From The Debt Collector’s Handbook: Collecting Debts, Finding Assets, Enforcing Judgments, and Beating Your Creditors, Chapters 1 and 2
If you are planning to enforce the judgment against the real property, securing a “good” and “marketable title” after the enforcement of judgment is paramount. Good title means that the owner has title or ownership according to the recorded documents. The most common title is fee simple, which means that the person is the owner of 100 percent of the legal and beneficial interest in the property. A person with a life estate is entitled to the ownership, and beneficial use, during his or her life. Life estates are estate planning devices that vest title in a surviving spouse who is usually spouse #2, and upon that person’s death, the property goes to the children of the original owner. Marketable title means that the title insurer is willing to write a policy of title insurance to a person who is going to buy the property. What is marketable title? Answer: The property is free of defects, blemish, clouds, or irregularities and enables the title company to write a policy for the buyer.
What is the standard blemish? Let’s say that about 100 years ago, a railroad company held an easement (a right way of the real property course in law school) that crosses your backyard. The railroad company is now long bankrupt, but that easement still sits on title. Another common scenario is that you are buying the property from the seller whose family held title over many generations. Blemishes are common in generational transfers because the family members reject a third-party sale or commercial refinance. Some 50 years ago, “Uncle Harry,” a fractional owner of the property with his brother Joe, another fractional owner, died without a will and no probate followed. Years later, Harry’s wife, Aunt Louise, died likewise without a will, and no probate. Joe and his wife Mary die without a will and no probate. Facing these remote but unresolved fractional interests in the property, the title company for the prospective buyer might suffer heartburn and decline to issue a policy of title insurance. Purchasing the property with exceptions on the title policy would be a disaster because, in turn, the buyer would not have been able to sell the property. A refinance of the property would be impossible because no financier, such as a bank, would accept blemished title as security.
Enforcing a judgment and acquiring title through a sheriff’s or receiver’s sale reposes the title in the name of the judgment creditor as the probable buyer at the sale or a third-party buyer who is a bidder at the sale. Whether the judgment creditor or a third-party buyer, the title in their name must be good and marketable; otherwise, no bona fide downstream buyer, or financier, would buy or lend against the property as collateral for a loan or refinance given flawed title. The title report at the outset would tell you what blemishes, clouds, or defects burden the title. If you find that the property is buried under a dozen blemishes of any type, you should reconsider your strategy and spool up a plan to clean up the title. Be alert to common names because some title companies will list as a potential lien holder any creditor, including the IRS, that has a lien claim against everybody with a same name.
Title reports are very informative and require attention to detail. You might also spot a few insider deeds of trust in favor of family members, offshore trusts, recently formed (or out-of-state or offshore) corporations, or limited liabilities companies. What a mess, you’d think. Shearing away this cavalcade of liens is going to accrue big expense and fees, and worse, the insiders (really) of the debtor are going to battle out the liens and claim that the debtor borrowed “family money” to finance living expenses. Every lien is a new claim, and multiple liens are multiple claims. As you will see later, you might win these battles, but at some ridiculous cost. Liars are guaranteed their day in court.
Before going further down the rabbit hole of real estate law and practice, I am going to pass along what I was told in law school by a very sharp lawyer. He said that when you do a real estate loan secured by the real property, the last document in the file is the posttransaction title report. What is a posttransaction title report? Answer: After the deed of trust (mortgage) has been recorded, run another title report to insure that the recorder’s records reflect the recording and the contractual position. If the deal calls for a first position, the postrecording title report would show that first position. This title report showing the recording is the “last document” and the title report is “dated down.” Dating down means that the title report shows all transaction up to the present date, as opposed to a date one, two, or even three weeks earlier. A title report that is effective, say, three weeks ago means that you have not the slightest clue what the debtor did in the last 21 days. What could the debtor do? You shall see.
Phony Baloney Mortgages, Liens, and Lies
The starting (and ending point) of the quest to strip these false and fraudulent liens from title to the property is always the basic maximum: Security follows the debt. If the creditor cannot prove up a debt, the security evaporates. In any court battle with the insiders, the fact of an “insider,” “family,” or other collusive transaction compels the court to apply a strict and precise standard of evidence to prove up the existence of the debt. This standard does not quite shift the burden of proof to the alleged secured creditor, but the secured creditor must prove the existence of the debt, with more than “Sure, the debtor gave me security for my loan.” These battles border on beauty contests, Oscar®-winning performances on the witness stand, and credible excuses as to why the secured party lacks any scratch of paper to prove the debt. These phony deeds will collapse in the face of a determined onslaught, but you will incur a significant expense. The fact of the phony deeds becomes part of the information mix in valuing the case, that the debtor perceived that the property has value that the debtor seeks to protect by these liens, and that the debtor is throwing up roadblocks to deter enforcement. This is information that aids your valuing the case, a settlement, the fees and charges that the client might have to pay, and the length of time (and misery factor) in collecting the judgment.
How do you get rid of these phony liens? When you pull the Uniform Residential Loan Application (URLA), credit report, tax returns (if possible), accountant’s working papers (more likely), and, most importantly, bank statements, you will find out. For example, what do the bank statements tell you? A lot. If the claim is that the debtor borrowed money from the creditor, you would find at least two banking transactions. The first transaction is the check written from the account of the lender. The account might be a bank account, stock account, or account with a mutual fund, credit union, or other institution. Whatever the institution, we start with an account statement and paper or electronic check, better known as a wire transfer, or Automated Clearing House (ACH).
On the other side of the equation is the fact that the debtor received these funds and deposited the funds in a bank, stock, credit union, or other account. The debtor spends these funds by writing checks on the loan proceedings. This is more paper. The total sum of paper at the minimum would be the statements of the borrower (your debtor) and the lender (the family member), the check written by the lenders, and the checks written by the debtor disbursing the funds. This transaction would involve four or more pieces of paper. Chances are that the debtor will claim that the lender did not write a check, but handed over cash. For what purpose? Why would the lender warehouse huge amounts of cash? Is the lender hiding cash from the government to avoid payment of taxes? If the lender earned the money and paid taxes, the lender would readily hand over the money and, without any guile or hesitation, park the money in a bank account. If the lender handed the cash over to the debtor, why would the debtor hide the cash? Worse, the debtor could never deposit the cash because of money-laundering requirements. A transaction built on cash that lacks the slightest paper trail would never pass the smell test, particularly if the cash loan is six figures, and the deed of trust securing the loan is recorded ahead of the judgment.
Security follows the debt is part of this treasure map. Debtors load themselves up with liens to look unattractive or to claim that their assets are immune. The liens mean nothing without the debt and imbue this little homily with legal punch. Review a title report of the debtor’s property, which shows multiple liens in favor of banks, commercial lenders, and family members. It looks bad, and the debtor apparently has no equity. Now compare the title report to a sworn financial statement (the URLA—see later discussion), and you might find that the debts represented by those liens are paid, paid down, or don’t exist at all because they are not listed. “Security follows the debt” is just another arrow on the treasure map pointing you to the treasure.
Old Math Is Good
I love amortization tables. There, I said it. When I was a budding real estate agent, my father taught me real estate. In buying commercial property, which generates rents that pay for the debt service, the initial trick is to determine monthly payments for debt service because the rent income is fairly fixed. Yes, new prospective owners tend to jack up the rents, but generally, the business model (maybe) is that current owner is charging the tenants the maximum rents.
Let’s take a spin. If the sale price for a building is $100,000 and the standard down is 20 percent, a financial institution would finance the balance. Interest rates and the terms of the loan would be fixed, and we would figure out the monthly debt in the amortization book. These books had columns of numbers for the amount of the loan, the term, and the rate of interest. All predigital, all manual, and accurate to the penny. These tables, now digital, spell out the monthly payments. Title companies handed these little green books in which the papers were tissue thin. Mine is buried in the back of the desk drawer and probably next to my slide rule and pocket protector.
What does amortization mean to you, and why are amortization tables important to you? Amortization means the gradual pay down of a debt that bears interest that is usually fixed. Title companies, lenders, and third-party websites offer online amortization tables that are more flexible than the paper versions and are accurate to the penny.
Let’s go through an example. Start with a $1,000,000 loan. We know this amount from the face of the deed of trust (or mortgage) because the recorded documents state that the deed of trust secures performance under the promissory note in the amount of $1,000,000 and other advances. Many deeds of trust reveal that the note provides for a 10-, 15-, or 30-year payout. If the lender is a nationally recognized bank, such as Bank of America, Wells Fargo, Chase, or Citibank, we can intuit by the date on the loan what the prevailing interest was.
Let’s presume that the date of the loan is January 2, 2005, and that the focal point in time is January 2, 2012 (seven years). The amortization table shows that the monthly payments are in the sum of $5,368.22 and that the balance as of January 2, 2012, is $879,450.15. From Zillow.com, we can calculate probable value as of January 2, 2012, which is $1,200,000; therefore, you would ascertain an equity spread of $320,549.85. That’s not bad for the postdigital Dick Tracy, the financial geek.
The recorder does not show a notice of default, or notice of sale, which is evidence of a loan default. Presume that the debtor is current on the loan. Mind you that many lenders hold thousands (or more) of default loans in their portfolio and decline to proceed with a foreclosure. Why? Foreclosure proceedings reduce the value of the property and hinder the homeowner’s ability to sell or refinance the property. For nearly all, the fact of a longstanding default sufficiently motivates the homeowner to sell the property to realize some equity, or at least cycle through a short sale. However, the fact of a recorded notice of default or sale, or the absence of their recordings, deflates, if recorded, and inflates, if not recorded, the value of property. Let’s mention credit reports. Assuming a traditional lender, the credit report would reveal the existence of the loan and would also indicate whether the loan was current or in default. We are going to presume that the loan is current and bears interest at five percent, which was the prevailing rate at the time of the loan. This information is ready online as business and government sites track the historic movement of interest rates. The credit report buttresses the probable balance due, the status of the loan (current or in default), and inferentially the amount due under the loan (if current).
An amortization table is another arrow on the treasure map that lays out the balance of the loans secured by the property and therefore the equity available for enforcement. The table also spells out the monthly payments. If the debtor claims total poverty but the amortization tables show monthly payments of $10,000 and the loan is current per the credit report, something is deathly wrong. Who is making these payments? The tooth fairy, the fairy godmother, or Don Corleone? The amortization table hands you the arrow on the map that spells out the debtor’s stated income at least at the time of the loan and probable throughout the loan.
Before running to the next section, I have a tooth fairy story. Like all dutiful parents, I wanted to ensure that my daughter enjoyed the complete “kid experience.” Disneyland, Great America, and Universal City were not missed. I got to love Happy Meals and the itty bitty toys. But what about little nuances like the tooth fairy? I thought to myself, “What can I do to ramp up that kid’s experience? What? The drill is to leave a quarter under the pillow. Okay, that’s a little chintzy today, but so what? Nope. I was going to challenge the tooth fairy. One tooth falls out, and I left the following: “Dear Gabriella, your tooth fell out. I ran out of coins. This is my IOU note. Signed, Mr. Tooth Fairy.” Next time: “Do you take a check?” Nope. I tried this: “Do you take Visa, Master Card, or American Express? How about Discover card?” Don’t cringe.
The kid went to summer camp and never wrote home. Out of desperation and to ensure that the wood fairies wouldn’t kidnap the kid, I gave her prestamped, self-addressed postcards. She was 8 years old at the time. She only had to check the boxes—“Having a Good Time: yes or no,” “Camp is Fun: yes or no,” “Food is Good: yes or no,” and “I am Alive”—and deposit them in the camp mail slot. Not one card got to me. I wonder why. It must have been something about a grudge.