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Compton v. Houston Casualty Co.

Supreme Court of Utah

March 23, 2017

William Compton, John Simcox, and Saltair Investments, LLC, Appellants,
v.
Houston Casualty Company, Appellee.

         Third District, Salt Lake The Honorable Paul G. Maughan No. 130906137

          Thor B. Roundy, Cory B. Mattson, Bountiful, for appellants

          Rebecca L. Hill, Salt Lake City, Karl A. Bekeny, Paul L. Janowicz, pro hac vice, Ohio, for appellee

          Chief Justice Durrant authored the opinion of the Court, in which Associate Chief Justice Lee, Justice Durham, Justice Himonas, and Justice Pearce joined.

          Durrant Chief Justice

         Introduction

         ¶ 1 This case requires us to determine the scope of the "covered profession" clause of a "Professional Liability Errors & Omissions Insurance" policy (Policy). Houston Casualty Company (Houston Casualty) issued the Policy to Utah County Real Estate, LLC (Prudential), a real estate brokerage. While working as a real estate agent for Prudential, Robert Seegmiller approached the plaintiffs in this action, William Compton, John Simcox, and their company, Saltair Investments, LLC (collectively, Investors), with information about a potential real estate transaction in Herriman, Utah. The Investors and seller Valley View Estates, LLC (Valley View) signed a Real Estate Purchase Contract (REPC), drafted by Mr. Seegmiller, which provided that the Investors were to deposit $705, 000 into escrow as a "reservation deposit." Valley View was to develop the tract of land into individual lots, after which the Investors would pay the final contract price. Mr. Seegmiller did not tell the Investors that he was to receive money from Valley View in exchange for bringing a buyer to the transaction. Further, the REPC did not provide that any portion of the funds to be transferred at closing would go to Prudential.

         ¶ 2 Though the Investors deposited the $705, 000 into escrow, Valley View failed to develop the lots as promised. When the Investors attempted to obtain their money back from escrow, they discovered that Valley View had withdrawn the deposit and used it for various purposes, including paying Mr. Seegmiller $165, 000. No portion of the $165, 000 ever passed through Prudential. In an earlier lawsuit that serves as a predicate to the current case, the Investors obtained a judgment against Mr. Seegmiller for "negligence" in the amount of $1, 041, 275.34. The court's order stated that Mr. Seegmiller was liable for "failing to clarify his role in the transaction, and failing to disclose a personal interest in the transaction."

         ¶ 3 Rather than execute the judgment against Mr. Seegmiller, the Investors settled with him, acquiring any claims he might have against Prudential's insurer, Houston Casualty. The Investors then brought the current action as a new lawsuit alleging that Houston Casualty breached the Policy by failing to defend and indemnify Mr. Seegmiller. The Policy covers losses that arise when an insured acts "[s]olely in the performance of services as a Real Estate Agent/Broker of non-owned properties, for others for a fee." The district court in this case granted summary judgment for Houston Casualty on the ground that, because Mr. Seegmiller had a "personal interest" in the transaction, he held "dual or competing roles" that precluded the possibility that he could have "acted 'solely' as Plaintiffs' real estate agent 'on behalf of' Prudential."

         ¶ 4 The Investors appeal the district court's grant of summary judgment, arguing that it misconstrued the scope of coverage under the Policy and contending that the plain language of the Policy mandates coverage for the judgment rendered against Mr. Seegmiller in the earlier lawsuit.[1] Houston Casualty counters that the district court's interpretation of the Policy was proper, and it also urges that we affirm the grant of summary judgment on several alternative grounds. These grounds are, first, that Mr. Seegmiller was not acting "on behalf of" Prudential in the transaction; second, that he was not providing services "for a fee" in that transaction; third, that his conduct falls within the Policy's "dishonest acts" exclusion; and fourth, that coverage is barred on grounds of waiver or estoppel.

         ¶ 5 We affirm the district court on the alternative ground that Mr. Seegmiller was not providing services "for a fee" in the transaction.[2] We reach this conclusion because the circumstances surrounding the formation of the insurance contract indicate that Prudential's agents are compensated through only one mechanism: a traditional real estate commission. The Investors' attempts to expand the concept of "commission" to cover the events at issue here are unavailing. We construe the phrase "for a fee" to mean that the real estate agent must have been providing services with the expectation of receiving a traditional real estate commission. The record contains no evidence that Mr. Seegmiller had such an expectation, so we conclude he was not providing services "for a fee."

         Background

         ¶ 6 Prudential is a real estate brokerage that affiliates with real estate agents who represent buyers and sellers in real estate transactions. To insure against potential liability for the acts of its agents, Prudential purchased the Policy from Houston Casualty. The Policy covers losses that arise from the wrongful acts of Prudential agents acting in the "profession described in Item 3 of the Declarations." Item 3 of the Declarations defines the "Named Insured's Profession" by a reference to "Endorsement #1, " which in turn defines the "Named Insured's Profession" as "[s]olely in the performance of services as a Real Estate Agent/Broker of non-owned properties, for others for a fee."

         ¶ 7 Prudential uses employment contracts to establish the nature of its rights and responsibilities with respect to its sales agents, including describing the nature of its agents' compensation. Robert Seegmiller had a "Broker-Sales Associate Agreement" with Prudential (Employment Contract) providing that "[c]ompliance with state laws, rules and regulations require that commissions, finder fees, bonuses or referral fees be paid to the Broker rather than to the Salesperson directly." Prudential also promulgated an internal "Policy and Procedure Manual, " in effect at the time the parties negotiated the Policy, which provides "PAYMENT OF COMMISSIONS BY ASSOCIATES. Real Estate regulations prohibit the payment of commissions between sales associates. All commissions or referral fees must be handled through the broker."

         ¶ 8 While employed as a real estate agent for Prudential, Mr. Seegmiller introduced the Investors to two real estate transactions, referred to as the Highland transaction and the Herriman transaction. The Highland transaction is not directly at issue on this appeal. In the Herriman transaction, Mr. Seegmiller introduced the Investors to Valley View, a company that planned to develop a large tract of property in Herriman, Utah, into individual lots and then sell them as a group. The Investors and Valley View, through its principal, Sterling Barnes, entered into a REPC, drafted at least in part by Mr. Seegmiller, which provided that the Investors would deposit $705, 000 into escrow as a "reservation deposit, " after which Valley View would develop the individual lots and record the plat. Upon recordation of the plat, the deposit would become non-refundable and the Investors were to pay the balance of the purchase price. No provision in the REPC provides that any funds are to be paid to Prudential, and Prudential's name does not appear on the REPC. As provided in the REPC, the Investors deposited $705, 000 into escrow. But Valley View breached the agreement by failing to develop the lots, and the plat was thus never recorded. In response, the Investors sought return of their escrow deposit. They then learned that Valley View had removed the escrow funds and used them for various purposes, including paying $165, 000 to Mr. Seegmiller for his role in bringing the Investors to the transaction.

         ¶ 9 The Investors pursued two separate lawsuits in their attempt to recover their lost escrow deposit, the first against Mr. Seegmiller and others, the second against Prudential's insurer, Houston Casualty. In the first lawsuit-which is not directly before us on this appeal-they sued Mr. Seegmiller and a number of other defendants, including Prudential, Valley View, and Mr. Barnes for their actions in connection with the Herriman transaction. The Investors asserted claims against Mr. Seegmiller for accounting, breach of fiduciary duty, negligence, fraud, negligent misrepresentation, and conspiracy. The Investors asserted claims against Mr. Barnes and Valley View for accounting, theft, fraud, and conspiracy.

         ¶ 10 In the earlier lawsuit, against Mr. Seegmiller and codefendants, the Investors moved for summary judgment on each of their claims. The district court in that case denied summary judgment on the breach of fiduciary duty claim because it concluded that a genuine dispute of fact precluded a finding that Mr. Seegmiller acted as the Investors' real estate agent. But the court granted summary judgment on the Investors' negligence claim, concluding that "[e]ven if a real estate agent is not acting in the capacity of agent for another party, he still owes certain duties to all parties to any transaction in which he is involved." The court reasoned that, "regardless of whether Mr. Seegmiller was acting as the real estate agent for [Investors] for the purpose of purchasing the Herriman lots, he owed certain duties to the [Investors], which he breached by failing to clarify his role in the transaction, and failing to disclose a personal interest in the transaction." Because the court concluded that Mr. Seegmiller was liable for negligence as a matter of law, it entered judgment against him for $1, 041, 275.34. This amount represented the Investors' $705, 000 of earnest money plus interest.

         ¶ 11 With this judgment in hand, the Investors chose to settle with Mr. Seegmiller rather than enforce the judgment against him. As part of that settlement, they obtained any claims Mr. Seegmiller might have against Houston Casualty. The Investors then filed a second lawsuit-the one currently before us on this appeal- claiming that Houston Casualty breached the Policy by refusing to defend and indemnify Mr. Seegmiller for his conduct in the Herriman transaction.

         ¶ 12 In this case, the parties cross-moved for summary judgment on the issue of whether the Policy covers the judgment against Mr. Seegmiller for his conduct in the Herriman transaction. The district court granted Houston Casualty's motion and denied the Investors', concluding that "[b]ecause [Mr.] Seegmiller had a personal interest, he held dual or competing roles in the transaction, " which prevented him from acting "'solely' as [Investors'] real estate agent 'on behalf of' Prudential." The district court therefore concluded that, as a matter of law, the Policy does not cover Mr. Seegmiller's conduct in the Herriman transaction. The Investors now appeal that determination. We have jurisdiction under Utah Code section 78A-3-102(3)(j).

         Standard ...


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