Integrated Lender Services, Inc. v. County of Los Angeles, Juan Velasquez

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.

3

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.

4

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

5

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.

6

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.

7

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.

8

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

9

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.

10

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.

11

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

12

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.

13

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.)

14

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

15

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.

The judgment is affirmed. The trusts shall recover their costs on appeal.