One of my three rules of life is the little things get you down (the other two will have to wait for another day). Kwok v. Transnation Title Insurance Company (Los Angeles County Super. Ct. No. EC044350, filed 2/10/09) is a case on point.
The plaintiffs, a husband and wife, each owned a 50 percent interest in an LLC that in turn owned real property on which a house was constructed for investment purposes. At the time of the purchase the the defendant issued a standard title insurance policy. The LLC was the only insured. The definition of "insured" included those who succeeded to the interest of the named insured "by operation of law."
A dispute arose with the owners of an adjacent property over access to an easement for sewer and drainage. Construction was delayed, the real estate market tanked, and the plaintiffs decided to move into the residence constructed on the property and rent their existing home until the market improved.
On September 21, 2005, the LLC transferred the property to the plaintiffs as trustees of a revocable trust. On December 15 of that year a certificate of dissolution was filed stating that the LLC had been dissolved.
Because the easement dispute could not be resolved the plaintiffs filed a claim with the title insurance company under the policy. Defendant denied coverage on the grounds that the property had been transferred by a voluntary act to a separate legal entity and not by operation of law. The letter of denial noted that plaintiffs had not purchased an additional endorsement covering transfers to a separate legal entity. The trial court granted the title company's motion for summary judgment and the appellate court affirmed holding that the transfer was a voluntary act to a separate legal entity and not one arising by operation of law.
Had the property been transferred to the members qua members by virtue of the dissolution of the company it would have been a transfer by operation of law. The plaintiffs skipped a step. They should have transferred their LLC interest to themselves as trustees of the revocable trust and then dissolved the LLC. The property would have been distributed to the trust by operation of law and the title insurance would have remained available.
A similar Maryland case had the same result. Gebhardt v. Family Inv., LLC v. Nations Title Ins. of N.Y., Inc., 132 Md. App. 457 (2000).
Watch out for the little things.
-Marc Ward
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