Posting for

Tuesday, June 9, l998

by: Bert Rush

brush@firstam.com

REVOLVING LIENS/MUNICIPAL LIENS/RELEASE TO COME

(Yeah, I know it's Wednesday--yesterday my computer froze up.)

In-house counsel Don McKelvey (Portland) asks that this be posted in hopes someone has an idea to help resolve this pending claim. I also hope that if someone else might be vulnerable to such a weird problem they won't be blindsided by it--as we have been in Portland.

Chronology: In 1990 one Zupsic purchased an older apartment building from Mr. and Mrs. Biedritzky under a land sale contract.

In April 1994 the City of Portland Bureau of Buildings recorded a document titled "Notice of City of Portland Code Violation and Possible Lien Against the Property." This Notice gives the name of the property owner (Biedritzky), the street address, legal description, etc., then states:

To view a copy of this stinker just double-click on the link below.

Later in 1994 Zupsic refinanced his land sale contract and we were asked to insure the new lender. Escrow contacted the Bureau of Buildings and got a payoff demand, which was paid through escrow--whereupon we insured the new lender with no exception for the municipal lien. (The Biedritzkys were now paid off--and have left the scene.)

In December 1995 Zupsic sold the property to a new owner who was insured by First American with no mention or exception for the municipal lien.

Our insured owner has now been visited by the City. The City claims the original code violations have not been remedied and, therefore, additional fines/penalties are due. Code violations consist of 15 units in a building with parking for 12. The problem units appear to have been added to basement area, and have the additional problem of insufficient light and air plus fire safety issues. The insured has also raised the issue of now being told (apparently by the City) that they must comply with the Americans with Disabilities Act. So there's a mix of potentially covered and non-covered issues.

On the other hand, obviously, the new owner purchased the property "as is" and in fairness should be willing to deal with what was visible and apparent when he or she purchased.

The policy which we issued is the new form, containing the standard exclusion for exercise of governmental police power except where "notice of violation thereof" has been recorded.

I think there is coverage for something--such as fines/penalties which became a lien before our policy date (and perhaps up til the date of discovery of the municipal lien)--but not for the full renovation treatment. Our present leaning is to try to get an appraisal measuring diminution in value with and without the lien as of the date of discovery of the defect. This should not include any calculation of loss of income from loss of 3 units, unless the methodology also takes into account the health and safety issues, as well as the enhanced desireability of the remaining units due to less crowding.

Anyone have any thoughts on this? Yes, e-mail is discoverable--so anyone inclined to rant should probably switch to decaf and call Don on the telephone. And, you can circumvent LandSakes and reach Don at dmckelvey@firstam.com--but I'd really like to hear what you think.

Either way, you may want to visit with folks in your region about what I (and the City of Portland) call "revolving liens."

You need only press "Reply" to send your thoughts to "LandSakes."

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Following Tuesday's posting, Ben Knittel (Houston) wrote:

It sounds like the problem was in treating this thing as a lien, instead of as a notice of violation. If we treat it as just a lien, we necessarily run into the "revolver" problem. If it's regarded as a notice of violation, we would continue to take exception to it until we had reliable evidence that the violation itself had been cured (and that any related fees had been paid.) Is there some mechanism for a release of these? - I wouldn't expect that the City would give a release unless cure and payment had been taken care of.

The coverage question is problematic - I won't go into all that here, because I'm not sure the discussion would be privileged (although discussions between FATCo in-house attorneys ought be privileged, it seems to me - we might want to ponder this, and limit some discussions to attorneys, or something?)

Reply to Ben: Yep, there are lots of non-lawyers on the listserv. If you're concerned about maintaining status of a privileged communication it's better to use the phone or person-to-person mail.

Keith Pearson (Glendale/L.A.) wrote:

This Oregon notice sounds a lot like the notices of substandard condition of the property that are recorded here in L.A.. There is a court decision that is unfortunately unpublished that states that a notice of substandard is a condition of the property and therefore not covered under a title insurance policy, Osterstock v. First American. The court held that a notice of substandard is a defect in the property, not a defect in the title to the property. The case did not address possible lien rights of the city though. It focused its analysis on the condition of the property being substandard, not on the lien claimed by the city for costs.

Although the case is unpublished, I find its analysis to be accurate in recognizing the difference between encumbrances on title like liens and other matters that happen to be recorded in the real property records. I do not know if Oregon has a abstractor's liability law similar to New Mexico or if Oregon follows the California rule of contractual indemnity under the terms and conditions of the policy as mandated by Section 12340.11 of the Insurance Code. This may impact the analysis on what is covered. If Oregon follows the California rule then I think we can pay off whatever is demanded under the lien by the city but avoid the cost of any hammer and nails work. I also wonder if the original demand can be enforced against the city to protect the new owner as a BFP since there was a notice, a demand, and a payoff in reliance of that demand. Under California law the lien creditor would be obliged to live up to their demand and as such would have to release the original lien. If the law is the same in Oregon, then the lien rights of the original notice must be released and we are totally out of the picture.

If you or Don wants the unpublished opinion, let me know. I have a copy here at the office. I have called Francis Cunningham III, Esq. who handled the case for First American to see if the court even considered the lien issue but have yet to hear from him. I will let you know what I find out.

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Keith Pearson (L.A.) follows up on his earlier reply with:

Follow up on my previous e-mail. The court did not address the lien issue because the notice claimed a possible future lien according to Skip Cunningham. I still stick with my initial analysis that our liability is limited by the lien amount, and that we may be able to get out of that by enforcing the demand. If Don needs the briefs or any other work product from that case, we can call Skip. He volunteered providing those things on our phone calls. Hope this is helpful.

And Cliff Morgan (Santa Ana) writes:

I think that Keith Pearson has a point regarding the notice and the case he cites. I am familiar with that case and believe the reasoning at least fits in part. With regard to the lien aspect, we should have some equitable arguments against the city in light of the fact we did pay the lien current and apparently thought we had paid it in full. Also we do have a bfp who should have the right to rely upon the city's demand as being final. Don't you have warranties in your deeds? Why can't we go after the previous owners?