64 N.Y.2d 313 (1984)
A notice of pendency (lis pendens) is not properly filed in an action seeking specific performance of a contract for the sale of stock representing beneficial ownership of real estate; the action must directly affect the title, possession, use, or enjoyment of the real property itself.
Summary
5303 Realty Corp. sought to purchase a building. Instead of a direct transfer, the transaction was structured as a stock sale of the entities owning the building, allegedly to avoid taxes. When the deal fell apart, 5303 Realty sued for specific performance and filed a notice of pendency (lis pendens) against the property. The New York Court of Appeals held that the lis pendens was improper because the action was fundamentally about the sale of stock, not a direct claim to the real property itself. The court emphasized the need for strict interpretation of lis pendens statutes due to their potential impact on property alienability.
Facts
Plaintiff 5303 Realty Corp. sought to purchase an office building. The building was owned by 41 Fifth Ave. Associates, a limited partnership. The general partner, 41 Fifth Ave. Realty Corp., was wholly owned by O & Y Equity Corp. An agreement was reached where O & Y Equity would sell its shares in Realty Corporation and cause the limited partners to convey their interests, structured this way to avoid real property transfer taxes. The contract linked the stock sale to the property, providing for title warranties, insurance, and representations about the building’s status. After disputes arose, the closing failed, and 5303 Realty sued for specific performance, seeking an order compelling defendants to comply with the contract and deliver title. It simultaneously filed a notice of pendency against the property.
Procedural History
The defendants moved to cancel the notice of pendency. The Supreme Court denied the motion, finding the original complaint sufficient to sustain the notice. The Appellate Division affirmed. The New York Court of Appeals reversed the lower courts’ decisions, holding that the notice of pendency should be canceled.
Issue(s)
Whether an action to enforce a contract for the sale of ownership interests in a realty-owning entity (structured as a stock sale) may be accompanied by a notice of pendency pursuant to CPLR 6501.
Holding
No, because the action, in essence, concerns the sale of stock and does not directly affect the title to, or the possession, use or enjoyment of, the real property itself, as required by CPLR 6501.
Court’s Reasoning
The Court of Appeals emphasized that a notice of pendency is a powerful tool that clouds title and restricts alienability, requiring strict compliance with statutory requirements and a narrow interpretation of CPLR 6501. The court traced the history of lis pendens from common law to the present statute, noting its potential harsh impact on innocent purchasers. It stated that courts must review the pleadings to determine if the action falls within the scope of CPLR 6501, focusing on whether the relief requested directly affects title to, or possession, use, or enjoyment of, real property. The court distinguished between actions that directly affect real property and those that merely refer to it. It found that the present action was essentially a suit to enforce a contract to sell stock, even though the corporation’s primary asset was real estate. Quoting Brock v. Poor, 216 N.Y. 387, 401, the court reiterated the principle that “the corporation in respect of corporate property and rights is entirely distinct from the stockholders…even complete ownership of capital stock does not operate to transfer the title to corporate property.” The court rejected the argument that the court should elevate substance over form, stating that permitting a notice of pendency in such cases would create uncertainty and be difficult to apply in diverse corporate structures. The court noted alternative remedies such as attachment or injunction are available to protect the plaintiff’s interests without improperly hindering the alienability of real property. The dissent argued that the economic reality of the transaction was a transfer of real property and that the notice of pendency should be allowed. The dissent also expressed concern that the majority’s decision could create uncertainty regarding the applicability of title insurance, recording acts, and the Statute of Frauds to similar transactions.