Statewide Newsletter and Legal Memorandum

View Current Newsletter - Search The Archive 
Sign UpPrint
Unsubscribe

View our Index of Newsletter Articles

Issue  147
Published:  10/1/2007

Marketable Title Synonyms
Chris Burti, Vice President and Legal Counsel

Justice Stewart, concurring in Jacobellis v. Ohio, 378 U.S. 184, (1964) authored the oft quoted definition of hard core pornography.   He said: “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description, and perhaps I could never succeed in intelligibly doing so. But I know it when I see it . . .” 

It has been said that the same may be said of marketable title. When the question has come up in modern appellate decisions, our courts have repeatedly relied upon Pack v. Newman, 232 N.C. 397, 61 S.E.2d 90 (1950), where Justice Ervin stated that a “ 'marketable title' is one free from reasonable doubt in law or fact as to its validity”, quoting Winkler v. Neilinger, 153 Fla. 288, 14 So.2d 403.  This definition is not a polar star which attorneys may rely upon for guidance when this issue is in question.  One may surmise that, like an esteemed jurist, title attorneys must learn to recognize marketable title when they see it.

 Kniep v. Templeton, COA06-967, filed on September 4, 2007 is no exception and it also illustrates why it is suggested that one wait until appellate decisions are published in final form before relying on them. This decision was originally filed on July 3, 2007. We prepared an article discussing the decision, but upon reviewing the status of the case, discovered that the opinion had then been withdrawn. The outcome remains essentially unchanged and the reason we originally selected the case for discussion is unaffected, but the road that the Court of Appeals used to arrive there was altered somewhat, and the case decided on the substantive issues rather than appellate procedure.

The opinion results from a Brunswick County Superior Court action for specific performance of a contract for the sale of a parcel of land.  After procedural events detailed in the opinion, the trial court entered default judgment and summary judgment in favor of Plaintiffs on their claim for specific performance of the defendant’s agreement to sell the property. The trial Judge ordered the defendant “to deliver to Plaintiffs['] counsel a duly executed General Warranty Deed conveying [the] property to the Plaintiffs, an executed IRS Form 1099, an executed lien waiver affidavit satisfactory to the title insurance company of Plaintiffs' choosing, and any and all other documents and/or things necessary to deliver clear and marketable title to Plaintiffs to the property in question.”

There were numerous procedural arguments in the appeal; however a discussion of those issues may be best left to appellate practitioners. The defendant argued that the trial court erred by requiring conveyance of “clear and marketable title” to his property to the plaintiffs when the contract called for the conveyance of “marketable and insurable title”. If correct, this supposition would invalidate the judgment because the equitable remedy of specific performance can’t be used to re-write the contract between the parties. The substance of the defendant’s argument being that “clear title” was in effect, better than “marketable title”. The defendant contended that rather “than requiring 'clear' title, the contract allowed for the existence of encumbrances such as ad valorem taxes, utility easements, and certain restrictive covenants and apparently that these excepted matters prevented title from being considered “clear”. The Court of Appeals disagreed with the defendant.

 The Court states that “Black's Law Dictionary defines clear title as ‘1. A title free from any encumbrances, burdens, or other limitations. 2. See marketable title. _ Also termed good title.’” Black's Law Dictionary 1522 (8th ed. 2004). The Court analyzed the definitional uses of synonymous words and phrases in the dictionary in context. It then examined the definitions of marketable title and good title.   “Marketable title is “[a] title that a reasonable buyer would accept because it appears to lack any defect and to cover the entire property that the seller has purported to sell. . . . _ Also termed good title; merchantable title; clear title.” Id at 1523. The Court, citing Pack, then concluded that “clear title” and “marketable title” are synonymous. The Court of Appeals states that each term refers “to a title that is free from major defect, such as a judgment or lien, and can be freely conveyed to a reasonable buyer.”  Since the defendant apparently failed to show and the court said that the record failed to demonstrate that the subject property was encumbered, the Court of Appeals determined that the contract was not being re-written by the trial court and further affirmed the judgment of the trial court on this issue.
    

The defendant also argued that the trial court altered the terms of the contract by requiring the defendant to convey his land to the plaintiffs before they were required to actually pay the contract price for it. The defendant specifically, contended that the order of the trial court “requires Defendant essentially to convey title on one date, and then to wait another sixty days for closing . . . [although] the actual contract calls for the conveyance of the deed 'at closing', not before.” The Court of Appeals found this argument without merit.    The Court notes that the “contract between the parties requires the property to be conveyed by ‘General Warranty Deed[.]’ To meet this requirement, the judgment requires Defendant to ‘deliver [a duly executed General Warranty Deed] to Plaintiffs' counsel within thirty (30) days of the date of this Judgment, [with] closing [to] occur within ninety (90) days of the date of this Judgment.’” The Court determined that the judgment was proper and that it was clear that it did not require the defendant to convey title to the land prior to receiving payment of the purchase price for the land. The Court noted that “Judge Locklear ordered Defendant to deliver a General Warranty Deed to Plaintiffs' attorney to ensure that the closing would occur. The actual transfer of title and funds will occur at the closing. Therefore, Judge Locklear did not order specific performance outside the terms of the contract entered by the parties.”  The plaintiffs' motion to dismiss the defendant's appeal was denied, and the judgment of the trial court was affirmed.

Marketable title is an essential element in most contracts for the sale of land, and it may be well to recap some of what we have discussed in previous articles on the subject in order to supplement the discussion of the current decision. Our Supreme Court has said that the requirement for delivery of marketable title is implicit unless the contract provides otherwise. In Burkhead v. Farlow, 146 S.E.2d 802, 266 N.C. 595, (N.C. 1966), the Court stated that “in the absence of an agreement to the contrary, merchantability is implied in a contract to convey land, 'the acceptance of an offer to sell land making no specifications or limitations as to title is not made conditional by including a provision requiring 'marketable title.'  1 Corbin, Contracts § 86 (2d Ed. 1963)… ”

Clearly then, marketable title is the standard of all contracts to sell land unless the parties expressly agree to the delivery of title of a lesser quality. It would seem that there would exist substantial guidance from our appellate courts as to effects of common defects on title marketability. Oddly enough, we are provided very little useful direction by appellate decisions or commentators in this regard. In Richardson v. Greensboro Warehouse & Storage Co., 223 N.C. 344, 26 S.E.2d 897, (1943), a decision antedating Pack, our Supreme Court gives a nudge toward providing limits to the broad definition enunciated in Pack.  There the Court stated that “it is implied in a contract to convey land, unless differently agreed, that the seller must give a good title.  But it is not implied in law or, as far as we know, required by any controlling custom, that attorneys of plaintiffs' selection should be designated to pass upon the title, and that their adjudication thereon should be final, and possibly have the effect of annulling the contract. 

The Court refined this statement as follows: “Although the law implies an obligation on the part of the vendor to furnish a good or marketable title, it does not imply any obligation to furnish a title that will be satisfactory to the vendee or his attorney or one that he will be willing to accept.  The fact that the title is not satisfactory to a particular purchaser or his attorney does not necessarily mean that the title is, in fact, not marketable. ” Burkhead v. Farlow, 146 S.E.2d 802, 266 N.C. 595, (N.C. 1966)

While this does not move us very far in discovering what marketable title is, we know by implication that it does not have to be perfect and unblemished, and the buyers (or their attorney) do not have to like it.  It is interesting to discover that North Carolina cases holding that certain defects do or do not affect marketability are rare. What is far more common is finding cases that hold that an alleged title defect is or is not actually a defect in legal title.

A review of these few appellate cases, leads to the following observations. When the record on appeal is sufficient, the appellate court will determine the legal effect of the defect that is alleged to make the title unmarketable. When the record is not sufficient for a ruling as a matter of law, the appellate bench will remand for the purpose of finding such facts. It may be reasonable to conclude that the unarticulated rule in North Carolina is that marketable title may be found to exist where there is legal title in law and fact even where record title reveals a questionable defect. As it is, we are left with the Pack definition which may be fairly paraphrased in Justice Stewart’s memorable phrase; “I know it when I see it . . .” This has, arguably, been the applicable test and seems to work, at least until there is enough disagreement, reasonable or otherwise, as to the validity of the title to motivate two parties to litigate the issue.

This uncertainty in what defines marketable title translates into difficulty for title insurers who are requested to insure over many questionable defects in record title.  A basic protection afforded by a policy is indemnity for losses sustained by reason of title unmarketability.  Often there is little risk in a particular defect giving rise to claim arising out of the defect itself. Yet, when the insurer agrees to insure without excepting to the existence of the alleged defect in the policy, the mere existence itself of the defect may give rise to a claim under the policy’s insuring provisions against unmarketability.  The better practice is to take exception to the existence of the defect and provide affirmative coverage for loss or damage arising from parties claiming rights as a result of the defect. This will provide indemnity for the insured if someone else claims rights in the property without exposing the title insurer to the risk that it might have to fund a contract dispute where marketable title may be used as a bargaining chip.



Dirt Tales From the Deed Vault - Episode 8
John Dillard, Vice President and Legal Counsel

This month’s edition of Tales from the Dirt looks at the difference in getting insurable versus marketable title for your client.  As always, this is an event that actually occurred, but the names of the parties have been changed.

When Steve was selling his home, the buyer’s attorney discovered a previous deed of trust that had not been canceled from the public records.  Steve took this information to the attorney who had closed his purchase earlier that year.  His attorney pulled his file and saw the problem.  The previous seller’s attorney had provided Steve’s attorney with a copy of the check that had been written to the mortgagee as well as a copy of the HUD statement showing the mortgage as an item that was to be paid at closing.  Based upon this information, Steve’s attorney had been able to get the title company to “insure over” this open deed of trust.

Steve was told he had title insurance over this deed of trust and that was all he needed.  He should let the buyer’s attorney know this and suggest he “tack on” to Steve’s policy.  Steve conveyed this information to his realtor, who in turn let the buyer and his attorney know that the deed of trust had been insured over in Steve’s title policy and that they were welcome to tack on to his policy.  The buyer’s attorney refused to accept this offer citing the sales contract provided that the seller was to deliver to his client marketable title and just not insurable title.  Insurable title is what is given whenever there is a defect that has not been cured, but has been insured over in a title policy.  

Since the buyer would not close until this mortgage had been canceled Steve instructed his attorney to do what was necessary to get this mortgage properly satisfied.  After looking into the matter, the attorney discovered that the uncanceled deed of trust had originally been given in favor of Bank A, who had just sold the note and deed of trust to Bank B.  No instrument of assignment had been recorded, so the attorney closing the sale had gotten a payoff on the deed of trust from Bank A and sent his trust check to them, where it was subsequently cashed.  As it turned out Bank A was not a bank, but a mortgage broker operating under a name that led one to believe it was a bank.  When the mortgage broker was contacted and asked to return the funds, his response was “if you want your money back come up here to Ohio and sue me”. 

At that point, Steve’s attorney filed a claim on his title policy to have his title cleared so he would  be able to deliver marketable title to the buyer.  Unfortunately, he learned that since there was no foreclosure proceeding filed against Steve, there was nothing the title company could do.  Title policies only cover the insured against out-of-pocket losses for covered items in the policy, or they offer a defense when sued, provided the subject of the suit is a matter covered under the policy.  Title policies do not make title problems go away nor are they covenants for good title.  Although the policy insured over the uncanceled deed of trust, that deed of trust had not caused Steve to suffer any monetary loss at that point.

Uncanceled deeds of trust are a big area of claims, both in the marketability of title realm as well as under the Insured Closing Protection Letter Service title companies provide lenders, so it is important to make certain that open deeds of trust are actually canceled of record and just not “insured over”.



Follow Statewide_Title on Twitter       View Statewide Title's profile on LinkedIn