Ny Title Insurance

LAW OF TITLES IN NEW YORK AND
COMPENDIUM OF REAL PROPERTY TITLE LAW
by William C. Hart
Electronic Format Copyright 2001 William C. Hart Title Law Associates 215.379.3195 (Home Office Library) fax: 215.379.2214 e-mail: whart@tatitle.com or titlelaw@home.com www.titlelawannotated.com
TABLE OF CONTENTS Click on the link of choice below to move to that area of the document.
TEXT TITLE COPYRIGHT DISCLAIMER PREFACE DETAILED TABLE OF CONTENTS SUMMARY OF CONTENTS BIOGRAPHY
SUMMARY OF CONTENTS In order to expeditiously move through this document, click on the section below that you are interested in and it will move you to that section.
CHAPTER AIR RIGHTS 1A. ABUTTING WALLS 1. 2. 3. ACCRETION & AVULSION ACKNOWLEDGMENT ADVERSE POSSESSION CHAPTER 17 REAL ESTATE TITLES CHAPTER 15 REAL ESTATE TITLES SEE ALSO CHAPTER 22 REAL ESTATE TITLES
3A. BANKRUPTCY 4. 5. 6. 7.
BUILDING LOAN AGREEMENTS & MORTGAGES CEMETERIES COMMUNITY PROPERTY CONCURRENT ESTATES CONDOMINIUMS CHAPTER 25 REAL ESTATE TITLES CHAPTER 25 REAL ESTATE TITLES
7A COOPERATIVES 8. 9. 10. 10A 11. CORPORATIONS CREDITORS RIGHTS DECEDANTS ESTATES DEEDS IN LIEU OF FORECLOSURE DEEDS OF CONVEYANCE
CHAPTER 5 REAL ESTATE TITLES
SEE ALSO CHAPTER 12. 13. 14. TITLE CHAPTER 6 REAL ESTATE TITLES DESCRIPTIONS DIVORCE EASEMENTS EMINENT DOMAIN 15. ENCROACHMENTS CHAPTER 16 REAL ESTATE TITLES
15A. EQUITY SECURITIZATION 16. 17. 18. ESTATES IN LAND EXECUTION EXECUTORY CONTRACTS FDIC and RTC 18A. FEDERAL LIENS 19. FORECLOSURE CHAPTER 14 REAL ESTATE TITLES CHAPTER 4 REAL ESTATE TITLES
19A. FORFEITURE 19B. HEIRS AT LAW 20. 21. 22. 23. 24. 25. HOMESTEAD IDENTITY INHERITANCE TAXES JOINT TENANTS JUDGMENTS LEASES
CHAPTER 15 & 26 REAL ESTATE TITLES
25A. LETTERS OF INDEMNITY 26. 27. LIENS & ENCUMBRANCES LIS PENDENS CHAPTER 9 REAL ESTATE TITLES
27A 28.
MARKETABILITY OF TITLE MECHANICS LIENS MINES AND MINERALS
CHAPTER 20 REAL ESTATE TITLE CHAPTER 8 REAL ESTATE TITLES
29.
MORTGAGES
29A. OPTIONS 30. PARTNERSHIPS CHAPTER 27 REAL ESTATE TITLES
30B. POLICIES AND ENDORSEMENTS 31. POWER OF ATTORNEY
31A. PUBLIC LANDS RAILROADS 32. 33. RECORDING ACTS RESTRICTIVE COVENANTS CHAPTER 21 REAL ESTATE TITLES
33A. SALE-LEASEBACK 33B. SALE-LEASEBACK-SEVERANCE 34. 35. 36. 37. 38. 39. STREETS SUBORDINATIONS SURVEY COVERAGE TAXES TENANCY BY THE ENTIRETY TENANTS IN COMMON CHAPTER 12 REAL ESTATE TITLES CHAPTER 19 REAL ESTATE TITLES
40A. TRUSTS 41. 42. WATER AND WATER COURSES WILL CHAPTER 18 REAL ESTATE TITLES
Biography William C. Hart

Mr. Hart is the Chief Underwriter of T.A. Title Insurance Company. His principal responsibility is to develop and monitor all underwriting policies and procedures for the company. Prior to joining T.A. Title he was the Chief Title Officer of American Title Insurance Company of Miami, Florida 1985-92 and Chief Title Officer of Meridian Title Insurance Company, 1988-92. He is the author of Standard Title Underwriting Practices, 1991; Creditors Rights and Title Insurance, Questionable Titles, Remedies & Extrahazardous Risks, 1991; Title Insurance Underwriting Principles and Exception Language, 1992; Instructions as to the Use of Title Insurance Endorsements, 1992; The Title Insurance Underwriting Process, 1994. He is the editor of the T.A. Title Insurance Company Florida Underwriting Manual and editor and contributing author to the T.A. Title Insurance Company Pennsylvania Title Insurance Manual. He is a prior instructor at the New Jersey Lawyers Title Institute, 1983-84; past Chairman of the NJLTA Legislative Committee, 1988-89; prior instructor at the New Jersey Land Title Institute, 1987 through 1989; prior instructor and Seminar Speaker at The Land Title Institute of Virginia, 1990 and 1991; member of the PLTA Forms Committee, 1989-92 and 1994-95; past member of NYSLTA Education Committee 1993-94; present member of the ALTA Reinsurance Section 1994-95. Mr. Hart is a graduate of Florida Southern College, 1969 and New York University, 1975. Mr. Hart is the recipient of Certificates of Recognition from American Title Insurance Company, The New Jersey Land Title Association and New York University. He was presented with the designation of "Certified Land Title Insurance Professional" [CLTIP] by the Land Title Institute of Virginia in 1991. Mr. Hart is an author, lecturer and course planner of numerous title insurance seminars. He was elected to Who's Who in the East", 25th Anniversary Edition, 1995-96
Copyright
Copyright1978 by William C. Hart. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in an electronic retrieval system, or transmitted in any form by any means whatsoever, without the prior written permission of the author or T.A. Title Ins. Co. Library of Congress Copyright Registration No.
DISCLAIMER
This publication is designed to provide our employees, officers, agents and approved attorneys general information prepared by professionals with regard to the subject matter covered. Its primary function is to serve as a reference manual. it is distributed to our policy writing offices and agents with the express understanding that the company and the author are not engaged in rendering legal opinions or advice or other professional services. Although prepared by a title professional, this publication under no circumstances shoud be utilized as a substitute for specific legal services in situations where the individual using the information is not an attorney at law licensed to practice in New York. Under NO circumstances should any individual not licensed to practice law in the State of New York disseminate any of this information to any customer or client. As circumstances warrant, if legal advise or other expert assistance is required, the services of a lawyer should be sought.
PREFACE
The purpose of this manual is to satisfy the need for a convenient reference source dealing with the subject of title examination, underwriting and closing of title to real estate within the State of New York. Traditionally, guidance in this area required reference to a number of Treatises written on the subject of real estate and conveyancing law by some very distinguished authors. Those include Real Property Law and Practice, by Joseph Rasch of the New York Bar; Harvey Law of Real Property and Title Closings, by David C.B. Harvey of the New York Bar, as expanded and recompiled by Elloit L. Biskind, of the New York Bar; Real Estate Closings, by Raymond J. Werner of the Chicago, Illinois Bar, The Law of Titles, by Eugene Sackman, of the New York Bar; Contracts and Conveyances of Real Property, by Milton R. Friedman of the New York Bar; Real Estate Law, by Robert Kratovil of the Chicago,Illinois Bar; Marketable Title to Real Estate, by Maupin; Guaranteeing Marketability of Titles to Real Estate, by Harold L. Reeve; Clearing Land Titles, by Paul E. Bayse, of the California and Missouri Bars; Modern Mortgage Law and Practice, By Robert Kratovil; Modern Real Estate Documentation, by Robert Kratovil; Warren's Weed New York Real Property and Real Estate Titles, Published by the New York State Bar Association, James M. Pedowitz, of the New York Bar, Editor-in-Chief. All of these texts are useful and should be referred to by the serious student when undertaking to address a particular title issue. Each of these texts reflects the individual experience and prejudice of the authors. Diversity of authorship and expertise will frequently disclose alternative solutions to title problems. As Professor Pedowitz has stated, "the law of real estate titles is quite complex" and "there is less than unanimity of thinking" as to the best way to resolve a controversy. What to do when a title controversy arises. While we don't want to refuse to issue a policy until we have determined that it is impossible to write the coverage within our guidelines as to what constitutes a safe and proper risk, our expertise as title underwriters lies in the field of what can be done with a title insurance policy. This adds an additional element to the traditional mix of our understanding of contract and real property law. That is our understanding of what the customer wants and why. Then, if our customers request that we do something which we can't do, such as providing a particular coverage, we ought to be able to explain to them not only why we can't do it but also, if we truly understand what they are trying to accomplish, what we can do which may address their concerns or serve that purpose and then ask whether this alternative would be a satisfactory substitute for that which they have requested.
With this thought in mind I felt there was a need to consolidate the substantive law relating to the examination and underwriting of title within the State of New York and have attempted to address within this manual all those situations which routinely arise in the course of the examination of title. There are no plans at this time to prepare annual revisions to the body of this text. Any supplements deemed necessary will appear as separate UNDERWRITING SUPPLEMENTS by chapter. For a more thorough in-depth analysis of New York title underwriting issues, the reader and underwriter are encouraged to refer to the second edition of Real Estate Titles published by the New York State Bar Association in 1994. That text will serve as the successor to this manual. For those matters that arise which are not addressed in this manual or Real Estate Titles, Second Edition, the examiner and underwriter are encouraged to refer to either Title Insurance Underwriting Principals and Exception Language [Underwriting Menu C. TI Underwriting Principals (F:\TIMANUAL\PRINCIPL)] or The Title Insurance Underwriting Process [Underwriting Menu G. TI Underwriting Process (F:\TIMANUAL\UPROCESS)]. The proper use of endorsements within the State of New York is addressed in the Tirsa Rate Manual and Instructions as to the Use of Title Insurance Endorsements [Underwriting Menu E. TI Endorsement Manual (F:\TIMANUAL\ENDORSE)]. A word of caution. The examiner and underwriter alike are reminded that the underwriting of title and the analysis required thereby must include both a thorough understanding of our contractual obligations to our insured and a thorough review of relevant case law. This necessarily implies that we recognize, at the time an underwriting decision is made, the potential cost to the insurer of the fulfillment of its contractual obligation to defend title against adverse claims, even if the legal analysis shows that the title insurer would ultimately prevail. Professor Pedowitz' first rule in underwriting was "don't make the company go to the Court of Appeals to prove you're right". A corollary to that rule is, "charge a premium commensurate with the risk". William C. Hart, Chief Underwriter Cheltenham, Pennsylvania December, 1995
FOREWARD
The principal function of an author's foreword is the justification of the text itself. This text is designed as an educational supplement to be used by title attorneys and related professionals in the examination and insuring of real estate titles within the State of New York. Preparation of this manual began 18 years ago. At that time I followed the advice of my mentor, Robert J. Hartlaub, and crossed over the river to New York City in search of a job in order to broaden my knowledge of the title insurance industry. I was fortunate to find work with Title Guarantee-New York, now part of the Chicago Title Family of title insurers. At first I worked as a closer and later in the title clearance department. Working as a title closer in New York City is a mixed blessing. You can make a good living. You cannot make a mistake. There is no one to call for help at 2 a.m. in the morning. I remember saying at the end of one closing "wouldn't it be great to have all the answers to title questions available in a computer which you could put in your briefcase and rely upon when you couldn't reach counsel?" I never forgot that idea. The technology wasn't available then. It is now. My stay in New York was brief but well spent. I have said that I was fortunate to find work at Title Guarantee because the educational resources available there at that time were tremendous. I read everything I could lay my hands on. Reader's Manuals, Exception Manuals, Law Bulletins, Closer's Manuals and Board of Counsel Minutes. I bought and read all the texts referenced in the Preface to this manual. I made copious notes and organized them alphabetically. Those notes formed the foundation for this manual. Over the next 18 years I worked in many places but I continued to return to New York City annually to attend the various Practicing Law Institute title insurance seminars. The speakers at those seminars were the best the industry had to offer. The PLI Publications accompanying the seminar material always contained updated reference to changes in New York law as it affected title. Prior to my present position there was never a need to organize, consolidate and formally present the material I had gathered over the years. This manual is the result of that undertaking. I want to acknowledge and thank all the PLI authors and all the New York title counsel who over the years prepared the materials contained within my title notes. They exemplify the finest tradition of our industry by sharing their expertise. I particularly want to thank James M. Pedowitz Esq. for calling me down to his office late one afternoon and explaining very bluntly exactly what he meant when he said "don't make the company go to the Court of Appeals to prove you're right". I also want to thank Edward P. Scharfenberger Esq. for his time, patience and guidance during my stay at Title Guarantee under his direction. He provided much needed direction and encouragement. He had the patience of a saint. Lastly, I want to thank my present Administrative Assistant, Diane Carpenter for her hard work in the typing of the entire manual.
DETAILED SUMMARY OF CONTENTS

CHAPTER 1 CHAPTER 1A
ABUTTING WALLS ACCRETION & AVULSION
LEGAL BULLETIN TITLE PAGE PAGE 1 PAGE 1 PAGE 2 PAGE 2 TITLE PAGE LEGAL BULLETIN DATE
ACCRETION AND AVULSION ACCRETION AVULSION EROSION CHAPTER 2
ACKNOWLEDGMENT ACKNOWLEDGMENTSCLEARANCE
CHAPTER 3
ADVERSE POSSESSION
GENERAL
PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE PAGE 1
ACQUISITION OF TITLE COLOR OF TITLE ADVERSE POSSESSION WITHOUT JUDICIAL DETERMINATION GENERALLY NOT INSURABLE SPECIAL CIRCUMSTANCES: REQUIREMENTS GOVERNMENT ENTITIES ADVERSE POSSESSION ADVERSE POSSESSION AND PRESCRIPTION ADVERSE POSSESSION IN GENERAL (R.P.A. & P.L. 501 ET SEQ.) ELEMENTS (R.P.A. & P.L. 511, 512, 521, 522) TIME REQUIRED LEGAL TITLE
PAGE PAGE 1 PAGE 1 PAGE 1
CHAPTER 3
ADVERSE POSSESSION
LEGAL
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE DATE 1 2 3 3 3 4 4
DEFINITION OWNERS AFFECTED BY ADVERSE POSSESSION COMMON-LAW REQUIREMENTS STATUTORY REQUIREMENTS CONSTRUCTIVE ADVERSE POSSESSION TACKING MISCELLANEOUS ADVERSE POSSESSION LEGAL BULLETIN AGAINST THE CITY AND STATE CHAPTER 3A
PAGE 1 GENERAL PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE TITLE PRACTICE PAGE PAGE 1 PAGE 3 PAGE 3 PAGE 4 4 PAGE 5 PAGE 5 1 1 2 2 3 3 4 4 4 5 6
BANKRUPTCY
INTRODUCTION DEFINITIONS APPLICABLE STATUTES GENERAL DISCUSSION FILING OF THE PETITION IN BANKRUPTCY TITLE TO THE PROPERTY OF THE DEBTOR AUTOMATIC STAY TITLE PROBLEMS CREATED BY BANKRUPTCY FRAUDULENT TRANSFERS PREFERENCES EXEMPT PROPERTY BANKRUPTCY
TITLE PRACTICE/BANKRUPTCY PREPARATION OF SCHEDULE "A" OF THE COMMITMENT WHEN INSURING OUT OF TRUSTEE IN BANKRUPTCY OR DEBTOR IN POSSESSION WHEN BANKRUPT WANTS TO SELL PREMISES AFTER MORTGAGE FORECLOSURE PROCEEDINGS HAVE BEEN INSTITUTED IF PROPERTY IS TO BE SOLD FREE AND CLEAR OF LIENS AND ENCUMBRANCES, THE FOLLOWING ITEMS SHOULD BE LOOKED FOR THE PAPERS PAGE IF THERE WAS A FORECLOSURE OR TAX SALE IN CHAIN OF TITLE AND BANKRUPTCY COURT WAS NOT NOTIFIED, CERTIFY THE FOLLOWING GENERAL BANKRUPTCY RECITAL AND ADD THE FOLLOWING BANKRUPTCY-ABANDONMENT UNDERWRITING GENERAL ABANDONMENT OF PROPERTY TITLE RULE PAGE
PAGE 1 PAGE 1 PAGE 1
COMMENT
PAGE 1
CHAPTER 3A
BANKRUPTCY-ABANDONMENT UNDERWRITING
PAGE PAGE 2 PAGE 2 PAGE 2 PAGE PAGE 1 PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 2 1 2 3 4 5
ACTUAL ABANDONMENT CONSTRUCTIVE ABANDONMENT TITLE RULE BANKRUPTCY-AUTOMATIC STAY AFFECT UPON JUDGMENT LIEN TEN YEAR PERIOD TOLLED BANKRUPTCY-CHAPTER REQUIREMENTS UNDERWRITING
CHAPTER 13 TITLE RULE CHAPTER 7 FREE AND CLEAR SITUATION - NO ORDER OBTAINED CHAPTER 11 BANKRUPTCY-CREDITORS RIGHTS CREDITORS' RIGHTS EXCEPTIONS BANKRUTPCY - DISCHARGES UNDERWRITING UNDERWRITING
PAGE 1 PAGE 2 PAGE 3 PAGE 4 PAGE PAGE 1
IN GENERAL PAGE EFFECT OF DISCHARGE PROPERTY ACQUIRED AFTER DISCHARGE - THE AFFECT UPON PRE-PETITION JUDGMENTS AGAINST THE DEBTOR THE AFFECT OF A DISCHARGE IN BANKRUPTCY UPON PRE-PETITION DOCKETED JUDGMENTS EXEMPT PROPERTY EXEMPT PROPERTY BANKRUPTCY - FRAUD FRAUDULENT TRANSFERS (11 U.S.C. 548) BANKRUPTCY - FREE & CLEAR UNDERWRITING SALES OF PROPERTY OF THE BANKRUPTCY ESTATE WHY DO WE WANT AN ORDER? TITLE RULE BANKRUPTCY - ORDER CONTENT UNDERWRITING PAGE UNDERWRITING UNDERWRITING
PAGE PAGE 1
PAGE 1 PAGE 1 PAGE 2 PAGE
WHAT SHOULD WE LOOK FOR IN A COURT ORDER? PAGE 1 SALES FREE AND CLEAR OF LIENS, TAXES AND TRANSFER TAXES PAGE 2
COMMENT
PAGE 2
CHAPTER 3A
BANKRUPTCY - MORTGAGES
UNDERWRITING
PAGE 1 2 2 2
IN GENERAL APPLICABLE SECTIONS OF THE CODE ADEQUATE PROTECTION REQUIREMENT PROCEDURAL MATTERS AND BANKRUPTCY RULES RULES OF TITLE PRACTICE BANKRUPTCY-TAX LIENS CHAPTER 4
PAGE 1 PAGE PAGE PAGE PAGE PAGE PAGE
UNDERWRITING
BUILDING LOAN AGREEMENTS

& MORTGAGES
GENERAL
BUILDING LOAN AGREEMENTS AND MORTGAGES SECTION 22 LIEN LAW AMENDMENTS TO BUILDING LOAN AGREEMENT
PAGE 1 PAGE 1 PAGE 2 DATE LEGAL BULLETIN 10/79
BUILDING LOANS
BUILDING LOANS-SURVEY EXCEPTIONS
DATE LEGAL BULLETIN 8/79
CHAPTER 5
CEMETERIES
GENERAL
PAGE PAGE 5
ABANDONED CEMETERIES CHAPTER 6
COMMUNITY PROPERTY
TITLE
PAGE PAGE 1 TITLE PAGE PAGE 1 PAGE 2 PAGE 4
COMMUNITY PROPERTY CHAPTER 7
CONCURRENT ESTATES
JOINT TENANCY TENANCY BY THE ENTIRETY TENANCY IN COMMON CHAPTER 7A
COOPERATIVES
GENERAL
PAGE PAGE 1 PAGE 2
COOPERATIVES DEFINED THE NEW YORK MODEL COOPERATIVES TENANTS INTEREST INSURABLE GUIDELINES TITLE
PAGE PAGE 1 PAGE 1
TITLE REQUIREMENTS
PAGE 3
CHAPTER 7A
COOPERATIVES
TITLE
PAGE PAGE 5 PAGE 5 DATE
FEE EXCEPTIONS LEASEHOLD COOPERATIVES EXCEPTION WHERE LEASE IS NOT DELIVERED AT CLOSING CHAPTER 8
LEGAL BULLETIN 6/79
CORPORATIONS
GENERAL
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 3 PAGE PAGE PAGE PAGE PAGE PAGE 1 PAGE 1 1 PAGE 1 PAGE PAGE PAGE PAGE 1 2 2 2 3 4 4 4 1 1 1 1 2 2 2 3
DEFINITIONS FOREIGN CORPORATIONS DOMESTIC CORPORATIONS JUDICIAL DISSOLUTION CORPORATE AUTHORITY-EXECUTION OF INSTRUMENTS TRANSFER OF ALL ASSETS - SALE OR MORTGAGE NON-PROFIT CORPORATION PUBLIC UTILITIES CHAPTER 8 CORPORATIONS GENERAL
CREDIT UNION - STATE TRANSACTIONS BETWEEN CORPORATIONS AND OFFICERS OR DIRECTORS TRANSACTIONS DURING DISSOLUTION TAXES RESULTING IN SUSPENSION OF CORPORATE POWERS MERGER AND CONSOLIDATION CORPORATE REQUIREMENTS TITLE
BOARD OF DIRECTORS RESOLUTION - REGARDING MORTGAGE TO BE MADE WHERE CERTIFICATE OF INCORPORATION REQUIRES CONSENT OF STOCKHOLDERS TO MORTGAGE STOCKHOLDERS CONSENT - REGARDING CONVEYANCE TO AN OFFICER HERETOFORE MADE PAGE LIQUIDATION OR DISSOLUTION TAX ON CONVEYANCES TO STOCKHOLDERS PRIOR TO JANUARY 1, 1962 SHAREHOLDERS CONSENT ON CORPORATE CONVEYANCE OR LEASE CORPORATE CONVEYANCE TO OFFICER EXECUTING DEED. CORPORATION NOT TIMELY ORGANIZED WHERE CERTIFICATE OF INCORPORATION NEEDED WHERE CERTIFICATE OF INCORPORATION OF A FOREIGN CORPORATION NEEDED STATUS OF FOREIGN CORPORATION - STATE OF INCORPORATION FOREIGN CORPORATION STATUS - NEW YORK STATE
CERTIFICATION OF TITLE IN A CORPORATION
PAGE 3
CHAPTER 8
CORPORATE REQUIREMENTS
TITLE
PAGE
SALE, LEASE, EXCHANGE OR MORTGAGE OF PROPERTY BY A CORPORATION GOVERNED BY THE NO-FOR-PROFIT CORPORATION LAW (FORMERLY GOVERNED BY THE MEMBERSHIP CORPORATION LAW PAGE 3 SALE BY A RELIGIOUS CORPORATION PAGE 3 MORTGAGE BY A RELIGIOUS CORPORATION PAGE 3 CORPORATE CONVEYANCE TO ITS OFFICER PAGE 3 CORPORATIONS 1 SALES & MORTGAGE CONSENT REQUIRED DATE
LEGAL BULLETIN 8/79 CHAPTER 8 CORPORATIONS 2 NOT-FOR PROFIT CORP.LAW APPLICABILITY TYPES OF CORPORATIONS DETERMINATION OF TYPE OF CORPORATION DISSOLUTION PURCHASE, SALE, MORTGAGE OR LEASE OF REAL PROPERTY SERVICE OF PROCESS DIGEST ONLY DATE LEGAL BULLETIN 8/79 PAGE PAGE PAGE PAGE 1 1 2 2
CORPORATIONS 3 RELIGIOUS CORPORATIONS LAW
CORPORATIONS 3.1 RELIGIOUS CORPORATIONS DISPOSITIONS RESEARCH OPINION
DATE
LEGAL BULLETIN 7/72 RELIGIOUS CORPORATIONS DISPOSITIONS CORPORATIONS 4 & 5 CORPORATIONS TAXES PAGE 1 DATE
LEGAL BULLETIN 8/79 FRANCHISE AND LICENSE FEE TAXES - NEW YORK STATE ARTICLE 9A, TAX LAW PAGE 1 NEW YORK CITY GENERAL CORPORATION TAX PAGE 1
CHAPTER 8
CORPORATIONS 4 NEW YORK CITY CORPORATION TAX
DATE
LEGAL BULLETIN 8/79 NEW YORK CITY CORPORATION TAX LIEN DATE EXAMPLES PROOF OF PAYMENT DEPOSIT - RATE OF TAX CORPORATIONS 4.1 BUSINESS CORPORATION TAX CLEARANCE (NYC) PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 DATE
LEGAL BULLETIN 5/79 CHAPTER 8 CORPORATIONS 5 FRANCHISE TAX NEW YORK STATE DATE LEGAL BULLETIN 8/79 ANNUAL FRANCHISE TAX ON REAL ESTATE CORPORATIONS TRANSITION TAX ON REAL ESTATE CORPORATIONS LIQUIDATION TAX ON REAL ESTATE CORPORATIONS ANNUAL FRANCHISE TAX ON BUSINESS CORPORATIONS NEW CORPORATIONS FOREIGN CORPORATIONS AUDIT OF RETURNS DEPOSITS DURATION OF LIEN CHAPTER 9 PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 PAGE 1 UNDERWRITING PAGE PAGE 2 PAGE 2 PAGE 5 PAGE 6 PAGE 8 PAGE 12 PAGE 14 PAGE 20 PAGE 22 1 1 1 1 2 2 2 2 2
CREDITOR'S RIGHTS
TITLE
PREFERENCES FRAUDULENT CONVEYANCES CREDITOR'S RIGHTS
CREDITOR'S RIGHTS EXCEPTIONS CREDITORS' RIGHTS EXCLUSION INTRODUCTION FRAUDULENT CONVEYANCE ISSUES TITLE RULE LOAN POLICY - NEW YORK ENDORSEMENT ENDORSEMENT HOW TO CLEAR THE TITLE EXCEPTION SUPREME COURT RESOLVES CONFLICTING RULES RELATING TO WHEN A MORTGAGE FORECLOSURE IS A FRAUDULENT CONVEYANCE
TITLE RULE
PAGE 23
CHAPTER 9
CREDITOR'S RIGHTS
UNDERWRITING
PAGE PAGE 23 PAGE 27 PAGE 28 PAGE PAGE PAGE PAGE 28 29 30 30
DEED IN LIEU OF FORECLOSURE ALTERNATIVE PRESENTATION OF TITLE CONSIDERATIONS FROM THE BORROWER YOU WANT THE FOLLOWING REPRESENTATIONS FROM THE LENDER YOU WANT THE FOLLOWING REPRESENTATIONS PARCEL ASSEMBLAGE - THE LEASE TERMINATION PROBLEM OPTION AGREEMENTS CONTRACT FOR SALE EQUITY PARTICIPATION TRANSACTIONS BETWEEN A GENERAL PARTNER AND PARTNERSHIP CORPORATE UPSTREAM OR CROSS-STREAM TRANSACTIONS MORTGAGEE'S OPTION TO PURCHASE MORTGAGES TO SECURE ANTECEDENT INDEBTEDNESS CHAPTER 10
PAGE 30 PAGE 31 PAGE 31 PAGE 32 PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 2
DECEDENTS' ESTATES
GENERAL
GENERALLY PRESUMPTION OF DEATH CREDITORS LIFE ESTATES JUDGMENTS AGAINST HEIRS EXAMINATION OF PROBATE PROCEEDINGS DECEDENTS ESTATE DIGEST
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 PAGE 1 PAGE 2 PAGE 3 PAGE 3 PAGE 4 PAGE 5 PAGE5 1 1 1 1 2 2 3
ABBREVIATIONS SIMULTANEOUS DEATH (E.P.T.L. 2-1.6) TRANSFER OF DECEDENT'S TITLE (S.C.P.A. 1907, 2505) INTESTATE SUCCESSION (E.P.T.L. 4-1.1) TESTATE SUCCESSION-WILLS ESTATE ADMINISTRATION TAXES DECEDENTS ESTATES TITLE
SUCCESSION TO TITLE OF A DECEDENT JURISDICTION POWERS AND DUTIES OF PERSONAL REPRESENTATIVES SPECIAL ADMINSTRATORS, ADMINSTRATORS WITH WILL ANNEXED, MULTIPLE REPRESENTATIVES PROCEDURE IN PROBATE PROCEEDINGS PROCEEDINGS FOR SALE OF PROPERTY RENUNCIATIONS, TRANSFERS, ASSIGNMENTS STATE INHERITANCE TAX
CHAPTER 10
DECEDENT ESTATES 1
UNDERWRITING
PAGE PAGE 1 PAGE 1 PAGE 3 PAGE 3 PAGE 3 PAGE 4 PAGE 5 PAGE 6 PAGE 5 PAGE
EFFECT OF DEATH ON RIGHTS TO DECEDENT'S PROPERTY QUALITY OF TITLE OF DISTRIBUTEES DEVOLUTION BY WILL NECESSITY FOR PROBATE PROBATE OF WILLS QUALITY OF TITLE OF DEVISEES GENERAL POWERS OF DISPOSITION BY A FIDUCIARY WHAT INTEREST MAY BE MORTGAGED? OTHER TITLE CONSIDERATIONS DECEDENTS ESTATES 2 PROBATED UNDERWRITING ESTATES - SALE BY EXECUTOR UNDER POWER CHAPTER 10 DECEDENTS ESTATES 3 ESTATE TAXES UNDERWRITING PAGE
FEDERAL ESTATE TAX NEW YORK ESTATE TAX
PAGE 1 PAGE 1 LEGAL BULLETIN 8/79
NEW YORK ESTATE TAX FEDERAL ESTATE TAX DECEDENTS ESTATES 3.1 ESTATE TAXES - ENTIRETY AND JOINT
PAGE 1 PAGE 2 DATE LEGAL BULLETIN 8/79
DECEDENTS ESTATE 4 FIDUCIARY PURCHASES FIDUCIARY PURCHASES DECEDENT ESTATES 5 FIDUCIARY POWERS
TITLE
PAGE PAGE 1 DATE
LEGAL BULLETIN 8/79 POWERS OF EXECUTORS AND TRUSTEES POWER OF ADMINSTRATORS FIDUCIARIES POWERS - MULTIPLE OF MAJORITY ACTION DECEDENTS ESTATES 6 RENUNCIATION OF DISPOSITIONS AND INTESTATE SHARES DATE PAGE 1 PAGE 2 PAGE 2
CHAPTER 10
DECEDENTS ESTATES 7 WILLS, FOREIGN
LEGAL BULLETIN 8/79 DATE LEGAL BULLETIN 8/79
DECEDENTS ESTATES-WILLS LEGAL BULLETIN ADMINSTRATOR C.T.A. (OLD) AFTER-BORN CHILDREN CHARITABLE BEQUESTS EQUITABLE CONVERSION EXECUTION OF EXECUTORS
PAGE
PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 2
CHAPTER 10
DECEDENTS ESTATES-WILLS
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 3 3 3 4 4 4 5 5 6 7 7 PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 9 PAGE 10 PAGE 11 DATE LEGAL BULLETIN 10/84
PERPETUITIES POWER OF SALE POWER OF SALE (IMPLIED) TRUSTEES TRUSTEES (FOREIGN TRUST COMPANIES) TRUSTEES (LIFE BENEFICIARY AND SOLE TRUSTEE) TRUSTEES (UNAUTHORIZED PURCHASE) REMAINDERS REMAINDERS - DIVIDE AND PAY OVER RULE REMAINDERS SUSPENSION OF ALIENATION CHAPTER 11
DEED OF CONVEYANCE
TITLE
GENERAL FORM OF DEED PARTS OF A DEED DELIVERY OF DEED KINDS OF DEEDS CAPACITY OF PARTIES DEEDS OF CONVEYANCE CONDITION RELEASE OF CONDITION ADOPTION OF STATUTE BARRING CONDITIONS CHAPTER 11 DEEDS OF CONVEYANCE (FAIR VALUE- CONSIDERATION)
PAGE 1 PAGE 2 DATE
LEGAL BULLETIN 5/79 DEEDS OF CONVEYANCE DELIVERY OF DEEDS DELIVERY OF DEEDS DEEDS OF CONVEYANCE EXECUTION OF DEEDS CHAPTER 11 DEEDS OF CONVEYANCE ESCROW DEEDS- RELOCATION SETTLEMENT TITLE TITLE PAGE PAGE 1 PAGE PAGE 1 PAGE PAGE 1 PAGE 1 SETTLEMENT PAGE PAGE PAGE PAGE PAGE PAGE DATE LEGAL BULLETIN DESCRIPTIONS - OLD STREETS DESCRIPTIONS - MARGINAL STREETS MONUMENTS DEDICATION DRAIN RIGHTS HUSBAND TO WIFE RECITALS (AS TO HEIRSHIP) RECITALS ("BEING THE SAME PREMISES", ETC) RECITALS (OLD DESCRIPTION CONTINUED) CHAPTER 12 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 2 PAGE 2 PAGE 2 PAGE 2 PAGE 3 TITLE PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 2 2 4 5 5
INTRODUCTION FACT SCENARIO CHAPTER 11 DEEDS OF CONVEYANCE ESCROW DEEDS- RELOCATION
GENERAL LAW DEFINABLE GRANTEE DELIVERY CONCLUSION AND THEORY PROBLEMS TO CONSIDER: DELIVERY DEEDS OF CONVEYANCE
DESCRIPTIONS
DESCRIPTION AFFECTED BY A PUBLIC ROAD AREAS COMPUTED TO STREET CENTERS MEMORANDUM AS TO EXCEPTIONS BASED ON LOCATION OF FENCES, HEDGES, RETAINING WALLS, POSSESSION ALONG PERIMTER LINES AS TO FENCES
CHAPTER 12
DESCRIPTIONS
TITLE
PAGE PAGE 3 PAGE 3
AS TO HEDGES AS TO WALLS - POSSESSION WALL, RETAINING WALLS
CHAPTER 13
DIVORCE
TITLE
PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 DATE
GENERAL PROPERTY SUBJECT TO DISPOSITION IN DIVORCE, SEPARATION, ANNULMENT OR TO DECLARE NULLITY OF A VOID MARRIAGE FOREIGN DIVORCE ALIMONY EXPENSES DIVORCE
LEGAL BULLETIN 9/75 JUDGMENT UNDER SECTION 234 OF DOMESTIC RELATIONS LAW DIVORCE - RESTORATION OF RIGHTS OF FORMER SPOUSE UPON REMARRIAGE TO TESTATOR E.P.T.L. 5-1.4 PAGE 1 DATE
LEGAL BULLETIN 11/79 CHAPTER 14
EASEMENTS
TITLE
PAGE PAGE PAGE PAGE PAGE DATE 1 1 1 4
DEFINED EASEMENTS APPURTENANT AND IN GROSS CREATION OF EASEMENTS EXTINGUISHMENT OF EASEMENTS CHAPTER 14 EASEMENTS - WIRES
LEGAL BULLETIN 8/79 DEFINED DISCONTINUED STREET PUBLIC STREET CHAPTER 15 ENCROACHMENTS GENERAL PAGE 2 PAGE 2 PAGE 2 PAGE PAGE PAGE PAGE PAGE PAGE 1 2 3 3 4
INTRODUCTION CLEARANCE PROCEDURE REQUEST FOR AFFIRMATIVE COVERAGE BUILDING ENCROACHMENTS ON STREET FENCES AND HENGES - OUT OF POSSESSION - CLEARANCE
PRIOR TO BOARD OF COUNSEL MEMORANDUM
PAGE 4
CHAPTER 15
ENCROACHMENTS
LEGAL BULLETIN
PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 PAGE 2 PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 2 2 3 5 6 7 9 1 1 2 2
ON STREET ON ADJOINING PROPERTY (ABUTTING WALLS) ON ADJOINING PROPERTY BY ADJOINING BUILDING CHAPTER 15A
EQUITY SECURITIZATION
GENERAL
EQUITY REAL ESTATE INVESTMENT TRUSTS UMBRELLA PARTNERSHIP REAL ESTATE INVESTMENT TRUSTS EQUITY SECURITIZATION REIT AS PURCHASER REIT AS BORROWER TITLE INSURANCE ISSUES POLICY CONSIDERATIONS OWNER'S POLICY LOAN POLICY SECURITIES ISSUES CREDITORS' RIGHTS CHAPTER 16 TITLE U/W
ESTATES IN LAND
TITLE
PAGE PAGE 1 PAGE 1 PAGE 2 PAGE
FEE SIMPLE ABSOLUTE FEE ON LIMITATION EPTL 6-1.1 (SOMETIMES KNOWN AS A FEE ON SPECIAL LIMITATION OR A FEE SIMPLE DETERMINABLE) FEE ON CONDITION EPTL 6.1-1 (SOMETIMES CALLED A FEE SIMPLE SUBJECT TO A CONDITION SUBSEQUENT. CHAPTER 16 ESTATES IN LAND TITLE
EFFORTS TO MODIFY THE SEVERITY OF BOTH THE FEE SIMPLE ON SPECIAL LIMITATION AND THE FEE SUBJECT TO A CONDITION ENFORCEMENT ESTATES IN FEE TAIL - E.G. "TO A AND THE HEIRS OF HIS BODY LIFE ESTATES COURTESY ABOLISHED R.P.L. 189 DOWER ESTATES AT WILL ESTATES AT SUFFERANCE CHAPTER 17
PAGE 4 PAGE 8 PAGE 8 PAGE 8 PAGE 9 PAGE 9 PAGE 10 PAGE 10 PAGE PAGE 1
EXECUTIONS
GENERAL
EXECUTIONS
CHAPTER 18
EXECUTORY CONTRACT FEDERAL LIENS
DATE LEGAL BULLETIN 8/79 PAGE PAGE 1 PAGE 2 PAGE 2 PAGE 3 PAGE 5 PAGE 5 PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 2 PAGE 3 PAGE 4 PAGE 4 PAGE PAGE 1
CHAPTER 18A
FEDERAL TAX LIENS FEDERAL LIENS FOR ESTATE TAXES BANKRUPTCY PETITIONS FEDERAL JUDGMENTS LABOR LAW FEDERAL LIENS UNDER CERCLA FEDERAL TAX LIENS - SEIZURE GENERAL AUTHORITY NOTICE OF SEIZURE NOTICE OF SALE MANNER AND CONDITIONS OF SALE ADDITIONAL RULES APPLICABLE TO SALE REDEMPTION CERTIFICATE OF SALE; DEED OF REAL PROPERTY LEGAL EFFECT OF CERTIFICATE OF SALE COMMENTS FEDERAL TAX LIENS - SEIZURE TITLE INSURABILITY OF TITLE DERIVED FROM FEDERAL TAX DISTRAINT SALE FEDERAL TAX LIENS - SEIZURE DATE
LEGAL BULLETIN 8/91 CHAPTER 19
FORECLOSURE
TITLE
PAGE PAGE 1 PAGE 2 PAGE 2 DATE
GENERAL DEFICIENCY JUDGMENT NON-JUDICIAL SALE FORECLOSURE 1 NOTICE OF SALE NOTICE OF SALE HISTORY IN NEW YORK CITY IN CITIES AND VILLAGES OUTSIDE OF CITIES AND VILLAGES IN WHICH A NEWSPAPER IS PUBLISHED
LEGAL BULLETIN 8/79 PAGE 1 PAGE 1 PAGE 1 PAGE 1
POSTPONEMENT OF SALE IN ALL CASES WHEN THE SALE MUST BE HELD EXECUTION SALE CHAPTER 19 FORECLOSURE 2 SERVICE OF SUMMONS PERSONAL SERVICE ON A NATURAL PERSON
PAGE 2 PAGE 2 PAGE 3 DATE
LEGAL BULLETIN 8/79 FORECLOSURE 3 SERVICE OF SUMMONS ON CORPORATION DATE
LEGAL BULLETIN 8/79 FORMER METHOD OF SERVICE ON DOMESTIC CORPORATION PAGE 1 FORMER METHOD OF SERVICE ON FOREIGN CORPORATION PAGE 1 PRESENT METHOD OF SERVICE ON ALL CORPORATIONS PAGE 1 ABSTRACTING PROOF OF SERVICE PAGE 1 SERVICE ON MANAGING OR GENERAL AGENT PAGE 1 SERVICE ON SECRETARY OF STATE PAGE 1 SPECIAL REQUIREMENTS PAGE 2 CHAPTER 19A FORFEITURE SUPPLEMENT PAGE PAGE PAGE PAGE PAGE PAGE 3 PAGE PAGE PAGE 1 1 1 2 3 4 4 5
INTRODUCTION POLICY INSURING CLAUSES PROCEEDINGS ARE IN REM UNDERWRITING REQUIREMENTS AND CONSIDERATIONS CIVIL FORFEITURE PROCEDURES CRIMINAL FORFEITURE PROCEDURES PAGE DOCUMENTS TO BE RETAINED IN THE TITLE FILE TITLE OBTAINED FROM A CONVICTED FELON THE CRUEL AND UNUSUAL PUNISHMENT ARGUMENT APPEAL OF STATE FORFEITURE STATUTES TO U.S. SUPREME COURT CHAPTER 19A FORFEITURE SUPPLEMENT PAGE
PAGE 5
CONCLUSION CHAPTER 19B HEIRS AT LAW
PAGE 6 PAGE PAGE 1 PAGE 2 GENERAL GENERAL TITLE PAGE PAGE PAGE
AFFIDAVITS OF HEIRSHIP MODEL FORM HEIRSHIP AFFIDAVIT CHAPTER 20 CHAPTER 21 CHAPTER 22
HOMESTEAD IDENTITY INHERITANCE TAXES
CHAPTER 23
JOINT TENANTS
TITLE
PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2
GENERAL DEFINITIONS CREATION SEVERANCE CONVEYANCE BY ONE MARRIED JOINT TENANT TERMINATION OF JOINT TENANCY BY DEATH CHAPTER 24
MONEY JUDGMENTS
GENERAL
PAGE PAGE 1 PAGE
MONEY JUDGMENTS JUDGMENTS 2 CLEARANCE IDENTITY OF DEBTOR JUDGMENTS 2 CLEARANCE USE OF DEPOSITS AND LETTERS OF UNDERTAKING
DATE
LEGAL BULLETIN 6/79 JUDGMENTS 2.1 SIMILIAR NAMES TITLE PAGE PAGE
JUDGMENTS 4 TITLE SATISFACTION OF JUDGMENT IN FACT AGAINST SELLER JUDGMENTS 5 SATISFACTION OF MONEY JUDGMENTS
DATE
LEGAL BULLETIN 8/79 CHAPTER 24 JUDGMENTS 6 DEPOSITS FOREIGN JUDGMENTS CPLR ARTICLE 53 LEGAL BULLETIN RECOGNITION OF FOREIGN COUNTRY MONEY-JUDGMENT SUMMARY OF ARTICLE PAGE 1 CHAPTER 24 FOREIGN JUDGMENTS ENFORCEMENT PAGE CPLR ARTICLE 54 DATE LEGAL BULLETIN 8/79 DATE
ENFORCEMENT OF JUDGMENTS ENTITLED TO FULL FAITH AND CREDIT SUMMARY OF ARTICLE CHAPTER 25
PAGE 1 PAGE PAGE PAGE PAGE PAGE 1 1 1 1
LEASES AND LEASEHOLD ESTATES
GENERAL
POSSESSION AND UNRECORDED LEASES RECORDED LEASES UNRECORDED LEASES INSURING THE LEASEHOLD LEASES TITLE ISSUES
PAGE PAGE 1 PAGE 2 PAGE 2 PAGE 3 PAGE 3 PAGE 4 PAGE 4 PAGE 6 PAGE PAGE 1 PAGE 4 PAGE 5 PAGE 6 PAGE 7 DATE
LEASES - MEMORANDA OF LEASES - MEMORANDUM - SURRENDER OF LEASES - TENANTS RIGHT OF NON-DISTURBANCE LEASES-POSSIBLE USE RESTRICTIONS-OPPOSITION BY LANDLORD TO INTENDED USE BY PROPOSED ASSIGNEE ASSIGNMENT OF RENTS INVESTMENT INCOME PROPERTY INSURING LEASEHOLD MORTGAGES WHERE THE FEE MORTGAGE IS TO BE SUBORDINATED INSURING LEASEHOLD MORTGAGES WITH FEE TITLE TO BE SUBORDINATED LEASE ASSIGNMENT AND SUB-LETTING RENEWALS AND EXTENSIONS ASSIGNMENT OF RENTS HOLD-OVER TENANTS TERMINATION OF LEASES LEASES ESTOPPEL CERTIFICATES AND LEASES AND MORTGAGE ON LEASE LEGAL
LEGAL BULLETIN 8/79 CHAPTER 25A LETTERS OF INDEMNITY TITLE PRACTICE PAGE PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 3 PAGE 4 PAGE 4
IN GENERAL ISSUANCE OF LETTERS OF INDEMNITY AND RELIANCE THEREON RULES OF TITLE PRACTICE PROCEDURE TO FOLLOW REQUESTING LETTER OF INDEMNITY MISUSE OF INDEMNIFICATION POLICY INSURING CLAUSE OBLIGATIONS LEGISLATIVE AND CASE LAW CONCERNS
CHAPTER 25A
LETTERS OF INDEMNITY
TITLE PRACTICE
PAGE PAGE 4
FORMS OF LETTERS OF INDEMNITY LETTERS OF INDEMNITY FORM ALTA FORM PAGE STANDARD ALTA/ATIC FORM TITLE PRACTICE PAGE
PAGE 1
PAGE 1
CHAPTER 26
LIENS & ENCUMBRANCES

REAL ESTATE TITLES NYSBA PUBLICATION
TITLE
PAGE
DEFINITION TYPES OF LIENS MONEY JUDGMENTS ESTATE TAX LIENS FEDERAL ESTATE TAX LIENS NEW YORK STATE INHERITANCE TAX FEDERAL TAX LIENS CHAPTER 26 LIENS & ENCUMBRANCES REAL ESTATE TITLES NYSBA PUBLICATION TITLE
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE
1 1 2 4 4 5 5
FEDERAL LIENS NEW YORK STATE FRANCHISE TAX AND NEW YORK CITY BUSINESS CORPORATION TAX MECHANIC'S LIEN NEW YORK CITY LIENS EMERGENCY REPAIR LIEN RELOCATION LIEN PEST CONTROL LIEN HOUSING VIOLATIONS AND CIVIL PENALTY LIEN CANOPY LIEN PARKING VIOLATIONS LEAKING TAP LIEN VAULT TAX LIEN BUILDING INSPECTION FEES LIEN SIDEWALK REPAIR LIEN ENVIRONMENTAL CONTROL BOARD LIENS VENDEE'S LIENS VENDOR'S LIENS REAL PROPERTY TAX LIENS ARE TREATED IN CHAPTER 38 BOOK UNDER TAXES
PAGE 6 PAGE 7 PAGE 7 PAGE 11 PAGE 11 PAGE 12 PAGE 12 PAGE 12 PAGE 12 PAGE 12 PAGE 13 PAGE 13 PAGE 13 PAGE 13 PAGE 13 PAGE 13 PAGE 14 PAGE 14
GAINS TAX PAGE 14 NEW YORK STATE DEED TRANSFER TAX PAGE 16 NEW YORK CITY REAL PROPERTY TAX PAGE 17 NEW YORK CITY DEPARTMENT OF HOUSING PRESERVATION & DEVELOPMENT PAGE 17 ATTACHMENT PAGE 17.1 RESTRICTIVE COVENANTS PAGE 19 EASEMENTS PAGE 23 GRANT OR DECLARATION PAGE 24 RESERVATION OR EXCEPTION PAGE 24 PRESCRIPTION PAGE 24 ESTOPPEL PAGE 24 NECESSITY PAGE 24 IMPLICATION PAGE 25 BEAM RIGHTS PAGE 25 PARTY WALLS PAGE 25 LIGHT AND AIR PAGE 26 TERMINATION OF EASEMENTS PAGE 26 RELEASE PAGE 26 CHAPTER 26 LIENS & ENCUMBRANCES TITLE PAGE REAL ESTATE TITLES NYSBA PUBLICATION ABANDONMENT MERGER ADVERSE USE SUPERIOR TITLE OVERBURDENING ENCROACHMENTS FUTURE SALES AND LIMITATIONS INTRODUCTION ESTATES IN POSSESSION COMPARED WITH FUTURE ESTATES ESTATS IN POSSESSION PAGE FEE SIMPLE ABSOLUTE FEE ON CONDITION FEE ON LIMITATION LIFE ESTATES FUTURE ESTATES - ESTATES IN THE GRANTOR (REVERSIONS) PAGE FUTURE INTERESTS - ESTATES IN THIRD PERSON (REMAINDERS) LIENS AND ENCUMBRANCES CLEARING TITLE DEFECTS MISUSE OF INDEMNIFICATION POLICY INSURING CLAUSE OBLIGATIONS LEGISLATIVE AND CASE LAW CONCERNS LIENS TO BE RELEASED DISPOSITION TITLE PAGE CLEARANCE PAGE PAGE PAGE PAGE PAGE 1 1 2 2 PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 30 PAGE PAGE PAGE PAGE 31 PAGE 26 26 27 27 27 27 29 29 29 30 30 30 31 32
STATUTORY REFERENCES TO NEW YORK CITY, STATE AND FEDERAL LIENS AND CHARGES ON REAL ESTATE LIENS AND ENCUMBRANCES
PAGE 1
DATE LEGAL BULLETIN 4/78 PAGE PAGE PAGE 5 PAGE PAGE PAGE PAGE PAGE 1 5 6 7 7 7 9
MORTGAGES RESTRICTIVE COVENANTS AS ENCUMBRANCES EASEMENTS LEASES JUDGMENT LIENS FEDERAL TAX LIENS OTHER INCUMBRANCES AFFECTING MARKETABILITY REAL ESTATE TAXES CHAPTER 26 LIENS FEDERAL TAX LIENS
PURCHASERS PAGE 1 MECHANIC'S LIENS PAGE 1 TAXES PAGE 1 FILING PAGE 1 FORECLOSURE OF PRIOR LIEN, REDEMPTION PAGE 2 LIS PENDENS PAGE 2 SEARCHES AGAINST TENANTS BY THE ENTIRETY, JOINT TENANTS TENANTS IN COMMON AND PARTNERS PAGE 2 DEPOSITS ON FEDERAL LIENS PAGE 3 CHAPTER 27
LIS PENDENS
DATE LEGAL BULLETIN 8/79 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE PAGE 1 PAGE PAGE PAGE PAGE 2 3 4 4
FEDERAL COURTS INDEXING COMPLAINT VERIFICATION TIME FOR SERVICE EFFECT ON NOTICE AS TO DEFENDANT NOT SERVED TERM & RENEWAL SEARCHES CHAPTER 27A
MARKETABILITY OF TITLE
GENERAL
VIOLATIONS OF BUILDING RESTRICTIONS AND ZONING ORDINANCES CASES INVOLVING VIOLATIONS OF BUILDING RESTRICTIONS WHERE TITLE HAS BEEN HELD MARKETABLE WHERE TITLE HAS BEEN HELD UNMARKETABLE POLICY EXCLUSION FOR MATTERS OF ZONING RECORDED ZONING ORDINANCE
VIOLATIONS OF ZONING ORDINANCES ZONING VIOLATIONS WHERE TITLE HAS BEEN HELD UNMARKETABLE ZONING VIOLATIONS WHERE TITLE HAS BEEN MARKETABLE CHAPTER 28
PAGE 4 PAGE 5 PAGE 7 PAGE PAGE 1 PAGE 1 PAGE 2 PAGE 3 PAGE 3 PAGE 5 PAGE 5 PAGE 5 PAGE 6 PAGE PAGE 1
MECHANICS LIENS
GENERAL
DEFINITION PERSONS ENTITLED TO MECHANIC'S LIENS PROPERTY SUBJECT TO MECHANIC'S LIENS PUBLIC IMPROVEMENTS PERFECTING AND ENFORCING A LIEN CLAIM PRIORITY OF MECHANICS' LIENS WAIVER OF MECHANICS LIEN RIGHTS DEVICES WHICH PRECLUDE OR LIMIT MECHANICS' LIENS BONDS MECHANICS LEIN CLEARANCE TITLE CHAPTER 28 MECHANIC'S LIEN MECHANICS' LIENS 1 CONSTRUCTION COMPLETELIEN PERIOD EXPIRED TITLE
PAGE
CONSTRUCTION COMPLETE - LIEN PERIOD EXPIRED MECHANICS' LIENS 2 CONSTRUCTION COMPLETED LIEN PERIOD NOT EXPIRED TITLE
PAGE 1 PAGE
CONSTRUCTION COMPLETED - LIEN PERIOD NOT EXPIRED MECHANCIS' LIENS 3 DURING CONSTRUCTION OWNERS POLICY DURING CONSTRUCTION - OWNERS POLICY MECHANICS' LIEN 4 DURING CONSTRUCTION LOAN POLICY DURING CONSTRUCTION - LOAN POLICY CASES CITED MECHANICS' LIEN 4 EXHIBIT B TITLE TITLE
PAGE 1 PAGE
PAGE 1 PAGE
PAGE 1 PAGE 4 PAGE PAGE 1
MATTERS TO BE REVIEWED AND COMPLETED WITH THE LENDER
MECHANICS' LIENS 4 DURING CONSTRUCTION LOAN POLICY DURING CONSTRUCTION - LOAN POLICY MECHANICS' LIENS 4 RESEARCH OPINION ISSUE QUESTIONS AND CONCLUSIONS STATUTES CASES COMMENTARIES REASONING CONCLUSION CHAPTER 28 MECHANICS' LIENS
LEGAL SUPPLEMENT
PAGE
PAGE 1 LEGAL PAGE
PAGE 1 PAGE 1 PAGE 2 PAGE 3 PAGE 3 PAGE 3 PAGE 6 UNDERWRITING PAGE PAGE PAGE PAGE PAGE PAGE 1 1 1 1 1
STANDARD EXCEPTIONS EXISTING IMPROVEMENTS NEWLY COMPLETED CONSTRUCTION UNIMPROVED PROPERTY CONSTRUCTION LOANS CONSTRUCTION MORTGAGES: PENDING DISBURSEMENTS CLAUSE CONSTRUCTION MORTGAGES - LOSS OF PRIORITY - CREDIT CONTROL OWNERS POLICIES: PENDING IMPROVEMENTS CLAUSE MECHANICS' LIENS CHAPTER 29
DATE LEGAL BULLETIN 8/79 GENERAL PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 3 PAGE 3 PAGE 3 PAGE 3 PAGE 3 PAGE 4 PAGE 4 PAGE 5 PAGE 5 PAGE 6
MORTGAGES
DEFINITION AND DISTINCTIONS FROM OTHER FORM OF SECURITY TRUST DEEDS PROPERTY AND INTERESTS SUBJECT TO MORTGAGE DEBT OF OBLIGATION SECURED FUTURE ADVANCES SUPPORT AND MAINTENANCE INDEMNITY MORTGAGES EXTENSION OF SECURITY TO OTHER DEBTS OR LIABILITIES INTEREST BONUS TO MORTGAGE PARTIES CONTENTS EXECUTION ASSIGNMENT OF OBLIGATION CAPACITY OF PARTIES
CONSENT CONSIDERATION DELIVERY NOTICE RECORDATION TRANSFER OF A DEBT AS ASSIGNMENT OF MORTGAGE OPERATION AND EFFECT OF A VALID ASSIGNMENT PRIORITIES OF ASSIGNEE RIGHTS OF ASSIGNEE LIABILITIES OF ASSIGNOR PRIORITIES SATISFACTION AND DISCHARGE DISCHARGE IN GENERAL PAYMENT OF THE SECURED DEBT WHAT CONSTITUTES PAYMENT IN GENERAL PAYMENT'S EFFECT PERFORMANCE OF PARTICULAR CONDITIONS CHAPTER 29 MORTGAGES GENERAL
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 9 PAGE PAGE PAGE PAGE PAGE
6 6 6 6 7 7 7 7 8 8 8 9 9 10 10 10
TENDER OF PERFORMANCE PAGE 11 COMPROMISE AND SETTLEMENT PAGE 11 CHANGE IN FORM IN DEBT PAGE 11 ENTRY OF SATISFACTION; SATISFACTION OF RECORD PAGE 11 ENFORCEMENT & FORECLOSURE PAGE 12 FORECLOSURE PAGE 12 STEPS IN ACTION TO FORECLOSE PAGE 12 NOTICE OF SALE PAGE 14 SALE PAGE 14 MORTGAGES - CLEARANCE PAGE 15 MORTGAGES AND OTHER LIENS PAGE 15 MORTGAGES - ACCOMMODATIONS MORTGAGES MADE BY CORPORATION PAGE 16 MORTGAGES - AFTER ACQUIRED PROPERTY CLAUSE PAGE 16 MORTGAGES - ASSIGNMENTS OF MORTGAGE - PROCEDURE PAGE 17 MORTGAGE - DOCTRINE OF MERGER PAGE 17 MORTGAGES - MOTOR FREIGHT CARRIERS - ICC APPROVAL REQUIRED PAGE 18 MORTGAGES - PARTICIPATION AGREEMENTS PAGE 18 MORTGAGES - PARITY CLAUSE PAGE 19 MORTGAGE - PARI PASSU PAGE 19 MORTGAGES - SPREADER AGREEMENT PAGE 19 MORTGAGES MORTGAGE DEFINED LEGAL LIEN MORTGAGE THE STATUTE OF FRAUDS EQUITABLE MORTGAGES ABSOLUTE DEEDS AS MORTGAGES TITLE PAGE PAGE PAGE PAGE PAGE PAGE 1 1 1 1 2
THE OBLIGATION SECURED THE MORTGAGED PROPERTY THE MORTGAGEE'S INTEREST TRANSFER OF MORTGAGEE'S INTEREST MORTGAGOR'S INTEREST PRIORITIES REMEDIES OF MORTGAGEE OR HOLDER OF MORTGAGE WHEN MORTGAGE DEBT IS DUE TERMINATION OF MORTGAGE MORTGAGES UNDERWRITING
PAGE PAGE PAGE PAGE PAGE PAGE
3 7 7 8 9 12
PAGE 13 PAGE 16 PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE PAGE PAGE PAGE PAGE 4 PAGE PAGE PAGE PAGE PAGE PAGE 2 3 4 4 5 5 6 6 7 7
SIMULTANEOUS ISSUE INSURING SIMULTANEOUS MORTGAGES ASSIGNMENT OF MORTGAGE FINANCING STATEMENTS AND ASSIGNMENTS OF LEASES/ RENTALS ASSIGNMENT OF MORTGAGE PREVIOUSLY INSURED CHAPTER 29 MORTGAGES UNDERWRITING CONSTRUCTION MORTGAGE FUTURE ADVANCE - OPEN-END MORTGAGES ALLOCATION OF PORTION OF LOAN AMOUNT EXISTING MORTGAGE BALANCE ADD ON INTEREST PAGE MORTGAGE ALSO PARTNER IN OWNERSHIP WRAP-AROUND MORTGAGE REGULATORY AGREEMENTS MORTGAGE RELEASE OR PAY-OFF VARIABLE RATE MORTGAGES REVOLVING CREDIT MORTGAGES MORTGAGES GIVEN BY PARTIES NOT RECEIVING THE LOAN PROCEEDS PAGE FORECLOSURE OF MORTGAGES CREDITORS' RIGHTS WAIVER OR EXCLUSION - RESIDENTIAL PROPERTY SUCCESSFUL BIDDER AS PROPOSED INSURED - DETERMINED OF REASONABLY EQUIVALENT VALUE FAIR MARKET VALUE DETERMINATION PURCHASER FROM SUCCESSFUL BIDDER - RESIDENTIAL PROPERTY PRIOR APPROVAL NECESSARY TO DELETE CREDITORS' RIGHTS EXCEPTION MORTGAGES 1 COLLATERAL MORTGAGES MORTGAGES 2 ESTOPPEL CERTIFICATES ASSIGNMENT
8 PAGE 8 PAGE 9 PAGE 10 PAGE 11 PAGE 11 PAGE 11 PAGE 11 DATE
LEGAL BULLETIN 8/79 DATE
OF MORTGAGES LEGAL BULLETIN 8/79 MORTGAGE AND MORTGAGE POLICIES 3 (B) EXOTIC FINANCING FACTORAGE FINANCING AMOUNT OF MORTGAGEE POLICY LESS THAN PRINCIPAL AMOUNT SECURE BY MORTGAGE (DEED OF TRUST) MORTGAGES 4 MORTGAGE REDUCTION CERTIFICATES CHAPTER 29 MORTGAGES 5 MORTGAGE SATISFACTION MORTGAGES 6 MORTGAGE-SATISFACTION INFANTS MORTGAGES 7 SUBORDINATION AGREEMENT MORTGAGES 8 WRAP-AROUND MORTGAGE CHAPTER 29A DATE LEGAL BULLETIN 8/79 PAGE 2 PAGE 3 DATE
LEGAL BULLETIN 8/79 DATE LEGAL BULLETIN 8/79 DATE LEGAL BULLETIN 8/79 DATE LEGAL BULLETIN 8/79 DATE LEGAL BULLETIN 8/79
OPTIONS
GENERAL
PAGE PAGE PAGE PAGE PAGE PAGE 1 2 2 4 4
INTRODUCTION EXCEPTION FOR OPTIONS INSURING OPTIONS CLOGGING OF THE EQUITY OF REDEMPTION ENDORSEMENT COVERAGE OPTIONS CHAPTER 30
LEGAL BULLETIN DATE GENERAL PAGE PAGE PAGE PAGE PAGE 1 1 2 2
PARTNERSHIPS
DEFINITION WHO MAY BE PARTNERS TYPES OF PARTNERSHIPS RISK
PATNERSHIPS
TITLE
PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 PAGE 2 PAGE PAGE 1 PAGE 1 1 2 3
REQUIREMENTS INSURING INCOMING PARTNERSHIP INTERESTS WHEN INSURING AN INCOMING STOCKHOLDER OR PARTNER WHEN INSURING AN INCOMING PARTNER PARTNERSHIPS UNDERWRITING
CHANGE OF PARTNERS - REQUEST FOR FAIRWAY ENDORSEMENT REQUESTS FOR NON-IMPUTATION COVERAGE PARTNERSHIPS BANKRUPTCY - RULES OF TITLE PRACTICE CHAPTER 30 BANKRUPTCY
PARTNERSHIPS
COMPENDIUM OF NEW YORK LAW

DEFINITION WHO MAY BE PARTNERS GENERAL PARTNERSHIPS - FORMATION LIMITED PARTNERSHIP - FORMATION PARTNERSHIP - ACQUISITION AND CONVEYANCE PARTNERSHIP - DISSOLUTION PARTNERSHIPS GENERAL PARTNERSHIPS LIMITED PARTNERSHIP (DOMESTIC) FOREIGN LIMITED PARTNERSHIPS CAPACITY TO BUY AND SELL REAL PROPERTY PARTNERSHIPS - CLOSERS MEMO PARTNERSHIPS PARTNERSHIPS FOREIGN LIMITED PARTNERSHIP CHAP. 519, LAWS 1979 LAW MEMO 8/79 PARTNERSHIPS DATE CHAPTER 519 OF THE LAWS OF 1979 LEGAL BULLETIN 8/79 PARTNERSHIPS DATE SETTLEMENT REQUIREMENTS PAGE PAGE PAGE PAGE 2 PAGE 2 PAGE UNDERWRITING PAGE PAGE PAGE PAGE PAGE PAGE 1 2 3 4 1 1 1 3
FEDERAL LIENS DATE LAW MEMO 4/73 DATE
LIMITED PARTNERSHIPS (FOREIGN) LAW NOTE CHAPTER 30B POLICIES AND ENDORSEMENTS GENERAL 9/79 PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 1 1 1 2 2 2 3 4 4 7 8
HISTORY GENERAL NATURE OF INSURANCE BRIEF DESCRIPTION OF ALTA LOAN POLICY BACKGROUND POLICY FORMAT POLICY COVERAGE WHO IS COVERED UNDER THE POLICY DURATION OF COVERAGE MATTERS EXCLUDED FROM COVERAGE UNDER THE POLICY CONDITIONS AND STIPULATIONS SCHEDULE A - ALTA LOAN POLICY 1992
CHAPTER 30B
POLICIES AND ENDORSEMENTS GENERAL
PAGE PAGE 9 PAGE 10 PAGE 11
SCHEDULE A SCHEDULE B I, ALTA LOAN POLICY SCHEDULE B 1992 POLICIES NYBTU AND POLICY FORM 100 1992 POLICY FORMS 1992 POLICIES ELEMENTS HISTORY
PAGE PAGE 1 PAGE 1 PAGE PAGE 1 PAGE 2 PAGE 2 PAGE 3 PAGE 3 PAGE PAGE 1 PAGE 4
SIX ELEMENTS OF A TITLE INSURANCE POLICY THE IDENTITY & NATURE OF THE INSURED AS AFFECTING THE ISSUANCE OF A POLICY - SCHEDULE A (OWNERS) THE IDENTITY & NATURE OF THE INSURED AS AFFECTING THE ISSUANCE OF A POLICY - SCHEDULE A (LOAN) MATTERS WHICH SHOULD BE SHOWN IN SCHEDULE B (MATTERS WHICH THE INSURED INTENDS TO TAKE SUBJECT TO) ENDORSEMENTS 1992 POLICIES EXCLUSIONS FROM COVERAGE - OWNERS 1992 EXCLUSIONS FROM COVERAGE - LOAN 1992 POLICIES AND ENDORSEMENTS UNDERWRITING EXCLUSIONS
PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE 1 1 1.1 1.1 2 3 4 4 5 6 13
THE NYBTU FORM 100 THE ALTA POLICY FORMS - INTRODUCTION 1970 ALTA LOAN POLICY 1984 REVISION OF THE 1970 ALTA LOAN POLICY 1970 AND 1984 REVISION OF THE 1970 ALTA LOAN POLICIES 1987 ALTA LOAN POLICY 1987 ALTA POLICIES CHANGES IN INSURING PROVISIONS 1987 ALTA LOAN POLICY EXCLUSIONS THE ALTA 1990 & 1992 POLICIES POLICIES AND ENDORSEMENTS ENDORSEMENT INSTRUCTIONS CHAPTER 31 SETTLEMENT & EXAMINATION
POWERS OF ATTORNEY
GENERAL
PAGE
GENERALLY REQUIREMENTS: THE EXAMINER MUST DETERMINE
PAGE 1 PAGE 1
EVIDENCE OF VALIDITY CHAPTER 31 POWERS OF ATTORNEY
GENERAL
PAGE 2 PAGE PAGE PAGE PAGE PAGE 4 PAGE PAGE PAGE 2 3 3 3 4 5 5
EXECUTION OF DOCUMENTS UNDER POWER OF ATTORNEY RECORDING OF POWER OF ATTORNEY POWERS GIVEN BY TRUSTEES AND PERSONAL REPRESENTATIVES POWERS GIVEN BY PARTNERSHIPS POWERS OF ATTORNEY TO PARTNERSHIPS PAGE POWERS OF ATTORNEY TO CORPORATIONS POWERS OF ATTORNEY FROM CORPORATIONS CAVEAT-ALL POWERS POWERS OF ATTORNEY POWERS OF ATTORNEY CAVEAT PARTNERSHIP POWER OF ATTORNEY PUBLICATION CHAPTER 31A
DATE LEGAL BULLETIN 5/78 PAGE PAGE PAGE PAGE PAGE GENERAL PAGE PAGE 1 GENERAL PAGE 1 1 1 1 1
PUBLIC LANDS
STATE OWNERSHIP CHAPTER 32
RECORDING ACTS
RECORDING ACT
DATE LEGAL BULLETIN 8/79 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE PAGE PAGE PAGE PAGE PAGE PAGE UNDERWRITING PAGE 1 1 1 2 2 3
DEFINITIONS NOTICE TO AGENT RECORDATION OF INSTRUMENT PRIOR TO GRANTOR ACQUIRING RECORD TITLE NOT CONSTRUCTIVE NOTICE NOTICE FROM RECITALS IN INSTRUMENTS IN THE CHAIN OF TITLE INSTRUMENTS RECITING THAT A GRANTEE HOLDS "IN TRUST", OR "AS TRUSTEE" CHAPTER 33
RESTRICTIVE COVENANTS
GENERAL
EXCEPTION FOR RESTRICTIONS VIOLATION OF RESTRICTIONS - REVERTERS INSURING AS TO VIOLATIONS RACIAL RESTRICTIONS ASSESSMENTS CONTAINED IN RESTRICTIONS RESTRICTIONS OF USE RESTRICTIVE COVENANTS
CHAPTER 33
RESTRICTIVE COVENANTS
CASE LAW
PAGE PAGE 1
COVENANTS AND RESTRICTIONS - DISPOSITION BY RESTRICTIVE COVENANTS APARTMENT HOUSE FAMILY RESIDENCE DWELING HOUSE PRIVATE DWELLING COVENANTS AGAINST NUISANCES CHANGE OF NEIGHBORHOOD GARAGE FIRST BUILDING NEARLY EXPIRED ON ADJOINING PROPERTY ON SINGLE LOT WHERE PARTLY RESTRICTED CONSTITUTIONALITY - NEGRO RACE DISPOSITION OF CHAPTER 33A
DATE LEGAL BULLETIN 3/62 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 2 PAGE 3 PAGE 3 PAGE 3 PAGE 3 PAGE 3 GENERAL PAGE PAGE PAGE PAGE PAGE PAGE 1 1 2 2 3
SALE-LEASEBACK
FEE AND LEASEHOLD INTERESTS MAY BE INSURED NATURE OF TRANSACTIONS - POSSIBLE SECURITY DEVICE RED FLAGS EVIDENCE TO BE OBTAINED EXCEPTIONS TO BE MADE
CHAPTER 33B
SALE-LEASEBACK SEVERANCE GENERAL
PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 3 PAGE 3 PAGE PAGE
GENERALLY INSURING THE LAND (ONLY) INSURING THE LANDLORD'S REVERSIONARY INTEREST IN THE BUILDINGS INSURING THE BUILDING ACCESS AND SUPPORT LOAN POLICIES CHAPTER 34 CHAPTER 35
STREETS - ABUTTING
TITLE
SUBORDINATION AGREEMENTS GENERAL
AUTOMATIC SUBORDINATION AGREEMENT FOR FUTUER SUBORDINATION SPECIFIC SUBORDINATION AGREEMENT CHAPTER 35 SUBORDINATION AGREEMENTS
PAGE 1 PAGE 1 PAGE 1 DATE LEGAL BULLETIN 8/79
CHAPTER 36
SURVEY COVERAGE
SURVEY-CONTACT LANGUAGE SURVEY SURVEY EXCEPTIONS
GENERAL TITLE
PAGE PAGE
DATE LEGAL BULLETIN 4/60 UNDERWRITING PAGE PAGE 2 PAGE 3 PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 1 TITLE PAGE PAGE 1 PAGE 1 PAGE 3 PAGE 3 DATE LEGAL BULLETIN 8/79
EXAMPLES OF SURVEY EXCEPTION & THE USE OF CASE LAW TO RESOLVE THEM ADDITIONAL SURVEY NOTES CHAPTER 37
TAXES AND ASSESSMENTS
GENERAL
EXCEPTION NECESSARY PROOF OF PAYMENT PUBLIC IMPROVEMENTS SEARCH: SPECIAL ASSESSMENTS DRAINAGE DISTRICTS PUD AND CONDO ASSESSMENTS TAXES
GENERAL - DEFINED DELINQUENCY OF TAXES AND ENFORCEMENT OF TAX LIENS AND SALE OF TAX DEED PROPERTY BY STATE PROPERTY SUBJECT TO TAXATION AND EXEMPTIONS REDEMPTION OF REAL PROPERTY FROM TAX DELINQUENCY TAXES 1 TAX EXEMPTIONS TAXES 2 TAX, REAL ESTATE TRANSFER NEW YORK STATE CHAPTER 38 TITLE
TENANCY BY THE ENTIRETIES
PAGE PAGE 1 PAGE 1 1 PAGE 2 2 PAGE
DEFINITION CREATION SEVERANCE OF THE TENANCY BY THE ENTIRETY OTHER THAN BY DEATH PAGE TERMINATION OF THE TENANCY BY DEATH GENERAL INFORMATION PAGE CHAPTER 39 TENANTS IN COMMON TITLE
DEFINITION REQUISITES AND CHARACTERISTICS RIGHTS OF THE TENANTS IN COMMON TERMINATION OF TENANTS IN COMMON HUSBAND AND WIFE AS TENANTS IN COMMON CHAPTER 40A
PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 GENERAL PAGE
TRUSTS
PRIVATE EXPRESS TRUST DEFINED PAGE 1 METHODS OF CREATION PAGE 1 TRUST ELEMENTS PAGE 3 A. THE TRUSTEE PAGE 3 B. THE TRUST PROPERTY PAGE 4 C. THE BENEFICIARY PAGE 4 TRUST PURPOSE PAGE 5 A. PASSIVE TRUSTS PAGE 5 B. EXPRESS TRUSTS PAGE 5 C. RESTRICTIONS ON TRUST PURPOSE PAGE 5 D. CHARITABLE TRUSTS PAGE 6 TENTATIVE OR TOTTEN TRUSTS PAGE 7 RESULTING TRUSTS PAGE 8 CONSTRUCTIVE TRUST PAGE 9 A. [DEFINED] PAGE 9 B. [EXAMPLES OF CREATION] PAGE 9 C. THE STATUTE OF FRAUDS PAGE 10 D. THE STATUTE OF WILLS PAGE 11 TRUST ADMINISTRATION PAGE 11 A. DUTIES OF TRUSTEE PAGE 11 B. POWERS OF TRUSTEE PAGE 12 C. ALLOCATION TO PRINCIPAL OR INCOME PAGE 14 CHARGES ENFORCEABLE AGAINST THE TRUST PAGE 15 REMEDIES OF BENEFICIARY PAGE 16 TRANSFERABILITY OF BENEFICIARY'S INTEREST PAGE 17 A. ASSIGNMENT OF PRINCIPAL PAGE 17 B. ASSIGNMENT OF INCOME PAGE 17 C. RIGTHS OF CREDITOR OF BENEFICIARY PAGE 18 D. APPLICATION OF PRINCIPAL TO INCOME BENEFICIARY PAGE 19 E. APPLICATION OF TAXES PAGE 20 REVOCATION AND AMENDMENT PAGE 20 ACCUMULATIONS PAGE 20 PERPETUITIES PAGE 22 FUTURE INTERESTS PAGE 26 POWERS OF APPOINTMENT PAGE 28 ESTATES, POWERS AND TRUSTS LAW PAGE 33 TRUSTS DATE LEGAL BULLETIN 9/74
CHAPTER 41
WATER & WATER RIGHTS

WATER & WATER RIGHTS
GENERAL TITLE
PAGE PAGE PAGE 1 PAGE 1 PAGE 2 PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE DATE 1 2 3 3 4 2 2 3 4 4 4 4 5 5
INTRODUCTION NAVIGABLE WATERS-TIDAL-NORMAL EXCEPTION (NO INSURANCE BELOW HIGH WATER MARK) NAVIGABLE WATERS - TIDAL- INSURANCE TO LOW WATER MARK NAVIGABLE WATERS - NON-TIDAL- NORMAL EXCEPTION (NO INSURANCE) NAVIGABLE WATERS - FILLED - IN LANDS NON-NAVIGABLE STREAMS PONDS, NON-NAVIGABLE LAKES RIPARIAN RIGHTS - NORMAL EXCEPTIONS (NO INSURANCE) RIPARIAN RIGHTS - NATURE AND EXTENT OF NOT INSURED DRAINS AND DITCHES INSURING BEACH AND SHORE AREAS WETLANDS CHAPTER 41 WATER & WATER RIGHTS TITLE CASE LAW
RIPARIAN RIGHTS WATER RIGHTS SUBTERRANEAN AND PERCOLATING WATERS NATURAL LAKES AND PONDS WATER BOUNDARIES WATER & WATER RIGHTS COVERAGE LEGAL BULLETIN EXCEPTIONS AFFIRMATIVE INSURANCE CHAPTER 42
PAGE 1 PAGE 1 GENERAL PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 4 PAGE 5 PAGE 5 PAGE 6 PAGE 12 PAGE 12 PAGE 14 PAGE 15 PAGE 16
WILLS
WILL DEFINED WILL CHARACTERISTICS WILL SUBSTITUTES TESTAMENTARY CAPACITY FRAUD, DURESS, UNDUE INFLUENCE MISTAKE EXECUTION OF WILLS INTEGRATION INCORPORATION BY REFERENCE NUNCUPATIVE AND HOLOGRAPHIC WILLS - EPTL 3-2.2 FOREIGN WILLS CONDITIONAL WILLS
JOINT AND MUTUAL WILLS CHAPTER 42 WILLS GENERAL PAGE
PAGE 17
CONTRACTS TO MAKE A WILL PAGE 17 REVOCATION OF WILLS PAGE 18 DUPLICATE WILLS - LOST AND DESTROYED WILLS PAGE 23 REVIVAL AND REPUBLICATION PAGE 24 GIFTS TO CHARITY - EPTL 5-3.3 PAGE 25 RIGHT OF ELECTION - WILLS EXECUTED PRIOR TO SEPTEMBER 1, 1966 PAGE 26 RIGHT OF ELECTION - AS OF SEPT. 1, 1966 PAGE 29 ILLUSTRATIONS PAGE 31 ILLUSTRATIONS PAGE 32 DISQUALIFICATION AS SURVIVING SPOUSE - EPTL 5-1.2 PAGE 33 DEATH IN A COMMON DISASTER - EPTL 2-1.6 PAGE 34 LAPSED DISPOSITIONS PAGE 34 RESIDUE OF RESIDUE: EPTL 3-3.4 EFFECTIVE SEPTEMBER 1, 1967 PAGE 35 UNWORTHY HEIRS PAGE 35 CLASSIFICATION OF TESTAMENTARY DISPOSITIONS PAGE 36 ADVANCEMENTS AND ADEMPTION BY SATISFACTION EPTL 2-1.5 PAGE 38 CONDITIONAL DISPOSITIONS PAGE 38 RENUNCIATION PAGE 39 MISCELLANEOUS PAGE 40 INTESTATE SUCCESSION PAGE 40
WILLS CONSTRUCTION
FACTS QUERY QUESTION OPINION
JOINT WILL MEMO
PAGE PAGE PAGE PAGE PAGE 1 1 1 1
Chapter 1 - Page1 ABUTTING WALLS Law Bulletin
ABUTTING WALLS
Where a building in any city encroaches not more than six inches in width upon adjoining land and a building has been erected on such adjoining land abutting said wall, no action may be maintained to remove said wall if the wall has been up for one year, but an action for damages may be brought during an additional year under Section 992 of the Civil Practice Act. Such walls need not abut throughout, but must abut at some point [Volz v. Steiner, 67 AD 504].
ACCESS General
ACCESS
1. ACCESS INSURED:
The ALTA and CLTA policies currently in use include, among their insuring provisions, insurance against "loss or damage sustained or incurred by the insured by reason of lack of a right of access" to the insured premises. The term "lack of a right of access" as used in the policies has been interpreted to mean that the insured has legal, not necessarily physical access to and from the land. It is the responsibility of the office issuing the policy to determine that a right of access does exist as to the land being insured. If the right of access is by other than a legally established public right-of-way abutting the property or by a private easement of record (see paragraph 4, below) or if the right of access is limited in any way, the Commitment and Schedule B of the policy must contain an exception for the lack of a right of access or the limitation on the right of access. Access by prescriptive right, way of necessity or means other than by a public right-of-way or private easement of record should not be insured without approval of the Regional Office. 2. PLAT DEDICATION:
Where a right-of-way is created by a dedication on a recorded plat or subdivision it is necessary that the plat complies with all statutory requirements since failure to so comply may void the plat dedications. However, roads and alleys shown on an "invalid" plat should not be ignored. Lot owners who purchased in reliance on the plat may still have prescriptive rights to utilize the roads and alleys. An exception should be made in Schedule B for the possible invalidity of the plat and lack of access resulting therefrom. 3. ACCESS TO NAMED STREET:
An insured may request that the policy insure access to and from a named right-of-way. Prior to providing this coverage, you should obtain a proper survey specifically certifying such access. Coverage can be provided either by an endorsement to the policy or as a note in Schedule B of the policy. Coverage should be worded as follows: "The Company insures that the land described in Schedule A of this policy abuts upon a public street known as (name of street)." Where permissible a CLTA 103.7 Endorsement may be used. Instructions for use of this endorsement may be found in the TI Endorsement manual, Instructions as to the use of Title Insurance Endorsements.
ACCESS General
4.
ACCESS VIA PRIVATE EASEMENT:
In the examination of title you may find that access to a public right-of-way is established by a private easement. When insuring access by a private easement the following requirements apply: a) b) c) The easement must be recorded in the public records. The easement grant must sufficiently identify the easement parcel. The easement parcel must be searched and examined to determine that the easement was validly granted. All matters affecting the title to the easement parcel must be set forth as exceptions in Schedule B of the policy. Schedule B of the Policy should set forth an exception for any terms, provisions and conditions set forth in the easement grant. It should be determined that there is no overburdening of the easement; that is, use of an easement beyond its intended purpose. As an example, if an easement for ingress and egress was granted for a parcel improved with a single family dwelling and an apartment complex is now to be constructed on the parcel with the easement to be used by the tenants, this could constitute an overburdening of the easement. It should be determined by an inspection of the property or by a proper survey that the easement is unobstructed and in use at the date of the policy.
d) e)
f)
A recommended method of insuring access by a private easement is to set forth the primary insured parcel as Parcel 1 and the easement parcel as Parcel 2. Suggested language is as follows: "Parcel 2: Easement for ingress and egress for the benefit of Parcel 1 as created by (the form of instrument creating the easement) dated in Book _______________ Page over and across the land describe as follows: (legal description of the easement parcel)." and recorded of the Public Records of County
ACCESS General
Alternatively, following the description of the insured premises add the following: "Together with the benefits but subject to the burdens of an easement of appurtenant benefit, over and across the following described land, for the purposes of ingress, egress and regress to and from (name the public street). Then describe the easement area by metes and bounds description. Note: For a general discussion of Easements - Propriety of Schedule "A" Coverage see article prepared by Michael E. Mirrington, Underwriting Counsel, Attorneys' Title Insurance Fund, Inc. appearing in Florida Land Title News [appearing in the Florida Title Insurance Underwriting Guidelines]. Note: for General discussion on the Effect on Appurtenant Easements see section 9.11 in The Law of Easements and Licenses in Land. NOTE: See Also: Easements and Right of Way
8/79
Chapter 1A - Page 1 ACCRETION & AVULSION Title
ACCRETION AND AVULSION

The riparian owner is entitled to newly made soil which is caused by the gradual and imperceptible deposit of alluvion. The standard of accretion as gradual and imperceptible is met when witnesses may see from time to time that progress has been made, but they could not perceive it while that progress was going on. It makes no difference whether the deposit is the effect of natural or artificial causes. (In re Hutchinson River Parkway Extention in City of New York, 14 N.Y.S. 2d 692 (1939)). The labor of other persons changing the current of the river and causing deposits of alluvion upon the land of riparian owners cannot deprive the owners of a right to the newly made soil. (ID.) Where owners have lost lands bordering on the seashore due to avulsion, such owners would, if submerged land once more emerged, continue to have title thereto regardless of the intervening length of time and regardless of whether the land had emerged by reason of art, industry or forces of nature. (Town of Hempstead v. Little, 245 N.Y.S. 2d 407, 20 App. Div. 2d 539 (1963)). When lands bordering on the seashore are lost by reason of avulsion, which is a sudden or violent action of the elements which is perceptible when in progress, the loss does not change the boundaries, nor does the owner lose his title, where the extent and quantity of his land is apparent and he endeavors as best he might to protect or reclaim his property. (In re Point Lookout, Town of Hempstead, Nassau County, 144 N.Y.S. 2d 440, 208 Misc. 84, affirmed in part 156 N.Y.S. 2d 219, 2 App. Div. 2d 865 (1955)). ACCRETION The slow, gradual, imperceptible addition to riparian lands by the action of water. 1. Land formed by accretion belongs to the riparian owner. Cramer v. Perine, 251 N.Y. 177 (1929) a. The filling in of land under water by the riparian owner does not constitute an accretion. Sanders v. N.Y.C. & H.R.R.R. Co., 144 N.Y. 75 (1984) The burden of proof is on the person who asserts a title by accretion. Land acquired by accretion is subject to the burdens borne by the land to which it was added, such as a mortgage.
b. c.
8/79
Chapter 1A - Page 2 ACCRETION & AVULSION Title
AVULSION
The sudden or violent action of the elements, perceptible while in progress, which tears away or adds to riparian land. Matter of Point Lookout, Town of Hempstead, 144 N.Y.S.2d 440 (1954) 1. Boundaries do not change, nor is a riparian owner divested even temporarily of title to land submerged by avulsion. Matter of City of N.Y. (Realty Associates), 256 N.Y.
EROSION The gradual and imperceptible wearing away of riparian land by the natural action of the elements. Matter of the City of Buffalo 206 N.Y. 319 (1912) 1. 2. Erosion results in a transfer of title to the owner of land under water. Matter of City of Buffalo, supra The owner of land lost by erosion has no right of reclamation.
See also Waters and Water Courses this manual
11/89
Chapter - page 1 AIR RIGHTS General
AIR RIGHTS AND AIR SPACE

1. IN GENERAL
One who acquires a fee simple estate in realty owns the surface of the ground, the earth beneath it and the sky above it. All three estates in land are recognized under English Common Law. That is the origin of both the "mineral estate" and the "doctrine of ancient lights and air". When a title insurer is called upon to insure title to property above or below the surface estate more stringent title standards and parcel descriptions are mandated. One of the additional prerequisite title requirements is the division of title by horizontal plane. Provided that an accurate description with reference to a horizontal plane is established, title to estates in land created above ground or below ground level, may themselves be the separate subjects of title insurance. This concept has broad application to large urban centers where it is necessary to utilize available air space and subsurface areas as well as the land surface itself in order to combine varied activities and uses within a limited geographical area. As noted in The Title Underwriting Process, the identity and nature of the insured affects the issuance of the policy. The literature on the subject of air space is plentiful. See Air Rights, Air Space, and Transferable Development Rights, PLI Seminar Text 269. For a comprehensive listing of the references see, Kratovil, Modern Real Estate Documentation, Chapter 44. 2. DESCRIPTIONS OF AIR SPACE
Descriptions of air space should be as precise as possible. The basic requirement of the division of title by horizontal planes is the additional engineering and survey data necessary to adequately describe the area to be insured. In some cases the outer perimeter lines of the airspace and the subsurface are drawn at right angles to the surface. Another common method requires a reference to mean datum plane elevations, usually triangulated and determined from mean high tide which itself is determined from the U.S. Coast and Geodetic Surveys. 3. SPECIAL PROBLEMS
In addition to the requirement of more sophisticated engineering standards the title insured should bear in mind that the creation of "air rights" or similar estates above the surface of the ground gives rise to the requirement of an easement or other appurtenant rights in the neighboring land surface to support the structure to be erected over the surface of the land. These may include rights of subjacent and lateral support.
11/89
Chapter - page 2 AIR RIGHTS General
Consideration should also be given as to whether existing case law may hold that the party attempting to reserve the "air rights" has created (i) an easement in gross, which is not favored in law or (ii) an unwarranted restraint on the right of alienation. The title examiner must also exercise care when examining the title to air space since this estate may be burdened by existing mortgages which must be disposed of or subject to numerous types of easements in favor of the neighboring land surface. 4. METHODS OF TRANSFERRING AIRSPACE OR AIR RIGHTS
The most common methods used are more particularly set forth and described in the Kratovil and PLI Texts above set forth. You should also refer to Pedowitz, Real Estate Titles, Chapter Sixteen and Fineberg, Real Estate Titles in New Jersey, Chapter 24. 5. INSURING AIR RIGHTS
The following title exceptions should be included unless otherwise instructed: "Rights to surface support and easements below the surface are excepted unless specifically granted in the insured instrument" "Easement in favor of the surface owners" You must also require satisfaction or other disposition of all the various mortgages which burden the estate from which the air space is created.
6/79
Chapter 2 - Page 1 ACKNOWLEDGMENT Title
ACKNOWLEDGMENT
Acknowledgments on an instrument executed outside the State of New York may be acknowledged according to the laws of the State or Country where such acknowledgment is taken. However, such acknowledgment, if in accordance with the law of the State or Country where taken, must be accompanied by a certificate to the effect that it so conforms. (Real Property Law Sec. 301 subdiv. (a)). Instruments on which acknowledgments were taken outside the State by a notary qualified in the place where said acknowledgment is taken, may not be recorded in New York until a certificate or authentication is obtained from: (1) The clerk of a court in the district in which such acknowledgment was taken, which said proof should be in the form of a certificate under the seal of said court. The clerk or register of the district in which such acknowledgment was taken. The officer having charge of the official records of appointment of such notary or having a record of the signature of such notary.
(2) (3)
NB Partially repealed. See Real Property Law (RPL) 310-311 over. Acknowledgments taken without the State, but within the United States may be taken by (1) (2) (3) (4) (5) Judge or Clerk of a court having a seal Mayor or other civil officer of any City or political subdivision Notary Public Commissioner of Deeds of New York State A person authorized under the law of the place where taken. (Real Property Law Sec. 299).
Acknowledgments within the State may be taken by: (1) (2) (3) Justice of the Supreme Court Official examiner of title Official referee
(4)
Notary Public
6/79
Chapter 2 - Page 2 ACKNOWLEDGMENT Title
Or within the district where the following officials are authorized to act: (a) (b) (c) (d) (e) Judge or Clerk of any Court of Record Commissioner of Deed outside the City of New York The Mayor or Recorder of a City A Surrogate, Special Surrogate or Special County Judge A County Clerk. (Real Property Law Se. 298)
Section 310 and 311 of the Real Property Law, eliminates the requirement for authentication of acknowledgments taken before a notary public of the State of New York or of any other State and the District of Columbia. The requirement for authentication still remains if the acknowledgment is taken in any territory, possession or dependency or if the acknowledgment is made within the state before a commissioner of deeds, justice, except that authentication is not required for an acknowledgment taken before a commissioner of deeds within the City of New York where the document is to be recorded in the Office of the Register of the City of New York. The requirement of authentication of acknowledgments made by a notary public in a foreign country must be authenticated by an official designated in Section 311(2) of the Real Property Law which includes a consular officer of the United States resident in such country.
Chapter 2 - Page 1 ACKNOWLEDGMENTS CLEARANCE Legal Bulletin
Real Property Law, Sec 243 requires that in order for a deed to take effect against a subsequent purchaser or encumbrancer, it must be duly acknowledged before its delivery or its execution and delivery must be attested to by at least one witness. A deed is also required to be acknowledged in order to be recorded under the provisions of the RPL, Sec 291. A recorded deed will not constitute constructive notice if the acknowledgment is missing or defective. Any conveyance which has been of record for 15 years or more is deemed to have been duly acknowledged or proved and properly authenticated. RPL Sec 306 RPL Sec 309 sets forth certificates of acknowledgments - it is not necessary that such forms be followed. Sec 142-a of the Executive Law validates the acts of notaries public and commissioners of deeds where certain defects, therein specified exist with respect to the acts of these officers. (1) Essential requirements Real Property Law - 303, 306 - not necessary to use exact words of statute Signature of office taking acknowledgment - RPL 306 USA - Sec 308 R.P.L. Acknowledgments in foreign countries See R.P.L. Sec 301 Acknowledgments without the state RPL Sec 308 and 311 Officers commission expires - usually shown, but not required by statute See RPL Sec 306 and 309 No certificate of authentication required when acknowledged or proved before any officer designated in Sec 298 RPL Acknowledgment before commissioner of deeds of the City of New York Sec 310 RPL
ASSET SWAPS General
ASSET SWAPS
The underlying reason for an asset swap is, for the most part, the need by a bank or prime lender to either collateralize unsecured loans or to liquidate such loans, in part, by taking assets for partial or total liquidation of antecedent debt. This antecedent debt is usually established by giving a line of credit to the debtor, itself a lender. This debtor uses these funds to make secured loans to developers. Thereafter, the debtor (lender) may acquire the property in question by means of a deed in lieu of foreclosure or by foreclosure and conveys the property or reassigns the mortgage to the prime lender. Where we become aware of such a transaction the usual creditors rights exceptions should be raised with respect to the grantor. In addition, where appropriate, especially if there is an uncompleted structure, exception must be taken to the possible rights of mechanics lienors. We must also call for the consent of all shareholders of the grantor or assignor to the conveyance or assignment. It is not always easy to ascertain a transaction that involves an asset swap. What follows is, at best, a guideline to give some clues to such a possible transaction: 1) 2) 3) 4) Where proposed conveyance or assignment recites consideration in terms other than dollars or recites past consideration, in whole or in part. Where a major conveyance transaction does not involve any new financing. A conveyance made by a lender. Many of the asset swaps involved REITS which makes conveyances or assignments of mortgages. Transactions by such entities involving conveyances or assignments of mortgage should be looked at with great care.
ANTECEDENT DEBT TRANSACTIONS General
ANTECEDENT DEBT TRANSACTIONS

A mortgage given in consideration of satisfying a prior unsecured indebtedness is referred to as an antecedent debt problem. It is a problem which is frequently overlooked by the insurer of title or its agent. The purpose of this chapter is to explain the risk more fully so that when you encounter the situation you will both recognize the risk and have some understanding of how to address the issue. An "antecedent debt" problem relates directly to the question of consideration. The standard Pre-printed Schedule B-l Requirement appearing in all ALTA Commitments is for the "Payment of the full consideration to or for the account of the mortgagor". The question as to whether an antecedent debt problem exists arises whenever we are put on notice of either of the following: l. 2. a lender seeks to obtain additional security for monies already advanced; or no new loan funds are being disbursed and, therefore, no additional consideration passes from the lender to the borrower.
In either case, the new lien is subject to being set aside in its entirety because no new value is being given, i.e., the borrower puts up additional land as security but receives little or no additional funds. Stated another way, if the value of the previously unencumbered land is substantially in excess of the new debt given to secure monies previously advanced, such action may at a later date render the mortgage or deed of trust void, as an attempt to effect a preference. This risk is frequently undisclosed and is often overlooked or missed when disclosed. Pay careful attention to what is disclosed both in correspondence or conversation. Where transfers are apparently made to secure or satisfy an antecedent debt, prudent and knowledgeable title underwriters will raise a creditors rights exception in all cases where the l990 ALTA Policy Form is not being used, which form contains a creditors' rights exclusion. The creditors' rights exception basically states that the title company is taking exception to the possible future application of bankruptcy law, state insolvency laws or similar creditors' rights laws in the event the transaction is later challenged or collaterally attacked by an aggrieved junior creditors as a voidable preference. Such an exception will be omitted only in extremely rare situations when facts can be clearly and convincingly established negating the elements of a voidable preference, the very least requirement of which would be to furnish evidence for our review which would indicate the borrower was not insolvent or in any
ANTECEDENT DEBT TRANSACTIONS General
financial difficulty. Such proof would of necessity require a review of current certified financial statements prepared by a reputable CPA. When you determine that the facts indicate the transaction is not a new loan but related to a prior antecedent debt and that no new loan funds are to be disbursed and, that the entire objective is for the lender to obtain additional security for monies paid out under a previous unsecured loan transaction, the underwriting risk is substantial. The lien is subject to being set aside in its entirety under both the federal Bankruptcy Code and the Uniform Fraudulent Conveyances Act. Section 547 of the Bankruptcy Code provides, in pertinent part, as follows: (b) the trustee may avoid any transfer of property of the debtor . . . (l) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent . . . unless the transfer was "a contemporaneous exchange for new value given to the debtor" [sec. 547 (c)(l)(A)]. Section 548 of the Code is also potentially applicable to the such a transaction, providing that: (a) the trustee may avoid any transfer of an interest of the debtor in property . . .that was made or incurred within one year of the date of the filing of the petition, if the debtor . . . (2)(A) received less than a reasonably equivalent value in exchange for such transfers; and (B)(i) was insolvent on the date that such transfer was made. If you have any questions regarding this matter please contact the Home Office Underwriting Department.
8/79
Chapter 4 - Page 1 BUILDING LOAN AGREEMENTS & MORTGAGES General
BUILDING LOAN AGREEMENTS AND MORTGAGES

SECTION 22 LIEN LAW In connection with every building loan a building loan contract must be filed on or before the date of recording of the building loan mortgage in order to protect a mortgagee form the effect of subsequently filed mechanics liens which may otherwise gain priority over the mortgage. The building loan agreement must contain affidavit to be made by the borrower showing: 1) * 2) 3) the consideration of the loan; the expenses in connection with obtaining the loan; and the net sum available for the "improvement" (defined in Section 2 subd. 4 of the Lien Law). This is sometimes described as the "hard" costs of construction.
Among the items customarily included in expenses ("cost of improvement" as distinguished from "improvement") and properly included in the affidavit are: -Broker's commission -Examination and insurance of title and recording fees, (for mortgage only) -Mortgage tax, -Architect's, engineer's & Surveyor's fees, -Internal revenue stamp taxes, -Inspections, -Appraisals, -Conveyancing, -Building loan service fees, $ Sums paid to take by assignment prior existing mortgages which are consolidated with building loan mortgages and also the interest charges on such mortgages,
8/79
Chapter 4 - Page 1 BUILDING LOAN AGREEMENTS & MORTGAGES General
$ $ $
Sums paid to discharge or reduce the indebtedness under mortgages and accrued interest thereon and other prior existing encumbrances, Sums paid to discharge building loan mortgages whenever recorded, Taxes, assessments, water rents and sewer rents paid (existing prior to commencement of improvement).
In addition to the foregoing it is permissible to include as an item of expense, reimbursement to the mortgagor for costs of improvement which were previously advanced and made subsequent to the commencement of the improvement, which are fully itemized and set forth in the building loan agreement and mortgage. It is also permissible to include reasonable counsel fees for lenders attorney. It is not clear that attorneys fees for the borrower is a permissible cost of improvement and preferably should not be included. Counsel should be consulted only if there is any doubt about the amount or propriety of any charge. This list is by no means complete. One item that is clearly not a permissible cost of improvement is the cost of land acquisition. Furthermore, if it appears during the course of the closing the funds are used for purposes not set forth above, such facts should be communicated to counsel. The closer should as unobtrusively as possible do the arithmetic to see that all the expenses plus the amount available for the "improvement" equals the amount of the building loan contract and the building loan mortgage. NOTE: On rare occasions a building loan mortgage is also combined with an ordinary mortgage. In such case the closer should obtain additional guidance and instruction from office counsel.
AMENDMENTS TO BUILDING LOAN AGREEMENT The amended building loan agreement must be filed within 10 days of its execution. Where this amendment is in conjunction with an additional or amended building loan mortgage we insist on both documents being delivered to the closer at the same time. In the foregoing cases consents are required from present mechanics and materialmen and those who have present contracts with respect to providing material or work for the subject premises. Proof must also be obtained that the requisite consent has been obtained from all persons and firms in the foregoing categories. When office counsel has not approved the compliance with the requirements as aforesaid, the following exception must be taken: "Rights of others by reason of non-compliance with Section 22 of the Lien Law"
NB
See Mechanics Liens this manual.
10/79
Chapter 4 - Page 1 BUILDING LOANS Legal Bulletin
The Court of Appeals has recently held in the case of Nanuet National Bank v. Eckerson Terrace, Inc. (N.Y.L.J.) 6/7/79 page 1 col. 6, that under Section 22 of the Lien Law, the filing by a lender of a Building Loan Contract which is known by the lender to contain statements that materially misinterpret the amount available to the borrower for "improvement" (cost of improvement defined under Section 2 (5) of the Lien Law) will result in the lien of its mortgage being subordinated to present or future mechanics' liens. In the instant case, the amount set forth in the affidavit as the net sum available for "improvement" was substantially greater than the amount actually available. Closers and clearance personnel should consider this ruling when handling Building Loan transactions. Counsel must be consulted if there is reason to believe that the total amount to be advanced in connection with the loan will be less than the amount shown in the Building Loan Agreement as the sum available for the improvement as defined above. CLOSERS AND CLEARANCE OFFICERS ARE NOT TO MAKE SPECIFIC INQUIRIES ON THIS POINT, BUT RATHER SHOULD SIMPLY BE ON GUARD FOR ANY INFORMATION INDICATING A POSSIBLE PROBLEM IN THIS AREA. NOTE: When handling a Building Loan transaction, consult the Title Guarantee Company-Closer's Guide-Section 9E. The requirement and procedures as set forth therein must be complied with. A copy of Section 9E is attached hereto.
8/79
Chapter 4 - Page 1 BUILDING LOANS SURVEY EXCEPTION Legal Bulletin
1.
In all reports where the transaction is a building loan transaction the survey exception will include a clause in the following form with appropriate changes to fit the facts: This is a building loan transaction. As of this date the premises described in Schedule "A" are improved as to foundations only (or, with a building under story), and as of this date there are no construction, up to the survey variations (except as set forth above). Before any further advances are made the mortgagor should arrange to have the survey brought up to date; thereupon this company will advise the insured of any (further) variations. The policy should read substantially as follows: This is a building loan transaction. As of this date there are no survey variations (except as set forth above). Before any further advances are made, this company will advise the insured of any (further) variations.
2.
If the survey is dated or redated within ten days of the date of any advance, no exception will be made as to any state of facts a new or redated survey may disclose
8/94
Chapter 3A - Page 1 BANKRUPTCY General
BANKRUPTCY
INTRODUCTION The filing of a petition in bankruptcy is a caveat to all the world, and in effect an attachment and injunction, and on adjudication and qualification of the trustee, the bankrupt's property is placed in the custody of the Bankruptcy Court, and title becomes vested in the trustee [Mueller v. Nugent, 184 U.S. Rep. 1]. Bankruptcy is the process in which an insolvent debtor's assets are gathered together and distributed fairly among his creditors. An ancillary function of bankruptcy is to enable the debtor to emerge with a "fresh start" so that he might henceforth make useful contributions to the economy. A person, by bankruptcy, wipes out his personal debts in order to give that person an opportunity to reinstate himself in the business world. DEFINITIONS 1. 2. 3. 4. Debtor/Bankrupt - The person or entity who files a voluntary or involuntary bankruptcy petition for protection under the Federal Bankruptcy Act. Bankruptcy Estate - Assets of the bankrupt which come under the control and jurisdiction of the Bankruptcy Court. Bankruptcy Judge - A judge appointed by the Federal District Court to supervise bankruptcy proceedings. Automatic Stay - Relief granted upon the filing of a Bankruptcy petition in which all State or Federal civil proceedings against the debtor are stopped/stayed. Trustee - The person appointed by Bankruptcy Court to marshal the assets of the debtor, control the assets of the debtor and make appropriate distribution of same. Debtor-in-Possession - Situation in Bankruptcy in which a Trustee is not appointed and the debtor is allowed to retain possession of his/her/its assets and to administer same. Order for Discharge - Bankruptcy Court order which discharges/releases the debtor from all personal liability except for certain specified obligations. Abandoned Property - Property removed from the bankruptcy proceeding by the Trustee petitioning the Court to have it abandoned due to the inconsequential value of the property.
5.
6.
7. 8.
8/94
APPLICABLE STATUTES A. B. Bankruptcy cases field before October 1, 1979 were governed by the Bankruptcy Act of 1898 and amendments thereto. Bankruptcy cases filed after October 1, 1979 are governed by the Bankruptcy Reform Act of 1978 and amendments thereto (Title II of the United States Code).
GENERAL DISCUSSION Bankruptcy is a procedure in federal court designed to reconcile the problem created when a person owes more than he/she can pay. Bankruptcy law is very complex and was further complicated in 1979, when major changes occurred in the law. A new bankruptcy law took effect in October 1979 and in 1983 a court decision created a great deal of uncertainty in the new law. There are two (2) types of Bankruptcy Petitions: 1. 2. Voluntary (the debtor files the petition) Involuntary (a group of creditors begin the proceedings)
Generally, there are three (3) types of Bankruptcy proceedings with which we are concerned, each being designated by the Chapter of the Bankruptcy Act in which they appear: 1. 2. 3. Chapter 7 Chapter 11 Chapter 13
[Note: There is a fourth type of bankruptcy proceeding. Chapter 12 provides for agricultural reorganization of the family farm. This plan is relatively new. Any requests for insurance with respect to Chapter 12 should be referred to Home Office counsel.] Chapter 7 proceedings are the ones with which the public is most familiar. Sometimes referred to as a "liquidation," under Chapter 7 the debtor's property is sold and the creditors are each paid a portion of the amounts owed. The debtor is left with certain exempt property, but more importantly, he/she gets a "fresh start". Chapters 11 and 13 are more in the nature of aid to the debtor so that he/she can put his/her financial affairs in such a state that he/she can begin paying his creditors again.
8/94
FILING OF THE PETITION IN BANKRUPTCY Upon the filing of the petition for relief in bankruptcy, a bankrupt estate is created. This "Bankrupt Estate" consists of the following: 1. All property owned by the debtor, whether real or personal. It includes all property in which he/she owns an interest, legal or equitable. This can include the interest his/her spouse has in their community property. In Chapter 7 cases, the estate includes interests acquired by the debtor within 180 days after filing the petition. In Chapter 11 and 13, earnings and property acquired after the petition are included in the estate.) TITLE TO THE PROPERTY OF THE DEBTOR Presently under the Bankruptcy law there is some question as to where title is vested after filing of the petition. For the purpose of title commitments, title should be shown as being in the debtor, subject to the bankruptcy proceedings. Example: The last deed of record places title in John Doe. Subsequent to the deed, John Doe files a petition in bankruptcy and notice of the filing is recorded in the land records. The commitment should show title as follows: John Doe, subject to proceedings in the U.S. Bankruptcy Court for the District of (state), entitled: In Re: John Doe, Debtor, Case No. , wherein a , 19 . petition for relief was filed on the day of Also, an exception should be taken in Schedule B as follows: Proceedings pending in the U.S. Bankruptcy Court for the District of (state) entitled: In Re: John Doe, Debtor, Case No. , wherein a petition for relief was filed on the day of 19 . Generally, it is the trustee who deals with the property and not and debtor. Deeds from the trustee should be executed by the trustee in his capacity as trustee of the bankrupt estate. A debtor in possession generally has the same authority as the trustee.
2.
8/94
AUTOMATIC STAY Upon the filing of the petition, all creditors must cease taking or continuing any action against the debtor or his/her property. The creditors cannot file suits, continue to prosecute a suit, foreclose on the property of the debtor, or seek, to enforce any existing liens against the debtor's property. The creditor has no recourse outside of the bankruptcy unless he/she can get the court to "lift" or modify the stay. TITLE PROBLEMS CREATED BY BANKRUPTCY Generally, title problems arise in the following areas: 1. Transactions occurring prior to the petition (prepetition) that are later attacked by the bankruptcy trustee as being fraudulent transfers or preferences Sale of property out of the bankrupt estate The effect of bankruptcy on judgments against the debtor
2. 3. 1.
Pre-petition transactions
As would be expected, the court will look very carefully at any transaction the debtor entered into prior to the bankruptcy. This is done to be sure that the bankrupt debtor did not convey or transfer property so as to hinder or defraud creditors in their collection efforts or to give preferential treatment to one creditor over other creditors. FRAUDULENT TRANSFERS The bankruptcy court can set aside any transfer made within 1 year prior to the filing of the petition in bankruptcy if the transfer: A. B. was made with intent to hinder, delay or defraud creditors; or was made for less than a reasonably equivalent value and the debtor was insolvent on the date that such transfer was made or became insolvent as a result of such transfer.
8/94
Even if a year has expired since the transfer, a trustee may still exercise its avoidance power under state law. Therefore, a conveyance that is within 1 year prior to the filing of a petition in bankruptcy is potentially subject to attack by the bankruptcy trustee under bankruptcy law and transfers more than a year prior to the petition may be subject to attack under state law. You should consult Company counsel for the state in which the land is located as to the time limit under state law. Probably the most common kind of transfer that is subject to being attacked by a trustee is a foreclosure deed in a non-judicial foreclosure. Decrees in judicial foreclosures are subject to the same type of attack. For a discussion of foreclosure deeds and this problem see the section on FORECLOSURES in this manual. PREFERENCES A trustee may avoid a transfer if it constitutes a preference and the transfer was made within 90 days of the commencement of the bankruptcy case or within one year of the commencement if the party receiving the transfer is an "insider". A transfer is a preference if it prefers one creditor over other creditors. The most common type of transfer that will be attacked as a preference is a mortgage given to a creditor to secure a prior debt. In order for the trustee to avoid the transfer as being a preference, it must have been made when the debtor was insolvent. For a discussion of conveyances or transfers that are likely to be attacked either as preferences or fraudulent transfers see the section on CREDITORS' RIGHTS PROBLEMS in this manual. 2. Sale of property out of the bankrupt estate
Under certain circumstances property can be sold by the trustee or even the debtor. The sale can have various consequences from a title standpoint. Title in the purchaser may or may not be subject to liens and encumbrances. Questions involving sales out of bankruptcy should be addressed to Company counsel. For a discussion of the underwriting guidelines in this area consult The Bankruptcy Handbook. 3. The effect of bankruptcy on judgments against the debtor
A judgment against a party who has been discharged in bankruptcy can be disregarded in insuring title to property that is acquired after the discharge when the following exist:
8/94
a. b.
The judgment was "scheduled" in the bankruptcy proceedings (i.e., the debtor disclosed it to the court), and The judgment was based on a debt that is "dischargeable" in bankruptcy.
Judgments based on debts that are not scheduled or debts that are not dischargeable must be shown as liens on property acquired by the debtor after discharge and, as discussed below, on property that the debtor owned prior to the discharge. Nondischargeable debts are such things as alimony, child support, certain kinds of tax liens and debts based on wrongful conduct on the part of the debtor such as fraud or causing malicious injury to others. Judgments against the debtor continue to be liens on property that the debtor owned prior to the discharge. In other words, the discharge does not eliminate the lien of the judgment. This is true even though it is scheduled and is based on a dischargeable debt. It continues to be a lien on property owned by the debtor, even as to property that was claimed as exempt by the debtor. A judgment based on a scheduled dischargeable debt does not become a lien on property acquired by the debtor after the discharge. EXEMPT PROPERTY Under the bankruptcy law, the debtor is allowed certain exemptions. In most jurisdictions the debtor gets to choose between the exemptions under state law or federal law. Usually, the debtor will claim his residence as exempt. If the court allows certain property to be exempt from the bankruptcy proceedings this does not mean that the property is now "free and clear" of liens. For the purposes of insuring title to this property, we would show as exceptions all matters that we would show if there were no petition in bankruptcy. Company counsel should be consulted for a determination as to whether or not the bankruptcy proceedings should be referenced in the commitment or policy.
2/89
Chapter 3A - Page 1 BANKRUPTCY Title Practice
TITLE PRACTICE/BANKRUPTCY: A. Relief from Liens by Order of Bankruptcy Court - When our search indicates that the property was or is a part of a Bankruptcy Estate and was sold or is to be sold by the trustee or the debtor in possession, we must review the Bankruptcy Court proceeding in the applicable Federal District Courthouse to ascertain the following: 1. Bankruptcy Petition Schedules - Check to see that the property in question was properly listed and that all lienholders are properly listed on the creditors schedule. Notice of Proposed Sale of Property - Check to see whether or not the sale of the property is to be free and clear of all liens affecting it. Check to see that there was a notice of proposed sale of the property. Proof of Service of the Notice to All Creditors - Check that all lienholders were served with the notice of the proposed sale of the property free and clear of all liens. No Objection to the Proposed Sale - Check to see if there were any objections by creditors as to the proposed sale of the real estate; and if there were objections, how were those objections disposed of by the Bankruptcy Court. Order of Sale Free and Clear of All Liens - Check to see whether or not the Bankruptcy Court issued an Order authorizing the sale of the property free and clear of all liens.
2.
3.
4.
5.
B.
Provided that the foregoing review establishes that all creditors have been given notice and an opportunity to be heard, and that all objections, if any, were disposed of in the bankruptcy proceeding and that an Order for Sale of the property was duly entered authorizing the sale free and clear of all liens, then the property can be insured without exception taken as to liens of record. Good title practices dictates that a certified copy of the Bankruptcy Court Order be filed of record with the Recorder of Deeds.
2/89
C.
Property Claimed as Exempt - The Bankruptcy Code provides that a debtor is allowed to claim certain property within certain monetary limits, as exempt property. Exempt property is not included in the bankruptcy estate and accordingly may be transferred by the debtor without court approval. Because there is a value limit imposed upon the exemption that may be claimed, it will be rare to find that the total value of real property is fully exempt. If only a partial exemption is allowed as to real property, the remaining equity will be subject to the Bankruptcy Code. Abandonment Property - The Bankruptcy Code provides that any property of the estate which is of inconsequential value and of little benefit to the estate may be abandoned by appropriate Bankruptcy Court proceeding. Abandonment may only be allowed after all creditors are given notice of such proposed act and given an opportunity to object to same. Generally, where no objection is filed by creditors, no court order will be entered and the property will be considered abandoned and title to the property will revert to the debtor. Abandonment removes the property from the Bankruptcy Estate but it does not alter any valid liens affecting the real estate. Title Practice Subsequent to Order for Discharge - Because the goal of the Bankruptcy Code is to provide the debtor with a "fresh start" property acquired by the debtor after discharge is treated differently from the property acquired prior to discharge. A valid lien prior to discharge affects only pre-discharge property and does not attach to property acquired by the debtor after discharge.
D.
E.
F.
Property acquired by the debtor within one year of discharge should be strictly scrutinized as to the source of assets used to acquire the property. If these assets were fraudulently concealed from the trustee and creditors by the debtor during the pendency of the bankruptcy case and later used to acquire other property, the Trustee may petition the court for revocation of discharge. If revocation is granted, the property may be brought back into the estate and administered by the Bankruptcy Court. If at all possible, debtor and trustee should execute the deed and/or the mortgage.
G.
2/89
BANKRUPTCY GUIDE TO TITLE DEPARTMENT As insurers of title we are expected to have a thorough understanding of both the Law of Real Property and the Law of Contracts as they apply to a title insurance policy. The courts have determined that we have certain contractual obligations of disclosure to our insured of anything of record which may put the insured in a position of peril or otherwise subject them to litigation or serious financial loss. The filing of a petition in bankruptcy is such an event. The Bankruptcy Court has exclusive jurisdiction of the debtor's estate [11 U.S.C 523]. Moreover, the title agent, examiner or closer must also understand that the Bankruptcy Code may change the rights and priorities that normally exist under substantive law. The introduction of a bankruptcy to the title requires knowledge of both bankruptcy court procedures and the substantive law and rules. For example there is a preference statute. This may alter the normal respective priorities of liens under real property law alone. All parties to the transactions should know this and be aware of the implications. Other illustrations will follow. PREPARATION OF SCHEDULE "A" OF THE COMMITMENT Schedule A-3 of the title insurance commitment requires the title insurer or his agent to identify in whom the fee simple title is vested. Normally this is the record owner. However, that is not the case in a bankruptcy situation. As stated elsewhere, upon the filing of a petition in bankruptcy the Bankrupts property is placed in the custody of the Bankruptcy Court and a "Bankruptcy Estate" is created which consists of all the property, real or personal, owned by the debtor. This estate must be identified within Schedule A-3. The preferable way to do this is by placing the Schedule on a separate page where the record owner is identified by name, having acquired title under deed from [grantors name] dated [date] and recorded [date] in Deed Book [identify] page [identify]. Following this you should state that "examination of title discloses the recorded owner filed a petition in bankruptcy [date], Chapter [ ] docket no._______________." You should also "white out" the first four words appearing in Schedule A-3 and in their place state "Title to . . .". When the debtor files a petition in bankruptcy he no longer holds title as "fee simple". This practice is in conjunction with the suggested "recital practice" set forth on page 4. Failure to disclose and properly identify a bankruptcy estate which appears of record can subject the company to unwarranted liability and claim. WHEN INSURING OUT OF TRUSTEE IN BANKRUPTCY OR DEBTOR IN POSSESSION "In re: Bankrupt Estate of , Cause No.
2/89
1. 2.
"Certified copy of Petition for leave to sell and convey premises insured hereunder to be produced and filed with the company." "Certified copy of Order & Decree approving and directing sale to be produced and filed with the company." Must contain judge's signature.
WHEN BANKRUPT WANTS TO SELL PREMISES AFTER MORTGAGE FORECLOSURE PROCEEDINGS HAVE BEEN INSTITUTED. "In re: Bankrupt Estate of 1. , Cause No. "
"Certified copies of any and all Bankruptcy Court Orders affecting premises insured hereunder, including but not limited to Order authorizing sale and conveyance of premises and Decree had thereon, to be produced and filed with the company." Order must contain judge's signature. NOTE: Above objection may be used when we have knowledge that seller is in Bankruptcy and the bankruptcy information is not currently available . . . by adding the following:
2.
"Possible additional searches to be made and objections noted hereon upon production thereof." NOTE: This should be done ONLY in EXTREME cases, due to time constraints. It is always best to wait until all information on bankruptcy is made available.
IF PROPERTY IS TO BE SOLD FREE AND CLEAR OF LIENS AND ENCUMBRANCES, THE FOLLOWING ITEMS SHOULD BE LOOKED FOR IN THE PAPERS: A. B. Petition by Trustee to the Court for an Order to sell free and clear and a Decree signed by a judge authorizing same. Proof of Notice to All lienholders of record of the Petition to Sell free and clear. If any lienholders were not notified, then those particular liens MUST be certified on report. Order to sell free and clear MUST SPECIFICALLY vest power in Trustee to sell premises free and clear AND to distribute proceeds generated by sale stating what lienholders will receive.
C.
2/89
IF THERE WAS A FORECLOSURE OR TAX SALE IN CHAIN OF TITLE AND BANKRUPTCY COURT WAS NOT NOTIFIED, CERTIFY THE FOLLOWING: 1. "Validity of title derived by (Foreclosure/Tax Sale) , as of C.P. # of , vs. by reason of failure to obtain leave from U.S. District Court in Bankrupt Estate of , Cause No. , to issue such execution." ,
GENERAL BANKRUPTCY RECITAL AND ADD THE FOLLOWING: 1. "AND by Proceedings duly had; in the United States District Court, for the , the Eastern District of Pennsylvania, as of Cause No. said (Individual or Corporation) was declared a Bankrupt under Chapter , and by Decree dated / /19 , was appointed Trustee of the Bankrupt Estate."
7/95
Chapter 3A - Page 1 BANKRUPTCY ABANDONMENT Underwriting
ABANDONED PROPERTY GENERAL Upon the filing of a petition in bankruptcy the property of the estate is in custodial legis of the bankruptcy court. However, a trustee in bankruptcy is not obliged to accept onerous or unprofitable property when surrendered as part of the estate and he/she has a reasonable time in which to determine what to do. Land in the bankruptcy estate may be abandoned. If the trustee abandons the property, title re-vests in the bankrupt party individually and is treated just as if no proceedings were commenced. In order to be abandoned the property must be scheduled as an asset. Unscheduled property is an unadministered asset. If the trustee has no knowledge of the fact that the property is an asset of the estate of the bankrupt, there can be no abandonment. ABANDONMENT OF PROPERTY Pursuant to Section 554, a trustee may, after notice and a hearing, abandon property that is either burdensome or of inconsequential value to the bankruptcy estate. Rule 6007 prescribes the notice requirements of abandonment. In essence, the creditors have 15 days from the mailing of the notice to object to the trustees proposed abandonment. If an objection is made, the court must hold a hearing to determine whether or not the property is to be abandoned. Rule 7062 does not apply to abandonment. TITLE RULE: Unscheduled assets are unadministered assets. As such they do not revest in the bankrupt upon the bankrupt's discharge. Such property remains subject to the jurisdiction of the bankruptcy court in which case the proceedings are subject to petition to be reopened for further administration of the unscheduled property. COMMENT: In the absence of a specific order of abandonment or a renunciation of the title by the trustee, property neither abandoned nor administered remains property of the estate and title will remain in the jurisdiction of the court pending a reopening of the proceeding and the appointment of a new trustee (see Section 554(d)). The manner in which abandonment takes place will vary. There are two types of abandonment: actual and constructive.
Chapter 3A - page 2 ABANDONMENT Underwriting
ACTUAL ABANDONMENT: Section 554 (a) of the Code provides for a specific order of abandonment. To effect abandonment thereunder the trustee should cause to be sent to creditors a notice of his intent to abandon the property therein described. if no creditor objects or requests a hearing, the trustee may abandon property of the estate that is burdensome or is of inconsequential value without further order of the court. Property not previously abandoned by the trustee, ultimately determined by him to be burdensome or of inconsequential value, should be described in the Final Report and Account of the Trustee and the Trustee should set forth his intention to abandon such property. Parties in interest should receive notice of this intent to abandon along with notice of the Trustees Final Report and Accounting. Where there has been a specific order of abandonment, or a renunciation of title by the trustee, title will be considered as never having vested in the trustee, and as having remained, uninterrupted, in the bankrupt (Rosenblum vs. Dingfelder) 111 Fed. 2d 406). CONSTRUCTIVE ABANDONMENT: Section 554 (c) provides that property which is duly scheduled but not otherwise administered at the time of the debtors discharge and case closing is deemed abandoned to the debtor and fully administered property abandoned under this section reverts to the debtor and is irrevocable (see Collier, Bankruptcy Manual, 3rd Ed Section 554.06). TITLE RULE: In order to avoid "The doctrine of Standard Oil and Gas Company v. Logan," 5 Cir., 92 F. 2d 28 and "Tuffy v. Nichols, 2 Cir., 120 F. 2d 906, while the proceedings are pending, you should undertake to obtain a specific order of abandonment; if the bankruptcy court grants such an order, and not otherwise, the asset should be regarded as abandonment by the creditors. The filing of a "No Asset report by bankruptcy trustee is not tantamount to an abandonment from the bankruptcy estate [In re Morton Reed, 940 F2d 1317 (9th Cir. 1991)].
7/95
ABANDONED PROPERTY - TITLE GUIDELINES 1. Case Pending: If you are asked to insure a title on the basis of a deed from the debtor while the case is still open, review the court file for satisfactory evidence of abandonment. You should find one of two courses of action as follows: a. After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate. On a request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate. Comment: You should require a court order approving the abandonment whether the action was initialed by the trustee or a party in interest. With such an order you may insure the title conveyed without a bankruptcy exception. Do not waive any liens of the property. 2. Case Closed: If you are asked to insure a title on the basis of a conveyance from the discharged debtor, as to bankruptcy estate property, review the court file for satisfactory evidence of abandonment. You should find one of two fact situations: a. The land to be conveyed was scheduled or listed in the bankruptcy estate and was not administered before the case was closed. This land is deemed abandoned.
b.
The owner may convey without court approval and you do not need to take, any specific exceptions as to bankruptcy. However, if the facts are not sufficiently clear, approval of the court should be required. b. If the land conveyed was not scheduled or listed in the bankruptcy estate, but should have been so shown, and consequently was not administered before the case was closed, it remains property of the estate. Such land is not abandoned.
7/95
You must require a court order for abandonment as follows: "The Company must be provided with a satisfactory order of the Bankruptcy Court for abandonment of the land to be insured. This land was property of the estate, but was unscheduled, and not administered in the bankruptcy of John Doe, Debtor in Case No. in the U.S. District Court for the District of ". Comment: If the property is of inconsequential value, the court may order the property abandoned without reopening the case. If the property is not of inconsequential value, the court will reopen the case to administer or abandon the land. With a court order for abandonment you should insure the title conveyed without a bankruptcy exception. Court orders should be final and no longer subject to appeal. Do not waive any liens on the property.
Chapter 3A - Page 1 BANKRUPTCY AUTOMATIC STAY Effect upon Judgment Lien Ten year period tolled
New York law provides that a judgment lien on real property expires after ten years unless it is extended by the lienholder on a motion to a state court with notice to the debtor. A question arose about the effect of a debtors bankruptcy filing upon New York's lien period. The court held: the automatic stay under section 362(a) does not limit the lien enforcement requirement. However, section 108(c) tolls New York's lien period until the automatic stay is terminated. There is no conflict between New Yorks lien law and 362 (a). An action to extend the lien does not enlarge it or threathen property of the estate. It merely allows the lienholder to maintain the status quo - a policy not adverse to bankruptcy law [Note: this is also consistent with the tax provisions contained within the The Bankruptcy Reform Act of 1994]. However, 108(c) makes application for an extension unnecessary. This section of the Code protects secured creditors from unfair advantage. This section tolls the statutes normal limitation period. [In re Morton, 866 F2d 561 (2d Cir. 1989)]
7/95
Chapter 3A - Page 1 BANKRUPTCY - CHAPTER REQUIREMENTS Title
CHAPTER RELATED ISSUES CHAPTER 13 A Chapter 13 proceeding seeks to provide debtors with an opportunity to make payments to creditors out of future earnings. Commencement stays creditor collection activity. The automatic stay may be lifted by motion (Rules 4001a and 9014). This Chapter was named the "Wage Earner" Chapter under the prior Bankruptcy Act. Under the Code it has been renamed "Adjustment of Debts of an Individual with Regular Income". There are various requirements for filing pursuant to Chapter 13 which in general are similar to Chapter 11. The following are some of the differences: 1. Only a debtor with unsecured debts of less than $100,000 and secured debts of less than $350,000 may a debtor be under Chapter 13 (Section 190(e)). A Trustee is appointed in each case. (Section 1302). However, unless otherwise provided for in the plan, the code provides that the property of the estate automatically vests in the debtor, free and clear of any claim or interest of any creditor provided for by the plan (see p. 4-99, Consumer Bankruptcy Manual). 11 USC 1327 (b) and (c) Upon Petition the debtor shall file the plan (Section 1321). The usual notice and hearing provisions apply. The plan may not provide for payments for a period longer than 3 years. The three year period may be extended to 5 years under unusual circumstances (Section 1322 (c)). The plan must be confirmed by order of the court. The provisions of a confirmed plan bind both the debtor and each creditor, whether or not the creditor's claim is provided for by the plan and regardless of whether the creditor objected to, accepted or rejected the plan. The debtor has certain exclusive rights not a part of the other Chapters: (a) (b) including the right to sell property granted in Section 363(b) through (f) and 363(1); the right to discriminate in favor of certain general creditors:
2.
3.
4.
7/95
Chapter 3A - Page 2 BANKRUPTCY - CHAPTER REQUIREMENTS Title
Chapter 13 permits the debtor to formulate a plan specifically designed to accommodate his needs and interests. Many debtors, for example, desire to repay some of their creditors while having little regard for other creditors. The debtor's financial condition and prospects may not permit him to repay all of his creditors in full. Thus, the only way for full restitution to be made to preferred creditors is for the debtor to pay less to other creditors. Many Bankruptcy Courts have permitted Chapter 13 plans to be confirmed even when large disparities in treatment have provided for different types of general creditors. (c) Avoid or postpone real estate mortgage foreclosure by arrearages and reinstating the mortgage term (not provided for under Chapter 7) by paying off arrearages during the term of the plan. Modifying the rights of secured creditors to reformulate installment payment obligations. However, secured creditors are entitled to recover 100% of the secured portions of their claims. Refinancing: The debtor is not permitted to borrow funds from a third party to make his chapter 13 payments. This on the theory that condoning a substitution of a new creditor for existing creditors would not provide the debtor with the fresh economic start that underlies the bankruptcy system. However, rejecting a debt substitution scheme does not preclude the debtor from borrowing against equity that he has in his home or other property, since this borrowing merely serves as a change in the form of the debtors interest. (Where the plan contemplates that repayment will be made through refinancing of the property see In re Washington, 6BR226, 230, 6BCD1094 (Bankruptcy Ed Va 1980). Contra: In re Whitten, 11BR333, 7 BCD902, holding that a plan funded solely by refinancing may not be confirmed.) TITLE RULE: Refinancing must be contemplated in the plan and confirmed. Where we are asked to insure a refinance and the plan does not contemplate such actions either originally or as modified require a court order (very unusual) since the sale of property of the estate is subject to court approval unless the court has ordered otherwise. The code permits an existing mortgagee to obtain a court order that requires the debtor to provide the mortgagee with adequate protection of its interests when the debtor wishes to continue using his real property (see Cohen, p. 9-19 note 45).
(d)
(e)
7/95
Chapter 3A - Page 3 BANKRUPTCY- CHAPTER Title
When the debtor completes all payments under his confirmed plan the Bankruptcy Court is directed to grant him a discharge from all debts provided for by the plan including claim of all creditors (rule 5009).
Chapter 3A - Page 3.1 BANKRUPTCY SALE OF PROPERTY CHAPTER 13 SALES UNDER PLANS SUBJECT TO LIENS Title
TITLE PRACTICE 1. 2. 3. 4. 5. 6. An order for relief must be in effect throughout the proceedings, and Bankruptcy petition must be reviewed to determine if all lien holders of record have been properly scheduled and the property to be sold was properly scheduled. The plan must be reviewed to determine if the sale was or will be conducted in strict accordance with the terms of the sale provided for in the plan. The court order approving the plan must be reviewed as to regularity. The deed of conveyance must be properly executed by the trustee or debtor in possession. Exceptions should be taken as to all mortgages, judgments, and other liens affecting the property. The sale out of the bankruptcy court will have no effect on the lien status of such matters.
The above examinations must be conducted in all matters where a sale out of the bankrupt estate under a plan occurred within one year of the transactions to be insured. If the property has been subsequently sold to a bona fide purchaser for fair market value by the purchaser at such sale the bankruptcy proceedings need not be reviewed. COURT ORDER REQUIRED Orders are necessary to preserve a record of the existence of jurisdictional facts and are important for the following reasons: a) b) c) It evidences that appropriate "Notice and Hearing" were granted to approve the sale of property; The Order authorizing sale provides evidence of the property passage of the real property through the Bankruptcy Estate; The order serves as a deterrent to second guessing trustees or creditors committees in Chapter 7 proceedings.
The title insurance industry is oriented around the concept of establishing marketable titles through transactions and we, in fact, guarantee the marketability of title on the facing page of the policy. Therefore, from a title insurance company's perspective, it is necessary to evidence in the real property records the fact of the bankruptcy and the passage of the real property through the bankruptcy estate.
Chapter 3A - Page 3.1.1 BANKRUPTCY SALE OF PROPERTY CHAPTER 13 SALES UNDER PLANS SUBJECT TO LIENS Title
TITLE REQUIREMENTS Schedule B I Requirement: If a report or commitment is issued prior to review of the bankruptcy proceedings in the chain of title, the following exception must be shown: "Title to the estate to be insured herein, was derived in whole or part through a Bankruptcy proceeding. The Company is in the process of reviewing said proceedings. This Commitment is issued subject to the results of the examination of said proceedings and the Company hereby reserves the right to amend this Commitment as may be warranted by said examination." If title is to be insured out of a current bankruptcy case: "Sale must be conducted in accordance with terms and provisions of the "Plan" (or court order)." "Deed of conveyance must be properly executed by the Trustee (or debtor in possessions) and make reference to the "Plan" (or court order) under which the sale was conducted." SCHEDULE B EXCEPTIONS If title is to be insured out of a current bankruptcy case, the following exception will be shown: Before adjudication the bankruptcy should be shown as: 1. "Subject to proceedings in Bankruptcy Court Name of Alleged Debtor: Name of Court: Date of Filing: Case No:" After adjudication before appointment of trustee the bankruptcy should be shown as: 2. "Subject to proceedings in Bankruptcy Court Name of Debtor: Name of Court: Date of Filing: Date of Adjudication: Case No:" After adjudication and appointment of trustee the bankruptcy should be shown as:
Chapter 3A - Page 3.1.2 BANKRUPTCY SALE OF PROPERTY CHAPTER 13 SALES UNDER PLANS SUBJECT TO LIENS Title
3.
"Subject to proceedings in Bankruptcy Court Name of Debtor: Name of Court: Date of Filing: Case No: Date of Adjudication: Name of Trustee:"
TITLE PRACTICE 1. 2. 3.
Chapter 3A - Page 3.2 BANKRUPTCY SALE OF PROPERTY CHAPTER 13 SALES UNDER PLANS "FREE AND CLEAR" OF LIENS Title
An order for relief must be effect throughout the proceedings, and Bankruptcy petition must be reviewed to determine if all lien holders of record have been properly scheduled and the property to be sold was properly scheduled, and The plan must be reviewed to determine if sale was conducted in strict accordance with terms of sale provided for in the plan, (CAUTION, often certain liens, such as real estate taxes, first mortgage/deed of trust, or other matters might be specifically excepted in the plan, i.e., that the sale be free and clear of all liens except specified liens) and Clerk's certification to the court must be reviewed to determine if all known lien holders received a copy of the notice at least ten days prior to the date for filing objections to the plan (Rule 6004), and If an objection was made, a court order adjudicating the merits of the objection and approving the plan must have been entered and the appeal period of ten days after the entry of the order must have elapsed without a notice of appeal having been filed (Rule 8003), and Any federal tax lien extinguished by sale was duly scheduled in the bankruptcy, and Any order authorizing sale, which may be incorporated in the Plan, was entered containing all the following: a. b. c. d. A finding that due notice of proposed sale was given, and a finding that the court has jurisdiction of the matter, and A finding that a hearing has been duly had; or, in the alternative, that there was adequate opportunity for a hearing, A list of the specific liens to be divested by sale, together with an itemization of the amount each lien secures, and A finding that for each specific lien sold free and clear of the court specifies one of the five reasons for selling free and clear of a lien (or interest) set forth in section 363(f) as follows: 1. 2. Applicable non-bankruptcy law permits sale of such property free and clear or liens, or The owner(s) of the lien(s) to be eliminated by the sale consent(s), or
4.
5.
6. 7.
3.
The price at which such property is sold free and clear of lien so is greater than the aggregate value of all liens on such property, or 4. 5. e. The lien(s) is (are) in bona fide dispute, or The owner(s) of the lien(s) could be compelled in a legal or equitable proceeding to accept a money satisfaction of the lien(s).
A direction to transfer the divested liens to proceeds of sale, and
8. 9.
The sale is for a price in excess of the total of the liens divested by the sale, and No court order enjoining consummation of the sale was filed.
The above examinations must be conducted in all matters where the purchaser at the sale out of the bankruptcy estate is still in title. If the property has been sold to a bona fide purchaser for fair market value by the purchaser out of the bankruptcy estate the bankruptcy proceedings need not be reviewed. SCHEDULE B I REQUIREMENT: If a report or commitment is issued prior to review of the bankruptcy proceedings in the chain of title, the following exception must be shown: "Title to the estate to be insured herein, was derived in while or part through a bankruptcy proceeding. The Company is in the process of reviewing said proceedings. This Commitment is issued subject to the results of the examination of said proceedings and the Company hereby reserves the right to amend this Commitment as may be warranted by said examination." If title is to be insured out of a current bankruptcy case: "Sale must be conducted in accordance with terms and provisions of the Plan (or court order) authorizing sale." "Deed of conveyance must be properly executed by the Trustee and make reference to the Plan (or court order) under which the sale was conducted." If the review of the proceedings finds one or more of the above title practice requirements have not been met, a special title exception requiring compliance must be made in the commitment or report.
SCHEDULE B EXCEPTIONS If title is to be insured out of a current bankruptcy case, the following exception will be shown: Before adjudication the bankruptcy should be shown as: 1. "Subject to proceedings in Bankruptcy Court Name of Alleged Debtor: Name of Court: Date of Filing: Case No:" After adjudication before appointment of trustee the bankruptcy should be shown as: 2. "Subject to proceedings in Bankruptcy Court Name of Debtor: Name of Court: Date of Filing: Date of Adjudication: Case NO:" After adjudication and appointment of trustee the bankruptcy should be shown as: 3. "Subject to proceedings in Bankruptcy Court Name of Debtor: Name of Court: Date of Filing: Case No: Date of Adjudication: Name of Trustee:" SALES PRIOR TO PLAN BEING ADOPTED After the filing of the petition, the property of the debtor becomes subject to the jurisdiction of the court. Such property may only be sold as provided by the Code. Accordingly, property sold after the filing of the petition without such sale being approved by an order of the court or without being approved by the court as part of an approved plan may not be insure. Such property must be properly administered before if may be insured.
7/95
CHAPTER 7 Title to the bankrupt's real property vests in the Trustee upon the Trustee's appointment and qualification as of the date of the filing of the petition in bankruptcy. Only the Trustee can convey title to the debtors interest in the real estate. When we are called upon to insure title out of the Trustee of a Chapter 7 debtor follow the procedures set forth under BANKRUPTCY - EXAMINATION REQUIREMENTS, I.E. (1) (2) require and obtain a copy of the petition together with the schedule of assets and schedule of creditors; proof to be provided that all parties entitled to notice and hearing (not just interested parties) were fully notified. This includes all creditors. This may be accomplished by obtaining one or more of the following: (a) (b) (c) (d) Trustees certification that all parties entitled to notice and hearing were fully notified; Certificate of Service of and/or Notice of Private Sale from Bankruptcy Court Clerk with list of creditors to whom said notice was furnished attached obtaining an affidavit of mailing of service of notice and hearing upon all creditors, together with the Bankruptcy Court's certification that there were no objections to the sale, or a statement from the trustee that, as of the date of closing, notice was uncontested. The former preferable.
NOTE: with reference to the copy of the notice, it should carefully spell out the terms and conditions of the sale and all particulars. We would prefer to obtain a Court Order authorizing the sale of the subject lands. The title insurance industry is oriented around the concept of establishing marketable title through transactions. Orders are necessary to preserve a record of the existence of jurisdictional facts. The Order is important for the following reasons:
7/95
a) b)
It evidences that appropriate "Notice and Hearing" were granted to approve the sale of property; The Order authorizing sale provides evidence of the proper passage of the real property through the Bankruptcy Estate;
Where we are able to obtain an Order for sale free and clear it is recommended that there be attached to the trustees deed a copy of (a) the Order appointing the Trustee (b) the order authorizing the sale free and clear of all liens and encumbrances We also recommend you obtain for the file a copy of the motion filed by the Trustee to allow the real estate to be sold free and clear. Specimen copies of the above forms of documents are attached to the rear of this section. As you can see, they are obtainable. The problem most frequently encountered in Chapter 7 proceedings is where a recalcitrant trustee refuses to obtain a court order. The Bankruptcy Act of 1978, as amended does not require a court order. Notwithstanding the fact that, pursuant to the amendment to the Bankruptcy Rules effective August 1, 1987, sales free and clear of an interest are an adversary proceeding and no longer strictly administrative, some trustees refuse to obtain orders. We cannot insist upon a court order where the trustee refuses to do more than is required of him under the act. Thus, if we choose to insure absent an order the following procedures shall apply: FREE AND CLEAR SITUATION - NO ORDER OBTAINED In each instance we are relying on the form, sufficiency and degree of detail set forth in the "Notice" to creditors. Each transaction requires a special risk review of the sufficiency of notice. Consideration of insurability will be done on a case by case basis only. (A) if the notice does not provide for the sale "free and clear" of all taxes, liens and encumbrances and the property is sold subject to same, we will treat the notice, in effect as an order to sell and go forward, raising no further questions than above. (B) If the notice provides that the property is to be sold free and clear of all taxes, liens and encumbrances we will not insure unless they are discharged or canceled of record. Accordingly, you should further require:
7/95
Chapter 3A - Page 6 BANKRUPTCY - CHAPTER Title
(i) a statement from the trustee that the existing liens will be satisfied from the proceeds of sale (unusual but possible), or (ii) entry of Default, Final Judgment of Default and Request to Clerk to Enter Default in the adversary matters regarding the captioned debtor, which entitle the Trustees to sell "free and clear". There is to be no deviation from these procedures unless specifically approved by the CEO or a senior underwriter.
Chapter 3A - Page 6.1 BANKRUPTCY - CHAPTER Title
CHAPTER 11 Chapter 11 reorganization proceedings contemplate a plan of reorganization. The first thing to do is obtain a copy of the plan. Also you should follow the procedures set forth in BANKRUPTCY - EXAMINATION REQUIREMENTS, i.e.: A) B) We shall require an Abstract of the Docket Entries entered in the proceedings. We shall require (i) a copy of the confirmation of the Plan of Reorganization;(ii) proof the Plan was not thereafter modified; (iii) a copy of the Court Order confirming the sale. We strongly recommend a Court Order be obtained in this proceeding to be attached as an Exhibit to the deed for the purposes of clearing paper title.
NOTE:
C) D)
We shall require a copy of the Schedule of Assets and Schedule of Creditors in the proceeding. Proof that notice was served upon all creditors. This may be satisfied upon production of a copy of the Certificate of Service.
The Order of Sale or Confirmation of Plan approving sale is to specifically identify the property to be sold by metes and bounds description and approve the sale by the person authorized under the code to transfer title. We further suggest that if the Order authorizes the sale free and clear of liens, it should identify specifically the liens which are to be divested by the sale. This procedure gets the "liens" off record. Require that title not close until the time period for appeal of the Order authorizing sale has expired with no appeal having been taken. (NOTE: Under Rule 802, the appeal period is ten days from the date of the entry of the Order of Sale.)
7/95
Chapter 3A - Page 7 BANKRUPTCY - CHAPTER Title
Please be aware that no court order approving the sale is required where (i) the sale is in the normal course of business and/or (ii) the sale is pursuant to a confirmed plan. Since our main concern is with the contemplated sale of the real property in order to insure title under the plan without the benefit of further order the following requirements should be complied with: 1. 2. 3. 4. 5. 6. 7. determine that a hearing was held; determine there was no opposition to the plan; determine the plan is sufficiently clear as to the terms of the sale; determine that the "notice" rules were complied with; determine that the plan was confirmed and not thereafter modified; require proof of compliance with the plan through closing; require all liens be paid and/or release procured as provided for in the sales contract or the plan.
NOTE: see Section 1142 of the Code. The foregoing should only be approved upon review with counsel.
7/95
Chapter 3A - Page 1 BANKRUPTCY - CREDITORS RIGHTS Underwriting
CREDITORS' RIGHTS PROBLEMS A transfer of an interest in real property may be considered fraudulent if the grantor transfers the interest with the intent, either actual or constructive, to obstruct the right of creditors of the grantor to reach the grantor's assets. Some common examples of transfers which a court might under certain circumstances hold to be fraudulent are: 1. 2. 3. A transfer of title to property without consideration at the time a suit is pending against the grantor. A conveyance by a debtor to himself and his wife as tenants by the entireties to shield the property from the debtor's creditors. The mortgaging of a subsidiary company's land to secure the subsidiary's guarantee of the parent's debt. A parent company's guarantee of the debt of a subsidiary company is usually not considered to be fraudulent. However, before insuring, consent of State counsel should be obtained. 4. Mortgages of a corporation's property where the mortgage funds are used to purchase the stock of the corporation by another entity. These types of transactions are commonly referred to as LBO's (leveraged buyouts). In such cases, the corporation does not receive the mortgage funds but has encumbered its property to secure payment. Generally speaking, the mortgaging of property for purposes of purchasing the assets of another corporation, as distinct from purchasing the stock, will not be considered fraudulent. However, if all of the assets of a corporation are being purchased, the mortgage should not be insured without the consent of State counsel. 5. The mortgaging of a debtor's property to secure an antecedent debt. Although not technically considered a fraudulent transfer, it might be deemed to be a preference under the bankruptcy code and thus voidable by a subsequent trustee in bankruptcy. The mortgaging of partnership property to provide funds to pay a withdrawing partner. Any transfer of partnership property either by way of grant or mortgage to general partner.
6. 7.
7/95
Other types of transactions that create creditors' rights problems but are not thought of as transfers of property are: 1. 2. A release or renunciation by a debtor of an inheritance. The release of a valuable long-term lease by a debtor lessee.
Of course, not every transfer of the types described above will be deemed to be fraudulent. If a transfer is made for the specific purpose of defrauding a creditor, there is little question that it will be voided. There are many situations, however, where there may not be an intent to defraud creditors, but based on the factual situation, a court would find a constructive fraud. The Bankruptcy Code, the Uniform Fraudulent Transfer Act and the Uniform Fraudulent Conveyance Act set out in some detail the situations where transfers will be considered a constructive fraud. Generally speaking, a transfer will be voided based on constructive fraud where the transfer was made either without consideration or reasonably equivalent consideration if the transferor was insolvent or would be made insolvent due to the transfer. State counsel should always be consulted where: 1. 2. 3. land is conveyed either without consideration or with inadequate consideration, or land is mortgaged and it appears the mortgagor will not receive the mortgage funds, and in any of the factual situations described above.
CREDITORS' RIGHTS EXCEPTIONS Where a possible fraudulent transfer or preference question exists with respect to the insurance of a mortgage, the following exception should be added to the policy: "The effect of an attack on the validity or priority of the lien of the insured mortgage based on the avoidance provisions of the federal Bankruptcy Code or similar state insolvency or creditors' rights laws."
7/95
Where a possible fraudulent transfer or preference exists with respect to the conveyance of land, the following exception should be taken: "The effect of an attack on the validity of the insured title based on the avoidance provisions of the federal Bankruptcy Code or similar state insolvency or creditors' rights laws."
7/95
Chapter 3A - Page 1 BANKRUPTCY - DISCHARGE Underwriting
DISCHARGE IN BANKRUPTCY IN GENERAL Most of the individual debtors in bankruptcy cases seek to be discharged from their debts. Unlike former law, the Code does not provide for the discharge of a corporate debtor or of a partnership debtor in Chapter 7 liquidation cases. The word "discharge" is viewed by the title insurers in the context of forgiveness of some debts; not as the extinguishment of all debts. If a debt is discharged it becomes unenforceable against the debtor but this does not mean the debt no longer exists or that it cannot be enforced against the property of the debtor's estate. There have always been, and there will continue to be, some debts a bankrupt debtor cannot shed liability for even if a discharge in bankruptcy is obtained. RULE 409 sets forth the procedure by which the debtor or any creditor may obtain a judicial determination of the dischargeability of a debt. Non Dischargeable Debts (11 USC 523) Included within the debts a debtor cannot be discharged from a bankruptcy case are the following: 1. Certain Taxes and Customs a. b. A tax on income or a tax measured by income on gross receipts due within 3 years before the date of filing the petition. A property tax assessed before commencement of the case and payable without penalty within 1 year of the date of the filing of the petition. Taxes the debtor is required to collect or withhold from others. Employment tax on wages, salary, and commission for which a return was due within 3 years of the date of the filing of the petition. Excise tax due on a transaction prior to but within 3 years of the date of filing the petition. Custom duty arising out of importation of merchandise within 1 year before date of filing the petition.
c. d.
e. f.
7/95
g. h. i. 2. 3. 4. 5. 6. 7. 8. 9.
Tax debts for which no tax return was filed. Tax debts for which a late return was filed within 2 years of the date of the filing of the petition. Tax debts for which debtor made a fraudulent return or wilfully attempted to evade or defeat the tax.
Those arising from obtaining money, property, services, or credit by false pretenses or fraud, including the use of false financial statement. Unlisted, unfilled, and unscheduled debts. Those debts incurred by fraud or defalcation while acting in a fiduciary capacity, by embezzlement, or by larceny. Those for alimony, spousal support, child support and maintenance. Those arising through wilful and malicious injury to others or to the property of others. Fines, penalties, or forfeitures due governmental units. Certain of the educational loan. Those arising in prior bankruptcies but not listed or claimed.
EFFECT OF DISCHARGE (11 USC 524) An individual debtor's discharge under a Chapter 7, 11 or 13 case is: 1. Conclusive as to the personal liability of the debtor for all pre-petition debts duly discharged therein. A judgment subsequently obtained to the contrary is void. Effective to enjoin any act, action, or proceeding to collect, recover, or offset duly discharged debts as personal liability of the debtor or from property acquired by debtor subsequent to the commencement of the case.
2.
Underwriting Department 210 West Front Street, Media, Pennsylvania 19063 (610) 892-8100 ext #135 1-800-220-3901 Fax (610) 892-8834
7/95
3.
Effective to enjoin any act, action, or proceeding to collect, recover, or offset against community property acquired by debtor after commencement of the case on account of an allowed community claim not excepted from discharge; or except as otherwise provided in 11 USC 524 (a)(3), any debt that would be excepted in the case commenced by debtor's spouse on the same date the case of debtor was filed, whether a discharge based on the community claim was waived or not.
The administration of debtor's estate continues after discharge. But, the debtor is left free to embark upon a "fresh start." Property which the debtor acquires after the discharge, absent fraud, is not subject to the jurisdiction of the bankruptcy court; and, a title insurer's usual inquiry into a debtor's discharge is significant only in connection with property debtor acquires after the petition in bankruptcy was filed. PROPERTY ACQUIRED AFTER DISCHARGE - THE AFFECT UPON PRE-PETITION JUDGMENTS AGAINST THE DEBTOR A judgment against a party who has been discharged in bankruptcy can be disregarded in insuring title to property that is acquired after the discharge when the following exist: a. b. The judgment was "scheduled" in the bankruptcy proceedings (i.e., the debtor disclosed it to the court), and The judgement was based on a debt that is "dischargeable" in bankruptcy.
Judgments based on debts that are not scheduled or debts that are not dischargeable must be shown as liens on property acquired by the debtor after discharge and, as discussed below, on property that the debtor owned prior to the discharge. Nondischargeable debts are such things as alimony, child support, certain kinds of tax liens and debts based on wrongful conduct on the part of the debtor such as fraud or causing malicious injury to others. Judgments against the debtor continue to be liens on property that the debtor owned prior to the discharge. In other words, the discharge does not eliminate the lien of the judgment. This is true even though it is scheduled and is based on a dischargeable debt. It continues to be a lien on property owned by the debtor, even as to property that was claimed as exempt by the debtor. A judgment based on a scheduled dischargeable debt does not become a lien on property acquired by the debtor after the discharge.
7/95
DISCHARGE EFFECT UPON LIENS

THE EFFECT OF A DISCHARGE IN BANKRUPTCY UPON PRE-PETITION DOCKETED JUDGMENTS The logical consequence of a bankruptcy proceeding is the discharge of the debtor from his "debts". The purpose of the discharge is to relieve the bankrupt of the personal liability on the obligation. Understand right now that the discharge of one's personal liability is to be distinguished from the discharge of "lien". If the obligation is secured by a valid "lien", including a judgment lien, entered more than four months before the debtors filing of the petition in bankruptcy and adjudication, the discharge does not affect the lien. The "lien" of the judgment is not discharged in bankruptcy; only the personal liability of the bankrupt is. In effect, a discharge extinguished the "debt" but not the "lien". A discharge in bankruptcy does not destroy all judgments recovered against the debtor. Attorneys who do not specialize in bankruptcy law will occasionally suggest that "if the debt is discharged then there is no lien". The "No Debt No Lien" theory does not apply as it would in the law of mortgages. The courts have consistently held that although the underlying debt is discharged, the lien created by the filing of the judgment remains since it attached prior to the filing of the petition in bankruptcy. The discharge of the bankrupt is not a release or discharge of the judgment but acts merely as a bar to the creditors right to collect on the judgment. Therefore, the "lien" must continue to be shown as an exception to title. Under Section 524 the exact language is "a discharge in a case under this title voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor...". Section 524(a) of the Bankruptcy Code effective October 1, 1979, insures that a discharge will operate as an injunction against commencement or continuation of an action to collect or recover a debt as a personal liability of the debtor.
7/95
However, except in "free and clear" sales, creditors holding judicial liens are entitled to claim a priority status for entitlement to proceeds from sale of a debtor's residence despite debtors having been discharged in bankruptcy from any judgment entered in any other court, in that discharge was only to the personal liability of the debtors, not to property of the estate from which debts may be satisfied (In re Bormes, Bankruptcy S.D. 1981, 14 B.R. 895) Comment: As suggested in the section entitled "Sales free and clear" we recommend that the "order to sell free and clear" include a specific statement setting forth those liens which are to be divested. This procedure does not address the issue of the judicial liens continued effect upon a discharged debtor's unsold "abandoned" residence. Remember, valid "liens" existing at the date of the filing of the petition are unaffected by the discharge unless an action to set them aside is taken in accordance with state law. (Collier, 15th ed., 524.01 (3); USCA 524 n. 128 and cases cited thereunder).
Chapter 3A - Page 1 EXEMPT PROPERTY Underwriting
EXEMPT PROPERTY Section 522 of the Bankruptcy Code governs what an individual debtor may keep after filing bankruptcy. Remember, a bankruptcy trustee represents the creditors, not the debtor. Section 522 simply allows the debtor to keep something to begin his or her life after bankruptcy. Section 522 provides a list of "federal exemptions". A debtor may either elect to utilize the federal exemptions or utilize exemptions available under state law. The statute also provides that a state may "opt out" of the federal exemptions, thereby denying its citizens the right to choose between exemptions. In Schedule B-4 of the petition for relief, a debtor may list the home as exempt from the bankruptcy estate if it qualifies as exempt under applicable law. Provided no creditor objects to the claimed exemption within 30 days of the meeting of creditors, the property is deemed exempt. The meeting of creditors must be held within 60 days of the filing of the bankruptcy proceedings. Refer to the abstract of the docket entries to determine if this requirement has been met. If the property is exempt, the property is not part of the bankruptcy estate and may be treated as if the bankruptcy petition had never been filed.
7/95
Chapter 3A - Page 1 BANKRUPTCY - FRAUD Underwriting
FRAUDULENT TRANSFERS AND OBLIGATIONS FRAUDULENT TRANSFERS (11 U.S.C. 548) The bankruptcy court can set aside any transfer made within 1 year prior to the filing of the petition in bankruptcy if the transfer: A. B. was made with intent to hinder, delay or defraud creditors; or was made for less than a reasonably equivalent value and the debtor was insolvent on the date that such transfer was made or became insolvent as a result of such transfer.
Even if a year has expired since the transfer, a trustee may still exercise its avoidance power under state law. Therefore, a conveyance that is within 1 year prior to the filing of a petition in bankruptcy trustee under bankruptcy law and transfers more than a year prior to the petition may be subject to attack under state law. You should consult Company counsel for the state in which the land is located as to the time limit under state law. Probably the most common kind of transfer that is subject to being attacked by a trustee is a foreclosure deed in a non-judicial foreclosure. Decrees in judicial foreclosures are subject to the same type of attack. For a discussion of foreclosure deeds and this problem see the section on FORECLOSURES in this manual. PREFERENCES (11 U.S.C. 547) Any transaction resulting in a debtor's transferee receiving more than he would have received if the transferee had participated in a liquidation of the debtor's bankruptcy estate is suspect as having been a preference. A trustee may avoid a transfer if it constitutes a preference and the transfer was made within 90 days of the commencement of the bankruptcy case or within one year of the commencement if the party receiving the transfer is an "insider". A transfer is a preference if it prefers one creditor over other creditors. The most common type of transfer that will be attacked as a preference is a mortgage given to a creditor to secure a prior debt. In order for the trustee to avoid the transfer as being a preference, it must have been made when the debtor was insolvent. For a discussion of conveyances or transfers that are likely to be attacked either as preferences or fraudulent transfers see the section on CREDITORS' RIGHTS PROBLEMS in this manual.
T.A. TITLE INSURANCE COMPANY 2 Veterans Square, Media, Pennsylvania 19063-3191 (610) 892-8100 Ext. 135 FAX # (610) 892-8834
7/95
Chapter 3A - Page 1 BANKRUPTCY SALES FREE & CLEAR Underwriting
SALES FREE AND CLEAR - COURT ORDER REQUIRED Sales free and clear of liens are governed by Section 363 of the Bankruptcy Code and Rules 6004 and 9014. Pursuant to the amendment to the Bankruptcy Rules effective August 1, 1987, a sale free and clear of an interest is an adversary proceeding and no longer strictly administrative. SALES OF PROPERTY OF THE BANKRUPTCY ESTATE Section 363 (f) states that a trustee may sell property free and clear of third-party interests such as liens or mortgages if one of five requirements are met: 1. 2. 3. 4. Nonbankruptcy law permits a sale free and clear of the interest, such as an unrecorded lien; The interest is a lien and the sale price is greater than the lien; The interest is in a bona fide dispute; or The interest holder could be compelled to take money in substitution of the interest in legal or equitable proceedings.
The rules further require that relief be requested by motion and that summons must be served on all parties whose liens are sought to be affected. The rules also require that a notice contain the date of the hearing. A court order is not legally required in order for property to be sold out of bankruptcy. Section 363(f)(3) provides that the trustee may sell property "free and clear" of any interest if the interest is a lien and if the price at which the property is to be sold is greater that the aggregate value of all liens on such property (emphasis mine). In other words, a lien creditor cannot defeat the trustee in his attempt to sell its collateral as long as the property has equity and above the aggregate value of all liens on such property. It is for this reason that a trustee may, especially in a chapter 7 case, refuse to obtain a court order. If that happens you must comply with the guidelines set forth above in the Chapter 7 requirements section of this manual. WHY DO WE WANT AN ORDER? Since we are dealing with an adversary proceeding and not administrative procedures, a title company insuring title from a sale pursuant to a Section 363 (f) "free and clear sale" will look for an order verifying and confirming that the requirements of the code and the procedures set forth in the rules have been properly complied with. Title insurance company personnel below the level of counsel are not sufficiently well-versed in bankruptcy court procedures and the substantive laws and rules to determined if all the procedural rules were complied with. An order will help the examiner or underwriter to
/95
Chapter 3A - Page 2 BANKRUPTCY - FREE AND CLEAR Underwriting
determine answers to the following questions: -How do we know adequate notice was given within 20 days to all creditors and creditors listed on the matrix? -How do we know that the notice adequately describes the terms of the sale? -How do we know that no creditor has requested a hearing or otherwise objected to the proposed action? -How do we know the buyer is a good faith purchaser? -How do we know the other legal prerequisites to the trustees proposed action have been met? TITLE RULE Orders are necessary to preserve a record of the existence of jurisdictional facts and are important for the following reasons: a) b) c) It evidences that appropriate "Notice and Hearing" were granted to approve the sale of property; The Order authorizing sale provides evidence of the property passage of the real property through the Bankruptcy Estate; The order serves as a deterrent to second guessing trustees or creditors committees in Chapter 7 proceedings.
The title insurance industry is oriented around the concept of establishing marketable titles through transactions and we, in fact, guarantee the marketability of title on the facing page of the policy. Therefore, from a title insurance company's perspective, it is necessary to evidence in the real property records the fact of the bankruptcy and the passage of the real property through the bankruptcy estate.
7/95
Chapter 3A - Page 1 BANKRUPTCY - ORDER CONTENT Underwriting
WHAT SHOULD WE LOOK FOR IN A COURT ORDER? Notice of the proposed sale leading up to the order may be as important as the order itself! Don't be lulled to sleep by the mere fact that you have an order. What if the bankruptcy judge doesn't have the authority to give the order? The following will serve to illustrate the question. We are asked to insure the sale after the plan of reorganization has been confirmed, but the sale is not provided for within the plan of reorganization. In reviewing the court order you consider the following: 1. whether or not the order needs to be recorded. It probably does. If so, obtain a certified copy of the order for recording purposes. Alternatively, insist upon a lengthy recital of the facts in the proposed deed and attach as an exhibit to the deed a copy of the order! Is the order signed by the judge? Does it have a filed stamp on it? You must be certain you are not looking at and relying upon a proposed order! Does the order adequately describe the property? Is a legal description attached? Does the order contain specific findings of fact that: a. proper notice of hearing was given? b. a hearing was held or at least opportunity for a hearing was provided? c. that the sale is pursuant to 363 and that the purchaser is a good faith purchaser and entitled to the benefits of 363(m) d. if the order is to be free and clear of liens does it state that fact? e. does the order specifically list those liens individually which the sale is to be free and clear of? 5. 6. Is the order a final order and has the appeal period expired under Rule 8002? Does the order allow the bankruptcy trustee to obtain secured financing? If so, a finding should be included in the order to the effect that the trustee was unable to obtain unsecured financing. It should also specify the respective parties priorities of the new lien vis-a-vis existing liens. This issue is discussed at greater length in Bankruptcy - Mortgages, "financing the Debtor-in-Possession".
2 3. 4.
7/95
SALES FREE AND CLEAR OF LIENS, TAXES AND TRANSFER TAXES In the Legal portion of this Bankruptcy section we have previously suggested that in order to absolutely divest the liens from the real estate it is good practice to specifically list in the "free and clear order" those liens to be divested and sold free and clear of. This practice suggestion also applies to the removal of real estate taxes and transfer taxes. Making specific reference to 11 U.S.C. 1146 (c) specifically stating the sale may not be taxed under any law imposing stamp or similar taxes will serve to achieve the desired result. COMMENT: We recommend that the "Order Free and Clear" include the following statements: ORDERED: 1. The debtors are authorized and directed to sell their real property located in Township, County, Pennsylvania ("the Property") to or their nominee for a sale price of not less than $ . The aforesaid sale shall be conducted, and proceeds of sale distributed, in accordance with that certain Stipulation and Order (which granted certain secured creditors relief from the automatic stay) issued by this Court in this matter on (Dates). The aforesaid sale shall be free and clear of all liens, claims, security interest, mortgages, pledges, charges, indentures, loan agreements, options, rights of first refusal, offsets, recoupment, rights of recovery, judgments, orders and decrees of any court or governmental entity, interest, successor, product, environmental tax, and other liabilities and claims against the debtors or their property, including state and local taxes on real estate and transfers thereof of any kind or nature, whether secured or unsecured, choate or inchoate, filed or unfiled, scheduled or unscheduled, noticed or unnoticed, recorded or unrecorded, contingent or noncontingent, liquidated or unliquidated, matured or unmatured, known or unknown (collectively the "Liens and Claims"), pursuant to 11 U.S.C. section 363. Pursuant to 11 U.S.C. section 1146 (c), the making and/or delivery of any instrument or transfer in connection with the above-described sale may not be taxed under any law imposing a stamp tax or similar tax, including real estate transfer taxes.
2.
3.
4.
7/95
5.
A copy of this Order may be recorded in the records of the County Recorder of Deeds as part of the conveyancing documents from the debtors to the purchasers of the Property. The purchase of the Property by or their nominee pursuant to this Order constitutes a purchase in good faith for fair value within the meaning of 11 U.S.C. section 363 (m) and In re Abbot's Dairies of Pennsylvania, Inc. 788 F.2d 142 (3rd Cir. 1986). In the event either of the debtors is unable or refuses to execute documents in accordance with this Order or the Stipulation and Order approving said Stipulation previously entered in this case, the able or non-refusing debtor or the United States Trustee is authorized to execute said documents on behalf of the unable or refusing debtor to carry out the Order approving said Stipulation and this Order.
6.
7.
7/95
Chapter 3A - Page 1 BANKRUPTCY - MORTGAGES Underwriting
FINANCING THE DEBTOR IN POSSESSION IN GENERAL A trustee or a debtor in possession is authorized to borrow funds and to secure repayment thereof by executing a Mortgage or Deed of Trust subject to the provisions of the Bankruptcy Code. The borrowing of money to be secured by liens on bankruptcy estate real property is governed by 11 U.S.C. 364. The statute is applicable to all chapters but is of primary importance in Chapter 11 reorganization cases. There will be few Chapter 11 or Chapter 13 cases which will not require an inflow of additional capital to implement the plan. Mortgages on bankruptcy estate real property can be anticipated in most reorganization and rehabilitation cases where the trustee or debtor in possession is unable to obtain credit on an unsecured basis. When this occurs the examination of title will usually disclose that the property of the bankruptcy estate is already heavily liened and that the debtor has little or no equity in it. For this reason it is of vital importance to the insurer of title that any order of the bankruptcy court authorizing the execution of a mortgage on bankruptcy estate property specify the relative priorities of all existing liens as to their relation to the proposed mortgage to be executed by the trustee or debtor in possession. APPLICABLE SECTIONS OF THE CODE section 364(c) authorizes the trustee, after notice and hearing upon all parties in interest, to incur debt with priority over other administrative claims, to incur debt secured by property presently free of liens; or to incur debt secured by a junior lien on presently encumbered property. Under Section 364(d), the bankruptcy court may authorize the obtaining of credit with a "superpriority" lien on encumbered property that is senior to or equal in priority to existing liens on the property of the bankrupt estate. The court will only authorize lending under section 364(d) if it is established that all reasonable effort to obtain credit under sections 364 (a), (b) and (c) have already been made and either (i) proven unsuccessful or (ii) that "less onerous post-petition financing was unavailable" [In re Reading Tube Industries, 72 B.R. 329 (E.D. Pa. 1987)(citing In re Beker Industrial Corp., 58 B.R. 725 (SDNY 1986), and In re Phoenix Steel Corp., 39 B.R. 218 (D.Del. 1984)]. Before court approval of a section 364(d) financing order will be given, there must be notice and a hearing; the trustee must show he cannot obtain credit otherwise and adequate protection must be given to the displaced lienholder.
7/95
ADEQUATE PROTECTION REQUIREMENT "Adequate protection" is not defined in the Code, but section 361 does state three nonexclusive methods by which adequate protection can be given when required under section 364. Section 361 states that adequate protection may be provided by cash payments to the creditor. Adequate protection can also be afforded by providing the lienholder with an additional or replacement lien or by granting relief that results in the realization by the displaced lienholder of the indubitable equivalent of its interest in the property. For cases citations refer to Real Property Issues In Bankruptcy, section 7.04 PROCEDURAL MATTERS AND BANKRUPTCY RULES Bankruptcy Rule 4001(c) controls the procedures to be followed in requiring approval of the various forms of credit that may be incurred after notice and hearing are given and held under section 364. A motion for approval of a financing arrangement is a contested matter under Bankruptcy Rule 9014. The notice of this motion must be given to any committee appointed under the Code, or if there is no such committee, to the twenty largest creditors of the debtor, and to such other entities as the court directs. RULES OF TITLE PRACTICE 1. You must obtain and review an abstract of the docket entries; 2. the examination of the bankruptcy case must disclose: -notice was served upon all parties in interest or as required by law or as was otherwise directed by the court; -notice of motion must make reference refinancing pursuant to 364; -hearing was held and no objections made or, if objections were made said objections were resolved as directed by the court; 3. the execution of the mortgage must be confirmed by order of the bankruptcy court and the appeal period expired; 4. the court order confirming the execution of the mortgage must contain a determination or a finding by the court as to the relative priorities of all existing liens on the property as well as the priority of the lien of the mortgage to be executed on the bankruptcy estate property;
7/95
5. If the court order confirming execution of the mortgage establishes its priority as superior to or equal to all existing liens, the order must also contain specific recitals or findings to the effect that : a. unsecured credit could not otherwise have been obtained and b. there is adequate protection of the interest or interests of the holder or holders of the other lien or liens on the property 6. Evidence of title issued in reliance upon an order of the bankruptcy court confirming the execution of a mortgage on bankruptcy real estate must be approved by the Home Office Underwriting Department. Cross reference with FATICO CLTA Manual 6.34, TICOR Manual 015.09, CTIC Manual Bankruptcy 13; Bankruptcy Service, Bkr-L Ed sec. 15:88.
7/95
Chapter 3A - Page 1 Bankruptcy-Tax Liens Underwriting
TAX PROVISIONS OF THE 1994 AMENDMENTS The Bankruptcy Reform Act of 1994 [the Act] (effective on October 22, 1994) includes an exception from the automatic stay for postpetition property taxes. Treatment of prepetition property taxes may be found in Bankruptcy Service Lawyers Edition, section 10:69. The new provision changes our underwriting position. Prior to the Act we were of the opinion that the trustee could sell the property free and clear of any interest in such property, including ad valorem real estate taxes, providing he met the requirements of the statute [11 USCA 363(f)] and the "free and clear order" specifically stated that the sale was to be free and clear of such tax liens. Title companies believed this applied to all real estate tax liens, irrespective of when they were created. Several recent decisions held that the automatic stay in bankruptcy prevented attachment of the statutory lien on the debtors property for real property taxes [see In re Paar Meadows, 800 F2d 1540 (2nd Cir. 1989); Makaroof v. City of Lockport, 916 F2d 890 (3rd Cir. 1990) and C.S. Associates, d/b/a University Nursing and Rehabilitation Center, Debtor, United Jersey Bank v. Miller, 29 F3d 903 (3rd Cir. 1994)]. The 1994 Amendment creates a new exception to the automatic stay to benefit local municipalities. New Section 362(b)(18) of the Bankruptcy Code specifically excepts from the automatic stay the creation or perfection of a statutory lien for postpetition property taxes imposed by a political subdivision of the state. This section of the statute is designed to overrule the cases above set forth. Makoroff had held that the automatic stay prevented local governments from perfecting statutory liens to collect property taxes which accrued subsequent to the bankruptcy filing. The concern of Congress was twofold: (i) the circuit courts' decisions had improved the position of secured lenders while (ii) harming the efforts of local governments to collect revenue. Prior to the circuit court decisions property taxes were entitled to a priority status in bankruptcy proceeding and lenders secured liens were subordinated to property tax liens. The amendment overcomes the inversion of priorities and restates the law as it was intended. The new exception to the automatic stay is not intended to lift the stay. The new tax provision does not authorize the commencement of any further collection activity but merely authorizes the liens to be perfected. Thus, while the lien attaches the property remains within the jurisdiction of the bankruptcy court preventing tax sale. A tax sale commenced under state law while the estate is in bankruptcy is void from the outset [In re Shambib, 878 F2d 324 (9th Cir. 1989)].
7/95
Chapter 3A - Page 2 Bankruptcy-Tax Liens Underwriting
As a result of the new law the company will require the payment of all real estate taxes. I do not believe the bankruptcy court can issue an order directing the property be sold free and clear of real estate tax liens. As a practical matter, how could the court order the property be sold "free and clear" of prepetition property tax liens when the 1994 Amendment specifically authorizes postpetition real estate tax liens to be perfected? See also Walz, Real Estate Tax Liens and the Automatic Stay in Chapter 11 Bankruptcy Cases: Off the Highway and into the Jungle, 2 J. Bankr. L. & Prac. 49 (1993)
5/85
Chapter 7A - Page 1 COOPERATIVES General
COOPERATIVES DEFINED A "Cooperative" is defined as a corporate entity which owns land and improvements thereon with the right of each individual member of such entity to the exclusive possession of certain parts of the land and of the improvements thereon. "Cooperative Ownership" is most commonly understood to mean that ownership and title to the land and improvements thereon are vested in a cooperative corporation and each shareholder of the corporation, by virtue of a proprietary lease, is entitled to the exclusive occupancy of an apartment in the building located on the land. The term "cooperative" is also sometimes applied to the situation where title to the land and improvements thereon is vested in a "land trust" and each beneficiary of such trust pursuant to an agreement between the beneficiaries, is entitled to the exclusive occupancy of an apartment in the building located on such land. A typical proprietary lease is generally for a term of 99 years at a rent of $1.00 per year and such additional amounts as are necessary for the payment of all direct and prospective expenditures necessary for the maintenance and operation of the building. These would include general taxes and special assessments; such additional amounts (sometimes called "special rents") which would constitute expenses for the upkeep of the individual apartment versus general expenses for the cooperative and, "mortgage note payments" which are allocated shares for the payments due under a loan secured by a mortgage on the land and improvements thereon. The lessee's interest under the lease is subject to the lien of the mortgage and to any mortgage thereafter placed upon the land and also to a lien in favor of the lessor to secure the payment of any sums due under the terms of the lease. The lease provides that the lessor's approval is necessary for any assignment of the lease or for any subletting and that the ownership of the stock in the corporate lessor cannot be separated from the lease and is transferable only to an assignee of the lessee. This must be stated in public offering statement. An agreement between the beneficiaries of a "land-trust cooperative" contains similar provisions relative to assessments, liens and assignment of the beneficial interest. General real estate taxes are assessed against the cooperative property as a whole and not against each individual unit. The greatest fear of the cooperative owner is the possible defeasance of his interest through a sale of the property for non-payment of the real estate taxes or of a sale of the entire cooperative property through foreclosure or otherwise under the terms of a mortgage on the fee.
5/85
Chapter 7A - Page 2 COOPERATIVES General
THE NEW YORK MODEL Throughout the country there are quite a number of different forms of cooperative housing projects, but in New York the venture invariably involves a corporation formed under the business corporation law (BCL) and the provisions of that law governs its formation - charter - by laws - issuance of stock, etc. The shares of stock in the corporation are allocated proportionately to value of the units in a multi family residence. Each stock owner by reason of his ownership of his stock is entitled to a proprietary lease generally on a long term basis. Stock and lease if transferred must be transferred together. The basic financing of the venture is of course handled by the cooperative corporation by a blanket mortgage upon the entire project. For Real Estate tax purposes, the entire project is subject to a single real estate tax. The rent payable under the proprietary lease is not truly rent but represents the proprietary tenants proportionate share based upon his ownership of a specific number of shareS of stock, of the mortgage payments, taxes, maintenance costs plus capital improvements, etc. which relate to the project. Despite the fact that it is the corporation which is paying the mortgage interest, interest on other loans for capital improvements and so forth and the real estate taxes, if the venture complies with the provisions of the internal revenue code, the individual tenant stockholder is nevertheless entitled for personal income tax purposes to take as deductions on his return, his proportionate share of mortgage interest, taxes, and any other interests payable by the corporation for the operation of the project.
Chapter 7A - Page 1 COOPERATIVES Title
COOPERATIVES - TENANTS INTEREST INSURABLE

Generally, the leasehold interest of a cooperative owner is an insurable interest in land. There has been a resurgence in interest in cooperatives by virtue of a 1974 amendment to the National Housing Act which authorizes the Secretary under certain conditions to insure mortgages involving dwelling units in a cooperative housing development which is covered by a blanket mortgage insured under the National Housing Act. Prior to the mid1970's financing was not generally available to a purchaser of a proprietary lease and its accompanying stock. Until that time the leasehold interest was not mortgageable and the priority of such a loan was therefore uninsurable. Today, limited coverage is available for lenders on a cooperative leasehold interest. Under the 1974 amendment the Federal Home Loan Bank Board amended its regulations to allow federal savings and loan associations to make 90 and 95% permanent and conventional mortgage loans on cooperative housing projects and recent legislation in many states authorizes state banks and savings and loan associations to make loans secured by cooperative interests. GUIDELINES The leasehold estate of a cooperative owner is unique in several respects from the leasehold estates that we ordinarily insure and therefore requires guidelines in addition to those specified in the LEASEHOLD section of this Guide. 1. 2. Where possible the ALTA Leasehold policy forms should be used to insure the cooperative leasehold interest. A properly executed proprietary lease or, where state law permits, a memorandum of lease, notice of lease or short form lease must be recorded in the county where the land is located. See LEASES 2 - Recording of ShortForm Leases. The legal description should describe the underlying lands setforth the apartment number and its location within the building and its boundaries. Wherever possible the apartment should be described by reference to a recorded survey or floor plans. Where the legal description of the apartment in the lease is totally indefinite then we should refuse to insure unless and until the legals are corrected to sufficiently describe and locate the apartment we are asked to insure. Where the memorandum of lease, notice of lease or short-form lease is recorded in lieu of the full proprietary lease, a certified copy of the proprietary lease must be requested to be retained in our files. The lease should be examined and all provisions that may affect the title or the lien of an insured mortgage should be reflected in Schedule B of the commitment/policy. The lease provisions that generally affect title and/or
3.
4.
mortgage liens are those relating to: (a) assignment of lease, (b) default, (c) assessments, (d) authority of lessor to mortgage the fee, (e) that ownership
of the corporate shares of stock is a prerequisite to a leasehold interest and (f) that ownership of stock cannot be separated from the leasehold interest. 5. The charter and by-laws of the cooperative corporation must be requested and retained in our files. They must be examined and all provisions that may affect the title or the lien of an insured mortgage should be reflected in Schedule B of the commitment/policy. The provisions relating to: (a) lease, (b) share of stock and (c) officers authorized to execute leases or other instruments should be particularly noted. You should determine that the lease or assignment and the mortgage, if any, that we are to insure were properly executed according to and in compliance with the provisions of the charter, by-laws and the lease. Necessary consents should be obtained and kept in our files. Non-conformance should be set-forth as exceptions in Schedule B of the commitment/policy and the instruments should be corrected to conform with such provisions or we should refuse to insure. Where you are to insure the lien of a mortgage on a cooperative leasehold interest, and you are unsure of the right of such lessee to mortgage his interest, then confirmatory documentation of the right to mortgage should be obtained from the cooperative corporate officers and retained in your files. Where the cooperative documents prohibit the mortgaging of the cooperative leasehold interest then, of course, you should refuse to insure the lien of any such mortgage. There must be compliance with cooperative legislation and any exceptions to title generated by such law should be reflected as exceptions in Schedule B of the commitment/policy, as for example, the lien provision for nonpayment of assessments. Ownership of stock in the cooperative corporation is generally a prerequisite to the lease. You should require satisfactory evidence that the necessary shares were delivered to and assigned to the insured owners. Where you are also issuing a loan policy the following exception should be set forth in Schedule B of the loan commitment/policy: Liability, if any, arising from the failure of the insured to obtain possession of the insured lease and the accompanying stock and to retain the same until the mortgage loan has been paid in full. 10. Extended Coverage: Where the legal description of the leasehold interest is less than definite, coverage over "questions of survey" and "parties in possession" should not be extended. It is possible that material and labor contracted for by the cooperative corporation and/or other proprietary
6.
7.
8.
9.
lessees may attach as a mechanic's lien to the lease insured. Mechanics' lien coverage should not be extended unless you have
Satisfactory documentation that no mechanics' lien will attach to the leasehold interest insured by virtue of labor and materials contracted for by the lessee insured, his assignor if any, the cooperative cooperation and other proprietary lessees in the underlying lands. 11. A search should be made for filings under the Uniform Commercial Code to determine that the stock or shares in the cooperative corporation has not been assigned as security for a loan. Where a search discloses that such assignment has been made, it should be reflected as an exception in Schedule B of the commitment and should be released before policy issues. See Paragraph 9 above. 12. Where a loan policy is issue and local law requires a filing of a financing statement under the Uniform Commercial Code to perfect one's security in the cooperative stock for his loan, Schedule B of the commitment should reflect the following exception: The Uniform Commercial Code statements with respect to the agreements securing the stock in the cooperative corporation as security for the lien of the mortgage to be insured should be filed in the offices designated for such purpose by the UCC. 13. Where we are asked to insure an assignee of the leasehold estate, which lease was not previously insured, it is necessary to obtain the names of and make a lien and Federal Estate Tax search against all parties previously having an interest in the leasehold estate equivalent to the time period that a lien endures. Any matters disclosed by such search should be shown on Schedule B.
TITLE REQUIREMENTS (A) The proprietary lease and accompanying stock described in the security agreement are to be delivered for examination and review. (Otherwise, see WCH memo of 5 June 1979) Any assignment of the proprietary lease and any new lease and transfer of the accompanying stock required at closing are to be proper in form, duly executed and that such assignment of the proprietary lease and any new lease delivered at closing must contain the trust clause provided for by subdivision 5 of section 13 of the lien law. Where the memorandum of lease, notice of lease or short-form lease is recorded in lieu of the full proprietary lease, a certified copy of the proprietary lease must be delivered to this company to be retained in our
(B)
(C)
files.
(D)
Alternatively, the original of the Proprietary lease and all assignments, including one to the present lessee, must be submitted to this Company prior to closing, so that appropriate searches may be made against any prior owners for the last 10 years. Note: this is the only way we are able to ascertain that the shares of stock secured by the UCC-1 are unencumbered by any further liens. An instrument in writing is to be obtained from the lessor corporation, its managing agent or its board of directors, indicating the consent of the board of directors to the transfer of stock or the issuance of new stock to the purchaser and the assignment of the lease and/or the issuance of a new lease to said purchaser and further consenting to the making of the security interest to be insured. The proprietary lease and accompanying stock described in the security agreement are to be delivered at closing otherwise, policy to issue will except "Liability arising from failure of the insured to obtain possession of the insured lease and the accompanying stock." If the proprietary lease requires any consents, same must be obtained and submitted to this Company. An Estoppel Certificate or other instrument in writing is to be obtained from the lessor corporation or its managing agents certifying that as of the date of closing the lease was in full force and affect, that there is no existing default by the tenant with respect to any of the terms, covenants, conditions and agreements contained in said lease, and that there were no outstanding charges payable with respect thereto. Proof is required that the cooperative plan of the building in which the proposed insured apartment is situate is in full force and effect and there is no pending litigation with respect thereto. Proof is required that said lease has not been otherwise encumbered. In order to insure the lenders interest we shall require both a Security Agreement and a UCC -1 be duly executed and delivered for recording in the appropriate county recording office and the Office of the Secretary of State. The legal description should describe the underlying lands and setforth the apartment number and its location within the building and its boundaries. Wherever possible the apartment should be described by reference to a recorded survey of floor plans. Where the legal description of the apartment in the lease is totally indefinite then we will refuse to insure unless and until
(E)
(F)
(G) (H)
(I)
(J) (K)
(L)
the legals are corrected to sufficiently describe and locate the apartment we
are asked to insured. (M) In order to insure the leasehold interest we shall require the original proprietary lease and all assignments thereof (or memorandas thereof) be recorded.
FEE EXCEPTIONS When insuring the cooperative association as fee owner and insuring the fee title of property which is known to be in "cooperative ownership" requires that an exception reflecting the interest of the cooperative owners be set forth in Schedule B of the commitment or policy. The exception may read as follows: Terms, provisions, conditions and rights of the cooperative owners or lessees under the proprietary leases issued by the cooperative corporation and all persons claiming by, through or under them. NB For further exceptions refer to PLI Publication no. 176 at p. 100.
LEASEHOLD EXCEPTIONS Any loss or damage due to the fact that the Proprietary lease to be insured is note recorded. NB Closers Note: if the lease is not recorded it may fall into "profane hands" and thereafter be improperly assigned or pledged by someone other than the lessee. In such event the title company may be liable upon claim for failure to advise the insured of the potential hazard.
Covenants, terms and conditions set forth in the proprietary lease and all assignments thereof.
6/79
Chapter 7A - Page 1 COOPERATIVES EXCEPTION WHERE LEASE IS NOT DELIVERED AT CLOSING Legal Bulletin
We have been asked to insure a cooperative title where the coop. corporation granted conditional approval for membership based upon the prospective grantees becoming married and further making delivery of the proprietary lease and stock certificates conditional upon delivery to the management a marriage certificate. Pending such delivery, during the interval, the parties would be given use of the premises. This would create in affect a landlord tenant relationship. Your attention is directed to the case entitle Earl W. Jimerson Housing Co. Inc., v. Butler, decided 2/1/79 wherein the court held a cooperators relationship with the cooperative corporation held not to be that of a landlord and tenant, regardless of any provision of the occupancy agreement attempting to define it consensually as such and are not therefore proper parties to a summary proceeding for non-payment of rent. Reversed NYLJ 12/11/79 p 12. This case should be born in mind in any similar circumstances and the following exception is to be included in the title certificate. Any loss or damage occasioned by failure to issue or assign the stock at the time of the delivery of the lease or assignment thereof to be insured hereunder. See 1979 NYLTA Bulletin JD-332
1/96
Chapter 7A - page 1 COOPERATIVES
UNDERWRITING SUPPLEMENT
UNDERWRITING DEPARTMENT 210 WEST FRONT STREET MEDIA PENNSYLVANIA 19063-3191
On Thursday, January 11, 1996 the New York Land Title Association held its 1996 Winter Educational Seminar. One of the subjects discussed at the seminar was entitled "Everything You Wanted to know about Co-ops but were afraid to ask". The speaker was Daniel Krimmer, V.P. and Senior Area Counsel, Chicago Title Insurance Company. Attached to this Supplement members of the underwriting department will find the handouts distributed by Mr. Krimmer. Please inset these materials at the end of Chapter 7A of the New York Manual. For any additional information relating to Cooperative issues you should refer to Real Estate Titles, 2d Edition, chapter 25 page 19. Additional material relating to cooperative policies and samples may be found in PLI publication no. 176 entitled Title Insurance, Special Problems at page 95
5/65
Chapter 5 - Page 1 CEMETERIES General
CEMETERIES
The subject of cemeteries is one which we have to consider only infrequently. However, it is of sufficient importance so that we ought to have some basic knowledge of cemeteries as they affect title. This is especially true in the suburban counties where it is not at all unusual to find a burial ground within the confines of a farm. In any case where we come across a cemetery or a burial ground in connection with our title, this should automatically wave a red flag of caution. Proceed slowly, and carefully consider the problems that pertain to a cemetery. We will also discuss, at least to some extent, problems pertaining to actual ongoing cemeteries, that are covered by the Membership Corporations Law. Occasionally, we are asked to insure the title to a burial plot in a cemetery. This we regularly decline to do because, primarily, the purchaser of a cemetery plot does not get a fee title to that plot. Usually what he buys is a burial right. A burial right in a church yard as distinguished from an independent cemetery is an easement, and not a title to the freehold, even though fee language is used. (Richard vs. N.W. Protestant Church, 32 BARB, 42) In another case, a deed of a burial plot in a rural cemetery incorporated under the Laws of 1847 was held to have conveyed an easement for burial only and not the fee to the soil. That case was affirmed by the Court of Appeals in 150 NY 577. Another case, Daniel vs. Hopkins in 257 NY 112 says that a burial lot is real property, but the purchaser of such lot acquires not a title in fee simple thereto but only the right to hold the lot for burial purposes. The rights in the lots are limited and circumscribed. Lots after an interment become forever inalienable and cannot be sold, but before any burial therein, a cemetery plot, like other real property, is subject to sale. In another case, it was said that the legislature can permit lands with bodies buried in them to be sold if proper provision is made for the removal of bodies. (Angel vs. Methodist Protestant Church, 47 App. Div. 459) In many cases, it may be appropriate to except: "No title is insured to the land lying within the confines of the cemetery." The cemetery might be described in a particular deed, it might be referred to in a particular deed, or it may be shown on a survey. In some cases, the lines of the cemetery may be indeterminate. It may merely be referred to as a plot of 100 X 100 in the northeasterly portion of the farm." They may refer to "the burial plot as now enclosed." In many cases like that, it may be necessary to phrase an exception which will cover the entire burial plot, even though you cannot accurately locate it with the information which you presently have at hand.
Where you except title to a burial ground, keep in mind that you belong to except an easement of access to it, unless it fronts on an existing right of way or street. If there is no easement that is specifically set forth, the owner of the property surrounding the
5/65
cemetery has the right to designate the location of the easement. In any case where a servient tenement is burdened by an easement that is not accurately located, the servient tenement owner has the right to locate the easement, within certain limitations. Where the burial ground fronts on a street on a new filed map or, the parcel to be developed shows a right of way leading from a street on the filed map to the burial ground, we may undertake to modify the exception so that the easement of access to the burial ground is limited to the street, or to the streets and the right of way. Thus, we are taking the practical position of lifting the indefinite burden over the entire parcel and giving the owner the right, which he has, to designate the means of access to this particular burial ground. We rarely get titles involving active cemeteries, largely because there are severe restrictions in the law with respect to the sale of cemetery lands, even by cemetery associations and because there are severe statutory restrictions with respect to the creation of new cemeteries, and because it is violative of public policy to permit any speculative activities with respect to cemetery land. Occasionally we see a survey which shows either an existing cemetery, or evidence of a possible cemetery, such as gravestones, markers, etc., within the premises. It is suggested that when you see something like that, that you initially except the title that may be outstanding with respect to that cemetery. WE can always modify our position later. One of the reasons for taking the basic position that no title is insured with respect to a burial ground even where there is no evidence in your chain of title with respect to it being a private cemetery for a particular family is the fact it may have been a public cemetery, by reason of dedication through use. And, under the provisions of Section 291 of the Town Law, the Town is given title to any abandoned cemetery in the town. Section 291 of the Town Law starts in this fashion: "The title to every lot or piece of land which shall have been used by the inhabitants of any Town in this State as a cemetery or burial ground of the State for fourteen years shall be deemed to be vested in such Town and shall be subject in the same manner as other corporate property of Town to the government and direction of the Town Board." There are similar provisions in the Village Law. There is a distinct possibility that there may be title in the Town or Village, if this is an abandoned cemetery. One of the reasons for this law is that the Town can expend Town funds in order to put the cemetery into decent condition again, rather than to permit it to just rot away. In some cases, the deed or other instruments in our chain of title either specifically refer to, or may contain recitals referring to, the creation of a cemetery or a burial ground within our property, or there may be a reservation of burial rights in a deed in our chain of title.
5/65
One of the more common cases where we find both the language of "exception" and the language of "reservation" or the confusing combination of both terms, is with respect to burial grounds. In Mitchell vs. Thorn, 134 NY 536, they used the language, "excepting and reserving the right of interment in the ground laid off for that purpose in the lands hereby conveyed, and also a right of way to the same to all the grantors of this deed and their heirs forever." The court said in this case that they referred to an exception and a reservation, and it is suggested that you read the case. In another case also reported in the Court of Appeals, Lonby Realty Corp. vs. Lane, in 250 NY 554, they used this language: "The parties of the first part reserving the 1/16th part of an acre or burial ground for a right of way to and from same." This did not "except" the title. Nothing on the ground anywhere on the farm indicated the location of any burials, gravestones, etc. Under these circumstances, the court held that the reservation was ineffective as too vague and indefinite and that the title was marketable. Each of these cases has to be considered on its own particular facts. With respect to these burial ground problems, one of the first things that we have to do is to try to make a determination as to the fee title. Is the title to that portion of the farm on which there may be a burial ground in our present certified owner or is it outstanding somewhere back in the chain of title, by reason of a proper "exception" of the title to the burial ground? In this respect, it becomes necessary to make sure that the instruments have been very carefully abstracted and any language with respect to "exception" or "reservation" taken off verbatim. If the examiner says, "subject to burial grounds," "subject to cemetery," don't take that as gospel and don't accept it. Make him go back and take that language off verbatim. In another case, Blackman vs. Striker, 142 NY 555, the language used was, "Saving, exception and reserving" a burying ground in a portion of the premises, to the heirs of the grantors' father. It was held that the grantors did not retain any beneficial interest in the fee of the burying grounds where no such claim had been made for over 100 years. Upon considering all of the facts, the court concluded that it was not an "exception" of title. If the title is clearly outstanding back in the chain of title and somebody wants to make title to this tract today, it would become necessary to trace that outstanding title down to date, either through additional deeds or through the genealogy of the person in whom title was outstanding. For instance, it may be that the bodies were previously removed or it is proposed to remove the bodies at the present time in accordance with an established procedure. If somebody wants to make that title good, they are going to have to make that title in the same manner as though any other owner had said, "Excepting a plot of 100 x 100," whether it was excepted for burial grounds or otherwise.
5/65
A complicating factor is the fact that lands actually used for cemetery purposes cannot be taxed, so that if our title comes through a tax title, that tax title may be ineffective with respect to that portion of our property which was used as a cemetery or a burial ground. Lands actually used for cemetery purposes are not subject to execution sale. If our title comes through an execution sale, it may be ineffective with respect to that portion which was actually used for cemetery purposes. Real Property Law, Section 450, is the authority for the statement which I made with respect to cemetery lands not being taxable or subject to execution sale, and under that same section, cases have held that you cannot mortgage such lands actually used for cemetery purposes. One case reported in 106 Misc. 534 said that under Section 450, Real Property Law, that it is highly improper if not actually fraudulent to devote mortgaged lands to cemetery purposes since the foreclosure of the mortgage might result in a desecration after burial. In those cases where we are satisfied that our title includes the burial ground and that the chain of deeds clearly includes it all the way down the line, we must nevertheless consider the rights of the remains that are buried "to remain", and the future rights to bury in favor of those people who might have been granted them, or their successors and heirs, who might succeed to those rights. In connection therewith, we have to consider the applicability of local ordinances in many areas which now make it unlawful to bury in private burial grounds. In case it is proposed to use the property after the removal of the remains that have previously been buried there, the removal must be done with notice to, or the consent of the family of the deceased to move the remains to a new cemetery. The provisions of Section 104, Membership Corporations Law, might be applicable with respect to the removal of remains. As to religious cemeteries or those under the jurisdiction of a religious corporation, Section 9 of the Religious Corporation Law would have to be considered in connection with such removal. There is authority in old cases that says, "Bodies can be removed from a private lot by physically removing them. In other lots, application must be made to the Supreme or the County Court." Another case says, "There is no law which prohibits the removal of human bones from a cemetery for lawful purposes and placing them elsewhere," (140 Misc. 557). These, of course, all presume that there was no specific right granted, either through the purchase of a burial plot or something like that, which would limit the owner of the fee of that property from having those remains removed. Another of the hazards is the possibility that the family may be entitled to damages in connection with such a burial. Gostkowski vs. the Roman Catholic Church, 262 NY 320, arose in Suffolk County. In that particular case, the priest decided that he didn't like to have the body in this particular part of the cemetery and without the consent of the family, had the body removed to another part of the cemetery. The court held that the family was entitled to damages by reason of the removal of the body under these particular circumstances.
5/65
ABANDONED CEMETERIES If we have fee title and there is no physical evidence of a cemetery or it is impossible to locate it, either from the records, the survey, or inspection, and if there is no reservation of burial rights, then we may be able under certain circumstances to pass the title. We would want proof that there are no bodies interred. In some cases, we demand probing or excavation, unless there is fairly strong evidence that no burial ever took place on the property and there has been no evidence of any graves or burial ground for long, long periods of time. I have already referred to some cases where it was held notwithstanding something in the record indicating that there was a burial ground, that the title might nevertheless be marketable, if for long periods of time there is no evidence at all to indicate that there is any burial ground. I have another case here that was decided in 218 Appellate Division 682 (Hutchinson Land vs. Whitehead). This was a case where an action was brought under the warranty in a full covenant and warranty deed for damages on the grounds that a part of the premises contained an old cemetery which might have been a public cemetery and that, therefore, there was a breach of the warranty. It was alleged that the land was used as a cemetery for over 100 years, that it had been dedicated to and accepted by the public as a cemetery through use, but not through any formal dedication, and that the remains of a large number of people were interred within the grounds. The answer denied liability on the grounds that the cemetery had been abandoned a long time ago and that the defendant had acquired an adverse title to it, even adverse to the right to maintain a public cemetery. The court said that "It was well settled that land may be dedicated to the public for cemetery purposes. It follows that the acceptance of such dedication can only be made by acts of the public in the use of the property for cemetery purposes . . . Dedication and acceptance are questions of fact . . . . The right which passes with this dedication is not an absolute title; it is a privilege or a license, not only to bury the dead, but to erect monuments, etc . . . While these rights are created by the acceptance of the dedication, they are subject to loss as a result of their abandonment." On abandonment, the rights reverted to the grantee. Then they quote from "Corpus Juris 58, 'So long as a cemetery is kept and preserved as a resting place for the dead, with anything to indicate the existence of graves, or so long as it is known or recognized by the public as a cemetery, it is not abandoned. But where a cemetery has been so neglected as entirely to have lost its identity as such, and is no longer known, recognized and respected by the public as a cemetery, it may be said to be abandoned." This is a quote from another case: "When these graves shall have worn away, when they who now weep over them shall have found kindred resting place for themselves; when nothing shall remain to distinguish this spot from the common earth around, and it shall be wholly unknown as a graveyard; it may be that someone, who can establish a good paper title will have a right to its possession, for it will then have lost its identity as a burial ground and with that, all right founded on the dedication must necessarily become
extinct." (Hunter vs. Trustees of Sandy Hill, 6 Hill 407)
5/65
We also have to consider the possible rights of a Town under the Town Law with respect to abandoned burial grounds. If there is no evidence that there is or has been a burial ground there, I do not think that the Town Law would apply because the purpose of the Town Law in cases like this is to preserve the sanctity and to maintain an old burial ground, and certainly there would be no such need if there is not now or has not been for long, long periods of time any actual physical evidence of a burial ground. You cannot maintain and preserve what no longer exists. Of course, if we cannot establish a good record title, we should not insure that part of the premises that is the former cemetery or burial grounds, unless we can establish a good title by adverse possession, based upon color of title (See Section 291, Town Law). That portion of the Membership Corporations Law that pertains to cemeteries is found in Article 9, which has been very extensively amended in recent years as a result of some of the scandals which occurred a number of years ago arising out of speculative activity in cemetery land. Cemetery corporations and cemetery associations come under the Membership Corporations Law. Section 70 provides for exclusion from the provisions of this law of a family cemetery corporation or a private cemetery corporation. It also does not affect cemeteries under the control of religious corporations or municipal corporations. Municipal cemeteries that are operated by a municipality would be regulated under the Municipal Corporations Law. The religious corporation cemeteries come under the Religious Corporations Law. With respect to the other cemetery corporations, they are affected by these provisions in the Membership Corporations Law. There is a Cemetery Board which is created within the Department of State which has jurisdiction over these cemeteries. In the Membership Corporations Law will be found the restrictions with respect to creating new cemeteries and the requirements for the consent of the Board of Supervisors, and the other very strict requirements with respect to any creation of a new cemetery. Section 81 would have to be very carefully considered in case we have a title involving a proposed sale of cemetery lands owned by one of these cemetery corporations. This is the section which limits the sale or disposition of cemetery lands and requires an application to the Supreme Court in connection with such sale and also creates a prohibition against selling any portion in which bodies had been buried. I suggest the section be read in its entirety in connection with any application that we might have involving a sale of such lands. Section 86, Subdivision 6, contains a provision that after a burial, a plot becomes inalienable as specifically provided within the article. In Section 85, we find the limitations on the resale of plots within the cemetery grounds although, as I indicated earlier, we will not normally become involved in such transactions. Section 104 is the section which pertains to the removal of bodies from private cemeteries. This is the section that requires that notice must be given to the next of kin of the deceased. In some cases, it may become necessary to apply to the court for the
manner in which such notice is to be given, such as by publication or otherwise. If it
5/65
becomes impractical to give actual notice, the Supervisor of any town containing a private cemetery may remove any body interred in such cemetery to any other cemetery within the town, if the owners of such cemetery and the next of kin of the deceased consent to such removal. The owners of a private cemetery may remove the bodies interred therein to any other cemetery within such town or to any cemetery designated by the next of kin of the deceased. Notice of such removal shall be given within 20 days before such removal, personally or by mail, to the next of kin of the deceased, if known. In any case involving title to cemetery lands, it is wise to consult counsel.
8/78
Chapter 6 - Page 1 COMMUNITY PROPERTY Title
COMMUNITY PROPERTY
Under a statute relating to dower, the legislature intended that where marriage occurred prior to September 1, 1930, a widow was to be endowed of a third part of all the lands of which her husband acquired prior to the effective date of the statute. (N.Y. Real Prop. Law 190, 1968; In re Fidler's Estate, 113 N.Y.S. 2d 634 (1952)). Under remedial legislation of 1930 in relation to decedents' estates, the estates of dower and curtesy were abolished. (In re Smiths' Will, 107 N.Y.S. 2d 993 (1951)). The estates of dower and curtesy based on the marital relationship were superseded in 1930 by statutes prescribing a surviving spouse's distributive status and right of election to take against the will of the deceased spouse. (In re Cotes' Will, 87 N.Y.S. 2d 555 (1949)). More modernly a definite trend toward equalization of rights with respect to contracting between a husband and wife is in evidence. A husband and wife each have the power, with respect only to real property which they occupy or are about to occupy as their home, to: 1) enter into and contract for a loan, 2) execute any necessary documents to obtain such a loan, 3) receive, hold and dispose of real property, and 4) execute all necessary documents for the disposition of real property. (N.Y. Gen. Oblig. Law 3-101, 1977). A married woman has all the rights with respect to real and personal property that she would have as an unmarried woman. These rights include: 1) the acquisition, use, enjoyment and disposition of the property, 2) making contracts in respect to the property with any person, including her husband, 3) exercising all powers and enjoying all rights concerning the property, and 4) being responsible for contracts made with respect to the property. All recoveries obtained by a married woman for damages to her person, estate or character are the separate property of the wife. The married woman may confess a judgment, and a judgment for or against her may be rendered and enforced. (N.Y. Gen. Obilg. Law 3-301 1977). A contract made by a married woman does not bind her husband or his property. (N.Y. Gen. Oblig. Law 3-305, 1977). A husband who acquires the property of his wife through an antenuptial contract or otherwise, is liable for her debts which were contracted before marriage. However, his liability is limited to the extent of the property he acquires. (N.Y. Gen. Oblig. Law 3307, 1977).
The marriage relationship will not affect the construction of instruments and transactions involving personal property
8/78
Chapter 6 - Page 2 COMMUNITY PROPERTY Title
If an instrument creates a joint tenancy or tenancy in common in personal property in unmarried persons, the title will also be in joint tenancy or tenancy by the entireties if the persons are married. If a right of survivorship would not be created in unmarried person, it will not be created in a husband and wife. (N.Y. Gen. Oblig. Law 3-311, 1977). The separate property of the wife is not subject to the husband's control nor liable for his debts. Her separate property includes: 1) the real and personal property a) Now owned by the wife b) Acquired by her c) Owned by the wife at the time of marriage 2) rents, issues, proceeds and profits of this personal and real property. (N.Y. Dom. Rel. Law 50, 1977). The general effect of the Married Women's Property Act was to deprive the husband of all his common law right to the wife's property during her life. the legislature intended: 1) to terminate this common law right, which gave the wife's property to the husband; and 2) to give the wife the unrestricted right to and control over the property, just as if the marriage didn't exist. The wife is not entitled to a one-half interest in personal property where the husband buys it, even though the property was intended to be and was used by the husband and wife as a family unit. (Manheim v. Manheim, 302 N.Y.S. 2d 573 (1969)).
8/78
Chapter 7 - Page 1 CONCURRENT ESTATES Title
CONCURRENT ESTATES - JOINT TENANCY

1. The common law preference for joint tenancies has been changed by EPTL 62.2. Thus a deed or devise "to A and B" in their own right creates a tenancy in common unless a joint tenancy is expressly called for. If A and B take as trustees, etc., they take still as joint tenants. Joint tenancies cannot be created by descent. EPTL 6-2.2. When X dies and A, B and C are his intestate distributees, they take as tenants in common. Creation of a joint tenancy requires the existence of the unities of time, title, interest and possession. This means that A and B must acquire their interests at the same time, from the same source, for the same duration and they each have equal rights to possession. The distinguishing mark of a joint tenancy is the right of survivorship. a. b. If property is deeded "to A and B as joint tenants with a right to survivorship" and A later dies, B owns the entire fee. In this instance should A have by will bequeathed his share to Y, or absent a will, Y was A's sole next-of-kin, Y would take nothing. A's interest is neither devisable nor descendible.
2.
3.
4.
5.
Termination a. b. By voluntary or compulsory partition. RPAPL 901. By conveyance (1) A and B own a joint tenancy. A deeds his undivided share to X.X and B own undivided shares but as tenants in common. X and B did not acquire their shares at the same time from the same source. A, B and C own a joint tenancy. A deeds his undivided share to X. B and C continue to own a 2/3 undivided interest as joint tenants. X owns a 1/3 undivided interest with them as tenants in common. Then B dies. As joint tenant with the right to survivorship. C now owns a 2/3 interest, but now he is tenant in common with X as to the whole parcel. Or, rather than die, B deeds his interest to Y. In this case X, Y and C would be tenants in common.
(2)
8/78
(3)
Again, A, B and C are joint tenants. A deeds his share to B. B thereby becomes a tenant in common in A's 1/3 share, while B and C continue with regard to the 2/3 balance to be joint tenants. B then dies devising his "share" to X. The 1/3 B owned as tenant in common belongs to X: but B cannot devise what he owned as joint tenant with C. C acquires this share by survivorship. Thus X owns 1/3 and C 2/3 of the parcel as tenants in common.
c.
RPAPL 1211, infra.
NB See Tenancy in Common this manual TENANCY BY THE ENTIRETY 1. A conveyance or devise of real property to a husband and wife creates a tenancy by the entirety in the absence of words creating a different estate. Bertles v. Nunan, 92 N.Y. 142 (1883) a. b. By a conveyance to himself or herself and spouse, one owner may create in them a tenancy by the entirety. A conveyance or devise to two persons as husband and wife, who are in fact not lawfully married at the time, creates either a tenancy in common or a joint tenancy. Crawley v. Shelby, 37 App. Div. 2d 673 (1971). X executed deed to "Tom S. and Helen S., his wife." Later in the habendum clause the deed recited that they were "to have and to hold the premises herein granted . . . as tenants by the entirety." Tom and Helen were not married so that presumptively a tenancy in common arose. But the later clause calling for a tenancy by the entirety manifested an intent to create a right of survivorship. Held, a joint tenancy was created. X conveyed house to H and W as husband and wife. W died intestate and her death certificate listed her as "housewife" leaving H as her surviving "husband." H then conveyed the house to Y, delivering to Y an affidavit the W had died while married to H. H and W had never married and W left as next-ofkin three sisters. Absent language indicating survivorship was intended, the deed to H and W created a tenancy in common. Held, Y has acquired only H's interest in the house and held it as tenant in common with W's sisters. His remedy was to sue H for fraud. Thurman v. M. Crath, 70 Misc. 2d 849 (1972).
c.
8/78
d.
In re Buttonow, 267 N.Y.S. 2d 740 (1966) (M as grantor conveyed to M and H and W, jointly. Held: M holds 1/2 as tenant in common with H and W who hold their 1/2 as tenants by the entirety.)
2. 3.
Estates by the entirety are peculiar to real property. EPTL 6-2.1 Neither the husband nor the wife can, without the consent of the other, dispose of any part of the estate so as to affect the right or survivorship in the other. Hiles v. Fisher, 144 N.Y. 306 (1895) a. The right of survivorship may be affected by a joint will or by a contract. Swerdfeger v. Swerdfeger, 4 App. Div. 2d 535 Each spouse is entitled to 1/2 of the rents and profits and to the use of an undivided 1/2 during their joint lives. Finnegan v. Hume, 252 App. Div. 385 aff'd, 277 N.Y. 683 (1938) Each spouse may mortgage his or her interest, subject to the right of survivorship in the other. Hiles v. Fisher, supra A judgment against one tenant by the entirety may be enforced against his or her interest. Finnegan v. Hume, supra One tenant by the entirety may sue the other for waste. Kawalis v. Kawalis, 183 Misc. 896 (1945)
b.
c.
d.
e. 4.
A tenancy by the entirety may be terminated by: a. b. c. Voluntary partition. G.O.L. 3-309 A conveyance in which both husband and wife join. An absolute divorce causes the property to be thereafter held by the parties as tenants in common. Stelz v. Shreck, 128 N.Y. 263 (1891) (1) An annulment will have the same effect. Awramenko v. Awramenko, 192 N.Y.S. 2d 15 (1959) Texido v. Merical, 132 Misc. 764 (1928) In re Kutick, 226 N.Y.S. 2d 869 (1962)
8/78
(2)
Statutory dissolution of marriage based upon 5 year absence does not terminate tenancy by the entirety and transform it into a tenancy in common. In re Pozer, 223 N.Y.S. 2d 525 (1962) In re Feltman, 202 N.Y.S.2d 503 (1960) A foreign divorce decree, where the court does not have jurisdiction over the person of both parties, does not affect the rights in New York property. Anello v Anello, 253 N.Y.S. 2d 759 (a) If, thereafter, both remarry, their tenancy by entirety transformed into tenancy in common. Topilow v. Peltz, 270 N.Y.S.2d 116
(3)
d.
RPAPL 1211, infra.
NB see also Tenancy by the Entirety this manual TENANCY IN COMMON 1. A tenancy in common exists where property is owned concurrently by two or more persons without any right of survivorship. a. Whenever an estate is granted, devised or descends to two or more persons in their own right a tenancy in common is created, unless expressly declared to be in joint tenancy. EPTL 6-2.2 Each tenant owns undivided share of entire estate which is descendible, devisable and alienable. One tenant may maintain action against co-tenant who received more than his just share of rents and profits. RPAPL 1201 Carrying charges fall upon each co-tenant in proportion to his interest.
b. c. d. 2. D.
May be terminated by voluntary or compulsory partition.
Action to Extinguish Missing Co-tenant's Estate Upon Deposit of its Value: RPAPL 1211 (What if one tenant by entirety disappears? The remaining spouse cannot sell the premises without establishing his or her death. Further, the remaining spouse by providing a mechanism to extinguish the
interest of the absent one by paying its value into court. Since joint tenants
8/78
or tenants in common could always sue the partition using substituted service, this enactment merely provides them with an additional remedy.) "1. Where real property is held by two or more persons in their own right as tenants in common, joint tenants or tenants by the entirety and one of such tenants is missing under circumstances which afford reasonable ground to believe that he is dead, the other tenants or tenant may maintain an action in this supreme court to obtain a determination of the value of the estate of the missing co-tenant and a judgment extinguishing the estate of the missing co-tenant upon payment into court for his credit of the amount so determined to be the value of his estate." "Persons known or unknown who are or may be the devisees or distributees of a missing co-tenant may be joined as defendants in such action." A finding of reasonable ground to believe that the missing co-tenant is dead may be made, for purpose of this section, either (a) upon proof that the co-tenant has been absent from his usual place of abode for seven successive years last past, and that a diligent search has been made to discover evidence that he is living and that no such evidence has been found, or (b) upon proof of other circumstances from which the probability that the missing co-tenant is dead may reasonably be inferred, although the period of his absence is less than seven years, provided that such period is not less than one year." Relief extinguishing the estate of the missing person shall be deemed equitable and shall be granted in the discretion of the court. However, no such relief shall be granted if the court shall find as a fact that the missing person is dead. In such event, the judgment dismissing the complaint shall state such determination, but shall not be deemed an adjudication of death of the missing person for any purpose other than the dismissal of the complaint and shall not be controlling in any other action or proceeding whether or not between the same parties, in which the fact of death of the missing person is in issue." The value of the estates of tenants by the entirety shall be deemed equal. The proportionate shares of joint tenants and tenants in common shall be determined in like manner as in an action for partition." A judgment extinguishing the estate of the missing co-tenant shall be conclusive even though the missing person was in fact alive, or was in fact dead, at the date of the entry thereof, and shall be conclusive
2.
"3.
"4.
"6.
"8.
against (a) any person claiming under the missing person by title
8/78
accruing or conveyance recorded after the filing of the judgment-roll, or of the notice of pendency of the action, and (b) any person claiming under the missing co-tenant who is made a party to the action. The judgment shall also have like effect as a conveyance made by the missing co-tenant or by the missing co-tenant and the other co-tenant or co-tenants conveying the premises to the co-tenant or contents in accordance with their interests resulting from the judgment. The court may direct that an instrument of conveyance in conformity with the judgment be executed and delivered by the sheriff in the name of the co-tenant. Added L. 1961, c. 869, eff. April 24, 1961." RPAPL 1211 applies to estates created before or after its effective date. NB See Tenants in Common this manual.
8/79
Chapter 18 - Page 1 EXECUTORY CONTRACTS Legal Bulletin
1.
Section 294, Real Property Law permits the recording of executory contracts for the sale, purchase or exchange of real property, or a memorandum thereof; or an option to purchase or lease real property. Such recorded contract or memorandum, or an agreement extending the same, is effective as notice only up to and including the thirtieth (30) day after the day fixed therein for the conveyance of title. (Subdivision 5). The recorded option is only effective as notice to and including the thirtieth (30) day after the last day fixed therein for its exercise. After the option is exercised, there is also provision within the thirty (30) day period subsequent to the last date fixed for the exercise of the option to extend the effectiveness of the recording to the thirtieth (30) day after the date fixed for the ultimate conveyance of title or delivery of the lease by recording a declaration as therein provided. (Subdivision 7). Subdivision 8(a) provides: "After the recording of an executory contract or memorandum has ceased to be effective as provided in subdivision five, or the recording of an option to purchase or lease real property has ceased to be effective as provided in subdivision seven, such executory contract, memorandum or option shall be: (1) void as against a subsequent purchaser in good faith and for a valuable consideration, who has no other notice of an estate or interest of the contract vendee or optionee in the premises to which such contract, memorandum or option refers, or of any claim thereof, and (2) ineffective to give notice to such subsequent purchaser of any estate or interest of the contract vendee or optionee in such premises, or of any claim thereof, or to create any duty of inquiry with respect thereto"** ** For similar case law cite in New Jersey Read case entitled "Garden of Memories Inc. v. Forest Law memorial Park Assn.", 109 Su. 523.
2.
3.
4.
5.
Examiners must abstract recorded executory contracts and options very carefully. This applies especially to the closing or performance dates, and any other provisions that may have the effect of extending the "performance date" to or beyond the happening of certain stated events. If such careful examination discloses that such final "performance date" is at least three years old, and provided that no action is found pending with respect thereto, the examiner may ." mark the instrument "Expired -- Performance date Readers may pass recorded executory contracts and options, after consultation with Counsel, if satisfied that (a) the final "performance date" is more than thirty (30) days past (b) no action is found pending pertaining thereto, and (c) there is nothing in our file indicating actual notice to our proposed insured of the contract or
option. Consultation with Counsel is not required if the final "performance date"
8/79
Chapter 18 - Page 1 EXECUTORY CONTRACTS Legal Bulletin
is more than one year past. In the cases above described no exception need be raised. 6. 7. In all cases other than described in paragraph 5 above, the recorded executory contract or option must be reported and excepted in the title report and policy. In any case where our proposed insured or his attorney gives us notice or advice of the existence of an outstanding contract or option, even though it is recorded, we must report and except it, as it would not then have the benefit of Section 294, subdivision 8(a) of the Real Property Law because such purchaser presumably has notice beyond that provided for in Section 294, subdivision 8(a). Unrecorded executory contracts and options of which we have notice, from whatever source, must be reported and excepted, unless satisfactorily disposed of by one of the following: 1) 2) 3) 4) 5) NB Final "performance date" is at least six (6) years past; Release or cancellation by vendee, or optionee, in recordable form; Final judgment against the vendee or optionee in a bar claim or other action adjudicating the rights of the parties; Satisfactory proof that the contract was mutually cancelled. Such proofs must be approved by Counsel; Such other proofs and requirements that may be determined by Counsel as appropriate to the particular case.
8.
Refer also to option in Title Insurance Underwriting Principals and Exception Language.
12/91
Chapter 9 - Page 1 CREDITOR'S RIGHTS Title - Underwriting
CREDITOR'S RIGHTS
The "Creditors' Rights" problems are largely a matter of issue recognition; i.e., the ability to recognize the flaw in the transaction which may render it vulnerable to an attack in the future. A transfer of an interest in real property may be considered fraudulent if the grantor transfers the interest with the intent, either actual or constructive, to obstruct the right of creditors of the grantor to reach the grantor's assets. Common "Creditors' Rights" Problem Transactions are illustrated as follows. It is by no means intended to be exhaustive: PREFERENCES, are transactions where the property is acquired by a creditor of the (former) owner. It is easy to see that mortgage-foreclosure sales, judgement execution sales, and deeds in lieu of foreclosure may fall into this category. Because only one creditor ends up owning the debtor's property, this may be viewed as a "preference" of one creditor's claim over the claims of others. Since the purpose of bankruptcy proceedings is to provide an orderly and equitable scheme for the distribution of the debtor's assets, it is obvious why these transactions are vulnerable. (See 11 U.S.C. Sections 547 & 548). Transactions where the debtor does not receive a sufficient consideration. Collateral Guaranty Mortgages fall into this category. If a party agrees to guaranty the debt of another, he may not receive consideration therefor. Thus, where XYZ Corp. obtains a bank loan, which is secured by a Mortgage on the residences of Mr. X, Mr. Y and Mr. Z (shareholders of XYZ Corp.), the consideration does not flow directly to the mortgagors, but to the corporation. While it is true that Messrs. X, Y and Z receive an indirect benefit from the loan (as shareholders of the corporation), this may be insufficient to validate the transaction. Leveraged Buy-Outs also fall into this category. LBO's frequently contain financing arrangements in which the mortgagor does not receive the proceeds of the loan. (See 11 U.S.C. Sections 547 & 548). FRAUDULENT CONVEYANCES The "Creditors' Rights" exception also extends to fraudulent conveyances which are voidable under State Law. Some common examples of transfers which a court might, under certain circumstances, hold to be fraudulent are: A. B. A transfer of title to property without consideration at the time a suit is pending against the grantor. A conveyance by a debtor to himself and his wife as tenants by the entireties to shield the property from the debtor's creditors.
Chapter 9 - Page 2 CREDITOR'S RIGHTS Underwriting
C.
The mortgaging of a subsidiary company's land to secure the subsidiary's guarantee of the parent's debt. A parent company's guarantee of the debt of a subsidiary company is usually not considered to be fraudulent. However, before insuring, consult with Home Office Counsel.
D.
Mortgages of a corporation's property where the mortgage funds are used to purchase the stock of the corporation by another entity. These types of transactions are commonly referred to as LBO's (leveraged buy-outs). In such cases, the corporation does not receive the mortgage funds but has encumbered its property to secure payment. Generally speaking, the mortgaging of property for purposes of purchasing the assets of another corporation, as distinct from purchasing the stock, will not be considered fraudulent. However, if all of the assets of a corporation are being purchased, the mortgage should not be insured without the consent of Senior Underwriter or the CEO.
E.
The mortgaging of a debtor's property to secure an antecedent debt. Although not technically considered a fraudulent transfer, it might be deemed to be a preference under the bankruptcy code and thus voidable by a subsequent trustee in bankruptcy. The mortgaging of partnership property to provide funds to pay a withdrawing partner. Any transfer of partnership property, either by way of grant or mortgage to a general partner.
F. G.
Other types of transactions that create creditors' rights problems, but are not thought of as transfers of property are: A. B. A release or renunciation by a debtor of an inheritance. The release of a valuable long-term lease by a debtor lessee.
Of course, not every transfer of the types described above will be deemed to be fraudulent. If a transfer is made for the specific purpose of defrauding a creditor, there is little question that it will be voided. There are many situations, however, where there may not be an intent to defraud
creditors, but based on the factual situation, a court would find a constructive fraud.
Chapter 9 - Page 2.1 CREDITOR'S RIGHTS Underwriting
The Bankruptcy Code, the Uniform Fraudulent Transfer Act and the Uniform Fraudulent Conveyance Act set out in some detail the situations where transfers will be considered a constructive fraud. Generally speaking, a transfer will be voided based on constructive fraud where the transfer was made either without consideration or reasonable equivalent consideration if the transferor was insolvent, or would be made insolvent due to the transfer. Home Office Counsel should always be consulted where: 1. 2. 3. land is conveyed either without consideration or with inadequate consideration, or land is mortgaged and it appears the mortgagor will not receive the mortgage funds, and in any of the factual situations described above.
CREDITORS' RIGHTS EXCEPTIONS Where a possible fraudulent transfer or preference question exists with respect to the insurance of a mortgage, the following exception should be added to the pre1990 policy: "Consequences of an attack on the validity or priority of the lien of the insured mortgage based on the avoidance provisions of the Federal Bankruptcy Code or similar state insolvency or creditors' rights laws." Where a possible fraudulent transfer or preference exists with respect to the conveyance of land, the following exception should be taken in the pre-1990 policy: "Consequences of an attack on the estate or interest insured herein based on the avoidance provisions of the Federal Bankruptcy Code or similar State Insolvency or Creditors' Rights Laws." CREDITORS' RIGHTS EXCLUSION The Creditors' Rights Exclusion (the "Exclusion") was adopted by the American Land Title Association ("ALTA") in April of 1990. It would be added as an exclusion to both the Lender's and Owner's policy forms. The version to be added to the Lender's policy is as follows:
Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. The language of the Exclusion to be added to the Owner's Policy is as follows: Any claim, which arises out of the transaction vesting in the insured, the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. The Exclusion seeks to guard title companies against claims and losses on policies resulting from the loss of an insured position through application of the Bankruptcy Code. Title companies argue that they are not equipped to uncover the hidden risks related to attacks on the structure of transactions under the federal bankruptcy and state insolvency laws. Additionally, title companies assert that these are not the types of risks against which title insurance is intended to protect.
Creditors' Rights Issues Affecting Title Insurance

Table of Contents Introduction to Subject Matter Fraudulent Conveyance Issues: [1] Leveraged Buy-outs [a] Description of Transaction [b] Fraudulent Conveyance Issues [c] Equitable Subordination Issues [d] Title Insurance Coverage (l) Creditors Rights Exclusion (2) Creditors Rights Exception (3) Affirmative Coverage Against Lien Avoidance: Form of Endorsement [e] Title Insurers Analysis of Financial Condition [2] The "Durrett" Problem and the 70% Rule: [a] The Holding [b] The Title Insurance Issues (pre 1990 policy) [c] The Title Insurance Considerations [d] The Title Insurance Exception(s) to be used in the 1970 ALTA Loan Policy (rev. 10-17-84) Durrett Set Aside - Supreme Court Resolves Fraudulent Conveyance Issue [a] Opinion specifically limits itself to the foreclosure of mortgages [b] Regularity of Proceedings essential including Mennonite principles [c] Foreclosure proceedings must be non-collusive, regularly conducted in conformance with state law Deeds in Lieu of Foreclosure: [a] The Legal Issue (pre l990 policy) [b] Form of Creditors Rights Exception [c] Requirements for/Conditions of Removal Parcel Assemblage - The Lease Termination Problem [a] The Legal Issue (pre l990 policy) [b] The Title Insurance Issue
[3]
[4]
[5]
[6] [7] [8] [9] [10]
Grantors Option to Purchase Agreement(s) Contracts for Sale - Vendee in Possession Transactions between a General Partner & Partnership Corporate Upstream (or cross-stream) Transactions Mortgagee's Option to Purchase [a] Clogging the Equity of Redemption Issue [b] Title Insurance Considerations Mortgages to Secure Antecedent Indebtedness
[11]
INTRODUCTION Creditors rights issues affecting title insurance traditionally required reference to the various "TREATISE" on Bankruptcy, Debtor and Creditors' Rights Law, Mortgage Foreclosure Law, the Law of Fraudulent Conveyances and the Law of Distressed Real Estate. As a result of the debt financing techniques used in the 1980's and the subsequent loan restructuring and workout arrangements there was a need to consolidate the various reference works in order to outline the creditors rights issues which present themselves to the underwriter of title. Because of the increasing pressure put on title insurers to (i) eliminate or modify "bankruptcy" exceptions customarily included in title policies issued for certain types of transactions, and (ii) provide affirmative coverage with respect to certain potential problems, underwriters must carefully monitor developments in creditors' rights law affecting real estate transactions to determine if they are increasing their exposure to risk of loss. Creditors' rights exceptions and affirmative coverage endorsements entail both a legal and underwriting risk analysis. The underwriting risk analysis takes into consideration the potential cost to the insurer of the fulfillment of its defense obligations against adverse (third-party) claims, even if the legal analysis shows that the insurer should ultimately prevail. The general title rule has always been to "not make the company go to the court of appeals to prove you're right". Thus the availability of certain coverage will depend not only on the correctness of the legal analysis but also on whether it is likely that the transaction may be attacked by a trustee in bankruptcy or a debtor in possession as either a preference or fraudulent transaction under the bankruptcy code.
FRAUDULENT CONVEYANCE ISSUES [1] Leveraged Buy-Outs: [a] Description of transaction In a leveraged buy-out (LBO), the stock of an acquired corporation, or the partnership interests in a partnership (or the equity interests involved in any other form of ownership, such as a trust), may be redeemed, repurchased, eliminated or otherwise acquired from the holders thereof for cash, debt obligations and/or other property, by the issuer of such stock or interest or the acquirer thereof. Using the corporate form as an example of the above "in a LBO, the stock of a corporation . . . may be . . . acquired from the holders thereof for . . . debt obligations (issued by) . . . the acquirer thereof". Stated another way, an LBO refers to a transaction in which an incoming investor group, sometimes including the existing management team, purchases the firm with debt collateralized by the company's assets, i.e., the acquisition of the company is financed with borrowed money secured by the assets of that company including a mortgage on the real property owned by that entity. These types of transactions are attractive for several reasons. Ordinarily, the buyers' equity is small in relation to the purchase price. Furthermore, the purchase of the corporation's stock may avoid (i) payment of real estate transfer taxes, (ii) reassessment for real estate tax purposes, and (iii) certain types of due- on-sale clauses. From a title insurance perspective, there are two problems encountered under such a scenario. The first involves the question of consideration and the second involves the question of equitable subordination. Both problems impact upon the rights of creditors, both existing and subsequent. Both problems are referred to as creditors rights problems. [b] The Creditors' Rights Problems - Fraudulent Conveyances In analyzing the structure of a mortgage loan in an LBO transaction, a mortgage lender will consider the risks that (i) its lien may be avoided as a fraudulent transfer under the Bankruptcy Code, and (ii) its claim may be equitably subordinated to the claims of other creditors of the debtor.
In the event a petition for bankruptcy is subsequently filed, the debtor in possession or the trustee may, pursuant to section 548 of the bankruptcy code, avoid and recover from the recipient thereof (i.e. the lender) any payments, incurrence of indebtedness or other transfer of property made voluntarily or involuntarily by the debtor on or within one year before the date of filing said petition if: (1) (2) The transfer was made by the debtor "with actual intent to hinder, delay or defraud" any creditor of the debtor; or The debtor received "less than a reasonably equivalent value" for such transfer and (a) (b) was insolvent on the date such transfer was made, or became insolvent as a result thereof; was engaged or was about to engage in a business or a transaction for which the remaining property of the debtor was "an unreasonably small capital"; or intended to or believed that it would incur debts beyond its ability to pay as such debts matured.
(c)
The Bankruptcy Code provision is derived from, and is substantially similar to, the Uniform Fraudulent Conveyance Act (UFCA). These provisions have in many respects been preserved in those states which have adopted the Uniform Fraudulent Transfer Act. Applicable statutes of limitation vary by state, but in a number of instances are longer than the CODE'S one-year limit. For example, the New Jersey statute of limitation is four years while the New York statute of limitation is six years. Also, state fraudulent conveyance acts are not generally limited to the bankruptcy context and are generally enforceable by creditors, as well as by a bankruptcy code debtor in possession or trustee, under section 544. Section 544(a) is the "strong arm" provision granting to the trustee the avoidance powers of certain hypothetical creditors and purchasers under state law. Section 544(b) gives the trustee the rights, if any, actual creditors have to set aside prepetition transfers, e.g., under state fraudulent conveyance law.
In most LBO transactions, particularly those involving publicly-held corporations, the potential for collateral attack based on "actual fraudulent intent" will be remote. However, even in the absence of actual fraudulent intent a transfer may be avoided as "constructive fraud" if the transferor did not receive reasonably equivalent value (the UFCA uses the term "fair consideration") for the property transferred and the transferor was rendered insolvent, undercapitalized or incapable of meeting its contemplated debts as they matured (11 U.S.C. 548 supra.).In the context of a mortgage loan transaction, this means that the mortgagor, in incurring the indebtedness and granting the mortgage lien to the lender (the transfer), did not receive reasonably equivalent value because the proceeds of the loan went to the selling shareholders or outgoing partners of the mortgagor (as the case may be), and not to the mortgagor (i.e. the corporation or partnership) itself. TITLE RULE: The way a title company must look at this kind of problem is through the eyes of a bankruptcy judge. The bankruptcy court will look through the transaction to find the substance of it. Form aside, if the analysis of the transaction determines that the people who are being benefitted are the outgoing parties, the transaction will be determined to be a "constructive fraud". As an underwriter, in order to determine whether a transaction constitutes a fraudulent transfer ask yourself: (l) was there the incurrence by the issuer (either directly or through a guarantee) of substantial indebtedness resulting from the mortgage financing of the acquisition of the stock (or partnership) interests? was there the grant of a mortgage lien? was there a substantial payout to former stockholders or partners (either directly by the issuer or from the proceeds of such indebtedness)?
(2) (3)
Such incurrence, grant and payout constitute transfers. If the answer to the above questions are yes and as a result of the transaction the issuers capital has been substantially reduced so as to render him insolvent or undercapitalized, the issuer will be viewed as not having received reasonably equivalent value or fair consideration for the incurrence of such debt and granting of the mortgage lien.
If, prior to the LBO, the firm was not highly leveraged or overly encumbered by debt in the form of mortgages on its property, the unsecured creditors could ultimately look to the property of the entity to satisfy their debt if the need arose. However, if, as a result of the LBO there is not sufficient capitalization to provide for unsecured creditors down the road and the property is highly leveraged and encumbered, the mortgage lender's claim on the debt may be invalidated or subordinated and its lien avoided (see U.S. v. Gleneagles Investment Co), on the grounds that the financing vehicle involved overreaching by the lender to the detriment of other creditors. NB See bulletin on Leveraged Buy-outs for further discussion. [c] The Creditors' Rights Problems - Subordination As noted above, a mortgage lender may run the risk that its claim will be equitably subordinated to other claims against the debtor. Equitable subordination results from some misconduct, usurpation of control, mismanagement or overreaching by a lender to the detriment of other creditors. The second title exception below set forth includes an exception for equitable subordination. If the subordination takes the form of reclassification of the loan as "equity", it is probably more accurate to refer to the process as a "recharacterization" rather than "subordination". Recharacterization most often occurs in cases involving "loans" from an affiliate of the debtor. NB refer also to bulletin on RECHARACTERIZATION It is well established that a bankruptcy court has the power to disallow or subordinate a claim when it determines that the conduct of the claimant or the special position which the claimant occupies in relation to the bankrupt and its other creditors was inequitable or unconscionable and that as a matter of equity the claim should be disallowed or subordinated (cases cited "Collier, Real Estate Transactions and the Bankruptcy Code" section 5.02[1] n.l2).
Subordinations may be ordered by a court by reason of the claimant's relationship to the bankrupt as dominant parent, controlling stockholder or other fiduciary, coupled with the claimant's failure to adhere to the standard of conduct required of persons in such relationship (cases cited "Collier" supra. n.l3. Title Concern: In the context of a title insurance exception providing for the application of principles of equitable subordination, the focus of concern is not the conduct of the lender subsequent to the making of the loan and issuance of the policy, because the policy does not insure against subsequent events. Furthermore, in an arms-length institutional mortgage loan transaction [without "equity participation" (NB see bulletin)], there is no issue of a parent, stockholder or other fiduciary relationship requiring a greater scrutiny of the lender-debtor relationship. The concern of the insurer of title will be that the mortgage loan "as structured at origination" will be found to be actually a capital contribution or other proprietary interest in recognition of what the court deems to be the "essential nature of the transaction" (i.e., e.g. recharacterization). This was precisely the issue illustrated in the case of United States v. Gleneagles Investment Co., 803 F2d 1288 (3rd Cir. l986). In that case an affiliated lender made a mortgage loan to a corporate subsidiary (also secured by mortgages given by other subsidiaries), who thereafter relent the proceeds to the parent corporation (in return for an unsecured note), which, in turn, used the bulk of the proceeds to pay selling shareholders for their stock. In hindsight, the court found that the borrower and lender knew that the borrower was in default under certain loan agreement covenants from and after the moment the loan was closed, that the corporate parent had no means to repay the advance received from its subsidiary, and that the borrower had an inadequate supply of cash with which to thereafter conduct its business. Although the court devoted substantial discussion to the fraudulent conveyance aspects of the transaction, it also appears that the lender's claim (apart from its lien) was subordinated to the claims of other creditors. Simply stated, this case may be viewed as involving an LBO loan that the parties knew would probably not be repaid, and thus the lender's position was viewed as actually constituting equity. It is interesting to note that in this case the lenders title company agreed to remove the fraudulent conveyance exception from its title policy in exchange for a personal indemnity (565 F. Supp at 571).
The courts application and emphasis of "the lender(s) knowledge" cannot be stressed enough. This concept was expanded upon later in the case entitled In Re O'Day Corp involving Meritor Bank. In that case the Bankruptcy Court in Boston determined that the bank "knew or should have known" the borrower was left undercapitalized and would be left unable to pay its bills as they matured. U.S. Bankruptcy Judge James N. Gabriel granted unsecured creditors the right to collect their debts ahead of the bank that lent the money to the buy-out group to finance the highly leveraged transaction that failed. Title insurers are ill equipped in many instances to identify creditors rights' problems at the inception of the transaction. In his paper entitled "Creditors and Debtors Rights in Title Insurance", James M. Pedowitz Esq., formerly First Vice President and Chief Counsel for the Title Guarantee Company in New York City explains "there are many situations where the title insurer will not realize there is a creditors rights issue until the notice of claim arrives". There are three main reasons for this: (i) many lawyers are not sufficiently well-versed in the developing law of creditors' rights and do not recognize the pitfalls; (ii) most lower-level title company personnel are not sufficiently trained to recognize situations that may prejudice junior creditors or other persons with interests deserving of protection; (iii) the inadequacy of consideration, or the insolvency or potential insolvency of the transferor or mortgagor, is not usually apparent from the papers seen by the title insurer or its agent. It is precisely for these reasons that ALTA Forms Committee adopted the "Creditors' Rights Exclusion" for inclusion in the l990 and subsequent title insurance policies. (1) The Creditors' Rights Exclusion
The Creditors' Rights Exclusion (the "Exclusion") was adopted by the American Land Title Association ("ALTA") in April of l990. It was added as an exclusion to both the Lender's and Owner's policy forms. The Lenders version reads as follows: Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws.
The language of the Exclusion to be added to the Owners Policy reads as follows: Any claim, which arises out of the transaction vesting in the insured, the estate of interest insured by this policy, by reason of the operation of federal bankruptcy law, state insolvency, or similar creditors' rights law. The Exclusion serves to safeguard title companies against claims and losses on policies resulting from the loss of an insured position through the application of the Bankruptcy Code. Title Companies have successfully argued that they are not equipped to uncover hidden risks related to attacks on the structure of transactions under the federal bankruptcy and state insolvency laws. Additionally, these types of transactions are not the type of risks against which title insurance is intended to protect. Some Lenders Counsel have suggested and successfully argued that where the insurer knew of the risk present and nonetheless agreed to insure as a "business risk" the form of Exclusion above set forth was too broad in scope and should be modified. This has resulted in what is known as the NEW YORK MODIFICATION. LOAN POLICY - NEW YORK ENDORSEMENT Paragraph number 7 of the Exclusions From Coverage is deleted and the following paragraph is substituted in its place: 7. Any claim, which arises out of the transaction creating the interest of the mortgage(s) insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (i) (ii) (iii) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or the subordination of the interest of the insured mortgagee as a result of the application of the doctrine of equitable subordination; or The transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure: (a) (b) to timely record the instrument of transfer; or of such recordation to impart notice to a purchaser for value or a judgment or lien creditor."
NB The NEW YORK ENDORSEMENT does not include language sufficient to address the issue of equitable subordination under section 544(b) of the Bankruptcy Code. If this endorsement is used in lieu of the EXCLUSION and a subsequent trustee in bankruptcy of the borrower pursues remedies available under state law and the statutes of limitations relating thereto, the title insurer will have assumed the risk. The risk is not in accordance with the types of risks normally assumed under "standard coverage". Accordingly, a risk premium should be charged in accordance with the risk assumed. (2) The Creditors' Rights Exception 1970 ALTA Loan Policy (re.10-17-84) In connection with a mortgage loan transaction in an LBO, title insurers are frequently requested by the mortgage lender to eliminate the title exception which should be included in the mortgagee's title insurance policy when the risk is recognized by the underwriter. Either of the following exceptions are appropriate. The second of the two includes an exception for equitable subordination while the first only addresses the issue of fraudulent conveyance: (a) Fraudulent Conveyance Exception:
"Consequences of an attack on the estate herein insured under any creditors' rights law, state insolvency law or federal bankruptcy law." (b) Exception for Equitable Subordination" "Any loss or damage on account of the fact that, under either the Federal Bankruptcy Code or other similar state insolvency or creditors' rights laws, the insured mortgage is attacked either on the ground that such mortgage is a fraudulent conveyance or on the ground that the claim or lien of such mortgage should be equitably subordinated to other claims or interests, under principles of equitable subordination." As noted above, the second exception covers both the possibility of lien avoidance through application of fraudulent conveyance law, and the possibility of lien subordination through application of equitable principles.
Elimination of the "Creditors' Rights Exception based on the passage of time Title insurers are often asked to modify the creditors' rights exception to add a time limit, or to commit in some other fashion to waive the exception altogether after a specified period. This request should be refused. Many customers have the mistaken belief that the transaction is subject to attack for only four months. In fact, if the transaction is later determined to be a fraudulent conveyance, the grantor's trustee in a subsequent bankruptcy can attack all conveyances (including mortgages) made within one year prior to the filing of the bankruptcy petition. In addition, section 544 of the Code gives the trustee the power to pursue remedies available under state fraudulent conveyance and insolvency law. As noted above, the statute(s) of limitation under these laws are often much longer than the one year period applicable under the federal bankruptcy code. Thus, if the title insurer allows the creditors' rights exception to be limited by the passage of time, it exposes itself to loss for any claim successfully made under section 544 of the Code. (3) Affirmative Coverage Against Lien Avoidance
Title insurers are sometimes requested to issue affirmative coverage to the effect that a mortgage lien will not be avoided as a fraudulent conveyance. The following is an example of such form of an affirmative coverage provision: ENDORSEMENT "Notwithstanding the purchase by ... of the partnership interest of ... in the limited partnership known as ... Associates, a ... limited partnership, and the utilization of the proceeds of the mortgage (insured herein) to purchase the ... partnership interests in ... Associates, policy insures that the making and delivery of the mortgage in connection with the consummation of the above transaction will not be set aside as a result of being a fraudulent transfer or conveyance under either Federal or State Law relating to fraudulent transfers or conveyances, the Company hereby assumes the costs and expenses of defense of any action undertaken to set aside the mortgage as a result of the utilization of the proceeds of the mortgage to purchase the . . . . partnership interests in the partnership; and policy further insures against monetary loss (including without limitation, attorneys' fees and expenses) resulting from a final determination that the insured mortgage is not a valid lien on the property, subject only to the terms and provisions of the policy herein including those items set forth in Schedule B herein, due to the application of Federal or State Law relative to fraudulent transfer(s) or conveyances."
The foregoing provision, although very broad, does not reach the question of equitable subordination and should not be granted without the approval of Home Office Counsel and the risk committee. Title Insurers Analysis of Financial Condition A title insurer requested to provide affirmative coverage of the type set forth above should study the financial condition of the issuer of the debt and mortgage at the time of the transaction and determine the effect of the transaction on such financial condition. Whether the title insurer is capable of making such objective determination is an issue in itself. Such determination is not within the normal purview of title insurance and is more appropriate to the field of accounting, banking and investment analysis. In theory two types of analyses are required: (i) a balance sheet analysis to determine solvency and sufficiency of capital; and (ii) a cash-flow analysis to determine ability to pay debts as they mature. Primary attention is made to a comparison of the assets and liabilities of the issuer of the debt both before and after the transaction. Insolvency is defined in section 101 of the Bankruptcy Code as a "financial condition such that the sum of [an] entity's debts is greater than all of such entity's property, at fair value" (emphasis added). There is a special definition for partnership insolvency that takes into account the general partner's net assets [11 U.S.C. 101(31)(B)].The UFCA states that "[a] person is insolvent when the present fair saleable value (emphasis added) of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured (UFCA sec 2). Although there are, at least arguably, differences between the terms "fair valuation" and "fair salable value", both concepts refer to a market value of the assets, not their book value. Thus, it is clear that generally accepted accounting principles are not controlling in insolvency determinations [In re Sierra Steel, Inc. 19 BCD 269, 271 (1989)]. The term "unreasonably small capital" is not statutorily defined. Relevant case law indicates that it is closely related to the insolvency concept, exists automatically if insolvency exists, and may be found even in the absence of insolvency if the debtor has insufficient working capital to reasonably operate its business and to meet its obligations (Gleneagles, supra., 565 F. Supp. 556, 580). Accordingly, a title insurer's assessment of the financial information concerning the issuer of the debt and mortgage will take into account the following considerations: (l) assets should be valued based on market value rather than book value. Therefore, financial statements prepared in accordance with generally accepted accounting principals, while significant, are not necessarily determinative of asset value in this context;
(2)
fraudulent transfer actions invariably arise after the transferor has encountered financial difficulty. While stating that solvency is to be determined as of the time of the transaction, it is common for courts in such cases to employ a great deal of hindsight in valuing the assets and, at times, even the liabilities. Therefore, little of no value will be given to "goodwill", prepaid items or other intangibles which are not useful in the absence of an ongoing profitable enterprise. Similarly, tangible items such as inventory and accounts receivable, the value, salability or collectibility of which are dependent upon the health of the enterprise, may receive discounted values; The issuer/transferor may have potential liabilities which may become actual if it meets with financial difficulty, particularly if it ceases operation. Some of these may be reflected to as footnotes to the financial statements, such as pension-related liabilities, guarantees, and pending litigation against the transferor. Another potential liability, although more difficult to identify and quantify, may be an issuer's subsequent rejection of some of its executory contracts; there may be assets which are not reflected on the balance sheet, such as claims or pending litigation of the issuer against third parties, and valuable leasehold interests. In addition, some assets may have a market value in excess of book value, such as fixed assets for which historic cost less depreciation understates current market value; valuations and appraisals are often made in connection with leveraged buyouts. These should be reviewed if available but their availability alone should not bind the insurer of title.
(3)
(4)
(5)
NB the availability of qualified persons to review financial statements, appraisals and valuations is a pre-requisite to providing any form of coverage against lien avoidance. [2] Mortgage Foreclosure, the "Durrett" Problem & the 70% Rule Mortgage foreclosures also present creditors' rights problems in light of the case entitled Durrett v. Washington Nat'l Ins. Co., 621 F2d 201 (5th Cir. 1980). The insurance of title acquired from the sheriff in a mortgage foreclosure sale should include consideration of this case.
The Title Question: When does the sale at foreclosure of real estate of a debtor constitute a fraudulent conveyance? The Facts: The facts of the case are as follows: In a non-judicial foreclosure sale the trustee under a deed-of-trust was the successful bidder by bidding the amount due on the debt which was equal to (only) 57.7% of the fair market value of the property. Subsequent to (and within one year of) the sale, the debtor/borrower filed bankruptcy and sought to upset the sale as a fraudulent transfer under section 67(d) of the old (then in affect) Bankruptcy Act, now 548 of the Bankruptcy Code, contending that (i) the "transfer" took place at the date of the sale, not when the mortgage or deed-of-trust was made and (ii) that the consideration was not a "fair equivalent" of the property's value. The District Court had denied the petition holding that the sales price, less than 60% of the fair market value, was a fair equivalent. NB A FORECLOSURE SALE is a distress sale. QUAERE: Should it be held to the same standard as a sale to a bona fide purchaser at arms length for good and valuable consideration? [a] The Holding: The United States Court of Appeals for the fifth circuit held: [GENERALLY] that a regularly conducted, noncollusive, nonjudicial foreclosure sale, conducted within one year of the mortgagor's bankruptcy, in which the consideration paid was less than 70% of the value of the real property (as determined by the court) was a transfer for less than reasonably equivalent value and therefore fraudulent without regard to intent; and [SPECIFICALLY] where the debtor's real property sold at a foreclosure sale for $115,400.00 despite having a fair market value of $200,000.00, the sale deprived the estate of equity in the property of $64,000.00. The price paid for the transfer was not the substantial equivalent value of the property. The sale constituted both a transfer of property by the debtor and a fraudulent conveyance and was subject to avoidance.
The Fifth Circuit Court of Appeals agreed with the District Court that the transfer occurred at the date of sale but reversed on the ground that in order for the consideration to be the "fair equivalent" it had to be at least 70% of the market value. This is the origin of the 70% Rule. "DURRETT" has been followed in a number of jurisdictions including the Third Circuit. New Jersey and Pennsylvania fall within the "Durrett" ruling [NB cases cited Underwriting Bulletin 89-13 and 91-12]. The effect of "Durrett" is to grant a defacto right of redemption in bankruptcy for a period of one year from the date of the foreclosure sale. Although "Durrett" and the cases following it were originally decided in the context of non-judicial foreclosure sales, the rationale as to the time at which the transfer occurs and the 70% Rule have been applied to conventional mortgage foreclosures prevalent in other jurisdictions. PRIOR to "Durrett", the universal understanding of mortgage lenders, attorneys, title insurers and bankruptcy practitioners was that the "transfer" occurred when the mortgage or deed-of-trust was executed and, that if this was more than a year prior to the bankruptcy, the mortgage or deed of trust could not be set aside. However, the "Durrett" court applied the sweeping definition of transfer in ll USC Subsection l which includes "voluntary and involuntary disposition, by or without judicial proceedings", and observed that the foreclosure sale also caused a change of possession falling within the definition of transfer. Thus, under "Durrett", one year must elapse after the date of the foreclosure sale before the purchaser thereat can have immunity from a bankruptcy filing by the prior borrower. [b] The Title Insurance Issues: Title insurance underwriting guidelines generally provide that where a mortgage foreclosure has taken place and one year has not expired from the date thereof, an exception for the reasonable equivalent value problems (the 70% Rule) must be placed in Schedule B. The principal title questions are whether title insurance will be issued in a "Durrett" jurisdiction to (i) a mortgage lender bidding-in at foreclosure sale; (ii) a third party purchasing at the foreclosure sale, and (iii) a third party purchasing from a mortgage lender that has bid-in at foreclosure sale. Stated another way, when, and under what circumstances, will a title insurer accept the risk that the transaction
will not be avoided under either section 548 of the Bankruptcy Code or state fraudulent conveyance law (through section 544(b) )? In jurisdictions that have adopted the ALTA creditors rights exclusion discussed above, the title insurer will be free of risk inasmuch as the exclusion from coverage in the owners' policy will ordinarily cover the "Durrett" problem. However, in those jurisdictions where the l970 ALTA Policy (re. l0-l7-84) is used, the issue remains very much alive. 11 USC 550 deals with the liability of the transferee of an avoided transfer. Under section 550 the trustee may recover, for the benefit of the estate, the property transferred, or if the court so orders, the value of such property, from (i) the initial transferee (or the party for whose benefit such transfer was made), or (ii) any immediate or "mediate" transferee of such initial transferee. However, an immediate or mediate transferee of the initial transferee is not subject to recovery if such transferee takes for value (including satisfaction or securing a present or antecedent debt), in good faith, and without knowledge of the voidability of the avoided transfer [ll USC 550(b)(l)]. NB Quaere: Whose responsibility is it to disclose the voidability of the transfer? The examiner of the title? Under section 550 (c), the trustee is entitled to only a single satisfaction under section 550. Under section 550 (d)(l), a good faith transferee from whom the trustee may recover under section 550 (a) has a lien on the property so recovered to secure an amount equal to the lesser of (i) the cost of any improvements made to the property after the transfer, less the amount of any profit realized by or for the account of such transferee from the property, and (ii) any increase in the value of the property resulting from such improvement. The term "improvement" is defined in section 550(d)(2) to include physical additions and changes, repairs, tax payment, payment of indebtedness on the property secured by a lien superior to the rights of the trustee, and costs of preservation of the property. Under section 550(e), an action or proceeding under section 550 may not be commenced after the earlier of one year after the avoidance of the transfer on account of which recovery is sought, or the time the case is closed or dismissed.
It should be noted that a transferee, other than the initial transferee, that takes for value is not required to meet the section 548(a)(2) requirement to give reasonably equivalent value in exchange for the transfer. Moreover, any immediate or mediate good faith transferee from a transferee(other than the initial transferee) that has given value is immune from recovery if it is acting in good faith, but there is no value requirement as long as the predecessor in title gave value and otherwise satisfied the requirements of section 550 (b)(l). It appears that the term "good faith" means, in this context, that the transferee does not know that the transaction is not a normal trade and that there is reason to believe that the transferor was engaged in defrauding his creditors [see 4 Collier on Bankruptcy, 550.03 (Matthew Bender l5th ed)]. [c] The Title Insurance Considerations: [i] Insurance of lender bidding-in foreclosure Title insurance companies ordinarily will not be willing to insure title for (i) a mortgagee bidding-in at a foreclosure sale without a policy exception of the type set forth below. The exception may be omitted in jurisdictions that permit variation or removal of the ALTA creditors rights exclusion in that rare instance where a mortgagee presents an unequivocal and trustworthy appraisal report to the title company, and the deletion of the exception is approved at the regional or home office. HOW TO CLEAR THE TITLE EXCEPTION The "DURRETT" exception can be removed from SCHEDULE B if a determination can be made that the bid made at the foreclosure sale of a first mortgage was in an amount equal to or in excess of the reasonable equivalent value of the property including the amount of the unpaid mortgage. For example, if the unpaid mortgage was in the amount of $l,000,000.00 and the full value of the property was $2,000,000.00, the bid would have to at least equal the $2,000,000.00 even though the remainder of the value after the first million was totally encumbered, i.e., there can be no equity remaining in the property.
[ii]
Insurance of third party purchaser at foreclosure Title insurance companies are more inclined to issue title insurance without exception in the case of (ii) a third-party purchaser at a foreclosure sale. However, once again, an appraisal will be required and there can be no equity value remaining in the property. Moreover, the title insurance company will seek to assure itself that the purchaser is proceeding in good faith and is dealing at arms-length. If any indication of collusive activity exists, the insurance will not be given without an appropriate exception.
[iii]
Insurance of purchaser from initial transferee Finally, in the case of a purchaser from the initial transferee, title insurance companies are generally willing to issue insurance without exception providing they are satisfied that the requirements of ll USC 550(b) have been met, i.e., that the purchaser is acting in good faith and is giving value.
[d]
The Title Insurance Exceptions: Exception One Consequences of an attack upon the estate insured under Federal Bankruptcy Law, State Insolvency Law or similar creditors rights law. Exception Two Any claim or allegation in any bankruptcy proceedings filed by or on behalf of (foreclosed mortgagor, grantor, or trustor) within one year (from the date of recordation of the foreclosure deed) that the deed from (grantor) to (grantee) was a fraudulent transfer. Exception Three Any loss or claim of loss arising from or occasioned by an attack upon the transferor to the insured herein (i) pursuant to sec 548 of the Federal Bankruptcy Code upon the filing of a petition thereunder within one year of said transfer; or (ii) pursuant to sec 544 of the Federal Bankruptcy Code and/or the provisions of any insolvency or debtor's relief statute or other law of the state of (state) upon the filing of a petition under said Code and/or state law within ( ) years of said transfer.
The second exception set forth above appears to provide the title insurer with no protection under section 544 or any action initiated under state law outside of a bankruptcy case, which may incorporate a state statute of limitations longer than one year from the date of recordation of the foreclosure deed. As noted above, the Broad ALTA creditors' rights exclusion, which covers any claim arising out of the transaction creating the interest of the insured by reason of the operation of the federal bankruptcy laws, will clearly cover any transaction involving the transfer of the property at foreclosure sale. As an underwriter, you are encouraged to use the exclusionary language in the form of an exception when using the l970 ALTA Policy (rev. l0-l7-84). [3] SUPREME COURT RESOLVES CONFLICTING RULES RELATING TO WHEN A MORTGAGE FORECLOSURE IS A FRAUDULENT CONVEYANCE
We previously raise two important questions regarding mortgage foreclosure sales. The first was when does the sale at foreclosure of a debtor constitute a fraudulent conveyance? The second was whether a foreclosure sale is a distress sale and if so, should it be held to the same standard as a sale to a bona fide purchaser at arms length for good and valuable consideration? Title insurers have been hard pressed to understand or argue that a sale at foreclosure upon the real estate of a defaulting debtor constitutes a fraudulent conveyance. [See Madrid v. Lawyers Title Insurance Corporation, ll B.C.D. 945 (Ninth cir. l984)]. DURRETT SET ASIDE In a very recent case also brought in the 9th Cir. entitled In Re. BFP, 974 F.2d ll44 the Ninth Circuit court of appeals held that as long as the foreclosure sale was non-collusive in nature and was held after proper notice in accordance with Mennonite (supra) principles, and there could not be demonstrated any collusive action between the lender and the bidders at the sale, the sale would be valid. The Supreme Court agreed with the 9th Circuit Court of Appeals. On may 23, l994 the United States Supreme Court delivered its opinion in BFP v. Resolution Trust Company, U.S. l994 U.S. Lexis 3776, 62 U.S.L.W. 4359, which overturns the Durrett and Bundles line of cases that previously created rules for setting aside mortgage foreclosure sales of real estate as fraudulent conveyances. In a 5-4 decisions the Supreme Court held that the price paid at a non-collusive, real estate mortgage foreclosure sale conducted in conformance with state law satisfies the requirements in Section 548 (a)(2)(A) that transfers of property by insolvent debtors (emphasis mine) be for "reasonably equivalent value," and that the sale could not be set aside as a fraudulent conveyance.
In other words, the court held that the price received in a mortgage foreclosure sale conclusively established "reasonably equivalent value" of mortgage property, as long as the requirements of that particular state's foreclosure laws were met. In essence, this case put a rather large stake through the Durrett 70% value standard. The court declined to accept "fair market value" as a benchmark for determining fraudulent transfers, finding that market value has no applicability in a forced-sale context. The opinion specifically limits itself to the foreclosure of mortgages and deeds of trust on real estate held in accordance with state foreclosure statutes, and recognizes that other foreclosures and forced sales, i.e., to satisfy tax liens, may be different. The opinion does not discuss other processes by which lenders realize on their collateral, such as deeds in lieu of foreclosure, or obtaining a partners' interest in the property in lieu of foreclosure. Nor does the opinion deal with the various types of loan workouts which may affect the debtor-creditor relationship, such as giving the lender an option to purchase the property that can be exercised in the future. All of these methods are still subject to creditors' rights attacks as fraudulent conveyances. The courts opinion made it clear that, while bankruptcy courts can no longer void a mortgage foreclosure sale for lack of reasonable equivalent value, sales can still be set aside if they were not held in strict compliance with state mortgage foreclosure laws, or if there were some type of collusion between the buyer and the seller.
TITLE RULE: If we are satisfied the mortgage foreclosure sale is not collusive, and was regularly conducted in accordance with state law, you may proceed to closing without further concern of the prior underwriting restrictions imposed by Durrett and Bundles.
[4] DEEDS IN LIEU OF FORECLOSURE Where the company is asked to insure a deed-in-lieu of foreclosure and the policy to issue is a l990 ALTA Owners Policy containing the Creditors Rights Exclusion set forth above, the title insurer may generally rely on the exclusion as sufficient protection against a subsequent creditors rights claim. I use the word "generally" above for good reason. You want to exercise a greater degree of caution where the borrower (and proposed grantor in the deed-in-lieu) is someone other than an individual. It has been suggested at "ALTA Title Counsel" that the industry must establish a minimum standard of obtaining an objective determination of consideration and value irrespective of the policy exclusion, because of the potential for collateral attack by aggrieved stockholders or limited partners, in those cases where the equity value substantially exceeds the unpaid debt. From a practical standpoint, while I am sure the company would prevail under the policy
exclusion, the defense costs could be excessive. Consequently, whenever there is even the potential threat of a stockholder derivative action or challenge by aggrieved limited partners the home office is to be contacted and the facts presented in writing for review. Bear in mind that the premium to be collected should be commensurate with the risk incurred. The title guidelines presently set forth in the "DEED IN LIEU OF FORECLOSURE" section of this manual will continue to apply in those instances where the company is asked to insure title coming from the prior deed-in-lieu grantee (the lender) to a new third party within the one year time frame of delivery of the prior deed-in-lieu of foreclosure. In that instance our concerns are different from those of the insurer of the actual deed-in-lieu of foreclosure transaction and we are not entitled to rely on the exclusion contained within the prior policy. That policy and its exclusion ceases to exist when the lender conveys to a third party. The issue of solvency is of concern where, within one year of the delivery of the deed-in-lieu, the company is asked to insure a deed from the grantee of the deed-in-lieu. I cannot emphasize this enough. IN THAT INSTANCE THE CREDITORS' RIGHTS EXCLUSION CONTAINED IN THE TITLE POLICY INSURING THE LENDER AS GRANTEE IN THE DEED-IN-LIEU IS NO LONGER APPLICABLE BECAUSE IT ONLY APPLIED TO THE TRANSACTION INSURING THE DEEDIN-LIEU. IT DOES NOT APPLY TO A SUBSEQUENT TRANSACTION INSURING A THIRD PARTY. In those jurisdictions or instances where the l990 ALTA Policy Form is not being used and the l970 ALTA Policy (rev. l0-l7-84) is being used the creditors rights issue and the issue of solvency continues to exist and must be addressed where we are asked to insure a deed-in-lieu of foreclosure. In those instances you should review the prior subject matter contained within this manual, including the following clearance suggestions. [a] The Legal Issue. The principal creditors' rights issues relating to the delivery by a mortgagor to a mortgagee of a deed-in-lieu of foreclosure are substantially the same as the fraudulent conveyance and avoidance concerns as discussed above, i.e., whether the lender is paying or otherwise giving reasonably equivalent value for the conveyance. Title insurance considerations include (i) whether the deed is intended to be an absolute conveyance by the mortgagor to the mortgagee and not a new security instrument. Additional concerns (ii) include the effect of the deed on the mortgagor's equity or right of redemption, and (iii) the
obtaining consents of all necessary parties to the transaction, such as shareholders, partners or trust beneficiaries. The Form of Title Exception The following is a broad form of exception that may be set forth in the title insurance policy relating to a deed-in-lieu of foreclosure transaction unless certain title company requirements are satisfied and approved by a senior underwriter: [i] (ii) Any defect, lien or encumbrance arising by reason of the fact that said deed was given in satisfaction of a mortgage; or The effects of said transfer being a fraudulent transfer or preference in any proceedings in or related to any chapter of the Federal Bankruptcy Code or the effect of said transfer being invalid under any state insolvency or fraudulent conveyance laws.
[b]
The Clearance Requirements of the Title Company: If the prospective lender insured party is unwilling to accept such a broad exception, the title company may issue a policy without exception if all of the following conditions are satisfied. The form of the requirements should read as follows: "With regard to the request that we undertake to insure the deed-inlieu of foreclosure free and clear of any exception relating to Federal or State insolvency or creditors' rights laws, we have several concerns, all of which are to be addressed in writing":
(i) (ii) (iii) (iv)
is the mortgagee paying or otherwise giving reasonably equivalent value for the conveyance? is the deed intended to be an absolute conveyance by the mortgagor to the mortgagee and not a new security instrument? what is the effect of the deed upon the mortgagor's right of redemption? will the consents of all the parties to the transaction be obtained, including corporate shareholders or partners?
"We will consider issuing a policy free of the creditors rights exception if all of the following conditions are met to the company's satisfaction": (a) An Estoppel Affidavit is to be executed and acknowledged in recordable form by the grantor of the deed. The estoppel affidavit shall include representations that the deed is intended to be an absolute conveyance and not a mortgage, trust conveyance or security instrument of any kind; that the grantor is [was] fully aware of the consequences of delivery of the deed-in-lieu of foreclosure; that the delivery of the deed was not given as a preference; that there were no other persons, firms or corporations having an interest in the premises (other than the mortgagee) at the time of delivery of the deed; that the grantor is [was] solvent at the time of the delivery of the deed, will not be rendered insolvent thereby and further that there are no other creditors whose rights would be prejudiced by the conveyance; The deed must contain a recital substantially to the effect that it is an absolute conveyance, the grantor having sold the land described therein to the grantee for fair and adequate consideration, such consideration being and including the full and complete satisfaction of all obligations secured by the mortgage (as described), and that the grantor declares that the conveyance is freely and fairly made, and that there are no agreements, oral or written, other than the deed, existing between the parties with respect to the land; The Note or other evidence of indebtedness secured by the mortgage must be surrendered and canceled, and the mortgage securing such note or evidence of indebtedness must be released of record; The grantor in the deed must surrender possession of the property to the grantee; Evidence of corporate authority (including shareholders resolutions, where required) must be delivered; The grantor must deliver an independent appraisal of the property satisfactory to the title company certified to by either a MAI or SRE appraiser. The appraisal should show that the property is not worth more than the amount of the unpaid principal balance of the mortgage plus accrued interest;
(b)
(c)
(d) (e) (f)
(g)
There can be no other circumstances, such as a leaseback with option to repurchase, or agreement to reconvey, which would imply the continued existence of the debt; The grantor must not be insolvent at the date of the execution of the deed.
(h)
If less than all the conditions above set forth on (a) through (h) inclusive are not satisfied, it shall be absolutely necessary to obtain the approval of the Home Office prior to issuing a policy clear of a creditors rights' exception. ALTERNATIVE PRESENTATION OF TITLE CONSIDERATIONS (1) Proof (by presentation of an independent appraisal) that the value of the property does not exceed the amount actually remaining due of the mortgage including accrued interest. This addresses bankruptcy and non-bankruptcy issues raised by "Durrett". Our concern is whether or not there is equity value in the premises over and above the mortgage balance. So long as the equity value in the property does not exceed the canceled debt and the further consideration of the deed-in-lieu includes both (i) the estimated cost of the foreclosure action and (ii) a full written release of the owner from the obligation of the note and cancellation of the mortgage, the transfer is not likely to be collaterally attacked. However, if the value or equity is in excess of the debt, then the transfer results in a diminution of the estate and is voidable. (2) Require an Agreement between the mortgagor and the mortgagee the minimum elements of which should include the following: (a) (b) (c) (d) acknowledgment of the indebtedness; acknowledgement of default; confirmation of the simultaneous execution of a deed to the mortgagee and satisfaction of the debt; warranties with respect to title that: (i) (ii) (iii) (iv) the mortgagor is the owner of the property; there are no leases, contracts of sale or other agreements affecting title (such as subordinate mortgages); owner has not suffered any lien or judgment (i.e., e.g. Judgment or Federal Tax Lien) whereby the premises have been encumbered in any way whatsoever; owner has not entered into any contract for or caused any work to be done or performed in or upon the premises which has or may result in the filing of a mechanics lien.
NB Because there is an absence of "cash" a bi-lateral agreement spelling out the terms of the transaction is preferable to an affidavit, although these issues could be addressed in an estoppel affidavit. Bear in mind that a written "agreement" may survive a subsequent bankruptcy of the borrower whereas an affidavit is clearly subject to disaffirmance. FROM THE BORROWER YOU WANT THE FOLLOWING REPRESENTATIONS: 3. 4. Representation that the transaction is entered into voluntarily, free of any fraud, duress or undue influence. Proof that the deed is being given unconditionally and absolutely; that there are no collateral side agreements to the delivery of the deed, such as repurchase options or contract to repurchase or management agreements or obligation for any future payments to the lender by the borrower which shows a continuing relationship. FROM THE LENDER YOU WANT THE FOLLOWING REPRESENTATIONS: A. Acknowledgment that the transfer is an absolute conveyance of the mortgagor's right, title and interest in and to the premises, together with the appurtenances and that, upon acceptance, it is intended to convey all rights of possession as well as title. This goes to the issue of marketability and could appear as a recitation in the deed to be delivered. If the representations of the mortgagor are made in an affidavit, the mortgagee must execute a separate contemporaneous instrument evidencing the release of the mortgagor from further obligation; A covenant that as consideration for the transfer, the mortgagee releases the mortgagor from any personal liability for the indebtedness; Acknowledgment that the affidavit or "bi-lateral agreement" is made to induce the mortgagee to accept the conveyance of the property in lieu of foreclosure knowing that the title company will rely upon the statements made therein and thereon for the purpose of issuing its policy of title insurance; that the representations and warranties made in the agreement are binding upon the parties their heirs, representative, successors and assigns.
B.
C.
[5]
PARCEL ASSEMBLAGE - THE LEASE TERMINATION PROBLEM [a] The Legal Issue:
This is the one area where title insurers frequently overlook the existence of a creditors' rights problem. While the problem is most likely to arise in a large metropolitan area it is not confined thereto. In assembling parcels of land to obtain a larger site for the purposes of construction of a new building, a developer may be constrained to purchase from one or more tenants their leasehold rights in exchange for the termination of their lease(s). It is possible that if such a former tenant subsequently files a petition in bankruptcy, the trustee will seek to avoid the surrender or conveyance of the lease to the developer. The avoidance action could be maintained under either section 548 or 544 of the Bankruptcy Code. There is no doubt that the surrender of a lease by the tenant, whether accomplished by way of a surrender or assignment, constitutes a transfer by the debtor of an interest in property within the meaning of the Bankruptcy Code [cases cited Collier Real Estate Transactions and the Bankruptcy Code, chapter 5, n.34]. The landlord accepting the assignment or surrender from the tenant is an immediate transferee for the purposes of section 550. And, a purchaser from the landlord is a transferee from an immediate transferee under section 550. A mortgage lender, receiving from the landlord a mortgage lien on the property, will be dependent upon the validity of the landlord's title for the preservation of its lien position which, as the insurer of title, is one of the things we insure on the facing page of the policy. The Title Insurance Issue The foregoing considerations give rise to considerable problems for the title insurer asked to issue a title policy on an assembled parcel with respect to which leases have been surrendered or conveyed to a developer, clear of any creditors' right exception. Obviously a title policy clear of any such exception is prerequisite to the funding of construction and permanent loan financing. However, in order to write such a policy the title company must determine whether each terminated lessee was solvent at the time of the transfer of the leasehold estate to the developer and that the lessee received reasonably equivalent consideration for the value of his leasehold interest. A value determination would require an analysis of the rental levels under the lease, the duration of the lease, the rights of the lessee under the lease (including assignment and subletting rights), and the relation of the lease rental to the then fair market rental value of the property [see In Re Pinto, 98 B.R. 200(B.Ct., E.D. Pa.) l989].
Title companies are neither equipped nor generally willing to engage in this process. Furthermore, it is not clear whether the ALTA Creditors' Rights Exclusion contained in the l990 loan policy form covers the lease termination problem. This exclusion relates only to the transaction(s) creating the interest of the mortgagee insured by the policy. It cannot be concluded with any certainty that this language protects a title insurer against claims arising from the surrender of leaseholds effected during the course of an assemblage. Consideration should be given to requiring indemnities or other form of financial inducement when a request is made to issue policies under these circumstances. [6] OPTION AGREEMENTS Refer to OPTIONS in this Manual for a discussion of the subject. [7] CONTRACT FOR SALE - Vendee in Possession Section 365(i) of the Bankruptcy Code recognizes the specific performance rights of a vendee in possession. On a case by case basis we may be willing to issue affirmative coverage as to the vendor's obligation to deliver a deed to a contract vendee in possession who elects to remain in possession of the real estate notwithstanding the fact that the trustee in bankruptcy may have elected to reject the contract as an executory contract. Such a request must be submitted to the Home Office in each and every instance. If approved, the following exception should be used which, you will note, includes a statement affirmatively insuring that a deed will be delivered: "The effect of federal bankruptcy law on the interest of the insured, except that, if the vendee is in possession of the property, the policy insures against the refusal of a trustee in the event of vendor's bankruptcy, to issue a deed pursuant to the contract". [8] EQUITY PARTICIPATION TRANSACTIONS BETWEEN A GENERAL PARTNER AND PARTNERSHIP Section 548(b) of the Bankruptcy Code provides that the trustee of a partnership debtor may avoid transfers made and obligations incurred to a general partner of the debtor within one year prior to the filing of a petition if the debtor was insolvent on the date of such transfer or incurrence, or became insolvent as a result thereof. For the purposes of section 548(b), it is irrelevant that the debtor received fair consideration in return for the transfer. Accordingly, there is an inherent problem with regard to a mortgage loan transaction between a partnership, as borrower, and one of the general partners, as lender. If the general partner then seeks to obtain title insurance in the form of a lender's policy with respect to its loan, it will have to deal with the customary policy exception concerning avoidance of the obligation under section 548 above cited.
With the approval of the Home Office only, this exception may be removed upon proof of solvency of the borrowing partnership. In determining whether or not to remove the exception, one of the crucial considerations would be the determination of the sufficiency of partnership assets to discharge the liabilities of the non-partner creditors. The issue is a factual one and, from the company's standpoint, requires a detailed analysis of the partnership's financial position at the time of the transaction, by a corporate employee qualified to evaluate financial statements or, of an independent professional certified public accountant. Bear in mind that the removal of the exception is a form of credit underwriting. The problem should be considered in transactions involving both a loan and an equity investment in a real estate project by the same financial institution. Although in some instances the lender will take its equity position in a different entity than that which makes the loan (usually a wholly owned subsidiary), consideration must be given to the possibility that a court of competent jurisdiction might hold that there is sufficient identity between the holder of the partnership interest and the holder of the mortgage loan such that junior creditors may be prejudiced. There is some authority (Hughes v. Dash, 309 F2d l, ATE Financial Services v. Carson, 268 A2d 73) indicating that because of section l3 of the Uniform Limited Partnership Act, the exception is unnecessary if the lender is a limited partner in a limited partnership formed pursuant to the Act. Because of the limited number of cases addressing this point, the company is unwilling to authorize omission of the title exception on a general basis where the lender is a limited partner. The title exception should read as follows: "Any loss or damage occasioned by the fact that the insured mortgagee is also a partner in the partnership which is the mortgagor in the mortgage set forth under Schedule A herein and insured hereunder". [9] CORPORATE UPSTREAM OR CROSS-STREAM TRANSACTIONS Refer to subject matter in this Manual entitled: INTERCORPORATE GUARANTEES AS FRAUDULENT TRANSACTIONS [10] MORTGAGEE'S OPTION TO PURCHASE Refer to OPTIONS in this Manual for a discussion of the material
[11] MORTGAGES TO SECURE ANTECEDENT INDEBTEDNESS Refer to subject matter in this Manual entitled ANTECEDENT DEBT TRANSACTIONS NOTE: The subject matter contained in this section originally appeared as CHAPTER 5, "Creditors' Rights Issues Affecting Title Insurance", COLLIER REAL ESTATE TRANSACTIONS AND THE BANKRUPTCY CODE, Matthew Bender & Co. Inc., New York, New York, (Rel. 8-9/92 Pub. l3l). Portions of that chapter are reprinted with permission of the Publisher. In some cases the material has been substantially edited by William C. Hart for inclusion of related material and case law. Excerpts from articles prepared by James M. Pedowitz Esq. and Oscar H. Beasley Esq. have in part been used For cross reference material please refer to Title Insurance Underwriting Principals and Exception Language For cross reference see also: Bankruptcy - Fraudulent Transfers Corporate guarantees Cross Stream, Downstream & Upstream Transactions Deeds-in-lieu Equitable Subordination Foreclosure Fraudulent Transfers Mortgage Modification - Novation issues
8/78
Chapter 8 - Page 1 CORPORATIONS General
CORPORATIONS
DEFINITIONS Corporation or domestic corporation means a corporation for profit formed under business corporation law, or formed under any other general statute or by any special act of this state for a purpose or purposes for which a corporation may be formed under this chapter. (N.Y. Bus. Corp. Law 102, Supp. 1977-78). Foreign corporation means a corporation for profit formed under laws other than the statutes of this state, which has as its purpose or among its purposes a purpose for which a corporation may be formed under business corporation law. "Authorized", when used with respect to a foreign corporation, means having authority under article 13 (Foreign Corporations) to do business in the state of New York. (N.Y. Bus. Corp. Law 102, Supp. 1977-78). FOREIGN CORPORATIONS A foreign corporation shall not do business in this state until it has been authorized in this state. A foreign corporation may be authorized to do any business which may be done lawfully in this state by a domestic corporation to the extent that it is authorized to do such business in jurisdiction of its incorporation. A foreign corporation will not be considered doing business in the state where it is: 1) maintaining or defending any action or proceeding, whether judicial, administrative, arbitrative or otherwise, or effecting settlement thereof, 2) holding meetings of its directors or its shareholders, 3) maintaining bank accounts, 4) maintaining offices or agencies only for the transfer, exchange and registration of its securities, or 5) appointing and maintaining trustees or depositaries with relation to its securities. (N.Y. Bus. Corp. Law 1301, Supp. 1977-78). A foreign corporation may apply for authority to do business in New York by having an officer of or attorney-in-fact for the corporation sign and verify and deliver an application to the department of state. (N.Y. Bus Corp. Law 1304, Supp. 1977-78). DOMESTIC CORPORATIONS Upon the filing of the certificates of incorporation by the department of state, the corporate existence shall begin, and such certificate shall be conclusive evidence that conditions precedent have been fulfilled and that the corporation has been appropriately formed. (N.Y. Bus. Corp. Law 403, 1963). JUDICIAL DISSOLUTION The attorney-general may bring an action for the dissolution of a corporation upon one or
more of the following grounds:
8/78
a) b)
That the corporation procured its formation through fraudulent misrepresentation or concealment of a material fact. That the corporation has exceeded the authority conferred upon it by law, or has violated any provision of law thus forfeiting its charter, or transacted business in an illegal manner, or abused its powers contrary to public policy. (N.Y. Bus. Corp. Law 1101, 1963).
A majority of the board, or the shareholders of the corporation, may adopt a resolution to judicially dissolve the corporation, either based on insufficient assets or that dissolution will be beneficial. (N.Y. Bus. Corp. Law 1102, 1103, 1963). CORPORATE AUTHORITY-EXECUTION OF INSTRUMENTS A corporation has power to purchase, receive, sell, convey, lease, mortgage, make contracts, give guarantees, incur liabilities, borrow money, issue notes and bonds, lend money, invest and reinvest its funds and all other powers necessary or convenient to effect any or all purposes for which the corporation is formed. (N.Y. Bus. Corp. Law 202, 1963). TRANSFER OF ALL ASSETS - SALE OR MORTGAGE A sale, lease, exchange or other disposition of all or substantially all the assets of a corporation, if not made in the usual or regular course of business actually conducted by the corporation, must be in accordance with the procedures outlined in 909 of the Business Corporation Laws. This includes board approval of the proposed transaction and submission to a vote of the shareholders. (N.Y. Bus. Corp. Law 909, Supp. 1977-78). The board may authorize any mortgage or pledge of, or creation of a security interest in, all or any part of the corporate property, or any interest therein, wherever situated. Unless the certificate of incorporation provides otherwise, no vote or consent of the shareholders shall be required to approve such action by the board. (N.Y. Bus. Corp. Law 911, Supp. 1977-78). NON-PROFIT CORPORATION A corporation is a not-for-profit corporation if it is formed for any purpose indicated in 201, of the Not-for-Profit Corporation Law. The corporation is classified. Classifications include social and fraternal purposes, charitable, cultural, educational, scientific, religious and social service purposes. (N.Y. Not-for-Profit Corp. Law 201, Supp. 1977-78). A not-for-profit corporation is not formed for pecuniary profit or financial gain. (N.Y. Notfor- Profit Corp. Law & 102, 1970). A not-for-profit corporation has the powers necessary to effect any and all of the purposes for which the corporation was formed. (N.Y. Not-for-Profit Corp. Law 202, Supp. 1977-78).
8/78
PUBLIC UTILITIES The term "utility company" or public utility company applies to one or more persons or corporations operating an agency or agencies for public service, and who are subject to the jurisdiction, supervision and regulations prescribed by or pursuant to Public Service Law. (N.Y. Pub. Serv. Law 2, 1955). A corporation or person owning or holding a majority of the stock of a common carrier, gas or electric corporation subject to the jurisdiction of the public service commission shall be subject to the supervision of the public service commission with respect to relations between the corporation and its owners or majority stockholders in so far as such relations arise by reason of such ownership or holding of stock. Supervision includes examination of records, accounts and memoranda and submission of reports and information to the public service commission. (N.Y. Pub. Serv. Law 5, Supp. 1977-78). CREDIT UNION - STATE When authorized by the superintendent, seven or more persons employed or residing in the state of New York may form a corporation to be known as a credit union, which may include a central credit union. Such persons must submit an organization certificate to the superintendent which state the name of the corporation which must include the words "credit union". (N.Y. Banking Law 45, 1971). TRANSACTIONS BETWEEN CORPORATIONS AND OFFICERS OR DIRECTORS Contracts or other transactions, between a corporation and its officers or directors, are neither void nor voidable for the following reasons alone: 1) between corporations where directors are on both boards, 2) where the directors have a substantial financial interest in the corporation, and 3) where the director is present at the meeting which approves the transaction or that his vote is counted for such purpose. If there is a full disclosure of all material facts and in the interested directors vote is not needed for approval, then the approved transaction may not be avoided by the corporation. If however, there was no disclosure or knowledge of the material facts or the vote of the interested director was necessary to approve the transaction, the corporation may avoid the transaction, unless the party can establish that the transaction was fair and reasonable as to the corporation, at time of approval. Shareholders may also ratify the transaction if they know the material facts. Common or interested directors may be counted in determining the presence of a quorum. The certificates of incorporation may contain additional restrictions on contracts and transactions between a corporation and its directors. (N.Y. Bus. Corp. Law. 713, Supp. 1977-78).
8/78
TRANSACTIONS DURING DISSOLUTION The mere filing of a certificate of dissolution does not fully dissolve an existent corporation; it must first lawfully dispose of its assets and do all other acts required to adjust and wind up its business and affairs, and it may sue and be sued in its corporate name. (Feneck v. Murdock, 181 N.Y.S. 2d 441, 16 Misc. 2d 789 (1958)). After dissolution the corporation shall carry on no business except for the purpose of winding up its affairs. The corporation shall proceed to wind up its affairs with power to fulfill or discharge its contracts, collect its assets, sell its assets for cash, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business. (N.Y. Bus. Corp. Law 1005, 1963). TAXES RESULTING IN SUSPENSION OF CORPORATE POWERS On or before the thirtieth day of June in each calendar year the tax commission may certify and transmit to the department of state a list containing the names of any or all designated corporations that have not filed tax reports during a two year period, or have been delinquent in the payment of taxes for any two years duly assessed. (N.Y. Tax Law 203 (a), Supp. 1977-78). Dissolution of a corporation by proclamation for failure to pay taxes did not affect either its right to collect and distribute its assets or to sue in its corporate name. (Vinlis Const. Co. v. Roreck, 325 N.Y.S. 2d 457, 67 Misc. 2d 942 (1971)). MERGER AND CONSOLIDATION Two or more domestic corporations may merge into a single corporation which shall be one of the constituent corporations. A constituent corporation means an existing corporation that is participating in a merger or consolidation with one or more other corporations. Two or more domestic corporations may consolidate into a single corporation which shall be a new corporation to be formed pursuant to the consolidation. (N.Y. Bus. Corp. Law 901, 1963). If a surviving or consolidated corporation is, or is to be, formed under the law of any jurisdiction other than this state it must comply with the provisions relating to foreign corporations. (N.Y. Bus. Corp. Law 907, Supp. 1977-78). Upon the filing of the certificate of merger or consolidation by the department of state or on such date subsequent thereto, not to exceed thirty days, the merger shall be effected. The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities, powers and purposes of each of the constituent corporations. All the property; real and personal, including subscriptions to shares, causes of actions and every other asset of each of the constituent corporations, shall vest in the surviving or consolidated corporation shall assume and be liable for all liabilities, obligations and penalties of each constituent corporation. (N.Y. Bus. Corp. Law 906, 1963).
8/78
Chapter 8 - Page 1 CORPORATE REQUIREMENTS Title
BOARD OF DIRECTORS RESOLUTION - REGARDING MORTGAGE TO BE MADE If the present transaction consists in whole or in part of the making of a new mortgage, we will require a certified copy of the resolution of the board of directors of any corporate mortgagor authorizing the making of said mortgage. Proof must also be shown that the consent of stockholders of the mortgagor corporation is not required by its certificate or incorporation or amendments thereto for the making of said mortgage. The mortgage should contain a recital showing that it was made and executed pursuant to the resolution of the board of directors of the mortgagor. WHERE CERTIFICATE OF INCORPORATION REQUIRES CONSENT OF STOCKHOLDERS TO MORTGAGE. The certificate of incorporation of (insert corporate name) requires consent of (insert all or give number) of the stockholders for the making of the mortgage. A certified copy of the resolution of the board of directors of said corporation and the consent of the stockholders is required as to the mortgage to be made. The mortgage should contain a recital showing that it was made and executed pursuant to the resolution of the board of directors of the mortgagor and the consent of stockholders as required by the certificate of incorporation. STOCKHOLDERS CONSENT - REGARDING CONVEYANCE TO AN OFFICER HERETOFORE MADE Consent of all stockholders of (insert name) is required as to the conveyance hereinafter set forth and proof shown that the making of said conveyance did not render the corporation insolvent. Said corporation by deed dated recorded liber cp conveyed to (insert name). LIQUIDATION OR DISSOLUTION TAX ON CONVEYANCES TO STOCKHOLDERS PRIOR TO JANUARY 1, 1962. Proof of payment of liquidation or dissolution tax on (insert corporate name) as provided by subdivision 2 of Section 182 of the Tax Law as same existed on the date of recording of the instrument set forth below is required. The corporation conveyed to the stockholders (insert name) by deed dated recorded Liber cp. SHAREHOLDERS CONSENT ON CORPORATE CONVEYANCE OR LEASE If the present transaction consists in whole or in part of a conveyance or lease by a corporate grantor or lessor we will require the written consent thereto by all of the holders of the outstanding shares of the said corporation and the instrument on closing
should so recite.
8/78
In lieu thereof the consent of the holders of two-thirds of all of the outstanding shares entitled to vote thereon obtained at a meeting duly noticed and called for the purpose of obtaining such consent in the manner provided for in Section 605 of the Business Corporation Law is required and the instrument on closing should so recite. If neither of the above is obtained, then, the proofs showing the basis upon which the conveyance or lease is to be made must be submitted to counsel prior to closing. CORPORATE CONVEYANCE TO OFFICER EXECUTING DEED. Deed dated recorded Liber cp is executed on behalf of the (insert corporate name) by (insert name) who is also a grantee in said instrument. Under section 301 sub 2 RPAPL said deed cannot be received in evidence. A confirmatory deed executed by a proper corporate officer not a grantee in the instrument is required. This objection can be disregarded if title is to pass to a purchaser for value. CORPORATION NOT TIMELY ORGANIZED Deed made by (insert name), grantor, to (insert name), grantee, dated is recorded in Liber cp , prior to the incorporation of the grantee. A confirmatory deed is required from said grantor to the present owner of the premises herein. WHERE CERTIFICATE OF INCORPORATION NEEDED. Certificate of Incorporation of (insert name) with proof of its due incorporation prior to (insert closing or give date) must be obtained and considered in connection with this title. Being further investigated by this Company. WHERE CERTIFICATE OF INCORPORATION OF A FOREIGN CORPORATION NEEDED Certified copy of the certificate of incorporation of (insert name) a corporation of the State of (insert) with proof of its due incorporation prior to (insert closing or give date) must be submitted to the Company and considered in connection with this title. STATUS OF FOREIGN CORPORATION - STATE OF INCORPORATION Proof is required to show that (insert name) a (insert State) corporation has not been dissolved either by proclamation or otherwise in the State of its incorporation. (Inquiry has been made of the Secretary of State of said State regarding this proof. Insert this sentence where applicable). FOREIGN CORPORATION STATUS - NEW YORK STATE Proof required that is in good standing and authorized to do business in this state and its License Fee and Franchise Taxes have been paid.
8/78
CERTIFICATION OF TITLE IN A CORPORATION (After our printed front sheet heading) say (insert name) a (insert word domestic or if not domestic insert state of incorporation) corporation SALE, LEASE, EXCHANGE OR MORTGAGE OF PROPERTY BY A CORPORATION GOVERNED BY THE NOT-FOR-PROFIT CORPORATION LAW (FORMERLY GOVERNED BY THE MEMBERSHIP CORPORATION LAW.) If the proposed sale, lease, exchange or mortgage to be insured is by a corporation governed by the Not-For-Profit Law, previously formed under the Membership Corporation Law, and said corporation is a type A, B, C or D corporation as defined in Section 201 of the Not-for-Profit Corporation Law, then we shall require proof of compliance with Section 510(a) (1) and/or (2) of the Not-For-Profit Corporation Law. If the proposed sale, lease or exchange to be insured is by a type B or C corporation as defined in Section 201 of the Not-For-Profit Corporation Law, then we shall require compliance with Section 510 (a) (1) and/or (2) of the Law as well as a Supreme Court order or County Court order as provided in Section 510 (a) (3) of the law. SALE BY A RELIGIOUS CORPORATION The proposed seller is a corporation formed under the Religious Corporation Law of the State of New York. The sale to the proposed insured must be approved by an appropriate order of the Supreme Court prior to closing. MORTGAGE BY A RELIGIOUS CORPORATION The proposed mortgagor is a corporation formed under the Religious Corporation Law of the State of New York. The mortgage to the proposed insured must be approved by an appropriate order of the Supreme Court prior to closing. CORPORATE CONVEYANCE TO ITS OFFICER Proof required that deed from (Corporation) to (individual) one of its officers, did not render the corporation insolvent.
8/79
Chapter 8 - Page 1 CORPORATIONS 1 SALES & MORTGAGE CONSENT REQUIRED Legal Bulletin
1.
Mortgage Prior to September 1, 1963 consent to mortgage was provided for in section 16 of the Stock Corporation Law. Where, however, a mortgage was executed without the required consent, it could be validated by a subsequent assent where there are no intervening rights. This operates to make the mortgage, as of the time it is given a valid mortgage [Rochester Savings Bank v Averell, 96 N.Y. 467]. Since September 1, 1963, consent of the stockholders of a New York Corporation to the execution and delivery of a mortgage has not been required unless the certificate of incorporation provided otherwise. (See Section 911 of the Business Corporation Law). We do, however, require a resolution of the Board of Directors authorizing the mortgage. The certificate showing the passage of the resolution must certify that the articles of incorporation do not require the consent of the stockholders.
2.
Sale On and after September 1, 1963, the sale, lease, exchange or disposition of all or substantially all of the assets of a New York Corporation outside of the regular course of business actually conducted by the corporation must be authorized * not only by the directors of the corporation but also by the consent of the holders of two-thirds of the outstanding shares of the corporation at a meeting duly called or of all its stockholders in writing. See Section 909 and 615, Business Corporation Law. * Effective September 1, 1965 the word authorized was changed to approved.
3.
In all reports where title is found in a New York Corporation or where title is to pass through a New York Corporation, the following exception must be inserted: Consent of the stockholders to the proposed conveyance or lease by the corporation must be obtained.
4.
Whether or not the question has been raised in the report, the closers are responsible for obtaining the necessary consents.
8/79
5.
Unanimous Consent Whenever feasible consent of all the stockholders should be obtained. The consent should be acknowledged and may be in the following simple form: The undersigned, being all of the stockholders of ABC Corporation, do hereby consent to the sale by the corporation of the premises known as No. 191 Main Street, New York City on such terms as the directors of the corporation may determine. The consent must be accompanied by a short affidavit of the secretary of the corporation showing that the signers of the consent are all the stockholders of the corporation. The deed should contain the following recital: "This conveyance has been made with the unanimous consent in writing of all the stockholders of the party of the first part."
6.
Two-Thirds Consent If consent of all stockholders in writing is not feasible and the consent is obtained at a meeting, an affidavit by the secretary should be submitted in substantially the following form: I reside at I am the Secretary of ABC Corporation. At a meeting of the stockholders of said corporation, duly called for that purpose of which due notice was given, the following resolution was adopted: (Name) "Resolved that the corporation located at No. 191 Main Street New York City consented that the said premises may be conveyed (mortgaged) on such terms as the Directors may determine." The holders of two-thirds of the outstanding shares of the corporation voted for the resolution. The certificate of incorporation does not require any higher percentage.
The deed should contain the following recital: "This conveyance has been made with the consent of the holders of at least two-thirds of the outstanding shares of the corporation entitled to vote thereon obtained at a meeting duly called."
8/79
7.
If a unanimous consent in writing or consent of two-thirds at a meeting is not feasible, we will consider proof by affidavit showing that the sale is in the ordinary course of business conducted by the corporation. Such proofs, whenever possible, should be submitted to counsel or to a title officer prior to closing. A suggested form of affidavit follows: I reside at I am the President of ABC Corporation, the owner of property at No. 191 Main Street, New York City which is about to be sold by the corporation. The stock of the corporation is (publicly) held. There are stockholders. The corporation was formed for the purpose of and is actually engaged in the business of buying and selling real estate. The parcel at No. 191 Main Street is one of parcels of real estate now owned by the corporation. The certificate of incorporation does not require any consent of stockholders to the sale of property.
The deed should contain the following recital: "This conveyance is made in the regular course of business actually conducted by the party of the first part." 8. If the unanimous consent in writing, or obtaining the consent at a meeting of twothirds of shareholders entitled to vote is not feasible, and the sale is not in the ordinary, usual and regular course of business, but is not all or substantially all of the corporation's assets, a consent of stockholders may not be required. But this category of cases must be submitted with appropriate affidavits to counsel for determination. If the deed is passed, it should contain the following recital: "This conveyance is of premises which do not constitute all or substantially all of the assets of the party of the first part. The Certificate of Incorporation of the party of the first part does not require any consent of stockholders to the sale of property." 9. Section 909 (b) and (c) of the Business Corporation Law provides: "(b) A recital in a deed, lease or other instrument of conveyance executed by a corporation to the effect that the property described therein does not constitute all or substantially all of the assets of the corporation, or that the disposition of the property affected by said instrument was made in the usual or regular course of business of the corporation, or that the shareholders have duly authorized such disposition, shall be presumptive evidence of the fact so recited.
8/79
(c) An action to set aside a deed, lease or other instrument of conveyance executed by a corporation affecting real property or real and personal property may not be maintained for failure to comply with the requirements of paragraph (a) unless the action is commenced and a notice of pendency of action is filed within one year after such conveyance, lease or other instrument is recorded . . ."
8/79
Chapter 8 - Page 1 CORPORATIONS 2 NOT-FOR-PROFIT CORP. LAW Legal Bulletin
1.
APPLICABILITY: Effective September 1, 1970 this law replaced the Membership Corporation Law and is cited as "N-PCL". Several amendments have subsequently been added. It applies to both domestic and foreign Corporations. The law as amended applies to benevolent orders (effective 9/1/71) and to corporations formed under the Religious Corporations Law (effective 9/1/72) , and to educational corporations effective 9/1/73 (Section 216-(a) Education Law). However, in the event of conflict between the N-PCL and RCL, the RCL shall prevail (Section 103 (a) N-PCL; Section 2-b RCL); similar provisions are contained with respect to education corporations and the special act under which it was formed. (216-a Education Law). The General Corporation Law is expressly made inapplicable (Section 103 (b)), though many of its provisions are incorporated in original or revised form. Similar provision is contained in Section 216-a (5) of the Education Law.
2.
TYPES OF CORPORATIONS: In addition to many special types of membership Corporations having specialized provisions (Article 14) that have been carried over from Articles 9 to 19 inclusive, of the Membership Corporation Law with revisions, there are four types of corporations under the new law designated as Type A, Type B, Type C and Type D (Section 201). Type A is intended to cover the usual non-business membership corporations where activities by or for members are the predominant aspect. They would include civic, patriotic, social, fraternal, professional, trade or service associations. Type B covers the charity, educational, cultural, scientific and literary corporations, those to prevent cruelty to children or animals, and religious corporations (Section 2-b (2) RCL) and also education corporations (Section 216-a (5)). Type C is a new type whose purposes are ordinarily carried on for profit, but is intended to be non-profit. Type D is intended to cover the formation of corporations for purposes as provided in some other law, and may also include purposes included within Types A, B and/or C.
8/79
3.
DETERMINATION OF TYPE OF CORPORATION: (a) Every Not-For-Profit corporation in existence on 9/1/70 with designated exemptions, is considered a Type B corporation (Section 113 (a) N-PCL), unless the type of corporation is determinable from its certificate of incorporation (Section 402 (a) (2) N-PCL) or it has filed a Certificate of type of not-for-profit corporation with the Department of State or its certificate of incorporation has been amended to state its type (Section 201 N-PCL). Corporations that are exempted from the automatic determination of type are corporations whose type is determined by the Education Law; the Religious Corporations Law; the Private Housing Finance Law; corporations formed under the Membership Corporations Law or a prior General Law or Special Act; corporations whose principal purpose is religious, educational or charitable and are operated, supervised or controlled by a religious corporation; or special corporations formed under Article 14. An exempt corporation may elect to deliver a Certificate of type of not-for-profit corporation to the Department of State. (Section 113 (b) N-PCL).
(b)
4.
DISSOLUTION: (a) A Membership Corporation that was dissolved under former Section 57 of the Membership Corporation Law may be reinstated by filing a Certificate of annulment of dissolution and reinstatement of corporate existence, pursuant to Section 1012 N-PCL, with the Department of State. In the event of a dissolution of a former membership corporation pursuant to former Section 57 of the Membership Corporation Law, the following exception should be raised: " , a Not-For-Profit Corporation (formerly a Membership Corporation) was dissolved by the Secretary of State on , 19 . Prior to closing, proof must be furnished that said corporation has been reinstated pursuant to Section 1012 N-PCL." In the event that the corporation is not reinstated, Section 1006 N-PCL will apply as to a winding up of the affairs of the corporation, and only a disposition of that nature should be insured.
(b)
8/79
5.
PURCHASE, SALE, MORTGAGE OR LEASE OF REAL PROPERTY: (a) No court order is required to authorize the purchase, sale, lease or mortgage of real property except under (b) (2) below, but it must be authorized by the vote of two-thirds of the entire board of directors, provided that if there are twenty-one or more directors the vote of a majority of the entire board is sufficient (Section 509) and comply with the certificate of incorporation and by-laws. A sale, lease, exchange or other disposition of "All, or substantially all" of the assets of the corporation must comply with Section 510 which includes the following: (1) If there are members entitled to vote thereon, the board of directors must adopt a resolution recommending the sale, lease, exchange or other disposition, specifying the terms and conditions and the eventual disposition of the consideration, together with a statement that the dissolution of the corporation is or is not contemplated thereafter. If there are members entitled to vote thereon, the resolution of the board containing all essential facts must be approved by a two-thirds vote at an annual or special meeting after notice to all members whether or not entitled to vote and to the holders of any bonds or subvention certificates of the corporation. If there are no members entitled to vote, the resolution of the board of directors as in (a) above will suffice. (2) Such a sale, lease, exchange or other disposition by a Type B or Type C corporation also requires a court order based upon a petition complying with Section 511. In addition, sales, mortgages (other than purchase money), and leases for a term exceeding 5 years by religious corporations continue to require a court order as required by Section 12 Religious Corporations Law, and Requires notice of the application to the attorney general (Section 2-b RCL). There is presently no provision for any confirmatory order to cover transactions consummated without the required court order, except as contained in Section 12 RCL.
(b)
(3)
8/79
6.
SERVICE OF PROCESS: The Secretary of State is designated the statutory agent for process as to both domestic and foreign Not-For-Profit Corporations (Section 304). In addition, a registered agent may be designated in the certificate of incorporation or an amendment thereto. Process is served on a registered agent as if the registered agent were a defendant (Section 306). Service on an unauthorized foreign corporation is provided for under Section 307.
7.
DIGEST ONLY: This digest does not cover the entire Not-For-Profit Corporation Law as it is too voluminous for such purpose. It only covers those portions of primary interest in our work.
5/79
Chapter 8 - Page 1 CORPORATIONS 3 RELIGIOUS CORPORATIONS LAW Legal Bulletin
1) 2) 3)
Churches are affected by the Religious Corporation Law & Not-For-Profit Corporation Law Franchise Taxes and Status reports are not required Even if property so specifically devised u/w to a religious corporation, the N.Y. State and Federal Estate tax questions apply because the property forms part of the gross estate. The following exception language applies: A. Unanimous written consent of stockholders of Saint John's Protestant Episcopal Church to the proposed sale must be submitted or in the alternative proof must be furnished that the holders of two-thirds of its stock have consented to the sale at a meeting duly called. Leave of court must be obtained approving the giving of a deed from Saint John's Protestant Episcopal Church, a Not-For-Profit Corporation, formerly a Membership Corporation, if the transaction to be insured hereunder is a sale of all or substantially all of the assets of the grantor corporation. If such sale is not for all or substantially all of the assets there is no need for such a court order, however, the following proofs must be submitted: 1) 2) Proof by affidavit and documentation that the sale does not constitute all or substantially all of the grantor's assets. That the sale has been authorized by a vote of two-thirds of the entire board, provided that if there are twenty-one or more directors, the vote of a majority of the entire board shall be sufficient. Proof that the sale is in compliance with the corporate charter and bylaws.
4)
B.
3)
Religious corporations a. Requires leave of court to sell but not to contract to sell. Relig. Corp. L., Sec. 12: Sun Assets Corp v. English Evangelical Luth. Church, 19 Misc. 2d 187, 185 NYS2d 695
5/79
Chapter 8 - Page 2 CORPORATIONS 3 RELIGIOUS CORPORATIONS LAW Legal Bulletin
b. c.
Sale without leave is nullity Wilson v. Ebenezer Baptist Church, 17 Misc. 2d 607, 187 NYS2d 861 Property acquired through foreclosure of mortgage held by religious corporation or by deed in lieu of foreclosure requires no leave to sell. Gen. Corp. L. , Sec. 52-a
7/72
Chapter 8 - Page 1 CORPORATIONS 3.1 RELIGIOUS CORPORATIONS DISPOSITIONS RESEARCH OPINION Legal Bulletin
RELIGIOUS CORPORATIONS DISPOSITIONS 1. QUERY: Will we insure a deed executed on behalf of a Roman Catholic Church corporation by the Bishop, without the necessity of a court order, when the parish has been split and the deed is being given to the new or second Roman Catholic Church corporation in accordance with Section 92 of the Religious Corporations Law?
The section permits the Bishop to execute such a deed. However, it also states: "Said transfer shall be made by the said roman Catholic Bishop or his successor after having complied with the requirements of this chapter in the same manner as the trustees of any religious corporation are compelled to do before making a transfer of church property." It is my opinion that this latter sentence contemplates compliance with Section 12 of the Religious Corporation Law. Reading Subdivisions 1, 3, and 8 together, it is my opinion that a court order would be required. I have given consideration to the fact that as of September 1, 1972 the Not-ForProfit Corporations Law will become applicable to religious corporations. However, wherever the provisions of the two laws conflict, the provisions of the Religious Corporation Law must prevail. In addition, where the provisions are not in conflict, both provisions must apply. Accordingly, I do not feel that there will be any change in the foregoing opinion after September 1, 1972. 2. QUERY: Under Section 12 of the Religious Corporations Law, may the pastor (secretary-treasurer) of a Roman Catholic Church corporation execute a deed to another church with the consent of the Bishop but without a court order?
In my opinion, a court order is required. We have always construed Section 12 of the Religious Corporations Law to apply to any disposition and not only to what could strictly be defined as a "sale". In addition, Section 12, Subdivision 8, Religious Corporations Law would apply.
7/72
Chapter 8 - Page 2 CORPORATIONS 3.1 RELIGIOUS CORPORATIONS DISPOSITIONS RESEARCH OPINION Legal Bulletin
Although the Not-For-Profit Corporation Law refers to sales, leases, exchanges or other dispositions, and although a technical argument might be made that a disposition other than a sale would not require a court order under the combination of the Religious Corporations Law and the Not-For-Profit Corporation Law, it is my opinion that a court order will still be required for all dispositions. 3. QUERY: After September 1, 1972, will a religious corporation still require a court order to sell, mortgage (other than purchase money mortgage) or lease for a term exceeding five years?
Yes, the Not-For-Profit Corporation Law will have no effect on the requirements for obtaining a court order in these cases. NB If title in Archbishop of New York, no court order needed.
5/79
Chapter 8 - Page 1 CORPORATIONS 4 & 5 CORPORATIONS TAXES Legal Bulletin
FRANCHISE AND LICENSE FEE TAXES - NEW YORK STATE - ARTICLE 9A, TAX LAW Lien limited to 10 years as to bona fide purchaser, Section 219, Tax Law. 1. 2. 3. Search and report of payments from Department of Taxation and Finance, Corporation Tax Bureau, State Campus, Albany, New York 12227. Release of lien - Section 213 (3), Tax Law. Insurance against collection?
FRANCHISE TAXES (When a Lien?) Engelhardt v. Alvino Realty Co. Inc., 222 AD 815, aff'd 248 N.Y. 374 NEW YORK CITY GENERAL CORPORATION TAX New York City Administrative Code, Sections R46-1.0 to R46-10.0; 10 year lien provisions, Section R46-73.0. 1. 2. Required letter form of search requiring full details of payment and report of payment. Release provisions in R46-73.0 (10) (b)
8/79
Chapter 8 - Page 1 CORPORATIONS 4 NEW YORK CITY CORPORATION TAX Legal Bulletin
1.
NEW YORK CITY CORPORATION TAX. On July 15, 1966 pursuant to a state enabling act (Chapter 772 of the Laws of 1966) the City enacted a law (Local Law 21) which added a new title, Title R, to Chapter 46 of the Administrative Code, imposing an annual tax on corporations doing business in New York City. The tax is retroactive to January 1, 1966 in that it taxes the business of such corporations since that date. The holding of real property in the city is doing business within the city (Section R46-3.0, subdivision 1 (effective August 10, 1970; )). the tax is a lien on all the property of the corporation in New York City. Therefore whenever a corporation now holds title to real estate or has held title to real estate in the city at any time since January 1, 1966, we must consider whether a tax under this new act has become a lien. LIEN DATE. The new law follows very closely the provisions of the Tax Law imposing the annual state franchise tax on corporations doing business in the state. As in the state statute the tax becomes a lien on the date the report is required to be filed (without regard to any extension of time that may be granted) (Section R46-73.0, subdivision 10). The corporation must report on or before March 15th if it reports, as most corporations do, on a calendar year basis. It must report two and one-half months after the close of the fiscal year if it reports on a fiscal year basis. We will rely on the reports from Albany on the state franchise tax for the date of the end of the fiscal year. EXAMPLES: If the corporation reports on a calendar year basis, the exception should read: New York City Corporation Tax which became a lien March 15, 1977. If the fiscal year ended September 30, 1976 the exception should read: New York City Corporation Tax which became a lien December 15, 1976.
2.
3.
4.
PROOF OF PAYMENT. The procedure for obtaining status reports on New York City Corporation tax is the following: Submit copies of the last two years returns and cancelled checks with a check for $5 payable to the city collector. Send to: Finance Administration Department of Tax Collection 139 Centre Street New York, NY 10013
8/79
Chapter 8 - Page 2 CORPORATIONS 4 NEW YORK CITY CORPORATION TAX Legal Bulletin
If the documentation is not available it may still be possible to obtain a status report. In such event contact New York Counsel. 5. DEPOSIT - RATE OF TAX. The rate of the tax follows the same pattern as the state franchise tax statute to the extent of the income earned and the capital employed in New York City. In brief the tax is the highest of four figures - (a) 6.7% of the income, (b) one mill for each dollar of the capital, (c) 6.7% of the sum of a figure which represents 30% of the income and a figure which represents of the excess over $15,000.00 of the compensation of officers and certain stockholders, or (d) $25.00 (effective June 30, 1971 Section R46-4.0). Generally therefore the deposit taken to secure payment of the tax should be the same as if it were a state franchise tax. Where both state and city taxes are unpaid, the deposit generally should be twice what the deposit should have been for the state franchise tax alone. The foregoing dates and rates apply only to ordinary stock corporations. Other dates and rates apply to insurance companies, banks and transportation companies.
6.
5/79
Chapter 8 - Page 1 CORPORATIONS 4.1 BUSINESS CORPORATION TAX CLEARANCE (NYC) Legal Bulletin
It is the applicant's responsibility to clear this exception and not the title companies? All requests for a status report are to be sent to: The City of New York, Finance Administration, Department of Tax Collection, 139 Centre Street, New York, New York, 10013. Together therewith, the City requires copies of (i) the reports filed for the past three years and (ii) the cancelled checks showing payment of the tax liability. It will not issue a status report unless all the above are complied with. T.A. Title will not accept submission of either (i) or (ii) above set forth without a status report from the City, because it is the City's position that they are not estopped from raising further tax questions unless a status report has been issued. In those situations wherein a prior corporation, now out of title, was properly dissolved in Albany, we cannot assume they have satisfied their obligation to the City of New York. Same must be verified. The applicant should obtain a "Release of Lien" - form 49 - to remove the exception. In those situations where we require an escrow covering said taxes, same should be taken only where the lien is to be paid and discharged of record not later than 30 days after closing. In addition to the escrow, require the completion of a letter of personal undertaking acceptable to the Company. The following forms relating to BCT follow: Activities Report of Corporation disclaiming liability for tax, form 245 Application for Release of Lien of NYC General Corp. Taxes, R46-73.9 Tax Status application
8/79
Chapter 8 - Page 1 CORPORATIONS 5 FRANCHISE TAX NEW YORK STATE Legal Bulletin
An important amendment of the Tax Law in 1961 classified real estate corporations as business corporations and another in 1962 changed the lien date on business corporations from May 15 to March 15. 1. ANNUAL FRANCHISE TAX ON REAL ESTATE CORPORATIONS Prior to 1962 corporations engaged solely in the business of buying and selling real estate were taxed annually pursuant to Section 182, subdivision 1 of the Tax Law. This tax became a lien on January 1 of each year. The last tax under this Section became a lien on January 1, 1961 and was imposed for the privilege of doing business during the calendar year 1961. 2. TRANSITION TAX ON REAL ESTATE CORPORATIONS By the statute passed in 1961, Section 182 was repealed as of the end of that year and corporations previously taxed under that Section became ordinary business corporations to be taxed under Article 9-a of the Tax Law. During the transition year, for the privilege of doing business during the calendar year 1962, a new provision, Section 209, Subdivision 1-a, imposed a tax on such corporations of 2% of the sum of its surplus and dividends paid during 1961. This tax became a lien March 1, 1962. 3. LIQUIDATION TAX ON REAL ESTATE CORPORATIONS If a corporation classified under Section 182 was dissolved or liquidated before January 1, 1962, it was required to pay a liquidation tax pursuant to Section 182, subdivision 2. The repeal of Section 182 abolished this tax as to any liquidation after January 1, 1962. 4. ANNUAL FRANCHISE TAX ON BUSINESS CORPORATIONS Prior to 1963, business corporations were required by Article 9-a of the Tax Law, for the privilege of doing business in a calendar year, to file reports on or before May 15, and the tax became a lien on that date. If a corporation filed on a fiscal year basis instead of a calendar year basis, the report was due and the tax became a lien three and one-half months after the end of the fiscal period. In 1963 and thereafter business corporations (which now include real estate corporations) are required to file reports on or before March 15 and the tax becomes a lien on that date. If the corporation files on a fiscal year basis the report is due and becomes a lien two and one-half months after the close of the fiscal year. Heretofore business corporations were permitted to pay the tax in two installments, but the entire tax was a lien on the report date. After 1963 the entire tax must be paid when the report is due.
8/79
Chapter 8 - Page 2 CORPORATIONS 5 FRANCHISE TAX NEW YORK STATE Legal Bulletin
5.
NEW CORPORATIONS If a corporation is created, acquires real estate and sells it during one calendar year, no franchise tax will be due before the sale if the corporation will report on a calendar year basis, but a tax may be due if it will report on a fiscal year basis. In such cases an affidavit must be obtained and considered which shows whether the corporation keeps books and will report on a calendar or fiscal year basis.
6.
FOREIGN CORPORATIONS When a foreign corporation holds real estate, the license fee imposed by Section 181 must be considered as well as the annual franchise taxes.
7.
AUDIT OF RETURNS The State Tax Commission has discontinued the practice of showing the word "unaudited" on its returns.
8.
DEPOSITS In computing deposits to secure payment of franchise taxes, consult branch Counsel.
9.
DURATION OF LIEN If a corporation is out of title by a deed recorded more than ten years ago, no question will be raised as to franchise, liquidation or license taxes against such corporation.
2/88
Chapter 10 - Page 1 DECEDENTS' ESTATES General
DECEDENTS' ESTATES
GENERALLY When a decedent appears in the chain of title, the examining agent should determine: a) b) c) that the owner is (or was), in fact, dead; and that claims of all unsecured creditors have been paid or that sufficient time has elapsed that enforcement of such claims is barred; and that federal and, if applicable, state estate or inheritance taxes have been paid or that the enforcement thereof if legally barred by passage of time or that no such taxes became due; and the person or persons who succeeded to the decedent's interest in the property.
d)
All four elements (a) to (d) above must be determined. PRESUMPTION OF DEATH: The best evidence of death is an official death certificate. Absent such record proof, for older conveyances, the examiner may usually rely upon affidavits, recitals made in deeds from heirs or upon facts recited in a petition for probate or administration of the estate to establish the fact of death of a record owner. The examiner should not rely upon mere presumptions of death where the individual has been absent for a statutory period of time. For an individual "presumed" but not known to be dead, a Court determination is required before title can be insured in a purchaser from the heirs of the absent owner, and even a Court Order may be relied upon only if the particular state statute authorizing such determination of death is sufficiently comprehensive that it includes protection for persons who purchase from the heirs of the presumed decedent. Under no circumstances should those persons claiming to be the heirs of a "missing" person be insured; even with a judicial determination of death. CREDITORS: If administration proceedings have been opened and appropriate notice to creditors has been given, most state statutes provide that, after the time for filing of claims as set forth in such statute has elapsed, the estate is not subject to claims of unsecured creditors who have not timely filed their claims. Secured creditors (Mortgages, etc.) ordinarily are not affected by the death of the debtor and a failure to file a claim in the estate will not
release or impair the lien on the security (property).
2/88
LIFE ESTATES: A Life Estate terminates on the death of the life tenant and title remains vested in the remaindermen, free and clear of any claim of the Estate or heirs of the life tenant. However, the examiner should recognize that if the Life Estate was created by the decedent as a retained interest in property he conveyed, the value of the life estate will be included in his Gross Estate and when the life tenant has a substantial Estate, estate tax clearance will be necessary. (26 U.S.C. 2036). A life estate received from a third party is not an interest which would be includable in the life tenant's Gross Estate and the property would generally not be subject to a lien for federal estate taxes. (Exception generation skipping transfers made after 1/1/83 - subject to $1,000,000 exemption.) The death certificate of the life tenant should be recorded and, if necessary, evidence of tax lien clearances should also be placed of record. JUDGMENTS AGAINST HEIRS: The lien of a properly recorded judgment against an heir will attach to that heir's interest in the property as soon as it is acquired by the debtor heir. Since title will be deemed to have vested in the heirs as of the date of death of the decedent, such judgments must be noted as exceptions unless the interest of the heir has been divested by a proper sale of the property by the Personal Representative. Even where the heirs have agreed amongst themselves to distribute the property to heirs other than the judgment debtor, and the judgment debtor never receives a record title, the judgment will have attached to the interest acquired at death and must be noted as an exception. EXAMINATION OF PROBATE PROCEEDINGS Certification of title through a decedent's estate assumes a full examination of the estate proceedings, notwithstanding that the proceeding has been completed in apparently regular order. The examiner must consider each of the essential elements of the Administration in accordance with the governing law of the state. In the absence of curative legislation (including time limitations), exception must be taken to any apparent omission or error in the proceedings. In addition, no policy which is based upon administration proceedings or any order entered therein, should be issued until the appropriate appeal time has elapsed, unless such possible appeal is set out as an exception in the policy or the requirement has been waived by the Home Office. In addition to death, taxes, creditors and determination of heirs, the examiner must consider: a) b) Sufficiency of execution, proofs and probate of the Will, if any. Entitlement of the personal representative to appointment. If not named in the Will or by statutory preference, have the named, preferred, parties waived their right to serve?
2/88
c) d) e) f) g) h) i)
The possibility of marriage of or children born to or adopted by the Testator after the execution of the Will. Disposition of homestead, dower, curtesy, elective shares and other marital or lineal descendant preferences and rights. Ambiguity in the terms of the Will or any Trust created thereby as to who are the intended beneficiaries or who has power of sale. Are there any restrictions imposed on the use or alienability of the land? Is there sufficient money in the Estate to pay any legacies, or are they a charge against the land being insured? (Proof of payment of the legacies required). What powers does the Personal Representative have? If the property is being sold by the Estate, has notice of the intended sale been given to all parties entitled to such notice? Does the insured transaction adhere to the terms of the order? Does the Estate properly dispose of the interests of all heirs and devisees If a Trust is created under the Will and the property to be insured is to be vested in the Trust, the Trust portions of the Will and any Trust document involved must be examined and the same determinations [a) through j) above], made. In addition, consideration must be given to any state statues regulating trusts.
j) k)
If any irregularities are found, or if the agent is uncertain as to the applicable state law, consult with the Home Office.
10/95
Chapter 10 - Page 1 DECEDENTS ESTATE Digest
ABBREVIATIONS: -EPTL: Estates Probate & Trust Law -SCPA: Surrogates Court Procedures Act -RPAPL: Real Property Applications and Procedures Law SIMULTANEOUS DEATH (E.P.T.L. 2-1.6) TRANSFER OF DECEDENT'S TITLE (S.C.P.A. 1907, 2505) 1. Testate Decedent Probate of will and issuance of letters pursuant to S.C.P.A. Article 14. Statutory power of sale in executor, trustee and preliminary executor. This does not apply to specifically devised property. (E.P.T.L. 11-1.1) A devisee can convey after probate of will. If decedent died outside the state ancillary probate is authorized pursuant to S.C.P.A. Article 16 ( 1601-1616). The domiciliary executor may act in New York state pursuant to power in will (unless restricted by 131, Banking Law). 2. Intestate Decedent Heirs can convey by intestate succession (see below). Administration proceedings and issuance of letters gives administrator power to convey without a court order; however, temporary administrator requires court order to sell. (S.C.P.A. 904) Administrator is required to file bond. (S.C.P.A. 805, Subd. 3) Court may order disposition of decedent's real property where there is no power in fiduciary. (S.C.P.A. art. 19) INTESTATE SUCCESSION (E.P.T.L. 4-1.1) If no issue, and no parent survive, a surviving spouse takes entire estate. If a spouse and children, or issue of child survive, property not exceeding $50,000 in value and one-third of residue goes to spouse with balance to children or their issue per stirpes.
10/95
If spouse and only one child, or issue of one child, survive, money or personal property not exceeding $50,000 in value and one-half of the residue goes to the spouse with the balance to the child or issue of child. If no spouse survives the entire estate is succeeded to by issue, per stirpes. TESTATE SUCCESSION-WILLS 1. Execution (E.P.T.L. 3-2.1) Must be signed by testator and attested to by at least two subscribing witnesses who affix their residence address. Testator may either sign in the presence of, or acknowledge his signature to each attesting witness separately; he must declare that the instrument is his will and request the witnesses to act. This section permits the execution of a will by another person, in the name of the testator, in the presence of a the testator, and by his direction. Such person must affix his residence address; and, he is not counted as one of the necessary witnesses. 2. Foreign Executed Will (E.P.T.L. 3-5.1) Will be recognized as valid in New York if executed: a. b. c. According to the law of New York or According to the law of the place where executed, According to the law of the domicile of the decedent at date of death.
ESTATE ADMINISTRATION 1. Personal Representatives - Qualifications (S.C.P.A. 707) An executor or administrator must be a natural person or an entity authorized by law to act as fiduciary. The following are not qualified: Infants, incompetents, non-domiciliary aliens (other than a foreign guardian of an infant who has been granted ancillary letters in New York), felons, incompetents by reason of drunkenness, dishonesty, improvidence, or want of understanding, persons disqualified by the court by reason of inability to read, and write the English language. 2. Creditor Claims (S.C.P.A. 1801, 1802)
10/95
Claims must be filed within three months from the day of first publication of notice to creditors; or, if no notice is published, within seven months from the date of issuance of letters. If claims are not so filed, the fiduciary shall not be chargeable for any assets or money paid in good faith in satisfaction of any lawful claims or of any legacies or distributions to distributees, before such claim was presented. 3. Real Property Transactions (E.P.T.L 11-1.1; S.C.P.A. 1901 et seq.) Unless limited by order of court, or by will, every fiduciary is authorized to sell or mortgage the real property at public or private sale. Fiduciaries, other than trustees, may lease for a term not exceeding three years; and, in case of trustees, for a term not exceeding ten years, even though such term extends beyond the duration of the trust. Leases for a greater period require court authorization and confirmation. 4. Summary Estate Administration (S.C.P.A. 1301 et seq.) Statutory provisions apply only to personal property estates not exceeding $10,000 in value. TAXES 1. Inheritance Tax None, 2. Estate Tax (Tax Law 951 et seq.) Modeled after federal estate tax. Where state tax is less than maximum credit allowed under federal law the New York tax is increased to that maximum credit allowed. Rate ranges from 2 percent on taxable estates of not more than $50,000 to more than 14 percent for taxable estate exceeding a value of $10,000,000.
8/78
Chapter 10 - Page 1 DECEDENTS ESTATES Title
SUCCESSION TO TITLE OF A DECEDENT The rights of succession to the property of the deceased, whether by will or intestacy, are of statutory creation. Nothing in the Federal Constitution forbids the state legislature to limit, condition or even abolish the power of testamentary disposition over property within its jurisdiction. (Will of Granchelli, 393 N.Y.S. 2d 894 (1977)). It is within the power of the legislature to prospectively dictate the terms of distribution of property in intestacy and to control the power of testamentary dispositions. (In re Schloessinger's Estate, 333 N.Y.S. 2d 603 (1972)). Every person who is at least eighteen years old is allowed to dispose of his real and personal property and to exercise a power to appoint such property. He can devise or bequeath every estate of property that he owns. This testamentary disposition of property can be made to any person who has the capacity to acquire and hold such property. The testamentary disposition, in order to be effective, must meet the requirements set forth in N.Y. Est. Powers $ Trust Law 3-2.1, 1967. The distribution by intestacy is really a transmission of property pursuant to a statutory will, which determines the property passing as well as the identity of the recipients. (In re Williams's Estate, 295 N.Y.S. 56 (1937)). The "statutory will" which governs intestate succession in New York is found in N.Y. Est. Powers & Trust Law 4-1.1 - 1.4, 1977. The law of the situs governs and controls descent, alienation, effect and construction of the decedent's will as well as the effect of any conveyance and validity of any power possessed by fiduciaries to deal with the land. (In re Drexel's Will, 231 N.Y.S. 2d 574 (1962)). The legal domicile at death determines what law is to be applied and what court has jurisdiction over personal property of the decedent. (In re Rougeron's Estate, 270 N.Y.S. 578 (1966)). JURISDICTION The Surrogate's Court has general jurisdiction over probate proceedings. This grant of jurisdiction to the court is an affirmative exercise of the legislative power under Article 6, section 12e of the Constitution. The Surrogate's Court is to exercise full and complete general jurisdiction in law and in equity in order to administer justice in all matters relating to the affairs of decedents. (N.Y. Surr. Ct. Proc. Act. 201, 1967).
8/78
The court obtains jurisdiction over a case by the existence of the jurisdictional facts prescribed by statute. The jurisdiction of the court is exercised by the commencement of a proceeding in the court. All proceedings are special proceedings and are commenced by filing a petition. Personal jurisdiction of the parties is obtained by: 1) service of process upon the parties; 2) submission to the jurisdiction of the court by waiver of issuance and service of process; 3) appearance of an adult competent party in person or by attorney or by pleading. (N.Y. Surr. Ct. Proc. Act. 203, 1977). The Surrogate's Court has jurisdiction to determine necessary parties to the proceeding and their right to share in the estate. No jury trials are granted for this preliminary question. (In re Fay's Estate, 332 N.Y.S. 2d 322 (1972)). The Surrogate's Court of each county has jurisdiction exclusive of every other surrogates' court over the estate if: 1) 2) The decedent was a domiciliary of that county at the time of his death, disappearance or internment; The decedent was a non-domiciliary of the state who: a) b) c) left property within that county and no other; left personal property which has come into that county and no other since his death, disappearance or internment, and remains unadministered; left a cause of action against a domiciliary of that county for damages for the wrongful death of the decedent and who left no property in any other county. (N.Y. Surr. Ct. Proc. Act. 206, 1967).
If an estate or matter may be within the jurisdiction of the surrogates' courts of two or more counties, the court which first exercises jurisdiction by the commencement of the proceeding shall retain jurisdiction. (N.Y. Surr. Ct. Proc. Act. 207, 1977). The court may exercise personal jurisdiction over any person as to any matter within the subject matter jurisdiction of the court if such a person would be subject to the personal jurisdiction of the supreme court in a similar action. (N.Y. Surr. Ct. Proc. Act. 211, 1967). POWERS AND DUTIES OF PERSONAL REPRESENTATIVES The powers and duties of the personal representative of the decedent's estate are set forth in N.Y. Est. Powers & Trusts Law 11-1.1, 1977.
8/78
An executor or administrator is primarily charged with the duty of liquidating estate assets as soon as possible. (Matter of Larson's Estate, 385 N.Y.S. 2d 720 (1976)). According to Larson, the executor/administrator's usual functions include: 1) Paying debts; 2) Marshalling assets; 3) Distributing specific sums. The executor/administrator must at all times discharge its fiduciary duty so that all legatees are treated in like manner and without prejudice. (In re Muller's Estate, 300 N.Y.S. 2d 341 (1969)). In addition, he must at all times exercise utmost good faith and may never advance their own personal interests at the expense of the beneficiaries. (In re Israel's Estate, 315 N.Y.S. 2d 453 (1970)). Letters of administration must be granted to the persons who are distributees of an intestate and who are eligible and qualify. If there are eligible distributees who qualify and are equally entitled to administer the estate, the court may grant letters of administration to one or more persons. SPECIAL ADMINISTRATORS, ADMINISTRATORS WITH WILL ANNEXED, MULTIPLE REPRESENTATIVES Letters of administration may be granted to a trust company or other company authorized to act as a fiduciary. (N.Y. Surr. Ct. Proc. Act. 1001, 1977). Any person interested in the estate of an intestate may present a petition to the court having jurisdiction, asking for a decree granting letters of administration to him or to another person upon the estate of the decedent. (N.Y. Surr. Ct. Proc. Act. 1002, 1977). Letters of administration with will annexed will be granted in the following priority: a) a sole beneficiary; b) one or more of the residuary beneficiaries; c) one or more persons interested in the estate. The court may refuse to issue letters of administration with will annexed where distribution of the estate is possible under law. (N.Y. Surr. Ct. Proc. Act. 1418, 1977). PROCEDURE IN PROBATE PROCEEDINGS The probate proceeding is initiated by the filing of the petition, if process is issued and service made upon any respondent within 60 days after the date of filing the petition. When process is served by publication, the first publication must be made within 60 days of the filing of the petition. (N.Y. Surr. Ct. Proc. Act. 301, 1967).
8/78
The pleadings shall consist of the pleading, answer or objections and account. A demand for the relief sought must also be stated. (N.Y. Surr. Ct. Proc. Act. 302, 1967). The determination of the rights of the parties to a special proceeding is a decree which is enforceable as any decree, judgment or order made by the Supreme Court in an action. (N.Y. Surr. Ct. Proc. Act. 601, 1967). Upon the request of any interested person, any instrument acknowledging payment of moneys pursuant to a decree may be recorded with the court. This recordation is presumptive evidence of: 1) the contents of the instrument; 2) its due execution; 3) any payment of money or delivery of property acknowledged in the record. (N.Y. Surr. Ct Proc. Act. 604, 1967). PROCEEDINGS FOR SALE OF PROPERTY The court may authorize or direct the disposition of a decedent's real property. Disposition includes: a) b) c) d) e) f) g) h) i) Sale; Mortgage; Exchange; Lease; Confirmation of a prior lease made without court approval; Release of the right to an award for the taking of real property by eminent domain; Transfer to a spouse or other beneficiary in full or partial satisfaction of the interest or share of such person in the decedent's estate; Enter into possession of any real property and receive the rents from the property and apply them as directed by the court; Bringing a partition action if the property was held in common. (N.Y. Surr. Ct. Proc. Act. 1901, 1977).
The administrator, in selling land, should make a business judgment and utilize the powers given him. (In re Osterndorf's Estate, 349 N.Y.S. 2d 275 (1973)). The surrogate's court has discretionary power to order the disposition of a decedent's real property. In order to justify the sale, however, the action must serve to carry out the provisions of the will or benefit those interested in the estate. (In re Perkin's Will, 286 N.Y.S. 2d 586 (1967)). The real property may be disposed of for any or all of the following purposes: the payment of: administration expenses, funeral expenses, decedent's debts, (including judgment or other liens, excepting mortgage liens, which existed on the property before his death), estate or death tax, any debt or legacy charged upon the property, payment and distribution of the shares to the entitled persons and any other purpose the court
deems necessary. (N.Y. Surr. Ct. Proc. Act. 1902, 1967).
8/78
A sale will not be ordered if it appears that the fiduciary officer can satisfy the debts from the rents from the property. (N.Y. Surr. Ct. Proc. Act. 1905, 1977). RENUNCIATIONS, TRANSFERS, ASSIGNMENTS An executor is deemed to have renounced the appointment if: a) b) c) he does not qualify or renounce within 15 days after the probate of the will; he does not qualify or renounce within 15 days after the filing of the document designating him as executor; an objection is made to his appointment and he fails to qualify or renounce within 5 days after the court ruled in his favor. (N.Y. Surr. Ct. Proc. Act. 1416, 1967).
A person named as executor in a will may renounce his right to letters testamentary by an acknowledged instrument. However, a renunciation may be retracted by an instrument similarly executed to an instrument of renunciation. This retraction must be made before the letters testamentary or letters of administration with will annexed are issued to another. (N.Y. Surr. Ct. Proc. Act. 1417, 1967). A distributee may not renounce once he has accepted any part of the property. (Smith v. City of New York, 344 N.Y.S. 2d 799 (1973)). A renunciation of an intestate share or of a testate share is made retroactive to the date of death of the deceased and must be treated as if no inheritance or gift ever passed or vested to the person who renounces. (Matter of Dankner's Estate, 384 N.Y.S. 2d 683 (1976)). The intestate renunciation statute permits distributees of an intestate estate to pass the intestate share to those who would have taken it if the renouncing distributee had predeceased the intestate, usually benefitting the renouncer's issue. (In re Fienga's Estate, 347 N.Y.S. 2d 150 (1973)). An interest in the decedent's estate can be transferred or assigned. The purpose of the statute which authorized the recordation of this disposition is to furnish a means of protection against other assignees of the same interest. (In re Gray's Estate, 214 N.Y. S. 2d 834 (1961)). Gray also held that the recordation affects priority but not the validity of the disposition. STATE INHERITANCE TAX An inheritance tax is imposed on the transfer of any real or personal property when: 1) The transfer is by a will or by the intestate succession laws from a person who died owning the property while a resident of the state.
8/78
2)
The transfer is made by deed, grant, bargain, sale or gift in contemplation of death. However, if any of the transfer is made for a valuable consideration, that portion for which the consideration was paid is not taxable. Any person or corporation becomes beneficially entitled, in possession or expectancy, to any property or its income by a transfer. Any person or corporation exercises a power of appointment obtained from any disposition of property. This appointment will be deemed a taxable transfer.
3) 4)
5/84
Chapter 10 - Page 1 DECEDENT ESTATES 1 Underwriting
EFFECT OF DEATH ON RIGHTS TO DECEDENT'S PROPERTY When an individual owner of property dies, his natural dominion and control over his property is at an end. The right to dispose of property owned during one's lifetime and to control its distribution after death is not an inherent right. Such right was created by statute in Roman and Anglo-Saxon Law and persists pursuant to the provisions of New York Statutory Law today. Since such rights are created by statute it is essential that all the legal requirements provided for be complied with strictly. Warren's Weed, New York Real Property, Descent, sec. 101, p.4; 14 N.Y. Jur. Rev. Decedent's Estates, secs. 17, 18, p. 224; Doldeer's Estate, 226 N.Y. 623, 123 N.E. 381 (1919); In re Adam's Estate, 182 Misc. 937 (Surr. Ct., N.Y. City., 1943), 45 N.Y.S. 2d 494, aff'd, 267 A.D. 985, 48 N.Y.S. 2d 801 app. den., 268 A.D. 849, cert. den., Adams v. City Bank Farmers Trust Co., 324 U.S. 865; Matter of Whitney's Will, 153 N.Y. 259, 264, 47 N.E. 272, 273; 60 Am. St. Rep 616 (1897). If the owner chooses to dispose of his property by will and complies with all the statutory requirements, the property will pass according to the terms of the will when the will is duly admitted to probate. If there is no will, or the owner fails to comply with the provisions of law, or there is failure in the devise of some of the property, the property (or that part which passes by the partial intestacy) will pass according to the rules of statutory descent and distribution which, in effect, will designate the persons who are to take title to property. Both transfers as a result of disposition by will and disposition by virtue of intestate succession will be discussed in this chapter. QUALITY OF TITLE OF DISTRIBUTEES 1. Vesting of Title Upon the death of an intestate, title to his real property vests immediately and automatically in his heirs or distributees, as determined by the statutory law in force at the time of the decedent's death. This is so with respect to those interests which survive an owner's death; but is not applicable to those interests which automatically cease and terminate upon the death of the owner (See sec. II, supra). Since the vesting is automatic on decedent's death no Surrogate's proceeding at all is necessary to effectuate the vesting. A Surrogate's proceeding may, nonetheless, be desirable in order to marshall the assets of the estate, pay the debts and claims of the estate including taxes, determine the intestate distributees, and provide for an orderly and proper administration and distribution of the assets of the estate.
5/84
Prior to the occurrence of the intestate's death, and in absence of any enforceable agreements to the contrary, prospective heirs or distributees have nothing more than a mere expectancy or prospect of taking the real property by descent. During the lifetime of the decedent such expectancy could be frustrated by conveyance, the due execution of an enforceable will which remains effective and unrevoked at the time of death; or by the execution of various enforceable agreements which will be enforceable against decedent's estate and thus effectively defeat the interests of the distributees. When the property of an intestate decedent passes upon his death to two or more heirs or distributes, such individuals take their shares as tenants in common. See the statutory references set forth in section 3 above. In re Hilliard's Will, 164 Misc. 677, 299 N.Y.S. 788 (Surr. Ct., Kings Cty., 1937), aff'd, In re Hilliard's Estate, 225 A.D. 781, 7 N.Y.S.2d 111. In re Myers, 254 A.D. 879, 5 N.Y.S.2d reh'g. den Irving Trust Co. v. Day (N.Y.) 314 U.S. 556; 137 A.L.R. 1093. NB 2. See Heirship this manual Existing liens and encumbrances The quality of title to the real property which the heirs or distributees take upon the death of the decedent is no better than that held by the decedent immediately prior to his death. Therefore, it is subject to all existing liens and encumbrances including mortgages, judgments, tax liens and all other legal and equitable right of third persons in the property (See EPTL sec. 3-3.6). In addition, any unrecorded interests which would have been enforceable and effective against the decedent will be effective and enforceable against the heirs or distributees. Therefore, a proper and enforceable unrecorded deed, mortgage or other conveyances executed by the decedent as grantor will be effective against the distributees. Enforceable contracts of sale and other enforceable agreement or gifts will likewise be enforceable against the distributees. It is obvious that the distributees are not purchasers for value and are not entitled to the benefit of the recording act. Moreover, in short, as to existing encumbrances they stand in the same shoes as the intestate decedent. In re Dell's Estate, 154 Misc. 216, 276 N.Y.S. 960 (Surr. Ct., Orange Cty., 1935); Chamberlain v. Dunlop, 126 N.Y. 45 (1891(; Crippen v. Spies, 255 A.D. 411, 7 N.Y.S.2d 704 (3rd Dept., 1938). Debts and claims against the estate
3.
5/84
The title of distributees, in addition to being subject to all existing liens and encumbrances, is also subject to certain general debts and claims which may be enforced against the decedent's estate. Pursuant to EPTL sec. 4-1.1, the property, not disposed of by will, is to be distributed only after the expenses of administration, funeral expenses, debts (presumably the claims of general creditors of the decedent) and any Federal and State Estate and death taxes have been paid. These matters are discussed in Section VI below. DEVOLUTION BY WILL Just as in the case of intestacy where distribution is governed by the law at the time of death so also the devolutionary effect of a will and its provisions are governed and determined by the law in effect at the time of testator's death, not the law in force when the will is executed (see EPTL sec. 1-1.5). The law in effect at the time of execution, on the other hand, will govern the formalities of execution and attestation, as well as any limitations on the power of testamentary disposition. So far as the choice of law relating to devises of real property, EPTL sec. 3-5.1 specifically provides that the testamentary disposition of real property will be determined by the law of the jurisdiction in which the land is situated. NECESSITY FOR PROBATE A will is not operative until it is filed in the proper court and admitted to probate. Admission to probate involves establishing to the court's satisfaction, upon due notice to all required persons, that the will is the will of the testator, that it has been signed and witnessed and otherwise executed as required by law, that at the time of its execution the testator was of sound mind and that it, indeed, was the last will and testament of the testator. The execution of a subsequent will revokes an earlier will, unless it is intended to be a codicil to the earlier will. When the court is satisfied as indicated, the will is admitted to probate and is effective for all purposes, including the transfer of the title to real property, as of the time of the decedent's death, as provided therein. Until such admission the will is with no force and effect. PROBATE OF WILLS The probate of a will, as the name implies, is a formal proceeding for the purpose of proving the will. Since testamentary disposition by will is a statutory privilege, every element of the statutory prescriptions necessary for its validity must be met and proved in the Surrogate's Court, a court of record. When the will has been recognized by the decree of the court, all the provisions of the will become, as part of the judgment or decree, binding upon and incontestable by all those made party to the proceedings. The probate of a will, devising or directing the disposition of real property, thereby judicially confirms the transfer of the title intended by the testator.
5/84
Moreover, the decree, by its affirmance of the title of those taking under the will, gives the devisees and legatees the benefit of the statutes of limitation incorporated in the SCPA. When no executor has been named in the will, or when the named executor, or anyone entitled to act as executor in his place, is incapable of acting by reason of death or disqualification, the Court appoints an administrator to carry out the provisions of the will (See 6. Letters of Administration with Will annexed, below. Also see the discussion regarding title practices set forth in VI. G infra.) The execution of a domestic will is governed by EPTL Article 3, Part 2. A will executed in another jurisdiction is governed by EPTL Article 3, Part 5. QUALITY OF TITLE OF DEVISEES 1. Vesting of title Generally the title of a devisee does not arise from the mere fact that the will has been executed by the testator, since the will is an ambulatory instrument revocable by the testator at any time before his death. There are some situations, however where a will may not be revoked. This occurs where there is an agreement, for good and valuable consideration, whereby parties agree either to execute joint, mutual and reciprocal wills or to provide property or services in consideration for the execution of a particular will by the recipient. Subject to the requirements of any circumstances which would disqualify the proposed devisee, and to the scrutiny of the court acting in its capacity as a court of equity, such agreements may be specifically enforced. Nevertheless, although intended beneficiaries often anticipate their inheritance by assigning their benefit in it, their title can arise only after the death of the testator, and subject to the solvency of the estate. Moreover, unlike the title of a distributee, the title of devisees does not vest automatically and immediately upon the death of the decedent. The testamentary gift to the devisees, provided for in the will of the testator, is considered an offer, and without acceptance of the gift there is no vesting or passage of title to the devisees. In the absence of a renunciation, however, acceptance of a devised gift, beneficial on its face, is presumed within a reasonable time. Once there is acceptance of the devise, title of the devisee relates back to the date of death. Unless testator expresses a contrary intention in the will a devise to two or more persons or devisees creates in them a tenancy in common. (EPTL sec 6-2.2., incorporating former RPL sec. 66).
5/84
Overheiser v. Lackey, 207 N.Y. 229 (1913); In re Walker's Will, 195 Misc. 793, 89 N.Y. S. 2d 826 (Surr. Ct., Broome Cty., 1949), modified, 277 A.D. 811, 97 N.Y.S.2d 82 (3rd Dep.); In re Bennett's Estate, 22 Misc. 2d 505, 207 N.Y.S. 2d 200 (Surr. Ct., Wayne Cty., 1959). 2. Existing liens and encumbrances; debts and claims Just as in the case of the intestate distributees in intestacy, the devisees under a will take subject to all existing liens and encumbrances on the property. (See EPTL sec. 3-3.6). In like manner, just as the title of the distributees is subject to certain general debts and claims which may be enforced against the decedent's estate, so is the title of the devisees. GENERAL POWERS OF DISPOSITION BY A FIDUCIARY The statutory powers given fiduciaries were thoroughly revised with the passage of section 127 of the Decedent Estate Law effective June 1, 1965 (The Fiduciaries' Powers Act). It consolidated the statutory powers of trustees and personal representatives which were formerly scattered among several statutes. Basically, if conferred a number of powers on a fiduciary, where the instrument appointing him is silent, of the type generally found in the "boiler plate" clauses of well drawn wills and trusts. As of September 1, 1967 sec. 127 of the Decedent Estate Law was replaced by sec. 11-1.1. of the Estates, Powers and Trust Law. The statutory powers may be expressly limited or excluded by the will or trust instrument, while other powers, not included in Article 11 of EPTL, may be expressly conferred, except for the powers prohibited by EPTL sec. 11-1.7 (a) as being contrary to public policy, which are: a. b. exoneration from liability for failure to exercise reasonable care, diligence and prudence; and the absolute power to fix the value of any asset for distribution.
As originally enacted and as subsequently amended, the Article has accomplished a number of major changes with respect to the powers of a fiduciary including the abolition of the distinction between personal and real property in the administration of an estate. This permits the personal representative to sell, under EPTL sec. 11-1.1 (b) (5), any property not specifically disposed of without specific court order. Under New York Law, an executor takes unqualified legal title to all of decedent's personal property not specifically bequeathed, however, title to property specifically bequeathed vests in the legatee as of testator's death, subject only to certain rights of retention and use in the executor, and title to real property passes directly to the devisee
as of the date of death, without passing through the executor. In re Bentley, 120 B.R. 712.
5/84
Title to real property devised under Will of decedent generally vests in beneficiary at moment of testator's death. DiSanto v. Wellcraft Marine Corp., (2nd Dept., 1989) 540 NYS2d 260, 149 AD2d 560, appeal denied 552 NYS2d 108, 75 NY2d 703. Real property title vests in the distributees on the date of death, and in devisees once the Will is probated, subject to power of sale possessed by the fiduciary. Application of Fello, (Sur., 1981) 440 NYS2d 1004 109 Misc2d 744, reversed 449 NYS2d 770, 88 AD2d 600, affirmed 461 NYS2d 1009, 58 NY2d 999. Landmark cases are Trask v. Sturgess, 170 NY 482, 63 NE 534; Hetzel v. Barber, 69 NY 1. WHAT INTEREST MAY BE MORTGAGED? Any interest capable of passing by purchase or decent is capable of being encumbered by a mortgage, Mutual Life Ins Co. v Shipman, 119 NY 324; Real Property Law, Section 240 (4). Article 8 of the Real Property Law dealing with conveyances and mortgages defines the terms "estate" and "interest in real property" as including every such estate and interest, freehold or chattel, legal or equitable, present or future, vested or contingent. According to the Real Property Actions and Proceedings Law, Section 1602, when the ownership of real property is divided into one or more possessory interests and one or more future interests, the owner of any interest in such real property or in the proceeds to be derived therefrom on a direct sale thereof except the owner of a possessory estate in fee simple absolute therein, may make application to the court for an order directing that such real property or a part thereof be mortgaged. OTHER TITLE CONSIDERATIONS While EPTL now empowers a fiduciary to sell property without a specific order of court, the fiduciary's power to sell should be established by a proceeding for probate or administration. If no letters have been issued, and no order for sale has been made, it is necessary to have all parties in interest join in a conveyance by the fiduciary. In the case of a will, these include all parties required to be joined in the proceedings for probate: beneficiaries under the will as well as presumptive distributees. A deed by a fiduciary should recite full consideration, to avoid marketability problems and the need to establish off the record that full consideration was paid. One last time I ask for your indulgence in repeating the admonition that when dealing with a death in the chain of title the substantive law that will govern is the law in effect at the time of death. Such admonition is certainly applicable in the consideration of the powers of the fiduciary.
5/84
A proper historical consideration of all the changes in the law relating to the powers of a fiduciary and all issues raised by such laws could be undertaken at length in an exhaustive treatise. Such a consideration is beyond the purpose and scope of this text and chapter, beyond the energy of this writer, and perhaps beyond the patience or interest of the readers. As is the case with all former law, the earlier laws relating to the powers of a fiduciary become less and less significant with the passage of time, and as the deaths encountered in the chain of title occur subsequent to the effective duration of such laws. Thus, the following represents a brief summary of some of the more significant changes in such laws. Section 13 of the Decedent Estate Law was adopted in 1930 and provided that duly qualified executors and trustees would be deemed to have a power to sell, lease or mortgage real property even if no such power was contained in the will. However, despite this broad provision, the statute and related statutes were construed so that the right to sell, lease or mortgage real property could not be exercised except upon Surrogate Court approval obtained through a proceeding brought under sec. 234 of the Surrogate's Court Act. Executors, trustees and administrators could petition the court under sec. 234. Effective September 1, 1947 sec. 13 DEL was amended to authorize executors and testamentary trustees to sell, lease or mortgage real property without court approval despite the absence of any power contained in the will. Such statutory power could be exercised without proceedings and court approval except: (1) (2) (3) Where the will expressly prohibited the sale, lease or mortgage; or Where the will expressly provides that a particular parcel shall not be sold, leased or mortgaged; or Where the property was specifically devised to one person not under a disability.
At this time an administrator could sell only upon due proceedings and court approval. On June 1, 1965 sec. 127 DEL replaced sec. 13 DEL. Section 127 authorized executors, trustees and other fiduciaries, including administrators to sell, lease or mortgage real property without proceedings and court approval. The statutory power in the case of executors and trustees was not applicable if the will or other instrument provided otherwise or where the property was specifically devised to one person not under a disability. In the case of an administrator, he must post an additional bond. In addition, the letters of administration should be carefully reviewed, for the Surrogate often limited the administrator's powers in the letters.
5/84
Effective September 1, 1967 the EPTL repealed the DEL and sec. 11-1.1 EPTL now sets forth the statutory powers. A most significant difference in the new law is that EPTL sec. 11-1.1 (b) (5) expressly excepts from the powers granted to the fiduciary the power to convey, mortgage or lease real property specifically disposed of. In such an instance, a specific order of the Surrogate's Court or the execution of the instrument by all interested parties must be obtained. Note that the former rule DEL sec. 127, only limited the fiduciary in regard to property devised or descending to one person. The statutes referred to above including the current EPTL sec. 11-1.1. (d) purport to apply to estates of all decedents irrespective of the dates of death. The constitutionality of such retroactive provisions is suspect. Hence, until the constitutionality of such provisions is clearly established, title insurers will apply such laws prospectively to the estates of decedents dying on and after the respective effective dates of the statutes.
5/79
Chapter 10 - Page 1 DECEDENTS ESTATES 2 PROBATED ESTATES - SALE BY EXECUTOR UNDER POWER Underwriting
In general, upon the death of an owner of land, its ownership passes to his heirs or devisees. The devolution of title, absolute and complete, is not automatic however. In a testate estate, probate is necessary to establish the will and antecedent to a determination of the persons who shall become entitled to the ownership of the land. Thereafter, ownership passes subject to the debts of the decedent. The debts are a potential lien upon the land and until they are discharged or barred by time, they remain an encumbrance rendering the title to the land unmarketable. Where an estate is in probate and the decedent's executor has a power of sale under the will, he may wish to sell immediately to preserve the asset, pay debts, etc. Conveyances by executors and/or administrators under powers and according to statute give the purchaser title free and clear of the claims of the creditors or the estate, their rights attaching to the proceeds of sale. In order that statutory liens be properly discharged, the attorney for the estate should make a frank disclosure of the assets of the estate. An estimate can be formed of the outside limit of the anticipated death taxes by submitting copies of the following: For N.Y. Estate Taxes - Copy of: (1) (2) (3) (4) TT102 or copy of Order fixing tax together with Copy of the transmittal letter of An estate tax remittance
For Federal - Copy of the 706 form. The total of these amounts are deposited with the title company plus a cushion, all which is returned to the executor upon proof of payment of death taxes.
5/79
Chapter 10 - Page 1 DECEDENTS ESTATES 3 ESTATES TAXES Underwriting
FEDERAL ESTATE TAX Affidavits can be used to dispose of this question where the gross estate wheresoever situated including all personal and real property is less than $600,000.00. Affidavits are sometimes used in cases where the estate is in excess of $600,000.00 where a full disclosure is made of the amount of the gross estate, the nature of the deductions, and the net figures show the estate is substantially less than $600,000.00. Where property is sold by the survivor of a tenancy by the entirety to a purchaser for value the Internal Revenue Service has ruled that the purchaser takes title free of the lien of Federal Estate Tax due on the estate of the deceased spouse. Note: New York State Tax Commission now follows this rule. NEW YORK ESTATE TAX Can be disposed of by one of the following: (1) (2) (3) (4) Order of exemption after a tax proceeding in which the property is listed. Proof of payment of a tax fixed in accord with a tax proceeding in which the property is listed. A recorded release of lien of the specific property in accordance with Section 249BB of the Tax Law. Title companies now apply a rule of the Tax Commission regarding sales by a survivor of a joint tenancy or tenancy by the entirety.
Note: Affidavits showing non-liability for tax are NOT acceptable by title companies with respect to New York Estate Tax.
8/79
Chapter 10 - Page 1 DECEDENTS ESTATES 3 ESTATE TAXES Legal Bulletin
NEW YORK ESTATE TAX 1. Section 249-11 of the Tax Law provides that the lien on real estate of New York Estate Taxes ceases fifteen years after accrual in all cases. We will not raise any question of New York Estate Tax if the decedent died more than fifteen years prior to the date of examination of title. Death on or before June 30, 1978. The rate of the tax for resident decedents is set forth in Section 249-n of the Tax Law. The rate applicable to estates of persons who died on or after April 1, 1959 is a sliding scale beginning at 2% of the first $50,000 of the net estate and 3% of the next $100,000 and going up to 21% of the excess of the net estate over $100,000. The net estate is computed after deductions from the gross estate of various personal exemptions and of insurance up to $100,000. 3. Death on and after July 1, 1978. Chapter 67 of the Laws of 1978, effective July 1, 1978, completely revised the estate and gift tax laws. The revisions however did not adopt all of the provisions of the Federal Tax Reform Act of 1976. a) b) c) d) There was and is no unified gross estate and gift tax. There was and is no unified gross exemption. Credits for personal and insurance exemptions have been eliminated (Tax Law Sections 952 (b) and 958). A new general estate tax credit provided under Section 952 (b) is to be applied before other credits (Agricultural exemptions, tax on gifts or prior transfers). Pursuant to this section a New York State gross estate of up to $108,333.33 will receive a credit of $2750 which will cancel the full amount of the tax. Where the gross estate exceeds the aforesaid sum the applicable credit declines to a maximum of $500 if the gross estate tax exceeds $5000 or more. Taxes are still computed at the rates provided for in Section 249-n (See Paragraph 2 above). Where the gross estate of a New York decedent who dies on or after July 1, 1978 is $100,000.00 or more, an affidavit cannot be used to omit an exception as to the New York Estate Tax. The question may only be passed upon a Release of New York Estate Tax or upon a Motion to Fix the Estate Tax and receipted bills showing payment of the same.
2.
e)
8/79
4.
An escrow or an indemnity to cover the New York Estate Tax can only be taken with the consent of counsel and then only for the purpose of omitting the exception for the mortgage and insuring the fee against collection.
FEDERAL ESTATE TAX 1. Section 26 U.S.C. 6324 provides that the lien on real estate of the Federal Estate Tax ceases ten years after accrual in all cases. We do not raise any questions of federal estate tax if the decedent died more than ten years before the date of examination of title. a) Death on or before December 31, 1976 The exemption for federal estate taxes up to and including December 31, 1976 was $60,000. An affidavit to the effect that the gross estate did not exceed that amount can be taken so as to pass an exception as to federal estate tax. Gross estate was defined as not including lifetime gifts unless made in contemplation of death (presumably within three years of the decedent's death). b) Death on and after January 1, 1977 i) The Tax Reform Act of 1976 redefines the gross estate which now includes all real estate, stocks and bonds mortgages, notes and cash, insurance on decedent's life, jointly owned property, transfers during decedent's life without an adequate or full consideration, powers of appointment, annuities, certain personal property, interests in a partnership of unincorporated business, and the value of the decedent's adjusted lifetime gifts. Where the current gross estate as above defined of a decedent who dies on or after January 1, 1977 is $600,000 or less, an affidavit may be used to omit an exception with respect to the lien of the gross estate [see the table on the following page showing changes in the size of estates subject to federal estate tax].
2.
ii)
3.
Where the current gross estate as defined in (2) (b) (i) above for a decedent who dies on or after January 1, 1977 is $600,000 or more, an affidavit cannot be used to omit an exception as to federal estate tax. The question may be passed only upon a Release of the lien of the federal estate tax or a closing letter from IRS and the cancelled checks showing the tax thereon, fully paid. An Estate Tax Clearance Letter, Escrow or an Indemnity to cover the federal estate tax can only be taken with the consent of counsel and then only for the purposes of omitting the exception for the mortgage and insuring the fee against collection.
4.
8/79
Note: 1)
In succeeding years the exempt gross estate for decedents dying in those years will be increased as follows: prior to year January 1, 1977; less than Commencing January 1, 1977; less than Commencing January 1, 1978; less than Commencing January 1, 1979; less than Commencing January 1, 1980; less than Commencing January 1, 1981; less than Commencing January 1, 1983; less than Commencing January 1, 1985; less than Commencing January 1, 1986; less than Commencing January 1, 1987; less than $60,000. $120,000. $134,000. $147,000. $161,000. $175,000. $325,000. $400,000. $500,000 $600,000.
Note: 2)
The tax rates range from 18% of the first $10,000 of taxable estate to a rate of 70% of taxable estate in excess of $5,000,000.
8/79
Chapter 10 - Page 1 DECEDENTS ESTATES 3.1 ESTATE TAXES - ENTIRETY AND JOINT Legal Bulletin
1.
Section 6324 of the Internal Revenue Code provides that a bona fide purchaser or mortgagee from a surviving joint tenant or surviving tenant by the entirety takes the property or the mortgage free of the lien of federal estate tax due from the estate of the deceased tenant by the entirety. A ruling was made by the Internal Revenue Service in 1956 to the effect that a purchaser or mortgagee who deals at arms's length with the property and pays a full and adequate consideration to the survivor is a bona fide purchaser notwithstanding that he has actual knowledge of the death. Similarly, as to the lien of the New York Estate Tax, Section 249-BB of the New York Tax Law protects a bona fide purchaser from the surviving joint tenant or tenant by the entirety. However, it makes no provision for the holder of a mortgage executed by such survivor. A ruling by the State Tax Commission follows the 1956 ruling of the Internal Revenue Service in recognizing that a purchaser who pays full and adequate consideration is a bona fide purchaser. Therefore when property is being sold for a valuable consideration by a surviving joint tenant or tenant by the entirety, we may disregard both federal estate and state estate taxes against the estate of the deceased tenant. When a mortgage is being made by a surviving joint tenant or tenant by the entirety, we may disregard the federal estate tax but not the state estate tax against the estate of deceased tenant.
2.
3.
4.
5.
Chapter 10 - Page 1 DECEDENTS ESTATE 4 FIDUCIARY PURCHASES Title
FIDUCIARY PURCHASES A trustee or other fiduciary cannot buy the trust property nor may he sell his individual holdings to himself as trustee, because such transactions can be attacked by the beneficiaries.198 That a full and adequate consideration was paid is no defense. Such a transfer is not void but is voidable at the election of the cestui que trusts. 199 If a chain of title discloses a deed from executors to a stranger and later there is a deed from the grantee back to one of the executors, an objection to the title will be set up because the transaction is subject to attack and the deeds may be set aside. Such a transaction makes the title unmarketable.200 This prohibition also extends to the husband and wife of an executor or trustee.201 Such voidable purchases may be validated and the title cured by having the purchase confirmed by the court on a full disclosure of the facts and on notice to all interested parties. 202 This can usually be done in an accounting proceeding. A purchase by a guardian of an infant is made void by statute.203 In a proceeding to sell for debts a purchase by the administratrix was held void and an action to determine claim could not be maintained to cure the defect.204
198
In re Fulton, 253 App. Div. 494; In re Whitmore, 172 Misc. 277.
Boerum v. Schenck, 41 N.Y. 182; Hubbell v. Medbury, 53, N.Y. 98; People v. Open Board of Stockbrokers Bldg. Co., 92 N.Y. 98.
200
199
LePage v. Goldstein, 121 Misc. 233. Seymour v. Seymour, 120 Misc. 525
201
Gallatian v. Cunningham, 8 Cow. 361; Rhodes v. Caswell, 41 App. Div. 229; Corbin v. Baker, 167 N.Y. 128; Webster v. Kings Co. Trust Co., 145 N.Y. 275.
203
202
C.P.A. 987; O'Donoghue v. Boies, 159 N.Y. 87.
204
Kaufman v. Koldin, 263 N.Y. 535
Chapter 10 - Page 2 DECEDENTS ESTATE 4 FIDUCIARY PURCHASES Title
In the case of a voidable sale, the ten year statute of limitations is usually applicable if there are no disabilities 205 Where, however, a trustee bought a mortgage which was a prior lien, foreclosed it and bought in the property individually, it was held that the 20 years statute, now reduced to 15 years, (applying to actions to redeem from mortgages)206 would apply.207 If executors or trustees desire to purchase any part of the estate property, the better practice is to obtain court approval before the consummation of the sale. This can usually be secured on a showing of the fairness of the proposed sale.208 In one estate, the executors owned real estate individually and the estate held mortgages thereon. The executors as individuals were authorized to purchase a $35000 mortgage for $6500 and a $40000 mortgage for $20,750. The executors were able to show that there was no other market where the mortgages could be sold at a higher price. All of the parties being before the court, no question of marketability of title could thereafter arise.209
Yeoman v. Townshend, 26 N.Y.S. 606; Smith v. Hamilton, 43 App. Div. 17; Dugan v. Sharkey, 89 App. Div. 161; Cahill v. Seitz, 93 App. Div. 105; As to disabilities, see Messinger v. Foster, 115 App. Div. 689, 691; N.Y.C. & H.R.R.R. Co. v. Cottle, 102 Misc. 30 aff'd 187 App. Div. 131, 229 N.Y. 514.
205
206
C.P.A. 46 Jefferson v. Bangs, 197 N.Y. 35 In re Mairs, Millard, S., Oct. 14, 1941; In re Segal, 170 Misc. 673
207
208
209
In re Segal, 170 Misc. 673.
8/79
Chapter 10 - Page 1 DECEDENTS ESTATES 4 PURCHASE BY FIDUCIARY Legal Bulletin
1. 2.
It is a fundamental principle that a fiduciary cannot convey property to himself, directly or indirectly. A conveyance by an executor, trustee, attorney in fact, guardian, committee or other fiduciary to himself is voidable and makes a title unmarketable, no matter how fair the consideration may appear to be. A conveyance by the fiduciary to wife or husband or close relative or nominee is also voidable. Sometimes it is sought to cure such defect by reconveyance to the fiduciary in his fiduciary capacity, but in such cases the matter should be submitted to counsel. Such transactions may be ratified by a court having jurisdiction in an appropriate proceeding or action, but all persons having any vested or contingent interest in the property or in the proceeds of the sale thereof must be made parties to such proceeding or action. An example: A devise is made to "A" for life with remainder to "A's " children, the children of a deceased child to take the share of the parent. "A" has three children, all adults. "A" and his three children cannot convey a marketable title to the property because of the contingent remainders in the children of the children, born or unborn. If the property is sold by the executor of the will to himself in an attempted exercise of a power of sale, it is not effective unless jurisdiction is obtained of "A" and all his descendants, including children, grandchildren and great-grandchildren.
3.
8/79
Chapter 10 - Page 1 DECEDENT ESTATES 5 FIDUCIARY POWERS Legal Bulletin
POWERS OF EXECUTORS AND TRUSTEES 1. A review of the statutes giving fiduciaries the power to sell, mortgage or lease is in order. Under the provisions of Section 13 of the Decedent Estate Law, as originally enacted in 1930, Executors and Trustee, in the absence of express powers granted by the will, could not sell, mortgage or lease real property without court approval. An amendment which took effect on September 1, 1947 provided that wills should be construed to confer on executors or trustees such powers unless the will expressly prohibited the exercise thereof or specifically devised the property to one person not under disability. Section 13 of the Decedent Estate Law was repealed effective June 1, 1965 and was replaced by Section 127 of Decedent Estate Law. The statute authorizes an executor or administrator to lease property for a term not exceeding ten years. Under Section 127 the statutory power could not be exercised if the property was specifically devised or descended to one person not under disability. Thus if a specific piece of property was devised by will to several persons, Section 127 permitted the executor or trustee to sell the property unless the power was expressly denied by the will. The amendment prohibits the exercise of the statutory power if the property is specifically devised. Thus under the new law, if a specific piece of property is devised to several persons, whether adults or infants, the executor cannot sell the property without court approval unless he is given express power in the will to sell the property specifically devised, whether to one or more persons. The new Estates, Powers and Trusts Law, which took effect September 1, 1967 repealed the entire Decedent Estate Law. The provisions for statutory powers of fiduciaries to sell, mortgage or lease real property, which formerly appeared in Section 127 of the Decedent Estate Law, is found in Section 11-1.1 of the Estates, Powers and Trust Law. These powers are extensive and apply in the absence of contrary provisions in the will. A ten-year lease by a trustee may be insured if the death occurred on or after June 1, 1965. For a longer lease a court order is required unless the will expressly grants the power to lease for a term which may last longer than the term of the trust. A mere power to lease for any number of years is not sufficient.
2.
3.
4.
5.
NOTE:
Although the statutes digested above purport to apply to estates of decedents regardless of the date of death, we must be careful not to approve titles made through the statutory power of sale or mortgage unless the applicable statute was in effect at the date of the death. Thus an executor's or trustee's statutory power to sell or mortgage may not be exercised if the death occurred before September 1, 1947.
POWER OF ADMINISTRATORS 1. 2. Section 13 of the Decedent Estate Law did not contain any power in the administrator to sell, mortgage, or lease property without court approval. Section 127 of the Decedent Estate Law replaced Section 13, effective June 1, 1965. This section confers on an administrator of an intestate the power to sell, mortgage, or lease without the court order provided that an additional bond is given pursuant to Section 121 of the Surrogate's Court Act (now Section 805, subdivision 3 of the Surrogate's Court Procedure Act). NOTE: 3. An administrator's power may not be exercised unless the death occurred after June 1, 1965.
See paragraph 4 above. Applies to administrators effective September 1, 1967.
FIDUCIARIES POWERS - MULTIPLE OR MAJORITY ACTION a. Trustees (three or more) after June 1, 1965: 1. Section 13 of the Decedent Estate Law was repealed by a statute which took effect on June 1, 1965 and was replaced by a new section, Section 127 of the Decedent Estate Law. The new section permits (unless the will otherwise directs) the majority of the survivors of the qualifying trustees to exercise the powers conferred by the statute. This provision was carried over to EPTL 11-1.1 (13) (b), since repealed but was carried into amended Section 10-10.7 EPTL (effective June 22, 1973).
b.
Executors, Trustees or Administrators (three or more) after June 22, 1973: 1. Chapter 904 of the Laws of 1973, effective June 22, 1973, amended Estates, Powers and Trust Law, Section 10-10.7, and repealed Estates Powers and Trusts Law, Section 11-11.1, Subdivision (b), Paragraph 13.
2.
It is now clear the multiple fiduciaries (three or more) whether they be trustees, executors or administrators, unless contrary to the express provisions of an instrument conferring power, may act by a majority (or a majority of the survivors). Where joint powers are conferred upon two fiduciaries, both must act in concert, provided that the survivor fiduciary may act alone, unless otherwise provided in the governing instrument. The prior provision in EPTL 11-1.1(13) (b) was limited to trustees rather than all fiduciaries. EPTL 10-10.7 was not so limited and was carried over from Section 166 of the real Property Law. The amendment eliminates the apparent disparity and existing case law permitting one or two or more personal representatives to act for and bind an estate when exercising a several power. Until decided by a higher court, the question of the possible retroactive effect of the new amendment will remain unsettled. Until such decision, we will treat the amendment (with respect to executors) as effective only with respect to the estates of decedents dying on or after June 22, 1973, or as to instruments becoming effective on or after June 22, 1973.
3.
8/79
Chapter 10 - Page 1 DECEDENTS ESTATES 6 RENUNCIATION OF DISPOSITIONS AND INTESTATE SHARES Legal Bulletin
Renunciation of testamentary provisions has heretofore been covered by EPTL 3-3.10 and renunciation of intestate shares by EPTL 4-1.3. These two sections have been repealed as of August 11, 1977, and have been replaced by a new EPTL 2-1.11 which provides a procedure for renunciation of dispositions and intestate shares. A disposition includes dispositions created under wills, trust agreements, powers of appointment, and the distributive share provisions of EPTL 4-1.1 as well as any of the foregoing created or increased by a renunciation made by another person. A beneficiary may accept one disposition and renounce another. Renunciation of a fractional part of a disposition is a renunciation of such fraction of all property passing to the renouncing party, while renunciation of a stated amount renounces the proportion of all the property to which such party is entitled under the disposition that the stated amount bears to the value of all property to which he is entitled in the absence of the renunciation. However, a distributee may not limit a renunciation to specified items of a decedent's estate. Property which has been accepted may not thereafter be renounced, except that an interest passing to a party by the renunciation of another may thereafter be renounced. A renunciation must be in a signed, acknowledged writing which should be filed in the office of the clerk of the court having jurisdiction over the will or trust agreement governing the property or the court which has issued letters of administration. The renunciation must be made within one year of the effective date of the disposition and must be accompanied by an affidavit of the renouncing party that he has not received and is not to receive any consideration for the renunciation from a person whose interest is to be accelerated. Notice of renunciation must be served personally or as the court directs upon the fiduciary in the will, trust agreement or estate and by mail or as the court directs upon all persons whose interest may be created or increased by the renunciation. The effective date of disposition for filing and service purpose is the date of probate of a will if the interest is created or the power of appointment is exercised by will; the date of execution of the trust agreements or the instruments exercising the power of appointment if the interest is so created; the date letters of administration are issued if the renunciation is of a distributive share, or the date upon which a person renouncing receives notice that a disposition to him has been created or increased by the renunciation of another; however, the effective date for a disposition which is a future estate is the date on which it becomes an estate in possession.
8/79
Chapter 10 - Page 2 DECEDENTS ESTATES 6 RENUNCIATION OF DISPOSITIONS AND INTESTATE SHARES Legal Bulletin
Unless otherwise provided, a renunciation has the same effect with respect to the renounced interest as though the renouncing party has predeceased the creator or decedent or, in the case of a future estate, had died at the time of filing or just prior to the estate's becoming an interest in possession, whichever is earlier in time. Possession and enjoyment of subsequent interests are accelerated except where such interest are limited to estates other than the renounced interest. Renunciation of a distributive share will not decrease the share of any other distributee. A renunciation is retroactive to the creation of the disposition. Renunciation of a present interest by a person who has both a present and future interest in property is deemed to be a renunciation of the future interest to the same extent. A renunciation may be made on behalf of an infant, incompetent, conservatee, or a decedent by the guardian of the property, a committee, a conservator or a personal representative, as the case may be. In such cases, the agent renouncing must receive the prior authorization of the court of proper jurisdiction. Renunciations may be revoked upon application to the court, but petitions for revocation will not be granted if filed more than three months after the renunciation unless there is no prejudice to third parties. The new section applies to dispositions created or increased on or after August 11, 1977, except that with respect to renunciation of future interest, it will apply to dispositions created or increased prior to the effective date of the section. (L. 1977, c. 861).
8/79
Chapter 10 - Page 1 DECEDENTS ESTATES 7 WILLS, FOREIGN Legal Bulletin
1.
Prior to September 1, 1967 Sections 44 and 45 of the Decedent Estate Law authorized the recording of exemplified copies of a will probated in another state and of the letters testamentary issued thereon. This recording was sufficient to enable us to insure titles made through such foreign will. When the original foreign executor named in the will sought to exercise a power of sale over New York property, we did not require the issuance of ancillary letters in New York, although we did require ancillary letters on a sale by a foreign trustee, or by an administrator with the will annexed. The Decedent Estate Law has been repealed. The substance of Sections 44 and 45 has not been incorporated in the new Estates, Powers and Trusts Law. Therefore, the mere recording of a will since September 1, 1967 is not sufficient to make the title insurable. Article 16 (Sections 1601 to 1616) of the new Surrogate's Court Procedure Act, which took effect on September 1, 1967 authorizes ancillary probate in New York of wills proved in a foreign jurisdiction and the issuance of ancillary letters thereon. Process in such ancillary proceeding must be issued to the State Tax Commission, to all domestic creditors, and to such other persons entitled to letters as the court directs. Therefore, if a decedent died seized of real property in the State of New York leaving a will probated in another jurisdiction and exemplified copies of the will and letters were not recorded in New York before September 1, 1967, our report must call for ancillary probate and issuance or ancillary letters in the county where the real property lies pursuant to Article 16 of the Surrogate's Court Procedure Act.
2.
3.
4.
Chapter 10 - Page 1 DECEDENTS ESTATES WILLS Legal Bulletin
ADMINISTRATOR C.T.A. (OLD) Where letters of administration with the will annexed are granted, the will of the deceased shall be observed and performed; and the administrators with such will have the rights and powers and are subject to the same duties, as if they had been named as executors in the will. "See Sec. 225 of the Surrogate's Court Act." Hollenbach v. Born, 206 A.D. 533, affirmed 238 N.Y. 34. As to the powers of an administrator with the will annexed prior to the Surrogate's Court Act of 1914, each case stands by itself depending entirely upon the construction of the will. AFTER-BORN CHILDREN A child born after the making of a will not provided for or "in any way mentioned" in such will, takes as if the testator had died intestate. Sec. 26 of the Decedent Estate Law. Nor does a power of sale in the will cut off the after-born child's interest. Smith v. Robertson, 89 N.Y. 555. But see matter of Hardenberg 144 Miscl. 248 CHARITABLE BEQUESTS See Sec. 17 of the Decedent Estate Law in reference to bequest of more than one-half the estate to charity. See also the following cases bearing upon this subject: Matter of Ham, 242 N.Y. 536. Matter of Seymour, 239 N.Y. 259, modifies 203 N.Y. Supp. 914. Unger v. Loewy, 236 N.Y. 73. In re Transfer Tax - Estate of Carnegie, 236 N.Y. 517. Barber v. Terry, 224 N.Y. 334. Jones v. Kelly, 170 N.Y. 401. Matter of MacDowell, 217 N.Y. 454. Decker v. Vreeland, 220 N.Y. 326. Amherst College v. Ritch, 151 N.Y. 282. Smith v. Chesebrough, 176 N.Y. 317. Kalish v. Kalish, 166 N.Y. 368. Hetzel v. Barber, 69 N.Y. 1 as to power of sale. Chamberlain v. Chamberlain, 43 N.Y. 424. Chamberlain v. Taylor, 105 N.Y. 185. In Re Braasch's Will, 206 A.D. 96; 200 N.Y. Supp. 404.
In re Oster's Will, 204 N.Y. Supp. 235. In re Title Guarantee and Trust Company re Hamilton's Will, 165 N.Y. Supp. 71 Affirmed 172 N.Y. Supp 922 In re Suydam's Will, 203 N.Y. Supp. 911 EQUITABLE CONVERSION There is no conversion of realty into personalty in the absence of a mandatory direction to sell, either express or implied from necessity. The power of sale to the trustee in this case was conditional on the consent of adult children. Fidelity - Philadelphia Trust Co., Etc. v. Grante et al., New York Law Journal, March 28, 1928. EXECUTION OF See Sec. 21 of the Decedent Estate Law. Also Matter of Roe, 82 Misc. 565. Hoysradt v. Kingman, 22 N.Y. 372, as to signatures of witnesses. EXECUTORS Where executors foreclose a mortgage held by the testator in his lifetime and purchase the property at the foreclosure sale, the character of the real estate is changed and becomes personal property in the hands of such executors. The leading case on this personal property fiction is Lockman v. Reilly, 95 N.Y. 64. It appears to be the rule that one of two executors may satisfy a mortgage that is due. People v. Keyser, 28 N.Y. 226. But it is not well settled that one of two executors may assign a mortgage. A mortgage payable to three executors and trustees is not properly satisfied by one (or two). People ex rel Moscovitz v. O'Loughlin, 79 Misc. 650 In this opinion Judge Benedict says: "Of course, if a mortgage ran to three executors, any one of them could satisfy it." Note - In dealing with trustees, however, all must join in either a satisfaction or an assignment of a mortgage.
See Bogert v. Hertell H.Hill 92 (asst.) PERPETUITIES Hoyt v. Hoyt, 210 N.Y. Supp. 155. Affirmed 213 N.Y. Supp. 823 POWER OF SALE Executors cannot sell and take stock in a corporation as a consideration. Sale must be for cash or equivalent of cash. This is true even though there was a full power of sale in the will. Schoellkopf Holding Co. V. Kavinoky, 216 N.Y. 507. Upon resignation and revocation of letters testamentary of one of two executors, the power may be validly exercised during the lifetime of the resigning executor by the remaining executor. Striker v. Daly, 175 A.D. 620; 223 N.Y. 468. Where a will devises one-half the property to the wife for life with remainder to children and provides that the wife may sell realty upon obtaining the consent of her co-executor who dies without his consent having been obtained, held; the power of sale is not destroyed and the wife may give good and marketable title. Loeb v. Hasslacher, 209 A.D. 58; 203 N.Y. Supp. 393. See also Secs. 166 and 173 of the Real Property Law. POWER OF SALE (IMPLIED) Where the will provided that the executors should "pay over" their part or portion of the estate and further that "upon all sales made by my executors," held that there was an implied power of sale. Burnham v. White, 117 A.D. 515. A will provided that "until the sale and conveyance of said premises by my executors as hereinafter provided, I give to my sister the use of said premises." Held that there was a good implied power of sale, the Court saying "Formal words are not necessary to create a power of sale." Cahill v. Russell, 140 N.Y. 402.
Note: It is extremely dangerous to make title through an implied power of sale in a will. Unless there is an EXPRESS power of sale, it would seem that the will should be construed by the Courts. TRUSTEES Where a will does not create a trust and the title to the property devised is vested in the heirs at law subject to a life estate, the appointment of a substituted trustee is improper. An administrator with the will annexed should be appointed. Matter of Eggsware, 123 Misc. 548. "It seems to be well established that when the acts of trustees call for the exercise of discretion and judgment, the concurrence of all its necessary." Matter of Johnson, 123 Misc. 834. Under Sec. 110 of the Decedent Estate Law, a testamentary trustee may take back a purchase money mortgage in order to accomplish a sale of the property which he is authorized to sell. In re Taylor, 198 N.Y. Supp. 347. TRUSTEES (FOREIGN TRUST COMPANIES) It appears that a foreign trust company may act as testamentary trustee in this State, but not as trustee under a deed of trust. Cited with approval in 223 N.Y. 312 See Sec. 223 of the Banking Law. TRUSTEES (LIFE BENEFICIARY AND SOLE TRUSTEE) The most important case on this subject is Weeks v. Frankel, 197 N.Y. 304. See also the case of Haendle v. Stewart, 84 A.D. 274. The decision in the Haendle case is now generally disregarded, more weight being given to the decision in the Weeks case. See also: Losey v. Stanley, 147 N.Y. 560. Rogers v. Rogers, 111 N.Y. 228. Woodward v. James, 115 N.Y. 346. Rankine v. Metzger, 69 A. D. 264. Affirmed 174 N.Y. 540. Odell v. Claussen, 120 A.D. 535.
Rose V. Hatch, 125 N.Y. 427. "Upon the authorities it is clear that one person can hold as trustee for the use and benefit of himself and others and it is only when the full beneficial and equitable titles become vested in the same person that a merger takes place." Editorial, New York Law Journal, March 11, 1927. TRUSTEES (UNAUTHORIZED PURCHASE) A conveyance of certain real property was made to John Quinn, as trustee under the last will and testament of Thomas Connell, deceased, by one Collins. In making the purchase Quinn used the money which formed a part of assets of the estate which were in his hands as trustee. Such purchase was not authorized by the will. The Court said that the money paid to Collins by Quinn upon the purchase of the property belonged to the estate of Connell and was in the hands of Quinn as trustee and such use of the funds was in contravention of his trust, yet the conveyance of Collins transferred the title to Quinn either individually or as trustee and for the purpose of this case the capacity in which he held the title is quite immaterial. McLean v. Ladd, 66 Hun 341. REMAINDERS In the case of Davidson v. Jones, the Court construed the will of John L. Hardee in which the testator devised all his property to his wife "for her sole and separate use for and during her natural life and on her death to my children or their legal representatives." It was held that it was the intent of the testator to vest absolute title to his real estate in such of his children as were living at his death, subject to the life estate of the widow. The Court said there is a long line of uniform authorities that the words "on," "when," "after," "from and after" and like expressions used in the devise of a remainder following a life estate do not afford sufficient ground in themselves for adjudging that a remainder is contingent and not vested and that such words, unless their meaning is enlarged by the context, are to be construed as relating merely to the time of the enjoyment of the estate and not to the time of its vesting in interest. Davidson v. Jones, 112 A.D. 254. Vanderpool v. Burke, 63 Misc. 545. Connelly v. O'Brien, 166 N.Y. 406. Hunt v. Wickbam 197 AD 80 In Marsh v. Consumers Park Brewing Co. the language of the testator was as follows: "All the estate I give, devise and bequeath to my wife Anne, during her natural life in lieu of all her dower share, thirds or portion of my estate, and on her death I give, devise and
bequeath the same to my children equally, share and share alike, the descendants of any deceased child to take the share which his or her deceased parent would take if living." The Court of Appeals over-ruling a unanimous decision of the Appellate Division, held in this case that the remainders were contingent and not vested. Marsh v. Consumers Park Brewing Co., 220 N.Y. 205. Note: In determining whether or not remainders are vested or contingent, be sure to note the distinction between the above decisions. A devise of the residue of the estate to wife for life with privilege to use part of principal and remainder to testator's heirs on wife's death, share and share alike, held, that remainder vested under Real Property Law, Sec. 40, in heirs living at the death of testator and not in those living at death of life tenant. Matter of Leverich, 125 Misc. 130. Attention is here called to the case of Hess v. Hess. Under the will in question there was a gift of a life estate to the widow with remainder over to children. In an action for dower by the widow, the plaintiff failed to make living grandchildren of the testator, who had contingent remainders, parties defendant. It was held that the judgment of sale did not cut off the interest of such contingent remaindermen and that a purchaser at a judicial sale should be relieved of his purchase. Hess v. Hess, 233 N.Y. 164. Note: This decision would affect a foreclosure suit also and it would be necessary to bring in all contingent remaindermen. See also amendment affecting parties in an action to foreclose a mortgage, Sec. 1079 of the Civil Practice Act and particularly Subd. 2. REMAINDERS - DIVIDE AND PAY OVER RULE Where testatrix created a trust under which her executors were to pay the net income thereof to her daughters for life and on the daughters' death to distribute principal among the testatrix's children and issue of deceased children, the remainders are contingent and vest on the death of the life tenant. May v. May, 209 A.D. 19; 209 A.D. 22. Note: Be careful to distinguish this case from the Davidson case and other cases above
noted where there was no trust. Where there is a trust, the rule is as laid down in the May case.
REMAINDERS (Infants Real Estate.) (Sections 105-107, Real Property Law.) Losey v. Stanley, 147 N.Y. 560 Matter of Easterly, 202 N.Y. 466; 204 N.Y. 586 Barker v. Barker, 172 A.D. 244. Matter of Petition of John H. O'Donnell, 221 N.Y. 197. But see Matter of Callahan, 96 Misc. 74, aff'd. 176 A.D. 906, aff'd 220 N.Y. 774 SUSPENSION OF ALIENATION Trust for four lives. Trust upheld on theory of division into separate shares. This case decided on the "lopping off" or "pruning" theory. Where several trusts are created, each trust independent of the other, the illegal will be cut off and the legal permitted to stand where this effectuates testator's intent. Re Bankers Trust Co., 131 Misc. 723. Cross Reference: See Chapter 42 of this Manual
Chapter 10a - page 1 DEEDS IN LIEU OF FORECLOSURE General
DEED IN LIEU OF FORECLOSURE

1. LANGUAGE FOR ABSOLUTE CONVEYANCE:
In most states a Mortgagor, upon default, may tender a deed to the Mortgagee in lieu of foreclosure (the "Deed"). The consideration for the Deed is usually the release of the Mortgagor from liability on the secured indebtedness. There is a possibility that the Deed may be construed as additional security and not as an absolute conveyance. To avoid this construction, the Deed should contain language specifically referring to the mortgage by record book and page and contain language providing that the conveyance is an absolute conveyance of the title in consideration of cancellation of the debt secured by the mortgage and is not intended as additional security. 2. MERGER:
Sometimes the Mortgagee does not want to extinguish the lien of the mortgage but prefers that the mortgage lien stay in existence so that the property can later be sold subject to the mortgage. In such case, the deed given in lieu of foreclosure should recite that the consideration is the release of the personal liability of the Mortgagor and that it is the intention of the parties that there shall not be a merger of the fee with the lien of the mortgage. Where state law relies upon the intention of the parties to determine merger, the lien will be preserved. 3. CREDITOR'S RIGHTS - BANKRUPTCY:
Consideration must also be given to the possibility that the Deed may be attacked by a creditor of the Mortgagor in the event of bankruptcy or other insolvency proceeding. The Deed is subject to being set aside under the Bankruptcy Code, Title 11 U.S.C. (the Code) as a preferential transfer within 90 days and within on year if the transaction is found to be a "fraudulent" transfer. A "fraudulent transfer" needs no actual fraud: insolvency of the mortgagor (as defined in the Code) coupled with a lack of "reasonably equivalent value" paid for the Deed may make the Deed a voidable transfer under Section 548 of the Code. 4. EXCEPTION NECESSARY:
A Deed in lieu of foreclosure should generally not be insured for at least one year after the date of the deed unless one of the following exceptions appears in Schedule B of the policy: "The enforcement, or attempted enforcement of rights under the Bankruptcy Code (11 U.S.C.) or state insolvency or creditor's rights law to invalidate or avoid the conveyance to (name of grantee)." This exception should also appear in any policy issued to a purchaser from the Mortgagee-
grantee within one year from the date of the Deed in lieu of foreclosure and thereafter if a Petition in Bankruptcy or under any state insolvency statue is filed by or against the Mortgagor-grantor within the one year period. The exception is not necessary where the l992 form policy is being issued unless the grantee in such deed in lieu subsequently sells within the one year period of the prior deed. 5. REQUIREMENTS FOR WAIVER:
However, on 1-4 family residential property, a policy may be issued to the Mortgageegrantee or to a bona fide purchaser for value from the Mortgagee-grantee after ninety days but within the one year period without the bankruptcy exception if it can be determined: a) That the amount of the outstanding indebtedness which was in return for the Deed in lieu of foreclosure, together with any other consideration which may have been paid to the Mortgagor, was "reasonably equivalent value" for the property and not less than 70% of the fair market value of the property as of the date of the Deed (See Paragraph 7, below): and That the Mortgagee-grantee is not an "insider" as defined in the Code: and That the Mortgagee-grantee or purchaser was without knowledge of the insolvency of Mortgagor-grantor; and No petition under the Bankruptcy Code, or similar state law, has been filed.
b) c) d)
6. PURCHASER FROM MORTGAGEE-GRANTEE: For residential property if the proposed insured is a bona fide purchaser who pays fair market value for the property, or such purchaser's lender, and the property is purchased from the Mortgagee-grantee more than ninety days after the Deed in lieu of foreclosure is filed, no exception for creditor's rights need be made. However, "fair market value" must be established and documented in the issuing office's files. Fair Market Value is best evidenced by a formal appraisal prepared by a licensed, recognized appraiser. On one to four family residential property, only, the Company will rely upon the Agent's sound business judgment and knowledge of the area in accepting evidence other than a formal appraisal for determination of "fair market value". 7. MORTGAGE-GRANTEE: FAIR MARKET VALUE; REASONABLY EQUIVALENT VALUE
When asked to issue a policy in favor the Mortgagee-grantee under a Deed in lieu of foreclosure, a determination of reasonably equivalent value must be made as of the date of the Deed given in lieu of foreclosure. In those jurisdictions which generally accept the "Durrett Rule" that a "reasonably equivalent value" is 70% or more of the fair market value, the issuing agent may rely upon requirements a) through d) set forth in Paragraph 5 above. In those jurisdictions which have not adopted or approved the Durrett rule, please
consult your Regional Office for any additional requirements necessary to establish that the Mortgagee-Grantee has given "reasonably equivalent value" in consideration for the Deed. Even through "Durrett" was set aside in BFP v. RTC _____US_____, Lexis 3776, 62 U.S.L.W. 4359, the 70% Rule continues to be in affect absent contrary jurisdictional findings. 8. PRIOR APPROVAL NECESSARY TO DELETE EXCEPTION:
On all commercial properties, on all policies to be issued less than ninety days after delivery of the Deed and in all instances where there is any question as to the "fair market value" or "reasonably equivalent value" of the property, and in any case where the issuing office has actual knowledge of the impending filing of a bankruptcy by the GrantorMortgagor, prior approval must be obtained from the Home Office in order to issue a policy to the Grantee-Mortgagee or an immediate purchaser from the Grantee-Mortgagee without the "creditor's rights' exception, within one year after the date of a Deed in lieu of foreclosure. 9. ALL OTHER EXISTING ENCUMBRANCES SURVIVE:
A Deed in lieu of foreclosure will not extinguish any other liens or encumbrances on the property. All other matters affecting the title, whether prior or subordinate to the mortgage being satisfied must appear as exceptions in Schedule B. See also: Creditors Rights and Title Insurance Underwriting Journal, Deeds in Lieu, Estoppel Affidavits
5/78 rev. 10/84
Chapter 11 - Page 1 DEEDS OF CONVEYANCE Title
DEEDS OF CONVEYANCE
GENERAL A. If the contract is silent on the subject, the vendor need give only a quit-claim deed. Emerick v. Hackett, 192 N.Y. 162 (1908) Tymon v. Linocki, 16 N.Y.2d 293 (1965) Kinds of Deeds (1) (2) (3) C. D. E. Quit-claim deed. Bargain and sale deed, with or without covenant against grantors acts. Full covenant and warranty deed.
B.
Must be in writing Gen. Oblig. Law 5-703 (1) Must be in English R.P.L. Sec. 333 (2) Law Governing Conveyance by Deed Peck v. Cary 27 NY9
FORM OF DEED A. Statutory Forms Real Prop. Law Sec. 258 Short Form - Permissive only Turner v. May 202 Misc. 320 B. Must contain a specific Grantor and Grantee, a proper designation of the property transferred, recital of consideration and operative words manifesting an intent to convey. It need not follow any exact or prescribed form of words. Cohen v. Cohen 188 AD 933 McGurl v. Burns 192 Misc. 1045
PARTS OF A DEED A. Presumption as to date executed and delivered. Undated or Misdated Deeds As affecting Validity
Real date is the date of delivery 15 N.Y. Jur. Rev. 73 Warren's Weed Vol 1A Deed 2.02 and 2.03
5/78 rev. 10/84
B.
Grantor and Grantee 1. A grantor and grantee must be named for deed to be operative as conveyance. Health v. Hewitt 127 NY 166 Bachelor v. Brereton 112 U.S. 396 Reformed Church v. Schoolcraft 65 NY 134 Addresses R.P.L Sec 333 Change of Name; Spelling of Name Grantee name blank;
2. 3. 4. C.
Consideration 1. Not essential to validate executed transfer of property Krause v. Krause 285 NY 27 15 NY Jur. Rev. 89 Gen. Oblig. Law 5-1115 a. 2. But beware of rights of Grantor's creditors or transfer included by fraud
Recital in Deed a. b. Deed from a fiduciary should recite the full actual consideration. Smith v. Reid 134 N.Y. 568; R.P.L. Sec. 258 Actual consideration need not be stated in deed from one other than a fiduciary Binzen v. Epstein 58 AD 304; aff'd 172 NY 59 Presumptive evidence of consideration Berndt v. Berndt 192 Misc. 57
c. 3.
Kinds of Consideration Love and affection, Loeschigle v. Hatfield 51 NY 660 Marriage, Johnson v. Johnson 33 AD2d 640, aff'd 37 AD2d 904; app. dismd. 30 NY2d 751 Agreement to Support Kinney v. Kinney 221 NY 133 a. Deed from a fiduciary
5/78 rev. 10/84
D.
Conveyance Clause 1. Granting or operative words of conveyance required Cohn v. Cohn, supra Warren's Weed Vol 1A, Deeds 5.01, 5.02 a. Precise words or phraseology not necessary provided intent to convey is manifested. Turner v. May, supra Suggest language from deed forms in R.P.L. 258
E.
Description 1. Property must be identifiable with reasonable certainty. Pope v. Levy 54 AD 495 a. Read as a whole to determine indentity Case v. Dexter 106 NY 548 1. Parol Evidence admissible to remove uncertainty and ascertain intention of parties Orvis v. Elmira C & N.R. Co. 172 NY 656 Harris v. Oakley 130 NY 1 15 N.Y. Jur. Rev 161 but not admissible if description leaves no doubt or uncertainty Malin v. Ward 21 AD2d 926 2. Importance of Beginning point Heller v. Cohn 154 NY 299 Eglehott v. Simpson 50 AD 595 b. "Same as" recital 1. May clarify or cure defective description Pillmore v. Walsworth 166 AD 557
Bernstein v. Nealis 144 NY 347
5/78 rev. 10/84
c.
Words "more or less" or "about" 1. Words of caution - to cover slight inaccuracy - do not make description void for indefiniteness Oakes v. DeLauncy 133 NY 227 2. Material difference may be grounds for recovery of difference in purchase price Mills v. Kampfe 202 NY 46
d.
Lot numbers; Metes and Bounds; Street number 1. To describe by Lot number, map must be filed Johnson v. Grennell 188 NY 407 2. Where both number and metes and bound descriptions used, Lot number prevails Mazzucco v. Eastman 36 Misc. 2d 648 3. Street number usually too indefinite and only indicates location but may be clarified by extrinsic evidence Pelletreau v. Brennan 113 AD 806 4. Where metes and bounds and street number conflict, the former prevails Fitzpatrick v. Sweeney 56 Hun 159, aff'd 121 NY 707
e.
A deed describing property as being bounded by an ocean, carries title to the high water mark. Marba Sea Bay Corp v. Clinton St Realty Corp., 272 N.Y. 292 (1936)
f.
A deed describing property as being bounded by a navigable river does not carry title to the center thereof. Fulton Light, Heat & Power Co. v State of N.Y. 200 NY 400 (1911)
5/78 rev. 10/84
g.
A deed describing property as being bounded by a non-navigable body of water, as a general rule, carries title to the center thereof if the grantor owns it and the boundary described touches the water. White v. Knickerbocker Ice Co., 254 N.Y. 152 (1930)
h.
A deed describing property as being bounded by a highway, as a general rule, carries title to the center thereof if the grantor owns it. Matter of City of N.Y., 209 N.Y. 344 (1913) If there is an inconsistency between the granting clause and the habendum clause, as a matter of construction the granting clause will prevail. Mott v. Richtmyer, 57 N.Y. 49 (1874)
i.
F.
Habendum Clause Not as important today as in early common law but should be read with the granting clause since it can explain or qualify what estate was intended. Harriot v. Harriot 25 AD 245 However, where there is an irreconcilable difference between the two clauses, the granting clause prevails. Bannin v. Peck 266 AD 209, aff'd 291 NY 717 Mott v. Richtmeyer 57 NY 49 However, this is a rule of construction and not of property and must yield to the intentions of the parties. Bates v. Virolet 33 AD 436
G.
Trust Provision (Sec. 13, Lien Law) Lien Law gives laborers and materialmen who improve real property priority over conveyance made during the improvement or within 4 months after completion. However, if the deed contains a covenant by the Grantor that he will receive the consideration as a trust fund to be applied to payment for such improvements before using same for any other purpose, the deed will take priority over liens thereafter filed if the deed is recorded and there is no fraud in execution or delivery.
5/78 rev. 10/84
Sec. 13(5) Lien Law Servidone v. Hirschmann 268 AD 347 H. Special Clauses 1. Exceptions Something in existence but not to be conveyed -- as "excepting" part of land conveyed. 2. Reservations Something not in being at the time of the grant and newly created out of or attaching to the land conveyed -- as "reserving" a life estate or easement. 3. Subject Clauses Charges or makes the property conveyed subservient to encumbrances of various kinds -- as mortgages, easements, restrictions, etc. Though Grantee may not be personally liable, he cannot contest the existence or validity of such encumbrance. I. Execution of Deed Deed must be subscribed by Grantor or his lawful agent authorized by writing. R.P.L. Sec. 243 Gen. Oblig. Law Sec 5-703 1. Signature can be any mark or sign printed, written, stamped or otherwise placed on the deed. Gen. Const. Law Sec. 46 2. Attorney-In-Fact should execute Deed in principal's name as AttorneyIn-Fact, to wit, (Principal) by Attorney-In-Fact
Care should be taken to assure that the Attorney-In-Fact has the power claimed at the time of delivery. Mere recitation in deed is insufficient.
Marvin v. Wilber 52 NY 270
5/78 rev. 10/84
3.
Corporate and Partnership deeds should be executed in name of the entity, to wit, ABC Corp. XYZ Associates
by President A Seal is no longer required.
by General Partner
Gen. Constr. Law, Sec 44-a J. Acknowledgement Deed must be acknowledged before its delivery or its execution and delivery attested by one witness or it does not take effect against a subsequent purchaser R.P.L, Sec. 243 even it that purchaser has knowledge of the prior deed and is not a bona fide purchaser. Dunn v. Dunn 151 AD 800 1. If not properly acknowledged or attested, it may not be recorded. R.P.L Sec 291 (a) After 15 years, a Deed defectively acknowledged but accepted for recording is deemed to have become duly acknowledged except as to a deed to a bona fide purchaser from Grantor recorded within the 15 year period R.P.L. Sec 306 (b) Deeds acknowledged outside State of New York no longer require a Certificate of the authority of the Notary Public attached thereto. R.P.L. Sec. 311 (2) 1975 Ops. Atty Gen - Nov. 20
5/78 rev. 10/84
(c)
Law in force at time of acknowledgment governs R.P.L. Sec. 293 Richardson v. Palmer 63 Barb 67
2.
Contents of Acknowledgment (a) No required form except for corporation Warren's Weed Vol. 1 Acknowledgments 3.01
3.
Officer must know person. Identity of person making acknowledgment must be ascertained by Officer taking it. R.P.L. Sec 302
4.
Acknowledgment by Corporation. (a) Special Form by Statute R.P.L Sec. 309 (b) Form requires Seal be attached; but, if corporation has none, that fact should be stated in acknowledgment. R.P.L. Sec. 309 However, note Gen Const. Law Sec. 44-a and 45 Matter of Skidmore Coll v. Cline 58 Misc. 2d 582
5.
Officer can only act within juridiction Execution Law, Sec 135, 139-142 However, by a permanent validating statute, acts of officer which are defective due to ineligibility, mistake or omission are deemed valid unless the officer knew of the defect or it was apparent on the face of the certificate; even in the latter two instances, validation occurs after 6 months. Execution Law, Sec. 142-a
K.
Real Estate Transfer Tax (Article 31, Tax Law, Sec. 1400-1410)
5/78 rev. 10/84
1. 2. 3. 4. 5. 6.
Rate: $0.55 for each $500.00 of purchase price or fraction thereof. Grantor liable therefor (Sec. 1404) Imposed at time of delivery (Sec. 1402) No tax if consideration $100.00 or less. (Sec. 1402) Not applicable to liens existing before and remain after delivery (Sec. 1401 (d)) Exemptions (Sec. 1405) a. b. Deeds to U.S. or N.Y. State Correction Deeds
7. 8.
Wilful non-compliance is misdemeanor (Sec. 1408) Some evidence of consideration Matter of McGeehan 134 Misc 334
9.
Failure to affix does not make deed invalid Moore v. Moore 47 NY 467
DELIVERY OF DEED A. Unconditional delivery is essential to Transfer of Title R.P.L. Sec. 244 Ross v. Ross 233 AD 626, aff'd 262 NY 381 Marden v. Dorthy 160 NY 39 1. There must be an unconditional acceptance or intention to accept by the Grantee. Buszozak v. Wolo 125 Misc. 546 Powderly v. Aetna Casualty 72 Misc 2d 251 Williams v. Ellerbe 62 Misc 2d 827 2. Acknowledgment and Recording is prima facia proof of delivery. Sweetland v. Buell 164 NY 541
5/78 rev. 10/84
3.
Delivery in Escrow Specific conditions in escrow agreement
KINDS OF DEEDS A. The various kinds of deeds differ in several respects -- to wit, granting clause, covenants, recital of consideration, appurtenance clause and acknowledgments. Annexed hereto is a composite form of deed showing these differences. For an explanation of what the covenants mean, see R.P.L. Sec 253 and Lien Law, Sec. 13 (5). A deed passes all of the title or interest of the Grantor unless an intent to pass a lesser title or interest is clearly stated. (R.P.L Sec. 245). 1. Full Covenant Deed a. Contains six covenants - (a) Seisin (b) Quiet Enjoyment (c) Freedom From Encumbrances (d) Further Assurance and (e) Warranty of Title (f) Trust Clause. R.P.L. Sec. 253; Lien Law, Sec. 13 (5) 2. Warranty Deed a. 3. Contains only the covenants of Quiet Enjoyment and Warranty of Title
Bargain and Sale Deed a. Contains no covenants usually. However, it may include a covenant against Grantors Acts.
4.
Quitclaim Deed a. b. Contains no covenants Conveys interest of Grantor rather than grant of the fee though it just as effectively passes title. Wallach v. Riverside Bank 206 NY 434
5.
Executors Deed a. Contains covenant against Grantor's Acts.
6.
Correction and Confirmatory Deeds
5/78 rev. 10/84
a.
Used to correct mistakes in deeds. However, if those mistakes are immaterial, a correction deed is unnecessary. Warren's Weed, Deeds, Sec. 21.01
b.
Correction Deed prevails over Corred deed; hence, there may be loss of property properly acquired in original deed. Bldrs Mtge Co. v Berkowitz 134 AD 136 Intervening judgment ineffective. Schroeder v. Gurney 73 NY 430
c.
There should be a recital in the Correction Deed explaining the correction.
CAPACITY OF PARTIES A. Partnerships 1. Real property may be taken in Partnership name and can thereafter only be conveyed in the Partnership name. Partnership Law, Sec. 12 a. Any partner can sign the deed and bind the partnership if the act appears to be in furtherance of the partnership's business. Partnership Law, Sec. 20, 21 b. Partnership can recover property if said partner, in fact, lacked authority and the Grantee knew this Partnership Law, Sec. 20 but if the Grantee has passed the title on to another Grantee for value without knowledge the partner exceeded his authority, the latter Grantee has good title despite lack of actual authority in partner. Partnership Law, Sec. 21 (1)
5/78 rev. 10/84
2.
Limited Partnership Exclusively statutory with limited partner's interest being personalty, even where the partnership deals in real estate. Limited partner acquires no interest in the real estate of the partnership. Lanier v. Bowdoin 282 NY 32 Partnership Law Sec. 107 Reiter v. Greenberg 21 NY 2d 388 a. Only general partners can act for partnership, so presumptively a limited partner cannot convey partnership real property. But, a limited partner, by his acts, may become liable as general partner.
B.
Stock Corporations 1. Sale of all or substantially all of assets: a. Within regular course of business 1. 2. 3. b. No stockholder consent needed Obtain affidavit sale is in ordinary course of business actually conducted by Corporation. Recital in Deed
Outside of Regular Course of Business: 1. 2. 3. Directors Resolution authorizing sale and direct submission to vote of shareholders. Consent of 2/3 shareholders obtained at a meeting duly called or written consent of all shareholders. Recital in Deed. Business Corporation Law, Sec. 615, 909
2.
Sale of Not all or substantially all of assets. a. b. Consent of stockholders or Directors not required. Recital in Deed. Business Corporation Law, Sec. 202 (a) (5)
5/78 rev. 10/84
NOTE:
Authorized foreign corporations may convey real property in same manner as a domestic corporation. Business Corporation Law, Sec. 1307, 1312 (b)
C.
Joint Ventures 1. 2. Not a recognized entity in New York If a partnership, Partnership Law governs. If not, take title in original names of joint ventures.
D.
Religious Corporations Unless limited by its certificate of incorporation or another statute, religious corporations, in furtherance of their corporate purpose, may purchase and sell real property. N-PCL Sec. 202 (4) and (5) Religious Corporation Law, Article 2 1. Authorized foreign corporations have same power. N-PCL Sec. 1307 2. Two-thirds vote of Board required unless Board numbers over 20 in such case, a majority is sufficient. N-PCL Sec. 509 3. Sale or Mortgage, other than Purchase Money Mortgage, requires Court order and membership approval may be required. Religious Corporation Law, Sec. 2 (b) and 12 Matter of the Trustee of Central Presbyterian Church of the City of N.Y.; N.Y.L.J. 12/15/75 p. 11, col. 4
E.
Infants 1. Sale of real property wholly statutory. RPA & PL, Article 17 SCPA, Article 19
5/78 rev. 10/84
2.
Statute must be strictly complied with. Losey v. Stanley 147 NY 560 O'Donoghue v. Boises 159 NY 87 (a) In examining title, check proceeding with the statute in force at the time of transfer of title. Warren's Weed Vol. 4A Real Prop. Inv. p 7 (b) Infant defined as person who has not attained age of 18 years Mental Hygiene Law Sec. 1.05 (22)
3.
Statutory limitation when infant's property may be disposed of (a) RPAPL Sec. 1711 1. Sale usually authorized by Court as a matter of course, (sec. 1711 (1) and (4)). (i) (ii) 2. Personal property and income from real property insufficient for maintenance and education. Contract of Sale made but can't be completed due to infancy.
Sale authorized by Court after hearing which shows infant's interest will be substantially promoted. Sec. 1711 (2) (3) (5) (6).
(b)
SCPA, Sec. 1902 (a) Real property can be sold for payment of decedent's debts, expenses, taxes distribution "or any other purpose the Court deems necessary".
4.
Proceeding commenced by: (a) Under RPAPL, Guardian not required but Court usually appoints one. 1. If over 14, infant must join in petition or sale is void. Rosenfield v. Miller 131 AD 282
5/78 rev. 10/84
(b) 5.
Under SCPA, fiduciary or interested party may institute but citation must issue to all interested parties and if Court directs, creditors.
Deed to an infant is voidable since it is an executed contract the infant may disaffirm on reaching majority; otherwise absolute title will ripen in the late infant. O'Donohue v. Smith 130 AD 214
6.
Deed from infant should be made by the infant through Guardian and the name of the infant should be subscribed by the Guardian Hyatt v. Seeley 11 NY 52 SCPA Sec. 1715
7.
An exception to complying with the statutory requirements noted above is where a husband and/or wife, not of full age, purchase real property they occupy or intend to occupy as a home. They can take, mortgage and dispose of such title without Court approval. Gen. Oblig. Law Sec. 3-101
F.
Incompetents RPAPL Article 17 also applies to proceedings to sell interest of incompetent person who is defined as one "incompetent to manage his affairs, or for whose property a committee has been appointed." Mental Hygiene Law, Sec. 78. 15 (d) 1. Conservators - one appointed to conserve property of a person not judicially declared incompetent, but rather one whose ability to care for his property or himself or others dependent on him has become substantially impaired. Mental Hygiene Law, Article 77 (a) As to real property, has same powers granted to committee of an incompetent person. Mental Hygien Law, Sec. 77.19 2. Deed by a judicially declared incompetent is void. Fitzburgh v. Wilcox 12 Barb. 235
5/78 rev. 10/84
If not judicially declared incompetent the deed is voidable and can be set aside at election of his committee when appointed. Finik v. Goldstein 245 NY 300 G. Unincorporated Associations Have no existence or legal entity separate and apart from the members who compose it. Consequently the title to its property is vested in its members. Schein v. Erasmus Realty Co. 107 Misc. 27; aff'd 194 AD 38 1. Deed to such association conveys no legal title Mount v. Tuttle 183 NY 358 2. Members hold title as joint tenants and may dispose of same subject to the rules and By Laws of the Association Branigan v. Buckman 67 Misc. 242, aff'd 145 AD 950; aff'd 207 NY 719 H. Benevolent Orders 1. Can take, hold and convey real property Benevolent Orders Law, Sec. 3 2. Not-For-Profit- Corporation-Law applies to every corporation formed under Benevolent Orders Law. Benevolent Order Law, Sec. 1-A I. Attorneys-In-Fact 1. Power of Attorney must be in writing and recorded R.P.L. Sec. 242 and Sec. 294 (a) Revocation of Power is not deemed revoked until recorded in same office where Power recorded. R.P.L. Sec. 326
5/78 rev. 10/84
2.
Form of Power of Attorney set forth in statute but does not exclude other forms. Gen. Oblig. Law, Sec. 5-1501
3.
Incompetency of Principal does not revoke Power of Attorney if the instrument states that the authority is exercisable despite subsequent disability or incompetence." Gen. Oblig. Law Sec. 5-1601 Otherwise, Power is revoked with respect to persons having notice of such incapacity. Dann v. Sands 38 AD 2d 661, app dismd, 30 NY 2d 944 But if the person dealing with the Attorney-in-Fact is not aware of the Principal's incompetence, the transaction is valid if the Attorney-in-Fact is acting within scope of authority. Merritt v. Merritt 27 AD 208
4.
Death of Principal or agent revoked power Weber v. Bridgman 113 NY 600 Re Chinese Merchants Bank Ltd. 151 Misc. 425
5.
Power of Attorney should be acknowledged. Gen. Oblig. Law, Sec. 5-1501
6.
Power of Attorney is revocable at will by Principal unless coupled with an interest. Culver v. Western Union 50 NY 691 Accordingly, care should be taken to ascertain extent of authority of Attorney-In-Fact. Duty of diligence devolves on one dealing with AttorneyIn-Fact. Riley v. Larocque 163 Mis. 423
J.
Custodian, Uniform Gifts to Minors Act.
5/78 rev. 10/84
1.
Real Property may not be subject of gift under U.G.M.A. EPTL, Sec. 7-4, 9 (e)
K.
Trusts 1. Trusts of real property are authorized by statute EPTL, Article 7 (a) Must be in writing Gen. Oblig. Law, Sec. 5-703 2. Kinds of Trusts (a) (b) 3. Inter Vivos; Testamentary Express; Implied; Constructive; Passive
Title to real property vests in Trustee, though the beneficiary may enforce the terms of the trust. EPTL Sec. 7-2.1
4.
Sale of Real Property by the Trustee (a) Consider the following 1. 2. The Trust instrument RPA & PL, Sec. 1603 (i) 3. Court Approval to sell generally; not approval of specific contract.
EPTL, Sec. 11-1.1 (b) (5) (e) (i) Court approval to sell for partnership purpose defined in
SCPA Sec. 1902
5/78 rev. 10/84
5.
Real Estate Investment Trusts (a) Purpose is Tax Shelter I.R.C. 856-858 (b) Qualifications
5/78 rev. 10/84
Chapter 11 - page 1 DEEDS OF CONVEYANCE CONDITION Law Bulletin
A deed upon condition that the premises be used for a certain purpose or purposes and upon breach title to revert to the grantor does not convey a "fee simple" title and this thought must be born in mind when preparing Schedule "A" of the title commitment or policy. Such a deed conveys a base or "determinable fee" and not a fee simple absolute notwithstanding the case of Towle v Remsen, 70 N.Y. 303. Invariably the device was used either to maintain a land use arrangement or to assure devotion of property to certain business, charitable or public purposes. Such conditions may appear in deeds to municipalities for "school purposes"; in deeds to religious corporations "for religious purposes" or in deeds or grants from the state to upland riparian owners. Prior to the adoption of RPAPL 1951, 1953, 1954 and 1955 (in 1958) some courts were loath to ignore the express intent of the grantor and this lent a sense of timelessness to the conditions which resulted in their recognition and enforcement in perpetuity. Appellate courts, however, view reversion as a harsh remedy and, on occasion, the courts would engage in "strained construction" to preserve the charitable or public purpose rather than allow the property to revert to the original grantor, his heirs or assigns. In those cases the court may determine, for example, that while the property may no longer be needed for school purposes it may be useful for some other related "public purpose". Such findings may result in the imposition by the court of a constructive trust for the purpose of effectuating the continued public purpose. Again, such judicial determination may be found in order to thwart the original grantors attempt to exercise the reverter clause in the deed, thus depriving the municipality of property to be put to use for the publics benefit. For further review of this issue please refer to ESTATES IN LAND in this manual. RELEASE OF CONDITION Unlike restrictive covenants, conditions can be released by the original imposer without the need for adjoining owners to join in the release. Formerly there was some difference of opinion as to whether the heirs-at-law of the imposer could release before breach of condition. That issue has now been determined [Trustees of Calvary Presbyterian Church of Buffalo v. Putnam, 221 AD 502, affirmed 249 N.Y. 111]. On the death of the imposer, the condition may be released by his/her heirs-at-law before breach. Property conveyed subject to a "condition subsequent" which was also set forth in a later deed by the grantee of a single lot, is effectually released from the right of reverter by a release from the original owner of all the lands conveyed by him from the effect of such condition subsequent. A subsequent grantee of a single lot need not be a party to such release where he has conveyed the property, and his attempted reimposition of the condition is ineffective [McArdle v Hurley, 103 Misc. 540]. However, some real property owners are not in accord with this decision. see also: Weinberg v Sanders, 204 AD 409 and Postley v. Kafka, 213 AD 595. These cases appear contra to the McArdle case.
5/78 rev. 10/84
Chapter 11 - page 2 DEEDS OF CONVEYANCE CONDITION Law Bulletin
ADOPTION OF STATUTE BARRING CONDITIONS New York has now adopted statutes which place limitations upon rights of re-entry for breach of condition if the specified contingency does not occur within a specified time frame. [McKinneys' Real Property Law (RPL) sec 345; RPAPL 1951-1955; see also the supporting study and recommendations of the New York Law Revision Commission contained in N.Y. Legis. Doc (1958) No. 65(B). The statute distinguishes "restrictions" by covenant from those enforced by right of entry or possibility of reverter. If created after the effective date of the statute, deeds upon condition with forfeiture provisions are, in effect, made enforceable only as covenants. Further, in actions brought by owners subject to rights of re-entry or possibilities of reverter which were created before enactment of the statute(s) courts are authorized to find that the devises were employed as mere land-use restrictions and to treat them, in effect, as covenants. However, special provision is made for court modification of restrictions affecting land held for charitable purposes [Bayse, Clearing Land Titles sec. 143]. Take note that while the above statutes authorize the court to determine that the deed of condition be treated as a restrictive covenant, i.e. permit the court to consider factors other than the intention of the grantor, it does not compel them to do so. In New York, the recognized present estates include "fee simple", "fee on condition" and "fee on limitation" including reversion. As Mr. Mitzner says, in chapter 5 of Real Estate Titles, " . . . the possibility of reverter and right of reacquisition are disfavored by the courts". And, " . . . whenever possible, a court will construe a grant attempting to create a possibility of reverter or right of reacquisition as containing precatory language or as creating a covenant, rather than as creating a future estate" (empasis mine). However, the court is not compelled to do so and upon clear and convincing evidence the court may still determine otherwise and rule that the condition or limitation be enforced. Therefore, passing upon such conditions containing reverter language should not be undertaken lightly. You are instructed to contact the Underwriting Department before passing upon or insuring over such conditional estates. For further review of this issue please refer to Chapter 16, ESTATES IN LAND this manual and Chapter 26, LIENS AND ENCUMBRANCES page 31 of this manual.
5/79
Chapter 11 - Page 1 DEEDS OF CONVEYANCE (FAIR VALUE CONSIDERATION) Legal Bulletin
1.
A recorded conveyance has no priority over an earlier unrecorded conveyance from the same vendor or assignor unless it was received "in good faith and for a valuable consideration." (Section 291, Real Property Law). A "conveyance" includes deeds, mortgages, leases, easements, etc. A conveyance given as a gift is an example of one not entitled to the benefit of the recording acts.
2.
There is a difference between "good" and "valuable" consideration. "Good" consideration includes such things as love and affection, moral obligation, etc. "Valuable" consideration normally means money or money's worth in property or services. Although payment of an antecedent debt can be a valuable consideration under Section 67, Bankruptcy Act, and Section 5-1105, General Obligations Law, It is not a sufficient "valuable" consideration under the recording acts. (See Groves v. George, 123 N.Y.S. 2d 192). Unless the "valuable" consideration is also "fair" as defined in Section 272 of the Debtor and Creditor Law, the conveyance will be fraudulent as to creditors if the grantor or obligor is rendered insolvent thereby (Section 273, Debtor and Creditor Law), and may be set aside in a bankruptcy occurring within four months. In any case where the consideration is clearly not a "fair" consideration, our Schedule "B" should except: "Unless satisfactory proof is furnished that (grantor) (mortgagor) is financially solvent and will not be rendered insolvent as a result of the transaction being insured, policy will except: "Rights of creditors of the (grantor) (mortgagor)."
3.
4.
5.
In any case where our insured is not paying "valuable" consideration the policy will except: "Any loss, claim or damage arising by reason of the insured not being a purchaser in good faith for a valuable consideration under the recording acts."
6.
Closers should be alert to recognize circumstances requiring the inclusion of either or both of the foregoing exceptions as these facts can sometimes only be discerned at the closing. Caution must be exercised in insuring under a policy in possession that we determine whether the insured falls in the category of a purchaser for a "valuable" consideration. If not (i.e., a devisee under a will), paragraph 5 above will apply.
7.
5/78
Chapter 11 - Page 1 DEEDS OF CONVEYANCE DELIVERY OF DEEDS Title
DELIVERY OF DEEDS a. A grant takes effect only from the time of its delivery. R.P.L. 244 (1) Delivery requires manifested intention to make, together with a complete surrender and parting of deed which passes under dominion of grantee or some person in his behalf. Bianco v. Furia 245 N.Y.S. 2d 645 (1963) b. Delivery to grantor's agent is ineffective. Schultz & Son v. Nelson, 256 N.Y. 473 (1931) c. A deed cannot be delivered to the grantee conditionally Herman v. Jorgenson, 263 N.Y. 344 (1934) d. A deed may be delivered to a third person to be delivered to the grantee upon the death of the grantor. Saltsieder v. Saltsieder, 219 N.Y. 523 (1916) Slowey v. Hunt, 108 Misc. 222 (1919) (1) The deed takes effect as against subsequent creditors and devisees of the grantor. Rosseau v. Bleau, 131 N.Y. 177 (1892) Rankin v. Donovan, 46 App. Div. 225 (1899), aff'd, 166 N.Y. 626 (1901)
5/78
Chapter 11 - Page 2 DEEDS OF CONVEYANCE DELIVERY OF DEEDS Title
e.
Escrow deliveries - an escrow delivery is a deed to a third person to be held until the performance of some condition. Stanton v. Miller, 58 N.Y. 192 (1874) (1) A deed delivered as an escrow does not take effect until the condition is performed. Jackson v. Rowland, 6 Wend. 666 (1831) (2) Intervening creditors of the grantor will prevail over the grantee. Jackson v. Rowland, supra (3) A wrongful delivery by the escrow agent to the grantee does not transfer title.
5/79
Chapter 11 - Page 1 DEEDS OF CONVEYANCE DEED EXECUTION Title
EXECUTION OF DEEDS a. A grant in fee or of a life estate must be subscribed by the grantor or his agent whose authority is in writing and either acknowledged or attested by at least one witness. If neither acknowledged nor attested it is void as against a subsequent purchaser or incumbrancer. R.P.L 243 An unacknowledged and unattested deed is effective as between the grantor and grantee. Strough v. Wilder, 119 N.Y. 530 (1890) c. The subsequent purchaser or incumbrancer need not be in good faith for value. Chamberlain v. Spargur, 86 N.Y. 603 (1881) (1) "Purchaser" construed to mean person who acquires interest by any method other than by descent. Illus: Deed from A to B unacknowledged and unattested. Deed from A to C properly executed and C has knowledge of B's deed. C prevails. Deed from A to B unacknowledged and unattested. A devises same property to C. C prevails. d. Exception to the statute where grantee under imperfect deed takes possession and makes improvements. City of N.Y. v. N.Y. & S.B.F. & S.T. Co., 231 N.Y. 18 (1921)
b.
5/94
Chapter 11 - Page 1 DEEDS OF CONVEYANCE ESCROW DEEDS RELOCATION Settlement
ESCROW DEEDS: OMISSION OF GRANTEES ON DEEDS INTRODUCTION: Closing agents and title attorneys have been confronted with the issue of whether an incompletely executed deed accompanying a relocation related transaction is valid for acceptance for purposes of conveying title. The central issue is whether the deed is legally valid as an effective written instrument to convey title to the intended purchaser. Our focus narrows even further by examining the validity of such deed wherein the deed omits the name(s) of the grantee(s). FACT SCENARIO: The relocating party (hereinafter seller) agrees with the relocation company on a price for the sellers' equity in the home and executes the relocation company's contract and resulting deed etc. The deed is completed but for the omission of the grantees names. The relocation company intends to use the same deed later to deliver it to a new purchaser of the fee simple interest in the real estate. The sellers receive the agreed equity for the real estate and go their merry way. Along comes a purchaser and agrees to a contract of sale between purchaser and agrees to a contract of sale between purchaser and relocation company. The relocation company provides the incompletely executed deed to the closing agent or the relocation company's local agent with instructions to complete the deed by adding the name(s) of the grantee(s) and to conduct or attend the closing and deliver the deed to the buyer and thereby convey title in exchange for the purchase price. Practices among relocation companies vary as to what documentation is provided. Some or all of the following are often used (except for No. 7 which is suggested for use): 1) 2) 3) 4) 5) 6) 7) Power of Attorney from seller to an officer in the relocation company (limited or general) Exhibits A & B. Assignment of Funds (Exhibit C) Closing Authorization (Exhibit D) Appointment of special Agent (Exhibit E) Owners Affidavit (Exhibit F) Affidavit of Agent (Exhibit G) (Proposed) Authorization of Conveyance (Exhibit H)
Chapter 11 - Page 2 DEEDS - ESCROW DEEDSRELOCATION Settlement
These forms have been used as authorization to complete the sale. Many of us have assumed that this includes an authorization to complete the deed. This conclusion may be supported by the following material and citations. However, as the following indicates, it appears that whatever forms are used, documentation of express authority to complete the execution of the deed is the most prudent policy. Otherwise, one may be faced with costly time consuming efforts to show proper authority or eventual litigation to support the validity of the deed. GENERAL LAW Generally, Ohio law requires that a valid deed purporting to convey title should have the following: 1) An appropriate written documentary act containing the elements of proper formalities of execution i.e., signed, dated, witnessed, acknowledged and notarized. Definable parties (i.e. grantor (s) and grantee (s) Consideration (or by gift) Sufficient legal description of the real estate, and Delivery
2) 3). 4). 5).
The fact scenario above raises title issues especially concerning items 2) and 5) above. Hence, do the relocation deeds meet the requirements of certainty as to the parties to the deed and when does delivery take place for purposes of passing title. Other issues are not covered here. DEFINABLE GRANTEE It is well settled law in Ohio dating back to 1824 that a blank deed or a deed containing blanks which is subsequently filled in without authority from the grantor is invalid and will not pass title to any property.13 These rulings seem to imply a means to insert the items omitted at the time of the partial execution of the deed by the grantor. The means apparently must afford proper authorization. This, of course, raises additional questions, i.e. What type of authorization is required and what type of legally acceptable relationship must exist between the seller and the authorized person? To be more specific, does this result in a
Ayres v. Harvess (1824) 1 Ohio 368, 372. Schueler v. Lynam 80 O App. 325, 36 O Ops 32, 49 OL Abs 225, 75 NE 2d 464.
13
principal/agency relationship and must the authority be by power of attorney, or
otherwise only in writing or will parol authority be sufficient? No definite answers were found under Ohio case law. But the common law in many states generally seems to be as set forth below. General case law provides that omissions as to the grantee (s) in the deed apparently may be supplied if done with authorization of the grantor and the enforcement of same may be based upon the following principles: (1) Express authorization of grantor for the deed to be completed. a) b) c) (2) a) b) (3) written and in recordable form 14 written instrument of authorization by grantor15 parol authorization and consent16 No express authorization or consent by the grantor, however, if such is implied by identification of the grantee on other parts of the deed besides the granting clause then the addition of grantees is proper.17 Implied authority as derived from facts of the case.18
Ratification by the grantor after the prior grantee was added. a) b)

14
Ratification by action i.e. receipt of funds, turning over possession, etc.19 Written confirmation and/or consent after the fact.20
Bretta v. Meltzer (1932) 280 Mass 573. Merchants Bank & T. Co. v. Wimbish (1926) 192 NC 552. Cross & Bissell v. State Bank 5 Ark. 525. Durbin v. Bennett (1939; DC 111) 31 F. Supp 24. Bryant v. Barger (1942) 112 Ind. App. 17 Fisher v. Paup (1920) 191 Iowa 296. Hoey v. Ebert (1935) 270 Mich 25. Calhoun v. Drass (1935) 319 Pa 449
15
Johnson v. Rost (1925) 164 Minn 164. 2409 Broadway Corp. v. Lange (1926) 128 Misc 118, 217 NYS 566. Calhoun v. Drass (1935) 319 Pa 449. Dicta - Hoey v. Ebert (1935) 270 Mich 25.
17
16
Irwin v. Longworth (1851) 20 0 582.
Norby v. Security State Bank (1929) 177 Minn 127. Barth v. Barth (1943) 19 Wash 2d 543.
19
18
Ward v. National Bank of Paulding 5 Misc. 140, 34 002d 321 (C.P. 1965). Sommer v. Wade 6 Abs 118 (App. 1928)
20
c)
Grantors' failure to disaffirm (an action in equity based on the theory that the signed deed was a contract to convey the real estate coupled with equitable remedy of estoppel) This situation assumes that the purchaser is a bonafide purchaser for value.21
No Ohio cases were found which specify that the authorization be recordable, written or parol. The dicta in the Ohio cases cited herein suggest to this author that express written authorization is sufficient even though not executed with the formalities of recording. Obviously, the best practice calls for written authorization in recordable form. DELIVERY The basis of the authority to permit the completion of the deed exists by rules of law governing agency relationships. An agency may be defined as a contract, express or implied, by which one of the parties confides to the other the management of some business to be transacted in his name, or on his account, by which the other assumes to do the business and to render an account of it.22 Construing the relocation company as acting for the seller as seller's agent, the deed given is in escrow. Implicit in most fact situations between seller and relocation company in the verbal or written escrow arrangement is that the conditions of sale must be met prior to delivery of the deed. Even one who is agent for the grantee may accept an agency for the grantor to hold the instrument as depositary until specified conditions are performed by the grantee.23 This suggests that the closing agent who may also be the attorney for the buyer may accept the deed as depositary and further under agency law complete the deed under the implied authorization of the seller. The relocation company usually employs the closing agent to conduct or attend the closing on behalf of the relocation company. Generally, an agent may not delegate to another a power already delegated to him as agent unless the agent has the principal's authorization. 24 Again, express written authority should permit the local agent to act on behalf of the relocation company and the seller.25 For best results, the original express written authorization from seller to relocation company should provide that the relocation
Holden v. Belmont, 32 OS 585 (1877). Becker v. Shade, 17 CC (NS) 83 (1910). Am Jur 2d, Deeds 142. Am Law of Prop 12.85. Thompson on Real Property 4270, 4278. Bryant v. Barger, 112 Ind 17.
22 21
Ish v. Crane, 13 OS 574. Cincinnati W. & 2R Co. v. Iliff, 13 OS 235.
23
Norton v. Blinn, 39 OS 145. Reynolds v. Moor Bros. Realty Co., 31 Ohio App. 333. Olman v. Rawson, 9 Ohio Supp 156, 24 00 39.
25
24
Thompson on Real Property 3237.
company may at its direction use an agent (subagent) to carry out the sale of the property as the relocation company deems appropriate. CONCLUSION AND THEORY The prudent practice calls for the seller to provide documentation to expressly authorize and give consent to the relocation company to: 1) 2) 3) 4) Act as agent for the seller in all respects concerning the sale and conveyance of the real estate Complete the signed but partially completed deed Complete the closing transaction on behalf of the seller Authorize the utilization of subagents as the agent deems appropriate.
Under general law governing agency relationships, the relocation company appears to act as the agent of the seller and the title passes upon delivery of the deed by the agent or its subagents to the purchaser at the closing table. Without the agency relationship and substantiating documentation to show authorization. It appears that the Fact Scenario set forth above may result with invalid deeds being delivered at the closing table unless the execution and delivery of the deed is substantiated with implied consent or ratifications. In either event, such determination would come about through litigation. However, in the event of challenge, the conveyance may be upheld under the remedies of equity. As set forth above the courts may hold that estoppel would result to give clear title to the buyer. However, the transaction may be defeated by a suspicious purchaser doubting proper authority wherein express authority is not in writing. Intended purchasers looking for a means to escape the sale may likely find protection behind this type of challenge to the authority of the alleged agent. PROBLEMS TO CONSIDER: DELIVERY The emergence of relocation company activities in home sales is a rather recent practice. Ohio courts have yet to directly encounter these issues. The conservative approach appears to be the best. Therefore, get express written authorization. The form is very simple. See Exhibit "H" for a simple form purporting to provide authorization. Further, documentation should be requested to check marital status, solvency or pending deceased estates. The occurrence of any of these conditions requires the same corrective measures as in an ordinary transaction wherein title has not passed. The burden of additional reasonable inquiry may be upon us to guard against the occurrence of these mishaps. The proposed forms provided in the Exhibits help address this by having the seller or the authorized agent (relocation company) assert certain facts to answer those inquiries deemed appropriate by you under your particular factual situation.
One theory of law which may help in the event of supervening incapacity, death, bankruptcy or liens filed after the seller has received the equity in the real estate for the partially executed deed deals with treating the relocation company as an agent coupled with an interest. It may be argued that since the relocation company has paid a valuable consideration for the sellers' equity, that the relocation company as an agent is protected as an agent coupled with an interest. This is a question of fact for the court to determine. However, generally, powers coupled with an interest are irrevocable.26 The incapacity or death of the principal does not revoke the power of the agent.27 Additionally, bankruptcy, by operation of law, divests the authority of an agent to deal with the assets or rights of property of which the principal was divested by reason of the bankruptcy. However, an agency coupled with an interest argument may aid in negotiations with the bankruptcy trustee in order for the trustee to look to the proceeds of the equity paid to the seller as the only asset of the seller from the real estate and thereby abandon the realty in question. Lastly, intervening liens may also be negotiated on the same basis. One may also be successful on the theory of subrogation. If the relocation company purchased the sellers' equity prior to the filing of the lien, the relocation company may be subrogated to its benefit and to the detriment of the lien claimant. However, I would not want to rely on this type of potentially "boot strap" rationale. It helps if you have little else on which to rely. These may only help after you have closed the deal and find that you or your claims representative must settle embarrassing claim.
26
Simmon Real Estate Co. v. Riestenberg 51 O App 176, 4 O Ops 569, 19 OL Abs McDonald v. Administrator of Balck, 20 OS 185.
353.
27
EXHIBIT A SPECIAL POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That (seller), (marital status ), the undersigned, hereby makes, constitutes and appoints an authorized officer of (RELOCATION COMPANY), his true and lawful attorney for him and in his name, place and property described as follows: LEGAL DESCRIPTION COMMONLY KNOWN AS: PROPERTY ADDRESS
For the limited purpose of inserting the names of the Grantee on said Deed or Deeds and to complete any instrument or document needed in the closing of this transaction and in particularly to complete the Deed, including but not limited to the incorporation of a proper legal description and the name(s) of the grantee(s). An authorized officer of (RELOCATION COMPANY), is also expressly empowered to accomplish an assignment of any pertinent lease contract of sale, or other document and to complete the transfer subject to encumbrances of record, including, but not limited to, escrow instructions, amendments, loans, taxes, assessments and bonds, if any covenants, conditions, restrictions, easements and rights of way of record. Further, an authorized officer of (RELOCATION COMPANY) or an authorized agent of (RELOCATION COMPANY), shall be empowered to accomplish the assumption and preparation of any necessary documents in connection with said assumption by the Grantee of any loan or mortgage in accordance with instructions to be given by an authorized officer of (THE RELOCATION COMPANY) or an authorized agent of (RELOCATION COMPANY). WHEREVER the context so requires, the masculine gender includes the feminine and neuter, and the singular number includes the plural. WITNESS MY HAND this WITNESSES: day of , 19 .
STATE OF COUNTY OF
) )SS: )
On this day of , 19 , before me, the undersigned, a Notary Public in and for said County and State, personally appeared known to me to be the person(s) whose name subscribed to the within signed and executed the same. instrument and acknowledged to me that
Notary Public
EXHIBIT B POWER OF ATTORNEY STATE OF COUNTY OF Know all men by these presence, that we and , husband and wife, now of , but about to do hereby make, constitute and appoint move to as our true and lawful attorney-in-fact for us and in our name, place and stand, and on our behalf and for our use and benefit, with respect to the real property described in Exhibit A, attached hereto and fully incorporated herein, to execute in part or full and deliver deeds and any other instruments necessary to accomplish the sale and conveyance of said real property to such person or persons and upon such terms and conditions as said attorney-in-fact may find appropriate. Further granting our attorney-in-fact the power to receive any and all sums of money due us and to endorse checks and drafts, as may be necessary or proper in connection with said sale. It is recognized that (RELOCATION COMPANY) has purchased our interest in said real property and accordingly has an interest in the subject matter of this power and it is, therefore, agreed that said attorney is hereby irrevocably vested with the powers granted herein and we do hereby forever renounce all right to revoke this power of attorney or any of the powers conferred upon our attorney hereby. This power of attorney shall not be affected by physical disability or mental incompetence of the principals which render either or both of them incapable of managing their estate or estates. Further, we expressly authorize (RELOCATION COMPANY) to complete the execution of any documents partially executed by the undersigned including but not limited to the deed, i.e. inserting the name of the grantee or otherwise. IN WITNESS WHEREOF, we hereunto set our hands and seal this , 19 . day of
STATE OF
COUNTY OF
ss: day of
The foregoing instrument was acknowledged before me this , 19 by:
Notary Public
EXHIBIT C ASSIGNMENT OF FUNDS The undersigned hereby transfers, sets over and assigns unto (RELOCATION COMPANY) the right to receive all funds due including the refund of escrow funds due or to become due the undersigned from the sale of said property more particularly described as follows: LEGAL DESCRIPTION Commonly known as: PROPERTY ADDRESS
The undersigned further covenants and warrants that said funds assigned hereunder are free from any and all liens, claims and encumbrances whatever and has not been and will not be assigned or disposed of except as provided herein. This Agreement of funds is irrevocably vested in (RELOCATION COMPANY) and shall not be affected by death or disability of the undersigned and the undersigned hereby further renounces forever all rights to revoke this Assignment of Funds.
STATE OF COUNTY OF
) )SS: )
On , before me, the undersigned, appeared and , known to me to be the person(s) whose Name(s) is/are subscribed to the within instrument and acknowledged that executed the same. Notary Public
EXHIBIT D CLOSING AUTHORIZATION TO WHOMEVER IT MAY CONCERN: Upon compliance with all closing instructions, (RELOCATION COMPANY) as equity owner of the captioned property, does hereby appoint its Attorney-in-fact, to act on its behalf concerning any and all matters related to the transfer of title represented above, including the execution of settlement sheets and other documents, acceptance of proceeds and payment of any liens upon the captioned property. IT WITNESS WHEREOF, said party has caused this instrument to be signed all in pursuance of authority duly given by said Corporation. (RELOCATION COMPANY) by: STATE OF COUNTY OF ) ) SS: )
Before me, the undersigned a Notary Public, in and for the State of , personally appeared and severally acknowledge the signing thereof, and that such signing was freely and voluntarily performed, for the uses and purposes therein mentioned. IN TESTIMONY WHEREOF, I have hereunto signed my name and affixed my official seal this day of , 19 .
Notary Public
EXHIBIT E APPOINTMENT OF SPECIAL AGENT TO: (CLOSING AGENT) (RELOCATION COMPANY) hereby authorizes the above named closing agent to insert the name of any purchaser(s) in a deed to the following described property: LEGAL DESCRIPTION Commonly known as: (PROPERTY ADDRESS)
at the direction of (RELOCATION COMPANY) DATED:
EXHIBIT F OWNER'S AFFIDAVIT The undersigned 1. 2. 3. , being first duly sworn, on oath say (s) that:
I/we own the following described property: See attached Exhibit "A" Said person is of legal age and under no legal disability. There have been no: a. Bankruptcy, divorce or dissolution proceedings involving said person during the time said person has had any interest in the Premises, described above, other than any proceedings of public record in the County where the subject real estate is situated. Unsatisfied judgments of record against said person nor any actions pending in any courts, which affect the Premises; Tax liens against said person except as herein stated:
b. c. 4.
Any bankruptcy, divorce or dissolution proceedings of record against parties with the same or similar names, during the time period in which the above named person has had any interest in the Premise, are not against the above named person (s). Any judgments, or tax liens of record against parties with the same or similar names are not against the above named person(s). There has been no labor or materials furnished to the premises for which payment has not been made. There are no unrecorded contracts, leases, easements or other agreement or interest relating to the Premises except as stated herein: There are no persons in possession of any portion of the Premises other than pursuant to a recorded document except as stated herein: There are no encroachments or boundary in questions affecting the Premises of which Affiant has knowledge.
5. 6. 7. 8. 9.
Affiant knows the matters herein stated are true and makes this Affidavit for the purpose of inducing the passing of title to the Premises.
STATE OF COUNTY OF
) )SS: )
On the day of , 19 , before me, the undersigned, a Notary Public in and for said County and State, personally appeared
known to me to be the person(s) whose name (s) is/are subscribed to the within instrument and acknowledged to me that executed the same as free act and deed. Notary Public
EXHIBIT G AGENTS AFFIDAVIT The undersigned that: 1. , being first duly sworn, on oath say(s)
The undersigned is acting in his official capacity as an Agent for the legal fee simple title holder to the following described legal estate: See attached Exhibit "A" The undersigned has express authority to represent the owner as the owners' Agent and express authority to engage others as agents of the owner to complete any documents including and not limited to the execution of the deed, i.e. name of grantee (s), etc. and to complete the sale of the above referenced real estate. That the owner/seller [hereinafter person] is of legal age and under no legal disability. There have been no: a. Bankruptcy, divorce or dissolution proceedings involving said person during the time said person has had any interest in the Premises, described above, other than any proceedings of public record in the County where the subject real estate is situated. Unsatisfied judgments of record against said person nor any actions pending in any courts, which affect the Premises; Tax liens against said person except as herein stated:
2.
3. 3.
b. c. 4.
Any bankruptcy, divorce or dissolution proceedings of record against parties with the same or similar names, during the time period in which the above named person has had any interest in the Premise, are not against the above named person(s). Any judgments, or tax liens of record against parties with the same or similar names are not against the above named person(s). There has been no labor or materials furnished to the premises for which payment has not been made. There are no unrecorded contracts, leases, easements or other agreement or interest relating to the Premises except as stated herein: There are no persons in possession of any portion of the Premises other than pursuant to a recorded document except as stated herein:
5. 6. 7. 8.
9.
There are no encroachments or boundary line questions affecting the Premises of which Affiant has knowledge.
Affiant knows the matters herein stated are true and makes this Affidavit for the purpose of inducing the passing of title to the Premises.
STATE OF COUNTY OF
) )SS: )
On the day of , 19 , before me the undersigned, a Notary Public and in and for said County and State, personally appeared known to me to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that executed the same as free act and deed. Notary Public
EXHIBIT H AUTHORIZATION OF CONVEYANCE In Re: Sale of (address of property)
The undersigned hereby expressly authorizes (RELOCATION COMPANY), its heirs, assigns and agents to insert the name of any purchaser(s) in a certain deed executed by the undersigned but for the omission of the grantee(s) name(s). Said deed will convey the following described real estate: LEGAL DESCRIPTION The undersigned further consents to and ratifies the insertion of the grantee's name on said deed as (RELOCATION COMPANY) or its agents deem appropriate to effectuate the conveyance of title. Further, the undersigned authorize (RELOCATION COMPANY) to act as escrow agent or to appoint an agent of its choice to act as escrow agent in the closing and settlement of the sale of said real estate or in the alternative to appoint an agent of its choice to act as a representative at the closing for the undersigned with complete authority to complete and execute any and all documents incidental to the sale of said real estate including but not limited to the insertion of the name(s) of the grantee (s) on the deed. Said (RELOCATION COMPANY), its heirs, assigns or agents are authorized to execute settlement statements, affidavits or other documentation incidental to the sale and closing of said real estate to effectuate the sale and closing. Witness hand (s) this day of , 19 .
STATE OF
, COUNTY OF
SS:
The foregoing instrument was acknowledged before me, a Notary Public in and for said County and State, by: Notary Public
Chapter 11 - Page 1 DEEDS OF CONVEYANCE Law Bulletin
DESCRIPTIONS - OLD STREETS A mere description by lot number on a filed map (as lot No. 10 on Map of Mt. Hope, without giving dimensions) carries half the adjoining street. Hennessy v. Murdock, 137 N.Y. 317 Johnson v. Grenell, 188 N.Y. 407. A description bounded by a street or running to and along a street carries one-half of the street. Matter of Ladue, 118 N.Y. 213. A description beginning at the side of the street or running to and along the side of a street excludes the land in the street. Throwbridge v. Ehirich, 191 N.Y. 361. A description beginning at a particular corner of two streets, for instance, at the northwesterly corner of two street as laid down on a map, excludes the land in the street. Matter of City of New York, 209 N.Y. 344 English v. Brennan, 60 N.Y. 609. Attention is also called to the cases of: Haberman v. Baker, 128 N.Y. 253. Potter v. Boyce, 176 N.Y. 551. Van Winkle v. Van Winkle, 184 N.Y. 193. By reason of the following cases, there is still some doubt as to whether a description by lot number followed by dimensions which run only to the side of the street would include or exclude the land in the street. Watson v. City of New York, 67 A.D. 573, affirmed in 175 N.Y. 475. Woolf v. Pierce, or In re Matter of City of New York, 209 N.Y. 344. Gosstol Realty Corporation v. Gillman, 224 A.D. 63. DESCRIPTIONS - MARGINAL STREETS Where the street is a marginal street and lots are conveyed by a description which would ordinarily carry half of the street, in such a case of the marginal street would be included. Haberman v. Baker, 128 N.Y. 253.
MONUMENTS As a general rule a monument in a deed governs as against the dimension, but the monument of the "center line of a party wall" falls and the dimension governs in certain case. Darling v. Alexander, 130 A.D. 85. DEDICATION The filing of a map and its acceptance by the city does not make the streets thereon shown legally opened streets. Matter of the City of New York, 239 N.Y. 119. DRAIN RIGHTS Where a common owner conveys the servient tenement first, the drain right is cut off. Where the dominant tenement is conveyed first, the drain right is preserved. Treadwell v. Inslee, 120 N.Y. 458 Stuyvesant v. Early, 58 A.D. 242-244. HUSBAND TO WIFE A creditor will not be successful in setting aside a deed from husband to wife solely on the ground that it was not founded on a valuable consideration unless he is able to show that there was fraudulent intent on the part of the grantor. Guy v. Craighead, 21 A.D. 460. Riker v. Gwynne, 129 A.D. 112, 113 N.Y. Supp. 404, Modified Another Point, 201 N.Y. 143. Neuberger v. Keim, 134 N.Y. 35. RECITALS (AS TO HEIRSHIP) Recitals in a duly acknowledged or proved deed, mortgage, lease, release, power of attorney, or other instrument more than twenty years old, executed for the purpose of transferring the title to or interest in lands, etc., which contains recitals that the grantors, grantees, or either or both are the heirs at law of a prior owner, shall be presumptive evidence of said heirship as therein recited, etc., provided, of course, the said instrument is duly recorded. Chapter 248, Laws of 1925.
RECITALS ("BEING THE SAME PREMISES," ETC.)
Where the closing clause of the description in an instrument sums up the intention of the parties as to the particular premises conveyed, it has a controlling effect upon all the prior phrases used in the description. Ousby v. Jones, 73 N.Y. 621. Thus a defect in a metes and bounds description contained in a mortgage which failed to cover two feet of premises, was cured by the recital "Being the same premises which were conveyed by F. to S." (giving date of deed and place of record). Bernstein v. Neal, 144 N.Y. 347. This case holds further that where the defective metes and bounds description was used in the complaint, judgment and referee's deed upon foreclosure of the mortgage, though the recital was omitted from all of these the purchaser could nevertheless convey good title. (But see also Thayer v. Finton, 108 N.Y. 394). However, a deed which does not include the street, will not be construed to do so because the phrase "being the same premises" etc., inserted after the description, refers to a deed which carries the street. Matter of City of New York, re: Lawrence Ave., 99 Misc. 24. RECITALS (OLD DESCRIPTION CONTINUED) An old description continued after the widening of a street which thereby caused a change in the distance of the property from that street, renders the title unmarketable in the absence of a recital or reference to the former deeds. Egelhoff v. Simpson, 50 A.D. 595.
Chapter 10A - page 1 DEEDS IN LIEU OF FORECLOSURE Underwriting
DEEDS IN LIEU OF FORECLOSURE Where the company is asked to insure an deed-in-lieu of foreclosure and the policy to issue is a 1990 ALTA Owners Policy containing the Creditors Rights Exclusion set forth above, the title insurer may generally rely on the exclusion as sufficient protection against a subsequent creditors rights claim. I use the word "generally" above for good reason. You want to exercise a greater degree of caution where the borrower (and proposed grantor in the deed-in-lieu) is someone other than an individual. It has been suggested at "ALTA Title Counsel" that the industry must establish a minimum standard of obtaining an objective determination of consideration and value irrespective of the policy exclusion, because of the potential for collateral attack by aggrieved stockholders or limited partners, in those cases where the equity value substantially exceeds the unpaid debt. From a practical standpoint, while I am sure the company would prevail under the policy exclusion, the defense costs could be excessive. Consequently, whenever there is even the potential threat of a stockholder derivative action or challenge by aggrieved limited partners the home office is to be contacted and the facts presented in writing for review. Bear in mind that the premium to be collected should be commensurate with the risk incurred.
The title guidelines presently set forth in the "DEED IN LIEU OF FORECLOSURE" section of this manual will continue to apply in those instances where the company is asked to insure title coming from the prior deed-in-lieu grantee (the lender) to a new third party within the one year time frame of delivery of the prior deed-in-lieu of foreclosure. In that instance our concerns are different from those of the insurer of the actual deed-in-lieu of foreclosure transaction and we are not entitled to rely on the exclusion contained within the prior policy. That policy and its exclusion ceases to exist when the lender conveys to a third party. The issue of solvency is of concern where, within one year of the delivery of the deed-in-lieu, the company is asked to insure a deed from the grantee of the deed-in-lieu. I cannot emphasize this enough. IN THAT INSTANCE THE CREDITORS' RIGHTS EXCLUSION CONTAINED IN THE TITLE POLICY INSURING THE LENDER AS GRANTEE IN THE DEED-IN-LIEU IS NO LONGER APPLICABLE BECAUSE IT ONLY APPLIED TO THE TRANSACTION INSURING THE DEED-IN-LIEU. IT DOES NOT APPLY TO A SUBSEQUENT TRANSACTION INSURING A THIRD PARTY.
In those jurisdictions or instances where the 1990 ALTA Policy Form is not being used and the 1970 ALTA Policy (rev. 10-17-84) is being used the creditors rights issue and the issue of solvency continues to exist and must be addressed where we are asked to insure a deed-in-lieu of foreclosure. In those instances you should review the prior subject matter contained within this manual, including the following clearance suggestions. [a] The Legal Issue. The principal creditors' rights issues relating to the delivery by a mortgagor to a mortgagee of a deed-in-lieu of foreclosure are substantially the same as the fraudulent conveyance and avoidance concerns as discussed above, i.e., whether the lender is paying or otherwise giving reasonably equivalent value for the conveyance. Title insurance considerations include (i) whether the deed is intended to be an absolute conveyance by the mortgagor to the mortgagee and not a new security instrument. Additional concerns (ii) include the effect of the deed on the mortgagor's equity or right of redemption, and (iii) the obtaining consents of all necessary parties to the transaction, such as shareholders, partners or trust beneficiaries.
The Form of Title Exception The following is a broad form of exception that may be set forth in the title insurance policy relating to a deed-in-lieu of foreclosure transaction unless certain title company requirements are satisfied and approved by a senior underwriter: [i] Any defect, lien or encumbrance arising by reason of the fact that said deed was given in satisfaction of a mortgage; or (ii) The effects of said transfer being a fraudulent transfer or preference in any proceedings in or related to any chapter of the Federal Bankruptcy Code or the effect of said transfer being invalid under any state insolvency or fraudulent conveyance laws.
[b]
The Clearance Requirements of the Title Company: If the prospective lender insured party is unwilling to accept such a broad exception, the title company may issue a policy without exception if all of the following conditions are satisfied. The form of the requirements should read as follows: "With regard to the request that we undertake to insure the deed-in-lieu of foreclosure free and clear of any exception relating to Federal or State insolvency or creditors' rights laws, we have several concerns, all of which are to be addressed in writing": (i) is the mortgagee paying or otherwise giving reasonably equivalent value for the conveyance? (ii) is the deed intended to be an absolute conveyance by the mortgagor to the mortgagee and not a new security instrument? (iii) what is the affect of the deed upon the mortgagors right of redemption? (iv) will the consents of all the parties to the transaction be obtained, including corporate shareholders or partners?
"We will consider issuing a policy free of the creditors rights exception if all of the following conditions are met to the companies satisfaction": (a) An Estoppel Affidavit is to be executed and acknowledged in recordable form by the grantor of the deed. The estoppel affidavit shall include representations that the deed is intended to be an absolute conveyance and not a mortgage, trust conveyance or security instrument of any kind; that the grantor is [was] fully aware of the consequences of delivery of the deed-in-lieu of foreclosure; that the delivery of the deed was not given as a preference; that there were no other persons, firms or corporations having an interest in the premises (other than the mortgagee) at the time of delivery of the deed; that the grantor is [was] solvent at the time of the delivery of the deed, will not be rendered insolvent thereby and further that there are no other creditors whose rights would be prejudiced by the conveyance;
(b)
The deed must contain a recital substantially to the effect that it is an absolute conveyance, the grantor having sold the land described therein to the grantee for fair and adequate consideration, such consideration being and including the full and complete satisfaction of all obligations secured by the mortgage (as described), and that the grantor declares that the conveyance is freely and fairly made, and that there are no agreements, oral or written, other than the deed, existing between the parties with respect to the land;
(c)
The Note or other evidence of indebtedness secured by the mortgage must be surrendered and canceled, and the mortgage securing such note or evidence of indebtedness must be released of record;
(d)
The grantor in the deed must surrender possession of the property to the grantee;
(e)
Evidence of corporate authority (including shareholders resolutions, where required) must be delivered;
(f)
The grantor must deliver an independent appraisal of the property satisfactory to the title company certified to by either a MAI or SRE appraiser. The appraisal should show that the property is not worth more than the amount of the unpaid principal balance of the mortgage plus accrued interest;
(g)
There can be no other circumstances, such as a leaseback with option to repurchase, or agreement to reconvey, which would imply the continued existence of the debt;
(h)
The grantor must not be insolvent at the date of the execution of the deed.
If less than all the conditions above set forth on (a) through (h) inclusive are not satisfied, it shall be absolutely necessary to obtain the approval of the Home Office prior to issuing a policy clear of a creditors rights' exception.
ALTERNATIVE PRESENTATION OF TITLE CONSIDERATIONS (l) Proof (by presentation of an independent appraisal) that the value of the property does not exceed the amount actually remaining due of the mortgage including accrued interest. This addresses bankruptcy and non-bankruptcy issues raised by "Durrett". Our concern is whether or not there is equity value in the premises over and above the mortgage balance. So long as the equity value in the property does not exceed the canceled debt and the further consideration of the deed-in-lieu includes both (i) the estimated cost of the foreclosure action and (ii) a full written release of the owner from the obligation of the note and cancellation of the mortgage, the transfer is not likely to be collaterally attacked. However, if the value or equity is in excess of the debt, then the transfer results in a diminution of the estate and is voidable. (2) Require an Agreement between the mortgagor and the mortgagee the minimum elements of which should include the following: (a) (b) (c) (d) acknowledgment of the indebtedness; acknowledgement of default; confirmation of the simultaneous execution of a deed to the mortgagee and satisfaction of the debt; warranties with respect to title that: (i) (ii) (iii) the mortgagor is the owner of the property; there are no leases, contracts of sale or other agreements affecting title (such as subordinate mortgages); owner has not suffered any lien or judgment (i.e., e.g. Judgment or Federal Tax Lien) whereby the premises have been encumbered in any way whatsoever; (iv) owner has not entered into any contract for or cause any work to be done or performed in or upon the premises which has or may result in the filing of a mechanics lien.
NB Because there is an absence of "cash" a bi-lateral agreement spelling out the terms of the transaction is preferable to an affidavit, although these issues could be addressed in an estoppel affidavit. Bear in mind that a written "agreement" may survive a subsequent bankruptcy of the borrower whereas an affidavit is clearly subject to disaffirmance. FROM THE BORROWER YOU WANT THE FOLLOWING REPRESENTATIONS: 3. Representation that the transaction is entered into voluntarily, free of any fraud, duress or undue influence. 4. Proof that the deed is being given unconditionally and absolutely; that there are no collateral side agreements to the delivery of the deed, such as repurchase options or contract to repurchase or management agreements or obligation for any future payments to the lender by the borrower which shows a continuing relationship. FROM THE LENDER YOU WANT THE FOLLOWING REPRESENTATIONS: 1. Acknowledgment that the transfer is an absolute conveyance of the mortgagor's right, title and interest in and to the premises, together with the appurtenances and that, upon acceptance, it is intended to convey all rights of possession as well as title. This goes to the issue of marketability and could appear as a recitation in the deed to be delivered. If the representations of the mortgagor are made in an affidavit, the mortgagee must execute a separate contemporaneous instrument evidencing the release of the mortgagor from further obligation; 2. A covenant that as consideration for the transfer, the mortgagee releases the mortgagor from any personal liability for the indebtedness; 3. Acknowledgment that the affidavit or "bi-lateral agreement" is made to induce the mortgagee to accept the conveyance of the property in lieu of foreclosure knowing that the title company will rely upon the statements made therein and thereon for the purpose of issuing its policy of title insurance; that the representations and warranties made in the agreement are
binding upon the parties their heirs, representative, successors and assigns.
ATTACHED ARE EXHIBITS TO BE USED IN CLEARANCE OF THIS ISSUE
8/78
Chapter 13 - Page 1 DIVORCE Title
DIVORCE
GENERAL An action for divorce may be maintained by a husband or wife on any of the following grounds: 1) 2) 3) 4) 5) 6) Cruel and inhuman treatment; Abandonment for one or more years; The confinement of one of the parties in prison for a period of three or more consecutive years after marriage; The commission of an act of adultery with exceptions recorded in 171 of Domestic Relations Law; Husband and wife have lived apart pursuant to a decree or judgment of separation for a period of one or more years; The husband and wife have lived separate and apart pursuant to a written agreement of separation in a form required to entitle a deed to be recorded for a period of one or more years. (N.Y. Dom. Rel Law 170, 1977).
PROPERTY SUBJECT TO DISPOSITION IN DIVORCE, SEPARATION, ANNULMENT OR TO DECLARE NULLITY OF A VOID MARRIAGE The court may determine any question as to the title to property arising between the parties in an action for divorce, separation, annulment or to declare nullity of a void marriage. It may also make such direction, between the parties concerning the possession of the property, as in the court's discretion. Such direction may be made in the final judgment and/or by one or more orders from time to time before or subsequent to final judgment. When the title to real property is affected, a copy of such judgment, order or decree, duly certified by the clerk of the court, shall be recorded in the office of the recording officer of the county in which such property is situated. (N.Y. Dom. Rel. Law 234, 1977). Where a husband and wife acquire realty as tenants by entirety, their status changes to that of tenants in common by operation of a judgment of divorce. (Gajerwski v. Gajerwski, 382 N.Y.S. 2d 177, 52 App. Div. 2d 735 (1976)). Where the wife secures a divorce, all real property owned by her, or personal property in her possession, or under her control, is divested of the husband's interest; but the wife's inchoate dower right, if any, in the husband's real property is not affected. (N.Y. Dom. Rel. Law 176, 1977). FOREIGN DIVORCE Foreign state ex parte divorces must be recognized in this state, if adequate notice and opportunity to defend was given and the plaintiff was domiciled in the foreign state. (Williams v. North Carolina, 317 U.S. 287, 1942).
The finding of domicile in an ex parte divorce by a foreign state may be readjudicated later by this state. (Williams v. North Carolina, 325 U.S. 226, 1945).
8/78
Chapter 13 - Page 2 DIVORCE Title
The finding of domicile in a divorce by a foreign state where both parties appeared may not be readjudicated later by this state. (Johnson v. Mulberger, 340 U.S. 581, 1951). A foreign ex parte divorce may not cut off defendants' right to support previously established in this state. (Estin v. Estin, 334 U.S. 541, 1948). New York may later grant alimony in spite of a foreign ex parte divorce obtained by the husband. (N.Y. Dom. Rel. Law 236, 1977). Court orders of foreign nations are respected only insofar as comity requires. Where a foreign country is but a brief haven for New York couples seeking divorce and the family resides in New York, there are important reasons for tipping comity considerations in favor of New York's power to enforce, supervise and modify the decree. (N.Y. Fam Ct. Act 466 (c); Santamaria v. Santamaria, 345 N.Y.S. 2d 906, 74 Misc. 2d 657 (1973)). A bilateral decree of divorce obtained in Mexico has been upheld as the matter of comity offends no public policy of the state and must be recognized. (Hambleton v. Palmer, 283 N.Y. S. 2d 404, 54 Misc. 2d 766 (1967)). ALIMONY The court may require the husband to provide for the support of the wife and the maintenance and education of the children. Such directions may be varied or annulled at any time and provisions for support of the wife must be annulled on proof of her remarriage. (N.Y. Dom. Rel. Law 236, 237, 240, 248, 1977). The husband may be required to give security for support payments, and in case of nonpayment his property may be sequestered in certain cases and a receiver appointed. (N.Y. Dom. Rel. Law 233, 243, 1977). EXPENSES The court may require a husband to pay the necessary expenses of the wife in prosecuting or defending an action for divorce or separation, or in proceedings to enforce payment of alimony or support. (N.Y. Dom. Rel. Law 237, 238, 1977).
9/75
Chapter 13 - Page 1 DIVORCE Legal Bulletin
JUDGMENT UNDER SECTION 234 OF DOMESTIC RELATIONS LAW May title be insured where the court makes an order providing for the sale of property under the said section? Section 234 of the Domestic Relations Law states as follows: Section 234. Title to or occupancy and possession of property. In any action for divorce, for a separation, for an annulment or to declare the nullity of a void marriage, the court may (1) determine any question as to the title to property arising between the parties, and (2) make such direction, between the parties, concerning the possession of property, as in the court's discretion justice requires having regard to the circumstances of the case and of the respective parties. Such direction may be made in the final judgment, or by one or more orders from time to time before or subsequent to final judgment, or by both such order or orders and final judgment. Where the title to real property is affected, a copy of such judgment, order or decree, duly certified by the clerk of such judgment, order or decree, duly certified by the clerk of the court wherein said judgment was rendered, shall be recorded in the office of the recording officer of the county in which such property is situated, as provided by section two hundred ninety-seven-b of the real property law. Added L. 1962, C. 313, Section 10; amended L. 1963, c. 685, Section 5, both eff. September 1, 1963." An example of a recent attempt to accomplish a sale of a tenancy by the entirety pursuant to Section 234 is given in the Reycroft v. Reycroft case, Supreme Court Suffolk County May 1, 1975 which provided: "Ordered, adjudged and decreed that the defendant herein is hereby authorized to enter into a contract of sale for the marital premises known as 123 Burr Road, East Northport, New York, and further that the defendant along with any person empowered to act for the plaintiff herein may execute a deed conveying the interest in said premises to a third party." It is the opinion of this Company that such a title emanating from an order such as is made by Judge Geiler in the Reycroft case is not an appropriate use of Section 234. Under the authority of this Section only questions of title and possession may be determined by the Court. The type of title question that may be determined by the Court under Section 234 are those where one spouse asserts a superior title by reason of constructive trust, fraud or other such matters. Such matters can only be passed with the consent of General Counsel or Associate General Counsel. It cannot be used for liquidating a tenancy by the entirety or for that matter a resulting tenancy in common after the divorce. See Hendel v. Hendel, 44 App. Div. 532, 353 N.Y. Supp. (2) 454 (1974).
9/75
Chapter 13 - Page 2 DIVORCE Legal Bulletin
The situation is quite different under Section 233 of the Domestic Relations Law. Where the spouse has obtained a judgment and a receiver or sequestrator is appointed we will consider insuring a deed out of such receiver or sequestrator where personal notice of the order is served on the spouse whose interest is being liquidated.
11/79
Chapter 13 - Page 1 DIVORCE - RESTORATION OF RIGHTS OF FORMER SPOUSE UPON REMARRIAGE TO TESTATOR E.P.T.L. 5-1.4 Legal Bulletin
E.P.T.L 5-1.4 currently provides as follows: "If, after executing a Will, the testator is divorced, his marriage is annulled or its nullity declared or such marriage is dissolved on the ground of absence, the divorce, annulment, declaration of nullity or dissolution revokes any disposition or appointment of property made by the Will to the former spouse and any provision therein naming the former spouse as executor or trustee, unless the will expressly provides otherwise." This section has been amended, effective 9/1/79 to provide that any provisions, dispositions or appointments set forth in the testator's Will which were revoked solely by the operation of this section are revived by the testator's remarriage to his former spouse.
8/78
Chapter 12 - Page 1 DESCRIPTIONS Title
DESCRIPTIONS - AFFECTED BY A PUBLIC ROAD

1. Dedication Whenever land is dedicated to a town for highway purposes therein, the town superintendent may with the consent of the town board, either with or without a written application therefore, and without expense to the town, make an order laying out such highway. This order will commence upon filing and recording in the town clerks' office with such order a release of the land from the owner thereof. (N.Y. High. Law 171, Supp. 1977-78). A grant of land for street purposes does not convey fee and the owner is entitled to recover whatever it is worth if it is subsequently appropriated, but is not entitled to be paid more than damages actually suffered. (Heyert v. Orange & Rockland Utilities, Inc. N.Y.S. 2d 352, 271 N.Y.S. 2d 201, 218 N.E. 2d 263 (1966)). 2. Apportionment of Vacated Streets The town superintendent may, upon written application and with written consent of the town board, make an order discontinuing a highway which has become useless, and file with the application, consent and order a release from all damages from the owners of the lands affected thereby. The consideration for such release shall not exceed $300.00 from any one claimant, or $1,000.00 from all claimants. An order of the town superintendent shall be final and the town clerk shall record the order in the office of the clerk of the county where such lands are located. (N.Y. High. Law 171, 172, 1962). AREAS COMPUTED TO STREET CENTERS Where a grantor divides his property into lots which border on a street or highway and executes conveyances which describe the property as abutting the street, the grant is deemed to pass the fee to the center line of the street. But when the deed describes the grant as starting at a corner of an intersection, and then running along parallel to or bounding on a street or streets to the beginning point, the grant is limited to the exterior line of the street. (City of Albany v. State, 321 N.Y. S. 2d 877, 28 N.Y. 2d 352, 270 N.E. 2d 705 (1971)). NB: See deeds this manual MEMORANDUM AS TO EXCEPTIONS BASED ON LOCATION OF FENCES, HEDGES, RETAINING WALLS, POSSESSION ALONG PERIMETER LINES We must consider the following: 1. Do such fences, hedges, retaining or possession wall exclude the owner of
the premises from any portion of the premises to be insured. What is the extent of the variation from the title line?
2. 3. 4.
By whom were such fences, hedges, etc. erected? When were same erected? How are our premises improved? How are the adjoining premises improved?
AS TO FENCES Obviously, fences cannot be exactly on line. A line has no width or thickness; a fence has. Even if originally placed on the property line, fences, due to the forces of the elements and nature, will not long remain so and will vary after a time. If the placement of a fence excludes our owner from possession of a part of the premises we must next consider (A) the extent of the variation; (B) whose fence is it; (C) when erected; (D) what are the other physical conditions of our plot or the adjoining plot. But if the fence, though not on the line, does not exclude our owner from possession by being record title." This would be so even if such fence is that of the neighbor, whether the fence is new or old, and whether the variation is small or great. If it could be established that the fence belongs to our owner or was erected by such owner or his predecessor even the exception "Fence is not on line or record title" may be considered to be omitted in these circumstances. Our owner may place his fences where he pleases within his own plot provided that he does not exclude himself from possession and does not permit the adjoining owner to assume physical possession up to the fence. We will now consider the situation where a fence excludes our owner from a strip of land which is part of the premises we are asked to insure. If the variance is less than 12 inches we use the exception "variations between location of fences and lines of the record title." If the variance is more than 12 inches we decline to insure the strip outside of the fence and say "no title is insured to ----------." Both exceptions are intended to exclude the strip from coverage by our policy, the former being used for the usual situation of a more or less minor variation, the latter for the one which gives us pause and some degree of apprehension. We will consider that if the fence was erected by the neighbor, his claim of title will extend to the fence line, and if erected more than 15 years ago, his claim of title may have ripened into a valid adverse title, particularly if this strip is substantially improved with the rest of the neighbor's plot or cultivated as part of it. If in this situation, we will not remove the exception without a satisfactory disclaimer by the neighbor and the removal of the fence to the line of the record title. If the fence is ours and same was erected less than 15 years ago, we will pass the exception provided the fence is moved to the correct line. No disclaimer from the neighbor will be necessary. If the fence is ours and same was erected more than 15 years ago, we will require a disclaimer from the neighbor if the physical facts show the neighbor using the strip for any purpose. If not in use by the neighbor, where the fence is ours, and same was erected more than 15 years ago, we will pass the exception upon the removal of the fence and its placement on the line. If erected by the neighbor, even if less than 15 years ago, a disclaimer should be obtained before we omit the exception, for the claim of title may in course ripen into an adverse title.
AS TO HEDGES "It cannot be held that a hedge is a substantial enclosure," said Judge Stoddard in Declade v. Manno, N.Y. Law Journal 10/8/53, P 694. See also 101 N.Y.S. 2d 716. "Enclosure of 50 foot strip as part of main property by hedge sufficient to constitute enclosure." McCosker v. Rollie Estates, 7 A.D. 2d 865. The above is sufficient to show that there is at least a lack of unanimity as to the effect of a hedge which is off the line. A hedge has width, thickness and life. It grows towards the sun and it is never intended to mark a mathematical line. Yet it can be a title problem! On the whole, we should give it almost the same effect as though it were a fence, keeping in mind that a hedge is essentially ornamental in character and accordingly it can be treated with a degree of liberality in the disposition of exceptions based upon it. AS TO WALLS - POSSESSION WALLS, RETAINING WALLS In farm titles, walls are usually erected to mark the exterior lines and we should not insure beyond such walls. In fact, in farm titles the exact location of farm lines where not marked by substantial walls or fences should not be insured, as disputes over the location of farm lines are not infrequent, and without the aid of walls marking such lines, exact location cannot easily be determined. Retaining walls however are generally erected to buttress the slope of land, and it is not material that such retaining walls are inside our parcel, provided that our owner or predecessor in title erected them. If however, such retaining walls support adjoining land and are on our parcel, a disclaimer must be obtained from the adjoining owner to avert a claim of possession of the adjoining owner. The above guides should be used with a degree of circumstances for there is no substitute for judgment; nor is it possible by categorizing to foresee that which cannot be foreseen and provide a rule to cover each contingency which may arise. The matter does not easily lend itself to standardization, no more than does knowledge, or acumen in discerning situations behind which trouble may lurk.
8/78
Chapter 17 - Page 1 EXECUTIONS General
EXECUTIONS
An execution is a judicial writ issuing from the court where the judgment is rendered and directed to an officer. The execution runs against the body or goods of a party, by which the court's judgment is enforced. (33 C.J.S. Executions 1). In New York, the writ of execution is statutory, (Rhoades v. Robles, 145 N.Y.S. 2d 286 (1955) and is the only method of enforcing a money judgment in an action at law. The person in whose favor a judgment is rendered has the exclusive right to and control of the issuance of execution and may order it at their option. (33 C.J.SD. Executions 14). Execution may also be issued at the instance of the assignee of the judgment. Generally, a writ of execution may be issued against any party against whom judgment can be rendered but it cannot issue against one who is not a party to the action. (33 C.J.S. Executions 15). If a judgment debtor dies, an execution upon a money judgment cannot be levied upon any debt owed to the deceased or upon any property in which he had an interest. In addition, no enforcement procedure can be undertaken unless the surrogate court grants permission. A judgment lien existing upon real property at the time of a judgment debtor's death will expire two years after the death or ten years after the judgment roll has been filed, whichever is later. (N.Y. Civ. Prac. Law 5208, 1978). An execution may be issued from the court by the clerk or attorney of the judgment creditor to the sheriffs of one or more counties of New York, directing them to satisfy the judgment out of the real and personal property of the judgment debtor and debts due to him. (N.Y. Civ. Prac Law. 5230, 1978). Notice of the judgment must be served on the party against whom it is rendered before the writ can issue. (Place v. Albanese, 342 N.Y.S. 2d 699 (1973)). Court permission is not necessary to authorize the issuance of a writ. (Mineola Plumbing Supply Co. v. Taylor, 113 N.Y.S. 2d 862 (1952)). However, it is necessary if the statutory time to issue executions has elapsed. (Shire v. Bornstein, 174 N.Y.S. 2d 645 (1958); Stanley Funding Corporation v. Kotcher, 41 N.Y.S. 2d 877 (1943)). The order to issue execution must conform to the usual requirements of a valid order but no technical form is necessary. (Rondout National Bank v. Shapee, 79 N.Y.S. 2d 611 (1948)).
8/78
The execution must not go beyond the territorial jurisdiction of the court which rendered the judgment. (American Metal Clinrax, Inc. v. Seaboard Diecasting Corp., 252 N.Y.S. 2d 475 (1964)). The execution may issue immediately after rendition of the judgment but not before the obligation of the defendant has matured. (33 C.J.S. Executions 66). The execution must state the sum of money to be made and the writ should command the officer to make a levy. (33 C.J.S. Executions 75, 76). The writ must direct a levy on personal property first. (Bryant v. Trutnel Realty Corp. 193 N.Y.S. 2d 533 (1959)). Generally, every kind of property or interest in that property which is not exempt by state law may be reached by an execution issued on a judgment. (Fishman v. Sanders, 258 N.Y.S. 2d 380 (1965)). Levy can be made on personal property or on real property. (N.Y.Civ. Prac. Law 5232, 5236, 1978). The levy of an execution consists of acts by which an officer sets apart and appropriates a part or all of the judgment debtor's property in order to satisfy the debt. The execution cannot be levied on the debtor's property, either real or personal, if the judgment has been satisfied or an execution against the person has been perfected. (33 C.J.S. Executions 88, 89; N.Y. Civ. Prac. Law 5230 (b), 1978). A levy of execution is necessary in order to conduct an execution sale but if the judgment constitutes a lien on the land, levy is unnecessary to conduct an execution sale. (Oysterman's Bank & Trust Co. v. Weeks, 313 N.Y.S. 2d 535 (1970)). The levy must be made by an officer who is qualified to act under the writ. (33 C.J.S. Executions 92). The levy must be timely made on or before the return day in order to be valid because an officer has no authority to make a levy after the return day. (Garro v. Republic Sheet Metal Works, 129 N.Y.S. 2d 568 (1954)). An officer should notify the judgment debtor of the issuance of the writ of execution or make a demand on him for payment of the debt before he can levy upon the property. The debtor can select property on which he chooses the levy to be made. (33 C.J.S. Executions 96). If the officer levies upon personal property, he must reduce that property to possession, if possible; he must at least bring it under his immediate control. (N.Y. Civ. Prac. Law 5232, 1978). An execution creates a lien. (In re Livingston's Estate, 211 N.Y.S. 2d 896 (1961)). The lien of an execution is a right by law to charge the property of the judgment debtor subject to levy and sale with the payment of the debt. (33 C.J.S. Executions 123). The execution must direct that only the property in which the judgment debtor has an interest is to be sold. Each sheriff must keep a record of the executions delivered to him. (N.Y. Civ. Prac. Law 5230,1978).
8/78
If personal property is sold, the proceeds shall be distributed to the judgment creditor and any excess shall be paid to the judgment debtor. However, fees, expenses and any taxes levied upon the sale, delivery, transfer or payment of the property must be satisfied first. (N.Y. Civ. Prac. Law 5233, 1978). If real property is levied upon, it shall be sold by the sheriff at a public auction between the 56th and 63rd day after the first publication of a copy of the notice of sale. A printed notice of the time and place of the sale containing a description of the property must be posted at least 56 days before the sale in three public places in the town where the property is located. After the fees, expenses and any taxes levied on the sale, transfer or delivery have been deducted, the sheriff shall: 1) distribute the proceeds to the judgment creditors who have delivered executions against the judgment debtor to the sheriff before the sale and 2) pay over any excess to the judgment debtor. (N.Y. Civ. Prac. Law 5236, 1978). The purchaser of property sold at an execution sale may recover the purchase money from the judgment creditor's who received the proceeds, if the purchaser must return the purchased property because of some irregularity in the sale or if the judgment upon which the sale was based is vacated, reversed or set aside. The judgment creditor may move, without notice, for an order restoring any lien or priority affected by the sale. (N.Y. Civ. Prac. Law 5237, 1978). Within ten (10) days after the sale, the sheriff shall execute and deliver to the purchaser proofs of: 1) publication, 2) service, 3) posting of the notice of sale. In addition, he will deliver to the purchaser a deed which will convey the right, title and interest sold. (N.Y. Civ. Prac. Law 5236, 1978). An execution shall be returned to the clerk of the court from which it is issued within 60 days after issuance. The time may be extended in writing for a period of not more than sixty (60) days by an attorney for the judgment creditor. (N.Y. Civ. Prac. Law 5230, 1978). A return is a short official statement of the officer, indorsed on the writ or attached to it, or how he has complied with the writ or why he has done nothing. It is the duty of the officer to whom an execution is directed to make a proper return. (33 C.J.S. Executions 314-330). The return must be in writing on the writ itself or on a paper attached to it and signed by the officer. In New York, the return must be filed; mailing a return is not sufficient compliance. (Smith v. Greaty, 109 N.Y.S. 738 (1906)). As a general rule, a failure to make a return or defects in the return do not invalidate the
title of a purchaser at execution sale. (33 C.J.S. Executions 253-265).
8/78
The right to redeem from an execution sale is purely statutory in the absence of an agreement between the parties. (Application of Burdikoff, 296 N.Y.S. 609, 251 App. Div. 826 (1937)). Only those persons designated in the statute have the right to redeem although usually the redemption statutes authorize redemption by the judgment or execution debtor and his assignee or grantee. A person who has a statutory right to redeem may waive such rights or may, by his acts or conduct, be estopped to claim it. (33 C.J.S. Executions 254). A person who seeks to redeem must exercise the right within the time fixed in the statute, complying with all statutory provisions as to tender, deposit of money or payment. (33 C.J.S. Executions 257). The officer who makes the sale or the court clerk is a proper party to whom payment may be made. In addition, redemption can be made from the person from whom it is sought. (33 C.J.S. Executions 258 (b)). The statutory provisions for redemption must be followed. (33 C.J.S. Executions 259 (a)). Unless the statute requires it, formal notice of an intention to exercise the right to redeem is not necessary. (33 C.J.S. Executions 259 (b)). Generally, a redemption by the debtor, his successor in interest or the owner will vacate or destroy the effect of the execution sale. (33 C.J.S. Executions 260). Redemption by the debtor or his successor in interest releases the title from the consequences of the execution sale but it restores the original liens. (33 C.J.S. Executions 263(a)). A person who has complied with the statutory redemption requirements may be entitled to a deed of the property either from the proper officer or from the purchaser at execution sale. (33 C.J.S. Executions 264). A stay of execution is the stopping of execution on a judgment or of a creditor's right to issue execution, for a limited period. In New York, the stay means that no execution can issue on a judgment. (Bono Sawdust Supply Co. v. Hahn s. Golin, 155 N.Y.S. 2d 510 (1956)).
5/78
Chapter 14 - page 1 EASEMENTS Title
Cross Reference with Chapter 26 page 23
EASEMENTS
DEFINED A right which one person has to use the land of another or to have the land of another used in a particular way. G.L & P.J. R.R. Co. v. N.Y. & G.L. R.R. Co., 134 N.Y. 435 (1892) EASEMENTS APPURTENANT AND IN GROSS a. An easement is appurtenant when it is attached to or exists for the benefit of land. (1) Cannot be served from dominant tenement and passes with a conveyances thereof without express mention, Law of Easements & Licenses in Land, Revised Ed., 9.01[1] n.8. The dominant and servient tenements need not be contiguous. Cady v. Springfield Water Works, 134 N.Y. 118 (1892) (3) A person who succeeds to the possession of the dominant estate is entitled to enjoy any easement appurtenant to that property [Circuit City Stores, Inc. v. Muss, 151 AD2d 714, 715, 543 NYS2d 147, 148, lessee of easement holder entitled to make use of easement); 2 American Law of Property, sec. 8.71 (1952)].
(2)
(4) Tax sale that operates to extinguish an appurtenant easement not included in the assessment constitutes a taking of the easement holder's property without due process of law [Clove Lakes, Serv. Corp. v. Greif Bros. Cooperage Corp. , 74 Misc 2d 1036, 1038, 346 NYS2d 668, 670 (Sup. Ct. 1973)]. b. An easement in gross is one which is held and enjoyed by a person distinct from the ownership of specific land or of a dominant tenement. Saratoga State Waters Corp. v. Pratt, 227 N.Y. 429 (1920) CREATION OF EASEMENTS a. An easement cannot be created by parol. Nellis v. Munson, 108 N.Y. 453 (1888)
5/78
(1)
An oral agreement to grant an easement is unenforceable Gracie Sq. Realty Corp v. Choice Realty Corp., 305 N.Y. 271 (1953)
b.
By express grant or express reservation (1) A reservation of an easement in favor of a stranger is void.
c.
By implied grant - quasi-easements. (1) (2) Apparent and visible Reasonably necessary Paine v. Chandler, 134 N.Y. 385 (1892)
d.
By implied reservation. (1) (2) Apparent and visible Strictly necessary Wells v. Garbut, 132 N.Y. 430 (1892) Reynolds v. Gorton, 213 N.Y.S. 2d 561 (1960)
e.
By prescription - an adverse use for 10 years. CPLR 212(a) (1) The 10 year period went into effect with the CPLR on September 1, 1963. Causes of action arising since then are governed by CPLR 212(a). Causes of action which arose before that date are still governed by the 15 year period set by CPA 34. CPLR 218. This avoids the constitutional problem inherent in ex post facto abbreviating the period of limitations, particularly when the period of limitation extinguishes the right as well as the remedy. Jansen v. Sawling, 37A.D.2d 635 (1971) (2) In order to acquire an easement by prescription there must have been open, notorious, continuous and uninterrupted use for the statutory period. The period is derived from the statute of limitations applicable to actions to recover real property. Klin Co. v. N.Y. Rapid Transit Corp., 271 N.Y. 376 (1936)
5/78
(3)
The statutory requirements for adverse possession have no application to prescription. DiLeo v. Pecksto Holding Corp., 304 N.Y. 505 (1952)
(4)
In 1945 plaintiffs acquired a wood lot remote from the public highway and made use of dirt track running over private parcels to haul out timber periodically. Twenty-five years later plaintiffs sought a judgment that they had acquired a prescriptive easement. (a) Prescription does not arise where the use was not continuous but only seasonal. "The adverse use need not be on a daily basis but it must be such that an owner should recognize that a hostile claim is asserted." Prescription does not arise where permission to use the road was permitted as a matter of courtesy among neighbors. "Where permission to use the land can be implied from the beginning, no adverse user may arise." Jansen v. Sawling, 37 A.D.2d 635 (1971)
(b)
(5)
A has used a driveway encroaching upon his neighbor's property such as that a prescriptive easement will shortly be perfected. A conveys his parcel to B but the deed does not include the alleged driveway easement. B continues the use to complete the prescriptive period begun by A. B has not acquired a prescriptive easement. B cannot "tack" his use onto the time accumulated by A where the deed did not include the alleged easement and there was no proof the grantor intended to include it. Jacobs v. Lewicki, 12 A.D.2d 625 (1960), aff'd 10 N.Y.2d 778
(6)
An easement of light, air and prospect cannot be acquired by prescription. (a) An easement of light and air can be acquired by agreement. Mannino v. Conoco Realty Corp., 86 N.Y. S.2d 855 (1949) Harte v. Empire State Bldg., Corp., 219 N.Y.S.2d 391 (1961)
5/78
EXTINGUISHMENT OF EASEMENTS a. b. By release, which must be in writing. G.O.L. 5-703 By abandonment-which requires proof of an unequivocal intention to abandon and some overt act or failure to act which carries the implication that the owner neither claims nor retains any interest in the easement. Mere non-user is insufficient. Gergig v. Zumpano, 7 N.Y.2d 327 (1960) c. By prescription Woodruff v. Paddock, 130 N.Y. 618 (1892) d. e. By merger By operation of Recording Act where easement originally created by grant or reservation. Recording Act not applicable where easement created by prescription. By termination of the necessity therefor when easement was created solely by necessity. (1) Often enough during nineteenth century adjoining land owners would each construct a building but design them to share a single staircase winding up inside both over the property line. To solve problem of trespass should a later dispute cause one of them to erect a barrier across the property line, law gave each an easement by necessity over the other. If one building accidentally burned down or the neighbor decided to replace it entirely, there was no need to provide any longer for a common stairway; the easement by necessity terminated. Language in New York flatly says that an easement created by grant, express or implied can be extinguished only by abandonment, conveyance, condemnation or prescription. Gerbig v. Zumpano, supra. Presumably then an easement created by an implied reservation upon the basis of strict necessity would terminate when the necessity for it terminated. See 3d supra.
f.
(2)
8/79
Chapter 14 - Page 1 EASEMENTS - WIRES WIRES Legal Bulletin
1.
The unexplained existence of telephone or other utility poles or wires on the property under examination may make the title unmarketable. Clark v. Riverhead Savings Bank, 260 App. Div. 1022, Aff'd. 286 N.Y. 586. However, when the survey or inspection discloses such a situation, careful consideration must be given to the facts before the exception is framed. if the wires are merely lead-in wires to the house on the premises under examination, no exception will be made. Even if the wires cross the premises and run to other property, we will omit the exception if we are furnished with a letter from the utility company which maintains them or will remove them on request. In any event we must avoid general exceptions like: "Rights of Utility Companies to maintain wires or poles on, over and across the premises." The exception should be clear, specific and concise. For example: "Possible easement to maintain telephone wire from pole in street across the premises described in Schedule 'A' to the premises in the rear thereof", or: "Possible easement to maintain power line along the rear boundary of the premises described in Schedule 'A'. When inspection or survey discloses telephone wires crossing or running along the boundaries of a property, we will make no exception whatsoever in reports affecting New York City property unless we find a recorded agreement authorizing the maintenance of such wires. Where inspection or survey discloses power lines crossing the property, an exception should be inserted, but the exception should be specific and as concise as possible, for example: "Power line runs above roof along east boundary". If possible, the reader should assemble the facts and consult counsel in each case to see whether even such an exception may be disregarded.
2. 3. 4.
5. 6.
7.
8.
Chapter 14 - Page 1 EASEMENTS Legal Bulletin
DEFINED Easement is privilege without profit which one has for benefits of grantee's estate and passes with estate to subsequent grantees and is inheritable. Plattsburg Gas and Electric Co. v. Miller, 206 N.Y. Supp. 42 Reversed 207 NYS 335 DISCONTINUED STREET Under the Street Closing Act (Chapter 1006, Laws of 1895, now New York Charter, Appendix III), when a street (public street) is discontinued, both public and private easements are destroyed. The street closed must have been a public street. In the Matter of Mayor etc., of New York (Walton Avenue), 131 A.D. 696, affirmed 197 N.Y. 518. Barber v. Woolf, 216 N.Y. 7 Stirnweis v. Cacioppo 258 N.Y. 68 (Cardozd) PUBLIC STREET Definition of what is not a public street. Matter of Wallace Avenue, 222 N.Y. 139.
5/78
Chapter 15 - Page 1 ENCROACHMENTS General
ENCROACHMENTS
INTRODUCTION Generally, an encroachment will render title unmarketable and justify the rejection of title. Stokes v. Johnson 57 NY 673 Antonelli v. Morgilli 265 NY 462 A vendor under a contract which is silent as to possible encroachments must deliver a title free of any encroachments which will render title unmarketable. McPherson v. Schade 149 NY 16 Place v. Dudley 41 AD 540, 58 NYS 671 Reynolds v. Wynne 121 AD 272, 105 NYS 849 A contract which provides that the property is sold subject to any state of facts an accurate survey would show provided the same does not render title unmarketable, merely restates the law and adds nothing to the contract. A vendee under a contract which provides that the property is sold subject to any state of facts an accurate survey would show, must take title even though the survey shows such encroachments as may render title unmarketable. McCarter v. Crawford 245 Y 43 Manhattan Life Ins. Co. v. Wall Investing Corp. 131 Misc. 363, 226 NYS 717, Aff'd. 223 AD 833 228 NYS 845 A contract which provides that the premises are sold subject to the state of facts shown on a specific survey is binding on the buyer even though the survey shows encroachment which may render the title unmarketable. Kreshover v. Berger 135 AD 27, 119 NYS 737 McCarter v. Crawford 245 NY 43 The seller can best protect himself by making his survey part of his contract and providing specifically that the property is sold subject to the state of facts shown thereon. A buyer should always consult his title company with respect to problems arising from encroachments. In many instances, for a small additional premium, he will be able to obtain some kind of insurance that will make his purchase reasonably safe. There is no mathematical formula or absolute legal rule by which one can determine that a particular encroachment makes a title unmarketable. The only rule of law that can be deduced from the cases is that there is no rule. Each encroachment case is peculiar to itself. Obviously, the materiality of an encroachment
depends on its nature, its relation to the use and enjoyment of the premises, the cost of removal, the right to maintain it and other such factors
5/78
The problem of fences and hedges off the line of record title is one of the most difficult problems to deal with at a title clearance level. the underwriter must use both intelligence and imagination in resolving the problem and determining whether affirmative coverage can be afforded. In deciding whether he should permit his client to enter into the contract, the attorney must take into consideration the generally accepted standards of the real estate market. He must consider whether the nature, extent or location of the encroachment will disturb possession or affect the use, the possibility that the encroachment may be ordered removed, the cost of removal and whether a mortgage can be obtained despite the encroachment. If a fence hedge or retaining wall is off line by more than one foot adjoining neighbor may claim possession of the disputed ground. For this reason certain guidelines are suggested in evaluating each particular case. CLEARANCE PROCEDURE In order to clear and/or remove the exception we will need the following information, preferably by affidavit, in advance of closing: When was it erected? By whom and/or at whose expense? What is the affected area? (grass shrubs plants, surfaced area, or any improvement) Has there been any discussion or dispute with the neighbor about the affected area? Will the neighbor state in writing, preferably by affidavit of disclaimer, that no claim of possession or title is made with respect to the affected area? Pictures of the affected area are to be procured If the pictures show a substantial enclosure along the entire property line an affidavit of disclaimer will have to be executed and delivered to clear exception. Where the pictures do not show substantial enclosure, the above are to be considered and if permitting, the exceptions may be passed on case law. Spadaro v. Putter, 108 NYS 2d 343
5/78
The court held therein that where the hedge was planted on the boundary line but gradually extended onto adjoining land to the extent of one foot or less . . . "there was no substantial permanent enclosure as to vest plaintiff with adverse title to the one foot strip. However, a prescriptive right of usage arose in the nature of an easement that permitted the hedge to continue until it died or was removed by the plaintiff. For policy on fences, hedges and retaining walls see T.G. Board of Counsel Minutes of 2/7/62 under "fences and hedges" this index. REQUEST FOR AFFIRMATIVE COVERAGE No affirmative insurance will be given covering non-structural encroachments. All other cases are to be considered on a case by case basis. One of the following should be used. (1) (2) (3) (4) Policy to issue will affirmatively insure (same) may remain for so long as the building shall continue to exist in its present location. Policy to issue shall affirmatively insure that (same) may remain as presently located for the remaining life of the structure. Policy to issue shall insure against loss or damages occasioned by enforced removal of said encroachment by reason of injunctive relief. As to encroaching wall of building: "But this policy insures that the encroachment may remain so long as the building stands." For alternative forms of coverage refer to Title Insurance Underwriting Principals and Exception Language. BUILDING ENCROACHMENTS ON STREET 1. So common - advisable to sell subject to them See English Speaking Union v. Payson, 11 Misc. 2d 669, 174 NYS2d 775 2. May make title unmarketable Jennings v. Bauman, 214 AD 361, 212 NYS 334, aff'd 243 N.Y. 532 Acme Realty Company v. Schinasi, 215 N.Y. 495
5/78
3.
But many such encroachments may remain, pursuant to statute, until removed Gen. City L., Sec. 38-a; Town L., Sec. 130; Village L., Sec. l89 (46) (b) (c) (e); N.Y.C. Adm. Code, Secs. C26-407.1 et seq.
FENCES AND HEDGES - OUT OF POSSESSION - CLEARANCE "Out of possession" or adverse possession issues arise whenever a fence or hedge is located one (1) foot or more inside the property perimeter line of the property to be insured [Spadaro v. Putter, 108 NSY2d 343]. Factual circumstances need to be determined on a case by case basis. These may enable the title underwriter and insurer to "remove" or "insure over" the risk. Before undertaking either require the following questions be answered and sworn to in affidavit form : 1. when was the fence or hedge erected? 2. by whom or at whose expense? 3. was the location mutually agreed upon by the adjoining owners? 4. has there been any dispute as to the location erection? 5. will the adjoining owner execute a disclaimer to the affected area? NB New York does not generally recognize the doctrine of consentable boundary line as does Pennsylvania law. PRIOR TG BOARD OF COUNSEL MEMORANDUM Where examination of title indicates title exceptions may be required based upon the location of fences, hedges, and retaining walls or, there exists a possession issue along property perimeter lines please refer to TG Board of Counsel [BC] minutes of February 7, 1962, page 7 as reproduced and set forth in Chapter 12, DESCRIPTIONS, page 1, Title, of this manual. See also Spadaro v. Putter, 108 NYS2d 343
Chapter 15 - Page 1 ENCROACHMENTS Legal Bulletin
ON STREET When wall may remain. See Chap. 646, Laws of 1899, for New York and Bronx. See Chap. 473, Law of 1897, for Brooklyn. Encroachments by overhang of bay window, cornices and trim, fence, stone stoop and cellar steps constitute sufficient cause for rejection of title. Jennings v. Baumann, 214 A.D. 361. Affirmed 243 N.Y. 532. See Also Klimas v. Brunbach, 116 Misc. 299. Gelman v. Herrman, 118 Misc. 290 Encroachment on street (according to the plaintiff two inches and according to defendants three-eighths of an inch) renders a title unmarketable. Judge Mullan said "It is not clear how or where a line necessarily arbitrary, can be drawn." Perlman v. Stellwagen, 187 N.Y. Supp. 845. ON ADJOINING PROPERTY (ABUTTING WALLS) See Section 992, Civil Practice Act (formerly Sec. 1499, Code of Civil Procedure) providing that where a building encroaches not more than six inches on adjoining property, and a building has been erected by the adjoining owner abutting the encroaching building, such encroaching wall may remain undisturbed, unless an action is commenced within one year. Walls must abut. Held not to apply where a considerable vacant space was left between the rear end of the building and the encroaching wall. Bergman v. Klein, 97 A.D. 15. The section applies notwithstanding the fact that the abutting walls are not of the same depth. Volz v. Steiner, 67 A.D. 504.
Chapter 15 - Page 2 ENCROACHMENTS Legal Bulletin
ON ADJOINING PROPERTY In each of the following cases the title was held to be unmarketable by reason of an encroachment of the wall of the building (contracted to be sold) on adjoining property of from one-half an inch to three inches: Bowie v. Brahe, 4 Duer 676 (encroachment 1 7/8 inches). Reynolds v. Wynne, 121 A.D. 272 (encroachment 1/2 to 3 inches). Wilhelm v. Federgreen, 157 N.Y. 713 (encroachment 2 inches). Stevenson v. Fox, 167 N.Y. 599 (encroachment 2 inches). Hennig v. Smith, 151 N.Y. Supp. 444 (encroachment 3 inches) Stokes v. Johnson, 57 N.Y. 673 (encroachment 1 1/2 inches). Kreshover v. Berger, 135 A.D. 27 (encroachment 1 to 1 3/4 inches). Snow v. Monk, 81 A.D. 206 (encroachment 2 inches). BY ADJOINING BUILDING Held where adjoining building encroached 1 to 3 1/2 inches on premises contracted to be sold, the title was unmarketable. Klim v. Sachs, 102 A.D. 44 Place v. Dudley, 41 A.D. 540 1 1/2 in by adjoining bld - Reduced frontage
5/78
Chapter 16 - Page 1 ESTATES IN LAND Title
ESTATES IN THE LAND

FEE SIMPLE ABSOLUTE 1. 2. The word "heirs" or other words of inheritance are no longer required to create or convey an estate in fee. EPTL 2-1.4 The Rule in Shelley's Case has been abolished in New York. EPTL 6-5.8 "To A for life remainder to A's heirs" or "To A for life remainder to the heirs of his body" - A takes a life estate and the heirs take as purchasers. FEE ON LIMITATION EPTL 6-1.1 (SOMETIMES KNOWN AS A FEE ON SPECIAL LIMITATION OR A FEE SIMPLE DETERMINABLE) 1. How created a. By use of words denoting the running of time, e.g., "so long as," "while", "during," "until," etc. Thus a deed or will "to B and his heirs until Gloversville becomes a village" creates a fee on limitation even though the event may be unrelated to the use of the land. Leonard v. Buss, 18 N.Y. 96 (1858) b. Upon the disposition of a fee on limitation by will or deed that which is left in its creator or his successors in interest is a possibility of reverter. EPTL 6-3.2 (a) (1) (B); 6-4.5
2.
The fee on limitations terminates automatically upon the occurrence of the specified event. Re-entry or other affirmative act by the creator is not required. Leonard v. Burr, 18 N.Y. 96 (1958)
3.
The possibility of reverter remaining in the creator or his successors in interest is descendible, devisable and alienable. It is not subject to the rule against perpetuities. Nicholas v. Haehn, 187 N.Y. S.2d 773 (1959); EPTL 6-5.1
4.
Enforcing right to recover possession - RPAPL 612: a. An action to recover possession founded upon a reverter incident to a fee on special limitation cannot be maintained unless:
5/78
(1)
Within 10 years after revert occurs plaintiff has served written demand that possession be delivered and commenced his action within 1 year thereafter, or If no demand served, commenced an action within 10 years after revert occurred.
(2) b.
If no action commenced within required period, it shall be conclusively presumed that possibility of reverter was extinguished.
FEE ON CONDITION EPTL 6-1.1 (SOMETIMES CALLED A FEE SIMPLE SUBJECT TO A CONDITION SUBSEQUENT. 1. How created a. By use of hypothetical words or conditional words such as "provided that," upon condition that," "but if," etc. Thus a deed or will "to B and his heirs but if liquor should ever be consumed on the premises the creator or his heirs may re-enter and reclaim the estate" creates a fee on condition. Upon the disposition of a fee on condition that which is left in the creator or his successors in interest is a right of reacquisition. EPTL 63.2(a) (1) (C); 6-4.6 (Also known as a right of re-entry).
b.
2.
At common law the grantee's estate did not terminate automatically upon the breach of the condition. The right was exercisable only by the creator and his heirs. In fact at common law the attempt to assign the right would extinguish the right and cancel the condition. The right was only exercisable by the creator of his heirs. Uppington v. Corrigan, 151 N.Y. 143 (1896); Fausett v. Guisewhite, 16 A.D.2d 82 (1962). The right of reacquisition today is descendible, devisable and alienable. EPTL 6.5-1 It is not necessary to reserve expressly a right of reacquisition to create fees on condition. A deed to B and his heirs upon express condition that liquor not be consumed upon the premises should suffice. Absent, however, an express reservation of a right of reacquisition a particular transaction may be read as creating a covenant. E.g., A owned a parcel of land and sold off half of it to B. The deed from A to B was upon express condition that no liquor should be sold upon the premises. A's heirs were no longer resident in the area; albeit the people who bought the remaining part of A's land were, they were not concerned with what occurred on B's parcel. The successors sued to enforce the right of reacquisition. Held, absent the express reservation of a right of reacquisition, given the policy that the law abhors a forfeiture and granted that A's heirs had moved away and really were not concerned, the deed from A to B created not a condition but a covenant.
3.
Post v. Weil, 115 N.Y. 361 (1889)
5/78
4.
Problems about a fee on limitation can also arise if the right of reacquisition clause is unartfully drawn. a. A conveyed land to a school district by way of a deed in which it was provided that it "is made and accepted subject to the following conditions and reservations viz: . . . and whenever the property shall cease to be used for school purposes it shall revert to A or his heirs." At face value the word "revert" seems to mean a possibility of reverter, in which case the deed created a fee on limitation. Crucial instead was the fact that the estate was conveyed on condition and nowhere did words like "so long as" appear. Held, the deed gave rise to a fee on condition leaving a right of reacquisition in A or his heirs. Fausett v. Guisewhite, supra b. A conveyed land to a city on the express condition that it be used as a park site. The deed also specified "and in the event of the discontinuance of the use as a park all of the same shall immediately revert to A or his heirs." Held, given the call for a condition, the deed created a fee on condition leaving a right of reacquisition in A or his heirs. Grant v. Koeniq, 39 A.D.2d 1000 (1972)
5.
Prior to the breach of condition the creator can waive the right of reacquisition. If the creator is dead, his heirs can waive the right prior to or even after the breach of condition. Trustees of Calvary Presbyterian Church v. Putnam, 249 N.Y. 111 (1928) a. A had conveyed land to a city upon express condition that the land be used as a park site. The city resolved to discontinue the park use. The heirs of A by quitclaim deed transferred their right of reacquisition to the local VFW but this deed contained the words "to extinguish a right of reversion." The city then deeded the parcel to the VFW and A's heirs. A taxpayer sought to set aside the city deed because the city had acquired a fee simple which, being a park, it could not deed away because a trust obligation arose. Issue: did the words in the deed by A's heirs constitute a waiver of their right of reacquisition thereby converting the parcel into a fee simple before the city deeded it back? Held, in light of the circumstances, the words did not constitute a waiver but rather were meant to describe the interest the heirs transferred. While the city could not sell a fee simple without competitive bidding, it could convey the park back to the owners of
the right of reacquisition since they had the right to such a
5/78
reconveyance upon breach of condition. The title of the VFW would not depend upon the deed from the city to it. Grant v. Koeniq, supra 6. Enforcing right of re-entry RPAPL 612: a. An action to record possession founded upon a claim of breach of a condition subsequent cannot be maintained unless: (1) Within 10 years after breach occurs plaintiff has served written demand that possession be delivered and commenced his action within 1 year thereafter, or If no demand served, commenced an action within 10 years after breach occurred.
(2) b. c.
If no action commenced within required period, it shall be conclusively presumed that right was extinguished. Why the need for RPAPL 612 when, once the event occurs to terminate the estate, it would appear that the occupant could begin to perfect a new title by way of adverse possession to which a period of 10 years also applies? Because possession which is not hostile at its inception does not become adverse by reason of a subsequent claim of right. City of N.Y. v. Coney Island Fire Dept., 259 App. Div. 286 (1940), aff'd 285 N.Y. 535
EFFORTS TO MODIFY THE SEVERITY OF BOTH THE FEE SIMPLE ON SPECIAL LIMITATION AND THE FEE SIMPLE SUBJECT TO A CONDITION. 1. Background a. If years ago a parcel was conveyed "so long as used exclusively as the site of residence" (or "but if . . .") and the neighborhood has since become an industrial one, the value of the parcel may be destroyed. The incumbent owner can breach the condition and risk forfeiting his estate, an impractical solution to the economic impasse. Note also that the same parcel might have been conveyed by a deed in which the grantee for himself, heirs, assigns and successors covenanted to use the parcel exclusively as the site of a residence. In this instance, however, the promise would have had to benefit land
b.
retained by the grantor out of which the burdened estate was carved.
5/78
The beneficiaries of that promise now occupying the land benefitted by the promise could not expect an equity court to compel compliance of it if the neighborhood had substantially changed, enforcement would work undue hardship or enforcement would achieve no practical purpose. c. The trend in New York has been gradually to change the forfeiture effect of "so long as" and "but if" estates by grafting onto them the doctrine of reason associated with the law of covenants. Note carefully that these reforms apply to restraints upon the use of land. Be careful to distinguish a conveyance "so long as used as the site of a residence only" and "so long as no liquor is consumed upon the premises."
d.
2.
Recording Declaration of Intention to Preserve Restrictions on Use of land R.P.L. 345 a. A condition subsequent or special limitation on restricting the use of land shall be extinguished and the rights incident thereto shall be unenforceable unless a declaration of intention to preserve it is recorded not less than 27 nor more than 30 years after the condition subsequent or special limitation was created. (1) With respect to a condition subsequent or special limitation created prior to September 1, 1931, the declaration may be recorded on or before September 1, 1961. Renewal declarations may be recorded at 10 year intervals.
(2) b.
This section shall not apply where the condition subsequent or special limitation was created in favor of: (1) (2) (3) (4) (5) The U.S., the State of New York or any government subdivision or agency of either. The owner of a reversion following a life estate. The owner of a reversion following an estate for less than 100 years. The owner of a reversion on a lease of communication, transportation or transmission lines. A mortgage or contract-vendor of land, or the holder of any
other security interest in land.
5/78
c.
This section shall not apply where prior to the time for recording the initial declaration or renewal declaration, the person entitled to record the same has validly entered into possession or obtained a judgment for recovery of possession of the land. The extinguishment of the restriction by this section shall not affect: (1) The enforcement of the same restriction by an action for damages or for an injunction to the extent that it is also imposed by covenant, promise or negative easement. A condition subsequent or special limitation and the rights incident thereto which does not involve a restriction on the use of land.
d.
(2)
e.
Bd of Ed etc v. Miles, 15 N.Y.2d 364 (1965) Where possibility of reverter arising in 1854 "matured" after Sept. 1, 1961 and no declaration of intention to preserve restriction recorded prior thereto, application of R.P.L. 345 to extinguish the reverter would be unconstitutional as impairing the obligation of the contract contained in the deed and as a deprivation of property without due process of law. No showing that the statute comes within the police power and therefore no constitutional basis for applying the statute retroactively.
3.
Special Limitation or Condition Subsequent Restricting the Use of Land, Created on or After September 1, 1958. RPAPL 1953 a. The automatic reverter and the right of entry are abolished. Upon the occurrence of the event or the breach of the condition, an action may be maintained to compel a conveyance of the land. (1) (2) Relief granted only to protect a substantial interest in enforcement of the restriction. The action is subject to any defense which might be raised in an action to enjoin a violation of the restriction if it were created by covenant. The court may deny the relief sought, impose conditions upon the granting thereof or grant alternative relief as in an action for an injunction. It may enjoin the breach of the restriction as an alternative to compelling a reconveyance. If it directs a reconveyance, it may be upon such terms as is required to prevent unjust enrichment.
(3)
5/78
b.
This section does not apply to: (1) (2) Restrictions created by lease for a term less than 100 years. Restrictions in a conveyance or devise for benevolent, charitable, educational, public or religious purposes.
4.
Codification of Equitable Doctrines - RPAPL 1951 a. Restrictions affecting the use of land shall not be enforced by injunction or judgment compelling reconveyance if restriction is of no actual and substantial benefit to person seeking to enforce it either because its purpose has already been accomplished or is not capable of being accomplished due to change conditions, or for any other reason. In such case the court may decree the extinguishment of the restriction upon the payment of damages.
5.
Action for Relief from Pre-September 1, 1958 Special Limitation or Condition Subsequent Restricting the Use of Land - RPAPL 1954 a. b. This section applies to special limitations and conditions subsequent created prior to September 1, 1958. Owners of land subject to a special limitation or condition subs. may maintain an action to obtain a judgment that the restriction be deemed to create only a cause of action to compel a conveyance, subject to equitable defenses. (1) Relief may be granted if primary purpose of special limitation or condition subsequent was to restrict the use of land and unreasonably limits the use and development of land or unreasonably impairs the certainty of titles. Relief shall not be granted if the restriction has already been breached. In such case, however, the cause of action to recover possession or enforce the right of entry must be asserted in the same action or commenced within six months thereafter.
(2)
6.
Action for relief from Special Limitation or Condition Subsequent Restricting Use of Land Held for Charitable Purposes - RPAPL 1955 a. An action may be maintained to obtain relief from restrictions limiting the use of land held for charitable purposes to such purposes.
b.
The relief granted is discretionary with the court.
5/78
c. d.
The section shall apply to special limitations or conditions subsequent created before or after September 1, 1958. Limitations: (1) No action under this section shall be commenced until expiration of two years from the creation of the special limitation or condition subsequent. The Attorney General must be party to such action. This section does not apply where: (a) (b) Rights have accrued because of a breach prior to September 1, 1958 The conveyance creating the restriction was made by the U.S., the State of New York or any governmental unit, subdivision or agency of either.
(2) (3)
ENFORCEMENT RPAPL 2001, eff. September 1, 1963 - limits the time in which an action can be brought to enforce covenants restricting the use of land with respect to structures that may be built thereon to a period of two years after the completion of the structure. ESTATES IN FEE TAIL - E.G. "TO A AND THE HEIRS OF HIS BODY" 1. Abolished in New York - EPTL 6-1.2 - A takes a fee simple absolute. a. Distinguish between "To A and the heirs of his body" (A takes a fee simple absolute) and "To A for life remainder to the heirs of his body" (A takes a life estate and the heirs take as purchasers). A contingent limitation on a fee may be limited to take effect on the death of the first taker without issue. (To A and the heirs of his body, but if A dies leaving no heirs of his body then to B.)
b.
LIFE ESTATES 1. 2. A grant of life estate must be executed with the same formalities as a grant of a fee. R.P.L. 243 No limitation upon creation of successive legal life estates other than that imposed by the rule against perpetuities. R.P.L. 43 repealed April 12, 1960.
5/78
3.
Estates pur autre vie - e.g. "To A for the life of B." a. b. c. If A predeceases B the residue of A's estate vests in his personal representative as personal property. EPTL 6-1.3 "To A for the life of B and then to C for life" - now valid. R.P.L. 44, repealed April 12, 1960 "To A for lives of B, C and D remainder to E" - now valid. R.P.L. 45 repealed April 12, 1960.
4. 5.
An attempt by a life tenant to convey a fee no longer results in a forfeiture. R.P.L. 247 Duties of Life Tenant a. Must defray all periodic charges such as taxes, water, rent and interest on incumbrances. Wade v. Malloy, 16 Hun 226 (1878) (1) When real property held by a person for life is encumbered by a mortgage or other lien the interest on which should be paid by the life tenant, and he neglects or refuses to pay such interest, the remainderman may do so and recover from the life tenant the amount thereof together with interest from the time of payment. R.P.L 269
b. c.
Need not pay the principal of a mortgage. Must make such ordinary repairs as are necessary to prevent waste. Peerless Candy Co. v. Kessler, 123 Misc. 361 (1924)
d.
Need not make permanent improvements. Stevens v. Melcher, 152 N.Y. 551 (1897)
e.
Is liable for voluntary or permissive waste. RPAPL 801
COURTESY ABOLISHED R.P.L 189 DOWER Dower abolished where either marriage or seisin of estate of inheritance, or both,
occurred after Sept 1, 1930. R.P. L. Sec. 190
5/78
ESTATES AT WILL 1. 2. An estate at will is one that at common law may be terminated at any time by either landlord or tenant and which has no fixed duration. How Created a. By express agreement Burns v. Bryant, 31 N.Y. 452 (1865) b. By a tenant taking possession under an unenforceable oral lease provided no installment of rent is paid. Talamo v. Spitzmiller, 120 N.Y. 37 (1890) 3. Termination a. b. Landlord must give tenant written 30-day notice. R.P.L. 228 By abandonment or attempted assignment by tenant.
ESTATES AT SUFFERANCE 1. An estate at sufferance arises when a tenant wrongfully holds over after the expiration of his term, but without asserting a claim to a superior title. Restatement, Law of Property, 22 Termination a. Landlord must give tenant written 30-day notice. R.P.L. 228 Smith v. Littlefield, 51 N.Y. 539 (1873)
2.
8/78
EXECUTIONS
An execution is a judicial writ issuing from the court where the judgment is rendered and directed to an officer. The execution runs against the body or goods of a party, by which the court's judgment is enforced. (33 C.J.S. Executions 1). In New York, the writ of execution is statutory, (Rhoades v. Robles, 145 N.Y.S. 2d 286 (1955) and is the only method of enforcing a money judgment in an action at law. The person in whose favor a judgment is rendered has the exclusive right to and control of the issuance of execution and may order it at their option. (33 C.J.SD. Executions 14). Execution may also be issued at the instance of the assignee of the judgment. Generally, a writ of execution may be issued against any party against whom judgment can be rendered but it cannot issue against one who is not a party to the action. (33 C.J.S. Executions 15). If a judgment debtor dies, an execution upon a money judgment cannot be levied upon any debt owed to the deceased or upon any property in which he had an interest. In addition, no enforcement procedure can be undertaken unless the surrogate court grants permission. A judgment lien existing upon real property at the time of a judgment debtor's death will expire two years after the death or ten years after the judgment roll has been filed, whichever is later. (N.Y. Civ. Prac. Law 5208, 1978). An execution may be issued from the court by the clerk or attorney of the judgment creditor to the sheriffs of one or more counties of New York, directing them to satisfy the judgment out of the real and personal property of the judgment debtor and debts due to him. (N.Y. Civ. Prac Law. 5230, 1978). Notice of the judgment must be served on the party against whom it is rendered before the writ can issue. (Place v. Albanese, 342 N.Y.S. 2d 699 (1973)). Court permission is not necessary to authorize the issuance of a writ. (Mineola Plumbing Supply Co. v. Taylor, 113 N.Y.S. 2d 862 (1952)). However, it is necessary if the statutory time to issue executions has elapsed. (Shire v. Bornstein, 174 N.Y.S. 2d 645 (1958); Stanley Funding Corporation v. Kotcher, 41 N.Y.S. 2d 877 (1943)). The order to issue execution must conform to the usual requirements of a valid order but no technical form is necessary. (Rondout National Bank v. Shapee, 79 N.Y.S. 2d 611 (1948)).
8/78
The execution must not go beyond the territorial jurisdiction of the court which rendered the judgment. (American Metal Clinrax, Inc. v. Seaboard Diecasting Corp., 252 N.Y.S. 2d 475 (1964)). The execution may issue immediately after rendition of the judgment but not before the obligation of the defendant has matured. (33 C.J.S. Executions 66). The execution must state the sum of money to be made and the writ should command the officer to make a levy. (33 C.J.S. Executions 75, 76). The writ must direct a levy on personal property first. (Bryant v. Trutnel Realty Corp. 193 N.Y.S. 2d 533 (1959)). Generally, every kind of property or interest in that property which is not exempt by state law may be reached by an execution issued on a judgment. (Fishman v. Sanders, 258 N.Y.S. 2d 380 (1965)). Levy can be made on personal property or on real property. (N.Y.Civ. Prac. Law 5232, 5236, 1978). The levy of an execution consists of acts by which an officer sets apart and appropriates a part or all of the judgment debtor's property in order to satisfy the debt. The execution cannot be levied on the debtor's property, either real or personal, if the judgment has been satisfied or an execution against the person has been perfected. (33 C.J.S. Executions 88, 89; N.Y. Civ. Prac. Law 5230 (b), 1978). A levy of execution is necessary in order to conduct an execution sale but if the judgment constitutes a lien on the land, levy is unnecessary to conduct an execution sale. (Oysterman's Bank & Trust Co. v. Weeks, 313 N.Y.S. 2d 535 (1970)). The levy must be made by an officer who is qualified to act under the writ. (33 C.J.S. Executions 92). The levy must be timely made on or before the return day in order to be valid because an officer has no authority to make a levy after the return day. (Garro v. Republic Sheet Metal Works, 129 N.Y.S. 2d 568 (1954)). An officer should notify the judgment debtor of the issuance of the writ of execution or make a demand on him for payment of the debt before he can levy upon the property. The debtor can select property on which he chooses the levy to be made. (33 C.J.S. Executions 96). If the officer levies upon personal property, he must reduce that property to possession, if possible; he must at least bring it under his immediate control. (N.Y. Civ. Prac. Law 5232, 1978). An execution creates a lien. (In re Livingston's Estate, 211 N.Y.S. 2d 896 (1961)). The lien of an execution is a right by law to charge the property of the judgment debtor subject to levy and sale with the payment of the debt. (33 C.J.S. Executions 123). The execution must direct that only the property in which the judgment debtor has an interest is to be sold. Each sheriff must keep a record of the executions delivered to him. (N.Y. Civ. Prac. Law 5230,1978).
8/78
If personal property is sold, the proceeds shall be distributed to the judgment creditor and any excess shall be paid to the judgment debtor. However, fees, expenses and any taxes levied upon the sale, delivery, transfer or payment of the property must be satisfied first. (N.Y. Civ. Prac. Law 5233, 1978). If real property is levied upon, it shall be sold by the sheriff at a public auction between the 56th and 63rd day after the first publication of a copy of the notice of sale. A printed notice of the time and place of the sale containing a description of the property must be posted at least 56 days before the sale in three public places in the town where the property is located. After the fees, expenses and any taxes levied on the sale, transfer or delivery have been deducted, the sheriff shall: 1) distribute the proceeds to the judgment creditors who have delivered executions against the judgment debtor to the sheriff before the sale and 2) pay over any excess to the judgment debtor. (N.Y. Civ. Prac. Law 5236, 1978). The purchaser of property sold at an execution sale may recover the purchase money from the judgment creditor's who received the proceeds, if the purchaser must return the purchased property because of some irregularity in the sale or if the judgment upon which the sale was based is vacated, reversed or set aside. The judgment creditor may move, without notice, for an order restoring any lien or priority affected by the sale. (N.Y. Civ. Prac. Law 5237, 1978). Within ten (10) days after the sale, the sheriff shall execute and deliver to the purchaser proofs of: 1) publication, 2) service, 3) posting of the notice of sale. In addition, he will deliver to the purchaser a deed which will convey the right, title and interest sold. (N.Y. Civ. Prac. Law 5236, 1978). An execution shall be returned to the clerk of the court from which it is issued within 60 days after issuance. The time may be extended in writing for a period of not more than sixty (60) days by an attorney for the judgment creditor. (N.Y. Civ. Prac. Law 5230, 1978). A return is a short official statement of the officer, indorsed on the writ or attached to it, or how he has complied with the writ or why he has done nothing. It is the duty of the officer to whom an execution is directed to make a proper return. (33 C.J.S. Executions 314-330). The return must be in writing on the writ itself or on a paper attached to it and signed by the officer. In New York, the return must be filed; mailing a return is not sufficient compliance. (Smith v. Greaty, 109 N.Y.S. 738 (1906)). As a general rule, a failure to make a return or defects in the return do not invalidate the
title of a purchaser at execution sale. (33 C.J.S. Executions 253-265).
8/78
The right to redeem from an execution sale is purely statutory in the absence of an agreement between the parties. (Application of Burdikoff, 296 N.Y.S. 609, 251 App. Div. 826 (1937)). Only those persons designated in the statute have the right to redeem although usually the redemption statutes authorize redemption by the judgment or execution debtor and his assignee or grantee. A person who has a statutory right to redeem may waive such rights or may, by his acts or conduct, be estopped to claim it. (33 C.J.S. Executions 254). A person who seeks to redeem must exercise the right within the time fixed in the statute, complying with all statutory provisions as to tender, deposit of money or payment. (33 C.J.S. Executions 257). The officer who makes the sale or the court clerk is a proper party to whom payment may be made. In addition, redemption can be made from the person from whom it is sought. (33 C.J.S. Executions 258 (b)). The statutory provisions for redemption must be followed. (33 C.J.S. Executions 259 (a)). Unless the statute requires it, formal notice of an intention to exercise the right to redeem is not necessary. (33 C.J.S. Executions 259 (b)). Generally, a redemption by the debtor, his successor in interest or the owner will vacate or destroy the effect of the execution sale. (33 C.J.S. Executions 260). Redemption by the debtor or his successor in interest releases the title from the consequences of the execution sale but it restores the original liens. (33 C.J.S. Executions 263(a)). A person who has complied with the statutory redemption requirements may be entitled to a deed of the property either from the proper officer or from the purchaser at execution sale. (33 C.J.S. Executions 264). A stay of execution is the stopping of execution on a judgment or of a creditor's right to issue execution, for a limited period. In New York, the stay means that no execution can issue on a judgment. (Bono Sawdust Supply Co. v. Hahn s. Golin, 155 N.Y.S. 2d 510 (1956)).
8/78
Chapter 19 - Page 1 FORECLOSURE Title
FORECLOSURE
GENERAL If final judgment has been awarded to the plaintiff to recover a mortgage debt, he cannot maintain an action to foreclose the mortgage unless an execution has been issued upon the judgment against the defendant's property. The execution must be issued to the sheriff of the county where he resides if he resides in New York. If he resides out of New York, it must be issued to the Sheriff where the judgment roll is filed. (N.Y. Real Prop. Acts Law 1301, 1963). Each of the persons, whose interest is claimed to be subject and subordinate to plaintiff's lien, shall be made a party defendant. (N.Y. Real Prop. Acts Law 1311, 1963). In an action to foreclose a mortgage, the plaintiff must join all the parties whose interests are subordinate to that of the mortgagee. (G.B. Seely's Son, Inc. v. Fulton-Edison, Inc., 382 N.Y.S. 2d 516 (1976)). If the defendant fails to answer within the required time or if he admits the plaintiff's rights, the court shall ascertain and determine the amount due. (N.Y. Real Prop. Acts Law 1321, 1963). The plaintiff must file in the clerk's office of each county where the property is situated, a notice of the pendency of the action. The notice must be given at least twenty days before a final judgment directing a sale is given and must specify: 1) the date of the mortgage; 2) the parties; and 3) time and place of recording. (N.Y. Real Prop. Acts Law 1331, 1963). The judgment must direct that the mortgaged premises or a sufficient amount to discharge the debt, the expenses and costs of the sale and action, be sold by or under the direction of the sheriff of the county. If the mortgage debt is not all due and the mortgaged property is so circumstanced that it can be sold in parcels without injury to the interests of the parties, the final judgment shall direct that no more of the property should be sold than is sufficient to pay the sums due. (N.Y. Real Prop. Acts Law 1351, 1963). The primary purpose of a mortgage foreclosure judgment is to divest the mortgagor of the ownership of the mortgaged property and make it or the proceeds of the sale of the property available to the mortgagee in satisfaction of his claim against the mortgagor. (Da Costa v. Hamilton Republican Club of Fifteenth Assembly Dist., 65 N.Y.S. 2d 500 (1946)). The right to redeem is an essential part of a mortgage. (Wallace v. McCabe, 245 N.Y.S. 2d 854 (1963)).
8/78
After the property has been sold, the officer conducting the sale shall execute a deed to the purchaser. Before a deed can be executed to the purchaser, however the deed must be recorded. This conveyance vests in the purchaser the same estate that would have vested in the mortgagee if the equity of redemption had been foreclosed. (N.Y. Real Prop. Acts. Law 1353, 1963). The officer who conducts the sale shall pay the expenses of the sale out of the proceeds. He must then pay to the plaintiff or his attorney the amount of the debt, interests and costs. All surplus moneys arising from the sale shall be paid into the court by the officer conducting the sale within five days from the date it is received. (N.Y. Real Prop. Acts Law 1354, Supp. 1978). DEFICIENCY JUDGMENT The procedure for bringing a motion for a deficiency judgment simultaneously with that of a motion to confirm the foreclosure sale is permissive and not mandatory. (Seiden v. Chagon, 306 N.Y.S. 2d 847 (1970)). If the foreclosure sale results in a deficiency, the deficiency judgment may be entered against the personal estate of the deceased obligor or as a guarantor of the mortgage debt and the amount may be recovered out of the assets of the estate. (Jemzura v. Jemzura, 369 N.Y.S. 2d 400 (1975)). The deficiency judgment shall be for an amount equal to the sum of the amount owing by the party liable, as determined by the judgment, with interest plus costs and disbursements of the action plus an amount owing on all prior liens and encumbrances with interests - the market value as determined by the sale price. (N.Y. Real Prop. Acts Law 1371, 1963). A deficiency judgment may be entered following a sale of the mortgaged premises under valid judgment of foreclosure and sale and the distribution of the proceeds if there is an adjudication of personal liability in the foreclosure judgment. (Cassia Corp. v. North Hills Holding Corp., 118 N.Y.S. 2d 220 (1953)). NON-JUDICIAL SALE A mortgage upon real property situated in New York in which a power to sell the mortgaged property upon default is given to the mortgagee or any other person, may be foreclosed if: a) default has been made in a condition of the mortgage so that the power to sell has become operative;
8/78
b)
an action has not been brought to recover the debt secured by the mortgage; if it has been brought, it must be: discontinued; or found that the final judgment was rendered against the plaintiff; or 3) an execution issued upon a judgment for the plaintiff was returned wholly or partly unsatisfied; the mortgage has been recorded in the proper book for recording mortgages, in the county where the property is located; the first notice is published within the time in which an action could be maintained to foreclose such mortgages. (N.Y. Real Prop. Acts Law 1402, 1963). 1) 2)
c) d)
The person entitled to execute the power of sale must give notice that the mortgage will be foreclosed by sale of the mortgaged property at a time and place specified in the notice. A copy of the notice must be: 1) published at least once in each of the twelve weeks preceding the sale; 2)fastened up at least 84 days before the day of sale in a conspicuous place near the courthouse entrance; 3) delivered at least 84 days before the day of sale, to the clerk of each county wherein the mortgaged property is situated; and 4) served upon the mortgagor. (N.Y. Real Prop. Acts Law 1402, 1963). Service of the notice of the sale must be made: a) upon the mortgagor, his wife, widow, executor or subsequent grantee by delivering a copy of the notice to the person or by leaving it at his dwelling house with a person of suitable age and discretion, at least 14 days before the sale; b) upon any other person by mail at least 28 days before the day of sale. (N.Y. Real Prop. Acts Law 1403, 1963). The notice of sale must specify: 1) the names of the mortgagor, mortgagee and each assignee of the mortgage; 2) the date of the mortgage and the time and place it is recorded; 3) the sum claimed to be due upon the mortgage at the time of the first publication of the notice; and 4) a description of the mortgaged property, conforming substantially to that contained in the mortgage. (N.Y. Real Prop. Acts Law 1405, 1963). The sale must be a public auction in the daytime on a day other than Sunday or a public holiday in a county in which the mortgaged property is located. (N.Y. Real Prop. Acts Law 1407, 1963). The mortgagee or his assignee may purchase the mortgaged property at the sale if done fairly and in good faith. (N.Y. Real Prop. Acts Law 1407, 1963). If the sale is made to a purchaser in good faith, it acts as a bar to all claims or equity of redemption to the property upon the following persons: 1) the mortgagor his heir, devisee, executor or administrator; 2) each person claiming under any of them, by virtue
8/78
of a title or of a lien by judgment or decree, subsequent to the mortgage, upon whom the notice of sale was served; 3) every person so claiming, whose assignment, mortgage or other conveyance was not duly recorded in the proper book for recording the same in the county or whose judgment or decree was not duly docketed in the county clerk's office at the time of the delivery of a copy of the notice of the sale; 4) every other person, claiming under a statutory lien or incumbrance, created subsequent to the mortgage, attaching to the interest or title of any person; and 5) the wife or widow of the mortgagor upon whom notice of the sale was served where the lien of the mortgage was superior to her contingent or vested right of dower, or her estate in dower. (N.Y. Real Prop. Acts Law 1411, 1963).
8/79
Chapter 19 - Page 1 FORECLOSURE 1 NOTICE OF SALE Legal Bulletin
1.
NOTICE OF SALE HISTORY. The provisions for publishing notice of sale of real property pursuant to a judgment have been transferred from Section 986 of the Civil Practice Act to Section 231 of the Real Property Actions and Proceedings Law. The provisions for sale of real property by virtue of an execution have been transferred from Section 712 of the Civil Practice Act to Section 5236, Civil Practice Law and Rules. Changes have been made in both sections. These took effect on September 1, 1963. Section 231 of the Real Property Actions and Proceedings Law was further amended by Chapter 230 of the Laws of 1964, effective March 29, 1964 and Section 5236, Civil Practice Law and Rules was further amended by Chapter 347 of the Laws of 1964, effective September 1, 1964, other changes have been made subsequently as noted herein. IN NEW YORK CITY. the requirement that the publication be made in two newspapers twice a week for three weeks has been amended so that since September 1, 1963 publication in only one newspaper is required. In New York County the publication is required to be in the New York Law Journal. (Section 91 of the Judiciary Law.) However in Bronx County the publication must still be in two newspapers twice a week for three weeks. One of these newspapers must be the New York Law Journal. IN CITIES AND VILLAGES. a. The provisions for publishing once a week for six weeks in a weekly newspaper of the City or village in which the property lies, or in an adjoining city or village if no paper is published in the city or village in which the property lies, have been changed to require publication once a week for only four weeks. *Effective September 1, 1973 (Laws of 1972 Chapter 892 Paragraph 10) "first class" was deleted from all references to Villages in Section 231 (RPAPL) and referred only to incorporated villages.
2.
3.
b.
4.
OUTSIDE OF CITIES AND VILLAGES IN WHICH A NEWSPAPER IS PUBLISHED. a. Before September 1, 1963. Before this date notice of sale pursuant to a judgment was required in the same manner as in a sheriff's sale by virtue of an execution. Section 712, C.P.A., provided for publication once a week for six weeks in a newspaper in the county in which the property lies, or, if there is none in the county, in a newspaper in an adjoining county. In addition the section called for posting at least 42 days before the sale in three public places in the town or city where the property lies.
b.
Between September 1, 1963 and March 28, 1964. During this period Section 5236, Civil Practice Law and Rules required four publications once in each period of 14 days during the 56 days preceding the sale. Posting was required to be made at least 56 days preceding the sale. In addition personal service or service by registered or certified mail at least 10 days before the sale must be made on all judgment creditors or mortgagees who acquire liens on the property up to 20 days before the sale.
c.
On or after March 29, 1964. The amendment of this date eliminated from Section 231, Real Property Actions and Proceedings Law, the reference to an execution sale by a sheriff. Notice of the time and place of a sale pursuant to a judgment (if the premises are outside of a city or an incorporated village of the (first class) * in which a newspaper is published), must now be published once a week for four successive weeks in a newspaper in the county where the property is located, or if there is none, in a newspaper published in an adjoining county and must be posted at least 28 days before the sale in three public places in the town where the property is located and if the sale is held in another town or city, in three public places in such other town or city. It is no longer necessary to serve the notice of sale pursuant to a judgment personally or by registered or certified mail on judgment creditors or mortgagees. However the statute provides that prior to September 1, 1964 notice of sale may be given either pursuant to the amendment or to the law in force just before the enactment of the amendment.
5.
POSTPONEMENT OF SALE IN ALL CASES. If the officer appointed to make the sale does not appear, the attorney may make application to have another appointed to make such sale and postpone the sale for a period not to exceed four weeks. Notice must be posted where required and notice must be published in the same newspaper once at least three days prior to the postponed date (Section 231 sub. 3 RPAPL). WHEN THE SALE MUST BE HELD. If the publication is for three weeks, the sale must be had between the 21st day and the 28th day after the day of the first publication. If the publication is for four weeks, the sale must take place between the 28th and 35th day after the first publication. When the publication is once in 14 days during the 56 days preceding the sale, the sale must be had between the 56th and 63rd days after the first publication. (Section 231 sub. 2(a) and (b)).
6.
7.
EXECUTION SALE. Section 5236, Civil Practice Law and Rules effective September 1, 1964 requires four publications by a Sheriff pursuant to an execution. Notice of Sale is still required to be given personally or by registered or certified mail to judgment creditors and mortgagees. NOTE: Recommended Practices Bulletin No. 1-(59) gives special attention to the counties wherein the New York Law Journal can be a newspaper of publication.
8/79
Chapter 19 - Page 1 FORECLOSURE 2 SERVICE OF SUMMONS PERSONAL SERVICE ON A NATURAL PERSON Legal Bulletin
1.
CPLR Section 308, prescribes how personal service of a summons upon a natural person may be made. The most important provision permits service of the summons on such defendant by delivering the summons to a person of suitable age and discretion at the defendant's place of business or home and by mailing another copy to the defendant, without need of showing any preliminary effort to deliver the summons to the defendant in person. It is personal service, though not by personal delivery. No prior efforts need be made to effect service by personal delivery. NB Cross reference this section with Chapter 26 page 3 this manual. CPLR Section 308 provides that "personal service" may be made within the state by any of the following methods: (a) (b) By personal delivery to the defendant. Except in matrimonial action by delivery within the state to a person of suitable age and discretion at defendant's actual place of business, dwelling place or usual place of abode, and by mailing to the defendant's last known residence, proof of service must be filed within twenty (20) days, and service is not complete until ten (10) days after such filing. Except in matrimonial actions, by delivery to an agent designated under Rule 318. Except in matrimonial actions, if service cannot be made with due diligence pursuant to (a) and (b) supra, by affixing the summons to the defendant's door at his actual place of business, dwelling place or usual place of abode and mailing to his last known residence. Here, too, proof must be filed within twenty (20) days and service is not complete until ten (10) days after such filing. In such manner as the court directs if service cannot be made pursuant to the preceding paragraphs.
2.
(c) (d)
(e) 3.
CPLR 308 requires since January 1, 1978, additional notice of default judgments against natural persons. The foreclosing attorney who seeks to enter a default judgment against all natural persons, must do so at least twenty days prior to the entry of the default judgment: 1) Mail a copy of the summons, by first class mail to defendant(s) at his (her) last known residence address.
2)
If this letter is returned as undeliverable prior to the entry of judgment, or if the residence address is unknown then it may be mailed to the defendant(s) in care of the place of employment, if known, in an envelope bearing the legend, "personal and confidential", and may not indicate that the letter is from an attorney or concerns an alleged debt. If no residence or place of employment is known then it can be mailed to any other known address. In addition, an affidavit of mailing executed by the person who did the required mailing must be filed with the judgment.
3) 4)
It appears that the above requirements must all be accomplished 20 days before entry of judgment. Since this new section appears in the CPLR under a section dealing with personal service, a failure to observe the new provisions will probably be held to be jurisdictional and not curable after the passage of one year. 4. CPLR Section 306, which prescribes proof of service has been amended, and the requirements of proof have been amplified and specified in an attempt to eliminate so called "sewer service". This section now provides: (a) General: Proof must specify the papers served; the person served; date, time and address or if no address, the place and manner of service and facts showing that service was made by an authorized person in an authorized manner. Personal Service: Proof when service is pursuant to Paragraph 2(a) (b) and (c), supra, must include in addition to other requirements, description of person served including sex, skin color, hair color, approximate age, approximate weight and height and other identifying features. Other Service: Proof when service is pursuant to Paragraph 3 (d), supra, must specify dates, addresses and times of attempted service pursuant to Paragraphs 3 (a), (b) or (c), supra. Form: Proof to be by certificate if service made by sheriff or other public officer and by affidavit for any other person. Admission of Service: Must be in writing.
(b)
(c)
(d) (e)
5.
A defendant served under Paragraph 2 (a), (b), (c), (d) or (e) supra has thirty (30) days after service is complete in which to answer or appear under CPLR Rule 320 (a) and CPLR 3012 (c). CPLR 317 gives the court the power to permit a defendant served "other than by personal delivery" to defend the action within five (5) years under certain conditions and to order restitution if the defense is successful. If we determine to insure the plaintiff in an action in which a defendant was served "other than by personal delivery" of the summons, the following exception must appear in the report or policy: "The defendant hereinafter named was served in the action mentioned by means other than by personal delivery of the summons." This policy does not insure against any rights the said defendant may have under CPLR 317. Defendant: Action - Plaintiff: - Defendants: Court: Index No.: Object of Action: This exception will be passed if we are asked to insure a subsequent purchaser or mortgagee provided that no motion to open the default of such defendant is pending."
6.
7.
PROCESS - WHO MAY SERVE (a) Although CPLR 2103 (a) provides that process and other papers may be served by any person not a party, of the age of eighteen years or over. The General Business Law, Section 89-b defines who is categorized as a process server. Included in the category are persons other than attorneys who are paid to serve papers or who have served papers in at least five actions in the year proceeding the service in question. However, the section creates no licensing requirement. New York City Local Law No. 80 creates a licensing requirement but failure to obtain such license does not invalidate service. The General Business Law, Section 89-c, prescribes the maintenance of specified records by process servers. This section is penal in nature, but non-compliance by the process server will not invalidate
(b)
service.
8.
NON PRO TUNC - ORDER OF PUBLICATION
Prior to January 1978, under the old law an order directing service of summons by publication on a non-resident defendant without the State which conforms to the statute in every respect except for a clerical error, is irregular merely and not void. Where the defendant is fully apprised that her interest in property may be cut off by a judgment, irregularity may be cured by a nunc pro tunc order even after judgment of foreclosure. Mishkind-Feinberg Realty Co. v. Sidorsky, 189 N.Y. 402.
8/79
Chapter 19 - Page 1 FORECLOSURE 3 SERVICE OF SUMMONS ON CORPORATION Legal Bulletin
1.
FORMER METHOD OF SERVICE ON DOMESTIC CORPORATION. Prior to September 1, 1963, the requirements for service on a domestic corporation differed from the requirements for service on a foreign corporation. Originally service on a domestic corporation could be made only on the president, secretary, clerk, treasurer, director or managing agent. Amendments from time to time permitted service on a vice president, assistant secretary, assistant cashier and assistant treasurer. In 1935 service was authorized on the Secretary of State. (See former Section 228, CPA).
2.
FORMER METHOD OF SERVICE ON FOREIGN CORPORATION. Prior to September 1, 1963 service on a foreign corporation could be made on the president, vice president, treasurer, assistant treasurer, secretary or assistant secretary, or on the person or officer designated in the certificate filed in the appropriate state office. If service could not be effected on any of the foregoing, then and only then the cashier, assistant cashier or managing agent could be served. (See former Section 229, CPA.)
3.
PRESENT METHOD OF SERVICE ON ALL CORPORATIONS. The provisions for service on corporations are now in Section 311, CPLR, effective September 1, 1963. This section makes the requirements the same for service on domestic or foreign corporations. Service must be on an officer, director, managing or general agent, cashier or assistant cashier or other agent authorized by law to receive service.
4.
ABSTRACTING PROOF OF SERVICE. Examiners must always show what officer or other person was served on behalf of the corporation and the reader must determine whether or not the service was proper under the statute in effect at the time it was made.
5.
SERVICE ON MANAGING OR GENERAL AGENT. We will not pass service on a managing agent or general agent without positive proof that the person so served was such agent. All such cases must be submitted to counsel.
6.
SERVICE ON SECRETARY OF STATE. The provisions formerly in Section 25 of the Stock Corporation Law for service on a domestic corporation by leaving duplicate copies of the process with the Secretary of State in his Albany Office are now in Section 306 of the Business Corporation
Law. The old section authorized delivery to the Secretary of State, a
Chapter 19 - Page 2 FORECLOSURE 3 SERVICE OS SUMMONS ON CORPORATION Legal Bulletin
Deputy Secretary of State, Associate Attorney, Senior Attorney or Attorney in the corporations authorized to do business within the state, authorizes delivery of duplicate copies of the process only to the Secretary of State, Deputy Secretary of State, or any person authorized by the Secretary to receive such service. Service is complete when made, but Section 320, CPLR, gives the corporation thirty (30) days in which to appear or answer. Foreign corporations not authorized to do business within the state, but subject to jurisdiction here, may also be served by serving process on the Secretary of State, a deputy Secretary of State, or other person authorized by the Secretary to receive such service (Section 307, Business Corporation Law). A copy of the process must also be served personally on the corporation outside the state according to the law of that state, or sent by registered mail, return receipt requested, to its officially designated office. Proof of service must conform to Section 307 (c) B.C.L., be made within thirty (30) days after service or receipt of the return receipt, and is complete ten (10) days after filing with the clerk of the court. 7. SPECIAL REQUIREMENTS. CPLR 317 gives the court the power to permit a defendant served "other than by personal delivery" to defend the action within five (5) years under certain conditions and to order restitution if the defense is successful. If we determine to insure the plaintiff in an action in which a defendant was served "other than by personal delivery" of the summons the following exception must appear in the report and policy: "The defendant hereinafter named was served in the action mentioned by means other than by personal delivery of the summons. This policy does not insure against any rights the said defendant may have under CPLR 317." Defendant Action - Plaintiff: - Defendants: Court: Index No.: This exception will be passed if we are asked to insure a subsequent purchaser or mortgagee provided that no motion to open the default of such defendant is pending.
1/94
Chapter 19A - page 1 FORFEITURE
FORFEITURE
UNDERWRITING SUPPLEMENT
UNDERWRITING DEPARTMENT 210 WEST FRONT STREET MEDIA PENNSYLVANIA 19063-3191
UNDERWRITING JUDICIAL FORFEITURE
INTRODUCTION
The foundation of forfeiture lies in the theory that the government can enact statutes which result in the loss of property without compensation upon the commission of specific crimes. Judicial forfeiture proceedings are a complicated area of the law that is continuously developing. Insuring judicial forfeiture remains a risky business for title insurers. However, the risk is not confined to only those transactions insured after a federal or state judicial forfeiture. It is equally applicable to titles already insured.
POLICY INSURING CLAUSES

The insuring clauses of both the ALTA l970 (re. l0/l7/84), l990 and l992 owners and loan policies provide coverage against forfeiture. Thus, if we insure title to be vested in the owner in "fee simple" and the property is later forfeited to the federal government, the insureds' title is not vested as set forth and insured in the policy. In this event [and, bear in mind, it is a post policy event] title reverts back to and becomes vested in the federal government as of the time of the commission of the act giving rise to forfeiture, under the "relation-back" doctrine [O'Reilly v. United States, 486 F2d 808 (8th Cir. l973)]. Thus, all right title and interest vests in the federal government as of the date of the illegal activity. The subsequent entry of a forfeiture decree confirming this earlier vesting is the operative moving paper formally transferring title to the federal government. In a number of cases this doctrine has been attacked as "a legal fiction" created by Congress to give unfair advantage to the government in any forfeiture proceedings. These attacks have to date only been partially successful. The relation back doctrine as applied by different courts has resulted in decisions not entirely consistent.
PROCEEDINGS ARE IN REM

Civil federal forfeitures are "In Rem proceedings", i.e., they are against the land, and not against the person. Federal forfeiture does not require a conviction of guilt. It only
requires that at some time an illegal act was committed on the property, i.e., the land committed the act. Thus, when one of the controlled substance crimes is discovered to have been committed on the land, under the law as enacted, the title to the property
1/94
reverts to the federal government. This has been held to apply even in those situations where the property in question was owned by an absentee owner or landlord. As you can see, under this theory, every time we issue a title insurance policy there exists the possibility we will later be called upon to defend title if the property is subsequently forfeited. To date, there is only one case which has been decided favorable to the title industry for defense purposes. That case is Estate Home Builders, Inc. v. Attorneys Title Insurance Fund, Inc., Case No. 90-35325 from the Circuit Court, Broward County, Florida. In that case the plaintiff was asserting a right under a policy of title insurance for reimbursement of the costs of defense paid pursuant to the policy to establish an "innocent owner exception" to a federal forfeiture. The defendant's title insurer contended that the exercise of governmental police power was excluded from coverage and therefore there was no coverage under the policy. The plaintiff's position was that because of the 7th Amendment to the Constitution, there was no federal police power and that, therefore, the police power exception did not apply. The trial court held that the exercise of forfeiture was in fact police power and that it was excluded by the policy. Unfortunately, because the plaintiffs did not appeal and because the decision came from the court of original jurisdiction, this case was not a reported case and, therefore, has little, if any, precedential value. The actual act of forfeiture is mechanically performed by the U. S. Marshals Office, which must meet specific requirements in order for the forfeiture to be proper, resulting in a title which is both transferable and insurable. Courts are now beginning to impose strict compliance standards on the federal government. If the following requirements are not satisfied the title is defective and subject to being set aside. These requirements include all of the following: l. File an action against the property in the United States District Court and record a notice of the action in the office of the county recorder where the land is located showing that the federal government is forfeiting the property; 2 Obtain sufficient title information to determine all parties who have an interest in the property including lenders and other judgment creditors; 3. Serve with proper constitutional due process notice all parties having an interest. [Note: published notice is insufficient except against an indicted fugitive. Mennonite style notice is a prerequisite to establish due process]; 4. Give the interested parties an opportunity to be heard by the Federal Court Judge; 5. Have the Federal District Court judge enter an order for forfeiture. All of the foregoing are essential elements to the conduct of a good forfeiture action. As a title insurer we are not interested in insuring any forfeiture proceeding which relies solely on administrative proceedings with no court involvement. What then must be done in order to determine if the title to forfeited property is insurable and what are the underwriting considerations which must be given in each case? Here are several things to
look for when insuring title after a judicial forfeiture proceeding.
1/94
UNDERWRITING REQUIREMENTS AND CONSIDERATIONS

A. Strict compliance with the statute under which the property has been judicially forfeited. There are several different federal forfeiture statutes and many states have enacted their own statutes. Below are addressed the most common federal statutes. The underwriting guidelines discussed here are equally applicable to other federal and state forfeiture statutes. Specific questions should be addressed to the Home Office Underwriting Department. CIVIL FORFEITURE PROCEDURES The primary civil federal forfeiture statute is 21 USC 88l. The proceedings are In Rem. As stated above, the proceedings are directed against the property itself, rather than against the owner of the property. Thus, a house would be subjected to civil forfeiture proceedings if it were used for the manufacture, storage or sale of illegal drugs, or if it were purchased with the proceeds obtained from illegal drug transactions. The proper sequence of events is as follows: l. a complaint is filed against the property in federal district court, whereupon the property is "arrested" by way of an in rem seizure warrant issued by either a Federal District Court Judge or a U.S. Magistrate; 2. a lis pendens is filed against the property in the public land records in accordance with state law. There are two reasons for this procedure. In the first instance the U.S. Marshall is unable to take actual physical possession and control of the property. Additionally, filing the lis pendens serves to give constructive notice to everyone that the real property has been seized by the United States; 3. notice of seizure is personally served on all parties having an interest in the real property. They have the right to appear at the trial and be heard in accordance with the applicable Federal Rules of Maritime Procedure, otherwise known as Admiralty Law. These Rules are used because the Federal Rules of Civil Procedure do not provide for in rem proceedings. Notice must be served, in the manner called for in Mennonite Board of Missions v. Adams, 462 U.S. 79l, upon all parties having an interest in the property. Alternative forms of notice by publication and posting are only sufficient as against those persons whose interest in the property is not "reasonably ascertainable". Under Mennonite, any lesser standard of notice has been determined to be in violation of that portion of the 5th Amendment to the United States Constitution which states that the federal government cannot deprive a person of his interest in property without due process of law; 4. If the property is found guilty, an order or judgment of forfeiture is entered, which, in turn, must be recorded in the public records;
1/94
5. After all appeal periods have expired the U.S. Marshall is able to convey the real property to a third party purchaser for value. The appeal period is generally 60 days, plus an additional 90 days for "excusable neglect" in the case of a contested trial, and one year for "good cause" in default judgment cases. CRIMINAL FORFEITURE PROCEDURES The principal criminal federal forfeiture statute is l8 USC l963. This is part of the RICO Act. In this case the proceeding is in personam, i.e. against the person. If the person is convicted of the offense in Federal District Court the property described in the indictment is forfeited. Criminal forfeiture is merely adjunct to a criminal trial where the Federal Rules of Criminal Procedure are applicable. Whereas in a civil proceeding described above, the property can be seized at the commencement of the action, in a criminal proceeding the property will not be seized until after a finding of guilt. Thus, in order to preserve the status of the property during the criminal trial, the government will often file a civil proceeding and a criminal indictment at the same time. In a criminal proceeding the federal government must not only prove the guilt of the individual property owner, but also that the property is subject to forfeiture under RICO. After the defendant is convicted of a RICO violation and the property is found subject to forfeiture the proper sequence of events is a follows: l. the federal government files an order for forfeiture; 2. Service must be made upon all parties having an interest in the property in accordance with Mennonite as above set forth; 3. third parties having an interest in the real property are given an opportunity to assert their legal rights in a post-conviction ancillary hearing; 4. the court then enters a judgment of forfeiture; 5. After the appeal periods have expired the U.S. Marshall is directed to sell the land. B. Personal service of process must be provided to all parties adversely affected by the judgment. This is an underwriting requirement even if the statute provides for a lesser form of notice. The only exception to this title rule is a situation where the statute doesn't require personal service and the party not provided with personal service is an indicted fugitive. In this case alone, service by publication will be acceptable. Parties to a stipulated judgment or who are paid off and release their interests do not require any greater notice than may be required by the particular statute involved. C. The order effecting the forfeiture must be a final, non-appealable order, and must be recorded in the land records. Be particularly careful in determining what appeal period you are dealing with. It varies between federal and state statutes.
D. All adverse matters of title disclosed by the examination of title should be excepted.
1/94
However, there is no need to except liens if, consistent with the order and judgment of forfeiture, the holders of such liens were notified of the forfeiture and given an opportunity to appear and (i) they failed to appear or (ii) they were unable to meet their burden of proof sufficient to support their lien. If the creditor(s) are unable to meet their burden of proof to support the superiority of their lien that lien is divested under the relation back doctrine unless it is prior in time to the criminal act for which the property is forfeited. E. As a Title Rule you should continue to search the name of the criminal owner up to and through the date that the order or judgment of forfeiture is recorded in the public records. This is a condition notwithstanding the fact that the government may argue the title relates back to the time of the illegal act. This rule again goes back to the satisfaction of the notice requirements. F. The deed from the United States of America via the U.S. Marshall to the third party purchaser must be recorded in the public land records. If special or general warranty deeds are customary in the jurisdiction where the property is located we should make every effort to obtain such warranties. Title Rule: the deed must contain (i) satisfactory recitals setting forth the statute by which the property was seized (ii) a reference to the order and judgment of forfeiture and (iii) reference to the statute or Rule by which the individual executing the deed is authorized to do so. G. As a consequence of the additional underwriting required to safely insure such transactions full premium should be charged and, at the discretion of the Home Office, a risk surcharge may be levied if permitted under state law and insurance department regulations. All pricing questions should be directed to the Home Office. DOCUMENTS TO BE RETAINED IN THE TITLE FILE For civil federal forfeitures, you should obtain and keep in your title file copies of the following: (l) the complaint; (2) the warrant for the "arrest" of the property; (3) the lis pendens, a copy of which must be recorded in the public land records; (4) certification from the Clerk of the Federal District Court [or independent investigation] that service was made upon the owner and all parties having an interest in or lien against the premises; (5) Order and judgment of forfeiture reciting the description of the property forfeited; the appropriate U.S. Code provision by which this was done; and a statement that title is now vested in the United States of America and that all right title and interest of the prior owner has
been forfeited. This must also be recorded in the public land records.
1/94
N.B. any commitment issued which requires these documents should contain the additional statement that the company reserves the right to make such additional requirements or exceptions as a review of these documents may warrant. For criminal forfeitures you should obtain and keep in your file copies of the following: (l) order for conviction of the defendant/owner; (2) certification from the Clerk that an ancillary hearing for the forfeiture of the subject real estate was held and that notice was given to all parties having an interest in or a lien against the land; (3) the lis pendens, which must also be recorded in the public land records; (4) Court order and judgment of forfeiture reciting (i) the a description of the property forfeited; the appropriate U.S. Code provision by which this was done; a inclusive statement that title is now vested in the United States of America and that all right title and interest of the defendant/owner has been forfeited. This should also be recorded in the public land records. TITLE OBTAINED FROM A CONVICTED FELON As stated earlier, we are reluctant to insure any forfeiture proceedings which rely on a administrative proceeding only. If, as part of a plea bargain or sentencing bargain, the defendant deeds the property directly and there is no formal forfeiture proceeding the following must be carefully considered before we agree to insure title. l. was the conviction for a crime which calls for the forfeiture of property? Is the government entitled to forfeiture? 2. Can a statement be obtained from the U.S. Attorneys or State Attorney Generals Office to the effect that the deed was given voluntarily as part of a plea bargain agreement. This concern goes to the issue of consideration, coercion and free will; 3. If the defendant grantor is married did the wife join in the deed? 4. was the property Homestead or otherwise entitled to any state law exemption? 5. Has the time for the appeal of the conviction expired? 6. Is the form of the conveyance regular and insurable? A quit claim deed may be suspect. It puts subsequent purchasers on notice to make further inquiry. Note that in some states a convicted felon is deprived of his constitutional rights and is considered incompetent for the purposes of executing documents of conveyance.
1/94
Non-judicial administrative forfeiture proceedings are the most risky of all. It is always possible that newly discovered evidence will be relied upon to open the criminal proceeding and that the conviction may be overturned. Criminal law permits cases to be reopened or reviewed under certain conditions. In that instance the former owner may contend he was coerced into signing the deed. If the wife has not joined in the deed there is nothing to prevent her from filing divorce proceedings and attempting to obtain the property pursuant to equitable distribution. In addition, any attempt to satisfy our concern that the conveyance was in fact voluntary may cause us to go outside the public lands records. The form of policy currently in use contains a definition of "public records". Our voluntary venture beyond such definition, in an attempt to assist our prospective customer, may thereafter preclude our ability to successfully avail ourselves of such definition in a subsequent defense of claim. THE CRUEL AND UNUSUAL PUNISHMENT ARGUMENT The penalty of forfeiture has been considered by many as a very harsh remedy when the actual crime committed was a relatively small infraction and a first offense. In a recent Supreme Court Case, Austin v United States of America, l25 L. Ed 2d 488 (l993) the Supreme Court partially addressed this issue. The facts of the case are that the defendant, Austin, had been indicted on various drug charges and pleaded guilty to one count of possession with intent to distribute. Subsequently the federal government started in rem civil forfeiture action. Defendant's counsel argued that the forfeiture would violate the 8th Amendment's Excessive Fines Clause. The District Court [the trial court] rejected this argument. The Appeals Court, in affirming the court below, commented that they thought the government was extracting too high a price for the offense committed. Before the Supreme Court, the government argued that the 8th Amendment did not constrain governmental conduct where criminal punishment was not imposed on the individual. The government contended the in rem forfeiture was remedial rather than punitive in nature. The Supreme Court held that the forfeiture, under the circumstances, would be excessive punishment that violates the 8th Amendment. Despite finding that forfeiture was subject to 8th amendment scrutiny, the court decline to establish a test to determine whether forfeiture is constitutionally excessive. That argument will be made another day. However, this case points out how important it is not to insure title where the appeals process has not been exhausted. APPEAL OF STATE FORFEITURE STATUTES TO U.S. SUPREME COURT In cases where the defendant(s) have exhausted their remedy of appeal in that State or Commonwealth Court system the question often arise as to whether there is continued recourse through the federal court system. The possibility of federal review may be disregarded if the appeal therefore has not been timely filed. Furthermore, the possibility for federal review is precluded where the decision of the State Supreme Court rests firmly on state constitutional grounds as articulated in Michigan v. Long, 363 U.S. l032, l03 S. Ct 3469, 77 L. Ed. 2d l20l (l983). Any questions regarding this possibility should be forwarded to the undersigned in the Home Office
1/94
CONCLUSION
The company is now willing to consider, on a case by case basis, insuring title(s) derived through Judicial Forfeiture Proceedings. If requested by an agent you must inquire as to the nature of the forfeiture, i.e., whether it is civil or criminal and, having determined that, advise him to send to you those items identified above as items to be retained in the title file. This type of insurance falls under the catergory of an extrahazardous risk which requires that all the underwriting standards herein established be complied with. In addition, it may be necessary that we also comply with the underwriting standards established by any other reinsurers. All forfeiture situations require Home Office approval before insurance can be undertaken and accepted.
William C. Hart, Chief Underwriter copyright l994 All Rights Reserved
6/91
Chapter 18A - Page 1 FEDERAL LIENS
FEDERAL LIENS AND ACTIONS IN FEDERAL COURT NOTICE IN NEW YORK

The following is an analysis of those liens arising under the United States Code which affect real property and where they must be filed to be effective. Also included is a listing of where notice of federal actions, such as bankruptcy, must be filed to be effective against a transferor's real property. This discussion does not include recording or filing problems arising out of Federal Racketeer Influenced and Corrupt Organization (RICO) Acts. 1.
Federal Tax Liens - The Internal Revenue Code of 1954, Title 26 of the United
States Code, provides in Section 6321 that there shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to any person who neglects or refuses to pay tax due after demand. Section 6323 (a) further provides that for such a lien to be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lienor that notice of the lien must be filed. Section 6323 (f) provides for the place for filing such a notice. In the case of real property, which under Section 6323(f)(2) is deemed situated at its physical location, the notice must be filed: (A) In one office within the state, county or other government subdivision, as designated by the laws of such state in which the real property subject to the lien is situated; or Whenever the State has not designated one office for filing as provided for in (A), the notice shall be filed in the office of the clerk of the United States district court for the judicial district in which the real property subject to the lien is situated. The Federal Tax Lien pursuant to Section 6323(g)(3) is effective November 5, 1990 a lien for 10 years from the date of assessment. New York law does provide for a place of filing, thus Federal Tax Liens against real property in New York must be filed in accordance with New York law. New York's Lien Law provides in Section 240(1) that for federal tax liens: (a) If the real property is in the counties of New York, Kings, Queens or the Bronx then the notice must be filed in the office of the city register in that county. In all other counties the notice is to be filed in the office of the clerk of the county in which the real property is situated.
(B)
(C)
(b)
6/91
(c)
If the real property is in two or more counties the notice must be filed in the appropriate office in both counties. Section 241(1) of the Lien Law further states that the city registers and county clerks in New York provide a file labeled "Federal Tax lien notices" and an index book or card Index system labeled "Federal Tax lien index." All notices are therefore filed in the "Federal Tax lien notices" file and an entry made in the "Federal Tax lien index" showing the name, and residence of the taxpayer named in the notice, the endorsed serial number (by the recording officer), the date of filing and the total amount of tax, interest and penalty. As to titles registered within New York's version of the Torrens system, the procedure for the filing of notice of federal tax liens is the same as under Lien Law Section 241. Real Property Law Section 400 specifically excepts federal tax liens from the Torrens system.
2.
Federal Liens for Estate Taxes - 26 U.S.C. Section 6324 provides for a "special lien" upon the gross estate of a decedent for ten years from the date of death for any unpaid estate taxes. The lien is not required to be recorded to be effective and imposes personal liability upon all: beneficiaries, surviving tenants, trustees, transferees, spouses, and persons in possession of the property, who receive, or have on the date of the decedents death, property included in the gross estate. It is important to note that while the special lien imposed by Section 6324 is unrecorded, the Government can also avail itself of Section 6321 and assert a recorded lien against real property of the estate. Section 6321 is not limited to liens for deficient income taxes. See Kaufman v Herter, 194 N.Y.S. 2d 848 (N.Y. County Sup. Ct 1959) and Detroit Bank v. U.S. 317 U.S. 329, 63 S. Ct. 297, 87 L. Ed. 304.
3.
Bankruptcy Petitions - The Bankruptcy Code, Title 11 of the United States Code, provides in Section 549 that all unauthorized post petition transfers of property of the estate are avoidable by the trustee with two major exceptions contained in subsections (b) and (c). Subsection (b) protects transferees to whom property is transferred between the date of filing an involuntary petition and the date of the order for relief. Notice of knowledge of the pending bankruptcy case is irrelevant in determining whether the transferee is protected. The transferee is only protected however, to the extent any value, including services, but not including satisfaction or securing of debt that arose before the commencement of the case, is given after the commencement of the case in exchange for the transfer.
6/91
Subsection (c) provides that a transfer of real property is not avoidable by the trustee where the transferee is a good faith purchaser without knowledge of the commencement of the case who pays fair equivalent value unless a copy of notice of the petition was filed in the office where the transfer of the real property could be recorded thereby perfecting it. (New York State Bar Association's See Real Property Law Section Newsletter, Vol. 15, No. 1 in Bankruptcy It's Open Season on Real Estate, Zinman, concerning the issue of what is considered fair consideration). Thus, for a post-petition transfer of real property to be avoidable in New York a copy of notice of the bankruptcy petition must be filed in the city register's office in Queens, Kings, New York and Bronx Counties, and in the county clerk's office in all other counties, depending on which county the real property is situated. The mere filing of the petition with the district court is insufficient. Subsection (d) of Section 549 provides that an action or proceeding under that section may not be commenced after the earlier of two years after the date of the transfer sought to be avoided on the date of the closing or dismissal of the case. This subsection does not obviate the rights which may be asserted by a trustee or debtor in possession with respect to preferences under Section 547 or fraudulent conveyances under Section 548. Those sections impose their own time limitations upon trustees and debtors in possession. 4. Federal Judgments - 28 USC Section 1962 entitled "Lien" provides that: A. Prior to May 29, 1991 (Lien for 10 years) "Every judgment rendered by a district court within a State shall be a lien on the property located in such State in the same manner, to the same extent and under the same conditions as a judgment of a court of general jurisdiction in such State, and shall cease to be a lien in the same manner and time. Whenever the law of any State requires a judgment of a State court to be registered, recorded, docketed or indexed, or any other act to be done, in a particular manner, or in a certain office or county or parish before such lien attaches, such requirements shall apply only if the law of such State authorizes the judgment of a court of the United States to be registered, recorded, docketed, indexed or otherwise conformed to rules and requirements relating to judgments of the courts of the State". For a federal judgment to be a lien on real property situated in New York, a transcript of the judgment must be filed with the county clerk of the county in which the real property is situated. Upon such a filing the clerk must docket the judgment, making the judgment a lien on the realty. See CPLR 5018-(b). The above procedure only applies to judgments obtained in Federal courts, located within New York. If the federal court was located outside of New York, a certified copy of the judgment must be filed with a clerk of a federal court located in New York. A transcript of the judgment issued by the New York federal court then may be filed with a county clerk
as provide din CPLR 5018(b).
6/91
For judgments against a title registered within New York's version of the Torrens System to be a lien it is necessary to have a transcript of the judgment filed with the registrar and also have a memorial of the judgment placed on the certificate of title by the registrar. Real Property Law Section 417. However, if the judgment is based on federal law or the United States Constitution, Real Property Law Section 400 excepts it from the Torrens System. B. On and After May 29, 1991 (Lien for 20 years) Crime Control Act of 1990, Federal Debt Collection Procedure Act of 1990, Subtitle A - Debt Collection Procedures, Chapter 176, Public Law 101-647. Enacted November 29, 1990, became effective May 29, 1991. (1) (2) The statue amends the lien period of federal judgments and debts (not tax liens) effective as of May 29, 1991 to a period of twenty years. The statute adopts the filing procedure as contained in Section 6323(f) of the Internal Revenue Code. This means that the lien applies to Real Property located in the County where the real property is located and where the lien is filed in those states which have adopted the Uniform Federal Lien Registration Act (UFLRA). In the other states the lien may apply to property located in the judicial district of the federal district court where the judgment is obtained. This judgment lien is perfected by the U.S. upon the filing of the abstract of judgment. The Act provides pursuant to Section 3631 (b)(1) and (2) that the twenty year period applies: (a) (b) (c) (d) (5) to judgments obtained in pending matter on or after May 29, 1991; to matters where earlier judgments are modified and filed on or after May 29, 1991; to judgments for an additional twenty years if a notice of renewal is filed before the expiration of the lien and the Court approves the renewal of the lien to judgments filed prior to May 29, 1991 but which have not expired prior to May 29, 1991 (Section 3005)
(3) (4)
Appended is a list of states complying with UFLRA
6/91
5.
Labor Law - The Federal Labor Law, Title 29 of the United State Code, in Section 1368 creates a lien in favor of the Pension Benefit Guaranty Corporation, 29 U.S.C. 1302, against any employer's real or personal property for liability due to a withdrawal from an authorized pension plan. Section 1368 also adopts the filing and notice provisions of 26 U.S.C. Section 6323(f).
6.
Federal Liens Under CERCLA - The Superfund Amendments and Reauthorization Act of 1986, (SARA), which was signed into law on October 17, 1986 has significantly amended Section 107 (42 U.S.C. 9607) of the Comprehensive Environmental Response, Compensation and Liability Act, commonly referred to as "CERCLA". "CERCLA", which was adopted by Congress in 1980, is a compensatory act which was intended to provide the funding for the cleanup of hazardous waste by holding responsible parties liable. Section 107 of the act expressly provides that the Environmental Protection Agency, which is charged with the enforcement of "CERCLA", can bring legal actions against parties in interest to recover the cost of cleaning up hazardous waste sites.
In addition, 42 U.S.C. Section 9607 makes available to the EPA a lien on the real property which both belongs to the party held liable and which is "subject to or affected by a removal or remedial action". While this lien does not obtain the status of a "super lien" it does successfully encumber real property subject only to prior perfected interests. The amended version of Section 107 also provides that the lien itself shall arise at the later of either the time the costs of responding to a hazardous waste cleanup are first incurred by the U.S. or the time that the person liable is provided with written notice by certified or registered mail of that liability. For the lien to be effective against purchasers, holders of security interest or judgment lien creditors, however, notice of the lien must be filed before such a party has perfected their interest under state law. This notice provision is quite similar to the federal tax lien notice provision of 26 U.S.C. Section 6323. Both statutes provide the State with the option of designating by State law an appropriate office within the State, county or other political subdivision in which the real property subject to the lien is located, where notice of the lien must be filed. If the lien is not so filed as provided by State law, or in the alternative if no such state law has been adopted, and the lien is not filed in the office of the clerk of the United States District court for the district in which the real property is situated, then the lien is not valid against purchasers, holders of security interest or judgment lien creditors who perfect their interest under state law. Thus, for the lien provided for under Section 107 of CERCLA to be effective against certain third parties the lien must either be filed in the office of the clerk of the U.S. District Court for the district in which the real property is located or it must be filed in the proper office as designated by state law. The state is left with an option. It can either adopt a filing statute or it can
rely on Section 107 and have the liens filed with the clerk of the district
6/91
court. This procedure, in essence, and its net result is identical to 26 U.S. C. Section 6323(f)'s provisions for the filing of federal tax liens. Recognizing this deficiency, the National Conference of Commissioners on Uniform State Laws approved the Uniform Federal Lien Registration Act (UFLRA) in 1978. This act, in contrast to the earlier Uniform Federal Tax Lien Registration Act (UFTLRA), expressly provides that it applies to federal tax liens and to other federal lien notices of which under federal statute or regulation the notice of lien is to be filed in the same manner as notices of federal tax liens. Given the similar notice provisions of amended Section 107 of CERCLA and of 26 U.S.C. Section 6323(f) it is clear that the UFLRA, if adopted by a state, would require the filing of notices of liens pursuant to Section 107 of CERCLA in the manner in which the UFLRA mandates. Given the obvious need of a potential lender or purchase to check for notice of CERCLA liens due to the scope of Section 107's liability as imposed by the courts construing that section, our state legislature must either adopt the UFLRA or a similar statute. Third parties could then conveniently search in the recorder's office for the county in which the real property is located rather than having to search in one of the four United States District Courts. Appended hereto is a list of states which have adopted the Uniform Federal Lien Registration Act or similar legislation.
STATES WHICH HAVE ENACTED THE UNIFORM FEDERAL LIEN REGISTRATION ACT OR SIMILAR LEGISLATION [AS OF 6/90] STATE Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon CITATION 35-11-42-35-16-48 40.19.010-40.19.050 A.R.S. 33-1031-33-1035 18-47-201-18-14-207 C.C.P. Secs. 2100-2107 C.R.S. Sec. 38-25-101-38-25-107 C.G.A. Sec.47-36,49-32a None None None Ga. St. Sec. 44-14-517 None I.C. Secs 45-201-45-207 Secs. 82-401-82-407 I.C. Sec 36-2-11-25 331.609 K.S.A. Secs 79-2613-79-2619 382480-382490 R.S. Secs 52:51-52:58 33 MRSA 1901-1907 Real Prop. Secs 3-401-3-404 MGL Ch 36, Sec 2 M.C.L.A. Secs 211.611-211.66 M.S.A. Secs 272.479, 272.481-272.48 S.B. 2470 (Regular Session 1898; effective 1-1-90) V.A.M.S. 14,010-14.04 M.C.A. Secs 71-3-201-71-3-201 R.R.S.N. Secs 52-1001-52-1001 N.R.S. Secs. 108.825-108.83 N.H.R.S.A. Ch 454-B:1 None NMSA 48-1-7-48-1 McKinneys Lien Law Sec.2 None N.D.C.C. Secs. 35-29-01-35-29-01 O.S.A. Sec. 317 O.K.S. Title 68, Sec. 243025-24302 O.R.S. Secs. 87.806-87.8
Pennsylvania
74 P.S. 157-1-157
10/62
Chapter 18 A - Page 1 FEDERAL TAX LIENS SEIZURE General
SEIZURE OF PROPERTY FOR THE COLLECTION OF FEDERAL TAXES PURSUANT TO 26 U.S.C.A. SEC. 6331 ET SEQ. The following is a skeleton outline of the statutory provisions for the seizure and sale of property based upon federal liens, together with a few decisional references. Where title is based upon proceedings pursuant to these provisions it is suggested that the full text be reviewed and the cases be more thoroughly examined. AUTHORITY If a person liable for taxes refuses to pay within 10 days after notice and demand the Secretary or his delegate shall collect by levy upon all property and rights to property belonging to such person on which there is a lien provided in this Section in this chapter. NOTICE OF SEIZURE After seizure notice in writing shall be given to the owner of the property or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Notice shall set forth: (a) (b) the sum demanded in the case of realty, a description with reasonable certainty of the property seized.
NOTICE OF SALE The Secretary or delegate shall as soon as practicable: (a) (b) give notice to the owner in the same manner as that prescribed above cause a notification to be published in some newspaper within the county wherein such seizure is made, or if no newspaper is published in such county, shall post notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Notice is to specify: (1) (2) (c) the property to be sold the date, place and manner and conditions of the sale.
The sale shall not be held less than 10 days or more than 40 days from the time of giving public notice.
10/62
(d)
The sale shall be within the county wherein the property is seized except by special order of the Secretary or his delegate.
MANNER AND CONDITIONS OF SALE The Secretary or his delegate must determine a minimum price for which the property shall be sold, and if there is no buyer at that price, the property shall be declared to be purchased at such price for the United States, otherwise to the highest bidder. ADDITIONAL RULES APPLICABLE TO SALE The Secretary or his delegate shall by regulations prescribe the manner and other conditions of the sale of property seized by levy. Such regulations shall provide: (a) that the sale shall not be conducted in any manner other than (1) (2) (b) (c) (d) (e) (f) by public auction by public sale under sealed bids
where several items of property are involved it must be stated whether such property shall be offered in the aggregate or in separate parcels whether the announcement of the minimum price determined by the Secretary or his delegate may be delayed until the receipt of the highest bid whether payment in full shall be required at the time of acceptance of a bid, or whether it may be partly deferred whether additional advertising is necessary under what conditions and circumstances the sale may be adjourned. (Adjournment shall not be for a period to exceed one month.)
REDEMPTION (a) (b) Before sale - The owners shall be permitted to redeem the property prior to the sale thereof. After sale (1) Period. The owner, heirs, devisees or any person having a lien may redeem the property sold or any particular tract of such property within a period of one year after sale.
10/62
(2)
Price. The property may be redeemed by payment to the purchaser or to the Secretary or his delegate for the use of the purchaser the amount bid by the purchaser and interest at 20% per annum.
(c)
Record - When any lands sold are redeemed as provided in this section, the Secretary or his delegate shall cause entry of the fact to be made upon the record and such entry shall be evidence of such redemption. (The record referred to is the record kept for each Internal Revenue District regarding sale of such property and redemption of such property.) The record must set forth: 1. 2. 3. 4. 5. 6. the tax for which the property is sold dates of seizure and sale names of parties assessed amount of expenses the name of the purchaser the date of the deed.
(A copy of such record or any part thereof certified by the Secretary or his delegate shall be evidence in any court of the truth of the facts therein stated.) CERTIFICATE OF SALE; DEED OF REAL PROPERTY (a) Certificate of Sale - The Secretary or his delegate shall give the purchaser a certificate of sale upon payment of the full purchase price. The certificate shall contain: 1. 2. 3. 4. (b) the real property purchased for whose taxes the same was sold name of purchaser the price paid therefor.
Deed to Real Property - If there is no redemption within the time prescribed the Secretary or his delegate shall, upon the surrender of the certificate, execute a deed to the purchaser in accordance with the laws of the State in which such real property is situated pertaining to sales of real property under execution. The deed shall recite the facts set forth in the certificate.
10/62
(c)
Purchase by United States - Where real property is purchased for the United States the deed to be used shall be approved as to form by the United States Attorney for the district in which the property is situated and the deed shall be properly recorded in the proper registry of deeds.
LEGAL EFFECT OF CERTIFICATE OF SALE Deed of Real Property (1) (2) Deed as evidence - The deed of sale given shall be prima facie evidence of the facts therein cited. Deed of Conveyance of Title - If the proceedings of the Secretary or his delegate have been substantially in accordance with the provisions of law, such deed shall be considered and shall operate as a conveyance of all the right, title and interest of the party delinquent had in and to the real property thus sold at the time the United States lien attached thereto.
COMMENTS: The following references may assist in the examination of title coming through a sale by the Federal Government under the above statute. The requirement that a demand be made upon the delinquent taxpayer is an important element in establishing the validity of the federal tax lien. In Cattani v. Korsan, 29 N.J. Super. 581, 103 A2 51, appeal dismissed 32 N.J. Super. 210, 108 A2 110, Judge (now Justice) Haneman said: "it is a mandatory requirement, both under the exact language of the statute and of the adjudication in the two above referred to cases [U.S. v. Allen, 14 F. 263, and In re Baltimore Pearl Hominy Co., 5 F.2d 553] that such demand must be made. As a condition precedent to establish its lien and priority, it was necessary that the United States of America make proof of such demand. Absent any such proof, the said United States of America failed in a vital respect." Further, the mere statement contained in the notice of federal tax lien filed in the county is not sufficient. The demand may be informal, and since it is for the protection of the taxpayer, may be waived by him. In re Baltimore Pearl Hominy Co., above. Where the taxpayer had died, the filing of the demand in the probate court against the deceased was a proper demand of payment. United States v. Ettelson, 159 Fed.2 193. The federal tax lien is analogous to a judgment lien, Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.ed. 1421, and will attach to after-acquired property. Citizens Nat. Trust & Savings Bank etc. v. United States, 135 Fed.2 527.
10/62
For the title examiner it is important to know the nature of the title a purchaser obtains under the federal statute, assuming that all necessary steps required by statute have been correctly taken. The statute provides the deed to the purchaser "shall operate as a conveyance of all the right, title and interest of the party delinquent had in and to the real property thus sold at the time the lien of the United States attaches thereto." This was construed to mean that when the federal lien is superior the sale extinguishes all inferior liens Commercial Credit v. Schwartz, 130 Fed. Supp. 524; United States v. City of New York, 233 Fed. 2 307. In the latter case the federal lien became fixed on April 25, 1933 while the deed under the sale recited that it conveyed the taxpayer's title which he held on December 17, 1941. This would present a difference in the city taxes which the city claimed to be superior to the federal lien. The court held that the provisions in the statute and not the erroneous reference in the deed determines the character and extent of the government's title. Where the requirements of the statute are not observed the sale is invalid. Margiotta v. District Director of Internal Revenue, 214 Fed.2 518. In holding the sale invalid the court noted: "The notice published in the New York Herald Tribune did not comply with the statute. For (aside from the fact that the newspaper was not published 'within the county wherein said distraint' was 'made'), the publication was not 'forthwith' but on February 15, which was many days after the distraint on January 21. Nor was the time of sale, February 16, 'not less than ten **** days from **** the publication of such notice.'" The statute further provides that the deed of sale shall be prima facie evidence of the facts therein stated, but in the following section provides that if the proceedings of the secretary or his delegate have been substantially in accordance with the provisions of the law the deed shall operate as a conveyance of the right, title and interest of the party delinquent. In McAndrews v. Belknap, 141 Fed.2 111 the court said: "The District Court held that since there was no evidence with reference to the manner in which the sale was made, the presumption of validity attaching to official acts required that the sale be upheld. We think that this presumption is not of such force as to supply the proof required affirmatively to exist in order to validate sale of real property for unpaid taxes. Cf. French v. Edwards, supra, 80 U.S. at page 514, 20 L.Ed. 702. It is the general rule that the burden of showing literal compliance with statutes governing the sale of land for taxes is upon the claimant under the tax sale. Ronkendorff v. Taylor's Lessee, 29 U.S. 349, 7 L.Ed. 882; Marx v. Hantborn, 148 U.S. 172, 13 S.Ct. 508, 37 L.Ed. 410; Lyon v. Alley, 130 U.S. 177, 9 S.Ct 480, 32 L.Ed. 899." The question of dower will often hold the attention of the examiner. Where the dower or the right of dower attached to the land prior to the government's lien, dower is superior. Where, however, dower attached after the government's lien, that is where the taxpayer owned the property before his marriage, the government's lien is superior and the sale extinguishes this right. See Commercial Credit v.
Schwartz, above; First National Bank of
10/62
Elkhorn v. White (Wisconsin) 1 A.F.T.R.2 1696. Decisions in other states may be misleading, for example Chadler v. Pilley, 5 A.F.T.R.2 437, where it was held that government's lien is superior to dower where the tax lien was imposed in the lifetime of the taxpayer because under the Tennessee law a husband could convey or encumber his interest in lands without the wife's concurrence. By failing to pay his taxes the husband did encumber his lands. Municipal land taxes accruing after the government's lien are, in like manner, governed by statute. A sale of the land pursuant to provisions of the statute frees the land from such taxes. United States v. City of New York, above, where the United States brought a suit to quiet title against the city to remove the cloud. A practical consideration in New Jersey may confront the examiner of title. While the sale extinguishes the subsequent taxes the collector may still carry the taxes on his books. They will appear on the official tax search with the recurring problem of having the record reflect the true facts. The purchaser may ultimately find himself defending a foreclosure under a tax sale certificate. Section 6323 or the U.S. Code requiring the filing of notices of the federal lien to be valid as against mortgages, pledgees purchasers of judgment creditors must be considered in determining priorities. And it may also be noted that not every lien comes within the protection of this section. Thus, in United States v. City of New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 it was held that municipal taxes are outside the scope of the provisions. "There is nothing in the language of sec. 3672 [now 6323] to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interest set out therein ****." Underscore the period of redemption after sale - one year after the sale. Within that period the title remains unmarketable. One of the shortcomings of the proceedings under these sections of the act is the absence of notice of record. It may of course be argued that there is no difference between a sale under a federal lien and a sale by the sheriff by virtue of a writ of fieri., facias. pursuant to a common law judgment. The difference does exist in that a period of one year intervenes between the issuance of a certificate of sale and the delivery of the deed to be recorded; nor is there any provision for the recording of the certificate either with the recording officer of the county wherein the lands are situate or with the clerk of the appropriate Untied States District Court. The record of the federal lien is not a sufficient answer to this problem nor is the right to redeem the answer. Another shortcoming is the proof of the steps taken by the Secretary or his delegate. The Secretary or his delegate for each internal revenue district must keep a record of all sales of real estate and a copy of such record is evidence in any court as to the truth of the facts therein stated. It seems to us that this record and the proof should be lodged with the Clerk of the District Court which may more effectively function as a recording office of public documents.
11/71
Chapter 18A - Page 1 FEDERAL TAX LIENS SEIZURE Title
INSURABILITY OF TITLE DERIVED FROM FEDERAL TAX DISTRAINT SALES "Distraint" is a summary extra-judicial remedy having its origin in the common law whereunder personal property was seized and held by individual action without intervention of legal process for the purpose of compelling payment of debt. 26 U.S.C.A. 6331 et seq. provides for administrative levy and distraint sale for the enforcement of federal tax liens. The title conveyed to a purchaser pursuant to such a distraint sale is all the right, title and interest of the taxpayer as of the date the federal tax lien attached. 26 U.S.C.A. Section 6339 (c) provides that upon the issuance of a deed to the purchaser, following administrative levy and distraint sale, all liens and encumbrances subordinate in priority to the federal tax lien which gave rise to the distraint sale, are discharged from the property. (Blacklock v. U.S., 208 U.S. 75) It must be remembered that each step required for the enforcement of the tax lien is jurisdictional and must be followed substantially preferably to the letter, if the tax sale is to be valid. Assuming the Internal Revenue Service makes adequate data available for inspection, the title of a purchaser of real property at a distraint sale may be insured without exception to liens subordinate to the federal tax lien, provided an examination of the sale proceedings in the Internal Revenue Service District Office discloses compliance with the following requirements: (1) Notice and demand for payment of the delinquent tax was made upon the taxpayer and levy was not made until 10 days after such notice and demand unless the Secretary or his delegate made a finding that collection of the tax was in jeopardy and the notice and demand was for immediate payment of the tax. (26 U.S.C.A. 6331 (a)) The Secretary or his delegate gave notice of seizure in writing, specifying the amount due and demanded, as well as a description of the property, which notice either was given to the owner or was left at his usual place of abode or business within the Internal Revenue District where seizure was made or was mailed to the owner's last known address. (26 U.S.C.A. 6335 (a)) The Secretary or his delegate gave to the owner, in the manner set out in (2) above, a written notice of the sale of the seized property specifying the time, place, manner and conditions of the sale. Such notice of sale was published in a newspaper published or generally circulated within the county where seizure was made, or, if there was no such newspaper the notice of sale was posted at the post office nearest the place of seizure and in not less than two other public places. (26 U.S.C.A. 6335 (b))
(2)
(3)
11/71
Chapter 18A - Page 2 FEDERAL TAX LIENS SEIZURE Title
(4)
The sale date was not less than 10 days nor more than 40 days from the time of giving public notice of sale. The place of sale was within the county in which the property was seized unless the Secretary or his delegate specially ordered otherwise. (26 U.S.C.A. 6335 (d)) The sale price was not less than the minimum price determined before the sale by the Secretary or his delegate. (26 U.S.C.A. 6335 (e) (1)) The sale of the seized property was at public auction or was a public sale under sealed bids. (26 U.S.C.A. 6335 (e)(2)) The records of sales and redemptions in the Internal Revenue Office (nearest to the county in which seizure was made) reveal that the property was not redeemed within 120 days after the date of sale. (26 U.S.C.A. 6337) A certificate of sale was issued to the purchaser setting forth a description of the real property purchased, for whose taxes the property was sold, the name of the purchaser and the price paid. Said certificate was surrendered upon the expiration of the redemption period whereupon the Secretary or his delegate executed and delivered to the purchaser a deed to the real property reciting the facts set forth in the certificate of sale. (26 U.S.C.A. 6338) The taxpayer has surrendered possession and dominion of the real property conveyed. The examiner of the records in the Internal Revenue Service District Office, as required above, must file with the Home Office an abstract of the proceedings examined. It should be attached to the Home Office copy of the binder or policy to which it pertains. Finally, it is reiterated for emphasis that a levy and distraint sale, although conducted in strict accordance with the law, does not dispose of anything except the taxpayer's interest in the property sold and conveyed. For instance, dower and other marital rights which are not subject to the tax lien will not be affected by the sale. Such a sale of the taxpayer's interest does not wipe-out either applicable restrictions, easements and the like, or liens senior to the federal tax lien, or real estate tax liens.
(5) (6) (7)
(8)
(9)
8/91
Chapter 18A - Page 1 FEDERAL TAX LIENS SEIZURE Legal Bulletin
TO: FROM: SUBJECT:
All Title Personnel William C. Hart Chief Title Officer Insurability of title derived from Federal Tax Distraint Sales
Pertinent Statute or Case Law Cited: 26 USCA s 6331 et seq. Underwriting File U-226 Federal Liens GLF-76 Federal Tax Liens - Sales & Seizure This memo is in confirmation of our phone conversation and letter of August 13, 1991 regarding the foregoing. I enclose herewith our Underwriting Guidelines on the subject matter. The leading case is Minix v. Maggard, 652 SW2d 93. Review also Margiotta v. District Director of Internal Revenue, 214 F2d 518 and Salves v. U.S., 53-2 USTC holding notice sent to taxpayers at old address when District Directors files showed new address is void. Because each step for the enforcement of the tax lien is jurisdictional, the record title is not conclusive evidence sufficient to satisfy the question of marketability of title. Thus, in addition to searching the record title, actual inspection must also be made of the records of the office of this District Director of Internal Revenue. The records must reflect that federal law was strictly complied with in all respects. Any irregularities would constitute sufficient reason not to insure. Also, you must make sure the one year redemption period from the date of sale has expired to take a special exception, therefore, in the policy to issue. If we have misunderstood or failed to fully respond to your situation, please contact the undersigned. This informal memo of communication has been adopted to expedite service to our branches, policy writing agents and approved attorneys.
8/78
Chapter 22 - Page 1 INHERITANCE TAXES Title
INHERITANCE TAXES
New York taxes the transfer of title of the property of the estate (estate tax). An inheritance tax, on the other hand is a tax imposed upon those receiving the property. (N.Y. Tax Law 249, 1977). An estate tax is imposed upon the transfer of any real or personal property of the decedent: 1) when the transfer is by will or by New York's intestate laws from any person who dies possessing the property and who was a New York resident; 2) when the transfer is made in contemplation of death or if the transfer is intended to take effect at the death of the transferor; 3) when the property is held in the joint tenancy and one of the joint tenants dies. (N.Y. Tax Law 220, 1966). The following transfers of property are exempt from the estate tax: 1) property for memorial services for the deceased; 2) property transferred to any religious, educational, library, charitable, missionary, benevolent, hospital or infirmary corporation; 3) real property transferred to a municipal corporation in trust for a specific public purpose; 4) personal property (other than money or securities) bequeathed to an organization for the moral or mental improvement of men and women, or for scientific, literary, patriotic, cemetery or historical purposes; 5) all property or beneficial interest transferred to any father, mother, husband, wife, widow or child of the decedent, unless such interest exceeds $5,000. If it exceeds $5,000 then it will be taxed on the amount exceeding $5,000; 6) all proceeds of any federal war risk insurance policy which is payable or may become payable to the veteran's estate. (N.Y. Tax Law 221, 1966). Taxes are due when the transfer is made. If the value of the transferred property or interest cannot be determined at the time of transfer, the tax will be due when the donee acquires actual possession. (N.Y. Tax Law 222, 1966). The estate transfer tax becomes a lien upon the transferred property and will remain until it is paid or released. The person to whom the property is transferred and the executors/administrators of the estate are personally liable for the tax. The executor/administrator has the power to sell as much property as is necessary to pay the tax. (N.Y. Tax Law 224, 1966). If the tax is not paid, the tax commission may cause the sheriff to levy upon the property and sell it. However, the tax lien is subject to any pre-existing mortgage which was incurred in good faith before the tax became a lien. (N.Y. Tax Law 224, 1966). Any interested person may file an application with the tax commission for a release of the tax lien on real property. If granted, the tax commission will release the lien and record the release. (N.Y.Tax Law 224, 1966). An unpaid transfer (estate) tax on the estate transferred remains a lien upon the property and makes it unmarketable. (Stock v. Mann, 225 N.Y. 100, 174 N.E. 76 (1930)).
8/78
The tax ceases to be a lien after the expiration of fifteen years from the date of accrual. (N.Y. Tax Law 245, 1966). A. Taxable Transfers - Nonresidents
An estate tax is not a levy upon the property itself but upon the right of transferring the property. (In re Reilly's Estate, 64 N.Y.S. 2d 72 (1946)). The tax rate schedule is set forth in N.Y. Tax Law 249 (a), 1966. In order to determine the tax, the gross estate and net estate must be calculated. The gross estate of the decedent is determined by including the value of all real, personal, tangible and intangible property held by the decedent at his death. Real property which is situated outside the state and tangible personal property which is outside the state are excluded. Once the gross estate has been determined, the net estate must be calculated by deducting certain items from the amount of the gross estate. These items include: 1) 2) 3) 4) 5) 6) funeral and administration expenses; claims against the estate; unpaid mortgages; losses from fire, storms, shipwreck, theft or other casualty (if not covered by insurance) during the settlement of the estate; amounts reasonably required and actually expended during the settlement of the estate for the support of decedent's dependents; an amount equal to the value of any property; a) which is part of the gross estate of any person who dies within five years before decedent's death or b) transferred by the decedent by gift within five years before his death; the amount of all bequests, legacies, devises or transfers a) to the government of the United States or its states to be used for public purposes; b) to any corporation which is organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. The amount of the deduction cannot exceed the value of the transferred property required to be included in the gross estate. an exemption of $100,000. (N.Y. Tax Law 249 (c), 1966).
7)
8)
The tax to be paid on the net estate can be calculated by using 249 (a) of the Tax Law, 1966 and is paid by the executor who must make a tax return in all cases where the gross estate exceeds $200,000 at the decedents death. (N.Y. Tax Law 249 (d), 1966).
8/78
The executor cannot make a final accounting to settle the estate until he pays the tax and receives a receipt or certificate. This certificate may be recorded. (N.Y. Tax Law 249 (f), 1966). The executor is personally liable for the tax but he has the full power to sell as much of the decedent's property as is necessary to pay the tax. If the executor fails to pay the tax within 18 months of the transfer, the commission may issue a warrant to the sheriff of any county and direct him to levy upon and sell any of the net estate's real and personal property found in the sheriff's county for payment of the tax. The tax commission is entitled to the legal remedies to enforce its claim if the warrant is not satisfied in full. If the tax is paid by or collected from a part of the estate in possession of one other than the executor, that person is entitled to reimbursement from the estate. The tax lien is subject to the lien of any mortgage indebtedness existing against the real property before the tax became a lien and where the mortgage indebtedness was incurred in good faith. (N.Y. Tax Law 249(g), 1966). The statute of limitations does not apply to any proceeding to levy, appraise, assess, determine or enforce the collection of the tax. (N.Y. Tax Law 249 (j), 1966).
Chapter 19B - Page 1 HEIRS AT LAW
HEIRS AT LAW
When a decedent dies intestate, all real property passes by intestate succession to heirs at law pursuant to such statutes. When insuring a title based upon a deed from grantors purporting to be all the heirs at law of a decedent, particular care must be exercised to determine that such grantors are in fact all of the heirs of the decedent. Do not rely solely on the recital in a deed to this effect. A judicial determination as to all the heirs of the decedent should be obtained. However, subject to Home Office approval, independent proof in lieu of judicial determination may be accomplished by appropriate affidavit that the named grantors were in fact all of the heirs of the decedent. Such affidavits should set forth sufficient information to enable the examiner to determine who are the heirs of the decedent under the laws of the state in which the property is situated. If not furnished satisfactory proof to determine the heirs of the decedent, appropriate exception must be made in Schedule B of the policy as follows: Rights of possible undisclosed heirs of AFFIDAVITS OF HEIRSHIP In requiring and accepting affidavits of this nature it is important to avoid affidavits that contain "conclusions of law" by laymen. All such affidavits should speak to facts. The following may be used for the purpose of requiring affidavits of heirship: Receipt of affidavits from two disinterested persons who actually know the facts, setting forth sufficient information to enable the examining attorney and this Company to determine, pursuant to applicable statutes, that the parties executing the above required deed were all of the heirs of and the consorts of those heirs who were married, and that said heirs and consorts were sui juris at the time of executing said deed. Note: this affidavit is to be made by one closely related in blood with knowledge of the facts. . deceased.
Chapter 19B - Page 2 HEIRS AT LAW
MODEL FORM HEIRSHIP AFFIDAVIT STATE OF COUNTY OF ) (John Doe) being duly sworn, deposes and says that he resides at (#1 A Street, Hempstead, New York), and that he is a (son) of (James Doe) now deceased. That my (father), the said (James Doe) died a resident of the (Village of Hempstead, Nassau County, New York), intestate, on or about the (1st) day of (January, 1999). That he left him surviving: (no spouse) (no child, no posthumous child, no adopted (child and no children of any deceased (child or adopted child (no father, no mother (no brothers no sisters, and no descendants (of any deceased brother or sister (no grand-parents (no great grand-parents, no uncles, no aunts (no great great grand-parents, no great uncles (or great aunts, and no cousins ) ) ss:
Go down as many classes as are necessary to establish title in your desired class
either of the whole or the half-blood, except the following: (here list names of survivors) NAME Anna Doe John Doe Mary Doe RELATIONSHIP Widow A son A daughter of Richard Doe, a predeceased son of the said decedent.
All of the above named individuals are over the age of 21 years and of sound mind, except: (Mary Doe) who is an infant of the age of 6 years and who resides with her (mother, Jane Doe) at (#10 B Street in the Village of Hempstead, Nassau County, New York). (It may also be advisable to add appropriate statements concerning debts against the Estate and possible Federal Estate tax to this affidavit)
Sworn to before me this day of , 19
8/79
Chapter 20 - Page 1 HOMESTEAD General
HOMESTEAD
Property of one of the following types, which does not exceed $10,000 in value above liens and encumbrances and is owned and occupied as a principal residence, is exempt from the satisfaction of a money judgment; however, a purchase money mortgage on: 1) a lot of land with a dwelling on it; 2) shares of stock in a cooperative apartment corporation; and 3) units of a condominium apartment are not exempt. In addition; no homestead is exempt from taxation or from sale for non-payment of taxes or assessments. The homestead exemption continues after the death in whose favor the property was exempted, for the benefit of the surviving spouse and children until the majority of the youngest surviving child and until the death of the surviving spouse. The homestead exemption ceases if the property ceases to be occupied as a residence by a person for whose benefit it may continue. However, the exemption will not be lost if the departure was caused by injury to or destruction of the dwelling house and the suspension of occupation was for less than a year. If the value of the property exceeds $10,000, the homestead exemption is not void but the lien of a judgment attaches to the surplus. If the homestead value exceeds $10,000 a judgment creditor may commence a special action against the judgment debtor for the sale. The court may direct the sale and, if so, shall marshall the proceeds of the sale so that the right and interest of each person shall correspond as nearly as possible to their rights and interests in the property. Money, not exceeding $10,000, paid to a judgment debtor, is exempt for one year after the the payment unless he acquires a homestead within that year. The exemption for the money, if another homestead is acquired, ceases with respect to that portion which was not used to purchase the property. (N.Y. Civ. Prac. Law 5206, Supp. 1978).
8/78
Chapter 21 - Page 1 IDENTITY General
INDENTITY
A married woman has all the rights in respect to both real and personal property, as if unmarried. Acknowledgment or proof of a conveyance of real property or any other written instrument, may also be made by a married woman the same as if unmarried. Statutes are contra to the common law and abolish the limitation on rights that marriage once created. (N.Y. Gen. Oblig. Law 3-301, 1963; N.Y. Real Prop. Law 3-301, 1963; N.Y. Real Prop. Law 302, 1909). As to a suit for divorce or annulment, a provision must be made available to allow the woman to resume the use of her maiden name. (N.Y. Dom Rel. Law 240 (a), 1973). And as early as 1889 a New York court held that upon obtaining a final decree of divorce, a wife may assume her maiden name for the purpose of entering into a new marriage contract. Since she no longer had a husband, there was no impropriety or illegality in reassuming her original name. (Rich v. Mayer, 7 N.Y.S. 69 (1889)).
4/68
Chapter 24 - Page 1 MONEY JUDGMENTS General
MONEY JUDGMENTS
Liens fall basically into two categories: specific liens and general liens. Mortgages or mechanics' liens are specific liens against a specific piece of real estate. Money judgments, on the other hand, are general liens. A money judgment docketed against a named judgment debtor is a general lien against all of the property, real and personal, of the judgment debtor. The federal tax lien is of the same category. Where we have a specific lien, our examination is directed against the particular parcel of real estate. On the other hand, where we have a general lien, our examination must be directed against names only. In order to make a judgment search, it is necessary to list the names in the chain of title, and the judgment dockets have to be run for the periods indicated. All judgments against the name and in most cases, similar names as well, must be abstracted. In abstracting the judgment, we take off all of the information which is then on the docket, unless the judgment is satisfied. After the judgments are abstracted, we normally return them all in our report with a notation calling for them "to be disposed of." In some offices, an investigation is made prior to the insertion of these judgments into the report for the purpose of determining which of them can be disregarded either based upon information then available to us or an investigation which we than make, establishing that the particular judgment debtor is not the same person who is in our chain of title, notwithstanding the fact that he may have the same or a similar name. This is especially true with respect to common names. In our area, however, we are not equipped to make that investigation in advance. Therefore, we return all of the judgments and ask for them to be disposed of. They are normally disposed of by the production of an affidavit from the party in our chain of title clearly indicating that these specific judgments or federal tax liens are not against him or her, but against some other person with the same or a similar name. Unfortunately, some people are not averse to making a false affidavit. Accordingly, the affidavit is to be considered critically and skeptically. This is especially true if you have a fairly uncommon name, and almost certainly true where in addition, the address shown on the judgment is either the address of our property or an address which appears to have been the address of the parties in our chain of title at some other time. Anything else which might indicate that the affidavit may not be completely true should be taken into consideration. The name of the spouse, in some cases, might be an indication as to whether the judgment debtor is our party. In any case where there is a doubt, the matter should be fully investigated and discussed with counsel. In this respect, it is also important for us to determine whether or not an individual has used other names, other than the name now being used by that individual. The most common type of situation, of course, is with respect to females who get married and change their names. For that reason, we raise the following Exception: "Proof is required that has not been known by any other
married or maiden name within the last ten years; otherwise such other name must be revealed to the Company and the office searches amended to cover."
4/68
In other cases, we may pick up a change of name. In some cases, a will may give us an indication of a change of name. In any such case, the Office Search must be promptly amended and searches run against these additional names not previously disclosed to us. As a matter of practice and as pure business risk, we do not require any special proof that everybody in the chain of title never used any other name. However, if somebody did use another name, a judgment docketed against that name could very well be a valid lien against our real estate. If the judgment docket shows a judgment against several parties but indicates that the particular judgment debtor we are concerned with was "not summoned," we can disregard that judgment because the notation "not summoned" indicates that the court did not have personal jurisdiction over that particular judgment debtor. For that reason, we would not be concerned as it would not become a lien. The judgment is effective for twenty years. It is a lien on the real estate of the judgment debtor for ten years, computed from the date of entry of the judgment in the court in which it was originally rendered (CPLR 5203). If that date is prior to the docketing date in our particular county, it may mean that the judgment lien expires some time prior to ten years from the docketing date. In just about all cases involving Supreme Court judgments that are docketed in the same county in which the judgment is obtained, the docketing date and "perfecting date" (the date of entry) are the same. Section 5018(b), CPLR, provides for the docketing of federal judgments in the County Clerk's Office. In all counties, except those counties where the United States District Court is itself located, federal judgments do not become a lien against real estate unless docketed in the County Clerk's Office as well. In those counties, such as Kings County for the Eastern District and New York County for the Southern District, it is not necessary to separately docket in the County Clerk's Office. Judgments have priority among themselves in accordance with their order of docketing in the County Clerk's Office in the county in which the real property is situated. If an owner dies while he is in the chain of title, we also run judgments against the executor of his will, or administrator of his estate in his representative capacity, but any judgment turned out against an executor or administrator even in his representative capacity is not a lien against the real estate of the decedent unless the judgment itself makes it a lien against specific real property. It was stated previously that we attempt to turn out judgments against names closely similar to that of the actual name in the chain of title. It is dangerous to pass such a judgment, notwithstanding the fact that the rule of law is that the judgment must be docketed against the true name of the party in the chain of title.
4/78
H.R & C Co. vs Smith, reported in 242, NY 267, is a case where a judgment was docketed against Elizabeth Hedges, also known as Bess Hedges. Title was held in the name of Mary Elizabeth Hedges. It was nevertheless held that the judgment was a lien against the property. In this case, the court refers to nicknames used by friends and relatives; for instance, Cliff for Radcliff and Will fro Wilbur or Wilfred, etc. It finds that Bess is used not only for Elizabeth but in some cases for Mary Elizabeth. Referring to cases in other jurisdictions, the court refers to the use of Harry for Henry, Willie for William, Bill for William, Charlie for Charles, Dan for Daniel, Mollie for Mary, etc. Notwithstanding, in Mauro vs Peninsula National Bank, New York Law Journal, October 7, 1964, page 20, a judgment against Tony Romano was held not to be a lien on the property of Antonio Romano. Possibly part of the reason was that the court found that the judgment creditor actually knew that this particular judgment debtor owned real estate in the name of Antonio Romano, his true name. The court refers to the H.R. & C Co. vs. Smith, above mentioned, but says the rule must be limited to the facts in that particular case. We must also bear in mind that when a judgment is docketed, it not only becomes a lien against all of the real property of the judgment debtor in the county, but it automatically becomes a lien on all of the after-acquired property of that particular debtor within the ten year lien period. Keep in mind as an exception to this last statement, that a purchase money mortgage is considered to be prior to pre-existing judgments against the purchase money mortgagor. However, we have, in the past, had some difficulty with some banks by reason of the fact that we did not run the name of the purchase money mortgagor at the closing. Of course, if we had run the name and turned out judgments, we would, upon request, have disregarded those judgments as not being liens so long as we were satisfied that what we were dealing with was a true purchase money mortgage. In one instance we didn't even run judgments because of an oversight by a closer. There were, in fact, two judgments which had been assigned to the United States of America. The bank said that assigned to the United States of America, they would not have closed their mortgage loan. Now they find that they have to foreclose their mortgage and they have to join the United States of America as a party defendant in order to cut off the judgments which are subordinate in lien to their mortgage. A judgment docketed against a person who later becomes an incompetent is perfectly valid as a lien so long as the judgment debtor was competent at that time. A judgment docketed against him after a committee has been appointed cannot be enforced as a lien ahead of other debts of the incompetent debtor. In that respect see Section 1761 of the Real Property Actions and Proceedings Law. We consider the docket as controlling with respect to a judgment. If it is supposed to be satisfied, we want the docket marked "Satisfied." If it is supposed to have been reversed on appeal, we want the docket marked "Reversed on appeal." If the lien is suspended on appeal, we want the docket so marked. In all cases, the order indicating either the suspension or reversal, etc., should be taken off. In some cases, those orders are conditional and in others they are limited. The provisions with respect to some of these
matters are in Section 5204 of the CPLR.
4/78
A money judgment, like any other lien, can be assigned; it can be released in whole or in part as to any specific property; and, of course, can be satisfied. With respect to the satisfaction of the judgment, it can either be satisfied by the judgment creditor, or within five years from the date of entry of a judgment, by the judgment creditor's attorney. Reference to that is in Section 5020 of the CPLR. However, where the County Clerk will not accept a satisfaction of a judgment executed by an attorney after September 1, 1969 if two years or more have elapsed between the entry of the judgment and September 1, 1969. In order to satisfy a judgment by deposit with the County Clerk, Section 5021 (a) of the CPLR now requires an order of the court on notice. As to Torrens titles, in order for the judgment to be a valid and effective lien against the real property, the judgment must be memorialized against the owner's certificate. We require running judgment and federal tax lien searches against the last owner in the County Clerk's Office, notwithstanding it is a Torrens title, and, also, for any federal liens against all names in the chain of title. The reason for that is that it is not clear from the law that federal liens are affected by the registration provisions. In addition, there is a real hazard that a judgment against a present owner may actually be memorialized between the time we make our examination or continuation and the time that the deed is delivered to the Registrar for the transfer of title. Keep in mind that in registered property, title does not pass until the deed is delivered to the Registered property, title does not pass until the deed is delivered to the Registrar and a new certificate is issued. Normally, we close our title away from the Registrar's Office and there is a delay of anywhere from one to several days between the closing of title and the delivery of the deed to the Registrar. We do not want to take that risk. With respect to normal closings, a judgment is only a lien against the right, title and interest the judgment debtor had at the time the judgment was docketed. Therefore, if in fact a title closing was held at 10:00 A.M. today and the deed delivered, and at 11:00 A.M. a judgment was docketed against the seller, that judgment would not be an enforceable lien, notwithstanding the fact that the deed out of the judgment debtor is not recorded until tomorrow or two or three days later. However, that title may very well be unmarketable because this type of proof can only be established by parol evidence, and there is a hazard of litigation. NB: Cross reference with Liens & Encumbrance this manual
5/78
Chapter 24 - Page 1 JUDGMENTS 2 Clearance Identity of Debtor
JUDGMENTS
When the examination of title discloses judgments against parties of similar name we are confronted with one of two instances: 1) 2) those cases where because of similarity of name, or otherwise, the lien may affect; and those cases where the lien definitely affects the property.
Category (1) can normally be disposed of by a specific affidavit, stating unequivocally that the lien in question does not affect the premises, and is not against the individual of that or similar name in our chain of title. It is often helpful to show in addition, that the address shown in the lien as that of the debtor is one at which our party never resided, or did business. Of course, the more uncommon the name the greater particularity will be required to establish that the lien does not in fact apply to our party. In those cases where the lien in fact affects, it must be discharged of record. This should be done in advances of the closing and the title company notified in order to avoid needless delay at closing. In many cases, though, the owner cannot discharge the lien in advance of closing because he does not have the necessary funds and intends to use the proceeds of the closing to satisfy the lien or liens. When it is anticipated that this will be the case, an appropriate provision permitting this should be included in the contract. The old N.Y. Board of Title Underwriters form of contract contains a clause that is sufficient only if the satisfaction is actually delivered at closing. In many cases, a sum in an amount more than sufficient to discharge the lien is deposited with the title company at closing, with a request that the lien be omitted from, or its collection out of the premises insured against, in the policy. There may be many reasons for such a procedure - i.e., there may have been difficulty in locating the party who is to give the discharge or, it is hoped that some additional time may be effectively utilized to work out a more favorable settlement - or, the lien may become outlawed by a statute of limitations in the near future - or, the lien may in fact have been paid, but no satisfaction obtained, - etc. Normally, the title company will accede to such request to omit the lien from the loan policy when it knows the lien will be discharged of record within a few days, or so long as it knows that it can effectively control a prompt satisfaction of record in the event of an unanticipated emergency. Normally, though, when a deposit is accepted, the procedure as to fee insurance is to except the lien, but insure that it will not be enforced against or collected out of the insured premises. In a mortgage policy to an institutional lender, the exception as to the lien is usually omitted, because the lender can not lend on encumbered property. Many attorneys ask about this double standard for fee insurance and mortgage insurance, since there are other cases in which a mortgage policy is treated more liberally. Basically, the main reason is that the possibility of a claim on technical marketability grounds is
much greater on a fee policy especially where there is a quick re-sale. Remember, the
5/78
Chapter 24 - Page 2 JUDGMENTS 2 Clearance
ALTA title insurance policy insures not only against direct attack, but also as to attack on marketability grounds. A title company may resist being asked to hold such funds for any extended period of time, even though only insuring against collection. Actually, when the company does so without the consent of the proposed insured, they can expect a fair share of future embarrassment, pressure and name-calling, even though their position may be technically correct. When a lien is excepted, but there is insurance against collection, there is normally no recourse against the title company who has insured against collection until there is a direct attempt to enforce collection. When re-selling a property with such a condition, the contract should except lien whose collection has been insured against, and provide that the existence of the particular lien shall not be deemed an objection to title so long as the "X" Title Company (which has so insured) will insure against its collection out of the subject premises. Judgments and other liens originally filed in another county must first be discharged of record in that county and a transcript obtained before the lien can be discharged in your county. In every case, it is well to remember that the lien may not be omitted until the record of that lien is discharged in the county where the property is located. Federal liens are a special headache because the 10 year statute of limitations set forth in Section 6502 of the Internal Revenue Code of 1954, as amended, cannot be relied upon. It is subject to various means of being tolled by instruments and actions taken by the tax payer and/or government, none of which are of record. In addition, the time required to obtain a satisfaction is much greater than other liens. In further addition, there have been cases where the government has been less than cooperative notwithstanding tender of the full amount originally required, because of other items due or pending against the same tax-payer, or because of their own clerical errors, etc. For these reasons, title companies may be reluctant to accept any escrow deposits as to federal liens unless there is a letter from Internal Revenue stating unequivocally that a release will be forthcoming on receipt of a specific amount, or that the lien has in fact been paid and that a release will be furnished. Delays in effecting final satisfaction or release of record are the rule rather than the exception. In summary, the title company wants all liens that are known to be of record affecting the property discharged of record in advance of closing or as promptly thereafter as possible. A lawyer for a purchaser or lender should want exactly the same thing.
6/79
Chapter 24 - Page 1 JUDGMENTS 2 CLEARANCE Legal Bulletin Use of Deposits and Letters of Undertaking
No deposit or Letter of Undertaking should be accepted for omission of, or insurance against collection of a money judgment unless specifically approved by an authorized officer in advance of closing unless the following are all complied with: (a) The minimum amount of any deposit must at least be in the amount of the Judgment, plus 10% per year, or fraction, from the date of the Judgment to a period one year from the performance date fixed, plus an additional $250. The performance date must be not later than 30 days after closing date; Every effort must be made to determine whether or not an execution on this judgment has been delivered to the Sheriff of the County where the property is located, (in some cases this information may be obtainable, by telephone from the Sheriff's Office). Otherwise, affidavits should be obtained from the depositor that he has no information or knowledge that an Execution Sale is pending. Information or affidavits obtained should be noted on the agency sheet, or attached thereto. The depositor must be advised that the Judgment must be disposed of as promptly as possible, and prior to the performance date. Any deviation from the above requirements must be approved in writing by the Branch Manager or Counsel of the County where the property is located, or by a Senior Officer. (e) If the premises are subject of homestead exemption Counsel should be consulted for the procedure to be followed.
(b) (c)
(d)
6/79
Chapter 24 - Page 1 JUDGMENTS 2.1 SIMILAR NAMES Title
If the judgment is against a person of a similar name as the person in title the lien can be disposed of by a specific affidavit, stating that the lien does not affect the premises, and is not against the person in the title or chain of title, and showing that the person in the title or chain of title is not the judgment debtor, and that the person in the chain of title never resided at or did business at the address shown for the judgment debtor. If the judgment is against the person in the title follow CPLR 5020 (A) or 5020 (B): (A) (B) provides that the person entitled to enforce the judgment may execute and deliver the satisfaction. provides that the attorney of record or the attorney named on the docket within 5 years after entry (since 9/1/69) may execute satisfaction piece.
Note: Satisfaction piece is filed first with the Clerk of the Court where the judgment was obtained and a transcript of the satisfaction is obtained from that Clerk's Office and filed in the Office of the County Clerk in which the property is located.
6/79
Chapter 24 - Page 1 JUDGMENTS 4 SATISFACTION OF JUDGMENT IN FACT AGAINST SELLER Title
At times, the title search reveals a judgment that R acknowledges is against him. Typically this is cleared by paying the judgment or arranging for judgment creditor to be present at closing and receiving payment then. The judgment creditor gives a Satisfaction of Judgment. The satisfaction must * also be signed by the judgment creditor's attorney, to release his attorney's lien. The judgment creditor also signs, though where absolutely full payment is being made, the judgment creditor's attorney may sign for him. Some attorneys prefer to have the judgment creditor sign in all cases. The firm of attorneys that presented the judgment creditor may have changed in membership after the judgment was rendered. This creates an obvious problem. If the judgment is too large to be handled in this way, the judgment creditor, rather than blow the deal, in which case he receives nothing, will often consent to issue a release of the lien of the judgment as to the land sold on receipt of a specified sum of money. This is handled much like the satisfaction of judgment. Alternatively, if only a new mortgage is involved, the judgment creditor may be willing to subordinate his judgment to a new first mortgage, though some lenders object to junior liens and others are legally bound to so object. *A judgment satisfaction must contain a recital that no executions are outstanding in the possession of a sheriff or marshal. If there are outstanding executions, however, then the instrument must certify that all sheriff's or marshall's fees are paid. Investigation is sometimes required in this instance and it may become necessary to obtain the marshal's consent before the lien can be satisfied. Tiffany on Tile Closing p. 104.
8/79
Chapter 24 - Page 1 JUDGMENTS 5 SATISFACTION OF MONEY JUDGMENTS Legal Bulletin
Section 5020, subdivision (b), CPLR, was amended effective September 1, 1977 to permit an attorney of record for a judgment creditor to execute a satisfaction of the judgment within ten years of its entry instead of within five years of such entry. We cannot assume that this has a retroactive effect until a ruling is issued by the Attorney General. We must, therefore, assume that the five year rate applies to judgments entered prior to September 1, 1977.
8/79
Chapter 24 - Page 1 JUDGMENTS 6 DEPOSITS Legal Bulletin
1.
The CPLR has made a radical change in the procedures for the enforcement of a money judgment against real property. Under the old law, Section 748, C.P.A., a sheriff was not permitted to deliver a deed until fifteen months after the sale. During this period the judgment debtor and his creditors were given the right to redeem the property from the sale. The right of redemption has been completely eliminated by the new CPLR, and the sheriff is now directed to deliver a deed to the purchaser within ten days after the execution sale. (Section 5236 (f), CPLR) This greatly increases the hazard involved in passing judgments on deposits or indemnity agreements. Every effort must therefore be made to have money judgments cancelled of record before the closing. When that is not feasible, the escrow agreement must provide for the disposition of the judgments at the earliest reasonable time and arrangements must be made for frequent follow-ups until the judgments are cancelled of record. See Closers Memo's entitle JUDGMENTS - CLEARANCE OF and AFFIRMATIVE INSURANCE this Manual.
2.
3.
Chapter 24 - Page 1 JUDGMENTS FOREIGN JUDGMENTS Legal Bulletin CPLR Article 53
RECOGNITION OF FOREIGN COUNTRY MONEY-JUDGMENT SUMMARY OF ARTICLE 5301. Definitions As used in this article the following definitions shall be applicable. a. Foreign state. "Foreign state" in this article means any governmental unit other than the United States, or any state district, commonwealth, territory insular possession thereof, or the Panama Canal Zone, the Trust Territory of the Pacific Islands or the Ryukyu Islands. Foreign country judgment. "Foreign country judgment" in this article means any judgment of a foreign state granting or denying recovery of a sum of money, other than a judgment for taxes, a fine or other penalty, or a judgment for support in matrimonial or family matters.
b.
5302.
Applicability This article applies to any foreign country judgment which is final conclusive and enforceable where rendered even though an appeal therefrom is pending or it is subject to appeal.
5303.
Recognition and enforcement Except as provided in section 5304, a foreign country judgment meeting the requirements of section 5302 is conclusive between the parties to the extent that it grants or denies recovery of a sum of money. Such a foreign judgment is enforceable by an action on the judgment, a motion for summary judgment in lieu of complaint, or in a pending action by counterclaim, crossclaim or affirmative defense.
5304.
Grounds for non-recognition a. No recognition. A foreign country judgment is not conclusive if: 1. the judgment was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law; 2. the foreign court did not have personal jurisdiction over the defendant. Other grounds for non-recognition. A foreign country judgment need not be recognized if: 1. the foreign court did not have jurisdiction over the subject matter;
b.
(2)
the defendant in the proceedings in the foreign court did not receive notice of the proceedings in sufficient time to enable him to defend; the judgment was obtained by fraud; the cause of action on which the judgment is based is repugnant to the public policy of this state; the judgment conflicts with another final and conclusive judgment; the proceeding in the foreign court was contrary to an agreement between the parties under which the dispute in question was to be settled otherwise than by proceedings in that court; or in the case of jurisdiction based only on a personal service, the foreign court was seriously inconvenient forum for the trial of the action.
(3) (4) (5) (6)
(7)
5305.
Personal jurisdiction a. Bases of jurisdiction. The foreign country judgment shall not be refused recognition for lack of personal jurisdiction if: (1) (2) the defendant was served personally in the foreign state; the defendant voluntarily appeared in the proceedings, other than for the purpose of protecting property seized or threatened with seizure in the proceedings or of contesting the jurisdiction of the court over him; the defendant prior to the commencement of the proceedings had agreed to submit to the jurisdiction of the foreign court with respect to the subject matter involved; the defendant was domiciled in the foreign state when the proceedings were instituted, or, being a body corporate had its principal place of business, was incorporated, or had otherwise acquired corporate status, in the foreign state; the defendant had a business office in the foreign state and the proceedings in the foreign court involved a cause of action
(3)
(4)
(5)
arising out of business done by the defendant through that office in the foreign state; or
(6)
the defendant operated a motor vehicle or airplane in the foreign state and the proceedings involved a cause of action arising out of such operation.
b. 5306.
Other bases of jurisdiction. The courts of this state may recognize other bases of jurisdiction.
Stay in case of appeal If the defendant satisfies the court either that an appeal is pending or that he is entitled and intends to appeal from the foreign country judgment, the court may stay the proceedings until the appeal has been determined or until the expiration of a period of time sufficient to enable the defendant to prosecute the appeal.
5307.
Recognition in other situations This article does not prevent the recognition of a foreign country judgment in situations not covered by this article.
5308.
Uniformity of interpretation This article shall be so constructed as to effectuate its general purpose to make uniform the law of those states which enact these provisions.
5309.
Citation This article may be cited as the "Uniform Foreign Country Money-Judgments Recognition Act."
2 This act shall take effect on the first day of September next succeeding the date on which it shall become law.
Chapter 24 - Page 1 JUDGMENTS FOREIGN JUDGMENTS Enforcement CPLR Article 54
ENFORCEMENT OF JUDGMENTS ENTITLED TO FULL FAITH AND CREDIT SUMMARY OF ARTICLE 5401 Definition In this article "foreign judgment" means any judgment, decree, or order of a court of the United States or of any other court which is entitled to full faith and credit in this state, except one obtained by default in appearance, or by confession of judgment. 5402 Filing and status of foreign judgments (a) Filing. A copy of any foreign judgment authenticated in accordance with an act of congress of the statutes of this state may be filed within ninety days of the date of authentication in the office of any county clerk of the state. The judgment creditor shall file with the judgment an affidavit stating that the judgment was not obtained by default in appearance or by confession of judgment, that is unsatisfied in whole or in part, the amount remaining unpaid, and that its enforcement has not been stayed, and setting forth the name and last known address of the judgment debtor. (b) Status of foreign judgments. The clerk shall treat the foreign judgment in the same manner as a judgment of the supreme court of this state. A judgment so filed has the same effect and is subject to the same procedures, defenses and proceedings for reopening, vacating, or staying as a judgment of the supreme court of this state and may be enforced or satisfied in like manner. 5403 Notice of filing Within thirty days after filing of the judgment and the affidavit, the judgment creditor shall mail notice of filing of the foreign judgment to the judgment debtor at his last known address. The proceeds of an execution shall not be distributed to the judgment creditor earlier than thirty days after filing of proof of service. 5404 Stay (a) Based upon security in foreign jurisdiction. If the judgment debtor shows the supreme court that an appeal from the foreign judgment is pending or will be taken, or that a stay of execution has been granted, the court shall stay enforcement of the foreign judgment until the appeal is concluded, the time for appeal expires, or the stay of execution expires or is vacated, upon proof that the judgment debtor has furnished the security for the satisfaction of the judgment required by the state in which it was rendered.
Chapter 24 - Page 2 JUDGMENTS FOREIGN JUDGMENTS Enforcement CPLR Article 54
(b) Based upon other grounds. If the judgment debtor shows the supreme court any ground upon which enforcement of a judgment of the supreme court of this state would be stayed, the court shall stay enforcement of the foreign judgment for an appropriate period, upon requiring the same security for satisfaction of the judgment which is required in this state. 5405 Fees When a foreign judgment is filed pursuant to this article, an index number shall be assigned in accordance with the provisions of subdivision (a) of section 8018 and the fee shall be as prescribed therein. 5406 Optional procedure The right of a judgment creditor to proceed by an action on the judgment or a motion for summary judgment in lieu of complaint, instead of proceeding under this article, remains unimpaired. 5406 Optional procedure The right of a judgment creditor to proceed by an action on the judgment or a motion for summary judgment in lieu of complaint, instead of proceeding under this article, remains unimpaired. 5407 Uniformity of interpretation This article shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact these provisions. 5408 Citation This article may be cited as the "Uniform Enforcement of Foreign Judgments Act." 2. This act shall take effect on the first day of September next succeeding the date on which it shall become a law.
Chapter 25A - page 1 1/96 INDEMNITIES & UNDERTAKINGS General
INDEMNITIES
INTRODUCTION It occasionally develops that a lien against the property is in dispute as to its validity or amount. When the lien is not a permitted title defect, it may be possible for the title to close while preserving for the seller the controversy with the claimant. This may be done if the customer is wiling to execute some form of Indemnity Agreement with the title insurer and post security to protect the title insurer against the liabilities assumed. The title insurer will usually take the monetary deposit out of the sale proceeds sufficient in amount to cover the risk . This procedure allows the title insurer to provided some form of affirmative coverage for the protection of the purchaser against the title defect. Frequently, the deposit is equal to 150% of the lien to insure the sufficiency of funds to discharge the encumbrance including interest and cost. This practice allows the title company to insure against the lien because it holds ample funds to pay the claimant. The money should also be deposited under escrow instructions satisfactory to the parties but sufficient in form and content to permit the escrowee to pay the lien if the lien claimant takes threatening action. Indemnification may be defined as the process by which the title insurer determines and receives what it perceives to be sufficient security to enable it to waive or "insure over" an objection to title. The acceptance of an Indemnity Agreement or Letter of Undertaking, regardless of whether it is secured by the deposit of satisfactory collateral, does not justify the issuance of a title policy without exception as to the matter for which the Indemnity Agreement was taken. Special procedures must be taken in determining those matters for which an Indemnity Agreement should be accepted and, when accepted, the form and content of the Agreement must be approved by the underwriting or risk department. Consideration must also be given as to whether collateral should be required and, if so, its nature, amount and the manner in which it should be held. You must obtain the approval of the underwriting department or senior management before accepting any indemnity agreement without the deposit of collateral. RELIANCE UPON INDEMNIFICATION As a general title rule no general or special exception set forth in Schedule B-2 of the Title Commitment is to be omitted from Schedule B of the Policy based upon an escrow deposit and/or indemnity which is intended to protect us against financial loss by reason of such matters. It is proper, however, to show certain matters as exceptions in Policy Schedule B and then to give affirmative coverage against loss arising from the enforcement of such matters.
6/81 9/90 Rev. 1/96
Chapter 25A - page 2 INDEMNITY General
TITLE RULE RELATING TO INDEMNITIES An inviolate rule for the reliance upon Indemnity Agreements is that they are not to be relied upon for any omission, error or claim which goes to title. It is not customary to accept deposits or indemnification to protect a purchaser against the rights of holders of record title from whom he has not secured a conveyance. For title insurance purposes an omission, error, or claim goes to title when it cannot be cured, perfected, terminated, extinguished, or satisfied by the payment of money. It is not considered to be the function of a title company to create a title where none in fact exists. The only matters which you are permitted to show as title exceptions and then "insure over" following the execution of indemnity and positing of security are liens which can be satisfied by the payment of a sum of money which, in turn, can be predetermined at the time the policy is issued. RISK EXPOSURE Where the risk exposure is determinable in "a fixed sum certain", usually a judgment or lien, the risk may be treated as a credit underwriting risk. The company's preference in such cases is to obtain both and Escrow and Indemnity Agreement . There are two approved forms which satisfy this objective and the branch office or agent are encouraged to use either the Indemnity Bond or the Indemnity with Deposit to Protect Against Title Defects. Where the risk exposure is determinable, and a deposit adequate to cover the risk is made along with the Indemnity Bond, the title company is relying on the availability of the deposit, and not the credit worthiness of the depositor, to protect itself, from loss due to the stipulated coverage. Any type of indemnification that is not totally backed-up by some form of deposit is clearly an extension of the indemnitor's credit. The acceptability of a particular Undertaking or Indemnity Agreement without the additional deposit of collateral security is "credit underwriting". In that case, acceptance of an indemnity alone is contingent both on the credit-worthiness of the indemnitor in addition to the "insured over" risk being a proper subject of credit underwriting.
6/81 9/90 Rev. 1/96
Chapter 25A - page 2.1 INDEMNITY General
MATTERS FOR WHICH INDEMNITY CAN BE TAKEN 1. Where the matter is a lien, or can result in a lien, against the land where its amount, except for interest which may accrue, is presently ascertainable, and where it is not being presently being paid and satisfied. Examples of such risk may include recorded judgments or liens; taxes not yet due and payable; mechanics' liens being contested, etc. 2. Where the matter presents very little real danger but the indemnity agreement will provide direct recourse against the seller or mortgagor, rather than recourse by reason of subrogation rights under the policy. MATTERS FOR WHICH INDEMNITY SHOULD NOT BE TAKEN 1. Where the matter may result in a complete failure of title and the possibility of such occurrence is such that an indemnity secured by collateral for the entire amount of the policy would be necessary. An example of such a concern would be a pending suit where an adverse decree would result in the insured being forced to vacate the land. If the examination of title discloses substantial possibility that an adverse claim might prevail and, therefore, the title insurer is unwilling to insure unless it has collateral for the entire policy amount, then the title insurer is not really acting as an insurer. It is acting as a stakeholder. Fair dealing with the insured requires the title company to advise him of this fact and, if he wants to proceed the title company should insist that the insured acknowledge full disclosure of the facts, in writing, including the fact that the insured recognizes that the title company is holding an indemnity for the entire amount of coverage under the policy and that in the event of loss the insured will not look to the title insurer for issuance of a policy in a larger amount, or for incidental loss occasioned by him for improvements subsequently made. 2. Where the Indemnity Agreement calls for future action on the part of the indemnitor other than the diligent prosecution of defense of litigation. Example of such concern would be indemnification against future events after the policy date.
6/81 9/90 Rev. 1/96
FORM OF AFFIRMATIVE COVERAGE The use of indemnity agreements without the positing of security limits our right or ability to eliminate a lien by payment thereof prior to the time that its existence or enforcement might impair the ownership of our insured. In other words, the insured might suffer a loss by reason of unmarketability of title by reason of the liens existence on the record prior the lien actually being enforced and the title insurer is unable under the terms of the indemnity agreement to correct the issue by payment of the lien because there's no security deposit posted from which the lien could be paid. For this reason the special insuring clause should be phrased to insure against "the successful enforcement of the lien" rather than "insuring against loss or damage" by reason of the liens existence. NATURE AND AMOUNT OF COLLATERAL TO BE TAKEN - PROCEDURE The collateral deposited with the title company is to be cash or cash equivalents. If the collateral is other than cash it must be approved by either the CEO, Senior Vice President, Chief Underwriter, Corporate Treasurer, or the Vice President in charge of risk management. Irrevocable Letters of Credit or Treasury Bills may be acceptable substitutes. The amount of the deposit must be sufficient to satisfy the lien for which it is posted, plus interest which may accrue thereon, plus litigation expense, including court costs and attorneys fees which may be incurred. A "dollar for dollar" deposit is never adequate except in matters where no additional interest or cost can accrue. The minimum acceptable deposit should never be less than one and one-half times the amount of the lien unless you have received specific authorization to accept less from a senior manager. MISUSE OF INDEMNIFICATION Title Insurers are frequently called upon to omit existing encumbrances or liens from a title policy or commitment based upon the offer of an indemnity from a developer or some other party. All to often there is little if any thought given to whether the party offering the indemnity is a financially responsible party capable of performing upon that indemnity if called upon to do so. This is not prudent underwriting, it is credit underwriting. The purpose in issuing a title commitment is always preliminary to the issuance of a title policy. It is not intended to serve any separate purpose. However, this is the real world. The underwriter must remain cognizant of the fact that title insurance commitment and reports of title are frequently used as sources of information by persons intending to invest in real property, such as builders and developers or their counsel. In some cases title commitments are used for submission to regulatory authorities who require a title report disclosing the condition of title before permits will be issued, an offering accepted, or a bond issue floated. It should be company policy that title reports or commitments issued to such agencies or to others must accurately reflect the true condition of the title. Public and regulatory agencies view a title commitment or policy as a true representation of title. Therefore, as company policy, the insurer should report faithfully all encumbrances on title whenever the commitment goes to a regulatory body, investment
6/81 9/90 Rev. 1/96
group, financial institution or purchaser. If the company is willing to "insure over" a particular encumbrance, then the basis on which the risk is to be assumed should be reported to the customer to whom the commitment is issued. That might be expressed as follows: " (judgment, lien, encumbrance) shown as items will not appear in the policy to issue providing (set forth the terms here) . The deliberate deletion of known title defects, liens or encumbrances may result in the unintended assumption of liability over and beyond a loss under the terms of the title policy. Accordingly, any and all risks assumed, based on an indemnity or other clearance procedure, must be disclosed to the insured unless you are otherwise authorized by a senior underwriter or senior corporate officer. POLICY INSURING CLAUSE OBLIGATIONS The title insurer is contractually obligated to disclose the priority of any lien or encumbrance over the lien of the insured mortgage under insuring clause 6 of the ALTA Loan Policy. The ALTA Loan Policy further insures that the mortgage it covers is valid and insurable and further requires that all matters affecting title be shown in the policy. Furthermore, and of equal importance, is the fact that institutional lenders, such as insurance companies, savings banks, and savings and loan associations, if permitted by state statute to invest in mortgage loans, must have first lien position. If an omitted matter should later be determined to affect the lenders priority or enforcement rights that lender does not have an appropriate asset and may, therefore, demand that the title company purchase the loan. LEGISLATIVE AND CASE LAW CONCERNS Don't be pressured into removing or omitting a lien or encumbrance instead of insuring over it. Federal law, including the Interstate Land Sales Full Disclosure Act, provides that a title policy is acceptable to HUD as evidence of the state of title. It has been interpreted that this Act applies to other federal agencies. In the worst case scenario, failure to disclose a outstanding known interest may result in a later claim of deceit or fraud or allegation that the title company intentionally made false statements for the purpose of inducing a federally insured financial institution to grant loans and for aiding and abetting in the making of false statements in policies of title insurance submitted to federally insured banks. That is precisely what was alleged in U.S. v. Keskey, 863 F2d 474, and the title company and one of its employees lost big time. In that the case the U.S. Prosecutor wasn't satisfied to sue under the policy. He sued for fraud and brought criminal charges alleging the above actions, all in violation of 18 U.S.C. 371. You want to avoid this possibility at all costs. Please refer to Mr. Pedowitz memo of May 28, 1974 attached at the end of this chapter.
6/81 9/90 Rev. 1/96
There are three forms of indemnity agreements generally accepted by title insurers. They are the Personal Undertaking, Indemnity with Deposit and Letters of Indemnity. THE PERSONAL UNDERTAKING, INDEMNITY AGREEMENT OR BOND OF INDEMNITY Letters of Undertaking or Personal Undertakings are sometimes accepted to protect the title company against loss but without the deposit of cash or similar security. These are primarily used where there is little risk of financial loss and where the person tendering the undertaking is of acceptable responsibility. Indemnity Agreements are stronger documents which permit the title insurer to "insure over" objections to title, based on a parties agreement to indemnity the company. It is also usually unsecured. As such it is a form of credit underwriting. Before accepting an Indemnity Agreement the title insurer or agent should satisfy itself that the indemnitor(s) is/are a financially responsible party of sufficient wealth and integrity, found to be capable of performing upon the agreement if called upon to do so. This determination requires both an evaluation of the risk and the evaluation of the credit capacity of the proposed indemnitor. If the analysis of the indemnitors financial statement should disclose that they may be unable to perform upon the indemnity in the future if called upon to do so then the indemnity most be further supported by cash or cash equivalents. Even if the financial analysis discloses the probability of performance you may wish to include in the agreement a material change in circumstances clause. As part of the agreement the responsible party should further agree to remove the item from the record, either by a given date, or within a certain number of days after demand by the company. The agreement is usually executed by the seller, and its use is restricted to liens, such as judgments, ancient mortgages, franchise taxes, etc. The Bond of Indemnity form is preferable to the other forms even if it is not accompanied by security because a Bond is a valid claim upon and obligation of a decedents estate whereas the others may not be. THE INDEMNITY WITH DEPOSIT This form of agreement permits the title insurer to "insure over" objections to title based upon a person or party's agreement to indemnify the insurer against loss together with a security deposit approximate to lien, plus interest. This form is preferable to an Escrow Agreement alone because an escrow agreement rarely contains conditions of performance. Because it provides additional security for the underwriter, it is considered superior to the undertaking form. The use of this form is also restricted to liens, such as judgments, ancient mortgages and franchise taxes. LETTERS OF INDEMNITY A Letter of Indemnity is a device employed by title companies whereby one title insurer discharges an obligation to its insured arising under a title policy by delivering a letter of indemnity to another title insurer. The rationale for such action is rather simple. If the insured has a basis for presenting a claim under his policy, the insurer can avoid the claim, possible risk of loss and expense of defense by issuing the letter. This procedure is
discussed further in the Title Practice section of this chapter.
6/81 9/90 Rev. 1/96
Chapter 25A - page 1 LETTERS OF INDEMNITY Title Practice
LETTERS OF INDEMNITY BETWEEN TITLE COMPANIES

IN GENERAL Occasionally, in the preparation of its policy of title insurance, a title insurer will make an error resulting in the unintentional omission of a specific matter from the policy that was issued. As a consequence, a subsequent title insurer and its customer can become understandably confused when the prior policy and that which is now being contemplated are compared. Should the subsequent policy being contemplated require that such matter also be omitted therefrom, an awkward problem could result. Under certain circumstances, the Company may consider issuing or accepting a letter of indemnity as a method of resolving this problem, whereby one title insurer agrees to indemnify a subsequent title insurer from loss sustained by reason of specific matters not included in a previously issued policy of title insurance. Such an indemnification shall be subject to the provisions and upon the forms as hereinafter provided. ISSUANCE OF LETTERS OF INDEMNITY AND RELIANCE THEREON An inviolate rule for the issuance of letters of indemnity and for reliance upon letters of indemnity is that they are not to be issued and they are not to be relied upon for any omission, error or claim which goes to title. For title insurance purposes an omission, error, or claim goes to title when it cannot be cured, perfected, terminated, extinguished, or satisfied by the payment of money. For example: If A is the record owner of an undivided 1/16th interest in a parcel of real property A's interest could not be deleted from the title except by a conveyance from A, a conveyance from A's duly authorized representative, or by operation of law, as by foreclosure sale, execution sale, or by a quiet title proceeding. No amount of money can stand in lieu of the divestiture of A's vested interest and it is not appropriate to give or to rely on a letter of indemnity in ignoring or in writing over the interest of A. On the other hand, mortgages, deeds of trust, taxes, special assessments, abstracts of judgment, and mechanics' liens are examples of matters which do not go to title. Their liens are extinguished by the payment of money. When liens of this nature are unintentionally omitted from a policy of title insurance, there may be occasions when letters of indemnity can be appropriately written and relied upon.
6/81 9/90 Rev. 1/96
RULES OF TITLE PRACTICE 1. With approval of Counsel letters of indemnity in a form set forth below may be issued by and relied upon by the Company as indemnitor or indemnitee in the following instances: a. the indemnitor has made an unintentional error in a policy, which error does not go to title, which may result in a loss claim, and under the following circumstance: (i) (ii) b. The indemnitor title insurer would reissue its policy if it had the opportunity to do so, but The indemnitee title insurer has been asked to issue its subsequent policy or policies without mention of the error.
The indemnitee title insurer, as trustee under a deed of trust, may rely upon a letter of indemnity to issue its reconveyance without delivery of the promissory note and deed of trust and without a request for reconveyance from the beneficiary provided: (i) (ii) The indemnitor title insurer has deleted or written over the deed of trust, and Investigation strongly indicates that the debt or obligation secured by the deed of trust has been fully satisfied.
c.
If the Company has indemnified Title Company A and Title Company B is later asked to insure title, the Company as indemnitor, should also indemnify Title company B to the same extent that Title Company A was indemnified.
2.
Any matter to be omitted from a policy in reliance upon such a letter of indemnity shall be internally carried forward so that it will be reconsidered in any future evidence of title, and shall be disclosed to the proposed insured in a manner as directed by Underwriting Counsel.
PROCEDURE TO FOLLOW REQUESTING LETTER OF INDEMNITY 1. 2. 3. Send your request letter (sample letter enclosed) to the prior underwriter along with a copy of your commitment. A copy of your letter and commitment should be sent to the attention of the Underwriting Department. Direct that the Letter of Indemnity be sent to the Underwriting Department
Indemnity Supervisor for review, with a copy to your attention.
6/81 9/90 Rev. 1/96
4.
The Indemnity Supervisor, in the Underwriting Department will review the letter received and will advise you in writing if it is acceptable. (NOTE: only Letter of Indemnity from an underwriter are acceptable. Under no circumstances will we accept a letter from an agent.) If you do not receive a timely response to your request, telephone the underwriter for a clarification of the reason for delay. If the requested letter is refused, you may not insure without taking exception to the item or items for which indemnification was requested.
5.
In the event that we receive a request to issue a Letter of Indemnity from another underwriter, we will contact you for supporting documentation and/or information. FORMS OF LETTERS OF INDEMNITY The Law Committee of the New York State Land Title Association has approved several standard forms of letters of indemnity for inter-company use, copies of which are annexed. They should be used in all cases other than those requiring some special treatment. In agreeing to give or to accept a letter of indemnity in the future, it should always be referred to by its standard form designation, i.e., "Code A" or "Code B," etc. In any case where a liability limitation is to be used, the arrangements must be: "with liability limitation of $ ."
6/81 Rev. 1/96
Chapter 25A - page 1 LETTERS OF INDEMNITY Title Practice Form
NEW YORK STATE LAND TITLE ASSOCIATION RECOMMENDED FORM LETTERS OF INDEMNIFICATION ADOPTED BY THE LAW COMMITTEE ON JUNE 2, 1976 Re: Your Title No. Our Title No. Premises: (Address)
Gentlemen: Paragraph I We understand that you have been asked to issue your policy of title insurance covering the premises set forth in the above title number, and that in connection with your examination of title your have raised the following objection: Objection Paragraph II CODE A - Straight Letter In consideration of your issuing your policy free from said objection, this company does hereby agree to indemnify you and hold you harmless from any and all loss, cost or damage which you may sustain by reason of your doing so. CODE B - Conditional Performance In consideration of your issuing your policy free from said objection, this Company does hereby agree to indemnify you and hold you harmless from any and all loss, cost or damage which you may sustain by reason of your doing so. This Company further agrees that it will take the immediate steps necessary to dispose of said objection if claim should properly be made upon you under the terms of your policy of title insurance. CODE C - Performance In consideration of your issuing your policy free from said objection, this Company does hereby agree to indemnify you and hold you harmless from any and all loss, cost or damage which you may sustain by reason of your doing so. This Company further agrees that it will take the immediate steps necessary to dispose of said objection. (Objection to be set forth herein)
6/81 Rev. 1/96
CODE D - Insure against collection In consideration of your issuing a title policy in which the lien of said ( ) will be insured against collection out of said premises, this Company hereby indemnifies you and holds you harmless from any and all loss, cost or damage which you may sustain by reason of the collection of said ( ) out of the above premises. Paragraph III This letter of indemnity (extends to and covers the question of marketability of title and) extends to any and all reissues to be issued by you affecting said premises or any part thereof, whether by a fee insurance, mortgage insurance, or assignment or foreclosure of any mortgage. Very truly yours,
Name of Officer Title of Officer NOTE: If the indemnification is to be limited, the following clause is to be added to paragraph III: Our liability under this letter is limited to $ policy. , the amount of our existing
CODE E - Letter of Escrow for the benefit of another Title Company for premises (Address) Lien of record Re: Your Title No. Our Title No.
Gentlemen: We are holding in escrow the sum of $ lien, filed by . amount of $ pending the disposition of the against in the
We will continue to hold such escrow for your benefit as well as our own and will not release the escrow until said lien is disposed of according to the record. Very truly yours,
Name of Officer
Title of Officer
6/81 Rev. 1/96
CODE F - Letter of Escrow for the benefit of another Title Company for Premises - Lien Not of record Address RE: Your Title No. Our Title No.
Gentlemen: We are holding in escrow the sum of $ pending as security for the payment of (franchise taxes, city corporate taxes, estate taxes, etc.). We agree to hold said escrow for the benefit of your Company as well as for our own and will not release the escrow until proof of proper disposition of the aforesaid has been received by us. Very truly yours,
Name of Officer Title of Officer
NEW YORK STATE LAND TITLE ASSOCIATION, INC. RECOMMENDED PRACTICES ADOPTED JANUARY, 1996 STRAIGHT LETTER OF INDEMNITY Re: We understand that you are about to issue your policy of title insurance covering the premises set forth in the above title number, and that in connection with your examination of title you have raised the following exception(s)" In consideration of your issuing your policy free from said exception(s), this Company does hereby agree to indemnify you and hold you harmless from any loss or damage which you may sustain by reason of doing so. This letter of indemnity extends and covers the question of marketability of title, and extends to and covers any and all reissues to be issued by you affecting said premises, whether by fee insurance, mortgage insurance, or the assignment or foreclosure of any mortgage. This letter of indemnity shall continue notwithstanding your issuance of further indemnities for the matters set forth herein, provided that you still have policy liability at the time of the issuance of such further indemnity. Very truly yours,
FULL PERFORMANCE LETTER OF INDEMNITY RE: We understand that you have been asked to issue your policy of title insurance covering the premises set forth in the above title number, and that in connection with your examination of title you have raised the following objection: In consideration of your issuing your policy free from the objection, this Company does hereby agree to indemnify you and hold you harmless from any and all loss, cost or damage which may sustain by reason of your doing so. This Company further agrees that it will take the immediate steps necessary to dispose of said objection. This letter of indemnity extends to and covers the question of marketability of title and extends to any and all reissues to be issued by you affecting said premises of any part thereof, whether by fee insurance, mortgage insurance, or assignment or foreclosure of any mortgage. If called on by you, we will issue this same letter to another insurer provided that you have policy liability at that time. Very truly yours,
CONDITIONAL PERFORMANCE LETTER OF INDEMNITY Re: We understand that you have been asked to issue your policy of title insurance covering the premises set forth in the above title number, and that in connection with your examination of title you have raised the following objection: In consideration of your issuing your policy free from the objection, this Company does hereby agree to indemnify you and hold you harmless from any and all loss, cost or damage which you may sustain by reason of your doing so. This Company further agrees that it will promptly take the necessary steps to dispose of said objection(s) if claim should properly be made upon you under the terms of your policy of title insurance. This letter of indemnity extends to and covers the question of marketability of title and extends to any and all reissues to be issued by you affecting said premises or any part thereof, whether by fee insurance, mortgage insurance, or assignment of foreclosure of any mortgage. If called on by you, we will issue this same letter to another insurer provided that you have policy liability at that time. Very truly yours,
SPECIAL MORTGAGE PAYOFF INDEMNITY RE: We understand that you have been asked to issue your title policy insuring a transaction covering the premises set forth in the above title number and find that the following mortgage is open of record: You have informed us that you have been requested to issue your title policy free of any exception as to said mortgage. This is to advise you that on or about to be made on said mortgage. we caused payment in full
However, we have not yet received the satisfaction documents. We assure you that we will continue to use our efforts to procure same and to satisfy said mortgage of record. In any event, this Company agrees to and does hereby indemnify you, but only by reason of the enforcement of attempted enforcement of said mortgage against the above premises provided you notify us within a reasonable time after receiving notice of said enforcement or attempted enforcement. If called on by you, we will issue this same letter to another insurer provided that you have policy liability at that time. Very truly yours,
Chapter 25A - Page 1 LETTERS OF INDEMNITY Alta Form
STANDARD ALTA/ATIC FORM RE: Dear You have advised us that in examining title to the captioned property, you have discovered an outstanding ^ encumbering the title as follows: We understand that in connection with your Order Number ^ you intend to insure title to the property. In consideration of your insuring without exception to the abovedescribed exception T.A. Title Insurance Company, Media, PA hereby , indemnifies ^ Company, ^ , against loss, damage, or expense which it shall sustain by reason of the existence of said ^ T.A. Title Insurance Company, hereunder shall in no event exceed $ ^ the face amount of its policy number ^ , or the cost and expense to it of causing said ^ to be satisfied of record or otherwise legally extinguished as a lien or encumbrance against the property, whichever shall be the smaller. This indemnity is given and received on condition that T.A. Title Insurance Company be given notice in writing immediately at its Home Office in Media, Pa., of any claims, demand, action, or proceeding made or brought, attempting to enforce said ^ against the insured property; and that said Company be given full opportunity in such case to defend against, satisfy, or otherwise dispose of said We appreciate your cooperation in resolving this problem. Very truly yours,
5/74
Chapter 25A - Page 1 LETTER OF INDEMNITY Memo of Mr. Pedowitz to Title Counsel
LETTER OF INDEMNITY FROM INDIVIDUALS OR CORPORATIONS Recently I received a communication form Dick Howlett, General Counsel of TI, pertaining to title insurance where the title insurer ignores existing encumbrances on the insured property based upon an indemnity from a developer or some other party. In some cases, our report is used for submission to a regulatory authority who requires a title report disclosing the condition of the title before permits will be issued, an offering accepted, etc. It is the policy of this company that title reports to all such agencies and to others must reflect the true condition of the title. The following is a quote from Mr. Howlett's memorandum: "The public and regulatory bodies view a title policy as a representation of title. Therefore, as a policy, we should report faithfully all encumbrances on titles whether the report goes to a regulatory body or an investment group or a financial institution or a purchaser without backing. In any report, if the Company is willing to accept the risk, the basis on which the risk is to be assumed should be reported to the customer or to the agency or other body to which it is issued. This would be expressed in the words as follows: Judgments, liens and encumbrances shown as items x, y and z in the foregoing report will not be shown as encumbrances on the title based upon an indemnity from (or whatever source). Under certain circumstances, deliberate deletions of known defects might result in a liability over and beyond a loss under the terms of a title policy. Accordingly, all risk assumed, based upon an indemnity, must be disclosed to the purchaser or lender unless waived by the Senior Title Counsel, the Chief Title Counsel or the General Counsel of the Company.
10/84 Rev. 12/95
Chapter 26 - Page 1 LIENS & ENCUMBRANCES REAL ESTATE TITLES NYSBA PUBLICATION Title
LIENS & ENCUMBRANCES

ENCUMBRANCES The term encumbrance is generally used to encompass both liens and a wide range of other conditions which may affect the state of title to a parcel of real property. Encumbrances can be classified as follows: 1. Mortgages 2 General and Specific liens [e.g. Federal Tax Liens, Money Judgments, Mechanics Liens, etc.] 3. Easements and Encroachments 4. Covenants and Restrictions 5. Conditions and Limitations 6. Other miscellaneous Each of the foregoing are the subject of a separate chapter within this manual and the reader is encouraged to review these sections additionally. All of the above encumbrances have a common element in that they consist of a right to or an interest in land, subsisting in a person other than the fee owner which diminishes the value of the land but does not prohibit the conveyance of the fee by the owner to another. Encumbrances can also be described as a claim, lien, charge or liability attached to and binding upon a specific parcel of real property. Each category of encumbrances (except mortgages, which are covered in another chapter) will be further discussed. LIEN DEFINITION A claim, charge or security interest in real property benefiting a third party and arising out of and created as a result of a debt, obligation or duty of a person having an interest in the real property. TYPES OF LIENS Liens are either general or specific. A general lien is a lien which encumbers all of the real property owned by a person, corporation or other entity. A specific lien is a lien on an identifiable parcel of real property. Some types of general and specific liens are set forth below:
GENERAL LIENS MONEY JUDGMENTS Liens arising out of rendition of a money judgment are normally effective for ten (10) years from the date of entry of the money judgment in the court where issued and after entry in the docket of the clerk of the county where the real property is located (CPLR section 5203). If the judgment is rendered in a county other than that in which the real property is located, the judgment will be a lien on the real property only from the time it is docketed in the county where the real property is located, and in any event not longer than ten (10) years from the date of its original entry. The lien of a judgment can be extended for an additional period if it was stayed [see "BANKRUPTCY - Automatic Stay", this manual], or if an execution on the judgment is duly delivered to a sheriff during the ten year period (CPLR section 5203 (b)). If the judgment debtor has died within two (2) years before the end of the ten year period, the expiration of the lien is extended to two years from the date of death (CPLR section 5208). NB See "Money Judgments" Chapter this manual Exempt Property - Property statutorily exempt from a money judgment lien is property covered by the homestead exemption (CPLR section 5206 (a) and (b) and burial ground property (CPLR section 5206 (f)). The homestead exemption is afforded where the owner's equity in the property does not exceed $10,000 above other liens and encumbrances thereon and where the property is used as the principal residence of the judgment debtor. The exemption covers only (i) a lot of land with a dwelling thereon, (ii) shares of stock in a cooperative apartment corporation, (iii) a condominium apartment unit and (iv) a mobile home. The exemption does not apply if the judgment was recovered wholly for the purchase price of the homestead (i.e. foreclosure of a purchase money mortgage, (Weinstein, Korn & Miller, New York Civil Practice, Vol. 6 Paragraph 5206.06)). Enforcement Against BFP - The lien of a duly docketed money judgment is not affected by a subsequent transfer of the affected real property and may be enforced by the judgment creditor against a bona fide purchaser for value, except in the following circumstances (CPLR section 5203 (a)): - a transfer to a purchase money mortgagee in satisfaction of the mortgage. - a transfer to a purchaser for value at a judicial or execution sale. - the judgment was entered after the death of the judgment debtor, or the judgment runs against the State of New York, an officer, department, board or commission of the state in its official capacity or a municipal corporation. - where the judgment debtor is the personal representative of a decedent and the judgment was awarded against him in his representative capacity.
- where the property is transferred or the proceeds of its sale are paid in satisfaction of a previously docketed judgment and where notice of levy pursuant to an execution thereon was previously duly filed. Sheriff's Sale - Real property which is subject to a lien for a money judgment may be sold at a public auction after due levy and execution thereon by a sheriff. This procedure is governed by CPLR section 5236. Because an execution and public sale is a very complicated process, the procedure must be examined very carefully to ascertain that the statutory provisions have been precisely followed. If the judgment debtor or his successor is in possession of the real property, additional inquiry may be in order. NB Important provisions of CPLR section 5236 governing public sales pursuant to a sheriff's execution are as follows: - the sheriff may sell the real property only between the 56th and 63rd day after the first publication of the notice of sale. - the sheriff must serve the judgment debtor with a copy of the notice by any means permitted and prescribed by CPLR section 308. However, the notice requirements are ** subject to judicial scrutiny, as stated by the United States Supreme Court in Mullane v. Central Hanover Bank & Trust Company, 339 U.S. 306 (1950) overruling the findings of the Surrogates Court, The Supreme Court of New York, Appellate Division, and the Court of Appeals [citing 275 A.D. 769, 88 NYS 2d 907 (1949); 299 N.Y. 697, 87 N.E.2d 73 (1949]. Notice by publication in local newspapers in compliance with the minimum requirements of New York Law is insufficient. 33 years later this point was once again driven home in Mennonite Board of Missions v. Adams 462 US 751. - the sheriff must post the notice of sale in three public places within the county in which the property is located and in the county in which the property will be sold if the two places are different. - the notice of sale must be published in a newspaper in the county in which the property is located at least once in each of four (4) fourteen (14) day periods prior to the sale of the real property. - all judgment creditors whose judgments were liens against the real property and every person who had an interest of record in the real property and every person who had an interest of record in the real property on a date which is forty-five days prior to the date fixed for sale must be served by the sheriff with a copy of the notice of sale. Any judgment creditor who receives the notice of sale and who, thereafter, does not deliver an execution to the sheriff will have no further lien on the real property. - within ten (10) days after the sale the sheriff is required to execute and deliver to the purchaser a deed conveying the right, title and interest sold and proofs of publication,
service and posting of the required notices.
- proceeds of the public sale are required to be distributed by the sheriff to pay, in the following order: (1) fees, expenses and taxes resulting from the sale transfer or delivery of the real property, (2) judgment creditors who have delivered execution to the sheriff against the judgment debtor prior to the sale, in the order in which their judgments have priority and (3) an excess to the judgment debtor. Release or Termination - The lien of a money judgment may be released or terminated by any of the following procedures: - pending appeal of the judgment, and upon posting a bond sufficient to secure the judgment creditor the court may, upon motion of the judgment debtor with notice to the judgment creditor, order the lien released upon such terms as justice requires (CPLR section 5204) and the docket of the judgment noted accordingly. - the lien may be terminated by filing a satisfaction of judgment with the clerk of the court in which the judgment was entered or later filed. The satisfaction must be signed by the judgment creditor or its attorney of record. When the judgment has also been docketed with the clerk of any county, a transcript of the filed satisfaction must also be filed with that county clerk. - the passing of ten (10) years since the first entry of the judgment (CPLR section 5014 (a)), if no execution is then pending, and not otherwise extended. - an order for relief from a judgment under CPLR section 5015 (a) (2) on the basis of newly discovered evidence which, if introduced at trial, would probably produce a different result. ESTATE TAX LIENS Estate taxes are excise taxes imposed on the transfer of property and are based on the value of a decedent's estate at the time of death. (See Chapter on Decedent's Real Property.) FEDERAL ESTATE TAX LIENS (1) The lien is effective against the decedent's real property for ten (10) years from the date of death. (2) Upon a conveyance of the real property by a surviving spouse or other joint co-owner the lien of the estate tax will attach to the proceeds of the sale, and assets of the transferor, allowing the co-owner to convey the real property free of the lien.
(3)
Federal tax liens can generally be disposed of at closing by (a) obtaining and recording a release of lien from the Internal Revenue Service, (b) producing proof of payment of the tax in the form of a cancelled check, plus a closing letter or 706 form (c) by clear and convincing proof that the value of the decedent's estate was lower than the statutory taxable amount for the applicable year.
NEW YORK STATE INHERITANCE TAX (1) The lien is effective against the decedent's real property for fifteen (15) years from the date of death (Tax Law section 249-11). (2) The estate tax lien is a lien on all real property of the decedent (except real property owned and located outside of the geographical boundaries of the state) including real property transferred by the decedent within three (3) years from the date of death, except in the case of a bona fide conveyance for adequate and full consideration in money or money's worth (Tax Law Section 249-r). (3) The provision of FEDERAL ESTATE TAX LIENS a.(2) above of this outline is also applicable with respect to the attachment of the New York estate tax lien to proceeds. (4) The estate tax lien can be disposed of (a) by obtaining and recording a release of lien; (b) automatically upon the disposition of the property by a surviving spouse or other joint co-tenant to a bona fide purchaser for value (however, the lien may survive against the property in the case of a disposition of the property to a mortgagee of a surviving co-tenant); (c) proof of payment as evidenced by a final receipt from the Department of Taxation and Finance of the State of New York or(d) by clear and convincing proof that the estate of the decedent is $100,000 or less and that the decedent died after July 1, 1978. NB Upon approval of counsel the closer may accept, in lieu of the foregoing, a completed "Questionnaire on Estate Debts" and "Indemnity Bond Against Debts" together with a "Letter of Counsel to Clear Estate Tax Issues" , the forms of which are to be found in chapter 10, DECEDENTS ESTATES 3.1, Estate Taxes, Legal Bulletin. FEDERAL TAX LIENS The lien for unpaid income and other federal taxes (including interest, costs and penalties) is effective upon all property and rights to property, whether real or personal, belonging to the person who neglected or refused to pay such tax (Title 26, section 6321 U.S.C.A.).
a.
Notice of Lien Previously, a notice of the federal tax lien filed in the county clerk's office is effective against a purchaser, mortgagee, etc. for six (6) years and thirty (30) days from the date of its assessment. Effective November 6, 1990, 6502 of the IRC was amended to extend the statute of limitations for federal liens from six (6) years to ten (10) years. The lien may be renewed indefinitely for additional ten (10) year periods if renewed during the required refiling period (the one year period ending thirty (30) days after such ten (10) year period) (Title 26 U.S.C.A. sec. 6323 (g) (3)). It should be filed in the county clerk's office in the county where the real property is located.
b.
Right of Redemption The United States of America is afforded a period of one hundred and twenty (120) days where the United States holds a federal tax lien to redeem from the foreclosure of a prior (mortgage) lien. This redemption period is effective only from the date of the sale under the foreclosure of the prior (mortgage) lien (not the date of delivery of the deed after foreclosure sale). It is not always clear whether the amount to be paid by the United States is the amount bid at the foreclosure sale, the amount of the judgment of foreclosure or the fair market value of the property (28 U.S.C.A., 2410 bd, Mikulec v. UST, 533 F.Supp 1142). The foreclosure sale of the prior lien must be a "judicial" sale. A judicial sale is one which is made pursuant to a court order or judicial proceedings.
c.
Disposition of federal tax liens Federal tax liens may be disposed of by release, discharge or certificate of non-attachment, certificates of release, discharge or nonattachment may be obtained upon compliance with the requirements of Title 26, section 6325 U.S.C.A., and should be filed in the same office where the notice of lien is filed. The above mentioned certificates have the effect set forth in sections (f) (1) U.S.C.A.
FEDERAL LIENS A federal lien (not a tax lien) has priority over every other lien according to the rule of "first in time, first in right," which means if the Untied States has a lien which is prior to the other lien the United States has a priority (United States v. Kimbell Foods Inc., 440 U.S. 715, 99 S.Ct. 1448; United States v. Pioneer American Ins. Co., 374 U.S. 47, 71 S.Ct. 1113; Long Beach Housing Authority v. Lew Chew Soon Corp., et al 446 N.Y.S.2d 400). The United States has one (1) year to redeem from the date of sale of the prior lien (28 U.S. Code Subdivision C). NB For provisions of the Federal Debt Collections Procedures Act see chapter 18A "FEDERAL LIENS" page 4.
NEW YORK STATE FRANCHISE TAX AND NEW YORK CITY BUSINESS CORPORATION TAX a. The New York State Franchise tax is a lien on all real property situated in the State of New York owned by a corporation incorporated in or doing business in the State of New York and attaches on the date the corporation's franchise tax return is required to be filed. A corporation's New York State franchise tax must be filed two and one-half (2 1/2) months after either the commencement of (1) a calendar year or (2) a corporation's fiscal year (Tax Law section 209). The franchise tax lien lapses ten (10) years after the return is required to be filed only as to real estate transferred to persons who would be holders thereof in good faith but for such taxes (Tax Law section 1092j(3)). The franchise tax lien is also applicable to Real Estate Investment Trusts or other trusts if the trust sells shares of stock which are negotiable (Tax Law section 209 (5)). The lien of the franchise tax on specific property may be disposed of by payment or obtaining a release of lien from the state tax commission. The release of lien form may be recorded against the real property so released (Tax Law section 1092j(2)). The New York City Business Corporation tax statute is substantially similar to the New York State franchise tax statute (New York City Administrative Code, Chapter 46, Title R). The tax is a lien on all real property located within the City of New York which is owned by a corporation doing business in New York State. See also chapter 8 Corporations 4&5 - Taxes. SPECIFIC LIENS MECHANIC'S LIEN Note: Cross Reference this section with Chapter 28. "MECHANICS LIENS", this manual. a. Definition - A statutory lien on real property, including the improvements on the real property in favor of contractors, materialmen and other classes of workmen in order to secure payment for the work done or material provided in the event of nonpayment by the owner or person on whose behalf the work or material was performed or provided. A recent change also provides mechanic's lien for Real Estate Brokers for leasing commissions in obtaining a lease for a term of more than three years for any part of non-residential real property pursuant to a written brokerage, employment or compensation contract (Chapter 925 Laws of 1982, amending section 2 Subdivision 4 and section 10 of the Lien Law). The lien of the Real Estate Broker can only be filed after the performance of the brokerage services and the signing of a
b.
c.
lease by both the landlord and tenant.
The brokerage employment or compensation agreement must be attached to the Notice of Lien when the Notice of Lien is filed. b. A contract vendor's or landlord's estate in real property will not be subject to a mechanic's lien claimed by persons performing work or furnishing material to real property unless there is consent to the performance of the work or provision of the material. See 37 N.Y. Jur., Mechanic's Liens sub-section 42, 46. A sub-contractor's lien is valid only to the extent his contractor is not paid. If the contractor has been paid in full the sub-contractor must look solely to the contractor for payment (Trusts v. Weintraub, 52 A.D.2d 600). Labor and materials for which a mechanic's lien may be claimed must be of a permanent nature and result in a lasting or continuing benefit to the real property. Tools, supplies or items normally associated with overhead and maintenance are generally not lienable. Items not actually furnished or delivered to the real property, but specifically manufactured for the project, are generally lienable. A duly licensed real estate broker who asserts that they (he or she) have produced a person who was ready, able and willing to purchase or lease all or any part of a parcel of real property and by virtue of this, feels that they are entitled to a real estate commission pursuant to a written or oral contract between the broker and owner of such property may file an affidavit of entitlement to commission for completed brokerage services in the office of the recording officer of any county in which the real property is located (section 249-b Real Property Law). Subsections 2 and 3 of section 294-b states that the filing of an affidavit shall not be deemed to create a lien nor shall it invalidate any transfer or lease on said property. However, the statute does state that the affidavit of entitlement to commission will be discharged one year after filing. It is not clear whether the affidavit of entitlement to commission will be treated as an encumbrance on title. d. A notice of mechanic's lien may be filed during the progress of work and furnishing of materials and must be filed no later than eight months after completion of the contract or other obligation of the lienor. If the notice of lien is not filed within that period, the lienor loses its right to create the mechanic's lien (Stevens v. Ogden 130 N.Y. 182, 29 N.E. 229 (1891)). The filing of the lien is effective only with respect to materials and work provided to the date of the notice of lien. The notice of lien must be filed in the clerk's office in the county in which the property is located.
c.
Note: The eight month period was extended from four months except for a "single family residence." This became law effective September 1, 1982. (See Chapter 477 Law of 1982). Chapter 925 Laws of 1982 when adding the Real Estate Brokers lien utilized a four month period. The Law is now in a confused state. e. The notice of mechanic's lien must be verified by the lienor or its agent and must include the following information: (1) (2) (3) (4) name and residence of lienor, and if the lienor is a partnership or corporation, its name and business address. name and address of lienor's attorney. name of owner of real property against whose interest lien is claimed. name and address of person or contractor by whom lienor was employed or to whom he furnished the work and materials or, if a contractor or subcontractor, the person with whom the contract was made. the materials ordered and labor furnished and the agreed value of the same, or the materials actually manufactured for, but not delivered to, the real property and the agreed value thereof. amount unpaid to lienor for materials or services. the date the first and last items were furnished or services performed. description of the property subject to the lien.
(5)
(6) (7) (8) f.
A mechanic's lien may be disposed of by the following methods (See, generally, Lien Law Section 19): (1) (2) filing a satisfaction or partial release of lien, signed by the lienor after payment is made. failure of lienor to commence action to foreclose the mechanic's lien within one (1) year from filing of the notice of lien, unless the lien is extended by an order of a court (Lien Law section 17), or unless an action is begun to foreclose a mortgage or another mechanic's lien on the same property and the mechanic's lienor is made a party, (Lien Law section 19(2)), in which case the lien will be extended during such time as the notice of pendency in such action is effective.
(3) (4) (5)
by order of the court, upon lienor's neglect to prosecute the lien (Lien Law section 59). by bonding the lien (Lien Law section 19(4)). by obtaining and filing a transcript of judgment in favor of the property owner showing a final determination of the action in favor of the property owner against whom the lien was claimed. upon motion of the owner of the real property showing that the lien is defective on its face. by payment into court of the amount of the claimed lien and interest thereon to the date of deposit, or if the action to foreclose the lien has been commenced, in an amount fixed by the court (Lien Law section 20). after an action to foreclose the lien is commenced by offering to deposit money or security with the court in place of the property subject to the lien, and such offer is accepted by the lienor (Lien Law section 55).
(6) (7)
(8)
g.
Important points regarding the foreclosure of mechanic's liens are: (1) An action to foreclose the lien must be commenced during the period of effectiveness (normally one (1) year) of the filing of the Notice of Lien. A notice of pendency specifying the nature of the action must also be filed within the same time period. However, it is not necessary to file a notice of pendency if the lien is discharged by an undertaking, deposit or an order of the court (White Plains Sash & Poor Co., v. Doyle, 262 N.Y. 16, 20). Necessary parties defendant in an action to foreclose a mechanic's lien are: all mechanic's lienors who filed notices of lien prior to commencement of the action, all subsequent lienors, whether mortgagee, judgment creditors or subsequent mechanic's lienors, and the owner or lessee of the real property whose interest is being foreclosed.
(2) (a) (b) (c)
In the case of the discharge of the lien by means of an undertaking on court order both the surety and its principal and all parties who have filed notices of lien after the filing of the undertaking must be joined in the action. If the lien to be foreclosed is a subcontractor's lien, the general contractor must be joined. h. Sections 13(3) and (5) of the Lien Law provide that, if a statutorily prescribed covenant is included in a deed or mortgage to the effect that the grantor or mortgagor will receive and hold the proceeds and advances as a trust fund to be applied first to the payment of the cost of the improvement then the deed or mortgage will be superior to any notice of mechanic's lien filed within four (4) months of the conveyance or mortgage for work done or material furnished prior to the date of the deed or mortgage.
NEW YORK CITY LIENS The City of New York has created several statutory liens in its favor against real property owned by persons subject to enforcement action pursuant to various sections of the New York City Administrative Code. As indicated below, some of these liens are "super" liens, having priority over all other private liens even if such liens are prior in time by reason of their becoming tax liens. EMERGENCY REPAIR LIEN (1) The Department of Health may file a "super" lien upon real property for expenses incurred in curing various emergency situations such as failure to provide heat, etc. The procedure for the filing of the notice of lien and foreclosing of this lien are similar to the procedure set out, infra, with respect to mechanic's liens (Chapter 22, Title A section 564-24.0, Administrative Code). The emergency repair lien is effective for four (4) years from the date of filing. The emergency repair lien can be disregarded after four (4) years if no action is pending for its enforcement. The Department of Rent and Housing Maintenance has the authority to file a lien for emergency repairs performed on multiple dwellings in order to correct any violation of the building code resulting in a dangerous or unlawful condition within its own Department. The Department files a record of the work performed by it on a building by building basis within thirty (30) days from the issuance of a work or purchase order, thus creating a "secret lien" during that period. Upon the Department fixing a definite statement of account, the Department causes the lien to be transferred to the records of the City Collector where it is noted and becomes a tax lien, which will then appear on the tax records (Chapter 26, section D26-57.03, Administrative Code).
(2)
RELOCATION LIEN The Department of Relocation may file a lien for expenses incurred in relocating tenants. The enforcement of the relocation lien is governed by the provisions of law regulating mechanic's liens. The lien is valid for three (3) years unless it is continued by order of a court for additional three year periods or enforced or discharged. Any judgment based upon the lien has a priority as of the original date of the lien (Chapter 53 Title A section 11605.0., Administrative Code). PEST CONTROL LIEN This lien is filed in a separate Pest Control Docket in the various County Clerks' offices. The lien is good for four (4) years from the date of filing. The lien can only be cancelled by a satisfaction of lien (section 564-240 et seq. Administrative Code). HOUSING VIOLATIONS AND CIVIL PENALTY LIEN The Housing and Development Administration is given the right to recover civil penalties for certain hazardous and non-hazardous violations and housing standards. The amount of the civil penalties recoverable by the Department of Housing are set forth in Chapter 25 section D26-51.01 of the Administrative Code. The transcript of judgment for civil penalties rendered in the Housing Court Part of the New York City Civil Court is filed in the manner prescribed for the filing of other civil judgments and constitutes a lien valid for ten (10) years from the date of its creation in the same manner as liens for money judgments (Chapter 26 section D26-51.03, Administrative Code). CANOPY LIEN The Department of Highways has the right to file with the City Collector a notice specifying the cost of removal of unauthorized or improperly maintained canopies, which notice constitutes a lien against the premises (section 692f-6.0 Administrative Code of the City of New York). This lien may be foreclosed in the same manner as liens for real estate taxes. PARKING VIOLATIONS Judgments for non-payment of penalties for parking violations are docketed in the various County Clerk's offices in a separate index and remain liens until paid. The judgments so rendered are enforceable in the same manner as are money judgments in civil actions (Chapter 40, section 883a-1.0e of the Administrative Code). The lien is a general lien.
LEAKING TAP LIEN A lien is created in favor of the City of New York for closing certain water taps and is administered by the Department of Environmental Protection. After authorizing work, it can be entered and be a secret lien, similar to emergency repair liens, for thirty (30) days. It then becomes a "super lien" as a tax lien when filed with the real estate tax records. VAULT TAX LIEN A lien for the period June 1 to May 31 of each year based on a return required to be filed by June 15. One and two family houses are exempt from vault taxes. The lien is effective until the vault tax is paid (section 241-1.0, Administrative Code). BUILDING INSPECTION FEES LIEN A "super lien" on the real property upon which the inspection is performed and is administered by the Department of Buildings (section 6430-14.0 Administrative Code). SIDEWALK REPAIR LIEN Administered by the Department of Transportation, and is a lien arising from repairing or installation of sidewalks, fencing vacant lots, raising sunken lots or cutting down raised lots (section 230 New York City Chapter). These liens are filed in the office of the City Collector. ENVIRONMENTAL CONTROL BOARD LIENS Liens can be enforced by the Environmental Control Board for air and water pollution, street cleanliness, harbor maintenance, keeping vacant lots clean and render judgment with regard to same. The judgments will be docketed pursuant to Article 52 of the Civil Practice Law and Rules and are enforceable as money judgments (section 1404 et seq. of New York City Charter). VENDEE'S LIENS a. A contract vendee in a real estate transaction, upon the default of the vendor, has an equitable lien on the real property for the amount of the downpayment or such amount that the contract vendor owes the contract vendee pursuant to the contract. (Feldbaum v. Laurelton Land Co., 151 A.D. 24, 135 N.Y.S. 349 (1912), aff'd, 210 N.Y. 294 (1914). However, unless the contract so provides, attorney's fees and the cost of title insurance are not included in a vendee's lien (Maurice Apartments Inc., v. Kriss, 15 Misc.
2d 638, N.Y.S.2d 408 (1958)).
b.
A vendee's lien may be enforced by foreclosure proceedings and the plaintiff may file a notice of pendency as provided in CPLR section 6501 (Interboro Operating Corp., v. Commonwealth S & M Corp., 243 A.D. 625, 198 N.E. 655, 269 N.Y. 56 (1935)). A vendee's lien under an unrecorded contract may be subordinate to the lien of a subsequently recorded mortgage made by the seller, unless the mortgagee had notice, either actual or constructive, of the rights of the contract vendee (Cassia Corp., v. North Hills Holding Corp., 278 A.D. 960, 105 N.Y.S.2d 631 (2nd Dept. 1951), aff'd 305 N.Y. 837). The priority of an unrecorded contract vendee vis-a-vis a later filed mechanic's lienor, or against the United States as holder of a federal lien, with or without knowledge of the existence of the Contract of Sale are not clear in New York. For mechanic's liens see section 13 of the Lien Law for what appears to be the status of mechanic's liens. The normal priority of federal liens is determined under federal law based upon "first in time, first in right."
c.
d.
VENDOR'S LIENS a. A vendor's lien runs in favor of the seller of real property for the unpaid portion of the purchase price of real property due to the seller by the purchaser. Vendor's liens usually arise at closing as a result of the dishonor of a purchaser's check delivered, or the delivery of an unsecured note. Enforcement would either be by suit for the amount due or to file a Notice of Pendency and foreclose the vendor's lien.
b.
REAL PROPERTY TAX LIENS ARE TREATED IN CHAPTER 38 BOOK UNDER TAXES. GAINS TAX By virtue of Chapters 15 and 16 of the laws of 1983 (Article 31-B Tax Law) a tax on Gains derived from certain real property transfers was imposed on all transactions involving property interests valued at one million dollars or more. The statute was amended by Chapter 900 of the Laws of 1984. The tax is ten (10%) percent of the "gain" as computed under the provisions of the law. The tax affects fee transfers of real property, exchanges, assignments, surrenders, mortgage foreclosures, transfers in lieu of foreclosure, trusts, condemnation, liquidation, options created or transferred with use and occupancy of the real property. Creation of a leasehold or subleasehold is also subject to tax where the sum total of the term of the lease including options for renewal exceeds forty-nine years, or
where substantial capital improvements are or may be made by or for the benefit of the lessee or sublessee and the lease or sublease is for substantially all of the premises. Sales by sponsors of condominiums and cooperative units and apartments are covered by the tax but sales in a subdivision of homes are not covered. A purchase of a "controlling interest" in real property is also covered by the tax. A "controlling interest" is defined in the case of a corporation as either fifty (50%) percent or more of the total combined voting power of all classes of stock of such corporation or fifty percent or more of the capital, profits or beneficial interest in such voting stock of such corporation. Where there is a partnership, association, trust or other entity, "controlling interest" is defined as fifty percent or more of the capital, profits or beneficial interest in the entity. The 1984 amendment has added Options or Contracts to purchase or use Real Property. The tax also covers a transfer of development rights. The tax does not cover a "transfer of real property" (the term transfer is defined in the statutes) occurring after the effective date of the law where the written contract was entered into on or before March 28, 1983, provided the execution date is confirmed by independent means such as recording the contract of sale, payment of a deposit or such facts and circumstances that would satisfy the tax commission of the State of New York. A written agreement to purchase shares in a cooperative corporation is deemed written contract for the transfer of real property for the purpose of the "grandfather clause." Affects Upon Recording -The State Tax Commission has prepared forms for the purposes of both computation of and exemption from the tax. The recording officer(s) in the various counties may not record any instrument of "conveyance" as defined in the real property law unless accompanied by either a statement of tentative assessment of the amount due or a statement that no amount is due or an affidavit in a form approved by the Department of Taxation and Finance for certain exempt transactions. The original purchase price of the property (OPP) from which the text is based has been defined as the consideration paid by the transferor to purchase the property and "capital improvements" made to the property; the latter under rules and regulations to be determined by the New York State Tax Commission. Some items includable have been built into the statute. Exemptions have been granted under the statute for transactions where the consideration is less than one million dollars, where the transferor is the State of New York, its agencies, instrumentalities, political subdivisions, public corporation, etc., United Nations or any international organization and the United States of America, its subdivisions, where the sales are not transferring beneficial interest and transfers by corporations in which control is not transferred. The tax does not appear to be a lien on real property but the transferee may be responsible for payment of the tax under certain conditions under the statute.
A three (3) year statue of limitations is in effect for any additional sums that may be due under the statute for co-ops and condominiums. The three (3) year statute runs from the date of the last transfers made pursuant to the Offering Plan. NEW YORK STATE DEED TRANSFER TAX Effective May 1, 1983 for all transfers of real property made on or after May 1, 1983, except if made pursuant to contracts entered into on or after May 1, 1983, a tax is imposed of two dollars ($2.00) for each five hundred dollars or any fraction thereof of gross consideration. A deduction from gross consideration for mortgages or other liens or encumbrances is given only where the transfer is (i) pursuant to a contract of sale entered into prior to May 1, 1983, or (ii) the consideration is less then five hundred thousand ($500,000) dollars or (iii) is a conveyance of a one (1), two (2) or three (3) family house, including individual residential condominium unit(s). The tax for transfers made prior to May 1, 1983 or pursuant to contracts entered into prior to May 1, 1983 is fifty-five cents (.55) per five hundred dollars amount and excludes the amount of any lien or encumbrance which existed prior to the delivery of the deed and which survives the delivery of the deed. Exemptions - exist for deeds from the State of New York, or any of its agencies, instrumentalities, political subdivisions or public corporations, the United Nations, the United States of America, its agencies or instrumentalities. However, the grantee in a conveyance from any of the above is liable for the tax. Deeds made to the United State of America, the United Nations, the State of New York or any of their agencies or instrumentalities or subdivisions are exempt. Other transactions exempted from the tax are deeds which secure a debt or obligation (although they may be subject to mortgage tax) or which correct, confirm, modify or supplement a previous deed, or made without consideration as a bonafide gift, for a tax sale, pursuant to mergers, dissolutions or consolidations of corporations or are transfers to or by subsidiary corporations and parent corporations for no consideration, or for partition or pursuant to a federal bankruptcy reorganization plan. The tax is paid to the recorder in each county in the state. The recorder has been designated the agent of the State of New York for collection of the tax. Willful failure of payment can result in a misdemeanor (Article 31 Tax Law of the State of New York sections 1400 thru 1410). The tax is not a lien on the real property. However, if the seller does not pay the tax, the buyer will be responsible and enforcement could be made against the
property of the buyer.
It appears that where the buyer has contracted to pay the tax, additional amount may be due. This could apply as to property within and without of the City of New York (for formula used for computation of the tax where the buyer voluntary pays, please note formula set forth under New York City Real Property Transfer Tax). NEW YORK CITY REAL PROPERTY TAX The current rates for real property transfers in New York City are as follows: a. b. c. Where the gross consideration is twenty-five ($25,000) thousand dollars or less there is no tax. There is no tax where the conveyance was made prior to May 1, 1959 or pursuant to a contract of sale validly executed before that date. Where the conveyance was made before July 1, 1971 or a valid contract was executed before July 1, 1971 the rate is one-half (1/2%) percent of the "net consideration" (deducting mortgages, liens and encumbrances which existed before the conveyance and which survive the conveyance).
NEW YORK CITY DEPARTMENT OF HOUSING PRESERVATION & DEVELOPMENT The New York City Maintenance Code requires owners of multiple family dwellings to register their properties with the Department of Housing Preservation and Development. The registration requirement is satisfied by completing OHP Form 515 (Rev. 11/95). The form is entitled "Preliminary Residential Housing Transfer Form". A copy of this form may be found in Underwriting Department File U-362. After completing and signing the form it is to be submitted to the Office of the City Register when the deed is recorded. The Registers Office may decline to record a deed if it is not accompanied by a correctly completed transfer form. The closer should undertake to obtain the form at closing and verify it has been properly filled out. The form is not a lien upon title but rather is an encumbrance. Even if the deed is recorded without presentation of the form, failure to complete the form and register the property in the name of the new owner is a violation of the law and may subject owners to either fines or criminal penalties. Failure to register may also prevent the Owner or Managing Agent from bringing certain actions before the New York City Housing Court, including recovery of possession of the premises for non-payment of rent.
Chapter 26 - Page 17.1 LIENS & ENCUMBRANCES REAL ESTATE TITLES NYSBA PUBLICATION Title
ATTACHMENT a. An order of attachment is filed in the same manner as a notice of pendency and constitutes an encumbrance on real property with the same effect as a notice of pendency (CPLR section 6216). An order of attachment may be obtained in any action except a matrimonial action and in a case where the plaintiff has demanded and would be entitled to a money judgment against the defendant, and the defendant meets any of the following conditions: (1) the defendant is a foreign corporation not qualified to do business in New York or a resident or domiciliary of the State of New York. the defendant resides or is domiciled in New York and cannot be personally served despite diligent efforts to do so. the defendant, with intent to defraud his creditors, has assigned, disposed of, secreted or encumbered property or removed it from New York or is about to do so.
(2)
(3)
(4)
the cause of action is based on a judgment decree or order of a court of the United States or any other court which is entitled to full faith and credit in New York, or is a judgment which qualifies for recognition under the provisions of Article 53 of the CPLR.
b.
An order of attachment may be obtained without notice. Within five days of the granting of such an order the plaintiff may upon such notice as the court may direct, move for an order confirming the prior order of attachment. At that time the order of confirmation is sought the plaintiff must establish (1) the proper grounds for the attachment, (2) that it is probable that he will prevail on the merits of the claim and (3) that the amount demanded from the defendant exceeds all counterclaims known to the plaintiff. Upon the granting of an order of confirmation the court will require the plaintiff to give an appropriate undertaking (CPLR section 6211). Attachments against real property - An attachment against real property is filed by the sheriff in the office of the county clerk in the county where the real property is located. A notice of attachment must state the name and address of plaintiff's attorney, the names of the parties to the action, the amount of the plaintiff's claim and a description of the property levied upon. The county clerk shall record and index the notice of attachment in the same manner as in a notice of pendency (CPLR section 6116). Termination of Attachment: (1) Discharge - upon the filing by the defendant of an undertaking equal to the value of the sum of sheriff's fees and expenses, including poundage, the property attached or, if lesser, the debt sought to be discharged (CPLR section 6222). (2) Vacating - by motion or notice of plaintiff and the sheriff by any person having an interest in the property showing that the attachment is unnecessary or the proceedings are defective. An attachment may be vacated if the plaintiff does not seek an order confirming the attachment within the five day period.
c.
d.
e.
Annulment of attachment may be granted upon the action upon which the attachment was based abating or being discontinued, or in the event a judgment is entered in favor of the defendant, or in the event the judgment in favor of the plaintiff is fully satisfied (CPLR section 6224).
RESTRICTIVE COVENANTS Note: Cross reference this section with Chapter 34, RESTRICTIVE COVENANTS A. Definition A restrictive covenant is a contractual restriction on the use or enjoyment of real property. The restrictive covenant may be real or personal, and may impose affirmative or negative obligations. It is an encumbrance justifying rejection of title (Golden Development Corp., v. Weyant, 269 A.D. 1039, aff'd, 295 N.Y. 845; Isaacs v. Schmick, 245 N.Y. 77; O'Hara v. Bronx Consumers Ice Co., 25 N.Y. 210). 1. Real Covenants and Personal Covenants Covenants which are personal bind only the covenantor and persons who take the burdened land with notice of the restriction. Real covenants run with the land and bind all future owners of the land. A real covenant will be deemed to exist only if the following conditions are fulfilled: a. b. c. d. the covenant is in writing the parties must have intended that the covenant run with the land the covenant must touch and concern the land; and the covenantor and covenantee are in privity of estate.
The requirement that the covenant touch and concern the land means, in general, that the covenant must make the benefitted land more useful or valuable to the benefitted party and must impose a burden on the use or ownership interest in the land of the burdened party. For an analysis of particular covenants as real or personal see 13 N.Y. Jur., Covenants and Restrictions section 14, et seq., see also Neponsit Property Owner's Association v. Emigrant Industrial Savings Bank, 278 N.Y. 248; 15 N.E.2d 793 (1938) (mot. for reh'd denied), 278 N.Y. 704, 16 N.E.2d 852 (1938). B. Affirmative and Negative Covenants The general rule, subject to the exceptions noted below, is that covenants which impose an affirmative obligation on the covenantor will not run with the land (Guaranty Trust Company of New York v. New York and Queens County Railway Company, 253 N.Y. 190, 170 N.E. 887; Miller v. Clary, 210 N.Y. 127, 103 N.E. 1114). Those covenants can usually be disregarded when the covenantor is out of title, except where the covenant imposes the following affirmative obligations: 1. to build fences along boundary lines, (Moxley v. New Jersey &
N.Y.R. Co., 143 N.Y. 649, 37 N.E. 824),
2. 3. 4. 5. 6.
to maintain party walls, (Mott v. Oppenheimer, 135 N.Y.312, 31 N.E. 1097), to provide railroad crossings, (Post v. West Shore R. Co., 123 N.Y. 580), to maintain and repair buildings and dams, (NYE v Hoyle, 120 N.Y. 195), to repair canal walls, (Morehouse v. Woodriff, 218 N.Y. 494, 113 N.E. 512), to repair and maintain rights of way and sewers, (Greenfarb v. R.S.K. Realty Corp., 256 N.Y. 130).
Both affirmative and negative real covenants are encumbrances on title and affect the marketability of the burdened property. See 13 N.Y. Jur., Covenants and Restrictions, section 61. C. Creation of Negative Covenants Covenants may be created by provisions in deeds, by recorded declarations, recitals on filed maps, by leases or other instruments conveying an estate in land and by contractual agreement among landowners. Since negative covenants are more likely to run with the land than affirmative covenants, the balance of this discussion will be concerned with negative covenants. (Warren's Weed vol. 4A) Neponsit Association v. Emigrant Bank, 278 N.Y. 248) D. Classes of Negative Covenants There are three classes of enforceable negative covenants. Generally, but with some exceptions, a purported covenant not within any of these classes will not be enforced (Korn v. Campbell, 192 N.Y. 490). 1. The first class are covenants created pursuant to a general scheme for improvement or development of real property. This class of covenant frequently involves an owner who subdivides a large plot or tract of land. In some cases the subdivider records a declaration of restrictions. In other cases the deeds conveying the separate lots usually each contain uniform covenants restricting the grantee's use of the property. Irrespective of priority of conveyances, each of the grantees has the right to enforce the uniform covenant against each of the other grantees who took or will take subject thereto. Subsequent purchasers of each plot become subject to the covenant, whether or not recited in the subsequent deed of conveyance (Booth v. Knipe, 225 N.Y. 390; 1 & 3 South William St. Bldg. Corp v. Gardens Corp., 232 A.D. 58, aff'd 261 N.Y. 575).
2.
The second class of covenants are covenants created to benefit the grantor's remaining land. The covenant is usually created by deed and may be enforced solely by the grantor or its successors, as owner of the remaining lands of the imposer but not by the grantee of the burdened lands against any other grantee subject to similar covenants. So if there is a subdivision of the burdened land no owner of the subdivided burdened land can enforce the covenants against another owner of the burdened land (Korn v. Campbell, 192 N.Y. 490; Voseler v. Alwyn Improvement Corp., 247 N.Y. 131). The third class of covenants are covenants for the mutual benefit of adjoining landowners made by the landowners for their mutual protection. This class of covenant burdens and benefits both parties and may be enforced by each party, its successors and assigns as against the other.
3.
For further discussion as to the parties entitled to enforcement of each class of negative covenants, see Warren's Weed New York Law of Real Property, "Restrictive Covenants" section 19. E. Types of Restrictive Covenants - Generally Imposed 1. 2. 3. 4. 5. 6. Stables and garages - (Sanders v. Fenimore Realty Corp., 261 A.D. 842). Dwelling Houses and Apartment Houses - (Reformed Church v. Madison Avenue Building Co., 214 N.Y. 268). Professions - e.g., lawyers dentists, doctors (Stewart v. Barber, 182 Misc. 91); Yeshiva of Far Rockaway v. Ginsberg. (36 N.Y.2d 706 1975). Private Dwellings - one family (Levy v. Schreyer, 177 N.Y. 293). Offensive trades - (Rowland v. Miller, 139 N.Y. 93; Jones v. Chapel Hill, 273 A.D. 510; Biggs v. Sea Gate Association, 211 N.Y. 482 (Garages); Goldstein v. Rosenberg, 191 A.D. 492, aff'd 232 N.Y. 535. Setbacks - (Clark v. New York Life Insurance & Trust Co., 64 N.Y. 33; Schermerhorn v. Bedell, 163 A.D. 445 Aff'd 221 N.Y. 536 (porches); Olcott v. Knapp, 96 A.D. 281, aff'd, 185 N.Y. 584 (fire escapes).
F.
Termination of Restrictive Covenants Covenants which run with the land are encumbrances and affect marketability of title. Occasionally, it becomes desirable or even essential that they be terminated or modified.
1.
Covenants imposing prohibited racial or other discriminatory restrictions will not be enforced (Shelly v. Kramer, 334 U.S. 1 (1948)). Such covenants are not repealed, but abstractors and title insurers will not repeat or show such covenants (Kemp v. Rubin, 298 N.Y. 590; Barrows v. Jacks, 346 U.S. 249). To do so may violate federal law. Where the purpose of the restrictive covenant cannot be carried out due to a change in the character or circumstances in a neighborhood, equity will not enforce the restrictive covenant so as to result in an inequitable application to the burdened landowner. However, the change in a neighborhood's character must be radical, extensive and permanent (Trustees of Columbia College v. Thatcher, 87 N.Y. 311 (1882)). Covenants may expire upon the passing of a time period specifically set forth therein. A reader of the covenant must determine whether the time period applies to the entire covenant or only as to one or more parts thereof. A covenant contained in a deed or lease is presumed to continue for the entire duration of the estate. Therefore, upon the extinguishing or expiration of the estate, the covenant will lapse (Olcott v. Knapp & Co., 96 A.D. 291 (1904), aff'd, 185 N.Y. 584 (1906)). Merger of estates. A restrictive covenant is coextensive with the estate to which it is annexed. The covenant is extinguished when the benefit and burden thereof become vested in the same estate. Care must be taken that the rights of mortgagees have terminated in respect of the merged estates since, upon a foreclosure after a merger of estates the mortgagee will have enforcement rights under the covenant (Morrill Realty Corp., v. Rayon Holding Corp., 254 N.Y. 268 (1930)). Release of enforcement rights by agreement of all owners, mortgagees or other interested parties (including lienors) having rights in the servient estate (Cook v. Murlin, 195 N.Y.S. 793, aff'd 236 NY 611 (1923)). Covenants may be extinguished by condemnation and, where appropriate, by payment of compensation to the party in whose favor the covenant ran.
2.
3.
4.
5.
6.
G.
Enforcement - Statutory Provisions Applicable to the Enforcement of Covenants Where a covenant or restriction is determined to be of no actual and substantial benefit to the person having enforcement rights because of the purpose of the restriction having been accomplished or because of changed conditions, such covenant or restriction may be extinguished by an action under RPAPL 1951 (1). An action to enforce a covenant which relates to structures that may be erected, set-backs, sidelines, areas that may be built upon, location, independent character or number of structures, height, or general purpose for which designed, etc. must be brought before the expiration of two years from the completion of the offending alteration or construction of the structure (RPAPL Art. 20). Note: Refer to Law Bulletin this Chapter.
EASEMENTS Note: Cross Reference with Chapter 14 & Refer to cases cited in Law Bulletin this Chapter A. Definition A limited right or privilege of enjoyment in a parcel of realty (the servient parcel) for the benefit of another parcel of realty (the dominant parcel). Easements appurtenant may be conveyed (together with the estate to which they are annexed) either by specific reference thereto or by including an appurtenance clause in the instrument of conveyance. Easements appurtenant constitute encumbrances on title of the servient estate, the existence of which may render title of the servient estate unmarketable, but in themselves do not constitute estates in land. In contrast, an easement in gross is a personal interest in realty and may not be transferred by the person for whose benefit such an easement was created. However, an exception to this rule does exist with respect to outdoor advertising affixed to a servient estate. Also, in contrast to easements appurtenant, a license is a personal, revocable and non-assignable privilege, created by a writing or by parole, to enter upon land for a specific purpose, but not creating a possessory interest on the part of the licensee in the land (The Greenwood Lake and PJR Co., v. N.Y. and GLR Co., 134 N.Y. 435 (1892)). For this reason, true licenses are not encumbrances on title.
B.
Easements appurtenant - [cross reference with chapter 14, EASEMENTS, page 1] may be created by the following methods: 1. GRANT OR DECLARATION - an easement created by grant or declaration must be in writing and, to be effective against subsequent owners of the servient property, must be recorded. RESERVATION OR EXCEPTION - an easement may be reserved from the estate granted by the creator of the easement where the grantor retains an interest in other property. An easement created in this manner must be carefully distinguished from an exception of a fee estate by the grantor in a specified part of the property. PRESCRIPTION - a prescriptive easement is created by use which is continuous for the prescriptive period. The prescriptive period in New York is currently ten (10) years if the use began on or after September 1, 1963. A title insurance company will generally not insure easements acquired by prescription in the absence of a judicial determination of the existence of such easement. However, a title insurance company will accept the effects of an easement acquired by prescription as to the estate burdened thereby. ESTOPPEL - an appurtenant easement by estoppel may be created if the owner of the "burdened" estate represents that an easement exists in favor of the "dominant" estate and if the owner of the "dominant" estate relies to his detriment on such representation (Olin v. Kingsbury, 181 A.D. 348, 168 N.Y.S. 766 (1918)). NECESSITY - an easement by necessity may arise in the context of a right of way to and from landlocked property where the grantor of the landlocked property retains access to a public road. The grantee will have an implied easement by necessity for ingress and egress over the grantor's property to the public road. The location of the easement by necessity may be fixed by a court. Easements by necessity are terminated where there is no longer a need for them, as when the dominant estate acquires independent access to a public road (Wells v. Garbutt, 132 N.Y. 430 (1892)). An easement by necessity will generally not be insured by a title insurer, but will be an exception or encumbrance on the burdened property and thereby affect its marketability.
2.
3.
4.
5.
6.
IMPLICATION - an easement by implied grant or reservation will be deemed to exist where (i) the easement is necessary to the proper or natural enjoyment or use of an estate, (ii) the parties show no contrary intention in the instrument of conveyance and (iii) the following factors are present: a. b. there formerly must have been unitary ownership of the dominant and servient estates; when in unitary ownership, a portion of the land must have been subordinated to the remaining portion, or a reciprocal subordination must have been evident; such subordinate use must have been plainly and physically apparent upon visible inspection or shown on a map made by the unitary owner, and the use must have a positive value to the benefited estate. A typical easement by implication is one of the access in favor of various lot owners in a common development over private streets to reach the nearest public outlet. A title insurance company will generally insure rights of access arising out of implied easements based upon a filed map.
c.
d.
C.
Special Classes of Easements 1. BEAM RIGHTS - An easement which entitles the owner of one property to have beams of the building on his property supported by a wall of a building on adjoining property. Beam rights are usually created by agreement or arise by implication upon the conveyance of one building by a common owner. Title to building without an easement for beam rights, where required, is unmarketable, and likewise, the existence of an easement for beam rights under the servient estate unmarketable. PARTY WALLS - An easement for the use of a party wall is usually created by agreement but may arise by implication or prescription. A party wall located on the boundary line of property will not be deemed an encumbrance on title (Hendricks v. Stark, 37 N.Y. 106 (1868)), but a party wall located entirely on one property will be deemed an encumbrance. A party wall easement may not be terminated by unilateral action, but once a party wall is demolished by mutual consent or once one of the buildings benefitting from the party wall is demolished, all easements in the wall are extinguished except as to
2.
the remaining owner, if any. The Administrative Code of the City of New York requires that the owner of a structure being demolished
brick up open beam holes in a party wall and otherwise provide for the structural integrity of the party wall (Section C26-1905.2). 3. LIGHT AND AIR - An easement for the enjoyment of light, air, or view cannot be acquired by prescription or implication, in contrast to the English common law doctrine of ancient lights. (Elgar v. S.H. Kress & Co., 280 A.D. 621, 116 N.Y.S.2d 527 (1952)). However, such easements may be created by express grant or reservation. As with all easements created by grant, mere nonuse, lapse of time or failure to enforce will not cause the easement to be extinguished (Remsen v. Wingent, 112 A.D. 234, 98 N.Y.S. 388 (1906), aff'd, 188 N.Y. 632, 81 N.E. 1174 (1907)).
TERMINATION OF EASEMENTS Easements may be terminated by the following methods: 1. RELEASE - Title examination can determine all the necessary parties to release an easement created by grant or reservation. They include the owner and all lienors of the dominant tenement. Upon execution of the release the agreement should be recorded. ABANDONMENT - An easement created by grant or reservation may be terminated by abandonment only if the abandonment is unequivocal and clear (Gerbig v. Zumpano, 7 N.Y.2d 327, 197 N.Y.S.2d 327 (1960)). Easements created by means other than by grant may be deemed abandoned when the necessity therefor no longer exists and there is in fact a non-use thereof. Title insurance will usually not be available to omit an easement on the grounds of abandonment since non-use is generally insufficient to show abandonment of an easement created by grant. Proof of an intent to abandon the easement is essential, and such intent is rarely found in the land records. MERGER - Upon the complete merger of the dominant and servient estates an easement formerly existing in the separate estates is extinguished. However, a non-merger clause in any instrument conveying the estates or the non-consent of a mortgagee to the extinguishing of an easement will keep the easement alive (Stilbell Realty Corp., v. Cullen, 352 N.Y.S.2d 656, 43 A.D.2d 966 (1974)). Care must be taken that the easement is not recreated in a subsequent conveyance from the common owner to a third party.
2.
3.
4.
ADVERSE USE - All of the elements of adverse possession must be evident in order for an easement to be lost by adverse use. The adverse use may be by the owner of the servient estate or by a stranger. It has been held that the period of adverse use does not begin until the easement is first denied to the dominant estate by the adverse user (Castle Associates v. Schwartz, 407 N.Y.S.2d 717 (1978)). Title insurers are reluctant to omit an easement based on adverse use unless it is clear that there is no conceivable use for the easement area. SUPERIOR TITLE - The foreclosure of a lien or superior lien in the servient estate which attached prior to the creation of the easement can extinguish the easement. OVERBURDENING - Where an easement by grant is not used for its intended purpose the easement may be limited to its original purpose. Where the easement is acquired by prescription or necessity an overburdening may result in the termination of the easement. See Warren's Weed New York Law of Real Property section 16.
5.
6.
ENCROACHMENTS Note: Cross Reference with Chapter 15, ENCROACHMENTS, this manual. Survey encroachments are encumbrances on title and depending on the extent of the encroachment, may make the title to the encroaching or encroached upon parcel unmarketable. An encroachment by an adjoining landowner upon property will be deemed to make title unmarketable if the encroachment is substantial enough to interfere with the use and enjoyment of the property. Each case is tested on its own merits. (Wachsumuth v. Stone's Mariana Inc., 26 Misc.2d 466, 214 N.Y.S.2d 15 (1960)). Where an encroachment is substantial but does not interfere with the use and enjoyment of the property a court may grant an abatement in the purchase price (McGraw v. Selkis, 245 A.D. 786, 280 N.Y.S. (1935); aff'd, 269 N.Y. 534, 199 N.E. 522). More difficult is the case in which the property to be conveyed encroaches on adjoining land. Normally, unless the adjoining owner is barred by statute from bringing an action to rid the encroachment, any encroachment by a contract vendor on adjoining land will render title unmarketable (Stokes v. Johnson, 57 N.Y. 673). A vendor must deliver title free of such encroachment unless the contract otherwise specifically permits its existence (McPherson v. Schade, 149 N.Y. 16 (1896)). Language in a contract permitting a seller to convey "subject to a state of facts an accurate survey would show" would require a contract vendee to take the property subject to such encroachments.
Many slight encroachments on streets and public ways are less troublesome due to statutory provisions, discussed below, limiting the time in which a municipality may act to enforce the removal of the encroachment. The former New York Board of Title Underwriters' standard form of contract of sale provided that title must be accepted subject to certain specific encroachments upon a street or highway. An action for injunctive relief to remove a structural encroachment may be maintained pursuant to RPAPL section 871. A. 1. Statutory Provisions With respect to encroachments on streets or public ways: General City Law section 38-a provides that structures constructed after January 1, 1960 which encroach less than six (6) inches on a public way may remain if, within one (1) year after filing a notice of such encroachment with the appropriate county clerk, no action is taken by the city to rid the encroachment. Somewhat similar provisions are contained in section 6-632 Village Law and section 138(7) Town Law. Encroachments greater than six (6) inches on public ways are subject to removal at any time and no easement or title may be acquired by adverse possession, no matter how long the adverse use (Walker v. Caywood, 31 N.Y. 51 (1865)). Section 692h-6.0 of the Administrative Code provides limited immunity from actions for owners of buildings erected prior to May 25, 1899 encroaching upon streets in the County of New York. 2. Encroachments on adjoining property: RPAPL section 611 governs encroachments of less than six (6) inches as to abutting walls on adjoining property. Under this provision no action may be maintained to recover such property after one (1) year from the date of the encroachment. A forced sale of the property encroached on may be maintained by the affected parcel within the further period of one (1) year from the date of the encroachment. If thereafter no action is brought, an easement will exist in favor of such encroachment as long as it shall remain. B. Adverse Possession Where the encroachment on adjoining property meets the requirements for adverse possession an easement for title by prescription may result (Kaplan v. Bergmann, 122 A.D. 876, 107 N.Y.S. 423 (1907)).
FUTURE ESTATES AND LIMITATIONS A. INTRODUCTION The possibility that a present possessory estate may terminate and/or that a future estate may vest is not technically considered an encumbrance upon the title of real property but is, instead, a limitation upon the extent of the estate. Nevertheless, the topic of future estates will be considered in this chapter because of the limited marketability and insurability of an estate of such a nature, and because its effect on the entire title is similar to that kind of encumbrance. In general, a condition or limitation on an estate in land will, when properly structured, cause the prior estate to be defeated or a different estate to commence upon the occurrence or non-occurrence of a particular event [See chapter 11, "DEEDS OF CONVEYANCE - Condition" and chapter 16, "ESTATE IN LAND - Title", this manual]. The construction and operation of future estates in New York are governed by Articles 6 and 9 of the Estates, Powers and Trusts Law. Several of the common law future estates, or their characteristics, have been abolished or redesignated by the statutory scheme. B. ESTATES IN POSSESSION COMPARED WITH FUTURE ESTATES Estates, Powers and Trusts Law section 6-3.1 classifies estates in property, with respect to the time of their enjoyment, as follows: (1) estates in possession and (2) future estates. 1. An estate in possession is an estate which entitles the owner to immediate possession of the property (Estates, Powers and Trust Law section 6-4.1). In New York, the recognized present estates include (i) fee simple absolute, (ii) fee on condition, (iii) fee on limitation and (iv) life estates. Each of these estates will be considered in section C. New York has abolished estates tail (Estates, Powers and Trusts Law section 6-1.2). A future estate is an estate limited to commence in possession at a future time, either without the intervention of a precedent estate or upon the determination, by lapse of time or otherwise, of a precedent estate created at the same time. (Estates, Powers and Trusts Law section 6-4.2). A future estate is created when the disposition creating it becomes legally effective (Estates, Powers and Trusts Law section 6-3.4). In Estates, Powers and Trusts Law section 6-3.2 New York recognizes the following future estates:
2.
a.
Estates left in the creator, consisting of (1) (2) (3) reversions possibilities of reverter rights of reacquisition; and
b.
Estates in favor of a person other than the creator, namely remainders, that are: (1) (2) (3) (4) indefeasibly vested vested subject to open vested subject to complete defeasance subject to condition precedent
The statutory scheme recognizes all of the future estates known at common law. However, the right of reacquisition had been known, at common law, as a right of entry. Future estates will be considered in greater detail in sections D and E. C. ESTATES IN POSSESSION 1. FEE SIMPLE ABSOLUTE - at common law, the words "to X and his heirs" were required in order to create a fee simple absolute estate. In New York this requirement has been abolished. A grant of real property passes all of the estate or interest of the grantor to the grantee unless the intent to pass a lesser estate appears by the express terms of the grant or by necessary implication therefrom (Real Property Law section 245). FEE ON CONDITION - this estate is created by a conveyance in fee, followed by a conditional limitation. At common law this estate was called a "fee simple subject to a condition subsequent." The effect of the creation of a fee on condition is that, upon the occurrence or nonoccurrence of the condition, the estate of the grantee will be liable to be divested in favor of and by an affirmative act (re-entry) by the grantor or a third person. The correlative estate of the grantor or third person is called a right of reacquisition. Typical language creating the fee on condition is: "provided," "on condition that," "but If." NB See "Deeds of Conveyance - Condition" & "Estates in Land" Chapters this manual. 3. FEE ON LIMITATION - this estate is created by a conveyance in fee, coupled with language restricting the duration of the fee estate, generally until such time as a specified event occurs or does not occur. The fee on limitation automatically terminates upon the
2.
occurrence or non-occurrence of the limitation contained in the grant. No further affirmative act is required by the grantor or any third
person. The correlative future estate is a possibility of reverter. Typical language used to create a fee on limitation is: "so long as," "while," "during", "until". 4. LIFE ESTATES are subject to statutory modification in two respects in New York. a. A life tenant may lease the property for a term up to 21 years, and such lease is valid even if the life estate comes to an end during the term of the lease (Estates, Powers and Trusts Law section 10-10.2). Life estates measured by the life of a third party (estates pur autre vie) have been modified by Estates, Powers and Trusts Law section 6-1.3, to eliminate the general occupant. Upon his death, the interest of a life tenant passes as personal property during the remaining duration of the estate.
b.
The correlative future estate is called a reversionary interest. D. FUTURE ESTATES - ESTATES IN THE GRANTOR (REVERSIONS) 1. Reversions - A reversion is created when the grantor of an estate conveys any estate which is lesser in duration than that which he enjoys (Estates, Powers and Trusts Law section 6-4.4). They differ in that the latter automatically terminates the prior estate, while the former will divest the prior estate only if affirmative steps are taken to enforce the right of reacquisition.
2.
The Possibility of Reverter and Right of Reacquisition are disfavored by the courts. These estates restrict the free use of property and neither of them are subject to the rule against perpetuities since these estates do not, with regard to the rule against perpetuities, vest remotely. Whenever possible, a court will construe a grant attempting to create a possibility of reverter or a right of reacquisition as containing precatory language or as creating a covenant, rather than as creating a future estate. Estates, Powers and Trusts Law section 6-5.1 now provides that future estates are descendible, devisable and alienable, in the same manner as estates in possession. Of course, a future estate which is contingent upon survival cannot be transferred if the estate does not vest due to the failure to survive. 3. Statutory Control of possibilities of reverter or rights of reacquisition:
a.
The Possibility of Reverter Act, effective September 1, 1958, and codified as Real Property Law section 345, provides that the holder of either a possibility of reverter of a right of reacquisition must record a "Declaration of Intention to Preserve" the future estate. The filing must occur between the 27th and 30th year after the creation of the interest, and must be renewed thereafter no earlier than nine and not later than ten years after the previous filing. In Board of Education v. Miles, 15 N.Y. 2d 364, 207 N.E., 2d 181 (1965), the retroactive application of the statute to possibility of reverter and rights of reacquisitions greater than thirty years old was declared unconstitutional. The statute does not apply to possibilities of reverter and rights of reacquisition in favor of the United States or the State of New York and in certain other circumstances, specifically set forth in Subdivision 8 of the section. (1) Statutes of Limitations - an action to obtain possession of property pursuant to a possibility of reverter or right of reacquisition must be brought within ten (10) years after the occurrence of the reverter or the breach of the condition or within one (1) year after notice and demand for possession is served, if made within the aforesaid ten (10) year period (Real Property Actions and Proceedings Law section 612 (1)). (2) Possibilities of reverter or rights of reacquisition created after September 1, 1958 are subject to an action in the Supreme Court in which relief will be granted only "to protect a substantial interest in the enforcement of the restriction." If the court finds that it would be inequitable to enforce the limitation or condition, the court is empowered to restrain the breach of the limitation or condition, or grant recovery of the land "upon such terms as justice may require to avoid a forfeiture of the value of the improvements or other unjust enrichment" (Real Property Actions and Proceedings Law Section 1953).
b.
E.
FUTURE INTERESTS - ESTATES IN THIRD PERSONS (REMAINDERS) New York follows the common law pattern of future interests in third persons with the exception that the "executory interest" has been eliminated from the statutory nomenclature. However, the concept of the executory interest prevails in the statutory scheme, as discussed below. 1. Indefeasibly vested remainder (Estates, Powers and Trusts Law section 6-4.7). This is a future estate "in favor of one or more ascertained persons in being which is certain when created to
become an estate in possession whenever and however the
preceding estates end and which can in no way be defeated or abridged." 2. Vested remainder subject to open (Estates, Powers and Trusts Law section 6-4.8). This is a future estate in a class of person which is "subject to diminution by reason of another person becoming entitled to share therein." Vested remainder subject to completed defeasance (Estates, Powers and Trust Law section 6-4.9). A future interest which is vested, in existence and not subject to a condition precedent may be subject to have its enjoyment and possession defeated by the occurrences of some condition subsequent as provided by the creator of the estate. Remainder subject to a condition precedent (Estates, Powers and Trusts Law section 6-4.10). The future estate "created in favor of one or more unborn or unascertained persons or in favor of one or more presently ascertainable persons upon the occurrence of an uncertain event." This type of remainder may vest remotely and, therefore, may be defeated by application of the rule against perpetuities (Estate, Powers and Trusts Law section 9.1.1).
3.
4.
NB cross reference this section with Simes and Smith, The Law of Future Interests; Cribbet, Principals of the Law of Property, chapter 5; and Estates in Land and Future Interests, Preface to, chapter 3. The principal portion of this chapter was originally written in 1984 by Melvyn Mitzner, Chief Counsel of Commonwealth Land Title Insurance Co & is re-printed with his permission. At that time he was Assistant Chief Counsel of LTIC Associates. Before that he was Regional Counsel of Ticor-Title Guarantee. The chapter first appeared in Real Estate Titles, published by the New York State Bar Association, James M. Pedowitz, Editor-in-chief. Cross references and some editing was later done by William C. Hart.
4/95
Chapter 26 - Page 1 LIENS AND ENCUMBRANCES Clearance
CLEARING TITLE DEFECTS There are a number of books available which address the issue of clearing title defects. I will name a few here for the serious student. Professor Kratovil, in his fine book entitled Modern Real Estate Documentation, includes a Chapter 14 "Clearing Title Objections." Volume 12, Chapter 190 of the Pennsylvania Transactions Guide, is entitled "Procedural Guide to Eliminating Defects of Record." Raymond J. Werner's book entitled Real Estate Closing briefly touches on the matter in Chapter 2. Chapter 27 and 28 of Harvey, Law of Real Property and Title Closings addresses the issue of title objections as disclosed by the search. McDermott's Deskbook on Land Title and Land Law is an excellent reference source and summary of all American Land Law which contain citations to all the major authors and Treatise on Real Property Law. The New York State Bar Association and James M. Pedowitz Esq. have written excellent Text entitled Real Estate Titles. Finally, Professor Bayse has written the definitive treatise entitled Clearing Land Titles. All of these books are readily available and invaluable to the serious title scholar. Combined, they offer both practical and theoretical solutions to most title objections which arise in the course of an examination of title. There are also many individual state texts which address the question of conveyancing and the Law of Titles and Abstracts in a particular state, too numerous to mention. All of these books offer suggestions on how to resolve title problems. None of them however point out one glaring misuse of a clearance procedure and that is the improper use of the indemnity. MISUSE OF INDEMNIFICATION Title Insurers are frequently called upon to omit existing encumbrances or liens from a title policy or commitment based upon the offer of an indemnity from a developer or some other party. All too often there is little if any thought given to whether the party offering the indemnity is a financially responsible party capable of performing upon that indemnity if called upon to do so. This is not prudent underwriting, it is credit underwriting. The purpose in issuing a title commitment is always preliminary to the issuance of a title policy. It is not intended to serve any separate purpose. However, this is the real world. The underwriter must remain cognizant of the fact that title insurance commitment and reports of title are frequently used as sources of information by persons intending to invest in real property, such as builders and developers or their counsel. In some cases title commitments are used for submission to regulatory authorities who require a title report disclosing the condition of title before permits will be issued, an offering accepted, or a bond issue floated. It should be company policy that title reports or commitments issued to such agencies or to others must accurately reflect the true condition of the title. Public and regulatory agencies view a title commitment or policy as a true representation of title. Therefore, as company policy, the insurer should report faithfully all encumbrances on title whenever the report goes to a regulatory body, investment group, financial institution or purchaser. If the company is willing to "insure over" a particular encumbrance, then the basis on which the risk is to be assumed should be reported to the customer to whom the commitment is issued. That might be expressed as follows:
4/95
Chapter 26 - Page 2 LIENS AND ENCUMBRANCES Clearance
will not " (judgment, lien, encumbrance) shown as items appear in the policy to issue providing (set forth the terms here) . The deliberate deletion of known title defects, liens or encumbrances may result in the unintended assumption of liability over and beyond a loss under the terms of the title policy. Accordingly, any and all risks assumed, based on an indemnity or other clearance procedure, must be disclosed to the insured unless you are otherwise authorized by a senior underwriter or senior corporate officer. NB Please refer to Chapter 25A, Letters of Indemnity, this manual and Mr. Pedowitz memo at the end of that chapter. POLICY INSURING CLAUSE OBLIGATIONS The title insurer is contractually obligated to disclose the priority of any lien or encumbrance over the lien of the insured mortgage under insuring clause 6 of the ALTA Loan Policy. The ALTA Loan Policy further insures that the mortgage it covers is valid and insurable and further requires that all matters affecting title be shown in the policy. Furthermore, and of equal importance, is the fact that institutional lenders, such as insurance companies, savings banks, and savings and loan associations, if permitted by state statute to invest in mortgage loans, must have first lien position. If an omitted matter should later be determined to affect the lender's priority or enforcement rights that lender does not have an appropriate asset and may, therefore, demand that the title company purchase the loan. LEGISLATIVE AND CASE LAW CONCERNS Don't be pressured into removing or omitting a lien or encumbrance instead of insuring over it. Federal law, including the Interstate Land Sales Full Disclosure Act, provides that a title policy is acceptable to HUD as evidence of the state of title. It has been interpreted that this Act applies to other federal agencies. In the worst case scenario, failure to disclose an outstanding known interest may result in a later claim of deceit or fraud or allegation that the title company intentionally made false statements for the purpose of inducing a federally insured financial institution to grant loans and for aiding and abetting in the making of false statements in policies of title insurance submitted to federally insured banks. That is precisely what was alleged in U.S. v. Keskey, 863 F2d 474, and the title company and one of its employees lost big time. In that case the U.S. Prosecutor wasn't satisfied to sue under the policy. He sued for fraud and brought criminal charges alleging the above actions, all in violation of 18 U.S.C. 371. You want to avoid this possibility at all costs.
5/78
Chapter 26 - Page 1 LIENS TO BE RELEASED DISPOSITION Title
STATUTORY REFERENCES TO NEW YORK CITY, STATE AND FEDERAL LIENS AND CHARGES ON REAL ESTATE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Assessments - Former New York City Charter, 314; Administrative Code, 415 (1)-12.0 and 415 (1) -13.0 Assignments of rents - Real Property Law, 294-a, 315, 316. Bankruptcy - petitions in -- Bankruptcy Act, 21; Real Property Law, 297-a. Conditional bills of sale and chattel mortgages (see Financing statements). Contracts, or Memorandum of Contract - Real Property Law, 294, 315, 316. Conveyances (deeds, leases, releases, etc.) - Real Property Law, 290, 291, 315, 316. Criminal surety bond liens - Lien Law, 246 to 251 and Code of Criminal Procedure, 556-b, 556-c. Decedents' debts -SCPA 1903. Decedents' estates - transfers of interest in - Real Property Law, 274. Domestic Relations bonds - Family Court Act, 472. Emergency Repair liens - Administrative Code, 564-24.0. Estate taxes - Federal - 26 U.S.C.A. 6324; see Detroit Bank v. U.S., 317 U.S. 329 Estate taxes - New York State - Tax Law, Article 10-C, particularly Sections 249-bb and 249-11, and Tax Law, Article 26. Federal tax lien notices - Lien Law, 240 to 245 and 26 U.S.C.A. 6321 to 6324. Financing statements - Uniform Commercial Code, 9-313, 9-401 to 405. Foreclosures by advertisement - Real Property Actions and Proceedings Law, 1401 to 1461
5/78
17.
Franchise and license taxes - Corporation - New York State, Tax Law, 181, 197, 207, 209 213, 219, and Article 27 of the Tax Law, particularly Section 1092. (See also New York City General Corporation Tax.) General assignments - Debtor and Creditor Law 3
18.
18A. Harassment, Notice of - Administration Code, Section Y51-10.0 (d), Lien ProvisionSection Y51-11.0(b) (3) 19. Health Department liens (New York City) - Administrative Code, 564-22.0 to 25.0.
19A. Historic Districts (see Landmark Designation) Housing Development Authority A.D. Code D26 of Work Costs; also 564-20.0; superior lien also 1160-5.0 lien 20. 21. 22. 23. 24. Housing Maintenance Code - Failure to register ownership Administrative Code, D26-41.05 and D26-41.21. Housing Maintenance Code - recovery of expenses Administrative Code, D26-57.03 Insolvent assignments - Debtor and Creditor Law, 76. Judgments - CPLR, 5203 (Judgment execution sale - CPLR, 5236, etc.). Judgments - United States Court - 28 U.S.C.A. 1962: See Rhea v. Smith 274 U.S. 434.
24A. Landmark Designation - Administrative Code, Chapter 8-A, Section 207-2.0 et al. 25. 26. 27. 28. 29. Mechanics' Liens - Lien Law, 2, 3, 4, 9, 10, 11, 13, 17, 19, 20, 22. Mortgages and assignments - Real Property Law, 290, 291, 315, 316. Mortgage Tax (City) - Administrative Code, W46-1.0, et seq. Mortgage Tax (State) - Tax Law, Article 11, Section 253. Municipal Department Violations - New York City Departments with jurisdiction (Various Sections of Administrative Code) a) Department of Housing and Buildings b) Fire Department c) Department of Health d) Department of Highways
5/78
e) Department of Marine and Aviation f) Department of Air Pollution Control New York State: Department of Labor, Division of Industrial Safety. (for office buildings, hotels, factories, and mercantile establishments.) Labor Law. 30. 31. New York City General Corporation Tax, Administrative Code, R46-1.0 to R4610.0; For lien provisions, See Section R46-73.0. Notices of pendency - CPLR, 6501 to 6515. Parking violation (Sec 883a-3.0(e), NYCAC) 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. Powers of attorney and revocations - Real Property Law, 294, 326. Public Welfare liens - Social Welfare Law, 322. Real Estate Transfer Tax - New York State - Tax Law, Article 31. Real Property Transfer Tax - New York City - Administrative Code, II 46-1.0, et seq. Real Property Transfer Tax - Yonkers - Tax Law, Section 1203(b); Code of Ordinances of City of Yonkers, Chapter 92, Article 6, effective 7/26/73 Relocation liens - Administrative Code, 1160-5.0. Sewer connection Liens - Administrative Code, 82d9-9.2. Sewer rents (New York City) - Administrative Code, 415 (1)-17.1, 687-1.0. Sheriff's sales of real property - CPLR, 5236(d). Sidewalks, fencing and filling - liens for - New York City Charter, Section 230. Spouse's notice of election - EPTL 5-1.1. Street openings and other condemnation proceedings in New York City Administrative Code, Chapter 15; Condemnation Law, 25. Surety bond liens - individual - CPLR, 2503. Tax collector's bonds - Administrative Code, 415 (1)-1.0; Town Law, 35.
46. 47. 48. 49.
Taxes - New York City Charter, 1518, Administrative Code, E17-24.0. Town generally - Real Property Tax Law, 902, 1312. Tax Sales (New York City) - Administrative Code, 415 (1)-23.0 et seq. and D171.0; Real Property Tax Law, 902, 1312. Unsafe building liens (New York City) - Administrative Code, C26-204.0. Vaults, sidewalk. a) License fee - Administrative Code, 692e-1.0 et seq. b) Annual charge - Administrative Code, Z46-1.0 et seq. c) Lien - Administrative Code, Z46-11.0(c) - effective 6/5/73 Water rents (New York City) - Administrative Code, 415(1)-7.0 and 415 (1)-17.0.
50.
4/78
Chapter 26 - Page 1 LIENS AND ENCUMBRANCES Law Bulletin & Case Cites 1
MORTGAGES A. B. Definition - A conditional conveyance of real estate as security for the payment of a debt or the performance of some other obligation. Nature of a mortgage Burnett v. Wright, 135 N.Y. 543 People ex rel Van Schaick v. Title & Mortgage Guaranty Co., 149 Misc. 643, aff'd 264 N.Y. 69 Mooney v. Byrne, 163 N.Y. 86 1. Once a mortgage always a mortgage Luesenhop v. Einsfeld, 184 N.Y. 590 Goldblatt v. Iris Construction Corp., 28 Misc. 2d 621 2. C. Personalty - Cogan v. Taylor, 212 App. Div. 8
Types of mortgages 1. Term Mortgage - (Standing Mortgage) - Usually calls for quarterly or semi-annual payments of interest, with the principal debt payable in a lump sum at the end of the term Amortizing Mortgage - provides for a gradual liquidation of the mortgage debt through regular scheduled payments of principal and interest Budget Mortgages - In addition to the regular monthly payment of principal and interest. This mortgage also includes 1/12 of the annual cost of the taxes and fire insurance Blanket Mortgages - Covers more than one parcel of real estate - a partial release clause is usually incorporated into blanket mortgages in order to facilitate the sale of individual lots or parcels The Open-End Mortgage - provides that the mortgaged real estate shall serve as security not only for the original loan but for future borrowings as well a. Priority of re-advances over intervening liens i. actual notice
2.
3.
4.
5.
4/78
6.
Purchase money Mortgage a. Ahead of prior judgment and franchise taxes Boies v. Benham, 127 N.Y. 620 b. Usury - not a defense Mandelino v. Fribourg, 23 N.Y. 2d 145
7.
Wrap Around Mortgage - A second mortgage subordinate in all cases to an existing first mortgage which remains outstanding and unsatisfied. However, such wrap around mortgage is an over statement of the actual indebtedness since the wrap around mortgage is the sum of an outstanding balance under the first mortgage plus the amount of additional funds, if any, to be disbursed by the wrap around mortgagee. The debt service is computed on this face amount. a. Unconditional assumption of the first mortgage by the wrap around mortgagee
8.
Equitable Mortgage a. Vendors Lien Dusenbury v. Hulbert, 59 N.Y. 541
9.
Sale leaseback - Financing Transaction a. Who may take the depreciation Frank Lyon Co. v. The United States No. 75-624, 4/18/78. Reversing CA-8, 76-1 USTC 9451, 536 F.2d 746, rehearing denied, 76-2 USTC 9589.
10.
Assignment a. By delivery Peoples Trust Co. v. Tonkonogy, 144 App. Div. 333
4/78
b.
Subject to all equities and defenses in absence of an estoppel Liebowitz v. Arrow Roofing Co., 259 N.Y. 391 Beck v. Sheldon, 259 N.Y. 208 Central Trust Co. v. West India Improvement Co., 169 N.Y. 314 Assets Realization Co. v. Clark 205 N.Y. 105
c.
Necessity of assigning obligation (bond or note) Merritt v. Bartholick, 36 N.Y. 44 Manne v. Carlson, 49 App. Div. 276
d.
Assignor and assignee to join after collateral assignment Hoyt v. Martense, 16 N.Y. 231
11.
Disposition - Recording discharge of mortgage a. b. Section 321 Real Property Law Payment to 1 of 2 mortgagees - Sec. 321 Real Property Law People ex rel Eagle v. Keyser, 28 N.Y. 226 c. Payment to agent Crane v. Gruenewald, 120 N.Y. 274 Central Trust Co., v. Folsom, 167 N.Y. 285 d. Payment to personal representatives
12.
Release a. Danger of using quit-claim Curtis v. Moore, 152 N.Y. 159 Purdy v. Huntington, 42 N.Y. 334 b. May effect a pro tanto satisfaction in favor of parcels known to have been conveyed out by mortgagor Howard Insurance Co. v. Halsey, 8 N.Y. 271 Sherman v. Foster, 158 N.Y. 587
4/78
13. 14.
Bar Claim Action - Article 15 Real Property Actions and Proceedings Law Merger a. Matter of intention Townsend v. Provident Realty Co., 110 App. Div. 226 b. Danger of relying on apparent merger Curtis v. Moore, 152 N.Y. 159 Purdy v. Huntington, 42 N.Y. 334
15.
Subordination McCarty v. Nostrand Lumber Co. Inc., 232 App. Div. 63
16.
Mortgage on a leasehold a. Basic requirements for leasehold mortgageability i) ii) iii) Term of lease - minimum term must remain unexpired at the time of closing of the mortgage Rent - does the proposed income exceed the expenses of running the premises plus the proposed debt service Use clause - is there a restricted use clause which will prevent a mortgagee from having the freedom to use the property for any purpose after foreclosure Tax clause - does the tenant have the right to contest (without payment thereof, if permitted by law) taxes and assessments with the landlord's cooperation and in the landlord's name. Insurance - does the ground lease provide for a standard New York type of first mortgagee endorsement, that the proceeds of insurance will be payable to the first leasehold mortgagee. Condemnation - is the mortgagee given first rights to the entire award to the extent of the then balance due on the mortgage.
iv)
v)
vi)
4/78
vii) viii)
Assignment - mortgagee must have the right to freely dispose of the premises. Subletting - ground lease must provide for subleasing because the mortgagee's underwriting is on the basis of income derived from the subleases Estoppel certificate - inasmuch as the mortgagee is disbursing his funds based on the security of the leasehold estate, he should have the right to know the status of the leasehold estate at the time of closing the mortgage.
x)
RESTRICTIVE COVENANTS AS ENCUMBRANCES A. Restrictive covenants running with the land are encumbrances justifying rejection of title even if restrictions are unenforceable. Golden Development Corp. v. Weyant, 269 App. Div. 1039, aff'd 295 N.Y. 845 Even if prohibited uses are also prohibited by law. B. Restrictive covenants are not encumbrances under mortgage investment statutes if there are no provisions for forfeiture in the event of breach. Matter of City of New York (Tunnel Street), 160 App. Div. 29, aff'd 212 N.Y. 547 EASEMENTS A. B. Defined and compared with license. Greenwood Lake & P.J.R.R. Co. v. N.Y. & N.Y. & Greenwood Lake R.R. Co., 134 N.Y. 435, 440 Easement by necessity. Falcone v. Benjamin, 129 Misc. 143; Bauman v. Wagner, 146 App. Div. 191 C. Carried as an "appurtenance" Colburn v. Marsh, 68 Hun 269, 22 NYS 990, aff'd 144 N.Y. 657 Simmons v. Clooman, 81 N.Y. 557
4/78
D.
Implied Paine v. Chandler, 134 N.Y. 385 Polhamus v. Hines, 128 Misc. 299 1. by constructive notice Historic Estates v. United Paper Board Co., 260 App. Div. 344, aff'd 285 N.Y. 658 2. in streets on a map White Bank v. Nichols, 64 N.Y. 65 Buffalo L & R.R. Co. v. Hoyer, 214 N.Y. 236 3. in park or breach area on filed map White v. Moore, 161 Appl. Div. 400
E.
Rights of Way Andrews v. Cohen, 221 N.Y. 148 Hatcher v. Wasserman, 92 Misc. 263 Holden v. City of N.Y. , 7 N.Y. 2d 840 (affects surface only)
F.
Utility easements in a street - affect marketability when contract includes any R.T. & I. in street and grantor owns bed of street Monogram Dev. Co. Inc. v. Natber Const. Co., 253 N.Y. 320 Sorosis Bldg. Corp. v. Prolay Realty Corp., 136 Misc. 890 aff'd 230 App. Div. 683
LEASES A. B. Memorandum of Lease Sec. 291-C Real Property Law Sec. 291-CC Real Property Law
Purchase Options in leases Gulf Oil Corp. v. Buram Realty Co., Inc., 11 N.Y. 2d 223 Masset v. Ruh, 235 N.Y. 462, 464 Jones & Brindisi v. Breslaw, 250 N.Y. 147, 151
C.
Subordination Clause
McCarty v. Nostrand Lumber Co. Inc., 232 App. Div. 63
4/78
D.
Creation of Estate on Limitation - Assures reversion of buildings and improvements to landlord upon termination of or expiration of lease
JUDGMENT LIENS A. B. 10 year lien - Sec 5203 CPLR to 20 years - Sec. 211(b) CPLR Debtor must be served with summons. Nathan Mfg. Co. v. Edna Smelting & Ref. Co., 130 AD 512 C. D. Federal Judgments - Sec. 5018 (b) CPLR Not a lien if docketed after delivery of deed Trento Banking Co. v. Duncan 86 N.Y. 221 Tausk v. Siry, 110 Misc. 514 E. F. Registered Title - Sec. 417 Real Property Law Names Berkowitz v. Dam 122 Misc. 143 Aff'd 212 App. Div. 836 H.R. & C. Co. Inc. v. Smith, 242 N.Y. 267 Grygorewicz v. Domestic & Foreign Discount Corp., 179 Misc. 1017 FEDERAL TAX LIENS A. B. Duration and extent - Title 26 U.S. Code Sec. 6502 & 6321 to 6326 incl. Priority over real estate taxes U.S. v. New Britain 347 U.S. 81 Buffalo Savings Bank v. Victory, 11 N.Y. 2d 31, rev'd by 9 Law Ed. 2d 283 (1/7/63) OTHER INCUMBRANCES AFFECTING MARKETABILITY A. Estate Taxes Warner v. Doscher 213 App. Div. 117, Aff'd 241 N.Y. 605 Jackson Terrace Homes v. Rottkamp, 180 Misc. Aff'd 465 App. Div. 959
4/78
B.
Decedents Debts Moser v. Cochrane, 107 N.Y. 35 & Sec. 233 Surrogate's Court Act.
C.
Mechanics Liens Bonding - Sec. 19 (4) Lien Law Deposit - Sec. 20 Lien Law
D. E.
Corporate Franchise Taxes - Sec. 213 Tax Law Taxes and charges peculiar to New York City 1. 2. 3. 4. Annual vault charges Relocation liens Emergency repair liens Other liens
F.
Options (Note: Refer to Option Chapter this Manual) 1. Title - Relation Back 50 ALR 1314; 66 CJ 487; 91 CJS Vendor and Purchaser 513 2. Bankruptcy a. b. Rejection of option as executory contract Erection of building by tenant In re N.Y. Investors Mut. Group 153 F Supp 772 aff'd 258 F. 2d 14 3. Exercise of Option a. b. c. Notice of exercise - must not deviate from terms of offer or may void notice Option in leases Pre-emption type options
4/78
REAL ESTATE TAXES A. B. C. D. Chase v. Chase 95 N.Y. 373 Priority of lien Escrows and accumulations Assessments - a lien - installments not yet due and payable - payable in interim installments
8/79
Chapter 26 - Page 1 LIENS FEDERAL TAX LIENS Legal Bulletin 2
Federal Tax Lien Act of 1966, effective November 2, 1966, made many changes in the law relating to federal liens. Among the items of interest to our staff are the following: 1. PURCHASERS: The old law expressly protected purchasers, mortgagees, pledgees and judgment creditors against unfiled federal liens. The new law continues this protection with changes in language. The word "purchaser" is defined for the first time as a person who for adequate and full consideration acquires an interest in property which is valid under local law against subsequent purchasers without actual notice. Therefore a federal lien should not be passed unless the deed to the purchaser is recorded before the federal lien is filed, regardless of when the deed was delivered. The word "purchaser" is further defined to include the holder of a lease, the holder of an executory contract to purchase or lease, and the holder of an option to purchase or lease to renew or extend the lease. Section 6323 (H) (6), Internal Revenue Code. MECHANIC'S LIENS: A mechanic's lienor for the first time is now given priority over unfiled federal tax liens Section 6323 (a). Moreover, a mechanics lien based on a contract for not more than $1,000.00 against the owner of an owneroccupied residence containing not more than four dwelling units has priority even over a filed federal lien. Section 6323 (b) (7). TAXES: Taxes (including assessments, water and sewer rents) will have priority over federal liens, both filed and unfiled. This provision should end the difficulties arising out of the circular priority problem which arose under the old law when a mortgage had priority over a later federal lien, the federal lien had priority over a later land tax, and the land tax had priority over the existing mortgage. Section 6323 (b) (6). Notwithstanding, the new priority given to land taxes over earlier federal liens, the new statute expressly requires notice to the United States in nonjudicial foreclosures and execution sales under liens prior to the federal lien, thus modifying the rule of the Brosnan case. The United States is also given the right to redeem in such cases (Section 7425). We will continue to make federal lien searches in all cases, including titles coming through in rem foreclosures. FILING: After January 1, 1968 the filing of a notice of federal lien will become ineffective unless the notice is refiled within the one year ending thirty days after the expiration of six years from the assessment of the tax. Section 6323(g) (3) and (4). The Internal Revenue Service thus has the entire calendar year 1967 to refile federal liens which were assessed before January 1, 1962. However, since there is no requirement that the notice of lien be indexed against the subsequent purchaser when the property is transferred before renewal, we will have to continue our practice even after January 1, 1968 of searching for federal liens against all persons in the chain for the preceding fifteen years. We will then disregard those that have not been renewed within the required period (See Recommended Practice 35.)
2.
3.
4.
8/79
5.
FORECLOSURE OF PRIOR LIEN. REDEMPTION. Existing law permits joinder of the Untied States as holder of a junior lien in an action to foreclose a prior lien if the summons and complaint is served on the United States Attorney for the district where the property lies and a copy is served by registered or certified mail on the Attorney General and the complaint sets forth with particularity the interest of the United States. The United States has 60 days in which to answer. The amendment requires in addition that the complaint state the name and address of the taxpayer whose liability created the lien, the identity of the Internal Revenue office which filed the notice of lien and the date and place such notice was filed. 28 United States Code 2410 (b). Under the previous law the United States had one year from the date of the sale in which to redeem from the foreclosure of a prior lien. The new law shortens this redemption period to 120 days where the United States holds a Federal Tax Lien but the period remains one year where the United States holds any other lien, such as a money judgment or junior mortgage. 28 United States Code 2410, subdivision (c). Moreover the likelihood of redemption is made much greater by the appropriation of $1,000,000 for the use by the Secretary of the Treasury for that purpose. LIS PENDENS. The new statute expressly provides that the Federal Lien is divested by foreclosure action and sale even if the United States is not made a party if the notice of the Federal Lien had not been filed before the action was commenced. We must, therefore, make sure in such cases that a foreclosure action was actually commenced by service of the summons of a defendant within 30 days after filing of the Lis Pendens before the filing after the Lis Pendens was filed. Section 7425 (a) (2), Internal Revenue Code. SEARCHES AGAINST TENANTS BY THE ENTIRETY, JOINT TENANTS IN COMMON AND PARTNERS: a) The Second U.S. Circuit Court of Appeals in United States v. Kocher, 468F 2d 503 (10/30/72) has joined the Courts of Appeals in the Fourth, Seventh and Ninth Circuits in holding that the United States Government is entitled to enforce a federal tax lien by selling the entire property in which the delinquent taxpayer only owns an undivided interest, even though the lien may be satisfied only out of the delinquent taxpayer's share of the net proceeds of sale. The basis for these decisions is found in Sections 6321 and 7403 of the Internal Revenue Code. The foregoing principle should not affect partnership property when a federal tax lien exists against a partner individually (United States v. Kaufman, 267 U.S. 408) since the partner does not own an interest in the real property owned by the partnership, but only in the partnership itself. Although no problem should arise when the title is held in the partnership name, it is possible that when partnership property is held in the names of one or more of the individual partners that the result would be otherwise.
6.
7.
b)
8/79
c)
Hereafter, we will run searches for Federal Tax Liens against all co-owners, whether tenants in common, joint tenants or tenants by the entirety and "except" all returns that affect any of their interests in the property, notwithstanding, that we may only be insuring the interest of the party against whom there is no lien. We will not limit a federal tax lien exception as affecting anything less than the entire property.
8.
DEPOSITS ON FEDERAL LIENS: a) We have found that the Internal Revenue Service has frequently declined to issue a release or satisfaction of a filed federal lien on payment of the amount due thereon unless there is also paid at the same time an additional sum for other federal taxes, even though no notice of lien was filed for the other taxes. We must, therefore, refrain from taking deposits to cover Federal Tax Liens noted in the title report unless satisfactory arrangements have been made in advance for the issuance of the necessary release.
b)
8/78
Chapter 23 - Page 1 JOINT TENANTS Title
JOINT TENANTS
GENERAL Estates which are owned by more than one person are classified as either being: 1) in severalty; 2) joint tenancy; 3) tenancy in common; or 4) tenancy by the entirety (as to real property only). (N.Y. Est. Powers & Trust Law 6-2.1, 1967). DEFINITIONS A joint tenancy is an estate held by two or more persons jointly, with equal rights to share in its enjoyment during their lives. The distinguishing characteristic of a joint tenancy is the right of survivorship. CREATION Joint tenants must have the same interest accruing under the same conveyance, commencing at the same time and held under the same undivided possession. Where these unities are absent, no joint tenancy exists. (Moore Lumber Co. Inc. v. Behrman, 259 N.Y.S. 248 (1932)). A disposition of property to two or more persons creates in them a tenancy in common, unless the parties expressly state that it is a joint tenancy with right of survivorship. A disposition of real property to a husband and wife creates a tenancy by the entirety, unless they expressly declare it to be a joint tenancy or a tenancy in common. A disposition of real property to unmarried persons who are described as husband and wife creates a joint tenancy unless they expressly declare that it is a tenancy in common. A disposition of property to two or more persons as executors, trustees or guardians creates a joint tenancy. Property passing in intestacy or two or more persons creates a tenancy in common. (N.Y. Est. Powers & Trust law 6-2.2, 1977). SEVERANCE One of the joint tenants can sever the joint tenancy by disposing of his interest. If that interest is transferred to a third party, the transferee and the other joint tenant become tenants in common. (In re McKelway's Estate, 221 N.Y. 15, 116 N.E. 348 (1917)). The joint tenancy can be served without the consent of each of the joint owners. The doctrine of survivorship applies only if the joint tenancy is not severed. (Loker v. Edmans, 197 N.Y.S. 857, 204 App. Div. 223 (1923)).
8/78
Chapter 23 - Page 2 JOINT TENANTS Title
If any of the joint tenants conveys his interest, his grantee holds as a tenant in common and the right of survivorship is extinguished. (In re Cossitt's Estate, 236 N.Y. 524, 142 N.E. 268 (1923)). An action for a partition if commenced by the decedent before he dies, is not a severance of the joint tenancy if the action is not completed by his death. Upon his death, the decedent's entire interest passes to the other joint tenant because of the right of survivorship. (Ellison v. Murphy, 219 N.Y.S. 667 (1927)). Each joint tenant owns an undivided interest in the land and has the power to alienate that interest, which would sever the joint tenancy. However, if the joint tenant does not convey his interest during his lifetime, it will pass to the other joint tenants by survivorship. (In re Weissbach's Estate, 183 N.Y.S. 771 (1920)). CONVEYANCE BY ONE MARRIED JOINT TENANT If the tenancy is expressly made a joint tenancy, despite the marriage relationship of the joint tenants, a conveyance by one of the married joint tenants acts to sever the joint tenancy and the grantee becomes a tenant in common with the other spouse. Since the right of survivorship is extinguished, the property will not pass to the other joint tenant. (In re Cossitt's Estate, supra). TERMINATION OF JOINT TENANCY BY DEATH Upon the death of one joint tenant, the interest of that person passes to the other joint tenant(s) by the right of survivorship. (In re Otte's Estate, 209 N.Y.S. 2d 885 (1960)). see also: Chapter 7 CONCURRENT ESTATES this manual.
2/88
Chapter 25 - Page 1 LEASES AND LEASEHOLD ESTATES General
LEASES
1. POSSESSION AND UNRECORDED LEASES: Since title insurance policies offer protection against matters that are not of record as well as those shown of record, the Agent should determine whether there are any parties in possession or unrecorded leases affecting the real estate under examination before writing the policy. Until such determination has been made, the following exception should appear in the commitment: "Rights or claims of parties in possession." Commitments on apartments and commercial property should also except: "Rights or claims of parties under recorded leases." Proper execution of an appropriate affidavit showing no unrecorded leases or parties in possession will permit deletion of the above exception on the policy. 2. RECORDED LEASES: Any recorded lease or recorded memorandum of lease must be shown as an exception to title in the commitment and Schedule B of policy, as follows: "Lease executed by Book , Page 3. UNRECORDED LEASES: Any recorded lease, information of which is referred to, obtained from or disclosed by other recorded instruments, must also be set forth as an exception in the commitment and Schedule B of policy, as follows: "Unrecorded lease executed by to ." to dated and recorded in as more fully set forth in said lease."
Furthermore, exception must be made to rights of any tenants in possession under unrecorded leases as set forth in Paragraph 1, above. 4. INSURING THE LEASEHOLD When a policy insures the leasehold estate, the lease creating that leasehold interest should be identified in Schedule A, with the following exception set forth in Schedule B of the policy:
"Failure to comply with the terms, covenants and conditions of lease executed by , Lessee, dated , recorded in Book , Page ."
2/88
Chapter 25 - Page 2 LEASES AND LEASEHOLD ESTATES General
The above exception is not necessary if the form of policy is an ALTA Leasehold Policy Form. NOTE: SEE also: Parties in Possession
3/78
Chapter 25 - Page 1 LEASES Title Issues
LEASES - MEMORANDA OF Obtain the original for inspection by the county clerk if the statute so requires. Often minimum statutory requirements will exist with respect to the content of a recordable notice or memorandum or lease. Generally these include; 1. 2. Names and addresses of the parties to the lease; A reference to the full lease, with its date of execution, which defines the rights of the parties.
NB include specific reference to any rights such as easements or protective business covenants which the tenant may have, which extend beyond his/her/their specific demised premises such as, for example, rights of the tenant to take additional premises beyond the specific demised premises; rights of the tenant to have easements for parking, access, ingress and egress for employees and business visitors over premises beyond the specific demised premises; rights of the tenant to restrict building upon adjacent premises and the use to which they may be put. A tenant such as a major department store in a mall would wish to protect all of the foregoing rights against the acquisition by a subsequent party of inconsistent rights superior to his/her/theirs. 3. 4. 5. The term of the lease with the date of commencement and the date of termination; A description of the property demised under the lease so that it can be readily identified. If a right of extension or renewal is granted, a notation of the date by which such right must be granted and notation of the date by which such right must be exercised; If a right to purchase is granted, a notation of the date by which such right must be exercised; Under the Statute of Frauds the lease must be signed by the parties to be charged, which translates to the parties who can be sued; A reference to the place of location where the lease is to be on file.
6. 7. 8.
Failure to disclose the parties is fatal. See Mr. Justice Cardozo's opinion in Irvmor Corp. V. Rodewald 253 NY 472 Failure to include reference to special financing in the memo may wreck the transaction. For problems that can arise when the informal memo meets the required minimum elements for recording but contains the phrase "Formal contract to be signed on or
before", see Levine v. Lafayette Bldg Corp., 103 N.J. Eq. 121; reversed, 105 NJL (Error
3/78
and Appeals, 1929). reference: see Cribbet, Principles of the Law of Property, page 127 LEASES - MEMORANDUM - SURRENDER OF Where record title discloses (or information obtained at the closing table discloses) a lease or leases in existence, the title underwriter and closer should determine that they do not contain purchase options or rights of first refusal and if they do, that they have not been exercised and have been extinguished. The underwriter or closer should always get the consent of the lessor as to all aspects of the current transaction. The consent may be in the form of an estoppel certificate. They should also review a full copy of the lease agreement and avoid reliance upon a memorandum of lease. This is because specific reference to the tenants rights beyond the demised premises such as easements or business protective covenants may not be set forth on the memorandum of lease. See Kratovil, Modern Mortgage Law and Practice sec. 243 and 246 and Modern Real Estate Documentation sec 722. A lease may be assigned or pledged to secure a mortgage loan if its terms do not prohibit such action. The closer and underwriter should obtain consents of the landlord/lessor regarding any assignments of subletting if the lease is silent on these questions. Where a lease or memo of lease is recorded which contains a renewal option, require proof of surrender of the lease. This may be accomplished in one of two manners. Either obtain a copy of the surrender of lease or prepare a specific affidavit stating that the tenant has relinquished possession of the premises and the landlord has resumed possession thereof and that all conditions under the prior lease have been extinguished and that the two estates have wholly merged. For a Form of Surrender of Lease see Harvey on Title Closings page 509. Be alert to the fact that the surrender of the master lease does not always terminate the sub-leases where they were not made pursuant to the provisions of the master lease. The effect of the surrender in this case is to transfer the reversion to the owner and the sublessees becomes direct tenants [Metropolitan Life Ins. Co. v. Hellinger, 246 A.D. 7] When the lease is surrendered before its expiration, all judgments, liens and encumbrances affecting the lessee must be disposed of. These questions do not arise if the lease has expired or been legally terminated by judicial action. This may be regarded as a general TITLE RULE unless otherwise determined by statute or case law in the state where the land is located. LEASES - TENANTS RIGHT OF NON-DISTURBANCE In all large commercial loan transactions high credit sublessees are involved and they are likely to insist on non-disturbance clauses, which leave them in possession as long as
they pay their rent, no matter what happens to the ground lease. In those cases where
3/78
the lease contains within its terms a non-disturbance agreement do not automatically remove the pre-printed exception as to rights of tenants or parties in possession. The proper method by which such a condition should be handled is by excepting the lease and then affirmative insuring that the lessee's rights thereunder are subordinate to the mortgage being made but which lease contains a non-disturbance clause. LEASES-POSSIBLE USE RESTRICTIONS-OPPOSITION BY LANDLORD TO INTENDED USE BY PROPOSED ASSIGNEE Where we are put on notice that the landlord is opposed to the proposed use to which the leasehold assignee intends to operate the premises the title underwriter cannot ignore the objections. Actual notice by the insurer (and the insured) is addressed within the Exclusion From Coverage in the policy. The title commitment should be amended to include the following additional requirement and exception: "Terms, covenants and conditions as set forth in (unrecorded) lease agreement dated by and between and which contains but is not limited to those purposes more specifically set forth in paragraph no. therein. By (letter or other form of notice) we are advised that the landlord is strongly opposed to the use to which the leasehold assignee intends to use the leased premises. As a condition of underwriting title, this company shall require our insured to execute and deliver to the company an Indemnification and Hold Harmless Agreement for any loss or damage occasioned by the assertion that the said use constitutes a restrictive covenant." Naturally, the indemnitor would have to be a credit worthy financially responsible party capable of performing on the indemnity if called upon to do so. Refer to indemnities in Title Insurance Underwriting Principles and Exception Language. You must also continue to certify the usual lease exceptions. ASSIGNMENT OF RENTS Institutional lenders regularly require a collateral assignment of rents and leases as additional security for commercial loans. In the event of default and subsequent foreclosure, the lender can then step into the shoes of the former owner and continue to collect rental payments. A common fault in clearing title where an assignment of rents has been given as additional security for a mortgage, is to procure a release of the mortgage but forget about obtaining a release of the assignment of rents. This makes it necessary to obtain and record a release of the assignment of rents. Before you do this, check the mortgage. Some mortgages contain a provision that a release of the mortgage automatically releases the assignment of rents. See Kratovil, Supra. Chapter 26
3/78
INVESTMENT INCOME PROPERTY Commercial property is frequently bought and sold by developers and real estate investors. The lender will want the usual assurances that its lien is a first and paramount lien on the subject premises. Insuring clause 6 obligates the insurer of title to disclose all matters which may "prime" the insured mortgage. A common fault lies in the title examiner's failing to make inquiry of or requiring any or all of the following, all of which are necessary if we are to properly underwrite the transaction: 1. Assignment of Leases and Security Deposits 2. Assignment of Rent Roll 3. Surrender and Assignment of Original leases by seller at closing 4. Collateral Assignment of Rents and Leases for Mortgagee 5. Letter from seller to tenants advising of sale and instructing tenants to pay rents as directed by buyer 6. Delivery of "Estoppel certificates" from each tenant, acknowledging lease term and status of rent payments INSURING LEASEHOLD MORTGAGES WHERE THE FEE MORTGAGE IS TO BE SUBORDINATED. Reference notes: See Kratovil, Modern Mortgage Law & Practice, Preparation of Leases, 1962 PLI.
Generally, the leasehold mortgage made by the lessee to finance his leasehold improvements is second in priority to the ground rents. The following instruments will be delivered at the closing table. It is incumbent upon the closer to procure copies of all instruments, as they make up the moving papers. Remember, in "title states" such as Maryland, a mortgage is an absolute conveyance subject to defeasance. 1. 2. 3. Delivery of a copy of the original fee mortgage. Delivery of a proper corporate resolution authorizing the subordination of the fee mortgage to the leasehold mortgage. Delivery of Counsel's opinion as to the authority of the corporate officers to
execute the subordination of the fee mortgage.
3/78
4.
Delivery to the fee mortgagee of an agreement that there will be no amendments to the ground lease without his consent, where the effect of same would be to decrease the rent or increase the ground lessor's liability. Delivery of a subordination agreement subordinating the fee mortgage to the leasehold mortgage. Assignment of the ground lease as collateral security by the fee owner together with proper corporate resolutions authorizing same. If the original fee mortgage by its terms came prior to the lease, or held an assignment of the lease as collateral security, require the delivery of an assignment of the ground lease by the fee mortgagee to the leasehold mortgagee as collateral security for the mortgage debt. (This leaves only the reversionary fee prior to the leasehold mortgage. So long as the fee owner does not default on his fee mortgage, the fee mortgagee will not accede to the lessor's fee position. If the fee owner defaults, the leasehold mortgagee still remains superior so long as he controls the leasehold estate.) Production of a schedule of all subleases for inspection and assignment at closing; also, all guarantees by third parties of leases. Delivery of the fee mortgagee estoppel certificate stating the mortgage is in full force and effect and that the fee owner is not presently in default. Delivery of lease estoppel certificate from the holder of the ground lease representing that at the time of closing the lease is in full force and effect. Delivery by the ground lessor/fee owner of an affidavit listing all parties in possession which further represents that there are no rights or claims of said parties not shown of record together with the warranty that there exists no breach of covenant or conditions in existing leases. Delivery of an estoppel certificate from each tenant. Delivery of the service contracts. Delivery of receipted or unpaid tax bills and/or water bills. Delivery of the proper corporate resolution authorizing the execution of the leasehold mortgage. Delivery of the following for recording: subordination of the fee mortgage; ground lease; assignment of the ground lease as collateral security; the leasehold mortgage.
5. 6. 7.
8. 9. 10. 11.
12. 13. 14. 15. 16.
17.
Delivery of affidavits of title where required.
3/78
18. 19.
Production and delivery of the clearing proofs. Delivery of escrow agreements
INSURING LEASEHOLD MORTGAGES WITH FEE TITLE TO BE SUBORDINATED Note: For Advantages of Bringing the Fee Title under a Leasehold Mortgage see Kratovil, Modern Mortgage Law and Practice, 247; also Modern Real Estate Documentation, 722; also, Friedman, Commercial Leases, PLI The courts have not been kind to "future subordinations". Future subordinations are legally vulnerable. From a title insurance underwriting position they should be treated with great care. Liens can be subordinated but not ownership. The proper way for the owner of the fee simple title to subordinate his fee title to a leasehold mortgage is to join in the leasehold mortgage and the supporting documents. As inducement, the mortgage should contain clause (s) specifically exonerating the fee owner from liability on any express or implied covenants in the lease on the tenants part. If, despite the exculpatory language, the landlord will not covenant to join in the mortgage, the following alternatives may be employed upon approval of the Senior Title Officer: (i) delivery of a specific supplemental mortgage, executed by the fee owner at the time the leasehold mortgage is executed, conveying the fee to the leasehold mortgagee as security for payment of the leasehold mortgage debt, but without individual liability of the fee owner for payment of the debt or for breach of covenant. (ii) delivery of a specific subordination agreement signed by the fee owner at the time the leasehold is executed. (iii) in the event the latter alternative is used we shall require a written opinion of counsel stating that such subordination agreements are sanctioned by local court decisions. It is suggested, unless some form of indemnification is employed, that the closing be held in escrow to insure no prior liens may attach against the fee owner during the "gap" between execution and recording. The above outlined procedures are to be strictly adhered to unless otherwise amended on an individual basis. The problems with future or automatic subordinations are numerous. For example: (i) the fee owner is an individual who dies leaving minor heirs. Legal proceeding would need be commenced to appoint a guardian. In the event of foreclosure, the courts order directing sale would be hampered by (a) the fact that the fee was never conveyed to the mortgagee and (b) the possibility that title may be further subject to proceeding for guardian's sale of infant's lands.
3/78
(ii) Bankruptcy is another problem, since an agreement to subordinate might be considered an executory contract, which the landlord's trustee in bankruptcy might disaffirm ( Old 70b Bankruptcy Act, sec 365 Bankruptcy Code; precluded by Bankruptcy Reform Act of 1994) Some or all of the following instruments will be required to facilitate the transfer of title. 1. Delivery by the ground lessor of a (i) supplemental mortgage, or (ii) specific subordination agreement subordinating his unencumbered fee title to the leasehold mortgage. 2. 3. In the event of (ii), delivery of opinion of Counsel. In the event the fee is encumbered by a mortgage, delivery of (i) the original fee mortgage; (ii) a subordination agreement subordinating the fee mortgage to the leasehold mortgage (iii) a proper corporate resolution authorizing the subordination. Delivery of fee mortgagee estoppel certificate stating that the fee mortgage is a valid and subsisting mortgage and that the fee owner is not presently in default or delivery of all paid notes on existing mortgage together with properly executed releases, discharges or satisfactions. Note: In New York, in order to delete in the latter instance, the closer will be obligated to do the pick-up. Delivery of a proper corporate resolution by fee owner authorizing the subordination of the fee or in the event the fee owner is a partnership the usual partnership requirements. Production of a schedule of delivery of all subleases for inspection (and assignment?) at closing; also, all guarantees by third parties of leases. Check for options to extend or cancel lease or abatement rights. Delivery of estoppel certificates from each tenant. Delivery of assignment of leases as collateral security for mortgage debt. Delivery by parent corporation of subsidiary lessee(s) of assignment of guarantee(s) insuring payment of rents and warranty (ies) that no breaches exist of covenants or conditions in existing leases. Delivery of any attornment or non-disturbance agreements. Delivery of the service contracts.
4.
5.
6.
7. 8. 9.
9a. 10.
11.
Delivery of receipted or paid tax bills.
3/78
12. 13. 14. 15. 16. 17. 18.
Production of paid water bills. Delivery of the ground lease for recording. Delivery of the proper corporate resolution authorizing execution of the leasehold mortgage. Delivery of the new leasehold mortgage and assignments of leases as collateral security for recording. Delivery of affidavits of title if New Jersey property. Delivery of escrow agreements. Production and delivery of clearing proofs. The leasehold mortgage should contain a description of both the fee title and leasehold interest with a provision for separate foreclosure. However, if the lender insists on the mortgage simply describing the real estate as the property mortgaged, without the reference to the separate estates of the landlord and tenants. In that case call for:
Closer's Note:
19.
Production, if any, of a side agreement, stating that in the event of default the leasehold mortgagee will realize his security first against the leasehold and then against the fee title.
3/78
Chapter 25 - Page 1 LEASE Legal
ASSIGNMENT AND SUB-LETTING A. Assignment 1. An assignment is the transfer by the lessee of his entire estate without reserving any reversion therein himself. a. b. c. If the lease itself is required to be in writing, the assignment thereof must be in writing. A covenant against sub-letting does not prohibit an assignment. A covenant not to be assigned does not prevent an assignment by operation of law. Charcowsky v. Stahl, 189 N.Y.S. 2d 384 (1959) Putch v. Jacard Realty Co., 253 N.Y.S.2d 335 (1964) (1) R.P.L. 236 eff. May 11, 1965. Notwithstanding any provision to the contrary in lease made after May 11, 1965 relating to property used for residential purposes or partly for residential and partly for professional purposes: (a) The legal representative of a deceased tenant may request the landlord to consent to an assignment of the lease or to a sub-letting (i) The request must be accompanied by the written consent of any co-tenant or guarantor of the lease, and (ii) The name, business and home address of the proposed assignee or sub-lessee. Within 10 days after the request is mailed, the landlord may ask for additional information which would enable him to determine whether he would be acting unreasonably if he rejected the request. Within 30 days after the original request for consent or the additional information is mailed (whichever is later) the landlord must send a notice of his election either to terminate the lease or to grant or withhold his consent. If the landlord fails to send this notice, it shall be deemed a consent to the proposed assignment or sub-letting. If the landlord consents, the lease may be assigned provided the assignee assumes the lease and a written assumption agreement is delivered to the landlord, or the
(b)
(c)
(d)
3/78
premises may be sub-let. In either case, the estate of the deceased tenant and any co-tenant remains liable for the performance of the provisions of the lease for the unexpired term. (e) If the landlord terminates lease or unreasonably refuses to consent, the lease is deemed terminated and the estate of the deceased tenant is discharged from liability. If the landlord reasonably refuses his consent, the lease continues in full force, subject to the right to make further requests for consent to an assignment or a subletting. The statute does not apply to proprietary leases, i.e., a lease held by a tenant by reason of ownership of stock in a corporate owner of property operated on a co-operative basis. Waiver of the statute is void as against public policy.
(f)
(g)
(h) 2.
The assignor remains liable on the express covenants in the lease-privity of contract. a. Assignor relieved when privity of contract destroyed.
3.
Liability of Non-Assuming Assignee a. Is bound by all the covenants in the original lease which run with land. (1) Liability terminates when privity of estate ceases to exist.
4.
Liability as Between Assignor and Non-Assuming Assignee a. The assignee is primarily liable.
5.
Liability of Assuming Assignee a. Is bound by all the covenants in the original lease from the time of the assignment. (1) (2) Is in privity of contract as well as privity of estate with landlord. Landlord may enforce assumption agreement as third party beneficiary.
3/78
Kottler v. N.Y. Bargain House, 242 N.Y. 28 (1926) 6. Liability as Between Assignor and Assuming Assignee a. 7. The assignee is primarily liable.
Conditioner Leasing Corp v. Sternmor Realty, 17 N.Y. 2d 1 (1966) (Real estate purchaser of apartment house took possession of property and leased air conditioning equipment installed therein. He knew that rental for balance of term of lease of the equipment had already become due and payable and insisted upon possession of leased equipment. Held: He became liable as assignee of lease to pay accrued rent for balance of term under acceleration clause.)
B.
Sub-Letting 1. A sub-lease is a transfer of only part of the lessor's estate, leaving a reversion in him as to the premises sub-let. a. b. c. 2. Creates a new relationship of landlord-tenant between sub-lessor and sub-lessee. A sub-letting for more than one year must be in writing. A covenant against assignment does not prohibit a sub-letting.
Liability of Sub-Lessee to Original Landlord a. Is not liable to original landlord on any of the covenants contained in the original lease.
3.
Liability of Sub-Lessee to Sub-Lessor a. Sub-lessee is liable to sub-lessor on all covenants contained in sublease.
4.
Sub-Lessee's Rights a. b. Sub-lessee's rights may be limited by terms of paramount lease. Sub-lessee may pay to landlord rent for which sub-lessor is in default if landlord is willing to accept it. 305 Broadway Co. v. Stanpud Operating Corp., 264 N.Y.S.2d 327 (1965)
3/78
C.
Cooperatives and Condominiums 1. Cooperative bylaws frequently provide that leases may not be assigned and share transferred without the consent of the board of directors or of a stipulated proportion of the tenant-stockholders. Absent a showing of discrimination based upon race, creed, color or national origin, this is valid and not a void restraint on alienation. Weisner v. 791 Park Ave. Corp., 6 N.Y.2d 426 (1959). 2. Condominium bylaws may include provision governing alienation provided the restriction is not based upon race, creed, color or national origin. R.P.L. 339-v.2.
RENEWALS AND EXTENSIONS A. No distinction between renewal - as requiring a new lease and extension - as being merely a continuation of the old term. Masset v. Ruh, 235 N.Y. 462 (1923) (T had lease for 3 years with option to renew and option to buy "at any time during term and existence of lease." T renewed lease and then sought to exercise option to buy. L refused to convey and T sought specific performance. Held: For T.) Gulf Oil Corp v. Buram Realty Co., 11 N.Y.2d 223 (1962) (T had option to buy "at any time during term of lease." After lease expired parties entered into 22 successive extension agreements and T sought to exercise option to buy 19 years after original lease made. Held: For landlord. Masset v. Ruh distinguished.) 1. An option to renew may be exercised by the original tenant or his assignee. Probst v. Rochester Steam Laundry Co., 171 N.Y. 584 (1902) a. If assignee exercises option to renew, he becomes personally liable for all rent to accrue during term as extended. Probst v. Rochester Steam Laundry Co., supra (1) b. Assignor also liable for breaches of lease by assignee during term as extended.
It may not be exercised by a sub-lessee. Loudave Estates, Inc. v. Cross Roads Improvement Co., Inc.,
214 N.Y.S.2d 72 (1961)
3/78
2.
An option to renew is not self-perpetuating unless the intent of the parties that it shall be is explicitly stated. Burns v. City of New York, 213 N.Y. 516 (1915) a. No provision of a lease of real property which states that the term shall be renewed for a specified additional period unless tenant gives notice to lessor of his intention to leave the premises at the expiration of such term shall be operative unless the lessor at least 15 days and not more than 30 days prior to the time specified for the furnishing of such notice to him, shall give the tenant written notice, served personally or by registered or certified mail calling the attention of the tenant to the existence of such provision in the lease. G.O.L. 5-905 A waiver of G.O.L. 5-905 in advance is contrary to public policy. Boyd H. Wood Co. v. Horgan, 291 N.Y. 422 (1943) c. G.O.L. 5-905 is for the benefit of the tenant and he may take advantage of the automatic renewal clause even though the landlord did not give the required statutory notice. J.H. Holding Co. v. Wooten, 291 N.Y. 427 (1943)
b.
4.
Where lease gave tenant option to renew at a rent to be determined by the landlord, tenant exercised the option and landlord increased the rent fivefold, court could hold increase was unconscionable and fix an appropriate rent. Tai on Luck Corp. v. Cirota, 35 A.D. 380 (1970)
5.
In lease expiring in June tenant had the option to renew exercisable in writing before the end of March. Tenant during March in letter sent notice of his exercise thereof but the letter was misdelivered. When landlord came to the premises in early May to post a "For Rent" sign tenant informed landlord about the notice. Landlord refused to let the tenant exercise option at this late date. Held, the option had not lapsed on these facts since tenant was not guilty of bad faith and landlord was put on notice before he had started any steps to find a new tenant. Sy Jack v. Pergament Syosset, 27 N.Y.2d 449 (1971)
ASSIGNMENT OF RENTS Institutional lenders regularly require a collateral assignment of rents and leases as
additional security for commercial loans. In the event of default and subsequent
3/78
foreclosure, the lender can then step into the shoes of the former owner and continue to collect rental payments. A common fault in clearing title where an assignment of rents has been given as additional security for a mortgage, is to procure a release of the mortgage but forget about obtaining a release of the assignment of rents. This makes it necessary to obtain and record a release of the assignment of rents. Before you do this, check the mortgage. Some mortgages contain a provision that a release of the mortgage automatically releases the assignment of rents. See Kratovil, Supra. Chapter 26 A. Common law rule - not deemed to be a conveyance of an interest in real property within meaning of Recording Act. Conley v. Fine, 181 App. Div. 675 (1919) B. R.P.L. 294-a changed common law rule: An assignment of rent may be recorded as a conveyance of an interest in real property and if not recorded is void as against a subsequent assignee of the rent or a subsequent purchaser of the land in good faith, for value, whose assignment or conveyance is first recorded. 1. The recording of an assignment of rent of itself is not notice to a tenant so as to invalidate a payment of rent made by him to the assignor. The tenant must have actual notice of the assignment.
C.
An assignment of rent must be in writing. King v. Kaiser, 3 Misc. 523 (1893)
HOLD-OVER TENANTS A. A hold-over tenant is one who voluntarily remains in possession after the expiration of his term or as a trespasser. Schuyler v. Smith, 51 N.Y. 309 (1873) a. As to holding-over commencing on or after Sept. 1, 1959: Where a tenant whose term is longer than one month holds over after the expiration of such term, such holding over shall not give to the landlord the option to hold the tenant for new term solely by virtue of the holding over. The landlord may, instead, proceed in any manner permitted by law to remove the tenant, or, if the landlord shall accept rent for any period subsequent to the expiration of such term, then, unless an agreement either express or implied is made providing otherwise, the tenancy created by the acceptance of such rent shall be a tenancy from month to month commencing on the first day after the expiration of such term. R.P.L 232-c
3/78
(1)
When tenant remained in possession after end of term and landlord thereafter accepted rent, the tenant became one month-to-month liable for the rent fixed in the lease and not an amount calculated upon the value of use and occupation. Bonner v. Nash, 70 Misc. 2d 752 (1972)
(2)
When tenant knowing termination date of lease held over even though landlord had given him notice 21 days earlier that the rent after the term ended should increase, tenant was liable for the rent set by the landlord and had no right to claim he was entitled to 30-day notice. Rita Knitting Mills v. Seidler, 243 N. Y.S.2d 1002
2.
The holding over by an assignee will not be attributable to the assignor. Phelan v. Kennedy, 185 App. Div. 749 (1919)
3.
The hold-over by a sub-lessee will be attributable to the sub-lessor. Sullivan v. Ringler & Co., 59 App. Div. 184 aff'd, 171 N.Y. 693 (1901)
4.
Effect of landlord's action in refusing to accept rent from holdover tenant. Matter of Jarslow v. Lehigh Valley Railroad, N.Y. 2d 991 (1969)
TERMINATION OF LEASES A. The Expiration of the Term Matter of Vinson v. Greenburgh Housing Auth., 27 N.Y.2d 675 (1970) (Public housing authority cannot terminate a month-to-month tenancy simply by giving tenant one month's notice as provided in the lease, because the due process concept prohibiting arbitrary behavior by agents of government and the relationship between a housing authority and its tenants combine to require the housing authority to state a reason for the termination.) B. C. By Merger Surrender - The tenant yields up his unexpired term to the landlord so that it merges with the landlord's reversion. 1. Express
3/78
a. 2.
When the unexpired term to be surrendered exceeds one year, the surrender must be in writing. G.O.L. 5-703
By Operation of Law - The parties to the lease do some act which is so inconsistent with the existing landlord-tenant relationship as to indicate that they have both agreed to regard that relationship as having terminated. Gray v. Kaufma Dairy & Ice Cream Co., 162 N.Y. 388 (1900) In re Barnes' Estate, 137 N.Y.S.2d 183 (1962) a. b. No writing is required. An abandonment by the tenant of the leased premises prior to the expiration of his term is not in itself a surrender and the landlord is under no duty to relet the premises to minimize his damages. Becar v. Flues, 64 N.Y. 518 (1876) c. If the tenant agrees that the landlord may relet the premises for the tenant's account and the landlord does so, he acts as agent for the tenant, does not re-assume control for his own account and does not effect a surrender by operation of law. Underhill v. Collins, 132 N.Y. 269 (1982)
D.
Summary Proceedings 1. The issuance of a warrant in a summary proceeding annuls the landlordtenant relationship. RPAPL 749 (3) a. The voluntary removal from premises by the tenant after issuance and service of petition and before issuance of warrant cancels the lease. Hoffman Brewing Co. v. Wuttge, 243 N.Y. 469 (1923)
E.
Survival Clauses 1. After the landlord-tenant relationship has been terminated, the lease is at an end and what survives is liability for damages and not for rent. Hermitage Co. v. Levine, 248 N.Y. 333 (1928) a. Liability for damages is single and entire and the amount thereof is to be ascertained when the term would have ended.
3/78
b.
A damage clause may provide that the tenant shall be responsible for monthly deficits after re-entry by landlord. McCready v. Lindenborn, 172 N.Y. 400 (1902) Tenant will pay the difference in rent in equal monthly payments as the amount of such difference shall from time to time be ascertained. See also, Bedford Myrtle Corp. v. Martin, 209 N.Y.S.2d 201 (1960)
8/79
Chapter 25- Page 1 LEASES ESTOPPEL CERTIFICATES AND LEASES AND MORTGAGE ON LEASE Legal Bulletin
1.
When we are to insure an assignment of a lease, a mortgage on a lease, an assignment of a mortgage on a lease or a sub-lease, call for the following: A duly acknowledged Estoppel Certificate is required from the landlord certifying that the lease is in full force and effect and that there is no existing default by the tenant in respect to any of the terms, covenants, conditions and agreements contained in said lease.
2.
When we are to insure an assignment of a sub-lease, a mortgage on a sub-lease or an assignment of such mortgage, we must call for two such Estoppel Certificates, one from the landlord in the sub-leases and one from the landlord in the main lease. In a separate exception we must call for the landlord's consent to the assignment, mortgage or sub-lease, if the lease requires it, or compliance with the requirements of the lease for assignment, mortgage or sub-lease.
3.
8/78
Chapter 29 - Page 1 MORTGAGES General
MORTGAGES
DEFINITION AND DISTINCTIONS FROM OTHER FORM OF SECURITY A "mortgage" is any conveyance of land intended by the parties to be a security for payment of money or doing of some prescribed act. (Jeffrey Towers, Inc. v. Straus, 297 N.Y.S. 2d 350, 31 A.D. 2d 319 (1969)). It is not an alienation or transfer of title but is merely an imposition of a lien. (Resnick v. Croton Park Colony, Inc., 151 N.Y.S. 2d 328, 3 Misc. 2d 109 (1956)). A mortgage is in effect a contract and must be construed in accordance with the intention of the parties as expressed by the language they chose to imply. (Brayton v. Pappas, 383 N.Y.S. 2d 723, 52 A.D. 2d 187 (1976)). What distinguishes a mortgage from any other kind of security is the condition that if the debt it is given to secure is paid in accordance with its terms, it becomes a nullity; if not, it becomes, either automatically by its own operation, or by means prescribed by law, a conveyance absolute. (Wright v. Holbrook, 25 N.Y.S. 516, 18, affirmed 32 N.Y. 587 (1865)). A mortgage has been defined as "any conveyance of land intended by the parties at the time of making it to be a security for the payment of money or the doing of some prescribed act." (Burnett v. Wright, 135 N.Y. 543 (1892)). Although a mortgage is generally referred to as security for a debt for the payment of money, it may also be for the performance of a promise or non-monetary obligation. (Dechow v. Haverkamp, 198 App. Div. 83, 189 N.Y.S. 617 (1921)). TRUST DEEDS Trust deeds intended as security are generally deemed mortgages. (N.Y. Real Prop. Law 320). There is no statutory form for trust deeds as such in New York. PROPERTY AND INTERESTS SUBJECT TO MORTGAGE Property capable of being sold, transferred and delivered, or charged, by means of legal proceedings, with the payment of debts is such an interest as enables its owner to create a charge thereon. (Mutual Life Inc. Co. v. Shipman, 119 N.Y. 324 (1890)). In the narrow contemplation of the common law, it was insisted that a man could not transfer what was not his and therefore could not mortgage property or interests to be acquired in the future. (Jacobson v. Smith, 73 App. Div, 412, 77 N.Y.S. 49 (1902)). However, equity gave effect to such mortgages not recognized at law, deeming them implied contracts to pledge such interests when acquired by the mortgagor, and holding that an equitable mortgage attached upon such acquisition. (Kribbs v. Alford, 120 N.Y.
519 (1890)).
8/78
Despite the different nature of realty and personalty, it is always within the competence of the parties to include within the charge of lien of a realty mortgage personalty or chattels. (Madfes v. Beverly Development Corp., 251 N.Y. 12 (1929)). Personal property therefore is not covered by the lien of a real property mortgage, unless included by a personal property clause. (Cohen v. 1165 Fulton Ave. Corp., 251 N.Y. 24 (1929)). The lien of a mortgage attaches not only to the land in the condition in which it was at the execution of the mortgage, but to everything which becomes by annexation a part of the realty during the existence of the mortgage. Improvements made upon the land and structures are immediately covered by the lien of the mortgage. (Gates v. DeLaMarc, 142 N.Y. 307 (1894)). DEBT OF OBLIGATION SECURED A debt which is the subject of a mortgage is a duty or obligation to pay money and an action can be brought to enforce that obligation. The debt secured by the mortgage may exist at the date of the execution of the mortgage or can be created later if the parties agree. (59 C.J.S. Mortgages 160-161; Brandenburg v. Tirino, 324 N.Y.S. 2d 126 (1971)). The character, terms and amount of the debt must be determined by looking at the instrument to find the actual intent of the parties. (Comellas v. Varicon Corp., 81 N.Y.S. 2d 449 (1948); Ketcham v. Willis, 28 N.Y.S. 2d 52 (1940)). Performance of unliquidated engagements, such as promises to build a new road and sewer, can be secured by a mortgage. (Application of Jeffrey Towers, Inc., 291 N.Y.S. 2d 41 (1968)). A mortgage given to secure an unliquidated demand which contains a limitation on the total amount for which it stands as security, must be strictly construed not enlarged. (59 C.J.S. Mortgages 167). Where a partial mortgage is given to secure a larger indebtedness, the presumption is, in the absence of evidence to the contrary, that it was not given as security for more than its principal sum. (Brandenberg v. Tirino, supra). A pre-existing debt or liability is a sufficient consideration for a mortgage. No new consideration is necessary at the time of the execution of the mortgage unless the mortgagor is a stranger to the debt. (59 C.J.S. Mortgages 91). FUTURE ADVANCES A mortgage may be made to secure future advances or indebtedness if it is executed in good faith. (In re Mayerhofer's Estate, 249 N.Y.S. 2d 896 (1964); In re Harris' Estate, 282 N.Y.S. 571 (1935)).
8/78
There is no question as to the validity of mortgages to secure future advances or liabilities. They have become a recognized form of security. Their frequent use has grown out of the necessities of trade, and their convenience in the transaction of business. (Ackerman v. Hunsicker, 85 N.Y. 43 (1881)). SUPPORT AND MAINTENANCE A mortgage may be given to secure the performance of a contract or agreement by the mortgagor to provide support and maintenance to the mortgagee or to another person. (59 C.J.S. Mortgages 169). However, the mortgage must indicate or refer to the property as security for the obligation for support and maintenance. A separate agreement is not part of the mortgage. (Castelli v. Walton Lake Country Club, 112 N.Y.S. 2d 179 (1952)). INDEMNITY MORTGAGES An indemnity mortgage is a mortgage which is not based on a present debt but is meant to secure the mortgagee against loss or damage which may result because of a contingent liability or responsibility which he has agreed to assume on behalf of the mortgagor. It is valid and enforceable. (59 C.J.S. Mortgages 171). Generally, an indemnity mortgage cannot be enforced by foreclosure or sale of the mortgaged property until the mortgagee has become immediately and absolutely liable for its payment to a fixed amount, so that the fact and extent of the damage to him are definitely fixed. (Lewis v. Duane, 141 N.Y. 302, 36 N.E. 322 (1984)). EXTENSION OF SECURITY TO OTHER DEBTS OR LIABILITIES A mortgage which is given to secure a particular debt cannot be enforced as security for another or different debt, unless the parties agree otherwise. (Fulbany Realty, Inc. v. Perkins, 185 N.Y.S. 2d 605 (1959)). Unless the parties intend otherwise, a mortgage will cover any renewals of the note, bond, or other evidence of the original secured debt. (59 C.J.S. Mortgages 178b). INTEREST The right to recover interest on a mortgage debt arises because of a contract in or accompanying the mortgage. If no contract exists, no interest is owed by the mortgagee. (Washington St. Corp. v. Peninsular Nat. Bank, 279 N.Y.S. 2d 204 (1967)). BONUS TO MORTGAGEE Unless a bonus agreement violates usury statutes, a mortgagor can agree to pay a bonus to the mortgagee. The bonus or commission, if stipulated in the mortgage, becomes a
part of the mortgage debt and is covered by the security of the mortgage. (59 C.J.S. Mortgages 180).
8/78
PARTIES The basic rule in determining the nature of the mortgage transaction, is that which requires the effectuation of the intention of the parties; similarly, this is the basis of the determination of who shall be deemed the parities in the transaction. Whether those who execute it are bound, depends upon the circumstances under which the instrument was delivered. These circumstances are open to proof by parol, and who is bound by the mortgage is subject to the equitable considerations of the court. (Chouteau v. Saydam, 21 N.Y. 180 (1860); Sprague v. Cochran, 144 N.Y. 104 (1894)). A mortgagor is one who owns property and, by a written instrument, pledges that property for some particular purpose, such as security for a debt. He must possess some title or interest in the mortgaged property. (Goodell v. Silver Creek Nat. Bank, 48 N.Y.S. 2d 572 (1944)). A person may act as a trustee even if he has an interest in the subject matter or debt secured by the mortgage. (59 C.J.S. Mortgages 84). The trustee does not have to be a resident in the state in which the mortgaged land is located. (Chelten Trust Co. v. National Automatic Press Co., 215 N.Y.S. 200 91926)). CONTENTS A mortgage of real property must be in writing to be valid and binding. No particular form or words are necessary to create a mortgage. The only requirement is that the instrument should clearly show: a) a present purpose on the part of the mortgagor/grantor to b) convey the title to a designated person as mortgagee c) which is to be held by the mortgagee as security for the payment of a certain sum of money or for the performance of an act by the mortgagor. (Citizen's National Bank and Trust Co. of Oneonta v. State Tax Commission, 87 N.Y.S. 2d 321 (1971)). The instrument must contain a sufficient description of the following subjects in order to be valid: 1) The first formal essential of the mortgage instrument is that it set forth the names of the parties. An instrument, purporting to be a mortgage, which is left blank as to the name of the payee, is absolutely void... However, if authority is expressly granted to fill in blank spaces left in a deed or mortgage, or if the granting of such authority is to be a legitimate factual inference, the grantor or mortgagor with respect to innocent third parties, may be bound by the words inserted. (Harlburt v. Walker, 258 N.Y. 8 (1932)).
8/78
2)
The mortgage instrument must describe the property against which it creates a lien, so that "the thing granted can be sufficiently ascertained." (People ex rel. Myers v. Storms, 97 N.Y. 367 (1885)). And a description of the debt or liability secured. The mortgage must clearly refer to the obligation which the real property is to secure. (Jeffrey Towers Inc. v. Straus, 297 N.Y.S. 2d 450 (1969)).
3)
The covenant to pay a specified sum may be contained in a collateral instrument or in a mortgage by which the instrument is secured. (Broward Operating Co. v. Harding, 3 N.Y.S. 2d 696 (1938)). EXECUTION No problem poses itself when the mortgage is executed by the individual mortgagor in person, if the instrument is "in writing, subscribed by" him, as required by Section 5-703 of the General Obligations Law. However, when such mortgagor seeks to execute it otherwise than personally, other questions arise. The statute of Frauds as cited requires not only that the conveyance be in writing, but also that the power of attorney be in writing. (Sleeth v. Sampson, 237 N.Y. 69 (1924)). The execution of mortgage instruments by a corporate mortgagor involves different problems, and entails different considerations, than an individual's. The corporation, as an artificial entity can act only through its officers and agents. Whether any specific officer or agent is authorized to execute on the corporations behalf must be determined under the usual values of agency, in the absence of provisions to the contrary. (New York etc. R. Co. v. Dixon, 114 N.Y. 80 (1889)). ASSIGNMENT OF OBLIGATION 1. Assignment An assignment may be effected by delivery of the bond or note, or other evidence of the debt, together with the mortgage. (Weaver Hardware Co. v. Solomowitz, 235 N.Y. 321 (1923)). It may in some circumstances be effected by parol. (Levy v. Louvre Realty Co., 222 N.Y. 14 (1917)). But the assignment in writing is the surest and safest method of accomplishing the transfer. (Sanzoro v. Tassone, 120 N.Y.S. 2d 22 (1953)). The possession of an instrument of assignment by the assignee "is presumptive evidence of a delivery of the instrument . . . for valid consideration. (Davin v. Isman, 228 N.Y. 1, 7 (1920). An assignment of a mortgage should be in writing in order to pass the legal title to the assignee. (Sanzoro v. Tassone, supra).
8/78
2.
CAPACITY OF PARTIES The parties to an assignment of a mortgage must have general contractual capacity and a capacity to consummate a transaction of this particular nature. (Application of Cosgrove, 87 N.Y.S. 2d 705 (1949); Larken v. Rejebian, 66 N.Y.S. 2d 776 (1946)). The capacity of a person to take an assignment of a mortgage is usually tested by the same rules which determine his capacity to hold the estate as original mortgagee. An interest in the mortgage or mortgaged premises will not usually affect his capacity to take the mortgage. (Mintz v. Kupferstein, 177 N.Y.S. 2d 652 (1958)).
3.
CONSENT The consent for an assignment may be implied. (Clark v. Rowell, 298 N.Y.S. 232 (1937)).
4.
CONSIDERATION An assignment of a mortgage must be supported by a good and valuable consideration in order to be valid. (59 C.J.S. Mortgages 351). As a general rule, an assignment given in satisfaction of, or as collateral security for, a pre-existing debt is not made on a valuable consideration unless something in addition is done to create a greater or different liability. (Orthey v. Bogan, 226 N.Y. 234, 123 N.E. 487 (1919)). The lack of consideration is not available as a defense to a person who is not a party to the assignment. (59 C.J.S. Mortgages 351).
5.
DELIVERY A physical transfer of the mortgage instrument or instrument evidencing the debt is not necessary to make an effective assignment. (Felin Associates, Inc. v. Rogers, 326 N.Y.S. 2d 413 (1971); Hebrew Home for Orphans and Aged of Hudson County, N.J. v. Freund, 144 N.Y.S. 2d 608 (1955)).
6.
NOTICE A mortgagor may deal with his mortgagee until he receives notice of facts putting him on notice of the assignment. (Chittick v. Thompson Hill Development Corporation, 245 N.Y.S. 71 (1963)). Once the mortgagor learns that the mortgage has been assigned, he is charged with "facts which could have been found by diligent investigation." (Finn v. Wells, 237 N.Y.S. 580 (1929)). However, until he has notice, the mortgagor may do whatever he legally might have done if no
assignment had been made. (59 C.J.S. Mortgages 353).
8/78
If the assignee gives notice to the mortgagor, it must be distinct, unequivocal and clearly identify the assignee. (Barnes v. Long Island Real Estate Exch. and Inv. Co., 84 N.Y.S. 951 (1903)). 7. RECORDATION The recording of an assignment of a mortgage is permitted in New York but recording is not necessary to give notice of the mortgage to subsequent purchasers of the mortgaged premises. (Drobney v. Sullivan, 266 N.Y.S. 245 (1938)). The recording act applies only to subsequent assignee of the same mortgage but not to a subsequent purchaser or encumbrancer of the premises. (Chittick V. Thompson Hill Development Corporation, Supra). It is necessary to record an assignment of a recorded mortgage against a subsequent purchaser of the mortgaged premises but it may be necessary to protect against a subsequent purchaser of the mortgage. (Drobney v. Sullivan, supra). 8. TRANSFER OF A DEBT AS ASSIGNMENT OF MORTGAGE Where the holder of the evidence of the debt secured by the mortgage assigns that evidence without specifically assigning the security, the security passes to the assignee who succeeds to all of the rights of the assignor under the security. (Felin Associates, Inc. v. Rogers, supra). 9. OPERATION AND EFFECT OF A VALID ASSIGNMENT As a general rule, the operation and effect of a valid assignment or transfer of a mortgage transfers all rights and interests of the assignor. (Nichol v. Royal Nat. Bank of New York, 336 N.Y.S. 2d 916 (1972); Application of Riverside Drive 82nd St. Corp., 90 N.Y.S. 2d 549 (1949)). An assignment of a mortgage: 1) carries with it a power of sale if it is incorporated in the mortgage, 2) may operate to transfer the legal title to the mortgaged property where the mortgagee has the title, and 3) implies a warranty that is valid and subsisting agreement . (In re Brooklyn Trust Co., 295 N.Y.S. 1007 (1936)). 10. PRIORITIES OF ASSIGNEE The assignee of a mortgage is entitled to the same priority that the original mortgagee would have had. (Flushing Fed. Savings and Loan Assn. v. Kapner, 133 N.Y.S. 2d 187 (1954)).
8/78
11.
RIGHTS OF ASSIGNEE The assignee of a mortgage has all the rights under the mortgage that his assignor had but no other or greater rights. (Mereogliano Lumber Corp. v. Sea Cliff Homes, 221 N.Y.S. 2d 920 (1961)). In taking an assignment of the mortgage, the assignee is justified in relying upon its terms. (Exchange Place Corp. v. Towan Realty Inc. 225 N.Y.S. 2d 1002 (1964)). The assignee of a purchase money mortgage has no greater rights than the mortgagee/assignor. (Gitlin v. Schneider, 247 N.Y.S. 2d 779 (1964)).
12.
LIABILITIES OF ASSIGNOR After the assignment, the assignor of a mortgage usually has no claim on the mortgage against the mortgagor. (59 C.J.S. Mortgages 384). However, the assignor is entitled to the purchase price from the assignee. (Melnick v. Drucker, 18 N.Y.S. 2d 928 (1938)).
PRIORITIES Unless the parties agree, there is generally no priority between several concurrent debts secured by the same mortgage. (Lowenfield v. Wimpie, 124 N.Y.S. 178 (1920)). However, the parties may agree on the order in which they shall be paid out of the proceeds (59 C.J.S. Mortgages 213). If several debts are secured by the same mortgage and are due or mature at different times, the priority of the lien is established by the order of their maturity. As a general rule the property of successive mortgages on the same property is determined in the order in which they have attached as liens. Where one gives a mortgage on property which he does not own at that time but later acquires title, the mortgage covers only the interest which he takes when title vests in him. A mortgage executed before the mortgagor acquired title to the premises is superior to a mortgage given by him after he had title in the property. (59 C.J.S. Mortgages 215). The assignee of the mortgage is of course, entitled to whatever priority his assignor would have had. (Flushing Fed. Sav. and Loan Assn. V. Kapner, 206 Misc. 564, 133 N.Y.S. 2d 187, 190 (1954)). But when the assignee seeks to enforce his claim he must be able to establish the bona fides of his assignor or any other facts essential to his priority. (Ardisco, Ltd. v. Taconic Holding Corp., 201 N.Y.S. 2d 992, 10 App. Div. 2d 973 (1960)).
8/78
Where an assignee or mortgagee cannot refuse to perform or make advances without subjecting himself to damage or loss, such assignee or mortgagee takes precedence over subsequent lienors who file their liens, after the assignment or mortgage is made, but before the performance is rendered or advances are made. (Hyman v. Hauff, 138 N.Y. 48 (1893); New York & Suburban Fed. Sav. & Loan Assn. V. Fi-Pen Realty Co., 133 N.Y.S. 2d 33 (1954)). A conveyance of real property within New York may be recorded in the office of the clerk of the county in which the real property is situated. Any conveyance of real property which is not recorded is void as against: 1) any subsequent purchaser of the same real property (or portion) who acquires it in good faith and for a valuable consideration from the same vendor or assignor. However, it will not be void unless this subsequent purchaser records before the original conveyance, and 2) the lien upon the same real property (or portion) arising from payments made upon the execution of the contract with the same vendor. Again, however, the original conveyance is not void unless the lien is recorded first and the contract was made in good faith. (N.Y. Real Prop. Law 291, 1968). SATISFACTION AND DISCHARGE 1. DISCHARGE IN GENERAL The lien of a mortgage continues until the debt is paid or it is extinguished by release or operation of law. (Application of Haber, 230 N.Y.S. 2d 755 (1962)). Because of the modern doctrine which holds that the secured debt or obligation is the principal thing and that the mortgage is an incident or accessory to it, the general rule is that whatever extinguishes, discharges or satisfies the debt or obligation will also discharge the mortgage. (Carousel, Inc. v. Ingegno, 247 N.Y.S. 2d 534 (1963)). However, the debt and the mortgagor's liability for it are not the same thing so the mortgage is not discharged if it is the intention of the parties only to release the mortgagor's personal liability for it and not to extinguish the debt. (59 C.J.S. Mortgages 444). 2. PAYMENT OF THE SECURED DEBT the mortgage debt is satisfied when the debt is paid in full by the person primarily liable. The amount owned depends on the terms of the agreement. (In re Realty Associates, 267 N.Y. 91, 195 N.E. 694 (1939)). In order to discharge the mortgage, the payment should be made to the rightful owner of the mortgage or to one authorized by the mortgagee to receive payment. (Yuni v. Herscovitz, 32 N.Y.S. 2d 199 (1942)).
8/78
The trustee in a deed of trust generally has no authority to receive payment. (Dye v. Lewis, 324 N.Y.S. 2d 172 (1971)). If the mortgage does not specify a time for payment, a reasonable time will be allowed. The mortgagor will generally not be compelled to make, or the mortgagee compelled to accept, payment before the due date. (59 C.J.S. Mortgages 447). Payment after default but before foreclosure is sufficient under the equitable or lien theory to discharge the lien. (59 C.J.S. Mortgages 447). 3. WHAT CONSTITUTES PAYMENT IN GENERAL The intended payment must actually reach the creditor or his agent before it is effective. (Union Bank v. Schneider, 128 N.Y.S 878 (1911)). The question of whether payment has been made so as to act as a discharge of the mortgage is dependent on their intention. (Sawyer v. Marmaro, 235 N.Y.S. 631 (1929)). Unless otherwise agreed, payment of the mortgage must be made in money. The taking of a note or bond for the amount due on the mortgage will not constitute payment unless the parties intend it to be payment. (59 C.J.S. Mortgages 448). 4. PAYMENT'S EFFECT Payment of the mortgage debt generally discharges the mortgage and terminates the mortgagee's rights. (Mann v. Sterling Holding Company, 179 N.Y.S. 2d 821 (1958)). The mortgagee is entitled to not more than full payment of the secured amount. (Central Hanover Bank and Trust v. Roslyn Estates, 42 N.Y.S. 2d 130 (1943)). Although payment is made, the parties may agree to keep the mortgage alive if innocent third parties are not prejudiced by such action. (Application of Cumberland Garage, 73 N.Y.S. 2d 571 (1937)). 5. PERFORMANCE OF PARTICULAR CONDITIONS If a mortgage agreement stipulates that the mortgage can be satisfied or released on the performance of some particular condition, performance of the condition discharges the mortgage by operation of law. (Jeffrey Towers, Inc. v. Straus, supra). A mortgage can also be conditioned to become void on the occurrence of a future event other than payment. If the future event occurs, the mortgage is discharged by operation of law. (Kellerman v. Kellerman, 164 N.Y.S. 2d 557 (1957)).
8/78
6.
TENDER OF PERFORMANCE An unaccepted tender of the amount due on a mortgage does not discharge the mortgage debt. (Geary v. Dade Development Co., 29 N.Y.S. 2d 457 (1972)). A mortgage is discharged in New York by a proper tender made at any time after the mortgage becomes payable and before foreclosure. (In re Greenbaum, 14 N.Y.S. 983 (1939)).
7.
COMPROMISE AND SETTLEMENT A mortgagee's offer to accept less than the amount due on the mortgage debt is revocable before acceptance by performance by the mortgagor. (M.V.T. Corp. v. Mount Vernon Lodge, 31 N.Y.S. 2d 705 (1942)).
8.
CHANGE IN FORM IN DEBT As long as there is no agreement or mutual intention that the change of form operates as a payment of any express release, a mortgage is not discharged or its lien affected by any change in the form of the debt which it secures. (First national of Glens Falls v. Myers, 192 N.Y.S. 2d 940 (1959)). Where a note secured by mortgage is taken up, at or before the maturity date, and a new or renewal note is substituted for that note, the mortgage continues as security for the debt in its new form. The rights and remedies of the mortgagee do not change unless there is an actual agreement or mutual intention of the parties that the mortgage shall be discharged. (Felin Associates Inc. v. Rogers, supra). A mere change in the mode or terms of payment does not discharge or in any way impair the mortgage security unless there is an express release. (Schuler v. Schuler, 357 N.Y.S. 2d 572 (1974)). The mortgagor may agree by express or implied contract, to pay and the mortgagee to accept payment of the mortgage debt before its maturity. However, the agreement must be founded on or supported by some new consideration in order to be enforceable. (Feldman v. Rockford Co., 126 N.Y.S. 646 (1910)).
9.
ENTRY OF SATISFACTION; SATISFACTION OF RECORD If a mortgage is recorded, space is usually provided for an entry of satisfaction. (Drobeny v. Sullivan, 266 N.Y.S. 245 (1933)).
8/78
ENFORCEMENT & FORECLOSURE A. FORECLOSURE Foreclosure is the means by which the mortgagor is deprived of the right to redeem the mortgaged estate. It denotes the end of a procedure adopted by the mortgagee to bar the rights of the mortgagor and includes the sale of the mortgaged property. (Capone v. Hinck, 296 N.Y.S. 346 (1937)). B. STEPS IN ACTION TO FORECLOSE An action to foreclose the mortgage cannot be commenced until: a) the plaintiff/mortgagee obtains a final judgment on the mortgage debt and b) an execution against the mortgaged property has been issued upon the judgment to the sheriff and c) the execution has been returned wholly or partly unsatisfied. The complaint must state whether any other action has been brought to recover any part of the mortgage debt, and, if so, whether any part has been collected. No other action shall be commenced or maintained to recover any part of the mortgage debt. (N.Y. Real Prop. Acts Law 1301, 1963). The purpose of this section is to avoid multiple litigations to recover the same mortgage debt and to confine proceedings to collect the mortgage debt to one court and one action. (Citibank Mid--Hudson, N.A. v. Rohdie, 368 N.Y.S. 2d 109 (1975)). In an action to foreclose a mortgage, the plaintiff must join all of the parties whose interests are subordinate to that of the mortgagee. (G.B. Seely's Son, Inc. v. Fulton-Edison, Inc., 382 N.Y.S. 2d 516 (1976)). The following persons must be made a party defendant if their claim is subject and subordinate to the plaintiff's lien: 1) every person who has an estate or interest in the property and every person entitled to the reversion, remainder or inheritance of the real property or any interest in the property; 2) every person having a right of dower or an inchoate right of dower in the real property or any part of it; 3) every person having any lien or encumbrance upon the real property which is claimed to be subject and subordinate to the lien of the plaintiff; and 4) where the mortgage is upon any of the public utilities regulated by the public service law. (N.Y. Real Prop. Acts Law 1311, 1963)..
8/78
Any person who is liable to the plaintiff/mortgagee for payment of the debt secured by the mortgage may be made a defendant in the action. (N.Y. Real Prop. Acts Law 1313, 1963). If the defendant fails to answer or admits the right of the plaintiff , the court shall determine the amount due and whether a sale of the mortgaged premises will provide an amount sufficient to pay for the debt. (N.Y. Real Prop. Acts Law 1321, 1963). The plaintiff must file a notice of the pendency of that action at least twenty days before a final judgment directing a sale is rendered. The notice must specify the date of the mortgage, the parties and the place of recording. (N.Y. Real Prop. Acts Law 1331, 1963). The function of this notice is to carry out the public policy that a plaintiff's action shall not be defeated by an alienation of the property during the course of the lawsuit. (Mechanics Exchange Savings Bank v. Chesterfield, 309 N.Y.S. 2d 548 (1970)). The defendant/mortgagor can avoid foreclosure proceedings by paying the amount due for principal, interest and costs of the action into the court. (N.Y. Real Prop. Acts Law 1341, 1963). If a judgment of sale is given to the plaintiff/mortgagee, it must direct that the mortgaged premises be sold to pay the debt. (N.Y. Real Prop. Acts Law 1351, 1963). The primary purpose of a mortgage foreclosure judgment is to divest the mortgagor of his ownership of the mortgaged property and to make it, or the proceeds of the sale, available to the mortgagee to satisfy his claim. (DaCosta v. Hamilton Republican Club of Fifteenth Assembly District, 65 N.Y.S. 2d 500 (1946)). The right to redeem is an essential part of the mortgage. (Wallace v. McCabe, 245 N.Y.S. 2d 854 (1963)). The mortgagor has a right to redeem but if he fails to do so, he shall be excluded from claiming any title or interest in the property. (N.Y. Real Prop. Acts Law 1352, 1963). If there has been no redemption, the officer who conducts the foreclosure sale will execute a deed to the purchaser. The mortgagee/plaintiff may become a purchaser, as well as any other party to the action. However, before the officer executes the deed to the purchaser, the plaintiff must file the mortgage in the county recorder's office. (N.Y. Real Prop. Acts Law 1353, 1963).
8/78
C.
NOTICE OF SALE Proper notice must be given by the person entitled to execute the power of sale. Proper notice as described by N.Y. Real Prop. Acts Law 1402 must state time and place of sale. Notice must be published in the county or in the municipal corporation a part of which is within the county in which the property to be sold is situated. A copy of the notice must be posed eighty-four (84) days before the date of sale, in a conspicuous place, at or near the entrance of the building where the sale is to be held. A copy of the notice must also, be delivered to the county clerk at least eighty-four days prior to the sale. (N.Y. Real Prop. Acts Law 1402, 1963). A copy of the notice may also be served in a like manner upon subsequent grantee or mortgagee of the property whose conveyance was recorded, in the proper office for recording in the county, at the time of the first publication of the notice of sale. (N.Y. Real Prop. Acts. Law 1402, 1963). Notice of sale will be given by personal service at least fourteen (14) days prior to the sale to any person whose conveyance is upon record. For foreign corporations or individuals not in the state notice will be given in a like manner at least twenty-eight (28) days prior to the day of sale. Notice will be given to any others in the same manner or by depositing a copy of the notice in the post office directed to the person to be served, at his place or residence, at least twenty-eight (28) days before the sale. (N.Y. Real Prop. Acts Law 1403, 1963).
D.
SALE The sale must be at public auction, in the daytime, on any day other than Sunday or a public holiday, in a county in which the property is situated. (N.Y. Real Prop. Acts. Law 1407, 1963). A purchaser of the mortgaged premises, upon a sale conducted as prescribed by this statute, obtains title thereto, against all bound by the sale, without the execution of a conveyance. (N.Y. Real Prop. Acts. Law 1425, 1962). The purchaser at the foreclosure sale is not required to pay the purchase money until affidavits setting forth the particulars of the notice and sale (as required by section 1421 and 1422) are filed or delivered to him for filing. (N.Y. Real Prop. Acts Law 1425, 1962).
8/78
MORTGAGES - CLEARANCE One of the most important title defects to be considered by the contract draftsman and underwriter is the mortgage to be cleared at closing. See 53 ALR3d 678. This is considered elsewhere. See Kratovil, Modern Real Estate Documentation Chapters 16,17 and 19. The important thought to bear in mind is that all outstanding mortgages must be satisfied, subordinated or otherwise disposed of. Title practices are different throughout the country. Local custom will rule. Whenever possible, obtain the original mortgage with a satisfaction piece together with the canceled note or bond. If the mortgage has been spread, you must also obtain the original spreader agreement with the satisfaction piece. If the mortgage is to be satisfied, obtain a pay-off letter from the lender in advance of closing and verify the per diem interest through the date of closing, plus a cushion sufficient to cover the number of days necessary to get the closing proceeds to the prior lender. MORTGAGES AND OTHER LIENS If the title commitment shows a recorded mortgage or other lien, it is quite customary to pay off the lien at closing, by use of part of the purchase price. Where a purchaser is paying off the mortgage, he must pay the right party. He comes under the payment rule rather than the release rule. Kratovil, Modern Mortgage Law and Practice Chapter 37. Where the mortgage is a deed of trust running to a corporate trustee, a release deed by the corporate trustee is usually acceptable. Where the trustee is an individual, the title company will ask to see the canceled deed of trust and note. At times the deed of trust and note cannot be produced. They have been destroyed or mislaid. In such case, the title company or purchaser will usually demand a lost mortgage or note affidavit and surety company bond. Who knows, for example, who is holding a bearer note secured by a deed of trust? If, however, the deed of trust secures a note running to a well-known lending institution, a corporate trustee will issue its release deed on proof furnished by the lending institution that the institution never sold, pledged, or otherwise disposed of the papers and that the debt was paid in full. If the party holding the mortgage or other lien cannot be paid in full, usually because the amount of his lien is larger than the sale price, he may be willing to give a partial release of his lien as to the property sold. This is a release in ordinary form coupled with a statement that the release is confined to the particular land described. Obviously a satisfaction of mortgage cannot be used in this situation. That form is used only where the debt is paid in full. In some cases a lienor may be willing to subordinate his mortgage to the new mortgage, in which case a subordination of lien is employed. See Subordinations and Kratovil, Modern Real Estate Documentation, Chapter 36.
8/78
MORTGAGES - ACCOMMODATION MORTGAGES MADE BY CORPORATION When an accommodation mortgage is made by a corporation for the benefit of the individual(s) in the corporation, question arises as to whether the first requirement appearing in Schedule B-1 of the Title commitment has been complied with. In such a situation the proceeds of the mortgage go to the individual and not to the corporation in which case the corporation does not have the use of the funds which are secured by corporations mortgage on its property. Such a mortgage is likely to be determined to be as to both present and future creditors. A similar risk is present where a mortgage is given by a corporation for the sole purpose of financing the purchase of the stock of the corporate mortgagor by third party stockholders. In that instance the risk is that the proceeds of the loan will be used by the third party individuals to finance the purchase of corporate stock. See Roxbury State Bank v. The Clarendon, 303 A2d 340. Therein the court held that "a corporation may not lawfully executed a bond secured by a mortgage on corporate property, to the detriment of its creditors, as a pure accommodation to one or more of its stockholders". In such a case the creditors rights exclusion must not be removed or modified. Such a transaction may also constitute a reduction of corporate capital without complying with statutory procedures for such purpose, in which case the transaction would be void. This requires a review of the state statutes. If the transaction would be void the title insurer should decline to guaranty the validity of the lien altogether. see also: Collateral Mortgages in Title Insurance Underwriting Principles and Exception Language. MORTGAGES - AFTER ACQUIRED PROPERTY CLAUSE In commercial loan transactions it is customary to insert in corporate mortgages or deeds of trust an after-acquired property clause, by which it is agreed that the lien of the mortgage or deed of trust will extend to and cover property subsequently acquired and attached to or installed in or upon the mortgaged property. Such clause is valid and enforceable against the mortgagor [Pa. cases cited in Ladner, Conveyancing in Pennsylvania, sec 12.18 n.44] With regard to a mortgage which may also extend to lands acquired by the mortgagor in the future, such property is said to be subject to an equitable mortgage [Cunningham and Tischler on Mortgage, sec. 55, 113 and 114 (1975)]. Such mortgages will frequently not appear in the chain of title to the property being examined. A subsequent mortgagee or purchaser for value without notice of the prior mortgage will obtain priority over the mortgage containing an after acquired property clause, also sometimes called a "Dragnet Clause", Tischler, supra, sec 113 n. 94 citing major Treatise. The underwriter should take note of the fact that while the law is pretty clear on the effect of such a mortgage clause upon the priority rights of a subsequent purchaser or lender without knowledge, it is less clear as to how it may apply to the contractual obligations of a title insurer under insuring clause 6 of the loan policy. Remember, real property law and contract law can sometimes conflict and a title insurer must look to both sometimes when undertaking his task. For example, if the mortgages
which do appear in the chain of title contain cross default or cross collaterization
8/78
provisions to other mortgages prudent underwriting would necessitate further investigation. This highlights an important point that cannot be emphasized enough. When examining title to commercial property, the title examiner/underwriter must examine, review and read thoroughly all mortgages set forth in the title search in their entirety. For general observations on clauses in large-scale transactions refer to Kratovil, Modern Real Estate Documentation, chapter 25 in its entirety. Examining abstracts will not suffice. If the examiner or underwriter does this, he/she runs the risk of certifying either those mortgages or the mortgage to be insured in the wrong position of priority. Furthermore, every effort must be made to avoid referring to the insured mortgage by reference to recording data in lieu of a property description. This is particularly crucial in the case of commercial mortgages which contain after-acquired property clauses. Title insurers do not wish to be seen as insuring (by implication) the validity of such a clause, or that the mortgagor will acquire an interest in a particular parcel of property in the future. MORTGAGES - ASSIGNMENTS OF MORTGAGE - PROCEDURE No assignment of a mortgage should be insured unless there is evidence of delivery of the bond or note and the mortgage which it secures. In addition, instruments of estoppel should also be secured. By way of brief explanation, it is fundamental that the bond or note is the evidence of the debt while the mortgage is the security for the indebtedness. Because the mortgage is the security for the obligation the courts have held that an assignment of the mortgage alone would be of no effect. The security cannot be separated from the indebtedness and cannot exist independently of it. Therefore, no assignment of a mortgage can be insured unless the bond or note are also delivered with the assignment. Delivery is essential. In confirmation of the validity and value of the bond and mortgage, an estoppel certificate must be obtained from the owner of the property and the indebtedness and should state the amount presently due on the mortgage, the interest rate, and that there are no offsets or defenses to the mortgage. From the assignor the company requires a statement that the assignor has not accelerated the maturity of the indebtedness or, if he has, that there has been a proper reinstatement of the obligation. MORTGAGE - DOCTRINE OF MERGER Where the record title shows that the owner of the mortgage subsequently acquired fee title the doctrine of merger of estates should not be presumed. While a merger at law follows inevitably upon the union of the greater and lesser estates in the same ownership it does not so follow in equity. The doctrine is not favored in equity and there the estates will be kept separate where such is the intention of the parties. The examiner or underwriter must also consider the possibility of an unrecorded assignment. The courts have held in some cases that an assignee of an unrecorded mortgage may prevail against a subsequent bona fide purchaser. See Curtis v. Moore, 152 N.Y. 159 decided by the New York Court of Appeals. The facts of that case are as follows: The holder of the mortgage assigned it to a person who did not record the assignment. Thereafter, the mortgagee and holder of the mortgage acquired the fee title. On the face of the record
8/78
the lender appeared to own both estates. The mortgagee later sold the property to a person who had no knowledge of the unrecorded assignment. The assignees of the mortgage then brought an action to foreclose against the bona fide purchaser and prevailed. The court said that the purchaser should have required the mortgage be satisfied and that in assuming merger he acted at his own peril. The same may be said of an underwriter. Insist that the mortgage be discharged. MORTGAGES - MOTOR FREIGHT CARRIERS - ICC APPROVAL REQUIRED Section 214 of the Interstate Commerce Commission Act (49 USCA 314) limits the amount of indebtedness incurred by interstate carriers to an aggregate of $1,000,000.00 unless specific approval is obtained from the ICC. Paragraph 11 of section 20(a) of Title 49 requires that any securities issue or any obligation or liability assumed by such carrier be approved by the ICC before their issuance. Real estate mortgages are included within the scope of this section. Securities are defined as "any share of capital stock or any bond or other evidence or interest or indebtedness of the carrier". It is not the underwriters place to determine whether the provisions of these sections would affect the existence of the debt or the validity of the mortgage lien upon the land. Insuring clause 5 of the loan policy obligates the insurer of title to disclose which may affect the invalidity or unenforceability of the lien of the insured mortgage upon the title. MORTGAGES - PARTICIPATION AGREEMENTS In large-scale commercial transactions it is quite common for the lender to offer other lenders the opportunity to participate in the transaction. Other lending institutions, seeking outlets for their loanable funds, will buy participation in another lender's mortgage if they like the risk and the structure of the transaction. A participation is a shared loan whereby one lender, usually called the lead company, divides into shares a large loan which it has or will make. These shares are then offered for sale to participant lending institutions. Participating interests in mortgages are generally created by an assignment whereby the assignor assigns to the assignee a junior interest in the mortgage to the extent of a stated dollar amount and interest thereon, accrued and to accrue. The bond and mortgage are usually retained by the lead company. This procedure is satisfactory under most circumstances and the owner of the property is notified to pay interest accordingly. Participation Agreements are sometimes executed in order to clarify the understandings and the rights of the respective parties. The proper method for disposing of a paid participating interest is to deliver an assignment (or reassignment) to the lead company. A sale of a Participation is a sale of a security within the scope of the Security Laws. See the section on Securities in Title Insurance Underwriting Principles and Exception Language.
8/78
It is not uncommon for the title insurer to be called upon to issue a mortgage participation endorsement. If this is requested you should not "undertake to insure the insured as to the order of rights of priority or the enforcement thereof with respect to the owner and holder of an interest known and designated as a Participation Agreement made by (name) with (name) dated and recorded in Book page and another Participation Agreement made by (name) with (name) dated and recorded in Book page except that the company does certify and insure that such holders have duly executed Subordination Agreements dated which are intended to be recorded, which subordinate such interests to the interest insured and certified herein". NOTE THAT THIS IS SAMPLE LANGUAGE. EACH TRANSACTION WILL DIFFER. For further information on these types of arrangements, refer to Kratovil, Mortgage Law The owner of a one-fifth subordinate interest in a mortgage may not sue to recover on the bond when the participation agreement, from which his interest in the mortgage arose, gave the holder of the remaining interest the right to foreclose and receive proceeds. The bond is a single and entire obligation which should not be split to commence a suit upon a minor portion thereof. Goodwin v. Investors & Traders Realty Co., 210 A.D. 38, 205 N.Y.S. 432 MORTGAGES - PARITY CLAUSE This issue is not likely to be present in a residential transaction. It may arise in commercial transactions. Bear in mind that a mortgage is personalty. It serves as security for the debt. The Note is evidence of the debt. Where one mortgage secures several notes and the notes are sold to different persons, various states have different rules governing the relative priority of such notes. The rule followed in most states is that where a mortgage secures a number of notes, absent a contrary provision, all the notes have equal lien regardless of their maturity dates or the dates of their assignment. For contrary state rules refer to Kratovil, Modern Real Estate Documentation sec. 506. Failure to understand these rule differences have led to unanticipated difficulties. Most printed mortgage forms are intended for use only when the mortgage secures one note. Where the underwriter becomes aware that the mortgage will or is intended to secure several notes he/she should require this be reflected in the mortgage instrument. MORTGAGE - PARI PASSU This term refers to commercial loan transactions where the Indenture of one Mortgage is insured as a co-equal first priority mortgage with another prior or concurrent mortgage. This is very sophisticated underwriting. It may or may not involve the same lender who is interested in preserving the continued priority of the first mortgage. and it may also involve Inter-Creditors Agreements. Special endorsements must be drawn. Both mortgages should contain cross-default clauses. Otherwise, how can you compel the other lender to foreclose? You should also consider inclusion of an anti-marshalling clause.
See Kratovil, Modern Mortgage Law and Practice, Chapter 18, sec 233.
8/78
MORTGAGES - SPREADER AGREEMENT A spreader Agreement is used when an existing mortgage is sought to be extended to cover other property for the better security of the debt. This may indicate "antecedent debt problems". See Title Insurance Underwriting Principles and Exception Language. Be cognizant of this fact. The description in this agreement must be accurate and cover the entire property to be mortgaged. Any number of parcels may be covered but each parcel must be properly indexed in the recording office of the county where the respective properties are located. In New York, an affidavit, executed in duplicate, must be delivered to the recording officer with the agreement which must state that new indebtedness has been created. This is necessary in order to claim exemption from the mortgage tax (sec 255 Tax law). A spreader agreement may also be used when an owner has acquired adjoining property, or property located elsewhere, and he/she obtains an additional loan. In this instance the new loan will be secured by a new mortgage and consolidated with the old mortgage, which is then spread by the same agreement to cover all parcels. When spreading mortgages over leased adjoining parcels, the lease subordination clause must be considered as though a new mortgage were being executed. Often this is overlooked to the dismay of owners when they try to close their transactions.
4/78
Chapter 29 - Page 1 MORTGAGES Title
MORTGAGE DEFINED Any conveyance of land intended by the parties at the time of making it to be a security for the payment of money or the doing of some prescribed act. Burnett v. Wright, 135 N.Y. 543 (1892); Jeffrey Towers, Inc. v. Straus, 297 N.Y.S. 2d 450 Aff'd, 26 N.Y.2d 813 (1970) LEGAL LIEN MORTGAGE A conveyance by the mortgagor to the mortgagee giving the mortgagee merely a legal lien on the mortgaged land, but no estate therein, nor title thereto, nor the right to possession thereof. A. Is the type of mortgage existing in New York. Holmes v. Gravenhorst, 263 N.Y. 148 (1933)
THE STATUTE OF FRAUDS A. A mortgage is a conveyance of an interest in real property within the meaning of G.O.L. 5-703 and therefore must be in writing and subscribed by mortgagor or by his lawful agent duly authorized in writing. A contract to give a mortgage is a contract for the sale of an interest in real property within the meaning of G.O.L 5-703. An assignment of the mortgage itself or a contract to assign the mortgage, need not be in writing, the mortgage being deemed a chose in action. Flyer v. Sullivan 134 N.Y.S. 2d 521 (1954) 1. Except as otherwise provided in Articles 2, 8 and 9, a contract for the sale of personal property exceeding $5,000 in amount or value is not enforceable unless in writing, signed by the party against whom enforcement is sought or by his authorized agent. U.C.C. 1-206
B. C.
D.
Transfer of mortgagor's interest must comply with Statute of Frauds.
EQUITABLE MORTGAGES Defined as security transactions which fail to satisfy the requirements of legal mortgages but nevertheless are treated as mortgages in equity.
4/78
A.
Agreement to Give a Mortgage. Where one party advances money to another upon the faith of a verbal agreement by the latter to secure its payment by a mortgage upon certain lands, but which is never executed, or which, if executed is so defective or informal as to fail in effectuating its purpose, equity may impress upon the land intended to be mortgaged a lien in favor of the creditor who advanced money for the security and satisfaction of his debt. Sprague v. Cochran, 144 N.Y. 104 (1894) 1. The promise by the debtor is within the Statute of Frauds (G.O.L. 5-703) a. The payment of money by the creditor is not part performance which would take the transaction out of the Statute of Frauds. Sleeth v. Sampson, 237 N.Y. 69 (1923) Possession plus improvements is part performance sufficient to take the transaction out of the Statute. Smith v. Smith, 125 N.Y. 224 (1891) Equity will grant relief where a portion of the land intended to be mortgaged was omitted from the description. Sprague v. Cochran, 144 N.Y. 104
b.
c.
2.
The equitable lien will be cut off if the property is conveyed to an innocent purchaser for value. Sprague v. Cochran, Supra Is entitled to preference over subsequent judgment creditors. Savings & Loan Ass'n of Kingston v. Berberich, 264 N.Y.S.2d 989 (1965); Payne v. Wilson, 74 N.Y. 348 (1878)
3.
B.
Defective Legal Mortgage A defectively executed mortgage, although it fails to create a legal mortgage will be given effect as an equitable mortgage. Hamilton Trust Co. v. Clemes, 163 N.Y. 423 (1900)
ABSOLUTE DEEDS AS MORTGAGES A. A conveyance absolute on its face may in equity be shown by parol to have been intended as a mortgage. Mooney v. Byrne, 163 N.Y. 86 (1900) 1. Burden of proof is on the party asserting that conveyance absolute on its face is a mortgage and he must sustain that burden by clear and convincing proof. In re 716 Third Ave. Holding Corp., 340 F.2d 42 (C.A. 2d 1964),
cert. denied, 381 U.S. 914
4/78
2. B.
Relevant Facts: value of land in relation to consideration; retention of possession by transferor; debt owed by transferor.
Although conveyance deemed to be a mortgage, the mortgagor cannot redeem from a purchaser in good faith and for value to whom the mortgagee conveyed the land. 1. Mortgagor may enforce right of redemption against purchase money deemed to be in mortgagee's hands in an amount equal to value of land at time of action to redeem. Mooney v. Byrne, 163 N.Y. 86 (1900)
C.
Deed conveying real property which by any other written instrument appears to be intended as a mortgage must be considered a mortgage. Person for whose benefit deed is made derives no advantage from recording it as a deed unless the writing, indicating it to be a mortgage is also recorded with it and at the same time. RPL 320. 1. Deed, whether or not accompanied by defeasance in writing, should be recorded as a mortgage. O'Dell v. Montrose, 68 N.Y. 499 (1876)
THE OBLIGATION SECURED A. Any obligation capable of reduction to a money equivalent may be secured by a mortgage. 1. 2. 3. B. The obligation need not be personal to mortgagor. May be a pre-existing debt. Mortgage does not contain an implied covenant for the payment of the sum intended to be secured. RPL 249
Future Advances 1. A mortgage may be made to secure advances to be made in the future and it constitutes security from the beginning for the entire performance of the mortgagor. Such a mortgage has priority over subsequent encumbrances to the extent of the advances made at the time the subsequent encumbrances became effective.
2.
4/78
3.
If the obligation to make advances is optional with mortgagee, the mortgage, if recorded, will have priority as to advances made after intervening liens have become effective, provided the mortgagee did not have actual notice of such intervening liens. Ackerman v. Hiensicker, 85 N.Y. 43 (1881) If the making of future advances is obligatory on the mortgagee, or where the right to decline to make them depends upon facts outside the mortgage instrument and may be the subject of dispute, all advances made have priority over intervening liens regardless of notice. Hyman v. Hauff, 138 N.Y. 48 (1893) a. 13(1) Lien Law creates an exception in favor of mechanic's liens.
4.
C.
Defenses 1. To the extent that the secured obligation is invalid, or subject to a defense, so too is the mortgage securing it. a. If mortgagor conveyed to a grantee who took subject to or assumed the mortgage the amount of which was deducted from the purchase price, the grantee may not avail himself of a defense which was available to his grantor, the mortgagor.
2.
Fraud, duress and mistake are defenses to an action to enforce a mortgage. Kline v. Paine, 1 N.Y.2d 15 (1956) a. Will not serve as basis for affirmative relief unless consideration received is restored. See Jo Ann Homes v. Dworetz, 25 N.Y.2d 112 (1969).
3.
Usury a. The legal rate of interest shall be the rate prescribed by the banking board, or if no rate has been so prescribed, 6% G.O.L. 5-501 Banking Law 14-a The banking board shall have power, prior to Sept. 1, 1972, to prescribe by a regulation a rate of interest not less than 5% nor more than 7 1/2%. Banking Law 14-a(2)(a)(1) No rate of interest prescribed by banking board shall remain in effect after Sept. 1, 1972, except that any loan or forbearance lawfully made on or before that day shall continue to be enforceable in accordance with its terms. Banking Law 14-a (2)(c)
b.
c.
4/78
d.
A usurious obligation is invalid, and the creditor cannot recover any part of it. G.O.L. 5-511 (1) A usurious loan made by a savings bank or a savings and loan association results in a forfeiture of the entire interest, but the principal may be recovered. G.O.L. 5-511
e.
A provision whereby the debtor agrees to pay, after maturity, interest at a higher rate than permitted by the usury laws does not render the contract usurious if made in good faith and without intent to evade the usury laws. H.D.S. Trading Co. v. Redisch, 186 N.Y.S.2d 696 (1959) The borrower may avail himself of the defense of usury, or may seek affirmative relief in an action to have the mortgage removed of record as a cloud upon his title without paying or offering to pay any interest or principal as a condition precedent. G.O.L. 5-515. Williams v. Fitzhugh, 37 N.Y. 444 (1) However, if part of the obligation which the mortgage secures is void and part valid, he will not be entitled to affirmative relief without paying what he owes on the valid obligation. This is true despite the fact that usury would be a good defense to an action by the creditor because a mortgage void in part as securing a usurious debt, is void altogether. Williams v. Fitzhugh, supra.
f.
g.
Affirmative relief available to borrower is personal to him and does not, on his death, pass to his heirs, devisees or representatives. They cannot maintain action for the cancellation of a usurious mortgage without first paying, or offering to pay the sum actually loaned. However, the defense of usury is available to them. Buckingham v. Corning, 91 N.Y. 525 (1883). If the borrower has conveyed the property, he is not entitled to affirmative relief without paying or offering to pay the indebtedness, but he can still set up the defense of usury in an action on the debt. Edelman v. Cymberg, 261 App. Div. 698 A grantee of the mortgaged premises who has taken subject to or assumed a specific mortgage, the amount of which has been deducted from the purchase price, cannot avail himself of the defense of usury. Hartly v. Harrison, 24 N.Y. 170 (1861) Del Rubio v. Duchesne, 284 App. Div. 89 (1954)
h.
i.
4/78
j.
The defense of usury is not available to a corporation, nor can it have affirmative relief, even though the corporation was formed for the express purpose of evading the usury laws. G.O.L. 5-521 Leader v. Dinkler Management Corp., 20 N.Y.2d 393 (1967) (Loan made by check payable to individual. Money did not pass through corporate account. Defense of usury available to corporation). (1) (2) The bar of the statute carries through to its grantees and to surety and guarantor of its obligation. The defense of usury is available to a corporation, the principal asset of which is a one or two family dwelling and the corporation was organized, or the controlling interest therein was acquired, within six months prior to the mortgage was executed. A waiver of the defense of usury by such corporation is contrary to public policy and void. G.O.L. 5521(2)
k.
A purchase money mortgage is not a loan within the terms of the usury statute and is not void for usury where the purchase money mortgage has not been used as a cloak for an actual loan at excessive interest. Mandelino v. Fribourg, 23 N.Y.2d 145 (1968); DelRubio v. Duchesne, 284 App. Div. 89 (1954)
3.
If a husband and wife occupy real property as a home, or affirm that they are about to occupy real property as a home, then regardless of the minority of either or both, each has power: a. To enter into and contract for a loan with respect to such real property with a bank whose home office is in N.Y. and execute any instrument necessary to effect the loan and provide security for it. To hold and dispose of such real property and make contracts, deeds, mortgages and other instruments necessary and appropriate to acquire or to dispose of such property. Notwithstanding any contrary provision or rule of law, neither husband nor wife shall have the power to disaffirm, because of minority, any act or transaction which they are empowered by this section to perform or engage in, nor shall any defense based upon minority be interposed in any action or proceeding arising out of any such act or transaction.
b.
c.
4/78
d. D.
This section affects only transactions entered into after its effective date. G.O.L. 3-101(3) eff. Sept. 1, 1965.
Conflict between Bond and Mortgage The provisions of the bond are controlling. Adler v. Berkowitz, 254 N.Y. 433
THE MORTGAGED PROPERTY A. Any transferrable interest in land may be mortgaged. 1. B. The mortgage is a lien on the property described and everything deemed a part thereof, including fixtures.
After-acquired Property 1. Accession - A mortgagee of real property is entitled to have his lien respected as to all that was realty when he accepted his mortgage, and also as to all accessions to the realty. McFadden v. Allen, 134 N.Y. 489 After-acquired property clause may subject personal property to lien of the mortgage. a. Whether specific items of personal property are subject to lien of mortgage depends upon finding that they were intended to be made part of security. General Synod of Reformed Church v. Bonac Realty Corp., 197 N.Y. 119 (1947) (Refrigerators, cooking ranges and portable showers installed in apartment house were covered by mortgage). Is not binding on the grantee of the mortgagor unless he assumes the mortgage. Guaranty Trust Co. v. N.Y. & O.C. Ry. Co., 253 N.Y. 190 (1930)
2.
b.
THE MORTGAGEE'S INTEREST A. B. Has merely a lien Barson v. Mulligan, 191 N.Y. 306 Is not entitled to possession of the mortgaged premises, nor can he maintain an action to recover possession. RPAPL 611(3)
4/78
C.
Mortgagee in Possession 1. Is the term applied to a mortgagee who goes into possession with the consent, either express or implied, of the mortgagor. A mortgagee in possession without such consent is a trespasser. Barson v. Mulligan, supra May retain possession until debt is paid. a. 3. Rents and profits must be used to make necessary repairs and surplus applied to payment of debt.
2.
May be compelled to account to mortgagor.
D.
Mortgagee's right to foreclose - infra
TRANSFER OF MORTGAGEE'S INTEREST A. Bond and mortgage treated as chose in action and may be assigned by simple manual delivery. Fryer v. Rockefeller, 63 N.Y. 268 1. B. Written assignment of a mortgage a conveyance of an interest in real property within meaning of Recording Act. 290(3) R.P.L.
Mortgage is deemed collateral to debt it secures and therefore, whoever owns the debt owns the mortgage. 1. 2. 3. Assignment of debt (bond or note) without the mortgage, carries the mortgage with it by implication. Assignment of the mortgage without the debt is a nullity. Merritt v. Bartholick, 36 N.Y. 44 A partial assignment of the debt carries with it a pro-rata portion of the mortgage.
C.
The Assignee of the mortgage 1. Takes subject to equities existing at the time of the assignment, in favor of the mortgagor. Rapps v. Gottlieb, 142 N.Y. 164 (1894) Exception: Where mortgage secures a negotiable instrument which is assigned to a holder in due course the assignee does not take subject to equities between the original parties. Assets Realization Co. v. Clark, 205 N.Y. 105 (1912).
4/78
2.
Payment to Assignor a. The recording of an assignment of a mortgage is not in itself a notice of such assignment to a mortgagor, his successor in interest, or to an owner of the mortgaged premises where such assignment is recorded subsequent to the recording of a conveyance of such premises to such owner, so as to invalidate a payment made by either of them to the mortgagee or to a prior assignee of the mortgage. R.P.L. 324 (1) A final payment in satisfaction of a bond and mortgage without taking a satisfaction piece and without requiring production of the instruments of receiving adequate excuse for their nonproduction, is made at the peril of the payor and is not good as against an assignee for value under an unrecorded assignment. Assets Realization Co. V. Clark, Supra. A mortgage secured by a negotiable instrument is not discharged by payment to the record holder if, as a matter of fact, the note and mortgage had already been transferred to a bona fide holder for value before maturity even though no assignment has been recorded.
(2)
3.
Equities arising in favor of third parties (latent equities) a. The Recording Act may confer upon an assignee greater rights than his assignor had. Decker v. Boice, 83 N.Y. 215 (1890); Simpson v. Del Hoyo, 94 N.Y. 189 (1883).
4.
Compulsory Assignment a. If a mortgage is due and payable and the mortgagor demands it when he tenders the amount due, the mortgagee must assign the mortgage to any designated nominee of the mortgagor. If the mortgagee also holds a junior lien on the same property he cannot be compelled to execute such an assignment. R.P.L. 275. A junior lienor has a common law right to demand an assignment of a matured senior lien when he tenders the amount due. Johnson v. Zink, 51 N.Y. 333 (1873)
b.
MORTGAGOR'S INTEREST A. Has legal title and therefore, the right to possession, until foreclosure sale.
1.
May make leases, which, if subsequent to mortgage, are subordinate to it.
4/78
a. b.
Is entitled to rents and profits. Mortgagor-landlord's right to cancel or modify leases or accept prepayments of rent may be restricted by written agreement. R.P.L. 291-f
2. B.
May not commit waste or otherwise impair security of the mortgage.
Right of Redemption 1. May not be waived or bargained away at inception of mortgage. Any agreement tending to diminish the right is void. Goldblatt v. Iris Const. Corp., 211 N.Y.S.2d 234 (1960) (A provision in mortgage that upon default mortgagor would give deed to mortgagee was deemed invalid.) a. 2. May also be exercised by any person having a right or interest in the mortgaged land.
May pay debt at maturity or thereafter if prior to foreclosure sale. (RPAPL 1341) a. Is entitled to a satisfaction piece on payment (RPAPL 1921) or an assignment of the mortgage pursuant to 275 R.P.L.
C.
Transfer of Mortgagor's Interest 1. Subject to mortgage - Makes land, in equity, primary fund for the payment of debt and places mortgagor in relation of surety therefor. Johnson v. Zink, 51 N.Y. 333 1893) a. b. Mortgagor continues liable on the bond. A valid modification of the terms of the obligation between mortgagee and grantee, without consent of mortgagor, will discharge the mortgagor-surety to the extent of the value of the land at the time of the modification agreement. Murray v. Marshall, 94 N.Y. 611 (1884) Becker v. Faber, 280 N.Y. 146 (1939)
2.
Mortgage Assumed - Makes the grantee, not merely the land, primarily liable and the mortgagor becomes secondarily liable. a. If assumption of mortgage by grantee to be effective, the grantee
must:
4/78
(1)
Simultaneously with conveyance to him, execute and acknowledge a writing stating that he assumes and agrees to pay the mortgage debt and the amount thereof, or Execute and acknowledge the deed which must contain a statement of assumption of the debt and the amount thereof. G.O.L. 5-705.
(2)
b. c.
Mortgagor continues liable on the bond. A valid modification of the terms of the obligation between the mortgagee and grantee, without consent of the mortgagor, will completely discharge the mortgagor. Calvo v. Davies, 73 N.Y. 211 (1878)
3.
Conveyance of Mortgaged Premises to Mortgagee Where the mortgagee acquires the fee by conveyance from the mortgagor or a subsequent owner, it constitutes a satisfaction of the bond and mortgage of the property, at the time of conveyance; is equal to the debt for which it was mortgaged. If it be of less value than the debt, it is payment pro tanto. Central Hanover Bank & Trust Co. v. Roslyn Estates, 266 App. Div. 244 (1943)
4.
Death of Mortgagor a. Where property subject to a mortgage passes to a devisee or distributee, the personal representative of decedent is not responsible for satisfaction of mortgage out of assets of decedent's estate, unless otherwise provided by testator. (1) (2) The mortgage is chargeable against decedent's property subject thereto. Devisee or distributee is not personally liable for payment of debt secured by the mortgage. EPTL 3-3.6 In re Ryan's Estate, 254 N.Y.S. 2d 191 (1964) (Statute applied where property passed to surviving tenant by the entirety). Seamen's Bank for Savings v. Smadbeck, 293 N.Y. 91 (1944) (Statute does not apply where property subject to mortgage died thereafter, mortgagee properly sued estate on bond).
4/78
PRIORITIES A. Generally - first in time, modified by bona fide purchaser doctrine. 1. 2. 3. 4. B. An unrecorded legal mortgage has priority over a subsequent equitable mortgage. A subsequent legal mortgage taken in good faith, for value and without notice will have priority over a prior equitable mortgage. An unrecorded mortgage has priority over a judgment subsequently obtained and docketed against a mortgagor. A prior equitable mortgage will have priority over a subsequent mortgage.
Under the Recording Act 291 R.P.L. 1. A mortgage and assignment of a mortgage are conveyances within the meaning of that section. a. b. 2. Notice a. b. c. May be actual or constructive Possession as notice Phelan v. Brady, 119 N.Y. 587 (1890) Notice obtained after consideration parted with, but before recording, will not deprive purchaser of protection. Constant v. University of Rochester, 111 N.Y. 604 A mortgagee and an assignee of a mortgage are purchasers within the meaning of that section. A judgment creditor is not a purchaser within meaning of that section.
3.
Value a. b. An antecedent debt which mortgage given to secure is not value. The extension of time for the payment of an existing debt is a valuable consideration. O'Brien v. Fleckenstein, 180 N.Y. 350 (1905) A valuable consideration expressed in the instrument is prima facie evidence that mortgagee is a purchaser in good faith. Hood v. Webster, 271 N.Y. 57 (1936)
c.
4/78
4. 5.
Burden of proof is on the party claiming the benefit of the statute. As to purchase money mortgages: a. A purchase money mortgage executed and recorded at the same time as another mortgage given in the same transaction has priority over such other mortgage. Boies v. Benham, 127 N.Y. 620 (1891) A purchase money mortgage has priority over the lien of a previously docketed judgment against the purchase money mortgagor. CPLR 5203 (a)(2)
b.
REMEDIES OF MORTGAGEE OR HOLDER OF MORTGAGE WHEN MORTGAGE DEBT IS DUE A. The holder of a bond and mortgage has two remedies: At law, in a suit on the debt as evidenced by the note or bond and in equity, to foreclose the mortgage. Copp v. Sands Point Marina, Inc., 17 N.Y. 2d 291 (1966) 1. If suit on the debt is brought, an action to foreclose the mortgage cannot be commenced until execution issued and returned unsatisfied. RPAPL 1301(1) If judgment obtained in suit on the debt is unsatisfied, it may not be enforced by levying execution on the property mortgaged to secure the debt. CPLR 5230(a), 5235, 5236(b) If suit commenced to foreclose mortgage, no action on the debt shall be commenced without leave of the court in which foreclosure action brought. RPAPL 1301 (3) Mortgagee cannot maintain action to recover possession of mortgaged property. RPAPL 611(3)
2.
3.
4.
B.
Action to Foreclose a Mortgage - RPAPL Art. 13. 1. 2. 3. Mortgagee may not be deprived of action to foreclose. Breed v. Ruoff, 173 N.Y. 340 (1902) Acceleration clause for nonpayment of principal or interest is enforceable. Graf v. Hope Building Corp., 254 N.Y. 1 (1930). Parties Defendant
4/78
a.
Necessary defendants - every person having an estate or interest which is subordinate to lien of mortgage being foreclosed. RPAPL 1311 Permissible defendants - any action liable for the payment of the debt secured by the mortgage. RPAPL 1313 Persons having estate or interest which is senior to the lien of the mortgage being foreclosed are neither necessary nor permissible defendants.
b. c.
4.
The estates or interests of necessary defendants who are parties to the action are extinguished by the foreclosure sale. Rector etc. of Christ P.E. Church v. Mack, 93 N.Y. 488 (1883) a. It is the foreclosure sale and not the judgment of foreclosure which extinguishes subordinate interests. Metropolitan Life Ins. Co. v. Childs, 230 N.Y. 285 (1921)
5.
If necessary defendant omitted as a party, his estate or interest is not affected by the foreclosure action and the purchaser at the foreclosure sale takes subject to that estate or interest. Herrmann v. Cabinet Land Co., 217 N.Y. 526 (1916) (If owner of fee omitted, purchaser at foreclosure sale deemed an assignee of mortgage and has no right to possession of mortgaged property). a. RPAPL 1503: If foreclosure of mortgage void or voidable, the purchaser at foreclosure sale or his successors in interest, if in possession of the property, may maintain an action to determine right of any person to set aside the sale, or to enforce an equity of redemption, or to recover possession or the right of any junior mortgagee to foreclose a mortgage. Such action may be maintained even though an action against the defendant to foreclose the mortgage under which the sale was made would be barred by the statutes of limitation. b. RPAPL 1523: If defect in original foreclosure not caused by fraud or wilful neglect of the plaintiff, judgment to foreclose or reforeclose the mortgage may fix a time for redemption of the property and provide that failure to redeem within such time shall preclude defendant from redeeming the property or claiming any right, title or interest therein.
4/78
(1)
No recovery shall be granted for any residue of debt remaining unsatisfied if action to foreclose mortgage would otherwise be barred. Plaintiff may have value of any improvements to property made subsequent to original sale.
(2) 6.
Rights of Purchaser at Foreclosure Sale a. b. Is entitled to a marketable title. Downs v. Wenninger, 207 N.Y. 286 (1913) Acquires a clear and absolute title as against all parties to the action and their privies which relates back to the date of the mortgage so as to cut off all intervening rights and equities. RPAPL 1353(3) Dorff v. Bornstein, 277 N.Y. 236 (1938) The mortgagee may purchase at the foreclosure sale. RPAPL 1353(1) The purchaser may convey the property back to the original owner without reviving liens which were cut off by the foreclosure sale. Dorff v. Bornstein, supra.
c. d.
7.
Deficiency Judgment a. If person liable for payment of debt secured by mortgage is made a defendant, plaintiff may have a deficiency judgment if proceeds of sale insufficient to satisfy debt. RPAPL 1371(1) The amount of the deficiency judgment equals the mortgage debt with interest plus the amount owed on all prior liens and encumbrances with interest plus costs and disbursements of the action less the fair and reasonable market value of the property on the day of the foreclosure sale. RPAPL 1371 (2) If no deficiency judgment sought, proceeds of sale deemed to be in full satisfaction of mortgage debt. RPAPL 1371(3)
b.
c.
8.
Redemption a. Up until foreclosure sale, any person who would be adversely affected
thereby may redeem by paying amount due. RPAPL 1341
4/78
b. 9. C.
No right of redemption after foreclosure sale.
Marshalling Assets
Foreclosure of Mortgage by Advertisement - RPAPL Art. 14. 1. Prerequisites: a. b. c. d. Mortgage contains a power of sale and the power has become operative because of default. No action was brought to recover mortgage debt. Mortgage recorded. First notice required by statute (RPAPL 1402) was published within time in which an action could be maintained to foreclose mortgage. RPAPL 1401.
TERMINATION OF MORTGAGE A. Merger - when a lesser and greater estate or interest in land meet in the same person at the same time, the lesser estate is merged into the greater. 1. Equity does not favor mergers and will treat the two estates or interests as separate if the parties intended to preserve them as such and justice requires it. Smith v. Roberts, 91 N.Y. 470
B. C.
Payment Tender - of the amount due on or after maturity of debt will discharge the lien of the mortgage if the tender is refused. The mortgagee may still pursue his remedy on the bond or note, but he no longer has the security of the mortgage. Statute of Limitations 1. 2. Is 6 years (CPLR 213(4)) Chapin v. Posner, 299 N.Y. 31 A waiver of the statute of limitations, or a promise not to plead it, or to pay the mortgage debt, if made after the cause of action to foreclose the mortgage accrued, and made, either with or without consideration, by the express terms of a writing signed by the party to be charged is effective, subject to any conditions expressed in the writing, to make the statute of
D.
limitations run from the date of waiver or promise.
4/78
a.
A statement of assumption of the mortgage debt by a grantee of the mortgaged premises which is effective as an assumption under G.O.L. 5-705, has the same effect as a waiver or promise, to the extent of the amount specified therein, unless the assumption statement disclaims an intention to affect the statute of limitations. A recital in a conveyance that is made subject to a mortgage, or a provision to that effect in a contract for the purchase of real property, or an agreement by which another encumbrance or interest is subordinated to the lien of a mortgage, does not have the same effect with respect to a waiver or promise as described above. A waiver or promises made as described above is effective. (1) against (i) the person who made it to the extent of any interest held by him at the date thereof and (ii) any person subsequently acquiring from him any such interest, without giving value or with actual notice of the making of the waiver or promise, to the extent of the interest so acquired; and in favor of (i) the mortgagee or his assignee, (ii) any other person to whom or for whose benefit it is expressed to be made, and (iii) any person who, after the making of the waiver or promise, succeeds or is subrogated to the interest of either of them in the mortgage or otherwise acquires an interest in the enforcement of the mortgage. G.O.L. 17-105 eff. Sept. 1, 1961 A payment on account of a mortgage indebtedness, or installments thereof, or interest thereon, which is effective to revive an action to recover such indebtedness, instalment or interest, or to extend the time limited for such action, is also effective to make the time limited for the commencement of an action to foreclose the mortgage run from the time of payment, unless the payment is accompanied by a written disclaimer or intention to affect the time limited for the foreclosure of the mortgage.
b.
c.
(2)
(3)
d.
A part payment is effective (1) against (i) the person who made it to the extent of any interest held by him at the date thereof, and (ii) any person subsequently acquiring from him any such interest without giving value or with actual notice of the making of the payment, to the extent of the interest so acquired; and
4/78
(2)
in favor of (i) the mortgagee or his assignee, and (ii) any person who, after the date of the payment, succeeds or is subrogated to the interest of either of them in the mortgage or otherwise acquires an interest in the enforcement of the mortgage. in the case of a part payment before the mortgage has actually become barred, it is effective against any subsequent purchaser of the interest of the person who made the payment to the extent of the interest that the person who made payment had at the time thereof. G.O.L. 17-107 eff. Sept. 1, 1961 Gorgas v. Perito, 299 N.Y. 265 (1949)
(3)
4/88
Chapter 29 - Page 1 MORTGAGES Underwriting Guidelines
SIMULTANEOUS ISSUE: Where an Owner's and Loan Policy are issued simultaneously, the mortgage, deed of trust, deed to secure debt or other security instrument insured by such Loan Policy must appear as an exception under Schedule B of the owner's policy. INSURING SIMULTANEOUS MORTGAGES: In cases where two mortgages or other security instruments between the same parties and bearing the same date are of record, neither being subject to the other, the following should appear in the policy: The Company assumes no liability as to the priority of the above (mortgages, deeds of trust, deeds to secure debt or security instruments)." ASSIGNMENT OF MORTGAGE: In the issuance of a Loan Policy insuring a mortgage or other security instrument which has been assigned, the assignee should be the named insured under Schedule A of the policy, and a) b) If the assignment is recorded, the recording information should appear under Schedule A of the policy. If the assignment has not been recorded and the laws of that state do not require such recording, evidence of such assignment must first be obtained by the agent before insuring the assignment under Schedule A of the policy. If there is no assignment of the mortgage or other security instrument and only the note or the indebtedness was assigned, transferred or endorsed by applicable laws of that state, the agent must first obtain evidence of such assignment, transfer or endorsement before issuing the policy. The original promissory note must be produced and assigned.
c)
d)
FINANCING STATEMENTS AND ASSIGNMENT OF LEASES/RENTALS: When financing statements, assignments of leases or rental agreements are given or assigned to the mortgagee or assignee as additional security these instruments should be set forth in Schedule B, Part 11, of the Loan Policy.
Chapter 29 - Page 2 MORTGAGES Underwriting
ASSIGNMENT OF MORTGAGE PREVIOUSLY INSURED: When an assignment of mortgage or other security instrument is recorded and an endorsement of a previously issued Loan Policy is requested the endorsement should properly reflect the name of the new assignee as the insured, as well as identify the assignment of mortgage. Also, the title must be searched and examined through the date of the recording of the assignment of mortgage and the effective date of the policy must be extended to the date of the title search. If the effective date is extended, then any changes in the title from the date of the original policy must be reflected on the endorsement. This includes change of ownership as well as any new exceptions and subordinate lien matters. CONSTRUCTION MORTGAGE A. Guidelines for use in connection with: ALTA Loan Policy 1970 (Amended 10/17/70 and 10/19/84) and ALTA Loan Policy 1987. In those states where mechanics' liens may gain priority over the lien of a construction mortgage to be insured, it is a matter of company policy that prior approval of the Regional Office be obtained before the issuance of a Commitment, Policy or Endorsement giving mechanics' lien coverage either by deleting the mechanics' lien exception or giving affirmative coverage against mechanics' liens filed or unfiled. This company policy shall prevail regardless of how the priority of the lien of the construction mortgage to be insured is lost, or could be lost, whether by prior commencement of construction or by statutory law giving mechanics' liens priority over such mortgages. All Loan Policies (including commitments preliminary to closing) insuring a construction loan prior to completion of the improvements, with proceeds of the loan being disbursed in stages as the work progresses, must contain the following "Pending Disbursement" exception: "Pending disbursement of full proceeds of the loan secured by the mortgage covered by the policy, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without any actual knowledge of any defects in, or objections to the title, up to the face amount of this policy." In those jurisdictions where mechanics' liens can gain priority over the lien of the mortgage, the pending disbursement exception should continue as follows:
"At the time of each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens, or objections intervening between the date of this policy and the date of such disbursement. Each title continuation must be evidenced by an endorsement to the policy, which endorsement will set forth all matters of record since the date of the preceding endorsement, but said endorsement will exclude coverage for matters of survey." All Construction Loan Policies should contain the additional exception: "This policy does not guarantee the completion of the improvements nor the sufficiency of funds for the completion thereof." When applicable, use the following language to reflect an increase to a mortgage policy under a pending disbursement clause: "The sum of $ of the proceeds of the loan insured by said policy having been disbursed, the coverage of said policy is increased to the total sum of $ ." If there is a possibility of subsequently filed liens gaining priority over the insured mortgage or any advances/disbursements under the mortgage, all endorsements to the policy pursuant to the pending disbursement clause shall contain the following exception: "This policy does not insure against the possibility of mechanics' liens relating to labor and materials furnished subsequent to date gaining priority over the insured mortgage nor does this policy guarantee completion of improvements now in progress." B. Guidelines for use in connection with: ALTA Construction Loan Policy Revised 10/17/84 or the 1987 ALTA Construction Loan Policy
The ALTA Construction Loan Policy Revised 10/17/84 and the 1987 ALTA Construction Loan Policy are forms of policies intended solely for the purpose of insuring a construction mortgage. By its terms, this policy excludes mechanics' lien coverage. Subject to the same rules as stated above with reference to the ALTA Loan Policy, certain types of mechanics' lien protection can be included in this new Construction Loan Policy. This additional protection is accomplished through the use of endorsements. Refer to Field manual Volume 1 for a description of these endorsements and the circumstances under which each is to be used. FUTURE ADVANCE - OPEN-END MORTGAGES: Before insuring any future advance under an "open-end" or future advance provision of a mortgage, it is generally necessary that an instrument be recorded evidencing such future advance. ALSO, it is necessary that the title be extended and examined to date of the recording of the instrument describing the future advance, and any intervening liens or
encumbrances are to be reported either as superior or inferior matters, as determined by applicable state law. When a future advance is contained in, or made a part of, a mortgage modification agreement, extreme care should be exercised since a modification may destroy or affect the mortgage priority. ALLOCATION OF PORTION OF LOAN AMOUNT: When insuring a mortgage or other security instrument which includes property (real or personal) in addition to the land described in Schedule A of the policy, the amount of the policy should be that portion of the total loan amount allocable to the land covered by the policy. The following exception should be included in Schedule B of the policy. "Notwithstanding the amount of the mortgage hereby insured, liability under this policy is limited to $ , being that portion of the total loan amount allocable to the land covered by this policy. Said mortgage also encumbers other land or personal property not covered by this policy." EXISTING MORTGAGE BALANCE: Loan Policies or Owner's Policies must not include affirmative insurance as to the present balance of an existing mortgage. An exception for an existing mortgage may make reference to the original principal indebtedness thereof, but must not make reference to the present outstanding balance. It is permissible to insure a previously recorded mortgage for the amount of the present principal balance, which may be less than the original indebtedness. In that case, the following exception should be included: "Notwithstanding the face amount of the mortgage hereby insured, the liability , being the amount which the under this policy is limited to $ Insured has represented to be the present principal balance under the mortgage." ADD ON INTEREST: In most cases the amount of a mortgage is stated to be the amount of the principal indebtedness. However, occasionally a lender will compute the full interest to maturity and add such amount to the principal, hence, the term "add on", which total amount of principal and interest is shown as the face amount of the mortgage. If a mortgage policy is to be issued to insure such a mortgage, the amount of liability as stated in the policy should be the amount of the principal indebtedness exclusive of interest, and the following must be set forth in Schedule B of the policy: "Notwithstanding the face amount of the mortgage hereby insured, the liability under this policy is limited to $ , being the full principal debt secured by the mortgage insured by this policy."
In rare instances, a lender will insist that a Loan Policy be issued for the face amount of the mortgage when such amount represents the combined total of the principal and full interest to maturity. As such additional interest which has not been earned may be declared by a court to be an unconscionable interest charge and in order to clarify that the policy does not insure the enforceability of such unearned interest, an exception should be set forth under Schedule B of the policy. MORTGAGE ALSO PARTNER IN OWNERSHIP: If the mortgagee is also one of a joint venture that is the mortgagor in the insured mortgage (or is a general partner in a partnership that is the mortgagor), the following exception must be shown in Schedule B: "This policy does not insure against loss or damage which has accrued or which may hereafter accrue to the insured by reason of its status as a joint venturer (or general partner) in ." WRAP-AROUND MORTGAGE: A wrap-around or all-inclusive mortgage is a junior mortgage which secures indebtedness in an amount which includes the amount disbursed to the borrower at closing and the balance(s) due on a senior mortgage(s). Since the face amount of the note secured by the wrap-around mortgage is greater than the amount disbursed to the borrower at closing, a determination must be made as to whether the amount of the loan policy being issued will be in the amount disbursed to the borrower at closing, or in the full amount of the wrap-around note. A policy may be issued in either of these amounts at the election of the lender under the conditions set forth below. (a) A policy insuring a wrap-around mortgage must contain an exception in Schedule B for the outstanding prior mortgage(s). (b) In order to clarify the limit of liability assumed, depending upon the amount for which the policy is written, one of the following must be included: (i) If Policy Written for Initial Amount Disbursed: Because the amount disbursed is less than the face amount of the mortgage and subsequent advances under the mortgage are not covered by the policy, the following two exceptions must be included: "Notwithstanding the face amount of the mortgage hereby insured, the liability under this policy is limited to $(amount disbursed to borrower), being the actual principal debt now secured by the insured mortgage." and
"The policy does not insure the validity or priority of the lien of the mortgage hereby insured by the mortgage made subsequent to the effective date of this policy." (ii) If Policy Written for Full Face Amount of Mortgage: Since only a portion of the full face amount may be disbursed, a form of pending disbursement clause, as follows, must be set forth under Schedule B: "Liability under this policy is limited to the amount disbursed by the mortgagee, and interest thereon, but such liability shall not include disbursements made subsequent to the date of policy unless such disbursements increase the debt under the insured mortgage and are made by the mortgagee out of its own funds (1) pursuant to an obligation to disburse or (2) to protect the lien of the insured mortgage, and unless the insured mortgage provides that such disbursements are secured thereby and, as to such disbursements to prior lienors, that the mortgagee shall be subrogated to the rights of such prior lienors." This clause would not increase the liability under the policy as regular payments are made by the wrap-around mortgagee to a senior mortgage holder out of payments collected from the mortgagor; but does offer protection, on the conditions stated in the exception, for payments made to cure defaults or, if required under the insured mortgage, to satisfy or pay down a junior mortgage. If the issuing agent has any doubt as to state law effecting the right of subrogation, or the priority or the enforceability of a wrap-around mortgage, contact the Home Office prior to issuance of any such Commitment or Policy. REGULATORY AGREEMENTS: As a condition to the insurance of project mortgages, certain Federal and State governmental authorities require the mortgagor to execute a Regulatory Agreement in favor of such governmental authority. The Regulatory Agreement is supplementary to the mortgage, is recorded contemporaneously with the mortgage and is incorporated by reference in the mortgage. Information regarding the Regulatory Agreement in the body of the Loan Policy should be set forth either as a "Note" following the identification of the insured mortgage in Schedule A or as a separate item under Schedule B. MORTGAGE RELEASE OR PAY-OFF: When an existing mortgage is to be satisfied, in addition to requiring the satisfaction or release of the mortgage, the agent should also require production of and obtain the original promissory note and mortgage. Both of these documents should be marked "Void" by the mortgagee.
When a mortgage is held by an individual lender (rather than an institutional lender), the agent must obtain the satisfaction or release of mortgage and, if the mortgage is being paid in full, the cancelled promissory note and mortgage prior to issuing a policy without exception to the mortgage. This same procedure should apply when the mortgage is held by an institutional lender unless the agent has custody and control of all funds necessary to pay in full or obtain a release of the mortgage (based on a proper written pay-off or estoppel statement) and promptly forwards such funds to the institutional lender and the release or satisfaction will be promptly recorded by the agent upon its receipt from the lender. Under these circumstances the agent may, if necessary and if permitted by state law, issue a policy without exception for the mortgage, prior to actual receipt of the satisfaction instrument. VARIABLE RATE MORTGAGES: You may be requested by a lender to insure against the invalidity or unenforceability or loss of priority of the line of an insured mortgage resulting from the provisions of the mortgage which provide for changes in the rate of interest and/or the addition of unpaid interest to the principal of the loan. The Company has 3 endorsement forms available to comply with such requests. These forms are: 1. 2. 3. ALTA Endorsement Form 6 - Variable Rate Mortgages ALTA Endorsement Form 6.1 - Variable Rate Mortgage. ALTA Endorsement Form 6.2 - Variable Rate Mortgage - Negative Amortization
These forms can be obtained from the Home Office. The Home Office should be contacted regarding a determination of whether the coverages provided by these endorsements can be given in your state and for instructions regarding the use of the endorsements. REVOLVING CREDIT MORTGAGES: You may be requested by a lender to insure that advances made pursuant to a mortgage where the principal balance may fluctuate in accordance with a credit line agreement, are included within the coverage of the policy and to insure against loss of priority of the lien of the mortgage resulting from such advances. To comply with such request the company has developed a Revolving Credit Endorsement. This form can be obtained from the Home Office. The Home Office should be contacted regarding a determination of whether the coverages provided by this endorsement can be given in your state and for instructions regarding the use of the endorsement.
MORTGAGES GIVEN BY PARTIES NOT RECEIVING THE LOAN PROCEEDS: When insuring a mortgage given by one party as collateral for the debt of another, additional Schedule B exceptions may be required. For example, as a condition of making a loan to A, a lender may require a mortgage on B's property which mortgage secures B's obligation as either co-maker or guarantor of A's note. In such situation, with the loan proceeds being disbursed to A, B may not have received a "reasonably equivalent value" for the estate or interest to be insured. In the example, B's obligation on A's note and B's mortgage are subject to being voided in a bankruptcy or state insolvency proceeding if at the time of the transaction B is either insolvent, or as a result thereof becomes insolvent or is left with unreasonably small capital or inability to pay debts which B intended to incur (including the subject debt). The example situation may occur with individuals, but most often the parties are corporations having a degree of common ownership, such as a subsidiary guaranteeing the loan of its parent or another corporation with a common parent. These transactions are sometimes referred to as "upstream," "downstream" or "cross-stream" guarantees. Although corporate laws generally empower corporations to guarantee the debts of others, such statutes do not address or avoid creditors' rights. If a Loan Policy other than the 1992 policy form is being issued in connection with security being furnished by one party when the consideration goes to another, a special exception for creditors' rights should be included in Schedule B unless either: (1) The security is being furnished by a parent corporation in connection with a loan to its subsidiary, or (2) a determination is made (by the issuing office with consent of the Home Office where any doubt might exist) that the mortgagor is solvent and that the loss of the mortgaged property or enforced payment of the obligation on the note or guarantee will not render the mortgagor insolvent, or left with unreasonably small capital with which to conduct its business or insufficient cash flow with which to pay its debts. If neither of the above conditions is applicable, the following exception must be used: "Any loss or damage on account of the fact that the proceeds of the loan secured by the insured mortgage were not disbursed to the mortgagor, including loss or damage resulting from the mortgage being attacked as a fraudulent conveyance under the federal Bankruptcy Code or state insolvency or creditors' rights laws." NOTE: See also: Leveraged Buyouts FORECLOSURE OF MORTGAGES: When title to be insured has come through a recent foreclosure proceeding, whether by judicial foreclosure and sale or by Trustee's sale under a Deed of Trust in those states which honor non-judicial sales, the following precautions must be taken:
4/88 rev. 12/95
a)
In those states where subordinate lien holders must receive notice or must be joined in judicial proceedings in order for their interests to be eliminated, it must be ascertained that all parties entitled thereto have received such notice or were joined in the foreclosure proceedings as defendants. The lien of any omitted party remains intact after the sale and exception must be made for such liens. The time for redemption must have expired, or exception must be made for such rights of redemption. If the United States held a junior tax lien, notice to the United States for a non-judicial sale must have been given at least 25 days prior to the sale and in a judicial proceeding the United States must be joined as a party. In either case, for a tax lien, the United States has 120 days after the sale to acquire the property for the price paid at the sale (26 U.S.C. 7425). For junior liens other than tax liens held by the United States, the period for redemption is one year from the date of sale (28 U.S.C. 2410)(c). There is some question notwithstanding state law as to whether secondary liens held by the United States, other than tax liens, can be eliminated by non-judicial proceedings. Please contact the Home Office if such problems arise. In judicial proceedings, the time for appeal must have run or exception taken therefore. Occasionally the record owner, or one of co-tenant former record owners, will redeem or will be the successful bidder at the sale. In most states, such reacquisition of title will revive all of the subordinate liens and may even revive the foreclosed mortgage or deed of trust to the extent of any deficiency remaining on the indebtedness. Redemption by one co-tenant is generally deemed to be for the benefit of all and the interests of all former co-tenants must be considered. The proceeding itself should be examined to determine that the published Notice of Sale, as well as the final Judgment or Order in judicial proceedings, contain the correct legal description. In judicial proceedings, proper notice and service upon all necessary parties is equally important.
b)
c) d)
e)
If any irregularities appear in the foreclosure proceeding, exception should be taken for such irregularity and the rights of parties affected thereby. For foreclosures which appeared back in the chain of title, curative and limitation statutes in your jurisdiction may be relied upon to correct minor irregularities. CREDITORS' RIGHTS: Until BFP v. RTC, supra., a foreclosure sale has now been determined to be a transaction which is subject to being set aside as a "fraudulent conveyance" or a "preference" under the Bankruptcy Code. Although the measure of "reasonably equivalent value" required under the Code still varies from state to state and on a case to case factual basis, many courts are now adopting the "Durrett Rule" (Durrett v. Washington National Ins. Co., 621
F2d 201, 5th Citr. 1980) which held that anything less than 70% of the fair market value was not a "reasonably equivalent value". Call counsel to determine Durrett's applicability.
Generally, if the foreclosure sale occurred less than a year before the issuance of the policy and if the insured is the party who acquired the property at the foreclosure sale or is a purchaser from the foreclosing mortgagee or successful bidder at the sale, or is a mortgagee financing such acquisition, the policy must contain one of the following exceptions: "The enforcement or attempted enforcement or rights under the Bankruptcy Code or state insolvency or creditor's rights law to invalidate or avoid the conveyance to (name of grantee)." (Owner's Policy) or "The invalidity or unenforceability of the lien of the insured mortgage or impairment or loss of priority of the lien of the insured mortgage, or claim thereof, by reason of the mortgage being subordinated or constituting a fraudulent conveyance or preference under the Bankruptcy Code or state insolvency or creditor's rights law." (Loan Policy) If you believe that a policy can be safely issued without such exception, unless such waiver is specifically authorized by the following paragraphs, consult with the Regional Office. WAIVER OR EXCLUSION - RESIDENTIAL PROPERTY: For residential property only, a policy may be issued to the successful bidder at the foreclosure sale, or a bona fide purchaser for value from the said bidder, after ninety days, but within the one year period from date of sale without the creditor's rights exception if the agent, utilizing sound business judgment and his knowledge of the area, can determine: a) That the amount of the outstanding indebtedness which was cancelled by the foreclosure, together with any other consideration which may have been paid to or on behalf of the former owner-mortgagor, constituted "reasonably equivalent value" for the property and the amount bid at the sale was not less than 70% of the fair market value of the property as of the date of the foreclosure sale; and That the proposed insured is not an "insider" as defined in the Bankruptcy Code; and That the proposed insured is without knowledge of the insolvency of the former owner-mortgagor as of the date of the foreclosure sale; and No petition under the Bankruptcy Code or state insolvency laws has been filed by or against the former owner-mortgagor (or any other party in title within the previous year).
b) c) d)
SUCCESSFUL BIDDER AS PROPOSED INSURED - DETERMINATION OF REASONABLY EQUIVALENT VALUE: When the proposed insured is the successful bidder at the foreclosure sale (whether the original foreclosing lender or a third party) a determination must be made of the "reasonably equivalent value," of the property as of the date of the foreclosure sale. In those jurisdictions which generally accept the "Durrett Rule" that a reasonably equivalent value is presumed to be 70% of the fair market value, requirement 20(a) above will be considered to be satisfied if the amount bid at the foreclosure sale was at least 70% of the fair market value of the property as of the date of the sale. In those jurisdictions where the Durrett Rule has not been approved or, the issue arises after the court's decision in BFP v. RTC, supra., please consult the Home Office for such additional requirements as may be necessary to establish "insurability or value." [Rev. 12/95] FAIR MARKET VALUE DETERMINATION: Fair Market Value is best evidenced by a full appraisal of the property as of the date of the foreclosure sale (as well as of the date of resale, if applicable) prepared by an M.A.I or similarly qualified and licensed appraiser. A full appraisal should be requested in all transactions being insured within one year after a foreclosure sale. PURCHASER FROM SUCCESSFUL BIDDER - RESIDENTIAL PROPERTY: On one to four family residential transactions only, when asked to insure the purchaser from the successful bidder, or such purchaser's mortgagee, if a full appraisal of the property is not available, the issuing office may, in the exercise of its sound business judgment, familiarity with neighborhood values and good underwriting practice in the area, rely upon other evidence of value in order to determine the Fair Market Value of the property, to determine whether the purchaser is a "bona fide purchaser for value" and whether after ninety days after date of the Foreclosure Sale, based on such evidence the creditor's rights exception can be deleted from the policy. PRIOR APPROVAL NECESSARY TO DELETE CREDITORS' RIGHTS EXCEPTION: On all commercial properties and on all policies to be issued less than ninety days after the foreclosure sale and in all instances where there is any doubt as to the "Fair Market Value" or "Reasonably Equivalent Value" and in any case where the issuing office has knowledge of an impending filing of a bankruptcy or insolvency petition by or against the previous owner-mortgagor, when less than one year has elapsed from the date of a foreclosure sale, prior approval must be obtained from the Home Office before issuing a commitment or policy to the successful bidder at a foreclosure sale, or an immediate purchase from such successful bidder, or such purchaser's lender, without including a "creditor's rights" exception in Schedule B unless the 1992 Policy Form is used. Note: See also: Deed in Lieu of Foreclosure Insolvent Banks Mortgage Modifications
8/79
Chapter 29 - Page 1 MORTGAGES 1 COLLATERAL MORTGAGES Legal Bulletin
1.
We are frequently asked to insure a collateral mortgage that secures the obligation of one other than the mortgagor. Typically an individual makes a collateral mortgage on his residence to secure a loan made to a corporation in which he is interested. In other cases a corporation that owns realty makes a mortgage to secure the loan made to another corporation. In each case the proceeds of the loan go to the borrower, not the mortgagor. Whenever it becomes apparent that we are to insure a collateral mortgage, the following exception is to be inserted in the title report: By reason of the fact that the proceeds of the mortgage to be insured will not be received by the mortgagor, Company will require proof: (i) that no work has been done or materials furnished which could result in the filing of a mechanic's lien against the premises to be insured within four months after the closing of the proposed mortgage, and (ii) that the mortgagor is financially solvent and will not be rendered insolvent by payment of said mortgage. Otherwise, policy will except: "Rights of creditors of the mortgagor." If the mortgagor is a partnership or a limited partnership, add: The written consent to the execution and delivery of the mortgage by all of the partners and limited partners will be required.
2.
3.
Notwithstanding that a collateral mortgage may be made by individuals on a onefamily residence, we will omit our truth in lending exception (see Law Bulletin No. U.S. -3 Par. 2) when the borrower is a corporation and we are furnished with convincing proof that the loan to the borrower is exclusively "for business or commercial purposes, other than agricultural purposes."
8/79
Chapter 29 - Page 1 MORTGAGES 2 ESTOPPEL CERTIFICATES ASSIGNMENT OF MORTGAGES Legal Bulletin
1.
Counsel and Title Officers are authorized to waive Estoppel Certificates by the owner in cases where a mortgage or mortgages are being assigned by a financial institution and where the present or former owner has acknowledged the mortgage indebtedness by a prior extension or consolidation agreement, or by a subject clause in a deed or otherwise provided that the assigning financial institution signs and delivers to us a letter stating the amount due on the mortgage for principal and interest. In such cases we will waive the requirement for obtaining junior lienor certificates as well. This also applies to multiple assignments where a financial institution is the assignor.
2.
Estoppel Certificates. If the transaction involves the assignment of an existing mortgage, add the following exception: "Procure Estoppel Certificates from the owner and subsequent encumbrancers. See Item "VI" or printed "Closing Requirements."
3.
When an Estoppel Certificate is required and is not obtained, the following exception is inserted in the policy: "Any defenses to the lien of the mortgage hereby insured which could not be interposed if an Estoppel Certificate had been obtained from the owner of the premises (and subordinate lienors)."
8/79
Chapter 29 - Page 1 MORTGAGE AND MORTGAGE POLICIES 3 (B) EXOTIC FINANCING Legal Bulletin
From time to time we are called upon to insure a mortgage executed by the owner of a parcel of real estate which is being given as collateral security to a lender who is advancing funds to third party and the third party is the only person executing the Note of repayment. Frequently, neither the examiner or the title officer is aware of the nature of the transaction since the application for title insurance only indicates that the proposed closing is to be a mortgage transaction. Thus, exceptions that would have been appropriately raised if all of the facts had been known were not considered and set forth in the commitment. The need for further underwriting considerations may be disclosed by the parties present at the time of closing. Seasoned closers encountering this situation, recognizing the problem involved, would amend the report to require the following additional proofs: (1) An affidavit satisfactory in fact and form must be obtained from the Mortgagor stating that the execution and delivery of the Mortgage as collateral security would not result in rendering the Mortgagor insolvent. Otherwise, policy to issue will except "Rights of creditors of the Mortgagor." If the collateral mortgage is being executed by a corporation we shall require the unanimous written consent of the shareholders of the mortgagor, together with a resolution of the Board of Directors, authorizing the mortgage to be made by the corporation to secure the obligation of the borrower. If the mortgagor is a partnership or limited partnership, we should require the written consent to the execution and delivery of the mortgage by all of the partners and limited partners.
(2)
(3)
The closer should also see to it that the collateral mortgage recites that it secures the Note of a third party stipulating the name of the obligor. This is particularly important if the obligor is a corporation and the mortgagor is an individual or a partnership, and the rate of interest is usurious. The closer should also see to it that the check representing the proceeds of the loan is made payable to the order of the borrower and not to the order of the mortgagor. * if the obligor Similarly, an application taken might indicate the requirement for mortgage insurance in the sum of $100,000. At the closing the closer may be presented with circumstances whereby the lender agrees to extend to the owner of the property a line of credit " not to exceed $100,000" and as security therefor the borrower executes its Note and Mortgage for $100,000 "or so much
there as may be advanced."
8/79
In such an instance several problems present themselves: (1) If at the time of the execution of the Note and the Mortgage the Mortgagor is already indebted to the lender and the parties deem this sum secured by the lien of the Mortgage, consideration must be given to an exception regarding "possible rights of creditors" by reason of the fact that the mortgage or a portion thereof secures an antecedent debt. In a fashion such a transaction resembles a construction loan in that the mortgagee is confronted with a possible priorities problem resulting from the unobligatory or optional advance. A "Pending Disbursement" exception in a modified manner should be raised. We should limit our liability to sums actually advanced; searches should be continued before future advances are made to the borrower. Refer to Mortgages and Mortgage Polices 2 (E), Open End Mortgages, for exception language. Note: (New York Office only) So long as there is no requirement to make any improvements to the premises before he is entitled to call for advances under the mortgage, we are not concerned with the filing of a Building Loan Contract. FACTORAGE FINANCING In factorage financing, where the principal reliance for repayment of the debt may or may not be the personal credit of the borrower, Commercial Banks may take back a mortgage to secure future advances, not as an investment, but as incidental collateral to other security. Usually: (i) substitutions of security are required from time to time to keep the collateral adequate in amount and (ii) the mortgagor/borrower from time to time repays a part of the debt and thereafter re-advances are made to him in the maximum amount of the mortgage. By reason of the following exceptions that we are required to raise in a "Factoring Mortgage" situation, there is some question as to the value of title insurance in these instances. However, where we are called upon to insure a factoring mortgage which meets the foregoing facts, the following exceptions should be raised: (1) (2) Policy to issue will insure only up to advances actually made and not exceeding the face amount of the mortgage. Readvances made by the insured after reductions in the principal, are not insured by the Policy [ C& S 8b].
(2)
8/79
(3)
Policy excepts intervening liens arising between the date of the closing and the date of future advances. (Note: if arrangements are made for the continuation of searches, the exception regarding intervening liens will be disregarded for future insurable advances if the record reflects that there are none.)
Note: (New York Office only) There are considerations you should be aware of relating to the payment of additional mortgage tax. Although at the outset, the mortgage tax is paid predicated on the principal amount of the mortgage, if you were to add up the total amount advanced over the life of the loan without crediting the payment made on account from time to time, you would find that this sum would be several times the face amount of the Mortgage. Obviously, the original mortgage tax would not adequately cover the situation. You should note that additional mortgage tax may be due from time to time by reason of the nature of the transaction and you should further take exception to "any additional mortgage tax that may be due and owing by reason of any readvances made." AMOUNT OF MORTGAGEE POLICY LESS THAN PRINCIPAL AMOUNT SECURED BY MORTGAGE (DEED OF TRUST) There are occasions where an application is accepted to insure a Mortgage in the amount of $100,000. At the closing the parties advise the closer that they desire insurance in the amount of $80,000 by reason of the fact that the mortgage also covers personal property; or there is a situation where an assignee is purchasing the Mortgage at a substantial discount. As a general rule, the company is not willing to issue a loan policy for less than the principal amount of the debt secured by the Mortgage (Deed of Trust) being insured. Therefore, in both instances insurance must be taken for the full unpaid principal owing on the Mortgage. Any requests for deviation from these procedures as outlined should be referred to the Home Office for approval.
8/79
Chapter 29 - Page 1 MORTGAGES 4 MORTGAGE REDUCTION CERTIFICATES Legal Bulletin
1.
In all ordinary cases we are willing to accept letters from banks and other large institutions as sufficient evidence to enable us to insure that a mortgage has been reduced. However, the letter should not have qualified language about the amount certified as the principal balance due. (See Section 274 (a) Real Property Law). In such cases the exception in the policy should read as follows: "Mortgage made by secure $ , dated which has been reduced to $ reduction has not been recorded.") to , to , recorded , , (but the evidence of such
2.
The reason for excepting the failure to record the proof of reduction will be found in Oppenheimer v. Humphreys, 9 N.Y. Supp. 840, aff'd on opinion below, 125 N.Y. 733. In that case it was held that a purchaser was entitled in such case to recorded proof of reduction and could not be compelled to accept a written unrecorded certification to that effect from the bank which was servicing the mortgage. Where the mortgage is privately held, we will not insure reduction except on a duly acknowledged reduction certificate executed by the holder of the mortgage. This proof should be recorded. Otherwise, our exception will take the same form as set forth above. However, notwithstanding the lack of such proof, we will, at the request of our applicant, word the exception as to the mortgage as follows: to , to secure "Mortgage made by $ , dated , and recorded , , but which mortgage is stated to have been reduced to $ there is nothing of record showing such reduction and the company does not insure that the amount of the mortgage has been so reduced."
3.
4.
In all cases the Policy Department must follow our commitment to our applicant as indicated by the closer's notes on the report.
8/79
Chapter 29 - Page 1 MORTGAGES 5 MORTGAGE SATISFACTION Legal Bulletin
1.
Production of Bond and Mortgage Essential. A satisfaction of a mortgage should never be accepted unless the original recorded mortgage and its accompanying bond or other obligation (and other instruments in connection with the mortgage) are produced, regardless of the county in which the instrument was recorded. (322 R.P.L. supra. ) The bond must be surrendered, and after the mortgage has been duly discharged of record, and a certificate of discharge issued, it should be marked "paid" and filed away with other papers in connection with the title. (Assets Realization Co. v. Clark, 205 N.Y. 117; Bergen v. Urbahn, 83 N.Y. 49; Anderson v. Culver, 127 N.Y. 377; and many other cases.) Title to the bond passes with delivery, Smith v. Wagner, 106 Misc. 178) and if it should be in the possession of a third person, there might be a presumption that it had not been paid, and the rights of the holder would have to be considered. Possession of a bond is the best evidence of a debt unpaid. (Munoz v. Wilson, 111 N.Y. 295.) Lost Bond. If the holder of a bond and mortgage has actually lost the bond and cannot produce it, an investigation should be made and affidavits containing the facts obtained. They should indicate the circumstances in connection with the loss, and should show that the bond had not been assigned, sold, pledged for a loan, or otherwise hypothecated. Discharge Section 322 of the Real Property Law is now repealed in its entirety so that it is no longer necessary to produce the original mortgage in order to record a discharge of mortgage. However, the bond and mortgage should be surrendered in any event and payment never should be made until the mortgagee can produce them. Certified copies will not suffice. One might rightfully refuse to close a transaction or make a payment unless the original instruments are produced. Assets Realization Co. v. Clark, 205 N.Y. 117 Bergen v. Urbahn, 83 N.Y. 49 Anderson v. Culver, 127 N.Y. 377 It has been held that the title to a bond and mortgage passes on delivery; and if it should be in the possession of a third person there might be a presumption that it had not been paid - and the right of the holder would have to be considered. Smith v. Wagner, 106 Misc. 178 Possession of a bond is the best evidence of a debt unpaid. Munoz v. Wilson, 111 N.Y. 295 The possession of the bond and mortgage is the best evidence of ownership and identity, since title to such securities passes on delivery. Thuber v. Chambers, 66 N.Y., 42, 49; as cited Smith v. Wagner, supra
2.
3.
8/79
Chapter 29 - Page 2 MORTGAGES 5 MORTGAGE SATISFACTION Legal Bulletin
4.
However, although it is no longer necessary to pick up the original mortgage that is being discharged, the closer should nevertheless see to it that the original note or bond and mortgage are surrendered or their absence accounted for by satisfactory proof. The closer should note on the appropriate mortgage sheet of our report either: "Original documents surrendered" or "Affidavit annexed re: original documents." See Harvey on Title Closing p. 105 (copy on reverse side) A payment to a record holder of a mortgage was held to be ineffectual as against the holder of an unrecorded assignment who also held the original documents in Assets Realization Co v. Clark, 205 N.Y. 105. Subordination in Lieu of Satisfaction - Lost Mortgage - "Time of the Essence" In a mortgage transaction affecting property in any county of New York City and Nassau after September 1, 1939, a subordination agreement may be used instead of a satisfaction when the mortgage is lost. This procedure should be followed, however, only when the closing of the transaction is urgent and the persons interested cannot wait for the completion of a lost mortgage proceeding. In addition the closer should take a letter of undertaking and fix a performance date.
5.
6.
Reference 194, p. 246 Harvey on Title Closing, 2d ed. 7. Release instead of Satisfaction: A holder of a mortgage has been known to offer a release instead of a satisfaction because he has lost his bond and mortgage and wishes to avoid a lost mortgage proceeding. This procedure is unacceptable. When the property covered by an underlying mortgage has been released in full, the mortgage must be satisfied.
1/95
Chapter 29 - Page 1 MORTGAGES 5.1 PAID - NOT SATISFIED LETTERS OF INDEMNITY Legal Bulletin
Occasionally the title examination and commitment will disclose a mortgage which is open of record, the lien of which was created by someone in title prior to the present owner. Further investigation may or may not disclose that said mortgage was assumed by the present owner. If it was an small ancient mortgage, you should refer to the Recommended Practices established by the NYSLTA in May of 1995 relating thereto in Chapter 31B. If the lien was created by the immediate predecessor in title and not assumed it may have been "paid off" at the prior closing and not satisfied of record. a "paid off" loan is no longer a debt or a lien although it is still a "cloud on title" on the public record. A cancelled check does not relieve the title insurer of its obligation to disclose the priority of any lien or encumbrance over the lien of the insured mortgage under loan policy insuring clause 6 [Ins. Cl.6], absent specific legislation to that affect. Therefore, absent a mortgage satisfaction, the best the title insurer can do is to either "insure over" the successful enforcement of the lien or to remove the lien in its entirety based upon a letter of indemnity from the previous title insurer. Which clearance procedure to follow is dependent upon the facts. If the open mortgage does not meet the Recommended Practices adopted by the NYSLTA it may nevertheless be "insured over" if the lien of the mortgage is more than twenty years old and you are able to secure (i) an affidavit from the present owners that no demand for the payment of principal or interest has been made during that time and (ii) you are able to secure from the present owner a Bond of Indemnity or other form of Indemnity approved by the title insurer. If the open mortgage is shown to be "paid off" on the closing statement/settlement sheet [HUD 1] of the prior title insurer the present title insurer may accept a Letter of Indemnity from the prior title insurer in accordance with Recommended Practices Addendum A. In that event the New York Practice is to disclose the lien on the title commitment together with a statement that the mortgage will not appear in the policy to issue based on either a Letter of Indemnity from the prior title insurer or proof of satisfaction of the debt by presentment of a cancelled check together with a copy of the letter of transmittal to the prior lender including said check in payment thereof or Special Mortgage Payoff Indemnity, also in accordance with the Recommended Practices Addendum A. This procedure should serve to satisfy our disclosure obligation. If you should have any questions you should contact the Home Office Underwriting Department for guidance.
8/79
Chapter 29 - Page 1 MORTGAGE 6 MORTGAGE - SATISFACTION INFANTS Legal Bulletin
1.
When a mortgage is made to the general guardian of an infant, the general guardian should make an assignment to his ward when the infant becomes eighteen years of age. The register has repeatedly refused to take a certificate of satisfaction from the former infant who has not obtained such assignment, even though affidavits are furnished to show that he has passed the age of eighteen. If the general guardian is dead at the time the infant reaches majority, the register requires a court adjudication that the infant is the legal holder of the mortgage. This might be a simple order of the surrogate, or it might be a direction that the executor or administrator of the deceased guardian make the assignment, or it might take the form of the appointment of a new guardian with limited letters for the sole purpose of making the assignment.
2.
3.
8/79
Chapter 29 - Page 1 MORTGAGES 7 SUBORDINATION AGREEMENT Legal Bulletin
1.
Self-operating subordination clauses, are and have been a significant source of claims. It is always preferable to obtain an unconditional subordination agreement to be recorded simultaneously with the insured mortgage. In every title where we are to insure a first mortgage and the search discloses an existing mortgage or mortgages, the reader must insert in the report an express exception calling for the execution of subordination agreements from the holder or holders of such earlier mortgage or mortgages, as follows: M.P. must be The mortgage in Liber unconditionally subordinated to the mortgage to be made and insured. Even if the reader through an oversight neglects to call for such agreements, the closer is still responsible for obtaining and recording such agreements.
2.
3.
The subordination clauses in the existing mortgages must still be copied verbatim and scheduled in the report. However, a new subordination agreement may not be waived without approval of one of our counsel, no matter how self-operating and unconditional the subordination clause in the old mortgage may appear. The following set of facts illustrates the danger of relying on an existing subordination. The holder of a large money judgment executed an agreement subordinating the lien of the judgment to a "construction loan." After the building was finished and the construction loan was fully advanced, the mortgage was assigned to a permanent lender who extended the time for payment for a period of years. The judgment creditor claimed priority over the permanent lender's interest because he had subordinated only to a construction loan. This loss could have been avoided if we had obtained a new subordination agreement at the time of the assignment or at least an estoppel certificate from the judgment creditor.
4.
NB Refer to Subordinates this manual & The Title Insurance Underwriting Process & Title Insurance Underwriting Principals & Exceptions Language
8/79
Chapter 29 - Page 1 MORTGAGES 8 WRAP-AROUND MORTGAGE Legal Bulletin
A Wrap-around or all inclusive mortgage is a junior mortgage which secures an indebtedness in an amount which includes both the amount advanced to the borrower at the closing of the wrap-around mortgage and the balance due on a senior mortgage. The wrap-around mortgage provides for amortization payments which are sufficient for the mortgagee to make the payments called for by the senior mortgage. For example, a borrower, may own property subject to a mortgage in the amount of $1,000,000. In order to construct additional improvements, he desires to borrow another $1,000,000. Because of a high prepayment penalty, a favorable interest rate in the existing mortgage, or for other reasons, he does not wish to pay it off and because he finds that a regular second mortgage carries a very high interest rate, he gives a wraparound mortgage to a new lender. The wrap-around mortgage will secure a note for $2,000,000., but only $1,000,000. will be advanced to the borrower. Out of the payments based on a $2,000,000. note, the wrap-around mortgagee will make the regular payments on the $1,000,000. debt secured by the senior mortgage. This usually produces a better rate of return for the lender since interest is based on the $2,000,000. note secured by the wrap-around mortgage, not just on the $1,000,000. cash disbursed to the borrower. In order to protect its position as a second mortgagee the wrap-around mortgagee will provide in its mortgage that it may cure defaults by the borrower under the senior mortgage. This may entail payments by the junior mortgagee out of its own funds for overdue regular payments, taxes, insurance, premiums, etc., required by the senior mortgage or the entire indebtedness secured by it. The wrap-around mortgage may provide that these payments are added to the indebtedness secured by it and usually provides that the wrap-around mortgagee is subrogated to the prior lien position of the senior mortgagee as to such payments. The wrap-around mortgage will usually contain provisions requiring that the owner may not enter into any modifications of, nor make prepayments of the subordinate mortgages. Of course, the Company will not insure compliance with any such covenants or obligations. A regular loan policy may be issued insuring a wrap-around mortgage in the same manner as an ordinary second mortgage. Exception must be made to the senior mortgage. Since the face amount of the note secured by the wrap-around mortgage is greater than the amount disbursed at the date of closing, the question arises as to whether the amount of the policy should be in full amount of the wrap-around mortgage or only in the amount disbursed to the borrower at the closing prior to the date of the policy. A wrap-around mortgage must be insured for the full face amount of the wrap-around and in the example cited above the amount of insurance would be for $2,000,000. If there is a request for a lesser amount of coverage the full facts concerning the matter together with the proposed draft documents should be submitted for approval to the office of the
Chief Counsel.
8/79
Chapter 29 - Page 2 MORTGAGES 8 WRAP-AROUND MORTGAGE Legal Bulletin
Where the Company is asked to insure a Wrap-around Mortgage, the following exceptions are to be raised: 1) The terms, covenants, conditions, provisions contained in mortgage dated day of , 19 and recorded in Liber/Record Liber/Reel at page (prior or first mortgage). Estoppel Certificate to be procured from the prior mortgagee. The proposed closing documents should be submitted to the Company's counsel for consideration prior to closing. Policy will except judgments, federal tax liens, mechanics liens and any other liens that may intervene between the date of closing and the date of payments or advances made by the insured pursuant to its mortgage.
2) 3) 4)
For Information only: 5) Financial arrangements should be made with the Company if the insured desires the Company to make continuation searches before making payments or advances pursuant to its mortgage. Exception No. 4 may be omitted under special circumstances where the projected funding of the payments is sufficient to pay all interest and amortization of the superior loans as well as of the wrap-around mortgage. The determination to omit or modify exception No. 4 can only be made with the approval of the Chief Counsel or Assistant Chief Counsel. Where the additional moneys are to be used for new construction the usual building loan agreement and "pending disbursement" exceptions should be added. Mortgage Tax should be collected only on the new money advanced or to be advanced on the junior mortgage (See matter of First Fiscal Fund Corp. vs. State Tax Commission, 375 N.Y. Supp. 2d 433, 49 A.D. 2d 408, affirmed without opinion in the Court of Appeals, 40 N.Y. 2d 940 (1976). Section 255 Wrap-around Affidavit (Form X-62) should be executed in duplicate.
Note A:
Note B:
Note C:
8/79
Chapter 29 - Page 1 MORTGAGES 9 HUSBAND AND WIFE Legal Bulletin
A mortgage to husband and wife is held by them as tenants in common. Real Property Law, Sec. 66; Brosnan v. Gaffney, 204 N.Y. Supp. 846. But evidence may be admitted to show an intention to hold as joint tenants. In re Moran's Estate, 127 Misc. 232, 215 N.Y. Supp. 649. Cogan v. Taylor, 212 A.D. 8 (ante). The husband's furnishing of the entire consideration may be evidence of such an intention. (Matter of Blumenthal, 236 N.Y. 448). Where land held as tenants by the entirety is sold by them and a purchase money mortgage executed to husband and wife, they hold such mortgage as tenants in common and in case of death a representative of each must assign or satisfy. (Matter of Blumenthal, 236 N.Y. 448) A mortgage by husband and wife given as part of the purchase price of land sold to them as tenants by the entirety, is a lien on the entire estate of the survivor even though the husband (deceased) had been alone liable for the mortgage under the contract. Geldart v. Bank of N.Y. & Trust Co., 209 A.D. 581; 205 N.Y. Supp. 238 In the absence of evidence to the contrary, a mortgage to husband and wife is prima facie evidence of a gift to the wife in case of her survivorship. In re Larmon's Will, 208 N.Y. Supp. 491
4/62
Rev. 12/95 Chapter 27A - page 1 MARKETABILITY OF TITLE General - Multi-state
MARKETABILITY OF TITLE
The late Harold L. Reeve, as Senior Vice President of Chicago Title &Trust Company, wrote a little known text entitled Guaranteeing Marketability of Titles to Real Estate, wherein he made a distinction between Perfect Title, Marketable Title & Insurable Title. Perfect title is defined as one " . . . without fault, defect of omission". Marketable title is defined "as indefeasible title in fee simple". Insurable title is defined as "a sound title which is subject to defects which prevent it from being technically marketable but which is not subject to being defeated, is defensible and insurable and which in fact is covered by a title guarantee policy of a kind which is generally acceptable to purchasers or lenders". Many titles which do not meet the test of true marketability nevertheless are sound in spite of the defects which render them technically unmarketable. What distinguishes a marketable title from an insurable title? The answer to the question lies with the nature of the title defect or irregularity. I am of the opinion that so long as the defect or irregularity are not of such character that they are likely to expose the purchaser or lender to the hazard of adverse claims or litigation then, and only then is the title insurable. So long as the technical defect gives no one an outstanding interest in the property the quality of title can be insured. Underwriting safeguards may need to be utilized, as in the case of outstanding liens or encumbrances, but the underlying title is capable of being insured. In his fine work on Marketable Title to Real Estate, Third Edition, Sections 283-4, Maupin said, "What matters are sufficient to make a title so doubtful as to be unmarketable can not be indicated by positive rules; questions which present no difficulty to one judicial mind may, in the opinion of another, raise insuperable objections to the title. A fair and reasonable doubt as to the title must depend upon the capacities of the Judge to whom it is addressed. A test as to whether a title is doubtful or not upon a question of law has been held to be the certain conviction of the Court in deciding the point, that no other Judge would take a different view." Exactly what constitutes a marketable title is the subject of judicial determination. Since publication of Maupin's work "the courts have used several definitions for a marketable title. For example, it has been defined as a title which is free from defects and encumbrances; free of reasonable doubt; a title a reasonable and prudent person would accept; not a perfect title but one which is not subject to reasonable doubt nor does it require litigation."* The ALTA Policies insure against loss or damage by reason of unmarketability of title [Ins. Cl. 4]. However, the following distinction is noteworthy. Guaranteeing against loss by reason of unmarketability of title is different from that of certifying that the owner or mortgagor "in fact" and "in Law" is possessed of a marketable title. The former leaves room for the title insurer to insure against loss by reason of the very existence of the title defect; i.e. affirmatively insure against loss by reason of unmarketability which actually exists in the owner/mortgagors title. If the title insurer were to make the latter statement in its policy there would be no room for affirmative coverage against a title defect. ______________
* Yzenbaard, Residential Real estate Transactions, 5:10, cases cited.
Chapter 27A - page 2 MARKETABILITY OF TITLE General
From a title insurers standpoint a purely theoretical treatment of the subject of marketability is not practical. Differences of opinion as to what constitutes marketability arise amongst attorneys astute in title law. For this very fact real estate title standards were developed by various state bar associations. Perhaps the better path to follow would be a study of the decisions of various jurisdictions addressing the issue of marketability. The cases on the question of marketability have been for the most part decided on the basis of their own peculiar facts and as justice seemed to require. It is impossible to formulate from them any general rules of law, other than one. In measuring the remoteness of the possibility of successful attack upon the title or quiet enjoyment of the owner we must keep in mind that a marketable title is one which a Court may not only deem safe from successful attack, but one about which there are no doubts to invite, or reasonably expose, the owner to litigation [Ritter v. Hill 282 Pa. 115]. A general review of New York decisions regarding marketability is contained in the New York Law Journal (NYLJ) of May 7, 1924. For further review of the issue of marketability generally please refer to Pedowitz, Real Estate Titles, Second edition, Chapter 24 and Bayse, Clearing Land Titles 7. MARKETABLE TITLE ISSUES There are two forms of marketable title problems generally recognized. The first relates to chain of title problems while the second relates to encumbrances. As to the former, a title is not marketable if there is a defect in the seller's chain of title to the property under examination. In that case the defect goes directly to title. Examples of such defects may include adverse possession or claim of ownership; title acquired by judicial decree; title acquired by descent or devise; title acquired from a fiduciary; titles which do not include the marital status of the parties; titles where there may be a variance of the spelling of parties names or titles where there is irregularity in the description. Clearing these defects may be possible via bar claim or quiet title actions seeking either declaratory judgment or equitable relief following judicial review and proper service of process; Partition proceedings; obtaining additional quit claim or corrective and confirmatory deeds; proceedings for leave to sell. None of these defects is capable of being corrected or resolved by escrow or indemnity A title is not marketable if encumbrances are present. An encumbrance has been defined as a right in a third party which diminishes the value of the property but is consistent with the passage of title [Rhodes v Astro-Pac, Inc., 394 NYS2d 623 (Ct. App 1977)]. The court of Appeals of the State of New York in the foregoing case even went so far as to hold that a reduction in value is not necessary to be shown for a valid encumbrance to exist. Common encumbrances include easements [Sell v Zylenski (1988 4th Dept.) 524 NYS2d 914]; covenants; liens; leases; encroachments or pending law suits. Zoning ordinances and building restrictions may affect the proposed use of the property; however, their presence in the chain of title will not generally render title unmarketable. A notable exception to this general rule may be found in Voorheesville Rod and Gun Club,
Inc. v E.W. Tompkins Company, Inc., 551 NYS2d 382 (1990, 3rd Dept). In that case the
Chapter 27A - page 2.1 MARKETABILITY OF TITLE General
Appellate Division held that the vendor's refusal to obtain subdivision approval so as to make the subject parcel a legal lot under applicable zoning laws rendered title "unmarketable", stating "where a person agrees to purchase real estate, which, at the time, is restricted by laws or ordinances, he will be deemed to have entered into the contract subject to same. He cannot thereafter be heard to object to taking title because of such restrictions (cases cited)". However, (where) the contract provides an exception to the general rule such exception "imposed upon the defendant (vendor) the affirmative obligation of complying with the relevant zoning ordinances that would affect the marketability of title at the time of delivery of the deed". Since the contract provided that the defendant would "convey the premises subject to . . . zoning . . . laws . . . provided that this (the zoning law) does not render the title to the premises unmarketable" and it was determined that the conveyance would not be a legal lot under the zoning law, failure to obtain subdivision approval so as to make the subject parcel a legal lot under applicable zoning laws rendered the title unmarketable. The remainder of this chapter will address the issue of zoning ordinances and building restrictions as they affect marketability in more detail. VIOLATIONS OF BUILDING RESTRICTIONS AND ZONING ORDINANCES No Court wants to expose a litigant to another possible suit where a different result could be reached. This is especially true with regard to the effect which violated restrictions and zoning ordinances have upon marketability. Although no positive rule can be drawn it does seem clear, that if without any doubt the restrictions or ordinance violated cannot be legally enforced, the title is marketable. Unless the contract provides otherwise, there is always an implied agreement that title offered by a vendor shall be marketable. And even though the agreement provides that the vendee shall take subject to existing restrictions or ordinances, this does not mean that he is compelled, under all circumstances, to take title when such restrictions or ordinances have been violated. Moyer v. DeVincentis Construction Company 107 Pa Super 588. For convenience, I have separated the cases into two categories: First, those concerning building restrictions imposed by deed; and secondly, those concerning zoning ordinances or similar building laws.
Chapter 27A - page 2.2 MARKETABILITY OF TITLE General
CASES INVOLVING VIOLATIONS OF BUILDING RESTRICTIONS WHERE TITLE HAS BEEN HELD MARKETABLE There seems to be no case in Pennsylvania where marketability was considered solely upon the effect of a violated building restriction. In People-Pittsburgh Trust Co. v. McKinley-Gregg Automobile Co. 353 Pa. 110, the issue was whether the title was marketable because of the existence of the restriction. The lots in question were restricted to residences with a 35-foot set back from the street. Since commercial buildings had been built in the tract and because the City of Pittsburgh had zoned the area "commercial" and "light industrial" the Court said the restriction was not enforceable and its existence did not make the title unmarketable. The opinion does not mention the fact, but the paper books show that the restriction had been violated by the erection of a commercial building on one of the lots right up to the street line, so although this case is not cited for the point, it does, on its facts, stand for the proposition that if the restriction is deemed unenforceable it doesn't matter whether it has been violated or not. It seems that our Supreme Court went a long way here in passing upon the enforceability of the restriction when all the parties having an interest in its enforcement were not before the Court. It might be dangerous to rely too strongly on this case as a precedent, since it was seemingly a friendly suit and the argument against the title was not vigorously pressed. In New Jersey the problem has arisen a number of times with cases on both sides. In Salter et al v. Beatty 137 Atl. 848 (1927) the dwelling violated by 3 feet a set-back covenant created in 1892. The Court said, "A suit at law against the vendee if she takes title, for breach of the covenant is out of the question; that could only be maintained against the owner who breached the covenant and surely a bill for a mandatory injunction would not be entertained by this court for such complaint must be presented promptly. The remote possibility of an idle and vain suit is not with the category of being exposed to the hazard of litigation." This case makes no reference to Dichter v. Isaacson et al decided a year earlier which we will come to in a few moments. In the earlier N.J. case of Zelman et al v. Kaufher 73 Atl. 1048 1909 a similar result was reached. The building in question was 4 feet over the line established by the restriction and failure of parties entitled to relief to act within 2 1/2 years barred them by laches. In Fort v. Field 124 At. 314 (N.J) 1923 the restrictive covenant limited the use of the plot of land 200' x 250' to a single dwelling. The violation was the erection of two dwellings and the foundations of a third. The court held that the change in the character of the community, the general violations in the surrounding area forming part of the original tract on which similar restrictions were imposed and the general acquiescence in violations by those concerned amounted to an abandonment and estoppel to enforce and hence title was marketable. Since the violated restriction in Allen v. Pfaltz and Bauer Realty Co., Inc., 236 N.Y.S. 210 (1929) was to expire three months from the closing date of the agreement of sale, an objection that the title was not marketable was considered frivolous.
WHERE TITLE HAS BEEN HELD UNMARKETABLE. On the other side of this question in New Jersey is the case of Dichter v. Isaacson et al 132 Atl. 481(affirmed in 138 Atl. 920) 1926. A deed made in 1882 contained a restriction affecting a larger tract of which the premises in question formed a part, forbidding the erection of a dwelling closer than thirty feet to the road. The house on the lot described in the agreement was 26' 11" from the road and had been built about a year before the date of the agreement. Other houses in the tract conformed to the restriction except the one adjoining which set back slightly less than thirty feet. The evidence did not show that any objection had ever been made to the violation. In a very meager opinion in which no cases were cited or reasons given the court held this title unmarketable because the restriction had been violated and allowed the recovery of down money paid under contract to buy. It is hard to reconcile this case with the other New Jersey decisions cited before. The case of Chesebro v. Moers 134 N.E. 842 (1922) is the leading one in New York and it divided the Court 4 to 3 with Justices Pound, Cardozo and Crane dissenting. The suit was to recover the purchase price of a property in a building development on the ground that a violated restriction made the title unmarketable. The restriction required a fifty-foot setback from the street line for the house and a five-foot one from the rear line for the garage and had been created after these buildings were built. It prohibited not only the erection, but the maintenance of a building in violation. The house set back 44.843' from the street and the garage "less than five feet from the rear line." The restrictions ran for the benefit of other lot owners. The court held this title unmarketable since the maintenance was in violation of the restriction, saying "A purchaser is not compelled to take property the possession of which he may be obliged to defend by litigation. Title to the lot in question, by reason of the location of the dwelling thereon, does not measure up to these requirements." Even at the risk of taking up more time on this case than I should, I want to quote to you some excerpts from Justice Pound's dissent, not only because they are so exceedingly well put, but because they point up so well the problems with which the courts have to struggle in these cases. This is what he said: "Every title is, in law and in fact, either good or bad and equity will not compel a purchaser to take a bad title. A title may be doubtful because of the absence of parties who may be in a position to maintain either contention. At times it is difficult to foresee what action such parties may take, what evidence they may offer, what legal propositions they may put forth. When from the nature of things, the court cannot be fully informed, it ought to doubt, and doubting, ought not to compel performance. But it is bound to do the best it can and decide what the law is if the facts are sufficiently developed to enable it to make a determination. It seems to be the unalienable right of any person to start a lawsuit but the court will not regard such possibility of action as a reason for refusing specific performance when a judgment is to be rendered which, under the ordinary rule of stare decisis, will control the
determination of subsequent suits started for the same purpose. The essential facts are not in dispute. The only doubt arises as to what
relief others may seek to claim on the basis of such facts. The purchaser will not be left open to serious attacks by other persons. The contingency of successful attack is so remote as to be negligible." A similar reluctance of a court to take the bull by the horns and decide the issue is found in Kittinger v. Rossman 110 Atl. 677 (Del.) 1920 in which the building violating the setback restriction had been erected 40 years before. The court said that although the owner might be safe from attack based on infraction of the restriction, the right to erect a new building on the same location, if the old building were removed, not being clear, the court could not make any decision thereon which would bind persons not parties to the cause, who might have a right to enforce the restriction and hence the title was unmarketable. Even though the character of the tract restricted to residences had been changed by the erection of duplexes and larger apartments, it was held in Wisconsin that until all the lot owners in the tract had their day in court it could not be held that their rights to enforce the restriction had been abandoned and hence the restriction of record made the title defective Goodman v. Kortsh, 196 Wis 70, 219 N.W. 354 (1928), cited in 89 ALR 812, at 816 and 819 Annotation, "Who May Enforce Restrictive Covenant or Agreement as to Use of Property", citing other annotations. POLICY EXCLUSION FOR MATTERS OF ZONING Cities, counties and other governmental bodies can pass zoning ordinances imposing restrictions and limitations on the use, occupancy and enjoyment of privately owned property. Zoning or building ordinances do not affect deed restrictions nor are they to be confused with one another. Deed restrictions are susceptible of creation by contract whereas zoning ordinances involve the exercise of police power. As such, zoning ordinances are specifically excluded from coverage under exclusion 1(c) of the title insurance policy. [See Ellis, Title Insurance Law Handbook, for citations]. There is another compelling reason to exclude zoning from coverage under a "standard coverage" policy and that is related to the definition of "public records". Any investigation regarding zoning coverage relates to matters outside the policy definition of "public records". RECORDED ZONING ORDINANCE Occasionally a zoning ordinance affecting the property to be insured may be filed and recorded in the County Clerk's Recorder's or Register's Office in the county in which the property is located. In that case the policy should contain an exception for the ordinance itself. Such exception and disclosure is in keeping with both (i) our contractual obligations set forth in Policy Exclusion 1(d) of the 1970 ALTA Loan Policy rev. 10-17-84 and (ii) the definition of public records set forth in Conditions and Stipulations 1 of the policy
VIOLATIONS OF ZONING ORDINANCES Notwithstanding the fact that zoning ordinances are not usually subject to coverage under the policy the recent New York case of Sunderlin v. National Attorney's Title Insurance Co., Vol. 213, No. 102 NYLJ 35 (5-30-95) held that, under the doctrine of reasonable expectations, title insurance covers improper subdivision. Despite the policy exclusion, there exists within the policy's terms a latent ambiguity because the policy insures against unmarketability of title and against any lien and encumbrance which affect title. The court reasoned that since an "encumbrance" is a burden, lien or charge on a property or some right that may interfere with the use and enjoyment of the property, that term is broad enough to include all forms of liens, survey projections, encroachments, easements and restrictive covenants and thus, the title company is responsible for "actual loss" incurred by the insured buyer because of a non-conforming use. This case points out the seriousness of the issue. This case is of particular importance in New York. Fortunately the courts of other states to not follow this reasoning. At the same time this case was being decided the New Jersey Superior Court held that a setback restriction imposed by zoning variance approval fell with the "police power" exclusion of the policy (Aldrich v Hawrylo, 656 A2d 1304). This case makes for an interesting juxtaposition to Sunderlin. ZONING VIOLATIONS WHERE TITLE HAS BEEN HELD UNMARKETABLE The violation of zoning ordinances would necessarily include violations of building laws and regulations and encroachments on streets because such violations are governed by similar principles of law. The only Pennsylvania case involving the effect of a violated zoning ordinance on marketability is Moyer v. DeVincentis Construction Company, previously cited. This was a suit to recover down money paid under an agreement which contained the usual clause to convey, "Free and clear of all liens and encumbrances excepting existing easements and restrictions if any -- title to be good and marketable and such as will be insured at regular rates, etc." After the agreement was signed the plaintiff found out that the building was set back only 22' whereas the local zoning ordinance required a 25' set back. The ordinance provided heavy penalties for maintaining a building in violation after legal notice. The Superior Court held that although the ordinance was a "restriction" within the meaning of the word as used in the contract to which the plaintiff agreed to take subject, he had not agreed to take a building erected in violation of the ordinance and the violation made the title unmarketable. In Doutney v. Lambie 78 Atl. 746 (N.J.) 1911 a similar question arose in a rather unusual set of circumstances, although not involving a zoning ordinance. The complainant had filed a Bill in Equity to compel the specific performance of an agreement to exchange property of the defendant in New Jersey for his in New York. There was conflict in the
evidence as to whether the complainant's property did or did not encroach on the street line of Park Avenue. The court said, "Having examined the evidence, we are satisfied
Chapter 27A - page 6 MARKETABILITY OF TITLE
that, to say the very least, the question of encroachment is a doubtful one and might well lead to troublesome and vexatious litigation in the future which might be decided adversely to the owner and compel a substantial alteration of a large apartment building. This is sufficient to render the title unmarketable and to justify, if not require, a Court of Equity to refuse specific performance to the vendor." Acme Realty Co. v. Schinasi 109 N.E. 577 (N.Y.) 1915 involved a violation of the New York building laws in that the stoops, portico and windows of an apartment building extended one to four feet over the building line. This title was held unmarketable because of the right of the city to compel the removal of the encroachments and a recently indicated policy of the city to enforce its rights in similar cases. This case overrules earlier New York cases decided when it was the policy of the city to acquiesce in such encroachments. (Cross reference with Encroachments, this manual) The decisions in outside jurisdictions on this point depend for the most part on the character and extent of the encroachments, the cost and effect of their removal, the policies of the different municipalities where the land lies and the provisions of a wide variety of laws and regulations concerning them. For this reason I do not think it would be helpful to discuss more in any detail. They are collected and analyzed in the references cited in the foot note to this paper.28 The following however are a few other situations where title was held defective. A 5" encroachment of windows, cellar doors, cornices, etc., on a street.29 In a similar case the court said it was immaterial that there was little likelihood that public authorities would compel removal,30 and a like result was reached in another case where "there was no evidence to establish an estoppel against the city".31 That the city never sought to remove the 1" to 1 1/2" encroachment of a factory building on a Newark Street was held immaterial for "time does not run against the sovereign", the court said.32 In New York a 2" encroachment on a street 33 and in New Jersey a 1" to 2-5/8" encroachment made the titles defective.34 Where a property did not comply with the structural requirements of the State Board of Tenement House Supervision, a New Jersey Court held the title
55 Am. Jur. - Vendor & Purchaser, Sec. 255 Notes to Justice v. Button 38 LRA (NS) p-34 57 A.L.R. 1451 66 C.J. p-939, 40 Sec. 639, p-912, Sec. 592.
29 28
Klimas v. Brumback 190 N.Y.S. 307 (1921)
Leo N. Levy Corp. v. Dick 190 N.Y.S. 238 (1921) see also Bier v. Walbaum et ux 131 A888 (N.J) 1926.
31
30
Smithers v. Steiner 34 N.Y.S. 678.
Vassar Holding Co. v. Wuensch 135 A 88 (N.J) 1926 see also White Walt Corp. v. Heinle 142 A 667 (N.J.) 1926.
33
32
Perlman v. Stellwagon 187 N.Y.S. 845 (1921). Goldstein v. Ehrleck 121 A 761 (1924)
34
unmarketable. 35 In Missouri a 2" encroachment on a public alley had the same effect.36Where the validity of a violated ordinance is attacked on grounds involving the Federal Constitution on which the State Court cannot give a final decision, it seems obvious that the purchaser should not be compelled to take the violating property where the constitutional question is a reasonable one. ZONING VIOLATIONS WHERE TITLE HAS BEEN HELD MARKETABLE. On the other side of this question there are a large number of cases which can also be found in the references given. Although some of the earlier New York cases are no longer the law in the state, there is every reason to believe they would be followed in localities where municipal policy conforms to the earlier New York one. In Levy v. Hill 66 N.E. 112 (N.Y.) 1902 where stoops projecting into the street had been maintained for thirty years, the title was held marketable because the possibility that the municipality would ever compel removal was so remote as not to be within reasonable contemplation. A similar result was reached in 556 and 558 Fifth Avenue Co. v. Lotus Club 37 where a basement had extended under the street for thirty years and the encroachment was easily removable at little cost. The possibility that the city would force removal of the encroachment over the street in case of Empire Realty Co v. Sayre 38 was so remote that the court would not consider the title unmarketable. And then there is the Pennsylvania case of Groskin v. Knight 39 where it was considered no error to charge the jury that a coal vault under Chestnut Street in Philadelphia was not an "encumbrance" on the property.
35
Moran v. Borrello et al 132 A 510 (1926)
McFarland et u v. Cobb et al 64 S.W. 2nd 931 (1933). For collection and discussion of earlier cases on street encroachments in N.Y. see Ebert v. Hannenan et al 125 N.Y.S. 237 (1910) 113 N.Y.S. 886 (1908) see also Broadbelt v. Loew 57 N.E. 1105 (N.Y.) not followed in Acme Realty Co. v. Schinasi (supra) because of changed municipal policy.
38 37
36
95 N.Y.S. 371 (1905). 290 Pa. 274.
39
Where a New York tenement house had its sanitary facilities in the yard, contrary to the State Tenement House Law, it was held that noncompliance did not allow the purchaser to rescind a contract in which it was agreed to convey "good title". The court said "the contract was to purchase the house as it was and it did not matter how defective . . . it might be. 40 Under certain circumstances, a right to maintain an encroachment on a street may be acquired by lapse of time,41 and where the encroachment is maintained by permissive ordinance even though no right is given to encroach in a rebuilding, the title is not defective.42 In a recent case where the encroachment on the street was slight and the expense of removal small, the title was considered good 43 and where public authorities failed to begin action to remove encroachment in time prescribed by law the title was likewise good.44 In a California case a slight overlapping on a sidewalk was treated as "de minimus" and did not make the title defective.45
40
Woodenbury v. Spier 106 N.Y.S. 816 (1907)
57 A.L.R. 1454-5 (Pa. Laches will defeat equitable relief; Hansell v. Downing (1901) 17 Sup. 235
42
41
Harrington Co. v. Kadrey 143 A 3 (N.J.) 1929. Goldberg v. Cohen 46 A. 2nd 146 (1946) Whittier Estates v. Manhattan Savings Bank 48 N.Y.S. 2d 111 (1944) Taxler v. McLeran 2 Pac 2d 553 (1931)
43
44
45
8/78
Chapter 28 - Page 1 MECHANICS' LIENS General
MECHANICS LIENS
DEFINITION A mechanic's lien is a statutory lien on specific real property as security for payment of the price or value of work performed or materials furnished for the erection, improvement or repair of buildings or other structures on the property. The mechanic's lien is a creature of statute and the statutory requirements must be strictly complied with by the lienor. (Ausable Chasm Co. v. Hotel Ausable Chasm and Country Club, 33 N.Y.S. 2d 427 (1942)). The purpose of the mechanic's lien law is to protect persons who have enhanced the value of real property by furnishing materials and performing labor for its improvement with the owner's consent. The protection afforded by the lien is that he (the lienor) receives an interest in the improved property to the extent of the value of the materials furnished and/or labor performed. (Met Painting Co., Inc. v. Dana, N.Y.S. 2d 392 (1977); Schenectady Homes Corp. v. Greenside Painting Corp. 37 N.Y.S. 2d 53 (1942)). PERSONS ENTITLED TO MECHANIC'S LIENS The following are entitled to mechanic's liens on real property: 1) 2) 3) 4) 5) contractor; subcontractor; laborer; materialman; and landscape gardener. (N.Y. Lien Law 3, 1966).
The owner must give his consent to or request the work in order for the lien to arise. The consent may be actual or implied. (Met Painting Co., Inc. v. Dana, supra). The one entitled obtains a lien from the time of the filing of the lien, for the principal and interest of the value, or the agreed price of the labor or materials used on the improved real property. (N.Y. Lien Law 3, 1966). If an improvement contract is made with a husband or wife and the property belongs to the other spouse or to both of them, the spouse who contracts for the improvements is presumed to be the agent of the other spouse. This presumption will stand unless the other spouse gives the contractor written notice of his consent or refusal within ten days after learning of the contract. (N.Y. Lien Law 3, 1966). This lien also covers materials that are actually manufactured for the real property but never delivered. A valid contract is not a prerequisite to the contractor obtaining a valid lien. (Seaboard Pools, Inc. v. Freeman, 259 N.Y.S. 2d 999 (1965)).
The validity of the mechanic's lien does not depend upon the personal liability of the owner for the debt. The lien can arise when the labor is performed or the materials are furnished with his knowledge and consent. (Pearce v. Kenney, 137 N.Y.S. 475 (1912)). PROPERTY SUBJECT TO MECHANIC'S LIENS A mechanic's lien may be filed only for the improvement of real estate described in the lien. The real estate involved must be definitely and sufficiently identified to determine the extent of the lien. (Levie v. Cottage Homes, Inc., 124 N.Y.S 2d 118 (1953); N.Y. Lien Law 24, 1966). The lien will not extend to personalty which has not become so attached to the real property as to become a fixture. (Pike v. Naylon Securities Co. Inc., 251 N.Y.S. 659 (1931)). Claims for unpaid insurance premiums for workmen's compensation insurance and for public liability insurance are not lienable. (Matter of O'Rourke, Inc., 273 N.Y.S. 1020 (1934)). A mechanic's lien may attach to a leasehold interest in privately owned real property. (Ingram E. Green, Inc. v. Wynne, 262 N.Y.S. 2d 663 (1965)). A sum advanced to a lessee to enable him to complete a building is actually a loan and is not subject to a mechanic's lien. (Barth v. Schmitz, 170 N.Y.S. 51 (1918)). The mechanic's lien extends to the owner's right, title or interest in the real property and improvements existing at or acquired after the filing of the lien. If the owner assigns his interest in the real property and improvements by a general assignment for the benefit of creditors and the assignment occurs within thirty days before the filing, the lien still extends to the property. The mechanic's lien will not be affected by the removal of any real property which is subjected to the lien, even if the removal occurs before the discharge of the lien. The owner is not liable to pay a sum greater than the value or agreed price of the labor and materials remaining unpaid at the time of the filing of notices of such liens. (N.Y. Lien Law 4, 1966). This lien attaches to this property when the lienor files a notice of the lien with the county clerk in which the property is located. The lienor shall have a lien for the value of his labor to the extent of the value, right, title and interest of the corporation in that property at the time of filing. A conveyance, mortgage, lien or encumbrance made by an owner of real property to avoid the mechanic's lien is void and does not affect the mechanic's lien which exists at
the time the conveyance or the creation of a mortgage, lien or encumbrance.
Chapter 28 - Page 3 MECHANICS LIENS General
The mechanic's lien, however, is not effective against a purchaser who bought the title of real property and recorded the conveyance before the lien was filed. (N.Y. Lien Law 7, 1966). The mechanic's lien can also apply to the insurance proceeds which the owner of the property or contractor/subcontractor receives because of the destruction or removal of the improvement by fire or other casualty. The proceeds are subject to the lien, after the owner is paid, to the same extent and in the same priority had the casualty not occurred. (N.Y. Lien Law 4(a), 1966). PUBLIC IMPROVEMENTS A mechanic's lien cannot be filed against land and buildings dedicated to and used by the public. (John Kennedy & Co. v. New York World's Fair, 22 N.Y.S. 2d 901 (1939)). A person who performs labor or furnishes material to a contractor, his subcontractor or legal representative for a public improvement shall have a lien for the principal and interest of the value or agreed price upon the funds used to pay for the improvement. The lien shall only be to the extent owed to the person. (N.Y. Lien Law 5, 1966). The lien does not attach to real property but attaches solely on money. (L.B. Foster Co. v. Terry Contracting, Inc., 310 N.Y.S. 2d 76 (1970)). A public improvement mechanic's lien does not attach to the improved real property but only to the sum that the public corporation has appropriated for the improvement. (Yula Corp. v. George Wassil Heating & Air Conditioning, 342 N.Y.S. 2d 673 (1973)). A person performing work for or furnishing materials to a contractor, his subcontractor, assignee or legal representative, may file a notice of lien at any time; 1) before the construction/demolition of a public improvement is completed and accepted by the state or public corporation; and 2) within thirty days after the completion and acceptance. The lienor may file with the: 1) department head or bureau in charge of the public improvement; 2) the comptroller of the state or the financial officer of a public corporation; or 3) other persons/officers charged with the custody and disbursements of the state or public corporation. A lien for labor done or materials furnished to a public improvement can't last for more than six months from the filing of the notice of the lien, unless: 1) an action is brought to foreclose the lien within the six month period. Notice of the action must be filed with the state comptroller or the financial officer of the public corporation; or 2) a court order continues the lien. (N.Y. Lien Law 18, 1966).
PERFECTING AND ENFORCING A LIEN CLAIM The notice of the lien shall state the: 1) 2) 3) 4) 5) 6) 7) name and residence of the lienor and lienor's attorney (if any); name of the owner of the real property and, if known, the extent of the owner's interest; the name of the person for whom the lienor supplied labor or furnished materials; if the lienor is a contractor or subcontractor, the person with whom the contract was made; the agreed price or value of the labor performed or materials furnished, or materials actually manufactured but not delivered to the real property; amount unpaid to the lienor for the labor or materials; time when the first and last items of work were performed and/or materials were furnished; description of the property subject to the lien.
However, the failure to state the name of the owner or contractor or a misdescription of the owner will not affect the validity of the lien. The lienor must also verify to the truth of the statements contained in the notice. (N.Y. Lien Law 9, 1966). A valid mechanic's lien is created by filing a notice which substantially complies with these requirements. (Corina Associates, Inc. v. McManus, Longe, Brockwehl, Inc., 330 N.Y.S. 2d 847 (1972)). The notice of the lien may be filed: 1) at any time during the progress of the work and the furnishing of the materials; or 2) within four months after the completion of the contract; or 3) within four months of the final performance of work; or 4) within four months of the final furnishing of material. The notice must be filed with the clerk in the county in which the real property is situated. The clerk will file the notice in a lien docket. (N.Y. Lien Law 10, 1966). A failure to file the notice within the statutory period is fatal to the lien. (Farabella v. Porter, 225 N.Y.S. 417 (1927). Upon filing the notice, the mechanic's lien attaches and becomes effective. (Beacon Construction Co., Inc. v. Matco Electric Co., Inc., 521 F. 2d 392 (1975)). The lienor, after filing the notice of lien, may serve a copy of the notice upon the owner, he can leave a copy with his agent, attorney, or at the owner's last known residence in the city in which the real property is situated. The notice must be left with a person of suitable age and discretion or by registered letter. The lienor can serve the notice by fixing a copy of the notice conspicuously on the property between 9 a.m. and 4 p.m. only if the: 1) owner cannot be found; and 2) his
last residence cannot be found; and 3) he has no agent or attorney.
If the owner is a corporation, the lienor can serve a copy of the notice by: 1) serving an officer of the corporation personally; or 2) fixing a copy conspicuously on the property between 9 a.m. and 4 p.m., if the officers cannot be found; or 3) sending a registered letter addressed to the corporation's last known place of business. Until service of the notice has been made, an owner who has no knowledge of the lien is protected in any payment he makes in good faith to any contractor or any other person claiming a lien. (N.Y. Lien Law 11, 1966). The lienor may amend his original pleading to reduce the amount of the lien within sixty days of the original filing. The lienor must give twenty days notice to existing lienors, mortgagees and the owner. However, no amendment will be allowed if an action to enforce or cancel the mechanics lien was brought before the amendment was filed. The court may, upon five day's notice to existing lienors, mortgagees and owner, make an order amending the notice upon a public or private improvement. However, no amendment shall be granted to the prejudice of an existing lienor, mortgagee or purchaser in good faith. (N.Y. Lien Law 12 (a), 1977). The mechanic's lien may be enforced against the property specified in the lien and against any person liable for the debt upon which the lien is founded. (N.Y. Lien Law 24, 1966). A mechanics' lien can only exist for one year after the notice of the lien has been filed unless: 1) the lienor has brought an action to foreclose the lien within that one year period; 2) notice of the action is filed with the county clerk of the county in which the lien was filed; or 3) a court order is granted within the one year period which grants a continuance of the lien and the lien is redocketed as of the date it was ordered. If such a court order is granted, the lien cannot be continued for more than one year but a new order and entry may be made in each successive year. (N.Y. Lien Law 17, 1966). PRIORITY OF MECHANICS' LIENS As a general rule, a mechanics' lien on real property has priority over: 1) a conveyance, mortgage, judgment or other claim against the property which has not been recorded, docketed or filed at the time the notice of the lien was filed; 2) advances made upon any encumbrances on the property after the filing of the notice; 3) a claim of a creditor who does not have a mechanics' lien on the property, if the property was assigned by the owner by a general assignment for the benefit of creditors within thirty days of the filing of the notice; 4) an attachment issued or a money judgment recovered upon a claim which was, in whole or in part, not for materials furnished, labor performed or moneys advanced for the improvement of the property; or 5) any claim or lien acquired by such a judgment. If several buildings are demolished, erected, altered or repaired, or several pieces of real property are improved under one contract, each lienor has priority upon the particular part of the real property or building where his labor is performed or his materials are used.
Lienors shall have no priority because of the time of the filing of the liens and all liens shall be on a parity. WAIVER OF MECHANICS LIEN RIGHTS Any contract, agreement or understanding in which the contractor, subcontractor or laborer waives his right to file or enforce a mechanic's lien is void and wholly unenforceable. However, the written waiver of the mechanic's lien is acceptable when: 1) a contractor, subcontractor, material supplier or laborer executes and delivers the written waiver simultaneously with the payment for the labor performed or the materials supplied; 2) the written agreement subordinates, releases, or satisfies all or part of the mechanic's lien after a notice of the lien has been filed. (N.Y. Lien Law 34, 1977). The lienor may waive his right to the mechanic's lien by an express written unambiguous unequivocal agreement. (Beacon Construction Co., Inc. v. Matco Electric Co., Inc., supra; Hauser Industrial Sheet Metal Works v. Ellar Estates Corp., 269 N.Y.S. 2d 759 (1966)). DEVICES WHICH PRECLUDE OR LIMIT MECHANICS' LIENS The owner or contractor may demand that a lienor who has filed a notice of the lien deliver a written statement listing the items of labor and/or the material and the value of each which make up the amount he claims, and the contract terms under which the items were furnished. The statement must be verified, and failure to deliver the statement within five days of the demand or delivering an insufficient statement, will permit the person demanding the statement to petition the court for an order directing the lienor to deliver a sufficient statement. If the order is made and the lienor still fails to meet the order, the court can cancel the lien after giving five day's notice to the lienor. (N.Y. Lien Law 38, 1966). The court can also declare a mechanics' lien void if it finds that the lienor willfully exaggerated the amount of the lien. The lienor, if the lien is declared void, has no right to file another lien on the same claim. (N.Y. Lien Law 39, 1966). The court's action punishes willful exaggerations but not honest differences and protects the owner or contractor against fictitious, groundless and fraudulent liens. (E-J Electrical Installation Co. v. Miller and Raved, Inc., 380 N.Y.S. 2d 702 (1976)). The owner or contractor may also hold the lienor liable for damages if the court declares the lien void because of willful exaggeration. The damages to which the owner or contractor is entitled includes: 1) the amount of any premium for a bond given to obtain the discharge of the lien or the amount of the interest on any money deposited for the purpose of discharging the lien; 2) reasonable attorney's fees for services in securing the discharge of the lien; or 3) an amount equal to the difference between the amount stated
in the notice and the amount actually due. (N.Y. Lien Law 39 (a), 1966). This remedy, however, is available only when the lienor seeks to enforce his lien. (Finger v. Roth Brothers Regal Restaurant Supply Corp., 150 N.Y.S. 2d 522 (1956)). BONDS The owner of the real property or the contractor may prevent the property from becoming encumbered by mechanics' liens by filing an adequate bond. The bond may be executed either before or after the commencement of the improvement. The amount of the bond must be sufficient to cover the unpaid amount of the contract existing at that time and for all labor performed and materials furnished. It must be executed as a surety by a fidelity or surety company authorized to do business in New York. Once the bond has been approved by the court and filed with the county clerk, the court will order the discharge of the mechanics' liens of every contractor, subcontractor, materialman or laborer. Cross reference with chapter 26 page 7 "LIENS AND ENCUMBRANCES - Mechanics Liens", this manual
Chapter 28 - Page 1 MECHANICS' LIEN CLEARANCE Title
Wherever applicable, the provisions of Section 19(4) Lien Law should be utilized for a discharge of the lien by bonding; or the provisions of Section 20 Lien Law utilized for discharge of the lien by deposit with the County Clerk. If an action to foreclose has been commenced it is also necessary to effect the cancellation of the Lis Pendens that may have been filed. It is the obligation of the owner to clear mechanics liens from the record. When a title company agrees to hold an escrow to cover a mechanic's lien for an extended period, it must take the risk that a foreclosure may be commenced and that additional liens with equal priority may be filed, among other things. Accordingly, such escrows are usually resisted - except for short periods sufficient to permit bonding, deposit or payment. Both with respect to judgments and mechanics liens it is sometimes desirable to use a release of your specific premises, in form similar to a release of part of mortgaged premises, when the entire lien or judgment cannot be satisfied, but where the creditor is willing to release a portion of the premises for a consideration. MECHANIC'S LIEN 1. Discharge - Section 19, Lien Law a. b. c. 2. 3. Payment, or Bonding and court order, or Payment into court - Section 20, Lien Law; Bretzfelder v. Froman, 76 Misc. 2d 1063, as to entitlement to return of deposit after lien expiration.
Expiration of one year without extension or renewal - Section 17, Lien Law; GellesBerger Co. v. Boynwat Prop., 37 Misc. 2d 126. Service of 30 day notice under Section 59, Lien Law and order of cancellation, Section 19(3), Lien Law. Note: Subcontractor's right to enforce lien limited to amount properly due to general contractor. Central Val. Concrete Corp. v. Monrgom. Ward & Co. 34 A.D. 2d 860; Mid-Island Lumber & Supply Co., Inc. v. Loenig, 78 Misc. 2d 27. Section 4, Lien Law.
4/81
Chapter 28 - Page 1 MECHANICS' LIENS 1 CONSTRUCTION COMPLETE LIEN PERIOD EXPIRED Title
CONSTRUCTION COMPLETE - LIEN PERIOD EXPIRED The sections of the CTIC Underwriting Guide that relate to Mechanics' Liens are most valuable in calling our attention to the extrahazardous risks which confront us in every jurisdiction. This state supplement is especially necessary, however, in order to adapt the principles set forth, to the particular conditions found in New York State. New York Lien Law is unique in a number of important respects and our practice is necessarily modified. Filing of the Notice of Lien is governed by Section 10 of the Lien Law. With respect to the time of filing, Section 10 provides as follows: Notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within four months after the completion of the Contract, or the final performance of the work, or the final furnishing of the materials dating from the last item of work performed or materials furnished. The notice of lien must be filed in the Clerk's Office of the County where the property is situated. Pursuant to Subdivision 3 of Section 13 of the Lien Law, all deeds and mortgages must contain the "trust clause." Provided that the instrument contains this clause, the ALTA Loan or Owner's Policy, which insures against unfiled Mechanics' Liens, may be issued without taking any Mechanics' Lien exception, provided also that we are insuring either a bona fide mortgage, securing money loaned at our closing, or a new arms-length purchaser for value. The trust fund clause as used in deeds reads as follows: AND the party of the first part, in compliance with Section 13 of the Lien Law, covenants that the party of the first part will receive the consideration for this conveyance and will hold the right to receive such consideration as a trust fund to be applied first for the purpose of paying the cost of improvement and will apply the same first to the payment of the cost of improvement before using any part of total of the same for any other purpose. The trust fund clause as used in mortgages reads as follows: That the mortgagor will, in compliance with Section 13 of the Lien Law, receive the advances as a trust fund to be applied first for the purpose of paying the cost of the improvement and will apply the same first to the payment of the cost of the improvement before using any part of the total of the same for any other purpose. In the absence of this statement, the deed and the mortgage cannot take priority over a Mechanics' Lien filed within four months after the completion of the improvement. If, however, the "trust clause" is included in the deed and mortgage, said deed and
mortgage will have priority and the lienor must look to the trust fund for payment.
4/81
Chapter 28 - Page 2 MECHANICS' LIENS 1 CONSTRUCTION COMPLETE LIEN PERIOD EXPIRED Title
When liens are not found of record, the use of the "trust clause" will protect the purchaser or mortgagee against the possibility of Mechanics' Liens filed subsequent thereto, within the four month period, and avoids the problems encountered in taking proof relative to the completion of construction and the expiration of the lien period.
4/81
Chapter 28 - Page 1 MECHANICS' LIENS 2 CONSTRUCTION COMPLETED LIEN PERIOD NOT EXPIRED Title
CONSTRUCTION COMPLETED - LIEN PERIOD NOT EXPIRED In New York State, the ALTA Loan or Owners Policy, which provides insurance against unfiled mechanics' liens, may be issued without taking exception to any mechanics' liens, provided we are insuring either a bona fide mortgage, securing money loaned at the closing or, a new arms-length purchaser for value (see CTIC Underwriting Guide "Words and Phrases" in Owners Policies 3). In addition, all deeds and mortgages must contain the "Trust Clause" specified in subdivision 3 of Section 13 of the Lien Law. There will be a number of titles which will not comply with the requirements set forth above. In those instances satisfactory proofs or indemnifications (see CTIC Underwriting Guide - Standard Underwriting Risks 5) are required, if we are to insure the title without taking an exception with respect to Mechanics' Liens. It is important to note that New York now has a statute with respect to Waivers which must be complied with. Its history is as follows: Section 34 of the Lien Law was added by Chapter 74 of the Laws of 1974, effective July 1, 1975. This new Section declared Waivers of Lien to be void as against public policy and wholly unenforceable . Fortunately the courts held that the section was not retroactive and applied only to contracts entered into after July 1, 1975. Many attorneys believed that this section also applied to subordinations, releases and satisfactions. The title association was successful in having the following clause added to this section effective August 5, 1977: "Nor shall this section be applicable to a written agreement to subordinate, release or satisfy all or part of such a lien made after a Notice of Lien has been filed." Section 34 as amended presently reads as follows: Notwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article 2 is waived, shall be void as against public policy and wholly unenforceable. This section shall not preclude a requirement for written waiver of the right to file a mechanic's lien executed and delivered by a contractor, subcontractor, material supplier or laborer simultaneously with or after payment for the labor performed or the materials furnished has been made to such contractor, subcontractor, materialmen or laborer nor shall this section be applicable to a written agreement to subordinate, release or satisfy all of part of such a lien made after a notice of lien has been filed. Waivers of Lien must not be requested or accepted as they may be void. Written agreements to subordinate, release or satisfy all or part of a lien are usually acceptable but may be made only after a Notice of Lien has been filed.
The sufficiency of statements and affidavits, if at all doubtful should be submitted to Home Office Underwriting Counsel for consideration.
4/81
Chapter 28 - Page 1 MECHANICS' LIENS 3 DURING CONSTRUCTION OWNERS POLICY Title
DURING CONSTRUCTION - OWNERS POLICY We are rarely asked to write this type of insurance in New York State. As the article states, we can never insure an owner against the effects of his own actions. If there is a transfer of title during construction, we will require an amended BUILDING LOAN CONTRACT and/or tri-partite agreement. The parties to such agreement are the outgoing party who is selling, the incoming party who is buying and the continuing party, the lending institution. These agreements are highly technical and should be submitted to Counsel for approval before execution.
4/81
Chapter 28 - Page 1 MECHANICS' LIEN 4 DURING CONSTRUCTION LOAN POLICY Title
DURING CONSTRUCTION - LOAN POLICY New York is a priority State. If the provisions of the Lien Law are followed with care, the lender receives substantial protection. We are still writing Construction Loan Policies on the ALTA form. The basic underwriting practices of the company with respect to construction loans in New York are as follows: It is permissible underwriting procedure in New York to insure installment advances on a construction loan under a commitment or policy which does not contain an exception as to unfiled Mechanics' Liens provided certain minimum safeguards are employed. The basic requirements arise from the provisions of Section 2, 13 and 22 of the Lien Law and those requirements may be summarized as follows: 1. A written Building Loan Agreement which describes the transaction with reasonable certainty must be executed by borrower and lender, duly acknowledged and filed in the office of the Clerk of the County in which the land is situated. If the land is situated in more than one county, a counterpart of the agreement is to be filed in each county in which any part of the land is situated. Such filing or filings must be made before the mortgage is offered for record in any county. Each office shall immediately take such steps as Counsel may consider necessary to be certain that office procedures are in force which will protect against inadvertent error in the time and place of such filing. As many who will receive this bulletin are aware, the Company has on a few occasions been subjected to needless exposure to loss because the building loan agreement had been recorded in the land records rather than filed in the Office of the County Clerk or because it has been filed a day or more later than the recording of the mortgage. The building loan agreement must contain an Affidavit by the borrower showing the consideration paid or to be paid for the loan, the expenses, if any, incurred in connection therewith and the net sum available to the borrower for payment of the cost of the improvements to be made. It is the practice of the Company to permit such Affidavit to show as deductions from the face amount of the loan only those items which are clearly the consideration paid for the marking of the loan as well as expenses incurred in connection therewith (such as title insurance costs, recording fees, mortgage taxes, etc) or which are within the meaning of "cost of improvement as defined in Section 2 (5) of the Lien Law. Among the items customarily included in expenses ("cost of improvements" as distinguished from "improvement") and properly included in the affidavit
2.
are Broker's commission; Architect's, engineer's and surveyor's fees;
4/81
Internal revenue stamp taxes; Inspections; Appraisals; Building loan service fees; Sums paid to take by assignment prior existing mortgages which are consolidated with the building loan mortgage and also the interest charges on such mortgages; Sums paid to discharge or reduce the indebtedness under mortgages and accrued interest thereon and other prior existing encumbrances; Sums paid to discharge building loan mortgages whenever recorded; Taxes, assessments, water rents and sewer rents paid (existing prior to commencement of the improvement. In addition to the foregoing it is permissible to include as an item of expense, reimbursement to the mortgagor for costs of improvement which were previously advanced and made subsequent to the commencement of the improvement, which are fully itemized and set forth in the building loan agreement and mortgage. It is also permissible to include reasonable counsel fees for the lenders attorney. It is not clear that attorneys fees for the borrower is a permissible cost and preferably should not be included. One item that is clearly not a permissible cost of improvement is the cost of land acquisition. The Closer should, as unobtrusively as possible, do the arithmetic to see that all the expenses plus the amount available for the "improvement" equals the amount of the building loan contract and the building loan mortgage. Counsel should be consulted only if there is any doubt as to the amount or propriety of any charge. If there is any doubt with respect to a particular item, our advice is to break it out, utilizing two distinct mortgages or a bifurcated mortgage to cover separately, permitted and non-permitted costs and expenses. If it appears during the course of closing that the funds are being used for purposes not set forth above, such facts should be communicated to Counsel. It is the position of the company that a participation by the lender in an unauthorized use by the borrower of building loan funds may jeopardize the priority of the mortgage at least to the extent of the unauthorized use. Further, the Court of Appeals has held that under Section 22 of the Lien Law, the filing by a lender of a Building Loan Contract which is known by the lender to contain statements that materially misrepresent the amount available to the borrower for "improvement" will result in the lien of the mortgage being subordinated to present or future mechanics liens. (Nanuet Nat'l Bank v. Eckerson Terrace Inc, 402 NYS2d, 42). Closers and clearance personnel should be alert to any information indicating a possible problem in this area and should further review the cases set forth at the end of this section. 3. The amended Building Loan Agreement must be filed within 10 days of its execution. Where this amendment is in conjunction with an additional or
amended building loan mortgage we shall require that both documents be
4/81
delivered to the closer at the same time. In the foregoing cases consents are required from present mechanics and materialmen and those who have present contracts with respect to providing material or work for the subject premises. Proof must also be obtained that the requisite consents have been obtained from all persons and firms in the foregoing categories. If the requirements are not complied with the following exception must be taken: "Rights of others by reason of non-compliance with Section 22 of the Lien Law." 4. Both the Building Loan Agreement and the Mortgage must contain the "trust clause" specified in Subdivision 3 of Section 13 of the Lien Law. It is recognized that this practice appears to go beyond the requirements of the statute, but adherence to this procedure has not posed any customer problems in the past and any request that an office deviate from it must be discussed with Counsel. Compliance with the foregoing will permit the Company to insure the priority of the mortgage lien to the extent of advances made prior to the filing of a notice of mechanics' lien. Although advances made after the filing of a notice of Mechanics' Lien may likewise have priority if such advances are obligatory (New York & Suburban Federal S & L Ass'n. v. Fi-Pen Realty Co., Inc., et al, 133 NYS2d 33), it is not the policy of the Company to so insure. Note the strong statutory language of Subdivision 2 of Section 13 of the Lien Law which contains no indication that the rule there stated is to have differing results in the event the advances are obligatory rather than optional. All commitments to insure or policies issued prior to completion of the agreed upon advances must therefore contain a "pending disbursement" clause reading substantially as follows: "Pending disbursement of the full proceeds of the loan secured by the mortgage insured, this policy insures only to the extent of the amount actually disbursed but increases as each disbursement is made in good faith and without knowledge of any defect in or objections to the title up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens or objections intervening between the date hereof and the date of such disbursement. Each report of continuation requested in connection with insurance of future advances will include a statement showing survey variation or encroachments, if any, since the date of the preceding report."
4/81
Any Mechanics' Lien or other item affecting title which is found upon a continuation of searches must be disposed of in the same manner as if it had affected title prior to the recording of the mortgage. It is customary in New York to report the results of a continuation of title searches made to the date of an interin advance by letter. Since such letter may well be construed to be a complete "date down" of a commitment to insure it is necessary not only to have a continuation of the record search and examination, but also of taxes and assessments, including new items which have become liens subsequent to the original date, as well as a reevaluation of the off-record aspects, including, without limitation, a recertification of the survey. If any matters are not brought down to date, an appropriate exception must be included in the letter. It is recommended that the standard form of letter, included herewith, be used (See Exhibit "A" attached). It is not necessary in New York, however, to take exception with respect to the possible impairment of the priority of the insured mortgage by reason of the fact that the interim advances were not obligatory. The priority of a construction mortgage in New York over unfiled Mechanics' Liens does not depend upon the obligatory nature of the advances. If any unusual title situation or request for coverage should arise during the disbursement of interim advances and instructions which cover the matter are not contained herein Counsel is to be consulted. It is the custom in New York to include in each commitment a form called F10009. This form is set forth information only, but has proven of help in calling attention to the major items which must be taken care of at a Building Loan closing. A copy of this form is attached and set forth as "Exhibit B". CASES CITED: Supreme Court, Rockland County, in H.N.C. Realty Co. v. Golan Heights Developers, Inc. (79 Misc. 2d 696, 360, N.Y.S. 2d 954) held that a building loan contract containing a false borrower's statement of the net amount available for the improvement, without indicating the portion that would be used to take up by assignment prior existing mortgages to be consolidated with the building loan agreement, all of which was known to the lender, violated Lien Law Sec. 22 which requires a true statement under oath of the net sum available to the borrower for the improvement. The filing of such a false statement, held to be substantial and material, known by the lender to be false, required the lien of the lender to be subordinated to certain mechanics' liens under the subordination penalty in Sec. 22, and it was immaterial whether or not the mechanics' lienors relied upon the
false statements. The court discusses the 1930 amendment which changed Lien
4/81
Law Sec. 22 from a simple requirement that it be in writing, acknowledged and filed, to one that must include a verified borrowers statement. See the pre-1930 decisions of Penn Steel Co. v. Title Guar. and Trust Co. (193 NY 37, 85 N.E. 820) and summers Lumber and Supply Corp. v. J.S. Barbara Construction Corp. (255 NY 525, 175 N.E. 298). The Second Department in Nanuet National Bank v. Eckerson Terrace, Inc., (61A.D. 2d 810, 402 NYS 2d 42), declined to follow the Third Department's holding in Ulster Sav. Bank v. Total Communities, and expressed accord with the holding of Supreme Court, Rockland County, in H.N.C. Realty Co. v. Golan Heights Developers, Inc. that a lender who files a building loan contract containing a materially false borrower's statement, which is known by the lender to be false at the time of such filing, must suffer the subordination penalty imposed by Lien Law Sec. 22d. Accordingly, subsequently filed mechanics' liens have priority over the mortgage only if the mortgagee filed a materially false borrowers' affidavit, known to be false at the time of the filing. The Supreme Court, Ulster County, in Ulster Sav. Bank v. Total Communities (83 Misc. 2d 645, 372 NYS 2d 793, affirmed 55 A.D. 2d 278, 390 NYS 2d252) after discussing and contrary to the holding in, the H.N.C. Realty case held that the failure of the borrowers affidavit to disclose that a portion of the building loan proceeds were to be used to discharge a prior mortgage and to defray other expenses, did not prejudice mechanic's lienors since an examination of the public record would have disclosed discharge of the proper mortgage at about the same time the owner acquired the proceeds of the building loan. And taking issue with the decision in H.N.C. Realty, the court concluded that nothing in Lien Law Sec. 22 justified disparity of treatment on the basis of the mortgagee's knowledge or lack of knowledge of the falsity of the borrower's affidavit. "If the statute is to be interpreted so as to forfeit the lender's priority of lien, if the borrower's statement is untrue . . . few lenders would care to incur the risks inherent in a building loan." The Appellate Division in affirming Trial Term in a 3-2 decision in the Total Communities case held that the only obligation imposed upon the borrower in amended Lien Law Sec. 22 was to file a verified statement with the building loan contract; the section moreover, makes no mention of verification by the lender nor of application of the penalty to the lender if he knew the borrower's statement was false which would be an enlargement and extension of the Legislature's intention. In a third case involving the subordination penalty in Lien Law Sec. 22, The Supreme Court, Queens County, in Security National Bank v. Village Mall at Hillcrest (85 Misc. 2d 771, 382 NYS 2d 882) held that, although every change in a building loan contract does not constitute a modification under Lien Law Sec. 22, any change relating to the consideration paid for the loan, any expenses incurred in connection with the loan or the net sum available to the borrower for the improvement, do constitute, as a matter of law, essential modifications required to
be filed in the county clerk's office, which, expressly pursuant to Sec. 22 is not
4/81
satisfied in New York City by filing in the register's office. The court, accordingly, following the H.N.C. Realty case held that the lien of the mortgage was subordinated to mechanic's liens for failure to file in the county clerk's office the essential modifications of reducing the retainage, prior to final payment, from 10% to 5% and changing the rental units to condominial units. There were also other allegations of secret expenditures reducing the net sum available to the borrower. The court discussed both the H.N.C. and Total Communities as well as McDermott v. Lawyers Mortgage Co. 232 N.Y. 335 and Rosenblum v. Tilden Improvement Co. 136 App. Div. 743, 121 NYS 510, discussed in the main volume. The Village Mall court follows H.N.C. on the question that any unfiled modification of the net sum available to the borrower is a violation of Lien Law Sec. 22 and remarks that the contrary holding in the Total Communities case is not in the mainstream of judicial opinions. The Village Mall court however agrees with Total Communities and disagrees with H.N.C. that there is no requirement that errors in the borrower's statement be knowingly made.
Chapter 28 - Page 1 MECHANICS LIEN 4 Exhibit "B"
MATTERS TO BE REVIEWED AND COMPLIED WITH BY THE LENDER For information only - Not for policy 1. 2. The building loan agreement must be filed on or before the date of recording the building loan mortgage. We find no building loan agreement of record. If the building loan agreement provides for a schedule of payments, without a reservation to the lender to vary such schedule, the Company will not insure against any loss or damage occasioned by or occurring by reason of any variance between the advances actually made on the mortgage to be insured and the schedule of payments set forth in the building loan agreement. Mortgages shown on this certificate must be satisfied or subordinated to the full amount of the mortgage to be insured. Subordination agreements must contain a clause subordinating such mortgages to the mortgage to be insured, and to all advances to be made thereon including advances made or to be made for the purpose of paying fees, brokerage and other expenses incident to the obtaining or making of the mortgage. As required by Section 22 of the Lien Law, the building loan agreement "must contain a true statement under oath, verified by the borrower, showing the consideration paid, or to be paid, for the loan described therein, and showing all other expenses, if any, incurred or to be incurred in connection therewith and the net sum available to the borrower for the improvement." Any modification of the building loan agreement must be filed within 10 days after its execution. In the event of any modification the policy will except the rights of all persons who had furnished or contracted to furnish material or had performed or contracted to perform labor for the improvement of the premises described in Schedule A, previous to the filing of the modification of the building loan agreement. The Company will not insure any advance made for the purpose of paying an incumbrance placed upon the property after the commencement of the improvement other than taxes, water rates, assessments and fire insurance premiums. Advances should only be made for the cost of the improvement as defined in the Lien Law and no advance made for any other purpose will be insured. If any advances are made without the presence of a representative of the Company, a statement from the lender or his attorney should be furnished, as to each such advance, that the advance was made pursuant to and in conformity with the building loan agreement and the Lien Law. In addition, all advances made under the Building Loan Contract should be made to the mortgagor.
3.
4.
5.
6.
Chapter 28 - Page 2 MECHANICS LIEN 4 Exhibit "B"
7.
A building permit must be obtained and, upon completion of the building, a certificate of occupancy and certificates of approval of the electric light wiring and electric fixtures must be obtained, together with such other certificates as may be required for the type of building erected. Policy does not insure the legal sufficiency of any such permits or certificates. If the survey does not show the completed buildings, it should be brought down to date so as to show the completed buildings before the final advance is made. The building loan mortgage and the building loan agreement must contain the covenant required by Section 13, subdivision 3 of the Lien Law. Title to personal property will not be insured. If the mortgage is to cover personal property the mortgage should be so drawn as to include it. The lien and rights of the purchaser under any contract for the sale of the property, known to, deposited with or exhibited to the lender must be subordinated to the building loan agreement and to the advances made or to be made pursuant to such agreement and building loan mortgage unless such rights and liens are so subordinate by the terms of the contract.
8. 9. 10. 11.
8/79
Chapter 28 - Page 1 MECHANICS' LIENS 4 DURING CONSTRUCTION LOAN POLICY Legal Supplement
DURING CONSTRUCTION - LOAN POLICY This memo is intended to be a general guide with respect to the manner of handling the questions that arise at the initial closing of Building Loan Mortgages and subsequent advances. It is intended to supplement the material in the New York Supplement to Mechanics' Liens 4, that sets forth the basic procedure to be followed in the processing of Building Loan Titles. A Building Loan Contract is an agreement by which a lender undertakes to advance funds that will be used primarily for the construction of an improvement (usually a building). The essential feature of this agreement is the covenant that commits the borrower to construct and apply, to the improvement, those funds that will be produced through this transaction. (see also Chapter 4 Building Loan Agreements and Chapter 26 page 7). Building Loan Contracts must be filed in the Office of the Clerk of the County in which the land is situated. If the land is situated in more than one county, a counterpart of the contract is to be filed in each county in which any part of the land is situated. Building Loan Contracts are never recorded in the Register's Office. The law provides that Building Loan Contracts must be filed on or before the date of the recording of the Building Loan Mortgage. Our Company practice, however, is to make certain that the filing of the Building Loan Contract has been completed in each county affected before the mortgage is offered for record in any county. (See Paragraph 1 of the New York Supplement to Mechanics' Liens 4). The filing of the Contract in itself does not create a lien on the property, but merely gives notice to the respective materialmen and contractors that their labor and materials will be subject to the claim or claims of a prior lien against the real property, insofar as said lien is evidenced by the advances made through the Building Loan Contract and Mortgage. The Contract also serves as notice to these parties, in that it sets forth those funds that will be basically available for that particular project. The lender's lien comes into existence when the Building Loan Mortgage is recorded, but only as to that amount actually advanced. The Contract as filed and the mortgage as recorded constitute the entire transaction. It is our Company practice to require that both the Building Loan Contract and the Building Loan Mortgage contain the "trust clause" specified in Subdivision 3 of Section 13 of the Lien Law. (See Paragraph 3 of the New York supplement to Mechanics' Liens 4). In essence, this clause requires that the borrower covenant that he will receive the advances secured by the mortgage as a trust fund to be applied for the purposes of paying the cost of improvement before utilizing it for any other purpose. The failure to include this covenant in the Building Loan Contract and Building Loan Mortgage may result in a loss of priority as to those mechanics lienors or materialmen who file valid Mechanics' Liens thereafter.
Every Building Loan Contract must contain a statement under oath, verified by the borrower, showing the consideration paid or to be paid for the loan described therein, and showing all fair and reasonable expenses, if any, incurred or to be incurred in connection therewith, and the net sum available to the borrower for the improvement. Section 22 of the Lien Law requires said Affidavit. This Affidavit must clearly show the net sum available for the improvement. Subdivision 5 of Section 2 of the Lien Law allows for the proceeds of any Building Loan Mortgage to be used to reimburse the owner for any payments made for any of the items that are considered as a cost of improvement that were paid for by the date of the initial advance and subsequent to the commencement of the improvement. If these items are to be deducted from the Building Loan Mortgage funds such payments must be itemized in the Affidavit which is part of the Building Loan Contract. NB: See Building Loan Agreements this manual. Section 22 of the Lien Law requires that the statement under oath in the Building Loan Contract must show all expenses, if any, incurred, or to be incurred in connection with the loan described therein. These must be shown even in those instances where the borrower has paid for these items and does not intend to be reimbursed from the proceeds of the Building Loan Mortgage. Where the borrower has paid for items and does not intend to be reimbursed from the proceeds of the Building Loan Mortgage, an asterisk should be placed along side the figure shown for such item. The following recital must then be set forth at a convenient place in the Section 22 Affidavit: "Items marked with an asterisk are being paid from other funds of the borrower and no reimbursement will be taken from the Building Loan funds." Note to Closer: Do not deduct these amounts in computing the net sum available. Zeros must never be used unless no money from any source was or will be expended for said item. Loan funds may only be utilized for those purposes enumerated under Subdivision 5 of Section 2 of the Lien Law. Building Loan funds may never be utilized to pay for the acquisition of land. If funds are required for non-building loan purposes, there should be two separate mortgages or else a bifurcated mortgage may be used covering both funds. Such bifurcated mortgage would state, for example, that it is a mortgage for $1,000,000.00 of which the sum of $800,000.00 represents a Building Loan Mortgage is accordance with a Building Loan Agreement of $800,000.00 filed simultaneously. Subdivision 5 of Section 2 of the Lien Law defines "cost of improvement" as expenditures of the owner in payment of claims of a contractor, architect, engineer, surveyor,
subcontractor, laborer or materialman, all of said claims arising out of the
specific improvement secured by the lien of the mortgage. This section goes on to enumerate that funds may be utilized in payment of withholding taxes or other taxes withheld or required to be withheld for the above described persons who may work on the improvement. Unemployment insurance or other wage supplements or benefits that the owner is obligated to pay or provide as an employer are also permissible. Cost of improvement is further defined to permit the owner to make expenditures in obtaining the Building Loan Mortgage and to utilize Building Loan funds to pay premiums on bonds that may be filed pursuant to Section 37 of the Lien Law (i.e. bonds to discharge all liens that may subsequently be filed during the course of construction); premiums required by bonds on the Building Loan Contract; premiums required by any bonds on leases to be mortgaged; premiums required by any bonds on a mortgage that may be subordinated to the Building Loan Mortgage; and premiums that may be required to file bonds to discharge any liens. The mortgagee may also utilize building funds to take prior existing mortgages by assignment provided these mortgages are to be consolidated with the building loan mortgage. The interest charges on such mortgages are also permissible expenditures. The mortgagor may also utilize building loan funds to discharge or reduce the indebtedness of any mortgage that existed prior to the commencement of the improvement. He may also utilize the funds to discharge or reduce any other encumbrance on the real estate that existed prior to the commencement of the improvement. Taxes, assessments and water rents existing prior to the commencement of the improvement and also accruing during the course of improvement; the interest on the Building Loan Mortgage; ground rent and premiums for insurance pertaining to the specific improvement are also considered to be costs of improvement. Our Company position is that the "commencement of the improvement" means that time when the first spade breaks the ground, commonly known as the "First Spade Rule." Section 2(16) states: "Prior Mortgage - By the term "prior mortgage" is meant a mortgage on real property and/or leasehold recorded prior to the commencement of an improvement thereon." Careful reasoning and loan practice have also established certain items felt to be either expenses of the loan or "cost of improvement", although the same are not specifically spelled out in this section of the Lien Law. Some of these items are as follows: Broker's commissions, examination and insurance of title, recording fees, mortgage tax, inspections, appraisals, attorney's fee for conveyancing, and building loan service fees. While the above may not be a total list of all items allowed under this particular section of the Lien Law, any departure from these items that may be claimed as an allowable cost or expense of improvement with respect to a Building Loan must be referred to Divisional Counsel for consideration.
Checks issued pursuant to the Building Loan Contract and Mortgage should be drawn payable to the borrower. This requirement will negate any possible claim of diversion that may be asserted against the mortgagee by a subsequent lienor. Direct checks to the mechanics lienors or holders of orders of payment create a hazardous situation in that such payment or payments impose a liability upon the mortgagee that such amounts are correct and that these particular items were specific claims that arose on that particular job site or building. The validity and the bona fide status of these claims is the obligation of the owner and/or the contractor. The checks should be drawn to the order of the borrower and the contractor in any instance where there is a request to pay the contractor directly. Payments to remove open judgments or Federal Tax Liens, docketed or filed after the commencement of the improvement would be considered a diversion of funds and are therefore not authorized. Open liens should never be passed without the approval of Office Counsel and Divisional Counsel. IT IS THEREFORE THE RULE THAT WHERE OPEN LIENS ARE FOUND OF RECORD, THESE LIENS SHOULD BE SATISFIED OR REMOVED AT THE TIME OF CLOSING. With respect to subdivision work, it is our practice to require a separate contract for each building being constructed. Building Loan Contracts must be filed for one specific improvement. Every Building Loan Mortgage must have a separate Building Loan Contract. The use of a Building Loan Contract as a Blanket Contract covering more than one improvement (i.e. a Building Loan Contract for a bulk development wherein many job numbers are listed with specified dollar amounts as to each job site), should be referred to Divisional Counsel. Building Loan Contracts should provide for a schedule of payments. Closers should examine the agreement in order to establish that the mortgagee has reserved the right to deviate from the schedule set forth in said contract. If this type of reservation or language is absent from the Building Loan Agreement, the mortgagee has no latitude in making advances, and the appropriate exception must be raised as follows: "Policy excepts all loss or damage arising from any variation between the advances actually made and the installments as set forth in the Building Loan Schedule." (See Codified Exception B-1.0) Pursuant to Section 22 of the Lien Law, a modification of a Building Loan Contract must be filed within ten (10) days of its execution. The modified Building Loan Contract must also contain an amended Affidavit, as required under Section 22 of the Lien Law.
The modification of a Building Loan Contract must be in writing and must contain a true statement under oath, verified by the borrower. Generally, modifications of Building Loan contracts do not affect or impair the right or interest of a person who, previous to the filing of such modification, has furnished or contracted to furnish materials, or has performed or contracted to perform labor for the improvement of real property, unless said parties have consented or subordinated their rights and claims to the amended Building Loan Contract. The rights of interest of said parties are determined by the original contract. The language in the statute is such that we generally are not in a position to insure over the rights of said parties. Our procedure, therefore, will be to raise the following exception: "Policy excepts possible prior lien rights of suppliers and mechanics who have supplied materials or services, or contracted to do so, prior to the date of the Building Loan Modification." (See Codified Exception B-1.2) Any variation from this procedure must be referred to Divisional Counsel. All building loan commitments must contain a pending disbursement clause in order to limit the liability of this Company to the amount of the funds actually advanced. (See Specimen clause, following Paragraph 3 of the New York Supplement to Mechanics' Liens 4). When this Company has been asked to insure the permanent mortgage, no part of the loan may be retained by the mortgagee for the completion of the improvements. If we are confronted with this type of situation the problem must be presented to the Office Counsel and must never be passed upon the Closer.
1/74
Chapter 28 - Page 1 MECHANICS' LIENS 4 RESEARCH OPINION Legal
ISSUE New York Building Loan Contract: Named expenses and payment to bank are alleged as not being shown in borrower's affidavit; demand for relief in complaint did not seek judgment declaring priority for mechanic's liens over mortgage advances. QUESTIONS AND CONCLUSIONS: 1. Is the borrower's affidavit pursuant to 22 of the Lien Law sufficient in law on it's face? Yes, as would appear under existing general constructions of this section of the statute, although the specific point has never been expressly construed. 2. Do the allegation and demand for relief in the complaint go to the essence of the validity of the mortgage lien itself? No. 3. Do the allegations and demand for relief in the complaint go to the essence of the validity of the priority of the mortgage lien? No. 4. Could the alleged impropriety of the mortgagee in demanding additional sums for services rendered allegedly not covered in the building loan (if said lien or priorities were attacked by the complaint) contract affect: a) No. b) the validity of the priority of lien? i. if the payments alleged in the complaint were outright "on the side" and additional to the expenses paid and recorded in the affidavit? The point might be arguable. But this would be an act of the insured. ii. If the payments alleged in the complaint were in fact covered fully by the expenses shown in the affidavit but the plaintiff attacks the sufficiency in law on it's face of the affidavit. No, but the title company would have to defend. the validity of the mortgage lien itself?
1/74
5)
If the court decision in this particular case is rendered in favor of plaintiff and the demand for relief is granted in full would such a judgment affect the validity of the mortgage or the priority of the lien? No. FACTS: i. At closing May 8, 1972 the title company accepted the various instruments (including the building loan contract in question) and insured the building loan mortgage. $3,833,730.00 (out of a total face value of $7,110,000.00) had been advanced and insured; the last advance having been made August 28, 1973. Summons and complaint were served on the mortgagee by several mechanic's lienors on December 14, 1973. The complaint alleged: a) the following payments were made to the mortgagee at or before closing: - processing fees: - "additional interest: - "appraisal and inspection: - "attorney fee": Total b) $35,500.00 35,500.00 5,000.00 12,000.00 $88,100.00
ii.
the borrower's affidavit attached to the building loan contract reported no consideration paid by the borrower for the loan and listed none of the above mentioned expenses.
The complaint demanded judgment for: a) b) STATUTES: Civil Practice Law and Rules, 3017 (a), Lien Law 2 (5), 22 and 23, Real Property Law, 290 (3). a constructive trust vis-a-vis the above mentioned $88,100.00 refunding of said $88,100.00.
1/74
CASES: 1) Construing 22 specifically: a) b) 2) P.T. McDermott, Inc., vs. Lawyer's Mortgage Co. et al, 232 N.Y. 336, 133 N.E. 909, Osinoff vs. Queens Apartments, Inc. et al, 10 Miscellaneous 2d 764, 173 N.Y.S. 2d 228.
Construing the Lien Law generally, but as shedding light on the instant facts: a) b) c) Spruck vs. McRoberts, 1893, 139 N.Y. 193, 34 N.E. 896, American Radiator Co. vs. New York, 1918, 223 N.Y. 193, 119 N.E. 391, Standard Sand, etc., Co. vs. New York, 1916 172 app Div 80, 157 N.Y.S. 447.
3)
Concerning the theoretical question not raised in the complaint (Question 4): a) b) c) J.M. Cott & Son vs. Gallon, 163 Misc. 914, 298 N.Y.S. 67, O'Neill vs. Seglin Const. Co., 1935 158 Misc. 742 286, N.Y.S. 849, aff. 248 App. Div. 684, 288 N.Y.S. 798, aff. 273 N.Y. 549, 7 N.E. 2d 686, Sullivan vs. Young, 95 Misc. 658, 159 N.Y.S. 791
COMMENTARIES: Black's Law Dictionary, "Conveyancing", Corpus Juris Secundum, Conveyancing. REASONING: Question 1: The statutory requirements for the borrower's affidavit are as follows: "A building loan contract . . . must contain a true statement under oath, verified by the borrower, showing the consideration paid or to be paid, for the loan described therein, and showing all other expenses, if any, incurred, or to be incurred in connection therewith, and the net sum available to the borrower for the improvement...."
1/74
The affidavit in question showed the following: 1. 2. consideration by the borrower to the lender for the loan: none. Expenses shown by category are broken down in a form affidavit: - Examination and insurance of title and recording fees: - Mortgage Tax: - Inspections, Appraisals, Conveyancing, Building Loan Service Fees (bracketed) Total 3. Net sum available to borrower $5,721,832.67 In Osinoff vs. Queens Apartments, Inc., et al, 10 Misc. 2d 764, decided in the Supreme Court Special Term, Queens County on March 19, 1958 the Court considered a case in which the service charges (of $19,800.00) were shown as the consideration by the borrower to the lender for the loan, Expenses were shown as follows: "... Attorneys fees $ 1,500.00 $ 9,656.15 43,922.00 80,859,18 $134,437.33
... Purchase money advanced out of the loan for the acquisition of the land, in the sum of $22,500.00 and the net of $174,500.00. The difference of expenses of $1,700.00 were not shown as broken down in the decision. The court said: "The building loan contract complied meticulously with the requirements of section 22 of the Lien Law, the object of which is to acquaint prospective contractors with the fact that they furnish labor and materials subject to claims prior to theirs against the property, so far as advances thereunder are prior to their liens when filed (Lien Law, 13), and also to inform such contractors of the amounts to be advanced and the times of such advances." (emphasis added): citing P.T. McDermott, Inc., vs. Lawyers Mortgage Co., et al, 232 N.Y. 336.
1/74
The affidavit considered by this Memorandum used a form in which service charges are listed as one of the expense items. Thus, using the form and putting the consideration then as "none" would appear to be substantially the same as what was done in the affidavit which the court said 'meticulously complied' with the requirements of the statute. "Conveyancing" would include attorneys fees, Black's Law Dictionary, C.J.S.; see also Real Property Law Section 290 (3) for the definition of "conveyance" which would include among other things a mortgage and building loan contract. Lastly, the question might be raised that the statute requires that the items of expense be broken down by amount, item by item, and not be lumped with one sum for four bracketed items, as was done in the affidavit considered herein. The requirement of the affidavit was added to 22 in 1930 (L. 1930, c. 859, 14, subsequent to the leading case construing the purpose of 22 (McDermott), although McDermott was cited in Osinoff and elsewhere subsequently. Cases construing 23 (the construction statute for the Lien Law) hold that the Lien Law cannot be extended to a state of facts not fairly within its scope and purview (Spruck vs. McRoberts, 139 N.Y. 193), does not permit the court to read into the statute an additional requirement (American Radiator Co. vs. New York, 223 N.Y. 193), is to be construed by seeking out the intent of the legislature and to give effect to that intention by any reasonable construction the language used will permit them to do so (Standard Sand, etc., Co. vs. New York, 157 N.Y.S. 447), and is to be construed in the light of the intent of the whole enactment (O'Neill vs Seglin Const. Co., 286 N.Y.S. 849 and subsequent history). The purpose of 22 is to apprise contractor's of the funds available to meet their claims. The nexus of the affidavit requirement would appear to be to apprise the contractor's of the net funds available in the beginning, to pay all costs of improvements, made intelligible by a statement of expenses incurred, to arrive at this net figure. It is essential that the affidavit truthfully state the expenses in connection with the loan. On their face they should appear complete as well as being in good faith. These would appear to be the minimum requirements of the statute. An item by item breakdown, however, might avoid the question even being raised. Note: The meaning of the terms "consideration" for the loan and "other" expenses are being variously construed in practice. "Consideration" will show up in building loan contracts of record as: the face amount of the
1/74
loan, loan service charges, or broker's fees, with "other" expenses interpreted accordingly. No opinion is given as to which practice is correct. QUESTIONS 2, 3 and 5: There is no allegation of facts in the complaint (such as times of various advances) to raise a question of relative priority. Even if there were no building contract at all, the mortgage lien itself (apart from priority problems) would be valid (Sullivan vs. Young, 159 N.Y.S. 791). This also answers 4 (a). Note: It is necessary that the allegations be insufficient, and not merely the demand for relief (C.P.L.R. 30 17). QUESTION 4(b) i: A failure of the building loan contract can affect priority of the liens (Sullivan, supra) and even nonrecord variances can affect the lien (J.N. Van Cott and Son vs. Gallon, 298 N.Y.S. 67). Each section is to be considered in terms of the intent of the whole enactment (O'Neill, Supra), the overall function of the statute being the governance of liens. Thus a failure of the affidavit (part of the building loan contract) might be held to affect priority of liens. However, such acts by the mortgagee wholly extraneous to the record would be acts of the insured. QUESTION 4 (b) ii: On these facts the affidavit appears to have met the requirements of the legislative intent. However, since the legal sufficiency on its face is attacked, the title company must prove this. CONCLUSION: The complaint does not state a cause of action concerning the validity of the mortgage lien or priority of the mortgage lien. The papers in question are sufficient in law on their face. The action in question does not affect any interest within the terms of the policy of title insurance. Refer to General Legal file 277 for an analysis of Section 22 of the Lien Law.
4/88
Chapter 28 - Page 1 MECHANICS' LIENS Underwriting
STANDARD EXCEPTIONS: All commitments must contain the standard exception for mechanics' liens, as follows: "Any lien, or right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law and not shown by the public records." EXISTING IMPROVEMENTS: When insuring existing improvements, this standard exception may be removed from the policy if a properly executed affidavit from the seller has been furnished evidencing that no recent repairs have been made giving rights to a mechanics' lien for labor or materials. If the affidavit indicates recent repairs and bills for labor or materials, the above exception cannot be removed without prior approval from the Regional Office. Paid receipts, Releases of Lien and possibly, an Indemnity Agreement will be required. NEWLY COMPLETED CONSTRUCTION: When insuring new construction where the statutory time for filing mechanics' liens has NOT expired, the standard mechanics' liens exception must be set forth as an exception on the commitment and, unless prior approval to delete the exceptions is received from the Regional Office, on Schedule B of the policy. Because statutory priority of mechanics' liens vary greatly from state to state, the issuing office must follow all Regional Guidelines for time periods, requirements and evidence necessary in order to issue any policy without an exception for mechanics' liens. Any affirmative insurance may only be issued after prior permission has been obtained from the Regional Office. UNIMPROVED PROPERTY: As to unimproved property, this standard exception can be removed from the policy upon an affidavit of no work from the seller, provided there has been no visible evidence of any commencement of work on the land and there is no recorded evidence of a contract or notice giving a right to file a mechanic's lien, and further provided that the insured loan is not a construction loan. CONSTRUCTION LOANS: For discussion and other requirements for construction loans, see the section on Mortgages Construction. CONSTRUCTION MORTGAGES: PENDING DISBURSEMENTS CLAUSE A. Guidelines for use in connection with ALTA Loan Policy 1970 (Amended 10/17/70).
4/88
In those instances where mechanic's liens may gain priority over the lien of a construction mortgage to be insured, it is a matter of company policy that prior approval be obtained before the issuance of a commitment, policy or endorsement giving mechanic's line coverage either by deleting the mechanic's lien exception or giving affirmative coverage against mechanic's liens filed or unfiled. This company policy shall prevail regardless of how the priority of the lien of the construction mortgage to be insured is lost or could be lost, whether by prior commencement of construction or by statutory law giving mechanic's liens priority over such mortgages. All mortgage policies (including commitments preliminary to closing) insuring a construction loan prior to completion of the improvements, with proceeds of the loan being disbursed in stages as the work progresses, must contain the following exception: a. Pending disbursement of full proceeds of the loan secured by the mortgage covered by the policy, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without any actual knowledge of any defects in, or objections to the title, up to the face amount of this policy. At the time of each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens, or objections intervening between the date of this policy and the date of such disbursement. Each title continuation must be evidenced by an endorsement to the policy, which endorsement will set forth all matters of record since the date of the preceeding endorsement, but said endorsement will exclude coverage for matters of survey. This policy does not guarantee the completion of the improvements nor the sufficiency of funds for the completion thereof. CONSTRUCTION MORTGAGES - LOSS OF PRIORITY - CREDIT CONTROL In those situations where mortgage priority has been lost by reason of the commencement of construction prior to the mortgage closing and you are asked to nonetheless insure the continued priority of the lien of the insured mortgage the granting of such coverage is a form of credit underwriting. Where you have obtained and passed upon all the other clearance requirements called for, the following criteria shall apply to the acceptance of and reliance upon all Indemnity Agreements offered for the purposes of credit underwriting: (a) full indemnification must be obtained from a financially responsible party for all loss, cost or damage. Ordinarily those will be either the owner of the project, the general contractor or both. If the owner is a shell corporation then the underwriter should request further indemnity from the principals owning the shell corporation. Consideration must always be given to
requiring the signatures of the spouse of any individual indemnitor. The
4/88
indemnity agreement should contain a material change of circumstances clause including a pledge to furnish unencumbered security at a later date if called upon to do so. (b) the financial responsibility of each and every indemnitor must be supported by financial statements certified to by a CPA or professional accountant based upon actual audit, which statements shall be the most recent available but not more than 6 months prior to the date of the assumption of the risk. If the financial statement is more than 6 months old (but not more than 12 months) it must be accompanied by a current certificate of no material adverse change. the indemnity and accompanying financial statements shall be acceptable only if the surplus of current assets over current liabilities shown by such statements plus the proceeds of the loan secured the insured mortgage which the lender commits to advance for payment of construction cost only, without condition other than appropriate advancement of work, exceeds at a minimum 125% of the total estimated costs of the improvements, and such statements show that the tangible net worth* of the sponsor plus such loan proceeds are not less than 200% of the total estimated cost of the improvements. Where two or more indemnitors exist their combined net worth and their combined current assets may be considered. However, bear in mind that when this is done you have to do twice the work to collect on the indemnity if necessary. if the indemnitors financial statements do not meet the foregoing criteria, then his/her indemnity agreement must be accompanied with an irrevocable and unconditional letter of credit to us from a bank which is a member of the federal reserve system, in an amount not less than the deficiency of working capital and tangible net worth, binding for a period not less than the estimated time of construction plus 60 days. If a letter of credit can not be obtained then such credit underwriting shall be supported by the deposit of equivalent in liquidity, consisting of cash, marketable securities or equities in income producing property. We must have the conditional right to convert the letter of credit to cash before expiration unless the improvements have theretofore been completed with evidence of full payment for all lienable items. The conversion right should also include the right to use the proceeds of the LC or the securities deposited to pay any and all liens or to reimburse the insurer for loss and damage resulting therefrom. the evaluation of the financial statements must be approved by a senior corporate officer after consultation with persons specially qualified to evaluate such statements or with an independent professional accountant. The evaluation shall also include consideration of whether there are any circumstances indicating undue risk or conditions whereby the indemnitor(s)
(c)
(d)
(e)
will not be able to perform upon their indemnity if called upon to do so, in which event the approval shall be denied.
4/88
(f) (g)
*tangible net worth consists of property of substance that is capable of being possessed and realized. the estimated cost of the improvement shall be not less than the aggregate contract price for the cost of the entire project of bona fide bids for contracts by responsible independent contractors. In the absence of such contracts or bids, the estimated cost of the improvement or such parts thereof as are not covered by such contracts or bids may be based upon a detailed cost analysis of the plans and specification by independent professional architects, engineers or cost appraisers. Such determination shall include appropriate allowances for cost increases and unanticipated contingencies. General Underwriting files Mechanic's Liens - Credit Underwriting Assumption of Risk; Financial Statement Reviews; Indemnity Agreement Preparation and Procedure this text.
See also:
See also "Use of Escrows When Insuring Over Special Exceptions" this text. NB You are automatically "insuring over" the loss of priority of a construction mortgage whenever you issue an ALTA Loan Policy and delete the preprinted mechanics lien exception which appears in the ALTA Commitment. See insuring clause 7 of the Loan Policy. OWNERS POLICIES: PENDING IMPROVEMENTS CLAUSE A. Guidelines for use in connection with ALTA owners policy on pending construction.
In those instances where the company is called upon to issue an owners policy in the amount paid for the land plus the cost of contemplated improvements or improvements under construction, it is permissible to issue the policy in an amount equal to the consideration paid for the land plus the estimated cost of the improvement. However, because we do not guarantee the completion of improvements nor the sufficiency of funds for the completion thereof the policy to issue should contain the following exception: a. Pending such time as the improvements upon the insured premises are completed, liability under this policy is limited to the purchase price paid for the land, plus the cost of proposed improvements or improvements under construction, liability hereunder shall increase, as the improvements progress, in the amount of the cost thereof, up to the face amount of this policy.
See also: Pa. Construction Loans and Construction Loans this text.
8/79
Chapter 28 - Page 1 MECHANICS' LIENS Legal Bulletin
1.
Mechanics' liens are effective for one (1) year after filing unless: (Section 17, Lien Law): (a) An action to foreclose it is commenced within that time, and a notice of pendency is filed with the County Clerk (unless otherwise extended, such lien terminates when the notice of pendency is cancelled, or becomes ineffective under CPLR 6513 and 6514); or Within one (1) year from its filing it is continued for up to one (1) year by court order. Subsequent court orders may extend the lien for successive years; or The lienor is made a party defendant in an action to enforce another lien, and a notice of pendency is filed in that action within the time prescribed above.
(b)
(c)
2. 3.
The foregoing provisions as to continuance of mechanics' liens also apply to liens discharged of record by deposit, order or undertaking. Mechanics' liens for private improvement are discharged by: (Section 19, Lien Law): (a) (b) Filing a certificate of satisfaction or release (subdivision 1); or By failure to begin an action to foreclose, continue the lien, or be made a party to another action as in 1(a), (b), or (c) above, (subdivision 2); or By court order obtained pursuant to Section 59 of the Lien Law for neglect in prosecution (subdivision 3); or By court order based upon filing a surety bond (subdivision 4); or By filing a transcript of a proper judgment and proof of notice of entry showing a final determination of the action in favor of the property owner (subdivision 5); or By court order based upon the invalidity of the lien (subdivision 6).
(c) (d) (e)
(f)
8/79
Chapter 28 - Page 2 MECHANICS' LIENS Legal Bulletin
Pursuant to Section 20 of the Lien Law: (g) By deposit with the County Clerk of a sum of money equal to the amount claimed, plus interest to the time of deposit. If the action to foreclose has already commenced, a court order must fix the amount of the deposit after five (5) days' notice of the application to all parties to the action.
4.
The deposit procedure in 3 (g) above is preferable to having the Company accept an Agency deposit because it effects a discharge of the lien, and still preserves the right of the owner to contest the future enforcement of the lien. There is no chronological priority between mechanics' liens. They all share equally, except that laborers for daily or weekly wages have a priority under Section 13 (1), and certain priorities in proceeds are provided for in Section 56. This lack of chronological priority increases the hazard of accepting a money deposit in lieu of requiring satisfaction or discharge of a mechanic's lien as in paragraph 3 above.
5.
Chapter 29A - page 1 OPTIONS General
OPTIONS TO PURCHASE
INTRODUCTION An option to purchase is a contractual right given by the owners of land (the optioner) to another (the optionee), which entitles the optionee to purchase the land at a set price and within a stated time frame. Options are subject to the Rule against Perpetuities, unless they are given in connection with a lease, in which case they are exempt from the operation of the Rule. Closely akin to the option is the right of first refusal, in which the owner of land promises to sell the property to the holder of the right first, if and when the owner decides to sell it. The right of first refusal differs from the option in that the former is dependent on the landowner's decision to sell, while the latter is dependent on the optionee's decision to buy. A right of first refusal is not an insurable interest in land. Options may be found in three forms: i) ii) iii) Options to Purchase not contained within a Lease. Options to Purchase contained within a Lease. Options found in or in association with mortgages.
In many states, a "naked" or "free-standing" option, may not create an interest or estate in the realty because it is merely a personal right. In such cases a "naked" option is not entitled to the protection of the recording acts until the option is exercised. The "relation back" doctrine does not apply in all cases. If the option is not an interest in real estate, it cannot be insured.
EXCEPTION FOR OPTIONS Where the title examination discloses the existence of an option, recorded or otherwise, it is to be disposed of or excepted in the policy to issue. The exception should read substantially as follows: Option to purchase the land contained in to recorded as document . from
An option should not be omitted simply because the stated time has expired for the exercise of the option. Whenever you are asked to remove a recorded option as an exception to title based on time alone, please consult with your principal underwriting office. You must determine that the option has not been exercised and that no time extension was granted. In all such cases, you should be provided evidence that the holder of the option is not in possession of the property and that the parties who are in possession are not there by reason of a lease or other arrangement with the option holder or some assignee of the option holder. INSURING OPTIONS The insurance of options is an extra hazardous risk and must be referred to your principal underwriting office. An option is a muniment of title. Detail is an important factor to consider when insuring options. Once the notice of exercise of the option right is given, the option becomes a contract of sale. The requirements of completeness and certainty should be present. The option should treat the matter of evidence of title in detail. All the provisions customarily found in a contract of sale relating to possession, default, mortgage terms, etc., should be set forth in the option. When considering the insurability of an option, whether or not contained within a lease, you must make the following determinations: (1) Is an option recordable under State Law so as to constitute constructive notice?
(2) (3)
Does the option violate the Rule against Perpetuities in the particular state? Does the instrument contain a statement of consideration? Otherwise, the option may be void.
Where we agree to insure the interest of an optionee there should be exceptions for the following in the policy: (a) (b) (c) (d) (e) (f) (g) (h) Failure of the optionee to fulfill the terms, conditions and stipulations set forth and contained in the option agreement. Costs which the optionee might incur in enforcing a conveyance after validly exercising the option. Disaffirmance of the option under the bankruptcy code or state insolvency law. The effect of condemnation proceedings. Liens for labor, services or material. Liens or encumbrances created or consented to by the insured. Liens or encumbrances in favor of or for the benefit of governmental bodies or public utilities such as real estate taxes or special assessments. Cost or expense incurred by the insured to enforce the option and obtain a transfer of title and/or obtain a conveyance or release from the party in whom title or any interest in the land is vested. When the option is contained in a lease, an exception for the terms and provisions of the lease.
(i)
A sample option endorsement is attached for your reference.
Whenever we agree to insure an option, you must remember the risk is not commensurate with the standard premium paid for a leasehold owners policy. Any policy would have to be insured for at least the option price so that the policy would be issued either for the full value of the leasehold estate or the option price, whichever is the greater. CLOGGING OF THE EQUITY OF REDEMPTION As to the third form of option mentioned earlier, that contained within the terms of a mortgage, or where the lender holds an option to purchase under a separate related document, entirely different underwriting concerns are present. In situations involving a loan with an option to purchase, the lender may ask for an endorsement to the mortgagee policy that affirmatively insures the validity and priority of the option to purchase or the lender may request a separate owner's policy insuring the option to purchase. Complying with the lender's request may run afoul of the old English doctrine, known as "clogging the equity of redemption". Under the doctrine if the purpose of the option is to circumvent the right of redemption, the option will be invalid. A mortgagor generally has one of two different forms of redemptive rights. The first is the equity of redemption created by statute following a foreclosure. This gives the mortgagor the right to redeem the property after a foreclosure within a given period of time. The second redemptive right of the mortgagor is the common-law equity of redemption. This guarantees to the mortgagor that up to the entry of a foreclosure decree, on satisfaction of all monetary obligations, the mortgagor will be able to redeem the property free of the debt. There is very little law in the United States on clogging of the equity of redemption and that law is not entirely favorable for the purposes of title insurance. ENDORSEMENT COVERAGE Providing coverage requires prior approval of your principal underwriting office. In determining whether or not the requested coverage can be given the following factors should be considered:
1. 2.
State statutory and case law regarding clogging. Whether separate consideration is given by the mortgagee to the mortgagor for the option, in addition to the mortgagee's willingness to make the loan. This separate consideration helps evidence the fact that the mortgagor and the mortgagee intend the mortgage loan and the option as separate and independent transactions and that value is being paid for the option. Whether the option relates to only a portion of the subject property and what particular undivided interest is subject to the option. The fact that the mortgagor may not be giving up all of the property may be significant in analyzing the transaction, and in particular the loan, in light of doctrines of unconscionability and overreaching on the part of the lender. Whether the transaction includes an "unwind mechanism" that enables the borrower to buy back the option of the lender and redeem the property. Whether the loan has been negotiated by the lender and the borrower voluntarily and at arm's length, and whether the borrower has received the benefit of legal counsel. You should require and obtain a letter or statement signed by the borrowers stating that they have entered into the transaction voluntarily and deliberately and have had the benefit of legal counsel. Whether the option to purchase may be exercised in the event of default under the mortgage. Such a provision tends to circumvent the mortgagee's traditional remedy of foreclosure of the mortgage. Any provision in the option agreement that enables the optionee (who also is the lender under the mortgage from the optionor) to exercise the option in case of default under the mortgage is considered dangerous.
3.
4. 5.
6.
NB Refer to TI Endorsement Manual. In addition to the specific problems relating to options in favor of a lender set forth above, all of the exceptions normally taken when insuring an option discussed earlier also are to be included in any policy or endorsement which insures the validity of priority of the option.
Chapter 29A - page 1 OPTIONS Law Bulletin
OPTIONS In options there is the problem of relation back. In many cases the courts have said that the exercise of an option relates back to the date of the option (50 ALR 1314; 66 CJ 487; 91 CJS, Vendor & Purchaser 13), i.e., once an option is exercised by the optionee, and executory contract for the sale of land is created and the doctrine of equitable conversion applies. A lease clause giving a prior lessee and option to purchase is a troublesome clause to lenders. If the exercise of the option relates back, it might wipe out the mortgage (Kansas State Bank v. Bourgeois, 382 P2d 931). It is easy to draft around the problem. The option to purchase should be subordinated to the mortgage. In the document subordinating the option to the mortgage it should also be provided that if the tenant exercise his option rights and thus becomes the owner of the property, the lease shall nevertheless remain in existence for the benefit of the lender, so that he can collect rent thereunder if default occurs under the mortgage. Few option draftsman consider these possibilities. Title Companies are constantly badgered by requests to insure that exercise of the option will result in good title. Such a guarantee is not possible. The Underwriter must consider the following possibilities: (1) (2) The lessor's trustee in bankruptcy may have the right to reject the option as an executory contract (26 Bus. Law 1391). An optionee is not a bona fide purchaser for value. A bona fide purchaser who is protected against unrecorded equities is one who acquires legal title for value without notice. In the instant case, the optionee has not paid the entire consideration nor has he acquired legal title.
An option is not an estate in land not presently owned but which may be acquired in the future nor is an option an "encumbrance" that makes a mortgage an illegal investment for institutional lenders. An option is a contract whereby the optionee acquires the "right" to purchase the property at a fixed or determined price (see 6 below) within a specified time (see 7 below).
(3)
Determine if the option is in the form of a "pre-emptive right". An unlimited future right of "first refusal" to purchase real estate is presumed to have been intended as limited to a reasonable time (Robroy Land Co. Inc. v Prather, 622 P2d 367, S. Ct., Wash., 1980). If the option is in the form of a "pre-emptive right" to purchase real estate at a price the mortgagor is willing to except from a third party, some court decisions hold that this gives the tenant the right to buy from the lender at a price equal to the foreclosure sale price if the mortgage is foreclosed (17 ALR 3d 962). What are the consequences of insuring title subject to an option where the option price is or could be less than the mortgage debt? Is the option recordable under state law so as to constitute notice? Does the option clearly set forth the purchase price or is it merely a nominal consideration? In the latter instance the option could be held void as a disguised mortgage transaction. Note: Where there is no "actual" consideration despite a recital of consideration the option contract is invalid; an option contract without consideration is merely a revocable offer to sell (NPLD Vol. 6/no. 5, p. 120 citing Lewis v Fletcher, 617 P2d 834, S. Ct.. Idaho, 1980. Majority and minority positions cited. Restatement (2d) Contracts, 89 B (1) takes the minority position). Note: An option to purchase contained in a lease does not survive the lease termination where there is no separate consideration for the option and the lease did not provide that the option would be valid for a fixed period independent of the lease (NPLD Vol 7/no. 1 citing Gourley v O'Donnell, 626 P2d 367, Ct. of Appeals, Oregon, 1981, wherein the court held an option ... is supported by consideration which supports the lease agreement itself).
(4)
(5) (6) (7)
(8)
If the option does not clearly set forth the purchase price does the option clause provide for a method by which the purchase price could be determined? Note: Although price is an essential element in a contract for the conveyance of land . . . specific performance may be granted even though the exact price is not stated, provided the contract provides for a method which renders the price readily ascertainable (Hanna v Bauguess, 430 A2d 104, Ct. of Sp. Appeals, Md., 1980, citing 1A Corbin, Contracts 98).
(9)
Does the option violate the Rule against Perpetuities in the particular state? Note: Options are not subject to the rule against perpetuities in New York. (Matter of Upper New York Bay (246 NY 1). Note: The Rule against Perpetuities applies to options in gross but not options in Leases (53 Mich L. Rev 147; 13 U. of Fla L. Rev. 214) Note: For a good enlightened analysis of why the rules applicability should no be extended to commercial transactions see St. Regis Paper Co. v Brown, 276 SE 2d 24, S. Ct, Georgia, 1981 briefed in NPLD vol 7/no. 3 p. 73 attached. See also Robroy Land Co. Inc. v Prather, supra, NPLD Vol 6/no. 9 p 226.
However, see Iglehart v Phillips, 383 So. 2d 610, S. Ct. of Fla., 1980, contra, holding the right of first refusal for an unlimited period and for fixed price invalid and unenforceable as unreasonable restraint on alienation (NPLD vol. 5/no. 11 p. 243). 10. Assuming we can insure the option, nevertheless, the company cannot be responsible for the cost which the optionee might incur in enforcing a conveyance thereof after validly exercising the option when the difficulty does not relate to the validity or priority of the option, e.g., the title to the property at the time of exercise might be vested in a party under disability so that a conveyance cannot be procured except by means of a suit for specific performance.
8/95
Chapter 30B - Page 1 POLICIES AND ENDORSEMENTS General
POLICIES AND ENDORSEMENTS

THE 1992 ALTA TITLE INSURANCE LOAN POLICY HISTORY The evolution of the title insurance policy within the state of New York is set forth in the History and Underwriting portions of this chapter. GENERAL Despite the fact that there are a great number of title insurance forms currently in use throughout the country, there are only two principal types of title insurance policies used on the east coast. The first of these is the ALTA Loan Policy, which insures the validity, enforceability and priority of a mortgage or deed of trust (or assignment) of an interest or estate in real property given by the parties at the time of its making as security for the payment of a debt or the performance of some other obligation. The second is the Owner's Policy, which insures the ownership of a particular interest or estate in real property. The preprinted language set forth on the policies facing page, the exclusions and the conditions and stipulations, constitute the "boilerplate" of standard coverage. Modification of either type of policy for particular circumstances represents extended coverage and can be readily accomplished by endorsement; the available and permitted printed policy and endorsement forms allow the flexibility necessary to permit title insurance to be issued on any number of different interests in real property, subject to compliance with the title insurer's underwriting requirements. Each form of policy affords the insured some protection against risk of loss or damage to the insured from a variety of title defects. This chapter will undertake to explain the loan policy in more detail. An explanation of the Owner's Policy will follow. NATURE OF INSURANCE A policy of title insurance is the written opinion of the issuing company as to the validity of the title, backed by an agreement to make that opinion good in case it should prove to be mistaken and as a result thereof the insured should suffer a loss. A title insurance policy is a contract of indemnity [C&S 7 & 13, Excl. 3 (c)] whereby the insurer, for a valuable consideration, agrees to indemnify the insured in a specific amount against loss sustained by reason of defects of title wherein the latter has an insured interest. In return for the premium paid, the insured, in relying on the contract, is assured that the policy is backed by the full faith and integrity of the Company and substantial assets from which losses could be paid. BRIEF DESCRIPTION OF ALTA LOAN POLICY
The ALTA Loan Policy is issued for the benefit of the lender only, and can be issued when the insured loan encumbers the fee, an easement or leasehold other than an oil leasehold.
9/95
BACKGROUND A mortgage is the security for the debt and the note is the evidence of the debt. When a mortgage is granted, the property owner pledges title to the real estate as security until the debt is repaid. Prior to the execution of the mortgage the borrower signs a personal promissory note for which he is personally liable to the lender. For repayment of the debt. In the event the borrower defaults in the repayment of his obligations, the lender will initiate foreclosure proceedings in order to recover the debt. Naturally, the lender wants assurance that its mortgage lien is a valid and enforceable lien on the land. He also wants assurance that he is the first creditor to partake of the proceeds from the foreclosure sale. It is the trend for lenders to seek such assurance from title insurance companies and their agents rather than rely upon Attorneys Opinion of Title, as they have in the past. POLICY FORMAT The title insurance policy is issued in a standard format promulgated by the American Land Title Association. The Policy is divided into several parts. The Policy consists of a foldover cover with the exclusions, stipulation and conditions set forth on the inside of the jacket. Within the jacket are inserted the various schedules and endorsements. The statement of coverage provided by the insurer is set forth on the face page of the policy . POLICY COVERAGE Matters covered to the extent they are not excepted in Schedule B or excluded by the Exclusions from coverage are set forth in the face page insuring clauses and the insuring clause preamble. More particularly, the face page of the policy describes the coverage afforded by the policy , subject to the exclusions, exceptions, conditions and stipulations, all of which are set forth in detail on the inside of the jacket. Assurance is given that the insured mortgage constitutes a valid and enforceable lien on the described estate or interest in real property. Insuring provisions of a specific nature are set forth and described in clauses (1) through (8). The company insures the lender against loss or damage sustained or incurred if the assurance therein set forth shall prove to be incorrect, i.e. the lenders suffer a loss by reasons of the fact that: 1. 2. Title Is vested other than as shown [see Ins, Cls. 1, Sch A-5 and C&S 1 (d)]; A defect, lien or encumbrance is not excepted in Schedule B or by the Conditions and Stipulations of the policy and we fail to disclose it [Ins. Cls 2]
8/95
3. 4.
Title is determined to be unmarketable, as insured [Ins. Cls 3 & C&S 1 (g)]; there is lack or right of access to and from the land [Ins. Cls. 4];
5. The insured mortgage* is determined to be invalid or unenforceable (except where a claim is based on usuary or any consumer credit protection or truth in lending law) as a result of defects in execution [Ins. Cls. 5; *Sch. A-4, C&S 1 (e)]; 6. Liens superior in time to the insured mortgage are found on the public record and are not shown in Part I of Schedule B [Ins. Cls. 6];
7. Statutory liens for labor or materials gain priority over the insured mortgage as a result of the commencement of construction prior to time of closing the loan excludes those liens arising from an improvement contracted for or begun after the policy date and not financed by the insured loan [Ins. Cls. 7 (a) and (b)]; 8. Any assignment of the insured mortgage is determined to be invalid or unenforceable including the failure of such assignment to vest title to the insured mortgage in the named insured assignee free and clear of all liens [Ins. Cls. 8]; Liability for costs, attorneys fees and expenses to defend matters covered by the policy may be found on the last paragraph on the facing page of the policy. The cover of the ALTA Loan Policy (10/17/92) contains the pre-assigned serial number for the policy and is, therefore, a controlled and audited form. If the cover is damaged or voided for any reason, it must be returned to the Home Office for cancellation and credit, WHO IS COVERED UNDER THE POLICY? 1. 2. 3. The insured named in Schedule A, See also Conditions and Stipulations [C&S 1 (a)]; Any owner of the indebtedness secured by the mortgage [C&S 1 (a) (1)]; Governmental Agencies insuring repayment of the debt [C&S 1 (a)(ii)];
8/95
4. Any owner of the indebtedness secured by the insured mortgage who acquires the title to the estate or interest in the land by foreclosure, deed in lieu of foreclosure or any other method which extinguished the lien of the insured mortgage [C&S 1 (a)(iii) & 2 (a)(i)]; 5. 6. Parent or wholly owned subsidiaries of the owner of the party acquiring title if title is transferred to them [C&S 1 (a)(iii), 2 (a)(ii)]; Governmental agencies which acquire the title as the result of a guarantee of payment as in 3 above [C&S 1 (a)(iii) & 2 (a)(iii)]
DURATION OF COVERAGE 1. Until the debt secured by the mortgage is paid [C&S 7 (a)(11)];
2. Until an insured who acquires title to the insured interest in the land (a) transfers it to another party who is not insured and (b) no longer has any liability for covenants of warranty it gives in the transfer [C&S 2 (b)]. MATTERS EXCLUDED FROM COVERAGE UNDER THE POLICY As with other types of insurance policies, a title insurance policy's stated coverage is modified by express exclusions and exceptions. The function of exclusionary language is to eliminate the insurer's duty to indemnify for losses resulting from the excluded risk, even if they exist in fact. The exclusions are standardized, i,e, they are not tailored to the individual transaction, but are rather the stated limits of every transaction undertaken by the insurer. Policy exclusions address four general categories of title defects: (1) those that cannot be discovered from an examination of the public; (2) those for which the insured bears responsibility; (3) those that do not cause any loss to the insured, and (4) miscellaneous matters including those that result from avoidance of the insured real property interest as a result of the application of federal or state creditors' rights laws. These four categories are addressed with more particularity below. 1. Laws, ordinances or governmental regulation (and the effect of their violation) which relate to any of the following categories unless notice of enforcement appears in the public records [C&S 1 (f)] or a notice of a defect, lien or encumbrance resulting from an actual or alleged violation appears in the public records:
8/95
a. Occupancy, use or enjoyment of the land [excl. 1 (a)(i)]; examples would include zoning laws; building codes and federal or state forfeitures based on the use of the land. b. Physical qualities of improvements on the land or their location on the land [excl. 1 (a)(ii)]; c. Subdivision laws or regulations [excl. 1 (a)(iii)]; d. Environmental protection [excl. 1 (a)(iv)]; e. Other governmental police powers [excl. 1 (b)]. 2. Matters within the insured's knowledge or control, i.e., a. matters created, suffered, assumed or agreed to by the insured [excl. 3 (a)]; or b. matters actually [C&S 1 (c)] known to the insured, not known to the company and not shown in the public records [excl. 3 (b)]; or for which the insured bears responsibility by reason of c. failure to comply with applicable state laws [excl. 4 & 5] 3. 4. Matters which result in no loss to the insured [excl. 3 (c)]; Miscellaneous matters: a. Rights of eminent domain, but only if: [excl. 2] 1. no notice of exercise is recorded in the public records at policy date; or 2. In a pre-policy taking, the taking would not be binding on a purchaser for value without knowledge.
8/95
b.
Matters which are created or attach after the policy date, except to the extent insured against future mechanics liens in insuring clause 7 [excl. 3 (d) and 6];
c. Matters creating loss the insured would not suffer if it had paid value for the insured mortgage [excl. 3 (e)] examples would include limitation on recording act protections for donees, heirs, and devisees, and corporate or fiduciary successors who acquire land interests by operation of law; d. Creditors Rights under bankruptcy and insolvency laws but only if: [excl. 7] 1. the claim arises out of the transaction vesting the estate or interest insured (the instant transaction) and 2. that transaction is determined to be a fraudulent transfer; or 3. that transaction is determined to be a preferential transfer which was not created by: (a) failure to timely record the instrument creating the interest [10 days 11 USC 547 (e)]; or (b) the failure of the recordation to impart constructive notice to a purchaser for value or judgment or lien creditor; or 4. the interest of the insured mortgagee is subordinated under the doctrine of equitable subordination.
8/95
CONDITIONS AND STIPULATIONS The terms and conditions of insurance comprise the balance of the pre-printed language of the policy. These paragraphs provide some basic definitions; a description of the events after which the policy will or will not continue; procedures for asserting a claim; an outline of the relationship between the insurer and the insured and their respective obligation to one another; a measure for determining the amounts payable on a claim; the reduction in the amount of insurance effected by any payment of a claim; an arbitration clause; and an "entire contract" clause.
See also:
Burke, LAW OF TITLE INSURANCE Ellis, TITLE INSURANCE LAW HANDBOOK Palomar, TITLE INSURANCE LAW Sackman. THE LAW OF TITLES
11/94
Chapter 30B - Page 8 POLICIES - SCHEDULE A General Instructions
SCHEDULE A - ALTA LOAN POLICY 1992 Every loan policy must contain a Schedule A. This is the Schedule which gives the specific details of the insured lien, the effective date of the policy, the amount of insurance, etc. Letters shown below correspond to those on the illustrated form. Beside each letter below is an explanation of the information which should be inserted where the corresponding letter appears on the form. A. B. C. Showing of Rate and/or Premium is mandatory in some jurisdictions; optional in others. Policy Number should be shown exactly as it appears on front cover of policy. The Date of Policy should be the month, day year, and time through which title has been examined, which must be through time of recording of the instrument on which exposure is based. The Amount of Insurance cannot be less than the full principal debt secured by the mortgage. The policy can, however, be issued for an amount in excess of the principal debt to cover interest, foreclosure costs, etc. in accordance with regulations of the state where the land is located. The full name of the insured as it appears in the mortgage should be shown. If the mortgage is FHA insured, also insert "and/or The Secretary of Housing and Urban Development, his successors and/or assigns, as their interests may appear" or if VA guaranteed, also add "and/or the Administrator of Veterans' Affairs, his successors and/or assigns, as their interests may appear." Insert the type of estate owned by the mortgagor which is the subject of the mortgage, e.g. Fee Simple. If the estate is other than Fee Simple it must be accurately described or you will have contradicted insuring clause one on the facing page of the policy. Insert the name or names of the owner of record of the estate or interest encumbered by the insured mortgage, which should be the same as the mortgage (s) shown on the insured mortgage. Insert the complete record information of the mortgage and any assignments of it covered by the policy. Frequently assignments of it covered by the policy. Frequently assignments are recorded after the policy is issued and an endorsement is issued to show such assignment. Insert T.A. application number.
D.
E.
F.
G.
H.
I.
American Land Title
Chapter 30B - Page 9 POLICIES -SCHEDULE A General Form Prep Loan Policy Revised 10/17/92
SCHEDULE A T.A. File No [1] Policy No. [B] Amount of Insurance $[D] Premium $ [A] Date of Policy 1. 2. [C] at [E] [C] a.m. [C] p.m.
Name of Insured:
The estate or interest in the land which is encumbered by the insured mortgage is: [F]
3.
Title to the estate or interest in the land is vested in: [G]
4.
The insured mortgage and assignments thereof, if any, are described as follows: [H]
[5.
The land referred to in this policy is described as follows:]
If Paragraph 5 is omitted, a Schedule C, captioned the same as Paragraph 5, must be used.
LOAN
American Land Title Association Loan Policy
Chapter 30B - Page 10 POLICIES -SCHEDULE B General Instructions
SCHEDULE B I, ALTA LOAN POLICY Every loan policy must contain Schedule BI. This Schedule states the exceptions from coverage of the policy. Letters shown below correspond to those on the illustrated form. Beside each letter below is an explanation of the information which should be inserted where the corresponding letter appears on the form. A. B. C. Policy Number should be shown exactly as it appears on front cover of policy. Ordinarily current year will be inserted unless taxes therefor have been paid and receipt is in file. Schedule BI should contain in consecutively numbered paragraphs all matters such as easements, restrictions, leases, encumbrances, defects, etc. which must be excepted from the coverage of the policy. (1) Restrictions and easements should be set forth in detail with recording information given and, in appropriate cases, with copies attached to the policy. Most institutional investors require that exceptions for restrictions include language assuring that the restrictions do not embody and are not accompanied by right of reverter and have not been violated, and that the policy insures that any future violation will not cause a forfeiture or reversion of the title. Such assurance may be included if it has been determined that there has been no violation of restrictions and there is no reverter clause. Blanket exceptions of easements, restrictions, etc. of record should not be made. Exceptions for (a) rights of parties in possession, (b)facts that an accurate survey of the premises would show, and (c) unrecorded mechanics liens must be included unless there is adequate evidence including affidavits, releases of liens, and current survey, etc. which support the waiver. All exceptions appearing in prior exposures related to this policy should appear as exceptions herein. Municipal assessments, or liens for public improvements should be excepted as follows: "Pending municipal assessment liens for public improvements, or notice of which is contained in Resolution No. . The amount of the assessment Ordinance No. or levy, if any has not been determined." (6) Be careful to specifically except any reservations for mineral, petroleum, and road rights-of-way which may appear in prior conveyances in the chain of title. Zoning should not be shown as an exception in Schedule BI since it is excluded in the "Exclusions from Coverage" contained in the policy.
(2) (3)
(4) (5)
(7) D.
Refer to any continuation sheet or sheets, if used.
American Land Title Association
Chapter 30B - Page 11 POLICIES - SCHEDULE B General - Form Prep Loan Policy Revised 10/17/92
SCHEDULE B T.A. File No [I] EXCEPTIONS FROM COVERAGE This policy does not insure against loss or damage (and the Company will not pay costs, attorneys' fees or expenses) which arise by reason of: PART I [B] [C] 1. 2. 3. The Lien of all taxes for the years 19 Restrictions set forth in Book Book page . page and thereafter. or Easements set forth in Policy No. [A]
Preprinted survey exception [if not removed from commitment] Rights of parties in possession [if not removed from commitment] Mechanics lien exception [if not removed from commitment] Road, ways, streams or easements, if any, not shown of record, etc., [if not removed from prior commitment]
4. 5. 6.
All title exceptions appearing in prior back title or policies are to be excepted. Municipal assessments, if any. Mineral reservations and Oil and Gas Leases, if any, are to be excepted if disclosed of record.
[ THIS IS A SAMPLE / INSTRUCTIONAL FORM]

Note: If there are matters which affect the title to the estate or interest in the land described in Schedule [A] [C], but which are subordinate to the lien of the insured mortgage, Part II of Schedule B must be added, or Part I of Schedule B must contain the following statement: "Matters which affect the title to the estate or interest, but which are subordinate to the lien of the insured mortgage." LOAN
8/95
Chapter 30B - Page 1 POLICIES AND ENDORSEMENTS Settlement and Examination
ENDORSEMENT INSTRUCTIONS AN ENDORSEMENT IS ATTACHED TO A TITLE POLICY WHEN IT IS OUR INTENTION TO ALTER OR MODIFY THE PROVISIONS OF THE POLICY SO THAT THE INSURED RECEIVES GREATER COVERAGE, AND WE HAVE INCURRED A GREATER LIABILITY, THAN EXISTED UNDER THE UNENDORSED POLICY. In large commercial transactions such as Apartment Houses, Condominium projects, Office buildings and Shopping Centers, the title insurer is frequently called upon to provide "affirmative Coverage" that goes beyond the policy coverage afforded under either a "Standard Coverage" or "Extended Coverage" policy. Any statement which changes the terms of the policy should be made in the form of an endorsement, printed on company forms and appended to the policy. Endorsements vary the terms of the policy and, therefore, should not be prepared and appended to the policy without careful consideration of the facts and the risks assumed. The Underwriting Department has prepared guidelines which are to be followed whenever special endorsement coverage is requested. No one is authorized to provide any form of special endorsement policy coverage unless the following steps have been followed: (i) (ii) (iii) (iv) (v) an independent determination has been made by the branch office or examining agent that such coverage is appropriate; all the documents in question relating to such coverage have been received and considered; the company guidelines have been followed and, where necessary; special permission has been obtained from the Home Office Underwriting Department; and a special risk premium is collected commensurate with the risk.
Closers may generally assume that the title examiner realizes that certain "Standard form loan endorsements" will be requested by the lender and that, as part of the title examination, the examiner has taken into consideration the underwriting guidelines for issuing such an endorsement and passed upon them as part of his or her examination of title. As an example, if we are asked to insure title to a condominium unit, the title examiner should anticipate that the following endorsements will be requested: Pa l00 (Restrictions), Pa 300 (Survey) and Pa 8l0 (ALTA 4 Condominium Endorsement). Therefore, the examiner, as part of the examination process, should review any and all restrictive covenants for reverter language and review all of the condominium documentation so as to determine that all the affirmative statements made in the Pa 8l0 (ALTA 4) endorsement can be given. That is the examiners responsibility, not the closers.
8/95
However, the closer must understand that the title examiner almost never sees the lenders loan commitment and title instructions. Consequently, any special title coverage requested by the lender in the loan commitment which are of an unusual nature will have to be referred back to either the examination department or the underwriting department for further consideration and determination that the coverage is appropriate and can be given. Such determination may require the review of additional information, material or surveys ordinarily not required. I want to emphasize that in the hands of the closer rests the final and serious responsibility of ascertaining that, in the closing of title, the company assumes only such liabilities and exposure as it intends. Accordingly, whenever a closer is requested to provided "affirmative coverage" and he or she knows that the title examiner could not have presumed that coverage request, the matter should be referred to the examination or underwriting department promptly for a further determination of the facts and the risks inherent in providing such coverage. On the following pages you will find the underwriting requirements for issuing the Pennsylvania Land Title Association (PLTA) Standard Form Endorsements. Other forms of coverage may be requested depending upon the geographic location of the lender. For example, West Coast lenders are familiar with the CLTA endorsement forms and customarily request that coverage. East coast lenders are familiar with the New York endorsement forms and request those forms of coverage. Alternative forms of coverage may be granted providing they do not conflict with TIRBOP Rate Rules 2.7 or 6.23. It is the function of the underwriting department to determine if requested coverage can be given and what the requirements prerequisite to such coverage are. With the recent changes in Federal and State banking regulations we have begun to see lenders making real estate loans across the country, bringing along with them the coverage requests with which they are familiar. The companies that will survive through the turn of the century will be the ones who are flexible and able to adapt to change. Our proposed insured(s) are not interested in how we've done things in our geographical area in the past. Unless the form of coverage requested is specifically prohibited by the state insurance laws and statutes (such as Texas), we have to at least consider our customers request and determine whether, in granting such coverage, we are assuming unwarranted risk exposure or merely making statements of fact which may be determined from a review of the documents. Whereas before, we could say "that form of coverage is not a filed form and therefore the coverage cannot be provided", today that answer won't work. Rate Rule 2.4 permits the title insurer to provide alternative forms of coverage not otherwise expressly prohibited, so long as, in so doing, you do not circumvent a filed endorsement form. Fees for such coverage must be filed with the Pennsylvania Insurance Department each month
8/95
There are four things to bear in mind when undertaking to provided extended coverage: l. 2. If the coverage requested is not a filed form the coverage can still be given on the company's blank endorsement forms; Any such coverage given must be labeled on the bottom of the endorsement form "SPECIAL COVERAGE (name) ENDORSEMENT; Any special endorsements given must be separately reported to the accounting department as risk premium Any special endorsement of an extra-hazardous risk nature requires the approval of both the underwriting department and our over limits treaty reinsurer even if they have otherwise already approved the deal.
3. 4.
Preprinted endorsement forms are provided where the frequency of use appears to justify it. Blank endorsement forms are to be used when a preprinted form is either not applicable or available. The Company has printed all the TIRSA Endorsement forms. The other forms of endorsements listed in either the Endorsement Manual named below or the CLTA Endorsement Manual would have to be considered on a case by case basis and the coverage, if provided, typed on a blank endorsement form. Whenever any of these alternative forms of coverage are requested, be sure to refer the request to the Underwriting Department as soon as possible. The TIRSA ENDORSEMENTS may be found in the TIRSA RATE MANUAL. See also, Real Estate Titles, chapter 27 Corporate Staff is encouraged to refer to Title Insurance Underwriting Principals and Exception Language and the sections entitled "Imputation of Knowledge" and "Nonimputation".
9/95
Chapter 30B - Page 1 1992 POLICIES History
HISTORY NYBTU AND POLICY FORM 100 The New York Board of Title Underwriters was the prior governing body of the various title insurers licensed to do business in the State of New York. In that capacity it served as a statistic-gathering rate service organization in accordance with Insurance Law section 2313 and filed uniform title insurance rates for its member companies under its rate manual. It also prescribed and regulated the use of policy forms. Prior to 1988 the New York Board of Title Underwriters [NYBTU] policy forms were used exclusively. The NYBTU voluntarily dissolved in 1985. The statistical compilation function of the NYBTU was replaced by the Title Insurance Rating Service [TIRSA] in November of 1991, at which time it was designated as the Insurance Department's statistical agent for title insurance. TIRSA also serves in an advisory capacity in regard to title insurance rates and forms on behalf of its members. The prior NYBTU Rate Manual, which, with some variations had continued to be adopted by various title insurers as their own until September 1, 1993, was thereafter superceded by the TIRSA Rate Manual [see "In the Matter of 1993 Title Insurance Rate & Rate Manual Filings" (as amended) page 197, Title Insurance 1993, Obtaining the Coverage You Want, PLI publication N4-4581, 1993]. Insurance Law section 6409 requires the filing of all rates, and any deviation from the filed rates without prior approval from the Insurance Department is prohibited. 1992 POLICY FORMS The ALTA 1992 policies were developed in response to objections of certain lenders to the broad wording of the "Creditors Rights" exclusion found in the ALTA 1990 policy. (FannieMae Announcement 94-13). They expressed concern that a literal reading of the exclusion could exculpate (to free from blame) the Title Company from liability where (for example) a mortgage was not timely recorded (and thus was deemed "unperfected" under the Bankruptcy Code), even though the delay was caused by the title insurer. The 1992 policy (formerly dated 10/17/1992) attempted to address such issues by modifying the exclusionary language; and as a result, FannieMae will NOT accept any ALTA Policy other than the 1992 Loan Policy.
9/95
Chapter 30B - Page 1 1992 POLICIES Elements
SIX ELEMENTS OF A TITLE INSURANCE POLICY. 1. Insuring Clauses: Contain the contractual provisions which obligate the Company for damage sustained by the insured which arise from matters listed in these clauses. Exclusions: List matters which may be included within the broad language of the insuring clauses but for which the Company does not assume liability. Conditions & Stipulations: List matters which are interpretive of the other Policy provisions; states how a claim should be made under the Policy and define the extent of the Company's obligation in connection with the claim. Schedule A: Identifies the following (i) (ii) (iii) (iv) (v) (vi) (vii) 5. the insured the estate or interest in the land being insured the owner the land the amount of insurance effective date of the Policy the mortgage being insured (Loan Policies)
2. 3.
4.
Schedule B: List matters which are within the insuring clauses, but for which the Company does NOT assume liability and which are not listed in the exclusions from coverage. Endorsement: is attached to the Policy which extends or alters its coverage or interprets its provisions. Explanation of "EXCLUSIONS FROM COVERAGE" -- 1992 Forms See 1992 Policies - Exclusions for Coverage which follows
6.
9/95
The Identity & Nature of the Insured as Affecting the Issuance of a Policy -- Schedule A (Owners): (a) (b) (c) It is very important to determine "who" or "what" the proposed insured is; as it may affect the issuance of or the exceptions in the Policy. The proposed insured must be definitively identified and have the legal capacity to acquire the ownership of the land. The acquisition of ownership must be absolute rather than security for payment of a debt. (i) If we are certain that the estate in the land which we have described in Schedule A has actually been created and vested in the insured, it is not necessary to make a Schedule B exception.
(d)
If the estate being insured is limited by the instrument which creates it, and that instrument is referred to in the description of the estate in Schedule A, it is not necessary to reference the limitations contained therein in Schedule B. Liens and encumbrances which have been created or suffered by the insured owner, and which automatically attach to the land upon acquisition of ownership by the insured, need not be excepted in Schedule B.
(e)
The Identity & Nature of the Insured as Affecting the Issuance of a Policy -- Schedule A (Loan): (a) It is of extreme importance, in certain situations, to determine whether a corporate mortgagee is a domestic corporation; or if a foreign corporation it is licensed "to do business" in the state where the land is located. (i) Please note that exclusion 4 of the Exclusions from Coverage in the ALTA Loan Policy -- 1992 form, does not apply to all situations. In those cases where a "doing business" issue exists, the Home Office must be notified. At the very minimum, the insured should be warned before the Policy is issued as to the exclusion & possible complications upon assignment.
(b)
Care should be taken in regards to the relationship between the Mortgagor and Mortgagee, as some relationships may cause the Mortgage to be unenforceable.
9/95
(i)
The common situation would occur if the Mortgagor is a Partnership or Limited Liability Company; and the Mortgagee is either a general partner or limited partner.
Matters which should be shown in Schedule B: (matters which the insured intends to take subject to) (a) Any matter which can result in Loss or Damage to the insured, which is within the scope of those matters listed in the "insuring clauses", and for which the Company does not intend to assume liability must be shown in Schedule B unless it is clearly within the Exclusions from Coverage. (i) (ii) (b) (c) General Exceptions: Current taxes, future installments of special assessments, mortgages, easements & restrictions. Actual defects in title - must be corrected prior to the closing of title.
The deposit of satisfactory indemnity with the Company to protect it against matters shown on Schedule B DOES NOT justify their omission. If satisfactory indemnity has been deposited with the Company, it is proper procedure to show the matter for which the indemnity has been posted in Schedule B, and to insure against loss occurring because of the endorsement of such matter. The ALTA Mortgage Policy requires that all matters affecting the title as of the Policy Date be shown, even though such matters are inferior to the lien of the Mortgage being insured. Such matters are shown in Schedule B Part II, Subordinated Matters.
(d)
Endorsements: Refer to Tirsa Rate Manual
9/95
Chapter 30B - Page 1 1992 POLICIES Exclusions
EXCLUSIONS FROM COVERAGE - OWNERS 1992 "The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorney's fees or expenses which arise by reason of:" 1(a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of an improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy. Any governmental police power not excluded by (a) above, except to the extent that a notice of the exercise thereof or a notice of a defect, lien, or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy. This first exclusion is a practical necessity for three basic reasons: (1) Although all such laws, ordinances, and governmental regulations are contained in the public records, they seldom appear in the land records. Therefore, the title examiner for the Company cannot discover such regulations through a title examination. Therefore Exclusion #1(a) is used. (2) It would also be very difficult to conduct the kind of detailed examination of the property itself that would be necessary in order to determine its conformity with the myriad requirements of the building code and other laws, ordinances, and governmental requirements. Exclusion #1(a) eliminates the necessity of such an examination. (3) Exclusion #1(b) reminds the insured that the Company has no way of predicting whether or not the property in question will ever be affected by an exercising of any governmental police power except for those of record in the public records at Date of Policy. 2. Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records at Date of Policy, but not excluding from coverage any taking which has occurred prior to Date of Policy which would be binding on the rights of a purchaser for value without knowledge.
(b)
9/95
Chapter 30B- Page 2 1992 POLICIES Exclusions
This exclusion retains the basic language of the 1970 policy and once again reminds the insured that the Company has no way of predicting whether or not the property in question will ever be affected by an exercising of governmental rights, such as eminent domain. Therefore, it would be impossible for the Company to include protection against such an event in policy coverage. While the 1992 policy retains the basic language of the earlier exclusion, the new exclusion provides for protection in cases of a prior taking which would be effective against a purchaser for value without knowledge. 3. Defects, liens, encumbrances, adverse claims or other matters: (a) (b) created, suffered, assumed or agreed to by the insured claimant; not known to the Company, not recorded in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant prior to the date the insured claimant became an insured under this policy; resulting in no loss or damage to the insured claimant; attaching or created subsequent to Date of Policy; or resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the estate or interest insured by this policy.
(c) (d) (e)
The third exclusion contains five separate parts: (a) (b) (c) (d) The first clause is based on the fact that there is no sound reason for insuring the policyholder against his own acts. This clause refers to matters that the insured had knowledge of when the policy was issued, but were not known to the Company or disclosed in writing to the Company and not a matter of public record. The third clause of this exclusion again states that the Company is not liable to the insured unless he actually suffers loss or damage. Once again, the insured is notified that the policy is effective only as of the date shown on Schedule A. Because of the importance of this point -- and to avoid any possible confusion in the mind of the policy holder -- the significance of the policy's effective date is mentioned several different times. The laws of most states afford protection to purchasers dealing in good faith who are giving valuable consideration. They are known as "bona fide purchasers for value". If the insured is not a bona fide purchaser for value, this protection may not be available to him. This clause excludes from coverage any loss or damage suffered by the insured that he would not have sustained had he paid value for the property.
(e)
9/95
4.
Any claim, which arises out of the transaction vesting in the insured the state or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (a) (b) the transaction creating the estate or interest insured by this policy being deemed a fraudulent conveyance or fraudulent transfer; or the transaction creating the estate or interest insured by this policy being deemed a preferential transfer results in failure: (i) (ii) to timely record the instrument of transfer; or of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.
The fourth exclusion is transactional in nature; in other words, its applicability is limited to circumstances where the estate or interest insured by this policy is subject to a flaw which renders it vulnerable to attack. This exclusion does NOT extend to situations where a prior transaction is the source of the problem.
9/95
EXCLUSIONS FROM COVERAGE - LOAN 1992 "The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorney's fees or expenses which arise by reason of: 1(a) 1(b) 2. 3. Identical to Exclusion 1(a) of the Owners Policy Identical to Exclusion 1(b) of the Owners Policy Identical to Exclusion 2 of the Owners Policy Defects, liens, encumbrances, adverse claims or other matters: (a) (b) (c) (d) (e) Identical to 3(a) of Owners Policy Identical to 3(b) of Owners Policy Identical to 3(c) of Owners Policy attaching or created subsequent to Date of Policy (except to the extent that this policy insures the priority of the lien of the insured mortgage over any statutory lien for services, labor or material); or resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the insured mortgage.
Exclusion 3(d) is identical to exclusion 3(d) of the Owners Policy except for one exception; the parenthetical phase refers to the coverage provision on mechanics' liens - liens attaching or created subsequent to the effective date of the policy are excluded from coverage EXCEPT for mechanics' liens on work financed through the mortgage. Exclusion 3(e) is a restated and clarified limitation of coverage. It excludes loss which arises because the insured claimant did not pay value (ie. mortgages acquired by descent or gift.) 4. Unenforceability of the lien of the insured mortgage because of the inability or failure of the insured at Date of Policy, or the inability or failure of any subsequent owner of the indebtedness, to comply with applicable doing business laws of the state in which the land is situated.
9/95
Exclusion 4, which applies exclusively to loan policies, refers to foreign corporations lending money for the purchase of local property. The laws of certain states make this exclusion necessary. These states require a foreign corporation to obtain a "Certificate of Authority" from the Secretary of State of the state where the property is located before they can lend money for the purchase of that property. The fourth exclusion alerts the insured to the fact that his coverage does not include losses or damages suffered as a result of noncompliance with such state laws. Exclusion 4 also contains clarified language (as compared to the basic language of the 1970 Policy) which now specifically states that no coverage exists if the insured is unable to qualify to do business and as a result suffers loss because the mortgage lien cannot be enforced. 5. Invalidity or unenforceability of the lien of the insured mortgage, or claim thereof, which arises out of the transaction evidenced by the insured mortgage and is based upon usury or any consumer credit protection or truth in lending law. Exclusion 5 originally appeared in Insuring Provision 5 of the 1970 Policy; there is no change in coverage. 6. Any statutory lien for services, labor or materials (or the claim of priority of any statutory lien for services, labor or materials over the lien of the insured mortgage) arising from an improvement or work related to the land which is contracted for and commenced subsequent to Date of Policy and is not financed in whole or part by proceeds of the indebtedness secured by the insured mortgage which at Date of Policy the insured has advanced or is obligated to advance. Exclusion 6 disallows coverage of losses resulting from statutory liens for services or materials that were contracted for and commenced after the date of the policy and that were not financed by proceeds of the loan secured by the insured mortgage which at the Date of Policy the insured had advanced or was obligated to advance. Originally appeared as part of the mechanics' lien priority Insuring Provision 7 of the 1970 Policy. 7. Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (a) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or
9/95
(b) (c)
the subordination of the interest of the insured mortgagee as a result of the application of the doctrine of equitable subordination; or the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure; (i) (ii) to timely record the instrument of transfer; or of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.
Exclusion 7 is transactional in nature. In other words, its applicability is limited to circumstances where the estate or interest insured is subject to a flaw which renders it vulnerable to attack. The exclusion does not extend to situations where a prior transaction is the source of the problem. It is also note worthy that the this exclusion makes specific reference to the doctrine of equitable subordination.
Chapter 30B - Page 1 POLICIES AND ENDORSEMENTS Underwriting
POLICY FORMS COMPARISON OF COVERAGE IN THE VARIOUS AMERICAN LAND TITLE ASSOCIATION POLICY FORMS WITH EMPHASIS ON DIFFERENCE IN EXCLUSION LANGUAGE THE NYBTU FORM 100 This form was previously issued exclusively in the State of New York as prescribed by the New York Board of Title Underwriters [NYBTU]. For further explanation please refer to page 58 of PLI publication N4-4432 Title Insurance in 1984. The NYBTU policy was a single form designed for use in any transaction that could be insured, unlike the multiple ALTA forms, which contain different provisions for owners, lenders, construction lenders, lessees or leasehold mortgagees. The ALTA policies use different forms for insuring owners and lenders. While the coverage provided the insured in either policy form is similar, it is not identical. For a policy coverage comparison please refer to chapter 27, Real Estate Titles, Second Edition, page 27-18. Prior to 1988 none of the ALTA forms were approved for use in New York, with the exception of the old 1946 ALTA mortgage policy. In early 1988 the New York Land Title Association [NYLTA] filed the 1987 ALTA forms for an owner's policy and loan policy. In November of 1991, the 1987 ALTA policy forms, and those later amended by ALTA in 1990 were accepted for filing in New York. The "New York Creditors' Rights Exclusion" was thereafter adopted. Effective January 1, 1992 only the 1990 ALTA owner's and loan policy forms were authorized for issuance in New York. That has since been superceded by the most recent TIRSA Rate Manual. The remainder of this chapter will be devoted to comparing the various ALTA policy forms primarily because it was those forms which were used when insuring New York owners and lenders for property lying outside the State of New York.
Chapter 30B - page 1.1 POLICIES AND ENDORSEMENTS Underwriting
THE ALTA POLICY FORMS - INTRODUCTION The American Land Title Association is an industry-wide association of title insurance companies. One of its major functions is the promulgation of title insurance forms for the use of its members. The Association cannot and does not require its members to use the forms promulgated. However, there is much to be gained by the use of forms throughout the country by title insurers in that as time passes, both insurer and insured become familiar with the coverage furnished by the various forms and there is created a body of law relating to their interpretation. These American Land Title Association forms are generally promulgated through the Title Insurance Forms Committee. The Committee, composed of general counsel of a number of member companies, receives requests from both customers and member companies for the consideration of forms to be issued on a national basis. Based on a decision of its Executive Committee, the Title Insurance Forms Committee drafts proposed forms which are then adopted by the Association. Over the years the forms have undergone changes and revisions. Highlights of those changes are discussed here. 1970 ALTA LOAN POLICY: The following matters are expressly excluded from the coverage of this policy: 1. Any law, ordinance or governmental regulation (including but not limited to building and zoning ordinances) restricting or regulating or prohibiting the occupancy, use or enjoyment of the land, or regulating the character, dimensions or location of any improvement now or hereafter erected on the land, or prohibiting a separation in ownership or a reduction in the dimensions or area of the land, or the effect of any violation of any such law, ordinance or governmental regulation. Rights of eminent domain or governmental rights of police power unless notice of the exercise of such rights appears in the public records at Date of Policy.
2.
3.
Defects, liens, encumbrances, adverse claims, or other matters (a) created, suffered, assumed or agreed to by the insured claimant; (b) not known to the Company and not shown by the public records but known to the insured claimant either at Date of Policy or at the date such claimant acquired an estate or interest insured by this policy or acquired the insured mortgage and not disclosed in writing by the insured claimant to the Company prior to the date such insured claimant became an insured hereunder; (c) resulting in no loss or damage to the insured claimant; (d) attaching or created subsequent to Date of Policy (except to the extent insurance is afforded herein as to any statutory lien for labor or material).
4.
Unenforceability of the lien of the insured mortgage because of failure of the insured at Date of Policy or any subsequent owner of the indebtedness to comply with applicable "doing business" laws of the state in which the land is situated.
1984 REVISION OF THE 1970 ALTA LOAN POLICY: The following matters are expressly excluded from the coverage of this policy: 1. (a) (b) (c) Governmental police power. Any law, ordinance or governmental, regulation relating to environmental protection. Any law, ordinance or governmental regulation (including but not limited to building and zoning ordinances) restricting or regulating or prohibiting the occupancy, use or enjoyment of the land, or regulating the character, dimensions or location of any improvement now or hereafter erected on the land, or prohibiting a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part.
(d)
The effect of any violation of the matters excluded under (a), (b) or (c) above, unless notice of a defect, lien or encumbrance resulting from a violation has been recorded at Date of Policy in those records in which under state statutes deeds, mortgages, lis pendens, liens or other title encumbrances must be recorded in order to impart constructive notice to purchasers of the land for value and without knowledge; provided, however, that without limitation, such records shall not be construed to include records in any of the offices of federal, state or local environmental protection, zoning, building, health or public safety authorities.
2. 3.
Rights of eminent domain unless notice of the exercise of such rights appears in the public records at Date of Policy. Defects, liens, encumbrances, adverse claims, or other matters (a) created, suffered, assumed or agreed to by the insured claimant; (b) not known to the Company and not shown by the public records but known to the insured claimant either at Date of Policy or at the date such claimant acquired an estate or interest insured by this policy or acquired the insured mortgage and not disclosed in writing by the insured claimant to the Company prior to the date such insured claimant became an insured hereunder; (c) resulting in no loss or damage to the insured claimant; (d) attaching or created subsequent to Date of Policy (except to the extent insurance is afforded herein as to any statutory lien for labor or material). Unenforceability of the lien of the insured mortgage because of failure of the insured at Date of Policy or of any subsequent owner of the indebtedness to comply with applicable "doing business" laws of the state in which the land is situated. CHANGE IN DEFINITION OF "PUBLIC RECORDS"
4.
1970 AND 1984 REVISION OF THE 1970 ALTA LOAN POLICIES: 1. Definition of Terms The following terms when used in this policy mean: ***
(f)
"public records":
those records which by law impart constructive notice of matters relating to said land.
1987 ALTA LOAN POLICY: 1. Definition of Terms The following terms when used in this policy mean: *** (f) "public records": records established under state statutes at Date of Policy for the purpose of imparting constructive notice of matters relating to real property to purchasers for value and without knowledge. With respect to Section 1 (a) (iv) of the Exclusions From Coverage, "public records" shall also include environmental protection liens filed in the records of the clerk of the United States district court for the district in which the land is located.
1987 ALTA POLICIES Many of the principal changes in the 1987 policies were designed to clarify the meaning or to put certain provisions where they properly belong. For instance, in the insuring provisions on the cover sheet of the policy, there had been exceptions from coverage for usury and consumer credit protection. These exceptions were deleted from the insuring provisions but were put under the Exclusions Section of the policy. The insuring clause of both the ALTA Loan policy 1970 (Rev. 10-17-70, 10-17-84) and the 1987 ALTA Loan Policy (10-21-87), which appears on the facing page of the policy are virtually the same. Both forms insure against: loss from defects in the execution of the mortgage the invalidity or unenforceability of the lien of the mortgage the title being vested other than as shown the unmarketability of the title of the mortgagor defects in or liens or encumbrances on the title insured which are not excepted under Schedule B or by the Conditions and Stipulations of the policy the priority of the mortgage over any lien or encumbrance not excepted under Schedule B or by the Conditions and Stipulations of the policy
any statutory lien for labor or materials lack of a right of access to and from the land CHANGES IN INSURING PROVISIONS:
In the 1970 policy, there had been an exception from coverage with respect to mechanic's liens for work contracted for and done after the date of the policy, for which the insured was not obligated to make an advance. This was deleted from the insuring provisions and was transferred to the Exclusion Section as Item No. 6. However, in transferring it to Item No. 6, not only did it exclude any statutory liens for services, labor or material, but it also excluded "the claim of priority of any statutory lien for services, labor and material over the lien of the insured mortgage" arising from work done, unless such work was financed in whole or in part by the proceeds of the indebtedness secured by the insured mortgage and the insured had an obligation to make such advances for such work. Thus, while changing the location of the exception the exception was expanded to include any claim of priority. This would relieve the title company of any defense obligation if the person is merely claiming a priority of lien over the insured mortgage. Another change in the insuring provisions was to remove from the initial paragraph of the insuring provisions, the obligation to pay the costs, attorney's fees and expenses, which the company may be obligated to pay under the policy, and to add it as a last item in the insuring provisions. The new provision states that the company will pay costs, attorney's fees and expenses incurred in the defense of title or the lien of the insured mortgage, "but only to the extent provided in the Conditions and Stipulations". Thus, the title companies have limited the costs, attorney's fees and expenses with respect to any defense, since they have limited their obligation to defend in the various provisions in the policy. In the Exclusions from Coverage, it is provided in the initial paragraph that the matters set forth in that Section are expressly excluded from coverage and, "the Company will not pay for loss or damage, costs, attorney's fees or expenses which arise by reason" thereof. Previously, there was no reference to the payment of loss, damage, costs, attorney's fees, or expenses in the Exclusions provision. In Sections 1(a) and (b) of the Exclusions, a provision is added with respect to any violation of environmental laws but, the policy excepts from the exclusion any claim to the extent that notice of the enforcement would have been recorded in the public records as the date of the policy. This provision, as well as the provision dealing with governmental police power in 1(b) of the Exclusions, was adopted and added to the 1970 policy in 1984.
A new exclusion has been added in Section 3(e) of the Exclusions, providing that there is excluded any claim or loss which would not have been sustained if the insured claimant had paid "value" for the insured mortgage. This is the first time that payment of value is required as a basis for an insured maintaining an action under the policy. The question arises as to whether this will be expanded by the Courts to require fair value as we have seen in recent Court decisions, or whether any value would be adequate. The 1987 ALTA loan policy exclusions follow. 1987 ALTA LOAN POLICY EXCLUSIONS: The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys' fees or expenses which arise by reason of: 1. (a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of any improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, or the effect of any violation of these laws, ordinances, or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien, or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records as Date of Policy. Any governmental police power not excluded by (a) above, except to the extent that a notice of the exercise thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records as of Date of Policy.
(b)
2.
Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records as of Date of Policy, but not excluding from coverage any taking which has occurred prior to Date of Policy which would be binding on the rights of a purchaser for value without knowledge.
3.
Defects, liens, encumbrances, adverse claims or other matters; (a) (b) created, suffered, assumed or agreed to by the insured claimant: not known to the Company, not recorded in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant prior to the date the insured claimant became an insured under this policy; resulting in no loss or damage to the insured claimant; attaching or created subsequent to Date of Policy (except to the extent that this policy insures the priority of the lien of the insured mortgage over any statutory lien for services, labor or material); or resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the insured mortgage.
(c) (d)
(e) 4.
Unenforceability of the lien of the insured mortgage because of the inability or failure of the insured at Date of Policy, or the inability or failure of any subsequent owner of the indebtedness, to comply with applicable doing business laws of the state in which the land is situated. Invalidity or unenforceability of the lien of the insured mortgage, or claim thereof, which arises out of the transaction evidenced by the insured mortgage and is based upon usury or any consumer credit protection or truth in lending law. Any statutory lien for services, labor or materials (or the claim of priority of any statutory lien for services, labor or materials over the lien of the insured mortgage) arising from an improvement or work related to the land which is contracted for and commenced subsequent to Date of Policy and is not financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage which at Date of Policy the insured had advanced or is obligated to advance.
5.
6.
In Schedule A of the Policy, Item 3, the words "Title to" had been added to Item 3 so that it now reads, "Title to the estate or interest in the land is vested in:". The title companies wanted to be certain that the only estate that the policy is insuring is the estate set forth in the Schedule A, whether it be a leasehold estate or a fee estate, and the only item the title company is insuring with respect to that estate is title. There is a revision in the initial paragraph of Schedule B, Part 1, which added to the policy, the provision that the "Company will not pay costs, attorney's fees or expenses" with respect to any item set forth in Schedule B, Part 1. If the title company excepts a matter from coverage, there will be no defense costs paid by the title company, even if some issue relative to title arises as a result of one of those matters. It is the position of the title company that this was always the intention and that it is just removing an ambiguity by inserting the provision in the initial paragraph of Schedule B. There are many changes in the Conditions and Stipulations Section of the policy. The principal ones are as follows: 1. Section 1(a) contains the definition of insured and in subsection (i) it provides that the term "Insured" includes the owner of the indebtedness secured by the insured mortgage and each successor in ownership of the indebtedness except "a successor who is an obligor under the provisions of Section 12(c) of these Conditions or Stipulations". This effectively eliminated any guarantor or bonding company which has reimbursed the insured and has taken an assignment of the mortgage. There is an exception to this Section 12(c) exception for the successor who acquired the indebtedness as a purchaser for value without knowledge of the asserted defect, lien, encumbrance or adverse claim, or other matter insured against by the policy as affecting title to the land. 2. Section 1(c) includes in the definition of "knowledge", the definition of "known" and provides that "knowledge" or "known" means actual knowledge, not constructive knowledge which may be imputed to the insured by reason of the public records or any other records which impart constructive notice. The question arises as to what is meant by actual knowledge. If there is a mortgage servicing clerk in a bank who is told of a defect in title, but the clerk never tells the manager of the Service Department or any officer of the bank of the defect, does the bank have actual knowledge of such defect so as to void coverage under the title policy?
3.
Section 1(f) contains the definition of "public records". This is much more restrictive than the prior definition in that it limits it to records "established under state statutes at the Date of Policy for the purpose of imparting constructive notice of matters relating to real property to purchasers for value and without notice". It is questionable whether all records presently searched by the title company before issuing a title commitment have been established by statute. Certain records, for instance, records in the Sheriff's office concerning foreign execution, in the Clerk of the Courts office concerning the judgments or pending suits, in the probate court's general index, or in bankruptcy court, are not specifically established under state statutes for the purpose of imparting notice of matters relating to real property. It is suggested that the insured obtain an endorsement to the policy, specifying the public records which must be searched and which should be included in the definition of public records. The new form of policy now defines unmarketability of the title in Section 1(g) as an alleged or apparent matter affecting the title to the land which would entitle a purchaser, of an estate or interest described in Schedule A or the insured mortgage, to be released from the obligation to purchase, by reason of a contractual condition requiring the delivery of marketable title. The questions arise as to whether or not there must be litigation determining that a purchaser would be able to terminate the contract based on unmarketability, before the title company could be held liable under this provision, and whether the title company could be required to defend any unmarketability claim. Must the Court determine whether the purchaser should be released? Section 2 deals with the continuation of insurance. It provides that the amount of insurance which shall be available to the insured, in the event the insured acquires title after foreclosure, or by deed in lieu of foreclosure, or any other legal manner which discharges the lien of the insured mortgage, shall be as set forth in Section 2(c). This provision is very similar to the provision contained in the 1970 policy, except that there is included in Subclause (2), in addition to the amount of the principal of the indebtedness, the interest thereon, expenses of foreclosure, amounts advanced to insure compliance with laws and to protect the lien of the mortgage, the "reasonable amounts expended to prevent deterioration of improvements." This gives a benefit to the insured over the 1970 Policy provisions.
4.
5.
6.
Sections 3 and 4 of the 1970 policy have been revised considerably and now appear as Sections 3, 4 and 5 in the 1986 policy. Section 3, provides that the insured must notify the company promptly of any litigation or any knowledge of any claim against the title or interest, which would be adverse to the title or interest being insured. If prompt notice is not given, the insurance shall terminate with regard to the matters for which the prompt notice was required unless the company was not prejudiced by the failure to give such notice.
In Section 4, the company agrees to provide for the defense of the insured in the litigation but limits its defense to only those "stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this Policy". The company has the right to select counsel of its own choice, without any consultation with the insured, but it is subject to the right of the insured to object for reasonable cause. The company shall not be liable for, and will not pay, the fees of any other counsel, and will not pay for the defense of any matter which is not insured against by the policy. Previously, if there were some matters insured against and some matters not insured included in the litigation, the company would assume on the entire defense so as to avoid two counsels working at cross purposes. When requested by the company, the insured must furnish to the company, all reasonable and necessary witnesses and evidence, and take any other lawful actions which, in the opinion of the company, are necessary or desirable to establish the title to the estate, or interest, or the lien of the insured mortgage. If the company is prejudiced by the failure of the insured to cooperate, the company's obligation as to the insured under the policy shall terminate. Section 5 provides that the insured must deliver to the company a proof of loss or damage signed and "sworn to by the insured claimant" within 90 days after the insured claimant shall ascertain the facts giving rise to the loss or damage. The proof of loss or damage shall describe the defect in, or lien or encumbrance on the title and other matters insured against by the policy which constitutes the basis of the loss and shall state to the extent possible, the basis for calculating the amount of the loss or damage. In addition, the insured is required to submit to examination under oath by representatives of the company, and is required to produce for examination, inspection and copying, at such reasonable times and places as may be designated by an authorized representative of the company, all records, books, ledgers, checks, correspondence or memorandums whether bearing a date before or after the effective date of the policy which pertain to the loss or damage. This could create problems for many insured in that there may be a confidential relationship between the insured lender and the borrower. For instance, a savings and loan association is prohibited by law against furnishing any information about its customers unless it receives the authorization of its customer to do so. This would
terminate coverage under the policy if the insured fails to comply, or in the alternative it could cause a violation of law if the insured complies with the policy. Section 5 further provides that failure to disclose the information terminates the insurance. The Company agrees to keep the information confidential "unless, in the sole judgment of the Company, it is necessary for the administration of the claim". 7. Section 6 of the 1984 policy is substantially the same as Section 5 of the 1970 policy and provides that the company may tender the amount of the insurance and be released of any further obligation to defend. Some believe that the company should be obligated to clear up a title that it insured as marketable if unmarketability is claimed, or to take other action, rather than merely make a payment of the amount and walk away from the claim. In any event, the company had the right previously, so this is nothing new with respect to the policy. Section 7 provides for the limit of liability of the company under the loan policy. Section 7(a) provides that the limit of liability is the least of (i) the amount of insurance, (ii) the amount of the unpaid principal indebtedness secured by the mortgage, (iii) the difference between the value of the estate as insured and the value of the estate with or subject to the defect. Section 2(c) also provides that the insurance would be the least of three amounts, but provides that one of the amounts would be the amount of the principal indebtedness remaining unpaid, plus the interest thereon, the expenses of foreclosure, the amount advanced to protect the lien of the mortgage or the security of the property, and reasonable amounts to prevent deterioration of the improvements. In Section 7(a)(ii), the amount is limited to the unpaid principal amount. It does not include interest, taxes which may be advanced or any other amounts advanced for the protection of the lien of the security of the property. Thus the company has again restricted its liability considerably. Section 7(c) provides that the company will only pay those costs, attorney's fees, and expenses incurred in accordance with Section 4 of the Conditions and Stipulation. Section (B) provides that the amount of insurance decreases as payments are made on the principal of the indebtedness. The Section was expanded to provide that any voluntary partial satisfaction or release of the insured mortgage, whether by payment, satisfaction or release, shall reduce the insurance pro tanto. In many corporate financings today, you will have a substantial loan secured, not only by real estate, but also by equipment, inventory, accounts receivable. For instance, a bank loans $100,000 to a corporate entity which is secured by a lien on real estate valued at $40,000
8.
9.
and a lien on machinery, inventory and accounts receivable valued at $60,000. If $40,000 of the $100,000 loan is satisfied and assuming a $40,000 loan policy was issued, is the insurance terminated even though $60,000 is still owing on the loan? According to Section (B), the insurance would have terminated at that point, even though the lender would be relying upon the insurance for protection of its security until they paid. Any insured would be wise to obtain an indorsement clarifying the insurance coverage. Section 12(b) permits an insured to release security, modify terms of payout or release collateral, provided the priority of the lien is not affected, but if done after insured has notice of claim, the Company is released to the extent its right of subrogation is impaired. This is similar to other forms of insurance. 10. Section 13, provides for compulsory arbitration. If either party requests arbitration, then both parties must submit to binding arbitration. At the March, 1987, Mid-Year Meeting of the ALTA, this was softened somewhat to provide that it shall be only binding arbitration for policies up to $1,000,000 in amount. Beyond that, both parties must agree to arbitration in order to be subject to binding arbitration. The arbitration shall be in accordance with the Title Insurance Arbitration Rules. Arbitration is not covered by any rules of evidence and all types of evidentiary material may be submitted to the arbitrators. The arbitration is to be submitted to the arbitrators. The arbitration is to be secret so that there will be no published decisions relative to it and no guidance for future arbitration. It is the purpose of arbitration to achieve an equitable result, rather than determining whether any party has specific rights or liabilities under the contract. An insured should obtain an indorsement deleting the arbitration provision. With respect to the Owner's Policy, a co-insurance clause has been added to Section 7(B) providing that, (i) if on the date of the policy the amount of insurance is less than 80% of the value of the land or the full consideration paid for the land, whichever is less, or (ii) if subsequent to the date of the policy an improvement is erected on the land which increases the value of the land by at least 20% over the amount of insurance stated in Schedule A, then the company shall only pay the loss pro rata in proportion to the amount of insurance on the date of the policy bears to the total value of the land on the date of the policy, or if improvements are made, the company will only pay the loss pro rata in proportion to 120% of the amount of insurance
11.
stated bears to the sum of the amount of insurance and the amount expended for the improvements. THE ALTA 1990 & 1992 POLICIES: The ALTA 1990 policies are gradually replacing the 1987 policies. In each case, the text is exactly the same as the 1987 version, the only difference being that addition of an exclusion dealing with "creditors' rights". In the owner's policy, this exclusion is worded as follows: Any claim, which arises out of the transaction vesting in the insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. [Emphasis added.] In the loan policy, the wording is slightly different: Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. [Emphasis added.] The italicized language restricts the exclusion to the transaction which creates the estate or interest insured. In other words, if a prior transaction in the chain of title is attacked, the exclusion does not apply. The use of the 1990 policies will nevertheless vastly simplify the underwriting considerations present where a title may be vulnerable to this sort of challenge. The ALTA 1992 policies were developed in response to objections of certain lenders to the broad wording of the "creditors' rights" exclusion found in the ALTA 1990 policies. They expressed concern that a literal reading of the exclusion could exculpate the title company from liability where (for example) a mortgage was not timely recorded (and thus was deemed "unperfected" under the Bankruptcy Code), even though the delay was caused by the title insurer. The 1992 policies (formally dated 10/17/92) attempt to address such issues by modifying the exclusionary language. In the owner's policies, the exclusion is worded as follows: "Any claim, which arises out of the transaction vesting in the insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or other similar creditors' rights laws, this is based on:
(i)
the transaction creating the estate or interest insured by this policy being deemed a fraudulent conveyance or fraudulent transfer; or the transaction creating the estate or interest insured by this policy being deemed a preferential transfer except where the preferential transfer results from the failure: (a) (b) to timely record the instrument of transfer; or of such recordation to impart constructive notice to a purchaser for value or a judgment or lien creditor." [Emphasis added.]
(ii)
In the loan policies, the wording is slightly different: "Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (i) (ii) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or the subordination of the interest of the insured mortgagee as the result of the application of the doctrine of equitable subordination; or the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure: (a) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor." [Emphasis added.]
(iii)
As the italicized language suggests, the exclusion, like that used in the 1990 policies, is transactional in nature. In other words, its applicability is limited to circumstances where the estate or interest insured is subject to a flaw which renders it vulnerable to attack. The exclusion does not extend to situations where a prior transaction is the source of the problem. It is also noteworthy that the loan policy exclusion makes specific reference to the doctrine of equitable subordination.
As a result of FannieMae Announcement 94-13, which amends Announcement M 07-91, affective November 1, 1991, FannieMae will not accept any ALTA Policy other than the 1992 Loan Policy.
11/89
Chapter 30 - Page 1 PARTNERSHIPS General
PARTNERSHIPS
DEFINITION A partnership is an association of two or more persons organized to carry on as coowners a business for profit. A partnership is created by an agreement, either express or implied, to jointly carry on the business and share profits and liabilities. The contract of partnership need not be in writing but may be implied from the acts and conduct of the partners. The contract need not be in writing even though the sole purpose of the partnership is to deal in real estate. For title insurance purposes, however, the statement or certificate of partnership must be in writing [to satisfy the Statute of Frauds] and recorded unless such recordation is waived by an authorized title representative. Furthermore, upon recordation of the statement or certificate and absent evidence or circumstances indicating that a partnership does not, in fact, exist, the partnership will be considered a legal entity for title insurance purposes subject to the rules of title practice set forth in this manual. It is preferable, although not always a requirement, that the certificate or statement appear of record before title is acquired in the partnership name. If satisfactory evidence of the existence of the partnership, prior to the acquisition of title, is produced, the recording prior requirement may be waived by the Home Office Underwriting Department. WHO MAY BE PARTNERS (A) (B) The persons who may be partners include individuals, partnerships, corporations and other associations. Individuals, of course, must be adults and competent. A married man can be a partner and his wife will not be required to join in or consent to conveyances affecting property, title to which is held in the partnership name, except in the event of dissolution and distribution or division of the partnership property among the partners. A general or limited partnership may become a partner in another partnership, either limited or general. A corporation may become a partner in a partnership "if so authorized by its articles of incorporation". There is, however, no need to examine the articles nor to require authorization by resolution of the directors, especially if the acknowledgment of the statement or certificate complies with the local statutes.
(C) (D)
(E) (F)
A trustee may become a partner in a partnership provided the trust, when examined, is valid and gives him the power to do so. There is no authority which would allow a minor or an insane person - either individually or by his guardian - to become a general partner in a partnership. The above statements are intended to apply in those cases where the validity of the partnership is being originally passed upon. Failure of any one or more of the partners to fall within the classes named or to comply with stated requirements may not always result in a void partnership. All questionable situations should be submitted to home office Underwriting Department.
TYPES OF PARTNERSHIPS The codes usually refer to four types of partnerships: special, mining, limited and general. Of these the two first mentioned are not commonly encountered in title work and will not be further considered in these sections. Every partnership that is not formed in accordance with the law concerning limited partnerships is a general partnership. A limited partnership is formed by two or more persons having as members one or more general partners and one or more limited partners. Generally a limited partner is not liable for the partnership obligations and if a limited partnership is not formed in substantial compliance with the statute, the failure to so comply may, for some purposes, constitute the intended limited partnership a general partnership. In this event, the so-called limited partners may become liable for the obligations of the partnership and for title insurance purposes must be considered as general partners when making the name run and for the execution of documents. These added obligations can be very serious for the limited partners and all such situations indicate submission to management before reporting or making title requirements that may be unnecessary as well as objectionable to the partners. RISK Partnerships, both general and limited, create risks in the insuring of real property interests as a result of an uneven mix of statutory and case law relative to the nature of a partnership and the authority of the partners to act on behalf of the partnership. When we insure an interest in real property created by a partnership, we cover the risk that there is no partnership in existence. While the Uniform Partnership Act does not require that the partnership agreement be in writing, our title practices do. This is because the Statute of Frauds says that any transaction involving realty of value over $500.00 must be in writing signed by the parties to be charged.
An estate in real property may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. A partner can effectively convey partnership property held in the partnership's name if such conveyance is in the regular course of partnership business. A conveyance not in the regular course of the partnership business can be set aside. No title insurance is to be issued in reliance upon a conveyance of real property to or from a partnership unless a statement of partnership or written partnership agreement is furnished for our examination and review. You should REQUIRE the PRODUCTION OF THE PARTNERSHIP agreement in Schedule B-1 of the Commitment, and further reserve the right to make such additional requirements and/or exceptions to title as a subsequent review thereof may warrant. If the partnership does not regularly deal in real estate, then get the signatures of all the partners or verify that those who are signing on behalf of the partnership are authorized to do so. You must determine the authority of the partner to act on behalf of the partnership, whether general or limited in nature. For title insurance purposes, no reliance is placed on the implied authority of a partner. Often there is a provision in limited partnership agreements for the consent of a certain percentage of limited partners to the action of the general partner before those actions become binding. Under those circumstances, you should further require proof of consent of the limited partners. Where you have determined that title to property is insurable in the name of the partnership, the title search and examination will be concerned with only certain matters affecting the individual partners, such as death and/or bankruptcy of the individual. Incapacity or death of a partner may, under the terms of the partnership agreement, cause dissolution of the partnership; likewise, bankruptcy of one of the partners may result in the bankruptcy or dissolution of the partnership. You should therefore further require proof that the partnership is in full force and effect, that it has not been dissolved by death or bankruptcy of any partner, and that the partnership agreement has not been amended subsequent to its original drafting. Provided title is vested in the name of the partnership, a partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When title to partnership real property vests in the name of a partnership, any interest a partner has in that property is personal property. A partner's right in specific partnership property is not subject to judgments or involuntary liens against any partner individually.
In dealing with partnership property, caution must be exercised when insuring transactions between the partnership and partners. The relationship between partners, one to the other and to the partnership, is of a fiduciary nature. For this reason any transfer or mortgage of partnership property in favor of one of the partners must be viewed as suspect and regarded as a risk. A title insurer's exposure to a claim or risk of loss in relying on such conveyances lies in the possibility of fraud on creditors of the partnership in the event it either renders the partnership insolvent or prejudices the rights of junior creditors by impairing the borrowing partnership's ability to perform under the junior liens. Keeping this in mind, agents and examining counsel are encouraged to review our Underwriting Bulletin relating to equity participation.
Chapter 30 - Page 1 PARTNERSHIPS Title
REQUIREMENTS As to ________________________________, a (General)(Limited) Partnership, we shall require: (a) A copy of the Articles of Partnership or Partnership Agreement of the Partnership are to be submitted for our review and examination prior to closing. The company reserves the right to amend the title commitment to include any additional requirements or exceptions to title as a review of the Partnership Agreement may warrant. (b) We shall require proof in affidavit form that: 1. The partnership is still in existence and active and has not been dissolved by reason of death, withdrawal, resignation or bankruptcy of a partner, and is in good standing in the State of __________; 2. There has been no change in the terms or conditions of the Partnership Agreement since its original execution; 3. The names of all the partners are as therein set forth, there being no other partners; 4. The parties signing the deed have the capacity to do so. INSURING INCOMING PARTNERSHIP INTERESTS Occasionally we are requested by parties who are either purchasing some or all of the stock of a corporation or an interest in a partnership, to issue an owner's policy either to the parties of the corporation or the partnership, insuring title to that interest in land owned by the corporation or partnership. Set forth below are the guidelines for authorizing the issuance of such policies. Bear in mind that in either case it is the corporation or the partnership which owns the real estate, not the individuals. We should not authorize the issuance of a policy insuring the interest of a shareholder in a corporation since that is clearly a personal property interest. Nor should we authorize the issuance of a policy insuring a partner's interest in a partnership since that also is clearly a personal property interest. [See section 26 of the Uniform Partnership Act which recites: "A partner's interest in the partnership is his share of the profits and surplus and the same is personal property"].
We should not authorize the issuance of a policy which would insure against "offrecord"matters occurring subsequent to the acquisition of title by the corporation or partnership since (i) we would be unable to discover the existence of such "off-record" matters, and (ii) the insured may not be a bona fide purchaser at arms length for good and valuable consideration sufficient to avail itself of the protection of the applicable recording acts. In those cases where we are requested to issue a "NON-IMPUTATION" Endorsement insuring against "off-record" matters the Home Office Legal Department should be contacted for underwriting guidance. WHEN INSURING AN INCOMING STOCKHOLDER OR PARTNER You are authorized to issue a policy structured so as to: l. insure an estate in land, and not an interest in personal property, by insuring the stockholder or partner as to the vesting of title in the corporation or partnership; 2. provide sufficient protection to the Company with appropriate exception(s) in Schedule B where coverage for matters occurring subsequent to the acquisition of title by the corporation or partnership is limited to matters of public record. Such policy should be issued in the following form: - the amount of insurance should be the consideration paid by the stockholder for his shares in the corporation or paid by the partner for his interest in the partnership; - the policy should be written with a current effective date; - the name of the insured should be the parties purchasing the stock of the corporation or purchasing the interest in the partnership; - the estate or interest in the land described in the policy should be the estate or interest held by the corporation or by the partnership. Under no circumstances can the individual interests be shown as "fee simple".
WHEN INSURING AN INCOMING PARTNER Schedule B-1 of the title commitment should include the following requirements: - amendment to the existing partnership agreement consenting to the withdrawal and substitution of partnership interests; and - amendment to the partnership agreement consenting to the admission of the incoming partner Schedule B of the policy should contain the following exception: "Defects, liens, encumbrances, adverse claims or other matters not shown by the public records created, suffered, assumed or agreed to by (the corporation or the partnership)." As a prerequisite to the issuance of the policy, proof should be provided to the issuing office sufficient to establish that the insured is a purchaser of stock in the corporation or is a purchaser of an interest in the partnership. Requests for a "FAIRWAY ENDORSEMENT" or any other form of affirmative coverage should be referred to the home office.
Chapter 30 - Page 1 PARTNERSHIPS Underwriting
CHANGE OF PARTNERS - REQUEST FOR FAIRWAY ENDORSEMENT A Fairway Endorsement is often requested when there is a change in part of the ownership interest in an insured partnership or venture. The endorsement provides that insurance continues in favor of the successors to the partnership interest - even if that change results in the dissolution or termination of the insured partnership entity. The endorsement must contain language that it "is not to be construed as insuring the legal effects of any change in the ownership interest". The reason for the inclusion of such exculpatory language finds its roots in the apparent conflict between the Law of Partnership under common law, the subsequent adoption of the Uniform Partnership Act and interpretive case law. Under Section 27 of the Uniform Partnership Act (UPA) real property held in the name of the partnership under the Uniform Partnership Act is not affected by the addition of a new partner or the leaving of an old partner so long as the firm is not dissolved and terminated. The continuing partnership may deal with assets held in the firm name as though no change of membership had occurred. This differs substantially from the common law, whereunder it was a well-established rule that the withdrawal of a partner caused the firm to be dissolved. In either event, a partner's sale and transfer of all his interests in the partnership to a stranger necessarily requires both the withdrawal of a partner and the admission of a new partner, which changes the relation of the partners. Now there is a difference in opinion between underwriters as to how we should proceed where there is a change in partnership interests, the agreement does not provide within its terms that any changes trigger dissolution and the UPA has been adopted in the state where the property is located. Some underwriters are of the opinion that, as a result of Section 27 of the UPA, we should look to the authority of signatories without regard for the fact that the membership in the partnership is changed. That is to say that you would make the same inquiries and requirements in order to insure a title received from the continuing partnership as though there had been no change of membership. This may be an overly selective reading of the law. Section 18 of the UPA provides that no person can become a member of the partnership without the consent of all partners, while Section 29 goes on to say that dissolution is the change in the relation of partners caused by any partner ceasing to be associated with the business.
11/89 rev. 1/96
Unless state law is definitive on this matter, the general principles of partnership law and judicial interpretation from other jurisdictions may be applicable. Cases from a number of jurisdictions have given form to the general rule left indistinct by the UPA. As may be seen from these cases, dissolution of a partnership may occur where: (i) there is a withdrawal of a partner; (ii) there is a specific intent of a partner to withdraw and terminate his relationship with the partnership; (iii) there is a general change in the partnership as an entity or (iv) where the incoming partners do not obligate themselves to assume partnership debts previously incurred. In light of the foregoing, I believe it is incumbent upon us to recognize the potential conflict of law and Act as follows: 1. If the transaction involves the withdrawal and substitution of some of the partners, you must obtain (i) from the remaining partners a consent to withdrawal and substitution of partners and (ii) from the withdrawing partners an assignment of partnership interest. If the transaction involves the transfer of all the partnership interests to new incoming partners involving no name change, there should be a formal written withdrawal of present partners and acceptance of the partnership by the incoming partners.
2.
Once you have received the foregoing only then is it necessary to secure any and all necessary authorizations from the current members of the partnership or consider the current partnership agreement. FAIRWAY ENDORSEMENT may be found in TI Endorsement Manual. Please also refer to the section of this manual entitled "Insuring Incoming Stockholder or Partnership Interests" for underwriting procedure. REQUESTS FOR NON-IMPUTATION COVERAGE Frequently sophisticated investors who are purchasing an interest in an existing partnership will request non-imputation coverage so they are not later determined to be responsible for the acts or obligations of the partnership of which they have/had no knowledge at the time of their acquisition. This is particularly hazardous coverage and the reader and underwriter alike are strongly encouraged to review the sections dealing with such coverage in both Title Insurance Principles and Exception Language and Instructions as to the use of Title Insurance Endorsements.
11/89 rev. 1/96
Chapter 30 - Page 2.1 PARTNERSHIPS Underwriting
PARTNERSHIPS IMPUTATION OF KNOWLEDGE ISSUE Title insurers are frequently requested to provide some form of non-imputation coverage in title policies insuring large commercial transactions involving either equity participation or a transfer and substitution of personal partnership or corporate stock interests. Purchasers of partnership interests, joint venture interests or shares in corporations want to protect themselves from the acts of other partners. In their effort to do so, they attempt to shift to the title insurer, the risk that notice or knowledge of existing or departing partners, venturers or shareholders might affect the title to the real property owned by the entity and, thereby, reduce the value of their investment. Therefore, an Endorsement is requested which provides that the company will not deny liability to one partner based upon acts imputed to him by operation of law. Issuance of the Endorsement involves a considerable degree of risk, requires careful underwriting, and should not be done without the express approval of the corporation and/or regional underwriting department. The Rules of imputation of knowledge are found in agency law, although they are frequently applied to both partnership of corporate law. The general rule is that a principal is bound by the knowledge of its agent. An incoming investor who obtains an interest in an existing partnership or corporation, is not entitled to the bona fide purchaser status under the recording acts, i.e., he is not protected against those parties who may claim an interest in the real estate by virtue of their dealings with former partners. Under the Application of Partnership Law, when considering the relation of partners, one to another, the entire partnership, including the new investor, will have the knowledge of all other partners imputed to it, i.e., the investor partner will enter into the partnership subject to all of those facts and matters known by the existing partners, including any possible unrecorded debt, defects or encumbrances created or agreed to by them. Similar concepts of agency apply in corporation law. The incoming partner or shareholder is looking for a clean and straightforward investment in real estate. From the incoming investor's standpoint the risk of the unrecorded interest of a third-party against which it does not have bona fide purchaser protection, is of considerable consequence and to be guarded against. It is the incoming investor's concern for these unrecorded matters that prompt it to look to the title company for title insurance and protection. While we would prefer not to extend coverage insuring the equity interest of the investor, we must be willing to do so on a selective basis following uniform guidelines. This type of risk is not commensurate with the normal premium rate structure. In providing the requested coverage, the insurer will be insuring against possible off-record matters that may have been created by the original partners, and it will be waiving its defense as to possible defects in title known by the insured, not known to the company,
11/89 rev. 1/96
not appearing of record and not disclosed to the Company prior to the insureds having taken its interest in the property. If the title insurer undertakes to provide the requested coverage, it must determine that there exists no previous transactions which may give rise to an equitable claim against the real estate assets of the partnership or corporation by third parties growing out of earlier transactions with the original parties. The Company must further be assured that the existing partners/shareholders have no knowledge of any defects or encumbrances against the property. In considering giving the requested coverage, the title insurer must carefully evaluate the financial worth and integrity of the partnership/corporation and its principles and secure from all of them an affidavit which states that they have created no act, thing, trust or relationship which would give rise to any right or claim against the real estate and further, that they have neither created nor have knowledge of any unrecorded debts, defects, liens or encumbrances or other adverse matters affecting title to the real estate. In determining whether or not the requested coverage will be given, the following guidelines apply: 1. The endorsement will not be given unless the existing partners, and each of them, have a track record of competent, honest and trouble-free development and a reputation of high integrity. The financial condition of the individuals comprising the partnership/corporation must indicate that they are financially responsible parties, not involved in other transactions that are likely to put them under financial pressure. The existing partners/shareholder must furnish affidavits and personal undertakings to hold American/Meridian Title Insurance Company harmless from loss through the issuance of a Non-Imputation Endorsement. The affidavits are further to establish that neither the partnership/corporation nor the partners/shareholders have done anything to create any lien, encumbrance, transfer of interest, creation of constructive trust or other latent equity in the land whatsoever. Forms of suggested affidavit language are attached. The business records of the partnership/corporation must be examined either by American/Meridian Title Insurance Company (at it's option)or by an independent auditor or attorney who will certify that such records appear to be complete and in good order and do not disclose or suggest the existence of any such interest in land.
2.
3.
4.
11/89 rev. 1/96
5.
A substantial additional premium must be charged. The risk of loss through such off-record imputation of knowledge is not commensurate with the standard premium rates. We suggest that the additional premiums between 10 percent and 35 percent of the normal policy premium and that we not fail to make appropriate charges for the amount of work actually involved in reviewing the partnership agreements, etc.
Assuming we can satisfy ourselves, based upon statements and affidavits obtained from the existing partners, coverage may be provided similar to that set forth on the attached endorsement. Such coverage may only be given with the approval of corporate underwriting. In summary, Non-Imputation coverage represents an unusual and extraordinary risk. The company will provide the coverage on a case by case basis only after careful analysis of each particular factual situation. The more complex the organization and history of the original entity the greater the chance that interests may have been created in third parties even without conscious realization.
Chapter 30 - Page 1 PARTNERSHIPS Bankruptcy
BANKRUPTCY - RULES OF TITLE PRACTICE 1. A partnership, general or limited, may be adjudged bankrupt either separately or jointly with one or more or all of its general partners. If a partnership is adjudged bankrupt, either separately from or jointly with any or all of the general partners, property held in the partnership firm name should be administered in the partnership bankruptcy. If less than all of the general partners are adjudicated bankrupt, property held in the partnership firm name can not be administered in the bankrupt estates of the individual partners unless the consent of all unadjudicated general partners is obtained. When all of the general partners, of either a general or limited partnership, are individually adjudged bankrupt the partnership itself must be adjudged bankrupt. If all of the general partners have been adjudged bankrupt but the partnership has not been so adjudicated, conveyances by the partnership of property held in the partnership should be adjudged bankrupt and administration had by the bankruptcy court. 2. Title in Partnership Name. When title is held in the partnership firm name as shown in the recorded statement or certificate of partnership, bankruptcy proceedings affecting individual names of less than all of the general partners can be ignored unless the property is listed as an asset of the individual or the trustee in bankruptcy makes some claim to it. 3. Title in Individual Names of Partners. When title is held in the individual names of the general partners in a partnership and the partnership has been adjudged bankrupt, the bankruptcy should not be ignored unless an order of court is obtained to establish (i) the property is not subject to administration in the bankruptcy proceeding, and (ii) that the bankrupt estate has no right, title or interest therein. This rule applies whether or not a statement or certificate of partnership is recorded and regardless of the sequence in which the firm or individuals' names are shown in the ownership of the property of the bankruptcy proceeding.
Chapter 30 - Page 2 PARTNERSHIPS Bankruptcy
4.
Partnership Agreement may be the controlling factor. A major achievement of the UPA was the clarification of the general area of property interests in Partnerships. Section 24-28 of the Act set forth which specific assets of the Partnership are available exclusively for Partnership purposes and Partnership creditors. When title to partnership real property vests in the name of the partnership, the interest which a partner has in the property is personal property. In equity, real property acquired with partnership funds for partnership purposes is regarded as personal estate, so far as the adjustment of partnership rights are concerned (40 Am. Jur 172, CJS, Partnerships, sec 69-75, 103, 244, 245). As a consequence of the adoption of the UPA a partner's right in specific partnership property is not subject to judgments or involuntary liens filed against any partner individually. Prior to the adoption of the UPA, under the common law a partnership was terminated upon the death, withdrawal or bankruptcy of an individual partner. Following the adoption of the UPA that is no longer the case, i.e., the partnership does not automatically terminate upon the occurrence of such an event. You have to look to the provisions of the Partnership Agreement. Absent a statement of such intent within the terms of the agreement itself, the Partnership is no longer terminated upon the death, withdrawal or bankruptcy of an individual partner. However, under the UPA, all or any of the continuing partners have the option thereafter, to cause the dissolution of the firm, in contravention of the Agreement. Therefore, it is necessary to (i) thoroughly review the Partnership Agreement and (ii) further determine that there is no intention on the part of the continuing partners to dissolve. Providing the property is held in the name of the Partnership and there is no intention on the part of the continuing partners to dissolve, it is not necessary to obtain the consent of an individual partners trustee in bankruptcy or the bankruptcy courts approval to the execution of any deed or mortgage on behalf of the Partnership following adjudication of one of the members as bankrupt because, as set forth above, the interest of the individual partner in the property of the partnership is personality. A partners rights in specific Partnership property is not subject to claim, attachment or execution except on a claim against the Partnership.
8/78
Chapter 30 - Page 1 PARTNERSHIPS COMPENDIUM OF NEW YORK LAW
DEFINITION A partnership is an association of two or more persons to carry on a business as coowners for profit. (N.Y. Partnership Law 10, 1948). An "indispensable requirement" of a partnership is that there must be a mutual promise of undertaking of the parties to share in the profits of the business and to cover the losses. (Milter v. Friedeberg, 222 N.Y.S. 2d 480 (1961)). WHO MAY BE PARTNERS Two or more persons must associate to carry on a business as co-owners for profit. The word "person" includes individuals, partnerships, corporations and other associations. (N.Y. Partnership Law 2, 1948). GENERAL PARTNERSHIPS - FORMATION A general partnership in New York is governed by New York law which has adopted the Uniform Partnership Act. (N.Y. Partnership Law 1-82, 1948). The following rules determine whether a partnership exists: 1) Persons who are not partners as to each other are not partners as to third persons, unless the doctrine of partnership by estoppel applies; 2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property or part ownership does not, of itself, establish a partnership; The sharing of gross returns does not, of itself, establish a partnership; The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. However, no inference can be drawn if the profits were received in payment as: a) a debt; b) wages of an employee; c) rent to a landlord; d) an annuity to a surviving spouse or representative of a deceased partner; e) interest on a loan; and f) consideration for the sale of the goodwill of the business or other property. (N.Y. Partnership Law 11, 1977).
3) 4)
8/78
The existence of a partnership must be determined by the circumstances. One of the tests which can be used is the intention of the parties which can be determined by their acts and the character in which they regard their relationship. (Keen v. Jason, 187 N.Y.S. 2d 285 (1959)). LIMITED PARTNERSHIP - FORMATION A limited partnership is a partnership formed by two or more persons, having at least one or more general partners and one or more limited partners. The limited partners are not bound by the obligations of the partnership. (N.Y. Partnership Law 90, 1948). The limited partnership resembles a corporation more than a general partnership because the principal-agent relationship of a general partnership is not present between the limited and general partners of a limited partnership. (Lynn v. Cohen, 359 F. Supp. 565 (1973)). The object of the limited partnership is to protect the limited partner by exempting him from liability. (Lanier v. Bowdoin, 282 N.Y. 32, 24 N.E. 2d 732 (1939)). Requisites for forming a limited partnership are outlined in 91 of N.Y. Partnership Law. Two or more persons must sign and acknowledge or swear to a certificate containing these requisites and file the certificate in the office of the county clerk where the principal place of the partnership business is situated. (N.Y. Partnership Law 91, 1948). The failure to comply with these requirements precludes the formation of a limited partnership but makes the association a general partnership. (Peerless Mills, Inc. v. American Tel. & Tel. Co., 527 F.2d 445 (1975)). However a limited partnership is formed if there has been substantial compliance in good faith with these requirements. (N.Y. Partnership Law 91, 1948). PARTNERSHIP - ACQUISITION AND CONVEYANCE Generally, partnership property consists of: 1) all property brought into the partnership or subsequently acquired on account of the partnership and 2) property acquired with partnership funds, unless a contrary intention appears. (N.Y. Partnership Law 12, 1948). Any estate in real property may be acquired by the partnership in the partnership name. If property is acquired in the partnership name, the title to the property can be conveyed only in the partnership name. A conveyance to the partnership in the partnership name passes the entire estate of the grantor unless a contrary intent appears. (N.Y. Partnership Law 12, 1948).
8/78
Any partner may convey title to real property which is in the partnership name by a conveyance executed in the partnership name. However, the partnership can usually recover the property. If title to the real property is in the partnership name, a conveyance by a partner in his own name passes the equitable interest of the partnership. If title to real property is in the name of one or more but not all of the partners, those partners in whose name the title stands may convey the title of the property if the record does not disclose the right of the partnership. A conveyance by all of the partners passes all their rights in the real property if the title to the property is in the names of all the partners. (N.Y. Partnership Law 21, 1948). A partner's property rights include: 1) his rights in specific partnership property; 2) his interest in the partnership. This interest is his share of the profits, which is considered personal property. (N.Y. Partnership Law 52, 1958). His right in the real estate owned by the partnership is personal property and he had no personal right in any 3) his right to participate in the management of the property. (N.Y. Partnership Law 50, 1948). The partner is a co-owner with his partners of specific partnership property, holding it as a tenant in partnership. As a tenant in partnership, the partner has a right in the specific partnership property which: 1) gives him an equal right with his partners to possess the property for general partnership purposes. However, he has no right to possess it for non-partnership purposes; 2) he cannot assign unless the assignment is made by all the partners; 3) is not subject to attachment or execution unless a claim is made against the partnership. If such a claim is made, the partner cannot claim the homestead or other exemptions; 4) vests in the surviving partners on his death. However, it must still be used for partnership purposes only; 5) is heirs or next of kin. (N.Y. Partnership Law 51, 1977). A partner may convey his interest in the partnership property but this conveyance does not: 1) dissolve the partnership or 2) entitle the assignee to interfere in the partnership management. The assignee is only entitled to receive the profits to which the assigning partner would be entitled. (N.Y. Partnership Law 53, 1948; Rapoport v. 55 Perry Co., 376 N.Y.S. 2d 147 (1975)). PARTNERSHIP - DISSOLUTION The dissolution of a partnership is the "change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the partnership business." (N.Y. Partnership Law 60, 1948). A partnership may be dissolved at any time by any partner. DeMartino v. Pensavalle, 391 N.Y.S. 2d 461 (1977).
8/78
The partnership is not terminated on dissolution but continues until the winding up of the partnership affairs has been completed. The process of winding up is an exclusive obligation and right of the surviving partner. (N.Y. Partnership Law 61, 1948; Niagara Mohawk Power Corp. v. Silbergeld, 294 N.Y.S. 2d 975 (1968)). If the partnership agreement has not been violated, dissolution can be caused by: 1) the termination of a definite term or particular understanding specified in the agreement; 2) the express will of any partner when no definite term or understanding is specified; 3) the express will of all the partners who have not assigned their interest away; and 4) the expulsion of any partner from the business in accordance with the partnership agreement. If the partnership agreement is violated, dissolution can be caused by the express will of any partner at any time. (N.Y. Partnership Law 62, 1948). Dissolution of the partnership can also be caused by: 1) any event which makes it unlawful for the partnership business to be carried on; 2) the bankruptcy of any partner of the partnership; or 3) a decree of a court. (N.Y. Partnership Law 62, 1948). A dissolution of the partnership may also be caused by a court decree. This method of dissolution, however, is allowed only if the acts directly affected the management of the partnership. (Jones v. Jones, 179 N.Y.S. 2d 480 (1958)). The court must decree a dissolution, if a partner applies, when a partner: 1) has judicially been declared a lunatic or is of unsound mind 2) becomes incapable of performing his part of the partnership contract; 3) has been guilty of conduct that prejudices the partnership agreement or conducts himself in a manner that makes it unreasonable to carry on the partnership business with him. The court must also issue a decree of dissolution when the partnership business can only be carried on at a loss or when other circumstances made the dissolution equitable. (N.Y. Partnership Law 63, 1948). Upon dissolution, the partners are permitted to wind up partnership affairs which were begun before dissolution. However, except for this winding up process, the dissolution terminates all authority of the partners to act for the partnership. (N.Y. Partnership Law 65, 1948). In cases where the dissolution is caused by the act, death or bankruptcy of a partner, each partner is liable to the other partners for his share of the liability which may be caused by a partner acting for the partnership as if it hadn't been dissolved. However, if the partner so acting had knowledge of the dissolution or knowledge and/or notice of the
8/78
death or bankruptcy of another partner, he alone is liable. (N.Y. Partnership Law 65, 1948). A partner can bind the partnership after dissolution by acts done in winding up the partnership or by any transaction which would bind the partnership if the dissolution had not occurred. However, the other party must have had no knowledge of the dissolution. The partnership is not liable by any act of a partner after dissolution where: 1) the partnership was dissolved because it was unlawful to carry on the business; 2) the partner has become bankrupt; or 3) the partner has no authority to wind up partnership affairs. (N.Y. Partnership Law 66, 1948). The withdrawal of a partner from a partnership does not relieve him of any of the obligations that were incurred by the partnership when he was a partner. (Application of Camhi, 208 N.Y.S. 2d 162 (1960)). However, the partner can be discharged from any existing liability by an agreement with the partnership creditor and the person of partnership continuing the business after the dissolution. (N.Y. Partnership Law 67, 1948). The partners who have not wrongfully dissolved the partnership or the representative of the last surviving partner have the right to wind up the partnership affairs. (N.Y. Partnership Law 68, 1948).
2/84
GENERAL PARTNERSHIPS 1. Definition and General The Uniform Partnership Law, with minor modifications, applies in New York. The term "partnership" is defined as "an association of two or more persons to carry on as co-owners a business for profit." (Partnership Law sec. 10 (1).) 2. Capacity to Buy and Sell Real Property Any estate in real property may be acquired in the partnership name. Title so acquired may be conveyed only in the partnership name. (Partnership Law sec. 12(3).) 1 Each partner has apparent authority to act on behalf of the partnership. However, a partnership agreement may in fact limit that authority. Any partner may convey title to real property held in the partnership name by a conveyance executed in the partnership name. The partnership may recover such property unless the partner's act was authorized or the grantee has conveyed the property to a purchaser for value without knowledge that the partner, in making the conveyance, exceeded his authority. (Partnership Law sec. 21(1).). Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes only the equitable title of the partnership, provided that the partner in so doing acted within the scope of his authority and was carrying on the business of the partnership in the usual way. (Partnership Law sec. 21 (2).) If title to real property is held in the name of some but not all the partners, and the record does not disclose the right of the partnership , the partners who hold title to such property may convey it. However, the partnership may recover such property from anyone except a bona fide purchaser for value without knowledge if the partners' act does not bind the partnership because they were not acting within the scope of their authority and were not carrying on the business of the partnership in the usual way. (Partnership Law sec. 21(3).) Where title to real property is in the name of some or all of the partners, or in a third person in trust for the partnership, a conveyance executed by a partner in his name or in the partnership name conveys the equitable interest of the property if the partner in so doing was acting within the scope of his authority and was carrying on the business of the partnership in the usual way. (Partnership Law sec. 21 (4).) A conveyance executed by all the partners passes all their right in real property the title to which is in the names of all the partners. (Partnership Law sec. 21(5).
2/84
3.
Dissolution and Winding up A partnership may be dissolved without violation of the partnership agreement by (a) the termination of the term of specific undertaking of the partnership; (b) the express will of any partner when no definite term or undertaking is specified in the partnership agreement; (c) the express will of all the partners or (d) the expulsion of any partner from the business in accordance with the terms of the partnership agreement. (Partnership Law sec. 62(1).) Dissolution in contravention of the partnership agreement may also be caused by the express will of any partner at any time, by any event which makes the business of the partnership unlawful, by the death of any partner, by the bankruptcy of any partner of the partnership or by court decree under sec. 63 of the Partnership Law. (Partnership law sec. 62(2)-(6).)
A partnership is not terminated upon dissolution, but continues until the winding-up of the affairs of the partnership is completed. (Partnership Law sec. 61; Ben-Dashan v. Plitt, 58 A.D.2d 244, 396 N.Y.S.2d 542 (4th Dep't 1977).) The mere dissolution of a partnership does not destroy the joint interest of the co-partners in the partnership property. Roby v. American Central Insurance Co., 120 N.Y. 510 (1890). When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, unless the partnership agreement provides otherwise, may have the partnership property applied to discharge the partnership liabilities and the balance applied to pay in cash the net amount owing to the partners. (Partnership Law sec. 69(1).) When dissolution is caused in contravention of the partnership agreement each partner who did not cause the wrongful dissolution is entitled to the rights set forth in the preceding sentence as well as a right for damages for breach of the partnership agreement against the partner who caused the wrongful dissolution. (Partnership Law sec. 69(2).) LIMITED PARTNERSHIP (DOMESTIC) 1. Definition and General Limited Partnerships have no common law basis, and are entirely statutory. A limited partnership is a partnership formed by two or more persons under the provision of sec. 91 of the Partnership Law consisting of one or more general partners and one or more limited partners. (Partnership Law sec. 90.) 2. Limited Partnership - Formation Two or more persons desiring to form a limited partnership must sign and acknowledge a certificate which contains certain information required by the statute and file such certificate in the office of the county clerk of the county in which the principal office of the partnership is located. (Partnership Law sec. 91(1)(a).) Immediately after the filing of the certificate a copy of such certificate
2/84
must be published once per week for six successive weeks in two newspapers of the county in which such certificate was filed (Partnership Law sec. 91(1)(b)), provided, however, that the continued existence of the limited partnership is conditioned upon completion of the specific requirements. A limited partnership is formed and may commence its business upon the filing of its certificate and the first weekly publication of such certificate. (Partnership Law sec. 91(1)(b).) 3. Capacity to Buy and Sell Property A general partner in a limited partnership has the same rights and powers and is subject to the same restriction and liabilities as a partner in a partnership without limited partners. (Partnership Law sec. 98). (See "Partnerships-Capacity to Buy and Sell Property.") A general partner may not, without the written consent or ratification of the specific act by all the limited partners, do any act in contravention of the limited partnership certificate or which would make it impossible to carry on the ordinary business of the partnership, or assign the rights in specific partnership property, for other than a partnership purpose. (Partnership Law secs. 98(1)(a), (b) and (d).) It has been held that a transfer of all of a limited partnership's assets without the consent of all of the limited partners is illegal since such a transfer makes it impossible for the limited partnership to carry on its ordinary business. Executive Hotel Associates v. Elm Hotel Corp., 41 Misc.2d 463, 245 N.Y.S.2d 935 (Civ. Ct. 1963), aff'd, 43 Misc.2d 153, 250 N.Y.S. 2d 351 (App. Term 1964); Newburger, Loeb & Co. v. Gross, 563 F.2d 1057 (2d Cir. 1977), cert denied, 434 U.s.1035 (1978) (applying New York law). However, the necessary consent may be found where the limited partnership agreement specifically contemplates and provides for the transfer made. Mist Properties, Inc. v. Fitzsimmons Realty Co., 228 N.Y.S.2d 406 (Sup. Ct. 1962). But see Newburger, Loeb & Co. Inc. v. Gross, 365 F. Supp. 1364 (S.D.N.Y. 1973), aff'd, 563 F.2d 1057 (2d Cir. 1977), cert denied, 434 U.S. 1035 (1978). FOREIGN LIMITED PARTNERSHIPS 1. Definition A foreign limited partnership is defined as: A partnership formed under the laws of any other state or territory or of any other country having as members one or more general partners and one or more limited partners and in which the limited partners as such are not bound by the obligations of the partnership. (Partnership Law sec. 120.)
2/84
CAPACITY TO BUY AND SELL REAL PROPERTY The statute authorizes a foreign limited partnership which has received a certificate of authority to do business in New York to purchase real property in New York in furtherance of its business and to convey real property in the same manner as a domestic limited partnership. (Partnership Law sec. 120-e.) Absent authorization to do business in New York, a foreign limited partnership duly formed in its home state may acquire, hold and dispose of real estate in New York, but the limited partners may have the liability of general partners in New York. However, until a limited partnership complies with sec. 120-a, et al. of the Partnership Law and obtains a certificate to do business in New York, it will be denied access to New York courts.
7/79
Chapter 30 - Page 1 PARTNERSHIPS Closers Memo Settlement Requirements
Whether or not the proper partnership exceptions have been raised in the commitment, Closers are responsible for procuring the proper clearance proofs when they become aware of partnership existence. The following are to be procured: Copy of the Partnership Agreement Proof by affidavit of the following: (1) (2) (3) The partnership is still in existence and active There have been no changes in the original partnership agreement since its inception The partnership has not been dissolved by reason of the death or insolvency of any of the original partners
The closer is charged with reading the partnership agreement very carefully. If it is found that the articles of co-partnership in any way limit the right of a general partner to execute the closing instruments, office counsel is to be advised.
4/73
Chapter 30 - Page 1 PARTNERSHIPS Federal Liens Law Memo
MEMO FROM MR. PEDOWITZ I have your memorandum requesting permission to eliminate the requirement that searches be made for federal tax liens against the names of the individual partners when we have title in the name of a partnership. I regret that I cannot give you permission to do so and that Law Bulletin No. 18 will have to continue to be observed. Under Title 26, Section 6321, of the U.S. Code, a notice of federal tax lien is a blanket lien on all property belonging to the delinquent taxpayer as well as a lien on all of his rights to property. There is concern that the notice of federal tax lien may be a lien not only on the individual assets of the general partner but that it may also be a lien on the partnership assets. I have checked the rules of title practice that are applicable to the parent company in California and I find that they, too have a similar rule requiring the running of federal tax lien searches against the name of the individual partners notwithstanding that title is in the partnership name. In California, too, they have the Uniform Partnership Act which is almost identical to ours. It does seem somewhat incongruous but we will have to continue running these searches.
8/9/79
Chapter 30 - Page 1 PARTNERSHIPS Foreign Limited Partnership Chap. 519, Laws 1979 Law Note
Under the old law the procedure was to file a Section 91 proceeding which required the parties to file a certificate of Limited Partnership and publish in the newspaper six (6) times. See Section 91 Partnership Law and Memo on new law attached. Also see Rifkins article. It is TG's position that failure to publish constitutes lack of substantial compliance with Section 91 and is fatal to the title. Your attention is called to the fact that the effective date of Chapter 519 of the Laws of 1979 requiring that foreign limited partnerships obtain a Certificate of Authority in New York in order to do business or acquire, hold or dispose of real property in this State (page 3 of our 1979 Summary) is 1/1/80 not 1/1/79.
8/13/79 1979
Chapter 30 - Page 1 PARTNERSHIPS Chapter 519 of the Laws of Legal Bulletin
This statute has a number of inconsistencies. Section 120-a states: Certificate of Authority acquired . 1. No foreign limited partnership shall do business or acquire, hold or dispose of real property in this state until it shall have received from the Department of State a Certificate of Authority to do business in this state. and Section 120-e states: A foreign limited partnership which has received a certificate of authority to do business in New York may acquire and hold real property in this state in furtherance of its limited partnership business and may convey same by deed or otherwise in the same manner as a domestic limited partnership. However, in contrast with the above two, Section 120-f states: Validity of contracts; ability to defend. 1. The failure of any foreign limited partnership, that is doing business in New York, to comply with the provisions of this article, shall not affect the validity of any contract or transaction with the foreign limited partnership. 2. A foreign limited partnership doing business in this state without having received a certificate of authority to do business in this state shall not maintain any action or special proceeding in this state unless and until such partnership shall have received a certificate. 3. The failure of any foreign limited partnership that is doing business in this state, to comply with the provisions of this article shall not prevent the foreign limited partnership from defending any action or special proceeding in this state. and further Section 120-h, Paragraph 2 states: 2. Limited partners of a foreign limited partnership doing business in this state, or acquiring, holding, or disposing of real property in this state without having received from the department of state a certificate of authority pursuant to this article, or having otherwise violated this article shall nevertheless be entitled to limited liability in New York to the same extent as is afforded in the state, territory, or country where the foreign limited partnership was created. In no event shall the liability to which such limited partners are subject be more limited than that of limited partners in a limited partnership organized under the laws of this state. It appears while a foreign limited partnership may be prohibited from taking title in this state the mere fact it is done does not render title bad. I would have no qualms insuring title into an entity which states itself to be a foreign limited partnership, but our policy should state:
8/13/79 1979
Chapter 30 - Page 2 PARTNERSHIPS Chapter 519 of the Laws of Legal Bulletin
XYZ, organized in Fee title vested in New York, as a limited partnership. We might consider an exception as follows:
, but not filed in
"Policy excepts any loss, claim or damage that might result from the failure to file a Certificate of Authority with the Secretary of State pursuant to Article 8A of the Partnership Law." I think this is a bit strong. Has the New York State Land Title Association taken this matter up as year? If so, was there any decision? Thank you.
9/7/79
Chapter 30 - Page 1 PARTNERSHIPS Law Note Limited Partnerships (Foreign)
The increased activity and real estate investment by foreign limited partnerships in New York has highlighted the omission of any reference to them in the New York Partnership Law. A new Article 8-A (Partnership Law Sections 120, 120-1) affecting Foreign Limited Partnerships, will be added to the Partnership Law on January 1, 1980. The Act is not prospective only. It will apply to all foreign limited partnerships that now or in the future do business or acquire, hold or dispose of real property in the state. A foreign limited partnership will be required to obtain a Certificate of Authority to do business from the Department of State. The certificate will be issued only after the filing with the Secretary of State of a duly authenticated copy of its organizational certificate and amendments as filed in the home state or country. It must be accompanied by a filing fee of ten ($10.00) dollars and an affidavit verified by a general partner containing sixteen elements of required information (Section 120-b), unless already included in the organizational certificate. One of the requirements is a designation of the Secretary of State as the agent upon whom process against the foreign limited partnership may be served. Provision is also made days after filing in the home state or country. The failure to obtain the Certificate of Authority does not affect the validity of contracts or transactions with the foreign limited partnership. Neither does it affect the limitation on the liability of the limited partners as otherwise extant, but the liability of the limited partners can be no less than is permissible under New York law. However, failure to obtain the required certificate denies the limited partnership access to New York courts to maintain any action or special proceeding; but only until it receives a certificate. However, it is not prevented from defending any action or special proceeding. Provision is also made whereby the Attorney General may bring an action to restrain the doing of business without the required Certificate of Authority or to annul a certificate previously issued. Provision is also made for the surrender of the authority to do business in the state and the filing of a certificate to that effect with the Department of State. Notwithstanding such surrender of authority, the Secretary of State's authority to receive process on behalf of the foreign limited partnership generally continues. No provision is made in the law either for the acceptance of filings or for the issuance by the Secretary of State of a Certificate of Authority before January 1, 1980. Foreign limited partnerships now doing business in the state might be well advised to prepare the necessary filings in advance so that any delay in obtaining the certificate can be minimized. This could be particularly important to owners or mortgagees involved in some form of litigation early in 1980.
9/7/79
Chapter 30 - Page 2 PARTNERSHIPS Law Note Limited Partnerships (Foreign)
Accordingly, where we certify title to a fee interest, leasehold or mortgage held by a foreign limited partnership, we should continue to certify title as heretofore without indication in the certification whether or not a Certificate of Authority has been issued by the Secretary of State. However, the report and policy should contain an exception as follows: "Any loss, claim or damage by reason of the failure to receive a Certificate of Authority from the Secretary of State pursuant to Article 8A of the Partnership Law, but the policy will nevertheless insure that the title or interest as set forth herein is vested in the insured." This exception should not be omitted unless the Certificate of Authority of the Secretary of State is submitted.
4/78
Chapter 30A - Page 1 PARTY WALLS General
PARTY WALLS WHAT CONSTITUTES

By ordinary usage a party wall is one between two adjoining owners built at common expense and used for common advantage.46 It is not necessary, however, that it be built at the expense of both adjoining owners. Frequently, such walls are constructed by the single owner of both lots who builds buildings on both tracts with a common wall between. Usually, it is built in such a way that half of it is on each lot, but this is not essential.47 Although the wall is entirely upon the premises of one of two owners of adjoining lots, it may still be a party wall under certain circumstances, and the rights of the parties may be determined by the use which they have made of it for a period of time sufficient to create a prescriptive right.48 A wall dividing two portions of a double frame house, each portion being in the ownership of different persons, may be a party wall where it appears that it was built with the express intention of having it serve such a purpose.49 The term "party wall" does not necessarily imply an absolutely solid structure and there is no rule requiring a wall to be such a structure in order to be a party wall.50 Each of the two adjoining owners of a party wall owns in severally so much of the wall as stands upon his own lot, each having an easement in the other strip for purposes of the support of his own building.51 CREATED BY PRESCRIPTION A common wall existing between two adjoining structures acquires a status comparable to that of a party wall if it has been in common use for the requisite time and an easement has accordingly, developed through prescription. 52 A party wall by
Spero v. Schultz, 14 AD 423, 43 NYS 1016, affd 160 NY 660, 55 NE 1101; see Adams v. Hahne, 59 Misc 2d 827, 300 NYS2d 420 (1969).
47 46
See 5E.73rd Inc. v. 11 E. 73rd St. Corp., 16 Misc 2d 49, 183 NYS2d 605 affd 13 AD2d 764, 217 NYS2d 1017. Pearsall v. Westcott, 30 AD 99, 51 NYS 663.
48
Schneider v. 44-84 Realty Corp., 169 Misc 249, 7 NYS2d 305, affd 257 AD 932, 12 NYS2d 1022, leave to appeal denied 258 AD 958, 14 NYA2d 279.
50
49
Hamman v. Jordan, 129 NY 61, 29 NE 294 5 E. 73rd Inc. v 11 E 73rd St. Corp., N 2 supra.
51
52
Browning v. Goldenberg, 36 Misc 438, 73 NYS 759, affd 71 AD 616, 76 NYS 1010;' Schile v. Brokhahus, 80 NY 614
prescription, however, gives the adjoining owners only such rights and easements therein as they have possessed and exercised. The wall, consequently, is not a party wall within the full meaning of the term.53
53
Mollenhauer v. Wolfe, 118 Misc 390, 193 NYS 348, affd 207 AD 869, 201 NYS 926; Pearsall v. Westcott, 30 AD 99, 51 NYS 663.
An easement for continued maintenance of a common wall can not be defeated by mere lack of knowledge on the part of the owner of the servant premises.54 However, the fact that the wall of an adjoining building has been used for support under an implied or oral license prevents the creation of an easement in favor of the licensee of his successors.55 DEMOLITION The easement ceases when the buildings are demolished. Douglas v. Coonly, 156 N.Y. 521. Heartt v. Kruger, 121 N.Y. 386. Brooks v. Curtis, 50 N.Y. 639. Negus v. Becker, 143 N.Y. 303. Katz v. Kaiser, 154 N.Y. 294. Herrman v. Hartwood Holding Co., 193 A.D. 115. Mollenhauer v. Wolfe, 193 N.Y. Supp. 348 201 N.Y. Supp 926. Bull v. Burton, 227 N.Y. 101. Wechsler v. Elbeco Realty Corp., 119 Misc. 178. Eno v. Del Vecchio,4 Duer, 53. Mittnachi v. Slevin, 67 Hun, 315, affd., 142 N.Y. 683 Partridge v. Gilbert, 15 N.Y. 601. American Exp. Co. v. Lassen Realty Co., 205 A.D. 238. PARTY WALLS - AS A MONUMENT Darling v. Alexander, 130 A.D. 85; 114 N.Y. Supp. 334. PARTY WALLS-WINDOWS Placing windows in a party wall violates the agreement in the absence of a provision authorizing such openings, and may be enjoined. Metzger v. 46 West 95th St., Inc., 216 A.D. 289; 214 N.Y. Supp. 664; affd., 244 N.Y. 520 WINDOWS Ordinarily, the main purpose of a party wall is for support of the buildings, and in the absence of agreement to the contrary windows are not proper in such a wall.56
54
Browning v. Goldenberg, N 7 supra. Munter v. Kobre, 107 Misc. 261, 177 NYS 392.
55
56
National Commercial Bank v. Grag, 71 Hun 295, 24 NYS 997, affd 144 NY 701, 39 NE 835; 5E 73rd Inc. v. 11 E. 73rd St. Corp., N 6 supra.
USES Either owner has the right to use the party wall for such purposes as are necessary for the proper use of his property, as long as such use is not detrimental to the other owner.57 Since the party wall is for the common benefit of the contiguous owners, neither may subject it to a limiting use making it unavailable for the enjoyment of the other. 58 In the Varriale case supra, the court held that one of the owners could not erect a heavy sign on the roof of its building with iron beams resting on the party wall along its entire width. It was held in another case, that one owner could erect a sign on its side of the party wall as long as it was maintained by the other owner for the benefit of her building where one owner demolished the buildings supported by the party wall and erected a gas station with independent walls.59 T he insertion of beams in a party wall to support air conditioning apparatus constituted a proper use of the wall and could not be enjoined in the absence of proof of injury to the contiguous building or the contiguous owners' use of the wall.60 It controls the description of the property. 61 This applies when the property is definitely bounded by the party wall or where the remaining description carries the lines of the property. If the description runs through the center of a party wall, however, without expressly going to the center, the given distances control, and the party wall is not a monument.62 This applies even though the description states that it goes through the party wall.63 PARTY WALL NOT ON BOUNDARY LINE Although the center of a party wall is one to two inches off the boundary line, it has been held not to be a substantial objection to the title.64 AS AN ENCUMBRANCE A party wall is not considered as a legal encumbrance on property since the mutual easements are a benefit, not a burden.65 Consequently, a purchaser at an auction may
57
American Ry Express Co. v. Lassen Realty Co., 205 AD 238, 199 NYS 744. Varriale v. Brooklyn Edison Co., 252 NY 222, 169 NE 284. Mileage Gas Corp. v. Kushner, 245 AD 836, 281 NYS 432.
58
59
60
Spring Realty Corp. v. Ryan, 206 Misc 37, 132 NYS2d 420. Muhlker v. Ruppert, 124 NY 627, 26 NE 313. Smyth v. McCool, 22 Hun 595. Meadows v. Michel, 135 AD 213, 120 NYS 319. Levy v. Hill, 50 AD 294, 63 NYS 1002.
61
62
63
64
not refuse to complete his purchase, even though the description does not mention the party wall. The mutual easement for wall support gives the building the benefit of more inside room, and its value is not diminished because it is equally beneficial to the contiguous owners.66 However, a party wall entirely on one lot and subject to sue by the other lot by written agreement, is an encumbrance.67 Furthermore, a party-wall agreement is an encumbrance entitling the purchaser to refuse to complete the sale where it contains a covenant running with the land which compels the owner to repair and rebuild.68 This rule seems applicable even though the agreement provides for the repair and rebuilding of the wall at the joint expense of the parties.69 RIGHT TO EXTEND Either party may extend the party wall if it can be done in such a manner that both parties may use it. If an entirely independent wall is built by one on his own property, he cannot hang any part of it on the party wall or use the party wall at all.70 An agreement between the parties with regard to an extension, controls. Accordingly, a co-owner of a party wall who authorized the other owner to extend the party wall by written agreement, is entitled to an injunction compelling the owner who extended the wall to close up window openings placed in the extension where this right did not exist in the agreement.71 RIGHT TO INCREASE HEIGHT A party wall's height may be increased by either proprietor if such increase can be accomplished without detriment to the wall or the adjacent property. Such work is done at the builder's peril, moreover, and he is liable for all damages.72 The addition must be so constructed that it may be used by both owners,73 and the work may be enjoined if it would cause a detriment to the other owner.74
65
Brooks v. Curtis, 50 NY 639. Hendricks v. Stark, 37 NY 106; Partridge v. Gilbert, 15 NY 601. Giles v. Dugro, 8 NY Super 331; Mohr v. Parmelee, 43 NY Super 320. O'Neil v. Van Tassel, 137 NY 297, 33 NE 314. Corn v. Bass, 43 AD 53, 59 NYS 315.
66
67
68
69
70
American Ry. Express Co. v. Lassen Realty Co., 205 AD 238, 199 NYS 744; Herman v. Hartwood Holding Co., Inc., 193 AD 115, 183 NYS 402.
71 Metzger v. Forty-six W. Ninety-fifty St.
, 216 AD 289, 214 NYS 664, affd 244 NY 520, 155 NE 880.
72
Brooks v. Curtis, 50 NY 639. Herman v. Hartwood Holding Co., Inc., N 25 supra. American Ry. Express Co. v. Lassen Realty Co., N 25 supra.
73
74
RELEASE OF RIGHT The owners may release the right to use a party wall. A release of a party-wall agreement by the fee owner, however, is insufficient to dispose of it without the mortgagee's consent.75 RIGHT TO RAZE BUILDINGS One owner of property using the party wall may tear down the building on his land. In the absence of a statute to the contrary, he is not liable to protect the party wall against the elements by covering exposed portions, as long as the demolition work is properly performed. He may be liable to the other proprietor, however, if injury results because of the manner in which the property was demolished.76 An unnecessary change in the party wall, unrelated for the purpose of repairs, may subject a party to a suit for damages caused thereby.77 Therefore, where one tears down part of a party wall under a claim that it is built entirely on his own land and intends to erect a new one without giving any benefit of it to the adjoining owner, he is liable to the adjoining owner for the damages that result.78 Although the demolition of a party wall by one party without permission of the co-owner, subjects the former to an action for damages resulting from his acts, 79 a wall that has deteriorated may be torn down and rebuilt by either party, on reasonable notice, without incurring liability80 ally , to rebuild the wall or maintain it for the other's benefit. After destruction of the wall, each party owns those portions of their premises previously covered by the wall, unqualified by the easements, without any right to compel re-erection of the wall or demand contribution therefore, and may make any use of their property they wish.81 However, an easement in a stairway and party wall suspended by fire destruction of the buildings was considered as revived by the reconstruction of the buildings, as they existed originally.82
75
Maupai v. Jackson, 64 Misc. 407, 118 NYS 513, affd 139 AD 524, 124 NYS 220.
76
D'Onofrio v. Central Sav. Bank, 176 Misc 709, 28 NYS2d 331. Alberti v. Emigrant Indus. Sav. Bank, 179 Misc. 1021, 43 NYS2d 310, affd 265 AD 1046, 40 NYS2d 333.
Schneider v. 44-84 Realty Corp., 169 Misc 249, 7 NYS2d 305, afffd 257 AD 932, 12 NYS2d 1022, leave to appeal denied 258 AD 958, 14 NYS 2d 279.
78
77
Schile v. Brokhahus, 80 NY 614. Schneider v. 44-84 Realty Corp.,N 32 Supra. Friedman v. Saul, 31 Misc 52, 64 NYS 599, Partridge v. Gilbert, 15 NY 601.
79
80
81
Partridge v. Gilbert, 15 NY 601, Heartt v. Kruger, 121 NY 386, 24 NE 841, 9 LRA 135; 5 E. 73rd Inc. v. 11 E. 73rd St. Corp., 16 Misc 2d 49, 183 NYS2d 605. affd 13 AD2d 764, 217 NYS2d 1017.
82
Douglas v. Coonley, 156 NY 521, 51 NE 283.
AGREEMENT AS COVENANT RUNNING WITH LAND The character of an agreement to repair a wall or pay for it controls as to whether it runs with the land. It has been held such agreements run with the land,83 but another case held that an agreement to erect a party wall at the joint expense of the parties, was not a covenant running with the land.84 In the latter case, the wall had not been erected and the parties had merely agreed to erect one when necessary. Another case similarly held that a covenant to pay for a party wall does not run with the land if the wall is built, but the opposite is true if the wall is not built.85 The rule seems to be that if the wall is already constructed, an agreement to pay for it does not run with the land. This rule apparently also applies where one of the parties is about to erect a building and the adjoining land owner agrees to pay a portion of the construction expense. However, where an agreement is made to the effect that if future buildings are erected on the contiguous parcels requiring the use of a party wall, both parties will pay a proportionate share of the expenses, this is a covenant running with the land. Furthermore, the agreement runs with the land if it expressly binds the grantees of the parties using the wall.86 It seems that the Crawford case previously cited, established the rule. It has also been held that a party wall agreement providing for the perpetual maintenance of the wall at the expense of both parties, is a covenant running with the land.87 TITLE EXCEPTION "Rights of adjacent owners, tenants & mortgagees together with the insured hereunder in and to party walls separating the premises in question from the adjoining premises."
83
Bedell v. Kennedy, 38 Hun 510, affd 109 NY 153, 16 NE 326. Sebald v. Mulholland, 155 NY 455, 50 NE 260.
84
85
Crawford v. Krollpfeiffer, 195 NY 185, 88 NE 29; Mott v. Oppenheimer, 135 NY 312, 31 NE 1097, 17 LRA 409. Morris v. Burr, 59 Misc. 259, 112 NYS 243. Maupai v. Jackson, 139 AD 524, 124 NYS 220.
86
87
8/1/79
Chapter 27 - Page 1 LIS PENDENS Legal Bulletin
LIS PENDENS
1. Substantial changes were made in the law of Lis Pendens or Notice of Pendency, effective September 1, 1963. The statutes, formerly in Section 120 to 125 of the Civil Practice Act, are now in Section 6501 to 6513 of the Civil Practice Law and Rules. FEDERAL COURTS: Previously there was doubt whether notice of pendency could be filed in an action pending in a Federal Court. The new statute expressly permits filing in any action in a State Court or in a United States Court if the action affects real property. INDEXING: The indexing requirements have been made more stringent. The old statute required that the Notice of Pendency was effective against the defendants against whom the plaintiff directed the Notice to be indexed. The new statute requires actual indexing against the name of the defendant to make the notice effective. In a county with a block index the name of the defendant must appear in the block index to make the notice effective against him. Catch-all phrases like "et al" or "and others" are not sufficient. COMPLAINT: The requirement that the complaint be filed at or before the time of the filing of the Notice of Pendency has been retained. The complaint must be filed in the office of the clerk of the county where the affected property lies. Filing of the complaint merely in the United States Court or in the New York City Civil Court or in the office of the clerk of another county is not sufficient to make the notice effective. VERIFICATION: The former requirements that the complaint be verified before the Lis Pendens become effective has been eliminated. TIME FOR SERVICE: Under the Civil Practice Act the notice of pendency became ineffective unless a defendant was served within sixty days. Under the new law the defendant must be served within thirty days after filing of the notice of pendency unless the defendant dies within thirty days, in which case his executor or administrator must be served within sixty days after issuance of letters. EFFECT ON NOTICE AS TO DEFENDANT NOT SERVED: Note the change of language from Section 120, C.P.A. which required that a defendant be served within sixty days, to the language in Section 6512, CPLR, which requires the defendant to be served within thirty days. Under the old law a Lis Pendens remained effective against all defendants if a necessary defendant was served within sixty days. The new law may be interpreted to mean that a lis pendens is effective only against those defendants who were served within thirty days. Therefore, whenever we are asked to disregard a conveyance or
2.
3.
4.
5. 6.
7.
8/1/79
Chapter 27 - Page 2 LIS PENDENS Legal Bulletin
encumbrance recorded or filed after the notice of pendency, make sure that the defendant in question was served within thirty days after filing. If not, take the matter up with counsel. NOTE: A special term decision affirms our previous understanding of the prior law and that service on all defendants is not necessary. Washington Heights Federal Savings and Loan Association v. 685A Hancock Street Corp. (1964) 246 N.Y.S. (2d) 681.
8.
TERM & RENEWAL: The provision that a notice of pendency is effective for only three years from the date of filing has been retained. It cannot be renewed except by court order which must be filed, recorded and indexed before the expiration of the three-year period. SEARCHES: a) Although Section 6513 of the Civil Practice Law and Rules provides that a lis pendens is effective for a period of three (3) years only unless renewed, nevertheless we have determined that searches must be made for lis pendens for the entire period of the search with the same care as heretofore. The lis pendens is effective only if, within thirty (30) days after filing, a summons is served or first publication of the summons is made pursuant to an order and publication is subsequently completed. (See Section 6512 CPLR). The lis pendens often serves as an index to an action affecting the title which may have gone to final judgment. The judgment is in itself constructive notice indefinitely even though the lis pendens ceases as notice. Unsafe Buildings: Unsafe buildings lis pendenses must not be disregarded regardless of age. These are filed pursuant to Section C26-204.0 of the administrative code. The Corporation Counsel claims that these are not affected by the three year limitation in Section 6513 of the Civil Practice Law and Rules. Mortgage Foreclosures: A lis pendens more than three (3) years old in an action to foreclose a mortgage that has not gone to judgment may be disregarded if the mortgage has been satisfied of record. Mechanics' Liens Foreclosures: A lis pendens more than three (3) years old in an action to foreclose a mechanics' lien may be disregarded if judgment has not been entered in the action. Other Cases: In other cases where the lis pendens is more than three (3) years old and the action has not gone to judgment, the reader should consult counsel to determine whether or not the lis pendens should be
9.
b)
c)
d)
e)
8/78
Chapter 31A - Page 1 PUBLIC LANDS General
PUBLIC LANDS
STATE OWNERSHIP Lands which belong to the state and are not legally directed to be kept for or applied to any specific purpose are called unappropriated state lands. Unappropriated state lands include: 1) all escheated lands; 2) all lands conveyed to the state for the benefit of the canal fund and not devoted to any public use; 3) all lands purchased by or for the state on the foreclosure of any mortgage given on the loan of any United States deposit funds or on any loan of money for the state; and 4) all state lands lying within the limits of any city and are not devoted to any public use. (N.Y. Pub. Lands Law sec. 30, 1977). The head of any state agency which has custody or jurisdiction over any state owned lands may determine that the land is no longer necessary to the agency , and declare the land abandoned. This land becomes unappropriated state land if: 1) a declaration of abandonment is filed; 2) the commissioner of general services approves the plan; and 3) it does not affect constitutionally protected property. (N.Y. Pub. Lands Law sec 30 (a), 1977). The commissioner of general services is authorized to sell these unappropriated state lands at a public auction. He must set the lowest sum at which the lot will be sold and advertise the auction in a local newspaper. The auction must be held at the county seat of the county where the property is situated. The commissioner may also sell all the right, title and interest of the state in a street or highway which has been abandoned. He has the authority to sell, convey, remise and quitclaim all the right, title and interest of the state in unappropriated state lands which were acquired by or through a tax sale before 1905. The land must have been privately occupied under color of title continuously for twenty years or a continuous chain of title through recorded conveyances, descent or devise from the owner of record immediately before the sale to the state. The sale of such land is to be made at a private sale to those persons claiming title because of their occupation of the land under color of title or under the chain of title. (N.Y. Pub. Lands Law Sec. 33, 1977). The commission may also transfer and convey unappropriated state lands to a city, incorporated village, town or county for $1.00. The governmental body receiving the land must certify that the land will be used for: 1) local mental health facilities, 2) mental retardation facilities; 3) park, recreation, or playground; 4) reforestation; or 5) street or highway purposes. If the land is not properly improved and maintained for one or more of the above purposes, the title to the land will revert to the state of New York. (N.Y. Pub. Lands Law
Sec 34, 1977).
8/78
Chapter 31A - Page 2 PUBLIC LANDS General
The commissioner may make a grant of navigable rivers and lakes and has the authority to grant the use, occupation and jurisdiction of the navigable rivers and lakes. (N.Y. Pub. Lands Law Sec 75, 1977).
2/88
Chapter 3 - Page 1 ADVERSE POSSESSION General
POSSESSION
ACQUISITION OF TITLE Title may be acquired through adverse possession by one who is not the legal owner of the land if that person can establish that the possession was actual, open, visible, notorious, continuous hostile, exclusive and under a claim of right. COLOR OF TITLE One may acquire title by adverse possession either under color of title (a written document conveying the title to the premises which either through lack of title in the grantor or a defect in the document does not legally pass title) or, in absence of statutory or case law to the contrary, without color of title. However, it is generally more difficult to establish adverse possession without color of title. Examples of documents which may create "color of title" are void or voidable deeds, wills and defective judgments. ADVERSE POSSESSION WITHOUT JUDICIAL DETERMINATION GENERALLY NOT INSURABLE Because of difficulties in establishing title through adverse possession and the potential of litigation when insuring title derived through adverse possession, it is the general policy of the Company not to insure such titles until the title so acquired is established by a decree or judgment of a court of competent jurisdiction, in which action all necessary and proper persons are made parties and the appeal period from such decree or judgment has expired. SPECIAL CIRCUMSTANCES: REQUIREMENTS Contact the Home Office if you believe circumstances warrant the insuring of title derived through adverse possession. Any such request should include the following information: a) b) Appropriate statutory and/or case law. The factual basis establishing adverse possession. This should include such information as the use to which the property has been put, if the property is walled or fenced, duration of the possession, the amount of land affected and improvements constructed by the party claiming adverse possession. Whether affidavits can be obtained, the contents of the affidavits and the parties executing the affidavits. The party paying the real estate taxes and the number of years paid.
c) d)
e)
Whether there are instruments of record or other circumstances which would indicate that the possession was by consent or permission and therefore not
2/88
Chapter 3 - Page 2 ADVERSE POSSESSION General
adverse. f) g) Whether the possession is under color of title or without color of title. If the claim is under color of title, the nature of the instrument constituting color of title. Additionally, does the instrument cover all of the land in question or only a portion thereof?
GOVERNMENT ENTITIES: It should be kept in mind that one can generally not obtain title by adverse possession against a governmental entity.
See also Bayse, Clearing Land Titles, 2d ed., Marketable Title, Statutes of Limitation, sections 37 and 56
4/65
Chapter 3 - Page 1 ADVERSE POSSESSION Title
ADVERSE POSSESSION AND PRESCRIPTION Title by adverse possession arises where the record owner of the property has failed to keep possession and the property has been seized adversely by another. Statutes of limitation fix a time beyond which disputes and claims can no longer be brought forth for judicial determination. In the State of New York, an action to recover real property or the possession thereof cannot be maintained by a party, other than the people, unless the plaintiff, his ancestor, predecessor or grantor was seized or possessed of the premises in question within ten years before the commencement of the action (CPLR Section 212). Prior to 1932, the time specified was twenty years, it was shortened to fifteen years in 1932, and reduced again to ten years on September 1, 1963. If an action is not barred on September 1, 1963, the plaintiff gets the benefit of the Civil Practice Act or the Civil Practice Law and Rules, whichever gives him the longer time to sue, and almost invariably this would be the Civil Practice Act (CPLR Section 218). In an action to recover real property or possession thereof, the person who establishes a legal title to the premises is presumed to have been possessed thereof within the time required by law; and the occupation of the premises by another person is deemed to have been under or in subordination to the legal title unless the premises have been held and possessed adversely to the legal title for ten years before the commencement of the action (RPAPL Section 311). The mere possession of real property, no matter how long continued, would not divest the real owner of his property unless it continued for the required period under a claim of title adverse to that of such owner. The person who asserts a claim of adverse possession has the burden of proving all the facts necessary to constitute it. It has been customary to speak of adverse possession and prescription as though they are one and the same thing. In fact, by statute today, both are called adverse possession. There is however, a distinction between them. Adverse possession is regulated by statute and prescription by common law, but they are closely related. Adverse possession is the open and hostile possession of land under claim of title to the exclusion of the true owner which, if continued for the statutory period, ripens into actual title. Prescription rests upon the presumption of a grant of incorporeal rights that has become lost and after the lapse of time, this presumption ripens into a title also. It is measured by user and the adverse use must commence the same way, continue for the same period and be of the same character as the adverse possession required to make title to real estate. The analogy between the two extends to the subject of disability. (Scallon vs. Manhattan Railway Company, 185 NY 359). Generally speaking, prescription applies only to incorporeal hereditsments, such as easements, rights of way and the like. For a right of way to be established, the use must have been continuous, uninterrupted exclusive and under a claim of right with the
knowledge of the record owner.
4/65
Adverse possession titles may be divided into two classes, and the statute recognizes this distinction: 1. 2. Those based on color of title (RPAPL Sections 511 and 512) Those based on actual possession only and without color of title (Sections 521 and 522).
The titles in the first class are marketable, while those in the second class are generally not marketable until fortified by a deed or a judgment or a decree of court. The basic reason for this is that with out color of title, there neither is nor can be any written record evidence of title. Color of title is defined by statute as a written instrument claimed to be a conveyance of the premises in question, or a decree or a judgment of a competent court (RPAPL Section 511). Color of title can be based on a defective deed, such as one having a defective acknowledgment or a deed executed under a power of attorney which power is not proved. It can be based on a contract of sale where the vendee has fully performed. It can be based on a state comptroller's deed because that is not a lease but is by statute and absolute conveyance. It cannot be founded on a tax lease which runs for a period of years only. Title by adverse possession for the statutory period without color of title may be a good title, but it is not a marketable one because it rests entirely on parol evidence which may be very difficult to prove (Gorman vs. Gorman, 40 App. Div. 225, aff'd 159 NY 571). In litigation between the party in possession and the record owner, the former may have no difficulty in producing evidence sufficient to establish title by adverse possession and the presence of the record owner as a party to the litigation permits a judgment which will be binding on the latter. The same evidence may be insufficient to establish marketability of title in litigation between a party in possession and his vendee, because in this litigation the record owner cannot be bound and the evidence then available may not be available when the vendee would be called upon to defend his title. For these reasons, there is a recognized distinction in cases involving adverse possession between those involving record owner and claimant and those involving buyer and seller. Titles by adverse possession are not favored, and the seller must show that the buyer will have the means to establish the title if attacked in the future. Under our statutes, possession is not deemed adverse unless the occupant entered under claim of title exclusive of any other right founding such claim upon some written instrument as being a conveyance of the premises or upon a decree or a judgment of some competent court (RPAPL Section 511). In all other cases, the occupation is presumed to be under the legal title where one is established. A squatter can never obtain title by adverse possession because his possession is not under claim of title.
There are five essential elements for adverse possession: 1. 2. 3. 4. 5. The possession must be hostile and under claim of right, It must be actual, Must be open and notorious, Must be exclusive and Must be continuous
(Belotti vs. Bickhardt, 228 NY 296). Of course, it must be for the statutory period and there should be evidence to show that there is no saving to any person on account of personal disabilities. Tacking: The possession of successive persons must be continued by a regular chain of privity between them. The mere surrendering of possession by one to the other is not sufficient. The grant must include the premises in question. As you know, as title insurers, we do not pass title on fifteen years now ten years, possession. The period may be extended in many ways, by infancy, incompetency, imprisonment, military service, outstanding life estates, etc. Section 208 of the Civil Practice Law and Rules is very helpful in providing that the time for bringing an action is extended by incompetency and imprisonment to three years after the cause of action accrues. Infancy extends the time to ten years after the infant attains his majority. Another weakness of a title based on adverse possession is that it is outside the record and may be difficult to prove. Tender of title by adverse possession must not only be accompanied by proofs of possession, but also by proofs that none of the persons having possible interests were under any legal disability, so that the statute of limitations would not run against them. Without the latter proof, however, it has been held that forty-two years possession was sufficient. Infancy can only extend the period of limitations to thirty one years, that is, ten years added to the time limited after the disability has ended (CPLR Section 208). The possibility of insanity is too remote to be considered without evidence to support it (Wanser vs. DeNyse, 125 App. Div. 209, aff'd. 192 NY 537). But Lalor vs. Tooker (130 App. Div. 11) held that twenty-seven years possession does make a marketable title in the absence of proof as to whether during that period any of the owners' heirs were infants or had been adjudged incompetent. An affidavit establishing title by adverse possession should state facts such as would be stated when testifying in court and should be made by a person who has sufficient knowledge of the facts that he would be permitted to testify concerning them in court, and such knowledge should appear from the affidavit. The affidavit should
contain: the chain of title showing the color of title; the description in full; buildings and improvements
and fences and hedges, referring to surveys, if any; who occupies the premises; when possession was started and continuous; leases, if any; the payment of taxes and by whom; photographs; family history of the party against whom adverse possession is running to negate the possibility of disability. The affidavit should be in detail; the more homily, the more impressive. As mentioned earlier, without color of title, title may be good but it is not marketable, and thus not insurable. Two parcels had been in the possession of one family for more than fifty years, but because of a difference in standard, there was a three-inch strip between the parcels, which strip had been built upon for sixty years, but there was no color of title to the strip. The Board of Counsel required that a deed with a perimeter description be recorded to start color and agreed to insure against ouster for fee insurance. (Board of Counsel, February 1, 1956, Page 19) Adverse possession by a tenant in common: Section 541 of the Real Property Actions and Proceedings Law enacted in 1949 as Section 41-a of the Civil Practice Act provides that the occupancy of one tenant in common is deemed to have been the possession of the other, "but this presumption shall not be made after the expiration of ten years of continuous occupancy by one such tenant or after ouster of one tenant." Such presumption does not add to the limitation already existing, but it is one of fact limited to run from the beginning of proof of actual continuous occupancy by one tenant in common, and to that extent, concurrently with the statutory adverse possession required as the third party and not consecutively. The disability of infancy does not extend Section 541 until the infant's majority, then for ten years of presumed tenancy in common and fifteen years more, now ten years, of adverse possession after the presumption. An infant has his time extended by his disability by ten years only (CPLR Section 208). The plaintiff and defendant were tenants in common of a farm. Plaintiff took possession in 1934, operated it as a farm continuously, fenced it in, erected various buildings at great expense and paid all the taxes. The defendant obtained his majority in 1942 and knew of the plaintiff's use. Held: The plaintiff acquired title by adverse possession of the property by complying with all of the requirements of Article 5 of the Real Property Actions and Proceedings Law. Defendant's time was extended for ten years because of his infancy and all rights of the defendant to oust the plaintiff expired in 1952 (Graham vs. Graham, 4 Misc. 2d 303). Adverse possession by lessee: Where the relation of landlord and tenant has existed between any persons, the possession of the tenant is deemed the possession of the landlord until the expiration of ten years after the termination of the tenancy or where no written lease, until the expiration of ten years after the last payment of rent when the presumption ceases (RPAPL Section 531). Adverse possession against the State: Title to land under water can never be acquired by adverse possession. When property of the state is inalienable under statute or otherwise,
title cannot be obtained by adverse possession. It has been said that adverse possession
will run against lands owned by the state as a proprietor only, but not that owned as a sovereign. Section 211 of the Civil Practice Law and Rules bars an action to recover lands owned by the state after twenty years, reducing the period of limitations from forty years. Generally, we decline to insure an easement claimed to arise by prescription based on use alone without instruments of record creating such an easement. Occasionally, the Board of Counsel has insured that "access over an existing right of way as laid down on the ground will not be disturbed" without a record easement, but those are special instances and each should be submitted to counsel. A right of way by prescription need not be enclosed, cultivated or improved, such requirements are for adverse possession of land (CPLR Section 521). The section does not apply to incorporeal rights of user. The plaintiff in the coal and accessory business traveled a path about 250 feet long over the defendant's land to a public highway, sometimes twenty-five times a day from 1909 without objection to 1946. The plaintiff alone repaired the road. The judgment for the plaintiff was that he had a perpetual right of way by prescription. The evidence supported the finding that the plaintiff and his predecessor used the right of way openly, notoriously, continuously, and adversely under claim of right for more than twenty years. (DiLeo vs. Pecksto Holding Corp., 304 NY 505). In an action to establish a right over a roadway connecting two highways used by the plaintiff, his predecessors in title and the general public, where the use was not adverse nor exclusive but was by implied consent of the owner of the land through which the roadway extended, the court held that the plaintiff acquired no easement by prescription. (Pirman vs. Confer, 273 NY 357) Easements by Prescription - Telephone Wires: Section 261 of the Real Property Law provides: "Whenever any wire or cable used for any telegraph, telephone, electric light or other electric purposes or for the purpose of communication otherwise than by the aid of electricity is and shall be attached to, or does or shall extend upon, over any building or land, no lapse of time whatever shall raise a presumption of any grant or justify a prescription of any perpetual right to such attachment or extension." Also see Law Bulletin No. 7 regarding wires. The enclosure of a fifty-foot strip of land as part of the main property by a hedge wall is sufficient to constitute enclosure within the meaning of Section 40 of the Civil Practice Act, now Section 521 of the Civil Practice Law and Rules. The cutting of grass by the plaintiff's predecessor in title is sufficient cultivation under this section to establish title by adverse possession. (McCosker vs. Rollie Estates, 7 AD 2d 865).
4/73
Chapter 3 - Page 1 ADVERSE POSSESSION Legal
IN GENERAL (R.P.A. & P.L. 501 ET SEQ.) Both fee titles and prescriptive easements may be acquired by adverse possession. With color of title, possession of a portion of the described premises is deemed possession of the whole except when it consists of a tract divided into lots, in which event possession of one lot is not deemed possession of any other lot. Without color of title only the premises actually occupied are deemed to have been held adversely. Title by adverse possession or prescription cannot be acquired as to registered land. (Torrens) (R.P.L. 401) ELEMENTS (R.P.A. & P.L. 511, 512, 521, 522) Under color of title land is deemed possessed and occupied when it has been usually cultivated or improved, where it has been protected by a substantial inclosure, where though not enclosed, it has been used for the supply of fuel or fencing timber either for the purpose of husbandry or for the ordinary use of the occupant. Where a known farm or single lot has been partly improved, the portion not cleared or enclosed according to usual course and custom of the adjoining county is deemed to have been occupied as the improved and cultivated part. Without color of title possession and occupancy is deemed only where land has been usually cultivated or improved, or where it has been protected by a substantial inclosure. The five essential elements of adverse possessions are: 1. 2. 3. 4. 5. Hostile possession under a claim of right, Actual possession, Open and notorious possession, Exclusive possession, Continuous possession. (306 NYS 2d 991)
TIME REQUIRED Ten years. Tacking is permitted with respect to a fee. As to prescriptive easements see: 268 App. Div. 170 (affd 294 NY 731) and 228 NY 296.
DEFINITION The actual, open, hostile possession of land, under claim of title, to the exclusion of the true owner, for 10 years. Scallon v. Manhattan Ry. Co., 185 N.Y. 359 (1906) a. If all the legal requirements are satisfied, the adverse possessor acquires title which is sufficient to support an action in ejectment against the former owner. Baker v. Oakwood, 123 N.Y. 16 (1890)
OWNERS AFFECTED BY ADVERSE POSSESSION a. The State lands which the state holds in a proprietary capacity may be acquired by adverse possession, but the statute of limitations is 20 years. CPLR 211 (c) (1) b. Public lands cannot be acquired by adverse possession. Hinkley v. State, 234 N.Y. 309 (1922)
Municipalities - lands held in a governmental capacity cannot be acquired from municipalities by adverse possession. City of New York v. Wilson, 278 N.Y. 86 Coltrone v. City of New York, 237 N.Y.S. 2d 487 (1962) (1) Lands which it holds in a proprietary capacity may be acquired by adverse possession. Long Island Research Bureau v. Town of Hempstead, 308 N.Y. 818 (1955)
c.
Landlords (1) There is a rebuttable presumption that the possession of a tenant is the possession of his landlord until the expiration of 10 years after the lease expires, or, in the absence of a lease, until 10 years after the last payment of rent. RPAPL 531
d. e.
Future Estates - A future estate cannot be defeated by the destruction of the preceding estate by disseisin. EPTL 6-5.10 Tenants in Common (1) There is a rebuttable presumption that the possession of one tenant in common is the possession of his co-tenants for 10 years. RPAPL 541 Graham v. Graham, 256 N.Y.S. 2d 888 (1965)
(2)
The presumption is rebutted by proof of an outser.
COMMON-LAW REQUIREMENTS a. The adverse possession must be: (1) (2) (3) (4) (5) Hostile and under a claim of right Actual Open and notorious Exclusive Continuous Belotti v. Bickhardt, 228 N.Y. 296 (1920);
STATUTORY REQUIREMENTS a. If the adverse possession is with color of title, then possession of all or part of the premises described, for 10 years will ripen into a title if: (1) (2) (3) The premises have been usually cultivated or improved; or The premises have been protected by a substantial inclosure; or Although not enclosed, the premises have been used for the supply of fuel or of fencing timber either for the purpose of husbandry or for the ordinary use of the occupant. RPAPL 511, 512 b. If the adverse possession is without color of title, then possession of the premises actually occupied for 10 years, will ripen into a title if: (1) (2) The premises have been protected by a substantial inclosure; or The premises have been usually cultivated or improved. RPAPL 521, 522 Van Valkenburgh v. Lutz, 304 N.Y. 95 (1952)
CONSTRUCTIVE ADVERSE POSSESSION a. The actual possession of part of another's land with the result that the occupant is deemed constructively possessed of the whole of such land.
b. c.
The adverse possession must be with color of title. Limitations: (1) (2) When the premises consist of a tract divided into lots, possession of one lot is not deemed possession of any other lot. RPAPL 511 The proportion between the land actually occupied and the whole tract must not be too large. Munro v. Merchant, 28 N.Y. 9
TACKING a. b. The adding together of successive periods of adverse possession in order to establish a title acquired thereby. Tacking is permissible by successive persons when the possession is continued by an unbroken chain of privity between the adverse possessors. Belotti v. Bickhardt, supra In 1945 A conveyed two-family house to B by deed describing a 33 feet wide lot. The lot was actually much wider because sometime past the fence along one side was erected 12 feet over onto the neighboring lot. Since 1937 the ground floor tenants in the house had cultivated a garden along the fence. These tenants remained in possession and in 1959 contracted to purchase the house from B on an installment basis. In 1963 the then owner next door tore down the fence and claimed back the 12 feet. Held, title had been acquired by B. Even though B had not owned the house for ten years, he could tack onto the tenants possession of the strip since 1937. While the tenants had not entered the strip under color of title they met the statutory requirements because the premises were fenced and cultivated. Bradt v. Giovannone, 35 A.D.2d 322 (1970)
c.
MISCELLANEOUS a. b. c. The recording act has no application to a title acquired by adverse possession. No grant, conveyance or mortgage of real property shall be void because at the time the property is being adversely possessed by another. R.P.L. 260 A purchases a house the fence to which actually encroaches across onto neighboring land. A treats the area on his side of the fence as his because he does not realize actually that he is encroaching. A need not actually "know" that he possesses the strip adversely; it is enough that he possessed it with behef that it was part of his estate.
Bradt v. Giovannone, supra
Chapter 3 - Page 1 ADVERSE POSSESSION Law Bulletin
The essentials of adverse possession are "possession" (formally for 20, now for 10 years) and "color of title". Both must be present if the title is to be regarded as marketable and, even with both present the title may not be insurable. Recent court decisions have modified the rule as to "color of title" in certain cases. In the well known case of Belotti v. Bickhardt, 228 N.Y. 296, it was held that adverse possession, even when held by mistake or through inadvertence, may ripen into a "prescriptive right" after twenty years of such possession, the actual physical occupation and improvement being, in a proper case, sufficient evidence of the intention to hold title adversely. In the Belotti case the building erected actually encroached upon the adjoining lot more than twelve feet and there was no color of title. The opinion states that ". . . it is clear that where the defense is founded on adverse possession, color of title by deed or other documental semblance or right is required, but it is equally clear that neither a deed or any equivalent instrument is necessary when the possession is indicated by actual possession (emphasis mine) and any other evidence of an adverse claim exists." The examiner should take note that it is this case and others that cause the underwriter such concerns when requested to provide affirmative coverage over encroachments. Smith v. Egan, 225 AD 586 seems to follow the ruling in the Belotti case. In the case of Wildove v. Papa, 223 AD 211 (1928), a building encroached onto adjoining property to the extent of four feet and had so encroached for more than thirty years. In this case as in the Belotti case there was not color of title, but there had existed on the adjoining property for many years two frame dwellings abutting the encroaching building. The Appellate Divison held that a title by adverse possession or through practical location of boundaries clearly establishes a Marketable title which the purchaser may be compelled to accept. It shall be noted that in this case instead of having adverse possession and color of title, there was adverse possession and practical location. AGAINST THE CITY AND STATE Title to land under water may be acquired by adverse possession as against the City of New York under certain conditions [City of New York v. Consolidated Gas C0., 217 N.Y. 1; Burns Bros. v, City of New York, 178 AD 614, affirmed 232 N.Y. 523]. Title to land under water cannot be acquired by the riparian owner against the State of New York [Hinkley v. State of New York, 234 N.Y. 309]. NB This case seems to cast some doubt on the decision in the Consolidated Gas case.
2/88
Chapter 31 - Page 1 POWERS OF ATTORNEY General
POWER OF ATTORNEY
1. GENERALLY
Titles derived through deeds executed under a power of attorney should always be closely scrutinized. 2. REQUIREMENTS: THE EXAMINER MUST DETERMINE: a) Execution of Power of Attorney:
That the power of attorney is property executed in accordance with applicable state law. In most states, a power of attorney must be executed with the same formality as is required for the instrument being executed under it. Therefore, if witnesses or the joinder of a spouse would be required to execute the instrument itself, the power must also be witnessed and/or be given jointly by the spouse. b) Power:
The power of attorney must grant full power to perform the required act, such as to convey or mortgage real property. The authority must be clearly stated. A general power to "do all things that might do..." is generally insufficient to authorize conveyancing of real property. The preferred form of power will actually describe the real property to be conveyed, with reference to the contract for sale if the principal has executed it, and then direct the attorney to execute and deliver the necessary documents to convey or mortgage in accordance with the terms of the contract. Although, in most states, a general direction to "sell and convey any and all real property owned by me..." is sufficient, it is not good underwriting practice to accept such Powers of Attorney without further inquiry. Note that "to sell" and "to convey" are not the same and that if the agent is the person who has also executed the contract, the power of attorney must contain both the power to "sell" and the power to "convey". c) Not Revoked: In most states, a power of attorney is not longer valid upon: i) ii) iii) Revocation by the principal. Death of the principal. Incompetency of the principal. Note that many states have adopted statutes providing for durable family powers of attorney which, if granted to certain named relatives of the principal, survive the factual incompetency of the principal. However, even durable family powers
of attorney generally do not survive a judicial determination of
2/88
incompetency. If a petition for determination of incompetency has been filed, or an order entered adjudging the principal incompetent, the power of attorney should not be relief upon for title insurance purposes. iv) v) Bankruptcy or insolvency of the principal. If any petition or order has been filed, do not rely upon any power granted prior to discharge. In some states, the subsequent marriage of the principal will also revoke any prior powers granted.
d) Use Permitted In some states, a wife or husband cannot serve as attorney in fact for the other. In some states, a power of attorney cannot be used to convey homestead property. State law must be checked to establish that the use of a power of attorney is permitted under the circumstances involved in the particular transaction. 3. EVIDENCE OF VALIDITY:
Whenever a power of attorney is utilized for execution of a material document, the closing office should obtain a recordable affidavit from the attorney in fact (agent) stating that, as of the date of the closing: a) b) c) the principal is alive; and the agent has no knowledge of any facts indicating the incompetence of the principal; and the power of attorney has not been revoked or amended.
Whenever possible, the necessary facts should be confirmed by telephone or other contact with the principal or a family member who might be knowledgeable of the principal's whereabouts and physical condition. The affidavit should be recorded along with the power of attorney. 4. EXECUTION OF DOCUMENTS UNDER POWER OF ATTORNEY:
The documents being executed must name the Principal as the grantor/mortgagor/lessor. The document must clearly set forth that it is the act of the principal; not of the agent, and generally, the principal's name should also appear on the signature line, either typed, printed or written. In most jurisdictions, the preferred signature will read: "JOHN DOE by Jane Smith, his attorney in fact." In some states, "Jane Smith, as attorney in fact for JOHN DOE" is preferable. The acknowledgment should read that it is acknowledged by "Jane Smith, as attorney in fact for John Doe."
2/88
5.
RECORDING OF POWER OF ATTORNEY:
The power of Attorney, together with any supporting affidavits obtained, must be recorded in the appropriate public records, preferably simultaneously with the documents executed under it. 6. POWERS GIVEN BY TRUSTEES AND PERSONAL REPRESENTATIVES:
Generally, fiduciaries, including Trustees and Personal Representatives of Decedent's Estates, cannot delegate discretionary powers and may delegate only purely ministerial acts to agents. Therefore, a power of attorney given by a Trustee or a Personal Representative should NOT be relied upon for execution of material documents unless you can establish, of record, that the acts to be performed by the attorney in fact do not involve any discretion on the part of the agent. For example, if the Contract for Purchase and Sale has been executed by the Trustee or Executor and nothing remains to be decided at the closing, and the power of attorney directs the agent only to execute the documents in accordance with the contract, it MAY be permissible to accept the agent's signature. However, unless the Contract is recorded, or the power of attorney is sufficiently specific that the record will reflect the agent's powers to be merely ministerial, such power of attorney should not be accepted without approval from the Regional Office. In addition to examination of the power of attorney, it must be established that; a) b) The discretionary acts were actually performed by the Trustee/Personal Representative; and That the Trustee Personal Representative had the authority to so act: i.e. the Trust or Will contained a power of sale and, where necessary, proper consents and/or court orders were obtained. (See Decedent's Estates and Trusts, this Manual)
7.
POWERS GIVEN BY PARTNERSHIPS:
In those states where a partnership is a recognized entity apart from its partners, a power of attorney generally MAY be granted by a partnership. The power must be: a) b) executed by ALL of the partners; and be specific in authorizing the attorney in fact to execute a deed or encumbrance of partnership property in the name of the partnership and to convey all of the partner's rights in the partnership property.
In addition, the agent must determine: a) b) c) that the partnership exists that the power has not been revoked that the signatories constitute all of the partners.
2/88
An affidavit as to the above facts should be obtained from the agent and recorded with the power of attorney. 8. POWERS OF ATTORNEY TO PARTNERSHIPS:
Although, generally, when a power of attorney is granted to more than one individual, all must sign, in a partnership where each partner can bind the partnership, unless the partnership agreement, state law or the power of attorney provides otherwise, any partner can perform the acts authorized by a power of attorney given to a partnership. In addition to the normal requirements for powers of attorney (i.e. no death, incompetency or revocation) the agent must obtain evidence as to the continued existence of the partnership and that the agent executing on behalf of the partnership is a partner thereof. The partnership agreement should be examined to make sure that there is no prohibition against the transaction. Again, an affidavit as to the pertinent facts should be obtained from the agent and recorded along with the power of attorney. 9. POWERS OF ATTORNEY TO CORPORATIONS:
Generally, absent statutory or corporate prohibitions, a corporation may act as attorney in fact for another. The power can be exercised by the corporation through its duly authorized officers. Determination should be made that the corporation is duly organized and in good standing under the laws of the state of its incorporation, and the corporate charter should be examined to make sure that there is no prohibition against its acting as agent for another. If the proposed signatory is other than the President or Chief Executive Officer, or if state law requires a resolution even for the President to act, then a certified copy of a corporate resolution is required, authorizing the execution under the power by the named signer. The instrument to be executed must still be in form sufficient to show that the instrument is the act of the principal and not the agent. A sample signature might be: JOHN DOE By: By: XYZ Corp., Attorney in Fact for JOHN JOE Mary Jones President
The notarization would be: "Mary Jones, as President of XYZ Corp., as attorney in fact for John Doe."
2/88
10.
POWERS OF ATTORNEY FROM CORPORATIONS:
Generally, a power of attorney FROM a corporation will not be acceptable unless it is accompanied by a recordable certified copy of a Corporate Resolution of the Board of Directors of the corporation authorizing the granted of the power and specifying with particularity the powers to be exercised. As with Trustees and Personal Representatives, corporate officers generally cannot delegate any acts which involve the exercise of discretion or judgment. For the same reason, a power of attorney given by an officer of a corporation purporting to give the agent power to sign as such officer should not be insured. 11. CAVEAT-ALL POWERS:
Remember - for all Powers of Attorney - an attempt should be made to determine why the principal cannot be personally present and to personally verify the reason given for this absence and as many of the other required facts as is possible. The affidavit required from the agent is, after all, a self-serving statement and the use of a power of attorney is one of the "red flags" alerting to a possibility of fraud or forgery. Do not accept any instrument executed under a power of attorney by the agent to himself or to an entity known to be controlled by the agent. If you have any questions or doubt about the sufficiency of a power of attorney, consult the Regional Office.
5/78
Chapter 31 - Page 1 POWERS OF ATTORNEY Legal Bulletin
POWERS OF ATTORNEY: Statutory Form in G.O.L. 6-1501, etc. 1. 2. Power of attorney must be recorded and in writing - 294 and 326 R.P.L.; Davis v. Dunnet , 239 N.Y. 338. Consideration should be recited - Binzen v. Epstein, 58 App. 304, but see Van Zandt v. Furlong, 18 N.Y. Supp 54. Tzeses v. Green, 149 Atl. 593 (N.J.) 72 C.J.S., Section 423. Proof is required that the principal is alive and competent - Lalor v. Tooker, 130 A.D. 11; Weber v. Bridgman, 113 N.Y. 600; As to military see: 3-501 G.O.L. Section 5-1601 G.O.L., effective June 10, 1975, authorizes effective inclusion of "this power of attorney shall not be affected by the subsequent disability or incompetence of the principal. 4. 5. Full consideration should be recited in the closing instrument as in any instrument executed by a fiduciary. Powers of attorney are revocable, unless coupled with an interest.
3.
CAVEAT: Avoid apparent conflicts of interest - i.e., attorney in fact conveying to self or to spouse, etc. executor devisee and beneficiary, but to bring in also all legatees named in the will of such deceased as party defendants. Sinclair v. Purdy, 214 A.D. 156. Same case, another point 242 N.Y. 559 PARTNERSHIP A deed by one partner in the partnership name, is valid to convey property held in the partnership name. Sec. 21, Article 3, Partnership Law. POWER OF ATTORNEY A power of attorney giving general powers "to do and perform all acts necessary to be done in and about premises" does not give the attorney-in-fact power to sell or mortgage. Davis v. Dunnet, 239 N.Y. 338.
5/78
Chapter 31 - Page 2 POWERS OF ATTORNEY Legal Bulletin
By Wife to Husband See "Dower" By Husband and Wife A power of attorney executed by husband and wife authorizing the attorney to sell certain realty owned by husband and grant good and sufficient deeds therefore, is valid to convey the wife's inchoate dower interest. Platt v. Finck, 60 A.D. 312.
2/88
Chapter 33 - Page 1 RESTRICTIVE COVENANTS General
RESTRICTIVE COVENANTS 1. EXCEPTION FOR RESTRICTIONS:
Restrictions affecting the use of the land may be contained in a deed or other instrument affecting only the subject property, or in an instrument affecting several parcels or an entire subdivision. Restrictions may also be imposed by a recorded subdivision plat. Regardless of how they are imposed, restrictions should be set forth on the commitment and Schedule B of the policy and be fully described by type of instrument, name, date and by recording information. Any rights of reverter or forfeiture for violation should also be shown. A copy of the restrictions should be made available to the proposed insured at the time of delivery of the commitment. 2. VIOLATION OF RESTRICTIONS - REVERTERS:
Reference should be made in the policy to any actual violation of restrictions arising out of the character of the building, use or encroachments. This reference to a violation must be made even though the company may be willing to insure against loss or damage because of such violation. Violations of setback lines must be excepted in the policy. However, when the violation does not exceed 10% of the required setback it is permissible to insure against loss or damage on mortgage policies provided the restrictions do not contain a reverter or forfeiture of title. The company will consider insuring that there will be no loss or damage because of a reversionary clause as to previous or existing violations, if the reversionary clause has been properly waived (Owner's Policies), or waived or subordinated (Loan Policies) by all parties entitled to enforce it. The Regional Office must be consulted before insuring over any violation of restrictions with reverters (see Encroachments). 3. INSURING AS TO VIOLATIONS:
The following language is suggested: a. If no violations exist: "The company insures that the above restrictions have not been violated as of the date hereof." b. If there is a violation: "The company insures that the above restrictions have not been violated as of the date hereof, except for (describe violation). or
2/88
"The company insures that the above restrictions have not been violated as of the date hereof, except for the encroachment(s) of (describe encroachments)." c. Where there is no right of reversion or forfeiture: "The company insures that the above restrictions have not been violated as of the date hereof and that a future violation will not result in a forfeiture or reversion of title." 4. RACIAL RESTRICTIONS:
If the only restriction contained in any instrument is of a racial nature, with or without a reversionary or forfeiture clause, commitments and policies shall be issued without exception or reference to the restriction. (a) If the racial restriction is one of two or more restrictions appearing in an instrument, whether or not coupled with a reversionary or forfeiture clause, then an exception to the restrictions should be shown in the commitment and under Schedule "B" of the policy as follows: "Covenants and restrictions, but omitting any such covenant or restriction based on race, color, religion or national origin, contained in instrument recorded in Book , Page . (State whether or not the instrument contains a reversionary or forfeiture clause if it affects the remaining restrictions.)" (b) If a copy of the restrictions is to be attached to or furnished with the commitment or policy, it should be so prepared that the racial restriction would be omitted by one of the following methods: (1) cross out the racial restriction; (2) rubber stamp, type or print across the restriction the words "The Covenant Omitted". Care should be exercised in every instance not to indicate omission of any other valid restriction. These instructions are applicable only to racial covenants and do not have reference to restrictions requiring approval of sale by a homeowner's or other association or which give such association the right of first refusal.
(c)
5.
ASSESSMENTS CONTAINED IN RESTRICTIONS:
If restrictions contain a clause authorizing the Trustees, Architectural Control Committee or other body to levy assessments against the property or property owners, exception to such right of assessment must be made.
2/88
6.
RESTRICTIONS OF USE:
Amendments to zoning ordinances which change use classifications have no effect on recorded covenants, conditions and restrictions. Any violation of recorded covenants, conditions and restrictions, even though not in violation of zoning ordinances, must be excluded from the coverage of title insurance. Under very special circumstances (which would include a showing that the deed restrictions are ancient, that the character of the neighborhood has changed drastically from residential to commercial, that properties immediately surrounding the land being insured are used commercially and no recent attempts have been made to enforce such restrictions), it may be permissible, first having obtained Regional Office approval, to afford affirmative coverage if there has been a violation of use restrictions appearing of record.
4/78
Chapter 33 - Page 1 RESTRICTIVE COVENANTS Underwriting
The most common problems between the Lawyer and the Title Company in the suburban counties surrounding metropolitan New York concern restrictive covenants, their violation, or proposed violation, and requests for affirmative insurance with respect thereto. Although common and frequent, the problem is not always fully understood. A restraint is a burdensome thing, and both the property owner and his lawyer often find it necessary or expedient to try to avoid the burden of covenants under varying circumstances. The subject matter is vast, and this article can only touch the subject superficially. Restrictive Covenants are negative easements, clearly recognized by a vast body of law and subject on occasion to the most stringent enforcement. Those that are commonly enforced as running with the land fall broadly into three classes, most clearly defined in Korn v. Campbell 192 NY 490, 85 NE 687, rearg. denied 193 NY 626, 86 NE 1126. The first class is the so called "general scheme," created when an owner divides his tract and in the deeds to different purchasers imposes uniform covenants restricting the use to which the grantees can put the property. In some cases the general scheme is imposed in the form of a declaration by the common owner in advance of his conveyance where in it is clearly stated that it is intended for the benefit of the entire tract. Where we have a "general scheme" the covenants are enforceable by any grantee or submutuality of covenant. The second class covers those cases in which a covenant is imposed by a grantor for the benefit of his neighboring lands. In this category, the subsequent owners of the retained lands can enforce the covenant against the subsequent owners of the land on which the covenant was imposed; although separate owners of the restricted lands cannot enforce against each other. (Equitable Life Assurance Society v. Brennan 148 NY 661 NE 173). The third broad class of enforceable covenants covers those cases where there are mutual agreements between owners of neighboring lands in which the restrictions are imposed for the mutual benefit of the land of all of the covenantors. In this category too, all of the subsequent owners can enforce against each other. (Korn v. Campbell supra; Trustees of Columbia College v. Lynch 70 NY 440). There are some types of covenants that can be enforced only by the imposer so long as he still retains some interest in the tract. See Larpeg Realty Corp. v. McGrath 262 AD 1041. In many cases the courts have held that a reservation by the imposer of the right to modify or cancel any of the covenants necessitates a construction that the covenants were intended solely for the benefit of the imposer and since there is no mutuality of covenant in such a case, that they are unenforceable except by him. (Ludlum v. Haskins 263 AD 741 31 NYS 2nd 97 aff'd 291 NY 811 53 NE 2d 574). In recent years we have also seen numerous covenants created as a condition to, or in connection with a rezoning. (See Church v. Town of Islip, 8 NY 2d 254).
4/78
The question most frequently asked of the title company is whether they will insure against the enforcement of covenants found of record with respect to an existing violation or with respect to a contemplated violation. Only rarely, however, has the inquirer taken the trouble to determine whether or not there is any basis in fact or in law for such an assurance. The lawyer who requests some form of affirmative insurance from the title company is in a much better position, and much more likely to have his request complied with if he has first analyzed the particular set of restrictive covenants in the light of the above principles, and prepared a basis or argument in favor of his request. Affirmative insurance is not normally given on a strict casualty basis. It is freely given in those cases where it appears that the covenant does not run with the land within the general classes defined in Korn v. Campbell supra, or where it can be fairly clearly established that it is a personal covenant and the imposer no longer has any interest to protect; or that it would clearly not be enforced by a court of equity. (See Sec. 346 Real Prop. Law now in Sec. 1951 Real Prop. Act & Proc. Law) In those cases where it appears that the covenants may in fact have been of a class that was originally enforceable there may yet be valid reasons making the likelihood of present enforcement slim. The lawyer who can demonstrate that there has been a distinct change of neighborhood rendering the possibility of enforcement by a court of equity unlikely has much better chance of obtaining the desired affirmative insurance than the lawyer who has made no effort to determine a possible basis for defense against enforcement of the covenant other than the fact that he or his client find it burdensome. In considering change of neighborhood within the restricted area, a change of neighborhood across the street, unaffected by restrictions may have no bearing whatsoever on the decision of the court. One of the larger New York title companies paid a substantial claim in recent years where they had given affirmative insurance that an apartment house could be erected on a plot restricted by covenants to private residential use, where there were other apartments and business structures in the immediate vicinity when none of these were actually on any portion of the restricted area. See Cummins v. Colgate Properties Corp., 2 Misc. 2d 301, aff'd 2 App. Div. 2nd 749. If the request is for affirmative insurance with respect to a violation or proposed violation of setback, it is important to be able to show how other properties in the same block on both sides of the street are set back. Where there has been a street widening subsequent to the creation of the covenant, set-backs are usually measured from the old street line. With respect to existing violations, it is important to determine how long the violation has existed undisturbed. In this respect see Sec. 1801 (added by Chap. 116 Laws 1963) providing a 2 year statute of limitations after Sept. 1, 1965 in many cases. Some points which are the subject of continual inquiries are as follows:
4/78
Restrictions as to stables are also applicable to private garages. (Beach v. Jenkins, 174 AD 813 159 NYS 652). A private residence is one for one family only, (Kalb v. Mayer 164 App Div 577 150 NYS 94). It cannot be altered into a two family house. (Paine v. Bergrose Development Corporation 119 Misc. 796 198 NYS 311). A modern apartment house probably does not violate a restriction against tenement houses. (Kitching v. Brown 180 NY 414 and White v. Collins B & C Co. 82 App Div 1, 81 NYS 434). The practice of medicine or dentistry violates a restriction as to private residential use, (Stewart v. Barber 182 Misc 91 43 NYS 2d 560), although it has been held that the practice of his profession by a physician is not a "Business" (Iselin v. Flynn 90 Misc 164, 154 NYS 133). A single objecting property owner who has a valid enforcement right is entitled to relief even though every other owner with a similar right of enforcement has released. In this respect it is worth re-reading Evangelical Lutheran Church v. Sahlem 254 NY 161 172 NE 455, where Justice Cardozo wrote a brilliant opinion on the subject. The fact that property is zoned more liberally than the restrictive covenants does not have the effect of modifying the restriction. The zoning is a municipal restriction in addition to and not in place of the private contractual one of the restrictive covenant. In those cases where affirmative insurance with respect to restrictive covenants is given, there is usually an additional minimum charge of 35% of the title premium unless it was previously so insured, or clearly within a court of appeals decision on the same restrictions, or pertains to existing completed buildings or improvements. When the affirmative insurance in a fee or leasehold policy is on vacant land, the policy must be written in an amount to include the contemplated improvement. A mortgage policy should include the following without additional charge where there is no apparent violation of restrictions: Cp , which Restrictive covenants in deeds recorded in Liber restrictions have not been violated by the existing improvements. There is no condition or right of re-entry or other provision for forfeiture under which the insured can be cut off, subordinated or otherwise disturbed. F.H.A. usually requires the following: The above restrictions contain no clause restricting the sale or occupancy of the mortgaged property on the basis of race, color or creed which became effective on or subsequent to February 15, 1950. Some of the more usual forms of affirmative insurance are as follows, when applicable: Restrictive covenants in deed recorded in Liber Cp said restrictions this policy insures that the construction of a permanently enjoyed. but notwithstanding will not be
4/78
- OR The building (dwelling) on premises described in Schedule "A" violates the provision in the restrictive covenants in Liber Cp but this policy insures that said building (dwelling) may remain undisturbed as long as it stands. - OR Restrictive covenants in deed recorded in Liber that said restrictions will not be enforced. Cp but this policy insures
On the other hand, if the title company is unwilling to assume the cost of litigation, but is willing to insure its ultimate outcome, if an action is started, the following form may be used: Restrictive covenants in deeds recorded in Liber Cp but notwithstanding said restrictions this policy insures that the construction of a will not be permanently enjoyed provided this company shall not be liable for the expense of defending any litigation that may be brought for such injunction, nor liable for damages incident to the pendency of such litigation and provided further such litigation is defended at the expense of the insured by counsel approved by this company. Unless the contract of sale provides that the premises are sold subject to them, the purchaser may reject title. See: Isaac v. Schmuck, 245 N.Y. 77; and Heller v. Cohen, 154 N.Y. 299 The parties can by their contract agree that the existence of certain restrictions of record will not render title unmarketable. In some cases the contract may provide that notwithstanding that the building on the premises violates a set-back or height restriction, that this should not be deemed an objection to title provided that the purchaser title company will insure that the building may remain as erected so long as it shall stand. There are other forms of affirmative insurance issued by title companies, as for example insurance against enforcement of the restrictions; or insurance that the covenants do not contain a provision for forfeiture in the event of a breach, etc. (A) Disposition of covenants and restrictions: 1. By action under Article 15 RPAPL where there has been a change in character of the neighborhood.
4/78
2.
By the limitation imposed by Section 2001 RPAPL in effect since September 1, 1963 which limits an action to enforce certain restrictions restricting the use of land or for damages for breach to be brought within two years. Important questions here is "how long the violation has existed undisturbed?"
Chapter 33 - Page 1 RESTRICTIVE COVENANTS Case Law
Covenants and Restrictions 1. 2. Make title unmarketable Bull v. Burton, 177 AD 824, 164 NYS 997, aff'd 227 N.Y. 101 Contract to provide premises are sold subject to C & Rs - otherwise buyer may reject title O'Hara v. Bronx Consumers, Inc., 254 N.Y. 210; Isaac v. Schmuck, 245 N.Y. 77 In conflict between zoning restrictions and restrictions of record, latter if more severe, control A. Kimball v. Fox, 120 Misc. 701, 200 NYS 267, aff'd 209 AD 812, 204 NYS 891, aff'd 239 N.Y. 554 "Subject to covenant and restrictions of record, if any"- does not include easement or reservations. Israelsky v. Levine, 215 AD 94, 213 NYS 589 Statute of limitations against enforcement of certain restrictions See RPAPL Secs. 2001 and 1951
3.
4.
5.
COVENANTS AND RESTRICTIONS - DISPOSITION BY: 1. Release or modification: a. b. 2. By all with enforcement rights, Post v. Bernheimer, 31 Hun (N.Y.) 247; Evangelical Church v. Sahlem, 254 N.Y. 161; or Pursuant to a reserved power.
By removal of first building when restriction affects first building only, although alteration of the first building to a non-permitted use is prohibited; Baumert v. Malkin, 235 N.Y. 115; Booth v. Knife, 225 N.Y. 390. By merger: Morrill Realty Corp. v. Rayon Holding Corp., 254 N.Y. 268
3.
4.
Expiration by its terms: Schrage v. Doran Building Corp., 257 App. Div. 1012, aff'd 281 N.Y. 864.
Chapter 33 - Page 2 RESTRICTIVE COVENANTS Case Law
5.
"Equitable" relief by judicial decree: R.P.A.P.L., Article 15 - Auction to determine claims. Dime Savings Bank v. Butler, 167 App. Div. 257, aff'd 215 N.Y. 708
6.
Statutory Relief: R.P.A.P.L., Section 2001 R.P.A.P.L., Sections 1951, 1953, 1954, 1955
7.
A possible alternative: Affirmative covenant insurance from title insurer against some or all forms of enforcement; but this is not a total substitute for "marketability" unless provided for by the contract. Gilchrist-Great Neck, Inc. v. Byers, 27 Misc. 2d 1078; aff'd. 13 A.D. 2d 1027, aff'd. 11 N.Y. 2d 911.
3/62
Chapter 33 - Page 1 RESTRICTIVE COVENANTS Legal Bulletin
APARTMENT HOUSE Apartment house distinguished from tenement house. Grimmer v. Tenement House Dept. of the City of New York, 204 N.Y. 370 FAMILY RESIDENCE 38 A.O. 515 Sonn v. Heilberg DWELLING HOUSE The words "dwelling house" in a covenant are broad enough to include and permit the erection of an apartment house. Bennett v. Petrino 235 N.Y. 474 Ministers, etc. of the Reformed Protestant Dutch Church v. Madison Avenue Building Company, 214 N.Y. 268. Kitching v. Brown 180 N.Y. 414 PRIVATE DWELLING Our courts have not as yet passed upon the question as to whether or not an apartment house may be erected when the words "private dwelling" appear in the covenant, but in New Jersey it has been held that where the words "private dwelling" were used in a covenant, that the same cannot be construed to include a flat house adapted for the residence of three separate families. Skillman v. Smatheurst, 57 N.J. Equity 1. COVENANTS AGAINST NUISANCES The ordinary covenant against nuisances such as stable, slaughter house, smith shop, forge, furnace, etc. is an encumbrance on the property, and unless provided for in the "contract" or "terms of sale," the purchaser would not be compelled to take. Kennelly v. Shapiro, 226 N.Y. Supp. 692, 222 A.D. 488 Affirmed 250 N.Y. 7 Conlen v. Rizer, 109 A.D. 537. In Bull v. Burton, 227 N.Y. 101, there is dicta to the effect that a covenant which provided only that nothing that is "noxious, dangerous or offensive" shall be erected, is not an encumbrance because it binds the owner no further than he would be bound by law in the absence of such covenant. CHANGE OF NEIGHBORHOOD McClure v. Leaycraft, 183 N.Y. 36 Field v. West 36th Street Realty Corporation, 238 N.Y. 609. Forstmann v. Joray Holding Co., Inc., 244 N.Y. 22 Bd of Stand and appeals Law Jnl Dec. 7.1927
3/62
GARAGE Where a covenant provided that no barn or stable should be erected, it was held that a garage was a violation of the covenant and the court quoted the Century Dictionary to the effect that a garage was a stable for motor cars. Beach v. Jenkins, 174 A.D. 813 In Wilmot v. Gandy, 122 Misc. 571, Aff'd 210 A.D. 823, it was held that a garage is a barn within such covenant, but that such covenant does not prevent the building of a private garage as an addition to the dwelling to be used for other domestic purposes. Where a covenant of 1850 contained the words "omnibus, livery or cow stable: and also "all other dangerous, noxious, etc., " it was held that a public garage was not a violation of the covenant. Change of neighborhood was also considered. Goldstein v. Rosenberg, 232 N.Y. 535. Words "public or private stables for horses or other animals, etc.," held not to prevent the erection of a private garage connected with the dwelling. Beckwith v. Pirung, 134 A.D. 608. Distinction between a public and a private garage. Sullivan v. Sprung, 170 A.D. 237. FIRST BUILDING Reed v. Sobel, 177 A.D. 532. (Never appealed.) Baumert v. Malin, 189 A.D. 858. (Reversed in 235 N.Y. 115) Which also reversed Reed v. Sobel. Booth v. Knipe, 225 N.Y. 390 Kurtz v. Potter, 44 A.D. 262, aff'd. 167 N.Y. 586 NEARLY EXPIRED McClure v. Leaycraft, 183 N.Y. 36 Covenant had about five years to run. Forstmann v. Joray Holding Co., Inc., 244 N.Y. 22. Covenant had two or three years to run
3/62
ON ADJOINING PROPERTY Covenant in deed of adjoining lot held to give notice to owner in whose claim deed did not appear. Whisler v. Cole, 162 A.D. 920 Appel v. Buckbinder, 82 Misc. 312. ON SINGLE LOT It appears to be the rule that where a property owner owns but a single lot or parcel in the neighborhood and then sells all of that lot imposing a restrictive covenant, that the covenant would not be effective, the former owner having no other property to protect. Korn v. Campbell, 192 N.Y. 490 It would also seem to be the rule that where a grantor sells a single parcel with a restriction and thereafter sells his remaining property without restriction that the covenant would fail. Obrock v. Crolly Co., Inc., 209 A.D. 624. WHERE PARTLY RESTRICTED Where premises are partly restricted and partly unrestricted, it was held that the covenant is not effective. Goodhue v. Cameron, 142 A.D. 470. CONSTITUTIONALITY - NEGRO RACE Corrigan v. Buckley, 299 Fed. Rep. 899. DISPOSITION OF Covenants may be disposed of by proper proceeding. Dime Savings Bank of Brooklyn v. Butler, 215 N.Y. 708.
T. A. Title Insurance Company 2 Veterans Square, Second Floor, Media, Pennsylvania, 19063 (610) 892-8100 Ext. # 135 FAX (610) 892-8834
Chapter 31B - Page 1 RECHARACTERIZATION General
RECHARACTERIZATION The legal doctrine of recharacterization is a broad, malleable concept under which a court may recast the roles of parties in a transaction to either more accurately reflect what the court determines to be their true intentions, or to reflect the economics of the transaction. The risk of recharacterization can be found in many different kinds of transactions. Plaintiffs have become more aggressive in recent years in seeking to recharacterize transactions to a form other than that which the documents would indicated. It is difficult to distill a few simple principles which may be easily applied in all recharacterization cases. However, through hindsight, we are able to identify some of the transactions which may, at a later date, be recharacterized. These would include the following: DEED IN LIEU OF FORECLOSURE RISK A deed absolute on its face may later be determined to be a mortgage or security instrument. This is probably the oldest form of recharacterization and is a risk inherent in deed-in-lieu of foreclosure transactions. The concept springs from the desire of the parties to give the borrower one last chance to work out his problems and to help the lender avoid the delay and expense of foreclosure. For a more detailed discussion of this issue refer to the chapter on DEEDS-IN-LIEU in this Manual and to the chapter on CREDITORS' RIGHTS AND TITLE INSURANCE. SALE-LEASEBACK RISK Recharacterization of sales, sale-leasebacks or conditional sales transactions as a financing vehicle. This type of recharacterization is driven by the desire to maximize the tax or other economic benefits from a transaction. The result is a hybrid which may contain elements of a lease, a financing device and a joint venture or partnership. If one of the parties is later found to be in financial difficulty, it may be to his advantage to attempt to have this transaction recharacterized to some other form because he is placed in a more advantageous position. See chapter entitled SALE-LEASEBACKS in this Manual. We do not believe that the owner's policy or leasehold owner's policy issued in connection with a sale-leaseback automatically insures against the possibility that the grantor or some other party may claim that the transaction is an equitable mortgage or that the parties are partners. However, notwithstanding this position, and, as a result of some contrary decisions, where we are insuring a sale-leaseback, we should avoid high risk cases by examining the transaction for repurchase obligations or options or a disproportionately small sale price which could trigger an assertion that the transaction constitutes an "equitable mortgage". If such elements are found to be present in the transaction, an exception should be raised in Schedule B of the owner's policy in the following form: T. A. Title Insurance Company 2 Veterans Square, Second Floor, Media, Pennsylvania, 19063 (610) 892-8100 Ext. # 135 FAX (610) 892-8834
"This policy is not to be construed as insuring against any claim that the conveyance to the insured is part of a transaction constituting an equitable mortgage, partnership, joint venture or other relationship other than that of parties to a sale and lease of real property." The leasehold owner's policy should have a similar exception substituting the word "lease" for the word "conveyance". LEASE RISK The allegation that a lease is not a true lease under section 365 of the Bankruptcy Code. A few cases have recognized that the landlord under a lease is afforded special considerations in bankruptcy and therefore, only "true" leases are entitled to special protection. In a few cases, debtor lessees have sought to use this to their advantage to force the lessors to renegotiate leases at the risk of having their interests recharacterized as a financing transaction. EQUITY PARTICIPATION RISK The risk of recharacterization is the greatest where we are asked to insure shared appreciation, participating or convertible mortgages. All of these transactions involve the lender taking an equity position in the project. The risk is simply that the lender may cross over the line in taking an equity position, and a court will say that the lender has become a partner or an owner of the project and, therefore, is no longer entitled to a lender's priority or, is liable for the debts of the venture. This concern is also addressed in the chapters relating to EQUITY PARTICIPATION and PARTICIPATING MORTGAGES . In the case of Equity Participation or the Workout of problem loans the risk is that of the lenders direct participation in the management or operation of the debtor's property, i.e., the day to day control of business operations is to such an extent as to make the borrower an agent, instrumentality or alter ego of the lender. This may impose liability on the lender for debts of the borrower to third parties, damages to third parties for improper influence in the debtors business activities and furtherance of the lender's own purposes to the detriment of other creditors and liability to the borrower for interference with the borrowers corporate covenants. [see In Re American Lumber Co.,5 B.R. 470 (Bankr. D. Minn l980) and In Re TE Mercer Trucking Co., l6 B.R. l76 (Bankr. N.D. Tex. l98l) [in both cases there was a subordination of the lenders loan due to the pervasive control exercised over the borrower's day-to-day business operations including control over payments made by the borrower]; Krivo Industrial Supply Co. v. National Distillers and Chemical Corp., 483 F2d l098 (5th Cir. l973) [contra., wherein the court held that the power to control through documentation was insufficient to impose "control liability" . . . there must be shown "actual, participatory, total control"]. T. A. Title Insurance Company 2 Veterans Square, Second Floor, Media, Pennsylvania, 19063 (610) 892-8100 Ext. # 135 FAX (610) 892-8834
Discussion of the Risk Generally, a lender has a broad license to monitor the activity of the borrower before it is deemed in control, including such matters as issuing cash expenditures for legitimate business purposes and monitoring the performance of its loan, so long as these functions are not accomplished in an inequitable or abusive fashion. Most jurisdictions follow the general rule that a lender has no duty of care or loyalty in an arm's length transaction and the lender/borrower relationship fits into the general rule. However, some business relationships characterized by a substantial degree of trust and confidence have led some courts to conclude that one party may owe a fiduciary duty to the other party (e.g., agent to principal, trustee to beneficiary, partner to partner, director to shareholder and those implied in law due to the particular relationships of the parties and the facts of a particular case) [see Victoria Bank & Trust Co. v. Brady, Fancher Cattle Co., 779 SW2d 893 (Texas Civ. App. l989]. The important thing to remember here is that the possibility of recharacterization exists in any situation where a lender is later determined to have an ownership interest in the borrowing entity because of (i) its capital contribution or (ii) its direct participation in the management and/or operation of the property. For this reason the mortgage documents, including modification agreements, must be thoroughly reviewed so as to determine the extent of controls the lender exercises over the borrowers day-to-day actions. COMPANY POSITION REGARDING MORTGAGE TRANSACTIONS We do not believe that the basic loan policy insures against the risk that the borrower or some other party may claim at some future date that the lender is, in fact, a partner. This is a question of the intention of the parties and is excluded as an "act of the insured". However, it must be understood that, if additional affirmative coverage has been negotiated and supplied, and loss thereunder is later determined to be sustained or incurred by the insured, ambiguities or conflicts with other policy provisions may occur, in which case it has been determined that "while the coverage provided by any insurance policy must be interpreted in light of its stated conditions, standard exceptions [or exclusions] to coverage must give way when . . . they conflict with specific coverage negotiated by the parties" [Eureka Inv. Corp. N.V. v CTIC, (1982) 530 F.Supp. 1110 (revised and affirmed at 743 F2d 932)]. Thus, great care must be taken to assure that special affirmative coverage does not conflict with policy boilerplate. CONTINGENT INTEREST ENDORSEMENT EXAMPLE This form of endorsement is usually requested in commercial transactions where the lender has bargained for a share of the profits, in addition to, or in lieu of a guaranteed return. This "return" is usually "characterized" as "interest" and is sometimes referred to as an "equity kicker". These equity kickers may be in the form of "additional interest" based on a percentage of the rent roll or "contingent interest" based on a share of cash flow or appreciated value of the project.
In the case of a participating mortgage containing contingent interest provisions the endorsement, also known as a SHARED APPRECIATION MORTGAGE ENDORSEMENT [SAM], provides that the lien of mortgage, as insured, includes (i) provisions for equity participation which entitles the lender to a share of the projects profits and (ii) that said provisions have the same priority as the basic principal and interest secured. In a claim scenario a customer might later argue that by issuing a "Contingent Interest Endorsement" we insured against recharacterization. We do not agree that is the case. However, we do look at the issue in order to avoid insuring a transaction on which the potential for recharacterization is clearly presently and which might invite a dispute between the company and its insured as to the extent of coverage provided under the policy. Available documents are examined to consider the lending terminology, the extent of the participation and control which the lender is being given, if any, and the clear disclaimer of intention to create a partnership. or underwriting guidelines relative to issuing this type of endorsement refer to Instructions as to the Use of Title Insurance Endorsements. Some state have statutes or case law which help with this analysis. If, however, the document examination discloses serious underwriting questions, the "contingent interest endorsement" should not be issued and, in addition, an exception concerning recharacterization should be raised in Schedule B of the Loan policy in the following form: "This policy is not to be construed as insuring against any claim that the relationship of the parties in the transaction evidenced by the mortgage described in Schedule A is other than that of Mortgagor and Mortgagee. One clear "red flag" would be in a situation where there is no apparent equity participation by the lender or one of its subsidiaries but, nevertheless, the lender requires "nonimputation coverage". In such a case there is a good chance that the lender may be concerned that the provisions in the loan agreement or other closing documents may later be determined to constitute management control on an active basis. In that case the form of the exception to be used is as follows: "Loss or damage by reason of any assertion that the relationship between the mortgagor and the insured is not that of a borrower/secured lender, or borrower/trustee for a secured lender". If you should have any questions please contact the Home Office Underwriting Department.
5/78
Chapter 32 - Page 1 RECORDING ACTS General
RECORDING ACTS
1. A conveyance of real property, if not recorded, is void as against a subsequent purchaser in good faith, for a valuable consideration from the same vendor, whose conveyance is first duly recorded, and is void as against the lien upon the same real property arising from payments made upon the execution of or pursuant to the terms of a contract with the same vendor, if such contract is made in good faith and is first duly recorded. R.P.L. 291. A lease for a term not exceeding three years is not a conveyance within the meaning of the recording act. R.P.L. 290. 2. Thus New York employs a "race-notice" statute. a. A conveys to B who does not record. B has title since common law still applies and delivery of a deed transfers title. (1) B should record because if he does not there exists the danger that A will convey to C, a good faith purchaser without notice of B, in which case C acquires title and B's title becomes void. Note that C must record first: i.e., he must win the "race" to record. A deeds to B and then to C, who knew nothing about B. B wins the race to the registry and records first. B wins. To be protected, C must record first. A deeds to B, and then to C, who knows nothing about B. C will win if he records first if he is a good faith purchaser. As C reaches the registry ahead of the unknown B, X tells C about the prior deed to B. C is still a good faith purchaser since his good faith is measured at the time of the closing, not the recording.
(2)
(3)
b.
Notice really involves two different kinds of notice. First the subsequent purchaser claiming the benefit of the statute must be a good faith purchaser, i.e., someone not on notice of a previous buyer because of facts extrinsic to the registry of deeds. (1) A deeds to B who does not record. A deed to C who actually knows about the A-B deed. C is not a good faith purchaser. Title is in B even if C records first. Only if C was not aware of B and C records before B, is C protected. C can, however, be put on inquiry notice: i.e., he can be charged to T. A. Title Insurance Company 2 Veterans Square, Second Floor, Media, Pennsylvania, 19063 (610) 892-8100 Ext. # 135 FAX (610) 892-8834
(2)
pursue certain facts such as that he is attributed with knowing the answers these investigations would reveal.
5/78
Chapter 32 - Page 2 RECORDING ACTS General
(a)
A deeds a house to B. B does not record but moves into the house. Then A deed to C. C is charged with notice of B's prior deed because possession by B should have put C on inquiry notice as to why he was there, which had he pursued the inquiries would have revealed the A to B deed. A by instrument never recorded had granted the telephone company an easement. A then conveyed the parcel to B, who recorded his deed and then claimed to be a BFP who took free and clear of the unrecorded easement. Held, B was not a BFP because there was open and notorious use of the property by the telephone company, the poles being in plain view; B had been put on inquiry notice of the possible existence of prior rights. Pallone v. N.Y. Telephone Co., 30 N.Y.2d 865 (1972) A deeds an apartment house to B who is one of many tenants and who does not record. A then deeds the building to C. Held, possession by the grantee under the unrecorded conveyance was prima facie notice of his interest to the subsequent purchaser. Phelan v. Brady, 119 N.Y. 587 (1890).
(b)
(c)
3.
A deeds to B who does not record and who does not move into possession. A then deeds to C. C will not be on record notice of B and, if not other inquiry notice, C owns the parcel if he records first. a. C can now convey the parcel to X, who knew of the prior deed to B. A purchaser with notice from one who has already had the benefit of the recording act is protected. O'Neil v. Lola Realty Corp., 264 App. Div. 60 (1942). Beware, however, the common law doctrine of estoppel by deed. A conveys a parcel to B by a deed containing a covenant of warranty or quiet enjoyment yet at the time A did not own the parcel. Later X conveys the parcel to A: B now owns it. A is estopped to deny his transfer to B. A conveyed to B several years ago by way of a full warranty deed. This week X conveyed to A. A agrees to convey to C who searches A's title only in the current index. As a result C does not find any record of the deed by A to B. C closes with A and records his deed. C should be protected by the statute because he is put on recordnotice only of transactions in A's chain of title, that is, during the time T. A. Title Insurance Company 2 Veterans Square, Second Floor, Media, Pennsylvania, 19063 (610) 892-8100 Ext. # 135 FAX (610) 892-8834
b.
A was record owner.
8/79
Chapter 32 - Page 1 RECORDING ACT Legal Bulletin
DEFINITIONS: Actual notice is that which consists in express information of a fact, e.g., if A saw B execute a lease of his home to C then A has actual knowledge of this fact. Constructive notice is that which is imputed by law. Thus, if A had no actual notice of the lease from B to C but C had recorded the lease, then constructive notice thereof has been imputed to A. Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact. NOTICE TO AGENT: A principal is ordinarily bound by matters known to his agent within the scope of his agency. The conventional agency relationship does not exist between a purchaser and a title company engaged to issue a title insurance policy, so that knowledge garnered by the company as to the condition of title is not necessarily imputed to the purchaser. Matters not in the direct record chain of title, but known to the company such as so-called "wild" deeds disclosed by plant records or prior title files which might affect the title if imputed to the purchaser, must be submitted to Counsel for consideration. RECORDATION OF INSTRUMENT PRIOR TO GRANTOR ACQUIRING RECORD TITLE NOT CONSTRUCTIVE NOTICE: Although a deed or mortgage executed by one not having title to the property operates to convey or impose a lien upon the property if and when subsequently acquired by the grantor or mortgagor, the recordation of such an instrument prior to the time of grantor or mortgagor acquires record title does not constitute constructive notice thereof to persons dealing with such grantor or mortgagor after he acquires the record title. Therefore, if we are to insure title based upon a deed or mortgage which was recorded prior to the recording of the instrument vesting title in the grantor or mortgagor, such title cannot be insured unless such deed or mortgage is recorded after the recording of the instrument vesting title in such grantor or mortgagor. The foregoing is not applicable where a. b. The deed by which the mortgagor acquires title is dated prior to the date of the mortgage, or The deed is expressly made subject to such mortgage.
8/79
Chapter 32 - Page 2 RECORDING ACT Legal Bulletin
NOTICE FROM RECITALS IN INSTRUMENTS IN THE CHAIN OF TITLE: When a purchaser is deemed to have notice of a conveyance or other instrument in his chain of title, whether constructive notice from a recorded instrument or actual notice of an unrecorded or defectively recorded instrument, he is charged with notice of all matters affecting the title which are recited in such instrument or which could be ascertained by an inquiry suggested by such recital. For example: a. If a recorded deed from A to B recites that the conveyance is subject to an agreement between A and C, a purchaser from B acquires subject to such anagreement because he had constructive notice imparted by the recital in his predecessor's deed. He must, therefore, inquire as to the nature of the agreement between A and C and its effect on his title. If, in the negotiations for the purchase of B's land, C is found in possession, B's purchaser has actual notice of C's occupancy and he is on notice to make inquiry as to the extent of C's interest. C may hold an unrecorded but totally effective deed. If C informed B's purchaser that the neighbor had an agreement with B in regard to the road between the properties, the purchaser is obligated to make inquiry as to the nature of the agreement and its effect on B's title since he had actual notices derived from C's statement.
b.
c.
He is also charged with notice not only of the contents of the instrument in his chain of title, but also of the contents of any other instrument, recorded or otherwise, recited in such instrument, at least to the extent that the recital is such as to suggest to a prudent person the possibility that the other instruments referred to affect the title and that it is reasonably possible to acquire knowledge thereof by an inquiry. INSTRUMENTS RECITING THAT A GRANTEE HOLDS "IN TRUST", OR "AS TRUSTEE" Such recital indicates that the grantee does not hold beneficially, and imposes a duty of inquiry as to the nature and terms of the trust under which the title is held. If the trust is valid and subsisting, title may be taken from the grantee as trustee, with appropriate recitals of identification of the trust instrument. If the trust is not valid or has terminated, Counsel must be consulted as to how the title is to be made. Similarly, if no information as to the trust can be found after diligent inquiry, Counsel must be consulted as to the manner of making or certifying title.
4/94
Chapter 15A - Page 1 EQUITY SECURITIZATION General
TITLE INSURANCE ISSUES RELATING TO EQUITY SECURITIZATIONS

EQUITY REAL ESTATE INVESTMENT TRUSTS REITs may be used to hold real estate mortgage debt, or real estate equity interests. REITs holding equity interests are usually structured to hold a specific kind of property, e.g. shopping centers, warehouses or office buildings. Some have diversified portfolios of properties, but all are located in selected geographical areas. Most equity REITs hold direct title to an interest in a property. It is usually a fee simple interest, but it can be a leasehold or easement (easement interests in the parking and common areas of shopping centers are common where the REIT's fee or leasehold interest is an anchor or outlet in the shopping center.) This section discusses direct interests. the securities aspects of the REIT usually have little impact on the title insurance issues, although they will affect the title insurance requirements for a transaction. The transactional issues involving the transfer of the assets to the REIT usually present the most difficult issues. If the transfer is made by deed from a corporation or partnership to the REIT, the most pressing issue is the validity of the authorizations to make the transfer. When the transfer involves a merger or some other form of conveyance of title by operation of law, that authorization issue becomes compounded by concerns about the validity of using a merger between two distinct forms of entities.
Transfer of assets to the REIT. The organizational structure, corporate or trust, and
Limited partner's consents. Many REITs are formed from existing limited partnerships, so the title insurer may want to see the consents obtained from the limited partners for the transaction to ensure that the required number of consents have been obtained. There is a risk that the disclosures made to procure those consents may not have been as complete or accurate as the limited partners would expect. Title insurers have no means of managing the risk because they have neither the information nor the expertise to evaluate the adequacy of disclosures. In these transactions, the risk that the former limited partners may decide to challenge the transfers to the REIT alleging that the consents were only given because of misleading disclosures, is one of the most troubling risks title insurers face.
are structured as mergers, even when the current owner of the property is in a different form than the REIT. For example, property held by a number of single asset limited partnerships may be contributed to the REIT by a process of merging them into the corporation qualified as the REIT. Some states permit merger of limited partnerships
Mergers of limited partnerships into REITs. To save money, many of these transactions
4/94
into corporations,88 but the vast majority have no authority for such mergers. Article 9 of the REVISED UNIFORM PARTNERSHIP ACT89 recognizes mergers between a general partnership and other general or limited partnerships. Title insurers are also concerned about these mergers because the courts in some states may reject the premise that limited partnerships can be merged into corporations or trusts. If the concerns about the authorizations and the propriety of the means of transfer have been resolved, the title insurance issues for the REIT become the standard issues for properties of the type included in the REIT. Of course, the parties may require quick service on the search orders to meet any need of the due diligence process for the public offering of the shares. Because these are direct interests, the title insurance policy to each property will show the REIT as the insured in Schedule A. UMBRELLA PARTNERSHIP REAL ESTATE INVESTMENT TRUSTS
UPREIT structure. An Umbrella Partnership REIT (UPREIT) owns a limited partner's share in a limited partnership owning a property or group of properties instead of the direct ownership of a fee, leasehold or easement interest in real property discussed in paragraph one above. The limited partnership that owns the properties will have a general partner, and will normally have other limited partners in addition to the REIT. It may own each property entirely, or it may be a partner in another limited partnership that owns the property. Title insurance options. From the title insurance perspective, the UPREIT structure creates some new opportunities to hold the premium costs down, In 1992, Taubman Realty Group (TRG) formed an UPREIT to take a limited partner's share of TRG's interest in 19 regional shopping centers. Lawyers Title was asked to insure the transaction and the negotiations involving the cost of the title insurance began at the end of March 1992, and continued until the transaction closed in November. Most of the 19 shopping centers had been owned by TRG or affiliates for terms in some cases exceeding 20 years. Because the UPREIT would be a limited partner in TRG, it required some form of
See, e.g., ALA CODE 10-9A191; CAL.CORP. CODE 15678.2; DEL.CODE ANN.Tit 8, 263, & Tit. 6 17-211; D.C. CODE 41-428; GA.CODE ANN 14-2-1109; MD.CRPS & ASS'NS CODE 4A1-101; NEB REV.STAT 67-248.02; NEV.REV.STAT. 78-464: OKLA.STAT.TIT. 54 310.1; R.I. GEN.LAWS 7-13-68; VA. CODEANN. 13.1-722.
88
REVISED UNIFORM PARTNERSHIP ACT, Art. 9,6 U.L.A.214 (1993 Supplementary Pamphlet).
89
4/94
"Fairway" coverage to protect it against a potential loss of title coverage.90 asked for quotations using the following approaches:
Pricing options. Various approaches were tried at the outset, but by September TRG (1) Increasing existing owners' policies. TRG asked for the premium needed to
increase the existing owners' policies to the amount needed to protect the UPREIT together with an assignment of the policies to the UPREIT. Each of the properties was insured by a Lawyers Title policy issued to TRG in a 1985 refinancing in which the lending institutions insisted on owner's coverage for TRG.
(2) reissue premiums for new policies. The second approach would be a price on the reissue premiums for new policies issued to the UPREIT. (3) New policies with "partner's excess coverage." In this approach, the 1985 policies would be assigned to the UPREIT, which would then purchase owners' policies with "partner's excess coverage" endorsements to fill out the REIT's requirements for each property. (This coverage could be more expensive than a mere increase in the owners' policies because some states might require the premium to start from the bottom of the rate schedule for excess policies, and allow starting from the old policy's level in increased policies. Fortunately, this problem did not arise in the states involved in the transaction.)
The decision in Fairway Development Company v. Title Insurance Company of Minnesota, 621 F. Supp. 120 (N.D. Ohio 1985) created concern in the legal community over the continuation of title insurance in favor of an insured when a change in the composition of the partnership has occurred. In Fairway, the court approved the title insurer's denial of a claim. The denial was grounded upon an allegation that the partnership making the claim was not the partnership insured in the policy because two of the three original partners had withdrawn from the partnership and had been replaced by a new partner. The decision was based upon the terms of the policy form and Ohio partnership law. The policy form was an Ohio Title Guaranty policy which is only issued in the northeast corner of the state. Its definition of the term "guaranteed" is perfunctory when compared to the definition of the term "insured" in an ALTA form. A "guaranteed" is "...the party or parties named in Schedule A as guaranteed." Ohio is a strong aggregate theory state with respect to partnership law, so the policy named the partners as the "guaranteed." These facts are not apparent from the decision. Although few believe the result would be the same if an ALTA form is construed in the context of a partial change in the composition of a partnership, especially in almost any other state, prudence often dictates requiring a "Fairway" endorsement or "Permitted Transactions" endorsement to remove any doubt.
90
4/94
(4) Reinsurance retention limitations. In addition to the quotations based on the approaches described above, the UPREIT sought the premium based upon a Lawyers Title retention for each property of $25, $30, $35 and $50 million ( to the extent such retention levels were available in the states involved.) As noted above, Items 1 and 2 cost the same, so the spread sheet provided to TRG gave a maximum of eight different premium quotes per property when the two premium approaches were multiplied by the four retention limit approaches.
In these policies, the insured was the UPREIT, not the owner, TRG. The policies showed the titles to the properties as vested in TRG. TRG had held the titles for so long that it chose to give the policies to its limited partner, but the effective date was advanced first. The UPREIT needed the title insurance with current effective dates as evidence that titles to these properties were vested in TRG when the transaction closed. NB the requirements for insuring incoming stockholders or partnership interests have to be followed. See Title Insurance Principles & Exception Language. converting to a REIT, ostensibly by operation of law, insurers have been asked to merely endorse each existing policy to show the REIT as the owner, without changing the effective date, and provide the customer with a title search covering the period since the policy was issued. The syndicator's counsel indicates that it will examine the title searches on each property. However, bringing the title forward in the policies would entail premium charges for title insurance that the parties choose to avoid. Insurers are often told that new title policies protecting the REIT would be too expensive, so it will rely on the old policies insuring the entities that merged into the REIT. If the REIT is being formed as the result of a merger of existing limited partnerships as described above, the title risks are substantial.
The no title insurance option. In some of the cases where a business entity is
4/94
This approach may make some sense if the same parties own the property (or the owner of the property) before and after the transaction and there are no novel merger issues. However, a REIT is created to market interests in the property to the public. The new owners need assurance that the title is vested in the parties conveying the properties to the REIT with acceptable exceptions to the title. A title insurance policy issued in the past is no assurance of the current ownership or the status of the title. See: Probate and Property, March/April 1992 "Who Does the Title Insurance Cover". When counsel for the syndicator decides to rely on old policies and a new title search, the attorney assumes the role of the title underwriter, and may be liable to the investors if a hidden defect in the title arises within the period of limitations applicable to the opinion. The title insurance industry was created to provide broader protection for title matters than was provided with the older device of an attorney's opinion on title. A company's reserves, and its reinsurance in large transactions, provide the policyholders with financial protection defined by its policy contract that is absent when the incoming purchaser accepts a title opinion instead.
Non-imputation coverages. This issue raises a final point: should the UPREIT secure a "non-imputation endorsement" from the limited partnership? The Taubman UPREIT decided against the "non-imputation" coverage because the people originally associated with the properties by their involvement with TRG were elected to the board of the UPREIT. Their knowledge of unrecorded and undisclosed matters was actual knowledge to the UPREIT, so the endorsement would not protect the UPREIT against their knowledge.
investors in the property. Instead, they were two tiers away. Any demand for non-imputation coverage would be made on their behalf, but that involves insurance of the relationship between the UPREIT shareholders and the UPREIT directors. Because the UPREIT is only an investment vehicle owning a share of the partnership, the relationship between its shareholders and its directors may be too remote from the real estate transaction to qualify the shareholders for non-imputation protection in a title insurance policy in filed form jurisdictions. Although title insurance policies can be issued to protect the interests of a shareholder in a corporation which owns an interest in real property, an entity qualifying as a REIT is limited in the concentration of shares any single shareholder may hold. Generally, this restriction in the tax code prevents any shareholder from holding a stake large enough to justify a shareholder's policy.
(1) UPREIT shareholders. The new shareholders of the UPREIT were not direct
4/94
have been involved with the real estate before the UPREIT enters as a partner, nonimputation protection for the UPREIT against the undisclosed knowledge of those who have been involved91 becomes a real consideration. The directors of the UPREIT should have no undisclosed knowledge derived from past ownership. The UPREIT may suffer damage or loss because such knowledge is imputed to it as a partner of the partnership. Non-imputation endorsements were originally devised to protect joint venturers and partners entering existing ventures of partnerships under these circumstances. Unfortunately, we see very few REITs being promoted by outsiders to the titles. imputation coverage, the title industry generally requires supporting affidavits and indemnity agreements. The indemnity must be backed up by solid financial statements from each party who may have knowledge of hidden or unrecorded matters. Traditionally, this unsecured indemnity is the only risk management tool sought by title insurers to justify assuming this risk, but if offers inadequate protection for risk elimination underwriting. Moreover, not all syndicators trying to create either a REIT or UPREIT have the financial strength to satisfy even this indulgent form of risk underwriting.
(2) The UPREIT itself. If the directors of the UPREIT are not the same people who
(3) Requirements for non-imputation endorsements. When a customer asks for non-
For further information see: - Title questions when insuring securitized loans, prepared by Oscar Beasley - Title insurance issues relating to Debt Securitization prepared by Robert S. Bozarth, Lawyers Title News, Spring 1994. - Securitization, the Mainstream Investment Device of the 90's - REITs & UPREITs, TI Underwriting Briefs U-329 - Title issues related to REITs, Hugh Brodkey, PLI Seminar Book #397.
The "same people who have been involved with the real estate" would include any person involved as a partner or as a business entity partner in the partnership owning the property, whether or not such person continued to be involved in the partnership after the entry of the UPREIT as a partner.
91
8/94
Chapter 15A - Page 1 EQUITY SECURITIZATION Title Underwriting
TITLE QUESTIONS WHEN INSURING SECURITIZED LOANS

The ownership of land by or the loaning of funds to Real Estate Investment Trusts (REIT) or the securitization of mortgages through a REMIC type of transaction, either through a usual form of purchase or a normal financing arrangement can be insured by issuing the American Land Title Association title policy forms. These forms include the 1992 Loan, Owners, Construction Loan, Residential, Leasehold Loan and Leasehold Owner's. REIT AS PURCHASER For many years the term REIT was used in connection with investment companies that were formed as Massachusetts Business Trusts. In some states the business trust was treated as an association and was not believed to be the same as an ordinary trust. In those states where the business trust was recognized as an entity capable of holding title the vesting was directly into trust. In other parts of the country the vesting was frequently into a trustee in the same way that the simple intervivos trust is done. The main purpose of the "old REIT" was the making of loans, not necessarily for the holding of property. Toward the end of the REIT era in the late 1970's and the early 1980's many of the REITS held great amounts of property because of the foreclosure of bad loans. The "New REITS" are not, although they could perhaps still be, business trusts. Today the REITS are generally either corporations or some type of partnership. The "New REIT" is, in many instances, being used to acquire property. The property's value and the resulting income stream generated by the property is used to obtain financing through the sale of securities in the public market. Some of the transactions become very convoluted and complicated. The new umbrella type of REIT involves partnerships that are termed owner partnerships and which hold title to real property. Frequently there are several owner partnerships that may or may not have a common general or limited partner. These partnerships trade their property to an operational umbrella partnership in exchange for a share or interest in the operational partnership. The interests may be in the form of options. The operational partnership may be owned by the REIT. The options are for interests or shares of stock in the REIT who themselves, may have given the operational partnership share interests in exchange for the operational partnerships interest in the land conveyed by the owner partnership. Many value issues can arise when the property is acquired in this manner.
8/94
REIT AS BORROWER As noted the REIT goes to the public market to raise money based on the income stream it acquires. In some instances the REIT will prepare a mortgage on the property and money will be raised from the sale of interests in the mortgage. In still other instances the owner partnerships will all have the same general partner and will in turn have mortgages with cross-collateralization agreements. TITLE INSURANCE ISSUES Many of the issues concerning title arise from the types of transactions listed. In addition to the title questions raised there are issues involving potential creditor rights relating to cross-collaterization; non-imputation; and violations of the securities laws. REITs are not the only method used for the securitization of mortgages. The use of a REMIC also raises some of the same issues. A REMIC concerns the pooling of mortgages and the selling of interests in the mortgage pool. Title insurance has become a very important element in the securitization of mortgages irrespective of the type of entity. Some of the more important issues for the title insurance underwriter are: a. b. Is the entity an insurable entity? What type of ownership interest does the entity have in the property being mortgaged for securitization or in the mortgages in the securitization pool? As an example FNMA is securitizing through the use of a new form of REMIC termed ACES or alternative credit enhancement structure. Is the estate or interest in land insurable, or is the mortgage itself the only insurable interest? Does the interest which is to be insured arise from or is it connected with some illegal or improper event such as the sale of securities that have not been registered? NB see securities laws this manual e. Who are the investors and what is their investment stature? Do they know and understand the nature of the investment? Do they have sufficient information and understanding to be a "sophisticated investor"? How can this be proven?
c. d.
f.
Do you, as insurer or closer, have sufficient knowledge to make an educated decision? Are you relying on others such as the parties' attorney to provide you with the impetus to make the decision?
Each of these issues may create more questions and raise more problems as you continue your investigation. POLICY CONSIDERATIONS The ALTA policies which were listed above are those which will be used to insure any securitization issue They contain two distinct types of coverage which are both disclosed in the opening or "Subject to" Paragraph and the closing "Defense Costs" paragraph of the first page of the policy. The paragraph reads as follows: SUBJECT TO THE EXCLUSIONS FORM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, TITLE INSURANCE COMPANY, a ( state ) corporation, herein called the Company, insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of: The words "loss or damage" as used, indicate that title insurance is indemnity insurance and that the company is responsible for any loss or damage incurred by the insured by reason of a defect, lien or encumbrance, or other covered matter creating a loss. The loss or damage (indemnity coverage) is limited by the amount of insurance purchased and stated in Schedule A. The defense costs are not limited, nor is the amount included as part of Schedule A. The second of the coverages, "defense", is contained in the last few lines of the insuring portion or face of the policy, and reads: The Company will also pay the costs, attorneys' fees and expenses incurred in defense of the title or the lien of the insured mortgage, as insured, but only to the extent provided in the Conditions and Stipulations. There is no limitation in the policy on the amount of defense costs that can be paid under the policy, except for the common sense used in the handling of claims.
Depending upon the type of transaction being insured, that is whether the transaction is for the purchase or financing of land, and the form of interest to be insured, the following insuring clauses are applicable. When a policy is issued to an owner, the insurance does not insure that the owning entity is valid, but does insure that whatever title the entity has received is valid, and that the interest is as we described it in the policy. If the insured entity is not valid then any loss would be excluded by paragraph 3 (a) of the exclusions as noted below. Title insurance under the Loan policy provides for the validity, enforceability, and priority of the insured mortgage. In order for there to be a potential for damages under the policy it must be shown that loss is related to the mortgagor's not being an entity capable of holding title or giving a mortgage. Both the owner's and lenders policies had the same insuring clauses which apply to the title to the property. Clause numbers 1 through 4 read as follows: 1. Title to the estate or interest described in Schedule A being vested other than as stated therein; benefit of the title company's ability to search the public records, as defined in the policy, and to determine from that search if there are any matters recorded which contain a notice of the enforcement or a notice of a defect, lien or encumbrance resulting from violation or alleged violation of one of the exclusions. If any are recorded, they must be disclosed in Schedule B of both the commitments and the policy, even though the policy does not provide coverage. Failure to disclose could create substantial liability for the title insurer. The excluded matters in paragraphs 1 (a) and 1 (b) of the 1990 owners and lenders policies include the use of the property, zoning, condemnations by public bodies and lot splits as well as environmental clean-ups or police power takings. The Exclusions From Coverage in ALTA-1987, amended 1992 Lender's policies are: 1. (a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use or enjoyment of the land; (ii) the character, dimensions or location of any improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.
(b)
Any governmental police power not excluded by (a) above, except to the extent that a notice of the exercise thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.
2.
Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records at Date of Policy, but not excluding from coverage any taking which has occurred prior to Date of Policy which would be binding on the rights of a purchaser for value without knowledge at the date the insured claimant became an insured under this policy; (c) (d) resulting in no loss or damage to the insured claimant; attaching or created subsequent to Date of Policy (except to the extent that this policy insures the priority of the lien of the insured mortgage over any statutory lien of services, labor or material or the extent insurance is afforded herein as to assessments for street improvements under construction or completed at date of policy); or resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the insured mortgage.
(e)
Many of the Excluded matters in 3 (a) are frequently referred to as "your" own darn "fault" matters. However, the words "suffered, assumed, created and agreed to" have been defined by the Court unfavorably to the insurer in many instances. Under exclusion 3 (b) the failure to disclose by the insured can be construed as a misrepresentation, or perhaps fraud, and is not covered by the title policy. If the matter is in the public record and not found, the insurer incurs the liability because of its obligation to discover what is in the public records. For example, a bankruptcy filed of record but not excepted is the title insurers problem. But a bankruptcy filed after date of policy is a post-policy event unless an insured transaction could be set aside or impaired under 547, 548 or 549 or 11 U.S.C. as a result of insolvency or preference created by the transaction. This is why the creditors rights exclusion was included in the 1990 & 1992 policies. The creditor's rights exclusions in the ALTA owners and loan policies reads as follows: OWNER'S POLICY
"4.
Any claim, which arises out of the transaction vesting in the Insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (i) the transaction creating the estate or interest insured by this policy being deemed a fraudulent conveyance or fraudulent transfer; or (ii) the transaction creating the estate or interest insured by this policy being deemed a preferential transfer except where the preferential transfer results from the failure: (a) to timely record the instrument or transfer; or (b) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor."
LOAN POLICY "7. Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (i) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or (ii) the subordination of the interest of the insured mortgagee as a result of the application of the doctrine or equitable subordination; or (iii) the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure: (a) to timely record the instrument of transfer; or (b) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor."
SECURITIES ISSUES Certain real estate transactions fall within the definition of a security. Title services provided in connection with securities transactions may expose the title insurer to additional risks. A security is defined as "Any note, ... bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit sharing agreement, collateral trust certificate, ... investment contract ... certificate of deposit for a security, ... or, in general, any interest or instrument commonly known as a ... "security," any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of or warrant or right to subscribe to or purchase, any of the foregoing." (Securities Act of 1933). The securities laws, both State and Federal, require securities to either be of an exempt class or registered. In many instances registration is required and this is not being done. Some of the reasons for this is that the level of awareness regarding securities as they relate to real estate is very low. Many promoters, Real Estate and Mortgage Brokers have not been burned yet so they continue to "fly by the seat of their pants" and hope nothing goes wrong. It is very difficult if not impossible in most deals, to determine that the security involved does not necessitate a permit and/or registration with the State and/or Federal authorities. A securities problem occurs when there is insufficient disclosure of all relevant issues. Failure to properly disclose a material fact taints the entire transactions and those in the investment group who lose their investment and can prove that the loss is because of the failure to disclose or one of the other related reasons collect their investment from the issuer and any aider or abettor. 1. Potential Violation of 1993-1994 SEC Acts
Securities acts, both federal and state, govern the registration, offering, sale, and other aspects of securities. Major federal acts include the Securities Act of 1933 and the Securities Exchange Act of 1934. The majority of the states have adopted the Uniform Securities Act, promulgated by the Securities and Exchange Commission (SEC). The SEC is a federal agency which administers laws pertaining to securities. The Securities Exchange Act of 1933 is federal law which provides for registration of securities which are to be sold to the public and for complete information as to the issuer and the stock offering. The Securities Exchange Act of 1934 is federal law which governs the operation of stock exchanges and over the counter trading. It requires, among other things, publication of information concerning stocks which are listed on these exchanges.
Potential violations of the Securities Act of 1933 or 1934 may occur by the improper sale of undivided interests in deeds of trust, mortgages or parcels of land, or of other forms of securities without having made proper disclosures or not having obtained proper permits. 2. Exemptions from Act for knowledgeable investors
Certain securities are not required to be registered under the provisions of the Securities Exchange Act. Usually in order to qualify for the exemption, investors must have an investment portfolio of at least $1 million, not including the value of their principal residence. This requirement is clearly in place to protect the "ma and pa" investors. 3. Potential for fraud - Aider and Abettor Liability
The federal and state securities laws provide that with some narrow exceptions, securities may not be sold unless an appropriate registration is first made. A registration is a form of disclosure, and the failure to properly disclose can lead to damages for fraud. A registration includes the publication for the buying public or a statement of information. Any person or entity who aides and abets in the sale of unregistered securities or a registered security where improper disclosures are made can be liable for losses which the investor suffers. Even if the securities do not require registration, there can still be liability on the aider and abettor as well as on the actual issuer because of failure to make proper disclosure. The aider and abettor is considered to be the same as the issuer and similarly liable. Title companies have been found liable for damages as an issuer merely for the handling of a closing. There are many attorneys who believe that the issuance of a title policy lends credibility to the transaction and lead to liability, although the courts have not to date been so inclined. The definition of a security was outlined in a case called Securities & Exchange Commission V. W.J. Howey Co. et al, (328 U.S. 293, 66 S. Ct. 1100, 90 L, Ed. 1244). The facts of the case involved an orange grove in Florida that the owner, Howey, wanted to and did sell to a group of, what were later termed by the court, to be investors, but maintaining the right to control the use of the property as manager. Howey was supposed to receive compensation for his management efforts, and the investors were to receive an adequate return on their investment. The court said that an investor is a person that gives money or something else of value to a third person for the purpose of management in order to obtain a profit. Applying the facts of the Howey case to the definition of a security discloses a classic case of investment. The investors purchased an undivided interest in the real property, left the management with the seller for the avowed purpose of making a profit on the investment. None of these individual actions was unusual when taken alone, but putting the whole scheme together made the scheme a security. Buying property for investment purposes is not bad. Hiring a manager to handle the property is not bad, and making money from buying and using property is not wrong, but the incorporation of all three actions in one transaction is a security.
issuance of a security is not wrong if there is a proper registration, or the transaction or the parties are exempt from registration. Several types of transactions commonly found in the title industry have been defined as security transactions. These include: A. B. Sales of participation in a beneficial interest of a trust deed or the mortgagee's interest in a mortgage or a pool of mortgages. Sales of real property including condominiums or condominium hotels, where a rental service or pool rents the property and shares the rental proceeds with all other members of the pool. Sales of undivided interests in real property as done in the Howey case.
C.
Each of the described transactions has been held to be a violation of the securities laws. The potential damages that arise from a securities problem are very large. The title to the property is not affected by the securities violation. If the issuance of the title policy were wrongly held to be part of the securities violation then the damages are not title damages but rather damagers assessed because of the unregistered security. Whatever damages the investor has suffered and is granted through the court can be trebled. See "Real Estate Interests As Securities" The Practical Real Estate Lawyer, May, 1992 and First American Title Insurance Co. Regional Counsel Meeting Seminar Material of June 10, 1992, page 1075. One of the more important issues now appearing in the title insurance field is the proposed use of private investors to fund construction loans. With the demise of many savings and loan associations and other forms of banks and the general retreat of investment capital, many loan brokers are trying to fund syndicates for construction investment. The syndicates are either one of the above described transactions or involve use of limited or general partnerships. Each of these organizational entities can create problems not only for the title companies but also for the attorney or broker involved. See First American Title Insurance Co. Underwriting Bulletin No. H.O. 1082 date January 27, 1992 appearing in FATICO Regional Counsel Seminar material at page 1081 CREDITORS' RIGHTS The Title Industry has been concerned for many years about the problems created for and by creditors through the mortgaging or transferring of real property by debtors. In many instances the creditors issues are not recognized by either the attorney handling the transaction or by the company being asked to issue title insurance. The creditors' rights
problems have been compounded by the increasing complexity of the transactions and by the speed with which they must close. Documentation frequently is not completed until shortly before closing, leaving inadequate time for review by all parties prior to recording. Whenever in a real estate transaction there is an increase in the amount of debt of the debtor or a decrease in the assets of the debtor, a creditors' rights problem occurs because of the potential insolvency. Fraudulent Conveyances Two major areas of concern to both the Federal Bankruptcy and State Courts dealing with similar concerns are the presence of fraudulent conveyances or preferential transfers of real property. All real property conveyances are subject to close scrutiny when made either at a time when the debtor is insolvent or when the conveyance creates the debtor's insolvency. The discussion in this handout is meant to acquaint or reacquaint the reader with the general law concerning these two areas. Preferences The preference action is the attempt through the Bankruptcy Code to establish or return all creditors to a position of parity based on their individual situation immediately prior to the debtor's filing of bankruptcy. The preference action has the added effect of penalizing those creditors who have, prior to the filing, effectively taken action to collect their obligations. As now written, Bankruptcy Code Title 11 U.S.C. Section 547 has made it considerably easier to prosecute a preference action. It is no longer necessary to prove that the debtor is in fact insolvent, because there is a presumption that any transfer made within ninety (90) days prior to the filing of a bankruptcy petition is a preference. There is no necessity to prove that the creditor knew or should have known that the debtor was insolvent at the time of the transfer. The change in the Code has increased the number of complaints filed by trustees to set aside alleged preferential transfers, but the Code attempts to balance the equities of legitimate business and consumer relationships to those transfers which are intentional attempts to hide assets of the estate. All transfers are potentially at jeopardy.
Section 547 provides that a trustee may avoid any voluntary or involuntary transfer of an interest of the debtor in property which is made: 1. 2. 3. 4. To or for the benefit of the creditors; For or on account of an antecedent debt owed by the debtor before such transfer was made; While the debtor was insolvent; (a) (b) 5. on or within ninety (90) days before the date of the filing of the petition; or between ninety (90) days and one year before the date of the filing of the petition, if such creditor at the time of transfer was an insider;
and enables the creditor to receive more than the creditor would receive if: (a) (b) (c) the case were a case under Chapter 7 of this title; the transfer had not been made; and such creditor received payment of such debt to the extent provided by the provisions of this title.
The Code further provides that, when the transfer is made to an insider, the preference period is extended to one year from the filing of the petition. The very narrow definition of an insider is set forth in Section 101 (3) and includes generally the debtor, individual, or entity and those closely connected with the debtor, and unless the creditor fits within this definition of insider, the preference period is limited to ninety (90) days. The defenses provided by Section 547 to an action by trustee include: 1. 2. The transfer was intended by the debtor and the creditor to be a contemporaneous exchange for new value given to the debtor. The transfer was in payment of a debt which was incurred by the debtor in the ordinary course of business and was made according to ordinary business procedures and practices.
3.
The transfer of a security interest in property was part of an enabling loan or purchase money mortgage. The trustee may not attack the security to the extent that new value is given at or after the signing of the security agreement. The creditor gives new value to or for the benefit of the debtor after the preferential transfer which is not secured and which does not constitute an otherwise avoidable transfer to the creditor. The creditor gives new value to or for the benefit of the debtor and perfects a security interest in inventory or receivables or the proceeds thereof. The transfer reflects the attachment of a security interest by operation of law through a statutory lien, including mechanics or tax liens.
4.
5. 6.
Fraudulent Transfers The code allows a trustee in either a voluntary or involuntary bankruptcy to invalidate prepetition transfers made by the debtor, including transfers to insiders, with actual intent to hinder, delay, or defraud creditors. It also provides for avoidance of transfers where the debtor received less than a reasonably equivalent value and (1) was rendered or became insolvent as a result of the transaction; or (2) was engaged in or was about to engage in a business transaction for which it has unreasonably small capital in relation to its remaining property; or (3) intended or believed that it would incur debts beyond its ability to pay. Section 544 provides that the trustee in behalf of unsecured creditors may avoid any transfer, in a liquidation proceeding, of an interest or obligation incurred by the debtor that is voidable under applicable state fraudulent conveyance statutes. Section 548 gives the trustee the power to avoid any transfer made or incurred within one year before the filing of the bankruptcy if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay or defraud any entity. Frequently, bankruptcy problems arise in situations where apparent credit problems appear. These can be identified when proceeds received from a financing transaction are not paid directly to the owner of the property being used as security for the mortgage, deed of trust or other security device. These types of transactions are described as "upstream", "down-stream", "leveraged buy-out", "cash-out" transactions. The terms "leveraged buy-out" or "leveraged cash-out"are associated with transactions involving the acquisition of businesses, usually corporations. In a leveraged by-out the stock of the corporation is being sold to the acquirer, but the acquirer is obtaining the funds to purchase the stock from the mortgaging of the assets of the corporation being
acquired. Concurrent transactions take place. The stock is transferred to the new owner at the same time that the new owner mortgages the property. A leveraged cash-out involves corporations that have either large amounts of cash or substantial equity in unencumbered or underencumbered properties. The properties are encumbered to obtain funds to pay out to stockholders. Neither the excess cash nor proceeds of the encumbrance are set aside for creditors or for operations. The leveraged buy-out frequently leaves the corporation insolvent or creates a situation where the corporation is unable to meet its obligations in the future. Although the word "leveraged buy out" does not describe the transaction, another situation must be considered when discussing fraudulent conveyances. If there is a foreclosure by a lender and the amount bid at the foreclosure sale is less than the reasonably equivalent value of the property, the sale can be set aside by a Bankruptcy Court if the foreclosed debtor files for a chapter proceeding within one year of the foreclosure. The term "reasonably equivalent value," although very nebulous, appears to be defined as the value of the property less all encumbrances including the amount of the mortgage being foreclosed, or the equity in the property. If the debtor goes into bankruptcy within a year of the date of the foreclosure, the Bankruptcy Court can set the transaction aside, declaring that because of the equity in the property, the creditors have been deprived of assets, and the sale is invalid. The court has the ability to restore the property to the debtor, but may have obligation to restore any loan to its original priority. The words "up-stream", "down-stream" and "cross-stream" describe financing transactions between parent and subsidiary corporations or between sister corporations. These transactions can be identified because the proceeds of the loan do not go to the owner of the property but are transferred either directly or indirectly out of the owner's assets. Accordingly, the balance sheet automatically deteriorates as there are now more liabilities (the mortgage or trust deed and note) without the offsetting new asset (the loan proceeds . . . which have gone to a third party). It is of no help that the party receiving the proceeds is, or was, related to the debtor. A refinance of a mortgage where the owner does not receive the proceeds will be equally subject to the claim that it is a fraudulent conveyance or preference. This type of transaction is difficult to identify. The potential problem in these transactions arises because in each of them the party giving the security does not obtain the proceeds of the loan. These transactions can be attacked, both under the Bankruptcy Code and state fraudulent conveyance laws. There is also a distinct possibility that they may fail for failure of consideration under basic contract laws. This article was prepared by Oscar A. Beasley, Senior Vice President and Senior Title Counsel, First American Title Insurance Company and originally appeared in Ohio Title Topics, January, 1994. It has been substantially edited from the original.
Chapter 40 - page 1 TITLE STANDARDS General
TITLE STANDARDS AND RECOMMENDED PRACTICES

In many States the Real Property Section of the State Bar Association has drafted Title Standards, outlining the standard rules and procedures governing the question of title in real estate transactions as determined by real estate practioners. Every attorney, title examiner and underwriter should be familiar with these standards, for they often contain an exposition of the local law and set forth customs that other lawyers in the transaction are likely to insist upon govern the deal. These standards review and declare the law applicable to commonly recurring situations. They do not undertake to address issues which may be controversial among competent and knowledgeable counsel. Such standards set forth many circumstances that, under the title standards, warrant the waiver of a title objection. The value of such standards are increasingly realized. The problem of title defects and irregularities are frequently a matter of opinion. How serious these irregularities are may vary from one examiner to another. Many would be "passed" by one examiner if he or she were confident the next examiner would do the same. Title Standards are intended to serve that purpose. In those jurisdictions where they are in use and relied upon by custom objections to title are only made when irregularities and defects in title are of such character that they are likely to expose the purchaser or lender to the hazard of adverse claims or litigation, and not when a technical defect gives no one an enforceable claim against the owner or the property. However, the existence of such standards do not have the binding effect of law unless they are formally adopted by the legislature and passed into law. A contractual stipulation that encumbrances be determined by the state bar standards was held inapplicable to defects of title. The New York Standards for Title Examination were originally adopted and published by the Executive Committee of the New York State Bar Association in 1955. They were thereafter revised and republished April, 1965 in 37 N.Y. State Bar Journal and last revised and approved in 1976. Copies of those Title Standards appear on the following pages. Those title standards served as a guide to the NYSLTA Law Committee of the Title Insurers Section when they adopted Recommended Title Practices, as amended June 18,1973. These Recommended Practices were revised and adopted May 1995 by the New York State Land Title Association. These practices were drafted by recognized experts in the field of conveyancing and represent the substantial unanimous opinion of the members of the bar who are experienced conveyancers. For further discussion of the of the title standards issue please refer to Bayse, Clearing Land Titles, 7.
Chapter 40 - Page 1 NYSLTA PRACTICES Amended June 6, 1973
INDEX TO RECOMMENDED PRACTICES NEW YORK STATE LAND TITLE ASSOCIATION LAW COMMITTEE OF THE TITLE INSURANCE SECTION Subject Action Against Disappearing Co-owners Administrator's Deed - Bond Afterborn and Posthumous Children Ancient Mortgages Ancient Mortgages, Small Ancillary Letters of Probate, Power of Sale Assignments of Judgment to United States of America Bankruptcy Searches Brooklyn Sales, Publication in New York Law Journal Charges, Labor and Material Children, Afterborn and Posthumous Co-owners, Disappearing - Action Against Commissioner of Public Welfare - Mortgages and Judgments Condemnation, Insuring an Award to which Section 35 and 35a of General City Law is Applicable Conveyance by Corporation to Stockholders Conveyance in Contemplation of Death Corporate Seal Corporation - Deeds Dated prior to Incorporation Corporation Deed to a Company Officer Corporations, Conveyance to Stockholders Corporations, Old Deed from Fiduciary - Consideration Deeds, by Infants, Incompetents Deeds, Corporation, Dated prior to Incorporation Deeds, Corporation, to a Company Officer Deeds, Effect of "Same As" Recital in Delivery Question Description, Record-Variation with Tax Map Description - Variance between Streets on Filed Map and in Particular Description Description Defect Caused by Change in Street Lines Directors, Stockholders, Interlocking Number 60 62 24 16 44 50 48 20 59 14 24 60 38 31 21 17 18 8 9 21 11 34 32 8 9 40 1 56 47 49 10 5 12 13 13 6 16 5 7 16 10 8 6 5 5 4 4 6 4 9 9 4 4 10 1 15 12 13 4 Page 16 17 7
Dower
Dower, Foreclosure - Parties Driveway Easement, Reciprocal Effect of "Same As" Recital in Deed Estate Taxes, Federal Federal Courts, Foreclosure Federal Estate Taxes Federal Estate Taxes Against Unknowns Federal and New York Estate Taxes Federal Liens Federal Liens - Searches Federal Tax Liens, After the Commencement of Foreclosure Action Federal Tax Liens, Tenants by the Entirety Fence Variations Financing Statements Foreclosure, in Federal Courts Foreclosure - Parties - Agency of State or Municipality Foreclosure - Parties - Dower Foreclosure - Parties - Successors of Deceased Mortgagee Franchise Taxes Gaps in Record Title - Insuring General City Law - Section 35 and 35a, Insuring an Award in Condemnation Heirship, Proof of, - in Petition for Letters of Administration Heirship, Proof of, - in Statement in Transfer or Estate Tax Petition Incompetents - Infants - Deeds by Infants - Incompetents - Deeds by Inheritance by Surviving Spouse Insuring Gaps in Record Title Interlocking Directors or Stockholders
22 42 40 5 58 5 5A 46B 35 33 39 46A 25 3 58 23A 22 23 13 43 31 30 28 32 32 7 43 10 16 48 51 10 38 2&3 6
6 11 10 2 15 2 2 12 9 9 10 12 7 1 15 6 6 5 11 8 8 8 9 9 11 4 13 14 10
Joint Tenant or Tenant by Entirety - Proof of Death 61 Judgment, Assignments to United States of America Judgments, Against Partners Judgments, Entered between Date of Deed and Recording 37 Judgments, Held by Commissioner of Public Welfare
Labor and Material Charges Legacies - Proof of Payment Liens, Federal Liens, Federal - Searches Liens, Federal Tax, After Commencement of Foreclosure Action Limited Partnership Lis Pendens - Open Mortgage or Mechanic's Lien Discharged Lis Pendens, Tenement House Department Lis Pendens - Unsafe Building Violation Mortgages, Ancient Mortgages, Held by Commissioner of Public Welfare Mortgages, Purchase Money - Priority over Judgment against the Mortgagor Mortgages, Release in Lieu of Satisfaction Mortgages - Small, Ancient Mortgages, Unrecorded Nassau Sales, Publication in New York Law Journal N.Y.C. Department of Health Liens Old Corporations Partners, Judgments Against Partnership, Limited Party Walls Posthumous and Afterborn Children Power of Sale, Ancillary Letters of Probate Priority of a Purchase Money Mortgage over Judgment Against the Mortgagor Probate of Wills Proof of Death, Joint Tenant or Tenant by Entirety Proof of Heirship, in Petition for Letters of Administration Proof of Heirship, in Statement in Transfer or Estate Tax Petition Proof of Payment of Legacies Public Administrator's Sales Public Administrator's Sales - Acting in Fiduciary Capacity Publication of Kings, Nassau and Queens Sales in New York Law Journal Purchase Money Mortgage, Priority over Judgment
14 19 35 33 39 53 15 4 55 16 38 54 64 44 12 59 65 11 51 53 41 24 50 54 29 61 30 28 19 27 27A 59 14
5 6 9 9 10 5 1 15 5 10 14 17 12 4 16 18 4 14 14 11 7 13 14 8 16 8 8 6 7 7 16
Against the Mortgagor
54
14
Queens Sales, Publication in New York Law Journal Re-entry, Right of - Tax Sales Reciprocal Driveway Easements Record Title, Insuring Gaps in Right of Election "Same As" Recital, Effect in Deed Searches, Bankruptcy Section 35 and 35a General City Law, Insuring an Award in Condemnation Section 307.A-i, Surrogate's Court Procedure Act Sheriff's Execution Sales - Prior Judgments Small Ancient Mortgages Stock Replaced by Real Estate Stockholders, Conveyance by Corporation to Stockholders, Directors, Interlocking Street Lines, Description Defect caused by Change in Surety Bond Liens - When Disregarded Surviving Spouse, Inheritance by Tax Sales - Right of Re-entry Tax Titles Taxes, Federal Estate Taxes, Federal Estate, Against Unknowns Taxes, Franchise Tenant by Entirety, or Joint Tenant - Proof of Death Tenants, by Entirety, Federal Tax Liens Tenement House Department Lis Pendens Unrecorded Mortgage Variation between Record Description and Tax Map Variations, Fence Wills, Probate of 56 42
59 36 11 43 45 40 20 31 6 57 44 52 21 10 49 63 7 36 26 5 5A 13 61 46A 4 12 15 25 29 17
16 10 11 12 10 6 8 2 15 12 14 6 4 13 2&3 10 7 2 2 5 16 12 1 4 7 8
NEW YORK STATE LAND TITLE ASSOCIATION LAW COMMITTEE OF THE TITLE INSURANCE SECTION RECOMMENDED PRACTICES JUNE 2, 1949 1. DELIVERY QUESTION (AS AMENDED MAY, 1971) Where there is a time lapse between the date of a deed and the date of its recording, no objection will be raised where the deed has been on record for more than ten (10) years. If the deed has been on record for ten (10) years or less, the period search in the Surrogate's office would be run against the grantor from the date of the instrument to the date of recording in the party is situated. If no death was found then the question would still in title and more definite information could therefore be obtained, or unless knowledge of the death of the grantor is definitely known. The question of delivery should not be raised where the interval between the date of the deed and the recording date thereof was less than thirty (30) days unless there was affirmative knowledge of the death of the grantor prior to recording. Under this 30-day period no Surrogate's search will be made. 2. DOWER Unless title to the property is still in the grantor's family, the question of dower will not be raised after a period of thirty-three (33) years. 3. FINANCING STATEMENTS (AS AMENDED MAY, 1971) Financing Statements will be passed where they are on file for more than five (5) years and there was a change of ownership or there would be a change on the closing. Where, however, the transaction was to insure a mortgage and there was to be no change of ownership, then the Financing Statements on file for more than five (5) years will be excepted unless they are on file for more than six (6) years and have not been renewed. 4. TENEMENT HOUSE DEPARTMENT LIS PENDENS (AS AMENDED NOVEMBER 24, 1959) A Lis pendens to enforce tenement house violations will be disregarded if the search shows that the violations which are the subject of the Lis pendens are no longer pending.
5.
FEDERAL ESTATE TAXES (AS AMENDED MAY, 1971) The question of Federal Estate Taxes may be disregarded where the New York Estate Tax proceeding against a former owner shows that the gross estate of the decedent was of the value of not more than $40,000.
5A.
FEDERAL ESTATE TAXES AGAINST UNKNOWNS (MAY 24, 1967) Where in an action parties defendants are included as unknowns in an omnibus clause, no question will be raised as to possible Federal Estate Taxes against the estates of any such unknowns who may be dead and the federal government need not be named a party for purpose of cutting off such possible Federal Estate Taxes. The federal government is to be named as a party defendant for any other proper reason which may exist in the title.
6.
SECTION 307.A-I, SURROGATE'S COURT PROCEDURE ACT (AS AMENDED MAY, 1971) Where the petition shows the gross estate to be less than five thousand dollars ($5,000) the publication of the citation in only one newspaper will be passed despite the fact that subsequent proceedings in the estate may show that it exceeded five thousand dollars ($5,000) in value.
7.
INHERITANCE BY SURVIVING SPOUSE (AS AMENDED MAY 24, 1967) A. - (a) When decedent died prior to March 1, 1964 and title is made through a surviving spouse who claims the entire title under subdivisions 2 and 3 of Section 83 of the Decedent Estate Law because the estate was less than $5,000, deeds should be obtained from the surviving parents or parent, or through a spouse who claims the entire title under subdivision 4 because the estate was less than $10,000, deeds should be obtained from the surviving brothers and sisters or their descendants. However such deeds will be waived if title is made through a proceeding in the Surrogate's Court by an administrator for leave to sell a property or an accounting proceeding or a proceeding for probate of heirship or other appropriate action or proceeding is properly conducted and such parents or collaterals are joined as parties and an appropriate finding is made that the value of the estate is below the required amount. (b) The title from the surviving spouse of an intestate may be passed without requiring deeds from the parents or collaterals and without requiring any of the foregoing proceedings or actions if proof is furnished of all three of the following: (1) The estate was below the amount required to give the spouse the entire title; this may be established either by the estate tax proceeding or by affidavit, and
(2) (3)
The property has been improved for more than fifteen years, and The deed from the surviving spouse or from his or her heirs, devisees or successors in interest has been recorded for more than fifteen years.
B. - (a) When decedent died after March 1, 1964 and title is made through a surviving spouse who claims the entire title under subdivisions 2 and 3 of Section 83 of the Decedent Estate Law because the estate was less than $25,000, deeds should be obtained from the surviving parents or parent. However such deeds will be waived if title is made through a proceeding in the Surrogate's Court by an administrator for leave to sell the property or an accounting proceeding or a proceeding for probate of heirship or other appropriate action or proceeding is properly conducted and such parents are joined as parties and an appropriate finding is made that the value of the estate is below the required amount. NOTE: The Following Cannot Possibly Take Effect Until March 1, 1974:
(b) The title from the surviving spouse of an intestate may be passed without requiring deeds from the parents and without requiring any of the foregoing proceedings or actions if proof is furnished of all three of the following: (1) The estate was below the amount required to give the spouse the entire title; this may be established either by the estate tax proceeding or by affidavit, and (2) The property has been improved for more than ten years, and (3) The deed from the surviving spouse or from his or her heirs, devisees or successors in interest has been recorded for more than ten years. 8. CORPORATION - DEEDS DATED PRIOR TO INCORPORATION (AS AMENDED AUGUST 24, 1951) (a) When a deed is dated and recorded before the certificate of incorporation of the grantee is filed in the office of the Secretary of State and a confirmatory deed is obtained from the grantor to the corporation after the filing of the certificate of incorporation, the deeds will be passed as sufficient without any requirement for further instruments from the incorporators or stockholders of the grantee or from those who furnished the consideration for the conveyance. (b) When a deed is dated before the certificate of incorporation of the grantee is filed in the office of the Secretary of State and the deed is recorded on the same day as the certificate is filed or later, the deed will be passed as sufficient without requirement of proof of delivery or of any confirmatory deeds whatsoever.
9.
CORPORATION DEED TO A COMPANY OFFICER A deed from a corporation to a grantee who, from the record appears to be an officer, director or stockholder of the grantor corporation or a grantee obviously related to such a person, may be passed without question where title has reached a purchaser for value.
10.
INTERLOCKING DIRECTORS OR STOCKHOLDERS The same rule may be applied to a conveyance from a corporation to a corporate grantee having interlocking directors or stockholders.
11.
OLD CORPORATIONS Where a corporation has been out of title and the property has also been improved regardless of parties for over fifteen (15) years, no search will be made for a certificate of incorporation.
12.
UNRECORDED MORTGAGE Recital of an unrecorded mortgage in a deed of record for 20 years or more may be passed on proof that for 6 years or more last past no principal or interest has been paid or demanded and no knowledge was had by the owners of said unrecorded mortgage. Where such recital is contained in the last deed of record satisfactory proof will be required to dispose of the objection.
13.
FRANCHISE TAXES When franchise taxes accrued more than 10 years ago against a corporation which has been dissolved within the past ten years the franchise taxes which are more than ten years old may be disregarded, provided premises have been, or are being, conveyed to a purchaser for value. If such dissolved corporation is the present owner proof of payment of taxes accruing subsequent to January 1, 1948 should be obtained. As to undissolved corporations all franchise taxes accruing during the period more than ten years last past may be disregarded provided title has passed, or is being conveyed, to a purchaser for value.
14.
LABOR AND MATERIAL CHARGES (AS AMENDED JUNE 1, 1950) Labor and material charges entered on the tax records will be passed unless they are against the last owner.
15.
LIS PENDENS OPEN MORTGAGE OR MECHANIC'S LIEN DISCHARGED (AS AMENDED NOVEMBER 14, 1955) If (1) a judgment has not been entered, or if entered, was entered more than six years ago and (2) a receiver has not been appointed, or if appointed, has bee discharged by court order, and (3) the mortgage or mechanic's lien has been satisfied prior to the pending transaction, the Lis pendens in an action to foreclose the mortgage or mechanic's lien will be disregarded.
16.
ANCIENT MORTGAGES (AS AMENDED MAY, 1971) A mortgage may be disregarded where the mortgage and fee title come into the same ownership of record more than 10 years ago without any recital of nonmerger, where such owner is no longer in title and where the chain of title subsequent to the original common ownership of the fee and the mortgage contains no recital of, or reference to, such mortgage. Proof is also to be taken from the last owner that no demand has been made for payment, that no payment has been made of principal or interest, and that he has not acknowledged the debt.
17.
CONVEYANCE IN CONTEMPLATION OF DEATH (AS AMENDED NOVEMBER 20, 1976) Where, within three years after a conveyance is recorded the grantor dies, no estate tax question need be raised after the property has been acquired by a subsequent purchaser for value.
18.
CORPORATE SEAL After 15 years a corporate instrument may be passed where no corporate seal was affixed.
19.
PROOF OF PAYMENT OF LEGACIES (AS AMENDED APRIL 24, 1974) Legacies whether expressly or impliedly charged on the real property of a decedent may be disregarded after 10 years from the date of death of the decedent if the estate has passed out of title.
20.
BANKRUPTCY SEARCHES (AS AMENDED MAY 24, 1976) In counties where the District Court Clerk is not located in the County, no search for bankruptcy records will be made but title companies will rely on land records. In counties where District Court is located in County, title companies will search back for twenty years.
21.
CONVEYANCE BY CORPORATION TO STOCKHOLDERS When a corporation conveys its property to its stockholders, if consent of all stockholders is secured, as well as proof of solvency of the corporation, title will be approved.
22.
FORECLOSURE - PARTIES - DOWER The fact that the holder of an inchoate right of dower, subordinate to a mortgage, was not made a party defendant in an action to foreclose the mortgage may be disregarded when fifteen years have elapsed since the delivery of the referee's deed.
23.
FORECLOSURE - PARTIES - SUCCESSORS OF DECEASED MORTGAGEE When the holder of a junior lien dies intestate and no proceedings have been had in his estate for the appointment of an administrator, the lien will be deemed barred in an action to foreclose a prior mortgage if all the next of kin have been made parties and satisfactory proof is furnished of the death, the intestacy, the family history and the absence of creditors of the estate. In such situations the lack of proof that there were no creditors may be disregarded when more than six years have elapsed since the delivery of the referee's deed.
23A. FORECLOSURE Where a judgment has been rendered in favor of an Agency of the State or Municipality it will be adequate to join the State of New York or such Municipality without joining the Agency as a party defendant. Appropriate recitals must be contained in the complaint giving the reason for joinder as a party. (This is inapplicable to the Industrial Commissioner of the State of New York who must be joined as a party). (Adopted June 16, 1970) 24. POSTHUMOUS AND AFTERBORN CHILDREN (AS AMENDED APRIL 24, 1974) When the records fail to show whether or not any child of a decedent was born after the death of the decedent or after the date of the decedent's will, and no proof on the subject is available, the question may be disregarded if thirty years have elapsed since the date of the death of the decedent, or if fifteen years have elapsed since a conveyance by the devisees to a bona fide purchaser. 25. FENCE VARIATIONS Where there are variations between the lines of the record title and lines of fences, hedges or retaining walls, the policy may except such variation but will not except
failure of title to the land outside of such fence, hedge or retaining wall unless such variations exceed twelve inches.
26.
TAX TITLES When title to property in Suffolk, Nassau or Westchester Counties or in the City of New York is made through a recorded tax deed properly describing the property under examination, and there is an applicable statute which makes the deed conclusive evidence of the validity of the sale after a specified period, and four more years have elapsed since the expiration of such period, the title will be insured without requirement of an action to perfect the tax title, unless it is established that the tax for the year which resulted in the sale was paid before the sale either directly or under another assessment for the same tax.
27.
PUBLIC ADMINISTRATOR'S SALES (AS AMENDED MAY, 1971) Title made through sales by public administrators will be insured, if otherwise valid, despite the fact that no bond has been filed in the proceeding for the sale of the particular parcel and despite the fact that no bank has been designated in the order as the depository of the proceeds of sale.
27A. PUBLIC ADMINISTRATOR'S SALES - ACTING IN FIDUCIARY CAPACITY If an intestate died on or after June 1, 1965 title companies will approve sales by the Public Administrator acting as administrator of the estate under Section 127 of the Decedent's Estatees Law without requiring the filing of an additional bond unless the court so requires. (Adopted November 3, 1966). 28. PROOF OF HEIRSHIP When a deed from the supposed heirs of a former owner who died intestate has been recorded for more than fifteen years, and the only proof that such grantors are the only heirs is contained in a statement in the transfer or estate tax petition by a qualified person to the effect that they are the only persons interested in the estate of the decedent, the title will be insured without exception as to the sufficiency of such proof. 29. PROBATE OF WILLS (a) When title is made through a will and the estate is out of title and the petition for probate, though not made by a blood relative of the decedent, shows that the heirs are direct descendants or brothers and sisters, the title will be insured without exception as to the sufficiency of such proof. (b) If under the same circumstances the petition shows that the heirs include nephews or nieces or more remote relatives, the title will nevertheless be insured without exception as to the sufficiency of such proof if five years have elapsed
since the probate of the will.
(c) Proof of Heirship on Probate - Where title is presently being made through a will and the petition is made for probate by the surviving spouse, who has had children with the decedent, the title will be insured without further proof of heirship, provided that the decedent had not had a prior marriage and satisfactory proof of that fact is furnished. (Adopted June 16, 1970) 30. PROOF OF HEIRSHIP When a deed from the supposed heirs of a former owner who died intestate has been recorded for more than fifteen years, and the only proof that such grantors are the only heirs is contained in a petition for letters of administration made by one who was not a blood relative of the decedent, the title will be insured without any exception as to the sufficiency of such proof. 31. SECTION 35 AND 35A GENERAL CITY LAW Where a building on land affected by Section 35 of the General City Law is legalized pursuant to Section 35a thereof, upon application and payment of such additional premiums as may be determined, policy will insure affirmatively that an award in condemnation as, if and when made, will not be diminished by reason of the fact that such building was not erected pursuant to a building permit issued by the Board of Standards and Appeals. 32. INFANTS, INCOMPETENTS - DEEDS BY Deeds executed by guardians, committees or attorneys in fact in behalf of their respective wards, incompetents or principals, instead of in their names by such representatives will not be deemed an objection to title where the instrument recites the source of authority for the act and the instruments have been properly indexed on the record against the respective infant, incompetent or principal. 33. FEDERAL LIENS - SEARCHES Where property is situated in the county in which is also located the Federal District Court, searches for judgments will be made in both the County Clerk's office and in the office of the District Court. Where the property is situated in a county in which the Federal District Court is not located, judgments need be run only in the office of the County Clerk. 34. DEED FROM FIDUCIARY, - CONSIDERATION AS AMENDED MAY, 1971 Where a deed form a fiduciary recites only a nominal consideration no exception as to adequacy of consideration will be raised if the deed is on record for more than 10 years.
35.
FEDERAL LIENS Effective January 1, 1968, a notice of Federal Tax Lien filed prior to January 1, 1962 may be disregarded upon the property of the taxpayer to a purchaser (as defined in the Federal Tax Lien Act of 1966) or a Mortgagee unless such notice shall have been refiled prior to the recording of the closing instruments. Any other notice of Federal Tax Lien may be disregarded in like manner provided it shall have been filed more than six years and thirty days and shall not have been refiled prior to the recording of the closing instruments. Despite the foregoing provisions, searches shall be run against all parties who have been in the chain of title during the 15 years preceding the date of examination of title and any liens filed will be treated in accordance with the foregoing.
36.
TAX SALES - RIGHT OF RE-ENTRY AS AMENDED MAY, 1971 In a title made through a tax sale or through a foreclosure of a tax lien, by an In Rem Proceeding or otherwise, a right of re-entry will be passed even though the taxes in question accrued subsequent to the instrument reserving the right of reentry and even though the right of re-entry was reserved as a means of enforcing the restrictive covenants. However, the restrictive covenants, as distinguished from the right of re-entry, will not be disregarded.
37.
JUDGMENTS ENTERED BETWEEN DATE OF DEED AND RECORDING Where between the time of closing and the time of recording instruments taken at a closing, a judgment is docketed against a grantor, the judgment will be passed upon the forwarding of proof by the insurer to the new insurer establishing the actual closing date and, if there be a large hiatus between the date of the deed or deeds and the recording thereof, the reason for the delay in recordation.
38.
COMMISSIONER OF PUBLIC WELFARE - MORTGAGES AND JUDGMENTS Judgments in favor of the Commissioner of Public Welfare and mortgages held by him as such Commissioner are deemed to be cut off when the property affected thereby has been foreclosed in an In Rem Action and such mortgages and judgments may be disregarded. This rule, however, shall not apply to deeds to the said Commissioner of the premises affected by said In Rem Action.
39.
FEDERAL TAX LIENS FILED AFTER THE COMMENCEMENT OF FORECLOSURE ACTION AS AMENDED APRIL 7, 1961 When a Federal lien subsequent in lien to a mortgage under foreclosure is filed by the United States of America after the docketing of a Lis pendens in such a foreclosure action such lien may be disregarded in action proceeds to judgment and
sale.
40.
EFFECT OF "SAME AS" RECITAL IN DEED When a conveyance purports to convey all of a plot which is completely described but the description is followed by a recital that the property is the same as that described in (as distinguished from conveyed by) a previous instrument which conveyed only a fractional interest, the recital should be disregarded and the deed passed as conveying the entire interest of the grantor.
41.
PARTY WALLS (a) When the distances and dimensions given for two or more plots would make them contiguous except for the fact that the point of beginning in one or more of the descriptions is located opposite the center of a party wall, the monumentation will be disregarded and contiguity will be insured when the properties come into a common ownership provided that the gap between the point opposite the center of the party wall and the line determined by the distance is 3 inches or less. (b) When the point of beginning is described as being "at" the center of the party wall (as distinguished from "opposite") and the front of the party wall is set back from the street lien at least two feet, the attempted location at the center of the party wall will be disregarded entirely as a monument even if the gap is more than 3 inches. (c) Where a common owner conveyed buildings separately monumenting some plots as opposite the center of a party wall, the monumentation shall be disregarded for the purpose of insuring contiguity where the sum of the dimensions used in the conveyances totals all the property originally held by the common owner. (d) Where a grantor conveys premises monumenting the same as opposite the center of a party wall, such monumentation may be disregarded for the purpose of insuring contiguity where the dimensions used in the conveyance would otherwise convey all the property of the grantor.
42.
RECIPROCAL DRIVEWAY EASEMENTS Where a reciprocal driveway easement is in actual use and the reciprocal easement is affirmatively recited in deeds of record on both sides for at least the past 15 years and in all open mortgages on both parcels, the reciprocal easement for driveway will be insured and any defect in the creation thereof by the common owner will be disregarded.
43.
INSURING GAPS IN RECORD TITLE Where there is a record gap of less than one inch between two lots, contiguity between the two lots will nevertheless be insured unless there is an express reservation to the land in the gap or unless there is pending litigation over title to the gap. Nothing herein is intended to prevent insuring contiguity where there is a larger gap under special circumstances.
44.
SMALL ANCIENT MORTGAGES AS AMENDED MAY, 1971 A mortgage in the face amount of $5,000 or less which matured more than fifty years ago and which is not recited in the chain of title for 20 years or more last passed, may be disregarded upon an affidavit of non-payment of principal or interest or of demand of the present owner provided that the present owner or his ancestor was not the mortgagor.
45.
RIGHT OF ELECTION AS AMENDED MAY, 1971 When there is no notice of an application for an extension of time to file a right of election within six months after issuance of letters of letters, no question will be raised where the title has passed from the estate.
46A. FEDERAL TAX LIENS AS AMENDED NOVEMBER 20, 1967 Federal liens against one of the parties holding title as tenants by the entirety may be passed when title passes from the other tenant as a survivor. The lien will not be passed when both tenants by the entirety are alive. 46B. FEDERAL AND NEW YORK ESTATE TAXES NEW - ADOPTED NOVEMBER 20, 1967 A Federal Estate Tax or a New York Estate Tax against a deceased tenant by entirety or a deceased joint tenant may be disregarded on a deed from the surviving tenant by the entirety or joint tenant to a bona fide purchaser. A Federal Estate Tax against a deceased tenant by entirety of deceased joint tenant may also be disregarded upon a mortgage from the surviving tenant by the entirety or a joint tenant. 47. DESCRIPTION - VARIANCE BETWEEN STREETS ON FILED MAP AND IN PARTICULAR DESCRIPTION Where a deed into the grantee describes the property by lot on a filed map followed by a particular description which makes no reference to the map and thereafter, there is a change in the street line of the street from which the beginning point is
monumented and the particular portion of the description in the
deed but does not describe the property with reference to the new street line, but coincides with the proper location according to the map, the title will be insured without requirement of a correction deed. 48. ASSIGNMENTS OF JUDGMENT TO UNITED STATES OF AMERICA When a judgment, subsequent in lien to a mortgage being foreclosed and docketed prior to the filing of a Lis pendens, or a judgment docketed subsequent to the filing of a Lis pendens, is assigned to the United States of America after the filing of the Lis pendens in an action to foreclose such mortgage, then such assignment may be disregarded provided the record holder of such judgment filed prior to the Lis pendens, is properly joined and served as a party defendant, all necessary papers are served on such party, and the action goes to judgment and sale. 49. DESCRIPTION - DEFECT CAUSED BY CHANGE IN STREET LINES Where there is a defect in the description appearing in a deed which has been on record for 15 years or more and the defect arose by reason of a change in the street line of the street by which the beginning point is monumented or by reason of a change in the street line of the street upon which the property abuts, the title will be insured without requirement of a correction deed, if both of the following conditions exist. I. II. 50. All subsequent deeds on record for 15 years or more correctly describe the property with reference to the changed street lines, and The property has been improved for 15 years or more, and the grantor in the described deed owned no other property abutting the misdescribed property.
POWER OF SALE - ANCILLARY LETTERS OF PROBATE Where a decedent dies in a foreign state, owning real property in New York State, and his will is probated in such foreign state and an ancillary probate is had in New York State, the domiciliary executor may act in New York State pursuant to power in the Will without obtaining Ancillary Letters in New York, unless precluded by Section 131 of the Banking Law. Ancillary Letters must be obtained if the Will lacks power to be exercised by the Executor and such power is included in Section 11-1.1 of the Estates, Powers and Trusts Law. (Adopted June 16, 1970)
51.
JUDGMENTS AGAINST PARTNERS Where title is in a limited partnership duly formed, which is about to convey or mortgage property, judgment searches need not be run against general or limited partners and judgment liens against them may be disregarded.
When title is taken in the trade name of a general partnership in accordance with its named designation in the certificate of partnership which is properly filed, judgment searches need not be run against general or limited partners and judgment liens against them may be disregarded. 52. STOCK REPLACED BY REAL ESTATE Where a custodian or general guardian holds stock in a corporation for the benefit of an infant and the corporation in liquidation conveys to the custodian or guardian an interest in real property represented by his proportionate share, the custodian or guardian can sell such real estate interest without securing a court order to sell. The same rule is applicable where an administrator or executor of an estate holds stock in a corporation which is liquidated and an interest in real estate replaces stock in the hands of the administrator or executor. 53. LIMITED PARTNERSHIP When a limited partnership takes title to real estate, the failure to commence or to complete the publication required by Section 91 of the Partnership Law before title passes to the partnership may be disregarded if the publication is ultimately commenced and completed. 54. PRIORITY OF A PURCHASE MONEY MORTGAGE OVER JUDGMENT AGAINST THE MORTGAGOR Where real property is sold and conveyed, and at the same time a mortgage thereupon is given by the purchase to secure the payment of the whole or a part of the purchase money, the lien of the mortgage upon that real property is superior to the lien of a previous judgment against a purchase money mortgagor wholly or partly for a sum of money or directing the payment of a sum of money against the purchaser. This may be followed whether the mortgage is made directly to the grantor or to a third party, so long as the mortgage recites that it is a purchase money mortgage. 55. LIS PENDENS - UNSAFE BUILDING VIOLATION On an unsafe building violation where the violation for which Lis pendens was filed is no longer in effect against the building and title came through an in Rem sale through City of New York subsequent to such Lis pendens, the Lis pendens will be deemed merged and will not be deemed an objection to title. (Note: This standard is not to be followed where there is a conveyance by the City to any of the parties permitted to acquire title pursuant to Sec. D17-25.0 of the N.Y.C. Administrative Code.)
56.
VARIATION BETWEEN RECORD DESCRIPTION AND TAX MAP Where there is a variation between record description and tax map up to one inch, no question shall be raised.
57.
SHERIFF'S EXECUTION SALES - PRIOR JUDGMENTS AS AMENDED MAY, 1971 No objection will be raised to an insured title which has come through a sheriff's execution sale provided that the judgment under which the sale was had was obtained by personal service, by actual delivery to the defendant, there were no other judgment creditors, no other subordinate liens at the time of the execution sale, that the owner at the time of the execution sale was the debtor, and the execution sale has been properly brought and the purchaser under such sale or his successor in title is in possession.
58.
FORECLOSURES IN FEDERAL COURTS Title companies will not question a publication of a public sale of realty or interest therein under any order, judgment or decree of any court of the United States provided it has been made in accordance with the Federal Statute (28 U.S. Code Sec. 2002) which reads as follows: "A public sale of realty or interest therein under any order, judgment or decree of any court of the United States shall not be made without notice published once a week for at least four weeks prior to the sale in at least one newspaper regularly issued and of general circulation in the county, state or judicial district of the United States wherein the realty is situated. "If such realty is situated in more than one county, state, district or circuit, such notice shall be published in one or more of the counties, states, or districts wherein it is situated, as the court directs. The notice shall be substantially in such form and contain such description of the property by reference or otherwise as the court approves. The court may direct that the publication be made in other newspapers. "This section shall not apply to sales and proceedings under Title 11 or by receivers or conservators of banks appointed by the Comptroller of the Currency."
59.
PUBLICATION OF KINGS, NASSAU AND QUEENS SALES IN NEW YORK LAW JOURNAL AS AMENDED AUGUST 18, 1977 Where a Justice of the Kings, Nassau or Queens County Supreme Court designates the New York Law Journal as a paper for publication for the judicial sale of property in such county or where the Surrogate of Kings, Nassau or Queens
County directs publication of notices under the Surrogate's Court Procedure Act for
the publication of Surrogate Court citations, with the exception of notices under Section 1801 of the Surrogate's Court Procedure Act, such publication will be deemed publication in a proper newspaper. 60. ACTIONS AGAINST DISAPPEARING CO-OWNERS Titles where the estate was created after the enactment of 532A of the Real Property Law repealed and superseded by Section 1211 of the Real Property Actions and Proceedings Law will be insured provided there has been strict compliance with the provisions of the section. Estates arising prior to the enactment of the act will be insured provided there is a decision by the Court of Appeals upholding the constitutionality with respect to each one of the Estates in that section created prior to the effective date of the Act. 61. JOINT TENANT OR TENANT BY ENTIRETY - PROOF OF DEATH A recorded release of New York Estate Tax may be accepted as proof of death of a deceased joint tenant or tenant by entirety if at the time of the examination, title has passed to a purchaser for value. 62. ADMINISTRATOR'S DEED - BOND A deed made by an administrator pursuant to EPTL 11-1.1 (where the decedent died on or after June 1, 1965) will be insured without exception as to compliance with SCPA 805 (3), if: (a) (b) (c) (d) (e) (f) a further bond in the amount of the proceeds is filed before the proceeds are distributed; or a further bond is dispensed with; or the existing bond was fixed in an amount that included the full value of the real property; or an accounting has been approved showing the proper disposition of the proceeds; or acknowledged consents, releases or deeds are obtained from all distributees; or a proper judicial decree establishes the validity and effectiveness of the deed.
63.
SURETY BOND LIENS - WHEN DISREGARDED A Surety Bond Lien may be disregarded after 10 years from the date of filing provided that such lien was not extended by court order and such extension noted in the record where the Surety Bond Lien is filed.
64.
RELEASE IN LIEU OF SATISFACTION OF MORTGAGE When the premises affected by a mortgage lien is released of record instead of the mortgage being satisfied, the said mortgage will be omitted as an objection to title if the release is recorded and indexed prior to the closing.
65.
N.Y.C. DEPARTMENT OF HEAL LIENS A Department of Health Lien as set forth in Section 564-25.0 of the Administrative Code of the City of New York may be disregarded after the expiration of four years from the date of its filing in the County Clerk's Office provided (1) a Lis pendens is not previously filed in said Clerk's Office in a proceeding to enforce or discharge the lien and (2) an affidavit is procured from the fee owner that no such proceeding has been commenced and is then pending.
Chapter 40 - Page 1 NYSBA STANDARDS Effective January 30, 1976
STANDARDS FOR TITLE EXAMINATION

FORWARD In 1955, the Executive Committee of the New York State Bar Association approved a set of Standards for Title Examinations which had been drafted by the Committee on Real Property Law in response to numerous requests from attorneys throughout the State. These Standards were revised in December, 1963 and, now again, they have been revised in January, 1976. The purpose of the Standards was to eliminate the countless cases where one attorney who had approved a title was met by a difference of opinion by the attorney for the subsequent purchaser with a different attitude towards some of the questions involved. Whether a title was considered marketable or not depended a great deal on the technical interpretation by one attorney as opposed to another and hairsplitting for one reason or another has resulted in rejections and litigation of titles and in unnecessary delay and cost to attorneys and clients alike. With the adoption of the uniform standards, it is felt that many technical objections will be disregarded by attorneys if they have the knowledge that other attorneys will look upon these questions in the same light. These Standards are fundamental in character and have been consciously formulated on that basis so as to avoid, at the beginning, a wide difference of opinion which would hinder their general acceptance. Each of the recommendations set forth has been tested with prominent counsel in all parts of the State and the reaction has been uniformly good. The Committee feels, therefore, that there should be no objections to any of these Standards by any attorney, and it earnestly hopes that they will accepted and approved by members of the Association and by the Bar generally. However, it is recognized that local bar associations may have approved title standards involving questions of a local nature for their own particular area and, if so, they should be followed whenever they are inconsistent with these standards. It should also be kept in mind that there exists no statutory or case law that requires recognition and compliance with these standards. They are only a guide to assist lawyers in approving titles by explaining how experienced real estate attorneys across the State generally treat certain specific title problems. 1. ACTIONS - LOST PAPERS Objections should not be made to a title derived through an action or proceeding conducted more than thirty years prior to the examination date because of inability to find certain pleadings, order, decrees or judgments on file in the office of the clerk of the court in which the action or proceeding was conducted, provided:
(a) that the clerk's register or other index shows that the missing pleading, order, decree or judgment was filed in said office, or (b) that the conveyance given pursuant to the judgment of final decree in such action or proceeding recites the making or granting of the missing pleading, order, decree or judgment. 2. ACKNOWLEDGMENTS Objections shall not be made because of any defect or invalidity in acknowledgments after the acknowledged document has been recorded or filed for fifteen years except where the rights of a purchaser in good faith and for value may be affected whose conveyance from the same grantor shall have been duly recorded before such period of fifteen years shall have elapsed. See section 316 RPL 301 RPAPL. 3. AFFIDAVITS BY INTERESTED OR RELATED PARTIES Affidavits made by interested or related parties are acceptable providing the facts therein stated are reasonably within the knowledge of the affiant and the source of such knowledge or the grounds thereof are satisfactorily stated. 4. ANCIENT MORTGAGES (a) A mortgage may be disregarded where the mortgage and fee title came into the same ownership of record more than ten years ago without any recital of nonmerger, where such owner is no longer in title and where the chain of title subsequent to the original common ownership of the fee and the mortgage contains no recital of, or reference to, such mortgage. Proof is also to be taken from the last owner than no demand has been made for payment, that no payment has been made of principal or interest and that he has not acknowledged the debt. (b) A mortgage in the face amount of $5,000 or less which matured more than fifty years ago and which is not recited in the chain of title for twenty years or more last passed, may be disregarded upon an affidavit of non-payment of principal or interest or of demand of the present owner, provided that the present owner of his ancestor was not the mortgagor. 5. BREAKS IN CHAIN OF TITLE Title affecting improved or cultivated land for at least thirty years, as distinguished from wild land, should not be rejected because of any break or hiatus in the chain of title which occurred over eighty years prior to the examination date.
6.
CHANCERY ACTIONS The regularity of the proceedings in actions conducted in the Court of Equity will be presumed.
7.
CORPORATE NAMES - MINOR VARIATIONS Objections should not be made to a minor variation between the name of a corporation appearing in the chain of title and its correct name if there is no other corporate name filed with the Secretary of State with which the name in the chain of title can be confused.
8.
CORPORATE SEAL After fifteen years, a corporate instrument may be passed where no corporate seal was affixed.
9.
CORPORATION DEED (a) When a deed is dated and recorded before the certificate of incorporation of the grantee is filed in the office of the Secretary of State and a confirmatory deed is obtained from the grantor to the corporation after the filing of the certificate of incorporation, the deeds will be passed as sufficient without any requirement for further instruments from the incorporators or stockholders of the grantee or from those who furnished the consideration for the conveyance: (b) When a deed is dated before the certificate of incorporation of the grantee is filed in the office of the Secretary of State and the deed is recorded on the same day as the certificate is filed or later, the deed will be passed as sufficient without requirement of proof of delivery or of any confirmatory deeds whatsoever; (c) A deed from a corporation to a grantee who, from the record, appears to be an officer, director or stockholder of the grantor corporation or a grantee obviously related to such a person, may be passed without question where title has reached a purchaser for value; (d) The same rule may be applied to a conveyance from a corporation to a corporate grantee having interlocking directors or stockholders.
10.
CORPORATION - FILING CERTIFICATE (a) Where a corporation is out of title more than twenty years, no proof beyond proof of its incorporation need be required. (b) Where a corporation has been out of title and the property has also been
improved regardless of parties for over fifteen years, no search will be made for a certificate of incorporation.
11.
DELIVERY Where there is a time lapse between the date of a deed and the date of its recording, no objection will be raised where the deed has been on record for more than ten years. If the deed has been on record for ten years or less, the period search in the Surrogate's office would be run against the grantor from the date of the instrument to the date of recording in the county where the grantor resides and in the county where the property is situated. If no death was found, then the question would be passed unless the grantee, or someone connected with him, was still in title and more definite information could, therefore, be obtained or unless knowledge of the death of the grantor is definitely known. The question of delivery should not be raised where the interval between the date of the deed and the recording date thereof was less than thirty days unless there was affirmative knowledge of the death of the grantor prior to recording.
12.
DISCHARGE OF ENCUMBRANCES (a) In the event that an encumbrance is recorded, the purpose of which is to correct a prior encumbrance, and a subsequent release or satisfaction is recorded releasing or satisfying the correction instrument, such a release or satisfaction is sufficient to release or satisfy both. (b) When the premises affected by a mortgage lien is released or record instead of the mortgage being satisfied, the said mortgage will be omitted as an objection to title if the release is recorded and indexed prior to the closing.
13.
DISCHARGE OF MORTGAGE - CLERICAL ERROR Objection should not be made in respect to a discharge of mortgage recorded more than fifteen years prior to the examination date because of clerical errors or omissions in the instrument of discharge, provided that the mortgage is reasonably identified and is marked "discharged" by the recording officer.
14.
DOWER Unless title to the property is still in the grantor's family, the question of dower will not be raised after a period of thirty-three (33) years.
15.
DOCUMENTARY STAMPS The omission of revenue stamps on a deed does not affect the marketability of the title of the premises therein described.
16.
FIDUCIARIES - NOMINAL CONSIDERATION Objection shall not be made on the ground of the recital of a nominal consideration in a deed given by an executor or other fiduciary after the expiration of twenty years from the recording of such deed.
17.
INFANTS, INCOMPETENTS - DEEDS BY Deeds executed by guardians, committees or attorneys in fact on behalf of their respective wards, incompetents or principals, instead of in their names by such representatives will not be deemed an objection to title where the instrument recites the sources of authority for the act and the instruments have been properly indexed on the record against the respective infant, incompetent or principal.
18.
INHERITANCE BY SURVIVING SPOUSE (a) When a surviving spouse claims the entire title under Subdivisions 2, 3 or 4 of Section 83 of the Decedent Estate Law because the estate was less than the applicable dollar amount therein set forth, deeds should, nevertheless, be obtained from those persons who would share in the estate as distributees if the estate exceeded the applicable dollar amount therein set forth. However, such deeds will be waived if the title is made through a proceeding in the Surrogate's Court by an administrator for leave to sell the property or an accounting proceeding or a proceeding for probate of heirship or other appropriate action or proceeding is properly conducted and such other possible distributees are joined as parties and an appropriate finding is made that the value of the estate is below the required amount. (b) The title from the surviving spouse of an intestate may be passed without requiring deeds from the other possible distributees and without requiring any of the foregoing proceedings or actions, if proof is furnished of all three of the following: (1) the estate was below the amount required to give the spouse the entire estate; this may be established either by the estate tax proceedings or by affidavit detailed as to assets; and (2) the property has been improved for more than ten years; (3) the deed from the surviving spouse or from his or her heirs, devisees or successors in interest has been recorded for more than fifteen years.
19.
INSTRUMENTS BY STRANGERS TO THE RECORD CHAIN OF TITLE An instrument executed by a person who is a stranger to the record chain of title at the time such instrument is recorded does not, in and of itself, make the title
unmarketable.
20.
LEGACIES (a) Objection shall not be made to a title upon the ground that payment of a legacy expressly charged upon real property is not shown to have been made, where more than twenty (20) years have elapsed since the legacy was payable and the estate has passed out of title. (b) Legacies which were not expressly charged on the real estate and which became payable more than ten (10) years ago may be disregarded if the estate has passed out of title.
21.
NAMES (a) Objection should not be made where there is a variance of initial between the names of successive grantees and grantors in the chain of title of improved property more than ten (10) years prior to the examination date. (b) All common abbreviations are accepted as sufficiently establishing the identity of parties.
22.
OPEN LIS PENDENS If no judgment has been entered, a Lis pendens will be disregarded if the mortgage has been satisfied.
23.
HEDGE AND FENCE VARIATIONS Title to residential property should not be rejected by reason of the following discrepancies shown upon an accurate survey: (a) Minor variations between fences, hedges and property lines; (b) Projection or encroachment of trees, shrubs or bushes. In all of the above instances the discrepancy shall be called to a client's attention prior to completion of transaction.
24.
POSTHUMOUS AND AFTERBORN CHILDREN When the records fail to show whether or not any child of a decedent was born after the death of the decedent or after the date of the decendent's will, and no proof on the subject is available, the question may be disregarded if thirty (30) years have elapsed since the date of the death of the decedent.
25.
PROOF OF HEIRSHIP When a deed dated on or after September 1, 1963 from the supposed heirs or distributees of a former owner who died intestate has been recorded for more than ten years (or fifteen years if the deed was recorded prior to September 1, 1963), and the only proof that such grantors are the only heirs or distributees is contained in (a) a statement in the transfer or estate tax petition by a qualified person to the effect that they are the only persons interested in the estate of the decedent or (b) a petition for letters of administration, such statement will be accepted as proof of devolution of title by descent.
26.
RECIPROCAL DRIVEWAY EASEMENTS Where a reciprocal driveway easement is in actual use and the reciprocal easement is affirmatively recited in deeds of record on both sides for at least the past fifteen (15) years and in all open mortgages on both parcels, the reciprocal easement for driveway will be passed and any defect in the creation thereof by the common owner be disregarded.
27.
RECORD OF EXPIRED LEASES In the absence of notice of renewal, arising from possession, record or otherwise, an examiner may omit from his opinion reference to a recorded lease when the term expressed in the lease (including renewal terms) has expired.
28.
SIGNING OF RECORD Objections shall not be made solely on the ground that the record is not signed, in respect to any instrument which has been recorded for more than twenty (20) years.
29.
STATE SALES FOR TAXES State sales for taxes, conducted prior to 1900, may be disregarded provided that proof by affidavit is furnished showing adverse possession against said tax title for a period of thirty (30) years, unless the title search discloses a chain of title by deed beginning with a conveyance given pursuant to such sale and extending to a time less than fifty (50) years prior to the examination date.
30.
SURVIVORSHIP A transfer or estate tax return made by a relative of the blood or by affinity or by the surviving joint tenant or tenant by the entirety will be accepted as proof of death and of the survivorship of a joint tenant or a tenant by the entirety.
31.
UNRECORDED MORTGAGE Recital of an unrecorded mortgage in a deed or record of twenty (20) years or more may be passed on proof that for six (6) years or more last past no principal or interest has been paid or demanded and no knowledge was had by the owners during such period of said unrecorded mortgage. Where such recital is contained i the last deed of record, satisfactory proof will be required to dispose of the objection.
32.
FINANCING STATEMENTS Financing Statements will be passed where they are on file for more than five (5) years and there was a change of ownership or there would be a change on the closing. However, for a current mortgage transaction, when there is to be no change of ownership, then the Financing Statements must always be terminated unless they are on file for more than six (6) years and have not been renewed.
33.
FEDERAL ESTATE TAXES (a) The question of Federal Estate Taxes may be disregarded where the New York Estate Tax Proceeding against a former owner shows that the gross estate of the decedent was of the value of not more than $40,000. (b) Where in an action party defendants are included as unknowns in an omnibus clause, no question will be raised as to possible Federal Estate Taxes against the estates of any such unknowns who may be dead and the Federal Government need not be named as a party for the purpose of cutting off such possible Federal Estate Taxes. The Federal Government is to be named as a party defendant for any other proper reason which may exist in the title.
34.
SURROGATES COURT PROCEDURE ACT (PUBLISHING CITATION; SEC. 307A-i) Where the petition shows the gross estate to be less than five thousand ($5,000) dollars, the publication of the citation in only one newspaper will be passed despite the fact that subsequent proceedings in the estate may show that it exceeded five thousand ($5,000) dollars in value.
35.
FRANCHISE TAXES When franchise taxes accrued more than ten (10) years ago against a corporation which has been dissolved within the past ten years, the franchise taxes which are more than ten years old may be disregarded, provided premises have been, or are being conveyed to a purchaser for value. If such dissolved corporation is the present owner, proof of payment of taxes accruing subsequent to January 1, 1948 should be obtained. As to undissolved corporations, all franchise taxes accruing during the period more than ten (10) years last past may be disregarded, provided
title has passed, or is being conveyed, to a purchaser for value.
36.
CONVEYANCE IN CONTEMPLATION OF DEATH Where, within three (3) years after a conveyance is recorded, the grantor dies, no estate tax question need be raised after the property has been acquired by a subsequent purchaser for value.
37.
BANKRUPTCY SEARCHES In counties where the District Court Clerk is not located in the County, no search for bankruptcy records will be made but searchers will rely on land records. In counties where District Court is located in the County, searchers will search back for twenty (20) years.
38.
FORECLOSURE - PARTIES - DOWER The fact that the holder of an inchoate right of dower, subordinate to a mortgage, was not made a party defendant in an action to foreclose the mortgage may be disregarded when fifteen (15) years have elapsed since the delivery of the Referee's Deed.
39.
FORECLOSURE - PARTIES - SUCCESSORS OF DECEASED MORTGAGEE When the holder of a junior lien dies intestate and no proceedings have been had in his estate for the appointment of an administrator, the lien will be deemed barred in an action to foreclosure a prior mortgage if all the next-of-kin have been made parties and satisfactory proof is furnished of the death, the intestacy, the family history and the absence of creditors of the estate. In such situations the lack of proof that there were no creditors may be disregarded when more than six (6) years have elapsed since the delivery of the Referee's Deed.
40.
FORECLOSURE - PARTIES - AGENCY OF STATE OR MUNICIPALITY Where a judgment has been rendered in favor of an Agency of the State or Municipality, it will be adequate to join the State of New York or such Municipality without joining the Agency as a party defendant. Appropriate recitals must be contained in the complaint giving the reason for joinder as a party. (This is inapplicable to the Industrial Commissioner of the State of New York, who must be joined as a party).
41.
PUBLIC ADMINISTRATOR'S SALES Title made through sales by public administrators will be accepted, if otherwise valid, despite the fact that no bond has been filed in the proceeding for the sale of the particular parcel and despite the fact that no bank has been designated in the
order as the depository of the proceeds of sale.
42.
PROBATE OF WILLS (a) When title is made through a will and the estate is out of title and the petition for probate, though not made by a blood relative of the decedent, shows that the heirs are direct descendants or brothers and sisters, the title will be accepted without exception as to the sufficiency of such proof. (b) If under the same circumstances the petition shows that the heirs include nephews or nieces or more remote relatives, the title will, nevertheless, be accepted without exception as to the sufficiency of such proof if five (5) years have elapsed since the probate of the will. (c) Proof of Heirship on Probate - Where title is presently being made through a will and the petition is made for probate by the surviving spouse, who has had children with the decedent, the title will be accepted without further proof of heirship, provided that the decedent had not had a prior marriage and satisfactory proof of that fact is furnished.
43.
FEDERAL LIENS - SEARCHES Where property is situated in the county in which is also located the Federal District Court, searches for judgments will be made in both the County Clerk's Office and in the offices of the District Court. Where the property is situated in a county in which the Federal District Court is not located, judgments need be run only in the office of the County Clerk.
44.
FEDERAL LIENS Effective January 1, 1968, a notice of Federal Tax Lien field prior to January 1, 1962 may be disregarded upon the execution and delivery of a deed, lease or mortgage affecting the property of the taxpayer to a purchaser (as defined in the Federal Tax Lien Act of 1966) or a Mortgagee unless such notice shall have been re-filed prior to the recording of the closing instruments. Any other notice of Federal Tax Lien may be disregarded in like manner provided it shall have been filed more than six (6) years and thirty (30) days and shall not have been re-filed prior to the recording of the closing instruments. Despite the foregoing provisions, searches shall be run against all parties who have been in the chain of title during the fifteen (15) years preceding the date of examination of title and any liens filed will be treated in accordance with the foregoing.
45.
TAX SALES - RIGHT OF RE-ENTRY In a title made through a tax sale or through a foreclosure of a tax lien, by an In Rem Proceeding or otherwise, a right of re-entry will be passed even though the taxes in question accrued subsequent to the instrument reserving the right of reentry and even though the right of re-entry was reserved as a means of enforcing the restrictive covenants. However, the restrictive covenants, as distinguished from the right of re-entry, will not be disregarded.
46.
COMMISSIONER OF PUBLIC WELFARE - MORTGAGES AND JUDGMENTS Judgments in favor of the Commissioner of Public Welfare and mortgages held by him as such Commissioner are deemed to be cut off when the property affected thereby has been foreclosed in an In Rem Action and such mortgages and judgments may be disregarded. This rule, however, shall not apply to deeds to the said Commissioner of the premises affected by said In Rem Action.
47.
FEDERAL TAX LIENS FILED AFTER THE COMMENCEMENT OF FORECLOSURE ACTION When a Federal lien subsequent in lien to a mortgage under foreclosure is filed by the United States of America after the docketing of a Lis pendens in such a foreclosure action, such lien may be disregarded if action proceeds to judgment and sale.
48.
EFFECT OF "SAME AS" RECITAL IN DEED When a conveyance purports to convey all of a plot which is completely described but the description is followed by a recital that the property is the same as that described in (as distinguished from conveyed by) a previous instrument which conveyed only a fractional interest, the recital should be disregarded and the deed passed as conveying the entire interest of the grantor.
49.
PARTY WALLS (a) When the distances and dimensions given for two or more plots would make them contiguous except for the fact that the point of beginning in one or more of the descriptions is located opposite the center of a party wall, the monumentation will be disregarded and contiguity will be presumed when the properties come into a common ownership provided that the gap between the point opposite the center of the party wall and the line determined by the distance is three inches or less. (b) When the point of beginning is described as being "at" the center of the party wall (as distinguished from "opposite") and the front of the party wall is set back from the street line at least two feet, the attempted location at the center of the
party wall will be disregarded entirely as a monument even if the gap is more than three inches.
(c) Where a common owner conveyed buildings separately monumenting some plots as opposite the center of a party wall, the monumentation shall be disregarded for the purpose of contiguity where the sum of the dimensions used in the conveyances totals all the property originally held by the common owner. (d) Where a grantor conveys premises monumenting the same as opposite the center of a party wall, such monumentation may be disregarded for the purpose of contiguity where the dimensions used in the conveyance would otherwise convey all the property of the grantor. 50. GAPS IN RECORD TITLE Where there is a record gap of less than one inch between two lots, contiguity between the two lots will, nevertheless, be presumed unless there is an express reservation to the land in the gap or unless there is pending litigation over title to the gap. Nothing herein is intended to prevent presuming contiguity where there is a larger gap under special circumstances. 51. RIGHT OF ELECTION When there is no notice of an application for an extension of time to file a right of election within six (6) months after issuance of letters, no question will be raised where the title has passed from the estate. 52. FEDERAL TAX LIENS-TENANTS BY THE ENTIRETY Federal liens against one of the parties holding title as tenants by the entirety may be passed when title passes from the other tenant as a survivor. The lien will not be passed when both tenants by the entirety are alive. 53. FEDERAL AND NEW YORK ESTATE TAXES A Federal Estate Tax or a New York Estate Tax against a deceased tenant by entirety or a deceased joint tenant may be disregarded on a deed from the surviving tenant by the entirety or joint tenant to a bona fide purchaser. A Federal Estate Tax against a deceased tenant by entirety or deceased joint tenant may also be disregarded upon a mortgage from the surviving tenant by the entirety or a joint tenant.
54.
DESCRIPTION - VARIANCE BETWEEN STREETS ON FILED MAP AND IN PARTICULAR DESCRIPTION Where a deed into the grantee describes the property by lot on a filed map followed by a particular description which makes no reference to the map and thereafter, there is a change in the street line of the street from which the beginning point is monumented and the particular portion of the description in the deed but does not describe the property with reference to the new street lien but coincides with the proper location according to the map, the title will be passed without requirement of a correction deed.
55.
ASSIGNMENT OF JUDGMENT TO UNITED STATES OF AMERICA When a judgment, subsequent in lien to a mortgage being foreclosed and docketed prior to the filing of a Lis pendens, or a judgment docketed subsequent to the filing of a Lis pendens, is assigned to the United States of America after the filing of the Lis pendens in an action to foreclose such mortgage, then such assignment may be disregarded provided the record holder of such judgment filed prior to the Lis pendens is properly joined and served as a party defendant, all necessary papers are served on such party and the action goes to judgment and sale.
56.
DESCRIPTION - DEFECT CAUSED BY CHANGE IN STREET LINES Where there is a defect in the description appearing in a deed which has been on record for fifteen (15) years or more and the defect arose by reason of a change in the street line of the street by which the beginning point is monumented or by reason of a change in the street line of the street upon which the property abuts, the title will be presumed approved without requirement of a correction deed, if both of the following conditions exist: I. II. All subsequent deeds on record for fifteen years or more correctly describe the property with reference to the changed street lines; and The property has been improved for fifteen years or more, and the grantor in the described deed owned no other property abutting the mis-described property.
57.
POWER OF SALE - ANCILLARY LETTERS OF PROBATE Where a decedent dies in a foreign state, owning real property in New York State, and his will is probated in such foreign state and an ancillary probate is had in New York State, the domiciliary executor may act in New York State pursuant to power in the Will without obtaining Ancillary Letters in New York, unless precluded by Section 131 of the Banking Law. Ancillary Letters must be obtained if the Will lacks power to be exercised by the Executor and such power is included in Section
11-1.1 of the Estates, Powers and Trusts Law (Adopted June 16, 1970).
58.
JUDGMENTS AGAINST PARTNERS Where title is in a limited partnership duly formed, which is about to convey or mortgage property, judgment searches need not be run against general or limited partners and judgment liens against them may be disregarded. When title is taken in the trade name of a general partnership in accordance with its named designation in the certificate of partnership, which is properly filed, judgment searches need not be run against general or limited partners and judgment liens against them may be disregarded.
59.
STOCK REPLACED BY REAL ESTATE Where a custodian or general guardian holds stock in a corporation for the benefit of an infant and the corporation, in liquidation, conveys to the custodian or guardian an interest in real property represented by his proportionate share, the custodian or guardian can sell such real estate interest without securing a court order to sell. The same rule is applicable where an administrator or executor of an estate holds stock in a corporation which is liquidated and an interest in real estate replaces stock in the hands of the administrator or executor.
60.
LIMITED PARTNERSHIP When a limited partnership takes title to real estate, the failure to commence or to complete the publication required by Section 91 of the Partnership Law before title passes to the partnership may be disregarded of the publication is ultimately commenced and completed.
61.
PRIORITY OF A PURCHASE MONEY MORTGAGE OVER JUDGMENT AGAINST THE MORTGAGOR Where real property is sold and conveyed, and at the same time a mortgage thereupon is given by the purchaser to secure the payment of the whole or a part of the purchase money, the lien of the mortgage upon that real property is superior to the lien of a previous judgment against a purchase money mortgagor wholly or partly for a sum of money or directing the payment of a sum of money against the purchaser. This may be followed whether the mortgage is made directly to the grantor or to a third party, so long as the mortgage recites that it is a purchase money mortgage.
62.
VARIATION BETWEEN RECORD DESCRIPTION AND TAX MAP Where there is a variation between record description and tax map up to one inch, no question shall be raised.
63.
SHERIFF'S EXECUTION SALES - PRIOR JUDGMENTS No objection will be raised to title which has come through a sheriff's execution sale provided that the judgment under which the sale was had was obtained by personal service, by actual delivery to the defendant, there were no other judgment creditors, no other subordinate liens at the time of the execution sale, that the owner at the time of the execution sale was the debtor, and the execution sale has been properly brought and the purchaser under such sale, or his successor in title, is in possession.
64.
FORECLOSURE IN FEDERAL COURTS No question will be raised relative to a publication of a public sale of realty or interest therein under any order, judgment or decree of any court of the United States, provided it has been made in accordance with the Federal Statute (28 U.S. Code, Sec. 2002) which reads as follows: "A public sale of realty or interest therein under any order, judgment or decree of any court of the United States shall not be made without notice published once a week for at least four weeks prior to the sale in at least one newspaper regularly issued and of general circulation in the county, state or judicial district of the United States wherein the realty is situated." "If such realty is situated in more than one county, state, district or circuit, such notice shall be published in one or more of the counties, states or districts wherein it is situated, as the court directs. The notice shall be substantially in such form and contain such description of the property by reference or otherwise, as the court approves. The court may direct that the publication be made in other newspapers." "This section shall not apply to sales and proceedings under Title II or by receivers or conservators of banks appointed by the Comptroller of the Currency."
65.
ACTIONS AGAINST DISAPPEARING CO-OWNERS Titles where the estate was created after the enactment of 532A of the Real Property Law, repealed and superseded by Section 1211 of the Real Property Actions and Proceedings Law, will be passed provided there has been strict compliance with the provisions of the Section. Estates arising prior to the enactment of the Act will be passed provided there is a decision by the Court of Appeals upholding the constitutionality with respect to each one of the Estates in that Section created prior to the effective date of the Act.
66.
JOINT TENANT OR TENANT BY ENTIRETY - PROOF OF DEATH A recorded release of New York Estate Tax may be accepted as proof of death of a deceased joint tenant or tenant by entirety if, at the time of the examination, title has passed to a purchaser for value.
67.
ADMINISTRATOR'S DEED - BOND A deed made by an administrator pursuant to EPTL 11-1.1 (where the decedent died on or after June 1, 1965) will be passed without exception as to compliance with SCPA 805(3), if: (a) (b) (c) (d) (e) (f) A further bond in the amount of the proceeds is filed before the proceeds are distributed; or A further bond is dispensed with; or The existing bond was fixed in an amount that included the full value of the real property; or An accounting has been approved showing the proper disposition of the proceeds; or Acknowledged consents, releases or deeds are obtained from all distributees; or A proper judicial decree establishes the validity and effectiveness of the deed.
68.
SURETY BOND LIENS - WHEN DISREGARDED A Surety Bond Lien may be disregarded after ten (10) years from the date of filing provided that such lien was not extended by court order and such extension noted in the record where the Surety Bond Lien is filed.
INDEX TO STANDARDS FOR TITLE EXAMINATION NUMBER Acknowledgements Action against disappearing co-owners Actions, lost papers Administrator's deed - bond Affidavits by interested or related parties Afterborn and posthumous children Ancient mortgages Ancillary letters of probate, power of sale Assignments of judgments to United States Bankruptcy searches Breaks in chain of title Certificate of incorporation, filing Chain of title, breaks in Chain of title, instruments by strangers Chancery actions Children, afterborn and posthumous Citation, publication of (SPCA) Co-owners, disappearing - actions against Commissioner of public welfare - mortgages and judgments Conveyance in contemplation of death 36 Corporate names - minor variations Corporate seal Corporation deed Corporation, filing certificate Deed from fiduciary - consideration Deeds by infants and incompetents Deeds - documentary stamps Deeds, effect of "same as" recital Delivery Description record - variation with tax map Description - variance between streets on filed map and in particular description Description defect caused by change in street lines Discharge of encumbrances Discharge of mortgage - clerical error Documentary stamps Dower Dower, foreclosure - parties Driveway easements, reciprocal Encumbrances, discharge of 2 65 1 67 3 24 4 57 55 37 5 10 5 19 6 24 34 65 46 8 7 8 9 10 16 17 15 48 11 62 54 56 12 13 15 14 38 26 12 7 5 11 11 5 5 5 5 8 4 4 4 5 5 6 5 10 5 12 4 12 11 8 4 5 4 6 4 7 8 13 10 13 3 13 4 7 PAGE 3
Estate taxes, federal Execution sales by sheriff - prior judgments
33 63
8 12
Federal courts, foreclosure Federal estate taxes Federal estate taxes against unknowns Federal and New York estate taxes Federal liens Federal liens - searches Federal tax liens, after commencement or foreclosure Federal tax liens, tenants by entirety Fiduciaries - nominal consideration Financing statement Foreclosure, in federal courts Foreclosure - parties - agency of state or municipality Foreclosure - parties - dower Foreclosure - parties - successors of deceased mortgagee Franchise taxes Gaps in record title
64 33 33 53 41 43 47 52 16 32 64 40 38 39 35 50 11 9 9
13 8 8 11 9 10 11 5 8 13 9 8 8
Hedge and fence variations 23 Heirship, proof of, - in petition for letters of administration 25 Heirship, proof of, - in statement in transfer or estate tax petition 25 Incompetents - infants - deeds by Infants - incompetents - deeds by Inheritance by surviving spouse Instruments by strangers to record chain of title Joint tenant or tenant by entirety - proof of death Joint tenant (deceased) - Federal and New York Estate Tax Judgment, assignments to United States Judgment - priority of purchase money mortgage Judgments, against partners Judgments, against partners Judgments, held by commissioner of public welfare 46 Leases, record of expired 27 Legacies Liens, federal Liens, federal - searches Liens, federal tax, after commencement of foreclosure action Limited partnership 60 Lis pendens, open Lost papers, actions Mortgages, ancient 4 Mortgages, held by commissioner of public welfare 46 Mortgages, purchase money - priority over judgment against mortgagor Mortgages, unrecorded 17 17 18 19 66 53 55 61 58 58
7 7 7 6 6 6 6 13 11 11 12 12 12 10 7
20 44 43 47 12 22 1 4 10 61 31
6 9 9 10 6 3
12 7
Names Partners, judgments against Partnership, limited Party walls Posthumous and afterborn children Power of sale, ancillary letters of probate Probate of wills Proof of death, joint tenant or tenant or entirety Proof of heirship Proof of payment of legacies Public administrator's sales Purchase money mortgage, priority over judgment against mortgagor right of - tax sales Reciprocal driveway easements Record of expired leases Record title, gaps in Right of election Sales by state for taxes "Same as" recital, effect in deed Seal of corporation Searches, bankruptcy Searches, federal liens Sheriff's execution sales - prior judgments Signing of record State sales of taxes Stock replaced by real estate Stockholders, conveyance by corporation to Street lines, description defect caused by change in Surety bond liens, when disregarded Surrogates court procedure act - publication of citation Survivorship Sales - right of re-entry Taxes, federal estate Taxes, federal estate, against unknowns Taxes, franchise Tenant by entirety or joint tenant - proof of death Tenant by entirety (deceased) - federal and New York State estate tax Tenants by entirety - Federal tax lien Unrecorded mortgage Variation between record description and tax map 60
21 58 12 49 24 57 42 66 25 20 41 61 45 26 27 50 51 29 48 8 37 43 63 28 29 59 9 56 68 34 30 45 33 33 35 66 53 52 31 62 7 4 12
6 12 10 7 12 9 13 7 6 9
10 7 7 11 11 7 10 8 9 12 7 7 12 4 11 14 8 10 8 8 8 13 11 11 7 12
Variations, corporate name Variations, hedge and fence Wills, probate of
7 23 42
4 7 9
11/89
Chapter 33A - page 1 SALE-LEASEBACK General
SALE-LEASEBACK
FEE AND LEASEHOLD INTERESTS MAY BE INSURED: Subject to the following rules, and to the maximum amount permitted in the agency contract, an agent may insure a true sale-leaseback, if it is otherwise insurable, without Regional Office clearance. The agent may commit the Company on the risk, if it meets these criteria. However, should the amount exceed the agent's authority or exceed $1 million, it should still be measured against the criteria, and then be submitted to the Regional Office for approval before a commitment is made. NATURE OF TRANSACTION - POSSIBLE SECURITY DEVICE: Before insuring the fee or leasehold interests created by a sale-leaseback, the agent must determine that the transaction is not a veiled financing scheme which may be set aside by creditors or even challenged by the "Seller" - Tenant as a usurious or fraudulent loan rather than a true "sale" of the fee simple interest in the land coupled with a normal lease for the possession and use thereof. These are the guidelines offered for your assistance: a) Try to determine how the owner-seller and the buyer commenced their negotiations, and what the results of those negotiations were. Ascertain whether the investor has agreed that it would lend no mortgage money but would be interested in a purchase and leaseback of the property. Obtain copies of all correspondence and other papers pertinent to the subject. Find out whether the sale is being made at a figure approximating competent real estate appraisals of the current value and, if possible, get copies of the appraisals. Determine whether the proposed lease payments are competitive in the prevailing market. Study the lease. Determine the initial term and whether there are options for renewal.
b)
c) d)
e)
Inquire whether the lessee, under the lease or any other related documentation, has any obligation ultimately to purchase all or any part of the real estate and, if so, when and at what price. The same also applies to any general or limited option which the lessee may have, and to any possible obligation on the part of the lessee eventually to repay any part of the selling price.
RED FLAGS: The following items constitute "Red Flags" that may indicate a security device: a) b) c) The Lease or other documentation contain references to the "Mortgage" or the "Lender". The purchase price is clearly less than the current value of the property. The rent to be paid during the term of the Lease appears to be equivalent to the amount required to repay the purchase price plus an additional amount which, if held to be interest, would be usurious. The Lease requires the tenant to construct valuable improvements on the land and the term of the lease appears unreasonably short to amortize the cost of the improvements. The tenant has an option to repurchase for an amount far below the initial purchase price or for an amount which gradually reduces to a token sum. The tenant has an obligation to repurchase the property.
d)
e) f)
If any of the "Red Flags" exist, please consult the Regional Office. EVIDENCE TO BE OBTAINED In addition to the information described in Paragraph 2, above, letters should be obtained from both seller/lessee and the buyer/lessor. They should be on official letterheads and, in the case of a corporation, should be accompanied by a certified copy of a resolution from the board of directors to the effect that it is fully authorized to issue the required letter of assurance. Such letters should contain
assurances that the sale, purchase and leaseback are bona bide, arms-length transactions; that they are not another vehicle for a mortgage loan transaction or security transaction; and that the parties will never assert to the contrary. EXCEPTIONS TO BE MADE: If the agent has any doubt as to the true nature of the transaction, or if any of the "Red Flags" exist and are not waived by the Regional Office, any policy issued must contain the following exception: "Any loss or damage which the insured may sustain because of any assertion that the (vesting of title in the insured)(lease) is part of a loan transaction, including the assertion that the deed and/or lease to the insured, constitutes a mortgage or other security device." If it appears to be applicable, a creditors' rights (bankruptcy) exception should also be made. The lease must always appear as an exception on the Owner's (fee) Policy.
NOTE: SEE Also: Severance of Land and Buildings
Chapter 33B - page 1 SALE-LEASEBACK SEVERANCE General
SALE-LEASEBACK SEVERANCE OF LAND AND BUILDINGS

GENERALLY Unless state law clearly provides that a building conveyed separately from the land is "real" property, capable of independent fee ownership, title to a "severed" building should not be insured unless the owner of the building also has an estate in the ground on which the buildings are situated such as a leasehold interest or an estate for years in the ground. Even when coupled with an estate for years or a leasehold in the ground, the agent should be wary of describing the interest in the building as a "fee simple" estate, since most "severance" transactions provide that title to the building will vest in the land owner upon termination of the lease or estate for years. INSURING THE LAND (ONLY): An Owner's Policy issued to the owner of the land should describe the estate insured in Schedule A as: "fee simple in the ground only." The description set forth in Schedule A should contain the words: "..except the buildings and improvements thereon." Schedule B should contain an additional exception as follows: "Title to the building and improvements now or hereafter located on the land, together with the right to maintain and use the same, together with the right of access thereto and support thereof." If there is a leasehold or estate for years in favor of the owner of the buildings, such lease or interest must also be fully described in Schedule B of the Commitment and Policy. INSURING THE LANDLORD'S REVERSIONARY INTEREST IN THE BUILDINGS: Generally, if a Sale and Leaseback includes buildings which are in existence at the time of the sale, unless the conveyance includes a present conveyance of land and buildings, with a reservation of title to the buildings during the lease term, title will not, without state law to the contrary, automatically vest in the land owner upon
termination of the lease, even though the lease may so state. If there is no state law (statutory or judicial) which provides for the automatic conveyance to the land owner upon termination of the lease, then, without a conveyance from the tenant (building owner), the reversionary interest of the landlord in buildings already constructed on the land cannot be insured. If the sale and leaseback includes a present conveyance of the buildings, subject to the reservation of title to the buildings during the term of the lease, as above, or if the sale is of vacant land and the lease contemplates that the Lessee will construct the buildings, with beneficial title thereto remaining in the Lessee until termination of the Lease and, upon termination of the lease, vesting in the Landlord-fee owner free of tenant's interest, then the reversionary interest in the buildings may be insured by describing the insured interest under Schedule A as: "fee simple in the ground only together with title to the buildings hereafter erected on Schedule B." on said ground upon termination of the lease set forth as item Schedule B should contain an exception for the Lease, the exception set out in Paragraph 2, above (as to title to the buildings) with the addition of the words "until termination of the Lease set forth as item of this Schedule B" and also contain an exception, as follows: "In insuring the reversion in the buildings or improvements now or hereafter erected on insured premises, this policy does not insure against any matters which may affect such interest after the effective date hereof. INSURING THE BUILDING: If the requirements for insuring the building have been met (state law, a leasehold interest or estate for years in the fee), then either an ALTA Leasehold Owner's Policy, or a regular Owner's Policy, as applicable may be used to insure the building and the interest in the ground. Presuming that the interest is a leasehold, the insured estate should be described, in Schedule A as: "Leasehold in the ground only together with title to the buildings until termination of said leasehold estate."
If a Leasehold Policy form is used, the words "as to the ground" may be inserted at the end of the first line describing the insured estate and the words "title to buildings situated on the ground until termination of the lease" added at the end of the description of the Lease in Schedule A. Regardless of which policy form is used, Schedule B should contain an exception for the Lease as well as the following exception: "Lessor's title to the buildings upon termination of the leasehold estate as provided in the Lease set forth in Schedule (A or B) creating the estate hereby insured."
ACCESS AND SUPPORT: Unless the deed conveying or reserving the buildings or the Lease of the ground expressly grants easements for access to and support of the improvements, the following exception must also appear in Schedule B: "This policy does not insure the access to or support of the buildings and improvements insured herein." LOAN POLICIES A Loan Policy may be issued to the holder of a mortgage lien on either the ground or the buildings under the same conditions as are set forth above for the insurability of the Owner's interests and must contain the same descriptions of the interest being insured and the same exceptions as to the respective ownership interests.
THIS PAGE INTENTIONALLY BLANK
8/79
Chapter 36 - Page 1 SURVEY COVERAGE General
SURVEY COVERAGE
When we are furnished with an acceptable survey in connection with a transaction we give "survey coverage" as of the date of the survey. The front page of the policy expressly insures the marketability of the title. This means, among other things, that we do guarantee to our insured that the marketability of the title is not affected adversely by the state of facts that a survey should disclose, such as encroachments of the improvements of the premises beyond the property lines or the street lines or by encroachments by neighbors' improvements on the expressly excepted in Schedule "B". For convenience of reference we often times note the name of the surveyor and the date of the survey. If Schedule "B" lists no items or survey encroachments or other survey facts affecting the marketability of the title and a review of the survey substantiates the same a survey endorsement containing the following language should be prepared and state: "survey prepared by [name surveyor] , license number [no] , dated [show date] shows no encroachments overlaps or other variations". We do not insure the survey as such. If we did it would imply more than the guarantees above set forth. A surveyor might designate a building as a brick building 4 stories high when in fact it is a concrete building 3 or 5 stories high, or show that the main entrance is on one street when in fact it is on another, or include erroneous data as to the height of the land above sea level, all of which matters have nothing to do with the quality of the title we insure. Yet if we insured the survey as such, that would imply that we insured the accuracy of all items shown on the survey, even those not within the ambit of our title policy coverage. A survey is a horizontal projection of the premises showing the physical facts of possession with reference to the perimeter lines. The presence of a structure upon the premises, no matter where it is located, so long as it does not encroach upon adjoining premises or violate some easement, agreement or restrictive covenant such as setback, does not constitute a defect in title. Non-compliance or violation of easements, agreement or restrictive covenants must be noted as an exception to title. Encroachments over the perimeter lines on the streets or on adjoining properties, and, conversely, encroachments over our property lines by structures on abutting parcels, must be noted as exceptions to title. Each of such may derogate from the marketability of title, which is what our policy insures. Where the perimeter lines of a survey do not coincide with the permiter liens of the record description, counsel should be consulted before the record description is altered, or exceptions are drawn as to the area affected. When a survey is over thirty (30) days old we normally except any state of facts since the date of the survey, except in those cases where a survey inspection is made in accordance with the provisions of the rate manual, or if the survey is re-dated to a current date. See over for ALTA language. When it is necessary to except both "any state of facts" and "personal inspection", please combine the exceptions so that it will read:
"any state of facts an accurate survey and personal inspection may disclose. Standard Survey Exception 2, 3, and 4, have previously been revised to eliminate exceptions concerning lack of title to strips outside of fences, hedges or wall unless the strips reach a width in excess of one foot.
8/79
Chapter 36 - Page 2 SURVEY COVERAGE General
In New York and Bronx Counties the survey department will locate new fences, hedges and retaining walls in redating surveys whenever a variation from the lines of reference exceeds one foot. If the redated survey shows that a fence, hedge or retaining wall has not been located the reader may assume that the variation is one foot or less. The other change clarifies the provisions on affirmative insurance as to encroachments on adjoining land. Survey - 2 Variations between the lines of fences (or hedges or retaining walls) and the line of record title. Note: If the variation exceeds one foot use Survey - 3 The owner is out of possession of a strip of land having a maximum width of lying (east) of the (easterly) fence (or hedge or wall or retaining wall); title to said strip is not insured. Note: Do not use this exception in an ordinary case if the strip is one foot or less at its maximum width [Spedaro v. Pudder, 108 NYS2d 343]. Survey - 4 The wall of the building on the premises described in Schedule "A" encroaches (or leans) inches on the premises adjoining on the .
Note: In a proper case, add "but this policy insures that the encroaching wall may remain so long as the building stands." One such case arises when the property is in a city, and the encroachment on the adjoining land does not exceed 6 inches and the adjoining owner has built a building with an abutting wall and both buildings are more than two years old. We will also give such insurance, even if the walls do not abut, if our building has been standing for more than 15 years and the encroachment does not exceed six inches. Such affirmative insurance should be given as a matter of course without waiting for applicant's request. Note: Leaning walls and encroachments of more than six inches present a more difficult problem. In those cases affirmative insurance should not be given without consulting counsel. In a proper case counsel may approve a clause reading: "but this policy insures that the removal of said wall will not be compelled."
Note: See "Encroachments" this Manual for additional Language
5/78
Chapter 36 - Page 1 SURVEY - CONTRACT LANGUAGE Title
N.Y. Contracts of sale will usually contain either of the following clause A or B below A. Any state of facts which an accurate survey might show. A vendee under a contract of sale which contains the above provision must take title even though the survey shows encroachments rendering title unmarketable. Adding "provided the same does not render title unmarketable," to the above clause merely restates the law and adds nothing to the contract. See: McCarter v. Crawford, 245 N.Y. 43 Manhattan Life Inc., 131 Misc. 363, Aff'd. 223 AD 833. B. Survey exceptions set forth herein. A contract which provides that the premises are sold subject to the state of facts on a specific survey is binding on the vendee even though the survey shows encroachments which may render the title unmarketable. See: Kreshover v. Berger, 135 AD 27. Legislative considerations in connection with encroachments: a partial listing. Section 212 (a) CPLR - Adverse possession for ten years. Section 871 RPAPL - Court may award damages instead of injunction directing removal of encroaching structure. Section 611 Subd. 2 RPAPL - Encroachment of abutting walls not exceeding six inches. Section 35-a General City Law - Building in bed of an officially mapped street - limitation of time for revocation of permit. Section 38-a General City Law - front wall encroachments of not more than six inches Administrative Code of the City of New York: Section 692h6.0-a (New York County only) Section 692h6.0-b (City of Brooklyn only) Section C26-407.1 et seq. - (Entire City of New York) Covers encroachments on streets by steps, cornices, eaves, balconies., enc.
4/60
Chapter 36 - Page 1 SURVEY Legal Bulletin
"Subject to any State of Facts" The purchaser of mortgaged premises at a sale under a judgment of foreclosure need not complete his purchase where there is an encroachment upon the premises which would make the title unmarketable, although the advertisement of sale contained the words "subject to any state of facts shown by an accurate survey." Ely v. Mathews, 58 Misc. 365. The above rule was also applied where a contract was made "subject to any state of facts an accurate survey might show," the Court holding that notwithstanding this phrase, the purchaser would not have to take if the title were unmarketable by reason of survey encroachments. Barker v. Brown, New York Law Journal, April 14, 1921, page 174. (Apparently not reported). But it was held that the purchaser under a contract which is "subject to such state of facts as an accurate survey would show" could not recover money paid SOLELY because one of the rear buildings (a carriage house) encroached from two inches to eight inches on adjoining property, even though such encroachment might render the title unmarketable. This case seems to modify the rule laid down in the above cases. It must be remembered, however, that in these cases the encroaching building was a carriage house in the rear. McCarter v. Crawford, 245 N.Y. 43. In Manhattan Life Insurance Co. v. Wall Investing Corp., where terms of sale in a foreclosure proceeding were being construed by the Court, Justice Levy in his opinion said "The objection that the property showed a number of encroachments is also untenable. The sale was made subject to a state of facts which an accurate survey would show. This has been interpreted in McCarter v. Crawford (245 N.Y. 43) as meaning that the purchaser took subject to these facts, and encroachments in such a situation did not constitute a meritorious objection to the title." Manhattan Life Insurance Co. v. Wall Investing Corp., 131 Misc. 363 Affirmed 223 AD. 833. Subject to a State of Facts shown on "Named" Survey Where a contract, however, contains a provision that the property is bought "subject to state of facts shown on survey by M, dated September 1, 1905," it was held that the vendee would be compelled to take title regardless of whether or not it was marketable on the theory that the survey was before the parties and the insertion of the clause above referred to indicated an intention to rely on the said named survey. Kreshover v. Berger, 135 A.D. 27. (First Department) But where the vendor agreed to convey to the vendee the absolute fee of certain described premises "subject to state of facts shown on survey of T, dated February 2,
1904" and it was disclosed that a building on adjoining property encroached 5 1/2
4/60
Chapter 36 - Page 2 SURVEY Legal Bulletin
inches, it was held that the defendant had no title to that portion of the land encroached upon and could not give absolute title to it subject to the encroachment of the building. Kaplan v. Bergmann, 122 A.D. 876 (Second Department) However, when the contract is made "subject to any state of facts an accurate survey may show provided said survey does not show facts as would render the title unmarketable," or substantially similar language, the vendee need not take if the title is actually unmarketable by reason of the survey facts. In that event, of course, there can be no question. Levy Corporation v. Dick, 116 Misc. 145 See Also Description & Encroachments this manual
5/78
Chapter 36 - Page 1 SURVEY EXCEPTIONS Underwriting
When survey protection is not requested or arranged for, the title report and policy will contain an exception: "Any state of facts which an accurate survey might show." Some contracts are "subject to any state of facts that an accurate survey might show." In that case, the prospective purchaser is contracting to buy a parcel that may be thoroughly unmarketable. If the contract provides that it is "subject to any state of facts which an accurate survey might show provided that the title is not rendered unmarketable thereby" then the provision might just as well have been left out of the contract since for all practical purposes it is meaningless. Of course, if the contract is made subject to the state of facts shown on a specific survey which is exhibited at the time of closing and initialed by the parties then the purchaser is agreeing to accept the state of facts shown on that survey notwithstanding that it might disclose an unmarketable condition. An attorney should only accept such a provision in a contract after he has carefully studied the survey and come to the conclusion that the state of facts shown thereon is acceptable to his client notwithstanding the fact if may involve unmarketability. Unless encroachments come within the "de minimus" rules, they usually affect marketability. Where the encroachment of adjoining buildings on our premises is slight, a purchaser will not be permitted to reject title although in some cases, an abatement in the purchase price is decreed. See McGraw v. Selkis 245 App Div 786, 280 NYS 921 Affirmed 269 NY 534; Ungrich v. Shaff 119 AD 843, 105 NYS 1013, Mergers v. Ringler 34 App Div 415, 54 NYS 280, affirmed 158 NY 701; Gold v. Calderazzo 100 Misc. 598, 166 NYS 928. Where an exterior wall of a building on our premises is erected partly on our premises and partly on the premises of a neighbor on whose land there stands an abutting wall and the encroachment does not exceed 6 inches, our wall has an easement to remain undisturbed after it has been erected for one year, although an action for damages can be brought based upon the encroachment within two years. This provision, although previously applicable only to lands in cities is now also applicable to lands outside of cities. See Chapter 491 Law of 1955 amending Section 992 Civil Practice Act (now removed to Sec 611 Real Prop. Actions & Proc. Law). Projections and encroachments of roof cornices, show windows, window trim, fire escapes, entrance steps and cellar doors on a street render the title technically unmarketable but ordinarily do not discourage a willing buyer or lender. If the encroachment by our premises on adjoining premises has continued in excess of 15 years, and disabilities have not tolled the running of the statute of limitations, a prescriptive right for the wall to remain can be established. In almost every case where there is such an encroachment of an exterior wall on adjoining premises for over 15 years, a title company will affirmatively insure that notwithstanding the encroachment, the wall may remain undisturbed so long as it stands.
5/78
Encroachments on streets ordinarily render a title unmarketable. (Ravine Point Corp. v. Kott 254 NY 580). In some cases there are statutory provisions permitting an encroachment on a street to remain. One such is Section 38A of the General City Law. In cities, an encroachment of an exterior wall not exceeding 6 inches may remain provided that it was erected prior to January 1, 1920. If it was erected after January 1, 1920 a statutory notice may be served by the owner of a corporation counsel, and if no action is commenced by the City within one year, it may then remain. This provision is not applicable to properties not within a city. New York County has a special provision with respect to encroachments by front walls up to 10 inches and bay windows up to 12 inches, erected before the turn of the century (see Section 82B 6-7.0 Administrative Code of the City of New York). EXAMPLES OF SURVEY EXCEPTION & THE USE OF CASE LAW TO RESOLVE THEM 1. The northerly wall is a party wall. This does not make title unmarketable (Hendricks v. Stark, 37 N.Y. 106). However, a party wall agreement may be a technical encumbrance (O'Neil v. Van Tassel, 137 N.Y. 297), but does not discourage a willing buyer or lender. The fact that the lot line does not run precisely through the center of the party wall is of no importance (Levy v. HIll, 50 App. Div. 294, 63 N.Y. Supp. 1002), unless the point of beginning in the descriptions is monumented opposite the center of the wall (Muhlker v. Ruppert, 124 N.Y. 627). The party wall can be increased in height by either adjoining owner if it can be done without injury thereto (Brooks v. Curtis, 50 N.Y. 639). When a party wall is overtopped with a modern steel structure, it is the practice to keep the overtopping wall within the lot line (302 Lexington Ave. Corp. v. 37th St. and Lexington Ave. Corp., 34 N.Y.S. 2d 445) 2. The common driveway is an indication of the possibility of an actual or claimed "apparent" easement (express, implied of prescriptive) by the adjoining owners; and of the possibility of a need to establish an easement in favor of subject premises 27 ALR 2d 332. If deeds of both properties affirmatively recite the easements for at least 15 years, it will be insured. Encroachment of retaining wall on premises on the east. Unless it can be removed without adverse effect, it technically affects marketability but should not discourage a willing purchaser or lender. See Dukas v. Tolmach, 2 A.D. 2d 57, 153 N.Y.S. 2d 392. Consider, also, responsibility for maintenance if necessary for support. section C26-562.0 to C26-564.0, New York City Administrative Code. "Out of possession" strip indicates possibility of present or future loss of title by adverse possession. R.P.A.P.L. 512; Devyr v. Schaefer, 55 N.Y. 446, Robinson v. Phillips, 56 N.Y. 634.
3.
4.
5/78
Consider boundary line agreement, or affidavit from abutting owner as to no adverse or prescriptive claim. If fence is of recent origin, submit affidavit proof. 5. The wall of our garage encroaches 0.3 feet on the premises adjoining on the east. There is no abutting wall. This encroachment has been maintained for more than 15 years without disability on the part of the adjoining owner (Harrison v. Platt, 35 App. Div. 533, 54 N.Y. Supp. 842, aff'd 158 N.Y. 712). The title policy insures that it may remain. The northerly wall of the garage on the south encroaches up to 0.6 feet on the property. This may make the title unmarketable (Reynolds v Wynne, 121 App. Div. 272, 105 N.Y. Supp. 849) but may not discourage a willing buyer or lender. Encroachments on the street of roof cornices, show windows, window trim, fire escapes, entrance steps and cellar doors make the title technically unmarketable. (Jennings v. Baumann, 214 App. Div. 361, 212 N.Y. Supp. 334, aff'd. 243 N.Y. 532), but do not discourage a willing buyer or lender. See Exception "C" below. This leaves open all survey encroachments and other facts arising since the date mentioned.
6.
7.
8. 9.
ADDITIONAL SURVEY NOTES a. R.P.A.P.L. 611(2) permits and exterior wall to continue to encroach not exceeding 6 inches against a neighbor's abutting wall if no action is commenced to remove the encroaching wall within one year after its completion. Front wall encroachments on streets permitted: * In Cities - up to 6 inches, if built before January 1, 1940 Section 38-A, General City Law. After 1/1/40, 1 year notice. * In Towns - up to 6 inches, if built before January 1, 1940 Section 130 (7), Town Law - after 1 year notice. * In Villages - Section 6-632, Village Law - after 1 year no * After January 1, 1965 - with legislative permission. In New York County - up to 10 inches, if built before May 30, 1896 Section 82 d 6-7.0 Administrative Code.
b.
5/78
c.
Vaults under sidewalks in New York City do not affect marketability. Leerburger v. Watson, 75 Misc. 3, at Page 7, aff'd. 213 N.Y. 662. However, the New York City vault charge is a lien on the abutting property Section Z46-11.0)
Section 35, General City Law (somewhat similar provisions are also in Section 279-a, Town Law and Section 7-734, Village Law) prohibit building permits to construct in the bed of planned or proposed streets, etc. To build in the proposed street requires special permit form. Marketability is doubtful, Section 4.31, Friedman - Contracts and Conveyances of Real Property, Second Edition. However, a building permit granted in violation of Section 35, General City Law cannot be revoked after 15 years and is deemed valid - Section 35-a, General City Law. see also: chapter 15 ENCROACHMENTS and chapter 26 LIENS AND ENCUMBRANCES "Encroachments" this manual.
5/78
Chapter 34 - Page 1 STREETS Title
STREETS
TITLE TO See Deeds - Descriptions - Marginal Street See Deeds - Dedication FILED MAP OF PROPOSED STREET OPENING A law prohibiting allowance to be made to an owner erecting a building on a proposed street after the filing of a map thereof is unconstitutional. However, such event clearly affects the title's marketability. Where an owner acting in bad faith moves a building from other lands to land within a proposed street, he is not entitled to compensation. Foster v. Scoot, 136 N.Y. 577 Matter of City of New York re. Briggs Ave., Bronx, 196 N.Y. 255 Matter of City of New York re Ave. D. Brooklyn, 200 N.Y. 536 see also Chapter 690, Laws of 1926 RIGHT ANGLE LINES Calkins v. Hart, 219 N.Y. 145 STREET CLOSINGS - PRIVATE WAYS The Street Closing Act does not apply to Private ways. User by the city, i.e., policing, lighting, installing gas and electric, granting sewer rights, etc., cannot make a private way a public street, and no compensation will be awarded where such a private way was closed under the Street Closing Act. Matter of Wallace Ave., 222 N.Y. 139 ABUTTING 1. Paragraph 1 of the prior NYBTU contract of sale and the present Bloomberg form carries all right, title and interest, if any, of seller to center lines of beds of abutting streets. Presumption is that one-half abutting streets belongs to adjoining owners. Van Winkle v. Van Winkle, 184 N.Y. 903. a. Where metes and bounds course runs "to A Street and thence along A Street", one-half street is deemed included
2.
b. c.
Where description is by lot and block on a filed property map only, fee to one-half abutting street is deemed included Presumption is overcome if intention is clear to exclude street Graham v. Stern, 168 N.Y. 517 City of Albany v. State of New York, 28 N.Y. 2d 352 Where description is by lot and block on a filed property map only and lots abut boundary or marginal street on same map, presumption is that adjoining owner is selling his interest in the entire abutting portion of street - and not only one-half.
d.
2/88
Chapter 35 - Page 1 SUBORDINATION AGREEMENTS General
SUBORDINATION AGREEMENTS
Our policy issuing offices frequently request authorization to rely on a subordination agreement to insure the priority of the insured instrument over a pre-existing mortgage, lease or other interest in land. Great care should be taken when providing such authorization. From the experience of our Claims Department, we know that a party who has subordinated his interest and who is in danger of losing that interest through foreclosure or otherwise will very likely seek every avenue available to them in an attempt to invalidate the subordination agreement. Although the act of subordination may take many forms, generally it falls into three major categories. These categories are set forth below, together with our comments regarding each category. 1. AUTOMATIC SUBORDINATION The situation where the holder of a pre-existing interest has provided for a subordination of his interest to an instrument to be created in the future without any further act on his part (e.g., a lease may state that the interest of the lessee will be subordinate to any mortgage executed in the future by the lessor). Comment: Authorizing a policy insuring office to rely on the provisions of any automatic subordination is a very dangerous practice and is to be provided only with Home Office approval. 2. AGREEMENT FOR FUTURE SUBORDINATION The situation where the holder of a pre-existing interest executed a subordination agreement knowing generally the terms of the insured instrument to which the preexisting interest will be subordinated, but the insured instrument has not in fact been either drafted or recorded at the time of the act or subordination. Comment: When authorizing the issuance of a policy based on this form of subordination agreement, it is vital to confirm that the subordination agreement contains sufficient reference to the terms of the insured instrument so there cannot be later allegations that (a) the subordination agreement was too indefinite to be enforced, or (b) the terms of the insured instrument were not the exact terms agreed to by the party executing the subordination agreement. 3. SPECIFIC SUBORDINATION AGREEMENT The situation where the insured instrument is of record at the time of the execution of the subordination agreement, and the subordination agreement is both specific
as to the terms of the insured instrument and includes the recording information of the insured instrument.
2/88
Chapter 35 - Page 2 SUBORDINATION AGREEMENTS General
Comment: Generally, few problems are presented in authorizing a policy issuing office to insure the priority of the insured instrument over the pre-existing interest when the subordination agreement is in this form. In all cases, subordination agreements should be reviewed to determine whether they are unconditional or whether there are conditions to the act of subordination. If the subordination agreement is conditional, any policy so authorized must contain an exception in Schedule B as to the terms and conditions of the subordination agreement. This memorandum is, by necessity, general in scope since the diversity of statutory and case law in the various states does not allow us to provide you with specific guidelines to be followed in each state in your region. The primary purpose of this memorandum is to alert you to the dangers inherent in relying upon a subordination agreement when a policy issuing officer requests authorization to insure an instrument over a pre-existing interest. See also: Kratovil, Modern Mortgage Law and Practice, Chapter 21, Subordinations. See also: Kratovil, Modern Real Estate Documentation, Chapter 36, Priorities between Mortgages and Leases, etc.
8/79
Chapter 35 - Page 1 SUBORDINATION AGREEMENTS Legal Bulletin
1.
Self-operating subordination clauses, are and have been a significant source of claims. It is always preferable to obtain an unconditional subordination agreement to be recorded simultaneously with the insured mortgage. In every title where we are to insure a first mortgage and the search discloses an existing mortgage or mortgages, the reader must insert in the report an express exception calling for the execution of subordination agreements from the holder or holders of such earlier mortgage or mortgagees, as follows: M.P. must be unconditionally The mortgage in Liber subordinated to the mortgage to be made and insured. Even if the reader through an oversight neglects to call for such agreements, the closer is still responsible for obtaining and recording such agreements.
2.
3.
The subordination clauses in the existing mortgages must still be copied verbatim and scheduled in the report. However a new subordination agreement may not be waived without approval of one of our counsel, no matter how self-operating and unconditional the subordination clause in the old mortgage may appear. The following set of facts illustrates the danger of relying on an existing subordination. The holder of a large money judgment executed an agreement subordinating the lien of the judgment to a "construction loan." After the building was finished and the construction loan was fully advanced, the mortgage was assigned to a permanent lender who extended the time for payment for a period of years. The judgment creditor claimed priority over the permanent lender's interest because he had subordinated only to a construction loan. This loss could have been avoided if we had obtained a new subordination agreement at the time of the assignment or at least an estoppel certificate from the judgment creditor. A person or corporation holding a mortgage in a fiduciary capacity has no general power to subordinate his lien. If the terms of a mortgage are explicit, however, and it appears that the principal would have been compelled to subordinate under the circumstances - or the security is not being impaired - then a valid agreement might be delivered. A testamentary executor or trustee necessarily would be guided by the terms of the will and the authority granted by the powers thereunder. Absolute and conclusive authority therein, read with any subordination clause in the mortgage, might suffice.
4.
5.
reference: Harvey on Title Closing, 2d ed. See also: This topic under Title Insurance Underwriting Principals and Exception Language & The Title Insurance Underwriting Process
4/78
Chapter 40A - Page 1 TRUSTS General
TRUSTS
PRIVATE EXPRESS TRUST DEFINED A fiduciary relationship in which one person holds title to property subject to an equitable obligation to keep or use the property for the benefit of another. It arises as a result of a manifestation of an intention to create it. METHODS OF CREATION A. B. C. D. Declaration of trust - owner of property declares that he holds it as trustee for another. Inter Vivos transfer - by the owner of the property to another as trustee for the transferor or for a third person. Testamentary transfer - a transfer by will by the owner of property to another as trustee for a third person. Manifestation of Intent - A trust is created only if the settlor properly manifests an intention to create a trust, whether orally, in writing or by conduct. 1. Precatory Words - If transferor expresses merely a suggestion or wish that transferee use or dispose of property in a given manner, leaving compliance discretionary with transferee, no trust is created. If transferor intended to control or direct a certain disposition, a trust is created. Intent to be gathered from terms of instrument and surrounding circumstances. a. Circumstances indicative of intent to create are: (1) (2) (3) Degree of precision in describing disposition. "request" or "wish" is addressed to a close relative. If disposition is testamentary and precatory in tone, it precedes residuary clause out of which gift is to come. Spencer v. Childs, 1 N.Y. 2d 103 (1956) ("I request A and B or survivor of them to pay C, of Manchester, Conn., $208.33 per month as long as she lives." (Held: Trust Created.)
2. 3.
E.
Necessity of a Writing 1. Testamentary trust must comply with the Statute of Wills. EPTL 3-2.1
4/78
2.
Express trust of real property, created either by declaration or transfer must be in writing, subscribed by the settlor or his lawful agent whose authority is in writing. G.O.L. 5-703. a. b. c. The writing must identify the trust property, the beneficiaries, the trust purpose and indicate an intent to create a trust. The statute has no application to trusts created by operation of law. The necessity of a writing is determined by the nature of the subject matter of the trust at the time the attempt to create it was made. Day v. Roth, 18 N.Y. 448 The trustee of an oral trust of land may choose to recognize his "moral obligation" and voluntarily perform although he cannot be compelled to do so if he raises the Statute of Frauds as a defense. (1) An express trust not declared in the disposition to the trustee or an implied or resulting trust does not defeat the title of a purchaser from the trustee for value and without notice of the trust, or the rights of a creditor who extended credit to the trustee in reliance upon his apparent ownership of the trust property. EPTL 7-3.2 (a) Creditors who do not so rely cannot set aside reconveyance made in recognition of moral obligation of trustee. Bryant v. Klatt, 2 F. 2d 167 (D.C.N.Y. 1924)
d.
3. 4.
Express trust of personal property may be created and proved without a writing. Blanco v. Velez, 295 N.Y. 224 (1946) A contract to establish a trust in the future, whether of real or personal property, must be in writing and subscribed by the party to be charged or by his lawfully authorized agent. EPTL 13.2.1
F.
Delivery - The effective creation of a trust by transfer requires the actual delivery of the fund or other property, or of a legal assignment thereof to the trustee, with the intention of passing legal title thereto to him as trustee. Brown v. Spohr, 180 N.Y. 201 a. Delivery is not necessary where trust created by declaration.
G.
Consideration - Not necessary for the creation of a trust whether by declaration or transfer and whether of realty or personalty.
4/78
1.
An executory agreement to establish a trust is enforceable if the requirements of an enforceable contract are established, one of such requirements being consideration. Young v. Young, 80 N.Y. 422 An incomplete gift will not be sustained as a declaration of trust. Farmers' L & T. Co. v. Winthrop, 238 N.Y. 477
2.
TRUST ELEMENTS A. The Trustee 1. In general, any person capable of taking title to property may be a trustee. a. SCPA 707 expressly disqualifies certain persons as testamentary trustee, viz: infants, adjudged incompetents, non-resident aliens, felons and any person otherwise incompetent because of drunkenness, dishonesty, improvidence or want of understanding. A settlor can also be a trustee of the trust. The sole beneficiary of a trust cannot be the sole trustee. Reed v. Browne, 295 N.Y. 184 (1946) Matter of Phipps, 2 N.Y. 2d 105 (To A and B in trust for the life of A, then for life of C, remainder to C, B and C died. Held: No merger. Successor trustee to B appointed). Equity will not allow a trust to fall for want of a trustee. A valid trust can be created without notice to or acceptance by trustee.
b. c.
d. e. 2.
Nature of Trustee's Interest. a. Has a legal interest, not a beneficial interest. (1) b. c. Trustee's creditors cannot satisfy their claims from trust property.
Trustee of land takes only such estate as is necessary to enable him to perform the trust. EPTL 7-2.1 A conveyance to two or more trustees creates a joint tenancy. EPTL 6.2.2 (c)
4/78
d.
Upon death of last surviving of sole trustee, the trust estate does not descend to his distributees but rests in the Supreme or Surrogate's Court. EPTL 7-2.3
3.
Resignation of Trustee. a. The general rule is that a trustee who has accepted the trust cannot resign except: (1) (2) (3) with court permission (SCPA 715; EPTL 7-2.6) or in accordance with the terms of the trust; or with consent of all beneficiaries if they have capacity to give such consent.
B.
The Trust Property 1. A trust cannot be created unless there is trust property. a. b. 2. Any interest which may be the subject of present transfer may be trust property, whether legal or equitable, tangible or intangible. An expectation or hope of receiving property in the future cannot be held in trust.
Life insurance may be made payable to a trustee to be named as beneficiary in the policy and the insurance proceeds shall be paid to the trustee and shall be held and disposed of by him as provided in a trust agreement made by the insured during his lifetime. It is not necessary to the validity of such a trust that it have a trust corpus other than the right of the trustee to receive the insurance proceeds. A life insurance policy may designate a trustee who is to be named in a will. The insurance proceeds are, upon death of the insured, payable to the trustee to be administered by him in accordance with the terms of the will as it exists on the testator's death. If a qualified trustee does not claim the insurance proceeds within 18 months after the insured dies, or if satisfactory evidence is given to the insurance company within that 18 month period that there will be no trustee, the company may pay the proceeds to the executor, administrator or assigns of the insured unless an agreement to the contrary has been made with the company during the lifetime of the insured. EPTL 13-3.3 (b)
C.
The Beneficiary
4/78
1. 2.
Every private trust must have a beneficiary who is definitely ascertained or ascertainable. The members of a definite class of persons may be beneficiaries. a. b. 3. Trustee may be authorized to select members of class who are to take and in what proportions they are to take. Members of an indefinite class cannot be beneficiaries of a private trust. A trust may be validly created without notice to or acceptance by the beneficiary.
TRUST PURPOSE A. Passive Trusts 1. Every person who is entitled both to the actual possession of property and to the rents and profits thereof, shall be deemed to have a legal estate therein, of the same quality and duration as his beneficial interest. EPTL 7-1.1 Every disposition of property shall be made directly to the person in whom the right to the possession and income is intended to be vested and not to another in trust for such person. If made to any person in trust for another, no estate or interest vests in the trustee. EPTL 7-1.2 EPTL 7-1.1 & 7-1.2 apply to real and personal property.
2.
3. B.
Express Trusts 1. An express trusts of real and personal property or either of them, may be created for any lawful purpose or purposes. EPTL 7-1.4.
C.
Restrictions on Trust Purpose 1. Illegality - A trust will fail if it is designed to accomplish a purpose which is illegal, or contrary to public policy, or fraudulent. Matter of Lieberman, 279 N.Y. 458 (1939) (Trust income to A provided he marries with consent of B and until he does income to B. Held: Invalid) Matter of Rothschild, 271 App. Div. 582 (1946) (Trust income to S of life. Upon his death principal to his wife and children other than his
present wife. Disposition valid as not tending to induce divorce)
4/78
Matter of Dettmer, 289 N.Y. 597 (1942) (Restraint upon remarriage of stranger contrary to public policy) Pattison v. Pattison, 301 N.Y. 65 (1950) (Trust created for purpose of defrauding creditors is invalid). Seagirt Realty Corp. v. Chazanoff, 13 N.Y. 2d 282 (1963) (Voluntary reconveyance to fraudulent grantor, even from immediate fraudulent grantee is effective as between the parties) 2. 3. D. Restrictions as to accumulations - infra Restrictions as to duration - the rule against perpetuities - infra
Charitable Trusts 1. 2. Common element of all charitable trusts in that they are designed to accomplish objects which are beneficial to the community. Vary from private express trusts in three ways: a. b. c. 3. Beneficiaries may be indefinite. Cy pres doctrine is applicable. May exist in perpetuity.
Purposes for which a charitable trust may be created include: a. b. c. d. e. Relief of poverty Advancement of education Advancement of religion Promotion of health Governmental or municipal purposes
4. 5.
The motive of the settlor is immaterial An express direction restricting use of gift to charitable corporation, although not creating a trust in a technical sense, must be obeyed.
4/78
a.
Attorney General may maintain suit to compel charity to use gift for purpose for which it was given St. Joseph's Hospital v. Bennett, 281 N.Y. 115 (1939)
6. 7.
If charitable trust intended, but no trustee named, title vests in the Court having jurisdiction over the trust. EPTL 8-1.1 (a) A devise or bequest to an unincorporated association which lacks capacity to take the gift shall not be void if within three years after probate of will, the beneficiary becomes incorporated with power to take the gift. EPTL 3-1.3 (b) Cy Pres Doctrine If a charitable trust becomes impossible, impractical or illegal to carry out and settlor manifested a general charitable intent, the trust will not fail, but the court will direct that property be used in such manner as will most effectually accomplish the general purpose of the trust instrument. EPTL 81.1(c) Matter of Syracuse Univ. (Hendricks), 4 N.Y. 2d 744 (1958) Matter of Scott, 8 N.Y. 2d 419 (1960) (1) If doner still living, his consent must be obtained.
8.
9.
Beneficiaries of a charitable trust are represented by the Attorney-General and it is his duty to enforce such trusts. EPTL 8-1.1(f)
TENTATIVE OR TOTTEN TRUSTS A. Such a trust arises when A deposits his own funds in a savings account entitled "A in trust for B." Standing alone, this transaction does not establish an irrevocable trust during the lifetime of A. Matter of Totten, 179 N.Y. 112 B. Such a trust may become irrevocable by: 1. 2. 3. An express statement of intention to that effect. Imperatrice v. Imperatrice, 298 N.Y. 549 Giving notice of the deposit to the beneficiary. Delivering bankbook to beneficiary. Matter of Farrell, 298 N.Y. 129
4/78
4. C.
Death of depositor without having revoked the trust during his lifetime or by his will.
Such a trust may be revoked by words or conduct of the depositor indicating an intention to revoke it, e.g.: 1. 2. 3. Withdrawal of the fund by the depositor. Beneficiary predeceasing depositor. Depositor's will where will provisions could not be effectuated without resort to trust account. In re Stein's Will, 249 N.Y.S. 2d 223 (1964). Revocation for the benefit of creditors. Matter of Reich, 146 Misc. 616 (1933) (Upon death of depositor his assets insufficient to pay his creditors and funeral expenses). If depositor becomes insane his guardian or committee cannot revoke the trust without court order.
4.
5. D.
Rights of Creditors of Depositor Beakes Dairy Co. v. Berns, 128 App. Div. 137 (Money in account is subject to claims of depositor's creditors during his lifetime and before the trust has become irrevocable).
RESULTING TRUSTS A. Where one person transfers property to another and it is presumed that he did not intend the transferee to have any beneficial interest therein, a trust will result in favor of the transferor or his estate. A resulting trust may arise as follows: 1. 2. 3. Failure of an express trust. Trust fully performed without exhausting trust property. Purchase money resulting trust. a. b. Common law rule Statute abolished common law rule:
B.
4/78
A disposition of property to one person for a valuable consideration paid, in whole or in part, by another is presumed fraudulent as against the creditors of the payor at the time of such disposition and, unless the presumption is rebutted, a trust results in favor of such creditors to the extent necessary to satisfy their claims; but title to the property vests in the transferee and no trust results to the payor unless the transferee either: (1) (2) c. Takes such property, in his own name, as an absolute transfer without the consent or knowledge of the payor; or In violation of some trust, purchases the property so transferred with money or property belonging to another. EPTL 7-1.3
Judicial exceptions Carr v. Carr, 52 N.Y. 251 (Constructive trust available against grantee named in deed which was intended as a mortgage) Foreman v. Foreman, 251N.Y. 237 (Constructive trust available against wife who obtained title to property which she seeks to keep in abuse of confidential relationship)
C. D.
A resulting trust will not be established to defeat the rights of a bona fide purchaser. EPTL 7-3.2 The Statute of Frauds is not applicable. G.O.L. 5-703
CONSTRUCTIVE TRUST A. A constructive trust is created by operation of law. It is a remedial device primarily designed to prevent unjust enrichment. Rosenblatt v. Birnbaum, 16 N.Y. 2d 212 (1965) (Divorced wife and second husband misappropriated payments made by first husband for support of children).
4/78
2.
Homicide - including murder and manslaughter in first or second degree constructive trust in favor of those who would have acquired property of victim had he survived. Hawkins v. Hawkins, 213 N.Y.S. 2d 188 (1961) Breach of a fiduciary obligation. a. Self-dealing Wendt v. Fisher, 243 N.Y. 439 (1926) (A employed broker B to sell property. B caused sale to be made to corporation he controlled). Commissions In re Tuttle's Will, 4 N.Y. 2d 159 (1958) (Trustee entitled to extra compensation for extra accounting services to extent that court may award it). Fiduciary's seizure for self of opportunity belonging to principal. Soles v. Stevenson, 278 N.Y.S. 2d 922 (1967) Sialkot Importing Co. v. Berlin, 295 N.Y. 482 (1946) d. Confidential information Defler Corp. v. Kleeman, 19 N.Y.2d 694 (Fiduciary may not use confidential information to further his own ends). Zeiden v. Oliphant, 54 N.Y.S.2d 27 (Attorney used confidential information to obtain property for charity). e. Conflict of interest - divided loyalties City Bank Farmers Trust Co. v. Cannon, 291 N.Y. 125 (X Corp. named trustee of corpus which included Y Corp. stock X and Y Corps. thereafter merged. X Corp. retained stock and was surcharged when it depreciated). Matter of Clark's Estate, 12 N.Y. 2d 183 (Compensation denied attorney for fiduciary who placed himself in position of divided loyalty).
3.
b.
c.
C.
The Statute of Frauds 1. The establishment of a constructive trust does not require a writing. G.O.L. 5-703
4/78
2.
An oral promise to hold realty in trust is unenforceable if the statute of frauds is raised as a defense, with two major exceptions: a. b. Fraud in the inception Breach of a confidential relationship Farano v. Stephanelli, 183 N.Y.S.2d 707 (1959) Tebin v. Moldock, 14 N.Y.2d 807 (1964)
D.
The Statute of Wills 1. Problem presented: A devises property to B relying on B's oral promise to hold in trust of C. A constructive trust will be established for the intended beneficiary where: a. b. c. B misrepresented his intention. A and B stood in a confidential relationship to each other. Disposition by will or intestacy was wrongfully procured. Latham v. Father Divine, 299 N.Y. 22
TRUST ADMINISTRATION A. Duties of Trustee 1. Imposed by terms of the trust a. Deviation may be justified by change of circumstances or an emergency. Matter of Pulitzer, 139 Misc. 575
2.
Imposed by law a. b. c. d. Duty to take possession of trust property Duty not to delegate Duty to account Duty to exercise reasonable care and skill (1) Exculpatory clause in testamentary trust void. EPTL 11-1.7
4/78
(2)
Such clause valid in inter vivos trust. Central Trust Co. v. Russell, 290 N.Y. 593 Benton v. Safe Deposit Bank, 255 N.Y. 260
e. f. g.
Duty to preserve the trust property Duty to keep trust property separate Duty to make trust property productive (1) Since May 1, 1970, the trustee's choice of investments has been governed by the Prudent Man Rule. This rule applies to any investment, made on or after May 1, 1970, of funds held for investment by a fiduciary, and to all estates and trusts in existence on May 22, 1972 or which may thereafter come into existence, at least for trusts established after that date. EPTL 11-2.2 The Prudent Man Rule yields, however, to terms of the trust specifying approved or forbidden types of investment.
(2) h. B.
Duty to prevent breach of duty by co-trustee where he has or should have knowledge of it.
Powers of Trustee 1. 2. 3. He has such powers as are conferred upon him by the terms of the trust and those which are by implication necessary to carry out the trust purpose. Discretionary powers are not subject to court control if exercised reasonably, in good faith and consonant with settlor's intention. Fiduciaries' Powers Act - EPTL 11-1.1 In the absence of contrary of limiting provisions in the order or decree appointing a trustee, or in the instrument creating the trust, every trustee of an express trust (whether inter vivos or testamentary) is, in addition to the powers vested by law or by the trust instrument, authorized: a. b. c. To take possession, manage and control all personal property. To accept additions to any trust from sources other than the settlor of a trust. To acquire the remaining undivided interest in a trust asset in which
the trustee holds an undivided interest.
4/78
d. e.
To invest and reinvest trust assets as provided by the trust instrument or by law. To effect and keep in force fire, rent, title, liability, casualty or other insurance to protect the assets of the trust and the trustee against hazards usually insured against. With respect to real property: (1) (2) (3) (4) to take possession of, collect the rents from and manage the same; to sell the same at public or private sale, and on such terms as in the trustee's opinion will be most advantageous; to lease the same for a term not exceeding ten years though such term extends beyond the duration of the trust; to mortgage the same.
f.
g. h. i.
To make ordinary repairs to the real or personal property of trust. To grant options for the sale of real or personal property for a period not exceeding six months. To lease personal property for not more than one year, unless the personal property is leased in conjunction with a lease of real property, in which event, it may be coterminous with the lease of real property. To employ banks or trust companies as custodians of securities held in trust. To cause securities held in trust to be registered and held in the name of a nominee of a bank or trust company acting as custodian. In the case of the survivor or survivors of the holder of a power given to two or more trustees, to exercise such power unless the exercise would be contrary to the express provisions of the trust instrument. As successor or substitute trustee to succeed to all the powers and duties of an original trustee or trustees unless contrary to the express provisions of the trust instrument. Where there are three or more trustees qualified to acted, to take any action with respect to the trust which a majority of such trustees shall
j. k. l.
m.
n.
determine.
4/78
o. p. q.
To compromise, contest or otherwise settle any and all claims in favor of or against the trust. To vote shares of stock held in trust either in person or by proxy. To sell or exercise stock subscriptions or conversion rights, participate in foreclosures, reorganizations consolidations, mergers or liquidations, and to consent to corporate sales or leases and encumbrances. To hold two or more trusts or parts of such trusts, created by the same instrument, as an undivided whole, without separation as between such trusts or parts of such trusts, provided that such separate trusts or parts of such trusts shall have undivided interests and provided further that no such holding shall defer the vesting of any estate in possession or otherwise. To distribute in kind any property of the trust at the value fixed by all of the parties interested to which they consent in writing. The court having jurisdiction of the trust may authorize the trustee to exercise any other power which is necessary for the proper administration of the trust. The Fiduciaries' Powers Act applies to all trusts now in existence or which may hereafter come into existence.
r.
s. t.
u. C.
Allocation to Principal or Income - EPTL 11-2.1 1. Unless the trust instrument otherwise provides: a. Distributions by a corporation or association made to a trustee in the shares of the distributing corporation or association held in such trust, whether in the form of a stock split or a stock dividend, at the rate of 6% or less of the shares upon which the distribution is made, shall be income. Any such distribution at a greater rate shall be principal. Unless otherwise provided by the will, deed or other instrument, the following definitions and rules of construction shall apply: (1) A stock dividend or distribution in the shares of the distributing corporation or association shall mean a distribution in the shares of the distributing corporation or association, whether in the form of a stock split or a stock dividend, at the rate of 6% or less of the shares upon which the distribution is made.
b.
4/78
(2) c.
Such a stock dividend or distribution shall be deemed to be ordinary and regular and in lieu of a cash dividend.
A right to subscribe to shares or other securities issued by the distributing corporation or association, whether in the stock or other securities of distributing corporation or association, or the stock or other securities of a corporation or association other than the distributing corporation or association, accruing to stockholders on account of their stock ownership and the proceeds of any sale of such rights are principal. When a corporation or association calls in a share of stock, or succeeds another merger, consolidation, reorganization or by other method of acquiring its assets, shares of stock issued for the stock so called in or shares of stock in the succeeding corporation or association are principal. When a corporation or association is being wholly or partially liquidated, shares of stock and cash or other assets distributed to stockholders are generally principal. If the distributing corporation or association gives a stockholder an option to receive a distribution, whether in the form of cash, or its own shares or cash, or an option to purchase new stock, the distribution chose is income. Except as otherwise provided in the statute, all corporate distributions, including cash dividends, are income. Record date is deemed to be date on which dividends accrue or, if no record date specified, date on which dividend declared. EPTL 11-2.1 applies to any trust whether created or declared before or after its effective date.
d.
e.
f.
g. h. i.
CHARGES ENFORCEABLE AGAINST THE TRUST A. Contract Claims - As a general rule, the trustee is personally liable upon contract made by him in the course of trust administration. 1. 2. If liability is properly incurred, he is entitled to indemnity out of trust property. If trustee is insolvent, creditor may be subrogated to trustee's right of indemnity and recover from trust estate.
4/78
a. 3.
Trust estate is entitled to offset claims it has against trustee.
The contract between the trustee and the third party may effectively provide that the trustee shall not be personally liable, but that the third party shall look only to the trust estate. Jessup v. Smith, 223 N.Y. 203
B.
Tort Claims - As a general rule, the trustee is personally liable for torts committed in the course of trust administration. 1. If liability is incurred without fault, the trustee is entitled to indemnity out of the trust estate.
REMEDIES OF BENEFICIARY A. The beneficiary has three major remedies for loss caused by breach of trust duty by trustee. 1. 2. He may hold trustee personally liable for damage caused (surcharge). He may recover the trust property or its substitute in the hands of the trustee or a third person (other than a b.f.p.) if he can identify it (tracing). Baxter House, Inc. v. Rosen, 278 N.Y.S.2d 442 (1967) He may hold trustee personally liable and in addition have a lien impressed on the trust property or its substitute in the hands of the trustee, if he can identify it, to satisfy his claim (surcharge plus lien). The beneficiary must elect his remedy.
3.
4. B.
Beneficiary's Remedies Against Third Parties 1. 2. One who knows he is dealing with a trustee is charged with knowledge of the trustee's powers. 359 (1) Gen. Business Law: If fiduciary deposits trust funds in his personal account, the bank, if acting in good faith and without actual knowledge to the contrary, may assume that the fiduciary is acting properly. If the bank receives such funds for its own benefit (e.g. fiduciary pays his debt to bank with it), it will be liable to the beneficiary to the extent of the amount so received. One who deals with a trustee who is acting within his powers, need not inquire as to the trustee's motives, nor be bound to see that the trust moneys are properly applied.
3.
4/78
TRANSFERABILITY OF BENEFICIARY'S INTEREST A. Assignment of Principal 1. 2. No New York statute prohibits a remainderman from transferring or assigning his interest in trust principal. A restraint upon alienation of principal may be validly imposed by the creator. Matter of Vought, 293 N.YS.2d 34 (1967)
B.
Assignment of Income 1. General rule - If trustee is directed to receive income and pay it or apply it to the use of a designated beneficiary, the beneficiary cannot irrevocably transfer or assign his right to receive income. EPTL 7-1.5(a) (1) Exceptions a. Unless the instrument creating the trust otherwise provides, the beneficiary may transfer: (1) (2) any amount in excess of $10,000 of annual income to which he is entitled from each trust; to the spouse or one or more lineal descendants, ancestors, brothers, sisters, uncles, aunts, nephews or nieces of the beneficiary; provided such transfer is in writing, signed and acknowledged by the beneficiary and delivered to the trustee or trustees of the trust together with an affidavit by the beneficiary that such transfer, together with any previous transfers concurrently in effect with it are for all or any part of the excess over $10,000 of the annual income from such trust to which the beneficiary is entitled and that he has not and will not receive any consideration in money or money's worth for the transfer. Such assignment shall be effective in any year only to the extent of income from such trust in excess of $10,000. A transferee of such income may make any further transfer thereof only to one or more of the persons referred to in (b), above, other than a prior transferror. EPTL 7-1.5(b)
2.
(3)
(4) (5)
4/78
b. c.
Annuities A trust in which the settlor and the beneficiary are the same. Schenck v. Barnes, 156 N.Y. 316 (1898) EPTL 7-3.1
d.
Assignments for the benefit of persons whom the beneficiary is legally obligated to support. Matter of Knauth, 12 N.Y.2d 259 (1963) (1) EPTL 7-1.5(b) supra, does not affect the beneficiary's right to transfer all or any part of such income to such persons. EPTL 7-1.5(d)
e.
Consent to revocation under EPTL 7-1.9. Carlebach v. Central Hanover B & T. Co., 269 App. Div. 45 (1945)
C.
Rights of Creditor of Beneficiary 1. Where the settlor is also the beneficiary the creditor may reach all the income without regard to the needs of the beneficiary. (Schneck v. Barns, supra) a. A transfer of property made in trust for the use of the person making it is void as against the existing or subsequent creditors of such person. EPTL 7-3.1
2.
If the settlor reserves to himself, for his own benefit, an absolute power of revocation he is still deemed the absolute owner of the estate conveyed so far as the rights of creditors or purchasers are concerned EPTL 10-10.6 Statutory Rights a. EPTL 7-3.4 - A creditor may reach the surplus of income beyond the sum necessary for the education and support of the beneficiary. (1) The phrase "beyond the sum necessary . . ." is construed to mean the sum necessary in accordance with his station in life. Matter of Brown, 35 N.Y.S.2d 646 (a) it also includes the needs of his dependents.
3.
(b)
other sources of income may be considered.
4/78
(2) (3) b.
This section is applicable to trusts of realty and personalty. Creditor must first exhaust his legal remedies and then bring creditor's bill in equity.
CPLR 5226 - Upon motion of the judgment creditor, the judgment debtor (the beneficiary) may be ordered to make specified instalment payments to the judgment creditor. CPLR 5231 (b) - If a judgment debtor (the beneficiary) is receiving or will receive more than $85 per week from any person an income execution for installments therefrom of not more than 10% thereof may be issued to the sheriff of the county where the judgment debtor resides.
c.
4.
Exception contained in EPTL 7-1.5 (a) (2) where proceeds of life insurance policy are left in trust with the company. Matter of Genessee Valley Trust Co. v. Glazer, 295 N.Y. 219
D.
Application of Principal to Income Beneficiary. 1. Spendthrift trusts created to prior to June 1, 1966: Unless otherwise provided by the trust instrument, the court having jurisdiction of the trust has discretion to make allowance from principal to an income beneficiary whose support or education is not sufficiently provided for by the trust or otherwise, to the extent that the income beneficiary is entitled to the principal of the trust; if income beneficiary is not entitled to the principal of the trust, if all persons beneficially interested in the trust are adult and competent and consent in writing, provided court is satisfied that original purpose of settlor cannot be carried out and that the allowance from principal would effectuate intention of settlor. EPTL 7-1.6(a) 2. Spendthrift trust created on or after June 1, 1966: Unless otherwise provided by the trust instrument, the court having jurisdiction of the trust has discretion to make allowance from principal to an income beneficiary whose support or education is not sufficiently provided for by the trust or otherwise, whether or not he is entitled to principal, provided the court is satisfied that the original purpose of the settlor cannot be carried out and that such allowance would effectuate intention of settlor. EPTL 7-1.6(b) 3. If income beneficiary to whom allowance is made is or becomes entitled to a share of the principal, allowances made will be charged against such share.
EPTL 7-1.6(c)
4/78
4. E.
Statute not applicable where tax exempt entity is entitled to trust principal. EPTL 7-1.6(d)
Application of Principal for Reimbursement of Taxes Under EPTL 7-1.11
REVOCATION AND AMENDMENT A. B. A power of revocation may be expressly provided for by the terms of the trust. In the absence of an express power of revocation, inter vivos trusts are irrevocable except as provided for by statute. 1. EPTL 7-1.9 provides that upon the written consent of all persons beneficially interested, the settlor may revoke in whole or in part. a. b. c. Applies only to inter vivos trusts. Infants who are beneficially interested cannot consent. Whittemore v. Equitable Trust Co., 250 N.Y. 298 Consent of unborn persons, who at birth would acquire an interest, is not necessary. Smith v. T.G. & T., 287 N.Y. 500 Matter of Peabody, 5 N.Y.2d 541 (1959) Who are "persons beneficially interested"? (1) Persons described only as heirs, next of kin or distributees (or by any terms of like import) of the creator of a trust are not beneficially interested if trust created on or after Sept. 1, 1951. EPTL 7-1.9 Construction of "next of kin" and words of similar import. Matter of Dodge, 25 N.Y.2d 273 (1969)
d.
(2) ACCUMULATIONS A.
Defined - The withholding, prevention or prohibition of the present enjoyment or present expending of rent, income or interest and the adding of such rent, income or interest to the principal or capital of a fund. Rules Governing Accumulations 1. All directions for the accumulation of income are void unless authorized by statute. EPTL 9-2.1 (a)
B.
4/78
2.
A direction for the accumulation of income is valid if such accumulation is to begin and terminate within the time allowed by the rule against perpetuities. EPTL 9-2.1(b) a. The time allowed by the rule against perpetuities is lives in being at the creation of the estate and a term of not more than 21 years. EPTL 9-1.1 (a) (2) An accumulation directed to continue for a period extending beyond the expiration of such time terminates upon such expiration. EPTL 92.1(b) Income may be accumulation for the benefit of any person, an adult or a minor.
b.
c. 3.
A direction for the accumulation of income by the trustee of a charitable trust is valid without regard to the time at which the accumulation is to begin or to terminate, but the accumulation is subject to the supervision and control of the court. EPTL 9-2.1(c) The income from a trust created by an employer as part of a stock bonus, pension, disability or death benefit or profitsharing plan, for the exclusive benefit of his employees, to which contributions are made by the employer, the employees or both, for the purpose of distributing to such employees the income or principal, may be accumulated until the funds are sufficient, in the opinion of the employer, to accomplish the purposes of such plan. EPTL 92.1(d) When a valid accumulation is directed for the benefit of a person without other sufficient means to support or educate himself, the appropriate court, on the application of such person, his guardian or committee, may direct that a suitable sum from the income accumulated or to be accumulated be applied for the support or education of such person. EPTL 9-2.2 (a) a. When the proceeds of a life insurance policy issued or delivered in this state are being retained under an agreement by the insurer to credit interest thereon for the benefit of a person without other sufficient means to support or educate himself, the Supreme Court, on the application of such person, his guardian or committee, may direct that a suitable sum from the interest credited or to be credited be applied of the support or education of such person. EPTL 9-2.2(b)
4.
5.
6.
When income is not disposed of and no valid direction is given for its accumulation, it passes to the person presumptively entitled to the next eventual estate. EPTL 9-2.3
4/78
a.
The next eventual estate is the one which is to take effect upon the happening of the event which terminates the accumulation. Pray v. Hegeman, 92 N.Y. 508
7.
When a direction for the accumulation of income is contained in an instrument exercising a power of appointment, the validity of such direction is determined by the law in effect when the power is exercised and not by the law in effect when the power was created. EPTL 10-8.4 When a real property situated in this state is acquired by a trust validly created under the law of another jurisdiction, whether a direction for the accumulation of rents and profits is valid is determined by the law of this state in effect at the time of the acquisition of such property. EPTL 9-1.4
8.
PERPETUITIES A. The rule against perpetuities, as that phrase is commonly understood in New York is directed at both the unlawful suspension of the power of alienation and remoteness in vesting. Suspension of the Power of Alienation 1. The absolute power of alienation is suspended when there are no persons in being by whom an absolute fee or estate in possession can be conveyed or transferred. EPTL 9-1.1 (a) (1) There are two ways by which the power of alienation is suspended: a. b. Spendthrift trusts EPTL 7-1.5 (a) (1) Future estates which are contingent because the persons to whom they are limited are unborn or unascertained. (1) A future estate which is limited in favor of a living, ascertained person but is contingent because of an uncertain event, does not suspend the power of alienation.
B.
2.
3.
All spendthrift trusts do not suspend the power of alienation. The exceptions are: a. The settlor is himself the beneficiary. Schenck v. Barnes, 156 N.Y. 316
4/78
b.
A legacy of a fixed amount payable under a testamentary trust, though payable in installments. Radley v. Kuhn, 97 N.Y. 26 An annuity of fixed annual payments, if payable out of principal or income and principal indiscriminately. Matter of Fowler, 263 App. Div. 255: Matter of Clark, 284 N.Y.S.2d 244. Revocable trusts.
c.
d. C.
Remoteness in Vesting 1. No estate in property shall be valid unless it must vest, if at all, within the permissible period. EPTL 9-1.1(b) Matter of Wilcox, 194 N.Y. 288
D.
"Suspension of the power of alienation" and "remoteness in vesting" are not synonymous. 1. Questions to be asked: a. b. c. d. Is there a suspension of the power of alienation? For how long will the suspension continue? Is there a contingent future estate? When, of necessity, must it vest?
E.
The Permissible Period - EPTL 9-1.1 (a) (2), (b) 1. The permissible period is lives in being at the creation of the estate and a term of not more than 21 years. a. b. c. 2. "Lives" refers to human lives. Lives in being shall include a child conceived before the creation of the estate and born alive thereafter. The lives must not be so designated or so numerous as to make proof of their end unreasonably difficult.
Where an estate is created by an instrument exercising a power of appointment, the permissible period is determined by the law in effect when the power is exercised and not by the law in effect when the power was
created. EPTL 10-8.2
4/78
F.
Computation of Permissible Period 1. The permissible period is computed as of the time of the creation of the estate. a. b. 2. If the estate is created inter vivos, the permissible period is normally computed as of the time the instrument of transfer is delivered. If the estate is created by will, the permissible period is computed as of the time of the testator's death.
Events occurring before the creation of the estate may be considered. As a general rule, events occurring after the creation of the estate may not be considered. a. See "second look" - 3 (b) (2) infra
3.
Powers of appointment. a. Where an estate is crated by an instrument exercising a general power of appointment which is presently exercisable, the permissible period is computed as to the time of the effective date of the instrument exercising the power. EPTL 10-9.1 (a) (1) (1) A power of appointment is general if it is exercisable in favor of the donee, his estate, his creditors or the creditors of his estate and is presently exercisable if it may be exercised by the donee during his lifetime or by his written will at any time after its creation. EPTL 10-3.2 (b), 10-3.3(b)
b.
Where an estate is created by an instrument exercising a power of appointment other than a general power which is presently exercisable, the permissible period is computed as of the time the power is created. (1) Note - although the computation begins as of the time of the creation of the power, the permissible period is determined by the law in effect when the power is exercised. "Second Look" - When computing the permissible period from the time of the creation of the power, facts and circumstances existing on the effective date of the instrument exercising the power shall be considered in determining the validity of interests created by the instrument exercising the power. EPTL 10-8.3
(2)
4/78
4.
Powers of revocation - Where the creator of a trust reserved to himself an unqualified power to revoke, the permissible period is computed as of the time when the power to revoke terminates by reason of the death of the creator, by release or otherwise. EPTL 10-8.1(b)
G.
Application of the Rule 1. Reduction of age contingency - Where an estate would be invalid because made to depend for its vesting or duration upon any person attaining or failing to attain an age in excess of 21 years, the age contingency shall be reduced to 21 years as to any or all persons subject to such contingency. EPTL 9-1.2 Matter of Pendleton, 246 N.Y.S.2d 351; In re Martin's Will, 296 N.Y.S.2d 498 2. Rules of construction: a. b. It shall be presumed that the creator intended the estate to be valid. EPTL 9-1.3(a) Obviation of the problem of the "unborn widow" - Where an estate would be invalid because limited to a person who is referred to as the spouse of another and because of the possibility that such person may not be in being at the creation of the estate, it shall be presumed that the reference is to a person in being at the creation of the estate. EPTL 9-1.3(c) In re Williams Will, 245 N.YS.2d 672 Where the duration of vesting of an estate is contingent upon the probate of a will, the appointment of a fiduciary, the location of a distributee, the payment of debts, the sale of assets, the settlement of an estate, the determination of questions relating to an estate or transfer tax or the occurrence of any specified contingency, it shall be presumed that the creditor intended the contingency to occur, if at all, within 21 years from the effective date of the instrument creating such estate. EPTL 9-1.3(d) Where the validity of a disposition depends upon the ability of a person to have a child at some future time, it shall be presumed that a male can have a child at 14 years of age or over, but not under that age, and that a female can have a child at 12 years of age or over but not under that age or over the age of 55 years. (1) In the case of a living person, evidence may be given to establish whether he or she is capable of having a child at the
c.
d.
time in question. EPTL 9-1.3(e) (2)
4/78
e.
Where the validity of a disposition depends upon the ability of a person to have a child at some future time, the possibility that such person may have a child by adoption shall be disregarded. EPTL 91.3(e) (3) The provisions of subparagraphs (1), (2) and (3) of EPTL 9-1.3(e), cited above, shall not apply for any purpose other than that of determining the validity of a disposition under the rule against perpetuities where such validity depends on the ability of a person to have a child at some future time. A determination of validity or invalidity of a disposition under the rule against perpetuities by the application of such subparagraphs shall not be affected by the later occurrence of facts in contradiction to the facts presumed or determined or the possibility of adoption disregarded thereunder.
f.
H.
Exceptions The rule against perpetuities has no application to: 1. A trust created by an employer as part of a stock bonus, pension, disability or death benefit or profit-sharing plan for the benefit of employees. EPTL 91.6 A trust created under a retirement plan which is exempt from federal income taxation under the laws of the U.S. EPTL 9-1.7
2.
FUTURE INTERESTS A. Classification 1. Estates, as respects the time of their enjoyment, are divided into estates in possession and future estates. EPTL 6-3.1 a. b. An estate in possession is an estate which entitles the owner to the immediate possession of property. EPTL 6-4.1 A future estate is an estate limited to commence in possession at a future time, either without the intervention of a precedent estate, or on the determination by lapse of time or otherwise, of a precedent estate created at the same time. EPTL 6-4.2
2.
Future estates are divided into: a. Estates left in the creator, consisting of:
(1)
Reversions
4/78
(2) (3) b.
Possibilities of reverter Rights of re-acquisition EPTL 6-3.2(a) (1)
Estates created in favor of a person other than the creator, namely remainders that are: (1) (2) (3) (4) Indefeasibly vested Vested subject to open Vested subject to complete defeasance Subject to a condition precedent EPTL 6-3.2(a) (2)
B.
Estates left in the creator (reversion) 1. A reversion is the future estate other than a possibility of reverter and a right of re-acquisition, left in the creator or in the successors in interest of the creator, upon the simultaneous creation of one or more lesser estates in property than the creator originally owned. EPTL 6-4.4 Reversions are always vested. Reversions are descendible, devisable and alienable. EPTL 6-5.1 The owner of a reversion may maintain an action founded upon an injury to the inheritance, notwithstanding any intervening estate for life or for years. RPAPL 831 The doctrine of worthier title has been abolished. EPTL 6-5.9
2. 3. 4.
5. C.
Estates created in favor of person other than creator (remainders) 1. Indefeasibly vested - A future estate indefeasibly vested is an estate created in favor of one or more ascertained persons in being or their successors in interest which is certain when created to become an estate in possession whenever and however the preceding estate ends and which can in no way be defeated or abridged. EPTL 6-4.7 Vested subject to open - A future estate vested subject to open is an estate created in favor of one or more ascertained persons in being or their successors in interest, which is certain when created to become an estate in possession whenever and however the preceding estate ends, and which is subject to diminution by reason of another person or persons becoming
2.
entitled to share therein. EPTL 6-4.8
4/78
3.
Vested subject to complete defeasance - a future estate vested subject to complete defeasance is an estate created in favor of one or more ascertained persons in being or their successors in interest, which would become an estate in possession upon the expiration of the preceding estates, but may end or be terminated as provided by the creator before the expiration of such preceding estates. EPTL 6-4.9 Subject to a condition precedent - a future estate subject to a condition precedent is an estate created in favor of one or more unborn or unascertained persons or in favor of one or more presently ascertainable persons in being upon the occurrence of an uncertain event. EPTL 6-4.10 a. b. c. d. e. May be limited upon an estate for years. EPTL 6-3.3 (a) (3) The rule of destructibility of contingent remainders has been abolished. EPTL 6-5.10, 6-5.11 Must vest within the permissible period of the rule against perpetuities. Are descendible, devisable and alienable. EPTL 6-5.1 The rule in Shelley's case has long been abolished. EPTL 6-5.8
4.
POWERS OF APPOINTMENT A. B. The common law of powers is established as the law of this state except as specifically modified by statutory provision. EPTL 10.1.1 Definition - A power is an authority to do an act in relation to real or personal property, or to the creation or revocation of an interest therein, or a charge thereon, which the person granting or reserving the power might himself lawfully perform EPTL 10-2.1 Classification 1. 2. 3. A power of appointment is general to the extent that it is exercisable wholly in favor of the donee, his estate, his creditors or creditors of his estate. All other powers of appointment are special. EPTL 10-3.2 (c) A power of appointment is presently exercisable if it may be exercised by the donee, during his lifetime or by his written will, at any time after its creation and does not include a postponed power. EPTL 10-3.3 (b)
C.
4/78
4. 5.
A power of appointment is testamentary when the donor intended it to be exercised only by a will of the donee. EPTL 10-3.3 (c) A power of appointment is postponed if it is exercisable by the donee only after the expiration of a stated time or after the occurrence or nonoccurrence of a specified event. EPTL 10-3.3 (d) A power of appointment is imperative when the terms of its creation impose on the donee a duty to exercise it. EPTL 10-3.4(b) A power of appointment which is not imperative is discretionary. EPTL 103.4(c)
6. 7. D.
Creation - The doner must be a person capable of transferring an interest in the appointive property. He must have executed the instrument creating the power in the manner required by law for such an instrument. He must intend to confer the power upon a person capable of holding an interest in the appointive property and he cannot nullify or alter the rights of the donee's creditors. EPTL 10-4.1 Contracts to Appoint 1. The donee of a presently exercisable power can contract to appoint it if neither the contract nor the promised appointment confers a benefit upon a person who is not a permissible object of the power. EPTL 10-5.2 The donee of a power not presently exercisable cannot make an enforceable contract to appoint it. If the contract is not performed, the promisee cannot obtain either specific performance or damages, but he can obtain restitution of the value given him for the promise. This provision does not in any way impair the donee's ability to release a power. EPTL 10-5.3
E.
2.
F.
Exercise of Power 1. Donee's discretion as to appointees and as to time and manner of appointment is unlimited except as donor manifested an intent to impose limits. EPTL 10-5.1 A power of appointment can be exercised only by a written instrument which would be sufficient to pass the interest intended to be appointed if the donee were the actual owner. EPTL 10-6.3 A power of appointment is effectively exercised when the donee manifests an intent to exercise it. EPTL 10-6.1 (a)
2.
3.
4/78
a.
It is not necessary that the power be referred to in the instrument exercising it unless the donor directed that the instrument exercising a power shall not be effective unless it contains a reference to the specific power. EPTL 10-6.1(b)
4.
The directions of the donor as to the manner, time and conditions of the exercise of a power must be observed. EPTL 106.2 (a) a. b c. Unnecessary formalities directed by the donor as to the exercise of a power may be ignored. EPTL 10-6.2 (a) (2) Where the donor made the power exercisable only by deed, it is also exercisable by will. EPTL 10-6.2 (a) (3) Where the donor of a general power of appointment has not explicitly imposed a requirement of good faith or of reasonableness with respect to its exercise by the donee, no implication of any such requirement shall be made. EPTL 10-6.2 (a) (4)
5.
When the consent of the donor or of a third person to the exercise of a power of appointment is requisite, such consent shall be expressed in a written instrument, subscribed by the person whose consent is necessary. EPTL 10-6.4 When the consent of two or more persons to the exercise of a power of appointment is requisite, all must consent thereto except that, if before its exercise one or more of them die or become incompetent, the consent of the survivor or the competent donee is sufficient unless the contrary is expressly required by the terms of the creation of the power. EPTL 10-6.4 (b) (2) Whenever a power is created in three or more fiduciaries it may be exercised by a majority of the holders of the power, or the survivor or survivors, unless contrary to the express provisions of the will, deed or other instrument creating the power. EPTL 10-10.7 Unless the donor expressly provides otherwise: a. The donee of an exclusive power may appoint all or any part of the appointive property to one or more of the appointees to the exclusion of the others. The donee of a non-exclusive power must appoint in favor of all of the appointees equally. EPTL 10-6.5
6.
7.
8.
b.
4/78
9.
Where an imperative power of appointment has been created by will which omitted to designate the donee, its exercise devolves on the Supreme Court. EPTL 10-6.8 (a) (1) a. If the imperative power confers on the donee a right of selection and he dies without having exercised the power, its exercise must be adjudged for the benefit equally of all the designated appointees. EPTL 10-6.8 (b) (1) If the imperative power has been defectively exercised in whole or in part, its proper execution may be adjudged for the benefit of appointees purportedly benefited by the defective execution. EPTL 10-6.8 (a) (4) If an imperative power has been so created as to confer on a person a right to compel the exercise of the power in his favor, and the right of such person is assignable, the exercise of such power for the benefit of creditors or assignees of such person can be compelled. EPTL 106.8 (b) (4,5)
b.
c.
10.
An exercise of a power of appointment is not void on the ground that it is more extensive than was authorized by the power. Interests created by such an exercise are valid, so far as is permitted by the terms of the power. EPTL 10-6.6
G.
Creditors of the Donee 1. 2. Property covered by a special power of appointment can not be subjected to claims of the donee's creditors or the creditors of his estate. EPTL 10-7.1 Property covered by a general power presently exercisable can be subjected to claims of the donee's creditors of the creditors of his estate. It is immaterial whether the donee has, or has not purported to exercise the power. EPTL 10-7.2 Property covered by a general power not presently exercisable can be subjected to the claims of creditors of the donee or of his estate only if the power was created by the donee in favor of himself. EPTL 10-7.4 Where the grantor in a conveyance reserves to himself for his own benefit an unqualified power of revocation, he is thereafter deemed still to be the absolute owner of the estate conveyed, so far as the rights of his creditors and purchasers are concerned. EPTL 10-10.6
3.
4.
H.
Powers and the Rule Against Perpetuities
4/78
1.
As a general rule, the period during which the absolute power of alienation or the vesting of a future interest may be suspended or postponed by an instrument exercising a power of appointment begins. a. b. in the case of an instrument exercising a general power presently exercisable, on the effective date of the instrument of exercise; and in all other cases, at the time of the creation of the power. EPTL 108.1
2.
When the creator of a trust reserves to himself an unqualified power to revoke, the period during which the absolute power of alienation or the vesting of a future interest may be suspended or postponed begins when the unqualified power to revoke terminates or on the effective date of the instrument exercising such power. EPTL 10-8.1 The permissible period for the suspension of the absolute power of alienation and for the postponement of the vesting of a future interest shall be fixed in accordance with the law in effect at the time of the exercise of the power or of the termination of the unqualified power of revocation, and not in accordance with the law in effect at the time of the creation of the power. EPTL 10-8.2 When the permissible period must be computed from the time of the creation of the power, facts and circumstances existing at the effective date of the instrument exercising the power shall be taken into account. EPTL 10-8.3 When a direction for accumulation is contained in an instrument exercising a power heretofore or hereafter created, the validity of such direction shall be determined under the law in effect at the time of the exercise of the power and not under the law in effect at the creation of the power. EPTL 10-8.4
3.
4.
5.
I.
Powers Other than Powers of Appointment 1. The statutory provisions governing powers of appointment (R.P.L. Art. 5) apply generally, to powers which are not powers of appointment, such as a power to revoke a disposition theretofore made, a power to disburse the principal of a trust, a power to sell in a mortgage and a power in a life tenant to make leases. They do not apply to a simple power of attorney to convey property in the name and for the benefit of the owner. EPTL 10-3.1 (b) A power conferred upon a person in his capacity as trustee of an express trust to distribute principal to himself cannot be exercised by him. If the power is conferred on two or more trustees it can be exercised by the trustee or trustees who are not so disqualified. If there is no trustee qualified
2.
to exercise the power, its exercise devolves upon the court. EPTL 10-10.1
4/78
3. J.
Power of life tenant to make leases and power to sell in a mortgage. EPTL 10-10.2-10-10.5
Release and Revocation 1. Any power of appointment other than an imperative power is releasable, either with or without consideration, by a written instrument signed by the donee and delivered as provided by statute. EPTL 10-9.2 (a) a. It may be released with respect to all or any part of the appointive property or with respect to the persons in whose favor the power would otherwise be exercisable, except that the release shall not cause a discretionary power to become imperative unless the instrument of release expressly so provides. EPTL 10-9.2(b)
2.
A power of appointment is irrevocable unless the instrument creating it otherwise provides. EPTL 10-91.(a) a. An exercise of a power of appointment is irrevocable less an authority to revoke it is granted or reserved in the instrument creating the power. EPTL 10-10.8
ESTATES, POWERS AND TRUSTS LAW 6-2.2 When estate is in common, in joint tenancy or by the entirety. (a) (b) A disposition of property to two or more persons creates in them a tenancy in common, unless expressly declared to be a joint tenancy. A disposition of real property to a husband and wife creates in them a tenancy by the entirety, unless expressly declared to be a joint tenancy or a tenancy in common. A disposition of property to two or more persons as executors, trustees or guardians creates in them a joint tenancy. Property passing in intestacy to two or more persons is taken by them as tenants in common.
(c) (d) 6-4.5
Definition of a possibility of reverter. A possibility of reverter is the future estate left in the creator or in his successors in interest upon the simultaneous creation of an estate that will terminate automatically within a period of time defined by the occurrence of a specified event.
4/78
6-4.6Definition of a right of reacquisition. A right of reacquisition is the future estate left in the creator or in his successors in interest upon the simultaneous creation of an estate on a condition subsequent. 605.1 Characteristics of future estates. Future estates are descendible, devisable and alienable, in the same manner as estates in possession. 6-5.8Heirs or distributees of life tenant take as purchasers. When a remainder is limited to the heirs, heirs of the body or distributees of a person to whom a life estate in the same property is given, the person who, on the termination of the life estate, are the heirs , heirs of the body or distributees of the life tenant take as purchasers.
9/74
Chapter 40A - Page 1 TRUSTS Legal Bulletin
When the Company is insuring a transaction where title comes through a trust, it is essential that we see the document which spells out the powers and authority of the fiduciary. If an attorney-in-fact is to execute an instrument, we call for the production and the recording of the power of attorney. When title devolves through a testamentary trustee, the will is fully abstracted and the powers are taken off verbatim. An inter vivos trust sometimes presents more complicated problems because the parties frequently desire confidentially. When the trust indenture is of record, our practice should be similar to that where title is made through a testamentary trust. However, in most instances, the trust agreement is not of record. In that event, we call for the trust agreement to be submitted to us prior to closing for examination and for it to be recorded. However, if the trust contains provisions which the parties prefer not to become public record or for other valid reasons resist recording the instrument, then upon the delivery of a true copy of the trust to us for our files, we may waive the recording of the instrument if we are satisfied that: (a) (b) the original will be retained in a safe place, and it will be available for recording in the even that it becomes necessary to do so to sustain the marketability of the insured title.
In the rare instance where the parties are reluctant event to exhibit the trust agreement to us the matter should be referred to the Branch Counsel for guidance and advice. Among the matters to be considered by Branch Counsel in such a case are: (a) (b) Whether the record title properly describes the trustee and the trust pursuant to which he is acting and the trust is not a naked trust. The availability of an opinion of competent counsel that he is familiar with the provisions of the trust agreement and that it contains adequate authorization for the actions taken or proposed to be taken by the trustee. Such an opinion should quote the exact language granting the authority of the trustee. In taking such proof however, the personal integrity of the one furnishing the evidence must be carefully considered. The availability of consents to the proposed action of all persons beneficially interested in the trust agreement including the settlor. Assurance that the trust agreement will be retained in some safe place and that if the marketability of the title is questioned and cannot be established
(c) (d)
without the production of the trust agreement, that it will be made available for said purposes.
8/77
Chapter 40A - Page 1 TRUSTS Legal Bulletin
Attached please find a copy of a purported trust agreement which may come to your attention. It is my opinion that this creates a naked trust under Section 7-1.2 of the EPTL and is therefore void. Even if it is proposed that the beneficiary (grantor) joins in the deed, other problems are created such as: 1) Failure of consideration, and lien law problems attendant thereon may affect the transaction, i.e., there is no trust fund and all mechanics liens would take precedence over the conveyance. Creditors rights, since the transaction may be an unlawful preference under State debtor and creditors laws and the Bankruptcy Code and the changes proposed for 1978.
2)
[TRUST AGREEMENT NOT INCLUDED]
4/88
Chapter 37 - Page 1 TAXES AND ASSESSMENTS General
TAXES AND ASSESSMENTS

EXCEPTION NECESSARY Exception should be made to all taxes and assessments which are, or could be, a charge or lien on the property, whether or not they are now due and payable. If due and payable at a later date, the exception should state that fact. PROOF OF PAYMENT General taxes should not be omitted on the Commitment, on production of receipted bills, nor on entry of payment by the collector until collector's books have been checked to correct errors and erase payments if the check is returned. Report on the Commitment "bill produce marked paid" or "marked paid on collector's books." PUBLIC IMPROVEMENTS Public improvements such as sidewalks, curb and gutter, street improvements, paving, sewer lines and other similar improvements may result in a special assessment or lien against the abutting properties served by such improvements. SEARCH: SPECIAL ASSESSMENTS: A search should be made for special assessments before issuance of a Commitment or Policy. If none is found, the policy should make exception to any special assessments levied or assessed subsequent to the date of the policy. If a special assessment is found, it should either be paid or set up as an exception on the final policy, notwithstanding the fact that all installments may be current. It must be treated as a lien and reported as such. DRAINAGE DISTRICTS Drainage districts should be checked to determine if there are any special assessments that should be noted. Also taxes on drainage districts may be recurring and should be checked and excepted if applicable. PUD AND CONDO ASSESSMENTS If an instrument creating or relating to a Planned Unit Development or Condominium contains a clause authorizing the Trustee, Management, Architectural Control Committee or other body to levy assessments against the property or property owners, the Commitment should carry the following exception: "Assessments by ( ) of said (name of project) if any."
8/78
Chapter 37 - Page 1 TAXES Title
GENERAL - DEFINED A tax lien is an unpaid tax or other charge which is imposed upon real property by or on behalf of a municipal corporation or special district. It acts as an encumbrance on the real property and does not have to be evidenced by a written instrument. (N.Y. Real Prop. Tax Law 102, 1972) DELINQUENCY OF TAXES AND ENFORCEMENT OF TAX LIENS AND SALE OF TAX DEED PROPERTY BY STATE If the tax on the real property remains unpaid on August 1, tax sale proceeding will be initiated for the payment of the: 1) tax, 2) interest, and 3) share of the expense for conducting the sale. The time when the tax sale may occur is determined in N.Y. Real Property Tax Law 1000, 1972. The county treasurer must cause a notice of the tax sale to be published at least once a week for six weeks in two newspapers which states the day of the sale. (N.Y. Real Property Tax Law 1002, 1972). The treasurer must also notify the owner or occupant by first class mail of the sale. This notification must be made before the publication of notice in the two newspapers. The notice must contain: 1) a brief description of the land, 2) the aggregate amount due on the land at the time of sale, and 3) a statement that the land will be sold unless the amount is paid before the commencement of the tax sale proceedings. (N.Y. Real Property Tax Law 1002, 1977). The notice must be approved by the state board before it can be published. If any state land is included within the land to be sold, the state board will notify the county treasurer to strike such land from the notice. (N.Y. Real Property Tax Law 1004, 1972). The county treasurer is to begin the sale on the date specified in the notice and continue the sale until sufficient funds are obtained to pay the amount due. All purchasers must pay the county treasurer who, upon payment, must furnish the purchaser with a written certificate which: 1)describes the land, 2)states the amount paid, 3) states the time when the purchaser will be entitled to a deed, and 4) contains a statement that if the purchased land is not redeemed, the purchaser may complete the purchase or foreclose his lien. If the purchaser fails to pay the amount of his bid within one month of the date of sale, the treasurer may set aside that sale and the purchaser's right to the purchased property is extinguished. Any person who then pays the amount of the bid will receive the certificate. However, if no one has paid the amount after three months from the extinguishment, the county shall become the purchaser. (N.Y. Real Property Tax Law 1006, 1972).
8/78
The purchase and the sale of the tax certificate extinguishes the personal liability for tax owed on the property by the tax payer. (Empire Lien Corp. v. William Young Transportation, Inc., 300 N.Y.S. 2d 443 (1969)). All of the counties in New York have the power to acquire and hold lands sold at a tax sale and purchases by the county are subject to the right of redemption as if it was an individual purchaser. If the property is not redeemed, the deed shall be issued to the county as if it was an individual purchaser. The county treasurer must reject all bids made on land in which the county has an interest and will bid in the land for the county. (N.Y. Real Property Tax Law 1008, 1972). The board of supervisors of any county may authorize and direct the county treasurer to purchase lands for the amount owed at a tax sale without competitive bidding. (N. Y. Real Property Tax Law 1008, 1977). No person has the right to despoil any lands sold at tax sale. The purchaser of any wild or unoccupied land cannot enter upon the land or exercise any acts of ownership over the land until the one year period for redemption has passed. The purchaser, however, may serve a notice on persons despoiling the land before he obtains the deed. The notice must: 1) describe the lands sold, 2) state that the lands were sold for taxes, and 3) state that an action will be instituted against all persons who despoil the land. (N.Y. Real Property Tax Law 1012, 1972). If the one year redemption period passes, the purchaser may make a written application to the county treasurer for the deed. The treasurer must convey the real property to the purchaser. The written application must be made by the purchaser within five years from the last day of the sale or the certificate of sale will become void and no further claim can be made on that certificate. (N.Y. Real Property Tax Law 1018, 1972). However, the requirement of a written application for a tax deed is solely for the benefit of the county treasurer and may be waived by him. (Crockford v. Zecher, 347 N.Y.S. 2d 105 (1973)). The conveyance of the deed by the county treasurer vests an absolute estate in fee to the purchaser. However, this is subject to: a) all county or state tax liens or other encumbrances, b) all easements or rights of way which were in existence at the time of the levy of the tax, c) redemption (if occupied or mortgaged land), and d) cancellation. The grantee, after receiving the conveyance, may possess and enjoy the property unless it is occupied or mortgaged land, which is subject to an extended redemption period. Once this period expires, however, the purchaser may cause the occupants to be removed and the possession of the property to be delivered to him. All such conveyances by the county treasurer are presumptive evidence that the sale and proceedings before the sale were done in accordance with the law. After two years from
the date of the conveyance, the presumption becomes conclusive. However, any such
8/78
conveyance is subject to cancellation because of: 1) the prior payment of the taxes, 2) an illegal levy, or 3) a defect in the proceeding. (N.Y. Real Property Tax Law 1020, 1972). If the county treasurer discovers, before the conveyance, that the sale was invalid or ineffectual to give title to the real property, he must: 1). 2). 3). 4). cancel the sale, refund the purchase money to the purchaser, issue a certificate of cancellation, and not convey the land.
If he discovers it after the conveyance, the treasurer must cancel the sale and refund the purchase money upon the application of any person having an interest in the property at the time of the sale. (N.Y. Real Property Tax Law 1026, 1972). The county treasurer may set aside any cancellation of sale when cancellation was 1) obtained through fraud or misrepresentation; 2) made under a mistake of fact; 3) obtained by the suppression of any material fact bearing on the case; or 4) made upon an application which the treasurer's office had no jurisdiction or legal right to entertain. The treasurer must give eight day's written notice to the person who applied for the cancellation of the sale, specifying the grounds upon which the cancellation was made. The effect of setting aside the cancellation is as if there had never been a cancellation at all. (N.Y. Real Property Tax Law 1028, 1972). The purchaser is entitled to a refund of the purchase money paid if he is unable to obtain possession of the real property or the sale was cancelled. (N.Y. Real Property Tax Law 1030, 1972). PROPERTY SUBJECT TO TAXATION AND EXEMPTIONS All real property within the state is subject to real property taxation unless exempted by law. (Erie County v. Kerr, 373 N.Y.S. 913 (1975)). REDEMPTION OF REAL PROPERTY FROM TAX DELINQUENCY The owner, occupant or any other person may redeem real property sold at a tax sale at any time within one year of the last day of the sale, by paying the county treasurer the amount of the tax with interest. If a person has an interest in a specific or an undivided part of the land sold, or in an undivided share in any part of the land from which the undivided part was sold, he may redeem that part by paying the proportion of the total amount required for redemption which represents the proportion of his interest in the land. (N.Y. Real Property Tax Law
1010, 1972).
8/78
The county treasurer must cause a publication of notice in a newspaper at least three months before the expiration of the one year redemption period. The notice must contain: a list of the lands in the county sold for taxes and unredeemed; the amount necessary to redeem property; a statement that unless the property is redeemed during the redemption period the property will be conveyed to the purchaser. (N.Y. Real Property Tax Law 1014, 1972). If the land sold for taxes is actually occupied at the end of the redemption period, the occupant or any other person may redeem the property at any time within three years of the sale by filing evidence of occupancy with the county treasurer and by paying him the amount owed. (N.Y. Real Property Tax Law 122, 1977). The same extension period applies to land encumbered by a recorded mortgage at the time of the tax sale. (N.Y. Real Property Tax Law 124, 1972). 1). 2). 3).
8/79
Chapter 37 - Page 1 TAXES 1 TAX EXEMPTIONS Legal Bulletin
1.
a.
Section 302 of the Real Property Tax Law was amended and a new Section 520 was added. The effect of this law is to follow the law presently in effect in New York City and West Chester (Section 494 of the Real Property Tax Law) as to the restoration of taxes when property is acquired by one not entitled to the exemption. Effective January 1, 1979, if title to any tax exempt property in the State of New York is acquired by one not entitled to the exemption, the property immediately becomes liable for the full tax for the balance of the taxable period. Effective immediately, the following exception is to be raised in every title report where there is an indication that the property is either partially or totally exempt from real estate taxes: "Pursuant to the Real Property Tax Law the exemption of the premises from taxation terminates immediately upon the acquisition of title by a non-exempt entity. The premises shall be taxed pro rata for the expired term of the taxable year and subsequent thereto at the full valuation without benefit of such tax exemption." Note: (1) Closers should be alert to possibility that a title report issued prior to this memo may not contain the necessary exception. In that case, it must be added at the closing. In all cases where there is a discrepancy between the name of certified owner, the person or entity to whom the property is assessed, or the name of the person or entity holding the exemption, then the exception noted above should be raised.
(2)
b.
In those counties where tax searchers do not, in the ordinary course, set forth the existence of the tax exemptions in the searches that are made for the Company, the exception should be raised in the following form: "New York Real Property Tax Law Sections 302 and 520 may affect the real estate tax liability if the premises described in Schedule A have a tax exemption. Pursuant to the Real Property Tax Law the exemption of the premises from taxation terminates immediately upon the acquisition of title by a non-exempt entity. The premises shall be taxed pro rata for the unexpired term of the taxable year and subsequent thereto at the full valuation without benefit of such tax
exemption."
8/79
Chapter 37 - Page 2 TAXES 1 TAX EXEMPTIONS Legal Bulletin
2.
Where it appears from the abstract that the exempt status has ceased prior to our report even though the tax records still show the property exempt, an additional exception should be added to the exception sheet. For Example: If a church formerly owned the property, the exception should read: Taxes not yet fixed against the premises described in the Schedule "A" for the period from date when Church, Inc. sold the premises described in Schedule "A". Another Example: If a veteran with partial exemption died prior to the report and his heirs or devisees are certified as owners, the exception should read: Additional taxes not yet fixed against the premises described in Schedule "A" for the period from the date of the death of .
3.
On tax search continuations for closings or for additional advances on building loans, care must be taken to note and report any change in the tax records on the exempt status of the property.
8/79
Chapter 37 - Page 1 TAXES 2 TAX, REAL ESTATE TRANSFER - NEW YORK STATE Legal Bulletin
1.
A new article of the Tax Law, Article 31, added by Chapter 347 of the Laws of 1968, imposes a tax on the transfer of real property in the State of New York, or an interest therein, by a deed delivered on or after August 1, 1968. The tax rate and the formula for computing the tax are the same as under the Federal Stamp Tax on conveyances which expired on December 31, 1967. The rate is 55 cents for each $5.00 or fraction thereof, of the purchase price of the value of the property conveyed. The value of any lien or encumbrance on the property which existed at the time of the delivery of the deed and remained thereon thereafter is deducted from the purchase price or value before computing the tax. A mortgage which was satisfied at the closing, or a purchase money mortgage delivered at the closing, is not deductible. The grantor is primarily liable for the tax, but if he does not pay the tax the grantee if liable. However, when the grant is by the United Nations, the United States of America, or the State of New York, or their agencies, the grantee alone is liable for the tax. The statute provides for a number of exemptions. Most important are deed to the United Nations, the United States of America, and the State of New York, or any of their political subdivisions; tax deeds, partition deed, correction deeds, and deeds given pursuant to the Federal Bankruptcy Act. There is no tax on deeds if the consideration, after deducting existing encumbrances, is $100 or less. There is no tax if the deed was delivered before August 1, 1968. The statute prohibits the recording officer from accepting a deed for record unless the tax is paid. Payment is made to the recording officer at the time of the recording of the deed by the person presenting it for record. Payment is evidenced by the issuance of stamps by the recording officer. The stamps must be affixed to the deed and cancelled. Cancellation is effected by the person offering it for record by writing his initials and the date on the stamp. To meet the requirements of the various recording officer the tax should be computed in advance and noted in the upper left-hand margin of the deed. If exemption is claimed or if the deed is not taxable, that fact should be noted in the same place, and the reason therefor; for example, "Tax $5.50" or "Exempt, Partition Deed" or "Exempt, Deed to U.S.A." or "No tax, deed delivered prior to August 1, 1968." The written statement in the margin should be initialed whenever possible by the grantor or an officer of the grantor. This tax is in addition to the New York City Real Property Transfer Tax when the property lies in the city. The State of New York has taken the position that a deed in lieu of foreclosure
2.
3.
4.
5.
6.
7.
even with non-merger language will be subject to the Transfer Tax based upon the unpaid principal balance of the mortgage.
8/78
Chapter 38 - Page 1 TENANCY BY THE ENTIRETIES Title
TENANCY BY THE ENTIRETIES

DEFINITION A tenancy by the entirety is a special form of ownership of real property which arises out of the marital relationship of the tenants. (Ninth Federal Savings & Loan Ass'n of New York City v. Thuna, 233 N.Y.S. 2d 753 (1962)). A tenancy by the entirety does resemble a joint tenancy because of the survivorship characteristic. However, a tenancy by the entirety can be created only in real property owned by a husband and wife. In a tenancy by the entirety, the survivor takes the estate because of the grant which vested the entire estate in the husband and wife. (In re Klatzes's Estate, 216 N.Y. 83, 110 N.E. 181 (1915)). CREATION An interest in realty acquired by the husband and wife as purchasers creates a tenancy by the entirety. (In re Kwesit's Estate, 223 N.Y.S. 2d 596 (1961)). A marriage relationship is necessary to create a tenancy by the entirety. (Kraus v. Huelsman, 276 N.Y.S. 2d 976 (1967)). The tenancy by the entirety is founded upon the maritall relationship on the theory of the absolute oneness of husband and wife. In that relationship never exists or ceases to exist, the unity is broken and tenancy is extinguished. (In re Kutich, 226 N.Y.S. 2d 869 (1962)). The tenancy must arise during the marital relation since it arises out of the marital relation. (Finnegan v. Humes, 298 N.Y.S. 50 (1937)). Once the required marital relationship exists, a grant or devise of real property made to the husband and wife creates a tenancy by the entirety unless there is a contrary expression of intent. (In re Squire's Will, 142 N.Y.S. 2d 925 (1955)). If one of the spouses owns the real property, the tenancy by the entirety can be created by having the owner convey the property to himself and his spouse. (In re vogelsang's Estate, 203 N.Y.S. 364 (1924)). SEVERANCE OF THE TENANCY BY THE ENTIRETY OTHER THAN BY DEATH As tenants by the entirety, the husband and wife cannot sever the tenancy without the consent of the other. (Baker v. Westfall, 219 N.Y.S. 2d 328 (1961)). One spouse cannot dispose of any part of the tenancy which will affect the right of survivorship in the other. (In re Hawkin's Estate, 213 N.Y.S. 2d 188 (1961)).
The tenancy by the entirety is characterized by its inseverability. Neither the husband nor the wife can dispose of the estate without the consent of the other. (Kawalis v. Kawalis, 53 N.Y.S. 2d 162 (1945)).
8/78
Chapter 38 - Page 2 TENANCY BY THE ENTIRETIES Title
Since a tenancy by the entireties is based upon the marriage relationship, a divorce will make them tenants in common. (Broadhurst v. Broadhurst, 374 N.Y.S. 2d 716 (1950)). The tenancy by the entirety can be ended by the voluntary act of both tenants. (Topilow v. Peltz, 252 N.Y.S. 530 (1964)). TERMINATION OF THE TENANCY BY DEATH The tenancy is destroyed by the death of one spouse, DeGolyer v. Schutt, 339 N.Y.S. 2d 240 (1972) and the survivor becomes the sole owner of the property. (Knight v. Knight, 296 N.Y.S. 2d 1007 (1969)). GENERAL INFORMATION The husband and wife, as tenants by the entirety, may mortgage his or her interest in the property without the consent of the other spouse. (Steinlauf v. Camporese, 142 N.Y.S. 2d 166 (1955)). However, if the mortgagor spouse dies, the mortgagee is remediless because the surviving spouse, unless he/she joined in the mortgage, takes the property clear from the mortgage. (Fine v. Scheinhaus, 109 N.Y.S. 2d 307 (1952)). One of the spouses in a tenancy by the entirety can lease the interest to a third person who becomes a tenant in common with the other tenant by the entirety, subject to that tenant's right of survivorship. However, the lease cannot affect the right of the other tenant's possession. (Cataldi v. Cataldi, 229 N.Y.S. 2d 919 (1962)). see also: Chapter 7 CONCURRENT ESTATES this manual
8/78
Chapter 39 - Page 1 TENANTS IN COMMON Title
TENANTS IN COMMON
DEFINITION Tenancy in common is the holding of an estate in land by different persons under different titles. Unity of possession must exist and each tenant in common must have the right to occupy the whole estate in common with his cotenants. A disposition of property to two or more persons creates a tenancy in common, unless expressly declared to be a joint tenancy. Property passing by intestacy to two or more persons is taken as a tenancy in common. (N.Y. Est. Powers & Trust Law 6-2.2, 1977). If a tenancy by the entirety fails because the grantees were not married, a tenancy in common is created. (Thurmond v. McGrath, 334 N.Y.S. 2d 917 (1972)). A tenancy in common exists where two persons hold possession of lands by several and distinct titles. The estate may be different or their shares unequal and the only necessary unity is that of possession. (Wainman v. Hampton, 110 N.Y. 429, 18 N.E. 234 (1888)). A tenant in common is an owner of real property who has a title in the estate, distinct from that of his cotenants. Only the unity of possession exists between them and his right to possession is exclusive against all except his cotenants. (Rapsons Cravats v. Mutual Instrument Corp., 69 N.Y.S. 2d 502 (1947)). REQUISITES AND CHARACTERISTICS Each tenant in common is entitled to an undivided possession in the land. RIGHTS OF THE TENANTS IN COMMON Tenants in common have the right to divide the possession of the common property in any manner they desire. (D'Addario v. Cavoto, 359 N.Y.S. 2d 421 (1974)). An individual tenant in common can occupy the property without paying rent if he does not exclude other cotenants from occupying the land. (Egan v. Sweeney, 270 N.Y.S. 2d 56 (1966)). Each tenant in common has the right to enter the property and collect rents and profits. (In re Jones' Will, 306 N.Y.S. 197, 117 N.E. 2d 250 (1954)). Each tenant in common holds his title and interest independently of the other tenants in common. One tenant may have full possession of the whole estate as long as he doesn't harm the property. As each tenant has a right to the entire property, each tenant has a right to enjoyment of the property so the cotenant who possesses the property cannot exclude them from the property. (Berlin v. Herbert, 265 N.Y.S. 2d 25 (1965)). A tenant in common also has the right to transfer, devise, convey or mortgage his interest in the land without the consent of the other tenants in common. (Id).
8/78
Chapter 39 - Page 2 TENANTS IN COMMON Title
A tenant in common has the right to possess and enjoy the land but he may be held accountable to the other cotenants for the use. (Harrison v. L.A. DeLuke Co., 229 N.Y.S. 2d 945 (1962)). TERMINATION OF TENANTS IN COMMON Whenever possession of a tenancy in common is destroyed the tenancy is terminated. The tenancy continues, however, until actual severance of the common property. The tenancy in common is terminated: 1) by a repudiation or abandonment by a tenant in common. The tenant's intent is the deciding element; 2) by the destruction of the common property; 3) by the forfeiture of an interest; 4) by the acquisition of all outstanding interests by one tenant. If one tenant purchases or otherwise acquires all the titles and interests, the tenancy is terminated because there is no unity of possession between the cotenants; 5) by a sale or conveyance of the property or interest to a third person. A sale of an undivided interest by a tenant in common severs his relationship as a tenant but the purchaser becomes a tenant in common with the cotenants. If only a part of the common property is sold, the balance remains as tenancy in common property (Dickson v. Caruso, 224 N.Y.S. 2d 33 (1977); or 6) by division of the common property. The tenancy in common can be terminated by a partition among the tenants by a judicial decree or agreement by the cotenants. (86 C.J.S. Tenancy in Common 512-16). HUSBAND AND WIFE AS TENANTS IN COMMON A disposition of property to a husband and wife creates a tenancy by the entirety, unless it is expressly declared to be a joint tenancy or tenancy in common. (N.Y. Est. Powers & Trust Law 6-2.2, 1977). An expressed common intent is sufficient to create the tenancy in common. (Crawley v. Shelby, 323 N.Y.S. 2d 222 (1971)). see also: Chapter 7 CONCURRENT ESTATES this manual.
8/79
Chapter 41 - Page 1 WATER & WATER RIGHTS General
WATER AND WATER RIGHTS LAND UNDER WATER

Riparian rights have been defined as the rights of a person owning land containing or bordering on a watercourse or other bodies of water in or to its banks, bed or waters. The rights of the riparian owner are determined in large measure by whether the water is non-navigable or navigable. Fresh water rivers and other bodies of water are navigable or non-navigable as a matter of fact, while salt rivers and tide waters generally are navigable as a matter of law at every point covered by the water. We have relatively few problems with non-navigable waters. Where a man buys a parcel with a self contained body of water he has title to the land below it may do anything he wishes to the water provided he does not divert it to a neighbors land. Where a person acquires a parcel with a stream running through it, he has title to the land under that portion of the brook which crosses his land and may make reasonable use of the water provided he does not interfere with the corresponding rights of the up-stream and down -stream owners. May he alter the course of the stream? Probably, provided the alteration is within the point of entry and departure from his parcel and does not unreasonably interfere with the normal flow of the stream. The next category - fresh waters which are navigable as a matter of fact - will be passed over lightly in order to get to the final category which has proved most troublesome. Rivers and streams are navigable in fact when they are susceptible of being used in their ordinary condition as highways of commerce. Navigable waters are public highways, title to which ordinarily vests in the state in trust for the use of the people. In the absence of congressional action, the power of the state over navigable streams within its borders is plenary. The United States government however does have the power, through congressional actions, to step in for the purpose of regulating and improving navigation. Land now or formerly affected by tidal waters presents by far the largest number of title problems. This land is commonly referred to as "Land Under Water". It does not necessarily lose its characteristic of "Land Under Water" even though it has been high and dry for many, many years and separated from the ocean by great distances. In the case of tidal waters, there is a high tide and a low tide and a strip in between which might be a shore, beach, strand or flats - known as the foreshore. Generally speaking title to all of the land below the average mean high water mark
belonged to the sovereign which in time became the State. The title to navigable waters and the land under them was not vested by the Constitution of the United States in the Federal Government but was reserved to the states within whose boundaries such navigable waters were located.
8/79
Chapter 41 - Page 2 WATER & WATER RIGHTS LAND UNDER WATER General
The Constitution did however place all navigable waters under the control of the United States for the purpose of regulating and improving navigation. This is known as the United States "navigational servitude." As previously stated generally title to the land below the high water mark in the foreshore and under the waters abutting the foreshore is in the state (or the subdivision of the State in some cases, i.e., City, County or Town). Prior to the formation of the states, there were many sovereign (colonial) grants to the owners of the upland - not only to the foreshore but to land out under the water subject to a public easement of navigation. Since the formation of State Constitutions the right of the state to make grants of land under water to owners of the upland has been restricted to grants for certain specific purpose such as improvement of navigation, etc. Individual ownership, then, normally ends at the average mean high water mark of the tidal water. Since, technically, a riparian owner is one who owns property on the bank of a river as compared to a littoral owner who owns property bordering upon a tidal water, it is preferable to refer to our individual owner as the "upland owner". The foreshore or land under the waters of the sea and its arms between high and low water mark is subject first to the jus publicum, the right of navigation, and when the tide is out the right of access to the water for fishing, bathing and other lawful purposes to which the right of passage over the beach may be a necessary incident. The State has title, holding such in a governmental rather than a proprietary capacity. Its ownership is as sovereign for the benefit of all its people. For that reason Statutes of Limitation are of no avail to the upland owner. However, the upland owner has rights over the foreshore of reasonable, safe and convenient access to the water for navigation, fishing and such other uses as commonly belong to riparian ownership. The upland owner is entitled to a right of access to the navigable part of a river to make a landing, wharf or pier subject to general rules and regulations of the governmental authorities. Access of the upland owner cannot be cut off. Each right to land under water, the right of the public and the right of the upland owner, must be exercised in a reasonable way. What happens to the title of the owner and the rights of the parties when the high water mark changes?
8/79
The manner in which the change comes about is important. Where the high water mark is caused to recede by the gradual and imperceptible increase of land deposit of earth, sand and sediment through natural causes such as the ordinary action of the water, the process is called accretion and the upland owner acquires title to the additional land to the then average mean high water mark. There must be a gradual imperceptible increase of land brought about by natural causes. When the increase of land is brought about by man made fill or even by jetties erected for the purpose of causing the tides to deposit sand the result is not the same and the additional land is deemed to be part of the foreshore. Physically by reason of this addition of land the high water mark has changed. But for the purpose of determining the ownership limit of the upland owner the high water mark is legally deemed not to have changed. We thus have two high water marks. When we are not certain that the additional land was caused by accretion, we may describe the entire parcel claimed by the upland owner by then adding an exception in the policy: "No title is insured below the present or former high water mark." Just as an upland owner may gain title to land by accretion, he may lose title to land by reason of gradual, imperceptible eating away of the land by the operation of currents or tides. This is known as erosion. When the sea or other navigable water so encroaches on land, the owner loses it and title returns to the state. When the upland disappears as a result of a sudden or violent action of the elements and effect and extent of which is perceptible while it is in progress we have an avulsion. The upland owner is not divested, even temporarily, of his title by avulsion. His land may be covered by water but he still retains title. Earlier reference was made to the fact that the rights of the upland owner in lands under water and the title of the state or other owner were subject to the superior right of control in the United States for the purpose of regulating and improving navigation the Federal navigational servitude. All land below the legal (historic or former) average mean high water mark as compared to the present physical high water mark is deemed to be legal (historic or former) navigable water and thus subject to Federal control. The Federal Government has the right to establish bulkhead lines anywhere below the legal average mean high water mark as indicating a line beyond which the Federal Government will not permit fill. It also has the right to establish Pierhead Lines beyond
which a pier may not be built.
8/79
The troublesome problems to title companies is that the Federal Government has the right to change the Bulkhead Line and cause the removal of any fill or improvements extending beyond the new line without compensation. It must be remembered that fill is only accomplished pursuant to a revocable license issued by the U.S. Corp. of Engineers. The Supreme Court of the United States has sustained the right of the Federal Government so to do. See Stockton v. Buffalo and N.Y.R. Co., 32 Fed. 9, app. dismissed 140 U.S. 289 and Lewis Blue Point Oyster Cultivation Co. v. Briggs, 198 N.Y. 287, 91 N.E. 846, aff'd 229 U.S. 82. Most title companies have limited affirmative insurance against the U.S. taking land under water without compensation to cases where the land under water being insured is separated from the water by a public highway. While this would not prevent the U.S. from taking without compensation, it is felt that it would be then a case of public interest versus private interest and the U.S. would probably not, except in a dire emergency, cut off the public highway.
7/80
Chapter 41 - page 1 WATER & WATER RIGHTS Title
INTRODUCTION That portion of any property lying below the high water mark of oceans and navigable lakes, rivers and streams is subject to certain rights 92 of the federal and state governments and of the public. The Federal Government, by reason of its jurisdiction with respect to navigation and commerce, exercises certain controls over all navigable bodies of water, and this applies to bodies of water which are deemed navigable in law as well as those which are navigable in fact. Therefore, in addition to waters which are known to be navigable, any body of water which is designated as a river should be so treated. In the case of streams, whether navigable or not, the upper and lower riparian owners have certain rights to the use of the waters of the stream. Recent case law in a number of jurisdictions has raised questions concerning the rights of the public in beach areas lying above the mean high water mark. This question should be considered separately from the water rights questions in insuring such areas. Lands encompassing marshes and other wetlands are subject to numerous environmental regulations and laws in most states. While such matters may be excluded from policy coverage, issuing offices should be alert for recorded implementations thereof. If any broader insurance than set out below is requested, the same should not be given unless approval thereof is obtained from the National Headquarters Legal Department or State or Regional Counsel. It should be noted that because of the general nature of this Manual, there is no discussion herein of specific state laws. Questions relating to such matters should be referred to the appropriate legal officer. NAVIGABLE WATERS - TIDAL - NORMAL EXCEPTION (NO INSURANCE BELOW HIGH WATER MARK) In all cases in which a tidal body of water crosses or abuts the property to be insured, to that portion lying below mean high water mark should be excepted unless title has been checked back to the original grant or patent and it has been definitely determined that private ownership extends to low water mark. If title below high water mark cannot be insured, the following exception should be used: Title to that portion of the property lying below the mean high water mark of .
These "rights" may amount to title to any land overflowed by the tide, regardless of navigability, being in the state. See Phillips Petroleum Company and Cinque Bambini Partnership v. State of Mississippi (1988), 484 U.S. , 98 L Ed 877, 108 S Ct 791.
92
7/80
NAVIGABLE WATERS - TIDAL - INSURANCE TO LOW WATER MARK If the description of the property runs to the low water mark of the body of water and private ownership thereof is definitely established after checking the title back to the original grant or patent, such ownership is still subject to the rights of the Federal and State Governments and the public generally. Such rights should be excepted in the following manner: , and the public Rights of the United States of America, State of generally in and to that portion of the property lying below the mean high water mark of . In no case should title be insured to any property lying below low water mark. If there is any possibility that the description in such case includes land below the low water mark of the particular body of water, in addition to W-2, the following exception should be made: Title to any portion of the property lying below the low water mark of NAVIGABLE WATERS - NON - TIDAL - NORMAL EXCEPTION (NO INSURANCE) In those cases in which a non-tidal, navigable body of water crosses or abuts the property to be insured, title to the property within the bounds thereof should be excepted, using one of the following exceptions: Title to that portion of the property within the normal bounds of . .
Title to artificially filled lands, submerged lands and lands lying below the ordinary . high water mark of NAVIGABLE WATERS - FILLED - IN LANDS As pointed out above, the Federal Government exercises certain control over all navigable bodies of water. This control derives from the Constitutional power to regulate interstate and foreign commerce and it applies to bodies of water which are deemed navigable in law as well as those which are navigable in fact. Consequently, when there has been an artificial filling in of a body of water deemed navigable in law, the title to the land constituted as a result of such filling in is subject to the control of the United States by reason of its paramount jurisdiction over navigation and commerce. Not only is this true, but, if the filling in was done pursuant to a permit issued by the Secretary of the Army, the title to the land conterms of the permit under which the filing in was done. All such permits are revocable and subject to the right of the government to require removal of the fill and/or other improvements. Removal may be required without compensation whether or not the filling was done pursuant to permit.
7/80
In the case of the title to lands artificially filled in, consideration also must be given to the rights of the State in and to such lands by reason of its control over naviagion and commerce. If a portion of the property to be insured is or may be filled-in land and the title to such portion below the prior high water mark of the body of water cannot be insured, one of the following exceptions should be used: Title to that portion of the property lying below the mean high mark of unaffected by fills, man-made jetties and bulkheads. ,
Title to that portion of the property which is or may be filled-in land, or which is or has been under water, or which lies below the mean high water mark of . If title to such filled-in land can be insured and the necessary permits have been obtained, it is still necessary to make the following exception: Any and all rights of the United States of America and State of in and to navigable waters or filled-in land formerly within navigable waters and any conditions contained in any permits authorizing the filling in of such land. Under no circumstances shall the issuing office insure against loss or damage resulting from the exercise of these rights without the specific approval of State or Regional Counsel or National Headquarters Legal Department. If approval is sought for any affirmative insurance against the exercise of the "navigational servitude," all relevant information should be submitted. This should include a map of the area indicating the extent of filling, information concerning permits therefor, and all available information on the nature and extent of existing and proposed improvements. The possibility of the need to widen channels and to install navigational aids of any type on the property should also be investigated. Any affirmative coverage so authorized should be by means of a separate endorsement which should be in substantially the following form: Notwithstanding the provisions of item of Schedule B hereof, this policy insures against loss or damage (including court costs and attorney's fees) which the insured may suffer due to the exercise, upon the land, of the rights referred to in said exception so as to require the removal, without compensation, of any improvements on said land. NON-NAVIGABLE STREAMS In all cases in which a stream, branch or other natural water course (short of a river) extends through a city lot, subdivided property or farm or acreage property, exception should be made to the rights of others entitled thereto in and to the waters of the stream
or branch and the natural flow thereof. One of the following exceptions should be used:
7/80
Rights of others thereto entitled in and to the continued uninterrupted flow of . Rights of upper and lower riparian owners in and to the use of the waters of and the natural flow thereof. PONDS, NON-NAVIGABLE LAKES If there is a pond or non-navigable lake on the property to be insured which is entirely surrounded by such property, no exception thereto is necessary. However, if the pond or lake is not surrounded by insured premises, then other abutting owners will have rights in such pond which should be excepted to in the following manner: Rights, if any, of the property owners abutting the in and to the waters of the and in and to the bed thereof; also boating and fishing rights of property owners abutting the or the stream of water leading thereto or therefrom. RIPARIAN RIGHTS - NORMAL EXCEPTION (NO INSURANCE) In those cases in which riparian rights are conveyed by the instrument to be insured, such rights are not to be insured unless it is definitely determined that such rights are appurtenant to the property. The exception when no rights are to be insured is as follows: Riparian rights incident to the premises. RIPARIAN RIGHTS - NATURE AND EXTENT OF NOT INSURED If riparian rights are conveyed by the instrument to be insured and it is definitely determined that such rights are appurtenant to the property, then only the nature and extent of such rights need be excepted in the following manner This policy does not insure the nature and extent of riparian rights conveyed by the set out under Schedule hereof. In no case is the Company willing to afford any insurance as to the nature and extent of riparian rights. DRAINS AND DITCHES The rights of upland owners to drain unwanted surface waters over lowlands may exist (apart from those created by recorded easement or agreements) by reason of the common law or by prescriptive easements. Some states have statutes dealing with the establishment and operation of drainage and irrigation districts. Many of those statutes
provide for liens for assessments for the costs of construction and maintenance. IN all
7/80
cases in which the plat of survey or other information furnished the company discloses any drains or ditches crossing the insured premises, the following exception should be made: Rights of others in and to the use of any drains and/or ditches located over, across in or under the insured premises, and rights to enter upon said premises to maintain the same. The foregoing exception may be modified to make reference to the plat of survey disclosing the drain or ditch in question. If the insured premises is contained within a drainage or irrigation district, reference to such fact should be made under Schedule B of the policy. If the statutes creating the drainage or irrigation district provide for a lien for assessment, an exception should be made to such lien under Schedule B of the policy.* INSURING BEACH AND SHORE AREAS Case law in a number of states has raised questions about insuring title to lands along the beaches and shores of major bodies of water. The assertion may be made that the beach has been subjected to the right of the public to use it for recreational and other related purposes. This sometimes is called "the public trust doctrine." Even if the courts do not recognize this doctrine as such, it is still possible that a beach area will have been subjected to prescriptive use. Therefore, when the description of the land includes a dry sand beach, the following exception should be used, whether or not the policy contains a survey exception: Rights, if any, of the public to use as a public beach or recreation area any part of the land lying between the body of water abutting the subject property and the natural line of vegetation, bluff, extreme high water line, or other apparent boundary line separating the publicly used area from the upland private area. WETLANDS A number of states have enacted legislation for the preservation of wetlands in their natural condition. These statutes generally affect both public and private wetlands. Our concern is primarily with the latter category since public wetlands are not likely to be the subject of title insurance. To the extent that the regulation or private wetlands concerns such matters as dredging, filling, removing or otherwise altering or polluting private wetlands, we were probably protected by the first exclusion in the 1970 ALTA policy to "any law, ordinance or governmental regulation . . . restricting or regulating or prohibiting the occupancy, use or enjoyment of the land." This is no longer trust under the 1984 amendment of the 1970 policies or the 1987 ALTA policies. A difficult problem is presented by the filing of maps depicting the boundaries of wetlands in the local land records because they may not always be readily accessible to title examiners. Specific inquiry as to the existence of these maps should be made if the land is thought to contain
wetlands.
7/80
If the title examination reveals that any such filing has been made, the following should be inserted in Schedule B of the policy: NOTE: Attention is directed to the fact that the records of show that (all) (portions) of the insured premises constitute wetlands and are subject to the provisions of (show appropriate statutory reference). * See Sections 1000 et seq. of this Manual for Requirements and Exceptions relating to such assessments.
8/78 Chapter 41 - Page 1 WATER & WATER RIGHTS Title - Case Law
RIPARIAN RIGHTS
[Supplemental Resources: Pedowitz, Real Estate Law, Ch, 18, pp. 18-8 to 18-12; NYSBA Videotape Seminar Program entitled "Problems and Pitfalls in Real Estate Titles" (1993), pp. 359 et seq.; old New York Laws 1931, Ch 313, now Public Lands Law [PLL] sec 14 & PLL sec 75. Note also in NYC proper you are also dealing with NY General City Law sec 20(2) and N.Y.C. Code sec 383; see also correspondence with J. Palomar, Patton on Land Titles, Rev. 3rd Ed., sec. _____ .]
A riparian right is a right to the use or enjoyment of the property which is fixed and governed by the local law. (93 C.J.S. Waters 5). Riparian rights constitute real property interests. (City of N.Y. v. Schwartz, 320 N.Y.S. 2d 983 (1971)). When a natural watercourse exists, riparian owners may jointly and reasonable use it, and each is entitled to reasonable use of water as it passes his premises for domestic and other uses which are not inconsistent with the use of the stream by owners above and below him. If there is no watercourse, landowners have no riparian rights. (Kennedy v. Moog, Inc., 264 N.Y.S. 2d 606 (1965)). The right to a natural flow of water is not an easement but a natural right which is inseparably annexed to the soil and passes with it as a part of the soil. (Lawrence v. Behncke, 150 N.Y.S. 2d 494 (1956)). The common-law rules of riparian rights exist in New York through constitutional provisions but such rights are subject to change by statute. New York has enacted a statute (N.Y. Envir. Conserv. Law 15-0501, 1973) which holds that a state may regulate and protect its water resources under its police power. (Prospect Enterprises Inc. v. People, 351 N.Y.S. 2d 998 (1974)). The control of fresh water streams is vested in the state but it has no control over nonnavigable watercourses. (93 C.J.S. Waters 7). The waters over which the state has control include all fresh water in public and private streams. (Application of City of Johnstown, 209 N.YS. 2d 982 (1961)). A natural watercourse is a natural stream which flows in a definite bed of channel with banks and has a permanent source of supply. (Kennedy v. Moog, Inc., supra). A riparian owner is an owner of land bounded by a watercourse. Generally, only such an owner can claim or exercise riparian rights. (Allen v. Potter, 316 N.Y.S. 2d 790 (1970)). Every riparian owner at common law is entitled to the natural flow of a running stream through or along his land. (93 C.J.S. Waters 9).
Generally, every riparian owner has the right to make any use of the water, which is beneficial to himself, on the riparian land; exercising this right in a reasonable manner so that it will not interfere unnecessarily with the rights of others. The reasonableness is determined by: 1) the extent and capacity of the stream; 2) uses to which it has been put; 3) rights of other riparian owners; and 4) other peculiar circumstances. (Kyser v. New York Central Railroad, 271 N.Y.S. 182 (1934)).
8/78
Chapter 41 - Page 2 WATER & WATER RIGHTS Title - Case Law
The riparian owner may own the bed of the stream but he does not own the water which runs through the stream. He is only entitled to the reasonable use of the water as it passes his land. (St Lawrence Shores, Inc. v. State, 302 N.Y.S. 2d 606 (1969)). A riparian owner can divest himself of these rights or lose them by his own acts. Riparian rights to the use of water are never lost, suspended or destroyed by the nonuse of the water unless: 1) an adverse possession claim is made or 2) a grantor's license is given to another to divert and use the water. The right to the flow of water is not suspended or destroyed by nonuse only, unless the owner also commits an act absolutely destructive of the right or which is incompatible with its exercise by him. (93 C.J.S. Waters 13). Riparian rights may be determined by: 1) a suit to quiet title or 2) a suit in equity to have the rights ascertained and apportioned. An injunction will be issued to protect the rights of a riparian owner which have been unlawfully interfered with or invaded. (93 C.J.S. Waters 14). However, the injunction will not be granted if it would produce "a great public or private mischief" merely to protect a technical or unsubstantial" right of the riparian owner in the stream. The riparian owner seeking the injunction has the burden of proving by the preponderance of evidence that the defendant unreasonably used the water and created substantial damage to the owner. (Kennedy v. Moog, Inc., supra). WATER RIGHTS 1. 2. While one leaves his land in its natural condition, he is not required to prevent flowage of surface water from his land to that of his neighbor. Either the upper or lower owner has the right to change the grade of and improve his property regardless of how it may affect the flowage of surface waters and neither has an easement in the land of the other in respect thereto. a. b. The improvements must be made in good faith to fit the property to some rational use to which it is adapted. The water must not be drained onto the other property by means of pipes or ditches. Kossoff v. Rathgeb-Walsh, Inc. 3 N.Y.2d 583 (1958) 3. If waters flow in a well-defined channel, e.g., a stream: a. b. Upper owner has right to have water pass through his land without hindrance. Lower owner may not dam the channel and cause water to flow back over
upper owner's property.
8/78
Buffalo Sewer Authority v. Town of Cheektowaga, 20 N.Y.2d 47 c. A riparian owner may not destroy a stream, a spring or well upon his neighbor's land by cutting off the source of its supply, except it was done in the exercise of a legal right to improve the land or make some use of it in connection with the enjoyment of the land for purposes of domestic use, agriculture or mining or by structures for business carried on upon the land. Stevens v. Spring Valley Water Works & Supply Co., 247 N.Y.S. 2d 503 (1964) SUBTERRANEAN AND PERCOLATING WATERS Flowing subterranean waters are those whose courses are well-defined and reasonably ascertainable and whose existence is not temporary. Percolating waters are those passing through the ground beneath the earth's surface without a definite channel and which are not shown to be supplied by a definite flowing stream. All underground waters are presumed to be percolating. (93 C.J.S. Waters 86, 87). Percolating waters may be used by the owner of the land as he sees fit. The landowner can use this water but he cannot waste it. (93 C.J.S. Waters 93). A landowner may not take percolating water from his own land for the malicious purpose of depriving the adjoining landowner of it. (93 C.J.S. Waters 94). An obstruction or diversion of percolating waters is actionable if it's beyond: 1) reasonable use or 2) taking of a reasonable share. (93 C.J.S. Waters 96). No actionable injury occurs, however, unless the obstruction or deviation actually does damage unreasonably and unnecessarily to the property rights of another. (Doundoulakis v. Town of Hempstead, 381 N.Y.S. 2d 287 (1976)). A landowner may not deal with his own land so that it fouls the water percolating through it polluting the neighbor's water. If he does so, the landowner is liable. (Easton v. State, 283 N.Y.S. 809 (1935)). NATURAL LAKES AND PONDS A lake is a large inland body of water having little or no current which is fed by surface waters or springs and occupies a natural depression in the earth's surface. A pond is similar to a lake but it may be artificial as well as natural and is of relatively small size. (93 C.J.S. Waters 103).
8/78
Riparian rights similar to those on a watercourse are vested in the owners of land bounded by a lake or pond. (93 C.J.S. Waters 104). The owner of a part of the bed of a lake or pond has exclusive rights in the water above it. The owner may also use the surface of the whole lake or pond as long as such use does not interfere with the reasonable use of other riparian owners. (Mix v. Tice, 285 N.Y.S. 441 (1937)). A riparian owner is entitled to have the waters preserved in their natural state (93 C.J.S. Waters 106) but the owner has no right to have the lake at a certain level. (Findley Lake Property Owners, Inc. v. Town of Mina, 154 N.Y.S. 2d 775 (1956)). A riparian owner on a lake or pond is generally entitled to any land added to his frontage by accretion. (Town of Hempstead v. Little, 293 N.Y.S. 2d 88 (1968)). A riparian owner of a lake or pond whose rights and privileges in those waters are unlawfully interfered with may maintain an action for damages or may seek an injunction to prohibit the interference where the legal remedy is inadequate. (Village of Old Field v. Schuyler, 240 N.Y.S. 2d 980 (1963)). WATER BOUNDARIES As a general rule, the title of riparian owners extends to the middle of the bed of an inland lake or pool. New York determines the quantity of the bed owned by taking a median line to form the longest axis of the lake and, at right angles to the line, drawing lines to meet the sidelines of the upland tract. (Mix v. Tice, 285 N.Y.S. 441 (1937)). If the deed contains words to the effect of "along the shores" of the lake, the land beneath the lake is not conveyed. However, the deed would convey title to all land up to the lower water mark. Phrases such as "by the shore" or "to the bank" in the description in the deed express a limitation of the deed to the edge or margin of the water. (Carlino v. Barton, 349 N.Y.S. 535 (1973)). A conveyance by metes and bounds referring to the side of the lake or pond will exclude the land under water from ownership. (Town of Guilderland v. Swanson, 286 N.Y.S. 2d 425 (1968)). At common law, a conveyance which was bounded by a lake or pond carries title to the center of the water. (Brant Lake Shores, Inc. v. Barton, 307 N.Y.S. 2d 1005 (1970)). A description which uses the words "low" water mark" as a boundary, carries title to the center of the lake or pond, unless an express contrary reservation is made. (Id).
Chapter 41 - Page 1 WATER & WATER RIGHTS COVERAGE Legal Bulletin
EXCEPTIONS: Lands now or formerly under water pose special and difficult problems in title insurance. For that reason we have a number of standard exceptions which must be considered in every title affected by such lands. On all titles where the property either abuts navigable waters or includes lands formerly under navigable waters, Counsel should be consulted as to adding an exception: Rights of the United States of America to enter upon and take possession of lands now or formerly below the high water mark of Prior policies may have used other phraseology such as the "right to change or relocated harbor lines" which had the same purpose. Upon request, Counsel will consider retention of the prior language in new policies. AFFIRMATIVE INSURANCE Requests are often made for affirmative insurance to be added to the foregoing exception, substantially as follows: "but notwithstanding such rights, this policy insures that the possession of the insured in said lands will not be disturbed by reason of the exercise of said rights and if any of said lands are taken by the United States of America by reason thereof, that compensation will be paid therefore as in condemnation." Such affirmative insurance is to be given only: (a) for mortgage insurance to financial institutions, (b) as to existing lawful fill, and (c) after approval of the Chief Counsel, the Assistant Chief Counsel or the Board of Counsel. Appropriate consideration must also be given as to whether an extra premium should be charged, and the amount thereof. A decision as to whether such affirmative insurance is to be given will depend upon the proximity of the parcel to the navigable waterway, the extent of commerce and navigation thereon, the possibilities of future navigational requirements and such other factors as may be pertinent. Underwriters are authorized to give the affirmative insurance where it has been previously given as to the same property, provided that they are satisfied that it was appropriate when previously written, and the new mortgage is not for an appreciably higher amount than the existing insurance. Consideration should also be given to whether an extra premium is appropriate as in Paragraph 4. As to the nature and extent of the rights of the Federal Government, see GreenleafJohnson Lumber Co. v. Lindley M. Garrison, 237 U.S. 251 59 L. Ed 939.
Chapter 42 - Page 1 WILLS General
WILLS
WILL DEFINED A. A will is an oral declaration or written instrument, made as prescribed by 3-2.1 or 3-2.2, to take effect upon death, whereby a person disposes of property or directs how it shall not be disposed of, disposes of his body or any part thereof, exercises a power, appoints a fiduciary or makes any other provision for the administration of his estate, and which is revocable during his lifetime. EPTL 1-2.8 (a). The term "will" includes a "codicil". EPTL 1-2.18(b)
B.
WILL CHARACTERISTICS A. B. C. D. No special form required. Need not be dispositive. Does not transfer a present interest. Is ambulatory. 1. 2. Takes effect on death of testator, not at time of making. May be revoked at any time during the testator's lifetime pursuant to EPTL 3-4.1.
WILL SUBSTITUTES Certain transactions which pass property upon death are considered nontestamenary transfers ("will substitutes") and thus need not comply with formalities of execution set forth in the Statute of Wills. A. B. Life Insurance Johnson v. Scott, 76 Misc. 641 (1912). U.S. Savings Bonds made payable to a designated person as co-owner or beneficiary. EPTL 13-3.1. Totten Trusts Inter Vivos Trusts
C. D.
Gilman v. McCardle, 99 N.Y. 451 (1885) (Income to settlor for life and on his death corpus to X); Van Cott V. Prentice, 104 N.Y. 45 (1887) (Income to settlor for life and on his death corpus to X, even where power of revocation reserved to settlor).
E.
Survivorship Interests 1. Joint tenancies and tenancies by the entirety.
F.
Joint Bank Accounts 1. At common law, gave rise to a rebuttable presumption that the account was created for convenience only. Beaver v. Beaver, 117 N.Y. 421 (1889). a. Exception - joint account created prior to April 20, 1959 by husband in name of himself and his wife gave rise to a rebuttable presumption that a right of survivorship only was intended. West v. McCullough, 123 App. Div. 846 (1908), aff'd 194 N.Y. 518 (1909). Joint account created on or after April 20, 1959 by husband in name of himself and his wife treated the same as if the parties were not so related. G.O.L. 3-311, eff. April 20, 1959. In re Otte's Estate, 209 N.Y.S.2d 885 (1960), aff'd, 225 N.Y.S2d 247 (1962).
b.
2.
By Statute - Banking Law 675, eff. June 1, 1965 a. When a deposit of cash, securities or other property has been made or shall hereafter be made in or with any banking organization, savings and loan association or credit union transacting business in this state, in the name of such depositor and another person and in form to be paid or delivered to either, or the survivor of them, such deposit and any additions thereto made by either of such persons after the making thereof, shall become the property of such persons as joint tenants, shall become the property of such persons as joint tenants, shall be held for the exclusive use of the persons so named, and may be paid or delivered to either during the lifetime of both or to the survivor after the death of one of them. The making of such deposit in such form shall, in the absence of fraud or undue influence, be prima facie evidence, in any action or proceeding to which the banking organization or surviving depositor is a party, of the intention of both depositors to create a joint tenancy and to vest title in the survivor to such deposit and additions thereto. The burden of proof in refuting such prima facie evidence is upon the party or parties challenging the title of the survivor.
b.
c.
During their lifetimes, each joint tenant: (1) (2) (3) (4) may make withdrawals owns an equal share of amount on deposit may be liable for withdrawals in excess of his share has right of survivorship. Matter of Bricker v. Krimer, 13 N.Y.2d 22.
3.
A common law rule will still govern if: a. Designation of the account is not in statutory form. Lombardi v. First National Bk of Hancock, 257 N.Y.S.2d 83 (1965). Depositor did not consent to designation of account as a joint tenancy. Matter of Fenelon, 262 N.Y. 57. Survivorship clause added without knowledge of depositor. Matter of Yauch, 296 N.Y. 585 (1946).
b. c. G.
Gifts Causa Mortis 1. Elements: a. Donor must be under a reasonable apprehension of death from a present illness or from an external and apprehended danger. No necessity that donor be in extremis. Donor does not recover from the illness. Delivery of the subject matter of the gift.
b. c. 2.
Real property cannot be the subject of a gift causa mortis. Butler v. Sherwood, 114 Misc. 483 (1921), aff'd 196 App. Div. 603, aff'd 233 N.Y. 655 (1922).
H.
Contracts and Deeds generally - If present interest created, transaction is not testamentary. Stoutenburg v. Stoutenburg, 176 Misc. 430, aff'd 265 App. Div. 570 (1943) (Deed from A to B reserving life estate in A-not testamentary).
Butler v. Sherwood, 233 N.Y. 655 (1922) (Conveyance upon condition that grantee survive grantor and which is revocable and not intended to take effect until grantor dies - testamentary). McCarthy v. Pieret, 281 N.Y. 407 (1939) (Agreement that if mortgagee dies before due date, mortgagor to continue to pay interest to X who is also to receive principal on due date testamentary). Matter of Hillowitz, 22 N.Y.2d 107 (1968) (Partnership agreement that on death of any partner his share will be transferred to his widow with no termination of the partnership not testamentary). Matter of Cairn's Estate, 225 N.Y.S.2d 274 (1962) (Provision in bond and mortgage that if mortgagee died before debt paid, the mortgage shall become null and void - not testamentary.) Estate of Gross, 35 App. Div. 2d 830 (1970) (Stockholders' agreement that upon the death of shareholder, his interest in the corporation was to be paid to his wife - not testamentary). TESTAMENTARY CAPACITY A. Every person of the age of eighteen years or upwards, of sound mind and memory, and no others, may devise and bequeath his or her real and personal property, and may exercise a power to appoint real or personal property by will in writing. EPTL 3-1.1. Blind, illiterate, deaf and dumb persons 1. A person who is blind, illiterate or deaf and dumb may make a will but there must be affirmative proof that the mind of the testator accompanied the act, that the instrument speaks his language and expresses his will and that it was duly executed. Matter of Regan, 206 App. Div. 403 (1923).
B.
C.
Testamentary capacity requires strength and clarity of mind and memory sufficient to know generally and without prompting: 1. 2. the nature of the act about to be performed, the nature and extent of the property about to be disposed of, and
3.
the names and identity of the persons who are the natural objects of testator's bounty and his relationship toward them. Delafiedl v. Parish, 25 N.Y. 9. Matter of Delmar, 243 N.Y. 7.
D. E.
Testamentary capacity must exist at the time of execution. Eccentricity, perverse opinions or unreasonable prejudices do not negative testamentary capacity. Matter of White, 121 N.Y. 406 (1890). Habitual intoxication is not in and of itself evidence of, nor does it constitute an unsound mind or testamentary incapacity. Matter of Heaton, 224 N.Y. 22 (1918). The burden of proving testamentary capacity is on the proponent of the will.
F.
G.
FRAUD, DURESS, UNDUE INFLUENCE A. B. Fraud, duress or undue influence may invalidate a will in whole or in part. In re Kaufmann's Will, 221 N.Y.S.2d 601 (1961). Influence is not undue unless it so overpowers and subjugates the mind of the testator as to destroy his free agency. In re Walter's Will, 6 N.Y.2d 49 (1959). The burden of proving fraud, duress or undue influence is on the person who asserts it. Matter of Schillinger, 258 N.Y. 186. Undue influence may be inferred where an attorney prepares a will in which he is named as a beneficiary. Attorney has burden to go forward with rebutting evidence. Matter of Putnam, 257 N.Y. 140
C.
D.
MISTAKE A. Mistake as to document 1. As a general rule, where the testator intended to execute his will, but by mistake signed the wrong document, neither the paper executed nor the paper intended in his will because there is no testamentary intent as to the paper signed. Intent and execution must coincide in same instrument. Matter of Culter, 58 N.Y.S.2d 604 (1945).
B.
Mistake as to external fact 1. A will is valid and entitled to probate despite the fact that the testator was mistaken about extraneous facts which might otherwise have caused him to make a different disposition of his property. Matter of Arnold, 200 Misc. 909 (1951). Matter o f Shumway, 138 Misc. 429 (1930). Matter of Reidy, 199 Misc. 311 (1951). 2. A mistake as to the legal effect of provisions of the will does not invalidate it in whole or in part. Matter of Cotter, 180 Misc. 399 (1943). 3. Equity has no jurisdiction to reform a will for mistake. Matter of Baylis, 78 N.Y.S.2d 893 (1948).
EXECUTION OF WILLS A. Subscription - the will must be subscribed by the testator at the end. EPTL 3-2.1(a) (1) 1. Subscription may validly be made as follows: a. b. By testator subscribing his name personally. By another subscribing for him, in his presence and by his direction. Such other person shall sign his own name and affix his address to the will but shall not be counted as one of the necessary attesting witnesses. Validity of will not affected by failure to sign and affix address. EPTL 3-2.1(a) (C). c. d. A third person may assist testator in signing his name. Testator may subscribe by making his mark or any other symbol which he intends as his signature. Matter of Romanlw, 163 Misc. 481 (1937).
2.
At the physical end of the will. Matter of Andrews, 162 N.Y. 1 (1900). Matter of Dupin's Will, 232 N.Y.S.2d 381 (1962). In re Angevine, 256 N.Y.S.2d 952 (1965). a. If writing following subscription or appearing above subscription was added after subscription, will as originally executed entitled to probate; added matter disregarded. EPTL 3-2.1(a) (1) (B). If writing following subscription was made prior to subscription, EPTL 3-21.(a)(1)(A) provides as follows: The presence of any matter following the testator's signature, appearing on the will of the time of its execution, shall not invalidate such matter preceding the signature as appeared on the will at the time of its execution, except that such matter preceding the signature shall not be given effect, in the discretion of the surrogate, if it is so incomplete as not to be readily comprehensible without the aid of the matter which follows the signature, or if to give effect to such matter preceding the signature would subvert the testor's general plan for the disposition and administration of his estate. Examples: (1) "Par. 1-I give $10,000. to X. Signature of T Attestation by W's Par. 2-I appoint Y as Executor." (Will admitted to probate excluding par. 2) "Par. 1-X has always been a good friend and I will not forget her. Signature of T Attestation by W's Par. 2 - The property I leave to X is as follows: etc." (Entire will denied probate. Par. 1 incomplete without aid of par. 2) "Par.1-I leave my entire estate to X. Signature of T Attestation by W's Par.2-X shall sell all the property and deliver proceeds to Y." (Entire will denied probate. To admit par 1. without par. 2
b.
(2)
(3)
would subvert T's testamentary plan.)
(4)
Same as (3), but par. 2 added after subscription. (Par. 1 admitted to probate. X takes all. Par. 2 disregarded.) In re Will of Hall, 300 N.Y.S.2d 813 (1969) ( An appendix following testator's signature, made prior to subscription, admitted to probate. Held, it did not violate the physical end requirement since it was deemed to have been constructively inserted before the subscription page.)
B.
Witnesses - the signature of the testator shall be affixed to the will in the presence of each of the attesting witnesses, or shall be acknowledged by the testator to each of them to have been affixed by him or by his direction. The testator may either sign in the presence of or acknowledge his signature to each attesting witness separately. EPTL 3-2.1(a)(2). 1. Subscription in the presence of one witness and an acknowledgment to another satisfies the statute. Foysradt v. Kingman, 22 N.Y. 372 (1860). If subscription is in the presence of witnesses, they must see the testator sign. Matter of Mackay, 110 N.Y. 611 (1888). If subscription is acknowledged to the witnesses, they must see the signature. Matter of Redway, 238 App. Div. 653 (1933) aff'd 265 N.Y. 519 (1934). Acknowledgment may be the word or sign. Matter of Turell, 166 N.Y. 330 (1901). Expression of acknowledgment may come form a third person on behalf of the testator, fit is with the consent of the testator.
2.
3.
4. 5. C.
Publication 1. The testator shall at some time during the ceremony or ceremonies of execution and attestation, declare to each of the attesting witnesses that the instrument to which his signature has been affixed is his will. EPTL 32.1(a)(3). The act of publication is separate and distinct from subscription and acknowledgment.
2.
3.
Testator must inform the witnesses of the nature of the instrument they are attesting. Matter of Pulvermacher, 305 N.Y. 378 (1953). Publication may be by signs or by conduct from which it can be understood that testator is executing his will. Matter of Hunt, 110 N.Y. 278. In re Alberino, 256 N.Y.S. 2d 762 (1964). Publication need not be made to both witnesses at the same time. Publication may be made by a third person on behalf of testator, if the testator consents.
4.
5. 6. D.
Witnesses There shall be at least two attesting witnesses, each of whom shall, at the request of the testator, sign his name and affix his residence address at the end of the will. The failure of a witness to affix his address shall not affect the validity of the will. EPTL 3-2.1 (a) (4). 1. 2. 3. 4. It is not necessary that the witnesses know the contents of the will. It is not necessary that the witnesses sign in the presence of each other. It is not necessary that the witnesses sign in the presence of the testator. Herrick v. Snyder, 27 Misc. 462 (1899). Qualification of Winesses a. Neither infancy nor immorality is a disqualification. Relevant re: credibility only. Matter of Tannenbaum, 154 Misc. 828 (1935). Matter of Klinzer, 71 Misc. 620.
5.
Interested Witnesses - EPTL 3-3.2 a. An attesting witness to a will to whom a beneficial disposition or appointment of property is made is a competent witness and compellable to testify respecting the execution of such will as if no such disposition or appointment had been made. However, any such disposition or appointment made to an attesting witness is void: (1) unless there are, at the time of execution and attestation, at least two other attesting witnesses to the will who receive no
beneficial disposition or appointment thereunder, and
(2) b.
unless the will can be proved without the testimony of such witness.
Any attesting witness whose disposition is void hereunder, who would be a distributee if the will were not established, is entitled to receive so much of his intestate share of the estate as does not exceed the value of the disposition made to him in the will, such share to be recovered as follows: (1) In case the void disposition becomes part of the residuary disposition (i.e., a voided pre-residuary disposition), from the residuary disposition only. In case the void disposition passes in intestacy (i.e., a voided residuary disposition, or, will has no residuary clause), ratably from the distributees who succeeded to such interest. For this purpose, the void disposition shall be distributed under EPTL 41.1 as though the attesting witness were not a distributee.
(2)
c. d.
The provisions of EPTL 3-3.2 apply to a witness to a nuncupative will authorized by EPTL 3-2.2. EPTL 303.2 does not apply where witness has not attested instrument under which he takes. Matters of Smith, 165 Misc. 361, aff'd 253 App. Div. 731 (1939) (Witness to a will not disqualified from taking under codicil to which he was not a witness). Matter of Hunt, 122 N.Y.S.2d 765 (1953) (Legacy to A, residuary estate to B. Codicil revoking legacy to A witnessed by B. B cannot take accretion to residuary estate caused by revocation of legacy.) Matter of Ackerina, 195 Misc. 383 (1949) (Legacy to A in will witnessed by A's daughter B. A pre-deceased testator and B claimed under anti-lapse statute. Disposition to B not voided her benefit results from operation of anti-lapse statute, not from disposition to her in will she witnessed. Matter of Moore, 222 N.YS.2d 521 (1961) (Statute does not apply where witness does not take beneficial interest under instrument he attests).
E.
Sequence and Time of Execution
1.
The procedure for the execution and attestation of wills need not be followed in the precise order of the statute so long as all the requisite formalities are observed during a period of time in which, satisfactorily to the surrogate, the ceremony or ceremonies of execution and attestation continue. EPTL 32.1(b). The formalities for the execution and attestation of a will must be completed within a period of thirty days. EPTL 3-2.1(c).
2. F.
Attestation Clause 1. Is not an essential part of a will, but is evidence of the facts certified in it. Matter of Hock, 160 Misc. 621 (1936).
G.
Burden of Proof 1. Proponent, i.e., the person offering a paper as a will, has the burden of proving that the instrument was duly executed. Matter of Schillinger, 258 N.Y. 186.
H.
Proof of will on testimony of less than two witnesses 1. If one witness is unable to testify by reason of: a. b. c. d. e. death, incompetence, absence from state, inability to be found within state, or physical or mental condition,
Surrogate may dispense with testimony of such witness and admit will on testimony of remaining witness. 2. If both witnesses are unable to testify for any of these reasons, surrogate may admit will to probate on proof of handwriting of testator and at least one witness, and such other facts as would be sufficient to prove will. SCPA 1405
INTEGRATION A will may be written on several sheets of paper so long as all are intended to operate as a will and all are present at the time of execution. Matter of Allen, 282 N.Y. 492 (1940). Matter of Seymour, 299 N.Y. 767 (1949). INCORPORATION BY REFERENCE A. The doctrine of incorporation by reference permits a will, by reference, to incorporate into itself some other paper which is not a valid will because not properly executed. The extraneous paper to which the will refers must be in existence at the time of the execution of the will; the will must manifest testator's intention to incorporate that extraneous paper in his will; the paper to be incorporated must be clearly identified and described in the will. 1. The doctrine is not generally recognized in New York. Thus, a will may not incorporate an unattested letter of instructions. Booth v Baptist Church, 126 N.Y. 215 (1891); Matter of Warren, 11 N.Y.2d 463 (1962). Matter of Angle, 147 Misc. 29 (1933). (Disposition "Contents of certain envelopes in my vault to those persons whose names appear thereon" ineffective). Compare with Matter of LeCollen's Will, infra. a. However, a non-testamentary extraneous paper may be referred to for the limited purpose of identifying the thing intended to be given. Matter of LeCollen's Will, 190 Misc. 272 (1947)- Disposition "To X, Y and Z, respectively, the securities contained in envelopes bearing their respective names, to be found in my vault" effective).
2.
Exceptions: a. A properly executed codicil republishes and revives a will originally invalid for want of testamentary capacity or undue influence, but which was otherwise validly executed, in accordance with EPTL 3-2.1. In re Brown, 160 N.Y.S.2d 761 (1957). Extraneous matters which have an independent legal significance. Langdon v. Astor's Executors, 16 N.Y. 9 (1857) (Legacy to X to be decreased by amount of inter vivos gifts made to X by testator and which he enters in his ledgers - valid).
b.
c.
Matter of Fowles, 222 N.Y. 222 (1918); Matter of Freund, 33 Misc. 2d 6 (1962) (A will can make a disposition by incorporating a disposition made in the will of another, whether other will antedates or post-dates testator's will). Pour-over Trusts: Significant Cases Affecting the Law Prior to June 1, 1966 (1) Matter of Rausch, 258 N.Y. 327 (1932) (Will may validly incorporate provisions of irrevocable inter vivos trust created by testator.) Matter of Snyder, 125 N.Y.S. 2d 459 (1953) (Will may validly incorporate provisions of inter vivos trust as amended, where trust instrument was not amended or modified after will executed) President and Directors of Manhattan Co. v. Janowitz, 250 App. Div. 174 (1940) (Inter vivos trust substantially amended twice after will executed may not be incorporated by reference) Matter of Ivie's Will 4 N.Y.2d 1788 (1959) (Inter vivos trust which underwent only minor administrative change after execution of will may be incorporated by reference.)
d.
(2)
(3)
(4)
e.
Pour-over Trusts EPTL 3-3.7 with respect to all wills becoming effective on or after 6/1/66: (1) A testator may by will dispose of or appoint all or any of his estate to a trustee of a trust, the terms of which are evidenced by a written instrument executed by the testator alone, the testator and another, or by some other person, including a trust established for the receipt of the proceeds of an annuity or pure endowment contract, or of a thrift, savings, pension, retirement, death benefit, stock bonus or profitsharing plan or system, or a funded or unfunded life insurance trust although the settlor has reserved any or all rights of ownership of the insurance contracts and regardless of the existence, size or character of the corpus of such life insurance or other trust; provided the trust instrument is executed and acknowledged by the parties thereto in the manner required for the recording of a conveyance of real property prior to or contemporaneously with the execution of the will and such trust is identified therein. The testamentary disposition or appointment is valid, even
(2)
though:
(a)
The trust instrument is amendable or revocable, or both, provided that the disposition or appointment shall be given effect in accordance with the terms of the trust instrument, including any amendments thereto, as they appear in writing on the date of the testator's death and, where the testator so directs, including amendments to the trust instrument after his death. The trust instrument was in fact amended after the execution of the will, provided the amending instrument was executed in the manner provided for the execution of the instrument which it amends. The right is reserved in the trust instrument: (i) To exercise any power over the trust property or (ii) To direct how the income shall be paid or the principal distributed. The trust instrument or any amendment thereto was not executed in accordance with the statute of wills.
(b)
(c)
(d) (3)
The property so disposed of or appointed by will become a part of the trust to which it is given and title thereto vests in the trustee to be administered and disposed of in accordance with the terms of the trust instrument. Any disposition or appointment to a trustee made by a testor who died prior to the effective date of the section, which would be invalid under the prior law, shall be construed to create a testamentary trust in accordance with the terms of the trust instrument which the testator intended should embrace the property disposed of or appointed as the terms appear in the trust instrument on the date of the testor's death. A revocation or termination of the trust before the testator dies shall cause the disposition or appointment to fail unless the testator had made an alternative disposition.
(4)
(5)
NUNCUPATIVE AND HOLOGRAPHIC WILLS - EPTL 3-2.2 A. A will is nuncupative when it is unwritten and the making thereof by the testator and its provisions are clearly established by at least two witnesses. EPTL 3-2.2(a)(1). A will is holographic when it is written entirely in the handwriting of the testator
B.
and is not executed and attested in accordance with the formalities prescribed by EPTL 3-2.1.
C.
A nuncupative or holographic will, as defined above, is valid only if made by: 1. a member of the armed forces of the United States while in actual military or naval service during a war, declared or undeclared, or other armed conflict in which members of the armed forces are engaged. EPTL 3-2.2(b)(1). a person who serves with or accompanies an armed force engaged in actual military or naval service during such war or other armed conflict. EPTL 32.2(b)(2). a mariner while at sea. EPTL 3-2.2(b)(3).
2.
3. D.
A nuncupative or holographic will authorized by EPTL 3-2.2 becomes invalid: 1. 2. if made by a member of the armed forces, upon the expiration of one year following his discharge from the armed forces. EPTL 3-2.2(c)(1). if made by a person who serves with or accompanies an armed force engaged in actual military or naval service, upon the expiration of one year from the time he has ceased serving with or accompanying such armed force. EPTL 3-2.2(c)(2), or if made by a mariner while at sea, upon the expiration of three years from the time such will was made. EPTL 3-2.2(c)(3). If any of the persons described in the preceding three sub-paragraphs lacks testamentary capacity at the expiration of the time limited therein for the validity of his will, such will shall continue to be valid until the expiration of one year from the time such person regains testamentary capacity. EPTL 32.2(d).
3. 4.
FOREIGN WILLS A. A will disposing of personal property, wherever situated, or real property situated in this state, made within or without this state by a domiciliary or non-domiciliary thereof, is formally valid and admissible to probate in this state, if it is in writing and signed by the testator, and otherwise executed and attested in accordance with the local law of: 1. 2. 3. this state, the jurisdiction in which the will was executed at the time of execution, or the jurisdiction in which the testator was domiciled, either at the time of execution or of death.
EPTl 3-5.1(c)
In re Estate of McInally, 163 N.Y.S.2d 793 (1957) (Holograph executed in Scotland provides: Read over to and signed by me for and on behalf of T and by her authority, who declares that she is unable to write, all in her presence and in the presence of the witnesses hereto subscribing. (Signed) X, solicitor, Glasgow." HELD: Entitled to probate in New York.) Cf. Matter of Tatone, 273 N.Y.S.2d 203 (1966) (Paper offered for probate contained following notation: "The party being illiterate is therefore unable to sign." HELD: Probate denied - no internal evidence of adoption by testator of agent's act and will not subscribed by testator. McInally distinguished.) In re Will of Wilson, 302 N.YS.2d 910 (1969) (Paper offered for probate in New York had been executed in Pennsylvania in accordance with the laws thereof, under which subscription to the will by two witnesses was superfluous. HELD: Will valid and admitted to probate in New York pursuant to EPTL 3-5.1(c)(2). Thus, the beneficiarywitness who subscribed the will could take thereunder even though the testator was a resident of New York at the time of his death.) B. A testamentary disposition of personal property intrinsically valid under the law of the jurisdiction in which the testator was domiciled at the time the will was executed shall not be affected by a subsequent change in the domicile of the testator to a jurisdiction by the law of which the disposition is intrinsically invalid. EPTL 3-5.1(d).
CONDITIONAL WILLS A. B. A will may be its terms declare that it is to become operative only upon the happening of some specified contingency. Since conditions are not favored in law, the courts favor a construction of the apparent condition as merely a statement of inducement, i.e., the testator's reasons for making a will. Thus, the inclination is to construe the will as absolute, unless the condition clearly appears either expressly or by necessary implication from a reading of the will's language as a whole, together with extrinsic circumstances. Matter of Pascal 152 N.YS.2d 185 (1956) ("This is my will if I should die on my trip to India." HELD: Conditional will.) Cf. Matter of Langer, 156 Misc. 440 (1935) ("Should a misfortune befall me on my journey's and I thereby lose my life . . .". HELD: Not a conditional will-language merely a statement of inducement.)
C.
Parol evidence is not admissible to show that a will absolute on its face is conditional. Matter of Johnson, 186 Misc. 533 (1945). Conditional dispositions - see XXVIII infra.
D.
JOINT AND MUTUAL WILLS A. A joint will is a signal testamentary instrument which contains the wills of two or more persons, is executed jointly by them and disposes of property owned jointly or in severalty. It may be probated as the will of either and sometimes both of the parties thereto. Rastetter v. Hoenninger, 214 N.Y. 66 (1915). Mutual wills are separate instruments each executed by an independent testator and containing mutual and/or reciprocal provisions. In the absence of a contract to the contrary, a joint will or mutual wills are ambulatory, i.e., freely revocable without liability. this is true even though one of the parties has received a benefit under the will of the other. Edson v. Parsons, 155 N.Y. 555 (1898)
B. C.
CONTRACTS TO MAKE A WILL A. A person may bind himself either by a separate agreement or by an agreement which is found in joint or mutual wills, to dispose of his estate in a specified manner. Tutunjian v. Vetzigian, 299 N.Y. 315 (1949). 1. B. Statute of Frauds - a contract to make a testamentary disposition must be in writing and signed. EPTL 13-2.1.
The mere existence of a joint will or of mutual wills is not enough to establish a contract to make a will but a court may find from the language of the will or wills themselves and from surrounding circumstances, that the parties made their joint will or mutual wills pursuant to a contract. In such case, the will(s) constitute(s) the memorandum required by EPTL 13-2.1. Rasteller v. Hoenninger, supra Oursler v. Armstrong, 10 N.Y.2d 385 (1961); Matter of Zeh, 18 N.Y.2d 900 (1966). Effect of contract upon revocability 1. As a general rule, where joint or mutual wills have been executed pursuant to a contract, either party may, during their joint lives, terminate his contract obligations and revoke his will with impunity by giving notice thereof to the
C.
other party.
a.
Knowledge that the other party has made a new will is equivalent to notice. Lally v. Cronen, 247 N.Y. 58 (1928).
2.
If one party revokes by making a new will, without giving notice to the other, thereby breaching the contract, it is the new or last will which will be entitled to probate, subject however, to any rights created by the contract. (see C.3.b.and D., infra). Tutunjian v. Vetzigian, supra. If a joining or mutual wills are made pursuant to a contract: a. Either party during his lifetime may freely use his property, short or making a disposition or a gift in bad faith which would defeat the purpose of the contract. Schwartz v. Horn, 31 N.Y.2d 275 (9172). After the contract has been executed by one dying without making a different testamentary disposition of his property, and after the survivor has accepted the benefits of the contract, the contract becomes obligatory upon the survivor and is enforceable in equity upon his death. (See D. infra). Rich v. Mottek, 11 N.Y.2d 90 (1962).
3.
b.
D.
Effect of contract upon the rights of the survivor or third parties 1. A contract to make a will is specifically enforceable in equity, e.g., the "breaching" will is admitted to probate, and executor or beneficiary thereunder required to satisfy the terms of the contractual will. Hermann v. Ludwig, 186 App. Div. 287, aff'd 229 N.Y. 544. Morgan v. Sanborn, 225 N.Y. 454 (1919). Tutunjian v. Vetzigian, supra.
REVOCATION OF WILLS A. By Writing A will or any part thereof may be revoked or altered by another will or by a writing of the testator clearly indicating an intention to effect such revocation or alteration, executed with the formalities prescribed for the execution and attestation of a will. EPTL 3-4.1(a)(1)(A),(B). 1. A will may also be revoked or altered by a nuncupative or holographic declaration of revocation or alteration made in the circumstances prescribed by EPTL 3-2.2 by any person therein authorized to make a nuncupative or
holographic will. EPTL 3-4.1(b).
2. 3. 4.
A later will is not necessarily a revocation of a prior will. A later will may expressly revoke a prior will, e.g., "I revoke all prior wills by me at any time made." A later will may revoke a prior will by implication. a. If the later will is inconsistent with the prior will, the prior will is deemed revoked in whole or in part, to the extent of the inconsistency. If the later will makes a complete disposition of the testator's property, it is deemed to be in revocation of all prior wills. Thus, if later will has residuary clause, it revokes prior wills by necessary implication. Matter of Cunnion, 201 N.Y. 123 (1911).
b.
5.
The revocation of the prior will becomes effective at the moment the later instrument is executed. Osborn v. Rochester Trust & S.D. Co., 209 N.Y. 54 (1913).
B.
By Act Upon the Instrument 1. A will may be revoked by an act of burning in, tearing, cutting, cancellation, obliteration, or other mutilation or destruction performed by: a. b. The testator Another person, in the presence, and by the direction of the testator, in which case, the fact that the will was so revoked in the presence and by the direction of the testator shall be proved by at least two witnesses, neither of whom shall be the person who performed the act of revocation. EPTL 3-4.1(a)(2)(A)(i),(ii).
2.
There cannot be a partial revocation by physical act. Lovell v. Quitman, 88 N.Y. 377 (1882). Cf. Matter of Enright, 139 Misc. 192 (1931). The body of the will must in some way be defaced or obliterated, but total annihilation of the instrument is not necessary. Matter of Tremain, 282 N.Y. 485 (1940). Matter of Akers, 74 App. Div. 461, aff'd, 173 N.Y. 620 (1903) (Testator wrote in margin of his will: This will is revoked." Held: No revocation.)
3.
In re Mack's Will, 250 N.Y.S.2d 177 (1964).
4.
If a will was in the custody of the testator and is found among his personal effects after his death, cut or otherwise mutilated in any of the modes prescribed by statute, there is a presumption that the cutting or mutilation was effected by the testator with the intention of revoking it. Matter of Bonner, 17 N.Y.2d 9 (1966) (Testator's will and the envelope in which it was contained were found, cut in two, after his death. The separate pieces had been placed in a larger envelope on which was written, in testator's handwriting. "my will." Held: Will presumptively revoked.)
C. D.
The revocation of a will revokes all codicils thereto. EPTL 3-4.1(c). The revocation of a codicil to a will does not generally operate as a revocation of the will. Osborn v. Rochester Trust Co., 209 N.Y. 54 (1913). The burden of establishing a revocation rests upon the person who claims it. Matter of McLarney, 153 N.Y. 416 (1897). Alterations and Erasures 1. 2. If the alteration or erasure was made prior to the execution of the will, the will as executed, including the change, is given effect. If the alteration or erasure was made after the execution of the will, the instrument in is original condition must be admitted to probate if the original condition can be ascertained. Alterations, interlineation and additions made to a will alter its execution do not change the terms of the will unless made with all the formalities required by statute. In re Carner's Will, 258 N.Y.S.2d 979 (1965).
E. F.
3.
G.
Dependent Relative Revocation (DRR) - A rule of interpretation, employed where testator's intent not clear. 1. Doctrine usually raised where testator revokes a will with present intention to make new testamentary disposition, which intention for some reason proves ineffective. If applied, doctrine presumes that the intention to revoke is conditional, and if the condition, i.e., making of valid new testamentary disposition, is not fulfilled, the revocation is not effective. Unsettled as to whether DRR recognized in N.Y.
a.
Re Raisbeck's Will, 52 Misc. 279 (1906) (T made a number of alterations including marks over the signatures of a duly executed will. HELD: Marks had reference to a draft of a new will which was not drawn up. Thus, under DRR the will was deemed not revoked.) Matter of McCaffrey, 174 Misc. 162 (1946) (Will #2 expressly revoked will #1. Will #2 was then revoked by cancellation and in margin T wrote: "I cancel this will so that will #1 may be restored to full force and effect." HELD: T died intestate since doctrine of dependent relative revocation had never been recognized in New York). Matter of Macomber, 274 App. Div. 724 (1949) (Will revoked by cancellation and across the face of it T wrote: "see codicil." Codicil improperly executed. HELD: Will admitted to probate. Doctrine of DRR applicable in New York).
b.
c.
H.
Revocation by Changed Circumstances - After-born Children 1. A child born after the making of a will who is not provided for by any settlement and neither provided for nor in any way mentioned in the will, shall succeed to a portion of the testator's estate as follows: a. If the testator has one or more children living when he executes his will and makes no provision therein for any such child, and after-born child is not entitled to share in the testator's estate. CPTL 53.2(a)(1)(a). If the testator made provision for one or more children living when he executed his will, an afterborn child is entitled to share in the testator's estate as follows: (1) The portion of the testator's estate in which the after-born child may share is limited to the total of disposition made to children under the will. The after-born child shall receive such share of the testator's estate, as limited in subparagraph (1) as he would have received had the testator included all after-born children with the children upon whom benefits were conferred under the will and given an equal share of the estate to each such child. EPTL 5-3.2(a)(1)(B).
b.
(2)
c.
If the testator has no child living when he executes his last will, the after-born child shall succeed to such portion of the testator's estate
as would have passed to such child had the testator died intestate. EPTL 5-3.2(a)(2).
d.
An adopted child is within the purview of the after-born child statute. Matter of Guilmartin, 156 Misc. 699, aff'd 277 N.Y. 689 (1938). An illegitimate child is included f the decedent was the mother. (Discrimination against illegitimate child of father of questionable constitutionality - see p. 43 Dom. Rel. outline) Bunce v. Bunce, 14 N.Y.S. 659 (1891).
e.
2. I.
Not a pretermitted child statute. Does not protect against disinheritance of child living at time of execution of will.
Revocation by changed circumstances - Subsequent marriage 1. If the testator leaves a will executed prior to September 1st, 1930 and marries at any time after such will was executed, the spouse who survives such testator is entitled to succeed to the same portion of the testator's estate as would have passed to such spouse had the testator died intestate, unless provision was made for the surviving spouse by an ante-nuptial agreement in writing. EPTL 5-1.3(a). a. A surviving spouse may waive his right under the statute to an intestate share of the testator's estate, and may accept in lieu thereof any benefits he may have received in whatever status, under the will. EPTL 5-1.3(c).
2. J.
Disqualifications as surviving spouse - EPTL 5-1.2 infra.
Revocatory effect of divorce, annulment, declaration of nullity or dissolution of marriage. - EPTL 5-1.4. 1. If, after executing a will, the testator is divorced, his marriage is annulled or its nullity declared or such marriage is dissolved on the ground of absence, the divorce, annulment, declaration of nullity or dissolution revokes any disposition or appointment of property made by the will to the former spouse and any provision therein naming the former spouse as executor or trustee, unless the will expressly provides otherwise. EPTL 5-1.4(a). In re Lampshire, 292 N.Y.S.2d 578 (1968). a. The statute applies to the will of a testator who dies on or after September 1, 1967 notwithstanding that the will was executed and the divorce, annulment, declaration of nullity or dissolution was procured prior to such date. EPTL 5-1.4(b).
b. c. 2.
The statute has no application to separations. EPTL 5-1.4 applies solely to divorce or dissolution of the testator's marriage. In re North's Will, 301 N.Y.S.2d 325 (1969).
Effective September 1, 1969 EPTL 5-1.4(a) was amended to provide that the provisions, dispositions, and appointments made in a will which is partially revoked by a subsequent divorce, annulment, etc., shall take effect as if the former spouse has died immediately before the testator. Effect: If testator's will made alternative disposition if his wife predeceased him, disposition to spouse revoked by divorce, etc. will be governed by such alternative disposition, rather than fall into residue or partial intestacy.
K.
Agreement to convey property previously disposed of by will not a revocation 1. An agreement made by a testator to convey any property does not revoke a prior testamentary disposition of such property, but such property passes under the will to the beneficiaries, subject to whatever rights were created by such agreement. EPTL 3-4.2.
L.
Revocatory effect of a conveyance, settlement or other act affecting property previously disposed of by will 1. A conveyance, settlement or other act of a testator by which an estate in his property, previously disposed of by will, is altered but not wholly divested does not revoke such disposition, but the estate in the property that remains in the testator passes to the beneficiaries pursuant to the disposition However, any such conveyance, settlement or other act of the testator which is wholly inconsistent with such previous testamentary disposition revokes it. EPTL 3-4.3. Matter of Hollister, 18 N.Y.2d 585.
DUPLICATE WILLS - LOST AND DESTROYED WILLS A. B. If a will is executed in duplicate original a revocation of one copy is revocation of all. Crossman v. Crossman, 95 N.Y. 145 (1884). If a will is shown to have once been in the testator's possession and it cannot be found after his death, there is a rebuttable presumption that he destroyed it with the intent to revoke it. Matter of Staiger, 243 N.Y. 468 (1926). 1. Rebutting the presumption:
a.
Matter of Mittlestaedt, 280 App. Div. 163, 304 N.Y. 795 (1952): (Duplicate originals executed by T.Upon death, 28 years later, only one counterpart found in his possession. Held: No revocation.) Matter of Sands, 194 Misc. 662 (1949) (Counterpart in possession of testator produced. Duplicate original in attorney's file has disappeared. Held: No revocation.) Matter of Fox, infra. SCPA 1407 - Proof of lost or destroyed will. A lost or destroyed will may be admitted to probate only if: (1) (2) (3) it is established that the will has not been revoked. execution of the will is proved in the manner required for the probate of an existing will, and all of the provisions of the will are clearly and distinctly proved by each of at least 2 credible witnesses or by 1 witness and a copy or draft of the will proved to be true and complete. Matter of Fox, 9 N.Y.2d 400 (1961) (Will destroyed in bombing raid. Copy offered for probate. Held: Copy admitted to probate on satisfaction of requirements of SCPA 1407.)
b.
c. d.
REVIVAL AND REPUBLICATION A. If after executing a will the testator executes a later will which revokes or alters the prior one, a revocation of the later will does not of itself, revive the prior will or any provision thereof. EPTL 3-4.6(a). A revival of a prior will or of one or more of its provisions may be effected by the execution of a codicil which in terms refers to and revalidates such prior will or one or more of its provisions. EPTL 3-4.6(b) (1). 1. A will which is republished by a codicil is deemed to speak as of the date of the codicil. Matter of Greenberg, 261 N.Y. 474. Effect of codicil on intervening instruments. a. Matter of Campbell, 170 N.Y. 84 (Will #1 revoked by will #2. Codicil to will #1 then duly executed. Held: Codicil revives and republishes will #1 and will #2, inconsistent therewith, revoked by implication.)
B.
2.
b.
Matter of Poorman, 211 N.Y.S.2d 440 (Will #1 revoked by complete destruction and will #2 executed. Codicil then executed to will #1. Held: Codicil not effective to revive and republish will #1 since it was no longer in existence at date of codicil and, therefore, it did not constitute a revocation of will #2.)
C.
A revival of a prior will or of one or more of its provisions may be effected by a writing declaring the revival of such prior will or of one or more of its provisions, which is executed and attested in accordance with the formalities prescribed by statute for the execution and attestation of a will. EPTL 3-4.6(b)(2). A revival of a prior will or of one or more of its provisions may be effected by a republication of such prior will, whether to the original witnesses or to new witnesses, in either event, revival by republication requires a re-execution and reattestation of the prior will in accordance with the formalities prescribed by EPTL 32.1.
D.
GIFTS TO CHARITY - EPTL 5-3.3 A. A person may make a testamentary disposition of his entire estate to any person for a benevolent, charitable, educational, literary, scientific, religious or missionary purpose, provided that if any such disposition is contested by the testator's surviving issue or parents, it shall be valid only to the extent of one-half of such testator's estate, wherever situated, after the payment of debts, subject to the following: 1. An issue or parent may not contest a disposition as invalid unless he will receive a pecuniary benefit from a successful contest as a beneficiary under the will or as a distributee. The right to share in any fund or property recovered from a successful contest shall be available solely to such persons as have actually contested a disposition as invalid, and only in the amount they would be entitled to receive had all persons authorized to contest actually contested. The right to contest a disposition as invalid is personal to the issue or parent authorized to contest, except that such a contest may be maintained by the guardian of the property of an infant when authorized by the surrogate having jurisdiction of the testator's estate and by the committee of an incompetent when authorized by a court of competent jurisdiction. An election to contest must be made within 6 months from the date of issuance of letters. The time may be extended before its expiration for a further period not exceeding 6 months upon any one application. If no election has been made within the 6 month period, the default may be relieved by the surrogate provided the executor's account has not been
2.
3.
4.
settled and 12 months have not elapsed since the issuance of letters.
5.
The term "issue" as used in the statute does not include the descendants of any issue who survived the testator and died thereafter. EPTL 5-3.3(b). Matter of Plaster, 293 N.Y. 822. The right to contest an excessive disposition to charity is not available to the issue or parents of a decedent who was not domiciled in this state at the time of death, unless such decedent elects, by provision in his will, to have the disposition of his property situated in this state governed by the laws of this state. Matter of Cairo, 29 N.Y.2d 527 (1971). Will provided "I make no bequest to my grandson J.L. Cairo for good and sufficient reason," and made exceeds disposition to charity. Held: Grandson ineligible to contest-language manifested intent to exclude him from any share in estate.
6.
RIGHT OF ELECTION - WILLS EXECUTED PRIOR TO SEPTEMBER 1, 1966 A. Where a testator leaves a will executed after August 31, 1930 and before September 1, 1966, and leaves a surviving husband or wife, a personal right of election is given to the surviving spouse to take an elective share of the estate. EPTL 5-1.1(a)(1). 1. The elective share of the surviving spouse is one-third of the net estate if the decedent is survived by one or more issue and, in all other cases, one-half of such net estate. In computing the net estate, debts, administration and funeral expenses shall be deducted, but all estate taxes shall be disregarded. a. Elective share and intestate share are not synonymous. Thus, e.g., if decedent survived by spouse and one child or issue of only one deceased child, intestate share is $2,000 plus on-half of the residue. EPTL 4-1.1(a)(2). The elective share is one-third. Rubenstein v. Mueller, 19 N.Y.2d 845 (H and WI made join will pursuant to contract providing that on death of survivor his estate to go to named beneficiaries. WI died. H remarried W2. Upon death of H is estate went to named beneficiaries and W2 had no elective right).
b.
B.
Right of election either general or limited. 1. 2. If surviving spouse is given under will an amount equal to or exceeding elective share, no right of election available. No general right of election available to surviving spouse where corpus of testamentary trust equals elective share and all income is payable to
surviving spouse for entire life. In such case:
a.
If elective share more than $2,500, surviving spouse has limited right to take $2500 which is deducted from trust corpus. EPTL 51.1(a)(1)(B). If elective share not more than $2500, surviving spouse can take elective share absolutely in lieu of testamentary provision for her benefit. EPTL 501.1(a)(1)(C). If will gives surviving spouse $2500 and creates trust of difference between that sum and elective share, income payable to surviving spouse for life, no right of election, general or limited, is available. EPTL 5-1.1(a)(1)(D). If will gives surviving spouse less than $2500 and creates trust of difference between such legacy and elective share, income to surviving spouse for life, surviving spouse entitled to take difference between legacy and $2500, which sum (such difference) is deducted from trust corpus. EPTL 5-1.1(a)(1)(E).
b.
c.
d.
3.
If surviving spouse not entitled to all the income for entire life, of trust created pursuant to B.2., supra, general right of election may be asserted. For example: a. b. c. Trust to terminate on remarriage of surviving spouse. Matter of Rosenzweig, 19 N.Y.2d 92. Corpus of trust for surviving spouse. Matter of Wittner, 301 N.Y. 461. However, a direction to pay to next estate income accrued prior to death of surviving spouse but not yet payable to trustee does not give rise to right of election. Matter of Baileson, 16 N.Y.2d 757. Similarly, direction to pay or apply so much of the net income and principal as the trustees in their discretion deem proper for surviving spouse's support and maintenance does not give rise to a right of election. Surrogate pursuant to supervisory power (see v.c. infra), directs payment of all the income. In re Best's Estate, 308 N.Y.S.2d 930 (1970).
d.
C.
The grant of authority in a will to a fiduciary to act without bond; to name his successor to act without bond; to sell assets of the estate upon terms fixed by him; to invest the funds of the estate of other than legal investments; to retain in the assets of the estate investments or property owned by the testator in his
lifetime; to make distributions in kind; to make a binding and conclusive valuation
of assets for the purpose of their distribution; to allocate assets either outright or in trust for the life of a surviving spouse or to conduct the affairs of the estate with partial or total exoneration from the legal responsibility of a fiduciary, shall not either singly or in the aggregate, give the surviving spouse an absolute right to take his elective share. The surrogate having jurisdiction of the testator's estate, notwithstanding the terms of the will, may, in his discretion, in an appropriate proceeding by the surviving spouse or upon an accounting, direct and enforce for the protection of the surviving spouse an equitable distribution, allocation or valuation of the assets, enforce the liability of a fiduciary and make such other directions, consistent with the purposes of the right of election statute, as he may consider necessary for the protection of the surviving spouse. EPTL 5-1.1(a)(1)(H). D. Right of election is personal to surviving spouse. 1. Exceptions: May be exercised by committee or guardian of incompetent or infant who survives spouse. EPTL 5-1.1(d)(3)(A)(B).
E. F.
The right of election is asserted by serving written notice to that effect within six months after issuance of letters testamentary. EPTL 5-1.1(e). The right of election may be waived during the lifetime of both spouses by a writing, subscribed by the maker thereof and acknowledged or proved in the manner required for the conveyance of real property. EPTL 5-1.1(f). Illusory Transfers - Pre-Sept. 1, 1966 1. If one spouse during his lifetime purports to divest himself of his property, but in reality retains effective control over that property and retains virtually all the attributes of ownership, a court may find that the transfer is illusory and consider such property as still being part of this estate so as to allow the surviving spouse to reach it for the purpose of obtaining her elective share. Newman v. Dore, 275 N.Y. 371 (1937). a. 2. A Totten trust is not necessarily illusory. Halpern v. Halpern, 303 N.Y. 33 (1951)
G.
The following have been held to be not illusory: a. b. A joint bank account or other property held in joint tenancy. Inda v. Inda, 288 N.Y. 315. U.S. Savings Bonds payable on death to a designated beneficiary. Matter of Kalina, 184 Misc. 367, app. dismissed, 270 App. Div. 761 (1946).
c.
The proceeds of insurance. Mitchell v. Mitchell, 265 App. Div. 27, aff'd 290 N.Y. 779 (1943). Conveyance by one spouse of property he owns to himself and another as joint tenants. Kaufman v. Zash, 7 N.Y.2d 831 (1959).
d.
RIGHT OF ELECTION - AS OF SEPT. 1, 1966 A. Testamentary Substitutes - EPTL 5-1.1(b) 1. If a person dies on or after Sept. 1, 1966, and leaves a surviving spouse who exercise right of election under EPTL 5-1.1(c) (infra), the following transactions, effected after the marriage and after Aug. 31, 1966, are treated as testamentary substitutes and the capital value thereof at date of decedent's death shall be included in net elective estate subject to surviving spouse's elective right: a. b. c. Gifts causa mortis. Money deposited after Aug. 31, 1966 in Totten trust and remaining on deposit at date of death. Money deposited after Aug. 31, 1966 in joint bank accounts and remaining on deposit at date of death to the extent that the funds on deposit were the decedent's immediately before the deposit. Any disposition of property by decedent after Aug. 31, 1966 creating joint tenancy or tenancy by the entirety, to the extent that the consideration for the property so held was furnished by the decedent. Any disposition of property by the decedent after Aug. 31, 1966 in trust or otherwise, to the extent that decedent at date of death retained either alone or in conjunction with another by the express provisions of the disposing instrument, a power to revoke, a power to consume, invade or dispose of the principal thereof.
d.
e.
2.
The following are not testamentary substitutes and are not included in the elective estate. a. b. Payments under a pension, retirement, death benefit, stock bonus or profit sharing plan, system or trust. Payments under an annuity or pure endowment contract or policy of
life, group life, industrial life or accident and health insurance.
c. 3. B.
U.S. Savings Bonds payable to a designated person.
Creditors of the decedent shall not be adversely affected.
Right of Election - Decedent Testate - EPTL 5-1.1(c) 1. Where testator leaves a will executed on or after Sept. 1, 1966, and leaves a surviving spouse, a personal right of election is given to surviving spouse, as follows: a. Decedent's elective estate includes: (1) (2) b. Property passing under the will (probate estate), plus Capital value at death of testamentary substitutes.
Elective share is one-third of net elective estate if decedent is survived by one or more issue, and in all other cases one-half, after deducting debts, funeral and administration expenses. EPTL 5-1.1(c)(1)(B). (Term "testamentary provision" as used in c., d., e., f., g., h., and i. below includes all testamentary disposition to s/s, and those testamentary substitutes which confer benefits on s/s at decedent's death).
c. d.
If surviving spouse takes by testamentary provision an amount equal to or exceeding the elective share, no right of election available. If elective share is more than $10,000 and a trust is created by testamentary provision in an amount equal to or greater than the elective share, with all or substantially all income payable to surviving spouse for life, surviving spouse has limited right to elect to take $10,000 which is deducted from trust corpus. EPTL 5-1.1(c)(1)(D). If elective share is $10,000 or less, surviving spouse has right to take elective share absolutely in lieu of any testamentary provision. EPTL 5-1.1(c)(1)(E). If absolute testamentary provision for surviving spouse is less than $10,000 and a trust is created by testamentary provision in an amount equal to or greater than elective share with income payable to surviving spouse for life, surviving spouse has limited right to take from corpus of trust an amount which when added to her absolute testamentary provision equals $10,000.
e.
f.
g.
If all testamentary provisions, including trust corpus, totals an amount less than the elective share, surviving spouse has limited right to elect to take the difference. In every estate, surviving spouse has limited right to withdraw $10,000 (inclusive of any testamentary provision) if elective share is equal to or greater than that amount. Surviving spouse shall have absolute right of election if in any trust created for her benefit: (1) (2) (3) Corpus may be invaded for the benefit of another. Trust may terminate before death of surviving spouse and corpus paid to another. Trustee may pay or apply less than substantially all of the income to the use of the surviving spouse.
h.
i.
j.
If instrument making testamentary provision contains grants of authority to fiduciary other than those in sub-paragraph i. above, the surrogate having jurisdiction of the decedent's estate may, in his discretion, in an appropriate proceeding by the surviving spouse or upon an accounting, direct and enforce for the protection of the surviving spouse an equitable distribution, allocation or valuation of assets, enjoin any fiduciary, whether appointed by will or otherwise, from exercising any power, statutory or otherwise, which would be prejudicial to the interests of the surviving spouse, enforce the liability of a fiduciary and make such other directions, consistent with the purposes of the right of election statute, as he may consider necessary for the protection of the surviving spouse. EPTL 51.1(c)(1)(J).
ILLUSTRATIONS 1. In Oct. 1966 H, with own funds, created joint accounts with W in sum of $90,000. In Nov. 1966 H made will excluding W entirely. When H died survived only by W his net probate estate was $80,000. W has no right of election. a. If joint accounts had been created prior to Sept. 1, 1966, W has elective right to take $40,000 in addition to balance in accounts. Same result if will made in 1965.
2.
H made will in Nov. 1966 leaving everything to W. In Oct. 1966 H deposited $10,000 in joint account of which S, his sister, was co-tenant. In December, 1966 H deposited $15,000 in Totten trust of which B, his brother, was beneficiary. H died in 1968 survived by W and S, a son. His net probate estate was $5,000. Elective estate is $30,000. (testamentary disposition $5,000, testamentary substitutes $10,000 and $15,000) W's elective share is $10,000 (1/3 of elective estate) to which S and B contribute ratably (proportionately). Where decedent dies intestate on or after Sept. 1, 1966, or if partially intestate, with a will executed after such date, and leaves a surviving spouse, such s/s has a right to take same elective share (1/3 or 1/2) of total value of property passing in intestacy, by will, and by testamentary substitute, less debts, funeral and administration expenses. a. The elective share is to be reduced by the value of any testamentary substitute in favor of the surviving spouse and any property passing to the surviving spouse by the will or by intestate distribution. The satisfaction of such elective share shall not reduce the intestate share of any other distributee.
1.
b. ILLUSTRATIONS 1.
H died intestate in 1967 survived by W and C, a child. His net intestate estate was $50,000. In Nov. 1966 H created Totten trust of $150,000 of which M, his mother, is beneficiary. In Dec. 1966, H deposited $50,000 in joint accounts of which W was co-tenant. Elective estate is $250,000 (total of intestate estate and testamentary substitutes) W's elective share is onethird of elective estate, or $83,333.33. Her intestate share of the net estate under EPTL 4-1.1 is $26,000 which, when added to the $50,000 in the joint accounts equals $76,000. Thus, in addition to her intestate share and the joint accounts, W is entitled to receive $7,333.33 from M. C, a distributee, does not contribute (see b. above). W died intestate in 1968 survived only by H. Her net intestate estate is zero. In Dec. 1967 W deposited $50,000 in joint accounts of which S, her sister, was co-tenant. H's elective share is $25,000, to be paid by S.
2.
D.
Generally 1. Right of election not available to spouse of decedent who was not domiciled in New York at time of death, unless decedent has elected to have disposition of his property situated in New York governed by the laws of New York.
2.
Right of election is personal to the surviving spouse, except: a. Election may be made by committee or guardian of incompetent or infant.
3. 4. 5.
Election must be made within six months from date of issuance of letters. Election may be withdrawn if no adverse rights have intervened and creditors or other persons interested in estate are not prejudiced. The right of election may be waived or released during lifetime of both spouses by a writing, subscribed by maker thereof and either acknowledged or proved as required for the recording of a conveyance of real property. The waiver or release may be: a. b. c. d. Executed before or after marriage. Executed before or after Sept. 1, 1966. Executed with or without consideration. Absolute or conditional.
6.
Decedent's estate against which right of election may be asserted shall not include real property of decedent situated outside of N.Y.
DISQUALIFICATION AS SURVIVING SPOUSE - EPTL 5-1.2 A. A husband or wife is a surviving spouse within the meaning and for the purposes of the statutes regulating intestate distribution (EPTL 4-1.1), right of election (EPTL 51.1), revocatory effect of marriage after execution of will (EPTL 5-1.3), exemption for benefit of family (EPTL 5-3.1) and distribution of damages in an action for wrongful death (EPTL 5-4.4) unless it is established satisfactorily to a court having jurisdiction of the action or proceeding that: 1. A final decree or judgment of divorce, annulment declaring the nullity of a marriage or dissolving such marriage on the ground of absence, recognized as valid under the law of New York, was in effect when the deceased spouse died. The marriage was void as incestuous under DRL 5, bigamous under DRL 6, or a prohibited marriage under DRL 8. The spouse had procured outside New York in final decree or judgment of divorce from the deceased spouse, of annulment or declaring the nullity of the marriage with the deceased spouse or dissolving such marriage on the
2. 3.
ground of absence, not recognized as valid under the law of New York.
4.
A final decree or judgment of separation, recognized as valid under the law of New York, was rendered against the spouse and such decree or judgment was in effect when the deceased spouse died. The spouse abandoned the deceased spouse and such abandonment continued until the time of death. A husband failed or refused to provide for his wife, unless such martial duty was resumed and continued until the death of the wife.
5. 6.
DEATH IN A COMMON DISASTER - EPTL 2-1.6 A. Where two or more persons have died in common disaster and there is no sufficient evidence that they have died otherwise than simultaneously, there is no presumption that one survived the other by reason of age, sex, strength, etc. In re Bucel, 293 N.YS.2d 994 (1968). 1. 2. 3. B. Each shall be deemed to have survived with respect to his own property. EPTL 2-1.6(a). Where a life of accident insurance policy is involved the insured is deemed to have survived the beneficiary. EPTL 2-1.6(d). The statutory rules prevail unless the will, trust, deed or insurance policy expressly provides otherwise. EPTL 2-1.6(e).
A person who alleges that one person survived another has the burden of proving it.
LAPSED DISPOSITIONS A. At common law if the beneficiary named in a will predeceased the testator, the disposition intended for him lapsed. 1. Exception - If a disposition is made in discharge of a legal or moral obligation, it will survive the death of the beneficiary before the testator. Matter of Shardlow, 173 Misc. 795 (1940). (Testamentary disposition to testator's doctor in appreciation of past services. Disposition did not lapse when doctor pre-deceased testator, but vested in to doctor's estate.) B. By Statute - EPTL 3-3.3 (the anti-lapse statute)
1.
If a testamentary disposition is made to the issue or to a brother or sister of the testator, and such beneficiary predeceases the testator leaving issue who survive the testator, the disposition does not lapse but vests in such surviving issue, per stirpes. Matter of Macklin, 177 Misc. 432 (1949) EPTL 3-3.3(a). The statute applies to dispositions made to named issue, brother or sister of the testator who die at any time, whether before or after execution of the will. In re Smythe, 314 N.Y.S.2d 887 (1970). The statute applies to a disposition made to issue or brothers or sisters as a class with same effect as if the disposition were to the beneficiaries by their individual names, except that in such case no benefit shall be conferred by the statute upon the surviving issue of an ancestor who died before the execution of the ancestor's will in which the disposition to the class was made. The terms "issue", "surviving issue" and "issue surviving" used in the statute, include adopted children and illegitimate children' for this purpose, an illegitimate is the child of his mother and is the child of his father if he is entitled to inherit from his father under EPTL 4-1.2. (see XXXI infra) The statute does not apply if the testator has made an alternative disposition naming an alternate beneficiary of the disposition in the event the firstnamed beneficiary does not survive the testator.
2.
3.
4.
5.
RESIDUE OF RESIDUE: EPTL 3-3.4 EFFECTIVE SEPTEMBER 1, 1967 When a testamentary disposition of property to two or more residuary beneficiaries is ineffective in part as of date of testator's death, and the anti-lapse statute (EPTL 3-3.3) is not applicable and an alternative disposition has not been made, the ineffective part passes to the remaining residuary beneficiary or beneficiaries ratably. EPTL 3-3.4. Estate of Mahrbrey - N.Y.S.2d - (1970) (T directed that his residuary estate be divided into ten parts, nine parts was to go to A and one part to B. A predeceased T. HELD: T died after the effective date of EPTL 3-3.4, A was neither issue nor sibling of T, and his will did not contain any alternative disposition. Therefore, b took the entire remainder). UNWORTHY HEIRS A. A person who procures the death of another is barred from succeeding to his estate either as a beneficiary under his will or an intestate distributee. Riggs v. Palmer, 115 N.Y. 506 (1889). Ellerson v. Westcott, 148 N.Y. 149 (1896).
1.
This rule applies even though the slayer had no intent to kill and was convicted of manslaughter. Matter of Sparks, 172 Misc. 642 (1939). This rule applies where the slayer was merely adjudicated a juvenile delinquent as a result of the slaying. Matter of Sengillo , 206 Misc. 751 (1954). The rule does not apply, however, where slayer is acquitted on the ground of insanity. Matter of Eckardt, 184 Misc. 748 (1945); In re Lupka, 289 N.Y.S.2d 705 (1968).
2.
3.
B.
Where one joint tenant or one tenant by the entirety slays the other, the property will pass as if the victim had survived the slayer. Matter of Santourian, 125 Misc. 668 (1925). Bierbrauer v. Moran, 244 App. Div. 87 (1935). Matter of Bobula, 19 N.Y.2d 818.
C.
For other grounds barring a person from taking a distributive share where the decedent died intestate. (See EPTL 4-1.4, infra, XXXI, B.)
CLASSIFICATION OF TESTAMENTARY DISPOSITIONS A. General Disposition A general disposition is a disposition of personal property not amounting to a bequest of a particular thing or money, or of a particular fund distinguished from all others of the same kind. Crawford v. McCarthy, 159 N.Y. 514 (1899). See also EPTL 1-2.8 B. Specific disposition A specific disposition is a disposition of a specified or identified item of the testator's property. EPTL 1-2.16. Crawford v. McCarthy, supra C. Demonstrative Disposition A demonstrative disposition is a testamentary disposition of property to be taken out of specified or identified property. EPTL 1-2.3. D. Ademption by Extinction
1.
Unless the subject of a specific legacy exists, unchanged in substance, at the death of the testator, a complete or partial ademption results, depending upon the facts. a. Where insurance proceeds on real or personal property which is the subject of a specific devise or bequest are paid after the death of the testator, such insurance proceeds to the extent they are received by the executor shall be payable by him to the specific devisee or legatee of such property with the incidents of a specific devise or bequest and subject to the usual rules applied in the marshalling of estate assets. EPTL 3-4.5. Matter of Cramm, 275 N.Y.S.2d 769 (Will devised real property and improvements thereon. Insurance proceeds from improvements destroyed by fire occurring prior to execution of will but paid after testator's death belong to residuary beneficiary rather than specific devisee).
2.
Ademption is not depended upon intention. An involuntary conversion such as a condemnation proceeding will work an ademption. Ametrano v. Downs, 170 N.Y. 388. As to wills of persons adjudicated incompetent prior to March 1, 1965: a. A sale of specifically bequeathed personal property by the committee of an incompetent works an ademption. Matter of Ireland, 257 N.Y. 155 (1931). A sale of specifically devised real property by the committee of an incompetent does not work an ademption. RPAPL 1755.
3.
b.
4.
As to wills of persons adjudicated incompetent on or after March 1, 1965: In the case of a sale or other transfer by a committee, during the lifetime of its incompetent, of any property which such incompetent had previously disposed of specifically by will when he was competent, and no order was entered setting aside the adjudication of incompetency at the time of such incompetent's death, the beneficiary of such specific disposition is entitled to receive the money or other property into which the proceeds from such sale or transfer may be traced. EPTL 3-4.4 and RPAPL 1755.
5.
General and demonstrative legacies are not subject to ademption by extinction. In re Peters' Estate, 224 N.Y.S.2d 305 (1962).
ADVANCEMENTS AND ADEMPTION BY SATISFACTION - EPTL 2-1.5 A. An advancement is an irrevocable gift intended by the donor as an anticipatory distribution in complete or partial satisfaction of the interest of the donee in the donor's estate, either as distributee in intestacy or as beneficiary under an existing will of the donor. No advancement shall affect the distribution of the estate of the donor unless proved by a writing contemporaneous therewith signed by the donor evidencing his intention that the gift be treated as an advancement or signed by the donee acknowledging that such was the intention. When so proved, the advancement is part of the estate of the donor for the purpose of distribution. If such advancement is equal to or greater than the interest may not share in the distribution of the estate; but if less than such intestate share or testamentary interest, the donee or his successor in interest may take his intestate share or testamentary interest reduced by the amount of the advancement.
B.
C.
CONDITIONAL DISPOSITIONS A. B. Conditions are valid unless they are too indefinite, offend a statute or are contrary to public policy. Particular Conditions 1. 2. 3. Conditions in total or unreasonable restraint of marriage are void. Matter of Liberman, 279 N.Y. 458 (1939). Conditions in partial or reasonable restraint-of marriage are valid. Matter of Seaman 218 N.Y. 77 (1916). Conditions in restraint of remarriage of a surviving spouse are valid. a. 4. 5. Conditions in restraint of re-marriage of a stranger are void. Matter of Dettner, 289 N.Y. 597 (1942).
Conditions tending to induce divorce or separation are void. Matter of Haight, 51 App. Div. 310 (1900). Conditions against will contests are generally sustained. EPTL 3-3.5(b). a. An infant or incompetent may contest a will without fear of forfeiture.
C.
Effect of Conditions 1. A condition qualifying a disposition of property (whether real or personal) is operative despite the failure of the testator to provide for an alternative gift to take effect upon the breach or non-occurrence of such condition. EPTL 3-3.5(a).
RENUNCIATION A. Testamentary Beneficiaries 1. A legatee or devisee has a reasonable time after the testator's death within which to renounce the legacy or devise. Albany Hospital v. Albany Guardian Society, 214 N.Y. 435 (1915) Matter of Wilson, 298 N.Y. 398 (1949). The right of renunciation may be exercised in person or by a personal representative. No particular formality is required. Renunciation may be in writing, orally or by conduct. Renunciation relates back to the death of the testator. a. Renunciation will prevent creditors of the beneficiary from reaching the property. Matter of Wilson, 298 N.Y.398 (1949).
2. 3. 4.
B.
Intestate Distributees - EPTL 4-1.3 1. An intestate distributee may renounce all or part of his share and the renunciation shall have the same effect as though the renouncing distributee pre-deceased the decedent. The renunciation is retroactive to the date of the decedent's death, but it affects the distribution of the renounced share only and shall not operate to decrease the share of any other distributee. The renunciation must be in writing, signed, acknowledged and filed in the appropriate surrogate's court within 6 months after letters of administration have been issued. a. A renunciation in behalf of an infant, an incompetent or a deceased person shall be made by the guardian, committee or personal representative who must first have obtained authority to renounce by the court having jurisdiction of the estate of the infant, incompetent or deceased.
2.
3. 4.
If the intestate distributee has accepted all or part of his share, he may not thereafter renounce it. A renunciation may be revoked and cancelled only by order of the surrogate and in his discretion.
MISCELLANEOUS A. Adopted and Posthumous Children - EPTL 2-1.3 1. Unless the creator expresses a contrary intention, a disposition of property to persons described in any instrument as the issue, lawful issue, children descendants, heirs, heirs at law, next of kin, distributees (or by an term of like import) of the creator or of another, includes: a. b. 2. B. C. Adopted children and their issue. Children conceived before, but born alive after such disposition becomes effective.
The statute applies to inter vivos as well as testamentary dispositions.
Distributees of intestate, conceived before his death but born alive thereafter take intestate share as if born in intestate's lifetime. EPTL 4-1.1(e). For purposes of intestate distribution, intestate's relatives of half-blood take as if they were relatives of the would blood. EPTL 4-1.1(d).
INTESTATE SUCCESSION A. Inheritance by and from illegitimate persons - EPTL 4-1.2 Eff. March 1, 1966. 1. For the purpose of intestate distribution: a. b. An illegitimate child is the legitimate child for his mother so that he and his issue inherit from his mother and from his maternal kindred. An illegitimate child is the legitimate child of his father so that he and his issue inherit from his father if a court of competent jurisdiction has, during the lifetime of the father, mad an order of filiation declaring paternity in a proceeding instituted during the pregnancy of the mother or within two year from the birth of the child. The existence of an agreement obligating the father to support the illegitimate child does not qualify such child or his issue to inherit from
c.
the father in the absence of an order of filiation made as prescribed above.
d.
No order shall be sufficient to relieve the putative father unless the motion to relieve from the effect thereof is made by the putative father and is made not more than one year after the entry of such order.
2.
If an illegitimate child dies, his surviving spouse, issue, mother, maternal kindred and father inherit and are entitled to letters of administration as if the decedent were legitimate, provided that the father may inherit or obtain such letters only if an order of filiation has been made in accordance with this statute. Constitutional questions a. Statutory scheme of EPTL 4-1.2, excluding illegitimate from intestate share of father's estate in absence of filiation order, seemingly constitutional. Labine v. Vincent, 401 U.S. 532 (construing La. statute preferring legitimate over illegitimate for intestate share of father's estate.) EPTL 5-4.1 and 5-4.4, permitting distributees only to share in proceeds of wrongful death action, may not constitutionally exclude father of illegitimate, despite absence of filiation order, where he openly acknowledged and reared her. Holden v. Alexander, 39 App. Div. 2d 476 (1972).
3.
b.
B.
Disqualification of Parent to Take Intestate Share - EPTL 4-1.4 1. Nodistributive share in the estate of a deceased child shall be allowed to a parent who has failed or refused to provide for, or has abandoned such child during infancy, unless the parental relationship and duties are subsequently resumed and continue until death. In the event that a parent is disqualified from taking a distributive sharer, the estate of the decedent shall be distributed in accordance with EPTL 4-1.1 as though such parent had predeceased the decedent.
2.
C.
See accompanying charts.
6/79
Chapter 42 - Page 1 WILLS - CONSTRUCTION Joint Will Memo
FACTS Elizabeth K. Pennington took title to the subject lands by deed dated 6/27/46 liber 5219 p 667. Robert C.C. Pennington and Elizabeth, his wife, executed a joint will on 8/30/49. Following the death of Elizabeth, on 11/18/62 the aforesaid will was duly admitted to probate by the Surrogates Court of Queens County. The estate proceeding show the testatrix to be survived by her husband, a stepson and Robert C. Pennington, Jr., a son of (the) decedent, believed to be mentally incapable of adequately protecting his rights. He was not an adjudicated incompetent at this time. Paragraph second of the joint will devises unto each other (the survivor) the residuary estate. I believe It is significant to note that paragraph second does not specifically vest in the surviving spouse an absolute estate in fee. The devise may be of a precatory nature Paragraph third provides a trust for the care of Robert Jr. QUERY In conjunction with paragraph second's failure to devise "absolutely and forever" was it the intention of the testatrix that paragraph third and the trust should survive the death of the husband? Robert C.C. Pennington executed a new will on 8/14/78, the terms of which differ significantly from the "apparent" intent of provisions of the aforesaid joint will. Thereafter, Robert C.C. Pennington died 4/2/79. The later will was duly admitted to probate without objection on 4/6/79 by the Surrogates Court of Queens County. The proceedings show that Margaret A. Rie, Esq. on 3/15/79, was appointed Guardian-at-Law for Robert Pennington Jr., and incapacitated person. By virtue thereof she became a party to the proceedings. Thereafter, letters of administration were granted to the executor of the latter will of Robert Sr. We are asked to insure a deed out of the executor. The Guardian-at-Law consented to the sale. QUESTION Are the proceedings and the proposed sale proper and could they be either (i) set aside at some future date and/or (ii) a trust imposed upon the assets? OPINION A joint will is defined as an instrument where "the common intention is expressed in one instrument which is signed and executed by both parties (Page on Wills, 85, 2d Ed.)" Old English common law held joint or mutual wills were irrevocable except by the joint act of both parties. This interpretation has been revised by our courts. A joint or mutual will might be revoked by either of the testators as to his own estate by a later will (Page, supra). However, the will is irrevocable by the survivor after the death of the other if the
survivor accepts any benefits given him by the joint will (Curry v. Cotton, 191 N.E. 307;
6/79
Chapter 42 - Page 1 WILLS - CONSTRUCTION Joint Will Memo
see also Tiffany, Real Property, 6 volume edition 1093). A joint will of husband and wife constitutes an irrevocable contract when one dies and it is probated; it will be enforced against (an) executor and beneficiaries of (a) subsequent will made by the survivor (Elwyn V. Comeau, 8 misc. 2d 704, ; affirmed 5 AD 2d 748; see also Warren Weed, Volume 6, Wills 6.04 and 10.31). Where such an agreement was made . . . and the wife (survivor) . . . . thereafter made a second will, . . . . revoking her first will . . . . (the aggrieved party) may maintain an action for specific performance of the contract between husband and wife, and the statute of frauds is not a bar to such action (Morgan v. Sanborn, 225 N.Y. 454). There is sufficient law to raise the question as to whether the will is in form a contract. The law is clear that the construction of a will must be determined from the dispositions it makes. However, it must also be considered in its entirety and from the four corners. The joint will obviously made provisions for the mentally retarded son. It was a manifest intent. I do not believe Elizabeth contemplated that her husband would thereafter change and attempt to rescind the joint will by making another, which latter will made no provision whatsoever for Robert Jr., now and abjudicated incompetent. For that reason, I believe the joint will was a contract with deliberately did not vest absolute title in the surviving spouse. In accordance with the above, I believe the findings in the case entitled In the matter of Diez, 50 NY 88, would not apply. I believe our exposure to litigation at some future date is greatly enhanced if we do not go behind the Surrogate Court proceedings and investigate the matter further, especially if Robert Jr. eventually becomes a ward of the state. I believe the Guardian-at-Law could (i) plead fraud down the road, claiming (ii) Robert Sr. usurped his authority as executor of Elizabeth's will; (iii) make application before the court and sue in equity to have those who take title under will of Robert Sr. (second will) held as constructive trustees and in the same pleading claim either (iv) she is entitled to recover the property under said joint will or (v) in the alternative, seek a judgment impressing a trust on the assets of the estate of Robert Sr. and (vi) demand an accounting of any assets received. Mr. Scharfenberger has instructed me to forward this matter to you and I should like your opinion. Reply from the Chief Counsel, Mr. Rifkin. Mr. Hart: You are correct. Unless the issue, i.e., the Joint Will, was before the Court do not pass. Check the Guardian's Report. Subsequent Notes: see Glass v. Battista, 56 AD2d 806, aff'd 43 NY2d 620 see Matter of Satterlee, Recent Decisions vol. 34 no. 5, 9-18-70 p 21 col.2 see Recent Decisions vol. 43 no.1 p.8. Joint and Reciprocal - wills which forbade
revocation; survives divorce.

Ny Title Insurance

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Ny Title Insurance

Transféré par

Droits d'auteur :

Formats disponibles

LAW OF TITLES IN NEW YORK AND

COMPENDIUM OF REAL PROPERTY TITLE LAW

CHAPTER 5 REAL ESTATE TITLES

CHAPTER 7 REAL ESTATE TITLES

CHAPTER 15 & 26 REAL ESTATE TITLES

MARKETABILITY OF TITLE MECHANICS LIENS MINES AND MINERALS

CHAPTER 24 REAL ESTATE TITLES

CHAPTER 20 REAL ESTATE TITLE CHAPTER 8 REAL ESTATE TITLES

29A. OPTIONS 30. PARTNERSHIPS CHAPTER 27 REAL ESTATE TITLES

30B. POLICIES AND ENDORSEMENTS 31. POWER OF ATTORNEY

Biography William C. Hart

DETAILED SUMMARY OF CONTENTS

ABUTTING WALLS ACCRETION & AVULSION

ACCRETION AND AVULSION ACCRETION AVULSION EROSION CHAPTER 2

PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE PAGE 1

PAGE PAGE 1 PAGE 1 PAGE 1

PAGE PAGE PAGE PAGE PAGE PAGE PAGE PAGE DATE 1 2 3 3 3 4 4

PAGE 1 PAGE 1 PAGE 1

PAGE 1 PAGE 2 PAGE 3 PAGE 4 PAGE PAGE 1

PAGE 1 PAGE 1 PAGE 2 PAGE

PAGE 1 PAGE PAGE PAGE PAGE PAGE PAGE

BUILDING LOAN AGREEMENTS

PAGE 1 PAGE 1 PAGE 2 DATE LEGAL BULLETIN 10/79

BUILDING LOANS-SURVEY EXCEPTIONS

DATE LEGAL BULLETIN 8/79

ABANDONED CEMETERIES CHAPTER 6

PAGE PAGE 1 TITLE PAGE PAGE 1 PAGE 2 PAGE 4

COMMUNITY PROPERTY CHAPTER 7

JOINT TENANCY TENANCY BY THE ENTIRETY TENANCY IN COMMON CHAPTER 7A

PAGE PAGE 1 PAGE 2

PAGE PAGE 1 PAGE 1

PAGE PAGE 5 PAGE 5 DATE

LEGAL BULLETIN 6/79

PAGE 2 PAGE 2 PAGE 2

CERTIFICATION OF TITLE IN A CORPORATION

PAGE 3 PAGE 4 PAGE 4

CORPORATIONS 3 RELIGIOUS CORPORATIONS LAW

DATE LEGAL BULLETIN 8/79

CORPORATIONS 3.1 RELIGIOUS CORPORATIONS DISPOSITIONS RESEARCH OPINION

CORPORATIONS 4 NEW YORK CITY CORPORATION TAX

PREFERENCES FRAUDULENT CONVEYANCES CREDITOR'S RIGHTS

PAGE PAGE 23 PAGE 27 PAGE 28 PAGE PAGE PAGE PAGE 28 29 30 30

FEDERAL ESTATE TAX NEW YORK ESTATE TAX

PAGE 1 PAGE 1 LEGAL BULLETIN 8/79

PAGE 1 PAGE 2 DATE LEGAL BULLETIN 8/79

PAGE PAGE 1 DATE

DECEDENTS ESTATES 7 WILLS, FOREIGN

LEGAL BULLETIN 8/79 DATE LEGAL BULLETIN 8/79

PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 PAGE 2

PAGE 1 PAGE 2 DATE

INTRODUCTION FACT SCENARIO CHAPTER 11 DEEDS OF CONVEYANCE ESCROW DEEDS- RELOCATION

PAGE PAGE 3 PAGE 3

AS TO HEDGES AS TO WALLS - POSSESSION WALL, RETAINING WALLS

PAGE PAGE 1 PAGE 1 PAGE 1 PAGE 2 PAGE 2 DATE

LEGAL BULLETIN 11/79 CHAPTER 14

PAGE PAGE PAGE PAGE PAGE DATE 1 1 1 4

PRIOR TO BOARD OF COUNSEL MEMORANDUM

PAGE PAGE 1 PAGE 1 PAGE 2 PAGE

EXECUTORY CONTRACT FEDERAL LIENS

LEGAL BULLETIN 8/91 CHAPTER 19

PAGE PAGE 1 PAGE 2 PAGE 2 DATE

LEGAL BULLETIN 8/79 PAGE 1 PAGE 1 PAGE 1 PAGE 1

PAGE 2 PAGE 2 PAGE 3 DATE

LEGAL BULLETIN 8/79 FORECLOSURE 3 SERVICE OF SUMMONS ON CORPORATION DATE