On certification to the Superior Court, Appellate Division, whose opinion is reported at 257 N.J. Super. 18 (1992).
For affirmance -- Chief Justice Wilentz, and Justices Handler, Pollock, O'Hern, Garibaldi and Stein. For reversal -- Justice Clifford. The opinion of the Court was delivered by Handler, J. Clifford, J., Dissenting.
[134 NJ Page 363] In the companion case, Sears Mortgage Corporation v. Rose and Kaiser, 134 N.J. 326, 634 A.2d 74 (1993), decided today, we considered the issue of which party participating in the closing of a real estate title must ultimately absorb the loss caused by the closing attorney's theft of moneys earmarked for the payment of an existing first mortgage on the property. In that case, aside from the seller, the only parties involved in the real-estate closing were the purchaser and the title-insurance carrier. We held that under the circumstances the closing attorney, although retained by the buyer, was the agent of the title-insurance carrier, and therefore the carrier, not the purchaser, was liable for the loss occasioned by the attorney's embezzlement. We also held the carrier liable for the loss because protection against the risk of
attorney defalcation was implicit in the duty of good faith and fair dealing owed by the insurer to the purchaser and was an incident of the title insurance provided to the purchaser.
In this case, the real-estate closing involved the refinancing and replacement of a first mortgage on property. The funds were furnished by a third-party lender to be secured by a first mortgage. The attorney who embezzled those funds was retained by the owner of the property (referred to throughout as the "purchaser" or "buyer"). As a result of that theft, the existing mortgage was not paid. Hence, we must directly address the status of the lender-mortgagee in determining which party -- the purchaser, the title insurer, or the third-party lender -- should bear the loss of the closing attorney's embezzlement. Further, we must also determine whether attorneys' fees may be awarded if the title-insurance carrier is found to be responsible for the loss.
In addition, the purchaser in this case, confronted with the loss caused by his attorney's theft, filed a claim with the Clients' Security Fund. The Fund paid the purchaser only a portion of the loss attributable to his attorney's misappropriation. We therefore consider the responsibility of the Fund in dealing with claims based on such losses.
In 1985, Douglas Hart purchased a condominium in Eatontown from its builder for $95,000. He financed the purchase with a $90,000 mortgage to Center Savings and Loan ("Center"). Hart retained Joseph Witkowski, a Rahway lawyer referred to him by a colleague, to represent him in the purchase.
Witkowski ordered and received a title report on the Eatontown property from Alliance Title Agency ("Alliance"), the local agent for Security Title and Guaranty Company ("Security"). At the closing, Hart gave Witkowski $526 to cover the title-insurance premium. Witkowski explained to Hart that title insurance would protect him against any claims made against the property. Witkowski, however, never sent the $526 to Alliance, and a title policy
never issued. Alliance did not communicate with Hart to ask why the premium had not been paid or to ask him if he wanted to cancel the policy. Hart received copies of his recorded deed and the loan documents and began making his monthly mortgage payments to Center.
In 1986, when interest rates fell, Hart decided to refinance his Center mortgage. He applied to Southern Mortgage Associates ("SMA") and was approved for a $91,000 loan. Hart retained Witkowski to represent him in closing the SMA mortgage. The SMA commitment for a $91,000 loan to Hart, which issued in May 1986, provided that Witkowski would close the loan for SMA in compliance with SMA's closing instructions. SMA required as a condition of the loan that Witkowski obtain title insurance and that the Center mortgage loan be paid off at the closing and cancelled.
Witkowski ordered a title report and commitment from Alliance. Alliance's May 15, 1986, commitment to issue a loan policy for $91,000 required that Hart pay off and cancel the Center mortgage. The title commitment listed SMA as the proposed insured. On May 27, 1986, Alliance sent Witkowski a bill for $522 to cover the policy premium.
As was its custom, SMA also required a "closing-protection letter" from the title-insurance company. The letter protected SMA against the risk of loss resulting from the fraud or theft of the buyer's closing attorney, who was designated as the title company's "approved attorney" for the purposes of the closing. Alliance did not charge SMA for the protection afforded through the letter; rather, the cost of that protection was built into the insurance premium charged and paid for by Hart. Security issued the letter.
Shortly before the closing date, June 13, 1986, SMA sent Witkowski the closing package, which included a note, the mortgage, the net check for the refinancing, and SMA's closing instructions. The check for $91,000 was made payable to Witkowski and
Hart jointly. The closing instructions, which were directed to Witkowski, began:
The following are closing instructions which you, as our closing agent, must comply with as checked. Do not disburse any loan proceeds without full compliance with these instructions.
The instructions required, among other things, that Witkowski pay off the Center mortgage.
At the closing, Witkowski had Hart endorse the check. Witkowski signed a copy of the closing instructions and returned it to SMA along with copies of all the documents executed at the closing. Included was his signed "Attorney's Certification," on a form furnished by SMA, in which he certified that SMA's $91,000 loan was secured by a first mortgage on Hart's property. The SMA mortgage was recorded.
The closing statement reflects a $547 charge to Hart for title insurance. On June 18, 1986, Witkowski sent a check for $522 to Security to cover the title-insurance premium. (Although the trial court concluded that Witkowski must have pocketed the $25 difference, in fact the $25 was a cancellation charge billed by Security to Witkowski directly and unbeknownst to Hart.) A year and a half after Witkowski's application to Security for title insurance, when Security was beginning to prepare a title binder for the refinancing, it noticed that no premium had been received for the original purchase and that no policy had been issued to either Center or Hart. Security billed Hart, through Witkowski, for cancelling the original policy without checking with Hart on whether he wanted to cancel the policy, and then issued a new commitment for a loan policy, with SMA as the proposed insured. Security deposited Hart's check for the premium on the loan policy but did not issue a policy because it was never informed that the Center mortgage had been paid off and cancelled. It was never so informed because instead of paying off the Center mortgage, Witkowski stole the $91,000.
Hart began making regular monthly payments on the SMA mortgage and stopped making payments to Center, because he
assumed that the loan had been repaid in full. When Hart received delinquency notices from Center, investigation revealed Witkowski's theft. Witkowski was prosecuted, convicted, sentenced, and disbarred for this and other similar defalcations.
SMA called on Security to fulfill its obligation under the closing-protection letter. Security did so in September 1987 by paying Center the amount due on its mortgage, $107,800, taking an assignment of the mortgage and subordinating it to the SMA mortgage. Security then demanded that Hart reimburse it for the Center mortgage. Hart, who was paying off the SMA mortgage, refused to reimburse Security for the Center mortgage.
In December 1987, Hart filed a claim with the Clients' Security Fund of the Bar of New Jersey, now called the New Jersey Lawyers' Fund for Client Protection ("Fund"). The Fund, which was created to reimburse clients for losses caused by the dishonest conduct of members of the bar of New Jersey, denied the claim because it concluded that Hart had a collateral source of recovery, namely, Security and SMA. See Rule 1:28-3(b)(5). However, the Fund set aside $50,000 in case a claim could later be substantiated. Although Hart's claimed loss was $91,000, the Fund's cap for individual claimants in 1986, when the loss occurred, was $50,000.
On October 20, 1988, Security, owner of the Center mortgage, filed a foreclosure complaint in the Chancery Division against Hart. Hart answered, counterclaimed against Security, and filed a third-party complaint against Witkowski.
In October 1989, while the foreclosure action was pending, Hart sold the Eatontown property because of a pending job transfer. The SMA mortgage was paid off and the remaining equity, $42,000, which normally would have been turned over to Hart, was put into escrow. The Fund paid half of the escrow, $20,986, to Hart in November 1989, and Hart assigned half of his interest in the escrow proceeds to the Fund. The Fund then brought its own action against Security in June 1989, naming as defendants Security,
Alliance, SMA, Center, and Witkowski. SMA cross-claimed against Security.
The trial court consolidated Security's foreclosure action and the Fund's action, and granted Center's and Alliance's motions for summary judgment. In January 1990, the court stayed the foreclosure action pending Disposition of the case.
Based on the explicit closing instructions that SMA had given Witkowski, the trial court found that Witkowski was not only Hart's agent but also SMA's agent for the limited purpose of the closing. The court, however, found that Witkowski, simply because of his designation as the title company's "approved attorney," was not Security's agent. It also determined that the money stolen belonged to Hart and thus Hart was responsible for the loss because his agent had embezzled the funds in violation of the conditions imposed by SMA. Therefore, the court held that Security could foreclose against Hart and was entitled to the $42,000 in escrow. It also awarded $7,300 in attorneys' fees to SMA and against Security.
The Appellate Division reversed, 257 N.J. Super. 18, 29, 607 A.2d 1319 (1992). It held that Witkowski had been SMA's agent for the closing and that the money stolen belonged to SMA, not to Hart. The court also stated that by designating Witkowski as its agent and putting him in a position that enabled him to steal the closing proceeds, SMA was liable for the lawyer's fraud. The Appellate Division further determined that Security was ultimately liable for the loss based on the closing-protection letter it had provided SMA. Consequently, it ruled that Security could not foreclose the Center mortgage against Hart, but rather was obligated to satisfy and discharge that mortgage and make SMA's lien fully enforceable against Hart. The court also affirmed the award of attorney's fees to SMA and against Security, and ordered the trial court to disburse the escrow funds in accordance with the agreement between the Fund and Hart.
This court granted Security's petition for certification, 130 N.J. 598, 617 A.2d 1220 (1992).
We consider initially the issue of who, as between the purchaser and the title-insurance carrier, should bear the loss occasioned by the theft of funds by the purchaser's closing attorney. We may thereafter consider the effect of that determination on whether, ...