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Law360 (April 9, 2020, 3:24 PM EDT) --
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| Courtney Bristow |
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| Michael Rosenberg |
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| Bret Salzer |
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| Dax Scharfstein |
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| John Thomas |
Title Company Readiness
Before reaching any point of no return in respect of a loan closing, you must have been provided with certainty that (1) the title insurer's office is open, (2) it is able to receive overnight packages of recording documents, (3) it is able to receive and send wires, (4) it is and is expected to remain solvent, and (5) it is otherwise ready, willing and able to close.
As always, if possible, funding should be through a national title underwriter; but if you accept title agents, and it is not practicable to require funding through a national title underwriter, closing must proceed through the title agent with a closing protection letter.
Recording Office Closures
Next, confirm that the recording office is and is expected to remain open. Among the resources to monitor recording office closures is the American Land Title Association website's link to the Recording Jurisdiction Operating Status Report.[1] This information is constantly changing so must be confirmed on a daily basis until the closing date.
Closing When the Recording Office Is Open
Whether the recording office is open or closed, title insurance must cover the gap between the last time title was, or could have been, checked and the time when the mortgage is actually recorded (as shown in the recording information in the final title policy). In other words, you must have contractual certainty that an exception cannot be raised in the final title insurance policy if an intervening lien or other title exception is filed or recorded after the loan as funded but before the mortgage is recorded.
To that end, (1) the title company's agreement to provide coverage for the gap is contained in our standard title escrow letter, (2) the final pro forma title insurance policy (reflecting no intervening liens on Schedule B), is attached to the title escrow letter, and (3) the title insurer agrees to be bound by the final pro forma title insurance policy, and to issue the final title policy with no added title exception for any intervening lien or any other matters on Schedule B.
If your closing protocols require recording (or at least that the record documents be presented for recording, at the recorder's office no later than, say, 3 p.m. on the funding date), then this too must be reflected as a funding condition in the title escrow letter.
Closing When the Recording Office Is Closed
Since the COVID-19 outbreak, once a recording office closes, there is no assurance as to when it will reopen. A prudent lender (and title company) will then generally deem itself unable to proceed with a closing until it receives assurances that the recording office will be open and able to accept the record documents for filing or recording.
However, if a physically closed recording office nevertheless continues to provide e-recording, and all other considerations permit the closing to occur, you may wish to proceed. If so, you will need confirmation from the title company that the record documents can be offered for e-recording and the recording process can be completed, including delivery of copies of recording receipts showing the recording information, within three (3) business days from the date of funding.
Even in a gap closing scenario, if the recording process is not completed within three (3) business days of funding, the mortgage may not constitute a valid, enforceable and perfected lien in accordance with your requirements. Where possible, when e-recording, we endeavor to obtain recording information on the same day as loan funding.
Of course, the devil is in the details since e-recording procedures vary among recording offices. For example, e-recording can, perhaps surprisingly, take longer than manual recording, so we practice overcommunication with title insurers to determine exactly how quickly we will receive recording information if the record documents will be e-recorded. If the e-recording process cannot be completed within three (3) business days of funding, closing is generally not advised.
Legal Issues With an Indefinite Gap
Since your lien is not perfected until the mortgage is recorded in the recording office, if the recording office is closed and not offering e-recording, the risks associated with nonperfection persist until the office is reopened.
Perhaps most notably, if the mortgage is not recorded for 10 days or more after funding, a question may arise as to whether the closing and perfection of the mortgage lien are a simultaneous exchange of value. If not, the lien is at risk of being disregarded as a preferential transfer by a bankruptcy court should the borrower file for bankruptcy within 90 days following the date the mortgage was recorded.
While a borrower bankruptcy would typically be covered by the nonrecourse guaranty (bankruptcy by borrower), obtaining and collecting on a judgment based on the nonrecourse guaranty is unlikely to be a satisfactory substitute for the ability to foreclose.
The provisions of the title policy jacket of a lender's policy of title insurance provide some protection in the event of a delay in recording, but we advise lenders not to rely solely on these protections. Specifically, Section 13 of the Covered Risks in the 2006 ALTA Loan Policy of Title Insurance jacket provides that, subject to the exclusions of coverage, the exceptions from coverage in Schedule B and the conditions, the title insurer insures against loss or damage sustained by reason of:
Section 6 of the Exclusions from Coverage in the 2006 ALTA Loan Policy of Title Insurance jacket provides that the following matters are expressly excluded from the coverage of this policy, and the company will not pay loss or damage, costs, attorney fees or expenses that arise by reason of:13. The invalidity, unenforceability, lack or priority or avoidance of the lien of the Insured Mortgage upon the Title:
(a) resulting from the avoidance in whole or in part, or from a court order providing an alternate remedy, or any transfer of all or any part of the title to or any interest in the Land occurring prior to the transaction creating the lien or the Insured Mortgage because that prior transfer constituted a fraudulent or preferential transfer under federal bankruptcy, state insolvency, or similar creditors' rights laws; or
(b) because the Insured Mortgage constitutes a preferential transfer under federal bankruptcy, state insolvency, or similar creditors' rights laws by reason of the failure of its recording in the Public Records
(i) to be timely, or
(ii) to impart notice of its existence to a purchaser for value or to a judgment or lien creditor.
While we believe the failure to record timely in the event of an indefinite recording office closure is a covered risk under the title policy, no lender should blindly proceed with an ill-advised closing that may be subject to a preferential transfer claim under federal bankruptcy laws only to be relegated to a title claim for recovery of the amount insured under the title insurance policy.6. Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that the transaction creating the lien of the Insured Mortgage, is
(a) a fraudulent conveyance or fraudulent transfer, or
(b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this Policy.
In conclusion, a loan should never be closed if the relevant real estate recording office is closed or expected to close. Exceptions may be cautiously considered in cases where the mortgage and other record documents can be electronically recorded with the recording office despite the closure.
Courtney Davis Bristow, Michael A. Rosenberg, Bret Salzer, Dax Scharfstein and John Thomas are partners at Cassin & Cassin LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.alta.org/business-tools/county-status.cfm.
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