Welcome to today s webinar! Stone[d] Soup John Rothermel and Heidi Junge December 20, 2018

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Linda McKinney
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1 Welcome to today s webinar! Stone[d] Soup John Rothermel and Heidi Junge December 20, 2018

2 In order to obtain a CE Certificate or CLE Credit, you must listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 2

3 ATTORNEY INFORMATION Because of opinions expressed by the Texas Department of Insurance (TDI) concerning rebates, legal credit is available only to: Attorneys who own title agencies that are Stewart Title Guaranty Agents Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity We welcome any other lawyers to listen, but cannot provide continuing education credit to you. 3

Stone[d] Soup: PACA, PSA, Pot Properties, Federal Liens, Non-Medical Reimbursement, Additional Insured, Continuing Insureds, Rollbacks John Rothermel Senior Vice President Regional

4 Stone[d] Soup: PACA, PSA, Pot Properties, Federal Liens, Non-Medical Reimbursement, Additional Insured, Continuing Insureds, Rollbacks John Rothermel Senior Vice President Regional Underwriting Counsel Senior Underwriter Heidi E. Junge Assistant Vice President Underwriting Counsel Senior Underwriter SW Regional Underwriting Office Stewart Title Guaranty Company

5 Introduction Multiple issues have arisen in the past several years which are fairly new to the title industry. Agricultural trust issues have been the law for decades, but were not considered title issues until a few years ago when a small number of liens became title claims. 5

6 Introduction The increased acceptance of marijuana by state legislatures without concomitant changes in federal law have caused title underwriters to reflect on coverage issues. Other issues have also arisen which need to be explored. 6

7 7 Perishable Agricultural Commodities Act (PACA)

8 Perishable Agricultural Commodities Act (PACA) 7 U.S.C. 499a et seq. Imposes a statutory trust (lien) for the benefit of unpaid suppliers (farmers), sellers and agents/brokers of perishable agricultural commodities The trust (lien) is against produce buyers. 8

9 What is a perishable agricultural commodity? Any fruit or vegetable, whether or not frozen or packed in ice, including cherries in brine Except those perishable fruits and vegetables which have been manufactured into articles of food of a different kind or character. 7 C.F.R 46.2(a) 9

10 Why should you be concerned about PACA? 10 Lien on Real Estate: PACA trust can apply to all produce buyer s assets including real estate and can be superior to the rights of third parties, such as mortgages, dealing with the merchant, dealer or broker. A bankruptcy cannot avoid the priority of the trust because the buyer-debtor does not have an equitable interest in the trust assets. No Notice Required! No notice requirement to be given for unpaid supplier, sellers and agents, not necessary to have a lis pendens or claim of the trust in the real property record to perfect the lien.

11 PACA Know Your Parties and if they could be a subject to a PACA Trust Parties whose assets may be subject to a PACA trust: Food processors, food and grocery chains and wholesalers, food service firms, produce dealers, distributing companies, canners, processing plants, even wineries, distilleries, and breweries. Grocery chains and supermarket chains; Chain restaurants and other major restaurants. Company name that includes food or a type of food, produce, packing, or distributor. 11

12 PACA What To Do: If your transaction involves a party whose assets may be subject to a PACA trust, you must contact your Underwriter. We may require a PACA title exception such as the following: Any trust, right, interest or claim that may exist, arise, or be asserted against the Title under or pursuant to the Perishable Agricultural Commodities Act of 1930, as amended, 7 U.S.C. 499a, et seq., or any similar state or federal law. SLS **NOTE: Even though the trust can only be terminated by paying all supplier in full prior to your transactions, we cannot verify with certainty and therefore cannot rely on such statements.

13 13 Packers and Stockyards Act (PSA)

14 Federal Liens Involving Agriculture Packers and Stockyards Act (PSA) The Packers and Stockyards Act of 1921 (7 U.S.C. 181 et seq.) also establishes a similar unrecorded trust (lien) on the assets of Meat Packers to protect producers/suppliers of Livestock and Poultry. Applies to all Packer s assets, including real estate assets. 14 Livestock is defined as cattle, sheep, swine, horses, mules, or goats, whether dead or alive, and Poultry defined as chickens, turkeys, ducks, geese and other domestic fowl. Packer is a person or entity in the business of: a) buying livestock in commerce for purposes of slaughter, or b) manufacturing or preparing meats or meat food products for sale or shipment in commerce, or c) marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce.

15 PSA Packers whose assets may be subject to a PSA trust may include: Stockyards, supermarket or grocery chains, wholesalers and retailers of meat products, meat packing companies, meat processing companies, farms that purchase livestock and poultry for slaughter. If your transaction involves a party whose assets may be subject to a PSA trust, you must contact your underwriter. We may require a PSA title exception such as the following: Any trust, right, interest or claim that may exist, arise, or be asserted against the Title under or pursuant to the Packers and Stockyard Act of 1921, as amended, 7 U.S.C. 181, et seq., or any similar state or federal law. 15 See STG Bulletin TX

16 16 Marijuana

17 SLS Land Used for Marijuana Activities Stewart Title Guaranty Company is not currently insuring title to land that is known to be used or intended to be used for any lawful purpose under state law for recreational or medical marijuana activities, including cultivation, storage, transport, manufacture, retail, or distribution. 17

18 Considerations Survey endorsements vs. CCRs Escrow Services CPLs Proper licensing for lawful operations under state law of marijuana related businesses Affidavits Exceptions 18

19 19 Medicaid Estate Recovery Program (MERP)

20 Created for some estates to reimburse the government for Medicaid benefits received by the deceased A MERP claim does NOT create a lien on real property. Treated as a general unsecured claim 20

21 21 Foreclosing Deed of Trust When IRS Lien is Attached

22 22 Cutting Off a Federal Tax Lien by Mortgage Foreclosure 1. Was the Tax Lien filed more than 30 days before the foreclosure sale? If no, the tax lien is eliminated against the property. If yes, was Notice given 25 days in advance of foreclosure to the IRS? 26 USC 74259(c )(1) If yes, there is a right of redemption in favor of the IRS for 120 days; if proper notice was not given, then the Federal Tax lien remains on the property. Stewart cannot recognize a re-foreclosure of an otherwise regular foreclosure simply to provide the IRS with notice. (Southern Bank of Lauderdale County v. IRS 770 F2d 1001, 1985).

23 23 Additional Insured Endorsement (T-26)

24 Virtual Underwriter T-26 Guideline Explanation This endorsement is primarily used in estate planning situations where title in individuals has been conveyed to a living trust, acquisition of interest under an agreement existing at the original policy date or family partnership or family corporation, limited liability company. Texas Procedural Rule P-57 provides the basic rules for issuance of this endorsement. 24 Please also see R-33 for more information regarding this endorsement.

25 Virtual Underwriter T-26 Guideline Explanation 25 To issue the endorsement the additional insured must be: a) the trustee or successor trustee of a Living Trust to whom the insured transfers the title after Policy Date, and/or the beneficiaries of the Living Trust, or b) any partner, member or stockholder that acquires the interests of the other owners of the insured in accordance with the terms and provisions of a written agreement in effect at Date of Policy, or c) a family partnership or family corporation solely composed of or owned by members of the insured's family and the insured.

26 Virtual Underwriter T-26 Guideline Explanation For Limited Liability companies the rule provides: i. there will be a transfer(s) of all or any part of the Limited Liability Company members' interests in the insured to any transferee(s), or ii. the withdrawal(s) of one or more of the members from the Limited Liability Company, or iii. the addition(s) of one or more persons or entities as members of the Limited Liability Company. 26

27 Virtual Underwriter T-26 Guideline Requirements We require: A review of the trust, written agreement that allows for the acquisition of the interest of the other owners that was in existence at Date of Policy, the family partnership agreement or family corporations founding documents and any agreements such as bylaws and operating agreements. This review should satisfy you that the documents allow the additional insured entry into the respective organization. For limited liability companies you need to review the founding documents and any later documents that create or allow the transfer of interest or withdrawal or addition of members. 27

28 28 Continuation of Coverage

29 P-35 Limits Our Ability to Interpret Policy Terms P-35. Prohibition Against Guaranties, Affirmations, Indemnifications, and Certifications No Title Insurance Company, Title Insurance Agent, Direct Operation, Escrow Officer, nor any employee, officer, director or agent of any such entity or person, shall issue or deliver any form of verbal or written guaranty, affirmation, indemnification, or certification of any fact, insurance coverage or conclusion of law to any insured or party to a transaction other than: (i) a statement that a transaction has closed and/or has been funded, (ii) issuance of an insured closing service letter, or any insuring form or endorsement promulgated by the State Board of Insurance, or (iii) certification of copies of documents as being true and exact copies of the original document or of the document recorded in the public records. 29

30 T-2. Conditions 2. CONTINUATION OF INSURANCE 30 The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured.

31 T-2. Conditions 1. DEFINITION OF TERMS (e) Insured": the Insured named in Schedule A. (i) The term "Insured" also includes: (A) the owner of the Indebtedness and each successor in ownership of the Indebtedness, whether the owner or successor owns the Indebtedness for its own account or as a trustee or other fiduciary, except a successor who is an obligor under the provisions of Section 12(c) of these Conditions; 31

32 T-2. Conditions 1. DEFINITION OF TERMS (B) if the Indebtedness is evidenced by a transferable record, the person or Entity who has control of the transferable record, as these terms are defined by applicable electronic transactions law; (C) successors to an Insured by dissolution, merger, consolidation, distribution or reorganization; (D) successors to an Insured by its conversion to another kind of Entity; 32

33 33 T-2. Conditions 1. DEFINITION OF TERMS (E) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title: (1) If the stock, shares, memberships, or other equity interests of the grantee are whollyowned by the named Insured, (2) If the grantee wholly owns the named Insured, or (3) If the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity;

34 34 T-2. Conditions 1. DEFINITION OF TERMS (F) any government agency or instrumentality that is an insurer or guarantor under an insurance contract or guaranty insuring or guaranteeing the Indebtedness secured by the Insured Mortgage, or any part of it, whether named as an Insured or not; (ii) With regard to (A), (B), (C), (D) and (E) reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured, unless the successor acquired the Indebtedness as a purchaser for value without Knowledge of the asserted defect, lien, encumbrance or other matter insured against by this policy.

35 35 T-2. Conditions 2. CONTINUATION OF INSURANCE The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured.

36 36 T-1. Conditions 1. DEFINITION OF TERMS The following terms when used in this policy mean: (d) Insured": the Insured named in Schedule A. (i) The term "Insured" also includes: (A) successors to the Title of the Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives or next of kin; (B) successors to an Insured by dissolution, merger, consolidation, distribution or reorganization; (C) successors to an Insured by its conversion to another kind of Entity;

37 T-1. Conditions 1. DEFINITION OF TERMS (D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title; (1) If the stock, shares, memberships, or other equity interests of the grantee are whollyowned by the named Insured, (2) If the grantee wholly owns the named Insured, 37

38 38 T-1. Conditions 1. DEFINITION OF TERMS (3) If the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity, or (4) If the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes. (ii) With regard to (A), (B), (C) and (D) reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured.

39 Same type of discussion applies to Who is insured? in OTPs (D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title; (1) If the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named Insured, (2) If the grantee wholly owns the named Insured, (3) If the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity, or 39 (4) If the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes.

40 Same type of discussion applies to Who is insured? in OTPs (d) Insured": the Insured named in Schedule A. (i) The term "Insured" also includes: (A) successors to the Title of the Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives or next of kin; (B) successors to an Insured by dissolution, merger, consolidation, distribution or reorganization; (C) successors to an Insured by its conversion to another kind of Entity; 40

41 41 Roll Back Tax Issues

42 Land Use Designation and Rollback Taxes Rural Properties can be subject to Special Use Designations or classifications depending on the land s usage. 42 Special Use Designations are under Tax Code, set by Tax Appraisal Districts and result in a reduced valuation for Tax Appraisal purposes: Tax Code 23.51(1) Tax Code and 23.51(2) Tax Code 23.51(2) and (7) Tax Code Tax Code Tax Code Qualified Open-Space Land Agricultural Use Wildlife Management Timber Land Recreational, Park or Scenic Use Public Access Airport Property

43 Land Use change Under Texas Tax Code Land Use Change = Rollback Taxes A land use change (e.g., from Ag to Residential use, etc.) can result in additional taxes imposed for each of the 5 years preceding the year when the land use change occurs amount of tax is the difference between the assessment at the special use valuation and the assessment at market value for the previous 5 years! (b) A Tax lien securing payment of additional tax attaches on the date when the land use change occurs (i) Construction of homestead improvements on Special Use designated land is not a land use change for purposes of triggering rollback taxes, but TAD will usually re-designate one acre for the home to residential use.

44 Insuring Against Rollback Taxes Rule P-20.b(2) 44 Each policy in Texas (T-1 OP, T-2 LP, T-2r) insures against lien of real estate taxes or assessments imposed on the Title by a governmental authority due or payable but unpaid But each policy limits that coverage in Schedule B through exceptions in various forms. As to Rollback Taxes, each policy includes an exception (Sch.B3) that includes the following language and subsequent taxes and assessments by any taxing authority for prior years due to a change in land usage or ownership Insuring against rollback taxes means deleting the phrase and subsequent taxes and assessments by any taxing authority for prior years due to a change in land usage or ownership from the Schedule B exception

45 Insuring Against Rollback Taxes Rule P-20.b(2) Insuring against rollback taxes can be done ONLY on the Loan Policy and Interim Construction Binder NOT allowed for the Owners Policy purchaser always assumes the risk of rollback taxes Coverage only allowed when: 1) the title company has proof in the file that the property is NOT subject to Agricultural, Wildlife or Open Space tax designations (i.e., can NOT be given if property has Ag, Wildlife or Open Space special use valuation); OR 45 2) rollback taxes for the current year and prior years have been assessed, are collected at closing and paid in the ordinary course of business

46 Insuring Against Rollback Taxes Rule P-20.b(2) No discretion allowed in giving coverage. No affidavit for No Change of Use can allow for rollback tax coverage on any owners policy Must comply with P-20.b(2) The Insuring against rollback taxes deletion is done by one of the following: box check-off on the T-2 or T-2R Loan Policy forms; or line through the exception phrase on T-2 or T-2R Schedule B; or produce electronic form T-2 or T-2R omitting the phrase; or issue a T-30 Tax Deletion Endorsement. 46 See STG Bulletin TX

47 Why does Texas have roll back taxes anyway? The philosophical concept arose during the late 1970s and 1980s when many farms in urban and suburban areas were being taxed at their highest and best use level (say a shopping center) when the farm was actually being farmed. In many such cases, the farm income wasn t even close to the taxes that a mall would generate. 47

48 Why does Texas have roll back taxes anyway? So the legislature came up with a compromise as long as land that could be used for a higher use was actually used for agriculture, the taxes would accrue as though used for a mall but collected on the actual agriculture use. Since the state never gives up on taxes that it could be entitled to, the taxes would accrue on a rolling 5 year basis until the use changes. 48

49 49 Why does Texas have roll back taxes anyway? And then the owner who got a tax break for those 5 years (and who just got a pot of money from the mall developer) would pay the back taxes. There is no actual penalty. It is just making up for the most immediate 5 years where you paid less than you should have. There is no incentive not to take the land out of agricultural production. It is a simple legislative compromise where the agricultural land owner doesn t pay taxes based on a use that is only theoretical but the government doesn t lose the taxes on that theoretical use either.

50 Contact Info John Rothermel SW Regional Underwriter Senior Vice President Senior Underwriter Stewart Title Guaranty Company San Antonio, Texas Heidi Junge Assistant Vice President Underwriting Counsel Senior Underwriter Stewart Title Guaranty Company San Antonio, Texas

51 Per the TDI and the State Bar, in order to obtain a CE Certificate or CLE Credit you must: listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 51

52 To Receive CE Credit Each individual seeking credit hours must send their own certificate request to: Please include the following information: Provide only this Presentation Name in the Subject Line of your Stone[d] Soup In the body of your Name of Participant (as it appears on your Escrow Officer License); Presentation PASSWORD given at the end of the webinar; License Number Only (located on left side of Escrow Officer Certificate of License for example: License Number: ) For Attorney CLE Credit also include: Texas State Bar Number Affiliation with Stewart Employed by Stewart Title Guaranty Company; an affiliate; or a Stewart agent For more details, see the CE and CLE FAQs at: 52

53 Recordings Under Texas TIPS tab Posted online 10 days after live presentation Other current courses available Certificates Processing can take up to 10 business days. Contact us if you haven t received your certificate after the allotted processing time. CEcertificate@stewart.com 53

54 Join us for the next Texas TIPS webinar! January 17, 2019 TDI Audit Review John Rothermel For Questions/Comments or 54

CE & CLE FAQs are available under the Texas TIPS tab at

CE & CLE FAQs are available under the Texas TIPS tab at www.stewart.com/texas ATTORNEY INFORMATION Because of opinions expressed by the Texas Department of Insurance (TDI) concerning rebates, legal credit