Compliance Bulletin

Amendments to Laws on Liens and Levies
October 16, 2009

A new California law, AB 1549, permits the creation of a judgment lien against the assets of a judgment debtor that is a corporation or other organization that is incorporated or registered in another jurisdiction as long as either the debtor’s tangible assets are located in California or, with respect to certain assets discussed below, its place of business (in some circumstances) or its chief executive office is in California. In addition, the bill also clarifies the priority of judgment liens on timber, “as-extracted collateral,” and agricultural liens. It also amends the provision for designating centralized service of levies to banks.

Non-California entities

Article 9 of the California Commercial Code [1] provides a system for establishing the perfection and priority of security interests and liens on personal property through the filing of a financing statement with the California Secretary of State when the debtor is deemed located in California. California Code of Civil Procedure (CCP) Sections 697.510 and 697.530(a) provide a similar mechanism for a judgment creditor to create and perfect a judgment lien but only if a security interest in those assets could be perfected under the Commercial Code (Article 9) by filing a financing statement with the California Secretary of State.

A recent bankruptcy decision, Aura Systems, Inc. v. Barovich (In re Aura Systems, Inc.), 347 B.R. 720 (Bankr. C.D. Cal. 2006) held that, because of this requirement a California judgment creditor could not obtain a valid judgment lien by filing a financing statement with the California Secretary of State against a debtor that was a Delaware corporation. Under Article 9, creating a security interest on the assets of a foreign entity required perfection in the state of registration [2].

AB 1549 amends CPP Section 697.530(a) to allow a judgment creditor to file a notice of judgment lien against the assets of certain entities not registered in California if the assets are located in California. Covered assets are equipment, farm products, inventory, and negotiable documents of title. As to a judgment lien against accounts receivable and tangible chattel paper, the requirement is that the judgment debtor is “located” in California.

Whether a person is located in California is determined in accordance with Commercial Code Section 9307. Thus, a debtor that is an individual is located at the individual’s principal residence; a debtor that is an organization and has only one place of business is located at its place of business; and a debtor that is an organization and has more than one place of business is located at its chief executive office. In determining the debtor’s location, the registration of an organization is not considered.

In addition, the bill amends CCP Section 697.590 to create a special priority rule for judgment liens against the assets of entities registered in another state. A California judgment lien against the assets of a non-California corporation or other registered entity is junior to a security interest in those assets perfected by filing or other action in the state of registration, regardless of whether the financing statement is filed after the notice of judgment lien and regardless of whether the secured party knew of the judgment lien when it filed the financing statement in the other state [3].

The rationale is that creditors of a corporation or other registered organization might limit their search to the state of registration (this is what Article 9 intended) and might not conduct lien searches of the records of the California Secretary of State. Recognizing this, the legislature provides that judgment liens filed in California against such an organization will not have priority over a properly created security interest in the same assets. This provision is seen as fair and necessary to achieve a consensus on restoring the ability to obtain judgment liens against the assets of foreign corporations and other entities without having to file in the state of registration.

Timber and mineral rights

Under existing CCP Section 697.530(d) a judgment lien does not attach to certain personal property, such as the debtor’s automobile. AB 1549 adds “timber to be cut” and “as-extracted collateral,” [4] which are oil, gas, and other minerals that are subject to a security interest created by the debtor before extraction and that attaches to the minerals as they are extracted, including accounts arising from the sale of the collateral.

Agricultural liens

AB 1549 adds references in CCP Section 697.590 to agricultural liens when appropriate to establish priority rules that should apply to judgment liens as compared to security interests and agricultural liens. The omission of references to agricultural liens in this section may be an oversight arising from the 2001 Article 9 revisions. These corrections also confirm that the general priority rules between judgment liens and agricultural liens do not override statutes that give explicit priority to specific agricultural liens over conflicting judgment liens.

Bank levies

Under existing law (CCP Section 700.140), to levy upon a deposit account, the levying officer must either personally serve a copy of the writ of execution and a notice of levy on the bank where the deposit account is maintained, or personally serve them to a centralized location within the county as designated by the bank. If the writ of execution is received at the designated central location, it applies to all deposit accounts held by the bank regardless of the location of that property. AB 1549 revises the central location that may be designated from “the county” to “this state.” Thus, a bank may elect to receive writs of execution and notices of levy only from a single location in California.

The wording of existing Section 700.140(a) has been a concern because it suggests that, if a bank designates a central location, then service to that location is effective nationwide:

If the writ of execution is received at the designated central location, it shall apply to all deposit accounts held by the financial institution regardless of the location of that property. [Emphasis added].

  1. Division 9 of the California Commercial Code beginning at Section 9101.
  2. Prior to the adoption of the revisions to Article 9, security interests and judgment liens were perfected by filing in the office designated by the law of the debtor’s location, which was deemed to be in the state where it had its place of business (and if it had more than one, where its chief executive offices were located). In California, security interests were perfected by filing with the Secretary of State’s office, and their relative priority was based on time of filing. Amended Article 9 changed the deemed location of the debtor to its place of formation without regard to the location of assets, and this resulted in an unintended change in CCP 697.530, which had referred to the perfection of security interests under the Commercial Code before the revision and continues to do so.
  3. See new CCP Section 697.590(h).
  4. Defined in Commercial Code Section 9102(a)(6).

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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