Insurance – Title Insurance – Trustee Suit – Tax Liens

In this diversity action for breach of a title insurance policy, an Alexandria U.S. District Court grants partial summary judgment to plaintiff, trustee on certain McLean real estate held in a trust of which she was sole beneficiary during her lifetime, on her claim that defendant title company breached an insurance policy when it denied coverage on the trust property, based on its treatment of tax liens against the trustee in her personal capacity.

Plaintiff Alexandra Murnan, in her capacity as trustee of the Murnan Springhill Trust, purchased a title insurance policy from defendant Stewart Title Guaranty Co. insuring the title of a property held in the trust and identified as 1150 Springhill Road in McLean, Va. In addition to serving as trustee, Murnan was also 1) sole holder of the right to revoke the trust and 2) the sole beneficiary of the trust for the duration of her life. At the time she purchased the policy, a number of IRS tax judgments were pending against Murnan in her personal capacity. Later, she claims, a sale of the property to a third party foundered because the IRS tax judgments against her in her personal capacity operated as liens on the property. Murnan, as trustee, subsequently defaulted on the mortgage payments for the property and the property was sold at a foreclosure auction for an amount less than she would have received from the sale that had previously foundered.

At issue on the parties’ cross-motions for summary judgment are these questions: 1) whether the IRS tax liens against Murnan in her personal capacity attach as liens on any property interests that Murnan holds in her personal capacity, and if so, 2) whether Murnan’s rights to the property, not as trustee, but as grantor with the sole power to revoke the trust and as sole trust beneficiary during her lifetime, are rights to property to which the IRS tax liens attach, and if so, 3) whether the IRS tax liens on Murnan’s rights to the property in her personal capacity are “liens” on the property covered by the policy and finally, if so, 4) whether recovery is nonetheless barred by the policy’s exclusion for liens that are “created, suffered, assumed or agreed to by the insured claimant.”

Murnan, as trustee, is entitled to summary judgment on these questions.

Murnan’s rights to the property as lifetime beneficiary of the trust and grantor with the sole power to revoke the trust are “rights to property” to which a federal tax lien attaches pursuant to IRC § 6321. Although there is no case directly on point on the question presented here, the analogous authority supports the result reached here.

While a trust under Virginia law may serve in various ways to safeguard trust property, Virginia law does not immunize trust property from the reach of a beneficiary’s judgment creditor. Thus, Virginia law does not protect the property from creditor’s liens on Murnan’s rights as beneficiary and grantor. Attachment of a federal tax lien pursuant to § 6321 does not “pierce” or otherwise disregard any state-law protection; rather, the attachment of the § 6321 lien to the property is entirely consistent with Virginia law. Accordingly, the policy’s coverage provision for liens on the property applies.

In the end, this is an odd case. As a general matter, an insurance policy is a wager that some future event or circumstance will or will not occur. In this case, however, the policy is not a wager about the occurrence or non-occurrence of some future event.

Rather, the title company wagered here that the federal tax liens – which it knew about – did not attach to the property, or alternatively, were barred by the exclusion; the insured, on the other hand, wagered to the contrary. In other words, this case is odd because the parties wagered about whether a set of facts – fully known to both parties – would fall within the policy. The parties’ wager really amounts to a wager on the legal effect of the federal tax liens and the policy exclusion. To the extent the title company wagered that a court would ultimately hold the liens did not attach to the property, were not covered by the policy or were barred by the policy’s exclusion, it has lost that wager.

Murnan, as trustee, is entitled to partial summary judgment on the issues of whether the federal tax liens filed against her in her personal capacity triggered the policy’s coverage provision for liens on the property’s title and whether the exclusion nonetheless bars coverage here.

Murnan, Trustee v. Stewart Title Guaranty Co. (Ellis, J.) No. 1:08cv2, Oct. 30, 2008; USDC at Alexandria, Va. VLW 008-3-492, 30 pp.