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Historic Smithville Development Co. v. Chelsea Title & Guaranty Co.

Decided: February 19, 1981.


Haines, J.s.c.


Historic Smithville Inns, Inc. ("Inns"), a Delaware corporation, owned 2,300 acres of partly improved land in Galloway Township, Atlantic County, New Jersey. Title to the real property was insured by Chelsea Title & Guaranty Company in August 1974. In November 1977 the New Jersey Attorney General commenced a suit entitled Hyland v. Burgess , in which the titles to numerous tracts of land in Burlington and Atlantic Counties were challenged on claims of fraud. Approximately 300 acres of the Inns' property were involved in the suit, which has not yet been tried. At the Inns' request, Chelsea authorized a firm of attorneys to defend its title at Chelsea's expense, as required by its title insurance policy. Fees to date, some of which are in dispute, have exceeded $200,000.

Historic Smithville Inns, Inc. was a wholly-owned subsidiary of ABC Leisure Attractions, Inc. ("ABC Leisure"), which, in turn, was wholly owned by the American Broadcasting Companies, Inc. ("ABC"). In 1978 ABC commenced negotiations for the sale of Inns to a group of prospective purchasers ultimately known as Historic Smithville Development Co., a partnership. The purchaser preferred to acquire the assets of Inns, as opposed to its stock. ABC, however, was insistent upon a stock transaction. The Development Company, attracted by a reduction in the purchase price from $17,000,000 to $15,000,000, eventually agreed to purchase all of Inns' stock. The price reduction was granted because of real-property title problems and to

offset tax costs to the buyer relating to the proposed liquidation of Inns after the transfer of its stock. The sales agreement relieved ABC of any responsibility for the quality of the real estate titles held by Inns. The purchaser was aware of the title problems caused by the proceedings in Hyland v. Burgess; an additional consideration which encouraged the stock purchase was its belief that Chelsea's title policy would remain in force after the transaction had been completed.

The Inns' stock was sold to the Development Company under an escrow arrangement in April 1979 and released from escrow on May 14, 1979. On the latter date the purchaser adopted a liquidation plan calling for the dissolution of Inns and the transfer of all of that corporation's assets to itself, thereby permitting the partners of the Development Company to enjoy certain tax advantages. Title to the real property was transferred to the partnership by deed.

Shortly after the events of May 14, 1979 Chelsea took the position that the purchasing partnership was not insured under its policy and was not entitled to have the Hyland v. Burgess litigation further defended by Chelsea. This suit ensued. Among other things, it seeks to compel Chelsea to supply the refused defense. This opinion responds to plaintiff's order to show cause and Chelsea's cross-motion, both seeking a declaration of the Development Company's rights under the title policy. The facts are not in dispute and the issues may now be decided as a matter of law. Judson v. Peoples , etc., 17 N.J. 67 (1954).

The Title Insurance Policy

Chelsea's policy of title insurance describes the "insured" thereunder in the following language:

By Operation of Law

The Inns was a Delaware corporation, dissolved in accordance with the requirements of Delaware law. 8 Del.Code § 275, authorizes dissolution by resolution of corporate directors and shareholders, followed by the filing of a certificate of dissolution in the office of the Secretary of State. The Code, § 278, also continues the existence of dissolved corporations for three years, "for the purpose of . . . enabling them gradually to settle and close their business, to dispose of and convey their property. . . ." The conveyance of the real property owned by Inns to the Development Company was made pursuant to this statute and the plan of liquidation.

Chelsea claims that this transaction made plaintiff a "purchaser" from its insured, expressly excluded from coverage by the language of its policy, since it did not acquire title by operation of law. It defines the phrase "by operation of law" to refer only to those transfers of title which are automatic or involuntary, which require no discretionary action on the part of any owner of real property. Pioneer Nat'l Title Ins. Co. v. Child, Inc. , 401 A.2d 68 (Del.Sup.Ct.1979), provides support for the argument; it held:

"Operation of law" is a generic term or phrase commonly used to express the manner in which rights (and/or liabilities) attach to a person by the mere application to the particular transaction of the established rules of law, without the act or cooperation of that person. Black's Law Dictionary (4 ed.)

A somewhat more practical statement of its meaning appears in 67 C.J.S. at page 877:

"Operation of law. The obligation of law, its practical working and effect. It is a term applied to indicate the manner in which a party acquires rights without any act of his own. In its usual signification, 'operation of law' is generally applicable to matters involving title and refers to situations in which ...

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