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NC Real Property Update 2011

VIEWS: 158 PAGES: 114

									     NC Real Property Update 2011
                    March 8 & 9, 2011
                Paragon Commercial Bank
                 Raleigh, North Carolina




 8:00am – 8:30am       Registration
 8:30am - 9:15am       Describing the Interest Insured
                       Live Presentation by Joe Ritter, State Underwriting
                       Counsel
 9:15am – 10:15am      Modifications and Deeds-in-Lieu of
                       Foreclosures
                       Live Presentation by Natasha Branch, Raleigh Branch
                       Title Counsel
10:15am – 10:30am      Break
10:30am – 11:30am      Malpractice Court: Risk Management
                       Lessons from the Bench*
                       Live Presentation by Louise Paglen, Esquire, Founder &
                       Owner of Intelisure, an independent insurance agency
11:30am – 12:30pm      Lunch Provided by Fidelity
12:30pm – 2:00pm       Claims & Policy Forms
                       Live Presentation by Joe Ritter, State Underwriting
                       Counsel & Natasha Branch, Raleigh Branch Title
                       Counsel
 2:00pm – 2:45pm       Current Day Fraud in the Financial Industry
                       Live Presentation by Steve Shuford, Treasury
                       Services Director of Paragon Commercial Bank
 2:45pm -   3:00pm     Break
 3:00pm -   4:00pm     1031 Exchange Update
                       Video-replay Presentation by John E. King, Manager of
                       Eastern Operations for IPX
                                       Speaker Bios
Joe Ritter, NC State Counsel for Underwriting, Fidelity National Title Insurance Company
& Commonwealth Land Title Insurance Company
         Joe Ritter is an Alumni of UNC-Chapel Hill and the Cumberland School of Law in Birmingham,
Alabama, and he has been in the title insurance industry since 1977. He served as president of the North
Carolina Land Title Association in the 1991-1992 year. Since 1998 he has been State Underwriting
Counsel for Fidelity National Title with his office in Greensboro, N.C. He is a member of the North
Carolina State Bar, the North Carolina Bar Association, and the Real Property and Corporate Counsel
Sections of the North Carolina Bar Association, and the NCLTA.


Natasha Branch, Title Counsel – Raleigh Branch Office
          Natasha Branch is Title Counsel in the Raleigh office of Commonwealth and Fidelity National
Title. She received her B.S. from UNC-Chapel Hill in Business Administration in 1994. After working in
the field of Human Resources for four years, Natasha returned to UNC-Chapel Hill and received her law
degree in 2001. She practiced real estate law for six years prior to joining Fidelity and is a member of the
NC State Bar, NC Bar Association Real Property Section, Wake County Bar and Wake County Real
Property Section.


Louise Paglen, Founder & Owner of Intelisure, LLC
         Louise Paglen is the founder and owner of Intelisure LLC, an independent insurance agency
specializing in risk management and insurance services for law firms. Ms. Paglen holds a JD with honors
from UNC-Chapel Hill and a Masters in Risk Management and Insurance from Florida State University.
Ms. Paglen clerked for the Honorable Gerald Arnold, Chief Judge of the North Carolina Court of Appeals
and practiced law for several years before joining Lawyers Mutual as Vice President of Risk Management.
Ms. Paglen serves as a member of the boards of the North Carolina Association of Women Attorneys and
the UNC Law Foundation, and as an Advisory Council member of the Authorized Practice Committee of
the NC State Bar. She is a member of the NC State Bar and is certified as a North Carolina Superior Court
mediator. She is married and has two sons, Gregory and Matthew.



Steve Shuford, Senior Vice President & Director of Treasury Management Services,
Paragon Commercial Bank
         Steve Shuford has worked in the financial industry over 30 years, beginning his career at BB&T.
Except for two years, all his time has been spent in various roles and cities with North Carolina banks.
Since 1985, Steve has worked exclusively in the Treasury Management field. Prior to joining Paragon in
May of 2006, he worked at RBC Centura for 16 years in treasury management sales and as manager of the
treasury management sales team. He also served as manager of RBC Centura's Treasury Management
Product team. At Paragon, Steve is Director of Treasury Management coordinating client consultation as
well as product development and enhancement.
         Steve is a native of Lenoir, NC and graduated in 1973 with Honors from N C State University
with a BS degree in Mathematics. In 1988, Steve attained the professional designation of Certified Cash
Manager (CCM) "with distinction". He became permanently certified in 1992. Since that time, he has
been an active member of the North Carolina Treasury Management Association.
                              Speaker Bios (cont.)
John E. King, Senior Vice President & Manager of Eastern Operations, IPX Exchange
Services
         John E. King, Esq. has been a Senior Vice President for Investment Property Exchange Services,
Inc. since 1996. A member of the California Bar since 1992, his practice is limited to Internal Revenue
Code §1031 exchange transactions. He received his B.A. degree from Flagler College and his J.D. degree
from Western State University College of Law. He has a strong real estate background and lectures
nationally on the subject of tax-deferred exchanges. He is also a member of several local and national real
estate trade organizations. Investment Property Exchange Services is a wholly owned subsidiary of
Fidelity National Financial, Inc., the largest Title Insurance company holder in the world and the parent
company of, among others, Chicago Title Insurance Company, Fidelity National Title Insurance Company,
Ticor Title Insurance Company, Security Union Title Insurance Company and Alamo Title.
  Describing the Interest Insured



             Joe Ritter
Commonwealth and Fidelity National Title




          March 8 & 9, 2011
        Raleigh, North Carolina
                        Reading Surveys and Drafting Legal Descriptions

                                         Joseph M. Ritter
                                    Commonwealth Land Title
                            Fidelity National Title Insurance Company
                                         Greensboro, N.C.


It is elementary that in order for a deed to constitute an effective conveyance it must contain
certain essential parts. Those parts are: a competent grantor, a grantee capable to holding title to
land, operative words of conveyance, proper execution by the grantor, proper delivery, an
acceptance by the grantee that is adequate at law, and the topic of this paper, a sufficient
description of the property. J. Webster, Real Estate Law in North Carolina § 130 (1971). Even
thought the art of legal descriptions is essential to a valid conveyance it is sometimes
underestimated in importance. It is a task that should be taken very seriously and certain
techniques are simple yet profound in their effect. The use of a survey when available goes hand
in hand with a legal description. It is natural to cover these two topics in one presentation.


                             The importance of the legal description
The goal when composing a legal description is to distinguish the subject property from all other
property in the world. Once the preface of the description including the state, county and
township in which the area is located is stated at that point the location is narrowed greatly. But
it has to go further.


An example of the importance of a good description appears in the case of North Carolina v.
Brooks, 279 N.C. 45 (1971). There, the State of North Carolina brought an action to remove a
cloud on title. The State asserted title to a marshland area in Brunswick County based on a
statutory conclusive presumption. To overcome that presumption the defendants must establish a
clear chain of title vesting title in them. The jury found sufficient chain of title to support
ownership in the defendants as opposed to the State, except for the area within a navigable body
of water. The State appealed and the Court of Appeals affirmed. The Supreme Court reversed.


The decision rested on an examination of the muniments of the chain. Two deeds in particular
caught the attention of the court. The deeds were the Gause deed dated in July, 1796, and the


                                                  1
Tilly deed dated in 1807. In both conveyances the Court reviewed the deed description for legal
adequacy. The description in the Gause deed read substantially as follows:
        Being “a certain plantation and tract of land” containing 610 acres, more or less,
        “that is to say, 110 acres on the Plead, also 200 acres of the marsh and islands
        Tubbs Inlet joining the above and granted by patent dated the 9th of April 1770 to
        said William Gause. Also 300 acres…”

In the Tilly deed, the description read substantially as follows:
        Being “a plantation tract or parcel of land” containing 610 acres, more or less,
        “that is to say 110 acres on the head of the east branch of Little River granted by
        patent to John Ludlum the 26th day of May, 1757, 200 acres of the tide marsh and
        island near Tubbs Inlet, and joining the above, granted by patent bearing date 9th
        day of April, 1770, William Gause.

In the later deed, there was no mention of the additional 300 acres referenced in the previous
deed.


The original grant from the State to William Gaus in April, 1770 to which the chain must be
linked described the land conveyed as:

        470 acres Brunswick being a tide marsh between Tubs Inlet and Mad Inlet joining
        and between Needham Gaus, John Simmons, his own, Peter Allston and Isaac
        Ludlams line, Beginning at a pine by the mouth of the Spring Branch on Peter
        Allstons line by the marsh side thence along with the up land and marsh joining
        Peter Allstons his own John Simmons and Needham Gaus lines to a pine on the
        marsh side by Shelleys Point 12 poles to eastward of Need Gaus westermost
        corner which on a straight line is south 74 west 882 poles, thence south 120 poles
        to a stake by his beach tract; thence along said line or beach north 68 east 320
        poles, thence north 76 east 560 poles to a stake by Tubs Inlet by the mouth of
        Morgans Creek; thence along by the side of said creek about north 49 east 40
        poles to the Beginning.

The only common reference between the several descriptions was the reference to 200 acres
granted on April 9, 1770. Because of the imprecise legal description the Gause and Tilly deeds in
the chain were deemed “patently and fatally defective.” Thus, the necessary chain to overcome
the presumed vesting statutorily provided in favor of the State was not possible. Thus, the
Supreme Court held in favor of the State.




                                                  2
Another common scenario pertains to secured lending such as in the case In re: Will A. Hudson,
182 N.C. App. 499 (2007). In that case the borrowers-Hudson executed a note and deed of trust
to the lender. The collateral listed on the note included four properties identified by street
address. The deed of trust used an attachment to describe the security. Borrower claimed that the
deed of trust when executed had no attachment. Among other issues including the jurisdiction of
the clerk at the foreclosure hearing to consider such issues, the court considered the validity of
the deed of trust when executed with no description. The trial court issued an order dismissing
the lender’s petition to foreclose on all the properties. The clerk had allowed the foreclosure to
proceed on certain properties but not others. The Court of Appeals upheld the trial court’s
decision. The Supreme Court summarized: “Here, the deed did not include a description of the
real property at the time of the execution, and such description was later added to the deed
without the [borrowers’] consent or knowledge. [Lender] argues that [borrowers] intended to
convey, at a minimum, four parcels of land as security for their loan, and that such intent is
sufficient to satisfy the Statute of Frauds. We disagree.” The instrument failed for lack of a
description.


                                 Composing a legal description
There are several methods of legal description commonly used in North Carolina. Those are:
descriptions by monuments, courses and distances, or by metes and bounds; descriptions by
reference to a map or plat; descriptions of city lots by reference streets and numbers; descriptions
by reference to a prior conveyance; and descriptions by reference to the quantity of land
conveyed. J. Webster, Real Estate Law in North Carolina § 156 (1971). The more precise of
those methods are the preferable: descriptions by monuments, courses and distances, or by metes
and bounds; and descriptions by reference to a map or plat. Use of reference to a prior
conveyance can likewise be helpful. But no matter the technique one must be careful to examine
the information provided for accuracy and completeness. For example, reference to a recorded
map is only as good and thorough as the information included in the reference and the
information shown on the plat.


A metes and bounds description is more carefully defined as: the outline or boundaries of a
parcel of land by the “selection of certain ascertained landmarks or ‘monuments’ that are as



                                                 3
permanent in nature as possible which are situated at the angles of the boundary lines of the tract,
and by stating the measurements between the ‘monuments’.” J. Webster, Real Estate Law in
North Carolina § 157 (1971). Webster refers to the metes and bounds description as an effort to
“mark out boundaries by mathematical lines.” The description is made up of lines running
certain courses and distances between monuments. According to Webster, monuments and
courses are:
    •   monument: “consists of any object or mark on the land that may serve to locate the
        boundary line at a given point. It may be a river, rock, tree, or other natural object, more
        or less permanent, or it may be artificial, as a wall, post, ditch, or road.”
    •   course: “is the direction in which a line runs, stated with reference, not to its terminus,
        but to its correspondence with a certain point on the compass.”


Here are some practical suggestions when drawing a legal description. After reviewing the case
law with regard to interpretation and rules for construction for legal descriptions the reason for
the practical suggestions will be clear.
   1. Begin the description with a brief short-hand description giving the adjoining landowners
        and parcels. An example might be:
        Being that certain parcel bounded on the North by Smith Lane; on the east by land now
        or formerly owned by Jones under deed appearing in Book 1234, Page 4567; on the
        South by lot 14 in that subdivision known as Morgan Place recorded in Plat Book 14,
        Page 34; and on the west by land know or formerly owned by Williams under deed
        appearing in Book 1678, Page 1234.
   2. Make sure and describe the beginning point in the most accurate way available, because
        the beginning point is the most important part of the description. Reference to permanent
        markers is important as demonstrated by the requirement under N.C.G.S. §47-30(f) (9).
        There, at least one corner must be accurately tied to a series of monuments such as the
        North Carolina Geodetic Survey.
   3. The calls and distances for each line should designate the ending or terminus in a line or
        corner of another owner or monument. An example might be:
        …to the northernmost corner of lot 14 of the Smith Subdivision appearing in Plat Book
        14, Page 32…


                                                  4
   4. The following call and distance should continue along the dividing line or common
       boundary such as: “…thence with the line of Jones North 11 degrees 11 minutes West
       100 feet…” This prevents gaps and gores between parcels.
   5. In the final call and distance indicate that it end at the place of beginning, such as:
       …thence with the line of Jones North 11 degrees 11 minutes West 100 feet back to the
       point of beginning.”
   6. Once the calls and distances have completed the outline of the real estate described,
       supplement the metes and bounds with other information like the survey from which the
       metes and bounds description was drawn, and the deed vesting title in the grantor- or
       least the most recent deed in the chain of title.
Two practical points of what one should not do are:
   1. Avoid using a “point-to-point” method of describing land where lines are simply a series
       of courses and distances from one point to another with no supplementary references to
       monuments. To use such a description, invites composition errors that might create
       crucial mistakes that require remedial work to correct the errors.
   2. Reference to the property conveyed for monumentation, such as “to the northernmost
       corner of the land conveyed” is self-serving.


If you wish to literally draw an outline of a description, perhaps to facilitate searching a title,
refer to the process described in § 4-17 of North Carolina Real Estate Title Searches (1982) by
Lilona S. Schiro and Gregory W. Schiro. Several software programs exist that with plot the
description.
                                      Rules of Construction
To ascertain the land conveyed the “first and foremost” guide, as described by Webster, is the
intent of the parties determined from the entirety of the instrument. This is the same direction
used in not only deed conveyances but also in wills and contracts generally. This standard can be
a subjective reference that leads to uncertain and inconsistent results. In order to better and more
consistently guide lawyers to determine the land conveyed where ambiguities exist, there are
rules of construction. These principles have been applied over the years so as to become settled
rules of construction.




                                                  5
Where uncertainty or conflict exists more permanent markers are favored. Here is the accepted
hierarchy reflected in the case law.
    •   Calls for natural or permanent monuments are given authority over artificial or less
        permanent markers.
    •   Physical markers are favored over courses.
    •   Courses control over distances.
    •   Statement of area, such as a number of acres, is the least authoritative method of
        description.
Other helpful guides are,
   •    Reference to a map in order to describe the land conveyed will control over a metes and
        bounds description.
   •    A reference to a previous deed may supplement the description in the present
        conveyance.


                                       Case law examples
In the case Tice v. Winchester, 225 N.C. 673 (1945) the “gist of the controversy [was] of the
beginning corner of the defendant’s deed (which was also the corner of the plaintiff’s deed)
described as ‘equidistant between the dwelling located on the lot here being described and the
dwelling located on the dwelling located on the next adjoining the same.’” The defendant
contends the beginning point is not physically ascertainable from the information provided in the
deed. They contend the point can be determined only by reversing a call from the first definitely
described corner. To the contrary, the plaintiff contends the beginning point is “fixed as a
mathematical point” and governs less certain elements of the description.


The Court described the steps of analysis. First, “all descriptive matter set out in a deed, where
pertinent, is to be considered in the attempt to identify the land intended to be conveyed…”
Second, “…to avoid a mere impressionistic conclusion, we must observe other more particular
and specific rules recognized in law respecting the comparative weight and value and controlling
influence of the descriptive elements ordinarily found in conveyances of land- natural objects,
artificial monuments, fixed corners, course, distance, quantity.”




                                                 6
Applying those rules of construction to honor the more permanent over the less secure, the Court
noted that “When such beginning point has been established, it cannot be shifted backward or
forward in the line by any call for course and distance; but the actual distance between it and the
next corner shall be taken regardless of whether the distance called for is over or short of that.”
The two houses referenced in the description were accepted by the Court as permanent objects,
even though not arranged with the symmetrically with the street or in a direct line with the
beginning point.


Even though the beginning point in Tice is not perfectly oriented it was given great deference.
Thus, it is advisable to make sure when composing a legal description to carefully use the best
most permanent and accurate monumentation, to set the beginning point. Every call and distance
revolves around the beginning point.


Two other well-established rules of construction with regard to legal descriptions appear in Kelly
v. King, 225 N.C. 709 (1945). The subject properties were platted lots that extended from the
public road to the sound. Several of the descriptions were with reference to the recorded plat
from the public road to the high water mark of the sound. Others simply referenced the lot as
shown on the recorded plat. One conveyance was to the low water mark of the sound. Plaintiff
alleged the boundary extended to the sound and that if the sound was navigable then the lot
owner was entitled to have the sound open and available. And if the sound was non-navigable
the lot extended to the thread of the stream.


Defendants received a deed from the State Board of Education including that area of the sound
bordering the subject properties. They had dredged and then reclaimed land bordering the subject
lots owned by plaintiffs. They built a road, thus, blocking plaintiffs’ access to the sound.


The general rule where the description goes to a non-navigable stream (and also other
monuments having width) the boundary is the middle of the stream. Only words which “clearly
restrict the grant to the edge or shore of the stream” are sufficient to limit the boundary to the
margin or edge of the monument. Here, the call “to the high water mark” of this shallow and




                                                  7
broad sound was appropriate language to clearly restrict the boundary to the high water mark
short of the “middle of the stream.”


Another general rule was applied where the description referred to both the recorded plat using
the lot and block manner of description in combination with a metes and bounds. The lot and
block manner controls.


However, in a situation like Lee v. McDonald, 230 N.C. 517 (1949) where the description
combined a metes and bounds with reference to a plat and the platted lots were not within the
metes and bounds, the more specific metes and bounds controlled:
        A tract of land in Moore County, State of North Carolina, adjoining the lands of J.
        M. Monger and the Courthouse Square, in the Town of Carthage, and known as
        the Barrett Hotel lot and bounded as follows: Beginning at a stake, the corner of
        the public square, runs thence N. 39 E. 101 links to Barretts' line (William
        Barretts) formerly Nalls; thence N. 51 W. 149 links to William Barretts' (formerly
        Nalls') corner on Dowd Street; thence with said street S. 39 W. 101 Links to the
        public square; thence with the line of the public square S. 51 E. 149 links to the
        beginning, including Lot No. 37 deeded to A. C. Currie by Neal Morrison,
        attorney, etc., registered in Book A.C., page 95. Also one other Lot No. 38
        formerly possessed and owned by Martin and adjoining the lot whereon Murdoc
        Bethune formerly lived hereinbefore described deeded by J. Worth, Clerk and
        Master of the County of Randolph, to A. C. Currie and registered in Register's
        office of Moore County in Book A.E., page 85. The foregoing description
        includes the Barrett Hotel, outhouses, garden, yards and all appurtenances and
        belongings thereto, the same being in the Town of Carthage.

                                         Using a survey
The most obvious use and perhaps the most important use of a survey are to precisely locate the
boundaries of the surveyed land. There other matters that the surveyor is expected to carry out.
Under the North Carolina Administrative Code (NCAC) Title 21, Chapter 56, Section .1602 the
procedures required of a Professional Land Surveyor are setout:
    •   Adequate investigation of each surveyed boundary to determine the presence of any
        encroachments, gaps, lappages or other irregularities must occur or the survey must
        reveal the line was not actually surveyed.
    •   Visible encroachments and easements must be located and clearly indicated.




                                                8
•   As to property boundaries and recorded easements, the surveyor must examine the most
    recent deeds and recorded plats of adjoining property, as well as deeds or plats of the
    surveyed land recorded after the survey or deed upon which the present survey is based.
•   Corners of the surveyed land should be marked unless impractical and then there must be
    markers placed in the surveyed line so the inaccessible corner can be located.
•   Just as N.C.G.S. §47-30(f)(9) for recorded plats, at least one corner of the surveyed land
    must be tied in to a horizontal control monument of a survey system such as the North
    Carolina Geodetic Survey so long as the monument is within 2000 feet of the subject
    property.


Under 21 NCAC 56.1603 there are classifications of boundary surveys. Ranging from the
most precise to the least precise the categories are: Local Control Network Surveys (Class
AA), Urban Land Surveys (Class A), Suburban Land Surveys (Class B), and Rural and
Farmland Surveys (Class C). Under the North Carolina Land Title Surveyor’s Report form
the standard survey required is the Class A Urban Land Survey. The classes are
distinguished based on the angular error of closure and the ratio of precision.


Generally, surveys are expected to accurately portray the boundaries of the land and the
potential for any third-party rights such as revealed in the North Carolina Land Title
Association for of surveyor’s report:
    •   Old roadways or driveways, or pipelines
    •   Springs, lakes or bodies of water
    •   Cemeteries, burial grounds
    •   Telephone or utility poles
    •   Joint driveways or party walls
    •   Encroachments or overhangs
    •   Improvements, ongoing or complete
    •   Changes in street lines, complete or proposed
    •   Access to a public street.




                                            9
                LEGAL DESCRIPTION WITH SURVEYS
                              (5 PAGES TOTAL)
A certain tract or parcel of land containing 21.413 acres, lying in Cooper
Creek Township, Hobart County, North Carolina, about 4.5 miles southwest
of the Town of Kensington, about 1200 feet northeast of the intersection of
Secondary Road No. 3833 (Wolf Trap Road) with N.C. Highway 53, and on
the southeast side and adjoining paves Secondary Road No. 3833. Bounded
on the northwest by Secondary Road No. 3833 (Wolf Trap Road), on the
north by George T. Armstrong, on the east by Lawless T. Jones, and on the
south by John T. Bristol and Mary Bristol Keen, and being more particularly
described as follows:


Beginning at an existing iron pinion gear in the southeastern right of way (30
feet from the center) of paved Secondary Road No. 3833, said gear having
North Carolina Grid Coordinates N=469,678.26 feet and E=2,147,846.46
feet and also said gear being the southeast corner of the lands conveyed to
George Armstrong by deed recorded in Deed Book 821, Page 65, Hobart
County Registry and being located South 58 degrees 09 minutes West
1597.26 feet from North Carolina Geodetic Monument “Buck”, and runs
thence as the southern line of George Armstrong, South 87 degrees 05
minutes East (226.25 feet to an existing iron No. 8 rebar) a total distance
821.21 feet to an iron nine in the western line on Lawless T. Jones, said iron
pipe being George Armstrong’s southeast corner and also being located
South 8 degrees 00 minutes West 223.50 feet from an axle in a stone pile;
thence as the western line of the lands conveyed to Lawless T. Jones by deed
recorded in Deed Book 943, Page 72, Hobart County Registry, South 8
degrees 11 minutes West 462.00 feet to an iron pipe 2.27 feet west of a 30


                                     10
inch pin oak with old corner marks; thence continuing as the Lawless T.
Jones line, South 13 degrees 18 minutes East 382.36 feet to an ½ inch iron
rod in an existing stone pile, said iron being in the center of a 68 foot
easement conveyed to Central Power and Light Company by deed recorded
in Deed Book 2002, Page 898, Hobart County Registry, also said iron rod
being located North 89 degrees 19 minutes West 23.3 feet from the west
face of power pole No. D-409; thence as the centerline of said 68 foot
easement and as the northern line of John Bristol, South 88 degrees 43 West
468.51 feet to an iron pipe in the northeast line of the lands conveyed to
Mary Bristol Keen by Deed Book 2963, Page 96, Hobart County Registry;
thence as Mary Bristol Keen’s northeastern line, North 38 degrees 38
minutes West 42.74 feet to an existing one-inch pipe on the southeastern
right-of-way (30 feet from the center) of paved Secondary Road No. 3833
(Wolf Trap Road); thence as the southeastern right-of-way of said road,
North 35 degrees 03 minutes East 1022.82 feet to the Beginning, containing
21.413 acres as surveyed by Spears Associates, Inc. on August 18, 1982,
using North Carolina Grid Meridan, and being all the lands conveyed to
Clearly Unreal Corporation, by deed recorded in Deed Book 2308, page 642,
Hobart County Registry.




                                    11
           Legal Descriptions and
                  Surveys


                                 Joe Ritter
                               State Counsel



3/7/2011               Legal Descriptions      1




             What to expect today

•   Methods of describing land
•   Determining the intent of the parties
•   Rules of construction
•   Drawing the best legal description
•   What information is provided by a survey




3/7/2011               Legal Descriptions      2




      Methods of describing real estate

•   Metes and bounds
•   Lot and block
•   Street address
•   Reference to previous conveyance
•   Quantity or some portion of land




3/7/2011               Legal Descriptions      3




                                                   1
      Methods of describing real estate
• Lot and block
      – Preferably a recorded map
      – Map reveals the location of the parcel and amenities
      – Example
      Lot 23, Fairfield Subdivision, as shown on plat
        recorded in the Book of Maps 2003, Page, 85, Wake
        County Registry.
• Reminder: apply the usual standards of certainty
  required to have a legally adequate description

3/7/2011                   Legal Descriptions                  4




      Methods of describing real estate

• Street address
      – One of the least preferable methods
      – Used primarily with platted or city land
      – Should be used only to supplement other methods
        description
      – Helpful with omitted exhibits




3/7/2011                   Legal Descriptions                  5




      Methods of describing real estate

• Reference to previous conveyance
      – Incorporation by reference
      – Common or uncommon?
      – Used primarily to supplement other methods of
        description
      – Helpful with omitted exhibits
      – Prior description must meet the standards necessary
        to have a legally certain description


3/7/2011                   Legal Descriptions                  6




                                                                   2
      Methods of describing real estate

• Reference to quantity, area, acreage or portion
  of parcel
      – Inferior method
      – Used primarily to supplement other methods of
        description
      – Helpful with omitted exhibits




3/7/2011                        Legal Descriptions                   7




      Methods of describing real estate

• Metes and bounds
      – Most common method
      – Selection of monuments with lines linking the
        monuments to create an outline of the land
      – Lines described by courses and distances
        (mathematical statement) from monument to
        monument



3/7/2011                        Legal Descriptions                   8




      Methods of describing real estate
• Metes and bounds
      – “Monument”: any object or mark on the land that
        locates the boundary at a given point
      – “Course”: the direction in which a line runs stated
        with reference to a certain point on the compass
      – Example: North 70 degrees 00 minutes East 200 feet
           • From the point of reference the boundary would run
             North, as opposed to South, at an angle of 70 degrees
           • Then determine whether the line runs East or West
           • Here, East

3/7/2011                        Legal Descriptions                   9




                                                                         3
     Rules of construction to reconcile
              inconsistencies
• Description must be written and certain
      – Patent uncertainty is apparent from the deed~ fatal
      – Latent uncertainty appears when applying the
        description~ permits parol evidence
      – Assumption that the parties intended to convey
• “Intention of the parties”
      – Look to the four corners of the writing
      – Use the rules of construction

3/7/2011                          Legal Descriptions                        10




Latent and patent ambiguity and use
         of the land records
• In re James A. Rose III
      – Property owned: lots 20, 21, Block 96
      – DT description: lots 20, 21, Block 98
      – Supplementary: tax id, street address
• Latent and patent determination
      – Trustee is like a BFP for purposes of avoiding the
        conveyance
      – BFP charged with the matters in the land records

3/7/2011                          Legal Descriptions                        11




     Rules of construction to reconcile
              inconsistencies
• More permanent and reliable markers are
  favored
      – Natural monuments are given highest respect
           • Rivers, creeks, large rocks, ditches, roads, trees, streams,
             adjoining owners
           • Not a surveyor’s stake
      – Artificial monuments are second in preference
      – Courses (direction of the line) are third
      – Distances are next in preference
      – Last in preference is statement of area
3/7/2011                          Legal Descriptions                        12




                                                                                 4
     Rules of construction to reconcile
              inconsistencies
• Boundaries with width: presumption that the
  precise boundary is the middle of the boundary
      – Example: river, stream, street
      – Exception: grantor does not own or expressed intent
        to the contrary
• Water boundaries
      – Application of reliction, avulsion, changing location
      – Navigable bodies owned by the state

3/7/2011                       Legal Descriptions                    13




     Rules of construction to reconcile
              inconsistencies
• Reconciling the preference for description by plat over
  metes and bounds description
      – Kelly case: where deed contains two descriptions the lot/block
        will control over the metes and bounds
      – Lee case: where deed includes a specific m&b description with
        reference to platted lots included the reference will not
        expand the more specific description
• Suggestion: provide the preferred description first
      – Add the less preferred description as a supplement (“for
        further reference”)
      – Avoid using the language “for a more perfect description”

3/7/2011                       Legal Descriptions                    14




      Suggestions for drawing the best
       metes and bounds description
                      short-
• Begin with a brief, short-hand statement outlining the
  land
• Focus on the importance of the beginning point
      – Corner near the physical monument used in the survey
      – First call with street or road
      – “myriads of gum and red oak trees”
• Each boundary description should end with reference
  to a monument such as the corner of a platted parcel or
  adjoining property owner
      – …to the Northwest corner of Ritter appearing in …


3/7/2011                       Legal Descriptions                    15




                                                                          5
      Suggestions for drawing the best
       metes and bounds description
• Each boundary description should continue along the
  line of a monument such as the line of a platted parcel
  or adjoining owner
      – …with the Southern boundary of R.E. Lee appearing in…
• After the M&B are complete with reference in the last
  call back to the point of beginning, make reference to
  survey or recorded plat reflecting the M&B
      – For further reference see plat of survey by ….
• Complete the description with reference to the most
  recent vesting conveyance adding any changes such as
  out conveyances or change in status of the owner
      – …being the same property conveyed to Abe Lincoln in…

3/7/2011                            Legal Descriptions                           16




     Surveys- what should you expect?
     Surveys-

• Practice of surveying regulated under Chapter
  89C
      – Definition of the practice of surveying:
           • Generating or interpreting “scientific measurements and
             information relative to the location, size, shape, or
             physical features of the earth, improvements on the earth,
             the space above the earth, or any part of the earth…”




3/7/2011                            Legal Descriptions                           17




     Surveys- what should you expect?
     Surveys-
• Procedures of surveying regulated under NC Adm
  Code Title 21, Chapter 56
      – Procedures of surveying:
           • Adequate investigation…to determine the presence of any
             encroachments, gaps, lappages or other irregularities.
           • Visible encroachments and easements must be located and clearly
             indicated.
           • As to property boundaries and recorded easements, the surveyor
             must examine the most recent deeds…of adjoining property, as
                                               deeds…of
             well as deeds or plats of the surveyed land recorded after the survey
             or deed upon which the present survey is based.



3/7/2011                            Legal Descriptions                           18




                                                                                      6
     Surveys-
     Surveys- what should you expect?
• Categories of survey
      – Under NC Adm Code Title 21, Chapter 56
            • Based on error of closure and ratio of precision
            • Class A Urban Land Survey required by title insurers
      – The ALTA/ACSM Survey (2011 version)
            • Requirements needed for title insurer to insure survey matters
            • Complete survey:
                  on-
                – on-site field work (Section 5),
                – map showing results,
                – relationship to record documents (Section 6)




3/7/2011                                 Legal Descriptions                    19




     Surveys- what should you expect?
     Surveys-
• Minimum Standard Detail Requirements for ALTA
      – Purpose
      – Request for Survey
            • Clear request for ALTA/ACSM survey
            • Optional Table A items
      – Surveying Standards and Standards of Care
            • More stringent of state and ALTA requirements prevail
      – Records Research
            • Surveyor must receive current description, record maatters




3/7/2011                                 Legal Descriptions                    20




     Surveys-
     Surveys- what should you expect?
• Minimum Standard Detail Requirements for ALTA
      –    Field Work
      –    Plat or Map
      –    Certification
      –    Deliverables




3/7/2011                                 Legal Descriptions                    21




                                                                                    7
             Thank you for listening!




3/7/2011                            Legal Descriptions                            22




     Surveys- what should you expect?
     Surveys-
• Statutory Requirements for Recorded Plats
             39-
      – G.S. 39-32.1 through 32.4
           • Land divided into lots and streets
           • “Control corners” and permanent monumentation oriented to street
             center lines are required
           • Required for sale of lot and recordation of plat
             47-
      – G.S. 47-30 and 30.1
           • Size and format
           • Information: property, owner, location, survey date, surveyor
           • Certification of actual survey



3/7/2011                            Legal Descriptions                            23




     Surveys-
     Surveys- what should you expect?
• Statutory Requirements for Recorded Plats
             47-
      – G.S. 47-30 and 30.1
           • Computation of area and ratio of precision
           • Specific survey requirements as made in NC Adm Code
             under mapping Requirements and Survey Procedures
               – Example: North arrow, courses and distances of each line, data
                 for curved boundary, streets and lot boundaries, adjoining
                                                      matters,tie-
                 properties by owner or plat, visible matters,tie-in with gird
                 system
               – Certification
               – Map not meeting requirements may be recorded w/ disclaimer
           • Maps that can be recorded

3/7/2011                            Legal Descriptions                            24




                                                                                       8
     Surveys-
     Surveys- what should you expect?
• Statutory Requirements for Recorded Plats
           47-
    – G.S. 47-30
       • Title Certification disclaimer:
Information Contained in Title of Plat. – The title of each plat shall
   contain the following information:
           • property designation,
           • name of owner (the name of owner shall be shown for indexing
             purposes only and is not to be construed as title certification),
           • location to include township, county and state,
           • the date or dates the survey was made;
           • scale or scale ratio in words or figures and bar graph;
           • name and address of surveyor or firm preparing the plat.



3/7/2011                             Legal Descriptions                             25




     Surveys-
     Surveys- what should you expect?
• Statutory Requirements for Recorded Plats
            47-
     – G.S. 47-30
         • Certification:
I, ______, certify that this plat was drawn under my supervision
    from an actual survey made under my supervision (deed
    description recorded in Book ____, page ____, etc.) (other); that
    the boundaries not surveyed are clearly indicated as drawn from
    information found in Book ____, page ____; that the ratio of
    precision as calculated is 1: ____; that this plat was prepared in
                           47-
    accordance with G.S. 47-30 as amended. Witness my original
    signature, registration number and seal this ____ day of ____,
    A.D., ____.



3/7/2011                             Legal Descriptions                             26




     Surveys-
     Surveys- what should you expect?

• Statutory Requirements for Recorded Plats
          47-
   – G.S. 47-30 (m)
      • Maps that can be recorded as attachment to
        deeds
               – Alternative #1: must be no larger than 8 ½ inches by 14 inches
                 and must:
               – (i) have the original signature of a registered land surveyor and
                 the surveyor's seal as , or
               – (ii) be a copy of a map, already on file in the public records, that
                 is certified by to be a true and accurate copy of an original.


3/7/2011                             Legal Descriptions                             27




                                                                                         9
     Surveys-
     Surveys- what should you expect?
• Statutory Requirements for Recorded Plats
             47-
      – G.S. 47-30(n)
         • Maps that can be recorded as attachment to deeds
            • Alternative #2:     A map that does not meet the requirements of
              subsection (m) of this section may be attached to a deed or other
              instrument submitted for recording in that form for illustrative
              purposes only if it meets both of the following requirements:
                – (1)  It is no larger than 8 ½ inches by 14 inches.
                – (2)  It is conspicuously labelled, "THIS MAP IS NOT A
                  CERTIFIED SURVEY AND HAS NOT BEEN REVIEWED BY A
                  LOCAL GOVERNMENT AGENCY FOR COMPLIANCE WITH
                  ANY APPLICABLE LAND DEVELOPMENT REGULATIONS."



3/7/2011                             Legal Descriptions                           28




Surveys-
Surveys- what should you expect?
                        47-
• Applicability of G.S. 47-30.1
             47-
      – G.S. 47-30 applies to all counties
             47-
      – G.S. 47-30.1 applies to: county to which the
                           47-
        provisions of G.S. 47-30 do not apply




3/7/2011                             Legal Descriptions                           29




       How to draw a legal description
• Tools needed
      – Ruler, protractor, scale and translator for odd measurements
        (rods, chains, inches, feet), paper
      – The ultimate tool: software for plotting descriptions
• Steps
      –    Establish a north arrow on the paper
      –    Establish a point to begin
      –    Place center point on the beginning point
      –    Align the 90 degree point on the protractor to create a line
           parallel to the north axis

3/7/2011                             Legal Descriptions                           30




                                                                                       10
       How to draw a legal description
• Steps
      – Turn the protractor N/S depending on the course
      – Apply the course by counting on the protractor the stated
        number of degrees away from the N/S axis, either east or
        west
      – Apply the length of the line by dividing the length by the
        scale (e.g. 1”=200’; a 600’ line would be 600/200= 3’)
      – Mark the line with the course and distance
      – Repeat by beginning with the center point of the protractor at
        the end of the previous line


3/7/2011                       Legal Descriptions                   31




       How to draw a legal description

• Suggestion: check out some software
      – Deed Plotter: www.deedplot.com
      – Net Deed Plotter: www.johnsonmapping.com
      – MapDraw: www.informatik.com/mapdraw
        Deed-
      – Deed-chek: http://deedchek.com/




3/7/2011                       Legal Descriptions                   32




                                                                         11
Modifications & Deeds-in-Lieu of Foreclosures



              Natasha Branch
     Commonwealth and Fidelity National Title




               March 8 & 9, 2011
             Raleigh, North Carolina
                                                       3/4/2011




    ALTERNATIVES TO FORECLOSURE:
    MODIFICATIONS AND DEEDS IN
    LIEU




                                      3/4/2011




TODAY’S AGENDA
 Why discuss these alternatives to foreclosure?
 Modifications to deeds of trust
 Deed-in-lieu of foreclosure




                                                   2




                                      3/4/2011




FROM 2000 THRU 2005      SINCE 2006


 2000: 20,842            2006: 45,464
 2001: 25,991            2007: 49,683

 2002: 35,661            2008: 53,958

 2003: 44,339            2009 : 63,289

 2004: 42,905            2010: 40,633 (thru

 2005: 42,876             7/2010)
WHY ARE WE TALKING ABOUT THIS?
FORECLOSURES BY YEAR IN NORTH CAROLINA
                                                   3




                                                             1
                                                                             3/4/2011




                                                          3/4/2011

WHY ARE WE TALKING ABOUT THIS?
NEW STATE STATUTES

   The effect of new Chapter 45 provisions
       § 45-21.16- Notice and hearing
          (c)(7)(f)notice that free legal advice may be available
          (d) through 10/31/10 pre-foreclosure finding and notice
           required for sub-prime loans
                        sub prime
          (d) After10/31/10 finding and notice for “home” loans

    §    45-102 Pre-foreclosure notice (PFN)
          “home”  loan after 10/31/10
          45 days prior to notice of hearing
          Contact information for bank rep, HUD-approved advisor



                                                                         4




                                                          3/4/2011

WHY ARE WE TALKING ABOUT THIS?
NEW STATE STATUTES

   The effect of new Chapter 45 provisions
       § 45-21.16C- Opportunity for parties to resolve
          Principleresidence
          Effortsof the lender to resolve with the borrower
          Continuance for no more than 60 days

    §    45-105- Extension of foreclosure process
          COB  reviews data to determine if home loans are proper
           for extension of hearing date
                > 30 days beyond the earliest date established by PFN



                                                                         5




                                                          3/4/2011




MODIFICATION AGREEMENTS
The essentials:
   In writing
   Describe the parties
   Consideration must be given
   Delivery and acceptance by the parties
   Describe the collateral
   Amendment to the terms
       Incorporate the original terms as needed


                                                                         6




                                                                                   2
                                                                       3/4/2011




                                                    3/4/2011




MODIFICATION AGREEMENTS
Other common provisions:
   Affirmation of the validity of the loan documents
   Default exists w/ specifics
   Identification of additional collateral
   Clarification, modification of borrower’s duties
   Waiver of defenses
   Expedited rights against collateral
   Forbearance of lender
   Agreements applying in bankruptcy

                                                                   7




                                                    3/4/2011




MODIFICATION AGREEMENTS
The essentials: recordation?
   As between the parties
   As to third-parties
       G.S. §47-20
          (a)    No deed of trust or mortgage of real or personal
           property….in which the title is retained by the vendor,
           shall be valid to pass any property as against lien
           creditors or purchasers for a valuable consideration from
           the grantor, mortgagor or conditional sales vendee, but
           from the time of registration thereof as provided in this
           Article…


                                                                   8




                                                    3/4/2011




MODIFICATION AGREEMENTS
The essentials: recordation?
   Intervening lienholders
       Interests of record after the original DT but before the
        modification
   No notice given




                                                                   9




                                                                             3
                                                                                      3/4/2011




                                                          3/4/2011




MODIFICATION AGREEMENTS
The essentials: proper parties
   Mortgagor, mortgagee, trustee
   Others: guarantors, other creditors
       Check the terms of the guaranty


Consequences for those not made a party
   Not bound by the new terms
   Release of liability


                                                                                 10




                                                          3/4/2011




MODIFICATION AGREEMENTS
The essentials: consideration
   “some benefit or advantage” to promisor
   “or detriment” to promisee
   Forbearance example
       Where the lender agrees to postpone foreclosure is there
        consideration?
       Recital of consideration




                                                                                 11




                                                          3/4/2011




MODIFICATION AGREEMENTS
Intervening liens
   Issue: loss of priority
       Junior liens are clearly inferior to senior liens so long as
        notice is given
       Where no notice is given to the junior lien, does the junior
        lien have priority?
       Dragnet clauses
            Securing the note and any alterations, amendments, substitutions,
             extensions and renewals




                                                                                 12




                                                                                            4
                                                                      3/4/2011




                                                      3/4/2011




MODIFICATION AGREEMENTS
Intervening liens
    Issue: loss of priority based on degree of prejudice
     to the intervening lienholder
    Lack of NC precedent


Examples of modifications:
    Extend the maturity
    Increase interest rate
    Add or release collateral
    Adjust payment schedule
                                                                 13




                                                      3/4/2011




MODIFICATION AGREEMENTS
Novations
    Issue: Is there a substitution of a new contract?
    Result: total loss of priority to intervening liens

Measure or standards to determine novation:
    Intent of the parties
        Clear and definite
    Agreement between the parties necessary to have
     a novation

                                                                 14




                                                      3/4/2011




MODIFICATION AGREEMENTS
Practical Tips
   Incorporate the terms of the DT to be retained
   Include good faith recitations of fairness
       Consideration disclosure
        Consideration, disclosure, right to counsel
   Agree not to contest relief from stay
       In re Atrium High Point case
   Review the original loan documents for mistakes
       Legal descriptions
       Properly identify the obligation secured

                                                                 15




                                                                            5
                                                                          3/4/2011




                                                          3/4/2011




MODIFICATION AGREEMENTS
Precaution as to the lenders title policy
   ALTA 11- Mortgage Modification
       Date of Endorsement: date and time of updated title
        certification
       Date of Policy: remains unchanged
   Affirmative statement
       Invalidity or unenforceability of the insured DT resulting from
        the recorded modification
       Lack of priority resulting from defects, liens, encumbrances
        not shown in policy or endorsement

                                                                     16




                                                          3/4/2011




MODIFICATION AGREEMENTS
Precaution as to the lenders title policy
   ALTA 11- Mortgage Modification
       Practical effect to insure ongoing enforceability of DT
                                     g g priority
        Practical effect to insured ongoing p     y
       Avoid moving the DOP and coverage affected
   Exclusions
       Policy exceptions
       Intervening matters
            Including possible unfiled mechanics liens



                                                                     17




                                                          3/4/2011




DEED-IN-LIEU OF FORECLOSURE
The basic precautions
   Check for intervening liens
       Perform a title search
   Include recitals to avoid conditional conveyance
       Consideration, disclosure, fairness
       Evaluate the need for retaining mortgagee’s rights
   Protect against bankruptcy scrutiny
       Less than equivalent value



                                                                     18




                                                                                6
                                                                        3/4/2011




                                                 3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Intervening liens- a deal breaker?
   Intervening liens survive
       Recording statute
       Perform a title search
       Contrast with Chapter 45 foreclosure




                                                                   19




                                                 3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Scrutiny of the courts
   Protecting the equity of redemption
       Right of a mortgagor after commencement of foreclosure
        proceedings, to "cure" his/her default by paying off the
        indebtedness
       “clogging the equity”
   Courts’ protection of EOR
       Presumption of fraud
       Rebuttable by mortgagee
       Retention of rights by the mortgagor
       Contrast mortgage with DT


                                                                   20




                                                 3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Merger
   Lesser interest “swallowed up”
   What’s the point? Why take the risk?
       Bankruptcy protection
       Intervening liens
   When does merger occur?
       Depends on the “intent of the parties”
            Express statements
            Actions of the parties



                                                                   21




                                                                              7
                                                                           3/4/2011




                                                           3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Bankruptcy and creditors rights
   State statute: Ch 39, Article 3A
   U.S. Bankruptcy Code: 11 USC §548 (fraudulent
    conveyance) and §547 (preferential transfer)
       BFP v. Resolution Trust: “reasonably equivalent value” under
        §548 as it relates to POS foreclosure
       Is BFP applicable to §547 (preferential transfer)?
            Minority: “no” -In re Villarreal
            Majority: “yes” -Newman v. FIBSA Forwarding



                                                                      22




                                                           3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Practical tips
   Deed recitals
       Absolute conveyance
        p
        Specific reference of consideration
       Fairly made w/out coercion
       No supplementary agreements
   Estoppel affidavit
       More elaborate w/ broader protections
   Record with deed

                                                                      23




                                                           3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Practical tips
   Title insurance protection beyond the policy
       Non-merger endorsement
                   g
        Creditors rights




                                                                      24




                                                                                 8
                                                                  3/4/2011




                                                3/4/2011




DEED-IN-LIEU OF FORECLOSURE
Practical tips
   Title insurance requirements
       Deed recitals
       Estoppel affidavit
       Evidence of mortgagor’s complete relinquishment of
        possession
       Corporate resolution from mortgagor
   Special requirements for special risks
       Evidence of solvency
       Evidence of value


                                                             25




                                                3/4/2011




THANKS FOR LISTENING



                     Natasha Branch

           Commonwealth & Fidelity National Title
               Raleigh Branch Title Counsel




                                                             26




                                                                        9
                                       EXHIBIT A

                                      Deed Recitals


This deed is an absolute conveyance, the grantor ___________________________,
having sold said land to the grantee ______________________________, such
consideration, in addition to that above recited, being full satisfaction of all obligations
secured by the deed of trust executed by ______________________________________,
as mortgagee, to _________________________, as Trustee, recorded in Book ______,
Page _______, __________________ County Registry.

Grantor, ___________________________, declares that this conveyance is freely and
fairly made, and that there are no agreements, oral or written, or other than this deed
between grantor, _______________________, and grantee, _______________________,
with respect to said land.




                                                                                         29
                                       EXHIBIT B

                                 ESTOPPEL AFFIDAVIT

STATE _________________

COUNTY _______________


_______________________________, as grantors in that certain deed to
_______________________________ dated _________, 2009 and conveying the
following property:
                      INSERT LEGAL DESCRIPTION

That the aforesaid deed is intended to be and is an absolute conveyance of the title to said
land to the grantee, and was not and is not now intended as a mortgage, trust conveyance,
or security of any kind; that it was the intention of the grantors to convey to grantee all
their right, title and interest absolutely in and to said premises; that possession of said
premises has been surrendered to the grantee;

That in the execution and delivery of said deed said grantor was not acting under any
misapprehension as to the effect thereof, and acted freely and voluntarily, and was not
acting under coercion or duress; that the consideration for said deed was and is full
cancellation of all debts, obligations, costs, and charges secured by that certain deed of
trust heretofore existing on the property, executed by ___________________________ to
_________________, as trustee for _________________________________, beneficiary
recorded _________________, 20__ in Book _____, Page _____, _______________
County Registry, and the reconveyance of said property under said deed of trust; that at
the time of the making of said deed said grantor believed and now believes that the
aforesaid consideration therefore represents the fair value of the property so deeded;

This affidavit and estoppel certificate is made for the protection and benefit of the grantee
in said deed, his successors and assigns, and all other parties hereafter dealing with or
who may acquire an interest in the land herein described, and specifically any title insurer
which may insure the title to said land;

That the affiants, and each of them, will testify, declare, depose, or certify before any
competent tribunal, officer or person in any case now pending or hereafter brought as to
the facts hereinabove setout.

_________________________
AFFIANT




                                                                                          30
                                       EXHIBIT C




                           NON-MERGER ENDORSEMENT


                            Attached to Policy ____________

                   _____________ TITLE INSURANCE COMPANY



The Company hereby insures the owner of the indebtedness secured by the mortgage
referred to in Schedule A against loss or damage the Insured may sustain by reason of a
final court judgment from a court of competent jurisdiction which holds that the lien of
the insured mortgage is invalid and unenforceable by reason of a merger of the mortgage
estate created by the insured mortgage with the fee estate acquired by
___________________ through the deed from _______________________, as grantor to
___________________, as grantee dated __________________ and recorded
______________ in Book ____, Page ____, ____________ County Registry.

This endorsement is issued as part of the policy. Except as it expressly states, it does not
(i) modify any of the terms and provisions of the policy, (ii) modify any prior
endorsements, (iii) extend the Date of Policy, or (iv) increase the Amount of Insurance.
To the extent a provision of the policy or a previous endorsement is inconsistent with an
express provision of this endorsement, this endorsement controls. Otherwise, this
endorsement is subject to all of the terms and provisions of the policy and of any prior
endorsements.




                                                                                         31
                                         EXHIBIT D
                                         PAGE ONE

11 USC § 547. Preferences

SUBCHAPTER III - THE ESTATE

   (a)   In this section—

     (1) ``inventory'' means personal property leased or furnished, held for sale or lease,
or to be furnished under a contract for service, raw materials, work in process, or
materials used or consumed in a business, including farm products such as crops or
livestock, held for sale or lease;

     (2) ``new value'' means money or money's worth in goods, services, or new credit,
or release by a transferee of property previously transferred to such transferee in a
transaction that is neither void nor voidable by the debtor or the trustee under any
applicable law, including proceeds of such property, but does not include an obligation
substituted for an existing obligation;

     (3) ``receivable'' means right to payment, whether or not such right has been earned
by performance; and

    (4) a debt for a tax is incurred on the day when such tax is last payable without
penalty, including any extension.


(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any
transfer of an interest of the debtor in property--

     (1) to or for the benefit of a creditor;

     (2) for or on account of an antecedent debt owed by the debtor before such transfer
was made;

      (3) made while the debtor was insolvent;

      (4) made--

           (A) on or within 90 days before the date of the filing of the petition; or

             (B) between ninety days and one year before the date of the filing of the
petition, if such creditor at the time of such transfer was an insider; and




                                                                                         32
                                        EXHIBIT D
                                        PAGE TWO



           (5) that enables such creditor to receive more than such creditor would receive
if--

              (A) the case were a case under chapter 7 of this title;

               (B) the transfer had not been made; and

              (C) such creditor received payment of such debt to the extent provided by
the provisions of this title.


11 USC § 548. Fraudulent transfers and obligations

       SUBCHAPTER III - THE ESTATE

    (a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit
of an insider under an employment contract) of an interest of the debtor in property, or
any obligation (including any obligation to or for the benefit of an insider under an
employment contract) incurred by the debtor, that was made or incurred on or within 2
years before the date of the filing of the petition, if the debtor voluntarily or involuntarily
-

    (A) made such transfer or incurred such obligation with actual intent to hinder, delay,
or defraud any entity to which the debtor was or became, on or after the date that such
transfer was made or such obligation was incurred, indebted; or

    (B)(i) received less than a reasonably equivalent value in exchange for such transfer
or obligation; and

    (ii)(I) was insolvent on the date that such transfer was made or such obligation was
incurred, or became insolvent as a result of such transfer or obligation;

    (II) was engaged in business or a transaction, or was about to engage in business or a
transaction, for which any property remaining with the debtor was an unreasonably small
capital;

    (III) intended to incur, or believed that the debtor would incur, debts that would be
beyond the debtor's ability to pay as such debts matured; or




                                                                                            33
                                      EXHIBIT D
                                     PAGE THREE



        (IV) made such transfer to or for the benefit of an insider, or incurred such
obligation to or for the benefit of an insider, under an employment contract and not in the
ordinary course of business.




                                                                                        34
                                         EXHIBIT E
                                          PAGE 1

§ 39-23.9. Extinguishment of cause of action.
    A cause of action with respect to a fraudulent or voidable transfer or obligation under
this Article is extinguished unless action is brought:
            (1)      Under G.S. 39-23.4(a)(1), within four years after the transfer was made
                     or the obligation was incurred or, if later, within one year after the
                     transfer or obligation was or could reasonably have been discovered by
                     the claimant;
            (2)      Under G.S. 39-23.4(a)(2) or G.S. 39-23.5(a), within four years after the
                     transfer was made or the obligation was incurred; or
            (3)      Under G.S. 39-23.5(b), within one year after the transfer was made or
                     the obligation was incurred. (1997-291, s. 2.)

§ 39-23.7. Remedies of creditors.
    (a)     In an action for relief against a transfer or obligation under this Article, a
creditor, subject to the limitations in G.S. 39-23.8, may obtain:
            (1)      Avoidance of the transfer or obligation to the extent necessary to
                    satisfy the creditor's claim;
            (2)     An attachment or other provisional remedy against the asset transferred
                    or other property of the transferee in accordance with the procedure
                    prescribed by Article 35 of Chapter 1 of the General Statutes;
            (3)      Subject to applicable principles of equity and in accordance with
                    applicable rules of civil procedure,
                    a.       An injunction against further disposition by the debtor or a
                             transferee, or both, of the asset transferred or of other property;
                    b.        Appointment of a receiver to take charge of the asset
                             transferred or of other property of the transferee; or
                    c.      Any other relief the circumstances may require.
    (b)     If a creditor has obtained a judgment on a claim against the debtor, the
creditor, if the court so orders, may levy execution on the asset transferred or its
proceeds. (1997-291, s. 2.)

§ 39-23.5. Transfers fraudulent as to present creditors.
     (a)    A transfer made or obligation incurred by a debtor is fraudulent as to a creditor
whose claim arose before the transfer was made or the obligation was incurred if the
debtor made the transfer or incurred the obligation without receiving a reasonably
equivalent value in exchange for the transfer or obligation, and the debtor was insolvent
at that time or the debtor became insolvent as a result of the transfer or obligation.
    (b)     A transfer made by a debtor is voidable as to a creditor whose claim arose
before the transfer was made if the transfer was made to an insider for an antecedent debt,
the debtor was insolvent at that time, and the insider had reasonable cause to believe that
the debtor was insolvent. (1997-291, s. 2.)



                                                                                             35
                                       EXHIBIT E
                                        PAGE 2

§ 39-23.4. Transfers fraudulent as to present and future creditors.
    (a)    A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor, whether the creditor's claim arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or incurred the obligation:
           (1)     With intent to hinder, delay, or defraud any creditor of the debtor; or
           (2)     Without receiving a reasonably equivalent value in exchange for the
                   transfer or obligation, and the debtor:
                   a.       Was engaged or was about to engage in a business or a
                           transaction for which the remaining assets of the debtor were
                           unreasonably small in relation to the business or transaction; or
                   b.      Intended to incur, or believed that the debtor would incur, debts
                           beyond the debtor's ability to pay as they became due.
    (b)    In determining intent under subdivision (a)(1) of this section, consideration
may be given, among other factors, to whether:
           (1)    The transfer or obligation was to an insider;
           (2)     The debtor retained possession or control of the property transferred
                   after the transfer;
           (3)     The transfer or obligation was disclosed or concealed;
           (4)     Before the transfer was made or obligation was incurred, the debtor
                   had been sued or threatened with suit;
           (5)     The transfer was of substantially all the debtor's assets;
           (6)     The debtor absconded;
           (7)     The debtor removed or concealed assets;
           (8)     The value of the consideration received by the debtor was reasonably
                   equivalent to the value of the asset transferred or the amount of the
                   obligation incurred;
           (9)     The debtor was insolvent or became insolvent shortly after the transfer
                   was made or the obligation was incurred;
           (10) The transfer occurred shortly before or shortly after a substantial debt
                   was incurred;
           (11) The debtor transferred the essential assets of the business to a lienor
                   who transferred the assets to an insider of the debtor;
           (12)     The debtor made the transfer or incurred the obligation without
                   receiving a reasonably equivalent value in exchange for the transfer or
                   obligation, and the debtor reasonably should have believed that the
                   debtor would incur debts beyond the debtor's ability to pay as they
                   became due; and
           (13) The debtor transferred the assets in the course of legitimate estate or
                   tax planning. (1997-291, s. 2.)




                                                                                         36
                                                      EXHIBIT F

                                              ENDORSEMENT
                                                 Issued by
                                         FIDELITY NATIONAL TITLE
                                           INSURANCE COMPANY
Attached to and forming a part of Policy No. SAMPLE
American Land Title Association                                          Endorsement 11-06 (Mortgage Modification)
                                                                                                  Adopted 6/17/06
The Company insures against loss or damage sustained by the Insured by reason of:
   1. The invalidity or unenforceability of the lien of the Insured Mortgage upon the Title at Date of
      Endorsement as a result of the agreement dated         , 2010, and recorded     ("Modification");
      and
   2. The lack of priority of the lien of the Insured Mortgage, at Date of Endorsement, over defects in or liens
      or encumbrances on the Title, except for those shown in the policy or any prior endorsement and except:
           a. Defects, liens, encumbrances, adverse claims or other matters, if any created, first appearing in
              the public records or attaching subsequent to            but prior to the date and time of the
              recording of the Modification. [NOTE: This is exception will be deleted upon receipt by the
              Company of a final title opinion in a form satisfactory to the Company updating the title to
              the Land from         down through the date and time of recording of the Modification and
              establishing that no additional matters affecting title to the Land appear of record.]
           b. Statutory liens of mechanics, laborers and materialmen that have performed or furnished labor,
              professional design or surveying services, or furnished materials or rental equipment of which no
              notice appears of record. [NOTE: This is exception will be deleted only upon satisfaction in
              a form acceptable to the Company of the applicable m/m lien requirement(s) set out in the
              accompanying requirements letter.]
           c. [Specify exceptions, if any]
This endorsement does not insure against loss or damage, and the Company will not pay costs, attorneys' fees,
or expenses, by reason of any claim that arises out of the transaction creating the Modification by reason of the
operation of federal bankruptcy, state insolvency, or similar creditors' rights laws that is based on:
   1. the Modification being deemed a fraudulent conveyance or fraudulent transfer; or
   2. the Modification being deemed a preferential transfer except where the preferential transfer results from
      the failure
      a. to timely record the instrument of transfer; or
      b. of such recordation to impart notice to a purchaser for value or to a judgment or lien creditor.
This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the
terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv)
increase the Amount of Insurance. To the extent a provision of the policy or a previous endorsement is
inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this
endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements.


                                                                    FIDELITY NATIONAL TITLE
                                                                    INSURANCE COMPANY

                                                                    BY:SAMPLE
                                                                           Authorized Signatory
                                                   EXHIBIT G
                                                 ENDORSEMENT
                                                    Issued by
                                       FIDELITY NATIONAL TITLE
                                         INSURANCE COMPANY
Attached to and forming a part of Policy No. SAMPLE
                                                                                             Mortgage Modification


1. The Policy Date is extended to:         , 2010 at          in          County, PROVIDED HOWEVER,
   coverage under any endorsements issued with the original Policy will retain their original effective dates as
   of the ORIGINAL Policy Date.
2. Schedule A, Paragraph 4, is amended to add:
   As supplemented and amended by               executed by      dated          , 2010, and recorded             ,
   2010 at     , in Book     , Page              ,       County Registry ("Modification"); and
3. Schedule B, Part I, Paragraph 1, is amended to read as follows:
       1. The lien of all taxes for the year          ,   .
4. The following is added as Schedule B, Part I, Paragraph Number        :
   Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title arising
   subsequent to        , that would be disclosed by an accurate and complete land survey of the Land made
   subsequent to said date.

5. The following is added as Schedule B, Part I, Paragraph Number        :
   Statutory liens of mechanics, laborers and materialmen that have performed or furnished labor, professional
   design or surveying services, or furnished materials or rental equipment of which no notice appears of
   record.
6. [Specify additional exceptions, if any]
This endorsement does not insure against loss or damage, and the Company will not pay costs, attorneys' fees,
or expenses, by reason of any claim that arises out of the transaction creating the Modification by reason of the
operation of federal bankruptcy, state insolvency, or similar creditors' rights laws that is based on:
   1. the Modification being deemed a fraudulent conveyance or fraudulent transfer; or
   2. the Modification being deemed a preferential transfer except where the preferential transfer results from
      the failure
      a. to timely record the instrument of transfer; or
      b. of such recordation to impart notice to a purchaser for value or to a judgment or lien creditor.
This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the
terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv)
increase the Amount of Insurance. To the extent a provision of the policy or a previous endorsement is
inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this
endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements.


                                                                     FIDELITY NATIONAL TITLE
                                                                     INSURANCE COMPANY

                                                                     BY:SAMPLE
Malpractice Court: Risk Management Lessons
              from the Bench



             Louise Paglen, Esquire
       Founder & Owner of Intelisure, LLC




              March 8 & 9, 2011
            Raleigh, North Carolina
          Malpractice Court:

Risk Management Lessons from the Bench

         LEGAL MALPRACTICE

           CASE SUMMARIES




             Presented by:

   Louise M. Paglen, JD, MSM in RMI




                                      1135 Kildaire Farm Road
                                      Suite 200
                                      Cary, NC 27511

                                      Office: (919) 297-3942
                                      Fax:     (919) 573-0341
                                      Email: louise@intelisure.com
                                      http://www.intelisure.com
INTRODUCTION

During an economic downturn, professional liability insurance carriers brace for an onslaught of
new malpractice claims. When companies and individuals find themselves in situations
involving default, bankruptcy, or foreclosure, they often look for a “deep pocket” to compensate
for lost revenue and financial losses. In many cases that “deep pocket” is a law firm and its
insurance carrier.

When the economy is in a downturn, many lawyers must deal with increased stress associated
with fewer clients and reduced revenues. They may be forced to reduce support staff and layoff
associates. Seasoned lawyers may suddenly find themselves working harder than ever to retain
existing clients or attract new ones. Financial problems can lead to personal problems such as
poor health or divorce. As a result lawyers are more likely to use poor judgment or make
careless mistakes increasing the risk of malpractice claims when “times are tough.”

Vigilant compliance with the Rules of Professional Conduct minimizes a lawyer’s exposure to
malpractice claims. Although an ethical violation is not malpractice per se, the plaintiff’s
attorney will readily cite a violation of The Rules of Professional Conduct as evidence that the
attorney breached a duty of care to the client.

This paper offers strategies for minimizing a law firm’s exposure to malpractice claims and
summarizes court opinions from a variety of jurisdictions that illustrate the intersection of ethical
responsibilities and the elements of a legal malpractice claim. Law firms that adopt excellent
risk management procedures and policies can usually get the lowest premiums on their
malpractice insurance.

The Elements of a Legal Malpractice Claim

As first year law students, we are all learned the four elements of a negligence claim. The
plaintiff has the burden of proving (1) the defendant owed a duty of care to the plaintiff (2) the
defendant breached the duty of care (3) the plaintiff suffered actual damages and (4) the
defendant’s actions were the proximate cause of the plaintiff’s damages. A legal malpractice
claim is essentially a claim for negligence, only it’s the lawyer who is the defendant. The
claimant, usually a former client of the lawyer, must prove “(1) that the attorney breached the
duties owed to his client ... and that this negligence (2) proximately caused (3) damage to the
plaintiff. Rorrer v. Cooke, 313 N.C. 338, 355, 329 S.E.2d 355, 366 (1985) (citations omitted).

Legal malpractice cases are enormously complicated because a “plaintiff in a legal malpractice
action must establish that the loss would not have occurred but for the attorney's conduct.”
Wilkins v. Safran, 649 S.E.2d 658 (N.C.App. 2007). The court and the attorneys prosecuting and
defending the claim must analyze “the case within the case.” To prevail on a malpractice claim,
the plaintiff must prove that the underlying action was viable, would have resulted in a favorable
judgment and would have been collectible. Id. Despite the complexity and costs associated with
prosecuting a malpractice claim, the payoff for the plaintiff can be high if the loss or damages
associated with the underlying representation are high.
                                                                                         Page 2 of 14


                                                                                        Revised: 3/4/2011
CONFLICTS OF INTEREST

Your professional liability insurance carrier is all too aware that conflicts of interest can expose a
law firm to a claim for malpractice. That is why insurers typically ask a potential insured
whether they have a computerized conflict of interest management system. A malpractice
insurance carrier is reticent to provide coverage for a firm that relies on memory to ferret out
potential conflicts.

A good conflicts management system should include the names of all former and current clients
and related parties. As the case summary below illustrates, even expert witnesses should be
identified in the conflicts checking system.

A malpractice claim based on a conflict of interest is usually couched as a “breach of fiduciary
duty” claim alleging that the law firm violated its duty of loyalty to the client. A breach of
fiduciary claim can also be based on a lawyer’s personal interest in the outcome of a
representation as well as a multiple representation. This is the reason that malpractice insurance
providers typically exclude claims alleged by an entity in which a lawyer in the firm has an
equity interest.

Malpractice claims that are based on a conflict of interest are particularly expensive and difficult
to defend. Juries are not sympathetic if there is evidence that a law firm placed profits above a
client’s interest.

Best Risk Management Practices

   •   Review your malpractice insurance policy thoroughly to determine whether claims based
       on your role as a fiduciary are covered.

   •   If you own an interest in another business, make sure this is disclosed on your application
       for insured. Failure to do so could result in your coverage being voided when you need it
       most.

   •   Review your policy to determine whether claims arising out of your role as a director or
       officer of a nonprofit organization are covered. If they are excluded, find out if the
       nonprofit organization carriers directors and officers liability insurance.

   •   Maintain a computerized conflicts checking system. Make sure that all former and
       current client names and affiliated parties are entered into the system.




                                                                                         Page 3 of 14


                                                                                         Revised: 3/4/2011
A Law Firm May be Disqualified from Representing a Client on Appeal if an Attorney in
the Firm Testified as an Expert on Behalf of the Opposing Party
Outside the Box Innovations, LLC v. Travel Caddy, Inc., 2009-1171. -1558 (Fed. Cir. 2010).
Attorney Askew, a partner in the firm of King & Spalding, testified as an expert witness on
behalf of a motion for attorneys’ fees filed by Outside the Box Innovations (d/b/a Union Rich).
Askew testified that in his opinion the attorneys’ fees sought by Union Rich were reasonable.
At the conclusion of the trial, Travel Caddy hired three lawyers from King & Spalding to file an
appeal of the lower court’s decision. Union Rich asserted that King & Spalding had a conflict of
interest because the firm had “switched sides.” The Federal Circuit Court agreed with Travel
Caddy’s position that no attorney-client relationship existed between Union Rich and Askew, but
nevertheless disqualified King & Spalding finding an impermissible conflict of interest.
Union Rich stated that its argument on appeal would be relying in part on the testimony of
Attorney Askew. The Federal Circuit opined that to properly represent the interests of Travel
Caddy, the King & Spalding lawyers may be required to challenge the expert opinion of one of
its own partners. The court held that since King & Spalding would likely question whether it
was appropriate to challenge Askew’s opinion, the conflict of interest would materially and
adversely affect the representation of Travel Caddy. King & Spalding was disqualified from
representing Travel Caddy in the appeal.
Risk Management Lesson

This case illustrates that conflicts of interest may arise in situations other than concurrent
representations. Even though an attorney acting as an expert witness has not established an
attorney-client relationship with the party on whose behalf the testimony was offered, that
attorney could nevertheless be disqualified from taking an adverse position against that party in
another proceeding. When a lawyer testifies as an expert witness, the names of the parties to the
proceeding should be entered into the law firm’s conflicts database. In this case, the disqualified
firm could have been required to disgorge fees associated with the appeal as a result of the
conflict of interest.
Imagine that Union Rich had not filed a motion to disqualify the firm of King & Spalding and
Travel Caddy had lost the appeal. Travel Caddy could have brought a malpractice claim against
King & Spalding alleging that the case was lost because the firm did not vigorously challenge the
expert’s testimony in the underlying case. They could have claimed that the firm’s conflict of
interest was the reason they lost on appeal. Although the motion to disqualify was made by
Union Rich, the Court’s analysis focused on whether King & Spalding could adequately
represent Travel Caddy in light of the conflict, not whether King & Spalding had breached a duty
of care to Union Rich by “switching sides.”




                                                                                      Page 4 of 14


                                                                                       Revised: 3/4/2011
QUESTIONABLE RETAINERS AND FEES
In the “good old days,” a handshake would be sufficient to bind an agreement between a client
and his lawyer. Unfortunately, in today’s litigious climate, law firms that rely only on a
handshake to confirm the scope of the representation do so at their own peril.
As discussed earlier, to prevail on a malpractice claim, the plaintiff must prove that the lawyer
owed a duty of care to the client. The duty of care is directly related to the scope of the
representation. Usually, if there is no attorney-client relationship with respect to the facts giving
rise to the malpractice claim, the lawyer will not be liable for malpractice because there was no
duty to act on the client’s behalf.
Courts will typically look to the firm’s engagement letter to determine when the representation
began as well as the responsibilities the lawyer agreed to undertake for the client. The
engagement letter should provide a thorough discussion of what the lawyer’s representation will
include, as well as any limitations on that representation.
For example, if a lawyer is representing a client with respect to a divorce, and the client has
indicated that she does not want the lawyer to engage in discovery because of the extra costs
involved, the engagement letter should clearly memorialize this agreement between lawyer and
client. The letter should also note that the lawyer has discussed with the client the risks
associated with foregoing discovery. Then, if the client later sues the lawyer for malpractice
alleging that she did not get her fair share of the marital estate because the lawyer failed to
conduct adequate discovery, the engagement letter will serve as evidence that the lawyer did not
have a duty to conduct discovery.
Professional liability insurance carriers also shy away from covering lawyers who have a
propensity for suing their clients for fees. This is because when a lawyer sues a client for fees, it
is almost guaranteed that the client will counterclaim for malpractice. Even if the malpractice
claim is frivolous, you will have to report the claim to your carrier, the insurance company will
be required to hire counsel to defend the claim, and you will have to pay the deductible. Next
time you go to renew your insurance your premium could go up. So, to avoid this unpleasant
scenario, get your money up front or considering writing off the lost fee as uncollectible debt. If
you choose to take your client to court on “principle”, it’s likely to cost you more than the lost
fee.

Best Risk Management Practices


   •   Create a form engagement letter for each area of law that you practice. Include a section
       for describing the specific scope of services related to a particular engagement.

   •   Collect your fees up front if possible. If that’s not feasible, include a paragraph in your
       engagement letter that addresses your billing procedures. Be sure to address the
       consequences of nonpayment of fees, including the possibility of withdrawal from the
       case.


                                                                                        Page 5 of 14


                                                                                         Revised: 3/4/2011
   •   Make sure that you comply with Rule 1.5(3) when splitting fees with counsel outside the
       firm.

   •   Put all fee agreements are in writing.



A Suit for Fees Will Usually Trigger a Counterclaim for Malpractice

Armstrong & Armstrong, P.A. v. Rhodes, 626 S.E.2d 876 (N.C. App. 2006)

Client hired Family Law Attorney to represent her in connection with her separation and
equitable distribution case. Client and her husband entered into a consent judgment resolving all
issues of the separation and equitable distribution. Attorney had previously sent Client periodic
bills for her services but the Client had failed to pay an outstanding balance of $17,000. Attorney
sent Client a letter telling her that she was not going to pursue litigation to collect the fee but
would instead accept any payment Client felt she owed. Client paid nothing. Attorney then
received a letter from Client’s Counsel notifying her that he intended file a malpractice action
against Family Law Attorney if they were not able to resolve issues surrounding the previous
representation. Family Law Attorney immediately filed a suit for fees and Client
counterclaimed for malpractice. The trial court granted summary judgment in favor of Family
Law Attorney and dismissed Client’s counterclaim for malpractice.

Risk Management Lesson

Attorneys who bill for services by the hour are well-advised to require that clients deposit an
advance payment as defined by 2008 Formal Ethics Opinion 10. An advance payment is a
“deposit by the client of money that will be billed against, usually on an hourly basis, as legal
services are provided; not earned until legal services are rendered; deposited in a trust account;
unearned portion refunded upon the termination of the client-lawyer relationship.” 2008 FEO
10.

To protect itself from the possibility of running up uncollected fees, the attorney-client
agreement should clearly set out the terms of the representation and the requirements for advance
payment. The lawyer should inform the client that a deposit to the trust account will be required
when the balance falls below the agreed upon threshold. The agreement should set out the
conditions under which the client consents to the attorney’s withdrawal from the representation,
and such conditions should include nonpayment of fees or failure to replenish the trust account.

Many applications for lawyers’ professional liability insurance inquire about the firm’s fee
collection practices. Underwriters are particularly concerned about whether a firm has a high
percentage of past due bills and/or whether the firm has a history of suing a client for fees. This
is because the insurance carrier knows from experience that a law firm that sues its clients is
more likely to be named the defendant in a malpractice suit.



                                                                                       Page 6 of 14


                                                                                        Revised: 3/4/2011
Working with Lawyers and Others Outside the Firm

Whalen v. DeGraff, Foy, Conway, Holt-Harris & Mealey, 863 N.Y.S.2d 100, 53 A.D.3d 912
(2008).

Client Whalen hired the law firm of DeGraff, Foy, et.al (hereinafter DeGraff) to represent her in
an action to recover her interest in a partnership. DeGraff secured a judgment in the amount of
$1,235,976 against Gerzof. Before the judgment was satisfied, Gerzof, a Florida resident died.
DeGraff, without consulting with Client Whalen, hired a Florida attorney to assist with
preserving Whalen’s rights against the Gerzof estate. DeGraff subsequently notified Whalen of
the association and instructed the Florida attorney to file a notice of claim against the Gerzof
estate. The Florida attorney failed to file the notice of claim within the required time, and
Whalen was unable to satisfy the judgment even though were substantial assets in the estate.

Whalen filed suit against DeGraff alleging vicarious liability and negligent supervision of the
Florida Attorney. The court cited the general rule that a law firm “’is not ordinarily liable . . .
for the acts or omissions of a lawyer outside the firm who is working with firm lawyers as co-
counsel or in a similar arrangement’ (Restatement [Third] of Law Governing Lawyers § 58,
Comment e), as such a lawyer is usually an independent agent of the client.” Whalen v. DeGraff,
Foy, Conway, Holt-Harris & Mealey, 863 N.Y.S.2d 100, 53 A.D.3d 912 (2008). The court
distinguished this case from the general rule on the basis of these facts: (1) DeGraff solicited the
Florida law firm and obtained their assistance without the client’s knowledge, (2) although the
client was subsequently notified of the association, she had no contact with the Florida lawyer,
(3) the client did not enter into a retainer agreement with the other firm, and (4) the client relied
completely on DeGraff to take the steps necessary to satisfy the Gerzof judgment. Under these
circumstances, DeGraff assumed responsibility for the filing of the Florida estate claim and the
Florida attorney became a subagent of the DeGraff firm. Therefore under the Restatement rule,
DeGraff had a duty to supervise the Florida lawyer’s actions. The court held that Whalen was
entitled to judgment as a matter of law.

Risk Management Lesson

This case illustrates that a law firm that associates counsel from another firm to assist with a
matter, may have a duty to supervise the other lawyer under certain circumstances. When
associating counsel outside the firm, law firms should comply with the requirements of Rule
1.5(e) governing fee sharing amongst lawyers who are not in the same firm.

The rule requires that the client agree to the fee sharing arrangement and that such agreement be
“confirmed in writing.” Each lawyer can comply with the rule and avoid liability for negligent
acts committed by the other lawyer, by executing an agreement that defines the scope of services
and responsibilities of the respective lawyers. The agreement will satisfy the “informed consent”
and “confirmed in writing” requirements of the rule, while also providing a defense to a potential
malpractice claim.

Law firms should also carefully scrutinize their malpractice insurance policy to determine
whether persons acting as “of counsel” to the firm or as “independent contractors” are covered

                                                                                        Page 7 of 14


                                                                                        Revised: 3/4/2011
under the terms of the policy. Some policies, such as that provided by Lawyers Mutual, provide
coverage only for persons or organizations that are named on the application or subsequently
added to the policy. Other carriers, such as Travelers, take a broader approach and provide
coverage for independent contractors and “of counsel” when acting on behalf of the insured law
firm.

FAILURE TO SAFEGUARD CLIENT FUNDS

We all know that the quickest way to lose your license to practice law is to embezzle funds from
your client’s trust account. Not surprisingly, it’s also a surefire way to get sued for malpractice.
Most lawyers’ professional liability insurance policies exclude coverage for dishonest acts – like
stealing from your clients. So, if you engage in such foolhardy behavior, you’ll be on your own.
The more likely scenario is that your firm will get sued because a partner or employee embezzles
funds. In this case, most policies provide an exception to the exclusion for dishonest acts called
the “innocent partner” clause. As the case summary below illustrates, however, your policy may
not provide protection if the thieving partner is dipping into the till at the time you complete your
renewal application for insurance.

Best Risk Management Practices

   •   Don’t steal money from your clients!

   •   Review and comply with the rules for managing your trust account.

   •   If you are concerned about your trust account funds, consult with Bruno DeMolli and
       request a voluntary audit.

   •   Have a CPA conduct an audit of your trust and operating accounts on an annual basis.

   •   Know your partners well and don’t keep separate trust accounts for the same firm.

   •   Review your accounting records on a regular basis and balance all accounts monthly.

   •   Don’t allow employees to sign checks.

   •   Always have two controls on your account. The person who signs the check should be
       someone other than the person who writes and records the check.




                                                                                        Page 8 of 14


                                                                                        Revised: 3/4/2011
When it comes to Safeguarding Client Money – You Are Your Brother’s Keeper

Minnesota Lawyers Mutual Insurance Co. v. Hancock, No. 3:08-CV-409-HEH,___F Supp
2d___, (E.D. Va. 2009)

In January 2006, Attorneys Michael Hancock and Stephen Dalton merged their solo law
practices to form, Dalton Hancock, PLLC. In May of 2006, Hancock submitted an application
form to Dalton’s insurance carrier, Minnesota Lawyers Mutual, adding himself as an insured
under Dalton’s existing professional liability policy. On the form, Hancock indicated that he was
not aware “of any incident which could reasonably result in a claim being made against him.”

Unbeknownst to Hancock’s partner, Dalton, or Minnesota Lawyers Mutual, Hancock had been
embezzling money from his clients for over a year by moving unearned funds from his trust
account to his operating account to cover overhead and expenses.

In March 2007, Dalton submitted an application to Minnesota Lawyers Mutual to renew the
firm’s malpractice insurance policy. Dalton, on behalf of the firm certified that no firm member
was aware of any incident which could reasonably result in a claim being made against the firm
or a member of the firm. This misrepresentation was repeated in several places on the
application submitted to Minnesota Lawyers Mutual.

In October 2007, Hancock voluntarily reported his misconduct to the Virginia State Bar and
surrendered his law license. Dalton was previously not aware of his partner’s misconduct.

Following Hancock’s admission, former clients sued both Hancock and the firm for damages
arising out of Hancock’s malfeasance. Minnesota Lawyers Mutual subsequently filed a
Declaratory Judgment action and Motion for Summary Judgment against Hancock’s former
clients seeking an order rescinding the firm’s malpractice insurance policy. The United States
District Court of Virginia granted summary judgment in favor of the insurance company and
rescinded the policy as to “all insureds notwithstanding Dalton’s lack of personal knowledge of
Hancock’s misdeeds.”

Risk Management Lesson

Although the Minnesota Lawyers Mutual policy included an “innocent insured” provision that
could have provided protection to Dalton under other circumstances, it did not preclude the
remedy of rescission for a material misrepresentation on the application. This recent holding is
likely to be used by other carriers to support actions for rescission as a way of avoiding the
“innocent insured” provision of a policy.

Lawyers’ professional liability insurance policies typically exclude coverage for claims “arising
out of any criminal, dishonest, fraudulent or malicious conduct, or other willful violation of laws,
committed by any Insured or by anyone with the consent or knowledge of any Insured . . .”
                                                                                       Page 9 of 14


                                                                                       Revised: 3/4/2011
Travelers 1st Choice Lawyers Professional Liability Coverage, Section V.E. Exclusions
(specimen policy attached). However most policies, like the Travelers policy cited here, also
include an “innocent insured” clause creating an exception for “any Insured Person who did not
participate in or have knowledge of such conduct or violation.” Id. at Section V.E.1.

As this case illustrates, however, the “misrepresentation clause” of the policy can be used to void
all coverage under the policy. The Travelers policy states: “This policy may be considered void
if, after the Inception Date of the Policy Period . . . any Principal Insured has intentionally
concealed or misrepresented any material fact or circumstance, concerning this insurance . . .” Id.
Section XIX. Misrepresentation.

So, the question becomes, how does an “innocent insured” protect himself from the unknown
and unlawful conduct of partners or associates?

   •   Contract with a qualified CPA to conduct an annual audit of your trust account to
       determine whether there have been any misappropriations.

   •   Don’t ignore red flags that could be an indicator that a lawyer is impaired. If you believe
       a lawyer is suffering from depression, anxiety, substance abuse, or a gambling addiction,
       contact Bar Cares or the Lawyers Assistance program to seek help.

   •   Scrutinize carefully who you choose as an associate or a partner.


FAILURE TO PROPERLY CONCLUDE THE ATTORNEY-CLIENT RELATIONSHIP
As already discussed, if there is no attorney-client relationship, there is usually no basis for a
malpractice claim. However, whether or not an attorney-client relationship existed can
sometimes be a matter of subjective opinion. When considering whether a relationship existed,
a court will look first to the documentary evidence.
Professional liability insurers expect their insureds to use nonengagement letters when declining
a representation. Like the engagement letter, the nonengagement letter provides evidence that
the lawyer did not have a duty to represent the client in a matter that becomes the subject of a
legal malpractice claim. Lawyers often balk at the additional paperwork associated with
nonengagement letters. However, depending on the lawyer’s practice, a simple form letter
noting that a lawyer is not retained as the result of a consultation will typically suffice.
In North Carolina, the statute of limitations on a legal malpractice claim is three years and the
statute of repose is four years. Unlike other jurisdictions, the North Carolina Supreme Court has
rejected the “continuous representation” doctrine and has held that the statute of limitations on a
malpractice claim begins running as of the last act committed by the lawyer with regard to the
representation. This is good news for North Carolina lawyers because if you establish in writing
that you have concluded your representation with regard to a particular matter or client, the
statute of limitations clock begins to run. A claim made four years after the last act will be
barred. The existence of a disengagement letter in the lawyer’s file (also commonly referred to
as a “thank you letter”) will provide concrete evidence as to when the statute began to toll. This
                                                                                     Page 10 of 14


                                                                                       Revised: 3/4/2011
is the reason that applications for professional liability insurance will commonly inquire whether
your firm uses disengagement letters in all matters.

Best Risk Management Practices
   •   Get in the habit of sending out nonengagement letters or have the client sign a form letter
       at a consultation documenting that you will not undertake the representation in the
       absence of a formal agreement.

   •   Send out a disengagement or thank you letter when you have concluded your work on a
       particular matter. Include a reference to the specific representation and note that you
       have closed your file.

Protect the Client’s Interest Before Ending the Attorney-Client Relationship

Wood v. Hollingsworth, 166 N.C. App. 637, 603 S.E.2d 388 (N.C. App. 2004)

In November of 1998, Wood hired Attorney Hollingsworth to represent her in connection with
injuries sustained in an automobile accident. The client signed a “Personal Injury Contract.” In
December 1999, Wood met with Hollingsworth and rejected an offer of settlement from the
insurance carrier. At the same time, she allegedly instructed Hollingsworth to file a lawsuit on
her behalf. In February 2000, Hollingsworth informed Wood that she was closing her office and
the she should seek other counsel. No lawsuit had been filed with respect to the automobile
accident and Hollingsworth did not notify Wood in writing about the impending deadline. The
statute of limitations on the action expired on March 8, 2000 after Hollingsworth terminated the
representation.

In April 2000, after the statute of limitations has expired, Wood met with another lawyer who
told her that had not been filed in her case and as a result her claims were barred by the statute of
limitations. In February 2003, Wood filed suit against Hollingsworth alleging malpractice. The
trial court granted Hollingsworth’s motion to dismiss on the basis that no attorney-client
relationship existed on the date the statute of limitations barred Wood’s action. The Court of
Appeals reversed the decision of the lower court and remanded the case for trial. The appellate
court held that the allegations in the complaint sufficiently stated a claim for legal malpractice.

Specifically, Wood had that Hollingsworth

       1) failed to notify her that a lawsuit had not been filed on her behalf;

       2) failed to advise her of the tolling of the applicable statute of limitations; and

       3) failed to protect her interests by timely filing a lawsuit on her behalf.

Risk Management Lesson

Once an attorney agrees to undertake representation of a client, the attorney has a duty to protect
the client’s interests before withdrawing from representation. In this case, the lawyer should
                                                                                       Page 11 of 14


                                                                                         Revised: 3/4/2011
have either (1) notified the client in writing of the need to file a lawsuit prior to the expiration of
the statute of limitations or (2) filed the lawsuit on her behalf and then sought permission of the
court to withdraw from the action. In either case, the lawyer had a duty to help the client find
other counsel and to transfer the client’s file to the new attorney.

Proper Withdrawal from Representation Ends Duty of Care Owed to the Client

Wilkins v. Safran, 649 S.E.2d 658 (N.C.App. 2007)

Attorney Safran represented Wilkins for over five years with respect to a construction lawsuit
filed against him. In February 2003, Safran had a heart attack. In April 2003, Safran asked the
court to set the construction case for trial in September of that year. In July 2003, Safran filed a
motion to withdraw as Wilkins’ counsel on the grounds that the associate attorney in charge of
the litigation was working at another law firm and his health did not allow his continued
representation of Wilkins. The motion was granted and Safran sent Wilkins a copy of the order.

Wilkins hired new counsel and before the September 2003 trial date, negotiated a settlement of
the construction lawsuit wherein he agreed to pay $22,500 in exchange for a voluntary dismissal
of the suit.

In December 2004, Wilkins filed a legal malpractice action against Safran alleging legal
malpractice, breach of fiduciary duty, fraud and punitive damages. The trial court granted the
defendant’s motion to dismiss and the Court of Appeals affirmed.

The Court of Appeals cited Rule 1.16(a) (2007) which requires that an attorney withdraw from
representation of a client if “. . . “the lawyer’s physical or mental condition materially impairs
the lawyer’s ability to represent the client[.]’” Finding that Attorney (1) filed the motion to
withdraw more than seven weeks prior to the scheduled trial date, (2) received a binding court
order allowing the motion to withdraw, (3) New Counsel properly filed a motion to continue the
case and (4) Wilkins and New Counsel settled the claims prior to the trial date; there was no
breach of the standard of care owed to Wilkins.

Risk Management Lesson

In this case, it appears that the lawyer did everything right by filing a motion to withdraw in a
timely manner, and notifying the client. The Rules of Professional Conduct required the
lawyer’s withdrawal. Nevertheless, the lawyer still got sued for malpractice and was required to
endure the expense and stress of the associated litigation. It appears from the facts of this case
that there was a breakdown in attorney-client relations sometime before the motion to withdraw
was filed. The associate responsible for the litigation left the firm to join another firm. Although
the client entered into a settlement agreement, he was clearly dissatisfied with how the
representation had been handled by his attorney of five years. Poor client relations are one of the
leading causes of malpractice claims filed against lawyers. Although the attorney in this case
ultimately prevailed, he paid a high price in the form of lost income, an insurance deductible,
claims record that could adversely affect future insurance premiums, and stress that could impair
his health.

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                                                                                           Revised: 3/4/2011
INATTENTION TO LAWYER LAYOFFS AND FIRM DISSOLUTIONS

When law firms dissolve or a lawyer leaves a firm, tensions may arise over who is going to
continue to represent certain clients. If a lawyer is sued for malpractice, it is likely that the
plaintiff will sue both the lawyer individually and the firm. Both the individual lawyer and the
firm need to take proactive steps to (1) make sure that exposure to potential claims for clients
that are no longer represented by the firm or lawyer are minimized and (2) that insurance
coverage is available for potential claims if they arise.

Best Risk Management Practices

   •   Since lawyers’ professional liability policies are “claims-made” policies, the law firm
       needs to make sure that there is continuous coverage for the firm after a change in
       ownership. Make sure that your policy includes coverage for predecessor firms and
       newly acquired firms. Keep your insurance broker or carrier informed of any changes to
       your firm to ensure that protection is continuous.

   •   Individual lawyers who depart a firm should consult with their insurance carrier or broker
       to make sure that they have either an “extended reporting endorsement” from their
       current carrier or “prior acts coverage” under their new firm’s policy.
   •   Make sure that there is continuous coverage from the time you leave a firm to the time
       you start working in another capacity. Delay in talking to your broker or carrier could
       create a gap in coverage.

   •   Lawyers who leave private practice to serve as in-house counsel or in a governmental
       capacity should consider purchasing an extended reporting endorsement (ERE) from their
       current carrier. An ERE, also known as a “tail policy” allows a lawyer who does not
       have coverage under a current policy to report and be covered for claims that become
       known after the expiration of the last in-force policy. Again, delay in securing a tail
       policy can create a gap in coverage.



A Law Firm May be Held Liable for Malpractice Committed by a Partner Following
Dissolution of the Firm

Dow v. Jones, 311 F.Supp.2d 461 (D. Md. 2004)

In January 1997, Jeffrey Dow signed a retainer agreement hiring Attorney Jones and the law firm
of Seals Jones Wilson Garrow & Evans, L.L.P. (SJWGE) to represent him in a criminal
proceeding. SJWGE was dissolved on May 1, 1997 and Dow claimed he was never informed
that the law firm had dissolved. Dow was tried by a jury in July 1997 and found guilty of and
sentenced to prison. In March 2000, Dow’s convictions were vacated and he was granted a new
trial based on incompetence of counsel. In July 2000, Dow filed a suit for malpractice against
Jones and SJWGE. SJWGE filed a motion for summary judgment on the basis that no attorney-

                                                                                     Page 13 of 14


                                                                                       Revised: 3/4/2011
client relationship existed between the firm and Dow because it had dissolved at the time of the
alleged malpractice.

Dow presented evidence showing that the retainer agreement was on the law firm’s letterhead,
that he had met with the lawyer and another partner at the firm’s office, and that he had never
been informed that Jones did not have authority enter into an agreement for the partnership.

The primary issue in the case was whether SJWGE could be held liable for the alleged
malpractice by Jones after the firm had dissolved. The court opined that in some cases liability
can be imposed for legal malpractice claims arising after dissolution because the former partner’s
conduct was appropriate for winding up the partnership. Therefore, the court denied the SJWGE
motion for summary judgment and allowed Dow to pursue a claim for legal malpractice against
the firm.

Risk Management Lesson

Attorneys have an ethical obligation to keep clients informed about any changes in the law firm.
When a law firm dissolves, the lawyers have a continuing obligation to fulfill the objectives of
the representation. Although the client may have a contractual agreement with the firm, the
individual attorney representing the client has a duty to continue the representation until the
matter is concluded.

The law firm and each partner should notify the clients that the firm is being dissolved and who
will be handling the client’s matter subject to the client’s consent. Each individual attorney
should also send a letter to his or her clients confirming that they will be continuing to handle the
client’s matter.

Law firm dissolution can also place a lawyer at risk of creating a gap in their malpractice
coverage. The typical malpractice insurance policy provides coverage only for claims that are
made subsequent to the retroactive date or prior acts date of the policy. The policy covers the
firm and the partners of the firm, but coverage will not extend to the lawyers after the firm
dissolves unless a new policy provides prior acts coverage for the individual lawyer or the
predecessor firm.

CONCLUSION

The practice of law is time consuming, stressful and demanding. An economic recession makes
it even more so. However, it’s when “times are tough” that lawyers need to be extra vigilant in
their adherence to the Rules of Professional Conduct. By doing so, they are likely to avoid the
additional stress, burden and expense of defending a claim for malpractice.




                                                                                      Page 14 of 14


                                                                                        Revised: 3/4/2011
      Claims & Policy Forms



    Joe Ritter & Natasha Branch
Commonwealth and Fidelity National Title




          March 8 & 9, 2011
        Raleigh, North Carolina
title insurance




                                                                    Underwriting College   1




                       TITLE INSURANCE:
                       FACILITATING REAL ESTATE
                       TRANSACTIONS

                                       Joseph M. Ritter
                                       • State Counsel for Underwriting

                                       Natasha Branch
                                       • Branch Counsel Raleigh Office




                3/4/2011




                Introduction
            2


                •   title insurance: a corporate guarantee/ indemnity
                •   that ownership of the land is as stated in the title
                    policy
                •   protects those insureds holding an interest in real
                    estate (owners/lenders)
                •   against actual loss incurred




                                            Underwriting College   3/4/2011




                Today’s Agenda
            3


                •   characteristics of title insurance contrasted with
                    other lines of insurance
                •   overview of policy provisions: what is insured and
                    what is excluded
                •   issuance of a title policy: the North Carolina
                    Approved Attorney system
                •   Closing Protection Letter
                •   claims concepts

                                            Underwriting College   3/4/2011




Joseph M. Ritter                                                                               1
title insurance




                Growth of Title Insurance
            4


                •   nationwide transfer of secured loans required
                    standardization of loan practices
                •   title insurance provides uniform coverages against
                    title defects and protection against failure of (local)
                    closing attorney to follow closing instructions-
                    increased standardization for national marketplace
                •   lenders have been the driving force behind the land
                    title industry- will that continue?


                                                    Underwriting College   3/4/2011




                Characteristics of Title Insurance
            5


                Traditional characteristics of title insurance:
                • one-time low premium

                • low loss ratio

                • high expense ratio

                • insures current status

                • no deductibles

                • unlimited policy term




                                                    Underwriting College   3/4/2011




                Title Commitment
            6


                •   Commitment or Binder
                      Commitment to insure
                      ALTA Commitment 2006


                •   Conditions to be met
                      Payment of premium and charges
                      Compliance with the requirements (Schedule B-I)


                •   Limitations
                      Proposed insured and amount of coverage must be provided
                      Expiration in 6 months from the effective date
                                                    Underwriting College   3/4/2011




Joseph M. Ritter                                                                      2
title insurance




                Title Commitment
            7


                •   Schedule A- the basics
                      Effective date
                        Date to which title is certified
                      Land and interest to be insured
                        Legal description of land to be insured
                        Interest to be insured: fee simple, easement, leasehold
                      Present owner: seller/grantor or borrower

                •   Schedule B-I- Requirements
                      Steps needed speaking at the effective date to insure
                        Conveyance, vesting instrument
                        Payment and cancellation of liens


                                                      Underwriting College   3/4/2011




                Title Commitment
            8


                •   Schedule B-II- Exceptions
                      Those matters to be excepted from coverage
                      Lender and owner perspectives differ
                      Item 1: intervening matters
                        Occurring subsequent to the effective date and before the
                        conveyance is made and recorded
                        Deleted upon final opinion, title certification through recordation


                •   For further consideration: interaction of the title
                    commitment and the Closing Protection Letter
                                                      Underwriting College   3/4/2011




                Policy Insuring Provisions- All Policies
            9


                •   Covered loss:
                      not exceeding the policy amount (excluding defense costs)
                      title vested other than as shown in the policy
                      from any defect, lien, encumbrance
                      due to “unmarketability”
                      due to lack of access
                      from recorded notice of violation of various government
                      ordinance or regulation like zoning
                      from recorded notice of eminent domain, police power
                      from a government taking binding on purchaser w/out
                      knowledge

                                                      Underwriting College   3/4/2011




Joseph M. Ritter                                                                              3
title insurance




                 Policy Insuring Provisions- Lenders
           10
                 Policy
                 •   Covered loss
                       against unenforceability of the insured mortgage
                         Failure of the insured DT to properly identify the secured
                         obligation
                       against loss of priority of insured mortgage to another
                       lien, encumbrance
                       against loss of priority due to mechanics liens
                         Contracted for or commenced at DOP
                         Financed by the insured loan
                       street assessments for work ongoing or finished at DOP
                                                 Underwriting College   3/4/2011




                 Policy Insuring Provisions- Lenders
            11
                 Policy
                 •   Covered loss
                       against unenforceability of insured assignment
                       assignment that is included in Schedule A
                       against unenforceability resulting from prior
                       conveyance being preference/fraudulent or present
                       mortgage not timely or impart notice
                       creditors rights risk still exists as to transactions prior to
                       the transaction creating the lien of the Insured
                       Mortgage


                                                 Underwriting College   3/4/2011




                 Policy Exclusions
           12


                 •   governmental regulations and police power
                       Occupancy or use rules like zoning
                       Environmental
                 •   rights of eminent domain
                 •   defects agreed to by the insured
                 •   defects not of record, known to the insured, not
                     known to the insurer
                       State of mind is difficult to prove


                                                 Underwriting College   3/4/2011




Joseph M. Ritter                                                                        4
title insurance




                Policy Exclusions
           13


                •   defects resulting in no loss
                      Title insurance is a contract of indemnity
                •   defects after the policy date
                •   defects resulting from failure to pay value
                •   claim the vesting transaction was fraudulent transfer
                    or preference under creditors laws
                      Creditors right coverage not applicable to the insured
                      transaction
                •   taxes or assessments by government b/t date of
                    policy and date of recording
                                                Underwriting College   3/4/2011




                Policy Exclusions- Lenders
           14


                •   unenforceability of insured mortgage for failure to
                    comply with “doing business” laws
                •   unenforceability of insured mortgage for violation
                    of usury, consumer protection laws, truth in lending




                                                Underwriting College   3/4/2011




                Policy Exceptions
           15


                •   Schedule B preface (owners):
                      This policy does not insure against loss or damage, and
                      the Company will not pay costs, attorneys’ fees, or
                      expenses that arise by reason of:
                •   Schedule B preface (lenders):
                      Except as provided in Schedule B- Part II this policy
                      does not insure against loss or damage….




                                                Underwriting College   3/4/2011




Joseph M. Ritter                                                                  5
title insurance




                Policy Exceptions
           16


                •   Schedule B-II preface (lenders only)
                      In addition to the matters set forth in Part I of this
                      Schedule, the Title is subject to the following matters,
                      and the Company insures against loss or damage
                      sustained in the event that they are not subordinate to
                      the lien of the Insured Mortgage:




                                                Underwriting College   3/4/2011




                Schedule A- The insured interest
           17


                •   Schedule A- owner policy
                      Amount of insurance
                      Date of policy
                      Name of insured
                      Estate insured
                      Owner/ vestee
                      Land insured
                •   Schedule A- lender policy
                      Insured security instrument

                                                Underwriting College   3/4/2011




                Steps Necessary to Issue a Title Policy
           18
                in North Carolina: is NC unique?
                •   by statute, title opinion provided by NC attorney in
                    private practice~ G.S 58-26-1
                      Not employed by the title insurer
                •   by statute and ethics opinion, attorney must
                    supervise the search to give title opinion~ 58-26-1
                •   by statute, insurer must evaluate risk~ 58-26-1
                •   by statute, policy signatory must be licensed by the
                    state~ 58-26-10


                                                Underwriting College   3/4/2011




Joseph M. Ritter                                                                  6
title insurance




                    Closing Protection Service
           19


                •       purpose: to protect the lender from shortcomings of
                        local attorney licensed to practice in NC
                          Also protects against acts of Issuing Agent doing a closing
                          Runs in favor of: lessee, purchaser
                •       to whom will we issue a CPL
                          Owner
                          o   buyer
                          o   seller
                          Lender
                          o   private
                          o   institutional
                          Lessee
                                                              Underwriting College   3/4/2011




                    Closing Protection Service
           20



                •       to whom will we issue a CPL
                          Owner
                          o   Buyer ……………………………. yes
                          o   Seller …………………………….. no
                          Lender
                          o   Private …………………………… no
                          o   Institutional ……………………… yes
                          Lessee …………………………. yes




                                                              Underwriting College   3/4/2011




                    Closing Protection Service
           21


                    •    provisions:
                           Title insurer protects against attorney’s failure to follow
                           closing instructions
                              o   Must affect title or priority
                           Attorney’s misappropriation, fraud or dishonesty in
                           handling funds or documents
                              o   Must affect the title or priority




                                                              Underwriting College   3/4/2011




Joseph M. Ritter                                                                                7
title insurance




                Closing Protection Service
           22


                •   prerequisites:
                      Title insurer specified as insurer
                      Issuance of title commitment
                      Issuance of CPL
                      Closing agent must be approved attorney or issuing
                      agent
                •   Conditions or Exclusions
                      Failure to comply with closing instructions which conflict
                      with title commitment
                      MM liens, opinion letters, 3-yr limitation

                                                       Underwriting College   3/4/2011




                Closing Protection Service
           23


                •   failure to comply with closing instructions which conflict
                    with title commitment
                      Example: commitment requires long form lien waiver
                      (NCLTA Form 2) which the attorney fails to provide and
                      the closing instructions contain a requirement the title
                      insurance protect against MM liens




                                                       Underwriting College   3/4/2011




                Closing Protection Service
           24


                •   closing instructions which conflict with title commitment
                      Competing provisions of the CPL
                      o   Protection: “failure…to comply with written closing instructions
                          to the extent they relate to…priority of the [insured deed of
                          trust]”
                      o   Exclusion A.1: closing instructions which require protection
                          inconsistent with the commitment
                              But closing instructions that require removal of specific exceptions or
                              compliance with requirements in the commitment are not
                              “inconsistent”
                      o   Exclusion A.3: MM in connection w/ purchase, lease or
                          “construction loan transaction” except as to protection afforded
                          in the policy, commitment

                                                       Underwriting College   3/4/2011




Joseph M. Ritter                                                                                        8
title insurance




                Claims Vocabulary
           25


                •   actual loss
                •   proximate cause
                •   marketability
                •   risk elimination




                                       Underwriting College   3/4/2011




Joseph M. Ritter                                                         9
               Supporting Claims
                   Examples


         Joseph M. Ritter
• State Counsel for Underwriting
         Natasha Branch
   • Counsel for Raleigh Office
                      Claim Example #1
   Failure to meet a Commitment Requirement; Intervening Liens



Mr. & Mrs. Smith own Blackacre as tenants by entirety. They have a first deed of trust and a
home equity line of credit deed of trust on Blackacre. In August 2004, Mr. & Mrs. Smith agree
to sell Blackacre to Mr. & Mrs. Jones. Attorney Atticus represents the Smiths and the Jones in
the transaction. Attorney Atticus submits his title opinion to Title Insurer for an Owner’s Policy
and a Lender’s Policy of Title Insurance with a Closing Protection Letter in favor of the Lender.
Attorney Atticus closes the transaction, records the deed and deed of trust for the Jones, and
disburses funds to close. Attorney Atticus issues a check to the first mortgage holder and the
HELOC mortgage holder and advises the Title Insurer and all requirements have been met.
Title Insurer issues title policies for the new owners and the new lender. HELOC lender allows
Mrs. Smith, who has an affinity for very expensive handbags and shoes, to withdraw funds on
the HELOC post closing. Mr. Smith and Mrs. Smith fall into marital discord. In 2008, Mrs. Smith
divorces Mr. Smith and moves to China with her favorite shoe salesman to pursue their joint
dream of starting their own business in China. Unfortunately, the plane crashes on the way to
China with no known survivors. Mr. Smith finds out there is a balance of about $50,000.00 on
the HELOC.
                         Claim Example #2
Schedule A Legal Description—What is Insured? What is included in the attorney’s
                               title opinion?


 Brett Michaels purchased a townhome in Brunswick County as a location to retreat and rest from
 his stressful lifestyle. His attorney, Bob B. Busy, obtained a title policy for the Lender from Title
 Insurer insuring Land described as: Being all of Lot 10, Riverburch Subdivision as more particularly
 described in a survey plat recorded in Map Book 5 and Page 56, Brunswick County Registry, to
 which plat reference is hereby made. Grantor further convey onto Grantee all of its rights and
 privileges as owner of Lot 10 as more fully described above, as set forth in that Agreement for Use
 of Recreational Facilities dated August 1, 2000, and entered into by Clam Harbor, LLC, Clam Harbour
 Homeowners Association, Inc., and Thundercloud Development, LLC. By acceptance and
 recordation of this deed, Grantee hereby acknowledges and agreed to be bound by the terms and
 conditions as set forth in the Agreement for Use of Recreational Facilities as more fully described in
 the paragraph herein above. This conveyance is made subject to any and all Covenants and
 Restrictions applicable to the subject property of record in the Brunswick County Registry.

 The loan was subsequently foreclosed, and the Lender was the highest bidder. Lender/Owner
 inquires with Clam Harbour regarding use of the amenities and receives notice that they must enter
 into a contract and pay fees to have use of the amenities. Lender submits title claim to Title Insurer
 stating they are being denied its rights and privileges under the Agreement.
                        Claim Example #3
                        Schedule A—Title is vested In
     Coverage under policy provision –Owner’s Policy –title vested other as


In 1996, Bethesda Presbyterian Church, Inc. (“Bethesda”) in Southern Pines, NC obtained title to a
14 acre parcel of Land for the property adjoining the church which had a house located on it and
the remaining land being unimproved acreage. In 2003, Bethesda conveyed the 14 acres parcel to
the Lumber River Presbytery, Inc. (“Lumber River”). Lumber River subsequently conveyed the land
back to Bethesda with the following language included in the deed: “The parties hereto specifically
agree and acknowledge that the subject premises shall revert in its entirety to Grantor or its
successor in the event that the subject premises cease to be occupied and utilized by the Grantee
as a ministry function serving Moore County, North Carolina, affiliated or directly associated with
the Lumber River Presbytery, Inc.”

After several years, the pastor of Bethesda purchased his own residence and moved from the house
located on the Land. In 2008, Bethesda conveys the parcel of Land to a developer by, General
Warranty Deed, who plans to clear the Land and place a new subdivision of townhomes on the
parcel. Attorney Ann closes the transaction and updates from a 1996 policy in favor of Bethesda.
Attorney Ann does not report the reverted language to the Title Insurer. Developer becomes
distressed and a foreclosure is initiated. When the Freddie, the Foreclosure Attorney does his title
search, he discovers the reverter and reports it to the Title Insurer, delaying the foreclosure on the
Land.
                       Claims Example #4
Grandpa Walton owns 30 acres on the side of Walton’s Mountain. He conveys 18 acres to his son,
Ed Walton. Ed Walton places a deed of trust on a portion of his 18 acres. Ed then conveys 9 acres
to his son, Ted Walton. Ted Walton, who has rejected mountain living, moves to Big City. Ted
subdivides his 9 acres into several lots to sell to finance his stage screen writing career. He conveys
a one acre tract to Harvey Hardworker. Attorney Dumas agrees to close the transaction for Harvey
and recommends that he get a survey of the Land. Attorney Dumas searches the title to the Land
all the way back to 1944 and obtains a title policy for Harvey. Harvey places a double-wide mobile
home on the one acre tract. Ed Walton, sick with despair over Ted’s abandonment, falls on bad
times and is unable to make his mortgage payments. The Lender forecloses. When Ed’s Lender
forecloses, it has a survey done to determine exactly what it owns. It discovers that a portion of
Harvey Hardworker’s one acre tract is actually encumbered by the foreclosed deed of trust. Lender
notifies Attorney Dumas and Harvey of its superior title. Attorney Dumas on behalf of Harvey,
makes a claim on the title policy reporting, “I found the deed of trust given by Ed Walton and I
looked at the maps on record and the survey and I could not determine if it encumbered Harvey’s
one acre tract or not.” (and so he did not report it)
                       Claims Example #5
Greg, Marsha, Peter, Jan, Bobby and Cindy McBrady are all siblings. They own 3 tracts of farm
land—one in Davie County, one in Davidson County, and one in Rowan County—as tenants in
common. The siblings operate an agriculture business. The siblings and their spouses give several
Notes to Carolina Farm Credit to facilitate an expansion of their farm operations. The Notes are
secured by several Deeds of Trust on all 3 tracts of Land. Norton Novice, the McBrady sibling’s
closing attorney, confuses the recording order of the Deeds of Trust for each county (i.e. the first
and second Deeds of Trust were not recorded in the same order in each county); Norton also failed
to notice that the loan numbers in the Deed of Trust did not match the loan numbers on the
promissory notes, nor did the dates on the promissory notes match the dates on the deeds of trust,
although the amounts matched. Carolina Farm Credit asked that these typographical errors be
remedied and the documents be re-recorded in the correct simultaneous order. Norton consults
with his partner, Woody Wisdom, who advises that the McBrady siblings need to initial the
corrections and execute an affidavit for re-recording.

All of the McBrady siblings and their spouses comply with this request. The instruments are re-
recorded in the correct order, and Norton updated the title, finding no liens of record. Norton
issues an updated final title opinion to Title Insurer who then issues the final title policies on the
loans. The McBrady farm operation suffers several poor crop yields due to extreme heat and lack of
rain. Greg McBrady and Bobby McBrady are forced to file personal bankruptcies. Their attorneys
file Motions to avoid the liens, alleging that the deeds of trust were invalid due to the re-recording
and that there were several unsecured creditors who should have priority over Carolina Farm
Credit. Carolina Farm Credit makes a claim under their Loan Policy
                  Claims Example #6

Jacob Black refinanced a tract of Land in Hayesville, NC, used as a preservation for the wolf
population. His closing attorney, Vera Verybusy, recorded the deed of trust in the Cherokee County
Registry, disbursed the loan proceeds, and rendered her title opinion to the Title Insurer that all
requirements had been met. Title Insurer issued its final title policy for the Lender. Jacob then
incurred a large hospital bill for treatment he received from a very bad motorcycle accident. The
bill was subsequently reduced to a judgment which was docketed in Clay County (Hayesville, NC).
Two months later, Vera Verybusy, due to a downturn in real estate closings, was catching up on her
paperwork and realized that Jacob’s Deed of Trust had been recorded in the wrong county. Since
the original was still in her file, she promptly recorded the deed of trust in Clay County. The Deed
of Trust then became delinquent. The foreclosing attorney does a title search of the Land,
discovers the judgment and subsequent recording of the deed of trust and notifies the Lender of
the intervening lien.
                      Claims Example #7

Sarah White purchases Lot 4 of Rainbow Subdivision, in Orange County, NC. Sarah White later
marries Chris Greene. Sarah and Chris take out a loan to do some remodeling and secure the Note
with a Deed of Trust in favor of Prism National Bank on Lot 4 of Rainbow Subdivision. Sarah has
never paid her Property Owner’s Association Dues. The Property Owner’s Association placed a lien
on Lot 4, under the name of Sarah White. The Property Owner’s Association foreclosed their lien
and the Lot was purchased by Bruce Black whose closing attorney obtained an Owner’s Policy from
Title Insurer insuring that Bruce owns the Lot free and clear of any other Deeds of Trust. Prism
National Bank initiates foreclosure proceedings when its loan to Sarah and Chris Green goes into
default. After the foreclosure sale, Prism National Bank, the highest bidder, goes to change the
locks on its newly acquired property only to find that Bruce Black is living in the house and has
already changed the locks. Bruce makes a claim under his Owner’s Policy.
                       Claims Example #8

Angelina Jolie and Brad Pitt wish to purchase a house in Corolla, NC. At closing, a deed is recorded
listing the Grantees as Brad Pitt and Angelina Jolie, husband and wife. Within weeks a hurricane
causes extensive damage to the house, and the two decide to renovate the home, using funds from
a loan from Hollywood Bank which is secured by a deed of trust from Brad Pitt, and wife, Angelina
Jolie. Their closing attorney searches the title to the land and finds a judgment in favor of Jennifer
Anniston against Angelina for criminal conversation and alienation of affection. Closing attorney
opines that the land is owned as tenants by the entirety and that the judgment does not attach to
the Land. Closing attorney obtains a Loan Policy from Title Insurer. Just as all of the renovations are
complete, Anniston decides to seek to enforce her judgment and takes action to levy the beach
house, stating that the home is owned as tenants in common, as Brad and Angelina are not
married. Search of the public record confirms that Pitt and Jolie are not married. Hollywood Bank
submits a claim as they appear to be in second position on at least a portion of the Land.
                        Claims Example #9
 Once upon a time in a land far, far away, (also known as Murphy, NC), there lived a king and queen.
The queen gave birth to a beautiful baby girl who was subsequently cursed by an evil witch. At
dusk the princess turned into a big green ogre. The king sent the princess away to live in a tower
until a brave and handsome prince could find a way to break the curse. The queen was heart
broken at the loss of her daughter and died of a broken heart. The king remarried and had six
children—3 boys and 3 girls who grew up and ran the kingdom together. The king died at the
happy old age of 99, without leaving a will. The kingdom was run by the 6 siblings. When times got
hard, they decided to sell some of the land which had been owned by the king to some individuals
from a strange and far away kingdom (also known as Florida). Since the king did not leave a will,
the closing attorney, at the request of the Title Insurer, sought an affidavit from a disinterested third
party, identifying the heirs of the king.

The disinterested third party identified all six of the king’s children as heirs to the land, just as
requested by the Closing Attorney. However, thinking the ogre princess was long since dead, the
disinterested third party, did not mention her. One day, a brave and handsome ogre, rescued the
ogre princess, who had decided that she liked herself for who she was. The ogre and ogress
returned to the land far far away. She discovered a new subdivision on a particularly beautiful part
of her father’s old kingdom and scared off the construction crew who had been clearing the Land.
The developer filed a claim on his title insurance policy.
                      Claims Example #10


John Smith purchases a million dollar home on Lake Wylie in 2006. He finances 100% of the
purchase price with w loans—a first mortgage for $800,000 from First Bank; and a second mortgage
for $200,000 to Second Bank. Guy Good, his attorney, obtains title policies from Title Insurer for
both First Bank and Second Bank. Title Insurer issues both policies with no survey exception and an
ALTA 9 endorsement. First Bank forecloses its loan and becomes the high bidder at the foreclosure
sale. First Bank, in preparation for selling the Land, obtains a survey of the Lot. It is discovered that
the septic tank for the lot is partially located on the neighbor’s lot and no valid easement exists.
First Bank’s attorney, Dan Diligent, contacts the neighbor and inquires about obtaining an easement
for the encroaching septic tank. Neighbor’s attorney contacts Diligent and reports that neighbor
will grant the easement for $200,000, but if First Bank does not accept the offer within 10 days,
Neighbor will have the encroaching septic tank removed. First Bank files a claim under their title
policy.
                   Claims Example #11
      Title vested other than as shown on the Policy; Marketability


Dean Developer purchased a large tract of Land and subdivided the Land into Lots. He began
developing the Land into a Townhome development, constructing townhomes on the Lots.
The townhomes were constructed by Carl Careless Construction. With pending sales
contracts in queue, Dean discovered that some of the townhome units were over the existing
lot lines by approximately 20 feet. Dean decides to have the lots resurveyed and a new plat
recorded to fix this problem—one week before his closing with Mr. & Mrs. Clack. Rush
T’Close, attorney for Dean and the purchasers, was not notified about the newly recorded
plat and used the legal description from the original plat for out conveyances in queue and
issued his title opinions to the Title Insurer with the old description. Rush did not find the
newly recorded plat prior to recording several out conveyances from Dean. In an out sale
from the Clacks, Thomas Thorough, attorney for the purchaser, discovered the re-recorded
plat and that the Clacks did not own the western wall of their townhome, and advised his
clients not to purchase the home if remedial measures were not taken to vest the entire
townhome in the Clacks. The Clacks filed a claim on their title insurance policy.
                     Claims Example #12
                         What is Insured? Schedule A Legal


Lynrd Skynrd purchased Lot 14 of Simple Acres in Chatham County, NC. At the same time, he
purchased a deluxe model double wide mobile home. He gave his lender a deed of trust on the lot
and the mobile home. The VIN number and description of the mobile home was placed in the deed
of trust along with Lot 14 in the legal description. This same legal description was provided to the
Title Insurer as part of the final title opinion and was used as the legal description for Schedule A.
The closing attorney did not request an ALTA 7 for the loan policy. The title to the mobile home was
never cancelled and no declaration of intent to affix was filed although the Chatham County tax
department did tax the mobile home as if it were real property.

Skynrd partied away his wealth, and stopped making his loan payments. The Lender started
foreclosure proceedings on the Insured Deed of Trust. Skynrd then filed Bankruptcy. The
Bankruptcy Trustee discovered that the mobile home was still titled with DMV without a lien on it
and seized the mobile home for sale. The Lender filed a claim on its title insurance policy.
                  Claim Example #13
Bob the Builder discovered a prime piece of real estate in Wake County, NC. He researched the
title to the Land and discovered that Grandma Gertie (not his grandma) owned the Land and that is
was already subdivided into lots. Bob visited Grandma and proposed a business arrangement
between them wherein he would build houses on the lots and she would receive 20% of the profits
from the sales. Grandma Gertie had her attorney draft a contract between to memorialize the
agreement. Nothing was put on record to provide notice of this contract. Bob began work on the
first home. In order to obtain capital to finance the building materials, Bob needed to take out a
construction loan on the Lot. As a part of the transaction, Grandma transferred title to Lot 1 to Bob
and the attached revenue stamps indicated that there was $10,000.00 of consideration. Bob
encumbered the lot with a construction loan line of credit on the lot. Bob completed the home,
but reported to Grandma that he was having difficulty selling it. Bob finally found a buyer, Fred
Frugal, who agreed to purchase the house at the reduced price of $485,000.00 . Fred contacted his
attorney, Carey Cautious to begin the title search. Carey searched the title and obtained a title
commitment with the standard gap exception on the commitment. Grandma, aware of the sale
and becoming concerned about her investment, began calling Bob daily asking about her 20%
profit. Bob reported to Grandma that there was no profit, that this was in fact a short sale, and that
she would not receive anything on the sale. Grandma Gertie contacted her attorney and
proceeded to file a lis pendens on the lot and a law suit for fraudulent conveyance.
Current Day Fraud in the Financial Industry



                Steve Shuford
          Paragon Commercial Bank




             March 8 & 9, 2011
           Raleigh, North Carolina
Current Day Fraud in the Financial Industry
Presentation to

Fidelity National Title Insurance Session
03/08/2011 & 03/09/2011


A tradition of fraud

Traditional forms of bank-related fraudulent transactions which still exist:
   • Bad checks
   • Kiting between a company’s accounts to “beat the float”
   • Stolen checks (making off with blank check stock or lifting someone’s mail to steal checks) to
        cash them or create duplicates
   • Company employee absconding with checks or fraudulent transfers, etc.
   • Fraudulent or counterfeit checks (including cashiers checks….)
   • Skimming credit cards


And the latest version:

   •   Cyber threats such as:
          o Hijacking or stealing credit card data base from a place of business that accepts credit
              cards (PCI Security measures and audits) – TJ Maxx or Heartland
          o External bad guy (cyber criminal) fraudulently transferring funds from a company’s
              account using “apparently” legitimate transactions via online banking – also known as
              Corporate ID theft or corporate account takeover


Cyber Crime

   •   Began in 2006 as attacks against larger companies
   •   Now a significant threat to smaller companies - non-profits organizations, churches,
       municipalities and law firms
   •   They may not have internal IT departments or more sophisticated (i.e., expensive) fraud
       detection or security systems.
Remain aware…

   •   It’s very difficult to outsmart the cyber criminal
   •   Requires diligence by banks and businesses
   •   No fool-proof methods of prevention, But,
   •   There are practical steps to significantly mitigate the risks. (Refer to Fraud Advisory for
       Businesses and Paragon’s Computing Security Recommendations)


WHAT can happen?

   •   Cyber criminals target a company’s employees who may have access to the financial information
       and accounts via online banking –senior executives, accounting or HR personnel.
   •   They cause the targeted employee or business partner to spread malicious software (malware) in
       order to steal personal information and / or online banking login credentials.
   •   Once “in”, the cyber criminal is able to steal the entity’s funds by initiating a wire transfer or
       ACH transactions to accounts their “money mules” have set up at various banks.
   •   The mules are contacted immediately; told to transfer most of the funds to a specific account or
       person usually in Eastern Europe within an hour or two and keep the difference for their trouble.


Nobody knows the TROUBLE I’ve seen since I … HOW can it happen?

   •   The trouble may have started by simply accepting a fake “friend” request or invitation from a
       social networking site or opening an email attachment or a pop-up box that

                   i. asks for personal or account info
                  ii. directs the employee to click a malicious link in the email to a legitimate website
                      which has been compromised (check the URL) and then installs malware on the
                      PC
                 iii. contains attachments that are infected
                 iv. appears to come from a trusted, legitimate source – UPS, banks, BBB, Court
                      system, FDIC…
                  v. appears to announce celebrity or sporting event news

   •   The malware allows the criminal team to “see” (maybe keylogging s/w) and track the
       employee’s activity on the company network or internet.

   •   An employee’s visit to online banking may reveal user IDs and passwords. With this
       information, the bad guy can create transactions that appear to be conducted by the employee…
       and the damage is done.

Scary!? But by taking even a few security measures, you can mitigate the risks significantly.

Presented by:
Pat O’Quinn poquinn@paragoncommercial.com            Steve Shuford sshuford@paragoncommercial.com
SVP Deposit Officer (919)-534-7344                   SVP Director of Treasury Services (919)-534-7415
Fraud Advisory for Businesses:
This product is a partial recreation of a joint effort between the United States Secret Service, The
Federal Bureau of Investigation, the Internet Crime Complaint Center (IC3 and the Financial Service
Information Sharing and Analysis Center (FS-ISAC)
Detect
1. Monitor and reconcile accounts at least once a day
   Reviewing accounts regularly enhances the ability to quickly detect
   unauthorized activity and allows the business and the financial institution to
   take action to prevent or minimize losses.

2. Discuss the options offered by your financial institution to help detect
or prevent out-of-pattern activity (including both routine and red flag
reporting for transaction activity).

3. Note any changes in the performance of your computer such as:

•  A dramatic loss of speed.
• Changes in the way things appear.
• Computer locks up so the user is unable to perform any functions.
• Unexpected rebooting or restarting of your computer.
• An unexpected request for a one time password (or token) in the middle of
  an online session.
• Unusual pop-up messages.
• New or unexpected toolbars and/or icons.
• Inability to shut down or restart.

4. Pay attention to warnings

    Your anti-virus software should alert you to potential viruses. If you receive
    a warning message, contact your IT professional immediately.

5. Be on the alert for rogue emails
   • If someone says they received an email from you that you did not send,
      you probably have malware on your computer.
   • You can also check your email “outbox” to look for email that you did
      not send.

Pat O’Quinn poquinn@paragoncommercial.com
SVP Deposit Officer (919)-534-7344
Steve Shuford sshuford@paragoncommercial.com
SVP Director of Treasury Services (919)-534-7415                                             Page 1
6. Run regular virus and malware scans of your computer’s hard drive
   This can usually be set to run automatically during non-peak hours.

Respond

7. If you detect suspicious activity, immediately cease all online activity
    and remove any computer systems that may be compromised from
    the network.
    • Disconnect the Ethernet cable and/or any other network connections
       (including wireless connections) to isolate the system from the network
       and prevent any unauthorized access.

8. Make sure your employees know how and to whom to report
   suspicious activity to within your company and at your financial
   institution.

9. Immediately contact your financial institution so that the following
    actions may be taken:

    • Disable online access to accounts.
    • Change online banking passwords.
    • Open new account(s) as appropriate.
    • Request that the financial institution’s agent review all recent
      transactions and electronic authorizations on the account. If suspicious
      active transactions are identified, cancel them immediately.
    • Ensure that no one has added any new payees, requested an address or
      phone number change, created any new user accounts, changed access to
      any existing user accounts, changed existing wire/ACH template
      profiles, changed PIN numbers or ordered new cards, checks or other
      account documents be sent to another address.

10. Maintain a written chronology of what happened, what was lost, and
    the steps taken to report the incident to the various agencies,
    financial institutions, and firms impacted
    • Be sure to record the date, time, contact telephone number, person
       spoken to, instructions, and any relevant report or reference number.


Pat O’Quinn poquinn@paragoncommercial.com
SVP Deposit Officer (919)-534-7344
Steve Shuford sshuford@paragoncommercial.com
SVP Director of Treasury Services (919)-534-7415                         Page 2
11. File a police report and provide the facts and circumstances
    surrounding the loss

    • Obtain a police report number with the date, time, department, location
      and officer’s name taking the report or involved in the subsequent
      investigation. Having a police report on file will often help facilitate the
      filing of claims with insurance companies, financial institutions, and
      other establishments that may be the recipient of fraudulent activity.
    • The police report may result in a law enforcement investigation into the
      loss with the goal of identifying, arresting and prosecuting the offender,
      and possibly recovering losses.
    • Depending on the incident and the circumstance surrounding the loss,
      investigating officials may request specific data be recorded and some or
      all of the system’s data may need to be preserved as potential evidence.
    • In addition, you may choose to file a complaint online at www.ic3.gov.
      For substantial losses, contact your local FBI field office
      (http://www.fbi.gov/contact-us/field/field-offices), your local United
      States Secret Service field office
      (http://www.secretservice.gov/field_offices.shtml), or the Secret
      Service’s local Electronic Crimes Task Force
      (http://www.secretservice.gov/ectf.shtml)

12. Have a contingency plan to recover systems suspected of
compromise.
    • The contingency plan should cover resolutions for a system infected by
      malware, data corruption, and catastrophic system/hardware failure. A
      recommended malware removal option is to reformat the hard drive,
      then reinstall the operating system and other software on the infected
      computer(s). There is no preservation of data using this method – all
      your data will be permanently erased. Do not take this step until you
      determine if a forensic analysis of the computer is needed. For additional
      recommendations on steps to take following a compromise, see the
      section “What if I am Compromised” on page 6 of the US CERT
      document, Malware Threats and Mitigation Strategies available at
      http://www.us-cert.gov/reading_room/malware-threats-mitigation.pdf

13. Consider whether other company or personal data may have been
compromised.

Pat O’Quinn poquinn@paragoncommercial.com
SVP Deposit Officer (919)-534-7344
Steve Shuford sshuford@paragoncommercial.com
SVP Director of Treasury Services (919)-534-7415                            Page 3
14. Report exposures to PCI DSS.
If your business accepts credit cards, you are subject to compliance with the
Payment Card Industry Data Security Standard (PCI DSS) and you may be
required to report and investigate the incident, limit the exposure of the
cardholder data, and report the incident to your card company. For more
information, see
https://www.pcisecuritystandards.org/security_standards/pci_dss.shtml.

Contact your financial institution for more information.


Additional Resources:

• Federal Trade Commission (FTC) website, “Computers& the Internet:
Privacy and Security” 13 (includes OnGuard Online),
• Internet Crime Complaint Center (IC3)14,
• Department of Homeland Security Cyber Report15,
• National Cyber Security Alliance Stay Safe Online16.
• Better Business Bureau- “Data Security Made Simple”17
  .    Microsoft Security Page 18
  .    U.S. Chamber of Commerce’s “Internet Security Essentials for
Small Business”19



____________________________________________
13 http://www.ftc.gov/bcp/menus/consumer/tech/privacy.shtm
14 The IC3 is a partnership between the Federal Bureau of Investigation (FBI), the National
White Collar Crime Center (NW3C), and the Bureau of Justice Assistance (BJA). For more
information, see http://www.ic3.gov/default.aspx.
15 http://www.cyber.st.dhs.gov/
16 http://www.staysafeonline.org/
17 http://www.bbb.org/data-security/
18 http://www.microsoft.com/security/default.aspx
19 This document is scheduled for release on October 26, 2010. Visit
www.uschamber.com/cybersecurity for more information.



Pat O’Quinn poquinn@paragoncommercial.com
SVP Deposit Officer (919)-534-7344
Steve Shuford sshuford@paragoncommercial.com
SVP Director of Treasury Services (919)-534-7415                                    Page 4
May 7, 2010


An Important Message to All Paragon Online Banking Clients:

Within the last year, there has been a significant increase nationally in online banking
fraud involving small and medium sized companies, non profits, and public institutions.
Unfortunately, certain Paragon clients have been impacted by this fraud. A typical fraud
scenario involves “phishing”; an email that looks legitimate (such as a bogus Microsoft
Critical Update) but contains an infectious computer virus sent to an employee of your
company. Once the user opens an email attachment, or navigates to the referenced web
site, malware is installed on the user’s computer. The malware will compromise the
user’s online banking credentials and use them to initiate fraudulent financial transactions
such as wire transfers and ACH transactions. Attempted fraudulent transfers nationwide
total more than $100 million, and the threat continues to increase.

One of the most effective methods to protect yourself and your business is to establish a
dual control environment for your wire and ACH transfers. We strongly recommend
adding this additional level of security, as it appears to be the most effective control to
prevent internal and external fraud. Additionally, we suggest that you establish
individual authority limits that are appropriate for the type of transaction performed.

For your convenience, we have included some additional computing security
recommendations with this letter. These will help improve safeguarding your company’s
information and further strengthen computer security.

We value our relationship with you and it is our hope that the enclosed information will
help you protect yourself and your company from becoming a victim of fraud. If you
have questions or concerns, please call me at 919-534-7444 or Jennifer Terry, our Chief
Deposit Officer, at 919-534-7430.

Sincerely,



Michael L. Story
Executive Vice President
Chief Operating Officer
                 Computing Security Recommendations
General Business Practices
         1. Review this letter with your IT department or consultant and evaluate how
             your systems may be vulnerable to this risk. Follow their advice to protect
             your system or individual computer from being used to perpetrate a
             fraudulent transaction.
         2. Talk to your insurance provider about adding a cyber insurance rider to
             your business insurance policy.
         3. Reconcile your banking transactions daily and look for unusual small
             amounts such as penny transactions. This may be an indication that your
             account has been compromised and a fraudulent plan is in progress.
         4. Never access bank, brokerage or other financial services information at
             internet cafes, public libraries, etc. Unauthorized software may have been
             installed to trap account numbers and sign on information leaving you
             vulnerable to fraud.
         5. Immediately escalate knowledge of any suspicious transaction to the
             Bank, particularly if these transactions are ACH or wire transfers. There
             is a limited recovery window for these transactions and immediate
             escalation may prevent or minimize further loss.

Password Practices
         6. Change passwords at least every 90 days and every time an employee
             leaves the company.
         7. Create a strong password with at least 10 characters that includes a
             combination of mixed case letters, numbers and special characters.
         8. Ensure that your account information and security responses are not
             written where they can be seen or accessed by others. If the information
             must be written down, it should be secured under lock and key when not
             being used.
         9. Never share your user ID or password with anyone for any reason. If it is
             compromised, contact us to have the ID and/or password disabled or reset.
         10. Secure your computers with a password protected screensaver that has a
             timeout feature activated after no more than 15 minutes.
         11. Avoid using an automatic login feature that saves usernames and
             passwords for online banking.

Operating System Protection
          12. Ensure that you use current anti-virus and anti-spyware products to protect
              yourself against malicious software that is created for the specific purpose
              of gathering information such as user ID, password, and other critical
              information that may be stored on your computer.
          13. Ensure that you have a patch management solution that keeps your
              computer software current and can further mitigate new vulnerabilities to
              which your computer may have been exposed.
14. Install a dedicated, actively managed firewall, especially if you have a
    broadband or dedicated connection to the Internet, such as DSL or cable.
    A firewall limits the potential for unauthorized access to a network and to
    computers.
15. Practice safe internet use. Never click on pop up messages or links to
    applications contained in emails. Try to get into the habit of manually
    going to links that are sent to you.
16. Be suspicious of emails purporting to be from a financial institution,
    government department, or other agency requesting account information,
    account verification, or banking access credentials such as usernames,
    passwords, PIN codes and similar information.
17. Use caution when opening attachments and ensure they were sent from a
    trusted source.
18. Consider designating a “locked down” PC to accommodate only your
    online banking transactions. This computer should not be used for email
    or any other internet activities. This precaution should minimize the
    opportunity to download malware.
     1031 Exchange Update



            John E. King
Manager of Eastern Operations for IPX




         March 8 & 9, 2011
       Raleigh, North Carolina
Investment Property Exchange Services,
Inc.




                     Internal Revenue Code §1031

                                   Update

                                   Speaker:
                                 John E. King
               Investment Property Exchanges Services, Inc.




                            Course Objectives
         •   IRC §1031 Rules-Review


         •   Recent changes to IRC §1031


         •   Hot Topics in IRC §1031




                Internal Revenue Code Section 1031

             “No gain or loss shall be recognized on the exchange of
             property held for productive use in a trade or business or
             for investment if such property is exchanged solely for
             property of like-kind which is to be held either for
             productive use in a trade or business or for investment.”




                                                                          1
Investment Property Exchange Services,
Inc.




                                    Run The Numbers
         §1031 permits deferral of:
         •   Capital Gains Taxes of (15% Federal and 7% State)
         •   Depreciation Recapture (25% Federal)
             Example: Selling $1,000,000 property that has no debt and has been fully
             depreciated. Using an assumption of a 20% combined taxes between capital
             gains and depreciation recapture. Purchasing replacement properties with a
             75% LTV ratio.
                                          SALE        VS. EXCHANGE
         NET EQUITY                       1,000,000         1,000,000
         CAPITAL GAIN TAX                   200,000             0
         EQUITY TO REINVEST                 800,000         1,000,000
         PROPOSED ACQUISITION              3,200,000        4,000,000




                                     Basic 1031 Rules
              In order to obtain a deferral of the entire capital gain tax the
              Exchanger must:
              1. Purchase property of equal or greater value.
              2. Reinvest all of the net proceeds from the relinquished property.
              3. Obtain equal or greater financing on the replacement property
              than was paid off on the relinquished property. Replacement
              property debt can be offset with cash put into the exchange.
               4. Receive nothing in the exchange but like-kind property.

              To the extent the Exchanger fails to observe these rules they will be
              subject to capital gain tax




                               Like-Kind Real Property
         •    Generally, all real property is “like-kind” to all other real property.
         •    “Like-kind” refers to the nature and character of the property and not its
              grade or quality.
         •    Real property can be improved or unimproved because this only relates to
              the grade or quality not its kind or class.
         •    The Exchanger’s intent must be to hold the replacement property as an
              investment or for productive use in a trade or business.
         •    Examples: Residential for commercial, commercial for industrial, single-
              family for multi-family rental




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         How long to I need to own something before I
                  can do a 1031 Exchange?
         •   1989-U.S. House of Representatives passed a one-year holding
             requirement before and after exchanging a property. This did not
             reach the final version of the Revenue Reconciliation Act of 1989.
         •   Nonetheless, prudent to hold a property in use for at least one year
             (long term gain). A taxpayer might note that Congress did include in
             the Act a two-year holding period of any property received in a
             “related party” exchange.
         •   The more conservative professionals and commentators speculate
             that this two-year hold might be a more appropriate holding period.




                       Vacation and Second Homes
         •   In Moore v. Commissioner, T.C. memo 2007-134, the
             Tax Court held that properties held for personal use with
             the mere hope or expectation of gain did not establish
             investment intent.
         •   Effective for all exchanges on or after March 10, 2008 ,
             Revenue Procedure 2008-16 creates a safe harbor
             (meaning the IRS will not challenge the exchange) for
             “dwelling units” that meet the following criteria:




                       Vacation and Second Homes
         •   The relinquished property: 1) was owned by the taxpayer for 24
             months prior to the exchange and 2) was rented for 14 days or more
             in each of the two 12 month periods preceding the exchange and 3)
             the Taxpayer’s personal use in each of those years did not exceed
             the greater of 14 days or 10 percent of the number of days the
             property was rented at fair rental rates.
         •   The replacement property must meet the same criteria.
         •   The exchange must meet all the other Section 1031 requirements.
         •   It is unknown how the IRS will view properties that do not fall within
             this safe harbor.




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                Combining IRC Sections 1031 and 121
         •   IRC §121 permits an exclusion from capital gain realized of
             $250,000 for a single person and $500,000 for a married couple on
             the sale of a home used as a primary residence for any two of the
             past five years.


         •   If, however, the residence was acquired as a replacement property
             in a §1031 exchange, the Exchanger must have held the property
             for a total of FIVE years before it qualifies for the §121 exclusion
             when it is sold. (HR 4520 October 22,2004)




                Combining IRC Sections 1031 and 121
         •   If a primary residence is converted for use as rental, it may qualify
             for both a §1031 exchange as property used in a trade or business
             and also for the §121 exclusion when it is sold (Revenue Procedure
             2005-14)


         •   Effective January 1, 2009, the §121 exclusion will not apply to gain
             from the sale of a residence that is allocable to periods of
             “nonqualified use”. (Housing Assistance Act of 2008)




                 Exchange Structures with a Qualified
                            Intermediary

         •   Delayed/Simultaneous
         •   Reverse
         •   Build-To-Suit
         •   Reverse Build-To-Suit




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                            The Exchange Process




                       Delayed Exchange Time Limits
         1.   45-Day Rule: The Exchanger must identify the potential replacement
              property or properties within the first 45 days of the 180 day Exchange
              period.
         2.   180-Day Rule: The Exchanger must acquire the replacement property or
              properties within 180 days, or the date the Exchanger must file a tax return
              (including extensions) for the year of the transfer of the relinquished
              property, whichever occurs first.
         3.   There are no extensions for Saturdays, Sundays, or holidays.
         4.   The time limits begin to run on the date the Exchanger transfers the
              relinquished property to the buyer.
         5.   The “date of transfer” will be the date of recording or transfer of the
              benefits and burdens of ownership, whichever occurs first.




                                 Disaster Extensions
         •    Since September 11, 2001, Congress has permitted 120 day
              extensions for taxpayers affected within federal disaster areas by
              presidential order. The rules are complicated, but generally the
              Exchanger receives the extension if one of the following is within the
              affected area:
         •    Exchange Properties
         •    Exchanger’s Principal Residence
         •    Exchanger’s Tax Preparer
         •    Qualified Intermediary




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                  Procedures for Property Identification
         1.    The property identification must be delivered to a party to the exchange
               that is not a disqualified party (i.e. the Qualified Intermediary).
         2.    It must be in writing and signed by the Exchanger.
         3.    It must be “unambiguous” (site specific).
         4.    It must be delivered, mailed, faxed, or “otherwise sent” within 45 days.
         5.    An identification can be revoked within 45 days but the revocation must
               also follow steps 1 through 4.




                         Exchange Identification Rules
         1.    Three Property Rule: The Exchanger may identify up to three properties of
               any value.


         2.    200% Rule: The Exchanger may identify more than three properties if the
               total fair market value of what is identified does not exceed 200% of the
               fair market value of the relinquished property.


         3.    95% Exception: If the Exchanger identifies properties in excess of both
               Rule 1 and Rule 2, then the Exchanger must acquire 95% of the value of
               all properties identified.




                         What is a Reverse Exchange?
         •    A Taxpayer needs to close on the acquisition of the replacement property
              before the relinquished property can close.


         •    Because IRC §1031 requires an “exchange” the taxpayer cannot own both
              the relinquished and the replacement properties at the same time.


         •    Typically, the reverse exchange involves a third-party “parking” title until the
              taxpayer can complete the exchange.




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                     Structuring a Reverse Exchange
         •   Revenue Procedure 2000-37 provides a safe harbor for reverse exchanges.
             IRS will not challenge the tax deferred status of a reverse exchange
             structure in accordance with the Revenue Procedure.
         •   Reverse exchanges allow the Exchanger to purchase replacement property
             prior to transferring the relinquished property. The Revenue Procedure
             states a new entity known as Exchange Accommodation Titleholder (EAT)
             must be used by the Exchanger to hold title to either the replacement
             property or the relinquished property.
         •   The EAT will generally form a disregarded special purpose entity (the
             “Holding Entity”) to take title to the parked property.




                     Structuring a Reverse Exchange
         •   The document governing the relationship between the Exchanger, the EAT
             and the Holding Entity is termed the “Qualified Exchange Accommodation
             Agreement (QEAA)”.
         •   The 45 and 180 day rules are required to maintain the safe harbor.




                            Which Property to Park?
         •   Replacement Property is usually the choice


         •   Provides flexibility if the Exchanger is not sure which relinquished
             property will be used in the exchange or which relinquished property
             will sell first.


         •   May have to park relinquished due to Lender or environmental
             issues. Potential risks include: triggering due on sale clause and
             potential boot issue.




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                            Practical Considerations
         •   Financial Requirements: Non-Recourse & Fully Assumable
         •   Insurance Requirements: Commercial Liability Policy
         •   Environmental Reports: Phase I Environmental Site Assessment required
             for properties larger than four family residential
         •   Additional Costs: Additional legal/financial advisor charges and closing
             costs, possible double transfer taxes, title insurance premiums, recording
             fees and possible LLC fees




                               Replacement Property Parked




                               Relinquished Property Parked




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                              Delayed Build-To-Suit Exchange




                             Reverse Build-To-Suit Exchange




                  Non-Safe Harbor Reverse Exchange
         •   Section 3.02 of Revenue Procedure 2000-37 states “the Service recognizes
             that ‘parking’ transactions can be accomplished outside the safe harbor.”


         •   Much riskier than “safe harbor” reverse because of lack of authority.


         •   May be used by Exchangers that need more than 180 days or will not have
             identified relinquished property.


         •   Unless structured within the “safe harbor”, the IRS will generally argue that
             the Accommodator in the transaction was the agent of the Exchanger.




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                              LLC and Partnership Issues
        •       Interest in a partnership or LLC is a personal property interest which is not
                like-kind to real property owned by a partnership.
        •       Drop and Swap-IRS may have some problems:
                      *If IRS sees distribution was for exchange purposes only it will be
                       seen as an exchange of partnership share (not permissible)
                      *Suggestions:
                         -Season the distribution for at least one tax period
                         -Distribute completely (change title, dissolve bank accounts, final
                          partnership return, no K1)
                         -Have each tenant in common sign as sellers on sales contract




                              LLC and Partnership Issues

            •    Form 1065 Partnership Income-looking for Drop and Swaps with
                  partnership distribution box checked


            •    Swap and Drop-If both parties want to continue in separate properties
                       *Create two Single-Member LLCs
                       *Do a tax deferred exchange for two properties with each LLC owning
                        one
                       *In subsequent tax year, distribute each LLC to the respective party




                                  Dealer Property Issues
            •    Dealer property is defined as real property held for sale in the ordinary
                 course of a trade or business.


            •    Such property does not meet the test of property “held for investment or
                 used in a trade or business”.


            •    Gain from the disposition of such property is generally taxed as ordinary
                 income. IRC §§ 1221(a)(1)-(2); Margolis v. Commissioner (9th Cir 1964)
                 337 F2nd 1001




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                     Property Held for Sale
                DOES NOT Qualify for an Exchange
          There are a number of factors , including the Exchanger’s intent at
          the time of the exchange that are considered in determining whether
          a property is held for sale and does not qualify for an exchange:
           1. Frequency, number and extent of real estate transactions
              entered into by Exchanger with respect to other properties
              owned by Exchanger.
           2. Development activity on Exchanger’s property:
              * Subdividing, Grading, Rezoning, Adding Streets, and Extent of
                Improvements to the Property




                     Property Held for Sale
                DOES NOT qualify for an Exchange

           3. Nature and extent of the efforts by the Exchangers to sell the
              property
               *Use of advertising
                *Sales personnel employed
                *Use of a business office to handle sales
                *Extent of Exchanger’s control over sales activities




                        Safe Harbor Restrictions
          To qualify as a Safe Harbor against actual or constructive receipt of
          the exchange funds, the Exchange Agreement must limit the
          Exchanger’s right to receive, pledge, borrow, or otherwise receive
          the benefit of money or other property except:
           1. After the end of the 45-day Identification Period, if Exchanger
          has not identified any replacement property; OR

           2. If Exchanger has identified replacement property, then upon or
          after receipt by Exchanger of all replacement property to which
          Exchanger is entitled under the Exchange Agreement; OR




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                             Safe Harbor Restrictions
              3. If Exchanger has identified replacement property, then upon or
              after the occurrence , after the end of the Identification Period, of a
              material and substantial contingency, that (a) relates to the
              exchange, (b) is provided for in writing and (c) is beyond the control
              of the Exchanger and of any disqualified party, other than the party
              obligated to transfer the replacement property to the Exchanger; OR

              4. After the end of the 180-day Exchange Period.




                                  Refinancing Issues
         •    Refinancing prior to the relinquished property sale-Most case law deals with
              this side of refinancing. If there is an independent business purpose, i.e.
              more favorable interest rates…
         •    Refinancing after the purchase of the replacement property-Better but still
              should have a time break/separate transaction…
         •    To avoid pitfalls of the “step transaction doctrine”: The refinance should not
              appear to be solely for the purpose of “pulling out equity”, refinance prior to
              listing relinquished for sale, document as separate transactions.




         Combining Seller Financing With An Exchange
         If the Exchanger carries back financing for the buyer, the Exchanger can:
         1.    Treat the seller financing as an installment sale under IRC §453. The
               capital gain taxes are due when Exchanger receives principal payments on
               the note.
         2.    Exchanger can act as a “third-party lender” and loan the buyer the
               equivalent amount of Exchanger’s own funds at the close of the
               relinquished property. The note and security instrument is in the
               Exchanger’s name. All exchange funds are transferred to Qualified
               Intermediary for use in the exchange. When buyer pays off the note the
               proceeds are not taxable to the Exchanger.




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         Combining Seller Financing With An Exchange
         3.    Include the note and security instrument as part of the exchange by
               specifying the Qualified Intermediary as the payee of the note. The
               Exchanger then can have the Qualified Intermediary use the note in
               several ways:
               A. Assign the note to the seller of the Replacement Property.
               B. Sell the note to a third party for cash and then use the cash to
               purchase the replacement property.
                C. Sell the note for cash to the Exchanger and use the cash to purchase
               the replacement property.
               If none of the options is utilized, the note will be reassigned to the
               Exchanger at the termination of the exchange.




                                 Related Party Issues
         •    IRC §1031(f) is designed to prevent basis-shifting & avoidance of payment
              of federal income tax.
         •    Through exchange of high basis property for low basis property, in
              anticipation of the sale of the low basis property.
         •    If a related party exchange is followed shortly thereafter by a disposition of
              the property, the related parties have, in effect ‘cashed out’ of the
              investment, and the original exchange should not be accorded non-
              recognition treatment.” H.R. Rep. No. 247, 101st Congress 1st Sess. 1340
              (1989)




                              Related Party Definition
         Related Parties Include:
         1.    Members of a family: Brothers and sisters, spouse, ancestors, and lineal
               descendents
         2.    An individual and a corporation where >50% in value of the outstanding
               stock is owned, directly or indirectly, by or for such individual
         3.    Two corporations which are members of the same controlled group
         4.    A corporation and a partnership if the same person owns:
               >50% in value of the outstanding stock of the corporation, and
               >50% of the capital interest, or the profits interest, in the partnership




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                              Related Party Definition
         Related Parties Include:
         5.    A grantor and fiduciary of any trust
         6.    A fiduciary of a trust and a fiduciary of another trust, if the same person is
               a grantor of both trusts
         7.    A fiduciary of a trust and a beneficiary of such trust
         8.    Attribution Rules: Taxpayer deemed to own interests of family members
               and other related parties (i.e. Family LLC with parents and kids treated as
               100% owned by any family member, parent treated as owning kid’s
               corporation…)




                                  Related Party Buyer
         •    Related Party Buyer must hold the Relinquished Property received from
              Exchanger for 2 years. IRC §1031(f)(C)(i)
         •    Unless Related Party Buyer is not actually “trading” any Related Party
              Buyer owned property with Exchanger.
         •    If Related Party Buyer starts out with cash, not property, and it simply a
              purchaser of Exchanger’s property, ending up with 100% basis in the
              purchased property, then the Related Party Buyer may dispose at will.
              PLRs 200709036 & 200712013-There is some dispute as to whether this
              will hold up for others.




                                  Related Party Seller
         •    Exchanger must hold Replacement Property received from Related Party
              for 2 years. IRC §1031(f)(C)(ii)
         •    Related Party Seller of Replacement Property must also do an exchange.
         •    Related Party Seller may not receive cash or non like-kind property.
         •    If Related Party Seller does not do an exchange, IRS views this as “cashing
              out” and transaction will be taxable (Revenue Ruling 2002-83).




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                                 Amendment to §6694
         •    Income Tax Preparers will be penalized if:
              (A) the tax return preparer knew (or reasonably should have known) of the
              position
              (B) there was not a reasonable belief that the position would more likely
              than not be sustained on its merits, and
              (C) (i) the position was not disclosed as provided in §6662(d)(2)(B)(ii), or (ii)
              there was no reasonable basis for the position.




                      Qualified Intermediary Questions


         •    Do you have a written third party performance guarantee?
         •    Do you have a fidelity bond and are you insured for errors and
              omissions?
         •    How are the funds invested?
         •    Does the Exchange Agreement require written authorization of the
              exchanger to disburse funds?
         •    Experience of staff to answer questions?




             Investment Property Exchange Services, Inc.

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         •    $100 Million Fidelity Bond
         •    Third Party Written Guarantee of Funds
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