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Source of Title Blog

The Entire System Of Property In This Country Might Collapse
by Robert Franco | 2009/06/15 |

The real drama of a Florida couple leads to a pretty bizarre court decision that should have most of us in the title business scratching our heads.  The MacLeods purchased a 70 acre farm and later found themselves in foreclosure over a lien against the prior owner.  Orix Financial had recorded its lien in 1996, but the county clerk never indexed it.  Thus, it was not discovered by the MacLeods, or their title agent... until the foreclosure action was instituted in 2006.

The Third Circuit ruled that the MacLeods' ownership rights trumped Orix's lien, but the First District Court of Appeals overturned the decision. The Court of Appeals stated that the MacLeods' "remedy, if any, will lie against the title insurer or abstractor or against the clerk of the circuit court." 

Source of Title Blog ::

First, it is necessary to look at the reason for the clerk's failure to index the lien.  It wasn't just a "mistake," the clerk apparently made a conscious decision NOT to index the lien because the payment was insufficient.

[MacLeods' attorney] said the issue was a quote from Dixie Clerk of Court Dana Johnson saying the lien was not indexed because "the New York authority sent payment for one document instead of two, so the lien was recorded but not indexed."  (see article on Gainesville.com.)

For reasons which I cannot begin to imagine, the clerk accepted the lien and stamped it with an instrument number, but did not enter the lien into the index. Wouldn't the proper course of action be to return the lien unrecorded, if the filing fees were not sufficient?  I can't see what was to be gained by accepting the document and not entering it in the index.

Second, I can see no rational basis for the court's finding that the appropriate remedy would be against the abstractor.  If the lien was not indexed there would be no way for an abstractor to find it in the course of a diligent title search. 

The issue here is that there are two innocent parties, Orix and the MacLeods, so which should bear the burden of the clerk's failure to index the lien?  On one hand, Orix did record the lien and on the other, the MacLeods were bona fide purchasers without notice of the lien. 

The Court of Appeals took a rather narrow view of the state's recording statute.  The statute provides that official recordation occurs at such time as the office of the clerk of the circuit court affixes to an instrument the official register numbers required by law "and at such time shall be notice to all persons."  But this view fails to incorporate the requirement that the court index the recorded documents.

It seems rather elementary that without indexing, the recording is meaningless and notice cannot possibly accomplished.  The concept of constructive notice is that all parties are charged with notice of documents filed for public record, but there is clearly a problem when a search of the public records could not possibly uncover a document, such as one not indexed.

In a well-written jurisdictional brief, MacLeods' counsel cited a Maryland case, Greenpoint Mortgage Funding v. Schlossberg, 390 Md. 211 (Md. Ct. App. 2005), for a good, solid common sense argument.  Maryland apparently has "virtually identical provisions" of state law and it requires indexing as a prerequisite to constructive notice.

The Greenpoint Court recognized that the nature of recording systems are such that "without indexing nothing works."  The Court therefore held that "indexing mistakes should be at the risk of the person who had the ability to insure that the document was indexed correction -- the filer."  The Court reasoned that, if the risk of indexing errors is placed on the innocent purchaser, "the marketability of titles would be seriously compromised and the entire system of property in this country might collapse."

That may seem like an exaggerated prediction, but I don't think it is too far off.  If a document that is not indexed, or even mis-indexed, is sufficient to impart constructive notice on third-parties, an abstractors would have to look at every document to find any strays that may have been correctly recorded but not correctly indexed.  Such a burden would be so impractical that nobody would be willing to accept the risks associated with searching or insuring titles.

The brief also pointed out that the First District's holding was inconsistent with prior Fourth District decisions.  The Fourth District interpreted the same recording provision in conjunction with a statute that requires the county clerk to maintain "a general alphabetical index, direct and inverse, of all instruments filed for record."  The holding was that "the purchaser had a right to rely on the record as disclosed by a full and complete search at the time of purchase."

Despite the inconsistencies between the district courts and the logical reasoning of the brief and the Fourth District, the Florida Supreme Court declined to accept jurisdiction with no explanation.  The court system in Florida has failed in this instance.  At this point, the Florida legislature would be well-advised to amend the statute that declares constructive notice to third parties is accomplished upon the clerk's affixing "to an instrument the official register numbers." Clearly, indexing must be a prerequisite to constructive notice.

Luckily for the MacLeods, a settlement was reached.

Although [the clerk of court's] quote blamed Orix for not paying to index the lien, the clerk's office agreed to pay Orix $200,000, the state's cap on suits against a government entity.

The clerk's attorney, Cindy Townsend, said the settlement was not an admission of liability, but was in the best interests of all parties. She said there is always a risk with a jury trial of an award in excess of $200,000, which could be paid above the state cap through a legislative claims bill.

Sadly, though, the MacLeods incurred more than $100,000 in legal fees throughout this ordeal.  Though their title insurance policy paid out $110,000, that only covered the original purchase price, not the value at the time or potential sales value, and was already spent in legal fees.  At least they will be able to keep their farm.

Robert A. Franco
SOURCE OF TITLE




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Categories: Abstractors, Risk, Liability and Claims, Title Problems

1463 words | 3751 views | 7 comments | log in or register to post a comment


Property in this Country might collapse

After reading this article and several others that you wrote, I feel like I have entered the Twilight Zone!

The incompetence in some of these Clerk office's are unbelievable. As is their willingness to take any responsibility for their actions.

I know in Bergen county NJ, the county finally had to start imaging documents because they were running out of space to keep books. There are tons of errors being found by the fellow who does my searches in this county, the main one being you can use one computer and find a deed and mortgage for the property you are searching, then go to another computer later on and find a deed and 2 mortgages for the same property!

And despite the fact that this problem has been reported over and over again, the county has done nothing to resolve it, and appears to not care that this is a real problem.

They have to be spending millons of dollars to get this imaging project done, you would think they would want problems like this resolved because it is a liability for them.

This world we live in is truely in a very very sad state!

 
by Jessica Talley | 2009/06/19 | log in or register to post a reply

Disclaimers

At this point in our screwed up, ruined and ruinous legal system, I really doubt that ANY disclaimer is going to keep an abstractor out of court, but it might be wise to state on your abstracts:  "The results of this search are dependant upon the indices generated and maintained by others.  This search does not cover matters of record if same were not properly indexed."

 
by Alix Ott | 2009/06/22 | log in or register to post a reply

Bad for Searchers - Good for Underwriters?

We had a similar state supreme court ruling regarding a recording statute in Pennsylvania in 2003.  In  First Citizens National Bank v. Sherwood, 879 A.2d 178, the court looked at a similar statute and interpreted it to mean that recording alone imparted constructive notice despite the existence of indexing statutes stating that indexing is what imparts constructive notice.  The decision was criticized quite a bit and there was a dissent, but there were similar holdings by other courts in other states with the same fact pattern, so the Sherwood decision in PA was not entirely out of the blue.

Interestingly, there has been no real uproar except among the searchers.  They of course cannot really change their practices to adjust to the decision since the only effective way to deal with the new rule is to pull every single document in the recorder of deeds office for each search.  However, there is a distinction to be made as to whether or not failing to find a document that is mis-indexed (or not indexed at all) really constitutes negligence.  The Florida cases discuss that to some extent as well.  Even though an innocent purchaser may take subject to the lien, an abstractor missing the lien may not necessarily be negligent.  That is one of the reasons title insurance came into being in the first place - it was supposed to pay claims for abstracting problems even when the abstracter wasn't necessarily negligent or liable for the error.

The only real complaints about this court decision in PA have come from the searchers because it seemingly places such an unreasonable burden on them.  The rest of the industry appears to have been largely silent and there has been no push from what I can tell to revise the statute.  I think some in the industry tacitly hold the view that these types of decisions will help the industry by drawing attention to the need for title insurance since these rulings mean that even a diligent (and even accurate) search of the records might not be enough to escape title problems.  I think the hope is that lenders, especially second mortgage lenders, will be more likely to require title insurance due to the increased risk legal decisions like these create.

 
by David Jenkins | 2009/06/22 | log in or register to post a reply

Bad for Searchers

David,

Ultimately he who did the search is the one who will in fact be held responsible and sued, that is why no one cares besides the examiners!

This all part and parcel of the no responsibility, no one cares anymore that we are seeing throughout the Great US of A!

Its very sad.

 
by Jessica Talley | 2009/06/30 | log in or register to post a reply

Bad for Searchers

David,

Ultimately he who did the search is the one who will in fact be held responsible and sued, that is why no one cares besides the examiners!

This all part and parcel of the no responsibility, no one cares anymore that we are seeing throughout the Great US of A!

Its very sad.

 
by Jessica Talley | 2009/06/30 | log in or register to post a reply

Bad for underwriters as well...

Jessica:

Regardless of whether or not a searcher could be held liable for missing an improperly indexed document under this type of rule (recording alone sufficient to provide notice without indexing), this type of rule appears just as likely if not more likely to generate losses for the underwriters.  Searchers are usually held to a negligence standard which is lower than the strict liability standard that most title policies incur.  In many states the policy holder would not even be able to sue the searcher directly because of a lack of a contract.  In other words, this decision is more likely to generate headaches and losses for the underwriters, but despite that, I still don't see any push to revise the law in those states where this situation exists.  I can only speculate that this is either a business decision or a strategic decision not to waste political capital trying to change the law.

 
by David Jenkins | 2009/07/02 | log in or register to post a reply

Notice v Liability

  The premise of the court decision appears to be that the Official Record constitutes the notification, and not the "card catalogue" which is the index.  It is like assigning a student to read a book, the student looking through the library index and not finding the book, and thus reporting a "no-results" report.  The analogy is not exact, but illustrative none the less.

  One of the interesting aspects of this is that many Title Insurance firms run "joint plant systems" (no, not maryjane greenhouses, but centralized databases).  These centralized databases, while undergoing corporatizations and buyouts in the past couple of decades, are illustrative of the ability of some firms to create parallel indexing systems.  They hire ty;pking pools (now mostly  in India and the Philippines) which receive microfilm reel copies or digital data which are the iimaged documents recorded on the Official Records.  They get daily or weekly deliveries of the data from the county, which they pay for.  Their typists view each and every document to create a new, property-based index.

  An outcome of this system is that the title company do not rely on the County Index alone, but a parallel, private database whereby their typists have done due diligence as their agents by reviewing and indexing each and every document themselves. 

  In my 25 years of title experience, I've seen one and only one example of a document that was indexed wrong by the title company AND by the County Recorder.

  The implication of this view is that we as abstractors have not done our due diligence by reviewing each and every one of the Official Records ourselves personally against each and every search (naturally an impossible feat given the hundreds of thousands of records stretching back, in some cases, centuries).

  Technology solution:  Near future tech could provide us with scanning, transmitting eye glasses or contact lenses. 

  Such wearable computronics, using high resolution cameras (available today), image stabilizers (like in video cameras today), image recognition software (like that used to auto-index tee-tor names in some counties today), would allow abstractors to create their own "joint plant" system nationwide.  The documents would be uploaded as with the wi-fi SD chips like those made for digitial cameras, and would be hosted on an editable wiki-board.  The database could be hosted online for any abstractor to cross-check against the County record, and would become more and more complete as time went on. 

  I would like to offer the prime example of do-it-yourself technology in the municipality of San Francisco.  Their goal of partnering with a tech giant to provide wi-fi service throughout the City for all of it's residents and guests was abandoned as unprofitable.  However, citizens and business owners stepped forward and wired over 40% of the city (with higher coverage areas in the more downtown / urban centers) using open source wi-fi networks.  Citizens exercising their rights with a greater diversity of interests, backgrounds and cultures than we abstractors have, gives me hope that technology and mutual interest in our field will prevail in this effort.

  It was one of my earliest hopes on this board, that we could cooperate in creating public records that would be available to all, and I still work toward that goal to this day.

 
by William Pattison | 2009/08/03 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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