Los Angeles Real Estate Attorneys Must Determine Whether The Claim Involves A Real Property Claim Before Recording A Lis Pendens
A lis pendens—also called a notice of pendency of action—is a document filed with the court and recorded with the county recorder when there is a pending lawsuit affecting a particular piece of real property. The purpose of the lis pendens is to provide constructive notice to potential buyers and others that a piece of property is involved in litigation that may affect the title to or right to possession of that property. Real estate attorneys and litigants have often used the lis pendens improperly for its “coercive effects” so courts are rightly sensitive to whether a lis pendens has been properly recorded against a property.
In a recent California appellate court case entitled Shoker v. Superior Court (Phangureh), the court addressed whether a lis pendens was appropriate in a lawsuit involving a claim for constructive trust. The court held that the lis pendens was appropriate.
Background: Plaintiffs sold their properties for the phantom investment
The plaintiffs allege in their lawsuit that the defendant lured them into investing $1.5 million in an unidentified technology company. The defendant befriended the plaintiffs, became familiar with the real property they owned and then promised greater returns if they sold their properties.
The plaintiffs gave defendant $1.5 million and then sold ten of their rental properties to a purported cash buyer identified by defendant. The defendant acted as plaintiffs’ agent and negotiated the deal. They then allowed him to invest the money—a total of $6 million–with the unidentified technology company.
While defendant promised that he was investing their money, he instead took the money for himself. Several years later he told the plaintiffs that their investment in the technology company had not been successful (but that their former rental properties were producing rental income of over $350,000 per year). Defendant offered to sell 50-60% of the properties back to them for approximately $5 million.
Plaintiffs began to doubt defendant’s honesty.
Plaintiff’s Lawsuit: Breach of Fiduciary Duty, Fraud and Constructive Trust
Plaintiffs filed a lawsuit including eight causes of action, including (1) breach of fiduciary duty; (2) aiding and abetting the breach of fiduciary duty; (3) intentional misrepresentation; (4) concealment; (5) conspiracy; (6) acting as real estate broker without a license; (7) unjust enrichment; and (8) constructive trust.
The lawsuit’s prayer for relief sought damages and “an order declaring that [defendants] hold the [rental properties] in trust for the plaintiffs,” and an order compelling defendants to convey the properties back to the plaintiffs.
The Trial Court Expunged The Lis Pendens
Almost two years after filing the complaint, the plaintiffs recorded a notice of lis pendens for each of the ten rental properties. Defendant moved to expunge the lis pendens, arguing that the plaintiffs did not assert a real property claim and that, even if they alleged such a claim, they could not prove the claim’s probable validity.
The trial court granted the motion, accepting the first argument that the complaint did not assert a real property claim.
The plaintiff filed a writ to review the order expunging the lis pendens.
The appellate court held that plaintiff’s constructive trust claim—which sought reconveyance of their ten rental properties—was a real property claim under Code of Civil Procedure section 405.31.
A Motion to Expunge Lis Pendens
A court shall order a notice of lis pendens expunged (i.e., removed) if it determines (1) that the pleading on which the notice is based does not contain a real property claim (§405.31); (2) that the claimant has not established, by a preponderance of the evidence, the probable validity of a real property claim (§405.32); or (3) that adequate relief can be secured by an undertaking. (§405.33). In this case, the trial court only examined the first factor.
Unlike most motions, the party opposing a motion to expunge a lis pendens bears the burden to show the existence of a real property claim. In reviewing this first factor, the court engages in a “demurrer-like analysis”. This is opposed to the analysis under the second factor, which is often referred to as a mini-trial where the court examines the facts of the case.
The question, in this case, was whether the plaintiffs’ claim for constructive trust is a real property claim. A real property claim is one that would, if meritorious, affect title to, or the right to possession of, specific real property.
The appellate court noted that some lawsuits are easily characterized as real property claims. Most real estate attorneys would quickly identify a specific performance cause of action as a real property claim. Specific performance in a real estate lawsuit is when a party is seeking to enforce a contract to purchase real estate. On the other hand, an action for money damages alone is not a real property claim—even if it involves real property in some way.
However, it has never been entirely clear if a claim that seeks to impose a constructive trust on real property affects title to or possession of the real property.
What Is A Constructive Trust In Real Estate Litigation?
A constructive trust is an equitable remedy that compels a wrongdoer—one who has property or proceeds to which he is not justly entitled—to transfer the same to its rightful owner. A constructive trust can apply to myriad situations. Those situations usually involve fraud and breach of fiduciary duty.
Prior cases have held that a constructive trust allegation will not support a lis pendens if ultimately those allegations act only as collateral means to collect money damages.
Then came a case entitled BGJ Associates, where a group of partners formed a joint venture to buy real property. When some of the partners usurped for themselves the partnership’s opportunity to purchase one particular property, the other partners sued. The court assumed the plaintiffs would be entitled, if their lawsuit was meritorious, to a constructive trust remedy that would require the defendants to convey title to the plaintiffs. However, the court ordered the lis pendens expunged, arguing that a narrower approach was necessary to avoid the potential for abuse of a lis pendens. The cloud on title presented by a lis pendens would give unscrupulous attorneys undue leverage. The court, therefore, characterized the action as essentially a fraud lawsuit to which constructive trust allegations were merely appended.
The court, in language which rings true, stated that “The danger is too great that a lis pendens, which effectively renders the property unmarketable, will have coercive effects.”
In this recent Shoker case, the court held that the BGJ Associates approach has since been discredited. The court noted that the California Legislature has revised the statutory scheme in order to curb potential abuse. It noted that (1) the addition of the ability to expunge when adequate relief can be secured by a monetary undertaking, and (2) the requirement for an award of attorneys’ fees to the prevailing party in a motion to expunge a lis pendens both worked to discourage abuse of the lis pendens process.
The court examined other lis pendens cases and noted that a prior court (Kirkeby) had rejected the argument that a court may disregard a well-pled real property claim simply because the plaintiff also seeks money damages. The Shoker court noted that its result serves the statute’s aim to preserve the status quo during litigation while also recognizing a plaintiff’s right to plead alternative remedies.
At the end of the court’s analysis, it determined that constructive trusts arise in a wide variety of factual circumstances so the trial court should decide these cases on a case-by-case basis. The trial court erred in expunging the lis pendens. The appellate court, therefore, issued a writ of mandate directing the superior court to vacate its order expunging the notice of lis pendens.
Tips for Los Angeles Real Estate Attorneys
The potential for abuse of a lis pendens in California still exists. Once filed and recorded, a lis pendens—whether valid or not—will stop a party from selling or financing a piece of property. While the law sets a process for expunging the lis pendens, that process can take six months. Some parties (and their litigation attorneys) may find that the threat of attorneys fees is an acceptable downside if they can exert undue leverage on the other party in the meantime.
As for when a lis pendens is appropriate, the general rule still applies. A lis pendens is appropriate if the lawsuit affects title to or possession of the real property.
Los Angeles real estate attorney Laine T. Wagenseller is the founder of Wagenseller Law Firm in downtown Los Angeles. The business litigation lawyers at Wagenseller Law Firm handle all types of real estate lawsuits and have extensive experience with lis pendens. For more information, please contact us at (213) 805-7445.