Dear constituency list members of the Insolvency Law Committee, the following is a case update written by Ethan B. Shakoori, Attorney at Franklin, Soto, Leeds, LLP analyzing a recent case of interest, Tahican, LLC v. Eighth Judicial District Court, 523 P.3d 550 (2023).

Summary

In Tahican, the Nevada Supreme Court held that a fraudulent transfer claim seeking avoidance of a transfer of real property affects title or possession of real property under NRS 14.010(1) and supports a lis pendens, regardless of whether the plaintiff claims title or possession of the property.

To read the full published decision: click here.

Facts

Real parties in interest Max Joly (“Joly”) and Bydoo, LLC (“Bydoo”) formed a partnership, Le Macaron, LLC, to operate restaurants. Later, Joly transferred his shares in Le Macaron, LLC to Bydoo for $360,000, but Bydoo never paid. Joly filed a complaint for, among other things, breach of contract and fraud, against Bydoo, Bydoo’s owner and sole member, Francois Rigollet (“Rigollet”), and Le Macaron, LLC. A month later, Bydoo transferred via quitclaim deed real property located in Nevada (“Nevada Property”) to Petitioner Tahican, LLC (“Tahican”), a company in which Rigollet was one of two managers. Joly then filed a notice of lis pendens against the Nevada Property.

Procedural Posture

Rigollet attempted to expunge the lis pendens by arguing that the Nevada Property was not the subject of the lawsuit, and that Joly could not record a lis pendens on the property to secure a potential judgment. Joly then amended his complaint to add Tahican as a defendant and to allege claims for conversion and fraudulent conveyance. Joly also opposed Rigollet’s motion on grounds that his lis pendens was proper because his fraudulent transfer claim affected the title or possession of the Nevada Property.

The district court sided with Joly in denying Rigollet’s motion to expunge and granted summary judgment to Joly on, among other claims, his fraudulent transfer claim. The district court also denied Tahican’s motion to expunge, which prompted Tahican to petition for a writ of mandamus instructing the district court to expunge the lis pendens.

Holding

NRS 14.010(1) states that a party may record a lis pendens “[i]n an action […] affecting the title or possession of real property.” The central question in Tahican was whether a fraudulent transfer claim “affect[s] the title or possession of real property” within the meaning of NRS 14.010(1).

Despite the language in the statute, Tahican argued that Joly’s fraudulent transfer claim could not support a lis pendens because Joly had no direct interest in the property and only sought to make the property available to collect on a judgment.  He also argued that allowing the use of a lis pendens in fraudulent transfer actions would invite abuse of the lis pendens statutes.  Tahican’s support for these arguments came from a case in which the Nevada Supreme Court previously construed NRS 14.010(1) to state that a party who records a lis pendens must have some claim of entitlement to real property. Levinson v. Eighth Judicial District Court, 109 Nev. 747, 752 (1993).  The court reflected on the interplay between the Levinson decision and Nevada’s Uniform Fraudulent Transfer Act (“UFTA”), in which a fraudulent transfer claim is a claim by a creditor that a debtor transferred property with the intent to defraud the creditor by placing the property out of the creditor’s reach.

The Tahican Court acknowledged its concern about some of the language in the Levinson decision and how it may have misled lower courts about the availability of a lis pendens in certain actions. To clarify, the Court stated that “NRS 14.010(1) required only that the action ‘affect[] title or possession of real property.’” Further, the Tahican Court also noted that, to the extent that a party improperly asserted a fraudulent transfer claim along with routine claims for money damages to be able to record a lis pendens, the lis pendens statute was designed to prevent and discourage this improper use. 

Ultimately, the Tahican Court determined that an interpretation of NRS 14.010(1) as encompassing fraudulent transfer claims seeking to avoid transfers of real property furthers the purpose of Nevada’s UFTA.  Importantly, the Court cited to a California Supreme Court opinion, Kirkeby v. Superior Court, 33 Cal.4th 642 (2004), in which 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 avoid a fraudulent transfer.  If this is problematic, it is up to the Legislature – and not this court – to change the law.” 

Comments

The 2004 Supreme Court decision of Kirkeby means that it has long been the law in California that a claim brought under California’s Uniform Voidable Transaction Act asserted is a “real property claim” that can support the recording of a notice of pendency of action under Cal. Code Civ. Proc. § 405.4.  The Nevada’s Supreme Court’s decision in Tahican provides support for the soundness of the reasoning by the Kirkeby Court.

The Tahican decision serves as a reminder that plaintiffs with a good faith basis to believe that real property has been transferred in violation of the California Uniform Voidable Transactions Act should seek to record a lis pendens to protect their rights, and defendants who believe a lis pendens has been wrongfully recorded are unlikely to succeed in asserting that a voidable transfer claim is not a “real property claim.” Instead, they are limited to seeking to expunge the lis pendens on grounds that claim has no evidentiary merit under Cal. Code Civ. Proc. § 405.32. 

These materials were written by Ethan B. Shakoori, Attorney at Franklin, Soto, Leeds, LLP, in San Diego, California (eshakoori@fsl.law).  Editorial contributions were provided by Meredith King at Franklin, Soto, Leeds, LLP (mking@fsl.law).