Dave Phillips: Land Title Principles

The Fee Simple Determinable & The Possibility of Reverter

2012-01-03T02:11:00.000-08:00

The following is an excerpt from my book titled Phillips on Land Title Examination: Estates in Blackacre.

Chapter 3:

In the previous chapter concerning the life estate and the reversion, we learned that the grantor of a life estate retains a reversion in blackacre. This reversion is certain to vest upon the natural expiration of the concurrent life estate. The reversion is patient in that it waits for the death of the life tenant.

In contrast, the fee simple determinable imposes a restriction that may act to cut short the interest of the fee simple owner. If such restriction is violated, the fee simple owner immediately loses all rights.

Note: In these writings, I use the words “restriction” and “condition” interchangeably. Though there is a technical distinction between a condition and a restriction, most property practitioners treat them as if they are one in the same.

Refer to the Table of Corresponding Estates displayed in the beginning of this writing. You will see that the fee simple determinable, an estate of present possession, corresponds with the possibility of reverter, an estate of future possession.

At the end of the previous section regarding the life estate and the reversion, I asked the reader to consider the fee simple absolute as the mother ship of all our estates. The fee simple absolute is the purest form of land ownership. We learned that whenever a piece of the fee simple absolute is carved out, there is a creation of new estates.

A fee simple is made defeasible in one of three ways: (1) by the creation of a fee simple determinable, (2) by the creation of a fee simple upon condition subsequent, and (3) by the creation of a fee simple subject to executory limitation. This chapter will examine the first of these; the fee simple determinable.

*Calculus of Estates → fee simple determinable + possibility of reverter = fee simple absolute.

The fee simple absolute represents an entire line segment. The fee simple absolute line is broken by the conveyance of a fee simple determinable.

What is a fee simple determinable? A fee simple determinable is a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, triggers an automatic reversion to its original grantor. This automatic reversion makes the fee simple determinable a formidable estate. It automatically and immediately terminates the interest of the holder of the fee simple determinable.

Example: Let's say that Bill Smith is the owner of blackacre in fee simple absolute. Bill Smith then conveys blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.

Discussion:

The above example creates a fee simple determinable. The conveyance from Bill to Shirley creates a right of automatic reversion if the property is used for other than residential purposes. The language in the conveyance is the key. For a fee simple determinable to be created, there must be specific words which would lead a reasonable person to conclude that an automatic reversion was intended. Our example uses the phrase “so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.” The body of this sentence contains two portions, which I have represented in bold, which makes clear that the grantor intended to create a fee simple determinable.

Now, after the conveyance of the fee simple determinable to Shirley Thomas, we must go back to the calculus of estates to determine what new estates have been created.

*Calculus of Estates → Fee simple determinable + ?? = fee simple absolute.

We call Bill's retained interest a possibility of reverter. If Shirley violates the condition, the property will automatically revert back to Bill Smith in fee simple absolute. It is called a “possibility of reverter” because a breach of the condition attaching to the fee simple determinable is not certain to happen. In our example, if blackacre is continuously used for residential purposes, there will be no breach. Absent breach, Bill, or Bill’s heirs, will never be able to execute the possibility of reverter. Conversely, if there is a breach, Bill, or Bill’s heirs, will become the immediate owners of blackacre in fee simple absolute.

The possibility of reverter, being only a possibility, is often referred to as an estate in expectancy. The holder of the possibility of reverter is expecting, but not guaranteed, to regain ownership.

Examples Creating a Fee Simple Determinable & Possibility of Reverter:

Conveyance #1: Bill Smith, a single man, conveys blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.

State of Title: Fee simple determinable in favor of Shirley Thomas with possibility of reverter in favor of Bill Smith.

If the land is subsequently used for other than residential purposes, Bill’s possibility of reverter will activate, automatically terminating the interest of Shirley. Bill will then own in fee simple absolute.

*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.

Conveyance #2: Samantha Jones conveys blackacre to Marcia Mayfield, on condition that no liquor will be sold on the subject property, and if this condition is violated, the property shall immediately return to Samantha Jones.

State of Title: Fee simple determinable in favor of Marcia Mayfield with possibility of reverter in favor of Samantha Jones.

Note: The language in the above conveyance is different than that contained in the first example. However, we look to the words in the conveyance to establish the intent of the grantor. The portions on condition that and shall immediately return indicate that there is to be an automatic reversion upon breach. This would certainly establish that a fee simple determinable was intended and created.

If liquor is subsequently sold on the land, Samantha’s possibility of reverter will activate, automatically terminating the interest of Marcia. Samantha will then own in fee simple absolute.

*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.

Conveyance #3: Dave Phillips, a single man, conveys blackacre to Hercules, so long as the land is used as a training facility for property professionals, and if it ever ceases to be so used, the property shall revest in Dave Phillips.

State of Title: Fee simple determinable in favor of Hercules, with possibility of reverter in favor of Dave Phillips.

If Hercules turns blackacre into a restaurant, the condition will have been violated. As a result, Dave’s possibility of reverter will activate, automatically terminating the interest of Hercules. Dave will then own in fee simple absolute.

*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.

Conveyance #4: Taylor Made, the world’s best female golfer, conveys blackacre to Dave Phillips, as long as he remains unmarried, and if he marries, then the property shall immediately return to Taylor Made.

State of Title: Fee simple determinable in favor of Dave Phillips, with possibility of reverter in favor of Taylor Made.

If Dave marries, Taylor’s possibility of reverter will activate, automatically terminating the interest of Dave. Taylor will then own in fee simple absolute.

*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.

Discussion:

The fee simple determinable is very harsh. If the restriction defining the fee simple determinable is violated, the interest of the holder of the determinable fee is automatically destroyed. A violation of such restriction enables the holder of the possibility of reverter to immediately possess blackacre; no court proceedings are necessary.

Concerning Title Examination:

The first step in proper title examination is to identify, with particularity, the request of the customer. In other words, what is the transaction and who are the proposed parties?

I would suggest this to you: If your state of title discloses estates other than a fee simple absolute, stop and call your applicant. The purpose of your call is twofold: 1) you want to disclose to the customer the various estates, and 2) you want clarification as to how the customer wants to proceed.

You see, a simple conversation with the customer, usually a lender, can help to insure that you produce an accurate and functional title commitment.

(Scenario #1): The Applicant is the Holder of the Fee Simple Determinable.

As a general rule, a lender is probably not going to be excited about securing its loan to an estate held in fee simple determinable. The reason is this: if the lender is forced to foreclose on the mortgage, it would be left holding title to land that is subject to a possibility of reverter. An attempted enforcement of the possibility of reverter may subsequently eliminate the interest of the lender. As a result, the lender will most likely require the termination of the possibility of reverter. In this way, the lender, upon foreclosure, would be able to take title to the entire fee simple absolute.

Given this scenario, I would place the following requirement on Schedule B-I of the Commitment:

REQUIREMENT: Record a document properly terminating the possibility of reverter, as recited on Schedule A. (Documents submitted to satisfy this requirement are subject to underwriter approval. This Commitment is subject to further requirements and exceptions)

(Scenario #2): The Applicant is the Holder of the Possibility of Reverter.

If the holder of the possibility of reverter is your applicant, chances are best that the specified contingency contained in the fee simple determinable has been violated.

Given this scenario, I would place the following requirement on Schedule B-I of the Commitment:

REQUIREMENT: Submit to the Company satisfactory evidence to establish that the specified contingency contained in the fee simple determinable has, in fact, been violated, resulting in the activation of the possibility of reverter. (Documents submitted to satisfy this requirement are subject to underwriter approval. This Commitment is subject to further requirements and exceptions)

NOTE: If your customer requires the termination of either a fee simple determinable or a possibility of reverter, you must ask for guidance from your particular underwriter. Your underwriter will likely have a specific set of requirements for terminating such interests.

Summary:

A fee simple determinable corresponds with the possibility of reverter. The name says it all. There is a possibility of reverter in favor of the original grantor. The property will not revert back unless the condition attached to the fee simple determinable is violated. Compare this to the last section in which I discussed the life estate and the reversion. There, the reversion was certain to take effect upon the death of the current life estate holder.

The next section covers the fee simple upon condition subsequent and the right of re-entry. These estates are similar in function to the fee simple determinable and the possibility of reverter, but they offer the holder of the fee simple upon condition subsequent a little more breathing room in case of a breach of condition.

dave

Subsurface Interests in Blackacre

2011-12-26T11:07:00.000-08:00

Introduction:

Land consists of the surface and subsurface. The surface of land is typically the most functional layer. The surface is where the home or business rests. The surface is easily visible to the human eye. The surface is how we ambulate from point A to point B.

For all of these reasons, it is not surprising that many people never consider the fact that there is land lying beneath the surface layer - abundant land. In many instances, this subsurface land has no practical meaning. It simply functions as a part of the whole that supports the surface layer and structures constituting the real property.

But sometimes just the opposite is true. The subsurface of blackacre may be loaded with valuable oil, gas or minerals. In such an instance, the subsurface becomes extremely valuable to its owner and anyone else who can put their grubby paws on it.

In this writing, I will explore the different ways in which oil, gas and minerals can be transferred. They may be transferred by conveyance, giving the grantee an ownership interest similar to that of the fee simple. They may also be transferred by lease, such as the ever popular oil and gas lease. Either method acts to realize on the value that the subsurface has to offer. As you will learn with the oil and gas lease, the homeowner typically earns profit from its oil producing land via a lease agreement with an oil company. The oil company does all the physical work and, if oil is found, the owner receives its payment in the form of royalties. It’s really a win-win. Unless you are as strong as the Baby Hercules, I doubt many of us could drill our own oil well. Furthermore, most people never know they are sitting on oil rich land until a landman approaches them requesting a lease.

Section 1 – Severing the Interests.

A subsurface interest can be severed from a surface interest:

In the lion’s share of cases, the surface owner and subsurface owner are one in the same person. Conversely, it is possible for one person to own the surface of blackacre, while another owns all or only a portion of the subsurface.

Severance is accomplished in one of two ways: 1) by grant, or 2) by reservation. Reservation, by far, is the common way in which a severance is accomplished.

Example of severance by grant:

Dave Phillips, a single man, as owner of all of blackacre, conveys to Lael Bryant, all the oil, gas and mineral rights lying beneath blackacre.

This conveyance results in a severance of the surface and subsurface interests. Lael Bryant would now own the rights to all the oil, gas and mineral deposits, while Dave Phillips continues as owner of the surface. Oftentimes a “Mineral Deed” would be used to accomplish this task. However, any deed would suffice, as long as there exists a clear recital in the body of the deed evidencing the intention of the grantor.

Example of severance by reservation:

Melissa Woloch, as the owner of all of blackacre, conveys to Lisa Giraud, reserving unto the grantor, Melissa Woloch, and her heirs, all oil, gas and mineral rights.

This conveyance reaches the same conclusion as our first conveyance (a severance of the surface from a portion of the subsurface). The only difference is that our second example was by way of reservation, not an outright conveyance.

*Although a conveyance or reservation of oil, gas or mineral rights acts to convey ownership to its grantee, such ownership interest is not as strong as that of the fee simple absolute. As you will learn in Section 2, there are statutory provisions in Michigan that act to terminate subsurface interests if those interests are not preserved within a specified period of time. It’s sort of like “inverse adverse possession.”

Section 2 – Termination of Oil, Gas and Mineral Interests.

Once oil, gas or mineral interests are severed from the surface owner, the clock begins to tick. The owner of the subsurface interest must be attentive to its rights or suffer the consequences. Statutory provisions are typically invoked by a surface owner who is attempting to reestablish its ownership in the subsurface. It is not actually the surface owner who prevails under the statutes; rather it is the subsurface owner that loses under the statutes.

Obviously, the easiest way for a termination of a severed interest is for the subsurface owner to convey its interest back to the surface owner. Short of this, a surface owner must rely on statutory law in its attempt to regain ownership of the severed subsurface rights.

In this section I will be discussing two statutes: 1) the so-called Twenty Year Dormancy Act, and 2) the Marketable Record Title Act.

The Dormancy Act deals exclusively with severed oil and gas interests. Severed mineral interests are not subject to the Dormancy Act. Please keep this in mind, as many practitioners continue to screw this up.

The Marketable Record Title Act deals exclusively with severed mineral interests. Severed oil and gas interests are not subject to the Marketable Title Act. Please keep this in mind, as many practitioners continue to screw this up.

A proper analysis involves distinguishing these two acts. Property searchers and title examiners are never required, nor should they ever invoke a statute for the purpose of disregarding a severed interest. These statutes are used by underwriters and attorneys involved in the heat of battle. Searchers and examiners report the interest, underwriters and attorneys invoke the statutes.

The Twenty Year Dormancy Act: (Act 42 of 1963)

This act deals exclusively with termination of oil or gas interests in land.

This statute addresses the presumed abandonment of oil and gas interests owned by someone other than the surface owner. It allows for a (20) year period of dormancy, at which time the oil and/or gas interest will re-vest in the surface owner, as disclosed by (MCL 554.291) and (Land Title Standard 15.4).

Section 291 specifically states that the Dormancy Act will not apply if the owner of the oil or gas interest does any of the following within twenty (20) years after creation of the interest:

1) Sells the interest, or
2) Leases the interest, or
3) Mortgages the interest, or
4) Transfers the interest.

Additionally, a drilling permit issued within the last 20 years, or actual production or withdrawal of oil or gas from the lands will act to preserve the interest.

This list is not exhaustive, but it gives you the idea: move it or lose it.

NOTE: Numbers 1 through 4 must be filed for record at the register of deeds.

In lieu of the above, the owner of the oil or gas interest may file a simple claim of interest at the ROD to preserve their interest for an additional 20 year period (MCL 554.292).

Of course, someone attempting to invoke the Dormancy Act will have to do some additional legwork. After all, only certain things are required to be filed of public record. The issuance of a drilling permit, or the actual production or withdrawal of oil or gas would take further investigation and documentation.

Remember, the Dormancy Act only encompasses oil and gas interests that have been severed. It’s like a railroad switch: if you are dealing with severed oil and gas interests, you are dealing with the potential clash with the Dormancy Act.

The following segment concerns mineral interests. Mineral interests are not one and the same as oil and gas interests. As such, mineral interests are handled under a different statute: The Marketable Title Act.

The Marketable Record Title Act:

As used in this act, “mineral interest” means an interest in minerals in any land if the interest in minerals is owned by a person other than the owner of the surface of the land. Mineral interest does not include an interest in oil or gas or an interest in sand, gravel, limestone, clay, or marl.

(MCL 565.101) reads, in part: “Any person, having the legal capacity to own land in this state, who has an unbroken chain of title of record to any interest in land for 20 years for mineral interests and 40 years for other interests, shall at the end of the applicable period be considered to have a marketable record title to that interest . . . .”

Most in the industry are familiar with the concept of “40 year marketable title.” This frequently comes into play when we are dealing with a fee simple interest of the surface owner. So this statute makes it easy to apply to mineral interests. We simply put 20 years in the place of 40 and perform the proper analysis.

The Marketable Title Act differs dramatically from the Dormancy Act in one way. The Marketable Title Act looks to create an interest after the expiration of 20 years, while the Dormancy Act looks to terminate an interest after the expiration of 20 years.

Section 2: Summary

Subsurface interests can be severed from the surface. This is accomplished by grant or reservation. Once severed, simply identify what interest has been severed. If it is oil and or gas, it will be subject to the Dormancy Act. If it is a mineral interest, as defined by statute, it will be subject to the Marketable Title Act.

In transition, parties are not always interested in owning a subsurface interest. In the case of oil and gas production, an oil company wants access to property for the purpose of drilling and exploration. If oil is found, the oil company takes its share and remits a portion of the earnings to the homeowner in the form of a royalty payment.

Section 3 - The Oil and Gas Lease.

An oil company will aggressively approach a property owner when it believes that valuable oil or gas may be sitting beneath the owner’s surface. An “Oil and Gas Lease” is often procured by the oil company in an attempt to accomplish its goal.

Oftentimes, an oil company will procure numerous leases from numerous landowners in a common area. In this instance they may choose to pool the leases in a so-called “pooling agreement.” This allows the oil company much more freedom in its exploration.

Example: Lot 1 and Lot 8 are part of the same pooling agreement. The oil company begins drilling on Lot 1, which drilling extends underground to Lot 8. It is under Lot 8 that the oil is found. The cool thing about a pooling agreement is that regardless of the land on which the drilling is commenced, the underground exploration can extend tremendous distances under the surface. It’s like a giant arm probing beneath the surface.

If production of oil is accomplished, the various members (property owners) of the pooling agreement will be subject to a “Division Order.” This order is a mathematical equation designed to pay royalties to an owner whose land is producing.

Termination of the Oil and Gas Lease:

The lease itself will expire in one of three (3) ways:
1) By expiration of its primary term;
2) By voluntary release by the lessee; or
3) If under production, by cessation of production.

Now, if a lease is not properly released of record, it may be necessary for the owner to take advantage of Michigan’s statutory procedures to accomplish this task.

Statutory Termination of Oil and Gas Lease, as set forth in Act 81 of 1929, as follows:

The owner must serve upon the lessee, in person or by registered mail, or by publication, for three (3) consecutive weeks in the county where the land is situated. This notice must state that the surface owner considers the lease terminated (MCL 554.281)

The owner MUST wait 30 days after first giving notice before filing with the register of deeds an affidavit setting forth (see page 2 of 554.281), along with a copy of the notice served on the lessee.

If, within 30 days of filing of the affidavit, the register of deeds does not here from the lessee, the clerk shall record the affidavit and the oil and gas lease will be legally terminated.

A reading of the statute shows that there is a 60 day period between first giving notice to the lessee and the effectual termination of the oil and gas lease.

Summary:

You may find it interesting that Michigan ranks 17th in the United States in oil and gas production, nearly 2 billion dollars a year. It is serious business and very competitive business. That’s what we should all desire, the chance to compete.

This writing concerned the severance of oil, gas and mineral rights from the surface. Remember that a proper analysis requires first determining what interest has been severed and how was it severed. In other words, are you looking at a transfer of ownership or are you looking at a lease?

When analyzing interests, it is beneficial to use the following checklist:

First, establish what interest was actually transferred.

1) Is it a transfer in ownership of oil and gas? If the answer is affirmative, this transfer will be subject to the Dormancy Act.

2) Is it a transfer of mineral interests? If the answer is affirmative, this transfer will be subject to the Marketable Title Act.

3) Is it a transfer via an oil and gas lease? If the answer is affirmative, statutory provisions exist that give the owner or original lessor power to terminate the lease, of record, short of a voluntary termination from the original lessee.

And remember to distinguish the Dormancy Act, which acts to terminate an interest, from the Marketable Title Act, which acts to create an interest. Very important stuff regarding proper analysis.

Some of the information incorporated in this writing was obtained from a recent meeting of the Michigan Land Title Association (MLTA).

That completes my brief overview of subsurface interests.

dave

Michigan's Construction Lien Act: (Part 4)

2011-12-09T16:01:00.000-08:00

This segment represents the final segment in a four part series analyzing the Michigan Construction Lien Act (CLA). I hope you find this compilation helpful.

Our original cast of characters:

Owner: Hercules
Contractor: Musclehead Building Corporation (Musclehead)
Subcontractor: Fritz Concrete Company (Fritz)
Insane Author: Dave Phillips of Lonely Boy, LLC

In review:

Part 1 concerned the Notice of Commencement (NOC). The NOC is typically posted on the property. It must also be recorded in a commercial context. Residential NOC's may be recorded, but is not required by statute. The NOC is just as its name implies. It is a notice to relevant parties that work is about to commence. If you are an interested party, the NOC contains relevant information, the most important being the listing of the designee.

Part 2 concerned the Notice of Furnishing (NOF). A subcontractor or supplier who contracts to provide an improvement to real property shall provide a NOF to the designee and the general contractor, if any, as named in the NOC within 20 days after furnishing the first labor or material. The NOF is how the owner learns of the presence of the subcontractor. A NOF must be filed before a lien will be effectual.

Part 3 concerned the Sworn Statement and Waiver (sworn statements and waivers). A sworn statement issued by a contractor will list all parties under contract with the contractor that are still owed money. Based upon this statement, the owner or other interested parties may obtain the proper waivers. The sworn statement must be furnished before money can be collected, or a complaint filed, in an attempt to enforce a lien filed pursuant thereto.

The Lien:

Musclehead has completed its work. It requests final payment and submits its sworn statement to Hercules. Unfortunately, Hercules is not in a position to make final payment. Evidently he lost a "quarter bounce" competition at the local Mr. B's in Royal Oak. This resulted in substantial loss of money and a loss of his lunch in the process.

Anyhow, Musclehead decides to file its lien in an attempt to protect its financial position. What are the criteria for filing?

(We start in MCL 570.1111)

(1) Notwithstanding section 109, the right of a contractor, subcontractor, laborer, or supplier to a construction lien created by this act shall cease to exist unless, within 90 days after the lien claimant's last furnishing of labor or material for the improvement, pursuant to the lien claimant's contract, a claim of lien is recorded in the office of the register of deeds for each county where the real property to which the improvement was made is located. A claim of lien shall be valid only as to the real property described in the claim of lien and located within the county where the claim of lien has been recorded.

(5) Each contractor, subcontractor, supplier, laborer, or agent of a group of laborers authorized under subsection (6) recording a claim of lien, within 15 days after the date of the recording, shall serve on the designee personally or by certified mail, return receipt requested, at the address shown on the notice of commencement, a copy of the claim of lien and a copy of any proof of service recorded in connection with the claim of lien. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If the service is made by certified mail, service is complete upon mailing. Proof of making the service shall be attached to any complaint, cross-claim, or counterclaim filed to enforce a construction lien.

The heart of Section 1 is that the lien claimant's right to a construction lien shall cease to exists unless it records its lien within 90 days after completing the work.

The heart of Section 5 is that the lien claimant must serve upon the designee or owner, a copy of the recorded lien, within 15 days of its recording. Proof of service must be attached to a complaint to foreclose. You see, serving the designee or owner with a copy of the lien is a condition precedent to lien foreclosure.

(We move to MCL 570.1116)

(1) The claim of lien of a contractor, subcontractor, supplier, or laborer may at any time be vacated and discharged if a bond, with the lien claimant as obligee, is filed with the county clerk for the county in which the property covered by the lien is located and a copy is given to the obligee lien claimant.

If a bond is properly positioned, there is no need for a lien. The clerk will notify the lien holder that a bond has been filed. The lien claimant has 10 days to object to the validity of the bond. If no objection is received, the clerk will record a certificate that a good and sufficient bond has been filed in accordance with the CLA. Once recorded, this acts to discharge the relevant lien.

(We move to MCL 570.1117)

(1) Proceedings for the enforcement of a construction lien and the foreclosure of any interests subject to the construction lien shall not be brought later than 1 year after the date the claim of lien was recorded.

(2) At the time of commencing an action for the enforcement of a construction lien through foreclosure, the plaintiff shall record a notice of lis pendens with respect to the action in the office of the register of deeds for the county in which the real property involved in the action is located.

I want to draw your attention to a point of detail. Section 1 tells us that proceedings to enforce the lien must be brought within one year of its recording. Section 2 tells us that a lis pendens must be filed concerning such actions. Many people, in reading these two sections, consider a lien as having expired after the one year period, unless a lis pendens is filed within this one year period. However, let me use an example to show how this assumption may be false:

Lien recorded January 1, 2010. A complaint to foreclose is filed December 15, 2010. But the lis pendens is not of record until January 20, 2011, after the one year period. Although there is no record activity within the one year frame, both segments of the statute have been satisfied. Action was commenced within the one year frame and a notice of lis pendens was recorded concerning the cause of action. Sneaky, but true.

(We move to 570.1119)

(3) A construction lien arising under this act shall take priority over all other interests, liens, or encumbrances which may attach to the building, structure, or improvement, or upon the real property on which the building, structure, or improvement is erected when the other interests, liens, or encumbrances are recorded subsequent to the first actual physical improvement.

(4) A mortgage, lien, encumbrance, or other interest recorded before the first actual physical improvement to real property shall have priority over a construction lien arising under this act. The priority of the mortgage shall exist as to all obligations secured by the mortgage except for indebtedness arising out of advances made subsequent to the first actual physical improvement. An advance made pursuant to the mortgage, but subsequent to the first actual physical improvement shall have priority over a construction lien if, for that advance, the mortgagee has received a contractor's sworn statement as provided in section 110, has made disbursements pursuant to the contractor's sworn statement, and has received waivers of lien from the contractor and all subcontractors, laborers, and suppliers who have provided notices of furnishing.

These two sections concern the doctrine of "relation back." It's a clever and sneaky little warrior that can catch many by surprise. In the context of the CLA, let me use an example to show how relation back works:

May 1, 2010, Musclehead begins work on Lot 1 of Phillips Subdivision.

June 1, 2010, Rocket Man Mortgage Company records its mortgage as to Lot 1.

September 1, 2010, Musclehead records its lien at the Oakland County ROD.

Relation Back: Although Rocket Man has recorded its mortgage prior to Musclehead's lien, Musclehead's lien will relate back to May 1, 2010, the first date of improvement, in establishing priority. Musclehead wins. This is exactly why a recorded Notice of Commencement must be reported. In essence, the NOC is a warning bell to a subsequent lienholder that the doctrine of relation back may be looming. Just my opinion.

I apologize for the lengthy writing, but please hang on; we're almost there.

(We move to 570.1128), the final section:

If any statement or claim of lien has been recorded in the office of a register of deeds, and the time within which proceedings to enforce the lien through foreclosure has elapsed without commencement of the proceedings, a person with an interest in the real property affected by the lien, or that person's agent or attorney, may make and present to the county clerk of the county in which the statement or claim of lien was recorded, an affidavit showing the time when the statement or claim of lien was recorded and the names of the parties to the statement or claim of lien. The county clerk shall examine the records of his or her office, and if it appears that proceedings to enforce the lien have not been commenced with the time provided by law, the county clerk shall execute and deliver to the owner a certificate of that fact, bearing the seal of the circuit court. The certificate may be recorded in the office of the register of deeds for the county where the statement or claim of lien was recorded, after which the statement or claim of lien shall have no effect.

This section simply cleans up the loose ends regarding attempted enforcement of a lien. It clears up all the issues I discussed concerning 570.1117. The certificate allows parties to move forward without the cloud of potential litigation.

Summary:

This concludes my overview of the CLA. I extracted portions of the CLA that I feel are relevant to most practitioners, excluding attorneys. Attorneys dealing with the CLA on a day to day basis have much more knowledge than I have. Therefore, this compilation is not designed to address the practice of law in this area.

The world of the CLA encompasses the Notice of Commencement, the Notice of Furnishing; the Sworn Statement; the Waiver; the recording of Lien; and the Lis Pendens. After an action to enforce a lien is filed, it becomes the issue of the Circuit Court. The CLA only functions to establish a valid lien. If the requirements of the CLA are not satisfied, there is no lien on which to collect or foreclose.

Post lien filing, the CLA establishes a one year expiration of the lien when no action to enforce has been commenced. The CLA also allows for the issuance of a certificate designed to properly end the life of the lien.

Thanks for reading, and please view my blog as often as possible. I have a lot of new ideas, such as audio recordings and numerous other topics. This might just be ready to explode.

dave

Michigan's Construction Lien Act: (Part 3)

2011-12-04T12:40:00.000-08:00

In this article, part 3 of a series concerning the Michigan Construction Lien Act, I will be discussing two segments that are closely related: 1) Sworn Statement, and 2) Waiver of Construction Lien. These are often collectively referred to as "Sworn Statements and Waivers."

Before I begin, I would like to remind the reader of a few things. Remember that a contractor contracts directly with the owner. The subcontractor contracts with the contractor to perform a portion of the contractor's overall contract with the owner. There may exist multiple mini-contracts between multiple parties, all designed to satisfy the original contract between the general contractor and the owner.

Section 570.1110 contains the statutory provisions regarding the sworn statement.

The sworn statement is a very practical device that is used to identify all contracting parties that remain unpaid as of the date the sworn statement is issued. The owner may rely on the statement, as issued by the contractor or subcontractor.

The contractor or subcontractor must supply a sworn statement to the owner when a request for payment is made.

The typical scenario is this: The general contractor has completed a portion of the overall contract with the owner and is now requesting partial payment from the owner. To accomplish this, the general contractor will prepare and submit a sworn statement to the owner. The sworn statement will display to the owner who is still owed money, if any that be.

Now, don't forget, there may be one or more subcontractors on the job. If the subcontractors have engaged contracts of their own, each subcontractor will have to supply a sworn statement as well. The owner wants to know who, if any, remain unpaid.

The owner wants to avoid construction lien(s) being placed on their property. They do this by utilizing Section 570.1115, which contains the statutory provisions regarding waiver of construction lien.

A lien claimant who receives FULL payment for his or her contract shall provide to the owner, lessee, or designee a full unconditional waiver of lien.

A lien claimant who receives PARTIAL payment for his or her contract shall provide to the owner, lessee, or designee a partial unconditional waiver of the lien for the amount which the lien claimant has received, if the owner, lessee, or designee requests the partial unconditional waiver.

A partial conditional waiver of lien or a full conditional waiver of lien shall be effective upon payment of the amount indicated in the waiver.

As disclosed, waivers come in the following forms:

1) Full unconditional waiver;
2) Full conditional waiver;
3) Partial unconditional waiver; and
4) Partial conditional waiver.

The conditional waivers are conditioned on the payment of a specific amount of money. When that money is paid, the lien rights will be waived up to the date of waiver.

Summary:

Sworn statements and waivers are highly utilized by title agencies involved in the new construction market. For example, an original construction loan may be for an amount of 5 million dollars. The title underwriter will only insure to the amount actually disbursed on the date the the original loan policy is issued. Let's assume that only $500,000.00 of this 5 million was disbursed on March 1, 2010. When the bank disburses additional money, it will seek to have a "date-down" endorsement attached to its original loan policy. This endorsement simply increases the amount of the coverage to the current amount disbursed. It also moves the policy date forward.

The title underwriter will not issue such endorsement until its agency has procured all necessary sworn statements and waivers. In this way, it can be comfortable that a party performing work on the property will not maintain a lien superior to that of the newly disbursed amount.

Sworn statements and waivers are designed to assist the parties in their dealings with one another. It offers a way for all parties to be dealt with fairly. As with anything, it is never a problem until it is a problem. Lack of honesty and sloppy paper work often contribute to problems between the parties.

The next section in this series will concern the construction "lien" itself. I hope to conclude this series in that article. I will also be offering an overall summary of the Construction Lien Act that I hope will leave the reader with a general understanding of its function.

Take care,

dave

Michigan's Construction Lien Act: (Part 2)

2011-11-25T11:41:00.000-08:00

In this article, part 2 of a series concerning the Michigan Construction Lien Act, I will be discussing the Notice of Furnishing (NOF).

In part 1, we had established that Fritz Concrete Company (Fritz) was a qualified subcontractor. It had contracted directly with Musclehead Building Corporation (Musclehead), the general contractor.

Fritz had obtained a copy of the Notice of Commencement (NOC) from Hercules. The next step is for Fritz to provide a NOF to the designee or owner named in the NOC, or to the general contractor, Musclehead.

Fritz decides to provide a copy of the NOF to Hercules, the property owner.

Chapter 570.1109 sets forth the rules concerning the NOF, which are:

(1) Except as otherwise provided in sections 108, 108a, and 301, a subcontractor or supplier who contracts to provide an improvement to real property shall provide a notice of furnishing to the designee and the general contractor, if any, as named in the notice of commencement at the address shown in the notice of commencement, either personally or by certified mail, within 20 days after furnishing the first labor or material. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If service of the notice of furnishing is made by certified mail, service is complete upon mailing. A contractor is not required to provide a notice of furnishing to preserve lien rights arising from his or her contract directly with an owner or lessee.

So, according to this Section, Fritz must supply the NOF to Hercules within 20 days after furnishing the first labor or material.

Question: Why does Fritz have to supply a NOF to Hercules?

Answer: It's all about notification. Remember, Fritz contracted directly with Musclehead, not with Hercules. As a result, the most logical way for Hercules to learn of the existence of Fritz is by use of the NOF. Fritz will notify Hercules directly that it is performing work on Hercules's project. Additionally, the general contractor, Musclehead, is not required by statute to supply a NOF to Hercules, because Musclehead contracted directly with Hercules. Hercules knows that Musclehead is fully involved.

Question: What happens if Fritz fails to supply a NOF to Hercules?

Answer: We look to section 1109(6) for the answer:

(6) The failure of a lien claimant, to provide a notice of furnishing within the time specified in this section shall not defeat the lien claimant's right to a construction lien for work performed or materials furnished by the lien claimant before the service of the notice of furnishing except to the extent that payments were made by or on behalf of the owner or lessee to the contractor pursuant to either a contractor's sworn statement or a waiver of lien in accordance with this act for work performed or material delivered by the lien claimant. This subsection does not apply to a laborer.

In part 3 of this series, I will be discussing the "sworn statement and waivers" that is so critical in understanding the Construction Lien Act. For now, just understand that if Fritz fails to supply a timely NOF, it may defeat Fritz's ability to file a successful lien for work performed if Hercules is relying on a "sworn statement" issued by Musclehead, that does not recite the interest of Fritz.

The NOF must be supplied to the owner, designee, or general contractor. A party in interest cannot file a valid lien until this NOF is supplied. This makes good sense: after all, how can a property owner be subject to a lien when they don't even know the lien claimant exists? If you stop and think about it, it's all really common sense.

So, what have we covered so far? Part 1 concerned the Notice of Commencement. The NOC is a notice from the owner of the subject property that work is about to commence. Any person or entity working the job can rely on the NOC for the filing of the NOF. The NOF is a notice to the owner of the subject property that a particular entity, other than the general contractor, has begun work on the job.

Please click on this site next week for a discussion of the "sworn statement and waiver."

dave

MERS Conundrum: Pragmatically Resolved

2011-11-20T07:37:00.000-08:00

Good morning. It is Sunday, November 20, 2011, and I am writing this article in great anticipation of the Lions and Panthers game at 1:00. For those who are football fans, I would like to extend my congratulations to the Wolverines, who beat the Cornhuskers yesterday in Ann Arbor!!

The MERS issue has been resolved. On November 16, 2011, the Michigan Supreme Court reached a pragmatic result in reversing the decision of the Michigan Court of Appeals.

In my article titled "MERS Conundrum," written August 14, 2011, I had analyzed the Court of Appeals decision. Under the microscope was MCL 600.3204(1)(d), which reads, in part: "a party may foreclose a mortgage by advertisement . . . if the party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage."

The appellate court held that for a party to own an interest in the indebtedness, it must own an interest in the note. It reasoned that MERS, acting solely as the mortgagee, did not own an interest in the note, which meant that it did not own an interest in the indebtedness, which meant that it did not qualify as a party capable of foreclosing under 600.3204(1)(d). Additionally, as agreed by the parties, MERS was never acting as a Servicing Agent.

Now . . . Enter the Michigan Supreme Court, stage right. It's like grandmother offering a comforting hand and sense of reasonableness to an otherwise chaotic situation.

On November 16, 2011, The Michigan Supreme Court reversed the decision of the Court of Appeals.

Supreme Court's REASONING:

MERS is in fact "the owner of an interest in the indebtedness secured by the mortgage, because MERS' contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured."

The Court acknowledged that MERS did not own an interest in the note, rather that MERS, as record holder of the mortgage, the continued existence of which was contingent upon the satisfaction of the indebtedness, authorized MERS to foreclose by advertisement under MCL 600.3204(1)(d).

The Court further added that, under settled law in Michigan, the mortgage and the note are to be construed together.

So that's it: the conundrum is resolved. Life goes on for all in the title and searching industry.

Some people support the decision of the Court of Appeals. Others support the decision of the Supreme Court. Regardless of which side of the fence you stand on, we all knew that the writing was on the wall. We all expected that the Court of Appeal's decision would be overturned, either by decision or legislation. I think the legislature left this decision to the higher courts of Michigan simply because the argument focused around a statutory interpretation. Such matters are for the court to tangle with.

The Michigan Supreme Court, acting like the comforting grandmother it is, put everyone in the real estate industry to bed with a warm glass of milk. Conundrum resolved.

dave

Untangling Dower and Homestead

2011-11-13T12:25:00.000-08:00

Many people confuse a dower right with a homestead right. More to the point, they struggle in understanding who must sign particular documents when BOTH dower and homestead are present.

I would like to take a shot at untangling dower and homestead. I hope to give the reader and practitioner a functional approach when dealing with either or both of these issues.

Dower is set forth in 558.1 (MCL), which reads in part: "The widow of every deceased person, shall be entitled to dower, or the use during her natural life, of 1/3 part of *all the lands whereof her husband was seized of an estate of inheritance*, at any time during the marriage, unless she is lawfully barred thereof."

Dower attaches to all lands of which the husband is "seized of an estate." What does "seized of an estate" mean? It means that the husband must own a property interest in fee simple. If the husband is a lessee or a land contract purchaser, dower will not apply. Additionally, dower does not attach to property in which the husband owns in joint tenancy with another. Importantly, dower does not attach to property held in tenancy by the entirety.

Example #1, State of Title: Bill Smith and Mary Smith, husband and wife. Here, Mary has no dower interest, rather she has a fee simple interest along with Bill.

Example #2, State of Title: Bill Smith, a married man. Here, Mary has no fee simple interest, rather she has an inchoate dower interest.

So, using our examples, what does all this mean? Well, the spouse of the man would be entitled to dower in "all" the lands owned by the husband. Some people believe that dower does not attach to land that is not the "primary residence" of the husband. The "primary residence" application is irrelevant. Whether property is the primary residence or not, dower attaches to all lands owned by the husband. This is by statute: no exceptions. Now, if the man holds title with his wife, as example #1 shows, she would have no dower, as she would hold in fee simple with the husband. Where you have a tenancy by the entirety you have no dower, and where you have dower you have no tenancy by the entirety.

Now to homestead. Homestead requires that a nontitled spouse join in the execution of a mortgage of property considered to be the "primary residence"of the couple. Homestead applies to both the man and the wife. The good news is that homestead only applies to finance transactions, it does not apply to conveyances.

Homestead is easy to represent with this example: Bob Jones is the owner of blackacre. He is married, but his wife is not on title. When Bob attempts to refinance, the wife will have to join in the execution of the mortgage for the purpose of acknowledging her "homestead" rights. Without her signature, the mortgage would be held invalid.

Interestingly, Bob's wife would also have to sign to bar her dower right in the subject property. The mortgage may read: "and Susan Jones, who joins in the execution of this mortgage for the dual purpose of acknowledging her homestead right and barring her dower right." This may seem long winded, but it is necessary.

Checklist for Sale Transaction:

1) Look at how title is held.

2) If the wife is not on title, she must sign the deed to bar her dower right.

3) If the wife is on title with the husband, she will be signing as a co-owner; no dower applies.

Checklist for Refinance Transaction:

1) Look at how title is held.

2) If the wife is not on title, she will have to sign to acknowledge homestead and bar dower.

3) If the *husband* is not on title, he will have to sign to acknowledge homestead rights.

4) If the wife and husband are both on title, both must sign the mortgage as co-owners; no dower applies.

Dower may be lawfully barred. The wife can voluntarily terminate her dower right in lands owned by her husband. She often does this via a deed to the husband with a clear recital that it is her intention to bar both present and future dower rights in the subject property.

Finally, if a man does not claim property as a "primary residence," it is not necessary for him to sign the mortgage. Instead, he would execute a non-homestead affidavit that would be placed with the closing package. And remember, he would only sign such affidavit if he is not on title. Similarly, if the wife does not claim property as a "primary residence," she will still be required to sign the non-homestead affidavit that would be placed with the closing package. But beware, if a wife does not claim property as a "primary residence," she still must sign to bar dower.

Sneaky but true. There is no easy way around this stuff, but keep in mind that dower is a legislative command. The participants in a transaction are not free to choose when it does and does not apply. It is most likely that the people are not trying to circumvent the law, but are simply confusing and co-mingling dower and homestead.

If you practice at keeping the two separate, it really isn't that hard to apply.

Hope this has been of some help,

Dave Phillips -- also known as "Elton" Phillips (check my glasses)

Michigan's Construction Lien Act: (Part 1)

2011-10-15T12:00:00.000-07:00

Michigan's Construction Lien Act, which I will refer to as CLA, is set forth in Chapter 570.1101 through 570.1305 of the Michigan Compiled Laws. I believe that all statutory compilations are easy to understand if you simply break down the relevant sections into digestible bites. When you understand the relevant sections, you understand the whole of the statute.

Many people in the real estate industry seem intimidated by the CLA. I believe the intimidation stems from information overload. The CLA contains numerous sections. A misunderstanding of any particular section can give the practitioner an extreme headache. In today's world, where many suffer from some form of ADD, an understanding of the CLA can seem a daunting task. Well, don't panic. I am here to help you. And it's all free!

My plan is to lay out the CLA in digestible bites. This first article, referenced in the title as "Part 1," will concern the Notice of Commencement. What is the Notice of Commencement and what role does it play in the filing of an "actual" lien? Subsequent articles will cover the remaining sections of the statute that I deem relevant to an overall understanding of the CLA.

The Pocket Hercules would like to help us out. He is here to demonstrate how and when the CLA becomes pertinent.

May, 2011:

Pocket Hercules has just completed his aerobic workout, aptly called "Sweating With the Midgets." He is standing on the deck of his 40 acre farmhouse located in Holly, Michigan. An entire 1/4 of the Southwest 1/4. This is usually the time he pops open a Bud Light and looks forward to watching the Tigers of FSD.

The cat is reading a newspaper, smoking a cigarette, and listening to the Elton John station on Pandora radio. Hercules informs the cat that smoking is bad for his health and, as is usually the case, the cat ignores him.

Now, instead of popping open a beer, he entertains a brilliant thought - I will build a workout facility right behind the pole barn. After all, with his own facility he can train at all hours of the day with his buddies, including Chairman and that clown Dave that he met while fishing for Walleye on Lake St. Clair. Maybe he can even get the cat to change his bad ways.

So how will Hercules accomplish this task?

He makes a few phone calls and decides to hire "Musclehead Building Corporation." Musclehead is a corporation formed in Delaware, with its home office located in Michigan. Schizoid jurisdictional issues. For those of you who understand personal jurisdiction and civil procedure, you may get a kick out of that.

Hercules meets with a representative of Musclehead. They come up with a design for the facility and Musclehead estimates $20,000.00 for completion of the project. Hercules accepts, with scheduled ground breaking of July 5.

You must be aware of and understand the following definitions, as they are key in the reading of the CLA:

"General contractor" means a contractor who contracts with an owner or lessee to provide, directly or indirectly through contracts with subcontractors, suppliers, or laborers, substantially all of the improvements to the property described in the notice of commencement.

"Subcontractor" means a person, other than a laborer or supplier, who pursuant to a contract between himself or herself and a person other than the owner or lessee performs any part of a contractor's contract for an improvement.

"Supplier" means a person who, pursuant to a contract with a contractor or a subcontractor, leases, rents, or in any other manner provides material or equipment that is used in the improvement of real property.

"Laborer" means an individual who, pursuant to a contract with a contractor or subcontractor, provides an improvement to real property through the individual's personal labor.

As a part of Musclehead's standard operating procedure, it hires "Fritz Concrete Company" to lay the foundation for the facility. Fritz now qualifies as a subcontractor of the project, as Fritz has contracted directly with the contractor, Musclehead.

Fritz will obtain a copy of the Notice of Commencement (NOC).

The relevant section in the CLA concerning the NOC is set forth in 570.1108a, which reads, in relevant part:

(1) An owner or lessee contracting for an improvement to a residential structure shall prepare and provide a notice of commencement to a contractor, subcontractor, supplier, or laborer who has made a written request for the notice pursuant to this section.

(2) The notice of commencement shall contain the following information:

(a) The legal description of the real property on which the improvement is to be made.

(b) The name, address, and capacity of the owner or lessee of the real property contracting for the improvement.

(c) The name and address of the fee owner of the real property, if the person contracting for the improvement is a land contract vendee or lessee.

(d) The name and address of the owner's or lessee's designee.

(e) The name and address of the general contractor, if any. The notice of commencement form shall contain the following caption below the line for the general contractor's name and address: (the name of the person with whom you have contracted to provide substantially all the improvements to the property.)

(f) The following statement in boldface type on the front of the form:

WARNING TO HOMEOWNER:

Michigan law requires that you do the following:

1. Complete and return this form to the person who asked for it within 10 days after the date of the postmark on the request.

2. If you do not complete and return this form within the 10 days you may have to pay the expenses incurred in getting the information.

3. If you do not live at the site of the improvement, you must post a copy of this form in a conspicuous place at that site.

You are not required to but should do the following:

1. Complete and post a copy of this form at the place where the improvement is being made, even if you live there.

2. Make and keep a copy of this form for your own records.

(g) The following statement:

“To lien claimants and subsequent purchasers:

Take notice that work is about to commence on an improvement to the real property described in this instrument. A person having a construction lien may preserve the lien by providing a notice of furnishing to the above named designee and the general contractor, if any, and by timely recording a claim of lien, in accordance with law.

A person having a construction lien arising by virtue of work performed on this improvement should refer to the name of the owner or lessee and the legal description appearing in this notice. A person subsequently acquiring an interest in the land described is not required to be named in a claim of lien.

A copy of this notice with an attached form for notice of furnishing may be obtained upon making a written request by certified mail to the above named owner or lessee; the designee; or the person with whom you have contracted.”

The owner, lessee, or designee, within 10 days after the date of mailing of a written request by certified mail from a contractor, subcontractor, supplier, or laborer, shall prepare and provide a copy of the notice of commencement, together with an attached blank notice of furnishing form, to the contractor, subcontractor, supplier, or laborer requesting a copy of the notice of commencement. A contractor, subcontractor, supplier, or laborer who requests a notice of commencement from an owner or lessee of a residential structure shall supply a blank notice of commencement form together with the attached blank notice of furnishing to the owner or lessee at the time the request is made.

So how does the NOC play into our set of facts?

First, the statute suggests, but does not require, that Hercules post a copy of the NOC in a conspicuous place on the property. He is not required to post a copy because he resides there.

Fritz Concrete, seeing no posting, makes a written request, by certified mail, to Hercules for a copy of the NOC. Notice that, in the case of a residential structure, Fritz must supply a blank copy of a Notice of Commencement to Hercules. Hercules then has 10 days in which to return a completed NOC to Fritz.

Why does Fritz need the NOC? The function of NOC is to give a subcontractor, supplier or laborer the proper information for the filing of a Notice of Furnishing. The Notice of Furnishing, covered in Part 2 of this series, is a prerequisite for the filing an actual lien.

The NOC is just as its name implies. It is a notice to relevant parties that work is about to commence. If you believe you are positioned as a possible lien holder, you must contact the parties listed on the NOC.

A word about the NOC to abstractors and examiners. The NOC is only a notice. The NOC is required to be recorded in the case of improvement to commercial property. It is not required that NOC pertaining to a residential structure be recorded. Nonetheless, an NOC is frequently recorded. You should realize that the NOC has no statute of limitation. Unlike the actual lien, which must be enforced within one year of its filing, the NOC is only a notice of an upcoming improvement. Many entities treat the NOC as if it has a one year expiration. That is simply not the case. The danger is this: As you will learn, a lien claimant has 90 days, AFTER COMPLETION OF WORK, in which to file its lien. So, although a NOC is recorded May 1, 2008, actual work may not be completed until let's say September 1, 2011, more than three years after the initial placement of the NOC.

I would recommend that all NOC's be shown on search reports and reflected as a note on all commitments. Why? Because it is recorded evidence that actual physical improvement may still be ongoing as to the subject property. It allows your client to question the owner of the property directly regarding the status of construction. I know many entities rely on the Owner's Affidavit signed at closing. But when papers are flying at the closing table, an affidavit could be signed in error. Showing the recorded NOC to the homeowner and getting direct feedback as to its validity will offer much more protection to the lender in case of a subsequent filing of lien. And, by the way, a subsequently filed construction lien will maintain priority over the newly recorded mortgage, as there is a relation back concerning the construction lien. The construction lien will relate back to the date improvements began. Sneaky stuff!

Please visit my site on Sunday October 23 for a discussion of the Notice of Furnishing. The Notice of Furnishing stems from the Notice of Commencement and brings us closer to the actual filing of the lien.

See ya,

dave

Aspects of The Land Contract

2011-09-25T12:09:00.000-07:00

In a traditional sale model, a bank will finance the transaction, or at least a large portion of the transaction. The buyer grants a mortgage to the bank, the proceeds of the loan are paid to the seller, and the seller deeds the property to the buyer. This creates a contractual relationship between the new homeowner and the bank; the purchase money mortgage model. Dr. Seuss would be proud!

The land contract is an alternative means of financing the sale of land. The purchaser makes installment payments directly to the seller. Upon completion of the contractual payments, the seller deeds the property to the purchaser. Nothing very complicated.

The land contract, like the mortgage, is a contract. As such, it offers contractual provisions designed to remedy breach. The seller has remedies available if the buyer cannot perform. These remedies consist of either foreclosure or forfeiture.

The seller in a land contract is known as the vendor. The purchaser in a land contract is known as the vendee. Here’s how a land contract plays out in a chain of title.

(Example)

State of Title: Steve Yzerman in fee simple absolute.

Steve Yzerman, owner of redacre, decides to sell redacre to Pavel Datsyuk, another great Red Wing, on land contract. Mr. Yzerman has accepted the job as GM of the Tampa Bay Lightning. Steve also enjoys the beaches, the bikinis, and many other aspects of Florida living. Being stuck in Michigan in the wintertime is not much fun.

Execution of this land contract creates new interests in redacre, which are:

Owner: Steve Yzerman.

Vendor: Steve Yzerman.

Vendee: Pavel Datsyuk.

We now have a contractual relationship between Mr. Yzerman and Mr. Datsyuk.

Assignment of Seller’s Interest in Land Contract:

After execution of the land contract, it is possible for Mr. Yzerman to sell his ownership interest. Let’s assume he wants to sell his interest to Mike Babcock. After all, Mr. Babcock, as coach of the Red Wings, wants to keep a closer eye on his star player, Pavel. There have been rumors of too many beers.

Remember, Mr. Yzerman is the owner of redacre, as well as the vendor in the land contract. How does Mr. Yzerman accomplish the transfer of his interests?

He will use two instruments: (1) the Assignment of Seller’s Interest in Land Contract, and (2) the warranty deed.

For Mr. Yzerman to effectively convey his interest in redacre, he must dispose of both interests. First, he will convey his ownership interest by way of the warranty deed. Second, he will convey his vendor interest by way of the assignment of seller’s interest in land contract.

An assignment consists of two parties: 1) the assignor, and 2) the assignee. In our example, Mr. Yzerman would be the assignor, while Mr. Babcock would be the assignee.

Execution of the warranty deed and the assignment of seller’s interest in land contract creates new and amended interests in redacre, which are:

Owner: Mike Babcock.

Vendor: Mike Babcock.

Vendee: Pavel Datsyuk.

Assignment of Purchaser’s Interest in Land Contract:

Now, let’s put the skate on the other foot. After execution of the land contract, it is possible for Mr. Datsyuk to convey his vendee interest. Let’s assume he wants to convey his interest to Nick Lidstrom. He knows that Nick is settled down and will probably get along better with Coach Babcock.

How does Mr. Datsyuk accomplish the transfer of his interest?

He will use two instruments: (1) the Assignment of Purchaser’s Interest in Land Contract, and (2) the quit claim deed.

Mr. Datsyuk has one responsibility concerning redacre; he is the vendee. He conveys his vendee interest by way of the assignment of purchaser’s interest in land contract. As a way of overkill, he will also execute a quit claim deed in favor of the new vendee. The use of a quit claim deed is proper in this situation. Mr. Datsyuk was not the owner of redacre, only a vendee under contract. As such, he was never seized of redacre and, therefore, could not have satisfied the covenant of seizen found in a warranty deed. Take a minute to digest this; it is important to understand the distinction.

In our example, Mr. Datsyuk would be the assignor, while Mr. Lidstrom would be the assignee.

Execution of the assignment of purchaser’s interest in land contract creates new interests in redacre, which are:

Owner: Mike Babcock.

Vendor: Mike Babcock.

Vendee: Nick Lidstrom.

Technical note: As a general rule, the vendor and vendee are free to convey their respective interests to a third party. However, if the terms of the land contract forbid assignment, an attempted assignment will not be effective. The terms of the land contract will control the relationship between the vendor and the vendee. If the contract is “silent” concerning assignment, an assignment will generally be permitted.

Nuance:

In your profession, you will run across the tiered land contract. It works like this:

A sells to B on land contract. (This is labeled the 1st land contract)

B then sells to C on land contract. (This is labeled the 2nd land contract)

C then sells to D on land contract. (This is labeled the 3rd land contract)

*It is possible for all three contracts to exist concurrently. In fact, it happens more often than you might think.

A, B, C, and D all have an interest in blackacre. A is the original owner in fee simple absolute and the vendor under the first contract. An examiner will look for the conveyance from A to B in fulfillment of contract 1. He will then look for subsequent conveyances from B to C and from C to D, all in fulfillment of their respective contracts. At the end of the day, an examiner will look for D to be the owner in fee simple absolute.

Obviously, a tiered land contract scenario can create numerous problems. In our example, we have four parties involved (A, B, C, and D). Judgments, liens, or other matters affecting either of the parties can create a logistical nightmare. Personally, I like these scenarios, as it gives me an opportunity to sort out and analyze all the interests.

When you encounter a tiered land contract, don’t panic! Make sure to properly search all the party names and ask for successive deed conveyances in fulfillment of the respective contracts.

So long,

dave

Statute of Frauds

2011-09-11T10:33:00.000-07:00

Hello. When I woke up this morning, I had yet to choose a topic for my Sunday blog article. So I started kicking around topics that I haven't considered in some time. One such topic was the "Statute of Frauds." It sounded good, so that is what I will write about in this posting.

The contract for the sale of land, or the conveyance of an interest in land, requires a written instrument evidencing such contract or conveyance. In the case of a sales contract, it is usually the purchase agreement or some derivative thereof that evidences the contractual obligations prior to conveyance. In the case of a conveyance, it is a deed of one form or another that will evidence an actual conveyance. But why is a written instrument necessary? Answering this question will afford the reader a basic understanding of the Statute of Frauds.

Dukeminier, Krier on Property - Fifth Addition, a 2002 publication - discloses that the Statute of Frauds, enacted in England in 1677 under the title "An Act for the Prevention of Frauds and Perjuries," sought to make people more secure in their property and their contracts by making deceitful claims unenforceable.

What is the Statute referring to with its use of the term "deceitful claims?"

The Statute of Frauds is designed to protect individuals and entities from wild claims pertaining to their land. Example: Let's say that Mr. Nogood, a Colorado Avalanche fan, files a lawsuit against Mr. Dogood, a Detroit Red Wing fan. Mr. Nogood claims he entered into an oral contract with Mr. Dogood for the purchase of Mr. Dogood's land for $50,000.00. Mr. Nogood offers no other proof aside from the existence of the proposed oral contract. Mr. Dogood, of course, denies the existence of such contract. Wherefore, Mr. Nogood requests "specific performance" based on the purported oral contract. Who wins?

Answer: Mr. Dogood wins. Why?

Because there is no written agreement between the parties for the sale of Mr. Dogood's land. Absent a writing, Mr. Nogood's position fails under the requirements of the Statute of Frauds. The existence of the Statute of Frauds affords Mr. Dogood substantial protection from wild or unfounded claims pertaining to his land. Even if Mr. Nogood and Mr. Dogood created a valid oral contract, the oral contract itself does not satisfy the elements of the Statute of Frauds, as written.

Michigan has enacted its own Statute of Frauds, which can be found in Chapter 566 of the Michigan Compiled Laws. The Michigan statute takes its roots from the original Statute of Frauds drafted in 1677. In particular, Sections 566.106 and 566.108 of the Michigan Compiled Laws are relevant to this discussion.

Section 566.106 reads: No estate or interest in lands, other than leases for a term not exceeding 1 year, nor any trust or power over or concerning lands, or in any manner relating thereto, shall hereafter be created, granted, assigned, surrendered or declared, unless by act or operation of law, or by a deed or conveyance in writing, subscribed by the party creating, granting, assigning, surrendering or declaring the same, or by some person thereunto by him lawfully authorized by writing.

Discussion: Section 566.106 concerns the conveyance of land. Simply put, a conveyance of blackacre must be accomplished by way of deed; you cannot have an oral conveyance of land. Notice the exception for a lease for a term not exceeding 1 year.

Section 566.108 reads: Every contract for the leasing for a longer period than 1 year, or for the sale of any lands, or any interest in lands, shall be void, unless the contract, or some note or memorandum thereof be in writing, and signed by the party by whom the lease or sale is to be made, or by some person thereunto by him lawfully authorized in writing: Provided, that whenever any lands or interest in lands shall be sold at public auction and the auctioneer or the clerk of the auction at the time of the sale enters in a sale book a memorandum specifying the description and price of the land sold and the name of the purchaser, such memorandum, together with the auction bills, catalog or written or printed notice of sale containing the name of the person on whose account the sale is made and the terms of sale, shall be deemed a memorandum of the contract of sale within the meaning of this section.

Discussion: Section 566.108 concerns contracting for the sale of land. Simply put, a contract for the sale of land must be in writing.

Now, the Statute of Frauds requires a contract for the sale of land to be in written form. However, there can be situations in which an oral contract for the sale of land will be immune from a Statute of Frauds defense. This can be seen when a court determines that circumstances between the parties justify enforcement of an oral contract. Such determinations are based in equity, which acts to circumvent the Statute of Frauds.

Explanation: Let me use the earlier example of Mr. Nogood and Mr. Dogood, with a significant change in facts. Let's say that Mr. Nogood wrote a check to Mr. Dogood for $5,000.00. On the check, Mr. Nogood wrote that it was a down payment on Mr. Dogood's land, based on their oral agreement. Mr. Dogood deposited this check in his personal bank account. Additionally, let's assume that Mr. Nogood informed Mr. Dogood that Mr. Nogood was planning on selling his current home with the intent of purchasing Mr. Dogood's property from the proceeds. Three months later, Mr. Nogood sells his property and asks Mr. Dogood to perform under their earlier oral agreement. Finally, let's assume that Mr. Dogood says, "No, I will not sell you my home because we never had a written agreement to sell." Now, given our change of facts, if Mr. Nogood files a suit for "specific performance," who wins?

Answer: Probably Mr. Nogood. Why?

Partial performance of the oral contract, the payment of $5,000.00, coupled with Mr. Dogood's knowledge of Mr. Nogood's attempt to sell his residence to finance the purchase of Mr. Dogood's land, would probably be enough to persuade a judge to afford specific performance to Mr. Nogood. With the particular set of facts before the court, the court may well determine that it is inequitable to deny Mr. Nogood. In other words, there were specific actions on the part of Mr. Nogood and Mr. Dogood to establish that there would be significant harm to Mr. Nogood if the oral contract, as purported, was not enforced. Based on the facts, Mr. Dogood would probably be estopped from denying the existence of the oral contract. This is because he had accepted and deposited $5,000.00 from Mr. Nogood.

Note on Specific Performance: Specific Performance is when a court orders the performance of a contractual obligation that someone or some entity is attempting to avoid. In the case of a garden variety sale agreement, specific performance may order a defendant to convey land to the plaintiff. The court is saying, in essence, that the defendant must perform per the original contractual arrangement.

Note on Estoppel: Estoppel precludes a person or entity from denying the existence of something that has, in the eyes of the law, been established as truth. In our example, once the court determined that a valid oral contract was formed (the depositing of the down payment of $5,000.00), Mr. Dogood would be estopped from denying the existence of the contract.

Conclusion:

The Statute of Frauds is designed to protect owners from bogus claims concerning their land. The Statute of Frauds is very pragmatic and easy to follow. After all, if you are intent on purchasing land, it seems that a logical first step would be the written execution of a contract for the sale of such land. However, persons involved in real estate transactions should be aware that the Statute of Frauds, although formidable, can be circumvented in limited circumstances. Circumstances allowing circumvention are fact intensive. If the plaintiff can establish that it would suffer inequity, based on the facts, it may prevail under "specific performance," stemming from partial performance and estoppel.

Chow,

dave

The Leasehold Estate

2011-09-05T08:32:00.000-07:00

The following is an excerpt from my program titled 'Phillips on Land Title Examination.'

I now introduce you to the leasehold estate. The leasehold estate is a way for a person or entity, known as the lessee, to obtain a right of possession in blackacre, short of actual ownership. The leasehold estate terminates upon the expiration of the specified lease term, or, in the absence of a specified term, upon reasonable notice by either party. Here’s how it works.

Owner: Dave Phillips in fee simple absolute.

On May 1, 2011, Elton John approaches Dave Phillips with the intent of leasing blackacre. Elton’s manager and Dave agree to a lease term of one year, beginning June 1, 2011 and expiring May 31, 2012.

The execution of such lease agreement creates new interests in blackacre, which are:

Owner: Dave Phillips in fee simple absolute.

Lessor: Dave Phillips.

Lessee: Elton John.

The lessor is the person or entity leasing the property out. The lessee is the person or entity possessing the property under the lease. In a traditional lease, it is usually the owner of blackacre that acts as lessor.

I must say, there is nothing particularly difficult regarding the leasehold estate. A lease is a contract between the lessor and the lessee, which contract allows the lessee to possess blackacre. The terms of the lease, as agreed to by the parties, will control the relationship throughout its term.

There are three leasehold estates recognized in Michigan, which are: 1) The Estate for Years; 2) The Tenancy at Will; and 3) The Tenancy at Sufferance. For the title examiner, the distinctions are almost irrelevant. This is because a leasehold estate, of any form, will be set out as an exception to title. That being said, I am a professional. As a professional, I feel it important for you to grasp the basic differences between the leasehold estates. Let me take each in turn.

The Estate for Years:

An estate for years can be defined as: A leasehold estate for a fixed period of time. Interestingly, the time period does not have to be measured in actual years. An estate for years may be for a period of one week, or a period of one year, or any variation thereof. In an estate for years, it is not the duration of the lease, rather the fixed period of time that qualifies the lease as an estate for years.

In most instances concerning a residential lease, this period will be for one year. However, in a commercial lease, this period is often greater than one year. A commercial lease may range from three to ten years, or even longer. Just remember, for an estate for years to be created, the lease itself must be for a fixed period of time.

In the example I used above, Dave and Elton had created an estate for years, as the lease was for a period of exactly one year.

The Tenancy at Will:

A tenancy at will can be defined as: A leasehold estate with no specified duration, which leasehold is terminable by either party at any time. A tenancy at will can be found with or without an actual lease agreement. For instance, an actual lease agreement may be silent on duration, with the ability of either party to cancel the lease at any time, typically with a 30 day notice. The tenancy at will may also be found without any lease agreement at all. For instance, Mike Smith may take possession of blackacre with the consent of Dave Phillips, the true owner. Dave and Mike agree, orally, that Mike’s possession will continue until either party decides to terminate.

In a residential setting, the tenancy at will occurs more often than one might think. I have personally been a party to a tenancy at will. The tenancy at will can function very effectively when both parties are on good terms with one another. For instance, the owner may decide to terminate the lease arrangement once he finds out that keg parties are a common occurrence on the premises. But who knows, maybe the owner would enjoy the festivities during football season. Oklahoma Sooners, baby! Just remember, the tenancy at will can be created with or without an actual written lease, and it is terminable by either party at any time; usually with reasonable notification to quit.

The Tenancy at Sufferance:

The tenancy at sufferance, although recognized as a leasehold estate, can be more accurately described as a "fictitious" estate. It is an estate created for the purpose of dealing with a tenant that won't vacate. The tenancy at sufferance can be defined as: A leasehold estate which is created by the holding over of a tenant at the end of a valid lease term. The typical scenario is this: Dave Phillips, lessor, and Mike Smith, lessee, enter into a one year written lease, which lease qualifies as an estate for years. At the end of the one year period, Mike Smith refuses to leave. At this moment, Mike Smith is considered a hold-over tenant and the tenancy at sufferance is created.

Question: What is the relevance of the tenancy at sufferance?

Answer: The tenancy at sufferance, once established, creates significant rights in the original lessor. The original lessor, Dave Phillips in our example, may either 1) evict Mike Smith, or 2) hold Mike Smith to an additional term of one year. A court may or may not agree with Dave’s position to hold Mike to another year, but, historically, the tenancy at sufferance would give Dave such a right. The bottom line is this: the tenancy at sufferance swings the pendulum in the original lessor’s favor. In either scenario, Dave’s interest will ultimately be protected.

The Memorandum of Lease:

As we know, a lease is a contract between the lessor and the lessee. Oftentimes, the parties do not wish to record the entire lease agreement. They desire the contents of the lease to remain private. In lieu of recording the entire lease, parties will often record a Memorandum of Lease. Like the memorandum of land contract, the memorandum of lease allows the public to receive record notice of the existence of the lease, without disclosing the terms of such lease.

A lease will affect either residential or commercial property. A potential lessee of either residential or commercial property will often seek title insurance. Similar to the land contract vendee, the potential lessee is looking for assurance that the land they are seeking to lease will not be fraught with danger and potential litigation.

dave

Seminars

2011-08-29T17:06:00.000-07:00

For those who may have an interest, I plan to offer free seminars on various property issues beginning at some point this fall. I am in the process of contacting numerous municipalities and religious organizations in hopes that I can find an audience for my material. These seminars will be fairly informal and very basic. It is my intent to educate homeowners in the various communities and offer them an affordable way to attain information.

These seminars will be absolutely free to those who attend. They will cover the basics of property transactions, title insurance, etcetera, etcetera.

I will update this site as soon as I have available dates and times.

If anyone reading this has an interest, or if you know of a group of people that may be interested in learning about property transactions, please email me
@ examiner.phillips@gmail.com.

dave

Unemployment Insurance Agency Liens

2011-08-28T10:59:00.000-07:00

Hello. I was involved in a recent discussion concerning unemployment tax liens (commonly referred to as MESC liens). The question was this: Do MESC liens expire? As we in the industry know, most liens have a period of expiration. If the lien holder does not attempt to satisfy the debt within a specified time frame, the right to enforce such lien is lost. State, federal, and construction liens all maintain a period of viability, after which time the lien expires. But there is no obvious statutory expiration for unemployment tax liens filed against nonpaying employers. This elusive expiration period will be the topic of this article.

Arts and crafts:

Employers in Michigan are required to contribute to the federal and state employment security system. The Michigan Unemployment Insurance Agency (UIA) is charged with the collection of monies from employers, as well as the day to day administration of such collections. The UIA was formerly known as the Michigan Employment Security Commission (MESC). The name was changed to the UIA in 2003, but many people still refer to the agency using the old MESC labeling.

If an employer becomes delinquent on its unemployment taxes, the UIA, pursuant to MCL 421.15(e), will have a lien against all personal and real property of the delinquent entity. The notice of lien shall be effective upon its filing with the register of deeds in which property of the employer is located. The lien continues until the liability for that amount or a judgment arising out of the liability is satisfied or becomes unenforceable by reason of lapse of time.

Section 421.15(e), as written, does NOT provide a statute of limitations concerning the Unemployment Agency lien. However, I would like to focus on the segment "or until it becomes unenforceable by reason of lapse of time." This segment indicates that the Unemployment Agency lien does in fact have a date of termination. But what is the date?

The answer may be found within the Revenue Division of Department of Treasury, Chapter 205 of the Michigan Compiled Laws, commonly referred to as the "Revenue Act." I direct your attention to MCL 205.1, which reads: the department is the agency of this state responsible for the collection of taxes and is responsible for all the following: (g) .... to supervise and control the collection of all past due money and accounts owed to this state or to any officer, department, commission, board, or agency of this state.

Additionally, MCL 205.29(1) states, in part, that taxes administered under this act shall be a lien in favor of this state for a period of 7 years, and may be extended for an additional 7 years if a refiling is made within 6 months prior to the expiration of the original 7 year period.

It seems to me that MCL 205.29(1) would be applicable to the UIA tax lien, as well. If the Revenue Division of Department of Treasury sits over the collection of taxes owed to the UIA, the UIA being an agency of the State of Michigan, it seems that a statutory provision contained within the Revenue Act (205.29(1)) would control. Adding to this, the UIA statute (421.15(e)), states that a lien will be unenforceable by reason of "lapse of time."

Currently, the title industry treats UIA liens as if they never expire. This is a very safe and very proper approach. However, the Revenue Act seems to profess that the Revenue Division of the Department of Treasury acts as a "supervisor and controller" of monies owed its numerous agencies. If a lien filed under the Revenue Act expires 7 years after its filing, shouldn't the UIA lien expire after 7 years, as well?

My reading of the statutory provisions had inspired me to write this article. I will continue to pursue this question of expiration of UIA liens until I have an accurate result. I thought some of the readers would find this question interesting. Any input or comments are welcome.

dave

Association Dues

2011-08-21T13:14:00.000-07:00

In an attempt to expand the reach of my blog, I will occasionally post articles written by Angela Warner. Angela is the Controller at In Rhodes Management, Inc., a property management firm based in Rochester Hills, Michigan.

Some of these articles will be written solely by Angela, others will be written in tandem; Angela writing from the perspective of the management firm, myself writing from the perspective of property principles.

The following article was composed by Angela and concerns association dues; a topic near and dear to the heart of all homeowners or unit owners governed by an association.
__________________________________________

What are association dues?

Homeowner associations and condominium associations are corporations responsible for maintaining property within a community. Association dues are monthly, quarterly or annual fees paid to condominium associations or homeowner associations. These fees are used to pay the bills associated with running and maintaining an association. These expenses include, but are not limited to, lawn care, grounds maintenance, building maintenance, pool care, insurance and administrative costs.

As with any company, income is needed to operate the corporation. Since these fees are the main source of income for the corporation, the Association cannot run effectively without them. Most communities provide either coupon booklets or monthly statements to facilitate payment. However, it’s a convenience and not a requirement for payment. It is the owner’s responsibility to know when the payment is due and for what amount. If you are unsure of the specifics, you should contact your Association immediately.

If these fees are not paid by the date set by the Master Deed and the Board of Directors, typically a late fee and/or interest is added. Furthermore, the Association also has the right to turn the account over to a collection company, if the account remains unpaid. The collection company may file a lien on the Association’s behalf, as well as proceed with foreclosure on the lien with the Board’s approval. If any or all of these occur, all fees associated with the collection of the unpaid amount are billed back to the homeowner’s account.

As you can see, it’s in the best interest of both the homeowner and the Association to pay the fees in a timely manner. It can save time, energy, and money for both parties.

Angela Warner
Controller
In Rhodes Management, Inc.

Action to Quiet Title

2011-08-21T11:19:00.000-07:00

It's early Sunday morning. Hercules, nursing a hangover, is lounging in his swimming pool. He is filled with relief. The previous day, he was nearly killed by the great storm of 2011 that almost obliterated the city of Royal Oak, Michigan. The "Woodward Cruise" had an historic day.

Through falling trees and downed wires, Hercules managed to hang on to his beer mug without spilling a drop on anything other than himself. His car, a 1984 Chevy Chevette, was turned upside down and completely destroyed. Fortunately for Hercules, he was able to salvage all of his weightlifting apparel from the backseat.

While floating in the pool waiting for the excedrin to kick in, Hercules is startled by the voice of his neighbor, Panface. Hercules quaintly named her this after an unfortunate Halloween accident left her without a nose. To add to the scenario, Panface is not the friendly sort.

She says, "Hercules, I have in my hands a survey that proves that I own 15 feet of your land located directly behind your pool. As such, I am requesting that you quit claim this portion to me."

Hercules about falls off his raft! He fears that he may still be drunk. Did he hear her correctly? Did she just say that she claims ownership to a portion of his property? Like a dirty pair of underwear, this just can't be right.

Panface goes on. "Based on this survey, I have recorded a Claim of Interest against this land. If you don't agree to deed this land to me, I will be forced to sue you for possession."

Hercules quickly towels off, grabs another beer, as at this point he needs one, and proceeds to review his survey of the subject property, performed two years earlier by a different surveyor. His survey shows that he is the owner.

So, what do we have? We have conflicting boundaries based upon conflicting surveys.

How does this play out?

Well, regardless of who pursues the claim, it is probable that a quiet title action will be necessary to decide the dispute between Hercules and Panface.

As it went, Hercules eventually filed suit to quiet title. Panface, her survey company, and all persons or entities maintaining an interest in the 15 foot strip, were named as parties to the lawsuit. The court, upon review of all documents, quieted title in Hercules. The court found that the survey, performed by Panface's surveyor, was erroneous. The court further ordered that Panface immediately record a Release of Claim of Interest in Hercules's property.

Title was quieted in Hercules and life went on.

Discussion:

A "Quiet Title Action" is just that. It is an action, brought by a plaintiff, or plaintiffs, for the purpose of determining, with certainty, title to a specific parcel of land. The final judgment allows the prevailing party to move forward, free from the interest of the defendant(s). A proper quiet title action will present all necessary parties before the court. If a necessary party is left out of the lawsuit, such party will not be bound by its final adjudication. The plaintiff's attorney will diligently determine all parties with a legal interest in order to properly join them in the suit.

Apart from determining the rights of the parties before the court, quiet title actions also serve an extremely important roll concerning the land records. You see, a quiet title judgment allows for a clear and clean start to an otherwise messy chain of title. The quiet title judgment allows for a new beginning, if you please.

Issues giving rise to a suit to quiet title are many. Some of the main issues are as follows: 1) Claim of Adverse Possession; 2) Claim of a fraudulent conveyance; 3) Boundary line disputes, as shown in our example concerning Hercules; 4) Multiple grantees in a chain of title, and 5) Post tax foreclosure.

A post tax foreclosure suit to quiet title is an interesting one. The county pursuing tax foreclosure will attempt to notify all interested parties prior to issuing a judgment of foreclosure for nonpayment of taxes. However, title underwriters are usually not excited about agreeing to insure land that has recently been the subject of tax foreclosure. Simply put, the underwriter cannot be certain that ALL parties were properly notified. They fear that the judgment of tax foreclosure may be attacked by a person not properly notified by the county during the tax foreclosure process.

To circumvent this fear, the underwriter may require a quiet title action. In other words, let's do it all over again. It's like watching a bad movie twice! You see, the underwriter is hoping that, pursuant to a formal quiet title action, all parties will be properly notified and properly disposed of. The underwriter may feel a greater sense of comfort after a more formal proceeding. Upon receipt of the judgment quieting title, the underwriter will most likely be willing to insure the owner who purchased at auction.

Hope this has been informative and somewhat entertaining.

dave

MERS Conundrum

2011-08-14T07:24:00.000-07:00

As all in the real estate industry of Michigan are aware, the recent State of Michigan Court of Appeals's decision, published April 21, 2011, has caused a great deal of confusion.

This case dealt with mortgage foreclosure by advertisement. It did not concern judicial foreclosure. Keep that in mind as you read.

MERS is an acronym for Mortgage Electronic Registration System. MERS was designed to make loans easily and rapidly transferable, without the necessity of having to record an assignment for each such transfer. The idea is that MERS continually remain the mortgagee "of record," while allowing for transfers behind the scene. If MERS foreclosed, as the "mortgagee of record," it would subsequently transfer its interest, as the grantee in the Sheriff's Deed, to the entity actually holding the loan, whichever entity that may have been at the time of foreclosure.

MERS appears in numerous mortgages "as nominee" for the lender. Such mortgages disclose that MERS's interest is solely that of mortgagee.

This had remained a very neat and convenient arrangement; until it ran into conflict with Michigan Compiled Laws 600.3204(1)(d). The stage had been set for an entertaining cage fight. And, as you might expect, statutory provisions make a respectable combatant! Sort of like Hercules on steroids.

MCL 600.3204(1)(d) reads as follows:

(1) A party may foreclose a mortgage by advertisement if all of the following conditions exist:

(d) The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.

To summarize the case at bar, the Michigan Court of Appeals analytically distinguished the "note" from the "mortgage." It determined that for a party to own an interest in the indebtedness, it must own an interest in the note. MERS, acting solely as the mortgagee, did not own an interest in the note, which meant that it did not own an interest in the indebtedness, which meant that it did not qualify as a party capable of foreclosing under 600.3204(1)(d).

Additionally, MERS is not the servicing agent of the mortgage. The parties agreed on this point, as MERS simply exists to transfer the loans.

The Note:

Between a lender and a borrower, it is the note that represents the contract between the parties. The note represents the indebtedness. MERS, acting solely as mortgagee, maintained no interest in the note and, therefore, maintained no interest in the indebtedness. As such, the court concluded that MERS had no standing to foreclose by advertisement within the State of Michigan, as discussed.

The Mortgage:

The mortgage is simply an instrument of security. The mortgage acts to secure the debt to the property. The mortgagor is the party pledging the property. The mortgagee is the party holding the benefits of the secured interest.

Another Question: Can MERS effectively assign?

Example: A mortgage is recorded May 1, 2009, in which MERS is acting as nominee for the lender therein. On June 1, 2009, MERS assigns to Lender A. On August 1, 2010, Lender A forecloses by advertisement. Is this foreclosure valid? Well, let's look at our facts.

We know that MERS, as nominee, does not own an interest in the note. When MERS transfers to Lender A, all it can logically transfer is its interest as mortgagee, solely. If all Lender A received was the interest as mortgagee, it would hold no interest in the note, no interest in the indebtedness, and would not be permitted to foreclose by advertisement under the statute. Lender A would be in the same shoes as MERS. If MERS owns no interest in the indebtedness, how can it subsequently assign such interest? It seems that the original lender would have to assign its interest in the note to Lender A, prior to foreclosure by advertisement. And how can we be certain that Lender A received such interest from the original lender? Interesting, huh?

I am aware that my example predates the Court of Appeals decision, and that the decision did not address such transfers. Nonetheless, everyone is waiting to see if this decision will effect transactions retroactively. A big mess.

The Davenport Decision (published April 24, 2007):

In Davenport, the defendant began foreclosure proceedings October 27, 2005, four days before receiving its assignment of the mortgage. The defendant subsequently recorded its assignment, prior to foreclosure sale.

At issue in Davenport were two statutory provisions, MCL 600.3204(1)(d) and MCL 600.3204(3). The court ruled that the defendant did not own an interest in the indebtedness which would permit it to foreclose by advertisement. Reason: The defendant began foreclosure proceedings on October 27, four days before receiving its actual interest in the indebtedness.

The defendant countered with the position that it had fulfilled the requirement of 600.3204(3), which statute requires that the foreclosing party record its assignment prior to foreclosure sale. The court recognized this fact, but reasoned that satisfaction of 600.3204(3) did not render 600.3204(1)(d) inapplicable.

Summary:

All of us await the position of the Michigan Supreme Court, if they hear the appeal, or the position of the Michigan Legislature. Will they uphold the current decision, strike down the current decision, or find some sort of legislative middle ground? Will such decisions be retroactive in nature, or will such decisions have a fresh starting date? Who knows.

The relevance of the determination that MERS, as nominee, holds no interest in the indebtedness, or no interest as servicer, automatically calls into question every transfer or foreclosure undertaken by MERS. If MERS never held an interest in the note, how could it have effectively transferred a forecloseable interest to a third party?

As it stands, where foreclosure by advertisement has occurred, or is contemplated, it is the original lender that holds all the answers. It is the original lender that must assign the note to subsequent assignees. It is the original lender that must assign servicing rights to subsequent assignees. Bringing the note and the mortgage into the same hands, prior to foreclosure by advertisement, is the only current solution.

The Court of Appeals decided one thing only: Could MERS, as mortgagee, but not note holder, foreclose by means of advertisement. They did not address the implications of this decision, nor did they offer suggestions on how everyone is to move forward from this point. That is not the job of the court; the court simply decides the issue before it.

Thanks to Lisa Giraud-Minutolo for conferring with me prior to writing this.

dave

Judgment Liens

2011-08-07T13:49:00.001-07:00

Michigan Compiled Laws Sections 600.2801 through 600.2819 sets forth the legal creation and termination of judgment liens.

When someone is sued in a civil cause of action, a final judgment will render the judgment debtor liable to the judgment creditor in an amount specified in the judgment. At this point, the judgment creditor only has a claim "in personam" against the judgment debtor.

The judgment creditor, and the judgment creditor's attorney, will pursue all angles in collecting the award. Most notably, the attorney will attempt to locate the county, or counties, in which the judgment debtor owns an interest in real property. If such interest is found, the attorney will file a "Judgment Lien" against the judgment debtor in the county where the real property is located. If the debtor owns property in multiple counties, the Judgment Lien will be filed in such additional counties. The Judgment Lien must be filed in the county where the real property is located. If not, a judgment "lien" will not attach.

Section 600.2803 dictates that the lien attaches the moment the Judgment Lien is recorded. There is no "relation back" concerning judgment liens. For example, a judgment in personam may have been rendered on March 1, 2010, with the Judgment Lien being filed June 1, 2010. The lien will be effective against blackacre on June 1, 2010, the date of recording, not March 1, the date of the rendered judgment.

Section 600.2807 makes clear that a Judgment Lien, filed against only one spouse, will not attach to property titled in tenancy by the entirety. For example, let's say that title to blackacre is held by Bob Jones and Mary Jones, husband and wife. A subsequent Judgment Lien is filed against Bob Jones, individually. This lien will not attach to blackacre, as it is protected under the statute.

Additionally, Section 600.2807 sets forth a number of liens that trump a Judgment Lien. A purchase money mortgage trumps a previously filed Judgment Lien. The refinance of the purchase money mortgage will trump a recorded Judgment Lien. Construction liens, state and federal tax liens also trump a recorded Judgment Lien. Some of these are a bit peculiar but, nonetheless, it is the law.

Section 600.2809 states that a Judgment Lien will expire 5 years after the date it is recorded. Note: a judgment "in personam" expires 10 years after it is rendered. Analytically, you must separate a judgment "in personam" from a judgment "lien," as they are distinct from one another. Take this example: A judgment "in personam" is entered on March 1, 2005. The Judgment Lien is not recorded until March 1, 2011. This particular Judgment Lien will expire on March 1, 2015, not March 1, 2016. The statute states that a judgment lien will expire at the earlier of 1) the termination of the judgment in personam, or 2) 5 years after the Judgment Lien is recorded, whichever occurs first. In this example, the judgment in personam expires March 1, 2015, thereby destroying the Judgment Lien.

A judgment lien may be rerecorded; but only once. And the rerecording must occur within 120 days prior to the expiration of the original filing.

Section 600.2819 states that a Judgment Lien creates no right to foreclose. The judgment creditor will typically have to wait for a sale of the subject property in hopes of receiving any of the proceeds.

In closing, I would like to discuss a unique situation concerning the tenancy by the entirety. When an initial title search is performed, it is possible that the applicants are in fact husband and wife. It is easy for the abstractor to ignore judgment liens filed against only one spouse, as these liens do not currently attach to the subject property. However, the concern lies between the date of the original search and the closing of the contemplated transaction. If, for whatever reason, the tenancy by the entireties is destroyed, all judgment liens filed against the husband or wife, individually, will now attach. It is possible that such liens could sneak by the closing department and ultimately end up a claim on the underwriter's desk. A little paranoid? Maybe. But I have recently heard of scenarios in which abstractors are ignoring judgment liens filed against only one spouse when the current deed discloses that they hold as tenants by the entireties.

The easiest and safest approach is for the abstractor to forward all judgment liens to the examiner. The examiner can then place these liens in the file and inform the escrow department. If the closing occurs with no change in the tenancy, these liens will be ignored. Simple stuff.

dave

Chapter 2: The Life Estate & The Reversion

2011-07-24T13:04:00.000-07:00

This is the final excerpt from my book titled 'Phillips on Land Title Examination: Estates in Blackacre.'

Please read!

The previous chapter dealt with the fee simple absolute. In this chapter, we will begin to examine what happens when the holder of a fee simple absolute attempts to transfer less than the entire fee simple absolute. As you will see, a transfer of less than the entire fee simple absolute creates, by logic, estates of both present and future possession.

I begin with a presentation of the life estate and the reversion. The life estate is fairly straight forward and will warm us up for the defeasible fee simples that are to follow.

Hey, some kids have their blanket, I have my writing. I love writing; it listens to me.

What is a life estate? A life estate is true to its name. It is an estate in land that endures for the life of its owner. The moment the holder of the life estate dies is the moment the life estate is terminated. The life estate is an estate of present possession. It is not inheritable, except in the limited case of the life estate per autre vie. Furthermore, dower does not attach in the case of a male life estate holder. The parameters of the life estate are very important to understand. I have reviewed numerous documents in which the preparer was asking for a probate regarding a deceased holder of a life estate, or the preparer was requesting a release of dower rights of the spouse of a male life estate holder. This is a complete misunderstanding of the life estate.

Refer to the Table of Corresponding Estates displayed in the beginning of this writing. You will see that the life estate, an estate of present possession, corresponds with the reversion, an estate of future possession.

*Calculus of Estates → life estate + reversion = fee simple absolute.

The fee simple absolute represents an entire line segment. When the fee simple absolute line is broken, the fee simple absolute is destroyed, resulting in the creation of new estates. The fee simple absolute line is broken by the conveyance of a life estate.

Let me demonstrate this:

Let's say that Bill Smith is the owner of blackacre in fee simple absolute. Bill Smith then conveys a life estate to Shirley Thomas. How does this affect the ownership of the property? To answer this question we must determine what new estates are created by Bill's transfer to Shirley.

We know that Bill Smith has conveyed a life estate to Shirley Thomas. Bill Smith, by conveying a life estate, has carved out a piece of his fee simple absolute. Remember that to satisfy the calculus of estates, the entire line must add up to a fee simple absolute. Does the conveyance of a life estate to Shirley add up to a fee simple absolute? The obvious answer is no. So, what follows Shirley's life estate?

When Shirley's life estate terminates, we call Bill's remaining interest a reversion. When Shirley dies, the property reverts back to Bill in fee simple absolute. Put another way, Bill conveyed a life estate, which is less than a fee simple absolute. Bill's retained interest is called a reversion. Upon Shirley's death, the property will automatically revert back to Bill Smith. Bill’s reversion will immediately ripen into a fee simple absolute.

*Calculus of Estates → life estate in favor of Shirley + reversion in favor of Bill = fee simple absolute.

Question: Why would Bill want to convey a life estate to Shirley?

The answers are many, but maybe Bill simply wants Shirley to have a place to live during her lifetime. Remember, the property will eventually make its way back into Bill’s family tree; upon Shirley’s death. The life estate offers Bill an estate vehicle by which he can transfer present possession to Shirley, legally, while guaranteeing that blackacre will find its way back into Bill’s family.

Additionally, maybe Bill owes a debt to Shirley. In this case, a life estate may be utilized as a form of repayment for such debt. From Bill’s point of view, the land is being used productively; for the payoff of an existing debt.

Question: Using the above example, what happens if Bill dies before Shirley?

Answer: Bill’s reversion passes to his estate. If Bill has not voluntarily conveyed his reversion prior to his death, his reversion will pass to his heir(s). The death of Bill will not disrupt the life estate held by Shirley.

Examples Creating a Life Estate & Reversion:

Conveyance #1: Mr. X, a single man, owner in fee simple absolute, conveys a life estate to Dave Phillips.

State of Title: Life estate in favor of Dave Phillips with reversion in favor of Mr. X.

This conveyance creates a life estate and a reversion and thereby satisfies the calculus of estates.

Upon Dave’s death, the reversion held by Mr. X will activate and Mr. X will once again own in fee simple absolute.

Conveyance #2: Dave Phillips, a single man, owner in fee simple absolute, conveys to Rick Phillips, for life.

State of Title: Life estate in favor of Rick Phillips with reversion in favor of Dave Phillips.

This conveyance creates a life estate and a reversion and thereby satisfies the calculus of estates.

Upon Rick’s death, the reversion held by Dave will activate and Dave will once again own in fee simple absolute.

Nuance:

A life estate may be granted or reserved. Let me show you how this works.

In the above examples, a life estate was granted, with a reversion retained by the grantor. However, it is possible for the grantor in a deed to reserve a life estate in himself.

Example: Dave Phillips, a single man, conveys to Rick Phillips. This appears to be a conveyance in fee simple absolute. But in reviewing the full body of the deed the examiner spots a recital, which reads: “Reserving a life estate in favor of the grantor herein.”

State of Title: Rick Phillips, together with a life estate in favor of Dave Phillips.

*Reservation of a life estate is usually effectuated by way of recital within the body of the deed, so make sure you always read the entire deed. Let me repeat this: The entire deed.

How does a reservation differ from a grant?

There is a significant difference between a reservation and a grant. As we already know, when a life estate is granted, there is created an estate of future possession; that being the reversion. When a life estate is reserved in the grantor, the grantor is actually creating two estates of present possession; that being a fee simple in favor of the grantee and a life estate in favor of the grantor, the person reserving the life estate.

This was demonstrated in the above example with Rick and Dave Phillips.

I have an interesting question. Can the holder of a life estate convey its interest?

The answer is yes, but with a direct condition. Remember that a life estate is an estate that is exclusive to the owner of the life estate. A life estate terminates upon the death of the original life estate owner, regardless of any transfer of the life estate interest. Transfer of an existing life estate interest creates the so-called life estate per autre vie.

The Life Estate Per Autre Vie:

When the holder of a life estate conveys his interest to another, he has created a life estate per autre vie. Life estate per autre vie can be defined as: for the life of another.

Here’s how it works:

Conveyance #1: Dave Phillips, owner in fee simple absolute, conveys blackacre to Rick Phillips, reserving a life estate in himself.

State of Title: Rick Phillips, with life estate in favor of Dave Phillips.

Subsequently, Dave conveys his life estate interest to Larry the Cable Guy. Larry the Cable Guy now owns a life estate interest, but only for the life of Dave. If Dave dies before Larry the Cable Guy, Larry’s interest is immediately destroyed. After Dave’s death, Rick Phillips would own blackacre in fee simple absolute, free of the interest of Larry.

Conveyance #2: Mike Thomas, a single man, owner in fee simple absolute, conveys blackacre to Sharon Phillips, reserving a life estate in himself.

State of Title: Sharon Phillips, with life estate in favor of Mike Thomas.

Nuance:

A life estate interest dies with its owner. However, a unique situation is created with the life estate per autre vie.

To demonstrate this, I will use conveyance #2 above as our example:

Original State of Title: Sharon Phillips, with life estate in favor of Mike Thomas.

Subsequent Conveyance: Mike Thomas conveys his life estate interest to Elvis Presley.

Resulting State of Title: Sharon Phillips, with life estate per autre vie in favor of Elvis Presley.

Now, here is what is interesting. Elvis’s life estate will terminate upon the death of Mike Thomas, the original life estate holder. But what happens if Elvis dies before Mike Thomas?

Answer: The estate of Elvis Presley would succeed to Elvis’s life estate per autre vie. Elvis’s estate would then hold a life estate per autre vie until the death of Mike Thomas. The analysis goes like this: A life estate per autre vie is a life estate that is measured against the life of another. In our example, Mike Thomas is the measuring life, not Elvis. As a result, the life estate and the life estate per autre vie will continue to exist until the death of the original life estate holder. This example represents the unique situation in which a life estate is inheritable.

So, when examining a chain of title, make certain to identify whether you are dealing with a straight life estate, or the more complex life estate per autre vie. If you have a life estate per autre vie, go back and identify the original life estate holder.

The life estate per autre vie can cause many practical problems. Many people are caught completely off guard when they find out their supposed life estate interest has been terminated due to the death of their grantor. In Michigan, the joint tenancy with full rights of survivorship is an example of how the life estate per autre vie can cause unsuspected loss of possession to its holder. In chapter eleven I will be discussing the joint tenancy with full rights of survivorship and the unique problems it can create within the State of Michigan.

Whenever you see a conveyance of an existing life estate interest, you are looking at a life estate per autre vie. The life estate per autre vie measures the duration of the subsequent life estate owner against the original holder. It is sneaky stuff, but not difficult stuff if you understand the parameters of the life estate.

The Grant of a Life Estate With Power to Convey:

Another nuance regarding the life estate that you will encounter is the so-called life estate with power to convey. This is not a difficult topic. Here’s how it works.

Example: George Strait, a single man, as grantor, conveys to George Strait, a life estate with power to convey, and if the land is not disposed of upon the death of George Strait, then to Kenny Chesney in fee simple absolute.

We’re up to our you-know-whats in alligators now! What the heck does this conveyance mean?

In the above conveyance, George Strait has created two estates. He created an estate of present possession in himself, that being a life estate with full power to convey. He also created a contingent remainder in favor of Kenny Chesney.

The life estate with full power to convey enables George Strait to convey blackacre, as well as mortgage blackacre. He can do so completely free of the interest of Kenny Chesney. Furthermore, if George conveys the property, or if the property is foreclosed pursuant to a mortgage given by George, Kenny’s interest is completely destroyed.

The potential for Kenny Chesney’s interest to be destroyed is what makes his interest contingent. It is termed a contingent remainder because Kenny’s possession is contingent upon George not conveying prior to George’s death. If George dies without having conveyed, Kenny’s contingent remainder will vest. Kenny will then be the owner in fee simple absolute.

Just remember, when you are faced with a life estate with full power to convey, the holder of this right has absolute power to dispose of or encumber blackacre.

The life estate with power to convey is a frequently used estate tool within Michigan.

State of Title:

You may have noticed my use of the term state of title in numerous areas of this program. The state of title represents the actual ownership of blackacre. The state of title is often referred to as the vesting line. The vesting line is what is displayed in your title commitment on Schedule A. Very important to get it right.

More Examples:

(Scenario #1): The Life Estate & the Reversion.

Conveyance: Dave Phillips, a single man, owner in fee simple absolute, conveys to Rick Phillips, for life.

State of Title: Life estate in favor of Rick Phillips with reversion in favor of Dave Phillips.

*The above state of title is how you would display the vesting line on Schedule A.

*The life estate and the reversion add up to a fee simple absolute, thereby satisfying the calculus of estates.

(Scenario #2): Creation of a Life Estate by Reservation.

Conveyance: Dave Phillips, a single man, owner in fee simple absolute, conveys to Rick Phillips, reserving a life estate in favor of the grantor herein.

State of Title: Rick Phillips, together with a life estate in favor of Dave Phillips.

*The above state of title is how you would display the vesting line on Schedule A.

*This is a unique state of title in that Rick Phillips holds a fee simple and Dave Phillips holds a life estate. This state of title satisfies the calculus of estates.

(Scenario #3): Creation of a Life Estate Per Autre Vie.

Original Conveyance: Dave Phillips, a single man, owner in fee simple absolute, conveys to Rick Phillips, reserving a life estate in favor of the grantor herein.

Original State of Title: Rick Phillips, together with a life estate in favor of Dave Phillips.

Subsequent Conveyance: Dave Phillips, holder of a life estate, conveys to Angela Warner.

Subsequent State of Title: Rick Phillips, together with a life estate per autre vie in favor of Angela Warner.

*The above state of title discloses the life estate per autre vie, which lets all parties know that Angela’s life estate interest is contingent upon the survival of Dave Phillips.

*This is a unique state of title in that Rick Phillips holds a fee simple and Angela Warner holds a life estate per autre vie. This state of title satisfies the calculus of estates.

(Scenario #4): Creation of a Life Estate With Power To Convey.

Conveyance: George Strait, a single man, conveys to George Strait, a life estate with full power to convey, and if the land is not disposed of upon my death, then to Kenny Chesney in fee simple absolute.

State of Title: Life estate with power to convey in favor of George Strait, with contingent remainder in favor of Kenny Chesney.

*The above state of title discloses to all parties that George Strait has full power to dispose of or encumber the subject property.

*This is a unique state of title in that George Strait may freely convey his interest at any time prior to his death, effectively terminating the interest of Mr. Chesney. If he has not conveyed, Kenny’s contingent remainder will vest and his vested remainder will immediately ripen into a fee simple absolute.

The life estate with power to convey and the contingent remainder, when added together, satisfy the calculus of estates.

Summary:

The life estate is exclusive to its holder. When the holder of the life estate dies, the life estate is terminated and the reversion is activated. This reversion immediately ripens into a fee simple absolute. The granting of a straight life estate will automatically create a reversion in the grantor.

I have discussed the unique aspects of a life estate. A life estate can be created by grant or reservation. A life estate holder may convey his life estate interest to another, subject to the life span of the original life estate holder; the so-called life estate per autre vie. I also discussed the creation of the so-called life estate with power to convey. The life estate with power to convey offers its holder full power to dispose of or encumber blackacre, while providing for the transfer of blackacre to a contingent remainderman.

Note: I want you to think of the fee simple absolute as the starting point in all discussions of the estates. It is the mother ship of all our estates. When any interest in the fee simple absolute is carved out, new estates are thereby created. It is your job as an examiner to determine these estates. You accomplish this by utilizing the calculus of estates, and you display this via the state of title.

In the next chapter, we begin a study of the defeasible fee simple estates. Chapter three will concern the fee simple determinable and the possibility of reverter.

dave

Chapter 1: The Fee Simples

2011-07-24T12:42:00.000-07:00

Hello,

The following is an excerpt from my book titled 'Phillips on Land Title Examination: Estates in Blackacre.' The book consists of 13 chapters and I am posting two of these chapters on this blog.

Please read on!

Most people, including most real estate professionals, associate the term fee simple with land ownership. You will often hear someone ask, “Who is the fee owner?” But how many people actually understand what fee simple is? The answer is: probably not many.

The fee simple family consists of two members: 1) The fee simple absolute, and 2) The fee simples defeasible, often referred to as the defeasible fee simples. Collectively, the fee simple absolute and the defeasible fee simples constitute the family of fee simples.

Chapter one will focus on the first of these; the fee simple absolute. A discussion of the defeasible fee simples will encompass chapters three, four and five.

The Fee Simple Absolute:

In our society, the fee simple absolute is the most comprehensive estate regarding land ownership. It is the ownership structure that most people are familiar. The fee simple absolute is characterized by the following: 1) its potential longevity; 2) its free transferability, and 3) its lack of conditions or restrictions that may render the fee simple estate defeasible.

First up, what do I mean by potential longevity?

Let me use this example to help explain:

Let’s say that Dave Phillips is the owner of blackacre in fee simple absolute. Upon Dave’s death, if he has not previously disposed of blackacre, his ownership interest will pass, by operation of law, to his heirs. Let’s further assume that upon Dave’s death, he is survived by his son, Sparky, his only heir.

Sparky would be the new owner of blackacre in fee simple absolute. Upon Sparky’s death, if he has not previously disposed of blackacre, his ownership interest will pass, by operation of law, to his heirs, if any.

This succession of ownership could theoretically continue for all time; as long as the family tree is strong. Inheritability is one of the aspects that make the fee simple absolute so appealing. As long as there is an heir in existence at the death of the fee simple absolute owner, title will transfer.

Next, property held in fee simple absolute is freely transferable. The holder of a fee simple absolute may convey his interest at any time. He may convey his entire fee simple absolute interest, or only a portion thereof; it’s his exclusive choice.

Nuance: The holder of a fee simple absolute interest may have one or more potential heirs during his ownership period. I say potential because an heir does not exist, legally, until the actual death of the fee simple absolute owner. There may be numerous hopeful people, but the heirs will not be established until death. For this reason, the potential heirs have no legal standing to challenge a conveyance from the living owner of a fee simple absolute estate.

Finally, the fee simple absolute estate is free of conditions or restrictions.

Let me show you what I mean:

Conveyance #1: Julie Phillips, owner in fee simple absolute, conveys blackacre to Dave Phillips.

State of Title: Dave Phillips in fee simple absolute.

Conveyance #2: Julie Phillips, owner in fee simple absolute, conveys blackacre to Dave Phillips, as long as no liquor is sold on the subject property, and if liquor is sold, the property shall automatically revert back to Julie Phillips in fee simple absolute.

All right, conveyance #1 contains no restrictions or conditions. A text-book fee simple absolute interest was transferred. Conversely, conveyance #2 contains a specific restriction: that no liquor is to be sold on blackacre. This restriction makes it impossible to establish a fee simple absolute estate.

Conveyance #2 actually creates a fee simple determinable with possibility of reverter. A discussion of these estates will begin in Chapter three.

*What is important to remember is this: The moment you spot a condition or a restriction placed upon a grantee, as demonstrated in conveyance #2, you are not looking at a fee simple absolute.

As a practical matter, the marketability of property is often interfered with when a restriction exists. For example, a potential purchaser of blackacre may decide to back out once she learns that blackacre is subject to a possibility of reverter.

Now, to complete the circle, how is the fee simple absolute terminated? Here are some possibilities.

First, the holder of a fee simple absolute may convey his or her interest at any time, as discussed. This conveyance would act to terminate the grantor’s fee simple absolute interest.

Second, a holder of a fee simple absolute interest in blackacre may die without an heir and without having left a will. Dying without a will is referred to as dying intestate. This scenario would terminate the fee simple absolute estate. In this peculiar situation, blackacre would escheat to the State of Michigan. Escheat is when a governmental unit takes back property that has no takers. If the owner of blackacre dies without a legal heir and without having left a will, the property would, in effect, be abandoned. So, in this situation, the State of Michigan would be more than happy to take your land. However, in today’s day and age, the state may not be excited about taking possession of land that may have little to no value. I digress.

Finally, a fee simple absolute interest, as well as any estate interest for that matter, may be terminated by forfeiture or foreclosure. Forfeiture and foreclosure are legal proceedings, the finalization of which acts to terminate all existing interests.

Additionally, although the fee simple absolute is an enduring estate, it is not free of governmental regulation. Governmental regulations such as zoning laws and police power represent inherent restrictions placed upon blackacre. Governmental regulations will maintain priority over any created estate.

Taxation is another beast. In Michigan, real property taxes are collected on all non-exempt parcels of land. If such taxes are not timely paid, forfeiture and foreclosure may act to oust the delinquent owner.

As a final twist of the knife, the hammer of eminent domain may be dropped on a land owner, completely destroying her ownership interest. Eminent domain is a legal process by which the landowner has property taken from them, called a condemnation proceeding. The landowner is compensated for such taking. Eminent domain is an animal of its own kind.

These points are made to demonstrate that the fee simple absolute, though our strongest form of land ownership, is not perfect.

Defining the Fee Simple Absolute:

Fee is synonymous with present possession and ownership. Simple refers to an estate that is inheritable. Absolute discloses that there are no impediments to the ownership, such as competing estates or restrictions, as discussed above.

Examples Creating A Fee Simple Absolute:

Conveyance #1: Mr. X, a single man, owner in fee simple absolute, conveys to Dave Phillips.

State of Title: Dave Phillips in fee simple absolute.

Notice that there are no conditions or restrictions placed on Dave’s interest. This conveyance creates a fee simple absolute and thereby satisfies the calculus of estates.

Conveyance #2: Susan Smith, a married woman, owner in fee simple absolute, conveys to Michael Thomas in fee.

State of Title: Michael Thomas in fee simple absolute.

Again, notice that there are no conditions or restrictions placed on Michael’s interest. This conveyance creates a fee simple absolute and thereby satisfies the calculus of estates.

Conveyance #3: Lisa Jones, owner in fee simple absolute, conveys to Rick Phillips in fee simple.

State of Title: Rick Phillips in fee simple absolute.

Again, notice that there are no conditions or restrictions placed on Rick’s interest. This conveyance creates a fee simple absolute and thereby satisfies the calculus of estates.

Conveyance #4: Tricia Title, owner in fee simple absolute, conveys to Bob Jones in fee simple absolute.

State of Title: Bob Jones in fee simple absolute.

Notice that conveyance #1 was to Dave Phillips; conveyance #2 was to Michael Thomas (in fee); conveyance #3 was to Rick Phillips (in fee simple); and conveyance #4 was to Bob Jones (in fee simple absolute). In all four examples, an estate of fee simple absolute was created. It is not necessary to add additional language, such as that used in conveyances 2 through 4. A conveyance to Dave Phillips will create the same estate as a conveyance to Bob Jones in fee simple absolute.

Summary:

Chapter one was predominantly a discussion of the fee simple absolute. The fee simple absolute, in our culture, is the most comprehensive estate regarding land ownership. It is characterized by 1) its potential longevity; 2) its free transferability, and 3) its lack of conditions or restrictions that may render the fee simple estate defeasible.

The family of fee simples consists of the fee simple absolute and the fee simples defeasible. Unlike the fee simple absolute, the fee simples defeasible are subject to conditions or restrictions. It is these conditions or restrictions that render the fee simple estate defeasible. Defeasible means that the owner of the fee simple interest may have his interest completely destroyed upon the breach of a restriction or the failure of a stated condition. Defeasible fee simples are very harsh, and the uneducated holder of such an estate may be in for some awful surprises.

The fee simple is made defeasible in one of three ways: 1) by creation of the estate of fee simple determinable; 2) by creation of the estate of fee simple upon condition subsequent; or 3) by creation of the estate of fee simple subject to executory limitation. These three estates are covered in detail beginning with chapter three. Please be patient!

The next chapter will concern the life estate and the reversion. The reversion is an estate of future possession created when the holder of a fee simple absolute conveys a life estate. Chapter two will offer us a good opportunity to make the distinction between present and future possession.

dave

Changes

2011-07-24T12:23:00.000-07:00

I have decided to change the format of this blog.

This blog will be used solely for posting property related articles. I am creating a separate blog site for my personal writings.

This should allow for easier reading for people concerned only with the property/title topics.

dave

Special Thanks

2011-03-11T15:02:00.000-08:00

I am offering special thanks to the following people:

1) Lisa Giraud-Minutolo;

2) Dan Nichols; and

3) Angela Warner.

They give me assistance and advice that I greatly need.

Lisa Giraud-Minutolo:

I met Lisa sometime around 1998 or 1999, I don't specifically remember, although I'm sure that she does. I have worked with Lisa at numerous entities over the years. Lisa is the Chief Title Officer at Dearborn Federal Credit Union.

Lisa is a consummate professional, a talented examiner. She calls me whenever she runs into computer problems (just kidding). In my eyes she represents all that a title professional should be. If I were starting a title operation of any sort, Lisa would be my first recruit; my blue chip recruit.

Lisa has helped me on numerous occasions over the past few years. That's what I'm thanking her for. Not only has she offered help; she has come through. She offers me logical thought when I'm illogical, which can be frequent.

I think she understands what I'm about. I believe we share similar philosophies regarding title insurance and life in general. We both despise the driftwood that permeates the industry, and we both have great hope that skilled professionals will eventually reenter the industry.

If you're looking for a top flight, consummate professional, Lisa is the one for you. Contact her at Dearborn Federal Credit Union today.

Dan Nichols:

I met Dan over 30 years ago. We were both young punks growing up in Royal Oak. As young punks in Royal Oak do, we played little league baseball. We actually pulled off the vaunted "hidden ball trick" to pick off an unsuspecting base runner. Really funny shit! It must have been a funny sight, as I was around four feet tall and Dan was around 5' 6".

Dan is an entrepreneur and a business owner. He owns and operates a D.J. business, performs as a motivational speaker, and offers consultation to other entrepreneurs launching a business venture. He has given me both advice and motivation. I wouldn't be writing this blog article if it weren't for his direction. I wouldn't be writing a program on land title examination if it weren't for his direction. The basis of my program was his idea.

I had the pleasure of watching Dan deliver a great performance as the key note speaker at the Michigan Real Estate Investors' meeting in January. It was held at the Michigan State University Educational Center in Troy. It was a motivational speech in front of a packed audience. I found it very creative, very emotional, and very inspiring. As an athlete I heard many motivational sermons; sermons so powerful I was inspired to eat nails. Dan's presentation was just as powerful. His performance required courage.

Dan, thanks for keeping the fire burning within me.

If you're looking for someone with great creativity and a great motivational force, contact Dan today @ tdannichols.com.

Angela Warner:

I met Angela in October of last year. To this point she seems to be able to withstand me. My mind has the ability to get a little strange once in a while. She likes the strange part of me. She wants me to be creative and aggressive; which I love.

Angela is the controller at In Rhodes Management, Inc., a property management firm specializing in condominium associations. She's a top shelf professional; extremely skilled at what she does.

What is it about her? She believes in what I am and what I want to be. It seems she has more confidence in me than I have in myself. As the old John Cougar song tells us: "Everyone needs a hand to hold onto . . . don't need to be no strong hand, don't need to be no rich hand .... ." Angela is a hand that I am holding onto.

Thank you, Angela. Thank you for being a good woman, and thank you for understanding.

If you represent an association looking for a great management firm with highly talented individuals, In Rhodes Management, Inc. is for you. Contact them today @ inrhodes.com.

The past few years have been an extreme challenge for me. I have had to lean on certain people for my very existence. People like Lisa, Dan, and Angela have given to me. I hope and believe that eventually I will be in a position to give to them. They are special people to me and they deserve special thanks.

dave

Land Division Act: Schedule B2

2010-12-23T12:58:00.000-08:00

INTRODUCTION

The purpose of this memorandum is (1) to explain why the Subdivision Control Act notation is placed on a title commitment, and (2) to explain why the Subdivision Control Act exception is placed on a title policy.

DISCUSSION

In Michigan, the division of unplatted land is governed by the Land Division Act, Act 288 of 1967, Chapter 560, MCL.

Sections 108 and 109 are the sections of concern.

The Subdivision Control Act notation that I place on a title commitment is as follows:

Should the Deed required in this Commitment contain the statement provided for in Section 109(3) of the Subdivision Control Act of 1967, as amended, the policy(s) to be issued pursuant to this Commitment will contain an exception as to such statement.

Section 109(3) states: A person shall not sell a parcel of unplatted land unless the deed contains a statement as to whether the right to make further divisions exempt from the platting requirements of this act under this section and section 108 is proposed to be conveyed. The statement shall be in substantially the following form: "The grantor grants to the grantee the right to make (insert number) division(s) under Section 108 of the land division act, Act No. 288 of the Public Acts of 1967." In the absence of a statement conforming to the requirements of this subsection, the right to make divisions under section 108(2), (3), and (4) stays with the remainder of the parent tract or parent parcel retained by the grantor.

Section 108(2), (3), and (4) deals with the number of available divisions as they relate to the size of the parent parcel (in acres). For example, subsection (2)(a) permits 4 parcels to be created out of a 10 acre parent parcel.

The last sentence in Section 109(3) is very important. If the statement for available divisions is excluded from the deed, the right to make further divisions shall stay with the remainder of the parent tract or parent parcel retained by the grantor. This is particularly important to the purchaser who intends splitting its newly acquired property.

We, as the title company, do not assume any responsibility or liability for failure of the parties to adequately display their intent as to the number of divisions either granted or retained. As a result, I place the above notation on the Commitment to serve notice to all interested parties that my company will take exception to all issues relevant to the land division act, as it applies to our transaction.

Finally, after the transaction closes, the following exception will be shown on the subsequent policy:

Provisions concerning the number and/or transfer of available divisions under Section 108 of the Subdivision Control Act, Act No. 288 of 1967, as contained in Deed recorded in Liber 25349, Page 202, Wayne County Records. (Example)

CONCLUSION

Sections 108 and 109 of the Land Division Act function together. Section 109(3) directs us to Section 108(2), (3), and (4).

The title commitment notation is solely informative in that it informs all parties that the title company will not be responsible for any conveyance, or lack thereof, of available divisions.

Finally, consent from the underwriter is necessary to remove the referenced policy exception.

Why? Because I'm good like that!

dave

Delinquent Taxes: The Forfeiture and Foreclosure Pipeline

2010-11-23T12:12:00.000-08:00

Many homeowners are dealing with delinquent property taxes. If you happen to be such an owner, please read on. This article walks the reader through the processes involved regarding delinquent property taxes. This process starts with an actual delinquency and may end with foreclosure and loss of your home. If your property is properly foreclosed, fee simple title will pass to the Foreclosing Governmental Unit (FGU), which is usually the county in which your property sits, and your interest will be terminated. This is some really serious shit; you will ultimately lose all rights in your home if property taxes are not paid.

Here's how it all plays out:

Property taxes are billed twice annually by the treasurer's office. There is a collection in the summer and a collection in the winter. They are indeed termed 'summer' and 'winter' taxes, respectively.

I use 2005 as the example year. Let's assume our property is located in Troy, Michigan, Oakland County. The fee owner of such property is none other than Hercules.

Hercules receives his 2005 summer tax bill. Instead of paying this bill, he decides to purchase season tickets for the Detroit Red Wings (an expense most Detroiters would deem logical).

Later this same year, Hercules receives his 2005 winter tax bill, due and payable on December 1. Instead of paying this bill, he decides to purchase the beard and mustache trimmer he spotted at Walmart (always the bargain shopper).

Ultimately, 2005 comes to a close and Hercules has not paid any portion of his taxes. Nonetheless, there is good news: The Red Wings are in first place and Hercules doesn't have to worry about crumbs getting caught in his mustache after a good meal.

What happens next?

Hercules will have until February 14, 2006 to pay the 2005 winter taxes, as well as the delinquent 2005 summer taxes, at his local treasurer's office. The timing and place of payment is important to understand. Up to February 14, Hercules can make payment directly to the treasurer's office in Troy. After such date, all delinquent 2005 taxes will be forwarded to the Oakland County Treasurer's Office. On March 1, 2006, the Oakland County Treasurer's Office receives all delinquent 2005 taxes and the game is on. Local treasury offices do not forfeit or foreclose tax delinquent lands. This responsibility is transferred directly to the county treasurer of the county where the land sits.

At this time, administrative fees and interest are added to the delinquent tax bill. The pressure mounts.

Between June 1, 2006 and February 1, 2007, a series of notices will be sent to Hercules, informing him of what he already knows. Pay the damn taxes or we will turn the screws even tighter.

2007 rolls around and Hercules has still not paid his delinquent 2005 taxes.

On March 1, 2007, his property is forfeited to the Oakland County Treasurer. A Certificate of Forfeiture is recorded at the Register of Deeds evidencing such forfeiture. The pressure continues to mount.

Does the Certificate of Forfeiture mean that Hercules loses his home? The answer is no; at least not at this moment.

You see, obtaining forfeiture is a procedural method executed by the county treasurer. The forfeiture allows the county to seek foreclosure, via the Circuit Court, regarding such forfeited land. In other words, the county can't just skip from delinquency to foreclosure. It must follow the necessary steps, and that first step is forfeiture.

The property in our example will remain in forfeiture, subject to payment, from March 1, 2007 until March 1, 2008: one full year. If Hercules pays all sums due, the county will record a Certificate of Redemption relative to the recorded Certificate of Forfeiture. Once paid, Hercules will be deemed current on his tax schedule and he can get back to enjoying Pavel Datsyuk.

March 1, 2008 has arrived and Hercules has not paid. What now?

Between March 1 and March 10, 2008, the Oakland County Circuit Court will enter Judgment of Foreclosure. Big time shit here! From the date the judgment is entered, Hercules has only 21 days to redeem. If he does not redeem within this window, fee simple absolute title will pass to the County of Oakland. Subsequently, Hercules will be removed from the property and he will have no further legal rights.

Heavy stuff!!

Regarding title examination:

First, if a Certificate of Forfeiture has been recorded, set up your requirement as follows:

Record Certificate of Redemption in regards to that certain Certificate of Forfeiture recorded April 10, 2010 in Liber 40116, Page 112, Wayne County Records.

Next, check the face of the Certificate of Forfeiture to see who or what entity has redeemed the property. This person or entity, if other than the current fee holder, may be entitled to a lien for such payment. If the party redeeming is someone other than your owner, set up your requirement as follows:

Record release of lien in favor of Bob Jones, redeemer, as disclosed by Certificate of Redemption recorded June 12, 2010 in Liber 42115, Page 104, Wayne County Records.

Note: If the redeemer is listed as a title company, the examiner should disregard this requirement, as a title company will not maintain a lien.

Additionally, if a Judgment of Foreclosure has been issued, stop and consult your particular underwriter for guidance. Many underwriters will not insure a transaction that is on the heels of a tax foreclosure. The reason is that of uncertainty, which focuses on due process. Due process is constitutional. In general, it requires that all parties with a legal interest in the property be given notice and an opportunity to be heard. Notice is key. Were all necessary parties properly served? Well, a title entity is not in the business of service of process and, therefore, cannot be certain if all necessary parties were granted due process. Regarding foreclosed property, it is likely that your underwriter will either 1) deny the order, or 2) require a quiet title action.

The tax forfeiture and foreclosure statutes were enacted for the purpose of streamlining the old tax laws. The new laws were supposed to make it easier to deal with tax delinquent lands. However, there is a joker in the deck. The joker is due process, as mentioned. The goal was to free up lands for sale, to make such lands more productive. But if title underwriters are unwilling to insure, the whole system theoretically fails. The purchaser of foreclosed property may find herself jumping through hoops to procure a title policy, which hoop may include the institution of a quiet title action. It all costs money and it all takes time and it is all stressful.

Remember to check with your underwriter.

Hope this has been a help to all.

dave

Land Contract - Insure Your Vendee Interest

2010-05-12T15:42:00.000-07:00

A land contract is an executory contract to sell land.

The person or entity selling the land is referred to as the vendor.

The person or entity purchasing the land is referred to as the vendee.

The vendor is typically the fee owner of the subject property. However, some contracts recite the vendor as an existing vendee. This is called a second land contract. It works like this: Bill Smith, fee owner and vendor, sells to Mike Thomas, vendee. This is the original land contract. Subsequently, Mike Thomas, as vendor, sells to Shirley James, vendee. This is the second land contract. Mike Thomas is both a vendee on the first contract and a vendor on the second contract. Both contracts exist concurrently and both contracts must be properly fulfilled before Shirley James can receive marketable title.

A purchaser in a land contract is similar to a purchaser in a garden variety purchase agreement. The difference is in the timing. A land contract is executory and extends over a period of time, whereas a purchase agreement calls for a single transaction, that being a concurrent transfer of money from the purchaser with receipt of deed from the seller.

Now, why should a land contract vendee obtain title insurance?

The reasons for insurance should seem obvious. However, many people believe that a land contract vendee interest is not insurable. This is incorrect, as a vendee interest is fully and necessarily insurable. Additionally, a vendee may figure they can just wait until the contract is fulfilled and then obtain title insurance upon receipt of their warranty deed. This is possible but extremely risky!

First off, a vendee will want to verify the proper fee owner of the land. Take this scenario for instance: Dave Phillips, fee owner of blackacre, leases his property to Brian Bosworth, former football hero. Subsequently, Mr. Bosworth sells on a land contract to Barry Switzer, his former coach. In this scenario, Mr. Switzer would not be purchasing anything, as Brian Bosworth has no ownership interest and consequently no authority to sell blackacre. A title company would disclose the fee interest of Dave Phillips and lessee interest of Brian Bosworth. Consequently, Mr. Switzer would not be fooled into signing a bogus contract. Establishing the proper fee owner establishes the legality of the proposed land contract.

Next, the tax monster. Prior to the execution of the contract, property taxes affecting the land may fall into many categories: (1) Taxes may be paid current; (2) taxes may be delinquent; (3) taxes may be forfeited; or (4) Taxes may have been foreclosed. For the unsuspecting vendee, categories 2, 3, or 4 can be a tremendous headache. Note: taxes always have superior lien position. Who pays the taxes will be spelled out in the land contract itself. However, a vendee will want to verify that there are no surprises. For instance, if a Judgment of Foreclosure has been rendered, and the relevant 21 days to redeem has passed, the property will be owned by the Foreclosing Governmental Unit (FGU), not your land contract vendor!

How about stray interests? Stray interests 'cloud' the title. There is usually no way a vendee can be aware of stray interests without a proper title search. If a stray interest exists, a title company can procure proper documentation to remove such interests, thereby relieving the vendee of future attacks on title.

Now, a big one: Senior liens. Any and all recorded liens in existence, prior to the recording of the land contract, will have priority over the vendee interest. Senior liens can be deadly to a contract vendee. If such lien falls into default and is foreclosed, the vendee interest will be wiped out. In the best case scenario, the vendee, after notice from the foreclosing party, would have to redeem such lien and then battle it out with the vendor regarding contribution or indemnification. You see, many contracts are executed with an existing lien on the property, usually a mortgage. The benefit of having vendee title insurance is this: The title company will record the land contract, or a memorandum thereof. You, as the vendee, will know what senior liens exist and, furthermore, all senior lien holders will have record notice of your vendee interest.

I have disclosed some of the major reasons why a land contract vendee should obtain title insurance. The vendee simply has too much at stake. Title insurance discloses the condition of the land prior to the vendee obtaining its interest. However, there are situations that may arise, subsequent to execution of the contract, that may impact the vendee's interest. Bankruptcy filed by the vendor, as well as defaulted senior liens, are two of the big ones. Note: If a vendor files bankruptcy, the contract is typically not affected. The trustee will usually give the vendee the option of either rejecting the contract or continuing the contract with payments being remitted to the trustee instead of the original vendor. It is possible that the trustee may try to argue that the land contract itself is part of a fraudulent transaction, but for general purposes, a garden variety land contract will survive a vendor bankruptcy filed subsequent to recordation of the land contract.

Important: Title insurance does not insure the land contract itself; it insures the vendee as to the condition of the land they are purchasing, as shown on the policy. The land contract itself is a contract between the vendor and the vendee. The title company is not a party to this contract. As a result, the terms and conditions of such land contract are set out as a specific exception on the title policy. This all focuses on "autonomy" of contract. The parties are free to make any legal contract they so desire. The vendor and vendee both have correlative 'rights' and 'duties' relative to such contract. The title company has no rights or duties relative to such contract and, therefore, cannot be asked to police or insure the contract.

Conclusion: A vendee should obtain title insurance. It would be extremely negligent to do otherwise.

Hope this helps,

dave

Preferential Transfer and Title Insurance

2008-12-09T15:35:00.000-08:00

It has been a long day. Recently, I have been working as a rancher in Norman, Oklahoma. It took me a time to get used to the cowboy hat and boots, but, all in all, I like it. I look cool, plus I am the desired 5' 10", up from my previous 5'5". Nonetheless, despite severe saddle sores and an annoying rattlesnake bite, I have made my way to the computer to write this inspiring article regarding preferential transfers.

First, some arts and crafts:

Lenders lend money to land owners. The land owner will grant a mortgage to the lender as security for such loan. The lender will usually seek 'title insurance' for the purpose of protecting its lien status on the subject property. Title insurance is extremely important to a lender that, among other things, may ultimately be forced to foreclose on the mortgagor. Sadly, bankruptcy is becoming more and more of an issue these days. The bank wants protection. The ALTA Loan Policy (6-17-06) affords a number of 'covered risks' to a lender. In keeping with the title of this article, I will be focusing on covered risk 13 (b). The relevant section reads:

13. The invalidity, unenforceability, lack of priority, or avoidance of the lien of the insured Mortgage upon the Title . . . (b) because the insured Mortgage constitutes a preferential transfer under federal bankruptcy, state insolvency, or similar creditors' rights laws by reason of the failure of its recording in the Public Records (i) to be timely, or (ii) to impart notice of its existence to a purchaser for value or to a judgment or lien creditor.

Objective: This article will enable a title examiner to understand what a bankruptcy trustee is attempting when she moves to avoid a mortgage lien under Section 547 of the bankruptcy code. I will accomplish this by helping the reader digest the preferential transfer statute, discussed below, as it relates to covered risk 13(b). EXAMINERS: If you haven't already done so, attain a copy of the current ALTA Loan Policy jacket and become familiar with its coverages and exclusions. When mortgagors find themselves in financial trouble, the crap will begin to hit-the-fan. At that moment, all parties scramble to protect their positions. The parties include the debtor, the mortgagee (lender), and the title company. The elements of a preferential transfer are set forth in Section 547 of the bankruptcy code. In particular, Section 547 (b). The bankruptcy trustee will invoke the use of this section, as it is only the bankruptcy trustee or debtor-in-possession that can bring the action.

Section 547(b) reads:

. . . the trustee may avoid any transfer of an interest of the debtor in property--

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made--

(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if--

(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

Now, let me use Mr. Routine to help us untangle the mess.

Section 547(b): The trustee may avoid any transfer of an interest of the debtor in property. Explanation: When Mr. Routine grants a mortgage of his land as security for the bank loan, he has effectively transferred an interest in his land.

Section 547(b)(1): To or for the benefit of a creditor. Explanation: Mr. Routine's granting of a mortgage is for the benefit of the bank. The bank is the creditor.

Section 547(b)(2): For or on account of an antecedent debt owed by the debtor before such transfer was made. Explanation: An antecedent debt is a debt in existence prior to the transfer of the debtor's interest in property. Example: Let's say that Mr. Routine takes a loan from the bank on February 1, 2008. He subsequently grants a mortgage to the bank, in regards to such loan, on April 1, 2008. We would technically say that Mr. Routine had transferred an interest in his land, the granting of the mortgage, on account of the loan received on February 1, the antecedent debt. The loan existed before the actual transfer of Mr. Routine's interest in land. Now, most loans are given in concurrence with the granting of the mortgage. Both are accomplished simultaneously at the same closing. But for preference policy, the transfer of the debtor's interest in property, the granting of the mortgage, is not deemed to be effective until the mortgage is perfected (recorded) in the public records. This is usually some days subsequent to the date of closing. Sensible or not, a loan/mortgage swap may be considered a transfer on account of an antecedent debt. More on this shortly.

Section 547(b)(3): Made while the debtor was insolvent. Explanation: A debtor is insolvent if the debtor cannot pay its debts as they mature. Very simple. The trustee has the benefit of assuming insolvency of the debtor at the time of the transfer in question. It is then up to the debtor to show rebuttable evidence to the contrary; the so-called burden of proof. The reasoning behind this section is prudent: if the debtor, at the moment the questionable transfer is made, is solvent, the debtor would theoretically have had enough money to pay all creditors on time. With solvency there is no preference; it only becomes an issue when it appears that one creditor is being favored over another.

Section 547(b)(4): Made (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, is such creditor at the time of such transfer was an insider. Explanation: Subsection (A) is self-explanatory: was the transfer of an interest of the debtor in property executed within 90 days prior to the filing of the petition. If the answer is yes, then the trustee can proceed with her analysis. However, if the answer is no, the trustee must move to subsection (B) in an attempt to establish transfer to an insider. Briefly, an insider includes a person or entity that has a special advantage or influence over other creditors or the debtor. A family member or business partner can be used as examples. If the trustee is successful in establishing insider preference, then she may lean on subsection (B) to satisfy this element.

Section 547(b)(5): That enables such creditor to receive more than such creditor would have received if - (A) the case were a case under chapter 7 of this title. Explanation: In a chapter 7 proceeding, the trustee will marshall as many non-exempt assets as possible for payment to unsecured creditors. Note, however, that a real estate mortgage, once perfected, secures the loan to its collateral: the homeowner's land. A secured creditor will receive 100 cents on the dollar. As a result, the lender holding a mortgage will not receive more than it would have received if the debtor subsequently files under chapter 7.

IMPORTANT INTERJECTION:

Section 547(e)(2) allows for immunity from a preferential transfer attack. This section allows for a 30 day grace period (or safe-harbor) in which a mortgage must be perfected. If the mortgage is successfully recorded within this time frame, a preferential transfer cannot be established. Section 547(e)(2) permits title companies, functioning efficiently, to avoid preferential transfer claims. If a title operation is negligent in its recording department, a preferential transfer attack is likely to pay a visit to such operation.

Now that 547(e)(2) has been disclosed and the main dimension discussed, I can now make the connection between covered risk 13(b) of the loan policy and 547(e)(2). Section 13(b) insures the insured against a preferential attack only if the mortgage is not recorded timely. What this means is this: a valid claim will exist against the loan policy if the title company does not get the mortgage perfected within the 30 day safe-harbor period (547 (e)(2)). In essence, 30 days subsequent to the closing of the loan. Remember, if the mortgage is timely perfected, a preference cannot be established.

Additionally, the ALTA Loan Policy contains exclusions from coverage. I want to draw your attention to Exclusions From Coverage Section 6(b). In short, Section 6(b) excludes from coverage a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy. Explanation: Understanding coverages and exclusions of any policy is essential for completing the full circle and understanding just what risks are being insured. I believe that exclusion Section 6(b) is saying this: "We, as your title insurer, will only assume liability if we are in violation of the safe-harbor rule set forth in Section 547(e)(2) of the bankruptcy code. We assume no liability regarding any provisions of Section 547(b)." In other words, the title company will not be a party to any arguments regarding the debtor's solvency or preference periods concerning the date of the filing of the bankruptcy petition. These are all arguments to be had between the trustee, the debtor, and the lender. Without this reasoning, title companies could not function in any logical manner; they would be defending a tremendous amount of their loan closings.

The elements of a preferential transfer are not very difficult to understand. The trustee has some homework to do before such an avoidance action can be brought. If all the elements of Section 547(b) are established, the trustee must then turn to 547(e)(2) to establish untimely recording. If all this is successfully accomplished, the trustee will be empowered to avoid the transfer of an interest of the debtor in such property. By avoid I mean "wiping out" the transfer of such interest. This makes good business sense, as the trustee is attempting to pay as many creditors as possible through equal distribution of the debtor's non-exempt assets. The trustee in a successful preferential transfer attack wins in two ways. She avoids the lien of the mortgage, and she can also recover pre-petition payments to such lender, as these payments would be considered preferential.

Author Note: I think it is imperative that the reader understand that a preferential transfer, although avoidable, is not illegal. The debtor is attempting to satisfy an obligation to an existing creditor. That's a good thing! Establishment of a preferential transfer simply allows the trustee to pay all creditors on an equal basis: the so-called equal distribution principle.

Title insurance, like any other form of insurance, involves risk. Every property transaction contains risk. Title insurance companies have no part in the contract between a land owner and a bank. For example, as it relates to Section 547, a title company does not have a duty to confirm debtor solvency on the day a loan was given to such debtor. Indeed, an underwriter has one simple demand of its title agent: RECORD THE MORTGAGE, PROPERLY, WITHIN 30 DAYS OF THE CLOSING. In so doing, although the elements of a preferential transfer exist, Section 547(e)(2) will act as an affirmative defense.

dave

Will Bailout Work?

2008-12-06T12:26:00.000-08:00

Hello again. As congressional proceedings continue to unfold, it has been almost impossible to ignore the drama surrounding bankruptcy, bailout, the Big 3, et cetera et cetera. I find it very entertaining and fascinating! It has also allowed for mass basic consumer education.

First, my thoughts on the current bank bailout:

This money was dispersed with the intention of stimulating banks to lend. Well, currently, that hasn't worked. In fact, it appears that most banks are holding the money and refusing loan applications from bad credit risks. Smart? Of course. In my article 'Common Cents' I posited that banks would not lend, at least initially, because of the current market risk.

It has been outlined that interest rates may fall as low as 4.5%. However, this only applies to the resale market. Furthermore, as of today, most purchasers may not meet the qualifications for such a loan. Why? Because they are bad credit risks! And around and around we go.

Michigan, in particular, needs help in the refinance arena. Many troubled homeowners with delinquent loans, or loans on the eve of a foreclosure sale (the 800 pound gorilla), are desperately seeking to refinance at lower rates. However, many of these loans exceed the value of the collateral, which renders zero equity, which renders the refinance applicant unable to qualify. Certainly they will not be able to qualify at 4.5%. And around and around we go. It's like Robert De Niro in Analyze This.

Realistically, the job market in Michigan may not see any significant change for two years or more. So how can there be any immediate help for these homeowners? Well, there has been talk in the media that some of the bailout money should go directly to the middle class, where foreclosures are destroying communities. We will have to wait and see if any of this money is allocated in such a manner, but I don't believe that we will see this. Maybe my idea of dropping all loans to 3% has some merit? No bailout money would be needed for this result, only a banking institution that is willing to share in the disaster it has created. Not likely to happen either!

Rest assured, bankruptcy filings will skyrocket in the coming months. Unfortunately, Chapter 13, used to cure a delinquent home loan, will not be available to people out of work, as Chapter 13 requires wage earnings or other viable means of funding the plan. I suspect that we will start to see more and more wild financing scams, as desperate homeowners throw caution to the wind.

Next, my thoughts on the current Big 3 bailout:

Alright, so they will get some bailout money, as predicted. Then what? That's a very sensible question. Let's take 20 or 30 billion dollars and continue to function, in the short term, as is. Well, the economy does not support people buying cars in December and it will not support people buying cars in January, February, or March either. So, this money is quite likely to be burned up by March 1. Then what? Well, as Congress has stated: "You guys will be back here asking for more money." Of course they will. Then what? Congress will lend more money. And around and around we go. How can we expect different when a Chapter 11 has been put on the bench. All or most of the creditors and contractual parties will continue to want money. With no increase in revenue, how are the Big 3 going to satisfy such obligations? Interesting. As some in Congress have implied: How long will we keep meeting with you and lending to you? 100 or 200 billion more dollars? Keep in mind that a bailout puts Congress in a management position. As many have said, Congress has no place managing a car company. Well, how about bankruptcy? Bankruptcy allows current management to stay in place (termed a "Debtor in Possession"). And, once again, such bankruptcy would not indicate a collapse of the industry, as so many analysts purport. Quite the opposite: It indicates a plan of rebirth.

Close:

If you follow the different experts, or watch the news, it is crystal clear that such experts are split (50-50) on the bankruptcy v. bailout debate. That, to me, indicates that you can't necessarily be wrong no matter what side of the fence you fall on. That's what decisions are: having options to choose from. That's what lends fascination to the current crisis facing this nation.

Mr. Obama indicates that 2.5 million jobs will be created by 2010 through infrastructure work on roads and bridges. That leaves 7.5 million still out in the cold. It also leaves most of the middle aged persons out in the cold. How many men and women, say 35 or older, would be physically fit for, or excited about, rebuilding I-94? It's comical in thought. And how would this impact our universities? Would Bill need that law school degree if all that awaits him is a job rebuilding on-ramps? Creation of jobs is much more profound than simply working on our infrastructure. Sure, it's a good first step, but only a first step. Suggestion: WE MUST REBUILD THE REAL ESTATE INDUSTRY. Everything from home building to the lending process (banks and others) must be changed to fit incomes; incomes that can sustain recessions.

Do I believe that America will regain economic stability and strength? Of course I do. But what inspires me to write of these issues is that these times are so unique to me. I am living the American "nightmare" and I am attempting to capture my point of view while I can; while it is fresh in my mind. Moreover, even if the rest of my life is an economic train wreck, it is of dire importance to me that my two children have an industry, or many industries, that they may flourish in and solidify their own family unit.

I am certain that many people agree with my writings. Conversely, I am certain that many people disagree. Either or, as time goes by, my current articles will enable me to remember and never forget 2008.

dave

Bankruptcy Bashing

2008-12-04T08:11:00.000-08:00

I just caught a conversation on CNN that featured Ray Young, the CFO of GM, and Jack Welch, the retired CEO of General Electric. These individuals share opposing views concerning a GM bankruptcy. Mr. Welch favors a bankruptcy administration, while Mr. Young opposes.

No surprise.

In my recent article 'Common Cents', I wrote, in part, of a viewpoint held by those opposing a bankruptcy. To restate, the basic position of those opposed is this: "People won't buy cars from a bankrupt company." What caught my attention during the above discussion was this: Mr. Young stood on the ground that people may not buy cars from a bankrupt company. He seemed to indicate that the mere possibility of a bankruptcy has already negatively affected auto sales across the globe. Mr. Young did not offer any business explanation as to why a bankruptcy would fail, only that consumers would run scared from a bankrupt entity. It appears to me, in my opinion, that GM may be using this supposed consumer fear of purchasing from a bankrupt entity as a tool to leverage Congress. It's crunch time and anything goes. If bankruptcy is such a bad and unreasonable option for GM or other members of the Big 3, then why is it, after massive amounts of analysis, that all the CFO of GM can come up with is supposed consumer fear? I find that very interesting. After all, this is the CFO of GM speaking, not a talk show host.

Following, I want to discuss my views on consumer confidence and company responsibility. Keep in mind that I am an average lower middle class guy with no expertise in finance or the Big 3. Here's a common sense question: Would consumer confidence increase if bailout money were given to an industry that most Americans feel will soon fail? Answer: No. If 70% of Americans believe that the Big 3 should be left to dissolution, how is it that acquiring 34 billion dollars of taxpayer money is going to create a spike in consumer confidence? Another question: If Congress grants bailout money, would it create resentment from the 70% of Americans disfavoring bailout?And wouldn't such resentment decrease sales even further? It begs the logical question: Will GM, or the Big 3, suffer a backlash from American consumers if bailout money is granted? Consumer confidence in the Big 3 has been consistently falling. In my mind, a bailout will not increase consumer confidence. In fact, it may very well foster resentment. Resentment that may take a long time to convert to confidence.

COMPANY RESPONSIBILITY:

The Big 3 can take responsibility for its current situation. File a Chapter 11 reorganization plan and educate the consumer regarding such plan. Most consumers and, sadly, most business entities, misunderstand bankruptcy in its totality. In the confines of Chapter 11, bankruptcy offers a socialized restructuring of the troubled entity. Socialized in the sense that all creditors and parties with a legal connection to the debtor are brought to the table and dealt with in a methodical, well thought out process. An entity or individual in Chapter 11 is attempting a rebirth, if you will. In theory, everyone will be on the same page. Dissimilar to Chapter 11 is Chapter 7. Chapter 7 is usually sought by insolvent debtors with little or no assets. An entity filing Chapter 7 is usually looking to close its doors and dissolve.

I would guess that the Big 3 has hundreds of thousands of marketing and public relations representatives across the globe. Such employees should be reigned in and taught the basics of a Chapter 11 administration, specifically as it relates to the Big 3 scenario. This educational process could be quick, simple, and extremely effective. These marketers could then reenter the field armed with an optimistic and clear vision: "Hey consumer, our Chapter 11 constitutes a responsible 'new beginning'. We, in essence, have begun a brand new business with you in mind."

Realistically, auto sales may continue to decline, in the short term, regardless of bailout or bankruptcy. An idea for the Big 3: Use this time wisely. Launch a campaign titled 'A New Beginning For The Big 3'. I believe that people will gain respect and confidence in the Big 3 if the Big 3 display an ability to survive these times on their own three feet. People want new cars, new management, and new Big 3 discipline. That is my opinion as a prospective consumer.

dave

Common Cents

2008-11-23T08:50:00.000-08:00

I know -- Common Cents, really funny Dave!

Please excuse me, I'm just a simple man singing simple songs on a sad piano.

Common Sense is my sincere title to this article. I have been following the 750 billion dollar bailout like everyone else: through media coverage. One thing strikes me: You really can't go wrong with any analysis or opinion you may have, as every politician and finance expert seems to create their own angle on the current financial crisis.

As part of my continuing education concerning real property title and real property law, I read numerous court cases relative to my topic under study. I most enjoy opinions written by the United States Supreme Court. The reasoning in these decisions, and the styles in which they are written, I find very attractive. But regardless of the court in which a decision is rendered, I find that most decisions are based on common sense. The court, in essence, will prove the common sense theory. Now, in this article I want to have fun helping Congress utilize common sense over our common cents.

This article will encompass (1) bailout; (2) corporate bankruptcy; (3) homeowner mortgage restructuring; and (4) my personal ideas on how to use bailout, or tax money. I want all readers to understand that I am not an expert, nor do I purport to be an expert, on world finance or the complexities of the auto giants (I will refer to them as the 'Big 3'). This article is written with a slant of fun. However, I do hope to spurn some thought from the readers, and maybe some of my opinions would hold water, given the right audience.

Bailout:

A bailout is demonstrated in many different contexts, such as bailing water out of a boat that is sinking, or bailing out a family member that is in severe financial crisis. But, in my mind, there exists a difference between helping out and bailing out. Helping out is when you buy someone groceries, or shovel their walkway after snowfall. Bailing out is when you redeem someone's home subsequent to a foreclosure sale. The difference is in the severity. We, and Congress alike, look to the severity of a situation in deciding how to help, or if we should help at all.

That is where Congress stands today. They consider the banking industry to be in a state of such severity that it dictates a bailout. Congress is saying that, for the good of the people, we can't let this industry fail. Conversely, look at their attitude toward the Big 3. They want to help the auto industry, but they are not sure whether the situation calls for a full blown bailout.

Of course, a bailout is a loan, not a gift. Bailout money must be paid back, but if such entities run amuck with the cash, it is you and I who will be paying this money back. I have a feeling that trying to recover this money from the banking industry would be like trying to tackle Barry Sanders while wearing roller skates; not likely. So therein lies the question facing Congress regarding bailouts: Can we reason the necessity of placing taxpayers at risk? If the reason is logical to Congress, a bailout plan will be offered. If, however, the reasoning is not logical, as seems to be the case with the Big 3, than a bailout option will die on the floor.

Many people in Congress seem to be fixated on replacing board members and executives of key banking institutions as a condition of bailout. They fear that a good portion of the bailout money will go 'up in smoke' if these banks continue to function as is. Well, news flash, the money is already out there, banks are continuing to function as is, and there has been no solid plan for regulating and dealing with such institutions. So, most common sense adults would reason that a good portion of the bailout money is already being wasted. I could be wrong, but it is food for thought.

That is bailout. There is nothing particularly difficult to understand regarding the bailout doctrine, but it is a big role of the dice. And it is Congress rolling the dice with all the citizens tumbling along.

Concerning the Big 3, I believe that in December, when push comes to shove, Congress will offer bailout money. Congress is asking the Big 3 to offer up detailed plans on how they plan to succeed in the future. Of course they will offer up detailed plans! In fact, these plans will be cleverly and beautifully written. Congress knows this, and I believe that this is subtle posturing by Congress to sell the citizens on the bailout. They want us to be confident in the scam.

Let's move on.

Bankruptcy:

The whole world is waiting to learn whether the Big 3 will get its 25 billion dollar loan. In Detroit, it is as exciting as watching the Red Wings play game 7 of the Stanley Cup Finals.

If any or all of the Big 3 companies file for bankruptcy reorganization, it will be under Chapter 11. Chapter 11 is designed for entities seeking to reorganize their financial relations with their various creditors and contractual parties. If the Big 3 are denied bailout money, and it looks as if they may be denied, they will be forced to file. I say forced because the Big 3 themselves indicate such.

There are two camps regarding the Big 3 bankruptcy option: (1) those opposed to a filing, and (2) those in favor of a filing.

There is a consistent statement circling around from those in opposition: "Consumers won't buy cars from a bankrupt company." This statement is the one thing I hear consistently. Others in opposition say that the Big 3 would not survive a bankruptcy. There is no real solid explanation from such people; only a general statement that bankruptcy is not viable.

In comparison, here are two of the most compelling reasons for the Big 3 to file:

(1) Chapter 11 will allow the auto giants to "reject" certain contracts. In Chapter 11 an entity may reject an ongoing contract. This terminates the contract. In doing so, it frees itself from contractual duties. On the other hand, an entity may assume an ongoing contract, in which it maintains its contractual rights and duties. Assumption is much more dangerous, as any breach of an assumed contract will be paid 100 cents on the dollar through the bankruptcy estate. So, some scholars in favor of a Big 3 filing believe that by wiping out substantial contracts, particularly contracts with dealerships, tremendous amounts of cash will be freed up; cash needed to fund the plan.

(2) The bankruptcy filing will keep 25 billion dollars where it belongs: in the original bailout pot of cash.

I believe that scholars who fall in the group favoring a bankruptcy share a very pragmatic view. They have no confidence in the Big 3, and believe these companies will fail with or without the bailout loan. So why burden the taxpayers with 25 billion dollars of pure risk? Congress lacks confidence as well. As mentioned, Congress is looking for some magic plan to be set forth by the Big 3. Well, to rehash, you can rest assured that the various management teams of the Big 3 are hard at work drafting a wonderful plan titled 'Pie in the Sky', by the Big 3. Sounds like a rock and roll title doesn't it? We'll have to wait and see if Congress is hungry enough to take a slice of the pie.

My perspective: Force the Big 3 into bankruptcy. Let's see how serious they are about surviving.

Points In Favor:

(1) A Chapter 11 filing keeps 25 billion dollars in the original bailout plan.
(2) Congress has, apart from the bailout money, already earmarked 25 billion dollars to help American car companies create new and competitive designs.This will be a tremendous boost to a reorganization plan, as well as a tremendous boost to consumer confidence.
(3) Outrageous executive expense and buyouts can be reduced or eliminated by the bankruptcy judge.
(4) I believe people will buy cars from a bankrupt company. First of all, consumer anxiety will be eased simply by the amount of advertisement and explanations offered by the Big 3 and the media. Citizens will quickly realize that Chapter 11 is not Chapter 7 and, if anything, I sense citizens will support such reorganization. They will view the reorganization as the Big 3 helping themselves out, instead of the citizens helping the Big 3 out, pursuant to a bailout.

Mortgage Restructuring:

As we know, the real estate market is in shambles. There are numerous reasons for such decline. Everyone in Michigan likes to blame the auto industry failure and its massive layoffs. Although this is part of the reason, bad home loans by bad lenders, coupled with a statewide recession, are the two culprits that strike me as most profound. Regardless of who's to blame, hundreds of thousands of home loans are either delinquent, the so-called troubled loan, or are bound up in foreclosure. The decline in land value has left most homeowners 'upside down'. Their loans exceed the value of the secured collateral. Given this fact, the following events are typical:

(1) The homeowner has no equity.
(2) The sale of the home, at current appraised value, won't satisfy the mortgage debt.
(3) Likely, the homeowner's income has dropped dramatically due to layoff.
(4) The loan soon becomes delinquent, ultimately leading to default and foreclosure.
(5) The homeowner loses his home, his dignity, and, quite possibly, his family. This is devastating stuff.

Now, hand and hand with the bank bailout has been a congressional push for banks to work with 'distressed' mortgagors in an attempt to avoid foreclosure. To date, the banks receiving bailout money have not done anything substantial to assist homeowners.

Supposedly the bailout money was designed to increase investor confidence and get the banks lending again. Whaaaat? For a moment, put yourself in the shoes of a current investor. The economy is bad and predicted to get worse. Would throwing good money after bad make any business sense to an investor? "Yes, let's fire off loans to a layoff rich society and hope for the best." Now seriously, remember common sense? Investors would label it 'business sense.' Check the papers: bank shares are continuing to fall. Doesn't sound like investor confidence to me. What is the bank to do? First, they should fly to a remote location, have a quick board meeting (which would require a serious look on all faces), and decide how the top executives are going to be bought out. Just kidding; or am I? It's a riddle.

Members in Congress have already blown their stack. They complain that the bailout plan was not well thought out, and that the banks are simply doing with the money what they choose. Common sense flash: Did we really expect anything different?

Here's how I see it. Home loans are typically 15 or 30 years, fixed or variable. The accrued interest, through the life of such loan, is astronomical. The bank has a windfall in the end run. Now, let's be reasonable for a second. For discussion, let's say that a bank is charging 12% interest on its loan, secured by a purchase money mortgage. Let's further say that the homeowner's monthly payment on this loan is $1,200.00. What if we re-wrote the loan down to 3% interest? What would happen to the homeowner? Well, first off, the homeowner's mortgage payment would probably drop to around $400.00 monthly. Hmm, that's a savings of $800.00. Wow, maybe this homeowner can now afford medical coverage for his family. Could it be?

On hand two, what would happen to the bank? Remember that this bank has written many a bad loan, as these loans were packaged and sold to investors unknowing. The banks are solely responsible for these bad loans. We can't forget that. Strangely, given our example, I think the bank wins in two ways: (1) they still realize a tremendous amount of earning (considering 3% over 30 years), and (2) delinquencies and foreclosures almost disappear, resulting in safe lending and immense investor confidence. Mr. Obama: Americans are asking for fairness. They understand that a bank will take a profit, but they do not expect the bank to take a windfall. Low and reasonable mortgage payments would allow the banks to sustain tough economic times, such as the times we are now facing. They would sustain because the consumer would sustain. Additionally, bankruptcies would drop dramatically, as many bankruptcies are filed to simply delay foreclosure of the debtor's home.

Remember, I am not an expert in mortgage lending or the economy, but the preceding paragraph strikes me as a reasonable compromise. Additionally, in arguing support of lowering loan interest rates, I would create a model covering a ten year period. We could use 1998 to 2008 as our example. Over this ten year period, how much money did a given bank lose because of costly foreclosure proceedings, coupled with having to receive and sell homes valued at well below the amount of the outstanding loan? Example: The bank forecloses on a home valued at $100,000.00. The bank loan stands at $130,000.00. The bank pays huge legal fees and ultimately sells the home for $90,000.00. All told, this bank, or more appropriately the investors, will lose roughly $50,000.00. Multiply this by tens of thousands of foreclosures over said ten year period. Staggering! Don't you think the bank would like to avoid this scenario? They always speak as if they would, but ultimately commissions and bad lending will win the day. Current executives and board members of such bad lending institutions should be immediately fired and the real culprits thrown in jail. Common sense tells us this, but it is not likely to happen. One thing must happen: Strict guidelines need to be developed and followed. Many, if not all the top executives, need to be removed. There exist many, many business and finance experts who would be more than willing to take the wheel. Congress, bring these individuals off the bench!!!

I remember an interesting conversation I had with my father-in-law regarding a loan he took out back in the 1960's. In those days, loan applications were highly formal and very stringent. The bank performed due diligence. The collateral for the loan was accurately appraised, and the chances of the mortgagor slipping into default were very low, because they qualified for the loan. Compare that to today's lending market, which throws loans at anyone breathing, as long as there is a commission to recover. Lesson: Mortgage lenders need to get back to the 1960's philosophy. I would love to own my own Cessna Citation Jet, but guess what? I can't afford the payments. It is what it is and we can't have everything we desire.

My suggestion: Put a 90 day freeze on all loans, whether delinquent or in good standing. During this period, the bank must restructure and write down its loans using 3% as the ceiling. The results would be dramatic, as money would begin flowing back to the bank at a consistent and steady rate.

New Ideas:

The following are my ideas. Humor me, as I would like to have some fun with them for a moment.

Right now, in this country, delinquent and defaulted credit cards total approximately 700 billion dollars. Hey Congress, I want to propose a bill. We'll call it the Phillips Act of 2009. Here is my proposal:

(1) Pay off all existing credit cards, whether delinquent, defaulted, or current.

O.K. -- After this payoff, Congress would have shuffled out roughly 750 billion dollars. Sound familiar?

(2) Make future extension of unsecured credit illegal, effective immediately. Unsecured credit will be viewed as against public policy. Remember, this will not affect home loans, as home loans are secured transactions.

(3) Such 750 billion dollars will be recouped within a 5 year period by reallocating taxpayer money away from outrageous oversees expense and ridiculous space exploration. The cost to the American families will be zero.

Reasoning: We, as a nation, throw hundreds of billions of dollars down the drain every year. This is common sense and is often discussed by Congress, other politicians, and business people. We pay taxes blindly, with a trust that such moneys will be spent wisely. Not true, and we know this. I realize that not all citizens have credit card debt, but with an understanding that huge piles of our tax money are wasted, don't you think the American people would support tax money earmarked to wipe out the credit card disease? The abolishment of credit card debts, coupled with reasonable and affordable home loans, would enable most families to comfortably survive on normal income. Debit cards would suffice. Bankruptcy filings would dramatically fall, and consumer obligations would be met. Indeed, entire communities could be saved, and the overall attitude of the nation would greatly improve.

The preceding section may seem crazy or even funny, but think for a second. Use common sense. Our government spends unbelievable amounts of money outside of our borders. We all know this and we all complain of this. Politicians bitch about this every day you turn on the news. Do you think most citizens would have a problem with grounding a space shuttle if the result were healthier financial positions for our families?

I hope Dave Ramsey, a financial expert that I read and enjoy, would be proud of this article. Credit cards need to go, and stuffing tax money into the proper envelopes would offer immediate and common sense relief to our country.

In Closing:

It seems that our government is concerned primarily with helping other nations and exploring universes outside of our own. We are in a bad situation and we are angry, frustrated, and scared. I'm convinced that if a psychiatrist, psychologist, or social therapist were sitting in a room with the United States, represented by our glorious flag, they might tell the U.S., "You must learn to love yourself before you can learn to love others." Believe me, the citizens of this country, on the whole, are reaching out for such teachings.

dave

Upcoming

2008-11-15T09:40:00.000-08:00

I am sure that most of you have been, to varying degrees, following the $700 billion dollar bailout. Media coverage of this event in saturating!

Many companies are seeking a portion of the $700 billion dollar pie, as they arrogantly posit that they are entitled to such relief. There has been much talk encompassing the proposed bailout of the 'Big Three'.

My next article will be written in the classic compare and contrast style. I will take a shot at comparing and contrasting corporate bankruptcies, corporate dissolutions, and corporate bailouts. Theoretically there is a proper time for each proceeding. But in real time, when a portion of $700 billion dollars is on the table, proper proceedings may fail due to the avalanche of greed and the never ending display of knee-jerk reactions that often lead to the wrong decision. A decision to choose between bankruptcy and bailout should be left in the soft and gentle hands of business and finance experts, not in the calloused hands of politicians.

I do not have expert knowledge regarding corporate bailouts, nor expert knowledge regarding worldwide finance. But, I do have common sense and the ability to analyze. Each of us is struggling to make sense of what is happening in today's economy. In a struggle to understand, people will utilize their common sense first. It is sort of like putting on a coat when the weather turns cold. It is instinctive.

I believe that common sense is the cornerstone of decision making. I hope that such common sense will be utilized when this immense amount of money is distributed. If it is being distributed for the sole purpose of enabling people to 'borrow' more money, it will fail.

What the hell, let's open up this blog.

dave

Bankruptcy - Chapter 13

2008-11-07T08:44:00.000-08:00

In furtherance of my recent article concerning Chapter 7, today I will discuss Chapter 13 of the bankruptcy code. Now, these articles are designed to give the reader a general understanding of bankruptcy law and how these laws may affect real property of the debtor. The topics that can spin off of a general bankruptcy article are endless.

Author Note: At its creation I had named this blog site 'Title Town'. My intention was to post writings dealing with specific title issues. It was to be informative and instructional, as best seen through the eyes of an examiner. Well, what has happened is that I have strayed a bit off course. I have written many informative articles, but have not given much instruction to the examiner who may be viewing this site. As I displayed in my writing on 'fundamentals', I think it is time I get back to the fundamentals and consider these articles through the eyes of the title examiner. So, from this point forward, when applicable, I will conclude each writing with a section labeled The Examiner's Perspective. Please understand, the advice I give you in the perspective section should be addressed with your particular underwriter, as your underwriter may direct you differently. Nonetheless, this section will give you, the examiner, a solid basis for attacking a particular issue affecting your commitment. These articles are based on my knowledge and opinions. A workplace can strip you of many things, but don't ever let it strip you of your opinions and common sense. Opinions lead to ideas, ideas lead to creation, creation leads to knowledge. In the words of Geoffrey Fieger, "If you don't stand for something, you end up standing for nothing at all."

Writing this blog has been a great experience for me. I never quite understood how difficult it is to write, especially in the area of technical writing. In reviewing my past articles, I can see some gaping holes; topics I should have covered, or connections I should have made for the reader. I write these blogs quickly, usually allotting myself one or two hours.

Dan Nichols is a very good friend. He is a business expert and runs a company specializing in helping individuals create and maintain their own entities. If you, the reader, have designs of creating your own business, it is well worth your time to contact Dan. He can be reached at: dan@businesslaunchexpert.com. Dan was actually the creator of this site. He knew I had a lot of information stored in my head, and he wanted me to share this information with others. He walked me through the blog process, step by step. I did not even know what a blog was. I have consulted with Dan frequently regarding these writings. He has helped me to avoid writer's block. He let me know that there is no such thing as a perfect writing. The writer will always find holes or fault in their own work. They will continually change and amend an otherwise competent article. His advice: It isn't perfect, and it won't be perfect, so just write it and move on. It is the imperfection that actually makes the writing perfect. Imperfection leads to questions, questions lead to discussion, discussion to answers. Welcome to my maddening mind!!

O.K. Chapter 13 - -

Chapter 13 is a bankruptcy proceeding that is designed to enable a debtor to pay its creditors over a three to five year span. Chapter 13 is in contrast to Chapter 7. As discussed previously, Chapter 7 is pure liquidation, while Chapter 13 allows the debtor to reorganize its financial relations with its various creditors. This is why Chapter 13, as well as Chapter 11, are termed reorganizations.

Qualifications: Chapter 13 may only be sought by individual wage earners; business entities are not eligible for Chapter 13 and must seek their reorganization via Chapter 11. Additionally, there is a cap on the amount of debt, both secured and unsecured, that a debtor may not exceed. If the debt limit is exceeded, the wage earner will have to seek reorganizational relief via Chapter 11. These debt limits frequently change, so I will not disclose exact figures. Suffice it to say, the combined secured and unsecured limit is roughly one million dollars, so 99.99% of normal wage earners will qualify under Chapter 13.

Chapter 13 may only be filed voluntarily by a debtor. Involuntary filings do not exist under Chapter 13 of the code. This is in response to a comment left by a reader of my last article. There, he/she indicated that bankruptcy filings may be voluntary, by the debtor, or involuntary, by a qualified group of creditors. This is true under Chapter 7, not Chapter 13.

Chapter 13 is typically filed by a normal wage earner who owns a home and simply wants some breathing space to deal with its creditors. It often is filed by the homeowner who is in arrears on its mortgage payments. Reason: the owner fears foreclosure, so they beat the bank to the punch by filing a petition for relief under Chapter 13. The filing of a Chapter 13 petition is extremely useful to a homeowner in arrears. First off, the filing grants the debtor the benefit of the 'automatic stay'. The automatic stay will prevent, at least initially, the foreclosure of the home. The filing will also allow the homeowner to cure its loan. What is cure? Let's say the homeowner is three months in arrears. They can catch up on the delinquent three months through the course of the Chapter 13 administration; generally 3 to 5 years. Note: The homeowner must be careful at this stage in dealing with the bank. If it appears that the debtor is simply playing games and stalling for time, the bank may move for 'relief from stay' and proceed to foreclose on its security. Remember, the bank is secured, which means it gets 100 cents on the dollar. Bankruptcy will not remove a secured lien, save for unique circumstances. A secured lien holder stands unaffected by the bankruptcy filing. The secured party, usually the bank, waits for the dust to settle, and then determines if it should move for relief from stay. The debtor and the debtor's attorney should play nice at this stage, or the bank may drop the hammer and move for such relief.

Shortly after the petition for relief under Chapter 13 is filed, the debtor must propose a reorganization plan. Simply, this plan shows how the debtor plans on paying its creditors. Proper funding is at the heart of a Chapter 13 plan. This funding must be realistic; usually the debtor's steady income. However, funding may also come from sources other than income, such as the sale of property. In any case, the judge wants to see that the debtor has the necessary funding to support the plan and that it is likely to succeed. If the judge sees the proverbial 'pie in the sky', the plan will not be confirmed.

Next, a 341 meeting is scheduled. This is the same as in Chapter 7. All creditors will be afforded a chance to review the reorganization plan and file any relevant objections. If all goes well, the plan will be confirmed by the court.

Following confirmation, payments pursuant to the plan will be made to the trustee, who then distributes payments to the various creditors until the plan is completed. The trustee administers the estate. All the debtor has to do is furnish the money to the trustee at the scheduled time. Note: The debtor will not receive the Chapter 13 discharge until the plan is fully completed.

Why is Chapter 13 sought by a debtor? I have already mentioned one reason, to avoid foreclosure. At the heart of the determination is this: How many non-exempt assets does the debtor have? If there are numerous non-exempt assets, or non-exempt assets that are special to the debtor, Chapter 13 can be utilized, as long as the unsecured creditors are paid adequately. Another reason is non-dischargeable claims. A debtor cannot file under Chapter 7 to avoid non-dischargeable claims, such as federal tax liens. Chapter 13 will typically allow the debtor to pay such claims throughout the administration of the Chapter 13 plan, with the benefit of reduced or eliminated interest regarding such non-dischargeable claims. These are all issues that a debtor's attorney will discuss with the debtor when selecting a chapter.

Why is Chapter 13 better for unsecured creditors, as compared to Chapter 7? Well, the answer should strike the reader as obvious. A creditor is typically paid more via Chapter 13 than they would receive via Chapter 7. Many times, the debtor's creditors are paid 100% through the administration of the plan. Even if the creditors are paid 10% or 20%, it beats a goose egg, which is exactly what they will receive in a typical Chapter 7 case. Interestingly, a creditor does not have grounds to object to a Chapter 13 plan, as long as that creditor receives as much as it would have received through Chapter 7. Considering most Chapter 7 filings are 'no asset' filings, this is not a very tough standard. However, as discussed in the previous paragraph, if the debtor has significant non-exempt assets, the chances of the creditor being paid in full will increase substantially. Ultimately, the judge will look to the debtor's debts, its assets, and the proposed funding of the plan to determine if all creditors are being paid adequately. This determination, coupled with the 341 meeting, afford the creditor ample protection.

Conversion: As discussed in my previous article, a debtor may convert from Chapter 13 to Chapter 7 if the confirmed plan runs amuck. This conversion can be devastating if the debtor has completed most of its plan. I will save conversion for the topic of a later article. Remember, approximately 2/3 of Chapter 13 plans will fail.

The Examiner's Perspective:

You are sitting with your file. A search of the records discloses that the property owner is bound up in a Chapter 13. What do you do? Well, let's look at two of the most probable circumstances. First, the homeowner is attempting to refinance, which means the lender will be the proposed insured. Second, the homeowner is attempting to sell, which means the purchaser will be the proposed insured. Mental gymnastics.

PROCEDURE FOR REFINANCE:

1) First off, confirm that the homeowner is, in fact, the debtor. Social security numbers are the best confirmation. Do not guess at this stage. If you erroneously show a homeowner in bankruptcy on Schedule A, you risk an enraged party.

2) Show the bankruptcy estate as vesting on Schedule A. Example of vesting line: Dave Spender, Chapter 13 debtor, being United States Bankruptcy Court Case No. 08-1234. Note: Individual debtors are not to be termed "debtor in possession". A debtor in possession is found when you have a business entity involved in Chapter 11.

3) As your first requirement, ask for an order from the bankruptcy court approving the proposed refinance transaction. You may hear a lot of title people say that you need either the order of abandonment, or proof that the home is exempt from the Chapter 13 case. The trustee may, during the confirmation of the proposed reorganization plan, determine that the home has no equity. The bankruptcy lingo is "no equity, not necessary for an effective reorganization." If this is found, the trustee will have no use for the home and may simply abandon it, similar to Chapter 7. Additionally, if the homeowner claims the home as exempt, and there is not a timely objection to the claimed exemption, the home may be considered exempt from the Chapter 13 case. It is also possible that the homeowner will attempt to refinance after confirmation of the Chapter 13 plan. If the home was not previously removed from the bankruptcy case, the rules would require notice to all existing creditors and an opportunity for each creditor to be heard regarding such refinancing. So you see, this can cause a tangled mess. Remember that the bankruptcy court controls the bankruptcy case. As such, it is not necessary to guess here or rely on taking a risk. Simply ask the court or the trustee for approval of the refinance as planned. The end result is sound: 1) you have court confirmation that there will not be a creditor attack, and 2) the lender, your insured, will be able to safely foreclose in the case of default. It has always been my position that many gray areas exist during the ongoing administration of a bankruptcy estate. The bankruptcy court has the authority to control all assets of the case. The court is also in the best position to understand the financial position of the debtor. Title companies are not positioned nor empowered to police the bankruptcy court. As such, you can cut out risk and time by simply asking for bankruptcy court approval of your transaction. I have read countless reorganization plans, especially plans filed by entities under Chapter 11. The plan usually discloses conditions upon conditions. The plan under Chapter 11 and Chapter 13 may change. Remember, Chapter 13 is a 3 to 5 year process. The financial condition, or the assets of the debtor, may change periodically. I have studied underwriter positions on various bankruptcy issues. Most underwriters seem to share my view that an ongoing bankruptcy estate can be dangerous. After offering numerous requirements and exceptions, and forcing the examiner to overwrite a commitment, most underwriters want the same thing: The order from the bankruptcy court.

PROCEDURE FOR SALE:

Note: It is not likely that a Chapter 13 debtor will be attempting to sell its property, as most Chapter 13 filings are designed to enable the debtor to keep his home. That being said, if the debtor owns additional property, say non-homestead, he may be attempting to sell the property as a means of funding his Chapter 13 plan. You are most likely to see this scenario at the onset of the Chapter 13 case, before confirmation of the plan.

1) As your first requirement, ask for an order from the bankruptcy court approving the proposed sale transaction.

2) Next, ask for an order confirming sale. This order will demonstrate that the court has looked at the sale price and is on board.

All reasoning is the same as discussed above.

FINALLY: Whether you are preparing a refinance or sale commitment, make sure you ascertain how the home is to be titled. This will be determined by the court. In other words, if the home is properly abandoned or exempt, the home will re-vest in the individual. However, if the home is to remain in the jurisdiction of the bankruptcy court, the bankruptcy estate will remain in title and the trustee will sign all necessary documents.

All property of a debtor becomes property of the bankruptcy estate at the moment a petition for relief if filed. Whether that asset will be exempt or abandoned is a matter of bankruptcy procedure. Property must go into the estate before it can come out. So, if a debtor fails to disclose real property on its list of assets, it is possible that the bankruptcy estate, although closed, will be reopened to administer that undisclosed asset. So, again, be very careful when dealing with a current or recent bankruptcy. Do not let a third party tell you that the property was exempt or abandoned. Confirm that the property was properly administered. This will require due diligence on the part of the examiner; the good examiner.

Bankruptcy brings all interests to the table. It is the intent of the bankruptcy court to offer equal distribution to all unsecured creditors. Many things can go wrong along the way and many lines can become blurred, so it is my advice to let the bankruptcy court guide your transaction. Don't let the tail wag the dog.

Later on dude -

dave

Bankruptcy

2008-10-14T07:00:00.000-07:00

As the middle class continues to erode, advertisements for filing bankruptcy will continue to increase. In this article, I aim to give the reader an insight as to what bankruptcy is and how bankruptcy relates to your real property.

Bankruptcy is a valid means by which a debtor may obtain a financial fresh start. I emphasize the word valid because most adds nowadays focus on jamming a debtor's mind with guilt or fear at the prospect of filing for bankruptcy protection. This is clearly wrong. The credit companies love this tactic, as it keeps the money flowing into their pockets.

Title XI of the United States Code (U.S.C.) contains the relevant provisions of bankruptcy law. This is a creature all its own.

Now, most people are vaguely familiar with Chapters 7, 11, and 13 of the bankruptcy code. Chapter 7 is a pure liquidation proceeding. Chapter 11 is usually confined to reorganizations of business entities and individuals with vast wealth. Chapter 13 is a normal wage earner individual reorganization. A business entity may not file under Chapter 13. Please understand that Chapters 11 and 13 are designed for reorganization. In these chapters, the individual or entity is attempting to hold onto its assets, while reorganizing its financial relationships with its creditors. Today I will discuss Chapter 7 only.

Chapter 7 is a liquidation proceeding. Chapter 7 is usually sought by individuals with few to no assets. Similarly, Chapter 7 is usually sought by business entities that wish to dissolve, which is synonymous with going out of business. The debtor in a Chapter 7 case will throw all its assets upon the bankruptcy trustee, save for relevant exemptions, and let the trustee sell and distribute the dividends to all creditors. This is what liquidation is. The trustee liquidates, or converts, assets to cash money.

Procedure: The normal procedures regarding Chapter 7 are as follows:

1) The debtor files a petition for relief under Chapter 7 with the bankruptcy court. This filing includes a comprehensive schedule of the debtor's assets, as well as a schedule of the debtor's proposed exemptions.
2) At the moment the petition is filed, an automatic stay is immediately invoked as to all existing creditors. This stay is effective upon the filing, not upon the creditor receiving notice.
3) A trustee is appointed to represent the estate of the debtor.
4) All relevant creditors and parties are notified.
5) A meeting of the creditors, otherwise known as the 341 meeting is scheduled.
6) The debtor's non-exempt assets, if any, are sold and the proceeds are divided amongst all creditors.
7) The debtor receives a discharge. Only individuals receive a discharge, business entities do not.
8) After all proceedings are completed, the trustee gives a reviewable accounting of all events and the case is closed.
9) The debtor goes forward, free from all previously unsecured debt.

Of great importance to the debtor is the benefit of the automatic stay, found in Section 362. The automatic stay is fairly simple: it prevents a creditor from further collection activity against the debtor. The stay does not forever prevent the creditor from collecting, it simply prevents the creditor from collection activities during the administration of the bankruptcy estate. The debtor in a garden variety Chapter 7 will typically have no assets to offer the bankruptcy trustee. This is referred to as a "no asset" filing.

The automatic stay will remain in effect throughout the administration of the debtor's estate. The emphasis for enacting the automatic stay should strike the reader as obvious. The automatic stay offers two practical benefits: 1) it keeps creditors from tearing the debtor apart at the seems (usually with nonstop phone calls), and 2) it allows the bankruptcy judge an opportunity to sort through the debtor's financial situation.

Along with the petition, the debtor files a schedule of assets, which must include full disclosure of all assets. It is the debtor's nondisclosure that usually brings about challenges to the Chapter 7 estate. The debtor also files a schedule of claimed exemptions. Some of these exemptions are common sense, such as the family automobile, or clothing. The thrust behind exemption law is to allow the debtor to maintain a reasonable life, post discharge. Bankruptcy is not designed to destroy a debtor.

The court will appoint a trustee to represent the estate. The trustee, in reality, works for the creditors. As discussed, the trustee marshalls all non-exempt assets for liquidation. The trustee represents the debtor's Chapter 7 estate.

After the petition is filed, and a trustee has been appointed, the trustee will notify all creditors as to the time and location of the 341 meeting. It is called the 341 meeting as this corresponds to its section in the bankruptcy code. Clever huh? At the 341 meeting, the court may hear any creditor complaints. These complaints can be anything from the amount of money a particular creditor is receiving, to nondisclosure of assets. Most times, in a typical individual Chapter 7 filing, the trustee will notify the creditor that the creditor need not attend the 341 meeting, as the debtor will have no assets to distribute.

At some point following the 341 meeting, assuming no creditor objections, the individual debtor will be granted a discharge. This discharge is what constitutes the "fresh start". The debtor will now be free of its previously unsecured debt.

Now, how is real estate affected by the Chapter 7 filing? Well, for simplicity, let us assume that the debtor's homestead is encumbered by a mortgage, as most are. This mortgage, as discussed in a previous article, constitutes a secured transaction. The bank has a security interest in the land pursuant to its loan to the debtor. As a general rule, secured debt is nondischargeable in bankruptcy. So, a debtor cannot file bankruptcy in order to avoid a valid mortgage. The Chapter 7 trustee will perform a simple analysis regarding the debtor's real property. The trustee will look for the debt to equity ratio. Example: If the debtor's property is valued at $100,000.00 and the property is subject to a mortgage for $120,000.00, the trustee will conclude very quickly that the debtor has no equity in the home. As a result, the home will be of no value to existing creditors. What will the trustee do in this situation? The trustee will abandon the interest of the bankruptcy estate, as to that property.

Conversely, what happens if the home is not subject to a mortgage or if the debtor has equity in the home? Answer: The home will be sold by the trustee and the proceeds will be distributed amongst the various creditors.

From a title insurance perspective, I envision a bankruptcy estate as a fishbowl. There are numerous fish in the bowl, each fish representing a particular asset. If title insurance is sought regarding the debtor's home, I ask the following initial question: how can I remove that one fish, which represents the home, from the fishbowl? When I have answered that question, the home will no longer be subject to the bankruptcy estate and it can now be safely insured. If the homeowner himself is attempting to sell, I ask for the affidavit of abandonment from the bankruptcy trustee, demonstrating that the trustee does not consider the home to be part of the bankruptcy estate. It is additionally safe to secure an order from the bankruptcy judge approving such abandonment. That is a case by case decision for an underwriter. Conversely, if the bankruptcy estate is attempting to sell, it would be the trustee herself that I would require sign the deed. I would also require an order confirming sale to be signed by the bankruptcy judge. Either way, once a debtor files bankruptcy, his home falls within the confines of the bankruptcy estate fishbowl. No further action can or should be taken without direction from a proper representative of the bankruptcy estate.

It is extremely important to understand that not all debt or obligations are dischargeable in bankruptcy. A bankruptcy attorney will pinpoint your nondischargeable claims. The attorney may advise you that bankruptcy is not for you, if the majority of your financial difficulties fall within the nondischargeable category. For example, some of the nondischargeable items are: 1) student loans, 2) secured debt, 3) federal tax liens, and 4) property taxes. So, for discussion sake, if your debt is in the form of a defaulted student loan, or numerous federal tax liens, bankruptcy will not provide a discharge from these obligations. A bankruptcy attorney will discuss all these issues with the debtor.

Author opinion: There are a myriad of situations which may land a debtor in financial straights. Job layoffs and lack of unaffordable health insurance are the typical culprits that club a debtor over the head and beat them into financial submission. Once there, no matter how good of a person the debtor may be, the sledding will be awful difficult. Depression, suicide, and divorce are very real results that often face a troubled debtor. The debtor faces these emotional problems because the debtor is not getting what they expected out of life and out of themselves. It is as simple as that.

Most adults remember, to some degree, the great depression. I personally fear that we may be heading for another great depression. Not an economic recession, but a full blown melt down. 80 years ago, the work ethic of Americans was very strong. People were frugal and knew how to live off the land. Americans today do not share that same work ethic. Can you imagine our credit starved, give it to me right now society having to tear bed sheets in half to make shirts for our children? It is an extremely scary prospect.

I say forget the 700 billion dollar bail out. We, the people, must stop buying debt. Curving our credit driven society and buying what an individual can pay for, in cash, would be a concrete solution. Forget the wall street bailout that will end up costing us greatly in the end run. I am an idealist, which means I like to view things the way they should be. I have made my share of financial mistakes, of which I am still paying for. My opinions are not based on magazine articles or hype, they are based on my own personal experiences. I hope to pass some of my experiences to others in an effort to help them avoid certain turmoils.

The debtor-creditor relationship can take many turns during the existence of the debt. Most debtors acquire their financial difficulties through uncontrolled use of credit cards. The high interest rates, coupled with the compound interest monster, often renders the debtor unable to make its monthly payments, let alone pay the account in full. The debtor can get into trouble in the blink of an eye.

There exists responsibilities on both sides of the debtor-creditor marriage. Let us not forget: it is the debtor that seeks the credit card. As such, the debtor has the responsibility of managing his account and making the required monthly payments. On the other hand, the credit company should have the responsibility of extending credit only to those who are properly qualified. In example: why extend a $10,000.00 line of credit to a debtor who earns $30,000.00 annually? In this example, the chances of default are almost certain.

Now, it is my opinion that bankruptcy should only be sought by individuals serious about changing their future financial condition. Bankruptcy can truly offer these individuals a fresh start. Historically, bankruptcy has been abused. It has been abused by debtors who simply wish to dump their current debt. These debtors have no real intentions of changing their spending habits or lifestyle. In response, Congress has made an attempt to cut down on the availability of Chapter 7 to such debtors. These changes were enacted via the Bankruptcy Reform Act of 2005 (The Act). The Act makes Chapter 7 unavailable to certain debtors. Generally, in order for a debtor to enter Chapter 7, she must pass a "means" test, which is based on her income to debt ratio. If her income to debt ratio is not significant enough, her Chapter 7 petition will be dismissed. Additionally, if she passes the means test, and is qualified for Chapter 7, she must also complete a course on debt management before the case can move forward toward discharge.

So, theoretically, this trimming of the availability of Chapter 7 will drive many debtors into Chapters 11 & 13, where a creditor may receive some or all of the money they are owed. I feel this is a questionable theory, as most reorganizations, especially under Chapter 13, fail. The failure rate of a basic Chapter 13 case is approximately 70%!! That means that only 3 out of 10 debtors will successfully complete their Chapter 13 plan. It is quite possible that many debtors denied Chapter 7 availability will file Chapter 13 instead. Once there, a debtor may be struck by the ever changing financial landscape. For instance, what if the debtor in a Chapter 13 case completes the first two years of a five year plan, and then is laid off? Well, in this case, the debtor may attempt to convert from Chapter 13 to Chapter 7. A big mess. So, on one hand you have Congress foreclosing the availability of Chapter 7 to certain debtors. At first blush, this looks great: after all, the debtor earns enough money to pay its creditors over time via Chapter 13. On the other hand, we have an economy that is falling apart. It is very possible that most of the debtors Congress is shoveling toward Chapter 13 will ultimately end up in Chapter 7 by way of conversion. What a complete and confusing circle. It probably would have been advisable to change the bankruptcy laws during a strong economy. Maybe?

In concluding, bankruptcy may be a valid option when your financial condition becomes too oppressive. Do not let the credit companies confuse you on this. My advice is to consult with a bankruptcy attorney regarding your options. The attorney can help guide you into the appropriate chapter, as well as handle the filing with the court and dealings with the bankruptcy trustee, if one is appointed.

My next article will concern Chapter 13, the wage earner reorganization.

Adios,
dave

Easement: Gross or Appurtenant?

2008-08-28T09:45:00.000-07:00

Juan Carlos takes a look. No Problem. The peak on the side of his house has needed painting for some time. In preparation to paint, Juan drives to Home Depot, as every working man must do. There he purchases a 32 foot extension ladder. He decides on the 32 footer over the 24 footer because, as an overpaid office executive, he thinks What the hell?

His nickname is 'Big Juan'. He believes he has earned this tag through the use of his new Bowflex machine. Unknown to Juan, the girls at the office call him 'Big Juan' because of the dozen donuts he polishes off each morning at his desk. Great minds must have proper fuel.

On his return from Home Depot, Juan struggles mightily with his new ladder. By the time he reaches the side of his house, he is sweating profusely and the muscles in his low back are cramping. Wasn't Bowflex supposed to prevent this? Welcome to the life of a laborer Juan! Juan seems to be 'Clueless in Seattle'. At last the ladder is up. He begins his ascent. Fear grips him as he reaches the top of the peak. A very natural fear of heights. He is so nervous that it seems likely he will be cleaning something other than his paint brush by the end of the day. Poor Juan.

Well, after six hours of hard labor, and a cycle through the washing machine, the job is finally complete. While admiring his work and sipping on his favorite soda in the comfort of his new briefs, Juan is struck by a menacing reality. He has nowhere to store his ladder. Later that day, he walks across the street to Mr. Thompson's house and asks if he can store his ladder in Mr. Thompson's spacious three-car garage. Mr. Thompson answers: "no problem." As luck would have it, Mr. Thompson is a property attorney. As the meticulous type, Mr. T offers to grant Juan an easement for the purpose of storing his ladder.

What follows is a basic discussion of the easement created in gross versus the easement created appurtenant.

First off, what is an easement? An easement is a right to use the land of another. The holder of an easement is not permitted to occupy or control the land on which the easement sits. The holder is only entitled to the use of the easement to fulfill a specific purpose; usually to get from point A to point B. In this article I am presuming a voluntary grant of easement. Prescriptive easements and easements by necessity will not be discussed in this article. Furthermore, although a typical easement does not allow for occupancy or control of the land, the parties are free to establish the terms of the easement as they see fit. My discussion in this article will stick with the usual easement agreement.

I will now discuss the easement appurtenant. I believe that by first understanding the easement appurtenant, the easement in gross will be very easy for the reader to comprehend.

An easement appurtenant requires two parcels of land; although there may certainly be more. The parcel that benefits from the creation of the easement is known as the dominant tenement. Conversely, the parcel that is burdened by the creation of the easement is known as the servient tenement. Now, there is one principle that the reader must memorize: for an appurtenant easement to be created, there must be a dominant tenement. The following example will help clarify the meaning and function of an easement appurtenant:

Blackacre, owned by Julie Phillips, abuts the west side of a public road. Whiteacre, owned by Dave Phillips, abuts the west side of Blackacre. Whiteacre has no direct access to the public road. Now, let's assume that Julie, owner of Blackacre, grants Dave, owner of Whiteacre, an easement over the southerly 15 feet of Blackacre for the purpose of giving Dave access to the public road. Well, after this grant, what do we have? Blackacre will be the servient tenement, as the easement runs across it. Whiteacre will be the dominant tenement, as the easement benefits Whiteacre. This is an example of a true blue appurtenant easement. Here we have two parcels of land and a dominant tenement: Whiteacre. This newly created easement will attach to both Blackacre and Whiteacre. The significant importance in finding an easement appurtenant is this: the benefit and the burden of the easement will run with the successive chain of title. It will automatically flow through to future owners or tenants unless and until the easement is properly terminated. Remember, a valid appurtenant easement requires a dominant tenement.

Finally, let me circle back to the easement in gross. Reflect back to my story concerning Juan Carlos. As you recall, Mr. Thompson granted Juan an easement for the purpose of storing his ladder. Why is this an easement in gross and not an easement appurtenant? Answer: Juan holds an easement in gross because there is no dominant tenement. Notice, however, that we do have a servient tenement. Mr. Thompson's land will be burdened with the easement. But there is no land that benefits from the easement. Juan benefits solely from the easement. Therefore, the easement is personal to Juan and is classified as an easement in gross.

I am frequently asked about easements. Oftentimes someone will get tripped up when attempting to distinguish the easement appurtenant from the easement in gross. Understanding the variations is important to property professionals involved in land transactions. The practitioner should always be concerned with what benefits or burdens the land in their particular transaction. As a general rule, when you are faced with attempting to qualify an easement, ask yourself: is there a dominant tenement? If so, chances are you are looking at an appurtenant easement.

More soon - dave

Michigan's Adverse Possession Doctrine

2008-08-09T08:26:00.000-07:00

Hello. It is Saturday morning, August 9. I am at the Novi library, where I am composing this article. Today's writing will concern Michigan's Adverse Possession Doctrine. It happened to pop into my head this morning, and it seems a good topic for my morning coffee. You may notice that I frequently use the word doctrine in my titles. Doctrine can be defined as a rule or principle of law. Doctrine encompasses the study of a particular law or body of law. As a result, doctrine can be broadly used. I also happen to like the word.

This article is being written for the layperson. Most property professionals understand adverse possession, at least basically. You may be surprised to learn that outright land ownership is not always accomplished through a buy-sell agreement. Ownership may also be found by satisfying the elements for adverse possession. The adverse possessor will, in effect, steal the land from its true owner. Adverse possession is the 800 pound tiger. When this tiger strikes, your time is up. When you complete the reading of my article, you will better understand the saying "possession is 9/10ths of the law."

Land is usually transferred from a seller to a buyer, with money changing hands. A deed is executed and recorded and life goes on. Conversely, adverse possession requires no money and requires no consent from the record owner. What it does require is the satisfaction of a group of elements and a court determination that these elements have been fulfilled. When adverse possession is found in the claimant, the true or prior owner loses all rights in the property and the adverse possessor's interest ripens into a fee simple absolute. This is heavy handed, tough stuff. Understand, adverse possession, although harsh, is not easy to prevail on. Rule number 1: the adverse possessor must possess the land in question for a minimum 15 year period. When the 15 year period runs, the possessor must then set out to show satisfaction of all the elements for adverse possession. Now, let me walk you through the function of adverse possession.

Fact Scenario:

It is January 1, 1993. Dave Phillips lives in Oklahoma. He enjoys riding his horse to work, as this saves on gas expenditures. His cowboy hat offers adequate protection from the elements. Riding his horse "trigger" also enables him to freely chew 'Red Man' without the inconvenience of a messy spit cup.

Concurrently, Dave owns 3 acres of improved property in Alanson, Michigan. Dave resides in Oklahoma, works in Oklahoma, and has no real plans on returning to Michigan.

Is it now February 1, 1993. For reasons that need not concern us, Mr. Harvey Nogood has a key to Dave's Alanson property and he begins to actually reside in Dave's Alanson home. The no-good fink!

Fast forward: It is now July 1, 2008, 15 years later, and Dave still has not returned to his Alanson property. As of July 1, 2008, who owns the Alanson property? Answer: Mr. Harvey Nogood, if and only if Mr. Nogood can satisfy all the elements for adverse possession. Let's examine them.

The elements of Adverse Possession are: (1) The possessor's use must be open; (2) The possessor's use must be continuous; (3) The possessor's use must be exclusive; (4) The possessor's use must be adverse; and (5) The possessor's use must be notorious. Now, I will discuss the open, continuous and adverse elements only. The exclusive and notorious elements overlap with the continuous and adverse elements. This makes the discussion much easier for the reader to understand.

Condition precedent: As I have mentioned, the elements of open, continuous and adverse must be demonstrated for a full 15 year period. This 15 year period acts as a condition precedent to the establishment of title via adverse possession. Once 15 years expire, the possessor is then free to prove its satisfaction of the necessary elements, but not until this period has elapsed. This time period is codified, as shown in 600.5801 of the Michigan Compiled Laws (MCL). This is a statute of limitation. This statute imposes responsibilities on the true owner of the land. What the statute says is this: Dave, you have 15 years in which to eject Mr. Nogood from your property. If you fail to do so, you will be forever barred from filing an ejectment action. So you see, this statute applies to Dave, not Mr. Nogood.

Using our example, let's see how Mr. Nogood prevails.

First off, the condition precedent has been satisfied. Mr. Nogood has been residing in the property since February of 1993. The 15 year period in which Dave was charged with bringing an action for ejectment has expired.

Now Mr. Nogood can set forth to prove satisfaction of the necessary elements. I say OCA, which is shorthand for open, continuous and adverse.

The open element: Mr. Nogood must demonstrate that he openly possessed the land. The open element is designed from the perspective of other people. In other words, did Mr. Nogood hide the fact that he was residing in the Alanson property? Did he show up in the dead of the night and leave before dawn? This is a very practical element and it simply asks the question: was Mr. Nogood's occupancy visible to neighbors in a normal setting, or did he attempt to hide the fact that he was residing at the Alanson home? For the purposes of our discussion, let's say that Mr. Nogood made no secret that he was residing in the home. He could be seen on the land either day or night. So, Mr. Nogood prevails concerning the open element.

The continuous element: This element is extremely important. The question is: was Mr. Nogood's occupancy of the land continuous enough, over the 15 year period, to cause a normal person to believe he was residing there? Or were there periods of say 6 months or 2 years in which Mr. Nogood was not present? If there were unreasonable periods of absence, Mr. Nogood would not prevail on this element. For the purposes of our discussion, let's say Mr. Nogood continually resided at the Alanson home. In fact, he worked just down the road at Jan and Sandy's Knitting Factory. So, Mr. Nogood prevails concerning the continuous element.

The adverse element: The adverse element is at the heart of adverse possession. The question is: is Mr. Nogood's occupancy without Dave's consent? In our example, the answer is obvious: Dave gave no consent to Mr. Nogood. But what if Dave knew Mr. Nogood and was simply giving him a place to stay? If this were true, Mr. Nogood would not prevail on this most basic element. The possession must be adverse to Dave, hence giving rise to a cause of ejectment. After all, how can you eject someone who has your permission to be on the land? So, Mr. Nogood prevails on the adverse element.

In summary, Mr. Nogood has met the statutory 15 year time period and has satisfied the 3 elements of adverse possession. Now what? Well, nobody in their right mind would accept a deed from Mr. Nogood to the Alanson property. A search of the Emmet County Register of Deeds office would disclose Dave as the owner. So what would Mr. Nogood do? He would prudently file to 'quiet title' in himself. The court would then set out to favor or disfavor Mr. Nogood's position based on the doctrine of Adverse Possession. Once adverse possession is proven, Mr. Nogood will be declared the true owner and he will be free to convey the land free from any legal claim posited by Dave.

Conclusion: Adverse possession is devastating to an unsuspecting land owner. The use of this doctrine should strike the reader as idiotic. After all, in today's world, why would the courts allow such an unjust result? Dave did nothing wrong! Well, the simplest answer is this: adverse possession allows for cleaner land records. It allows a court to perfect a chain of title. Without this doctrine, disputes over title could theoretically go on forever. The numerous statutes of limitation take their roots from this reasoning. In effect, life is just too short. A statute of limitation allows for a particular terminus or ending. It gives individuals peace of mind and an absolute conclusion to a particular legal matter. The adverse possession doctrine inspires a land owner not to sleep on their rights. Furthermore, if someone has neglected property for 15 or more years, and the adverse possessor is making use of the land, isn't it more functional and practical to pass title to the adverse possessor? I think so. And remember, although adverse possession is harsh, 15 years is an awfully long time.

More soon - dave

Estoppel By Deed

2008-08-06T13:36:00.000-07:00

Estoppel comes from old french and it simply means to preclude or stop.

In this article I will discuss the 'estoppel by deed'; sometimes referred to as 'after acquired title'.

The doctrine is fairly simple to understand via the use of the following fact scenario:

1) On May 29, 1988, Elton John, the purported owner of Rocket Man Acres, conveys by way of warranty deed to Dave Phillips. Pay attention to the use of the warranty deed.

2) At the time of the above conveyance, Elton was not the owner of Rocket Man Acres.

3) On July 4, 1988, Nikita, a lovely russian female soldier, conveys by way of warranty deed to Elton.

On July 4, 1988, who owns Rocket Man Acres?

Answer: Dave. How?

Reasoning: Although Elton did not own Rocket Man Acres on May 29, he will be estopped from denying his transfer of title to Dave. Elton's use of a warranty deed is the key factor. Although Elton did not technically own the land on the date of his conveyance to Dave, the warranty deed carries with it 3 present and 3 future covenants of title (covered in a prior article). At the heart of estoppel by deed is the fact that the grantor, Elton, has warranted to Dave that he is the owner of the land in fee simple and that he has the right to convey his fee simple interest to Dave. Hence, when Elton received his deed on July 4, it would by considered a formality and the chain of title would continue on with Dave as the owner. This is fair and should strike all readers as very common sensical.

Now, in most states, estoppel by deed will be found either by the use of a warranty deed or by the use of a quit claim deed. Of great importance, the quit claim deed carries with it no warranties, it simply purports to convey what the grantor owns. This is where Michigan case law gets a little funny.

Michigan courts do draw the distinction between the use of a warranty deed or a quit claim deed when the question of estoppel by deed arises. Using the above example, if Rocket Man Acres were located in Michigan, namely beautiful northern Michigan, and Elton had conveyed to Dave via quit claim deed, no title would have transferred to Dave and estoppel by deed would not be found. Why?

Reasoning: The quit claim deed, executed on May 29, will only convey what Elton actually owned, which was nothing. Nothing from nothing equals nothing (sounds like a song title). Now, when Elton receives his deed on July 4, he will be the outright owner, Dave will have no legal interest. When Dave confronted Elton with this, Elton simply said "I guess that's why they call it the blues."

I know, a regular comedian. Anyway, I have been painting all day and am very sore, so I will conclude. Estoppel by deed is a very streamlined and pragmatic doctrine that sounds of good common sense. Whether or not I agree with current Michigan law is not a topic for this article. Estoppel by deed is a technical issue, albeit a very straight forward issue. But like my contracts teacher liked to say, "It's only a problem when it becomes a problem." Cases are brought because there exists competing interests. The use of a warranty deed is always golden to the grantee.

More soon - dave

Michigan's Race-Notice Doctrine

2008-08-04T15:09:00.000-07:00

So you have just purchased your new home and are in receipt of the original deed. What do you do next? Answer: You immediately march down to the Register of Deeds (ROD) office of the county where your land sits and record your deed. Prompt recording will evidence your legal rights to your new home. Why is this so important? After all, you have paid a lot of money for your new home and the seller appeared to be a really nice guy.

First off, it is possible that you may never have a dispute of your ownership, even if you never record your deed. In the past, many people did not record their deed. This was referred to as 'desk drawer title' because the unrecorded deed was oftentimes found in the deceased homeowner's desk. On the contrary, a problem arises when a third party initiates a legal claim against your land. If you do not have your deed 'of record' you may be in for a shocking surprise. The following will depict the power of the land recording system.

Like it or not, the courts of Michigan will look to the public record when a dispute over title exists. Such public record is found at the ROD office of the county in which the land is located. The court, in making its determination, will make use of the Michigan recording acts for its resolution.

Michigan is a race-notice jurisdiction. About 1/2 of the states are race-notice jurisdictions. The majority of the remaining states are notice jurisdictions, while only a handful are race jurisdictions. To understand how the race-notice principle works, I will offer a set of facts:

(1) On February 1, 2008, Dave Phillips purchases a beautiful new home in Novi for $300,000.00. He resides in Oklahoma and plans to move into the Novi home by the summer of 2009. In his infinite wisdom, Dave decides not to purchase title insurance. His reasoning? He used to party hardy with the seller back at Indiana University. There is no way the seller would deceive him.

(2) Dave decides to be responsible, so he places his unrecorded deed in his safety deposit box located at his bank in Norman, Oklahoma. No way anyone can tamper with it in there. Go Sooners!!

(3) It is now August 1 of 2008 and the deed remains unrecorded and also remains in his safety deposit box.

(4) Enter the Joker. On April 1, 2008, Dave's party buddy decides that he would rather sell the Novi home to Mr. Opportunist.

(5) Mr. Opportunist has no idea that Dave exists, nor any idea that Dave has already received a deed to this same property. He also pays $300,000.00 for the Novi residence.

(6) Mr. Opportunist immediately records his deed with the Oakland County ROD.

(7) At Christmas time, 2008, Dave decides to pay a visit to his new home, just to move a few things in. He is shocked to see Mr. Opportunist living in his home. He is further shocked and dismayed that Mr. Opportunist is wearing a Michigan Wolverine sweatshirt. Go Sooners!!

(8) Dave, being rather upset, takes his deed to the Oakland County circuit court and demands that Mr. Opportunist be removed!

(9) Result: Dave loses; Mr. Opportunist wins. How can this be??

The result is found based on the application of the race-notice doctrine. When two or more deeds exist with competing interests, we have a problem. It is considered a race to see who records first. This is the simple meaning of the race element of the doctrine. Whoever records first will prevail under the race element. But there is an additional element; that being the notice element. To fully understand the notice principle, the reader must understand the meaning of a bona fide purchaser (BFP). To qualify as a BFP, the grantee must satisfy two elements: (1) the grantee must pay value for the land, and (2) the grantee must have no actual or recorded notice of intervening rights adverse to their own.

The value paid for the land does not have to be market value. The court will determine if the grantee has furnished adequate consideration. Actual notice is just as it sounds, so keep this simple. Example: the grantee has actual notice if the seller verbally discloses the adverse interest. Record notice is found via a search of the land records. The grantee is charged with such record notice even if they do not perform an adequate search.

Capsule Summary: So, there exists three (3) elements that a party must satisfy in order to be protected under the race-notice doctrine. When applying the race-notice doctrine, the court may use the following checklist:

(1) Which party recorded first?
(2) Does the party qualify as a BFP? The BFP consists of two elements: (a) did the grantee pay value?, and (b) did the grantee lack actual or record notice?

This is straight forward. Either the party satisfies all three elements, or they do not.

Using my earlier example, Mr. Opportunist satisfies all three elements. He certainly recorded his deed first, so he prevails on the race element. Additionally, Mr. Opportunist had no idea of the existence of Dave's interest in the land. He was not told of Dave's interest and there was no record interest created in Dave. He also paid value for the land. So he qualifies as a BFP.

Dave will be able to sue his IU buddy, but the race-notice doctrine will enable Mr. Opportunist to go forward, free of any claims posited by Dave.

So, going back to our original set of facts, you can see how easily Dave's problems could have been avoided if only he had promptly recorded his deed. If he had done so, Mr. Opportunist would have lost the battle based on Dave's record interest.

Disputes oftentimes arise because necessary documents were not recorded or, worse yet, the documents were recorded, but they were not filed properly and were considered by the court to be recorded 'outside' the chain of title. Either way, the race-notice doctrine allows the court to establish who has the superior position.

It is well worth the time for an attorney or homeowner to search the land records shortly after depositing a deed for recording. Why? This concerns clerical mistakes. When someone with a competing interest runs a search of the land records, they will usually find your interest of record and all will be fine. However, if your deed was erroneously filed and a normal search of the ROD records fails to disclose your deed, it may be determined that your deed was recorded outside the chain of title. As a result, the party would not be charged with record notice. If you do discover that your deed was misfiled, you can have the ROD office correct the mistake. Forgive me, I am just cleaning all the corners.

Writing more soon - dave

Consensual, Judicial, & Statutory Liens

2008-03-02T06:48:00.000-08:00

In this article, I will discuss the various ways in which a lien may attach to real property. I will only be discussing attachment to real property, not personal property. I intend to educate the reader as to the nature of a lien and its affects on Blackacre.

The legal dictionary defines lien as: any official claim or charge against property. In viewing this definition, focus should be attended to the word 'official'. For a claim or charge to constitute a lien, it must be official or substantiated. Many persons or entities may claim a lien on real property, especially during a debtor's bankruptcy proceedings, when, in fact, these claims are unsecured. As any creditor knows, if your claim against a debtor is unsecured, your payment from a bankrupt's estate will be pennies on the dollar, if not zero. For a lien to be official, it must materialize in one of three ways: 1) by consent; 2) by judicial determination; or 3) by statute. Hence the title of this article. Now, let me break these three segments down into their elemental parts for simplification.

Consensual Lien:

Consent is basic to human relations. Consent is granted from one individual to another. Example: a young man asks his girlfriend's father for his daughter's hand in marriage. The father, by giving his permission to the marriage, will have consented to the young man's request.

In the context of a consensual lien, the consent is reciprocal by nature. I will use the real estate mortgage as our example of a consensual lien. The homeowner asks the bank to consent to a loan, while the bank reciprocally asks the homeowner to consent to the offering of its land as collateral for the loan. When both sides consent, there is created a consensual lien.

Judicial Lien:

Human relations frequently create disputes. Many times a dispute will require judicial resolution. Whether or not this dispute involves Blackacre, the court may, at its discretion, allow for a lien to be placed on Blackacre by an injured party. This lien is certainly not consensual in nature.

The judicial lien is often found at the completion of divorce proceedings. Let us say that Mr. and Mrs. Property divorce. The property settlement agreement awards the property to Mrs. Property. However, the judge places a lien in the amount of $10,000.00 on Blackacre, now owned by Mrs. Property. This lien is in favor of Mr. Property. The judicial lien is true to its name; it is a lien, determined by a judge, to protect some one's interest.

Interestingly, Michigan's enactment of the Judgment Lien Act has curbed the necessity of court ordered lien rights. In brief, here is how it works: Let us say that Mr. A sues Mr. B for breach of contract. Mr. A wins the suit and is awarded $100,000.00. Let us further assume that Mr. B owns property in Oakland County. Before the enactment of the Judgment Lien Act, Mr. A would have had to exhaust all efforts of collecting on the personal effects of Mr. B before attacking the Oakland County property. He would have attacked the Oakland County property via levy and execution. Today, under the Judgment Lien Act, all Mr. A has to do is record his $100,000.00 judgment with the Oakland County Register of Deeds and presto, Mr. A holds an official lien against the property of Mr. B. This particular lien is created via statute, as discussed below.

The Judgment Lien Act will be the topic of a later article, as I can not fully discuss it in this writing. I raise the subject here to notify the reader that the line between judicial and statutory lien rights has begun to gray.

Statutory Lien:

Statutes are laws enacted by state legislatures. These laws, although influenced by court decisions, are not judge made. Example: The Michigan Construction Lien Act, which grants lien rights to unpaid contractors, does not require consent, nor does it require the contractor to initiate time consuming and expensive litigation. The Michigan Legislature, in enacting the Michigan Construction Lien Act, had made a determination that a material-man should have a simple and inexpensive way of protecting itself from nonpayment. A statutory lien is extremely powerful and beneficial to its holder. NOTE: I am only discussing the establishment of a lien, not the enforcement of said lien.

Conclusion:

A valid lienor (person holding lien rights) has a secured interest in Blackacre. In other words, the lienor's interest is secured to Blackacre. A person or entity with no lien rights is said to be unsecured as to Blackacre.

Regardless of which method a lien arises, the proper establishment of a lien is critical. Once established, the lienor has a legal interest in Blackacre. Ultimately, this gives the lienor tremendous and viable leverage against the land. In today's market, collecting on a debt can be quite an adventure. There are simply no absolute guarantees that a debt will ultimately be satisfied. However, the establishment of an official and valid lien will greatly aid the lienor in its efforts.

I hope to post articles more frequently then I have. Hopefully I will soon be in a career position to exploit this site and my endless enthusiasm regarding the elements of its creation.

-los lonely boy-

Correlational Analysis

2008-02-09T05:08:00.000-08:00

Analysis lies at the heart of real property title examination and underwriting.

Title examination is my specialty, and I've wondered the question: What are the elements of the skilled title examiner or the skilled underwriter? It's like asking the question: What are the elements of a skilled hockey player? Answering this question is critcial to me, as I'm creating an instructional guide specifically for examiners. If I can answer this question with some degree of certainty, I'll be sure to have created a well designed program.

Let's look at the elements of a skilled hockey player. He will be able to 1) skate well; 2) skate fast; 3) handle the puck; and 4) understand the game. This isn't a complete list, but you get the picture. Now, let's say the player we are scouting scates very well, handles the puck well, and understands the game, however, he is slow on his skates. He fails the second element. The coach, and the player, now understand what must be worked on: he must improve his speed. When he accomplishes this, he'll be a well rounded player.

When evaluating the skills of a title examiner, the approach is basically the same. However, most examiners I've met would fail element #4, above, as they don't understand the game. They are weak in analytical skills. In fact, the skilled examiners I've met I can count on one hand, and I've been in this business for 10 years. Why so few? Well, on one hand, some examiners are basically unmotivated, they only want a paycheck. On the other hand, effective training seems to have been abandoned by most companies. This is unfortunate for the young examiner, as it sort of leaves them adrift in their formal training.

This makes me beg the question: How can I write a program that will improve an examiner's analytical skills? That's a loaded question. Most programs I've read are of the garden variety. These programs define numerous terms and offer the examiner a basic guideline for drafting requirements and exceptions. From there, the examiner is usually left to her own intuition if she hopes to further her career. Unfortunate.

Correlation: The American Heritage Dictionary defines correlation in part as: a reciprocal relationship between two comparable things. Stop and think about Blackacre, our traditional parcel of land. Blackacre has numerous legal interests attaching to it, such as taxes, multiple mortgage liens, zoning laws, police power, etcetera etcetera. A subsequent occurence affecting Blackacre will effect all existing legal interests to some degree. This effect may be nominal, or it may be drastic. Let's say the owner files a bankruptcy petition under Chapter 13. This filing will have an immediate correlative effect on all existing interests. It will be up to the bankruptcy judge to determine these effects. The Chapter 13 filing has a reciprocal relationship with the mortgage. The mortgagee may very well maintain its lien priority and be unaffected by the bankruptcy proceedings. However, the mortgagee may also see its mortgage subordinated through the judge's application of equitable subordination, or have a portion of its lien rendered unsecured if the property value has dropped. Additionally, if the bank has begun foreclosure proceedings, short of sale, these proceedings will be stayed. And a Chapter 13 filing will usually allow the homeowner to cure its default. So you see, whether or not a subsequent event affects a current legal interest, there is an immediate correlative effect on all existing interests.

When an examiner is creating a commitment, he is often faced with numerous problems. Some of these problems are apparent and some are not. Example: Let's say the order requests the examiner to produce a foreclosure commitment. The bank is preparing to foreclose on its mortgage and is requesting title work. A search of the property discloses nothing unusual; it shows the deed into the homeowner and the corresponding purchase money mortgage, the target of the foreclosure commitment. If the analysis stopped here, the examiner could create a very simple foreclosure commitment. However, there are numerous red flags that call for a deeper inquiry. This is professional servicing.

Correlational Analysis: Continuing with the above example, let's use correlation to disclose these red flags. The order for a foreclosure commitment itself indicates that Mr. and Mrs. Title may be insolvent. There are no guarantees here; just assumption. Two issues that frequently arise out of insolvency of homeowners are: 1) Divorce, and 2) Bankruptcy. Again, whether or not divorce or bankruptcy is an issue in this particular transaction, there exists a causal relationship between insolvency, foreclosure, divorce, and bankruptcy. All of these areas should be investigated before they are dismissed. Correlational analysis is the use of correlation to evaluate the strength of relations between variables.

My program will consist of the fundamentals of property and title examination, as it must. But I plan to incorporate, within the program, different scenarios that an examiner may encounter. Within these scenarios, the correlative variables will be disclosed. It would function much like a traditional flow chart. By applying correlational analysis to unique scenarios, the examiner will not only produce expert work; she will also realize the amazing benefits of education.

My next article will concern consensual, judicial, and statutory liens.

Take care - los lonely boy

The Real Estate Mortgage

2008-01-29T06:36:00.000-08:00

Mortgagor: A person or entity that grants (mortgages) its land to its mortgagee (usually a bank).

Mortgagee: A person or entity that receives a grant of mortgage from the land owner (the mortgagor).

What is a mortgage? If asked, most people would respond with "a mortgage is money we owe the bank", or something similar. In the scheme of things, this statement is accurate enough. After all, if an owner makes all the scheduled payments, the default provisions of the mortgage will never be triggered. However, when chronic default occurs, the mortgage becomes a player.

First, my definition of a mortgage: A mortgage is a grant of land offered as collateral for an underlying loan.

The following story demonstrates the creation and function of the real estate mortgage.

Mr. X has inherited land from his deceased father. The land has an appraised value of $200,000.00, free of liens. Mr. X has some ideas concerning future career objectives, but it will take some greenbacks to accomplish this. In contemplating his financial health, he realizes that he has little savings and an investment account that is better left alone.

So, he says to his best friend, "I'll just take out a mortgage with the bank for $50,000.00." Mr. X trudges to the bank and completes his loan application. The bank approves the loan on condition that Mr. X agree to offer his home as collateral. Mr. X then attends his closing at Godzilla Title Company.

Step 1: Mr. X and the bank sign the Note. The note is the actual contract between the lender and Mr. X regarding the terms of the loan, interest rates, etc.

Step 2: Mr. X signs the mortgage. The mortgage effectively attaches the underlying debt, as set forth in the note, to Mr. X's property. The mortgage only acts as collateral for the loan. It grants the lender a lien on Mr. X's property in the amount of the loan. The lender will, possibly, be fully protected in the event of subsequent default and acceleration of the loan. I say possibly, because as we have seen in the recent mortgage market, anything can happen.

I often here people say that they will "take out" a mortgage. That is technically incorrect. The individual or entity "takes out" a loan. Concurrent with the loan, the individual or entity (now the mortgagor), grants a mortgage to the lender. The owner voluntarily grants its land as collateral. The lien created by the mortgage is known as a consensual lien.

Now, if the underlying debt is satisfied, either by its own terms or by early payoff, the lender will discharge its mortgage. When the discharge is properly recorded, the land is effectively removed as collateral.

The mortgage will now become a player if the mortgagor falls drastically behind in its payments. The mortgage lies in wait. It is the heavy artillery used by the lender when all collection efforts fail. I say that the mortgage becomes a "player" because until the lender accelerates the loan, the mortgage offers no immediate remedy for the lender. The lender must accelerate the loan before it can foreclose on the property secured by the mortgage.

There are vast scenarios that can play out through the course of debtor's loan. Of course, none of these scenarios become an issue until something goes wrong. Some of these scenarios include: (1) foreclosure by advertisement; (2) judicial foreclosure; and (3) a mortgagor's bankruptcy. These are all topics for future articles.

Summary: This article briefly discussed the nature of a mortgage; what a mortgage is; how it is created; and its benefit to a lender in case of default. I hope this gives the reader an elementary understanding.

-los lonely boy-

The Debtor-Creditor Relationship

2008-01-26T09:15:00.000-08:00

This is Dave. My intention, for the near future, is to continue posting on this blog. Property offers numerous avenues of education and application. I happen to have a strong interest and affinity in matters concerning real property. People reading these articles aspire in a wide variety of professions. As a result, it is hard for me to target a particular audience, such as the title examiner, the attorney, or the land owner. I am not looking for monetary profit from this blog site; quite the contrary. In my own way, I consider myself a fiduciary of my profession. I feel that I have a professional responsibility to uphold the traditional aspects of property law. Over the past decade, I have read tens of thousands of pages regarding all matters property. I write these articles on the fly, without the aid of notes or outlines. For me, it is both easy and enjoyable. I happen to be someone that believes in passing knowledge along, not sequestering it. So hold tight, continue to read, and allow yourself to learn.

This article will concern the basic relations between a debtor and its creditor.

A debtor is an individual or entity that is under an obligation to pay back money it has borrowed from its creditor.

A creditor is an individual or entity owed money from its debtor.

To demonstrate this relationship, let's use a common story. My readers are familiar with credit cards and the financial disasters they may create for the uneducated. In my opinion, the national law should be: If you can't pay for the item in cash, then you can't have it! Our country has become the giant 'pie in the sky'. I digress. Anyhow, an individual applies for a credit card and his application is approved. Let's say the credit company sets the credit limit at $3,000.00. The debtor-creditor relationship is established the moment the individual uses his card. The individual is the debtor and the credit company is the creditor. The iceberg is dead ahead!

Moving ahead in this relation, let's say the debtor has maxed out his card. Additionally, the debtor is in arrears on his scheduled payment. Now the compound interest monster begins to raise its ugly head. Before our debtor can find a suitable life raft, his obligation to the creditor has ballooned to $5,500.00. Now he's really in the soup! He knows it, and his creditor knows it. Now the games begin.

The creditor's perspective:

The creditor starts with soft zone coverage. They mail numerous notices and place numerous calls to the debtor. This usually brings false promises of repayment. The debtor knows it, and his creditor knows it. So, the creditor moves to the full court press. The creditor brings in the ever friendly credit collection agency. It's like putting John Rambo on the debtor's ass. Unfortunately, Colonel Troutman is not available to assist the debtor.

The phone calls ramp up; the threatening letters ramp up; and now we have a race to the finish line. The creditor will now look to its remedies under state law. In Michigan, the creditor may sue its debtor for the purpose of obtaining judgment. The creditor may then attempt to attach and sell personal assets of the debtor in satisfaction of its judgment. Additionally, pursuant to the recently adopted Judgment Lien Act of 2004, the creditor may simply record its judgment in a county where the debtor owns land. Upon proper recording, the creditor's judgment will attach to the debtor's interest in real property. Curiously, this recent legislation does not allow the creditor to foreclose its lien. The creditor can only collect after sale or refinancing of the property, and only if there is an equity cushion in the property. The Judgment Lien Act will be the topic of a later article.

Now, the reality is that most debtors, who are in financial distress, will not have enough money to satisfy the judgment; nor will the debtor own enough nonexempt personal assets to satisfy the judgment. But the most basic reality is that the creditor will spend too much time and money of its own in attempting to collect the debt. It's one thing if the creditor's judgment is against a multi-million dollar corporation; quite another if its judgment is against a typical homeowner.

Another remedy for the creditor is to invoke the powers of federal bankruptcy law. If the debtor has enough creditors, and the aggregate amount owed is great enough, the numerous creditors may join in the filing of an involuntary petition under Chapter 7. This involuntary filing cannot be brought under Chapter 13. This makes sense, as an involuntary filing under Chapter 13 would create a human receivership consisting of the bankruptcy trustee and the bankruptcy judge. If the creditors are successful in forcing a Chapter 7, the assets of the debtor, excluding available exemptions, will be sold and distributed by the trustee to the various creditors in satisfaction of their claims. Again, the reality is that very few debtors will have qualified assets available for distribution. Most voluntary Chapter 7 filings are 'no asset' filings.

The debtor's perspective:

The debtor, whether it admits to its creditor or not, realizes that repayment of the debt, as it stands, will be impossible. There are some strategic moves that a debtor may invoke in order to find a resolution. These may include: (1) Dealing directly with the creditor in an attempt at reorganizing the amount owed (usually by wiping out interest), and working out a payment plan regarding this new amount; (2) Hiring a credit agency to work with the creditors. Often the credit agency can greatly reduce payments and consolidate the debts. The creditor should be anxious to work out an arrangement, as the alternative may be that the creditor gets nothing at all; and (3) The filing of a Chapter 7 or Chapter 13 bankruptcy petition. If the debtor can qualify for protection under Chapter 7, as these qualifications have become greater, then the debtor may be able to avoid, in whole, its obligations to its unsecured creditors. The debtor may also propose a plan under Chapter 13, in which most, if not all, of its debts will be paid its creditors over a 3 to 5 year plan. Generally, a debtor will file a Chapter 13 plan when it owns property with equity. In other words, the property has an equity cushion that may be used to satisfy creditor claims if the debtor were to file under Chapter 7, liquidation. If the creditors agree to the Chapter 13 plan, as proposed, the debtor will not lose his home through a forced sale by the bankruptcy trustee, as would be the case under Chapter 7. Bankruptcy procedures are highly complex and, as such, will be the topic of later articles. It is enough to say that creditors are wary of the protections of United States Code, Title 11 - Bankruptcy, which are often invoked by debtors in distress.

Result:

Unfortunately, there are no quick and easy answers when a debtor comes into financial difficulty. The relations between a debtor and a creditor, as shown, can be very complicated. Although a debtor is under an obligation to pay what it has charged, the creditor is also under an obligation to properly determine the creditworthiness of an applicant before it approves the application. The remedies I have written of, certainly not comprehensive, were outlined to give the reader an elementary understanding of the relations that develop between the debtor and creditor when the obligations of the debtor are not being met. Unfortunately, at the end of the day, the creditor may get nothing, and the debtor may wind up with destroyed credit. That's a lose-lose situation. My question: Do you really need that credit card?

Additional information:

Let me distinguish between an unsecured debt and a secured debt.

An unsecured debt is a debt that is not attached to any particular property of the debtor. It is a debt that is not collateralized. A credit card, the topic of this article, is the best example of an unsecured debt. If the debtor defaults, the creditor has no immediate legal property interest that it can foreclose on.

A secured debt is a debt that is attached to a particular piece of property of the debtor. A mortgage is the best example of a secured debt. The owner's land is offered as collateral against the loan. If the debtor defaults, the creditor may foreclose the loan and sell the land in satisfaction of its claim.

In my next article I will discuss the mortgage.

Take care - 'los lonely boy'

What is a title commitment?

2008-01-25T05:15:00.000-08:00

This article regards the title commitment. I will discuss its structure and function. This writing is crafted for the non-title professional. Real estate professionals often have a hard time differentiating between a title commitment, a title policy, and a title search. I hope this article offers you some clarity.

First of all, what is a title commitment? A title commitment is a document created by a title examiner, which document sets forth requirements that must be satisfied by a customer before an underwriter will insure that particular transaction. The commitment also discloses exceptions to title that will be included in the final policy, unless these exceptions are properly satisfied and removed. The title commitment consists of Schedule A, Schedule B-I, and Schedule B-II. I will discuss each of these Schedules in some detail. From this point forward I will refer to the title commitment as a commitment.

First, a discussion of Schedule A:

As most of us know, commitments can come in many forms and styles, but the guts and purpose of the commitment are the same among all title companies in Michigan. I will discuss the commitment using a very traditional model. In your practice, you will encounter many creative and often overwritten and cumbersome commitments. But there is good news: When you understand the structure and function of the commitment, you will have little trouble in weeding out the relevant issues.

Schedule A is the first page of the commitment. At the very top of this Schedule you will see the title company's file number. It is very important to keep track of the file number, as you may need to reference it many times throughout the transaction. Next, you will see a date and time, such as June 1, 2004 at 8:00 a.m. This date is known as the effective date. I will not use the acronym ED for obvious reasons! The effective date is disclosed by the register of deeds (ROD) office located in the county where the property is located. For clarity, when the ROD receives an instrument for recording, it will assign the instrument a liber and page number. The date the instrument is recorded will be displayed directly beneath the liber and page number. When this process is completed, the instrument is said to be recorded and indexed.

The ROD receives a tremendous number of documents for recording on a daily basis. As a result, they simply can't record all instruments on the same day they are submitted. So, for example, on July 1 the ROD may have an effective date of June 1. That particular ROD is indexed through June 1 only. The effective date, in almost all counties, is prior to the current date. The effective date is very simple to understand and it should be explained to all parties.

Next, there is a section for listing the proposed insured parties. This section discloses the purchasing party and the amount of the purchase price, as well as the lending party and the amount of the loan. The parties to a transaction, as well as the purchase price and loan amount, frequently change throughout the negotiation process. As these changes occur, the examiner will simply revise the commitment to reflect the particular change. This is where the file number becomes important, because you may be requesting the revised commitment.

The next section of Schedule A is quite possibly the most important section in the entire commitment. This section discloses who the owner of the property is. This may seem an overstatement on my part, but consider this for example: Let's say the commitment recites the owner of the property as Bob Jones and Mary Jones, husband wife, when, in fact, Bob Jones and Mary Jones are not married. Let's further assume that the examiner erred in reading the deed. The deed recites the grantees as Bob Jones and Mary Jones, as tenants in common. If the property is conveyed without the signature of the real spouse of Bob Jones, the new owner's title will be subject to the inchoate dower interest of the spouse of Bob Jones. Disclosing the proper state of title is, in my opinion, the most important function of the title examiner.

The last section of Schedule A consists of the legal description of the land which is the subject of the transaction. I will not go into detail about legal descriptions in this writing. It is enough to say that the examiner must confirm that the proper legal description is set forth. And remember, the title policy insures the legal description, not the address of the property.

In summary, Schedule A is the informative schedule. It discloses the current effective date; the parties to the transaction; what the transaction is; the amount of the transaction; who owns the property; and the property which is the subject of the transaction. Indeed, it discloses the overall structure of the transaction.

Next, a discussion of Schedule B; in particular Schedule B-I:

Schedule B-I immediately follows Schedule A. In this Schedule, the title examiner discloses particular requirements that must be satisfied before the underwriter will issue its policy. Now I would like to pose a question: Why do we have title examiners? Is it so we can create new jobs and keep people off the streets? The obvious answer is no. The responsibility of the examiner is twofold: First, it is to protect his title agency and, by definition, the agency's underwriter, from liability. Second, it is to establish marketable title in the subject property, thereby properly serving the property owner or lender.

For the sake of clarity, I will bifurcate Schedule B-I. These segments will be labeled Schedule B-Ia and Schedule B-Ib, respectively. In Schedule B-Ia, the examiner will set forth the basic requirements that the owner or lender must fulfill. The basic requirements consist of deed and mortgage execution. For example, in a purchase transaction, the first requirement may call for the execution of a deed from the seller to the buyer. The next requirement may call for the execution of the purchase money mortgage from the buyer.

Property transactions can have unbelievable dimensions, but for the purpose of this discussion, the two most common transactions are (1) the sale with a corresponding purchase money mortgage transaction, and (2) the refinance transaction. Schedule B-Ia disposes of the easy requirements first. These requirements will be expected and understood by all parties.

Schedule B-Ib is where the examiner cleans up the title. Common problems include federal tax liens, tax forfeitures, foreclosure proceedings, and divorce proceedings, just to name some. These problems fall within the gambit of Schedule B-Ib, because they are not formality requirements, such as the execution of a deed or mortgage; they are complex requirements that must be drafted with skill. Schedule B-Ib is where the talented examiner can display his or her skill.

My goal, as an examiner, is to create marketable title relative to the particular transaction. I create marketable title through the drafting of the commitment. The commitment is my instrument of communication. It is important for the reader to understand that a good title examiner is essential to a property transaction. Disclosing title problems and correcting these problems, prior to closing, will enable all parties of a transaction to get a good night sleep. The parties will not have to fear being named a defendant in a lawsuit. Now, I understand that perfect title to property can never be guaranteed. That is because there are many circumstances, such as nondisclosure, that may cause problems subsequent to the date of closing. That being said, an expert examiner will greatly reduce the element of surprise for the new home owner or lender. After all the requirements of Schedule B-I have been complied with, the parties may schedule a closing.

Finally, a discussion of Schedule B-II:

Schedule B-II sets forth the list of exceptions to coverage that will appear on the final policy. Schedule B-II is broken down into two sections: (1) the general exceptions section, and (2) the specific exceptions section.

The general exceptions section is a list of exceptions based on industry standards and practice. These exceptions include, among others, the parties in possession exception and the matters of survey exception, just to name two. A well created template, created by an underwriter, will display an actual general exceptions section.

The specific exceptions are the exceptions that are particular to the subject parcel. These exceptions may include, as an example, recorded easements, recorded building and use restrictions, platted easements, and recorded leasehold interests. Indeed, the list of specific exceptions may total greater than 100 in certain commercial settings.

At the end of the day, if the purchaser and/or lender are content with the list of general and specific exceptions, as shown on the commitment, the closing may be scheduled. If, however, the purchaser or lender, or an attorney representing a particular party, object to one or more of the specific exceptions, and you can expect an objection, the closing will have to be postponed until these issues can be resolved. Challenges to Schedule B-II are common, and this makes good sense. The client, or attorney will desire as few exceptions as possible. This is common sense: The fewer the exceptions, the greater the coverage afforded by the policy.

Specific exceptions can only be removed by agency counsel or the underwriter, as these decisions require expertise and experience. If a customer can produce satisfactory evidence supporting the removal of an exception, the underwriter may remove the exception entirely, or it may insure over the existing exception. Insuring over the exception simply means that the policy will continue to show the exception, with a statement attached to the exception disclosing that the underwriter will cover the insured in any attempted enforcement of the relevant exception.

It is important for the reader to understand that Schedule B-II exceptions are not written in stone. There are a variety of reasons why a specific exception may not apply, but unless and until the insurer receives adequate evidence supporting the removal of the exception, the exception will stand.

dave -los lonely boy-

Dower

2008-01-21T12:45:00.000-08:00

Frequently, dower is an issue in a property transaction. In this article, I will disclose what dower is, as well as offer ways in which parties to a transaction may effectively address the issue. I will be discussing dower in some detail, because understanding dower is critical in avoiding a potentially burdensome title problem.

The right of a widow to dower is defined in Section 558.1 of the Michigan Compiled Laws, which reads: "The widow of every deceased person, shall be entitled to dower, or the use during her natural life, of 1/3 part of all the lands whereof her husband was seized of an estate of inheritance, at any time during the marriage, unless she is lawfully barred thereof."

I will break this definition down, by segment, so you can obtain a clear understanding of dower. Let's start with the first segment the widow of every deceased person. This is very straight forward and should not confuse anyone. The widow is the surviving spouse of the deceased husband.

Now, let's look at the second segment shall be entitled to dower. The word shall is a command by the state legislature, and this command means that there are no exceptions to the rule: The widow is entitled to her dower rights in the lands of her husband. In other words, there is no wiggle room with dower; it is a bright line rule of law in Michigan. The next portion or the use during her natural life refers to a life estate interest held by the widow. This life estate interest is exclusive to the widow and will terminate upon her death.

Next, let's examine the segment of 1/3 part of all the lands whereof her husband was seized of an estate of inheritance. For the husband to be seized of an estate of inheritance, he must hold title to land in one of two ways: (1) either individually, such as Bob Jones, a single man, or (2) as a tenant in common with another individual, such as Bob Jones and Mike Smith, as tenants in common. The husbands interest is held in fee simple, which is what qualifies his interest as an estate of inheritance. You must understand that dower does not attach to property in which the husband holds title as a joint tenant. *(Reference previous articles concerning the fee simple; the tenancy in common; and the joint tenancy)

Next let's examine the segment at any time during the marriage. This segment is very simple. Any property that the husband owns as a tenant in common, or property of which the husband owns individually at the moment of marriage will be subject to dower. This also includes property that the husband acquires as a tenant in common, or property of which the husband acquires individually during the marriage. So dower attaches to before and after acquired property interests of the husband, as above discussed.

Finally, let's examine the segment unless she is lawfully barred thereof. There are two basic ways in which a wife's dower can be lawfully barred. These are (1) by voluntary conveyance, and (2) by execution of a prenuptial or post nuptial agreement.

By far, the most common way to bar dower is by a deed conveyance from the wife. The wife usually signs the deed of conveyance along with the husband in a sale transaction. The wife may also bar her dower by a separate conveyance directly to the grantee of the husband. As an example, let's say that Bill Smith, a married man, is the sole owner of Blackacre. Bill Smith then executes a deed to Bob Jones, without Bill's wife joining in the execution of the deed. Six months after this conveyance, the spouse of Bill Smith executes a deed to Bob Jones, which deed recites that it is given for the purpose of barring her dower right. This conveyance will effectively terminate the dower interest of the spouse of Bill Smith. Simple!

The husband and wife may also enter into a prenuptial agreement prior to marriage, or a post nuptial agreement subsequent to marriage. Generally, if the agreement clearly sets forth that the wife, or soon to be wife, voluntarily releases all dower rights in and to her fiance's or husband's present or future lands, it will lawfully terminate the dower interest of the wife. A strong note of caution: prenuptial and post nuptial agreements may be attacked on grounds of duress, undue influence, or nondisclosure by the fiance or husband. As a result, these agreements must be reviewed by competent legal counsel before making a determination as to the validity of the agreements.

As a general rule, title companies will require the wife to sign the deed, along with the husband, even though a nuptial agreement exists. It is not wise and is often unnecessary for the title company to police a nuptial agreement, as the wife will usually consent to signing the deed. This is a smart move by the title company, because her voluntary signature is a current barring of her dower right, which demonstrates that the wife intended to bar her dower right as to the specific transaction. I don't mean to dwell on this point, but there is no need to get a team of lawyers involved when the wife is offering to sign the deed; her execution of the deed simply circumvents the nuptial agreement.

How did dower come to be? At common law, and still today, a widow was not the heir of the deceased husband. In an attempt to protect the interest of the surviving wife, the estate of dower was created. Now, I will clarify this statement further. Dower attaches before the death of the husband, and this is known as dower inchoate. To simplify, the dower right of the wife attached immediately to all interests of which her husband was seized of an estate of inheritance.

When the husband dies before the wife, the inchoate dower interest of the wife is transformed, by operation of law, to dower consummate. Dower consummate is really an estate in expectancy; there exists a condition precedent, as the wife must survive the husband to realize the full benefit of dower.

As an aside, I must speak to the interest of the husband at common law. The estate of curtesy was afforded the husband. Curtesy was a life estate interest in all the lands in which the wife held a freehold interest. Curtesy differed from dower in two ways: (1) the husband was entitled to a 100% life estate interest, not just a 1/3 interest as in dower, and (2) the husband was only entitled to curtesy if the husband and wife had a child. The child did not have to survive; it only had to be born alive. Curtesy is the common law correlative of dower. Curtesy has been abolished in Michigan, so the good news is that we as real estate professionals only need concern ourselves with dower.

Conclusion:

I write of dower because my experience has shown me that dower is one of the most misunderstood concepts of property law. Dower comes to us from the common law; the common law being a fascinating and historical basis of property law.

-los lonely boy-

The Tenancy By The Entirety

2008-01-21T05:25:00.000-08:00

The tenancy by the entirety can only be held by a husband and wife. At common law, the concept was that the wife and husband were one unit; hence the term entirety. This concept is very similar to that of the joint tenancy. However, regarding the joint tenancy, each owner is considered to own the whole. With the tenancy by the entirety, the husband and wife are considered one unit owning the whole. The significant difference between the joint tenancy and the tenancy by the entirety is that with a joint tenancy, each joint tenant is free to convey its interest at any time. Conversely, with the tenancy by the entirety, one spouse, acting alone, cannot effectively transfer an interest in entirety property. There is one exception to this rule: One spouse, acting alone, may convey its interest to the other spouse, thereby destroying the tenancy by the entirety.

Regarding the tenancy by the entirety, when a spouse dies, the remaining spouse survives herself and her deceased spouse. You may be wondering how someone can survive themselves? Remember that with a tenancy by the entirety, the spouses are considered to be one unit owning the whole. This verbiage simply indicates a passing of the entirety interest to the remaining spouse. When a spouse dies, the tenancy by the entirety terminates, and the surviving spouse will hold in fee simple.

The typical tenancy by the entirety recites the grantee line as: Owner conveys to Mark Thompson and Karen Thompson, husband and wife.

Severance of the tenancy by the entirety:

Either spouse, acting alone, cannot convey property held in tenancy by the entirety. The property must be transferred by the husband and wife, acting in concert.

As mentioned, there is an exception to this rule: One spouse may convey to the other spouse, thereby destroying the tenancy by the entirety. The tenancy by the entirety will also be destroyed death, as discussed, and also by divorce.

Note: When the tenancy by the entirety is destroyed by conveyance of one spouse to the other, the inchoate dower interest of the wife will immediately attach.

Caution: Do not ever confuse a tenancy by the entirety with dower. When the wife is on title with the husband, she owns a fee simple interest in the land. If the wife is not on title with the husband, she holds an inchoate right of dower. Where there is a tenancy by the entirety there is no dower, and where there is dower there is no tenancy by the entirety.

Summary: The tenancy by the entirety can be created only in a husband and wife. It grants a right of survivorship to the surviving spouse. One spouse, acting alone, cannot transfer any interest in the entirety property. Conversely, one spouse may transfer its interest to the other spouse, thereby destroying the tenancy by the entirety.

My next article will concern dower.

-los lonely boy-

The Joint Tenancy With Full Rights of Survivorship

2008-01-18T11:41:00.000-08:00

Let me start by posing a question: how many homeowners in Michigan do you think would intentionally hold title with their co-owner as: joint life estate with dual alternative contingent remainders? I dare say that the answer is probably one in one thousand. Now, let me compare and contrast the joint tenancy with full rights of survivorship with the more traditional joint tenancy. This is fun stuff, because it's highly analytical stuff.

Reference my last article concerning the joint tenancy. Remember that the joint tenancy can be created by a conveyance from the Owner to Bill Smith and Bob Jones, as joint tenants.

Now, regarding our current tenancy, let's look at this example: Owner conveys to Bill Smith and Bob Jones, as joint tenants with full rights of survivorship. There can be variations of this, but the use of the word "survivorship" is essential. The joint tenancy with full rights of survivorship is an ultra joint tenancy, as the last survivor cannot be denied sole ownership of the property. Buckle your seat belts!

Example: Owner conveys to A and B, as joint tenants with full rights of survivorship. The actual state of title would read: Joint life estate held by A and B, with dual alternative contingent remainders held by A and B. What the hell is this? Exactly my thoughts upon first encounter. Now, let me explain.

In doing so, I will break down the above state of title. First, we have a joint life estate held by A and B. If A were to die, B would be the sole life estate holder. Conversely, if B were to die, A would be the sole life estate holder.

The dual alternative contingent remainders: the remainder interests of A and B are contingent on one tenant surviving the other. If A were to die, B's contingent remainder would vest. B would then own the entire life estate interest, as well as the vested remainder. Apply merger, and B would hold in fee simple absolute. Simple!

Well, to this point in the discussion, the joint tenancy with full rights of survivorship is functioning the same as the traditional joint tenancy. After all, A has died and B holds in fee simple absolute. The complexity of the joint tenancy with full rights of survivorship raises its head when there is a conveyance from one of the tenants to a third party. Here we go!!

Example: Owner conveys to A and B, as joint tenants with full rights of survivorship. A then conveys to C. The new state of title would read: Life estate per autre vie held by C, Life estate held by B, with dual alternative contingent remainders held by B and C. A life estate per autre vie means a life estate measured by the life of another. It is true that A has effectively conveyed her life estate to C, however, C's life estate period is measured by the life of A. When A dies, C's life estate terminates immediately. The determining factor in our current state of title hinges on the dual alternative contingent remainders. This is what is unique: the relation between A and B still exists after the conveyance from A to C. For C to obtain fee simple ownership, B must predecease A. If A dies before B, C's interest is terminated. This is because C's remainder interest is contingent upon A surviving B. Imagine C's surprise when he finds out that his interest is forever terminated upon A's death? This displays the sneaky power of the right of survivorship element. A and B, in taking title as joint tenants with full rights of survivorship, indeed have full rights of survivorship. This is the position of current Michigan law.

The joint tenancy and the joint tenancy with full rights of survivorship should be declared synonymous, with the traditional joint tenancy controlling.

Here is my reasoning. Historically, the creation of a traditional fee simple estate had to contain the phrase and his or her heirs after the grantee's name. Example: Owner conveys to David M. Phillips, and his heirs. Absent the use of this phrase, only a life estate would have been conveyed. In other words, a conveyance from the owner to David M. Phillips would have conveyed a life estate only. Michigan has since abolished this rule and now holds that a conveyance to David M. Phillips will convey a fee simple estate. This speaks of good common sense. If a grantor intends to convey only a life estate, it should be clearly set forth in the deed. Now, back to our current discussion. Most people involved in property transactions have NO idea of the ramifications of the joint tenancy with full rights of survivorship. Indeed, most attorneys I have worked with could not begin to describe this particular estate. How then can the Michigan Supreme Court or the Michigan Legislature expect a layperson to understand the ramifications of using the word "survivorship"? I think the obvious answer is they can't. Applying the above analysis of the fee simple to our current tenancy, what would we have? Let's see. Owner conveys to David M. Phillips and Taylor A. Phillips, as joint tenants. Or, owner conveys to David M. Phillips and Taylor A. Phillips, as joint tenants with full rights of survivorship. Result: Both would convey a traditional joint tenancy. Problem solved.

You see, the Michigan Supreme Court or the Michigan Legislature, by declaring the two interests as synonymous, and favoring the traditional joint tenancy, would find themselves in a win-win situation. First, homeowners AND ATTORNEYS would not be hit with unsuspected surprises. Second, there is no destruction of the existing estates. The joint tenancy, the life estate, and the contingent remainder are unaffected. If the grantees choose to hold title via joint life estate with dual alternative contingent remainders, they can do so by expressing this in the deed. Additionally, you could apply a contract analysis to the joint tenancy and the joint tenancy with full rights of survivorship. The terms, and certainly the analysis, appear to be ambiguous and, as such, the court may determine the ambiguity based on the intention of the parties. Most parties would intend to hold as a traditional joint tenancy.

As additional fuel: In 1988, Michigan adopted The Uniform Statutory Rule Against Perpetuities (USRAP). This was done in part to curb the drastic results of the application of the common law Rule Against Perpetuities, as such. The Rule Against Perpetuities was a monster that was routinely misunderstood and misapplied. Again, this is a result based mostly on common sense. The adoption of the USRAP functions to simplify property transactions by eliminating the guesswork of blindly terminating contingent or executory interests.

If I were drafting arguments for my position, I would start with the common sense position that, as a general rule, no one understands what they are creating when they hold with full rights of survivorship.

Most importantly, by adopting the position of the traditional joint tenancy, it would create a verifiable line between a joint tenancy and a joint life estate with dual alternative contingent remainders. The joint life estate with dual alternative contingent remainders would be created with specifity on the face of the deed.

So, as you should be able to determine, attorneys, courts, and homeowners should take note of this position and move toward clarifying a unique problem. Remember, my position is not one of destroying estates or tenancies; quite the contrary. My position is to clarify a fundamental misunderstanding.

-los lonely boy-

The Joint Tenancy

2008-01-17T04:56:00.000-08:00

The typical joint tenancy recites the grantee line as follows: Owner conveys to Bill Smith and Bob Jones, as joint tenants. However, the grantee line may read as follows: Owner to Bill Smith and Bob Jones, as joint tenants, and not as tenants in common.

The joint tenancy is created in two or more grantees. As with the tenancy in common, all joint tenants have the right to occupy and use the premises on an equal footing with the other joint tenants. Unlike the tenancy in common, the joint tenants are not free to apportion their ownership interests. This is because, historically, each joint tenant is considered to own the whole. When a fellow joint tenant dies, the remaining joint tenants do not succeed to the interest of the deceased joint tenant, the joint tenancy simply remains in effect less and except the interest of the deceased joint tenant. Compare this with the undivided interests of a tenancy in common.

The unique characteristic of a joint tenancy is the survivorship element. For our example we will use Bill Smith and Bob Jones, as joint tenants. If Bill Smith dies, full ownership of the property will shift to Bob Jones, exclusively. The joint tenancy allows the parties to avoid probate of a deceased joint tenant.

NOTE: Dower does not attach to property held in joint tenancy! If Bill Smith and Bob Jones hold title as joint tenants, they can convey the property free from the inchoate dower interests of their wives. Dower will only attach to lands of which the husband was seized of an estate of inheritance. A joint tenant is not seized of an estate of inheritance, because when that particular joint tenant dies, the full right to fee ownership passes to the surviving joint tenant(s).

Severance Of The Joint Tenancy:

Similar to the tenancy in common, each joint tenant is free to convey its interest at any time. For example, Bill Smith may convey his interest to Susan Thomas. However, when Bill Smith conveys his interest to Susan Thomas, this conveyance will destroy the joint tenancy held by Bill Smith and Bob Jones and will create a tenancy in common between Bob Jones and Susan Thomas. When there are conveyances to third parties, from an existing joint tenant, the examiner must be extra cautious in setting up the state of title, i.e. the ownership line set forth on Schedule A.

What if we have three or more joint tenants and one is conveying its interest? This is more complicated, but very simple to handle if you follow this example: Owner conveys to Bill Smith, Bob Jones, and Susan Thomas, as joint tenants. This is a classic joint tenancy held by three people. Now, let's say Bill Smith conveys to Rick Phillips. What is the resulting state of title? It's like I used to answer my coach when he asked me: "Can you make this lift?" I would usually respond with: "Child's play!" The new state of title would read: Bob Jones and Susan Thomas, an undivided 2/3 interest as joint tenants, and Rick Phillips, an undivided 1/3 interest. The interesting thing is that Bob Jones and Susan Thomas remain joint tenants, vis a vis, each other. Rick Phillips becomes a tenant in common with Bob Jones and Susan Thomas. It may seem confusing, but look at this example a few times and it should become clearer.

Preview: My next article will concern a particular form of ownership recognized in Michigan, which I have intentionally left out of this discussion. This form of ownership is known as the joint tenancy with full rights of survivorship. It is a technical tenancy which incorporates elements of future interest law. Attorneys who may be reading should pay particular attention to what I say regarding the right of survivorship. I will discuss its similarities and differences to the regular joint tenancy. This will enable you to explain these tenancies to your clients so they can make an educated decision on how they want to hold title.

-los lonely boy-

The Tenancy in Common

2008-01-16T05:26:00.000-08:00

Sorry for the ranting in the last article; back to property.

There can be multiple persons owning an interest in real property at the same time. This is referred to as 'fragmentation of ownership.' In Michigan, there are three principal ways is which title to real property may be held: (1) the tenancy in common; (2) the joint tenancy, and (3) the tenancy by the entirety. In this article I will address the tenancy in common. The attorney representing a purchaser has to be astute to the form of ownership their client is seeking. Sometimes, a poorly drafted deed may produce a tenancy that the parties never intended. This article, and the subsequent articles on fragmented ownership, will clarify what these tenancies are and how they are properly created by deed.

The Tenancy In Common

A typical tenancy in common recites the grantee line as follows: Owner conveys to Bill Smith and Bob Jones. There is no additional language used. However, the grantee line may also be recited as follows: Owner conveys to Bill Smith and Bob Jones, as tenants in common.

The tenancy in common is created in two or more grantees. Each tenant in common has the right to occupy and use the premises on an equal footing with the other tenants in common. It is also assumed that each tenant in common owns an equal share in the property; however, the parties are free to apportion different interests to different owners. For instance, in the above example, title can be held by Bill Smith, as to an undivided 75% interest, and Bob Jones, as to an undivided 25% interest. It is up to the parties to decide.

Each tenant in common is free to convey its interest at any time. For example, Bill Smith may convey his interest to Susan Thomas. This would create title held by Bob Jones and Susan Thomas. It simply replaces one person for another. (NOTE: The spouse of Bill Smith, if any, would need to sign the deed to Susan Thomas to release her dower interest in the property). Dower will be the topic of a later article.

When an existing tenant in common dies, that interest in the property passes to his or her estate. For instance, using Bill Smith and Bob Jones as the parties, if Bill Smith were to die, the new state of title would by held by Bob Jones and The Estate of Bill Smith, deceased.

In its basic form, the tenancy in common is a very simple form of ownership. It also has its drawbacks: (1) the co-owners may frequently change, (2) judgments may attach to a co-owners interest, (3) a bankrupt co-owners interest, and yours as well, may be sold in bankruptcy proceedings, (4) divorce or death of a co-owner will disrupt the tenancy and may tie up free transferability of the property. These are just four examples of a laundry list of possible complications.

Important: Remember that the spouse of every male tenant in common must sign to bar dower if the male co-tenant is selling or mortgaging.

The next article will concern the joint tenancy.

-los lonely boy-

The Executory Interest

2007-12-31T06:46:00.000-08:00

In this article I will discuss The Executory Interest and its effect on present possessory estates.

Before I begin, let me summarize the road we've travelled throughout these estate articles. As you know, I have constantly and consistently referred to a doctrine known as The Calculus of Estates. The calculus of estates is a formula used in estate analysis that answers one question: Do we have an accurate and complete state of title? In title speak, the state of title is also known as the vesting line.

A state of title will always consist of a present possessory interest, and may or may not consist of a future possessory interest. Following is a handy chart that depicts the various present possessory interests and their correlative future possessory interests - - -

Present Interest: Fee Simple Absolute
Future Interest: None

Present Interest: Life Estate
Future Interest: Reversion

Present Interest: Life Estate
Future Interest: Vested Remainder

Present Interest: Life Estate
Future Interest: Contingent Remainder & *Reversion

Present Interest: Fee Simple Determinable
Future Interest: Possibility of Reverter

Present Interest: Fee Simple Upon Condition Subsequent
Future Interest: Right of Re-entry

Present Interest: Fee Simple Subject to Executory Limitation
Future Interest: Executory Interest

Present Interest: Life Estate Subject to Executory Limitation
Future Interest: Executory Interest

*Reversion always follows a contingent remainder, unless and until the contingency is satisfied.

Following the identification of the present possessory interest, simply use this chart to identify the correlative future interest, if any. When all interests are properly set forth in the state of title, the parties to a transaction can then determine how to handle these various interests.

Now, I present to you The Executory Interest. Folks, it simply doesn't get more exciting than this! Some of you may think I'm kidding, some of you may think I'm not kidding. Such is the importance of individual opinion!

My definition of The Executory Interest: The executory interest is a contingent interest, created in a third party grantee, which contingency, once fulfilled, will operate to terminate the preceding estate. It differs from the contingent remainder in that the contingent remainder waits for the natural expiration of the preceding life estate.

Example: Let's say that Bill Smith, as owner of Blackacre in fee simple absolute, conveys to Shirley Thomas, for life, then to Mike Thomas, if and only if Mike Thomas attains the age of 21. The state of title would be: Life estate held by Shirley Thomas, contingent remainder held by Mike Thomas, reversion held by Bill Smith. Wow!! Now, what happens if Shirley Thomas dies and Mike Thomas has NOT attained the age of 21. Well, prior to 1536, the interest of Mike Thomas would have been destroyed because his interest had to be vested at the moment the preceding estate terminated. If Shirley died before Mike attained the age of 21, the doctrine of Destructibility of Contingent Remainders was applied to destroy the interest of Mike.

This result changed in 1536. Using the same example, if Shirley were to die before Mike attained the age of 21, Bill Smith's reversion would activate and the state of title would be reconfigured as follows: Fee Simple Subject to Executory Limitation held by Bill Smith, with an executory interest held by Mike Thomas. The executory limitation is Mike attaining the age of 21. When Mike Thomas attains the age of 21, Bill Smith's interest would be destroyed and a shift to Mike Thomas in fee simple absolute would occur. Conversely, if Mike Thomas dies before reaching the age of 21, the executory interest would be destroyed and Bill Smith would once again hold in fee simple absolute.

The executory interest was not recognized at the beginning of common law. In fact, it was not until the year 1536 that the executory interest was recognized as a viable estate. There is history surrounding the executory interest. I will discuss this history in two sections; pre 1536 and post 1536.

Let me use the following example, which will be applicable to our pre 1536, as well as our post 1536 discussion. EXAMPLE: Bill Smith, as owner of Blackacre in fee simple absolute, conveys to Shirley Thomas and her heirs, but if Mike Thomas returns from Rome, then to Mike Thomas and his heirs.

What do we have? Well, our example creates a fee simple held by Shirley Thomas, with a condition attached that the property shall vest in Mike Thomas should he return from Rome. This creates what is known as a shifting interest in favor of Mike Thomas. Do you see why? If Mike returns from Rome, the fee simple interest would shift from Shirley to Mike.

Some of you may be thinking that Mike holds a contingent remainder interest. Well, let me distinguish between a contingent remainder and an executory interest. A contingent remainder waits for the termination of the preceding estate; the life estate. A contingent remainder is patient through time. Conversely, the executory interest can act to cut short the preceding estate, whether that be an estate for life or in fee simple.

Prior to 1536, a shifting interest was forbidden, as the law did not recognize the cutting short of a previous estate. Prior to 1536, using our example, the conveyance would have been determined a fee simple absolute in favor of Shirley Thomas; Mike Thomas's interest would have been void upon its face.

Now, our example would have a completely different result post 1536. Using our example, Shirley Thomas would hold in fee simple, subject to executory limitation. Mike Thomas would hold an executory interest. So, the state of title post 1536 would read: Shirley Thomas in fee simple subject to executory limitation with an executory interest in fee simple held by Mike Thomas.

The executory interest is very similar to the contingent remainder. Both contain a contingency; both convey land to a third party grantee upon fulfillment of the contingency. However, as discussed, the executory interest may act to cut short the preceding estate, while the contingent remainder waits for the natural expiration of the preceding estate.

I would suggest the following analysis when you are facing a remainder issue in your chain of title. If you can't determine whether the interest is a contingent remainder or an executory interest, ask yourself the following question: If the contingency is fulfilled, will the preceding estate be immediately terminated. If the answer is yes, you have an executory interest. Obviously, if the answer is no, you have a contingent remainder.

See you next week - los lonely boy

The Contingent Remainder

2007-12-25T09:09:00.000-08:00

In this article I will be discussing The Contingent Remainder. My last article concerned the vested remainder. As a fundamental rule, a contingent remainder may become a vested remainder. Conversely, the vested remainder, once established, cannot become a contingent remainder. Ultimately, the holder of a remainder interest wants the interest to be determined vested, because once vested, the interest cannot thereafter be destroyed. The distinction between the vested and contingent remainder was once extremely important. At traditional common law, doctrines such as 'the destructibility of contingent remainders' and the 'rule against perpetuities' were often used to destroy the interest of the person holding the contingent interest. Fortunately, for practitioners in Michigan today, the doctrine of 'the destructibility of contingent remainders' has been abolished, and the common law 'rule against perpetuities' has been replaced with the 'Uniform Statutory Rule Against Perpetuities' (USRAP). The USRAP all but destroyed the relevance of the rule against perpetuities, as such. Both the 'destructibility of contingent remainders' and the USRAP are beyond the scope of this article, but this author would be more than happy to write of these topics, if someone were to so inquire.

Realistically, the function of the contingent remainder is identical to that of the vested remainder; both estates act to transfer title to a third party grantee immediately upon the termination of the preceding estate; that being the preceding life estate. However, as the name implies, the contingent remainder contains a contingency applicable to the remainder interest. The grantor creating a contingent remainder is attempting to control some aspect of future events. She controls such future events through the use of a contingency.

My definition of The Contingent Remainder: A contingent remainder is a remainder interest, created in a third party grantee, which interest either (1) contains a condition precedent to its vesting, or (2) is created in an individual not yet born or ascertainable at the moment the remainder is created.

Therefore, when analyzing a remainder interest, ask yourself two questions: Is the person holding the remainder interest born and ascertainable? If the answer is no, you have a contingent remainder. If the answer is yes, move to the next question: Is there a condition precedent attached to the remainder interest? If the answer is yes, you are looking at a contingent remainder. If the person is born and ascertainable and if there is no condition precedent attaching to the remainder interest, you are looking at a vested remainder. If you use this checklist for remainderman analysis, you will succeed in determining the proper remainderman estate.

Let me demonstrate the two (2) variations of the contingent remainder via the following examples: Bill Smith, as owner of Blackacre in fee simple absolute, conveys a life estate to Shirley Thomas, remainder to Dave Phillips, if and only if Dave Phillips attains the age of 21. Now, this example falls within the parameters of subsection (1), above. The remainder interest contains a condition precedent; Dave Phillips must attain the age of 21 before the contingency is satisfied. Let's continue with our hypothetical so you can see how this may realistically play itself out. Let's assume that Dave Phillips is 15 years old on the date of the conveyance from Bill Smith. Now, let's further assume that during the term of Shirley's life estate, Dave attains the age of 21. What's the result? Well, the contingency placed on the remainder interest has been satisfied; Dave has reached the age of 21. The contingent remainder has now become a vested remainder. The result is that upon the termination of the life estate of Shirley, Dave Phillips will own Blackacre in fee simple absolute. Simple my friends!

Next, Bill Smith, as owner of Blackacre in fee simple absolute, conveys a life estate to Shirley Thomas, remainder to the children of Dave Phillips. Let's assume that on the date of this conveyance Dave Phillips has no children. This would create a contingent remainder falling within the parameters of subsection (2), above. Do you see why? In our example, the remainder interest is created in a person or persons who are not yet born; the potential children of Dave Phillips. Now, moving forward in time, let's assume that Dave Phillips has a child, Colin, before the termination of Shirley's life estate. What's the result? Well, we classified our original example as a contingent remainder because the potential children of Dave Phillips were not in being at the moment of creation of the remainder interest. The birth of Colin has transformed the contingent remainder to a vested remainder, as far as Colin's interest is concerned. Question: What if Dave has additional children before the termination of Shirley's life estate? Stay with me here. Colin's interest is considered a vested remainder, subject to open. Colin's vested remainder is subject to the opening up for newly born children of Dave. The vested remainder will remain subject to open until the moment of termination of Shirley's life estate. Keeping it simple, if Colin were the only child of Dave upon the termination of Shirley's life estate, Colin would then own Blackacre in fee simple absolute. Simple!

Now for the $65,000.00 question: What happens if the contingent remainders fail? Relating to our first example, let's assume Dave dies before he attains the age of 21. In our second example, let's assume Dave has no children before his death. What happens to the state of title following the failure of the contingent interests? This question is answered through the application of our old friend, the calculus of estates. Remember that to satisfy the calculus of estates, all estates, when added together, must add up to a fee simple absolute. Let's tie all this together.

Back to our first example. There we had a life estate held by Shirley Thomas, and a contingent remainder held by Dave Phillips. If Dave were to die, and the contingent remainder were to fail, we would be left with a life estate in Shirley and nothing further. We know that a life estate alone does not satisfy the calculus of estates. Using our first example, the proper state of title would read as follows: Life Estate held by Shirley Thomas, Contingent Remainder held by Dave Phillips, and Reversion held by Bill Smith. If the contingent remainder fails, for whatever reason, the reversion would kick in and Bill Smith would once again hold in fee simple absolute following the termination of Shirley's life estate. Conversely, if the contingent remainder vests, the reversion is destroyed. With subsequent conversion of the contingent remainder to a vested remainder, Dave Phillips would hold in fee simple absolute upon the termination of Shirley's life estate.

If you have a true blue vested remainder, there is no reversion. If you have a true blue contingent remainder, there is a reversion. A reversion always follows a contingent remainder.

My next writing will be a compilation of the remaining two estates: The Fee Simple Subject to Executory Limitation and The Executory Interest. These estates deal with shifting and springing interests. Fancy phrases but not very intimidating once you meet them. See you then.

dave - 'los lonely boy'

The Vested Remainder

2007-12-11T05:01:00.000-08:00

Hello again and thanks for reading this blog. In this article I will be discussing The Vested Remainder. In my next article I will discuss The Contingent Remainder, a first cousin of The Vested Remainder.

Up to this point I have written of the following estates: (1) The Fee Simple Absolute; (2) The Life Estate and its counterpart, The Reversion; (3) The Fee Simple Determinable and its counterpart, The Possibility of Reverter; and (4) The Fee Simple Upon Condition Subsequent and its counterpart, The Right of Re-entry. In estates 2 through 4 above, remember that The Reversion, The Possibility of Reverter, and The Right of Re-entry always went back, if at all, to the original grantor. These are all future interests reserved by the grantor. In our next estate, The Vested Remainder, we will see a future interest created in a third party grantee, not the original grantor.

My definition of The Vested Remainder: A vested remainder is a remainder interest, created in a third party grantee, that is certain to vest upon the expiration of the preceding Life Estate.

Let me use our traditional parties to demonstrate how this works: Bill Smith, as owner of Blackacre in Fee Simple Absolute (the mother ship) conveys a Life Estate to Shirley Thomas, remainder to Julie Phillips in fee simple absolute. Now, let's analyze this as every good examiner must do. As always, we are starting with the fee simple absolute held by Bill Smith. Bill Smith then carves a piece out of the fee simple absolute by conveying a Life Estate to Shirley Thomas. If we were to stop our analysis at this point, we would be left with a Life Estate held by Shirley Thomas and a Reversion held by Bill Smith. But, as you can see, there is additional language following the created interest of Shirley. That interest is classified as a vested remainder. Why is Julie's interest a vested remainder? Well, following our definition of a vested remainder, Julie's interest is certain to vest upon the termination of the preceding life estate.

Let me pose a question that some of you may have already considered: What would happen if Bill Smith conveyed a fee simple estate to Shirley Thomas, instead of a life estate? So our example would be re-written as follows: Bill Smith, as owner of Blackacre in fee simple absolute, conveys to Shirley Thomas in fee simple, remainder to Julie Phillips. The answer is that the interest of Julie Phillips would fail. Why? It is a rule of property law: There can never be a remainder interest following a grant in fee simple. It is essential to understand that a vested remainder can only follow the expiration of a properly created life estate.

Applying the calculus of estates: We have a conveyance from Bill Smith of a Life Estate to Shirley Thomas, remainder to Julie Phillips in fee simple absolute. Satisfying the calculus of estates is easy: upon the death of Shirley Thomas, Julie Phillips will hold in fee simple absolute and the calculus of estates is satisfied.

The Vested Remainder and its cousin, The Contingent Remainder, are often labeled as a 'remainderman' interest. It is the interest held by the third party grantee which remains after the termination of the preceding life estate.

In summary, a vested remainder is certain to vest upon the termination of the preceding life estate. You will see the importance of this when I discuss the contingent remainder in my next article. The contingent remainder is a remainder interest that is subject to a condition precedent. This condition precedent must be satisfied before it will vest in its holder.

Please click on next week for a discussion of the contingent remainder.

dave

The Fee Simple Upon Condition Subsequent & The Right of Re-entry

2007-12-01T05:24:00.000-08:00

This article written by Dave Phillips, December 2, 2007.

Welcome. In this article I will discuss The Fee Simple Upon Condition Subsequent and The Right of Re-entry. Before discussion, I would like to disclose some of my thoughts. First of all, I understand that my writings on estates can, at times, be very hard to understand. You, as a particular reader, may not work as a title examiner or a property attorney. The result is that a discussion of an estate or multiple estates can leave the reader confused. This is normal and is to be expected. I have spent years studying these estates, and through my profession I have dealt with numerous clients, attorneys, homeowners, and business owners. My observations have formed a general rule: Estates are misunderstood.

When a buyer and seller begin negotiations, there are expectations on both sides. The buyer wants something, and the seller wants something. The estate(s) created by the conveyance from the seller to the buyer is the vehicle in which the parties carry out these expectations. Remember that my articles, when completed, will cover 11 estates. It follows like the night the day: If the majority of people lack basic knowledge of the available estates, the expectations of the parties to a transaction are frequently frustrated. In other words, the parties may not have fully benefited from the transaction. I'm beating this drum from an estate planning perspective. Many problems arise, particularly in probate, when the expectations of the parties have not been met, simply because they did not understand the estate vehicle they were using. Posting these articles is my attempt at changing this general rule.

At the conclusion of my estates articles, I will post a review article on the numerous estates. I will write the summary as it relates to three groups: (1) the homeowner or business owner; (2) the attorney, and (3) the title examiner. This culminating article will allow most readers to take what is necessary for them to understand. That being said, I will now discuss the second of our defeasible fee simple estates, The Fee Simple Upon Condition Subsequent and its counterpart, The Right of Re-entry. This discussion will be fairly brief, as these two estates are very similar in form and function to The Fee Simple Determinable and The Possibility of Reverter.

The Fee Simple Upon Condition Subsequent can be defined as a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, creates a non-automatic right in the original grantor to re-enter and take possession of the land.

Let's say that Bill Smith is the owner of Blackacre in fee simple absolute. Bill Smith then conveys Blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession. If you read the last posting on The Fee Simple Determinable, you will notice that the example I use above is almost identical to the example I used there. I did this on purpose to demonstrate the subtle change in form between the two estates.

Concerning the above example, focus on the portion the grantor may re-enter and take possession. This language demonstrates that upon a violation of the condition, the grantor may re-enter. However, the grantor is not required to re-enter. It is in the discretion of the grantor, when a violation of the condition occurs, to either enforce the condition or waive the condition. This is in direct contrast to The Fee Simple Determinable, in which the property automatically reverts back to the grantor upon a violation of the condition.

As with The Fee Simple Determinable, the condition attached to The Fee Simple Upon Condition Subsequent may never be violated. If such be the case, the property may remain in the grantee's family in perpituity. However, if the condition in our example is broken, the grantor has a cause of action based on the violation of the condition. To enforce this cause of action, the grantor must file an action in state court. In court, the grantor must show that the condition was properly created and that there has been a clear violation of such condition. Upon a finding in favor of the grantor, the grantee will be dispossessed of its interest and the grantor will again hold title in fee simple absolute. Compare this result to that of The Fee Simple Determinable, in which no legal proceedings are necessary.

It is the automatic reversion of The Fee Simple Determinable and the right of a cause of action of The Fee Simple Upon Condition Subsequent that differentiates these two estates. The condition placed in a deed must be carefully crafted to ensure the proper intention of the grantor.

Again, when a grantor creates a Fee Simple Upon Condition Subsequent, the grantor has carved a piece out of its Fee Simple Absolute estate. By definition, we know that there must be an estate that follows The Fee Simple Upon Condition Subsequent in order to satisfy the calculus of estates. No surprise, this estate is The Right of Re-entry. Using our example, the current possessory estate is a Fee Simple Upon Condition Subsequent held by Shirley. The possible future estate is The Right of Re-entry held by Bill. This future interest will only become possessory upon a violation of the condition placed on The Fee Simple Upon Condition Subsequent coupled with the grantor's decision to enforce such violation.

Until next week, Chow - - - The Hungry Dog!!

The Fee Simple Determinable & The Possibility of Reverter

2007-11-26T05:39:00.000-08:00

This article written by Dave Phillips, November 26, 2007.

A continuation of the estates in land. This article will focus on The Fee Simple Determinable and The Possibility of Reverter.

At the end of the previous article regarding the life estate and the reversion, I asked the reader to consider the fee simple absolute as the mother ship of all our estates. The fee simple absolute is the purest form of land ownership. I will restate the definition of the fee simple absolute, as this is necessary for our current discussion: The fee is synonymous with holding or ownership. Simple refers to an estate that is inheritable. Absolute discloses that there are no apparent impediments to the title. We also learned that whenever a piece of the fee simple absolute is carved out, there is a creation of new estates. All the estates, when added together, must add up to a fee simple absolute, thereby satisfying the calculus of estates.

Now let me twist the knife a little. There are situations in which a fee simple estate will not be absolute. In other words, the fee simple will be conditioned or impeded. When a fee simple is conditioned or impeded, we call this a defeasible fee simple. There are 3 ways in which a fee simple may be made defeasible: (1) by the creation of a fee simple determinable, (2) by the creation of a fee simple upon condition subsequent, and (3) by the creation of a fee simple subject to executory limitation. This article will examine the first of these; the fee simple determinable. I will also discuss its counterpart, the possibility of reverter.

First off, what is a fee simple determinable? A fee simple determinable is a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, triggers an automatic reversion to its original grantor.

Let's say that Bill Smith is the owner of Blackacre in fee simple absolute. Bill Smith then conveys Blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute. Don't panic! Let me discuss this conveyance as it is written. Bill conveyed a fee simple estate to Shirley. However, this fee simple estate is not considered absolute because there is a condition on the title. The condition is found in the language 'so long as the land is used for residential purposes'. This condition destroys the fee simple absolute. The additional language 'and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute' discloses that the current possessory estate is a fee simple determinable. Explain this Dave!

If the condition in our example is ever broken, the property will automatically revert back to Bill Smith. It is this automatic reversion that defines the fee simple determinable. To complete our example, let's say that Shirley constructs a restaurant on the subject property after she acquired title from Bill. The construction of the restaurant is a violation of the condition that the property be used only for residential purposes. The property would automatically revert back to Bill and Shirley's interest would be destroyed.

What happens if the condition is never broken? If the condition is never broken, the property will continue to descend through Shirley's family tree. A fee simple determinable creates a condition, which condition may or may not be broken; only time will tell. If the condition is not broken, the fee simple determinable functions much like a fee simple absolute. The reader should also understand that the fee simple determinable can be very harsh on its grantee. If Shirley violates the condition, Bill has an automatic present right to possess the property and to dispossess Shirley of her interest; no court proceedings are necessary.

A fee simple determinable is not a fee simple absolute. As a result, there must be an interest following the fee simple determinable. As you probably surmised by the title of this article, this interest is the possibility of reverter. The possibility of reverter is a future interest and therefore falls within the jurisdiction of future interest law. This future interest is a present right to future possession.

In our example, we created a current possessory interest of a fee simple determinable in favor of Shirley. We call Bill's retained interest a possibility of reverter. The name says it all. There is a possibility of reverter in favor of Bill. The property will not revert back to Bill unless the condition attached to the fee simple determinable is violated. Compare this to my last article in which I discussed the life estate and the reversion. There, the reversion was certain to take effect upon the death of the current life estate holder. In our current example of a fee simple determinable, the reversion is not certain to vest in Bill, therefore Bill's interest is classified as a possibility of reverter. So you see, when a fee simple absolute owner creates a fee simple determinable estate, the original owner, Bill, is not certain to regain any current possessory interest in Blackacre.

Summary, I have discussed two additional estates in this article: (1) the fee simple determinable, and (2) the possibility of reverter. Both of these estates are created by carving a piece out of the fee simple absolute. The fee simple determinable represents the current possessory interest, while the possibility of reverter represents the possible future possessory interest. For this future interest to become possessory, the condition attached to the fee simple determinable must be violated.

See you next week.
dave

The Life Estate and the Reversion

2007-11-17T13:45:00.000-08:00

Welcome back for a continuation of the estates in land. This article will focus on the Life Estate and the Reversion.

Reference the previous article in which I discussed the calculus of estates. Remember that the calculus of estates is represented by a line. The entire line represents a fee simple absolute. Let me demonstrate this visually (line _________________ = fee simple absolute.) This is a clean line with no impediments to title. Well, what happens if we break this line into two or more segments? As mentioned, if the fee simple absolute line is broken, the fee simple absolute is destroyed, resulting in the creation of new estates. Let me show you how the fee simple absolute line can be broken by the conveyance of a Life Estate.

Let's say that Bill Smith is the owner of Blackacre in fee simple absolute. Bill Smith then conveys a life estate to Shirley Thomas. Note that Bill Smith conveyed a life estate, he did not convey his entire fee simple absolute. How does this affect the ownership of the property? To answer this question we must determine what new estates are created by Bill's transfer to Shirley.

First off, what is a life estate? A life estate is true to its name. It is an estate in land that endures for the life of its owner. The moment the holder of the life estate dies is the moment the life estate is terminated. A life estate is exclusive to its holder. The life estate is a current possessory estate. It is not inheritable, nor does dower attach in the case of a male life estate holder. The parameters of the life estate are very important to understand. I have reviewed numerous documents in which the preparer was asking for a probate regarding a deceased holder of a life estate, or the preparer was requesting a release of dower rights of the spouse of a male life estate holder. This is a complete misunderstanding of the life estate.

Now, after the conveyance of the life estate from Bill Smith to Shirley Thomas, we must go back to the calculus of estates to determine what new estates have been created. Remember that when the fee simple absolute line is broken, the fee simple absolute itself is destroyed. So, using our example, what are the new estates? Well, we know that Bill Smith has conveyed a life estate to Shirley Thomas. Bill Smith, by conveying a life estate, has carved out a piece of his fee simple absolute. Remember that to satisfy the calculus of estates, the entire line must add up to a fee simple absolute. Does the conveyance of a life estate to Shirley add up to a fee simple absolute? The obvious answer is no. Well, what follows Shirley's life estate?

When Shirley's life estate terminates, we call Bill's remaining interest a Reversion. When Shirley dies, the property reverts back to Bill in fee simple absolute. Let me try to clarify this. Bill conveyed a life estate, which is less than a fee simple absolute. Bill's retained interest is called a reversion. Upon Shirley's death, the property will automatically revert back to Bill Smith. With the life estate of Shirley terminated, Bill once again owns a fee simple absolute.

I told you in the last posting that I would be discussing the elements of future interest law in these articles. There are six future interests. Well, the reversion is the first of these future interests. A future interest in land is said to be a present right to future possession. In the example I have been using, Bill Smith conveyed a life estate to Shirley Thomas. This life estate is a present possessory interest. We also know that Bill Smith holds a reversion. However, this reversion is not a present possessory interest; it is a future possessory interest. This future interest is an estate in the land to the same extent of the present interest. So you see, when analyzing the state of title (ownership), all of the estates must be accounted for. In our example, the new state of title after Bill's conveyance to Shirley would be: Life Estate held by Shirley Thomas and Reversion held by Bill Smith. This is exactly how I would set the vesting line on a title commitment given our example.

In summary, I want you to think of the fee simple absolute as the starting point in all my discussions of the estates. It is the mother ship of all our estates. When any interest in the fee simple absolute is carved out, as in the case of a life estate, we have to determine what new estates have been created. With the conveyance of a life estate, we have learned that two new estates have been created: the life estate and the reversion. The life estate and the reversion, when added together, add up to a fee simple absolute, thereby satisfying the calculus of estates.

Click on next week for a continuation of the estates.

dave

The Fee Simple Absolute and Calculus of Estates

2007-11-10T10:04:00.000-08:00

There are 11 estates in land recognized in Michigan, which are:

1) The Fee Simple Absolute
2) The Life Estate
3) The Reversion
4) The Fee Simple Determinable
5) The Possibility of Reverter
6) The Fee Simple Upon Condition Subsequent
7) The Right of Re-entry
8) The Fee Simple Subject to Executory Limitation
9) The Executory Interest
10) The Vested Remainder, and
11) The Contingent Remainder

I will be covering all the above estates in due course, but this article will focus on the first of these; the Fee Simple Absolute.

First off, what is an estate? The word estate stems from the word status. When someone claims to hold an estate in land, we must determine the status of that claim. Example: Let's say Bill Smith claims an interest in Blackacre. We perform the title search and find that Bill Smith only holds a life estate interest. The result is that Bill Smith's estate is that of a life estate in Blackacre. Trust me, this will become clear to you after I compose and you read all the estate articles. This is tough stuff, but I am confident that I can help you grasp the function of these estates.

IMPORTANT: All of our property laws grew out a rich history. Some of the property rules, particularly regarding estates in land, developed over centuries and were the product of accident and confusion. Some of the aspects I will be discussing may not seem logical to the reader. This is totally normal thinking, because accident and confusion can produce some absurd results. Just keep in mind that the rules in property law, whether logical or not, are the current rules. So if something seems unclear or illogical, just accept the rule 'as stated' and move on. Knowing that the rule was formed by accident or mistake will actually help you accept it.

These writings will incorporate the elements of future interest law. I will let the reader know when I am discussing any of the future interests. In my experience, it is impossible to accurately discuss the estates in land without discussing the components of future interest law. They go hand in hand.

Another question. Why should the reader care about understanding estates? Let me use a car engine to explain: Visualize the engine and all its components. Let's say that Dave Phillips decides he wants to become an auto mechanic. He applies for a job and is hired on the spot. He opens up the hood of a 2003 Mercury Sable and all he recognizes is the 'dip stick'. He has absolutely no knowledge of the additional components of the engine. So you see, Dave the dip stick cannot properly analyze the problem with the engine, because he doesn't understand how the engine functions as a whole. Analyzing estates in land is exactly the same as my example. The reader may understand what a fee simple is, but when the chain of title begins to disclose other estates, the reader may be left in the same shoes as Dave the dip stick.

The Fee Simple Absolute. The most valued form of land ownership is the fee simple absolute. Let me attempt to define the fee simple absolute. The fee is synonymous with holding or ownership. Simple refers to an estate that is inheritable. Absolute discloses that there are no apparent impediments to the title, such as competing estates or conditions on ownership. Let me illustrate this with a basic example: Let's say Mr. X, a single man, conveys his property to Dave Phillips. The deed contains no conditions and there are no apparent competing estates. Dave Phillips would own a fee simple absolute.

Why is the fee simple absolute preferred? The fee simple absolute is indeed simple. The property owned by Dave Phillips is inheritable. It could theoretically remain in his family tree forever. Also, if Dave Phillips decides to sell his property, he can do so freely. There are no additional estates to be concerned with. Free transferability and inheritance are the fundamental reasons why a fee simple absolute is so appealing to its owner.

Critical to your education on estates is an understanding of the so called Calculus of Estates. Don't be intimidated by the name. The calculus of estates is a simple formula. When this formula is satisfied, a complete and accurate state of title will be found. State of title is an accurate and complete disclosure of the true owner(s) of the property.

That's great Dave, but what is the Calculus of Estates? Think of the calculus of estates as a line segment with a clear beginning and a clear end. This entire line segment represents a fee simple absolute, as discussed earlier. This fee simple absolute line segment is often broken into separate pieces. When the line segment is broken, the fee simple absolute is destroyed, resulting in the creation of new estates. Each separate piece of that line segment will represent a particular estate. To satisfy the calculus of estates, all the separate pieces, when added together, must add up to a fee simple absolute. Remember, the fee simple absolute represents the entire line segment. I use the calculus on every chain of title I examine. By applying the calculus I am sure that I have an accurate and complete state of title.

This article may seem a bit confusing to the reader. I will ask you to give it some time. It is incredibly hard to precisely convey knowledge of these estates in a writing. As mentioned, when you have read all the estate compilations, I believe these earlier writings will begin to make more sense. Also, as you gain experience in reading a chain of title, or a series of deed conveyances, the estates will become less confusing and less intimidating.

Please click on next week for my article on the Life Estate and the Reversion.

dave

Common Law Instruments of Conveyance

2007-11-05T14:09:00.000-08:00

This article written by Dave Phillips on November 5, 2007.

As a beginning article, I will be discussing the common law instruments of conveyance. The purpose of this writing is to give the reader a basic introductory understanding of the various deed instruments.

There are two basic instruments of conveyance used in property transactions. These are (1) the Warranty Deed, and (2) the Quit Claim Deed. There are other deeds that can be used, such as the Special Warranty Deed, but an understanding of the Warranty Deed and Quit Claim Deed are first and foremost at this stage of a beginner's development.

First, some arts and crafts: The person conveying the property is referred to as the grantor; the person receiving the conveyance of the property is referred to as the grantee. Become familiar with the labeling. The language used in the title insurance industry is very particular. As you gain experience the language will become second nature.

The Warranty Deed.

The Warranty Deed, or general Warranty Deed, as it is sometimes called, is the traditional instrument used to convey ownership of land. The Warranty Deed is true to its name. It is a conveyance of land by a grantor to a grantee, which conveyance carries with it three (3) present covenants and three (3) future covenants. These are often collectively referred to as the six covenants of title, or simply the deed covenants. A covenant is synonymous with a promise.

*The three present covenants are (1) Seisin, (2) Right to Convey, and (3) Against Encumbrances.

*The three future covenants are (1) Quiet Enjoyment, (2) General Warranty, and (3) Further Assurance.

What are the parameters of the three present covenants?

-Seisin, technically speaking, is a declaration by the grantor that the grantor is the owner of the estate they are purporting to convey and that the grantor is in possession of the land which they are purporting to convey. In its most common form, seisin is a declaration by the grantor that the grantor is the fee simple owner, the true owner, of the subject property. The covenant of seisin, in effect, is a promise made by the grantor to the grantee that the grantor owns what they purport to own.

-Right to Convey is a declaration by the grantor that the grantor has the right to convey what it purports to convey. This seems to overlap with seisin, and in most instances it does. However, the reason for the distinction is logical. For example, when property is conveyed by a 'power of attorney', the 'power of attorney' has the right to convey the property, but is not seized of the property. In other words, the 'power of attorney' has the legal right to convey, but they are not the legal owner.

-Against Encumbrances is a declaration by the grantor that the land they are purporting to convey is free of all liens, easements, lessee interests, etc., except for those interests which are set forth as a recital on the deed itself. This covenant is most useful in flushing out encumbrances that are not a matter of public record.

**Any of the three present covenants are breached, if at all, the moment the deed is executed and properly delivered. The moment of breach is what separates the present covenants from the future covenants.

What are the parameters of the three future covenants?

-Quiet Enjoyment is a promise by the grantor that the grantee will enjoy ownership of the property free from the lawful rights or claims of others.

-General Warranty is a promise by the grantor to the grantee that the grantor will warrant against any lawful claims arising out of the grantor's ownership or any of the grantor's predecessors. This is an extremely inclusive promise because not only is the grantor warranting against problems relative to its ownership; the grantor is also warranting against problems created or undertaken by a preceding owner(s).

-Further Assurance is a promise by the grantor to the grantee that the grantor will take all steps necessary to clear up title problems arising out of the breach of general warranty. That is all that further assurance entails.

**Any of the three future covenants are breached, if at all, ONLY WHEN a party holding a legal right attempts to enforce that right. In other words, the grantee cannot sue the grantor, on the future covenants, until action has been commenced on behalf of a person or entity claiming a legal interest in the land.

When read together, the covenant of quiet enjoyment and the covenant of general warranty are very similar in nature, and the case law tends to discuss the two as if they were one in the same. I think it best to just understand that the future covenants, when boiled down, simply promise the grantee that the grantee will not endure title problems subsequent to acquiring title, and, if they do experience problems, the grantor will step in and attempt to remedy the problem(s).

Cumulatively, the present covenants and future covenants appear to create decent coverage for the new grantee. However, it must be understood that collecting a judgment against a grantor in breach will depend on the creditworthiness of the grantor (judgment debtor). The aggrieved grantee may not be able to receive adequate compensation because the grantor in breach is insolvent. Also, the amount of damages is limited to the amount that the original grantor, the party in breach, paid for the property. Example: Let's assume that a current owner paid $100,000.00 for its property and is now suing a remote grantor based on future covenants. If the remote grantor only paid $5,000.00 for the property, the amount of recovery available to the current owner will be limited to $5,000.00. THUS THE IMPORTANCE OF OBTAINING AN OWNER'S POLICY OF TITLE INSURANCE.

The Quit Claim Deed.

The Quit Claim Deed carries no warranties. The Quit Claim Deed only purports to convey the interest which the grantor owns, whatever that interest may be. This deed is usually used to clean up a messy chain of title. A Quit Claim Deed is not the instrument normally used for a straightforward conveyance from an owner to a purchaser. This is because the Quit Claim Deed offers no warranties. As a purchaser, you will be looking for the instrument that offers the most coverage in case of an improper conveyance. In summary, think of the Quit Claim Deed as the cleanup deed; it simply cleans up stray interests in the chain of title.

Hope this helps. Please forward comments and make sure to visit my site next week when I will begin discussing the 11 estates in land recognized in Michigan.