A title insurance company will not be on the hook for money a lawyer stole from his clients because the misappropriation of funds took place well before the lawyer acted as the company's agent, the New Jersey Supreme Court ruled on Monday.
The timing problem allowed the court to avoid dealing with the thornier issue raised on appeal: whether a title carrier must tell homebuyers directly and explicitly that it is not responsible for their attorney's misdeeds.
The company's failure to do so in this case had led the appellate division to impute a continuing agency relationship that was sufficient to hold the company liable to the homebuyers for the attorney's misappropriation.
But the justices were unwilling to make that leap. "Plainly stated, no agency relationship existed between [the attorney] and the Title Company at the time the funds were misappropriated," Justice John Wallace Jr. wrote for the unanimous Court in New Jersey Lawyers' Funds for Client Protection v. Stewart Title Guaranty Co., A-44-09.
Stuart and Susan Goodman hired Richard Pizzi, their neighbor in Bedminster, to represent them in the purchase of a new home in Somerset in 2003. They sold their existing home and gave the net proceeds to Pizzi, who stole the money in January 2004.
Pizzi first contacted Atlantic Title Agency, the agent for Stewart Title Guaranty Co., in May 2004, but the theft was not discovered until his trust account checks bounced when the Goodmans closed on their new house in June 2004.
Pizzi was disbarred by consent in 2005 and the Lawyers' Fund for Client Protection awarded the Goodmans $307,456. The fund then moved to have Stewart Title Guaranty Co. reimburse its payout.
Mercer County Superior Court Judge Bill Mathesius dismissed the suit, finding Pizzi stole the Goodmans' money before he had contact with Atlantic Title Insurance Co., Stewart Title's agent.
But the appellate division reversed, saying Stewart Title should reimburse the fund, even though Pizzi committed the theft months before it was retained a week before the closing.
Stewart Title's defense was its disclaimer it sent to Pizzi. When it issued the insurance commitment, the company sent an "Important Notice of Disclosure" along with the other papers, saying the buyer's lawyer was not its agent and that it "assumes no liability for any loss, cost or expense incurred by you because your attorney or your lender's attorney has made a mistake or misapplied your funds."
In reversing, the appellate division held that simply sending notice to the buyer's attorney was not enough. Stewart Title should have informed the Goodmans directly that the title policy did not cover the risk of Pizzi's defalcation, said Judges Jose Fuentes, Amy Piro Chambers and Michael Winkelstein. They specified the "preferred and most effective method of service should include a signed verification from the client/insured acknowledging receipt of the notice."
The panel cited the court's ruling in Sears Mortgage Corp. v. Rose, 134 N.J. 326 (1993), where the justices ruled that in order not to be held liable for attorney misconduct, the title insurer must notify the homebuyer directly that it is not responsible.
Wallace said Stewart Title could not be held liable here simply because Pizzi already had stolen the money from the Goodmans months before he sought to purchase insurance for them.
"When Pizzi applied for title insurance and the Title Insurance mailed its standard notice and disclaimer to Pizzi, the Title Company was not in a position to prevent the theft because the theft had already occurred," he said.
"Further, the Title Company never represented to the Goodmans that Pizzi had actual or apparent authority to act on its behalf," Wallace said.
"We agree with the Title Company's position that the circumstances that gave rise to an agency relation in Sears -- the authorization to the attorney to perform functions on behalf of the Title Company, the attorney's manifestation of consent to the agency, and the third-party's reliance on the agent's apparent authority to act for the principal -- are not present here."
Stewart Title's lawyer, Jaimee Katz Sussner, says of the ruling: "We are delighted for our client, which should never have been held liable for Pizzi's theft [that] occurred before they had ever met or heard of him or his clients.
"This decision clarifies and properly narrows Sears Mortgage, which the lawyers' fund has historically cited in an attempt to shift its statutory financial responsibility for attorneys' thefts to the title industry, far beyond any reasonable reading of that case," says Sussner, of Newark's Herrick Feinstein.
Officials from the Lawyers' Fund for Client Protection did not return calls.