3.84 Creditors' Rights

3.84.1

In General

If an issuing agent discovers a creditor's rights issue in a prior deed in the chain of title, the Company may require that a creditor's rights exception be included in the policy.  Such exception may read as follows"

"Consequences of any attack on the estate or interest insured herein under any federal or state law dealing with bankruptcy, insolvency, or creditor's rights." 

It is impossible to enumerate all the cases or circumstances where a creditor's rights issue may exist, but as an illustration only, we cite transactions involving:

  • Asset swaps
  • Deeds in lieu of foreclosure.
  • Workout agreements.
  • Nonjudicial foreclosures.
  • Preexisting debts.
  • Downstream problems.
  • Upstream problems.
  • Corporations conveying to an insider.
  • Lack of adequate consideration.
  • Corporate assets being used to finance the purchase of the stock of the corporation.
  • Leveraged Buyouts.

3.84.2

Creditor's Rights Exclusion In ALTA Policies

The decertified ALTA policies (4-6-90) contain the following creditors' rights exclusions:

Loan Policy:

"Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws."

Owner's Policy:

"Any claim, which arises out of the transaction vesting in the insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws."

The ALTA policies (10-17-92) contain the following creditors' rights exclusions:

Loan Policy:

Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on:

(a) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or

(b) the subordination of the interest of the insured mortgagee as a result of the application of the doctrine of equitable subordination; or

(c) the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure:

(i) to timely record the instrument of transfer; or

(ii) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.

Owner's Policy:

Any claim, which arises out of the transaction vesting in the Insured the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on:

(a) the transaction creating the estate or interest insured by this policy being deemed a fraudulent conveyance or fraudulent transfer; or

(b) the transaction creating the estate or interest insured by this policy being deemed a preferential transfer except where the preferential transfer results from the failure:

(i) to timely record the instrument of transfer; or

(ii) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.

If the creditors' rights issue arises out of the current insured transaction, you do not need to add the creditors' rights exception when you issue a 1990 or 1992 policy. For example, if you issue a 1990 or 1992 policy to the grantee of a deed-in- lieu of foreclosure where all other underwriting requirements are met, you do not need to add the creditors' rights exception. However, if the creditors' rights issue arises out of a prior deed in a prior transaction, add the creditors' rights exception even if you use a 1990 or 1992 policy.