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Insurer Blames N.J. Lawyer for Blot on Title
Suit shows that rubber-stamping title commitments can be dangerous
New Jersey Law Journal
June 16, 2009
A venerable title insurance company has done something unusual in New Jersey, and lawyers aren't likely to applaud.
Chicago Title Insurance Co. filed a malpractice claim against a homebuyer's attorney, saying he acted without diligence and owes a piece of the $300,000 the company paid to save a policyholder's home.
The Bergen County suit charged Albert Birchwale, of Basile, Birchwale & Pellino in Ridgefield, N.J., failed to investigate a previous sale in the chain of ownership to make sure there was no potential federal estate tax lien.
Veteran real estate lawyers say that they've heard of suits by title insurers against lawyers who weren't diligent but that this is the first they know of to allege an attorney failed to research previous sales in the property's history -- a job usually thought to be the role of title professionals.
Chicago Title, founded in 1849, is part of a conglomerate with 30 percent of the national title insurance market.
On Friday, Chicago Title said through its lawyer that the company had decided to voluntarily dismiss the case, Chicago Title Insurance Company v. Birchwale, Ber-L-483-09, but didn't backtrack from the position that the claim has merit.
The case reminds lawyers that rubber-stamping title commitments can be dangerous, particularly in northern New Jersey, where buyers' attorneys often act as title companies' proxies.
It also raises the question of whether title insurers should be added to the list of potential malpractice plaintiffs to be feared by attorneys and their legal malpractice carriers.
Birchwale devotes half his practice to real estate transactions and says he had been handling closings at a rate of 20 or 30 a year without a serious hitch for 33 years before the suit, which began as a third-party complaint in a tax delinquency case in federal court in Newark.
The chain of events that snared him started in early 2001, when the estate of a man who died in 1999 sold a six-unit apartment house in Cliffside Park to Danton Properties, LLC.
The title insurer called in by Danton, Commonwealth Land Title Insurance Company, questioned whether federal estate taxes might be owing, but after the executor of the estate certified none were due, Commonwealth issued a policy that did not contain any exception for federal estate taxes that might emerge.
In May 2002, Danton sold the property to John Jhang, who was represented by Birchwale. Danton executed an affidavit of title affirming there were no competing liens or legal obligations affecting the property. Birchwale ordered title work from Vested Title Inc., which made various records searches and obtained a title commitment from Chicago Title.
Neither of the two purchasers or their professionals knew that the executor of the estate that sold the property to Danton in 2001 had failed to pay estate taxes. An Internal Revenue Service investigation disclosed the failure and the IRS sued the executor in 2007, seeking $2.7 million in back taxes.
The recovery operation included an IRS lien on the Cliffside Park property, which the estate owned at the time taxes were due.
Under the tax code, unpaid taxes remain a lien on the gross estate of decedents for 10 years from time of death. Prudent executors who want to sell property during that time will obtain an Estate Tax Closing Letter from the IRS to assure buyers. In this case, executor Richard Hartman -- who later was accused of fraud -- certified himself that no taxes were due when he sold the property to Danton.
Earlier this year, after months of proceedings before U.S. Magistrate Judge Patty Schwartz in Newark, mostly about whether the estate was liable for taxes, Chicago Title paid a $300,000 settlement on behalf of Jhang so he could keep the property. But the company continued to pursue its third-party complaint against Birchwale, and Danton as well, which subsequently was transferred to state court as a subrogation action.
Here's how Birchwale erred, according to an expert for Chicago Title, Stuart Reiser of Shapiro & Croland in Hackensack:
He should have noted from the title binder he reviewed before the closing that there had been an estate in the chain of owners within the preceding 10 years. Had he done so, Birchwale would have seen there was no Estate Tax Closing Letter in the record of that previous transaction and no exception to a federal lien in the Jhang's title binder.
And that would have prompted him to take action. "Armed with such knowledge, defendant should then have requested additional information or documents from the seller or their attorney which would have demonstrated that the estate taxes were either paid or unpaid," Reiser said.
Birchwale could have asked the seller for a closing letter from the IRS, a release from any liens, an affidavit of no taxes due, a bond for any unpaid estate taxes, an escrow of funds to pay taxes or an indemnification agreement, Reiser said.
The title agent's review wasn't dispositive, Reiser added. In northern New Jersey, where title agents merely report on the status of title through research of public documents, lawyers are "obligated to exercise a greater degree of care than that which could or should be expected of a title agent," Reiser said.
Birchwale had a "heightened sense of duty" to protect Jhang's interests, he concluded.
Chicago Title sued Birchwale on Jhang's behalf during the federal tax litigation at a time when the IRS was valuing the property at more than $500,000 and there was concern that the $310,000 title insurance policy wouldn't cover the lien.
That fear was allayed once the IRS agreed to take $300,000.
"Following the conclusion of the original suit in federal court and the filing of the related suit in Superior Court, we reviewed the situation and determined that the rights of our insured were fully protected," says Chicago Title's lawyer Jaimee Katz Sussner, of Herrick, Feinstein in Newark.
But she says the dismissal doesn't mean Chicago Title has altered its opinion that the suit had merit. "A review of the record shows that serious mistakes were made at the time of closing, which materially contributed to this lien being overlooked," Sussner says.
Defense experts disagreed in reports obtained by Thomas Quinn of Wilson, Elser, Moskowitz, Edelman & Dicker in Newark, who was called in by Zurich Insurance Co., Birchwale's malpractice carrier.
First, Birchwale had no duty to make an inquiry after seeing there was no federal lien exception in the binder, according to expert John Dusinberre of Mandelbaum, Salsburg, Gold, Lazris & Discenza in West Orange.
"Since before the mid-1970s, attorneys have long since stopped performing their own 60-year title searches, relying instead upon title insurance companies to perform the searches and to summarize their findings into a title commitment," Dusinberre says.
Even if Birchwale had made inquiries, he would have been told by his title agent, Vested, that the previous owner's title was free and clear of any reference to a federal lien. The lawyer in the previous transaction would have produced his title commitment showing there was no federal tax liability.
"A prudent attorney of ordinary skill would not have gone any further than that answer," Dusinberre opined. He says Vested, which wasn't sued, was responsible.
Another defense expert, Gary Falkin of Falkin & Panzini-Romeo in Florham Park, says that even Vested might not have erred. It issued the title policy in reliance on the prior policy issued by Commonwealth.
Falkin said in his report that in depositions, representatives of Chicago Title and Vested testified that "such reliance is standard in the title insurance industry and is a recognized business risk which was accepted by Chicago."
Falkin also noted that in Smith v. Boyd, 272 N.J. Super. 186 (Law Div. 1993), a court held a lawyer not liable for the failure of a title company he hired to disclose an existing mortgage.
Nothing in the file of the case suggests there is a precedent on point for the theory that Chicago Title argued, although it is possible that cases like it settled with a malpractice carrier making a contribution.
Three real estate lawyers who don't want to be identified say they know of no other suits by title companies against lawyers for failing to unearth an unfilled federal tax lien on a property missed by both their title agent and a title agent in a previous transaction.
Birchwale, meanwhile, is glad that the suit has been dropped and says he doesn't think it was merited.
If lawyers are going to be held accountable for what title professionals are supposed to do, why should homeowners pay for searches and coverage? he asks.
"I had no doubt all along about our position because I did nothing wrong," he says.
