CLTA Education Committee Presents

"Basic Education" Seminar

October 2002

Table of ContentsThe Theory of Title Insurance.......................................................................................................................................................3

The History of Title Insurance...............................................................................................................................................4The Theory of Title Insurance..................................................................................................................................................6Casualty Insurance vs Title Insurance.................................................................................................................................8

History of Title in California...........................................................................................................................................................9

A History of Title in California..............................................................................................................................................10History of California Land Titles.........................................................................................................................................12Key Words and Bibliography...............................................................................................................................................14

The Nature of Real Property.......................................................................................................................................................15

The Nature of Real Property..................................................................................................................................................16

Covenants, Conditions & Restrictions.....................................................................................................................................21

Covenants Conditions and Restrictions.........................................................................................................................22Glossary........................................................................................................................................................................................... 27

Voluntary Encumbrances - Deeds of Trust.........................................................................................................................28

Voluntary Encumbrances -Deeds of Trust.......................................................................................................................29

Taxes, Bonds, and Assessments.................................................................................................................................................34

Taxes, Bonds, and Assessments.........................................................................................................................................35The Tax Calendar...................................................................................................................................................................... 38Bonds and Assessments...........................................................................................................................................................58

Involuntary Encumbrances.........................................................................................................................................................59

Involuntary Encumbrances....................................................................................................................................................60Bankruptcy.....................................................................................................................................................................................71Glossary......................................................................................................................................................................................... 85

Estates and Interests in Real Property...................................................................................................................................88

Estates and Interest in Real Property.............................................................................................................................89

Holding Title....................................................................................................................................................................................... 94

Tenancy In Common.................................................................................................................................................................95Community Property and Separate Property.................................................................................................................97Joint Tenants.............................................................................................................................................................................. 100Community Property with Right of Survivorship......................................................................................................105

Claims, Bad Faith & Other..........................................................................................................................................................109

Claims Bad Faith and Other................................................................................................................................................. 111

The Theory of Title Insurance

The History of Title Insurance

From the inception of civilization, man has sought to possess land to which he had an incontestable right. To achieve this originally was relatively uncomplicated. Property was usually bequeathed from father to eldest son and was defended by whatever method was deemed necessary.

With the advent of the written document to transfer title, "chains of title" became voluminous and hard to keep current. Additionally, certain defects in the chain of title, if undetected in the written documents, gave rise to conflicts which, most often, became the subject of court rulings. These defects cost many landowners the possession of their land, most notable Abraham Lincoln's father, who lost three farms because of title defects.

Abstracts of Title

As Europeans immigrated to America, new systems arose to cope with the growth of population. Too many documents existed for an individual to search property for ownerships efficiently. Therefore, specialists took on the tasks. These specialists, called abstractors, or conveyancers, were men who compiled all recorded instruments pertaining to the given parcel of property. A summary, or abstract, was then issued. To determine the validity of these abstracts, they were then taken to a lawyer for his opinion. At this point, liability only covered mistakes of negligence. In 1868 a landmark case was tried in Philadelphia in

which a conveyancer was sued because he, after careful review of the records, and in agreement with a title attorney, ignored certain liens against a property, which liens were later held valid. The court found that the conveyancer was not to be held liable for the liens because he did exercise due diligence and was not liable for overt negligence. At this point the abstract of title was no longer recognized as being protection from attacks on ownership of land.

Certificates of Title

Near the turn of the century, the "abstract/opinion" system in California began to break down. Quicker, cheaper methods were needed. Abstracts gave way to briefer "Certificates of Title" which certified that title was vested in a particular owner and that the property was subject to listed encumbrances. Protection was still minimal, and in cases of loss, court action was still necessary.

Guarantees of TitleAs title companies became more sophisticated and competitive, they began taking out money reserves to protect the interest of their customers. With proof of a loss, a buyer could be reimbursed regardless of why an omission occurred. A

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Guarantee, rather than a Certificate, was offered. However, hidden defects, such as forgery or unknown spouses, still required court action.

The Title Policy

In the early 1920's, to protect the buyer from "hidden hazards", the title policy became the title ownership assurance that the public demanded. The title insurance policy is actually a "contract of indemnity11 between the company and the insured, which states: If title is substantially different than is shown in the policy, and if the insured suffers monetary loss by reason of that difference, the insurance company will protect the insured from that loss, or reimburse the loss. This mode of insuring land ownership, and ownership of any interest in land, still exists today throughout most of the United States.

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The Theory of Title Insurance

The concept of insurance is a wide-ranging, complex and critical component of today's business environment. Insurance, regardless of its specific type, scope or extent, directly impacts the major aspects of today's business operations. It makes little difference whether the business operation be public, private or personal, individual or corporate, large or small - insurance plays a vital role in the business operations of the 1980's.

Broadly defined, insurance is a contractual obligation whereby one party (the insurer) agrees to indemnify or reimburse another party (the insured) for losses or damages that may occur under the terms and provisions of their contract. Forms of insurance, such as fire, life, auto, casualty, health, are all contractual obligations which are based upon the principal of "RISK ASSUMPTION"; that is, they insure, .as of the effective date, against loss by reason of some future event. Such types of insurance are, by far, the most common and most familiar to the general public.

Title insurance, on the other hand, is a contractual obligation which differs greatly from the most common forms of insurance in today's business environment. Defined by the California Insurance Code as:

"insuring, guaranteeing or indemnifying owners of real estate or personal property or holders of liens or encumbrances thereon or others interested therein against loss or damage suffered by reason of:

a) liens or encumbrances on, or defects in the title to said property;

b) invalidity or unenforceability of any liens or encumbrances thereon; or

c) incorrectness of searches relating to the title to real property or personal property;"

Title insurance is designed to insure owners of estates and interests in land and beneficiaries under deeds of trust which secure such land or mortgages on such land.

Title insurance guarantees the insured against risk of loss from defects existing as of the insurance date of the policy. More specifically, title insurance guarantees that the title to real property is free from defects in title, undisclosed liens, and adverse claims already existing at the time the policy is written. Title

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insurance is, therefore, based upon the principle of "RISK ELIMINATION"; it is a means to identify and eliminate those risks to the title which are already in existence as of the issuance date of the policy. While other forms of insurance assume future risks, title insurance eliminates existing risks.

In order to issue a policy of title insurance on real property, a title company will conduct an extensive "search11 of the public records as well as other off-record sources for documents that identify persons who have ever owned the land and documents which identify the prospective buyers of the land. Materials derived as a result of such a "search" are then "examined" (reviewed) by title company personnel so as to determine:

a) the legal effect of those documents,

b) what legal rights continue to exist in the land, and

c) whether or not the company can safely insure against a defective document or a legal right to the land.

Once insured, a policy of title insurance insures only against those covered matters - defects, liens, encumbrances and ownership -that have existence prior to the date of the policy. Matters that cannot be safely insured against are shown as exceptions to the policy coverage. Thus, the process of "risk elimination"; a search of the record and off-record matters and an examination (review) of the known facts and the decision (title policy) on what may or may not be insured against.

Although title insurance is not mandatory in the state of California for the purchase of real property, the vast majority of institutional and non-institutional lenders will require that a policy of title insurance be issued so as to protect their secured interest in the real property. Additionally, most buyers will insist that Lhe title to real property be insurable so as to protect their claim to the property. While not mandatory, title insurance has become essential and customary in most California real estate transactions.

Title insurance is substantially different from other forms of insurance. As previously stated, title insurance is one of RISK ELIMINATION, while others are RISK ASSUMPTION forms of insurance. Title insurance requires only one premium, payable at the close of escrow; fire, life, health, etc., insurance policies require periodic payments so as to keep the policy in force. Title policies are issued for the duration of the insured's exposure to risk, and are non-transferable except to the insured's estate or heirs; typical insurance policies are issued for fixed periods of time and are often freely transferable.

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Casualty Insurance vs Title Insurance

Casualty Insurance

Insures against unforeseen future events

Period premium payments (monthly, quarterly, semi-annually, annually)

Insurance only valid for period of premium Based upon risk assumption and distribution Probability of claim increases with time

Title Insurance

No insurance for events after date of policy (protection from past)

Only one premium paid at time of issuance

Insurance lasts for indefinite period

Based upon risk avoidance and risk elimination

Probability of claim decreases with time

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History of Title in California

A History of Title in California

In order for us to understand the nature of title insurance, and its need in modern conveyancing, we should look to how title originated.

Most of our title laws are based on English common law, which dates back to land ownership in England beginning with the feudal system established in 1066 when William of Normandy conquered the British Isles after the Battle of Hastings. William established a Feudal Lord system in which land was subdivided and awarded to Lords. Their title was limited, and possession was their only right; title remaining vested in the King. The Lords favored with land then dealt out rights of possession to others, who in turn sublet, thus forming a pyramid of estates from the serf to the crown.

The next progression in.. the concept of land ownership emerged after the abolition of the feudal system. Individuals became eligible to own land privately. The transfer of title merely was the physical transfer of a piece of earth or a twig from the property in question handed from the seller to the buyer. This token ceremony was known as the "Livery of Seisen 11

, and ·was subject to numerous frauds. Under the "statute of frauds11 drafted in 1677, in order for an agreement to affect the ownership of land, an instrument in writing had to be created. Moreover, once the instrument was created, it could not be changed by the spoken word. Accompanying the original written instrument, a buyer of land was also given numerous other papers which included all prior owners and transfers to the property. The bundle of papers was then known and is still known as the "chain of title".

In California, title is traced to the King of Spain, rather than the King of England. Spain conquered the land which is now California, and in 1769 established a threefold plan for colonization which included the creation of missions and presidios (Churches and Forts), establishing pueblos (land available for sale), and ranchos (large tracts of land remaining in the ownership of the King, to be granted at his whim).

In 1822, through treaty, California carne under Mexican law. Under this treaty governors were given the authority to grant land outside the pueblos and ranchos. All land granted by the King of Spain was held valid.

Then in 1848 a battle between United States troops was fought in the San Pasqua] Valley in San Diego County. The result of this battle, where the troops of Mexico were defeated, was the Treaty of Guadalupe Hidalgo, wherein California became a territory of the United States. Under the treaty> all ownership of land standing in the name of either Spanish or Mexican Nationals was held valid, but all other land was surveyed and divided into categories:

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1. Mexican Grants: Derived from Spanish or Mexican authority, held valid by treaty.

2. State Lands: One mile square sections, granted by Congress to the State of California to be used for commerce, education. or sale.

3. Tidelands: All lands lying below the Mean High Tide line, remaining vested in the state, not available for sale, but available for lease.

4. Public Lands: One mile square sections, remaining in the ownership of the U. S. Government.

Since statehood on September 9, 1850, all of the above categories of land have been subject to transfer of title by either the state or federal governments, or the individuals who derived their title from Mexico or Spain.

Today there are millions of parcels of land in California owned by individuals, corporations or other legal entities, and the U. S. and state . governments. But, all title in California is derived from either Spanish, Mexican, or U. S. or state governments. This is the start of the "Chains of title," which we, as title insurers ultimately insure.

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History of California Land Titles

A. Important dates in California history

1. 1769 - Spaniards' three-fold plan for colonization

a. Establish Missions and Presidios

21 Missions -churches4 Presidios - forts

b. Establish pueblos

Land available for sale to inhabitants4 leagues (12 square miles)Mayor (alcalde) and councilHouse lots (Solares) for merchantsFarn lots (Suertes) for farmers

c. Rancho concessions

Large tracts of landGranted to Spanish nationalsUsually to soldiers for a job well done

2. 1822 - Mexican Rule

a. Governors given right to grant land outside pueblos

b. Governor petitioned by buyer, with a map of the land he wished to buy. This instrument was called a "diseno".

c. Governor issued a grant and filed an evidence of title, called an "expediente" in the official archives.

d. More than 500 grants of these tracts of land made by 1846

e. Former Spanish land grants held valid

3. 1848 - California 'becomes a territory of the United States

a. Treaty of Guadalupe Hidalgo

b. All land standing in the name of Mexican or Spanish nationals was held valid

c. Board of Governors appointed by the President

4. September 9, 1850 - Statehood for California

5. March 3, 1851 -Congress enacted "An Act to Ascertain and Settle the Private Land Claims in the State of California"

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6. 1893 - First California map acta. Provided for the recording of subdivision maps

b. Legal descriptions referring to those maps could be used on documents affecting real property

B. Origin of Land Titles in California

1. Spanish and Mexican Grantsa. All ownerships derived from Spanish or Mexican authority, prior to statehood

were held valid

b. Confirmed by the Board of Land Commissioners

c. Confirmed by Federal Courts upon appeal

2. State Lands

a. Granted to the State of California by Congress

b. Lands out of the public domain

c. Proceeds from the sale of such lands to be used for education, reclamation and other purposes

3. Tidelands, submerged lands and the beds of Navigable waters

a. State owned in trust for the public for the purposes of commerce, navigation and fisheries

b. State's title subject to the paramount right of the United States to regulate and improve navigation

4. Public Lands of the United States

a. Lands passing to the U.S. upon cession of California by Mexico

b. Bureau of Land Management, Dept. of the Interior

c. Disposal by the U.S. is evidenced by a conveyance in the form of a patent

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Key Words and Bibliography

(History of California Titlesand The History and Theory of Title Insurance)

Key Words:

LiabilityAbstracter (Conveyancer) RanchosState Lands Tidelands Public Lands

Bibliography:

Ogdens Revised Real Property Law, Melvin C. Ogden, Chapter 30, Section lAAppendix: "What is Title Insurance?"

C.L.T.A. ManualSections 01.03, 46.02a and 54.01a

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The Nature of Real Property

The Nature of Real Property

A. Definitions

1. Property - a thing of which there may be ownership

2. Ownership - the right to the use and enjoyment of property to the exclusion of others -includes the right of disposition

3. A policy of title insurance insures ownership of real property or of any estate or interest in real property

B. Classes of Property

1. Personal property

a. All property that is not real property

b. Title passes with delivery of possession (except in specific cases where a statute requires a writing)

c. Generally subject to the jurisdiction and laws of the state in which its owner is domiciled

2. Real property

a. Generally consist of

Land That which is affixed to landThat which is ·appurtenant to hind

b. An instrument in writing is necessary to effect a voluntary transfer of title to real property

c. Subject to the jurisdiction and laws of the state in which it is located

C. Components of Real Property

1. The land itself, i.e., the soil or earth

2. Any houses or structures located on the land

3. Other things permanently attached to the land such as fences and gates

4. Fructus Naturales

a. Trees, shrubs, vines and crops

b. Products of nature alone

c. Part of the land to which they are attached by roots

d. Standing timber - may be separately owned

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5. Fructus Industriales - Crops

a. Part of the land until severed or agreed to be severed

b. Once severed- treated as goods

c. Crop mortgages not constitute a lien on land UCC financing statements - 1-1-65

6. Space above the land

a. Common law rule

Owner has right to everything permanently situated above itModified to meet the development of air navigation

b. Landowner owns at least as much of the space above the ground as he can occupy and use in connection with the land - even though he does not occupy it in the physical sense

c. Some compensation or consideration for noise and/or vibrations, etc.

d. Can be severed provided it can be sufficiently described

Aviation easementsCondominiums

7. Soil beneath the surface of the land

a. That which the owner can reasonably use b. Even to the center of the earth

8. Minerals in place

a. Gems, gold and silver

b. Coal

9. Oil and gas

a. Oil and Gas in Place theory

Some states - not CaliforniaConstitute a part of the land and as such, are corporeal real property '

b. California theory

Migratory substances- which when brought to the surface may include not only oil and gas drawn from beneath the land in question, but also from beneath the surface of other lands.

Owner has no title to oil and gas in place within the land.

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Owner acquires title to such substance only when transformed to personal property by severing them from the soil and reducing them to possession.

Right to reduce to possession is a real property right:

(1) Owner has the exclusive right to drill for and produce and to retain as his property

(2) Right may be conveyed separately from a grant of the surface tide

(3) There is an implied right of surface entry, unless excluded.

10. Water

a. In its natural state it is real property

b. When severed and reduced to possession it is personal property

c. Underground water - landowner has only a right in common with other owners to take his share; doctrine of reasonable use

d. Waterways- small streams or riversOwnership of the land beneath is included

e. Riparian Rights

(1) Owners of lands bordering rivers

(2) Rights may be severed from the land by grant, condemnation or prescription,

(3) General rule of title practice: title to water and water rights not insured.

11. Unaccrued rents

a. Rents not yet due and payable

b. Unless prorated by agreement

12. Appurtenant rights and easements

a. Right to use the land of another

b. Once granted for the benefit and use of land, it 11runs with the land"

c. Essential to the full use of the land

13. Fixtures

a. Those things which were originally personal property and are now attached to the land and are part of it

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b. Three generally recognized tests to determine if a thing is still personal property or has become part of the real property:

(1) Manner of being attached to the land or building, i.e., is it permanently attached by means of cement, plaster, bolts or screws.

(2) Adaptability and appropriateness to the use and purpose of the real property. Is it essential to the ordinary and convenient use of the property to which it is attached?

(3) The intention of the person making the annexation

Intention is the controlling consideration, attachment and adaptability are subsidiary elements.

c. General trends .

(1) When a landowner sells land, the law favors the buyer, and articles installed on the land will usually be regarded as fixtures and will pass to the buyer.

(2) When the dispute of ownership occurs between a landlord and a tenant under a lease, the law favors the tenant and will allow him to remove almost any article he has installed.

(3) Tools and implements of a trade or business are classified as trade fixtures and may be removed if the removal can be effected without injury to the premises.

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Summary of Differences Between Real and Personal Property

Real Property Personal Property

Mobility Immobile Mobile

Permanence Highly Permanent

Relatively Indestructible

Easily consumed or destroyed

Method of Transfer Must be in writing Generally by delivery of possession

Recording Laws Recordation gives constructive notice

Not determinable from public records

Jurisdiction State in which the property is located

State in which the owner's domicile is located

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Covenants, Conditions & Restrictions

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Covenants Conditions and Restrictions

1. Creation of Restrictions

Following is an illustration of the manner in which restrictions may be created by deed:

(a) Provided, however, that this conveyance is made and accepted on each of the following expressed conditions ...

(b) That said premises shall be used for residence purposes only.

(c) That no building or structure whatever, other than a first class private residence with the customary outbuildings, shall be erected, placed, or permitted ant he said premises or any part thereof and that said residence shall cost and be fairly worth not less than $

(d) That any such residence shall be located not less than feet from the front line of said premisses and said building shall face the front of said premises.

(e) That no intoxicating liquor of any character shall be bought, sold, or kept for sale on said premises or any part thereof.

(f) PROVIDED that a breach of any of the foregoing conditions shall cause said premises to revert to the said grantor, her heirs or assigns, each of whom respectively shall have the right· of immediate re-entry upon said premises in the event of any such breach.

(g) PROVIDED ALSO THAT a breach of any of the foregoing conditions or re-entry by reason of such breach shall not defeat or render invalid the lien of any mortgage or deed of trust made in good faith and for value as to said premises or any part thereof, but said conditions shall be binding upon and effective against any owner of said premises whose title thereto is acquired by foreclosure, trustee's sale, or otherwise.

(h) PROVIDED FURTHER THAT all and each of the restrictions, conditions, and covenants herein contained shall in all respects terminate and end and be of no further effect either legal or equitable and shall not be enforceable after

2. Validity and Duration of Restrictions

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The following two cases are illustrative:

Case #1 - Wilkman vs Banks. 124 C.A. (2d) 451. (1954)

This was an action to enforce general plan restrictions against the maintenance of an alcoholic sanitarium on a lot in Los Angeles County purchased by the defendants. Plaintiffs are the owners of another lot in ,·ne tract which they occupy as a home. The restrictions were imposed in 19.28 and in 1932, and prohibit the operation of a hospital or sanitarium on any portion of the tract. In 1948, the tract was rezoned to C-2, which authorizes the maintenance of a sanitarium. Defendants acquired the property in 1950 and learned from inquiries that the zone was C-2 and that it permitted the operation of a sanitarium, but didn't receive actual notice of the deed restrictions until after they had started the construction of the sanitarium and had obtained an annual license from the State Department of Mental Hygiene.

The trial court granted an injunction, and on appeal the judgment was affirmed, the court stating:

"Appellants (defendants) cry with alarn against the enforcement of an agreement they and their predecessors had made to preserve the homelike character of their community, and make the novel plea that it is unreasonable and unjust for a court to enforce the compact. We know of no authority to warrant the ruthless renouncement of a contract made to preserve and protect the rights of the contracting parties.

The fact that. the City of Los Angeles had rezoned Tract 9854 to allow the construction of hospitals and sanitariums therein is not authority to violate the restrictive covenants. An act of sovereignty with respect to lands already restricted by a general. plan against specified uses confers no authority to violate the existing restrictive covenants as to se. One is a legislative enactment for the general good, authorized by the police power and confers a merely permissive right; the other is a contract of individuals made for their own enjoyment, is protected by the Federal Constitution, and in no sense interferes with a zoning ordinance. The latter becomes effective for Tract 9854 only after the restrictive covenants in the deed of the lot owners shall have expired."

Case #2 - Griesen vs City of Glendale, 290 CaL 425 (1930)

Plaintiffs brought an action to enjoin the City from constructing a public street across any portion of Lot 2 of Tract 4335 in Glendale and from making any use of said lot other than for residence purposes. Plaintiffs were the owners of the south 70 feet of Lot 1 of said tract. When the tract was laid

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out, all of the deeds conveying lots in the tract contained a restriction that the property shall be used for residence purposes only. In 1929 the owners of Lot 2 delivered a deed conveying to the City for public street purposes the south 50 feet of said Lot 2. When the City proceeded to order the improvement, this action resulted. Plaintiffs contended that so long as the restriction on Lot 2 for residential purposes remains in force, the owner of each lot in the tract laid out under the general plan has a proprietary interest in the portion of the lot so proposed to be improved for street purposes, which interest may not be taken for public use without payment of just compensation.

The trial court granted the injunction, but on appeal the Supreme Court reversed the decision of the trial court, holding that the private deed restriction was not binding on the City when it acquired title, and that the lot owners do not have such an interest in the other lots by reason of the restriction as would require the City to acquire the interest by purchase or condemnation before it could construct a public street thereon. The court stated:

"The interest 'sought to be 'imposed on said portion of Lot 2 is no more than a negative easement or an equitable servitude. It does not rise to the dignity of an estate in the land itself. It is not a property right, but is a contractual right cognizable in equity as between the contracting parties,. not binding on the sovereign contemplating a public use of the particular property taken;"

3. Interpretation of Deed Restrictions

Following are some typical deed restrictions and their interpretations:

Restriction Meaning

(a) "Residential Purpose"Land must be used for such purpose, but type of building not restricted.

(b) No building ·other than "a first-class private residence."

Excludes duplex or any multiple dwelling structure.

(c) All "outbuildings" must be on rear portion of lot.

Does not prohibit garage constructed as integral part of main residence.

(d) Residence must be set back from front lot line at least 25 feet

Does not prohibit garage constructed as integral part of main residence.

(e) Restriction in 1932: house to cost $5,000.00

General rule (no California cases): a restriction fixing minimum cost in dollars, without reference to the gold content of the dollar required or other standard, is satisfied by erection of structure costing amount specified in restrictions, measured in dollars which are not legal tender.

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4. Enforcement of Restrictions

The following case involved the application of the rule that changed conditions in a neighborhood may render deed restrictions (or portions thereat) unenforceable;

Wolff vs Fallon. 44 C. (2d) 695 (1955):

This was an action for declaratory relief and to quiet title against building restrictions, based on changed conditions in the neighborhood. Plaintiff sought to use her property for commercial pl.lrposes. When the subdivision was created in 1913, about 20 lots in each of two separate areas were left unrestricted, and approximately 740 lots, including the one owned by plaintiff, were set aside for residential purposes. The property was located in the City and Coun-r;y of San Francisco.

The trial court, after making detailed findings as to changes which had occurred in the neighborhood since 1913, found and concluded that plaintiff's lot was not now suitable or desirable for residential use, but was essentially business property, that its use for commercial purposes would not detrimentally affect the adjoining property or neighborhood and might be beneficial, and that by reason of the changed conditions in the neighborhood and present character of the block, enforcement of the restrictions would be inequitable and oppressive and would harass plaintiff without benefiting the adjoining owners. On appeal, the Supreme Court held that the findings were supported by the evidence, and warranted granting relief from the restrictions, stating:

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"It is argued .that the growth of business in the block where plaintiffs lot was located did not constitute such a change of conditions as would permit lifting the restrictions because commercial usage was in accordance with the plan of the original subdivider who had left that area unrestricted. As we have seen, however, there was also evidence that there had been a substantial increase in streetcar and other traffic and in the noise resulting therefrom, that encroachment within the restricted portion of the tract. had occurred, and that plaintiffs lot had been zoned by ordinance as part of a 'commercial district. When taken as a whole, the record is sufficient to support the findings made by the trail court.

5. Termination of Restrictions

The following clauses are sometimes employed in a quitclaim deed eliminating restrictions:

a. This deed is given for the purpose of canceling and annulling all of the covenants, conditions, restrictions, and reservations contained in the deed from to , recorded in Book Page , Official Records of said county, and releasing the above described property from the effect, if any, of each and all of said covenants, conditions, restrictions, and reservations.

b. This deed is given for the purpose of removing any interest that the grantor may have in the above described premises, or that he might have acquired therein, by reason of the restrictions contained in the deed from to , recorded in Book , Page Official Records of said County.

It is important, of course, to ascertain whose signatures are necessary to accomplish the purpose in mind. Usually the interested party will call on a title company for this information.

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Glossary

Appurtenant Belong to.

Conditions - Restrictions on the use of property, a breach of which may result in a loss of title.

Covenants - Agreements contained in deeds or other instruments promising performance or nonperformance of certain acts or stipulating to certain uses or non-uses of property.

Dominant Tenement - The land obtaining the benefit of an easement appurtenant.

Easement - A right or interest in the land of another existing apart from the ownership of the land.

General Plan Restrictions - Restrictions on the. use of property imposed for the benefit of more than one parcel of property, usually an entire tract or subdivision.

Implied - Presumed or inferred, rather than expressed.

License - A personal privilege to do some act on the land of another.

Merger of Title - The absorption of one estate or interest in another.

Prescription - Title or right obtained by possession for a prescnbed period.

Restrictions - Limitations on the use which an owner may make of his property.

Right of Way - Right to ·cross a parcel of land.

Servient Tenement - An estate burdened by an easement.

Servitude - A right in another person's land in· the nature of an easement.

Variance - A departure from the general rule.

Zone - The area of a community set off by governmental regulations relating to the use of property.

Zoning - Governmental regulations relating to the use of property.

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Voluntary Encumbrances - Deeds of Trust

Voluntary Encumbrances -Deeds of Trust

Definition

A trust deed is a conveyance of an estate in real property by the owner to an entity solely for the purpose of securing payment of a debt.

General Information

The parties:

1) Trustor: The owner of the estate or interest.

2) Trustee: The entity to whom title is conveyed.

3) Beneficiary: The person for whose benefit the security is conveyed.

Prior to the early 1900's, mortgages were· used to secure· debt instead of trust deeds. The mortgage proved to be too cumbersome to work with as the pace. of modern real estate transactions accelerated. This was because the mortgage, as a two-party contract, required, court action to foreclose and give the property owners one year 'after the court foreclosure within which to redeem, or buy back, the property. This is because a mortgage creates only a lien on, the property. Title and the right of possession remain in the borrower. Upon:· execution of a trust deed, however, title to .the secured property passes to the trustee and remains there until the· debt is satisfied or the property is sold by the trustee.

Unlike the mortgage and its right of redemption; there is no right to redeem the property from a trustee's (or non-judicial) sale.

Contents

1) proper designation of the parties

2) description of land encumbered

3) executed by property owner

4) must be recorded (for title insurance)

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A trust ordinarily secures a fixed and identified amount of money. However, if specific languages is used in the original trust deed, it may also be used to secure additional money advanced subsequent to recording.

As security for a loan, most lenders require a deed of trust rather than a mortgage. If confronted with a decision as to the choice of security, the lender should, of course, consider the advantages and disadvantages of each. The differences between these two types of security devices relate to the following:

1) Effect of the statute of limitations. The power of sale under a deed of trust does not outlaw, even though the statute has run on the obligation.

2) Right of redemption.

3) The number of parties involved.

4) Whether or not a deficiency judgment will be allowed.

5) The status of title to the property, and the requirements for a release of the security.

6) The type of remedy available in the event of default.

Some of the differences noted above actually relate to the type of remedy selected in case of default. rather than the type of security.. device. For instance, if a deed of trust is selected as the security device whether a redemption will be allowed following the foreclosure of the deed of trust will depend on whether the foreclosure is by judicial or non-judicial action. If a judicial foreclosure has taken place, then a redemption period will be applicable whether the security instrument is a mortgagor a deed of trust. If non-judicial foreclosure has taken place by exercise of the power of sale by the trustee, there is no redemption following the sale.

The deed of trust is a more flexible security device than the mortgage, and the rules for foreclosure by trustee's sale have been firmly established with the result that the deed of trust is widely used in California in preference to a mortgage. The deed of trust can be foreclosed either by judicial action or by trustee's sale proceedings. It is possible to utilize a mortgage with a power of sale in California, which does give some of the flexibility found in a deed of trust. However, it still has not been used to any great extent. A mortgage with power of sale, similar to a deed of trust in that there can be no redemption after the exercise of the power of sale, has one of the disadvantages of a mortgage in that its enforcement will be barred when the statute of limitations runs on the underlying obligation.

The note includes, among other things, a promise to pay. It is evidence of a debt and an agreement or promise to repay the debt in a specified manner

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and time. A form of note that provides for repayment all at one time is referred to as a straight note.

If the note becomes lost or destroyed, difficulties will be encountered both with regard to obtaining a reconveyance or proceeding with foreclosure.

Note that, unlike a deed which involves two parties (the grantor who conveys to the grantee), the deed of trust involves three parties, i.e., the trustor, the beneficiary, and the trustee.

The trustor is the owner of the property and the borrower who executes both the note and the deed of trust.

The· beneficiary is the lender - the person, such as a lending institution, to whom the obligation is owed and to whom payment is due.

The trustee is the party who is said to stand ·between the trustor and the beneficiary. Usually the trustee is a corporation that holds the title in trust with power of sale to secure the debt. The trustee's powers are confined primarily to two functions:

1) If the debt is not paid in accordance with the tenus of the note, upon request by the beneficiary, to sell the property at public auction in satisfaction of the debt; or

2) To execute a reconveyance (release) of the property when so requested by the beneficiary.

Each of these functions is, of course, performed in accordance with applicable laws and the provisions of the instrument itself.

The terms of the printed form disclose that title is conveyed to the trustee. Since the deed of trust recites that the "Trustor irrevocably grants, transfers and assigns to trustee...," the terms are quite unmistakable. From use of the word "grant," this would seem to divest the trustor of all title, including the right of possession. However, this is not the case. To construe the effecting of this language in the proper context, we must look to the purpose of the instrument. Actually, the trust deed merely provides security for the performance of the obligation (payment of the debt), so the law concludes that the trustee acquires only such title as is necessary to accomplish this purpose.

The caption refers to a "Short Form ..." This form is· designed to save recording expenses, in that the general provisions appearing on the reverse side of the deed of trust are not recorded. To obtain the benefit of this ·

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procedure, a fictitious deed of trust is recorded in each county where the deed of trust is to be used, setting forth the full provisions of the agreement between parties using this particular form. The "general provisions" are then incorporated by reference into the abbreviated form executed by the trustor. The identical text is printed on the reverse side of the short form for information, but is not transcribed into the recorder's records. The "general provisions" contained in an·actual recorded deed of trust may likewise be incorporated by reference to save recording costs:

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OPEN END DEED OF TRUST

A form with such a provision allows the beneficiary to lend to the record owner of the property additional sums of money to be secured by the same deed of trust. In such event, an additional note would be signed by the trustor, reciting that it is secured by the reference deed of trust.

Under the majority rule, an optional advance under an open end mortgage or deed of trust is superior to intervening liens, provided the mortgagee or beneficiary has no actual notice or knowledge of them at the time he made the additional advance. California follows the majority rule.

Future advances made pursuant to an obligatory advance clause of a mortgage or deed of trust are entitled to priority, regardless of knowledge on the part of the lender that there are intervening liens. This rule appears to be applicable to intervening federal tax liens.

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Taxes, Bonds, and Assessments

Taxes, Bonds, and Assessments

1. DEFINITIONS

A Taxes - a burden or charge imposed on people and/or property by the government to raise money for the support of itself, and to enable it to perform governmental functions.

1. Real property taxes - the taxes that are imposed on land and improvements on the land.

2. Property taxes have priority over all other liens on real property, regardless of when the other liens were created.

B. Assessments - special charges imposed only upon real property that is benefitted by a particular public improvement.

C. Bonds·- improvement assessments sold to finance an improvement project. The buyer or holder of the bond is entitled to receive periodic installment payments of principal and interest.

2. What property is subject to being taxed?

A Possessory interests in land, whether a leasehold or right of possession, can be taxed. This means:

1. Possession of land separate from ownership of the improvements.

2. Possession of, claim to, or right of possession of improvements separate from ownership of the land.

3. Possession of improvements situated on tax-exempt land.

B. Where a right exists to· extract gas, petroleum and other hydrocarbon substances from land, and where the same are being extracted, such real estate or right is ordinarily taxed separately from the ownership of the surface.

C. Property exempt from taxation

1. All property of the United States, and other such property as is exempted by the State Constitution.

a. Improvements belonging to the State, County, City and County, or municipality, wherever located.

b. Land belonging to a County, City and County, City, or municipal corporation and located within its boundaries.

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c. Free public libraries, museums and public schools.

d. Buildings used solely and exclusively for religious worship and the land required for convenient use and occupation.

e. Growing crops and certain trees and vines.

3. Priority of taxes

A. The lien of real property taxes and assessments of all taxing agencies have priority over all other liens on the real property, regardless of time of creation. Other taxes take their priority from the date that the tax becomes a lien on real property.

1. Basic order of priority of taxation:

a. Property taxes

b. Income taxes

c. Franchise taxes

d. Gift, inheritance and estate taxes

4. Property tax assessment and valuation

A. Section 110.0 of the Revenue & Taxation Code was enacted to confirm that the base year value of real property for taxation purposes means the Fair Market Value as of March 1.

B. The lien is based on the assessed value placed on the property by the tax assessor. It is not particularly important as to how the properties are assessed, but rather that they are all assessed on the same basis.

C. The tax rate is established by the Board of Supervisors and is expressed in dollars and cents per one hundred dollars of as5essed value.

D. Taxes are billed in two halves:

1. First half pays for July through December

2. Second half pays for January through June

5. Supplemental taxes

A. General information

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1 New legislation requiring the immediate reassessment of property when it changed ownership, or when new construction was completed, became effective July 1, 1983.

2. Under the new law, if you are the owner of real property, or if you completed new construction, you may receive more than one property tax bill within a fiscal year. If the new assessed value is higher than the prior value, the additional amount results in a supplemental tax bill, covering the balance of the fiscal year during which the change in ownership or completed new construction occurred.

3. After reassessment, a notice of the new value is sent before the supplemental tax bill is mailed. Property owners have the right of appeal if they feel the new assessment is unjustified.

4. Taxes on the supplemental roll become a lien against the real property on the date of the change in ownership or completion of new construction. The first installment of taxes is delinquent on the last day of the month following the month the bill is mailed. The second installment is delinquent on the last day of the fourth month after the first installment is delinquent.

5. Since we do not usually know of the existence of new construction, or whether a supplemental tax bill was sent, we always show the possibility of supplemental taxes in all reports and policies.

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The Tax Calendar

1. Important date and facts to remember concerning real property taxes:

A March 1. Taxes become a lien at 12.01 a.m. on this day. Every title evidence issued on or after March 1 must show taxes as a lien for the coming fiscal year.

B. November 1. Taxes for the current fiscal year become payable on November 1, and tax bills are usually mailed by the tax collector in time to reach the taxpayer by that date.

a. The first half, or both installments, may be paid at this time. Every title evidence issued from November 1 forward must show taxes now due and payable.

C. December 10. The first installment of taxes become delinquent on December 10, at 5:00 p.m., and a 10% penalty is attached.

D. February 1. Second installment of taxes now payable. Second installment may not be paid until first is paid.

E. April 10. At 5:00p.m., second installment becomes delinquent, and a 10% penalty, plus $10.00 for preparation of a delinquent tax list, is attached.

F. June 30. At the end of the fiscal year, real property upon which the taxes for the year, or either installment, is delinquent is declared "tax defaulted property". This establishes the beginning of a statutory five year period of redemption, during which the taxpayer has an absolute right to redeem the property from default by paying all delinquent· taxes, as well as all prescribed penalties and costs.

a. At the end of the five year period, the property is deeded to the state, removing it from the tax rolls. The state acquires an absolute title, freed from all claims, except easements, water rights held separately, and restrictions. It is not, however, free from special assessments or improvement bonds, nor from municipal taxes separately assessed by a municipality.

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TAX CALENDAR

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Bonds and Assessments

1. GENERAL

A Our exposure to bonds and assessments will normally come under the Improvement Act of. 1911. This· act provides for assessing real property in an "improvement district", said property being enhanced by the public improvements being funded.

1 The procedure for issuing bonds, which are sold to investors as a means of raising the money for the initial improvement, is as follows:

a. a resolution of intention

b. a notice of resolution of intention

c. a resolution ordering the work of improvement to proceed

d. an award of contract

e. a notice of award of contract, published and recorded

f. a diagram/map of property to be benefitted and assessed

g. a levy of assessments

h. a notice of assessment

2. The lien of an assessment attaches to the property assessed upon the recording of the notice of assessment in the office of the County Recorder.

3. The amount of the assessment is based on the total cost of the improvement and the benefit received by the assessed parcel, and is payable as follows:

a. The original amount of the assessment is payable to the contractor within 30 days of completion.

b. If the original amount is not paid in full within 30 days, the unpaid balance goes to bond. Bonds are payable over a period of years, in specified payments plus interest.

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Involuntary Encumbrances

Involuntary Encumbrances

I. Introduction

The following types of liens will be considered: attachment liens, judgment liens, execution liens and mechanics' liens. These liens, said to be created by operation of law, are referred to as involuntary liens - involuntary in the sense that although an obligation may have been incurred voluntarily, the debtor did not execute a document such as a mortgage or deed of trust, creating a lien. However, the creditor has the right to obtain a lien by complying with certain statutory requirements.

II. Legal Incidents of Liens in General

The following lists some important rules applicable to liens ·in general:

1. A lien is a 11charge imposed in some mode other than a transfer in trust upon specific property by which it is made security for the performance of an act." (Civil Code Section 2872)

2. It is created (1) by contract of the parties (e.g., a mortgage), or (2) by operation of law (e.g., taxes.

3. The property subjected to a lien depends upon the kind of lien (e.g., a mortgage affects only the specific property mortgaged, but a money judgment is by statute a lien on all real proper.ty. of the debtor that is not exempt.

4. A lien does not transfer title to the property; until foreclosure title remains in the debtor.

5. Remedies for enforcement of a lien vary, ·e.g., mortgage is enforced by judicial foreclosure; a judgment by execution sale; taxes by tax sale.

6. Different liens on the same real property have priority according to their time of creation (Civil Code Section 2897); subject to the operation of recording laws and to statutes according to special priority, e.g., taxes and mechanics' liens.

7. Liens may cease or become unenforceable after a lapse of time, e.g., 10 years as to judgments; 90 days as to mechanics' liens; 4 years from due date on mortgages (but period may be extended by waivers or suspensions of statute of limitations).

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III. Attachment Liens

As an adjunct of certain types of actions for money, an attachment is a procedure to seize and hold personal property or obtain a Hen on real property of a debtor. When a judgment is thereafter entered, the creditor will be in a position, to the extent of the value of the debtor's equity in the property attached during the pendency of the action, to realize recovery of the judgment.

An attachment is not available where a party brings an action to effect payment of a secured obligation. The case of Lencioni vs Dan, 128 C.A (2d) 105, is illustrative. In cases plaintiffs brought an action to compel performance by defendant buyers of their written agreement to pay the purchase price of certain real and personal property. The full purchase price was $42,000.00, of whlch $500.00 was paid on· the execution of the contract, and' defendants agreed to pay $32,500.00 within 30 days, the balance of $9,500.00 to be carried by plaintiffs as a second loan payable in installments. This action was to recover the $32,500.00 payment. Plaintiffs secured from the clerk of the court the issuance ofa .. writ of attachment for $15,000.00 upon the filing of the required affidavit and undertaking, and levied upon two other parcels of real property owned by the defendants. Defendants moved to dissolve the attachment on the grounds that plaintiffs were secured creditors. The court rejected this contention, but on appeal the judgment was reversed, the court stating:

"The law is well settled that a seller under an executory contract for the sale of real property who retains title until all payments are made as security for the payments of the purchased price, has security which prevents him from obtaining an attachment in a legal or equitable action to recover the unpaid balance on the contract. . ."

"Whether the obligation was or was not secured turns upon the terms of the contract and the allegations of the complaint. There is no expressed provision in the contract reserving title in the plaintiffs as security for the payment of the purchase price, but the record demonstrates, beyond doubt, that such was the intention of the parties, and such results necessarily follow from the allegations of the complaint, including the provisions of the contract set forth as an exhibit."

IV. Judgment Liens

A judgment lien is frequently encountered in title work. A judgment may be described briefly as an order or decree evidencing the final determination by the court of the rights of contending parties in litigation. The kind of

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} judgment we are concerned with here is one resulting from an action for money, rather than for other types of relief. Such an action may be based on a claim for money loaned, or for the purchase of merchandise, or for services performed, or for medical expenses incurred as a result of an automobile

accident, or for many other causes. Before the judgment can constitute a lien on real property, an abstract or certified copy of the judgment must be recorded in the office of the county recorder of the county where the judgment debtor owns or may acquire title to real property. Upon recording, the judgment or thereafter acquired by the debtor in any county in which the abstract is recorded. The lien continues for a period of ten years from date of entry of the judgment and can be renewed if the judgment is·not satisfied during that period. The lien is a general lien, in that it does not relate to any specifically descnbed property, but is a lien on any and all non-exempt real property of the debtor, even though no particular real property is described.

The following problem raises a"question as to whether or not a judgment lien was crated on a parcel of property: .

Clarke and his wife owned a parcel of real property which they conveyed to· Bill. One month later Bill executed an instrument by which he agreed to reconvey the property to·Clarke and his wife upon their paying to him, within one year, the sum of $8;600.00 plus interest. During the one-year perio'd a judgment was obtained against Qarke and an abstract recorded in the office of the county where the real property was located. Is the judgment a lien on this property? In the case of People :Ys Irwin.14 Cal. 428,. it was held that a judgment lien does attach to the interest of the grantor where the deed though absolute in· form is in fact a mortgage. .This must be so since the mortgagor retains all of the legl title subject only to.the mortgage lien.

V. Execution Liens

The general principals relating to the nature and effect of an execution may be listed as follows:

1. An execution is a writ issued by the court to the sheriff or other officer directing him to satisfy a judgment by sale of the property of the debtor.

2. Such writ must usually issue within 10 years from date of entry of the judgment.

3. The officer levies on specific real property by recording the writ, and serving the occupant or posting the property.

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4. The officer than advertises a sale of the property levied on, and after a prescribed time sells at public auction to the highest bidder, and files a return with the court.

5. A certificate of sale is issued to the highest bidder. The judgment debtor or his successor may redeem within one year: junior lienholders also have a right to redeem. If no redemption is made, the officer issues a deed to the purchaser or an assignee from the purchaser.

6. An execution sale may be void if:

a. The debtor was deceased when the action commenced or the writ of execution was levied.

b. The debtor had been judicially declared incompetent.

c. The property is protected by homestead.

d. The judgment was void, e.g., a personal money judgment against a non-resident debtor served by publication where such procedure is not authorized.

The case of Christensen vs Forst, 153 C.A. (2d) 465, illustrates the application of the law on execution sales. On June 16, 1954, a judgment was entered in the Long Beach Municipal Court in favor of Joe Gideon and against John Goldin. A writ of execution was issued, and on November 29, 1954, the constable levied upon all right, title, and interest of John Goldin, "Standing in the name of Jacob Forst," in and to certain .real property in Huntington·Beach. On January 5, 1955,. Goldin redeemed the property by paying the sum due, to wit, $3,888.00.. Plaintiff refused to ·accept the money from the constable, and brought thls action for a declaration of his rights, alleging that in addition to the amount due on the judgment, he was entitled to all rents, issues, and profits of the property, including certain oil royalties, from the date of the execution sale to the date of redemption. The court held, however, that plaintiff is not entitled to recover the rentals or profits attributable to the property during the period in question, and in its decision stated:

"The purpose of the statutes permitting property to be sold at an execution sale in order to make a judgment effective is to enable the creditor to recover the amount to which he is entitled under the judgment. The purpose of the statutes permitting a redemption of the property within a limited time is to protect the debtor and enable him to save his property by paying the amount for which the property was sold, with interest and expenses. In view of these purposes, it would be unreasonable to interpret these statutes as intended to permit the unjust result of allowing a judgment-creditor or a purchaser to retain or to collect an additional profit out of the execution sale."

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VI. Mechanics' Liens

A mechanic's lien law first made its appearance in the State of California on April 12, 1850, when 11An Act to Provide for the Lien of Mechanics, and Others11 was enacted.

In 1855, the predecessor of the present mechanic's lien law was passed which provided for a lien on the property upon which the authority to do so is unquestioned, and the constitutionality of the mechanic's lien law has been upheld. There was no expressed or implied prohibition to such legislative action. This act was amended several times prior to 1879, when the new California Constitution was adopted. Article XX, Section 15 of the Constitution provided:

"Mechanics, materialmen, artisans, and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens.11

The Legislature has implemented the Constitution by various enactments and amendments thereto. The present law, designating those who are entitled to the benefit of this law, is found in the Code of Civil Procedure, Section 1181, which reads:

"Mechanics, materialmen, contractors,· subcontractors, artisans, architects, registered engineers, licensed land surveyors, machinists, builders, teamsters, and draymen, and all persons. and labors of every class performing labors upon or bestowing skill or other necessary services on, or furnishing materials to be used or consumed in, or furnishing appliances, teams, or power contributing to, the construction, alteration, addition to, or repair, either in whole or in part, of any building, structure or other work of improvement shall have a lien upon

the property upon which they have bestowed labor or furnished material or appliances for the value of such labor done or materials furnished and for the value of the use of such appliances, teams, or ·power, whether done or furnished at the instance of the owner or of any person acting by his authority or under him, as contractor or otherwise.The fact that the Legislative enactment lists persons not named in the Constitutional provision, i.e., a subcontractor or one who supplies power by means of a team, etc., does not invalidate the statute.

That the present philosophy is to liberally cwnstrue the mechanic's lien law is well settled. Cases have held that the remedial portions should be liberally construed in favor of the classes benefitted. With respect to the requirements

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as to notices, it has been declared by the courts that substance rather than form should prevail.

The following two cases illustrate the application of the rules relating to mechanic's liens:

Case #1 - Credit Bureau of San Diego vs Williams, 153 C.A (2d) 834

A roofing subcontractor recorded a notice of lien for materials furnished and labor performed on certain real property in San Diego. The mechanic's lien descnbed the property as follows: "2152 California St., San Diego, Calif., which premises claimant is informed and believes to be described as Lot 5, Block 227." An action to foreclose the lien was filed against the contractor and the owner of the premises. At the trial it was disclosed that there are not houses in the 2100 block on California Street (which runs north and south), and this block is taken up largely with railway tracks. However, there was testimony that block numbers from 200 up, in what is known as Middletown Addition, would be on West California Street, and the number son it westward begin at 1900. The contractor testified that the premises were 11SOmewhere below Mission Hills on the bay side of Mission Hills:• The owner contended that the mechanic's lien was invalid because of a defective description. Ithe owner correct?

It was held in the above cited case that the description was inadequate, hence the lien claim was denied. The error was concluded to· be one of substance rather than form.

Case #2- Hammond Lumber Co. vs Yeager, 185 Cal. 355·

Plaintiff (lumber company) brought an action to foreclose a mechanic's lien for the value of building materials furnished to Yeager as contractor for the construction of a home on the real property of Woods. The building was completed on September 28, 1917. Woods paid the contractor the final payment due on the contract on that date and entered into the possession and occupancy of the property. After such acceptance and 'Occupancy, it was discovered that certain woodstone work constituting the floor of the bathroom and the sinks in the kitchen, composed of a chemical composition, was defective by reason of the fact that the chemicals were improperly mixed. This work was replaced at a cost of $35.50 on October 26, 1917.

Plaintiff's action was filed more than 90 days after September 28, 1917, but within 90 days after October 26, 1917. The court held that the lien was not filed in time, the actual completion date being September 28, 1917. Plaintiff

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appealed, alleging that the removal of the defective work and its replacement was a part of the original contract, and that the time for filing liens began at the time the work was finally replace by good material. The court rejected this contention, and sustained the trail court's decision holding that the necessity for the corrective work, being a trivial imperfection, was not to be deemed a lack of completion under the mechanic's lien law. The court stated:

"What constitutes a trivial imperfection is a question of fact to be determined by the trail court under the conditions and circumstances of each case. This finding can only be overturned when it can be said that there is no substantial evidence to support it. No doubt any imperfections in the performance of the work which were of so trivial a character as to permit the contractor to recover for substantial performance notwithstanding such defects would be trivial. imperfections within the meaning of Section 1187 of the Code of Civil Procedure."

Either by way of an indorsement or by the issuance of a policy of title insurance, a title company is often requested to give assurances which ar based ont he validity of a notice of completion. As mentioned, a valid notice of completion will shorten t1:1e time within which a mechanic's lien may be filed.

For title insurance purposes, the validity of a notice of completion is usually dependent up_on compliance with the following rules:

1. The notice. of completion must set· forth the date of completion of the whole improvement or of such particular portion or portions of the work of irp.provement as may be provided for in separate contracts.

2. The notice of completion must be recorded within 10 days after the date of such completion.

3. It must show the name and address of the owner, together with the nature of this title.

If there are co-owners and less than all sign, the names and addresses of all co-owners must be recited in such notice and if the notice is signed by successor it must recite the names and addresses of his transferor or transferors.

If the street address of an owner, or transferor, when required, is given without naming the city, the notice will be deemed defective.

If the city is named but the street address is not given, the notice may be deemed valid.

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4. The notice of completion must set forth a description of the property sufficient for identification.

If the notice sets forth the street address and the name of the city, it will be deemed sufficient.

5. It must show the name of the original (general contractor for the work of improvement, or if the notice is given of completion of a contract for a particular portion of the whole work of improvement then it must show the name of the original contractor under such contract and include a general statement of the kind of work done or materials furnished pursuant to such contract.

If the notice states there was a general contractor for·the work of improvement as whole or the particular portion thereof, or if it is known that there was such a contractor, an his name is not given, the notice will be deemed invalid.

6. The notice of completion must be signed and verified by the owner or his agent, and if the notice is signed by a successor it must recite the names an addresses of his transferor· or transferors.

If it is signed by some person other than the owner, as his agent, it must appear on the face of the notice that such person signs for and as agent of the owner, naming him. The authority· of an agent for such purpose must be in Writing but need not appear of record.

7. When a corporation is the owner. the notice should be signed in the name of the corporation by at least one officer, and the corporate seal should be affixed. If a partnership is the owner, the notice. should be signed fu the name of the partnership by at least one partner. In either case the verification should be made by the officer or partner signing the notice.

A mechanic's lien may attach not only to a structure, but also may attach to the land where the work that is done on the land constitutes "tract improvements." Thus, any person who, at the request of the owner of any lot or tract of land, grades, fills in, or otherwise improves the same, or the street, highway, or sidewalk in front of or adjoining the same, or constructs or installs sewers or other utilities on the property may file a lien upon the lot or tract of land for his worry done and materials furnished, The work of improvement described above is often termed "off site" work or improvement, as distinguished from "on site" work.

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If "off site" work of improvement is done under separate contract from any contract or agreement with respect to the erection of residential units or other structures upon said land, the commencement of the "off site" work does not constitute a commencement of any residential unit. This rule was probably intended to make it possible for owners of unimproved acreage to finance the necessary grading and street work necessary to be done prior to the construction of residential units or other structures.

"Off site" liens have priority over any mortgage, deed of trust, or other encumbrance which may have attached subsequent to the time when the work of improvement in connection with which the lien claimant has done his work or furnished his material was commenced; or of which the lien claimant had no notice and which was unrecorded at the time of commencement; or to any mortgage; deed of trust or other encumbrance recorded before commencement which was given for the sole or primary purpose of financing such improvement, unless the loan proceeds are· placed in control .of the lender under a binding agreement pertaining. to the. payment of claims or unless a bond is filed.

A mechanic's lien ordinarily cannot be eliminated following the foreclosure of an apparently prior deed of trust. Priority of all mechanics' liens relates back to the. time the work of improvement was commenced. If work· commenced prior to the recording of the deed of trust, the date of recordation of. the lien in relation to the recording date of the deed of trust is immaterial, nor does fact that mechanics' lien priority' insurance was correctly issued prevent such a lien from obtaining priority over the deed of trust. Priority insurance insures· the lender against loss of .priority in the event a lien claimant establishes that work was commenced on, or materials were delivered to, the land prior to the recordation of the insured deed of trust. It must be observed that priority, aside from the feature of commencement, can be lost by such factors as failure to comply with the building loan agreement, or by making advances that are not obligatory thereunder or under the deed of trust. These are matters that are not covered or insured against by the usual indorsement insuring priority of a deed of trust over mechanics' liens that may thereafter be recorded.

In the last few years, equitable liens and stop notices under the mechanic's lien law have been the subject of numerous appellate court decisions. Where a third party, such as a lending institution, holds funds under a construction loan, the use of stop notices has become quite prevalent. As an additional filing a lien, at any time prior to the expiration of their lien claims, subcontractors and materialmen may file a stop notice with the lender supplying the construction loan. When the notice is served on the lender, the latter may withhold funds to answer the claims, but is not obligated to do so

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unless a bond is filed. When a bond in the requisite amount is filed, the person holding the construction loan funds must withhold from such funds an amount sufficient to answer the claim.

A landmark case involving both stop notices and the application of the equitable lien doctrine is that of A-1 Door and Materials Co. vs Fresno Guarantee Savings & Loan Assn., 61 Cal. (2d) 728. The facts and decision in that case may be summarized as follows:

Defendant lender made construction loans. Four progress payments were made and then work stopped. The defendant lender retained the unexpended loan funds. Four claimants filed bonded stop notices and other claimants filed mechanics' liens. the plaintiff brought an action on its bonded stop notice and the lender filed a cross-complaint for declaratory relief .naming all cross defendants. The stop notice claimants claimed the fund on the basis of their stop notices and the mechanic's lien claimants, recorded .mechanics' liens and had the right to apply the undisbursed loan funds to reduce the borrower's debt to it and/or expend such funds to complete the buildings. The trial court

held that the stop notice claimants were entitled to recover from the lender on their claims. and that the mechanic's lien claimants had an equitable lien on the funds of secondary priority to the bonded stop notice claims. The Supreme Court reversed the trial court with regard to its holding that the mechanic's lien claimants had equitable liens. Without stating what evidence of reliance had been presented to the trial court, the Supreme Court held that there was no evidence in the record from which reliance on the loan fund could be inferred. The Supreme Court did lay down the basic prerequisites for the establishment of an equitable lien. The court held that an equitable lien may be imposed on a construction loan fund only if it is established that the borrower or lender induced the claimant to rely on the fund for payment. The court further concluded that the mere filing of a mechanic's lien did not create an equitable lien.

The above case indicates the following basic requirements for application of the equitable lien doctrine:

1. A construction loan fund.

2. A structure of encumbrances having priority over the mechanics' liens, which renders the liens of little value.

3. Reliance by the claimant on the construction loan fund as a source of payment.

4. Improvement of the security of the construction lender's deed of trust.

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5. Refusal by the lender to disburse loan funds.

In the later case of Miller vs Mountain View Savings and Loan Assn., 238 A.C.A 759, the court held that where there is sufficient evidence to support a finding of fact by the trail court that the claimant relied on the construction loan funds for payment, such reliance is sufficient to establish the basis for an equitable lien.

In the case of McBain vs Santa Clara Savings & Loan Assn., 241 A.C.A 1052, the rationale of the rule permitting recovery by the supplier of labor or materials from a construction loan fund on the theory of an equitable lien was explained as follows: it would be inequitable to withhold fonn persons who, by their labor and materials, enhanced the value of the property where the loan fund constituted a material inducement to them to supply the labor and materials. Also, the court pointed out that the right of subcontractors or materialmen to an equitable lien is not established merely by filing a mechanic's lien claim.

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BankruptcyThe modern escape from debtor's prisons!

Bankruptcy law is designed to provide procedures where by parties may seek relief from financial problems. This is evidenced by the use of the "fresh start11 theory in descnbing the operation of bankruptcy law.

Bankruptcy Code

The Bankruptcy code is divided into eight chapters numbered 1 to 13 as follows:

1. Chapter 1 (General Provisions)

2. Chapter 3 (Case Administration)

3. Chapter 4 (Creditors, the Debtor and the Estate)

4. Chapter 7 (Liquidation)

A Chapter 7 Bankruptcy (Straight Bankruptcy) is where the debtor forfeits all except those assets declared exempt. The trustee reduces the assets to cash. and distributes it ratably among the unsecured creditors in exchange for a court order discharging the debtor from any legal duty to make further payments (except as to debts determined by the Court to be non-dischargeable). A trustee will always be appointed in a Chapter 7 case to administer the estate.

5. Chapter 9 (Adjustment of debts of a Municipality):

This Chapter governs the bankruptcy of a Municipality, and is not included in this discussion.

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6. Chapter 11 (Reorganization)

This Chapter provides a distressed debtor having assets in excess of liabilities with a period in which to reorganize or liquidate sufficient assets to satisfy creditors. A successful Chapter 11 will normally involve court approval of a "Plan of Arrangement" providing the debtor an opportunity to realize the equity in its assets, to pay its creditors over an appropriate period and avoid loss through foreclosure or execution. As a general rule a trustee will not be appointed. The debtor will continue to operate its business as "debtor in possession" under courts supervision. The court has authority to appoint a trustee anytime it determines it would be in the best interest of the creditors.

7. Chapter 12 (Adjustment of debts of a family farmer with annual income.)

This Chapter, effective November 25, 1986, provides an insolvent family farmer (an· individual, family partnership or family corporation which derives more than 50% of its income from fanning operations) with regular annual income·an opportunity to pay the debtors creditors over a reasonable period (usually. not more than 3 years but in no event more than 5 years) without the threat of foreclosure, execution, attachment or other creditors' remedies during the court approved plan period.

8. Chapter 13 (Adjustment of debts of individual, regular income.)

This Chapter provides an Insolvent Debtor with regular income an opportunity to pay the debtor's creditors over a reasonable period (usually not more than 3 years but in no event more than 5 years) without the threat of foreclosure, execution, attachment or other creditors' remedies during the court approved plan period.

Various subchapters in each chapter exist which pertain to such entities as railroads, stockbrokers, and commodity brokers.

Some Definitions

1. The party in bankruptcy is now call the "Debtor", not the bankrupt.

2. After filing a petition for bankruptcy the court enters an "Order of Relief", not an Order of Adjudication of Bankruptcy.

3. In rehabilitation cases the Debtor does not surrender assets and is referred to as the "Debtor in Possession."

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4. Most action to be taken by a trustee requires notice to interested parties. The Code refers to "notice and Hearing." This means notice must be given to an interested party for an opportunity to be heard. If no one requests a hearing, none is required ·and no court order will be obtained. They are, however, certain types of actions where orders are required.

Property of the Estate

1. In General, when the order for relief is obtained, essentially all non exempt property owned by the debtor at the date of the filing of the petition becomes property of the estate. Wbat is property of the estate is determined by law without regard to title of possession and includes any interest owned by the debtor, legal or equitable, Such depending on state law, beneficial interests under a trust or a spouse's interest in community property.

In Chapter 7 cases· property of the estate will not include property acquired by the debtor after the filing of the petition except for property acquired by bequest, inheritance, or property settlement agreements within the 180.days after commencement of the case.

In Chapters 11, 12, and 13 after-acquired property of the debtor is considered property of the estate.

The·code·does·not specifically provide that title to the property vests in the trustee. It is clear, however that the trustee has the power to deal with the property as if title were vested in the trustee. Upon the commencement of the case, a trustee has the same rights and powers given to creditors and purchasers .under state law without regard to whether the trustee has knowledge.

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The Most Common Encountered Chapters

Chapter 7:

Chapter 7 is commonly referred to as the Straight Liquidation Bankruptcy. This is the only chapter in which judgements and other unsecured debts may be discharged or rendered uncollectible. In addition, this is the only chapter in which real property may be exempted from bankruptcy proceedings.

(A) Within 20 to 45 days after filing the petition for relief, the First Creditor's Meeting (known as 34la) is held. At this meeting, the court Trustee and any creditor may examine the debtor as to the truthfulness of the petitioner and the facts contained therein. Creditor have between 15 and 21 days to file objections to the exemptions claimed in. the debtor's petition (schedule B·4). If there are no creditor objections the Court Trustee will file a "Report of No Assets."

This change in procedure, as compared to the pre-1980 "Trustee's Report of Exemption Property," places the burden of research on the creditors if they wish to force the sale of property to satisfy debts. As a side note, virtually all personal and homesteaded real property is considered exempt. If no creditor objections are filed within the 21 day period, the Report of No Assets may be presumed to be conclusive and relied upon for title insurance purposes as to the debtor's ability to deal with the exempted property, but NOT as to the discharge or liquidation of any debts.

(B) Creditors have approximately three months in which to file Objection to Discharge. An example of such an objection would be for alleged fraud. (i.e., Creditor claims debtor overcharged on his credit card ·knowing he would file for bankruptcy). The bankruptcy judge might find the debt non-dischargeable in. the bankruptcy.

(C) Upon expiration of the last day for Objections to Discharge, the Court Clerk will set the case for the Discharge and Reaffirmation Hearing. At this hearing the discharge from the bankruptcy is granted and secured debts (such as car, boat, and home loans) are reaffirmed,. An additional note: Due to the major increase in bankruptcy petitions the case might actually take from two t6 ten months before it is officially closed and the trustee discharged. However, the proceedings are generally considered over after the Discharge Hearing.

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Chapter 11:

Chapter 11 Bankruptcy is usually called the Corporate Reorganization Chapter. This chapter entitles The Corporation to a stay of execution against creditors and provides time in which to liquidate assets in order to meet corporate obligations. In recent years, more and more individuals with businesses have declared under this Chapter because the Debtor-in-Possession rules allow the individual far more than flexibility to operate the business.

(A) A Plan of Reorganization must be submitted and approved by the judge and a majority of the creditors. Confirmation of the plan in Chapter 11 proceedings essentially terminates the bankruptcy, although the court does retain jurisdiction to enforce the terms of the plan.

Plans often provide for the disposition of real property, the mortgaging of real property or some other event affecting real property. Once the plan has been confirmed by the court and the appeal time has run, we can rely on the provisions of the plan dealing with real property for title insurance purposes. The order and the ·plan can be recorded if necessary for title purposes.

Once a plan of reorganization·has been approved by the court, title to real property not dealt with in: plan revests ·in the debtor as its own real estate; and the debtor is free to· deal with that property as if the bankruptcy had not existed. 'This assumes that the property .was listed. If the reorganization is not successful, the bankruptcy case will be automatically converted· to a Chapter 7 and all assets will be liquidated and dividends ·win be paid to creditors.

(B) The debtor-in-possession rule leaves the debtor in control of the estate under the very loose supervision of the creditor's committee consisting of the ten major creditors. A .trustee is appointed only on the request of either the debtor or collectors and not automatically.

(C) The debtor-in-possession may encumber, sell, lease, rent or purchase real property without court approval providing the transaction is in the 11normal course of business." If, however, the transaction is "outside the normal ·course of business" or the debtor decides to liquidate assets, it may also sell off those assets (real property) after notifying creditors of the intent to sell. Said notification does to require an open court hearing. Further, the court will rarely provide the formal court order usually required by title companies to insure such a transaction.

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(D) Judgments are not discharged and there is NO exempt property.

Chapter 13:

Chapter 13 is officially the Wage Earner Bankruptcy. This form is for debtors not wishing to liquidate (as in a Chapter 7) but rather seeks to repay debts based upon a plan submitted to the bankruptcy court. The plan may last as long as 60 months and continues to run until completion of it's term.

(A) The Chapter 13 plan and the schedules of assets and liabilities must be submitted within ten day so the filing of a Chapter 13 petition or the case MAY be dismissed for lack of prosection.

(B) A Creditors Meeting is held where the plan can be confirmed. Upon confirmation, the debtor's employer. is directed to send all salary to the Court Trustee. The Trustee then pays off a portion of the scheduled debts and sends whatever is left to the debtor. When all scheduled debts have been paid according to the approved plan, The Confirmed Plan· is then considered completed and the case closed.

(C) NO judgments are "cleared" in a Chapter 13 since there is no discharge. If the judgments are paid according to the Plan, the creditor should file satisfaction in the judgment case file.

(D) There is no exempt property in this type of bankruptcy even though the·schedules (and the court service abstracts) include a section for exempt property (exactly the same as Chapter 7) and the property may be "claimed" as exempt. The information is priman1y in case the file is later converted to a Chapter 7 case so an amendment would not have to be filed in the case.

A trustee is appointed to supervise and assist the debtor, but the trustee has no power of sale except with the consent of the debtor.

Chapter 13 cases may be dismissed at the discretion of the debtor · and Court approval is not necessary. If, during the original case, a creditor obtained an order lifting the stay prohibiting foreclosure, the debtor may not refile for a period of 180 days.

If dealing with a buyer in a Chapter 13, the court should confirm the purchase. Record an order. Also, inquire into the source of the down payment and whether the funds could have been secreted from creditors and should have been included in the plan.

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A Chapter 13 seller should provide a recordable order pursuant to section 363, of the code.

Investigation

The investigation into the bankruptcy file will usually indicate that the file is either 11closed 11 the case is "dismissed", the property is "exempt" or "abandoned" or your debtor is "discharged" or the "debt is discharged." The investigation may also reveal that an "order for sale free and clear of liens" has been entered or that a lease has been "rejected" or "accepted."

Closed Cases

Closing requires the estate to have been fully administered and the trustee discharged. Discharge of debts or debtor is unrelated to closing. A discharge occurs early on in a processing. A closed case is usually good news to the title person because it means that title may be considered without regard to the bankruptcy. However, a case may need to be reopened to correct clerical errors, or administer property or claims originally omitted.

Dismissal of the Case

All bankruptcy cases can be dismissed with approval of the court. Dismissal has the effect of revesting title in a debtor, vacating some court orders such as those avoiding a transfer, and generally returning the debtors financial affairs to what it was prior to the filing of the petition. Interests acquired by a .third party such as purchasers of: real property from a trustee are protected.

Exempted Property

The title person will usually encounter exemption issues when an individual is selling their home or a beneficiary under a deed of trust wants to proceed with a trustee sale and does not want the title insurer to object for lack of a bankruptcy court order approving the purchase· or trustee sale.

Section 522 defines what property a debtor may keep and what the debtor must surrender to creditors. A claim of exemption must be ·made on schedule B-4 and filed with the court. Property claimed exempt from a bankruptcy estate will be deemed exempt and the bankruptcy court will make no inquiry into validity of the claim if neither the trustee nor any creditor files an objection.

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Objections are governed by certain rules. The trustee or any creditor must file an objection within 30 days after the conclusion of the meeting of creditors. The court may grant further time. The creditor meetings may be held not more than 60 days after the order for relief. Notice of the meetings must be given to creditors. In those instances where the exemption is contested and/or there appears to be equity sufficient to invite attack, consider requesting a court order of exemption of the property in question.

Title to lands exempted will be treated as if no bankruptcy had ever been filed. A:ny pre-petition judgments or liens not avoided under Section 522 (f) should be shown in any evidence of title.

Abandoned Property

Property of little value or burdensome to the estate may ·be abandoned. There are four provisions under the Code for abandonment (Section 544 a, b, c, and d.):

The trustee may abandon under Section 544 (a) after notice and hearing (Rule 6007 (a) & ,(c). If no one objects, no hearing necessary.

A party in interest may petition the court for abandonment under Section 544 (b). Notice arid hearing are· required.

The property may be deemed. abandoned under Section 544 (c).

Property not covered under Section 544 (a), (b), or (c) remains an asset of the estate under Section 544 (d). Abandoned property may·be treated as if no bankruptcy had been filed after a certified copy of a court order specifically describing the property in question and reciting that due notice and· hearing proceeded entry has been recorded.

Discharge in Bankruptcy

A discharge in bankruptcy is a court order determining that a debtor is

a) not personally liable for dischargeable pre-petition debts.

b) entitled to personal immunity from collection attempts relating to prepetition debts.

Chapter 7: Discharge is available only to individuals. Objectors to discharge must initiate an adversary proceeding.

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Chapter 11: Discharge is available to corporations, partnerships, and associations as well as individuals if the estate is not sold and the debtors business is continued after the reorganization plan is consummated.

Chapter 13: Discharge is available to an individual debtor upon completion of the plan.

A discharge does not prohibit the enforcement of non-avoided pre-petition liens on bankruptcy estate property. The fact of discharge of a debtor is usually irrelevant to the underwriter except for those instances where a seller or buyer requests insurance for possible claims of creditors under pre-petition recorded judgments or liens that attached to bankruptcy estate property. Most of the debts from which debtor will receive relief via discharge will be unsecured. But those creditors whose claims are secured are not denied the security if the liens are not avoided by the trustee.

"Writing Over" Judgments

Involuntary liens recorded prior to petition.

Judgments and other liens which ·are perfected prior to the petition for bankruptcy against property of the estate continue or even though the de t may be discharged. the property abandoned, claimed as exempt.

Although a strict reading of the code would indicate that the debt based upon which the judgment was based is extinguished, the legal effect of the discharge appears to be limited to enjoining a judgment creditor proceeding against the debtor in a personal· action. The creditor is not prohibited from proceeding against the property owned by he. debtor prior to the petition for bankruptcy..

There are a few cases, however, which hold that the judgment creditor is enjoined from proceeding against pre-petition property after the bankruptcy case is closed and the debt discharged.

To the extent that a judgment lien might impact on an exemption available to the debtor, it is possible for a debtor to proceed under Section 552 (f) to void the judgment

However, the customer and/or his attorney will usually argue that .because the creditor was scheduled and the debt discharged, the abstract of judgment (or other lien) can be safely ignore by the title insurer. The first reason why that is not so turns on an understanding of the effect of a discharge in

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bankruptcy upon the lien of the judgment and the debt underlying the judgment.

The debt owed to the creditor and the resulting lien obtained are distinguished and must be considered separately.

The unpaid creditor has two sources to look to for payment or satisfaction of a money judgment:

1. The personal obligation of the debtor to voluntarily satisfy the debt, or;

2. Enforcement of the judgment lien in an action against property.

If the debt was discharged, the debtor has no more personal obligation to satisfy the judgment. However, the debtors real property to which the judgment attached is still subject to an enforcement action.

The second reason why an Abstract of Judgment cannot be safely ignored based upon the mere scheduling and discharge is that the debt. may not be dischargeable under 11 USC, Section 523 and Rule 4007. Non-dischargeable debts include for example:

a) Alimony;

b) Child Support;

c) Certain taxes, and;

d) Obligations arising from fraud.

The title person should independently confirm the fact of scheduling of the particular judgment creditor and the discharge of the debt. This eliminates the possibility of a later action as to .(1) whether the debt is dischargeable (inquiry into the state court file may be necessary - did the obligation arise out of fraud, unpaid alimony, etc.) (2 if there were any objections to discharge, and if the discharge has been or might be revoked. For example, Section 727 (e) provides that a trustee or creditor may request revocation of a discharge before the latter of one year after the grant of discharge or date the bankruptcy was caused.

Liens Perfected Before .Bankruptcy On After·Acquired Property

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After a case is closed and the debt which was the basis for a judgment lien is discharged, the judgment creditor is enjoined from proceeding against after- acquired property acquired by the debtor.

After-acquired property means property acquired after the case is closed in Chapters 11, 12, and 13 proceedings. In Chapter 7 cases, after-acquired property means property acquired after the order for relief, except for certain types of property which vest in the debtor within 180 days after the commencement of the case.

Before insuring title, without showing the judgment as alien against after acquired property it is necessary to examine the bankruptcy case to make sure the debt represented by the judgment was scheduled and discharged.

If property is abandoned because no equity exists which would be available for sale by the trustee, a pre-petition judgment creditor is free to proceed against the real estate to the extent of any value existing· at the date the property is abandoned. In theory, the judgment creditor is enjoined from proceeding against the property to the extent that the value increased subsequent to the date of the closing of the ease due to inflation.

Sale or Lease or Real Property

In a typical Chapter 7 proceeding, a debtor surrenders all property in exchange for discharge of personal liability from dischargeable debts. Sale proceeds in excess of secured creditor claims is the only source of funds for unsecured creditors.

Chapter 11 cases,..do not usually contemplate sale of property and distribution of proceeds to creditors. Conservation and preservation is the goal while the debtor arranges for payments to creditors. If property is sold, .it is usually to raise money for creditors.

Chapter 13 cases also preserve and conserve the estate while providing for payment of creditors out of debtors income.

The title person will usually encounter a proceeding which results in an order for sale of the property either subject to· liens or free and clear of liens.

After notice to interested parties, the trustee is free to sell real property subject to liens provided no party objects and requests a hearing. Unless there is an objection no order is necessary.

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Property is usually sold out of the bankruptcy estate free and clear of liens and encumbrances. However, secured creditors are still entitled to "Adequate Protection" and any use, sale, or lease is conditioned upon providing that protection.

This is usually accomplished by transferring the various liens from the land to the proceeds of the sale. The order should specifically mention every secured creditor (beneficiary, judgment creditor, etc.) disclosed in the preliminary report and provide for their claim to the proceeds. The order should be (1) final, (2) confirm that due notice was given to all entitled parties (Rule 2002), (3) that an opportunity for hearing was provided (Rules 6004 & 9014) and (3) disclose which provisions of Section 363 (f) authorized the sale.

An excellent check list is found in CLTA Section 7.11J. In doubtful cases, request a copy of the moving papers, and position or reply memorandums and all accompanying certificates of proof of mailing.

Executory Contract and Unexpired Leases

Under Bankruptcy Law, the benefits· and burdens of a debtor under Executory Contracts and unexpired leases do not. automatically become sets and liabilities of the estate.. . ';I1le trustee or debtor in possession can accept or realiZe on favorable Executory Contract or unexpired leases in order to benefit debtors creditors. Conversely, the trustee or debtor in possession can lesson the loss to creditors by rejecting unfavorable contracts or leases.

The title person will usually encounter. these issues in the form of a request to:

(a) delete a tenant lease from evidence of title on a shopping center (a debtor/tenant whose lease is rejected) or;

(b) insure an assignee of a lease that has been excepted.

In Chapter 7 cases, executory contracts and leases, if .not assumed or rejected within 60 days from the date of the order of relief, are deemed rejected unless the court extends the time.

In Chapter 11 and 13 cases, the Debtor in Possession can assume or reject at anytime before confirmation of a plan unless the court requires earlier action.

If a trustee determines that a particular contract or lease constitutes a saleable asset, it has power to sell even if an assignment is prohibited in the

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agreement. However, adequate security might have to be given to the other party.

A contract or lease in default for reasons other than insolvency or bankruptcy of the debtor cannot be assumed by the trustee unless the default is:

(a) cured;

(b) damages, if any, paid; and

(c) adequate assurance is given for future performance.

Rejection by a trustee where the debtor is the vendee under a contract of sale for real property or a lessee under a lease constitutes breach for which the estate may be liable for damages.

The same is true where the debtor is the lessor under a lease or the vendor under a contract for sale. However, .the Code protects contract purchasers and lessees if they are in possession of the property pursuant to the contract or the lease.

The trustee. cannot terminate a leasehold estate or the equitable estate of a vendee under a conditional· sales contract if the party· is in possession pursuant to the contract or lease and neither agreement is in default.

Rights of Appeal

Rights of Appeal will usually be encountered by the title person in connection with an order approving sale of property, obtaining credit, incurring debt, confirmation of a plan or dismissal or conversation of the case.

Bankruptcy Rule 8002 requires that any notice of appeal be filed no later than 10 days after entry of the bankruptcy court's order. Intermediate weekend days and holidays are counted because the period of time prescribed is not less than eight days.

Closing a transaction during an appeal period should be considered very carefully. Were all parties timely noticed? Was the motion for the order opposed and if so by someone who would or could be motivated to appeal? Are the issues such that an aggrieved party might move for. an extension of time to file an appeal under 8002 (c) or move· for reconsideration under Rule 9023? After receipt of the recordable order, the entry date should be noted and before closing check the court file after expiration of the appeal period for any post order proceedings.

From CLTA Section 7.11J

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... Rules of Title Practice ...

Absent direction of Counsel, a policy shall not be written in reliance upon sale of property out of a bankruptcy estate free and clear of liens unless an examination of the court file of the case confirms compliance with all of the following:

(1) An order for relief in effect throughout the proceedings, and

(2) The real property sold was duly scheduled, and

(3) Due to notice of sale given pursuant to Rule 6004, and

(4) Opportunity to object to the motion to sell free and clear of liens was provided pursuant to Rules 6004 and 9014 [consider appeal rights if objection to motion] and

(5) Any Federal Tax lien extinguished by sale. was duly scheduled in the bankruptcy, and

(6) An order authorizing-sale was entered containing all the following:

(a) A finding that due notice of proposed sale was given, and a finding that the court has jurisdiction of the matter, and

(b) A finding that a hearing has been duly had; -or, in the alternative, that there was adequate ·opportunity for a hearing,

(c) A list of the specific liens to be divested· by sale, together with an itemization of the amount each lien secures; and

(d) A finding that for each specific lien sold free and clear of the court specifies one of the five reasons for selling free and clear of a lien (or interest) set forth in Section 363 (f) [set out above], and

(e) A direction to transfer the divested liens to proceeds of sale, and

(7) A sale for a price in excess of the totals of the liens divested by the sale, and

(8) No court order enjoining consummation of the sale was filed ..."

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Glossary

Abstract of Judgment - A condensation of the essential provisions of a court judgment.

Attachment - A seizure of property by judicial process during the pendency of an action.

Certificate of Sale - A certificate issued to the purchaser at a judicial sale.

Equitable Lien - A lien recognized only in a court of equity.

Involuntary Lien - A lien not voluntarily created by the debtor.

Judgment Lien - A statutory lien created by recording an abstract of judgment.

Levy - A seizure of property by judicial process.

Lien - A charge upon property for the payment of a debt or performance of an obligation.

Mechanic's Lien - A statutory lien in favor. of .laborers and materialmen who have contributed to a work of improvement.

Notice of Cessation - A notice recorded after work stops on a construction project; shortens time for filing mechanics liens.

Notice of Completion - Notice recorded within ten (10) days after completion of a work of improvement; shortens time for filing mechanic's liens.

Notice of Non-Responsibility - Notice recorded by an owner to relieve the land from mechanics liens under prescribed conditions.

Redemption - Buying back one's property after a judicial sale.

Stop Notice - A statutory notice by a mechanic's lien claimant to reach undisbursed funds in a construction loan.

Writ - A process of court under which property may be seized and thereafter sold.

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The following documents are NOT posted to the Computer Index:

Any document normally abstracted to the property index only, on which the only property is not in the county

Agreements between government agencies

Annexations to government territory or district

Assessment district diagrams and maps

Assessments of an improvement district (or school, flood control, irrigation, drainage, streets, sewer districts) or under the Act of 1913 or 1915

Bills of sale

Bonds or notices thereof secured by improvement district assessments (see assessments above)

Building contract plans

Bulk sales or transfers

Cemetery property deeds

Certificate of birth

Certificates of Marriage

Certificates of redemption of tax sales executed by taxing authority

Chattel mortgages

Consents to transfer liquor license

Deeds for delinquent taxes to state of taxing authority

Financing statements

Highway maps

Locations of lode or mine

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,

Military discharges

Notary bonds

Notices of bulk transfer or sale

Notices of intention or intended sale

Notices of intended security agreement

Notices of completion by government body

Notices to creditor

Notices of sale to taxing authority or state

Performance bond with government agency as owner

Power of attorney by government agency

Proof of annual labor, proof of labor or performance

Release of equity executed by taxing authority

Transfer of liquor license

Will (recorded by itself)

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Estates and Interests in Real Property

Estates and Interest in Real Property

Estate in Fee

A. Characteristics

1. It is potentially of indefinite duration

2. It can be freely transferred, encumbered and inherited

3. You have the most absolute interest one can have in land

4. It can be used and enjoyed

B. Limitations -Subject only to the power of the State and Federal Government:

1. To tax

2. To take for public use upon payment of just compensation - through the power of eminent domain. (roads, highways, etc.)

3. To regulate its use in the interests of public welfare--zoning and building restrictions

4. To restrain such use as would constitute a nuisance to the public or neighbors - noise abatement or pollution

Lesser Estates

A. Life Estate

1. An estate measured in duration by the lifetime of a natural person

2. The life or lives measuring the duration of a life estate may be that of the owner or owners of the life estate. For example:

"To A for his life," or "To A and B for their joint lives and for the life of the survivor of them."

3. The life estate may also be measured by the life or lives of third persons, for example:

"To A for the life of C," or "To A for the life of the survivor of C and D."

4. Life Tenant

a. The person who is the owner of a life estate

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5. Remainder

a. An estate limited to take effect in possession after the expiration of a prior estate (life estate) usually created at the same time and by the same instrument

B. Leasehold Estate

1. A possessory estate - owner does not own but is entitled to possession

2. Not a freehold estate because its duration is fixed and certain

3. An estate for years

4. Parties - lessor (landlord) and lessee (tenant)

5. Reversion -residue of an estate remaining with the lessor which commences in possession upon the termination of a lease

C. Estates at Will

1. Month-to-month

2. Terminable by either party with reasonable notice

ESTATES ARE PRIMARILY CLASSIFIED WITH REFERENCE TO THEIR PERIOD OF ENJOYMENT

A. Freehold Estates

1. Estates of uncertain duration which are characteristic of the holding of a freeman under the feudal system.

a. Fee estates (estate of inheritance)

b. Life estates

B. Less Than Freehold Estates

1. Estates of certain duration - definite period of time

a. Leasehold (estate for years)

b. Tenancy at will (month-to-month)

2. No title passes when a less-than-freehold estate is transferred.

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ESTATES ARE ALSO CLASSIFIED ACCORDING TO RIGHTS TO POSSESSION

A. Possessory Interests Where Holder has Immediate Possession

1. Freehold estates

2. Less than freehold estates

?

B. Non-possessory interests where the holder's right to the use of the property is postponed to a future date or the right of use is limited.

Reversion - This is left after a leasehold is given.

Remainder - This is what is left after a life estate is granted with the property to go to someone other than the grantor when the life estate terminates.

LIFE ESTATES

A. Definition - A life estate is an estate created for the lifetime of a·natural person. The duration of the estate can be measured on the lifetime of the person holding it or on the lifetime of some other person.

B. Creation By Conveyance

1. To "A" for life.

2. To "A" for the life of "X11 (The interest of "A11 vests in his heirs if he predeceases "X".)

3. To 11A" and "B" for their joint lives and to the survivor of them for life. (The life estate will continue until both "A" and "B" are deceased.)

4. To "A" for life and upon his death to 11B."

C. Creation By Reservation

1. To "A" reserving a life estate in the grantor.

D. Creation By Devise - Creation set out in a will and made of record in a decree of distribution.

Examples:

1. Ray Fisher gives James Hill a place to live for the remainder of his life.

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Ray Fisher: grantor and remaindermanJames Hill: life tenant

2. Daniel Karnes and Leona Karnes grant to Susan Myer a life estate for the lifetime of Fern Mornsen.

3. To Nonnan Sada and Billy Sada for their joint lives and to the survivor of them for life or as joint tenants.

4. George Lyman for life and upon his death to George Sanders.

We can identify and define he life tenant)s interest as a present interest while the remainderman's interest is a future interest.

TRANSFER OF A LIFE TENANT'S INTEREST

A. Unless expressly restrained at the time of creation, the life tenant has the power to sell, lease, mortgage or otherwise dispose of or encumber his/her interest.

B. Anyone who acquires a life tenant's interest will have that interest terminate upon the death of the person upon whose life the life estate is based.·

C. A life tenant's interest may be transferred by operation of law.

D. The lien of any mortgage or deed of trust executed by a life tenant only, or any title acquired by foreclosure thereunder, terminates upon the death of the person upon whose life the life tenancy is based.

TRANSFER OF REMAINDERS

A. In order to transfer the remainder estate there must be determinable parties who can unite and convey a good title to a purchaser.

B. If the identity of any of the remaindermen is contingent upon certain things happening in the future (e.g., possible birth of additional heirs) the court must make a determination in accordance with proceedings prescribed by statute.

Example for contingent remainder: Title held as:

John Ray, a life estate then to Tom Ray provided Tom Ray survives John Ray.

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To A for life, remainder to B if B pay A $100.00.

A contingent remainder requires that some condition be met or fulfilled before we know for certain who the remainderman is.

OBLIGATIONS & RIGHTS OF LIFE TENANT

A. Rights:

1. All rents, profits, insurance proceeds, crop harvest

B. Obligations:

1. Proper maintenance of improvements

2. Payment of taxes, assessment & other charges

3. Payment of interest (but not principal) of trust deeds

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Holding Title

Tenancy In Common

DEFINITION

A. A tenancy in common results when two or more persons acquire title not as community property, not as joint tenants and not as a partnership.

CHARACTERISTICS OF TENANCY IN COMMON

A. Unlike a joint tenancy, a tenancy in common has only one unity...the unity of possession.

1. The co-tenants hold undivided interests which may or may not be equal in quantity or duration.

2. Interest of co-tenants may be acquired by separate conveyances and at different times.

3. Each co-tenant· holds a distinct estate which passes to his heirs or devisees at his death.

RIGHTS OF POSSESSION

A. No co-tenant can claim a specific part of the land.

1. Each co-tenant has the right to occupy the entire property and cannot exclude other co-tenants.

B. A co-tenant in exclusive possession is not liable to other co-tenants for rental.

1. A co-tenant in possession must account ·for:

a. profits received from third parties

b. profits from any use of the land which reduces the value of the land

(1) extraction of oil or minerals

C. Occupancy by one co-tenant is not adverse possession

1. Adverse possession can occur where there is an "ouster" of a co-tenant.

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a. Example: A deed by a co-tenant purporting to convey the entire estate to a stranger who then takes possession and makes improvemen ts.

CONTRIBUTIONS AMONG CO-TENANTS

A. If one co-tenant makes necessary repairs he is entitled to contribution.

B. Where improvements are made, contribution is not allowed unless the other co-tenants agreed to the improvements.

PRESUMPTIONS WHERE INTERESTS ARE NOT DISCLOSED

A. When two or more persons acquire title as tenants in common and their respective interests are not set forth in the instrument of acquisition or otherwise shown of record, a presumption arises that their interests are equal. ·

1. This presumption is not conclusive and therefore not to be relied upon for title insurance purposes.

DISPOSITION ON DEATH

A. If one of the co-tenants die, his/her interest passes to their heirs or

1. Establish of record

a. a certified copy of a decree from the decedent's probate proceedings

TAXES AND OTHER DEBTS ON THE PROPERTY

A Each must pay a part of the taxes as well as any other debt that affects the whole property. In a tenancy in common each co-tenant, whether he is occupying the property or not, must contribute to such expenses. Suppose that one co-tenant pays an expense and the other does not contribute, the co-tenant who has borne the full expense in entitled to a lien (a claim) on the share of the other co-tenant.

PARTITION

A. Partition is defined as the severance of common or undivided interests, particularly in real estate; a division into severalty of property held jointly or in common.

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Community Property and Separate Property

DEFINITION (COMMUNITY PROPERTY)

A. All property which is acquired by husband and wife or either of them, after marriage that is not separate property.

SEPARATE PROPERTY INCLUDES:

A. All property owned by either spouse before marriage.

B. All property acquired by either spouse during marriage by gift, bequest, devise or descent.

C. The rents, issue, profits and natural increase of separate property.

D. Property acquired during marriage with the proceeds of separate property.

E. The earnings and accumulations of a spouse and minor children living with him/her or in his/her custody, while the spouse is living apart.

F. The earnings and accumulations of each party after rendition of a judgment or decree of separate maintenance.

G. The earnings and profits of thspouse from the conduit of a business as a sole trader.

H. Property conveyed from one spouse to the other with the intent to make it the latter's separate property.

I. Since 1957, damages awarded to either par·ty in a civil action for personal injury.

J. Since 1959, the earnings and accumulations of the husband after an interlocutory decree of divorce and while the parties are living separate and apart.

ACQUISITIONS

A. Gift

1. Any property that either spouse acquires by gift during marriage is separate property.

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B. Bequest, D vise and Descent

1. Any property acquired by a married person by bequest, devise or descent is separate property.

C. Contract of Sale

1. Whenever property is acquired under a contract of sale, and title is conveyed to the purchaser after he marries, we must treat the property as community property.

Rule of Practice: We do not trace funds.

D. With Separate Funds

1. Property which is purchased with the proceeds from the sale or exchange of separate property is separate property.

E. One Spouse to Another

1. The deed from one spouse to the other must contain some indication that the grantor spouse actually intended to change the status from community property to separate property.

DEATH OF ONE PARTY

A. If the spouse dies, the remaining spouse is entitled to a one-half interest in the parcel. The other one-half is subject to testamentary disposition of the decedent.

1. In this situation the property' does not have to be administered by probate court. The surviving spouse has the right to deal with it, as he/&he wishes, 40 days after the date of death.

LAW CHANGES

A. Effective January 1, 1975, all property acquired by a married man or married woman is considered community property.

Vesting should read:

, a married man/woman by a deed recorded instrument no. which recites as his/her separate property.

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Add to Schedule B:

The requirement that the spouse of join in the execution if any documents to be recorded.

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Joint Tenants

DEFINITION

A. An estate owned by two or more persons, in equal shares, by a title created by a single will or transfer, when expressly declared in the transfer to be joint tenancy.

B. Property subject to joint tenancy can be real or personal.

1. Land or a portion of land such as oil and minerals.

2. Interests in land, such as easements and reversionary rights.

3. Estates in land, whether in fee, for life, for years, in remainder, legal or equitable.

4. The beneficial interest under an indebtedness evidenced by a note.

ESSENTIAL ELEMENTS OF A JOINT TEN.A.NCY (FOUR UNITIES)

A. Unity of interest-equal shares

1. Unity of interest results from the theory that there is but one estate which each tenant owns jointly with the other.

2. Each joint tenant's share or interest in the estate must be equal in quantity and duration.

B. Unity of Title

1. A joint tenancy must be created by a single will or transfer.

a. Prior to 1955, in order to create a valid joint tenancy on property where a proposed joint tenant already owned an interest, it was necessary to convey the property to a disinterested third party (strawman) who then conveyed the title to the ultimate grantees as joint tenants.

b. Subsequent to 1955 a joint tenancy can be created by a single conveyance from owners to themselves or to themselves and others.

C. Unity of Time

1. The unity of time requires that the interests of all the joint tenants must begin or vest at the same time.

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D. Unity of Possession

1. Each of the joint tenants must have the right to full possession of all the land at the time the joint tenancy is created.

NECESSITY FOR EXPRESS DECLARATION

A. A joint tenancy in land does not arise unless it is expressly declared as such in the instrument of creation.

1. The wording "as joint tenants" is sufficient to create the joint tenancy, and additional words such as "with right of survivorship" or not as "tenants in common" are unnecessary.

VESTING WHEN A JOINT TENANCY FAlLS

A. When a conveyance is made purporting to create a joint tenancy in two or more persons, the joint tenancy fails because it does not meet the proper requirements, it is held that the deed is not invalid but passes title to the grantees as tenants in common.

JOINT TENANCY AMONG MARRIED PERSONS AND OTHERS ··

A. When married persons take title with others as joint tenants, title practice requires certain recitals to be affixed to the acquisition deed before the validity of the joint tenancy can be insured.

1. The spouse not coming into title must acknowledge that the consideration paid is the other spouse's separate property and evidencing consent to the creation of a valid joint tenancy. To accomplish this husband/wife must either join as a grantor in the deed or consent to the creation of the joint tenancy by an indorsement on the deed.

Recital: ·

" husband/wife of consents to thecreation of a joint tenancy in the grantees above named in the property herein described."

2. When both spouses are coming into title with others, both spouses must accept the interest therein conveyed to them as joint tenants with those outside the marriage.

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3. When two married couples acquire title in joint tenancy title practice requires that all tenants indicate acceptance of their interest as joint tenants. This act specifically identifies the type of ownership which is being established. This practice eliminates the opportunity at some future date for one owner to attempt to prove that ownership was interested to be community property.

Recital:

"The undersigned hereby accept the interest herein conveyed to them as joint tenants."

SURVIVORSHIP

A. The chief incident of a joint tenancy is survivorship.

1. Upon the death of one joint tenant the survivors take no new title but hold the entire estate under the original grant.

2. One joint tenant cannot dispose of his interest by will upon his death. Survivorship is immediate and no estate remains in the property upon which the will can operate.

3. Upon the death of one joint tenant the surviving joint tenants hold the estate free from debts and creditors' claims against the deceased joint tenant.

TERMINATION OF JOINT TENANCY BY DEATH

A. The fact of death established the survivorship rights of the remaining joint tenants, however, to insure the title of the remaining joint tenants the fact of death must be established. of record.

1. A certified copy of the death certificate along with an affidavit identifying the decedent as the owner of the property described.

2. A certified copy of a decree determining death from the decedent's probate proceedings.

B. State Inheritance Tax and Federal Estate Tax must be considered before insuring title free of their effect.

SEVERANCE OF JOINT TENANCY BY MEANS OTHER THAN DEATH

A. Conveyance of a joint tenant's interest to a stranger.

1. If only two persons are in title, the joint tenancy is terminated.

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2. If more than two persons are in title, the joint tenancy is severed as to the interest conveyed and continues between the remaining joint tenants. The entire estate is then held as tenants in common.

B. A lease by one joint tenant is valid, however, there is some question as to whether the joint tenancy is severed.

1. If this situation is encountered, present the facts to management for a determination.

C. A contract of sale by one joint tenant to deliver a deed to his interest when a purchase price is finally paid, severs the joint tenancy with respect to that joint tenant.

1. A contract by all the joint tenants does not destroy the joint tenancy. Equitable title passes to the purchaser with legal title being retained by the vendors in joint tenancy.

D. A deed of trust by one joint tenant upon his interest does not in itself affect a severance of the joint tenancy.

1. A foreclosure of the deed of trust will affect a severance of the joint tenancy.

2. Death of the joint tenant who executed the deed of trust may eliminate the security under the deed of trust.

a. A deed of trust executed by one joint tenant should not be insured without an appropriate qualification, and such deed of trust should not be ignored upon the death of the trustor.

E. An execution of sale of a joint tenant's interest severs the joint tenancy leaving title in the execution purchaser and the remaining joint tenants as tenants in common.

1. The effect of redemption by the debtor as to restoration of the joint tenancy is undecided for title insurance purposes.

F. If one joint tenant is adjudicated a bankrupt, involuntary transfer of his interest to the trustee in bankruptcy operates to sever the joint tenancy.

G. A declaration of homestead executed by one of the joint tenants creates no new or additional title, but only attaches certain privileges (e.g. - exemption from forced sale for debts) to the title, therefore it has been held that the declaration of homestead does not disturb the joint tenancy.

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ADVANTAGES AND DISADVANTAGES OF JOINT TENANCY

A. Advantages

1. The incident of survivorship makes probate proceedings unnecessary to clear title held in joint tenancy.

2. A surviving joint tenant holds title free from debts and claims against the deceased joint tenant.

B. Disadvantages

1. The possibility that the joint tenancy may be severed by a transfer of one co-tenant's interest either. voluntarily or by operation of law.

2. The joint tenant who dies first has no power to dispose of his interest by will.

3. Between married joint tenants the divorce court has no power to award true joint tenancy property to the innocent .spouse.

4. Tax disadvantages

a. Joint tenancy often makes it impossible to obtain the benefit of significant tax savings that otherwise would be readily available through careful estate planning.

b. Only an attorney is permitted to make a recommendation in regard to the way a person should hold title to real property. As a title insurer we must be careful to avoid any remarks which could be interpreted as advice.

A CORPORATION HAS THE POSSIBILITY OF CONTINUOUS OR PERPETUAL EXISTENCE AND HAS NO SURVIVORSHIP TO EXCHANGE WITH AN INDIVIDUAL JOINT OWNER. THEREFORE, A CORPORATION CANNOT HOLD TITLE AS A JOINT TENANT.

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Community Property with Right of Survivorship

DEFINITION

A. A California form of joint ownership with right of survivorship created between spouses

B. Property can be real property or personal property but not a financial banlc account.

ESSENTIAL ELEMENTS OF COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSIDP

A. Law is new (created as of July 1, 2001)- so law is not well defined by case law.

B. Appears to require unities of time, title and possession and community property - similar in all respects to joint tenancy but only for married spouses.

C. Reason created: capital gain benefits of community property while also having the benefit of being a non-probate transfer. IRS had taken position that (a) upon the death of a spouse, both halves of community property received a stepped-up in basis to value at date of death, and (b) joint tenancy property did not receive a step-up in basis for both halves- only the decedent's half received step-up in basis.

EXPRESS DECLARATION REQUIREMENT

A. The law makes the "acceptance" of the vesting by the spouses optional: "which may be accepted in writing on the face of the document by a statement signed or initialed by the grantees,... "

B. The reason this optional acceptance was included in the law is not clear.

C. Issues: having an acceptance by the grantees on the deed would require that the grantees execute document (which can not leave possession of escrow) and would have to be notarized.

VESTING WHEN A DEED FOR COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP FAILS

A. Case law has not defined what happens when a conveyance fails due to inadequacies in the deed. Similar to joint tenancy, the deed will probably still pass title to the grantees as tenants-in-common as community property.

TERMINATION

A. BY DEATH OF SPOUSE: Upon the death of a spouse, title to the property will vest in the surviving spouse. A specific "Affidavit - Death of Spouse" (Community Property with Right of Survivorship) should be recorded together with a certified copy of the Certificate of Death.

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B. BY OTHER METHODS OTHER THAN DEATH:

a. This manner of holding title may be terminated by either party in the same manner which a joint tenant may terminate a joint tenancy. (Civil Code Section 682.1)

b. Special law regarding divorced spouses: Effective January 1, 2002, a new California law provided that dissolution or annulment of a marriage revokes a bequest of property made by a non-probate means (i.e. joint tenancy, community property with right of survivorship, etc.). The law already automatically revokes bequests to a former spouse made in a will. Please see the Special Supplement for more details. ·

ADVANTAGES

A. Surviving spouse receives step-up basis for both halves of the property and has the benefit of a non-probate transfer immediate on death.

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SPECIAL SUPPLEMENT TO JOINT TENANCY & COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP

REVOCATION OF NONPROBATE TRANSFERS TO FORMER SPOUSE

A. NewLaw·

Existing California law provides that dissolution or annulment of a marriage revokes a bequest of property made by will to a former spouse (except under certain circumstances).

Effective January 1, 2002, AB 873 provided a similar result for transfers to a former spouse which are effective upon death by means other than a will such as (a) real property held as joint tenants, or (b) real property held as community property with right of survivorship. However, the new law does not revoke such transfers if at the time of death if either (a) the transfer was not subject to revocation, or (b) where there is clear and convincing evidence that the transferor intended to preserve the transfer to the former spouse. Whether these circumstances exist is obviously a matter offactual determination.

B. Statutory Protections for Real Property

For real property transferred at death by a non-probate method, the new law provides statutory protections (see Probate Code Section 5602) for a bona fide purchaser who subsequently purchases or encumbers the real property for value and who in good faith relies on an affidavit or declaration by the surviving party which affidavit or declaration contains all of the following information given under penalty of perjury of the laws of the State of California:

1. The name of the decedent.

2. The name and place of the decedent's death.

3. A description of the real property transferred to the affiant or declarant.

4. Either of the following statements as appropriate:

a. The affiant or declarant is the surviving spouse ofthe decedent.

b. The affiant or declarant is not the surviving spouse of the decedent but the rights of the affiant or declarant to the described property are not affected by Probate Code Sections 5600 or 5601.

Probate Code Section 78 defines "surviving spouse" in the negative as to who does not qualify as a surviving spouse. Since the issue of who qualifies as a "surviving spouse" can be complicated, anyone who is not sure of their status as a surviving spouse should be referred to their own legal counsel.

This law is not limited to only real property interests but also includes contracts, mortgages, promissory notes, trusts, etc. (see Probate Code Sections 5600, et seq). Furthermore, a provision in a trust which appoints a former spouse as a successor trustee or grants a power of appointment to a former spouse are also included as "non-probate transfers" within the meaning of the statute (See Probate Code Section 5600(e)). Please note that the affidavit/declaration safe-harbor procedure set forth above only applies to real property.

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C. Affidavit or Declaration

The law requires good faith reliance on the information in the affidavit or declaration which contains all the required elements set forth in Section B above. The law does not impose any independent duty of inquiry into the information set forth in the affidavit or declaration. However, if there is actual knowledge that the affidavit or declaration is inaccurate, please do not rely on it.

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Claims, Bad Faith & Other

I THINK

I'M HAVING

STRESS!

Claims Bad Faith and Other

This session is entitled "Claims, Bad Faith, and Other." It is a very interesting topic and one with which I am involved on a daily basis. One of the key things that we find in the title insurance business is a lack of understanding on the part of most title people about when a claim arises and the nature of the claim and how it should be handled. Let me explain. A claim generally originates· through some defect either in the title or that prevents the intended use of the property. Our first notification comes in some instances from a telephone call usually in the manner: "I have a problem with my fence line." Or, "My neighbors have this problem with their fence line." An then they go on to give us some definition of what the problem is, usually not very accurate and not very succinct. They go on to say, "Would my policy of title insurance or does a policy of title insurance cover this kind of a transaction?" Those are the key words right there. Upon receipt of that kind of information, everybody in the title business needs to be trained to be alert to the fact that a potential title claim is in the offing. The policy itself makes specific reference to the manner and the time frame in which a notice of claim must be presented. All too often, however, these telephone calls come to the switchboard and the switchboard operator dutifully listens and then either tries to make a determination as to who the call should go to or, in some cases which are scary, tries to give some sort of a response to the question that is asked, not realizing that this is a potential claim. Those responses oftentimes are inaccurate, they don'tcover the details that were involved, and unfortunately I have to say, are given by people who are less than adequately trained to handle this type of an inquiry. The consequent result is that a great deal of liability is assumed right up front by people who unknowingly try to respond to a potential claim situation. Everyone in the title business, and particularly those assembled for this seminar, needs to be aware of the possible manners in which claims are presented and to understand that when those kinds of questions are asked, they almost always are a precursor to the filing of a claim.

One important consideration in claims' handling is that a claim, once presented, never goes away. People seem to think that if they can pacify the person making the phone call, that will be the end of the story. I guarantee you that it is not. If in fact a title defect does exist and the person took the time and the trouble to make the phone call that claim, while it may not have been accorded the status of a claim by the proper filing of notices under the terms of the policy, is a claim nonetheless and must be dealt with in a very expeditious and professional manner. The failure to do so, I guarantee you, will come back to haunt you for many, many months, and oftentimes years.

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So what am I taking about? How do we handle claims? First and foremost, people who are involved in claims are specially trained. When that kind of a telephone call is presented, the person answering the phone needs to be aware of the proper company procedure for handling the situation rather than trying to assume the responsibility of being helpful and answering the customer's question. I realize that this is a very delicate situation that oftentimes creates public relation problems because you are trained at the outset to always try to answer the customer's questions. But believe me, there are some tips that do become available and one needs to learn what those tips are because the wrong answer can really bury a title company in a loss claims adjustment procedure.

By case law in California, there are several dates on which the insured property may be valued when a title loss has occurred. The cases generally hold that the valuation is done as of the date of the discovery of the defect in title, regardless of what the date is on the policy and regardless of the date of settlement of the claim. In the 1986 landmark case of White vs. Western Title Insurance Company, which dealt with claims settlement procedure and bad faith allegations, the Supreme Court allowed the insured to introduce at trial two of three settlement offers which were made by the insurer. In a very strongly :worded dissent by the Chief Justice, he said, "Freewheeling settlement negotiations and exploratory offers will, I suspect, become things of the past as insurers balance present and future liabilities and interests. The effect may well rebound to .the disadvantage of plaintiffs who will find it harder to negotiate "with constrained insurers." Justice Grodin in a concurring dissenting opinion in the White case, took issue with the exclusion of Western's third and highest settlement offer, which was nearly twice the amount of the insured's loss, when he said, 11What bothers me -in this case, and I take it our dissenting colleague's as well, is that the two :settlement offers which were admitted in evidence support the plaintiffs theory of bad faith only weakly. The third settlement offer, which might have been helpful to the jury's evaluation despite its somewhat disparate context, was excluded. Once the trial court decided to admit the first two offers, I believe unlike the majority that it should have allowed the defendant to complete the picture." We will talk further about the ramifications of the White vs. Western case, but needless to say, it has put into issue some very important considerations in the area of loss claims settlement negotiations and the ultimate effect of bad faith charges.

Under the terms of the policy, an insurer's responsibility to investigate and process legitimate claims does not arise unless and until the insured furnishes the insurer under the terms of the policy, which is a contract, a timely notice of claim and proof of loss. It is common practice for title companies to have their own in-house counsel investigate the facts related to any claim. When investigating for the insured, counsel should determine

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whether the insurer's error was a proximate cause of the loss. Otherwise, there is no ground for recovery.

In the case of Safeco Title vs. Moscopoulis, decided in 1981, it was determined that the title insurance company had agreed to provide a defense to the insured, but at the same time sought to obtain an adjudication of its obligation to the insured by way of declaratory relief. In the case, the title insurance company denied that it had a duty to defend its insured but provided its insured a defense under a reservation of rights. Safeco then brought the declaratory relief action against Moscopoulis seeking adjudication of its responsibilities to provide a defense to its insured. The Court of Appeal held that Safeco had no duty to provide a defense to its insured and having undertaken the defense with a reservation of rights was entitled to recover judgment against its insured for the amount of costs and fees that it had expended in providing that defense.

When the insurer files an action for declaratory relief as to its duties under the policy of title insurance and the defendants then bring an action for damages arising from the same transaction, a court may abate the damages pending the resolution of the declaratory relief action. The CLTA Standard Policy provides that the insurer shall, at its own cost, provide for the defense of such insured in litigation in which any third party asserts a claim adverse to the title or interest of the insured, but only as to those stated causes of action alleging a defect, a defective lien, or encumbrance, or other matter insured by the policy. That same provision in the CLTA policy also provides that the title company has the right to select the counsel of its choice, subject to the right of the insured to object for reasonable cause, to represent in the insured as those stated causes of action for which it has policy liability. The company will not pay any fees, costs, or expenses incurred by an insured in the defense of those causes of action which allege matters not insured against by the policy. That is what we mean when we talk about. a reservation of right.

Of particular note is the fact that a 1985 Washington Court of Appeals case involving Transamerica Title held that when the insurer has exercised its option to pay policy limits in full, that act terminates its liability and the insurer has no liability for attorneys' fees incurred after the policy limits because there is no longer a duty to defend. This is a good case for title insurance claims administration but that same posture has not yet been adopted by the California courts.

An insurer who has subrogation rights under the policy with the insured often does not pay the insured immediately, but first brings an action for declaratory relief against the third party person who is termed a "tort feasor." A tort feasor being defined as somebody who commits a tort against

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another party, usually negligence. A declaratory relief action is permissible ( under these circumstances, but an action by the insurer for a money judgment against a third party is not. The right of subrogation under the title policy is a very important tool in the settlement of any loss claim. In many cases a third party tort feasor is the grantor of the insured. When the title insurer is negligent in failing to discover the title defect, that third party tort feasor normally cannot maintain an action for negligence under a third party beneficiary theory against the title insurer or its failure to discover the title defect. In most instances, the third party tort feasor is not an insured of the title insurer. Occasionally, if the third party grantor is insured because it receives a seller canyback deed of trust as part of the consideration of the sale, they may be insured under a joint protection policy. Even so, the mere fact that a third party tort feasor is also an insured should not preclude the insurer from enforcing its subrogation rights against the tort feasor. Under these circumstances, the third party tort feasor often has actual knowledge of the defect and has been contractually bound to convey the property to the grantee before the insurer has become involve. As such, the ·balance of equities are usually decided in favor of the insurer. A very good example of a title insurer's right of subrogation is found in the 1975 American Title vs. Anderson case in California in which persons who purported to be property owners conveyed their title to certain real property to an insured. Another action determined that the vendors did not have title to the subject property and that the insureds had acquired nothing by the conveyance from them. The insurer settled its claim with the insured and filed suit against the vendors based on their right of subrogation under the title policy. The court held that the vendors were liable to the insurer because "the sin of American, the title insurer, was one of omission while the sin of the defendants, the vendors, was one of commission and one which was the genesis of the problem." The court went on to note that American's issuance of the title insurance policy did not cause the failure of the title. Finally the court held that the amount which American would be entitled on subrogation would be limited to the amount that the insureds could have recovered had they proceeded directly against the vendors.

One of the biggest areas of concern in claims settlement administration is in the area of litigation expense. Expenses incurred in defending an insured's title that are within the policy's coverage are an additional aspect of the coverage. The policy coverage extends not only to the face amount of the insurance, but also to the costs, attorneys' fees, and expenses incurred in defending insured matters. Likewise, when the insurer improperly rejects a tender of defense and the insured defends, the insured may recover its costs of defense as a compensable item under the policy. The insurer may recover its defense costs if there were no grounds for the defense provided the insured was advised that the insurer reserved its right to recover its defense costs.

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The title insurance policy is a contract of indemnity where the title company agrees to indemnify the insured against loss from any defect of title, liens, or encumbrances on realty in which the insured has an interest and that have not otherwise been excluded or excepted from coverage. The exact nature and extent of the insurer's liability will depend initially on whether the insured is an owner or a lender. Further considerations also include whether there is a complete loss of title or only an encroachment or encumbrance.

Generally, when we are dealing with a loss claim for administration purposes, the most significant matter, in addition to litigation costs, is what is the measure of damage. In dealing with a lender, it's based on the extent to which the security has been impaired by the defect. This is measured by the difference between the value of the security with the defect and its value without it. When there is a complete title failure and the value of the secured property equals or exceeds the amount due the insured, the measure of recovery is the amount due on the note up to the face amount of the policy. In other words, the lender is not entitled to a windfall profit by taking full policy limits if in fact his note has been partially paid. The recovery is limited to the value of the property even when the amount due on the note exceeds the value of the property. This is one of the reasons why we hesit te to insure for amounts in excess of the fair market value of the property. If for some reason the insured's loss exceeds the policy limits, the insurer might be liable for the full amount of the loss if a negligence theory of liability is applicable to the insurer. The measure of damage for negligence is much more lenient that the measure based on the policy terms. It is not unusual for an insured lender to sustain no loss from an encroachment or a prior encumbrance because the borrower will continue to pay the obligation or the remaining value of the property will be adequate to fully compensate the lender. The insured has the burden of establishing the amount of the loss. When there is a complete failure of title, the measure of recovery for an owner under an owner's policy is the value of the property up to the policy limits.

A very significant matter in loss claims administration was put forth by the California Appellate Court in the Crane vs. Security Title case in 1935 which said essentially that a title insurer may be liable beyond the policy limits for consequential damages that are proved to have arisen naturally and legally from the loss. Following this theory, any breach of an implied covenant of good faith in a insurance contract gives rise to an independent tort action for bad faith. In addition, the breach of the implied covenant may constitute a breach of the policy. Accordingly, the insured may recover additional damages proximately resulting from the breach of the policy. One of the first significant cases that followed this line of reasoning was the Jarchow vs. Transamerica Title decided in 1975 which allowed recovery for emotional suffering without bad faith and physical injury. This decision has been roundly criticized and in

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all probability should have been decided on the question of bad faith. But this ( particular case is one that has rocked the title insurance industry to its very foundations. We'll talk more about Jarchow a little later. In some rare instances, it's possible to determine that an intentional wrongful act by an employee of the insurer has occurred. Actions of this nature are normally beyond the scope of the employment if such employees and the insurer ::..; not liable. It is not, however, difficult to visualize some circumstances undc:which the company will be held responsible not as an insurer but as an employer of a dishonest employee.

From this very brief discussion, it is very obvious that the first line of defense in any kind of a claim situation is to have a well-prepared, well reasoned and thoughtout policy of title insurance which contains the necessary exclusions and exceptions to coverage which gives us the opportunity to pursue adequate defenses under the terms of the tide policy. I recognize that this sounds like we don't want rur£ losses. I have to tell you that that theory is absolutely true, as I have already pointed out. Title insurance rates are not based on any kind of an actuarial basis which permits us to predict future losses. In loss claims administration, careful attention has to be given to the various exceptions and exclusions found in each individual policy of title insurance. Each policy, guarantee or reports sets forth its own specific set of exceptions and exclusions to liability. Because these provisions vary widely among policy types, careful scrutiny is absolutely necessary.

The insured's failure to provide timely and complete notice of a problem to the insurer in accordance with the provisions of the policy constitutes a breach of the insurance contract and may be a bar to recovery. A lack of timely notice, if not promptly objected to by the insurer, cannot be relied on except to the extent that the insurer can show that it was prejudiced by the lack of a timely claim. Because the primary reason for notice requirements is to enable the insurer to evaluate and handle claims adequately and promptly, it is always in the insured's best interest to give timely and appropriate notice in accordance with the terms and provisions of the policy.

A very important tool that we utilize in the policy is the insured's obligation to cooperate with the title insurer in defending the claim or in otherwise establishing title as it was insured. When the insured fails to comply with the policy in securing or permitting the insurer the right and opportunity to defend, courts in other states at least have held a refusal to be a bar to any recovery under the terms of the policy. Other defenses include policy exclusions for loss or damage created, suffered, assumed, or agreed to by the insured.

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Keep in the back of your mind the concept that, regardless of the fa amount of the title policy, the only amounts that are paid are those that are defined by the terms of the policy as acrual loss or damage. This was brought clearly to light in two cases. One in 1971 in California involving Transamerica Title and one in 1978 involving Transamerica Title in the State of Washington. The general facts situation in both cases was essentially that a lender purchased a promissory note at a discount and obtained a title policy based on the undiscounted amount of the note. Later a complete loss on the lien transpired and the value of the property that was security for the insured lien equalled or exceeded the amount due on the note. Even though the policy had been written for the full face value of the note, the only actual loss that was sustained by the insured was the discounted value of the note and the court upheld that as being the major damages under the terms of the policy.

Oftentimes litigation will transpire over the title to real property that will delay a property owner in the planned development of a property. During that period of time the owner will incur incidental damages because of carrying costs relative to existing financing. Ticor Title had a case in California in 1987 under similar type circumstances and in that case the court held that the insured was not able to recover from the insurer for those incidental damages because there was no causal connection between any delay and a covered title defect. In a New York case decided in 1971 involving Lawyers Title Insurance, a New York court held that because a policy of title insurance is a contract of indemnity, an owner who sustains a loss is only able to recover the actual Io::· sustained, which does not include the unpaid portion of the purchase price a.. the insured property. In 1984, a Colorado court in a case involving Transamerica Title held that the insurer has no obligation to·indemnify the owner for a loss or pay for defense costs that were incurred before the tender of defense is made by the insured.

When title insurance companies handle escrows, a common issue that was litigated in 1986 in a case involving Ticor Title Insurance Company was the amount, if any , of the title insurer's liability for punitive damages for its failure to act on proper instructions of the parties. In that case, the court stated, and I quote, "Punitive damages are appropriate if the defendant's acts are reprehensible, fraudulent, or in blatant violation of law or policy. The mere carelessness or ignorance of defendant does not justify the imposition of punitive damages. Unhappily, as a society, we must tolerate without added retributing all those too common lapses in ourselves. Punitive damages are proper only when the tortious conduct rises to levels of extreme indifference to the plaintiffs rights. A level which decent citizens should not have to tolerate."

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An area that created a great deal of consternation in the title industry ( for a long period of time apparently has now been resolved with the passage of Insurance Code Sections 12340.10 and 12340.11. The theory of abstractor's liability was not unique to California but it gained a Jot of attention because of the wide use of title insurance in the state. It is now clear under those statutory enactments that any title search or examination is performed by the insurer solely for the purpose of seeking to evaluate its underwriting decision in issuing the policy and not for the benefit of the insured. This has lead to an easing of the heavy burden in the area of abstractor's liability for title insurance companies. This is one of the primacy arguments that we utilize in refusing to give letter reports and other kinds of written infonnation and, even to some extent, to give verbal responses to requests for infonnation, because without the necessary exculpatory language contained in the preliminary reports, commitments, and binders, we can have abstractor's liability imposed upon us and that liability is unlimited. It extends to all damages which flow from the incorrect or the negligent material furnished. So even though you write some sort of limiting language on the so called letter report or whatever evidence that you give, if the case is tried on the basis of abstractor's liability and negligence, such protestations to the contrary notwithstanding, the measure of damage would be for all damages which flow from the negligent act. This is an extremely important point and certainly one which you should carry back with you to your local offices. I caution you to use an extreme amount of care when providing any kind of title evidence other than the regularly adopted forms which have been provided by the California Land Title Association or by the American Land Title Association.

The next area that I want to cover is a relatively recent development in the law as far as title insurance is concerned. It has been around for a number of years under other insurance contracts but only recently seems to have had an application in the area of title insurance. That is in the area of bad faith. Under California law, an ins er may be liable for the tort of bad faith if it fails to deal fairly and in good faith with its insured by refusing without proper cause to compensate its insured for a loss covered by the insured's policy. The 1986 landmark case of White vs. Western Title carne very close to ruling that an insurance company's failure to settle a claim was bad faith per se. The White vs. Western case has been roundly criticized by a number of different commentators and even by the courts. An insured, under a 1982 Safeco Title case, was determined to have no cause of action against an insurer for common law bad faith or for violation of the Insurance Code which deals with unfair and deceptive insurance practices when there is, in fact, a good faith dispute with regard to policy coverage.

The 1987 California case involving Ticer did provide a little bit of help for us in these areas of bad faith when it said that an insurer must fulfill its

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obligations under the policy of title insurance in good faith, but there is nothing improper about the insurer taking its own economic interest into account as long as it does not violate its obligations. It went on the say further that the duty of good faith and fair dealing does not require an insurer to pay every claim presented to it nor does it require an insurer to pay meritless claims. In this regard, a title insurer is not a fiduciary to the insured, but it does have a duty of a fiduciary nature not to profit at the expense of its insured. The duty that the insurer owes to its insured may be breached even though it performs its expressed contractual undertakings. And this is a tough law.

In 1988, a 9th Circuit federal decision involving Transamerica Title reversed a trial court decision in favor of the title insurer that had included a settlement with third parties without participation of the insured. In that case · the Court of Appeals held that the insurer had benefitted itself at the expense of the insured by not giving equal consideration to the interest of the insured. It appears that that decision is erroneous because the underlying claim by the third parties against the insured's charge that the latter had committed fraud, breach of contract, and a breach of fiduciary duty. Unfortunately, for the insurer, it appears that the settlement that was entered into between it and the third parties took on the appearance of impropriety because the insured's lawyer was excluded from the settlement negotiations.

If the insurer's liability is fairly debatable or there is a reasonable basis for refusal to settle for policy limits, it has been held in an Arizona court that as a matter of law the insurer did not act in bad faith. That was a 1984 case involving Arizona Title Insurance and Trust Company. In California since 1985 and insurer may now be allowed to assert an affirmative defense of comparative bad faith and that's an important step forward in this particular area. An insurer is not require to pay all claims presented by an insured. The insurer owes a duty to other policy holders and the stockholder.s of the company not to dissipate its reserves through the payment of meritless claims. That was a 1983 California case involving the Blue Chip Stamp Company. In a Lawyer's Title case decided in 1984, the court determined that it is not bad faith for an insurer to institute an action for declaratory relief under the title insurance policy to avail itself of the right to pursue discovery.

Why am I making such a big thing out of the area of bad faith? If you will go back just a little bit in our discussion, you will remember that I pointed out that title policies only pay for actual loss or damage sustained regardless of what the face amount of the policy recites. This is not true in the case of a bad faith claim. If bad faith can be established and upheld, then a title insurance company is responsible for nil damages, both general and punitive, which can be assessed, including payment of all attorney's fees and costs. This

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is a very important consideration and probably one of the first cases that came down the pike involving title insurance was the 1975 case of Jarchow vs. Transamerica Title in California as I pointed out earlier. While that particular case did not revolve directly around the issue of bad faith, it did impose for the first time liability on title insurance companies for negligent actions outside of the normal scope of the terms of the policy. The Jarchow case was a situation involving an easement in Orange County in Santa Ana. The owners and the insureds came in to the title company and informed the title officer that there was an easement across, as I recall, the rear 20 feet of the property. The title officer very flippantly responded that that couldn't be so because the company didn't make mistakes. The people went on down the road for a few months and came back and reasserted their claim that there was an easement not disclosed on their title policy across the rear 20 feet which was preventing them from the sale and development of their property. Again, they were informed by a responsible officer in the company that the company didn't make mistakes and that an allegation of a missed easement simply couldn't be true. Needless to say, the case ultimately wound up on court. The plaintiffs prove that there was a great deal of mental distress caused by the refusal of the company to properly investigate the claim and to resolve the situation. That refusal created a major trauma and significant mental distress in the lives of the insured. That decision represented the first indication that liability beyond the face amount of the policy and that coverages not included within the specific terms of the contract could and would be assessed against title insurance companies. As I pointed out, bad faith was not directly involved in that case although it should have been alleged. They simply went off on the basis of mental distress as opposed to bad faith.

Obviously, since the Jarchow case in 1975, title insurance companies have taken a far different look at the liability of the policy and the manner in which they now process claims. Remember, my initial caveat: claims don't go away. Some claims even seen to take on a life of their own. Again, I must reiterate to you that the manner in which a claim is first presented to the company oftentimes is very obscure and can involve people who are not necessarily qualified to handle that aspect of the business. All people who have the ability to answer a telephone should be schooled in the proper procedures for handling a claim or for identifying when a potential claim is presented to the company. The area of bad faith can most certainly be attributed in large measure to the inexperience of title company personnel in handling loss claims where the assertion of bad faith is made and the award is granted. Remember, the measure of loss in a bad faith claim can include not only actual damages but punitive damages as well and the award for these kinds of claims can be absolutely devastating and astronomical. The area of bad faith claims is one which takes substantially more time to develop and I could spend an entire day talking on the subject. What 1 have given you is a

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not Transarnerica's $100,000 settlement check satisfied its duty to protect its insured. The testimony of Transamerica's agent showed that he was unaware of his duty to do what was in the best interest of the insured - very damaging testimony. Moreover his actions, which included negotiating with other lienholders and paying the insured's competitor $100,000 for a release that proved valueless to the insured, showed his failure to assume the duty of good faith and fair dealing. This was a tough case. Transamerica negotiated for settlement of a loss claim and paid $100,000 and bought a release which was valueless to its insured. It couldn't get the $100,000 back and the court still held that because the agent handling the transaction for Transarnerica was not aware of his duties to negotiate and deal fairly was held liable on a charge of bad faith. Just for your information, that case involved a $1.8 million dollar punitive damage award. In that case, Transamerica sought to claim credit for the $100,000 that they had paid and the Cotirt of Appeals disagreed with all of their contentions and upheld the $1.8 million award. It is absolutely incomprehensible that Transamerica and the attorney that it hired to settle a claim not only disregarded the interest of the policyholder, but testified at trial that they did not know that there was an obligation under the policy to act in the best interests of the insured. You won't find this language in the policy, but it certainly is the law of the land. And even though it hurts and even though it would appear that we can protect the company and save money for the company, we lose in the long run because our ultimate responsible is not to the company, but to the insured to deal fairly and in good faith.

This concludes a very brief overview of title insurance claims handling and bad faith. Again, I am indebted to John Hosack, author of the book entitled, California Title Insurance Practices from which I have obtained much of the reference material for this presentation.

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