Daily Development for
Friday, April 7, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

Sorry for all the New Jersey cases. It appears to be the new "activist" court in the area of home closings (among others).

CLOSING PARTIES; DUTY OF GOOD FAITH AND FAIR DEALING: Title insurer has the duty of good faith and fair dealing to provide to the insured the services the insured would reasonably expect or to communicate clearly that it is not providing such services.

Sears Mortgage Corporation v. Rose, 634 A.2d 74 (N.J. 1993).

After an attorney defalcated with closing proceeds, the buyer sued the title insurance company on several theories.

The court first held that the attorney was the agent for the title company, even though retained by the buyer and clearly the buyer's attorney as well. The title company had established a "approved list" of acceptable attornies and, in arranging the insurance, worked primarily with the attorney. Comment: It boggles the mind to view an implicit agency relationship arising that has a built in conflict of interest, such as here. The court held that the title company was bound by the buyer's attorney's representation that the title company would insure "clear title."

But wait . . . there's more:

In a companion holding, the court goes on to conclude that the title insurer had a duty of good faith and fair dealing to disclose to the buyer that there was a risk of attorney defalcation in the closing process. It stated that the buyer, based upon the business environment in which the closing occurred, had a reason to believe that it was protected against such risks, and that therefore the insurer would be viewed as insuring against such risks unless it specifically warned the buyer that the risks existed.

Comment 1: It clearly is the desire of the court to compel the insurers actually to insure about these risks, not necessarily to compel insurers to disclose that uninsured risks exist. The court emphasizes that insurers in this market were providing insurance against defalcation to lenders as a routine matter, and that some insurers were already insuring buyers as well. One suspects that courts will read very narrowly any exculpatory language a title company might attempt to include as a "disclosure" in order to avoid actual coverage.

Comment 2: There is an increasing amount of "vertical integration" in the home financing business. Relationships are arising among brokers, closers, title insurers, and even lenders. Although brokers often insert "boiler plate" in form documents exculpating them for wrongs committed by related parties, will the duty of good faith and fair dealing in fact expose all parties in the chain to liability for the failure of one to do its job?

ESCROWS; REFINANCINGS; ATTORNEYS AS AGENTS: A title insurer that pays off an existing mortgage as a result of the closing attorney's failure to do so out of closing proceeds may not pass off to the borrower its loss incurred in protecting the lien of a refinancing mortgagee.

Clients' Security Fund v. Security Title and Guarantee Company, 634 A.2d 90 (N.J. 1993).

This is a companion case to Sears Mortgage Corporation v. Rose, 634 A.2d 74 (N.J. 1993), reported above. The principal distinction here is the involvement in this case of a refinancing mortgage lender. The sad story involves an attorney who exploited the "gap" created by the need for efficiency in the refinancing of home mortgages. The attorney got the money from the refinancing lender to pay off the old loan, together with instructions as to use. The refinancing lender's check was made out to the attorney and the borrower, and the attorney instructed the borrower to endorse the check as part of the closing. The attorney then recorded the new mortgage and pocketed the money without paying off the old mortgage.

The court, consistent with its holding in Sears, holds that the closing attorney was acting as agent of the title insurer (which had issued an insured closing letter to the refinancing lender). In addition, however, the attorney was held to be the agent of the refinancing lender. Even though the borrower retained the attorney, the attorney was in fact an agent with three principals the borrower, the refinancing lender, and the title insurer. The lender had the ability to control the attorney's actions with respect to its funds at settlement by requiring explicit compliance with its written closing instructions, and in fact exercised the greatest degree of control. The borrower was entitled to rely on the lender's willingness to act entirely through the attorney, and, as between. Consequently, the title insurer, when it paid off the old loan pursuant to its closing letter commitment, could not recover against the borrower in subrogation of the claims of the refinancing lender.

Comment: Note that there is no reason to limit the analysis of this case to attorney closers. Any escrow closing company would also have the same agency relationship.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 15, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260.