The Future of Lis Pendens in Texas
In a recent post, we discussed the importance of the statutory notice of lis pendens in real estate litigation. Basically, a notice of lis pendens puts the world on notice of someone’s claim to title of a property. It works to deter the current record title holder from selling the property while litigation is pending.
In my opinion, the filing of a lis pendens is step two in any litigation involving title to real property. If a litigant’s purpose in a lawsuit is to recover title to property, the lis pendens is key to clouding title and potentially halting any sale of the property by the current record title holder.
Recent Supreme Court Cases: NewBiss and Sandcastle
On June 16, 2017, the Texas Supreme Court issued an opinion that changed the impact of an expungement of a lis pendens, Ron Sommers, As Chapter 7 Trustee for Alabama and Dunlavy, Ltd., Flat Stone II, Ltd., and Flat Stone, Ltd., and as Successor in Interest to Jay Cohen, Individually and as Trustee of the JHC Trusts I and II v. Sandcastle Homes, Inc.; ______ S.W.3d _______ (Tex. 2017); and Ron Sommers, As Chapter 7 Trustee for Alabama and Dunlavy,, Ltd., Flat Stone II, Ltd., and Flat Stone, Ltd., and as Successor in Interest to Jay Cohen, Individually and as Trustee of the JHC Trusts I and II v. NewBiss Property, LP; ______ S.W.3d _______ (Tex. 2017).
Jay Cohen was trustee of the JCH Trusts I and II. In this capacity, he transferred several properties belonging to the trust into different partnerships. Cohen later sued his business partner, Matthew Dilick, alleging that Dilick fraudulently transferred certain properties outside his authority during subsequent transactions.
Cohen filed notices of lis pendens on the various pieces of property involved in the suit. The lis pendens on these properties were later expunged, and the properties were sold to Sandcastle and NewBiss. In response to being added to the lawsuit, both Sandcastle and NewBiss claimed bona fide purchaser status and filed summary judgment motions.
Issue Before the Court
This appeal presented one basic question to the Texas Supreme Court: “When a notice of lis pendens is expunged, is all notice – no matter the sort and no matter its source – extinguished with the expunction order?”
Parties’ Arguments and Court’s Interpretation
Cohen’s primary contention was that Sandcastle and NewBiss could not conclusively establish their bona fide purchaser affirmative defense because they had separate notice of the claim on the property. In other words, they had separate disqualifying knowledge that was obtained by means independent of the lis pendens filing. (Remember: a bona fide purchaser is one who purchases a property for value without any knowledge of a claim to the property. Claiming a bona fide purchaser defense usually means the party can maintain ownership free and clear.) Cohen urged that Sandcastle and NewBiss’ knowledge could not be undermined by the expunction statute because independent actual notice does not constitute information contained in “the notice of lis pendens” or “any information derived from the notice.” § 12.0071(f).
The Houston Court of Appeals rejected Cohen’s view as a too narrow reading of the statute. Instead, the Houston Court of Appeals accepted a bright-line rule that the expunction of the lis pendens notice includes any notice of the claims involved in the underlying suit.
However, the Texas Supreme Court determined that this was not in line with the plain wording of the lis pendens statute, which limits its protection to “the notice of lis pendens” and “any information derived from the notice.”
Sandcastle and NewBiss argued that the expungement destroyed all information that could have been derived from the notice, no matter the actual source. The Supreme Court determined that this view is an impermissible enlargement of the provision’s meaning and operation, which directs expunction of a recorded lis pendens notice and eradicates the effects of filing one. If the Legislature intended for the statute to go further, then it could have enlarged the language to include the phrase “information that could have been derived from the notice.”
Based on the plain wording of the statute, the Supreme Court held that expunction of the lis pendens only eradicates the knowledge obtained based upon the lis pendens – and does not include notice arising independently of the recorded instrument expunged.
As such, if a buyer obtains knowledge of the claims from other circumstances, then the buyer cannot claim bona fide purchaser status. In this instance, the Supreme Court gave the example of improvements being made on the property at issue. Based on the improvements, the buyer would have constructive notice of the claims.
As for NewBiss and Sandcastle, the cases were remanded to the trial court for determination of whether they had independent knowledge of the issues covered by the lis pendens notice. In their motions for summary judgment, each relied only on the expungement statute to support its bona fide purchaser status. The trial court had not resolved the issue as to whether each had independent knowledge of Cohen’s claims.
New Legislation “Fixing” the NewBiss/Sandcastle Problem
Effective September 1, 2017, section 12.0071(f) of the Texas Property Code is amended to eliminate the potential for bona fide purchaser status to be defeated by knowledge obtained independently from the lis pendens notice. Specifically, the new statute explicitly provides that expungement of the lis pendens destroys all information “derived or that could be derived from the notice.”
This change confirms that the effect of an expungement is as NewBiss and Sandcastle argued: to include all notice that could have been derived from the lis pendens and the underlying lawsuit.
Why Does This Matter?
This minute statutory amendment may seem esoteric, but the implications are quite large for the real estate and title industry. There is a problem if a buyer or title insurance company cannot conclusively rely on the expungement of the lis pendens to establish bona fide purchaser status.
In a world where expungement of the lis pendens is insufficient, there would be no certainty with property ownership. As a result, even an improper lis pendens could stop any further transactions concerning a property; no buyer or title company would want to risk losing title to the property or fighting a legal battle to maintain title.
In the real world, though, title to real property requires real certainty.