Touch Stone v. title/western

NOTICE: NOT FOR PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE
LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

TOUCH STONE AZ-CENTRAL PROPERTIES, L.L.C., an Arizona limited
liability company, Plaintiff/Appellant/Cross-Appellee,

v.

TITLE MANAGEMENT AGENCY OF ARIZONA, L.L.C., an Arizona
limited liability company; WESTERN SURETY COMPANY, a South
Dakota corporation, Defendants/Appellees/Cross-Appellants.

Nos. 1 CA-CV 12-0614, 1 CA-CV 12-0724, 1 CA-CV 12-0782
(Consolidated)
FILED 5-1-2014

Appeal from the Superior Court in Maricopa County
No. CV2009-037433
The Honorable John Rea, Judge

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED

COUNSEL

Curtis Ensign, P.L.L.C., Phoenix
By Curtis Ensign
Counsel for Plaintiff/Appellant/Cross-Appellee

Davis Miles McGuire Gardner, PLLC, Tempe
By Gregory L. Miles, Julie A. LaFave, Joshua Carden
Counsel for Defendants/Appellees/Cross-Appellants
 TOUCH STONE v. TITLE/WESTERN
Decision of the Court

MEMORANDUM DECISION

Judge Peter B. Swann delivered the decision of the Court, in which
Presiding Judge Andrew W. Gould and Judge Jon W. Thompson joined.

S W A N N, Judge:

¶1 This appeal involves claims asserted against an escrow agent
by a plaintiff who purchased property without knowing it was
encumbered by a deed of trust. The superior court entered summary
judgment in the escrow agent’s favor on the plaintiff’s claims for breach of
contract, breach of fiduciary duty, breach of the covenant of good faith
and fair dealing, and negligence, and the court denied the plaintiff’s
motion to amend its complaint to allege additional claims. We hold that
summary judgment on the complaint was proper, but the court erred by
determining that the plaintiff’s proposed negligent misrepresentation
claim was futile. We therefore affirm in part, reverse in part, and remand
for further proceedings.

FACTS AND PROCEDURAL HISTORY

¶2 In July 2009, Touch Stone AZ-Central Properties, LLC
(“Touch Stone”) sought to purchase real property from DYRCZ
Commercial Venture, LLC (“DYRCZ”). The parties executed an escrow
employment agreement and escrow instructions (collectively, “the escrow
contracts”) by which they agreed that Title Management Agency of
Arizona, LLC (“Title Management”) would act as escrow agent for the
sale. The escrow instructions set forth the terms of the sale and there was
no other contract between the buyer and seller.

¶3 Under the escrow contracts, Title Management was directed
to disburse Touch Stone’s purchase money to DYRCZ when the terms of
escrow were complied with and the title insurer, Commonwealth Land
Title Insurance Company (“Commonwealth”), became willing to issue a
title insurance policy through Title Management as its agent.

¶4 Commonwealth, through an employee of Title
Management’s title department, issued an initial commitment for title
insurance conditioned on the release of certain liens on the property,
including a deed of trust held by Northern Trust Bank, N.A. (“Northern
Trust”). Later, after a trustee’s sale was completed concerning other

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properties encumbered by Northern Trust’s deed of trust, the title-
department employee came to believe that the property Touch Stone
sought to purchase was not encumbered by the deed of trust after all and
that no release of lien was necessary. Title Management closed the escrow
and Commonwealth issued a title insurance policy that did not list
Northern Trust’s deed of trust as an exception.

¶5 In fact, the property that Touch Stone purchased was indeed
encumbered by Northern Trust’s deed of trust, and was sold to Northern
Trust at a trustee’s sale a few months after Touch Stone acquired it. This
action followed, with Touch Stone asserting claims against
Commonwealth and against Title Management and its surety, Western
Surety Company (collectively, “Title Management”). Touch Stone
eventually settled its claims against Commonwealth. As against Title
Management, Touch Stone alleged in its first amended complaint that in
closing the escrow with Northern Trust’s deed of trust outstanding, Title
Management breached its contractual duties, breached its fiduciary duties,
breached the covenant of good faith and fair dealing, and was negligent.

¶6 Touch Stone and Title Management filed competing motions
for summary judgment on the contract and negligence claims. The
superior court denied Touch Stone’s motion and granted Title
Management’s motion. Touch Stone then sought leave to file a second
amended complaint that alleged additional forms of breach of fiduciary
duty and breach of the covenant of good faith and fair dealing, and added
new counts for negligence and negligent misrepresentation. The court
denied the motion to amend, finding that the proposed amendments did
“not add any allegation or claim that would survive the arguments and
authorities presented in [Title Management’s] Motion for Summary
Judgment.” Some months after the court denied Touch Stone’s motion to
amend, Title Management filed a second motion for summary judgment,
directed at the existing fiduciary duty and good faith and fair dealing
claims. The court granted Title Management’s motion and dismissed the
action.

¶7 Touch Stone appeals the entry of summary judgment and
the denial of its motion to file the second amended complaint. Title
Management appeals the denial of its application for attorney’s fees.

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DISCUSSION

I. TOUCH STONE’S APPEAL

A. Title Management Was Entitled to Summary Judgment on
the First Amended Complaint.

¶8 In the first amended complaint, Touch Stone asserted claims
against Title Management for breach of contract, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, and negligence. The
contract, fiduciary duty, and good faith and fair dealing claims were
predicated on an alleged breach of requirements expressly or impliedly
created by the escrow contracts. The negligence claim, by contrast, was
based on the title-department employee’s mistaken conclusion regarding
the continuing applicability of Northern Trust’s deed of trust, which in
turn led to satisfaction of a condition precedent to Title Management’s
performance under the escrow contracts. We hold that under the
undisputed material facts, Title Management was entitled to judgment as
a matter of law on all of the claims set forth in the first amended
complaint. See Ariz. R. Civ. P. 56(a).

¶9 Touch Stone contends that Title Management knew the
transaction was meant to be lien-free because the escrow instructions set
forth a purchase-price calculation that showed “N/A” and “$ 0.00” next to
headings styled “encumbrance of record.” Moreover, the escrow officer
and the employee who acted as Commonwealth’s agent both testified that
they believed the transfer would be “free and clear.” But the fact that Title
Management knew that the parties intended a lien-free transfer did not
transform Title Management from an escrow agent into a title
investigator, guarantor, or insurer. Nothing in the escrow contracts
provided or even suggested that Title Management assumed
responsibility for ensuring that no title defects existed. Under the clear
and unambiguous terms of the escrow contracts, Title Management’s only
relevant responsibility was to wait to close the escrow until
Commonwealth indicated its willingness to issue a policy for title
insurance. Consistent with its duties as a fiduciary, Title Management
performed precisely the duties required of it in the escrow contracts. See,
e.g., Tucson Title Ins. Co. v. D’Ascoli, 94 Ariz. 230, 234, 383 P.2d 119, 121
(1963).

¶10 Contrary to Touch Stone’s contentions, the escrow contracts
did not impliedly require that Title Management clear the title to the
property. To be sure, Title Management assumed some obligations

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beyond the express terms of the escrow contracts. Title Management’s
fiduciary duties, as well as the implied covenant of good faith and fair
dealing, required it to act with scrupulous honesty, fairness, skill, and
diligence. Burkons v. Ticor Title Ins. Co. of Cal., 168 Ariz. 345, 355, 813 P.2d
710, 720 (1991); D’Ascoli, 94 Ariz. at 234, 383 P.2d at 121-22. For example,
Title Management was required to disclose known facts that reasonably
indicated fraud. Burkons, 168 Ariz. at 353, 813 P.2d at 718. And similarly,
Title Management was required to disclose any substantial title defects of
which it had knowledge. Cf. Aranki v. RKP Invs., Inc., 194 Ariz. 206, 208-
09, ¶ 9, 979 P.2d 534, 536-37 (App. 1999) (holding that real estate agents’
duty of fair dealing required disclosure of known latent defects in home).
But Title Management was not required to search for fraud or title defects.
Burkons, 168 Ariz. at 353, 813 P.2d at 718; Aranki, 194 Ariz. at 208-09, ¶ 9,
979 P.2d at 536-37. It is undisputed that when Title Management closed
the escrow, it believed the property was unencumbered. We hold that
Title Management acted in conformance with its fiduciary duties and the
covenant of good faith and fair dealing.

¶11 Touch Stone argues that Title Management’s belief that the
property was unencumbered cannot provide a defense to liability because
its belief arose from a “wrong” that Title Management itself committed.
The “wrong” to which Touch Stone refers is the conduct described by its
negligence claim: the title-department employee’s mistaken reassessment
of Northern Trust’s deed of trust. As a matter of law, the mistake did not
constitute negligence. Negligence requires the existence of a duty of care.
Gipson v. Kasey, 214 Ariz. 141, 143, ¶ 9, 150 P.3d 228, 230 (2007). As escrow
agent, Title Management had no duty to represent the condition of title.
Further, Title Management assumed no such duty by providing a title
insurance commitment and policy on Commonwealth’s behalf. A policy
attached to a commitment’s list of discovered title defects “is not a
promise that no other exceptions or encumbrances exist[, but is
instead] . . . a contract under which the insurer agrees to indemnify the
insured for losses caused by claims arising from encumbrances not
identified in the insurer’s commitment.” Centennial Dev. Grp., LLC v.
Lawyer’s Title Ins. Corp., 233 Ariz. 147, 149, ¶ 6, 310 P.3d 23, 25 (App. 2013).
A title insurance commitment “is not a representation as to the condition
of title to real property,” A.R.S. § 20-1562(5), and gives rise to “no rights,
duties, or responsibilities” related to ensuring clear title. Centennial Dev.
Grp., LLC, 233 Ariz. at 149, ¶ 10, 310 P.3d at 25.

¶12 None of the claims set forth in Touch Stone’s first amended
complaint alleged a violation of any duty imposed by contract or by law.

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The superior court correctly entered summary judgment for Title
Management on the first amended complaint.

B. Touch Stone’s Proposed Second Amended Complaint Was
Not Entirely Futile.

¶13 Touch Stone contends that it should have been allowed to
file its second amended complaint. “Leave to amend shall be freely given
when justice requires.” Ariz. R. Civ. P. 15(a)(1)(B). Leave to amend
should be granted when the underlying facts relied upon may be a proper
subject of relief, and should also generally be granted when the
amendment merely seeks to add a new legal theory. MacCollum v.
Perkinson, 185 Ariz. 179, 185, 913 P.2d 1097, 1103 (App. 1996). The court
may deny amendment, however, if the amendment would be futile.
Bishop v. State Dep’t of Corr., 172 Ariz. 472, 474-75, 837 P.2d 1207, 1209-10
(App. 1992). We agree for the most part with the superior court’s
determination that Touch Stone’s proposed amendments would have
been futile, but we conclude that its proposed negligent misrepresentation
claim should have been allowed.

¶14 As an initial matter, Touch Stone points out that the court’s
futility finding relied on arguments previously asserted in the summary
judgment proceedings on the contract and negligence claims, which were
not claims that Touch Stone sought to amend. Contrary to Touch Stone’s
suggestion, the court’s reliance on the previous arguments was
appropriate. All of the claims that Touch Stone asserted shared
substantial factual and legal similarities. The arguments directed toward
the previously disposed-of contract and negligence claims were also
relevant to the court’s consideration of the amendments that Touch Stone
sought to make to its fiduciary duty and good faith and fair dealing
claims, and to the new claims that Touch Stone sought to add.

¶15 With respect to the fiduciary duty and good faith and fair
dealing claims, Touch Stone sought to allege the following as additional
examples of breach: “preparing escrow instructions that did not clearly
indicate or failed to indicate that the parties’ agreement was that the
Property was to be transferred free and clear of liens,” and “preparing a
deed that indicated that the Property was to be conveyed subject to all
encumbrances of record.” Touch Stone also sought to add a new
negligence claim based on these factual allegations. The court did not err
by finding that these amendments would be futile. The escrow
instructions already fairly suggested that the parties intended a lien-free
transfer, and Title Management had actual knowledge of the parties’

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intention. But Title Management’s knowledge of the transaction’s
intended result did not create an express or implied obligation to
investigate and eradicate title defects. Likewise, Title Management was
obligated neither by contract nor by law to prepare a deed that warranted
title against encumbrances.

¶16 Touch Stone also sought to amend the fiduciary duty claim,
and to add a new claim for negligent misrepresentation, based on alleged
representations by Title Management. In the proposed negligent
misrepresentation claim, Touch Stone alleged, in relevant part, that:

In the course of dealing between [Title Management] and
Plaintiff, [Title Management], through its duly authorized
representatives, represented as follows:

a. that after the foreclosure by Northern Trust, the
Property was what remained and Northern Trust did
not have a lien on the Property; and

b. that the Property was free and clear of liens.

Touch Stone also alleged that it relied on these alleged misrepresentations
to its detriment.

¶17 Title Management contends that the proposed negligent
misrepresentation claim “clearly targets the title commitment
representations” and could not be read to refer to any other
representations made by Title Management. Were that the case, the
proposed amendment would be futile under Centennial Dev. Grp., LLC, 233
Ariz. at 149, ¶ 10, 310 P.3d at 25. But we conclude that the claim is not that
narrow. Nothing in the claim, or in the balance of the proposed second
amended complaint, limits the alleged misrepresentations to
representations set forth in a title commitment. Further, we reject Title
Management’s contention that title-commitment representations were the
only representations that Touch Stone could have intended to describe.
As an initial matter, Touch Stone disputed that it ever received an
amended title commitment misrepresenting the applicability of Northern
Trust’s deed of trust. Touch Stone also expressly stated in its reply to the
motion to amend that the proposed negligent misrepresentation claim was
based on statements made during meetings, and the record includes an
example of an e-mail communication from Title Management to Touch
Stone discussing the status of Northern Trust’s deed of trust.

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¶18 Arizona has adopted the definition of negligent
misrepresentation set forth in the Restatement (Second) of Torts § 552
(1977). Mur-Ray Mgmt. Corp. v. Founders Title Co., 169 Ariz. 417, 422, 819
P.2d 1003, 1008 (App. 1991). Section 552(1) provides that

[o]ne who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the
guidance of others in their business transactions, is subject to
liability for pecuniary loss caused to them by their justifiable
reliance upon the information, if he fails to exercise
reasonable care or competence in obtaining or
communicating the information.

Title Management contends that this standard could not be satisfied
because it was not duty-bound to guide Touch Stone in its business
transactions. But if Title Management voluntarily represented the
condition of title, it assumed a duty to use reasonable care to ensure that
the representation was accurate. See Mur-Ray, 169 Ariz. at 422, 819 P.2d at
1009 (“[A]lthough Minnesota Title may have had no duty to respond to
[plaintiff]’s questions [regarding the effect of an assignment], when
Minnesota Title chose to speak in its capacity as an escrow agent, it
assumed a duty to use reasonable care when it did speak.”); Ariz. Title Ins.
& Trust Co. v. O’Malley Lumber Co., 14 Ariz. App. 486, 492, 484 P.2d 639,
645 (1971) (“Arizona Title had no duty to speak or respond to the [third-
party] contractors’ inquiries [regarding the amount of available
construction funds] at all. But if it chose to speak, we think that under all
of the circumstances its business relationship with the contractors carried
with it a duty to exercise reasonable care in making representations about
presently ascertainable facts.”). The superior court’s denial of Touch
Stone’s motion to amend based on futility was error with respect to the
negligent misrepresentation claim. The negligent misrepresentation claim
was facially adequate.1

II. TITLE MANAGEMENT’S APPEAL

¶19 We now turn to Title Management’s appeal from the denial
of its application for attorney’s fees. The superior court denied the
application as untimely filed. Ariz. R. Civ. P. 54(g)(2) requires that a

1 We express no opinion as to the merits of the claim, or as to the
nature of any remedy available for the claim.

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motion for attorney’s fees be filed “within 20 days from the clerk’s mailing
of a decision on the merits of the case, unless extended by the trial court.”
Here, Title Management did not move or apply for attorney’s fees until
more than 20 days after the court filed its minute entry granting summary
judgment on Touch Stone’s last remaining claims. Title Management
contends that the minute entry did not trigger the 20-day period
prescribed by Rule 54(g)(2) because it was not a signed order, and was
later followed by a signed judgment. This argument confuses a “decision
on the merits” for purposes of Rule 54(g)(2) with an appealable order.
Rule 54(g)(2) does not require a signed order, and Ariz. R. Civ. P. 58(g) in
fact contemplates that claims for attorney’s fees will be decided before a
final judgment is entered. See also Ariz. R. Civ. P. 54(b), State Bar
Committee Notes to 1999 Amendments. The superior court correctly
determined that Title Management’s fee application was untimely, and
the court had no obligation to grant Title Management an extension of
time.

CONCLUSION

¶20 For the reasons set forth above, we affirm the judgment to
the extent that it dismissed Touch Stone’s contract, fiduciary duty, good
faith and fair dealing, and negligence claims. We reverse the judgment to
the extent that it disallowed Touch Stone’s proposed negligent
misrepresentation claim, and we remand for further proceedings
consistent with this decision. We affirm the denial of Title Management’s
application for attorney’s fees in the superior court. In exercise of our
discretion, we deny both parties’ requests for attorney’s fees awards on
appeal.

:MJT

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