yet here’s more from the Texas Supreme Court regarding commercial property.
This one shocked me and I suspect you’ll be hearing / seeing / reading more
Cohen, trustee of various trusts, transferred several properties owned by the
trusts into different partnerships. One involved the “West Newcastle” property,
which Cohen transferred to Flat Stone II, Ltd. The controlling shareholder of
Flat Stone’s general partner, Matthew Dilick, gave Regions Bank a mortgage to
secure a personal loan.
the loan wasn’t repaid because Dilick defaulted, Dilick transferred a piece
from the West Newcastle property to a new entity. Cohen sued Dilick, alleging a
fraudulent transfer and that Dilick lacked authority to mortgage the parcel.
Cohen also filed notices of “litigation pending” (lis pendens) on the various
pieces of property involved in the lawsuit.
of the Notices of Lis Pendens stated that the purpose of the underlying suit
was to invalidate the transfer of property and Regions Bank lien. The trial
court granted the Dilick’s motion to expunge
the Notices of Lis Pendens.
Cohen was appealing the Expunction Order, Dilick sold one of the parcels to
Sandcastle for $750,000.
the Texas court of appeals overturned the trial court’s Expunction Order, so
Cohen added Sandcastle as a defendant to cancel its recent purchase. When
Dilick sold another piece to NewBiss for $1.8 million, Cohen added NewBiss as a
defendant to the same litigation.
now to the important part:
Both Sandcastle and NewBiss claimed that they lawfully relied on the trial
courts Expungement Orders, which had
the effect of voiding any notice derived from the Lis Pendens.
trial court agreed that the Expungement
Orders superceded the Notice of Lis Pendens, and that such Notices were void.
That was the first win for Sandcastle and NewBiss. Cohen appealed.
Texas Court of Appeals agreed with the trial court. That was the second win for
NewBiss and Sandcastle. An appeal to the Texas Supreme Court followed.
our State’s highest Court, Cohen argued that expunction of the Notices of Lis
Pendens does *not* relieve a purchaser from the duty to review the underlying
lawsuit to determine if it could impact future ownership. NewBiss and
Sandcastle defended by stating the obvious: that is what the word “expunction” means, to remove from a
record, erase or destroy.
Supremes decided that, no, the word “expunction,”
at least in the context of Notices of Lis Pendens, does not mean what we think
it means. Rather, the word means that although the chain of title may be free
from the recorded Notice, the E word
does not have the affect of ignoring the underlying lawsuit altogether.
Texas Supreme Court reversed the Judgment of the court of appeals and trial
court. NewBiss and Sandcastle lost this last round and are now charged with
knowledge of the contents of a lawsuit they believed was no longer relevant due
to the Expunction Orders. See Sommers v.
Sandcastle Homes and NewBiss Property.; Case No. 15-0847; Texas Supreme
Court; June 16, 2017: http://cases.justia.com/texas/supreme-court/2017-15-0848.pdf?ts=1497621851.
implication of this case is far-reaching. This means that if a Notice of Lis
Pendens has ever been filed (even though later released / discharged /
expunged), purchasers, tenants and lenders are still charged with understanding
what was contained in the Notice as well as the underlying lawsuit. This
appears to be the case even though after release / discharge / expungement, the
Notice would not typically appear in a commitment for title insurance.
a purchaser, tenant or lender fails to review the Notice (again, even though
it’s been released), the purchaser / tenant / lender may find itself defending
a claim regarding fraudulent transfer or other legal issue. And, the title
insurer may refuse to defend or indemnify claiming that the Notice (even though
released) was a matter of public record, accessible to anyone who looked for it
Texas legislators will need to fix this when they next meet. In 2019. We’ll
need new laws to the effect that the word “expunge
means exactly what we think. Otherwise and until that happens, smart buyers,
lenders and tenants will need to instruct title agents to specifically search
for all Notices of Lis Pendens affecting the target property, even though they
may appear to have been subsequently released. Because a recorded Release – and
I’m struggling writing this – but it appears that a recorded Release of Lis
Pendens is ineffective and provides no safe harbor to buyers, lenders and
tenants and everyone else who trusts that the word “release
” or “expunge
means exactly that.
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization
Licensed in the States of Texas and New
with the permission of North Texas Commercial Association of REALTORS®, Inc.