California Appellate Court Affirms That Title Insurance Policy Terminated When Individual Insureds Transferred Title to Their LLC

The California Court of Appeals recently affirmed that a title insurance policy was terminated when the insureds sold the property to their LLC, and that the policy was not reinstated when they rescinded this transaction. See Pak, v. First American Title Insurance Company, 2020 WL 6886551 (Cal. Ct. App. Nov. 24, 2020).  Plaintiffs purchased a commercial property in 2003 in their individual names, and obtained a title insurance policy from defendant.  In 2008, plaintiffs conveyed the insured property to an LLC of which they were the sole members.  In 2017, someone purchased a neighboring lot and informed plaintiffs that the insured property was burdened by an irrevocable easement in the neighbor’s favor that allowed the neighbor to use the parking lot on the insured property.  Plaintiffs then made a claim with defendant, which defendant denied because the 2008 sale to the LLC terminated coverage under the policy.  Plaintiffs then rescinded the 2008 quitclaim deed, but defendant again denied coverage.  Plaintiffs brought this action, and the trial court dismissed it and found there was no coverage under the policy because plaintiffs sold the property to the LLC.

On appeal, the Court affirmed. Under Condition 2 of the Policy, coverage “shall continue . . . in favor of an insured only so long as the insured retains an estate or interest in the land . . .”  The Court found that “[b]ecause it is well established that a limited liability company is an independent legal entity and the members of such a company have no interest, much less a fee interest, in the company’s property, the transfer of the Property to the LLC triggered Condition 2 and terminated the Policy.”  Second, the Court found that the rescission of the quitclaim deed did not restore coverage because coverage immediately terminated upon the 2008 conveyance.  “The subsequent rescission of the quitclaim deed did restore the Paks and the LLC to their pre-contract statuses vis-à-vis each other, but it did not erase the consequences and effects of originally executing the quitclaim deed, including the violation of Condition 2 and termination of coverage.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Andrew Raimondi at araimondi@riker.com.