Sevy v. Security Title Co. of Southern Utah

• Citation: 902 P.2d 629
• Decision Date: 06 September 1995
• Docket Number: No. 930484,930484
• Parties: Harold SEVY and Winona Sevy, Plaintiffs and Petitioners, v. SECURITY TITLE COMPANY OF SOUTHERN UTAH, Defendant and Respondent.
• Court: Supreme Court of Utah

Page 629

902 P.2d 629

Harold SEVY and Winona Sevy, Plaintiffs and Petitioners, v. SECURITY TITLE COMPANY OF SOUTHERN UTAH, Defendant and Respondent.

No. 930484.

Supreme Court of Utah.

Sept. 6, 1995.

Robert F. Orton and Mark F. Bell, Salt Lake City, for plaintiffs.

Bruce A. Maak, Jeffrey J. Hunt, Salt Lake City, and J. Bryan Jackson, Cedar City, for defendant.

On Certiorari to the Utah Court of Appeals

HOWE, Justice:

We granted certiorari to review the court of appeals' decision that the statute of limitations bars plaintiffs Harold and Winona Sevy's negligence action against defendant Security Title Company of Southern Utah. The decision reversed the trial court's judgment awarding the Sevys damages against Security Title for negligently failing to protect their security interest in water shares. Sevy v. Security Title Co., 857 P.2d 958, 963 (Utah Ct.App.1993).

In 1981, the Sevys sold Kyle and Cindy Stewart approximately thirteen acres of farmland in Garfield County, Utah, along with thirty-nine shares of Long Canal Company stock that provided irrigation water to the land. The purchase price was $25,000 for the land and the water shares, with a down payment of $5,000 and the balance payable in annual installments. Both parties intended that the Sevys would convey title to the land and the water shares to the Stewarts and the Stewarts would give the Sevys a lien on the land and the water shares to secure the balance of the unpaid purchase price.

The parties engaged Security Title to prepare the documents of sale, transfer, and security. It prepared a warranty deed to convey the land and the water shares from the Sevys to the Stewarts, a promissory note in the amount of $20,000 from the Stewarts to the Sevys, and a deed of trust with assignment of rents (the trust deed) against the land and the water shares to secure the promissory note. According to industry practice at the time, it should have perfected the security interest in the water shares by recording the trust deed at the county recorder's office and delivering a certificate for thirty-nine shares of water stock to the Sevys. Although it recorded the trust deed, it mistakenly delivered the certificate to the Stewarts rather than to the Sevys.

After it closed the transaction, the Stewarts borrowed money from the Lockhart Company and delivered the certificate to it to secure the loan. Lockhart accepted the certificate and filed a financing statement to secure its interest in the water shares with the Utah State Division of Corporations and Commercial Code. The Stewarts eventually defaulted on their loan, and Lockhart assigned all of its rights against the Stewarts to Associates Financial Services of Utah, Inc.

After defaulting, the Stewarts petitioned for bankruptcy, and the trustee abandoned any interest in the thirty-nine shares of water stock. Seeking to foreclose on its security interest in the shares, Associates filed a lawsuit against the Sevys and Security Title in district court, asking the court to declare it the holder of a valid, perfected security interest in the shares, free from any claims by the Sevys or Security Title. Security Title made no appearance in the action, and the court entered a default judgment against it. The court also granted Associates' motion for summary judgment against the Sevys. The Sevys appealed, and we poured the case over to the court of appeals. That court affirmed the judgment, holding that water stock is a "certified security" under Utah Code Ann. § 70A-9-105(1)(i) and that the Sevys must have taken possession of the stock certificate to perfect their security interest. Associates Fin. Servs. v. Sevy, 776 P.2d 650, 652 (Utah Ct.App.1989).

Meanwhile, the Stewarts defaulted on their promissory note to the Sevys. The Sevys took possession of the farm and brought this action against Security Title for negligently failing to protect their security interest in the water shares. The district court, noting that the statute of limitations for negligence actions is only four years, Utah Code Ann. § 78-12-25(3), found that more than eight years had passed since Security Title had closed the transaction between the Sevys and the Stewarts. However, the court held that the discovery rule applied to toll the statute of limitations until the Sevys discovered that Associates claimed a security interest in the shares. The court further held that Security Title had breached its duty to the Sevys and awarded them damages. Security Title appealed to the court of appeals, which reversed the judgment. We granted the Sevys' petition for a writ of certiorari. Sevy v. Security Title, 870 P.2d 957 (Utah 1994).

About three months before hearing oral arguments for this case, we decided Salt Lake City Corp. v. Cahoon & Maxfield Irrigation Co., 879 P.2d 248 (Utah 1994). In Cahoon, this court disavowed Associates Financial and held that water stock is not a certified security but an interest in real property. Id. at 252. Therefore, recording a trust deed is sufficient to perfect a security interest, and Security Title arguably could not be liable to the Sevys for negligence because it had properly recorded that document. After hearing oral arguments, we asked the parties to submit supplemental briefs addressing the issue of whether Cahoon or Associates Financial should govern this case.

I. RES JUDICATA

The Sevys contend that this court is precluded from applying the decision in Cahoon to this case because the doctrine of res judicata requires the parties to abide by the court of appeals' decision in Associates Financial. The doctrine of res judicata embodies two separate theories called issue preclusion and claim preclusion. Madsen v. Borthick, 769 P.2d 245, 247 (Utah 1988). We will begin by analyzing the relationship between this case and Associates Financial under the theory of issue preclusion.

Issue preclusion, sometimes referred to as collateral estoppel, prevents the parties from relitigating issues resolved in a prior related action. Timm v. Dewsnup, 851 P.2d 1178, 1184 (Utah 1993). The party seeking to invoke this doctrine must satisfy four requirements. First, the party must show that the issue challenged in the case at hand is identical to the issue decided in the previous action. Second, the issue in the previous action must have been decided in a final judgment on the merits. Third, the issue in the previous action must have been competently, fully, and fairly litigated. Fourth, the opposing party in the action at hand must have been either a party or privy to the previous action. Id.

We find that the first requirement is met because the issues in this case and in Associates Financial are identical. The issue which the district court and the court of appeals addressed in Associates Financial was whether the Sevys had a perfected security interest in the water stock that was superior to that of Stewarts' creditors. Associates Fin. Servs., 776 P.2d at 651. The issue presented here, which is whether in this action this court should apply the court of appeals' resolution of that issue or the resolution advanced in Cahoon, is essentially the same.

Security Title argues that the first requirement is not met because the remedy sought in Associates Financial is different from the remedy sought in this case. It points out that in Associates Financial, Associates pleaded for authorization to foreclose on the water shares without interference from the Sevys or from Security Title. In this case, the Sevys are pleading for damages from Security Title for negligently failing to perfect their security interest. Although we acknowledge this difference, it does not prevent the application of issue preclusion. It is well settled that issue preclusion prevents relitigation of the same issue even if the claims for relief in the two actions are different. Penrod v. Nu Creation Creme, Inc., 669 P.2d 873, 875 (Utah 1983). In support of its assertion to the contrary, Security Title cites Schaer v. State, 657 P.2d 1337 (Utah 1983), in which this court referred to the theory of claim preclusion under the general term of res judicata and explained that the relitigation of claims is precluded only when both suits involve the same cause of action. Id. at 1340 (citing Searle Bros. v. Searle, 588 P.2d 689, 690 (Utah 1978)). Security Title fails to notice, however, that we later clarified that the separate theory of issue preclusion, or collateral estoppel, often "arises from a [d]ifferent cause of action and prevents parties or their privies from relitigating facts and issues in the second suit that were fully litigated in the first suit." Id. Therefore, Schaer does not support Security Title's argument.

In examining the second requirement of issue preclusion, we find that the court of appeals' decision in Associates Financial was a final judgment on the merits. The judgment was not further appealed or remanded, nor was it determined on the basis of an unrelated procedural issue. See Robinson v. Myers, 599 P.2d 513, 515 (Utah 1979) (explaining that a judgment based on a procedural issue does not constitute a judgment on the merits). Rather, the court of appeals examined the substantive arguments and based its decision on related case law.

Third, the issue of whether the Sevys had a superior security interest in the water shares was competently, fully, and fairly litigated in Associates Financial. Security Title argues that the issue was not properly litigated because it allowed its default to be entered in the action and the Sevys did not demand that it appear and defend the action. However, Security Title's failure to defend its position in Associates Financial bears no relationship to whether the issue was competently, fully, and fairly litigated by the Sevys and Associates Financial. We find nothing in the record or in the Associates Financial decision which indicates that the parties did not adequately litigate the issue. Thus, we...