The Statewide Title Newsletter and Legal Memorandum

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Issue  17  Article  36
Published:  12/1/1996

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Tacking on to Prior Policies
Ed Urban, Vice President and Corporate Counsel

1.General Comments Tacking on to a prior owner’s policy is expressly permitted by the bar association’s ethics opinions. RPC 99. Tacking on to a prior loan policy can also be allowed as discussed below.

2.The Preliminary Opinion And What The Title Insurer Looks For - Prior Policy Is An Owner’s Policy

The Bar Association’s preliminary opinion sets forth the following paragraph on the front of the form and the following standard exception No. 3 on the reverse side, respectively:

Updating From Previous Title Insurance Policy? Yes [ ]; No [ ] (Attach Copy). If “Yes”, has a search of the public records been accomplished for such period of time within which judgments, liens or other matters could affect the property, regarding the owner(s) of the property on and after the date of said policy? Yes [ ]; No [ ].
___3. Matters which would be revealed by a review of the public records regarding the proposed purchaser/borrower, who is not a current owner of the property.

EXAMPLE: Bar form preliminary #1 for transaction #1 deals with a transfer for cash from A to B. B obtains no loan. A must be checked for encumbrances. B need not be, since owner’s policy #1 insuring B will exclude liability for judgments, etc., created by B. Exclusion From Coverage, paragraph 3(a).

However, when preliminary #2 for transaction #2 is prepared for a transfer from B to C (with or without C getting a loan) and prior policy #1 is “tacked on to,” B must be checked for all encumbrances whenever they attached. It is wrong to say that the tacking can commence from the effective date of policy #1. If C is obtaining no loan secured by a deed of trust, C need not be checked for encumbrances since owner’s policy #2 insuring C will exclude liability for such encumbrances created by C. If C is obtaining a loan all proceeds of which are to go toward the purchase from B and closing costs, which loan is to be secured by a deed of trust to M, C should still be checked for all encumbrances if M is to be insured by a loan policy This is not necessary if the encumbrance is a federal tax lien or judgment lien other than a judgment lien in favor of the United States or one of its agencies (hereinafter “USA”). This is because of the “purchase money rule.” Smith Builders Supply, Inc. v. Rivenbark, 231 N.C. 213, 56 SE. 2d 431 (1949); Carolina Builders Corp. v. Howard-Veasey Homes, Inc., 72 NC. App. 224, 324 SE. 2d 626, cert den. 313 NC.597, 330 SE. 2d 606 (1985). However, a recent federal law governing judgments in favor of the USA states that: “This chapter shall preempt State law to the extent such law is inconsistent with a provision of this chapter.” 28 U.S.C. Sec. 3003(d). “A lien created under subsection (a) shall have priority over any other lien or encumbrance which is perfected later in time.” 28 U.S.C. Sec. 320 1(b). This has been interpreted to mean that such a judgment does not get the benefit of the “purchase money rule” cited above. Also, if such a purchase money loan is not involved but a construction loan deed of trust securing M is involved and is to be insured, the “purchase money rule” does not apply and C should be checked for all liens against C. Further, if M’s deed of trust to be insured secures both purchase
money and construction loan proceeds, the deed of trust will not have "purchase money rule" priority to the extent of the construction loan proceeds. Dalton Moran Shook, Inc. v. Pitt. Dev. Co., 113 NC. App. 707, 440 SE. 2d 585 (1994). In this case, C would have to be checked for all liens.

In sum, since the above quoted provisions of the bar form were promulgated before 28 U.S.C. Secs. 3003(d) and 320 1(b), it is wise to check C for all liens (whatever the effective date or filing date) when preliminary opinion #2 applies for a loan policy insuring M even if M’s deed of trust secures purchase money.

3. Tacking Onto A Prior Loan Policy
A prior loan policy can be tacked on to. However, since that loan policy might insure, for example, M’s first lien position because a prior deed of trust securing X was subordinated to M’s lien and X’s lien was not noted as a subordinate matter in M’s policy, it is prudent to check the borrower in M’s policy for liens as well as that borrower’s predecessor in title if that predecessor was in title with the last 10 years. There have been serious and large claims when this caution is not employed, It is Statewide Title’s practice to list in M’s loan policy subordinated mortgages or deeds of trust for information purposes in order to avoid tacking problems.

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