Last year, I wrote a blog about The North Jersey Practice. It was about an appellate case that held that an underwriter was responsible for an attorney's theft of funds - even though the attorney sole his client's money before the title company got involved. I wrote at the time, "I would expect a reversal on appeal." And I was right...
You may want to re-read the previous blog, but here are the basic facts of the case:
After the closing, the checks issued by Pizzi from this trust account bounced and it was determined that he had stolen at least $277,717.00 of the Goodmans' funds. He was later disbarred.
The Goodmans were purchasing a home in Somerset. They hired their neighbor, attorney Richard Pizzi, to represent them in the sale of their old home and the purchase of the new one. When the old home sold, the Goodmans instructed Pizzi to deposit part of the proceeds, $293,308.47, into his attorney trust account for the purpose of closing on the purchase. Pizzi later told them that they needed to deposit an additional $20,000, which was not the case.
Pizzi then requested Atlantic Title, an agent of Stewart Title, to issue title insurance. The request stated "This is a cash deal... this is a super rush!" Atlantic provided a title commitment showing Pizzi as the applicant and the Goodmans as the purchasers.
The trial court held for Stewart Title finding that Pizzi had misappropriated the funds before he had any contract with Atlantic Title. Thus, at the time of the theft, there could not have been any agency relationship between Stewart and Pizzi and they could not be held liable for his actions. The trial court said that to impose liability under these circumstances was "inequitable and unfair and inappropriate in law."
But the appellate court reversed, finding that defalcation committed by the buyer's attorney remains a risk covered under the title insurance policy, unless the title insurer notifies its insured directly that the policy does not cover such risk. It found that Atlantic Title failed to take the steps necessary to inform the Goodmans directly that the title policy they were buying did not cover the risk of Pizzi's defalcation. Atlantic Title's practice to include the disclaimer statement in an insurance commitment binder that is sent only to the buyer's attorney, does not sever, as a matter of law, the agency relationship between the carrier and the attorney.
As I said last year, the issue here is one of timing. The New Jersey Supreme Court correctly reversed the court of appeals:
Here, the Goodmans gave their money to Pizzi in January 2004, and Pizzi misappropriated those funds prior to the time he sought title insurance for the Goodmans. It is not disputed that just prior to the time Pizzi contacted the Title Company no agency relationship existed between Pizzi and the Title Company, nor was there evidence that Pizzi had previously interacted with the Title Company. Thus, it cannot be argued that the Goodmans relied on Pizzi as a representative of the Title Company.
When Pizzi applied for title insurance and the Title Company 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. Further, the Title Company never represented to the Goodmans that Pizzi had actual or apparent authority to act on its behalf. Plainly stated, no agency relationship existed between Pizzi and the Title Company at the time the funds were misappropriated. Consequently, the Title Company is not liable for the misappropriation by Pizzi.
This case may be unique to North Jersey, where title companies rely on buyers' attorneys to handle the closing. While it does seem like a good idea to involve the attorneys, it does present risks for the title company if they can be held liable for this sort of theft. I think the result here may have been different if Pizzi had waited until he brought the title company in to steal the Goodmans' money. It seems in such cases, the title company may be liable if it does not notify the client directly that it is not liable for their attorney's theft. Thus, it would seem that title companies ought to send a notice directly to the client and not rely on notices sent only to the attorneys.
In the end, the Goodmans were reimbursed for their loss by the New Jersey Lawyers Fund for Client Protection. And, that is what they are there for. This was a case of a rotten attorney - not a crooked title company. Pizzi was disbarred... and hopefully he will pay restitution to the Fund.
Robert A. Franco
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