eNotes: Liability – March 2023 – Virginia

SIGNIFICANT CASE SUMMARIES

Virginia Case Summary

Landfall Trust LLC v. Fidelity Nat’l Title Ins. Co.
United States District Court for the Eastern District of Virginia
No. 3:22cv194 (RCY)

Decided: December 21, 2022

Source of duty rule and economic loss doctrine bar negligence action; sole right to recovery was breach of contract.

Background

Real estate developers sought to develop and subdivide property in Lancaster County, Virginia, known as Henry’s Island. As part of this development, they turned the property into multiple lots, created land use restrictions, and provided easements for roads, common areas, and utilities. To maintain drainage, the developers reserved a perpetual easement and right of way on, over, and under each lot to establish drainage ways, provided that those rights not unreasonably interfere with the construction of any structures. Over a decade later, Landfall Trust, LLC purchased two lots, one of which was separated by several hundred feet from a “Reserve Drainfield” for which the developers retained an easement and had created several land use restrictions.

Fidelity National Title Insurance Company issued an owner’s policy of title insurance regarding those lots. The title insurance policies included property descriptions for Landfall Trust’s lots, which did not mention the easements regarding the septic system and drain fields. Landfall Trust contracted with Jesse Crotty to sell the lots, but was ultimately unsuccessful in being able to convey the property under the terms of the contract because, during the contracting process, Crotty discovered the title’s omission of the drainage easements. Landfall Trust released Crotty from the contract to sell the property and commenced litigation against Fidelity regarding coverage under its title insurance policy due to the title issue, claiming entitlement to compensation for its “losses related to the muddied state of its title” to the property or to cure the relevant title questions in a reasonable manner. Landfall Trust also claimed Fidelity was negligent in performing its title search and producing inaccurate legal descriptions of Landfall Trust’s property.

Holding

Landfall Trust claimed that the Homeowners Association held an interest in the property that was not reflected in the title, that there is an encumbrance to the title due to the incorrect legal description in the title, and that the title was ultimately unmarketable because the easement prevented the Crotty contract from closing. The Court found that these events plausibly stated a claim for breach of contract, as they facially met the conditions required for coverage under the policy. The Court held, however, that the source of duty rule and the economic loss doctrine precluded Landfall Trust’s negligence claim against Fidelity. The source of duty rule applied because Fidelity’s duty to perform the title search and produce a legal description of the property arose solely out of the insurance policy, and Landfall Trust failed to identify any independent duty in tort regarding those tasks. The economic loss rule similarly precluded Landfall Trust’s negligence claim because Landfall Trust incurred only economic loss as a result of the alleged misconduct. None of Landfall Trust’s damages demonstrate an injury to the safety of person or property, such that the sole remedy is the law of contracts. While Landfall Trust was permitted to continue on its breach of contract claim, its negligence claim was precluded and, therefore, dismissed.

Questions about this case can be directed to Mackenzie Payne at (571) 470-1906 or mpayne@tthlaw.com.