Integrated Lender Services v. County of L.A

Citation: Not availableDocket: B281135

Court: California Court of Appeal; April 27, 2018; California; State Appellate Court

Original Court Document: View Document

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A trustee sold a property at foreclosure, leading to surplus funds that required judicial distribution. Two claims emerged for these funds: the County of Los Angeles, which sought restitution from a convicted fraudster through a lis pendens and temporary restraining order, and several trusts with interests post-dating the lis pendens. The trial court ruled that the County's lis pendens was insufficient to establish an interest in the property since the criminal court only ordered restitution without levying the property. Consequently, the surplus proceeds were awarded to the trusts. The County's appeal was denied, affirming the trial court's decision.

The case involved property at 959 N. Vista Street in Los Angeles, purchased by the African Community Resource Center (ACRC) with fraudulent ties to its executive director, Nigisti Tesfai. ACRC recorded a deed of trust to secure a loan from the City of Los Angeles aimed at ensuring compliance with public interest standards. Tesfai faced a 24-count criminal complaint for various fraud-related schemes, invoking enhanced penalties under Penal Code section 186.11, which allows for the preservation and potential levy of property for restitution following a conviction.

Penal Code section 186.11, known as the “Freeze and Seize Law,” outlines a procedure to preserve property related to white collar crimes through several steps: 

1. The prosecution charges the defendant with a white collar enhancement.
2. A petition is filed for a temporary restraining order or similar protective relief in criminal court.
3. A lis pendens is recorded on real property involved.
4. The court may issue a temporary restraining order ex parte or notify interested parties.
5. The court conducts a noticed hearing, considering statutory factors to decide on the restraining order or preliminary injunction.
6. If a receiver is appointed, the court can order an interlocutory sale of the property.
7. Upon conviction, the court continues the injunction until sentencing.
8. At sentencing, the court determines what property may be levied for fines and restitution to victims.

In the case of Tesfai, the prosecutor filed for a temporary restraining order on September 28, 2007, seeking to preserve various assets, including the Vista Street property. The court issued an order prohibiting transfers or encumbrances on the property and recorded a lis pendens. A second similar order was signed on November 21, 2007. 

Tesfai was ultimately convicted on four counts in October 2011, but there was no record of her admitting the white collar enhancement. A restitution hearing on July 30, 2012, ordered Tesfai to pay $341,404 to various victims, including the County, but did not specify whether any property under the restraining order would be used for restitution.

On January 15, 2014, while ACRC still owned the property under the City’s deed of trust, a trust deed for $12,000 was recorded for the Barrington 2005 Trust, executed by Tesfai on ACRC's behalf. ACRC later defaulted on the original note, leading the City to record a Notice of Default and Election to Sell on July 1, 2014, citing nonpayment and failure to operate the property as a domestic violence shelter. In response to the impending foreclosure, ACRC sold the property to the Vista 2014 Trust, with Juan Velasquez as co-trustee, for approximately $1 million. Tesfai signed the grant deed on September 19, 2014. Subsequently, the Vista 2014 Trust recorded a deed of trust securing a $15,000 debt in favor of Velasquez, who later assigned his rights to the Barrington 2005 Trust. 

The foreclosure proceeded, with ACRC owing $575,097.91 to the City, and the property sold for $850,500, resulting in a surplus of $273,157.09. The foreclosing trustee sought court guidance on distributing this surplus after receiving claims from the trusts and the County, which argued for restitution based on a prior lis pendens related to criminal proceedings. The trusts contended they had priority over the surplus due to their recorded interests.

The trial court ultimately awarded the surplus to the trusts, ruling that the County's claims were invalid as there was no judicial determination linking the property to the restitution. The County appealed this decision, choosing to proceed without a reporter’s transcript. The standard of review for the appeal encompasses de novo for legal questions and substantial evidence for factual findings.

Findings of fact are interpreted to support the judgment, with evidence viewed favorably towards the prevailing party. The County held a restitution order against Tesfai for $341,404, which is enforceable as a civil money judgment. However, the County did not record this judgment against the Vista property, and although it argued the property was seized to satisfy the restitution under the Freeze and Seize law, the trial court determined that the property was not actually seized. Initial actions by the prosecutor, such as filing a petition and recording a lis pendens, merely froze the property pending criminal proceedings rather than seizing it to satisfy the restitution.

For the property to be levied for restitution, two conditions must be met: Tesfai's conviction must satisfy the white collar enhancement requirements, and the court must determine the amount of the frozen property to levy. Although the enhancement was alleged, there was no evidence that Tesfai admitted to it or that it was found true by a trier of fact. The County provided no proof that her offenses resulted in losses exceeding $100,000, which is necessary for the crimes to be classified as white collar under Penal Code section 186.11. Furthermore, the sentencing court failed to make any determination about levying the Vista property to pay restitution, nor did it appoint a receiver for liquidation, which supports the conclusion that the necessary prerequisites for levying the property were not satisfied.

The County claims a superior interest in the property over the trusts due to a lis pendens and a temporary restraining order (TRO) that predated the trusts' interests. A lis pendens provides constructive notice of litigation but does not confer rights to the County; it merely clouds the title until resolution or expungement. The trusts acquired their interests after the lis pendens was recorded and after the related criminal case concluded, meaning the lis pendens served only as notice of a resolved action that did not affect property title. The requirement for Tesfai to pay restitution does not impact title since the court did not levy the Vista property for that obligation. Regarding the TRO, issued in 2007, it restrained Tesfai and ACRC from transferring the property but did not grant the County any rights. The timing of the trusts' acquisition in 2014, after the relevant proceedings concluded, raises questions about the TRO's effectiveness. The County's argument that the combination of the lis pendens, TRO, and restitution order equates to property seizure lacks legal basis, as the necessary steps for a levy were never taken, and the County has not recorded a judgment lien. Therefore, the County holds no interest in the property and is not entitled to surplus funds from the trustee’s sale. The judgment is affirmed, and the trusts are awarded costs on appeal.