Daily Development for Friday, August 13, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

LIS PENDENS; GROUNDS; FRAUDULENT CONVEYANCE: Although a claim for constructive trust will not support a lis pendens, and a complaint seeking only relief in the form of constructive trust will result in expungement of an associated lis pendens filing, the court should not grant expungement if the complaint also alleges fraudulent conveyance, as a fraudulent conveyance claim does support a lis pendens filing, and the statute providing for expungement based upon the pleadings looks only to allegations, and not to evidence.

Kirkeby v. Superior Court, 93 P.3d 395, 15 Cal.Rptr.3d 805 (Cal. 2004)

This case reverses the case discussed as the DIRT DD for 7/8/03.

Kirkeby and her brother, Fascenelli, developed a business called FasTags for manufacturing and wholesale selling of pet identification tags. The business was incorporated, with Fascenelli and his wife controlling 51 percent, and Kirkeby controlling 49 percent, individually and in trust.
Things went south between the siblings and Kirkebyz, who had resigned from the board, filed a complaint in 2002 alleging 27 causes of action, including a fraudulent conveyance claim, and asking for declaratory and injunctive relief and $4.9 million aggregate damages for FasTags and herself.

The fraudulent conveyance cause of action alleged that Fascenelli obtained a $50,000 loan from FasTags to purchase or construct a building for FasTags' operations, but used the proceeds to buy a residential income property known as the Oak Street Property.

Fascenelli transferred the Oak Street Property to a family partnership which also owned the Fascenelli family residence called the Clark Street Property. Kirkeby petitioned that the $50,000 be viewed as establishing a constructive trust and to the extent the Oak Street Property had appreciated in value, that Fascenelli disgorge the profits. After filing the complaint, Kirkeby recorded notices of lis pendens on both the Oak Street Property and the Clark Street Property.

The Fascenellis moved to expunge the lis pendens and the trial court granted the motion, finding the complaint to be concerned with monetary damages. The trial court based its decision on cases that found a recording of a lis pendens to be inappropriate where a claim for fraudulent conveyance or imposition of a constructive trust is made and no ownership or possessory interest is claimed in the property. LaPaglia v. Superior Court 215 Cal.App.3d 1322 (1989) ; Urez Corp. Superior Court, 190 Cal.App.3d 1141 (1987).

Kirkeby appealed, and the California Supreme Court reversed, holding that the lower court mistakenly looked to the expungement standard in CCP 405.32, rather than 405.31. Under 405.31, upon which the respondents had relied in seeking expungement, the court is to look to the allegations of the complaint. If there is an allegation of a claim that will support a lis pendens, the court will deny the motion to expunge. The California Supreme Court, analyzing the Uniform Fraudulent Transfer Act adopted in California, concluded lis pendens is an available remedy under that Act, even though it is not specifically mentioned in the statute. Kirkeby adequately alleged that her relatives had transferred properties to the Family Trust with the intent to defraud creditors. This was an adequate allegation.

The court noted that a second statute, 405.32, provides additional grounds for expungement upon hearing of the evidence. Under this statute, if the court concludes, upon evaluation of the evidence presented, that the evidence does not support a claim for relief as to which a lis pendens is appropriate, then the court will grant expungement. It reiterated the point made below that the showing of facts sufficient to support a constructive trust, which was the primary thrust of the plaintiff’s case, was insufficient to support a lis pendens. But it noted that counsel for respondents had not invoked 405.32 in its expungement motion. It is not clear whether this would have been an available remedy at the time that the motion was made.

The court acknowledged that parties may be able to exploit the broad reach of the fraudulent conveyance statute and the narrow reach of the expungement statute to tie up property improperly as a tactic in a larger dispute. But it stated that the remedy for this possibility lies with the legislature, and that the language of the statutes in question clearly mandated the result it had reached.

Comment 2: Kirkeby isn’t home free. She still has to show facts sufficient to support a fraudulent conveyance. Simply establishing grounds for a constructive trust will not be enough. But one assumes, since she paid for this appeal to the California Supreme Court, that she believes that her evidence will support her claim.

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