Martin R. Ufford
Member, Hinkle Law Firm, LLC
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.
Triple check your legal descriptions
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.
Be on the lookout for unanticipated reservations or easements in deeds
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:
A non-exclusive easement for the use and enjoyment of a [12 acre] body of water known as Allen Lake located in the [adjoining 150 acres]
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.
Beware of Judicial Quit Claim Deeds
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:
- (1) get a quit claim deed from the property owners who lost their title as a result of the judicial quit claim deed;
(2) get judgment lien waivers from any judgment creditors whose liens were arguably extinguished by the recording of the judicial quit claim deed; and
(3) get a mortgage release from any mortgagee whose mortgage lien was extinguished by the recording of the judicial quit claim deed.
Beware of Bankruptcies
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
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:
- Always obtain a payoff statement directly from the lender. Do not rely on payoff statements provided by other parties. Your request for a payoff should include a letter of authorization from the borrower, the loan number, the property address, the borrower’s name and your fax number or email address.
- Only rely on a payoff statement sent by the current holder of the note. Check the MERS system, (if the mortgage is a MERS loan), and the public records for the last assignee.
- Be mindful of working with hard money lenders – hard money lenders may assign their interests off the record. (See Bulletin 2017-02 and Claims Title Tip dated September 18, 2017 discussing hard money lenders .)
- Obtain separate payoff statements directly from each lender with an interest in the property being sold or refinanced. Do not rely on representations from the borrower or other institutions regarding the balance of a loan.
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 firstname.lastname@example.org 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.
The Claims Department recently paired up with the Ronald McDonald House Charities as part of their annual campaign to give back.
Ronald McDonald House Charities provides support to children and their families at hospitals worldwide by providing a place to stay, and home-cooked meals, at little or no cost.
This service allows families to focus on the health and healing of their child, instead of having to worry about groceries, shopping, cleaning and cooking.
The Claims Team paid a visit to the Ronald McDonald house in Orlando and prepared a home cooked meal of tacos with all the fixins. Photos from their time volunteering in the kitchen are on display in the slideshow below.
Ronald McDonald’s policy is that no family is ever turned away — fees are waived for families that cannot afford to make a donation.
Please visit the donation page to give to your local Ronald McDonald House Charities chapter, or to other chapters located across the globe.