When I started this article, a colleague asked me what I was writing about. When I responded with, “lis pendens (!),” I saw his eyes glaze over. Lis pendens: apparently, Latin for “boring.”
Although lis pendens may sound boring, they are extraordinarily irritating to clients. A lis pendens in place throughout litigation can hamstring a client’s cash flow: they prevent sales and prevent clients from acquiring financing.
Lis pendens are recorded documents that secure an interest in real property that is subject to pending litigation. Courts have historically allowed plaintiffs to record lis pendens based on unsupported allegations in the complaint, as long as the complaint alleges facts supporting a legal theory that traces an eventual money judgment to specific real estate.
But change is in the air. Statutory developments over the last 20 years have given defendants more ammunition to remove lis pendens. The following article suggests how Oregon attorneys can attack lis pendens recorded to secure prayed-for money judgments.
What are lis pendens and why do they matter?
Lis pendens means “pending lawsuit.” Under common law, filing a complaint “concerning real property” was constructive notice to buyers that they would take subject to the suit. Oregon now requires plaintiffs to record a separate Notice of Lis Pendens to secure their interest in the property. ORS 93.740. The statute allows lis pendens “in all suits in which the title to or any interest in or lien upon real property is involved, affected or brought in question.” Id. The subject of the lawsuit “must be an actual interest in real property, not merely a speculative future one.” Doughty v. Birkholtz, 156 Or App 89, 95 (1998).
Although lawsuits involving real property stereotypically involve claims for specific performance of land sale contracts, plaintiffs also record lis pendens in connection with claims for money, when the money is ostensibly tied up in real estate. These claims ask the court to avoid fraudulent transfers or impose a constructive trust on real property to effect restitution.
When the complaint alone provided constructive notice to third parties, lis pendens disputes were between a successful plaintiff and a third-party purchaser. See, e.g., Hoyt v. Am. Traders, Inc., 301 Or 599 (1986); Land Assocs., Inc. v. Becker, 294 Or 308 (1982). Now that plaintiffs must record a separate notice, the paradigm has shifted. Title searches reveal lis pendens and potential buyers walk away. A lis pendens “effectively renders title unmarketable” until the litigation is resolved. Pierce v. Francis, 194 P3d 505 (Colo App 2008). Plaintiffs therefore may use lis pendens to pressure defendants to settle simply to remove the cloud of title on their property. To avoid this pressure, defendants must find ways to remove lis pendens and allow cases to proceed on the merits.
Lis pendens vs. prejudgment attachment.
A lis pendens achieves the same result as prejudgment attachment: freezing assets pending litigation. But, procedurally, lis pendens and prejudgment attachment are vastly different. Whereas prejudgment attachment constitutes a 5th Amendment “taking” and requires compliance with ORCP 81-85, courts assess the validity of a lis pendens only by asking whether the allegations in the complaint—taken as true—concern an interest in real property. Darr v. Muratore, 143 BR 973, 977 (D RI 1992).
Given that the two procedures achieve the same result, why would a plaintiff invoke the strict procedural barriers of prejudgment attachment, when she can achieve the same result by recording a lis pendens? Some courts have acknowledged this end-run around due process and have prohibited plaintiffs from using lis pendens as a substitute for attachment. See, e.g., In re Bradshaw, 315 BR 875 (Bankr D Nev 2004). Attorneys should advocate for Oregon courts to adopt a similar approach.
Lis pendens in cases seeking primarily money judgments.
Although Oregon courts have not yet addressed whether due process applies to lis pendens, Oregon cases are progressively holding that lis pendens are inappropriate in cases seeking primarily monetary damages.
In Doughty v. Birkholtz, the court invalidated a lis pendens based on a claim filed with the Construction Contractors Board. 156 Or App 89 (1998). The board could only issue money damages and not transfer interests in real property. Even though an unpaid damages award could eventually become a lien on the defendant’s real property, that possibility was “speculative” instead of an “an actual interest in real property.”
In Vukanovich v. Kine, 251 Or App 807 (2012), the court expunged a lis pendens recorded with an action to enforce an agreement to jointly invest in an LLC formed to acquire certain real estate. The lawsuit did not involve an interest in real property because the plaintiff did not allege an existing interest in the property. Had the plaintiff prevailed, he would acquire an interest in an LLC that owned the property, but not direct ownership of the property itself. Further, because the plaintiff sought specific performance only as an alternative to money damages, the nexus between the claim and title to the property was too attenuated.
Vukanovich and Doughty are coming closer to California’s way of thinking, where the courts have determined that a lis pendens “is a provisional remedy which should be applied narrowly.” BGJ Assocs., LLC v. Superior Court, 75 Cal App 4th 952, 966-97 (Cal Ct App 1999). “The danger is too great that a lis pendens, which effectively renders the property unmarketable” will have an improper coercive effect on litigation. Id. at 972. California courts must look to “the substance of the dispute” to determine whether it seeks money damages, “with constructive trust allegations ‘appended,’” or if it is a bona fide claim for real property. Id. at 971-72.
Attacking lis pendens under ORS 205.460.
In 1997, the Oregon legislature enacted a statute that allows defendants to petition the court at ex parte for a show cause hearing why the lis pendens should not be stricken. ORS 205.460; see Vukanovich, 251 Or App 807. Prevailing party attorney fees are recoverable.
In practice, Oregon trial courts have not yet figured out how to handle ORS 205.460—particularly in connection with lis pendens recorded to secure money judgments. Despite earlier cases upholding lis pendens in connection with fraudulent transfer claims and constructive trust remedies, see Pedro v. Kipp, 85 Or App 44 (1987) and Fremont Indemnity Company v. Corbett, 66 Or App 668 (1984), some trial courts are striking lis pendens under ORS 205.460 because the real property interest is too speculative, à la Vukanovich and Doughty.
By highlighting the legislative history and the similarity to prejudgment attachment, defense attorneys have a good faith basis to attack lis pendens recorded primarily to secure money judgments. Attorneys should request the court—through an ORS 205.460 show cause hearing—to impose more stringent procedural burdens on the plaintiff.
When a client’s livelihood is at stake, it’s worth it to pull out all the stops. Defendants should not be forced to capitulate on thin claims merely to free up encumbered property. Perhaps with a slight nudge from the defense bar, Oregon courts will continue to adopt modern approaches to lis pendens, and acknowledge the practical effect of freezing assets based on allegations alone.
Originally published in the Summer 2016 edition of the Oregon Association of Defense Counsel's publication, The Verdict.