Real-estate practitioners should be sure to read recent decisions on the duty of title insurers, the content of mortgage documents, and recording of deeds and mortgages.
A trio of recent state and federal court decisions has caught the attention of attorneys from a local title insurance company because of how the opinions affect real-estate practice.
Title company - no duty to provide chain-of-title info
According to Phil McGargill, vice president and Midwest litigation manager for Chicago Title, one such decision presents a cautionary tale for home buyers who are seeking title insurance to protect themselves from potential third-party claims on the property.
In United Community Bank and McDonough v. Prairie State Bank & Trust, et al., 2012 IL App (4th Dist.) 110973, the court determined that a title company's failure to discover a memorandum of judgment affecting the subject property was not misfeasance or negligence.
Although the title company failed to identify a lien against the property and to include that information in its insurance policy, the court determined that equitable subrogation was not a proper remedy for the purchaser because the title company has no duty to provide that information to the buyer.
"The buyer was not entitled to rely on the title commitment for information regarding the title, because the purpose of the title commitment was not to provide information regarding the title," wrote a unanimous panel of the Illinois Appellate Court, Fourth District. "[R]ather, the title commitment had a wholly different, contractual purpose, namely, specifying the losses the title insurer was excluding from coverage in its offer to provide insurance. The title insurer breached no duty to the seller by offering (through its omission of the exception) to cover any loss resulting from the prior conveyance."
McGargill said this decision is beneficial to title companies because it clarifies what their duties are to customers, and he said real estate attorneys can easily assist their clients in investigating the chain of title and any potential claims against it if they are concerned that such claims might exist.
"If you want to know the status of a title, you can get a title abstract," McGargill said. "This decision is absolutely fair to everybody. Everyone is really in the position they thought they were in before, but for what turned out to be a mistake."
Mortgage documents: 'may' equals 'shall'
In a recent decision by the U.S. Bankruptcy Court for the Central District of Illinois, the court held that mortgage documents are flawed when they fail to state the maturity date and interest rate of the loan, even though the underlying statute says that information "may" (not "shall") be included in the contract.
Section 11 of the Illinois Conveyancing Act states that mortgage contracts "may" contain information including the maturity date and interest rate. 765 ILCS 5/11. McGargill said courts and lawyers had been interpreting that to mean the statute was advisory rather than mandatory, since the statute did not say that the information "shall" be contained in the mortgage papers.
Nonetheless, in In re: Crane v. Gifford State Bank, No. 11-90592 (C.D. Ill. 2012), the federal court determined that the state statute includes mandatory provisions that lenders must include in their mortgages to provide constructive notice to a bankruptcy trustee.
McGargill said there was proposed legislation to fix this issue in the statutory language, but that bill failed to become a law. After this court decision, he believes there could be another push for the General Assembly to amend the statute.
"Until there's a fix, you need to comply with the mortgage statute perfectly," McGargill said. "To be ultra-safe, you're going to have to turn the word 'may' into 'shall.' I just don't see any way around it at this point - you have to have the interest rate and maturity date in there."
Make sure the deed is recorded before the mortgage
In yet another cautionary tale for lawyers and title agents who record deeds and mortgages on behalf of homebuyers, the U.S. Bankruptcy Court for the Northern District of Illinois held that a mortgage that is recorded before the deed to the mortgagor was recorded is outside the property's chain of title.
When a mortgage is outside the property's chain of title, the court ruled that a trustee was allowed to avoid the mortgage in the bankruptcy proceedings. In re: Jeannine Victoria Heaver, No. 09-B-73096 (N.D. Ill. 2012).
In his written materials for a Chicago Title CLE seminar from July, staff attorney Richard F. Bales said: "Title companies have always considered a property's chain of title to be based on the execution date of the documents and not the recording date of the documents. [Citation.] By holding that a property's chain of title is the recording date of the relevant documents, the court cited with approval Skidmore, Owings & Merrill v. Pathway Financial, 173 Ill.App.3d 512 (1988), a case that until now title companies viewed as an aberration."
McGargill said that at Chicago Title they often file deeds and mortgages simultaneously. Although the Heaver decision involves a mortgage and deed that were filed on different days, McGargill believes a responsible attorney or title agent must now be sure to file the deed before the mortgage, even if they are filed on the same day.
"The court found there's no duty by a purchaser to look past the deed into your seller," McGargill said. "The thought [among real estate practitioners and title insurers] was that execution of the deed and delivery controlled, but this decision says that's not the law. You have to make sure the deed gets recorded first."