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LCL LLC v. Falen

Supreme Court of Kansas

July 27, 2018

James W. Falen, in His Capacity as Sole Trustee of the James W. Falen Living Trust U/A, dated April 30, 2007; Julie D. Falen; Gregory A. Falen; and Maryl M. Wesolowski, (Defendants/Third-Party Plaintiffs), Appellants,
Rice County Abstract & Title Co., Inc., (Third-Party Defendant), Appellee.


         1. Filing and recording of a deed omitting a seller's reservation of a mineral interest, at a minimum, clouds the seller's title and causes an immediate substantial, actionable injury.

         2. Whether a substantial injury is "reasonably ascertainable" under K.S.A. 60-513(b) is a question of fact, not resolvable as a matter of law under the constructive notice provision in K.S.A. 58-2222. The filing and recording of a deed is only one piece of relevant evidence to be considered by the fact-finder in deciding whether a substantial injury caused by the deed's omission of a seller's reserved mineral interest is "reasonably ascertainable."

         Review of the judgment of the Court of Appeals in 53 Kan.App.2d 651, 390 P.3d 571 (2017).

          Appeal from Rice District Court; Steven E. Johnson, judge..

          Gordon B. Stull, of Stull, Beverlin, Nicolay & Haas, LLC, of Pratt, argued the cause, and Joshua V.C. Nicolay, was on the briefs for appellants.

          William P. Denning, of Sanders Warren Russell & Scheer LLP, of Overland Park, argued the cause, and Jeffrey C. Baker, and Kaitlin M. Marsh-Blake, were with him on the briefs for appellee.


          BEIER, J.

         This appeal examines summary judgment granted to a title company on negligence and breach of fiduciary duty claims, which arose out of the company's 2008 omission of a reserved mineral interest in a deed and its handling of a 2014 conveyance. The district court judge ruled that the claims were launched too late.

         A panel of our Court of Appeals reversed, and we granted the title company's petition for review. We now hold that summary judgment was granted in error, although our reasoning in support of that conclusion differs somewhat from that of the panel. We reverse the judgment in favor of the title company on the negligence and breach of fiduciary duty claims and remand the case to the district court for further proceedings.

         Factual and Procedural Background

         On its way to summary judgment in district court, third-party defendant Rice County Abstract & Title Co., Inc. (RCAT), set forth 22 paragraphs of what it asserted were uncontroverted facts. Defendants/third-party plaintiffs (the Falens), successors in interest to the Mary Louise Falen-Olsen Trust (the Trust), attempted to contest seven of the paragraphs, and the district judge assumed the Falens' versions were true for purposes of ruling on the motion. See Drouhard-Nordhus v. Rosenquist, 301 Kan. 618, 622-23, 345 P.3d 281 (2015) (district court required to resolve all facts and inferences that may reasonably be drawn from the evidence in favor of nonmoving party). The Falens also listed 56 additional paragraphs of what they asserted were uncontroverted facts. Although RCAT, in turn, attempted to challenge certain of those 56 paragraphs, we have carefully reviewed all of the parties' pyrotechnic tit for tat, and we perceive no disputes on core facts necessary to resolution of this appeal, other than as specifically noted below.

         The roots of this case can be traced to November 20, 2007, when the Trust entered into a contract to convey approximately 200 acres of Rice County land to Sammy Dean. The Trust had owned all of the surface rights and an undivided one-half mineral interest in the land. The contents of the listing agreement, an advertising brochure, and the eventual sale contract are consistent in reflecting the contemporaneous intention of the Trust and Dean that the Trust would sell the surface rights and retain the mineral interest.

         RCAT was the closing agent and the title insurer on the sale. It charged half of its fee to Dean and the other half to the Trust. It did not include any reference to the mineral reservation in the deed it prepared, although it had a copy of the sale contract.

         RCAT has asserted that it sent the deed to third-party plaintiffs Gregory A. Falen and Julie D. Falen, co-trustees of the Trust, for "review and signature," but Gregory and Julie have asserted that the deed was sent to them by RCAT only for signature. Neither Gregory nor Julie nor any other representative of the Trust asked RCAT about the mineral reservation before Gregory and Julie executed the deed. The deed was filed and recorded in Rice County on January 18, 2008.

         After the Trust's sale of the land to Dean, the Trust transferred what all concerned believed was still its mineral interest to the Trust's beneficiaries. The beneficiaries, in turn, made several additional transfers of the interest among themselves, executing and recording mineral deeds and quitclaims with the Rice County Register of Deeds. On March 6, 2008, Dean conveyed his interest in the property to SDM Properties2, LLC (SDM2), evidently an entity owned, at least in part, by Dean.

         From January 2008 until August 2014, the Trust and then its successors in interest continued to be paid royalties for mineral production from the land sold to Dean. The Trust and then its successors in interest also continued to pay all property taxes associated with that production.

         In April 2014, LCL, LLC, a company formed by Ron Laudick and Cheryl Armstrong, agreed to buy the property from SDM2. Before this conveyance was finalized, Laudick sent Dean an e-mail acknowledging "that the mineral rights do not go with the property."

         RCAT again acted as the closing agent and title insurer for the 2014 transaction. Again, the deed prepared to record the conveyance did not note the Trust's 2008 mineral right reservation.

         After the 2014 sale closed, Laudick contacted RCAT about the mineral rights on the property. He asked about the discrepancy between Dean's understanding of the ownership and RCAT's title commitment. RCAT conducted a title search and discovered that the 2008 deed had not included the reservation of the Trust's mineral interest. RCAT did not contact the Trust or its successors in interest, but it asked LCL to sign a corrected deed to remedy the omission. LCL refused. The Trust's successors in interest first learned of the brewing dispute in August 2014, when the company operating the oil and gas lease on the property contacted Gregory about LCL's claim of ownership and the right to receive royalties. Royalty payments to the Trust's successors in interest were suspended by August 21, 2014.

         LCL filed a petition to quiet title on the mineral interest on September 22, 2014. It named as defendants the Trust's successors in interest-Gregory; Julie; James W. Falen, in his capacity as sole trustee of the James W. Falen Living Trust U/A dated April 30, 2007; and Maryl M. Wesolowski. LCL asserted that its interest in the mineral rights was superior to the interest claimed by any defendant.

         On December 1, 2014, the Falens filed an answer denying LCL's ownership of the mineral interest and a counterclaim to quiet title in their favor, based in part on the assertion that LCL did not qualify as a bona fide purchaser because it had actual notice that the mineral right was not included with the land. The same day, the Falens also filed a third-party petition against RCAT, alleging RCAT had been negligent and had breached an implied contract by failing to include the mineral reservation in the deed it prepared and recorded for the 2008 sale.

         RCAT moved for summary judgment on the Falens' third-party claims. It argued that any injury to the Trust and the Falens occurred in January 2008 and thus the applicable two-year statute of limitations had expired. See K.S.A. 60-513(a)(4). Specifically, RCAT argued that the "the uncontroverted facts establish that the [Trust] knew or could have known of the error in the deed in January 2008" because Gregory and Julie had received the 2008 deed two days before they executed it and returned it to RCAT. In the alternative, RCAT argued that K.S.A. 58-2222 charged the Trust and its successors in interest with constructive notice of the contents of the 2008 deed as it was filed and recorded.

         A few days later, the Falens moved to amend their third-party petition, seeking to add allegations regarding the 2014 sale and a claim for breach of fiduciary duty by RCAT. Although this motion was never ruled upon, the district judge thereafter treated the amended petition as the controlling pleading for the Falens' third-party claims.

         In their response to the RCAT motion for summary judgment, the Falens argued that the "clear language of K.S.A. §60-513(b) indicates the limitation period is triggered by both the act which causes injury and the existence of substantial injury." They also argued that "'in a tort action where the evidence is in dispute as to when substantial injury first appears or becomes reasonably ascertainable, the issue is for determination by the trier of fact.'" They asserted that a genuine issue of material fact exists in this case on when their injury from RCAT's omission of the mineral reservation in the 2008 deed became reasonably ascertainable.

         With respect to RCAT's argument that the Falens had constructive notice under K.S.A. 58-2222, the Falens cited Luthi v. Evans, 223 Kan. 622, 629, 576 P.2d 1064 (1978), for the proposition that the purpose of the recording statute is to "'impart to a subsequent purchaser notice of instruments which affect the title to a specific tract of land in which the subsequent purchaser is interested at the time.'" Because they did not qualify as subsequent purchasers, the Falens argued, they were not in the class of individuals whom the Legislature intended to charge with constructive notice under K.S.A. 58-2222.

         The district judge bifurcated the quiet title action between LCL and the Falens from the Falens' third-party claims against RCAT. LCL and the Falens entered into a confidential settlement, and the judge dismissed the quiet title action on November 23, 2015.

         RCAT's reply in support of its motion for summary judgment, filed in December 2015, repeated its actual and constructive notice claims, adding that any allegation that Gregory and Julie were inexperienced with reviewing deeds was irrelevant because the standard for whether the Falens' substantial ...

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