from the May, 2001 issue of The Title Insurance Law Newsletter
The title insurance policy terminated on the deeding of Illinois land trust property to a corporation controlled by the beneficiaries, and a second deed to the beneficiaries. This two-step process was not a distribution within the policy definition of successor insureds. The court gives a very clear statement as to what is a "purchase" as opposed to a transfer "by operation of law."
Facts
Joseph, Paul and Giovanni Butera formed a land trust and conveyed property in suburban Chicago into the trust in 1986. Attorneys' Title Guaranty Fund (ATG) issued a policy to the trust company trustee. Giovanni assigned his beneficial interest to Joseph and Paul. Several years later, Joseph and Paul instructed the trustee to convey the property to Joe and Paul, Inc., a corporation they controlled. The corporation deeded to Joseph and Paul two years later, and then dissolved.
The Buteras later learned that there were outstanding taxes from 1978. They submitted a claim to ATG, which denied the claim on the basis that the policy had expired. The Buteras sued for declaratory judgment. The trial court gave summary judgment to ATG, which was affirmed on this appeal.
Purchase or Distribution?
The Buteras' first argument on appeal had to do with the dichotomy between transfers "by operation of law" as opposed to "purchase," as found in the definition of insured in Conditions & Stipulations 1(a):
'insured': the insured named in Schedule A, and, subject to any rights or defenses The Fund may have had against the named insured, those who succeed to the interest of such insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors.
The Buteras argued that each deed was a different kind of "distribution," and therefore fell within that enumerated example of a transfer by operation of law. The Buteras asserted that the deed to the corporation was a distribution from the trust. The court noted that the policy lacked a definition for "distributee." However, it found no basis in law for this claim:
While the Policy uses the term generally, a distribution from a trust does have a specific meaning. Black's Law Dictionary defines a trust distribution as "[t]he cash or other property paid or credited to a trust beneficiary." Black's Law Dictionary 488 (7th ed.1999). Here the first transfer was a distribution not to the beneficiaries of the trust but, rather, to a separate entity, Joe and Paul, Inc. The Buteras do not cite any case or statute to support their claim that the trustee distributed the property to the corporation as a distribution by operation of any law.
The Buteras also claimed that the deed from the corporation to themselves was a distribution by a dissolving corporation, and controlled by Historic Smithville Development Co. v. Chelsea Title & Guaranty Co., 184 N.J.Super. 282, 284, 445 A.2d 1174, 1175 (1981) aff'd in part & rev'd on other grounds, 190 N.J.Super. 567, 464 A.2d 1177 (1983). In Historic Smithville, the court found that a deed from a corporation to its sole shareholder, issued on the dissolution of the company, was a distribution of the asset and the grantee became the insured. In response, ATG pointed the court to Pioneer National Title Insurance Co. v. Child, Inc., 401 A.2d 68 (Del.1979), which came to essentially the opposite conclusion on similar facts.
The court found that Historic Smithville would apply in this case if Joe and Paul, Inc. had been the named insured. However, the Buteras had not cleared the hurdle of establishing that the corporation was the insured. Therefore, it did not matter whether or not the second deed would terminate the policy.
What is "Purchase"?
The Buteras also argued that their deeds were by operation of law, because the plain and ordinary meaning of "purchase" denotes a transfer only for valuable consideration and, therefore, "by operation of law" means every method of acquiring property that is not for valuable consideration.
The court found equally reasonable, however, ATG's view that "'purchase' in real estate law covers any acquisition of title by the voluntary act of the parties." The court turned to a basic but trusted reference work to support this position:
Black's Law Dictionary provides two definitions for "purchase": (1) "[t]he act or an instance of buying" (A purchaser is one who obtains property for money or other consideration) and (2) "[t]he acquisition of real property by one's own or another's act (as by will or gift) rather than by descent or inheritance." Black's Law Dictionary 1248 (7th ed.1999). Because "purchase" is able to be defined in at least two different, reasonable ways, we find the term to be ambiguous.
Purchase is Deed to Stranger
The court was looking for a general principle to guide it, and to reconcile the seeming inconsistency in cases such as Historic Smithville and Child. ATG supplied the principle, and the court adopted it:
At oral argument, ATG attempted to reconcile these cases with the various terms within the policy language in question. ATG contends successors "by operation of law" under the Policy are those who acquire enforceable property rights without the necessity of conveyance of a deed, as distinct from those who purchase property where paper title changes hands. In each of the examples provided in the Policy, the individuals or entities have relationships to the named insured that preexisted the exchange of title. The "heirs," "devisees," "corporate successors," etc., are successors of the named insured because they take the property not from the insured, but through the named insured by operation of law.
We agree that this interpretation of the policy language gives meaning to all the terms in the provision and fulfills the intent of the parties. It is also consistent with the results reached by the Historic Smithville and Child courts. In Child, the property was deeded by the named insured Child Foundation to the du Ponts, who then deeded it to another entity, Child, Inc. Applying our interpretation, it becomes clear that Child, Inc., was a stranger to the property, having no preexisting relationship to either the Child Foundation or the du Ponts. On the other hand, the property in Historic Smithville was transferred to the shareholders and through the named insured corporation based on their relationship to the corporation.
This interpretation also correlates with public policy. Title insurance is an unusual type of insurance. It is not a recurring policy: there is a single premium, and the policy remains outstanding forever to protect the property owner. Black's Law Dictionary 808 (7th ed.1999). In its definition of "insured," ATG's title insurance policy anticipated changes in the title owner of the insured property, and, thus, changes in the named insured. The Policy, however, placed limits on who could obtain the property and still remain insured under the Policy. Our interpretation of successors "by operation of law" restricts the definition of "insured" to certain foreseeable groups of individuals. Transfers by purchase, on the other hand, would expose the insurer to significantly greater risk because the number of possible transferees is limitless.
Applying this rule to the case at hand, the court ruled:
We find Joe and Paul, Inc., was not a successor to the interest of the Trust by operation of law. The corporation was a stranger to the property with no preexisting relationship to the Trust when the named insured trustee deeded the property to it. While the Buteras received the property as shareholders of a dissolved corporation, the corporation was not a named insured under the Policy and, therefore, the Buteras were not named insureds.
The Buteras also argue that they qualify as "insureds" under the Policy due to the "Continuation of Insurance after Conveyance of Title" section. That paragraph states that "coverage of this policy shall continue in force as of Effective Date of policy in favor of an insured so long as such insured retains an estate or interest in the land." The Buteras argue that, as beneficiaries of a land trust, they are the true "owners" of the property and clearly retained an interest in the land.
Because the Trust relinquished its interest in the real estate when the trustee deeded the property to Joe and Paul, Inc., we need not reach the question whether the Buteras possessed an estate or interest in the property as beneficiaries of the Trust. In this first conveyance, the named insured did not retain an interest in the property. Additionally, as shareholders of the corporation, the Buteras' interest was limited to a share of the profits and the losses of the company and the right to receive a proportionate share of the dividends and assets upon dissolution. In Illinois, the interest of a shareholder in a corporation is deemed to be one in personal property. Sawko v. Dominion Plaza One Condominium Ass'n No. 1-A, 218 Ill.App.3d 521, 531, 578 N.E.2d 621, 627-28 (1991). We find coverage under the Policy was not continued to the Buteras after the title was conveyed.
Congratulations to the founding editor of this Newsletter, Robert E. Ellis, and his client on their victory in this very quotable decision.
Butera v. Attorneys' Title Guar. Fund, Inc., ___ N.E.2d ___, 2001 WL 314663 (not yet released for publication).
© Copyright 2001 J. Bushnell Nielsen. All rights reserved. Photocopying or reproducing of this article in any form in whole or in part is strictly prohibited without the publishers consent.
