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Claims Avoidance or How to Keep Yourself Out of Trouble

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices Summer 2010, Volume 9, Number 1

Claims Avoidance or How to Keep Yourself Out of Trouble
by Sean O'Callaghan, Esq., and Margaret M. Fortuna, Esq., Claims Counsels

These past few years of skyrocketing foreclosures have coincided with unprecedented numbers of claim filings in the title insurance industry. Claims avoidance seems to be a popular topic of discussion, and as Claims Counsels we are often asked by our agents to describe some of the more common fact patterns that we see.

Below, we have set forth some different examples of common claim situations, discuss the issues raised by claimants or claimants' counsel on behalf of the Insured lenders and outline what you can do as a settlement agent to avoid these situations. 

I. The Power of Attorney and Accompanying Attorney in Fact Affidavit

Scenario 1

Timmy and Tammy Smith are under contract for the sale of their Watertown home to Mike and Janet Johnson. Currently, Timmy and Tammy hold title to the property as tenants by the entirety. You are the settlement agent for ABC Bank. Two weeks prior to the closing date, Timmy informs you that he will not be able to attend the closing because of a prior work obligation. Rather than reschedule the closing date so Timmy can attend, you suggest that Timmy execute a Limited Power of Attorney authorizing Tammy to act as his attorney in fact and convey his interest in the Watertown home to the buyers at closing. You draft the power of attorney, Timmy properly executes the document and mails the document back to your office a week before the closing.

The closing occurs and Tammy executes a quitclaim deed of the property to Mike and Janet signing on behalf of herself and on behalf of Timmy as his attorney in fact. You record the power of attorney, the deed, the MLC and Mike and Janet Johnson’s mortgage to ABC Bank. Everyone can go home happy, correct?

Probably not. How do you and subsequent purchasers know that the power of attorney was still in effect at the time of the transaction in question? What if the night before the closing, Timmy changed his mind and decided not to sell the property and revoked the power of attorney he had granted to his wife?

For assistance with this question, let’s take a look at the Article V, Part 5 of G.L.c. 190B entitled, “Massachusetts Uniform Probate Code.”

Section 5-504: Power of Attorney Not Revoked Until Notice.

(a) The death of a principal who has executed a written power of attorney, durable or otherwise, shall not revoke or terminate the agency as to the attorney in fact or other person, who, without actual knowledge of the death of the principal, acts in good faith under the power. Any action so taken, unless otherwise invalid or unenforceable, binds successors in interest of the principal.

(b) The disability or incapacity of a principal who has previously executed a written power of attorney that is not a durable power shall not revoke or terminate the agency as to the attorney in fact or other person, who, without actual knowledge of the disability or incapacity of the principal, acts in good faith under the power. Any action so taken, unless otherwise invalid or unenforceable, binds the principal and his successors in interest.

For the purposes of our discussion, let’s assume that the power of attorney in question does not contain some type of self-proving provision which specifically allows good faith purchasers to rely on the power of attorney being in full force and effect until documentation which indicates a contrary intent is recorded at the Registry of Deeds.

How do we establish that the attorney in fact acted in good faith and without knowledge of the death, disability or incapacity of the principal so that a third party can safely rely on his/her actions?

The answer to that question is discussed in Section 5-505 which states the following:

Section 5-505: Proof of Continuance of Durable and Other Powers of Attorney by Affidavit.

As to acts undertaken in good faith reliance thereon, an affidavit executed by the attorney in fact under a power of attorney, durable or otherwise, stating that he did not have at the time of exercise of the power actual knowledge of the termination of the power by revocation or of the principal's death, disability, or incapacity is conclusive proof of the nonrevocation or nontermination of the power at that time. If the exercise of the power of attorney requires execution and delivery of any instrument that is recordable, the affidavit when authenticated for record is likewise recordable. This section shall not affect any provision in a power of attorney for its termination by expiration of time or occurrence of an event other than express revocation or a change in the principal's capacity.

The attorney in fact should sign an affidavit, under the pains and penalties of perjury, which states that at the time he/she exercised the power in question, he/she had no knowledge of the revocation of the power by the principal or the death, disability or incapacity of the principal. Such an affidavit must be recorded so that third parties, such as purchasers and mortgagees, may reasonably rely on such evidence that the attorney in fact’s authority had not been revoked or terminated.

REBA Title Standard 34 also discusses this topic and requires the following:

1. An instrument executed after September 19, 1981, by an agent under a recorded, durable power of attorney containing a power to convey is not on that account defective during any period of disability or incapacity of the principal provided:

(a) the power of attorney had not, at the time of such execution, terminated pursuant to its own terms; and

(b) there has been recorded an affidavit signed by the attorney in fact or agent under the penalties of perjury stating that the attorney in fact or agent did not have at the time of such execution pursuant to the power of attorney, actual knowledge of the revocation or of the termination of the power of attorney by death.

2. An instrument executed after December 31, 1977, by an agent under a recorded power of attorney containing a power to convey is not on that account defective provided:

(a) the power of attorney had not, at the time of such execution, terminated pursuant to its own terms; and

(b) there has been recorded an affidavit signed by the attorney in fact or agent under the penalties of perjury stating that the attorney in fact or agent did not have at the time of such execution pursuant to the power of attorney, actual knowledge of the revocation or of the termination of the power of attorney by death, mental illness or other disability.

How can you avoid this type of claim situation?

Whenever you are acting as a settlement agent and the deed or mortgage is being executed under a power of attorney, remember that the attorney in fact must execute an accompanying affidavit which indicates that he/she has no knowledge of the revocation or termination of the power at the time of the transaction. Along with the power of attorney, the affidavit must be recorded at the Registry of Deeds. Third parties can then rely on this documentation as evidence of the attorney in facts authority to act. 

Scenario 2

Timmy and Tammy Smith still own their Watertown home. They want to refinance with MNO Bank, but for whatever reason the lender does not want Timmy listed as borrower on the mortgage. You are the settlement agent for this transaction. Timmy is out of state on business, but Tammy provides you with an original durable power of attorney that Timmy executed the prior year in connection with some estate planning the husband and wife had done. You review the power of attorney and find that it grants to the attorney in fact the power to sell as well as the power to mortgage the property. You draft a deed wherein the property is conveyed to Tammy individually for nominal consideration. Tammy signs the deed for both herself and for her husband as attorney in fact. Tammy executes an attorney in fact affidavit which confirms that the power has not been revoked or terminated. Tammy then executes the mortgage to MNO Bank. As settlement agent, you record the power of attorney, the attorney in fact affidavit and the mortgage. Everything should be fine, correct?

Probably not. Remember a conveyance for nominal consideration does not constitute a sale of the property. Also, you must confirm that the power of attorney allows for this type of self-dealing by the attorney in fact. Many durable powers of attorney place limits on the amount of the gift(s) the attorney in fact can transfer to himself or herself on behalf of the principal.

How can you avoid this type of claim situation?

You must carefully review the terms of the power of attorney in question to confirm that there is a specific provision which allows for this type of self-dealing by the attorney in fact. If you have any questions regarding whether or not the power of attorney you are dealing with has this type of clause, do not hesitate to contact your Stewart Underwriters. 

II. Paying off and Properly Discharging a Senior Home Equity Line of Credit

Scenario

Jerry and Elaine own a Massachusetts home and plan to refinance their current purchase money mortgage with BANK Lender. As the settlement agent for the refinance, you contact your title examiner who reports that in addition to Jerry and Elaine’s current purchase money mortgage that is in senior lien position, Jerry and Elaine also have a secured Home Equity Line of Credit (“HELOC”) as a junior lien.

At the closing, you have obtained the most up-to-date payoff information pertaining to the purchase money mortgage and HELOC. In addition, you have collected enough money to pay off both liens. Upon execution of the refinance mortgage and the three day right of recession lapses, you inform your title examiner to record the refinance mortgage and you proceed to pay off the purchase money mortgage and HELOC. As the settlement agent, there is nothing left to do but wait for the two discharges to be put on record, correct?

No, as you know, Home Equity Lines of Credit are different from purchase money and most refinance mortgages. Purchase money and most refinance mortgages are actually one-time financial transactions whereby the Lender loans an agreed-upon amount in exchange for a promise to pay the amount back in monthly installments. This loan is secured by the particular property owned by borrower (i.e. the mortgage). HELOCs are credit accounts that, while secured by the particular property owned by the borrower, can be drawn upon or paid down by the borrower on numerous occasions.

The issue with paying off a HELOC at a sale or refinance transaction is that, sometimes, the Lender fails to close out the borrower’s account and the borrower subsequently draws more money on the account. Thus, there will remain a senior lien to your lender’s mortgage unless the borrower subsequently closes the account, which rarely occurs.

Failure to properly close and record a discharge of a HELOC can cause significant problems for both the subsequent owner in a purchase transaction and the lender. In a purchase transaction, should the seller withdraw money on a HELOC which is allowed to remain open, the current owner of the property could be subject to a possible foreclosure action by the HELOC mortgagee should the seller subsequently default. Lenders in a purchase or refinance transaction have similar exposure should the prior HELOC not be properly paid off, closed and discharged of record.

Obviously, this type of situation can result in a significant claim. How can you avoid this type of situation?

As a settlement agent, any time a Home Equity Line of Credit is to be paid off at closing, a Termination of Credit Account or Close-Out Account letter must accompany the payoff with specific instructions from the borrower to close out the account and discharge the secured Home Equity Line of Credit. Upon submitting the appropriate close-out letter from the borrower, your office should actively seek a discharge of the Home Equity Line of Credit to ensure that the lien is properly released and you avoid a possible claim. Continue to pursue the discharge in question until the discharge has been obtained and recorded with the Registry of Deeds. 

III. Estate Tax Liens

Scenario

Manny and Fanny own the Real Property located 456 Main Street in Malden as joint tenants as of 2001. Unfortunately, Manny dies in 2006. In 2008, Fanny attempts to refinance the property. You are the settlement agent for this transaction. Your title examiner reports to you that Fanny is the record title holder of the property, per a recorded copy of Manny’s death certificate at the local Registry of Deeds. Therefore, you proceed with the refinance transaction. Fanny falls upon difficult financial times late in 2009 and cannot pay her mortgage. The lender attempts to foreclose and through their title examiner discovers that, although there is no issue with the record chain of title, there may be a senior lien to their mortgage as there is no Massachusetts Estate Tax release of record pursuant to G.L.c. 65C, §14(a).

As you may know, estate taxes are a transfer tax on the value of the decedent’s estate before distribution to any beneficiary. Thus, in our above example, upon Manny’s death, the estate taxes may apply and attach to the property. Upon the death of a person, a legal claim by the Commonwealth automatically arises on all property taxable in the Massachusetts estate on the date of death.

Therefore, it is important to know when such a tax applies and when such a tax is adequately released. To help us understand when these taxes apply and how they are released, it is helpful to discuss REBA Title Standard Number 24, which states in part:

B. For Deaths between January 1, 1997 and December 31, 2002

There is no Massachusetts estate tax lien if the sum of the (a) decedent’s federal taxable estate and (b) adjusted taxable gifts was less than the amounts set forth below:

Year of Death

Net Estate

1997$600,000
1998$625,000
1999$650,000
2000, 2001$675,000
2002$1,000,000

Land is free of the Massachusetts estate tax lien 10 years after the date of death and sooner:

1. When there is proof of payment of the amount shown due by the Massachusetts estate tax closing letter provided (a) the land is reported in the probate inventory filed in the decedent’s estate; or (b) in the case of the non-probate property, there is properly documented evidence that the property was listed in the estate tax return; or

2. When the Commissioner of Revenue issues a certificate of release or partial discharge of the lien; or

3. Upon the recording of an affidavit stating that the decedent’s estate does not necessitate the filing of a federal Estate Tax return.

C. For deaths on and after January 1, 2003

There is no Massachusetts estate tax lien if the sum of the (a) decedent’s federal taxable estate and (b) adjusted taxable gifts was less than the amounts set forth below:

Year of Death

Net Estate

2003$700,000
2004$855,000
2005$950,000
2006 and after$1,000,000

Land is free of the Massachusetts estate tax lien 10 years after the date of death and sooner:

1. When there is proof of payment of the amount shown due by the Massachusetts estate tax closing letter provided (a) the land is reported in the probate inventory filed in the decedent’s estate; or (b) in the case of the non-probate property, there is properly documented evidence that the property was listed in the estate tax return; or

2. When the Commissioner of Revenue issues a certificate of release or partial discharge of the lien; or

3. Upon the recording of an affidavit stating that the decedent’s estate does not necessitate the filing of a Massachusetts Estate Tax return based upon the amounts set forth in the table above.

As such, for deaths on or after January 1, 2003, it is important to note that the Massachusetts estate tax has been decoupled from the Federal Estate Tax and is instead tied to the provision of the Internal Revenue Code effective as of December 31, 2000. Therefore, the threshold amounts for filing Massachusetts and federal estate tax returns will be different.

Therefore, it is important to remember that when dealing with a situation where the owner died on or after January 1, 2003, both the Massachusetts Estate Tax lien and the Federal Estate Tax lien should be addressed in connection with your transaction.

How can you avoid this type of claim situation?

If you as a settlement agent record an estate tax affidavit for a person who died on or after January 1, 2003, the affidavit must declare that the decedent’s estate does not necessitate the filing of a Massachusettsand federal estate tax return, if applicable. If the size of the decedent’s gross estate does require the filing of either or both estate tax returns, then estate tax releases must be obtained and recorded.

If you ever have a question about whether such an affidavit or release is needed, do not hesitate to contact a Stewart Underwriter. 

IV. Tenancy Matters – Possible Missing Interest Problems and the Importance of Checking Probate and Administration Records.

Martha and George acquired title to their property in Tewksbury as tenants by the entirety in 2000 

Scenario 1

Sadly, George dies of old age in 2005. Unable to maintain the property without help, Martha contracts to sell the property. You are the settlement agent for the purchaser’s lender. Upon completion of the title exam, your examiner informs you that the property is owned by Martha and George, as tenants by the entirety. When you contact Martha to find out George did not sign the purchase and sale agreement, she informs you of the sad news pertaining to her husband’s death. After you extend your appropriate condolences, you remember that, in Massachusetts, upon the death of one tenant by the entirety, the deceased’s interest in the property owned transfers to the surviving spouse. Without any further inquiry, you proceed with the sale accordingly and Martha conveys the property to Ben and Jerry. Ben and Jerry execute a purchase money mortgage to your client, the lender, and you record the deed and the mortgage with the Registry of Deeds. Subsequently, Ben and Jerry run upon hard times and cannot pay their mortgage. Accordingly, their lender attempts to foreclose upon their mortgage and their title exam reveals that there is a possible missing interest problem because there is a gap in the record chain of title (i.e. there is a deed into Martha and George, but the deed out is only from Martha). Thus, the purchase money mortgage that your office conducted may not properly encumber the entire, if any, interest of the property as the lender and parties intended, if George is not, in fact, deceased.

How can the settlement agent avoid this type of claim?

In this scenario, the settlement agent needs to make sure there is record evidence that George’s interest in the Property either vests with, or was deeded to Martha, prior to Martha conveying the property to Ben and Jerry.

For assistance with this issue, a review of REBA Title Standard No. 71 is appropriate. In part, the title standard states that evidence of death of a deceased joint owner or life tenant can be established by the recording of a death certificate at the Registry of Deeds in the district where the property is located or if a death certificate is located in the docket or a probate or other proceeding in the Probate Court in the County where the real property is located. In addition, the recording of the following documents at the appropriate Registry of Deeds is sufficient as proof of death:

1. A certified copy of an allowed petition for probate or administration of the decedent’s estate, or a certificate of appointment in such matter, which in either case recites the decedent’s date of death, provided that recording of such petition in the Registry of Deeds shall not be necessary if such petition is filed in the same county where there property is located; or

2. A Massachusetts Inheritance Tax Lien Release relative to the decedent’s interest in the property; or

3. A Massachusetts Certificate of Release of Estate Tax Lien relative to the decedent’s interest in the property, provided the document has been recorded for twenty (20) years; or

4. A Deed for the real property from the survivors that contains a recital that the decedent has died, even if no date or place of death is recited, provided however, that such deed has been recorded for more than twenty (20) years.

When faced with a situation whereby one tenant, in a tenancy by the entirety, is attempting to convey the entire property, the first thing the settlement agent should do is have their examiner check the appropriate Registry of Deeds for the other tenant’s Death Certificate. In our above scenario, if a copy of George’s death certificate is already recorded, then record title should vest the entire property in Martha. Thus, Martha would be able to validly convey the entire interest in the property to Ben and Jerry.

If a death certificate is not already on record, and one cannot be easily obtained and recorded at closing along with the deed/mortgage, the settlement agent should have their examiner check the appropriate Massachusetts Probate Court records. Probate documents, after final disposition, are matters of public record. Your examiner should be able to look for the Probate or Administration of the purportedly deceased tenant’s estate. If the deceased’s Probate or Administration contains a certified copy of a Death Certificate, or the allowed Petition for probating the estate as discussed above (#1), that document should provide the appropriate record evidence that the surviving tenant owns the complete interest in the property. In our scenario, if the settlement agent’s title examiner found George’s Probate from 2005 at the appropriate Probate Court and the file contained a death certificate, Martha would be the record title holder of the Property. Thus, Martha could validly convey the property individually. Should the Probate documents not contain any acceptable evidence of death of a record title holder’s death, your examiner should continue to look for a recorded Inheritance Tax Release or a Certificate of Release of Estate Tax Lien.

As a helpful reminder, the settlement agent should maintain a copy of the evidence of death or Probate records in their file and request that any recorded conveyance documents (deed/mortgage) reference the Probate Docket number or the recording information of the evidence of death to reduce confusion for future transactions.

Should you not be able to find documentation of a record title holder’s death pursuant to any of the acceptable forms of evidence referenced in Title Standard No. 71, you should not proceed with the transaction until you have reviewed this matter with a Stewart Underwriter.

Remember in a tenancy by the entirety if a divorce has intervened, the tenancy will be converted to a tenancy in common. 

Scenario 2

Martha is in the process of refinancing the mortgage on the property. You are conducting the closing as settlement agent. Upon completion of a title exam, your examiner informs you the current owner deed reveals that the property is in the name of Martha and George as tenants by the entirety. Martha informs you that George died several years ago. After you extend your appropriate condolences, you remember that in Massachusetts, upon the death of one tenant by the entirety, the deceased’s interest in the property owned transfers to the surviving spouse. Without any further confirmation, you proceed with the refinance and execute the refinance Mortgage. However, George is in fact alive and well. George and Martha are in the process of a very turbulent marriage and Martha plans on taking the proceeds from the refinance for the purposes of enjoying a lavish European vacation. If this sounds far fetched or ridiculous, please keep in mind that we have seen a similar claim in the past.

As previously discussed in Scenario 1, one tenant of a tenancy by the entirety cannot convey property without the consent of the other tenant. See Hale v. Hale, 332 Mass. 329, 331 (1955). Thus, situations like the one stated in Scenario 2 are a nightmare because the refinance mortgage that your office conducted may not properly encumber the entire, if any, interest of the property as the Lender intended due to the fact that George did not sign the Mortgage. Should the Mortgagee attempt to subsequently foreclose due to the borrower’s default, the Mortgagee may encounter significant difficulty enforcing their rights because George may challenge the validity of Mortgage because he did not sign the document.

Therefore, whenever you are faced with one record title holder attempting to convey the entire property prior to closing, have your examiner check the Registry of Deeds and Probate records for any of the evidences of death of a purportedly deceased joint owner/life tenant pursuant to Title Standard No. 71. By checking the Registry of Deeds and Probate records, you can avoid a possible claim and make sure the borrower can properly convey the real property that they purportedly own. If you ever have any questions, please do not hesitate to contact our Stewart Underwriters.

V. Acknowledgment of Deeds

Scenario

David and Donna Dawkins are selling their Arlington, Massachusetts property. You are handling the sales transaction for QRS Bank, the lender for the buyers. David and Donna have granted executed powers of attorney in favor of their attorney, John Smith, Esq., as Mr. and Mrs. Dawkins are in Florida and will not be attending the closing. Attorney Smith has forwarded to your attention copies of these powers of attorney as well as a proposed deed for your review. The closing date arrives and the buyers and Attorney Smith are at your closing table. Attorney Smith executes the sellers’ documents and signs an affidavit indicating that the power has not been terminated or revoked. He then provides you with the deed that has been signed by both sellers. However, as you review the final deed you notice that only one of the signatures has been acknowledged. You mention this discovery to Attorney Smith who tells you that Mrs. Dawkins has been ill and could not leave her home to appear before a notary public. Attorney Smith suggests that you contact Mrs. Dawkins to confirm that she has executed the deed and provides you with her telephone number. He also states that under G.L.c. 183, §30, only one of the grantors’ signatures needs to be notarized for the deed to be effective. You use the telephone number supplied by Attorney Smith and speak with Mrs. Dawkins. You review the statute and find that it states the following:

Chapter 183: Section 30. Method of making acknowledgment

Section 30. The acknowledgment of a deed or other written instrument required to be acknowledged shall be by one or more of the grantors or by the attorney executing it. The officer before whom the acknowledgment is made shall endorse upon or annex to the instrument a certificate thereof. Such acknowledgment may be made—

(a) If within the commonwealth, before a justice of the peace or notary public.

(b) If without the commonwealth, in any state, territory, district or dependency of the United States, before a justice of the peace, notary public, magistrate or commissioner appointed therefor by the governor of this commonwealth, or, if a certificate of authority in the form prescribed by section thirty-three is attached thereto, before any other officer therein authorized to take acknowledgments of deeds.

(c) If without the United States or any dependency thereof, before a justice of the peace, notary, magistrate or commissioner as above provided, or before an ambassador, minister, consul, vice consul, charge d’affaires or consular officer or agent of the United States accredited to the country where the acknowledgment is made; if made before an ambassador or other official of the United States, it shall be certified by him under his seal of office.

Given the language of the statute and the anxious buyers you have sitting at your closing table, you go forward. You record the deed and mortgage and the buyers move into their new home. Some time later you are contacted by an attorney for the buyers who tells you that Donna Dawkins has filed suit against the buyers and the lender. She alleges that her signature on the deed to the buyers was forged. At this point you review the deed once again and recall the conversation you had with Attorney Smith the day of the closing and see that only David Dawkins’ signature on the deed was acknowledged. You call Donna Dawkins’ attorney to find out the particulars of her complaint. He informs you that he has a handwriting expert who will testify that the signature on the deed to the buyers was not his client’s. You mention that the buyers were innocent purchasers, but he tells you that the bona fide purchaser defense will not be successful when dealing with the issue of forgery.

How can you avoid this type of claim situation?

As you can imagine, this type of claim can have serious ramifications for everyone involved. Unfortunately, depending on the extent of the nefariousness of the parties, in the example above, Mr. Dawkins and his attorney, you may not always be able to avoid situations involving alleged forged instruments.

In the fact pattern above, depending on the powers granted in the power of attorney, the attorney in fact could have also executed the deed on behalf of his principal in your presence. Of course, given the apparent character of Mr. Dawkins and the seller’s attorney in our claim hypothetical, the power of attorney from Donna Dawkins to Attorney Smith may have also been forged.

Whenever you are dealing with an out-of-the-ordinary situation like the one we have outlined above, pay attention for ‘red flags’; for example the deed that was purportedly signed by both parties but only one grantor’s signature was acknowledged. Do not hesitate to contact a Stewart Underwriter to review your particular fact pattern and discuss how you might be able to protect your client, the company and your firm.