In our current economic climate, title insurers have become more careful about giving creditors’ rights coverage through the ALTA 21-06 endorsement. Although the issue of creditors’ rights coverage has long been considered an extra-hazardous risk by the title insurance industry, extra emphasis on underwriting this issue has resulted in a more stringent due diligence process. Consequently, the proposed insured borrower and the seller should be prepared to fully explain the structure of their proposed transaction as well as provide needed financial documents requested by their title insurance company if the lender requires creditors’ rights coverage in their title insurance policy.
As a compromise with lenders who request creditors’ rights coverage on their transactions, the ALTA Forms Committee added Covered Risk 13 to the ALTA 2006 Loan Policy jacket which gives limited creditors’ rights coverage for all prior transactions in the chain of title. In addition, Covered Risk 13(b) gives coverage for the invalidity or unenforceability of the insured mortgage if it is considered a preferential transfer because of the failure of the mortgage to be recorded in a timely manner.
In a nutshell, the 2006 title insurance policy jacket contains an exclusion for creditors’ rights issues related to the current insured transaction, and subsequently, the title insurance company will not be liable for any loss or damage associated with “any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the Insured Mortgage is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.”
If the insured lender would like creditors’ rights coverage for the current insured transaction, the ALTA 21-06 endorsement is typically requested. The following is a list of issues that the title insurance company will typically want to know in order to complete their analysis for giving the creditors’ rights coverage:
What is the current and proposed future use of the insured property?
What is the structure of the transaction and the financing involved?
Who are the parties involved in the transaction? What type of entity is each party?
Are the buyer and seller “related” parties?
Are the parties involved in the transaction currently in bankruptcy or contemplating bankruptcy?
What is the loan to value of the transaction? Has a current appraisal been completed?
Where is the money going at closing?
Are there audited financial statements for the parties available for review?
The above list is not exhaustive, and each transaction will be analyzed by the title insurance company on a case-by-case basis. Please note that the title insurance company will evaluate each transaction based on the facts and circumstances involved and that a title attorney will make the final determination as to issuance of this coverage. As always, please inform the title insurance company if the lender requests creditors’ rights coverage as soon as possible in order to avoid any unnecessary delays in closing the transaction.