Key Points

  • Recording a PACE assessment lien is not protected prelitigation activity under Code of Civil Procedure section 425.16 merely because recording is a prerequisite to judicial foreclosure.
  • The court held that the parties had no dispute or grievance when FortiFi recorded the assessments, which homeowners enter voluntarily and ordinarily repay with their taxes, and it likened PACE liens to deeds of trust rather than mechanic's liens.
  • The court declined to treat the alleged conspiracy's intent as converting the recording into prelitigation conduct, adopting the reasoning of People ex rel. 20th Century Ins. Co. v. Building Permit Consultants.
  • Diplomat's claims do not arise from FortiFi's later intervention in the receivership case, because the alleged conspiracy was complete and the damage done when Top Flight defaulted and stopped paying its taxes.
  • The order denying FortiFi's anti-SLAPP motion was affirmed, with costs on appeal to Diplomat.

A California appeals court has held that a clean-energy loan administrator's recording of liens on a lender's collateral was not protected petitioning, refusing to let the company use the anti-SLAPP law to dismiss the lender's fraud suit.

The Fourth Appellate District, Division One, affirmed a San Diego County Superior Court order denying FortiFi Financial Inc.'s anti-SLAPP motion against a suit by Diplomat Property Manager LLC. Justice Castillo wrote for a unanimous panel that included Acting Presiding Justice Do and Justice Kelety. The opinion, filed unpublished on Sept. 23, was certified for publication on Oct. 20.

The anti-SLAPP statute, Code of Civil Procedure section 425.16, protects speech and petitioning activity, and courts have read it to cover some communications made in anticipation of litigation. FortiFi argued that recording a lien qualifies because recording is a legal prerequisite to judicial foreclosure. The panel held that an act is not protected merely because it is a prerequisite to a court remedy when the parties have no dispute yet, and it confined the division's 2020 holding protecting mechanic's liens.

The case involves California's Property Assessed Clean Energy, or PACE, program, which lets homeowners finance solar panels, efficient water heaters and similar upgrades and repay the cost in installments on their property tax bills. Local governments typically contract with private administrators such as FortiFi to act as de facto lenders, according to the complaint. By law, PACE liens take priority over other liens and run with the property.

Diplomat's predecessor made construction loans secured by real property to developer Andre Wegner, his company Top Flight and related borrowers. Top Flight then entered into PACE assessment contracts for the properties, which FortiFi recorded as tax liens. Diplomat alleges that FortiFi colluded with Wegner and paid the PACE money up front to a Wegner-controlled construction company that never completed the work.

Top Flight then "defaulted strategically" on the construction loans while letting its property taxes go delinquent, the complaint alleges. Sound Equity High Income Debt Fund LLC, which serviced the loans for Diplomat, sued the borrowers in April 2021, and the court appointed a receiver to sell the properties. Diplomat says most buyers would not take the homes subject to the PACE liens, so the receiver paid FortiFi first from sale proceeds. Diplomat's claims include tortious interference and conspiracy to commit fraud, and it seeks remedies including recovery of $844,205.

Judge Loren G. Freestone denied FortiFi's motion, reasoning that voluntary assessments, recorded before any default to facilitate financing, are more akin to deeds of trust than to litigation.

The appeals court agreed. A state statute directs the local legislative body's clerk to record notice of each assessment, and the recording creates the lien. The purpose of recording "was thus to create a tax lien, not to 'redress' a 'grievance,'" Castillo wrote, noting that homeowners enter PACE contracts voluntarily and in the normal course pay the tax without any dispute.

FortiFi relied on five decisions, including Birkner v. Lam and CKE Restaurants v. Moore, that protected notices served before suit. The panel said each of those cases involved an existing dispute, such as a landlord's notice terminating a tenancy. FortiFi's position, Castillo wrote, "is too attenuated from our Supreme Court's rationale for extending anti-SLAPP coverage to prelitigation activities in the first place."

The panel distinguished its 2020 decision in RGC Gaslamp LLC v. Ehmcke Sheet Metal Co., which held that recording a mechanic's lien, the claim an unpaid contractor or supplier files, is protected. That case "pre-supposed the existence of a grievance in need of redress," the opinion said. "Recording a PACE assessment, by contrast, is a prerequisite to something else—receiving repayment along with taxes," Castillo wrote.

Timing also counted against FortiFi, which never filed a foreclosure action and intervened in Sound Equity's receivership case three and a half years after recording the liens. At oral argument, FortiFi's counsel appeared to contend there were no "off ramps" in that span. The panel wrote that "at the time of recording, FortiFi had not yet reached the on ramp of non-payment necessary to potentially demonstrate the statutorily required grievance."

FortiFi also argued that the complaint's conspiracy allegations showed litigation was the plan all along. The panel declined to weigh FortiFi's intent. Protecting the recording on that theory, Castillo wrote, "would allow a co-conspirator to not only defraud another lender but also rely on its conspiracy to avoid facing the merits of a complaint alleging wrongdoing."

The panel adopted the reasoning of People ex rel. 20th Century Ins. Co. v. Building Permit Consultants Inc., a 2000 decision holding that protecting allegedly fraudulent earthquake damage reports would mean "providing immunity for any kind of criminal fraud so long as the defrauding party was willing to take its cause to court."

The court also rejected FortiFi's argument that Diplomat's claims arise from its intervention in the receivership case in November 2022, when FortiFi opposed a motion it understood would let two homes be sold clear of the PACE liens without payment. FortiFi contended the alleged scheme succeeded only through that protected litigation.

That argument "hinges on the faulty premise that Diplomat would not have been harmed but for FortiFi intervening in the litigation to defend its lien position," Castillo wrote. The panel reasoned that the receiver otherwise would have paid off the liens or sold the homes subject to them, and Diplomat would have lost money either way. The alleged conspiracy "was complete and the damages incurred when Top Flight defaulted and stopped paying its taxes," the court held.

Lawyers for FortiFi included Fredrick S. Levin of Orrick Herrington & Sutcliffe. Diplomat was represented by R. Jeremy Adamson of Buchalter.

The panel affirmed the order and awarded Diplomat its costs on appeal. Because FortiFi failed at the first step of the anti-SLAPP analysis, the courts did not reach the second step, at which Diplomat would have had to show its claims were legally sufficient and factually substantiated.