The New Jersey Supreme Court has recently handed down a decision that should be of interest to title insurance companies, lenders, real estate developers, and other property owners. In Henry J. Shotmeyer, et al. v. New Jersey Realty Title Insurance Company, the Court interpreted the effect of a voluntary property transfer on title insurance coverage. The Court examined the circumstances of the transfer and concluded that, according to the policy, the transfer of the property from one company to another, both owned by the same individuals, cancelled the title insurance policy. The Court’s decision highlights the fact that title insurance policies are contracts. Thus, coverage is limited to the terms of the policy. All interested parties should be aware of the possible effects of property transfers on title coverage when issuing or securing policies. One should not assume that when property is transferred between related entities that the title policy is also transferred, even if the parties involved are identical.
FACTUAL BACKGROUND
Two brothers, Henry Shotmeyer and Charles Shotmeyer, formed a partnership, Beaver Run Farms, a General Partnership, in order to purchase and develop real estate. In 1981, the partnership purchased a 24.7 acre tract of land. The deed recited the grantees as Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership. Subsequently, the Defendant, New Jersey Realty Title Insurance Co. (“New Jersey Realty Title”), issued a title insurance policy for the property.
The policy listed the insureds as Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership. The policy further specified that coverage would be extended to those that succeed in interest to the insured by operation of law, to wit:
The insured named in Schedule A and, . . . 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.
Further, the policy defined its duration in a section entitled “Continuation of Insurance After Conveyance of Title” as follows:
The coverage of this policy shall continue in force as of Date of Policy in favor of an insured so long as such insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from such insured, or so long as such insured shall have liability by reason of covenants of warranty made by such insured in any transfer or conveyance of such estate or interest . . .
In 1991, the brothers formed a limited partnership, Beaver Run Farms, L.P.. Subsequently, the land owned by the general partnership was conveyed to the limited partnership. In 2001, the brothers were informed that the Board of Taxation entered two judgments in 2000, declaring that 12.02 acres of their property belonged to their neighbor. The Shotmeyers demanded compensation under the policy from New Jersey Realty Title.
The title company denied coverage as it claimed the policy lapsed upon the transfer to the limited partnership. The parties attempted to settle the claim but the Shotmeyers rejected the Defendant’s offer and filed suit. The Law Division found for New Jersey Realty Title, but the Appellate Division reversed. An appeal to the Supreme Court followed.
SUPREME COURT’S DECISION
Ownership of the Property – The Shotmeyers’ never owned the property.
The issue of whether the voluntary transfer of property between related parties causes the policy to lapse had never been addressed by a New Jersey court in a written opinion, despite it being clearly stated in the policy. Thus, the Court rendered its decision by carefully evaluating the policy terms, mindful that policy terms are liberally construed in favor of the insured.
First, the Court addressed whether the brothers had an ownership interest in the property. The Plaintiffs, with the Appellate Division agreeing, claimed that they merely transferred the property to themselves, thus retaining ownership at all times. There, the Appellate Division ruled that the partnerships were no “more than alter egos of the Shotmeyer brothers . . . [and] should be disregarded.” The Supreme Court disagreed and found simply that New Jersey law provides that property purchased by a partner, in their capacity as partner, belongs to the partnership. Therefore, the Court, relying on the language in the deed and Title 42 (New Jersey Partnership Statute), held that because the property was purchased in the Shotmeyers’ capacity as partners in the general partnership, the partnership, not the Shotmeyers, owned the property. Further, the Court, again relying on Title 42, held that because the property was transferred to the limited partnership, the Shotmeyers did not acquire an interest in the property. Consequently, the Shotmeyers never had an ownership interest in the property.
The Court then addressed the issue of whether the policy insured the Shotmeyers individually or merely the general partnership. The Court explained that, parties may “contract for indemnity if the interest existed during the risk term and upon the occurrence of the loss.” The Court noted that the property was conveyed from the general partnership to a separate entity, the limited partnership, in 1991. The loss, however, occurred as a result of the Board of Taxation judgments in about 2000. This fact made it unnecessary for the Court to answer whether the brothers were insureds under the general partnership. Instead, the Court held that, even if the Shotmeyers were individually insured under the policy, they did not have an interest in the property at the time the loss occurred because of the transfer to the limited partnership. Thus, neither the general partnership nor the brothers individually could recover under the title policy. The Court’s ruling illustrates that in order to be covered under a title policy one must maintain an interest in the property.
Beneficial Interest – Plain terms of the policy governs.
The Court further addressed the Plaintiffs’ argument that they should be covered under the policy as named insureds because they retained a “beneficial interest” in the property after its transfer. The Plaintiffs argued that both partnerships were merely their “alter egos” and that the transfer did not increase the risk to the insurer. Nevertheless, the Court again highlighted that New Jersey law clearly provides that partnerships are entities distinct from its partners. Further, the Court explained that the partnerships were separate legal entities, serving different purposes. The Court also noted that title policies are based on the length of time of the exposure to risk. Allowing coverage to continue after the property has been transferred to a different entity increases the time of exposure, and therefore, the risk to the insurer. Thus, the Court found that the plain terms of the policy should determine who is covered, and that the “se 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.”
The Court also held that the Shotmeyers may not rely on the “alter ego” doctrine to “pierce the corporate veil,” as its purpose is to prevent fraud and injustice by removing protection when one corporation acts through another. Here, the Shotmeyers used the partnerships as legitimate entities to further their business plans. Therefore, the Court held that the Shotmeyers were not individually insured under the policy.
Operation of Law – The limited partnership is not insured.
Next, the Court addressed the issue of whether the limited partnership is insured under the policy and whether the property was transferred by operation of law. The policy expressly provided coverage to the insured’s successors who take title by operation of law and not those who take title by purchase. The Court defined a transfer by operation of law as one accomplished by statutory provision, that occurs automatically and involuntarily. The Court noted that the 1991 transfer was voluntary and in exchange for nominal consideration. The Court also emphasized that the limited partnership did not take over the entire business of the general partnership and that both continued to operate independently. Thus, the Court held that the transfer did not occur by operation of law, denying coverage to the limited partnership.
Coverage Through Retained Liability – The Shotmeyers’ only retained liability for their own acts.
The policy also provided for the continuation of coverage based on liability retained through covenants made along with the transfer of title. The general partnership, in the transfer to the limited partnership, made a covenant, promising that it had done nothing to encumber the property. The Court held that the covenant had no bearing on the case because the general partnership had not caused the defect in title, which existed before it purchased the land. Thus, coverage under the policy was not extended because of the covenant.
Conclusion
Generally, insurance policies are liberally construed according to the reasonable expectations of the insured. Nevertheless, the courts will not rewrite a policy when its plain meaning is clear. Thus, all interested parties should take care in analyzing what impact any potential transfer of property will have on title coverage. It should be noted that if an insurance policy clearly does not provide coverage when property is transferred, one should not expect title coverage to continue when that property is transferred, even if the parties involved are identical.
POSTSCRIPT:
While not relevant to the Shotmeyer case, which was decided based on the 1981 American Land Title Association Owner’s Policy Form, the Supreme Court did note that in 2006 the American Land Title Association amended its owner’s policy to include as an insured: “a grantee that is wholly-owned by an affiliate of the named insured if that affiliate and the named insured are both wholly-owned by the same person”.
