Proposals to Amend CPLR Article 65, Notices of Pendency

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1 1 Memorandum October 2, 2013 To: From: CPLR Committee of the NYSBA Jim Blair Subject : Proposals to Amend CPLR Article 65, Notices of Pendency Introduction This memo addresses the proposal on the agenda for October 4 to amend Article 65 of the CPLR, submitted by Tom Curtis. The other Article 65 proposal by Paul Aloe is by and large a critique of the Curtis proposal in the form of a marked up version of that proposal which I do not intend to address here. As background, in 2001 the CPLR Committee of the Commercial and Federal Litigation Section prepared an extensive report on the notice of pendency, a/k/a lis pendens, as it exists in New York and recommended significant changes. The report was written by Susan Davies and myself. It was adopted by the Executive Committee of the C & FL Section and circulated to other sections in contemplation of presentation to the NYSBA Executive Committee. The Real Property Section requested a change concerning mortgage foreclosures which was incorporated, and was otherwise generally supportive. The Executive Committee of the NYSBA adopted the report and the proposed amendments were introduced as A10747-a on March 18, That bill and identical bills introduced in subsequent sessions did not advance, primarily due to objection by a particular staff counsel and the New York State Land Title Association. The concern of the latter was that the increased possibility of cancellations of notices of pendency the bill would provide might complicate the work of title insurers in keeping their files on particular transactions current. The bill, however, remains a part of the NYSBA legislative program. I have attached to the forwarding this memo the Report of the Commercial and Federal Litigation Section Report on a Proposal for Revision of CPLR 65 (24 pages and a 6 page appendix with the text of the proposed article 65) and the NYSBA Staff Memorandum prepared as an executive summary for the meeting of the NYSBA Executive Committee on January 24, 2002 (referred to collectively herein as the C & FL Report ). I have not updated the substance of the report but I do not believe there have been any significant developments in the law concerning Article 65 since then. I have also attached the memo of Richard S. Fries, et al, dated January 3, 2002 constituting the report of the NYSBA Real Property Section on the C & FL Report. 1

2 I refer committee members to the C & FL Report for an extensive discussion of the serious issues arising from the existence of Article 65 in its present form in New York and how the proposed revisions would address them. The Executive Summary explores these issues in an abbreviated form. Here I will briefly summarize the features of current Article 65 which give the notice of pendency its harsh consequences, the extent to which the courts have mitigated these consequences, how the C & FL report adopted by the NYSBA Executive Committee mitigates the current harsh consequences for both defendants and plaintiffs and how the Curtis proposal fails to address these basic concerns. Article 65 In Its Current Form The filing of a notice of pendency effectively prevents the sale of the property against which it is filed by making the purchaser s title subject to any claim which the plaintiff may ultimately establish against the seller after closing. It thus has the effect of a preliminary injunction precluding sale of the property. A plaintiff seeking this remedy need meet only two requirements; (1) successfully plead a claim to an interest in real property and (2) serve the pleading containing this claim within 30 days of filing the notice of pendency. In sharp contrast to a preliminary injunction granted under Article 65, there is no opportunity for a court to review the sufficiency of the pleading, the plaintiff is not required to make any showing of the merits of its claim and it cannot usually be compelled to provide any undertaking against damages that defendant may incur from the filing of a notice of pendency ultimately found to have no merit. Further, once granted the plaintiff has no realistic route available to obtain a vacating of the notice of pendency other than by obtaining a judgment on the merits, either by a successful motion for summary judgment or judgment in its favor after trial. While there is a provision for filing of bonds, it can only be initiated by the defendant filing a bond as a condition of vacating the notice, a complete perversion of the purpose served by the undertaking required as a condition to obtaining a preliminary injunction. Because of these harsh results favoring the plaintiff, the courts have required strict compliance with the few requirements Article 65 imposes upon it. As the Court of Appeals said in Matter of Sakow, 97 N.Y 2d 436 (2002), "To counterbalance the ease with which a party may hinder another's right to transfer property, this court has required strict compliance with the statutory procedural requirements [of CPLR article 65]" (id. at 320). In particular, as Article 65 has been applied by the courts, if a plaintiff fails to serve the complaint within 30 days of filing the notice of pendency it may neither obtain an extension of time within which to serve within the same action or commence a new action on the same claim within timely service of the complaint may be made. While a notice of pendency may provide a

3 3 powerful club to a plaintiff with a very modest likelihood of success on the merits, a notice of claim for even a very compelling claim can be fatally compromised by a stumble in service. Similarly, while applications to extend the term of a notice of pendency beyond the initial three year period provide by CPLR 6513 are routinely granted, a failure to obtain the extensionbefore expiration of that period results in vacating of the notice with no opportunity to renew in the same or any future action. In the same vein, recognizing the ease with which a plaintiff may deploy a notice of pendency which retards the alienability of title for the duration of a lawsuit, the courts have denied efforts to impose a notice of pendency in disputes which more or less referred to real property but which did not necessarily seek to directly affect title to or possession of the land Realty v. O & Y Equity, 64 N.Y. 2d 313, 321 (1984). In that case, the Court refused to permit filing a notice of pendency in an action in which plaintiffs sought title to stock in the corporation holding title to the land rather than the land itself. The C&FL Section report proposed two fundamental changes to mitigate the harsh consequences Article 65 can deal to both plaintiff and defendant. To address the extraordinary ease with which a plaintiff can obtain a notice of pendency, it proposed that defendant be enabled to move for an order vacating the notice unless the plaintiff can establish the same likelihood of success required for the granting of a preliminary injunction. To address the hardship to plaintiff flowing from a minor failure in complying with time limits, it proposed that plaintiffs be permitted to refile a second notice of pendency that has expired due to failure to timely file or renew, but only with effect from the date of the refiling. Tom Curtis 10/25/2012 Proposal. From the view point of recognizing the harsh consequences of the current Article 65 and the steps proposed by the NYSBA to address them, the Curtis proposal has several troubling provisions. The Curtis proposal adds a new Section 6502 that would define in greater detail real property as it presently appears in CPLR At present there is no pressing uncertainty in identifying real property; and the motivation for this change appears to be to either expand or contract, mostly expand, the present scope of Article 65 to suit the preferences of the drafters. The proposal would make three major changes. 6502(a) would make Article 65 available in actions in which the dispute is not about title to the real property but about title to the stock of a corporation which has undisputed title to the real property. This change would overrule 5303 Realty v. O & Y Equity, 64 N.Y. 2d 313, 323 (1984) and substantially expand the availability of the notice of pendency. Given the unique 3

4 unfairness of the notice of pendency in its present form, it should not become available to a wider class of plaintiffs. As the court in 5303 Realty noted, plaintiffs in a dispute about stock are not with no protective devices whatsoever. The property s conveyance may be blocked by, for example, attachment of injunction, Id. at 324, the same remedies available when the dispute is about title to stock of any of the vast majority of corporations which are not dedicated to ownership of real estate. 6502(c) would make the notice of pendency available to plaintiff in any litigation in which the subject matter is the ownership of stock in a cooperative apartment corporation. The presumed rationale for this change is that if the notice of pendency is available for condominium apartments it should be available for cooperative apartments. However, the burdening of one class of apartments with vulnerability to a repugnant remedy for plaintiffs is no reason to inflict this burden on all apartment owners. Plaintiffs claiming an interest in the stock associated with a cooperative apartment have available to them the provisional remedy of injunction which will adequately safeguard any claims which for which a showing of merit can be made. These two amendments will for the first time expose owners of stock in corporate entities which have a real estate connection to the harsh remedies of Article 65. In all such situations, all parties have chosen a form of ownership which utilizes a corporate intermediary to hold title and indeed, the unavailability of a notice of pendency may be one of the attractions for the corporate form of ownership. The proponents of this amendment have offered no rationale for making it available now other than the advantage it may confer to one side in future litigation. A further difficulty in the case of proposed 6502(a) and the corporate owner of real property is the amendment does not, and perhaps can not, answer such questions as how much of a corporation s assets have to be real property, and how much of the real property assets have to be invested in the particular parcel of real property in issue to be eligible for attack by notice of pendency. Also, the proposed amendment would make notices of pendency available in mezzanine loan foreclosures, not the case now. The NYSBA Real Property Section has recently expressed concerned about this. As Paul Aloe has pointed out, the proposed amendment would define as real property various interests that are not considered real property for purposes of the recording statute, Real Property Law 291. CPLR Article 65 and RPL 291 should remain congruent (b) would limit the availability of article 65 where the real estate is a leasehold to those in which the leasehold included substantially all of the property which would be effected by the notice of pendency. A limitation in the availability of the remedy available under current Article 65 is in my view always desirable, whatever other justification there may be for such a change, but cannot serve to justify the proposal s other significant expansions of the litigations in which a notice of pendency would be available. While the addition of proposed CPLR 6502 would greatly expand the types of property potentially subject to a notice of pendency and the inherent harshness of this remedy, nothing in the Curtis amendment would in anyway diminish that harshness; indeed, some of the mitigating measures now observed by the courts would be overruled. For instance, proposed CPLR 6516(c)

5 5 would overrule the judicial requirement of strict adherence to the requirement that the complaint be served within 30 days of filing of the notice of pendency, thereby eliminating one of the few existing limits on the harshness of Article 65. There may be one qualification to this last observation. The Curtis amendment would modify CPLR 6515, concerning a defendant s motion that the notice be vacated upon the filing of an undertaking, to prohibit consideration by the court of the merits of the plaintiff s cause of action. The intended effect of this amendment is not clear. While some courts have declined to consider the merits on such applications, courts that grant such applications have referred to the absence of merit of the plaintiff s cause of action. (See C & FL Section Report, p. 9). Thus this prohibition might mean that no such motions by defendants could be granted. On the other hand, it might be intended to permit vacating of the notice upon posting of a sufficient undertaking regardless of the presence or absence of merits to the plaintiff s cause of action, thus expanding the ability of the court to grant such relief. With more clarification of the intended impact of this change, it might very modestly mitigate the harshness of Article 65. Other elements of the Curtis amendment may be improvements to the current Article 65, such as the specific articulation of attorneys fees as among the costs recovered by a defendant who obtains the vacating of a notice of pendency, proposed CPLR 6514( c), but it is difficult to consider them while the thrust of the amended is overwhelmingly to extend the current harsh consequences of Article 65 to an significantly enlarged group of plaintiffs. The Aloe proposal, which would remove the expansions of the property potentially subject to notice of pendency, would be a useful place to start such a review. Conclusion The Curtis proposal would only make more harsh those elements of the current Article 65 that caused the NYSBA to recommend substantial modifications to it. This Committee should not endorse it. 5