Red Lobster Inns of America, Inc. v. Lawyers Title Ins. Corp.

• Decision Date: 25 August 1981
• Docket Number: No. 80-1895,80-1895
• Citation: 656 F.2d 381
• Parties: RED LOBSTER INNS OF AMERICA, INC., Appellee, v. LAWYERS TITLE INSURANCE CORPORATION and Standard Abstract & Title Co., Inc., Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 381

656 F.2d 381

RED LOBSTER INNS OF AMERICA, INC., Appellee, v. LAWYERS TITLE INSURANCE CORPORATION and Standard Abstract &

Title Co., Inc., Appellants.

No. 80-1895.

United States Court of Appeals,

Eighth Circuit.

Submitted June 17, 1981.

Decided Aug. 25, 1981.

Edward L. Wright, Jr., Alston Jennings (argued), Wright, Lindsey & Jennings, Little Rock, Ark., for appellants.

Friday, Eldredge & Clark, Little Rock, Ark. by Michael G. Thompson, Little Rock, Ark. (argued), for appellee.

Before LAY, Chief Judge, and BRIGHT and STEPHENSON, Circuit Judges.

STEPHENSON, Circuit Judge.

Defendants-appellants Lawyers Title Insurance Corporation (Lawyers Title) and Standard Abstract & Title Co., Inc. (Standard Abstract) appeal the judgment of the district court ¹ awarding plaintiff-appellee Red Lobster Inns of America, Inc. (Red Lobster) $78,805 for loss of profits and prejudgment interest on that amount. ² The district court based its award upon a national agreement between Red Lobster and Lawyers Title and upon Standard Abstract's breach of its fiduciary duties as escrow agent. Appellants contend that there is no basis for an award of loss of profits, that Red Lobster did not carry its burden of proving proximate cause and that even if Red Lobster is entitled to judgment, the award of prejudgment interest is inappropriate. We affirm the district court's award of loss of profits but reverse the award of prejudgment interest.

I. BACKGROUND

A detailed statement of the facts can be found in the district court opinion. Red Lobster Inns of America, Inc. v. Lawyers Title Insurance Corp., 492 F.Supp. 933, 934-39 (E.D.Ark.1980). Following is a summary of the facts necessary to the resolution of this appeal.

Red Lobster is a corporation with company-owned restaurants scattered throughout the United States. In order to further its expansion plans, Red Lobster entered into an agreement regarding national land acquisition with Lawyers Title around July of 1974. Lawyers Title agreed to give priority service in exchange for Red Lobster purchasing the bulk of its title insurance from Lawyers Title. Lawyers Title's priority service, as set out in a memorandum, included: (1) acting as closing agent in Red Lobster land acquisitions through local agents of Lawyers Title; (2) examining title with a view toward Red Lobster's intended use as a restaurant; (3) advising Red Lobster of any restrictions of record that would be violated by restaurant use; (4) providing Red Lobster with a copy of such restrictions with the interim title insurance binders; and (5) issuing title insurance on land acquired by Red Lobster.

After making a market and site survey, Red Lobster decided to open a new restaurant in Little Rock, Arkansas, on property owned by Skaggs-Albertson Properties, Inc. Red Lobster wrote to Standard Abstract, Lawyers Title's agent in Little Rock, requesting them to act as escrow agent for the closing, to issue title insurance and to prepare title examination. Three days later, on January 30, 1976, Lawyers Title wrote Standard Abstract and enclosed the memorandum of the agreement between Red Lobster and Lawyers Title setting out the priority service requirements.

There was a restriction against use of the land as a restaurant ³ which Standard Abstract either overlooked or erroneously assumed did not apply when it made its original title search and also when it brought the title up to date before closing. On February 10, 1976, Red Lobster, unaware of the restriction, entered into a contract to purchase the land for their new restaurant and, with Standard Abstract acting as escrow agent, the purchase was closed on May 28, 1976. Construction began May 31, 1976, and Lawyers Title issued a title insurance policy through its agent Standard Abstract on June 4, 1976. The restriction against restaurant use was not an exception in the title insurance policy, therefore, it was insured against by the policy.

Subsequently, Red Lobster received letters from abutting land owners threatening legal action if construction violating the use restriction continued. On June 11, 1976, construction of the restaurant was halted and attorneys for Red Lobster, Lawyers Title, and Standard Abstract cooperated in efforts to remove the restriction. The objecting land owners agreed to a settlement. Construction recommenced on October 4, 1976, and was completed on December 16, 1976. A company rule against opening new restaurants during holiday seasons caused the actual opening to be delayed until January 18, 1977.

The district court found that the restaurant would have opened on August 24, 1976, if construction had not been halted because of the undisclosed use restriction. The court awarded Red Lobster $78,805 as the amount of profits lost between August 24, 1976, and December 16, 1976. In an amendment to the original judgment, the court awarded prejudgment interest to Red Lobster.

II. ANALYSIS

A. The National Agreement

The district court noted that there were two contracts between the parties: the contract of title insurance and the national agreement between Red Lobster and Lawyers Title. The court awarded loss of profits to Red Lobster by going beyond the title insurance contract and basing liability in tort for the misperformance of the national agreement contract. Red Lobster Inns of America, Inc. v. Lawyers Title Insurance Corp., supra, 492 F.Supp. at 939-41.

On appeal, Lawyers Title ⁴ first argues that the national agreement does not constitute a contract because it lacked the consideration necessary for the formation of a contract. However, a contract was formed between the parties because Arkansas recognizes that mutual promises constitute adequate consideration for contract formation. Abbott v. Arkansas Utilities Co., 165 F.2d 339, 341 (8th Cir. 1948). See Grayling Lumber Co. v. Hemingway, 124 Ark. 354, 187 S.W. 327 (1916); Eustice v. Meytrott, 100 Ark. 510, 140 S.W. 590 (1911). The mutual promises were Red Lobster's promise to buy the bulk of its title insurance from Lawyers Title in exchange for Lawyers Title's promise to give Red Lobster priority service.

Lawyers Title's second contention is that even if the national agreement is a contract, it merged into and is superceded by the title insurance policy. Lawyers Title relies upon item twelve of the conditions and stipulations section of the title insurance policy which provides in pertinent part 12. Liability Limited to this Policy

This instrument together with all endorsements and other instruments, if any, attached hereto by the Company is the entire policy and contract between the insured and the Company.

Any claim of loss or damage, whether or not based on negligence, and which arises out of the status of the title to the estate or interest covered hereby or any action asserting such claim, shall be restricted to the provisions and conditions and stipulations of this policy.

The Arkansas Supreme Court has cited and followed the Restatement of the Law of Contracts § 240. Arkansas Aviation Sales, Inc. v. Carter Construction Co., 250 Ark. 1007, 469 S.W.2d 118, 119 (1971); Bonds v. Littrell, 247 Ark. 577, 446 S.W.2d 672, 674 (1969); Magee v. Robinson, 218 Ark. 54, 234 S.W.2d 27, 29 (1950). The relevant portion of section 240 provides:

§ 240. In What Cases Integration Does Not Affect Prior or Contemporaneous Agreements.

(1) An oral agreement is not superseded or invalidated by a subsequent or contemporaneous integration, nor a written agreement by a subsequent integration relating to the same subject-matter, if the agreement is not inconsistent with the integrated contract, and

(a) is made for separate consideration, or

(b) is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract.

The district court ruled, and we agree, that there were two separate contracts between the parties. Under the national agreement Lawyers Title agreed to examine title and inform Red Lobster of use restrictions, while under the insurance policy Lawyers Title agreed to insure the title to the property. The national agreement setting out the priority service is not inconsistent with the title insurance policy which does not cover title examination and the duty to disclose restrictive covenants. The requirement in section 240(1)(a) is met because there was separate consideration for each contract. As previously discussed, mutual promises formed the consideration for the national agreement. In contrast, Red Lobster paid Lawyers Title for its promise of coverage under the title insurance contract. Additionally, the requirement in section 240(1)(b) is fulfilled because the national agreement is a broader contract of the type which would naturally be made as a separate agreement. The national agreement had been in effect since approximately July 1974, and many parcels of land had been acquired under it. For those parcels a specific title insurance policy was purchased. Therefore, the parties intended that the national agreement survive the issuance of the title insurance policy covering the 1976 Little Rock transaction and that the national agreement would apply in Red Lobster's future land purchases. In conclusion, the limitation in item twelve of the title insurance policy does not cause the national agreement to be merged into or superseded by that policy.

Lawyers Title's third contention is that the award of loss of profits is barred because Arkansas follows the tacit agreement rule for the recovery of consequential damages in breach of contract cases. Under that rule, "the plaintiff must prove more than the defendant's mere knowledge that a breach of contract will entail special damages to the plaintiff. It must also appear that the defendant at least tacitly agreed to assume responsibility." Morrow v. First National Bank, 261 Ark. 568, 550 S.W.2d 429, 430 (1977).

The district court's award of loss of profits was based in...