A title examination will not provide sufficient information to evaluate underwriter exposure in a transaction under the various bankruptcy or state insolvency laws.  A title agent is simply not in a position to ascertain the financial positions of the parties, the sufficiency of the consideration for a given sale or acquisition, and other relevant factors. 

It is impossible to enumerate all the cases or circumstances where a creditors’ rights issue may exist, but as an illustration only, we cite transactions involving:

• Asset swaps.
• Deeds in lieu of foreclosure.
• Workout agreements.
• Nonjudicial foreclosures.
• Preexisting debts.
• Downstream problems.
• Upstream problems.
• Corporations conveying to an insider.
• Lack of adequate consideration.
• Corporate assets being used to finance the purchase of the stock of the corporation.
• Leveraged Buyouts.

In addition to the above, creditors’ rights concerns are also presented by the application of Sections 547 and 548 of the Federal Bankruptcy Code.  Section 547 of the Bankruptcy Code establishes the power of a bankruptcy trustee to initiate a preference action.  A preference exists when the debtor selectively makes a payment or grants a security interest to a certain creditor that puts that creditor in better position under a bankruptcy case than if the payment had not been made. The standard lookback period is 90 days from the bankruptcy filing date. The period is extended to one year from the filing date if the creditor is deemed an insider as defined in the Bankruptcy Code. When a preference is identified, the trustee can avoid the preferential transfer, meaning the trustee can reach back and undo the transfer to the detriment of the creditor.

Section 548 of the Bankruptcy Code addresses fraudulent conveyances. Fraudulent conveyances occur generally when a transfer is made with intent to hinder, delay or defraud a creditor, or where the consideration for a transfer is for less than reasonably  equivalent value and when the debtor was insolvent, rendered insolvent by the payment, rendered unable to pay debts, or was left with unreasonably small capital after the transfer. Such a transfer may be avoided within two years of the bankruptcy filing.  It should be noted that trustees can also avail themselves of state fraudulent conveyance laws that may extend the period to avoid a fraudulent transfer. 

In the 1980’s, the title industry experienced a number of claims and resulting losses based on the powers of bankruptcy trustees and courts to set aside real estate transactions due to their negative impact on creditors. At that time, title insurance policies issued on ALTA forms did not have an exclusion of creditors’ rights claims.  With the introduction of the 1990 ALTA policy forms, such coverage was excluded.

In 2004, in response to industry concerns that the creditors’ rights exclusion was too broad, ALTA adopted the ALTA 21-06 or ALTA 21 Creditors’ Rights Endorsements.   Under such endorsements, if a borrower filed bankruptcy after the insured transaction, the policy would afford coverage in the event the court set aside the insured mortgage as a fraudulent conveyance or preferential transfer. The title insurer would be required to defend any actions attacking the mortgage as a fraudulent conveyance or preferential transfer and pay the amount of the lender’s loss if the insured mortgage was set aside.    

Over time, due to the aforementioned concerns regarding the ability of the title agent to evaluate creditors’ rights concerns and the resulting risk, and the fact that such a determination is largely beyond the expertise of most title agencies whose primary expertise involves reviewing land title records, it was ultimately determined that creditors’ rights coverage falls outside the scope and purpose of title insurance. Also, various state insurance regulators prohibited title insurance companies from providing affirmative insurance for creditors’ rights coverage.  As a result, in 2010 ALTA voted to withdraw and decertify the ALTA 21-06 and ALTA 21 Creditors’ Rights Endorsements.

Stewart Title Guaranty Company is prohibited by law from providing creditors' rights coverage arising out of a current transaction creating the Insured Mortgage or vesting title in the owner who is the Insured. The law applies to any policy issued, delivered, or renewed on or after January 1, 2012.

Accordingly, you must comply with the following: 

• Only issue the ALTA 2006 or later policies (These policies contain appropriate creditors’ rights exclusions.)
• Do not delete or modify the creditors' rights exclusion in any policy or endorsement.
• Do not issue a creditors' rights endorsement, such as the former ALTA 21-06 (Creditors' Rights).
• Add the creditors' rights exception shown on Exhibit 1 (below) in any assignment endorsement, unless it already appears in that endorsement. An additional creditors’ rights exception is not required in connection with an endorsement that does not involve an assignment.

EXHIBIT 1

CREDITORS' RIGHTS EXCEPTIONS

_________________________________________________________________________________________________________________

Creditors' Rights Exception for Assignment Endorsement (Use when issuing ALTA 10-06 (Assignment); ALTA 10-06 (Assignment) revised 10/16/08; ALTA 10.1-06 (Assignment and Date Down); and ALTA 10.1-06 (Assignment and Date Down) Revised 10/16/08.)  

This endorsement does not insure against loss or damage, and the Company will not pay costs, attorneys' fees, or expenses, by reason of any claim that arises out of the transaction creating the assignment by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights law that is based on the assignment being a:

a.      fraudulent conveyance or fraudulent transfer;

b.      voidable transfer under the Uniform Voidable Transactions Act; or

c.      preferential transfer.

The decertified ALTA policies (4-6-90) contain the following creditors' rights exclusions:

Loan Policy:

"Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws."

Owner's Policy:

"Any claim, which arises out of the transaction vesting in the insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws."

The ALTA policies (10-17-92) contain the following creditors' rights exclusions:

Loan Policy:

Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on:

(a) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or

(b) the subordination of the interest of the insured mortgagee as a result of the application of the doctrine of equitable subordination; or

(c) the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure:

(i) to timely record the instrument of transfer; or

(ii) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.

Owner's Policy:

Any claim, which arises out of the transaction vesting in the Insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on:

(a) the transaction creating the estate or interest insured by this policy being deemed a fraudulent conveyance or fraudulent transfer; or

(b) the transaction creating the estate or interest insured by this policy being deemed a preferential transfer except where the preferential transfer results from the failure:

(i) to timely record the instrument of transfer; or

(ii) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.

If the creditors' rights issue arises out of the current insured transaction, you do not need to add the creditors' rights exception when you issue a 1990 or 1992 policy. For example, if you issue a 1990 or 1992 policy to the grantee of a deed-in- lieu of foreclosure where all other underwriting requirements are met, you do not need to add the creditors' rights exception. However, if the creditors' rights issue arises out of a prior deed in a prior transaction, add the creditors' rights exception even if you use a 1990 or 1992 policy.