On appeal from Superior Court, Chancery Division, Union County.
Petrella, Baime and Conley. The opinion of the court was delivered by Petrella, P.J.A.D.
The issue is whether a law firm can apply an attorney's common law retaining lien against monies it received in trust for a special purpose, where effectuation of that purpose is subsequently frustrated or, as now appears,*fn1 resolved permanently or temporarily in some other fashion. The law firm of Lowenstein, Sandler, Kohl, Fisher & Boylan (Lowenstein firm) appeals from a March 10, 1993 Law Division order that directed the firm to disburse $132,180.80, plus any interest thereon, to plaintiff Home Savings Bank of America, SSB (Home Savings), with the direction that it be applied to reduce the mortgage balance owed by Malcolm and Rhoda Scharf.
Although various events transpired, it is unnecessary to detail them at length -- a brief review will suffice. The Lowenstein firm's representation of the Scharfs apparently began in 1990. It initially represented the Scharfs in negotiating a lease between them, as landlord, and Sixth Avenue Electronics (Sixth Avenue), as tenant, for commercial property owned by them on Route 22 in Springfield.
As a result of the new tenancy, the Scharfs applied for a mortgage to refinance the property. A dispute arose, however, between the Scharfs and Sixth Avenue, primarily over an alleged failure of the Scharfs to repair a leaking roof. Litigation resulted between the Scharfs and Sixth Avenue. An order was entered directing Sixth Avenue to pay rent from and after January 1, 1992, into an escrow account held by its law firm. During the period of negotiations with Sixth Avenue, the Scharfs failed to make mortgage payments to Home Savings from January 1 to April 1, 1992.
As a result, Home Savings declared the mortgage in default and announced its intention to proceed with foreclosure. During this period, the Lowenstein firm represented the Scharfs regarding the Sixth Avenue dispute, attempts to refinance with another bank, and efforts to avoid foreclosure by Home Savings.
The Scharfs entered into a settlement agreement with Sixth Avenue on July 13, 1992. As a result, the Lowenstein firm deposited into its attorney trust account $257,772.42, which represented the rent and tax monies paid into escrow by Sixth Avenue during the litigation, plus interest, and $70,000 in cash payments representing a portion of the Scharfs' claimed damages. The settlement agreement provided for a disbursement of certain funds and the balance was to be disbursed in accordance with section three of the settlement agreement, which provided:
The balance of the principal remaining in the rent escrow, including the accrued interest on the rent escrow, shall be used first to pay overdue real estate taxes, if any, and then to pay any arrearages in the Home Savings mortgage. The balance then remaining shall be remitted to the Scharfs.
Pursuant to this provision the Lowenstein firm tendered $132,015.42 to Home Savings on July 16, 1992, in an attempt to reinstate the mortgage and prevent foreclosure. On July 17 Home Savings returned the trust account check because at that time it would not accept a partial payment. It instead demanded a full mortgage payment of $1,555,509.24. Home Savings thereafter instituted foreclosure proceedings.
As of September 8, 1992, the Lowenstein firm had rendered periodic statements for services that aggregated $141,229.99 as of that date. The Lowenstein firm requested that the funds it held in its trust account be used to pay its bill because Home Savings would not accept a partial payment. The Scharfs rejected this and requested the firm to turnover the funds to them. The Lowenstein firm then proposed to retain $80,000 of the escrow
fund and disburse $50,000 to the Scharfs.*fn2 The Scharfs also ...