1.60 Antecedent Debts

1.60.1

In General

The insurance of any transfer of property in which the owner of the land does not receive a present consideration but merely conveys or mortgages property to a creditor for the payment or as a guaranty for the payment of an antecedent debt, is extremely dangerous for a title insurance company, since such a transfer may be voidable as a preference under section 547(b) of the Bankruptcy Act. Section 547(b) reads as follows:

Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor--

  • to or for the benefit of a creditor;
  • for or on account of any antecedent debt owned by the debtor before such transfer was made;
  • made while the debtor was insolvent;
  • made--

o        on or within 90 days before the date of filing of the petition: or

o        between 90 days and within one year before the date of the filing of the petition, if such creditor, at the time of such transfer:

§         was an insider; and

§         had reasonable cause to believe the debtor was insolvent at the time of such transfer; and

  • that enables such creditor to receive more than such creditor would receive if:

o        the case were a case under chapter 7 of this title;

o        the transfer had not been made; and

o        such creditor received payment of such debt to the extent provided by the provisions of this title.

Transactions that intend to restructure, extend, guarantee, recast, or release old debts and create new liens on the property, thus converting previously unsecured debts into secured debts, are strong candidates for a voidable preference designation.

The concept of voidable preference (section 547(b)) and the concept of fraudulent conveyance (section 548(a)) are two separate and distinct problems, but because of the lack of precise and adequate information at the time of closing, it is not always possible to determine whether the transfer is part of a preference or fraudulent transfer.

Item 6 of the exclusions of the Texas Loan Policy of Title Insurance (T-2 and T-2R) contains a creditor's rights exclusion which cannot be amended or deleted. Call a Texas Underwriter if you or the proposed insured have questions about this exclusion.  Texas regulations do not allow deletion of this creditor's rights exclusion, nor is a creditor's rights endorsement available.

In 2011, the Texas Legislature added Section 2502.006 to the Title Insurance Code, providing that the Texas Insurance Commissioner can prohibit any title insurance company licensed in Texas from providing creditor’s rights coverage anywhere in the United States unless required by the law of that state.  The reason that the commissioner has this power is that creditor’s rights coverage could affect the solvency of a title insurer licensed in Texas and other states.  The Texas Title Insurance Guaranty Association would have liability to Texas policyholders should the underwriter fail because of this extra-hazardous coverage.

Note: Texas has never allowed creditor’s rights endorsements.