The title company requires certain assurances from the seller that the delivery of a deed is not impaired by fraud or error.  The signer of a deed or a power of attorney will have to prove their identity by producing government-issued identification.  When the seller is an entity, the title company requires the seller to provide proof that the sale has been duly authorized.  The proof required consists of certified copies of the documents discussed below and affidavits of persons with knowledge of the workings of the selling entity.   

For a corporation that sells real estate, the sale must either be made in the ordinary course of the corporation’s business or, if the sale is not in the ordinary course, it must be approved, pursuant to Business Corporation Law Section 909, by the board of directors and the requisite percentage of shareholders at a duly called meeting. The requisite percentage of shares approving the sale is 50% of those outstanding for corporations that were already in existence when Section 909 was enacted, and 2/3 for corporations formed thereafter.  Compliance with any shareholder’s agreement must also be shown.

When the selling entity is a limited partnership or limited liability company, the title company requires the seller to provide for review a certified copy of the relevant formation document and, as applicable, the partnership agreement or the LLC operating agreement.  The Seller must show compliance with these governing documents. The seller’s general partner or manager will typically provide an affidavit that confirms that the documents provided the title company are true and complete and that the authorizing procedures were followed.  A successful sale depends in large part on the confidence the title agents get in dealing with the seller’s attorney.

When title insurance is being purchased the buyer’s lawyer generally relies on the title company to vet any issues about the authority of the seller to deliver the deed. But if a buyer’s attorney has any reason to doubt the seller’s authority, it is best to raise those concerns and verify the basis on which the title company has cleared the issue of due authority.  This is because of an exclusion in the Owner’s Policy permitting the insurer to disclaim when the buyer possesses knowledge of a problem that the insurer isn’t aware of. 

The exclusion (“exclusion 3(a)”) is expressed as follows:

3. Defects, liens, encumbrances, adverse claims, or other matters

(a) created, suffered, assumed, or agreed to by the Insured Claimant;

(b) not Known to the Company, not recorded in the Public Records at Date of Policy, but Known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this policy;

A recent ruling in the Federal District Court in the Northern District of New York demonstrates the importance of exclusion 3(a), the application of which resulted in no coverage for the buyer.  The case is NY-32 Realty Group Inc. v. Westcor Land Title Insurance Co., case number 1:22-cv-00803.  In that action, the buyer of real property, NY-32 Realty Group, Inc. (“NY-32”) sought an order requiring its title insurer to cover damages arising from an underlying action and to appoint counsel to defend NY-32 in the underlying action.

The plaintiffs in the underlying action, presently pending in Supreme Court, Greene County, seek to invalidate a 2020 deed given by L&H Resorts Systems LP (“L&H”), the record owner, to NY-32, as a buyer, for consideration of $5.8 million. The claim in the underlying action is that the deed’s signers (purporting to be “president” and a “member” of this limited partnership) were, in fact, strangers to the seller with no authority. 

The mere fact that unauthorized signers gave a deed would not alone have triggered exclusion 3(a), but additional allegations in the underlying action resulted in the dismissal of NY-32’s complaint. Judge Thomas A. McAvoy granted summary judgment in favor of Westcor noting that the complaint in the underlying action alleged a scheme to defraud partners in L&H in which NY-32 was a willing and essential participant.  Judge McAvoy’s ruling noted, “[t]he allegations of the Complaint therefore cast that pleading solely and entirely within the policy exclusions and the allegations, in toto, are subject to no other interpretation.” (internal quotes removed).  The fit within the exclusion was so clear that Westcor was not even required to provide a defense to its insured.