New California case changes the way creditors can collect their debts

New California case changes the way creditors can collect their debts

| Apr 15, 2021 | Consumer Debt Collection

Judgment and debt collection is an ever-changing field, and new challenges of statute interpretation arise in the courts every day. If you are a creditor in California, you should pay attention to a new lawsuit that has changed the way California courts classify debtor judgments that you can seize in satisfaction of your own lien.

The statute in question

The California Code of Civil Procedure, Section 708.410, allows a creditor to claim a money judgment that their debtor wins against a third party in satisfaction of the creditor’s judgment against the debtor.

In other words, if Party B owes Party A money, and Party B wins a lawsuit against Party C, then Party A can claim the money that Party C pays to Party B in satisfaction of Party B’s debt to Party A.

A recent California case put the application of this statute to the test in new and unforeseen ways. For the first time, California courts had to decide exactly what counts as a judgment received by the debtor for purposes of the statute.

The controversy

Kevan Gilman brought a lawsuit against Lena Dalby and her law firm to recover money that he thought they owed him. He initially lost the suit, and the court ordered him to pay $17,229 to the Dalby law firm.

Later, on appeal, the California Court of Appeal for the Third Appellate District ordered the Dalby firm to return the $17,229 to Mr. Gilman, which they did.

At the time, a different law firm – that of Tammy Phillips – held an outstanding judgment against Mr. Gilman for an unrelated matter.

As soon as Mr. Gilman received his money back from the Dalby firm, the Phillips firm tried to claim it in satisfaction of their lien on Mr. Gilman’s potential judgments. The Phillips firm asserted that the money counted as a judgment received in a lawsuit, and thus that they were entitled to claim it in satisfaction of their own judgment according to Section 708.410.

Mr. Gilman, on the other hand, argued that the Phillips firm was not entitled to the $17,229 – since it was not new money that a third party was paying to him, but rather his own money that the Dalby firm was returning to him. He argued that Section 708.410 does not apply to money returned in this manner.

The resolution

The court ultimately held that the Phillips firm’s lien could absolutely attach to the money, even if it was just restitution of Mr. Gilman’s own money instead of new money paid to him. The issue became whether the Dalby firm had notice of the Phillips firm’s lien on Mr. Gilman’s assets.

What does this mean for creditors in California? It means that, as long as you ensure that all parties involved have notice of your lien, you may recover money given as part of a judgment to your debtor in satisfaction of your lien, even if that money is simple restitution of your debtor’s own assets.