Title Insurance Companies Eliminate Creditors' Rights Coverage For Real Estate Buyers And Lenders

Recently, various national title insurance companies, such as First American Title Insurance Company and the entire Fidelity National Title Group—which includes Chicago Title Insurance Company, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title and Alamo Title—officially announced that, effective immediately, creditors' rights coverage will no longer be available by endorsement, affirmative coverage, issuance of the American Land Title Association (ALTA) 1970 policies or otherwise. This change affects both owner's and loan policies.

Creditors' rights coverage previously provided the purchaser of real property or its lender with insurance that the transaction at issue would not be unwound or set aside by a creditor of the seller or borrower, as applicable, on the basis of the transaction constituting a voidable preference or fraudulent conveyance under federal bankruptcy, state insolvency or similar creditors' rights laws. This coverage also included attorneys' fees and defense costs resulting from such claims. The costs in these cases can be substantial.

The elimination of title insurance, and the resulting significant costs from a claim by a creditor, underscores that buyers and lenders may want to conduct a greater level of due diligence regarding the parties to the transaction and the terms of each transaction to identify whether any of the elements of a potential claim by a creditor exists. In general, a successful creditors' claim requires proof that the transaction was either: (i) made with the intent to hinder, delay or defraud a creditor or (ii) for less than "reasonably equivalent value" when the transferor was insolvent at the time of the transfer or became insolvent as a result of it. If a successful preference or fraudulent transfer claim is asserted by a creditor, a court may set aside the subject transaction. The analysis would be fact-specific and may turn on the circumstances of a particular transaction. However, for any transaction, a buyer or lender may want to examine all available data and information to identify if any of the foregoing factors are present.

As part of such examination, buyers or lenders should thoroughly investigate the financial condition of the seller or borrower, as applicable, at the time of entering into the particular transaction and analyze the likely impact of the transaction on such party and its creditors going forward. They may also want to...