John N. Redding
Mr. Redding recently returned to private practice and is now serving as the principal of John Neil Redding, P.A. in Tampa, Florida. His areas of practice include real estate, probate, estate planning, wills and trusts, and business and personal affairs. Until November 2008, Mr. Redding served as Associate Counsel - Underwriting with First American Title Insurance Company. Mr. Redding has been involved in the title insurance industry for more than 20 years in various capacities.
The Impact of the Crumbling Real Estate Market on Title Insurers: Is There Any Money Out There?
We are all aware of the present market conditions. Everywhere we turn we are constantly reminded that our economy is in dire need of resuscitation. Recent developments in the title insurance industry have raised concern among both attorney and corporate title agents for the condition of the once powerful national underwriters. Over the course of the past year these once revered entities have fallen into hardship, reduced staff, and shut down offices that were once considered mini palaces or towers of opulence. Where does this leave the industry, what of the insured parties, and does it leave the agent holding the bag?
With the national underwriters feeling figurative hunger pangs and tightening of the belt, it was no longer a game of biggest and baddest, but rather a game of survival of the thinnest and quickest. Then the news that LandAmerica Financial Group, Inc. (LandAm) the parent company for Lawyer’s Title Insurance Corp. and Commonwealth Land Title Insurance Company, two of the national underwriters and smaller regional underwriters United Capital Title Insurance Company and LandAmerica NJ Title Insurance Company, was experiencing in financial difficulties and it was in negotiations to be purchased by Fidelity National Financial, Inc., (Fidelity) the parent company of Fidelity National Title Insurance Company, made for interesting water cooler conversation throughout the industry. Then on November 21, Fidelity withdrew the offer and following the announcement, on November 24, LandAmerica 1031 Exchange Services Company, Inc., announced that it was terminating operations and would be unable to presently honor requests for withdrawals. This of course was a matter of great concern, as the 1031 funds are held in trust and are not the funds of the exchange entity.
On November 26, after Fidelity backed out on the planned purchase of LandAm, LandAm and LandAmerica 1031 Exchange Services, Inc., filed for Chapter 11 protections under two separate, but jointly administered, cases. Several adversarial proceedings have been filed under the jointly administered bankruptcy cases. These adversarial proceedings are generally regarding the 1031 exchange entity and funds that were being held in trust for the benefit of the parties using the exchange entity for their closings. All raised issue with the fact that the monies being held were not the funds of LandAm but rather that of the parties. These cases are all too recent to report on the Court’s handling of them.
Aside from the funds at risk here we are also concerned with the 1031 exchange clients and the damages that they would be exposed to in the extent that they could not close on their proposed exchange property. Aside from the standard list of damages and loss there would be the added potential of tax liability added to the mix. There is one adversarial proceeding that clearly points out that the plaintiff will be looking for damages. At the time of this writing I am not sure where the plaintiff will be looking, though. LandAm is certainly not in a position to pay out on a damages claim. One concern would be that the party seeking damages would then turn from seeking damages the failed exchange entity and seek recovery from the agent. At the time of this writing, I have not seen this occur, but that is not to say it hasn’t.
Let us now turn toward the day-to-day concerns of the attorney or the corporate title agent. There is a lot more at play here than just the financial matters and these bankruptcies. There are many other concerns and some of these will definitely serve to change the industry, at least for the short term.
With some recent failures of various exchange entities, LandAm is not the only one; concerns have been raised about the possibility of wire transfers being reversed. Caution must be exercised to ensure that the funds that are wired into an escrow account are actually in the account prior to disbursing. Wired funds, considered “good funds,” are safe if they are finally credited by the depository bank to the escrow account. These funds should not be reversible back to the sender without your consent. Please note that receipt of the federal reference number does not ensure the funds have been received in the account nor finally credited. This number merely serves to inform one that the sender has completed the wire transmission. However, there are instances where the funds may not reach the intended account. If the wire transmission is coming into an account after that bank’s incoming wire cut-off time, the receiving bank will credit the account the next business morning. Also, if the registration on the wire does not match the bank account registration or if the account number is invalid, the receiving bank will reject the wire back to the transmitter. Prior to disbursing on a closing, you are urged to confirm via the banks on line system that wired funds appear in the account and, thus, are finally credited to you. I encourage everyone to discuss this with your depository bank.
Agents must be certain that the funds are not ACH credits. An ACH (Automatic Clearing House) credit is not the same as a wire, and these funds may be pulled back. There is great concern regarding the ACH credits. While we may not encourage them, sometimes it is the only way we are able to get the funds. When receiving an ACH credit, the closing cannot be funded until the funds are verified and have been finally cleared into the agent’s trust account.
Another point to clarify is that membership in the Federation of Exchange Accommodators (FEA) should not be used as a guide for the condition or solvency of an exchange entity. This is a self–governing entity, and membership, is not a necessary requirement. Many exchange entities have not joined the FEA, and, as such, membership cannot be used as a determining factor.
Lawyer’s Title Insurance Corp. and Commonwealth Land Title Insurance Company have been placed under the control of the Nebraska Department of Insurance by a District Court Judge. At the time of this writing, I have been unable to determine if any other states have followed this course of action.
Another issue that agents will need to become more familiar with is that the large national underwriters in many states are signatories to and operate under what in known as a Mutual Indemnification Agreement (MIA.) These MIAs differ somewhat from state to state but serve the same purpose. The various MIAs serve to indemnify over several commonly encountered defects, with minor risk or exposure that may be discovered during the examination of title. These are generally minor technical errors or omissions many of them are self–curing over the passage of time. Some of these defects are for example; the failure to file a death certificate on a party in the chain of title, lack of a witness, or proof of authority to act under an agency agreement or trust. In a case where these minor defects are identified, the MIA could be relied upon when the new issuing insurer was in possession of the prior policy and that policy took no exception to the issue in concern if it was one of the matters on the MIA. However if there are more serious issues, a transaction–specific indemnification would be required.
Often if the matter was serious enough the requesting underwriter would ask for what is know as an undertaking. An undertaking is where the indemnification–issuing underwriter agrees to cure the matter, and extend its liability up to its policy limits over the offending matter. Think of this as an accelerated claim. Now with no money to pay to cure the matter, where does that leave the agent when the underwriter is in bankruptcy?
Many lenders are refusing to accept LandAm’s underwriting entities as an underwriter on their transactions. One large national lender is not accepting any new LandAm commitments. This places the agent in a situation of either having to sign with another underwriter when scrutiny is high and many are not looking for new agents, particularly if that agent is small, or trying to rush the deal through their other underwriter if they had another underwriter. I know in Florida it is common to have at least two underwriters. I cannot, however, speak for the practices in other states.
In conclusion, these are trying times for all of us, not only the attorney agent, or small firm or solo practitioner. Even the large firms and once giant underwriters are suffering in the current economic environment. There are ways to be safer in these times. All it takes is a modicum of caution. Whenever dealing with a qualified intermediary (exchange entity), it is a good practice to run a check of that entity in the local indices and court records to see if any litigation has been filed: not only if title is to be held in the name of the exchange entity, but also to get a feel for the security of that entity. Not only when dealing with an exchange entity, but on any transaction, never close or fund until there are collected funds in your trust account. Those simple actions may save both you and your client a lot of misery.
John Redding recently returned to private practice and is now serving as the principal of John Neil Redding, P.A. in Tampa, Florida. His areas of practice include real estate, probate, estate planning, wills and trusts, and business and personal affairs. Until November 2008, Mr. Redding served as Associate Counsel- Underwriting with First American Title Insurance Company. Mr. Redding has been involved in the title insurance industry for more than 20 years in various capacities.
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