presents presents Title Insurance Risks in Distressed Real Estate Transactions Evaluating and Dealing With Liens and Other Encumbrances During Title Due Diligence A Live 90-Minute Teleconference/Webinar with Interactive Q&A A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: David Weissmann, Partner, Weissmann Zucker Euster , Atlanta Patricia “Trish” Brown, Assistant Vice President, Regional Underwriting Counsel, First American Title Insurance Company , Kansas City, Mo. First American Title Insurance Company Kansas City Mo Ren R. Hayhurst, Partner, Bryan Cave , Irvine, Calif. Wednesday, June 16, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
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CREDI TORS RI GHTS AND MORTGAGE MODI FI CATI ONS: TI TLE I NSURANCE I NDUSTRY MODI FI CATI ONS: TI TLE I NSURANCE I NDUSTRY RESPONSE TO AN ECONOMI C COLLAPSE 4
Bankruptcy Avoidance Pow ers Risk Bankruptcy Avoidance Pow ers Risk Loss of Title Loss of Title • Primarily concerned: – fraudulent conveyances under Section 548 y – preferences under Section 547 • Equitable subordination is also a risk Equitable subordination is also a risk 5
Fraudulent Conveyances Fraudulent Conveyances • A A transfer transfer made made within within two two years years before before bankruptcy if (i) the transfer was made “with actu al intent to hinder, delay, or defraud” a then existing or subsequent creditor, or (ii) the th i ti b t dit (ii) th debtor was insolvent or had insufficient capital p at the time of the transfer, , and received less than the reasonable equivalent value of the transferred property 6
Section 5 4 8 ( c) : transferee “for Section 5 4 8 ( c) : transferee “for value” and “in good faith value” and “in good faith ”: ”: • Retains lien up to value notwithstanding fraudulent conveyance concerns • Good faith means having sufficient G d f i h h i ffi i knowledge to place transferee on inquiry notice of the debtor’s possible insolvency or notice of the debtor s possible insolvency, or abstaining from unconscionable behavior to the detriment of other creditors 7
Fraudulent transfer risks to the len Fraudulent transfer risks to the len der: der: • 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 would receive in Chapter 7 liquidation • Mortgages granted as additional security 8
Preferences: 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 pre existing debt, made when the debtor was insolvent, and made within 90 days of the filing of the petition generally, or within 1 year of the filing of the petition by insiders , whereby the creditor f th titi b i id h b th dit obtains property valued in excess of what would have been received in a Chapter 7 bankruptcy p p y 9
Preferences: Preferences: • Uncertainty whether a foreclosure made within the statutory period could constitute a preference especially if the secured claim is preference, especially if the secured claim is substantially less than the value of the foreclosed property, because the creditor foreclosed property, because the creditor receives dramatically more than it would receive in a Chapter 7 liquidation 10
Preferences: Preferences: • Issue on time of recordation. Does preference period relate back to date of deed, or date of recording? • Statute now grants 30 days grace period Statute now grants 30 days grace period to record to retain relation back to date of deed and transaction of deed and transaction 11
Exclusions to title coverage Exclusions to title coverage g provide protection to insurers provide protection to insurers • No coverage for damages which “would • No coverage for damages which would not have been sustained if the [insured] had paid value for” mortgage/property had paid value for mortgage/property (covers a failure of consideration) (Exclusion 3(e) ALTA 2006) (Exclusion 3(e) ALTA 2006) 12
Exclusions to title coverage Exclusions to title coverage g provide protection to insurers provide protection to insurers • Exclusion for matters “attaching or created subsequent to the Date of the Policy” (Exclusion 3(d) ALTA 2006 – the “post-policy exclusion”) – Bankruptcy is always a matter created subsequent to the date of the policy 13
Specific Specific p bankruptcy bankruptcy p p y y creditors’ creditors’ rights rights exclusions exclusions: : • 1990 ALTA Policy: excludes liability for f claims arising under the operation of federal bankruptcy, state insolvency, or federal bankruptcy, state insolvency, or similar creditor’s rights laws – Deletion was often done by endorsement at little or no charge with little review little or no charge with little review – In later years, there was more attention to detailed financial information 14
ALTA ALTA offered offered specific specific creditor’s creditor’s rights rights c c overage overage i in in 2 0 0 6 2 0 0 6 , 2 0 0 6 2 0 0 6 insuring insuring i i i i th th the the “invalidity, “invalidity, unenforceability, unenforceability, lack lack of of priority priority priority priority or or or or avoidance avoidance avoidance avoidance of” of” of of the the the the insured insured insured insured lien lien: : • Resulting Resulting from from fraudulent fraudulent transfer transfer occurring prior to the transaction creating the lien; or ; • Resulting from failure to timely record lien (preference issue) (p ) 15
Creditors’ rights exclusion also Creditors’ rights exclusion also m odified excluding coverage if transaction m odified excluding coverage if transaction m odified, excluding coverage if transaction m odified, excluding coverage if transaction creating lien: creating lien: • is a fraudulent conveyance or transfer • is a preferential transfer (other than if due to a failure to timely record) • Even if not specifically excluded, other exclusions arguably still apply 16
ALTA Endorsem ent 2 1 ALTA Endorsem ent 2 1 - -0 6 ( Creditors’ Rights) 0 6 ( Creditors’ Rights) insures against loss: insures against loss: insures against loss: insures against loss: • Sustained by reason of avoidance due to an occurrence on or before the effective b f h ff i date of the policy of a fraudulent transfer or preference f – unless fraudulent nature was “known” to the i insured or insured is not a purchase in “good” d i d i h i “ d” faith 17
ALTA Endorsem ent 2 1 ALTA Endorsem ent 2 1 - -0 6 is decertified 0 6 is decertified in February 2 0 1 0 in February 2 0 1 0 i F b i F b 2 0 1 0 2 0 1 0 • Business risk shifts back to business players l • Title companies reviewed upcoming defaults and determined risk was too great 18
Mortgage m odifications on the rise Mortgage m odifications on the rise • Extensions of maturity • Increase in interest rate I i i t t t • Payment modifications • Additional collateral • Cross default/cross collateralize Cross default/cross collateralize • Partial releases 19
Modifications can prim e junior liens Modifications can prim e junior liens • Is modification materials or substantially prejudicial so as to jeopardize the junior prejudicial so as to jeopardize the junior lien holder – Increase in interest or payment put stress on p y p 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 20
Original m ortgage language or Original m ortgage language or intercreditor agreem ent can protect i intercreditor agreem ent can protect i di di • Future advance clauses provide some protection, depending on local law g • Language that note secured includes amendments and renewals helps amendments and renewals helps • Cut-off letter from junior lender may be required nonetheless required nonetheless 21
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