Title Problems You Never Want to See:

When Divorce Litigation Meets a Refinance

Presented by Hayden-Anne Breedlove, Counsel

Every now and then, a file lands on your desk that reminds you that underwriting is more art than science. Recently, we were presented with a transaction involving a former husband who had been awarded the marital residence in a divorce. On its face, the deal appeared straightforward: the husband intended to convey the property to his newly formed LLC and then refinance in the LLC’s name. However, beneath the surface, there was a complication.

The ex-wife alleged that the husband was in violation of prior court orders, specifically for unpaid child support and attorney’s fees totaling more than $35,000. She had filed a Motion to Enforce in the Circuit Court, which was originally scheduled to be heard in December but has now been continued to July. At this time, no signed order exists. No judgment has been entered. No lien has attached. No lis pendens has been filed.

Legally and technically speaking, there is not yet a lien. This is precisely where underwriting becomes an exercise in judgment, rather than simple application of rules.

The Risk: Knowledge of a Dispute

Although there is no recorded judgment lien at this time, we have been made aware of active litigation between former spouses, including a pending Motion to Enforce Court Order alleging unpaid child support and attorney’s fees in excess of $35,000. At the same time, the former husband is attempting to transfer the property to a newly formed LLC and refinance in the LLC’s name prior to the scheduled hearing. While there is currently no lien of record requiring payment, the timing and structure of the proposed conveyance raise legitimate concerns that the property could be perceived as being placed beyond the reach of a potential creditor.

Depending on the outcome of the pending motion, a court could examine whether the transfer constitutes a fraudulent conveyance or whether the corporate veil of the LLC should be pierced. In short, even without a recorded lien today, our knowledge of the dispute materially alters the underwriting analysis.

Why an Escrow Doesn’t Solve It

A common solution is to suggest escrowing the disputed amount. In this scenario, that does not meaningfully mitigate the underwriter’s risk.

The issue is not simply the $35,000. The risk is the possibility that:

• A court later determines the conveyance was fraudulent
• The transfer to the LLC is unwound
• The corporate veil is pierced
• The title insurer becomes entangled in litigation

Title insurance is not intended to underwrite active disputes or pending enforcement litigation.

The Solution

Since we have knowledge of the pending litigation, we cannot ignore it. The appropriate approach is to include an exception similar to:

“Any order, judgment, result, outcome, or consequence of the Motion to Enforce Court Order pending in Case No. CL XXX-XXXX in Y County Circuit Court.”

Lenders often find such an exception unacceptable. If the lender will not accept the exception, the only path forward would be indemnities signed by both former spouses relating specifically to the pending litigation. Without mutual indemnities, the exception must remain. If the lender will not proceed with the exception in place, the unfortunate but necessary outcome may be a declination to insure.

The Takeaway

This scenario is a perfect example of why title underwriting is not purely mechanical. The land records may be clean today, but actual knowledge of a significant pending dispute changes the risk analysis entirely. When active litigation intersects with an attempted transfer (particularly to a closely held LLC), caution is warranted. Sometimes the title problem you don’t want to see isn’t the recorded lien. It’s the lawsuit you already know about.