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A contractor bought a vacant lot in Winter Park, Fla. with cash and built a $1.4 million home. The contractor went to his local bank to obtain a $1 million loan after he completed building his dream home. Fidelity was then asked to insure the $1 million loan. The title examiner for the order found a multi–million dollar judgment in the chain of title and brought it to the attention of the escrow officer before sending the completed commitment.

Here is what happened: In 2008, a lender lent $650,000 to a real–estate developer (developer) using the vacant two–acre lot on a lake as collateral. The developer had been a successful homebuilder and developer, whose companies were responsible for a pair of high–end 18–story condominiums in Orlando, Fla. that later went bankrupt.

The developer also had financial problems in Volusia County, Fla. where in 2011, a judge entered a $12.6 million judgment against him because of a failed $20 million Daytona Beach hotel redevelopment that resulted in foreclosure and a courthouse auction.

That judgment was recorded as a lien in Orange County, Fla. on January 18, 2011. One month later, the lender took the title to the vacant land in exchange for forgiving the $650,000 debt. Four months later, the lender sold the land in the upscale Winter Park subdivision to the contractor for $760,000.

The lender did the legal paperwork in both transactions – the swap with the developer of the mortgage for the deed, and the sale to the contractor. In that sale, the lender signed an affidavit – which had been prepared by his son – declaring that there were no judgments or liens that encumbered the property.

The contractor then built a $1.4 million, 8,500–square–foot home on the lot in 2012. According to Orange County property records, the land and home are worth $2.2 million. At the time of purchase, the contractor received an owner's policy of title insurance from one of Fidelity's biggest competitors, but only for the value of the vacant land, $760,000.

After completion of construction, the contractor went to a local bank to borrow $1 million against the property. The bank opened an escrow with Elizabeth Fierro, an escrow officer with Fidelity's Lenders Express Division in Tampa. Elizabeth placed the title order. The title examiner assigned by Property Insight was Richard Mirabella, an outside vendor.

Richard informed Elizabeth of the $12.6 million judgment attached to the former owner and the property. Elizabeth reached out to the title insurance company who had insured the lot purchase for a letter of indemnity against the multi–million judgment and later received the letter.

Elizabeth and her underwriter reviewed the letter of indemnity, and together they determined the letter did not contain sufficient language to protect the Company from a future claim or loss. Elizabeth declined to close and insure the $1 million loan. Her manager said, "Elizabeth is sharp enough to know occasionally there is a valid reason to say 'no' to a customer."

The contractor says he wants to sell the property and be done with the whole mess. He has brought a lawsuit against the former owners of the property. In the meantime, if he sells the home, he will get none of the money. Instead, it will go to pay off the lien holder that won the $12.6 million judgment against the developer in Volusia County.

The contractor also has a claim against his original title insurance company, but the policy limits of $760,000 are not nearly enough to reimburse the $1.4 in construction costs and the judgment lien in the amount of $12.6 million.

Richard Mirabella and Elizabeth Fierro were rewarded $1,000 for their joint efforts. Richard received his half for searching and discovering the judgment lien against the former owner. Elizabeth received her half for obtaining the indemnity letter, working with her underwriter to determine it did not contain sufficient language to mitigate our risks on a $1 million policy of title insurance, and for telling the customer we would not close and insure the loan.

 

 
 

MORAL OF THE STORY

A judgment against a debtor can be recorded as a lien in any Florida county. Once that happens, proceeds from any property sale by the debtor in that county would go first to pay off the lien holder. Somebody apparently missed that judgment lien in a previous title search and now the property is encumbered until the judgment lien is satisfied and released.

Had we closed and insured the $1 million loan it would have been in second lien position behind the judgment lien. The lienholder would have had a priority lien position adversely affecting the proposed insured lender's ability to foreclose on the property had the borrower failed to make their agreed upon payments.

 
 
 
 
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