Posting for

Thursday, June 25, 1998

by: Bert Rush

brush@firstam.com

LIFE ESTATES/POSTING/SEARCH AND EXAMINATION

We tried to get the drop on this issue by addressing it in Claims Chronicles V (Williamsburg, VA), but we continue to see claims involving missed life estates. Here for the morbidly curious are some examples:

Phoenix, AZ--First American was asked to insure sale of a condo in Scottsdale. A computer run from our automated title plant disclosed the property was vested in Dennis McClung--having been conveyed to Dennis by a document coded "PD" ("probate decree") in connection with a probate of the Estate of Florence McClung.

The transaction closed and we insured the new owner, a corporation, for $145,000.

Almost eighteen months later we got a call from one of the grandchildren of Florence McClung. She and seven other grandchildren claimed a remainder interest in the insured condo--as heirs of Florence McClung.

In-house counsel got a copy of the recorded "Deed of Distribution"--which vested title in Dennis--and, sure enough, there on page one following words of conveyance was this:

Although Dennis was still alive, we learned that Marilyn Whitney died in 1995--so the interest of the grandchildren couldn't be questioned.

Things got even more complicated when our insured corporation was made aware of the problem. It turns out this transaction was, for the new owner, acquisition of replacement property as part of a 1031 tax-deferred exchange. Since our insured owner acquired only a life estate (for the life of Dennis), rather than fee title, the acquisition would fail to qualify as "like kind" property--dashing the new owner's hopes of claiming the tax advantages of IRC section 1031.

First American paid its insured owner $165,000 to resolve the claim.

Nashville, TN--We insured a deed of trust for $26,000. The borrower had recently taken title under the Will of the deceased prior owner. Once again, our examiner failed to notice that the vestee/borrower had inherited only a life estate. The remaindermen ("remainderpersons?") did not sign and would not consent to the borrowing. First American paid $34,910 to purchase the insured deed of trust.

Staten Island, NY--A First American agent was asked to insure the sale of a residential duplex, by a mother to her son. The contract for sale stipulated that the mother would deliver possession of the entire premises for a sale price of $210,000. The son, Jeffrey, got a loan commitment from Citibank for $160,000.

Before closing mother and son apparently renegotiated and the contract language for conveyance of the entire premises was crossed out.

The deed delivered at closing contained the following provision:

The transaction closed and First American policies were issued insuring Jeffrey as owner in fee and Citibank as holder of a first mortgage--with no mention or exception for mother's "life tenancy." It went unnoticed.

Several years later the loan became delinquent and Citibank foreclosed. Jeffrey split leaving his mother in possession of the first floor unit, and his wife and four children on the second floor.

Citibank tried to evict the mother without success. The court wouldn't let 'em. First American paid Citibank $160,000, and we now own the property subject to the life estate.

The point??? I'll bet 4 gigabytes there are still plenty of our employees and agents out there who don't look out for life estates--maybe don't know what they are. Let's be thinking about this in planning our training. And look for another "life estate" story in the next Claims

Chronicles.

Questions, comments, argument? Just press the "Reply" button and send your thoughts to LandSakes.

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Following Thursday's posting, Jon Reynolds (Phoenix) wrote about the Phoenix (McClung) and Staten Island examples:

"Where there's smoke, there's fire!"

Where there's a remainder, there's not always a life estate; but there is some prior interest, arising from the same conveyance, which WILL TERMINATE at some point. The significance of this is that there are distinct remedies available which may obtain vastly different results from a loss perspective depending entirely upon whether we "missed" the life estate or the remainder.

This is why I refer to the McClung claim as a "remainder claim" vice a "life estate claim." We insured out of the life estate, effectively "missing" the remainder interest. Either way, we missed the language creating the split estate. However, if we had insured out of the remainder, we may presume that ultimately our insured interest (given the applicability of the doctrine of after acquired title) would fully vest; but since we insured out of the life estate, sooner or later we could anticipate a total failure of title.

In the Staten Island example, which I would refer to as a "life estate claim," we ended up with a presumably bookable salvage asset. In the McClung matter, we got squat.

Reply to Jon: Define "squat." In Staten Island we booked as salvage $60,000--Mother occupies only one of the two units comprising the PIQ, and her daughter-in-law has expressed interest in buying the fee estate back from First American (as successor to our insured lender). Problem has been the daughter-in-law hasn't been able to arrange financing....

Anyway, stay tuned on the subject of "Life Estates." Just found an interesting case decision I'll try to share next week.

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Another end-of-the-day reply to the posting on Life Estates, from Alan Rubin (Uniondale, NY):

Unfortunately, sometimes even when a life estate is not missed by the examiner, a "life estate claim" is submitted which ends up costing the Company. Consider the following:

In 1994, the grantor, mother/mother-in-law of the grantees, conveyed title to her daughter and her son-in law (our insureds). The house--in the very nice Long Island area called Roslyn Heights-- was the one in which the daughter was born and raised. The deed did not reserve a life estate in favor of the mother, nor was there any written indication (i.e., separate contract, etc.) that it was the parties' intention to reserve a life estate for the mother.

In 1996, the mother commenced an action against our insureds, alleging that the parties entered into an oral and written agreement whereby the grantor reserved a life estate in the subject premises. The causes of action against our insured include fraud, breach of contract, mutual mistake, infliction of emotional distress, etc. We agreed to defend our insured with reservation of rights.

The depositions indicate that the daughter and son-in-law got "fed up" with the mother living with them and changed the locks while she was out for a walk with a friend. The insureds deny any agreement for a life estate; however, the mother apparently sold the house for some $60,000 below fair market value.

To date (and discovery is still ongoing), we have spent in excess of $25,000 defending our insured.

The moral: Don't do business with your mother-in-law!

Reply to Alan: This reminds me of a case decision from eastern Tennessee, discussed at our Regional Counsel & Underwriters Meetings last year. Case had to do with a "support mortgage"--question of enforceability. Grantor conveyed the farm to relatives (apparently) on condition the grantees would take care of grantor for her life, get her Blue Cross, provide a decent Christian burial--it was kind of detailed. Anyhow, the parties had a falling out and the grantor sued to enforce these conditions (probably by taking the property back)--grantees argued conditions were vague and unenforceable. Court of appeal held for the grantor--said a "support mortgage" (at least this one) could be enforced by a court. At the time I remember asking if anyone had seen anything like this before. No one had, as I recall. Family matters!!!

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Following up on posting last week and Monday, Oscar Beasley writes:

In my years of teaching real property I found this subject to confuse a lot of students and when you add to the Fee Simple Determinable and Fee Simple subject to a condition Subsequent the confusion abounds. Unfortunately each of the estates creates an estate that is not fully transferable. It is not used to the extent that it once was I think because most attorneys today either don't understand or because of the age of specialization just never have to learn about it. No so with the trusts and estates practitioners and companies. I think that in many instances we miss this type of an estate when we fast track or skip chain and the issue is do we save sufficiently from those procedures to accept the problems? I think we do but as am old title man the only way to protect is to check all deeds in the title. When did we last do that?

And of Alan Rubin's claim story Ben Knittel (Houston) writes:

Alan must have been in a generous spirit when his life estate claim was asserted. All of the described causes of action strike me as falling within the "created, suffered, assumed" exclusion. These intrafamily squabbles can be a real problem if we agree to provide a defense - I think the parties often just want to carry forward a long-standing feud, which is all the more fun if they can do it for free.

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I knew Alan Rubin (Uniondale, NY) would want to weigh in again—every claims counsel has heartburn over the duty to defend from time to time.

Alan writes:

In response to Ben Knittel (Houston): It is not that we were in a "generous spirit" when we agreed to provide a defense; however, the cases in New York are not as clear cut as in other states regarding the duty to defend.

On one hand, I believe that since the only way the plaintiff could have been successful in the litigation is if she was able to establish an "act of the insured", and therefore, there did not appear to be a potential for coverage under the policy, there was not a duty to defend. However, the defense of the insured is that the facts were not as pled by the plaintiff (i.e., that defendants daughter/son-in-law did not enter into any agreement by which the plaintiff was to retain a life estate). In such a situation, where the matter will be covered if the insured's version of the facts is accepted, many states find a duty to defend.

I believe that, while you have a good argument for not defending, it is a close question. As previously indicated, our defense was under a reservation of rights.