Humphries v. West End Terrace, Inc.

• Decision Date: 30 March 1990
• Docket Number: No. C,C
• Citation: 795 S.W.2d 128
• Parties: Paul E. HUMPHRIES, et al., Plaintiffs-Appellants, v. WEST END TERRACE, INC., Town & Country Realty Company, Ticor Title Insurance Company, and Sovran Bank/Central South, Defendants-Appellees. A. 89-365-II. 795 S.W.2d 128
• Court: Tennessee Court of Appeals

Page 128

795 S.W.2d 128

Paul E. HUMPHRIES, et al., Plaintiffs-Appellants, v. WEST END TERRACE, INC., Town & Country Realty Company, Ticor Title Insurance Company, and Sovran Bank/Central South, Defendants-Appellees.

No. C.A. 89-365-II.

795 S.W.2d 128

Court of Appeals of Tennessee Western Section.

March 30, 1990.

Permission to Appeal Denied by

Supreme Court July 16, 1990.

H. Frederick Humbrachet, Jr., Nashville, for defendants-appellees, Sovran Bank and Central South.

John H. Roe, Jr., and Kenneth R. Jones, Jr., Nashville, for defendant-appellee, Ticor Title Ins. Co.

Thomas E. Stewart, and Thomas M. Black, Madison, for plaintiffs-appellants.

CRAWFORD, Judge.

This is an appeal by plaintiffs from the order of the trial court dismissing plaintiffs' suit as to two of the four defendants for failure to state a claim upon which relief can be granted. The order was made final pursuant to Rule 54.02, Tennessee Rules of Civil Procedure, and plaintiffs appeal to this Court as an appeal of right under Rule 3(a) T.R.A.P.

The case involves the conversion of an apartment complex on White Bridge Road in Nashville into condominiums and the subsequent sale of those condominium units to individual purchasers.

Plaintiffs are 71 of these individual purchasers of condominium units. Suit was filed on February 25, 1988, after one of the plaintiffs attempted to sell a unit. It was at this point that the plaintiffs allegedly first learned that the underlying indebtedness made the property unmarketable. They sued West End Terrace, Inc., (Seller), Town & Country Realty Company (the real estate company that arranged the deal), and the appellees in this Court, Ticor Title Insurance Company & Sovran Bank/Central South.

The only issue before the Court is whether the trial court erred in granting the motions of defendants Ticor and Sovran to dismiss plaintiffs' complaint pursuant to Rule 12.02(6), Tenn.R.Civ.P., for failure to state a claim upon which relief can be granted.

A motion to dismiss pursuant to Rule 12.02(6), Tenn.R.Civ.P., for failure to state a claim upon which relief can be granted is the equivalent of a demurrer under our former common law procedure and, thus, is a test of the sufficiency of the leading pleading. Cornpropst v. Sloan, 528 S.W.2d 188, 190, 93 ALR3d 979 (Tenn.1975). Such a motion admits the truth of all relevant and material averments contained in the complaint but asserts that such facts do not constitute a cause of action. Cornpropst, 528 S.W.2d at 190. A complaint should not be dismissed upon such a motion "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Fuerst v. Methodist Hospital South, 566 S.W.2d 847, 848 (Tenn.1978). In considering whether to dismiss a complaint for failure to state a claim upon which relief can be granted, the court should construe the complaint liberally in favor of the plaintiff taking all of the allegations of fact therein as true. Huckeby v. Spangler, 521 S.W.2d 568, 571 (Tenn.1975).

The complaint, which seeks rescission and monetary damages, is 22 pages in length and contains 86 numbered paragraphs. There are ten exhibits to the complaint on which the causes of action are based. Plaintiffs make numerous allegations against the defendants generally without reference to any individual defendant. We will relate the substance of the complaint as necessary for an understanding of the case and will detail such specific allegations as we perceive to be made against these appellees.

In August, 1985, West End Terrace, Inc., purchased the apartment complex known as Capri Garden Apartments in order to convert the complex into a condominium development pursuant to the Tennessee Horizontal Property Act, T.C.A. Sec. 66-27-101--123 (1982). The purchase and conversion was financed with a loan from Sovran in the amount of 5.1 million dollars secured by a wrap-around mortgage on the property. In September, 1985, West End Terrace, Inc., recorded its master deed in the Register's Office of Davidson County creating the West End Terrace Condominiums. West End Terrace, Inc., then started selling the units to individual purchasers pursuant to the purchase agreements in which the seller agreed to convey "good and marketable title ... subject to ... liens and other matters which the owner's insurance policy, to be provided buyer, shall insure against." The purchase agreements provided for a purchase price of $39,900 per unit financed by a mortgage on the unit to be retained by West End Terrace, Inc. Closings of the transactions involving the plaintiffs in this case took place in late September or early October, 1985, and in some instances a number of closings were held simultaneously in a large classroom. At closing, the documents were executed and each plaintiff-purchaser was furnished a warranty deed, which provided in part:

AND GRANTOR COVENANTS with the said Grantee that it is lawfully seized and possessed of said property, that it has a good right to convey it, and that the same is unencumbered except for the following: ... (12) such liens against which Grantee's title insurer commits to insure Grantee from loss as provided in the title insurance policy given Grantee by Grantor.

Also at closing, the purchasers were provided with a title insurance commitment from Ticor which excepted the existing liens on the property in favor of the bank from coverage, but provided that Ticor's policy would insure the purchasers from loss suffered as a result of enforcement or attempted enforcement of the liens securing the indebtedness. The title policies eventually issued by Ticor insured against the unmarketability of title except if it arose as a result of these listed items of indebtedness. The policy affirmatively insured against loss or damage resulting from the enforcement or attempted enforcement of these items. Sovran issued a letter of credit, naming Ticor as beneficiary, as security for this affirmative insurance.

Within one year of the filing of this suit, one of the plaintiffs attempted to sell an individual unit and was advised of the pre-existing underlying mortgages when the prospective purchaser had the title examined in contemplation of closing the transaction. Plaintiffs allege that this was the first time they had knowledge of the property being encumbered by underlying mortgages in favor of Sovran or any other entity.

THE COMPLAINT ALLEGATIONS AS TO DEFENDANT TICOR

Tennessee Horizontal Property Act

The first allegation against Ticor concerns the Tennessee Horizontal Property Act, T.C.A. Sec. 66-27-101 et seq. Plaintiffs assert that this Act prohibits the establishment of a horizontal property regime (condominium) upon property that is encumbered by pre-existing indebtedness. In support of this position, the plaintiffs quote T.C.A. Sec. 66-27-104:

Ownership of apartments.--Once the property is submitted to the horizontal property regime, an apartment in the building may be individually conveyed and encumbered and may be the subject of ownership, possession or sale and of all types of juridic acts intervivos or mortis causa, as if it were sole and entirely independent of the other apartments in the building of which they form a part, and the corresponding individual titles and interest shall be recordable.

Assuming arguendo that such a prohibition exists and assuming that a right of action might arise from it, any cause of action resulting from the violation of that prohibition would be against the creator of the horizontal property regime. This complaint makes no allegation that Ticor was in any way involved in converting this apartment complex into condominiums. The complaint specifically avers that West End Terrace, Inc., purchased the apartment complex from White Bridge Road Associates, Inc., and that West End Terrace, Inc., recorded a master deed for the West End Terrace Condominiums. Without any allegation of Ticor's role in the purchase and conversion of this property into a condominium complex, there can be no cause of action against Ticor for the creation of a horizontal property regime on encumbered property.

Moreover, from our reading of the Tennessee Horizontal Property Act we fail to find language prohibiting the establishment of a horizontal property regime on encumbered property. Some states have such prohibitions, see Virginia Code Section 55-79.46; Cal.Bus.Prof.Code Sec. 11013.1--11013.5, Ind.Code Ann. Sec. 32-1-6-16, N.Y. Real Prop. Law Sec. 339-r, and some states do not. See Ky.Rev.Stat. Secs. 381.805-.990; Ark.Stat.Ann. Secs. 18-13-101 through -120; and Miss.Code Ann. Secs. 89-9-1 through -37. Without further guidance from the legislature, we decline to construe the Tennessee statute to prohibit the establishment of such a regime on encumbered property.

Tennessee Consumer Protection Act

The plaintiffs also allege that the defendants violated the Tennessee Consumer Protection Act, T.C.A. Sec. 47-18-101 et seq. The Consumer Protection Act declares unlawful, various unfair or deceptive acts or practices which affect the conduct of any trade or business. T.C.A. Sec. 47-18-104 (Supp.1989). Any person suffering a loss as a result of such acts or practices may bring an action for damages. T.C.A. Sec. 47-18-109 (Supp.1989). The factual allegations pertaining to this claim are that the underlying indebtedness was misrepresented or inadequately disclosed. In the complaint, plaintiffs describe the closing on the sale as follows:

Plaintiffs then closed the loan transaction and contract by attending, in some cases, an en masse closing held in a thirty-person classroom where the closing documents were presented for the first time. At closing, neither the master deed, warranty deed (a copy of which is attached hereto as Exhibit 4), deed of trust (a copy of which is attached hereto as exhibit 5), loan application (a copy of which is attached hereto as Exhibit 6), disclosure...