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SUMMARY:

The California Supreme Court recently ruled that creditors may record a notice of pendency of action (commonly known as a “lis pendens”) against real property that is subject to fraudulent conveyance claims. Kirkeby v. Superior Court, 33 Cal.4th 642 (2004). This decision is important to creditors since with the recording of a lis pendens a purchaser or an encumbrancer who subsequently acquires an interest in the real property will take that interest subject to the outcome of the litigation, regardless of whether that person had actual knowledge of the action. This is because a lis pendens constitutes constructive notice of what may be later established by the judgment.

FACTS:

Kirkeby was a minority shareholder in a company that manufactured tags for pets. Kirkeby alleged that the majority shareholder, Fascenelli, looted the company after Kirkeby resigned from the board of directors. Fascenelli was claimed to have taken excessive bonuses, paid personal expenses with corporate funds and taken improper loans, all amounting to approximately $4.9 million. One of the loans was used to purchase residential rental property which was then placed in the Fascenelli’s Family Trust. Additionally, Fascenelli took his personal residence and placed it in the same Family Trust, and then subsequently transferred the properties to a partnership in order to avoid execution by creditors.

Kirkeby claimed that both transfers to the trust constituted fraudulent conveyances and thereafter recorded a lis pendens (pursuant to Section 405 et seq. of the California Code of Civil Procedure) against both properties. Upon Fascenelli’s petition, the trial court expunged the lis pendens since the underlying claims were for money damages. A writ of petition to review the expungement order was filed with the Court of Appeals, but was denied on the basis that the claims contained in the complaint would not affect title or the right to possession of real property, which was required by applicable law. The California Supreme Court granted review of the expungement order.

Initially, the Court noted that a “real property claim” was defined as “the cause or causes of action in a pleading which would, if meritorious, affect (a) title or right to possession of, specific real property …” Id. at p. 647. Therefore, a review of the expungement order was limited to whether a real property claim had been properly pled in the complaint. Using plain language analysis, the Court found in favor of Kirkeby and reversed the lower court’s decision.

The Court reasoned that a fraudulent conveyance gives rise to various remedies, including, but not limited to providing for the avoidance of transfer of title to specific pieces of real property. Since such remedies would affect the title or possession of real property it was clear that Kirkeby’s complaint asserted a “real property claim” and therefore formed the basis for a lis pendens. The Court acknowledged that its decision could be abused by creditors recognizing that the lis pendens statute was designed only to give notice to third parties and not necessarily to aid plaintiffs in pursuing claims. The Court noted that “the practical effect of a recorded lis pendens would be to render a defendant’s property unmarketable and unsuitable as security for a loan.” Id. at p. 651. However, the plain language of the statute required such a result and if it became problematic, then it was up to the legislature to change the law.

COMMENT:

It appears that under Kirkeby, a creditor will now be free to proceed to record a lis pendens against specific real property when it is able to assert a claim for fraudulent conveyance in its complaint. This will allow creditors to move extremely quickly without the need for a court to issue a prejudgment order or injunction to prevent debtors from attempting to further transfer or collateralize real property that had been transferred in an attempt to hinder, delay or defraud creditors. However, a creditor should be aware that a property owner may be entitled to attorneys’ fees and costs if successful in expunging a lis pendens, so it would be prudent to confirm the evidence of fraud before recording the notice of lis pendens. In any case, this is certainly good news for creditors who will benefit greatly from this added enforcement tool for use against unscrupulous and questionable transfers.


For more information, call Peter C. Califano, Barry A. Dubin or Denise C. Reagan

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