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New Jersey Lawyers’ Fund for Client Protection v. Stewart Title Guaranty Co.

409 N.J. Super. 28, 975 A.2d 1016 (App. Div. 2009)

TITLE INSURANCE; ATTORNEYS — Where a closing attorney represents both purchaser/borrower and the title insurance company, as is common in parts of New Jersey, if the title company wants to disclaim liability for the closing attorney’s misappropriation of client funds, the disclaimer must be delivered directly to the insured and not merely to the attorney as part of the title insurance commitment.

Buyers contracted to purchase a new home. They retained their neighbor, an attorney, to represent them in the transaction and instructed him to deposit the net sale proceeds from the sale of their home into his attorney trust account to use to pay the purchase price for their new home. They also deposited additional funds into their attorney’s trust account, believing that those funds would be needed for the closing. The attorney then ordered title insurance and received a title insurance commitment. It had a disclaimer stating that the attorney was not an agent of the title company and the title company would not be responsible for the attorney’s malfeasance. The buyer’s attorney stole his client’s funds, and the checks he wrote from his trust account were not honored by reason of insufficient funds. The buyer filed a claim with the title company, but it was denied.

The New Jersey Lawyer’s Fund for Client Protection (Lawyers’ Fund) reimbursed the buyers and assumed their rights to recover from other sources. The lower court found that the title company was not liable for the attorney’s misconduct because the buyer’s attorney stole the funds before he had any contact with the title company. Lawyers’ Fund appealed and the Appellate Division reversed. The Court rejected the title company’s argument that it was shielded from liability because of the disclaimer in the title commitment stating that it was not liable for the attorney’s misconduct. The title company argued that since the attorney was the buyer’s agent, delivery of the commitment with the disclaimer to the attorney put the buyers on constructive notice that they would not be insured if their attorney stole their money. The Court disagreed, noting that this case involved the “North Jersey” closing practice where the buyer’s attorney handles the closing of title and disbursement of funds. In North Jersey practice, the buyer’s attorney acts as agent for the title company for the purpose of dealing with the insured. Therefore, there is an inherent conflict of interest between the role served by the attorney when acting as both attorney for the buyer and as closing agent for the title company.

The Court held that if a title company wants to disclaim liability for a closing attorney’s misappropriation of client funds, a disclaimer notice must be delivered directly to the insured. Inclusion of the disclaimer as an insert with the title insurance commitment is insufficient. The Court also disagreed with the lower court’s finding that the title company was not responsible for the attorney’s theft because the theft took place before the attorney ordered the title insurance commitment. It found that because of the relationship between title companies and a buyer’s attorney acting as a closing agent, where the buyer’s attorney is responsible for overseeing the transaction, title companies are in a better position than the insured to prevent misappropriation at any time during the closing process. So, the Court found the title company liable for misappropriation even though the theft began before the attorney ordered a title insurance commitment because the malfeasance continued unabated afterward.

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