A California Lis Pendens (Notice of Pending Action) May Be Recorded In a Fraudulent Conveyance Lawsuit – When it Can Be Done

In Mira Overseas Consulting Ltd. v. Muse Family Enterprises, Ltd., David Smith owned BTM Funding. Smith bought a house in Pacific Palisades for $10 million, but BTM held title so he could hide it from his wife during their divorce. Defendant Muse was an investor in BTM. Smith later deeded the property to himself, then to his new wife, but these were not recorded until BTM had financial problems. Once they were recorded, BTM’s primary asset was gone, and BTM was insolvent.

Muse sued BTM, Smith, and his wife, seeking to void the deeds as a fraudulent conveyance. Muse recorded a Lis Pendens in September 2010. A Judgment was entered and recorded nullifying all the deeds.

Mira Consulting, now owned by David’s ex-wife, had made the loan for the house purchase, also sued SBTM, Smith, and his wife. Mira obtained a money judgment, recording an abstract in July 2011. Mira then sued Muse, claiming that its judgment lien was superior to any claimed by Muse.

The Court said no – the lis pendens recorded in 2010 established Muse in first priority. Because a lis pendens provides constructive notice of the litigation, any judgment later obtained in the action relates back to the filing of the lis pendens.

The court noted that a judgment favorable to the plaintiff relates to, and receives its priority from, the date the lis pendens is recorded, and is senior and prior to any interests in the property acquired after that date. As set forth in Code of Civil Procedure, section 405.24: “From the time of recording the notice of pendency of action, a purchaser, encumbrancer, or other transferee of the real property described in the notice shall be deemed to have constructive notice of the pendency of the noticed action as it relates to the real property and only of its pendency against parties not fictitiously named. The rights and interest of the claimant in the property, as ultimately determined in the pending noticed action, shall relate back to the date of the recording of the notice.” (Italics added.)

It also noted 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. The possible remedies include voiding, or un-doing, the transfer of property to the extent necessary to pay the creditor. Citing the Supreme Court in Kirkeby v. Superior Court (2004) 33 Cal 4th 642, voiding of a transfer of real property will affect title to the real property. Therefore, a fraudulent conveyance action seeking avoidance of a clearly ‘affects title to, or the right to possession of’ (Code Civ. Proc., § 405.4) real property and is therefore a real property claim for the purposes of the lis pendens statutes.