Federal Appeals Court Upholds <i>Lis Pendens</i> Law

The United States Court of Appeals for the Second Circuit in Diaz v. Patterson, 547 F. 3d 88, has rejected a due-process challenge to a New York law that allows a person who brings or plans to bring a lawsuit claiming an interest in real property to file a lis pendens against the property. The lis pendens is a document, filed in the office of the clerk of the county where the property is located, which serves to notify potential purchasers of claims against the property. It is valid for three years and can be extended for another three years upon a showing of good cause. Although a lis pendens does not technically prevent a transfer of the property, it may as a practical matter make the property impossible to sell or mortgage.

Background

The three plaintiff property owners in the two related appeals that were consolidated for decision contended that the New York lis pendens law, contained in Article 65 of the New York Civil Practice Law & Rules, is unconstitutional. They made three major arguments in support of their claim, all of which the Court of Appeals rejected.

First, the property owners pointed out that, although an alternate name for lis pendens is “notice of pendency,” in fact no notice to the property owner is required by the challenged law. They all had discovered that a lis pendens had been filed against their homes only when attempting to sell or refinance the property. Since no notice at all is provided, there is, of course, no notice of what a property owner can do to challenge the lis pendens, a particular problem for individuals who do not have counsel.

Second, the property owners complained that even if they make a motion in court to remove the lis pendens, the law does not permit the court to consider whether the underlying case has any merit, but only to determine if the technical requirements for the filing of a lis pendens have been met and whether the case was brought in “good faith,” with the burden on the challenger to prove it was not. Moreover, there is no requirement that such a motion be decided expeditiously. The property owners contended that these difficulties in having a lis pendens removed allows abuse of the lis pendens procedure by unscrupulous litigants, since property owners are frequently forced to settle claims against their property, even claims with no merit, in order to have the lis pendens removed. Two of the three property owner appellants did settle the cases against them cases on adverse terms because of the notice of pendency; the third property owner eventually had the case against him dismissed and the lis pendens placed on his home vacated, but it took more than a year for him to accomplish this, during which time he was unable to secure a mortgage he needed to repair fire damage that made his home almost unlivable.

The property owners also claimed that the double-bonding procedure in the New York law allowing a substitute bond was unfair because it required them, in order to secure a bond from the claimant indemnifying them from any damages resulting from the lis pendens, to post a bond, as well, a kind of “pay to play” provision that they argued was unfair to poor people.

Law Sustained

The Court of Appeals agreed that the lower court had correctly dismissed the case. The Court stated it need not resolve the debate over whether a “lis pendens” constituted a taking of property, because the procedures set forth in the New York statute were sufficient in any case to satisfy the requirements of the due process clause.

In reaching its conclusion to sustain the law, the Court of Appeals applied the three-part balancing test that was used in the case of Doehr v. Connecticut, 501 U.S. 1 (1991), which had invalidated Connecticut's attachment laws on due process grounds, with the Supreme Court ruling that even “the temporary or partial impairments to property rights that attachments, liens, and similar encumbrances entail are sufficient to merit due process protection.”

Doehr Test

The first part of the Doehr test considers the private interest that is affected by a lis pendens. The Court in Diaz agreed with the property owners that the impact on marketability imposed by the lis pendens was a significant factor supporting the property owners' position.

The second part of the test looks at the risk of an erroneous deprivation of property. The Court opined that there was not a substantial risk of error, because the nature of cases where lis pendens are filed involve claims that are “pre-existing, readily quantifiable, and largely susceptible to proof by documentary evidence.” Moreover, the court found the risk of error is reduced by the procedural safeguards in the law. Although there is no notice of the lis pendens, merely a filing with the county clerk, the property owner will at least learn of the underlying lawsuit, since the law requires the summons and complaint to be served no later than 30 days after the filing of the lis pendens. And while the Court conceded that a hearing that does not consider the underlying merits of the lawsuit, “does not afford the most meaningful process,” it still was sufficient given all the other considerations. Nor did the Court find any problem in the statute's procedure for substituting a bond, since a bond is not constitutionally required in any event.

The third part of the Doehr test considers the interest of the claimant to the property and the state. On this part of the test, the Court found these interests weighed heavily in favor of the constitutionality of the law. The Court noted that the claimant to the property must have or claim to have a pre-existing interest in the property, since this is a condition to entitlement to the lis pendens. Without the protection of lis pendens, such claimants could be frustrated by transfer or incumbrance of the property to an innocent third party who lacked notice. The Court also found that the lis pendens law served the state's interest in avoiding additional litigation and maintaining public confidence in the judicial process. Accordingly, the Court concluded that the interest of the property owners “as affected by the lis pendens carries some weight, but is outweighed by the remaining considerations.”

The Court also rejected the argument by one of the property owners that the law denied her equal protection, because it does not permit her as a spouse-creditor to place a lis pendens on her husband's property to secure equitable distribution of the property. The Court ruled the law is facially neutral, because a claim for equitable distribution, under New York law, is not in any case a claim that “would affect the title to, or the possession, use or enjoyment, of real property” as required by the lis pendens law.

The plaintiffs intend to petition the United States Supreme Court for certiorari.

Conclusion

Regardless of the outcome of the litigation, there is room for improvement in the New York lis pendens procedures that would make the procedures fairer, while protecting the interests of claimants to the property. Connecticut law, for example, requires notice to the property owner of the lis pendens, notice of the procedures to challenge it, a timely hearing, and that the claimant show probability of success in the litigation, presumably not much of a burden in meritorious cases, yet a significant safeguard to protect property owners from abusive lis pendens filings.

Toby Golick is Clinical Professor of Law at the Benjamin Cardozo School of Law and represented the property owners in the Diaz case.

The United States Court of Appeals for the Second Circuit in Diaz v. Patterson , 547 F. 3d 88, has rejected a due-process challenge to a New York law that allows a person who brings or plans to bring a lawsuit claiming an interest in real property to file a lis pendens against the property. The lis pendens is a document, filed in the office of the clerk of the county where the property is located, which serves to notify potential purchasers of claims against the property. It is valid for three years and can be extended for another three years upon a showing of good cause. Although a lis pendens does not technically prevent a transfer of the property, it may as a practical matter make the property impossible to sell or mortgage.

Background

The three plaintiff property owners in the two related appeals that were consolidated for decision contended that the New York lis pendens law, contained in Article 65 of the New York Civil Practice Law & Rules, is unconstitutional. They made three major arguments in support of their claim, all of which the Court of Appeals rejected.

First, the property owners pointed out that, although an alternate name for lis pendens is “notice of pendency,” in fact no notice to the property owner is required by the challenged law. They all had discovered that a lis pendens had been filed against their homes only when attempting to sell or refinance the property. Since no notice at all is provided, there is, of course, no notice of what a property owner can do to challenge the lis pendens, a particular problem for individuals who do not have counsel.

Second, the property owners complained that even if they make a motion in court to remove the lis pendens, the law does not permit the court to consider whether the underlying case has any merit, but only to determine if the technical requirements for the filing of a lis pendens have been met and whether the case was brought in “good faith,” with the burden on the challenger to prove it was not. Moreover, there is no requirement that such a motion be decided expeditiously. The property owners contended that these difficulties in having a lis pendens removed allows abuse of the lis pendens procedure by unscrupulous litigants, since property owners are frequently forced to settle claims against their property, even claims with no merit, in order to have the lis pendens removed. Two of the three property owner appellants did settle the cases against them cases on adverse terms because of the notice of pendency; the third property owner eventually had the case against him dismissed and the lis pendens placed on his home vacated, but it took more than a year for him to accomplish this, during which time he was unable to secure a mortgage he needed to repair fire damage that made his home almost unlivable.

The property owners also claimed that the double-bonding procedure in the New York law allowing a substitute bond was unfair because it required them, in order to secure a bond from the claimant indemnifying them from any damages resulting from the lis pendens, to post a bond, as well, a kind of “pay to play” provision that they argued was unfair to poor people.

Law Sustained

The Court of Appeals agreed that the lower court had correctly dismissed the case. The Court stated it need not resolve the debate over whether a “lis pendens” constituted a taking of property, because the procedures set forth in the New York statute were sufficient in any case to satisfy the requirements of the due process clause.

In reaching its conclusion to sustain the law, the Court of Appeals applied the three-part balancing test that was used in the case of Doehr v. Connecticut , 501 U.S. 1 (1991), which had invalidated Connecticut's attachment laws on due process grounds, with the Supreme Court ruling that even “the temporary or partial impairments to property rights that attachments, liens, and similar encumbrances entail are sufficient to merit due process protection.”

Doehr Test

The first part of the Doehr test considers the private interest that is affected by a lis pendens. The Court in Diaz agreed with the property owners that the impact on marketability imposed by the lis pendens was a significant factor supporting the property owners' position.

The second part of the test looks at the risk of an erroneous deprivation of property. The Court opined that there was not a substantial risk of error, because the nature of cases where lis pendens are filed involve claims that are “pre-existing, readily quantifiable, and largely susceptible to proof by documentary evidence.” Moreover, the court found the risk of error is reduced by the procedural safeguards in the law. Although there is no notice of the lis pendens, merely a filing with the county clerk, the property owner will at least learn of the underlying lawsuit, since the law requires the summons and complaint to be served no later than 30 days after the filing of the lis pendens. And while the Court conceded that a hearing that does not consider the underlying merits of the lawsuit, “does not afford the most meaningful process,” it still was sufficient given all the other considerations. Nor did the Court find any problem in the statute's procedure for substituting a bond, since a bond is not constitutionally required in any event.

The third part of the Doehr test considers the interest of the claimant to the property and the state. On this part of the test, the Court found these interests weighed heavily in favor of the constitutionality of the law. The Court noted that the claimant to the property must have or claim to have a pre-existing interest in the property, since this is a condition to entitlement to the lis pendens. Without the protection of lis pendens, such claimants could be frustrated by transfer or incumbrance of the property to an innocent third party who lacked notice. The Court also found that the lis pendens law served the state's interest in avoiding additional litigation and maintaining public confidence in the judicial process. Accordingly, the Court concluded that the interest of the property owners “as affected by the lis pendens carries some weight, but is outweighed by the remaining considerations.”

The Court also rejected the argument by one of the property owners that the law denied her equal protection, because it does not permit her as a spouse-creditor to place a lis pendens on her husband's property to secure equitable distribution of the property. The Court ruled the law is facially neutral, because a claim for equitable distribution, under New York law, is not in any case a claim that “would affect the title to, or the possession, use or enjoyment, of real property” as required by the lis pendens law.

The plaintiffs intend to petition the United States Supreme Court for certiorari.

Conclusion

Regardless of the outcome of the litigation, there is room for improvement in the New York lis pendens procedures that would make the procedures fairer, while protecting the interests of claimants to the property. Connecticut law, for example, requires notice to the property owner of the lis pendens, notice of the procedures to challenge it, a timely hearing, and that the claimant show probability of success in the litigation, presumably not much of a burden in meritorious cases, yet a significant safeguard to protect property owners from abusive lis pendens filings.

Toby Golick is Clinical Professor of Law at the Benjamin Cardozo School of Law and represented the property owners in the Diaz case.