{ "id": 4152333, "name": "WILLIAM WOOD JOHNSON and wife, SUZANNE WAYNE JOHNSON v. TIMOTHY P. SCHULTZ and wife, SHELLEY D. SCHULTZ, DONALD A. PARKER, JERRY HALBROOK, Trustee, and STATE FARM BANK, F.S.B.", "name_abbreviation": "Johnson v. Schultz", "decision_date": "2010-04-15", "docket_number": "No. 75A09", "first_page": "90", "last_page": "102", "citations": [ { "type": "official", "cite": "364 N.C. 90" } ], "court": { "name_abbreviation": "N.C.", "id": 9292, "name": "Supreme Court of North Carolina" }, "jurisdiction": { "id": 5, "name_long": "North Carolina", "name": "N.C." }, "cites_to": [ { "cite": "671 S.E.2d 559", "category": "reporters:state_regional", "reporter": "S.E.2d", "case_ids": [ 12642559 ], "year": 2009, "opinion_index": -1, "case_paths": [ "/se2d/671/0559-01" ] }, { "cite": "671 S.E.2d 559", "category": "reporters:state_regional", "reporter": "S.E.2d", "case_ids": [ 12642559 ], "weight": 8, "year": 2009, "pin_cites": [ { "page": "566" }, { "page": "570" }, { "page": "563-64" }, { "page": "568-69" } ], "opinion_index": 0, "case_paths": [ "/se2d/671/0559-01" ] }, { "cite": "Va. Code Ann. \u00a7 6.1-2.21", "category": "laws:leg_statute", "reporter": "Va. Code Ann.", "year": 1999, "pin_cites": [ { "page": "(D)", "parenthetical": "requiring settlement agents to maintain malpractice insurance, blanket fidelity bonds or employee dishonesty insurance policies, and surety bonds" } ], "opinion_index": 0 }, { "cite": "91 N.C. 39", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8684085 ], "weight": 3, "year": 1884, "pin_cites": [ { "page": "44", "parenthetical": "citing, inter alia, Barnes, 73 N.C. 138" }, { "page": "44" } ], "opinion_index": 0, "case_paths": [ "/nc/91/0039-01" ] }, { "cite": "17 N.C. 393", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8692569 ], "year": 1833, "pin_cites": [ { "page": "396-97", "parenthetical": "\"No one can [in equity] be permitted to set up a benefit derived through the fraud of another, although he may not have had a personal agency in the imposition.\" (citation omitted)" } ], "opinion_index": 0, "case_paths": [ "/nc/17/0393-01" ] }, { "cite": "17 N.C. 317", "category": "reporters:state", "reporter": "N.C.", "year": 1833, "pin_cites": [ { "page": "319", "parenthetical": "\"No one can [in equity] be permitted to set up a benefit derived through the fraud of another, although he may not have had a personal agency in the imposition.\" (citation omitted)" } ], "opinion_index": 0 }, { "cite": "136 S.E.2d 279", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1964, "pin_cites": [ { "page": "284", "parenthetical": "citations omitted" } ], "opinion_index": 0 }, { "cite": "262 N.C. 16", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8565137 ], "year": 1964, "pin_cites": [ { "page": "23", "parenthetical": "citations omitted" } ], "opinion_index": 0, "case_paths": [ "/nc/262/0016-01" ] }, { "cite": "281 U.S. 457", "category": "reporters:federal", "reporter": "U.S.", "case_ids": [ 3913262 ], "weight": 2, "year": 1930, "pin_cites": [ { "page": "462", "parenthetical": "\"As between two innocent persons[,] one of whom must suffer the consequence of a breach of trustf,] the one who made it possible by his act of confidence must bear the loss.\"" }, { "page": "967", "parenthetical": "\"As between two innocent persons[,] one of whom must suffer the consequence of a breach of trustf,] the one who made it possible by his act of confidence must bear the loss.\"" } ], "opinion_index": 0, "case_paths": [ "/us/281/0457-01" ] }, { "cite": "73 N.C. 138", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8686893 ], "weight": 2, "year": 1875, "pin_cites": [ { "page": "144" } ], "opinion_index": 0, "case_paths": [ "/nc/73/0138-01" ] }, { "cite": "209 S.E.2d 795", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1974, "pin_cites": [ { "page": "799", "parenthetical": "alterations in original" } ], "opinion_index": 0 }, { "cite": "286 N.C. 24", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8563251 ], "year": 1974, "pin_cites": [ { "page": "30", "parenthetical": "alterations in original" } ], "opinion_index": 0, "case_paths": [ "/nc/286/0024-01" ] }, { "cite": "442 S.E.2d 98", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 4, "year": 1994, "pin_cites": [ { "page": "100" }, { "page": "101", "parenthetical": "internal quotation marks omitted" } ], "opinion_index": 0 }, { "cite": "114 N.C. App. 430", "category": "reporters:state", "reporter": "N.C. App.", "case_ids": [ 8527665 ], "weight": 2, "year": 1994, "pin_cites": [ { "page": "435" } ], "opinion_index": 0, "case_paths": [ "/nc-app/114/0430-01" ] }, { "cite": "154 S.E. 674", "category": "reporters:state_regional", "reporter": "S.E.", "year": 1930, "pin_cites": [ { "page": "676" } ], "opinion_index": 1 }, { "cite": "199 N.C. 413", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8602516 ], "year": 1930, "pin_cites": [ { "page": "415-16" } ], "opinion_index": 1, "case_paths": [ "/nc/199/0413-01" ] }, { "cite": "145 S.E.2d 316", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1965, "pin_cites": [ { "page": "318-19" } ], "opinion_index": 1 }, { "cite": "266 N.C. 64", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8559597 ], "year": 1965, "pin_cites": [ { "page": "68-69" } ], "opinion_index": 1, "case_paths": [ "/nc/266/0064-01" ] }, { "cite": "360 S.E.2d 786", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1987, "pin_cites": [ { "page": "789", "parenthetical": "stating that \"this Court has held with respect to apparent authority that where one of two persons must suffer loss by the fraud or misconduct of a third person, he who first reposes the confidence or by his negligent conduct made it possible for the loss to occur, must bear the loss\"" } ], "opinion_index": 1 }, { "cite": "320 N.C. 770", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 4730268 ], "year": 1987, "pin_cites": [ { "page": "774" } ], "opinion_index": 1, "case_paths": [ "/nc/320/0770-01" ] }, { "cite": "149 S.E. 377", "category": "reporters:state_regional", "reporter": "S.E.", "weight": 8, "year": 1929, "pin_cites": [ { "page": "379", "parenthetical": "quoting Wilmington & Weldon R.R. Co. v. Kitchin, 91 N.C. 39, 44 (1884)" }, { "page": "377" }, { "page": "378" }, { "page": "418" }, { "page": "379" }, { "page": "379" } ], "opinion_index": 1 }, { "cite": "197 N.C. 413", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8629318 ], "weight": 4, "year": 1929, "pin_cites": [ { "page": "418", "parenthetical": "quoting Wilmington & Weldon R.R. Co. v. Kitchin, 91 N.C. 39, 44 (1884)" }, { "page": "414" }, { "page": "415-16" }, { "page": "417" } ], "opinion_index": 1, "case_paths": [ "/nc/197/0413-01" ] }, { "cite": "27 S.E.2d 647", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 2, "year": 1943, "pin_cites": [ { "page": "649", "parenthetical": "citations omitted" }, { "page": "649" } ], "opinion_index": 1 }, { "cite": "223 N.C. 587", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8613983 ], "weight": 2, "year": 1943, "pin_cites": [ { "page": "589", "parenthetical": "citations omitted" }, { "page": "589" } ], "opinion_index": 1, "case_paths": [ "/nc/223/0587-01" ] }, { "cite": "193 S.E. 224", "category": "reporters:state_regional", "reporter": "S.E.", "weight": 3, "year": 1937, "pin_cites": [ { "page": "226" }, { "page": "226-27" }, { "page": "226-27" } ], "opinion_index": 1 }, { "cite": "212 N.C. 120", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8601183 ], "weight": 2, "year": 1937, "pin_cites": [ { "page": "122" }, { "page": "122-24" } ], "opinion_index": 1, "case_paths": [ "/nc/212/0120-01" ] }, { "cite": "515 S.E.2d 442", "category": "reporters:state_regional", "reporter": "S.E.2d", "year": 1999, "pin_cites": [ { "page": "444" } ], "opinion_index": 1 }, { "cite": "350 N.C. 573", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 131948 ], "year": 1999, "pin_cites": [ { "page": "577" } ], "opinion_index": 1, "case_paths": [ "/nc/350/0573-01" ] }, { "cite": "91 N.C. 39", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8684085 ], "weight": 3, "year": 1884, "pin_cites": [ { "page": "44" }, { "page": "44-45", "parenthetical": "holding the principals liable for the fraud of their agent who acted with apparent authority" } ], "opinion_index": 1, "case_paths": [ "/nc/91/0039-01" ] }, { "cite": "281 U.S. 457", "category": "reporters:federal", "reporter": "U.S.", "case_ids": [ 3913262 ], "weight": 9, "year": 1930, "pin_cites": [ { "page": "458" }, { "page": "965" }, { "page": "462" }, { "page": "967" }, { "page": "461" }, { "page": "967" }, { "page": "967" } ], "opinion_index": 1, "case_paths": [ "/us/281/0457-01" ] }, { "cite": "73 N.C. 138", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8686893 ], "weight": 5, "year": 1875, "pin_cites": [ { "page": "138" }, { "page": "144" } ], "opinion_index": 1, "case_paths": [ "/nc/73/0138-01" ] }, { "cite": "209 S.E.2d 795", "category": "reporters:state_regional", "reporter": "S.E.2d", "weight": 2, "year": 1974, "pin_cites": [ { "page": "799", "parenthetical": "discussing apparent authority" }, { "page": "799" } ], "opinion_index": 1 }, { "cite": "286 N.C. 24", "category": "reporters:state", "reporter": "N.C.", "case_ids": [ 8563251 ], "weight": 2, "year": 1974, "pin_cites": [ { "page": "30", "parenthetical": "discussing apparent authority" }, { "page": "30-31" } ], "opinion_index": 1, "case_paths": [ "/nc/286/0024-01" ] } ], "analysis": { "cardinality": 1244, "char_count": 30138, "ocr_confidence": 0.747, "pagerank": { "raw": 7.057802777465756e-08, "percentile": 0.42547268199806243 }, "sha256": "da0501b61a5dc71db8b3f872c03da82994b6429374d706e5b82f61bdcb9c19af", "simhash": "1:d2eef1cca68e945c", "word_count": 4945 }, "last_updated": "2023-07-14T15:08:37.384656+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [ "Justice HUDSON joins in this dissenting opinion." ], "parties": [ "WILLIAM WOOD JOHNSON and wife, SUZANNE WAYNE JOHNSON v. TIMOTHY P. SCHULTZ and wife, SHELLEY D. SCHULTZ, DONALD A. PARKER, JERRY HALBROOK, Trustee, and STATE FARM BANK, F.S.B." ], "opinions": [ { "text": "MARTIN, Justice.\nThis appeal presents the question of how North Carolina law allocates the risk of loss between a buyer and a seller when the closing attorney in a residential real estate transaction embezzles the sales proceeds. We conclude that in most residential closings buyers possess practical advantages over sellers in terms of protecting themselves from attorney misconduct. Therefore, under principles of equity recognized by this Court as early as 1875, buyers must bear the risk of such losses.\nThe facts of the instant appeal arise from a real estate transaction involving William and Suzanne Johnson (sellers or plaintiffs) and Timothy and Shelley Schultz (buyers). On 17 November 2005, buyers contracted to purchase sellers\u2019 home in Benson, North Carolina for $277,500. Buyers hired attorney Donald Parker to represent them during the closing process. On behalf of buyers, Parker searched the title to the property, obtained title insurance, prepared and recorded a power of attorney, prepared the closing documents, and conducted the closing. Sellers were familiar with Parker from past dealings and paid him $125 to prepare a deed to the property. On 3 January 2006, the parties closed the transaction at Parker\u2019s law office.\nTo help pay for the property, buyers financed $200,320.24 from State Farm Bank (the Bank). On the day of closing, the Bank wired this money to Parker\u2019s trust account. Buyers paid the remaining balance from their personal funds. On 3 January 2006 at 4:46 p.m., Parker recorded the general warranty deed and the deed of trust. Thereafter, Parker tendered sellers a check drawn from his trust account for the net proceeds of the sale. When sellers attempted to cash Parker\u2019s check in May 2006, it was returned to them marked \u201cNSF\u201d for non-sufficient funds. The State Bar\u2019s subsequent investigation revealed that Parker had embezzled the closing proceeds on 4 January 2006.\nOn 13 July 2006, sellers filed a complaint against buyers, Parker, Jerry Halbrook as trustee under the deed of trust, and the Bank (defendants). Sellers filed an amended complaint against defendants on 20 July 2007 asking the trial court to set aside the conveyance of property and revert fee title back to sellers. In the alternative, sellers requested $277,500 in monetary damages. All defendants except for Parker \u2014 who admitted all allegations in the complaint \u2014 moved for summary judgment. The trial court ultimately concluded that sellers must bear the risk of loss since they were entitled to the sales proceeds at the time of the embezzlement. The trial court granted defendants\u2019 summary judgment motion, and sellers appealed.\nThe Court of Appeals, in a divided opinion, reversed the trial court\u2019s grant of summary judgment in favor of defendants. Johnson v. Schultz, 195 N.C. App. \u2014, 671 S.E.2d 559 (2009). The Court of Appeals concluded that placing the risk of loss on buyers is \u201cnot only more consistent with how residential real estate transactions are generally closed in this state, but also produces a more equitable result.\u201d Id. at-, 671 S.E.2d at 566. Since the trial court did not consider whether Parker acted as sellers\u2019 attorney \u2014 a disputed issue of fact\u2014 the Court of Appeals remanded the case with instructions for the trial court to consider this issue to determine if sellers must share in the loss. Id. at-. 671 S.E.2d at 570.\nBefore turning to the merits of this appeal, we briefly address two preliminary issues. First, we observe that the parties utilized the settlement method rather than the escrow method at closing. All three judges at the Court of Appeals agreed on this point, and the majority opinion describes both closing methods in detail. Id. at-, 671 S.E.2d at 563-64. Second, because the parties did not engage in an escrow closing, the entitlement rule applied in GE Capital Mortgage Services, Inc. v. Avent, 114 N.C. App. 430, 442 S.E.2d 98 (1994), is not applicable to the present case. The entitlement rule provides an equitable framework for placing losses during escrow transactions on \u201cthe party who was entitled to the property at the time of the . . . embezzlement.\u201d Id. at 432, 442 S.E.2d at 100. Avent applied the entitlement rule to an escrow method closing, id., and we decline to extend it to settlement method closings.\nHaving resolved these preliminary issues, we now turn to principles of equity that have been applied under North Carolina jurisprudence to allocate losses between innocent parties. The court in Avent stated that its application of the entitlement rule was \u201cconsistent with the equitable principle that where one of two persons must suffer loss by the fraud or misconduct of a third person, he who first reposes the confidence or by his negligent conduct made it possible for the loss to occur, must bear the loss.\u201d 114 N.C. App. at 435, 442 S.E.2d at 101 (internal quotation marks omitted) (quoting Zimmerman v. Hogg & Allen, P.A., 286 N.C. 24, 30, 209 S.E.2d 795, 799 (1974) (alterations in original) (citations omitted)). Thus, while the entitlement rule is limited to escrow closings, there are no similar restrictions on the broader equitable principle underlying the Avent decision.\nAs early as 1875, this Court declared that \u201cno principle of equity is better established than that where one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss, must sustain it.\u201d State ex rel. Barnes v. Lewis, 73 N.C. 138, 144 (1875). This equitable maxim is not unique to this jurisdiction and is a foundational principle of American common law. See, e.g., Eliason v. Wilborn, 281 U.S. 457, 462, 74 L. Ed. 962, 967 (1930) (\u201cAs between two innocent persons[,] one of whom must suffer the consequence of a breach of trustf,] the one who made it possible by his act of confidence must bear the loss.\u201d); . 1 William Lawrence Clark & Henry H. Skyles, A Treatise on the Law of Agency \u00a7 493, at 1070 (1905) (\u201c[W]here one or two innocent persons must suffer from the agent\u2019s wrongful act, it is just and reasonable that the principal, who has put it in the agent\u2019s power to commit such wrong, should bear the loss, rather than the innocent third person.\u201d (citations omitted)); 2 John Norton Pomeroy, Equity Jurisprudence \u00a7 363, at 9 (Spencer W. Symons ed., 5th ed. 1941) (\u201c \u2018He who trusts most must lose most.\u2019 \u201d (citations omitted)).\nA principal is typically only responsible \u201cto third parties for injuries resulting from the fraud of his agent committed during the existence of the agency and within the scope of the agent\u2019s actual or apparent authority from the principal.\u201d Norburn v. Mackie, 262 N.C. 16, 23, 136 S.E.2d 279, 284 (1964) (citations omitted). In the present case there is no evidence that Parker acted within the scope of his actual or apparent authority when he embezzled the sales proceeds.\nEven where the law of agency does not apply, however, equitable principles continue to operate. See Goode v. Hawkins, 17 N.C. 317, 319, 17 N.C. 393, 396-97 (1833) (\u201cNo one can [in equity] be permitted to set up a benefit derived through the fraud of another, although he may not have had a personal agency in the imposition.\u201d (citation omitted)). Thus, while agency law does not require the principal to absorb losses caused by actions outside the agent\u2019s authority, equity may nonetheless place these losses on the party \u201cwho first repose [d] the confidence, or by his negligent conduct made it possible for the loss to occur.\u201d Wilmington & Weldon R.R., Co. v. Kitchin, 91 N.C. 39, 44 (1884) (citing, inter alia, Barnes, 73 N.C. 138).\nTo determine which party reposed confidence in Parker, we must consider the. customary procedures for closing real estate transactions in North Carolina. Although both parties in a residential real estate closing are free to hire their own attorney, \u201c[t]he most common practice is for the closing attorney to represent the purchaser and lender while performing limited functions for the seller (such as the preparation of the deed).\u201d Patrick K. Hetrick, Larry A. Outlaw & Patricia A. Moylan, N.C. Real Estate Comm\u2019n, North Carolina Real Estate Manual 508 (2008-2009 ed.) (italics omitted) [hereinafter North Carolina Real Estate Manual]. In fact, the State Bar instructs that the closing attorney \u201cmay prepare the deed as an accommodation to the needs of her client, the buyer, without becoming the lawyer for Seller.\u201d N.C. St. B. Formal Ethics Op. 10 (July 14, 2005), reprinted in North Carolina State Bar Lawyer\u2019s Handbook 2008, at 317 (2008) [hereinafter Ethics Opinion]. Moreover, the buyer\u2019s attorney usually \u201chandles or coordinates the closing, prepares the closing statement(s), and disburses funds.\u201d North Carolina Real Estate Manual 509.\nBecause of these customary procedures for residential real estate closings, buyers have recourse to actionable legal claims not available to sellers. By embezzling the funds provided for the purchase of sellers\u2019 home, Parker breached fiduciary duties he undertook on behalf of buyers. Buyers also maintain the possibility of recovering a portion of their loss from the Client Security Fund of the North Carolina State Bar (CSF). The CSF reimburses \u201cclients who have suffered financial loss as the result of dishonest conduct of lawyers engaged in the private practice of law in North Carolina.\u201d 27 NCAC ID .1401(a) (Dec. 8, 1994). Accordingly, \u201cit has been regarded as more appropriate for costs flowing from a lawyer\u2019s misconduct generally to be borne by the client rather than by an innocent third person.\u201d Restatement (Third) of the Law Governing Lawyers \u00a7 26 cmt. b (2000).\nFurthermore, in a typical residential real estate transaction, closing protection letters place buyers in a better position than sellers to bear any losses that result from attorney misconduct. Closing protection letters, which are usually made available by title insurance companies, protect buyers from closing defects that affect the status of title. See 2 James A. Webster, Jr., Webster\u2019s Real Estate Law in North Carolina \u00a7 27-10, at 1195 (Patrick K. Hetrick & James B. McLaughlin, Jr. eds., 5th ed. 1999). More particularly, \u201cclosing protection service . . . covers losses suffered due to the fraud or dishonesty of the . . . approved attorney in the handling of the protected party\u2019s funds or documents in connection with the closing.\u201d Id. at 1195. Notably, this coverage can only be obtained by \u201ca purchaser, lessee', or lender.\u201d Id. at 1194. As a result, while insurance coverage is normally an irrelevant inquiry when allocating losses between parties, we find it significant that the market as a whole allows buyers to protect themselves through a means entirely unavailable to sellers. This fact provides further indication that, at least in a typical transaction, buyers are better positioned than sellers to recover losses caused by a dishonest closing attorney.\nAlthough buyers observe that sellers chose not to accept cash or some other surer method of payment, we do not believe the loss here should fall on sellers simply because they adhered to the nearly universal practice of accepting a check drawn from the closing attorney\u2019s trust account. See North Carolina Real Estate Manual 524 (\u201cThe attorney will deposit all funds paid by the purchaser into his trust account and then will make all required disbursements from the trust account.\u201d). As an initial proposition, we are unwilling to accept the consequences likely to result if the standard of practice would require lawyers to possess and disburse tens of thousands of dollars in cash at real estate closings. Moreover, as noted by the Court of Appeals, \u201cshifting the risk of loss based merely on the form of payment the seller accepts would significantly disrupt the way residential real estate closings are handled under our current system.\u201d Johnson v. Schultz, 195 N.C. App. at \u2014, 671 S.E.2d at 568-69. Rather, equity dictates that the loss should lie with the party \u201cwho first repose [d] the confidence, or by his negligent conduct made it possible for the loss to occur.\u201d Kitchin, 91 N.C. at 44. Given that the parties here followed the customary procedures in this state for closing residential real estate transactions, we conclude that buyers reposed confidence in Parker as their closing attorney.\nIn summary, after considering the procedures customarily used for residential real estate closings and applying long-standing principles of equity, we hold that buyers must bear the loss caused by the misconduct of their own retained attorney. We stress that it is the buyer alone in most residential real estate transactions who is legally deemed to repose confidence in the closing attorney through the existence of the attorney-client relationship. In the present case, however, there is evidence that in addition to paying Parker $125 to prepare a deed to the property, sellers had a prior relationship with him. Thus, a factual inquiry must be conducted to determine whether Parker also represented sellers during the closing process. Therefore, we remand this case to the trial court to determine if an attorney-client relationship existed between sellers and Parker.\nTo determine whether an attorney-client relationship in fact existed between sellers and Parker, the trial court should consider the guidance offered in the Ethics Opinion as to how a closing attorney \u201cmay prepare the deed as an accommodation to the needs of her client, the buyer, without becoming the lawyer for Seller.\u201d To avoid establishment of an attorney-client relationship, the Ethics Opinion instructs lawyers to make certain clarifications and disclosures about their role in the transaction as well as to abstain from giving the seller legal advice. Id. On remand, we instruct the trial court to consider these factors and determine whether Parker, as closing attorney, exceeded the ethical safe harbor in the Ethics Opinion and established an attorney-client relationship with sellers.\nTo be sure, Parker\u2019s misconduct has adversely affected all parties to this proceeding. Although lawyers rarely embezzle closing proceeds, such misconduct has a devastating effect on the party who is ultimately left to incur the loss. While the General Assembly enacted legislation holding settlement agents responsible for a loss liable for \u201cactual damages plus reasonable attorneys\u2019 fees\u201d and further requires payment to the injured party of \u201can amount equal to one thousand dollars ($1,000) or double the amount of interest payable on any loan for the first 60 days after the loan closing,\u201d N.C.G.S. \u00a7 45A-7 (2009), this statute provides little or no protection when the embezzler is judgment proof.\nFor the reasons stated, we affirm the decision of the Court of Appeals. We remand this case to the Court of Appeals for further remand to the trial court for further proceedings not inconsistent with this opinion.\nAFFIRMED.\n. The CSF provides no guarantee of complete relief as it is a discretionary fund that caps recovery sustained by an applicant due to the conduct of one attorney at $100,000. 27 NCAC ID .1418 (e), (g) (Mar. 6, 1997).\n. The approach used in Virginia ensures that victimized parties are made whole, even if the embezzler is judgment proof. See Va. Code Ann. \u00a7 6.1-2.21(D) (1999) (requiring settlement agents to maintain malpractice insurance, blanket fidelity bonds or employee dishonesty insurance policies, and surety bonds).", "type": "majority", "author": "MARTIN, Justice." }, { "text": "Justice TIMMONS-GOODSON\ndissenting.\nThe majority holds for the first time that innocent buyers in a residential real estate transaction, by virtue of their mere employment of a closing attorney, are liable for the sellers\u2019 loss arising from the active malfeasance of the closing attorney. The majority explains that this result is equitable because the buyers are more likely to have insurance. Because the majority\u2019s decision inflicts incalculable damage upon the settled law of agency and violates the general rule that prohibits consideration of insurance coverage in determining liability, I respectfully dissent.\nIt is well established in North Carolina that an attorney-client relationship is based upon principles of agency. E.g., Dunkley v. Shoemate, 350 N.C. 573, 577, 515 S.E.2d 442, 444 (1999). A universal rule of agency provides that a principal may not be held liable for the torts of his agent unless the agent\u2019s act is (1) expressly authorized by the principal, (2) committed within the scope of his employment and in furtherance of the principal\u2019s business, or (3) ratified by the principal. See, e.g., Snow v. DeButts, 212 N.C. 120, 122, 193 S.E. 224, 226 (1937). Mere employment of an agent is insufficient to impose liability upon the principal for the agent\u2019s wrongful acts committed outside the scope of employment. See id. at 122-24, 193 S.E. at 226-27; Salmon v. Pearce, 223 N.C. 587, 589, 27 S.E.2d 647, 649 (1943) (citations omitted).\nClearly, the acts of embezzlement by attorney Parker far exceeded the scope of his employment or any apparent or actual authority invested in him by either party, and the majority concedes as much. The majority nevertheless determines that the innocent buyers may be held liable for their employment of Parker under the principle that \u201c \u2018[w]here one of two persons must suffer loss by the fraud or misconduct of a third person, he who first reposes the confidence, or by his negligent conduct made it possible for the loss to occur, must bear the loss.\u2019 \u201d Virginia-Carolina Joint Stock Land Bank v. Liles, 197 N.C. 413, 418, 149 S.E. 377, 379 (1929) (quoting Wilmington & Weldon R.R. Co. v. Kitchin, 91 N.C. 39, 44 (1884)). This principle, taken out of context and presented without analysis by the majority, may perhaps appear at first blush to support the majority\u2019s proposition that an innocent, non-negligent party may be nonetheless held liable for the malfeasance of an agent. Careful examination of the legal precedent, however, including all the cases relied upon by the majority, quickly reveals that the principle is simply inapplicable to the facts of the present case.\nThe principle that when one of two persons must suffer loss by the misconduct of a third party, the person who \u201cfirst reposes the confidence, or by his negligent conduct made it possible for the loss to occur, must bear the loss,\u201d id., is generally regarded as a principle of apparent authority under the law of agency. See, e.g., Investors Title Ins. Co. v. Herzig, 320 N.C. 770, 774, 360 S.E.2d 786, 789 (1987) (stating that \u201cthis Court has held with respect to apparent authority that where one of two persons must suffer loss by the fraud or misconduct of a third person, he who first reposes the confidence or by his negligent conduct made it possible for the loss to occur, must bear the loss\u201d) (citing, inter alia, Zimmerman v. Hogg & Allen, P.A., 286 N.C. 24, 30, 209 S.E.2d 795, 799 (1974) (discussing apparent authority)); Kitchin, 91 N.C. at 44-45 (holding the principals liable for the fraud of their agent who acted with apparent authority); Robert E. Lee, North Carolina Law of Agency and Partnership \u00a7 57, at 73 (6th ed. 1977) (discussing the \u201cinnocence principle\u201d as one of apparent authority).\nUnder apparent authority, a principal may be held liable for the misconduct of his agent if the agent acts within the scope of his apparent authority and the innocent third party has no notice of the limitation of the authority. See, e.g., Zimmerman, 286 N.C. at 30-31, 209 S.E.2d at 799; 1 William Lawrence Clark & Henry H. Skyles, Law of Agency \u00a7 493, at 1070-71 (1905) (relating that a principal is bound by even the wrongful acts of his agent as long as the agent was \u201cacting at the time for the principal, and within the scope of the business intrusted to him\u201d). Here, there is no contention that Parker acted with any real or apparent authority when he embezzled the sales proceeds. Thus, the \u201cinnocence principle,\u201d as a principle of apparent authority, does not apply to the circumstances presented by the instant case.\nThe \u201cinnocence principle\u201d is also sometimes invoked by courts in cases in which the direct loss to one of the parties has been caused by the misconduct of a third party who may not technically be the agent of one of the parties, but whose misconduct was nevertheless somehow enabled by one of the parties. In such cases, one of the parties will invariably be found to be \u201cless innocent\u201d, that is, negligent in some manner:\nThe maxim is often put in the form of \u201cone of two equally innocent parties,\u201d etc.; but... it is clear that, in general, there is no reason for preferring one of two equally innocent parties, and the loss must in general lie where it has fallen. It seems perfectly clear that the incidence of the loss can only be shifted where the parties were not equally innocent, and that, before the loss can be thrown upon the principal, he must be shown to have been guilty of some misconduct, \u2014 that his conduct must have contributed in some way, .which reasonable care would have avoided, to the perpetration of the wrong. Certainly the mere employment of an agent in the ordinary way is not such misconduct, unless we are prepared to say that one avails himself of this common, useful and supposedly lawful instrumentality at his risk, and this has not hitherto been deemed to be the law.\n1 Floyd R. Mechem, Law of Agency \u00a7 749, at 532 (2d ed. 1914) [hereinafter \u201cMechem\u201d].\nThe cases relied upon by the majority perfectly illustrate the truth of Professor Mechem\u2019s observations. For example, in State ex rel. Barnes v. Lewis, 73 N.C. 138 (1875), the State of North Carolina, acting on behalf of the estate of the plaintiff ward, brought a civil action against the defendant as surety to the bond given by the proposed guardian of the ward\u2019s estate. Id. at 138. The guardian wasted the ward\u2019s property and then died insolvent. Id. at 144. The Court determined that the defendant surety \u201cfail[ed] to use ordinary caution either to protect himself or to protect the relator\u201d which was \u201c[c]learly . . . negligenft].\u201d Id. By his negligence, the defendant enabled the misconduct of the guardian. The Court declared that: \u201cNo fraud is imputed to the defendant: but no principle of equity is better established than that where one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss, must sustain it.\u201d Id. Thus, although the Court in Barnes declared the defendant innocent of actual fraud, the defendant was clearly negligent and thereby liable. Hence, the defendant in Barnes was not truly \u201cinnocent,\u201d but instead enabled the misconduct of the third party through his negligence and was properly held accountable for such negligence.\nSimilarly, the plaintiffs in Eliason v. Wilborn, 281 U.S. 457, 74 L. Ed. 962 (1930), negligently entrusted a certificate of title to a third person, Napletone, who through forgery then fraudulently obtained a new certificate of title in himself, and subsequently sold the new certificate of title to innocent buyers. See id. at 458, 74 L. Ed. at 965. The plaintiffs sought cancellation of the deed and certificates issued to the innocent buyers. The United States Supreme Court stated that, \u201cfa]s between two innocent persons one of whom must suffer the consequence of a breach of trust the one who made it possible by his act of confidence must bear the loss.\u201d Id. at 462, 74 L. Ed. at 967. Because the plaintiffs \u201csaw fit to entrust [the certificate of title] to Napletone . . . they took the risk,\u201d id. at 461, 74 L. Ed. at 967, and the Court affirmed judgment for the buyers, id. at 452, 74 L. Ed. at 967. Thus, as was the case in Barnes, the Court was not faced with two truly \u201cinnocent\u201d parties, but determined rather that the plaintiffs\u2019 \u201cconduct . . . contributed in some way, which reasonable care would have avoided, to the perpetration of the wrong.\u201d 1 Mechera \u00a7 749, at 532.\nThe case of Bank v. Liles is also instructive. In Liles the plaintiff-bank brought suit to recover a $4500 loan to the defendant-borrowers. 197 N.C. at 414, 149 S.E. at 377. The note was secured by a deed of trust on property that the defendants warranted-was unencumbered. Id. The property was, however, encumbered by another lien. Id. The plaintiff-bank executed the loan by issuing a check payable to the defendants and their attorney. The defendants endorsed the check over to the attorney with directions for him to pay the balance on the prior lien, but instead the attorney absconded. 197 N.C. at 415-16, 149 S.E. at 378. In reviewing the case, this Court recited the \u201cinnocence principle\u201d and determined that the defendants were required to bear the loss because they were \u201cnegligent, and there was a lack of due care on [their] part, in trusting [the attorney]\u201d and because they \u201chad the opportunity of protecting themselves, and failed to do so, by the check being made payable to the order of both.\u201d Id. at 418,149 S.E. at 379. Thus, the Court in Liles made it clear that the defendants\u2019 liability arose through negligence, rather than their mere employment of the malfeasant attorney.\nIn the instant case, unlike the situation in Barnes, Eliason, and Liles, we are faced with the unfortunate reality of two completely innocent \u2014 that is, non-negligent parties. Buyers had no reason to mistrust Parker, had no opportunity to prevent Parker\u2019s misconduct, and did nothing to enable the embezzlement. In short, there was no lack of due care on the part of buyers. Buyers did nothing other than employ Parker to conduct the closing, and mere employment of an agent is insufficient to impose liability upon the principal for the agent\u2019s wrongful acts. See Salmon, 223 N.C. at 589, 27 S.E.2d at 649; Snow, 212 N.C. at 122-24,193 S.E. at 226-27. Accordingly, the loss sustained by sellers cannot be shifted to buyers and must \u201clie where it has fallen.\u201d 1 Mechem \u00a7 749, at 532.\nAlthough the majority expressly recognizes that \u201cagency law does not require the principal to absorb losses caused by actions outside the agent\u2019s authority,\u201d the majority nevertheless determines that buyers may be held liable for Parker\u2019s malfeasance because they \u201creposed confidence in Parker.\u201d This is true with every principal-agent relationship, however. Under the majority\u2019s reasoning, innocent, non-negligent principals may now be held liable to third persons for the misconduct of their agents, even if the misconduct exceeds the scope of employment. This has never before been the law in North Carolina and should not be so now.\nUnable to cite to any authority that supports its reasoning, the majority concludes that buyers should be held responsible for sellers\u2019 loss because \u201cbuyers are normally in a better position than sellers to bear the loss that results from embezzlement by the closing attorney.\u201d Buyers are better positioned to sustain the loss, the majority asserts, because of the availability of insurance coverage to buyers. This Court has long held, however, that evidence of insurance coverage is irrelevant to the substantive inquiry of a case. E.g., Fincher v. Rhyne, 266 N.C. 64, 68-69, 145 S.E.2d 316, 318-19 (1965); Keller v. Caldwell Furn. Co., 199 N.C. 413, 415-16, 154 S.E. 674, 676 (1930). The majority\u2019s decision to base buyers\u2019 liability on the availability of insurance completely contradicts this nearly universal rule. I therefore disagree that equity requires buyers to absorb sellers\u2019 loss.\nI strongly believe that buyers\u2019 liability must be premised on something more than general notions of equity that \u201cseem[] to be resorted to only to cover loose reasoning or to span a gap without noticing it.\u201d 2 Mechem \u00a7 1986, at 1552. Because sellers fail to show that buyers in any manner contributed or enabled the theft of the sales proceeds by Parker, sellers cannot shift their loss to buyers, and the loss must \u201clie where it has fallen.\u201d 1 Mechem \u00a7 749, at 532.1 recognize that this is a difficult case, but \u201cwe cannot break into well-settled principles of law in hard cases. If we did, we would have no orderly system, and law would be a \u2018rope of sand'.\u2019 \u201d Liles, 197 N.C. at 417, 149 S.E. at 379. Therefore, I respectfully dissent.\nJustice HUDSON joins in this dissenting opinion.\n. I refer hereafter to this principle as the \u201cinnocence principle\u201d for ease of reading.", "type": "dissent", "author": "Justice TIMMONS-GOODSON" } ], "attorneys": [ "Woodruff, Reece & Fortner, by Gordon C. Woodruff and Mary McCullers Reece, for plaintiff-appellees.", "Pendergrass Law Firm, PLLC, by James K. Pendergrass, Jr., for defendant-appellants Timothy and Shelley Schultz, Jerry. Halbrook, and State Farm Bank, F.S.B.", "Katherine Jean, Counsel, and David R. Johnson, Deputy Counsel, for North Carolina State Bar, amicus curiae.", "Horack Talley Pharr & Lowndes, P.A., by Robert B. McNeill and Phillip E. Lewis, for North Carolina Land Title Association, amicus curiae." ], "corrections": "", "head_matter": "WILLIAM WOOD JOHNSON and wife, SUZANNE WAYNE JOHNSON v. TIMOTHY P. SCHULTZ and wife, SHELLEY D. SCHULTZ, DONALD A. PARKER, JERRY HALBROOK, Trustee, and STATE FARM BANK, F.S.B.\nNo. 75A09\n(Filed 15 April 2010)\nReal Estate\u2014 embezzlement by closing attorney \u2014 risk of loss \u2014 born by buyers\nThe trial court erred by granting summary judgment for the buyers in an action arising from the embezzlement of escrow funds by an attorney during a real estate closing, and the Court of Appeals correctly reversed that judgment. Considering the procedures customarily used for residential real estate closings and applying long-standing principles of equity, the buyers must bear the loss caused by the misconduct of their own attorney. However, in this case, there is evidence of a prior relationship with the attorney by the sellers, and the matter was remanded for a factual inquiry into whether the attorney also represented the sellers during the closing process.\nJustice TIMMONS-GOODSON dissenting.\nJustice HUDSON joins in this dissenting opinion.\nAppeal pursuant to N.C.G.S. \u00a7 7A-30(2) from the decision of a divided panel of the Court of Appeals, 195 N.C. App.-, 671 S.E.2d 559 (2009), reversing and remanding a judgment entered on 16 October 2007 by Judge Jack A. Thompson in Superior Court, Johnston County. Heard in the Supreme Court on 8 September 2009.\nWoodruff, Reece & Fortner, by Gordon C. Woodruff and Mary McCullers Reece, for plaintiff-appellees.\nPendergrass Law Firm, PLLC, by James K. Pendergrass, Jr., for defendant-appellants Timothy and Shelley Schultz, Jerry. Halbrook, and State Farm Bank, F.S.B.\nKatherine Jean, Counsel, and David R. Johnson, Deputy Counsel, for North Carolina State Bar, amicus curiae.\nHorack Talley Pharr & Lowndes, P.A., by Robert B. McNeill and Phillip E. Lewis, for North Carolina Land Title Association, amicus curiae." }, "file_name": "0090-01", "first_page_order": 184, "last_page_order": 196 }