Can a Lawsuit Stop You from Selling Your Home?
A defendant served with a lawsuit may face a multitude of different risks and consequences depending on the nature of the litigation. One issue, however, often not considered by those facing suit is the immediate impact a lawsuit can have on their property ownership. Indeed, depending on the circumstances, the mere filing of a lawsuit can stop a property owner from being able to sell that property or even refinance a loan that involves the property.
During a sale or refinance, title companies will conduct a thorough title search to locate deeds of trust, liens, and judgments on title, most of which must be cleared before a sale or refinance can close. Failure to clear these encumbrances can result in a sale or refinance not going through. Title issues affecting sale and refinance most typically come up with: (1) deeds of trust, where the property owner has voluntarily given a security interest to a lender; (2) liens recorded by those who have a statutory right to do so after nonpayment (HOAs, some construction contractors and subcontractors, etc.); or (3) judgments obtained after a party has litigated a case and prevailed on some or all claims entitling the party to monetary damages.
Yet there is a less discussed mechanism for “clouding” title and preventing sale or refinance as well. This is the lis pendens. While deeds of trust, liens, and judgments are common enough that many property owners have at least a general awareness of them, the lis pendens is often forgotten by those who do not engage in real property litigation. A recorded lis pendens can immediately prevent a property owner from selling or refinancing. The lis pendens comes up most often in cases of adverse possession and prescriptive easements but may also sometimes be utilized in partitions, resulting trust cases, or constructive trust cases. My colleague, William Kessler, discussed some of the practical applications of the lis pendens in a blog post here.
Importantly, the lis pendens can only be used in a subset of cases that involve real property. Specifically, a party to a lawsuit may record a lis pendens under RCW 4.28.320 where that lawsuit may affect title to real property, or where a writ of attachment has been issued with respect to real property. From the time of recording, the pending action serves as constructive notice to any subsequent purchaser or encumbrancer that the outcome of the lawsuit will impact the property and bind them. That is the case even if they are not named in the suit. The outcome of the suits binds them as if they were, so a purchaser or encumbrancer ignoring a lis pendens does so at their own risk.
Although most claimants record a lis pendens as part of a legitimate action affecting title to real property, some unscrupulous litigants might file suit and record a lis pendens without reasonable justification as a mechanism to quickly tie up title and stop someone from selling their property or refinancing. In other words, they will slander title to harass a property owner and/or leverage some kind of favorable resolution.
The Washington legislature has considered this possibility and enacted a statute to protect property owners from this misconduct. RCW 4.28.328 states that an aggrieved party (most often the property owner) can expedite their defense by filing a motion to cancel the lis pendens, which can result in a potential favorable ruling far more quickly than the full adjudication of an underlying lawsuit. Of course, succeeding on this motion requires meeting a high bar. Specifically, the statute provides that the claimant must establish “substantial justification” for having recorded the lis pendens. If the claimant fails to provide this substantial justification, the Court may: (1) summarily cancel the lis pendens; (2) award the actual damages caused to the aggrieved party by the recording of the lis pendens; and (3) may award reasonable attorney’s fees and costs incurred by the aggrieved party in defending the action.
The streamlined process of cancelling a lis pendens can provide aggrieved property owners with a powerful tool for clearing title to their property quickly and proceeding with a necessary sale or refinance. However, a properly filed lis pendens with substantial justification will not be subject to summary dismissal. The mere fact that the claimant might ultimately lose the lawsuit far from guarantees that the claimant’s lis pendens can be cancelled on a motion.
The lawyers at Beresford Booth have significant experience with real estate litigation and dispute resolution. If you are a property owner or are involved in litigation over real property, please do not hesitate to contact us at info@beresfordlaw.com or by phone at (425) 776-4100.
