Posting for

Tuesday, November 17, 1998

by: Bert Rush

brush@firstam.com

GOVERNMENT FORFEITURES/SPECIAL WARRANTY/TITLE UNDERWRITING

Over the past ten years First American employees and agents have underwritten and insured countless real property sales after a government forfeiture. These forfeitures usually involve drug traffickers, who may be fugitives-in-hiding when we are asked to insure.

Despite the obvious risks, our claims experience in these cases has been generally good. But one claim stands out as an unfinished nightmare. Here's what happened.

Miguel Yanez and Serafina Garcia were co-owners and inhabitants of a home in Stockton (San Joaquin County), California. In February 1993 the local County Counsel filed a Complaint for Forfeiture against Yanez, Garcia and others, based on alleged violations of drug laws involving their property.

Yanez and Garcia filed responsive pleadings but, according to her attorney, by mid-May 1993 Ms. Garcia had stopped communicating or cooperating with his efforts to defend her. The attorney was relieved as counsel for Ms. Garcia by order of the court in October 1993.

Ms. Garcia was not further represented in the forfeiture action. In time her Answer was stricken due to her failure to appear and participate in court-ordered discovery, and in October 1994 the court entered a default judgment against Ms. Garcia. Ms. Garcia is believed to have gone to live in Mexico from December 1994 until late April 1995.

Meanwhile, the County obtained orders that the property was forfeited and could be sold at auction.

Ernest and Jeri (who are husband and wife) learned of this property from a pamphlet distributed by the auctioneer. They had purchased several drug-forfeited automobiles in the past--and never had a problem--so they considered bidding on the property.

The auctioneer assured Ernest and Jeri that if they were the successful bidders they would receive free and clear title. They got a preliminary title report (which disclosed an existing first mortgage to be satisfied through the auction) and, at auction, they out-bid nine other interested parties to take the property for $57,000. Of this purchase price, $45,600 was financed by a loan from Home Savings. First American issued an owner's policy to Ernest and Jeri for $57,000, and a loan policy to Home Savings for $45,600.

Ernest and Jeri promptly rented the property.

But within a few weeks Ms. Garcia filed suit to quiet title (among other things), claiming that she was in "innocent owner" without knowledge of any violations of drug laws, and that the forfeiture and subsequent auction were flawed and violated her constitutional rights.

First American hired outside counsel to defend the interests of its insureds--but it soon became clear this would be no simple task.

The first problem was that the default judgment, drafted by a deputy county counsel, referred to (and was therefore based upon) the wrong court order. So the attorneys for our insureds had to ask the court to amend the default judgment, nunc protunc--which was fine except that opposing counsel fought the amendment to the extent of taking the issue up on appeal.

Likewise, discovery in the case has been slow and arduous --to the extent that sanctions have been awarded against Garcia's attorney in an amount reportable to the State Bar.

To make a long story short--legal expenses in defense of our insureds now total $234,481--our motion for summary judgment has been submitted for decision for seven months--and there doesn't seem to be (nor ever have been) a time when we could have put this mess to rest for a reasonable settlement. Just your basic train wreck in slow motion.

What can we learn from this? First American has had good experience in these cases where we have asked for and received a warranty from the government agency giving a deed after a forfeiture. One particular case comes to mind, in Steamboat Springs, Colorado, where the forfeiture of a custom home valued at more than $600,000 (as I recall) was challenged. Fortunately, the U.S. Marshal's office included in the deed a special warranty against any claim arising from the conduct of the forfeiture action and sale. When the claim arose, we asked the U.S. to defend--and they have--without expense to First American or its insured.

This practice of the U.S. giving a special warranty has been approved as official policy--by a memo from Cary Copeland, Director and Chief Counsel of the U.S. Dept. of Justice, to all interested federal agencies, titled "Departmental Policy on Attorney General's Authority to Warrant Title," and dated February 12, 1992. For more information contact myself or Richard Flory in the Home Office Senior Underwriting Department.

And what assistance have we received from San Joaquin County? Zilch. We can't even tell if they're rooting for us. I'm told the deposition of the Deputy County Counsel involved was a disaster--he came off best when merely indifferent....

So let's pay heed to the special underwriting practices for government forfeitures--described in the Cole and Dimon article from Probate & Property (our posting for 11/13/98)--and don't hesitate to ask for a special warranty (at least where the U.S. is your seller).

Questions, comment, argument? Just press the "reply" button....

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The U.S.Department of Justice Memorandum (Directive No. 92-1)--referred to in our posting for Tuesday (11/16/98) and also referred to in the reply below, can be viewed by clicking on the URL immediately below. (Sorry for the quality of the copy--best we could dig up here--it prints better than it looks on-screen.)

Now then, following Tuesday's posting Jim Dondero (Grand Rapids, MI) writes:

I take it that the County did NOT give any kind of warranties in the Garcia case! I would remind the Savants that, as Bert has inferred, Federal agencies conveying title following forfeiture to the U.S.A. are authorized to give warranties of title under Sec. 3266 of the Crime Control Act of 1990 (which amends 28 U.S.C. Sec. 524(c). On February 12, 1992, the U.S. Department of Justice issued a Memorandum on the subject, which even authorizes those agencies to give INDEMNIFICATIONS or GENERAL warranty deeds under some "special circumstances" or if required in order to obtain title insurance (apparently recognizing the extra "value" in a marketable or insurable title).

I had a case several years ago (expensive property held free and clear and purchased with illicit proceeds by the forfeited party) where I held out for, and finally obtained a general warranty deed from the U.S. Marshal on this basis (the U.S. attorney and Marshal's office were not real happy when I was able to produce the Memorandum!).

Despite the fact that hindsight is always better than foresight, how do we justify the exorbitant legal expense in this case vis-a-vis policy limits? And I wonder whether the total aggregate premiums collected by First American on forfeiture re-sale policies is sufficient to cover our loss in just this one claim ??? We continue to insure them in Michigan, but query whether or not they are worth the risk (at least without warranty deeds or indemnities from the forfeiting governmental agencies).

Reply: I know this doesn't happen to you very often in Michigan (your claims experience has always been very good) but in many other areas (including many parts of California) it's sometimes hard to avoid getting whipsawed in litigation until you find you've paid more for legal expenses than the property is worth. We had one claim years ago in L.A.--which I worked on with then in-house counsel Harold Grossman--we insured a doctor whose decking encroached --I swear--if you ever found out how much we spent I'd have to kill you.

Part of the problem is the affinity of CA lawyers, particularly in years past--for bad faith insurance lawsuits. We've been sued for bad faith here BEFORE they send in the claim! And we've had concerns that the duty to defend might continue even after payment of policy limits (again, this is mainly in years past with prior policy forms).

On the other hand, we plan to make a claim for reimbursement to the County in the Garcia case--when the dust settles. I don't know how strong our case is legally (you're right--we didn't get a warranty)--but sooner or later they'll want to sell another forfeited property....

Meanwhile, Keith Pearson (Glendale/L.A.) writes:

I underwrote many forfeitures in Texas when I was counsel for First American in Houston. It seems we are one of the only companies that will do this kind of work. I found that so long as we had personal service and a good judgment that was non-appealable, or in the case of a default past the period to set it aside, there were no problems.

The only other factor I considered was the sympathetic plaintiff factor. Was the person losing their house a drug dealer or someone who could claim innocent status? ("Well of course I was surprised when I was given a house after dating Mr. Drug Dealer for only two weeks but we really were in love and planning on raising little drug dealers.") This got to be a problem where the drug dealer gives the property to his girlfriend's mother. In those cases a much closer review of the forfeiture case was done.

To the best of my knowledge, we did not have any claims in Texas during this time and still have not.

In the case you mentioned in your e-mail, we had a default with a faulty judgment but waited the proper amount of time. It seems that a court with some guts would put this case to rest, but you can always run into the nobody loses since there is a insurance company mentality. While I am not advocating paring back our approval of these transactions to cases where only the drug dealer is losing his house, I do feel we need to look closer where the sympathetic plaintiff is a possibility.

P.S. As an aside, have any of the US Attorneys helped us out with some of our fraud problems in light of the working relationship we have with them on these forfeitures?

Reply: Not that I know of. These Assistant U.S. Attorneys don't have much discretion to pick their causes. Typically the U.S. Attorney (a Presidential appointee) directs litigation in his or her office--sometimes with the advice of the head of a criminal or civil division. And, the U.S. Attorney in turn reports to the U.S. Attorney General....

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 Following up on last Tuesday's posting, and subsequent replies about assistance from prosecutors in connection with claims-handling, Troy Kelley (Glendale/L.A.) writes:

I have had some luck with the Central and Southern Districts in California. Mostly with AUS's I know through the military or my time with DOJ & SEC. Their investigations have applied some pressure, but each case was dropped before indictment - probably to ensure each AUS maintains a 100% conviction rate. I have had less success with the local DA's and AG's.

Reply: For those who don't know, an "AUS" is an Assistant U.S. Attorney--federal prosecutor at the U.S. District level. DOJ is Dept. of Justice, SEC is Securities and Exchange Commission. The rest is TV lingo (television, that is).