Dec. 13, 2012 – Judgment creditors can request “supplemental proceedings” to make debtors answer for unsatisfied debts and identify property. Recently, an appeals court clarified that creditor liens still attach to property acquired subsequent to supplemental proceedings.

In 2006, Town Bank obtained a judgment for nearly $1.7 million against Timothy Brophy. Two days later, Town Bank requested and received a supplemental hearing.

More than a year later, Brophy assigned his interest in legal malpractice claims to Heartland Wisconsin Corporation as security for loans totaling $222,539. Brophy defaulted.

The legal malpractice case settled, and both Town Bank and Heartland Wisconsin Corp. claimed a priority interest in the settlement funds. The funds were placed in escrow pending resolution.

The Waukesha County Circuit Court ruled that Town Bank had priority. Heartland appealed, arguing that Town Bank’s priority ceased when it failed to file notice of the supplemental proceeding and order with the clerk of court, alleging Wis. Stat. section 816.035 required it.

Town Bank had served Brophy with the supplemental hearing order and summons, but did not file the documents with the circuit court clerk.

Heartland Wisconsin characterized Town Bank’s lien as an unenforceable “secret lien,” and in any event, the lien could not attach to property acquired after the supplementary hearing.

The District II Wisconsin Court of Appeals disagreed in Attorney’s Title Guaranty Fund Inc. v. Town Bank, 2011AP2774 (Dec. 5, 2012), upholding the lower court’s decision.

A three-judge appeals panel explained that Wis. Stat. chapter 816 requires the “supplemental commissioner,” not the party requesting the supplemental hearing, to file the supplemental proceeding order and proof of service with the corresponding circuit court clerk.

“While Heartland contends Town Bank had a duty to ensure the order and return at issue in this case were filed with the clerk of court, this statute clearly placed that responsibility only upon the supplemental commissioner, not Town Bank,” wrote Judge Mark Gundrum.

The panel also ruled that Town Bank perfected its creditor lien when it served Brophy with an order to appear for supplementary hearing, and this perfected interest was superior.

Citing Mann v. Bankruptcy Estate of Badger Lines Inc., 224 Wis. 2d 646, 590 N.W.2d 270 (1999), the panel noted that “’a creditor’s lien is valid and superior against other creditors at the time the creditor serves the debtor with a summons to appear at the supplementary proceeding under Wis. Stat. § 816.03(1)(b).’” This is the only step necessary to perfect the lien, it noted.

Finally, the appeals panel downed Heartland Wisconsin’s argument that Town Bank’s lien did not apply to personal property that Brophy acquired after the supplemental proceeding.

“We hold that a creditor’s lien may attach to any property of the judgment debtor, including property acquired subsequent to a supplementary proceeding,” Judge Gundrum wrote.