Keown v. West Jersey Title & Guaranty Co.

• Decision Date: 07 July 1978
• Parties: William S. KEOWN, Plaintiff-Respondent, v. WEST JERSEY TITLE AND GUARANTY COMPANY, a New Jersey corporation, Defendant-Appellant.
• Court: New Jersey Superior Court — Appellate Division

Page 19

161 N.J.Super. 19

390 A.2d 715

William S. KEOWN, Plaintiff-Respondent, v. WEST JERSEY TITLE AND GUARANTY COMPANY, a New Jersey

corporation, Defendant-Appellant.

Superior Court of New Jersey, Appellate Division.

Argued June 13, 1978.

Decided July 7, 1978.

Joseph S. Georgiana, Camden, for defendant-appellant (Capehart & Scatchard, Camden, attorneys).

M. Gene Haeberle, Camden, for plaintiff-respondent.

John R. Weigel, Princeton, for amicus curiae, N.J. Land Title Ins. Ass'n.

Before Judges MATTHEWS, CRANE and ANTELL.

PER CURIAM.

The facts of this case are set forth in the trial judge's opinion, which is reported at 147 N.J.Super. 427, 431-433, 371 A.2d 370.

The trial judge decided that plaintiff's lack of authority to invest in real estate created a defect in his title and rendered it unmarketable, 147 N.J.Super. at 436, 371 A.2d 370; that the exemption for defects created by the insured did not cover accidental or innocent conduct of the insured, so conduct of this type causing a defect would not prevent recovery on the policy, 147 N.J.Super. at 439, 371 A.2d 370; that plaintiff's conduct was no worse than simple negligence, so it was not conduct that would exempt the resulting defect from coverage, 147 N.J.Super. at 443, 371 A.2d 370, and that the title company was estopped from denying liability because it represented to Keown's secretary on the telephone that Keown had the "right to take title." 147 N.J.Super. at 445, 371 A.2d 370.

A marketable title is one that is relatively free from doubt, such that in a suit for specific performance a court would compel the prospective purchaser to accept the title. 4 American Law of Property § 18.7 at 670 (1952). If it is reasonably probable that the purchaser would be exposed to litigation not of a frivolous nature concerning the title, or would have to bring an action to quiet title, then specific performance would be denied to the prospective seller and the title would be considered unmarketable. Tillotson v. Gesner, 33 N.J.Eq. 313, 326-327 (E. & A.1880); Gaub v. Nassau Homes, Inc., 53 N.J.Super. 209, 223, 147 A.2d 73 (App.Div.1958).

Marketable title has also been defined as a title free from reasonable doubt, that which a reasonable buyer would be willing to accept, or which is "salable." Bier v. Walbaum, 102 N.J.L. 368, 370, 131 A. 888 (E. & A.1926).

When a trustee breaches his trust by purchasing property that is not within his authority to purchase, the beneficiaries have the options of compelling him to replace the trust funds with interest or to hold the property subject to the trust. 3 Scott, Trusts (3 ed. 1967), § 210 at 1695-1696; Restatement, Trusts 2d, § 210 (1959). If the beneficiaries charge the trustee with the amount he spent, they can enforce an equitable lien on the property as security for their claim. However, this does not prevent the trustee from disposing of the property. A trustee takes the risk of acting Ultra vires, and if he does so he will be held personally liable for any loss to the trust. Dickerson v. Camden Trust Co., 140 N.J. Eq. 34, 44, 53 A.2d 225 (Ch.1947), mod. on other grounds 1 N.J 459, 64 A.2d 214 (1949); Conover v. Guarantee Trust Co., 88 N.J.Eq. 450, 458-459, 463, 102 A. 844 (Ch.1917), aff'd 89 N.J.Eq. 584, 585, 106 A. 890 (E. & A.1918). Because he is personally subject to liability for any losses, he is not required to hold the property in case it might be advantageous for the trust, but is permitted to dispose of it. 3 Scott, Op. cit., § 210 at 1697-1698. Under those circumstances it can hardly be said that a trustee in this position will be unable to pass good title.

A trustee's lack of authority under the trust instrument to purchase real estate does not void the conveyance to him. We see no reason, then, that his title should be impaired. Because of the possibility of an equitable lien held by the beneficiaries it might be prudent to arrange for them to release their claims by signing the deed, but such does not make the title unmarketable. The beneficiaries are not adverse parties but are the beneficial owners through the trustee. Since they challenged the trustee's powers in court and received an order surcharging him, they have obviously chosen the option of repudiating the purchase and cannot make a claim on the property at a later date.

All of the cases we have found in which unmarketability of title resulted involved a defect which would give rise to some kind of adverse claim on the part of third parties. In Gaub v. Nassau Homes, Inc., 53 N.J.Super. 209, 147 A.2d 73 (App.Div.1958), the description in the deed could be read two ways, making a difference of 25 acres in the plot, and an heir of a grantor far back in the chain of title could claim that questionable acreage. In United States v. Roebling, 244 F.Supp. 736, 744 (D.N.J.1965), the seller's deed was unclear and could mean that there was a reversionary interest in an earlier grantor and that the prospective seller did not have a fee simple. Gravino v. Gralia, 18 N.J.Super. 241, 86 A.2d 827 (Ch.Div.1952), involved restrictive covenants on the use of the property which might be enforced by third parties, and Bier v. Walbaum, 102 N.J.L. 368, 131 A. 888 (E. & A.1926), involved encroachments by the property in question and such encroachments were nuisances under local ordinance.

We conclude that the trustee's lack of authority did not make his title to the property unmarketable, and the risk involved in this case was not the type against which the trustee had insured.

The trial judge also decided that the defect was not created by the plaintiff in the sense of the policy's exclusion. She found that defects brought about by the accidental or innocent conduct of the insured were not created by the insured for purposes of interpreting the policy. 147 N.J.Super. at 443, 371 A.2d 370.

In the only New Jersey case interpreting such a clause it was held that the word "create" connotes "the idea of knowledge, the performance of some affirmative act by the insured, a conscious or deliberate causation." Feldman v. Urban Commercial, Inc., 87 N.J.Super. 391, 404, 209 A.2d 640, 648 (App.Div.1965). There, the insured had taken part in an "unconscionable scheme" and had taken affirmative action which rendered his mortgage unenforceable so he was barred from collecting on the insurance policy. 87 N.J.Super. at 409, 209 A.2d 640; Feldman v. Urban Commercial, Inc., 78 N.J.Super. 520, 532, 189 A.2d 467 (Ch.Div.1963), aff'd 87 N.J.Super. 391, 209 A.2d 640 (App.Div.1965). The court distinguished the case from Hansen v. Western Title Ins. Co., 220 Cal.App.2d 531, 33 Cal.Rptr. 668, 98 A.L.R.2d 520 (D.C.App.1963), noting that the defect in that case was caused by inadvertence rather than conscious causation. 87 N.J.Super. at 408-409, 209 A.2d 640.

In Hansen the insureds' attorney had so badly drafted an option agreement that he caused the defect in title because it provided that the land would be reconveyed if not developed by a certain time. The insureds were apparently unaware of this interest and were assured by the attorney and the title company that the seller had no interest in the properties. The court held the defect not to have been created by the insured. Therefore the policy was found to cover his loss. It limited its holding to circumstances where the insured did not intentionally produce the claim and the insurance company had an opportunity to know of the defect.

In the other case where the insured was held not to have "created" the defect, the title problem resulted from the operation of law and not really from an affirmative act of the insured at all. A bank's mortgage was invalidated as a preference but the bank had not intended to establish a preference. First National Bank & Trust Co. v. New York Title Ins. Co., 171 Misc. 854, 12 N.Y.S.2d 703 (Sup.Ct.1939), cited in Annotation, 98 A.L.R.2d 527, 530 (1964).

All the other cases that were found interpreting this clause involved some fraudulent or inequitable behavior by the insured and, accordingly, he was found to have created the defect: Ginger v. American Title Ins. Co., 29 Mich.App. 279, 185 N.W.2d 54, 56 (Ct.App.1970) (insured took title fraudulently to assist in evasion of grantor's creditors); Conway v. Title Ins. Co., 291 Ala. 76, 277 So.2d 890, 892 (Sup.Ct.1973) (insured kept...