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Thursday, September 8, 2011

Title Issues in Foreclosures

Another case involving purchase of property through a foreclosure sale highlights the importance both of conducting a thorough title search and purchasing title insurance.  In Water Pollution Control Authority of the City of Bridgeport v. Johnson, AC 32621, the WPCA foreclosed its lien for unpaid sewer fees, and the buyer purchased the property at auction for the price of $99,100.

After the sale was completed it was discovered that there was another mortgage on the property.  The holder of the mortgage was not notified of the foreclosure and not named in the foreclosure pleadings.  As a result, the mortgage was not extinguished in the foreclosure and remained a valid lien on the property.  That lender proceeded to file a new foreclosure, which threatened to take away the buyer’s entire investment in the property.

The buyer requested that the court vacate the judgment of foreclosure, invalidate the sale and return its funds.  The Superior Court denied the request and the Court of Appeals affirmed.  The appellate court ruled that Section 49-30 of the Connecticut General Statutes clearly provided that, notwithstanding the omitted mortgage, the foreclosure was valid and the omitted lender was free to pursue its own foreclosure.  The court stated that the buyer knew that it would be assuming all risks with regard to the condition of the property, including the condition of title to the property.  In reaching this conclusion the court noted that the seller had provided very clear disclosures.

I find the case somewhat troubling, because the buyer paid value for the property and received a deed which stated that the property was being conveyed “free and clear … of all claims subsequent in right” to the foreclosed lien.  There were, however, other circumstances involved.  The court noted that the buyer waited fifteen months to file its motion to vacate the foreclosure judgment.

Regardless of the facts, this case provides an important lesson.  There are often, very often, mistakes in foreclosure actions.  There are firms which have thousands of foreclosure actions pending at any one time, and they often miss important details.  I personally have represented purchasers of two properties where there were omitted liens.  Both were resolved, but only after a delay of over a month.  It is critical that the buyer conduct a full title search, and obtain title insurance.  In this case, a title insurance policy would have cost the buyer $400.  If the buyer had obtained title insurance, the title insurance company would have had to assume the risk of the additional lien.  This would include the cost of legal fees to defend against the claim.  Title insurance it not a substitute for due diligence.  But it is a layer of protection that you dismiss at your own risk.




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