Daily Development for
Tuesday, January 7, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LIS PENDENS; EXPUNGEMENT; EFFECT: Although expungement of a lis pendens may result in the conclusion that a subsequent purchaser, for recording act purposes, will be treated as having neither actual nor constructive notice of the matters noted in the lis pendens, this does not mean that actual knowledge of the lis pendens is irrelevant for other purposes. For instance, a person awareness of the lis pendens might be relevant in determining whether that person is a victim of fraud or misrepresentation concerning facts that knowledge of the lis pendens might have disclosed.

Bishop Creek Lodge v. Scira, 54 Cal. Rptr. 2d 745 (Cal. App. 1996)

The complex facts in this case are a good read for persons intrigued by complex real estate disputes. It involves a covenant running with the land whose primary burden, the court here comments, has been on the trial courts of Inyo County, California. Unfortunately, and somewhat ironically, in a case focussing on notice), the appeals court certified for publication only a small part of its opinion, and many of the "jucier" issues are not preserved for our inquiring eyes.

The covenant was a kind of "radius clause" restricting the use of certain property in a resort area for various commercial purposes, apparently to protect such commercial activity on the promissee's property. In a stipulated settlement of a 1956 lawsuit, a permanent injunction was entered enforcing the covenant against the then owners of the burdened property. Later, those owners sold the property. The preliminary title report at that time did not show the covenant, and the sellers did not disclose it. The final title policy, however, did show the covenant and the injunction decree. The buyers sued the sellers and the title company, and obtained a judgment for fraud against the buyers. The title company was found not liable (we are not told why).

In the early 1980's the then owners of the benefitted property had discussions to sell the property to interests that became the Bishop Creek Lodge. They told the Lodge that the property was benefitted by the anti-compete covenant. Sale discussions, however, fell into a lull. Then, as the sellers tell the tale, they discovered that the new owner of the burdened property, notwithstanding his recovery of damages from his own sellers, was violating the covenant. They sued to enforce the covenant, and the burdened party sued to have the covenant declared unenforceable, attaching a lis pendens notice to the benefitted property.

In a first skirmish in this litigation, the trial court denied a temporary restraining order enforcing the covenant. The benefitted owners decided to seek a new attorney in their lawsuit, and interviewed an attorney who had represented the title company in the earlier suit concerning the burdened property. This attorney told the owners of the benefitted property that he believed the covenant was unenforceable.

While this litigation was pending, discussions for sale of the benefitted property resumed. Owners of the benefitted property, however, did not tell the Lodge interests of the dispute over the enforceability of the covenant that they earlier had marketed as a benefit of the property. They opened escrow with the Lodge.

At about the same time, the owners entered negotiations to settle the dispute over the enforceability of the covenant. The settlement called for payment of $17,500 by the burdened landowner and a dismissal of the lawsuit with prejudice. In effect the settlement destroyed the covenant.

Meanwhile, in the sale negotiation, the Lodge received a preliminary title report showing the lis pendens, and a number of other title defects, and demanded that all of this be expunged from the title. The court says that the evidence conflicts as to whether this happened before or after commencement of settlement notions with the burdened property. In any event, the settlement was structured so that the release of the covenant was recorded only as to the burdened property, while the release of the lis pendens was recorded as to the benefitted property, with the result that the Lodge's final title policy did not show the lis pendens but also did not show the release of the covenant.

After the closing, of course, the Lodge found out about everything that had gone on, and brought an injunction action to enforce the covenant and a suit for fraud against both the burdened owners and the sellers of the benefitted property. The jury found that fraud had occurred and awarded punitive damages. The Lodge elected to take the damages remedy, which was in excess of $100,000, and consequently the court denied the injunction for enforcement of the injunction. Perhaps the omitted portions of the opinion deal with enforceability of the injunction, but we don't know what the trial court's or appeals court's views were on this issue.

The issue in the case on appeal was whether the trial court properly instructed the jury that the lis pendens was not evidence of the Lodge's knowledge of the problem with the covenant. The trial court had based its ruling on a California statute providing that an expunged lis pendens cannot be used as evidence of constructive or actual notice of its contents to otherwise bona fide purchasers of the affected property. The appeals court admitted that the problem was a difficult one for the trial judge, but concluded that the trial judge had erred. In a suit for fraud, it held, the jury should be able to take into account the plaintiff's knowledge of a lis pendens, notwithstanding the statute, because it is some evidence going to show whether the plaintiff was misled and therefore injured by the alleged fraudulent statements or acts.

So, the case is returning to bedevil the trial courts of Inyo County. California.

Comment: The editor suspects that the California statute regarding the impact of an expunged lis pendens is probably typical of statutes on this issue around the country, so he thought that the case, although narrowly focussed, makes an interesting point. Besides, isn't it an interesting story?

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