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Commonwealth Land Title Insurance Company v. Kurnos

340 N.J. Super. 25, 773 A.2d 726 (App. Div. 2001)

MORTGAGES; ATTORNEYS—A title company that waited more than six years after it first became aware that a closing attorney failed to close out a home equity line of credit is barred by the statute of limitations from collecting from the attorney even if the loss took place much later when the borrower defaulted.

Property owners retained an attorney to represent them in the refinancing of their home mortgage. The home was to be secured by a first mortgage and a title insurance company was to provide title insurance guaranteeing that the bank’s mortgage was the first lien on the property. The refinance was to discharge an existing first mortgage and a second mortgage. The second mortgage was a home equity line of credit. The attorney sought a “pay-off” letter and received a response with a pay-off figure and per diem charge. The letter also contained the following instructions: “[i]f you wish to close the account, we require a letter from either the customer or the acting attorney.” From the closing proceeds, both mortgages were satisfied, but neither the borrowers nor the attorney instructed the home equity lender to close the account, and the mortgage securing the home equity loan remained on the record. After the original first mortgage was canceled, the home equity mortgage moved into first position. Thereafter, the borrowers drew down an additional amount on their still available home equity line of credit. About nine months after the closing, the title company learned of the error and instructed the branch manager to see that the equity mortgage be discharged or postponed for the first mortgage. The home equity lender was unwilling to subordinate, postpone, or discharge its mortgage. In fact, it explained that there was insufficient equity in the property to allow it to do so comfortably. The attorney’s first inclination was to file an action against the home equity lender on the title company’s behalf, but the title company instructed the attorney not to file suit. No further action ensued until more than six years later when the borrowers defaulted on the bank’s loan, prompting a foreclosure action. They also defaulted on the home equity loan. To protect the bank’s interest, the title company paid off the home equity loan. It took an assignment of that mortgage and postponed its mortgage to that of the bank and assumed its second lien position on the property. Two years later, it filed a malpractice action against the closing attorney, alleging that the closing attorney failed to secure the bank’s first lien position. This was seven years after the title company wrote to the closing attorney about the error. The lower court concluded that the statute began to run when the title company knew of the error. Therefore, the lower court dismissed the malpractice action. On appeal, the title company argued that “the statute does not begin to run until plaintiffs have suffered an injury or damages.” They claimed that they did not suffer such injury or damages until the 1996 default, and thus, that their action was not barred. The Appellate Division pointed out that all parties agree that the six-year statute applied to the underlying action. There was also no question that the title company knew of the attorney’s alleged error more than six years prior to filing suit. It disagreed, however, with the title company that no ascertainable damage was recognized until the borrowers’ default. According to the Court, the title company “knew that [its] bargained-for first position was actually a second position; [it] further knew or should have known that the borrowers had available to them $150,000 in credit, and a simple equity analysis would have revealed that their security was impaired at the time of the closing.” Under New Jersey law, “[t]hat the damages may be uncertain does not delay accrual.” Further, the Court rejected the title insurance company’s claim for subrogation and indemnification, holding that the same statute of limitations period applied to such claims as to the underlying claim for negligence.

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