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Construction
Lien Law Construed: Mansion Supply Co. v. Bapat
A recent decision of the Superior Court, Law Division, has attempted to
clarify the somewhat confusing statutory scheme which the Construction
Lien Law, N.J.S.A. 2A:44A-1 of seq., sets forth regarding residential
construction. As originaly drafted, the bill did not distinguish between
residential and commercial projects. However, in an effort to obtain support
from home builders, its sponsors agreed to the insertion of ¤21, which
set up special procedures regarding the enforcement of lions against residential
properties. This section, now codified as N.J.S.A. 2A:44A-21 provides
that a subcontractor or supplier seeking to impose a lion against residential
construction must file a Notice of Unpaid Balance and Right to File A
Lion ["NUB"]. When this is done, the manor proceeds to mandatory arbitration.
The arbitrator is required to render his or her decision within 30 days
of the date on which the demand for arbitration was received. The NUB
must then be perfected by the filing of a Construction Lion Claim ["CLL"]
within 10 days of receipt of notice of the arbitrator's award. Ina non-residential
project, the filing of the NUB is optional. But to be valid, it must be
filed within 90 days of the last date work was done by the claimant. The
CLL will "relate back" to the NUB, but the CLL must be filed within 90
days of the NUB. If the claimant elects not to file a NUB, the CLC must
be filed within 90 days of the last date work was done by the claimant.
There is no statutory provision for arbitration. N.J.S.A. 2A:44A-6; -20.
Unfortunately, the last-minute inclusion of ¤21 in the final version of
the law created inconsistencies with the time limits prescribed in the
preceding sections. In Mansion Supply Co. v. Bapat, 293 N.J. Super. 253
(Law Div. 1996), plaintiff was alleged to be owed money for materials
supplied to a residential construction project, arising from a contract
between plaintiff and the general contractor. The claimant filed its NUB
on August 21, 1995, together with a demand for arbitration. it also filed
a CLC on the same date. The arbitration hearing was hold on September
26, 1995. The arbitrator dismissed plaintiff's claim on the grounds that
the CLC had been improperly filed. Accordingly, no determination was made
as to the merit of plaintiff's claim for damages. On appeal, the Law Division
reversed the arbitrators decision, and remanded it* manor #or further
proceedings. It framed the mum in the case and resolved it as follows:
The crux of the dispute in this matter is an interpretation of time requirements
for filing a ionclaim based on a residential construction contract under
N.J.S.A. 2A:44A-1. The Construction Lion Law has stringent time requirements.
The Legislature, however, has speciallytreated residential construction
contracts and the various parties involved in the construction or renovation
of a home. [N.J.S.A. 2A:44A-21] creates a different lime frame for residential
construction contracts and the liens that result, as opposed to all other
types of liens covered by this statute. Under this analysis, the court
concludes that all liens need to be filed within the ninety day window
stated in N.J.S.A. 2A:44A-6, except those stemming from residential construction
contracts. In order to comply with the time limits under residential construction
contracts one must go beyond N.J.S.A. 2A:44A-6 and consider other sections
of the statute, read together. 293 N.J. Super. at 257 - 258. The court
concluded that the following 'time line" applies to residential construction:
First, the claim must be "initiated" within 90 days of the last date that
work was performed or materials supplied (presumably by the filing of
a NUB). Second, the claimant must simultaneously demand arbitration. Third,
the decision of the arbitrator must be made within 30 days of the demand
for same. Fourth, the claimant must file a CLC within 10 days after the
arbitrators decision is made. Thus, the total "lien claim process may
take up to, but not exceed 130 days". Id at 258. (The sum of 90 plus 30
plus 10 is 130.) Applying its analysis to the case at bar, the court found
that the arbitrator's reasoning was flawed. He should have taken into
account the 10 day post-arbitration award period in which a claimant may
file a CLC. In the alternative, plaintiff's prearbitration filing of the
CLC could have been considered as valid within the statute. In short,
the plaintiff had complied with the statutory" time line" set forth above.
The court's decision is probably correct, given the inconsistencies found
in the statutory scheme. The Legislature should resolve ambiguities in
the law by amending N.J.S.A. 2A:44A-21 to incorporate the "time line"
set down by the court for residential construction. A claimant should
riot feel compelled to file the CLC simultaneously with the NUB for fear
that the arbitrator's decision will not be made within 30 days. All parties
in interest should have the benefit of a clearly written statute.
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Lead
Paint Disclosure Rules in Effect
The Department of Housing and Urban Development [HUD] and the Environmental
Protection Agency [EPA] have jointly issued a final rule regarding the
disclosure of lead-based paint hazards in housing. 61 Fed. Reg. 9064 (Mar.
6,1996); see 24 C.F.R. ¤35; 40 id. ¤745. The Residential Lead-Based Paint
Hazard Reduction Act of 1992,42 U.S.C. ¤4852d, directed HUD and EPA to
issue joint regulations requiring such disclosures by persons selling
or leasing target housing. Owners of more than four (4) residential dwellings
were required to comply as of September 6,1996. Compliance by owners of
one (1) to four (4) residential dwellings will be required as of December
6,1996. In general, "target housing" refers to any housing unit constructed
prior to 1978, except housing for the elderly or disabled or zero-bedroom
housing. Exemptions include sales of target housing at foreclosure; short-term
leases; and long-term leases where the promises have been certified by
an inspector to be free of leadbased paint. Subject to certain exceptions
(including those set forth above), the regulations impose a duty upon
sellers and lessors of target housing to disclose the presence of known
lead-based paint and/or lead-based paint hazards therein. To this end,
disclosure statements (in a formal prescribed by the regulations) must
be attached to the contract or lease. In addition, the purchaser or lessee
must be given a government-prepared pamphlet about leadbased paint hazards.
A purchaser must be afforded a ten (110) day period for risk assessment
or inspection. However, the purchaser may waive his or her right to this
period in writing, or the parties may mutually agree upon a different
time period. The seller's or lessor's "agent" is also bound by the regulations.
The term "agent" seems to include real estate brokers and leasing agents
or property management firms. Under certain circumstances, the term might
also cover a lawyer who is handling business matters for his or her client.
The regulations clearly provide that the failure to comply does not, in
and of itself, affect the validity or enforceability of the contract or
lease, and will not result in a lien or defect in this. However, serious
civil or criminal penalties may be imposed for non-compliance. Thus, attorneys
for sellers and lessors would be well-served to ensure that I eir clients
are complying with these rules
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Approved
Forms of Endorsements
Title companies are increasingly besieged by requests for policy endorsements.
Most, but not all, of the requests originate from lenders. Many of the
endorsements were created by the California Land Title Association ["CLTA"]
for use in conjunction with the CLTA title insurance policy. Because the
CLTA policy (generally speaking) provides narrower coverage than the ALTA
policy (in use in New Jersey), these forms may be unnecessary or redundant
when used in conjunction with an ALTA policy. More importantly, title
insurers in this State are not at liberty to provide any form of coverage
which may be requested. Section 54 of the Title Insurance Act, N.J.S.A.
17:46B-54, provides for the filing of commitment and policy forms, and
for their approval by the Commissioner of Insurance prior to use. It then
goes on to state: Nothing contained heroin shall authorize a title Insurance
company to delete or Insure over an exception to or exclusion from coverage
contained In forms of title policies or other approved contracts of this
Insurance Mad hereunder except by endorsement specifically approved by
the commissioner. [N.J.S.A. 17:46B-54] The practical effect of this section
is to preclude title companies from issuing endorsements which modify
or delete preprinted wording in policy forms. For example, the ALTA Loan
Policy specifically excludes usury. Therefore, a request to issue a usury
endorsement (which would modify or delete this exclusion) must be declined,
bemuse the usury endorsement has not been approved by the Commissioner
of Insurance. On the other hand, ALTA Endorsements Nos. 3 and 3.1 (regarding
zoning) have been submitted to, and approved by, the Commissioner. Approval
was necessary because the endorsements modify the policies' preprinted
exclusion for matters pertaining to zoning and land use regulation. The
subdivision endorsement, however, has neither been submitted nor approved,
so that its use is unlawful, because it modifies the same exclusion. But
it does not stand to reason that all requests for endorsements must he
refused. Many endorsements do not modify the text of the policy, but merely
provide affirmative insurance regarding specific exceptions. For example,
one CLTA endorsement insures that restrictive covenants have not been
violated. In New Jersey, we are accustomed to add ing this wording following
the appropriate exception in Schedule"B". Thus, issuance of this endorsement
does not present a regulatory problem. When an endorsement is submitted
to the Commissioner for approval, a charge for same is generally requested.
Once the endorsement (and the charge) have been approved, neither the
text of the endorsement nor the approved charge may he varied. With respect
to the text, alteration may result in a violation of N.J.S.A. 17:46B-54,
because the document issued will not be the same as the one originally
approved. The charge for the endorsement may not be waived or decreased,
because all rates and charges must be approved by the Commissioner, and
may not be deviated from, pursuant to N.J.S.A. 17-46B-35; -42. Most title
insurance companies doing business in New Jersey are members of the New
Jersey Land Tale Insurance Rating Bureau [NJLTIRBI and subscribe to its
Rate Manual. A future edition of "Title Talk" will contain a list of endorsements
which have thus far been approved and incorporated into NJLTIRB's Rate
Mani* together with the permitted charge for same. However, the Title
Insurance Act permits deviation filings [N.J.S.A. 17:46B-47], so there
maybe instances where a particular insurer has gained approval for an
endorsement riot on the list, or has declined to adopt an endorsement
for use, notwithstanding Its approval. In conclusion, each request for
issuance of an endorsement which has not been approved for use in New
Jersey must be reviewed on its merits. Obviously, a form which states
"nothwithstanding the provisions of article of the POLICY... " probably
runs afoul of N.J.S.A. 17:46B-54. But even where an endorsement does not
specifically state that it modifies a particular clause of the policy,
It may nevertheless have that effect. Where an endorsement may lawfully
be given, the insurer may fee) that Its issuance In a particular case
represents an imprudent underwriting risk, and may decline to do so.
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Mortgage
Foreclosure Insurance Policy Adopted
The Commissioner of Insurance has recently approved the request of the
Now Jersey Land Title Insurance Rating Bureau ["NJLTIRB" for the issuance
of the Mortgage Foreclosure Insurance Policy ["MFIP"], off active June
1, 1996. The policy is intended to be used instead of informational searches
or letter reports (so-called "foreclosure searches") given to attorneys
representing foreclosing mortgagees. However, it is unlike other policies
in that its issuance is not preceded by the preparation of a title commitment.
While the adoption of this form does not preclude this companies and agents
from preparing traditional foreclosure searches, use of the policy is
preferable. The policy consists of a jacket, entitled "Mortgage Foreclosure
Insurance Policy" and six (6) schedules, identif led as follows: A-description
of the land B--the mortgage to be foreclosed C--necessary parties D--junior
liens and encumbrances E--tax and assessment searches F--judgments; There
is also an endorsement to the policy, entitled "Continuation to Mortgage
Foreclosure Insurance Policy". This is intended to disclose liens or other
matters first appearing of record between the date of the original search
on which the policy is based and the filing of the Notice of Lis Panders,
so that the holders of those interests may be added as parties defendant.
It is anticipated that, in preparing the MFIP, the this company or agent
will generally conduct a search from the date of the mortgage to be foreclosed.
on the front page of the policy jacket, the name of the insured [normally
the foreclosing lender] will be inserted, as well as the party in whom
or in which the record title is vested. The amount of liability will generally
be $10,000, but may be higher (as discussed below). The effective date
of the MFIP will normally be the "board date" (ie., the date to which
the county records have been indexed). Information customarily set forth
in a foreclosure search will be listed under the appropriate schedules.
The policy coverage is restricted (in general) to liens and encumbrances
which are subordinate to the mortgage being foreclosed. As a result of
the approval of this policy, ¤4.7 has been added to the NJLTIRB Rate Manual.
The underwriting charge for the minimum $10,000 in coverage is $500.00
plus pass-through charges, payable upon application. If additional coverage
is desired, the extra premium is to be based upon the refinance rate.
So if, for example, the applicant desires a $20,000 policy, the extra
cost would be $20.00 (computed at the rate of $2.00 per $1,000.00).
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Liens
vs. Heirs or Devisees
Since the enactment
of the Probate Reform Act in 1977 (which has now been codified as Title
3B of the Revised Statutes), a great deal of controversy has arisen over
the status of title to real property belonging to a deceased person ad
the time of his or her death, and the effect of the Act (if any) upon
liens entered against a decadent's heirs or devisees. The conflict has
centered around the apparent contradiction between the Statute of Devise
and Descent, N.J.S.A. 3B:1-3, and the Fiduciary Powers Act, N.J.S.A. 3B:14-23.
Under the former, title to the decedent's real estate passes upon his
or her death by operation of law to his or her heirs or devisees. Thus,
title is vested in the heirs or devisees, so liens entered against those
persons are presumably encumbrances upon title which must be disposed
of when insuring a conveyance, lease or mortgage. Under the latter, however,
the decedent's executor or administrator is given broad powers to convey,
lease or mortgage the decedent's real estate. Thus, it is argued that
the Legislature intended that the executor or administrator be able to
dispose of the decedent's real estate without concern for liens entered
against heirs or devisees, although the statute Itself does not say this.
There has been a lack of uniformity of practice in this area throughout
the title industry. One segment takes the position that liens against
heirs and devisees must be disposed of, while another takes the opposite
view. Yet a third group prefers to resolve these issues on a case-by-case
basis. Sea Handbook of N.J. Title Practice, ¤¤5323 at seq. (1995 Rev'n).
In support of the view that the Fiduciary Powers Act should prevail over
the Statute of Devise and Descent, it has been suggested that the off
act of N.J.S.A. 3B:14-23 is to grant a statutory power of sale to each
executor and administrator. Judicial decisions which have discussed the
eff ad of a testamentary power of sale (La., one contained in a Will)
have generally held that the title derived through the executor upon exercise
of his power of sale was superior to the title acquired through the devisees.
The this acquired by the devisees was subject to defeasance, upon exercise
of the power of sale. When this occurred, the title of the devisees was
divested, and the interest of anyone claiming by, through or under them
(such as a lienholder) was divested as well. See, e.q., Sock v. Dennis,
128 N.J. Eq. (Ch. 1940) (mortgage made by devisees held unenforceable
against executor's grantee). From this it may be Inferred that title insurers
need not be concerned with liens entered against heirs or devisees when
insuring a conveyance, lease or mortgage made by an executor or administrator.
Why? Because the title acquired through the exercise of the statutory
power of sale conferred by N.J.S.A. 3B:14-23 is a conveyance of the decedent's
right, title and interest in the realty. The interest of the heirs or
devisees under N.J.S.A. 3B:1 -3 (and those claiming liens against them)
is thereupon divested. In an off on to establish uniform underwriting
practices in this area for branch off ices and agents of Chicago and Ticor
Title, the procedures set forth below were recently adopted. In general,
when insuring a conveyance, lease or mortgage made by an executor or administrator,
it will not be necessary to require a search against the names of the
devisees or heirs for judgments or other liens (or to require the disposition
of such liens), provided that: (a) there is no provision in a Court order
which restricts the executor's or administrator's allilftyto dispose of
or encumber the realty; and (b) in the case of a Will, the realty is not
specifically devised and no provision of the Will restricts the executor's
ability to dispose of or encumber the realty; and (c) the letters testamentary
or of administration are still in effect; and (d) the conveyance, lease
or mortgage to be insured is an arm's length transfer made to a bona Me
grantee, lessee or mortgages for value; and (9) the executor or administrator
is not the sole hair or devises; and (f) the transaction occurs within
a timely period (generally within one year) following the decadent's death;
and (g) none of the devisees or heirs is in possession of or exercises
custody over or control of the really in a manner which would suggest
ownership thereof. Of course, 9 it is unclear whether a particular transaction
falls within the guidelines set forth above, the Company's position with
regard thereto must be determined on a case-by-case" basis. Never the
less, it is hoped that the adoption of these guidelines will facilitate
title closings in the vast majority of cases
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Functions
of RTC Terminated
Section 21A(m)(1) of the Federal Home Loan Bank Act [FHLBA], 12 U.S.C.
¤1441a(m)(1), established a "sunset date "for activities of the Resolution
Trust Corporation [RTC] as of December 31, 1995. Under the statute, the
RTC's functions have been assumed by the Federal Deposit Insurance Corporation
[FDlC]. Thus FDIC has succeeded RTC as receiver for any remaining RTC
receiverships. In addition, FDIC is now responsible for managing any remaining
RTC assets and liabilities, which are transferred to the FSLIC Resolution
Fund. However, FDIC has taken the position that since congress did not
expressly provide for the continuation of administrative regulations promulgated
by RTC, the same have ceased to be effective. In lieu thereof, the applicable
FDIC regulations will govern. RTC was originally established under the
Financial institutions Reform, Recovery and Enforcement Act [FIRREA] in
1989 to act as conservator or receiver for failed financial institutions.
It is of primary interest to title insurers and attorneys in the context
of obtaining discharges of mortgages or conveyances of realty formerly
hold by insolvent lenders. In general, discharges, deeds or other recordable
instruments which formerly were executed by RTC will be executed by FDIC
as successor to RTC. With respect to foreclosures where it is necessary
to name RTC or FDIC as a party defendant, the provisions of 12 U.S.C.
¤1 825(b) remain in effect. This statute requires the plaintiff to obtain
the consent of RTC or FDIC before it may be joined in the suit. Under
the RTC's interim policy statement adopted in 1992, RTC waived its right
to require consent where it acted as a conservator. Where it held assets
as a receiver, It generally waived Its right to require consent. However,
where the RTC was the owner of the property (as opposed to a junior lienholder),
it required that notice be given. Notwithstanding the foregoing, RTC had
insisted that its consent be obtained before enforcing an Involuntary
lien, such as a judgment or mechanic's lien, against its interest. As
noted above, FDIC has taken the position that it is not bound by RTC regulations.
Nevertheless, the FDIC's previously articulated position on consent is
similar to, although not identical with, the foregoing. It is unclear
whether FDIC enjoys a one (1) year postforeclosure right of redemption
under 28 U.S.C. ¤ 2410.
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Banking
and Insurance Departments Combined
The Legislature has enacted P.L. 1996, c. 45, entitled the "Department
of Banking and Insurance Act of 199611, effective July 1, 1996. As the
name implies, the act provides for the consolidation of the Departments
of Banking and Insurance into a new entity known as the Department of
Banking and Insurance. As a result, the incumbent Commissioner of Insurance,
Elizabeth Randall, is now the Commissioner of Banking and Insurance. The
law continues all powers and functions of the departments, repealing only
those sections of Title 17 which were rendered obsolete by, or inconsistent
with, the consolidation. However, all rules, regulations and promulgations
previously made by either department are expressly dedared to be in full
force and effect. N.J.S.A. 17:1.22. Finally, the act creates a Study Commission,
the purpose of which is to "examine the effects of the merger ... ". The
Commission is to convene not later than January 2, 2001, and shall render
its report within twelve (12) months. N.J.S.A. 17:22-23.
"Title Talk" is published
periodically by the Chicago Title and TICOR Title Insurance Companies,
and is distributed free of charge to their customers and friends. Steven
G. Day, Esq., State Manager, Publisher Lawrence J. Fineberg, Esq., State
Counsel, Editor Chicago Title Insurance Company TICOR Title Insurance
Company 111 Wood Avenue South Iselin (Woodbridge Twp.) New Jersey 08830
(908) 205-0055 o Fax: (908) 205-0330
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