The Colorado Court of Appeals has held that a properly recorded transcript of judgment did not create a judgment lien in a judgment debtor’s residence, because the net equity in the property was less than the judgment debtor’s homestead exemption. This decision, (City Center National Bank, N.A. v. Barone), 807 P.2d 1251 (Colo. App. 1991) (“Barone“), may help some owners sell their homes.
A creditor may pursue its claim by suing and obtaining a judgment against its borrower. A transcript of the judgment can be recorded in any Colorado county in which the judgment debtor owns real property, creating a “judgment lien” against the real estate. The judgment lien may be foreclosed, allowing the creditor to recover against the judgment debtor’s real estate.
In Barone, City Center National Bank, N.A. (the “Bank”) obtained a judgment against its judgment debtor in an amount in excess of $44,000. The Bank recorded its transcript of judgment in the Arapahoe County Clerk and Recorder’s Office at a time when its judgment debtor owned his home in Arapahoe County. The judgment debtor later sold the residence to the Barones. At the time the judgment transcript was recorded, and through the sale to the Barones, the judgment debtor had less than $20,000 of net equity in his home. (The amount of the homestead exemption for the times applicable to the Barone case was $20,000. The Colorado legislature has since increased the homestead exemption to $30,000. The examples discussed below use the current $30,000 homestead exemption.
Because the facts of Barone were so simple, the court was not forced to address the point in time relevant for determining:
(1) whether the net equity exceeded the homestead, or (2) whether the property was the judgment debtor’s homestead. As the examples below suggest, the resolution of these questions is problematic.
When a transcript of judgment is recorded against a property that has less than $30,000 of net equity, but which is not a homestead at the time the transcript is recorded, the judgment lien attaches. However, what happens if the property later becomes the judgment debtor’s homestead, does the lien drop off? If, at the time the judgment is recorded, the property is the judgment debtor’s home and there is less than $30,000 in net equity, the lien does not attach. However, what happens if the judgment debtor moves and retains ownership? The law should be that, at the time the property stops becoming the judgment debtor’s homestead, the lien attaches.
There are similar questions surrounding the amount of net equity. If a judgment is recorded at the time real property is a homestead and has net equity in excess of $30,000, the lien attaches. However, what then happens if the equity is reduced below $30,000? (This could happen, for example, through a failure to pay property taxes or a default on a mortgage senior to the judgment.) Does the lien come off? What happens if, at the time a judgment is recorded, there is less than $30,000 of net equity, but at some later point in time, the net equity exceeds $30,000? (Presumably the lien attaches to the extent that the net equity exceeds $30,000.
OPPORTUNITY FOR SELLERS
Regardless of the answers to the above questions, Barone creates an opportunity for some owners. A title commitment generated prior to a sale may require that judgment liens be satisfied through a closing. Yet Barone establishes that not all judgment liens which purport to attach to the property actually become liens against it.
For example, your home may be worth $100,000 and have a first deed of trust against it with a pay-off of $80,000. ABC Finance Company may have recorded a transcript of a $20,000 judgment in the same county as the property. The lien does not attach as there is not sufficient equity (behind the first mortgage and the homestead exemption) to cover it.
It is extremely unlikely that you will be able to convince the title company to delete the judgment from the title commitment entirely. Title companies will not want to make the factual determinations necessary to bear the risk that the lien does attach. Yet, a title company should be willing to show the judgment as an exception to its insurance coverage. An entreprenurial buyer may have sufficient confidence that the lien does not attach to accept the omission from the insurance coverage in exchange for a discount in the sales price. If the first mortgage can be assumed, or if the buyer does not need financing, there will be no new mortgage lender to second guess the buyer’s decision.
In the example above, the parties could agree to a sales price of $90,000. Without paying off the judgment, the seller would net $10,000 more than if the judgment was paid through the closing, and the buyer would receive a $10,000 discount from the property’s value. Unless revived, the judgment lien would drop off of the property six years after the entry of the judgment. Even if such an entrepreneurial buyer cannot be found, the possibility of this scenario may be used to motivate the judgment holder to take a discounted pay-off.