Stone[d] Soup John Rothermel and Heidi Junge December 20, 2018 In - - PowerPoint PPT Presentation

Welcome to today’s webinar!

Stone[d] Soup

John Rothermel and Heidi Junge December 20, 2018

• In order to obtain a CE Certificate or CLE

Credit, you must

• listen to the webinar for a minimum of 55

minutes

• btain the password (provided at the end of the

presentation)

• follow the instructions as given

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ATTORNEY INFORMATION

Because of opinions expressed by the Texas Department

• f Insurance (TDI) concerning rebates, legal credit is

available only to:  Attorneys who own title agencies that are Stewart Title Guaranty Agents  Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities  Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity

We welcome any other lawyers to listen, but cannot provide continuing education credit to you.

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Stone[d] Soup:

PACA, PSA, Pot Properties, Federal Liens, Non-Medical Reimbursement, Additional Insured, Continuing Insureds, Rollbacks

John Rothermel

Senior Vice President Regional Underwriting Counsel Senior Underwriter

Heidi E. Junge

Assistant Vice President Underwriting Counsel Senior Underwriter

SW Regional Underwriting Office Stewart Title Guaranty Company

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Introduction

• Multiple issues have arisen in the past several years which

are fairly new to the title industry.

• Agricultural trust issues have been the law for decades,

but were not considered title issues until a few years ago when a small number of liens became title claims.

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Introduction

• The increased acceptance of marijuana by state

legislatures without concomitant changes in federal law have caused title underwriters to reflect on coverage issues.

• Other issues have also arisen which need to be explored.

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Perishable Agricultural Commodities Act (PACA)

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Perishable Agricultural Commodities Act (PACA)

7 U.S.C. § 499a et seq.

• Imposes a statutory “trust” (lien) for the benefit of unpaid

suppliers (farmers), sellers and agents/brokers of perishable agricultural commodities

• The trust (lien) is against produce buyers.

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What is a “perishable agricultural commodity”?

– Any fruit or vegetable, whether or not frozen or packed in ice, including cherries in brine – Except those perishable fruits and vegetables which have been manufactured into articles of food of a different kind or character. 7 C.F.R § 46.2(a)

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Why should you be concerned about PACA?

• Lien on Real Estate: PACA trust can apply to all

produce buyer’s assets including real estate and can be superior to the rights of third parties, such as mortgages, dealing with the merchant, dealer or broker.

• A bankruptcy cannot avoid the priority of the trust

because the buyer-debtor does not have an equitable interest in the trust assets.

• No Notice Required! No notice requirement to be given

for unpaid supplier, sellers and agents, not necessary to have a lis pendens or claim of the trust in the real property record to perfect the lien.

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PACA – Know Your Parties and if they could be a subject to a PACA Trust

Parties whose assets may be subject to a PACA trust:

• Food processors, food and grocery chains and

wholesalers, food service firms, produce dealers, distributing companies, canners, processing plants, even wineries, distilleries, and breweries.

• Grocery chains and supermarket chains; Chain

restaurants and other major restaurants.

• Company name that includes “food” or a type of food,

“produce,” “packing,” or “distributor.”

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PACA – What To Do:

If your transaction involves a party whose assets may be subject to a PACA trust, you must contact your Underwriter. We may require a PACA title exception such as the following: “Any trust, right, interest or claim that may exist, arise, or be asserted against the Title under or pursuant to the Perishable Agricultural Commodities Act of 1930, as amended, 7 U.S.C. §499a, et seq., or any similar state or federal law.”

SLS2014001 https://www.vuwriter.com/en/bulletins/2014-1/BL138998757600000001.html

**NOTE: Even though the trust can only be terminated by paying all supplier in full prior to your transactions, we cannot verify with certainty and therefore cannot rely on such statements.

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Packers and Stockyards Act (PSA)

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Federal Liens Involving Agriculture— Packers and Stockyards Act (PSA)

The Packers and Stockyards Act of 1921 (7 U.S.C. §§181 et seq.) also establishes a similar unrecorded “trust” (lien) on the assets of Meat Packers to protect producers/suppliers of Livestock and Poultry. Applies to all Packer’s assets, including real estate assets. “Livestock” is defined as cattle, sheep, swine, horses, mules, or goats, whether dead or alive, and “Poultry” defined as chickens, turkeys, ducks, geese and other domestic fowl. “Packer” is a person or entity in the business of:

a) buying livestock in commerce for purposes of slaughter, or b) manufacturing or preparing meats or meat food products for sale or shipment in commerce, or c) marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce.

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PSA

Packers whose assets may be subject to a PSA trust may include:

– Stockyards, supermarket or grocery chains, wholesalers and retailers of meat products, meat packing companies, meat processing companies, farms that purchase livestock and poultry for slaughter.

If your transaction involves a party whose assets may be subject to a PSA trust, you must contact your underwriter. We may require a PSA title exception such as the following: “Any trust, right, interest or claim that may exist, arise, or be asserted against the Title under or pursuant to the Packers and Stockyard Act

• f

1921, as amended, 7 U.S.C. §181, et seq., or any similar state or federal law.” See STG Bulletin TX2014001 https://www.vuwriter.com/en/bulletins/2014-1/BL138998757600000003.html

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Marijuana

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SLS2017004—Land Used for Marijuana Activities

“Stewart Title Guaranty Company is not currently insuring title to land that is known to be used or intended to be used for any lawful purpose under state law for recreational or medical marijuana activities, including cultivation, storage, transport, manufacture, retail, or distribution.”

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Considerations

– Survey endorsements vs. CCRs – Escrow Services – CPLs – Proper licensing for lawful operations under state law of marijuana related businesses – Affidavits – Exceptions

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Medicaid Estate Recovery Program (MERP)

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• Created for some estates to reimburse the government for

Medicaid benefits received by the deceased

• A MERP claim does NOT create a lien on real property.

‒ Treated as a general unsecured claim

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Foreclosing Deed of Trust When IRS Lien is Attached

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Cutting Off a Federal Tax Lien by Mortgage Foreclosure

• 1. Was the Tax Lien filed more than 30 days before the

foreclosure sale? ________ If no, the tax lien is eliminated against the property. If yes, was Notice given 25 days in advance of foreclosure to the IRS? 26 USC 74259(c )(1)__________ If yes, there is a right of redemption in favor of the IRS for 120 days; if proper notice was not given, then the Federal Tax lien remains on the property. Stewart cannot recognize a re-foreclosure of an otherwise regular foreclosure simply to provide the IRS with notice. (Southern Bank of Lauderdale County v. IRS 770 F2d 1001, 1985).

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Additional Insured Endorsement (T-26)

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Virtual Underwriter—T-26 Guideline Explanation

This endorsement is primarily used in estate planning situations where title in individuals has been conveyed to a living trust, acquisition of interest under an agreement existing at the original policy date or family partnership or family corporation, limited liability company. Texas Procedural Rule P-57 provides the basic rules for issuance of this endorsement. Please also see R-33 for more information regarding this endorsement.

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Virtual Underwriter—T-26 Guideline Explanation

To issue the endorsement the additional insured must be: a) the trustee or successor trustee of a Living Trust to whom the insured transfers the title after Policy Date, and/or the beneficiaries of the Living Trust, or b) any partner, member or stockholder that acquires the interests of the other owners of the insured in accordance with the terms and provisions of a written agreement in effect at Date of Policy, or c) a family partnership or family corporation solely composed of or owned by members of the insured's family and the insured.

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Virtual Underwriter—T-26 Guideline Explanation

For Limited Liability companies the rule provides: i. there will be a transfer(s) of all or any part of the Limited Liability Company members' interests in the insured to any transferee(s), or ii. the withdrawal(s) of one or more of the members from the Limited Liability Company, or

• iii. the addition(s) of one or more persons or entities as

members of the Limited Liability Company.

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Virtual Underwriter—T-26 Guideline Requirements

We require: A review of the trust, written agreement that allows for the acquisition of the interest of the other owners that was in existence at Date of Policy, the family partnership agreement or family corporations founding documents and any agreements such as bylaws and operating agreements. This review should satisfy you that the documents allow the additional insured entry into the respective organization. For limited liability companies you need to review the founding documents and any later documents that create or allow the transfer of interest or withdrawal or addition of members.

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Continuation of Coverage

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P-35 Limits Our Ability to Interpret Policy Terms

P-35. Prohibition Against Guaranties, Affirmations, Indemnifications, and Certifications No Title Insurance Company, Title Insurance Agent, Direct Operation, Escrow Officer, nor any employee, officer, director or agent of any such entity or person, shall issue or deliver any form of verbal or written guaranty, affirmation, indemnification, or certification of any fact, insurance coverage or conclusion of law to any insured or party to a transaction other than: (i) a statement that a transaction has closed and/or has been funded, (ii) issuance of an insured closing service letter,

• r any insuring form or endorsement promulgated by the State Board of

Insurance, or (iii) certification of copies of documents as being true and exact copies of the original document or of the document recorded in the public records.

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T-2. Conditions –

• 2. CONTINUATION OF INSURANCE

The coverage of this policy shall continue in force as of Date

• f Policy in favor of an Insured, but only so long as the

Insured retains an estate or interest in the Land, or holds an

• bligation secured by a purchase money Mortgage given by

a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured.

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T-2. Conditions –

• 1. DEFINITION OF TERMS

(e) “Insured": the Insured named in Schedule A. (i) The term "Insured" also includes: (A) 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

• ther fiduciary, except a successor who is an
• bligor under the provisions of Section 12(c) of

these Conditions;

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T-2. Conditions –

• 1. DEFINITION OF TERMS

(B) if the Indebtedness is evidenced by a “transferable record,” the person or Entity who has “control” of the “transferable record,” as these terms are defined by applicable electronic transactions law; (C) successors to an Insured by dissolution, merger, consolidation, distribution or reorganization; (D) successors to an Insured by its conversion to another kind of Entity;

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T-2. Conditions –

• 1. DEFINITION OF TERMS

(E) 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-

• wned by the named Insured,

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

• r

(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;

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T-2. Conditions –

• 1. DEFINITION OF TERMS

(F) any government agency or instrumentality that is an insurer or guarantor under an insurance contract or guaranty insuring or guaranteeing the Indebtedness secured by the Insured Mortgage, or any part of it, whether named as an Insured or not; (ii) With regard to (A), (B), (C), (D) and (E) reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured, unless the successor acquired the Indebtedness as a purchaser for value without Knowledge of the asserted defect, lien, encumbrance or other matter insured against by this policy.

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T-2. Conditions –

• 2. CONTINUATION OF INSURANCE

The coverage of this policy shall continue in force as of Date

• f Policy in favor of an Insured after acquisition of the Title by

an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land,

• r holds an obligation secured by a purchase money

Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured.

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T-1. Conditions –

• 1. DEFINITION OF TERMS

The following terms when used in this policy mean: (d) “Insured": the Insured named in Schedule A. (i) The term "Insured" also includes: (A) successors to the Title of the Insured by operation

• f law as distinguished from purchase, including

heirs, devisees, survivors, personal representatives or next

• f 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;

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T-1. Conditions –

• 1. DEFINITION OF TERMS

(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-

• wned by the named Insured,

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

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T-1. Conditions –

• 1. DEFINITION OF TERMS

(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. (ii) With regard to (A), (B), (C) and (D) reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured.

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Same type of discussion applies to “Who is insured?” in OTPs

(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.

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Same type of discussion applies to “Who is insured?” in OTPs

(d) “Insured": the Insured named in Schedule A. (i) 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;

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Roll Back Tax Issues

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Land Use Designation and Rollback Taxes

Rural Properties can be subject to “Special Use Designations”

• r classifications depending on the land’s usage.

Special Use Designations are under Tax Code, set by Tax Appraisal Districts and result in a reduced valuation for Tax – Appraisal purposes:

Tax Code §23.51(1) Qualified Open-Space Land Tax Code §23.41 and 23.51(2) Agricultural Use Tax Code §23.51(2) and (7) Wildlife Management Tax Code §23.71 Timber Land Tax Code §23.81 Recreational, Park or Scenic Use Tax Code §23.91 Public Access Airport Property

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Land Use change Under Texas Tax Code §23.55

Land Use Change = Rollback Taxes

A “land use change” – (e.g., from Ag to Residential use, etc.) can result in additional taxes imposed for each of the 5 years preceding the year when the land use change occurs – amount of tax is the difference between the assessment at the special use valuation and the assessment at market value… for the previous 5 years! (b) A Tax lien securing payment of additional tax attaches on the date when the land use change occurs … (i) Construction of homestead improvements on Special Use designated land is not a “land use change” for purposes of triggering rollback taxes, but TAD will usually re-designate one acre for the home to residential use.

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Insuring Against Rollback Taxes—Rule P-20.b(2)

• Each policy in Texas (T-1 OP, T-2 LP, T-2r) insures against “lien of real

estate taxes or assessments imposed on the Title by a governmental authority due or payable but unpaid”

• But each policy limits that coverage in Schedule B through exceptions

in various forms.

• As to Rollback Taxes, each policy includes an exception (Sch.B3) that

includes the following language “… and subsequent taxes and assessments by any taxing authority for prior years due to a change in land usage or ownership…”

• “Insuring against rollback taxes” means deleting the phrase “and

subsequent taxes and assessments by any taxing authority for prior years due to a change in land usage or ownership…” from the Schedule B exception

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Insuring Against Rollback Taxes—Rule P-20.b(2)

“Insuring against rollback taxes” can be done ONLY on the Loan Policy and Interim Construction Binder – NOT allowed for the Owners Policy – purchaser always assumes the risk of rollback taxes

Coverage only allowed when:

1) the title company has proof in the file that the property is NOT subject to Agricultural, Wildlife or Open Space tax designations (i.e., can NOT be given if property has Ag, Wildlife or Open Space special use valuation); OR 2) rollback taxes for the current year and prior years have been assessed, are collected at closing and paid “in the ordinary course of business”

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Insuring Against Rollback Taxes—Rule P-20.b(2)

• No discretion allowed in giving coverage.
• No affidavit for “No Change of Use” can allow for rollback

tax coverage on any owners policy

• Must comply with P-20.b(2)

The “Insuring against rollback taxes” deletion is done by

• ne of the following:

– box check-off on the T-2 or T-2R Loan Policy forms; or – line through the exception phrase on T-2 or T-2R Schedule B;

• r

– produce electronic form T-2 or T-2R omitting the phrase; or – issue a T-30 Tax Deletion Endorsement.

See STG Bulletin TX20100009 https://www.vuwriter.com/en/bulletins/2010-11/BL128867070200000015.html

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Why does Texas have roll back taxes anyway?

The philosophical concept arose during the late 1970s and 1980s when many farms in urban and suburban areas were being taxed at their highest and best use level (say a shopping center) when the farm was actually being farmed. In many such cases, the farm income wasn’t even close to the taxes that a mall would generate.

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Why does Texas have roll back taxes anyway?

So the legislature came up with a compromise—as long as land that could be used for a higher use was actually used for agriculture, the taxes would accrue as though used for a mall but collected on the actual agriculture use. Since the state never gives up on taxes that it could be entitled to, the taxes would accrue on a rolling 5 year basis until the use changes.

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Why does Texas have roll back taxes anyway?

And then the owner who got a “tax break” for those 5 years (and who just got a pot of money from the mall developer) would pay the “back taxes”. There is no actual penalty. It is just making up for the most immediate 5 years where you paid less than you “should have”. There is no incentive not to take the land out of agricultural

• production. It is a simple legislative compromise where the

agricultural land owner doesn’t pay taxes based on a use that is only theoretical but the government doesn’t lose the taxes on that theoretical use either.

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Contact Info John Rothermel

SW Regional Underwriter Senior Vice President Senior Underwriter

Stewart Title Guaranty Company San Antonio, Texas

210.590.1981 john.rothermel@stewart.com

Heidi Junge

Assistant Vice President Underwriting Counsel Senior Underwriter

Stewart Title Guaranty Company San Antonio, Texas

210.590.1981 heidi.junge@stewart.com

Per the TDI and the State Bar, in order to obtain a CE Certificate or CLE Credit you must:

–listen to the webinar for a minimum of 55 minutes –obtain the password (provided at the end of the presentation) –follow the instructions as given

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To Receive CE Credit

Each individual seeking credit hours must send their own certificate request to: CEcertificate@stewart.com Please include the following information:

• Provide only this Presentation Name in the Subject Line of your e-mail – “Stone[d]

Soup” In the body of your e-mail:

• Name of Participant (as it appears on your Escrow Officer License);
• Presentation PASSWORD given at the end of the webinar;
• License Number Only (located on left side of Escrow Officer Certificate of License –

for example: License Number: 1234567-890123) For Attorney CLE Credit also include:

• Texas State Bar Number
• Affiliation with Stewart

– Employed by Stewart Title Guaranty Company; – an affiliate; or – a Stewart agent

For more details, see the CE and CLE FAQs at:

http://www.stewart.com/en/stg/texas/education/texas-tips/ce-cle-faqs.html

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• Posted online 10 days after live presentation
• Other current courses available

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CEcertificate@stewart.com

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Join us for the next Texas TIPS webinar!

January 17, 2019

TDI Audit Review

John Rothermel

For Questions/Comments Email john.rothermel@stewart.com

• r

heidi.junge@stewart.com

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