From Barns to Big Boxes Redux 2012 New Laws, New Economy

Transcription

1 From Barns to Big Boxes Redux 2012 New Laws, New Economy Foreclosures & Deeds in Lieu of Foreclosure 3 CRITICAL TIMES To Analyze Title, Development and Title Insurance ORIGINAL DEVELOPMENT LAND ACQUISITION & LOAN FORECLOSURE OR DEED IN LIEU POST FORECLOSURE SALE TO NEW DEVELOPER(S) OR LOT PURCHASERS

2 Options Deed in lieu Power of sale foreclosure Judicial sale ANSWER DEPENDS ON: Intervening liens or other interests Development documentation problems Quality of initial loan documentation Possibility of cures under any of these options Foreclosure vs Deed In Lieu Foreclosure Statutory court procedure Typically Non judicial Special Proceeding Equity of Redemption ends Subordinate matters extinguished as liens Not clear prior matters Priority deeds of trust Spousal Interests Mechanics liens that relate back prior to DOT recording Deed in Lieu Quicker Cheaper Heavily scrutizined postclosing (duress, adequate consideration) Not clear prior OR intervening / subordinate matters Junior deeds of trust Judgments Mechanics liens HOA dues

3 RECOMMEND NEW OWNER S POLICY FOR GRANTEE OFDEED INLIEU Owner coverage (not just loan) first loss, not just debt cap after exhaust remedies Vesting in new owner Insured Update of title through deed in lieu of foreclosure Coverage / exceptions intervening matters Satisfaction (or not) or satisfactory foreclosure of deed of trust LENDER vs. OWNER POST FORECLOSURE OR POST DEED IN LIEU Continuation of Coverage Holds note with outstanding balance Owns the property per foreclosure or deed in lieu Has liability under warranties (rare because lenders give non warranties or special warranties) or took back purchase money note from new purchaser (but doesn t insure that purchase viability or priority or enforceability) Loss calculation Lender must realize the loss (liquidate collateral) The Marble Bank Insured Lender or affiliate Assignee of note Assignee of bid (need Additional Insured endorsement or new policy) Defenses against the original Insured remain Effective Date not post policy matters: Compliance foreclosure proceeding Notice to owners, IRS or others required No extinguishment of subordinate liens in Deed in Lieu Authority of debtor to convey deed in lieu Are post policy advances even covered under the particular policy?

4 Lender s Loss Foreclosure: The Marble Bank case Lender did not suffer a loss until it foreclosed on the project. Since a lender suffers loss only if the note is not repaid, the discovery of an insured against lien does not trigger recognition of that loss. Only the completion of foreclosure signifies that a lender will not collect on its note. Moreover, as is typical, plaintiff selected the foreclosure date, thereby controlling to the extent possible the amount of its loss. In this case, the lender had insured a third mortgage. The court ultimately found that since the project was not worth enough to cover the balances on the first and second mortgage, any loss by the lender due to contractor s liens with priority was not because of those liens but because the project itself was not of sufficient value to consider the third mortgage secured at all. Title Insurance: Coverage vs Exception Standard coverages for title matters EXAMPLES: Access Specific property described the Land Ownership Affirmative coverages specifically crafted based on the situation Affirmative coverage continuing loan policy coverage (limitations) in postforeclosure owner s policy Exceptions Does not imply affirmatively covered EXAMPLES: Plats Declarations (incl. HOA dues, easements, ARC) Easements Any matters that cannot clearly be identified as no longer applicable Survey matters, especially post closing changes Exclusions from Coverage Matters known and not disclosed to title insurer (from lender relationship with borrower) Matters suffered, assumed or agreed by insured (consents, reviews)

5 Creditors rights coverage NOT on this transaction to be insured (if not caused by delayed or ineffective recording) DOES apply for prior transactions RECOMMENDATION: Pre approval by title insurer counsel of deed in lieu (obligation forgiven) or foreclosure (high bid) Within last 4 years VS. FMV of property (current appraisals) CAUTION: Cancellation of Indebtedness Income I.R.C. Sec. 61(a)(12), Sec. 108, Sec. 1017: Cancellation income taxable at ordinary rates (some exclusions reduce basis in other property) Federal exclusion for primary residence until 12/31/2013 Form 1099-C (Cancellation of Debt) Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) Publications

6 DEEDS IN LIEU OF FORECLOSURE Different from a Foreclosure Different Risks to Assess

7 Deeds in Lieu of Foreclosure Deeds in Lieu ( DIL ) Conveyance by mortgagor/borrower to the beneficiary under the deed of trust Debt forgiven Usually all secured property, but not always Why Done Borrower in default Debt undersecured value of property less than debt Avoid foreclosure expense Allow a loan workout Can be part of bankruptcy plan CONTRAST: Deeds in Lieu of Foreclosure will NOT extinguish intervening matters WILL be subject to intervening matters not cleared at DIL closing

8 NEW OWNER S POLICY: Title Requirements Warranty Deed from borrower giving deed in lieu of foreclosure (DIL) to proposed grantee reciting a fair and adequate consideration, a portion of which is satisfaction of the indebtedness (or forgiveness of personal liability for debt) evidenced by the Deed of Trust. (Possibly anti merger exception to DOT with covenant not to sue) Satisfactory evidence or estoppel affidavit/indemnity that: DIL was given for adequate consideration (with some indication of value, whether appraisal or otherwise, and balance of outstanding debt forgiven), DIL was free of fraud, undue influence, coercion, oppression or duress, No other agreements, oral or written Grantor was not insolvent or rendered insolvent by the transaction Grantor surrendered possession of the Land, and Deed of trust has been canceled of record. Attorney s title opinion through the DIL transaction, addressing all normal title matters, such as: INTERVENING or SUBORDINATE LIENS OR INTERESTS Marital rights Mechanics Liens NOTIFY THE TITLE COMPANY IF POSSIBLE DEED IN LIEU IN CHAIN OF TITLE WITHIN LAST 4 YEARS!!! Deed stamps on deeds It is professional misconduct for a lawyer to engage in conduct involving dishonesty, fraud, deceit, or misrepresentation. Rule 8.4(c). Members of the public regularly rely upon the information about the price of real property that can be derived from tax stamps on recorded instruments. Therefore, a lawyer may not counsel or help a client to put excess tax stamps on an instrument when it is recorded with the register of deeds because such conduct involves dishonesty and misrepresentation FEO 12

9 Overcoming DIL Challenges Borrower not in possession Lack of consideration Release of personal liability Cancellation of debt Cancellation of deed of trust Covenant not to sue; release of Personal liability Transfer tax stamps on deed & recitals in deed Appraisal or evidence of value of the property Given under duress, coercion Clogging equity of redemption Recitals that voluntary, arms length, reasonable value Preferential or fraudulent transfer Re characterization as equitable mortgage Fraudulent Transfers Sec. 548 (a) (1)(B) Bankruptcy trustee possesses power to void any transfer by debtor-transferor for less than reasonably equivalent value Made while insolvent, engaged in a business having unreasonably inadequate capital, or intended to incur debts beyond its ability to pay. Transfer can encompass a mortgage or foreclosure a/w/a deed in lieu of foreclosure. Time frame: 2 years before date of Petition Also NC Fraudulent Transfers Act, NCGS Up to 4 years Bankruptcy Trustee may take advantage of state law

10 Preferences Under Bankruptcy Code Sec. 547 Transfer to a creditor 1. made on account of an antecedent debt 2. while debtor is insolvent, 3. enabling that creditor to receive more than it would under bankruptcy (i.e. prejudice to other creditors) 4. incurred by the debtor prior to filing a bankruptcy petition. Transfer made within ninety (90) days of the filing Petition within one (1) year if the transferee is an insider. Must record within 30 days (deemed at time of transfer. Covered Risk 9(b) Owners Policy & 13(b) Loan Policy Non-Merger: Keeping the Deed of Trust Outstanding In case need to foreclose to clear title Typically, Grantee is SPE of noteholder Grantee new owner s policy Adequate consideration (since no deed of trust satisfaction) Provision in Deed In Lieu Loan policy endorsement

11 Anti-Merger: Deed Provision Exception must be stated expressly in DIL to avoid merger of ownership & lien interests: Title to the land described here is subject to a deed of trust dated, secured indebtedness in the amount of $ executed by Grantor in favor of Trustee for the benefit of Beneficiary, recorded in Book, Page, County Registry. Grantee is the holder of the entire beneficial interest under said deed of trust. Grantor and Grantee intend that the lien of the deed of trust remain a valid lien on the land described herein after the delivery and recordation of this Deed. The lien of the deed of trust will not merge into Grantee s title to the land described herein. Grantee reserves the right to extinguish the lien of the deed of trust by foreclosure or otherwise. Grantor has no rights to control approve or pass upon the manner in which Grantee subsequently disposes of the Land. Anti-Merger: Add l Provision Notwithstanding the fact that Grantor may be indebted to Grantee or an affiliate of Grantee, or that Grantee or an affiliate of Grantee may have or acquire, directly or indirectly, an interest in one or more liens or encumbrances affecting title to the property conveyed herein: This deed is intended as an absolute conveyance rather than as security for any obligation, Grantor expressly waives any statutory, equitable or other right to redeem any interest in the property conveyed herein, This deed shall not result in the merger of any such lien or encumbrance with the title conveyed hereby, or in the subordination or extinguishment of any such lien or encumbrance in favor of any other lien or encumbrance, and Grantor has no rights to control approve or pass upon the manner in which Grantee subsequently disposes of the Land.

12 Anti-Merger: Loan Policy Endorsement The Company hereby insures the owner of the obligation(s) secured by the Mortgage referred to in Paragraph of Schedule A against loss which the Insured shall sustain by reason of the invalidity or unenforceability of the lien of the Mortgage upon the estate or interest referred to in Schedule A occasioned by the title to the Land being vested [select Option 1 or Option 2 below]: Option 1: as shown in Paragraph of Schedule A Option 2: in [name grantee of deed in lieu] NOTE: A new Owner s Policy is required!!! Additional concerns Grantor has no rights to control approve or pass upon the manner in which Grantee subsequently disposes of the Land. Release of lender from lender liability & other claims Environmental concerns Subordinate (potential or actual) liens or interests Due diligence, as with any arms-length purchase (leases, insurance, personal property / taxes, CAMA) NO PRE-SALES BY LENDER/GRANTEE!! G.S. 22-2: Statute of Frauds, Contract for Sale of Land G.S. 22-5: Statute of Frauds, Commercial Loan Commitment DOCUMENT! DOCUMENT! DOCUMENT!

13 FOCUS TODAY: Title Issues in Distressed Development Foreclosure VIEWING THIS WITH A WHOLE NEW EYE!!! Quality & Consistency of Development Documents Quality of loan documentation

14 Foreclosure Abstracts Long Form Short Form Parties Lender or SPE own? Assignment of Bid vs. Assignment of Note in Foreclosure Noteholder? PROVE IT Dobson v Substitute Tr. Servs., Inc., GET THE ENTITIES RIGHT!!

15 Post foreclosure Risks Sanitation liens On this property On all property Cities/counties looking for back tax discoveries Business personal property taxes HOA dues (or even complete foreclosure) Transfer of Special Declarant s Rights Tacking and prior owner ( buyer ) judgments & liens not checked FHA Anti Flipping Seasoning Waiver Arms length contract no identity of interest between parties Seller holds title individual or "established" legitimately formed & operated LLC, corporation or trust No previous flips of property within past 12 months Marketed openly through MLS, auction, FSBO If the proposed price exceeds the seller s acquisition price by 20% or more: second appraisal evaluating legitimate renovations and repairs by seller or other sufficient explanation independent detailed inspection (not just of the repairs and renovations, but the entire structure)

16 Fannie Mae Anti Flipping Seasoning REO Investor Deed Restrictions Grantee herein shall be prohibited from conveying captioned property to a bona fide purchaser for value for a sale prices of greater than ($ =120% of sales price) for a period of one hundered [sic] and eighty (180) days from the date of this deed. Grantee shall also be prohibited from encumbering subject property with a security interest in the amount greater than ($ =120% of sales price) for a period of one hundred and eighty (180) days from the date of this deed. These restrictions shall run with the land and are not personal to grantee." Searching Owner Issues (again) Judgments in favor of US PMDT Preempted under US Code IRS Tax Liens Slodov case No instantaneous seisin for construction loans Information may affect vesting Use of entity or T by E Subordinate matters potential problems for sale or refinance Lack of competency to hold title Broker liens

17 Maintenance Liens (GS 160A 193, 228, 233, and 443) Mowing, trash pickup Public Nuisance Removal of building or dwelling prejudicial to public health & safety Property vacant for a while Often not yet filed Have super priority Maintenance Liens (GS 160A 193, 228, 233, and 443) Cost of repairs, alterations improvements, vacating, closing, removal or demolition shall be: (1) a lien against the real property with same priority as a special assessment and (2) a lien on any other real property of the owner located within the city limits or within one mile thereof except for the owner's primary residence (a) The expense is a lien on the land or premises where the nuisance occurred with the same priority as unpaid ad valorem taxes. (b) The expense of the action is also a lien on any other real property owned by the person in default within the city limits or within one mile of the city limits, except for the person's primary residence, is inferior to all prior liens and shall be collected as a money judgment.

18 Post Foreclosure you represent Bloomberg Graphic?? another developer hoping to take over the development remaining lots & undeveloped future phases group lot builder buyer to build on or complete a partially completed house single lot purchaser for investment single lot/home residential purchaser lender high bidder at foreclosure, or their assignee of loan? Of high bid at foreclosure? Your client needs A minor variance waived. Plans & specs approved for proposed construction. Access through common areas of a prior phase. Amendment / clarification to the restrictions for existing violations or needed improvements. Annexation rights for additional phases to be built on undeveloped parcels Ability to create a valid HOA & enforce the restrictions or to assure HOA officers, directors, budgets & procedures in place for financial viability Utility access Compliance with evolving lender regulatory requirements

19 On the flip side The foreclosure process may be a good time to cleanup development errors or problems and purge problems from the title. Problem declarations or amendments without lender consents Defective plats Intervening mechanics liens, especially on common elements Subordinate interests Inappropriate or inexact easements Again, it will be especially important to review ALL documents related to both the development and the loan, even earlier phases which may be sold out but may be your source of access or require communication with the owner s association for annexation. What do Deed of Trust, Loan Agreement & other recorded & unrecorded closing documents address? All right title and interest to the Land & appurtenant interests (save & except released parcels) CONTRAST: Just individual units General, nonspecific assignment Development rights Declarant rights All rights under the Declaration Specific itemization Consent to Declaration, Future Annexation Liabilities for common areas / improvements

20 Checklist: Development Documents Declarations REO Buyer NEEDS Special Declarant Rights GS 47F (min) or GS 47C (detailed) Get developer to assign declarant rights, even though they are no longer involved Problem: They won t cooperate They are in bankruptcy They are dissolved or otherwise gone Real Estate Title rights (insurable) vs. benefits (not insurable)

21 Development Status (or The Importance of Knowing What s There) Only one lot sold Half of lots sold already 75% of lots sold already Multiple phases already with different lenders and different foreclosures Access only through earlier phases Developer uncooperative Multiple purchasers of groups of lots Phased purchase of groups of lots or tracts Legal Description of Property Foreclosed Entire development tract(s) mortgaged Save and except released properties (deed references) Together with appurtenant easements Together with important appurtenant rights Subject to provisions restrictions, plats, easements and other benefits/burdens to be preserved (whether or not earlier consents filed) NOT JUST residual units remaining Which limits your ability to correct ambiguities Were undeveloped tracts shown as: unplatted or undeveloped areas? specifically reserved for future development? for particular use (such as beach, golf course, clubhouse or private road )? common elements?

22 Plats & More Plats Plats & More Plats CA G.S. 47C sets forth detailed requirements for condominium plat. With regard to ongoing special declarant and development rights: (b) Each plat or plan or combination thereof must show: (10) Any unit in which the declarant has reserved the right to create additional units or common elements. (c) A plat may also show the intended location and dimensions of any contemplated improvement to be constructed anywhere within the condominium. Any contemplated improvement shown must be labeled either "MUST BE BUILT" or "NEED NOT BE BUILT". (d) Upon exercising any development right, the declarant shall record either new plats and plans necessary to conform to the requirements of subsections (a), (b), and (c) or new certifications of plats and plans previously recorded if those plats and plans otherwise conform to the requirements of those subsections. PCA The NC Planned Community Act has no such provisions. See G.S , however.

23 Common Elements & Amenities G.S. 47C & Proposed G.S. 47F Does the lender purchaser have the obligation to complete? Does the lender purchaser have the authority to complete? Shared facilities? Conveyed to HOA?

24 Access Direct? Over common elements HOA does not own? Over common elements of a prior phase, to which buyer cannot annex? Can buyer / does purchase comply with subdivision development ordinances applicable? Mechanics liens for construction of common areas? Over common elements for which buyer cannot change use (golf course, for example)? Vertical (elevator shafts, stairs) Horizontal (reserved rights in private roads) Access (more) Define the rights of access (pedestrian, private, public, prior phases, utilities). Identify the specific easement agreements, plats, declarations, deed appurtenances or other sources of title to the easement, rights of others and fee title holders. Is that easement assignable? Appurtenant? A license? Reserved only for owners in earlier phases of the development? Who owns the fee the association, other unit owners (condominium)? Were the easements as created clearly intended (per recorded documents) to benefit the property to be insured? What changes in development create risks of contest and litigation?

25 Negotiations with the HOA Are you dealing with the correct entity? Are they correctly formed? Do they have the authority (required formation, meeting and votes) to even negotiate with you? HOA Dues GS 47F & GS 47C (b) & (f) WARNING: Many HOA counsel assert that the lien starts when right of redemption expires on foreclosure proceeding. PRACTICE NOTE: Foreclosure of the mortgage or deed of trust only extinguishes the portion of the liens which became outstanding and for which no claim of lien had been filed prior to the recording of the deed of trust, through the actual sale or transfer through the foreclosure. In situations of delayed filing of the Substitute Trustee s deed, the closing attorney must be extremely careful to assure that the Association is bound by the amount paid at the attorney s closing to assure that the purchaser is not later charged with a recalculated amount due to the delay in recording.

26 Stressed Associations & Developer s Liability for HOA Dues PCA CA What if the HOA can t function otherwise? Even if not yet a lien, common element charges will absorb (i.e. increase for viable owners) to cover shortages Exclusion in owner s title policy (no affirmative coverage) Obtain statement of amount owed from HOA; resolve prior to closing Quandary of when lien attaches: Expiration of equity of redemption/final upset bid period Recordation of trustee s deed Front door / backdoor if don t collect now, will be included in pro rata shares for future years when HOA has a shortfall At the end of the day, owners of units (whether purchasers from lender or individual unit/lot purchaser) will absorb shortages in the HOA budget and costs! Other Easements, Liens & Encumbrances

27 Non Record Matters Parties in Possession, or The Importance of Knowing Who s There Unrecorded leases Recorded leases Licenses Co owners Subordinations Contractors Unknowns