The Michigan Judgment Lien Act, MCL 600.2801, et seq. (the “MJLA”), grants judgment creditors with a lien on real property owned by judgment debtors, subject to certain restrictions. Because the MJLA does not authorize a judgment creditor to foreclose, judgment creditors typically record their liens, provide proper notice and await payment from the proceeds of the sale of the real property subject to the lien. However, a recent decision by the Michigan Court of Appeals reveals that assertion of the lien is not enough, as a purchaser has no obligation to ensure that proceeds from a sale are used to satisfy judgment liens.
On Oct. 28, 2010, in an opinion designated for publication, the Michigan Court of Appeals held that a properly recorded judgment lien under the MJLA survives after a judgment debtor’s disposition of real property to a third party purchaser with notice in the absence of full or partial satisfaction of the underlying judgment. However, despite the survival of the judgment lien with respect to the real property, the court effectively held that (i) a judgment creditor is without recourse to enforce a lien against the third party purchaser under the MJLA, and (ii) a third party purchaser has no obligation to pay any portion of the proceeds of a sale directly to the judgment creditor. The court left open the potential for levy under MCL 600.6018 on the real property in order to satisfy the judgment.
In Thomas v Dutkavich, --- NW2d ---, 2010 WL 4260094 (Mich Ct App Oct. 28, 2010), the judgment creditors obtain a judgment against the judgment debtor and thereafter recorded a notice of judgment lien with the register of deeds for Schoolcraft County on certain real property. The judgment debtor subsequently issued a warranty deed conveying the real property to the purchaser in exchange for proceeds in excess of the amount of the judgment lien. None of the proceeds from the sale were distributed to the judgment creditors. Approximately five months after the sale, the sheriff, on behalf of the judgment creditors, executed a notice of levy, which was recorded with the register of deeds.
The purchaser subsequently filed a quite title action against the judgment creditors, alleging, among other things, that the purchaser owned the property free and clear, and that under the MJLA, the real property was not subject to foreclosure, nor did the purchaser owe any obligation to the judgment creditors. The judgment creditors filed a counter-claim which alleged that the purchaser failed to direct payment of the proceeds to the judgment creditors and therefore should be liable for the amount necessary to satisfy the judgment lien. After the parties filed cross motions for summary judgment, the trial court held that the purchaser had no duty to ensure that the judgment creditors were paid from the sale proceeds.
On appeal, the judgment creditors argued that payment in full is a perquisite to discharging a judgment lien under the MJLA. Because no payment was made, the judgment creditors argued, among other things, that the judgment lien was an appropriate cloud on the title of the real property. After first holding that the judgment lien was valid, notwithstanding a dower interest of the judgment debtor’s spouse, the court addressed the discharge of the judgment lien upon sale to the purchaser. The court noted that under the MJLA, only a judgment debtor has an obligation to pay proceeds to the judgment creditor. The express provisions of the statute do not contemplate that any other party has a similar obligation. As support for its conclusion, the court noted that MCL 600.2807(3) and MCL 600.2813(2) make clear that where the proceeds are not enough to satisfy a judgment lien, the judgment creditor is only required to execute a partial discharge of its judgment lien. According to the court, where no payment is made to the judgment creditor from the proceeds, the judgment lien remains attached to the property and is not dischargeable.
Despite the fact that the purchaser purchased the property subject to the judgment lien, the court also noted that the judgment creditor was without recourse against the purchaser, since the MJLA does not allow foreclosure. Instead, the MJLA provides leverage in that the purchaser would have difficulty selling the property in the future, because a subsequent purchaser “would likely be hesitant to buy clouded property.” Any future sale would not implicate the need to pay the judgment creditor though, because such requirement only applies when the judgment debtor makes a conveyance.
Finally, the court remanded to the trial court for determination whether the judgment creditors could nonetheless still levy on the property under MCL 600.6018.
The court’s decision at first seems favorable to the judgment creditor and extremely prejudicial to a third party purchaser. However, upon close inspection, the decision reveals numerous deficiencies in the MJLA, which actually provides little, if any, recourse to a judgment creditor. First, it is clear under the act that a judgment creditor has no right of foreclosure against the judgment debtor, let alone any purchaser.
Second, the MJLA fails to provide a judgment creditor with any mechanism by which to ensure that sale proceeds are first applied to its judgment lien. As an example, assume that a judgment creditor has a lien on real property subject to a first mortgage and a second mortgage which was recorded after the judgment lien. The judgment debtor and purchaser would seemingly be free to satisfy the second mortgage, despite the fact that the judgment lien should have priority. In such a scenario, the judgment creditor would maintain its lien against the real property but be unable to enforce that lien in the future.
Third, in the event that the initial purchaser seeks to later sell the property, payment to a judgment creditor is likely to occur only in the event that the subsequent purchaser is uncomfortable with the judgment lien. Arguably, the court’s decision should be of concern to third party purchasers and title companies. However, because foreclosure is not an option under the MJLA, it is unclear whether a mere cloud in title without recourse would be a disincentive with respect to future dispositions of the property. Perhaps the potential for levy under MCL 600.6018 will provide judgment creditors with the enforcement provisions that the MJLA lacks, but it is uncertain given the many restrictions to enforcement under MCL 600.6018.
While the court’s decision offers little protection for judgment creditors, the decision does reinforce the need for purchasers and title companies to insert provisions in the purchase agreement allowing the purchaser or the escrow agent to pay any judgment lien creditor directly from the sale proceeds and prior to any distribution to the judgment debtor or junior lienholders. Of course, this is sound practice under any circumstances, but the court’s decision certainly serves as yet another reminder of the need to carefully document sale transactions.