If you practice real estate law in Pennsylvania, it is not too uncommon for you to receive a frantic call from a client indicating a deal to purchase real estate is falling apart through no fault of its own. During that call, you would then discuss whether the client wishes to either seek a refund of any monies being held in escrow at the time on account of the agreement of sale and possibly monetary damages as a result of the alleged breach of the agreement of sale or specifically enforce that agreement of sale by compelling the seller to sell the property to it. If the client elects to force a sale of the property, it is typically not sufficient for the client to simply sue the seller for such specific performance of the agreement of sale. Rather, in addition to commencing a lawsuit against the seller, the client must also duly obtain a lis pendens against the property.
Law.com defines the term lis pendens as “a written notice that a lawsuit has been filed which concerns the title to real property or some interest in that real property.” In Pennsylvania, a lis pendens is first filed in the lawsuit pending between the parties by way of a praecipe directing the prothonotary to index the lis pendens within the property’s chain of title and thereafter the plaintiff purchaser should also record the filed praecipe with the recorder of deeds in which the property is located.
As succinctly pointed out by Law.com in its definition of the term lis pendens, “this gives notice to the defendant who owns real estate that there is a claim on the property, and the recording informs the general public (and particularly anyone interested in buying … the property) that there is this potential claim against it.”
The effect of lis pendens is that it places third parties on notice that there is a dispute concerning the property and anyone who purchases the property after the lis pendens is of record takes their interest subject to the lis pendens pending the final disposition of the litigation between the plaintiff purchaser and the seller.
The filing of a lis pendens against the property keeps the attempted sale of the property alive while the litigation between the parties is pending in order to prevent the seller from backing out of his contractual obligation to sell the property to the plaintiff purchaser and instead sell it to an unsuspecting third party.
A recent decision by the Superior Court of Pennsylvania in Michael v. GLD Foremost Holdings, 2017 Pa. Super. LEXIS 94 (Feb. 16), illustrates when the filing of a lis pendens is inappropriate under the circumstances.
In Michael, GLD Foremost Holdings and Ralph C. Michael entered into a stock purchase agreement for GLD to purchase Foremost Industries, Inc. from Michael, the opinion said. Upon the execution of the stock purchase agreement, GLD allegedly received all of Michael’s rights, titles and interests in Foremost Industries without first being obligated to pay the agreed upon purchase of $2 million for the company, the opinion said.
According to GLD, it discovered that Michael, a month prior to the execution of the stock purchase agreement, improperly transferred some real estate owned by Foremost Industries to his daughter without due consideration and otherwise in violation of the stock purchase agreement, the opinion said.
When GLD did not pay the purchase price of $2 million to Michael due under the stock purchase agreement, Michael then filed a complaint in federal court against GLD claiming breach of the stock purchase agreement, fraud, and unjust enrichment. In the complaint, Michael sought monetary damages against GLD, the opinion said.
Afterwards, Michael filed praecipes for lis pendens on three different tracts of land owned by Foremost Industries in the Court of Common Pleas of Franklin County, certifying that the federal action concerned real property located in Franklin County. At that time, GLD was negotiating a sale of one of the tracts of land, the opinion said.
GLD filed an emergency petition to strike the lis pendens. In response to the petition, Michael argued that title was involved in the pending federal litigation and denied that GLD is the owner of Foremost Industries given its failure to pay the agreed upon purchase price.
Following a hearing, the trial court denied GLD’s emergency petition to strike the lis pendens.
GLD then appealed the trial court’s ruling to the Superior Court.
As explained by the Superior Court, a “lis pendens is construed to be the jurisdiction, power, or control which courts acquire over property involved in a suit, pending the continuance of the action, and until final judgment” and a “lis pendens may be imposed when the property is subject to litigation and that any interest acquired by the third party will be subject to the result of the litigation.”
The Superior Court, however, warned that, “if title to the property is not subject to the result of the litigation, then there is no reason to provide notice to a third party about the litigation” and “to impose lis pendens in such a case would prove to be an arbitrary application of the doctrine and, equity can and should refuse to give it effect, and, under its power to remove a cloud on title can and should cancel a notice of lis pendens which might otherwise exist.”
The Superior Court noted that there is a two-part analysis which courts in Pennsylvania should apply to determine whether exerting the court’s control over real estate is appropriate under the circumstances.
According to the Superior Court, “the first step is to ascertain whether title is at issue in the pending litigation” and, under the second step of this analysis, the trial “court must balance the equities to determine whether the application of the doctrine is harsh or arbitrary and whether the cancellation of the lis pendens would result in prejudice to the nonpetitioning party.”
On appeal, GLD argued that the trial court abused its discretion in denying the petition to strike the lis pendens, asserting, among others things, that “the trial court erred by ignoring the threshold requirement that title to real estate be at issue.”
The Superior Court agreed with GLD that the threshold requirement to maintain a lis pendens was not met by Michael because he did not claim he is the rightful owner of the real estate owned by Foremost Industries nor did he seek the return of real estate assets transferred pursuant to the stock purchase agreement.
Reviewing the complaint filed by Michael in federal court, the Superior Court emphasized that Michael did not dispute that GLD now owned Foremost Industries and its assets, including the real estate which was the subject of the lis pendens, but, rather, Michael merely sought monetary damages due to GLD’s failure to pay the $2 million owed to him under the stock purchase agreement.
Quoting to the analysis previously employed by another panel of the Superior Court in Psaki v. Ferrari, 547 A.2d 1127 (Pa. Super. Ct. 1988), the Superior Court elaborated that a “lis pendens may not be predicated upon an action seeking to recover a personal demand.” Rather, according to the Superior Court, “when a personal demand is reduced to judgment, of course, it becomes a lien, without more, on real estate which is owned by the judgment debtor” and, “in such event, the filing of the lis pendens is unnecessary.”
Utilizing that same line of reasoning, the Supreme Court refused to permit Michael to maintain a lis pendens against Foremost Industries’ real estate based on a pending lawsuit for monetary damages only which would improperly place a cloud on title to that real estate and ordered that the lis pendens had to be stricken from the real estate.
Reprinted with permission from the March 10, 2017 edition of The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.