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James v. McCombs (1/24/97), 936 P 2d 520
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NOTICE: This opinion is subject to formal correction before
publication in the Pacific Reporter. Readers are requested to bring
errors to the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, phone (907) 264-0607, fax (907)
264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
J. MICHAEL JAMES, d/b/a )
JAMES FARMS, ) Supreme Court No. S-6685
)
Appellant, ) Superior Court No.
) 3AN-91-03926 CI
v. )
) O P I N I O N
JOAN H. McCOMBS, )
) [No. 4466 - January 24, 1997]
Appellee. )
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Joan Woodward, Judge.
Appearances: Dennis P. James and Keith A.
Christenson, Anchorage, for Appellant. John
G. Davies and Allen G. Kingman, Wasilla, for
Appellee.
Before: Compton, Chief Justice, Rabinowitz,
Eastaugh, and Fabe, Justices. [Matthews,
Justice, not participating.]
RABINOWITZ, Justice.
I. INTRODUCTION
This appeal arises out of a purchase of the agricultural
interest in a parcel of land originally held as part of the corpus
of the Alaska Mental Health Trust and subsequently acquired by Joan
McCombs. J. Michael James, who purchased the agricultural interest
in land from McCombs, sued McCombs based on claims relating to the
Mental Health Trust Lands litigation (State v. Weiss, 706 P.2d 681
(Alaska 1985)), which he argues impaired the title he received when
he purchased the land. James contends that this alleged impairment
breached a covenant in the deed he received from McCombs, thus
entitling him to rescission.
McCombs counterclaimed on the unpaid principal and
accrued interest owed under the promissory note executed by James
in connection with his purchase of the land. Based on his
contention that the title he received at the time of the purchase
was impaired, James asserted failure of consideration as a defense
to McCombs' suit on the note.
On cross-motions for summary judgment the superior court
ruled for McCombs on both James's claim and McCombs' counterclaim.
We affirm.
II. FACTS AND PROCEEDINGS
In November 1982 McCombs acquired Tract 29 of the Point
McKenzie Dairy Farm Project from the State of Alaska. The purchase
was made subject to contractual obligations to the State regarding
the use and improvement of the land.
In November 1984 McCombs sold the agricultural interest
in Tract 29 to James. McCombs executed a warranty deed for the
property to James, and in exchange received a promissory note from
him for $94,000, secured by a deed of trust on the property. The
warranty deed and deed of trust were subject to McCombs's contracts
with the State regarding the land, including James's assumption of
a clearing loan and his agreement to indemnify McCombs for that
obligation. (EN1)
In 1990 it became apparent that James's dairy farm would
fail. In April 1991 James informed Doyle McCombs, appellee's
husband, that he would make no further payments on the note. James
subsequently filed suit against McCombs for breach of warranty in
the warranty deed. McCombs then counterclaimed for the principal
and interest owed on James's promissory note.
In June 1991 James reached a settlement with the State
under which he agreed to convey his interest in Tract 29 of the
Point McKenzie project, as well as two additional tracts not
acquired from McCombs. He also transferred title and possession of
cattle, equipment, crops and milk checks, as well as the profits
and proceeds derived from them. In exchange, James received from
the State $2.4 million in forgiveness of loans and future
obligations, and a new loan of $700,000 which was also subsequently
forgiven.
The parties then filed cross-motions for summary judgment
and the superior court granted summary judgment to McCombs on both
James's claim and McCombs' counterclaim. In so ruling, the
superior court concluded that James was not entitled to rescission,
since he had already reconveyed his interest to the State and
therefore could no longer tender it back to McCombs. Though basing
its decision to award summary judgment on this rationale, the
superior court additionally concluded that James's complaint was
"substantively deficient as well." The superior court also granted
McCombs's motion for summary judgment on the grounds that James's
defense to the counterclaim sounded in contract and thus was time-
barred by the six-year statute of limitations.
We affirm the superior court's order granting summary
judgment for McCombs on both James's claim and her counterclaim.
(EN2)
III. DISCUSSION
A. The concepts on þcloud of titleþ and þmarketable titleþ
are inapplicable given the facts of the instant case.
We first address James's appeal of the superior court's
dismissal of his claim for breach of warranty in the deed. James's
suit for rescission of the sale of Tract 29 is based on a theory
that a covenant in the warranty deed was breached. It is unclear,
however, which particular covenant James relies upon to support
this contention. (EN3) Regardless, even if the alleged þcloud on
titleþ ever existed (EN4) we hold that it does not bear on the
issue at hand, since in this case the deed has already been
delivered. We base this conclusion on settled principles of
property and contract law. The failure to deliver
þmarketable titleþ is a breach of the warranty implied in a
contract to sell land. A title is not þmarketableþ if there is a
reasonable probability that the purchaser will be subject to a
lawsuit. Ficke v. Alaska Airlines, Inc., 524 P.2d 271 (Alaska
1974). A þcloud on titleþ indicates that such a probability
exists. If there is a þcloud on title,þ the seller is unable to
deliver þmarketable title.þ Thus the existence of a þcloud on
titleþ is grounds for rescission of a contract to sell land before
the deed is delivered and accepted.
These doctrines are applicable specifically to the
context of an executory contract to sell land. The failure to
deliver þgoodþ or þmarketableþ title (EN5) is a breach of the sale
contract and constitutes a defense available to the buyer against
specific performance. Once the deed is delivered and the sale is
completed, however, the relevant covenants are only those contained
in the deed itself. (EN6) The requirements for þgood titleþ as
covenanted in the deed are distinct from those contained in the
land sale contract:
The concept of marketable title which applies
to contracts requires substantial but not
perfect performance; thus a title is
objectionable only if it poses significant
risks, while a title which is good in fact may
be deemed unmarketable if it presents a risk
of litigation which the court feels a
purchaser should not be forced to accept. No
such notions apply to deed covenants for
title. They are deemed violated only if the
title is actually bad or defective, not merely
risky or in doubt.
Roger A. Cunningham et al., The Law of Property sec. 11.13, at 862
(2d ed. 1993).
This requirement of actual defectiveness of title is
particularly evident with respect to the covenants statutorily
implied in the warranty deed. Though James has never clearly
articulated which of these covenants he claims were breached, we
note that each requires that title actually be defective before the
grantor is held liable.
With respect to the covenant of seisin, "[t]he fact that
a title is not marketable does not establish that it is bad or that
there has been a breach of the covenant of seisin." 7 George W.
Thompson, Thompson on Real Property sec. 3180, at 248 (1962). "The
covenant of seisen pertains to title only and is not breached by
the existence of an encumbrance." Monti v. Tangora, 425 N.E.2d
597, 602 (Ill. App. 1981).
As regards the covenant of freedom from encumbrances,
"[a]n encumbrance that is invalid is not within the covenant
against encumbrances, though it is upon record . . . . If the
purchaser expends money in removing the apparent encumbrance, he
cannot recover even nominal damages in an action upon such a
covenant." 7 Thompson, Thompson on Real Property sec. 3187, at
317. In regard to the covenant against encumbrances, the court in
Boulware v. Mayfield, 317 So. 2d 471, 472 (Fla. App. 1975), said,
"[t]he existence of an invalid and unenforceable claim is not a
breach even though it constitutes a cloud on title"(quoting 4
Tiffany Real Property sec. 1013 (3d ed. 1975)).
The covenant of warranty (EN7) requires that the
"apparent cloud on the title . . . be shown to be valid before the
grantor will be liable . . . ." 7 Thompson, Thompson on Real
Property sec. 3196, at 355.
This covenant is merely a guarantee that there
are no valid claims outstanding against the
property conveyed. If an invalid or inferior
claim is asserted, the covenantor has no
liability. . . . A breach of this covenant
occurs when, and only when, the grantee
suffers an eviction under paramount title.
6A Richard R. Powell, Powell on Real Property sec. 900[2][d]
(1993).
Finally, expressly included in the warranty deed at issue
is the covenant to provide further assurances against title. "This
is a promise by the grantor to execute any additional documents
that may be needed in the future to perfect the title which the
original deed purported to convey." Cunningham, The Law of
Property, at 866. "An apparent outstanding title does not violate
a covenant for further assurance unless the defect is one which can
be supplied by the grantor himself." 5 A.L.R 1088. Since McCombs
could not have executed a document perfecting James's title, this
covenant is not relevant to the instant case.
We note that James's conveyance of Tract 29 to the State
does not in any way suggest a breach of covenant by McCombs. There
is no evidence that the State or the Alaska Mental Health Trust
ever asserted a claim of title. Moreover, had there been such a
claim and had James surrendered title because of it, still the
State must actually have held superior title in order for there to
have been a breach: "A covenantee may not yield to an opposing but
inferior title and then hold his warrantor to liability for
damages." 2 Milton R. Friedman, Contracts and Conveyances of Real
Property sec. 12.2(a)2 n.19, at 1093 (5th ed. 1991).
Since a mere þcloud on titleþ would not amount to a
breach of any of the covenants contained in his warranty deed,
James must show the actual existence of a paramount title in the
State at the time title was delivered to him in order to establish
a breach.
B. There was no outstanding paramount title to Tract 29 when
McCombs delivered title to James.
James's contention that the Alaska Mental Health Trust
held paramount title is based on the holding of State v. Weiss, 706
P.2d 681 (Alaska 1985), where this court invalidated the statute
redesignating Mental Health Trust lands as general grant lands.
(EN8)
James incorrectly asserts that invalidation of the
redesignation act would essentially strip title from a third party
bona fide purchaser. In fact, a trustee's breach of fiduciary duty
in selling trust land does not affect the title held by a bona fide
purchaser. Restatement (Second) of Trusts sec. 284; George T.
Bogert, Trusts sec. 165 (6th ed. 1987). (EN9)
Indeed our decision in Weiss supports this general
proposition that title to lands sold to third parties remains valid
even after a trust has been restructured. The Weiss court
indicated that lands purchased by third parties are not to be
brought back into the trust. Instead, "[t]o the extent that former
mental health lands have been sold since the date of the conveyance
[to the general grant],"the State is instructed to reimburse the
trust for the fair market value at the time of the sale of those
lands. Weiss, 706 P.2d at 684.
All other claims made by James suggesting that McCombs's
title, and therefore his own, was voided by the Mental Health Trust
litigation are similarly without merit. We conclude that at the
time the deed was conveyed, McCombs possessed paramount title to
Tract 29. We further conclude that since there were no defects in
James's title, no covenants contained in his warranty deed were
breached, and therefore James was not entitled to rescissionary
relief.
C. Since James received good title to Tract 29, his failure
of consideration defense to McCombs's counterclaim is
rejected as a matter of law.
In response to McCombs's countersuit to enforce the
promissory note executed as payment for the land, James asserts
failure of consideration as a defense, based on his contention that
title was impaired. Without reaching the issue of whether this
defense is time-barred, we hold that it fails as a matter of law.
The failure of consideration defense is predicated on James's
original claim that he received defective title to the land. Since
we have concluded that the superior court properly granted summary
judgment against James on this claim, we must hold that James's
defense is similarly without merit. Because McCombs conveyed good
title, James's defense fails as a matter of law regardless of
whether it is barred by the statute of limitations.
IV. CONCLUSION
James's claim for rescission fails because no covenants,
either express or implied, in his warranty deed to Tract 29 were
breached. We similarly reject James's failure of consideration
defense to McCombs's counterclaim for payment on his promissory
note, based on the fact that good title was conveyed. For these
reasons, we AFFIRM the superior court's award of summary judgment
in favor of McCombs on both James's claim and McCombs'
counterclaim.
ENDNOTES:
1. The parties did not obtain title insurance on the tract and
James did not undertake a title search. In August 1984, a lis
pendens, applying to Tract 29, relating to the Weiss v. State case
was filed in the Palmer Recording District.
2. Our rationale for affirmance differs from the superior court's
analysis of the relevant issues. This court may affirm a decision
on grounds different than those advanced by the trial court. Dixon
v. Dixon, 747 P.2d 1169, 1175 n.5 (Alaska 1987). We are not bound
by the reasoning of the trial court and can instead affirm a grant
of summary judgment on alternative grounds. Wright v. State, 824
P.2d 718, 720 (Alaska 1992).
We review the superior court's order de novo since it presents
questions of law. Langdon v. Champion, 745 P.2d 1371, 1372 n.2
(Alaska 1987).
3. James's briefing sheds little light on this question. We note
that only four covenants potentially exist in the relevant warranty
deed. AS 34.15.080 provides that "[n]o covenant is implied in a
conveyance of real estate whether the conveyance contains special
covenants or not." Therefore, aside from any express covenants
contained in the deed, the only covenants that exist are those
present by virtue of statute; namely, the covenants of seisin, of
freedom from encumbrances, and of warranty. AS 34.15.030(b)
describes the covenants implied in the warranty deed between
grantor and grantee:
(1) that at the time of the making and
delivery of the deed the grantor is lawfully
seized of an indefeasible estate in fee simple
to the premises described, and has the right
and power to convey the premises [seisin]; (2)
that at the time of making and delivery of the
deed the premises are free from encumbrances;
and (3) that the grantor warrants the quiet
and peaceable possession of the premises, and
will defend the title to the premises against
all persons claiming the premises [warranty].
In the instant case, the covenant to provide further assurances of
title was expressly included in the deed.
4. McCombs's assertion that State v. Weiss, 706 P.2d 681 (Alaska
1985), casts a þcloud on [his] titleþ is highly questionable.
Though we need not reach this particular issue to decide this case,
we note that in Weiss this court specifically said:
Those general grant lands which were once
mental health lands will return to their
former trust status. In the event exchanges
have been made, those properties which can be
traced to an exchange involving mental health
lands will also be included in the trust. To
the extent that former mental health lands
have been sold since the date of the
conveyance the trust must be reimbursed for
the fair market value at the time of sale. In
calculating the total amount owed, the trial
court should grant a set-off for mental health
expenditures made by the state during the same
period. In the event that expenditures
exceeded the value of lands sold, the state
need not furnish cash as part of the
reconstitution. The goal is to restore the
trust to its position just prior to the
conveyance effected by the redesignation
legislation.
Id. at 684 (footnote omitted). The effect of this directive is to
protect bona fide purchasers of trust land from title problems
related to property conveyed from the Trust.
5. In the land sale context, the requirement of delivering þgoodþ
title is normally understood to mean þmarketableþ title. See,
e.g., Fouch v. Rollins, 146 F. Supp. 87, 90 (D. Alaska 1957).
6. James offers no legal authority supporting his contention that
an implied covenant of marketable title exists in a deed. The
cases he cites relating to marketable title arise in the context of
land sale contracts, and thus are not relevant to a claim for
breach based on a deed that has been executed and delivered to the
purchaser.
7. The covenant of quiet enjoyment, or quiet and peaceable
possession, is contained in the covenant of warranty. AS
34.15.030. See also 7 Thompson, Thompson on Real Property
sec. 3189 (1981 pocket part) ("A covenant of warranty is synonymous
with a covenant of peaceful possession and enjoyment."). The
covenant of quiet enjoyment "assures the grantee that his or her
quiet possession or enjoyment will not be disrupted by the grantor
or anyone else with paramount title."6A Richard R. Powell, Powell
on Real Property sec. 900[2][d] (1993).
8. McCombs persuasively argues that
Dr. James rests his entire case on the
spurious proposition that because this Court
declared the Redesignation Act invalid, any
transfer by the state of former Mental Health
lands was void from its inception. Nowhere
does the Plaintiff support this conclusion
with any legal authority, nor does he explain
why, if the Redesignation Act was void, the
state in its capacity as Trustee of the mental
Health Land Trust could not have legitimately
sold the agricultural rights in Tract 29 to
Mrs. McCombs.
9. Both McCombs and James were bona fide purchasers for
value. A bona fide purchaser is one who "acquired title without
notice, actual or constructive, of another's rights and also must
have paid value for the same." State v. 18,018 Square Feet, More
or Less, 621 P.2d 887, 890 n.5 (Alaska 1980) (quoting Sieger v.
Standard Oil Co., 318 P.2d 479, 484 (Cal. App. 1957)).
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