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Foreclosures / Haunted Houses

Friday, October 28th, 2011

First there were bad mortgages, now it’s dud foreclosures.

HAVERHILL, MA–Francis Bevilacqua was a cash-for-trash real estate investor.

When he bought this duplex in 2006 the chain of title was, let’s say, not perfect.

The property in question, at Haverhill, Massachusetts

A prior owner was Pablo Rodriquez. In March 2005 Rodriquez gave a mortgage against the property to Mortgage Electronic Registration Systems (“MERS”), as nominee for the originating lender, Finance America. MERS, remember, is the privately owned database created by the mortgage banking industry to track mortgage loan ownership and servicing rights throughout the U.S. The mortgage bankers save lots of money on recording fees by registering with MERS instead of local county recording offices.

Rodriguez defaulted on his loan and in June 2006 the property was sold at a foreclosure sale. The foreclosing lender was U.S. Bank, as Trustee under a mortgage pooling and servicing agreement, and the successful bidder was also U.S. Bank. Weeks later, in July 2006, an assignment of the now-foreclosed mortgage from MERS, as nominee for Finance America, to U.S. Bank, was created (signed and dated). The assignment of mortgage was then recorded in the land records (Southern Essex Registry of Deeds).

Such were the circumstances when, in October 2006, Francis acquired the property by quitclaim deed from U.S. Bank.

MERS has headquarters in this building, at Reston, Virginia

By April 2010 Francis had converted the property into four condominiums and sold three units. At this point he had concerns about the title(s), so he filed suit to try title (akin to a quiet title action). He sought an order from the Massachusetts Land Court confirming his quitclaim deed, to rule out “the possibility of an adverse claim by Rodriquez.”

The Land Court ruled against Francis, even though Rodriguez could not be found and there was no opposition to the lawsuit. The court held Francis did not have standing to sue because the U.S. Bank foreclosure was void and his quitclaim deed was worthless. Francis appealed, and the Massachusetts Supreme Judicial Court agreed to decide the case.

The Supreme Court upheld the Land Court decision. The Court explained that at the time the foreclosure deed was created (June 29, 2006) its grantor (U.S. Bank, as Trustee) did not have an interest in the property according to “official” land records (the Southern Essex Registry of Deeds). Instead, U.S. Bank first appears in the chain of title by virtue of the assignment of mortgage (dated July 21, 2006). Since foreclosure can only be done by a mortgage holder, the foreclosure here was unauthorized, and void.

The Southern Essex Registry of Deeds, at Salem, Massachusetts

It follows the quitlclaim deed from U.S. Bank to Francis was ineffective to pass title.

Responding to Francis’ argument that he should be entitled to protected status of a bona fide purchaser, because he had no way of knowing all this, the Court disagreed saying the problem was apparent in the land records before Francis bought the property.

The Court concluded saying Francis may yet perfect his title if he can arrange a proper foreclosure to eliminate Rodriguez’s interest.

Moral: In recent years lenders and investors have relied heavily on MERS to evidence their mortgage rights. It’s been assumed an investor with superior rights can foreclose first and straighten out land records later. This decision upends such assumptions, at least in Massachusetts.

But what should such technicalities matter, when a borrower can’t afford property and abandons it?

According to the Supreme Court, it matters because the defaulting borrower continues to have a right to redeem the loan and reclaim the property, until the right of redemption is ended by foreclosure. It follows the borrower can still refinance or sell and, if he files bankruptcy, the property may be part of the debtor’s estate–tied up in bankruptcy proceedings.

Consequences of all this may seem illusory, but fear of clouded titles will cause some to avoid foreclosures entirely. And as for properties already foreclosed, and perhaps resold, no one knows how many could be in legal limbo.

State laws differ, so it’s unclear whether this view of faulty foreclosures will spread outside the Bay State.

The case is Bevilacqua v. Rodriguez, 995 N.E.2d 884 (Mass. 2011).

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Hiding in Plain Sight

Friday, October 7th, 2011

Enduring rights of parties in possession.

SPOKANE, WA–Clare House is a senior living community on the south side of Spokane. It has a 124-unit apartment complex, flanked by 28 “bungalow” units built in clusters much like attached homes.

Entrance to the Clare House community

The bungalows have been offered under a “Resident Agreement,” by which the buyer pays a lump sum at move-in for the right to occupy their bungalow and use common areas until they die or become unable to care for themselves. When occupancy ends, the resident or their heirs are entitled to repayment of 80 or 85% of the initial lump sum or, in some cases, 80 or 85% of the price received from resale of the bungalow. Each resident is also a member of the Clare House Bungalow Homes Residents Association, an association formed to represent their common interests.

The bungalows occupy a 2.68 acre parcel of land, which continues to be owned by the developer. Beginning in 2004, the developer took a series of loans from “hard money” lenders, secured by deeds of trust against the 2.68 acre parcel. The first of these loans was arranged by the Caudill Group, in the amount of $400,000, secured by a deed of trust in favor of the Caudill Living Trust. There were four subsequent loans, secured by deeds of trust totalling $565,000.

One of the Clare House bungalows

All of these deeds of trust were recorded in Spokane County land records. Prior to the first deed of trust, two of the Resident Agreements had been recorded, even though the bungalow residents did not have proper deeds conveying ownership of the real property.

All was well at Clare House until the developer filed bankruptcy. Then things got dicey. The lenders, headed by the Caudill Group, made known their wishes to foreclose against the 2.68 acre parcel, and oust the residents.

The Residents Association stepped in, and filed an adversary proceeding in the developer’s bankruptcy. The Association asked for a court order that the residents’ rights are superior to rights of the lenders.

The bankruptcy court ruled for the residents, in part. The court ordered that all members of the Residents Association (i.e., all those having a Resident Agreement with the developer) may continue to occupy their bungalows undisturbed by the lenders, even if the lenders foreclose and acquire the land. However, the court also held the residents’ rights to repayment upon termination of occupancy are contractual rights against the developer only, and are not enforceable against any lender.

Aerial view of the Clare House community, with apartment complex, lower left, and 2.68 acre parcel, highlighted

Citing “longstanding common law,” the court explained that one who acquires an interest in real property with actual or constructive notice of the rights of another takes subject to the other’s rights. In modern times, this rule has been refined by statute and case decisions so as to impose a duty on a subsequent purchaser (or encumbrancer) to inquire as to rights of parties in possession of land, “and a failure to inquire results in the new title holder taking title subject to whatever rights of occupancy existed.”

In this case, the court said a “casual observer” could see the bungalows were occupied as “single family residential units,” and inquiry would have disclosed the Resident Agreements. Likewise, these lenders who received financial information from the developer should have been aware of his “basic business model.” The court noted that two Residents Agreements were recorded in the land records, but this does not appear to have been decisive in the court’s reasoning.

So the residents win what amounts to a life estate in their bungalows, but must stand in line as unsecured creditors in the bankruptcy to recover what they can of promised repayments. For their part, the lenders can foreclose, but their security interests are subject to all Resident Agreements made with the developer–even those signed after deeds of trust were recorded.

Moral: Lessons here for everyone, since both residents and lenders now have much, much less than they bargained for.

The case is In re Clare House Bungalow Homes, L.L.C. (Clare House Bungalow Homes Residents Association v. Clare House Bungalow Homes, L.L.C.), 447 B.R. 617 (Bankr.E.D.Wash. 2011).

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False Security

Monday, September 12th, 2011

An unattested mortgage, even when recorded, fails its purpose.

ALPHARETTA, GA–On October 12, 2005, Bertha Hagler refinanced her home.

The property in question, center

She signed two security deeds (akin to a mortgage): A “first” securing repayment of $240,000, and a “second” for a lesser amount. But at closing somehow things got confused, and only the “second” got signed by the notary and witness who were there.

Weeks later when the security deeds were recorded no one noticed that the “first” was not properly attested to.

In April 2007 Bertha filed Chapter 7 bankruptcy, and a trustee in bankruptcy was appointed. The trustee noticed the defective security deed, and filed an adversary proceeding to avoid it as against Bertha’s home.

The trustee relied on Bankruptcy Code section 544(a)(3), the so-called “trustee avoiding power” or “strong arm” power. This code provision allows a trustee (or a debtor-in-possession) to avoid an interest in debtor real property that is not perfected as of the commencement of bankruptcy. (See our posting for 5/22/10, “Bankruptcy 101.”)

Fulton County Courthouse, where the questioned security deed was recorded and indexed in the land records

In this case, the trustee claimed the “first” was not entitled to be recorded in the land records, and thus “perfected,” because it did not comply with Georgia statutes requiring that a mortgage affecting real property be signed and acknowledged before a notary, attested to by the notary, and attested to by one additional witness, in order to be accepted for recording.

The bankruptcy court ruled in favor of the trustee, avoiding the mortgage and relegating the lender to status of an unsecured creditor for the $240,000 debt. The lender would stand in line for cents on the dollar.

The lender appealed, arguing that despite its flaws the mortgage was in fact recorded and correctly indexed in the land records. Anyone who searched the records should find the mortgage and readily understand it was intended to encumber the property. The lender relied on case law holding that a defective instrument once recorded may impart constructive notice of its contents.

The federal district court entertaining the appeal said the issue involved “an unclear question of Georgia law,” and asked the Georgia Supreme Court to decide whether, in Georgia, a recorded security deed with a “facially defective attestation” can provide constructive notice.

The Georgia Supreme Court building

The Supreme Court sided with the bankruptcy court. The Court allowed that a “duly recorded” albeit defective instrument can provide constructive notice, but said this security deed was not duly recorded because a lack of required attestations was apparent “on the face” of the instrument. Instead, the Court cited “longstanding law” that a mortgage recorded with “facial defects as to attestation” may not impart constructive notice.

The Court concluded saying the lender’s position would relieve it and other lenders “of any obligation to present properly attested security deeds.” It would “risk an increase in fraud,” and “shift to the subsequent bona fide purchaser and everyone else the burden of determining (possibly decades after the fact) the genuineness of the grantor’s signature.”

Moral: Another example of section 544(a)(3) at work, and a reminder (if we need one) that legal formalities matter.

The case is U.S. Bank National Association v. Gordon, ___ S.E.2d ___, 2011 WL 1102995 (Ga. 2011).

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Landlocked

Wednesday, August 3rd, 2011

When you own land, you need a right of access.

VALPARAISO, IN–In August 1985 John and Susan Hall acquired two parcels here in rural Indiana, one fronting County Road 50 North and the other 800 feet to the rear. Neighbors to the east were John’s brother and his wife.

The rear parcel, shown highlighted, with the front (Wilusz) parcel above it and the eastern (Luna) parcel to its right. The public road is at the top of this image.

John and Susan soon mortgaged the front parcel and built a home.

Our story continues in 1998, when John and Susan were delinquent and their mortgage lender, First Federal Savings, filed a judicial foreclosure action. In March 1999, the front parcel was sold at sheriff’s sale and promptly resold to William and Judith Wilusz.

John and Susan remained owners of the rear parcel, about two acres, which was undeveloped. By 2007, they determined to sell the property but, problem was, there was no legal right of access to connect it with the public road. The Wiluszes would not grant an easement over the front parcel, and the eastern parcel was now owned by Benjamin Luna who likewise denied the Halls’ plea for an easement. So the Halls filed suit against the Wiluszes and Mr. Luna, seeking an “easement of necessity.”

The trial court ruled in favor of defendants Wilusz and Luna, reasoning that the Halls had failed to arrange for access when they easily could have, and waited too long to raise the issue with innocent newcomers Wilusz and Luna. The Halls appealed.

The Court of Appeals reversed in part (against Wilusz), and affirmed in part (for Luna).

Porter County Courthouse, at Valparaiso, Indiana

The Court explained that an easement of necessity may arise, by implication, when land under a “unity of title” (having one owner) is divided “in such a way as to leave one part without access to a public road.” In such a case, the law presumes an intention of the owner that none of the land be made inaccessible by the division.

In this case, the effect of the mortgage against the front parcel, and subsequent foreclosure and sale to Wilusz, was to render the rear parcel inaccessible. It follows that an easement of necessity was created, by operation of law, over the Wilusz parcel at the time the Halls’ ownership of the two parcels was “divided,” and this easement benefits the rear parcel indefinitely even as one or both parcels are acquired by new owners.

The Luna parcel, on the other hand, was never owned by John and Susan Hall and, the Court said, “an easement of necessity cannot arise against the lands of a stranger.”

Moral: Key words here are “easement by implication,” and “unity of title.” The common law favors productive use and enjoyment of land, hence this rule to preserve rights of access when lands are divided and dealt off.

A legal right of access to land is typically covered by title insurance, at least in subdivisions and established neighborhoods. But real estate buyers and investors should always assure themselves that covered or “legal” access meets expectations.

The case is William C. Haak Trust v. Wilusz, ___ N.E.2d ___, 2011 WL 1842735 (Ind. App. 2011).

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Electronic Recording / To Err is Human

Monday, May 16th, 2011

eRecording is here to stay; so is human error.

SEYMOUR, TN–Here’s a failure of title, 21st century style.

The Greene home

Richard and Deana Greene were owners of this newer home in the Smoky Mountains of Tennessee.

In February 2009 the couple borrowed $204,517 from Homeowners Mortgage, giving a deed of trust against the property.

The title agent was Network Closing Services, a company offering regional services through affiliates in 21 states. Network Closing got the deed of trust signed and notarized, and delivered it to Simplifile, an electronic recording agent. Simplifile provides electronic recording services, converting paper documents into digitized images for transmittal via the Internet to local recording offices.

Sevier County Courthouse, home to the Register of Deeds. The statue on the courthouse lawn honors Dolly Parton

The Greene property is located in Sevier County, TN. The Sevier County Register of Deeds has a vendor relationship with Business Information Systems (B.I.S.), so the Register’s office only accepts imaged documents that are formatted and transmitted through B.I.S.

So it happened that this deed of trust went from Network Closing to Simplifile, then from Simplifile to B.I.S., and then from B.I.S. to the Register of Deeds.

The imaged deed of trust was received by the Register’s office on March 11, 2009. It was reviewed by Deputy Register Lois McMurry, who with a keystroke accepted the document and assigned it Instrument Number 09015404, recorded March 11, 2009, at Book 3300, Page 584.

But perhaps she had been too hasty. Before moving on, Ms. McMurry noticed the document had been mislabeled in a data field affixed by B.I.S. for the Register’s use, as “Miscellaneous” instead of “Deed of Trust,” and the Tennessee mortgage tax had not been paid. So she deleted the recording and returned the deed of trust to B.I.S. with advice it was rejected, but it still showed the recording information (Instrument Number, recorded date, and Book and Page numbers).

Moving on, Ms. McMurry re-assigned this identical recording information to the next document in her queue.

B.I.S. got the deed of trust and forwarded it to Simplifile, but failed to report it was unrecorded. Had Simplifile known, they would have advanced the mortgage tax payment and backcharged Network Closing.

The Greenes filed a Chapter 7 bankruptcy in June 2009, and their court-appointed Trustee in bankruptcy filed an adversary proceeding to avoid the unrecorded deed of trust as an interest in the Greene property. Mainly, the Trustee based his action on Bankruptcy Code section 544(a)(3), which allows a trustee to avoid an interest in debtor real property that is not perfected as of commencement of bankruptcy. This is the so-called “trustee avoiding power,” or “strong arm power.” (See our posting for May 22, 2010, “Bankruptcy 101.”)

The Trustee argued the deed of trust was not “perfected,” because there’s no record of it in county land records. The lender (Bank of America, as current holder of the loan) replied the deed of trust was duly recorded, and therefore perfected, because Tennessee law states that a document once accepted for recording cannot later be removed from land records for failure to pay a fee or tax.

The bankruptcy court ruled in favor of the Trustee, allowing that even though Ms. McMurry’s actions were “improper and contrary to statute,” the result was the deed of trust disappeared from Sevier County land records. And, the court concluded, intervening rights of the trustee in bankruptcy prevail over expectations of the lender.

So the lender loses its security, and becomes just another unsecured creditor.

Moral: We’ve said it before, “There’s no crying in bankruptcy.”

The risk that a mortgage or deed of trust is invalid or unenforceable against security property is typically covered by title insurance.

The case is In re Greene (Newton v. Bank of America), 2011 WL 864971 (Bkrtcy,E.D.Tenn. 2011).

The rejected deed of trust, as returned to Simplifile and Network Closing. Note entries in the data field, upper right, as "Miscellaneous" and "zero" mortgage tax (yellow). Note also recording information (red arrow). (Click to enlarge)

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Mortgages and Deeds / A Contested Deed

Saturday, April 2nd, 2011

It comes to this: Is the deed void, or merely voidable?

LOS ANGELES, CA–Back in the day this two unit income property in South Los Angeles was owned by David and Florence Sims. The couple lived next door.

Back in the day: The Simses' income property

David and Florence did some estate planning and, in September 1991, they created the Sims Family Trust to hold title to their residence and income property. With the trust agreement, the Simses directed that upon their deaths the residence would be gifted to Florence’s daughter, Shirley, and the income property would go to David’s daughter, Yvonne.

David died and, as alleged in court filings, shortly after his death Florence began to show signs of dementia. She was then 86. As her condition deteriorated, Florence came to rely on her granddaughter, Sheron, to help her with medical decisions.

By December 2001, Florence was diagnosed with paranoia, hallucinations, and dementia. She signed a Power of Attorney giving Sheron authority over her health care decisions.

Florence died April 7, 2003.

Later, in November 2003, there were recorded two grant deeds purportedly signed by Florence conveying the residence and income property to Sheron. The deeds were dated and notarized as of January 2, 2002.

Sheron proceeded to refinance the properties, taking subsantial cash “out.” The income property was last refinanced in 2006, when Sheron gave Washington Mutual a deed of trust for $440,000.

By early 2008 Sheron was in default on her loans, and in April 2008 foreclosure notices were posted on both properties.

By this time David’s daughter, Yvonne, and her husband James had opened separate probates for the estates of David and Florence. They were in possession of the properties, and were surprised by the foreclosure notices. Apparently, Sheron had made payments without anyone knowing, until she ran out of money.

Yvonne and James filed complaints to invalidate the newly-discovered deeds of trust. As to the income property, they claimed the Washington Mutual deed of trust is invalid because (a) Sheron may have forged Florence’s signature on the deed giving the property to Sheron, (b) if Florence did in fact sign the deed, she lacked mental capacity to understand what she was doing, and/or (c) if Florence did sign, she lacked capacity to understand the nature and effect of the deed.

Washington Mutual (now known as J.P. Morgan) defended the deed of trust arguing the lender relied on the Florence-to-Sheron deed in good faith and, therefore, it is entitled to favored status as a bona fide encumbrancer.

The trial court ruled in favor of the lender, and dismissed the complaint. The court reasoned the deed may be voidable, but it could not be void because, at the time its loan was made, the deed appeared in county land records and the lender had no reason to question it. Plaintiffs Yvonne and James appealed.

The Ronald Reagan State Building at Los Angeles, home to the Court of Appeal

The Court of Appeal reversed, holding the deed would be void if any of the three grounds alleged by plaintiffs can be proven. “Generally,” the Court explained, “a deed is void if the grantor’s signature is forged or if the grantor is unaware of the nature of what he or she is signing. A voidable deed, on the other hand, is one where the grantor is aware of what he or she is executing, but has been induced to do so through fraudulent misrepresentations.”

And, said the Court, a deed which is “wholly void” cannot ordinarily provide a foundation for good title even in the hands of a bona fide purchaser or encumbrancer.

With that, the case was remanded for trial of plaintiffs’ allegations.

Moral: This decision will not be published in the official reports, because it’s based on established law, but it shows how land records are viewed (void vs. voidable) in a deed contest.

The outcome here will likely turn on medical opinion and testimony of those around Florence in her final years.

The risk of forgery or a void instrument in the chain of title is commonly covered by title insurance.

The (unpublished) case is reported as Casonhua v. Washington Mutual Bank, 2010 WL 4193214 (Cal. App. 2 Dist.).

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Mortgages and Deeds / Larceny, Inc.

Saturday, March 19th, 2011

Can a phony deed pass good title?

BALTIMORE, MD–When she bought this row house in December 2005, Cateania Matthews stepped into legal Adventureland.

The Matthews house, right

The seller was Scotch Bonnett Realty Corporation. Scotch Bonnett was formed in 2003 by Emora Horton and Sandra Denton, then husband and wife, to buy and sell real estate. The business was to be financed with Denton’s earnings as a recording artist. Articles of incorporation were filed, naming Denton as initial sole director.

By the end of 2003 Horton and Denton were divorced, and the incorporation of Scotch Bonnett stalled. There were no by-laws, no minute book, and no officers. The only contact person of record was Richard Hackerman, an attorney who signed the articles of incorporation and was named as “resident agent.”

Following the divorce, Horton and Denton continued to do business as “Scotch Bonnett.”

Through Horton, Denton was introduced to Corey Johnson. Later, in September 2005, there was filed with the state an amendment of Scotch Bonnett’s articles of incorporation. The amendment stated “Corey Johnson is to be added as an officer of the Company.” The amendment was purportedly signed by “Richard Hackerman, President,” but Hackerman would later say this was a forgery and he had never been president of Scotch Bonnett.

Now back to Ms. Matthews. When she bought the house (December 2005) she got a deed from Scotch Bonnett signed by “Corey Johnson (Officer).” But none of the sale proceeds found their way into a Scotch Bonnett bank account, and Denton later denied Johnson’s authority to sell the property.

Scotch Bonnett filed suit against Matthews and her purchase money mortgage lender, to quiet title. When Matthews filed a Chapter 13 bankruptcy, the quiet title suit was re-filed in the bankruptcy court.

The settlement officer who handled the Matthews purchase testified in bankruptcy court. She said she relied on state filings to confirm Johnson’s authority to act on behalf of the corporation, and had no reason to suspect the amendment to articles of incorporation was a forgery. There was no suggestion that Matthews or her lender were anything other than innocent victims.

The bankruptcy court framed the question as follows: “Does the use of a deed that is neither a forged document, nor signed with a forged signature, but which derives its transactional validity from forged corporate articles of amendment, render a conveyance of land void ab initio, or, is good title transferred to bona fide purchasers for value without notice (of the fraud)?”

The bankruptcy court certified the question to the Maryland Court of Appeals (the state’s highest court), for an advisory opinion.

The Robert C. Murphy Courts of Appeal Building, home to Maryland's high court, at Annapolis

The Court of Appeals answered that the fraudulent deed could convey good title to a bona fide purchaser, because the deed itself was not a forgery.

The Court explained that a deed bearing a false signature is a forgery, and under the common law “forgery rule” a forged deed is null and void, at inception. On the other hand, a deed with a genuine signature but based on false authority is merely voidable, by court action. Just as any deed tainted by fraud, duress or undue influence may be voidable, but not void.

In declining to follow the forgery rule here, the Court cited “strong public policy favoring bona fide purchasers.” An expansion of the rule, the Court said, “would turn into a jury question whether fraud in the inducement voided a deed ab initio and destabilize predictability of result for bona fide purchasers for value.”

Moral: The distinction between a deed that is void, as opposed to one that’s voidable, is crucial to maintaining the legal protection for a bona fide purchaser. This protection promotes predictable outcomes for real estate transactions, and certainty in land records.

Still, the result here is stunning. A stranger to title (signing as Corey Johnson), without authority to act on behalf of Scotch Bonnett, has deeded away its property.

Title insurance typically covers many types of fraud risk, other than fraud by the insured.

The case is reported as Scotch Bonnett Realty Corporation v. Matthews, 417 Md. 570, 11 A.3d 801 (2011).

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Mechanics’ Liens

Sunday, September 19th, 2010

The hidden risk of unpaid work.

ST. LOUIS, MO–The papers here lately have carried stories of a once-respected local builder, whose ruinous attempts to save his business have landed him in prison.

As reported in the Globe Democrat, Edward Levinson borrowed millions from three banks to build custom homes in upscale subdivisions, but failed to pay his contractors and material suppliers while falsely representing that all bills were paid when the homes were sold.  He also took down payments from home buyers, which he used to keep his business afloat rather than to construct their homes.

Levinson was the owner of Levinson Companies, a firm founded by his father more than 50 years ago.

Facing multiple criminal charges, in June Levinson pleaded guilty to one count of bank fraud. He was sentenced to 51 months in federal prison, and ordered to pay restitution of $13,457,603 to a long list of victims.

Some buyers in this neighborhood got a nasty welcome

Behind the news coverage, there are untold stories of home buyers who, along with their lenders, were stuck with mechanics’ liens against their properties.

Missouri, like most other states, has laws allowing a provider of labor or materials for construction to file a lien against the improved property if their bills and invoices go unpaid. This construction lien is most commonly known as the “mechanics’ lien.” If necessary, the unpaid improver can file suit to force a sheriff’s sale of the property to satisfy his lien.

Buyers hit with sixteen lien claims, totaling $446,401

In one such case, within months of moving in  buyers of an $898,000 home were surprised to be served with a total of sixteeen liens, claiming $446,401 due for everything from drywall to landscaping. Not to be outdone, their neighbors are looking at nineteen liens totaling $345,468 due.

Because they have title insurance, most of Levinson’s buyers and their lenders are protected. The real losers will be the banks that loaned money to Levinson, his contractors and suppliers who failed to timely perfect their liens, and buyers who lost down payments. And, of course, the title insurance company.

Moral: The risk that property may be charged with mechanics’ lien claims can be hard to assess before closing a purchase, because liens filed after closing may “relate back” and have priority as of the date of commencement of work on the project as a whole. So a carpet layer may have the same lien rights and priority as the contractor that laid the foundation

In other words, the risk may be virtually undetectable. And, this risk exists with resale properties, as well as new construction.

Mortgage lenders require title insurance coverage against this “hidden” risk; so too should buyers.

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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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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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