ISSUES IN CLOSING AND INSURING REAL ESTATE TRANSACTIONS

ISSUES IN CLOSING AND INSURING REAL ESTATE TRANSACTIONS MLTA 2018 Spring Education Seminar David Lawson Fidelity National Title Group I love a good pun I enjoy Edgar Allen Poe s works Edgar Allan Poe wrote: "The goodness of a pun is proportional to its intolerableness. So, is there such a thing as a good pun? 1

Church Corporation Sole Fraternal Elks, Masons, Oddfellows, Kiwanis College Sorority/Fraternity Home Owners Association Road Maintenance Association, Water Association Conservation Organization College, Private School, Day Care Boys and Girls Club Chamber of Commerce Senior living facility Hospital or clinic Medical research facility Union Hall or Apprentice Training Facility Memorial Baptist Church; The American Cancer Society, Inc.; American Lung Association; American Heart Association; Children's Orthopedic Hospital; Cal Farley's Boys Ranch; Shrine Burn Center; Alpine Boys Ranch; Everett Gospel Mission; St. Labre Indian School; Alzheimer Puget Sound Chapter, North Gate Hospital 2

Designed for religious organizations in which an appointed individual represents the church locally, such as the Roman Catholic Bishop of Helena, Montana. MCA 35 3 201. When corporation sole may be created. Whenever the rules or discipline of any religious denomination, society, or church permit or require the estate, property, temporalities, and business thereof to be held in the name of or managed by a bishop, chief priest, or presiding elder, it shall be lawful for such (person) to become a corporation sole in the manner herein prescribed. MCA 35 3 207. Succession. (1) In the event of the death or resignation transfer or removal from office, the individual's successor in office succeeds to the powers, rights, and obligations of the office and becomes vested with the title to the property (subject to filing certain required documents) How many would you expect to find in Montana? 20? 50? 150? 500? Probably well over 150. But why so many? Fraud! At least as to the majority. Usually defrauding IRS, claiming exemptions that aren t legitimate. Names often include Overseer or Presiding Elder in the name. Sometimes Ministerial Trusts are created with the corporation sole as trustee. IRS shut down a company, Remedies at Law, which promoted this scheme. Federal authorities are accusing two Snohomish County men of promoting a widespread scheme encouraging people to renounce government authority and avoid paying taxes by claiming to be religious entities. 3

Can you spot the legitimate corporation sole? Office of the Senior Pastor and President of the Flowing Streams Church, and His Successors, a Corporation Sole Shield of Faith Ministries Overseer & Successors, a Corporation Sole Corporation of the Presiding Bishop of the Church of Jesus Christ of Latter day Saints Office of Presiding Patriarch (Overseer), and Successors, a Corporation Sole Over/For the Society of Sovereigns Goddess of the Vale Covenant of Danann Overseer, And Successors Sleeping Bear Property Overseers Inc. Unified Neighbors of Integrity Truth Edification Discerning Prophetic Apostolic Covering Covenant International Overseer Cardboard Box Church Overseer How many still exist as an active corporation sole? A significant percentage are active. But many are dissolved. There s a recent increase in new filings in the last couple of years! In a legitimate Corporation Sole the individual s name is not important for judgment and lien search purposes. But in a potentially fraudulent Corporation Sole we should run the individual name and show all judgments and liens. Articles of Incorporation and Bylaws should help determine if it might be insurable as legitimate. Contact underwriting if you are uncertain. 4

Articles of Incorporation they disclose: Existence or lack of members Any duties owed to a national, regional or affiliated entity Any reversion of title upon dissolution Any reversion of title upon severing affiliation with a national, regional or other entity Prohibitions on certain types of transactions Bylaws (and Constitution?) they disclose: Types of officers and their duties Different types of governing boards, possibly more than one Membership and rights of members Steps involved to create binding authority for a transaction The activity of the congregation is carried out by its members. The office of Deacon is established (but duties and powers are not defined). Membership shall consist of those who regularly attend congregational meetings. Membership is limited to legally competent individuals. To be a voting member one must: 1) Acknowledge the Messiah, 2) Have attended for at least six months, 3) Be of age 13 or older. The final decision of whether or not children may vote rests with the parents. In case of dissension, title to all congregational property shall remain with the group abiding by these by laws. Special meetings will be called as needed. A two week notice shall be given to the congregation, and shall be posted. No congregational meeting shall convene without 50% of the Shepherds present and 50% of the Deacons present. A congregational quorum shall be at least 50% of voting members. Decision Making: It is the goal in all matters of congregational decision making to be of one heart and one mind. (No other provisions relating to property.) 5

Common Organizational Provisions: Governing board(s) almost always. Sometimes more than one type of board one advisory, one making the final decision Some boards authority may be unrelated to real estate decisions. Can you find the right one or all of the right ones? Pastors of churches almost never have any decision making authority, except to the extent they may be a member of a board. They are not always an appropriate signer. Are they an officer of the corporation? Does a resolution grant them signing authority? Officers: Similar to for profit corporations, meaning they are only able to act once corporate decision making is complete! Members: Some corporations have members, others don t. Members usually have voting rights, but not always. What steps are required to give notice, hold meetings and obtain consent? Any obligations to consult with or obtain permission from a higher body (?): Regional or national church, of which the local church is an affiliate. National fraternity or sorority, of which the local entity is a Chapter. National fraternal order (Elks?, Knights of Columbus?). 6

Common steps needed for binding decisions: Did they hold all necessary meetings? Was adequate notice given? Was there a quorum? Might be a percentage of the required body Might be just whoever attends Don t be fooled by the number of attendees. There might be non voting parties attending. Can you tell if the right people attended? Was there a formal resolution? Did the right percentage approve it? Who are the appropriate signers to bind the corporation? Directors, trustees, officers, pastor? What Kind of Documentation Should You Expect? Minutes of board(s) meetings Minutes of membership meetings Resolutions of a board, signed by board if done without a meeting, or described in minutes if done in a meeting Secretary s confirmation of names of board members, if not within the minutes Evidence or recital about providing notice for meetings Evidence of a higher body s approval in writing (signature, not just an email) What process does that higher body need to follow? What person can give the consent? 7

MCA 35 contains many provisions about nonprofit corporate decision making steps. BUT it does not override any provisions of the Articles of Incorporation or Bylaws. State Code is only a fallback when corporate documents are unclear or perhaps lost, or dissolution has occurred. Underwriting must be consulted if Articles of Incorporation or Bylaws are not available. A Water Association is borrowing: 2017 last minute email from Corporate officer: Our lawyer drew up a letter with his opinion that the vote taken in 2015 gave the board approval to fund the water system project. Title Officer email: The bylaws state in section V.c. the board can borrow in extreme emergencies only and not to exceed $1000, so they have to get member approval. The letter from the association s lawyer indicates the members approved the improvements. But did they approve encumbering? Would you still require a copy of said minutes? Does the extreme emergencies limitation apply to all borrowing or only unilateral borrowing by the board without member approval? It s unclear! Association Bylaws: quorum = 20%; majority = 50+% (A vote as low as 11% might approve encumbrance) There are technical risks, as well as insuring risks here! 8

Nondenominational church is borrowing: General authority of the church is held by the congregation. General authority includes purchasing/selling properties. (Borrowing isn t mentioned.) A quorum shall consist of the voting members present for any regular or special business meetings. Special meetings require two weeks notice. All votes shall have a 2/3 majority to pass. Elder Board: includes Vocational Elders, Lay Elders (unclear if Deacons, too). Trustees: quorum = 50%, 2/3 majority to pass, but subject to the approval of the elder board. Customer provided Trustee and Elder Board minutes with approvals. But nothing from the congregation. Local United Methodist Church is selling. Email regarding rental property: 2017 Board of Trustees meeting minutes: At that point, they discussed of the property and decisions back to the Administrative Council, which voted at their June meeting to hold a full charge conference of the membership of the church (per our doctrine, which outlines the necessary steps to transfer property in paragraphs 2539 & 2540 of the Book of Discipline in the national United Methodist Church). Charge conference: The vote to move forward with a sale was approved unanimously by present voting members. Attached, please find the agenda and briefing statements, and meeting minutes as well as the June 2017 meeting minutes from the Administrative Council. The laity and clergy of the (local) United Methodist Church have been working diligently to ensure proper steps taken and proper recording. Communication has been maintained with our district superintendent. 9

Our Lady Mary Help of Christians Catholic Church (not Roman Catholic): 1. Deed of trust for $147,500 from the church back to the seller July 5, 1994. 2. Deed of trust for $135,808 from the church to Francisco Blanco (relative of the priest) August 27, 2001. 3. Deed in Lieu of Foreclosure February 23, 2007, from Rev. Fr. Mario Blanco for Our Lady Mary Help of Christians, to Francisco Blanco. 4. Board of Director s resolution 2 23 07 grants the priest full and unlimited power to make all financial decisions to sell or gift real property and use any proceeds for his care and expenses and to support his religious beliefs. (Presumably contrary to Bylaws) 5. Deed of trust $840,000 dated February 23, 2007, from Francisco Blanco to Javier Blanco. 6. Deed in Lieu of Foreclosure also dated and recorded February 23, 2007, from Francisco Blanco to Javier Blanco. 7. Deed of trust for $1,200,000 dated August 17, 2011, from Javier Blanco to Our Lady Mary Help of Christians Catholic Church. 8. Deed in Lieu recorded November 23, 2011, from Javier F. Blanco to the church. Church is selling: Secretary of State website shows incorporation date in 1983. Title acquired in 1985. Bylaws submitted are from 2016, stating the church is not affiliated with any national church organization. Customer provides minutes and resolutions authorizing a new loan, consistent with the Bylaws. When asked about the recent date of the bylaws, it turns out the local church took action to sever ties with the national church and revised the bylaws. Articles of Incorporation were not submitted initially but, when finally obtained, disclose reversion of title to the national church upon severing ties. (Uninsurable!) 10

Cemeteries it s complicated: Rights of sepulcher (the right of the deceased to remain undisturbed for eternity). Disinterment is not favored in law and closely regulated. Rights of owners in burial plots. Easement rights over any roads, alleys, paths of the cemetery. 11

Limited right of reinstatement 5 years in MT Who owns title during dissolution? MCA 35 6 104(5): All property of the dissolved corporation must be held in trust by the directors of the corporation and 35 2 729 et seq. relating to court ordered receivership is applicable to liquidate the property and assets if necessary. MCA 35, Chapter 2, Part 7 addresses voluntary dissolution, as well as court ordered dissolution and liquidation. Reinstatement in a timely manner causes the corporation to continue as if the dissolution never occurred. Don t forget to look for any automatic reversion of title upon permanent dissolution. Review the Articles & Bylaws. A common response to dissolution when reinstatement is no longer possible: File a new corporation with the same name. Are they the same corporation if they have the same name and members? No, never! Can they own title without a deed? No, a deed or court order is required. Beware of newer fraud trends where people find dissolved corporations owning property, obtain rights to use the same name for a different and unrelated corporation, then try to sell or encumber the property. The fraud also commonly extorts money for return of the right to the corporate name or return of corporate property. 12

Potential ways of creating insurable title? Remember, title is held by the directors in trust per statute, if there s no automatic reversion per Articles or Bylaws. Must MCA 35, Chapter 2, Part 7 regarding court ordered dissolution be applied? Can we accept a deed from the last Directors or other board that held title upon dissolution? Or do the current Directors replace them? What if their terms as Directors have lapsed? What if they are dead, or cannot be found? Can we accept a deed from the current Directors or other board that were elected by action of the dissolved corporation? Do they succeed to title held by the original directors? Obtaining a court order quieting title might be an option. But who do you serve? Current members, members at the time of dissolution, all of the above? Contact Underwriting! We insured a deed from a new corporation intended to replace the dissolved owner. Claim filed by an attorney for our insured, noting the selling corporation came into existence after the seller s vesting deed. The Secretary of State website easily disclosed this information. Someone didn t catch the issue or assumed the corporation somehow was the same one. Nobody is challenging the deed, other than our insured who is worried about future marketability. 13

Unions Federal law prevents them from being incorporated Union owned property, like meeting halls and apprentice training facilities, are often owned by nonprofit corporations in which the governing board is often identical to the union s board. Title acquired by a Church prior to incorporation, or intentionally never incorporated. Homeowners Associations are occasionally left unincorporated, sometimes even when common properties are to be owned by the HOA, or incorporation occurred after title was conveyed to the HOA. A schism arose among members of an unincorporated church over control of the organization. One group of members incorporated and then filed suit against remaining individual members of the church seeking to quiet title to $14 million dollars worth of real estate. The court pointed out that although an unincorporated religious association, such as the Church, may incorporate, to do so and distribute all interests of the Church to the Corporation would have required the consent of all members of the Church. 14

CONSTRUCTION This issue isn t faced often, but may arise as use of the ALTA 32/33 endorsements become more prevalent. Usually no shareholders or others personally guaranteeing payments. Often significant funds are restricted, unavailable for the project. Even if they have significant unrestricted funds, they may have large current obligations that will use up those funds. Financial statements often show funds for construction equity as pledges from members/community, not actually in the bank. A certain percentage of pledges will never be funded. Some because of financial hardships or changes in contributor priorities. Some may be withheld at signs of trouble. (But others may increase contributions at signs of trouble). Did the corporate approval of the transaction also include approval to execute an indemnity agreement for the title company? Don t fall for this: Many times we have been asked to ignore Declarations, relating to violations of restrictions, potential assessments and architectural review boards requirements on the basis that the former incorporated HOA has been dissolved and/or the property owner has not heard from the HOA in years or received any assessment notices. But HOA s can become active again, even if dissolved and acting as an unincorporated HOA. Rights granted to the HOA can usually also be enforced by individual lot owners. 15

Known manager of a Golf Course borrowed $100,000, went to Mexico. Pastor borrowed money on his church owned residence for a non church purpose. HOA authorized the declarant to sell common area by resolution. Minutes looked good, but dated 15 years earlier. Pure forgery! There are many instances where we could have claims if a disgruntled member had wanted to contest the sale or loan. There are so many procedures, creating chances for missing or failing to document a step. Loan policies are probably more risky now that the public is more aware foreclosures can be challenged. Our job is to avoid claims through knowledge and diligence! 16