Business Counsel Services

Judgment Liens vs. Texas Homesteads: Down for the Count?

Perhaps one of the most famous lines in American pugilism was Muhammad Ali’s: “Float like a butterfly, sting like a bee.” For decades, judgment creditors and judgment debtors have been trading punches in the post-judgment ring, either in an effort to collect judgments owed or to avoid paying the same. The ebb and flow of this fight has seen the exchange of heavy punches, sometimes staggering one or the other. Now, the Texas Legislature may have delivered a knock-out blow to judgment creditors.

The fight usually starts the same. In the first round, a creditor secures a judgment against a debtor and then files an abstract of the judgment in every county where the debtor possesses, or may possess, real property. The filing of the abstract creates a judgment lien on any real property in that county. TEX. PROP. CODE ANN. § 52.001 (West 2007). Usually, although not always, the judgment lien attaches to the debtor’s homestead property. This, in and of itself, is not an issue. The Texas Supreme Court has observed that a lien against a homestead is never valid (in the sense of being enforceable) unless it secures payment for certain debts provided for in the Texas Constitution. TEX. CONST. art. XVI, § 50; Benchmark Bank v. Crowder, 919 S.W.2d 657, 660 (Tex. 1996). This does not mean, however, that a lien that is not valid and enforceable is completely without effect. As one Texas Court of Appeals has observed: “Under [the Texas Property Code] statutory provisions, a judgment lien is ‘perfected,’ or brought into existence against a debtor’s property, by recording and indexing an abstract of judgment in the county where the property lies. The debtor’s homestead is not exempt from the perfected lien; rather, the homestead is exempt from any seizure attempting to enforce the perfected lien.” Exocet, Inc. v. Cordes, 815 S.W.2d 350, 352 (Tex. App. – Austin 1991, no writ).

This is true, because as a principle of Texas law, “a judgment lien attaches to the judgment debtor’s interest if he abandons the property as his homestead before he sells it.” Hoffman v. Love, 494 S.W.2d 591, 594 (Tex. Civ. App. – Dallas 1973, no writ). For example, where a debtor acquires a second homestead before selling the first homestead, the first homestead is deemed abandoned and is no longer exempt from seizure. England v. Federal Deposit Insurance Corp., 975 F.2d 1168, 1175 (5th Cir. 1992). Furthermore, if the debtor retains the property as his homestead until he sells it,unless the debtor reinvests the proceeds of the sale in another homestead within six months from the date of the sale, the proceeds are subject to seizure by creditors. TEX. PROP. CODE ANN. § 41.001(c) (West 2007); Sharman v. Schuble, 846 S.W.2d 574, 576 (Tex. App. – Houston [14th Dist.] 1993, no writ). Even during this six-month window, if the debtor purchases another homestead, any remaining proceeds from the sale of the first homestead are instantly rendered non-exempt. England, 975 F.2d at 1174. Thus, judgment lien holders have a significant interest in filing and maintaining their judgment liens, even against a debtor’s homestead property.

As the fight moves toward the middle rounds, the debtor who was attempting to sell his homestead property demands that a judgment lien creditor release the judgment lien so as to not interfere with the sale of his homestead. Although the abstract does not create a lien on the debtor’s homestead, it can still create a cloud on the title. Where a judgment lien creditor refuses to release the judgment lien in conjunction with the debtor’s sale of his homestead, when requested to do so by the debtor, the judgment creditor may be held liable for damages occasioned by the refusal. Tarrant Bank v. Miller, 833 S.W.2d 666, 667-68 (Tex. App. – Eastland 1992, writ denied). Notwithstanding the requirement that a judgment lien creditor release a judgment lien on homestead property when requested to so, the creditor is entitled to evidence that the property is, in fact, a debtor’s homestead.

To this end, most judgment lien creditors require that the debtor(s) sign and file in the appropriate county real property records, an affidavit designating the property at issue as their homestead.

This practice finds support in the Texas Property Code, which provides for the filing of such a voluntary designation of homestead. TEX. PROP. CODE ANN. § 41.105 (West 2007). Indeed, under Chapter 41, Subchapter B entitled “Designation
of a Homestead in Aid of Enforcement of a Judgment Debt,” the judgment creditor may force the judgment debtor to elect his homestead and file such a designation. TEX. PROP. CODE ANN. § 41.021 et seq. (West 2007).

That procedure has now been amended by the Texas Legislature, effective September 1, 2007. A new section to Chapter 52, Subchapter A of the Texas Property Code was enacted to address homestead property interests and the release of judgment liens. TEX. PROP. CODE ANN. § 52.0012 (West 2007). Under this new provision, entitled “Release of Record of Lien on Homestead Property,” a judgment debtor may now avoid and remove an abstracted judgment lien without the judgment creditor signing a release of that lien. The judgment debtor does so by first preparing and then later filing a prescribed form of an affidavit in the real property records of the county in which the homestead is located. TEX. PROP. CODE ANN. § 52.0012(b(West 2007). Once filed, if a judgment creditor does not respond to the filing, the affidavit “serves as a release of a judgment lien,” upon which a bona fide purchaser or a mortgagee for value (including successors and assigns) “may rely conclusively,” so long as the affidavit complies with the statutory requirements. TEX. PROP. CODE ANN. § 52.0012(c) & (d) (West 2007).

The affidavit must state that the judgment debtor: (1) sent a letter and a copy of the affidavit (without attachments and before execution of the affidavit), notifying the judgment creditor of the affidavit and the judgment debtor’s intent to file it of record; and (2) the letter and affidavit were sent by registered or certified mail, return receipt requested, at least thirty days before the affidavit was filed, (a) to the judgment creditor’s last known address; (b) to the address appearing in the judgment creditor’s pleadings in the underlying lawsuit (if different from the last known address); (c) to the address of the judgment creditor’s last known attorney as shown in those pleadings; and (d) to the address of the judgment creditor’s last known attorney as shown in the records of the State of Bar of Texas. TEX. PROP. CODE ANN. § 52.0012 (d) (1) & (2) (West 2007).

However, the affidavit will not result in a release of the judgment lien if the judgment lien creditor files a contradicting affidavit in the real property records of the county in which the property is located asserting that: (1) the affidavit filed by the judgment lien debtor is untrue; or (2) “another reason exists as to why the judgment lien attaches to the judgment debtor’s property.” TEX. PROP. CODE ANN. § 52.0012(e) (West 2007).  The new statutory provision does not address two very important issues. First, the new statute does not set a deadline or a timeframe for a judgment creditor to file its contradicting affidavit. Because the new statute provides that a bona fide purchaser or mortgagee may rely upon the judgment debtor’s filed affidavit “conclusively,” a judgment lien creditor will necessarily have to file its contradicting affidavit almost immediately upon the expiration of the thirty-day notice. Second, assuming that such a contradicting affidavit is filed, the new statute does not provide a procedure or mechanism for resolving the dispute. Presumably, the parties will be left to pursue litigation to resolve the dispute, with the attendant risk that if the judgment creditor is wrong, it may be held liable for damages. It appears that the Texas Legislature has now added a haymaker punch to the homestead judgment debtor’s arsenal of punches. If a judgment creditor is not careful, it may find itself on the canvas only to learn that it has been counted out of the fight. As George Foreman quipped: “There’s more to boxing than hitting. There’s not getting hit, for instance.”

By David M. O’ Dens

Business Counsel Services

Just when you thought it was safe again… A National and State Review on Holes in Malpractice Damage Caps

SettlePou is pleased to announce a three part series from the Business Counsel Service Section for physicians, discussing the following: (1) the attack on malpractice damage caps; (2) increasing the physician’s professional protection; and (3) increasing the physician’s personal protection.

Part One

As children growing up in the 70’s, nothing scared us more than being attacked by a great white shark when jumping into the deep end of the pool (“Cue-Jaws Soundtrack”). But just when you thought it was safe again, Jaws 2 came out, terrifying us all over again.

Just as Jaws scared us out of the pool, many lawsuits have scared medical practices into limiting the types of procedures performed or out-right retiring. In 2004 Texas legislation, as in many other states, introduced a medical malpractice cap as a means of protecting physicians. For example, in Texas a patient can only recover $250,000 for noneconomic losses and $500,000 for wrongful death. However, just when physicians thought it was safe again, physicians are encountering new lines of attack. The two most prominent attacks, which will be discussed in this article from both a national and state perspective, are: (1) using of consumer protection laws against physicians, and (2) establishing high economic damages in a malpractice case, which many times are uncapped.

Consumer Protection Laws

Consumer Protection laws are designed to protect the state’s citizens from unfair and deceptive bargaining power against larger, more capitalized entities. Because the legislature cannot specifically address each area where a consumer might encounter an unfair business practice, the state statutes giving rise to consumer protection claims are often broad. Courts then have the final say on to whom the statute applies, or in other words, how consumers will be limited in pursuing damages under consumer protection statutes.

Developments Across the Nation.

To combat the medical malpractice caps, plaintiffs look for other avenues to pursue their claims. Essentially, in many states, plaintiffs are now either tacking on consumer claims against physicians to get around the medical malpractice limitations, or they are abandoning their physician negligence claims altogether and seeking only the consumer protection claim. The critical issue for courts, so far, has been how carefully the legislature drafted the statute when limiting liability. For instance, Pennsylvania decided that consumer protection statute did not apply at all to physicians supplying medical services, but only to business enterprises engaged in trade or commerce. However, this is an exception as most states allow consumer protections claims against physicians in a limited capacity.

The other extreme is when the legislature drafts a statute broadly enough to allow for consumer protection claims for a physician’s negligence. Thus, even though the state has medical malpractice limitations for recovery resulting from a physician’s negligence, it allows patients to circumvent the limitations by bringing consumer protection claims to recover for their injuries. The plaintiff will point to written representations, advertisements, or other oral representations made by or on behalf of the physician as lulling the patient into a false sense of security. If this activity rises to the level of a deceptive or unfair trade practice, it could subject the physician to hefty damages for something that essentially arose out of a negligent rendering of medical services. In Kansas, for example, the Supreme Court decided that the language of the statute was broad enough to allow consumer protection claims to be brought against physicians who provide medical treatment or services.

Most states strike a balance between these two extremes and allow claims against physicians under a consumer protection statute only in limited circumstances. Generally, consumer protection claims can be brought against a physician when the nature of the claim arises out of the “entrepreneurial, commercial, or business aspect of a physician’s practice”. A patient cannot simply recast a negligence claim as a consumer protection claim to avoid malpractice limitations. Colorado requires a certificate for review for all cases brought against physicians, so if a consumer protection claim sounds in negligence as well, the plaintiff must provide expert testimony to support its claim. The need for medical expert testimony often suggests a negligence claim rather than a consumer protection claim. Similarly, with regard to federal claims brought under the Federal Trade Commission Act (“FTCA”),
federal courts have also required the claim to arise out of the commercial or business aspects of a physician’s practice.

The Texas Approach. Texas has addressed the issue several times and has been very reluctant to allow claims against physicians under the consumer protection statute. Even when a dentist represented that he could do a bone graft “with no problems,” said a skin graft would work as well as a bone graft, and made statements about a patient’s prognosis, the Supreme Court said the dentist’s statements had to do with the medical standard of care sounding in negligence and not deceptive or unfair trade practices. The plaintiff’s claims was dismissed for failure to submit an expert report. Ultimately, the court looks to the underlying nature of the claim to determine whether it involves a breach of the accepted standard of medical care rather than a claim for deceptive trade practices. In another case, even when the physician expressly warranted to a patient that she would not be sedated and he thereafter sedated her, the Supreme Court said the representations all have to do with whether the administration of a general anesthetic under all the circumstances met the standard of care for anesthesiologists.” Therefore, the Texas approach only allows a claim to be brought under the Deceptive Trade Practices Act if it does not have to do with the standard of medical care.

A Cap is not a “CAP” when it’s Economic.

Tort reform measures place some limitations on physician liability, and, in many states including Texas, have helped significantly reduce frivolous lawsuits and reduce insurance premiums (at least for some specialties). However, tort reform does not eliminate the risk for a substantial judgment against a physician.

In explaining tort reform, the damages caps typically put in place cover non-economic damages. Non-economic damages include things that do not involve a cash loss, with no precise value, such as pain and suffering, emotional distress and loss of consortium or companionship. In Texas, patients are limited to recovering $250,000 for noneconomic damages. California and Montana also cap non-economic damages.

Few have a counterpart limitation, however, on economic damages. Economic damages encompass actual pecuniary losses, such as health care expenses, loss of wages, medical bills, and damage to property. As a result, there can be significant exposure for a physician where a catastrophic injury occurs to a patient, particularly to a well educated patient who can establish significant lost wages damages.

While many physicians believe that tort reform eliminates their exposure for malpractice claims, the reality is that tort reform helps but cannot be relied upon as the sole protection from a massive malpractice judgment. It remains important for physicians to review their professional and personal structures as a means to taking needed steps for protection.

By Michael S. Byrd and Bradford E. Adatto