Daily Development for Tuesday, April 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; MALICIOUS PROSECUTION: Filing of lis pendens, even for an action actually cognizable as an action against title, may constitute malicious prosecution, and actionable notwithstanding immunity for filings, it is not based upon credible evidence supporting the legitimacy of a claim.

Palmer v Zaklama 109 CA4th 1367, 1 CR3d 116 (2003)

Zaklama owned a house in Bakersfield, California, subject to a purchase money mortgage with the seller. The house had substantial equity. Zaklama moved to New Jersey and elected to rent out the house. In connection with this process, Zaklama hired a contractor to make certain repairs to the house, and failed to pay the contractor. The contractor obtained a judgment for $9000. Although Zaklama apparently did appeal the judgment, he did not post an appeal bond, and the contractor executed upon the judgment. Palmer bid $10,000 and bought the property at a sheriff’s sale. Although subject to the first mortgage, the property had an equity of around $150,000. Zaklama claimed that he did not have actual notice of the sale, but could not prove a legal notice defect, apparently.

In California, a judgment debtor can redeem from a lien foreclosure sale within 90 days of the sale if the property is bid in by the judgment creditor, but not otherwise. Zaklama claimed that the buyer, the contractor and the sheriff were “in cahoots” and that in fact the sale to Palmer was a disguise for the fact that the contractor really was the party acquiring the property. Zaklama brought a civil rights claim, due to the involvement of the sheriff, claiming that this conspiracy resulted in depriving him of property under color of law. In connection with that claim and a number of others, he filed a lis pendens against the property. Only the civil rights claim was noted in the lis pendens against Palmer’s title, however, Other filings were made against other parties, but none of them, in the end, had an interest in the property.

The lis pendens continued through a number of years of intense wrangling. At one point, Zaklamas replaced the existing tenants in the property with his own brother and family, who barricaded themselves in, and had to be removed by sheriff’s deputies going through the window. In the meantime, Palmer was hindered in getting financing to improve the property, refinancing it, and in disposing of it. Further, there were continuing difficulties (which the court fails to adequately explain) with the purchase money mortgagee. (One would assume that Palmer would be responsible for this mortgage on a “subject to” basis, but for some reason it appears that Zaklamas was viewed as having some responsibility here.)

In the end, when all was said and done, Palmer sold the property and, despite the original bargain price, reaped a profit after four years of chaos of $243. (That’s right, two hundred forty three and no/100 dollars.)

When Palmer sued Zaklamas on a variety of counts for the damage done by the lis pendens filings, Zaklamas admitted that his claim that the execution sale to Palmer was a fraud in which the sheriff was involved was based only on suspicion, and that he had no factual foundation for his belief. In the end, the court awarded Palmer $135,000 damages against Zaklamas for malicious prosecution, abuse of process and slander of title. and and $150,000 in punitive damage. Interestingly, the jury found that Zaklams’ wife (from whom he was estranged, and who claimed she had made no real decisions and only signed documents he gave her), found her liable for slander of title, but not malicious prosecution, but stuck her with even higher punitive damages - $200,000.

In its discussion, the court went into great length about the gradual erosion of the lis pendens power in California as the state tilted more and more in favor of the beleaguered landowner in these cases. First, the legislature created a right in the owner to obtain judicial expungement of an improper lis pendens. Later, it concluded that the burden of proof to uphold the lis pendens in such actions was on the lis pendens filer. 1992 amendments broadened the basis for expungement and broadened the class of persons who could seek it. The legislature also provided that there could be a grounds for expungement even when the cause of action properly implicated the property if there was no “evidentiary merit” to the cause of action itself. Thus, “a showing of good faith and a proper purpose are no longer sufficient to overcome a motion to expunge.”

Subsequent to this legislation, the California courts ruled that the “absolute privilege” that attached to court pleadings also attached to lis pendens filings, but that the protection of the privilege did not apply to claims for malicious prosecution. [The distinction between a slander of title action alleging malice (barred by privilege) and a malicious prosecution action based upon the same facts was apparently clear to the California courts, although it is lost on the editor.]

But the courts went on to conclude that if the lis pendens is “expungeable” because it lacks evidentiary merit or for some other reason, it also is outside of the privilege. Whether the court in this cases reaches this conclusion as a matter of first impression is unclear, but the case unequivocally stands for this proposition. In summary, if there is no evidentiary merit, even a filing in good faith can be the basis for a slander of title action, and, if in bad faith, can form the basis for either a slander of title or malicious prosecution action and punitive damages for either.

Although the trial court also entered a judgment for abuse of process on the same facts, the appeals court here reversed that ruling on the grounds that a filing of a lis pendens is not a “process” within the meaning of that cause of action.

The court did uphold the application of slander of title and malicious prosecution causes of action to these facts, however. It noted that the term “prosecution” now encompasses civil actions as well as the traditional focus - criminal actions. The court noted that all the plaintiff had to show was that the lis pendens filing was done without probable cause and for a malicious reason. It those things are true, then it is no defense that the action was taken on the advice of counsel. “The burden of proving good faith reliance on the advice of counsel falls on the party asserting the defense. Because, as we have said, Zaklamas lacked any evidence of a conspiracy, the jury reasonably could have concluded he had not acted in good faith.”

Roger Bernhardt’s Comment: From its once lofty perch, how low the mighty lis pendens has fallen in California. Ever since its inception in the common law glory of easy recordability in the 1850s, it has been successively whittled away by the legislature: First, the legislature permitted expungement; then reversed the burden of proof and lowered the standard from clear and convincing to simple preponderance; then moved from a "good faith and proper purpose" standard for survival to the stricter one of probable validity; and, finally, permitted third party intervention, attorney fees, and restrictions on the absolute litigation privilege.

The ability to set a conveyance aside does little good if the bad guys can simply transfer it a second time as the creditor plays an endlessly losing game of catch up.

The California legislature has been silent on the question of what constitutes a proper real property claim for purposes of the lis pendens, but our courts have taken the hint and have been equally diligent in confining its scope and repudiating the more creative theories of plaintiffs' counsel here.

In earlier days, the plaintiffs in both of these cases might have succeeded in their attempts to tie up the properties they were after. Although the behavior of the Zaklamas in Palmer seems fairly excessive, the house they were reaching for had been their home and had been sold out from under them for a song at an execution sale (a $200,000 house sold to satisfy a $9000 judgment). One can understand their belief that getting the house back was the only meaningful protection. However, because we have a sensible, albeit counterintuitive, rule that execution sales to third parties are absolute even when founded on defective judgments, the Zaklamas' attempt to retrieve the property, instead of merely reversing the judgment, had to lose. The policy that execution sales are final may make sense, but it often penalizes the merely inattentive or ignorant judgment debtor.

The plaintiffs here failed to satisfy the judiciary's emerging inclination to focus-often with a jaundiced eye-on the underlying issues. (See, for example, BGJ Assocs., LLC v Superior Court (1999) 75 CA4th 952, 89 CR2d 693, reported in 23 CEB RPLR 65 (Jan. 2000), in which an underlying constructive trust claim based on a joint venture to acquire real estate failed to qualify as a real property claim because the specific performance sought was only "appended" onto what was essentially a fraud action for damages.) The underlying actions might succeed, but meanwhile the lis pendens "notices" will have been expunged, limiting the plaintiffs to a strictly monetary recourse if they do prevail.

Plaintiffs' attempts to obtain a lis pendens was worse than ineffective; they turned out to be downright dangerous: Zaklamas had to pay compensatory damages (covering not only the defendant's costs, but also the decline in market value) as well as punitive damages. The very convenience of the lis pendens - the ability to merely identify a piece of real estate in a complaint and then record against it-is what has now led it to backfire, and perhaps hurt more than it helps.
What has brought about the backlash is that the lis pendens is not only a prejudgment remedy-available before the merits have been decided-it is also a self-help remedy, meaning that no official has taken the slightest look at it before it is recorded. No other litigational step is so easy and so powerful. As we all know, abuse in such cases is tempting and inevitable. To stop the abuse inevitably means to punish the abusers as well as some nearby hangers-on.

The problem of the too-available lis pendens might be solved in various ways. The legislature could add a lot of specifics, attempting to resolve all issues in advance, as it does for nonjudicial foreclosures. Or, it could interpose a threshold judicial review, as is done for attachments and TROs. But those remedies would require more effort and planning than anyone is likely to undertake. Permitting the courts to penalize abusers by making them pay might be the most effective technique in any event (as well as being the easiest, since we are already there).
Given the current judicial disposition, attorneys should advise their clients to think twice before recording that lis pendens. The pleasure of tying up the property may cost more than it's worth.

Note: Although Roger did not write the report of the case, his comments are taken with permission from the California CLE Real Property Reporter, which he edits.

Editor’s Comment 1: There was another California case decided about the same time, Kirkeby v. Superior Court, 135 Cal. Rptr. 2d 861 (Cal. App.. 2003), which the California Supreme Court has now taken on appeal and vacated. In Kirkeby, a minority shareholder in a family corporation sought to annul a alleged fraudulent conveyance to the two majority shareholders, and filed a lis pendens in connection with that. In fact, the allegations related to loans to the majority shareholders that they used to acquire property for themselves instead of for the corporation and that they looted money from the corporation and engaged in transfer to insulate their ill gotten gains from plaintiff or others seeking to get the looted money back. The complaint sought to impose a constructive trust and set aside the fraudulent conveyances. The trial court and appeals court held that these claims were not “actions affecting real property.” Maybe the Supreme Court will disagree. We’ll see.

Editor’s Comment 2: Of course, many lawsuits are essentially fishing expeditions. Until one files the suit and makes the allegations, one can’t get into discovery. Without discovery, often one wouldn’t be able to make a real case. But, while that case is being made, at least in California, the defendant still has the power to fritter away the property, leaving the plaintiff, when the case is won, with nothing but thin air and empty pockets. There’s got to be a balance somewhere. Abusive lis pendens practices - perhaps such as those involved in the principle case, are what have driven at least California to get much more conservative in protecting plaintiffs by permitting them to tie up land before they have made their case against it.

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