Sears Mortg. Corp. v. Rose

CourtUnited States State Supreme Court (New Jersey)
Citation634 A.2d 74,134 N.J. 326
Decision Date29 July 1993
PartiesSEARS MORTGAGE CORPORATION, Plaintiff-Respondent, v. Michael ROSE and Emery Kaiser, Defendants and Third-Party Plaintiffs-Appellants, and Mrs. Michael Rose, wife of Michael Rose; Mrs. Emery Kaiser, wife of Emery Kaiser; General Investment Corp., a corporation of New Jersey; Theodore Janulis & Helen Janulis; Stanley H. Sprague; Morbach-Kaslander Co., Inc., a N.J. Corp.; Del's Electric Inc.; Turner Lumber Company, Inc.; National Siding Corp., a N.J. Corp.; Lakeview Condominium Association, Defendants, v. COMMONWEALTH LAND TITLE INSURANCE COMPANY, Third-Party Defendant-Respondent, and Joseph F. Gillen and TRW, Third-Party Defendants.

Peter D. Ciancia, Englewood, for appellant Emery Kaiser.

Richard M. Fricke, Tenafly, for appellant Michael Rose (Daniels & Solomon, attorneys).

Ben J. Slavitt, Newark, for respondent Commonwealth Land Title Ins. Co. (Slavitt, Fish & Cowen, attorneys; Ronald G. Schecter, on the brief).

Elizabeth J. Sher, Morristown, for respondent Sears Mortg. Corp. (Pitney, Hardin, Kipp & Szuch, attorneys; Ms. Sher and Loryn P. Riggiola, on the brief).

Daniel R. Hendi, Deputy Counsel, submitted a letter in lieu of brief on behalf of amicus curiae New Jersey Lawyers' Fund for Client Protection (Kenneth J. Bossong, Director, attorney).

John R. Weigel, Princeton, submitted a letter in lieu of brief on behalf of amicus curiae New Jersey Land Title Ass'n.

The opinion of the Court was delivered by


In this case and the companion case, Clients' Security Fund v. Security Title & Guarantee Co., 134 N.J. 358, 634 A.2d 90 (1993), also decided today, the Court must determine which party participating in the closing of a real-estate title must ultimately sustain the loss caused by the closing attorney's theft of moneys earmarked for the payment and satisfaction of an existing first mortgage on the property. The parties with an interest in the closing are, on the one hand, the title-insurance carrier and, on the other hand, those furnishing the money to acquire the property--in this case, the buyer and, in the companion case, an institutional third-party lender. As a result of the closing attorney's embezzlement, one of those parties must ultimately bear the loss. Further, because the attorney's misappropriation prevented the payment and satisfaction of the existing mortgage on the property, we must consider as well the status and rights of the party holding that mortgage.

It is highly regrettable that closing attorneys, as exemplified by these cases, from time to time abscond with the moneys entrusted to them for purposes of the closing of title. That form of misappropriation is a recurrent basis for disbarment. The appeals, therefore, provide the opportunity for the Court both to enunciate a rule to govern liability in this kind of transaction and, further, to suggest sound practices and ethics standards that may serve to reduce the incidence of this serious misconduct.


In 1985, Michael Rose purchased a residential condominium in Leonia. On the same day, he gave a purchase-money mortgage for $107,950 to Allstate Enterprises Mortgage Corporation, the predecessor corporation to Sears Mortgage Corporation ("Sears").

On August 3, 1987, Emery Kaiser contracted to buy Rose's condominium for $165,000. Because Kaiser was paying with cash, the "Rose to Kaiser" contract did not contain a mortgage-contingency clause. At the same time, Kaiser was preparing to sell his home, which would provide the funds for his purchase of Rose's condominium. Kaiser retained an attorney to represent him in both the sale of his home and the purchase of Rose's, but the attorney became seriously ill before either transaction took place. Subsequently, a real-estate broker involved in the transaction recommended that Kaiser retain Joseph Gillen, an experienced real-estate attorney, to represent him. Kaiser spoke to Gillen over the phone twice, but did not meet him until the day of the closings.

Gillen, who had a longstanding business relationship with Commonwealth Land Title Insurance Company ("Commonwealth"), wrote to Commonwealth on a standard form provided by the company, requesting a title-insurance policy for Kaiser in the sum of $165,000. He also wrote to Sears, requesting a mortgage payoff statement.

Commonwealth conducted a title search and sent Gillen its title insurance commitment, which listed Gillen as "applicant" and Kaiser as "proposed insured." The cover sheet of that document stated that the commitment "is issued to show the basis on which we will issue a Title Insurance Policy to you. The Policy will insure you against certain risks to the land title, subject to the limitations shown in the Policy." The cover sheet also stated in bold capital letters: "You should read the commitment very carefully.... If you have any questions about the Commitment, contact the local office issuing this commitment."

On the second page of the title-insurance document, Commonwealth set out the terms of the commitment and provided that the policy would be subject to the requirements of Schedule B-1. Those requirements were payment of the purchase price to the seller, payment of the premium for the policy, proper signing of a proposed deed from Rose to Kaiser, and that the mortgage from Rose to Sears be "paid and cancelled of record."

Despite the language of that document, which is directed to the insured, Commonwealth sent it only to Gillen, along with an invoice for $704.25, covering title-commitment charges and the insurance premium. The invoice was made out to Gillen but referred to Kaiser as the "buyer/client."

On the morning of October 16, 1987, Kaiser closed on the sale of his house and received a net-proceeds check of $127,000. He endorsed the check over to Gillen's trust account. Gillen was to use the funds to purchase the Rose condominium for Kaiser that afternoon. Kaiser also wrote personal checks to Gillen totaling $38,000 to cover the balance of the $165,000 purchase price of the Rose condominium. The "Rose to Kaiser" closing took place at Gillen's law office. Kaiser was given a credit against the purchase price in the amount of the outstanding balance on the Sears mortgage, $107,155.62. Rose's attorney, Kaiser, and Gillen agreed that Gillen would pay off the mortgage, as provided in the contract of sale. Gillen also collected from Kaiser $704.25 to pay Commonwealth its title insurance premium. He told Kaiser that in return for this fee he would be getting free title to the property.

On October 17, 1987, on a form provided by Commonwealth, Gillen informed the insurance company that the closing had taken place and asked it to perform its final search and issue a fee policy. The form also stated: "all open items which are not to appear as exceptions on [the] policy have been disposed of...." Gillen also noted on the form that a check for $704.25 was enclosed. Commonwealth received and deposited the check.

Gillen never sent any funds to Sears to pay off the Rose mortgage. He misappropriated the closing funds from that transaction and from two others, absconded, and was later criminally convicted, imprisoned, and disbarred. The other two thefts involved purchasers who had obtained mortgages. Commonwealth paid off those mortgages in order to satisfy its closing-protection obligation to the lenders.

In November 1987, Sears communicated with Rose's lawyer and Commonwealth to let them know that the mortgage on Rose's condominium had not been paid off. On December 1, 1987, Commonwealth directly communicated with Kaiser for the first time. It wrote to him that "as you are aware," Commonwealth had been "requested to provide title insurance to you in connection with your purchase" from Rose. The letter continued:

[A]s of this writing the requirements of our title commitment have not been met. No insurance will be issued to you until such time as all the requirements of the commitment have been fulfilled. We have been informed that a mortgage made by your grantor has not been cancelled of record and we have reason to believe the same was never paid off by your closing attorney. I can advise you that Joseph Gillen has been temporarily suspended from the practice of law by the Office of Attorney Ethics as of November 23, 1987.

I suggest you retain an attorney immediately as this is a very serious matter.

Commonwealth offered Kaiser a title policy subject to an exception for the Sears mortgage. Kaiser demanded that Commonwealth issue a policy free of the Sears mortgage exception. Commonwealth refused, stating that its title commitment expressly conditioned issuance of the policy on payment of the Sears mortgage.

Kaiser then asked the New Jersey Lawyers' Fund for Client Protection ("the Fund") to reimburse him for the amount Gillen had stolen. The Fund told Kaiser that it would not be able to indemnify him because it believed that he had legal recourse against Commonwealth, and thus was barred under Rule 1:28-3(b)(5), which permits the trustees of the Fund to consider "[t]he potential for recovery from a collateral source" in determining whether an "eligible claim merit[s] reimbursement from the Fund."

Sears filed a foreclosure complaint in the Chancery Division on April 14, 1988. Kaiser and Rose separately answered and filed third-party complaints naming Commonwealth and Gillen as third-party defendants. Commonwealth filed answers to Rose's and Kaiser's third-party complaints and cross-claimed against Gillen, Rose, and Kaiser.

Commonwealth moved for summary judgment to dismiss Kaiser's third-party complaint. The trial court denied the motion in order to get a "full picture of the relationships among title insurance company, closing attorney and purchaser on which the question of Commonwealth's liability might well turn." The Fund and the New Jersey Land Title Association ("NJLTA") were permitted...

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