Daily Development for Wednesday, May 8, 2002
By: Patrick A.
Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu
TITLE INSURANCE; ATTORNEYS; LIENS: Once clear title passes to a buyer, a title insurance company's
relationship to the buyer's attorney ends and it has no responsibility for a
subsequent defalcation of closing funds.
GE Capital Mortgage Services, Inc. v. Privetera, 346 N.J.
Super. 424,
778 A.2d 324 (App. Div. 2002).
A sale of real property was conducted pursuant to a
bankruptcy court order which provided that the property was to be sold free and
clear of all liens but that the liens would attach to the sale proceeds. The closing took place and the buyer's
attorney was required to hold the sale proceeds in escrow until the bankruptcy
court authorized their disbursement. A
bank, the first mortgage holder, demanded that its promissory note be paid from
the sale proceeds as directed in the bankruptcy court order, but was told by
the buyer's attorney that he misappropriated all of the funds.
The bank filed a motion with the bankruptcy court seeking to
reinstate its lien on the property. The
bankruptcy court denied the motion. The
bank then filed a lawsuit in the Chancery Division seeking payment from the
buyer's title insurance company. It
claimed that the buyer's attorney, when he stole the sale proceeds, was acting
as an agent for the title insurance company, the buyer's mortgage lender, and
the seller. The bank also claimed it
was a third-party beneficiary of the contract between the title insurance
company, the buyer's lender, and the seller.
The lower court rejected the bank's claim and held that the
agency relationship between the title insurance company and the buyer's
attorney was extinguished when the bankruptcy court approved the sale of the
property free from all liens. This
occurred before the attorney stole the sale proceeds.
On appeal, the bank relied on two cases that held that a
buyer's attorney acts as an agent of the title insurance company and that a
title insurance company assumes the risk of loss resulting from an attorney's
misappropriation of funds intended to pay off an existing mortgage.
Here, the Appellate Division agreed with the lower court's
ruling that the bankruptcy court order cut off the title insurance company's
interest in the matter and terminated the agency relationship with the buyer's
attorney. Once clear title was passed
to the buyer pursuant to the bankruptcy court order, the terms of the title
insurance commitment were satisfied.
The appellate court also rejected the bank's contention that
it was a third-
party beneficiary.
The test for determining if one is a third-party beneficiary of a
contract is if the parties to the contract intended that the third-party
receive a benefit. The closing protection letter provided by the title
insurance company only protected the new mortgage holder against the buyer's
attorney's conduct. The new mortgagee,
pursuant to a commitment letter, provided the funds for the purchase. Neither
agreement was intended to protect the bank holding the liens.
Comment 1: Wondering how a closing agent became an agent of
the title insurer in the first instance?
You're not alone. See Universal
Bank v.
Lawyer's Title Ins. Co., 73 Cal. Rptr. 2d 196 (Cal. App.
1997), the DIRT DD for 9/30/98, where
the court concluded that there was no agency relationship (agent participated
in a fraud to inflate values artificially) But compare Sears Mortgage
Corporation v. Rose, 634 A.2d 74 (N.J.1993) (The DIRT DD for 4/7/95, where the
court found a defalcating lawyer was the agent not only of the title company
but also of the lender. Both cases
appear on the DIRT website:
http://www.umkc.edu/dirt.
Comment 2: This situation doesn't happen all that often, of
course, but it demonstrates why lawyers sometimes have to accept being
characterized as overprotective nit pickers in insuring that their client's
interests are protected. Just when you
think everything is going fine . . .
Comment 3: One wonders whether the bank even will be able to
recover from the state bar trust fund (assuming that New Jersey maintains one),
since the bank was not the lawyer's client, and these funds often are
designated as protection for defrauded clients.
Readers are urged to respond, comment, and
argue with the daily development or the editor's comments about it.
Items in the Daily Development section
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