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Chicago Title Insurance Company v. Ellis

409 N.J. Super. 444, 978 A.2d 281 (App. Div. 2009)

CONVERSION — The exercise of dominion or control over money constitutes conversion unless the person in possession of the money is unaware of fraud underlying the source of the funds or has received the money in exchange for fair value.

A woman was part of a scheme to obtain millions of dollars through the processing of fraudulent mortgage applications. Her parents received money over a five-month period. They admitted receiving the money and acknowledged that the money was part of the money fraudulently taken in the scheme. The fraud involved conspirators submitting false documents to a lender who approved mortgage loans in amounts greater than the actual contract prices for the houses. The conspirators retained the excess over the actual purchase price after each of the fraudulent transactions closed. A title company covered the lender’s losses and was subrogated to the lender’s claims after settling with the lender.

The title company sued the parents, and the lower court held in favor of the title company on its cause of action for conversion. The parents appealed, asserting that they had no knowledge of the fraud when they received the money. The father claimed that the money was to repay loans he had made to his daughter. The mother contended that she was only a nominal custodian with no dominion or control over most of the money she received.

The Appellate Division affirmed in part and reversed in part. The Court held that the exercise of dominion or control over money constitutes conversion, unless the person in possession of the money is unaware of the fraud and received the money in exchange for fair value. It ruled that, as to the bulk of the funds, the lower court correctly concluded that the parents had converted the property and were liable to repay it. As to a small portion of the funds, the Court found that there was a disputed issue of fact as to value allegedly exchanged. Thus, the Court reversed the lower court as to that portion of the funds that represented the amount that was claimed by the parents to be repayment of money previously lent to their daughter. The Court accepted, as true, the parents’ contention that they did not know about the illegal scheme. The Court noted that parents did not dispute that the source of various deposits made by their daughter to certain accounts was the fraudulently obtained loan proceeds. The mother claimed that she was designated as a trustee on one of the accounts solely as a means to provide access to the account in the event her daughter was unable to access it due to disability or unavailability.

The Court ruled that New York law was applicable to the accounts because the account was located in New York and was set up as a Totten Trust account. Under New York law she had dominion and control, despite her assertions to the contrary, because she had full access and signatory rights to the account. In addition, the Court noted that even if New York law did not apply, under applicable New Jersey statute, N.J.S.A. 17:16I-4(d), the account belonged to the mother because a trust account belongs to the trustee unless otherwise specified by contract or other clear and convincing evidence (which was not present here). Moreover, the Court held that she exercised control over the account when she deposited and withdrew money from the account. The father claimed that although he had dominion and control of the funds, part of the money was used to repay him for money he had lent to his daughter to renovate her home. The Court found that there was no evidence presented to support his assertion that his daughter had a source other than the fraudulent proceeds for the money that she transferred. Thus, it rejected the claim that the money may have come from a source other than the illegally obtained funds. According to the Court, the tort of conversion has been applied to money, although it has been historically applied with respect to chattels. It also held that courts have restricted its application to money to avoid turning a claim based on breach of contract into a tort claim. It rejected the parents’ assertion that the lender did not have title to money lent to others because it believed that the funds would be used as loan proceeds to purchase houses. The Court rejected that argument, ruling that it was mistaken because there was no debtor-creditor relationship between the lender and the parents of the woman who defrauded the lender; they were never the intended debtors; and neither the woman nor her parents ever obtained the right to exercise dominion or control over the money. Accordingly, it ruled that when the proceeds from the fraudulent loan were paid over to the parents, those proceeds were still the personal property of the lender. It held that here, the parents’ wrongfully exercised dominion or control over property of the lender without authorization and to the exclusion of the owner’s rights in that property. It pointed out that conversion does not require that a defendant have an intent to harm the rightful owner or know that the money belongs to another, even if the party who converts the funds acts in good faith and in ignorance of the rights or title of the owner. The Court, however, mentioned that despite the exercise of dominion or control over money belonging to another, one who innocently receives the money in exchange for something of equivalent value (but not in exchange for a gift), without participation in or knowledge of the fraud, has a greater right to keep the money than the victim of the fraud has to its return from that person so long as the recipient did not know that the money belonged to another.

In the instant case, the mother’s sworn statement that she made a loan to her daughter was admissible evidence and sufficient to create a disputed issue of fact about whether she gave fair value for the payment to discharge the debt. As to the father, because the accounting he provided, if true, could support a claim that some of the payments received by his daughter represented repayment of moneys owed him, a genuine issue of disputed fact was presented only as to that amount. It concluded that the father had no factual defense based on alleged repayment of loans to him for the balance of the sum he received. The balance of the funds was thus deemed, by the Court, to be converted funds.

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