Escrow fraud; Title insurance fraud; Demotech, Inc.

In light of the ongoing scandal involving Core Settlement Services, Chelsea Settlement Services and Jami Braafhart, it might be useful to review the fundamentals of title insurance and escrow fraud. Follow this link to an online book from Demotech, Inc. entitled Escrow Theft: Today's Challenge in Title Insurance. This book contains reference to the laws of Pennsylvania and other states. This book might be worth reviewing for those who have trouble following the Core/Chelsea scandal or who have questions about their own transactions. Here is an excerpt:

Parties to a real estate transaction often entrust title agents or other settlement professionals with the transaction. Problems can arise when these professionals violate that trust and breach their duties to hold the purchase money and deed to property in a fi duciary capacity and disburse the funds appropriately. Most alarmingly, this violation of trust comes in the form of escrow theft, which occurs when an agent embezzles or misappropriates funds held in a fiduciary capacity.

Core Settlement Services; Chelsea Settlement Services; Jami Braafhart; Preliminary Injunction issued by Court; Stewart Title Guaranty Company;

A lawsuit is proceeding in Cumberland County that reveals the seamier side of the real estate business and the risks to innocent purchasers from settlements. 

On June 1, 2012, the Cumberland County Court of Common Pleas issued a "Temporary Restraining Order and Special Injunction" against Core Settlement Services, Chelsea Settlement Services and Jami Braafhart.  The lawsuit and Order are docketed at 12-3471.  A hearing is scheduled for June 14, 2012.  In the meantime, the Defendants are prohibited from engaging in real estate transactions or selling assets.

Core/Chelsea are settlement companies that issue title insurance and disburse funds in connection with real estate purchases and refinances. The companies are owned/managed by Jami Braafhart.  The companies serve(d) as title agents for Stewart Title Guaranty Company.  The Defendants were required to collect the proceeds from real estate settlements, pay the sellers and pay the liens, taxes and old mortgages and insure title to the properties in each transaction.  These are the typical duties and functions of any title agency/settlement company.

Stewart has filed suit against all Defendants, alleging essentially that for a period of several years, they have failed to pay liens and mortgages from properties for which they conducted settlement. Stewart's lawsuit accuses the Defendants of keeping the settlement proceeds instead of paying liens and mortgages.  The lawsuit claims that the agencies' escrow accounts have a negative balance in excess of one million dollars and have had a negative balance for some time.  Stewart discovered this conduct in May 2012.

Escrow accounts are not supposed to have negative balances at all, as the accounts do not belong to the title agents, but exist solely to collect the sale proceeds and then pay the sellers, the old mortgages and liens, taxes, etc. 

Paragraph 25 of Stewart's Complaint alleges that the Defendants' account balances have been negative since 2007.  Paragraph 31 alleges that the shortage in the accounts exceeded 1.1 million dollars as of May 29, 2012.  To the extent that these allegations are true, Stewart (as the underwriter) is ultimately responsible to pay off unsatisfied mortgages and other liens on numerous real estate transactions - even though Stewart committed no wrongdoing.

This matter is of concern to more than Stewart Title Guaranty Company and the Defendants. The Defendant companies operated at very high volume for a number of years. There are possibly numerous transactions and properties that now suffer from defective title because liens may not have been paid off. Indeed, paragraph 20 of the Complaint alleges that some customers have complained that prior mortgages have not been paid off. Those customers can seek redress through Stewart Title, but the story does not end there. 

Customers that obtained title policies through Core/Chelsea/Braafhart will someday seek refinance through other agencies.  It has been the policy of many title companies in recent years to search the title only so far back as the last mortgage, instead of searching the previous 60 years (as the practice used to be).  The theory for this shortcut is that if a mortgage was placed on the property five years ago (for example), there must have been a title search at that time and the new title company can rely on the fact that someone did their job 5 years earlier and corrected any liens.  But now that whole practice becomes suspect - especially in light of the large volume that Core/Chelsea handled.  If Core/Chelsea failed to pay old liens (as they were required to do), other title companies should not rely on the fact that a settlement occurred in which Core/Chelsea was involved. Once a new title company insures title (defective or not) with a new purchaser, the old title company is off the hook, as the old title company did not insure that new purchaser.

Other title companies need to be concerned, as Core/Chelsea's high volume has created a potential nightmare scenario in which thousands of purchasers/owners unknowingly spread Core/Chelsea's problems to new title companies.  Title companies should decide whether to stick with the recent policy of searching only back to the last mortgage or resuming the old policy of searching the previous sixty years. 

The insurance commission may want to rethink the rate schedule, in which properties that have been insured within the last two or three years are eligible for deeper discounts.  Due to situations such as Core/Chelsea's as well as the general real estate collapse of the past four years (with the resulting increase in short sales, foreclosures, tax sales, unpaid contractors, etc.) properties that have been sold or financed in the past two or three years involve greater risk than those that have seen no transactions for 10 or more years.

Property owners should be cautious also, especially those that used Core or Chelsea for their transaction.  Even though a buyer is covered by the title insurance policy, there still exists a certain amount of aggravation and stress in dealing with an unpaid lien.  Those who merely refinanced (instead of purchasing) through Core/Chelsea are at greater risk. In that scenario, only the mortgage company was insured and only the mortgage company can make a claim through the policy.  As long as the owner is current on the mortgage, the mortgage company suffers no loss, even if an old mortgage remains unpaid or unsatisfied. 

The bottom line is that buyers should not be comfortable with just any settlement company that a mortgage broker or Realtor sends them to for settlement on their purchase or refinance.  Core and Chelsea were favorites for referrals among many Realtors and mortgage brokers.  Those same Realtors and brokers will now begin sending unsuspecting buyers to other settlement companies, about whom the buyers know or understand little.

If you are a buyer or property owner, use your own attorney for settlement. 

Update - here is a link to the Patriot News article from June 7, 2012.

Maronda Homes, Inc. files bankruptcy petition; Title issues of which to be aware.

Last week, the Pittsburgh area's third largest builder filed for bankruptcy protection.

Maronda Homes Inc., the region's third-largest home builder, filed for bankruptcy protection from creditors yesterday amid a national and local housing market that continues to stagnate.

H/T Pittsburgh Tribune Review

The builder assures buyers that settlements will continue as scheduled:

For Maronda customers, homes will be built, and closings will be held on time "with no issues whatsoever," according to attorney Joseph F. McDonough, representing Maronda.

U.S. Bankruptcy Judge Judith Fitzgerald approved an order that closings continue, he said.

It may be true that closings will continue as scheduled, but title agents will face additional issues as a result of the bankruptcy filing and whatever legal/debt issues forced Maronda into bankruptcy.
Title agents should do the following in addition to their regular duties handling the closings:

• scrutinize all bankruptcy orders to make certain that sales are authorized and liens are removed.


• devote additional diligence to the judgment index in the county in which the real estate exists.


• make certain that all subcontractors and materialmen have been paid prior to closing. The period for filing mechanics liens was expanded in 2007 to six months following the performance of the work. Even if the subcontractors have filed no lien prior to settlement, any lien they file up to six months after settlement could take priority over the new deed and the new mortgage.


• be certain that all real estate taxes have been paid - especially for the current year - instead of relying only on the records of tax claim bureau.

Buyers should be careful to hire a real estate attorney for settlements instead of letting the mortgage broker or realtor choose a non-attorney title company to conduct settlement. Non-attorney settlement companies may not be aware of the above issues, especially the mechanics lien issues.

These concerns should be addressed always, but in the current real estate market these issues are more likely to create a problem.

Maronda conducts development in five states, including western Pennsylvania.

Tax sale challenge based on improper notice; Northumberland County Tax Claim Bureau

I wrote previously about properties that have been sold at tax sales and how those prior tax sales constitute title defects, requiring investors/owners to expend attorney fees to clear the title:

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

An example of how such a prior tax sale can create problems for the current owner was recently provided in the case of Steinbacher v. Northumberland County Tax Claim Bureau (decided by the Commonwealth Court in May 2010) (510 C.D. 2009). (I will not bore you with all of the legal details.) The appeals court decided that a prior owner could challenge a tax sale if the tax claim bureau had searched only a "single directory" to find the prior owner before selling the property at a tax sale. The court held that a single directory search was insufficient.

This ruling is not exactly groundbreaking. Tax sales are overturned often for notice-related issues. This case is simply a recent example. Former owners have many arguments to use as they try to show a court that they did not receive proper notice of a tax sale. (This decision applies statewide and is not limited to Northumberland County.)

Who should be interested in decisions like this?

1. Any investor that is tempted to buy properties at a tax sale and who wants to know what legal challenges he might face;
2. Any city government that is tempted to impose greater fees, costs and duties on non-owner occupied properties, without realizing that title defects like this one tend to make it impossible to finance repairs, regardless of how strong the city building code or inspection ordinance might be.

Real estate title defects in Pennsylvania; Buying property subject to title defects.

I wrote earlier about buyers that purchase real estate with title defects because a settlement company cut corners. Some settlement companies, instead of fixing title defects resulting from tax sales, simply delay settlement for a year:

Keep in mind that the "one year period" has no legal significance. Title defects resulting from a tax sale do not go away after one year. If a buyer purchases a property under these conditions, the buyer will have difficulty selling the property, regardless of the fact that he used a corner-cutting settlement company to do an end run around the title defects.

The same reasoning applies to other title defects, like unpaid judgments, tax liens or unsatisfied mortgages. If you somehow buy a property with such a defect, even if you have purchased title insurance from a corner-cutting settlement company, you will suffer consequences when you try to sell the property.

• Your buyer will refuse to complete the purchase until the defect is cured.
• The settlement company through which you purchased the property may be out of business due to an excess of claims because of similar problems.
• The settlement company through which you purchased the property might have excluded this defect from coverage without you realizing it.

Even if your settlement company covers your defect, you may find yourself in the middle of litigation or negotiation instead of collecting proceeds from a clean and simple settlement.

The point is, when you buy property, make sure any defects are addressed either by obtaining the proper releases from the parties holding the liens or by obtaining an "indemnification" from a nationally based title insurance company. Solve these problems before you complete settlement on your purchase.

I will write more about "indemnification" at a later date.

Tax sales; title defects; the arbitrary one-year period.

Click here for a previous post relating to title defects resulting from tax sales:

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. . . . Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

Occasionally I hear about settlement companies that tell buyers that such a property will be insurable "after one year." Details are sketchy because I have heard of this only second hand, but it appears as if some settlement companies have established an arbitrary one year period after which they will purport to insure a former tax sale property - regardless of whether the title defects have been resolved.

Keep in mind that the "one year period" has no legal significance. Title defects resulting from a tax sale do not go away after one year. If a buyer purchases a property under these conditions, the buyer will have difficulty selling the property, regardless of the fact that he used a corner-cutting settlement company to do an end run around the title defects.

Check here for future posts on the consequences of buying a property with title defects (with or without the blessing of a settlement company).

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Update - click here to see some of the consequences of buying property with title defects.

Tax sales and title defects in Harrisburg, PA

I wrote earlier about tax sales, and the likelihood that an increase in property taxes and related expenses would lead to more properties being exposed to tax sales, as owners abandoned their already marginal properties in the face of these new and higher expenses.

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

Every year a few investors take the necessary steps and spend the money required to clear their tax sale properties of title defects. They clear these properties one lawsuit (or one quitclaim deed) at a time. Meanwhile, hundreds more properties are exposed to new tax sales (and new title defects) every year. Every year the city gets deeper in the title defect hole, as more tax sale defects are created than are resolved.

The City of Harrisburg owns hundreds of properties that were unsold at prior tax sales. Countless more have been purchased at tax sale and remain burdened with the same title defect(s). Increasing the tax rates will only compound the problems. Fewer investors will attempt to purchase these properties and undertake the expense involved in clearing the title after the cost of such ownership has been drastically increased, as the City's consultant now proposes.

Tax sale title defects will now be made more burdensome, and will contribute more to the downward spiral in the real estate market.