By Evan A. Blaker
A harsh reality in any business, including construction, is that there will be people who owe you money but do not have it. In general, a simple collection action can be brought against these individuals to obtain a judgment that can be executed against their property or recorded as a lien against a future sale. In most states, the priority of the judgments occurs in the order in which they are recorded, the so-called rule of “first in time, first in right.” This is not the rule, however, in New Jersey.
In New Jersey, merely recording a judgment is insufficient to preserve the creditor’s lien priority. A typical course of action for the creditor is to simply record the judgment as a lien and then wait for the debtor’s business to generate assets to pay the judgment. However, that strategy can backfire under New Jersey law, especially if the debtor winds up filing for bankruptcy. Rather, to preserve your judgment priority in New Jersey, you must be sure to take action to file and to serve a writ of execution on the debtor’s personal property and real property.
Like most states, to affect judgment lien rights in New Jersey, a creditor must record its judgment with the Clerk of the Superior Court. This action creates a lien on all real property owned by the debtor within the entire state. The reason for this policy is that the judgment, after the clerk records it, serves as constructive notice to subsequent purchasers, encumbrancers, and others that there is a judgment lien on the title of the affected property.
However, unlike most states, in New Jersey, the priority among judgment creditors is determined by the order of their levies of execution. Moreover, “execution is accomplished only after the creditor delivers the writ to the sheriff and the sheriff actually levies upon the debtor’s property.” Party Parrot, Inc. v. Birthdays & Holidays, Inc. As the Appellate Division put simply in a recent opinion in B.B. v. Mell, “the creditor who levies first has priority over all nonlevying judgment creditors.” This priority is with respect to all of the debtor’s property and not just the levied property.
This departure from the mainstream of collections law invites particular peril to judgment creditors in the context of bankruptcy. Under section 544 of the U.S. Bankruptcy Code, the trustee of the bankruptcy estate has priority over a creditor that obtains either a judgment-lien when bankruptcy is filed or “an execution against the debtor that is returned unsatisfied at such time.” This is referred to as the trustee’s “strong-arm” power against unperfected judgment creditors. Therefore, in New Jersey, because a judgment is not perfected until it is executed upon, the trustee can “strong-arm” all creditors who have not executed on their judgments before the bankruptcy date. The trustee holds this “strong-arm” power even over creditors who already recorded their judgment liens with the Clerk of the Superior Court before the debtor filed for bankruptcy.
Moreover, to maintain a priority position over other judgment creditors or the bankruptcy trustee, creditors in New Jersey must execute against both the debtor’s real estate and its personal property. New Jersey law actually requires that judgment creditors execute upon a debtor’s personal property before they may attempt to execute upon its real estate. Several courts have observed that N.J.S.A. 2A:17–1 “clearly and unequivocally expresses the legislative mandate” that the sheriff must first levy upon and sell the debtor’s goods before it may sell the debtor’s real estate. Sklar v. Cont’l Cas. Co. (In re Mariano). This principle is also stated in the New Jersey Rules of Court, which require that “execution shall be made out of the judgment debtor’s personal property before the judgment-creditor may proceed to sale of the debtor’s real property.” R. 4:59-1(d).
In accordance with this principle, when a creditor has filed and served a writ of execution against only real property, the trustee can use its strong-arm power to avoid the creditor’s judgment lien and take priority, based on the creditor’s failure to exhaust its remedies against the debtor’s personal property. In In re Mariano, the court declined to vacate a sheriff’s sale of a debtor’s real estate only because the trustee failed to show that the judgment creditor had not first tried to locate the debtor’s personal property. As the court observed, New Jersey law requires creditors to “make a good faith attempt to ascertain the location” of the debtor’s personal property before executing upon its real estate. The Mariano court implied that, had the trustee made that showing, it would have invalidated the sale of the debtor’s real estate, and the proceeds would have been “clawed back” into the bankruptcy estate.
In the recent case In re: Hillesland, a bankruptcy trustee successfully invalidated a judgment lien on that very basis. In Hillesland, the debtor did not answer the judgment creditor’s requests for information regarding the location and value of the debtor’s personal property and refused to allow the sheriff entry onto his property to take an inventory of goods. The creditor filed a writ of execution directing the sheriff first to sell the debtor’s personal property and then to seek what remained of the judgment from the debtor’s real estate. The debtor then filed for bankruptcy and revealed that he owned personal property.
The court in Hillesland held that the bankruptcy trustee had priority over the creditor’s claims because the creditor had not properly executed on the debtor’s property. Specifically, the court found that a creditor cannot execute upon a judgment debtor’s personal property and real property simultaneously and that reliance upon a debtor’s non-answers to discovery requests was insufficient to constitute a “good faith attempt to ascertain the location” of the debtor’s assets. The Hillesland court distinguished the facts before it from those presented in Mariano by observing that the creditor in Mariano had not relied solely upon the debtor’s non-answers to discovery about personal property but also had “commission[ed] two investigative reports.” This additional effort by the creditor in Mariano rendered its search for the debtor’s personal property as one conducted “in good faith.”
The decision in Hillesland provides a warning to creditors who do not take steps to preserve the priority of their liens against a New Jersey debtor’s property. But, less ominously, it also guides what must be done to do so. The statutes, Rules of Court, and Hillesland, taken together, show that a judgment creditor must take the following steps to preserve the priority of a judgment lien:
- Conduct an active search to locate personal property of the debtor, even if the creditor does not answer discovery requests;
- Record the judgment with the clerk of Superior Court to effectuate a state-wide lien on the debtor’s real property;
- File and serve a writ of execution against the debtor’s personal property;
- File and serve a writ of execution against the debtor’s real property.
By taking these steps, a creditor can ensure that the priority of its judgment is preserved if its debtor in New Jersey files for bankruptcy.
