By Sarah E. Aberg

In Ostad v. Nehmadi, No. 650460/2010 (Sup. Ct., N.Y. Co., Apr. 11, 2011) (“Ostad”), Justice Bernard J. Fried reiterated the rule that a notice of pendency cannot be based on a claim asserting an interest in personal property, even where that personal property is an interest in a partnership whose sole asset is real property.  Ostad illustrates the less-than-straightforward procedures of filing a valid notice of pendency.

According to the complaint, plaintiff David Ostad and defendant Behzad Nehmadi agreed to form an “Enterprise” in 2003, in order to engage in various real estate ventures, including acquiring real property known as 227 East 45th Street, New York, New York (the “Premises”). Nehmadi formed defendant Benita Holdings, LLC (“Benita”) for the purpose of acquiring the Premises. Ostad contributed capital to Benita’s down payment in exchange for a 10% interest in the Premises.  After Nehmadi and Benita refused to account for Ostad’s 10% interest in the Premises, Ostad filed a complaint seeking, inter alia, an accounting of all proceeds generated by the Premises, the formation of a constructive trust over the Premises and Benita. 

Ostad filed a notice of pendency pursuant to CPLR § 6501 concurrently with the summons and complaint on the grounds that his request for relief implicated a 10% interest in the ownership of the Premises. Section 6501 is applicable only where the “judgment demanded would affect the title to, or the possession, use or enjoyment of, real property . . . .” The defendants moved to vacate and cancel the notice of pendency, claiming the complaint alleged interest in a partnership, not in real property.    

Justice Fried limited his review to the face of the original complaint, without “inquiry . . . into the underlying transactions or the merits of the claim.” Ostad at 4. Moreover, his review was limited to the original complaint, despite that Ostad had filed an amended complaint after service of defendant’s motion to vacate, because “defects in the filing of the original notice of pendency cannot be cured based on the filing of an amended complaint.” Id.

Citing ample case law from the Second Circuit to the Appellate Division, Justice Fried found that “New York courts have confirmed the notice of pendency to cases in which the plaintiff claims a direct interest in the defendant’s real property and actions asserting an interest in personal property do not fall within the scope of CPLR § 6501Ostad at 6. Therefore, “notices of pendency may not be used in actions where the relief sought is a declaration of ownership in a corporation, even where the sole corporate asset is real property.” Id.  Justice Fried further found that Ostad’s complaint, which included an allegation that Nehmadi “formed Benita for the purpose of acquiring title to the premises on behalf of the ‘Enterprise,’” failed to allege that Ostad himself owned an interest in the Premises. Id. at 7. Further, Ostad’s complaint “clearly state[d] that the Plaintiff and Nehmadi acted as members of the ‘Enterprise,’ and that the Premises were acquired by Benita on behalf of the ‘Enterprise.’” Id. at 9. After extensive analysis, Justice Fried found that Ostad had in fact averred the existence of a partnership, and that his investment “appeared as a contribution to the purported ‘Enterprise’ for the purpose of purchasing and sharing in the profits of the real estate indirectly owned by the ‘Enterprise.’” Id. at 10. Thus, despite that Ostad’s complaint plainly sought to recover 10% of the Premises that Nehmadi allegedly promised to Ostad, the Court found that Ostad was in fact claiming an interest not in real property, but in personality, which fell outside the scope of CPLR § 6501.

Moreover, Ostad could not salvage the notice of pendency based on his request for a constructive trust. While Justice Fried acknowledged that “certain actions seeking to impose a constructive trust on real property have been deemed to affect title to real property . . . courts applying New York law have held that the requirements of CPLR § 6501 may be satisfied if a cause of action involves the imposition of a constructive trust on real property and the judgment demanded will affect the title to, or the possession, use or enjoyment of real property.” Ostad at 12.  Because Ostad had not alleged a transfer of real property, the court could not justify the imposition of a constructive trust, and so could not further justify a notice of pendency on that basis.

Finally, Justice Fried refused to award the defendants the costs incurred in filing their motion to cancel the notice of pendency pursuant to CPLR § 6514(c). According to the court, it may cancel a notice of pendency for procedural reasons such as untimely service of process and has discretion to cancel a notice of pendency “if the plaintiff has not commenced or prosecuted the action in good faith.” Ostad at 16-17. Neither provision for cancellation “was applicable to the defendant’s request for cancellation of the notice of pendency,” and the defendants “eschewed their motion to cancel under CPLR § 6514, instead proceeding under CPLR § 6501 to vacate the Notice of Pendency.” Id. at 17. Instead, defendants had in fact moved to vacate the notice of pendency, a procedure distinct from moving to cancel a notice of pendency. Accordingly, Justice Fried refused to award any costs to defendants.

In light of Ostad, litigants should make careful note of the requirements for filing a notice of pendency. They must claim a direct interest in real property. An indirect interest through a partnership or other entity, will not suffice, even if the litigant requests the imposition of a constructive trust over the property.

For further information, please contact Sarah Aberg at (212) 634-3091.