Judge: Mark H. Epstein, Case: 22SMCP00093, Date: 2023-01-11 Tentative Ruling

Case Number: 22SMCP00093    Hearing Date: January 11, 2023    Dept: R

At issue is how to disburse the surplus funds generated on the sale of certain property.  Essentially, there was a default on a unit in the Malibu Villas development.  The property was sold and a surplus was generated.  A number of parties seek the surplus.  At issue is the dispute between the HOA and USCL (who was assigned the interest of Zumacat, who USCL asserts is the prior owner).  Also at issue is a claim by the Franchise Tax Board.  However, the only challenge to its claim is that its claim was not verified.  The state is exempt from verification requirements, and as such, that objection is without merit.  (Code Civ. Proc. sec. 446, subd. (a).)  The FTB claim is granted and it has priority over the HOA’s claim and the USCL claim, as the court has previously ordered.

USCL asserts that the HOA’s claim is not proper because the lien giving rise to the claim is improper.  According to USCL, the HOA failed to comply with Code of Civil Procedure section 386 subdivisions (a) and (b) because it did not file a proper verified cross-complaint.  But USCL has it wrong.  Subdivision (a) applies where a party is sued for funds in possession but that party has no interest in the funds and wants to be removed.  Subdivision (b) is to the same effect but applies where no action has yet been filed.  Neither applies here.  Subdivision (d) is the one USCL meant to rely upon.  It provides that a party named in a complaint to resolve conflicting claims may file an answer or cross-complaint setting forth allegations as to that party’s ownership or interest.  The HOA here filed an answer, and that is enough.  USCL also claims that the HOA failed to serve the response with their claim to the funds.  But that argument considers only the proof of service.  But on May 6, 2022, the HOA filed a separate proof of service showing proper service.

At the last hearing, the court requested further briefing on the limited topic of whether proper notice was given by the HOA such that the lien was (or was not) appropriate.  USCL went beyond the scope of the court’s order, and to that extent the court has not considered USCL’s supplemental brief.

One of the questions for further briefing was who owned the property at the time of the sale.  The HOA argues that Linch owned the property; USCL claims it was Zumacat.  USCL relies on a grant deed that was recorded on January 8, 2019.  The deed states that the conveyance from Linch to Zumacat “changes the manner in which title is held.  Grantor and grantees remain the same and continue to hold same proportionate interest.  R&T 11911.”  Put another way, the deed provides that Linch still owned whatever proportionate interest he held before the transfer (which the court believes is 100%), but now owns it through Zumacat.  If that is the case, then it would appear that Linch was the owner at the relevant time.

This stems from a 2019 change to section 11925 of the Revenue and Taxation Code.  It exempts from the documentary transfer tax any conveyance between an individual (or individuals) and a legal entity that results only in a change in the method of holding title and in which the proportional ownership is the same.  The easy example would be property held by two people as joint tenants that was later held by the same two people as tenants in common.  The same two people own the same property in the same proportions; there has just been a change in the manner of holding.  It makes sense (as the Legislature determined) not to impose a tax on that kind of transfer-in-name-only, and, for the same reason, generally speaking such a change does not trigger a re-appraisal for property tax purposes.  The question is whether there is a change in beneficial ownership.  If so, then there can be a reappraisal and also imposition of the tax.  If not, not.  (926 North Ardmore Ave., LLC v. County of Los Angeles (2017) 3 Cal.5th 319.)  According to the 2019 deed, then, Linch had the same beneficial interest in the property when both before and after the deed was recorded.  In fact, Linch’s own declaration stated that he “and Zumacat LLC owned a condominium located at 28248 Rey de Copas Lane in Malibu, California 92065, which is within and subject to the Malibu Villas Homeowners Association and CONDO development.”  Assuming that the 2019 deed is correct, Linch still owned the property, albeit through Zumacat.  If the 2019 deed was meant to do more than simply change the manner of ownership, then it was a fraud.  In other words, if an individual owning property conveys it to a legal entity owned or intended to be owned by others, that is a true conveyance and it does more than change the manner of holding.  Filing such a document but claiming the exemption from taxes and avoiding reappraisal is a fraud on the state and likely would render the deed void or at least voidable (not to mention potential criminal sanctions).  The court will not presume that Linch intended criminal conduct, and, if he did, neither he nor his assignees are likely to reap any benefits from it now.

This leads to a related question.  Ms. Sultanova states that in fact she “own[s] and [is] the sole member of Zumacat LLC.”  That said, whomever the property’s owner is today is not really relevant.  The question is who owned it at the time of the sale, and so far as the court can tell, that would still be Linch.  As set forth above, if in fact Linch transferred his interest to Zumacat and divested himself of ownership, the court is concerned that Linch and Sultanova have committed fraud in that they avoided the transfer tax and also reassessment.  For now, the court will not so assume and will take the 2019 deed’s language at face value.

USCL also suggests that there is some problem because the Recorder’s office has a typo in the records, listing the owner as “Zumucat.”  That is of no moment here.  The court does not believe that a typographic error affects the merits.

After weighing the evidence, the court believes that there was no beneficial change as a result of the 2019 deed.  Because the January 2019 deed did not reflect an actual change in ownership, the February 2019 lien is not deficient.  The HOA debt was still Linch’s debt and the fact that the form of ownership changed did not extinguish the debt.

Mountain Home Properties v. Pine Mountain Lake Ass’n. (1982) 135 Cal.App.3d 959 is not to the contrary.  There, the HOA sought to assert a debt or lien against the new owner even though the law is clear that the new owner would take free and clear of any such debt.  But here, the HOA is asserting its claim only against the original owner (or that person’s assignee), not a new owner.  The purpose of the Civil Code section at issue is one of fairness to a party acquiring property.  Because the acquiror had no connection with the property prior to coming into possession, that party is not liable for its predecessors’ debts.  That is simply not the factual scenario here.

Because Linch was the actual person with the ownership interest at the time of the sale, the lien is valid and can be enforced at least against him or his assignees.  Accordingly, the court finds the HOA’s claim to be valid.  Thus, to the extent that there are funds left after the IRS and FTB are paid, the HOA is next.  If there are any funds extant after that, USCL is entitled to them.  The HOA is to prepare the order.