Developments of Interest
Chris Burti, Vice President and Legal Counsel

Case Law - Investors Title Insurance Company, v. Montegue

243 S.E. 2d 527 (NC APP.2220)

This is an appeal from an adverse summary judgment against Investors Title Insurance Company (Plaintiff), in a claim recovery action. Defendant executed a Deed of Trust to secure a loan made by the City of Charlotte to Defendant to purchase a condominium. Defendant sold the condominium to Edna V. Johnson. As part of the purchase price for the property, Johnson entered into an assumption agreement to assume the balance owing. The agreement did not release Defendant from liability. Johnson died, and Donald S. Gillespie, Jr. was appointed as commissioner to sell Johnson's real property. Gillespie sold the condo to Norman A. Holmes. Subsequently, the City of Charlotte instituted foreclosure proceedings on the property. Plaintiff provided title insurance to Holmes, and was required to pay off the Note pursuant to the policy. Foreclosure proceedings were never completed. Plaintiff was assigned the Deed of Trust with the Note and then demanded that Defendant pay $64,907.26. Defendant made no payment, and Plaintiff commenced an action against Defendant. Defendant answered- alleging that she had never received demand for payment from Plaintiff, that she was not made a party to and did not receive actual notice to the foreclosure proceeding, and that Plaintiff had not offered to assign the Deed and the Note upon payment. Defendant successfully moved for summary judgment.

The Court ruled that an assignee of a Note and Deed of Trust, who seeks to collect from the mortgagor, is required to assign the Deed of Trust to the mortgagor as a condition of collecting on the Note. "If the mortgagee brings an action against the mortgagor and the mortgagor pays the debt, the mortgagor is subrogated to the rights of the mortgagee against the person who assumed the mortgage. Hatley v. Johnston, 265 N.C. 73, 83, 143 S.E.2d 260, 267 (1965). The mortgagor has several options of seeking reimbursement. He may bring an action to foreclose on the property, sue to recover the land, or bring an action against the person who assumed the mortgage. Id."

The case was remanded for a determination of whether the plaintiff is willing to assign the debt instruments to the defendant. In a footnote, the Court observes (correctly, we think) that, "It does appear, however, it would be unlikely for Plaintiff to assign the Deed to Defendant, as this would result in the foreclosure of property which it insured."

Privacy Policy: Gramm-Leach-Bliley

Most of you have noticed all the "Privacy" notices or disclosures you have suddenly been getting with credit card bills, bank statements, insurance policies or other things.

The Gramm-Leach-Bliley Act ("GLBA") allows financial institutions (banks, securities firms and insurance companies) to form affiliations and controlled business arrangements that were previously prohibited by law. In order to protect personal privacy, amendments were incorporated, before passage, that restrict financial institutions from disclosing information that is not otherwise public to unaffiliated third parties if it is gained from its customers. This is accomplished by requiring these institutions to provide each customer an annual written disclosure of its privacy policy and an opportunity to deny any third party disclosure of such information. The initial privacy notice must be provided to existing customers by July 1, of this year.

The Federal Trade Commission has adopted interpretive regulations that provide that the definition of a financial institution also includes any person "providing tax planning and tax preparation services" and "an entity that provides real estate settlement services" to consumers "primarily for personal, family, or household use." It is rapidly becoming the consensus among the Bar that this applies to attorneys doing individual estate planning, and firms closing residential real estate. Some are arguing for reading wider applicability into this interpretation, out of a sense of due caution.

The determination was made at the last minute, and your clients had to be mailed the notice procedure by July 1, 2001. There is no specific penalty provision in the Act for failure to comply, although there are penalties and fines applicable for failure to abide by FTC regulations.

The Gramm-Leach-Bliley Act (GLBA) imposes three basic requirements: (1) a privacy notice requirement; (2) a requirement that all consumers be provided the opportunity to opt-out of certain information disclosures; and (3) a requirement that measures be instituted to maintain the "security and integrity" of all nonpublic information.

All "financial institutions" must comply. This includes all title insurance companies, agents and settlement service providers. The GLBA applies only to individuals who are purchasing insurance or other financial products for personal, family or household purposes. In the title context, the rules apply only to residential closings; they do not apply to commercial activities.

A privacy notice must be given to any individual who purchases a residential title insurance product or service at the time the product or service is sold or delivered. Since closing attorneys are seemingly included in the FTC’s interpretation of the definition, they also must provide a privacy notice to their customers. The notice must be provided when you and a client enter into a continuing relationship.

Clients must be given notice of a firm’s information-handling practices. These disclosures include the categories of nonpublic information collected and what may be disclosed and to whom. Lawyers Mutual Insurance Company has a sample disclosure available. It includes a full list of the required disclosures. The sample form does not anticipate sharing of information outside the title insurance underwriter and affiliate or agent structure. A privacy policy may be construed as imposing, binding, and contractual obligations.

Members of the ABA and NCBA are looking into this issue and hope to be communicating recommendations to the membership soon. Reportedly, the ABA is organizing an effort to secure legislation that will exempt attorneys from this requirement. The North Carolina Bar Association’s web site can be found at www.ncbar.org. Various list servers and bar organizations are beginning to promulgate forms of notice tailored to law practice. Until change is effected, it would be wise to prepare for sending notice to all applicable current clients, and providing it to new ones with your initial contact.

Before nonpublic personal information about any individual may be disclosed to a nonaffiliated third party, the individual must be informed of the intended disclosure and given at least 30 days to prevent it (an "opt-out" notice). The right extends to present customers, former customers, and anyone else about whom you maintain information. The right is subject to a long list of exceptions. No opt-out notice is required if the purpose of the disclosure is to complete the title insurance transaction or to service the insurance policy. If an opt-out notice is required, it must include a copy of the general privacy notice, or contain a statement that the person may obtain a copy of that notice with instructions on how to obtain it. The opt-out notice must inform the individual of the intended disclosure, and provide a mechanism for the person to opt-out of that disclosure. The mechanism may require the individual to submit a provided form, or call a toll-free number. It must not require the individual to write a letter.

GLBA privacy rules are being implemented separately by the federal banking agencies, the Securities and Exchange Commission, the Federal Trade Commission (FTC), and each of the states. The federal agencies have finalized their regulations. North Carolina is still in the process of doing so.

Legislation - LUST Land-Use Restrictions

Sponsors: Representative Gibson

This bill, as passed in the house, would simply have extended the sunset provision of Section 4 of S.L. 2000-51. The Senate committee substitute would make extensive changes to G. S. 143B-279.9 and add G. S. 143B-279.11, as well as make conforming changes in several other statutes. The thrust of the changes will be to change the standard for imposition of land use restrictions on risk-based remediation from "current" standards to "restricted use" standards. When the owner of contaminated property and the State agree on a plan of remediation that removes substantially all contamination from the property, it may then be classified for unrestricted use. When the nature of the contamination justifies a less stringent remediation, it may be a risk-based plan. If the State and the owner agree in such cases, restrictions will be placed on the current and future use of the property. The owner must agree to record the restrictions. In addition, there will be a requirement that these restrictions be recorded in the Register of Deeds, in order to provide notice that the contamination was not fully remediated. If there is subsequent full remediation, the bill contains provisions for notice and removal of restrictions. G. S. 143B-279.9(b) expressly provided that these provisions did not apply to contamination from leaking underground storage tanks. This provision is eliminated in the new version.

G. S. 143B-279.10 presently provides a recording requirement and procedure for a Notice of Contamination. G. S. 143B-279.11 is a new provision that only applies to a "cleanup pursuant to a risk-based remedial action plan that addresses damage resulting from an underground storage tank …". It also contains requirements, recording procedures and notice for these action plans.

The bill, if passed, would become effective on September 1, 2001, the same date as the existing act would sunset. It will apply to any cleanup of a petroleum discharge from an underground storage tank. Recorded restriction on land use will not be required, if DENR has issued a determination requiring no further action prior to the effective date.

This bill would provide greater certainty for title examiners, with respect to environmental concerns arising from underground storage tanks. We suspect that title insurers will receive requests from lenders asking for affirmative coverage over these notices when reported. This is not coverage that is properly afforded by title insurance. The issue may create some difficult closing negotiations, until all parties become comfortable in dealing with them.

Controlled Business
Statewide Title, Inc.

For those who wish to be politically correct, these evolving adaptations in our industry are now euphemistically referred to as "affiliated business arrangements." We believe that the practice of soliciting captive title business during the loan application process is inherently adverse to the interests and welfare of the consumer in several aspects.

Statewide Title, Inc. has been unequivocal in its position of supporting the role of the attorney in the closing process, as typified in North Carolina. The statistics consistently demonstrate that our form of practice produces a lower closing cost to the consumer for title assurance. We believe that this is the result of the greater accountability and professionalism of the attorney-client relationship. This relationship results in fewer errors, resulting in fewer claims and lower losses. Controlled business arrangements erode this relationship by dictating the selection of the title insurer- without providing the consumer with an informed choice. The attorney has traditionally been the source of information for a consumer’s choice of insurer. Because of our laws in North Carolina, an attorney will not have a financial interest in the choice. The choice of insurer will typically be the result of a company’s financial strength, performance, service and claims philosophy. Title companies are not all alike. There are very real differences in these aspects, and these differences will have an impact on the client’s welfare in the event of a claim. The lenders have a very clear interest in the consumer’s policy being written by a captive company. We have heard apocryphal stories of attorneys complying with lender directives to use a captive company solely for fear of the lender steering business to more compliant firms, even when the attorney does not believe the captive company will serve the client well. We doubt that this situation occurs very often. Most attorneys take their professional responsibility too seriously for this and comply, because they have made an independent judgment that the client’s interest is well served. Still, the concern for lost business is a very real one among real property practitioners. While this concern may not, and should not, be a deciding factor in insurer choice, its influence, nonetheless, casts doubt on attorneys’ independence of advice.

Clients, when questioned, sometimes report that they would rather leave the choice in place rather than risk incurring a lender’s dissatisfaction and, thereby, unfavorably influencing lending decisions. This is, in all probability, the situation in most minds even if it is not articulated as such. We have heard such reported in the context of sophisticated commercial clients. Where does that leave the typical consumer who is relying on the bank for financial advice? Soliciting a self-serving business relationship during the loan application process has the appearance of economic coercion of the worst sort. If an attorney were soliciting investment by a client in some personal enterprise with no more disclosure than these lenders provide, it would be grounds for disciplinary action. Lenders with self-interested solicitations should make their pitch after the loan has been formally approved. Thus, they would avoid the appearance of improper influence.

These arrangements also provide an excellent opportunity for conflict of interest litigation to result. A title insurers risk on a lender’s policy of insurance is lower than the risk on an owner’s policy. The risk is lower because there is rarely any liability to a lender, unless there is a default in the loan and foreclosure of the security instrument. Liability for covered losses exists on the effective date of an owner’s policy. This risk differential often results in lenders being afforded coverage over certain title matters that will not be made available in an owner’s policy. Suppose that an underwriting decision is made by a captive company to afford a lender, and not an owner, coverage over a title matter not normally insured against in a purchase context. If a successful claim arises, the lender will be paid in full by the title insurer under the policy, or by the borrower under the note. The owner has to absorb the loss, and is still obligated to pay the lender. The argument for liability goes as follows: if the lender had been unable to secure coverage, the loan would not have gone through, and the owner would not have purchased. The owner will claim that the assumption is reasonable- that if the lender was protected, so was the owner. Because of our society’s deep-pocket syndrome, this will be a compelling argument. When one considers modern trends, it will not be surprising if the closing attorney is dragged into the litigation under some theory that there is a responsibility for the attorney to advise the client of the potential conflict that was created before the attorney was involved. Considering the propensity for consumer activism, based upon deep-pocket liability, it may not be prudent to wager on the outcome.

Insurers often feel compelled to participate in these arrangements in order to remain competitive and insure economic survival in a rapidly changing environment. This belief can result in negotiating leverage that results in contracts providing minimal profitability for the insurer. When this occurs, tighter claims management and more aggressive loss recovery policies will result. This creates further dissatisfaction among owners already struggling with the inconvenience, worry and stress of a title claim. We all know that it is the closing attorney that typically endures this dissatisfaction. Aggressive loss recovery activities by an insurer often result in economic losses for attorneys also.

While there are numerous concerns engendered by controlled business arrangements, we will limit our discussion to this last one. Lenders are increasingly making demands upon title insurers to provide affirmative coverage over title defects, regardless of whether providing such coverage might be prudent risk underwriting. As lenders become more closely involved in the underwriting process, as in the case of controlled business arrangements, these demands will further escalate and tend to be met. At some point, one can envision that the argument may be successfully postulated that attorneys’ opinions on title are unnecessary, that title insurance should be underwritten, and premiums accordingly based, simply on an actuarial loss basis. States that have excluded attorneys from the process dominate the top half of the cost statistics for title assurance. It is extremely reasonable to conclude that if such becomes the practice, that consumers will have to bear the cost of the increased losses that will of necessity result from attorneys being excluded from the title assurance process.

Attorneys who have clients that would like to change their selection of title insurer after being provided with the information necessary to make an informed choice, may use the Borrower’s Title Insurer Selection form included with this newsletter, or download the form from our www.statewidetitle.com web site.