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Martin R. Ufford
Member, Hinkle Law Firm, LLC
Wichita, KS
I’ve had the privilege of representing title insurance companies and their insureds for the past ten years. Each claim represents a unique challenge. With the benefit of hindsight, I have reached some conclusions that may assist agents and local counsel in avoiding claims.
While this is belaboring the obvious, errors in legal descriptions on deeds and mortgages must be avoided.
If a mortgage contains an inaccurate legal description, the loan goes into default, and a mortgage foreclosure action is filed, the lender will need to add a request for the court to reform the mortgage to revise the legal description to accurately describe the property that the lender and borrower supposedly “intended” to be the collateral in the mortgage.
Unfortunately, borrowers in financial difficulty, or worse, the borrower’s bankruptcy trustee, might argue that the error in the legal description results in the lender having an unsecured loan.
If the error is not discovered until after a foreclosure judgment is entered, the lender will have additional delays and expenses due to a need to set aside the journal entry of judgment and starting over with an amended petition.
Immediately following a metes and bounds legal description in a deed conveying ten acres out of a 160 acre quarter section to party A, the deed granted to party A:
Ten years later, a title examiner failed to pick up and exclude the grant of easement when the remaining 150 acres in the quarter section were sold to party B.
Allen Lake is directly in the flight path of more than 800,000 migratory game birds that fly over it each year, making Allen Lake one of the best geese and duck hunting properties in Kansas.
Party B made a claim against the title insurance company because he did not have the exclusive right to develop and hunt on the lake he had bought.
It cost the title insurance company a lot of money to resolve this claim.
At least one state has enacted a series of statutes that permit the issuance of a “judicial quit claim deed” to an organization that rehabilitates “abandoned” property, i.e., a residence for which real estate taxes are delinquent for the preceding two years and which has been unoccupied continuously for the preceding 90 days.
A non-profit corporation can file a petition with the court to approve a rehabilitation plan to fix up the property. Once the rehabilitation plan is completed, the non-profit corporation can file a motion with the court for it to obtain a judicial quit claim deed to the property.
The statutes require the non-profit corporation to properly serve the record title owner of the property with both the initial lawsuit and the motion for the issuance of the judicial quit claim deeds.
In one case, the court ordered the judicial quit claim deed to be set aside since the non-profit organization failed to make a good faith effort to locate the record title owner, and, therefore, its reliance on publication notice for the filing of the lawsuit was held to be improper.
Unfortunately for the title insurance company, the property had been conveyed to three different entities in the span of about a year before the property was sold to its insured, and the title examiner relied upon the judicial quit claim deed in the chain of title. The title company ultimately settled with the former property owner after an 11-hour mediation.
Therefore if a “judicial quit claim deed” appears in your chain of title, it is recommended that you:
A Kansas county held a tax foreclosure sale for payment of unpaid real estate taxes and the property was sold to Party A who received a sheriff’s deed to the property.
Prior to the sale, the property owner had filed a Chapter 13 bankruptcy, which was pending at the time of the tax foreclosure sale.
Because the county did not obtain permission from the Bankruptcy Court to hold the sale (this is called a “motion for relief from the automatic stay”), the sale to Party A was ruled to be null and void, and the county had to refund the amount paid to Party A.
Most states have title standards that address what documentation is required prior to obtaining a deed from a trustee in bankruptcy or a Chapter 11, 12 or 13 debtor while the case is pending or after a discharge has been granted.
Bankruptcy is a red flag that should always alert a title examiner to proceed with caution. Contact your Underwriter to discuss.
About the Author:
Martin R. Ufford has defended claims against both title insurance companies and their insureds in state and federal courts. He is admitted to practice before the Kansas Supreme Court, United States District Court for the District of Kansas, the Tenth Circuit Court of Appeals in Denver, Colorado, and the United States Supreme Court.
*****
Martin R. Ufford
Hinkle Law Firm LLC
1617 N. Waterfront Parkway, Suite 400
Wichita, Kansas 67206
(316) 267-2000
mufford@hinklaw.com
Looking to avoid title claims related to unpaid mortgages and deeds of trust? We offer 4 tips
Our Claims Team has received various claims related to unpaid mortgages and deeds of trust. Here are two scenarios we have seen arise in the context of a claim:
The agent receives a payoff statement from the seller. The seller sends an email requesting the payoff from the lender and copies the agent on the email.
The agent relies on the email and the payoff statement to wire funds to the lender.
Later, it is discovered that the email address for the lender is fake, and the bank account receiving the payment was held by the seller, not the lender.
The agent reaches out to the lender for a payoff statement. However, the closing date is approaching, and the lender has not responded.
The seller provides the agent with a printout showing a zero-balance owed on the account. The agent contacts the lender once again for a payoff statement.
The lender confirms over the phone that a zero balance is owed. The agent closes the transaction based on these representations.
Later, it is determined the original lender confirmed a zero-balance due because the loan had been sold to another lender.
An assignment of the mortgage had been recorded, and the current holder of the notes filed to foreclose.
Here are 4 tips to help you avoid these types of claims:
Recorded judgments in Arizona do not encumber homestead property, but watch out for a Lis Pendens
By Scott A. Malm
Many lawyers representing creditors record their money judgments and let escrow companies collect the judgment amount for them when the debtor sells real property.
But after a recent published opinion in Arizona applying its homestead protection laws, that practice may soon come to an end if the real property is protected by the homestead statutes.
In Pac. W. Bank v. Castleton, No. 1 CA-CV 17-0667, 2018 WL 6815531 (Ariz. Ct. App. Dec. 27, 2018), the Arizona Court of Appeals considered the effect of a $5.2 million recorded judgment on a subsequent conveyance of a personal residence by the judgment debtor to a third-party buyer.
After the close of escrow, the judgment creditor sought to collect its judgment against the buyer by filing a judicial foreclosure complaint.
Such action triggered coverage under a title insurance policy (not an Alliant National policy!) because the judgment was not listed in Schedule B.
The Arizona Court of Appeals had to decide the purely legal question: Is a recorded judgment a lien that encumbers homestead property? If so, the insured would lose its property.
Almost 100 years ago, the Arizona Supreme Court followed the majority view in the United States that a judgment lien does not attach to homestead protected property.
But some lawyers for creditors argued that an amendment to Arizona’s judgment lien and homestead statutes enacted in 2007 changed that precedent – A.R.S. Section 33-1103(A)(4) – provides that homestead property is not exempt if there is sufficient equity in the property to satisfy a judgment or other lien.
The Pacific Western case confirms the idea that homestead statutes and judgment lien statutes follow the concept of “homestead” as being the actual property.
As a result, the insured buyer is protected from a recorded judgment if the homestead exemption applies because the judgment lien will not attach to homestead protected property.
However, homestead statutes may not fully insulate a sale by a judgment creditor because many states, including Arizona, allow a creditor to proceed with a statutorily described process to reach any equity in excess of the homestead protection amount.
The judgment lien may not attach to a property protected by this homestead exemption, but a court may order a sheriff’s sale for the creditor to recover any equity that exists in excess of the homestead amount.
If such an action is filed and a lis pendens is recorded before the close of escrow of a sale of the property by the judgment debtor, then the subsequent sheriff’s sale could extinguish the insured buyer’s title.
Therefore, best practice is to dispose of any pending judgment liens prior to closing a proposed transaction.
If you encounter an outstanding judgment lien prior to closing, please contact underwriting counsel with any questions regarding attachment or homestead exemptions.
About the Author:
Scott Malm is a managing member of Gust Rosenfeld, PLC, one of the oldest law firms in Arizona, and represents many title and escrow companies, including Alliant National Title. He successfully argued the Pacific Western case and may be reached at samalm@gustlaw.com or 602-257-7481.
By Carleton Burch
Anderson, McPharlin & Conners LLP Lawyers
Protecting against the stale HELOC and mitigating losses.
Home equity lines of credit (“HELOC”) secured by Deeds of Trusts are a fixture of modern consumer finance. According to an article appearing in the Washington Post, an estimated 10 million homeowners will open a HELOC between 2018 and 2022.
For the title insurer, the revolving nature of the HELOC, coupled with the fact there is no universally accepted procedure for closing a HELOC and reconveying the Deed of Trust in connection with a subsequent transaction, creates a unique problem.
With property values on the rise, there appears to be an uptick in foreclosures of HELOC loans.
Thus, downstream owners and lenders are faced with issues relating to not only the validity, but the amount and priority of the HELOC.
This article discusses ways to protect against the stale HELOC and how to mitigate losses.
From the underwriting perspective, never assume that an earlier refinance, sale or conveyance resulted in the release of the HELOC Deed of Trust unless there is a Full release of record.
More often than not, it happens that a HELOC was paid down through a refinance, but the HELOC was not closed and the borrower continued to draw down.
Where a subsequent lender intended its loan to pay the HELOC and be secured as a first priority Deed of Trust but there is no release (or subordination agreement), a lien priority dispute may arise.
To protect against such a situation, as part of the closing there should be express instruction signed by the borrower to close the HELOC and there should be a full release Deed of Trust or subordination agreement executed by the holder of the HELOC Deed of Trust.
Recent case law confirms the need for caution. The California Court of Appeals decision Bank of New York Mellon v. Citibank, N.A. 8 Cal.App.5th 935 ( 2017) in which the court found that the HELOC was not automatically extinguished as a result of the loan being “paid off” or “paid down” absent express instructions to the lender to close the line of credit and reconvey the security.
The court held that a subsequent owner took subject to the lien of the prior HELOC.
To avoid the unique issues that come with an outstanding HELOC claim, be mindful of any open HELOC Deeds of Trust. Be sure to provide express written instructions to the lender, signed by the borrower, instructing the lender to close loan and reconvey the property.
If you have any questions when working to close out a HELOC Deed of Trust please contact Alliant National’s underwriting department.
ALTA TitleNews Online Archive
November 29, 2018
The Internal Revenue Service and Security Summit partners recently issued a warning about the surge of fraudulent emails impersonating the IRS and using tax transcripts as bait to entice users to open documents containing malware.
The scam is especially problematic for businesses whose employees might open the malware because the software can spread throughout the network and potentially take months to successfully remove.
Known as Emotet, this malware generally poses as specific banks and financial institutions in its effort to trick people into opening infected documents.
In the past few weeks, the scam masqueraded as the IRS, pretending to be from “IRS Online.” The scam email carries an attachment labeled “Tax Account Transcript” or something similar, and the subject line uses some variation of the phrase “tax transcript.”
These clues can change with each version of the malware. Scores of these malicious Emotet emails were forwarded to phishing@irs.gov.
recently.
The IRS reminds taxpayers it does not send unsolicited emails to the public, nor would it email a sensitive document such as a tax transcript, which is a summary of a tax return. The IRS urges taxpayers not to open the email or the attachment.
If using a personal computer, delete or forward the scam email to phishing@irs.gov.
If you see these using an employer’s computer, notify the company’s technology professionals.
Successful SSAE 18 Type II examination validates Alliant National’s processes for approving, monitoring and reviewing its agents
LONGMONT, Colo. – Alliant National Title Insurance Company, a unique title insurance underwriter that partners with Independent Agents to improve their competitive position in the marketplace, announces the successful completion of the Service Organization Control (SOC 1) SSAE 18 Type II examination for the fifth consecutive year.
The examination results in an AICPA endorsed report stating that Alliant National Title Insurance Company has maintained effective controls over its Agent Quality Management System. A-Lign Certified Public Accountants of Tampa, Fla., performed the engagement and certification.
The successful SSAE 18 Type II examination validates Alliant National’s processes for approving, monitoring, and reviewing its agents, which results in its agents being designated as Authorized Service Providers or Certified Service Providers of Alliant National. Under this framework, Alliant National’s Independent Agents are reviewed annually against rigorous quality standards.
Lenders relying upon Alliant National’s oversight of its agents and Authorized and Certified Service Provider programs receive additional assurance that processes and controls are designed and function properly and accurately.
Alliant National was certified to the SSAE 16 Type I standard on Dec. 1, 2013 and received compliant status to the more rigorous SSAE 16 Type II standard effective Aug. 31, 2014 and each year through December 31, 2018. That makes 2018 the fifth consecutive year of continued compliance to SSAE Type II standards. The unqualified report was issued without exceptions.
“Alliant National was the first title insurance underwriter in the nation to obtain an SSAE16 Type II compliant status and is the only title insurance underwriter to achieve compliant status for five consecutive years. This certification provides strong independent assurance of our agent oversight systems to lenders and all stakeholders,” Alliant National President and CEO, Bob Grubb said. “Our goal is to provide unequivocal evidence of the quality of our agents through an independently audited system.”
Wire fraud is a HUGE problem that only keeps getting bigger and bigger.
In fact, U.S. Representative Randy Hultgren (R-III) wrote a letter to Fed Chairman Jerome Powell on June 29th urging the Fed to be more proactive in regard to wire fraud and real estate transactions. The letter referenced the United Kingdom’s system of matching payees’ names as a possible solution to the problem of wire fraud.
However, we don’t have to wait until a federal law is passed that orders banks to match the payee name on the wire transfer payment to name on the payee’s destination bank account (“Beneficiary Bank”).
As title and escrow agents, we can be proactive and in partnership with the banks with which we do business.
So, what can we do right now?
First, we can know what our Agreement with our Escrow Account Bank says.
Does your Bank Agreement say that your bank will check the payee’s name with the name on the destination account when a wire fund transfer is initiated?
Or, does it say your bank need only rely upon the account number it was provided in the wiring instructions order? The answers to these questions might lead to an opportunity to have a discussion with your partnering Receiving Bank.
We can also send the wire instructions on the payment order, with explicit directions that acceptance be restricted to match the designated payee’s name on the Beneficiary Bank account. If it doesn’t match, then do not send the funds.
Lastly, if something does go wrong despite our best efforts and precautions, then notify both the Beneficiary Bank and the Receiving Bank as soon as possible. Typically, banks require notification of an unauthorized transfer or error within a defined time period such as, for example, thirty or sixty days.
Aside from any contractual or legal requirement for early notification, the sooner the problem is communicated, the greater the odds of the bank being able to halt or pull back the wire funds transfer.
For a great explanation of how a wire fund transfer works behind the scenes, view “Funds Transfer Law and Unauthorized Payment Liability.”
According to the IRS, thousands of people have lost millions of dollars and their personal information to tax scams.
These days, when we consider fraud schemes targeting title agents, we usually think about email scams where criminals attempt to interject themselves into specific transactions for the purpose of diverting a wire.
Such scams can be devastating for agents and consumers, and we must guard against this type of email fraud.
However, scams involving real estate transactions are just one small piece of the larger fraud puzzle; and with tax season upon us, it’s important to remember that our industry is not immune to the types of email and other schemes that are common to other businesses.
According to the IRS, thousands of people have lost millions of dollars and their personal information to tax scams.
Scammers use the regular mail, telephone, or email to set up individuals, businesses, payroll and tax professionals.
The agency recently released a flurry of alerts warning of various schemes. You can find a full summary on the IRS webpage, but here are just a few highlights.
W-2 scam
The IRS warned that fraudsters are increasingly targeting payroll and human resource departments in an attempt to obtain their Forms W-2, which the criminals then use to file fraudulent tax returns.
To work the scam, the fraudster writes emails that look like they’re from an organization executive. The emails are directed to an internal employee with access to wage and tax information, and they often begin with an innocent greeting, such as: “hi, are you working today.”
Soon, the fraudster asks for all Form W-2 information.
The W-2 phishing scam has victimized hundreds of organizations and thousands of employees in recent years, the IRS said. Employers of all sizes have been affected including public schools, universities, hospitals, tribal governments and charities.
The IRS has established a process allowing businesses and payroll service providers to quickly report any data losses related to the W-2 scam.
Learn more about the process here.
Phone scam
In a recent blog post,”Think Email Fraud is the Only Hack Tactic? Think Again.” , we noted that scammers are increasingly using phone calls to attempt to trick title agents into wiring money to fraudulent accounts.
Some simple technologies even allow fraudsters to spoof phone numbers. So, a criminal could call you, but make it look like the call was coming from someone legitimately involved in the transaction.
As it turns out, tax fraudsters are using this same technology.
The IRS warned that criminals claiming to be IRS employees — using fake names and bogus IRS identification badge numbers — are trying to bully victims into sending them money.
Sometimes the fraudsters claim that the victim has a tax refund coming, and the money can be deposited if the victim provides his or her banking information.
The tax phone scam seems to be targeted toward individuals as opposed to businesses, but it underscores at least two important points: 1.) treat threats and high pressure language as a red flag; and 2.) the telephone isn’t always a “safe” method of communication.
Malware
Malware scams certainly aren’t new. Basically, the fraudster sends an email that looks like it’s from a trusted source, such as a business contact, a reputable company or a government agency.
The email directs the receiver to click a hyperlink or open an attachment.
When clicked, malicious software loads onto the victim’s computer, and the scammer uses that software to gain access to sensitive systems and information.
Fraudsters often attempt to trick title agents and others involved in real estate transactions into clicking malicious links by sending emails purporting to contain “important closing documents.”
By now many agents have seen the “closing documents” scheme, and they know how to avoid it. However, companies need to remain vigilant for other types of malware emails.
In recent weeks, the IRS has seen a surge in malware emails targeting the employees of all types of businesses. The emails, which appear to come from the IRS, carry malicious attachments labeled “Tax Account Transcript” or something similar. The words “tax transcript” often appear in the subject line.
The IRS reminded taxpayers that it does not send unsolicited emails to the public and would never email a sensitive document such as a tax transcript, which is a summary of a tax return.
If using a personal computer, such emails should be deleted or forwarded to phishing@irs.gov, the agency said. Those who receive such emails at work should notify their company’s technology team.
