Daily Development for Wednesday, February 2, 2000

Daily Development for Wednesday, August 31, 1999 By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

These two cases are reported able by Ira Meislik of the New Jersey Bar. The first report is lengthy, but worth it in order to get to the "punch line" in the second case. Ed.

TITLE; MARKETABILITY: Title is not rendered unmarketable by an alleged defect which is not reasonably debatable or by the threat of litigation which has no rational justification. Stewart Title Guaranty Co. v. Greenlands Realty, L.L.C., 58 F. Supp.2d 360 (D. N.J. 1999).

A contract for the sale of real estate was terminated over a dispute as to whether the property had marketable title. The property consisted of a main parcel and a 3 foot wide strip of land running from that parcel to the street. The contract required that title to the property be good and marketable. After examining the title report, the buyer wrote to the seller stating that the strip appeared to be part of a different tax lot and, as a result, title to the Property did not appear to be marketable or insurable. In fact, the buyer had discovered that title to the strip may not have passed through the same series of conveyances as had the main parcel. An earlier owner had obtained title to the main parcel in 1910 and to the strip in 1912. When it sold the property to the next owner in 1970, the new deed only made reference to the property it had acquired in 1910 and not the strip. As a result, the contract buyer believed that title to the strip remained with the old owner while title to the main parcel passed through a series of owners, ultimately to the contract seller. Uncontroverted evidence in the record revealed that the old owner intended to convey both the main parcel and the strip to its buyer.

In fact, all subsequent owners of the main parcel exercised all incidents of ownership and control over the strip in conjunction with the main parcel, including continuous payment of taxes. No separate conveyance of a strip was made when the original owner, a corporation, dissolved. When its former shareholders passed away, there was no disposing of any remaining interest that they may have had in the strip, strongly suggesting that the former owner and its former shareholders did not believe that they had any such interest. A state court determined that the former owner's failure to including a metes and bounds description of the strip in the 1970 deed was a mistake and, as a result, it appointed a commissioner to execute a Confirmatory Deed. Notwithstanding that title to the strip was eventually confirmed, the contract buyer argued that its seller did not possess marketable title at the time required for closing and, because the sales agreement provided that time was of the essence, it had the right to terminate the agreement.

The resolution of the dispute hinged on whether title to the property was "marketable" at the time of closing. "A marketable title is one that is relatively free from doubt, such that in a suit for specific performance a court would compel the prospective purchaser to accept title." A party "will not be compelled to take a conveyance if it be reasonably probable that he will be exposed to litigation thereafter, or if it seems reasonable to believe that subsequently he will be obligated to institute an affirmative action to quiet title or otherwise." "[Title, however,] is not rendered unmarketable by an alleged defect which is not reasonably debatable or by the threat of litigation which has no rational justification." To the Court, the success of any action asserting a claim to the strip depended on the meaning of the 1970 deed by which the old seller conveyed property to its buyer. That is, if the old seller did, if fact, convey the strip to its buyer, then any claim to the strip from one of the old seller's successors' in interest would fail. "In determining the meaning of a deed, [the] prime consideration is the intent of the parties." Consequently, to determine who had title to strip, the Court examined the language of the 1970 deed, as a whole, in light of the surrounding circumstances, to ascertain the intent of the parties. It found it uncontroverted that the old owner intended to convey the strip to its buyer in 1970. As a result, the Court felt that any person alleging to be a successor in title to the old seller could not succeed on a claim to the strip.

The contract buyer also argued that even if the old seller did intend to convey the strip to its buyer, then its buyer's successor in interest still possessed title to the strip. This is because, in 1970, just months after the initial transaction, that buyer conveyed the property through a deed that also did not contain a description of the strip or refer to the 1912 deed. In fact, every subsequent deed lacked any description of the strip or any reference to the 1912 deed. Based on this evidence, and the lack of evidence, the current contract buyer contended that even if the original seller did intend to convey the strip in 1970, the repetition of its mistake in subsequent deeds "leaves title to the strip reposing in" the old seller's original buyer.

The Court found this argument to make no sense. To the Court, common sense suggested "scriveners, subsequent to the one who prepared the 1970 Deed... likely copied the language from preceding deeds and, as a result, repeated the original error." "In short, under these circumstances, a scrivener's error does not represent fertile ground for a lawsuit of any merit."

Lastly, the contract buyer insisted that "numerous parties unfamiliar to the matter at hand still have interests viable against this property." The Court rejected this argument because the original seller that created the problem had dissolved and only its shareholders or former creditors could make claims upon its assets. By this time, however, all of its creditors were forever barred from suing and had been so for over 25 years. As to the shareholders and their legatees and devisees, the Court determined that because the corporate seller intended to convey the strip as part of the 1970 deed, none of those parties had any rights to the strip to which they could have succeeded. In conclusion, the Court concluded that any "outstanding claimants could not succeed were they in fact to assert a claim, [therefore,] at the time of the closing, title was marketable."

TITLE INSURANCE: An insured that has marketable title may at the same time have a title defect for which a title insurer must cover the resulting loss or damage. Stewart Title Guaranty Co. v. Greenlands Realty, L.L.C., 58 F. Supp.2d 370 (D. N.J. 1999).

In an earlier decision in this case, the Court determined that title was not "unmarketable" despite an early error in the chain of title omitting reference to a particular strip of land. Here, the Court had to decide whether the title company may have had a different obligation under its title insurance policy, specifically one which arose out of a provision of the policy protecting against "[a]ny defect in or lien or encumbrance on the title."

Whether this provision required the title insurance company to fulfill any obligations under the policy was a question of contract construction. A title insurance policy "is subject to the same rules of construction as are other insurance policies." Generally, the words of an insurance policy are to be given their plain, ordinary meaning. In addition, phraseology in such policies must be liberally construed in favor of the insured and strictly construed against the insurer. What was needed was to define "defect" as used in the policy.

A "defect" in title is: "[t]he want or absence of something necessary for completeness or perfection; a lack or absence of something essential to completeness; a deficiency in something essential to the proper use for the purpose for which a thing is to be used." This definition makes clear that a "defect" is something less than "unmarketability." Moreover, if "defect" was synonymous with "unmarketability," there would be no reason for a policy to list both terms. That is, unless there are defects that do not render a title unmarketable, the inclusion of the word "defect" in the list of coverage would be superfluous. Simply put, some defects do not render title unmarketable, while others do. The circumstances in this case involved a situation in which there was an alleged "defect" that was sufficiently insignificant to leave the title "relatively free from doubt," and, thus, marketable. Therefore, the Court found that while the insured had marketable title, it also had a "defect." Consequently, the title insurance company was held to be obligated to cover the "loss or damage, not exceeding the Amount of Insurance[,] ... sustained or incurred by [the insured] by reason of ... [this] defect."

Having said that, the Court was only willing to go so far as to find that there was a genuine issue of material fact regarding whether or not the title insurance company had removed the defect "in a reasonably diligent manner." Consequently, summary judgment in favor of the title insurance company was denied.

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