Lewis v. Superior Court

FRED WOODS, Associate Justice.

II.
STATEMENT OF FACTS
A. Background of the sale.

Randolph Shipley (“Shipley”) bought the property in question in November 1990 for $3.2 million. About a year later, he contacted a broker, Al Scafati (“Scafati”), hoping to sell the property for $2,950,000. However, Scafati believed that the property would only bring somewhere around $2.5 million to $2.7 million, and after seeing the condition of the property, he lowered his estimate. Scafati found a buyer at $2.5 million, and escrow was opened at that price. However, Shipley and the buyer never reached agreement on financing.

B. Appearance of the Lewises.

Robert F. and Josephine N. Lewis (“the Lewises”) had lived in Palos Verdes for many years. They were casual house-hunters-not particularly anxious to move, but willing to consider opportunities. Chris Adlam (“Adlam”), like Scafati a RE/MAX realtor, called Josephine Lewis in late January 1992 to tell her about the property. Knowing that Robert Lewis had always liked the property, she told him about it, and they decided to go see it.

Adlam told the Lewises about the $2.5 million escrow and provided them with an appraisal Shipley had obtained only a month before that showed a $2.5 million value. Because the Lewises had the ability to pay cash without a financing contingency, Robert Lewis believed that Shipley would accept less than the $2.5 million asking price, and he offered $2.25 million. After an exchange of counterproposals, they agreed on $2.3 million and opened escrow in early February.

Subsequent analyses confirmed that $2,300,000 was a reasonable price. For instance, shortly after the purchase, the Lewises' bank obtained its own appraisal, which concluded that the property was worth $2,300,000. An additional valuation conducted for this litigation showed that the probable range of sales prices for the property in early 1992 would have been $2,200,000 to $2,600,000.


C. Fontana records the federal lis pendens, but it is neither indexed by the county recorder nor discovered by the title insurer.

After the Lewises opened escrow, and just a few days before they acquired title, Fontana Films of Sweden Aktiebalag (“Fontana”) recorded the federal lis pendens. Dennis McCraven (“McCraven”), the county recorder's division manager, document recording, determined that although the federal lis pendens was recorded on February 24, it was not indexed until February 29-the day after the Lewises acquired title.

During the same period, a title search was under way at Lincoln Title Company, which ultimately issued title insurance to the Lewises. The trial court based one of its key conclusions on its statement that Lincoln Title was “retained as Lewises['] agent.” The only evidence of how Lincoln Title became involved was Robert Lewis's statement that Adlam suggested using Lincoln Title because it had been used in the previous, failed escrow. The Lewises' original offer to purchase the property only provided that the buyer was to receive a title policy issued by Lincoln Title “at sellers['] expense.”

The title officer, David Pelis (“Pelis”), explained that title companies have access to private services that provide copies of recorded documents. In this case, the service provided Lincoln Title with a computer report that contained an entry for the federal lis pendens. However, the service misposted the information and as a result it did not appear to affect the property. Pelis himself was never aware there was a lis pendens.


D. The Lewises acquire title and receive two “clean” title policies and never learn about the federal action.

The purchase agreement provided that after all contingencies were removed, $350,000 could be released from escrow to Shipley in return for a note secured by a first trust deed on the property. Shipley used that money to buy other property, which Folksam General Mutual Insurance Society (“Folksam”) then encumbered by an injunction. This transaction occurred on February 25-the day after Fontana recorded its lis pendens-and the Lewises received a title insurance policy insuring their trust deed. Neither this policy nor the preliminary report that preceded it disclosed the federal lis pendens.

Although escrow was originally scheduled to close by April 1, Shipley asked for an earlier close, and the Lewises agreed, with the result that the Lewises' grant deed was recorded on February 28. The Lewises received a second title insurance policy, this time insuring their title as owners. Like the earlier policy, this one did not reveal any claims against title.

During this series of events, there was no substantive communication between the Lewises and Shipley; everything was handled through the realtors. Neither the Lewises nor the realtors heard anything about any litigation involving Shipley, Yuk Lee, or anyone connected with them.


E. The Lewises undertake multi-million-dollar improvements to the property, still unaware of the Folksam-Fontana litigation.

The all-cash purchase by the Lewises, was funded by liquidating securities holdings. They expected to spend an additional $1,050,000 in renovating the property, but that estimate turned out to be far too low. By the March 3 hearing, they had spent approximately $2,600,000 on still-uncompleted construction, and they expected the total cost of the house to exceed $5,000,000.

In the midst of their multi-million-dollar renovation of the property, the Lewises received a copy of Fontana's cross-complaint in the mail. This was the first they ever heard about Folksam or Fontana or about any of the claims alleged in this case.

The Lewises brought a motion for summary judgment. The trial court ruled on the Lewises' motion after an unusually complete factual presentation by the parties. There was no serious claim of factual dispute and no credibility contentions. The denial of summary judgment was based entirely on legal conclusions drawn from the undisputed facts.


III.

DISCUSSION

A. The nature of the claims against the Lewises.

The pleadings of both Folksam and Fontana, including Fontana's federal complaint, originally focused on the conduct of Shipley and related parties, alleging in substance that Shipley bought the property with misappropriated funds. There was no claim that the Lewises did anything wrong; indeed, they were not even named in either the federal action or Folksam's second amended complaint. Any claim affecting the property therefore necessarily depended entirely on the intervention of the federal lis pendens: if the lis pendens were valid-supported by a proper complaint and properly recorded before the Lewises acquired title-in theory, the Lewises' purchase could be set aside solely upon proof of Fontana's claims against Shipley, without regard to the Lewises' conduct.

The expungement of the federal lis pendens has eliminated this possibility.) What remains is Fontana's fraudulent conveyance claim against the Lewises. Since this claim is based on Shipley's transfer of the property to the Lewises rather than his original acquisition of the property, it necessarily concerns the conduct of the Lewises themselves. The Lewises contended that they had established a complete defense to this claim by virtue of Civil Code section 3439.08, subdivision (a), which provides: “A transfer or an obligation is not voidable under subdivision (a) of Section 3439.04 [transfer made with intent to hinder, delay or defraud creditors], against a person who took in good faith and for a reasonably equivalent value”¢”¢”¢”¢”

The trial court recognized that the Lewises did not actually know about the claims against Shipley or about the lis pendens: “The evidence presently before the court indicates the Lewises had no actual knowledge of Shipley's misdeeds, nor any relationship with Shipley other than in connection with purchase [sic] of 2728 Elevado. [R. Lewis Dec., par. 10]. The Lewises personally apparently had no knowledge of the federal lis pendens until September 1993”¢”¢”¢”¢”

The court concluded that the federal lis pendens deprived the Lewises of their status as good-faith purchasers through constructive notice.

This conclusion is the linchpin of the trial court's denial of summary judgment and its refusal to expunge Folksam's lis pendens. Without this conclusion, summary judgment and expungement were mandatory.


B. The fraudulent conveyance statute requires actual, subjective knowledge by the alleged fraudulent transferee. The fiction of constructive knowledge is not enough.

The requirements of the fraudulent conveyance statute are: “the term “˜good faith,”™ as used in this subdivision and subdivision (d) [of Civ.Code § 3439.08] means that the transferee did not collude with the debtor or otherwise actively participate in the fraudulent scheme of the debtor.” “Fraudulent intent,” “collusion,” “active participation,” “fraudulent scheme”-this is the language of deliberate wrongful conduct. It belies any notion that one can become a fraudulent transferee by accident, or even negligently. It certainly belies the notion that guilty knowledge can be created by the fiction of constructive notice.

But that is nevertheless what the trial court concluded, rejecting the Legislature's clear mandate in the name of “common sense”: “[C]ommon sense suggests that the test cannot be a purely subjective one which allows the transferee to preserve good faith by hiding his head in the sand and making no reasonable inquiry. The extensive case authorities cited at pages 5-6 of Folksam's reply brief confirm that “˜good faith”™ includes doing the sort of reasonable inquiry that a reasonably prudent person would do under the circumstances.” The problem with this reasoning, aside from the fact that the cited authorities do not support it, is that in the very next breath the trial court concluded that the Lewises did make what the court itself believed was a “reasonable inquiry” ! The court said: “reasonable inquiry includes getting a title report and title insurance”¢”¢”¢”¢ The Lewises themselves by their conduct evidence this to be so: they obtained title reports and title insurance.” Unfortunately, the Lewises' reasonable inquiry still left them in ignorance, because the federal lis pendens was not disclosed in the preliminary reports and title policies.

Since the Lewises had made precisely the inquiry that the trial court thought they should have made and still knew nothing about the claims against Shipley, the trial court erred in holding that they “colluded” or “actively participated” in the claimed fraudulent conveyance. Instead, the court stripped the Lewises of their good-faith status by imputing to them knowledge supposedly (but not actually) held by their title insurer concerning the federal lis pendens and the supposed (but not shown by any evidence) negligence of their insurer in failing to find and disclose the lis pendens.

IV.


DISPOSITION

Let a peremptory writ of mandate issue directing the superior court to vacate its order denying petitioners' motion for summary judgment, and thereafter issue a new and different order granting said motion and expunging the lis pendens. Petitioners to recover costs of these proceedings.