In the November 2022 matter of Shah v. Fidelity National Title Insurance Company, No. A165816, LEXIS 7239 (Nov. 30, 2022), the California First District Court of Appeal (“the Court”) issued a decision interpreting a “Continuance of Insurance” Condition in the Standard ALTA Owner Policy against a unique factual backdrop involving adverse possession, invalid title transfers, and the after-acquired title doctrine, ultimately affirming the Condition justified the denial of an insured’s title claim where the insured son’s trust had voluntarily transferred his title to the property to a separate trust with his parents as trustee.
The origin of this matter dates back to 1959, at which time non-party Mary Silva obtained a life estate in an open tract of grazing land in San Jose (“the Property”), which was to pass to her heirs as the remaindermen upon her death. In December 1995, she contracted to sell the Property to Plaintiff Jay C. Shah (“Plaintiff”), executing a grant deed transferring her interest to the “Jay C. Shah Living Trust” (“the Trust”). During the sale process, Ms. Silva never informed Plaintiff she only held – and he was thus only purchasing – a life estate interest in the Property.
As part of the sale transaction, Defendant Fidelity National Title Insurance Company (“Fidelity”) issued Plaintiff a title insurance policy containing a standard ALTA “Continuance of Insurance” Condition (“the Condition”), which provided that post conveyance, coverage would continue “in favor of an insured only so long as the insured retains an estate or interest in the land.” Ms. Silva died in May 2002, with title to the Property passing to her heirs upon her death. However, the heirs never took possession of the Property, and in June 2002, Plaintiff, as trustee of the Trust, recorded a grant deed transferring the property to his parents in their role as trustees of their own trust, the “Shah 1978 Revocable Trust.”
In September 2007, Plaintiff borrowed $350,000.00 against the Property from a private lender using a deed of trust as the security instrument. Plaintiff was unable to repay the loan when it came due nine months later, causing the lender to record a notice of default and set a trustee’s sale for February 2009. In January 2009, Plaintiff attempted to refinance to avoid foreclosure. During the refinancing process, Ms. Silva’s life estate and Plaintiff’s corresponding defect in title was discovered by the escrow title holder company, which disclosed the defect to Plaintiff and refused to issue title insurance to the proposed new lender. The refinancing then fell through and the Property was sold via a February 2009 trustee sale.
Quiet Title Action and Title Claim Denial
In March 2009, Plaintiff brought a quiet title action alleging he had obtained ownership of the Property by having adversely possessed it from the time he first obtained an interest in December 1995, claiming that since his purchase he had used and maintained the Property, paid taxes concerning it, rode horses on it, entered an agricultural lease to allow a rancher to have livestock graze upon it, collected rent generated by the Property, and had never actually surrendered possession of the Property to his parents despite the June 2002 transfer.
Simultaneous with filing suit, Plaintiff also tendered a claim to Fidelity for coverage of his quiet title action. Fidelity denied this claim, quoting the Condition and citing that Plaintiff’s transfer of the Property to his parents had terminated coverage, as post-transfer Plaintiff was “no longer the owner of an estate or interest” in the Property and Fidelity accordingly no longer owed him any contractual obligation under his title policy. Plaintiff’s quiet title action was ultimately settled, with Plaintiff incurring $135,000.00 in total expenses in connection therewith.
The Coverage Action
A. The Trial Court Decision
In June 2011, Plaintiff brought an action against Fidelity for its denial of his claim, alleging Fidelity’s actions constituted breach of contract and breach of the covenant of good faith and fair dealing. Fidelity ultimately prevailed via summary judgment, with the trial court holding its interpretation of the Condition was correct and its denial justified, as coverage had been terminated when Plaintiff voluntarily transferred the Property to his parents.
However, the mechanism of this termination was hardly straightforward. The trial court explained that Plaintiff had indeed obtained title to the Property via adverse possession, finding Plaintiff’s adverse possession period began to run upon Ms. Silva’s death, with title vesting in May 2007 – five years after her death, as California’s adverse possession statute only requires five years of use. Upon vesting, title then passed directly to Plaintiff’s parents via the after-acquired title doctrine, which provides that when unvested title is transferred, but then later vests, the newly-vested title passes directly to the transferee of the unvested title. Thus, when Plaintiff had filed his March 2009 lawsuit, he held no title and was owed no coverage by Fidelity.
B. The Appeal
Plaintiff appealed the grant of summary judgment to the Court, which ultimately affirmed both the outcome and reasoning of the trial court. The Court began by confirming that while Plaintiff’s June 2002 transfer to his parents was ineffective at the time it was performed – as his life estate interest had expired and he held no title to transfer – upon the vesting of title via adverse possession in May 2007, the prior June 2002 conveyance became valid, title immediately passed to his parents via the after-acquired title doctrine, and the Condition was triggered terminating title coverage as Plaintiff no longer held any interest in the Property.
The Court also interpreted and commented upon the Condition’s “estate or interest” language, concluding that the language was “not ambiguous” and was clearly consistent with the very “purpose of title insurance,” which is the provision of “title protection,” not “occupancy” protection or the protection of a “right to collect rents or profits.” Thus, when Plaintiff transferred title and no longer held an “estate or interest” in the Property, there was no longer any “title” for Fidelity to protect, and the termination of Plaintiff’s policy was justified.
While this Opinion primarily affirms the strength and validity of “Continuance of Insurance” obligations, it also demonstrates that a trust is capable of possessing property for purposes of adverse possession, and that once title vests following a prior transfer of unvested title, the transfer will be deemed effective as of the vesting date and will not be back-dated to the original transfer date.
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