June 2007
Proposed Real Property Ethics Opinions Pending
By
Chris Burti, Vice President and Legal Counsel, Statewide Title, Inc.
There
are two proposed Formal Ethics Opinions that would have an impact on real
property practice if adopted and which we feel merit an article that may promote
due consideration and discussion among practitioners. They are proposed FEO
2007-9 and FEO 2006-3. Proposed FEO 2007-9 attempts to address the issues
arising for a closing attorney when the seller’s conditions concerning deed
delivery conflict with the instructions of the buyer. The facts posited by the
inquiry occur often enough that we will benefit from having the questions
addressed as long as the answers are clear and cover the most likely situations.
The proposed opinion seems to address the issues in a fashion that will promote
greater certainty for practitioners when these conflicts arise.
In the first inquiry, the settlement conference has occurred and the attorney has updated the title, recorded the deed, deposited the check into the trust account but not disbursed when the buyer changes its mind and demands return of the proceeds. The proposed response recognizes that as title has passed and all conditions have been met that the attorney has a fiduciary obligation to the seller to deliver the funds even though not representing the seller. This response rejects the erroneous perception of an attorney as a ‘hired gun’ that will do the client’s bidding right or wrong. The opinion would also logically prohibit a subsequent representation of the buyer by the attorney in an action for rescission.
If the buyer’s demand precedes the recording of the deed it does not change the opinion. The seller delivered the deed conditioned upon the sale proceeds being disbursed when all other conditions were met. “If all other conditions on the sale were satisfied and in the absence of fraud by the seller, the lawyer must fulfill the condition on the delivery of the deed by disbursing the proceeds. A deed becomes effective as a transfer of title between the parties upon its execution and delivery. Newell v. Edwards, 7 N.C. App. 650, 173 S.E.2d 504 (1970). The fact that the deed was not recorded does not affect the equities between the parties or Attorney’s obligation to the parties.” The opinion also addresses the reverse situation where the attorney represents the seller and the seller seeks to withdraw after the conditions are met, but prior to recording. The outcome is the same and for the same reasons.
It
should be observed that the committee addressing this opinion was inconsistent
in its use of the term “closing” that may point out an issue of current
relevance to the real property Bar. There is currently a significant amount of
conversation among real property practitioners as to ‘when’ closing has
occurred. The opinion assumes at one point that closing constitutes the
settlement conference only, but distinguishes it at another point.
Many practitioners use the term in this fashion, but many more also feel
that closing has not occurred until title has been updated, the documents
recorded and funds disbursed. It would be helpful if the term had a more
consistent application.
The
full text of the proposed FEO 2007-9 follows.
Lawyer’s
Obligation to Disburse Closing Funds
Proposed
opinion rules that a closing lawyer must comply with the conditions placed upon
the delivery of a deed by the seller, including recording the deed and
disbursing proceeds, despite receiving contrary instructions from the buyer.
Editor’s
Note: This opinion expands upon 99 Formal Ethics Opinion 9. To the extent that
this opinion differs from 99 FEO 9, that opinion is overruled.
Inquiry
#1:
Attorney
represented Small Corporation on the purchase of a lot from Development Company.
After the closing, Attorney deposited the check for the purchase price in his
trust account and recorded the deed at the register of deeds. When he returned
from the courthouse, he received a telephone call from an official with Small
Corporation who stated that Small Corporation did not want to purchase the lot
anymore because company officials had just learned that a house with a basement
could not be built on the lot. The corporate official instructed Attorney not to
disburse any of the closing funds although the deed was already recorded and
title vested in Small Corporation. Development Company, the seller, demanded the
sale proceeds. What should Attorney do?
Opinion
#1:
Normally,
a client’s decision not to proceed with a transaction must be honored by the
lawyer and, if necessary, the lawyer must restore the status quo
ante by returning documents, property, or funds to the appropriate parties
to the transaction. Comment [1] to Rule 1.2 of the Revised Rules of Professional
Conduct states, “[t]he client has ultimate authority to determine the purposes
to be served by legal representation within the limits imposed by law and the
lawyer’s professional obligations.” However, a closing lawyer must also
comply with the conditions placed upon the delivery of the deed by the seller
absent fraud. If the seller delivered the executed deed to the lawyer upon the
condition that the deed would only be recorded if the purchase price was paid,
the lawyer has fiduciary responsibilities to the seller even if the seller is
not the lawyer’s client. See, e.g.,
RPC 44 (conditional delivery of loan proceeds). Because title has passed to the
buyer, the lawyer must satisfy the conditions of the transfer of the property by
disbursing the sale proceeds. The lawyer must notify the buyer and the buyer can
then take appropriate legal action to seek to have the sale rescinded.
Inquiry
#2:
May
Attorney represent Small Corporation in the subsequent action for rescission?
Opinion
#2:
No.
Rule 3.7(a) prohibits a lawyer from serving as a witness and an advocate in a
trial proceeding. Moreover, Attorney’s testimony may be detrimental to the
interests of Small Corporation. If so, Attorney is also be barred from the
representation because of the conflict of interest. Rule 3.7(b).
Inquiry
#3:
Would
the answer to Inquiry #1 be different if the buyer had instructed the lawyer not
to disburse the sales proceeds after the closing conference, but before the deed
had been recorded?
Opinion
#3:
No.
The seller delivered the deed upon the condition that the sale proceeds would be
disbursed if all other conditions on the sale were satisfied. In this regard,
the lawyer is a fiduciary for the seller. If all other conditions on the sale
were satisfied and in the absence of fraud by the seller, the lawyer must
fulfill the condition on the delivery of the deed by disbursing the proceeds. A
deed becomes effective as a transfer of title between the parties upon its
execution and delivery. Newell v. Edwards,
7 N.C. App. 650, 173 S.E.2d 504 (1970). The fact that the deed was not recorded
does not affect the equities between the parties or Attorney’s obligation to
the parties. See N.C. Gen. Stat. A7
47-18.
Inquiry
#4:
Assume
that Attorney represents Development Company, the seller of the property. After
the closing conference, but prior to recording the deed, Attorney received a
telephone call from the seller asking the lawyer not to record the deed. What
should attorney do?
Opinion
#4
The
buyer delivered the purchase money to the closing lawyer upon the condition that
the deed would be recorded, and, in that regard, the lawyer is a fiduciary for
the buyer and must fulfill the condition on the delivery of the funds absent
fraud by the buyer. Because title has passed to the buyer, the lawyer must
satisfy the conditions of the transfer of the property by recording the deed and
disbursing the sale proceeds.
Proposed
2006 Formal Ethics Opinion 3
This
inquiry has been under consideration and discussion since January 19, 2006. It
attempts to provide guidance where lenders selling foreclosed properties, want
to have the foreclosing attorneys close the sale to subsequent buyers and these
attorneys wish to either represent both parties or limit their representation to
that of the lender. Under the facts presented, the contract signed by the buyer
would provide that; the seller/lender will select the title and closing agent;
the seller will pay the title examination fee and title insurance premium; and
that the closing will be held at the title/closing agent’s office. It would
provide that the buyer will pay the “customary closing fee” to the
title/closing agent selected by the seller and that the buyer is entitled to
legal representation “at the buyer’s own expense”.
The
proposed opinion provides detailed guidance concerning the attorney’s
requirements for providing informed consent, avoiding misplaced loyalty and
avoiding prohibited acts. It is fairly straightforward and easy to follow the
logical analysis. Of significant import to those attorneys involved in
representing lenders disposing of foreclosed properties and writing in these
representation provisions should be Inquiry # 5. The Bar maintains that clients
are entitled to legal counsel of their choice. The lender’s attorney is
permitted to be the designated closing agent under the terms of the purchase
contract. However, if the buyers choose to hire a lawyer to represent their
interests by examining and giving an opinion on title and participating in the
closing on their behalf, “the other lawyer may not interfere with this
representation.” The attorney must also comply with the ethical prohibition on
direct communications with a represented party without the consent of that
party’s lawyer.
Certain
aspects of the proposed opinion were deemed to be legal questions outside of the
purview of the State Bar and we have deleted them due to space considerations.
The edited version follows and the full version can be found online at:
http://www.ncbar.com/ethics/propeth.asp
Representation
in Purchase of Foreclosed Property
(This
opinion is being studied by a subcommittee for another quarter.)
Proposed
opinion examines the circumstances in which a lawyer who regularly represents a
lender may close the sale of foreclosed property owned by the lender and limit
his representation to the lender.
Inquiry
#1:
Client
X entered into a contract with Lender to buy a property that was repossessed via
foreclosure. The Attorney A regularly handles foreclosure proceedings for Lender
and subsequently represents Lender on the sale of the foreclosed properties.
Lender names Attorney A as the “title/closing agent” for the sale to Client
X. May Attorney A represent both Client X and Lender on the closing of the
transaction, including examining title and giving an opinion as to title to
Client X?
Opinion
#1:
Attorney
A may represent both parties to the transaction but only if he reasonably
believes that the common representation will not be adverse to the interests of
either client, there is full disclosure of Attorney A’s prior representation
and relationship with Lender, and Client X consents to the representation. Rule
1.7; 97 FEO 8. As stated in 97 FEO 8,1.
Where
a lawyer has a long-standing professional relationship with a seller and a
financial interest in continuing to represent the seller, the lawyer must
carefully and thoughtfully evaluate whether he or she will be able to act
impartially in closing the transaction. The lawyer may proceed with the common
representation only if the lawyer reasonably believes that his or her loyalty to
the seller will not interfere with the lawyer’s responsibilities to the buyer.
Rule 2.2(a)(3). Also, the lawyer may not proceed with the common representation
unless he or she reasonably believes that there is little likelihood that an
actual conflict will arise out of the common representation and, should a
conflict arise, the potential prejudice to the parties will be minimal. RPC 210
and Rule 2.2(a)(2).
If
the lawyer reasonably believes the common representation can be managed, the
lawyer must make full disclosure of the advantages and risks of common
representation and obtain the consent of both parties before proceeding with the
representation. Rule 2.2(a)(1). This disclosure should include informing the
seller that, in closing the transaction, the lawyer has equal responsibility to
the buyer and, regardless of the prior representation of the seller, the lawyer
cannot prefer the interests of the seller over the interests of the buyer. With
regard to the buyer, the lawyer must fully disclose the lawyer’s prior and
existing professional relationship with the seller. This disclosure should
include a general explanation of the extent of the lawyer’s prior and current
representation of the seller and a specific explanation of the lawyer’s legal
work, if any, on the property that is the subject of the transaction...
Full
disclosure to the seller and to the buyer must also include an explanation of
the scope of the lawyer’s representation. See
RPC 210. In addition, the lawyer should explain that if a conflict develops
between the seller and the buyer, the lawyer must withdraw from the
representation of all parties and may not continue to represent any of the
clients in the transaction. RPC 210 and Rule 2.2(c)…Areas of potential
conflict should be outlined for both parties prior to obtaining their separate
consents to the common representation...
If
common representation is permitted under the conditions outlined above, Attorney
may perform legal services for both parties as necessary to close the
transaction including offering an opinion as to title to the buyer. Either party
may be charged for the lawyer’s services as appropriate. See
Rule 1.5.
Inquiry
#2:
Attorney
A intends to represent only the interests of Lender and does not intend to
represent Client X in closing the transaction. May Attorney A limit his
representation in this manner?
Opinion
#2:
Yes,
provided there is full disclosure to Client X that Lender is his sole client,
that he does not represent the interests of Client X, that the closing documents
will be prepared consistent with the specifications in the contract to purchase
and, that in the absence of such specifications, he will prepare the documents
in a manner that will protect the interests of his client, Lender, and,
therefore, Client X may wish to obtain his own lawyer. See,
e.g., RPC 40 (disclosure must be far enough in advance of the closing that
the buyer can procure his own counsel), RPC 210, 04 FEO 10, and Rule 4.3(a).
Inquiry
#3:
If
Attorney A limits his representation to Lender, but closes the transaction, does
he have any duty to disclose or discuss any of the following with Client X:
defects of title; the difference between insurable title and marketable title;
the exceptions contained in the title policy and the need for exception
documents at closing; and the terms of the sales contract?
Opinion
#3:
If
Attorney A explicitly limits his representation to Lender, he should not give
any legal advice to Client X except the advice to secure counsel. Rule 4.3(a).
Inquiry
#5:
Client
X believes that Attorney A has a conflict of interest because he regularly
represents Lender and he asks Attorney Y to represent him on the closing of the
purchase of the property. Client X wants Attorney Y to examine the title to the
property, give his opinion as to title, and act as Client X’s agent at the
closing.
Attorney
A insists that the contract requires Client X to accept him as the closing agent
for the transaction. May Attorney A refuse to allow Attorney Y to participate in
the closing as Client X’s lawyer?
Opinion
#5:
No.
Clients are entitled to legal counsel of their choice. See, e.g., RPC 48. Attorney A may, by the terms of the purchase
agreement, be the designated closing agent for the sale. However, if Client X
hires a lawyer to represent his interests by examining and giving him an opinion
on title and participating in the closing on his behalf, the other lawyer may
not interfere with this representation. See, e.g., Rule 4.2. In addition, Attorney A must comply with the
prohibition in Rule 4.2(a) on direct communications with a represented person
without the consent of the lawyer for the represented person.
Inquiry
#6:
Attorney
A agrees that Attorney Y will represent Client X’s interests at the closing.
However, Attorney A claims that he is still entitled to a fee from Client X
because the terms of the contract.
May
Attorney A charge a fee to Client X?
Opinion
#6:
Whether
the contract to purchase the property requires Client X to pay Attorney A’s
fee is a legal question outside the purview of the Ethics Committee. However, a
lawyer may be paid by a third party, including an opposing party, provided the
lawyer complies with Rule 1.8(f) and the fee is not illegal or clearly excessive
in violation of Rule 1.5(a). See RPC
196. Attorney A’s time and labor relative to the closing may be reduced
because of the legal services performed by Attorney Y on behalf of Client X. If
so, this factor should be taken into account in determining whether the
“customary fee” is excessive. Rule 1.5(a).
Dirt Tales From the
Deed Vault
By John Dillard, Vice
President and Legal Counsel, Statewide Title Exchange Corporation
In this month’s installment of claims prevention, depicting true claims situations, Statewide Title examines the risk involved when an attorney fails to follow state law and ignores the standard of practice for real property attorneys.
New Attorney has been set up in his practice for less than a year. During this time he has pretty much limited the scope of his practice to real estate matters. One day New Attorney receives a phone call from a potential client who advises the attorney he has signed a contract to buy a large tract of land two counties over from an out-of-state developer. The client further advises that he intends to subdivide the tract and promises New Attorney that if all goes well he will see to it that he gets all the legal work on the out sale of the parcels.
The attorney
does a title examination and makes a report of title to his client and they set
up a date for the closing. The
out-of-state developer calls the attorney and asks if he will make a deed for
him since he doesn’t have local counsel. New
Attorney agrees. The closing is set
for 4 PM on a Friday. Various things
come up and some of the documents have to be reworked so that it is close to 5
PM before the closing is completed. New
Attorney advises the parties that he will not be able to record the documents
until the following Monday since the courthouse where the land is located is two
counties away. The seller insists
that he has to have his check that day; that he has another deal depending on
this funding and that he must make it to his bank before 6 PM and have the money
wired out. He tells the New Attorney
that this kind of thing is done all the time in commercial transactions and that
the attorney can disburse his money, record the following Monday and that he can
get a GAP endorsement to his title binder to cover the “gap period” between
Friday and recording on Monday. He
gives him the phone number of the title company he uses in
The following
Monday the attorney drives to the county where the land is located and does his
bring down. To his surprise and
horror a transcript of judgment against the developer for $2.5 million from
What could the
attorney have done to prevent this from happening?
First, he should be familiar with the statutes and ethics opinions
governing closings in
Oftentimes
claims such as this one can be avoided if the attorney will simply slow down and
not let either the buyer or seller pressure them.
And when you are treading into territory that your are not familiar with,
always ask a more seasoned attorney or pick up the phone and call your title
company counsel. Statewide Title has
two full time underwriting attorneys with 55 years experience between them to
assist you with your underwriting questions.
So don’t hesitate to call them when an issue like this pops up in a
closing you are doing.