Litigation

N.J. Supreme Court: Title Insurers Not Liable For Attorney's Misappropriation Of Funds

TRENTON, N.J. - (Mealey's) A unanimous New Jersey Supreme Court on Aug. 2 found that two title insurance companies cannot be held liable for an attorney's misappropriation of a couple's closing funds for a home sale because no agency relationship existed between the companies and the attorney at the time of the occurrence (New Jersey Lawyer's Fund for Client Protection v. Stewart Title Insurance Guaranty Co., No. A-44-09, N.J. Sup.).

The state's high court reversed an appellate court's finding that an agency relationship did exist pursuant to Sears Mortgage Corp. v. Rose (134 N.J. 326 [1993]) and remanded the case to the Mercer County Superior Court for judgment to be reinstated in favor of Stewart Title Insurance Company Guaranty and Atlantic Title Agency Inc. 

In 2004, Stuart and Susan Goodman sold their Bedminster, N.J., home and received approximately $325,000 in proceeds.  Attorney Richard Pizzi represented the Goodmans in closing on the sale of the home and the purchase of the couple's new home in Somerset, N.J.  Before closing on the purchase of their new home, the Goodmans instructed Pizzi to disburse $50,000 of the proceeds to them and to put the remainder in a trust account until closing.  Pizzi ordered title insurance for the Somerset property from Stewart and Atlantic.  On May 25, 2004, Atlantic sent Pizzi but not the Goodmans a commitment for title insurance.  The commitment letter stated that the attorney closing on the property was not the agent for the title insurance company and that the company assumed no liability for any loss caused by the attorney's mistake or misapplication of funds.

The Goodmans later learned that Pizzi had misappropriated all or most of their funds before ordering title insurance in May 2004.  The couple filed an unsuccessful claim with Stewart to cover their loss and later filed a claim with the New Jersey Lawyers' Fund for Client Protection, which was established by the New Jersey Supreme Court to reimburse clients for losses caused by the dishonesty of lawyers.  The New Jersey Lawyers' Fund for Client Protection awarded the Goodmans $307,456 and attempted to obtain reimbursement from Stewart, Atlantic and Pizzi by filing suit in the Mercer County Superior Court.  The trial court judge awarded summary judgment to the title insurance companies after finding that it would be unfair to hold them liable for Pizzi's conduct and that an agency relationship had not existed until after Pizzi misappropriated the Goodmans' funds. The Lawyers' Fund appealed.

The appeals court overturned the ruling, finding that an agency relationship existed between Pizzi and the companies because the Goodmans did not receive a copy of the commitment letter.

The high court held that courts must examine a totality of the circumstances when determining if an agency relationship exists in a situation where a principal did not have control over the agent.  The panel held that in the present case, the title insurers could not be held liable because Pizzi's misappropriation occurred before an agency relationship was formed.

[Editor's Note:  Full coverage will be in the August issue of Mealey's Litigation Report: Mortgage Lending.  In the meantime, the opinion is available at www.mealeysonline.com or by calling the Customer Support Department at 1-800-833-9844.  Document #85-100820-006Z.  For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]

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For more information, call editor Shane Dilworth at 610-205-1106, or e-mail him at Shane.Dilworth@lexisnexis.com.