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REAL ESTATE TRANSFER TO FAMILY L.L.C CONSIDERED A TRANSFER TO A SEPARATE ENTITY FOR PURPOSES OF TITLE INSURANCE, AND TERMINATED THE TITLE INSURANCE
The Court here considered whether a conveyance of property insured under a title insurance policy, from the Gebhardts to their own family L.L.C., terminated the title insurance policy. The Court held that it did. The Gebhardts purchased a parcel of land in Maryland in 1987, purchasing title insurance at the same time. The policy named Mr. & Mrs. Gebhardt as the insureds. In 1995, the Gebhardts learned of a possible cloud on the title: someone else was paying real estate taxes on a portion of the parcel. They reported this to the insurer. They demanded that the insurer remedy the situation. Before this was resolved, the Gebhardts in 1996 decided to do some estate planning. As part of that planning, they conveyed the parcel of land in fee simple to the Gebhardt Family Investment, L.L.C., which was a limited liability company created under Virginia law. The Gebhardts were the sole members of the L.L.C. They conveyed the parcel to the L.L.C. for virtually no consideration, and they continued to pay the taxes on the land. Subsequently, they brought suit against the title insurer for breach of contract, for not clearing the cloud on title. The trial court found in favor of the insurer. The trial court ruled that the L.L.C. was not the insured under the policy, because it obtained the property by purchase rather than through operation of law. It determined that coverage terminated when the insureds conveyed the property to a separate entity. The trial court found that the L.L.C. was a distinct legal entity as a matter of law. On appeal, the insureds argued that, in effect, since they were the sole members of the L.L.C., the conveyance in substance was to themselves and they still retained an interest in the property for purposes of the title insurance policy. The Court rejected that reasoning, citing a 1997 opinion from the Supreme Court of Virginia that a limited liability company is an independent entity which can sue and be sued, and that in contrast to a partnership, a limited liability company under Virginia law is an entity separate from its members. Thus, the transfer of property from a member to the limited liability company is more than a change in the form of ownership; it is a transfer from one entity or person to another. Further, under Virginia law, a member of a limited liability company is not a proper party to a proceeding by or against a limited liability company. Thus here, when the Gebhardts conveyed their interest in the property to the L.L.C., they effected a transfer from one entity to another. While the Gebhardts afterwards had an interest in the L.L.C., they no longer had an interest in the property. Rather, the L.L.C. had the interest in the property. The Court further reasoned that the Gebhardts transferred from themselves to the L.L.C. the problem of the cloud on title. By conveying under a special warranty deed, they did not warrant title against a claim of superior title made by someone else. Should a third party bring an action to quiet title, the L.L.C., rather than the Gebhardts, would be required to defend. The Court refused to disregard the conveyance, notwithstanding the Gebhardts’ argument that no money actually was paid. Finally the Court rejected the Gebhardts’ argument that they had suffered a loss and reported it to the insurer before the conveyance took place. But the court found that they had suffered no loss, reasoning that the Gebhardts successfully conveyed the entire property to the L.L.C. by way of a special warranty deed. So the problem of the cloud on title is now the problem of the L.L.C., not the Gebhardts. If any loss is suffered because of the cloud on title, it will be suffered by the L.L.C., which was not an insured under the policy either before or after the conveyance. [Ed. note: The key interpretation of Virginia law for this case was made about a year after the conveyance of the property to the L.L.C.] |
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