When we use the term "creditors’ rights," we are generally speaking about an area of the law that has become quite litigious in the recent past. This issue typically arises in the context of a bankruptcy proceeding or a mortgage foreclosure. It can also become important in the event that you have any kind of a workout scenario involving a deed in lieu of foreclosure or even a leveraged buy out transaction.
When we refer to the term creditors’ rights, we are simply indicating the possible rights and challenges which may be asserted by creditors to a particular transaction. Typically, the challenge will be asserted on the basis that the transaction involved rendered the owner or mortgagor assetless. Creditors’ rights challenges have also been asserted in the context that the transfer or mortgage involved was a preferential transfer. In addition to creditors, bankruptcy trustees can also bring an action which we group into this generic category of creditors’ rights issues.
In 1990 (and again in 1992), all ALTA title insurance policies were amended to include a specific exclusion for these so-called creditors’ rights issues. It was the feeling of the ALTA that these matters are not truly within the scope of traditional title insurance coverage. They are not record title matters that could be discerned by an examination of land title records. They more typically relate to the financial solvency and position of the parties to the transaction.
For a more detailed discussion of creditors’ rights related issues and guidelines concerning our position, please see both the "Bankruptcy" and "Mortgage Foreclosure" sections of this manual.