Holmes Development, LLC v. Cook, 20000745.

• Decision Date: 16 April 2002
• Docket Number: No. 20000745.,20000745.
• Citation: 48 P.3d 895,2002 UT 38
• Parties: HOLMES DEVELOPMENT, LLC, Plaintiff and Appellant, v. Paul COOK, an individual, Cook Development, LC, a Utah limited liability company, and First American Title Insurance Company, a California corporation, Defendants and Appellees.
• Court: Utah Supreme Court

48 P.3d 895

2002 UT 38

HOLMES DEVELOPMENT, LLC, Plaintiff and Appellant, v. Paul COOK, an individual, Cook Development, LC, a Utah limited liability company, and First American Title Insurance Company, a California corporation, Defendants and Appellees.

No. 20000745.

Supreme Court of Utah.

April 16, 2002.

Barry N. Johnson, Daniel L. Steele, Salt Lake City, for plaintiff.

Gregory N. Jones, Gifford W. Price, Salt Lake City, for Cook and Cook Development.

Alan L. Sullivan, Robert W. Payne, Salt Lake City, for First American Title.

RUSSON, Justice.

¶ 1 Holmes Development, LLC ("Holmes"), appeals from an order granting summary judgment to First American Title Insurance Co. ("First American") and from an order granting summary judgment to Paul Cook ("Cook") and Cook Development, LC ("Cook Development"). We affirm.

BACKGROUND

¶ 2 The parties to this appeal do not dispute the material facts. In 1993, Cook purchased two parcels of land in Heber City, Utah. One parcel was approximately 323 acres, and the other parcel was approximately 73 acres. Cook began subdividing and developing the larger parcel. Eventually, Cook conveyed the two parcels 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.

¶ 3 To further the development of the property, Cook Development associated with Premier Homes ("Premier") to infuse cash into the 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.

¶ 4 Eventually, 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. To effectuate the parties' agreement, 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.

¶ 5 Immediately thereafter, 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.

¶ 6 Then, in April 1998, Holmes and Cook Development agreed that Holmes 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 Holmes. On or about May 20, 1998, Cook Development closed the property sale, conveying both parcels to Holmes by way of warranty deed.

¶ 7 In connection with this closing, First American acted as the escrow agent for the transaction and prepared all the closing documents, deeds, and settlement statements. At closing, First American provided Holmes 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.

In addition, in connection with the transaction, Cook and Cook Development signed an indemnity agreement and a modification and extension agreement on May 19, 1998. Holmes was the other party to these agreements.

¶ 8 After the transaction was consummated, Holmes sought additional financing from Bank One of Utah ("Bank One"). Bank One retained First American to prepare the trust deed and title insurance documents associated with the financing. In July 1998, while examining the title for the Bank One loan, First American discovered that Cook Development did not validly convey the 323-acre parcel to Holmes 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.

¶ 9 Upon making this discovery, First American immediately attempted to rectify the error, as it was obligated to do under the title insurance policy. Initially, 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. When Premier refused to sign the deed, First American prepared a special warranty deed whereby LC Farms deeded the 323-acre parcel directly to Holmes. First American prepared the corrective special warranty deed from LC Farms for Cook's signature, and Cook signed the deed.¹

¶ 10 Then, in November 1998, Premier sold the 323-acre parcel, as a member of and on behalf of LC Farms, to Keystone Development, LC ("Keystone").² Realizing that there were various competing claims as to the ownership of the 323-acre parcel, Keystone commenced a quiet title action ("Keystone litigation") and promptly recorded a lis pendens to give notice of the action. Keystone named Holmes, Cook, 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.

¶ 11 In the suit, Keystone contended that LC Farms did not validly convey the 323-acre parcel to Holmes because Cook 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.

¶ 12 Defending against Keystone's claims, Cook and Cook Development realized that 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 defendants and against Keystone. In particular, the court determined that the special warranty deed was a valid instrument of conveyance and that title vested in Holmes.

¶ 13 During the pendency of the Keystone litigation, the lis pendens precluded Holmes from selling a single lot in the 323-acre parcel. In particular, Holmes was unable to avail himself of the prime spring selling season. Additionally, Holmes continued to make interest payments to Bank One in connection with the loan Holmes procured.

¶ 14 As a result, in October 1999, Holmes brought suit against Cook, 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 that Holmes alleged it would not have been required to pay if Holmes had been able to sell lots. Holmes asserted three causes of action against First American: (1) negligence in (a) preparing the original quitclaim deed conveying the 323-acre parcel from LC Farms to Cook Development where the quitclaim deed named LC Associates as grantor, (b) performing a title search respecting the warranty deed from Cook Development to Holmes, and (c) allowing Cook to sign the special warranty deed in his individual capacity; (2) breach of contract/third-party beneficiary liability; and (3) negligent misrepresentation in that the quitclaim deed and the special warranty deed were "representations" from First American upon which Holmes relied to its detriment. Holmes also asserted three causes of action against Cook and Cook Development: (1) negligence, (2) breach of warranty, and (3) indemnification of damages under the indemnity agreement resulting from Cook's, Cook Development's, and First American's alleged negligence.

¶ 15 First American, Cook, and Cook Development all moved to dismiss each of Holmes's claims, or in the alternative, for summary judgment. In its memoranda in opposition, Holmes opposed the motions on legal grounds and also moved for leave to amend its complaint to defeat the motions.

¶ 16 On May 18, 2000, after receiving evidence regarding the propriety of dismissal, the trial court entered summary judgment in favor of First American and denied Holmes's motion for leave to amend the complaint with respect to First American. The trial court stated five independent grounds upon which it relied: (1) First American cured any title defects by September 3, 1998, two months before Keystone initiated the Keystone litigation, and therefore First American did not proximately cause Holmes's damages; (2) First American diligently and timely cured all of Holmes's title problems pursuant to the title insurance policy; (3) the economic loss rule precluded the negligence and negligent misrepresentation claims; (4) First American could not have reasonably expected Holmes to rely on its conduct with respect to the quitclaim deeds, thus barring the negligent misrepresentation claims; and (5) First American and Cook Development did not intend to confer a benefit upon Holmes in March 1998 as a third-party beneficiary, precluding the third-party beneficiary claims as a matter of law.

¶ 17 On August 2, 2000, the trial court entered summary judgment in favor of Cook and Cook Development on three independent grounds:...