LLCs and Title Insurance; Transferring Ownership to an LLC May Void Your Title Insurance
It is common advice that real property should be held in an LLC. Basis for this advice includes that it is easier to transfer LLC interests than it is an interest in the real estate, and the limited liability protects the ultimate owners from potential claims arising from property ownership. A decision from California cautions to keep an eye on the title insurance when making those transfers.
In Pak v. First American Title Insurance Co., No. B297647, 2020 WL 6886551 (Cal. App. 2 Dist., 2020), the individual property owners (the Paks), at the time of purchase in 2003, acquired a title insurance policy. In 2008 they formed an LLC and quit claim deeded of the property to the LLC. In 2018, when a title problem, namely a parking easement, arose, the Paks made a claim on the insurer. The insurer successfully argued that “because the quitclaim deed to the LLC divested the Paks of any estate or interest in the Property, and the policy’s coverage – which only continued in favor of an insured so long as the insured retained an estate or interest in the land-had lapsed.” The court would hold that “Because it is well established that a limited liability company is an independent legal entity and the members of such a company have no interest, much less a fee interest, in the company's property, the transfer of the Property to the LLC triggered Condition 2 and terminated the Policy.” Id., *3. “Pak’s efforts to “unring the bell” by revoking the quitclaim deeds was found to be ineffective:
The Paks argue that even if coverage was terminated when they signed the quitclaim deed, their subsequent agreement with the LLC to rescind the deed means they have maintained an unbroken interest in the Property since its purchase. While the Paks are correct that rescission extinguishes a contract and restores the parties to their former positions, they carry this principle past its breaking point by effectively contending their agreement to rescind the quitclaim deed reverses all consequences of their original agreement. That is not the case.
Id., *6. See also Kevin Brodehl, Title Insurance Booby Traps in the LLC Jungle, The LLC Jungle (March 21, 2021), available at https://thellcjungle.com/2021/03/title-insurance-booby-traps-in-the-llc-jungle/.