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Shotmeyer v. New Jersey Realty Title Insurance Co.

June 5, 2008

HENRY J. SHOTMEYER AND CHARLES P. SHOTMEYER, PARTNERS TRADING AS BEAVER RUN FARMS, A GENERAL PARTNERSHIP AND BEAVER RUN FARMS, L.P., PLAINTIFFS-RESPONDENTS,
v.
NEW JERSEY REALTY TITLE INSURANCE COMPANY, DEFENDANT-APPELLANT.



On certification to the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The Court considers whether a title insurance policy lapsed when the property at issue was voluntarily conveyed from one business entity to another business entity, both of which were controlled by the same individuals.

Brothers Charles and Henry Shotmeyer formed Beaver Run Farms, a general partnership, to acquire real estate in New Jersey. In 1981, the general partnership bought a tract of land in Sussex County for $260,000. The grantees were recorded in the deed as "Henry J. Shotmeyer & Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership." New Jersey Realty Title Insurance Company provided a policy of title insurance for the property. Schedule A of the policy listed the named insured as "Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership." The policy defined "insured" as those named in Schedule A and "those who succeed to the interest of such insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors." The policy also contained a section entitled "Continuation of Insurance after Conveyance of Title," which stated that the policy's coverage would continue in force "so long as such insured retains an estate or interest in the land . . . or so long as such insured shall have liability by reason of covenants of warranty made by such insured in any transfer or conveyance of such estate or interest.."

Ten years later, as part of their estate planning, the Shotmeyers formed a limited partnership, Beaver Run Farms, L.P. S.B. Properties, Inc., a corporation owned jointly and exclusively by the brothers, was the general partner; the Shotmeyers were the sole limited partners. In 1992, the general partnership conveyed the Sussex County property to Beaver Run Farms, L.P., a New Jersey Limited Partnership, for ten dollars. The limited partnership did not obtain a new title insurance policy for the property.

In 2001, Charles Shotmeyer noticed on a tax bill that the Sussex County property had been reduced from 24.7 acres to 12.68 acres. He later learned that two judgments had been filed with the Sussex County Board of Taxation on April 24, 2000, declaring that the missing 12.02 acres belonged to a neighboring lot. The lost property was appraised at $900,000. The Shotmeyers demanded compensation from the title insurance company, which offered to settle for $43, 000. The Shotmeyers rejected the offer, and the general partnership filed a complaint against the title insurance company. In its answer to the complaint, the title insurance company denied the claim and asserted that the plaintiff was not a proper party and that the insured party no longer held title to the land. The complaint was amended to list as plaintiffs "Henry J. Shotmeyer and Charles P. Shotmeyer, partners trading as Beaver Run Farms, a general partnership, and Beaver Run Farms, L.P." The amended complaint alleged that the Shotmeyers conveyed the property to themselves as limited partners, and S.B. Properties, Inc. as general partner, in Beaver Run Farms,

L.P., and that the policy therefore remained in effect.

The trial court granted the title insurance company's motion for summary judgment, finding that the limited partnership was not covered under the original policy bought by the general partnership. The court ruled that the property transfer from the general partnership to the limited partnership was voluntary and intentional and was not done "by operation of law." As a result, the court found that the title insurance policy lapsed with the conveyance of the property and the new owner did not have standing to sue.

The Appellate Division reversed, finding that there was never a transfer of the Shotmeyer brothers' beneficial interests in the land and that the general and limited partnerships were the alter egos of the Shotmeyer brothers, who retained control of the property at all times. Finally, the panel concluded that the corporate form of the partnerships should be disregarded in the interest of justice.

HELD: The title insurance policy obtained by the general partnership when it purchased the property lapsed when the property was voluntarily conveyed to the separate and distinct limited partnership formed by the same individuals, and the limited partnership did not have standing to sue under the policy.

1. A title insurance policy is a contract that protects a landowner against loss caused by a defective title. To recover, the defect must have existed at the time the insurance was purchased. Buyers of title insurance pay a one-time premium at the time of purchase. The policy continues in force indefinitely until the insured divests title or alters title in a way that terminates coverage. Like all insurance policies, in the absence of ambiguity, a title insurance policy should be interpreted according to its ordinary meaning. Here, the title insurance policy provided coverage to two groups: (1) the "insured named in Schedule A"; and (2) those who succeeded the named insured "by operation of law." (Pp. 9-10).

2. With regard to the "insured named in Schedule A," the policy names the insured as "Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership," which mirrors the ownership reflected on the deed when the property was purchased in 1981. A partnership is an entity distinct from its partners. Under N.J.S.A. 42:1A-12(a)(2), land is property of a partnership if it is acquired in the name of one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner. Here, therefore, the property belonged to the general partnership and not the brothers as individuals. Similarly, the 1992 transfer involved a conveyance from the general partnership to the limited partnership and, by statute, the property belonged to the limited partnership, not the individual brothers. The Shotmeyers, as individuals, never had an ownership interest in the property. Even if the Shotmeyers had been insured as individuals in 1981, they did not have an insurable interest at the time of the loss, in or around 2000, because the property had been conveyed to a new entity. The Court is not persuaded by the argument that the brothers did nothing to affect the defect in the property's title or the risk to the insurer through their conveyances. One-time title insurance premiums are based in part on the time of exposure to risk. Allowing coverage to continue when a tract of land is conveyed to a different legal entity extends the time of exposure and the risk to the insurer. Nor does the alter ego doctrine provide relief to the Shotmeyers. The Shotmeyers set up the different, legitimate business structures to further their personal and business plans. They did not use the partnerships to commit fraud or defeat the ends of justice, requiring the application of the doctrine to pierce the corporate veil. (Pp. 11-16).

3. With regard to the policy's provision of coverage to those who succeeded the named insured "by operation of law," courts generally have found that when title is passed by operation of law, the change is automatic or involuntary. Here, the general partnership voluntarily transferred the property to a newly formed limited partnership in exchange for nominal consideration. All obligations relating to the land were transferred from the general partnership, in which the individual members were personally liable, to the limited partnership, which shielded them from liability. Thereafter, the general partnership continued to exist and carried on unrelated business activities. The Court finds, therefore, that the property was not transferred by operation of law. (Pp. 16-18).

4. The Shotmeyers also cannot rely on the clause in the policy entitled "Continuation of Insurance after Conveyance of Title," which states that coverage continues after a transfer "so long as such insured shall have liability by reason of covenants of warranty made by such insured in any transfer or conveyance." Here, the 1992 deed included a covenant promising that the grantor had done no act to encumber the property. By statute, a covenant against a grantor's acts covers only the grantor's conduct. Because the defect in title existed before the general partnership purchased the land, this covenant does not come into play. (Pp. 18-20).

5. Finally, the title insurance company's offer to settle the claim was not a waiver its policy defenses. Although an insurer's unreasonable delay in disclaiming coverage or in giving notice of the possibility of such a disclaimer can estop an insurer from later repudiating responsibility under an insurance policy, prejudice is critical to a finding of estoppel. Here, plaintiffs have not shown any prejudice; therefore the Court does not consider whether the title insurance company unreasonably delayed denying coverage in this case. (P. 20).

The judgment of the Appellate Division is REVERSED and the judgment of the Law Division is REINSTATED.

JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, RIVERA-SOTO and HOENS join in CHIEF JUSTICE RABNER's opinion.

The opinion of the court was delivered by: Chief Justice Rabner

Argued November 28, 2007

In 1981, a general partnership, comprised of two individual partners, bought a tract of land and obtained title insurance for the property. Ten years later, the general partnership conveyed the property to a limited partnership controlled by the same two individuals. The limited partnership did not obtain a new title insurance policy. Another decade later, when the partners discovered a defect in title, they sued the insurer under the title policy originally purchased by the general partnership.

We now hold that the title insurance policy lapsed when the property was voluntarily conveyed from the general partnership to the separate and distinct limited partnership. As a result, the trial court properly granted summary judgment to the insurer. We therefore reverse the judgment of the Appellate Division.

I.

Brothers Charles and Henry Shotmeyer formed Beaver Run Farms, a general partnership, to acquire, hold, and develop real estate in New Jersey. On June 18, 1981, the partnership purchased a tract of farmland in Sussex County from Mabel A. Day for $260,000. The grantees were recorded in the deed as "HENRY J. SHOTMEYER & CHARLES P. SHOTMEYER, Partners trading as BEAVER RUN FARMS, a General Partnership."

On June 22, 1981, defendant New Jersey Realty Title Insurance Company, now known as New Jersey Title Insurance Company, ("defendant" or "Title Company") provided an owner's policy of title insurance for the property in the amount of $260,000. Schedule A of the policy lists the named insured as "Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership." The policy further defines "insured" as: the insured named in Schedule A, and, subject to any rights or defenses the Company may have had against the named insured, those who succeed to the interest of such insured by operation of law as ...


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