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Shotmeyer v. New Jersey Realty Title Insurance Company

195 N.J. 72, 948 A.2d 600 (2008)

TITLE INSURANCE — Where a title insurance policy lists a property owner as two individuals trading in the name of a general partnership, the title policy protects the partnership and not the individual partners and a voluntary transfer of the property from the partnership to a limited partnership, even with no change in beneficial ownership, does not transfer the title insurance policy.

A two-partner general partnership bought five parcels of land. The partners obtained a title insurance policy which named, as the insured, the individuals trading as the general partnership. Eleven years later, the partners formed a limited partnership for estate planning purposes and transferred title to the property from the general partnership to the new limited partnership. Ten years later, an adjoining landowner claimed title to approximately twelve acres of their property. The partners then sued the title company for damages under the title policy.

The title insurance policy covered the “named insured” as well as those who succeed to their interests by operation of law. The insurer claimed that the limited partnership was not covered under the policy, because it was not the named insured and it acquired its interest voluntarily and not by operation of law. The lower court agreed, finding that, as a matter of law, the transfer of title from the general partnership to the limited partnership was a voluntary transfer that did not transfer the benefits of the title policy to the successor entity.

On appeal, the Appellate Division reversed. It noted that insurance policies, in general, are to be liberally construed in favor of the insured and against the insurer in order to provide the insured with the broad measure of protections necessary to meet their reasonable expectations. In this case, the Appellate Division found that the individuals were named individually, as partners, and because they were also the beneficial owners of the limited partnership (individually as limited partners and also as the sole shareholders of the corporate general partner), the limited partnership was merely their alter ego. Therefore, it was reasonable for them to expect that the insurance coverage would continue.

On further appeal, the New Jersey Supreme Court granted certification and reversed. The Court rejected the partners’ claim that they were named individually on the title policy and were entitled to continued coverage since they retained beneficial ownership of the entities in title. It found that the property was not owned by the partners as individuals, but was owned by the partnership. N.J.S.A. 42:1A-12(a)(2) provides that land is the property of the partnership if it is acquired in the name of one or more partners with an indication in the deed of the person’s capacity as a partner. The two partners acquired the property in the name of the partnership, so the partnership, and not the individuals, was the named insured. By law, a partnership is a legal entity distinct from the individual partners. The Court also rejected the Appellate Division’s alter ego theory, finding that it is only appropriate to pierce the veil when an entity abuses its entity status to commit fraud or injustice. In this case, the partners did not form the limited partnership in order to perpetrate a fraud. Rather, they formed the limited partnership for legitimate estate planning purposes and to shield themselves from personal liability. They voluntarily transferred the property from their general partnership to the limited partnership for legitimate purposes, and therefore, the transfer was neither involuntary nor by operation of law. The Court also rejected the partners’ claim that the title company was required to indemnify them for losses under the breach of covenants provision in the title policy. Pursuant to that provision, the title company would have been required to indemnify the general partnership for breach of the covenants in its deed to the limited partnership. However, the Court found that the partners did no act to encumber the property which would have triggered coverage, but rather that there was a title defect that pre-existed their ownership.

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