5303 Realty Corp. v. O & Y Equity Corp.

• Citation: 476 N.E.2d 276,486 N.Y.S.2d 877,64 N.Y.2d 313
• Court: New York Court of Appeals
• Decision Date: 27 December 1984
• Parties: , 476 N.E.2d 276, 48 A.L.R.4th 715 5303 REALTY CORP., Respondent, v. O & Y EQUITY CORP. et al., Appellants.

Page 877

486 N.Y.S.2d 877

64 N.Y.2d 313, 476 N.E.2d 276, 48

A.L.R.4th 715

5303 REALTY CORP., Respondent, v. O & Y EQUITY CORP. et al., Appellants.

Court of Appeals of New York.

Dec. 27, 1984.

Julius Berman, Stanley H. Fuld, Paul J. Curran, Aaron Rubinstein and Steven E. Shapiro, New York City, for appellants.

George Weisz and Deborah M. Buell, New York City, for respondent.

OPINION OF THE COURT

COOKE, Chief Judge.

A notice of pendency, commonly known as a "lis pendens," can be a potent shield to protect litigants claiming an interest in real property. The powerful impact that this device has on the alienability of property, when conjoined with the facility with which it may be obtained, calls for its narrow application to only those lawsuits directly affecting title to, or the possession, use or enjoyment of, real property. Consequently, a suit to specifically perform a contract for the sale of stock representing a beneficial ownership of real estate will not support the filing of a notice of pendency.

I

This action arises out of plaintiff's unsuccessful attempt to purchase an office building and its land in Manhattan. The fee owner of this property was a limited partnership, defendant 41 Fifth Ave. Associates ("Associates"). Defendants Fruchthandler Brothers Enterprises and Edward J. Minskoff were the limited partners in Associates, owning a 3% interest between them. The remaining 97% was owned by the general partner, defendant 41 Fifth Ave. Realty Corp. ("Realty Corporation"), which, in turn, was wholly owned by defendant O & Y Equity Corp. ¹

After extended negotiations, plaintiff and O & Y Equity reached an agreement to convey the property. Rather than an outright transfer of the title by deed, the transaction was constructed in terms of a sale of stock. This was allegedly done at defendants' request in order to avoid the New York City Real Property Transfer Tax. The contract provided that O & Y Equity would sell its shares in Realty Corporation and would cause the limited partners in Associates to convey their interests as well. The limited partners also signed this contract, agreeing to perform all acts required of them to consummate the transaction.

The contract was a lengthy document running over 40 pages, not including a number of extensive schedules. It expressly specified that Realty Corporation's sole business was owning the general partnership in Associates and that Associates' sole business was owning and operating the office building that plaintiff wished to acquire. The sale of the stock and title to the property were linked throughout the contract, which provided for title warranties and insurance, real estate tax protests, cancellation or adjustment upon taking by condemnation, and representations as to the status of the rents and leases in the building. Article 10 of the contract governed how the building would be operated pending closing. Paragraph 10.03 restricted Associates' power to execute new leases and required O & Y Equity to have an experienced person "expend a reasonable amount of time (i.e., an average of approximately 10 hours per regular work week)" to renew leases or obtain new tenants.

The closing never took place, and plaintiff's $500,000 deposit was paid to defendants out of the escrow account. Plaintiff commenced this suit, alleging that defendants had failed to carry out their obligations under paragraph 10.03, which would cause irreparable injury to plaintiff and make it impossible to close title pursuant to the contract. The complaint further alleged that defendants refused to perform their other obligations. In its prayer for relief, plaintiff requested that defendants be ordered "to specifically perform the Contract specifically to comply with paragraphs 10.03(b) and 10.03(c) thereof and within a reasonable time thereafter, which time is to be set out by the Court to deliver title to the Property to plaintiff or its as signee;" plaintiff also sought an alternative remedy of money damages in the amount of $4,500,000, as well as judgment for $500,000 against defendant Bachner, Tally & Mantell.

Plaintiff filed the complaint and immediately filed a notice of pendency against the property owned by Associates. The notice described the underlying action as one to enforce a contract to sell the fee ownership in the property and to deliver its possession. Defendants moved to cancel the notice. While the motion was pending, plaintiff filed an amended complaint that added allegations of fraudulent conduct by defendants. Supreme Court denied the motion, without considering the effect of the amended complaint, on the ground that the original complaint was sufficient to sustain the notice of pendency. The Appellate Division, First Department, affirmed, with two Justices dissenting.

II

The question presented on this appeal concerns the right to obtain a provisional remedy authorized by the Legislature. Specifically, we are asked to decide whether an action to enforce a contract to sell the ownership interest in a realty-owning entity may be accompanied by a notice of pendency pursuant to CPLR 6501. Because the terms of the statute and its history do not support plaintiff's claimed right to this provisional remedy, this court must reverse the decisions below and order that plaintiff's notice of pendency be canceled.

A

The authority and requirements for securing a valid notice of pendency against real estate are set forth in CPLR article 65. CPLR 6501 provides: "A notice of pendency may be filed in any action in a court of the state or of the United States in which the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property." Once properly indexed, the notice acts as constructive notice to all subsequent purchasers or incumbrancers: "A person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as if he were a party" (CPLR 6501). It is this special consequence, resulting as a matter of law from the filing of the statutory notice of pendency which is the essence of the remedy afforded by the Legislature.

This, of course, is not a recent innovation. CPLR 6501 can trace its lineage directly back to the Code of Procedure enacted in 1848 (see L.1848, ch. 379, § 111). A still earlier law required a notice of pendency in mortgage foreclosures (see L.1840, ch. 342, §§ 8, 9, as amd. by L.1844, ch. 346, §§ 4, 5). These statutes, however, merely evolved from the common-law doctrine of lis pendens. ²

The doctrine of lis pendens is long lived. It was first formally recognized in New York by Chancellor Kent in 1815 (Murray v. Ballou, 1 Johns Ch. 566; see 2 Reeves, Real Property, § 750, p. 1045). It can be traced at least to rule 12 of Lord Chancellor Bacon's Ordinances for the Government of the Court of Chancery, adopted in 1618 (see Murray v. Blatchford, 1 Wend. 583, 594; Bennett, Lis Pendens, pp. 57, 437). The doctrine was applied in actions concerning real property before Lord Bacon prescribed its use in chancery (see Bennett, op. cit., at pp. 59, 96), and one commentator ascribed the rule's remote derivation to Roman Law (see id., § 9, pp. 62-63).

The rule itself provided substantially the same protection as the modern statute. The doctrine of lis pendens --the pendency of a suit--"was, of itself, notice to the purchaser * * * It is no more than an adoption of the rule in a real action at common law, where, if the defendant aliens after the pendency of the writ, the judgment in the real action will overreach such alienation" (Murray v. Ballou, supra, at p 577; see Leitch v. Wells, 48 Barb. 637, 649, revd. 48 N.Y. 585; Murray v. Blatchford, 1 Wend. 583, 618, supra; Aron, N.Y. Real Property Law, p. 204; 2 Reeves, op. cit., at pp. 1044-1045; Note, Application of Lis Pendens to Personalty, 47 Harv.L.Rev. 1023, 1024-1025). For the purposes of lis pendens, a suit was not begun until the summons was served and the complaint filed (see Leitch v. Wells, 48 N.Y. 585, 609-610, revg. 48 Barb. 637, supra; Murray v. Blatchford, supra, at p. 618; Murray v. Ballou, supra, at p. 576).

The purpose of the doctrine was to assure that a court retained its ability to effect justice by preserving its power over the property, regardless of whether a purchaser had any notice of the pending suit. Courts and commentators acknowledged the doctrine's potentially harsh impact on innocent purchasers, but they willingly accepted this as a necessary concomitant to preserving the judicial power (see Leitch v. Wells, supra, at pp. 608-609; Murray v. Ballou, supra, at pp. 576-577; Bennett, op. cit., §§ 12, 14; 5 Tiffany, Real Property [3d ed.], § 1294, p. 82). Some justification for the doctrine's rugged application was found by reference to the rule of caveat emptor (see Murray v. Ballou, supra, at p. 577; Bennett, op. cit., § 21, p. 82). The statutes diminished this effect by requiring that a notice of pendency be filed in a central registry. ³

B

Determining the substantive scope of the notice of pendency, as embodied in CPLR 6501, cannot be divorced from consideration of the relative procedural ease with which it can be imposed throughout the duration of a lawsuit. Basically, a plaintiff can cloud a defendant's title merely by serving a summons and filing a proper complaint and notice of pendency stating the names of the parties, the object of the action, and a description of the property (CPLR 6511, subds. [a], [b]; see Israelson v. Bradley, 308 N.Y. 511, 127 N.E.2d 313). Indeed, the notice of pendency may even precede the service of summons (CPLR 6511, subd. [a]; 6512). The notice is valid for three years and it may be extended by court order (CPLR 6513).

Critically, the statutory scheme permits a party to effectively retard the alienability of real property without any prior judicial review. To the extent that a motion to cancel the notice of pendency...