Thursday, April 8, 2010

Lis Pendens Limited -- Georgia Supreme Court Extends Hill Case Even Where Constructive Trust Claim is Made

The Georgia Supreme Court reversed the Court of Appeals in a case that holds that a lis pendens was improperly placed on the defendant's property notwithstanding litigation that the plaintiff alleged involved the property at issue.  Meadow Springs, LLC v. IH Riverdale, LLC, Georgia Supreme Court Case No. S09G1127, decided March 15, 2010. 

In this case, the plaintiff IH Riverdale claimed, among other things, that the defendant had improperly terminated a right of first refusal that it had to invest in the development of a multi-family apartment complex.  IH Riverdale had invested in the first phase of a multi-family development and was granted a right of first refusal to invest in the second phase.  The first phase was a success.  In 2003, IH Riverdale contends, the defendant deprived it of the the right to invest in the second phase of the project.  IH Riverdale made other contentions regarding the actions of the defendants, claiming fraud, breach of fiduciary duty, seeking an accounting, and other claims.  Upon filing the lawsuit, IH Riverdale filed a lis pendens on the second phase property, owned by Meadow Springs, seeking specific performance of the right of first refusal and a constructive trust over the phase two property.  Once the lis pendens was filed, the lender refused to fund the loan to construct the second phase.  Meadow Springs sought a temporary restraining order removing the lis pendens on the grounds, it argued, that the lawsuit filed by IH Riverdale did not "involve" the property within the meaning of the lis pendens statute, O.C.G.A. § 44-14-610. 

The trial court denied the motion for relief, and the Court of Appeals denied a motion for an interlocutory appeal.  Meadow Springs filed a seperate lawsuit against IH Riverdale, alleging that the lis pendens was invalid and claiming slander of title.  IH Riverdale filed a motion for summary judgment on these claims contending that the lis pendens was absolutely privileged as a matter of law.  The trial court granted the motion for summary judgment and the Court of Appeals affirmed.  The Court of Appeals stated that, because of the claims for constructive trust, the plaintiff was seeking a remedy that would be executed against the property.  The remedy for a constructive trust claim is an equitable lien against the property at issue.  Thus, said the court, the lawsuit "involves" the property. 

The Georgia Supreme Court reversed this holding, relying on and extending Hill v. L/A Management Corp., 234 Ga. 341, 342-43 (216 SE2d 97) (1975).  Hill held that real property is "involved" in litigation under the lis pendens statute only if it is actually and directly brought into litigation by the pleadings in a pending suit and as to which some relief is sought respecting that particular property.  The easiest way this is accomplished is to claim a direct interest in the real estate that would support relief such as specific performance or cancellation of a deed.  However, it is not essential that the plaintiff assert a direct interest in the real property for a lis pendens to be valid, so long as the real property would be directly affected by the relief sought.  For example, in Griggs v. Gwinco Development Corp. 240 Ga. 487 (241 S.E.2d 244) the plaintiff filed a lawsuit alleging that an obstruction on an adjoining property was causing flooding on its property.  The plaintiff sought to have the obstruction removed and filed a lis pendens on the adjoining property.  The lis pendens was upheld even though the property at issue was not claimed by the party filing the lis pendens, because the relief claimed would directly affect the property.

In Hill, the plaintiff contended that he had been denied his right to invest in the development of real estate through a partnership, and he filed a notice of lis pendens against the real estate owned by the partnership.  The plaintiff's partnership interest in the development was in the profits of the deal and not the real property itself.  Because of this, the court held that the interest claimed in the suit and the relief sought did not "involve" the property.  The Supreme Court in this case likened the facts to those in Hill.  The court noted that the option that IH Riverdale claimed had been denied in the right of first refusal was merely an option to invest in the development, and not to buy a piece of the phase two property.  What the Supreme Court did not mention is that in Hill there was no claim for constructive trust.  Therefore, Hill contained no claim for relief against the property, while the Meadows Springs case did involve such a claim. 

The court deals with the constructive trust claim for relief by stating that the relief sought by IH Riverdale actually would not be granted against the property.  Instead, says the court, if IH Riverdale prevails the constructive trust would be placed on the profits of the deal, not the property itself.  However, that is not what IH Riverdale asked for; it sought a trust, i.e. an equitable lien, on the property itself.  In essence therefore, the holding is a finding that IH Riverdale could not seek a constructive trust against the property based on its claimed ownership interest in the LLC that owned the property. 

The Meadow Springs court distinguished the main case relied upon by IH Riverdale and the Court of Appeals, Scroggins v. Edmunds, 250 Ga. 430, (297 SE2d 469)(1982).  In Scroggins the plaintiff, a trustee for a company in bankruptcy, alleged that the defendant, a company officer, had fraudulently transferred money from the company to pay off a security deed on the officer's residence.  The Supreme Court upheld the lis pendens, finding that if the trustee won the case a trust or lien would be imposed on the property described in the complaint.  The Court in the present case explained that the lis pendens was proper in Scroggins because whenever one person steals money from another and invests that money in real estate, the person defrauded may follow that money to the property and impress a trust on the property for his benefit.  In the present case, the court stated, IH Riverdale had not claimed that any of its funds were improperly used to acquire the real property at issue.  This statement, however, does not provide a completely accurate statement of IH Riverdale's claims. 

IH Riverdale's claims generally asserted that the main defendant and co-member in the Phase I development, McChesney Capital Partners, committed a host of grievances related to both phases of the development including but not limited to, fraud, breach of fiduciary duty, breach of an operating agreement, and other offenses.  The relief sought included not only damages but also an accounting of the funds of the business.  IH Riverdale maintained that McChesney Capital Partners and Meadow Springs were alter egos and that $100,000 of money from phase I had been improperly used to make the down payment on the real property for phase II.  Thus, while IH Riverdale had not claimed explicitly that its money was stolen and used to buy the phase II property, it had made allegations of embezzlement of funds that it had an interest in, and at least some of those funds were alleged to have been used to buy part of the property on which the lis pendens was placed.  The Supreme Court chose not to mention these facts or opine on whether they would have any affect on their analysis that the claims of IH Riverdale did not "involve" the property in the meaning of the lis pendens statute. 

Ultimately, making a constructive trust claim against the property of a real estate development will not by itself protect the validity of the lis pendens.  Instead, the plaintiff will apparently have to make specific allegations that its money was improperly used to purchase the property at issue in the development.  This leaves open the question as to what happens when a party invests in a single purpose entity and believes that money from the entity has been been embezzled by the other members.  Or where the investor believes that some of the money of the business has been stolen to buy property not held within the business.  According to this holding, the investor has no right to seek relief against the property itself, to have an equitable lien against the property, which may be the only asset in the business.  In other words your business partners can steal your earnings from a business that owns real estate, and then when you seek to recover your damages by seeking an equitable lien against the property owned by the business, if you file a lis pendens to give notice of that claim against the property, apparently your business partners can sue you for slandering the title of the property of the business. 

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