For a judgment to become a lien on a debtor’s real property, filing a UCC financing statement is no substitute for docketing the judgment, for reasons explained by Chief Bankruptcy Judge Catherine J. Furay of Madison, Wis.

A man guaranteed a loan to a corporation that he owned. Two years later, the man quitclaimed a parcel of real property to his wife. The wife had not guaranteed the loan to the corporation.

Several months after the transfer, the lender sued the man and the corporation and obtained a default judgment for almost $250,000. The wife was not a defendant, and there was no judgment against her.

Less than a month after the default judgment, the lender filed a UCC financing statement, identifying the husband as the debtor and asserting that the lender had an interest in the transferred property. As Judge Furay said in her December 19 opinion, there was no mortgage or security interest granted to the lender.

After the filing of the UCC financing statement, the wife sold the transferred property to a third party. At the insistence of the buyer’s title insurer, the sale proceeds were held in escrow by the title insurer to abide resolution of the lender’s claim to the proceeds.

After the sale, the lender finally docketed the judgment in the county where the transferred property was located. One month later, the husband filed a chapter 7 petition. The lender filed a secured proof of claim asserting a security interest in the sale proceeds that were being held by the title insurer.

The chapter 7 trustee filed an adversary proceeding against the lender followed by a motion for summary judgment, seeking a declaration that the lender had no lien or security interest in the property or proceeds. Judge Furay granted the motion.

No Judgment Lien and No UCC Security Interest

Addressing the merits, Judge Furay immediately noted how the lender had not docketed the judgment until after the wife had sold the property. The lender argued that docketing the judgment was not the only method for obtaining a judgment lien in Wisconsin.

Judge Furay surveyed decisions by the Wisconsin Supreme Court to conclude that a “creditor may have a valid judgment but, if not properly docketed, it does not become a lien.” She added, “It is the only statutory basis for obtaining a judgment lien on real property in the state.” [Emphasis in original.]

By the same token, Judge Furay explained why the “UCC filing did not create a judgment lien.”

Wisconsin’s version of the UCC governs perfection. Although the UCC no longer requires the debtor’s signature on a UCC financing statement, Judge Furay said,

[T]his does not mean that all filings are authorized. Instead, section 409.509(a) [of the Wisconsin UCC] entitles a person to file an initial financing statement only if the debtor authorizes the filing. This presumes, however, that a security interest was granted.

Judge Furay explained that the lender was “not a secured party,” because “[n]o security interest was created or provided for under a security agreement in its favor.” She added, “A judgment is not an agreement. It does not create a security interest. So, the UCC filing didn’t create a security interest that was or could be perfected.”

Judge Furay held that the judgment, docketed after the sale, did not create a lien on the property and that the UCC financing statement did not create a lien on the property or the proceeds.

No Equitable Lien

Despite having no statutory lien, the lender argued that it was entitled to an equitable lien.

Although the Wisconsin Supreme Court has said “that creditors may be granted equitable liens,” Judge Furay said that the state’s high court “repeatedly emphasized that an equitable interest will not defeat the interest of a properly secured judgment creditor, such as a Chapter 7 trustee.” [Emphasis in original.]

Judge Furay went on to say that none of “the representations, omissions, or misguided advice that may have been given to [the lender] by anyone protects [the lender’s] alleged interest in the Property or the proceeds from the Trustee’s rights as a lien creditor under the Code.”

Judge Furay granted the trustee’s motion for summary judgment and declared that the lender had “no valid or perfected security interest or lien, its alleged lien is void, and it is a general unsecured creditor.”