By Catherine Schlomann Robertson
Pahl & McCay
225 West Santa Clara Street
San Jose, California 95113
408/286-5100 (phone); 408/286-5722 (fax)
Please understand that the information discussed in this Article is general in nature and is not intended to be legal advice. It is intended to assist owners and managers in understanding this issue area, but it may not apply to the specific fact circumstances or business situations of all owners and managers. You may need to consult applicable state and local laws. For specific legal advice, consult your attorney.
What is the priority of liens where additional advances are made by a receivables financing company after the filing of a judgment lien by a third party creditor.
A party with a perfected UCC-1 security interest may assume that it has priority against all judgment creditors filed after the UCC-1 is filed. However, if the financing company receives a “Notice of Judgment Lien”, the receivables financing company will be protected for exactly 45 days, and then lose the priority position as to future advances. The clearest safeguard would be to deny additional advances until the judgment lien is resolved. However, as always, the decision is a “judgment call” on your part.
California Code of Civil Procedure (CCP) §697-590(b) is the general provision for priority of security interests. It states:
Priority between a judgment lien on personal property and a conflicting security interest in the same personal property shall be determined according to this subdivision. Conflicting interests rank according to priority in time of filing or perfection.
In the case of a judgment lien, priority dates from the time a filing is first made covering the personal property. In the case of a security interest, priority dates from the time a filing is first made on the date from the time a filing is first made or the time the security interest is first perfected, whichever is earlier.
Clearly then, a judgment lien is a subordinate to a security interest which is prior and perfected. However, that still does not clearly address whether a secured party who advances additional monies, based on their security interest, would be “ahead” in priority over a perfected judgment lien. CCP §697.590(f) directly deals with the issue of future advances. It states the following:
A judgment lien that has attached to personal property and that is also subordinate under (b) to a security interest in the same personal property is subordinate to the security interest only to the extent that the security interest secures advances made before the judgment lien attached or within 45 days thereafter, or made without knowledge of the judgment lien or pursuant to a commitment entered into without knowledge of the judgment lien. For purposes of this section, a secured party shall be deemed not to have knowledge of a judgment lien on personal property until (1) the judgment creditor serves a copy of the notice of judgment lien on the secured party personally or by mail; and (2) the secured party has knowledge of the judgment lien on personal property, as “knowledge” is defined in Section 1201 of the Commercial Code. If service on the secured party is by mail, it shall be sent to the secured party at the address shown in the financing statement or security agreement.
As a result, it appears that the secured party is fully secured as to all future advances based on their security agreement and perfected UCC-1 as long as the secured party has not received a notice of judgment lien. After the secured lender has physically received the notice of judgment lien, the secured party will be fully secured ahead of all judgment creditors for all advances made before the judgment lien and for 45 days thereafter. However, in view of the fact that service is authorized by mail, and mail can be misdirected or lost, there is not a significant comfort level and we recommend you maintain a monitoring service for lien filings against your debtors.
After receiving her a B.S. in Finance and her J.D. from the University of San Francisco in 1988, Catherine Robertson has provided collection, bankruptcy and pre-judgment remedy solutions for the clients of Pahl & McCay. She is a partner at Pahl & McCay, and has been rated A-V (highest professional and ethical rating) by Martindale-Hubbell. Should you require expertise or assistance in collecting an outstanding obligation, please consider Pahl & McCay.