SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-921-95T1
A-1466-95T1
CHEMICAL BANK OF NEW JERSEY
NATIONAL ASSOCIATION,
Plaintiff,
v.
LEROY BAILEY, VELERIA BAILEY,
CITICORP MORTGAGE, INC.,
UNITED STATES OF AMERICA,
Defendants,
and
STEWART TITLE GUARANTY COMPANY,
Defendant and Third-Party
Plaintiff-Appellant,
v.
JANICE M. NEWMAN, ESQ., and
R.C. SEARCH CO., INC.,
Third-Party Defendants-
Respondents,
and
R.C. SEARCH CO., INC.,
Fourth-Party Plaintiff,
and
JANICE M. NEWMAN, ESQ.,
Fourth-Party Defendant
and Fifth-Party Plaintiff,
v.
STEWART TITLE GUARANTY COMPANY,
Fifth-Party Defendant.
_________________________________________________________________
Argued: September 10, 1996 - Decided: January 21, 1997
Before Judges Michels, Muir, Jr. and Kleiner.
On appeal from the Superior Court of New
Jersey, Law Division, Essex County.
Richard L. Marcickiewicz argued the cause for
appellant Stewart Title Guaranty Company (Sears,
Sweeney & Marcickiewicz, attorneys; Robert A.
Maren, of counsel and on the brief).
Janice M. Newman, Esq., respondent, argued the
cause pro se.
Evan W. Zwillman argued the cause for respondent
R.C. Search Co., Inc. (Zwillman & Zwillman,
attorneys; Mr. Zwillman, of counsel and on the
brief).
The opinion of the court was delivered by
MICHELS, P.J.A.D.
Defendant and third-party plaintiff Stewart Title Guaranty
Co. (Stewart Title) appeal from a judgment of the Law Division
entered in favor of third-party defendants Janice M. Newman, Esq.
(Newman) and R.C. Search Co., Inc. (R.C.) following a bench trial
arising out of a foreclosure action in which Stewart Title sought
to recover damages, including counsel fees and costs, against
Newman on the theory of legal malpractice and against R.C. on the
theory of breach of contract.
The factual background and the procedural history giving
rise to this complex matter is summarized as follows: On June
22, 1981, Stewart Title and R.C. executed a Title Insurance
Underwriting Agreement wherein R.C. became an agent for Stewart
Title. Section 5 of the Underwriting Agreement set forth how
losses were to be divided between the two companies. Section
5(A) specified that R.C. would be liable to Stewart Title for the
first $500 of each loss under a title policy not due to R.C.'s
negligence or fraud. Section 5(A) provides:
On each loss under a title policy issued
pursuant to this AGREEMENT not due to
[R.C.'s] negligence or fraud, [R.C.] shall be
liable to [Stewart Title] for the first
$500.00 of such loss. The term loss shall
include the amount paid to or for the benefit
of the insured as well as loss adjustment
expense including any cost of defending the
claim resulting in the loss.
Section 5(B) provided that R.C. was liable to Stewart Title
for the entire amount of each loss due to negligence, fraud, or
the intentional act or omission of R.C., its employees,
representatives, or agents. Section 5(B) provides:
On each such loss due to the negligence,
fraud or intentional act or omission of
[R.C.] or it's [sic] employees,
representatives or agents, [R.C.] shall be
liable to [Stewart Title] for the entire
amount of such loss. Negligence, as the term
is used herein, includes, but is not limited
to the failure of the title plant, failure
to discover or report any instrument of
record affecting title, violation of escrow
instructions and the failure to prepare a
title policy in a manner that properly
reflects any such instrument contained in the
search of title.
Section 5(C) provided that: "On each loss suffered by [Stewart Title] by reason of it's [sic] Indemnity Letter issued pursuant to Clause 2E of this AGREEMENT, [R.C.] shall be liable to [Stewart Title] for the entire amount of such loss." Clause
2(E), in turn, provided: "[Stewart Title] shall furnish it's
[sic] usual form of indemnity letter to each of [R.C.]'s
customers that request such a letter."
The issues in this appeal arose from a real estate
transaction occurring on or about July 9, 1990. Defendant Leroy
Bailey and Veleria Bailey (the Baileys) were the fee title owners
of real property located at Lot 14, Block 258, otherwise known as
104 Mt. Vernon Avenue (the property), in the Township of
Irvington, New Jersey. The Baileys retained the services of
Newman, an attorney, to close a loan of $80,000.00 to be made by
defendant Citicorp Mortgage, Inc. (Citicorp). The Citicorp loan
was to refinance the existing debt secured by the property.
At the time the property was encumbered by two existing
mortgages: a purchase money mortgage of Forman Mortgage Co. in
the amount of $26,000.00, assigned to Talman Home Mortgage
Corporation (Talman) and a second mortgage of plaintiff Chemical
Bank of New Jersey, National Association (Chemical), in the
amount of $50,000.00. Citicorp required that the mortgage
securing its loan be a first lien on the property. The loan
commitment issued by Citicorp further required that the Baileys
obtain a title insurance policy insuring the Citicorp mortgage as
a first lien.
Newman, on behalf of the Baileys, contacted R.C. to obtain
the requisite title insurance for the Citicorp mortgage. A
commitment for title insurance, effective February 5, 1990, was
issued by R.C. The policy to be issued was a loan policy
insuring the Citicorp mortgage of $80,000.00 as a first lien.
The requirements of the commitment issued by R.C. included the
execution, delivery, and recording of all instruments necessary
to create the interest to be insured.
Newman received closing instructions from Citicorp's review
attorneys. One of the identified conditions to be met prior to
closing was the following:
Any Mortgage referred to in the title binder
must be paid or canceled of record and proof
of same submitted to this office.
The closing instructions also prohibited any secondary financing.
On April 10, 1990, Stewart Title sent a copy of its usual
indemnity letter to Citicorp, as a customer of R.C., as required
by the Underwriting Agreement.
Newman closed the loan on or about June 28, 1990. A payoff
statement was obtained from Talman and a check was sent
representing payment in full. No specific payoff statement was
obtained from Chemical. Newman had possession of the Baileys'
March 12, 1990 billing statement from Chemical and called prior
to closing to obtain an updated balance. Newman calculated the
per diem interest through closing and forwarded a check to
Chemical in the amount of $49,076.80 along with the March 12,
1990 billing statement. No cover letter or other instruction
were sent by Newman.
Newman received a mortgage endorsed for cancellation from
Talman. Newman did not receive a discharge of mortgage or the
original mortgage endorsed for cancellation from Chemical.
Newman did not make any effort following the closing to obtain a
discharge of the Chemical mortgage or to cancel it of record.
R.C., as title agent, received payment from Newman for the title
policies to be issued. No policies, however, were issued by R.C.
since Newman did not provide R.C. with the canceled Chemical
mortgage.
Citicorp, as the proposed first mortgagee in the title
commitment issued by R.C., made efforts to obtain a copy of the
title policy. Subsequent communications regarding the title
policy, in 1991 through 1993, occurred between Citicorp and
Newman and Citicorp and R.C. However, neither Newman nor R.C.
provided a title policy to Citicorp, nor was Citicorp advised
regarding why the title policy was not issued.
In August and September 1991, withdrawals were made against
the Chemical home equity credit line of the Baileys by the son of
Veleria Bailey, James Williams (Williams). This credit line was
supposed to have been canceled at the closing. Within thirty
days, $31,500 was advanced from the $50,000 home equity credit
line. During an attempt at a subsequent withdrawal from the
credit line, Chemical became suspicious and contacted the local
authorities. The Verona Police Department identified Williams,
who was in possession of various personal identification
documents belonging to Leroy Bailey, as the party seeking to make
withdrawals from this credit line. The Verona Police contacted a
person who it assumed was Mrs. Bailey to determine whether or not
her son had authority to make withdrawals on the $50,000 credit
line. The person indicated to the police that her son did have
such authority. Yet, during an investigation by Chemical's Fraud
Prevention Unit, Mrs. Bailey did not confirm that her son had
authority to make the withdrawals.
When no payments were made on these advances, Chemical
declared default and instituted a foreclosure action against the
Baileys, Citicorp, and defendant United States of America, which
had filed a federal tax lien against the Baileys. Citicorp was
named in the foreclosure action as a defendant because it was the
holder of the mortgage which was recorded subsequent to the
Chemical mortgage. Stewart Title, on behalf of and in the name
of its insured Citicorp, filed an answer and counterclaimed
against Chemical, essentially seeking first lien protection based
on a theory of equitable subrogation. It also crossclaimed
against the Baileys and filed a third-party complaint against
third-party defendants Newman and R.C. The crossclaim and third-party complaint asserted that, should it be determined that
Citicorp did have not a priority lien but a junior lien as
alleged by Chemical, the damages sustained by Citicorp were the
result of the wrongful conduct of the Baileys, Newman, and R.C.
Newman and R.C. filed answers, crossclaims, counterclaims
and fourth- and fifth-party complaints.See footnote 1 R.C.'s answer denied
negligence and by way of a crossclaim sought contribution and
indemnification from Newman and the Baileys. R.C.'s fourth-party
complaint against Stewart Title sought indemnification and
contribution. The Baileys filed an answer, third-party
complaint, and counterclaim denying liability and alleging that
Chemical advanced monies to a third party secured by their
mortgage without their consent and/or authorization.
In May 1994 Citicorp, through Stewart Title, agreed to
purchase the note and mortgage of Chemical and to take an
assignment of the mortgage and the foreclosure cause of action
for the sum of $17,350. Stewart Title then paid $17,350
necessary to purchase the Chemical note and mortgage. The
remaining balance due, as claimed in the foreclosure complaint,
was $31,500. Through Stewart Title, Citicorp continued to
prosecute the foreclosure action and pursued the Baileys, Newman,
and R.C. for the monies advanced to purchase the Chemical note
and mortgage.
Thereafter, the trial court granted summary judgment on
liability in favor of Citicorp against Newman and the matter was
then listed for trial against the remaining defendants. Prior to
trial, the Baileys settled the foreclosure action with Stewart
Title, giving a deed in lieu of foreclosure to Citicorp.
Citicorp then released the Baileys from all claims.
On the scheduled trial date, the terms of the settlement
between Citicorp and the Baileys were placed on the record and
the trial court declared a mistrial and transferred the remaining
claims to the Law Division. In the Law Division, Citicorp was
granted leave to amend its claims against R.C. to include claims
arising out of the Underwriting Agreement and to substitute
Stewart Title as subrogee of Citicorp. In sum, Stewart Title
sought to recover the $17,350 that it paid to purchase the
Chemical note and mortgage, as well as counsel fees and costs,
from Newman based on a claim of legal malpractice and from R.C.
based on the Underwriting Agreement. At the conclusion of the
proofs, the trial court found that R.C. was not liable to Stewart
Title because the liability provisions of the Underwriting
Agreement were unenforceable. The trial court also found that
Newman was not liable to Stewart Title because the settlement had
prejudiced her subrogation rights. Stewart Title appeals.
Stewart Title seeks a reversal of the judgment and the entry
of a judgment against Newman and R.C. for the $17,350 it paid to
purchase the Chemical note and mortgage as well as counsel fees
and costs. It contends that (1) the trial court incorrectly
interpreted Section 5(C) of the Underwriting Agreement and
incorrectly held that Section 5(c) was not enforceable; (2)
Newman is liable to the extent that her legal malpractice was a
proximate cause of the loss and damages sustained; (3) the
settlement of the foreclosure complaint does not preclude it from
pursuing claims against Newman and R.C.; and (4) Newman's legal
malpractice in failing to request and obtain a discharge or
cancellation of the Chemical mortgage was a proximate cause of
the loss and damages it sustained.
We are satisfied the trial court properly held that Stewart Title impaired Newman's right of subrogation and, therefore, Newman, although guilty of legal malpractice in closing the Baileys loan, was not liable to Stewart Title for the loss damages incurred in settling the foreclosure matter by purchasing the Chemical note and mortgage and arranging for the Baileys to give a deed in lieu of foreclosure to Citicorp for the latter's release.
"`[S]ubrogation is a device of equity to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it [and] . . . to serve the interests of essential justice between the parties.'" Culver v. Insurance Co. of N. Am., 115 N.J. 451, 455-56 (1989) (omission and second alteration in original) (quoting Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162, 171 (1954)). Subrogation is an equitable tool by which the subrogee, having paid the subrogor for a loss, steps into the shoes of the subrogor to assert any claim the subrogor had against a third party who in good conscience ought to pay for the loss. The subrogated claim may be asserted against any third party who bears the ultimate risk of loss, regardless of how such responsibility arose. Nevertheless, it is important to understand that subrogation rights neither arise spontaneously nor float freely or open-endedly. Id. at 456. Instead, subrogation rights are created in three ways: (1) by an agreement between an insurer and the insured, (2) by statute, or (3) by a
judicial "`device of equity to compel the ultimate discharge of
an obligation by one who in good conscience ought to pay it.'"
Ibid. (citations omitted).
In addition to subrogation rights, New Jersey permits
indemnification for monies paid in settlement of a lawsuit.
Central Motor Parts Corp. v. E.I. duPont deNemours and Co.,
251 N.J. Super. 34, 38 (Law Div. 1989), aff'd in part, rev'd in part,
251 N.J. Super. 5 (App. Div. 1991). Yet, while case law allows
indemnification for settlement payments, it requires the
indemnitee to demonstrate that "(a) the indemnitee's claims are
based on a valid, pre-existing indemnitor/indemnitee
relationship; (b) the indemnitee faced potential liability for
the claims underlying the settlement; and (c) the settlement
amount was reasonable." Id. at 39.
Based on these principles, the trial court properly found
that (1) Stewart Title had not proven that the alleged damages
and loss claimed were attributable to Newman's legal malpractice
because Stewart Title had failed to mitigate damages when it
purchased the Chemical note and mortgage and settled the case and
(2) Stewart Title impaired Newman's subrogation right when it
settled the underlying claims against the Baileys without
consulting with and obtaining the approval of Newman.
As a party who must indemnify Stewart Title for losses
naturally flowing from her legal malpractice, Newman would have
acquired subrogation rights in Stewart Title's underlying claims
if she settled with Stewart Title. As noted, a subrogee has
rights against third parties who in good conscience are
responsible for the debt paid to the subrogor. The settlements
by Stewart Title, as subrogor, concluded the case against the
Baileys who Newman, as subrogee, would have had a cause of action
against. Stewart Title, however, settled the matter without
consulting Newman and thus impaired Newman's right of
subrogation. Stewart Title purchased Chemical's note and
mortgage on the Baileys property for $17,350 and took an
assignment of the foreclosure action against the Baileys. The
note and mortgage were assigned to Citicorp and Stewart Title
continued to prosecute the foreclosure action. In order to
settle the foreclosure action, Stewart accepted from the Baileys
a deed in lieu of foreclosure, which was also assigned to
Citicorp. By accepting this deed to resolve these interrelated
transactions, Stewart Title satisfied all claims arising out of
the foreclosure action through an accord and satisfaction. In
Theobald v. Kenney's Suburban House, Inc.,
48 N.J. 203, 206-07
(1966), our Supreme Court explained:
Joint tortfeasors being severally as
well as jointly liable, the injured party may
pursue them in separate actions, see Kennedy
v. Camp,
14 N.J. 390, 395 (1954) . . . . But
it is generally agreed that if claimant
receives satisfaction of a judgment against
one, his rights against all are thereby
concluded. Restatement of Judgments, § 95
(1942); 4 Restatement of Torts § 886 (1939);
Prosser, Torts § 45, p.268 (1964); 1 Harper
and James, Torts §10.1, p. 710 (1956); 30A
Am. Jur. Judgments § 1007, p.865; 52 Am.
Jur., Torts § 131, p.467; Annotations,
166
A.L.R. 1099 (1947);
65 A.L.R. 1087 (1930);
27
A.L.R. 805 (1923).
[Footnote omitted.]
The accord and satisfaction achieved by the settlement is
especially important because it eliminated the necessity of
litigating the validity of Chemical's $31,500 claim for the
forged checks negotiated on the Baileys' home equity credit line.
Were this claim successfully challenged by the Baileys, it could
have totally eliminated Chemical's claim under its note and
mortgage, and relieved Newman of any liability for her legal
malpractice. Consequently, the settlement eliminated Newman's
opportunity to prove that her legal malpractice was not a
proximate cause of any loss eventually sustained by Stewart
Title.
Moreover, the trial court correctly noted that these
settlements should have accrued to Newman's benefit to eliminate
the consequences of her legal malpractice. The trial court also
correctly ruled that no evidence was offered regarding the value
of the mortgage and deed which Stewart Title obtained in
settlement for Citicorp. Such amounts should have accrued to
Newman's benefit. Thus, Stewart Title did not perform the
necessary prerequisites to trigger an obligation on Newman's part
to indemnify it. Stewart Title also offered no proof to
establish that the settlements were objectively reasonable.
Stewart Title's reliance on Tessmar v. Grosner,
23 N.J. 193
(1957), to support its argument that the reasonableness of
settlement need not be established with certainty is misplaced.
In sum, the judgment in favor of Newman on the claim asserted by
Stewart Title is affirmed substantially for the reasons expressed
by Judge Kirsten in his letter opinion of August 4, 1995.
However, we are satisfied that the trial court erred in entering judgment in favor of R.C. on Stewart Title's claim under the Underwriting Agreement. It is fundamental that parties to a contract may allocate risk of loss by agreeing to limit their liability as long as the limitation does not violate public policy. Moreira Constr. Co. v. Moretrench Corp., 97 N.J. Super. 391, 394 (App. Div. 1967), aff'd o.b., 51 N.J. 405 (1968); 5 Williston on Contracts § 781A at 709-10 (Jaeger ed., 3d ed. 1961). Clauses in private contracts that limit liability are also generally sustained so long as they do not adversely impact the public interest. Mayfair Fabrics v. Henley, 48 N.J. 483, 487 (1967).
Courts, however, will not enforce an exculpatory clause if the party benefiting from exculpation is subject to a positive duty imposed by law or is imbued with a public trust, or if exculpation of the party would adversely affect the public interest. McCarthy v. National Ass'n for Stock Car Auto Racing, Inc., 48 N.J. 539, 543 (1967); Hy-Grade Oil Co. v. New Jersey Bank, 138 N.J. Super. 112, 116 (App. Div. 1975), certif. denied, 70 N.J. 518 (1976); Mayfair Fabrics v. Henley, supra, 48 N.J. at 487; Kuzmiak v. Brookchester, Inc., 33 N.J. Super. 575, 580 (App. Div. 1955). Exculpatory clauses are more commonly upheld in the
commercial context. See Hy-Grade Oil Co. v. New Jersey Bank,
supra, 138 N.J. Super. at 116.
In a commercial setting, "[t]he judiciary will not undertake
the writing of a different or better contract between the
parties." Swisscraft Novelty Co. v. Alad Realty Corp.,
113 N.J.
Super. 416, 421 (App. Div. 1971). See also Marini v. Ireland,
56 N.J. 130, 143 (1970); Kampf v. Franklin Life Ins. Co.,
33 N.J. 36, 43 (1960); Washington Constr. Co., Inc. v. Spinella,
8 N.J. 212, 217 (1951). Where the interpretation of exculpatory clauses
are involved,
[t]he central question is not whether
the parties agreed to insure against loss the
risks they severally assumed inter sese but,
rather, whether they so clearly allocated the
risks that each party knew, or should have
known, the existence of its contingent
liability and was thus placed in a position
where it could protect itself against such
loss by adequate insurance coverage or
otherwise.
[Swisscraft Novelty Co. v. Alad Realty Corp.,
supra, 113 N.J. Super. at 422.]
"The scope and application of an exculpatory clause depends
on the particular circumstances [of a case]." Tannock v. New
Jersey Bell Telephone Co.,
212 N.J. Super. 506, 512 (Law Div.
1986), aff'd in part, rev'd in part,
223 N.J. Super. 1 (App. Div.
1988). The Tannock court offered the following analysis:
In a given case, factors such as
unconscionability and other contract defenses
may bear on the enforceability of the
exculpatory agreement. Broadway Maintenance
Corp. v. Rutgers,
90 N.J. 253 (1982)
(exculpatory clause upheld in construction
contract where it did not violate public
policy). However, it is well settled that
such provisions are to be construed strictly
against the party relying on the clause.
Carbone v. Cortlandt Realty Corp.,
58 N.J. 366 (1971) (an exculpatory clause in a
commercial lease should not be construed to
exculpate a landlord unless the clause
expressly so states or the intent to do so is
evident from the arrangement of the parties);
Kuzmiak v. Brookchester, 33 N.J. Super. 575
(App. Div. 1955) (exculpatory clause in a
residential lease that attempted to immunize
landlord from liability for an wrongdoing
held invalid).
[Id. at 512.]
Though offered as a two-pronged test for unconscionability,
the Tannock court analyzed the relative bargaining power of the
parties and the alleged unreasonability of the provision to
determine when an exculpatory clause should not be enforced. Id.
at 513.
In this case, Stewart Title has sought to exculpate itself
from liability for the costs of putting Citicorp in first lien
position though Section 5(C) in the Underwriting Agreement. The
trial court, however, reasoned that "the extent of the liability
under the indemnity letter is not based upon the letter but based
upon the interpretation of . . . the agreement." Thus, it would
not enforce Stewart Title's attempt to exculpate itself from
paying to put Citicorp in first lien position by the "circuitous"
route of Section 5C since it was "inequitable." This
interpretation, however, rendered Section 5C meaningless and left
R.C. liable only for its negligent, fraudulent, or intentional
wrongdoing under Section 5B.
There is no support in the record for this interpretation.
Even though Stewart Title drafted the Underwriting Agreement,
there is no evidence or even suggestion that R.C. was the victim
of an inequitable bargaining situation or that the Underwriting
Agreement violated public policy. During the testimony of the
R.C.'s president, Richard Cecere, no mention was made of
significant economic disparities between R.C. and Stewart Title.
To the contrary, the Underwriting Agreement is a private contract
between business entities. Both parties are sophisticated and
deal regularly with contract liability.
Furthermore, the language of Section 5 is clear and
unambiguous and establishes the division of loss and expenses
between the parties. When Stewart Title must pay a claim under
Section 5(C) because of the conditions contained in the indemnity
letter, such as its claim on behalf of Citicorp, R.C. became
liable to Stewart Title for the "entire amount of such loss."
The trial court's interpretation to the contrary rendered Section
5(c) completely meaningless. The judgment in favor of R.C.,
therefore, must be reversed and judgment of liability entered in
favor of Stewart Title against R.C. In addition, the matter is
remanded to the trial court to determine damages. In this
regard, Stewart Title argues that it is entitled to recover the
cost of its defense of Citicorp, including the $17,350 paid to
Chemical Bank and counsel fees. The payment of the $17,350 led
to the deed in lieu of foreclosure from the Baileys. The record
does not disclose the amount realized from the sale of the
property or, alternatively, the fair market value of the
property. These factors may have relevance to Stewart Title's
damage claim and should be considered by the trial court in
determining damages.
Accordingly, the judgment in favor of Newman is affirmed, the judgment in favor of R.C. is reversed, and judgment of liability is entered in favor of Stewart Title against R.C. The matter is remanded to the trial court to determine damages, counsel fees, and costs. We do not retain jurisdiction.
Footnote: 1This opinion repeats the actual language...."fourth-" and "fifth-party" complaints....used by the parties. However, the parties should have instead only entered crossclaims and counterclaims against the other parties already members to the suit.