I Have a Title Company That Will Close the Deal. Afterwards, I’ll File a Claim Under My Title Insurance Policy. They’ll Pay Out.

“I have a Title Company that will close the deal.” How often does a Purchaser’s Attorney hear that from a Seller’s Attorney? All too often, right? However, the reality is different. The Seller’s Attorney doesn’t have a Title Company ready to close the deal. What he has is a Title Agency that might close the deal. That is, until the Title Agent or the Purchaser’s Attorney directly challenges the Underwriting Counsel at the Title Company regarding the title issues raised by your chosen Title Company, which they won’t simply overlook.. This brings us to the decision discussed below. 

Remember, Insurance Companies, in general, are not in the business of writing checks, especially when avoidable. Their objective is not to write checks. The fastest way an insurance company can become insolvent is by paying out many policies. In a recent decision, the Court ruled that a Title Company has the right to deny coverage if the Insured created, suffered, and/or had knowledge of the title defect that prompted the filing of the Title Claim.

A Real Estate Purchaser typically secures a Title Insurance Policy at the closing, aiming to shift the burden of any title defect to the Title Insurance Company rather than assuming the risk that gave rise to the Title Claim. Should the Claim prove valid, without a viable defense, the Title Company is contractually bound to defend the Claim and reimburse the Insured for the damages incurred by the Insured, including all costs associated with defending the Lawsuit.  

The current form of Title Insurance Policy used by Title Companies in New York is the American Land Title Association’s (ALTA) Owner’s Policy dated June 17, 2006.  The defects discovered after a closing that are covered by an Owner’s Policy of Title Insurance include these:

(a) A defect in the Title caused by:

(i) forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation;

(ii) failure of any person or entity to have authorized a transfer or conveyance;

(iii) a document affecting Title not properly created, executed, witnessed, sealed, acknowledged, notarized, or delivered;

(iv) failure to perform those acts necessary to create a document by electronic means authorized by law;

(v) a document executed under a falsified, expired, or otherwise invalid Power of Attorney;

The Title Company requires certain assurances from the Seller to ensure that the delivery of the Deed is free from fraud or error.  The signatory of a Deed is required to prove their identity by producing government-issued photo identification.  When the Seller is a Corporate Entity, the Title Company typically demands evidence demonstrating the proper authorization of sale. This evidence often includes certified copies of the documents, accompanied by affidavits from individuals possessing knowledge of the inner workings of the selling entity.

In the case of a Corporation selling Real Estate, the transaction must occur within either the Corporation’s ordinary course of business operations or, if it deviates from the ordinary course of business, it requires approval pursuant to Business Corporation Law Section 909. This approval involves both the Board of Directors and the requisite percentage of Shareholders convening at a duly called meeting. The requisite percentage of shares approving the sale is 50% of those outstanding for Corporations that were already in existence when Section 909 was enacted, and 66.67% for Corporations that were formed thereafter.  Compliance with any Shareholder’s Agreement is also a prerequisite.

When the selling entity is a Limited Partnership or Limited Liability Company, the Title Company typically requires that the Seller provide for review a certified copy of the relevant formation documents and, as applicable, the Partnership Agreement or the LLC Operating Agreement.  The Seller must show compliance with these governing documents. The Seller’s General Partner or Managing Member will typically provide an Affidavit that confirms that the documents provided to the Title Company are accurate, true and complete and that the authorizing procedures were fully complied with.  A successful sale depends in large part on the confidence that the Title Agent has in dealing with the Seller’s Attorney.

When Title Insurance is being purchased for a Real Estate closing, the Purchaser’s Attorney typically relies on the Title Company to examine and consider any issues about the authority of the Seller to deliver good title to the Real Estate to the Purchaser. But if a Purchaser’s Attorney has any reason to doubt the Seller’s authority, it is best to raise those concerns and verify the basis on which the Title Company has cleared the issue of authority to sell.  This is because of an Exclusion in the Owner’s Title Policy which permits the Title Insurer to disclaim coverage when the Purchaser possesses knowledge of a problem that the Title Insurer is not aware of. 

The Exclusion (“Exclusion 3(a)”) is expressed as follows:

1. Defects, liens, encumbrances, adverse claims, or other matters

(a) created, suffered, assumed, or agreed to by the Insured Claimant;

(b) not known to the Company, not recorded in the Public Records at the date of the Policy, but known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this Policy;

A Decision in the Federal District Court in the Northern District of New York demonstrates the importance of Exclusion 3(a), the application of which resulted in no Title Insurance Coverage for the Purchaser.  The Decision is NY-32 Realty Group Inc. v. Westcor Land Title Insurance Co., Case Number 1:22-cv-00803.  In that Decision, the Purchaser of Real Property, NY-32 Realty Group, Inc. (“NY-32”) sought an Order requiring its Title Insurer to cover damages arising from an underlying Action and to appoint Title Counsel to defend the Insured, NY-32 in the underlying Action.

The Plaintiff in the underlying Action, presently pending in the Supreme Court, Greene County, seeks to invalidate a 2020 Deed given by L&H Resorts Systems LP (“L&H”), the record Owner, to NY-32, as a Purchaser, for consideration of $5.8 million. The Claim in the underlying Action is that the Deed’s signatory (purporting to be “President” and a “Member” of this Limited Partnership) were, in fact, strangers to the Seller with no authority to bind the Entity. 

The Complaint in the underlying Action alleged a scheme to defraud the Partners in L&H. The mere fact that unauthorized signatories tendered a Deed would not, without more, have triggered Exclusion 3(a), but the Complaint further alleged that the Insured Purchaser was a willing and essential participant. The Court granted Summary Judgment in favor of the Insurer, Westcor.  The Court’s Ruling noted, “the allegations of the Complaint therefore cast that Pleading solely and entirely within the Policy Exclusions and the allegations, in toto, are subject to no other interpretation.”.  The allegations fit within the Title Exclusion so clearly that Westcor was not even required to provide a defense to its Insured.

The Attorney should be mindful, if the allegations had not been so clear in the Complaint, it is amazing what facts are revealed when witnesses must give sworn testimony under penalty of perjury. When those facts reveal that the Insured Purchaser was a willing and essential participant, the result will be the same. The Insurer will deny coverage and leave the Insured to reap what they have sown.

So, do you really have a Title Company that will close the deal? Perhaps you don’t.

***I would like to extend a special thanks to Alina Gluzman, Esq., Associate Attorney at Bronster, LLP in assisting with the research and editing of this Article.