On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County.
Shebell, Skillman and D'Annunzio. The opinion of the court was delivered by Shebell, J.A.D.
The opinion of the court was delivered by
The underlying actions before us in these consolidated appeals give rise to issues arising from an attempt by a condominium owner to refinance the mortgage on his unit. Simply stated, his attorney stole the money which the refinancing mortgage company had directed the attorney to use to pay off the original mortgage thereby leaving the owner with two outstanding mortgage obligations and causing the refinancing mortgage company to be subject to the lien of the prior mortgage.
Appellant, Douglas C. Hart (Hart), was the owner of premises known as 45 Oak Lane in Eatontown, consisting of a condominium unit. Defendant, Joseph R. Witkowski (Witkowski), was an attorney-at-law of the State of New Jersey until he was suspended from practice on December 22, 1986 and disbarred on November 17, 1987.
Defendant, Alliance Title Agency (Alliance Title), is a title insurance agency located at 19 West Main Street, Freehold,
New Jersey, and is an agent of Security Title and Guaranty Company (Security Title). Security Title is headquartered in New York City and licensed to sell title insurance in New Jersey. Southern Mortgage Associates, Inc. (Southern Mortgage) is a Georgia corporation and was engaged in mortgage lending activities in New Jersey. Center Savings & Loan Association (Center) is a New Jersey corporation engaged in banking and mortgage lending activities in New Jersey.
On or about February 5, 1985, Hart purchased the unit from a developer, the Farinella Group, Ltd., for $95,090 and obtained from Center a $90,000 thirty-year mortgage, adjustable every three years, at a beginning rate of 12 1/2%. Hart engaged Witkowski to handle the purchase and close the loan from Center. Alliance Title provided a report of title and a closing-protection letter to Center in response to a request from Witkowski for a title policy insuring the proposed mortgage. The loan closed on February 5, 1985, and the mortgage was duly recorded.
Hart testified, and the settlement statement shows, that he paid a premium of $526 to Witkowski at the 1985 closing. Apparently, the money was never forwarded to Alliance Title, and, therefore, the title policy was not issued. Hart believed that he had purchased title insurance for the 1985 transaction, and never instructed Witkowski or anyone else to cancel the insurance.
In May, 1986, Hart sought to refinance the Center mortgage with another loan for a lower interest rate. Southern Mortgage offered a fifteen-year loan at 11.25%. Hart retained Witkowski to represent him in connection with the refinancing transaction. Witkowski ordered title insurance from Security Title on behalf of Hart as required by Southern Mortgage in its loan commitment. Alliance Title provided Witkowski with a title insurance commitment as part of the order for title insurance. That commitment cites the Center mortgage as an item
to be excepted from policy coverage unless satisfactorily removed at closing.
Alliance Title, as agent for Security Title, issued a closing-protection letter to Southern Mortgage naming Witkowski as the Approved Attorney for the closing. Southern Mortgage would not have forwarded the funds to Witkowski for the refinance closing without first having obtained a closing-protection letter from Security Title. The letter stated that upon certain conditions Security Title
hereby agrees to reimburse you for actual loss incurred by you in connection with such closings when conducted by an Issuing Agent (an agent authorized to issue title insurance for the Company) or an Approved Attorney (an attorney upon whose certification of title the Company issues title insurance) and when such loss arises out of:
1. Failure of the Issuing Agent or Approved Attorney to comply with your written closing instructions to the extent that they relate to (a) the status of the title to said interest in land or the validity, enforceability and priority of the lien of said mortgage on said interest in land, including the obtaining of documents and the disbursement of funds necessary to establish such status or lien, or (b) the obtaining of any other document, specifically required by you, but not to the extent that said instructions require a determination of the validity, enforceability or effectiveness of such other document, or (c) the collection and payment of funds due you, or
2. Fraud or dishonesty of the Issuing Agent or Approved Attorney in handling your funds or documents in connection with such closing.
Conditions and Exclusions:
C. When the Company shall have reimbursed you pursuant to this letter, it shall be subrogated to all rights and remedies which you would have had against any person or property had you not been so reimbursed. Liability of the Company for such reimbursement shall be reduced to the extent that you have knowingly and voluntarily impaired the value of such right of subrogation.
On June 13, 1986, Southern Mortgage sent Witkowski a closing package that contained the prepared documents such as the Note and Mortgage, loan closing instructions, and the net check for the refinance. The check was endorsed by Hart and Witkowski so that Witkowski could use the proceeds to satisfy the Center mortgage. Southern Mortgage's closing instructions were directed to the closing attorney, Witkowski. The
first paragraph of the closing instructions designated Witkowski as Southern Mortgage's "closing agent."
As Southern Mortgage's agent, Witkowski was to follow all of the instructions that had been checked off on the lender's preprinted form. If he could not follow all of the instructions, Witkowski was to have called Southern Mortgage for clearance and a determination as to what was to be done. According to the testimony of an officer of Southern Mortgage, when a closing agent is unable to follow instructions, the funds are to be returned to Southern Mortgage.
Witkowski failed to pay off the Center mortgage and embezzled the funds. He did, however, pay Security Title's premium for title insurance. Hart did not see the closing-protection letter or communicate with the title insurance company.
After learning of Witkowski's misappropriation, Security Title purchased the Center mortgage and subordinated it to the Southern Mortgage mortgage, thereby placing the Southern Mortgage mortgage as a first lien against the property. Security Title claimed it took that action because it was necessary under its obligation to protect the priority of Southern Mortgage's lien. Security Title, however, never issued a title insurance policy even though it had collected the premium from Hart.
Security Title, having purchased the Center mortgage, demanded payment of it from Hart. Hart, however, was paying and continues to pay on Southern Mortgage's mortgage. He, therefore, refused to make payments to Security Title.
On May 13, 1987, Hart filed a claim with the Clients' Security Fund. The New Jersey Lawyers' Fund for Client Protection (Fund), formerly the Clients' Security Fund of the Bar of New Jersey, is an entity created by the Supreme Court of New Jersey under the provisions of R. 1:28-1 to -9 of the Rules of Court, to provide protection for the clients of all attorneys licensed in the State of New Jersey. New Jersey licensed attorneys, with few exceptions listed in R. 1:28-2, are required
to pay an annual sum set by the Supreme Court. That sum provides the main corpus of the Fund's monies for distribution to ...