On appeal from Superior Court of New Jersey, Chancery Division, Cape May County, C-19-97.
Before Judges Skillman, Carchman and Wells.
The opinion of the court was delivered by: Carchman, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Following a real estate closing, the buyer's attorney absconded with the sale proceeds. The sale was conducted pursuant to an order of the bankruptcy court providing that the property was to be sold free and clear of all liens with the liens to attach to the proceeds. As a result of the attorney's defalcation, the existing first mortgage remained unpaid, and the first mortgagee then brought an action against the title company and other related parties seeking, among other relief, satisfaction of the first mortgage. On cross-motions for summary judgment, the chancery judge dismissed the complaint and entered judgment in favor of the title company, holding that the title company had no obligation to satisfy the outstanding mortgage. Plaintiff appeals, and we affirm.
These are the facts presented to the judge on the parties' cross-motions for summary judgment. Plaintiff GE Capital Mortgage Services ("plaintiff" or "first mortgagee") held a first mortgage on property located in Avalon and owned by James and Nancy Hudanich (collectively "Hudanich").*fn1 Hudanich filed a bankruptcy petition in the United States Bankruptcy Court for the District of New Jersey. Plaintiff received relief from the automatic bankruptcy stay, and, as the mortgage was in default, filed a foreclosure action. Hudanich, thereafter, filed a motion before the bankruptcy court to sell the Avalon property to defendant Robert Nils Herdelin "free and clear of liens." See 11 U.S.C.A. § 1123(a)(5)(D). The bankruptcy judge entered an order authorizing and approving the sale to Herdelin, free and clear of liens and encumbrances "with said liens and encumbrances to attach to the proceeds of the sale."
Herdelin retained defendant Joseph Privetera, Esquire, to represent him at the closing. To finance the purchase, Herdelin obtained a $350,000 mortgage loan from defendant New Jersey Mortgage and Investment Corp. (N.J. Mortgage) to be secured by a first mortgage on the Avalon property. Prior to closing, N.J. Mortgage had obtained from defendant New Jersey Title Insurance Co. (the title company) a closing protection letter insuring N.J. Mortgage against loss by reason of Privetera's failure to comply with the closing instructions.
At closing on June 16, 1999, a deed was received from Hudanich, the mortgage loan was closed, and Privetera received the proceeds of the sale of $694,146.75 to await an order of the bankruptcy court authorizing disbursements. Significantly, N.J. Mortgage's lien was insured by the title company as a valid first lien on the property, even though no proceeds had been disbursed, and plaintiff's mortgage remained of record. Herdelin declined title insurance. The parties understood that Privetera was holding the funds in escrow pending further instructions from the bankruptcy court. Plaintiff did not attend the closing.
On November 13, 1996, the bankruptcy judge signed a consent order authorizing disbursement of the proceeds of the sale of the Avalon property. Although the order identified Privetera as "settlement agent for New Jersey Title Insurance Company," neither N.J. Mortgage nor the title company appeared in the bankruptcy proceeding resulting in this order. After Privetera was notified of the consent order and asked to forward the funds to plaintiff's counsel, he confessed that he had misappropriated all of the proceeds from the closing. He was subsequently prosecuted, imprisoned and disbarred.
Plaintiff then filed a motion with the bankruptcy court seeking to reinstate its lien on the Avalon property. The motion was denied. Following denial of the motion, plaintiff filed an action in the Chancery Division seeking, among other relief, damages from the title company representing payment of plaintiff's outstanding and existing first mortgage.*fn2
During the bankruptcy proceedings, Herdelin refinanced the property with a first mortgage loan from defendant Conti Mortgage Corp., which was insured by defendant First American Title Insurance Co., thus satisfying N.J. Mortgage's obligation.
Plaintiff's theory of recovery against the title company was premised on the contention that Privetera was acting as agent for the title company, N.J. Mortgage and Herdelin when he absconded with the proceeds of sale. In addition, plaintiff asserted that it was a third-party beneficiary of any contract between the title company and N.J. Mortgage, or N.J. Mortgage and Herdelin. The motion judge rejected plaintiff's argument and concluded that any agency relationship between Privetera and the title company had ceased prior to the defalcation, and plaintiff was not a third-party beneficiary of any agreement between defendants.
In asserting its claim against the title company, plaintiff relied on two Supreme Court decisions — Sears Mortgage Corp. v. Rose, 134 N.J. 326 (1993), and Clients' Sec. Fund of the Bar of New Jersey v. Security Title and Guar. Co., 134 N.J. 358 (1993) (Clients' Security) — which addressed the rights of parties in somewhat analogous factual circumstances. We detail the facts and holdings of both cases.
In Sears, the Court held that an attorney retained by a purchaser to represent him in the closing of a loan functioned as the agent of the title company, and, as a result, the title company must assume the losses resulting from the attorney's embezzlement of funds intended to pay-off an existing mortgage. 134 N.J. at 346. The purchaser, Kaiser, retained attorney Gillen to represent him in the sale of his home and the purchase of a condominium. Gillen requested a title insurance commitment from Commonwealth Land Title Insurance Company (Commonwealth) for Kaiser. The closing took place at Gillen's office with the seller's attorney and Gillen agreeing that Gillen would pay off the mortgage with the proceeds of the sale. However, contrary to this agreement, Gillen never paid the mortgage. Instead, he misappropriated the closing funds, absconded, and was later criminally ...