Shotmeyer v. New Jersey Realty Title Ins. Co., --- A.2d ----, 2008 WL 2355781 (N.J.).
Reversing a decision of the court of appeals, the New Jersey Supreme Court has held that a voluntary conveyance terminates the policy. The New Jersey Land Title Association weighed in on the case.
Facts
In 1981, a partnership took title to land, the deed reciting the grantee as "Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership." New Jersey Realty Title Insurance issued a policy reciting the insured exactly as shown on the deed. Eleven years later, the general partnership conveyed to Beaver Run Farms, L.P., for estate planning purposes. The general partnership continued to operate and had other assets.
Charles Shotmeyer says that in late 2001, about ten years after the deed, he noticed on a tax bill that the acreage for the property had been reduced from 24.7 to 12.68 acres. He later learned that two judgments had been filed with the Sussex County Board of Taxation on April 24, 2000, declaring that the missing 12.02 acres belonged to a neighboring lot. He made a claim under the policy. New Jersey Title sent a letter acknowledging that the issue "may well present a compensable event." It investigated the claim, appraised the property, and offered $43,000 in settlement. The Shotmeyers rejected the offer and later sent an appraisal valuing the 12.02 acres at $900,000. When New Jersey Title refused to pay, Beaver Run Farms, the general partnership, sued.
In its answer, New Jersey Title raised the defense of policy termination. This prompted an amended complaint listing the limited partnership as a plaintiff also. The trial court granted summary judgment to New Jersey Title on the policy termination issue. The court of appeals reversed in 2007. See 2007 WL 283661 (N.J.Super.A.D.) (unpublished) [March, 2007 issue]. It ruled that the two partnerships were mere alter egos of the brothers, who were the sole partners in each entity, and therefore should be disregarded to avoid "the absurdity that results when form is exalted over substance."
New Jersey Title appealed, and the Supreme Court accepted the petition. In a thoughtful and well-researched decision, it reversed, and held that the policy was terminated.
Beneficial Interest Debunked
The court first addressed Charles Shotmeyer's argument that he and his brother were always the real insureds (Henry Shotmeyer passed away while this case was pending). Shotmeyer's first argument was that his name was typed on Schedule A, and that made him an insured. The court held, however, that the New Jersey partnership statute specifically states that land is property of a partnership if it is acquired in the name of "one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner." N.J.S.A. 42:1A-12(a)(2). It concluded: "[t]hat is what occurred here.
[T]he property belonged to the partnership and not the brothers as individuals." The court also held that the Shotmeyers as individuals were not insureds, though listed on Schedule A in their partnership capacities, because they did not hold insurable interests in the real estate. "The brothers had no ownership or insurable interest in 2000 and therefore cannot recover under the terms of the 1981 title policy."
The court next held that the Shotmeyer brothers were not the real owners of the property on its transfer to the limited partnership. It again recited New Jersey statutes holding that, when title is vested in a limited partnership, the partners are not the owners. "Thus, after the 1992 conveyance, and at the time of the loss in particular, the limited partnership owned the land. The Shotmeyers, as individuals, never had an ownership interest in the property."
The court also rejected the Appellate Division's alter ego analysis. It reviewed Gebhardt Family Inv., L.L.C. v. Nations Title Ins. Of N.Y., Inc., 132 Md.App. 457, 752 A.2d 1222 (Md.Ct.Spec.App. 2000), which had also rejected that notion. First, it said, the entities were not mere shams but real entities. Second, the entities were formed for legitimate and different purposes. The limited partnership in particular was an estate planning vehicle which provided protection against personal liability. Third, the "alter ego" doctrine is used to pierce the corporate veil on behalf of a creditor, when property has been transferred to defeat justice, perpetrate fraud, accomplish a crime, or otherwise evade the law. It is not a tool to be employed by the principals to disregard their own entity.
Here, the Shotmeyers set up different, legitimate business structures to further their personal and business plans. They did not use their partnerships to commit fraud or defeat the ends of justice. The alter ego doctrine, therefore, does not apply.
In response to the partnerships' argument that the insurer's risk was not increased by extending the duration of the policy, the court gave a clear explanation of the importance to title insurance underwriting of having policies terminate to retire liability:
[O]ne-time title insurance premiums, unlike regular casualty policy premiums, are based in part on the time of exposure to risk. The Chancery Division has addressed this issue as follows: A title insurance company which issues a policy providing coverage so long as the insured retains any liability with respect to the insured property would be obliged to increase its premium for that coverage, not because of any change in risk, but because of an increase in the time of its exposure to risk. [Sylvania v. Stein, 177 N.J.Super. 117, 123, 425 A.2d 701(Ch.Div.1980) (emphasis in original).] Therefore, allowing coverage to continue when a tract of land is conveyed to a different legal entity effectively extends the time of exposure and the risk to the insurer. Ordinarily, parties to an insurance contract should be able to ascertain who is covered by looking to the plain terms of the policy. In the event of a genuine ambiguity, litigation may be necessary. Use of a "beneficial interest" test to determine the owner of a policy, however, may allow a party to "create" ambiguity in an otherwise clear situation.
Successor Liability
The court also rejected the partnerships' argument that the continuation provision extended the policy, because the transfer to the limited partnership was "by operation of law." Paragraph 2 of the policy says that the policy continues in effect after a transfer "by operation of law," as distinguished from a "purchase."
The court noted that "when title is passed by 'operation of law,' the change is automatic or involuntary." It cited the leading case on that subject, Pioneer Nat'l Title Ins. Co. v. Child, Inc., 401 A.2d 68, 70 (Del.1979), which said that "operation of law" refers to those in which "a party acquires rights without any act of his own." It contrasted Child, which involved a voluntary deed from one entity to another, with the lead case on transfers by operation of law, which is a New Jersey case. In Historic Smithville Dev. Co. v. Chelsea Title & Guar. Co., 184 N.J.Super. 282, 291-93, 445 A.2d 1174 (Ch.Div.1981), aff'd,190 N.J.Super. 567, 464 A.2d 1177 (App.Div.1983). A transfer of assets from a dissolved corporation, pursuant to a plan of liquidation, was found to occur by operation of law.
The court said the deed to the limited partnership was not a transfer by operation of law. The transfer was voluntary and complete. "As a result, all financial obligations were transferred from an entity in which the individual members were personally liable to one that shielded them from liability." In addition, the limited partnership "did not take over all of the general partnership's business; it assumed ownership of just the one piece of property." The general partnership continued to exist and carry on business. The court noted that one commentator finds that factor significant in militating against an involuntary transfer:
As one treatise explains, "the continued independent existence of both the named insured corporation and the grantee subsidiary or sister corporation" may suggest "that the grantee did not take by 'operation of law' as a 'corporate successor.' " Palomar, supra, § 4.13 (emphasis in original). All of those considerations lead to the conclusion that the property was not transferred by "operation of law." Accordingly, plaintiffs are not covered under the express terms of the policy.
Warranty Liability
The partnerships also tried to invoke the continuation clause's provision for warranty liability. However, the court noted that the deed to the limited partnership was a special warranty deed and covered only the acts of the general partnership. Thus, the warranty was not breached.
No Waiver
Finally, the court agreed with the Appellate Division that New Jersey Title's offer to settle the claim "was in no way a waiver of any policy defenses it might have." The court said that the offer was not a "voluntary and intentional relinquishment of a known right."
The court concluded with sound advice for all real estate practitioners:
This case highlights the need for special care when transferring assets as part of an estate plan. Particular attention must be given to title insurance policies when real property is transferred.
This decision is entirely in line with the remarkably consistent decisions from many other states on the issue of policy termination. Thanks to subscriber Dennis M. Gonski, Esq., of Dollinger, Gonski & Grossman, counsel for New Jersey Title, for alerting the editor to this important decision.
