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Title Insurance Risks in Distressed Real Estate Transactions

Evaluating and Dealing With Liens and Other Encumbrances During Title Due Diligence

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURS DAY, MARCH 10, 2011

Today’s faculty features: David Weissmann, Partner, Weissmann Zucker Euster, Atlanta Karl R. Phares, Underwriting Counsel,First American Title Insurance Company National Commercial Services Overland Park Kan National Commercial Services, Overland Park, Kan.

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Title Insurance Risks in Distressed Real Estate Transactions Transactions

Evaluating and Dealing With Liens and Other Encumbrances During Title Due Diligence

David A. Weissmann Weissmann Zucker Euster Morochnik P.C. Atlanta, Georgia 30305 404.364.4620 direct david@wzlegal.com

5

Fl hi th S t Wh W A Flushing the System – Where We Are Today

6

THE GREAT FLUSH

 Impediments to liquidating bad assets are

p q g alleviating somewhat as:

 The Fed continues to put extreme pressure on banks

to increase capital reserves and bank losses are lessening somewhat, allowing more bad loan losses to be recognized g

 Banks are still reluctant to reveal the extent of their

losses, which are exaggerated due to declines in t l property values

 Long term capital is more readily available from

insurance companies and even CMBS loans but short

7

p term capital remains scarce

 As long as “deleveraging” continues, banks are

reluctant to loan against real estate to facilitate g purchases of REO (real estate owned) property

 Capital for REO purchases is coming from private

d lt f d sources and vulture funds

 Property values have declined dramatically, as much

as 75% or more in some cases as 75% or more in some cases

8

M th d f Di iti f B d Methods of Disposition of Bad Assets

 Note Sales – the sale of the note and

accompanying loan and security documents p y g y

 “The” surprise of this downturn – Note sales have been

more prevalent than in other downturns

 Short Sales – the borrower sells the secured

property for a price less than the outstanding balance of the loan and the lender releases the balance of the loan and the lender releases the loan documents

 REO Sales the sale of the foreclosed asset or

9

 REO Sales – the sale of the foreclosed asset or

receiver’s sale

Note Sales

 The loan generally is delinquent or soon to be

delinquent q

 Electronic auctions have become commonplace,

but more recently word of mouth and sales teams have been utilized

 The borrower is a possible purchaser, for a

discount, but some banks have been reluctant to “reward” the borrower even though borrower is most likely “purchaser” to preserve equity

10

most likely purchaser to preserve equity

Note Sales

 Technically, the sale is not complicated, but can

happen quickly pp q y

 Sale is “as is” with limited representations as to

• wnership of the loan documents, outstanding balance

and status of default and status of default

 Short review period; may allow conversations with

borrower

 Documents will be sold “free and clear” of all liens,

participations and encumbrances but generally no

• ther arranties or representations

11

• ther warranties or representations

Note Sales

 Mechanics of the transfer

 Endorsement of the note, or allonge

, g

 Transfer and assignment of loan documents  Recordable assignment of security instruments  Assignment or amendment of UCC’s  Estoppel from borrower: outstanding balance/default

M b i ibl t bt i

 May be impossible to obtain

12

Note Sales – Quick Cash

 Motivations for the lender are quick transposition

• f loan obligation into cash

g

 Federal reserve requirements have not necessarily

changed, but they are being more scrutinized and enforced, requiring quick infusion of cash into bank’s liquidity coffer

 The ratio of loan to deposits or cash reserves

indicate one element of financial stability

13

Note Sales – Quick Cash

 Some State loan-to-deposit ratios are*:

 California

101%

 Connecticut

104%

 Florida

94%

 Georgia

95%

 Hawaii

78% N Y k 70%

 New York

70%

 North Dakota

172%



*Source: Federal Reserve Publication 2009

14

Note Sales – Quick Cash

 Please note that if bank has a high loan-to-deposit

ratio, and property values decline, then even if the p p y loan-to-value ratio of loans generally was conservative (i.e. 80%), many loans could still be “ d t ” th b th t i th fi i l “underwater” thereby threatening the financial stability of the bank

15

Note Sales - Words of Caution

 Pay attention to default letters and notices to

determine status of loan

 Third tier financing may not be of public record –

must to be careful regarding liens on the loan documents

 Title searches may not reveal litigation that can

impact the loan or the collateral

 Pooled collateral prevents borrower from bidding

it l t l

16

• n its own loan separately

Short Sales

 Property is sold for less than the debt

 Necessitates an agreement with the lender to release

g the collateral

 May involve a delinquency or “wish” note  Lenders are reluctant to accept a short sale if the

borrower will retain tangible benefit of the property, h t t as purchaser or tenant

17

Short Sales

 Affidavit is required whereby purchaser affirms

that:

 The borrower is not related through blood or business  There are no hidden agreements or special

d di understandings

 There are no oral agreements whereby borrower

retains possession or beneficial ownership or retains possession or beneficial ownership, or proceeds of sale

18

Short Sales

 Penalty for false affidavit is that the affiant and

purchaser may be liable for the deficiency p y y because the lender relied on the purchaser’s promises and affirmations when releasing the ll t l t th d t i t f th l d collateral to the detriment of the lender

19

REO Sales

 The traditional means of flushing the system –

foreclosure followed by sale of the “real estate y

• wned”

 Value used by lender at foreclosure is generally

higher than a purchaser will pay

 While banking regulations do not require a quick

sale, liquidity and reserve requirements generally necessitate quicker sales

20

REO Sales

 The sales are “as is” – some lenders even want

indemnities from the purchaser for property p p p y liabilities (hazardous materials and others)

 The less a lender knows about liabilities, the better

 Lender’s may therefore avoid complete inspections of

the property so as to be a “mere holder” of secured property rather than a true property owner property rather than a true property owner

21

REO Sales

 Typically short fuses – 30 day inspection followed

by 15 day closing y y g

 Leverage is very much with the purchaser and re-

trading is common

 The calendar quarter may drive the sales; as bank

books are cleaned up, the bank becomes more attractive to the Fed and to potential suitors

22

CREDITORS RIGHTS AND MORTGAGE CREDITORS RIGHTS AND MORTGAGE MODIFICATIONS: TITLE INSURANCE INDUSTRY RESPONSE TO AN ECONOMIC INDUSTRY RESPONSE TO AN ECONOMIC COLLAPSE

23

B k t A id P Bankruptcy Avoidance Powers Risk Loss of Title

 Primarily concerned:

 fraudulent conveyances under Section 548

y

 preferences under Section 547

 Equitable subordination is also a risk

24

Fraudulent Conveyances y

 A

transfer made within two years before bankruptcy if (i) the transfer was made “with p y ( ) actual intent to hinder, delay, or defraud” a then existing or subsequent creditor, or (ii) the d bt i l t h d i ffi i t debtor was insolvent

• r

had insufficient capital at the time

• f

the transfer, and received less than the reasonable equivalent value received less than the reasonable equivalent value

• f the transferred property

25

S ti 548( ) t f “f Section 548(c): transferee “for value” and “in good faith”: g

 Retains lien up to value notwithstanding

fraudulent conveyance concerns y

 Good faith means having sufficient

knowledge to place transferee on inquiry notice of the debtor’s possible insolvency, or abstaining from unconscionable behavior t th d t i t f th dit to the detriment of other creditors

26

F d l t t f i k t th Fraudulent transfer risks to the lender:

 Foreclosures  Deeds in lieu of foreclosure especially if  Deeds in lieu of foreclosure especially if

value of property is more than lender would receive in Chapter 7 liquidation

 Mortgages granted as additional security

27

Preferences:

 Transfers of interest in property, to or for the

benefit of a creditor, for or on account of a pre-existing debt, made when the debtor was insolvent, and made within 90 days of the filing of th titi ll ithi 1 f th fili the petition generally, or within 1 year of the filing

• f the petition by insiders, whereby the creditor
• btains property valued in excess of what would
• btains property valued in excess of what would

have been received in a Chapter 7 bankruptcy

28

Preferences:

 Uncertainty whether a foreclosure made

within the statutory period could constitute a y p preference, especially if the secured claim is substantially less than the value of the f l d t b th dit foreclosed property, because the creditor receives dramatically more than it would receive in a Chapter 7 liquidation receive in a Chapter 7 liquidation

29

Preferences:

 Issue on time of recordation: Does

preference period relate back to date of p p deed, or date of recording?

 Statute now grants 30 days grace period

to record to retain relation back to date

• f deed and transaction

30

E l i t titl Exclusions to title coverage provide protection to insurers p p

 No coverage for damages which “would

not have been sustained if the [insured] [ ] had paid value for” mortgage/property (covers a failure of consideration) (E l i 3( ) ALTA 2006) (Exclusion 3(e) ALTA 2006)

 Language refers to grounds for fraudulent

conveyance

31

Exclusions to title coverage h l id d t ti have always provided protection to insurers

 Exclusion for matters “attaching or

created subsequent to the Date of the q Policy” (Exclusion 3(d) ALTA 2006 – the “post-policy exclusion”)

 Bankruptcy is always a matter created

subsequent to the date of the policy

32

S ifi b k t dit ’ Specific bankruptcy creditors’ rights exclusions: g

 1990 ALTA Policy: excludes liability for

claims arising under the operation of g p federal bankruptcy, state insolvency, or similar creditor’s rights laws

 Deletion was often done by endorsement at

little or no charge with little review

 In later years there was more attention to  In later years, there was more attention to

detailed financial information

33

ALTA offered specific creditor’s p rights coverage in 2006, insuring the invalidity unenforceability the invalidity, unenforceability, lack of priority or avoidance of” the insured lien:

 Resulting

from fraudulent transfer

 Resulting

from fraudulent transfer

• ccurring prior to the transaction creating the lien;
• r

 Resulting from failure to timely record lien

(preference issue)

34

Creditors’ rights exclusion also difi d l di if modified, excluding coverage if transaction creating lien: g

 is a fraudulent conveyance or transfer  is a preferential transfer (other than if due to a  is a preferential transfer (other than if due to a

failure to timely record)

 Even if not specifically excluded, other

p y , exclusions arguably still apply

35

ALTA Endorsement 21-06 (C dit ’ Ri ht ) i (Creditors’ Rights) insures against loss: g

 Sustained by reason of avoidance due to

an occurrence on or before the effective date of the policy of a fraudulent transfer or preference

 unless fraudulent nature was “known” to the

insured or insured is not a purchase in “good” faith faith

36

ALTA E d t 21 06 i ALTA Endorsement 21-06 is decertified in February 2010 y

 Business risk shifts back to business

players p y

 Title companies reviewed upcoming

defaults and determined risk was too great

37

Mortgage modifications on the i b k h l t ki k rise as banks have leeway to kick the can

 Extensions of maturity  Increase in interest rate  Increase in interest rate  Payment modifications  Additional collateral  Additional collateral  Cross default/cross collateralize  Partial releases  Partial releases

38

M difi ti i j i Modifications can prime junior liens

 Is modification materials or substantially

prejudicial so as to jeopardize the junior p j j p j lien holder

 Increase in interest or payment put stress on

th t the property

 Changes in maturity date may not be

prejudicial but case law is mixed prejudicial but case law is mixed

 Cross collateralization/cross default increase

risk to junior lien holder

39

Original mortgage language or i t dit t intercreditor agreement can protect p

 Future advance clauses provide some

protection, depending on local law p p g

 Language that note secured includes

amendments and renewals helps

 Cut-off letter from junior lender may be

required nonetheless

40

I t dit d b di ti Intercreditor and subordination agreements g

 Generally contain broad provisions which

prohibit modifications p

 Can be limited to “major” modifications such

as interest, payment terms, principal amount

41

R t t t f P t Restatement of Property (Mortgages): ( g g )

 7.3(b) – Senior mortgage if modified is

effective against junior lien holder unless g j modification is materially prejudicial and is not within the scope of reservation of right t dif to modify

42

R t t t f P t Restatement of Property (Mortgages): ( g g )

 Assumption that extensions are also for

the benefit of junior lien holders j

 Assumption that courts will view increase

in interest rate or principal detrimental to junior lien holders

43

R t t t f P t Restatement of Property (Mortgages): ( g g )

 Should respect language in senior

mortgage allowing for modifications unless “cutoff g g g notice” is provided

44

Title insurance does not always difi ti l i d cover modification unless insured

• btains endorsement

 Policy jacket exclusions may apply:

 Exclusion for risk voluntarily assumed by

y y insured

 Exclusion for liability created, suffered or

assumed by insured assumed by insured

 Exclusion for post-policy actions 45

T f d t Types of endorsements – Date down

 Brings forward the effective date and

revises description of mortgage to include p g g modification

 Any creditors’ rights protection in the

policy would be brought forward as well

46

T f d t Types of endorsements – ALTA Form 11-06

 Insures priority of mortgage as modified

but does not bring forward the effective g date

 Contains specific exclusions for creditors’

rights (fraudulent transfer and preference)

47

W d f ti T d Word of caution: To endorse or not to endorse

 Title companies may deny coverage even on

simple modifications such as extensions p

 Getting title companies to agree that they

will continue coverage under the original policy without the endorsement is a problem

48

Title Insurance Risks in Distressed Real Estate T ti Transactions

Title insurance-related due diligence strategies

Karl R. Phares, Esq. 913.981.2028 kphares@firstam.com

March 10, 2011

Title Insurance Risks in Distressed Real Estate T ti Transactions

Foreclosure Sales Deeds in Lieu of Foreclosure Bankruptcy Sales Receiver Sales

Foreclosure Sales

Foreclosure: Foreclosure: P d b hi h l d i titl Procedure by which lender can gain title to the collateral upon borrower default on th t l the mortgage loan.

51

Foreclosure typically results in liens subsequent and subordinate to lender’s subsequent and subordinate to lender s mortgage being wiped out.

• Deeds of trust and mortgages entered

into after the lender’s mortgage.

• Judgment liens.
• Mechanics’ liens (to some extent, in some

states).

52

Some liens have super priority and may not be extinguished or may only be extinguished be extinguished or may only be extinguished by following specific procedures.

• Mechanics’ liens (in some states these liens will

prime the lien of the mortgage if such mortgage f t ti if k d was for construction or if work commenced prior to granting the mortgage). Liens in favor of the United States government

• Liens in favor of the United States government

(28 U.S.C. 2410).

53

• Subdivision assessments.
• Condominium assessments.

Co do u assess e ts

• Real Estate taxes and special assessments.
• Vendor’s and Vendee’s Liens.

Vendor s and Vendee s Liens.

• UCC’s.
• Sewer assessments.

Sewer assessments.

• IRS liens (if proper notice of foreclosure is

given, then IRS has 120 days to redeem; if ti t i th li i d proper notice not given, then lien remains and purchaser at foreclosure will be subject to the lien). )

54

Methods of Foreclosure

The process(es) for completing a valid foreclosure p ( ) p g sale depends on the remedies available in the state in which the subject property is located.

• Judicial Foreclosure is the statutory process by
• Judicial Foreclosure is the statutory process by

which a lender is authorized to commence a foreclosure action by filing a petition in a certain court ith j i di ti th bj t t O with jurisdiction over the subject property. Once a judgment is obtained by the lender, the sheriff is authorized to conduct a foreclosure sale.

• In Kansas, judicial foreclosure is the only available

foreclosure process.

55

Kansas Foreclosure Commitment Requirement:

We have been informed that the title to be insured by our policy will come through foreclosure proceedings of the Mortgage shown at Item __. We require that an appropriate proceeding be commenced in the District Court of ____ County, and concluded in strict compliance with law and the orders of said court, including but not limited to the following:

• A. The filing of a petition praying for foreclosure of the mortgage against the parties named in paragraph

3 of Schedule A hereof.

• B. The entry of a journal entry of judgment declaring the lien of the mortgage paramount to the interest of

all defendants, and adjudging it foreclosed.

• C. Sheriff’s sale, pursuant to proper order and notice.
• C. Sheriff s sale, pursuant to proper order and notice.
• D. Expiration of the redemption rights of all parties having a right to redeem, and delivery of a proper

Sheriff’s Deed to the lawful holder of the Sheriff’s Certificate of Purchase on the date of expiration of said rights.

• E. Obtain possession of the premises from the mortgagor and any persons claiming through him. We

reserve the right to make additional requirements in connection with the following matters: reserve the right to make additional requirements in connection with the following matters: 1. The form of the foreclosure proceedings; 2. The identity of the proposed insured and the sale price, when the same become known; and 3. Federal tax liens or bankruptcy proceedings intervening subsequent to the date of the commitment and prior to the acquisition of title by the proposed insured.

56

• Non-Judicial Foreclosure is a statutory process,

depending on the specific requirements of a given t t ’ j di i l f l t t t state’s non-judicial foreclosure statutes.

• Non-judicial foreclosure, when available, can be a

more attractive process to lenders because it is p

• ften quicker and less expensive than judicial

foreclosure.

• In Missouri both judicial and non-judicial

In Missouri, both judicial and non judicial foreclosure processes are available.

57

Missouri Non-Judicial Foreclosure Commitment Requirement:

We have been informed that the title to be insured by our policy will come through foreclosure proceedings of the Deed of Trust to be foreclosed. In this respect, and in strict compliance with Section 443.325, RSMo., we require the following:

• A. An affidavit, which is to be recorded, executed by the foreclosing Trustee, and supplying the necessary

date of mailing notices, persons to whom mailed and the addresses to which the notices were mailed (alternatively, if the foreclosing Trustee deems it more convenient, the necessary statement of facts may be recited in the Trustee’s Deed, in which case, the receipts for registered or certified mail should be attached to the deed and incorporated therein by reference);

• B. Compliance with all the recorded requests for notice of sale under the Deed of Trust to be foreclosed;
• C. Proper notice of sale be given to any subsequent lienholder (including judgment liens, mechanic’s

liens and leases); and

• D. Proper notice to the Internal Revenue Service as to any federal tax liens set forth herein.
• E. Proof that no owner has died within six months next preceding the date of the foreclosure sale;

p g ;

• F. The property described in the Deed of Trust is located within the limits of ____ County, and publication
• f notice of foreclosure in strict compliance with 443.320 RSMo;
• G. Proof that no owner is entitled to the protection of the Soldiers and Sailors Civil Relief Act;…

58

…

• H. Proof that no owner has given notice of intention to redeem;
• I. We reserve the right to make further requirements in regard to federal tax liens or bankruptcy

proceedings which might intervene after the commitment and prior to the sale;

• J. Issuance of the Policy is conditioned upon the purchaser’s obtaining possession of the property

peacefully; peacefully;

• K. We reserve the right to make such further requirements when the identity of the purchaser and the sale

price are known as the title company may deem necessary. In the event that there is a substantial discrepancy between the amount of the debt and the amount bid at the sale, a waiver of the right to sue for a deficiency may be requested as a condition to insuring the title of the purchaser at such sale.

• L. Your attention is directed to the fact that Bankruptcy Code Section 362 operates as an automatic stay
• L. Your attention is directed to the fact that Bankruptcy Code Section 362 operates as an automatic stay
• f any proceedings to foreclose, so that an examination of the Bankruptcy Court records will have to be

made through and including the date of foreclosure in order to determine whether or not a petition in bankruptcy has been filed by or against an owner.

• M. If the Deed of Trust is a Second Mortgage Loan as defined by Section 408.231 RSMo, as amended,

furnish proof of strict compliance with the provisions of Sections 408.554 and 408.555 RSMo, as amended p p p , pertaining to notice of default and right to cure default.

• N. In the event the proposed insured is the foreclosing mortgagee or any other party who does not

constitute a bona fide purchaser for the present fair equivalent value, the Owner’s Policy will contain the following exception: “Right of any party interested to sue or petition to have the foreclosure sale set aside or modified or contest the foreclosure sale or the deed pursuant thereto through which title to the land insured is derived.”

59

Title Insurance for Foreclosure Sales

I th t t f titl t f l

• Insures the state of title post foreclosure.
• Usually Lender’s Fee Simple estate acquired through

foreclosure.

• It is important to specify title order request before the

commencement of the foreclosure proceeding.

• Foreclosure Report v. Foreclosure Commitment.

Foreclosure Report v. Foreclosure Commitment.

• Title insurance company will set forth specific requirements that

must be met in order to insure. Requirements vary per method of foreclosure (judicial v

• Requirements vary per method of foreclosure (judicial v.

non-judicial).

60

Deeds in Lieu of Foreclosure

• Arrangement between Borrower and Lender

whereby lender can obtain title to the collateral ith t i th h th f l without going through the foreclosure process.

• Possibly, quicker, less expensive.
• Depends on number of parties/lienholders involved
• Depends on number of parties/lienholders involved

and Borrower/Lender relationship.

61

• The mortgage instrument is typically not

released, so that in the event borrower or

• ther interested party challenges the DIL

transaction and it is set aside, Lender may still be able to exercise foreclose rights still be able to exercise foreclose rights.

• Also if there are subordinate liens once

Also, if there are subordinate liens, once Lender takes title, it can foreclose those liens prior to selling the property. This may b d t if th i i liti ti be advantageous if there is ongoing litigation involving the property (such as mechanics’ liens enforcement). liens enforcement).

62

DIL transactions require detailed documentation.

• Lender should not pursue or be willing to accept a

DIL l h d i DIL conveyance unless the documentation meets certain requirements.

• The title company will look to certain documents, or

p y , a combination thereof, to address certain matters:

• Deed.
• Settlement Agreement

Settlement Agreement.

• Estoppel Affidavit.
• Key matters to address in documentation:
• Absolute Conveyance.
• Value of the Land.

63

Absolute Conveyance

• Purpose:
• To prevent Borrower or other interested party (ex. trustee in

bankruptcy) from attacking transaction by claiming it was a f d l t f ti l t f fraudulent conveyance or preferential transfer.

• To prevent a court from possibly construing the transaction

as an equitable mortgage and subsequently voiding the deed.

• Elements:
• Elements:
• No continuing borrower rights in the property.
• Possession, lease, option to purchase, etc.

No duress/coercion/undue influence or grossly inadequate

• No duress/coercion/undue influence or grossly inadequate

consideration.

• Borrower solvency at time of conveyance.
• No other agreements.

No other agreements.

64

Preferential Transfers § 547 (and applicable state statutes)

• A transfer of an interest of the debtor in property

may be avoided if the transfer was made within 90 days prior to debtor filing for bankruptcy (one year days prior to debtor filing for bankruptcy (one year if creditor is an insider) and if certain criteria exists:

• Made for the benefit of the creditor for an antecedent debt;
• Debtor was insolvent or becomes insolvent as a result of the

transfer; and transfer; and

• Creditor received more than it would have in a Chapter 7

liquidation

65

Fraudulent Transfers § 548 (and applicable state statutes)

• A transfer of an interest of the debtor in property may be

avoided if the transfer was made within one year prior to debtor filing for bankruptcy and if certain criteria exists:

• Debtor had actual intent to hinder, delay or defraud creditors; or
• Transfer was made for less than reasonably equivalent value; and
• Debtor was insolvent or becomes insolvent as a result of the

transfer; or

• Debtor intended or believed it was incurring debts beyond its
• Debtor intended or believed it was incurring debts beyond its

ability to repay; or

• Debtor maintained an unreasonably low level of capital.

66

Value of the Property

• Purpose:
• To prevent Borrower or other interested party from attacking

transaction by claiming lack of adequate consideration or l t d it bl l i related equitable claims.

• Elements:
• No Borrower Equity in property.
• If value of property < outstanding debt, then no borrower

equity and transaction not likely to be set aside.

• Objective evidence of value of the land

3rd party appraisal

• 3rd party appraisal
• Other

67

Additional Deed in Lieu Considerations:

• Non-merger language.
• e ge

a guage

• Preserving lien position in case subsequent foreclosure is necessary to wipe out

junior liens.

• Subsequent conveyance.
• Deed in Lieu from Borrower to Lender.
• Sale out from Lender to 3rd Party.
• Standard exceptions.
• Reliance on Owner’s Affidavit from troubled Borrower.
• Survey

Survey.

• Creditors’ Rights and Mechanics’ Liens considerations.
• Standard exceptions.
• Indemnity.
• Deeds in Escrow
• Deeds in Escrow.
• Borrower conveys title to Lender, but deed not recorded unless/until the occurrence
• f a subsequent default pursuant to the settlement agreement.
• Executory contracts – rejectable in bankruptcy.
• Equitable Mortgage considerations
• Equitable Mortgage considerations.

68

Bankruptcy Sales p y

• Federal Code and Rules which allow

borrower/debtor time to liquidate or i ith t f reorganize without pressure of enforcement actions. U ll t i i t t th t i

• Usually pertaining to one asset that is one

aspect of a larger bankruptcy case.

69

Sale under § 363

• Allows debtor to institute bidding to sell

property of the bankrupt estate. Lender can dit bid th d bt d if th hi h t bidd credit bid the debt, and if the highest bidder, can obtain title to the subject property.

70

Most 363 sales are done free and clear of all liens and require a court order stating that liens and require a court order stating that the sale is free and clear of all liens and that any lien attach to the proceeds from the sale. y p From a title company perspective, “all liens” may not necessarily be all of the liens…

71

Judgment Liens

• Judgment liens that attach prior to the debtor

filing bankruptcy are not dischargeable in b k t Th l li bilit f th

• bankruptcy. The personal liability of the

debtor is discharged but the lien is not extinguished It is important that any order

• extinguished. It is important that any order

relating to judgment liens also releases the lien lien.

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§ 363 Sale Requirement:

We are informed that the sale to the proposed insured will be a sale free and clear of liens under section 363(f) of the Bankruptcy Code in connection with a proceeding now pending in the United States Bankruptcy Court for the ____ District of ____, styled In the Matter of ____, Debtor, and being Case No. ____ therein.

• Said sale must be completed in strict conformity with the applicable sections of the

Bankruptcy Code, the Rules of Bankruptcy, and the orders of said Court.

• An Order Authorizing a Sale Free and Clear of Liens must be entered prior to the

recording of the Deed.

• After the Court has entered its order confirming said sale and the time to appeal

therefrom expired, evidence of compliance with all the foregoing must be presented to the Company for examination and approval.

• We reserve the right to make any additional requirements on the above matter as we

deem necessary.

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Receiver Sales Receiver Sales

• Although some of these transactions may be

Although some of these transactions may be insurable, many are not and almost all require a very close examination of:

– Bases for the court’s jurisdiction. – Proceedings leading up to the sale. – The sale itself.

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Jurisdictional Considerations:

• Even when an order rests upon unanimous consent of the

parties, no consent can confer jurisdiction on a court when there is none to begin with. We cannot insure a void sale regardless of who consents to it.

• Federal receiverships.
• State receiverships.

– Home state courts. – Out-of-state courts.

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• Missouri Receiverships

Missouri Receiverships

– RSMo. § 515.240. No sale by receivers – No sale by receivers.

• Kansas Receiverships

S § – K.S.A. § 60-1301 et seq. – Ancillary remedy only.

• Examples

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For sample documentation and additional underwriting information: additional underwriting information:

http://title.firstam.com/resources

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Title Insurance Risks in Distressed Real Estate T ti Transactions

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