California Court Rules on PACE Program Misuse Case

The California Court of Appeal has affirmed a lower court's decision in the case of Diplomat Property Manager, LLC v. FortiFi Financial, Inc., docket number D086371. The ruling addresses allegations of misuse involving the Property Assessed Clean Energy (PACE) program, which allows homeowners to finance energy-efficient upgrades through property tax assessments. This ruling significantly impacts how PACE liens are managed and enforced, particularly in cases of financial distress.

The case centers around Diplomat Property Manager, LLC, which claims that FortiFi Financial, a company administering the PACE program, conspired with a real estate developer to prioritize payments on PACE liens over other debts. This alleged collusion has implications for lenders and property owners involved in similar financial arrangements.

Background

Diplomat Property Manager, LLC, the plaintiff in this case, inherited a series of construction loans made to real estate developer Andre Wegner and his company, Top Flight. The loans were secured by properties that later fell into default. As part of the PACE program, Top Flight entered into voluntary assessment contracts, allowing them to finance energy-efficient upgrades that would be paid back through property taxes.

FortiFi Financial, the defendant, administers the PACE program and recorded the assessments as tax liens on the properties. When Top Flight defaulted on its loans and allowed property taxes to become delinquent, a court appointed a receiver to sell the properties. Diplomat claims that potential buyers were deterred by the PACE liens, leading the receiver to pay off these liens first, ultimately diminishing Diplomat's recovery.

In response, Diplomat filed a lawsuit against FortiFi, alleging conspiracy and various forms of tortious interference. FortiFi countered with a special motion to strike the complaint, arguing that it was a strategic lawsuit against public participation (SLAPP) under California's anti-SLAPP statute.

The Ruling

The California Court of Appeal upheld the lower court's decision to deny FortiFi's anti-SLAPP motion. The court found that FortiFi failed to demonstrate that Diplomat's claims arose from protected activity under the anti-SLAPP statute. The court stated, "FortiFi’s argument that recording PACE liens is protected conduct seeks to push the boundaries of what constitutes protected prelitigation conduct too far afield of the expressed language and intent of section 425.16."

The court clarified that the recording of PACE liens is not inherently linked to any litigation and that the claims made by Diplomat were based on actions taken prior to any involvement in litigation. The court emphasized that the PACE program is designed to facilitate financing for home improvements, not to serve as a mechanism for litigation.

Additionally, the court noted that FortiFi's actions during the receivership proceedings did not form the basis for Diplomat's claims. The court concluded that the alleged fraudulent scheme and actions that led to Diplomat's damages occurred before FortiFi's involvement in the litigation.

Impact

This ruling has significant implications for the future of the PACE program and how its liens are treated in financial distress situations. By affirming that the recording of PACE liens does not constitute protected activity under the anti-SLAPP statute, the court has clarified that parties cannot use the PACE program to shield themselves from allegations of fraud or misconduct.

The decision may set a precedent for similar cases involving PACE financing, as it underscores the need for transparency and accountability in the administration of such programs. Lenders and property owners must be aware that actions taken under the PACE program can be scrutinized and challenged in court.

What's Next

FortiFi may consider appealing the ruling, although the court's decision is a significant setback for the company. There are no indications of related cases pending that could affect this ruling. The outcome of this case may influence future litigation surrounding the PACE program and its administration.