Tactical Use of Bankruptcy when a Lis Pendens is Recorded

On June 2, 2015, the California Court of Appeals issued a decision where it reversed the Superior Court’s decision to grant priority to a judgment lien recorded by a party after a lis pendens was recorded by a different party. While some nuances about the interaction of fraudulent transfer judgments and lis pendens were discussed, the result appears to be correct and is certainly fair.

Delving into the facts, it appears the following scheme was stopped:

Husband defrauded “ex-wife” by hiding assets in a company called BTM. BTM transferred this property to third parties without the knowledge of ex-wife or creditors. Creditors later recorded a lis pendens and proceeded to trial. Meanwhile ex-wife proceeded to trial for essentially the same thing.

While Husband stalled creditors, he stipulated to judgment with ex-wife. AHA! Ex-wife recorded her abstract of judgment which became a second priority lien against the property. At the time of the appeal, Husband and ex-wife had rekindled their love and were married! This is a brilliant strategy for husband. He obtained the benefit of the loans made by creditors but the creditors now stood to receive nothing as the wife’s lien left them wholly unsecured.

Since the Court of Appeals reversed, the priority of the second judgment related back to the date the lis pendens was recorded thereby moving the creditors’ secured status up a notch resulting in the creditors being in second position and the ex-wife being in third position.

This scenario got me thinking. What would have happened if after ex-wife recorded her abstract of judgment, husband filed for bankruptcy? (Assuming no preference problems.)

On the petition date, the bank would have a secured first priority lien, the ex-wife a secured second priority lien and the creditors would have an unliquidated, disputed potential judgment for $21,000,000.

One course of action would be for the property to be sold, the lienholders to be paid and for any remaining proceeds to be paid to the creditors. This result would be contrary to what happened in state court. This is what the schemer’s apparently wanted to happen.

The other course of action would be to allow the creditors to proceed to judgment, then allow them to record an abstract of judgment thereby making them secured.

But what happened to fixing the rights of creditors as of the petition date? You can find a copy of the state court case here.

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