title insurance coverage: what real estate counsel need to...

Title Insurance Coverage:

What Real Estate Counsel Need to Know Leveraging the Latest Developments in ALTA Coverage and Endorsements

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THURSDAY, MAY 21, 2015

Presenting a live 90-minute webinar with interactive Q&A

Cheri Hipenbecker, General Counsel, Knight Barry Title, Milwaukee, Wis.

Brad L.F. Hoeschen, Esq., Chernov Stern & Krings, Milwaukee, Wis.

Bridget M. Hubing, Shareholder, Reinhart Boerner Van Deuren, Waukesha, Wis.

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FOR LIVE EVENT ONLY

S

THE WHAT’S OF TITLE

INSURANCE

What you get and what you don’t

Cheri Hipenbecker Knight Barry Title

[email protected]

4

Title Insurance –

varies State by State

S Title insurance rates – filed rates or a dart board?

S Title insurance forms – state mandated? underwriter filed?

negotiable?

S Enforcement – active insurance commissioner?

S Closing protection letters – mandatory? optional? fee? seller,

buyer, borrower and/or lender?

5

WHAT YOU GET

Covered Risks

S 10 Covered Risks in the Owners Policy (ALTA 2006 policy)

(“OP”)

S 14 Covered Risks in the Loan Policy (ALTA 2006 policy)

(“LP”)

S Covered Risks are subject to the Exclusions from Coverage

(Policy Jacket), Exceptions from Coverage (Schedule B),

and the Conditions (Policy Jacket)

6

WHAT YOU GET

Pay or Otherwise settle claims

S Paragraph 7 of Conditions of OP and LP

S In the event that the claim against the title is valid, the title insurance company has a few options:

S To Pay or Tender Payment of the Amount of Insurance (Note - if improvements/additions made to a property, the property owner may wish to increase the amount of title insurance)

S To Pay or Otherwise Settle With Parties Other Than the Insured or With the Insured Claimant.

S In the event that the claim is one of “Unmarketable Title” - that is junk (being a legal term) which shows up on a title commitment which would permit a prospective purchaser to be released from the obligation to purchase - the title company per Paragraph 9 of the Conditions of the Owners Policy may “cure(s) the claim of Unmarketable Title” by removing from the title commitment.

7

WHAT YOU GET

Covered Risk #1 – OP & LP

S Title being vested other than as stated in Schedule A.

S Applies to both Owners Policy (OP) and Loan Policy (LP) . The issue - do you know is the correct person/entity selling the property?

HYPO (based on Wisconsin law)

- 1990 -vesting deed to “Jack Hagen and Mary Biver”. At the time of the deed Jack Hagen and Mary Biver are dating and subsequently marry.

- 2000 – Jack Hagen dies and Mary Biver records a document to terminate joint tenancy

- 2010 – Mary Biver nka Mary Hagen conveys the property to Kelsey Smart. Kelsey obtains an owners policy of title insurance.

- 2012 – Jack Hagen’s son from a previous marriage, now an adult, commences a lawsuit against Kelsey Smart

- 2012 – Kelsey Smart files a claim under the title insurance policy. Is there coverage? hint - how was title held originally.

8

WHAT YOU GET

Covered Risk #2– OP & LP

Applies to both OP and LP .

9

WHAT YOU GET


Defect in the Title caused by forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation

HYPO (undue influence)

- 1990 -vesting deed to “Jack Hagen and Mary Biver”. At the time of the deed Jack Hagen and Mary Biver are dating and subsequently marry.

- 1994 Jack Hagen and Mary Biver deed the property to themselves as “Jack Hagen and Mary Hagen, husband and wife with rights of survivorship”. They also prepare wills providing that the surviving spouse receives 50% of their estate and their respective children from prior marriages receive 50% of the Estate (Jack has a son and Mary has a daughter)

- 2000 – Jack Hagen dies and Mary Hagen records an instrument confirming that she succeeds to Jack’s interest in the Property.

- 2008 – Mary Hagen deeds the property to Jack Hagen’s son from a prior marriage, retaining a life estate.

- 2010 – Mary Hagen dies and Jack Hagen’s son records an instrument confirming that he succeeds to Mary’s interest in the Property.

- 2012 – Jack Hagen’s son conveys the property to Kelsey Smart. Kelsey obtains an owners policy of title insurance.

- 2014 – Mary Hagen’s daughter, now an adult, commences a lawsuit against Kelsey Smart. Kelsey files a claim under the title insurance policy. Is there coverage?

- Answer depends on capacity. The items in this category include casualty risks.

10

WHAT YOU GET


A defect in the Title caused by … failure of any person or Entity to have authorized a transfer or conveyance;

HYPO - The issue - is the person signing the deed on behalf of a corporation /LLC /partnership the right person?

• 1990 - deed to “Cheri’s LLC”.

• 1995 - the registered agent for “Cheri’s LLC” is changed from Cheri to Bob.

• 2007 - deed from “Cheri’s LLC” to Kelsey Smart. Bob signs the deed for and on behalf of Cheri’s LLC”. Kelsey obtains an owners policy of title insurance.

• 2013 - Cheri commences a lawsuit against Kelsey Smart. Kelsey files a claim under the title insurance policy. Is there coverage?

• In Wisconsin, Kelsey wins. See the statute of limitations in Section 706.09, Wis. Stats.

11

WHAT YOU GET


S Unmarketable Title.

S Applies to both OP and LP .

S “Title” is defined as “The estate or interest described in Schedule A” (could be a fee simple, leasehold, life estate..)

S “Unmarketable Title” is defined as “Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title.”

S Unmarketable is not the same as un-salable. Example, failure to search if the property is in a flood plain does not give rise to coverage under Covered Risk #3.

12

WHAT YOU GET


S No right of access to and from the Land.


S The access insurance under the policy is a legally enforceable right of access to and from a public

street or road. There is no requirement that the public street or road is actually built, is buildable

or is at grade.

S The access insurance is not a quality of physical access insurance - that is, there is no insurance

that access to the Land is suitable for the proposed owner/insured’s use, that there is an open

and improved road, or that access is via pedestrian or vehicular means.

S Simply, the access insurance insures that the proposed insured Owner/Lender will be able to get

to (access) the Land --- but the Owner/Lender might need some grappling gear.

S So what does this mean to the insured? Does the insured need more?

S Consider buying access endorsement, either direct or via an easement, ALTA forms 17 and 17.1 13

WHAT YOU GET


So if the title insurance company misses the recorded notice,

the title insurance company pays

Example - notice to raze building.

Consider a zoning endorsement for affirmative coverage –

ALTA 3 series

Applies to both OP and LP .

14

WHAT YOU GET


S An enforcement action based on the exercise of a governmental

police power not covered by Covered Risk 5 if a notice of the

enforcement action, describing any part of the Land, is recorded

in the Public Records, but only to the extent of the enforcement

referred to in that notice.


S Similar to Covered Risk #5, if the title company misses

the recorded notice the title company pays.

15

WHAT YOU GET


S The exercise of the rights of eminent domain if a notice of the

exercise, describing any part of the Land, is recorded in the

Public Records.


S Similar to Covered Risks #5 and 6, if the title company

misses the recorded notice of the exercise of the rights

of the eminent domain the title company pays.

16

WHAT YOU GET


S Any taking by a governmental body that has occurred and is binding on

the rights of a purchaser for value without Knowledge.


S Similar to Covered Risks #5, 6 and 7, if the title company

misses the recorded notice regarding the taking, then the title

company pays.

S Coverage may also depend on whether the state is a

race/notice state.

17

WHAT YOU GET

Covered Risk #9 - OP

S Applies to OP only.

18

WHAT YOU GET

Covered Risk #9(a) - OP

S Title being vested other than as stated in Schedule A or being defective (a) as a result of the avoidance in whole or in part, or from a court order providing an alternative remedy, of a transfer of all or any part of the title to or any interest in the Land occurring prior to the transaction vesting Title as shown in Schedule A because that prior transfer constituted a fraudulent or preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws; or

HYPO – fun with bankruptcy

S 1990 - vesting deed to Johnny Walker.

S Late 2012 - Johnny Walker deeds the property to his LLC, Johnny Walker’s LLC

S 2012- Johnny Walker files bankruptcy

S Early 2013 - Johnny Walker conveys the property to Kelsey Smart. Kelsey obtains an owners policy of title insurance

S Late 2013 - the bankruptcy trustee files a lawsuit against Kelsey Smart. Kelsey files a claim under the title insurance policy. Is there coverage?

S Covered Risk 9(a) includes casualty risks.

19

WHAT YOU GET

Covered Risk #9(b) - OP

S Title being vested other than as stated in Schedule A or being defective … (b) because the instrument of transfer vesting Title as shown in Schedule A constitutes a preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws by reason of the failure of its recording in the Public Records (i) to be timely, or (ii) to impart notice of its existence to a purchaser for value or to a judgment or lien creditor.

S HYPO – more fun with bankruptcy (but easier to explain in the context of a loan policy – covered risk 13(b))

S 1990 - vesting deed to Johnny Walker.

S January 2012- Johnny Walker obtains a mortgage loan from Best Bank. Best Bank obtains a loan policy.

S February 2012- Johnny Walker files bankruptcy.

S June 2012 – Mortgage to Best Bank recorded with local Register of Deeds.

S July 2012- the bankruptcy trustee files an adversary proceeding including Best Bank . Best Bank files a claim under the title insurance policy. Is there coverage?

20

WHAT YOU GET

Covered Risk #10 - OP

S Any defect in or lien or encumbrance on the Title or other matter included in Covered Risks 1 through 9 that has been created or attached or has been filed or recorded in the Public Records subsequent to Date of Policy and prior to the recording of the deed or other instrument of transfer in the Public Records that vests Title as shown in Schedule A.

S Applies to OP only.

S HYPO – this is the “post-closing” GAP coverage for policies issued at the table.

S 1990 - vesting deed to Mark Maker.

S March 1, 2014- Mark Maker conveys the property to Kelsey Smart. Kelsey obtains an owners policy of title insurance which is issued at the closing table.

S March 2, 2014- Mark Maker conveys the property to Gavin Silly. Gavin obtains an owners policy of title insurance which is issued at the closing table.

S March 3, 2014- deed to Gavin Silly recorded.

S March 4, 2014- deed to Kelsey Smart recorded.

S Who owns the property? Who gets the fat check from the title company? What would happen if no title insurance?

21

WHAT YOU GET

Covered Risk #9 - LP

Applies to LP only. Similar to Covered Risk #2

22

WHAT YOU GET


S The lack of priority of the lien of the Insured Mortgage upon the Title over any other lien or

encumbrance.

S Applies to LP only.

S As with all of the Covered Risks, this is subject to the Exceptions show in Schedule B-

Section I (of the Commitment) and Schedule B (of the Policy).

S So unless otherwise Excepted in Schedule B, the Insured Mortgage is insured as in first lien

position.

S Be aware of construction liens that may “jump” over the insured mortgage and which are

generally excepted out on Schedule B.

23

WHAT YOU GET


S Applies to LP only.

S Subject to Exceptions.

S If the title company is disbursing for the construction project, and if the general exception for unfiled

construction liens remains on the policy, then consider ALTA Endorsement series 32 and 33 which are

issued together and which insure against loss or damage by reason of the lack of priority for Construction

Loan Advances (as defined in the endorsements).

24

WHAT YOU GET


S The invalidity or unenforceability of any assignment of the Insured Mortgage, provided

the assignment is shown in Schedule A, or the failure of the assignment shown in Schedule

A to vest title to the Insured Mortgage in the named Insured assignee free and clear of all

liens.

S Applies to LP only. Really only applies if the assignment is shown in Schedule A

(which typically does not happen).

S See the Definitions section of the Conditions defining who is the Insured.

Included in the definition of the Insured is the owner of the Indebtedness and

each successor in ownership of the Indebtedness, whether the owner or

successor owns the Indebtedness for its own account or as a trustee or other

fiduciary, except a successor who is an obligor under the provisions of Section

12(c) of the Conditions.

25

WHAT YOU GET


S Applies to LP only. Akin to Covered Risk 9 in the Owners Policy.

26

WHAT YOU GET


S Any defect in or lien or encumbrance on the Title or other matter included in

Covered Risks 1 through 13 that has been created or attached or has been filed or

recorded in the Public Records subsequent to Date of Policy and prior to the

recording of the Insured Mortgage in the Public Records.

S This is the “post-closing” GAP coverage for policies issued at the table.

S Akin to Covered Risk 10 in the Owners Policy.

27

WHAT YOU DON’T

Exclusions from Coverage

S 5 Exclusions from Coverage in the Owners Policy (ALTA 2006 policy)

S 7 Exclusions from Coverage in the Loan Policy (ALTA 2006 policy)

S The following matters are expressly excluded from the coverage of this policy,

and the Company will not pay loss or damage, costs, attorneys' fees, or expenses

that arise by reason of:

S (consider an endorsement over an exclusion or to add additional coverage)

28

WHAT YOU DON’T

Exclusions #1 and 2

S EXCLUSION 1 - below. Consider ALTA Endorsement 3 series – Zoning endorsements for vacant land, completed

structures and land under development.

S EXCLUSION 2 - Rights of eminent domain. This Exclusion does not modify or limit the coverage provided under

Covered Risk 7 or 8.

S Thus title company has no duty to defend against or pay for eminent domain actions unless the title

company missed the recorded notice.

29

WHAT YOU DON’T

Exclusion #3

In the presenter’s humble experience, title insurers deny coverage most often using Exclusion 3. Consider a mortgage signed by a insured owner, a judgment against an insured owner, or a claim by a neighbor known to the insured owner and not disclosed to the title company.

S EXCLUSION 3 - below from OP (slightly different language in LP)

30

WHAT YOU DON’T

Exclusion #4 OP (#6 on LP)

S EXCLUSION 4 - below from OP (this is Exclusion 6 on LP with slightly different language)

S This is similar to Exclusion 3(a), at least for an owners policy, in that if the insured transaction is deemed to be a fraud under creditor’s rights laws, or a preferential transfer, then the insured owner may have been involved in creating the claim.

S As for lenders, the ALTA Endorsement Series 21 (which provided coverage under the Loan Policy if there was a loss sustanined “…based on the voidability of any estate or interest shown in Schedule A or the Insured Mortgage because of the occurrence on or before Date of Policy of a fraudulent transfer or a preference under federal bankruptcy, state insolvency, or similar creditors' rights law.”) was decertified in February 2010.

S As stated in one scholarly article, the effect that of decertifying the 21 Endorsement Series is lenders will have to “…rely on their own analyses of the fraudulent conveyance and preference risks inherent in their transactions, price them accordingly and act at their own, and not the title insurers‘ risk.”

31

WHAT YOU DON’T

Exclusion #5 OP (#7 on LP)

S EXCLUSION 5 - below from OP (this is Exclusion 7 on LP with slightly different language)

S Thus although the Covered Risks include a “post closing” GAP coverage (See Covered Risk #10 in

the OP and Covered Risk #14 in the LP), that coverage does not extend to real estate taxes or

assessments.

32

WHAT YOU DON’T

Exclusion #4 and 5 on LP

S EXCLUSIONS 4 and 5 - below from LP

S Both of these Exclusions relate to conditions created by the insured under a Loan Policy.

S #4 – Consider ALTA 24-06 “Doing Business” Endorsement which insures against loss or damage

sustained by the Insured by reason of the invalidity or unenforceability of the lien of the Insured Mortgage

on the ground that making the loan secured by the Insured Mortgage constituted a violation of the "doing-

business" laws of the State where the Land is located….

S #5 – Consider ALTA 27-06 Usury Endorsement which insures against loss or damage sustained by the

Insured by reason of the invalidity or unenforceability of the lien of the Insured Mortgage as security for the

Indebtedness because the loan secured by the Insured Mortgage violates the usury law of the state where the

Land is located.

33

WHAT YOU DON’T

Exceptions – Standard 1-3

S STANDARD EXCEPTION 1 - Defects, liens, encumbrances, adverse claims or other matters, if any, created, first

appearing in public records or attaching subsequent to the effective date hereof but prior to the date the proposed insured acquires for value of record the estate or interest or mortgage thereon covered by this Commitment.

S Consider a GAP endorsement to delete this exception on the final OP or LP. The concern – does a lien, defect etc.. Fall into the GAP between the Effective Date of the Commitment and the Date of Policy? How long does it take to record documents in your location? Are the public records current?

S STANDARD EXCEPTION 2 - Special assessments, special taxes or special charges, if any, payable with the taxes levied or to be levied for the current and subsequent years.

S Consider asking the title company what the company needs to remove this exception. For an OP, typically obtaining special assessment information from the local municipality and seller indemnity will suffice.

S STANDARD EXCEPTION 3 - Liens, hook-up charges or fees, deferred charges, reserve capacity assessments, impact fees, or other charges or fees due payable on the development or improvement of the Land, whether assessed or charged before or after the date of the policy.

S Consider asking the title company what the company needs to remove this exception. For an OP, typically if the Land is improved and has water/sewer service, then obtaining special assessment information from the local municipality and seller indemnity will suffice.

34

WHAT YOU DON’T

Exceptions – Standard 4 and 5

S STANDARD EXCEPTION 4 - Any lien, or right to a lien, for services, labor, or material heretofore or

hereafter furnished, imposed by law and not shown by the public records..

S See Covered Risk #11 on the LP. It’s fair to say that a large percentage of claims under title

policies arise with respect to unfiled construction/mechanic’s liens. Whether the title

company may be willing to delete this exception depends on the law of the state, the

financial status of the seller (or borrower), whether construction has been done, is being

done or is contemplated, the risk tolerance of the title insurer and the day of the week.

S STANDARD EXCEPTION 5 - Rights or claims of parties in possession not shown by the public

records..

S Consider asking the title company what the company needs to remove this exception. For

an OP, typically a seller indemnity will suffice.

35

WHAT YOU DON’T


S Standard exceptions 6, 7 and 8 are colloquially called the “survey exception”

S STANDARD EXCEPTION 6 - Any encroachments, encumbrance, violation, variation, or adverse

circumstance affecting Title that would be disclosed by an accurate and complete land survey of

the Land.

S STANDARD EXCEPTION 7 - Easements or claims of easements not shown by the public

records.

S STANDARD EXCEPTION 8- Any claim of adverse possession or prescriptive easement.

36

WHAT YOU DON’T


S REMOVING STANDARD EXCEPTION 6-8

S Consider asking the title company what the company needs to remove these “survey exceptions”. For an

OP, typically a survey (depending on the amount of the policy, an ALTA survey may be required, or

something less such as a boundary survey).

S For an LP – different insurers have different tolerance levels and may not require a survey to remove these

“survey exceptions”.

S In Wisconsin title insurers generally permit deletion of the survey exceptions if the mortgage loan is

on residential property, less than 25 acres, less than $1M, no new construction, the property does not

abut water and the seller provides an indemnity.

S In Wisconsin title insurers generally permit deletion of the survey exceptions if the mortgage loan is

on non-residential (commercial) property, less than 25 acres, less than $5M, no new construction,

existing improvements, the property does not abut water and the seller provides an indemnity.

37

CONDITIONS

S 18 Conditions in the Owners Policy (ALTA 2006 policy)

S 17 Conditions in the Loan Policy (ALTA 2006 policy)

S Additional Condition on Owners Policy: “The Amount of Insurance shall be reduced by any

amount the Company pays under any policy insuring a Mortgage to which exception is taken in

Schedule B or to which the Insured has agreed, assumed, or taken subject, or which is executed

by an Insured after Date of Policy and which is a charge or lien on the Title, and the amount so

paid shall be deemed a payment to the Insured under this policy.”

38

CONDITIONS

Definition of Insured (OP)

“Insured": The Insured named in Schedule A. The term "Insured" also includes

(A) successors to the Title of the Insured by operation of law as distinguished from purchase, including

heirs, devisees, survivors, personal representatives, or next of kin;

(B) successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization;

(C) successors to an Insured by its conversion to another kind of Entity;

(D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration

conveying the Title

(1) if the stock, shares, memberships, or other equity interests of the grantee are wholly

owned by the named Insured,

(2) if the grantee wholly owns the named Insured,

(3) if the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the

affiliated Entity and the named Insured are both wholly-owned by the same person or Entity, or

(4) if the grantee is a trustee or beneficiary of a trust created by a written instrument

established by the Insured named in Schedule A for estate planning purposes.

39

CONDITIONS

Filing a Claim

S When to file? ASAP especially when litigation is pending and time periods are sensitive

S What if the claim is denied? arbitrate coverage? (if OP under $2M then 1 party can demand

arbitration). file lawsuit? file complaint with state insurance commissioner?

S Where to file? Depends on the insurer – see Conditions on the policy jacket - Paragraph 18 of the

OP and 17 of the LP

S What to include?

S Contact information

S A description of the title problem, including any letters or documents establishing the claim

(you may wish to identify the covered risk)

S Copy of the title policy (if policy not issued, title commitment and settlement statement)

40

MOST COMMON TITLE

ENDORSEMENTS

Brad L. F. Hoeschen Chernov, Stern & Krings, S.C.

[email protected]

41

Residential Offer to Purchase

• Drafting provisions

– Getting GAP coverage

– Obtaining a survey

– Assessments

– Timing for objections

42

Reviewing the Commitment

Who owns it?

Is it in the name of the Seller?

What is recorded against it?

Is there enough equity to support the sale?

Are there any encumbrances?

Liens

Judgments

43

• Easements

– Express Easements

• Drafting for termination

• Complying with terms of use

• Drafting for specific owners

– Prescriptive Easements

• Continuous use

• For a specific purpose

44

• ZONING

• Use restrictions

– Duplex

– Multi-family

• Utilities

• Declarations

– Condominiums

– Homeowner’s Associations

45

SURVEY

Age of survey

What the survey depicts

Closing boundaries

Potential encroachments

Utility easements

Fences

46

III. Special Considerations

for Financially Distressed

Real Estate

Bridget M. Hubing, Esq.

Reinhart Boerner Van Deuren

[email protected]

Disposition Types

Distressed property scenarios to consider:

• Mortgage Foreclosures

• Deeds in Lieu of Foreclosure

• Loan Modifications/Workouts

©2015 All Rights Reserved

Reinhart Boerner Van Deuren s.c.

48

Foreclosure

Coverage under a loan policy continues after

foreclosure (or deed in lieu) if title to the property is

taken by the same entity that is the named insured

under the loan policy.

However, the lender should always obtain a

foreclosure commitment at the commencement of a

foreclosure action, setting forth the specific

requirements that must be met in order to insure the

state of title post foreclosure.



49

Foreclosure

BEWARE: If the named insured and the new owner are

not the same entity, the title insurer may deny

coverage under the loan policy.

For Example:

• The loan policy will terminate if the lender takes title

in another entity name, such as an REO subsidiary.

• The loan policy will terminate if the lender takes title

through foreclosure and then deeds to an REO

subsidiary.



50

Foreclosure

Solutions:

• Assign the loan before the foreclosure sale

and have the new lender take title by

sheriff's deed; or

• Buy an owner's policy!



51

Foreclosure

Five advantages to purchasing an owner's policy:

1. It will insure that the foreclosure was done properly and title was

successfully transferred without any outstanding adverse interests;

2. It insures title during the time period between the issuance date of

the existing loan policy and the date of the foreclosure;

3. It improves marketability of the property by evidencing clean title

after the foreclosure to prospective buyers;

4. It will typically have a greater policy coverage amount; and

5. It may trigger the insurer's obligation to pay a loss sooner.



52

Deed in Lieu

Owner's policy is virtually a must!

By taking a deed in lieu of foreclosure, the lender

foregoes the extinguishment of any junior interests in

the property.

An owner's policy can identify all junior interests before

the deed is recorded.

The lender can then eliminate any intervening interests

and obtain clean title insurance.



53

Deed in Lieu

The title company will also spell out the requirements to

insure a deed in lieu transaction – typically, the following:

• Deed: Must state deed in lieu and include non-coercion

and anti-merger language.

• Settlement Agreement: [See next slide].

• Affidavit of Borrower: Must attest to the items in the

settlement agreement.

• Value of Property: Must be less than the debt, and must

establish that borrower has no equity in the property.



54

Deed in Lieu

The Settlement Agreement should contain the following:

• Amount of outstanding debt;

• Covenant not to sue or release of personal liability under the

note;

• Non-coercion language;

• Anti-merger language;

• Statement that borrower is delivering possession of the property

at or before closing; and

• Statement that borrower is not retaining any interest in the

property.



55

Deed in Lieu

Important Practice Tip:

ALWAYS order the title insurance policy after the deed

in lieu is taken.

If you fail to do so, the title company's liability may be

limited to the amount of the foreclosure commitment,

or the title company may deny liability altogether

because no policy was issued!



56

Deed in Lieu

Typical to see the following exceptions:

• “Any invalidity of or avoidance of the transfer of the title to the insured

property pursuant to the provisions of the Bankruptcy Code (11 U.S.C.)

or similar creditor’s rights or state insolvency laws.”

• Exclusion 3(d) of ALTA 2006: Exclusion for matters "attaching or

created subsequent to the Date of the Policy (the "post-policy"

exclusion).

• Exclusion 3(e) of ALTA 2006: No coverage for damages which "would

not have been sustained if the [insured] had paid value for" the

property (covers a failure of consideration).



57

Deed in Lieu

If the lender does not obtain an owner's policy, it

should at least request a non-merger endorsement to

the existing loan policy.

The mortgagee may be able to foreclose its mortgage

after accepting a deed in lieu of foreclosure where

the deed contains an anti-merger clause.

Note: Some courts will not enforce anti-merger clauses

where innocent third parties may be affected.



58

Loan Modification

BEWARE: Title insurance does not always cover

loan modifications unless the insured obtains

an endorsement.

Typical policy jacket exclusions may apply:

• Exclusion for risk voluntarily assumed by insured;

• Exclusion for liability created, suffered or assumed by

insured; and

• Exclusion for post-policy actions.



59

Loan Modification

ALTA 11-06

This endorsement insures the lender that (1) the

modification of mortgage does not result in invalidity or

unenforceability of the insured mortgage; and, (2) the

mortgage, as modified, has priority over defects, liens,

and encumbrances, except those in the policy and

prior endorsements and except those set forth in this

endorsement. The endorsement does not insure

against creditors' rights issues arising out of the

modification.



60

ALTA 11-06 Endorsement

The Company insures against loss or damage sustained by the Insured by reason of:

1. The invalidity or unenforceability of the lien of the Insured Mortgage upon the Title at Date of Endorsement as a result of the agreement dated ________________________, recorded ________________________ ("Modification"); and

2. The lack of priority of the lien of the Insured Mortgage, at Date of Endorsement, over defects in or liens or encumbrances on the Title, except for those shown in the policy or any prior endorsement and except: [Specify exceptions, if any]



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ALTA 11-06 Endorsement (cont.)

This endorsement does not insure against loss or damage, and the Company will not pay costs, attorneys' fees, or expenses, by reason of any claim that arises out of the transaction creating the Modification by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws that is based on:

1. the Modification being deemed a fraudulent conveyance or fraudulent transfer; or

2. the Modification being deemed a preferential transfer except where the preferential transfer results from the failure. to timely record the instrument of transfer; or b. of such recordation to impart notice to a purchaser for value or to a judgment or lien creditor.



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ALTA 11-06 Endorsement (cont.)

This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv) increase the Amount of Insurance.

To the extent a provision of the policy or a previous endorsement is inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements.



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title insurance coverage: what real estate counsel need to...

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