Christenson v. Commonwealth Land Title Ins. Co.

• Decision Date: 24 May 1983
• Docket Number: No. 18330,18330
• Citation: 666 P.2d 302
• Parties: Richard A. CHRISTENSON, Trustee for Cape Trust, Plaintiff and Respondent, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Defendant and Appellant.
• Court: Utah Supreme Court

Page 302

666 P.2d 302

Richard A. CHRISTENSON, Trustee for Cape Trust, Plaintiff and Respondent, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Defendant and Appellant.

No. 18330.

Supreme Court of Utah.

May 24, 1983.

George A. Hunt, Randy K. Johnson, Salt Lake City, for defendant and appellant.

David B. Boyce, Salt Lake City, for plaintiff and respondent.

STEWART, Justice:

Plaintiff brought this action to recover damages caused by defendant's negligent acknowledgment of a document that incorrectly indicated that certain properties held in escrow had unencumbered equity values available as security for the plaintiff. The trial court ruled that defendant's action constituted negligent misrepresentation and awarded appropriate damages. We affirm.

Plaintiff, Richard A. Christenson, is one of the trustees of Cape Trust, a pension and profit-sharing trust for the employees of Capitol Thrift & Loan. In 1977, AGLA, a land development company, began developing a residential subdivision known as "Falconhurst." AGLA obtained major financing through Western Mortgage Loan Corporation, which loaned AGLA $450,000. The loan was secured by a first deed of trust on all the Falconhurst lots.

To handle the collection and disbursement of lot proceeds, AGLA hired the defendant, Commonwealth Land Title Insurance Company, to act as its escrow agent. As set forth in their written escrow agreement, AGLA conveyed to Commonwealth as trustee, legal title to the lots. When a lot was sold, the proceeds were to be paid to Commonwealth. The buyer of a lot was to pay 60% down in cash and sign a note secured by a second deed of trust for the remaining 40%. Commonwealth would disburse the 60% cash down payment to Western Mortgage and the remaining 40%, when collected, to AGLA or to "any party to whom AGLA may assign its interest in this escrow agreement."

Because it had hired Commonwealth as its escrow agent, AGLA did not keep any records of how much had been paid off on the lots it sold, and relied instead on Commonwealth to do the bookkeeping. On occasion, AGLA would request a list of lots in which it still had a beneficial interest, i.e., those on which the second deed of trust had not yet been paid off.

Shortly after entering into the escrow agreement, AGLA sought additional financing for the Falconhurst development and obtained a supplemental loan from Capital Thrift. To secure the loan, AGLA assigned its beneficial interest in several Falconhurst lots to Capitol Thrift. Commonwealth duly forwarded 40% of the proceeds from these lots to Capitol Thrift as the notes secured by the second deeds of trust were paid off.

In 1977, AGLA also established a debtor-creditor relationship with Cape Trust by entering into a joint venture to develop a residential subdivision known as "Colony Estates." Cape Trust put up most of the money with the understanding that it would receive back what it disbursed plus some profit at the end.

When the Colony Estates project was completed, Cape Trust had not received enough money from the project to cover what it had disbursed. To make up the deficit and pay Cape Trust some profit, AGLA agreed to assign to Cape Trust its beneficial interest in several of the Falconhurst lots. Unlike the Capitol Thrift assignment, this assignment was not for security but for total satisfaction of the debt.

At the request of AGLA, Commonwealth sent AGLA a letter listing the lots which it represented had not been paid off. The list erroneously included five lots which had previously been paid off and the proceeds sent to Capitol Thrift. Thus, although the letter stated otherwise, AGLA had no beneficial interest left in those lots to assign.

AGLA forwarded the letter to Merlyn Hanks, a trustee of Cape Trust. Using this information, Hanks drew up an assignment which included the five lots. The assignment was signed by AGLA. On the back of the assignment was an "Acknowledgment" which was signed by Commonwealth and stated in relevant part:

Commonwealth Land Title Insurance Company ... agrees that it is in possession of the beneficial interest of promissory notes and second trust deeds covering the above mentioned properties ....

Before sending the proposed assignment to be signed by Commonwealth, Hanks telephoned Ralph Ribas, assistant vice-president of Commonwealth. At trial, Hanks testified that during the conversation,

[I told Ribas] approximately what would be in it and the reason for it, and ask[ed] if he thought ... if he would be able to give us the assurance we needed.

....

I told [Ribas] ... that he would [sic, i.e., should] not sign the agreement unless the lots described in the agreement were available.

In other words, Hanks told Commonwealth that Cape Trust needed the information on the assignment to be accurate, and that Cape Trust was relying on the assignment as written.

The assignment and acknowledgment were signed by AGLA and Commonwealth on October 4, 1978. Shortly thereafter, Cape Trust accepted the assignment from AGLA in satisfaction of the remaining Colony Estate joint venture debt. Later, when Cape Trust discovered the error in the assignment, it brought suit alleging unjust enrichment and negligent misrepresentation on the part of AGLA and negligent misrepresentation on the part of Commonwealth.

The trial court held that Cape Trust had failed to prove either unjust enrichment or negligent misrepresentation against AGLA. However, the court ruled in favor of Cape Trust on the negligent misrepresentation claim against Commonwealth. The issue on this appeal is whether the latter ruling was correct.

Negligent misrepresentation is a tort which grew out of common-law fraud. We defined it in Jardine v. Brunswick Corp., 18 Utah 2d 378, 381, 423 P.2d 659, 662 (1967), as follows:

Where (1) one having a pecuniary interest in a transaction, (2) is in a superior position to know material facts, and (3) carelessly or negligently makes a false representation concerning them, (4) expecting the other party to rely and act thereon, and (5) the other party reasonably does so and (6) suffers loss in that transaction, the representor can be held responsible if the other elements of fraud are also present. [Subdivisions added.]

See also Dugan v. Jones, Utah, 615 P.2d 1239 (1980); Restatement (Second) of Torts § 552 (1965). See generally 1 F. Harper and F. James, The Law of Torts, § 7.6 (1956); W. Prosser, The Law of Torts, § 107 at 704-710 (4th ed. 1971).

As the definition suggests, a casual statement or gratuitous advice from a stranger to a transaction cannot be the grounds for negligent misrepresentation. The recipient of such information could not reasonably rely on it because he could hardly expect the representor to exercise prudence and care in making the statement that would warrant reliance. If, however,

the information is given in the capacity of one in the business of supplying such information, that care and diligence should be exercised which is compatible with the particular business or profession involved. Those who deal with such persons do so because of the advantages which they expect to derive from this special competence. The law, therefore, may well predicate on such a relationship, the duty of care to insure the accuracy and validity of the information.

1 F. Harper & F. James, supra, § 7.6 at 546 (footnotes omitted).

In cases where there is privity of contract between the parties, there is rarely doubt as to the existence of this duty. Id. Even without privity, however, one negligently making a false statement may be held liable. A recent case in point is Dugan v. Jones, Utah, 615 P.2d 1239 (1980). There the third-party plaintiffs were real estate purchasers who had been told by the third-party defendant, a real estate agent, that the property they were purchasing comprised 22 3/4 acres, when in fact it comprised only 6.9. We held that a claim for relief for negligent misrepresentation lies in tort against third parties to a real estate transaction. In support of this ruling, we quoted from Jardine v. Brunswick, supra, and Restatement (Second) Torts § 552. ¹ See also Arizona Title Insurance and Trust Co. v. O'Malley Lumber Co., 14 Ariz.App. 486, 484 P.2d 639 (1971); 1 F. Harper & F. James, supra, § 7.6 at 546-47; W. Prosser, supra, § 107 at 707.

The present case meets the requirements set by Jardine. (1) Commonwealth had a pecuniary interest in the AGLA-Cape Trust assignment. It was paid to be the escrow agent and disburse part of the proceeds of lot sales to AGLA or its assigns. (2) As escrow agent, Commonwealth was in a superior position to know which lots had been paid off because of its duty to keep such records. Indeed, one of the reasons that both Cape Trust and Capitol Thrift were willing to rely on the assignments was that Commonwealth did the necessary bookkeeping, thereby relieving Cape Trust and Capitol Thrift from that responsibility. (3) Because Commonwealth was the escrow agent and had superior knowledge of the status of the Falconhurst project, Commonwealth was negligent in signing the acknowledgment without checking its records to see that all the lots to be assigned still had a beneficial interest left. (4) Commonwealth knew that Cape Trust would rely on the acknowledgment; both the acknowledgment itself and Hanks' advance phone call alerted Commonwealth to this fact. (5) Cape Trust's reliance on the acknowledgment was reasonable and (6) that reliance led to a loss.

Commonwealth contends that it owed no duty to Cape Trust to make accurate representations. We disagree. It is true that Commonwealth was not in privity with Cape Trust and had no duty to sign the acknowledgment or give Cape Trust any information concerning the lots. But when Commonwealth signed the acknowledgment, a duty arose to use reasonable care to not mislead one whom Commonwealth knew would justifiably rely upon the facts as represented.

Arizona Title Insurance and Trust Co. v. O'Malley Lumber Co., ...