Posting for

     Monday, July 16, 2001

 

     By:  Bert Rush

     brush@firstam.com

 

     LIS PENDENS/COMMON LAW LIS PENDENS/NOTICE OF PENDING ACTION/STAY PENDING APPEAL/TITLE UNDERWRITING

 

     From time to time, title companies are asked to insure out of judicial proceedings-often as soon as a trial court hands down its decision.  When this happens, a question for the title underwriter is, "Is this judgment final-incapable of being undone on appeal?"  Such was the question posed in the Wisconsin case of Gaugert v. Duve, discussed here in our posting for 4/5/00.

 

     As dedicated Savants may recall, the Gaugert case involved a disputed option to purchase land.  The optionor and optionees had a falling out, and a third party contracted to buy the land for residential development.  The optionees filed suit to enforce the option, naming both the optionor and the third party as defendants.  After the trial court ruled the option was unenforceable, and discharged a notice of lis pendens (pending action) recorded by the optionees, the judge cautioned the optionees that they should seek an order staying enforcement of the judgment or risk losing their right to enforce the option if they should be successful on appeal.  But the attorney for the optionees dismissed this advice, brazenly saying that defendants would be bound by the final outcome even without the lis pendens or a stay order.

 

     Relying on the trial court's decision, the optionor (Duve) sold the land to the third party (Hansen) for $390,000, and Hansen obtained an owner's policy of title insurance from First American.  So, naturally, we were very interested when the trial court decision was reversed on appeal and the optionees (Mr. and Mrs. Gaugert) returned to court for an order of specific performance, requiring that the land be conveyed to them upon payment of the option price.

 

     Again, however, the Gaugerts were denied relief.  Again the trial court told them that by failing to revive the lis pendens or obtain a stay order they had, in effect, elected to waive the remedy of specific performance and would now be limited to an action for money damages.  Again, the Gaugerts appealed--but the Court of Appeals, agreeing with the trial court, dismissed the appeal as "moot."  Specifically, the Court of Appeals disagreed with Gaugerts' attorney's argument that Hansen should be bound by the final outcome after appeal under the "common law doctrine of lis pendens."  (This was the decision reported in our posting for 4/5/00--which should be revisited by those interested in a more detailed statement of the facts.)

 

     But now the Wisconsin Supreme Court has weighed in and, surprisingly, reversed the trial court and Court of Appeals decisions.  In a lengthy opinion filed 7/2/01, the Supreme Court holds that the common law doctrine of lis pendens is alive and well, at least in the Badger State, and the Gaugerts are entitled to specific performance.   

 

     In so holding, the Court analyzed the interplay between the common law lis pendens, statutory lis pendens, and state rules of appellate procedure.

 

     The Court explained that the purpose of the common law lis pendens was "not, primarily, notice, but to hold the subject of the suit (such as land) within the power of the court, so as to enable it (the court) to pronounce judgment upon it (the land).  (Cite.)"  Under this doctrine, when land involved in a lawsuit is conveyed the transferee remains bound by the outcome of the suit, whether or not the transferee had actual notice of the suit.  It was said that existence of the suit was sufficient notice of the competing claims to bind the transferee.

 

     With the coming of modern land record systems and recording acts, the common law lis pendens was perceived as too harsh on transferees who might (understandably) take title without knowledge of a pending suit.  As a result, most or all states have now enacted a statutory lis pendens procedure, whereby litigants must record a lis pendens in the public records in order to bind transferees by the outcome of pending litigation.  Under this procedure, a transferee of land identified in a recorded lis pendens is charged with constructive notice of the action.

 

     The Court weighed these doctrines and procedures against state law providing that appeal of a trial court decision does not stay enforcement of the decision, unless the court specifically orders that enforcement shall be stayed pending appeal (i.e., Wis. Stat. section 808.07[1]), and concluded that neither the statutory lis pendens nor the provision for stay orders were intended to entirely replace the common law lis pendens. 

 

     With specific reference to the statutory lis pendens, the Court said:

 

             "The plain language of Wis. Stat.

          section 840.10(1)(a) supports our

          conclusion that Wisconsin's lis pendens

          statute plays no role as to a purchaser

          who is a party to the relevant litigation. 

          The statute states in relevant part:     

 

          'From the time of filing or recording

          (of lis pendens) every purchaser or

          encumbrancer whose conveyance or

          encumbrance is not recorded or filed

          shall be deemed a subsequent purchaser

          or encumbrancer and shall be bound by

          the proceedings in the action to the

          same extent and in the same manner as

          if the purchaser or encumbrancer were

          a party thereto.'"

 

     With that the Court concluded, "(p)arties to litigation have actual notice of the dispute and, therefore, as to those individuals the (lis pendens) statute plays no role."  The Court expressly reserved judgment as to effect of the common law lis pendens or the discharge of a statutory lis pendens on a purchaser or encumbrancer who is not a party to litigation.

 

     Having decided that the lower court decisions were based on erroneous interpretation of Wisconsin law, the Court had no problem holding the Gaugerts are now entitled to specific performance (i.e., judicial enforcement) of the option agreement.

 

     The Supreme Court decision is reported as Gaugert v. Duve, 244 Wis. 2d 691, 628 N.W. 2d 861 (2001).

 

     Comment:  Now what?

 

     Following the lower court decisions, First American insured purchaser Hansen as owner for $390,000, plus a first mortgage which now has a balance due of $410,000, plus a another mortgage which now has a balance of $181,000.  Will these insured lenders also be subject to final outcome of the lawsuit??  How much will the Gaugerts have to pay to get clear title to the land???

 

     This area of law--the right of a litigant to deal with property after a favorable trial court decision--is often less certain than one would expect, or hope.  The Supreme Court's decision in this case, reaching back to almost-forgotten common law for a resolution, is a warning to title underwriters everywhere.  Unless your state law is very clear in this regard...watch out!

**********

     Following up on our posting for 7/16/01, Don Schenker (Madison, WI) provides this update:

 

     We now have the bad news that under Wisconsin case law our insured owner must give a warranty deed to the Gaugerts.  Ouch! So much for the leverage we thought we had with our insured mortgagees as BFPs....