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New Jersey Lawyers' Fund For Client Protection v. First Fidelity Bank

July 9, 1997

NEW JERSEY LAWYERS' FUND FOR CLIENT PROTECTION, PLAINTIFF-RESPONDENT,V. FIRST FIDELITY BANK, N.A., DEFENDANT-APPELLANT, AND ALLSTATE INSURANCE COMPANY; WACHOVIA BANK AND TRUST CO., N.A.; GOVERNMENT EMPLOYEES INSURANCE COMPANY; RIGGS NATIONAL BANK; CIGNA INSURANCE COMPANY; CONNECTICUT NATIONAL BANK; THE TRAVELERS INDEMNITY COMPANY; NATIONAL RAILROAD PASSENGER CORP.; FIRST OMNI BANK, N.A.; CAMBRIDGE MUTUAL FIRE INSURANCE COMPANY; BAY BANK MIDDLESEX; STATE OF NEW JERSEY, DEPARTMENT OF THE TREASURY; NEW JERSEY NATIONAL BANK; THE HOME INSURANCE CO.; CITICORP (CITIBANK); CSC INSURANCE SERVICES; THE FARMERS' MUTUAL FIRE ASSURANCE ASSOCIATION OF NEW JERSEY; ESE CORP.; MCA INSURANCE COMPANIES; MIDLANTIC NATIONAL BANK; EMPLOYERS REINSURANCE CORPORATION; BOATMEN'S BANK OF MARSHALL; MERCER MUTUAL INSURANCE CO.; PRUDENTIAL COMMERCIAL INSURANCE COMPANY, AND NEW JERSEY AUTOMOBILE FULL INSURANCE UNDERWRITING ASSOCIATION AND MARKET TRANSITION FACILITY OF NEW JERSEY, DEFENDANTS-RESPONDENTS.


On appeal from the Superior Court of New Jersey, Law Division, Mercer County.

Approved For Publication July 9, 1997.

Before Judges King, Keefe and Conley. The opinion of the court was delivered by King, P.j.a.d.

The opinion of the court was delivered by: King

The opinion of the court was delivered by

KING, P.J.A.D.

I.

In 1968 the Supreme Court adopted a Rule authorizing and creating a fund, currently called the "New Jersey Lawyers' Fund for Client Protection" (Lawyers' Fund) *fn1, to reimburse clients who sustain losses caused by dishonest members of the New Jersey bar. The Lawyers' Fund is administered by a seven-member Board of Trustees (Trustees) appointed by the Supreme Court. R. 1:28-1. "The trustees shall adopt rules and regulations, consistent with these rules and subject to the approval of the Supreme Court, governing the administration of the Fund, the procedures for the presentation, consideration and payment of claims, and the exercise of their investment powers." R. 1:28-1(d). The Lawyers' Fund is financed primarily through mandatory annual contributions from New Jersey attorneys. *fn2 R. 1:28-2. The Trustees are authorized in "their sole discretion" to determine which claims "merit reimbursement from the Fund and the amount, time, manner, conditions and order of payment of reimbursement." R. 1:28-3(b). The Trustees may require a claimant to execute an assignment, subrogation agreement, trust agreement, and a promise to cooperate with the Trustees in making or prosecuting claims or charges against any person as a condition to payment from the Lawyers' Fund. R. 1:28-3(e).

In this case the Lawyers' Fund paid fifteen former clients of James V. Higgins, Esquire, now deceased, who had settled their tort claims without the clients' knowledge, forged the clients' signatures, and embezzled the clients' funds. The Higgins' clients assigned their rights to the Lawyers' Fund. The Lawyers' Fund, as assignee and subrogee of the defrauded clients, brought a suit for conversion against the depositary bank, First Fidelity Bank (FFB), for accepting the clients' forged indorsements. The Law Division Judge granted summary judgment to the Lawyers' Fund. FFB appeals contending (1) the banks' liability for accepting the forged indorsements was not the proximate cause of the clients' losses, and (2) the transfer of the loss from the Lawyers' Fund to an "innocent" party violates public policy and the goals of the Lawyers' Fund. We disagree and affirm.

II.

The facts are not in dispute. James V. Higgins, admitted to practice law in New Jersey in 1965, was a sole practitioner who maintained offices in South Amboy, New Jersey. He died on September 1, 1992. After his death, his widow discovered that he had settled a number of personal injury actions without the knowledge of the clients, forged their signatures on the settlements checks, negotiated checks, and stolen the funds.

The Lawyers' Fund made an application to the Superior Court, Chancery Division, Middlesex County, for the appointment of a custodial receiver for the Higgins estate, including the former law practice. The custodial receiver recovered about $208,000 for the benefit of Higgins' creditors, representing money stolen from clients and used by Higgins for the purchase and maintenance of real estate owned by him and his widow.

Simultaneously with the appointment of the custodial receiver the Lawyers' Fund began processing claims against Higgins and ultimately paid $292,000 on twenty-six claims involving his dishonest conduct. Upon payment of the claims, the Lawyers' Fund received an assignment from each of the claimants of their claims against Higgins and any other party involved in the transaction giving rise to the claims.

III.

On September 19, 1994 the Lawyers' Fund filed a forty-five count complaint, as assignee and subrogee of fifteen former Higgins clients, against various banks and insurance companies seeking damages for conversion and for paying checks with forged indorsements. Appellant First Fidelity Bank (FFB) was one of the banks sued by the Lawyers' Fund. On December 12, 1994 FFB answered the complaint, asserted seventeen defenses and cross-claimed against the other defendants for indemnification and contribution. Several other defendant banks answered the complaint (and filed cross-claims against the other defendants): Wachovia Bank of N.A.; Shawmut Bank of Connecticut, N.A.; Baybank Boston, N.A.; Citibank, DE.; Boatman's Bank of Marshall, and Midlantic Bank, N.A., Government Employees Insurance Co. (GEICO) and Riggs National Bank jointly answered the complaint and cross-claimed against the various defendants.

In August 1995 the banks and GEICO jointly moved for summary judgment. The Lawyer's Fund cross-moved for summary judgment. Judge Shuster (1) granted summary judgment in favor of the Lawyers' Fund and against FFB for two-thirds (recovery net of fee) the face amount of the drafts; (2) granted summary judgment in favor of the other payor banks, pay-through-banks, and insurance companies and against the Lawyer's Fund; and (3) denied FFB's motion for summary judgment.

On September 25, 1996 First Union National Bank, successor of FFB, filed a notice of appeal with this court. FFB and the Lawyers' Fund are the only parties participating in this appeal. FFB contends that the Lawyers' Fund has no right to maintain a subrogation action against anyone other than the defrauding attorney. We disagree.

IV.

Both parties look to the history of R. 1:28 to support their respective positions on whether the Lawyers' Fund can subrogate against the bank. FFB cites various comments made prior to the adoption of the Clients' Fund rule by Dickinson R. Debevoise, the original chairman of the Clients' Security Fund Committee, to demonstrate that the "only collateral source or subrogation action that appears to have been contemplated [at the time of the rule's proposal] is an action against the dishonest attorney." The Lawyers' Fund argues that when the Clients' Fund rule was originally adopted, the philosophy was that the Fund would be a source of last resort for defrauded clients but that over the years the policy governing the Lawyers' Fund has changed, as demonstrated by textual changes in the Rule. Now, the Lawyers' Fund can pay a client before the client pursues the collateral source and the Lawyers' Fund can then itself pursue the collateral source. 1. The Original Proposed Rule, R. 1:22A.

In 1968 the Trustees of the New Jersey State Bar Association approved the Clients' Security Fund Supreme Court Committee's proposal for a court rule governing the proposed Clients' Security Fund. 91 N.J.L.J. 329 (May 23, 1968). The proposed rule, R. 1:22A, authorized and created a fund called the "Clients' Security Fund of the Bar of New Jersey." "The purpose of the Fund shall be to maintain the integrity and protect the good name of the legal profession by reimbursing, to the extent deemed proper and feasible by the Trustees, losses caused by the dishonest conduct of members of the Bar of the State of New Jersey." Proposed R. 1:22A-1(c) printed in 91 N.J.L.J. 329. Under the proposed rule the Trustees had the power to "enforce claims for restitution, arising by subrogation or assignment or otherwise." Proposed R. 1:22A-3(a)(4) printed in 91 N.J.L.J. 329. The Committee proposed the following as R. 1:22A-8(e):

Claims.

(e) In addition to other conditions and requirements the Trustees may require each claimant, as a condition of payment, to execute such instruments, to take such action, and to enter such agreements as the Trustees may desire, including assignments, trust agreements and promises to co-operate with the Trustees in making and prosecuting claims or charges against any person.

[91 N.J.L.J. 329.]

There was no mention of "collateral sources" in the proposed rule. The Supreme Court placed the proposal on the agenda of the May 24, 1968 Judicial Conference. 91 N.J.L.J. 329.

2. The Original Rule, R. 1:22A.

On December 17, 1968 the Supreme Court adopted the Clients' Security Fund rule, R. 1:22A, which became effective on January 1, 1969. 92 N.J.L.J. 1 (January 2, 1969). R. 1:22A-1 stated that the purpose of the Clients' Security Fund of the Bar of New Jersey "is the reimbursement, to the extent and in the manner provided by these rules, of losses caused by the dishonest conduct of members of the bar of this State." 92 N.J.L.J. 1. This "purpose" language has remained constant. See the current R. 1:28-1(a). The "Payment of Claims" section of the original rule stated in pertinent part:

(a) Eligible Claims. The trustees may consider for payment all claims resulting from the dishonest conduct of a member of the bar of this State acting either as an attorney or fiduciary, provided that:

(4) The trustees are satisfied that there is no other collateral source, such as a fidelity bond for the reimbursement of the claim.

[R. 1:22A-3(a)(4) published in 92 N.J.L.J. 1.]

The Supreme Court adopted the proposed provision giving the trustees the right to require a claimant to enter into agreements including assignments, subrogation agreements, trust agreements or promises to cooperate in "making and prosecuting claims or charges against any person." R. 1:22A-3(e). Under R. 1:22A-5, "General Powers of Trustees" the Supreme Court gave the trustees the general power "(b) to enforce claims which the Fund may have for restitution." 92 N.J.L.J. 9.

On January 23, 1969 the trustees adopted "rules and regulations" for the Clients' Fund, which were approved by the Supreme Court on February 13, 1969. 92 N.J.L.J. 113 (Feb. 20, 1969). The regulation concerning the consideration of reimbursement claims provided in pertinent part:

The trustees shall not allow a claim where there is a collateral source, such as a fidelity bond, for the reimbursement of the claim, and except in cases of extreme hardship the trustees shall not allow a claim until the claimant ...


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