The Great Recession brought tremendous opportunity for real estate investors. Portfolios of delinquent mortgages, short sales and foreclosure properties brought significant value. But, as with all cycles, things change. The real estate market has improved and the flow of foreclosures has slowed to a trickle.
This does not mean that value no longer exists – only that real estate investors may need to look elsewhere. There are billions of dollars in uncollected money judgments, which can be found in public records, bank auctions and online marketplaces, and many of them are for sale at “bargain bin” prices. For savvy real estate investors, these judgments may represent the next big wave of opportunity; provided that, investors understand the process of judgment collection.
What’s For Sale?
Typically, when buying a judgment, the buyer obtains from the seller the right to collect the amount of the judgment from the judgment debtor, the one who lost the lawsuit.
The buyer steps into the seller’s shoes and becomes the judgment creditor. So long as all appellate rights have been extinguished, the buyer does not have to litigate the underlying claim. For example, a buyer who acquires a judgment arising out of a loan default does not have to prove that the borrower defaulted.
The buyer acquires the right to collect a judgment, but is limited only to its seller’s rights. Judgments are collectible only for a limited time after which they become unenforceable as a matter of law. The buyer cannot restart or extend the collection time beyond that which its seller may have had. For example, in a state where the right to collect a judgment lasts only 20 years, the buyer of a 12-year-old judgment only has 8 years left to collect it. Because the buyer assumes the seller’s rights, whatever knowledge a seller may have had will be imputed to the buyer. If a seller knew that the judgment debtor fraudulently transferred assets, but took no steps to assert a claim during the applicable statute of limitation, the buyer may not be able to pursue a claim even though it knew nothing of the fraud.
Understanding Judgment Collection
Judgment collection is governed by state law, even in federal court. Although different states may use different terms, judgment collection options involve: execution – seizing a judgment debtor’s real and/or personal property to be sold and the proceeds used to satisfy the judgment; garnishment – seizure of bank amounts and other indebtedness owed to the judgment debtor; and proceedings supplementary – specialized procedures designed to locate assets belonging to judgment debtors that may be applied to pay the debt.
Many states have adopted specific procedures for judgment collection. Because statutory judgment collection is in derogation of traditional common law mechanisms (i.e., creditor’s bill, etc.), the requirements of the judgment collection statutes must be followed strictly. Failure to comply with these requirements may forfeit automatically the judgment creditor’s rights altogether.
Many states also have adopted proceedings supplementary to assist judgment creditors in efforts to satisfy their judgments. The rights afforded to judgment creditors in proceedings supplementary may be quite broad, and allow a judgment creditor to reach assets even after the judgment debtor transferred them to a third party.
Know the Judgment Collection Pitfalls.
When it comes to judgment collection, a buyer must do its due diligence. The buyer must confirm that the judgment is final, that any appeals have been waived or resolved, and that the statute of limitations for enforcement has not expired.
Then, the buyer must evaluate whether the judgment debtor has sufficient assets that may be used to satisfy the amounts. In some cases, buyers may have access to the underlying case files, which could contain information providing insight into the judgment debtor’s financial condition. In some states, the rules of civil procedure or state law require a judgment debtor to provide certain disclosures regarding its assets and liabilities. This information, along with various online resources, may help the buyer determine if the judgment is worth pursuing and, if so, at what price.
If the buyer has not yet consulted its legal counsel, this is the time to do it. It is critical that the buyer works with counsel experienced with judgment collection. Many excellent lawyers can help clients obtain money judgments, but fewer are experienced with converting those judgments into cash while avoiding the pitfalls that can frustrate and, in some cases, bring a premature end to judgment collection. Many states have debtor-friendly laws. As a result, the buyer should hire counsel familiar with judgment collection, as opposed to debt collection. Debt collection lawyers, especially consumer debt collection, are skilled at collecting debts, whether or not the debts have been reduced to a judgment, and, importantly, in helping debt collectors avoid liability in the labyrinth of federal and state consumer protection laws. Judgment collection lawyers help buyers understand the statutory mechanisms used in judgment collection, guide buyers through the collection process, and help clients to develop an economically viable judgment collection plan.
The buyer needs to understand how the judgment debtor may be protected under different circumstances. Where a judgment is against a judgment debtor, who is married, but the spouse was not a party to the judgment, the law protects the marital form of property ownership, known as a tenancy by the entireties, and will prevent the buyer from collecting against marital property. Other state laws may exempt certain property, such as the debtor’s home, no matter how big it might be, from forced sale.
Follow a Judgment Collection Strategy.
By the time a buyer decides to acquire a judgment, buyer and counsel already should have mapped out the collection process.
A sound judgment collection strategy exploits the simplest sources of recovery first – the proverbial “low hanging fruit.” Garnishment of known or suspected bank accounts allow the judgment creditor to recover all or even a portion of the amount due and, importantly, provide a war chest to fund additional, more costly collection efforts.
As collection efforts move into more complex sources of recovery, the judgment debtor should work closely with its collection attorney to understand all of the potential costs and risks, constantly assessing and re-assessing the risks and rewards. Some states have laws that limit the ability to seize and sell certain assets. For example, under Nevada law, a judgment debtor’s stock in a Nevada corporation cannot be seized and sold to satisfy the judgment. Instead, a judgment creditor of a Nevada stockholder can only obtain a charging order, which would direct that distributions, dividends and/or other payments to stockholders be paid to the judgment creditor. In other circumstances, certain types of assets present logistical challenges. When executing upon cars, boats or even airplanes, the judgment creditor may have to bear the costs of storage and insuring the seized assets until they can be sold in accordance with applicable law.
Returns are Possible
Even with the improving real estate market, opportunities abound for those real estate investors who invest the time and money to mine the billions of dollars sitting in uncollected judgments. Disciplined, savvy investors working with experienced counsel can navigate through the governing state law, avoiding the potential pitfalls and, with discipline, implement a plan to convert uncollected judgments into returns.
This article originally appeared in the May 14, 2018 issue of Real Estate Finance & Investment.