July, 2006
Special Transfers - Involuntary Conveyances
Involuntary conveyances such as judicial sales, foreclosures, partitions, execution sales, tax titles, bankruptcy and forfeitures can make for a complicated title exam. Although they are not the usual forms of conveyances, which operate to divest title from the record title holder. Since they are usually based upon statutory procedures, they require special attention.
In most cases of involuntary conveyance, there will be a judicial proceeding of some type. Therefore, an examination of the court files is required to verify validity. The file must be examined in light of the statutory, judicial or administrative authority in effect at the time of the proceeding. First, there must be a basic determination as to the court having proper jurisdiction over the subject matter. Next, it must be confirmed that the parties received proper service of process and that all necessary parties were properly named as defendants so as to be bound by the judgment. These are the general rules; however, each type of action has its own particular procedure and requirements.
FORECLOSURES AND PARTITION SALES
Foreclosures are by far the most common judicial sales that occur. Partition sales are regularly used in estate administration, guardianships and trusts. The validity of a judicial sale depends on the regularity of the underlying judgment and the sale procedure. If either is faulty, the conveyance is void.
In most states, foreclosure is accomplished by nonjudicial procedure pursuant to the contract (deed of trust/mortgage) provisions between the borrower and lender. In other states, it requires a judicial proceeding. A judicial sale is a sale pursuant to a court order. The order must describe the property and the proceedings must show facts necessary to establish the court’s jurisdiction or the judgment is not valid. Usually, the judgment describes the action to be taken and provides for a procedure to affect the judgment if the losing party fails to perform. In these cases, the judgment itself is not the conveyance and does not in and of itself create an insurable interest.
For all foreclosure sales, judicial or private, there must be a published notice of sale. After publication for a specified period of time, the property is sold at public auction to the highest bidder for cash. In judicial sale states, unless a state statute provides for alternative procedures, court confirmation of the sale may be required. After the sale, a court appointed officer, normally the clerk of the court, reports to the court what action was taken, the name of the purchaser and the sales price. Title passes upon execution of a deed or certificate of title by the officer or trustee conducting the sale. If a review of the proceeding indicates no irregularities, then the title should be insurable.
In the case of partition sales, it is a matter of making sure that all the necessary owners and parties are before the court and that they have been properly served. This is especially critical when any of the parties could possibly be under some legal disability such as being a minor, mentally incompetent or even out of the country or in military service.
TAX TITLES
Because the taxes on a property, even if seriously delinquent, are far less than the value of the property, courts generally view tax titles with disfavor. In some jurisdictions, title companies are unwilling to insure these titles at all. In other jurisdictions, title insurers are only willing to insure title based on tax deeds after a quiet title suit confirming title.
In the case of county or state real estate taxes, the usual procedure is that after the taxes become delinquent, the taxing authority will conduct a public auction. After the running of a specified time period, the successful bidder may take steps to acquire a tax deed or foreclose the equity of redemption. The issuance of the tax deed divests the former owner of title and constitutes a new source of title.
The federal government has two basic means of enforcing its tax lien: judicial and administrative. When the federal government chooses to enforce its tax lien by judicial proceedings in which all parties in interest, including the taxpayers, are before the court, ordinarily no particular problems are presented (see 26 U.S.C. § 7403). The federal government, however, occasionally acquires title to real property by levy and distraint (see 26 U.S.C. § 6331). Distraint is a summary administration remedy whereby title is conveyed to a purchaser pursuant to a distraint sale. Basically, the IRS sends a notice informing the taxpayer that his or her property has been taken for taxes. The deed generally executed by the regional director of the Internal Revenue Service.
Deeds issued pursuant to federal levy and distraint proceedings and tax titles arising from state real estate administrative tax deeds are not issued pursuant to any public judicial proceedings and lack many of the fundamental elements of due process. Thus, the company is reluctant to insure title based on such deeds.
EXECUTION SALES
An execution sale is a proceeding to enforce a judgment lien. The property is sold by a sheriff or deputy under a writ of execution. An execution sale differs from a judicial sale in that the sheriff’s authority to act is derived from statutory law rather than from the direction of the court and must be based on a valid execution, levy, notice of sale, sale and issuance of a deed. There are no presumptions as to the validity of a sheriff’s sale.
The form of deed is generally a quitclaim deed. Thus, the purchaser at an execution sale acquires only such interest as the debtor had in the property. As a general rule, title derived from a sheriff’s sale is not insurable without a quiet title action confirming title in the purchaser at the sheriff’s sale.
FORFEITURE
There are numerous federal and state forfeiture statues that govern property linked with various crimes. The most common federal forfeiture statues are 21 U.S.C. § 881 (a civil "in rem" forfeiture brought directly as an action against the property with no requirement that the owner be convicted of the crime); 21 U.S.C. § 853 (a criminal "in personam" forfeiture requiring that the owner be convicted of a crime); and 18 U.S.C. § 1963 (the RICO Act, which is also a criminal in personam forfeiture requiring that the defendant be convicted).
When the government proceeds under an § 881 civil in rem forfeiture, it will file a complaint against the property in federal district court whereupon the property is "arrested" by way of an in rem seizure warrant issued by either a federal district court judge or a US magistrate. Notice of the seizure of the property is personally served on all parties having an interest in the property, who then have a right to appear at the forfeiture trial in accordance with the Federal Rules of Maritime Procedures. These rules apply since the Federal Rules of Civil Procedure do not provide for in rem proceedings. Under Mennonite Board of Mission v. Adams, 462 US 103 (1983), all parties must be personally served if they are "reasonably ascertainable" and, if not, alternative service such as publication or posting notice on the property is permitted.
A lis pendens giving construction notice of the seizure is filed in the public land records. If the property is "found guilty," an order and judgment of forfeiture is entered and recorded in the public land records. After the running of any appeal period, the US marshal can convey the property to a third-party purchaser.
If the court chooses the criminal proceeding route, it requires a conviction. The proceeding is in personam, and if the defendant is convicted, the property described in the indictment is forfeited. After conviction, an order for forfeiture is filed, and third parties having an interest in the property are given an opportunity to be heard. Service of process must be in compliance with Mennonite. The court then issues an order and judgment of forfeiture. After the appeal period has run, the US marshal may convey the property. Under both civil and criminal forfeiture, the conveyance is usually made by a US marshal quitclaim deed executed by the marshal.
CONCLUSION
When dealing with these types of conveyances, it is highly unlikely that an agent would be able to ascertain the validity of title solely from local land records. Since it will probably require a review of court proceedings in the state court or possibly those of a federal court in another jurisdiction, be sure to consult with your company representative early to determine the necessary requirements for insurability. As a practical tip, it is also advisable that you inform your client that there may be delays and additional costs in finalizing the transaction. And, as with any transaction, make sure you have all the facts.
