3.84 Creditors' Rights Exception

3.84.1

In General

Texas policy forms contain a basic creditors right exclusion which is adequate in most situations.

The wording of the creditors' rights exclusion is as follows:

  • Owner Policy (T-1) -

    "Any claim which arises out of the transaction vesting in the person named in paragraph 3 of Schedule A the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or other state or federal creditors' rights laws that is based on either (i) the transaction creating the estate or interest Insured by this Policy being deemed a fraudulent conveyance or fraudulent transfer or a voidable distribution or voidable dividend, (ii) the subordination or recharacterization of the estate or interest insured by this Policy as a result of the application of the doctrine of equitable subordination or (iii) 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 of the Company or its issuing agent to timely file for record the instrument of transfer to the insured after delivery or the failure of such recordation to impart notice to a purchaser for value or a judgment or lien creditor."

  • Residential Owner Policy (T-1R) -

    "We do not cover any claim based upon allegations that your purchase of title (or acquisition of title by gift or otherwise):

    (a) was a fraudulent conveyance, fraudulent transfer, voidable distribution, or voidable dividend;

    (b) should be subordinated or recharacterized as a result of equitable subordination;

    (c) was a preferential transfer unless

    (i) the company or its issuing agent failed to timely file for record the deed to you after delivery, or

    (ii) the recordation of the deed to you is not legal record notice.

    We do not cover the two types of claims described in c.(1) and c.(2) above.)"

  • Mortgagee Policy (T-2) -

    "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 other state or federal creditors' rights laws that is based on either (i) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer or a voidable distribution or voidable dividend, (ii) the subordination or recharacterization of the interest of the insured mortgagee as a result of the application of the doctrine of equitable subordination or (iii) the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure of the Company or its issuing agent to timely file for record the instrument of transfer to the insured after delivery or the failure of such recordation to impart notice to a purchaser for value or a judgment or lien creditor."

The exclusion cannot be deleted or amended in any of the promulgated policies.

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 credior'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 wherein the exception may be applicable or necessary, but as an ILLUSTRATION ONLY, we may 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.

Consult a Texas Underwriter if you believe you have a situation that requires an additional exception.

3.84.2

Creditors Rights Coverage Prohibited Nationally

• Texas Title Insurance Code Section 2502.006 provides that the Texas Insurance Commissioner can prohibit any title insurance company licensed in Texas from providing creditor's rights coverage anywhere in the United States unless required by the law of that state. The reason that the commissioner has this power is that creditor's rights coverage could affect the solvency of a title insurer licensed in Texas and other states. The Texas Title Insurance Guaranty Association would have liability to Texas policyholders should the underwriter fail because of this extra-hazardous coverage.

• Note: Texas has never allowed creditor's rights endorsements.

• Effective date of Texas Legislation: Sept. 2, 2011