Integrated Lender Services v. County of L.A ( 2018 )

Filed 4/27/18
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
INTEGRATED LENDER B281135
SERVICES, INC.,
(Los Angeles County
Plaintiff, Super. Ct. No. BS161639)
v.
COUNTY OF LOS ANGELES,
Defendant and Appellant;
JUAN VELASQUEZ, as Trustee,
etc., et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County. Michael P. Linfield, Judge. Affirmed.
Nelson & Fulton, Henry Patrick Nelson and Amber A.
Logan for Plaintiff and Appellant.
MHM Law Group and Michael Moghtader for Defendants
and Respondents.
__________________________
When a trustee sold at foreclosure property once owned by
a convicted fraudster, there were surplus proceeds. Following
statutory procedures (Civ. Code, § 2924j), the trustee deposited
the surplus funds with the trial court for determination of the
proper distribution. There were two claims to the funds: (1) the
County of Los Angeles, which had been awarded criminal
restitution against the fraudster, and claimed the right to collect
the restitution from the property by means of a lis pendens and
temporary restraining order recorded in the criminal prosecution;
and (2) several trusts, whose interests in the property were both
junior to that of the foreclosing trustee and had post-dated the
criminal lis pendens. The trial court concluded that the lis
pendens was inadequate to give the County any interest in the
property because the criminal court had ordered restitution but
had not ordered the property levied upon to satisfy the restitution
award. Therefore, the trial court awarded the surplus proceeds
to the trusts. The County appeals. Finding no error, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
This case involves a piece of property located at 959
N. Vista Street in Los Angeles. The parties do not dispute the
authenticity of any of the recorded documents; their
disagreement is the effect to be given those documents.
2
The story begins with Nigisti Tesfai and a charity called
the African Community Resource Center (ACRC). Tesfai was the
executive director of ACRC. Pursuant to a felony complaint, it
was alleged that Tesfai committed numerous acts of fraud
through ACRC – specifically by obtaining grants and preferential
loans from public agencies but using the funds to line her own
pockets rather than for charitable purposes. It is not clear from
the record in our case whether ACRC was in pari delicto with
Tesfai, or if, instead, it was an innocent pawn, unaware of
Tesfai’s malfeasance. Ultimately, it does not matter to our
resolution of the appeal.
1. ACRC Obtains the Property and Conveys a Deed of Trust to
the City
ACRC purchased the Vista Street property by deed
recorded September 8, 2000. It planned to operate the property
as a domestic violence shelter. That same day, ACRC recorded a
deed of trust in favor of the City of Los Angeles, to ensure that
the City’s interest-free loan of public funds to ACRC was repaid.1
Additionally, the deed of trust was to guarantee that the project
was developed and operated in a manner consistent with the
public interest. This is the deed of trust which would ultimately
be foreclosed upon, leading to the present lawsuit. Before that
would happen, however, Tesfai’s crimes would catch up with her.
2. Charges are Brought Against Tesfai
On September 18, 2007, the district attorney filed a 24-
count criminal complaint against Tesfai and three other
1 To avoid confusion, we observe the City, although a prior
lienholder, is not a party to this action or this appeal. It is the
County who seeks the surplus funds.
3
defendants. It alleged several schemes involving the use of
ACRC to commit fraudulent acts.
The complaint contained sentence enhancement allegations
under Penal Code section 186.11. That section provides an
enhanced prison term for “white collar crime” – defined as two or
more related felonies, a material element of which is fraud or
embezzlement, which pattern of conduct involves the taking of, or
results in the loss of, more than $100,000. (Pen. Code, § 186.11,
subd. (a).) For our purposes, the statute also provides a means by
which property in the hands of the white collar defendant may be
“preserved by the superior court in order to pay restitution and
fines.” (Pen. Code, § 186.11, subd. (d)(1).) Upon conviction, the
property “may be levied upon by the superior court to pay
restitution and fines” if the facts supporting the white collar
enhancement are “admitted or found to be true by the trier of
fact.” (Ibid.) For this reason, Penal Code section 186.11 “is
sometimes known as the ‘Freeze and Seize Law.’ [Citation.]”
(People v. Green (2004) 125 Cal. App. 4th 360, 363 [restitution
award of seized property reversed for failure to file a Penal Code
section 186.11 petition].)
Briefly, the Freeze and Seize procedure involves the
following steps (all subdivisions are within Penal Code section
186.11): (1) the prosecution brings charges which include the
white collar enhancement (subd. (d)(2)); (2) the prosecution files a
petition to commence a pendent proceeding, in criminal court,
“seeking a temporary restraining order, preliminary injunction,
the appointment of a receiver, or any other protective relief
necessary to preserve the property or assets” (ibid.); (3) the
prosecutor “shall record” a lis pendens on any real property at
issue (subd. (d)(4)); (4) either the court issues a temporary
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restraining order ex parte, pending a noticed hearing
(subd. (f)(1)); (5) or formal notice is provided to anyone who may
have an interest in the property (subd. (d)(3)); (6) the court holds
a noticed hearing, weighs several factors identified in the statute,
and determines whether to issue the temporary restraining order
or preliminary injunction (subd. (f)(3)); (7) if a receiver is
appointed, the court may order an interlocutory sale of the
property and hold the proceeds (subd. (f)(7)); (8) if the defendant
is convicted and the facts supporting the white collar enhancement
are admitted or found to be true by the trier of fact, the court
“shall continue the preliminary injunction or temporary
restraining order until the date of the criminal sentencing”
(subd. (h)(1)(A)); and (9) at sentencing, the court “shall make a
finding” as to “what portion, if any, of the property or assets
subject to the preliminary injunction or temporary restraining
order shall be levied upon to pay fines and restitution to victims
of the crime.” The court “may order the immediate transfer of the
property or assets to satisfy any judgment and sentence made
pursuant to this section.” (Ibid.)
As we will now explain, some, but not all, of these
procedures were followed by the prosecution in Tesfai’s criminal
case.
3. A Lis Pendens is Recorded and Temporary Restraining
Order Issued
On September 28, 2007, the prosecutor filed a petition,
under Penal Code section 186.11, for a temporary restraining
order. The prosecutor identified and sought to preserve
numerous assets and property held in the name of Tesfai, her
codefendants, and ACRC. The Vista Street property was one of
the identified properties.
5
That same day, the trial court signed an order doing three
things: (1) temporarily restraining the defendants and anyone
acting in concert with them from transferring or encumbering the
property; (2) requiring the prosecutor to give notice to anyone
who may have an interest in the property; and (3) imposing a lis
pendens on the property. This order was recorded.
4. A Second Temporary Restraining Order Is Issued
On November 21, 2007, the court signed a second order,
which was denominated a temporary restraining order, but may
have constituted a preliminary injunction.2 Like the first
temporary restraining order, this one prohibited anyone from
transferring any interest in, or encumbering, the property. As
the orders are virtually identical, we treat them as a single
temporary restraining order.
5. Tesfai is Convicted and Restitution is Ordered
The operative information against Tesfai ultimately alleged
41 counts, each with a statutory white collar enhancement
alleged. In October 2011, Tesfai entered a plea to four of the
counts, and was convicted. The record before us contains only the
subsequent abstract of judgment; we do not have a minute order
or transcript from Tesfai’s plea hearing. According to the
2 Whether an order restraining a defendant from an action is
a temporary restraining order or a preliminary injunction is
determined not by the title of the document, but its effect.
(McManus v. KPAL Broadcasting Corp. (1960) 182 Cal. App. 2d
558, 562; Weil & Brown, Cal. Practice Guide: Civil Procedure
Before Trial (The Rutter Group 2017) ¶ 9:538.2 at p. 9(II)-16.)
Regardless of the name of the document, the fact that it was
issued two months after the initial temporary restraining order
indicates that it may well have followed a noticed hearing.
6
abstract, Tesfai pled to filing or procuring a false instrument
(Pen. Code, § 115, subd. (a)); conspiracy (Pen. Code, § 182,
subd. (a)(1)); misuse of public funds (Pen. Code, § 424); and filing
a false tax return (Rev. & Tax. Code, § 19705, subd. (a)). The
abstract does not indicate that she admitted the white collar
enhancement; indeed, the abstract does not reflect that any
sentence enhancements were found true. Nor does anything else
in the record reflect a true finding on the white collar
enhancement.3
A restitution hearing was held on July 30, 2012; Tesfai
appeared. She was ordered to pay restitution to multiple victims,
including the County. The County was awarded a total of
$341,404 in restitution. The court made no order addressing
whether any of the property subject to the temporary restraining
order should be levied to pay Tesfai’s restitution obligation.
6. One Trust Obtains Its Interest in the Property
Eighteen months later, on January 15, 2014, at a time
when ACRC still owned the property subject to the City’s deed of
trust, a trust deed was recorded in favor of the Barrington 2005
Trust. This trust deed secured payment of a $12,000 note. The
deed of trust was executed by Tesfai on behalf of ACRC.
7. The City Commences Foreclosure Proceedings
At some point ACRC defaulted on the original note secured
by the City’s 2000 deed of trust, and on July 1, 2014, the City
3 Tesfai was sentenced to three years, calculated as the
middle term of three years for the misuse of public funds, a
concurrent middle term of three years for conspiracy, and
concurrent terms of two years for the false instrument and false
tax return counts. As her preconfinement credits equaled or
exceeded the sentence, she was released for time served.
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caused the recording of a Notice of Default and Election to Sell.
The City claimed ACRC was in default for many reasons,
including nonpayment and failing to document that it was
operating the property as a domestic violence shelter.
8. The Trusts Obtain Their Other Interests
Facing foreclosure, ACRC sold the entire property to the
Vista 2014 Trust, identifying Juan Velasquez as the cotrustee of
this trust. (Velasquez was also a cotrustee of the Barrington
2005 Trust.) The grant deed in favor of Vista 2014 was signed by
Tesfai on behalf of ACRC. The deed was recorded September 19,
2014. The Vista 2014 Trust asserted at trial that it paid
approximately $1 million for the property.
Immediately thereafter, the Vista 2014 Trust recorded a
deed of trust in favor of Velasquez, personally, securing a $15,000
debt. Velasquez would ultimately assign to the Barrington 2005
Trust any rights he had in this action with respect to this deed of
trust. Velasquez has not appeared in this case; the current
trustee of both the Barrington 2005 Trust and the Vista 2014
Trust is Camerino Islas. As the interests of the two trusts
(Barrington 2005 and Vista 2014) in the three documents (two
deeds of trust and a grant deed) are aligned, we consider them
together.
9. The Foreclosure Sale
The foreclosure on the City’s deed of trust proceeded and
the property was sold at a trustee’s sale. The amount unpaid on
ACRC’s note to the City was $575,097.91. The property sold to a
third party for $850,500.4 Deducting the amount due the City
4 The buyer was identified in the Trustee’s Deed Upon Sale
as “VWH Trust UDT 6-12-15.” The Trustee’s Deed also states
that the “Grantee Herein was the Foreclosing Beneficiary,” and
8
and costs left a surplus of $273,157.09. It is this amount that the
respective parties claim.
10. The Trustee Commences This Action
After the sale, the foreclosing trustee sent notice to
everyone with a recorded interest in the property to determine
how to distribute the surplus. Having received claims from the
trusts on one hand and the County on the other, the trustee
deposited the surplus funds with the trial court, seeking a court
determination of the proper allocation of the funds.5
The case proceeded to a bench trial on written briefs and
exhibits. The County argued that it should be awarded the
surplus as restitution, given that the lis pendens in the criminal
matter predated the trusts’ interests. The County took the
position that the lis pendens and TRO constituted a seizure of the
property “for the purpose of paying victim restitution in the event
of Tesfai’s conviction.” The trusts responded that they were
that the amount of the unpaid debt equaled the sale price of
$850,500. These two statements appear to be in error. The
foreclosing beneficiary was the City, not VWH Trust, and if the
amount of the debt were the amount paid, this action to
distribute surplus proceeds would not exist.
5 A notice of related case was filed, identifying a January
2015 action brought by ACRC against the Vista 2014 Trust,
among others. It is described as centering “around the issues
relating to the foreclosure of a deed of trust, the amount that was
actually owing on the loan that foreclosed, and the entitlement to
the proceeds of the foreclosure sale.” Counsel for the trusts
represented that “Both case[s] are based upon the foreclosure of
the sa[m]e loan, the same property, and the entitlement to the
same foreclosure proceeds.” There is no further reference to that
case in the record before us.
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entitled to the proceeds as their deeds of trust and grant deed
interests were next in line after the City’s deed of trust was
foreclosed upon. They argued that the County had no rights to
the property because the criminal court never ordered that the
County’s restitution be repaid from the property, nor issued a lien
against it.
11. The Trial Court’s Order
After briefing and oral argument, the trial court awarded
the surplus to the trusts. The court issued a lengthy order
explaining that the Freeze and Seize procedure, under which the
County claimed the proceeds, had not been followed. Specifically,
the court stated, “there is no showing that the trial judge in the
criminal action made a finding that any portion of the subject
property was to be levied upon to pay the restitution.”
12. Judgment and Appeal
Judgment was entered awarding the surplus to the trusts.6
The County filed a timely notice appeal. In designating the
record, the County elected to proceed without a reporter’s
transcript.
DISCUSSION
1. Standard of Review
“In reviewing a judgment based upon a statement of
decision following a bench trial, we review questions of law de
novo. [Citation.] We apply a substantial evidence standard of
review to the trial court’s findings of fact. [Citation.] Under this
deferential standard of review, findings of fact are liberally
construed to support the judgment and we consider the evidence
6 The judgment was prepared by counsel for the trusts, who
apparently erroneously identified the “Verdugo 2014 Trust” when
the “Vista 2014 Trust” was intended. Nobody noticed the error.
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in the light most favorable to the prevailing party, drawing all
reasonable inferences in support of the findings. [Citation.]”
(Thompson v. Asimos (2016) 6 Cal.App.5th 970, 981.)
2. The County Had No Interest in the Property as it was Not
Seized
The County indisputably had a restitution order in its
favor; Tesfai owed it $341,404. When a defendant is ordered to
pay restitution at a noticed hearing, the order to pay restitution
is deemed a money judgment, fully enforceable as if it were a civil
money judgment. (Pen. Code, § 1214, subd. (b).) The holder of a
money judgment may record it to create a judgment lien on real
property. (Code Civ. Proc., § 697.310.) There is no suggestion
that the County recorded its money judgment against the Vista
property.
The County takes the position that the Vista property was
nonetheless seized to be used to pay Tesfai’s restitution
obligation under the Freeze and Seize law. But as the trial court
rightly found, the criminal court never actually seized the
property.
To be sure, the prosecutor took the first initial steps of
filing a petition under Penal Code section 186.11, recording a lis
pendens, and obtaining a temporary restraining order. But this
simply froze the property pending the criminal proceedings; it did
not seize the property to satisfy the restitution order. Further
proceedings were necessary once Tesfai was convicted.
Specifically, if a defendant’s conviction meets the requirements of
the white collar enhancement, the court is required to determine
how much of the frozen property shall be levied to satisfy the
restitution orders. This requires two things, neither of which
occurred here: (1) that Tesfai’s conviction met the requirements
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of the white collar enhancement; and (2) the court made a finding
that the Vista Property be levied.
As to the first requirement, the statute provides that the
defendant’s property may be levied to satisfy restitution if the
defendant is convicted of white collar felonies and “the existence
of facts that would make the person subject to the aggravated
white collar crime enhancement . . . have been charged in the
accusatory pleading and admitted or found to be true by the trier
of fact.” (Pen. Code, § 186.11, subd. (d)(1).) Here, it is clear that
the white collar enhancement was alleged, but there is no
evidence that Tesfai admitted it or that it was found true by any
trier of fact. The County has established that Tesfai was charged
with numerous crimes to which a while collar enhancement could
have attached, and the enhancement was alleged; but the County
offered no evidence that she admitted the enhancement or the
facts supporting it.7 At trial, the County relied solely on the
abstract which identified the four counts of which Tesfai was
convicted. The County argued only, “These crimes meet the
definition of ‘white collar crimes’ defined by Penal Code [section]
186.11.” But the abstract shows only conviction of the four
7 The white collar enhancement applies to a pattern of
criminal activity, consisting of at least two related felonies
involving fraud or embezzlement, causing a loss in excess of
$100,000. The Freeze and Seize statute also allows assets to be
frozen and levied if, instead of the white collar enhancement
having been pleaded and proven, it is pleaded and proven that
the defendant caused a loss in excess of $100,000 in a single
felony, a material element of which is fraud or embezzlement.
(Pen. Code, § 186.11, subd. (d)(1).) There is no evidence that
Tesfai admitted the facts supporting this allegation, and County
does not attempt to rely on this alternative basis.
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offenses, which do not constitute white collar crimes under the
statute unless the crimes constitute a pattern of related felony
conduct involving the taking of, or resulting in the loss of, more
than $100,000. (Pen. Code, § 186.11, subd. (a)(1).) The abstract
shows Tesfai’s sentence was not increased for the white collar
enhancement, nor did the County submit any evidence
suggesting that Tesfai admitted her offenses caused losses
exceeding $100,000.
As to the second requirement, even if Tesfai had admitted
the enhancement, the court would have been required, at
sentencing, to make a finding “as to what portion, if any, of the
property or assets subject to the preliminary injunction or
temporary restraining order shall be levied upon to pay fines and
restitution to victims of the crime.” (Pen. Code, § 186.11,
subd. (h)(1)(A).) The sentencing court did not do this, which is, of
course, consistent with Tesfai not having admitted the
enhancement. But if this issue had been before it, the court
would have been required to determine, at the very least,
whether the Vista Street property, which was in the name of
ACRC, should, in fact, be levied upon to pay restitution owed by
Tesfai. The court never made this determination, never levied
upon the property, and never appointed a receiver to liquidate it.8
8 In its brief on appeal, County relies on People v. Pollard
(2001) 90 Cal. App. 4th 483, in which an order that property be
sold under Penal Code section 186.11 was held to defeat a
quitclaim deed which the defendant had made after a lis pendens
had been recorded and preliminary injunction issued. But in that
case, the criminal defendant, as part of her no contest plea,
admitted the white collar enhancement and the court had
actually ordered the property sold. (Id. at pp. 487-488.)
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3. On Their Own, the Lis Pendens and Temporary Restraining
Order do not Mandate a Different Result
The County nonetheless argues that it has an interest in
the property superior to that of the trusts because the lis pendens
and the temporary restraining order predated the trusts’
interests. We consider each document separately.
A lis pendens does not give the County any rights in the
property in and of itself. “A lis pendens provides constructive
notice of the litigation, such that any judgment later obtained in
the action relates back to the filing of the lis pendens. [Citation.]
A lis pendens clouds title until the litigation is resolved or the lis
pendens is expunged, and any party acquiring an interest in the
property after the action is filed will be bound by the judgment.
[Citation.]” (Slintak v. Buckeye Retirement Co., LLC, Ltd. (2006)
139 Cal. App. 4th 575, 586-587.) In other words, a party obtaining
an interest in the property subsequent to the lis pendens takes
with constructive notice of the pending action and will be bound
by the judgment in that action. (Deutsche Bank National Trust
Co. v. McGurk (2012) 206 Cal. App. 4th 201, 214.) Here, the trusts
took not only after the lis pendens was recorded, but after the
criminal proceeding to which it was connected had been complete.
If the lis pendens gave them notice of anything, it gave them
notice of an action which had ended without impacting title to the
property. That Tesfai was ordered to pay restitution to the
County meant nothing with respect to title, when the court did
not order the Vista property levied to satisfy that obligation.
As to the temporary restraining order, it was dated in 2007,
Tesfai was sentenced in 2012, and the trusts did not obtain any
interest in the property until 2014. It is certainly questionable
whether a temporary restraining order – or even a preliminary
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injunction – could have any effect years after the proceedings in
which it was entered have been concluded. But we need not
reach the issue. The temporary restraining order, even if
effective, at most restrained Tesfai and ACRC from transferring
the Vista property. It did not give the County any interest in the
Vista property. In other words, even if the temporary restraining
order gives rise to a reason to question the validity of the
transfers to the trusts, it would not improve County’s position, as
the County has never been granted any right in the property.
In short, the County argues that some combination of a lis
pendens (giving notice that the criminal action may affect the
property), a temporary restraining order (prohibiting the criminal
defendant from transferring the property), and a restitution order
(that the criminal defendant pay money to the victim) add up the
property being “seized” for the restitution obligation such that
the County has an interest in the property dating back to the lis
pendens. Such cobbling is at odds with the statutory scheme and
we do not adopt it. On the contrary, the criminal defendant did
not admit the allegations necessary for a levy and a levy never
occurred. The County never recorded a judgment lien or
otherwise attempted to recover its restitution from the property.
It has no interest, and is not entitled to the surplus funds from
the trustee’s sale.
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DISPOSITION
The judgment is affirmed. The trusts shall recover their
costs on appeal.
RUBIN, ACTING P. J.
WE CONCUR:
GRIMES, J.
ROGAN, J.*
* Judge of the Orange Superior Court, assigned by the Chief
Justice pursuant to article VI, section 6 of the California
Constitution.
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