Kristina Dyer v. Exon Martinez et al. (February 23, 2007, G037423) __ Cal.App.4th__; http://www.courtinfo.ca.gov/opinions
In this action for specific performance of a contract for the purchase of real property, the Court of Appeals found that the physical recordation of a lis pendens in the county recorder’s office was insufficient to provide a prospective purchaser with constructive notice of the claim until the recorder properly indexed the lis pendens in the county real property records because a diligent title search would not reveal the existence of the claim unless it was properly indexed.
On June 9, 2003, Kristina Dyer entered into an agreement with Juan Carlos and Aida Rojas ("Sellers") for the purchase of real property located in Mission Viejo, California (the "Property"). However, on July 3, 2003, Sellers sent a letter to the escrow company canceling the sale due to Dyer’s alleged failure to obtain financing. Roughly one year later, Sellers relisted the Property. Upon learning this, Dyer contacted the listing agent to inform him that she had a prior agreement to purchase the Property and she remained ready and willing to complete the sale. Despite Dyer’s offer, Sellers entered into a new purchase agreement for the Property with Exon Martinez.
On September 9, 2004, Dyer filed suit against Sellers seeking specific performance and damages based on their alleged breach of the purchase agreement with Dyer. That same day, Dyer deposited a lis pendens with the Orange County Recorder’s Office for recording. Although the lis pendens indicated that the recorder physically recorded the claim on September 9, 2004, the recorder failed to actually index the claim in the county real property records until September 14, 2004. As a result, when Martinez closed escrow on the Property on September 10, 2004, Dyer’s lis pendens had not yet been indexed and did not show up in the title search on the Property. Dyer thereafter amended her complaint to include an action against Martinez to quiet title to the Property.
The trial court granted Martinez’s motion for summary judgment on the grounds that Martinez lacked constructive notice of Dyer’s lis pendens because the recorder had not properly indexed the claim prior to the close of escrow. The Court of Appeal affirmed the trial court’s ruling and awarded costs for the appeal to Martinez.
A purchaser of real property only has constructive notice of those matters pertaining to real property which are discoverable through a diligent title search.
The Court of Appeals held that Martinez lacked constructive notice of Dyer’s lis pendens when he purchased the Property because the recorder failed to index the lis pendens until after the close of escrow and, as a result, a diligent title search prior to the close of escrow would not have revealed the existence of the lis pendens. The court noted that the purpose of the recording statutes and the doctrine of constructive notice was to charge a purchaser of real property with notice of those documents which are locatable by a search of the proper indexes.
In reaching the above conclusion, the court rejected Dyer’s claim that the legislature intended for courts to interpret and apply California Civil Code Section 405.24 literally and to the exclusion of any other applicable recording statute because the legislature omitted the phrase "as prescribed by law," which it included in all other recording statutes where proper indexing of a document was deemed necessary to impute constructive notice of the document on a purchaser of real property. The court determined that despite the omission of this phrase, the legislature intended courts to read Section 405.24 in conjunction with all other applicable recording statutes so that Section 405.24 preserved the prior law that proper indexing of a claim was a prerequisite to imputing constructive notice of the claim on a purchaser. Thus, even though Section 405.24, read literally, only required that a claimant record a lis pendens in order to provide constructive notice of the claim to a purchaser of real property, when the statute is read in conjunction with other applicable recording statutes, the resulting rule is that a recorded lis pendens does not provide constructive notice of the claim until the recorder properly indexes the lis pendens in the county real property records.
Finally, the court rejected Dyer’s arguments regarding uncertainty and risk allocation. The court noted that although a claimant had no control over when the recorder indexes a document and this results in uncertainty, the level of uncertainty would be substantially greater if a purchaser of real estate could not rely on a diligent search of public records to reveal a prior claimant’s interest. Furthermore, the court noted that placing the risk of loss due to a recorder’s delay or mistake in indexing a claim on the claimant provided the latter with an incentive to diligently deposit the lis pendens for recordation, whereas placing the risk of loss on an innocent purchaser does nothing to ensure proper and timely recording of the claim.
For more information please contact Katharine Allen. Katharine Allen is an associate in the Real Estate, Environmental and Land Use and Natural Resources Practice Group in the firm’s San Francisco Office.