Arizona Title Ins. & Trust Co. v. O'Malley Lumber Co.

• Decision Date: 11 May 1971
• Docket Number: CA-CIV,No. 1,1
• Citation: 484 P.2d 639,14 Ariz.App. 486
• Parties: ARIZONA TITLE INSURANCE AND TRUST COMPANY, an Arizona corporation, Appellant and Cross-Appellee, v. O'MALLEY LUMBER COMPANY, a Corporation, et al., Appellees and Cross- Appellants. ALL MICA, INC., a corporation, Appellants, v. ARIZONA TITLE INSURANCE AND TRUST COMPANY, an Arizona corporation, Appellee. 1179.
• Court: Arizona Court of Appeals

Page 639

484 P.2d 639

14 Ariz.App. 486

ARIZONA TITLE INSURANCE AND TRUST COMPANY, an Arizona corporation, Appellant and Cross-Appellee, v. O'MALLEY LUMBER COMPANY, a Corporation, et al., Appellees and Cross- Appellants.

ALL MICA, INC., a corporation, Appellants, v. ARIZONA TITLE INSURANCE AND TRUST COMPANY, an Arizona corporation, Appellee.

No. 1 CA-CIV 1179.

Court of Appeals of Arizona, Division 1, Department B.

May 11, 1971.

Renaud, Cook, Miller & Cordova by J. Gordon Cook, Phoenix, for appellant and cross-appellee, Arizona Title Ins. and Trust Co

Marks & Marks by Philip J. Shea, Phoenix, for appellees, cross-appellants and all other appellants.

HAIRE, Judge.

The appellant, Arizona Title Insurance and Trust Co. (Arizona Title'), appeals from a judgment holding it liable for Negligent misrepresentations made by it to each of seven contractors (including materialmen) to the effect that it either had in its capacity as 'Builder's Control' escrow agent sufficient funds or that there would be sufficient funds available to pay the contractors for work or materials which the subsequently performed on or furnished to a construction project. The seven contractors referred to are appellees; the eighth appellee is a contractor to whom the trial court found that Arizona Title had made a similar but Intentional misrepresentation. The appellees cross appeal, claiming interest from the date their claims fell due to the date of judgment. There is also before us another appeal, erroneously designated a cross appeal, prosecuted by five other contractors to whom Arizona Title was held not liable. For convenience in identification, we will call these five contractors 'counter-appellants'.

We shall at this point state the mainstream facts which have applicability or give understanding to all aspects of the Additional facts will be stated where necessary in connection with specific contentions.

Chiefly in consideration of assuming existing mortgage indebtedness, Fortner Bell and his wife acquired for $38,400.00 a parcel of land in the City of Phoenix. Bell wished to erect an apartment building on the land, and to that end he had plans drawn and a prospective appraisal of the project made by an MAI appraiser. After obtaining a $210,000.00 'permanent' loan commitment from an insurance company, Bell approached the Bank of Scottsdale (hereinafter 'the bank') for a loan to pay off the major ($27,917.59 principal) existing mortgage indebtedness and for a construction The bank gave Bell a mortgage loan to pay off the existing $27,917.5. mortgage indebtedness and further agreed to lend him the $195,000.00 he sought for construction financing, payable in five installments of $39,000.00 each, provided that the loan given him to liquidate the $27,917.59 indebtedness was first repaid so that a mortgage securing the $195,000.00 loan would have a first priority position. Bell subsequently approached Arizona Title in August 1963 for a loan to repay the bank's initial loan. Arizona Title performed a title search which showed that the land was also subject to the lien of a judgment against Bell. Arizona Title agreed to lend Bell $37,000.00 to remove these two encumbrances. It was also agreed between Arizona Title, Bell and the bank that Arizona Title would receive the construction loan proceeds from the bank and act as disbursing agent pursuant to a 'Builder's Control Agreement'. The $37,000.00 loan by Arizona Title to Bell was to be repaid by equal appropriations out of the first four $39,000.00 installments disbursed by the bank to Arizona Title.

financing loan in the amount of $195,000.00.

The Builder's Control Agreement was executed in September 1963, after construction had begun. By its terms, Bell was required to furnish Arizona Title with complete plans and specifications for the contemplated improvements and to submit a complete breakdown of all direct and indirect costs to be incurred. Bell, who acted as his own construction supervisor, was also required to supply Arizona Title with firm contracts from contractors and materialmen. Of these, at the outset, Bell furnished only a very general cost breakdown, which indicated construction costs of $158,316.62. This figure was in sharp contrast to a cost estimate contained in the MAI appraisal submitted by Bell to Arizona Title with his loan application, which put estimated construction cost at $273,593.00. No plans and specifications beyond those contained in the MAI appraisal were ever submitted to Arizona Title, and the various contracts were received by Arizona Title 'in dribs and drabs' while construction was in progress through January 1964.

As indicated by the trial court's findings, Arizona Title could have calculated at the inception of its Builder's Control escrow that out of the $195,000.00 construction loan proceeds, it was to receive a total of $40,309.96 in repayment of its loan to Bell and for other services, ¹ and that another financial institution was to receive the sum of $7,876.41 in repayment of another existing mortgage. This left $146,813.63 out of the construction loan proceeds which could be applied to the costs of actually planning and constructing the improvements. It is to be noted that this last figure is more than $11,000.00 short of the general cost breakdown which Bell gave to Arizona Title, over $60,000.00 short of the commitment for permanent financing, and some $125,000.00 short of the cost estimate appearing in the MAI appraisal which Bell had submitted to Arizona Title.

Subsequent to execution of the Builder's Control Agreement, each of the appellee contractors contacted Raphael Constand, Arizona Title's employee in charge of the Builder's Control escrow, with respect to the apartment construction project. The tenor of each of the various telephonic communications differed, but generally witnesses for the appellee contractors testified that Constand told them in substance that money was either on hand or would be available to pay them for their labor and materials. Testimony was also adduced that appellees furnished labor and/or materials, for which they were not paid, in reliance upon these representations by Constand.

The claims of all contractors and materialmen on the substantially completed project exceeded $259,000.00. The bank stopped disbursing loan proceeds to Arizona Title

on the then-recognizably troubled project after the fourth installment, at which time $156,000.00 had been disbursed. A secondary construction financing source, eagerly sought as the project progressed, failed to materialize. The plaintiff contractors (appellees and counter-appellants) brought their claims against Arizona Title through a joint third-party complaint in litigation commenced by the bank to foreclose its mortgage. In a trial to the court sitting without a jury, the trial judge found that the eight appellees either entered into their contracts or performed some specified portion of their contracts for which they were not paid in reliance upon the aforementioned statements (seven negligent and one intentional) of Constand. The trial judge further found that none of the five counter-appellants had performed proven services subsequent to or in reliance upon false statements by Constand.

THE STATUTE OF LIMITATIONS ISSUE

Arizona's Title's first asserted ground for reversal is a statute of limitations argument based upon the fact that appellees did not amend their complaint to state a claim for negligent misrepresentation until more than two years after the alleged misrepresentations were made.

Appellees' original third-party complaint was in two counts. The first count asserted dual bases of liability by reason of (1) appellees' alleged third party beneficiary status under the Builder's Control Agreement, and (2) Arizona Title's alleged position as trustee for the sole benefit of appellees under the some agreement. Arizona Title was granted summary judgment on both grounds of this first count and the judgment became final pursuant to the provisions of Rule 54(b) of the Rules of Civil Procedure, 16 A.R.S. The second count pleaded a statement or assurance by Arizona Title that it had sufficient funds to pay the contractors and a promise to pay them. In its brief in this Court Arizona Title describes this second count as pleading 'offensive promissory estoppel'. The second count was later amended to allege, in substance, that Arizona Title tortiously misled the appellees.

Under Rule 15(c) of our Rules of Civil Procedure, a claim in an amended complaint 'relates back' if it arose out of the same 'conduct, transaction, or occurrence' set forth in the original pleading. We recently explored the meaning of this provision at some length in Neeriemer v. Superior Court, 13 Ariz.App. 460, 477 P.2d 746 (1970) (petition for review denied, No. 10331--PR January 12, 1971). Where the factual setting is the same, relation back will not be defeated by a change in the theory of recovery from contract to tort, See 3 J. Moore, Federal Practice § 15.15(3), at 1030 (2d ed. 1968), particularly, we would add, where the change is the relatively slight one from estoppel to misrepresentation and reliance. For the reasons set forth in Neeriemer, Supra, plaintiffs' amended claim related back to the original third-party complaint and was not defeated by the statute of limitations.

THE PROPRIETY OF ALLOWING RECOVERY FOR NEGLIGENT MISREPRESENTATION

As indicated above, the trial judge found that Arizona Title made an intentional misrepresentation to one of the appellee contractors. With respect to the seven other appellee contractors, we construe the trial judge's comprehensive findings, conclusions and judgment to be based upon negligent as opposed to fraudulent or intentional misrepresentation. It is strenuously contended by Arizona Title that under the facts and law of the case it could not have any liability to any of the appellees for negligent misrepresentation.

Arizona...