Creditors Rights Endorsement in New York

Title companies discontinued effective March 8, 2010 offering as a standard the American Land Title Association (ALTA) 21 endorsement, also known as the “creditor’s rights endorsement”. This provided New York lenders and owners with title insurance protection for losses or damages arising out of voidable estate or interest in property, including a mortgage, resulting from to a fraudulent transfer or preference under federal bankruptcy, state insolvency, or similar creditors’ rights law.

Bankruptcy Code Section 548 allows a bankruptcy trustee to invalidate pre-petition transfers made by a NY debtor where there was an actual intention to hinder, delay or defraud other creditors. The trustee may avoid transfer where the debtor received less than a reasonably equivalent value for the property transferred and (i) the debtor was rendered or became insolvent as a result of the transaction; (ii) was engaged in or about to engage in a business transaction for which had unreasonably small capital in relation to its remaining property; or (iii) intended or believed that it would incur debts beyond its ability to pay.

The NY creditors’ rights endorsement provided coverage for fraudulent transfers or preferences through the date of the title insurance policy, usually through closing or recording of the insured deed or mortgage. Bankruptcy Code Section 544 allows the bankruptcy trustee on behalf of unsecured creditors to avoid any transfer, in a liquidation proceeding, of an interest or obligation incurred by the debtor that is voidable under state fraudulent conveyance statutes.

The creditors’ rights coverage included the transaction being insured, payment of costs, expenses and attorneys’ fee incurred to defend the insured against claims. The coverage allowed purchasers and lenders to limit investigation of the financial condition of parties in the transaction, such as whether they were insolvent or had credit problems. If a creditors’ rights problem existed, the transaction can be avoided, leaving a purchaser without the property, or a lender without security.

Bankruptcy Code Section 547 allows a bankruptcy trustee to avoid a transfer made: (i) to or for the benefit of creditors; (ii) for or on account of an antecedent debt owed by the debtor before the transfer was made; (iii) while the debtor was insolvent; (iv) the timing of the transfer is generally within 90 days before the date of filing of the petition, or between 90 days and 1 year before the date of filing if the creditor is an insider of the debtor; and (v) the transfer enables the creditor to receive more favorable treatment than the creditor would have received absent the transfer.

Consult an experienced New York bankruptcy attorney on fraudulent transfers or preference claims.