Too Big To Underwrite? The Loss of Creditors' Rights Coverage, and What's Next

Kathleen Carpenter — Sun, 14 Mar 2010 23:38:51 -0800

The current economic crisis has just suffered another casualty: the standard form creditors' rights coverage. Creditors’ rights coverage is often viewed by lenders to be one of the most important risk management tools when negotiating title insurance coverage. That’s because the ability to purchase creditors’ rights coverage permits the shift of the risk of loss to the title company for any “covered” real property asset. More specifically, it provides coverage for the losses incurred where the subject transaction is voided by a bankruptcy or other applicable insolvency laws. Moreover, it also provides coverage for significant costs incurred in defending fraudulent conveyance or other preference challenge-type claims

While this is not a shocking development, as the availability of the coverage has been diminishing over time, it’s a significant jolt. When did this occur? Recently, The American Land Title Association (ALTA) actually decertified the ALTA Endorsement Form 21/21-06, which provides an insured with coverage against challenges and claims arising out of insolvency-type claims. This decertification went into effect on March 8, 2010. In fact, most title companies have already advised clients that they will no longer offer creditors’ rights coverage under new policies, and not will such endorsements be added to existing policies. Keep in mind, however, that decertification of the ALTA 21 does not mean that title companies cannot continue to offer creditors' rights coverage, unless prohibited by state law. Even if title insurance companies offer a special endorsement in the future, the level of coverage it will provide is unclear, and it will be likely be more expensive the ALTA 21 Endorsement.

How does this affect existing and future transactions? This change has already affected existing transactions and has indeed prevented some deals from closing. As to future transactions, without this coverage, lenders and buyers of distressed debt will need to perform even more extensive due diligence in order to better assess the risks of structuring transactions that could be subject to attack under applicable insolvency laws when entering into real estate purchase and/or financing transactions. Take a look at the factors title companies were examining when underwriting the insurance back in 2003. Borrowers will need to seek new advice to meet the changing expectations of their lenders. There is little information available as to which title insurance companies, if any, will offer cost-effective coverage. So for now, parties need to work to create new structures or transactional guarantees and alternative solutions to address the lack of creditors’ rights coverage. Now is a good time to update your title insurance checklist as part of your due diligence process because this may not be the only risk that has changed in the real new economy.Borrowers will need to seek new advice to meet the changing expectations of their lenders. There is little information available as to which title insurance companies, if any, will offer cost-effective coverage. So for now, parties need to work to create new structures or transactional guarantees and alternative solutions to address the lack of creditors’ rights coverage. Now is a good time to update your title insurance checklist as part of your due diligence process because this may not be the only risk that has changed in the real new economy.

Calling For YELP: How to Handle a Negative Review of Your Brand on The Internet

Kathleen Carpenter — Tue, 02 Mar 2010 05:11:09 -0800

Your company has been in business for two decades. One day you read a very negative review of your company on Yelp. Yelp is a fast-growing online review website whose stated mission is to make the world a better place by helping people to connect with great local businesses. However, the negative review of your company also contains damaging false and defamatory information, that could destroy a reputation that took you two decades to build. What to do? Suddenly just one disgruntled customer has a cyber megaphone.

Can you write Yelp and ask them to take the review down?

Well, you may attempt that route, but you are unlikely to have Yelp remove a review at your request. Part of the reason for this is that Yelp has come under fire recently for allegedly manipulating reviews when customers advertise on Yelp (removing negative reviews). These allegations are addressed in Yelp’s blog "Additional thoughts on last week's lawsuit, or how a Conspiracy Theory is Born.” Yelp has an informational blog that assists business owners in maintaining their online Yelp identity – allowing businesses to publicly post a business description, announce special offers, message customers, add photos, track traffic to your Yelp site and more.

In the case of a very disgruntled customer who took enough time to post a negative review, you need to assess the best and quickest course of action necessary to obtain retraction of the false and defamatory information. You must also proceed with caution, as you risk putting gasoline on a fire if you further inflame the customer.

For example, last year, a resident of an apartment owned by a Chicago developer complained on Twitter about mold in her unit and was immediately sued by the developer. The developer’s press release in response stated, “the company sues first and ask questions later.” Utilizing this tactic may undermine your company's reputation, whether on-line of off-line.

In a recent case, on behalf of a business I was successful in reaching out to a customer that posted a negative Yelp review and having the review taken down, without a lawsuit. Quick tips: In addition to customer satisfaction, consider joining the major social networks with a business membership and take advantage of the benefits. It should also be a part of your company's regular practice to monitor your online reputation and perhaps communicate with the irate customer that slipped through the cracks. Start monitoring now. Google is still free.

Crisis and Risk Management: The Legal Whiteboard

Too Big To Underwrite? The Loss of Creditors' Rights Coverage, and What's Next

Calling For YELP: How to Handle a Negative Review of Your Brand on The Internet