Title Insurance Company’s Concerns in Issuing Coverage for Lender Remedies for Distressed Commercial Real Estate

Lender and Borrower enter into a workout agreement pursuant to which Lender’s subsidiary takes record title and the mortgage remains upon the propertyLender forecloses upon the property (straight or via a lift stay); and Lender, or Lender’s subsidiary (as REO), sells it to an unrelated third partyBorrower files bankruptcy and the property is sold under the jurisdiction of the Bankruptcy Court
Why should Lender get an owner’s insurance policy?Coverage as to the existence of any intervening acts and the types of items described below, particularly creditors’ rights endorsement.In selling REO, the creditor’s rights exception does not relate back to the prior sale.
Insuring over standard exceptions1. Borrower’s/

Seller’s affidavit and indemnity is worthless.

2. Purchaser should be able to give it for its own loan policy.

No Seller’s affidavit or indemnity.No affidavit or indemnity from Borrower or the bankruptcy estate

Insuring over mechanics’ liens1. Borrower’s/

Seller’s affidavit and indemnity is worthless.

2. Purchaser should be able to give it for its own loan policy.

1. State law

2. Issue as to Lender’s implied consent.

Addressed by court order
Non-merger endorsementNon-merger language in the workout agreement and in the deed. Effectiveness under state law?N/AState law

Creditors’ rights endorsement1. Borrower has to request.

2. Borrower has to acknowledge that the loan is in default.

3. Borrower has to acknowledge that the loan outstanding exceeds the value of the property.

4. Get an appraisal to that effect.

5. What is the consideration to Borrower – forbearance; partial or total forgiveness, release or extension; covenant not to sue principals of borrower or for a deficiency or for breach of various other covenants; walking around money or paying some of Borrower’s expenses, including for removal of other liens; no other liens exist; and non-merger language in the workout agreement and deed?

6. If the consideration is forgiveness of indebtedness, issue whether Lender or its subsidiary is a “good faith purchaser for value” as required under the Owner’s policy conditions.

Fear that the foreclosure was not conducted properly, especially with a non-judicial foreclosure. Opinion of lender’s counsel to transfer a negligence standard of the attorney to a strict liability standard of the title insurance company?1. Fear that a sale conducted without Court approval may not be conducted “in the ordinary course of business” under Bankruptcy Code Section 363(c). Opinion of lender’s counsel to transfer a negligence standard of the attorney to a strict liability standard of the title insurance company?

2. Fear that, prior to the date a plan or reorganization is approved (beyond appeal), a bankruptcy court could find an equitable subordination under Bankruptcy Code Section 510(c); however, with a reputable lender, title company could have language protecting itself.

3. Cram-down is not a title issue.