Favero Farms v. Baugh

2015 UT App 182

THE UTAH COURT OF APPEALS

FAVERO FARMS, LC,
Appellee,
v.
H. DAN BAUGH AND TAMI S. BAUGH,
Appellants.

Opinion
No. 20140711-CA
Filed July 30, 2015

Second District Court, Ogden Department
The Honorable Ernest W. Jones
No. 120905218

Robin K. Nalder, 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.

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
Favero Farms v. Baugh

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

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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.

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¶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,

1. The Baughs also challenge the trial court’s determination that
they breached the contract by failing to disclose the existence of
the wetlands as required by the REPC, asserting that Favero
waived any objection to the Baughs’ failure to disclose the
wetlands when it neglected to deliver a written objection to the
Baughs’ nondisclosure. We agree that the trial court erred in
(continued…)

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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

(…continued)
determining that the failure to disclose was a breach of contract,
but for different reasons. The Baughs’ contractual duty to
disclose under the REPC was abrogated once the warranty deed
was delivered. See supra ¶ 4; see also Mason v. Loveless, 2001 UT
App 145, ¶ 14, 24 P.3d 997 (‚Under the merger doctrine, the
terms of the underlying contract for the sale of land are merged
into the deed and thereby become extinguished and
unenforceable upon delivery and acceptance of the deed.‛
(citation and internal quotation marks omitted)). While Favero
might have sought redress for the Baughs’ failure to disclose in
the context of a claim for fraudulent nondisclosure, see
Hermansen v. Tasulis, 2002 UT 52, ¶ 25, 48 P.3d 235 (‚*S+ellers of
real property owe a duty to disclose material known defects that
cannot be discovered by a reasonable inspection by an ordinary
prudent buyer.‛), the Baughs’ contractual duty to disclose
expired at closing. Nevertheless, because we ultimately affirm
the trial court’s determination that the Baughs breached the
REPC by failing to deliver the property in generally accepted
agricultural condition, see infra ¶ 16, the trial court’s error on this
alternative breach-of-contract ground does not affect the
outcome of this appeal.

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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.‛

2. The Baughs assert that the REPC expired before closing and
that they refused to sell the property to Favero after the
expiration of the REPC unless Favero was willing to accept the
property as is. According to the Baughs, the language in the
Escrow Instructions in which Favero accepted the property ‚in
its present condition‛ was intended to abrogate any duty the
Baughs had to provide disclosures or to deliver the property in
any particular condition. This assertion is inconsistent with the
plain language of the Escrow Instructions, and we therefore
decline to consider it further.

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¶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 in concluding that the

3. The trial court also determined that the Baughs breached the
Owner/Borrower Statement by representing that ‚‘no work has
been done and no materials have been furnished on or incident
to the referenced property’‛ when they admittedly ‚leveled the
property, brought in fill dirt, and failed to tell [Favero] about the
wetlands or wetlands violation.‛ Although we ultimately agree
with the trial court that the wetlands violation constitutes an
(continued…)

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Baughs breached the REPC and the Escrow Instructions by
failing to deliver the property in generally accepted agricultural
condition.4

(…continued)
encumbrance, see infra ¶ 22, we are not necessarily convinced
that it is the type of encumbrance contemplated by the
Owner/Borrower Statement. The Owner/Borrower Statement
appears to contemplate a situation in which lienable work has
been performed on the property. The relationship between the
Baughs’ work to fill and level the property and the ultimate
wetlands violation seems to us to be different from the
relationship between a contractor performing work and the
contractor’s entitlement to payment for that work. Furthermore,
the trial court’s specific focus on the language, ‚no work has
been done and no materials have been furnished on or incident
to the referenced property,‛ as opposed to the language, ‚there
are no outstanding claims or persons entitled to any claim,‛
seems to suggest that the trial court found objectionable the
Baughs’ simple failure to inform Favero about work they had
performed on the property, regardless of the relationship the
work had to an actual claim on the property. On the whole, the
court’s determination that the Baughs breached the
Owner/Borrower Statement, which appears to pertain
specifically to mechanics’ liens, seems a bit of a stretch.
However, we need not resolve the question of whether the trial
court erred in determining that the Baughs breached the
Owner/Borrower Statement, because we nevertheless uphold the
trial court’s ruling on Favero’s breach-of-contract claim on the
ground that the Baughs breached the REPC and the Escrow
Instructions.

4. The Baughs do not challenge the trial court’s finding ‚that the
property was not in agricultural condition because of the
wetlands problem.‛

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II. Warranty Against Encumbrances

¶17 The Baughs next challenge the trial court’s ruling that
they breached the covenant against encumbrances. They argue
that ‚a wetlands designation and wetlands restrictions do not
rise to the level of an encumbrance within the meaning of the
warranty against encumbrances.‛ An encumbrance includes
‚any interest in a third person consistent with a title in fee in the
grantee, if such outstanding interest injuriously affects the value
of the property, or constitutes a burden or limitation upon the
rights of the fee title holder.‛ Holmes Dev., LLC v. Cook, 2002 UT
38, ¶ 44, 48 P.3d 895 (citations and internal quotation marks
omitted).

¶18 In support of their argument, the Baughs cite a number of
cases from other jurisdictions holding that a wetlands
designation does not constitute an encumbrance. See Bear Fritz
Land Co. v. Kachemak Bay Title Agency, Inc., 920 P.2d 759, 761–62
(Alaska 1996); Frimberger v. Anzellotti, 594 A.2d 1029, 1031, 1033–
34 (Conn. App. Ct. 1991); Truck South, Inc. v. Patel, 528 S.E.2d 424,
429 (S.C. 2000); McMaster v. Strickland, 409 S.E.2d 440, 442 (S.C.
Ct. App. 1991); Martin v. Floyd, 317 S.E.2d 133, 136 (S.C. Ct. App.
1984). However, the present case involves not only the existence
of a wetlands designation or wetlands restrictions, but a
documented violation of wetlands restrictions.5 Favero was not
simply restricted in its use of the land but was required to incur

5. The trial court held, ‚*T+hese Federal requirements represent
an encumbrance on the property and a breach of the warranty
conveyed in the warranty deed.‛ However, our supreme court
has previously held that ‚public statutes restricting the use of
the granted premises . . . constitute no breach of covenant or
warranty.‛ Flemetis v. McArthur, 226 P.2d 124, 126 (Utah 1951);
accord Mortenson v. Financial Growth, Inc., 456 P.2d 181, 183 (Utah
1969). Thus, to the extent the trial court’s ruling suggests that the
mere existence of the wetlands and the wetlands regulations
constituted an encumbrance, that ruling was in error.

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significant costs to remedy the Baughs’ wetlands violations.
Only one of the cases cited by the Baughs, Frimberger, involves a
wetlands violation as opposed to a wetlands designation.

¶19 In Frimberger, the Connecticut Appellate Court held that a
violation of wetlands restrictions did not constitute an
encumbrance on real property where the violation was
committed by the seller’s predecessor in title, the seller was
unaware of it, and the state department of environmental
protection had taken no action to compel compliance with the
wetlands restrictions. Frimberger, 594 A.2d at 1031, 1033–34. The
court held,

Latent violations of state or municipal land use
regulations that do not appear on the land records,
that are unknown to the seller of the property, as to
which the agency charged with enforcement has
taken no official action to compel compliance at the
time the deed was executed, and that have not
ripened into an interest that can be recorded on the
land records do not constitute an encumbrance for
the purpose of the deed warranty.

Id.

¶20 Courts that have considered whether violations of other
types of governmental regulations constitute encumbrances have
reached mixed results. Some, expressing concern that expanding
the definition of encumbrance in this way ‚would create
uncertainty and confusion in the law of conveyancing and title
insurance,‛ have suggested that a violation of a governmental
regulation can never constitute an encumbrance. See, e.g., Fahmie
v. Wulster, 408 A.2d 789, 792 (N.J. 1979). But others have
determined that a violation of a governmental restriction may
constitute an encumbrance when it exists at the time of
conveyance, see, e.g., Wilcox v. Pioneer Homes, Inc., 254 S.E.2d 214,
215–16 (N.C. Ct. App. 1979) (holding that an existing violation of
a minimum side lot requirement constituted an encumbrance),

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especially where the seller is aware of the violation prior to
conveying the property or has been specifically ordered to
comply with a particular regulation, see, e.g., Feit v. Donahue, 826
P.2d 407, 409–11 (Colo. App. 1992) (holding that the sellers’
violation of a zoning ordinance, which ultimately resulted in the
revocation of the buyers’ certificate of occupancy, constituted an
encumbrance where the city had previously instructed the
sellers to comply with the zoning ordinance in a conditional
building permit issued two years prior to the sale); Brunke v.
Pharo, 89 N.W.2d 221, 222–23 (Wis. 1958) (holding that a building
code violation ‚with respect to which the agency charged with
enforcement has begun to take official action is an encumbrance‛
and distinguishing such circumstances from those where
violations existed but no official action had been taken prior to
conveyance).

¶21 The latter approach appears to be the most consistent
with Utah case law on the subject. In Brewer v. Peatross, 595 P.2d
866 (Utah 1979), our supreme court was asked to consider
whether the existence of a special improvement district
constituted an encumbrance. Id. at 867. The court held that while
the mere existence of a burdensome condition does not
necessarily constitute an encumbrance, a condition that either
imposes ‚some burden upon the property [that] is . . .
discoverable from the record‛ or is ‚such that the grantor either
had or should have had knowledge that there was such a
burden‛ does constitute an encumbrance. Id. at 868. Because the
sellers in that case were aware that improvements were being
undertaken and that the property they were conveying would be
assessed costs for the improvements, the court held that the
existence of the special improvement district constituted an
encumbrance on the property. Id.

¶22 While the existence of a special improvement district is
not quite the same as governmental restrictions on the use of
land, the idea that the existence of an encumbrance depends, in
part, on whether the seller knew or should have known of a
burden on the property is consistent with the view that a

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violation of a governmental regulation on land constitutes an
encumbrance on the property if it exists at the time of
conveyance and the seller either is aware or should be aware of
it. Unlike the wetlands violation in Frimberger, the violation in
this case was not latent. The Baughs were aware of the wetlands
violation and, in fact, committed it themselves. Furthermore, the
Army Corps of Engineers had informed the Baughs that their
improvements violated the wetlands restrictions and had
ordered them to remove the fill dirt and construct a silt fence.
Because the Baughs were aware of the wetlands violation and
the Army Corps of Engineers had taken action to compel
compliance with the wetlands regulations prior to the time the
warranty deed was conveyed, the violation is an ‚interest in a
third person‛ that ‚constitutes a burden or limitation upon the
rights of the fee title holder.‛ See Holmes Dev., LLC v. Cook, 2002
UT 38, ¶ 44, 48 P.3d 895 (citations and internal quotation marks
omitted). Accordingly, the trial court did not err in concluding
that the Baughs had breached the covenant against
encumbrances by conveying the property without disclosing the
existence of the wetlands violation.

III. Good Faith and Fair Dealing

¶23 Finally, the Baughs challenge the trial court’s
determination that their failure to disclose the existence of the
wetlands violation was a breach of the covenant of good faith
and fair dealing. ‚An implied covenant of good faith and fair
dealing inheres in every contract.‛ Eggett v. Wasatch Energy Corp.,
2004 UT 28, ¶ 14, 94 P.3d 193. ‚Under the covenant of good faith
and fair dealing, both parties to a contract impliedly promise not
to intentionally do anything to injure the other party’s right to
receive the benefits of the contract.‛ Id.

¶24 The Baughs reiterate their argument that Favero waived
its right to disclosure of the wetlands violations by failing to
object to the Baughs’ failure to make disclosures, see supra note 1,
and argue that their failure to make the disclosures could
therefore not have injured Favero’s rights under the contract.

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The trial court found that Favero would not have gone through
with the purchase had the Baughs disclosed the wetlands
problem. It further found that Favero did not waive its right to
receive the disclosures by failing to object because Favero could
not ‚object to a problem of which it is unaware.‛ The trial court’s
findings support its determination that the Baughs breached the
covenant of good faith and fair dealing. By failing to make the
disclosures, the Baughs misled Favero concerning the existence
of environmental problems on the property and thereby
deprived it of the opportunity to object or cancel the contract in
accordance with its rights under the REPC. Thus, the trial court
did not clearly err in concluding that the Baughs breached the
covenant of good faith and fair dealing by failing to disclose the
existence of the wetlands violation.

IV. Attorney Fees

¶25 Favero requests an award of attorney fees and costs on
appeal. The trial court awarded Favero its attorney fees pursuant
to the terms of the REPC, which provide that ‚*i+n the event of
litigation . . . to enforce [the REPC], the prevailing party shall be
entitled to costs and reasonable attorney fees.‛ ‚*A+ provision for
payment of attorney[] fees in a contract includes attorney[] fees
incurred by the prevailing party on appeal as well as at trial, if
the action is brought to enforce the contract . . . .‛ Covey v. Covey,
2003 UT App 380, ¶ 36, 80 P.3d 553 (alterations and omission in
original) (citation and internal quotation marks omitted). ‚In
addition, when a party who received attorney fees below
prevails on appeal, the party is also entitled to fees reasonably
incurred on appeal.‛ Id. (citation and internal quotation marks
omitted). Thus, as the prevailing party, Favero is entitled to an
award of attorney fees and costs reasonably incurred on appeal.

CONCLUSION

¶26 Because the Baughs failed to deliver the property in
generally accepted agricultural condition, they breached the

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terms of the REPC and the Escrow Instructions. Furthermore,
they breached the covenant against encumbrances in the
warranty deed by failing to disclose the existing wetlands
violation. They also breached the covenant of good faith and fair
dealing by misleading Favero as to the environmental condition
of the property. Accordingly, we affirm the trial court’s rulings
in favor of Favero. As the prevailing party, Favero is entitled to
an award of attorney fees and costs on appeal. We therefore
remand to the trial court for the limited purpose of calculating
Favero’s fees and costs reasonably incurred on appeal.

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