The Supreme Court of Kentucky, on June 19, 2014, finalized its “to be published” decision in the case of Patricia W. Ballard v. 1400 Willow Council of Co-Owners, Inc.  Although this case arises from facts involving a condominium owner’s dispute with her building’s council of owners, the case is of interest to all financial institutions engaged in mortgage lending and real estate collections. 

The case’s first issue of interest relates to slander of title claims.  For many years, practitioners understood that a one year statute of limitations applied to such causes of action, and usually cited Montgomery v. Milam, 910 S.W.2d 237 (Ky. 1995) (a 4-4 decision) in support of that understanding.  However, the Kentucky Supreme Court, after analyzing the nature of the injury which a slander title claim is intended to redress, ruled that the five-year limitations period found in KRS 413.120(7) applies to slander of title claims.  This decision marks a change, away from a libel analysis, to the substantive understanding that such claims are more directly related to injury visited upon an interest in real estate. Consequently, the Court overruled prior case precedent where a different and shorter statute of limitations had been applied.

The second interesting consequence of the Ballard decision concerns lis pendens practice.  In many collection actions, lis pendens are routinely lodged of record at the outset of the litigation.  There was often little critical analysis applied to the filing decision, as lenders wanted to place the public on record notice of their litigation interest in the encumbered real estate, and as their legal counsel perceived that a lis pendens enjoyed an “absolute privilege”, along with other legal pleadings made in a lawsuit.  The past thinking had been that which was absolutely privileged in character could not be alleged later as grounds for a slander of title claim. 

The Supreme Court of Kentucky has corrected that false perception.  In Ballard the Court concluded “the filing of a lis pendens is protected by a qualified privilege,” as opposed to an absolute privilege.  This particular case did not involve an action to foreclose upon a mortgage.  Rather, the case began with an owner of a condominium unit who filed a civil complaint for damages and injunctive relief. The defendant Council of Co-Owners counterclaimed for its expenses to replace windows in the condo and also filed a lis pendens.  The unit’s owner then amended her claim to assert slander of title arising from the lis pendens and a subsequent “statement of lien” filed by the Council. The Council defended by asserting the absolute privilege it understood attached to pleadings filed in civil actions, including the subject lis pendens. At the conclusion of a nine day trial, the jury found that the Council knowingly and maliciously communicated a false statement about the unit’s owner’s title via the lis pendens’ filing.  The Kentucky Supreme Court affirmed the trial court’s judgment on the slander of title claim.  The Supreme Court also found no legal distinction between a lis pendens filing and a statement of lien, making them both subject to a qualified privilege. 

While the facts in Ballard are unique, the Supreme Court’s decision highlights new legal issues for lenders and their legal counsel. First, KRS 382.440 dictates the necessity for the filing of lis pendens as the recognized means for providing record notice of a party’s litigation interest in real estate.  Many older practitioners can recall the troubles mortgage lenders faced whenever a borrower went into bankruptcy court without a lis pendens encumbering the collateral real property.  But Ballard makes clear that a defensible basis must exist before even taking this protective step of filing a lis pendens.  Second, the Court states that the cloak of “qualified privilege” requires that the filing be “made in good faith and without actual malice.”  And, the decision continues, “[s]uch a determination is a question for the jury.”  

It is with this last point that some future borrowers may now perceive an invitation to file a tactical counterclaim whenever a lender has recorded a lis pendens.   The trial risk is whether the court, even should it rule as a matter of law that the lender is entitled to enforce the lending documents, including the mortgage, may view itself as prohibited from dispositively ruling on a the borrower’s counterclaim. Approaching this issue should begin by recognizing that Ballard involved a factually unique history.  There the Council relied upon its “determination” that the unit owner’s window replacement was caused by her own negligence, and consequentially acted to assert an encumbrance, i.e., there were no authenticated lending documents upon which the action was premised.  Additionally, the evidence at trial demonstrated that the window replacement and its resulting costs were due to the Council’s own acts or omissions, and also that the Council had replaced other condo owner’s windows at the Council’s cost.  Second, slander of title still requires proof of a false statement. A traditional real estate lender’s mortgage and the accompanying grant of the security interest by a borrower, perfected with the filing of the mortgage, should prove an entirely different situation from that which was faced by the Ballard Court. Such traditional circumstances should also permit the qualified privilege to attach under theBallard standard.  Consequentially, in a more typical mortgage lender versus borrower collection lawsuit, once lender’s counsel demonstrates that the lending documents are enforceable as a matter of law, it may be persuasively argued to the presiding court that the case has been lifted from the Ballard analysis and that the “false statement” issue is one that should be summarily resolved.

The Supreme Court’s ruling invites enhanced diligence in determining if a lis pendens may be properly filed.  The filing decision is no longer automatic.  But even under the Ballard decision, a lender who holds a valid security interest in the collateral land and/or a mortgage, coupled with KRS 382.440, should find that it can expeditiously demonstrate its compliance with the “good faith and without actual malice” requirement, and that any tactical counterclaim connected with a filed lis pendens can be resolved in its favor without resort to a jury determination.