November 1996
Controlled Business Arrangements
As you may have heard, certain title insurers have established agency relationships with either lending institutions (usually state chartered banks) or real estate brokerage firms or both. Often, the agency is a wholly owned subsidiary of the lending institution or real estate brokerage firm. The title insurers setting up these arrangements hope to capture more business by doing this. They have told us that they (the title insurers) have told these lending institutions and real estate brokerage firms that there is not to be any coercion of either the borrower or your firm. You will see a borrower’s selection form from the lending institution or real estate brokerage firm. However, the borrower, with your guidance, can make the selection of his or her choice, whether on the pre-selected list or not. Ask for our "Borrower’s Title Insurance Selection Form (including change of prior selection)" sent to you previously.
By the way, we know that the title insurers setting up these arrangements are sincere about there being no coercion. They want to be careful and their agents should want to be careful. The reasons for this caution are best described in W. Copenhaver and P. Millen, Title Companies Prevail In Action Against Investors Title, 14 Real Property no. 1, p. 6 (NCBA Real Property Section Newsletter, November, 1992). This describes the evidence of consumer and attorney coercion where the court found violation of RESPA, coercion in violation of G.S. 75-1.1 and G.S. 75-17, and a violation of state kick back statutes in G.S. 58-27-5. The plaintiffs won in lower court and received $4.36 million in a settlement.
While revised RESPA regulations (see Sec. 3500.15) permit "Controlled Business Arrangements", Sec. 3500.15(b) states that such an arrangement does not violate RESPA provided that (1) there is written disclosure, (2) there is no required use and (3) the only thing of value is a return on ownership interest. G.S. 75-17 provides that no lender can require the use of a particular title insurer. There is enormous legal liability for violating these laws and, as noted above, aggrieved parties can collect substantial damages. We urge you to deal with the title agency of your choice as well as the title insurer of your choice. Don’t be fooled when a bank’s agency tells you that their agency writes for one of Statewide’s title insurers. That may be true, but it is Statewide’s underwriting counsel and service that you and your clients are entitled to prefer. We are reviewing additional RESPA regulations becoming effective October 7, 1996 regarding the revised controlled business disclosure requirements. We will keep you informed.
Trusts - Selected Issues - Article 13 of Chapter 36A And Trust Powers
By Ed Urban, Vice President and Corporate Counsel and
Chris Burti, Vice President and Counsel
I. General Comments; G.S. 36A-139 and G.S. 36A-140
Effective December 1, 1993, G.S. 36A-135 through G.S. 36A-140 were enacted. These statutes constitute Article 13 of Chapter 36A. They apply to "all trusts in existence on December 1, 1993 or created on or after December 1, 1993." (Emphasis added.) Session Laws 1993, c. 377, s.4. Therefore, the statutes apply to pre-existing trusts. While G.S. 36A-135(a) sets out a list of trusts to which Article 13 does not apply, the powers in Article 13 apply to most express trusts. G.S. 36A-135(a) and (b) make it clear enough that Article 13 powers do not exist to the extent that they are inconsistent with the express terms of the trust. Also, see G.S. 36A-136(8). And, the powers are in addition to other powers provided by law. G.S. 36A-135(c).
G.S. 36A-136 contains a comprehensive list of powers applicable to trusts, to the extent noted above. G.S. 36A-136(8) refers to the power to sell, exchange, partition, dispose of, or grant options with respect to real property in the manner prescribed by G.S. 36A-139 and G.S. 36A-140. However, G.S. 36A-136(8) makes it clear that the powers in an express trust control and, in such an event, G.S. 36A-139 and G.S. 36A-140 do not apply to the extent of any inconsistency.
When G.S. 36A-139 is otherwise applicable, there is a legitimate question regarding what it means. The statute, (including its caption) states:
Sec. 36A-139. Disposition of real property without court order
Pursuant to the authority contained in G.S. 36A-136(8), the trustee has the power to sell, exchange, partition, or otherwise dispose of, or grant options with respect to, real property of the trust upon such terms as he may deem just and for the advantage of the trust. The procedure shall be as provided in Article 29A of Chapter 1 of the General Statutes, entitled "Judicial Sales." If the clerk of superior court is petitioned and provided with satisfactory proof that the best interest of the estate will be served by private sale, the clerk may authorize a private sale in accordance with the provisions of G.S. 1-339.33 through G.S. 1-339.40.
Obviously, the caption of the statute and the first sentence are relatively clear. Standing alone, the first sentence grants a power not in need of a court order. The second sentence creates a literal ambiguity when compared to the caption and first sentence. G.S.
1-339.1(a) states that a "judicial sale" is one made pursuant to an order of a judge or clerk in a superior or district court action. While that statute exempts certain sales from the definition of "judicial sales," a sale under G.S. 36A-136 is not specifically exempted. G.S. 1-339.1(a)(9)’s exemption is for "[a]ny other sale the proceedure for which is specifically provided by any statute other than this Article." (Emphasis added.) However, G.S. 36A-139 does not specifically provide for a procedure other than the procedure in the judicial sales statutes; instead, by virtue of G.S. 36A-139’s second sentence, G.S. 36A-139 makes the sale procedure in the judicial sales statutes applicable. The last sentence of G.S. 36A-139 does not eliminate potential ambiguity; it merely states that a private sale may be authorized in accordance with G.S. 1-339.33 through G.S.
1-339.40.
G.S. 1-339.3 again refers to a sale ordered by a clerk of superior court or a superior court or district court judge. A public or private sale can be ordered. G.S. 1-339.3A. An order of sale may authorize the trustee to sell. G.S. 1-339.4(8). For a public sale, there is an order of sale prescribing the terms of the sale. G.S. 1-339.13. The statutes provide for the contents of notice of public sale, which notice must, among other things, refer to the order authorizing the sale and state the sale’s terms. G.S. 1-339.15.
Private sale, referred to in G.S. 36A-139 as noted above, is outlined in G.S. 1-339.33 through G.S. 1-339.40 and also requires an order of sale, among other sale requirements. G.S. 1-339.33. The order shall prescribe the sale terms that the judge or clerk deem advisable. G.S. 1-339.33.
However, the exact meaning of G.S. 36A-139 is uncertain. One interpretation is that, insofar as a public sale is concerned, due to the second sentence of G.S. 36A-139, all of the judicial sales statutes apply. If that interpretation is correct, an order would be required but the judicial officer would not have discretion to sign it; the judicial officer would have to sign the order. A private sale is discretionary with the clerk and would have to be ordered.
A second interpretation of G.S. 36A-139 is that the second sentence of G.S. 36A-139 is implicitly limited to making only Part 2 of Article 29A of Chapter 1 applicable to a public sale. That is, no order would be required to authorize the sale, but the conduct of the sale would have to comply with Part 2’s sale requirements, including, arguably, G.S. 1-339.27(a)’s requirement for an order of resale in the event of an upset bid. Also, see G.S. 1-339.30(d) regarding order of resale. Of course, under this second interpretation, the last sentence of G.S. 36A-139 would require an order of private sale when a private sale is to be conducted. G.S. 1-339.33. With some doubt, Statewide Title’s position is that this second interpretation is correct. If this is true, Statewide Title recommends that the second sentence of G.S. 36A-139 be amended as follows: "The procedure for a sale shall be as provided in Part 2 of Article 29A of Chapter 1 of the General Statutes entitled "Judicial Sales," except that in the case of a public sale, no order is required except to the extent specifically required in Part 2."
G.S. 36A-136(8), noted above, also refers to G.S. 36A-140, which reference is also subject to G.S. 36A-136(8)’s rule that the terms of an express trust control. G.S.
36A-140 is entitled, "Disposition of real property by court order," and states that:
(a) A trustee may request the clerk of superior court to issue to him an order to sell, exchange, partition, or otherwise dispose of, or grant options with respect to, real property of the trust.
(b) Sales of real property shall be conducted as provided in Article 29A of Chapter 1 of the General Statutes, entitled "Judicial Sales."
It is noted that while the judicial sales statutes apply, G.S. 36A-140(a) states that the trustee may request an order. This may be the subtle difference with G.S. 36A-139. Note how G.S. 36A-140(b) is phrased somewhat different than the second sentence of G.S. 36A-139.
II. Miscellaneous related issues
The reader is directed to the following other trust powers in G.S. 36A-136 that can impact real property transactions (the applicable subdivision is in parentheses): the power to (5) execute instruments under seal; (6) abandon property rights when the property is valueless; (14) employ agents and attorneys-in-fact to assist the trustee; (17) invest and reinvest trust property as the trustee deems advisable in accord with the trust provisions or as provided by law; (18) make leases for not more than 3 years; (19) foreclose or take a deed in lieu; (20) borrow money and to give security as the trustee deems advisable; and (24) divide trust properties into two or more trusts. None of these powers expressly mentions a court order. While G.S. 36A-136(17) could be construed to imply a power to sell (see 228 N.C. 562; 251 N.C. 14; 263 N.C. 189) it is believed that G.S. 36A-136(8), discussed in I above, clearly was intended to control, but this is not certain. If G.S. 36A-136(17) is subject to G.S. 36A-136(8), that probably will mean that the power in G.S. 136A-(17) (when otherwise applicable) will apply to invest and reinvestment situations other than (and not including) situations governed by G.S. 36A-136(8).
It is believed that G.S. 36A-136(14), noted above, allows a trustee to use an attorney-in-fact to execute a deed to property if the trustee has decided to sell under G.S. 36A-136(8). However, it is believed that the trustee cannot delegate his decision making responsibility to the attorney-in-fact. G.S. 36A-136(14) could be used even if a power to sell other than G.S. 36A-136(8) is used. For example, see the powers in G.S. 32-27, especially G.S. 32-27(2), which can be incorporated by reference into the trust instrument. A G.S. 32-27(2) power to sell does not require any procedure or court order. Of course, G.S. 36A-136(14) cannot be used if the trust says otherwise.
G.S. 36A-135(a) makes G.S. 36A-73 applicable. G.S. 36A-73 applies even when Article 13 of Chapter 36A does not. G.S. 36A-73 determines how many trustees must act. If there are more than two, whatever the trust document says governs. G.S. 36A-73(a). In other words, if the document says a certain number must sign, that is what must occur. If there are two trustees, both must act. G.S. 36A-73(d). If there more than two and if the trust instrument is silent, a majority must act. G.S. 36A-73(d).
For additional reading on trusts, see E. Urban and G. Whitney, North Carolina Real Estate, Secs 12-9 and 12-10 (Harrison Co. 1996).
We will be addressing other trust issues in the future.
Tax Deferred Exchanges - Replacement Property Construction
By Ed Urban, Vice President and Corporate Counsel
and President of Statewide Title Exchange Corporation
The I.R.S. Regulations say that the replacement property can be property to be "produced" as "produced" is defined in Sec. 263A(g)(1). See Regs. Sec. 1.1031(k)-1(e)(1). Identification rules in Regs. Sec. 1.1031(k)-1(c) apply, especially (c)(3) thereof. See Regs. Sec. 1.1031(k)-1(e)(2)(i). This requires an acceptable legal description of the land and as much detail as possible regarding construction. Id.
Regs. Sec. 1.1031(k)-1(e)(3) governs "receipt of replacement property to be produced." For purposes of Regs. Sec. 1.1031(k)-1(d)(1)(ii) (receipt of replacement property) variations due to "usual or typical production changes" do not matter, but "substantial changes" will mean that the replacement property received will not be considered to be substantially the same property as the property identified. See Regs. Sec.1.1031(k)-1(e)(3)(i).
Regs. Sec. 1.1031(k)-1(e)(3)(iii) deals with completion rules and is a "mouthful." If the construction is not completed "on or before the date the taxpayer receives the property," this regulation can be a problem. Apparently, this means that, to the extent construction on the replacement real property is not finished when the taxpayer acquires title to the replacement property, the transaction will not constitute a tax deferred exchange. Only the land and improvements finished at the time title is so transferred can qualify for replacement property status. See Regs. Sec. 1.1031(k)-1(e)(5)’s example. Thus, (1) the replacement property seller must construct all of the improvements before title is conveyed to the taxpayer or (2) pending completion of construction the title can be conveyed to (a) a qualified intermediary, (b) a single asset corporation of the qualified intermediary or (c) another qualified intermediary or subsidiary.
The "build to suit" rules are set forth in the above cited regulations and are discussed in T. Cuff, Deferred Exchange Regulations, CCH, text at n.n. 326, et seq. (1991).
Husband and Wife Conveyances Under G.S. 39-13.3 and Joinder Problems
By Ed Urban, Vice President and Corporate Counsel
G.S. 39-13.3 governs conveyances between husband and wife. A conveyance from a husband or wife to the other spouse of property owned by the grantor alone vests title in the grantee. G.S. 39-13.3(a). A conveyance from a husband or wife to the other spouse of real property held by husband and wife as tenants by the entirety vests full title in the grantee spouse. G.S. 39-13.3(c). G.S. 39-13.3(d) states that joinder of the spouse of the grantor is not necessary. G.S. 39-13.3(e) says that a conveyance under G.S. 39-13.3 is subject to G.S. 52-10 and G.S. 52-10.1 except that acknowledgment by the spouse of the grantor is not necessary.
An example of what this reference to G.S. 52-10 may mean is as follows: H (husband) conveys title held by the entirety to W under G.S. 39-13.3(c). W now has full title. Without more in the G.S. 39-13.3(c) deed, when W wants to convey title or give a deed of trust, W may need H’s joinder because of H’s potential elective rights under G.S. 29-30, unless H and W have executed and recorded a valid separation agreement under G.S.
39-13.4 wherein H waives marital rights (as would W, reciprocally). See G.S. 52-10 and G.S. 52-10.1. G.S. 39-7(a) would seem to require such joinder. G.S. 39-7(c) states that G.S. 39-7(a) shall not be construed to require the spouse’s joinder or waiver of rights in G.S. 29-30 where a different provision is made in, for example, G.S. 39-13.3 (among other listed statutes.)
A safe way for W (in the example above) to avoid this problem and various uncertainties is for H and W to both sign and acknowledge the deed wherein H would expressly waive G.S. 29-30 rights in the property, all under G.S. 52-10.
It is noted that G.S. 39-13.3, including G.S. 39-13.3(d), pertains to the conveyance to W in the above example (the first conveyance) and not the prospective subsequent deed or deed of trust by W. The above discussion applies to a conveyance under G.S. 39-13.3(a) as well.
G.S. 50-20(d) allows equitable distribution rights to be waived in compliance with G.S. 52-10 and G.S. 52-10.1.
"ICS Letters"
By Ed Urban, Vice President and Corporate Counsel
"Insured closing protection" or "insured closing service" letters are now clearly permitted by North Carolina’s insurance laws. See G.S. 58-26-1(d). Routinely, the title insurer will issue such a letter to a proposed insured lender (or other proposed insured) covering the protected party for certain specified acts or omissions of the approved attorney or group of approved attorneys named or referred to in the letter, subject to the provisions of the letter. The two major problems protected against are failure of the attorney to follow closing instructions and attorney defalcation. This is issued at no extra charge. In North Carolina, this letter is actually additional protection for the named protected party or parties, since, in North Carolina, the approved attorney might be the attorney agent of the insured, but is probably not the agent of the insurer. See G.S. 58-26-1.
It is important for all parties to see to it that clear, written, closing instructions are given to the approved attorney if the approved attorney is playing any role in the closing.
The ALTA form letter is frequently used. This letter can be amended to waive requirement for a binder or commitment. A master letter covering all of the title insurer’s approved attorneys can be issued to the lender. Subsequently, the lender can request a short confirmation letter from the title insurer confirming that an attorney or a law firm is covered by the previously issued master letter by virtue of being an approved attorney or an approved firm.
It is important to follow closing instructions since an "ICS" letter can create liability where policy liability might not exist.