By , James L. Windsor, Real Estate Claims & Title Insurance Solutions

In the case of Terry v. Fidelity Nat’l Title Ins. Co. (In re Ware), 2013 Bankr. LEXIS 1051 (Bankr. E.D. Va. Mar. 20, 2013), the Honorable Douglas O. Tice held that a Lis Pendens filed within 90 days of a bankruptcy petition is, in fact, avoidable as a preferential transfer of property under 11 U.S.C. § 547 along with the reformation action which is pegged to said Lis Pendens.

In this case, a deed of trust was erroneously executed by a debtor’s business instead of by the debtor himself. Before the debtor could rectify the mistake, an unrelated third-party obtained a judgment lien against the debtor and recorded the judgment against the subject matter real property. The lender filed a state court reformation lawsuit seeking to resolve the mistake and lien priority issue, and the lender also filed and recorded a Lis Pendens. Within 90 days after the Lis Pendens was recorded, the debtor filed for Chapter 7 bankruptcy protection.

The Chapter 7 Trustee filed a multi-count complaint to avoid any liens against the property so that it could sell the property free and clear of any liens for the benefit of the bankruptcy estate. The lender followed with a reformation complaint filed in the Bankruptcy Court (similar to the one filed in state court), and the two adversary proceedings were consolidated.

The Bankruptcy Court agreed with the Chapter 7 Trustee’s position concluding that, while a Lis Pendens generally provides sufficient notice to defeat the strong-arm powers under 11 U.S.C. § 544, a Lis Pendens recorded within 90 days of the bankruptcy petition may be avoided as a preferential transfer. As the Lis Pendens was avoided as a preferential transfer, there was not the notice necessary to defeat or trump the section 544 strong-arm powers held by the Chapter 7 Trustee. Also, the Court pegged any reformation to the date of the recorded Lis Pendens and not the date of the original transaction, thus any reformation in and of itself would be avoidable as a section 547 preferential transfer. Accordingly, the Bankruptcy Court ruled in favor of the Chapter 7 Trustee and also dismissed the lender’s reformation complaint.

Not only is this a challenging ruling from the perspective of a lender, but two points can be extracted from this case that must be emphasized. First, the Bankruptcy Court paid reverence and homage to the holding in Wells Fargo Funding v. Gold, 432 B.R. 216 (E.D. Va. 2009), in which the court held in that case that, amongst other holdings, a Lis Pendens recorded within 90 days of the bankruptcy court is avoidable as a preferential transfer. Second, Judge Tice emphasized that any reformation relates back to the date of the Lis Pendens and not the settlement date of the original deed of trust. Therefore, a successful reformation brought by a lender would intrinsically be avoidable and thus of no effect if the Lis Pendens was recorded within 90 days of the bankruptcy filing date. If you would like to discuss this case or have any questions about any of the legal issues presented herein, please feel free to call my law partner, Jeffrey L. Marks, at (757) 491.4045, or me, James L. Windsor, at (757) 873.6308.

James L. Windsor is the managing partner of the firm’s Virginia Beach office and is the Chairman of the firm’s Title Insurance Practice Group. AV® Preeminent rated by Martindale Hubbell, Jim’s practice includes a broad range of civil litigation, with an emphasis on title insurance, real estate, construction, malpractice, creditor’s rights and banking.

Jeffrey L. Marks is a partner in the firm’s Virginia Beach office where his practice focuses on complex commercial disputes, with particular experience in creditors’ rights and bankruptcy matters. He represents all types of lenders, vendors and other creditors in bankruptcy, commercial litigation and creditors’ rights matters. In addition to appearing on behalf of the firm’s clients at all levels of the state and federal courts, he provides representation to creditors, debtors and trustees in Chapter 7, 11, and 13 bankruptcy cases. Not only does Jeff handle all types of commercial and bankruptcy litigation cases, but he also negotiates settlements and workouts on behalf of borrowers and lenders.

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