Holmes Development, LLC v. Cook

Facts

Cook (D) purchased two parcels of land of 323 acres and 73 acres. They were conveyed to Cook Development, a Utah limited liability company. Cook is and has been at all relevant times, the principal member, the manager, and the registered agent of Cook Development. Cook Development then associated with Premier Homes to infuse cash into the development project. In October 1997, Cook Development and Premier formed two limited liability companies known as Lake Creek Farms, LC ('LC Farms'), and Lake Creek Associates, LC ('LC Associates'). Cook Development conveyed the 323-acre parcel to LC Farms and the 73-acre parcel to LC Associates. Premier and Cook Development decided to part ways and agreed that deeds would be executed on behalf of LC Farms and LC Associates to reconvey the 323- and 73-acre parcels, respectively, to Cook Development. First American prepared two quitclaim deeds, which were signed by Cook on behalf of Cook Development and by an agent of Premier. The quitclaim deed conveying the 323-acre parcel erroneously identified LC Associates, rather than LC Farms, as the grantor. Cook Development obtained financing from Clark Real Estate and used both parcels as collateral. Neither Cook, Cook Development, nor First American discovered the error in the quitclaim deed at that time. In 1998, P and Cook Development agreed that P would purchase both parcels from Cook Development. First American was again retained to prepare a title insurance commitment report and to issue a title insurance policy to P. Cook Development closed the property sale, conveying both parcels to P by way of warranty deed. At closing, First American provided P a title insurance policy that insured both parcels. According to subsection 4(b) of the policy, in the event of a title defect, the policy allowed First American to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish the title to the estate or interest, as insured, or to prevent or reduce loss or damage to the insured. [First American] may take any appropriate action under the terms of this policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy. D and Cook Development signed an indemnity agreement and a modification and extension agreement. P was the other party to these agreements. P sought financing and retained First American to prepare the trust deed and title insurance documents associated with the financing. First American discovered that Cook Development did not validly convey the 323-acre parcel to P because Cook Development never held title to the parcel as a result of the erroneous quitclaim deed that was intended to convey the parcel from LC Farms to Cook Development. First American immediately attempted to rectify the error, as it was obligated to do under the policy. First American contacted Premier and Cook Development, the members of LC Farms, and requested that they execute a corrected quitclaim deed to convey the 323-acre parcel from LC Farms to Cook Development. Premier refused to sign the deed. First American then prepared a special warranty deed whereby LC Farms deeded the 323-acre parcel directly to P. First American prepared the corrective special warranty deed from LC Farms for Cook's signature and Cook signed the deed. In November 1998, Premier sold the 323-acre parcel, as a member of and on behalf of LC Farms, to Keystone Development. Keystone commenced a quiet title action and promptly recorded a lis pendens to give notice of the action. Keystone named P, D, Cook Development, First American, and Bank One as defendants. First American, pursuant to the title insurance policy, retained legal counsel to defend the named defendants. Keystone contended that LC Farms did not validly convey the 323-acre parcel to P because D and Cook Development lacked the authority to convey the property. In addition, Keystone argued that Premier, instead of Cook Development, was the manager of LC Farms and thus able to convey the parcel on behalf of LC Farms, vesting paramount title to the 323-acre parcel in Keystone. The special warranty deed did not specify that Cook signed the deed in his representative capacity of Cook Development. In an effort to correct the signature on the special warranty deed, defense counsel prepared an affidavit in which Cook maintained that he intended to sign the special warranty deed in his capacity as the manager of Cook Development, which was a managing member of LC Farms. After eight months of litigation, on June 29, 1999, the trial court granted summary judgment in favor of all Ds and against Keystone. In particular, the court determined that the special warranty deed was a valid instrument of conveyance and that title vested in P. The lis pendens precluded P from selling a single lot in the 323-acre parcel. P had missed the prime spring selling season. P was also obligated to continue to make interest payments to Bank One in connection with the loan. P sued D, Cook Development, and First American, seeking recovery for damages suffered in the form of lost profits and lost sales and reimbursement of interest paid to Bank One. P claimed under negligence, breach of contract/third-party beneficiary liability; and (3) negligent misrepresentation. Ds all moved to dismiss each the claims, or in the alternative, for summary judgment. The trial court entered summary judgment in favor of First American and denied D's motion for leave to amend the complaint with respect to First American. It held that First American cured any title defects two months before Keystone initiated the Keystone litigation, and therefore First did not proximately cause P's damages; First diligently and timely cured all of P's title problems pursuant to the title insurance policy; the economic loss rule precluded the negligence and negligent misrepresentation claims; (4) First could not have reasonably expected P to rely on its conduct with respect to the quitclaim deeds, thus barring the negligent misrepresentation claims; and (5) First and Cook Development did not intend to confer a benefit upon P in March 1998 as a third-party beneficiary, precluding the third-party beneficiary claims as a matter of law. The trial court entered summary judgment in favor of D and Cook Development on three independent grounds: The economic loss rule precluded any recovery on P's negligence claim; the breach of warranty was cured before Keystone filed its lawsuit against P and no damages were alleged to have occurred prior to good title being conveyed; and (3) P's claim for indemnification of damages was barred as being outside the scope of the indemnification agreement. P appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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