DeShields v. Broadwater

BELL, Judge. This is a case of first impression with respect to the application of the related doctrines of lis pendens and equitable conversion. Specifically, the issue this case presents is whether, prior to the initiation of litigation respecting its ownership, the execution of a contract for the purchase of real property, coupled with a downpayment of less than ten percent of the purchase price, preclude lis pendens notice of the subsequent litigation from affecting the contract purchaser’s interest — whether, in other words, the interest the purchaser acquires is unaffected by the results of the subsequent litigation. The Circuit Court for Prince George’s County ruled in favor of Tommy Broadwater, Jr., the purchaser (the “appellee”), holding that, by virtue of equitable conversion, the purchase occurred before, rather than pending, the litigation.

It thus rejected the argument made by Shirley DeShields and Jack’s Liquors, Inc., collectively, “the appellants,” that lis pendens is applicable to subject the appellee’s purchase to the decree passed in the litigation initiated by Jack’s Liquors. We granted certiorari, on our own motion, while the appellants’ appeal was pending in the Court of Special Appeals. We shall affirm the judgment of the circuit court. I At the core of this case is the property known as 5361 Sheriff Road, Fairmont Heights, Prince George’s County, Maryland, out of which the commercial establishment known as Jack’s Liquors, Inc. is operated.

Before April 27, 1985, the property was owned by Charles and Marnette Jackson. 1 On ⁴²⁹ that day it was purchased by Phunlop Sriuthai and his wife, Chitra, for $190,000.00. Charles Jackson took back a $165,000 purchase money deed of trust, secured by the property, payable in 30 years. The property was subsequently sold to the appellee. On January 30, 1989, the appellee entered into a contract of sale with the Sriuthais to purchase the property for $135,000.

Although the contract called for settlement within 60 days or earlier, at the option of the appellee, and despite a title search having confirmed the Sriuthais’ fee simple title, subject to the deed of trust, settlement was not held until July 12, 1989, due to difficulties encountered in surveying the property. As required by the contract of sale, the appellee paid $10,000 down, which was placed in his attorney’s escrow account. At the settlement, pursuant to the contract, the appellee paid the balance due under the deed of trust 2 and received, in return, an executed release of the deed of trust. He also paid the taxes that were due on the premises. 3 No further money was due or payable to the Sriuthais under the contract.

Phunlop Sriuthai had earlier purchased, on March 23, 1984, Jack’s Liquors, Inc. from Shirley DeShields. 4 The contract of ⁴³⁰ sale stated that the purchase price was $100,000, $40,000 of which was to be paid in cash and the remainder by assuming 36]é percent of the monthly payments on a $134,000 Small Business Administration loan. The contract also provided for an option to purchase the remainder of the capital stock. If exercised, that purchase price would also be $100,000, payable part in cash and part by assuming the balance of the Small Business Administration loan. A little less than two years later, DeShields sued Sriuthai for breach of contract, breach of fiduciary duties, and conversion.

The breach of contract count alleged Sriuthai’s failure to pay off the assumed portion of the Small Business Administration loan, while the breach of fiduciary relationship related to his purchase of the subject property “without disclosing to [DeShields] any information regarding the purchase price and its impact on the financial condition and prospects of Jack’s Liquors, Inc.” The conversion count was premised upon the obligation of Sriuthai to pay DeShields one-half of the profits derived from Jack’s Liquors, Inc., an obligation, she alleged, Sriuthai failed to meet. The lawsuit was settled almost three years later, but prior to the appellee’s entering into the contract for the purchase of the subject property. The settlement agreement provided, inter alia, that DeShields, acting as chief executive officer, would assume control of the corporate affairs of Jack’s Liquors, Inc. Another provision of the agreement pertinent to the case sub judice, given the trial court’s findings, was that Jack’s Liquors agreed to pay rent to the Sriuthais for a five year period, with an option to renew. 5 After the appellee had contracted to purchase the subject property, Jack’s Liquors, Inc. filed suit against Phunlop and ⁴³¹ Chitra Sriuthai, asking the court to establish a constructive trust on the subject property and award it damages. This was done on March 28, 1989.

The suit alleged that the Sriuthais “conspired to use Corporate funds to acquire for their own use a Corporate opportunity to acquire ownership of the premises.” The appellee, who was not joined as a defendant in that action, later moved to intervene. Default judgment was entered against the Sriuthais on January 28, 1991. On April 17, while the appellee’s motion to intervene, filed on March 21, 1991, was pending, the court entered judgment against the Sriuthais for $124,000 and appointed the appellants’ attorney trustee to convey, by quit claim deed, their interest in the subject property, an ex parte hearing having previously been held on April 3, 1991. That judgment was partially vacated as to Phunlop Sriuthai, on motion of the appellants, based upon defective service of process, on November 8, 1991, the same date on which the appellee’s motion to intervene was denied.

In the meantime, having unsuccessfully attempted to negotiate a lease arrangement for Jack’s Liquors, Inc., with DeShields, the appellee filed a complaint for possession of real property against the appellants. In that complaint, he sought an order requiring the appellants to quit and surrender the premises and damages for the fair reiftal value of the premises since July 12, 1989. On the appellee’s motion, this action was consolidated with Jack’s Liquors, Inc.’s constructive trust action against the Sriuthais. The trial court found as a fact that when he contracted to purchase the premises, the appellee did not know that Jack’s Liquors contemplated suing the Sriuthais, or that it claimed any interest or title in the subject property.

Consequently, the court concluded that the appellee was a bona fide purchaser for value of the subject property. In support of that conclusion, it noted, in addition to the February, 1989 title search, that sometime in January, 1989, but prior to the date of the contract of sale, DeShields showed the appellee a copy of the settlement agreement between Sriuthai and DeShields. It will be recalled that that agreement contained provisions ⁴³² requiring Jack’s Liquors to pay the Sriuthias’ rent, thus seeming to recognize them as landlord of such property. Moreover, the court found that Sriuthai informed the appellee that DeShields did not want to purchase the property.

Furthermore, the court was satisfied that [d]uring the period between January 30, 1989 and July 12, 1989, Mr. Broadwater had several conversations with Ms. DeShields. The first conversation was on January 30, 1989 when Mr. Broadwater told Ms. DeShields that he had purchased the property. Ms. DeShields appeared happy about the purchase and assured Mr. Broadwater that ‘we’ll be friends.’ Within two weeks of the purchase, Ms. DeShields again reassured Mr. Broadwater by saying words to this effect: ‘You’ll be my landlord and we’ll get along well.’ The circuit court also found as a fact that the appellee did not learn of the litigation between Jack’s Liquors and the Sriuthais until after July 12, 1989. It was convinced by a preponderance of the evidence that DeShields informed appellee of the suit within a week after the settlement on the property.

The court similarly concluded that no agent of the appellee had any knowledge of the suit prior to July 12, 1989. The court held that the appellee, through equitable conversion, acquired his interest in the subject property prior to the initiation of the litigation relating to it. Consequently, the court concluded that lis pendens had no applicability to the appellee’s purchase. II The doctrine of lis pendens is well-established in Maryland. 6 See Corey v. Carback, 201 Md. 389, 403-04 , 94 ⁴³³ A.2d 629, 638 (1953); Hall v. Jack, 32 Md. 253, 263-64 (1870); Applegarth v. Russell, 25 Md. 317, 320 (1866); Inloes’ Lessee v. Harvey, 11 Md. 519, 524-25 (1857); Feigley v. Feigley, 7 Md. 537, 563 (1855); Warfel v. Brady, 95 Md.App. 1, 7 , 619 A.2d 171, 174 , cert. denied, 331 Md. 88 , 626 A.2d 371 , cert. denied, ___ U.S. ___, 114 S.Ct. 470 , 126 L.Ed.2d 422 (1993); Permanent Financial Corp. v. Taro, 71 Md.App. 489, 492 , 526 A.2d 611, 612 , cert. granted, 311 Md. 193 , 533 A.2d 670 (1987) appeal dismissed, January 26, 1988; Angelos v. Maryland Casualty Company, 38 Md.App. 265, 268 , 380 A.2d 646, 648 (1977).

It literally means a pending lawsuit, referring to the jurisdiction, power, or control which a court acquires over property involved in a lawsuit pending its continuance and final judgment. Warfel, 95 Md.App. at 7 , 619 A.2d at 174 ; Angelos, 38 Md.App. at 268 , 380 A.2d at 648 ; Black’s Law Dictionary 840 (5th Ed.1979). Under the doctrine, an interest in property acquired while litigation affecting title to that property is pending is taken subject to the results of that pending litigation. Applegarth, 25 Md. at 320 ; Inloes’ Lessee, 11 Md. at 524-25 ; Angelos, 38 Md.App. at 268 , 380 A.2d at 648 ; Creative Development Corp. v. Bond, 34 Md.App. 279, 284 , 367 A.2d 566, 569 (1976).

Thus, “[ujnder the common-law doctrine of lis pendens, if property was the subject of litigation, the defendant-owner could transfer all or part of his or her interest in the property during the course of litigation, but not to the detriment of the rights of the plaintiff.” Janice Gregg Levy, Comment, Lis Pendens and Procedural Due Process: A Closer Look After Connecticut v. Doehr, 51 Md. L.Rev. 1054, 1056 (1992). This Court stated the same proposition thusly, in Inloes’ Lessee, 11 Md. at 524 (quoting I Story Eq.Jur. §§ 405, 406): “A purchase made of property actually in litigation, pendente lite, for a valuable consideration, and without any express ⁴³⁴ or implied notice in point of fact, affects the purchaser in the same manner as if he had such notice; and he will accordingly be bound by the judgment or decree in the suit.... Ordinarily, it is true, that the decree of a court binds only the parties and their privies in representation or estate. But he who purchases during the pendency of a suit, is held bound by the decree that may be made against the person from whom he derives title.

The litigating parties are exempted from taking notice of the title so acquired; and such purchaser need not be made a party to the suit.” See Taro, 71 Md.App. at 492 , 526 A.2d at 612 . The doctrine “ ‘is founded upon a great public policy,’ to prevent alienation during the progress of the suit and to prevent endless litigation.” Applegarth, 25 Md. at 323 (quoting Story’s Eq.Jur. § 406). See also Inloes’ Lessee, 11 Md. at 524 -25 (quoting Story’s Eq.Jur. § 406), in which we said: “Where there is a real and fair purchase without any notice, the rule may operate very hardly. But it is a rule founded upon a great public policy, for, otherwise, alienation made during a suit might defeat its whole purpose; and there would be no end to litigation.

And hence arises the maxim, pendente lite nihil innovetw,[ 7 ]; the effect of which is, not to annul the conveyance, but only to render it subservient to the rights of the parties in litigation. As to the rights of these parties, the conveyance is treated as if it never had any existence; and it does not vary them.” A cogent and'concise discussion of the public policy underlying lis pendens is also contained in Levy, 51 Md.L.Rev. at 1057-58: The reasons underlying the lis pendens doctrine are grounded in public policy and are self-evident: if a defendant could convey his interest in property to a bona fide purchaser during the course of litigation concerning the title of the ⁴³⁵ property, a court would be limited in its ability to provide a meaningful remedy to a successful plaintiff. If the remedy granted is a money judgment, the plaintiff could obtain and execute liens on other property held by the defendant, but this would be of little use if the defendant had insufficient or no other property. More often, in fact, the remedy granted is title to or interest in the property itself; thus, the availability of the property is usually critical to a plaintiffs relief.

The doctrine therefore ensures that judicial decisions will be given full effect, and that there will be an end to litigation. Lis pendens has no applicability, therefore, except to proceedings directly relating to the title to the property transferred or in which the ultimate interest and object is to subject the property in question to the disposal of a decree of the court. Feigley, 7 Md. at 563 ; see also Applegarth, 25 Md. at 320-21 . A “lis pendens is a general notice of an equity to all the world,” not notice of an actual lien.

Applegarth, 25 Md. at 323 (quoting Story’s Eq.Jur. § 406). Consequently lis pen-dens proceedings do not technically prevent alienation; they place a cloud on title to the property and “[create] a priority in favor of the plaintiff, which, if the plaintiff succeeds on the merits of the claim, relates back to the date of the filing of the complaint ... [and, thus, preserve] for a successful plaintiff the opportunity to have a lien relating back to the date of the filing of the complaint.” Levy, Comment, 51 Md.L.Rev. at 1057. This is so because “the law does not allow litigant parties to give to others, pending the litigation, rights to the property in dispute, so as to prejudice the opposite party.” Creative Development Corp., 34 Md.App. at 284 , 367 A.2d at 569 (quoting 2 J. Pomeroy, A Treatise on Equity Jurisprudence § 632 (5th ed. S. Symons 1941)). 8 Unless the transfer ⁴³⁶ of the property occurs after the suit which provides lis pen-dens notice is filed, the doctrine does not apply.

See, e.g., Hall, 32 Md. at 263-64 . Because lis pendens is triggered by the initiation of litigation affecting the title to real property, ordinarily whether the plaintiff in that litigation has knowledge of the transfer of the property is not an issue. Thus, when, after the complaint has been filed, the defendant transfers his or her interest in the property which is the subject of the lawsuit, lis pendens applies to subject that property to the result of the pending litigation whether or not the plaintiff is aware of the transfer. In other words, even if the plaintiff is aware of the transfer, the plaintiff need not join the transferee as a party to his or her suit.

On the other hand, a transferee’s knowledge of the pendency of litigation affecting the property acquired may very well be quite important. Because lis pendens provides constructive notice of the equity claimed by the plaintiff, the transferee’s actual notice of that equitable claim prevents that transferee from being a purchaser in good faith. Indeed, it has been said that one who purchases with notice of another’s equity is a mala fide purchaser. See Newport Terminals, Inc. v. Sunset Terminals, Inc., 279 Or. 93 , 566 P.2d 1181, 1185 (1977); Seguin v. Maloney, 198 Or. 272 , 253 P.2d 252, 258 (1953); Ford v. Hofer, 79 S.D. 257 , 111 N.W.2d 214, 218 (1961); Harkness v. McQueen, 232 S.W.2d 629, 635 (Tex.1950); Mitchell v. Peters, 18 Iowa 119, 121 (1864).

As we have seen, where the defendant’s interest in the property is transferred prior to the initiation of the action affecting title to that property, lis pendens does not apply. In that event, the usual rule — that the decree of the court binds only those parties before it and their privies — applies. Thus, where it is uncertain as to whether the transfer occurred prior to or after the suit was initiated, the only way to ensure that the results of the litigation will be applicable to the property which is its subject is to join the contract purchaser as a party to the case. In that situation, the plaintiffs knowledge of the transfer is quite relevant. ⁴³⁷ Ill The doctrine of equitable conversion and, more particularly, by contract, is also well-established in Maryland.

We recently observed that “[e]quitable conversion ... is a theoretical change of property from realty to personalty, or vice versa, in order that the intention of the parties, in the case of a contract of sale, or the directions of the testator, in the case of directions in a will, may be given effect.” Coe v. Hays, 328 Md. 350, 358 , 614 A.2d 576, 580 (1992) (citing Harrison v. Prentice, 183 Md. 474, 479 , 38 A.2d 101, 104-05 (1944), and Roger A. Cunningham et al., The Law of Property § 10.13, at 698-705 (1984)). In Himmighoefer v. Medallion Industries, Inc., 302 Md. 270, 278 , 487 A.2d 282, 286 (1985), this Court explained equitable conversion by contract, thusly: The legal cliche, that equity treats that as being done which should be done, is the basis of the theory of equitable conversion. Hence, when the vendee contracts to buy and the vendor to sell, though legal title has not yet passed, in equity the vendee becomes the owner of the land, the vendor of the purchase money. In equity the vendee has a real interest and the vendor a personal interest.

Equity treats the executory contract as a conversion, whereby an equitable interest in the land is secured to the purchaser for whom the vendor holds the legal title in trust. This is the doctrine of equitable conversion. (Citations omitted.) (Quoting 8A Thompson, Real Property, § 4447 at 273-74 (Grimes Repl.Vol. 1963).) We elaborated on the doctrine’s effect in Watson v. Watson, 304 Md. 48, 60 , 497 A.2d 794, 800 (1985): One result of the doctrine is that a judgment entered against the vendor after the contract has been made does not become a lien on the realty. A vendor’s judgment creditor may not execute on the realty because the vendor, sometimes described as trustee for the purchaser, has a right to the balance of the purchase money but has no beneficial interest in the property.

Equitable title is superi- or to a later judgment lien. ⁴³⁸ With regard to the latter point, we observed in Himmighoefer : It is a general rule that the holder of an equitable title or interest in property, by virtue of an unrecorded contract of sale, has a claim superior to that of a creditor obtaining judgment subsequent to the execution of the contract. For the purposes of this rule it appears to be quite immaterial whether the credit was extended prior or subsequent to the execution of the contract. ‘The effect of such a contract is to vest the equitable ownership of the property in the vendee, subject to the vendor’s lien for unpaid purchase money, and to leave only the legal title in the vendor pending the fulfillment of the contract and the formal conveyance of the estate. The right of the vendee to have the title conveyed upon full compliance with the contract of purchase is not impaired by the fact that the vendor, subsequently to the execution of the contract, incurred a debt upon which judgment was recovered. A judgment creditor “stands in the place of his debtor, and he can only take the property of his debtor subject to the equitable charges to which it is liable in the hands of the debtor at the time of the rendition of the judgment.” ’ 302 Md. at 279 , 487 A.2d at 287 (citations omitted) (quoting Stebbins-Anderson Company v. Bolton, 208 Md. 183, 187 , 117 A.2d 908, 910 (1955)).

See also William Skinner & Sons’ Ship-Building & Dry Dock Co. v. Houghton, 92 Md. 68, 86 , 48 A. 85, 87 (1900); Valentine v. Seiss, 79 Md. 187, 190 , 28 A. 892, 893 (1894); Hampson v. Edelen 2 H. & J. 64, 66 (Md.1806). In addition to the intention of the parties, the determination whether real property, the subject of a contract of sale, is realty or personalty depends upon whether the contract was “ ‘valid and binding, free from inequitable imperfections, and such as a court of equity will specifically enforce against an unwilling purchaser.’ ” Birckner v. Tilch, 179 Md. 314, 323 , 18 A.2d 222, 226 , cert. denied, 314 U.S. 635 , 62 S.Ct. 68 , 86 L.Ed. 509 (1941) (quoting Pomeroy’s Equity Jurisprudence, § 1161, at 2753 (4th ed. 1918)). See also Watson, 304 Md. at 61 , 497 A.2d at 800 ; Hampson , 2 H & J at 66. “Ordinarily, the ⁴³⁹ conversion occurs when the contract is executed, assuming that the contract of sale is ‘bona fide made for a valuable consideration,’ and, at that time, is specifically enforceable.” Coe v. Hays, 328 Md. at 358 , 614 A.2d at 580 (quoting Hampson , 2 H & J at 66) (citation omitted). IV Appellee entered into an executory contract with the Sriuthais for the purchase of the subject property on January 30, 1989, almost two months before Jack’s Liquors filed its constructive trust suit against the Sriuthias.

If that act constitutes the “purchase” of the property, then, because it preceded the suit, lis pendens does not apply, notwithstanding that settlement was held more than three months after suit was filed. The critical question, therefore, is what was the effect of the executory contract. 9 Moreover, the court specifically found, as a fact, that the appellee did not know about the constructive trust action until after he had gone to settlement. Indeed, it found that the appellee and DeShields had conversations both before and after the executory contract was signed which gave no indication that there was any claim to equity in the property by DeShields, or, through DeShields as its chief executive officer, by Jack’s Liquors. We find the answer in the doctrine of equitable conversion.

When, in a bona fide transaction for a valuable consideration, the appellee contracted with the Sriuthais to purchase and the Sriuthais contracted to sell the subject property, the appellee became the equitable owner of the real property. Himmighoefer, 302 Md. at 278 , 487 A.2d at 286 ; Hampson , 2 H & J at 66. The trial court found that the ⁴⁴⁰