Getting At Those Revocable Trust Assets

Getting At Those Revocable Trust Assets

On Behalf of | Mar 28, 2017 | Business

Collecting upon a judgment is not for the faint of heart. Unless there is insurance or a solvent debtor, getting the judgment is only half the battle. The real theater comes after the client has expended considerable sums getting to the judgment only to learn that the debtor typically doesn’t just cut a check to the creditor. Instead, many debtors see the writing on the wall and engage in what we in the business call “asset protection.” Nothing is more frustrating than finding out that between the time the judge signed the judgment and the abstract of judgment was recorded, the debtor has transferred his residence to a newly set up revocable trust. For many debtors, their home is often the sole source of recovery for a judgment creditor.

Does the judgment lien attach to the real property even though title is no longer held in the name of the debtor? Ah, that is the question.

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A debtor is not entitled to shield his assets from creditors by transferring them into a revocable family trust. A trust is an agreement that determines how a person’s property is to be managed and distributed during his or her lifetime and also upon death. In a “revocable” trust, the settlor has reserved the right to amend or revoke the trust during his or her lifetime. Under California law, all property owned by arevocable trust is legally subject to the debts of its settlor. Indeed, California Probate Code Section 18200 provides that if the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor. Accordingly, a judgment lien created by an abstract of judgment recorded against the settlor of a revocable trust attaches directly to the assets contained within a trust without any need to amend the judgment to name the trust as an additional debtor. See, Bank One Texas v. Pollack (1994) 24 Cal.App.4th 973, 980.

There is no need for a creditor to file a fraudulent conveyance act against the debtor and the trustee of the trust because a transfer of property to a revocable trust cannot constitute a fraudulent transfer because the transaction does not result in disposing of or parting with an asset or an interest in an asset. See, Gagan v. Gouyd (1999) 73 Cal.App.4th 835, 842 (disapproved on other grounds in Mejia v. Reed (2003) 31 Cal.App.4th 657, 669. Why, because the property transferred to the trust still remains available to creditors. Id., at page 842.

Now what happens when the trust sells the real property to a third party before the judgment creditor sets its judgment lien for sale under a writ of execution? Is that third party considered a bona fide purchaser for value who took the property without knowledge or notice of the judgment creditor’s abstract of judgment?

In this situation, the third party will likely argue that the abstract of judgment did not appear in the chain of title and thus, they had no notice of the creditor’s judgment lien. Heck, they may even cite to Far West Savings & Loan Association v. McLaughlin (1988) 201 Cal. App.3d 67, 73, for the proposition that they were under no obligation to search recorded documents beyond interests affecting the trust as the grantor of the property (i.e., not the settlor personally).

An experienced collection attorney knows just want to do. The judgment creditor can and should argue that constructive notice is not limited to the facts revealed in the recorded chain of title. Thus, a party is not entitled to ignore information that comes to him/her from outside the recorded chain of title to the extent that information puts him/her on notice of information that reasonably brings into question the state of title reflected in the chain of title. Triple A Management Co. v. Frisone (1999) 69 Cal.App.4th 520, 531.

Does a third party taking title from a revocable trust have some duty to consider whether recorded judgments remain unsatisfied against the trust settlor? Yes. California Civil Code Section 19 provides that every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry to a particular fact has constructive notice of the fact itself…”

As long as the grant deed from the settlor to the revocable trust provides sufficient information on its face about the transaction (i.e., it identifies the trust as revocable and shows the debtor as settlor), the judgment creditor should be able to successfully assert that the third party was not a bona fide purchaser because the third party is presumed to have knowledge of California law (Bank One Texas, supra at 981). This is great news for the judgment creditor as it will allow the creditor to enforce its lien against the property. A happy ending after all.

To discuss your collection matter, contact collection attorney Ronald P. Slates today.