August 2004

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

(See TCNC Website: www.oldrepublictitle.com/nc for our newsletters, newsletter index and forms)

 

AUGUST 2004 TCNC NEWSLETTER

 

ENDORSEMENTS FROM THE AMERICAN LAND TITLE ASSOCIATION

 

On October 22, 2003, the American Land Title Association (ALTA) voted to adopt endorsements 14 through 17 and 18 through 19.1. On January 17, 2004, Endorsement 17.1 was adopted. On April 19, 2004, Endorsements 20 and 21 were adopted. All endorsements can be found on the ALTA website at www.alta.org or the direct link to the forms which is http://www.alta.org/standards/index.cfm. The endorsements were intended for commercial transactions, but most can be used in any transaction.

 

The Title Company of North Carolina, Inc., has placed most of these on its website at www.oldrepublictitle.com/nc. We have these endorsements available. We will briefly discuss the endorsements, most of which are requested primarily for commercial transactions. Much of the coverage has been provided in other endorsements.

 

ALTA ENDORSEMENT FORM 14 (FUTURE ADVANCES)

           

This is endorsement insures against the invalidity, unenforceability, lack of priority, and loss of priority of the lien of the “insured mortgage” (which is defined in the Conditions and Stipulations of the policy to include a deed of trust) as set out in Sections 1, 2 and 3 of the endorsement; but subject to the Exclusions From Coverage in the policy (except exclusion 3(d) pertaining to “post-Date of Policy” matters, but, due to Section 1 of the endorsement, subject to exclusion 3(a) of the Exclusions From Coverage pertaining to matters created, suffered or agreed to by the insured), the Conditions and Stipulations of the policy (except Section 9(b) pertaining to reduction of insurance), and any of the Schedule B exceptions; and further subject to the exclusions in Section 4 of the endorsement pertaining to not being liable for loss or damage (or attorney’s fees, costs and expenses) resulting from (a) advances made after the filing of a bankruptcy petition by or on behalf of the mortgagor, (b) loss of priority due to real estate taxes or assessments arising after the date of policy (which have “super priority” under North Carolina law), (c) loss of priority to any federal tax lien of any advance made more than 45 days after a federal tax lien has been filed, (d) the loss of priority of an advance to any federal or state environmental protection lien, (e) usury or any consumer credit or truth-in-lending law and (f) the loss of priority of an advance to a mechanics’ or materialman’s lien.

 

First, it should be noted that exclusion (c) of Section 4 does not apply to an insured deed of trust securing a construction loan advance, but does apply to an insured deed of trust to the extent it secures other types of advances such as what an equity line of credit would allow. For construction loans, see 26 U.S.C. § 6323(c) discussed in E. Urban, North Carolina Real Property Mechanics’ Liens, Future Advances and Equity Lines—Including Title Insurance (2d Ed.) § 41-5. For the 45 day rule, see 26 U.S.C. § 6323(d) discussed in § 41-6 of the above referred to book. D. Schmudde, Federal Tax Liens (4th Ed. ALI/ABA 2001, Supplemented 2003) § 4.04(b) (construction loans) and § 4.04(e) (45 day period rule) should also be noted. There is some concern that exclusion (c) in Section 4 would allow the title insurer to deny an obligation to defend against a lawsuit which makes an erroneous allegation against the priority of a construction loan deed of trust, contrary to 26 U.S.C. § 6323(c). However, it would seem that exclusion (c) of Section 4 makes reference to actual “loss of priority,” so, if the result of the government’s lawsuit is that the government is defeated, the title insurer would be liable for attorneys’ fees, costs and expenses since the exclusion would not apply. That is, there would be no “loss of priority” to trigger the exclusion. Conversely, if some fact were uncovered that allowed the government to win under 26 U.S.C. § 6323, the exclusion would apply and the title insurer would not be liable for attorneys’ fees, costs and expenses. If there is any doubt at the time the claim is made, the title insurer should set forth its reservation of rights.

 

It would seem that in a commercial transaction context involving an entity barrower, and considering the law, exclusion (d) of Section 4 can be deleted at least with respect to federal environmental liens. For the priority of a federal environmental protection lien, see 42 U.S.C. § 9607. 42 U.S.C. § 9607(l)(3) states that the lien shall be subject to the rights of any purchaser, holder of a security interest, or judgment lien creditor whose interest is perfected under applicable State law before notice of the lien has been filed in the appropriate office within the State. This is the Clerk of Superior Court’s office. G.S. 44-68.12. Any such purchaser, holder of a security interest, or judgment lien creditor shall be afforded the same protections against the lien imposed as are afforded under State law against a judgment lien. For purposes of the subsection, the terms “purchaser” and “security interest” shall have the definitions provided under 26 U.S.C. § 6323(h).

 

26 U.S.C. § 6323(h) states that a “security interest” exists at any time (1) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (2) to the extent that, at such time, the holder has parted with money or money’s worth. (“Money or money’s worth” is defined in I.R.C. Reg. § 301.6323(h)-1.)

 

In sum, 42 U.S.C. § 9607(l)(3) only incorporates the definitions in 26 U.S.C. § 6323(h); it does not incorporate rules of priority in 26 U.S.C. § 6323 cited above. The priority rule for a federal environmental lien is governed by 42 U.S.C. § 9607(l)(3), which defers to state law. Therefore, if a deed of trust complies with the contents requirements of North Carolina statutory law and is recorded before the lien under 42 U.S.C. § 9607 is filed, the deed of trust will have priority over the lien even as to an advance made after the lien’s filing (as long as state law is complied with), even though the “security interest” secured by the deed of trust, to the extent of the advance, did not exist until after the lien was filed. This is true with regard to a construction loan deed of trust or other future advances or equity line deed of trust. Of course, a lien filed before the insured deed of trust would have to be cancelled or be listed as an exception.

 

As to state liens, see G.S. 130A-19 and G.S. 130A-20. These liens for abatement apparently have priority like a “mechanic’s and materialmen’s” lien. See. G.S. 44A-10 and G.S. 44A-14(a). As to such abatement prior to the Date of Policy (the recording of the deed of trust) the title insurance underwriting would be the same as for an unfiled “mechanic’s and materialmen’s” lien for performance prior to the deed of trust’s recordation. As to abatement after the recording of the insured deed of trust, the deed of trust would have priority. Therefore, if the title insurer is satisfied that no abatement occurred prior to the recording of the insured deed of trust, exclusion (d) of Section 4 can be deleted as to such liens as well.

 

Exclusion (f) (mechanics’ or materialmen’s liens) can be deleted if the title insurer receives adequate assurance that the deed of trust complies with applicable statutes and has been recorded prior to the commencement of furnishing of labor, services, material and equipment (or if the title insurer receives satisfactory evidence of payment of a potential lienor who has already furnished lienable performance or receives a subordination of that person’s lien rights.)

 

Section 5 of the endorsement makes it clear that Section 2(c)(ii) of the Conditions and Stipulations pertaining to the amount of insurance shall include “advances” (“advances” being defined in Section 1b. of the endorsement) and that Section 8(d) of the policy’s Conditions and Stipulations, pertaining to limitation of liability regarding advances, shall not apply to advances.

 

Endorsement Form 14 can be used in North Carolina if the insured’s deed of trust complies with Article 7 of Chapter 45 or Article 9 of Chapter 45 of the General Statutes and if the title insurer determines that, upon recordation, the deed of trust has initial priority over “mechanics’ and materialmen’s liens” or, more precisely, liens for labor, services, materials or equipment furnished pursuant to Chapter 44A of the General Statutes. See G.S. 44A-10; G.S. 44A-14(a); G.S. 45-70(a) and G.S. 45-82. The endorsement makes a pending disbursement clause unnecessary.

 

 

ENDORSEMENT 14.1 (FUTURE ADVANCE—KNOWLEDGE)

 

This endorsement is virtually identical to Endorsement 14, except for exclusion d. of Section 4, not found in Endorsement 14, which excludes liability for loss of priority of any advance made after the insured has knowledge of liens and other matters intervening between the Date of Policy and the advance, as to such intervening matters. Due to G.S. 45-70(a) and G.S. 45-82, this is not a factor, and so Endorsement 14.1 should not be used in North Carolina.

 

 

ENDORSEMENT 14.2 (FUTURE ADVANCES—LETTER OF CREDIT)

 

Letters of credit present certain interesting problems. See R. Bozarth, Commercial Mortgage Finance—Title Insurance Issues and Endorsements—Multi-Site Issues, appearing in Title Insurance, 2003 (P.L.I.), at p. 501, et seq. Whereas Section 1a of Endorsement 14 and Endorsement 14.1 define the term “agreement” as the note or loan agreement secured by the “insured mortgage” or the insured mortgage itself,  “agreement” is defined in Section 1a of Endorsement 14.2 to mean the letter of credit, surety agreement or reimbursement agreement relating to repayment of advances.

 

Section 2 of Endorsement 14.2 is nearly identical to Section 2 of Endorsement 14 and Endorsement 14.1, except for obvious differences in Section 2.c.(ii). Endorsement 14.2 does not contain Endorsement 14’s and Endorsement 14.1’s Section 3. Endorsement 14.2’s Section 3.a. is identical to Endorsement 14’s and Endorsement 14.1’s Section 4.b. Endorsement 14.2’s Section 3.b. is identical to Endorsement 14’s and Endorsement 14.1’s Section 4.d. and Section 4.e. respectively. Endorsement 14.2’s Section 3.c. excludes usury matters similar to Endorsement 14’s Section 4.e. and Endorsement 14.1’s Section 4.f. Endorsement 14.2’s Section 3.d. excludes mechanics’ and materialmen’s liens as do Endorsement 14 and Endorsement 14.1. Endorsement 14.2 does not contain Endorsement 14’s and Endorsement 14.1’s exclusions in Section 4.a. for advances after the mortgager’s bankruptcy. Endorsement 14.2 does not contain Endorsement 14’s and Endorsement 14.1’s exclusion in Section 4.c. for certain federal tax liens. This is due to 26 U.S.C. § 6323(c), discussed in the North Carolina book cited above, at § 41-8.

 

Endorsement 14.2’s Section 4 and Section 5 correspond to Endorsement 14’s and Endorsement 14.1’s Section 5 and Section 6, respectively.

 

Exclusions (b), (c), and (d) of Section 3 can be deleted as noted in the above discussion of Endorsement 14’s corresponding exclusions.

 

 

ENDORSEMENT 15 (NON-IMPUTATION—FULL EQUITY TRANSFER)

 

Endorsement 15 is attached to an owner’s policy where the entity is the named insured and vestee of the insured estate or interest in Schedule A. It provides that the Company agrees that it will not assert the provisions of Exclusions from Coverage 3(a), (b), or (e) to deny liability for loss or damage otherwise insured against under the terms of the policy solely by reason of the action or inaction or knowledge, as of Date of Policy, of [identify exiting or contributing partner(s) of the insured partnership entity, member(s) or manager(s) of the insured limited liability company entity, or officer(s) and/or director(s) of the insured corporate entity], whether or not imputed to the insured by operation of law, provided [identify the “incoming” partners, members or shareholders] acquired the insured as a purchaser for value without knowledge of the asserted defect, lien, encumbrance, adverse claim, or other matter insured against by the policy.

 

 

ENDORSEMENT 15.1 (NON-IMPUTATION—ADDITIONAL INSURED)

 

This form is used with an owner’s policy where the entity is the named insured and vestee of the insured estate or interest in Schedule A. The endorsement provides that, for purposes of the coverage provided by the endorsement, [identify the “incoming” partner, member or shareholder] (“Additional Insured”) is added as an insured under the policy. By execution below, the insured named in Schedule A acknowledges that any payment made under the endorsement shall reduce the amount of insurance as provided in Section 10 of the Conditions and Stipulations of the policy. The Company agrees that it will not assert the provisions of Exclusions from Coverage 3(a), (b), or (e) to deny liability to the Additional Insured for loss or damage otherwise insured against under the terms of the policy solely by reason of the action or inaction or knowledge, as of Date of Policy, of [identify, as applicable, the existing and/or exiting partner(s) of the insured partnership entity, member(s) or manager(s) of the insured limited liability company entity, or officer(s) and/or director(s) of the insured corporate entity], whether or not imputed to the Additional Insured by operation of law, to the extent of the percentage interest in the insured acquired by Additional Insured as a purchaser for value without knowledge of the asserted defect, lien, encumbrance, adverse claim, or other matter insured against by the policy.

 

 

ENDORSEMENT 15.2 (NON-IMPUTATION—PARTIAL EQUITY TRANSFER)

 

The endorsement is attached to an owner’s policy where an incoming partner, member or shareholder is the insured and where the vestee of the insured estate or interest in Schedule A is a partnership, limited liability company or corporation. The endorsement provides that the Company agrees that it will not assert the provisions of Exclusion from Coverage 3(a), (b), or (e) to deny liability for loss or damage otherwise insured against under the terms of the policy solely by reason of the action or inaction or knowledge, as of Date of Policy, of [identify, as applicable, the existing and/or exiting partner(s) of the vestee partnership entity, member(s) or manager(s) of the vestee limited liability company entity, or officer(s) and/or director(s) of the vestee corporate entity], whether or not imputed to the entity identified in paragraph 3 of Schedule A or to the insured by operation of law, but only to the extent that the insured acquired the insured’s interest in the entity as a purchaser for value without knowledge of the asserted defect, lien, encumbrance, adverse claim, or other matter insured against by the policy.

 

 

ENDORSEMENT 16 (MEZZANINE FINANCING)

 

Mezzanine financing is discussed in detail elsewhere. J.C. Murray, Mezzanine Financing Endorsement to Title and UCC Insurance Policies, appearing in Title Insurance, 2003 (PLI), p. 677.

 

The endorsement is attached to an owner’s policy insuring an entity owner. Section 1 identifies the “Mezzanine Lender.” By signature, as noted in Section 2, the insured owner (a) assigns to the Mezzanine Lender the right to receive amounts otherwise payable to the insured under the policy, not to exceed the outstanding indebtedness under the Mezzanine Loan; and (b) agrees that no amendment of or endorsement to the policy can be made without consent of the Mezzanine Lender except as provided in Section 12(a) of the Conditions and Stipulations of the policy.

 

Section 4 provides that, in the event of a loss under the policy, the Company agrees that it will not assert the provisions of Exclusions from Coverage 3(a), (b), or (e) to refuse payment to the Mezzanine Lender solely by reason of the action or inaction or knowledge, as of Date of Policy, of the insured, provided: (a) the Mezzanine Lender had no knowledge of the defect, lien, encumbrance or other matter creating or causing loss on Date of Policy; (b) this limitation on the application of Exclusions from Coverage 3(a), (b) and (e) shall: (1) apply whether or not the Mezzanine Lender has acquired an interest (direct or indirect) in the insured either on or after Date of Policy, and (2) benefit the Mezzanine Lender only without benefiting any other individual or entity that holds an interest (direct or indirect) in the insured or the land.

 

The endorsement has other helpful sections and is to be executed by the “Mezzanine Lender” and the insured owner.

 

 

ENDORSEMENT 17 (ACCESS AND ENTRY)

 

The endorsement can be attached to an owner’s policy or loan policy. Obviously, the approved attorney and title insurer must work together to make sure the insured land has the access rights covered by the endorsement, which rights are more specific than the insuring provision in the policy jacket insuring against “lack of a right of access to and from the land.” The endorsement provides that the Company insures against loss or damage sustained by the insured if, at Date of Policy: (i) the land does not abut and have both actual vehicular and pedestrian access to and from [insert name of street, road, or highway] (the “Street”), (ii) the Street is not physically open and publicly maintained, or (iii) the insured has no right to use existing curb cuts or entries along that portion of the Street abutting the land. This endorsement’s clause (iii) would appear to require checking with the local government authority and appears to override Exclusions from Coverage Sec. 1. See Marriott Financial Services v. Capitol Funds, 288 N.C. 122, 217 S.E.2d 551 (1975).

 

 

ENDORSEMENT 17.1 (INDIRECT ACCESS AND ENTRY)

 

The endorsement can be attached to an owner’s or loan policy. This endorsement states that the Company insures against loss or damage sustained by the insured if, at Date of Policy: (i) the easement identified [as Parcel __________] in Schedule [A] (the “Easement”) does not provide that portion of the land identified [as Parcel __________] in Schedule [A] both actual vehicular and pedestrian access to and from [insert name of street, road, or highway] (the “Street”), (ii) the Street is not physically open and publicly maintained, or (iii) the insured has no right to use existing curb cuts or entries along that portion of the Street abutting the Easement. As to (iii), see the discussion of Endorsement 17 above.

 

Obviously, the status of title (including taxes and assessments) to the servient tract must be checked and set forth in the opinion of title given to the title insurer. If, for example, there is a deed of trust on the servient tract, either (1) the title insurer will have to take exception to the deed of trust or (2) the servient tract lender will have to subordinate its lien to the easement. See G.S. 39-6.6 for subordinations and G.S. 39-6.4 for creation of easements. Pursuant to G.S. 39-6.6, the trustee in the deed of trust need not join in the subordination unless the deed of trust requires the trustee’s joinder. The title examination of the servient tract should reflect restrictive covenants. Of particular concern is a restriction expressly or implicitly prohibiting a subdivision lot from being used for access to adjoining land. See the discussion in Restrictive Covenants—Using a Subdivision Lot For a Street or Access Way (TCNC Newsletter, August 2001) and Restrictive Covenants—Using a Subdivision Lot For a Street or Access Way—A New Case (TCNC Newsletter, December 2002), both at www.oldrepublictitle.com/nc.

 

 

ENDORSEMENT 18 (SINGLE TAX PARCEL)

 

The endorsement can be attached to a loan or owner’s policy. The endorsement states that the Company insures against loss or damage sustained by the insured by reason of the land being taxed as part of a larger parcel of land or failing to constitute a separate tax parcel for real estate tax purposes.

 

Obviously, the approved attorney must give an opinion to this effect. It would be better if this endorsement had a space for the inserting of a tax lot or parcel number (as do other such endorsements).

 

 

ENDORSEMENT 18.1 (MULTIPLE TAX PARCEL)

 

The endorsement can be attached to a loan or owner’s policy The endorsement provides that the Company insures against loss or damage sustained by the insured by reason of: 1. those portions of the land identified below not being assessed for real estate tax purposes under the listed tax identification numbers or those tax identification numbers including any additional land: Parcel:               Tax Identification Numbers:             ; and 2. the easements, if any, described in Schedule A being cut off or disturbed by the non-payment of real estate taxes or assessments imposed on the servient estate by a governmental authority.

 

Presumably, Section 2 relates only to taxes and assessments existing as liens as of Date of Policy. We have been told that is the case. The title to the servient estate should be checked in this regard. The lien for taxes and assessments have “super priority” pursuant to G.S. 105-356(a)(1); G.S. 160A-228; G.S. 160A-233(c); G.S. 153A-195 and G.S. 153A-200(c). G.S. 105-374 and G.S. 105-375 literally would seem to allow a tax foreclosure against a servient tract to extinguish an easement. The matter has not been ruled on by the Court of Appeals or North Carolina Supreme Court. Cases from other jurisdictions go both ways. Annot. 7 ALR 5th 187.

 

 

ENDORSEMENT 19 (CONTIGUITY—MULTIPLE PARCEL)

 

The endorsement can be attached to a loan or owner’s policy. This endorsement is to be used when the policy insures more than one parcel. An examination of a survey and/or the legal description will be necessary.

 

 

ENDORSEMENT 19.1 (CONTIGUITY—SINCE PARCEL)

 

The endorsement can be attached to a loan or owner’s policy. This endorsement insures that the insured land is contiguous to specifically identified contiguous uninsured land. An examination of a survey and/or the legal description will be necessary.

 

 

ENDORSEMENT 20 (FIRST LOSS—MULTIPLE PARCEL TRANSACTIONS)

 

Section 1 of this endorsement to a loan policy defines “Indebtedness,” “Collateral,” and “Material Impairment Amount.” “Material Impairment Amount” means the amount by which any matter covered by this policy for which a claim is made diminishes the value of Collateral below the Indebtedness.

 

Section 2 of this endorsement provides that, subject to the provisions of Section 8 of the Conditions and Stipulations (pertaining to limitation of liability), in the event of a claim resulting from a matter insured against by the policy, the Company agrees to pay that portion of the Material Impairment Amount that does not exceed the limits of liability imposed by Sections 2 (Continuation of insurance) and 7 (Determination and extent of liability) of the Conditions and Stipulations without requiring: (a) maturity of the Indebtedness by acceleration or otherwise; (b) pursuit by the insured of its remedies against the Collateral; and (c) pursuit by the insured of its remedies under any guaranty, bond or other insurance policy.

 

Section 3 provides that nothing in the endorsement shall impair the Company’s right of subrogation. However, the Company agrees that its right of subrogation shall be subordinate to the rights and remedies of the insured. The Company’s right of subrogation shall include the right to recover the amount paid to the insured pursuant to paragraph 2 from any debtor or guarantor of the Indebtedness, after payment or other satisfaction of the remainder of the Indebtedness and other obligations secured by the lien of the “insured mortgage.” The Company shall have the right to recoup from the insured claimant any amount received by it in excess of the Indebtedness up to the amount of the payment under paragraph 2.

 

 

ENDORSEMENT 21 (CREDITORS’ RIGHTS)

 

The loan policy endorsement provides that the Company insures against loss or damage sustained by the insured by reason of the avoidance in whole or in part, or a court order providing some other remedy, based on the voidability of any estate, interest, or mortgage shown in Schedule A because of the occurrence on or before Date of Policy of a fraudulent transfer or a preference under federal bankruptcy, state insolvency or similar creditors’ rights laws. The coverage provided by this endorsement shall include the payment of costs, attorneys’ fees and expenses necessary to defend the insured against those counts, and no others, of any litigation seeking a court order which will result in loss or damage against which this endorsement provides insurance to the extent provided in the Conditions and Stipulations. This endorsement does not insure against loss or damage if the insured: (a) knew when it acquired any estate, interest, or mortgage shown in Schedule A that the transfer, conveyance, or mortgage was intended to hinder, delay, or defraud any creditor; or (b) is found by a court not to be a transferee or purchaser in good faith.

           

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