This article explains the use of a lis pendens and the statutory requirements to record a lis pendens.

Clouding the title

Three weeks into a sales escrow, the seller discovers the sales price he agreed to is 10% below the real estate’s value.

Before closing, the seller receives a backup offer at the property’s value. The seller accepts it, by way of a counteroffer, contingent on cancellation of the existing sales escrow.

To frustrate the closing of the existing escrow, the seller refuses to cooperate or perform any of the conditions required to close. However, the buyer proceeds to perform all the obligations necessary for him to close as scheduled.

The seller is without contingency provisions or other justifiable excuses to cancel the purchase agreement and escrow.

Nevertheless, the seller sends a Notice of Cancellation to escrow. Further, mutual cancellation instructions are prepared by escrow and forwarded to the buyer.

The buyer refuses to sign the cancellation instructions. The buyer wants to force the seller to convey the real estate under the terms of the purchase agreement.

The buyer is especially concerned the seller will convey the real estate to the second buyer, or someone else, who may acquire a superior claim to his ownership right to the property under his purchase agreement.

Is there a legal mechanism to notify all later buyers and lenders of the buyer’s claim to ownership of the real estate?

Yes! When recorded, a lis pendens or Notice of Pending Action, is a notice of warning to all prospective buyers or encumbrancers that title or possession of the real estate is in dispute. [Calif. Code of Civil Procedure §405.2]

Lis pendens is the latin phrase for pending litigation. More commonly, a lis pendens is referred to as a Notice of Pending Action. The pending action noticed by the lis pendens will be the buyer’s action for the specific performance of the purchase agreement.

Persons who buy or lend on the real estate after a lis pendens has been recorded take the interest they acquire in the property subject to the claimant’s right, if any, to the real estate.

Preservation of title

The purpose of a recorded lis pendens is to preserve a person’s rights to the real estate until the dispute with the owner is resolved.

Without the recording of a lis pendens, the person claiming an interest in title or possession to the real estate runs the risk the owner will encumber or convey the property to an individual who is unaware of the dispute.

When another buyer or lender obtains an interest in real estate before they become aware of a dispute over title, the claimant in the dispute loses his right to recover the real estate.

Proper use of lis pendens

A lis pendens is properly recorded in the county recorder’s office of the county where the property is located if the lawsuit it references involves a claim to a right in title or possession of the real estate described in the lis pendens. [CCP §405.20]

Recording of a lis pendens is (constructive) notice to all persons about the dispute over title or possession. Any later buyers, lenders or tenants will be bound by the final resolution of the dispute.

Title companies usually refuse to insure title when a lis pendens is recorded against the title for a specific performance action. Without title insurance, buyers will not buy and lenders will not lend on the property.

As a result, property is often rendered unmarketable while the lis pendens is in effect – especially on specific performance actions by buyers.

The tremendous value of the lis pendens to litigating buyers is its ability to preserve the buyer’s right to purchase and to persuade a hedging seller to perform.

Accordingly, the potential for abuse of the lis pendens procedure is readily apparent.

However, a recorded lis pendens identifying a court action which actually concerns title or right of possession to real estate is an absolutely privileged communication. [Calif. Civil Code §47(b)(4)]

A publication made under an absolute privilege bars a slander of title action.

Title or possession to real estate

Primarily, a lawsuit must affect title or the right to possession of real estate to support the recording of a lis pendens. [CCP §405.20]

Lawsuits affecting title or possession of real estate include:

• specific performance or rescission of real estate agreements [Wilkins v. Oken (1958) 157 CA2d 603];
• judicial foreclosure of a trust deed [Bolton v. Logan (1938) 30 CA2d 30];
• the foreclosure of a mechanic’s lien [CC §3146];
• cancellation of a grant deed or other conveyance;
• a fraudulent conveyance set aside [Hunting World, Incorporated v. Superior Court (1994) 22 CA4th 67];
• evictions and suits concerning leaseholds;
• termination or establishment of an easement [Kendall-Brief Company v. Superior Court of Orange County (1976) 60 CA3d 462];
• a declaration that a building is uninhabitable;
• ejectment from real estate;
• partition or sale of the real estate [CCP §872.250];
• slander of title [Albertson v. Raboff (1956) 46 C2d 375];
• quiet title [CCP §§760.010 et seq.];
• condemnation proceedings [CCP §1250.150]; and
• divorce proceedings involving real estate.

The recording of a lis pendens is also permitted in the following lawsuits over real estate:

• actions by adverse possessors to determine claims [CC §1007];
• actions to re-establish lost land records [CCP §751.13];
• actions to determine adverse interests in any liens or clouds on real estate arising out of public improvement assessments [CCP §801.5];
• actions by purchasers or the state to quiet title to tax-deeded property [Calif. Revenue and Taxation Code §3956];
• actions by innocent improvers of real estate against owners or lenders of record [CC §1013.5(b)];
• actions on an improvement bond [Calif. Streets and Highways Code §6619]; and
• actions terminating or establishing an easement, except for a public utility easement. [CCP §405.4(b)]

Actions in which a lis pendens is improper include:

• suits affecting title to personal property located on real estate;
• foreclosure on real estate by trustee’s sale;
• actions to impress a trust on personal property;
• actions to recover attorney fees;
• actions for breach of a real estate contract where only money damages are sought;
• actions for recovery of a brokerage fee on the sale or lease of the property; and
• actions against a partner, member or stockholder co-owning real estate as a partnership, limited liability company (LLC) or a corporation.

For example, a creditor of an individual who is a partner with others in the ownership of real estate sues the partner and places a lis pendens on the partnership’s real estate. The creditor has no claim against the partnership itself. However, the funds lent and sought to be recovered from the partner were traced to the partnership.

Is the lis pendens properly recorded on the partnership property?

No! The partner’s interest is in the partnership, not the real estate which is owned by the partnership. Further, the partnership interest held by the partner is personal property. [North Coast Business Park v. Superior Court (1984) 158 CA3d 858]

Likewise, a creditor’s suit against a shareholder does not entitle the creditor to place a lis pendens on the corporation’s real estate, even if the funds obtained by the shareholder’s wrongful conduct can be traced to the corporation. The shareholder’s interest is in the corporation and not the real estate. Again, the interest of the shareholder in the corporation is personal property. [Wardley Development Inc. v. Superior Court (1989) 213 CA3d 391]

The same holds true for suits against the manager and members in an LLC.

Now consider a county which repeals an ordinance designed to control the resale and possession of real estate for low-income buyers. An individual files an action to undo the repeal and reimpose the county controls.

The individual also records a lis pendens describing all the properties in the county which could be affected by the possible outcome of the action even though none of the owners are named in the lawsuit.

Is a lis pendens proper to notice a suit seeking to re-enact a county ordinance?

No! The fact the action might affect title to the properties described in the lis pendens sometime in the future is insufficient basis for a lis pendens when none of the owners of the properties are parties to the suit. [Moseley v. Superior Court County of Orange (1986) 177 CA3d 672]

Constructive trust

However, a lis pendens may be recorded in an action to impose a constructive trust on real estate if fraudulently acquired funds can be directly traced to the real estate.

A constructive trust is a court-created trust imposed on the ownership of property acquired through:

• fraud;
• accident;
• mistake;
• undue influence;
• the violation of a trust; or
• some other wrongful act. [CC §2224]

A constructive trust is imposed on title as a remedy used to establish that a wrongdoer, who holds title to property he is not justly entitled to, is an involuntary trustee holding title to the property in trust for the person entitled to the property. [CC §2224]

However, a constructive trust is not created when real estate is improved rather than purchased by use of fraudulently acquired money. The transfer of property by imposing a constructive trust on it in favor of an injured party is not appropriate when the fraudulently acquired funds are used to make improvements which are less than the overall value of the property. Thus, the recording of a lis pendens on property improved by the use of fraudulently acquired funds is improper since the action seeking to impose a constructive trust is essentially one for the recovery of money. [Burger v. Superior Court of Santa Clara County (1984) 151 CA3d 1013]

Now consider an unsecured creditor who seeks to impose a constructive trust on real estate the owner acquires with funds claimed by the creditor.

The creditor files a lawsuit and records a lis pendens against the property to recover the money owed from the real estate purchased with the creditor’s money.

The owner claims the lis pendens is invalid since the underlying dispute does not concern the real estate, but only the funds used to purchase the real estate.

The creditor claims the lis pendens is valid since the funds are traceable to the real estate and he seeks to impose a constructive trust on the real estate.

However, the lis pendens is invalid. None of the claims of the creditor against the owner of the real estate concern claims to possession or an interest in title to the real estate. [Lewis v. Superior Court (1994) 30 CA4th 1850]

Editor’s note — The Lewis court noted the unsecured creditor should have sought and obtained a court ordered attachment of the property to reflect the constructive trust claim.

The lis pendens process

To record a lis pendens, a lawsuit must first be filed involving the title or possession in the real estate. [CCP §405.20]

The lis pendens must:

• identify the parties to the lawsuit; and
• give an adequate description of the real estate. [CCP §405.20]

While the object of the lawsuit and its affect on title or possession of real estate is no longer required to be stated in a lis pendens, the objective of the lawsuit must be stated if the lis pendens is to be considered an absolutely privileged publication. [CC §47(b)(4)]

Editor’s note — An absolute privilege includes any publication during a judicial proceeding which is authorized by law. A publication made under absolute privilege bars a slander of title action.

A technical legal description is not required as long as the property can be properly identified. The property’s common name or address will be sufficient to give constructive notice as long as the description (the “Jones Ranch”), upon inquiry, would lead to the identity of the property. [Stearns v. Los Angeles City School District (1966) 244 CA2d 696]

However, the property’s legal description should be used.

Notice to buyer

The lis pendens must first be indexed by the county recorder to give constructive notice of the claim in the lawsuit.

For example, a lis pendens is recorded by a creditor identifying real estate the owner of which has agreed to sell, but has yet to close escrow.

However, the lis pendens is not indexed by the county recorder until after the sales escrow closes. Later, the buyer discovers the lis pendens and seeks to expunge it.

The creditor claims the lis pendens cannot be expunged since the recording alone places the buyer on constructive notice of the claim against the real estate.

The buyer claims he did not have constructive notice since the lis pendens was not indexed until after escrow closed.

Can the lis pendens be expunged and title cleared of its cloud?

Yes! The buyer took title to the property free of the lis pendens since only a properly indexed lis pendens gives constructive notice. [Lewis, supra]

The reason for the indexing requirements is basic. Until a recorded document is indexed, it cannot be found by a title search. Thus, it would be unfair to impose constructive notice on a buyer who cannot be expected to locate the document.

Correct claims

If the owner or any other person with an interest in the property contests a lis pendens which clouds title to his property, the claimant filing the lis pendens has to prove the action:

• affects title or the right of possession to the property described in the notice; and
• was filed for a proper purpose and in good faith. [Malcolm v. Superior Court of Santa Clara County (1981) 29 C3d 518]

If these two requirements are not established, the lis pendens will be ordered expunged and will no longer affect title.

Attorney fees

Attorney fees can be recovered by the prevailing party for the motion to remove the lis pendens, unless the opposing party acted with justification. [CCP §405.38]

When a lis pendens is successfully expunged, the owner is the prevailing party for attorney fees purposes.

Bonds

The owner or other persons seeking the expungement of a lis pendens will not have to post a bond with the court as a requirement for the removal of the lis pendens if a valid claim to the real estate does not exist. [CCP §405.32]

Conversely, the party who recorded the lis pendens may be required to post a bond for the amount of money he claims is due as a condition of maintaining the lis pendens. [CCP §405.34]

Expungement of lis pendens

The lis pendens is sometimes improperly used to merely tie up real estate when the claim is against the individual, not against an interest in his real estate.

Procedurally, a wrongfully recorded lis pendens can be removed quite quickly. [CCP §§405.30 et seq.]

Anytime after a lis pendens has been recorded, anyone with an interest in the property affected may file a motion asking the court to remove, or expunge the lis pendens.

An order expunging a lis pendens removes from title any restrictions sought to be imposed by the lawsuit on the transfer of the property described in the lis pendens. [CCP §405.61]

Once a lis pendens has been successfully expunged, the claimant may not record another lis pendens against the property without the permission of the court. [CCP §405.36]

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