Court Opinion

ID: 4391221
Source: CourtListenerOpinion
Date Created: 2019-04-26 15:00:32.482783+00
Date Added: 2024-06-11T07:49:51.035955
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 1, 2018              Decided April 26, 2019

                       No. 18-7051

    COMMONWEALTH LAND TITLE INSURANCE COMPANY,
                   APPELLANT

                             v.

KCI TECHNOLOGIES, INC. AND WILES MENSCH CORPORATION,
                      APPELLEES

        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:17-cv-01070)

     Joseph T. Nah argued the cause for appellant. With him
on the briefs was Marianne R. Casserly.

    Howard S. Stevens argued the cause for appellee KCI
Technologies, Inc. With him on the brief was Meighan G.
Burton.

    Jonathan C. Shoemaker argued the cause for appellee
Wiles Mensch Corporation. With him on the brief was Dalene
A. Radcliffe.

    Before: GARLAND, Chief Judge, and TATEL and WILKINS,
Circuit Judges.
                                2
    Opinion for the Court filed by Circuit Judge WILKINS.

     On March 23, 2017, Appellant Commonwealth Land Title
Insurance Company filed a seven-count complaint against two
land surveyors: Appellees KCI Technologies, Inc. (“KCI”) and
Wiles Mensch Corporation (“WMC”). Appellant’s complaint
brings breach of contract and negligence claims against KCI
and WMC in connection with four allegedly defective surveys
that the two entities delivered to ICG 16th Street Associates
(“ICG”). ICG, a non-party to this litigation, is a development
group to whom Appellant issued, and made a loss payment
under, a title insurance policy. The gravamen of the complaint
is that KCI’s and WMC’s surveys failed to notice the full size
of a twelve-inch encroachment – which ICG discovered on
March 24, 2014 – spanning from an abutting building onto
ICG’s property.

     KCI and WMC each moved to dismiss pursuant to the
District of Columbia’s three-year statute of limitations, and the
District Court dismissed the complaint, with prejudice, as
untimely. The District Court held that Appellant’s claims
accrued when KCI and WMC delivered the defective surveys
to ICG in 2006, 2012, 2013, and 2014. In so holding, the
District Court declined to apply D.C.’s so-called “discovery
rule,” which, in certain cases, tolls the statute of limitations
until a plaintiff knew, or in the exercise of reasonable diligence
should have known, of the injury, see Ehrenhaft v. Malcolm
Price, Inc., 483 A.2d 1192, 1203 (D.C. 1984). The District
Court found that ICG and Appellant are sophisticated business
entities, and that the 2012 and 2013 surveys put them on notice
of the encroachment’s existence (just not its precise length).

      Appellant argues that this Court should reverse as to the
first three counts of the complaint because the District Court
erred in dismissing them on statute of limitations grounds
                               3
without applying the discovery rule. We agree. The complaint,
filed on March 23, 2017, alleges that ICG did not learn that the
encroachment was twelve inches – a fact that obstructed its
development plan – until March 24, 2014, only after its
contractor removed a portion of the property’s brick façade.
Appellant and ICG, an insurance company and development
group respectively, are unsophisticated parties with respect to
land surveying, and the complaint alleges that they
commissioned four surveys from KCI and WMC for the
purpose, inter alia, of accurately identifying encroachments.
At the motion to dismiss stage, therefore, it cannot conclusively
be said that Appellant and ICG failed to exercise reasonable
diligence in attempting to discover the encroachment’s full
size. In turn, it is premature to reject the possibility that
Appellant’s claims in counts one, two, and three did not accrue,
at the earliest, until ICG discovered that the encroachment was
twelve inches on March 24, 2014. See Bregman v. Perles, 747
F.3d 873, 875-76 (D.C. Cir. 2014) (“[B]ecause statute of
limitations issues often depend on contested questions of fact,
dismissal is appropriate only if the complaint on its face is
conclusively time-barred.”) (quoting de Csepel v. Republic of
Hungary, 714 F.3d 591, 603 (D.C. Cir. 2013))).

                              I.
    The following facts are taken from Appellant’s complaint
and assumed true for the purpose of reviewing KCI’s and
WMC’s motions to dismiss. Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007).

     In 2006, in connection with ICG’s plan to purchase and
commercially develop a lot (“Property”) in D.C., KCI
conducted a land title survey (“KCI 2006 Survey”), which
included a certification of accuracy made out to ICG, Appellant
(ICG’s title insurer), and other parties. J.A. 19-20, 49. The KCI
                               4
2006 Survey failed, entirely, to notice any encroachment upon
the Property.

     On or about April 12, 2007, in reliance on the KCI 2006
Survey, ICG acquired the Property. At the time of purchase,
there were two buildings on the lot; ICG planned to demolish
them and construct an office building in their stead. Also on
April 12, 2007, and also in reliance on the KCI 2006 Survey,
Appellant issued ICG a title insurance policy (“2007 Title
Policy”).

     On December 2, 2012, in connection with its planned
development, ICG retained WMC to conduct a boundary,
topographic, and utility survey (“WMC 2012 Survey”). It
indicated that a party wall – i.e. a wall common to two
adjoining buildings – existed between the Property and an
adjacent building and encroached onto the Property by two to
three inches. In 2013, ICG commissioned WMC to conduct a
second survey (“WMC 2013 Survey”), which indicated that, in
fact, the party wall encroached onto the Property by four
inches. 1

     In early 2014, ICG initiated demolition of the existing
buildings on the Property. On March 24, 2014, however, the
demolition process hit a snag. That day, Oscar Perez, a director
of the architectural firm ICG hired, emailed ICG to inform it
that the party wall actually encroached onto the Property by
twelve inches. Mr. Perez’s email (which Appellant included as
an exhibit to its complaint, see J.A. 22) indicates that Mr.
Perez’s discovery was possible only because the relevant
portion of the building’s brick façade had been removed, id. at

1
  In January 2014, ICG commissioned KCI to conduct a second
survey, which also failed to notice the encroachment. None of
Appellant’s claims on appeal, however, implicates this survey.
                                5
131. Upon discovering that the encroachment was twelve
inches – as opposed to four inches or less – ICG determined
that it could construct the office building as planned only by
demolishing the party wall. In addition, ICG was obligated to
pay its main tenant $577,000 per month in delay penalties if the
tenant was unable to move in by December 2015. Accordingly,
shortly after learning that the encroachment was twelve inches,
ICG razed the party wall.

    On November 17, 2014, ICG submitted a claim to
Appellant under the 2007 Title Policy for the cost of the party
wall demolition. Appellant accepted coverage and made a loss
payment of approximately $1 million to ICG. According to
Appellant, as of July 2015, ICG incurred total costs of more
than $2.5 million for demolition of the party wall and
associated delay penalties. Appellant brings breach of contract
and negligence claims against KCI and WMC for the allegedly
defective surveys.

                               II.
     This Court reviews de novo the dismissal of a complaint.
Bregman, 747 F.3d at 875. “[C]ourts should hesitate to dismiss
a complaint on statute of limitations grounds based solely on
the face of the complaint” because “statute of limitations issues
often depend on contested questions of fact.” Firestone v.
Firestone, 76 F.3d 1205, 1208-09 (D.C. Cir. 1996) (internal
citations omitted). Indeed, dismissal is appropriate on statute of
limitations grounds “only if the complaint on its face is
conclusively time-barred.” Bregman, 747 F.3d at 875-76
(quoting de Csepel, 714 F.3d at 603).

     In D.C., to maintain a cause of action for breach of contract
or negligence, a litigant must bring suit within three years from
when a claim “accrues.” D.C. CODE § 12-301. The statute,
however, does not define “accrues,” and the term is therefore
                                  6
“left to judicial interpretation.” Ehrenhaft, 483 A.2d at 1198.
In negligence, a cause of action accrues when the “injury
result[s].” Hanna v. Fletcher, 231 F.2d 469, 472 (D.C. Cir.
1956). In contract, the statute of limitations begins to run when
the contract is first breached, or when the “defective work is
done.” Lieberman v. Aldon Constr. Co., 125 A.2d 517, 518
(D.C. 1956).

     The D.C. Court of Appeals, however, does not enforce the
statute in a draconian fashion. Indeed, a well-established
exception is central to this dispute – i.e. the discovery rule,
under which “accrual occurs . . . when a party knows or by the
exercise of reasonable diligence should know: (1) of the injury;
(2) the injury’s cause in fact; and (3) of some evidence of
wrongdoing.” Capitol Place I Assocs. L.P. v. George Hyman
Constr. Co., 673 A.2d 194, 199 (D.C. 1996), superseded in part
on other grounds by D.C. CODE § 16-4406(c). The discovery
rule is an equitable doctrine; its purpose is to preserve claims
in circumstances where the fact of injury or breach “‘may not
be readily discernible’ at the time when actually incurred.”
Ehrenhaft, 483 A.2d at 1202 (quoting Wilson v. Johns-
Manville Sales Corp., 684 F.2d 111, 116 (D.C. Cir. 1982)). 2

    The D.C. Court of Appeals twice has examined the
discovery rule in the context of deficient design and
construction: first, in Ehrenhaft, and then in Capitol Place.

2
  The rule originated in the medical malpractice context; the
archetypical case to which it applies is where a surgeon leaves a
foreign object in a patient who does not discover it until years after
the operation. See, e.g., Burke v. Wash. Hosp. Ctr., 293 F. Supp.
1328, 1333-34 (D.D.C. 1968). Over time, the D.C. Court of Appeals
has extended the rule to a variety of contexts, including legal
malpractice, personal injury based on products liability, and latent
disease. See Ehrenhaft, 483 A.2d at 1201-02 (collecting cases).
                               7
     In Ehrenhaft, plaintiff-homeowner hired defendant-
contractor to build a new room, which defendant completed in
1977. 483 A.2d at 1194-95. Over the next four years, various
issues with the room’s plumbing and insulation arose, and
defendant made repairs. Id. at 1195. During the winter of 1981
to 1982, however, the room’s pipes burst, and a separate
contractor informed plaintiff that, due to faulty construction,
the room’s windows functioned improperly, and its heated
bench was a burn hazard. Id. In 1982, plaintiff sued defendant
for breach of contract and negligence. On summary judgment,
the trial court held that plaintiff’s claims were time-barred
because defendant performed the defective work in 1977. Id.
at 1199. The D.C. Court of Appeals, however, reversed;
applying the discovery rule, it held that there was a question of
material fact as to whether plaintiff knew or should have known
of the defects for which he sought damages – i.e. the burst pipe,
faulty windows, and heated bench – for more than three years
prior to the time he filed the complaint. Id. at 1204.

     In support of its holding, the Ehrenhaft Court reasoned as
follows. First, plaintiff was a lay person and therefore
justifiably relied on defendant’s assurances that the room had
been properly constructed and repaired. Id. at 1202. Second,
the difficulty in identifying deficiencies in construction or
design is exacerbated when those deficiencies – like the faulty
plumbing, window structure, and electric wiring at issue – are
“latent in nature.” Id. Third, applying the discovery rule in
construction disputes does not frustrate the policies underlying
the statute of limitations where the injured party does not and,
in the exercise of reasonable diligence, could not have known
of her claim prior to discovering the defect. Id. at 1203. And
fourth, in such a case, the interests of judicial economy favor
applying the rule, because declining to do so would incentivize
plaintiffs to file suit at the drop of a hat in order to preserve
potential claims. Id.
                               8

     In Capitol Place, the D.C. Court of Appeals assessed for
the second time whether the discovery rule applied in a
construction dispute. This time, however, the Court held that
it did not. There, plaintiff was a principal in a property
development firm, and defendant was a construction company
that, in 1984, substantially completed an office building for
plaintiff. Capitol Place, 673 A.2d at 196. From the time of
completion, plaintiff complained of numerous defects,
including: water leakage causing sopped carpets and
mushroom growth; salt residue on and cracking of the
building’s façade; shifting of the penthouse’s façade; and
masonry distress and roofing problems. Id. at 196, 200.
Because of these issues, in 1994 – ten years after defendant
completed the building – plaintiff filed a demand for
arbitration. Id. at 197. On summary judgment, the trial court
enjoined plaintiff from proceeding on the ground that its claims
were time-barred.

     The D.C. Court of Appeals affirmed; it assumed without
deciding that the discovery rule is applicable in the commercial
(as opposed to residential) construction context but held that it
did not apply to the case at bar. Id. at 200. The Court explained
that, unlike in Ehrenhaft, the defects plaintiff complained of
were obvious and abundant, and plaintiff was a sophisticated
entity that could have promptly discovered their cause without
relying on defendant’s expertise. Id. In so holding, the Court
emphasized that the rule does not permit a plaintiff who knows
that she has been “significantly injured” to defer institution of
suit. Id. (quoting Colbert v. Georgetown Univ., 641 A.2d 469,
473 (D.C. 1994) (en banc)).

    Two additional cases warrant mention. In Woodruff v.
McConkey, 524 A.2d 72 (D.C. 1987), plaintiffs-homeowners
sued defendant-contractor, more than three years after he
                               9
completed otherwise satisfactory work, because they learned
he was unlicensed, id. at 724. The D.C. Court of Appeals held
that the discovery rule was inapplicable because plaintiffs, with
reasonable diligence, could have found out that defendant was
unlicensed within three years of hiring him, see id. at 727. In
Washington Tennis & Education Foundation, Inc. v. Clark
Nexsen, Inc., 324 F. Supp. 3d 129 (D.D.C. 2018), plaintiff, a
nonprofit, sued defendant, an architectural firm, in 2015 for
services rendered in 2011. The District Court declined to apply
the discovery rule because the defects plaintiff complained of
pertained to design documents delivered to plaintiff in 2011
and were thus “discoverable and correctable” within the
limitations period. Id. at 140.

     Notably, in each case upon which we rely, the question of
whether the discovery rule applied was resolved no earlier than
on summary judgment. See Wash. Tennis, 324 F. Supp. 3d at
131-32; Capitol Place, 673 A.2d at 197; Woodruff, 524 A.2d at
724; Ehrenhaft, 483 A.2d at 1194. Indeed, Appellees, neither
in their briefs nor at oral argument, were able to point us to a
D.C. case holding that the discovery rule does not apply based
solely upon the pleadings. Oral Arg. at 24:25-25:03. But this is
unsurprising, since the rule’s application, most often, depends
on contested questions of fact.

                              III.
     Before explaining why the District Court erred in
dismissing counts one through three as time-barred without
applying the discovery rule, we acknowledge that the D.C.
Court of Appeals has never explicitly held that the discovery
rule is available to a plaintiff in a commercial construction
dispute. We must, therefore, predict whether the Court would
extend the rule to this context. Earle v. District of Columbia,
707 F.3d 299, 310 (D.C. Cir. 2012).
                                10
     We predict that it would. Indeed, in Capitol Place, the
D.C. Court of Appeals could have foreclosed this possibility.
Instead, in a well-reasoned opinion, it assumed without
deciding that the rule was available in a commercial
construction dispute but explained that it did not apply to the
case at bar because plaintiff was a sophisticated party and the
defects complained of were obvious and abundant. As such,
we infer that – where a plaintiff in a construction dispute clearly
lacks the requisite sophistication to identify defects that are
latent in nature – the D.C. Court of Appeals would hold that the
discovery rule is available to that plaintiff, even in the
commercial context.

    We turn now to the arguments before us.

     In count one, Appellant brings a claim – as assignee of ICG
– against WMC for negligent breach of contract, based on the
2012 and 2013 Surveys’ failures to notice the encroachment’s
true size. Appellant argues that the discovery rule applies to
this count, and the statute of limitations was thus tolled until
March 24, 2014, when ICG learned from Mr. Perez that the
encroachment was twelve inches. In response, WMC argues
that Appellant lacks standing to bring count one, because it
fails to sufficiently allege that ICG assigned its claims against
WMC to Appellant. Even assuming Appellant has standing,
WMC argues further, count one is time-barred because the
statute of limitations began to run when it delivered the
defective 2012 Survey to ICG. Moreover, WMC contends, the
discovery rule does not apply to this claim because ICG is a
sophisticated party and, upon delivery of the 2013 Survey, was
on notice that the encroachment was at least four inches and
that the 2006 and 2012 Surveys were defective.

   Appellant has standing to bring count one because the
complaint clearly alleges the existence of an “assignment of
                                11
[ICG’s] rights and claims to [Appellant].” J.A. 24 ¶ 38.
Information Handling Servs., Inc. v. Defense Automated
Printing Servs., 338 F.3d 1024, 1029 (D.C. Cir. 2003) (holding
that, in reviewing “standing at the dismissal stage, we must
. . . accept the factual allegations in the complaint as true”)
(internal quotation marks and citations omitted). Moreover, the
District Court erred in dismissing this count as time-barred
without applying the discovery rule because it cannot
conclusively be said that ICG failed to exercise reasonable
diligence in attempting to discover the full extent of the
encroachment. Indeed, at least at the pleading stage, the facts
here hew closer to Ehrenhaft than Capitol Place. ICG may be
a sophisticated business entity, but it lacks sophistication in the
area of land surveying. Why else would it have commissioned
four land surveys? In addition, the defect Appellant complains
of – i.e. the twelve-inch encroachment – was far from open and
obvious; it was so latent that, despite four attempts, the land
surveyors were unable to accurately identify it, and it was
discovered only after the Property’s brick façade was removed.
Accordingly, at the motion to dismiss stage, it is premature to
reject the possibility that Appellant’s claim in count one did not
accrue until March 24, 2014, when ICG discovered the
encroachment’s true size and, as a result, altered its
development plan.

     The District Court also erred in dismissing counts two and
three as time-barred without applying the discovery rule. In
these counts, Appellant brings direct claims against KCI, based
on the 2006 Survey’s failure to notice the encroachment, for
negligence and negligent misrepresentation, respectively.
Because, unlike its assigned claim against WMC, Appellant
brings counts two and three against KCI directly, the relevant
inquiry is when Appellant, not ICG, had notice under the
discovery rule. Appellant argues that its claims are timely
because it discovered that the 2006 Survey was defective only
                                  12
on September 17, 2014, when ICG tendered its loss claim to
Appellant. 3 KCI responds that counts two and three are time-
barred because they accrued, at the latest, on April 12, 2007,
when Appellant issued ICG the 2007 Title Policy in reliance on
the 2006 Survey. Moreover, KCI contends, the discovery rule
does not apply because Appellant is a sophisticated entity that,
with reasonable diligence, could have learned that the 2006
Survey was defective when the 2012 and 2013 WMC Surveys
indicated the encroachment’s existence.

     For many of the same reasons we applied it to count one,
we hold that the discovery rule applies at the pleading stage to
counts two and three. Appellant may be a sophisticated insurer,
but it is not sophisticated in the field of land surveying, and it
reasonably relied on the KCI 2006 Survey – the accuracy of
which KCI certified to Appellant – in assuming that the
Property was encroachment-free. Moreover, Appellant alleges
that it learned that the 2006 Survey was defective only when
ICG tendered its loss claim on September 17, 2014, and no
separate allegation contradicts this alleged fact. The face of the
complaint, therefore, does not permit us to conclusively reject
the possibility that Appellant’s claims in counts two and three
accrued no sooner than September 17, 2014.

3
  Appellant argues further that, irrespective of the discovery rule,
counts two and three are timely because negligence claims accrue at
the time of injury, and Appellant was not injured by the 2006 Survey
until December 21, 2015, when it made the related loss payment to
ICG. See Appellant Br. 27-29 (first citing Fort Myers Packers Inc.
v. Steptoe & Johnson, 381 F.2d 261, 262 (D.C. Cir. 1967), and then
citing Hanna, 231 F.2d at 470-72). Because we hold that, at least at
the pleading stage, the discovery rule applies to counts two and three,
and these claims are timely on that basis, we need not reach this
argument.
                              13
     Finally, KCI argues for affirmance on the following
alternative grounds: (1) Appellant cannot bring direct claims
against it because Appellant has rights only as subrogee and
assignee of ICG; (2) Appellant fails to allege that KCI owed it
a duty; (3) Appellant cannot allege damages against KCI; and
(4) Appellant’s claims are barred by the economic loss
doctrine, which prohibits recovery for purely economic
damages in tort. KCI did not raise the first three arguments
below, and we therefore decline to consider them. See Kassman
v. Am. Univ., 546 F.2d 1029, 1032 (D.C. Cir. 1976) (per
curiam). And at the pleading stage, the economic loss doctrine
does not properly apply to counts two and three because, in
certifying the 2006 Survey to Appellant, KCI plausibly
“undertook obligations that would ‘implicate [appellant’s]
economic expectancies,’” Whit v. Am. Prop. Constr., P.C., 157
A.3d 196, 205 (D.C. 2017) (alteration in original) (quoting
Aguilar v. RP MRP Wash. Harbour, LLC, 98 A.3d 979, 985
(D.C. 2014)).
                             ***
     For the foregoing reasons, we reverse the District Court’s
order dismissing Appellant’s complaint as to counts one, two,
and three and remand for proceedings consistent with this
opinion.

                                                   So ordered.