Patel v. Patel (COA23-924) 7/16/2024
Judgment Transferred to a Debtor is a Legal Satisfaction
Chris Burti, Vice President and Senior Legal Counsel

The defendants appealed from the trial court's order granting judgment on the pleadings to the plaintiff in his action to renew a prior judgment. The defendants challenged the trial court's decision because the plaintiff was a joint debtor on the judgment he was seeking to collect and was therefore barred from collecting on the judgment. The Court of Appeals, in a unanimous opinion, concluded that the plaintiff was equitably barred from enforcing the judgment and reversed the trial court's order.

In 2012, Bank of the Carolinas (the "Bank") obtained a judgment (the "2012 Judgment") against both the plaintiff and the defendants in favor of the Bank and assigned its right to enforce the 2012 Judgment to the plaintiff for less than the total judgment. Subsequently, until November 2021, the plaintiff collected payments on the judgment from the defendants. In November 2021, the plaintiff filed a complaint seeking to renew and enforce the 2012 Judgment. The trial court granted the plaintiff's motion for judgment on the pleadings.

The defendants argued on appeal that the trial court's judgment on the pleadings was improper because the plaintiff is a co-debtor under the judgment, that he could not show the existence of a prior judgment rendering it unenforceable. The plaintiff contended that this was an untimely collateral attack on the enforceability of the original 2012 Judgment. On the issue of judgment renewal, the opinion states:

To renew the enforceability of a prior judgment, the owner of the judgment may bring an independent action alleging "[1] the existence of a prior judgment against the defendant; [2] the fact that full payment on the judgment has not been made; and [3] an accounting of the unpaid balance due and any applicable interest." Unifund CCR Partners v. Young, 282 N.C. App. 381, 386, 871 S.E.2d 347, 351 (2022).

The parties' briefs on appeal contended that the precedent of either, Hoft v. Mohn, 215 N.C. 397 (1939) or Unifund CCR Partners v. Hoke, 273 N.C.App. 401 (2020) should control. The Plaintiff argued that Unifund should control the outcome of the case and this opinion observes that the trial court cited Unifund in granting judgment on the pleadings. In Unifund, the court held that no genuine issues of material fact existed because the defendant did "not challenge the existence or validity of the judgment, nor the validity of the underlying debt..." and therefore, the only evidence of the defendant's debt material to the renewal action was the judgment being renewed. (citations omitted) The Court of Appeals concluded that Unifund only had limited application in this case because the defendants here explicitly challenged the existence of the 2012 Judgment and did not make any assertions that the plaintiff failed to comply with pleading requirements. The Court did find Unifund "instructive as to what evidence is material in an action to renew a judgment: the existence of that judgment, notwithstanding any issues of fact or law corresponding to the underlying debt claims. Id. at 406, 848 S.E.2d at 511. Defendants do not contest the legal foundations of the 2012 Bank Judgment or seek to present evidence concerning the legality or accuracy of the debts supporting it. Rather, they contend that Plaintiff's possession of the judgment is what renders an otherwise valid judgment unenforceable."

In Hoft v. Mohn the plaintiff was not one of the original debtors on the judgment, but rather, was assigned the judgment as the result of a series of transfers from an original judgment co-debtor and the Hoft plaintiff sought recovery of the judgment balance from the other judgment co-debtors. The Court of Appeals reasoned:

Our Supreme Court explained that, "[s]ince remote days of the common law, it has been held that payment by one or more of those jointly and severally liable on a judgment is an extinguishment of the judgment, and that an assignment of the judgment to such person or persons will not serve to keep it alive against the others." Id. (citations omitted). The Court in Hoft held that the judgment could not be enforced by the plaintiff because he "must be held to represent the [judgment co-debtor] to whose rights and privileges he has succeeded and which he exercises," and law and equity prevented the judgment co-debtor from recovering the balance of the judgment from the non-paying co-debtors. Id. at 400..."

In other words, in such case, the co-debtor paying off the judgment has no right to subrogation of the whole debt from their co-debtors:

The Court is not aware of any principle, on which, after the satisfaction of a judgment for a partnership debt by one of the partners sued, equity ought to extend or preserve the vitality of the legal security, under the guise of an assignment, so as to charge the bail of the other partner.
. . .
Upon the whole, the Court is of opinion, clearly, that the doctrine of subrogation cannot be applied between partners and joint principals, so as, after payment to the creditor, to affect the bail of one of them for the benefit of the other. It is against conscience to enforce the judgment for that purpose. Hinton v. Odenheimer, 57 N.C. 406, 407-08 (1859).

The Court concluded that a judgment creditor's rights are extinguished upon the payment of the debt, and the co-debtor paying the judgment cannot be assigned what no longer exists. That said, the judgment co-debtor who paid the judgment has both a common law and a statutory right of contribution from the co-debtors. The opinion cites: Norris v. Johnson, 246 N.C. 179, 182, 97 S.E.2d 773, 775 (1957); Sherwood v. Collier, 14 N.C. 380, 382 (1832); Towe v. Felton, 52 N.C. 216(1859); Liverman v. Cahoon, 156 N.C. 187, (1911); Bunker v. Llewellyn, 221 N.C. 1, (1942) and N.C. Gen. Stat. § 1B-7 to opine that if "a payment is made to the judgment creditor by a party to the judgment with the intent to purchase the judgment, the actual legal effect of the payment is a satisfaction of the debt owed." The opinion relies upon Scales v. Scales, 218 N.C. 553 (1940) to conclude that negotiation a settlement for less than the full balance of the debt does not change this outcome and the judgment is deemed satisfied.

The Court of Appeals enunciates the doctrine in this way:

When we read Hoft, Sherwood, Scales, and the remainder of our jurisprudence as a cohesive body of law, the following principles emerge: (1) A judgment on a debt extinguishes, unless it is preserved by statutory process, when the amount owed under the judgment is satisfied. (2) If a debt is transferred to its debtor, the amount owed as a liability merges into the debtor's assets, the debt no longer exists, and there is no longer any amount owed on any judgment for that debt; the judgment ceases to exist. (3) If a co-debtor pays any amount to his judgment creditor and causes the judgment to extinguish, it may only function as a payment in full satisfaction of the debt, and he is entitled not to subrogation of the entire amount of the debt or the entire amount paid, but to a ratable contribution from his co-debtors.

Further:

Though Plaintiff, here, intended his payment to the Bank to be a purchase of the 2012 Bank Judgment for his sole benefit, a judgment cannot be effectually assigned to its own debtor. See Sherwood, 14 N.C. at 381 ("[N]otwithstanding the intention; . . . an assignment to one, of his own debt, is an absurdity[.]"). Plaintiff instead obtained a satisfaction of the judgment. Scales, 218 N.C. at 556, 11 S.E.2d at 571. By agreeing to pay the Bank a lesser amount than the full amount owed under the judgment in exchange for a purported assignment of the judgment, Plaintiff has effectually negotiated a release of the debt owed for a lesser sum, paid in lump sum, on behalf of himself and his co-debtors.

The significance of this opinion for title examiners is twofold. First, renewal judgments should be examined with great care as there may exist facial validity issues as the facts of this case suggests and second, seeking to have a title insurer insure over a judgment that is approaching its statute of limitations for enforcement may be far riskier than at first blush might appear.