When the owner of property across the street claimed an easement on commercial property, the owners of the commercial property sought coverage under their title policy. Coverage was denied because the owners had quitclaimed the property to an LLC of which they were the sole members. The couple filed suit for breach of contract.
The case is Soon Han Pak et al. v. First American Title Insurance Co. (Second District Court of Appeal of California, No. B297647).
Soon Han Pak and Chung Huyk Pak purchased commercial property in Los Angeles in 2003. They purchased a title insurance policy from First American in connection with the purchase.
Five years later, the Paks formed 1232 East Washington Blvd. Property LLC. They were the sole owners and jointly responsible for its management. In August 2008, the Paks recorded a quitclaim deed transferring the property to the LLC.
In 2017, the real property across the street from the Paks’ was acquired by a group of third parties including Gage & 62nd LLC; C&W Investment LLC; Centerwa Investments LLC; and Yousef Golbahary. The next year, Gage informed the Paks a portion of the property was burdened by a non-exclusive irrevocable easement in Gage’s favor. Gage said the easement granted it the right to use a parking lot on the property and allow customers to park there. The Paks argued they were not aware of the easement when they purchased the property.
The Paks notified First American of Gage’s claims and made a claim under the policy. First American asked for additional information and, in April 2018, First American denied coverage because the quitclaim deed to the LLC divested the Paks of any estate or interest in the property. The policy’s coverage had lapsed because it only continued in favor of an insured if the insured retained an estate or interest in the land.
Gage sued the LLC and Soon Han Pak, alleging causes of action for quiet title and declaratory relief in connection with the use of the easement. Gage also served a lis pendens regarding its claims and recorded it in Los Angeles County. The Paks tendered the lawsuit and lis pendens to First American for coverage.
The Paks (in their capacity as members of the LLC) sent a letter to themselves (as individuals) asking that the Paks (as individuals) rescind the quitclaim deed or indemnify and defend the LLC in the Gage lawsuit. They sent a copy of the demand letter to First American, which acknowledged receipt.
In August 2018, the Paks and the LLC signed an agreement rescinding the quitclaim deed and provided First American with a copy of it. First American again denied coverage, explaining the policy had been voided by the quitclaim deed from the Paks to the LLC and the rescission agreement could not revive coverage.
The Paks sued First American in November 2018, alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. They alleged First American breached its obligations under the policy by refusing to defend the Paks against Gage’s investigation, failing to fully inquire into possible bases for coverage, denying coverage on grounds that are contrary to the policy, taking coverage position contrary to the Paks’ reasonable expectations of coverage.
First American demurred to the complaint. It argued all three causes of action failed to state facts sufficient to state a proper claim. First American argued the Paks’ voluntary transfer of the property to the LLC terminated coverage under Condition 2 in the policy and by transferring title via quitclaim deed, the Paks did not retain an interest in the property as required by Condition 2.
The Paks countered by arguing their transfer of the property did not terminate coverage because they were the only members of the LLC and the quitclaim deed stated they would retain their same proportional interest in the property after transfer.
The trial court sustained the demurrer, finding the policy ceased to be in force when the Paks transferred the property to the LLC, years before the Paks sought coverage. It held that an LLC and its members are distinct and the Paks, as LLC members, did not have the requisite interest in the property of the LLC. The Paks appealed.
The appellate court affirmed the lower court’s decision, noting that Condition 2 states coverage under the policy shall continue in favor of an insured only so long as the insured retains an estate or interest in the land.
“The question, then, is whether the Paks, as members of the LLC continued to possess a fee interest in the property once it was quitclaimed to the LLC,” the court stated. “Contrary to the Paks’ contentions, this has little to do with whether one characterizes the interest they were required to maintain as direct or indirect, and much to do with the legal effect of their decision to quitclaim the property to the LLC.”
It noted a limited liability company is separate from its members and a member has no interest in limited liability company property.
“Thus, after the quitclaim deed was signed, it was the LLC that held a fee interest in the property,” the court stated. “The Paks were left with only their interest in the LLC. The Paks’ argument they nonetheless maintained an “indirect” interest in the property is therefore doubly deficient. The very nature of a limited liability company means they retained no interest in the property, and regardless, they certainly did not retain the fee interest that the policy requires.
“The other arguments the Paks offer in no way undermine this conclusion,” the court continued. “The Paks argue they continued to hold interests in the property after signing the quitclaim deed because the deed itself stated ‘the grantors and grantees in this conveyance are comprised of the same parties who continue to hold the same proportional interest in the property…’ That the Paks’ personal property or membership interests in the LLC were held in the same proportions as the individual ownership interests they previously held in the property, however, does not mean they maintained a fee interest in the property as required by Condition 2.”
The court also heldthe rescission of the quitclaim deed does not undo the triggering of Condition 2. It noted rescission of a contract does not mean every action the parties took during the pendency of the contract is erased from history.
“As before, the arguments the Paks advance to avoid this conclusion are unpersuasive,” the court stated. “The Paks argue the rescission is binding on First American because California law provides the rescission of a contract binds an intended third-party beneficiary, who cannot enforce a contract after it is rescinded. That principle is inapposite here. First American was not an intended third-party beneficiary of the quitclaim deed, and it is not attempting to somehow enforce it. Rather, it is asserting Condition 2 of the policy was triggered in 2008 by the execution of the quitclaim deed.
“Because the quitclaim deed terminated coverage under Condition 2 of the policy, and because the subsequent rescission of the quitclaim deed did not erase all effects of that initial termination, we conclude the trial court properly sustained First American’s demurrer to the breach of contract cause of action,” the court concluded.