Gebhardt Family Investment, L.L.C. v. Nations Title Insurance of New York, Inc.

MARVIN H. SMITH, Judge (Retired, specially assigned). Appellants Joseph and Faye Gebhardt (“the Gebhardts”) and Gebhardt Family Investment, L.L.C. (“the L.L.C.”) sued appellee Nations Title Insurance of New York, Inc. (“Nations”) for breach of contract in connection with a claim under a title insurance policy. The Circuit Court for Prince George’s County entered judgment in favor of Nations, and the appellants filed this appeal.

ISSUES The appellants argue, in essence, that: ⁴⁵⁹ I. The trial court erred by determining that a conveyance of the insured property from the Gebhardts to the L.L.C. terminated the title insurance policy, and II. Even if the conveyance did terminate the policy, the Gebhardts reported their claim under the policy to Nations before the conveyance occurred and were therefore entitled to recover from Nations. We shall affirm the judgment of the trial court. FACTS The Gebhardts purchased 31.6707 acres of land in Prince George’s County on September 1, 1987.

They simultaneously purchased title insurance from Nations Title Insurance of New York, Inc. The policy named Joseph and Faye Gebhardt as the insureds. In 1995, the Gebhardts learned that someone else was paying property taxes on 4.75 acres of the property. They reported to Nations that there was a cloud on the title as to the 4.75 acres, and demanded that Nations correct the situation by “negotiating] a purchase from the alleged owner (who also has a cloud on title) ... and obtaining] a quitclaim in favor of [the Gebhardts].” On December 18, 1996, before the matter was resolved, and apparently to facilitate their estate planning, the Gebhardts executed a special warranty deed conveying all 31.6707 acres in fee simple to Gebhardt Family Investment, L.L.C., a limited liability company created under Virginia law. 1 The Geb-hardts were the sole members of the L.L.C. 2 The deed stated ⁴⁶⁰ that the L.L.C. paid consideration of $160,990.00 for the property. On November 13, 1997, the Gebhardts and the L.L.C. sued Nations for breach of contract for failing to resolve the cloud on title.

Trial was held on July 22, 1999, and the sole issue before the court was whether the Gebhardts and/or the L.L.C. were insured under the title insurance policy. The parties apparently reached a settlement agreement as to the amount of damages that Nations would pay in the event that the court found there was coverage. 3 Joseph Gebhardt was the only witness called. He testified to the effect that he and his "wife formed the L.L.C. and conveyed the property in question to it as part of their estate planning. Mr. Gebhardt stated that “not a penny” of consideration was paid for the conveyance, and that consideration of $160,990.00 was recited on the deed so that the State could “assess the transfer taxes from the individual to the L.L.C.” 4 Mr. Gebhardt added that he and his wife still own “[o]ne hundred percent” of the property and pay all of the taxes thereon.

Counsel for the Gebhardts and the L.L.C. argued that, despite the conveyance to the L.L.C., we’ve clearly shown there’s no purchase here, that the Gebhardts are still the owners and maintain the ownership interest which the policy says, in the land, and therefore they’re covered under this policy as well as the L.L.C., they’re both covered under this policy. The trial court disagreed, however. It explained that the “conveyance from Joseph M. Gebhardt and Fay[e] W. Geb-hardt to Gebhardt Family Investment, Limited Liability Com ⁴⁶¹ pany, was a conveyance to an entity distinct as a matter of law from Joseph M. Gebhardt and Fay[e] W. Gebhardt.” The court acknowledged that the consideration of 160,990.00 recited in the deed might have been recited merely to allow the calculation of transfer taxes, and that the money might not actually have changed hands. It nevertheless concluded that the transfer or the conveyance was one for consideration.

The consideration has been the benefit of the limited Pliability accorded by the State of Virginia for [ljimited Pliability [c]ompanies. And also, the acquisition of an ownership interest in the Limited Liability Company and there was consideration by virtue of receiving certain estate planning benefits. The court thus determined that the L.L.C. was not insured under the policy because it obtained the property by way of purchase rather than by operation of law. It determined that the Gebhardts’ coverage terminated when they conveyed the property to a separate entity.

The court directed that judgment be entered in favor of Nations. Counsel for the Gebhardts and the L.L.C. then argued that, even if the conveyance terminated the Gebhardts’ coverage, the Gebhardts should be permitted to recover from Nations on the ground that the loss occurred and was reported to Nations before the conveyance took place. Counsel pointed out that Mr. Gebhardt had testified that, without the disputed 4.75 acres, he didn’t think the property was marketable. The court nevertheless stated that it “continue[d] to believe that the proper judgment is for the Defendant.... ” DISCUSSION I Coverage Under Policy The title insurance policy issued by Nations to the Gebhardts in 1987 states, in pertinent part: The coverage of this policy shall continue in force as of Date of Policy in favor of an insured so long as such insured ⁴⁶² retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from such insured, 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, provided, however, this policy shall not continue in force in favor of any purchaser from such insured of either said estate or interest or the indebtedness secured by a purchase money mortgage given to such insured.

Paragraph 2(a) of Conditions and Stipulations to Policy of Title Insurance. The policy defines “insured” as the insured named [in the policy] 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 distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors. Id., paragraph 1(a). The trial court determined, and the appellants conceded at oral argument, that the L.L.C. did not acquire the property by operation of law.

The appellants thus tacitly concede that the L.L.C. is not an insured under the policy. The argument on appeal is that the Gebhardts remain insured despite the conveyance to the L.L.C. There is no dispute that the Gebhardts do not remain insured by virtue of a purchase money mortgage or covenants of warranty. The appellants argue that because the Gebhardts are the sole members of the L.L.C. the conveyance was, in effect, to themselves and they still retain an interest in the property within the meaning of Paragraph 2(a) of the policy’s Conditions and Stipulations. The argument is based on a misunderstanding of the nature of limited liability companies.

It is widely recognized that [t]he allure of the limited liability company is its unique ability to bring together in a single business organization ⁴⁶³ the best features of all other business forms — properly structured, its owners obtain both a corporate-styled liability shield and the pass-through tax benefits of a partnership. General and limited partnerships do not offer their partners a corporate-styled liability shield. Corporations, including those having made a Subchapter S election, do not offer their shareholders all the pass-through tax benefits of a partnership. All state limited liability company acts contain provisions for a liability shield and partnership tax status. 6A Uniform Laws Annotated, Foreword to Limited Liability Company Act at 426 (1995).

As we have indicated, the L.L.C. in question was formed under the laws of Virginia. While the record extract does not reveal whether the L.L.C. is registered to do business in Maryland, see Code (1975, 1999 Repl. Vol.), §§ 4A-1001-4A-1013 of the Corps. & Ass’ns art., “[t]he failure of a foreign limited liability company to register in this State does not impair the