Bulletin: NJ000047

Dear Associates:

In the recent case of Manchester Fund, Ltd. V. First American, (Law Division decided October 22, 1999) Judge Walsh addressed two issues of importance to the title industry:

What constitutes constructive notice in the recording system?

What is the obligation of an insured to disclose known title defects to the title insurer?

The facts of the case were simple; the United States instituted an In Rem proceeding seeking civil forfeiture of property owned by one Raynoso. The Lis Pendens filed by the United States in 1993 was intended to affect the real estate owned by Raynoso, but did not mention Raynoso's name. Consequently, the Clerk indexed the Lis Pendens only in the name of the United States and not against the name "Raynoso".

Raynoso failed to pay real estate taxes on the property. Manchester Fund, Ltd. (Manchester), brought a tax sale certificate in 1994. The title commitment furnished to Manchester by First American did not take exception to the Lis Pendens filed by the United States, as it could not be discovered by a search of the county clerk's index. In 1996, Manchester moved to foreclose. The United States became aware of the foreclosure and advised Manchester of its Lis Pendens, and requested Manchester to adjourn the proceedings, but Manchester refused. Manchester did not advise First American of the existence of the Lis Pendens.

After Manchester took title, the United States sought to strip Manchester of its title. Manchester requested a defense by First American, which refused, citing Manchester's failure to advise First American, despite its knowledge of the Lis Pendens. First American based its decision on the following title policy language, which excludes responsibility for:

Defects, liens, encumbrances, adverse claims or other matters?. not known to the Company, not recorded in the public records at Date of Policy, but known to insured claimant and not disclosed in writing to the Company by the insured claimant prior to the date the insured claimant became and insured under this policy. (EXCLUSIONS FROM COVERAGE Paragraph 3 b, emphasis added)

Manchester claimed it was entitled to coverage, maintaining that the notice of the Lis Pendens, whether mis-indexed or not, was part of the public record. Judge Walsh found that the indices are part of the public record, and since the Lis Pendens was mis-indexed, it was not part of the public records for purposes of providing constructive notice under the Recording Act, nor did it qualify as a "public record" as defined in the title commitment provided to Manchester.

In addition to the obvious lessons from this case, carefully search the indexes prior to issuing a commitment to insure and make sure your customers understand the need to disclose known title defects, the case is a reminder of the importance of properly recording insured documents. "Cover Record" searches or post closing title continuation are of utmost importance prior to the issuance of a policy. The indices must be checked to make certain that the instruments to be insured are properly indexed. Recording alone will not impart constructive notice, if the instrument cannot be found via the indices.