JENKINS v. SECURITY TITLE AGENCY INC.

No. 1 CA-CV 16-0309.

STEPHEN MILTON JENKINS, et al., Plaintiffs/Appellants, v. SECURITY TITLE AGENCY INC, Defendant/Appellee.

Court of Appeals of Arizona, Division One.


Attorney(s) appearing for the Case

Breen Olson & Trenton LLP, Tucson, By Dennis M. Breen, III , Todd Dean Jarvis , Counsel for Plaintiffs/Appellants.

Fidelity National Law Group, Phoenix, By Patrick J. Davis , David M. LaSpaluto , Counsel for Defendant/Appellee.

Judge Donn Kessler delivered the decision of the Court, in which Presiding Judge Margaret H. Downie and Judge Kenton D. Jones joined.


NOT FOR OFFICIAL PUBLICATION

UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

MEMORANDUM DECISION

KESSLER, Judge.

¶1 Appellants Stephen and Helen Jenkins (collectively, the "Jenkins") appeal from the superior court's granting of a motion to dismiss filed by Appellee Security Title Agency, Inc. ("Security Title"). The Jenkins argue the court erred by granting Security Title's motion to dismiss and by not allowing their amended complaint to apply to Security Title. For the reasons that follow, we affirm.

FACTUAL AND PROCEDURAL HISTORY

¶2 The Jenkins inherited approximately forty acres of unimproved land in Maricopa County ("Property"). Soon after, the Jenkins placed inquiries online about selling the Property. Larry Farris ("Farris"),2 a licensed real estate agent, contacted the Jenkins to offer his services. In March 2006, the Jenkins and Farris signed an exclusive right to sell agreement, which granted Farris the exclusive right, for two years, to sell the Property at a price of $3 million. Before signing this agreement, Farris and an associate formed Equity 253 LLC ("Equity") for the purpose of purchasing the Property.3 The Jenkins signed an Agency Disclosure and Election Agreement, which, once executed, allowed Farris to represent both the buyer and seller.

¶3 Shortly thereafter, Farris presented the Jenkins with an initial Purchase and Sale Agreement ("PSA 1") on behalf of Equity. Under PSA 1, Equity would purchase the Property for $3 million, with a $300,000 down payment at closing and the remaining $2.7 million would be financed by the Jenkins as reflected through execution of a promissory note payable by Equity, the note secured by a deed of trust encumbering the Property. PSA 1 disclosed, in bold print, that Farris had a financial interest in Equity. The Jenkins never accepted PSA 1.

¶4 A few months later, Farris presented a second Purchase and Sale Agreement ("PSA 2"). The primary difference between PSA 1 and PSA 2 was that it did not provide for the execution of a promissory note secured by a deed of trust against the Property. PSA 2 simply obligated Equity to pay the remaining unpaid balance of $2.7 million pursuant to the payment stream described in PSA 2. PSA 2 expressly stated that the loan was unsecured and recognized the risk inherent in an unsecured transaction: "Risk: The nature of the payment stream promised to seller from purchaser is not secured by real property and may be subject to default in which case Sellers['] ability to collect may be limited." Like PSA 1, PSA 2 disclosed in bold that Farris had a financial interest in Equity.

¶5 Later, Farris presented the third and final Purchase and Sale Agreement ("PSA 3"), which further altered the terms of the previous two proposals. Under PSA 3, Equity agreed to purchase the property for $2.95 million, with $300,000 down and the remaining unsecured balance to be paid in annual installments. Again, because the future payments due under PSA 3 were unsecured, PSA 3 expressly warned the Jenkins—this time in bold—that "[t]he nature of the payment stream promised to seller from purchaser is not secured by real property and may be subject to default in which case Seller's ability to collect may be severely limited." And for a third time, PSA 3 disclosed in bold that Farris had a financial interest in Equity. The Jenkins and Equity executed PSA 3 in 2006.

¶6 Jenkins and Equity signed escrow instructions with Security Title acting as the escrow agent. An escrow amendment signed by the Jenkins noted that the Jenkins "acknowledge[] that [they are] fully aware that this transaction includes an Unsecured Loan Agreement with [Equity]. . . . Security [Title] . . . makes no representation as to the validity or enforceability of said documents, and is relieved of any and all liability in connection with same." (emphasis in original). The same document notes the "risky nature of this transaction" and states that the parties acknowledge they had an "opportunity to consult a Tax Accountant, and/or an Attorney to review [the] documents on their behalf."

¶7 The sale of the Property to Equity closed in July 2006. Equity borrowed the $300,000 down payment from two individual lenders ("Sandland") to close the sale, and Sandland received a deed of trust encumbering the Property as security. The Jenkins subsequently received installment payments in 2007, 2008, and 2009, however, the full amount of the payments anticipated under PSA 3 were not paid beginning in 2008. Equity defaulted on the loan from Sandland, and Sandland purchased the Property at a September 2010 trustee's sale. As unsecured creditors of Equity, the Jenkins were not made aware of the sale, and even after the sale was completed, Farris continued to make periodic payments to the Jenkins. Farris made a payment as recently as May 2014.

¶8 In July 2014, six years after Farris began missing payments to the Jenkins, the Jenkins filed suit against various defendants, including Security Title. The Jenkins asserted claims against Security Title for negligent misrepresentation, breach of fiduciary duty, tortious breach of the implied covenant of good faith and fair dealing, constructive fraud, fraudulent concealment, breach of contract, and aiding and abetting breach of fiduciary duty.

¶9 Security Title filed a motion to dismiss, asserting that (1) Security Title satisfied its duties as an escrow agent; (2) the Jenkins knew or should have known the risky nature of the transaction; and (3) the Jenkins' claims were time-barred. The Jenkins then dismissed, without prejudice, their counts against Security Title for breach of the implied covenant of good faith and fair dealing, constructive fraud, fraudulent concealment, and breach of contract, leaving only claims for negligent misrepresentation and aiding and abetting a breach of fiduciary duty. However, in opposing the motion to dismiss, the Jenkins argued that the waiver issued by Security Title did not release Security Title from the duties the Jenkins perceived were owed them. The Jenkins asserted further that Security Title breached its fiduciary duties by not complying with the terms of the escrow agreement and by failing to disclose facts that a reasonable escrow agent would perceive as evidence of fraud. They also argued Security Title negligently failed to tell the Jenkins about the risky nature of the agreement and aided and abetted Farris in breaching his fiduciary duties by allowing the transaction to close when Security Title knew the Jenkins' best interests were not being represented. The superior court granted the motion, finding Security Title complied with the escrow agreement, the tort claims were barred by the statute of limitations, and the tort claims would otherwise fail because Security Title "explicitly raised the unsecured and risky nature of the transaction to plaintiffs" and the court could not find other alleged facts that a reasonable escrow agent would perceive as evidence of a fraud.

¶10 After the motion to dismiss was granted, the Jenkins moved to amend their complaint. In the proposed amended complaint, the Jenkins alleged that Security Title knew or should have known that the sale had various indicia of fraud, failed to adequately disclose the potential fraud, and failed to confirm the validity of Equity. The Jenkins claimed Security Title had breached its own internal policy to confirm the power of persons acting for a limited liability company. They asserted Security Title had failed to disclose to the Jenkins that Farris was acting as a dual agent for Jenkins and Equity and that Farris was the only person behind the entire transaction. They also alleged that Security Title never informed the Jenkins that Farris was borrowing money to make the down payment on the Property and then issued to the parties a title commitment showing the Jenkins as the insureds.

¶11 The proposed amended complaint failed to assert a claim against Security Title for breach of contract. However, it again alleged a claim of negligent misrepresentation against Security Title, including, for the first time, a claim based on the erroneous title commitment. It also resurrected the dismissed claim for breach of fiduciary duty, now alleging the title commitment and failure to disclose facts showing possible fraud because (1) Equity was not certified to do business in Arizona and was never validly formed; (2) Farris was the only person behind Equity and was violating his fiduciary duties to the Jenkins; (3) no promissory note was issued evidencing the debt owed by Equity to the Jenkins; and (4) the terms of the successive loan documents were red flags of fraud.

¶12 The Jenkins also alleged that Security Title aided and abetted the fiduciary breaches by Farris because it was aware that Farris was the undisclosed buyer and the unsecured loan was unusual, extreme, and outrageous. The alleged aiding and abetting was based on Security Title's dealing only through Farris, not "reaching out to the Jenkins" to gain clarification on the transaction, failing to disclose to the Jenkins Farris' multiple roles, and closing the escrow despite substantial evidence of fraud.

¶13 Finally, the amended complaint alleged two new claims against Security Title for negligence per se/negligent supervision and securities fraud. As to the first claim, the Jenkins alleged Security Title violated Arizona Revised Statutes ("A.R.S.") section 6-841 (2016)4 by failing to adopt an internal control to ensure its employees did not perpetuate fraud or allow significant irregularities, which the Jenkins alleged included failing to warn the Jenkins of the fraud, issuing the faulty title policy, and not adhering to the terms of the escrow agreement. The securities fraud claim was based on an alleged private annuity described in PSA 2.

¶14 Security Title opposed the motion to amend, arguing first that it was untimely. It also argued that it was futile because all the tort claims were barred by a two-year limitations period. Security Title also argued that the negligence/negligent supervision, breach of fiduciary duty, and aiding and abetting claims were barred by the economic loss rule and that the securities fraud claim failed as a matter of law because this was merely a sale of real property rather than a security; it did not sell any securities; and it did not participate in any such alleged sale because it was merely an escrow agent.

¶15 The superior court granted leave to amend the complaint except as it applied to Security Title. The court found that the motion to amend was untimely as to Security Title because a motion to dismiss had already been granted and that the amendments were futile.

¶16 The Jenkins timely appealed. We have jurisdiction pursuant to A.R.S. §§ 12-2101(A) (2016) and 12-120.21(A)(1) (2016).

DISCUSSION

I. Security Title's Motion to Dismiss

¶17 This Court reviews de novo an order granting a Rule 12(b) motion to dismiss. Coleman v. City of Mesa, 230 Ariz. 352, 355-56, ¶¶ 7-8 (2012). We assume the truth of the allegations set forth in the complaint provided they are well-pled and not conclusory, id. at 356, ¶ 9 (citation omitted), and "uphold dismissal only if the plaintiffs would not be entitled to relief under any facts susceptible of proof in the statement of the claim." Mohave Disposal, Inc. v. City of Kingman, 186 Ariz. 343, 346 (1996) (citation omitted). We review questions of law concerning the statute of limitations de novo. Rogers v. Bd. of Regents of Univ. of Ariz., 233 Ariz. 262, 265, ¶ 6 (App. 2013) (citation omitted). Reliance on documents attached to the complaint may be considered without converting the motion into one for summary judgment. Coleman, 230 Ariz. at 356, ¶ 9 (citation omitted).

¶18 The Jenkins argue that the motion to dismiss should not have been granted because the allegations in the original complaint were sufficient to create liability and the claims were not time barred. Upon review, we find these arguments unpersuasive.

¶19 The superior court granted Security Title's motion to dismiss, finding that there were no allegations that Security Title failed to behave as a reasonable escrow agent.5 The Jenkins assert the court should have found that the complaint

sufficiently states facts and allegations that when assumed true, show that Security [Title] violated a duty, against public policy, when it failed to verify the validity of Equity 253, when it recognized the high level of risk and only acted to cover its own liability, if and when the deal went bad, instead of informing the unsuspecting buyer or excusing itself from participation in the scheme.

However, none of the allegations state facts that indicate Security Title acted unreasonably in its role as an escrow agent by failing to disclose facts that a reasonable escrow agent would perceive as evidence of fraud. Burkons v. Ticor Title Ins. Co. of Cal., 168 Ariz. 345, 353 (1991) (citations omitted). Here, the information available to Security Title as alleged in the complaint indicated simply that the transaction was risky, not fraudulent, and the risks were disclosed.

¶20 Although unfortunate, the Jenkins' loss resulted from their entering into a contract to sell their land when the contract was unsecured. Security Title clearly brought this fact to the Jenkins' attention through language that should have placed even "unsophisticated sellers" on notice. The supplemental escrow instructions—a single page with a signature block—state that "[t]he Seller further acknowledges that he is fully aware that this transaction includes an Unsecured Loan Agreement with the Buyer." (emphasis in original). All three purchase and sales agreements noted the risky nature of the transaction: "Risk: The nature of the payment stream promised to seller from purchaser is not secured by real property and may be subject to default in which case Sellers['] ability to collect may be limited." The closing instructions also state

Buyer and Seller acknowledge that Escrow Agent has not given and will not be requested or expected to give financial, tax, or legal advice; to give advice as to the type or form of any instrument to be used in connection with this escrow; to revise any documents deposited into escrow to determine their legality or sufficiency; to explain the meaning or legal consequences of any document; to make any inquiry of any nature concerning the financial condition of any party or entity; . . . [or] to assist in negotiating or structuring of the transaction.

¶21 As a matter of law, a competent person is held to know the contents of an agreement he or she signs. In re Henry's Estate, 6 Ariz.App. 183, 186 (1967) (citation omitted). The superior court correctly found that none of the allegations, even when viewed in the light most favorable to the Jenkins, were sufficient to state a basis for liability. While the Jenkins argue that Security Title knew they were novices in real estate and even allegedly referred to them as "yahoos," our supreme court has explained that an "escrow company is not a guardian for the uninitiated." Berry v. McLeod, 124 Ariz. 346, 352 (1979). Nor was Security Title the Jenkins' legal advocate. There can be no actionable duty to disclose by Security Title amounting to negligent misrepresentation or aiding and abetting others when all the documents outlined the risky nature of the transaction and the sale documents indicate that Farris was acting as the agent for the seller and the buyer.6

¶22 Finally, the Jenkins' assertion that the tort claims were not time barred must also fail. At the time of the ruling on the motion to dismiss, only two tort claims—negligent misrepresentation and aiding and abetting a breach of fiduciary duty—remained before the superior court on the motion to dismiss. Those tort claims needed to be brought within two years after the cause of action accrued, A.R.S. § 12-542 (1985). "[A] cause of action does not accrue until the plaintiff knows or with reasonable diligence should know the facts underlying the cause." Doe v. Roe, 191 Ariz. 313, 322, ¶ 29 (1998) (citation omitted). The Jenkins claim their cause of action did not accrue until January 2014 "after Farris stopped paying them and they spoke to their current counsel regarding the matter." However, PSA 3 fixed the terms of payment, and Farris began missing payments in August 2008, when he paid $18,000 rather than the $60,000 payment provided for in the agreement. The Jenkins do not provide any meritorious reason why only the missed payment in 2014, and not those beginning in 2008, triggered their discovery of the torts.

¶23 The Jenkins' reliance on Acton v. Morrison, 62 Ariz. 139 (1945) and Walk v. Ring, 202 Ariz. 310 (2002) is misplaced. In these cases, a doctor and a dentist fraudulently concealed from the injured patients the fact of their negligence. Acton, 62 Ariz. at 144; Walk, 202 Ariz. at 319, ¶¶ 34-35. This fraudulent concealment tolled the statute of limitations "until such concealment is discovered, or reasonably should have been discovered." Walk, 202 Ariz. at 319, ¶ 35 (citations and quotation omitted). Such was not the case here. The Jenkins do not claim to have had contact with Security Title in any manner after the close of escrow, and the unsecured nature of the loan and Farris' involvement with Equity were disclosed at closing. The Jenkins may not successfully assert tolling as to Security Title on the theory that Security Title fraudulently concealed its alleged negligence when they never contacted Security Title after the injury arose—when Farris missed his first payment in 2008—and when there is no evidence Security Title made any representations to the Jenkins, fraudulent or otherwise, after the sale closed. Under these facts, the Jenkins cannot successfully argue the statute of limitations was tolled by fraudulent concealment as the record reflects no such concealment by Security Title. Furthermore, the default reasonably put the Jenkins on notice that something was amiss, sufficient notice to trigger an investigation.

II. Amended Complaint Against Security Title

¶24 A court may deny leave to amend if it finds "`undue' delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments or undue prejudice to the opposing party." Owen v. Superior Court of State of Ariz., In & For Maricopa Cty., 133 Ariz. 75, 79 (1982) (citation omitted). We review the denial of a request to amend a complaint for an abuse of discretion. Carranza v. Madrigal, 237 Ariz. 512, 515, ¶ 13 (2015) (citation omitted). We will affirm if the superior court was correct for any reason. Tumacacori Mission Land Dev., Ltd. v. Union Pac. R.R. Co., 231 Ariz. 517, 519, ¶ 4 (App. 2013) (citation omitted).

¶25 The Jenkins assert the superior court erred by denying them leave to amend their complaint as to Security Title. We disagree. The Jenkins were not entitled to amend as a matter of course and could amend only with leave of the court. See Ariz. R. Civ. P. 15(a)(1)(B) (2016) (allowing amendment as a matter of course no later than the date on which a response to a Rule 12(b)(6) motion is due), 15(a)(2) (allowing other amendments only with leave of the court). Security Title filed its motion to dismiss on September 19, 2014. On October 7, 2014, the Jenkins voluntarily dismissed most of their claims against Security Title. The court granted Security Title's motion to dismiss on December 1, 2014. The Jenkins did not file their motion to amend until January 31, 2015. The Jenkins should have filed their motion to amend before the court ruled on the motion to dismiss. Nothing in the record indicates any compelling reason for the delay. We find this constitutes an undue delay in filing the motion, and it was not an abuse of discretion by the superior court to deny the motion to amend the complaint against Security Title as untimely.

¶26 In any event, the proposed amendments were futile because they were all barred by the two-year statutes of limitations for torts and violation of securities statutes. A.R.S. §§ 12-542 (2017), 44-2204(B) (2017). The proposed amended complaint asserted tort claims against Security Title for negligent misrepresentation, breach of fiduciary duty, aiding and abetting fiduciary breaches by others, negligence per se/negligent supervision, and securities fraud. Supra, ¶¶ 11-13. As detailed above, the alleged facts on which such claims were based occurred prior to or at the time of the 2006 closing. The Jenkins knew of the default in 2008, were put on notice to investigate any possible tortious conduct by Security Title at that point, and were not free to simply sit on their rights until 2014 when they contacted an attorney. For the reasons stated above, their reliance on Walk is misplaced. Supra, ¶¶ 22-23.

CONCLUSION

¶27 For the reasons stated above, we affirm. Security Title has requested an award of attorneys' fees and costs pursuant to paragraph 13 of the Escrow Agreement and to A.R.S. §§ 13-341 (2017). We grant Security Title its reasonable attorneys' fees on appeal pursuant to the Escrow Agreement and taxable costs on appeal upon timely compliance with Arizona Rule of Civil Appellate Procedure 21.

FootNotes


1. We amend the caption to reflect this Court's orders dated May 18, 2017 deconsolidating the two appeals and dismissing the Jenkins' appeal in 1 CA-CV 16-0310 as settled. All future pleadings in this matter will use the above caption.
2. Farris was a defendant in the proceedings below, but reached a settlement agreement in favor of the Jenkins for $2.5 million.
3. Equity was also a defendant in this action, and the superior court entered a default judgment against it.
4. We cite to the most recent version of statutes unless changes material to this decision have occurred.
5. In light of the Jenkins' voluntary dismissal of all but two of the claims against Security Title, we construe that ruling as concluding that the alleged failure of Security Title to disclose certain facts did not amount to a negligent misrepresentation. We also construe the ruling to mean Security Title did not aid other defendants in their alleged breach of fiduciary duties.
6. The Jenkins assert that Security Title stated it would issue a title commitment on their behalf and its failure to do so fell below the standard of a reasonable escrow. However, the title commitment was conditioned on a deed of trust being issued to the Jenkins. The agreement signed by the parties, as expressed by PSA 3, stated there would be no secured interest in the Property.

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