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Sevenson Environmental Services, Inc. v. McDonald

2009 WL 427402 (U.S. Dist. Ct. D. N.J. 2009)

LIS PENDENS — When a lis pendens is removed pursuant to a consent order that also sets aside money as security for the underlying, alleged obligation, the property owner is not permitted to draw upon that money just because the lis pendens has been discharged.

An employer filed suit in United States District Court against an employee, alleging that the employee had embezzled funds to purchase real property. The employer filed a Notice of Lis Pendens with respect to the property. In the suit, the employer demanded judgment in the form of a constructive trust upon the property. Upon consent, the court ordered that the Notice of Lis Pendens be discharged because a sale of the property was imminent. The net sale proceeds, after payment of certain judgments, were to be held in an interest-bearing escrow account until the Court determined its disposition. The net sale proceeds were escrowed at closing. The employee requested that the court immediately release a portion of the escrowed funds, and retain only the lesser amount sought by the employer in its constructive trust claim. The employee also requested an evidentiary hearing to determine the employer’s probability of success on the constructive trust claim. The employer opposed, arguing that because the Notice of Lis Pendens had been discharged, it was no longer required to provide such proof at an evidentiary hearing. Further, the employer asserted that all of the net proceeds should remain in escrow as security for payment of any possible future judgment.

The Court examined New Jersey’s lis pendens procedure. The procedure ensures that a claim related to the property at issue is not defeated by a pre-judgment transfer of the property, and also informs any prospective purchasers that they take the property subject to the outcome of the litigation. Upon the filing of a lis pendens, an affected property owner may move for relief in two relevant ways: (i) it may file a motion for discharge of the lis pendens, where the filer of the lis pendens must prove a probability that final judgment will be entered in its favor; or (ii) it may seek the discharge of the lis pendens by posting sufficient security as directed by the court.

In this matter, the Court found that it had issued an order discharging the lis pendens to allow a sale to go forward on the condition that the net sale proceeds would be escrowed until the Court determined its disposition. The Court concluded that the deposit of the net proceeds of the sale of the property had temporarily served as sufficient security to permit discharge of the lis pendens, but denied the employee his alternative request for relief to have the funds released now that there was no filed lis pendens. The Court then calculated the total amount of embezzled funds allegedly invested in the property for purposes of setting the “sufficient security” required under law, and returned the remainder of the escrowed funds to the employee.

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