Tahican, LLC v. Eighth Judicial District, 523 P.3d 550 (Nev. S.Ct. February 2, 2023)

The following is a case update written by Corey R. Weber (cweber@bg.law), a partner at BG Law LLP, analyzing a recent decision of interest:

SUMMARY

The Nevada Supreme Court held that a fraudulent transfer claim seeking to avoid the transfer of real property supports the recording of a lis pendens. Tahican, LLC v. Eighth Judicial District, 523 P.3d 550 (Nev. S.Ct. February 2, 2023). 

To view the opinion, click here.

FACTS

            Max Joly (“Joly”) and Bydoo, LLC (“Bydoo”) formed a partnership to operate restaurants.  They entered into a purchase agreement whereby Joly sold his ownership interests in the new company to Bydoo.  Bydoo failed to make the payments to Joly under the purchase agreement and Joly thereafter filed a complaint against Bydoo, the owner of Bydoo and the new company including claims for breach of contract, fraud in the inducement and fraud.  Bydoo transferred real property to Tahican, LLC (“Tahican”) after the complaint was filed and Joly recorded a notice of lis pendens against the transferred property.  In response to arguments that Joly could not record a lis pendens to secure an eventual money judgment, Joly amended the complaint, adding fraudulent transfer and conversion claims and adding Tahican as a defendant.

            Bydoo and its owner filed a motion to expunge the lis pendens and the trial court denied the motion.  Following the denial, the transferee, Tahican, filed a motion to expunge the lis pendens and the trial court denied that motion.  Tahican filed a petition for writ of mandamus.

            The Nevada Supreme Court entertained the petition but determined that the trial court did not err in denying the motion to expunge the lis pendens and therefore denied the petition.

REASONING

            The Nevada Supreme Court determined that the extraordinary relief of hearing a petition for writ of mandamus was warranted because Tahican lacked an adequate legal remedy and the petition involved a pure issue of law.  As stated in the opinion, “[t]he sole issue in this petition is whether a claim of fraudulent transfer of real property seeking avoidance of the transfer supports the recording of a lis pendens” and “[t]he central question here is whether a claim of fraudulent transfer ‘affect[s] the title or possession of real property’ within the meaning of NRS 14.010(1).”  Given that the issue was a pure issue of law, the court reviewed the issue de novo.

            The court distinguished its prior opinion in Levinson v. Eighth Judicial District Court, 857 P.2d 18, 21 (1993), stating that “this court did not decide that a fraudulent transfer claim can never be a basis for a lis pendens; rather the court determined that the plaintiffs fraudulent transfer claim was without merit, given that the plaintiff had not ‘adequately demonstrated actual fraud’” and that “the court left open the issue of whether a lis pendens may be proper in a fraudulent transfer action where the plaintiff demonstrates actionable fraud.”  In addition, the opinion went further and disavowed Levinson and another case, Weddell v. H20, Inc., 271 P.3d 743 (2012), “to the extent they suggest that a lis pendens must be grounded in a claim of ownership or possessory interest in the real property.”

            The court determined that “a fraudulent transfer action seeking avoidance of a transfer of real property constitutes an action ‘affecting the title or possession of real property’ within the meaning of NRS 14.010(1).”  In reaching that conclusion, the court stated that NRS 14.010(1) “notably does not require the party to show entitlement to the title or possession.”

            In addressing the potential for parties to improperly recorded a lis pendens, the court stated that NRS 14.015 provides for an expedited expungement process and that there are civil and criminal consequences for filing a groundless lis pendens pursuant to NRS 14.015(6).

AUTHOR’S COMMENTS

            The Nevada Supreme Court’s opinion provides a tool for creditors, and to bankruptcy trustees in the event of a bankruptcy filing, to record a lis pendens on real property that is fraudulently transferred, at least for actual intent fraudulent transfer claims.  In distinguishing or disavowing Levinson, the opinion refers to “actual” or “actionable” fraud, apparently referring to actual intent fraudulent transfer claims rather than constructive fraudulent transfer claims (in constructive fraudulent transfer claims there is less than reasonably equivalent value provided and one of the insolvency tests are met, but there is no intent requirement). 

            The Nevada Supreme Court cited to the California Supreme Court’s opinion in Kirkeby v. Superior Court, 33 Cal.4th 642 (2004) in reaching its decision.  In Kirkeby, the California Supreme Court stated that “we cannot ignore the plain language of the statute, which clearly establishes that fraudulent conveyance claims may support a lis pendens where the plaintiff seeks to void a fraudulent transfer.  If this is problematic, it is up to the Legislature—and not this court—to change the law.”  Kirkeby at 651.  There are some interesting offshoots to Kirkeby, including a bankruptcy court decision in 2020 that determined that seeking substantive consolidation in a bankruptcy case can support the recordation of a lis pendens.  See In re Prototype Engineering & Manufacturing, Inc., 2020 WL 6937401 (Bankr. C.D. Cal. 2020) (citing to Kirkeby).  

This review was written by Corey R. Weber (cweber@bg.law), a partner at BG Law LLP, a member of the ad hoc group and a past chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), also a member of the ad hoc group.  Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.