Title Derived Through Court Orders

When a search reveals that the current owner obtained title to property through a chain of title containing a sheriff's deed, tax deed, trustee's deed in bankruptcy, or through some other type of court order, you must follow certain underwriting guidelines. The property title in these cases is only as good as the court order that created it. You must find out if there are any defects in the order or the procedure leading to the order that should be noted on Schedule B of a commitment or final policy.

First, whenever title is derived through any kind of court proceeding (foreclosure, probate, quiet title, etc.), you must find title vested in the last person who obtained good title prior to the proceeding. Raise an exception for the court proceeding and of the interest of the person who received the court-derived title, with a note after the exception that an examination of the court proceeding has not been made and the commitment and policies are subject to such further exceptions as may be necessary. For mortgage foreclosures and other cases where a lis pendens is recorded, there should be an exception on the commitment for the lis pendens.

Second, obtain a copy of the court file and review it. If you know or can contact the parties' attorneys, it may be easiest to ask them if they have copies of the court file that you can review, especially in bankruptcy cases where it may be time-consuming to travel to the courthouse to see the file. Review the steps taken in the case to notify parties and interest holders in the property of the pending litigation and find out if they were legally sufficient to create jurisdiction. Defects in service of process or service by publication will make the court's jurisdiction over those parties — and any orders entered by the court as to those parties — defective. Jurisdictional defects are not cured by the passage of time. Make sure that all statutorily-required time periods were properly calculated and observed. Pay special attention to any redemption periods. Confirm that the court had proper subject matter jurisdiction of the case. If individual hearings required that notice be sent to the parties, verify that those notices were properly sent. If all these matters were properly handled, then you can determine that there are no defects in the order that would subject it to either direct appeal or collateral attack, and that a buyer relying upon that order risks no threat to the title to the property.

If you find defects in the proceedings, note them on Schedule B. For example, consider a situation where a lender pursuing a mortgage foreclosure failed to notify an inferior mortgagee of the foreclosure case. The judgment of foreclosure will not affect the inferior mortgage, which will remain a lien on the title even though a foreclosure of a superior mortgage took place. In that case, while you may find that the superior mortgage was properly foreclosed and the exception for that mortgage can be removed from Schedule B, you would leave the exception for the inferior mortgage on Schedule B until it is paid, a release is recorded, or the foreclosure case is reopened and reprosecuted to foreclose that mortgagee's interest.

Third, revise Schedule B of the commitment to reflect your determination of the condition of title, having reviewed the court proceedings. If the commitment is issued within the time period to file an appeal, raise an exception for the right to appeal. This exception can be removed once the appeals period has expired and you have reviewed the court file again to see that no appeal was actually filed.

Conducting a review of a court proceeding affecting title requires that you have a thorough understanding of the statutes and case law setting forth the procedure to be used. Tax deeds and mortgage foreclosures in particular pose complicated reviews. The Underwriting Department is available to help answer specific questions about court file reviews and can make decisions about how to show certain problems on title commitments and what is required to remove exceptions. If you have questions, please contact the ATG Underwriting Department, legal@atgf.com, 217.403.0020, or 312.752.1990.

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