RE: [DIRT] DD 8/20/09 Where unrecorded contract loses to BFP, filing a lis pendens regarding lawsuit to enforce that contract will not suffice to establish priority.

Daily Development for Thursday, August 20, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
dirt@umkc.edu

Another great contribution from Ira Meislik, whom we've missed:

RECORDING STATUTES; NOTICES OF PENDENCY: In New York, a Notice of
Pendency does not create a property interest and a contract-buyer who
files such a notice, but does not record its contract. Consequently the
filer does not have a superior right under the recording statutes over a
good faith purchaser for value that records its deed for the same
property from the same seller as was named in the Notice of Pendency but
who records his deed after the Notice. .

2386 Creston Avenue Realty, LLC v. M-P-M Management Corp., 867 N.Y.S.2d
416 (App. Div. 2008) (November 18, 2008):

A closing pursuant to a real estate sales contract was scheduled to take
place on November 1, 2004. By reason of outstanding building violations,
it was postponed to give the seller time to clear those violations. For
several months, letters flew back and forth between the parties'
attorneys and on February 14, 2005 the seller cancelled the contract.
Unbeknownst to the buyer, the seller had found another purchaser. Sale
of the property to that other purchaser took place on February 14 as
well. The purchaser was not aware of the prior unrecorded contract with
the original contract-buyer. On February 22, the title company delivered
a deed to the recording office and the deed was recorded on March 1.

On the same day that the deed was delivered to the recording office, the
original contract-buyer filed a "notice of pendency" against the
property and filed suit against the seller for specific performance and
against the new owner under the theory that the new owner had
intentionally interfered with the prior contract and was complicit in a
conspiracy to defraud. There was no evidence that the new owner knew of
the first contract. The suit against it was dismissed.

On appeal, the buyer argued that, as a contract-buyer seeking specific
performance, "its filing of a notice of pendency was the proper vehicle
to protect its rights pending the outcome of the litigation, even if the
filing did not, in an[d] of itself, create an interest in the property."
The Appellate Court rejected that argument.

New York law holds that a notice of pendency may be filed in connection
with a lawsuit where the judgment "would affect the title to, or the
possession, use or enjoyment of, real property ... ." It would be
constructive notice, from the date of filing, for purchases or
encumbrances. Where a "conveyance or encumbrance is recorded after the
filing of a notice," a purchaser or encumbrancer is bound by all of the
proceedings to the same extent as the property owner itself. Also under
New York law, unrecorded contracts are "void as against any person who
subsequently purchases or ... contracts to purchase ... the same real
property." Therefore, "[a] good faith purchaser whose deed is recorded
... thus takes precedence over a purchaser with an unrecorded contract
of sale and no deed." Under New York law, "[t]he filing of a notice of
pendency does not substitute for the recording of the contract of sale
or the conveyance." Its purpose is "to afford constructive notice from
the time of the filing
so that any person who records a conveyance or encumbrance after that
time becomes bound by all of the proceedings in the action." It does not
create rights that did not already exist.

According to the Court, "since a notice of pendency does not serve to
create rights, [the original contract-buyer] could not obtain a superior
right under the recording statutes over [the ultimate purchaser who
was], a good faith purchaser for value from the same vendor [and] who
recorded a conveyance." If the contract-buyer had a superior enforceable
interest in the property, then the ultimate purchaser would have been
bound by the outcome of the litigation. Further, according to the Court,
specific performance was not available since the seller "did not have
title to the subject property at the time that the action was
commenced." The Court summed up the situation as follows: "New York's
'race-notice' statute protects good faith purchasers who record first.
[The ultimate purchaser] took advantage of the statute and recorded, but
[the original contract-buyer] did not. While 'the status of good faith
purchaser for value cannot be maintained by a purchaser with either
notice or kno
wledge of a prior interest or equity in the property, or one with
knowledge of facts that would lead a reasonably prudent purchaser to
make inquiries concerning such,' ... [the original contract-buyer had]
failed to demonstrate that [the ultimate purchaser] had knowledge of
[its] contract with [the same seller] and thus was not a good faith
purchaser."

Reporter's Comment 1: The opinion did not state such, but one wonders if
the original contract-buyer's attorney was primarily a litigator and did
what litigators do - file the Notice of Pendency. Query - how many
attorneys would have recorded the contract or a memorandum of contract.
In New Jersey (and this case was NOT in New Jersey), there is a
procedure for filing a notice of settlement for contracts and for
prospective mortgages. It "saves" a place in the recording line for 45
days after its filing and does not need to be signed by other than the
attorney.

Reporter's Comment 2: New York is a Race-Notice state, and it would seem
that its recording scheme trumps its civil procedure scheme that would
otherwise make persons whose conveyances or encumbrances recorded after
the filing of the Notice of Pendency bound by the outcome of the related
litigation.

Editor's Comment: One assumes that a party filing a lawsuit alleging an
equitable interest in the property or an adverse possession claim not
based upon a written contract would provide notice successfully simply
by filing the notice of pendency. An interest distinction, and one not
anticipated by editor.

The Reporter (and author) of this item was Ira Meislik of the New Jersey
Bar.

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