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 Post subject: Bennett: Expunging Lis Pendens and Fraudulent Transfer
PostPosted: Sat Dec 24, 2011 10:02 am 
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Bennett v. Superior Court, 2011 WL 6365125 (Cal.App., Dist. 6, Unpublished, Dec. 1, 2011).

Not Officially Published (Cal. Rules of Court, Rules 8.1105 and 8.1110, 8.1115). California Rules of Court, rule 8.1115, restricts citation of unpublished opinions in California courts.

Court of Appeal, Sixth District, California.

Gary BENNETT, Petitioner,

v.

The SUPERIOR COURT of Santa Clara County, Respondent,

Magnate Fund # 2, LLC, et. al., Real Parties in Interest.

No. H036470.

(Santa Clara County Super. Ct. No. 110CV171320).

Dec. 1, 2011.

Jonathan Grant Chance, JC Law Offices, Redwood City, CA, for Petitioner.

Richard Thomas Bowles, Walnut Creek, CA, for Real Party in Interest.

ELIA, J.

*1 Petitioner Gary Bennett is the plaintiff in a suit for fraudulent and negligent misrepresentation, fraudulent conveyance, and other causes of action related to investment property in Los Gatos. The trial court granted a motion by three of the defendants to expunge the lis pendens Bennett had filed, based on two cases cited by those defendants in their motion. Bennett then brought this petition for a writ of mandate or prohibition to overturn the expungement order. We issued an order to show cause why the requested relief should not be granted, and we now grant the petition.

Background

Bennett filed this action on May 6, 2010, naming only James B. Rogers, the primary source of the alleged fraud. According to the original complaint as well as his subsequent pleadings, in August 2007 Bennett loaned Rogers $2 million. Rogers had represented that he planned to construct a home and "Guest House" on a parcel of land in Los Gatos and then sell the property to recoup Bennett's investment. In exchange for the loan, Rogers gave Bennett a promissory note, secured by a deed of trust on the property. The deed of trust allowed Bennett to "call the loan due in full" if Rogers transferred any or all of the property.

On April 1, 2008 Rogers persuaded Bennett to "go off title" to the Guest House, ostensibly so he could refinance that part of the loan. The papers Bennett signed, however, transferred to Rogers all of Bennett's title to and interest in the main property as well as the Guest House. In his first amended complaint Bennett alleged that he had mistakenly signed these documents in reliance on Rogers's representation that only title to the Guest House was being transferred.

On August 7, 2008, Rogers conveyed the property to Lexington Consulting, Rogers's solely owned entity. Less than two weeks later, Lexington Consulting filed for bankruptcy protection. According to Bennett, Rogers had made no payments on the note since September 2007.

When Bennett discovered that he had been removed from title to the main property, he contacted Rogers, who first blamed the title company for incorrectly drafting the documents, but then explained that he needed Bennett's name and deed of trust removed from the main property to facilitate the transfer to Lexington Consulting and the bankruptcy filing. Rogers allegedly also told Bennett that Bennett had to be removed from the title to the main property because Rogers needed another $250,000 to complete construction on the main property in order to sell it. In addition, Rogers explained, the second lienholders reportedly would not provide the additional funding unless Bennett was removed from title, because he had not signed a subordination agreement. These second lienholders were real parties in interest Magnate Fund # 2, LLC; Lodgepole Investments, LLC; and LHJS Investments, LLC (collectively, real parties).

Real parties subsequently acquired the property in a foreclosure sale. According to Bennett, however, they were not bona fide purchasers because they knew about Bennett's claims to the main property. In his first amended complaint, Bennett added real parties as defendants.FN1 In that pleading he alleged fraud, fraudulent conveyance, mistake, civil conspiracy between Rogers and real parties, and unjust enrichment by Rogers. He sought declaratory relief, damages, restitution, and cancellation of the instruments transferring his own interests to Rogers and those of Rogers to Lexington Consulting.

FN1. Bennett filed a second amended complaint adding Lexington Consulting as a defendant, but real parties demurred and moved to strike the pleading on the ground that Bennett had not sought leave to file it. Real parties submitted a letter to this court asking that we "take notice" of the court's tentative ruling. Although Bennett has provided a copy of the actual written order, which strikes the complaint without prejudice to a noticed motion to amend—we deny real parties' informal, ex parte request. (See Cal. Rules of Court, rule 8.252.) We will take judicial notice, however, of the documents submitted in Bennett's formal motion of September 7, 2011, including a motion for leave to file the second amended complaint. We further grant his more recent motion for judicial notice of the superior court's order granting leave to file the second amended complaint. Nevertheless, in our view the only operative pleading before us is the first amended complaint.

*2 Bennett filed a "Notice of Pend[e]ncy of Action," (lis pendens), and real parties filed their motion to expunge. The court heard the parties' arguments at a hearing on October 19, 2010, and on December 17, 2010, it filed the order granting defendants' motion. On March 2, 2011, upon receiving Bennett's petition for writ relief, this court issued a stay of the expungement order.

Discussion

A notice of pendency of action, or lis pendens, is " 'a recorded document giving constructive notice that an action has been filed affecting title or right to possession of the real property described in the notice.' " ( Kirkeby v. Superior Court (2004) 33 Cal.4th 642, 647 ( Kirkeby ), quoting Urez Corp. v. Superior Court (1987) 190 Cal.App.3d 1141, 1144.) "The purpose of a lis pendens is to give constructive notice of an action affecting real property to persons who subsequently acquire an interest in that property, so that the judgment in the action will be binding on such persons even if they acquire their interest before the judgment is actually rendered." ( Bishop Creek Lodge v. Scira (1996) 46 Cal .App.4th 1721, 1733; see also Code Civ. Proc., sec. 405.24 [recording operates as constructive notice to transferees].)

A lis pendens may be filed by any party who asserts a "real property claim." (Code Civ. Proc., sec. 405.20.) As pertinent here, the term "real property claim" is defined as "the cause or causes of action in a pleading which would, if meritorious, affect ... title to, or the right to possession of, specific real property...." (Code Civ. Proc., sec. 405.4.)

Code of Civil Procedure section 405.30 FN2 allows a party to move to expunge the lis pendens. It is then the opposing claimant's burden to show that he or she has a real property claim. ( sec. 405.30.) The court must grant the motion if it finds that "the pleading on which the notice is based does not contain a real property claim." (sec. 405.31.) Even if the claimant shows the existence of such a claim, the notice must still be expunged if the "claimant has not established by a preponderance of the evidence the probable validity of the real property claim." (sec. 405.32.)

FN2. All further statutory references are to the Code of Civil Procedure except as otherwise indicated.

The central issue before us in this proceeding is whether Bennett has pleaded a "real property claim" under section 405.31, because the absence of such a claim was the sole basis of the respondent court's ruling. The trial court did not articulate specific factual findings on the probable validity of the claims asserted in the pleadings, other than to express its view that Bennett had asserted a "credible claim" against Rogers, and that there was "admissible testimony" that "the moving parties are profiting from plaintiff's exclusion from the secured interest in the subject property." We therefore decide only whether Bennett's pleadings state a real property claim under section 405.31. ( Kirkeby, supra, 33 Cal.4th at p. 648.)

We review the court's ruling de novo; like the trial court, we engage in a "demurrer-like analysis." ( Id. at pp. 647–648.) The Supreme Court has emphasized that it is the pleading, not any supporting or defeating evidence, that determines whether expungement is required. " 'The analysis required by this section is analogous to, but more limited than, the analysis undertaken by a court on a demurrer.... [T]he court must undertake the more limited analysis of whether the pleading states a real property claim.' " ( Id. at p. 650, quoting code comment to statute.)

*3 In their motion to expunge, real parties contended that Bennett's action would not qualify as a real property claim because it did not affect title to or possession of the property; that is, if Bennett obtained the requested relief, he "would not then own the property or have a possessory interest" in it, but would have only a security interest. Real parties further argued that Bennett would not be able to establish the probable validity of his causes of action. Citing Urez v. Superior Court, supra, 190 Cal.App.3d 1141 ( Urez ) and Campbell v. Superior Court (2005) 132 Cal.App.4th 904, they maintained that Bennett's cause of action for fraudulent conveyance against them was unsustainable because, unlike Rogers, they were never debtors of Bennett. They again argued that the most Bennett could obtain as relief would be restoration of his status as a lienholder, "which would still be destroyed by a foreclosure of a senior lienholder." At the hearing defense counsel asserted that the claims against real parties "aren't fraudulent conveyance allegations, those are fraud allegations."

In his opposition Bennett maintained that his fraudulent conveyance claim was a valid real property claim which precluded expungement. He relied on Kirkeby, supra, 33 Cal.4th 642, where the Supreme Court overturned an order granting a motion to expunge a lis pendens predicated in part on a claim of fraudulent conveyance. In that case Cynthia Kirkeby, a minority shareholder in a company that manufactured pet identification tags, alleged that the majority shareholders—her brother, Frederick, and his wife—had looted the company. Her fraudulent conveyance claim related to her allegation that the defendants had borrowed money from the company, ostensibly for a building in which to house the company's operations; but instead, they bought a residential home and then transferred their interest in that property to their family partnership. The previous year Frederick had transferred his interest in the family residence to his family trust, and from there to their family partnership.

Kirkeby recorded a lis pendens on each of the two properties, but the trial court granted the defendants' motion to expunge, reasoning that Kirkeby had claimed no ownership or possessory interest in the property. The appellate court agreed and upheld that ruling. The Supreme Court, however, reversed the expungement order, explaining that fraudulent conveyance, as defined in the Uniform Fraudulent Transfer Act (UFTA), necessarily is a real property claim within the meaning of the lis pendens statutes.

In its order in this case, the respondent court cited Urez and BGJ Associates v. Superior Court (1999) 75 Cal.App.4th 952. Urez was a fraud action in which the plaintiff sought a constructive trust and declaratory relief. The appellate court, characterizing the action as "a collateral means to collect money damages," held that the plaintiff's claims, even if colorable, would not support a lis pendens. (190 Cal.App.3d at p. 1149.) In BGJ Associates the plaintiff asserted 11 causes of action arising out of the defendants' alleged breach of fiduciary duty in a joint venture to buy real property. Most of these claims called for compensatory and punitive damages, separately or together with a constructive trust; only two "focus[ed] narrowly on imposition of a constructive trust." (75 Cal.App.4th at p. 971.) After reviewing with approval its prior decision in Urez, the Second District, Division Four, held that "where the pleading combines theories of liability for monetary damages and for a constructive trust, ... plaintiffs should not be able to maintain a lis pendens. The danger is too great that a lis pendens, which effectively renders the property unmarketable, will have the coercive effects condemned by the cases." ( Id. at p. 972.)

*4 This concern for the abuse of the lis pendens process was addressed in Kirkeby, supra, 33 Cal.4th 642. The court specifically acknowledged the potential for abuse highlighted by the appellate court in BGJ Associates; but the language of the UFTA, particularly Civil Code section 3439.07, "clearly establishes that fraudulent conveyance claims may support a lis pendens where the plaintiff seeks to void a fraudulent transfer." ( Id. at p. 651.) Moreover, the court pointed out, protections against abuse are intrinsic to section 405.32, which requires expungement if the claimant has not established the probable validity of the real property claim.

Unlike the plaintiffs in either Urez or BGJ Associates, Cynthia Kirkeby alleged fraudulent conveyance as well as 26 other causes of action. The Supreme Court focused on that claim, and in particular the Legislature's broad definition of "transfer" FN3 and its view of "fraudulent conveyance" as " '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.' " ( Kirkeby, supra, 33 Cal.4th at p. 648, quoting Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.) The Supreme Court also called attention to Civil Code section 3439.04, which liberally describes the fraudulent nature of a debtor's conveyance of assets or obligation undertaken with reference to the debtor's intent to "hinder, delay, or defraud" a creditor or the debtor's receipt of an insufficient value in exchange for the transfer or obligation. ( Kirkeby, supra, 33 Cal.4th at p. 648; see also Yaesu Electronics Corp. v. Tamura, supra, 28 Cal.App.4th at p. 13 [fraudulent transfer is intended to prevent a creditor from reaching debtor's interest to satisfy its claim].)

FN3. The UFTA defines a "transfer" as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." (Civ.Code, sec. 3439.01, subd. (i).)

The court in Kirkeby acknowledged that section 405.31 mandates expungement of a lis pendens if the pleading does not contain a real property claim. Because the plaintiff had adequately pleaded fraudulent conveyance by alleging a transfer of title with the intent to defraud, she had stated a real property claim, because it would, if successful, "affect title to specific property." ( Id. at pp. 650–651.) That Kirkeby had asserted multiple claims and sought damages as well as declaratory and injunctive relief did not contravene or attenuate the conclusiveness of the Supreme Court's holding.

Cited with approval in Kirkeby was Hunting World, Inc. v. Superior Court (1994) 22 Cal.App.4th 67 ( Hunting World ), another case involving a claim of fraudulent conveyance. There the plaintiff alleged that the defendant, whom it was simultaneously suing in federal court for trademark infringement, had fraudulently quitclaimed his interest in his residence to his wife as a way of protecting his assets against the suit. The trial court expunged the lis pendens because the plaintiff was not seeking title to the property but only wished to reach the assets of the transferor. The First District, Division Three, issued a peremptory writ in the plaintiff's favor, thereby overturning the expungement order. The court refused to extend the line of cases represented by Urez, La Paglia v. Superior Court (1989) 215 Cal.App.3d 1322, and Wardley Development Inc. v. Superior Court (1989) 213 Cal.App.3d 391, which preceded the Legislature's 1992 revision of the lis pendens procedure. In those cases, the court explained, causes of action for constructive trust or an equitable lien were " appended to lawsuits centering on money damages. Those courts could conclude that the actions covered by those notices of lis pendens primarily sought money damages and did not affect title to real property." ( Hunting World, supra, 22 Cal.App.4th at p. 74; see also Campbell v. Superior Court, supra, 132 Cal.App.4th 904, 916 [continuing to follow Urez/La Paglia reasoning in equitable lien and constructive trust claims, as Legislature expressly left the viability of lis pendens in these cases to judicial development].) By contrast, a cause of action for fraudulent transfer, as defined in the UFTA, is a real property claim in light of the "clear wording of the 'real property claim' prong" of the current lis pendens law. ( Hunting World, supra, 22 Cal.App.4th at p. 73.) Moreover, the court noted, the requirement that the recording party show by a preponderance of evidence that the action is probably valid was a sufficient safeguard against abuse of the lis pendens procedure. Any burden on the property owner is alleviated by the opportunity for demurrer, summary judgment, another expungement motion, or prompt trial, and sanctions are available for meritless or harassing lis pendens notices. ( Id. at p. 74.)

*5 In Hunting World a fraudulent transfer was apparently the only claim in the state action. The court there found it significant that the plaintiff's action affected only title to real property, unlike the actions in the Urez/La Paglia cases, in which the courts "could conclude that the actions covered by those notices of lis pendens primarily sought money damages and did not affect title to real property." (22 Cal.App.4th at p. 74.) The same procedural posture was not present in Kirkeby, however. The plaintiff in that case asserted 27 causes of action and requested damages as well as declaratory and injunctive relief. The existence of these other claims made no difference to the outcome; the court could not "ignore the plain language of [section 405.31], which clearly establishes that fraudulent conveyance claims may support a lis pendens where the plaintiff seeks to void a fraudulent transfer." ( Kirkeby, supra, 33 Cal.4th at p. 651.)

In this case Bennett has clearly pleaded fraudulent conveyance in addition to other wrongs. His position is indistinguishable in any material way from the situation presented in Kirkeby. Real parties nonetheless maintain that Kirkeby is not controlling because Bennett does not have any "colorable claims" under the UFTA. More specifically, they argue, (1) a transfer from Bennett to Rogers could not qualify as a fraudulent transfer under the UFTA; (2) the transfer from Rogers to Lexington Consulting was not alleged to have prevented Bennett from recovering his loss from Rogers; and (3) the trustee's sale cannot be deemed a fraudulent transfer because it was authorized by the bankruptcy court. These arguments go to the probable validity of Bennett's claim, which the superior court did not reach; its only comments on the prospect of Bennett's successfully proving his case were in Bennett's favor, recognizing that (a) his testimony "present[ed] a credible claim against the actions of defendant Rogers," and (b) there was "admissible testimony that the moving parties [i.e., real parties] are profiting from [Bennett's] exclusion from the secured interest in the subject property." Should the trial court be called upon to rule on the probable validity of Bennett's claim after remand, it will no doubt eschew hypertechnical views of "transfer" and "fraudulent transfer," and instead apply the Legislature's expansive definition of those terms in Civil Code sections 3439.01 FN4 and 3439.04.FN5

FN4. As noted earlier, the term "transfer" is broadly defined in Civil Code section 3439.01 to encompass all means of parting with an asset " or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." (Italics added.)

FN5. The scope of a fraudulent transfer or obligation under Civil Code section 3439.04 is extensive. This provision states: "(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:

[Para.] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor.

[Para.] (2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:

[Para.] (A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.

[Para.] (B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

[Para.] (b) In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:

[Para.] (1) Whether the transfer or obligation was to an insider.

[Para.] (2) Whether the debtor retained possession or control of the property transferred after the transfer.

[Para.] (3) Whether the transfer or obligation was disclosed or concealed.

[Para.] (4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

[Para.] (5) Whether the transfer was of substantially all the debtor's assets.

[Para.] (6) Whether the debtor absconded.

[Para.] (7) Whether the debtor removed or concealed assets .[para.] (8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

[Para.] (9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

[Para.] (10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.

[Para.] (11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor."

We thus conclude that Bennett's cause of action for fraudulent conveyance cannot be disposed of by predicating the expungement on the inadequacy of his pleading under section 405.31. Whether probable validity attends this claim is beyond the scope of this proceeding, which requires only the "limited analysis of whether the pleading states a real property claim." ( Kirkeby, supra, 33 Cal.4th at p. 648.) The viability of Bennett's action may ultimately turn on the facts as they are developed in the course of any further proceedings.

Disposition

*6 Let a peremptory writ of mandate issue, directing the respondent court to vacate its December 17, 2010 order granting real parties' motion to expunge petitioner Bennett's lis pendens, and to enter a new order denying that motion. Upon finality of this opinion, the temporary stay issued on March 2, 2011 is vacated. Costs in this original proceeding are awarded to the petitioner.

WE CONCUR: PREMO, Acting P.J. and DUFFY, J.FN*

FN* Retired Associate Justice of the Court of Appeal, Sixth Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

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