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Herten, Burstein, Sheridan, Cevasco,
Bottinelli, Litt, Toskos & Harz, LLC
REPORT FROM COUNSEL
FALL
ISSUE,
2008
TRANSFER OF TITLE FROM OWNER TO A RELATED
ENTITY TERMINATES TITLE INSURANCE
COVERAGE
By Arnold D. Litt and Susan M. Marra
On June 5, 2008, in the case of Shotmeyer, et al v. New Jersey Realty Title
Insurance Company, the Supreme Court of New Jersey reversed the Appellate
Division (Supreme Court, A-125 Sept. Term 2006, decided June 5, 2008) agreeing
with the trial court, that title insurance coverage provided by a policy
terminated upon the transfer of title, notwithstanding the fact that the new
entity had the same composition of membership as its predecessor.
The facts of the case are simply stated as follows:
Through a general partnership controlled by them, Shotmeyer, et al purchased
a tract of land (the "property") in 1981 which was transferred to a new entity,
a limited partnership also controlled by Shotmeyer, as part of an
estate-planning program in 1991 and 1992. In 2001, Shotmeyer discovered the
property was smaller than believed and filed a claim with the title company that
insured the 1981 purchase. The title company declined coverage on the basis that
the real party in interest, the insured, had transferred title, and therefore
there were no further obligations on the part of the title company to provide
coverage. The trial court agreed with the title company, but upon appeal, the
Appellate Division reversed. The Appellate Division found that the Shotmeyers
had never transferred their "beneficial interest" in the land and that both the
general and limited partnerships were merely alter egos of the Shotmeyers. The
Supreme Court noted that the limited partnership entity shielded the individual
partners from personal liability as contrasted with the general partnership in
which the general partners were personally liable. The Court also found
significant the fact that the general partnership entity remained with respect
to its business operations. It only conveyed the real estate in question to the
limited partnership. The Court found "that this fact carries weight in analyzing
whether the policy continues to offer coverage".
Unfortunately for the Shotmeyers, what started out as an estate planning
tool, the conveyance to a limited partnership, resulted in the release of the
title insurance company from any obligation to insure title relative to the
successor entity. Its claim against the title company, therefore, was denied.
In this day and age when income taxes are substantial and ever-increasing,
estate planning techniques are extremely important in attempting to preserve
wealth and assets. Moreover, other tax deferral techniques such as Section 1031
tax free exchanges have enabled property owners to avoid the payment of taxes in
a properly qualifying 1031 Exchange. However, these techniques in many instances
have required transitioning of existing entities to new entities in order to
maximize the estate planning and 1031 tax saving opportunities. As the Supreme
Court has now held, this may jeopardize existing title insurance coverage,
thereby relieving title companies of their title coverage obligations in the
event of post-closing claims.
However, there are mechanisms including title insurance endorsements that can
be procured that will prevent termination of coverage in the event of subsequent
transfer of title:
* As pointed out by the Supreme Court, a transfer by way of a warranty deed
as opposed to a bargain and sale deed with covenant against grantor's acts will
result in continuing coverage for the benefit of the insured. That is the case
because with a warranty deed the grantor is warranting title to subsequent
purchasers. This is contrasted with a bargain and sale deed in which the grantor
only represents that it has not created a title defect. In the context of a
warranty deed, the title policy coverage continues notwithstanding the transfer
to another entity because the grantor remains liable for a breach of any
covenants. However, in Shotmeyer the deed of conveyance was a bargain and sale
deed. The Court noted that "the defect in title existed before the general
partnership purchased the land", so the covenant in the bargain and sale deed
did not control, since the grantor did not create the title defect. Simply
stated, a warranty deed will protect against title insurance termination upon
transfer to another entity. However, this exposes the grantor to continual
liability to subsequent purchasers for title defects. Thus, one has to weigh
possible liability exposure with the possible termination of title insurance.
* For policies issued before 2007, there is an endorsement know as Successors
and Transferees Coverage Endorsement ("S&TCE"), which expands the definition of
insured to include related entity transferees for nominal consideration and has
the effect of continuing coverage in favor of certain grantees who acquire title
at a point in time after the policy is issued. The endorsement may be obtained
at the time the policy is issued or at a subsequent date. The cost is 20% of the
original premium if issued after closing and 10% of the original premium if
issued simultaneously with the policy.
* The new ALTA Owner's Policy (2006) expands the definition of insured to
include certain related entity transferees, including the following:
A. successor to the title of the insured by operation of law as distinguished
from purchase, including heirs, devisees, survivors, personal representatives,
or next of kin;
B. successors to an insured by dissolution, merger, consolidation,
distribution, or reorganization;
C. successors to an insured by its conversion to another kind of entity;
D. a grantee of an insured under a deed delivered without payment of actual
valuable consideration conveying the title.
1. if the stock, shares, memberships, or other equity interests of the
grantee are wholly owned by the named insured,
2. if the grantee wholly owns the named insured,
3. if the grantee is wholly-owned by an affiliated entity of the named
insured, provided the affiliated entity and the named insured are both
wholly-owned by the same person or entity, or
4. if the grantee is a trustee or beneficiary of a trust created by a written
instrument established by the insured named in Schedule A of that title policy
for estate planning purposes.
* The "Fairway" Endorsement. This endorsement is named after the Court's
holding in Fairway Development Co. vs. Title Ins. Co. of Minn., 621 F. Supp. 120
(N.D. Ohio 1985) (Court holding that a successor partnership had no insurable
interest under title insurance policy with respect to an alleged defect in title
to the property where two partners in an existing general partnership
transferred their interest to the remaining partner who, in turn, entered into a
new partnership bearing the same partnership name and where the original
partnership was dissolved). If a Fairway Endorsement is in place, a general
partnership or LLC is protected against lapse of title insurance coverage
resulting from a change in the membership of the partnership or LLC, or from any
resulting dissolution. Some title companies may insert strict limitations in the
Fairway Endorsement that may vary from case-to-case and must be read closely by
the insured. The cost is approximately $50.00 and the endorsement issues
simultaneously with the title policy.
In conclusion, it is extremely important that sellers and buyers of real
estate retain competent real estate counsel to analyze for them any potential
pit falls of a discontinuation of title insurance based upon their post-closing
conveyance plans, so as to provide them with the best continuity of coverage
available.
In the meanwhile, let us hope that the New Jersey State Legislature will
intervene to cure some of the potential inequities that may have arisen in
connection with transfers for nominal consideration in the context of estate
planning and tax free exchanges.
Should you have any questions with regard to the above in general or as
specifically applied to your particular situation, please feel free to contact
Arnold D. Litt or Susan M. Marra.
NEWS FROM HERTEN BURSTEIN
Michael I. Lubin has been appointed by the Supreme Court of New Jersey as
Chairman of the District IIB Ethics Committee for Bergen County. Steven B. Harz
has also been appointed by the Court as a member of the Committee for a four
year term.
Andrew T. Fede, as the Borough Attorney for Norwood, obtained a Superior
Court, Law Division decision and order in June finding that Norwood and its
Clerk did not violate New Jersey's Open Public Records Act, N.J.S.A. 47:1A-1 et
seq. ("OPRA"), when they did not produce a copy of a document requested by the
plaintiffs because that document was not in Norwood's files. Applying the "rule
of reason," the judge held that OPRA requests are not a "gotcha-game" played by
document requestors and custodians. The judge also found for the plaintiffs on
the OPRA claims that they asserted against another municipality, which we do not
represent, after the plaintiffs settled with eight other municipalities that
they also sued.
Mr. Fede also obtained a Superior Court, Law Division decision and order in
July, on a summary judgment motion, finding that an individual and his
newly-formed corporation were liable for a Consumer Fraud Act judgment that Mr.
Fede previously obtained against another corporation owned by the individual.
The judge pierced the corporate veil, and found that the individual used these
corporations as his alter ego to deprive the plaintiff of his right to collect
on his judgment.
Andrew J. Cevasco was recently appointed by the New Jersey Supreme Court to a
three year term on its Committee on Character. The Committee reviews all
applications for membership to the New Jersey Bar to determine the applicant's
fitness to be admitted as an attorney at law in the State of New Jersey. He also
continues to serve as a Member of the Board of Trustees of the Bergen County Bar
Association.
Mr. Cevasco will be lecturing on Guardianships and Conservatorships at an NBI
seminar in November, 2008.
Gianfranco A. Pietrafesa, a member of the firm's business law practice group,
was elected as the Secretary of the Business Law Section of the New Jersey State
Bar Association. He has served on the Board of Directors of the Business Law
Section since 2002.
In November, Franco will be serving as the moderator for the seminar "Legal
Ethics for Transactional Lawyers," which is sponsored by the New Jersey
Institute for Continuing Legal Education and the New Jersey State Bar
Association Business Law Section. Franco developed the seminar several years ago
and has organized and moderated it every year since then.
In addition to being a transactional lawyer, Franco
is an experienced trial
attorney and has written a chapter on drafting complaints in federal lawsuits.
The chapter was included in the second edition of New Jersey Federal Civil
Procedure, published by New Jersey Law Journal Books in September.
Finally, Franco continues to be active in his community and was recently
appointed to the Board of Trustees of the Louis Bay 2d Library in Hawthorne.
On the weekend of October 4-5, 2008, associate
Tanja J. Fagan will
participate in the Avon Walk for Breast Cancer in New York City. She strives to
raise more funds than last year and has set a personal goal of $3,000.
Arnold D. Litt and Nilufer O. DeScherer
recently acted as purchaser's and
borrower's counsel on the $23,550,000 acquisition of the Carlyle, a 128-unit
luxury hi-rise apartment building in Hackensack, New Jersey. Litt and DeScherer
also recently closed another 1031 like kind exchange transaction involving the
$11,750,000 sale of a 70-unit apartment building in Red Bank, New Jersey.
LANDOWNER GETS SETTLEMENT FOR "TAKING"
When the government takes aim at private property to be taken for some public
purpose, more often than not any resulting litigation is a contest over how much
the property owner should be paid, rather than whether the exercise of the power
of eminent domain was appropriate in the first place.
From the landowner's standpoint, it is important to realize that adequate
compensation is not determined simply on the basis of the current use of the
property. Instead, the landowner is entitled to the value of the property based
on its "highest and best" use (whether that use already exists or is only in the
eye of a developer), so long as such a potential use is not too speculative or
otherwise foreclosed by applicable laws and regulations.
The importance to a property owner of negotiating compensation on the basis
of a best-case, but realistic, development scenario for the property is
illustrated by a recent case in which the owner of a vacant, 22,000-square-foot
lot settled with a town for compensation in an amount that was about 27 times
higher than the amount initially offered by the town.
The lot was zoned for residential use, although at the time of the
condemnation action the owner had no building or development plans. Appraisers
hired by the town offered an opinion that the vacant lot's best use was only as
open space, or as a buffer for an abutting lot. They reasoned that compliance
with the town's lot area and frontage requirements, as well as with its road
standards for improving the dirt road on which the lot was located, would be so
burdensome as to make any development of the property prohibitively expensive.
They also indicated that extensive development costs would preclude development
even if the lot was considered to have grandfathered status that would protect
it from certain town requirements.
For its part, the landowner retained experts who opined that the lot was, in
fact, suitable for residential purposes and should be valued as such when
arriving at a compensation figure for the taking. As the town's experts had
noted, there were various requirements on the books that, in theory, could be
costly to comply with. However, an examination of past rulings by the town's
zoning and conservation officials showed that the lot was likely to be exempted
from some of the requirements. Moreover, improvement of the dirt road, which
would have been an especially big-ticket item, was not likely to be required.
Both sides were necessarily looking into the future to some extent, but the
landowner was able to depict a scenario for the lot that was optimistic enough
to bring about a favorable monetary settlement with the town.
For more information on this case or any other land use planning matter,
please contact Daniel Y. Gielchinsky or Nilufer O. DeScherer.
CYBER INSURANCE FOR BUSINESSES
Businesses have been dependent on computerized information for some time now,
but it has been only relatively recently that insurance companies have devised
and offered insurance policies specifically tailored to the potential losses
from a variety of problems that can affect a computer system.
An early impetus for cyber insurance was anticipation in the late 1990s of
losses associated with the coming of "Y2K." That concern turned out to be
overblown, but the threats that have spurred cyber insurance offerings since
then are real enough, including viruses, hackers, and legal injuries to others
from information on a company's website. One study has found that the average
annual technology- related financial loss for United States companies more than
doubled just from 2006 to 2007.
Another development that prompted more cyber insurance policies was the
realization, which sometimes came as a surprise to insured businesses, that
general liability policies did not cover computer problems. Cyber insurance is a
good idea for all of the usual reasons associated with insuring against business
losses. But it also makes sense because of the particular costs associated with
responding to a computer data breach, especially now that many states have
adopted data breach notification laws.
This kind of postmortem after a breach could include such measures as
notifying affected customers, paying for credit monitoring for those customers,
replacing compromised credit or debit cards, and undertaking forensic analyses
of affected databases. All in all, there are some expensive scenarios to insure
against.
Categories of Losses
The losses covered by cyber insurance generally fall into two categories:
first-party losses, meaning those affecting the business itself; and third-party
losses, meaning incidents mainly affecting outside parties, including the
customers of a business. Of course, the same underlying problem can cause both
kinds of losses, such as when unauthorized access to a computer system shuts
down the computer system of a company whose customers or clients rely on that
system through an extranet.
A comprehensive cyber insurance policy should encompass both kinds of risks.
These are the typical categories of coverage:
* First-party business interruption, covering lost revenue experienced during
downtime due to accidents or security breaches (but typically not losses due to
catastrophic regional power outages);
* First-party electronic data damage, such as the compromise of data from a
virus infection;
* First-party extortion, including the demands made by hackers;
* Third-party network security liability, arising from compromise and misuse
of data stemming from identity theft and credit-card fraud;
* Third-party network liability in the form of court judgments obtained by
persons harmed by problems originating with a business's computer system; and
* Third-party media liability, aimed at the full range of potential liability
from matter published in interactive online communications.
For more information about these types of litigation risks or any other
litigation matter, please feel free to contact Jason T. Shafron or Scott D.
Jacobson.
FEDERAL ESTATE TAX
The federal estate tax credit, currently at $2 million, is set to increase to
$3.5 million in 2009. This means that in 2009 you can leave up to $3.5 million
to your heirs without any federal estate tax liability.
If Congress takes no action, the federal estate tax will be repealed
altogether in 2010. While this is an unlikely scenario, it does underscore the
uncertainty involved in estate planning over the next few years. Our estate
planning department can help you evaluate these and other estate planning
issues. Please contact Andrew J. Cevasco or Louis C. Tomasella.
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