Category: #CTtalk

Coinsurance/Reinsurance: A Different Means to a Similar End

By Gerald J. Castro
Vice President and National Commercial Counsel
Chicago Title Insurance Company, Chicago NCS office

Chicago Title Insurance Company is a leader within the title insurance industry, with revenues in excess of most of its competitors. But even the strongest title insurer has limits as to the amount that it can pay out on a single claim. Each title company's ability to pay claims is limited by its financial strength. In addition, however, each title company faces limits on the amount of liability it may assume under any policy or set of policies. These limits may be set by state law, customer request or internal controls. Notwithstanding these limits, the title insurance industry has developed a system that affords individual companies the ability to insure properties that have values in excess of limits, including those with values running into the hundreds of millions of dollars. As the amounts needed to acquire or invest in real estate continue to swell, so do the demands for increasing amounts of title insurance. To balance the difficulty of accommodating our customers while not overstepping our ability to react to potential claims, we enter into coinsurance or reinsurance agreements with other title insurers. These agreements enable one company to spread the risk of loss on large-liability policies to other companies. This article will define and explain coinsurance and reinsurance arrangements, increasingly significant aspects of the title insurance industry.

The Case for Interpleader

By Douglas M. Karlen
Vice President and Regional Counsel
Chicago Title Insurance Company

When parties to an escrow agreement dispute the disposition of escrow deposits, the escrowee’s interpleader action may be the best means of resolving the impasse.  A recent interpleader case, for example, shows how sloppy drafting can lead to problems that require a court to clean up an escrow mess.  See Wiczer v. Wojciak, 2015 IL App. (1^st) 123753.

BACKGROUND
Details, LLC owned a car wash business and the real estate upon which the business operated. The business experienced financial difficulties. At the time in question, Details owed $2.15 million on its mortgage. Wojciak was interested in purchasing the business and real estate. The parties agreed on a purchase price of $2.15 million, but Wojciak was willing to pay only $1.75 million. Four individual members of Details, LLC agreed to put up $400,000 as earnest money to cover the difference.

With some degree of understatement, the appellate court says, “Although this circumstance was unusual in that the sellers, as opposed to the buyer, were making an earnest money deposit, Wojciak wanted to ensure that the sale closed.”

An escrow agreement was prepared before an asset purchase agreement. The escrow agreement identified seller as Details, LLC and buyer as “Details Acquisition, LLC, an Illinois limited liability company in formation.” The escrow agreement appointed Wiczer, Wojciak’s attorney, as “temporary escrowee” and Ticor as the escrowee. Notwithstanding the identification of parties, the only signatories to the escrow agreement were the four individual members of Details, LLC, who had agreed to put up the $400,000. Neither Details, LLC, as seller, nor Wojciak as buyer, nor Ticor as escrowee signed the escrow agreement. Details Acquisition, LLC, the buyer, was never formed. The four individual members of seller forwarded the $400,000 to Wiczer, who deposited the funds in his IOLTA account. Wiczer never sent the money to Ticor.

The escrow agreement required deposit of earnest money by the seller and return of the earnest money to buyer, instead of seller, if the transaction did not close.

Wiczer testified that Wojciak wanted the earnest money if the transaction did not close because he was “concerned from the start that the car wash purchase was problematic and he wanted protection to at least cover his expenses.” Counsel for the four individual members testified that they agreed to deposit the $400,000 in escrow “because they owed their bank $400,000 more than Wojciak was willing to pay for the business and they wanted to mitigate their losses and sell the business and the real estate.”

Later, an asset purchase agreement provided that earnest money was to be deposited by buyer in accordance with an escrow agreement to be executed by the parties and simultaneously delivered and attached to the asset purchase agreement. Earnest money, under the asset purchase agreement, was to be returned to buyer if the transaction did not close. The escrow agreement was never attached. The asset purchase agreement was signed by Details, LLC, as seller by its manager, and by Details Acquisition, LLC “to be formed,” as buyer by Wojciak.

In October of 2009, Wojciak served notice that he was terminating the purchase, as permitted by provisions of the asset purchase agreement. There was no allegation of breach of contract. In quick succession, the four individual members of Details, LLC made demand on Wiczer for the return of the $400,000 deposit; Wojciak made demand on Wiczer for delivery to him (Wojciak) of the $400,000; and Wiczer claimed $98,250 from the deposits as Wojciak’s expenses.

Wiczer filed an interpleader action, seeking guidance from the court for the proper disposition of the funds held by Wiczer. The four individual members and Wojciak all filed cross-complaints, each seeking recovery of the deposits. After a trial, the trial court found in favor of the four individual members and ordered Wiczer to return the deposits to them. The appellate court affirmed.

The Zombie Title: When a Mortgage Foreclosure Refuses to Die

By Richard F. Bales
Chicago Title Insurance Company

Introduction

As the recent recession and accompanying real estate crisis receded, they left behind a flotsam of new legal terms.  For example, all real property practitioners know what a “short sale” is.  Some lawyers may have even heard of the phrase, “jingle mail”—when the underwater homeowner mails his house keys to the lender due to his inability to meet his mortgage payment obligations. But now, with a nod to the hit television series, “The Walking Dead,” there is a new distressed real estate term—the zombie title.

A zombie title is the title to real estate that results from a lender initiating mortgage foreclosure proceedings, but then unexpectedly abandoning the foreclosure before a judicial deed or consent foreclosure is issued.

The phrase is an apt one.  When the foreclosing lender originally files its complaint, it is possible that the homeowner, recognizing what he believes to be the inevitable, moves out of his house and moves on with his life.  He rents a new home in the same or a different neighborhood; he may enroll his children in new schools—all because he feels that the lender will eventually take title to his home pursuant to the foreclosure. He walks away leaving (he thinks) the foreclosure of his home behind him.

But sometimes foreclosure is not inevitable. The lender may decide to drop out of the proceeding halfway through the litigation because the home is not worth the costs of foreclosure, because the lender has a surplus of inventory, or simply because the lender does not want the home.

When a lender pulls out of a foreclosure, the hapless homeowner eventually discovers that he still owns title to his house—but it often is a house that has deteriorated due to months and months of abandonment and neglect.

The Effect of a Zombie Title on the Homeowner

A Google search of the term “zombie title” reveals disturbing accounts of mortgagors trapped in the ownership of derelict homes—homes with broken windows, stolen sinks and toilets, and holes in roofs and siding. These owners remain responsible for the property taxes and association assessments. These owners will ultimately be responsible for costs incurred by the municipality in trying to maintain these properties—for example, weed cutting liens; garbage, debris, and graffiti removal liens; and ultimately, demolition liens.