment debtor to tell the truth or face the consequences. I call it an environmental approach. Lawfully attack the environment surrounding the judgment debtor and you will surely get more truthful answers at your judgment debtor hearing, if not convincing the judgment debtor to come forward and make a deal to pay the debt. Too many litigators believe that simply putting the judgment debtor on the stand immediately after the judgment has been entered is the right way to enforce a judgment. It is not.

To request the appearance, a creditor with a state court judgment can seek the issuance of an Order for Appearance and Examination ("ORAP") (pursuant to California Code of Civil Procedure Section 708.110). In order to be valid, the issued ORAP must be personally served upon the debtor at least ten (10) days before the date set for the debtor examination. Once done, the creditor is rewarded with a lien on all of the judgment debtor's non-exempt personal property for one year from the date of the order. This is considered a "secret" lien because it is not recorded or published.

In the recently published case Good v. Daff (In re Swintek), 543 B.R. 303 (9th Cir. BAP 2015), the U.S. BAP for the Ninth Circuit held that Bankruptcy Code section 108(c) tolls, or suspends, the one-year expiration period of an ORAP lien. The facts of the case are as follows... Good was the assignee of an approximately $300,000.00 judgment entered against Swintek. Good sought issuance of an ORAP for Swintek which was personally served upon him. Good also levied on approximately $67,000.00 held in a joint bank account. Swintek then filed a Chapter 7 Bankruptcy case in 2010. The funds levied in the bank account pre-petition were turned over to the Chapter 7 Trustee.Thumbnail image for 1452314260_Lawyer.png

In 2013, Good filed an adversary complaint against the Chapter 7 Trustee because the Trustee refused to distribute funds levied upon pre-bankruptcy to Good, which she claimed were subject to her ORAP personal property lien. The Trustee argued that Good's ORAP lien expired one year after its issuance as set forth in CCP Section 708.110(d) and that such period was not extended or tolled by Bankruptcy Code Section 108(c).

Bankruptcy Code section 108(c) extends the expiration period for commencing or continuing a civil action under applicable non-bankruptcy law until 30 days after the notice of termination or expiration of the stay under 11 U.S.C § 362. The Trustee argued that section 108(c) did not apply to the ORAP liens because an ORAP lien does not involve the "commencement" or "continuation" of a civil action as specified by that section, consistent with an earlier decision of the same bankruptcy court, Wolfe v. Palladino (In re Harris), Adv. No. 8:13-01125 (Bankr. C.D. Cal. Apr. 29, 2014) ("Harris"). In contrast, Good argued that her ORAP lien was an "enforcement" lien under California law and as such it was stayed by U.S.C. Section 362 and was therefore tolled by Bankruptcy Code Section 108(c).

The bankruptcy court ruled in favor of the Chapter 7 Trustee, consistent with its earlier decision in Harris, finding that Bankruptcy Code section 108(c) did not toll the ORAP lien, and thus, the ORAP lien expired in 2011. Good appealed. Next, the BAP reversed the bankruptcy court's decision, holding that the bankruptcy court made a mistake in determining that the one-year expiration period for an ORAP lien was not tolled by § 108(c).

Although no Ninth Circuit panel has specifically ruled on the applicability of Bankruptcy Code section 108(c) to ORAP liens, the BAP believed that the decision of Spirtos v. Moreno (In re Spirtos), 221 F.3d 1079, 1080 (9th Cir. 2000) was controlling. In Spirtos, at issue was whether section 108(c) tolled the time to renew a judgment under CCP section 683.110 et seq., which statute provides that the duration for enforcing a judgment is ten years unless the judgment is renewed. The Spirtos court held that section 108(c) applied to toll the ten year duration period before the judgment must be renewed. Id. at 1080.

Accordingly, the BAP concluded that the ORAP issued under CCP Section 708.110(d) is a similar creditor enforcement statute and as the Ninth Circuit held in Spirtos regarding enforcing judgments, the BAP determined that it was required to hold that Bankruptcy Code Section 108(c) applied to toll the duration of ORAP liens as well. This case provides an excellent and well reasoned analysis of why tolling should apply since it is clear that Good's post-judgment enforcement activities were clearly stayed under 11 U.S.C. Section 362.

For assistance with your collections matter, contact experienced Los Angeles collections attorney Ronald P. Slates today.

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