Court Opinion

ID: 9566577
Source: CourtListenerOpinion
Date Created: 2023-08-21 19:40:59.940019+00
Date Added: 2024-06-11T09:38:33.270833
License: Public Domain

Justice TIMMONS-GOODSON
dissenting.
The 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’ 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’s 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.
It 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’s act is (1) expressly authorized by the principal, (2) committed within the scope of his employment and *98in furtherance of the principal’s 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’s 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).
Clearly, 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 “ ‘[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.’ ” 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’s 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.
The principle3 that when one of two persons must suffer loss by the misconduct of a third party, the person who “first reposes the confidence, or by his negligent conduct made it possible for the loss to occur, must bear the loss,” 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 “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”) (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); *99Robert E. Lee, North Carolina Law of Agency and Partnership § 57, at 73 (6th ed. 1977) (discussing the “innocence principle” as one of apparent authority).
Under 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 § 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 “acting at the time for the principal, and within the scope of the business intrusted to him”). Here, there is no contention that Parker acted with any real or apparent authority when he embezzled the sales proceeds. Thus, the “innocence principle,” as a principle of apparent authority, does not apply to the circumstances presented by the instant case.
The “innocence principle” 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 “less innocent”, that is, negligent in some manner:
The maxim is often put in the form of “one of two equally innocent parties,” 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, — 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.
1 Floyd R. Mechem, Law of Agency § 749, at 532 (2d ed. 1914) [hereinafter “Mechem”].
*100The cases relied upon by the majority perfectly illustrate the truth of Professor Mechem’s 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’s estate. Id. at 138. The guardian wasted the ward’s property and then died insolvent. Id. at 144. The Court determined that the defendant surety “fail[ed] to use ordinary caution either to protect himself or to protect the relator” which was “[c]learly . . . negligenft].” Id. By his negligence, the defendant enabled the misconduct of the guardian. The Court declared that: “No 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.” 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 “innocent,” but instead enabled the misconduct of the third party through his negligence and was properly held accountable for such negligence.
Similarly, 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, “fa]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.” Id. at 462, 74 L. Ed. at 967. Because the plaintiffs “saw fit to entrust [the certificate of title] to Napletone . . . they took the risk,” 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 “innocent” parties, but determined rather that the plaintiffs’ “conduct . . . contributed in some way, which reasonable care would have avoided, to the perpetration of the wrong.” 1 Mechera § 749, at 532.
The 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 *101a 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 “innocence principle” and determined that the defendants were required to bear the loss because they were “negligent, and there was a lack of due care on [their] part, in trusting [the attorney]” and because they “had the opportunity of protecting themselves, and failed to do so, by the check being made payable to the order of both.” Id. at 418,149 S.E. at 379. Thus, the Court in Liles made it clear that the defendants’ liability arose through negligence, rather than their mere employment of the malfeasant attorney.
In the instant case, unlike the situation in Barnes, Eliason, and Liles, we are faced with the unfortunate reality of two completely innocent — that is, non-negligent parties. Buyers had no reason to mistrust Parker, had no opportunity to prevent Parker’s 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’s 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 “lie where it has fallen.” 1 Mechem § 749, at 532.
Although the majority expressly recognizes that “agency law does not require the principal to absorb losses caused by actions outside the agent’s authority,” the majority nevertheless determines that buyers may be held liable for Parker’s malfeasance because they “reposed confidence in Parker.” This is true with every principal-agent relationship, however. Under the majority’s 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.
Unable to cite to any authority that supports its reasoning, the majority concludes that buyers should be held responsible for sellers’ loss because “buyers are normally in a better position than sellers to bear the loss that results from embezzlement by the closing attor*102ney.” 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’s decision to base buyers’ liability on the availability of insurance completely contradicts this nearly universal rule. I therefore disagree that equity requires buyers to absorb sellers’ loss.
I strongly believe that buyers’ liability must be premised on something more than general notions of equity that “seem[] to be resorted to only to cover loose reasoning or to span a gap without noticing it.” 2 Mechem § 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 “lie where it has fallen.” 1 Mechem § 749, at 532.1 recognize that this is a difficult case, but “we 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 ‘rope of sand'.’ ” Liles, 197 N.C. at 417, 149 S.E. at 379. Therefore, I respectfully dissent.
Justice HUDSON joins in this dissenting opinion.

. I refer hereafter to this principle as the “innocence principle” for ease of reading.