NAILTA Blog

The Source of Title has once again uncovered an interesting story from the American Land Title Association’s past.  This time, it has to do with ALTA’s support of a private right of action for competitors to sue an offending settlement service provider under RESPA Section 8.

Click here for the full story from SOT.

In 2007, while introducing the toothless “Principles of Fair Conduct,” ALTA members agreed to support a replacement to its abandoned Code of Ethics that said “Congress should amend section 8 of RESPA to provide a competitor’s right of action for injunctive relief.”  According to SOT, 100 businesses, including all four major title insurance underwriters signed the statement.

ALTA said it would ask Congress for the amendment back in 2007.  According to the SOT article, ALTA is still supportive of the idea of an amendment to RESPA providing injunctive relief for competitors of sham affiliated business arrangements.  However, ALTA hasn’t pushed the amendment because “ALTA hasn’t heard support for the measure in some time.”

Hate to be the members interested in having ALTA follow through on that promise back in 2007 and have to hear that last quote as an excuse.

To be fair, this is the first sign of life from ALTA on the subject of competition in the industry and even though the subject matter is dated (2007) it is a good piece of follow-up journalism on the part of SOT to confirm that ALTA does, indeed, still support the measure today.  Whether that translates into anything, however, is the now five year old question.

Wow.

The Massachusetts Supreme Judicial Court, in the much-anticipated Bevilacqua v. Rodriguez case,  ruled that buyers of some foreclosed homes may not be the legal owners of those properties, even though they purchased the homes through a foreclosure proceeding and even in cases where they attempted a “try-title” (mostly equivalent to a state quiet title action) to resolve the title issues on the property. 

The decision was hailed by consumer advocates such as Max Weinstein, an attorney and instructor on predatory lending issues at Harvard Law School’s WilmerHale Legal Services Center, and Massachusetts Attorney General Martha Coakley, who each filed an amicus brief on behalf of the man whose foreclosed home was bought by Bevilacqua. 

Representatives for the Real Estate Bar Association for Massachusetts were not so upbeat.  “It leaves us nowhere,” said Edward M. Bloom, president of the association.

The SJC decision did, however, give a remedial course for the BFP (Bevilacqua) involved in this action.  He can sue the lender who botched the underlying foreclosure or “reforeclose” on the prior owner. 

There has been no immediate comment from the title insurance industry on this case.  A title insurance claim stemming from these faulty foreclosures could be deemed a matter “created, suffered or assumed” by the insured under Condition and Stipulation 3(a) of the lender’s title insurance policy.  If so, there would be no claim for damages against the title insurance agency or insurer for the lender who “botched” the foreclosure.  It remains to be seen whether the industry will begin instituting those types of defenses to coverage in the event the foreclosing lenders start facing a wave of Bevilacqua-related lawsuits — at least in Massachusetts.  Check with your underwriters for more information.

For more information on the case, click here.

We recommend visiting the Source of Title webpage for more information on the background of the case.  If you do not already subscribe to SOT, you should.  It is the best source for straightforward title insurance news in the industry.

In 2005, Countrywide Home Loans, Inc. obtained a first mortgage against real estate owned by Rita and Kenneth Cloud. Sometime thereafter, the Clouds went into default and the mortgage was foreclosed. On August 28, 2006, Countrywide filed a foreclosure action against the Clouds. At a Sheriff’s Sale on February 22, 2007, Countrywide bid its judgment and took title to the real estate by Sheriff’s Deed. The Deed was recorded on March 15, 2007.

However, prior to the first mortgage and subsequent foreclosure judgment, the Clouds executed an unsecured promissory note to Citizens Bank of New Castle in January of 2003. The Clouds went into default on that note, as well. A complaint was filed against the Clouds to obtain a judgment on the unsecured note. On June 9, 2006, the Steuben County Court entered a default judgment against the Clouds in favor of Citizens Bank.

At the time Countrywide filed its foreclosure action in August of 2006, the Citizens Bank judgment lien was of record, but missed and Citizens Bank was not named as a defendant in the Countrywide foreclosure action.

On April 19, 2007, Countrywide conveyed title to the subject property to Fannie Mae by limited warranty deed. Afterwards, Countrywide discovered that Citizens Bank held a judgment lien that was not made a part of the prior foreclosure action. Consequently, Countrywide then filed a Complaint for Strict Foreclosure to foreclose any right of redemption that Citizens Bank had in the subject property. Citizens Bank was served and filed an answer and separate complaint seeking to foreclose the judgment lien.

The parties to the consolidated actions filed cross motions for summary judgment and the trial court ruled in favor of Countrywide and ordered Citizens Bank to redeem Countrywide’s mortgage within 30 days or be forever barred from asserting its judgment lien against the subject property.

Citizens Bank appealed and the Court of Appeals reversed the judgment of the trial court holding that through operation of the doctrine of merger, Countrywide’s lien was extinguished and could no longer be asserted against Citizens Bank.

A petition to transfer the matter to the Indiana Supreme Court was granted and the Indiana Supreme Court also decided to overturn the trial court, but upon different grounds as the appellate court.

The Indiana Supreme Court held that Citizens Bank was not bound by the prior foreclosure and that Countrywide/Fannie Mae simply stepped into the shoes of the original holder of the real estate and took such owners interest subjec to all existing liens and claims against it.

The Indiana Supreme Court also held that a strict foreclosure is not an end in and of itself. Rather, it is only the vehicle to address an important underlying issue within the case. It does not, by itself, produce a result to subordinate or eliminate the priority of the Citizens Bank mortgage. Instead, it only places before the court the question of whether the doctrine of merger should be enforced.

The Court continued:

In essence by conveying title to a third party [Fannie Mae] by way of a warranty deed, albeit limited, Countrywide demonstrated that it intended a merger of its interests.

The Court held that the merger of the mortgage and title, which occurred when Countrywide purchased the subject property from the Sheriff’s Sale, prevented Countrywide from rolling back the clock and obtaining strict foreclosure relief as though a merger had not occurred.

The dissenting opinion filed by Justice Sullivan suggests that the result reached by the Indiana Supreme Court unfairly or unjustly enriches a junior lienholder at the expense of a superior lienholder in contravention of prior Indiana caselaw.

What is the lesson for title agents?

Any post-Sheriff’s Sale attempts to foreclose the interests of omitted junior lienholders through strict foreclosure actions — at least in Indiana — cannot be insured without significant risk to the title insurer. Title agents should treat the liens of those omitted junior lienholders as viable liens on the real estate and have them paid as any lien, even in the case where subsequent strict foreclosure actions are filed by the plaintiff’s of prior foreclosure actions.

A copy of the case is found below:

Citizens State Bank v. Country Wide 949 NE2 1195