On certification to the Superior Court, Appellate Division, whose opinion is reported at 257 N.J. Super. 33 (1992).
For reversal and reinstatement -- Chief Justice Wilentz and Justices Handler, O'Hern, and Stein. For affirmance -- Justices Clifford and Garibaldi. The opinion of the Court was delivered by Handler, J. Clifford, J., Dissenting. Garibaldi, J., Dissenting.
In this case and the companion case, Clients' Security Fund v. Security Title & Guarantee Co., 134 N.J. 358, 634 A.2d 90 (1993), also decided today, the Court must determine which party participating in the closing of a real-estate title must ultimately sustain the loss caused by the closing attorney's theft of moneys earmarked for the payment and satisfaction of an existing first mortgage on the property. The parties with an interest in the closing are, on the one hand, the title-insurance carrier and, on the other hand, those furnishing the money to acquire the property -- in this case, the buyer and, in the companion case, an institutional third-party lender. As a result of the closing attorney's embezzlement, one of those parties must ultimately bear the loss. Further, because the attorney's misappropriation prevented the payment and satisfaction of the existing mortgage on the property, we must consider as well the status and rights of the party holding that mortgage.
It is highly regrettable that closing attorneys, as exemplified by these cases, from time to time abscond with the moneys entrusted to them for purposes of the closing of title. That form of misappropriation is a recurrent basis for disbarment. The appeals, therefore, provide the opportunity for the Court both to
enunciate a rule to govern liability in this kind of transaction and, further, to suggest sound practices and ethics standards that may serve to reduce the incidence of this serious misconduct.
In 1985, Michael Rose purchased a residential condominium in Leonia. On the same day, he gave a purchase-money mortgage for $107,950 to Allstate Enterprises Mortgage Corporation, the predecessor corporation to Sears Mortgage Corporation ("Sears").
On August 3, 1987, Emery Kaiser contracted to buy Rose's condominium for $165,000. Because Kaiser was paying with cash, the "Rose to Kaiser" contract did not contain a mortgage-contingency clause. At the same time, Kaiser was preparing to sell his home, which would provide the funds for his purchase of Rose's condominium. Kaiser retained an attorney to represent him in both the sale of his home and the purchase of Rose's, but the attorney became seriously ill before either transaction took place. Subsequently, a real-estate broker involved in the transaction recommended that Kaiser retain Joseph Gillen, an experienced real-estate attorney, to represent him. Kaiser spoke to Gillen over the phone twice, but did not meet him until the day of the closings.
Gillen, who had a longstanding business relationship with Commonwealth Land Title Insurance Company ("Commonwealth"), wrote to Commonwealth on a standard form provided by the company, requesting a title-insurance policy for Kaiser in the sum of $165,000. He also wrote to Sears, requesting a mortgage payoff statement.
Commonwealth conducted a title search and sent Gillen its title insurance commitment, which listed Gillen as "applicant" and Kaiser as "proposed insured." The cover sheet of that document stated that the commitment "is issued to show the basis on which we will issue a Title Insurance Policy to you. The Policy will insure you against certain risks to the land title, subject to the limitations shown in the Policy." The cover sheet also stated in
bold capital letters: "You should read the commitment very carefully . . . . If you have any questions about the Commitment, contact the local office issuing this commitment."
On the second page of the title-insurance document, Commonwealth set out the terms of the commitment and provided that the policy would be subject to the requirements of Schedule B-1. Those requirements were payment of the purchase price to the seller, payment of the premium for the policy, proper signing of a proposed deed from Rose to Kaiser, and that the mortgage from Rose to Sears be "paid and cancelled of record."
Despite the language of that document, which is directed to the insured, Commonwealth sent it only to Gillen, along with an invoice for $704.25, covering title-commitment charges and the insurance premium. The invoice was made out to Gillen but referred to Kaiser as the "buyer/client."
On the morning of October 16, 1987, Kaiser closed on the sale of his house and received a net-proceeds check of $127,000. He endorsed the check over to Gillen's trust account. Gillen was to use the funds to purchase the Rose condominium for Kaiser that afternoon. Kaiser also wrote personal checks to Gillen totaling $38,000 to cover the balance of the $165,000 purchase price of the Rose condominium. The "Rose to Kaiser" closing took place at Gillen's law office. Kaiser was given a credit against the purchase price in the amount of the outstanding balance on the Sears mortgage, $107,155.62. Rose's attorney, Kaiser, and Gillen agreed that Gillen would pay off the mortgage, as provided in the contract of sale. Gillen also collected from Kaiser $704.25 to pay Commonwealth its title insurance premium. He told Kaiser that in return for this fee he would be getting free title to the property.
On October 17, 1987, on a form provided by Commonwealth, Gillen informed the insurance company that the closing had taken place and asked it to perform its final search and issue a fee policy. The form also stated: "all open items which are not to appear as exceptions on [the] policy have been disposed of . . . ."
Gillen also noted on the form that a check for $704.25 was enclosed. Commonwealth received and deposited the check.
Gillen never sent any funds to Sears to pay off the Rose mortgage. He misappropriated the closing funds from that transaction and from two others, absconded, and was later criminally convicted, imprisoned, and disbarred. The other two thefts involved purchasers who had obtained mortgages. Commonwealth paid off those mortgages in order to satisfy its closing-protection obligation to the lenders.
In November 1987, Sears communicated with Rose's lawyer and Commonwealth to let them know that the mortgage on Rose's condominium had not been paid off. On December 1, 1987, Commonwealth directly communicated with Kaiser for the first time. It wrote to him that "as you are aware," Commonwealth had been "requested to provide title insurance to you in connection with your purchase" from Rose. The letter continued:
[A]s of this writing the requirements of our title commitment have not been met. No insurance will be issued to you until such time as all the requirements of the commitment have been fulfilled. We have been informed that a mortgage made by your grantor has not been cancelled of record and we have reason to believe the same was never paid off by your closing attorney. I can advise you that Joseph Gillen has been temporarily suspended from the practice of law by the Office of Attorney Ethics as of November 23, 1987.
I suggest you retain an attorney immediately as this is a very serious matter.
Commonwealth offered Kaiser a title policy subject to an exception for the Sears mortgage. Kaiser demanded that Commonwealth issue a policy free of the Sears mortgage exception. Commonwealth refused, stating that its title commitment expressly conditioned issuance of the policy on payment of the Sears mortgage.
Kaiser then asked the New Jersey Lawyers' Fund for Client Protection ("the Fund") to reimburse him for the amount Gillen had stolen. The Fund told Kaiser that it would not be able to indemnify him because it believed that he had legal recourse against Commonwealth, and thus was barred under Rule 1:28-3(b)(5), which permits the trustees of the Fund to consider "[t]he
potential for recovery from a collateral source" in determining whether an "eligible claim merit[s] reimbursement from the Fund."
Sears filed a foreclosure complaint in the Chancery Division on April 14, 1988. Kaiser and Rose separately answered and filed third-party complaints naming Commonwealth and Gillen as third-party defendants. Commonwealth filed answers to Rose's and Kaiser's third-party complaints and cross-claimed against Gillen, Rose, and Kaiser.
Commonwealth moved for summary judgment to dismiss Kaiser's third-party complaint. The trial court denied the motion in order to get a "full picture of the relationships among title insurance company, closing attorney and purchaser on which the question of Commonwealth's liability might well turn." The Fund and the New Jersey Land Title Association ("NJLTA") were permitted to participate at the trial as amicus curiae. The Fund contended that it was not required to reimburse Kaiser for the loss because it had resulted from an insurable risk, that it was subject to the collateral-source rule, and that it was subject to payment limits. Several expert witnesses in title-insurance law, real-estate practices, and south Jersey closing practices testified at the trial.
The trial court held that Commonwealth was liable to Kaiser for breach of its duty of good faith, fair dealing, and full disclosure. The court also found that Gillen had been Commonwealth's agent in its dealings with Kaiser and thus Commonwealth would be liable for Gillen's misconduct under the law of agency. The court ordered Commonwealth to pay off the Sears mortgage and to issue Kaiser an owner's title-insurance policy free of the Sears mortgage encumbrance. It also denied Sears a judgment of foreclosure and ordered Commonwealth to pay Rose's and Kaiser's attorney's fees. Commonwealth appealed and Sears cross-appealed.
The Appellate Division reversed the trial court judgment. It refused to impose liability on Commonwealth because Kaiser's
insurance policy did not include a provision protecting him against the risk of attorney defalcation, and because Gillen was Kaiser's, not Commonwealth's, agent. The court granted Sears the right to foreclose on the condominium and denied an award of counsel fees to Rose and Kaiser. It urged the Fund to act promptly in order to mitigate the harm to Kaiser.
This case turns on the specific relationships between the parties and the roles and responsibilities of the several parties in completing a real-estate-title closing. We therefore consider, first, whether those relationships implicate principles of agency that should govern the resolution of this controversy. The issue under such an analysis is whether a closing attorney who has been retained by the purchaser may properly be found to be the agent of the title-insurance company for the purpose of applying the purchase moneys to satisfy and cancel an existing mortgage, securing clear title for the purchaser, and obtaining from the carrier a title-insurance policy covering that title. As noted, although the trial court did not rely on agency principles as the primary basis of its determination, it did find that Gillen was Commonwealth's agent in its dealings with Kaiser and thus that Commonwealth would be liable for Gillen's misconduct under the law of agency.
An agency relationship is created when one party consents to have another act on its behalf, with the principal controlling and directing the acts of the agent. Arcell v. Ashland Chem. Co., 152 N.J. Super. 471, 494-95, 378 A.2d 53 (Law Div.1977); 2A C.J.S. Agency § 37 (1972); Restatement (Second) of Agency § 1 (1958). There need not be an agreement between parties specifying an agency relationship; rather, "the law will look at their conduct and not to their intent or their words as between themselves but to their factual relation." Henningsen v. Bloomfield Motors, 32 N.J. 358, 161 A.2d 69 (1960) (finding agency relationship
between auto manufacturer and car dealer). "Implied authority may be inferred from the nature or extent of the function to be performed, the general course of conducting the business, or from particular circumstances in the case." Carlson v. Hannah, 6 N.J. 202, 212, 78 A.2d 83 (1951). Even if a person is not an "actual agent," he or she may be an agent by virtue of apparent authority based on manifestations of that authority by the principal. See C.B. Snyder Realty Co. v. National Newark Banking Co., 14 N.J. 146, 154, 101 A.2d 544 (1953); Restatement (Second) Agency § 8 (1958). Of particular importance is whether a third party has relied on the agent's apparent authority to act for a principal. N. Rothenberg & Son v. Nako, 49 N.J. Super. 372, 382-83, 139 A.2d 783 (App.Div.1958). Moreover, direct control of principal over agent is not absolutely necessary; a court must examine the totality of the circumstances to determine whether an agency relationship existed even though the principal did not have direct control over the agent. 2 C.J.S. Agency § 36, at 599-600 (1972).
Critical to the question of agency in this case are the specific role and functions undertaken by the closing attorney and the extent to which those activities were authorized and directed by the title-insurance company and served its specific purposes in the title closing. The backdrop to our consideration of those factors is the importance of real-estate title insurance and the essential involvement and participation of title insurers in completing the transfers of real-estate titles.
In addressing those matters, we note that the closing in this case took place in Bergen County, in the northern part of the state. (The division between north and south Jersey was described at the trial as roughly paralleling the division between telephone area codes in New Jersey -- 201 [now 201 and 908] and 609.) The locale is significant because it sheds light on the function of title-insurance carriers in effectuating real-estate closings, the role and responsibilities of the closing attorney with
respect to obtaining title insurance, and the relationship between the attorney and the ...