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What Does “Chain Of Title” Mean?

The Indiana Court of Appeals in Weathersby v. JPMorgan Chase, 2009 Ind. App. LEXIS 836 (Ind. Ct. App. 2009) (.pdf), which I’ll discuss in more detail next week, explains the idea of “chain of title” and what it means in Indiana.  To brush up on your real estate vocabulary, keep reading.

Chain of title.  Weathersby explains what “chain of title” to a tract of land is.  Here are the Court’s words:   

 In a title search, the prospective purchaser or his abstractor assesses the marketability of title to a tract of land by determining the “chain of title.”  Beginning with the person who received the grant of land from the United States, the purchaser or abstractor traces the name of the grantor until the conveyance of the tract in question.  The particular grantor’s name is not searched thereafter.  As the process is repeated, the links in the chain of title are forged.

My trusty Black’s Law Dictionary defines “chain of title” as:

 Successive conveyances, or other forms of alienation, affecting a particular parcel of land, arranged consecutively, from the government or original source of title down to the present holder.

Indiana’s system.  Indiana counties are required to maintain a name index system for recording deeds and mortgages.  See, Ind. Code § 36-2-11-12.  These indices are organized alphabetically by grantor and by grantee, or mortgagor and mortgagee, with cross-references.  Furthermore, the indices describe the tract and show the date of the recording.  As noted in Weathersby, purchasers of real estate are presumed to have examined these county records and are legally charged with notice of the facts in them.  This rule applies to both purchasers and mortgagees.  A record outside the chain of title does not provide constructive notice to bona fide purchasers for value, however. 

Following a chain of title is sort of like connecting the dots of ownership.  As I’ll illustrate in next week’s post, there are times when parties, outside the chain of title, claim an interest in, or ownership to, real estate.  Weathersby addresses what can happen in such a scenario.

IndyStar: Salin Bank Suing Former Owner Of Davis Homes

Today's Indianapolis Star is reporting:

Salin Bank charges that the owners of the former Davis Homes committed fraud by taking money and other assets from their Indianapolis homebuilding company after it sank into insolvency last year.

Click here for the story.  I haven't read the Complaint, but this appears to be a fraudulent transfer case.  I have four prior posts, which touch upon these issues, if you're interested in learning a little more about the legal issues. 

Always Consider An Environmental Liability Analysis

Before a secured lender decides to move forward with the filing of a lawsuit to foreclose its mortgage, a variety of matters should be considered.  Generally, for example, the loan collateral should be analyzed.  If the loan collateral is real estate, the analysis should include, among other things, a determination of value.  More than likely, in Indiana the foreclosure suit will result in the lender/mortgagee taking title to the real estate at the post-judgment sheriff's sale.  In other words, the lender will become the owner.  This begs the question of whether the benefits of owning the property outweigh the costs.  

Environmental liability.  Since the Indiana commercial foreclosure process could transform the secured lender into the property owner, before the case is even filed some thought should be devoted to ordering an environmental liability analysis (aka a "Phase I").  An environmental assessment company can examine the property and the public environmental records relating to the property.  While environmental issues and liabilities go beyond the scope of this blog, secured lenders and their counsel should be aware that there are federal and statue statutes pertaining to such liability, including CERCLA, 42 U.S.C. 9601, et. seq.  

Subsequent owners.  Generally, the law imposes liabilities on owners or operators of properties for the cost of remedial action when there is an actual or threatened release of hazardous substances.  The key is that environmental liability exposure extends to subsequent owners of the real estate, so lenders need to be cognizant of any such liability exposure and to factor such exposure into the lender's workout decisions.  The potential costs associated with any environmental issues should be measured against the ultimate benefits of repossessing the property at the sheriff's sale (or by deed-in-lieu).  Depending upon the nature and scope of the environmental contamination, foreclosure may not be warranted.  

Not required.  Although we recommend that lenders consider a Phase I, environmental work is not a requirement to foreclose, and common sense should prevail.  Phase I's are not cheap.  Certainly not all properties or locations pose a significant risk for environmental problems.  Moreover, depending upon the age of the loan, a recent environmental assessment conducted in connection with the funding of the loan may provide sufficient comfort going forward.  

Assignment.  One way to mitigate against liability exposure is for the lender to take title at the sheriff's sale through an entity that is different than the plaintiff/judgment creditor (the lender/mortgagee).  This can be accomplished by a pre-sale assignment of the judgment and the loan documents.  There are other business reasons why lenders may seek to hold title to real estate in the name of a separate entity, and some of our clients have set up such entities to own and control their "REO" (real estate owned) properties. 

If you have questions about the nuances of environmental matters, as they relate to the acquisition of real estate, I can put you in touch with one of my real estate transactional partners.  For more in-depth environmental questions, my partner Dale Eikenberry is experienced in this area and can assist.  If you'd like to contact an environmental firm directly, August Mack Environmental is a nice regional environmental group, and Cassie Anderson can help you.  Her email is candersson@augustmack.com, and August Mack has a blog at http://blog.augustmack.com/blog/re-start-for-forecloseddistressed-properties.                  

WSJ: Commercial Real Estate Lurks As Next Potential Mortgage Crisis

From yesterday's Wall Street Journal

Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.  Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.

Click here for the rest of the article.