On appeal from the Superior Court, Appellate Division, whose opinion is reported at 351 N.J. Super. 407 (2002).
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
Verniero, J., writing for a majority of the Court
In this appeal, the Court is asked whether an insurer is entitled to consider coverage void ab initio as to a law firm or any of its attorneys upon discovering that the managing partner of the firm misrepresented certain material facts in the application process.
Edward Lawson, Jr., Kenneth E. Wheeler, and Craig J.J. Snyder, attorneys-at-law, formed a limited liability partnership known as Wheeler, Lawson & Snyder, L.L.P. (the firm). Lawson was the only partner licensed to practice in New Jersey. Wheeler was licensed in Connecticut and the District of Columbia, though he acted as closing agent for several real estate transactions in New Jersey, while Snyder maintained the firm's Manhattan office and performed little or no work in the firm's New Jersey office. Both Lawson and Wheeler issued checks from the firm's trust account, but Wheeler was primarily responsible for the firm's trust and business accounts. Snyder had no responsibility in respect of those accounts. In addition, Lawson considered Wheeler the firm's managing partner.
In late 1997 or early 1998, Lawson discovered that Wheeler was improperly transferring money between various client accounts. Wheeler advised Lawson that this was necessary to cover firm expenses. Lawson not only accepted the explanation, but also joined in the "kiting" scheme. In December 1997, Wheeler applied for professional liability insurance through Jamison Special Risk, Inc. (Jamison), a domestic broker for Certain Underwriters at Lloyd's, London (Underwriters). The application contained a question as to knowledge of "[a]ny acts, error or omissions in professional services that may reasonably be expected to be the basis of a professional liability claim[,]" to which Wheeler responded "no." Subsequently, Wheeler signed a warranty statement and a oneyear policy was issued effective April 19, 1998. The policy was cancelled effective January 16, 1999, for failure to pay the required premium. Jamison wrote to Wheeler offering to reinstate the policy should the premiums be satisfied and a renewed warranty statement executed.
Meanwhile, the firm was notified that the Office of Attorney Ethics (OAE) would be conducting an audit of the firm's books, in response to three grievances. The notice is dated January 8, 1999. On January 22, 1999, Wheeler executed the new warranty, affirming in part that he was "not aware of any claims being made" or of "any circumstances or any allegations or contentions as to any incident, which may result in a claim being made against the firm or any of its past or present owners, partners, shareholders, corporate officers or employees or its predecessors in business." Wheeler delivered the warranty to Jamison by faxing it on January 26, 1999. About a week later, Lawson was suspended from the practice of law and ultimately disbarred by the Supreme Court.
As a result of numerous defalcations, First American Title Insurance Company (First American) and Lawyers Title Insurance Corporation (Lawyers Title) (collectively, the title insurers) each paid claims to various individuals. The title insurers then filed complaints, seeking recovery from the firm and its partners. Unaware of these problems, Jamison notified Wheeler in February 1999 that the firm's policy had been reinstated. Snyder thereafter sent Jamison a notice of insurance claim regarding the above matters. The carrier denied those claims. Underwriters then filed a declaratory judgment action alleging that the firm's policy "was cancelled as of January 16, 1999" and that the purported reinstatement "was void by reason of the material misrepresentation set forth in the Warranty[.]" Snyder answered Underwriters' complaint and asserted certain affirmative defenses.
Following consolidation of actions and motions, the trial court held that the firm's insurance with Underwriters was not void and had not been cancelled properly, and granted summary judgment in favor of the title insurers and against Underwriters. The Appellate Division granted leave to appeal on behalf of Underwriters and reversed the trial court's determination in a reported decision. First American Title Ins. Co. v. Lawson, 351 N.J. Super. 407 (App. Div. 2002). The panel held that the policy was void for all purposes.
The Supreme Court granted the title insurers' motions for leave to appeal.
HELD: The firm's policy is void in respect of the firm as an entity and any defalcating partner, but not in respect of any innocent partner.
1. Under the Uniform Partnership Law, N.J.S.A. 42:1-1 to - 49 (UPL), any partner can execute any instrument, such as an application for insurance requiring the payment of premiums, and in so doing can bind the partnership as a whole in the ordinary course of its business. Also, when a firm is a limited liability partnership, a special rule exists to shield partners from incurring liability arising solely from the wrongful acts of fellow partners. (Pp. 11-13)
2. Equitable fraud provides that a party may rescind a contract where there is proof of (1) a material misrepresentation of a presently existing or past fact; (2) the maker's intent that the other party rely on it; and (3) detrimental reliance by the other party. In the context of an application for insurance, an additional inquiry must be made into whether the insured knew that the information was false when completing the application. (Pp. 14-15)
3. Rule 1:21-1C(a) provides that attorneys may engage in the practice of law as limited liability partnerships, so long as they comply with all rules governing the practice of law by attorneys. In addition, and to protect consumers of legal services from attorney malpractice, the partnership must maintain a minimum level of lawyers' professional liability insurance, as set forth in the rule. (Pp. 15-18)
4. Our case law provides Underwriters with the clear right to rescind Wheeler's coverage in the face of his blatant and direct misrepresentations and to consider the policy void insofar as that individual is concerned. Similarly, the carrier is entitled to rescind coverage in respect of Lawson, who knew or should have known that the forms submitted to the carrier contained false or misleading information. The carrier is also entitled to rescind its coverage for the firm as an entity because two of the firm's three partners had engaged in wrongful conduct and the managing partner, himself a wrongdoer, had concealed that conduct when applying for the firm's policy. Equity, however, does not warrant rescission of Snyder's coverage. Snyder was an innocent partner and to void his coverage solely because of his partners' wrongful conduct potentially would expose him to uninsured liability in a manner inconsistent with his expectations under the UPL and would leave him uninsured for any of his own actions, including simple malpractice, a harsh and sweeping result that would be contrary to the public interest. Finally, rescinding the policy as to Wheeler, Lawson, and the firm as an entity, but not in respect of Snyder, is consistent with rescission as an equitable remedy, which properly depends on the totality of circumstances in a given case and resides within a court's discretion. (Pp. 18-24)
The judgment of the Appellate Division is AFFIRMED in part and REVERSED in part. The matter is REMANDED to the APPELLATE DIVISION for further proceedings consistent with this opinion.
JUSTICE LaVECCHIA filed a separate, dissenting opinion stating that the entire insurance policy should be rescinded as to all parties because the policy would never have been issued but for the deceit of one partner, the complicity of a second partner, and the indifference of a third partner.
CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, LONG, ZAZZALI and ALBIN join in Justice VERNIERO's opinion. JUSTICE LaVECCHIA filed a separate, dissenting opinion.
The opinion of the court was delivered by: Verniero, J.
This case presents difficult questions concerning an attorney's exposure to uninsured liability while practicing in a law firm organized as a limited liability partnership. The firm's coverage also is at stake. Specifically, the firm's managing partner knowingly had made material misrepresentations when he applied to an insurer for malpractice coverage on behalf of the firm and its members. The Appellate Division concluded that such misrepresentations entitled the insurer to consider the firm's coverage void ab initio, that is, to treat that coverage as if it had never existed for any of the firm's attorneys or for the firm itself. We reverse in part, and affirm in part. We hold that the firm's policy is void in respect of the firm as an entity and any defalcating partner, but not in respect of any innocent partner.
The record in this case is extensive. We summarize only the procedural history and facts that are relevant to our disposition. The parties do not dispute those facts.
Edward Lawson, Jr. obtained his New Jersey law license in 1992. Kenneth E. Wheeler was licensed to practice law in Connecticut and in the District of Columbia, but was not licensed in New Jersey. Lawson and Wheeler formed a law partnership in late 1996 or early 1997. In the spring or summer of 1997, Craig J.J. Snyder joined the firm, which then became Wheeler, Lawson & Snyder, L.L.P. Snyder drew up a formal partnership agreement between the parties and registered the firm as a limited liability partnership with the New Jersey Secretary of State. During all times relevant to this action, Snyder was licensed to practice law in New York and maintained the firm's Manhattan office. Unlike Lawson and Wheeler, Snyder performed little or no work in the firm's New Jersey office, which was located in Guttenberg.
According to Lawson's deposition testimony, Wheeler acted as a closing attorney for several real estate transactions in New Jersey, even though he was not licensed to practice here. Consistent with that testimony, Wheeler acted as Lawson's own attorney in a closing involving residential real estate in Mahwah in January 1999.
Lawson further testified that he had "delegated" to Wheeler the authority to open and maintain the firm's bank accounts and to maintain the firm's account ledgers. Wheeler purportedly "knew everything that was going on with the books[.]" In that regard, the firm's "check writing system... [and] the on-line banking system [were] on [Wheeler's] computer." Lawson also indicated that Wheeler "did most, if not all, of the arrangements with the banks" in respect of distributing real-estate closing checks, regardless of which attorney actually had handled the particular transaction. All three partners apparently had signatory authority over the firm's business account. In a certification, however, Snyder indicates that he "never transferred any funds to, from, or within the [f]irm's New Jersey business or trust accounts." The record indicates that only Wheeler and Lawson issued checks from the firm's trust account. Lawson considered Wheeler the firm's managing partner.
In late 1997 or early 1998, Lawson discovered that Wheeler had been transferring money improperly from various client accounts, including that of Lawson's widowed mother, into other client accounts and into the firm's business account. When Lawson confronted Wheeler with that discovery, Wheeler responded that the monies were necessary to pay the firm's expenses. Rather than halt the practice, Lawson joined Wheeler in what became essentially
a "kiting" scheme whereby monies from one client trust account would be transferred to pay the obligations of another client. Monies were also being transferred from client trust accounts to the law firm's business account to pay expenses of the law firm, including partners' draws. On occasion, Lawson also used client trust account funds, including those of his mother, for his own personal use. By all accounts, Snyder was neither privy, nor a party, to this scheme.
On behalf of the firm and its members in December 1997, Wheeler applied for professional liability insurance through Jamison Special Risk, Inc. (Jamison), a domestic broker for Certain Underwriters for Lloyd's of London (Underwriters). Wheeler provided information required by the application and verified the application as a whole. For that purpose, ...