- April 28, 1992
- All Issuing Agents
- Subordination Agreement
Due to recent case law it has become necessary for us to reexamine our procedures in regard to Subordination Agreements. Two cases, In re: Sunset Bay Associates and Proactive Equity Trust No. 83 Limited v. Bybee, both ruled against the priority of the construction lender's lien, taking the position that the construction lender was put on notice, whether it be actual, constructive or inquiry, of the terms and conditions surrounding the subordination of the purchase money to the construction loan. Any deviation from those terms could result in the construction lender losing their priority notwithstanding the subordination agreement.
At the recent CLTA Forms and Practices Committee meetings, there was much debate about this issue. Although the majority of companies felt that if the standard CLTA Subordination Forms were used there is enough limiting language on it that the title companies should be protected from a successful attack by the purchase money lienholder. Ultimately this may be correct from the standpoint of indemnification but the defense costs defending our insured's position may be substantial. We at Stewart want to avoid that. Therefore, it was agreed amongst the Stewart Title Guaranty senior underwriters that whenever possible, Stewart will require the execution of the construction lender, to the standard form CLTA Subordination Agreements (in addition to requiring the execution by the subordinating lender and the owner). The same changes will apply to Forms A, C & D. For the time being, this requirement will only be applicable in the construction loan transaction. This appears to be the current concerns of the court. If you are asked to use any other form of subordination, other than the standard forms or if the construction lender refuses to execute the Subordination Agreement please contact the underwriting department so we may review the request.
Finally, there is an argument that by providing the forms, the lender was not given an opportunity to object to its terms before executing it. A court may not look favorably upon the providing title company. Therefore, it is suggested references to CLTA and Stewart Title be eliminated from the forms.
We would like to implement this as soon as possible. Please advise your title and escrow officers accordingly. If you have any questions, please call.
THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.