Bulletin: WA000056

Dear Associates:

As you know, if a judgment or tax lien is filed or recorded against a person who owns real property, and the lien is filed prior to the date that person conveys their property, the judgment or tax lien remains a lien on the property notwithstanding the transfer of title. This bulletin is to remind you that, under certain circumstances, a lien can attach even if it is filed or recorded after the debtor transfers the property. The circumstances under which this can occur generally fall into two categories.

Transfers When Debtor Had Knowledge of Pending Lien.

Occasionally you will see a deed to a third party recorded shortly before a judgment or tax lien comes of record against the grantor. In these circumstances, the judgment creditor can argue that the transfer should be avoided as a fraud on the creditor. The chances of this argument succeeding increase dramatically when no consideration is paid for the transfer or when the transfer is made to a family member or to a corporation, trust, LLC or other entity owned or controlled by the grantor (see RCW 19.40.041).

When you find a transfer shortly before a lien comes of record, you should investigate whether fair consideration was paid (compare the tax value against the excise tax statement) and whether the transfer was made to a family member or an entity owned or controlled by the grantor. If fair consideration was not paid, or if the transfer was to a family member or to a grantor-owned entity, you should either list the lien as an exception or obtain underwriting approval before ignoring it. The underwriter will evaluate the nature and size of the lien, the circumstances surrounding the transfer, and whether the grantor was likely aware of the pending lien (had the litigation which created the judgment already commenced?)

Transfers To Trusts Where Grantor/Trustor is a Beneficiary.

Frequently, and for often legitimate purposes, people transfer their real estate to a living (inter vivos) trust. Usually the trustee is a relative of the grantor/trustor, and often the grantor/trustor is named as a beneficiary of the trust. Under Washington law (RCW 19.36.020), if a person transfers property to a living trust of which he is the beneficiary, the transfer is void as against existing or subsequent creditors and the lien attaches. For example, in 2001 John Smith creates a living trust naming his son as trustee and himself as the beneficiary. A day later a deed is recorded transferring the property from Smith to his son as trustee of the trust. In 2002 John Smith enters into a business arrangement that goes bad and Smith ends up with a judgment against him for $25,000 in favor of Smith's business partner, Sue Jones. The judgment is not entered until 2004. Despite the prior transfer of the property to Smith's trust, the Jones' judgment still attaches to the property.

Therefore, anytime property is vested in the trustee of a living trust and the grantor/trustor of the trust is a beneficiary of the trust, you must run the grantor/trustor in the General Index and list as exceptions any judgment or tax liens against him.

In addition, any time property is vested in an inter vivos trust and you have not yet examined the trust agreement and all amendments thereto to determine whether the trustor is also a beneficiary, the following should be added to the commitment:

TITLE TO THE PROPERTY IS CURRENTLY VESTED IN THE TRUSTEE OF A LIVING TRUST. IN THE EVENT THE TRUSTOR OF SAID TRUST IS ALSO A BENEFICIARY OF THE TRUST, A GENERAL INDEX SEARCH OF THE TRUSTOR WILL BE MADE AND ANY MATTERS AGAINST SAID PARTY DISCLOSED BY SUCH SEARCH WILL BE ADDED TO THIS COMMITMENT AS EXCEPTIONS.