DS News - Digital Archives

renewed interest in foreclosures and foreclosure filings.6 However, this push has created the very upswing title companies fear: As foreclosures increase, the likelihood for serious title defects also increases. Analysis of a random sample of foreclosed properties conducted by AFX Title detected mortgage recording issues that created and are continuing to create title flaws, the result of which is an anticipated mass upsurge in title claims over the next few years.7 Adding to Foreclosure Delays Early last year, financial institutions and state attorneys general reached a comprimise to compensate property buyers for alleged damages due to questioned foreclosure practices. While this settlement and its intent seems to be a fair and effective resolution for all parties, the downside is the enormous clouded title problem is not addressed under the terms of that settlement. Many property owners now allege they cannot prove they own real estate they thought they rightfully purchased while others argue that banks cannot prove they have the right to foreclose and sell the property. While no one is sure of the number of properties that face clouded titles, it is believed to be in excess of 1 million personal residences given the number of foreclosures that have occurred since 2006 and a great deal more commercial properties.8 The end result is that a property owner, whether commercial or residential, cannot sell the property if he or she cannot prove ownership, as mortgage companies will not issue mortgages on property that cannot be insured. To compound troubles, title insurance companies also face seemingly harmful case law due to a frequent misunderstanding by lawyers and judges as to what is and isn't available under title insurance. A decision reached in Massachusetts in U.S. Bank v. Ibanez, 458 Mass. 637 (2011)9 upheld the long-standing principle that a bank must own the note and mortgage on which it forecloses. When Wells Fargo and U.S. Bancorp could not prove they owned the mortgages they attempted to foreclose, the Ibanez court did not give clear title to the properties. The court went a step further to indicate it was not limiting its ruling to future foreclosures only, meaning all completed foreclosures with similar problems theoretically failed to give good title. This means insurance companies that insured the titles of these properties will most certainly face a deluge of title claims and the affected properties will require re-foreclosure or quiet title actions. Under title policies, an insurer has to act with diligence to clear title problems brought under a claim or face damages for failing to timely act.10 The difficulty faced with foreclosure claims brought under a title policy is the strong possibility that problems with title many times cannot be cleared. And, given the slow track record of many financial institutions in correcting the issues raised, it is highly likely a violation of the diligence standard for title insurers would occur prior to them curing title. This places the title insurer in a difficult position of breaching policy provisions with the limited ability to clear title, if at all, given the court's stance on "true" ownership of notes and mortgages by banks. Most certainly, once it is realized that such an opportunity exists to collect on the title policy, an influx of claims will occur. Other courts reached similar decisions as the Premier Tierra court, such as that in Mattson Ridge, LLC, v. Clear Rock Title, LLP, 2011 WL 2175832 (Minn. App. 2011)11, which found that the insured could recover consequential damages including lost profits, the cost to cure the defect, attorney's fees, and the diminution in value to the property, beyond policy limits where the insurer breaches the policy by failing to cure title. Again, the title insurer is essentially exposed to quasibad faith damages by allowing for an excess judgment against them for failing to cure the title to a property. The difficulty again is the question of what occurs if a title cannot be cleared due to mortgage foreclosure issues that created clouds on title. Title insurers face further claim exposure through the truism that bad facts make bad law. In JPMorgan Chase Bank, N.A., v. First American Title Ins. Co., 795 F.Supp.2d 624 (E.D. Mich. June 10, 2011),12 the federal court decided that title insurers will also be held responsible for claims that arise due to the fraudulent activities of title agents, attorneys, and real estate agents even if the title insurer receives late notice of the claim. As a response, many title policy lenders refused to issue title policies for JPMorgan foreclosures and are considering the same for other lenders who admitted the use of questionably signed documents, mortgages that lacked assignments, or other issues that affected the foreclosure.13 When foreclosures are completed with faulty documentation, it can leave the new owners of the property vulnerable to expensive legal claims. Title insurance protects the buyer against defects, errors, or omissions in the chain of title. As title insurance firms begin to shy away from insuring foreclosed properties, the entire real estate market could suffer. The prices of foreclosures would plummet since lenders will not issue a new mortgage without title insurance. And small businesses that invested in commercial properties, taking advantage of historically low rates, could face ruin if they are hit with expensive litigation to correct title issues on property they thought they rightfully owned. While case law at the current time is unfriendly toward title defense, courts typically are equally as unfriendly due to their misunderstanding of title policies and the provisions therein. Many judges never see title policy claims or at best may have one or two come through during their entire careers. The legal system faced these same difficulties as foreclosure actions increased in numbers. Courts and attorneys were in large part forced to learn under a deluge of case filings. The same could happen with an anticipated swell in title claim filings. The end result is the creation of more "bad law," the misapplication of statutes and policy provisions, and a windfall of claims to the detriment of the title insurer and the real estate market. New Vulnerabilities It is abundantly clear based upon the continuation of foreclosures that we are at the beginning stages of what could well end up being our next wave of instability in the real estate market caused by a mass increase in title claims that simultaneously places our title insurers in an exceptionally difficult financial position. No one can indicate how many clouded properties now exist that may subject title insurers to potential claims, which, in turn, will cause further delays of foreclosures in progress and foreclosures yet to be filed. Additionally, as insured property owners and insured mortgagees continue to seek answers and reparations, they most certainly will look to their title policy for payment and resolution. James E. Moon, Esq., is an associate in the Fort Myers, Florida, office of Quintairos, Prieto, Wood & Boyer, P.A., practicing in the areas of civil and commercial litigation. Michael J. Barker, Esq., is a partner in the Jacksonville, Florida, office and heads up the firm's financial services practice group. latest-real-estate-time-bomb-title-of-foreclosed-properties-clouded-wells-fargo-dumping-risk-on-hapless-buyers.html. 7. Id.8 Abigail Field, "Why the Foreclosure Mess Settlement Proposal Can't Fix the Damage," DailyFinance, March 18, 2011, www.dailyfinance.com/2011/03/18/whythe-foreclosure-mess-settlement-proposal-cant-fix-the-damag/. 9. U.S. Bank v. Ibanez, 458 Mass. 637 (2011). 10. Premier Tierra Holdings v. Ticor Title Insurance Co. of Florida, Inc., No. 4:09-02872, 2011 WL 2313206 (S.D. Tex. June 9, 2011)10, where the Southern District for Texas, while interpreting Florida law, found that standard title policy provisions 4(b), 8(a), and 8(b) were ambiguous, but more importantly, that if an insurer breaches the policy under one of these provisions, the policy limitation on damages would no longer apply under the policy, exposing the carrier to greater damages. 11. Mattson Ridge, LLC, v. Clear Rock Title, LLP, 2011 WL 2175832 (Minn. App. 2011). 12. JPMorgan Chase Bank, N.A., v. First American Title Ins. Co., 795 F.Supp.2d 624 (E.D. Mich. June 10, 2011). 13. See Streitfield, David, "Companies Stop Issuing Title Policies," found at www.nytimes.com/2010/10/03/business/economy/03foreclose.html?_r=1. 46

• Cover