Justia.com Opinion Summary: This case involved a property dispute that arose after the sale of a plot of residential land pursuant to a statutory warranty deed. Specifically, the issue on appeal centered on whether a grantor's duty to defend against another's claim to title was satisfied by that grantor's independent decision to settle the claim and pay the grantee damages for the breach of warranty. Upon review, the Supreme Court held that the duty to defend requires that a grantor defend in good faith. The grantor in this case, Csaba Kiss, was ordered by a trial court to pay damages to grantees Ivan and Varvara Popchoi when the court granted summary judgment against them and awarded a portion of their land to their neighbors J.E. and Naomi Edmonson through adverse possession. Mr. Kiss did not dispute that he owed damages, but appealed whether he owed attorney fees to the Popchois to defend against the Edmonsons' claim. The Supreme Court held Mr. Kiss was liable to the Popchois for the breach of the warranty to defend and ordered to pay their attorney fees.
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IN THE SUPREME COURT OF THE STATE OF WASHINGTON
J.E. EDMONSON and NAOMI I.
EDMONSON, husband and wife,
)
)
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Plaintiffs,
)
)
v.
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)
IVAN G. POPCHOI and VARVARA M.
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POPCHOI, husband and wife,
)
)
Respondents,
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NATIONAL CITY MORTGAGE, INC.,
)
an Ohio corporation; NATIONAL CITY
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BANK, an Ohio corporation; and FIDELITY )
NATIONAL TITLE COMPANY OF
)
WASHINGTON, INC., a Washington
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corporation,
)
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Defendants,
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CSABA KISS, a single person,
)
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Petitioner.
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)
No. 84695-2
En Banc
Filed August 4, 2011
OWENS, J. -- This case involves a property dispute that arose after the sale of
a plot of residential land pursuant to a statutory warranty deed. Specifically, this case
presents the question of whether a grantor’s duty to defend against another’s claim to
Edmonson v. Popchoi
No. 84695-2
title is satisfied by that grantor’s independent decision to settle the claim, whatever its
merits, and pay the grantee damages for the breach of warranty. We hold that the duty
to defend requires that a grantor defend in good faith and that the duty was breached in
this case. We also hold that the grantee in this case did not waive the warranties of the
statutory warranty deed by failing to disclose an encroachment.
FACTS
On May 4, 2006, pursuant to a statutory warranty deed, Csaba Kiss sold a
parcel of residential property to Ivan and Varvara Popchoi for $575,000. The
Popchois bought the property with the intent of tearing down the existing house and
building another to sell. Ilene and Jim Edmonson own the neighboring property to the
south of the lot that the Popchois purchased.
Before closing, the Popchois commissioned a survey of Kiss’s land, which
revealed that a cyclone fence was set north of the actual southern property boundary,
within the lot. The Popchois’ survey showed that the fence was between several
inches and more than one foot north of the property line in different places. The
surveyor placed stakes at the corners of the actual property line. The fence had been
built by a prior owner of the Kiss lot, not by the Edmonsons, and it did not extend
across the full length of the property. Kiss testified that he was not aware that the
survey revealed a discrepancy between the property line and the location of the fence
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because the survey was neither recorded nor made known to him by the Popchois.
The sale nonetheless proceeded.
Shortly after the sale, on August 6, 2006, the Edmonsons sent a letter to the
Popchois, notifying the Popchois of their adverse possession claim to the property
south of the fence. The Popchois in turn forwarded this information to Kiss by letter,
dated August 31, 2006, and demanded that he quickly resolve the dispute. In that
letter, the Popchois communicated that they were about to pour the foundation for the
new house and that the adverse possession claim would force a delay, as well as make
questionable their ability to develop the property in the way that they had intended.
After unsuccessful attempts to negotiate a resolution, the Edmonsons filed a
complaint to quiet title in King County Superior Court on March 7, 2007, asserting
that they acquired title to part of the Popchoi lot by adverse possession. On March 20,
2007, counsel for the Popchois submitted a “tender of defense” to Kiss as “the seller
of the property and grantor of the statutory warranty deed.” Clerk’s Papers (CP) at
162; Trial Ex. 6. Kiss conditionally accepted by a letter from his lawyer dated April
27, 2007, stating in relevant part:
Mr. Kiss conditionally accepts the tender of the right to defend the
adverse possession action. This acceptance is conditional only on your
confirmation that the tender was made in accordance with RCW
64.04.030 and cases interpreting it. I point this out because your letter
referred to the tender of “the defense” to the action rather than a “right to
defend” it. A tender of the defense alone could be interpreted as
retaining the right to control the defense, whereas a tender of the right to
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defend includes the right to compromise or settle the claim.
Trial Ex. 7; see CP at 162. Kiss testified that it was his understanding that “the
Edmonson[s’] claim was going to be agreed to” and he would “pay damages to
Popchoi” because “that would be less expensive than defending the lawsuit.” Tr. (Jan.
8, 2009) at 25-26.
There is no evidence in the record that Kiss or his attorneys investigated the
merits of the Edmonsons’ adverse possession claim or assisted in the representation of
the Popchois against the Edmonsons. “The time records of Mr. Popchoi[’]s attorney,
John Hathaway, show that he defended the adverse possession claim.” CP at 164
(citing Trial Ex. 19). Through a third party complaint by the Popchois, Kiss was
joined as a third party defendant to the Edmonsons’ claim.
On July 18, 2008, King County Superior Court granted the Edmonsons’ motion
for summary judgment, finding that their “use of the disputed property was open,
notorious[,] hostile & exclusive for the requisite 10 years.” CP at 130-31. The
superior court transferred title to 165 square feet of land along the southern property
line of the Popchois’ lot to the Edmonsons. Besides the loss of land, the diminishment
of the Popchoi title caused the Popchois to be nonconforming with certain land use
regulations of the city of Bellevue. The Popchois’ total lot size was reduced from
8,630 square feet to 8,465 square feet, which is less than the 8,500 square feet
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required for residential lots in Bellevue’s R-4 zone, the zoning designation of the
Popchoi lot. Additionally, the Popchois built their house five feet from where they
believed the property line to be; since the Edmonsons prevailed, the Popchoi house is
now three feet from the actual property line, which is nonconforming with Bellevue’s
land use ordinances that require a minimum five-foot setback.
On February 5, 2009, King County Superior Court granted the Popchois some
relief in their third party claim against Kiss. Specifically, the trial court ordered that
Kiss pay the damages of his breach of warranty, the amount the Popchois paid for the
165 square feet of land to which they lost title, including the enhancement of the value
of that property and interest. The trial court did not award the Popchois damages for
construction delay or for diminution in the land value based on how the change of the
lot size caused nonconformance with applicable land use regulations. Those rulings
are not now disputed. What is disputed is the trial court’s order that Kiss pay the
Popchois $30,281.90, the total amount of legal fees and costs that the Popchois
incurred to defend against the adverse possession claim. The trial court based this
judgment on its legal conclusion that Kiss did not have the right to condition
acceptance of the tender of defense on his ability to settle the claim, without any
investigation of its merits, and simply pay damages for breach in the amount of the
value of the diminished title.
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Kiss appealed, and the Court of Appeals affirmed the trial court. Edmonson v.
Popchoi, 155 Wn. App. 376, 390, 228 P.3d 780 (2010). We accepted review.
Edmonson v. Popchoi, 170 Wn.2d 1001, 243 P.3d 551 (2010).
ISSUES
1. Can the grantor of a statutory warranty deed satisfy the duty to defend
against another’s claim to title by settling the claim, regardless of its merits, and
paying damages to the grantee for breach of warranty?
2. Does a grantee waive a breach of warranty claim by failing to notify the
grantor of an encroachment?
ANALYSIS
A. Standard of Review
Questions and conclusions of law are reviewed de novo. Sunnyside Valley
Irrigation Dist. v. Dickie, 149 Wn.2d 873, 880, 73 P.3d 369 (2003). “Statutory
interpretation is a question of law.” Lake v. Woodcreek Homeowners Ass'n, 169
Wn.2d 516, 526, 243 P.3d 1283 (2010).
B. Warranty To Defend
Statutory warranty deeds are governed by RCW 64.04.030 and include a
covenant to defend against another’s claim to title. In relevant part, the statute states
that
[the grantor] warrants to the grantee, his heirs and assigns, the quiet and
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peaceable possession of such premises, and will defend the title thereto
against all persons who may lawfully claim the same.
RCW 64.04.030 (emphasis added). The covenant to defend is “obligatory upon any
grantor . . . as fully and with like effect as if written at full length in such deed.” Id.
“Where covenants under the warranty deed are breached, an injured grantee is entitled
to recover both damages for lost property or diminution in property value and
attorney's fees incurred in defending title.” Mastro v. Kumakichi Corp., 90 Wn. App.
157, 163, 951 P.2d 817 (1998) (citation omitted). Kiss sold the Popchois a plot of
residential real estate pursuant to a statutory warranty deed.
There is little Washington case law interpreting the covenant to defend in the
statutory warranty deed. The leading cases on point involve questions of the sufficient
notice or tender of defense to the grantor necessary to make the grantor liable for
attorney fees incurred by the grantee in the course of defending title to the property.
See Mellor v. Chamberlin, 100 Wn.2d 643, 648-49, 673 P.2d 610 (1983); Mastro, 90
Wn. App. at 164-66. The central question in this case is whether the duty to defend is
satisfied by a settlement conceding a third party’s claim to title and payment of
damages for the value of the portion by which the title is diminished to the grantee for
the breach of warranty. Neither Mastro nor Mellor addresses the scope of the
grantor’s duty to defend.
Based on a plain reading of the statute and the implied duty of good faith, we
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hold that the warranty to defend means that, upon proper tender, a grantor is obligated
to defend in good faith and is liable for a breach of that duty. The plain meaning of
“defend” means something more than complete concession to another party’s claim.
Black’s Law Dictionary 482 (9th ed. 2009) (defining to “defend” as “[t]o deny,
contest, or oppose (an allegation or claim)”). An interpretation of the warranty to
defend that includes mere concession to another’s claim to title, regardless of the
merits, would render the warranty to defend superfluous in the statute. A grantee can
already recover for the diminished title under the warranties that the estate is “free
from all encumbrances” and of “quiet and peaceable possession of [the] premises.”
RCW 64.04.030. The duty to defend must mean something more. This is especially
important in light of the unique character of real property because the tract of land,
title to which needs defending, may be of greater value to the grantee than its
monetary value reflects.1 See Cornish Coll. of the Arts v. 1000 Virginia Ltd. P’ship,
158 Wn. App. 203, 222, 242 P.3d 1 (2010) (“[B]ecause land is unique and difficult to
value, specific performance is often the only adequate remedy for a breach of contract
regarding real property.”), review denied, 171 Wn.2d 1014, 249 P.3d 1029 (2011).
Finally, an implied covenant of good faith inheres in every contract. Miller v. Othello
Packers, Inc., 67 Wn.2d 842, 844, 410 P.2d 33 (1966). The duty of good faith
1
This case presents a relevant example: loss of title to the disputed tract of land not only
meant the loss of the land itself but caused the Popchois to be noncompliant with land use
regulations of the city of Bellevue and affected their planned use of the entire lot.
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requires “faithfulness to an agreed common purpose and consistency with the justified
expectations of the other party.” Restatement (Second) of Contracts § 205 cmt. a
(1981); see id. cmt. d (“[B]ad faith may be overt or may consist of inaction.”). As
with any covenant of any contract, we read a duty of good faith into the warranty to
defend. Accordingly, the promise that a grantor will defend against all other claims to
title must mean something more than that the grantor will do nothing but concede such
claims.
Kiss breached his duty to defend in good faith. The contract between Kiss and
the Popchois included a warranty to defend against another’s claim to title by
reference to the fact that the sale of land was pursuant to a statutory warranty deed.
When the Edmonsons filed their claim, the Popchois sent a tender of defense to Kiss.
Kiss conditioned his acceptance of the tender on his right to control the defense,
including settling the case without putting on any defense. This condition of
acceptance effectively rendered his response a refusal of the tender. Cf. Mastro, 90
Wn. App. at 166 (assuming that failure to respond to a tender of defense “constitutes a
refusal to defend”). Kiss now argues that this case is about control over the defense
strategy and that a grantee cannot control the defense after issuing a tender of defense
to the grantor. However, a concern about micromanagement is a far cry from the facts
of this case where Kiss immediately sought to concede and settle the claim, without
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any evident consideration of the merits, because it would be most cost effective for
him. Such indifference to the dispute and out-of-hand dismissal of the duty to defend
simply cannot be characterized as satisfying the warranty to defend. Rather, Kiss’s
refusal to defend in good faith constitutes a breach of warranty.
At the crux of Kiss’s argument that he did not breach his warranty to defend is a
distinction between a “duty to defend” and a “right to defend.” He argues that the
statutory warranty deed provides only that a grantor has the “right to defend.” The
statute, however, does not contain language about a right; rather, it provides that the
grantor “will defend the title.” RCW 64.04.030 (emphasis added). The language of a
“right to defend” appears in case law but does not support Kiss’s interpretation. See,
e.g., Mellor, 100 Wn.2d at 648; Mastro, 90 Wn. App. at 165 (quoting Dixon v. FiatRoosevelt Motors, Inc., 8 Wn. App. 689, 692, 509 P.2d 86 (1973)). In Mellor, this
court stated:
RCW 64.04.030 expressly states the grantor•not the grantee•will
defend title against third persons. Whether a covenantee is successful at
defending title is irrelevant, as the right to defend statutorily lies with a
covenantor.
100 Wn.2d at 648. Mellor referred to the right of the grantor to defend because, in
that case, the grantee defended without giving any notice to the grantor of the dispute
and then sought attorney fees. Id. Mellor stands only for the rule that the grantor
cannot be found to owe attorney fees as a result of a breach of the duty to defend if the
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grantor never received notice or opportunity to fulfill the duty to defend. Id. Mastro
similarly involved a question of the requirements of a “tender of defense.”2 90 Wn.
App. at 165. The specific language of the “right to defend,” taken in context, refers to
the grantee’s action of handing over the grantee’s right to defend to the grantor
through a tender of defense; it does not convert the grantor’s duty into a right.
Kiss cites Petersen-Gonzales v. Garcia, 120 Wn. App. 624, 86 P.3d 210 (2004),
to define the “right to defend,” but, as the Court of Appeals noted below, the analogy
to Petersen-Gonzales and generally to insurance law is incomplete and inapt.
Edmonson, 155 Wn. App. at 385. Petersen-Gonzales involved a contractual dispute
over the right of the insurer to defend in an underinsured motorist suit. 120 Wn. App.
at 629. That court held that an insurer’s contractual “right to defend” included the
right to participate at trial, despite the insured’s motion to exclude the insurer. Id. at
630-31. Importantly, the contract in that case created a right, not a duty, of the
insurer, which is simply not analogous to the duty of Kiss, as grantor, to defend against
another’s claim to title pursuant to a statutory warranty deed.
A more appropriate analogy would be to cases involving the duty of an insurer
to defend, but Kiss would not find support there for his argument that he may just
settle and pay damages. “[T]he duty to defend is different from and broader than the
duty to indemnify.” Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 404,
2
Kiss does not argue that the Popchois’ tender of defense was inadequate.
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229 P.3d 693 (2010). In the insurance context, this court has recognized that the right
to a defense may be “of greater benefit” than indemnity and has held that “if there is
any reasonable interpretation of the facts or the law that could result in coverage, the
insurer must defend.” Id. at 405. If pressed to draw an insurance analogy to the
statutory warranty deed, which we do not find necessary,3 a grantor’s settlement of a
third party claim to title by concession and paying damages to the grantee is most like
indemnity. The duty to defend is something different under both insurance law and a
statutory warranty deed.
We hold that the warranty to defend in a statutory warranty deed, RCW
64.04.030, requires that the grantor provide a good faith defense to title. Kiss
effectively refused the Popchois’ tender of defense when he conditioned his
acceptance on a nonexistent right to settle the claim without any consideration of its
merits. Accordingly, we affirm the Court of Appeals and hold that Kiss breached the
warranty to defend and is therefore liable for the attorney fees incurred by the
Popchois in defense of their title.
3
Both the Court of Appeals and trial court in this case found that Kiss had a duty to
investigate. A duty to investigate can be found in insurance law. See, e.g., WAC 284-30330(4) (“Refusing to pay claims without conducting a reasonable investigation” is an unfair or
deceptive act or practice.); Coventry Assocs. v. Am. States Ins. Co., 136 Wn.2d 269, 281, 961
P.2d 933 (1998) (finding that a reasonable investigation is required before coverage is
denied). While it is hard to imagine how a grantor could defend in good faith without
investigating the merits of a third party claim to title, we opt not to extend the insurance
analogy. It is sufficient to say that Kiss had a duty to defend in good faith.
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C. Waiver of the Warranty To Defend
Kiss alternatively argues that the Popchois waived the warranty of defense and
other warranties of the deed. Specifically, he argues that the Popchois failed to
disclose survey results that showed the fence as an encroachment and that this
constitutes a waiver of the deed’s warranties. Kiss testified that, had he known about
the discrepancy between the placement of the fence and the actual property line, he
would not have proceeded with the sale. The Popchois did not have any apparent
knowledge of the legal effect of the fence, which had been built by a previous owner
of the Kiss lot, not by the Edmonsons. Specifically, the Popchois did not know that
the location of the fence implicated a viable adverse possession claim.
Kiss’s claim that the Popchois waived the warranties of the deed is without
merit. At least since 1901, Washington courts have followed the rule that a grantee
does not waive the covenants of a deed by having knowledge of a defect. Edmonson,
155 Wn. App. at 389 (citing W. Coast Mfg. & Inv. Co. v. W. Coast Improvement Co.,
25 Wash. 627, 637, 66 P. 97 (1901)); accord Fagan v. Walters, 115 Wash. 454, 457,
197 P. 635 (1921). “Such covenants warrant against known as well as unknown
defects, and grantees with knowledge of an encumbrance have the right to rely on the
covenants in the deed for their protection.” Foley v. Smith, 14 Wn. App. 285, 292, 539
P.2d 874 (1975). In Foley, both the grantee and grantor had knowledge of the defect,
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but as the Court of Appeals noted in this case, “This is a distinction without a
difference.” Edmonson, 155 Wn. App. at 389.
We hold that the Popchois did not waive the warranty of defense of the title by
failing to notify Kiss of the survey that showed that the cyclone fence was set north of
the actual property line.
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CONCLUSION
The warranty to defend against another’s claim to title under a statutory
warranty deed means that, upon a grantee’s tender of defense, a grantor must provide a
good faith defense to title or face liability for breach of the warranty to defend. That
warranty is not waived by the grantee’s knowledge of and failure to disclose an
encroachment. Accordingly, we affirm the Court of Appeals and trial court: Kiss is
liable to the Popchois for breach of the warranty to defend and must pay the attorney
fees they incurred to defend their title.
AUTHOR:
Justice Susan Owens
WE CONCUR:
Chief Justice Barbara A. Madsen
Justice Mary E. Fairhurst
Justice Charles W. Johnson
Justice James M. Johnson
Justice Gerry L. Alexander
Justice Debra L. Stephens
Justice Tom Chambers
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