HOLMES DEVELOPMENT, LLC V. COOK
48 P.3d 895 (Utah 2002)
NATURE OF THE CASE: Holmes (P), a development company, appealed an order granting summary
judgment to Cook (D), a title insurance company and a developer.
FACTS: Cook (D) purchased two parcels of land of 323 acres, and 73 acres. They were
conveyed 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. Cook Development then associated with Premier Homes to infuse cash into the
development 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. 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. 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. 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. In 1998, P and Cook
Development agreed that P 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 P. Cook Development closed the property sale, conveying both parcels to
P by way of warranty deed. At closing, First American provided P 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. D and Cook Development signed an indemnity
agreement and a modification and extension agreement. P was the other party to these
agreements. P sought financing and retained First American to prepare the trust deed and
title insurance documents associated with the financing. First American discovered that Cook
Development did not validly convey the 323-acre parcel to P 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. First American immediately attempted to
rectify the error, as it was obligated to do under the policy. 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.
Premier refused to sign the deed. First American then prepared a special warranty deed
whereby LC Farms deeded the 323-acre parcel directly to P. First American prepared the
corrective special warranty deed from LC Farms for Cook's signature and Cook signed the
deed. In November 1998, Premier sold the 323-acre parcel, as a member of and on behalf of LC
Farms, to Keystone Development. Keystone commenced a quiet title action and promptly
recorded a lis pendens to give notice of the action. Keystone named P, D, 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. Keystone contended that LC
Farms did not validly convey the 323-acre parcel to P because D 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. 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 Ds and against Keystone. In particular, the
court determined that the special warranty deed was a valid instrument of conveyance and
that title vested in P. The lis pendens precluded P from selling a single lot in the
323-acre parcel. P had missed the prime spring selling season. P was also obligated to
continue to make interest payments to Bank One in connection with the loan. P sued D, 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. P claimed under
negligence, breach of contract/third-party beneficiary liability; and (3) negligent
misrepresentation. Ds all moved to dismiss each the claims, or in the alternative, for
summary judgment. The trial court entered summary judgment in favor of First American and
denied D's motion for leave to amend the complaint with respect to First American. It held
that First American cured any title defects two months before Keystone initiated the
Keystone litigation, and therefore First did not proximately cause P's damages; First
diligently and timely cured all of P's title problems pursuant to the title insurance
policy; the economic loss rule precluded the negligence and negligent misrepresentation
claims; (4) First could not have reasonably expected P to rely on its conduct with respect
to the quitclaim deeds, thus barring the negligent misrepresentation claims; and (5) First
and Cook Development did not intend to confer a benefit upon P in March 1998 as a
third-party beneficiary, precluding the third-party beneficiary claims as a matter of law.
The trial court entered summary judgment in favor of D and Cook Development on three
independent grounds: The economic loss rule precluded any recovery on P's negligence claim;
the breach of warranty was cured before Keystone filed its lawsuit against P and no damages
were alleged to have occurred prior to good title being conveyed; and (3) P's claim for
indemnification of damages was barred as being outside the scope of the indemnification
agreement. P appealed.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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