Chemical Bank of New Jersey, N.A. v. Bailey

296 N.J. Super. 515, 687 A.2d 316 (App. Div. 1997)
  • Opinion Date: January 21, 1997

MORTGAGES; ATTORNEYS; TITLE INSURANCE—This case deals with two issues arising out of a mistake by an attorney that led to a lender failing to get a first mortgage position. The attorney is released because the title company settled with the attorney’s client. The title agency is required to indemnify its title company under the agency agreement’s provision concerning closing protection letters.

In June, 1981, a title company and a title agent executed a title insurance underwriting agreement wherein the agent became an agent for the title company. As part of this agreement, the agent agreed to be liable to the title company for the entire amount of any loss attributable to the agent’s negligence or fraud. The agent would be liable to the title company only for the first $500.00 of any loss not due to the title agent’s negligence or fraud. In July, 1990, the Baileys, fee title owners of real property, retained the services of an attorney to close an $80,000.00 refinancing loan made by a mortgage company. The mortgage company required that the mortgage securing its loan be a first lien on the property and that the Baileys obtain title insurance insuring the mortgage as a first lien. At the time, the property had a mortgage and home equity credit line from a bank. When the closing attorney contacted the agent to obtain title insurance, the agent’s requirements included execution and recording of all instruments necessary to extinguish all other liens. Shortly thereafter, the title company sent a copy of its indemnity letter to the mortgage company, the agent’s customer, as required by the underwriting agreement. Although the closing attorney forwarded a check representing the full amount of money owed to the bank to pay the existing home equity loan, the bank failed to send either a payoff statement or the original mortgage, endorsed for cancellation. The closing attorney made no efforts following closing to obtain a discharge or cancellation of the bank’s mortgage. The closing attorney paid the agent for the title policies, but they were never issued because she failed to provide the agent with evidence that the bank mortgage had been canceled.

In August 1991, $31,500.00 was advanced to the Baileys’ son from the bank home equity credit line, despite the fact that this credit line was supposed to have been withdrawn at the closing in June, 1990. When no payments were made on the advances, the bank brought a foreclosure action that named the mortgage company as a defendant since it was the holder of the mortgage recorded subsequent to the bank mortgage. The title company answered on behalf and in the name of its insured, the mortgage company, and counterclaimed against the bank, seeking first lien protection based on the theory of equitable subrogation. The title company also filed a third-party complaint against the Baileys, the closing attorney and the agent, asserting that if the mortgage company has only a junior lien, any damages sustained by the mortgage company were the result of wrongful conduct by those parties. The agent sought contribution and indemnification from the closing attorney, the Baileys and the title company. In May, 1994, the mortgage company, through the title company, purchased the note and mortgage of the bank and took an assignment of the mortgage and the foreclosure action. The mortgage company then amended its claims to substitute the title company as its subrogee and pursued the Baileys, the closing attorney, and the agent for monies advanced to purchase the bank’s note and mortgage. Prior to trial, the Baileys entered into a settlement with the title company. The title company then sought to recover costs and damages from the closing attorney, based on legal malpractice, and from the agent based on the allocation of loss provisions in the underwriting agreement. The trial court found the closing attorney not liable to the title company because the settlement with the Baileys had prejudiced her subrogation rights, and that the agent was not liable to the title company because the loss provisions of the underwriting agreement were unenforceable. On appeal, the title company claimed: (1) the settlement with the Baileys does not preclude claims against the closing attorney based on her malpractice; (2) the closing attorney is still liable to the extent her failure to obtain a discharge or cancellation of the bank’s mortgage was a proximate cause of the loss sustained; and (3) the trial court incorrectly interpreted the underwriting agreement, and the title company should be able to recover damages caused by their indemnification letter, as agreed to in the underwriting agreement.

The Superior Court upheld the trial court’s finding that the title company impaired the closing attorney’s right of subrogation when it settled with the Baileys without the closing attorney’s approval, thereby depriving her of an opportunity to prove her malpractice was not the proximate cause of any loss sustained by the title company. Had there been no settlement with the Baileys, the closing attorney would have had to indemnify the title company for any losses arising from her malpractice, thus giving her subrogation rights in the title company’s claim against the Baileys. By accepting a deed in lieu of foreclosure from the Baileys, the title company satisfied all claims arising out of the foreclosure action, and it is well settled that even though the closing attorney may be liable, once a claimant receives satisfaction of a judgment from one party, the claimant no longer has rights against other parties based on the same claim.

As to the title company’s claim against the agent, the Superior Court ruled that the trial court erred in holding the underwriting agreement unenforceable. The Court stated that parties to a contract may limit their liability by allocating the risk of loss between them. Since the Court refused to write a different contract than the one the parties entered into, the only issues are whether the risks were clearly allocated such that each party knew the extent of its own potential liability, and whether there was inequitable bargaining power. The Court found the relevant provisions of the underwriting agreement to be clear and both parties to be sophisticated entities who deal regularly with contract liability, and therefore, the loss provisions were enforceable. The Court found the agent liable to the title company and remanded the case to determine damages, counsel fees, and costs. [Note: Certification has been denied.]