In my previous post, I discussed the Texas Supreme Court’s (the “Court”) decision in Chicago Title Insurance Company v. Cochran Investments, Inc., No. 18-0676 (Tex. 2020) that pertained to the claim for breach of the covenant of seisin [click here for Part 1].   In this post, I will discuss the Court’s holding that the merger doctrine barred Chicago’s claim for breach of contract for failure to convey title.

As a reminder, the Court ruled that:

  • Qualifying language in a special warranty deed limits the grantor’s liability for the implied covenant of seisin (the covenant that the grantor owns the property being conveyed).

  • The merger doctrine bars a claim for breach of warranty under the purchase agreement if (i) the deed limits the grantor’s liability for failures of title to claims asserted by those claiming by, through and under the grantor (special warranty deed) and (ii) the claimant’s asserted interest is not made by, through and under the grantor.

Now for a quick refresher on the facts of the case.  In 2009, William England and Medardo Garza owned equal shares of a parcel of land located in Houston, Texas. The land was mortgaged to EMC Mortgage.  In September of 2009, England conveyed his interest in the property to Garza.  A few months later, a bankruptcy proceeding was commenced against England.  England’s conveyance to Garza was set aside as a fraudulent transfer in the bankruptcy proceeding.  In December of 2010, EMC Mortgage foreclosed its lien on the property.  Cochran Investments, Inc. (“Cochran”) purchased the property at the foreclosure sale.  In May 2011, Cochran and Michael Ayers entered into a residential sales contract for the property.  The contract provided that, at closing, Cochran would execute and deliver a general warranty deed conveying title to the property to Ayers.  The contract also included a savings clause, which provided in pertinent part:

“Representations: All covenants, representations, and warranties in this contract shall survive closing.  If any representation of Seller in this contract is untrue on the Closing Date, Seller will be in default…”

On June 6, 2011, the sale closed and in conjunction with the sale, Ayers obtained a special warranty deed from Cochran and an owner’s title policy from Chicago Title Insurance Company (“Chicago”).  Four days after Cochran signed the special warranty deed, England’s bankruptcy trustee sued EMC Mortgage and Cochran asserting that the foreclosure sale of the property violated the bankruptcy proceeding’s automatic stay and seeking to set aside the sale.  Ayers was subsequently added as a defendant to the suit and filed a claim with Chicago, which assumed his defense in the proceeding. Chicago defended Ayers and paid the bankruptcy trustee and Garza for their interests in the property.

Chicago, as Ayer’s subrogee under the title policy, sued Cochran, asserting claims for breach of the implied covenant of seisin and breach of contract.  The trial court rendered judgment for Chicago.  The 14th Court of Appeals reversed, holding that the deed’s granting clause did not make a representation or claim that the grantor owned the property at issue and therefore, does not imply the covenant of seisin and that the merger doctrine barred Chicago’s breach of contract claim. Cochran Investments, Inc. v. Chicago Title Insurance Company, 550 S.W.3d 196 (Tex. App.—Houston [14th Dist.] 2018).  The Court affirmed the appellate court’s decision, finding in favor of Cochran on the claims for breach of the implied covenant of seisin and breach of contract, although its reasoning differed from the appellate court.

The merger doctrine operates when earlier contracts are contradicted in the deed.  The merger doctrine provides that when a deed is delivered and accepted as performance of a contract to convey, the contract is merged in the deed.  Where the terms of the deed vary from those contained in the contract, courts look to the deed alone to determine the rights of the parties.   Chicago argued that the pertinent obligations in the sales contract do not contradict the obligations in the deed and the savings clause in the sales contract precludes the effect of the merger doctrine.

The Court disagreed, holding that the terms of the deed and the purchase agreement vary because (i) the deed limits Cochran’s liability for failure of title in a way the contract does not and (ii) the special warranty limits Cochran’s liability with respect to a failure of title to claims of an individual claiming by, through and under Cochran but not otherwise. Accordingly, Chicago’s claim for breach of contract was foreclosed by the special warranty in the deed.  The Court noted that allowing the savings clause to preserve a breach of contract claim for the same failure of title for which the special warranty bars recovery would undo the effect of the warranty, rendering it useless.  The Court also pointed out that had Chicago pursued a claim for breach of contract based on Cochran conveying the property by special warranty deed rather than by general warranty deed, as contemplated by the contract, Chicago could have proceeded on that claim.