Wisconsin Lawyer: 101 How to Collect on a Judgment After the Demise of the Creditor’s Lien:

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  • Wisconsin Lawyer
    July
    28
    2016

    101
    How to Collect on a Judgment After the Demise of the Creditor’s Lien

    Megan Stelljes

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    Now that the Wisconsin Supreme Court has done away with the creditor’s lien, a common-law device that enabled creditors to have a lien on all of a judgment debtor’s personal property, lawyers must learn other ways to use the supplemental examination to help creditor clients maximize their ability to collect from debtors.
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    If you have ever tried to satisfy a judgment from a judgment debtor’s personal property (for example cars, stocks, or bank accounts), you might be familiar with the supplemental examination, a proceeding where a judgment creditor is able to question a debtor to identify the debtor’s assets. From 1999 until 2014, service of the notice to appear at a supplemental examination gave rise to and perfected a common-law “creditor’s lien” on all personal property of a judgment debtor, preserving that property for the creditor’s benefit until the creditor got around to actual collection.

    Two decisions from the Wisconsin Supreme Court have effectively done away with this type of lien. Now, to claim superior rights, judgment creditors must levy on a particular piece of property, instead of simply serving a notice to appear at a supplemental examination. This has significant implications not only for judgment creditors but also for parties engaged in lending governed by Article 9 the Uniform Commercial Code (U.C.C.) and unsecured creditors represented by a bankruptcy trustee.

    Collection Background

    A judgment creditor has several tools at its disposal to satisfy a judgment. The first and easiest is to seek voluntary payment from the judgment debtor. If that does not work, the judgment creditor can have the clerk of court deliver a writ of execution to the sheriff, directing the sheriff to satisfy the judgment out of the debtor’s personal property.1 Unless a creditor has provided the sheriff with information about a specific piece of property available for seizure and sale, the execution is likely to be returned unsatisfied.

    Megan Stelljescom mstelljes foley Megan Stelljes, U.W. 2013, is an associate at Foley & Lardner LLP, Madison, where she is a member of the business litigation and dispute resolution practice group.

    A judgment creditor is then left with the statutory collection mechanisms set forth in Wis. Stat. chapters 815 and 816. In addition to execution, these mechanisms include garnishment of the debtor’s property held by third parties and court-ordered turnovers of property to a court commissioner or a supplemental receiver.

    Wisconsin law also provides judgment creditors with a discovery tool to identify property that could be used to satisfy their judgment.2 This supplemental examination,sometimes referred to as a “debtor’s examination,” gives judgment creditors the right to require judgment debtors to answer, under oath, questions about the nature and extent of their assets.3

    The Creditor’s Lien

    The supplemental examination (more accurately, service of notice to appear at a supplemental examination) took on new importance with the Wisconsin Supreme Court’s 1999 decision in In re Badger Lines Inc.In that case, the court held that “a creditor’s lien is valid and superior against other creditors at the time the creditor serves the debtor with a summons to appear at the supplementary proceeding.”4

    This procedure gave rise to what the losing appellee characterized as “secret” liens – liens that exist but are not centrally recorded so as to give notice to third parties trying to ascertain the status of a debtor’s property. (Unlike the judgment and lien docket for liens on real property and the filing office called for under U.C.C. article 9 for security interests in personal property, there is no central recording place for common-law liens.)

    Limiting Case Law

    Two decisions from the Wisconsin Supreme Court have seriously limited – if not overruled – Badger Lines. The first case, Associated Bank N.A. v. Collier,5 involved two judgment creditors, SB1 and Decade. Both creditors obtained a notice for the debtor to appear at a supplemental examination, but only Decade, an allegedly “friendly” creditor of Collier’s, was able to serve the notice. Citing Badger Lines, Decade argued that by serving the notice, it had obtained a blanket lien on all of Collier’s personal property. That lien prevented SB1 from undertaking collection activity to satisfy its judgment from Collier’s personal property, whether or not Decade ultimately seized any of Collier’s assets.

    The companion case of Attorney’s Title Guaranty Fund Inc. v. Town Bank6 involved a dispute over the proceeds of a legal malpractice claim. After obtaining a judgment against a debtor, Brophy, Town Bank served notice of a supplemental examination. Brophy identified assets at the supplemental examination, and a supplemental receiver was appointed to aid in collecting those assets. Later, Brophy obtained a loan from defendant Heartland using as collateral the potential proceeds from a malpractice claim against Brophy’s former lawyer.

    Now, to claim superior rights, judgment creditors must levy on a particular piece of property, instead of simply serving a notice to appear at a supplemental examination.

    After learning about the malpractice claim in the course of Brophy’s bankruptcy, Town Bank argued its common-law creditor’s lien attached to all personal property, including property that was not identified or did not exist at the time of the examination, and therefore it had superior rights over Heartland to the proceeds of the malpractice claim.

    In both cases, the supreme court rejected the idea of a blanket lien on a debtor’s personal property arising out of, or perfected at, service of notice to appear at a supplemental examination.7 The court held that a judgment creditor “obtains a superior interest in a debtor’s non-exempt personal property when it levies specifically identified property” and gave the following examples of levy: 1) executing against specifically identified personal property with the assistance of a sheriff; 2) serving a garnishee defendant with an order to seize specific property in the hands of the garnishee; and 3) obtaining a turnover order, which a creditor may do with the assistance of a supplemental receiver.

    Notice of the supplemental examination is no longer enough to save a creditor’s place in line. These decisions mean that a judgment creditor must proceed on an asset-by-asset basis, using statutory collection mechanisms to secure its rights in a specific piece of property.8 Until a judgment creditor actually levies on the judgment debtor’s assets, those assets are available for a competing creditor to seize. The judgment debtor also could transfer assets or use them as collateral for a loan. In the bankruptcy context, a creditor who has done nothing more than serve a notice to appear at a supplemental examination will be treated as an unsecured creditor.

    Meet Our Contributors

    What is one piece of advice that you have been given that you use in your practice?

    Megan Stelljes

    “Work smarter, not harder.” Before law school, I worked as a whitewater rafting guide for a couple of years. In Colorado, new guides learn the job in the spring, when the snow is just starting to melt and the water levels are relatively low. It’s easy to muscle the raft where you want it to go at those flows. But once the water levels rise, you need to learn to read the water, and rely on brains not brawn.

    The same principle applies to practicing law. Particularly as a new attorney, it is tempting to think that more is better; that asking for more documents in discovery, citing more cases in a brief, or arguing additional points in your motion will improve your position. Thinking strategically and targeting your efforts, however, is often the better approach.

    com mstelljes foley Megan Stelljes, Foley & Lardner LLP, Madison.

    Implications

    Although Collier and Town Bank make clear that it is the actual levy on assets that matters for the purpose of a lien, the supplemental examination is still important.

    For instance, it is more crucial than before to conduct a thorough supplemental examination. If a judgment creditor fails to discover an asset during a supplemental examination, the door is open for a competing creditor who does identify the asset to levy.

    Lawyers preparing for supplemental examinations should carefully consider how to maximize the examination. For example, although Wisconsin law does not provide for the full range of discovery allowed under the federal rule,9 a judgment creditor still can require the judgment debtor to bring specific documents to the examination, call voluntary witnesses to testify about the location of the debtor’s assets,10 and subpoena a judgment debtor’s spouse to testify about marital property.11

    With no lien protecting the judgment creditor’s rights in the debtor’s personal property, a judgment creditor who has reason to believe the debtor might play games with assets also might want to ask the court for a restraining order prohibiting the debtor from transferring or encumbering the property before the examination.12

    Additionally, promptly serving a notice of supplemental examination is good practice while the dust settles around Collier. The Wisconsin Supreme Court qualified its holding in that case with a footnote stating that “when two judgment creditors with docketed money judgments each attempt to levy identified, non-exempt personal property, or when a perfected secured party’s rights are at issue, further analysis may be necessary to determine relative priorities.”13

    Town Bank probably took care of the perfected-secured-party issue, but issues might still exist regarding competing judgment creditors. For instance, in a recent bankruptcy decision interpreting Collier, Judge Martin of the U.S. Bankruptcy Court for the Western District of Wisconsin noted that “the only way to reconcile Collier’s statement that it was merely distinguishing Badger, rather than overruling it, is to infer that the lien ‘related back’ to the date of service for the purposes of priority only.”14 Stated differently, perhaps Badger Lines would break the tie between two judgment creditors who both obtain a writ of execution for the same asset, or both serve the same garnishee defendant with a notice, before the levy is complete.15

    Conclusion

    The actions necessary to perfect a judgment creditor’s interest in a debtor’s personal property have changed with Collier and Town Bank. A judgment creditor previously could rely on service of the notice to appear at a supplemental examination to fix his or her priority, but now the creditor must levy each asset before obtaining superior rights. What has not changed is the need to act quickly to collect on a judgment and to carefully consider the mechanics of the collection statutes.

    Endnotes

    1 Wis. Stat. § 815.05.

    2 Wis. Stat. § 806.15(1).

    3 See Robert A. Pasch, 12 Wisconsin Practice Series: Wisconsin Collection Law § 16:1 at 318 (2d ed. 2006) (“By conducting a supplemental examination the judgment creditor hopes to discover property of the judgment debtor which can be applied voluntarily, or by court order, to satisfy in whole or in part the judgment, or satisfy the judgment by subsequent execution or garnishment on the discovered property.”).

    4 In re Badger Lines Inc., 224 Wis. 2d 646, 649, 590 N.W.2d 270 (1999).

    5 Associated Bank N.A. v. Collier,2014 WI 62, 355 Wis. 2d 343, 852 N.W.2d 443.

    6 Attorney’s Title Guaranty Fund Inc. v. Town Bank,2014 WI 63, 355 Wis. 2d 125, 850 N.W.2d 28.

    7 In other words, as the trustee argued in Badger Lines,“there must be specific property targeted before the equitable lien can attach, and the lien does not attach to unknown property.” Brief for Appellee at 20, In re Badger Lines Inc., No. 98-0888 (Wis. June 4, 1998).

    8 Wis. Stat. §§ 815.05(6), 812.01, 816.08.

    9 Under Federal Rule of Civil Procedure 69(a)(2), a judgment creditor “may obtain discovery from any person – including the judgment debtor – as provided in these rules or by the procedure of the state where the court is located.”

    10 Wis. Stat. § 816.06.

    11 Courtyard Condo. Ass’n v. Draper, 2001 WI App 115, ¶ 11, 244 Wis. 2d 153, 629 N.W.2d 38.

    12 A judgment creditor could request a restraining order in the proposed order for the debtor to appear at a supplemental examination, although the court is under no obligation to grant it. Alternatively, a judgment creditor could obtain a restraining order under Wis. Stat. chapter 813. See Pasch, supra note 3, § 16:2.

    13 Collier, 2014 WI 62, ¶ 33 n.8, 355 Wis. 2d 343.

    14 In re Heffron-Clark, 530 B.R. 439, 446 (Bankr. W.D. Wis. 2015).

    15 But see Jay E. Grenig, 6 Wisconsin Pleading and Practice § 44:51 (5th ed. 2010) (“An officer must, on receipt of an execution, … endorse on it the precise time of its receipt, in order to fix its priority. It then becomes the duty of the officer to levy executions impartially and in order of seniority. Nevertheless, the lien acquired by actual seizure by virtue of the execution first levied, is prior and superior to that of any execution subsequently levied, even where the latter is a senior lien.”).




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