A CREDITOR'S ACTION TO VOID A FRAUDULENT PROPERTY
TRANSFER IS AN ACTION AFFECTING TITLE TO REAL PROPERTY
UNDER THE LIS PENDES STATUTE

On November 1, 2007, the Arizona Supreme Court rendered a Decision in Farris v. Advantage Capital Corporation to answer a certified question for the District of Arizona: Whether a creditor's action under Arizona's version of the Uniform Fraudulent Transfer Act (“UFTA”) (See, A.R.S. § 44-1001 to 1010) to void a debtor's allegedly fraudulent transfer of real property and thus made the property available for the payment of a debt or judgment, is an action “affecting title to real property” under the lis pendens statute (A.R.S. § 12-1191).

The Supreme Court determined that it was and that the lis pendens was properly filed while the underlying UFTA action was pending. The Court examined the purpose behind both the UFTA and the lis pendens statute. It concluded that since the UFTA allows a creditor to seek relief "against a transfer . . . by avoidance of the transfer" and return title to its rightful owner that such an action "affects the title to real property" which is the necessary predicate to filing a lis pendens under A.R.S. § 12-1191. The court rejected the notion that the Plaintiff had to be seeking a personal legal claim to the property in order to file a lis pendens. The Court distinguished the UFTA claim (which sought to void a fraudulent transfer) from a claim that merely attempts to preserve property for payment of a possible money judgment (distinguishing West Pinal Family Health Center, Inc. v McBryde (Holmes) 162 Ariz. 546 (App 1989) and Mammoth Cave Production Credit Ass'n v. Gross, 141 Ariz. 389 (App. 1984).

This case involved an action against a former employee (and his wife and Mr. Farris) to recover some $649,000 in missing funds. The complaint included a claim under the UFTA alleging that the employee's sale of its residence to Farris was a fraudulent transfer and sought to void the sale. The lawsuit included the filing of a lis pendens against the property by the employer (Advantage). Farris filed a superior court action to have the lis pendens removed and for damages. The suit was transferred to federal district court, which in turn certified the foregoing question to the Arizona Supreme Court.

The Supreme Court cautioned that A.R.S. § 12-1191 was not a license to freeze the defendants real property, pointing to A.R.S. § 33-420 (which subjects anyone knowing or having reason to know that the document they are recording is forged, groundless, contains a material misstatement or false claim or is otherwise invalid to the payment of $5,000 or treble the actual damages, whichever is greater) and A.R.S. § 33-420(A) (which makes such filing a class 1 misdemeanor).  

THE FOREGOING IS MERELY A PARTIAL SUMMARY OF THE CASE
AND IS NOT INTENDED TO BE RELIED UPON AS A LEGAL OPINION.