Sales

(Sill, P.J.)

The trial court erred when, in conjunction with its order for specific performance of a real property sales agreement, it also ordered that the buyer's attorney fees be directly deducted from the purchase price of the property.

After a sale of real estate fell through, the prospective buyers sought specific performance and declaratory relief. The trial court entered judgment denying the request for specific performance, but ordered the sellers' agent to pay attorney fees to the buyers. The Court of Appeal reversed and remanded with directions. On remand, the Superior Court, Orange County, ordered specific performance and awarded the buyers attorney fees of $250,000, with the attorney-fee award to be deducted from the purchase price of $540,000. The vendors appealed.

The question on appeal was whether the attorney fees awarded were rightfully considered 'incidental' to the grant of specific performance such that they could be ordered directly deducted from the purchase price. 'In effect,' stated the appellate court, 'by providing for a direct offset against purchase price, the trial court converted what would be, at best, the basis for a judgment lien against all the sellers' property into a pre-existing special lien with super-priority over all other liens on this particular property.'

The court looked at several cases dealing with the provision of monetary relief of some sort as an 'incident' to a grant of specific performance. These cases pointed up the principle that monetary relief incidental to specific performance is intended to restore relations between the parties to what they would have been absent the breach. The court found that while these cases' holdings might provide 'some inferential support for the offset mechanism,' in none of the cases reviewed was the monetary relief directly deducted from the purchase price as distinct from enforced some other way. Neither did any of the cases involve offsetting a contractual attorney fee award against the purchase price. Thus, the trial court's inclusion in this case of such an enforcement mechanism for contractually owed attorney fees was unprecedented.

The appellate court conceded that there was a 'powerful argument' for what the trial court did here, as there was ample evidence that the sellers were not wealthy people and that the buyers would likely not be truly restored to the status quo unless the attorney fees awarded were taken directly off the top of the purchase price. However, the trial court's methods were unsupported because an attorney fee award sought by a successful buyer in a specific performance action is not a true 'incident' to the judgment for specific performance but is instead a matter of simple contract; the prevailing party's right to its fees is under the contract in conjunction with section 1717 of California's Civil Code, which governs attorney fees awarded under contract. The attorney fee award was not like 'costs' which would be 'incident' to the judgment, but was instead a directly litigated issue that was subject to full hearing on remand, and the amount awarded was a matter of judicial discretion. A true 'incident' to the judgment ' for example, the costs of duplicating reply briefs ' would flow directly from the litigation.

Secondly, if the contractual attorney fee award were allowed to be deducted directly from the purchase price, such ruling would 'play havoc' with the law of liens and lien priorities. The court explained: 'Under the judgment here, for example, the buyers' attorney fees are being given effective precedence over even government liens for unpaid property taxes and purchase money deeds of trust entered into prior to the litigation. That can't be right. And we will hold that it is not.'

Notice of Lis Pendens Not Effective Until Indexed

Dyer v. Martinez

147 Cal.App.4th 621 (Cal.App. 4 Dist., 2/23/2007)

(Aronson, J.)

Although the thwarted attempted purchaser of real property filed notice of her pending action against the seller with the county recorder prior to sale of the property to a bona fide purchaser, the fact that the notice was not indexed promptly ' and thus did not show up in a title search ' excused the purchaser, who was not charged with constructive notice.

Plaintiff Kristina Dyer filed suit against real property sellers on Sept. 9, 2004, seeking specific performance and damages based on their alleged breach of a sales agreement. The same day, Dyer deposited a lis pendens with the Orange County Recorder's Office for recording. Although the lis pendens reflects a recording date of Sept. 9, 2004, it was not indexed until Sept. 14, 2004. On Sept. 10, 2004, escrow closed on the sale of the property to the defendant property purchaser. Dyer thereafter filed an amended complaint for breach of contract, quiet title, and declaratory relief against the real property purchaser, his mortgage company and the firm that conducted the purchaser's title search. Defendants moved for summary judgment, contending Dyer's lis pendens failed to provide constructive notice of her claim against the property. The court granted summary judgment based on defendants' status as bona fide purchasers and encumbrancers for value who took their interests without knowledge of Dyer's specific performance action against the real property seller. The trial court ordered Dyer's lis pendens expunged, and Dyer appealed.

On appeal, Dyer acknowledged that all relevant case law was contrary to her position, but argued the court should literally apply Code of Civil Procedure ' 405.24, which provides: 'From the time of recording the notice of pendency of action, a purchaser, encumbrancer, or other transferee of the real property described in the notice shall be deemed to have constructive notice of the pendency of the noticed action as it relates to the real property and only of its pendency against parties not fictitiously named. The rights and interest of the claimant in the property, as ultimately determined in the pending noticed action, shall relate back to the date of the recording of the notice.' Thus, according to plaintiff, under ' 405.24, defendants had constructive notice of her lis pendens on the day she placed it with the recorder's office, even though it had not yet been indexed and could not have been located by a title search.

The appellate court affirmed, noting that for 'well over a century, the law in California has been that a recorded document does not provide constructive notice unless and until it can be located by a title search.' The court found nothing in the current statute governing the recording of a lis pendens to indicate the legislature intended to change this longstanding rule concerning constructive notice.

COMMENT

Dyer v. Martinez demonstrates the necessity of diligent action when pursuing a specific performance action to perfect a right to purchase real property in California.

In finding for cofendants, the court noted the doctrine of constructive notice was viewed as a harsh necessity and subject to rigid construction. In citing a string of cases dating back to the 1850's, the Court reasoned that a subsequent purchaser should only be charged with notice of those documents locatable by a search of the proper indexes. Thus, the term 'recording' in Code of Civil Procedure ' 405.24 should be construed to mean 'recorded as prescribed by law.' Since Government Code ' 27250 requires indexing of all recorded lis pendens, a lis pendens does not provide constructive notice until it is properly indexed. In the final analysis, the court noted that placing the risk with the claimant, in this instance, Dyer, provided an incentive to diligently deposit the lis pendens for recording in the first instance.

In this case, Dyer waited over one year before initiating her action and seeking to record the lis pendens. A different result might also have been possible had Dyer secured the names of the second listing broker and agent, diligently served them with the Complaint and Notice before the closing of escrow, and demanded they serve all potential other brokers, agents, buyers and lenders to any pending transaction. Under such circumstance, the buyer might have had actual knowledge of the claim that would have defeated the bona fide purchaser status.

' Jeffrey H. Belote, Carroll, Burdick & McDonough LLP, San Francisco

After Specific Performance Order, Attorney Fee Cannot Come 'Off the Top'

Behniwal v. Mix

147 Cal.App.4th 621 (Cal.App. 4 Dist. 2/7/2007)

(Sill, P.J.)

The trial court erred when, in conjunction with its order for specific performance of a real property sales agreement, it also ordered that the buyer's attorney fees be directly deducted from the purchase price of the property.

After a sale of real estate fell through, the prospective buyers sought specific performance and declaratory relief. The trial court entered judgment denying the request for specific performance, but ordered the sellers' agent to pay attorney fees to the buyers. The Court of Appeal reversed and remanded with directions. On remand, the Superior Court, Orange County, ordered specific performance and awarded the buyers attorney fees of $250,000, with the attorney-fee award to be deducted from the purchase price of $540,000. The vendors appealed.

The question on appeal was whether the attorney fees awarded were rightfully considered 'incidental' to the grant of specific performance such that they could be ordered directly deducted from the purchase price. 'In effect,' stated the appellate court, 'by providing for a direct offset against purchase price, the trial court converted what would be, at best, the basis for a judgment lien against all the sellers' property into a pre-existing special lien with super-priority over all other liens on this particular property.'

The court looked at several cases dealing with the provision of monetary relief of some sort as an 'incident' to a grant of specific performance. These cases pointed up the principle that monetary relief incidental to specific performance is intended to restore relations between the parties to what they would have been absent the breach. The court found that while these cases' holdings might provide 'some inferential support for the offset mechanism,' in none of the cases reviewed was the monetary relief directly deducted from the purchase price as distinct from enforced some other way. Neither did any of the cases involve offsetting a contractual attorney fee award against the purchase price. Thus, the trial court's inclusion in this case of such an enforcement mechanism for contractually owed attorney fees was unprecedented.

The appellate court conceded that there was a 'powerful argument' for what the trial court did here, as there was ample evidence that the sellers were not wealthy people and that the buyers would likely not be truly restored to the status quo unless the attorney fees awarded were taken directly off the top of the purchase price. However, the trial court's methods were unsupported because an attorney fee award sought by a successful buyer in a specific performance action is not a true 'incident' to the judgment for specific performance but is instead a matter of simple contract; the prevailing party's right to its fees is under the contract in conjunction with section 1717 of California's Civil Code, which governs attorney fees awarded under contract. The attorney fee award was not like 'costs' which would be 'incident' to the judgment, but was instead a directly litigated issue that was subject to full hearing on remand, and the amount awarded was a matter of judicial discretion. A true 'incident' to the judgment ' for example, the costs of duplicating reply briefs ' would flow directly from the litigation.

Secondly, if the contractual attorney fee award were allowed to be deducted directly from the purchase price, such ruling would 'play havoc' with the law of liens and lien priorities. The court explained: 'Under the judgment here, for example, the buyers' attorney fees are being given effective precedence over even government liens for unpaid property taxes and purchase money deeds of trust entered into prior to the litigation. That can't be right. And we will hold that it is not.'

Notice of Lis Pendens Not Effective Until Indexed

Dyer v. Martinez

147 Cal.App.4th 621 (Cal.App. 4 Dist., 2/23/2007)

(Aronson, J.)

Although the thwarted attempted purchaser of real property filed notice of her pending action against the seller with the county recorder prior to sale of the property to a bona fide purchaser, the fact that the notice was not indexed promptly ' and thus did not show up in a title search ' excused the purchaser, who was not charged with constructive notice.

Plaintiff Kristina Dyer filed suit against real property sellers on Sept. 9, 2004, seeking specific performance and damages based on their alleged breach of a sales agreement. The same day, Dyer deposited a lis pendens with the Orange County Recorder's Office for recording. Although the lis pendens reflects a recording date of Sept. 9, 2004, it was not indexed until Sept. 14, 2004. On Sept. 10, 2004, escrow closed on the sale of the property to the defendant property purchaser. Dyer thereafter filed an amended complaint for breach of contract, quiet title, and declaratory relief against the real property purchaser, his mortgage company and the firm that conducted the purchaser's title search. Defendants moved for summary judgment, contending Dyer's lis pendens failed to provide constructive notice of her claim against the property. The court granted summary judgment based on defendants' status as bona fide purchasers and encumbrancers for value who took their interests without knowledge of Dyer's specific performance action against the real property seller. The trial court ordered Dyer's lis pendens expunged, and Dyer appealed.

On appeal, Dyer acknowledged that all relevant case law was contrary to her position, but argued the court should literally apply Code of Civil Procedure ' 405.24, which provides: 'From the time of recording the notice of pendency of action, a purchaser, encumbrancer, or other transferee of the real property described in the notice shall be deemed to have constructive notice of the pendency of the noticed action as it relates to the real property and only of its pendency against parties not fictitiously named. The rights and interest of the claimant in the property, as ultimately determined in the pending noticed action, shall relate back to the date of the recording of the notice.' Thus, according to plaintiff, under ' 405.24, defendants had constructive notice of her lis pendens on the day she placed it with the recorder's office, even though it had not yet been indexed and could not have been located by a title search.

The appellate court affirmed, noting that for 'well over a century, the law in California has been that a recorded document does not provide constructive notice unless and until it can be located by a title search.' The court found nothing in the current statute governing the recording of a lis pendens to indicate the legislature intended to change this longstanding rule concerning constructive notice.

COMMENT

Dyer v. Martinez demonstrates the necessity of diligent action when pursuing a specific performance action to perfect a right to purchase real property in California.

In finding for cofendants, the court noted the doctrine of constructive notice was viewed as a harsh necessity and subject to rigid construction. In citing a string of cases dating back to the 1850's, the Court reasoned that a subsequent purchaser should only be charged with notice of those documents locatable by a search of the proper indexes. Thus, the term 'recording' in Code of Civil Procedure ' 405.24 should be construed to mean 'recorded as prescribed by law.' Since Government Code ' 27250 requires indexing of all recorded lis pendens, a lis pendens does not provide constructive notice until it is properly indexed. In the final analysis, the court noted that placing the risk with the claimant, in this instance, Dyer, provided an incentive to diligently deposit the lis pendens for recording in the first instance.

In this case, Dyer waited over one year before initiating her action and seeking to record the lis pendens. A different result might also have been possible had Dyer secured the names of the second listing broker and agent, diligently served them with the Complaint and Notice before the closing of escrow, and demanded they serve all potential other brokers, agents, buyers and lenders to any pending transaction. Under such circumstance, the buyer might have had actual knowledge of the claim that would have defeated the bona fide purchaser status.

' Jeffrey H. Belote, Carroll, Burdick & McDonough LLP, San Francisco