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Land Records / Sham Recordings

Monday, December 13th, 2010

Who’s responsible for public records?

Amador County lies west of the Sierra Nevada mountains, in California’s historic Gold Rush territory.

Here in the small town of Ione, Jewel Jackson owned two rental homes.

One of Ms. Jackson's rentals

In March 2007, while she was living in Texas, Ms. Jackson’s brother Willie B. Norton determined to take control of her properties without her knowledge. To this end, Norton crafted a power of attorney purporting to appoint himself as Ms. Jackson’s attorney in fact to conduct real estate transactions on her behalf.

This was amateur hour. Norton alone signed the power of attorney form, before getting it notarized and recorded. Then he signed two quitclaim deeds transfering the properties to himself, and likewise had them notarized and recorded. When the paperwork was done, he evicted Ms. Jackson’s tenants.

Crime as inartful as this did not fool the authorities. Norton was prosecuted, and he pleaded guilty.

In the meantime, Ms. Jackson’s loss of rental income caused her to miss mortgage payments and the properties were lost to foreclosure.

Amador County Courthouse, at Jackson, California

So it happened that Ms. Jackson sued the County for negligently recording the sham documents. She argued the power of attorney was obviously bogus, since it wasn’t signed by the person supposedly granting the power. As such, it should not have been accepted by the recorder’s office and should not have appeared in the land records.

In its defense, the County said the documents were “recordable,” since they were on required sized paper (81/2 x 11), were legible, and were notarized.

The trial court agreed with the County, and Ms. Jackson appealed.

The Court of Appeals also sided with the County, saying the recorder was, in fact, legally required to record these documents because they were in proper format. Likewise, the Court said, the recorder is not responsible for legal sufficiency of recorded documents, and to hold otherwise “would place a county recorder’s office in the untenable position of requiring its employees to in effect practice law.”

Moral: Aside from the limited protection of notary laws, no one really vouches for validity of what gets into public land records.

Title insurance covers a multitude of risks for owners and lenders, and policies offered in some markets may in fact cover post-policy forgery. It’s a good idea to know your insurance coverage, before and after investing in real property.

The case is Jackson v. County of Amador, 186 Cal.App.4th 514 (Cal. App. 2010).

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Mortgage Fraud / Gaming the System

Saturday, November 20th, 2010

Little lies with big consequences.

MIAMI, FL–Yvette Valdes was a mortgage broker, doing business as “Best Mortgage Choice” in Homestead, Florida.

Like other mortgage brokers Valdes relied on large financial institutions, so-called “warehouse lenders,” to finance her loans. Typically, a warehouse lender wires funds direct to an escrow or loan closer, acquires the loan through closing, and re-sells the loan in the secondary mortgage market where it is packaged, or “securitized,” for investment offerings (mainly bonds).

10802 SW 244th Terrace

This business model relies on guidelines and ratings to assure investment quality. Among the critical guidelines, for a prime quality loan, is a requirement that the borrower have equity in the real property security. Thus, a loan equal to 90% of property value is rated more secure than a 100% loan. Likewise, a buyer making a 10% down payment is deemed a better risk than one with no “earnest money.”

Which explains why faking this stuff is a big deal.

Two weeks ago, Yvette Valdes pleaded guilty to federal criminal charges related to mortgages she originated against two residential properties in Miami. Also pleading guilty were her daughter Jeannine Valdes-Perez, her brother Joseph Gonzalez, son-in-law Victor Perez, and a hapless escrow officer named Catherine Maiz. All five pled to one count of conspiracy to commit wire fraud, while Valdez-Perez also pled to an additional count of wire fraud.

According to court filings, Valdes conspired with the other defendants to acquire properties at 10802 SW 244th Terrace (the “10802 Property”) and 21012 SW 122nd Court (the “21012 Property”), under false pretenses.

Prosecutors dubbed this the "21012 Property"

For the 10802 Property, Valdes arranged for her son-in-law, Perez, to submit a loan application falsifying his employment, income, and cash on hand for a down payment. Valdes then enlisted the escrow officer, Maiz, to send a letter to the warehouse lender, Argent Mortgage, saying the title company was holding $17,000 received from Perez. The statement was false. Relying on false information Argent approved the loan and wired $337,808 to fund the closing. The loan defaulted, causing “substantial loss” to Argent.

For the 21012 Property, Valdes again arranged for Perez to submit a loan application with false information, including a statement he would occupy the property as his residence. This time, Valdes instructed Maiz to create a false settlement statement (HUD-1 form) misrepresenting the source and amount of funds handled through escrow. Mainly, the HUD-1 showed $26,321 as deposited by Perez toward closing. In fact, Maiz held only a “fake” check which, following instructions from Valdes, she did not attempt to deposit. Relying on phony documentation, JPMorgan Chase wired $246,646 to fund the closing. Unbeknownst to JPMorgan Chase, some $15,000 was diverted from loan proceeds to pay Perez for his cooperation as the “straw borrower.” This loan also defaulted, and JPMorgan Chase took a loss.

The Wilkie D. Ferguson, Jr., Federal Courthouse, Miami, Florida

Sentencing for all defendants is set for January 21, 2011. Each faces a maximum 30 years in federal prison.

Moral: As mortgage fraud goes, these are small cases. It appears the main motive was to create bad loans so Valdes, and others, could “earn” routine commissions and fees.

And this isn’t Valdes’s first brush with notoriety. In 2008, in a series titled “Borrowers Betrayed,” the Miami Herald named Yvette Valdes as a local mortgage broker who originated $22 million in loans approved by Orson Benn, a former executive with Argent Mortgage. According to the Herald, “nearly all of the (Valdes) mortgages contained false or misleading information.” Benn was charged with racketeering by Florida state prosecutors in 2008, and is serving an 18-year prison sentence.

Like counterfeit money, bad loans subvert the economy. Creating them is serious crime.

Postscript: In February 2011 each defendant was found guilty of one count of conspiracy to commit wire fraud. Valdes was sentenced to 33 months in prison, followed by three years’ supervised release, and ordered to pay restitution of $386,500; her daughter Valdes-Perez got 27 months, three years’ supervised release, and must pay restitution of $249,500; brother Gonzalez got 33 months, three years’ supervised release, and must pay restitution of $302,000; son-in-law Perez got 21 months, three years’ supervised release, and must pay restitution of $386,500; and, finally, escrow officer Maiz was credited for time served (nine months), plus five years’ supervised release, and must pay restitution of $337,000.

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Foreclosure Rescue / Indictable Offenses

Saturday, November 6th, 2010

Suspicious dealings of a foreclosure rescue “expert.”

The first thing was to save her home.

It was 2008, and Karen Tappert was broke. Sometimes self-employed, but mainly unemployed, she couldn’t make the mortgage payment on her home in Bend, Oregon.

The Las Vegas property

Twice that year Tappert filed bankruptcy, but each case was dismissed when she failed to make court appearances and required payments.

In the meantime, Tappert studied debt elimination schemes being touted on the internet. She became convinced that debt, in particular mortgage debt, could legally be avoided using simple procedures and forms offered by the debt elimination “consultants.” The typical rationale behind these schemes was that the U.S. Federal Reserve system is unconstitutional, and loans funded with anything other than gold or silver can be avoided.

Soon Tappert began to offer her own services, and dubious legal forms, on the internet and by word of mouth. One blog boasted, “Karen has over 100 SUCCESSES around the country and WITHOUT having to use the courts!”

But last June the “Karen Tappert Method” came into question, when Tappert was indicted by a federal grand jury in Las Vegas and charged with multiple counts of mail and wire fraud. Here are some highlights from the criminal indictment.

The "rental" in Farmington, New Mexico

Count 3: The owner of property at 1601 Imperial Cup Dr., Las Vegas, NV, was behind in payments and faced foreclosure. Tappert offered to rescue the property for $1,800. The owner declined, but signed a quitclaim deed to an entity controlled by Tappert, known as “Amari Group.” Later, the property was foreclosed and acquired by Federal National Mortgage Association (a/k/a “Fannie Mae”). Tappert caused a fraudulent deed to be recorded, purportedly conveying the property from Fannie Mae to Amari Group. Tappert signed this deed on behalf of Fannie Mae.

Count 5: Property at 612 Diamond St., Farmington, NM, was foreclosed and acquired by Deutsche Bank National Trust Company, as trustee for investors in a mortgage-backed security that included the foreclosed mortgage. Tappert caused a fraudulent deed to be recorded, purportedly conveying the property from Deutsche Bank to an entity controlled by Tappert, known as “Saraland Investments.” Tappert notarized the bogus deed. Then Tappert rented out the property pocketing $4,050.

Corona, California: A million-dollar property "sold" for $490,000

Count 6: Property at 675 Gregory Circle, Corona, CA, was in the midst of non-judicial foreclosure. The foreclosure sale had been postponed, several times, when a fraudulent “Trustee’s Deed Upon Sale” was recorded. This trustee’s deed purportedly evidenced a foreclosure sale to an entity controlled by Tappert, known as “Northwest Properties Associates, Asset-Backed Certificates, Series 2006-FF1.” Days later, the property was sold by Northwest Property Associates for $490,000. The sale deed was signed by Tappert, on behalf of Northwest Property Associates.

Tappert has entered pleas of not guilty, and she awaits trial.

Moral: Karen Tappert is presumed innocent until proved otherwise. But if a defense to these charges will be that the Fed’s unconstitutional, and the money’s no good, she should know that others betting on this defense have gone to prison.

Postscript: In July 2011 Karen Tappert pleaded guilty to two counts of mail fraud and four counts of wire fraud. In January 2012 Tappert was sentenced to 97 months in prison, followed by three years supervised release, and ordered to pay restitution of $3,643,259.

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The Spider and the Fly

Saturday, October 2nd, 2010

How not to pay for that new home.

LEE’S SUMMIT, MO–Sanctum, LLC was developer of the “Siena at Longview” subdivision in this suburb of Kansas City.

In June 2002, Ivan and Marie Johnson entered into a construction contract with Sanctum for a new home to be built on Lot 7B in the Siena subdivision. The price would be $317,600, with the understanding the Johnsons would upgrade cabinetry, lighting and fixtures at their own expense, and receive credit for upgrades against the sale price at closing. Move-in was scheduled for November 2002. This would be their “retirement home.”

Lot 7B: A trap for the unwary

At the time the contract was made, Sanctum had construction loans from Gold Bank–secured by deeds of trust against the subdivision–for infrastructure and other improvements.

As provided by the contract, at signing the Johnsons paid Sanctum an earnest money deposit of $1,000, plus an additional $62,720 sixty days later.

Planning to move, the Johnsons sold their old home and moved into an apartment. They put most of their possessions in storage.

As work on the home proceeded the Johnsons advanced $57,517 for upgraded materials and labor.

November came, but the home was not ready. Each month thereafter Sanctum gave the Johnsons a new move-in date. Finally, in February 2004, the interior was ready and Sanctum scheduled a closing for March. The Johnsons were told they could move in on the first of April.

But as the closing date approached, Sanctum announced a new problem. It was, perhaps, “the problem” all along. Sanctum, it seemed, could not get its lender, Gold Bank, to release the property from construction deeds of trust without payment of an amount Sanctum didn’t have at hand. Sanctum hoped to have new investors, but wouldn’t be able to close until the investors were lined up and provided funding.

The Johnsons were allowed to move in, but there was no closing and they didn’t have a deed to the property. That, they hoped, would come.

Instead, by July 2004 Gold Bank put the subdivision into foreclosure. The foreclosure sale was held August 17. The Johnsons attended the sale, but couldn’t bid on Lot 7B because the subdivision was offered as a whole for $3 to 4 million.

By now the Johnsons had hired a lawyer, and they began heroic efforts to save their investment.

The Jackson County Courthouse at Kansas City, Missouri

First, they recorded a “Notice of Equitable Lien” against Lot 7B. Later, they filed a lawsuit and recorded a “Notice of Mechanic’s Lien.”

There were other mechanics’ lien claims against the subdivision, and other lawsuits, and the cases were consolidated for trial.

The trial court ruled against the Johnsons, and they appealed.

The Court of Appeals ruled the Johnsons were simply out of luck. Even though they had paid for substantial improvements, the court held they were not “eligible” to enforce a mechanic’s lien claim because the contract with Sanctum, coupled with their payments, made them “equitable owners” of the property. The court explained Missouri law provides mechanics’ lien rights for contractors and material suppliers, but not an “owner.”

As for their equitable lien claim, the court said the claim had merit and “the Johnsons did, in fact, have a legally recognizable vendee’s lien against the property in the total amount of $121,237.86.” But their lien was created after the Gold Bank deeds of trust were recorded and, the court said, it was wiped out by the foreclosure.

In closing, the court said: “This is not a result that sits well with the Court, but it is a result that is required by the law….”

Moral: The Johnsons should not have paid Sanctum or the upgraders before they had clear title to the property. That means a deed, of record, not subject to prior deeds of trust.

The earnest money should have been put in escrow, and not paid out until the buyers could get clear title.

“Unto an evil counsellor, close heart and ear and eye; And take a lesson from this tale, of the Spider and the Fly.” (Mary Howitt, The Spider and the Fly, 1829.)

The case is reported as First Banc Real Estate, Inc. v. Johnson, 321 S.W.3d 322 (Mo. App. W.D. 2010).

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Who’s on First?

Monday, August 2nd, 2010

When being first means getting paid.

DUNDALK, MD–Mary was twelve years old, and homeless.

Her mother was mentally ill, and she had never known her father, so Mary went to live with her aunt Linda and Linda’s boyfriend, Charles.  Charles owned a house in Dundalk, a working class suburb of Baltimore.

Charles' property: A house is not a home

But Charles was a sexual predator. By the time Mary was thirteen she was having sexual relations with Charles, and by fourteen he had impregnated her twice. The first pregnancy ended in a miscarriage, while the second led to the birth of a son, Jesse.

At sixteen Mary attracted the interest of a boy in the neighborhood, who befriended her, but Charles warned the boy to stay away since Mary was his “girlfriend.”

At the boy’s urging, Mary went to a school counselor and told her story. Then the local department of social services intervened, causing Mary and Jesse to be removed from the home and placed in foster care.

Soon Charles was prosecuted for molesting Mary, and convicted of second-degree rape.  He got 20 years.

Meanwhile, one of the lawyers for Mary in social services recommended that she sue Charles for damages.  The lawyer had checked the land records, and concluded Charles’ property was free and clear.

So Mary sued Charles and, on May 11, 2007, got a judgment against him for $2,000,000.  The judgment was docketed in the Circuit Court of Baltimore County that day, and, because the property was also located in Baltimore County, upon docketing the judgment became a lien against Charles’ house.

Mary’s lawyer proceeded to get a writ of execution, directing the sheriff to sell the property and apply the proceeds to pay a portion of Mary’s judgment.  The sheriff posted the property with notice of a sheriff’s sale set for October 25, 2007.

But fate would deal Mary another blow.  It turned out Charles had previously given a deed of trust against the property which, for reasons unknown, had not been recorded.  This deed of trust secured a refinancing of the property, and it was signed and delivered by Charles on July 15, 2005.  It was recorded on October 9, 2007, just ahead of the sheriff’s sale.

So now Mary found herself back in court, in a lawsuit filed by the lender and the lender’s title insurance company, to decide who was entitled to first priority and payment.

Mary argued that she was first, as a matter of record, having obtained a judgment lien disclosed by county land records as of May 11, 2007.

The lender claimed priority under a Maryland statute providing that a deed (or mortgage) is effective as of the date of delivery and, when recorded, is enforceable against “the grantor, his personal representatives, every purchaser with notice of the deed, and every creditor of the grantor with or without notice.”

Baltimore County Courts Building

The trial court ruled for Mary, but the Court of Special Appeals reversed and held for the lender.

The court of appeals said the statute is clear, and it promotes public policy to protect mortgage lenders, advancing money in good faith, against involuntary liens that may (as happened here) be recorded first.  It made no difference to the court that Mary’s lawyer had checked the land records and believed the property to be free and clear, because Mary was a mere “creditor” rather than a “purchaser” entitled to protection under the statute.

Moral:  Courts in other states, asked to consider this question, have reached the same result as here in Maryland. Although statutes and precedents may differ, across state lines we Americans share many values and principles adopted mainly from English common law.

The lesson here is, not all liens are created equal. Involuntary liens created under state laws may be trumped by consensual mortgages, and sometimes federal liens.

This case is reported as Chicago Title Insurance Company v. Mary B., 988 A.2d 1044 (Md. App. 2010)

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Last Wishes

Sunday, July 18th, 2010

A transfer on death deed:  What a difference a day makes.

UNIONTOWN, OH–Charles Morris was dying.

Diagnosed with colon cancer in 2004, his condition worsened until, in the summer of 2006, the end was near.

Charles' house: A dying wish would be tested in court

So Charles sat with a lawyer to draw up a will.  He wanted his house and two cats to go to his ex-wife, Michelle;

his computer and camera equipment to Thomas Hall; and the remainder of his possessions to his nephew, Joseph Mattia.

Because gifts made by a will must go through probate, which could tie up the real property for months, the lawyer suggested Charles sign a transfer on death deed, so that upon his death the house would immediately pass to Michelle outside of probate, without court supervision.

The transfer on death (“TOD”) deed is new.  It’s an alternative to the trust, or joint tenancy with right of survivorship, as a means to transfer a decedent’s real property without necessity of probate.  Ohio’s statute approving the TOD form became effective in 2002.

On August 25, 2006, Charles executed his Last Will and Testament, along with a TOD deed naming Michelle as the transfer on death beneficiary.  It appears the TOD was left with the lawyer for recording.

Days later, on August 30, Charles died.  The next day, August 31, the TOD was recorded with the Recorder Division of the Summit County Fiscal Office.

Soon Charles’ will was filed in court and admitted to probate.  Thomas Hall was appointed executor of the estate.

As instructed by the lawyer, Michelle recorded an affidavit of transfer on death, stating she was the sole surviving beneficiary under the TOD, along with a certified copy of Charles’ death certificate.

Then things got contentious.

Joseph Mattia, the nephew entitled to the remainder (“residue”) of the estate under Charles’ will, filed suit for a judgment that the TOD was invalid, because the deed was not recorded while Charles was living.  Such a judgment would cause the house to be included in the probate proceedings where, as part of the “residue” of the estate, it could be inherited by Joseph.  This leaves Michelle with just the two cats.

Joseph argued for a literal reading of the Ohio statute (Revised Code section 5302.22).  The statute says that a TOD deed must be executed and recorded for the beneficiary to have rights to the property.  So, the argument goes, a deed recorded after the grantor’s death is ineffective.

Michelle countered that the statute should not be so narrowly construed.  She pointed out a grantee can’t control when a deed, filed for record, will be officially “recorded.”  She also invoked the familiar rule that a deed is effective, as between the grantor and grantee, when it is executed and delivered (i.e., entrusted to a third party for recording).

The trial court ruled in favor of Joseph, and the decision was upheld by the Court of Appeals.

Summit County courthouse at Akron, Ohio

The courts relied on language of the statute, which states that a property owner “may create an interest in the real property transferable on death by executing and recording a deed as provided in this section….”  Citing an earlier Ohio case in which the literal interpretation was followed, the appeals court reasoned that a TOD deed may be later revoked by a grantor, so the recording requirement protects the grantor’s true “last wishes.”

Moral:  As of this writing, the TOD deed has been approved by legislatures in more than a dozen states and is under review in the rest.  It may become commonplace.  As with anything new, there may be pitfalls.  When relying on the TOD deed you should get legal advice, follow your state statute, and be mindful of local recording practices.

Such is the power of wishes.

The (unpublished) case is reported as Mattia v. Hall, 2008 WL 186650 (Ohio App. 9 Dist.)

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You Be the Judge

Sunday, July 11th, 2010

The case of the misfit mortgage.

BESSEMER, AL–Davis & Associates, LLC,  was the owner of two lots in Jefferson County, Alabama.

Davis & Associates borrowed $43,000 from Frank Bynum, giving Bynum a mortgage against the lots.  The mortgage identified the borrower as “Davis Associates, LLC.”  The mortgage was recorded in the land records maintained by the Jefferson County Probate Office.

Later, Davis & Associates conveyed the lots to TMS Properties and, a few months after that, TMS Properties conveyed the lots to Angel Barker.  Ms. Barker purchased the lots with a loan secured by a mortgage held by GMAC Mortgage.

Meanwhile, Davis & Associates failed to repay the loan from Bynum, and Bynum threatened foreclosure.

But Barker and GMAC said they didn’t know about the Bynum mortgage.  So Barker and GMAC filed suit for a judicial declaration that they were bona fide purchasers of the lots, without notice of the Bynum mortgage, and not subject to it.

In court, Barker and GMAC said the incorrect name on the Bynum mortgage (“Davis Associates” rather than “Davis & Associates”) caused the mortgage to be mis-indexed in county land records.

As provided by Alabama statutes, the land records consist of a grantor-grantee index, containing names listed alphabetically, maintained by the county probate office.  In 1984, the Jefferson County Probate Office converted its paper index books to a computer database.  Expert witnesses testified that a search of the computer database for “Davis & Associates” does not turn out the Bynum mortgage, because of the missing ampersand.

Bynum argued that all duly recorded documents become part of the land records, and impart constructive notice whether or not they are properly indexed in the computer database.  It follows, said Bynum, that Barker and GMAC had constructive notice of the mortgage and are subject to its enforcement.

You’re the Judge:  How do you rule?

Jefferson County courthouse, Bessemer Division: Home to the land records and trial court

The Alabama Supreme Court ruled in favor of Barker and GMAC.

The Court reasoned that the county land records were set up and maintained in full compliance with state statutes.  Persons relying on this index should not be charged with notice of recordings that can’t be found by searching a correct name.

Since the missing ampersand caused the Bynum mortgage to go undetected, the Court held the mortgage was outside the chain of title for Davis & Associates.  So the mortgage did not impart constructive notice, and it cannot be enforced against Barker or GMAC.

The case is Bynum v. Barker, 39 So.3d 1013 (Ala. 2009).

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Escrow School

Sunday, July 4th, 2010

A seller’s trick brings a teachable moment.

VICTORVILLE, CA–Wesley was the owner of this house in Victorville, between Los Angeles and Las Vegas.

The property in question, sold by Wesley to Maria

When he contracted to sell the house to Maria, an escrow was opened to handle the transaction.

The escrow company asked Wesley to fill out an “Information Request” form, giving contact information for Wesley’s mortgage lender.  Wesley completed the form, reporting two deeds of trust against the property.  The first deed of trust was held by EMC Mortgage Corporation, for which Wesley provided an address, phone number, and loan number.

Escrow contacted EMC and, within a week, got a payoff demand for $176,317 good through the end of the month.

Escrow paid the demand and the transaction closed.

Ten months later Maria and her mortgage lender got notices of default, saying an unknown deed of trust was delinquent and had entered foreclosure.  Someone called the title insurer.

It turned out Wesley had pulled a fast one.  The information he provided about the EMC deed of trust pertained to different property, also owned by Wesley, across town.  So escrow’s payment to EMC made the ‘other’ property free and clear.  One month after close of escrow, Wesley and his wife refinanced the other property giving a new deed of trust for $150,000.

Wesley's other property, made free and clear

Having pocketed sale proceeds of $122,000, plus new loan proceeds of $150,000, Wesley netted about $270,000.

The deed of trust that Wesley left behind, the one that should have been paid off, had a principal amount of $264,000.

The title insurer demanded that Wesley straighten things out, but he wouldn’t, so the insurer paid $293,647 to clear Maria’s title.

And here’s the teachable moment:  The deed of trust that was “left behind” identified “MERS,” Mortgage Electronic Registration Systems, as “nominee” for the lender during the life of the loan.  MERS is a corporation formed by mortgage lenders to track ownership of promissory notes secured by mortgages and deeds of trust.  Once a mortgage has been recorded in county land records, and registered with MERS, anyone wanting payoff information need only contact MERS for referral to the current loan servicer.  The information is free, easy to get, and guaranteed accurate.

If escrow had asked MERS, rather than Wesley, they would have gotten true information instead of a nasty loss.

The deed of trust that was "left behind." Note MERS mortgage identification number (MIN), upper arrow, and MERS contact information, lower arrow. (Click to enlarge.)

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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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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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