Why God Created Title Insurance- When Attorneys Disagree

“The title should be fine.” - Everyone

“It certainly should be.”- Me

Anytime I speak with a client about title insurance, the sentiment is the same. The title to the property should be fine.

But, the title isn’t always fine. Roughly 25-30% of titles I review reveal something to be cleared up. It’s rare when lawyers disagree on whether an issue is an issue or not. Here’s a recent example of a disagreement, and we’re only moving forward because the seller has title insurance.

I came across a title showing 2 prior owner mortgages still on record. Meaning the person who sold the property to the seller had two mortgages in their name, and those mortgages still show up on the property’s records. This is a garden variety title issue.

But, this one has a twist! Here’s the timeframe:

Today, Seller is selling to my Buyer. – easy enough.

In the early 90’s, everyone took a break from consuming carbohydrates and the Seller bought the property from Builder.

In the late 80’s, Builder borrowed money from Lender A and Lender B and gave them mortgages.

These mortgages remain as liens on the property until released-IT DOESN’T MATTER WHO OWNS THE PROPERTY.

Now, after inquiring about the releases, I was told that Builder declared Chapter 11 bankruptcy and the court issued a Clerk’s Certificate releasing all liens. The Certificate contains this language which leads to the disagreement:

“…the property be sold free and clear of all remaining liens and that the creditors be ordered to release said liens for the purpose of allowing the Debtor (Builder) to transfer clear and marketable title”

I say that this language is an order and these liens need to be released; the title isn’t clear.

The Attorney who closed the loan argues this language is simply permissive and the Certificate releases the liens; the title is clear.

So, does this language release the liens or not?

The question is everything and it’s nothing.

It’s the rare occasion where reasonable attorneys disagree. But, the Seller is required to pass “marketable title” to the Buyer.

Marketable title is title free from the suggestion of a problem.

So, the answer is irrelevant. While the question exists, the title isn’t “marketable.”

The Seller has owner’s title insurance, so the sale is moving forward. Absent that, this sale could be delayed by a few years-no exaggeration.

If you have buyers wondering about the importance of title insurance, it’s okay, call me.