Though it's not the primary purpose of the title insurance industry, title companies have always played an important role in the process of collecting judgments. When an interest in land was conveyed, whether it was a sale or a new mortgage, the title company did a thorough title search and if there were any judgment liens they were required to be paid off before the transaction could proceed. The main function of this, of course, was to clear the title so a policy could be issued. However, as a secondary matter, it assured creditors that they would get paid if the debtor tried to dispose of their interest in the encumbered property.
Today, shoddy workmanship and a drastic decline in search standards means that judgment creditors can no longer rely on the system. That is bad news for creditors.
One of the best title examiners I know called me recently to tell me about a search she had just completed. A valid judgment lien was missed at least three times in three different transactions and now the lien is dormant. The judgment creditor had no idea that they missed three opportunities to collect on their lien and because they failed to renew it, they are out of luck.
Here is a brief summary of the events.
In 2002 Dee Kay bought a house and wrote a $10,000 check to the title company... which bounced. Criminal charges were filed and the title company obtained a $10,000 judgment and filed a lien against the property shortly thereafter.
In 2003, Dee Kay was foreclosed on by The Bank. The lien was apparently not discovered in the title search, it was not shown on the preliminary judicial report, and the title company was not served notice.
In 2005, The Bank sold the property to Kris Stew. Again, the lien was apparently not picked up in the title search and the closing proceeded without paying off the title company's lien.
In 2006, Kris Stew was foreclosed on and the property went back to HUD. Once again, the judgment lien was discovered in the search, not shown on the preliminary judicial report, and the title company was not served notice of the pending foreclosure.
Now, it's 2008 and HUD is selling the property. In Ohio, judgment liens are good for five years. Thus, the title company's lien expired in 2007.
There is no doubt that the title search for the first foreclosure in 2003 should have disclosed the existence of the lien. Had it been included on the preliminary judicial report, the title company would have been served and, whether or not they would have received any payment, the lien would have been released as to this property. That should have taken care of the issue. However, the title company was not included as a defendant in the foreclosure and their lien survived.
My guess from there is that the on the sale from The Bank to Kris Stew, the abstractor saw that there was a foreclosure with a preliminary judicial report and it was relied on, rather than conducting a proper search. Perhaps, it was even the title company's direction to do a short search. It was probably assumed that it just came out of foreclosure, everything must be fine.
The law firm handling the second foreclosure for HUD most likely relied on the lender's policy and only conducted a current owner, or updated the policy. This is becoming more and more common with foreclosure searches. In my opinion, it is a very hazardous practice. The searches done for the loan policies are mostly short searches and, especially with the quality of work that passes these days, it is just not a safe assumption to rely on the accuracy of someone else's work. Yet... it happens every day.
I know a few business owners who have had to obtain judgments and they have followed all of the proper steps to assure that they have a lien on the property. They all assume the same thing... "at least I'll get paid if they sell or refinance their home." That is just not a safe assumption anymore. The title industry no longer protects the judgment creditors like it once did. Should these creditors be forced into a position where they have to do title searches every know and then just to check to see if the debtor has conveyed any interest that was encumbered by their lien? I don't think that should be necessary.
In this case, the title company creditor would not likely have gotten paid from any of these transactions anyway. The first sheriff's sale probably did not provide enough to payoff the mortgage and the lien. However, the creditor was deprived of their right to show up and bid on the property at the sale. Who knows what the property was worth, or if they would have opted to do so, but they should have been given notice of the suit and afforded the opportunity to file an answer. In any regard, at the conclusion of the action, the lien would have been removed from this property.
The criminal case against Dee Kay is still open while she makes restitution payments to the title company. The debt may still get paid. However, the fact that the lien was missed in three separate transactions should be enough to shake your faith in the system... I know it worries me. This doesn't say much for the integrity of the title industry, and it is bad news for creditors.
Robert A. Franco
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