Liens & Lis Pendens - Part 2 - Chapters 32-34 Flashcards
Use a limited liability company (LLC) as a shield to allow real estate vested in the LLC to remain undisturbed by creditors of a member.
The use of a limited liability company (LLC) to hold real estate assets was neither designed nor intended to be employed as a place to hide an individual’s personal wealth from creditors. Rather, use of an LLC is a means to allow real estate vested in the LLC to remain undisturbed in the face of an individual member’s financial adversity, and vice versa.
A member in a LLC may have an outstanding debt they owe due to a money judgment or a local, state, or federal tax lien. Through a money judgement against a member in an LLC, a creditor may attach the members fractional ownership interest in the LLC to satisfy the judgment.
The attachment procedure involves the use of a judicial device called a CHARGING ORDER. Once recorded, these money judgments and tax liens automatically attach to any real estate interest vested in the individuals name or the name of a trust they have established to hold title.
A money judgement against an LLC member which does not also name the LLC entity as a judgement debtor, can only be satisfied by foreclosing on the members ownership interest in the LLC, not the real estate owned by the LLC. Thus, an LLC entity remains unaffected by a lawsuit against an individual member.
Membership in a limited liability company (LLC) is:
B. personal property.
Understand what the creditor of an individual LLC member achieves when they enforce a money judgement against the debtor member’s ownership interest in the LLC.
A creditor of an individual LLC member has two options when enforcing a money judgment.
- Have a receiver appointed to collect the debtor member’s share of the income and profits generated by operations of the property vested in the name of the LLC or
- foreclose under the charging order lien and have the members interest in the LLC sold.
A creditor with a judgment has the judicial means only to go after a member’s economic interest of the debtor member. The interest the creditor obtains from the debtor member is a non-voting interest, which prohibits interference with the LLC activities requiring a vote.
One or all of the members in an LLC may terminate a debtor member’s interest in the LLC on the notice of a charging order without causing the LLC to be dissolved and the property sold. Upon the termination of a member’s interest, the remaining members may buy the terminated member’s entire interest in the LLC. Buyout provisions in a LLC agreement between members are the most common method used for the elimination of a debtor member and their judgment creditor. Additionally, the terms of buyout provisions are usually advantageous to the remaining members.
money judgement
A MONEY JUDGEMENT is an award for money, issued by a court, resulting from a lawsuit for payment of a claim.
charging order
A CHARGING ORDER is an attachment device used by a creditor to place a lien on the ownership interest in a limited liability company LLC held by the individual member for the payment of a money judgment. A creditor of an individual member has two options when enforcing a money judgment, they can either:
- appoint a receiver to hold the debtor member’s share or
- foreclose on the members interest in LLC.
buyout provision
A BUYOUT PROVISION is a provision in a limited liability company LLC operating agreement which, on termination of a member’s interest, grants the remaining members the right to buy out the terminated members interest in the LLC or dissolve the LLC.
fraudulent conveyance
FRAUDULENT CONVEYANCE is when a property transfer is made for the purpose of avoiding creditors without receiving fair value on the transfer which is voidable. The transfer of property by an owner of real estate to evade a creditor is considered fraudulent when:
- the owner intends to defraud their creditors AND
- a reasonably equivalent value is not received by the owner in exchange for the property transfer, and the owner is or will be insolvent (for example when debts exceed assets) on the transfer.
A fraudulent conveyance of a property may be invalidated or voidable when a reasonably equivalent value is not received.
However, when the full value or a reasonably equivalent value is received by an owner for a transfer, the transaction cannot be invalidated. The creditor is then left to chase down and attach the proceeds received by the owner/debtor.
Advise a homeowner whether they qualify to voluntarily sell and protect the equity in their residence from creditor seizure
A homeowner who decides to voluntarily sell their residence when title is subject to a creditors lien may not use the automatic homestead exemption to protect the sales proceeds from being taken by the Judgment creditor.
In contrast, a declaration of Homestead recorded prior to the recording of the Judgment lien allows the homeowner to voluntarily sell their home and first withdraw their Homestead amount from the net sales proceeds before the Judgment creditor receives any funds.
Cant: have a lien, then voluntary sell, then claim automatic homestead
Can: do a Declaration of Homestead and RECORD that Homestead, then have a lien, then voluntarily sell
Unlike a declared homestead, the homeowner claiming only an automatic homestead exemption may not use a quiet title action to remove the lien and sell the home. When an insufficient net equity exists barring the Judgment creditor from forcing a sale of the home, the homeowner is unable to sell without dealing with the Judgment creditor, as through in a short sale. Thus, the homeowner who relies solely on the automatic homestead exemption to protect their Equity is imprisoned in their own home unless they file a bankruptcy petition, since they cannot voluntarily sell and avoid the Judgment lien.
Differentiate between an automatic homestead and a recorded declaration of homestead and the protections afforded under each
Two types of Homestead procedures are available to California homeowners:
- the Declaration of Homestead, which is recorded or
- the Automatic Homestead, also called a statutory homestead exemption, which is not recorded.
Neither the declared nor the automatic Homestead interferes with:
- voluntary liens previously or later placed on title to the property by the homeowner, such as trust Deeds
- involuntary liens given priority over the homestead exemption under public policy legislation or
- the homeowner’s credit ratings or title conditions.
Some involuntary liens and encumbrances are given priority to the amount of the homestead exemption by Statute. Liens with priority are enforced as senior, including:
- mechanics or contractors and vendors liens
- homeowners association assessments
- judgments for alimony or child support
- real estate property taxes
- Federal Internal Revenue Service (IRS) liens
Here is where the homestead protection would come in and be applied. Then….
Involuntary liens subordinate and junior to the homestead amount would be processed, they include:
- State Franchise Tax Board personal income tax liens
- Medi-cal liens
- judgment creditors liens
Determine the specified dollar amounts of net equity homestead protection available
A homestead is the dollar amount of equity in a homeowner’s dwelling the homeowner qualifies to exempt from creditor seizure.
The dollar amount of the homestead held by the homeowner has priority on title over most judgment liens and state government liens.
Homeowners qualify for one of three specified dollar amounts of net Equity Homestead protection with either type of Homestead.
- a $75,000 equity for an individual homeowner with no dependents
- a $100,000 equity for a head of household or
- $175,000 equity for homeowners who are:
- 65 or older
- physically or mentally disabled
- 55 or older with an annual income of less than $15,000 or $20,000 if married.
Understand the components of a recorded homestead declaratoin
A creditor may be permitted by the court to force the sale of a debtors home. If so, the dollar amount of the homestead received by the homeowner on the sale is protected from the creditors attachment during a six-month reinvestment period following the sale.
However, a homeowner needs to record a Declaration of Homestead to receive all the benefits available under the Homestead laws. In contrast to an automatic homestead exemption, a recorded Declaration of Homestead coupled with a quiet title action allows the homeowner to remove judgement liens attached to their title. A declaration of Homestead allows homeowners to voluntarily sell their home, receive the net sales proceeds up to the dollar amount of the homestead and reinvest the funds in another home.
Once recorded, a declaration of Homestead lasts until the homestead owner records a declaration of abandonment of the homestead or the homestead owner records a new Declaration of Homestead on another residence.*
abstract of judgement
An ABSTRACT OF JUDGEMENT is a condensed written summary of the essential holdings of a court judgment. When a homeowner is sued by a creditor for money owed on an unsecured debt, a money judgment is awarded to the creditor who becomes a judgment creditor, the homeowner becomes a judgement debtor. An abstract of judgment is recorded by the Judgment creditor in the county where the homeowners residence is located.
declaration of homestead
A DECLARATION OF HOMESTEAD is a document signed by a homeowner and filed with the county recorder’s office to shield the owner-occupant homestead equity from seizure by creditors.
automatic homestead
An AUTOMATIC HOMESTEAD is the dollar amount of equity in a homeowner’s principal dwelling the homeowner is automatically qualified to exempt from creditor seizure. Also known as a statutory homestead exemption.
quiet title
QUIET TITLE is a court action to remove a cloud and establish title to a property.
In contrast to an Automatic Homestead exemption, a recorded Declaration of Homestead coupled with a quiet title action allows the homeowner to remove judgement liens attached to their title.
A quiet title action determines the priorities of the creditors lien and the recorded Homestead on title. When the homeowner demonstrates the homestead declaration is valid and was recorded prior to the creditors lien, the title will be cleared of the lien, provided the equity in the property does not exceed the homestead amount. Judgment creditors Junior to a declared Homestead where no excess equity exists soon realize they’re futility in litigation. Thus, they are generally receptive to a negotiated release. Consequently, the homeowner can usually buy a partial or full release from the Creditor typically less than the cost of a quiet title action.
Note when the homeowner does not reinvest the proceeds of their home sale in a new Homestead within six months, and the proceeds are still in the state of California, the exempt proceeds from the sale may be attacked by a judgment creditor.
Identify statements and conduct which constitute slander of title against a person’s interest in real estate
Any interest in real estate can be harmed or damaged by false oral statements, called slander, or false written statement, called libel.
For a person to be liable for slander of title based on their comments about another person’s interest in a parcel of real estate, the oral or written statement needs to:
- be published
- be untrue and disparaging to the owner’s property interest
- be made without privilege
- cause money losses.
A real estate interest is slandered when a person:
- makes an unprivileged false statement about a real estate interest
- the statement brings into question the right or title to the interest, called disparagement
- the statement causes the owner of the real estate interest to lose money.
A false statement consists of writings, words or conduct communicated to another - the publication - which adversely affects the desirability of a marketable interest in real estate. Slander of title applies to any marketable interest in real estate which is assignable, transferable or capable of being sold.
