Bulletin: NJ000011

Dear Associates:

In the recent case of In The Matter of Lands of Rose M. Castner, Adjudicated Incompetent, Judge Martin of the Superior Court, Law Division - Passaic County (opinion has not been approved for publication) voided a transaction in which a guardian of an incompetent person made a mortgage on residential property. The case raises certain concerns about our reliance upon the Uniform Probate Act (N.J.S.A. 3B:14-23) in transactions involving sale or mortgaging of property by guardians without specific court orders authorizing such transactions. As you probably remember under the prior Probate Act a court order was always required for the sale or mortgaging of property by a guardian. The new act adopted in 1982 specifically permitted a guardian to sell or mortgage property without a court order. Although Judge Martin confirmed our understanding as to the power granted to guardians under the new act in his decision, he nevertheless voided the transaction in question under N.J.S.A. 3B:14-36, which section provides that conveyances or mortgages are voidable if there is a substantial conflict of interest on the part of the fiduciary.

The facts in the Castner case are as follows: Mr. & Mrs. Castner owned a home as tenants by the entireties. Mrs. Castner was declared incompetent and her husband was appointed her guardian. Mr. Castner thereafter borrowed $200,000.00 from a bank and mortgaged both a commercial piece of property and their residence as security for the loan. It appears to be undisputed that the loan was for the purpose of running Mr. Castner's business and that the home was an additional collateral for the loan. Mr. Castner then died and Mrs. Castner's new guardian claimed that the mortgage on the home was void either because it was not signed pursuant to court order or because there was substantial conflict between the fiduciary's (Mr. Castner) interest as a businessman in securing the loan and his obligations as his wife's guardian.

Again the court upheld the validity of a mortgage by a guardian without the benefit of a court order but, under these particular facts, found there was a substantial conflict between Mr. Castner's interest in securing the loan for his business and his duty in protecting the incompetent's estate. Because of the conflict the court voided the mortgage.

New Underwriting Guidelines:

As a result of the Castner case it appears that we need to make inquiry as to the nature of transactions involving guardians. You may no longer rely strictly on the Probate Act when insuring conveyances and/or mortgages executed by guardians. You will need to inquire as to the circumstances of the transaction to make sure that there is a good faith purchaser or mortgagee being insured and that the benefit of the transaction runs directly to the estate of the incompetent. If there appears to be a questions as to the propriety of the transaction, a court order will be required confirming the guardian's authority to consummate the transaction. The following is a suggested additional Schedule B, Section I requirement for matters involving the sale or mortgaging of property by guardians:

Proof will be required that the sale/mortgaging of the property by the guardian is in the best interest of the incompetent (infant/minor) and that the purchaser/mortgagee is acting in good faith as required by N.J.S.A.:3B.:14-37, such proof must be submitted to the company prior to closing of title. The company reserves the right to make further requirements as may be warranted by the review of such proofs, including but not limited to, a requirement that a court order be obtained to authorize this transaction.

Please file this memo in your Underwriting Manual under Guardianship and Conservatorship Procedures, Section 7.12 as a supplement thereto.