ALI-ABA Course of Study Commercial Real Estate Defaults ...

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3.6.5 Claims to Unpaid Proceeds and Retainage Under Construction
Contract.
State law will determine whether or not earned but unpaid construction
consideration and retainage are assets of a debtor in a Bankruptcy Code
proceeding. 60 Payments held by the federal government as owner of a
construction project do not become part of the bankruptcy estate and, as a
result, may be available to a bonding company or other claimants such as
subcontractors. 61 Language of contracts may determine relative rights of
the parties to undisbursed contract proceeds. 62
3.7 Permits, Governmental Licenses and Approvals, Zoning, Subdivision,
Environmental and Other Land Use Documentation.
Review documents and opinion letters to be sure the mortgaged property is zoned
for current intended use and that the current or intended use is authorized as
required by local law. A mortgagee's taking title by a foreclosure or deed in lieu
thereof to improperly permitted property may subject the lender or its personnel to
civil or in some cases to criminal proceedings.
3.8 Title Insurance Policy and Marked Up Title Report or Commitment. 63
3.8.1 Review
Was policy actually issued Is the policy as issued consistent with marked
up report Any special endorsements Compare title policy descriptions
with closing documents. Compare a current title report with the policy
issued for closing.
3.8.2 Liability Theories
It has been held that a title insurer may be held liable for failure to disclose
a title defect of which it has knowledge even if the defect is of the type
excluded by the terms of the policy. 64
60 Universal Bonding Ins. Co. v. Gittens & Sprinkle Enterprises,. Inc., 960 F.2d 366 (3rd Cir. N.J. 1992); Mullins v.
Burtch, 249 B.R. 360 (D. Del. 2000) Criticized at 368 although it is followed in part at 371.
61 Pearlman v. Reliance Insurance Co., 371 US 132 (1962). 9 L.Ed 2d 190, 83 S.Ct., 232. See also, North Am.
Speciality Ins. Co. v. Chichester Sch. Dist., 2000 U.S. Dist. LEXIS 10745 (E.D. Pa. 2000), Ins. Co. v. United States,
243 F.3d 1367, 1375 (Fed.Cir. 2001).
62 See In re Modular Structures, Inc., 27 F.3d 72 (3rd Cir. N.J.1994); Pics No. 94-0899; Stevlee Factors, Inc. v. State,
136 N.J.Super 461, 346 A.2d 624 (N.J. Super. Ct. 1975).
63 See discussion also at Item 1.6.
64 Crawford v. Safeco Title Ins. Co., 585 So.2d 952 (Ct. of App. 1st Dist. 1991).
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