Los Angeles law firm: lis pendens: protect your real property interests.

Real estate has become one of the most important assets for businesses and individuals in Southern California. Present market conditions and the availability of historically cheap financing have fueled a boom in both the residential and commercial markets. The stock market's recent lackluster performance adds fuel to this fire as more and more money moves from the financial markets to the real estate markets. Simultaneously, personal and business foreclosures are at an all-time high. The confluence of these factors has led to an almost "perfect storm" of disputes over the ownership of and rights in real estate.

The blunt instrument of real estate litigation is the lis pendens or notice of pending action. This tool allows a plaintiff to effectively create a lien against real property with the potential to frighten off purchasers, lenders and all others interested in that property. The lis pendens also creates a powerful inducement to settlement and can be the bane of a defendant's existence. This article will briefly describe the appropriate times to use a lis pendens, its effect, and the steps necessary to have a lis pendens removed from real property.

What is a lis pendens?

A purchaser or encumbrancer who takes title to or records a lien on real property without actual or constructive notice of pending litigation affecting title to that property is not bound by any judgment in the litigation entered after title was received or the lien recorded. Thus, a plaintiff receiving a specific performance decree takes the property subject to title vested or a lien created in a third party who did not have actual or constructive notice of the specific performance action. Such a result completely vitiates a specific performance decree.

A lis pendens is designed to provide actual or constructive notice "to the world" of a pending action that affects title to or an interest in real property. The lis pendens is recorded with the County Recorder and is considered a "conveyance" or a "transfer" within the provisions of the recording laws. After a lis pendens is recorded, all purchasers, encumbrancers, or other interested parties have constructive notice of that action. A lis pendens effectively clouds the title to the property described in the notice and impedes or prevents a sale or encumbrance of the property until litigation is resolved or the lis pendens is expunged.

A lis pendens is not effective if improperly used. It is appropriate only where there is in fact a pending litigation matter of the type in which a lis pendens is authorized. A lis pendens recorded in sup port of an action that does not allege the appropriate type of real property claim does not give constructive notice of the pending litigation to subsequent third parties, even if those subsequent third parties have actual knowledge of the litigation. In short, a recorded lis pendens in the correct kind of action gives notice to the world that a claim exists which affects title to or an interest in that specific real property. A real property action without a lis pendens or the filing of a lis pendens in the wrong kind of action does not give actual or constructive notice to anybody of the real property claim.

What Kind of Action Supports a lis pendens?

A lis pendens may be recorded by a party who asserts a "real property claim." A "real property claim" is a cause of action that would, if meritorious, affect the title or the right to possession to specific property or the use of an easement other than an easement acquired by statute by a regulated public utility.

There are certain types of actions in which the filing of a lis pendens is mandatory: an action to quiet title; the partition of real property; to establish land records that have been destroyed against an estate based on a rejected claim; for the enforcement of an improvement bond; or to determine adverse interests in real property arising from the enforcement of an improvement bond.

In all other cases that affect the title to or possession of real property, the claimant may record a lis pendens, but is not required to do so. There are numerous types of actions appropriate for recording a lis pendens, including: an action for specific performance of a contract to acquire title to real property; an action to rescind a contract to purchase real property; an action to cancel a deed or other instrument affecting the rights of ownership or possession of real property; an action to set aside a fraudulent conveyance; an action to enforce a lien on real property, including a deed of trust or mechanics' lien; actions between a landlord and tenant to cancel a lease, for unlawful detainer, or for ejectment; actions regarding easements; an action for adverse possession; a marital dissolution action where real property is involved; and a governmental action for eminent domain.

While this is a fairly wide-ranging list, there are common misperceptions about when a lis pendens can be filed. There is a common misperception that a lis pendens is appropriate where the parties to an action have some joint interest in real property even if the action does not affect title to or possession of that real property. It is only when the real property interest of the parties is at issue that a lis pendens is appropriate.

Another common misperception is that a lis pendens can be put on real property owned by a defendant as a tactic to exert pressure on that defendant to pay an unrelated debt or claim. Lawyers are regularly told that the defendant in a lawsuit owns real property and asked to put a lis pendens on that property to help enforce a claim. The answer to that kind of question is a resounding "no." A lis pendens is only appropriate where the underlying action affects title to or possession of real property--it is never appropriate to use to secure payment of an unrelated debt. Any plaintiff seeking to tie up a defendant's real property to be sure the equity is there to pay a later judgment needs to seek an attachment or other provisional remedy, not a lis pendens.

A lis pendens is critical in a proper case. A properly recorded lis pendens gives constructive notice to all potential purchasers and encumbrancers of the claims of the parties in the pending litigation so that the judgment in that action will be binding on subsequent parties even if they acquire their interest before judgment is actually rendered. A judgment in that pending action that determines the rights in the property in favor of the claimant relates back to and gets its priority from the date the lis pendens is recorded. That judgment is senior and prior to any interests in the property acquired after that date and precludes a subsequent purchaser from acquiring a superior interest. The practical effect of the lis pendens is that the vast majority of lenders and potential purchasers will not touch a property that has a lis pendens recorded against it. It thus preserves the claimant's ability to receive title to or possession of that real property should the claimant be successful in litigation.

How Do I Remove a lis pendens From Property?

The procedure for expunging a lis pendens is a creature of statute, as is the lis pendens procedure itself. Complete compliance with the statutory requirements is necessary for an effective expungement of a lis pendens.

After the lis pendens is recorded, any party to the litigation, or for that matter any non-party who has an interest in the affected real property, may apply to the court to expunge live lis pendens. There are lour grounds on which the court may expunge a lis pendens: (1) the lis pendens is "void or invalid" if the requirements of service or recording an affidavit of service are not satisfied, (2) the action does not involve a real property claim, (3) the claimant has not proven the probable validity of the claim by a preponderance of the evidence, or (4) monetary relief is adequate.

The most common ground asserted for expunging a lis pendens is that the claim does not set forth an appropriate real properly claim or that the claimant cannot prove the validity of that claim by a preponderance of the evidence. When a motion to expunge is made on either of these grounds, the claimant, i.e., the person who created the lis pendens, bears the burden of proof to show that the appropriate real property claim exists and that the claim is "probably valid." This standard means that there is a preponderance of evidence in support of the claim, generally viewed as at least a 50.1% chance that the claim is valid. A claimant who files declarations purporting to show the action alleging a real property claim, and has probable validity, satisfies its burden of proof even if the defendant's evidence raises serious questions of fact on either element. The court's function at an expungement hearing is not to determine who is likely to win the case; it is only to determine whether the evidence is sufficient to allow a jury to find in favor of the claimant.

Sometimes there are circumstances where a properly filed lis pendens can be expunged even if a real property claim has probable validity. The statute allows lot a conditional expungement when a court finds that, even though the claim has probable validity, adequate protection can be secured to the claimant through a bond or undertaking. This type of conditional expungement is only available in a commercial setting. The law presumes that residential real property is sufficiently unique and that money is almost never an adequate remedy. Where conditional expungement is granted, the party seeking expungement must post a sizeable bond to cover the potential loss to the claimant. Most bending companies require cash collateral for the bond, which effectively ties up significant cash assets of the defendant.

How Do I Sell My Property After The Its pendens Is Removed?

Many litigants believe that once the court grants expungement, they have been given the "all clear" to sell or encumber the property at will. That assumption is wrong. There is a significant trap for the unwary that can undo all the good done at an expungement hearing.

The statutes are very specific on when a party who purchases after expungement holds title free and clear of the underlying litigation. The party getting the expungement order must provide written notice of the entry of that order. That notice commences a 20-day period within which the claimant may seek appellate relief from the expungement order. The expungement order is not effective until after the later of two times--expiration of the period for the appeal or, if the claimant does appeal the expungement order, when the an appellate court resolves the issue. Any third party who purchases or lends against real property before the expiration of this period takes possession with notice of the pending litigation and is subject to a judgment in that litigation.

Conversely, if the party seeking and receiving expungement follows the statutory procedure, a subsequent purchaser or encumbrancer receives the property free and clear of notice of the underlying action as a matter of law. In other words, once the appropriate steps are taken after an expungement order is issue, a subsequent purchaser takes possession free and clear of any judgment in the underlying lawsuit even if the purchaser knows of the lawsuit and the claims to title on the property.

A lis pendens can be an effective tool for anyone claiming title to or the possession of real property to preserve his or her potential rights in the property until litigation is completed. The procedures surrounding a lis pendens are complex and a single misstep can destroy the value of the lis pendens or the value of an expungement order received after countless hours and thousands of dollars. A lis pendens is an absolute necessity whenever litigation affects the title to or possession of real property and can be an extremely effective tool to retain rights in that property; conversely, a well-planned expungement motion may put the property holder in a position to sell or encumber the property "free and clear" of any claim that might affect that title.

Barry J. MacNaughton is a partner at the Beverly Hills law firm of Ervin, Cohen & Jessup LLP and a member of the firm's Litigation Department. He can be reached at 310.281.6342 or [e-mail].