Turned Upside Down: The Wisconsin Supreme Court Reverses The Rule On Judgment Liens

In 1999, the Wisconsin Supreme Court decided Mann v. Badger Lines, Inc. (In re Badger Lines, Inc.), 224 Wis. 2d 646, 590 N.W. 2d 270 (1999), in which it addressed a question certified to it by the Seventh Circuit Court of Appeals: Does Wisconsin law require that a lien obtained by a judgment creditor who institutes supplementary proceedings under Wisconsin Statutes section 816.04 be perfected, and if so, how is the lien to be perfected? The Wisconsin Supreme Court concluded 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). Mann, 224 Wis. 2d at 649.

In October 1991, plaintiff Emerald Industrial Leasing Corporation ("Emerald") obtained a default judgment against defendant Badger Lines, Inc. ("Badger Lines"). It also obtained an order from the circuit court directing Badger Lines to appear at a supplementary proceeding under Wisconsin Statutes section 816.03 and enjoining Badger Lines from transferring its assets. In December 1991, the court commissioner appointed Douglas Mann ("Mann") as supplementary receiver and issued an order for Badger Lines to turn over its assets pursuant to Wisconsin Statutes section 816.04. In February 1992 (within ninty days of Mann's appointment and the turnover order), Badger Lines filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code and Robert Waud ("Waud") was appointed as trustee. Mann asserted a secured claim in the Chapter 7 case based upon a receiver's lien. However, Waud filed a final report listing Emerald as an unsecured creditor because Mann's appointment and the turnover order had occurred within the 90-day preference period under 11 U.S.C. § 547. The Bankruptcy Court held that a judgment lien is created when the receiver is appointed and that the asserted lien was voidable as a preference. Mann, 224 Wis. 2d at 651

Mann appealed and the United States District Court held that Emerald received a lien when the order to appear at the supplementary proceeding was entered, but remanded to the Bankruptcy Court the question of how such lien is to be perfected. On remand, the Bankruptcy Court determined that a judgment lien is perfected by either the appointment of a supplementary receiver or upon the issuance of a turnover order. Since both of these events occurred within the preference period, the lien was avoidable as a preference. Id. at 652. Mann appealed to the Seventh Circuit and because the court determined that it should not speculate on how the Wisconsin Supreme Court would rule on the issue, it certified the question. Id at 653.

The Wisconsin Supreme Court defined perfection as the single date or moment in time when a creditor obtains a lien which cannot be overtaken by another creditor on simple contract. Id. at 654. The court concluded that the answer to when perfection occurs was not found in the Wisconsin Statutes, but must be answered by existing case law. As part of its analysis, the Supreme Court reviewed the three very old cases (Kellogg v. Coller, 47 Wis. 649, 3 N.W. 433 (1879); Holton v. Burton, 78 Wis. 321, 47 N.W. 624 (1890); and Alexander v. Wald, 231 Wis. 550, 286 N.W. 6 (1939)).

In Holton, the court determined that a debtor could assign its property after supplementary proceedings because a lien had not yet arisen, which appeared to support Trustee Waud's view. In Kellogg, a sheriff served an order to appear for a supplementary examination before a second creditor had a similar order served. However, the first order was technically invalid because of an error in the sheriff's affidavit. The Supreme Court held that the first order was sufficient to give the first creditor a prior lien. In Alexander, both the service of the order to appear and the appointment of the receiver occurred outside of the preference period in the defendant's subsequent federal bankruptcy proceeding. However, the court emphasized the order to appear at the supplementary...