Summer 2005

SUPREME COURT APPROVES A LIS PENDENS
AS REMEDY FOR FRAUDULENT CONVEYANCE

In Kirkeby v. Superior Court (Fascenelli), the California Supreme Court issued an opinion approving a notice of pendency of action—commonly referred to as a lis pendens—to prevent any further transfers of real property to defraud creditors.

The Supreme Court held that a creditor may record a lis pendens to prevent a further transfer by a debtor’s transferee of an interest in real property in furtherance of an attempt to render the property unavailable for satisfaction of a debt.  The court made it clear, however, that the recordation of a lis pendens may not be used without a transfer being, at least, alleged by the creditor.

The case arose of a dispute between a brother and sister who were co-owners of a company called FasTags, Inc. (“FasTags”).  FasTags was a manufacturer and wholesaler of identification tags for pets.  Plaintiff Kirkeby alleged that after she resigned from the FasTags board of directors in 1988, her brother Frederick Fascenelli and his wife Diana Fascenelli looted the company.  Kirkeby filed a lawsuit in 2001, alleging 27 different causes of action against the Fascenellis, including a cause of action based on two alleged fraudulent conveyances.  The aggregate amount of damages sought was $4.9 million.

With respect to the fraudulent conveyance action, Kirkeby alleged that Frederick obtained a $50,000 loan from FasTags by representing that he would use the funds to construct a building to house FasTags’ operations but, instead, used the funds to purchase a residence for himself and Diana.  After making the purchase, the Fascenellis immediately transferred their interest in the property to a family limited partnership.  In addition, Frederick transferred his interest in another residential property to a family trust which then also transferred it to the partnership.  Kirkeby alleged that these transfers were made to defraud creditors in collection of their claims and requested that the transfers be voided to the extent necessary to satisfy the claims in her complaint.  These transfers form the basis of Kirkeby’s fraudulent conveyance claim.

After filing and recording a lis pendens against both properties, the Fascenellis successfully obtained an order expunging the lis pendens.  The trial court found that the essence of Kirkeby’s complaint was for collection of money (as opposed to a dispute over property ownership) and, therefore, did not state a proper cause of action for the use of a lis pendens.  Kirkeby petitioned the appellate court to overturn the trial court’s decision, which was denied.  The appellate court held that the complaint did not allege a claim that affected title to or the right to possession of real property to support the lis pendens, which is a requirement under Code of Civil Procedure section 405.4.  That is, the use of a lis pendens cannot generally be used as a collection remedy for an unsecured obligation.  The California Supreme Court granted a discretionary review of the matter.

As set forth in Urez Corp. v. Superior Court, “a lis pendens is a recorded document giving constructive notice that an action has been filed affecting title to or right to possession of the real property described in the notice.”  Pursuant to California Code of Civil Procedure section 405.20, a lis pendens may be filed by any party in an action who asserts a “real property claim.”  Section 405.4 defines a “real property claim” as “the cause or causes of action in a pleading which would, if meritorious, affect (a) title to, or the right to possession of, specific real property. . . .”  If the pleading filed by the plaintiff does not properly plead a real property claim, the lis pendens must be expunged under Code of Civil Procedure section 405.31. 

It is important to note, and the Supreme Court made it clear, that there are at least three different procedures by which a party whose real property has been encumbered by a lis pendens can seek to expunge or remove the lis pendens from the property.  These include asserting through a motion that the lawsuit itself does not allege a proper real property claim (as indicated above) and that the plaintiff is unable to establish the probable validity of the real property claim by a preponderance of the evidence.  Other methods to expunge a lis pendens include a motion alleging the failure to comply with recording, service, or filing requirements; that the claim is secured by the property owner filing an undertaking; or that the creditor failed to file an undertaking as ordered by the court as a condition for maintaining the lis pendens.

The Fascenellis moved to expunge the lis pendens on the basis that the plaintiff did not allege a real property claim.  This decision was not based on a factual finding that Kirkeby could not support the claim but rather that the claim as alleged did not fit within the definition of a “real property claim.”

The Supreme Court disagreed finding that Kirkeby’s claim did relate to real property and that it also affected “title to, or right to possession of, specific real property.”  The court based its finding upon the conclusion that the Uniform Fraudulent Transfer Act (UFTA), which is codified in Civil Code section 3439 et seq., provides that a “fraudulent conveyance is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.”  One of the remedies for a fraudulent conveyance, as set forth in California Civil Code section 3439.07(a)(1), provides that a creditor can void the transfer or obligation to the extent necessary to satisfy the creditor’s claim.  Thus, the Supreme Court concluded that, if successful, the result of a fraudulent conveyance claim can be the voiding of a transfer of title to specific real property.  As stated by the Supreme Court:

By definition, the voiding of the transfer of real property will affect title to or possession of real property.  Therefore, a fraudulent conveyance action seeking avoidance of a transfer under subdivision (a)(1) of Civil Code section 3439.07 clearly “affects title to, or the right to possession of”  . . . real property and is therefore a real property claim for the purpose of lis pendens statutes.

In the cited case, Kirkeby adequately pled a fraudulent conveyance claim by alleging that the Fascenellis transferred title to the subject properties with intent to defraud.  She also sought an order from the court voiding the transfers to the extent necessary to satisfy her claims.  As such, the court concluded that she had properly stated a real property claim because it would affect title to specific real property.  If she prevailed, she would be able to set aside the transfers in order to satisfy her claim.

The court also noted that despite its approval of the lis pendens procedures for these purposes, the procedure could be subject to abuse.  The court suggested that trial courts could liberally impose sanctions upon anyone who files a fraudulent transfer action and records a notice of lis pendens before uncovering credible evidence of fraud. 

The availability of a lis pendens to prevent further disposition of real property assets is a strong and powerful remedy for a creditor.  Typically, the creditor with an unsecured nonconsumer-based claim, must first prepare attachment applications and seek the approval of the superior court before tying up the property.  A lis pendens does not require court approval, a nonconsumer debt, and can be filed and recorded immediately upon filing the complaint, subject to service and recordation requirements.  A lis pendens will cloud title to the property during the pendency of the lawsuit.  The availability of sanctions, on the other hand, should discourage an abuse of this process.  Nonetheless, for a creditor—acting in good faith—this is a welcome addition to its arsenal of creditor remedies.

MITCHELL B. LUDWIG            

Mr. Ludwig is a Director in the firm’s Commercial Law, Real Estate and Business Litigation department.  Email: mbl@kpclegal.com.

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