Posting for

Friday, August 28, 1998

by: David Dickson

ddickson@firstam.com

and: Bert Rush

brush@firstam.com

TENNESSEE CLAIM/CREDIT LINES/BANKRUPTCY

(Intro by Bert: Amid the replies to Wednesday's posting was this from David Dickson [Memphis].)

We have a very sticky claim here in Tennessee.

On October 17, 1994 our agent issued an owner's policy to mother and daughter in the amount of $119,900. The seller, who conveyed by general warranty deed, took back a purchase money mortgage in the amount of $104,900, which was shown on Schedule B as an exception.

Our agent missed a revolving credit line deed of trust held by Merrill Lynch in the amount of $115,000 dated September 1987. Its status at closing (paid down, balance owing ???) is not known-we are looking into it.

The seller/purchase money mortgage holder advised our insured to make the payments to his ML account and-of course-told ML to draft his account to pay the equity line. This whole arrangement smells bad-what did he know and when did he know it?-but it worked until late 1997 when daughter filed ch. 13 BK. Her purchase money obligation went into arrears and as might be expected so did ML. Her BK lawyer uncovered the ML Trust Deed.

The holders of the pmm filed a proof of claim showing 10 months arrearages which the BK court has disallowed (I have asked for a copy of the order). They live "offshore" to avoid process servers...

ML sought relief from the automatic stay to foreclose but have backed off now that the BK trustee is keeping the account current.

It seems a suit on the warranties of title, to quiet title and perhaps on fraud theory filed by the BK Trustee as an adversary suit in BK, would be in order. There was some concern about service but I would hope a BK judge worth his/her salt would say they submitted to jurisdiction by filing their proof of claim-particularly when the notorious nature of the note holder as a freeloader is fully understood by the court.

Thoughts?

Reply: I assume the seller's idea was to carry back a wrap-around deed of trust, and profit from being paid a higher rate of interest than he (or she) is paying Merrill Lynch. I'm also assuming the present balance due on the Merrill Lynch credit line is pretty close to the max ($115,000).

Ideally, our insured owners should be in the position of making mortgage payments direct to Merrill Lynch--and tell the seller to go shinny up a tree. I don't know if this will fly with Merrill Lynch. Someone (ahem) may be asked to purchase and take an assignment of their deed of trust. If they are willing to let the insureds assume the loan, we might be asked to pay the balance down to the amount owed on the seller's carry-back deed of trust.

Otherwise, I agree with you that action needs to be taken in bankruptcy court to avoid the carry-back deed of trust. The trustee should object to seller's proof of claim in toto (which the trustee may have already done) and file an adversary proceeding to avoid the seller's deed of trust on the grounds you suggest. Although not absolutely necessary--and maybe not permissable under state statutes--I'd consider recording a notice of pending action to hinder seller if he tries to sell the carry-back D/T. I don't think service of process should be a problem under the Bankruptcy Code and Rules.

Questions, comment, argument? Just press the "reply" button and send your thoughts to LandSakes.

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Following Friday's posting Keith Pearson (Glendale/L.A.) writes:

It seems that along with the lawsuit claiming liability of the seller on the warranty of title claim that you can try to attach the carry-back mortgage against the seller. If this is possible (and hopefully it is since these people probably brought most of their assets offshore with them) a deal might be worked out with Merrill Lynch to release the credit line in exchange for the purchase money mortgage and hopefully not too much of First American's money. It would seem of prime importance to go after the purchase money mortgage as a way of mitigating First American's damages. It would also seem possible since we are subrogated to the insured's right to do so under the title policy.

Reply: David Dickson called today with news about this claim. Seems the Trustee in BK did object to the seller's proof of claim--and the claim has been disallowed as obtained by fraud. Also, there is now pending an adversary proceeding to quiet title. But now the Trustee's saying there are serious defects in the condition of the property (the house was built over a landfill), so the insured owners may just walk away from it. If they do, Merrill Lynch can foreclose--and the claim is closed. The amount now due Merrill Lynch is about $95,000--$10,000 less than the balance due on the seller's carry-back mortgage. Merrill Lynch would do well to freeze the account--even if it calls for obligatory advances--seems to me.