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First American Title Insurance Company v. Township of Rockaway

322 N.J. Super. 583, 731 A.2d 572 (App. Div. 1999)

CONTRACTS; RECISSION—Where a municipality sells property without the right to do so, the transaction is void ab initio and the municipality is liable for damages flowing from the sale, even to a title insurance company that gained its claim by subrogation.

Under the Green Acres Land Acquisition Act, a local unit that receives a Green Acres grant can not dispose of it for other than recreational and conservation purposes without State approvals. Without those consents and approvals, a municipality sold a parcel of land that was subject to a Green Acres easement. The municipal resolution authorizing the sale stated that no affidavit of title would be provided and if title to the property were to prove to be unmarketable, the municipality’s liability would be limited to repayment of the deposit and the balance of the purchase price and no more. A further requirement was that notice of any defect in title or claim of unmarketability had to be given to the municipality within 30 days after sale and that failure to give the notice would be deemed to be conclusive evidence that the buyer accepted the title in its then condition. The original buyer obtained a title insurance policy. When it resold the property, its buyer obtained a title insurance policy. Shortly after the second sale, the problem with the unauthorized sale was discovered. The second buyer’s title company settled with its customer and with the mortgagee and then sought recovery from the municipality. The Court held that each of the transfers was void ab initio and required the municipality to repay the original purchase price plus interest from the day of the sale so that the title insurance company could recover what it paid and the balance would be returned to the first buyer. The municipality argued that because the title company failed to discover the Green Acres Grant Development Contract, a required instrument, it should have been barred from any claim. It could cite no case law to support that position. The municipality also pointed to the thirty day time limit for claims in its original contract. The Court held that because the transaction was void ab initio, there was no title that could have been conveyed because “[t]he township did not breach a contract; rather, what happened in 1985 was a failure of contract.”

The municipality also claimed that the public policy was that “as between a public entity and a commercial title insurance company paid to search the public record, the public entity’s position must be preferred… .” However, the Court held that the municipality ignored its own failure to adhere to the law with respect to a document to which it was a party. To the Court, “this was more than mere inadvertence and more akin to a reckless disregard of facts within its actual knowledge. ‛Disgorgement’ is a necessary result of declaring the conveyance void.”

The municipality also argued that the title company could not stand in its customer’s shoes because the seller of the property in the transaction which it insured did nothing to adversely affect the title. Under this theory, because the title insurance company could not stand in the original buyer’s shoes, it was not in privity with the municipality. The Court pointed out that lack of privity is a defense in a breach of contract case, but this was not a breach of contract case. This was an action to quiet title and the title insurance company was in privity of estate with the municipality by virtue of “mutual or successive relation to the same right in property.” By reason of the Court having ruled that no contract existed, as it failed ab initio, all transactions flowing from the initial void conveyance were without effect. Therefore, the municipality’s arguments about what any other person or entity failed to do was irrelevant. For the same reason, the municipality’s defense under N.J.S. 59:9-2e, which states, in part: “No insurer or other person shall be entitled to bring an action under a subrogation provision in an insurance contract against a public entity or public employee” was unsupported. In rejecting this defense, the Court pointed to prior case law which stated that the “immunity provided governmental entities under the Act is limited to tort based liability.” The present action did not assert “liability for negligence or trespassing or any other alleged tortious conduct.” Thus, the Act did not bar the title company’s claims, as they did not sound in tort.


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