December 2010 Vol. 3, No. 10
 

Underwriters' Bulletin

Claims Corner

Record Mortgages within Two Days of Closing

Occasionally, a member's office is asked by the lender to refrain from recording the mortgage for some reason for a period of time beyond 30 days after closing. When that situation arises, the member should notify the lender of the risks of waiting to record and should raise an appropriate exception on the Loan Policy of Title Insurance for the consequences of the failure to record within 30 days of the closing, as follows:

Consequences, if any, of the failure to record the insured mortgage on or before 30 days after the borrower took possession of the property.

In addition to the risk that the mortgage will be subject to other, prior-recorded liens or interests in the land, the mortgage is also subject to the risk of being avoided by a bankruptcy trustee if not promptly recorded.

The bankruptcy code provides that a bankruptcy trustee may avoid any transfer or interest of the debtor in property that is made on or within 90 days before the filing of the bankruptcy petition. See, 11 USC § 547(b). The underlying purpose is to ensure creditors are treated with equality so that one creditor does not receive a windfall because its lien was secured right before the debtor filed for bankruptcy.

However, the trustee may not avoid transfers that create a security interest in property acquired by the debtor that are perfected on or before 30 days after the debtor receives possession of the property. 11 USC §547(c)(3)(B). Generally, this section protects purchase money mortgages that are recorded within 30 days of closing, assuming that the closing date was the date possession was transferred to the buyer.

The bankruptcy trustee's power to avoid a mortgage can become a title problem if a mortgage is recorded within 90 days of a mortgagor filing for bankruptcy. To help minimize this type of claim ATG's underwriting guidelines require that a mortgage recorded by a member's office must be recorded within two days of the closing and in no event more than 30 days after the closing.

Raising an exception on the policy is necessary because of the creditor's rights coverage provided in the policy. Covered Risk 13 of the Loan Policy of Title Insurance provides:
 

13. The invalidity, unenforceability, lack of 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 alternative remedy, of 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 of 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.

Therefore, ATG could have liability to the insured lender if the bankruptcy trustee attempts to set aside the mortgage. This could be the case even when it was the lender that specifically requested the delay of the recording. If you have any questions regarding the avoidance of a transfer, contact the ATG Underwriting Department,legal@atgf.com, 217.403.0020, or 312.752.1990.

© ATG|Casenotes/Bulletin 1012_v3n10

[Last update: 12-14-10]

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