Filing a Notice of Pendency on Estate Property in New York

Property that is the subject of a lawsuit owned solely in the name of the decedent at the time of the decedent’s death is also subject to probate under New York laws. The property is considered an asset of the decedent’s estate for the benefit of the decedent’s beneficiaries. The owner’s spouse, children or tenants may still occupy a property that has a lis pendens, and the estate may still receive rental income, but any conveyance or transfer of the property would be subject to the interest of the plaintiff in the pending lawsuit until the lawsuit is settled or withdrawn and the transfer of title approved by the New York Surrogate’s Court.

When a lis pendens in a foreclosure litigation action has been filed against the property of a New York decedent, the personal representative is faced with either continuing to make the mortgage payments out of the estate funds to avoid a foreclosure or default on the payments. If the property is worth less than the decedent owed the lender, the personal representative, and the beneficiaries may just decide to let the property get foreclosed upon. If the property is occupied by the decedent’s family or tenants, then the occupants would need to vacate the property prior to the foreclosure sale. Also, if the property is sold at a foreclosure sale, the lender may obtain a deficiency judgment against the estate for the difference between the sale proceeds, and the amount owed by the decedent or the estate.

Background information: A lis pendens is a notice of pending litigation regarding a person’s interest to title to real estate or with regard to a boundary line issues, use of the property or a foreclosure matter. The lis pendens puts a buyer who may be interested in acquiring the property on notice that there is pending litigation concerning the property. Anyone that has an interest in the title to the property or claiming use of the property, can file a lis pendens with the county clerk in the county where the property is located, who will certify the notice and then the notice can be filed with the county recorder’s office in the same county. A lis pendens makes it more difficult for the owner of property or the estate of a decedent to sell, convey or transfer the property to a new buyer or the beneficiaries of the decedent because title would be subject to interest of the plaintiff in the litigation action.

If you don’t qualify for a mortgage or you are no longer interested in buying the property and you just want your deposit back, then you can sue the seller for the deposit but you probably cannot place a lis pendens on the property because the lawsuit is not about the property, it’s only about the deposit.

Lis pendens matters involving New York estates are complex. If you are involved in a lis pendens litigation matter concerning a New York estate, it is recommended that you seek the assistance of a New York probate and estate attorney. The attorney can prepare any necessary documents and represent you in court.

How a Notice of Pendency Affects Estate Administration

When a notice of pendency is filed against a property that belonged to a decedent, the estate's administration becomes significantly more complicated. The fiduciary — whether an executor named in the will or an administrator appointed by the court — must address the pending litigation as part of administering the estate. Specific issues that come up include:

Whether to defend or settle the underlying action. The fiduciary owes a duty to the estate and its beneficiaries to make a reasoned decision about whether to fight the case or resolve it.
Whether to retain counsel. Litigation counsel for the estate must be retained, and the fees are typically paid out of estate assets. Court approval may be required for fees that exceed certain thresholds.
Whether to preserve the property pending the case. Mortgage payments, taxes, insurance, and maintenance all continue to come due. Failure to pay can lead to foreclosure or tax sale, which can wipe out estate equity.
Whether to sell the property notwithstanding the notice. A sale may be possible with the agreement of the lis pendens plaintiff, with court authority, or with a structured arrangement that protects the plaintiff's claim.
Whether to distribute other estate assets pending resolution. The litigation may delay final distribution of the estate, but partial distributions may be appropriate.

Surrogate's Court Involvement

Most estate litigation in New York runs through Surrogate's Court. The Surrogate's Court has broad jurisdiction over the administration of the estate, the conduct of the fiduciary, and the resolution of claims against the estate. Where the underlying lawsuit is in Supreme Court, the two proceedings often run in parallel, with the Surrogate's Court overseeing administration and the Supreme Court adjudicating the lawsuit. Coordination between the two courts is essential.

Common Scenarios That Generate Estate Notices of Pendency

The notice of pendency arises in a familiar set of situations involving decedents' property:

Foreclosure actions. The decedent's mortgage was in default at death (or fell into default during administration), and the lender filed foreclosure with a notice of pendency.
Disputed sales contracts. The decedent had contracted to sell or buy property before death and the contract was not completed. The other side may file a specific performance action with a notice of pendency.
Will contests involving real property. Where the will or distribution of the estate is contested and the estate includes specific real property, a notice of pendency can sometimes be filed in connection with the contest.
Claims by beneficiaries. A beneficiary may sue to compel transfer of specific property as required by the will.
Boundary, easement, and title disputes. Neighbors or other adjoining owners may have ongoing disputes with the decedent that survive the death.
Partition actions. Where the decedent owned property jointly with others, a co-owner may seek partition.
Claims by creditors. Certain creditor claims, particularly those that already include a recorded judgment or are otherwise tied to the real property, can produce a notice of pendency.

Mortgage Payments and Default Decisions

One of the most common dilemmas for personal representatives is whether to continue paying a mortgage on property subject to a pending lawsuit. The answer depends on several factors:

The equity in the property — if the property is worth substantially more than the mortgage, continuing payments preserves estate value.
The cash position of the estate — paying the mortgage may consume cash needed for other expenses.
The likely outcome of the litigation — if the case is likely to be settled or won, continuing payments makes sense.
The willingness of the beneficiaries — some beneficiaries may volunteer to pay the mortgage to preserve their inheritance.
The wishes of any tenants or family occupying the property — some occupants want to remain and may be willing to share costs.

The personal representative's decision is reviewed by the Surrogate's Court if challenged. A reasonable, well-documented decision is generally protected even if events later prove the decision wrong.

Deficiency Judgments After Foreclosure

When property goes through foreclosure and sells for less than the outstanding mortgage balance, the lender can in some cases pursue a deficiency judgment for the shortfall. If the borrower has died, the deficiency claim is asserted against the estate. The personal representative must address it as a claim against the estate, paying or compromising it from estate assets. Deficiency claims are subject to certain statutory limits in New York, including the requirement that the deficiency be calculated based on fair market value rather than the foreclosure sale price.

Selling Estate Property With a Notice of Pendency

A buyer who agrees to purchase property subject to a notice of pendency takes the property subject to whatever rights the lis pendens plaintiff ultimately establishes. Most buyers are unwilling to take that risk, so the practical effect of a notice of pendency is to freeze the market for the property. To complete a sale during the pendency of the lawsuit, the parties typically need to:

Resolve the lawsuit through settlement, with cancellation of the notice of pendency at closing.
Obtain agreement of the plaintiff to release the notice in exchange for an escrow or other security.
Obtain a court order cancelling the notice on the ground that the action is not the kind authorized by CPLR 6501.
Sell the property subject to the litigation with a buyer who is willing to accept the risk, typically at a substantial price discount.

Title Insurance Implications

Title insurance companies will not issue a policy clear of the notice of pendency. The lis pendens appears as an exception in the title commitment. Any sale during the pendency of the action requires either resolution of the underlying claim or some form of arrangement that satisfies the title insurer. We negotiate with title companies regularly to structure closings that move forward despite pending litigation.

Strategic Considerations for Fiduciaries

The personal representative of an estate that includes property subject to a notice of pendency faces strategic decisions throughout administration:

When to fight, when to settle, and when to walk away from a contested property.
How aggressively to preserve the property pending litigation.
Whether to seek instructions from the Surrogate's Court before making major decisions.
How to communicate with beneficiaries who may have different views about the property.
Whether to make partial distributions of other assets while the litigation is pending.
How to allocate litigation costs and proceeds among multiple beneficiaries.

A thoughtful, well-documented decision process protects the personal representative from later claims of breach of fiduciary duty.

Beneficiary Rights

Beneficiaries of an estate that includes contested real property have rights to information, to consultation, and to participate in major decisions. Where the personal representative is moving in a direction the beneficiaries oppose, the beneficiaries can seek instructions from the Surrogate's Court, can object to the personal representative's accounting, or in serious cases can petition for removal of the personal representative. We represent both fiduciaries defending their decisions and beneficiaries challenging fiduciary decisions.