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Insuring Tax Lien Foreclosures

The real estate tax lien industry has become a big business in New Jersey. Municipalities conduct regular auctions at which tax sale certificates [TSCs] are sold to entities which are in the business of purchasing tax liens. If no third-party bidder acquires a TSC, it is sold to the municipality. The TSCs may be foreclosed in rem (if held by the municipality) or in personam (if held by a non-governmental entity in the Superior Court, Chancery Division, and the titles derived through such foreclosures are insurable. Nevertheless, a final judgment entered in a tax foreclosure (in rem or in personam) is not as “final” as it may seem at first glance. The former owner enjoys a statutory right of redemption for a period of three (3) months following the entry of judgment. N.J.S.A. 54:5-87 (in personam); 54:5-104.67 (in rem). In addition, the Rules of Court generally permit the re-opening or vacation of judgments (including tax foreclosure judgments) for an extended period of time (usually up to one year) following entry of same. R. 4:50 (“Relief from Judgment or Order”). See Handbook of N.J. Title Practice (hereinafter “Handbook”), Ch. 102 (3d Ed. 2012 Rev’n) for more information.

Title insurers continue to experience losses resulting from attempts to set aside tax foreclosure judgments. In these cases, the former owners of the insured land have sought post-judgment relief under N.J.S.A. 54:5-87 (or -104.67) or R. 4:50 (or both). Unfortunately, the courts have seemed anxious to grant the relief sought in these cases, even though the foreclosure proceeding was apparently regular, and (in some cases) despite the fact that title had been conveyed by the TSC holder to another party after foreclosure. In other words, the courts have favored the former (foreclosed) owner at the expense of the current owner, permitting the re-opening or vacating of the foreclosure judgment, and thus (in effect) causing a failure of title.

As a result of the claims experience discussed above, many title insurers (including FNTG) have taken the position that each commitment and policy issued within one year of the entry of judgment in a tax foreclosure proceeding, whether personam or in rem, must contain the following exception:

Consequences of the exercise of the right of redemption for a period of three (3) months from the entry of final judgment, pursuant to N.J.S.A. 54:5-87 [or 54:5-104.67], or re-opening or vacating of the final judgment for a period of one (1) year from the entry thereof, pursuant to R. 4:50.

Underwriting guidelines published by many title insurers (including FNTG) go on to state that the exception should appear in all policies insuring titles derived through tax foreclosures, regardless of whether the insured is the party in who foreclosed the TSC or a subsequent transferee or mortgagee. Furthermore, the exception should not be waived unless more than one (1) year has elapsed since the date of entry of the final judgment, and then only if the title company is satisfied that no redemption has occurred, and there is no pending application to redeem.

In addition to the post-judgment right of redemption (discussed above), a final judgment of foreclosure in personam may be vulnerable to attack in a bankruptcy proceeding. Therefore, the “upper court” judgment search should be continued past the date of recording of the foreclosure judgment to confirm that no bankruptcy petition has been filed by the former owner. If no petition has been filed, and the proposed insured is the party in whose favor the foreclosure judgment was entered (or a related entity), the “creditors’ rights” exclusion contained in the ALTA Owner’s Policy (2006) provides sufficient protection for the insurer. However, if the policy is to be issued within one year from the entry of the final judgment, and the proposed insured is a subsequent arms’ length purchaser or mortgagee, a “creditors’ rights” exception should be inserted in the policy. See Handbook, §§ 2910 and 5206. (The “creditors’ rights” exclusion and exception are in addition to (and not in place of) the exception for the post-judgment right of redemption discussed above.) It should be noted that the creditors’ rights exclusion contained in the policy jacket may not be deleted or modified. N.J.S.A. 17:46B-54.

Furthermore, when the insured is the party in whose favor the judgment was entered (or a related entity), many title insurers (including FNTG) take the position that the policy amount should not exceed the amount required for redemption under the foreclosure judgment. If the insured is a subsequent purchaser for value, the policy amount should not exceed the consideration set forth in the deed vesting title in the insured. See NJLTIRB Rate Manual, §§ 3.1.1 & 3.1.2. For more information about insuring titles derived through TSC foreclosures, see Handbook, §§ 10208 (in rem) and 10218 (in personam).

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