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Taylor v. Shepard

Decided: September 3, 1975.

FRANK H. TAYLOR AND SON, INC., PLAINTIFF-APPELLANT,
v.
SEYMOUR D. SHEPARD, DEFENDANT-RESPONDENT



Collester, Lora and Handler. The opinion of the court was delivered by Collester, P.J.A.D.

Collester

This is a legal malpractice suit. Plaintiff appeals from a judgment entered on a jury verdict of no cause for action in favor of defendant, an attorney at law of this State.

On March 17, 1966 plaintiff entered into a construction mortgage agreement with Belvidere Manor, Inc. and Anderson Construction Co. (hereinafter Belvidere). Under the terms of the agreement plaintiff was to advance monies to Belvidere to be used in the construction of garden apartments in Warren County. The agreement called for plaintiff to make periodic progress payments to Belvidere upon certification by the architect of the project at various stages of construction and upon approval of defendant, plaintiff's attorney, whose responsibility it was to determine that the payment made by plaintiff would continue to be a first lien on the mortgaged property. The progress payments were to be used only for the construction of the housing project.

On April 6, 1966 Belvidere assigned the payments due under the construction mortgage agreement to the Englewood National Bank and Trust Company (hereinafter bank) as security for a loan by the bank to Belvidere, the proceeds of which were also to be used in the construction of the project. Plaintiff refused to honor the assignment and on April 11 and April 28, 1966 paid over progress payments due under the construction mortgage agreement to Belvidere. Shortly thereafter Belvidere became insolvent. The bank sued plaintiff for its refusal to honor the assignment, and as a result of a judgment entered in favor of the bank, plaintiff was required to pay $37,700 together with interest.

Plaintiff brought a malpractice suit against defendant to recover the money it was required to pay and for legal expenses incurred in defending that litigation. Plaintiff alleged it sustained such damages as a result of the negligence of defendant in wrongly advising it not to honor the assignment to the bank and to make progress payments to Belvidere. Defendant denied that he was negligent and raised the defense of contributory negligence. He alleged that he had

exercised the skill and care required of him in his profession.

During the trial defendant, who had been plaintiff's counsel in matters relating to real estate and mortgage financing for 25 years, conceded that he had advised plaintiff not to honor the assignment. He testified that he had researched the law concerning the assignment of moneys payable under the terms of a construction mortgage and while he had found no relevant judicial decisions he had concluded that such an assignment was invalid. He based his opinion, in part, upon the fact that the construction mortgage agreement contained a provision that the agreement was not assignable, and further, that if the assignment was honored plaintiff would lose control of the distribution of the construction loan funds which should be used to pay for materialmen, labor and equipment on the Warren County project and that the funds might be diverted to another project being constructed by Belvidere in Sussex County. He was also concerned that if payments were not made to Belvidere in accordance with the construction mortgage agreement the monies paid under the assignment would lose their priority as a first lien on the mortgaged property.

Each party called expert witnesses to testify on their behalf. Both experts said they were never faced with the legal question which confronted defendant in this case. Plaintiff's expert testified that defendant's conduct varied from the usual accepted standard of the legal profession under the same or similar circumstances. He disagreed with defendant's conclusion that the construction mortgage proceeds were not assignable. He expressed the view that defendant should have advised plaintiff to draw checks for the payments to both Belvidere and the bank and to let them "fight it out" as to who was going to get the proceeds or that defendant should have advised his client to start an interpleader suit.

Defendant's expert testified that the disbursement of funds authorized by defendant was in accordance with the standards that would be followed by an attorney who was

experienced in this field. He agreed with defendant that if the construction mortgage funds were diverted under the assignment plaintiff's priority of lien for such payments would be subject to attack by the second mortgagee, subcontractors, materialmen and laborers employed in the event of a mortgage foreclosure. He indicated that if checks for payments had been made out to both Belvidere and the bank or an interpleader action was filed by plaintiff the project would go "down the drain" because of the delay and Taylor might have been held liable for not honoring the mortgage commitment. He expressed the opinion that in view of the lack of law regarding the situation at the time defendant exercised reasonable care for the protection of his client's interests.

The jury returned a verdict in favor of defendant, and plaintiff's motion for a judgment notwithstanding the verdict or a new trial ...


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