Table of Contents Cover: June 1996
Featured Article: Free and Clear
A three-year-old law seems to be having the desired effect of ending lis pendens blackmail.
By Justice John Zebrowski and Barry P. Jablon
Barry P. Jablon is a partner in the Los Angeles office of Cox, Castle & Nicholson. He was the organizer and chairman of the State Bar subcommittee that drafted the proposal that became the 1993 lis pendens law. Justice John Zebrowski, a member of the Second District Court of Appeal, served as the subcommittee's reporter. His annotations have been officially adopted as the Code Comments that now appear in the annotated Code of Civil Procedure Sections 405 through 405.61.
On January 1, 1993, California's revamped lis pendens law took effect as Code of Civil Procedure Sections 405 through 405.61. The new law was the result of a two-year drafting effort by a subcommittee of the State Bar's Real Property Section to clarify the confusion and reform the abuses that had crept into the former statutes, Code of Civil Procedure Sections 409 through 409.8.
A "lis pendens," or "notice of pending action," is a recorded notice that a particular piece of real property is the subject of pending litigation that could affect the title or use of the property. The former statutes governing lis pendens provided that a motion to expunge a lis pendens had to be granted unless the proponent of the lis pendens proved, by a preponderance of the evidence, that the action affected title or right to possession of real property. Alternatively, an expungement motion had to be granted if the party filing the lis pendens could not show by a preponderance that it was acting "for a proper purpose and in good faith."
Nevertheless, the California Supreme Court held in Malcolm v. Superior Court that evidence on the merits could not be considered on an expungement motion. This ruling led to the worst of all worlds: expungement motions were limited to a demurrer-like review of the pleadings or to a search (rarely fruitful) for extrinsic evidence of the proponent's state of mind. Moreover, since some courts took the view that "all real property is unique," they would not permit property owners to post a bond in lieu of the lis pendens, as no bond could ever satisfy the possible loss of an interest in real property. In the rising market of the 1980s, the mere recordation of a lis pendens became a method to effectively stop a pending real estate sale dead in its tracks. By the early 1990s, lis pendens were being used in California for such unusual purposes as blocking corporate mergers.
Under the old lis pendens law, often the only practical course of action for a property owner faced with even a marginal lis pendens was to settle--that is, buy off the proponent. As a result, two movements developed to reform the law. One, promoted by state Senator Quentin Kopp (I-San Francisco), was the amendment of Civil Code Section 47 to remove the absolute privilege for recording an improper lis pendens. The other, chosen by the State Bar subcommittee, was to write new statutes that would create a quick, objective way for courts to test the validity of a lis pendens.
Three years have passed since the new lis pendens law took effect. Fortunately, the statutes are being interpreted by the courts according to the intentions of the drafters. The practical effect of the law has been an apparent end to lis pendens blackmail--an all-too-frequent occurrence in the past.
The subcommittee's revisions to the lis pendens law had several major themes. First, the new expungement statutes, Code of Civil Procedure Sections 405.30 through 405.34, draw a clear distinction between allegations in pleadings and the evidence supporting the propriety of a lis pendens. The Malcolm court's confusion of allegations in pleadings with evidence eviscerated the evidentiary requirements of the former statutes. In every other forum for provisional relief, a preliminary showing of evidentiary merit is required before the relief is granted. The committee found that similar requirements for prompt objective review should apply to lis pendens as well.
This was accomplished in part through the use of more narrowly defined terms. A "claimant" is defined in Section 405.1 as the party who asserts a "real property claim," which in turn is defined in Section 405.4 as a cause of action in a pleading which would, "if meritorious," affect title or the use of specific real property or an easement. Section 405.31 provides for review of a pleading, and expungement must be ordered if the pleading fails to state a real property claim. Section 405.32 provides for review of evidence, and expungement must be ordered if the claimant cannot show the probable validity of the real property claim. Section 405.3 defines "probable validity" as "more likely than not that the claimant will obtain a judgment against the defendant on the claim." Under the new lis pendens law, the claimant's subjective mental state was eliminated as an expungement issue. The probable validity standard ensures that expungement decisions are governed by more objective factors.
The previous statutory language had occasionally led judges to make orders improperly conditioning expungement of all (even invalid) lis pendens on the posting of a bond by the property owner. Sections 405.31 and 405.32 expressly state that a bond may not be required as a condition of expungement if the claimant has failed to show the required statutory bases for maintenance of the lis pendens. The Code Comments to these sections explain that a bonding order would require the defendant to supply pretrial security under conditions of dubious due process validity.
Even if the court finds that a real property claim has probable validity, Section 405.33 provides that a defendant can obtain expungement of a lis pendens by posting a bond if the court finds that a bond will secure "adequate relief" to the claimant. Stewart Development v. Superior Court, decided under the old law, found undeveloped commercial property to be "unique," so no bond could be posted in order to expunge the lis pendens recorded against it. The new statutes clarify that commercial property is not necessarily unique for expungement purposes, since simple financial return is the usual objective of commercial transactions. For purposes of expungement on the defendant's bonding, the statutes provide that the conclusive presumption of "uniqueness" applies only in the case of a single-family dwelling that the claimant intends to occupy. The possibility of proving that a particular piece of commercial property may have unique qualities is not eliminated, but this is now a matter of proof rather than presumption.
The old law provided that courts could require proponents to post a bond as a condition of continuing even a proper lis pendens in force. However, former Section 409.1 seemed to provide that a bond from the proponent could be sought only in conjunction with an expungement motion. A similar provision is preserved in Section 405.34 of the new law but is considerably clearer. The new law allows a defendant to either move for a claimant's bond, expungement, or both. Further, Section 405.37 of the new statutes specifically authorizes additional hearings to increase or decrease the amount of bond previously posted.
As noted in the Code Comments to new Section 405.4, the debate over the use of the lis pendens as a means of securing a constructive trust on real estate was left to further case law development since differences of opinion on this issue loomed as a potential impediment to passage of the legislation. Two published cases from Orange County had permitted use of the lis pendens to secure claims of constructive trust. Although these cases were widely criticized and have never been followed in any other published decision, the State Bar subcommittee's review of comments from the legal community unearthed a strong body of opinion opposing statutory elimination of the use of lis pendens to secure constructive trust claims. Rather than allow the lis pendens reform project to be sidetracked into a policy dispute on this peripheral issue, the committee proposed and the legislature enacted the new statutes without expressly specifying whether a constructive trust claim qualifies as a real property claim.
Since its passage in 1992, numerous courts have issued decisions interpreting the new lis pendens law. Most judicial attention has focused on the definition of a "real property claim," but some procedural issues have been addressed as well. While several important areas remain unexplored, it appears that the major changes in the law have been well understood by the courts, and the prospect of another Malcolm decision is now extremely small.
In Hunting World, Inc. v. Superior Court, a defendant quitclaimed his interest in a residence to his wife shortly after being sued for counterfeiting Hunting World's trademarks. Hunting World brought an action to set aside the transfer based on California's Uniform Fraudulent Transfer Act (UFTA) and recorded a lis pendens. The defendant successfully moved to expunge, arguing that a fraudulent conveyance action is a creditor's remedy that will not support a lis pendens. The California Court of Appeal reversed and, citing the new Code Comments, held that an action to set aside a transfer of real property based on the UFTA can qualify as a real property claim under new Section 405.4. The court of appeal came to similar conclusions in Lewis v. Superior Court. Homebuyers were sued by a third party who alleged that the seller had fraudulently conveyed to them a house obtained with money stolen from the third party. The third party had recorded a lis pendens against the buyers' property before their escrow closed, but it was not indexed until the day after the closing and consequently did not appear on their title insurance policy. The buyers moved to expunge, claiming that the sale was not a fraudulent transfer because they had bought the property "in good faith and for reasonable value." The trial court denied their motion, ruling that they could not be "bona-fide purchasers" because the recordation of the lis pendens gave them constructive notice of the third party's claims. The court of appeal found that the sale was not a fraudulent transfer and expunged the lis pendens.
The UFTA defines "good faith" in contrast to deliberate wrongful conduct, rather than as knowledge based on negligence or the "fiction of constructive notice." The lis pendens in Lewis purported to be based on a theory of constructive trust. The Lewis court, citing the Code Comments, noted that the area of constructive trust had been left to further judicial development, which implied legislative satisfaction with the prevailing view disallowing use of the lis pendens in the context of constructive trusts. The court also emphasized that, as set forth in new Sections 405.60 and 405.61, the withdrawal of a lis pendens forever eliminates any constructive notice that the lis pendens otherwise may have provided.
In Ziello v. Superior Court, a homeowner sought declaratory relief that she had exclusive right to earthquake-insurance proceeds, and her lender's refusal to cede insurance proceeds to her had violated the "one-action rule." The homeowner thus claimed that the lender had forfeited its lien on her property. Based on the lien-forfeiture claim, she sued and recorded a lis pendens in order to cloud the title to the property, which was to be sold at foreclosure. The court of appeal issued a writ of mandate overturning summary judgment in favor of the lender but held that the trial court properly granted the lender's motion to expunge the lis pendens. The trial court had found that the dispute over the insurance proceeds was not a violation of the one-action rule and therefore did not eliminate the lender's lien. The resolved claim of lien forfeiture was the only claim that could support the lis pendens, and the lingering dispute over insurance proceeds was found not to involve the real property itself and was instead strictly a matter of contract. The borrower thus failed her burden of proving the probable validity of a real property claim. However, Section 405.8 of the new statutes provides that recordation of a lis pendens does not preclude a party from seeking an attachment, injunction, or other relief. The Ziello plaintiff might have been better served by seeking a preliminary injunction.
Several cases have addressed the distinctions between lis pendens and liens. Federal Deposit Insurance Corporation v. Charlton was decided just after enactment of the new statutes. A bank recorded two abstracts of judgment against a borrower, sued to enforce and foreclose on the lien created by its abstracts, and simultaneously recorded a lis pendens. The trial court sustained the borrower's demurrer to the complaint and granted her motion to expunge the lis pendens. While the bank appealed, the borrower sold the property to the Charltons. After the case was reversed and remanded, the bank filed an amended complaint against the Charltons and recorded a new lis pendens. The Charltons moved for summary judgment, contending they were bona-fide purchasers because the order expunging the prior lis pendens removed all clouds on the title to their property, including the abstracts of judgment.
The trial court granted their motion, but the court of appeal reversed, noting that the transfer of property after a lis pendens has been recorded binds the transferees to any judgment subsequently rendered but does not make the party recording the lis pendens a secured creditor. The court also noted that expunging a lis pendens does not expunge or extinguish a recorded abstract of judgment, which is extinguished only by a recorded acknowledgment of satisfaction of judgment or by a creditor's release.
Next, In re Irizarry noted (but did not decide) the question of whether a lis pendens is sufficiently "analogous" to a lien in order to preserve a creditor's right to assert claims against real property after the underlying debt has been discharged in bankruptcy. Most recently, in Feiler v. U.S., would-be buyers sued for specific performance of a real property purchase contract and recorded a lis pendens. The IRS subsequently recorded a tax lien on the seller's property. After recordation of the tax lien, the buyers obtained a judgment for specific performance, which they sought to enforce against the property. The buyers argued that the relation-back effect of their lis pendens gave them priority over the tax lien. The Ninth Circuit, however, citing Sections 405.4 and 405.20, noted that a lis pendens is not itself a security interest and that federal law controls the relative priority of federal tax liens.
In Nintendo of America, Inc. v. Dragon Pacific International, the court identified circumstances under which a lis pendens could be used in a non-real estate action. After the district court preliminarily enjoined defendant Dragon Pacific from infringing Nintendo's copyrights, Dragon Pacific sought a continuance of trial. The district court granted a continuance on the condition that a lis pendens be "filed" (i.e., recorded against defendant's realty) in conjunction with a court order barring the defendant from transferring or encumbering any real property pending trial. On appeal, Dragon Pacific argued that since the underlying claim was not a real property claim but an intellectual property claim, the lis pendens was improper under new Section 405.20. The Ninth Circuit dismissed this distinction because Dragon Pacific had voluntarily consented to the recordation of the lis pendens in return for a continuance of trial.
The appealability of an order expunging a lis pendens was addressed in Orange County v. Hong Kong & Shanghai Banking Corp. A borrower recorded a lis pendens against property that was subject to foreclosure and sued for imposition of a constructive trust. The district court expunged the lis pendens, and the borrower appealed. The Ninth Circuit held that the expungement order was not appealable, distinguishing its prior contrary ruling in Preston v. United States as not arising under the new California statutes.
The court noted that orders under the new statute are more like nonappealable orders of attachment than appealable injunctions: unlike an injunction, which is a creature of equity, the lis pendens is a legal remedy created by a statute that limits the discretion of the trial court. The court also cited the Code Comments to Section 405.32 and their explanation of how the new statutes "fundamentally altered" the requirements for expunging a lis pendens by specifically requiring the trial court to examine the merits of the dispute. Further, the new statutory requirements for a hearing and the giving of a bond or undertaking when appropriate should make it less likely that appellate review will be necessary to prevent irreparable injury in the context of an expungement battle.
Perhaps the most significant area yet to be explored by the appellate courts is the scope of damages that may be awarded as a result of the recordation or expungement of a lis pendens. The California Supreme Court granted review to address these issues under the old statutes in the depublished case of Long Beach Equities v. American Manufacturers Mutual Insurance Co. but then dismissed and remanded the matter, which remains under appellate consideration. The new statutes try to minimize damages by a speedy determination of the validity of the lis pendens and provide that after the entry of final judgment the prevailing party can recover all of its damages from the bonds posted in connection with expungement (Section 405.33) or continued maintenance of the lis pendens (Section 405.34).
Though the general law regarding the setting of bond amounts might provide guidance, there are few cases regarding the proper amount of bonds in the context of a lis pendens. In J.A. Jones Construction Co. v. Superior Court, the court ordered expungement pursuant to Section 405.33 (expungement where bonding will secure adequate relief) and set the amount of the bond at twice the amount of the plaintiff's mechanic's lien. However, precisely what damages could later be recovered against the bond was not decided. A final area of importance is attorneys' fees incurred in connection with litigation over a lis pendens. Section 405.38 mandates an award of reasonable attorneys' fees and costs to the party prevailing on expungement motions; the former statutes made such awards discretionary. In addition, as noted in Hunting World, Inc., sanctions may be imposed under Code of Civil Procedure Section 128.5 against claimants who record lis pendens and do not have real property claims. The Hunting World court went on to state that trial courts should "liberally impose these sanctions upon any who file fraudulent transfer actions and record notices of lis pendens before uncovering creditable evidence of fraud." Fewer lis pendens are being recorded now than three years ago. This may partly reflect inactivity in the real estate market, but a number of practitioners report that even accounting for the market, they are seeing and recording fewer lis pendens. This may stem from lawyers being more concerned about whether their client's facts will truly support filing a lis pendens due to the heightened objective standards that must be satisfied under the new statutes to support a lis pendens and the mandatory award of attorneys' fees and damages to the prevailing party.
Also, there appear to be no significant additional burdens imposed on the courts by the "mini-trial on the merits" required by the new law. The comparatively smaller number of recordings and resulting motions to expunge may be making their mark here, too, as well as the new statutes' clearer articulation of applicable standards.
The tangled garble of appellate decisions following the Malcolm court's decimation of the evidentiary provisions of the old statute left the outcome of lis pendens expungement motions often in doubt. By eliminating nebulous standards and focusing on objective indices of merit, the new law makes the outcome of expungement motions more predictable. The ultimate goal of preserving a means to protect legitimate real property claims while reducing or eliminating abuses thus seems better served under the new statutory scheme.
- Former Code Civ. Proc. Section 409.1. The term "proponent" was commonly used to designate the person recording the lis pendens in practice under the old law. The new law defines that person as the "claimant."
- Malcolm v. Superior Court, 29 Cal. 3d 518 (1981).
- See, e.g., Litigant Gives Lumber Giant a Tough Time, L. A. Daily Journal, July 17, 1990, at 1.
- The thrust of the amendment to Civ. Code Section 47 was to permit subsequent lawsuits for malicious prosecution or abuse of process against a party who unsuccessfully tried to maintain a lis pendens in the preceding action. See generally Jan Yoss, New Lis Pendens Statutes, Los Angeles Lawyer, Jan. 1994, at 29. The effect of Civ. Code Section 47(b)(4), which provides that a recorded lis pendens is not a privileged publication unless it refers to an action "which affects the title or right of possession of real property," is still not clear, since it was passed with respect to, and adopts language from, the old law. Under the old law and the Malcolm decision, a lis pendens was deemed to "affect title" if the underlying complaint was merely properly pleaded. If this construction is placed on new Civ. Code Section 47(b)(4), it will have little (if any) effect. Whether the statute intended the word "affect" in an evidentiary sense or in a pleading sense has not yet been tested.
- While the legislature adopted the committee's draft text without substantive change, several misnumberings occurred in the first set of "official" Code Comments when the legislature chose to renumber the new statutes from the 409 series to the 405 series. Some section headings were also renamed by the legislature, on occasion with inaccurate new titles (most notably Section 405.32, which is now headed "standard of proof" but actually deals with an alternative basis for expungement). As to substance, Section 405.21 was revised to give judges discretion to approve the recordation of a lis pendens, and Section 405.4 was revised to exempt easements obtained by regulated public utilities. The official Code Comments are now part of both the West Publishing and Bancroft Whitney annotated editions of the Code Civ. Proc. The Code Comments in their original numbering are set out in Proposed New Lis Pendens Law with California Code Comments, 9 Cal. R. P. J. (Summer 1991), at 31-41.
- The point is often made that a lis pendens is not truly a provisional remedy but rather a notice system. However, given the relation-back effect of a judgment following the recording of a lis pendens, plus the practical effect of a lis pendens in the context of secured real property financing and title insurance, a lis pendens is a de facto provisional remedy.
- The legislature's misnaming of this section could lead to misunderstanding: Code Civ. Proc. Section 405.32 does not establish any general standard of proof. Instead, it establishes an independent basis for expungement for lack of adequate evidentiary support.
- Stewart Development v. Superior Court, 149 Cal. App. 3d 114 (1983).
- A constructive trust is an equitable remedy to prevent unjust enrichment and enforce restitution. A person who wrongfully acquires property of another holds it involuntarily as a constructive trustee, and the trust extends to property acquired in exchange for that wrongfully taken.
- See Coppinger v. Superior Court, 134 Cal. App. 3d 883 (1982); Okuda v. Superior Court, 144 Cal. App. 3d 135 (1983).
- See, e.g., Burger v. Superior Court, 151 Cal. App. 3d 1013 (1984); Deane v. Superior Court, 164 Cal. App. 3d 292 (1985); Moseley v. Superior Court, 177 Cal. App. 3d 672 (1986); Urez v. Superior Court, 190 Cal. App. 3d 1141 (1987); Wardley Development Co. v. Superior Court, 213 Cal. App. 3d 391 (1989); LaPaglia v. Superior Court, 215 Cal. App. 3d 1322 (1989).
- See Code Civ. Proc. Section 405.4 and its Code Comment.
- Hunting World, Inc. v. Superior Court, 22 Cal. App. 4th 67 (1994).
- Civ. Code Section Section 3439, et seq.
- Lewis v. Superior Court, 30 Cal. App. 4th 1850 (1994).
- Civ. Code Section 3439.08(a).
- Lewis, 30 Cal. App. 4th at 1859.
- The court took some effort to dispel what it deemed the "common misperception" that a recorded document gives constructive notice on recordation, noting that constructive notice is actually achieved only on indexing. Civ. Code Section 1213, Gov't Code Section Section 27230-265.
- Ziello v. Superior Court, 36 Cal. App. 4th 321 (1995).
- See also 1111 Prospect Partners, L.P. v. Superior Court, 38 Cal. App. 4th 1066 (1993) (lender's draw on letter of credit did not violate the one-action rule and therefore the lis pendens recorded by debtor was properly expunged). Early this year the California Supreme Court granted review to resolve the conflict between 1111 Prospect Partners, 96 Daily Journal D.A.R. 605, petition for review granted, Jan. 18, 1996, and Western Security Bank, N.A. v. Beverly Hills Business Bank, 38 Cal. App. 4th 1241, 96 Daily Journal D.A.R. 607, petition for review granted, Jan. 18, 1996, as to the interplay between letters of credit and the one-action rule.
- Federal Deposit Insurance Corporation v. Charlton, 17 Cal. App. 4th 1066 (1993).
- In re Irizarry, 171 B.R. 874, 879 (9th Cir. BAP 1994).
- Feiler v. U.S., 62 F. 3d 315 (9th Cir. 1995).
- Nintendo of America, Inc. v. Dragon Pacific International, 40 F. 3d 1007 (9th Cir. 1994).
- Orange County v. Hong Kong & Shanghai Banking Corp., 52 F. 3d 821 (9th Cir. 1995).
- Preston v. United States, 284 F. 2d 514 (9th Cir. 1960).
- Long Beach Equities v. American Manufacturers Mutual Insurance Co., 849 P. 2d 776 (Cal. Sup. Ct., en banc, 1993) (dismissing grant of review and remanding).
- See, e.g., 6 Witkin, California Procedure, Provisional Remedies, Section Section 18-20 (3d ed. 1985).
- J.A. Jones Construction Co. v. Superior Court, 27 Cal. App. 4th 1568 (1994).
- Hunting World, Inc., 22 Cal. App. 4th at 74.
- See Code Civ. Proc. Section 405.8.
- After the reorganization of the superior courts pursuant to the Trial Court Delay Reduction Act of 1986 and its subsequent amendments, it is not possible to obtain statistics from the courts regarding the actual number of lis pendens recorded and filed in connection with pending litigation. The authors have made numerous inquiries of practitioners, primarily in Los Angeles, San Francisco, and San Diego, and the information presented here is based upon those communications.
- Civ. Code Section 47's abolition of the former absolute privilege for recording a lis pendens may also play a role. The new statutes have attempted to prevent such subsequent litigation by providing for a speedy expungement of improperly recorded lis pendens together with a mandatory grant of damages and attorneys' fees to the prevailing party. [T]he one thing that has clearly changed is that now everyone goes through the exercise of considering whether they have enough to prevail against a motion to expunge. Under the prior law, many lawyers were prone to record first, and think about substance later. Interview with Michael Berk. See also M. Berk, R. Hertzberg & D. Zipzer, California Lis Pendens Practice (2d ed. 1995).