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State
Banks and Title Insurance:
"Parity" with National Banks Sought
State-chartered banks have caused to be introduced in the Legislature
a series of bills which are intended to give such institutions"parity'with
national banks. The impetus behind this is the passage by Congress last
year of the so-called Financial Services Modernization Act, or Gramm-Leach-Bliley
Act,. P.L. 106-102. The law was signed by the President on November 12,1999
and became effective on or about March 10, 2000. Among other innovations,
the Act permits national banks to enter the insurance field. Under [former)
§13 of the National Banking Act [112 U.S.C. §92], only national
banks located in a town having a population of 5,000 orfewer persons could
sell insurance. Relying on this section and a Supreme Court decision construing
it, Barnett Bank v. Nelson, 517 U.S. 25 (1996), the United States District
Court compelled the Commissioner of Banking and Insurance to grant a title
insurance producer license to a national bank's title insurance subsidiary.
Valley Nat'l Bank v. La Vecchia, 59 F.Supp. 2d 432 (U.S.Dist Ct., D.N.J.
1999). For more information, see "Title Talk" No. 44 (Summer,
1999), p. 1.
The Gramm-Leach-Bliley Act, of course, applies only to national banks.
However, state-chartered banks are concerned that they will be unable
to compete with national banks, now that they have been given additional
powers that the statechartered institutions lack. For example, Gramm-Leach-Bliley
has done away with the 5,000- person restriction found in the 12 U.S.C.
§92 and replaced it with much broader wording. In New Jersey a package
of three bills, aimed at giving state banks .'parity"with national
banks, was introduced in the Assembly: A-2263, A-2264 and A-2265. These
bills sought to amend or repeal various banking and insurance statutes
wbich restricted the activities of state-chartered banks. Thefirst two
bills passed the Assembly without much fanfare. The last one, however,
A2265, sought to repeal the first sentence of the §30.1 [formerly
§30(g)] of the Title Insurance Act, NJSA 17:4613-30.11, which reads:
"No bank, trust company, bank and trust company or other lending
institution, mortgage service, mortgage brokerage or mortgage guaranty
company or any service company of or for any lending institution or any
officer or employee of any of theforegoing shall be licensed or permitted
to act as an insurance producer for a title insurance company."
Relying on this section, the Department of Banking & Insurance ["DOBI"]
has refused to issue title insurance producer licenses under the Insurance
Producer Licensing Act, NJSA 17:22A-1 et seq., to lender-controlled title
agencies. The bill was opposed by the New Jersey Land Title Association
["NJLTA"] and by the New Jersey State Bar Association
ONJSBA"] on the grounds that allowing lenders to control title agencies
would create conflicts of interest which would have a negative impact
on consumers. Furthermore, by simply repealing the quoted language, other
lending institutions, such as mortgage bankers and mortgage brokers, would
be able to control title agencies. This goes beyond the concept of "parity"
between state- and national- chartered banks.
Eventually the Assembly Banking and Insurance Committee approved a revised
version of A-2265, which states:
"Except for a State or federally chartered bank, savings bank, savings
and loan association or its subsidiary or any officer or employee of any
of the foregoing, no other lending institution, mortgage service, mortgage
brokerage or mortgage guaranty company or service company or any person
licensed pursuant to ... NJSA 17: 11 C- 1 at seq. [the Licensed Lenders
Act] shall be licensed as or permitted to act as an insurance producerfora
title insurance company.
Thus, only state- or national- chartered banks may become title insurance
agents.
Ironically, however, this bill, if enacted, will give the national banks
located in New Jersey the abi lity to enter the title insurance field
directly and compete with state banks. Why? GrammLeach-Bliley does not
grant national banks unlimited power to sell title insurance. Rather,
under §303(b) (1) of Gramm-LeachBliley, national banks may (in general)
only sell title insurance directly in a state where state-chartered banks
are allowed by state law to sell title insurance. By giving themselves
the power to sell title insurance directly in New Jersey, state banks
are allowing national banks to do so. Thus, if A-2265 is never enacted,
neither state banks nor national banks (with one possible exception) will
be able to sell title insurance directly in New Jersey. The possible exception
is Valley National Bank (discussed above), because §303(c) contains
a "grandfather" clause.
On the other hand, most banks will probably not wish to sell title insurance
directly. Rather, they will seek to operate or control a title insurance
agency. Gramm-Leach-Bliley permits national banks to become involved in
the sale of title insurance through a subsidiary. Furthermore, under §303(b)
(1), national banks may only sell title insurance "in the same manner,
to same extent, and under the same restrictions" that apply to state
banks. Since the anti-rebate and controlled business sections of the Title
Insurance Act and the Insurance Producer Act will presumably apply to
state-chartered banks selling title insurance oust as they apply to all
other title insurance agents), national banks should be subject to the
same restrictions.
It is also noteworthy that the second sentence of NJSA 17:46B,30.1 (which
prohibits a lenderfrom requiring the use of a particular title agency
as a condition precedent for granting a mortgage loan) remains intact.
This provision should apply to both state and national bank title agencies.
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Narucki Joins Iselin
Staff as Agency Counsel
Steven G. Day, Vice President and Northeast Region Manager, is pleased
to announce the appointment of Robert J. Narucki as Agency Counsel in
Iselin, A native of Nutley, New Jersey, Mr. Narucki was graduated from
Notre Dame University with a Bachelor of Arts degree in 1969, and from
Wake Forest University School of Law with a Juris Doctor degree in 1972.
He was admitted to the bars of the State of New Jersey and the United
States District Court for the District of New Jersey in 1972, and to the
bar of the State of New York in 1982.
After graduating from law school, Narucki served as law cierk to the Hon.
F. Michael Caruso, J.S.C., in Essex County and laterjoined the Office
of the Public Defender in that county. He was an associate with the Belleville
firm of Gaccione & Pomaco (now Gaccione, Pomaco & Beck) in 1975
and 1976. Narucki joined Chicago Title in 1977 as a title officer in the
East Orange office. From 1980 to 1990 he acted as manager of the East
Brunswick office, having been promoted to Assistant Vice President and
later Resident Vice President. Following a stint with a competitor, Narucki
returned to Chicago Title as manager of the Union office in 1993, where
he served until that branch was consolidated with the Roseland office
last year.
Rob lives in Verona with his wife of thirty years, Ellen, a special education
pre-school teacher. The couple has three children: Robert, Jr., a 1997
graduate of St. Michael's College in Vermont, Kara, who was graduated
from Notre Dame this year; and Ross, an incoming freshman at St. Michael's..
Rob sings in the choir of Our Lady of the Lake R.C. Church and has served
as secretary of the Verona Lions Club for the past fifteen years.
Narucki will be located in the State Headquarters office in Iselin. As
an attorneywith over 25 years of experience in real estate and title insurance
transactions, he will provide invaluable legal and logistical support
to the Chicago I Ticor statewide agency network.
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Construction Lien Law
Construed by Supreme Court:
Thomas Group v. Wharton Sr Housing
Although the Construction Lien Law, NJSA 2A:44A-1 at seq., went into effect
in April of 1994, our Supreme Court has not had occasion to construe its
provisions until recently, in Thomas Group v. Wharton & Housing, 163
N.J. 607 (2000). The following issue was presented: whether a contractor
is entitled to file a lien claim for unpaid contractual amounts if the
contractor has not fully performed contractual conditions precedent. The
court, in a unanimous opinion by written Justice LaVecchia, held that
the contractor was entitled to file a lien:
We hold that by dismissing Thomas Group's lien claim as "prematurely
filed" the courts below improperly denied Thomas Group the right
to a lien establishing its security interest in the property in the amount
of the value of the actual work it had performed on the project. 163 N.J.
at 510.
Thomas Group entered into a contract on July 28, 1995 to serve as general
contractor for a project in Wharton. Thecontract amount was in excess
of $5,000,000. OnSeptember3, 1997 it sent the builder an application for
final payment in the approximate amount of $755,000, and it simultaneously
filed a construction lien claim ["CLC"l for approximately $658,000.
In October of 1997 , Thomas Group filed a complaint in Superior Court
to foreclose its CLC. The trial court dismissed the complaint and ordered
the CLC to be discharged, holding that the CLC was prematurely filed because
the work performed did not represent the value of the of the lien. Specifically,
the court found that the CLC included a ten per cent retainage amount,
which, under the contract, was not to be disbursed until the work was
completed. At the time itfiled the CLC, Thomas Group had not submitted
the required documentation under the contract which would have enabled
the retainage to have been released. Thus, the claimant had not supplied
labor or materials " in accordance with the contract", as required
by NJSA 2A:44A3, and thus was not eligible to file a CLC. The Appellate
Division affirmed the trial court's determination in an unreported decision.
The Supreme Court began its analysis by summarizing the Construction Lien
Law's provisions and comparing them to those found in the Mechanics' Lien
Law, NJSA 2A:44-1 at seq., which it had replaced. 163 N.J. at 512 - 514.
It noted that 'Injo provisions address the interaction between the statute
and contractual retainage clauses", and that there are only a handful
of reported decisions construing the statute. Id. at 515. For more information,
see "Title Talk" Nos. 26 (Spring, 1994); 35 (Fall, 1996); and
39 (Winter, 1997-98).
According to the Supreme Court, the key to understanding the statute and
its application to the fact of the case at bar is to be found in NJSA
2A:44A-3:
Any contractor, subcontractor or supplierwho provides work, services,
material or equipment pursuant to a contract, shall be entitled to a lien
for the value of the work or services performed, or materials or equipment
fumished in accordance with the contiract and based upon the contract
price [Emphasis added.]
The decision thus turns on the meaning of the phrase "in accordancewith
the contract", which is not defined bythe statute. The court concluded
that the phrase
... must be read sensibly and consistent with the law's overall intent
to permit contractors to file liens and thus protect the value of the
work they have provided. We interpret that language to mean that a party
must perform work under a contract to be entitled to a lien, but not to
require literally that a party must satisfy all of the terms and conditions
of a contract before it can file a lien. 163 N.J. at 517.
In responseto the objection thatthe form of CLC, which is setfbrth in
NJSA 2A:44A-8, requires theclaimant to verify that the amount claimed
is "due and owing", the court pointed out that the phrase is
not defined by the statute. It noted that there are two competing interests,
those of the contractor and those of the owner- The court attempted to
reconcile these as follows:
We conclude that Thomas Group did not have to risk losing its statutory
lien by waiting until all of the contractual preconditions to payment
were satisfied before it asserted its lien. ... [The interests of an owner
can adequately be protected by staying the contractor's right to enforce
its lien unti I the con tractual preconditions for payment are met. ...
This accomplishes the legislative purpose of affording lien protection
to contractors, while safeguarding the owner's right to insist on strict
compliance with contractual terms of payment. 163 N.J. at 520-521.
Thomas Group v. Wharton Sr. Housing provides a good summary of the provisions
of the Construction Lien Law. It also attempts to resolve some of the
problems resulting from apparent deficiencies in the text of the statute.
Whether or not the case was correctly decided, the court's common-sense
approach to solving the problems presented by the facts is refreshing.
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Disclaimers and Federal
Tax Liens: Drye v. U. S.
In a recent decision, Drye v. U.S., - U.S.-, 120 S. Ct. 474 (1999), the
United States Supreme Court held that federal tax liens attached to the
interest of a person who disclaimed property inherited by him under Arkansas
law. The taxpayer, Rohn Drye, was insolvent and owed the government approximately
$325,000 in unpaid taxes, for which notices of federal tax liens had been
filed. His mother Irma died intestate in 1994, leaving an estate with
a value of about $233,000. Rohn was the sole heirof his mother underArkansas
lawand was appointed administrator of her estate. He subsequently resigned
and filed a disclaimer with the Probate Court covering all property he
would have inherited. The Supreme Court characterized the disclaimer as
creating a "... legal fiction that the disclaimant predeceased the
decedent" under Arkansas law. The Arkansas disclaimer statute also
provides that the creditors of a person disclaiming cannot reach the disclaimed
assets. As a result of the disclaimer, the assets of Irma's estate passed
to Theresa, Rohn's daughter. Theresa was appointed administratrix and
transferred the assets to the Drye Family Trust, the beneficiaries of
which are Theresa and her parents.
As noted above, the Supreme Court, in a unanimous opinion delivered by
Justice Ginsburg, held that the disclaimer did not defeat the federal
tax liens. The court's reasoningwas based upon the text of 26 U.S.C. §6321,
which states that the lien attaches to "... all property and rights
to property..." of the taxpayer [emphasis added]. Since the heir
or devisee has the power to decide whether or not to disclaim, the court
concluded that this right is sufficient to permit the attachment of the
lien. Although the court recognized that, in general, title to property
and interests therein is a matter governed by state, rather than federal,
law, it viewed the broad language of I.R.C. §6321 as controlling
in this case. Put another way, state law permitted the disclaimer, but
federal law permitted the attachment of the lien to the taxpayer's interest
in the disclaimed property.
What effect, if any, does the holding in Drye have upon New Jersey practice?
Our statutes recognize both testamentary and inter vivos disclaimers.
See NJSA 3B:9-1 et seq. and 46:2E-1 et seq., respectively. These statutes
provide that the person disclaiming is deemed to have predeceased the
"transferor", and title passes by operation of law to others,
such as the [other] heirs or devisees; of the of the decedent, etc. Thus,
title companies have traditionally waived as objections to title liens
entered against the person disclaiming on the grounds that title never
vested in him or her, so there was no real estate interest to which the
liens could attach. Of course, as a result of Drye, it will no longer
be possible to waive federal tax liens on this basis.
Can the rationale of Dryebe generally applied toother liens, such as Superior
Court judg- ments? As the decision turns on the broad wording of a section
of the Internal Revenue Code, the answer appears to be "no".
The state statutes regarding Superior Courtjudgment liens (for example)
do not contain the same language. See N.J.S.A. ZA:16-1; 2A:17-17. On the
other hand, a disclaimer may be treated as a fraudulent transfer It is
likely that the Supreme Court in Dtye believed that the disclaimer was
being employed as vehicle to hinder, delay or defraud creditors (including
the Internal Revenue Service). Transfers made for th is purpose are subject
to attack under the New Jersey Fraudulent Conveyances Act [NJFCA] , N.J.S.A.
26:2-1 et seq. and the Uniform Fraudulent Transfer Act [UFTA1 , INA.S.A.
25:2-20 et seq. In fact, the statutes auth()-rizing testamentary and inter
vivos disclaimers address this issue. See NJSA 3B:9-9(d) and 46:2E- 9,
respectively. Thus ' it is necessary for title insurers to consider the
effect of the NJFCA or UFTA whenever a disclaimer is utilized
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Construction Loan Endorsement
Revised
The New Jersey Land Title Insurance Rating Bureau ["NJLTIRB")
has received the approval of the Commissioner of Banking & Insurancefor
a revision to the Special Construction Loan Policy Endorsement, effective
August 7,2000. The text of the form has been amended to add a sentence
which clarifies that all claims under a construction loan policy must
be presented during the three (3) year life of the policy. Under Rate
Manual §4.5 the charge for a policy insuring a construction loan
is reduced to $1.00 per $1,000 of liability assumed. However, a policy
for which the reduced rate is paid is a term policy, which expires in
three (3) years. It is contemplated that a permanent loan will be secured
at or before the end of the three (3) year period. A credit is given at
that time for the amount paid for the construction loan policy towards
the premium due for the permanent loan policy. Of course, if the standard
premium rate is paid, the coverage does not expire in three (3) years,
even though the mortgage secures a construction loan.
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Veterans"Tax Deduction
Increased
The Legislature has enacted P.L. 2000, c. 9, which amends N.J.S.A. 54:4-8.11
to increase theveterans'prop~ arty tax deduction. Under the law, the former
yearly deduction of $50.00 has been increased asfollows: $100.00 in 2000;
$150.00 in 2001; $200.00 in 2002, and $250.00 thereafter. The act was
approved on March 30,2000 and takes effect immediately.
'Title Talk" is published periodically by Chicago Title and
Ticor Title Insurance Companies, and is distributed free of
charge to their customers and friends.
Steven 6. Day, Esq., Regional Manager, Publisher
Lawrence J. Fineberg, Esq., State Counsel, Editor
Chicago Title Insurance Company
TicorTitle Insurance Company
111 Wood Avenue South
Iselin (Woodbridge Twp.), New Jersey 08830
(732) 205 - 0055 Fax (732) 205 - 0330
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