Favero Farms, LC v. Baugh

356 P.3d 188

2015 UT App 182

FAVERO FARMS, LC, Appellee

v.H. Dan BAUGH and Tami S. Baugh, Appellants.

No. 20140711–CA.

Court of Appeals of Utah.

July 30, 2015.

Robin K. Nalder, South Ogden, Attorney for Appellants.

Jonathan R. Grover, Attorney for Appellee.

Judge JAMES Z. DAVIS authored this Opinion, in which Judges GREGORY K. ORME and MICHELE M. CHRISTIANSEN concurred.

Opinion

DAVIS, Judge:

¶ 1 H. Dan Baugh and Tami S. Baugh appeal the trial court's ruling in favor of Favero Farms, LC (Favero) on Favero's claims for breach of contract, breach of the covenant against encumbrances, and breach of the covenant of good faith and fair dealing in connection with the Baughs' sale of real property to Favero. We affirm.

BACKGROUND

¶ 2 The Baughs owned twenty acres of land in Weber County, Utah. In 2004, they met with a wetlands consultant who informed them that there were wetlands on their property and that they therefore could not use fill dirt on the property without obtaining a permit from the United States Army Corps of Engineers. The Baughs had already placed some fill dirt on the property before meeting with the wetlands consultant, and they placed additional fill dirt on the property after meeting with him. The Baughs never obtained a permit for any of the fill dirt.

¶ 3 In 2005, a representative of the Army Corps of Engineers inspected the property, advised the Baughs that the fill dirt violated wetlands regulations, and instructed them to remove the fill dirt and to install a silt fence against the wetlands. The Baughs did not comply with these instructions.

¶ 4 In August 2009, the Baughs sold the property to Favero. The parties entered into a real estate purchase contract (the REPC), which required the Baughs to disclose “conditions known to [the Baughs] relating to environmental problems and building or zoning code violations.” Favero had the right to object to the disclosures or cancel the contract if it did not acquiesce to what was revealed by the disclosures. The REPC also provided that the property would be delivered to Favero “in a generally accepted agricultural condition.” The REPC contained an abrogation clause indicating that certain enumerated provisions, including a provision pertaining to attorney fees and the provision requiring that the property be delivered “in a generally accepted agricultural condition,” would survive closing but that the remaining provisions of the REPC, including those related to disclosures, would not. The Baughs never delivered any disclosures to Favero and never informed Favero of the existence of the wetlands or the wetlands violation.

¶ 5 At closing, the parties signed a document titled “Escrow Instructions,” which indicated that “[a]ny warrants made between the seller and the buyer in the original purchase agreement which are not specifically deleted in the final settlement documents shall survive closing and shall be binding upon seller and buyer.” The Escrow Instructions further represented, “Buyer has completed its due diligence on the subject property, including, but not limited to inspections and tests performed thereon. Buyer is comfortable and accepts the results of said inspections and tests and states, warrants and stipulates that the property is accepted by the same in its present condition.” The parties also signed an Owner/Borrower Statement, in which the Baughs represented that “no work has been done and no materials have been furnished on or incident to the referenced property and there are no outstanding claims or persons entitled to any claim.” The Baughs then conveyed the property via warranty deed.

¶ 6 After the sale, Favero discovered the wetlands violation and learned that it could not use the property for agricultural purposes “without extensive work and repairs” and that it would need to restore or relocate the wetlands in order to comply with federal requirements. Favero sued the Baughs for breach of contract, breach of the covenants in the warranty deed, breach of the covenant of good faith and fair dealing, negligence, and fraudulent misrepresentation. Following a bench trial, the trial court dismissed Favero's negligence and fraudulent misrepresentation claims but granted judgment in favor of Favero on its other three claims.

¶ 7 In ruling on Favero's breach-of-contract claim, the court ruled that the REPC imposed on the Baughs a duty to disclose the condition of the property and to deliver the property in generally accepted agricultural condition and that the Baughs violated these duties. Further, the court held that the Baughs breached the Owner/Borrower Statement, which represented that “no work has been done and no materials have been furnished on or incident to the referenced property,” because the Baughs had, in fact, “leveled the property, brought in fill dirt, and failed to tell [Favero] about the wetlands or wetlands violation.” The court determined that Favero could not waive an objection to a nondisclosure it was not aware of and, accordingly, rejected the Baughs' argument that Favero had waived the nondisclosure by failing to file a written objection.

¶ 8 The court next ruled that the Baughs had breached the warranty deed's covenant against encumbrances because the wetlands violation would require Favero “to restore the wetlands or relocate the wetlands to comply with Federal requirements.” The court found that the “Federal requirements represent an encumbrance on the property and a breach of the warranty conveyed in the warranty deed.”

¶ 9 Finally, the court ruled that the Baughs had breached the implied covenant of good faith and fair dealing by failing to disclose the existence of the wetlands to Favero prior to the sale of the property.

¶ 10 The court awarded damages in the amount of $200,000 based on testimony that it would “cost between $197,850 and $287,850 to restore or mitigate the damages to the wetland property.” The court also ordered that the Baughs pay Favero's attorney fees in the amount of $32,853.63. This award was based on the provisions of the REPC. The Baughs appeal the trial court's rulings.

ISSUES AND STANDARDS OF REVIEW

¶ 11 First, the Baughs argue that Favero's representation in the Escrow Instructions that it accepted the property “ ‘in its present condition’ ” amounted to an as-is acceptance of the property and waived any warranties made in the REPC, specifically, that the property would be delivered in “generally accepted agricultural condition.”¹ “The interpretation of a contract is a question of law, which we review for correctness, giving no deference to the ruling of the district court.” Meadow Valley Contractors, Inc. v. Utah Dep't of Transp., 2011 UT 35, ¶ 13, 266 P.3d 671 (citation and internal quotation marks omitted).

¶ 12 The Baughs further argue that the trial court erred in determining that their failure to disclose the wetlands violation constituted a breach of the warranty deed's covenant against encumbrances. We review the trial court's interpretation of a deed for correctness. Keith v. Mountain Resorts Dev., LLC, 2014 UT 32, ¶ 17, 337 P.3d 213.

¶ 13 Finally, the Baughs challenge the trial court's determination that they breached the implied covenant of good faith and fair dealing by failing to disclose the wetlands violation. “[W]hether there has been a breach of good faith and fair dealing is a factual issue, and [w]e review questions of fact under the clearly erroneous standard.” Iota, LLC v. Davco Mgmt. Co., 2012 UT App 218, ¶ 14, 284 P.3d 681 (alterations in original) (citations and internal quotation marks omitted).

ANALYSIS

I. Breach of Contract

¶ 14 The Baughs argue that the language in the Escrow Instructions indicating that Favero “states, warrants and stipulates” that it accepted the property “in its present condition” abrogates their contractual duty in the REPC to deliver the property in “generally accepted agricultural condition.”² However, the Escrow Instructions also provide, “Any warrants made between the seller and the buyer in the original purchase agreement which are not specifically deleted in the final settlement documents shall survive closing and shall be binding upon seller and buyer.” One such “warrant” was that the Baughs would deliver the property in “generally accepted agricultural condition.”

¶ 15 When interpreting a contract, the entire contract “should be read as a whole, in an attempt to harmonize and give effect to all of the contract provisions.” Lee v. Barnes, 1999 UT App 126, ¶ 11, 977 P.2d 550 (citation and internal quotation marks omitted). Were we to interpret the Escrow Instructions as the Baughs urge, then the provision indicating that warranties made in the REPC remain in force unless specifically deleted would be rendered meaningless. See Munford v. Lee Servicing Co., 2000 UT App 108, ¶ 18, 999 P.2d 23 (“Provisions which are apparently conflicting are to be reconciled and harmonized, if possible, by reasonable interpretation so that the entire agreement can be given effect.” (citation and internal quotation marks omitted)).

¶ 16 Furthermore, read in context, Favero's acceptance of the property in its present condition is an acceptance of any flaws that were or could have been revealed in the course of conducting due diligence on the property rather than an unconditional as-is acceptance of the property. The relevant provision reads in full, “Buyer has completed its due diligence on the subject property, including, but not limited to inspections and tests performed thereon. Buyer is comfortable and accepts the results of said inspections and tests and states, warrants and stipulates that the property is accepted by the same in its present condition.” Because the Escrow Instructions indicated that warrants made in the REPC would survive closing if not specifically deleted, the “generally accepted agricultural condition” promised by the Baughs was part of the “present condition” in which Favero believed it was accepting the property. Thus, the trial court did not err³ ...