What an Owelty is NOT

 Did Someone Just Conflate the Special Warranty Deed with Encumbrance for Owelty of Partition with the Deed of Trust to Secure Assumption?

Have you ever seen this? A total misunderstanding and misapplication of the Owelty lien. This scenario illustrates what the Owelty lien IS NOT. And, using definition by negation, perhaps we can clarify even more exactly what the Owelty is.

I get questions through my blog from divorced/divorcing homeowners all the time. This is one of those homeowners’ issues. So, I asked the homeowner if it was okay to share their story. The response was typical - “Yes feel free to use us as an example. I would be glad to help educate to prevent others from dealing with the same issue.” I am discovering more and more that divorcing people want to share their story. I’m here to make sure when they tell their story of their case with you that it’s a positive one!

By the way, Texas is the only state that secures a divorce buyout with a lien on property. You may have an opinion as to whether that’s good, bad or indifferent. But, I think it’s pretty cool. Why?

1. Because it helps to define exactly what a “home buyout” in a divorce should be – an agreement about what INTEREST one party has in the property rather than how much equity there is or how much equity one person “gets.”
2. Because it encumbers the property rather than the person. Other states do not necessarily encumber the person rather than the property – depends upon state law, title insurance and title search processes; but, without lien language you do not have the same level of security in a property; and you can effectively have a judgment against a person rather than a lien against the property.
3. Because it encumbers the property with the same type of encumbrance as a vendor’s lien, the strongest security (by legality) one can have in a property. Well, second only to an IRS lien which I do not consider as by legality but as by fiat. That is to say, they have bigger guns than you have.
4. Because it makes the financing of it so much more straightforward and simple (once the lender understands the nature of the Owelty lien). Liens have to be satisfied at time of transaction (sale or refi) – that makes it very straightforward.

But, what happens when the family law attorney doesn’t understand the Owelty and seeks to use it to secure something other than an ex-spouse’s interest in the marital residence?

Here’s the situation:

Ex-wife (from a 2012 divorce) is trying to sell her house 6 years, now, after final divorce. The title company notices something in their search and sends her the following email:

Attached is a copy of our title commitment and a copy of the special warranty deed that was executed by John Doe.

I have reached out to our underwriter in regards to item #7 on schedule C of the title commitment (page 11) to see what we need to do to clear this requirement.

An owelty lien is debt or money owed to the spouse that is created in the divorce decree. I didn't see any mention of that upon review of the decree.

I will let you know what I find out ASAP. Thanks so much!

 

What does #7 in the title commitment say? Here it is:

7. Record a Release of Owelty Vendor's Lien retained in Deed:

Grantor: REDACTED

Grantee: REDACTED

Dated: APRIL XX, 2012

Recorded: APRIL XX, 2012, in COUNTY CLERK'S FILE NO. 2012XXXXXX, of the Official Public Records, Harris County, Texas.

We do not find a[n] Owelty Deed of Trust record securing said lien.

Get this. Without the creation of an Owelty of Partition within the decree, a Special Warranty Deed with Encumbrance for Owelty of Partition was filed. I saw it. Both parties signed it. Evidently, no one explained to either of them what it was. Apparently, the attorney who prepared the document didn’t know what it was either.

I noticed that the attorney who functioned as the trustee “…has been suspended by the State Bar of Texas for an Administrative reason” but has no history of disciplinary action. We might breathe a sigh of relief that a lack of understanding the Owelty is NOT grounds for disciplinary action.

[I may reach out to this attorney and try to help him/her with the matter going forward….maybe I’ll just sneak their name on this email list and start sending my blog articles, eh. ?]

So, what did the SWD actually say? [I changed names, numbers and identifying information; emphasis mine.]

First of all, it was titled

Special Warranty Deed with Encumbrance for Owelty of Partition

Then, after the standard recitation of names and addresses and who was who, it began.

Consideration: Ten dollars…blah blah blah…hereby acknowledged, and:

1. Grantee's assumption of and agreement to pay the unpaid principal and earned interest on the note in the original principal sum of $250,000.00, dated on or about 9/28/XXXX, executed by Grantor and Grantee, payable to the order of ABC Mortgage Co., and secured by a deed of trust dated on or about 9/28/XXXX, from Grantor and Grantee to Trusty Old Trust, Trustee, as is recorded in the real property records of Tombstone County, TX, at 2XXX-1234567;

[This is the underlying first mortgage on the subject property.]

2. Grantee's agreement to indemnify and hold grantor harmless from payment of the note described above and from performance of Grantor's obligations specified in any instrument(s) securing payment of the note;

[Recognize everything so far? Well, get this…]

3. The execution and delivery by grantee to grantor of one certain real estate lien note in the principal amount equal to the balance on the aforementioned note on the date of the PARTITION OR EXCHANGE AGREEMENT NUMBER 1 BETWEEN JANE A. DOE AND JOHN R. DOE, payable to the order of grantor, and secured by a vendor's lien, a lien for owelty, and superior title retained and additionally secured by a deed of trust executed by grantee herein to F. Lee Bailey, Trustee; and…

There is more but that’s all that’s important for now.

This is a gross misapplication of Owelty interest and is basically a nonsensical document. I know what the attorneys were trying to do - secure the payment of the existing first mortgage with the filing of Owelty interest. Look at paragraph 3. The Owelty interest amount is set to reflect the underlying first lien. But, that is not what the Owelty lien is or what it’s for! It’s a total misuse of what an Owelty is.

The Deed of Trust to Secure Assumption is probably what the attorney had in mind. But, even the DOTSA does not “secure payment” in the sense that a security instrument (mortgage / deed of trust) does. The only document that secures payment is a promissory note. The deed of trust secures the lender’s interest in the property and, by extension, entices payments from the homeowner. “You pay, you stay” the escrow agent tells the home buyer as they execute the lender’s deed of trust.

Therefore, I told the client, the title company will probably be satisfied if your ex will sign a Release of Lien. This is astounding and is an illustration of how little is known about the purpose of an Owelty.

For now, I offer my insights free of charge – sort of as a public service. Well, I do get something in return – some satisfaction in reading….

"Thank you so much for your prompt reply! I was really unsure on who to turn to for answers to this question. I was simply afraid that I would somehow be forced to split the equity in half."

Jane Doe

Conclusion: An Owelty Lien is not for enticing a homeowner to pay a debt. Only a promissory note and the threat of repossession (foreclosure and sale) of the asset does that. An Owelty lien is a co-parcener’s (as an ex-spouse’s) interest in a marital residence.

Now….

Philosophical Meanderings on Lien Theory

Lien theory is based upon ideas of property and property rights considered by most to be the foundation of a free and democratic society, indeed, of modern, first world civilization itself.

When the founders of the country declared their independence from Britain, they did so upon foundations. They were unalienable rights from which no power could separate humans.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

It is the last of these 3 rights that are cited which form the basis of lien theory and property rights. One of the first drafts of these rights was “Life, Liberty and Property;” the “property” referring singularly to property rights. Specifically, a property right was the right of a person to enjoy the fruits of his own labors, that which he secured by the work of his hands and the purchase with his own resources. Unless there is a right to property, there is no such thing as theft. One may freely take whatever he might wrest from the holdings of another. One should readily see why property rights form the basis of western civilization.

Missionaries to certain other cultures noted that “theft” was rampant among the indigenous peoples. They might “steal” a bar of soap, an article of clothing, food, anything. The more the missionaries learned about the culture, the more they realized that those people had no concept of property rights and, thus, no concept that “stealing” something was immoral. No one owned it. It was there for the taking and using.

This also explains why it’s hardly accurate to say that Europeans came to the new world and stole land from the native peoples and tribes. Larry Schweikart concluded (A Patriot’s History of the United States) that when colonists purchased land from Indian tribes, the natives were “selling” land which even they didn’t think they “owned.” One cannot be sure who was getting the better end of that deal. But, one thing for sure – the purchasers were much more steeped in the ideas of English property rights than were the native populations.

Schweikart makes another powerful observation. It was the English idea of property rights (including intellectual property rights) that was as responsible as anything for the ascendancy of the English and Dutch over the Spanish and French who had a century head start in the new world with many times the resources of the English. Why did the English gain over the Spanish and French? It was, Schweikart concluded, English ideas of business and property rights.

Western countries were not necessarily the first to invent or use technologies. Often, eastern cultures discovered and invented centuries before western cultures would discover, invent or use. So, why did the west overtake the east? The development of the idea of property rights.

Liens are called “security.” A mortgage is not a promissory note. Only a promissory note is a promissory note for repayment of a debt. The mortgage – some states do not use the term “deed of trust” but, rather, “mortgage” - is the instrument that secures a lender’s interest in a real (dirt underneath it) property. Without a lien, whoever “squats” on dirt controls that dirt. It’s the law of the jungle that says “possession is nine-tenths of the law.” Proper, legal liens make that statement untrue.

Thus, we have western civilization…and property financed with relative ease and confidence by people and institutions.