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June, 2010

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Loose Ends

Sunday, June 27th, 2010

How not to close a credit line.

PARKER, CO–Most residential resales go smoothly, but some seem to follow one bad turn after another.

This newer home near Denver was owned by Paul and Robin.

The property in question: back on the market.

When the couple agreed to divorce, they applied for a home equity line of credit to finance the break-up.  Approved for a line of $100,000 by TCF National Bank, Paul and Robin gave TCF a deed of trust even as they contracted to sell the property to Jennifer.

Robin moved out and gave Paul a power of attorney to handle details of the sale.  The power of attorney was on a standard form, appointing Paul to act for Robin “to sell and convey” the property “for such price as to (him) may seem advisable.”

When it came time to close, the title agent got a payoff demand from TCF.  The demand, also on a standard form, called for a payoff of $80,462 within one week, by check to be mailed to TCF’s Consumer Payoffs department in St. Paul, Minnesota.  The demand specified, “(a) signed authorization from the customer requesting the account to be closed is also required.  The section below can be used to accomplish this.  Please return original signatures with the payoff funds.”

Paul signed the form, on the signature lines provided, for himself and Robin.  Underneath the line for Robin’s signature he wrote “/s/ Power of Attorney.”

The sale closed, and the title agent wired $80,462 to TCF.  Both Jennifer and her purchase money lender got title insurance.

One year later, Robin was dunned by TCF for overdue payments under the old credit line.  Her lawyer contacted TCF and was told, “(a) wire transfer of $80,462 was received…and applied as a payment on the account.  However, because TCF did not receive a signed authorization from the borrowers requesting that the account be closed, the account has not been closed.”

Wha??

After the sale to Jennifer, Paul continued to get monthly statements from TCF showing a zero balance and “available credit” of $100,000.  It was too tempting.  Paul made new draws until he maxed out the credit line, then he stopped making payments.

Robin too failed to pay, and TCF began foreclosure proceedings.

While all of this was unfolding, Jennifer fell behind in her mortgage payments, and her lender commenced foreclosure.

Unbeknownst of each other, the two lenders held foreclosure sales and each “took back” the property.

The title insurance company for Jennifer’s lender entered the picture, and paid $160,543 to redeem the property from TCF’s foreclosure.  So now the title was clear, and Jennifer’s lender could deal with the property.

Having taken care of its insured, the title insurer then sued TCF to recover its money.

At the center of this dispute was the escrow officer employed by the title agent, who had handled the payoff.  Answering TCF’s claim that it did not receive authorization to close the loan account, the escrow officer produced copies of the authorization and the power of attorney.  She vowed she ‘must have’ mailed the forms to TCF, as ‘normal practice.’  But TCF denied receiving the forms and, even if they did, said they would not rely on Paul’s signature for Robin because the power of attorney did not expressly authorize him to close the loan account.

TCF won the argument, and the title insure took the loss.  Paul doesn’t answer, and Robin is forgiven.

Moral:  Our story ends with a mystery–who dropped the ball?

It seems likely that escrow mailed the authorization to TCF, but whoever received it there may not have matched it with the payoff received by wire.  Or, just as likely, the recipient may have found the power of attorney as unreliable, but didn’t contact escrow to say so.

Modern real estate transactions frequently close, and go to record, with loose ends and unfinished business.  Take, for example, the closing with a release of lien or mortgage “to come”–as happened here.

In real estate, loose ends represent risk.

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Hide and Seek

Monday, June 14th, 2010

A plan to dodge tax liens runs aground.

McLEAN, VA–Alexandra Murnan wasn’t clear about paying taxes.  By 2001 there were multiple federal tax liens against her, totaling more than $100,000.

So when an uncle offered to give her a house in upscale McLean, Alexandra saw she would have a problem.  The tax liens were recorded in Fairfax County, and if she accepted a deed the liens would attach and the IRS might force a sale of the property to pay her tax bill.  What to do?

The gift property: A gift for the IRS?

Alexandra consulted a lawyer, and based (perhaps only partly) on advice she created a trust to take title to the property.  Four days later, the uncle signed a deed conveying the property to Alexandra, as Trustee of the “Murnan Spring Hill Trust,” and the Trust took title subject to the uncle’s mortgage in the amount of $420,905.

The Trust subsequently borrowed from a mortgage lender to make improvements to the property.  Incident to these borrowings the Trust gave a deed to the lender to secure repayment.  When the Trust failed to make payments, the lender recorded the deed and became owner of the property.

In February 2003, the Trust negotiated to repurchase the property for $819,604.  The repurchase was financed by a new mortgage loan.  As part of this transaction, the Trust obtained an owners policy of title insurance in the amount of $1,450,000 from Stewart Title Guaranty Co.  Although Stewart Title was aware of the recorded tax liens, the title policy in favor of the Trust did not include a specific exception for them.

Within months the recent mortgage was also in default, so the Trust offered the property for sale.  In September 2003, the Trust contracted to sell the property to Krishna Tayal for $1,140,000.

But this time several title companies, including Stewart Title, required that the tax liens against Alexandra individually be paid, before they would issue a new owners policy to Tayal with coverage against them.  The liens now totaled almost $300,000.

The Trust made a claim under its title policy, but Stewart Title denied coverage.  Tayal canceled his purchase contract, and the Trust filed suit against Stewart Title for breach of the insurance contract.

Albert V. Bryan U.S. Courthouse, at Alexandria, Virginia

A federal trial court ruled in favor of Stewart Title, and the Trust appealed.

The Fourth Circuit Court of Appeals affirmed the trial court, finding the liens against Alexandra individually would attach to this Trust property, because the Trust was revocable at the sole discretion of Alexandra, she had control of Trust assets (the house), and she was sole beneficiary of the Trust during her lifetime.  It follows that if the IRS should enforce its lien to acquire Alexandra’s interest in the Trust, it could revoke the Trust and become owner of the property.

The Court then held that the Trust’s title policy claim was excluded from coverage by a standard policy exclusion for matters “created, suffered, assumed or agreed to by the insured claimant.”  Alexandra allowed the liens to exist, by her non-payment of taxes, and Alexandra, as trustee, “‘suffered’ the liens on the property by accepting title on behalf of the Trust.”

Under the circumstances, the Court said Stewart Title’s knowledge of the tax liens prior to issuing the owners policy makes no difference.

Moral:  There may be ways to shield assets from creditors by use of a trust (see, “spendthrift trust”), but this wasn’t one of them.  And protection against your own pre-existing debts is not ordinarily covered by insurance.

The (unpublished) case is reported as Murnan Spring Hill Trust v. Stewart Title Guaranty Company, 105 A.F.T.R.2d 2010-1756  (4th Cir. 2010).

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Rules of the Road

Sunday, June 6th, 2010

A fixed easement blocks development.

WASHOE VALLEY, NV–Washoe Valley lies east of the Sierra Nevada mountains, midway between Reno and Carson City.  It’s a scenic place, with native pines, panoramic views and, until recently, few residents.

Washoe Valley, Nevada

But with a gaming capital up north, and the state capitol to the south, Washoe Valley is attracting developers who want to exploit its obvious growth potential.

The push for “growth” has been strongly opposed by long-time residents, who fear losing their rural lifestyle and dread “urbanization.”

Battle lines have been drawn, and in the face of local opposition developers have gone to court to advance their interests.  Some have filed lawsuits to force municipal entitlements, such as water and sewer services, for new subdivisions.

One prominent developer here is St. James Village, Inc., owner of a 1,600 acre project known as “St. James’s Village.”  St. James’s Village is a master-planned gated community of custom homesites, on acre-sized lots.

Main Gate to St. James's Village

On St. James’s drawing board is a plan to subdivide one of its parcels into 28 lots.  This parcel is adjacent to lands owned by families named Cunningham and Saladin (collectively, the Cunninghams).

In 1974, a predecessor of the Cunninghams acquired an easement over what is now the St. James parcel to provide access for the Cunninghams’ properties to an existing road, now known as “Joy Lake Road.”  The deed creating this easement used a metes and bounds description, making it clear where the easement would be located on the ground.

In drawing their subdivision plan, St. James determined they would have to relocate the 1974 easement in order to create 28 buildable lots, instead of a lesser number.  So the plan was drawn with a curved road to replace the easement, still connecting Joy Lake Road to the Cunninghams’ properties.

The St. James Parcel, showing Joy Lake Road (top), the 1974 easement (yellow), and the proposed relocated road (red). The Cunninghams' properties are lower right (not shown). (Click to enlarge.)

Problem was, the Cunninghams would not agree.  So St. James filed a lawsuit against the Cunninghams, contending “property owners can unilaterally relocate easements, if such relocation does not materially inconvenience the easement holder, in order to allow the development of their property.”

The Cunninghams responded, denying “inconvenience” as the issue, and instead asserting an absolute right to keep the easement in place based on Nevada case precedents.  Mainly, the 1969 case of Swenson v. Strout Realty, Inc., holds that location of an easement, once selected, cannot be changed by either the owner of the burdened property or an owner of benefited property without consent of the other.

The trial court ruled for the Cunninghams, and the case headed up to the Nevada Supreme Court.

While acknowledging Swenson and other precedents, the Supreme Court said the traditional rule no longer reflects public policy, and it fails to fairly deal with interests of a land owner and easement holder as they may change over time.

So the Court announced a new rule, holding an easement may be unilaterally relocated when no one’s rights will be impaired; except that an easement created with an agreed-upon location or dimensions cannot be changed without mutual consent of the land owner and easement holder.

In this case the 1974 easement was created with a fixed location and dimensions, so it can’t be relocated by St. James acting unilaterally.  Back to the drawing board.

1974 easement deed, showing metes and bounds description. (Click to enlarge.)

Moral:  This new rule in Nevada follows a modern trend to allow relocation of easements, while giving deference to the intentions of parties who created the easement.

This is basic contract law, and it hews to the rules of interpretation of contracts.  It’s a little known secret that much of “real estate law” is simply contract law, applied to real property.

The case is St. James Village, Inc., v. Cunningham, 210 P.3d 190 (Nev. 2009).

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