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02/04/88 MANUEL GROVES AND MAUREEN GROVES v. FIRST

Filed: February 4, 1988.

MANUEL GROVES AND MAUREEN GROVES, APPELLANTS,
v.
FIRST NATIONAL BANK OF VALPARAISO, APPELLEE



APPEAL FROM THE LAPORTE CIRCUIT COURT, The Honorable Robert S. Gettinger, Presiding Judge, Cause No. 45584-C.

Miller, P.j., Garrard, P.j., and Ratliff, C.j., Concurring.

Author: Miller

MILLER, P.J.

Manuel and Maureen Groves purchased a house and lot from the First National Bank of Valparaiso (the Bank). The Bank had obtained title to this property by means of a quitclaim deed from Martin E. Rogness. Rogness had encumbered the property before giving title to the Bank; although the Bank knew of these encumbrances its officers told the Groves there were no liens or mortgages on the property.

After the Groves purchased the property, the quitclaim deed from Rogness to the Bank was declared void. Rogness sued the Groves to quiet title. The Groves defended that suit, and also filed suit against the Bank for breach of contract, breach of covenant of warranty, and fraud. The trial court granted partial judgment on the evidence on the question of exemplary damages for fraud. The jury returned a general verdict in the amount of $100,000 in favor of the Groves, but the trial court ordered a new trial upon granting the motion to correct errors filed by the Bank. We reverse the order for new trial insofar as it granted a new trial with respect to liability, and we reverse the partial judgment on the evidence with respect to exemplary damages for fraud. However, because we find the jury's damage award excessive, we remand for a new trial to determine: 1) the proper amount of compensatory damages for mental anguish and; 2) whether the Groves are entitled to exemplary damages as well as the amount of such exemplary damages.

Issues

The Groves raise several issues for our consideration. We restate these issues as follows:

1. Did the trial court err in setting aside the jury's award of attorney's fees because the Groves did not tender the defense of their title to the Bank?

2. Did the trial court properly refuse the defendant's tendered instructions nos. 8 and 4 which dealt with attorney's fees and fraud?

3. Did the trial court err when it granted partial judgment on the evidence in favor of the Bank on the issue of punitive damage for fraud?

4. Did the trial court err in refusing plaintiffs' tendered instructions nose 5, 9, and 10?

On cross appeal, the Bank raises the question of whether the jury awarded excessive damaged for emotional distress.

FACTS

Martin E. Rogness began construction of two houses located on lots 41 and 43 of the Fairview Meadows Unit 3 in Porter County. In order to obtain financing for this project, Rogness borrowed money from the First National Bank of Valparaiso. He executed notes in favor of the Bank which were secured by an apparently pre-existing mortgage in favor of the Bank. Rogness defaulted on the notes and the Bank initiated an action to foreclose the mortgages The Bank also named Parks Heating & Air Conditioning (Parks), holder of a mechanics lien on the property, as a defendant in this action.

On November 12, 1981, the Bank was awarded a default judgment against Rogness. After it obtained this judgment, Rogness entered negotiations to resolve the matter without further litigation. The parties agreed Rogness would cede his interest in the two lots to the Bank in exchange for a promise that the Bank would forego any rights to pursue a deficiency against him. Pursuant to this agreement Rogness, on December 8, 1981, executed and delivered two quitclaim deeds transferring his interest in the properties to the bank.

Before Rogness executed these deeds, but after the bank commenced the foreclosure action, Rogness executed a mortgage on the two lots in favor of Hobart Lumber Company (Hobart Lumber). This mortgage, as well as the mechanics lien in favor of Parks, was duly noted when the Bank obtained title insurance policies on the property.

On March 23, 1982, the Bank filed a petition to remove the Hobart Lumber mortgage. The petition named Hobart Lumber and Rogness as defendants; it alleged they defrauded the Bank when they executed the mortgage because they knew of the imminent transfer of the property to the Bank.

The properties were placed in the Bank's "Other Real Estate Owned", or OREO, file. This file apparently referred to properties owned by the Bank, some of which were not producing income and upon which the bank was incurring expenses. The Bank was anxious to sell these properties, since it was suffering a net loss on them.

Donald Wiggins, a loan officer of the Bank, contacted John Rhame, III, the attorney for the Bank, and asked whether the properties could be sold. Rhame advised Wiggins that the marketability of the title was impaired and that the Bank should not sell the properties on the open market. Rhame further advised Wiggins that, if the Bank insisted upon selling the properties, it should do so by setting up an escrow account, which would require disclosure of any liens and mortgages to the buyer.

Despite Rhame's advice, Wiggins proceeded to list the properties. The Bank sold lot 41 to Heriberto and Madeline Coello, but did not follow Rhame's suggestion and use an escrow account. After the Bank sold the lot 41 property, the Groves entered negotiations to purchase the lot 43 property. On August 10, 1982, these negotiations culminated in the Groves signing a purchase agreement for the lot 43 property.

Soon after the Groves signed the purchase agreement, they applied for a homeowner's loan from the Bank in order to finance the purchase of the lot 43 property. The Groves met with LeRoy Cole, one of the Bank's loan officers. Cole obtained the necessary information from the Groves, and the Bank quickly approved the loan.

After the Bank approved the loan, it ordered a title commitment policy from Pioneer Title Insurance Company (Pioneer). Pioneer mailed a commitment letter to Cole; he deceived this letter on September 5, 1982, five days before the closing on the lot 43 property. This letter noted, among other things, the existence of the Hobart Lumber mortgage, the Parks lien, and two lawsuits involving the property. When Cole read the letter, he contacted Rhame and told him that the lot 41 property had been sold, Cole also informed Rhame the Bank had prospective buyers for the lot 43 property. Rhame restated his position that the properties should only be sold through escrow and that the Bank had to disclose the existence of the encumbrances to the buyers. Shortly before closing, Mary Ann Weltz, a real estate agent who listed the lot 43 property, requested a copy of the Pioneer commitment letter. Cole did not send her a copy; instead, he assured her the Bank held clear title to the property.

On September 10, 1982, the Groves, Weltz, Cole and Robert Bruce, met in Cole's office to close the sale. Cole told the Groves a preliminary title search showed the Bank possessed merchantable title, clear of all encumbrances. When Manuel Groves asked specifically if there were any liens on the property, Cole replied there were none. When Manuel Groves asked if Hobart Lumber could make a claim against the property, Cole told him no, Groves asked these questions because he knew Hobart Lumber had already asserted a claim against the Coellos.

After the closing, the Groves borrowed $5,000 from relatives so they could complete the construction of the house. Manuel Groves worked for as many as eight hours a day for almost six weeks to complete the plumbing, duct work, and other work necessary to make the house habitable.

On October 28, the Bank recorded a corporate warranty deed granting title to the Groves. The Bank did not exempt the Parks lien or the Hobart Lumber mortgage from the coverage of the warranties in the deed. On November 5, Rhame attended a hearing in civil cause no. 81-PSC-3142, which was an action to remove the Hobart Lumber mortgage. The Groves were not informed of this hearing, even though the status of their title was, in effect, being litigated, The court, in this action, voided the quitclaim deeds which Rogness had granted the Bank.

Rhame volunteered to go to the Groves and explain what had happened, but he was disuaded by William Welter, the Bank's chairman of the board. Welter said he would contact the Groves, but he delayed doing so for almost six weeks. When he finally contacted Maureen Groves, he merely told her there were problems with the paperwork, and asked that she and her husband come to the Bank's offices. He refused to explain the nature of these problems. The Groves decided to retain an attorney, Jerry E. Huelat, to represent them.

In response to Huelat's inquiries and threats of suit, Rhame finally explained the problems surrounding the lot 43 property. This letter, dated March 2, 1983, marked the first time any official of the Bank informed the Groves the deed from Rogness had been voided.

In yet another court proceeding on March 5, the trial court set aside the original default judgment against Rogness because the Judge who granted the default, Bruce Douglas, was the son of George Douglas, a member of the Bank's board of directors. It is unclear whether the Groves were notified of this proceeding and the court action.

Within days of this judgment, Rogness went to the Groves' home and informed them he was legal owner of the lot 43 property. He informed them, magnanimously, that they could rent the property from him if they desired. On April 8 Rogness filed suit against the Groves to quiet title and for damages. He also filed a request with the court that he be allowed to enter and inspect the house. The Groves thereupon filed a complaint against the Bank. After the trial court granted a partial judgment on the evidence in favor of the Bank, the jury awarded the Groves $100,000 in damages. The trial court set aside this award when it granted the motion to correct errors filed by the Bank.

DECISION

I. Court's Instruction 20: Reasonable Attorney's Fees

The trial court initially instructed the jury that the Groves could recover reasonable attorney's fees, out-of-pocket expenses, and damaged for mental anguish which arose out of the defense of the title to their property. These items of damaged were set forth as individual paragraphs of court's instruction no. 20. The Bank objected to the instruction insofar as it deferred to attorney's fees because the court did not instruct the jury the Groves had a duty to tender the defense of their title to the Bank before they could recover attorney's fees.

The Groves assert the trial court erred when it reversed its position on this instruction and granted the motion to correct errors filed by the Bank. Specifically, they argue they did not have to tender the defense of the quiet title action to the Bank because it was actively defrauding them and trying to improve its position against Hobart Lumber and Rogness at the Groves's expense.

The Bank notes the general rule requires tender of the defense to the warranting party. In this case, the Groves made no tender of the defense of the action to the Bank.

In Indiana, as in most jurisdictions which allow recovery of attorney's fees in this type of action, the party seeking recovery of fees is generally required to tender the defense to the party who breached the covenant of warranty. Fence v. Rhonemus (1915), 58 Ind. App. 268, 108 N.E. 129; Teague v. Whaley (1898), 20 Ind. App. 31, 50 N.E. 41. Neither of these cases specifically addresses the issue of whether a party who is being defrauded must tender defense to the party who is defrauding him.

We hold the Groves were not required to tender the defense of the title suit to the Bank in order to recover their attorney's fees. Although we have found no case, either in Indiana or any of our sister jurisdictions, in which a covenantee was relieved of the duty to tender defense of the title suit because of the covenantor's fraud, we have fund that several of our sister states have allowed recovery without tender where tender would be futile. Specifically, tender has been found to be unnecessary where the covenantor is not present in the state at the time of the title defense. Quick v. Walker (1907), 125 Mo.App. 257, 102 S.W. 33; Fulweiler v. Baugher (1826), Pa., 15 Serg. & Rawle 45; see Annot., 61 A.L.R. 10. In Fulweiler, the Pennsylvania Supreme Court recognized, in dicta, that tender should not be required where the covenantor has defrauded the covenantee. 15 Serg. & Rawle at 55.

Thus, in this case of first impression, we find an exception to the general tender rule where the covenantor defrauds the covenantee. We are persuaded that to require tender would place the Groves at the mercy of the Bank, the very party which was lately defrauding them. The Bank had already demonstrated a willingness to put its interests before the Groves', and we will not require the Groves to entrust the Bank with the defense of the very interests the Bank had chosen to disregard.

Even if we had found the Groves were required to tender the defense of the title to recover attorney's fees under the covenant of warranty, we could find the jury properly awarded attorney's fees under the fee provision of the purchase agreement. The purchase agreement provided:

"In the event the sellers breach the accepted offer and fail or refuse to close, buyer shall be entitled to sue sellers either for specific performance, recission or for damages. . . . Any judgment recovered shall include reasonable attorney's fees, eight percent (8 %) interest and shall be without relief for valuation or appraisement laws." Record, p. 1127.

The Bank argued this provision is unambiguous, and should be given its plain, ordinary meanings. Eli Lilly and Co. v. Home Insurance Co. (1985), Ind., 482 N.E.2d 467. The Bank notes this provision requires both a breach of the offer and failure or refusal to close. Since instruction no. 20 does not include any mention of these requirements, the Bank argued it was erroneous.

The Groves respond, correctly, that the Bank waived this issue. When the trial court stated its intention to give instruction no. ...


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