Posted by JD on October 30, 2000 at 19:29:42:
Thanks again. FYI: In CO a homestead can be claimed if a spouse or child lives in the property, which is the case here (providing you are not claiming another property as a homestead) University Nat. Bank v. Harsh , 1992. There is a distinction between validy and collectability. “…a judgement lien which can not be enforeced of no avail” -numerous cas law.
technical title insurance question - Posted by JD
Posted by JD on October 28, 2000 at 23:38:56:
This question relates to the priority of a judgement lien on a homesteaded property in Colorado. Excuse me, but if I gave any more detail it would just distract for the question.
The question:
When Joe Homeowner refinances, paying off Bank 1 with loan proceeds form Bank 2, using a typical title company title policy and closing escrow, which of the following two loan payoff senarios takes place from a legal standpoint;
or
Re: technical title insurance question - Posted by dewCO
Posted by dewCO on October 29, 2000 at 20:35:35:
The bank #2 will require that the title company pay off the lien from bank #1, otherwise bank #2 would be in second position. (I’m assuming that is not what is desired by Bank #2.) Liens are prioritized by the order in which they are recorded. Anyone wanting 1st position must require the title company to pay off any liens prior in order to get into the first lien position.
Re: technical title insurance question - Posted by Bob H
Posted by Bob H on October 29, 2000 at 01:44:01:
Colorado is a “good funds” state, meaning that the title company must receive the proceeds of the new loan in the form of a cashiers check or wire transfer before disbursing the pay off on the old loan. Further, Colorado is not an escrow state, which means there is a gap period between the disbursement of the funds and the recordation of the new Deed of Trust ( and the release of the old one, as well). A standard title commitment normally provides coverage for the lender during the gap period. With an extended coverage policy, the howeowner is also covered.
If a judgment lien is of record prior to the refinance, the title company will require it to be paid off, either prior to closing, or out of the proceeds of the refinance. If it comes of record during the gap period, the title company will insure over it (as far as the new lender’s position) and seek to recover any losses from the homeowner via the indemnity agreement that is a typical part of all closings.
Hope this answers your question, if not, post more details, and we’ll try again.
Re: technical title insurance question - Posted by JD
Posted by JD on October 29, 2000 at 22:06:06:
thanks for the response, but i was hoping for “senario 1” or “senario 2” as the answer. I could not discern from your response which seanrio actually takes place. Neither the judgment or any issues pertaining to recording are not part of the question. You seem knowledgable about the process, please try again.
Re: technical title insurance question - Posted by Bob H
Posted by Bob H on October 30, 2000 at 03:09:08:
Unfortunately, neither scenario accurately describes the process: Scenario 1 fails the “good funds” requirement; title companies will not disburse the proceeds of an unfunded loan. Scenario 2 is closer, but more accurately describes the process for an escrow state (Colorado is not one)
It is important to understand the function of the title company in non-escrow states. Since it would be impossible to facilitate the simultaneous recording of both release and new loan documents for every transaction, title companies assume the risks of disbursing the proceeds from transactions prior to the recordation of the actual documents. During this “gap period”, after they have collected and disbursed the funds from the transaction, but before the respective documents have been recorded, they insure the condition of title. In the case of a refinance, they would insure the new lender a 1st lien position.
Your post asks about what takes place from a “legal” standpoint. I’m assuming your question relates to chain of title. In a typical refinance, the following occur in order:
Day of closing: borrower executes loan documents; new lender funds loan to title company; title company sends pay off to old lender. At this point, the old lender still has a 1st lien position, and the new lender, an unsecured loan that is insured by the title company to become a 1st lien.
Subsequent day(s): title company records new lender’s Deed of Trust (technically now a 2nd);
Several days (or weeks) later, title company receives an executed Release of Deed of Trust from old lender and records it: new lender is now legally in 1st position.
How this process relates to the priority of a judgment lien is not apparent w/o more information. In general, if a judgment lien was of record prior to a refinance, or came of record, in the gap period, before recordation of the new Deed of Trust, it would be senior to the new loan. The only scenario where I could envision this happening would be in the case of a title company error, or collusion between the judgment creditor and the borrower.
Hope this additional information helps answer your question.
The actual situation - Posted by JD
Posted by JD on October 30, 2000 at 09:34:15:
thank again. The description of the gap period and charcterization of the new note as ‘unsecured’ until recorded helps my thought process. The actual detailed situation is:
I am the assignee of a 15k 1996 judgment (I bought the judgment for a different purpose, the fact that it may be senior to the refinanced loan is just a bonus), which was recorded in 1996. Although the transcript of Judgment was correct, it was indexed improperly by the Clerk and Recorder (spelling error). The homeowner refinanced in 1997 without the title company picking up the judgment in their search. Both the previous and existing 1st deeds of trust were high LTV loans, hence the judgement was not enforecable (because of Homestead law) at the time of recording in 1996, nor would it be enforecable today if it is junior to the 2nd TD. My thought process is that if the title company (an agent of the new lender) had constructive knowledge (even though a release has not yet been recorded) of the payoff of the 1st TD prior to recordation (or execution?) of the 2nd TD, then the judgment would attach to the property (because there would now be equity above the homestead exemption) and hence be senior to the new 1st TD. But if the new 1st TD is executed prior to the payoff of the old 1st TD, then my judgement lien may not be senior to the new 1st deed (because there would never have been equity above the homestead exemption for it to attach to). Since the debtor is in jail (on an unrelated matter) till 2006, the title company may not have any realistic recourse against him, and may fight my claim.
Re: The actual situation - Posted by Bob H
Posted by Bob H on October 30, 2000 at 13:50:31:
It sounds as if your judgment is indeed senior to the new TD by virtue of being of record, prior to the recordation of that TD. Once the transcript of your judgment was recorded, the title company was presumed to have constructive knowledge of its existence. The incorrect indexing by the Clerk & Recorder may blur this point, but in the end, the title company is ultimately responsible for the quality of it’s own research. As I see it, the new TD, is, and always was, junior to your judgment, which automatically became the 1st lien of record at the time of recordation of the release on the old TD.
The issue regarding the homestead exemption raises an interesting question. Is there a distinction between validity and collectibility of the judgment? In my view, your judgment attached to the property when the transcript was recorded. You could have chosen to judicially foreclose at that point. The economic reality (having to pay the homestead exemption) made this course of action impracticable, but it did not invalidate the judgment as an encumbrance on the property.
Another point to consider is the validity of the homestead exemption. Homestead exemptions only apply to a person’s primary residence. If the person is in jail, what is considered his place of residency?
It would seem the title company’s only defensible argument would be that the new lender is entitled to assume the old lender’s 1st position through subrogation. In my opinion, not a slam-dunk for them, given the facts you have presented. The upside is it probably would cost them more to litigate and win, than it would to settle with you for something close to the face amount of the judgment. If I were you, I would initiate a judicial foreclosure, taking the position that your judgment is a 1st lien, and see what happens from there.
Good luck in resolving this, it probably goes w/o saying, but get yourself a good RE attorney to protect your interests.