|
|
Uniform
Commercial Code Article 9 Revised
As noted in the previous issue of "Title Talk",
the Legislature has recently enacted a revised version of Article 9 of
the UCC, which relates to secured transactions. P.L. 2001, c. 117, effective
July 1, 2001. The new law will be codified as N.J.S.A. 12A:9-101 et seq.
Although the proposed act makes significant changes to Article 9, many
portions which are of interest to lawyers and title insurers are unaffected.
Under the former Article 9, a non-f ixture financing statement was filed
in the central off ice in the state where the collateral was located.
Under the revised Article 9, the location of the debtor (rather than the
collateral) usually determines the place of non-fixture filings. If the
debtor is a corporation or similar business entity, its location will
normally be its place of "registration" or formation. Thus,
if a corporation is formed in Delaware, the correct place to file a non-f
ixture financing statement is probably in Delaware's central filing office,
even if the collateral is located in New Jersey. N.J. S.A. 12A:9-301 and
- 307. However, as discussed below, fixture filings will continue to be
made in the county where the fixture is located. In general, security
interests continue to be perfected by the filing of financing statements.
N.J.S.A. 12A:9-310. Rules of priority are set forth in N.J.S.A. 12A:9-317
et seq. The priority of security interests in fixtures is addressed in
N.J.S.A. 12A:9-334, which sets forth the general rule that "... a
perfected security
interest in fixtures is subordinate to the conflicting interest of an
encumbrancer or owner of the related real property other than the debtor".
The signature of the debtor is no longer required for a financing statement
to be effective. N.J.S.A. 12A:9-502. Uniform statutory forms of "financing
statement', "financing statement addendum", "financing
statement amendment" and "Financing statement amendment addendum"
are found in N.J.S.A12A:9- 521. These are intended to replace the UCC-1
and UCC3 forms used in the past. The fee for the Ming of each document
is $25.00. N.J.S.A. 12A:9-525. The recording officer is required to accept
for filing a document which meets the requirements of the statute. N.J.S.A.
12A:9-516. It is noteworthy that under N.J.S.A. 12A:9-517 an improperly-indexed
financing statement may still be effective.
The system of central and local filing is preserved by N.J.S.A. 12A:9-501
et seq. (re- placing 12A:9-401 et seq.), so that financing statements
affecting fixtures will continue to be filed in the county land records
(rather than in Trenton). N.J. S.A. 12A:9-501. A mortgage may serve as
a fixture filing. N.J.S.A. 12A:9-502. In general, financing statements
will still be effective for a period of five (5) years from the date of
filing, unless a continuation statement is filed within six (6) months
of expiration. N.J.S.A. 12A:9-515.
Default and enforcement are discussed in N.J.S.A. 12A:9-601 et seq. Transitional
rules are found in N.J.S.A. 12A:9.701 et seq. In general, financing statements
filed under the [former] Article 9 continue to be valid until their expiration
(but not later than June 30, 2006), so that the full impact of the revised
Article 9 will not be felt immediately. N.J.S.A. 12A:9-703(a); - 705(c).
However, under some circumstances, it will be necessary to re-file certain
statements by July 1, 2002. N.J.S.A. 12A:703(b).
As noted above, many portions of the new act which are of interest to
lawyers and title insurers remain largely unaffected.. Most title insurers
believe that requests for so-called Trenton UCC searches should be reported
for information only, as fixture filings will continue to be made in the
county land records. Thus, Trenton filings do not (at least in theory)
affect title to real estate. (The Title Insurance Act, N.J.S.A. 17:46B-1
at seq., prohibits title insurers from insuring title to personalty. N.J.S.A
117:4613-110.) Because most existing financing statements will continue
to be effective until their expiration, but the location for filing new
[non-fixture] statements will not necessarily be the same, it may be necessary
- in some instances - to perform informational searches both in Trenton
and in the debtor's home state.
With regard to the new statutory forms, the Division of Commercial Recording
in Trenton has indicated that it will continue to accept old or new forms
until August 1, 2001. After that date, it will accept only new forms.
An informal survey of county clerks' and registers' offices revealed that
most will continue to accept both the old and the new forms (even after
August 1), unless a contrary directive is received from Trenton. At least
one county intends to reject new forms which do not contain the debtor's
signature, despite the wording of the statute.
In conclusion, the revised Article 9 should not have a significant impact
on most transactions. However, its numerous changes will make life more
complicated for borrowers and lenders and their counsel.
TOP
Gramm-Leach
Privacy Notice Affects Attorneys, Title Insurers
The Gramm-Leach-Bli ley Act, also known as the Financial Services Modernization
Act, P.L. 106- 102, requires "financial institutions" (which
includes title insurers and their policy-issuing agents) to furnish customers
with a notice regarding the insurer's privacy policy, effective July 1,
2001. Providing a title insurance product or real estate settlement service
is deemed to be a "financial service or product", within the
meaning of the Act. In general, the law forbids the disclosure of non-public
personal information (i.e., specific information about an individual which
is not otherwise available in the public records), except under limited
circumstances; and it also requires (as noted above) that certain privacy
notices be given to customers. The portion of the Act dealing with this
topic is found at §§ 6801 et seq. It has been supplemented by
a comprehensive set of administrative regulations promulgated by the Federal
Trade Commission ["FTC"]. 16 CFR Part 313 (May 24, 2000).
Furthermore, the administrative regulations are so broad that they appear
to apply to lawyers who provide "financial, investment, or economic
advisory services" or "real estate settlement services"
to their clients (or "customers", in the words of the regulation).
§313.3 (i)(2) (G), (K). Despite efforts by the American Bar Association
to obtain an exemption, the FTC has continued to adhere to the position
that attorneys must comply the with privacy notice requirements of the
Act and its regulations. This is despite the fact that attorneys in all
juris dictions are prohibited by long-standing ethics rules from dis closing
non-public personal information to others without their clients' consent.
From the title industry's perspective, the Act protects individuals who
obtain a financial service or product (such as title insurance commitments,
policies or real estate settlement ser vices) primarily for personal,
family or household purposes.. In a loan transaction, it may be assumed
that the lender (usually a business entity) is the customer. In a New
Jersey purchase transaction, the purchaser - but not the seller - is usually
the customer. Thus the notice requirement appears to affect only individuals
(rather than business entities) who are customers and thus presumably
applies only to residential purchase trans actions
TOP
Federal
Estate Tax Exemption Increased
Congress has enacted H.R. 1836, the Economic Growth and Tax Relief Reconciliation
Act of 2001. The law contains many changes in the Internal Revenue Code,
26 U.S.C. §§ 1 et seq. Among the most significant of these is
the increase in the federal estate tax exemptions for those dying in the
years 2002 through 2009. As of 2010, the tax is repealed entirely. The
tax is of concern to attorneys and title insurers, because it constitutes
a lien on most property of the decedent's estate. 26 U.S.C. §§
2033 and 6324. The revised amounts are set forth below:
Year of Death 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Amount of Exemption
$ 675,000 [unchanged]
1,000,000 (formerly $700,000)
1,000,000 [formerly $700,000]
1,500,000
1,500,000
2,000,000
2,000,000
2,000,000
3,500,000
N/A [tax repealed]
TOP
New Endorsements
Gain Approval
The Commissioner of Banking and Insurance has given approval
to the New Jersey Land Title Insurance Rating Bureau ["NNJLTIRB"]
for the issuance of two new endorsements: the Modifiable Mortgage Option
Endorsement and the Successors and Transferees Coverage Endorsement. The
first endorsement insures the continuing validity, priority and enforceability
of the lien of the insured mortgage, as modified, resulting from the provisions
contained in the Modifiable Mortgage Option Rider (or other name the lender
may give to the document) attached thereto. The charge for the endorsement
is $50.00. It is important to bear in mind, however, that its use is appropriate
only in limited circumstances; Le., where the mortgage contains a Modifiable
Mortgage Option Rider (or similar document). It may not be issued in most
cases where the title company is asked to insure a mortgage modification
agreement. The vast majority of mortgage modifications will still be governed
by NJLTIRB Rate Manual §§ 4.6.2 and 10.37, which provide a separate
rate schedule for insuring modifications.
The Successors and Transferees Coverage Endorsement ["S&TCE"]
is similar, but not identical, to an endorsement of the same name approved
several years ago for Chicago and Ticor as a deviation filing. This form
provides coverage is situations (such as related-entity transfers) where,
under the definition of "insured" in the policy, coverage would
cease. See Handbook of N.J. Title Practice, §§ 8703 & 8704
(2d Ed. 2000) for more information. The principal difference between the
two is that NJILTIRB's version is not restricted to commercial trans-
actions, while the current text of the Chicago / Ticor form is. However,
NJLTIRB has also simultaneously withdrawn the Inter Vivos Trust and Inter-Spousal
Transfer Endorsements, NJLTIRB Rate Manual §§ 10.17,10.18 &
10.26. Thus, the only way to obtain the coverage [formerly] provided by
these endorsements will be to obtain the S&TCE.
Chicago and Ticor will preserve their version of the S&TCE as a deviation
filing, but the commercial-use restriction will be deleted. Furthermore,
they will preserve the use of the Inter Vivos Trust and Inter- Spousal
Transfer Endorsements as deviation filings. Thus, Chicago and Ticor branch
offices and agents will be able to offer both versions of the S&TCE,
as well as the two endorsements which have been withdrawn by NJLTIRB (Inter
Vivos Trust and Inter-Spousal Transfer). The cost of S&TCE (whether
the NJLTIRB or Chicago / Ticor version) is a 10% premium surcharge (if
obtained at the time of policy issuance), or a 20% surcharge (if issued
subsequently).
TOP
Bankruptcy: Recent Cases
When a real estate transaction occurs in which the current
or a former owner has gone through a bankruptcy proceeding, issues frequently
arise regarding the discharge of liens. There exists a common misconception
that the personal discharge of the debtor serves to avoid liens. However,
this is not the case. As the court stated in Party Parrot v. Birthdays
& Holidays, 289 N.J. Super. 167,174 (App. Div. 1996):
while a discharge... generally prevents further in personarn actions against
the discharged debtor, it does not prohibit creditors from proceeding
in rem against the debtor's property.
Nevertheless, although the mere "scheduling" of a debt is insufficient
to avoid a lien arising therefrom, in some instances it is necessary or
helpful to determine whether a debt has been "scheduled". The
schedules attached to the petition serve as the basis for the "matrix";
ie., the list of creditors and others who receive notice of the proceedings.1
1 U.S.C.§301; Bankr. R. 1007; Local Bankr. R. 2(c) (D.N.J). Thus,
a creditor holding an unscheduled debt may not be bound by the debtor's
discharge or other actions taken by the bankruptcy court.
What happens if the debtor fails to list a particular debt? Judd v. Wolfe,
78 F. 3d 110 (3d Cir. 1996) held that in a noasset, no bar-date Chapter
7 case a debt was discharged, despite the failure to schedule same, because
the creditor was not prejudiced by the error. In other words, even if
the debt had been scheduled, and the creditor had filed a claim, it was
almost certain that he would not have received any funds from the estate.
While the court's holding is logical, given the facts of that case, it
is sometimes (erroneously) cited for the proposition that the failure
to schedule is irrelevant. This a fallacy; the decision does not state
that all debts are automatically discharged whether or not scheduled.
In fact, the court acknowledged that some unscheduled debts will not be
eligible to be discharged. 11 U.S.C. §§ 727(b) & 523(a)(3).
This brings us to another decision of interest, In re Levy, 256 B.R. 563
(Bankr., D.N.J 2000). The debtor sought to reopen his Chapter 13 bankruptcy
proceeding, four years after the petition was filed, in order to obtain
an order avoiding judgment liens under 11 U.S.C. §522(f). See In
re Arevalo, 142 B.R. 111 (Bankr., D.N.J. 1992). One of the judgment creditors
objected. The debtor could not supply a good reason for waiting so long,
and the court found that the creditor had been prejudiced by the delay.
The opinion noted that re- opening is discretionary under 11 U.S.C. §350;
hence, the court declined to re-open the case. The decision is important
from a real estate practitioner's perspective, because it shows that an
application to re-open in order to avoid a lien will not automatically
be granted in all instances.
A more liberal view was taken by the Appellate Division in Lever v. Thomas,
340 N.J. Super. 198 (App. Div. 2001). In that case Lever recovered a $350,000
tort judgment against Thomas in 1979, and obtained a writ of execution
in 1980, although no levy resulted against the realty owned by Thomas.
In 1981, Thomas filed a Chapter 7 petition, but he failed to 11 schedule"
the debt owed to Lever. The "no-asset" Chapter 7 case was eventually
concluded, and Thomas received a personal discharge. In 1992, he conveyed
the realty to his daughter. Lever obtained an order permitting execution
in 1997, but Thomas sought relief under N.J.S.A. 2A:1 6-49.1.
Relying on Judd v. Wolfe, supra, the court held that the failure to "schedule"
the debt owed to Lever did not prevent Thomas' discharge with respect
to same, because it was a "no-asset" Chapter 7 case. Since it
was clear that the Lever's judgment impaired Thomas' exemption, the panel
found that the trustee could have successfully avoided it under 11 U.S.C.
§522(f). Thus, applying the rationale of Party Parrot v. Birthdays
& Holidays, supra, and Associates Comm'l Credit v. Langston, 236 N.J.
Super. 236 (App. Div. 1989), the Appellate Division directed that the
judgment lien be discharged.
The decision is noteworthy for two reasons. First, Thomas was found to
have standing to seek relief under N.J.S.A. 2A:1 649.1, even though he
was no longer the owner of the realty. Second, the Judd v. Wolfe doctrine
was applied to a proceeding under that statute. Nevertheless, undue reliance
should not be placed upon the holding in Lever v. Thomas. A debtor who
seeks to avoid a judgment lien under N.J.S.A. 2A: 16-49.1 (or by re-opening
of the bankruptcy case under 11 U.S.C. §350) must still show (in
general) that the underlying debt has been discharged. Thus, it is prudent
to assume that an unscheduled debt has not been discharged unless evidence
to the contrary is obtained.
Another recent decision permitting the discharge of a judgment lien is
Summit Bank v. Vessel "Harbor Light", 260 B.R. 694 (U.S.Dist.
Ct., D.N.J. 2001). Following his discharge in bankruptcy, the debtor made
application under N.J.S.A2A:1649.1 to discharge the lien of a default
judgment entered against him in the amount of $57,000.00. The judgment
had been entered several months prior to the date he had filed a Chapter
7 petition. The debtor claimed that the judgment impaired his personal
exemption in his residence, and was thus avoidable under 11 U.S.C. §522(f).
The District Court agreed and di- rected that the judgment lien be cancelled
of record.
The case is of interest primarily because it sets forth a formula for
determining if a judgment lien may be avoided under §522(f): (1)
determine the value of the property; (2) deduct the amount of all liens
not be avoided from No. 1; (3) deduct the debtor's allowable exemptions
from No. 2; (4) if No. 3 is a negative number, all judicial liens are
avoided; (5) if No. 3 yields a positive number, liens may be avoided,
in order of priority, to that extent only. Finally, In re Downey, 261
B.R. 124 (Bankr., D.N.J. 2001) permitted the discharge of a worker's compensation
lien entered under N.J.S.A. 34:15-120.3, pursuant to the provisions of
11 U.S.C. §544(a)(1). That section of the Code permits the trustee
to assume the status of a hypothetical lien creditor who has levied upon
the debtor's property. Since under New Jersey law the first judgment creditor
to execute takes priority over other judgments upon which executions have
not been issued, the trustee may use this section to avoid judgment liens.
In re Feldman, 54 B.R. 659 (Bankr., D.N.J. 1985). The State of New Jersey
argued that the lien in question was not a judicial lien, relying on In
re Fennelly, 212 B.R. 61 (U.S.Dist. Ct., D.N.J. 1997). That decision held
that a DMV surcharge, even though it was the equivalent of a judgment
under state law, was not a judicial lien within the meaning of the Bankruptcy
Code. Thus, it could not be avoided under 11 U.S.C. §522(f). The
court noted that the Bankruptcy Code recognizes three (3) types of liens:
judicial, consensual and statutory. It found that the worker's compensation
lien arose from a judicial proceeding, and thus could be classified as
a judicial lien within the meaning of 11 U.S.C. §101(36). Because
the lien remained unperfected (by execution or levy), it was subject to
avoidance under 11 U.S.C. §544(a)(1). The Downey court distinguished
Fennelly on the grounds that the DMV surcharge was in the nature of a
statutory lien within the meaning of 11 U.S.C. §101(53), rather than
a judicial lien. Judicial liens (but not statutory liens) may be avoided
under 11 U.S.C. §544(a)(1) and 11 U.S.C. §522(f). Accordingly,
judgment was entered directing that the lien be discharged.
The foregoing cases have one common thread. A discharge in bankruptcy
does not automatically operate to discharge or avoid judgment liens, even
though the debtor may have been relieved of his personal liability to
pay the underlying debt. If the debtor wishes to clear the record title
to his or her real property, further judicial proceedings must be instituted.
Register
of Deeds Abolished in Passaic County
The Legislature has enacted P.L. 2001, c. 52, effective April 10, 2001,
which has the effect of abolishing the Passaic County Register's Office
and consolidating its functions with those of the Passaic County Clerk's
Office. The statute achieves this goal by amending N.J.S.A. 40A:980 in
order to add [new] sub-section "c". It provides that the functions
of the Register shall be consolidated with those of the Clerk in every
county, other than those of the "first class", upon the expiration
of the current term of the Register. Essex and Hudson Counties, which
are counties of the "first class", therefore still retain their
respective Registers' and Clerks' Offices. Passaic is a county of the
"second class", and thus the statute applies to it. The only
other two counties to maintain a separate Register's office in recent
years were Camden and Union. These were abolished by separate acts of
the Legislature in 1995 and 1996, respectively.
"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 G. Day, Esq., Regional 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
(732) 205 - 0055 Fax (732) 205 - 0330
TOP
Back
to "Title Talk" Archive
|
