Title Carriers Hit the Fan: Their Solvency in Question

One of the hidden issues in the mortgage meltdown is the issue of clouded title caused by non-disclosed table-funded loans that were “securitized.” The unquestionable presence of unknown parties, MERS (or MERS like pooling, service and assignment agreements) who at least COULD assert claims on the “borrower’s” obligation, note or mortgage, means that your loan closing created an immediate title question.

The question is who can prove that they are the proper party to file a satisfaction of mortgage, enter into a short-sale or modification of a loan, enforce the obligation, declare a default on the note and enforce it, or foreclose on the mortgage. Right now there is no answer. In fact, most loan servicers have taken to saying that the name and information concerning the “investor” is confidential!

This is good since they are confirming that the name of the true lender has been and is continuing ot be withheld from you. It’s good because it means that your THREE-DAY Right of Rescission can’t start running until you know who the lender is. How can you send a letter of rescission to the lender when they are withholding the name of the lender?

But for those that are relying upon title insurance to protect them consider the article which follows: the solvency of title insurance carriers is now in question — both because of liability on these title issues arising out of the mortgage meltdown and because the insurance carriers themselves bought mortgage-backed securities. Here is a story about one that went bankrupt which I lifted off of Mario Kenny’s comment.

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LandAmerica Financial Group Seeks Bankruptcy Protection
November 26, 2008

Late the night of Nov. 25, LandAmerica Financial Group, Inc. and its subsidiary, LandAmerica 1031 Exchange Services, Inc., filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Eastern District of Virginia (”Bankruptcy Court”), seeking bankruptcy protection for both entities. The action does not cover Commonwealth Land Title Insurance Company or Lawyers Title Insurance Company, two LandAmerica subsidiaries that are each domiciled in the State of Nebraska. Under the federal Bankruptcy Code, these insurance company subsidiaries cannot be debtors in the federal bankruptcy proceeding. The LandAmerica subsidiaries together comprise the country’s third largest underwriter of title insurance.

By separate agreement, LandAmerica agreed to sell Commonwealth to Chicago Title Insurance Company as well as Lawyers and United Capital Title Insurance Company to Fidelity National Financial Inc. The proposed sales will require approval of the Bankruptcy Court and various state insurance regulators. LandAmerica filed a first day motion in the Chapter 11 proceeding seeking expedited approval of the sales, which could occur as early as late December. The motion to approve the sales is on the agenda of matters to be heard by the Bankruptcy Court beginning at 11 a.m. EST on Nov. 26.

The Nebraska Department of Insurance (”the Department”) issued a statement on Nov. 24 that, based on the latest statutory accounting reports received by the Department from the insurers, both Commonwealth and Lawyers are solvent and are continuing to write title insurance. However, while the sale agreement is pending, representatives of the Department have confirmed that the Department instituted proceedings the week of Nov. 24 to place both Commonwealth and Lawyers into rehabilitation under state insurance laws. A hearing is expected the afternoon of Nov. 26. A rehabilitation would allow both insurers to continue business as usual, but with enhanced oversight by the Department. At this time, the Department has indicated that it is not pursuing a liquidation of either insurer. Lawyers acquired Transnation Title Insurance Company earlier this year and assumed its obligations by merger. We will provide additional information on the implications of the Nebraska insurance regulatory issues once we confirm what level of oversight the Department obtains.

LandAmerica and its subsidiaries have reported a decline in financial position in recent weeks. The situation became more tenuous on Friday, Nov. 21, when Fidelity elected not to proceed with an acquisition of LandAmerica after completing its due diligence review. Shares of LandAmerica fell 88 percent in trading the Monday following Fidelity’s announcement. LandAmerica 1031 Exchange Services abruptly issued a press release announcing that it had ceased operations, citing investments in auction rate securities as a reason for being unable to meet all of its obligations as qualified intermediary to taxpayers under exchange agreements. LandAmerica also confirmed that it is not in compliance with loan covenants in its existing credit agreements with its lenders. Fitch Ratings downgraded LandAmerica’s insurance subsidiaries to a BB rating.

What Does this Mean for Real Estate Owners, Investors and Lenders?

We recommend that you complete a review of your property files to determine which properties may have title insurance through a LandAmerica insurer to (i) identify any existing cash escrows held by the LandAmerica insurers, (ii) identify any projects with construction funds being disbursed through a LandAmerica company, and (iii) determine any active claims pending against any of the LandAmerica insurers. Those projects with current cash escrows and ongoing needs to disburse funds through a LandAmerica insurer or prosecute claims against a LandAmerica insurer should be closely monitored as the proposed sales move forward. If you are currently a party to an exchange agreement with LandAmerica’s exchange subsidiary that is a debtor in the bankruptcy, we would be happy to discuss a course of action.

Assuming Commonwealth and Lawyers are placed into rehabilitation in Nebraska, both companies should be able to continue business as usual, subject to enhanced oversight by the Department of Insurance. No assets of the title insurance subsidiaries, including any escrows held by the subsidiaries in a fiduciary capacity, would be captured by the bankruptcy estate of LandAmerica. However, until the sales to Fidelity and Chicago are complete, we recommend that you monitor the progress of the sale agreement closely and carefully consider how funds are being handled in the course of transactions. If the sales do not occur and the title insurers are forced into a liquidation in Nebraska, then cash escrows and funds disbursed through a LandAmerica insurer could be captured through the Nebraska proceedings.

Even if you have no active projects with a LandAmerica insurer, if you hold a title policy written by a LandAmerica insurer, then you should still monitor the proposed sales. Acquisition of the LandAmerica title insurance obligations by rival Fidelity should alleviate concerns of insureds over a possible failure of the LandAmerica insurers and impact on the value of title policies issued by the LandAmerica companies.

As more information becomes available on the LandAmerica situation, we will provide updates and more detail on a recommended course of action to address the potential issues. In the meantime, please feel free to contact Jenny Marler ( 314.259.5874 or jmarler@sonnenschein.com) for transactional real estate and lender issues, Robert Millner ( 312.876.7994 or rmillner@sonnenschein.com) for bankruptcy issues, Corinne Carr ( 312.876.7477 or ccarr@sonnenschein.com) for insurance regulatory issues, or your regular Sonnenschein contact for additional information.

4 Responses

  1. With Title companies facing a crisis, wouldn’t it be a good idea to lodge a Claim against defective title while Cancelling the Deeds Of Trust for fraud ?

  2. Thanks, Neil.

    This confirms some of my previous posts.

    As I discovered, at the hands of my besieged Florida carrier, attempts to make claims on my title insurance policy, are resisted by well-prepared legal cadres using any excuse or argument to ignore or dismiss liability.

    I was naive to believe they’d respond to a pro se litigant, or for that matter, even a lawyer. It seems you either have to join them in a foreclosure suit or sue them directly.

    In business-friendly Florida, forget turning to the Insurance regulators. They’re paper tigers, and the intake person I talked to didn’t have a clue what title insurance covered.

    Years ago, I suggested the Lender file a demand against the lender policy, but given lender complicity in the very, extensive fraud that I complained of, that suggestion went nowhere.

    Attorneys who know how to file demands too often recuse themselves as having a conflict of interest because they write these policies, and owe a primary loyalty or fiduciary duty to their principals.

    Anybody have good pleadings that can reach these recalcitrant title insurance carriers?

    RSVP
    Allan
    BeMoved@AOL.com

  3. Thanks for posting the background on LandAmerica in easy to understand form. This will be helpful to my clients!

  4. Neil,

    Once again great stuff, especially for me as it pertains at least in part to my defense. As each day goes by, I find myself learning a little more every day. I’m by no means even close to being an expert, but I do know more now than I did when all of this started for me. Thankfully, at least I’m in a position to be able to at least try and defend myself in court, as well as to help others who are new to the game.

    Steve Cisko
    San Diego, Calif.
    99Libra@gmail.com

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