When a trust purchased property from a developer, the purchase and sales agreement required it to develop the lot within two years or the developer would have the right to repurchase the lot. The trust failed to do so and eventually settled with the developer, seeking coverage from its title insurer. The insurer declined coverage of the losses and the trust sued.
The case is Camilo Salas III, as trustee of the Salas Children Trust v. Commonwealth Land Title Insurance Co. (11th U.S. Circuit Court of Appeals, No. 22-12264).
In 2009, the Salas Children Trust purchased property in Alys Beach, Fla., from Ebsco Gulf Coast Development Inc. Camilo Salas III, as trustee of the trust, entered into a purchase and sales agreement with Ebsco for the lot, under which the trust was required to build on the lot within two years or Ebsco would be able to repurchase the property and have the ability to recover fines and monthly liquidated damages.
The trust received a title insurance policy from Commonwealth Land Title Insurance Co., which contained an exclusion for defects, liens, encumbrances, adverse claims or other matters created, suffered, assumed or agreed to by the insurance claimant. The policy also exempted from coverage losses or damages related to the declaration of covenants, conditions, and restrictions for the neighborhood of Alys Beach and the warranty deed. They both contained the same two-year construction requirement and repurchase option.
The trust failed to build on the lot within the two-year period and Ebsco sued Salas for breach of the purchase agreement, the declaration of covenants, and the warranty deed. The parties engaged in almost three years of litigation before settling. Salas incurred nearly a million dollars of fees and costs defending the Ebsco lawsuit. Salas sought defense and indemnification from Commonwealth. Commonwealth denied coverage.
Salas originally filed suit against Commonwealth in Louisiana state court before the case was removed to federal court and transferred to the Northern District of Florida. Salas filed an amended complaint and Commonwealth filed a motion to dismiss the amended complaint. Salas filed a motion for summary judgment and Commonwealth filed an omnibus motion. In that motion, Commonwealth moved to stay the action and reset the scheduling order or, alternatively, supplement its motion to dismiss which the district court could construe as a motion for summary judgment. Commonwealth sought to supplement its motion to dismiss with Salas’ deposition transcript. During his deposition, Salas testified understood at the time he signed the purchase agreement that he committed the trust to the terms of the purchase agreement.
Commonwealth also filed a response in opposition to Salas’ motion for summary judgment. It included Salas’ deposition transcript as an exhibit. On March 2, 2022, Salas filed a response opposing Commonwealth’s motion to supplement, as well as file a reply in support of its motion for summary judgment.
On April 2, 2022, a magistrate judge granted Commonwealth’s request to supplement the motion to dismiss. The magistrate judge also issued a report and recommendation, recommending the district court treat Commonwealth’s motion to dismiss as a motion for summary judgment, grant that motion, and deny Salas’ motion for summary judgment. The magistrate judge found that Florida law applied; Standard Exclusion 3(a) barred coverage; and no abstractor liability applied.
Salas objected to the magistrate’s report and recommendations, arguing that the district court should reject the recommendation to convert Commonwealth’s motion to dismiss into a motion for summary judgment without providing proper notice. The district court adopted the magistrate’s recommendations and entered judgment in favor of Commonwealth.
The appellate court affirmed the lower court’s decision, first addressing Salas’ argument that the district court erred when it converted Commonwealth’s motion to dismiss into a motion for summary judgment because it did so without providing fair notice.
The court agreed that the district court erred in failing to provide the 10 days’ notice.
“Nevertheless, such error does not require us to reverse and remand because the limited exception presented in Property Management applies,” the court stated. “Commonwealth sought to supplement the motion to dismiss after the trustee had presented all the arguments it sought to present in a 64-page motion for summary judgment and had submitted 29 exhibits in support of its arguments.
“Further, Commonwealth sought to supplement the motion to dismiss with one document—the trustee’s deposition transcript,” the court continued. “Significant, however, is the fact that Commonwealth also provided a copy of the trustee’s deposition transcript—the very document with which it sought to supplement the motion to dismiss—as an exhibit to its response in opposition to the trustee’s motion for summary judgment. In the reply brief supporting the trustee’s motion for summary judgment, the trustee did not even address the deposition transcript let alone present any arguments as to why the trustee’s statements should not be considered in support of either Commonwealth’s motion to dismiss or converted motion for summary judgment.
“The trustee had more than ‘a reasonable opportunity’ to submit additional documents in support of its position and in opposition to Commonwealth’s converted motion for summary judgment,” the court stated. “Two months elapsed between the magistrate judge’s recommendation to convert Commonwealth’s motion to dismiss and the district court’s adoption of that recommendation. The record clearly shows that the trustee actively participated in the motions practice, submitted over 40 documents in support of and opposition to the parties’ positions, was not prohibited from submitting additional documents prior to the deadline for responding to Commonwealth’s motion, and had ample opportunities to challenge reliance on Commonwealth’s exhibits, including the trustee’s admittedly damaging deposition testimony. After reviewing all the arguments and documents submitted by the parties and considering materials outside the pleadings, Rule 12(d) mandated that the district court convert the 12(b)(6) motion to dismiss into a motion for summary judgment. Thus, this case represents the very ‘unique’ circumstance where the district court’s failure to notify the parties before it converted the motion to dismiss into a motion for summary judgment was harmless. Therefore, we need not remand this case, but instead decide it on the merits at this time.”
The court then addressed the argument that the district court erred in concluding that the policy’s Standard Exclusion 3(a) precluded coverage.
“Standard Exclusion 3(a) bars coverage for ‘[d]efects, liens, encumbrances, adverse claims or other matters ... created, suffered, assumed or agreed to by the insured claimant,’” the court stated. “Here, the district court, in adopting the R&R, properly construed this provision as precluding coverage if an insured failed to perform a contractual obligation that the insured ‘assumed or agreed to.’ During his deposition, the trustee testified that, on behalf of the trust, he reviewed the purchase agreement before signing it, and he was aware of the liquated damages clause that imposed penalties if the trust failed to build on the lot within the mandatory two-year period. By the trustee’s admission, the trust ‘assumed or agreed to’ the terms of the purchase agreement. Any resultant harm, such as being subject to liquidated damages and penalties, that the trust suffered was by its own doing.”
It also addressed Salas’ argument that by failing to list the purchase agreement in Schedule B, Commonwealth demonstrated that it was aware of the liquidated damages clauses and agreed to insure over that risk.
“The trustee’s third argument is that even if Commonwealth had no duty to indemnify, it had a duty to defend the trust in the Ebsco litigation because the allegations set forth in the Ebsco litigation complaint brought that suit within the policy’s coverage,” the court stated. “Yet, the trustee neglects to address how the Ebsco litigation fit within the scope of the policy and thus gave rise to Commonwealth’s duty to defend. As explained above, Ebsco sued the trustee because of the trust’s failure to construct on the lot within the required two-year period—an express requirement of the purchase agreement. The policy, however, does not provide coverage for the trust’s breach of its contractual duties under the purchase agreement. Thus, because the Ebsco litigation was conditioned solely upon the trust’s breach of the purchase agreement, the Ebsco litigation is not within the scope of the policy’s coverage, and Commonwealth had no duty to defend.”
Lastly, the court addressed the argument that the district court improperly analyzed the abstractor liability claim.
“The parties dispute whether the liquated damages clause in the purchase agreement is an encumbrance or title defect,” the court stated. “Without deciding the issue of whether the liquated damages clause is a defect or an encumbrance to title, we conclude there is no abstractor liability. As we have previously discussed, the trust expressly ‘assumed or agreed to’ the terms of the purchase agreement. Thus, the trust was not ‘surprised’ by the liquated damages clause, or any other penalties imposed against it when it breached its contractual duties under the purchase agreement.”