Title insurers have a unique advantage over other types of insurers because they can assess and limit their exposure to claims before they ever issue a title insurance policy. Specifically, if the title insurer retains a skilled attorney to thoroughly examine the title of the property it is seeking to insure, most title defects can be discovered and cured before the insured sale or loan ever closes. This allows title insurers to significantly lower their risk of claims under the policies they issue.
Unfortunately, many title insurance claim litigators will tell you that they often see variations of the same claims over and over again, and these claims frequently arise out of defects that a careful title examiner could have cured prior to issuing the title policy. This article reviews some of these common sources of title claims and explains how agents and title examiners can take simple steps to cure them before their client’s sale or mortgage ever closes.
Louisiana Community Property Interests: A Trap for Out of State Agents, Title Examiners, Lenders and Purchasers
Steeg Law Firm is often retained to cure title defects that arise due to a purchaser or mortgagor’s spouse’s interest in a property. One common scenario involves one spouse with good credit and another with poor credit. The spouse with good credit applies for a mortgage loan without the other spouse in order to obtain a better interest rate or a larger loan, and then the spouse with poor credit is left out of the purchase, note and/or mortgage documents.
Later, when the lender attempts to foreclose, the lender discovers that the poor-credit spouse is legally presumed to have obtained an interest in the property by operation of Louisiana law, even if that spouse did not participate in any of the transactions. Unfortunately, the lender’s mortgage over the property is relatively null in this scenario because the poor-credit spouse obtained an interest in the property but failed to sign the mortgage.
National lenders, agents and title examiners based in common law states often overlook the fact that Louisiana’s community property regime automatically applies to all spouses domiciled in Louisiana unless this regime is modified by contract. This body of law presumes that all property acquired by either spouse during the marriage is community property. Because each spouse owns an “undivided” one-half interest in the community property, both spouses must sign any sale or mortgage of the couple’s real property. If one spouse fails to sign, the transaction is relatively null.
In order to avoid this problem, title examiners and agents should always inquire into the marital status of sellers and borrowers and require both spouses to sign any sale or mortgage. The spouses will certainly be much more cooperative when they are initially purchasing the property as opposed to when they are facing a foreclosure.
On the flip side, one spouse does not need permission from the other in order to sell or mortgage “separate property,” such as property acquired before marriage. However, there is always a risk that the non-owner spouse will later claim that the property was in fact community property requiring agreement of both spouses prior to a sale or mortgage. This risk can be eliminated by including in the transaction a declaration that states that the property is the separate property of one spouse, and having the non-owner spouse concur in this declaration by signing the document.
Tax Sale Notice Problems: Looking Beyond the Sale
Tax sale law in Louisiana is constantly evolving through both statutory revisions and legal precedent, and keeping up with tax sale notice requirements can be confusing even for the most sophisticated parties. However, due process violations continue to present the most significant danger for purchasers or mortgagees of property with a tax sale in the chain of title.
The Louisiana Supreme Court has recognized that failure to provide notice of a tax delinquency and pending tax sale to all of the property owners of record prior to the tax sale is a due process violation under the Fourteenth Amendment of the United States Constitution. As a result, any tax sale occurring without this notice is an absolute nullity that cannot be cured by passage of the three year redemptive period, a judgment confirming tax title, or even Louisiana’s five year constitutional prescriptive period for annulling tax sales. The worrisome result of this rule is that all successive sales in the chain of title, including those to innocent third party purchasers, can be annulled any time before thirty-year acquisitive prescription runs.
The only way to prevent title claims arising out of invalid tax sales is to examine the relevant tax sale notices before issuing a title policy for any property with a tax sale in the chain of title.
The title examiner should contact the tax collector’s office to obtain all documentation of notices provided to the tax debtor prior to the tax sale. The notice should be examined to make sure all pre-sale notice requirements are met. Specifically, the documentation should show that the tax collector sent a written notice by certified mail, return receipt requested, to each “tax notice party” informing them that the taxes were required to be paid within 20 days or the property would be sold according to law. The notice must be sent to the owner(s) of record at the time of the tax sale as shown by the conveyance records (including all co-owners and any heirs of deceased owners), anyone who has requested notice under the tax sale statute, and anyone else holding an interest in the property, such as such the mortgagee.
The Obvious: Best Practices Title Searches
Many title insurance claims can be avoided simply by employing standardized title examination procedures and carefully preparing documents for closing. Pre-foreclosure title examinations often reveal defects in the chain of title that could have been discovered prior to issuing the policy if a best practices title search had been performed. Unfortunately, sometimes pre-foreclosure title searches even reveal defects in the lender’s own mortgage, such as an inaccurate legal description or incorrect party names.
It is much more efficient to prevent or remedy these defects prior to closing, when you have the cooperation of the lender, seller and purchaser, rather than in the future when the parties may be facing impending foreclosure.
The Louisiana Title Insurance Act requires a title examination by a Licensed Louisiana attorney and a written title opinion prior to issuing a title insurance policy relating to immovable property. The minimum title search period for a sale is thirty years, or longer if necessary in order to reach an arms-length sale between unrelated third parties. If only a mortgage is being insured then the search must be for a minimum of ten years or two links in the chain of title, whichever is greater. Notably, title searches that cover these statutory search periods will reveal most defects that have not been cured by the ten and thirty year periods for acquisitive prescription.
Every examiner must include in his written title opinion the following information:
- The complete name(s) of individuals with an ownership or other interest in the property.
- The legal description of the property examined.
- A complete list of all encumbrances, mortgages, judgments, liens, and privileges.
- A complete list of all servitudes, rights-of-way, leases, options, rights of first refusal, and usufructs encumbering the property.
- Any curative measures, which are required in order to render title merchantable.
- All parish and municipal property taxes which are past due.
- The length of the examiner’s search and date of the earliest recorded instrument reviewed by the examiner.
- The name and attorney bar roll number of the examining attorney.
It is useful for the examiner to write out the items listed above because this practice encourages careful review of the chain of title, which in turn, makes the examiner more likely to notice defects and take corrective action prior to issuing a title policy. Further, this information helps ensure that the insured mortgage and/or sale documents list the correct parties and include an accurate legal description.
Title examiners who adhere to the requirements laid out above, along with the specific insurer’s underwriting guidelines, will help prevent claims and save thousands of dollars in future curative measures. They will also avoid penalties under the Title Insurance Act.
The Upshot: Identify and Address Common Title Defects at the Inception
As many practitioners in this industry know, title insurers and lenders are loyal to agents and title examiners who can be trusted to root out title defects at the inception of a transaction in order to prevent more complicated and expensive problems in the future. Being able to identify and address common title defects should aid agents and title examiners in these efforts, making their services more valuable for all parties involved the transaction.