Assertion of “Constructive Trust” Can Sometimes Support a Lis Pendens
This post was primarily authored by Zachary B. Young, a “Rising Star” for four years running who was recently elevated to Partner at Patton Sullivan Brodehl LLP.
One of the tools available in the real estate litigation attorney’s toolbox is a lis pendens, also known as a notice of pending action. A lis pendens is a document recorded at the County Recorder’s Office providing constructive notice to the public of a pending lawsuit affecting the real property described in the notice.
To be eligible to record a lis pendens, the claimant must have a pending “real property claim.” Whether a claim qualifies as a real property claim is not always an easy question to answer.
A case recently published by California’s First Appellate District — Shoker v. Superior Court of Alameda County — grappled with the question of whether a claim for “constructive trust” based on the defendant allegedly acquiring an interest in the property through fraud qualifies as a real property claim. The Court sought to address the “need to clarify this complicated area of the law,” and concluded that certain constructive trust claims could in some instances qualify as real property claims, including in the Shokers’ case.
Facts of Shoker v. Superior Court
In their complaint, the Shokers alleged that they befriended the defendant Sukhjinder Singh Ghuman. Through the friendship, Ghuman learned about several real properties that the Shokers owned and rented for income. Eventually, Ghuman approached the Shokers and urged them to sell their properties and invest in an unidentified technology company that would lead to returns greatly exceeding their current rental income. Ghuman stressed that the Shokers needed to advance funds to him immediately to take advantage of the opportunity.
Based on Ghuman’s promises and representations, the Shokers sent Ghuman $1.5 million to invest in the technology company and then began the process of systematically selling off ten of their rental properties to a purported cash buyer, Jasbir Phangureh, with Ghuman handling the transactions and acting on behalf of the Shokers as their agent.
After each sale, the Shokers gave Ghuman the proceeds for further investment in the technology company. Unbeknownst to the Shokers at the time, Ghuman was not investing the money in any technology company but was instead conspiring with Phangureh to use the Shokers’ own money to purchase their properties from them, before eventually telling the Shokers that the technology company investment had not been successful.
The Shokers filed suit alleging causes of action against Ghuman and Phangureh, including a constructive trust claim among other claims primarily seeking damages. In connection with the constructive trust claim, the Shokers asked the Court to order that title to the rental properties be conveyed back to them. While the case was pending, the Shokers also recorded a lis pendens against each of the ten rental properties.
Trial court: motion to expunge granted; no “real property” claims
Phangureh (as the new owner on title of each of the properties) filed a motion to expunge the lis pendens, arguing that the Shokers had no claims qualifying as “real property claims” that would support the recordation of a lis pendens.
Relying on a series of prior cases holding that a lis pendens could not be recorded by a party who primarily pursued money damages and corresponding claims, the trial court agreed with Phangureh and ordered the lis pendens expunged.
The Shokers filed a petition for writ of mandate in the Court of Appeal.
Court of Appeal: reversed; constructive trust claim could affect title or possession
Although state statutes provide an explicit definition of real property claims—namely “the cause or causes of action in a pleading which would, if meritorious, affect … title to, or the right to possession of, specific real property”—the appellate court acknowledged that the application of this definition is not always clear. There are claims that are clearly real property claims, such as specific performance of a real property purchase and sale agreement. On the other hand, an action for money damages alone is clearly not a real property claim—even if it involves real property in some way.
The equitable remedy of constructive trust falls somewhere in the middle — it asks the Court to find that an owner of property is holding that property “in trust” for the rightful owner, because the apparent owner holds an interest only through a wrongful means. The appellate court explained that a constructive trust claim must be analyzed on a case-by-case basis.
Where a constructive trust claim is merely a means to secure payment of a debt, then it likely would not qualify as a real property claim triggering the right to record a lis pendens.
However, as in the Shoker case, where the constructive trust claim, if proven, would affect title or possession of the property, then the claim qualifies as a real property claim and supports a lis pendens. The Court observed: “the Shokers claim a present right to title in the same real properties they claim were wrongfully obtained by Phangureh.”
The Court also rejected Phangureh’s argument that constructive trust was merely a remedy and not a “claim.” The Court noted that the statutory definition of a real property claim was based, in part, on the remedy: “how a successful cause of action would ‘affect’ title or possession of a property.”
A lis pendens is a powerful tool because it gives notice to the public (including potential buyers) that there is a real property claim that runs with the land and puts a cloud on title. Recording an improper lis pendens can expose the claimant to an attorney’s fees claim from the party having to go through the process of expunging the lis pendens.
Under the holding of the Shoker case, a claim seeking a constructive trust might — given the right underlying facts — affect title to real property and support a lis pendens.