Proposed Ethics Opinion 99-5
This proposed ethics opinion would rule that an attorney, who makes an appropriate disclosure to the new lender and the borrower, would not be ethically required to cancel a deed of trust satisfied at the closing. The basis for the ruling is the right of the attorney to limit their representation of the client. The opinion seems correct as far as it goes. Arguably, the opinion does not go far enough. The opinion requires attorneys to advise clients and lenders if the attorney does not intend to cancel the existing instruments. The opinion does not address how much information the disclosure needs to include. A literal reading of the opinion may only require that the disclosure indicate that the representation is limited and does not include cancellation. The opinion only goes as far as stating that the attorney must "explain the limits of her representation sufficiently to allow the borrowers to make reasonably informed decisions about the representation" This statement gives us no guidance, whatsoever, as to what the explanation should cover to be deemed sufficient.
It should be clear that that uncanceled deeds of trust would make the title unmarketable if it can not be proved that they have been fully satisfied. As time passes and lenders are consolidated it becomes increasingly difficult to determine if uncanceled instruments are satisfied. This will also make it increasingly difficult for title insurers to insure over these matters. Of even greater concern would be uncanceled equity line deeds of trust. Raintree Realty and Construction, Inc. v. Kasey, 116 N.C App 340, 447 S.E.2d 823 (1994) is a classic horror story involving the difficulty of canceling this type of instrument and the disastrous result of failing to do so. If the client is purchasing property and the payoff is insufficient, the seller could continue to use the account, default and subject the property to foreclosure.
The opinion requires disclosure to the borrower and the lender. Under the exclusions from coverage set out in the 1992 ALTA policy forms, the insured can not recover for "Defects, liens, encumbrances, adverse claims or other matters . . . created, suffered, assumed or agreed to by the insured claimant." Arguably, accepting the limited representation contemplated by the opinion would preclude recovery from the Title Company for the problems discussed above. The inquiry and response seem to assume that a title policy will protect the borrower and lender but this may not be the case. The opinion does not address the attorneys responsibility to the Title company. Most companies use a commitment requirement that calls for cancellation of outstanding deeds of trust. Many companies will issue the policy before cancellation based upon the attorneys assurance that it will be canceled. This would clearly require further disclosure to the company. Because of the exposure created by the holding in Raintree, it would extremely risky for the Title companies to insure over uncanceled instruments.
If these and other similar issues are clearly explained to the client, it would not seem prudent for a borrower or lender to accept the limited representation. If this assumption is correct, it would not seem to be proper to recommend such action to a client.
The proposed opinion does provide that if the attorney charges for cancellation or charges a payoff processing fee the attorney "may not close the file until the deed of trust is canceled of record." The opinion also requires the attorney to pursue the cancellation with reasonable diligence and promptness in such cases. There has been some discussion within the real property bar as to whether the closing attorney is responsible for cancellation. Most real property attorneys we have discussed the issue with strongly believe this to be the standard of practice. The proposed opinion clearly makes this assumption if there is no disclosure of "limited representation".
The obvious inference is that clients are not well served by cutting corners. As the difficulty in canceling instruments increases, attorneys should charge accordingly for this important service. In the end, the clients will save money and better protect their investment in their property.
Editorial Comment: Title companies are increasingly being asked by attorneys to insure over record defects that can be, and should be, corrected. In the past, many of these defects were automatically cured by the attorney as part of their clients representation. Due to competitive pressures, some companies comply with these requests when they formerly would have refused. If this process continues to expand, it begs the question of why search records at all if companies are going to insure all defects anyway.
The answer lies in the fact that North Carolina consumers enjoy one of the lowest claims rates and one of the lowest cost of title assurance (title premium plus attorneys fees). The major difference in this state is the direct involvement of attorneys in the title examination process. In other states, where attorneys have abdicated title assurance responsibility to the Title companies, the cost to the consumer has increased dramatically. Unfortunately, with this increase in cost has come a corresponding increase in problems that have to be dealt with and title insurance does not compensate an insured for time, stress and aggravation.
As the complexity of closing real property transactions increases, the attorneys fees should increase in reasonable proportion. If closing attorneys are fairly compensated, they will not be tempted to limit representation and the client will benefit both economically and emotionally.
Proposed Ethics Opinion 99-6
This opinion if adopted would authorize attorneys to own title agencies providing that they did not render an opinion on title for policies issued by the agency on land in this state. The Ethics committee declined an opportunity to give specific guidance on the level of supervision required to ethically use independent abstracter. The Committee did say that a thorough screening including interviews with an evaluation of the abstracters education, experience and work history would not satisfy the attorneys duty to properly supervise.
The consumer protection committee of the North Carolina Bar Association requested the Ethics Committee to adopt guidelines for attorneys concerning adequate supervision of non-attorneys in title examinations. This attempt to restrict the circumvention of consumer protection laws was not supported by the Ethics Committee.
Editors note: If independent paralegals start entering pleas in District Courts all over the state under the "supervision" of an attorney hired by a Bail Bondsman in Charlotte, we can expect much more support from the committee. This is not a likely occurrence since the judges will not permit it but it is a fair analogy.
More on HB 979, Intestacy Revision
We have previously written on the pending rewrite of the intestacy statutes. One concern about the revision is the potential for inclusion in the elective share of gifts made prior to marriage. It could include gifts made prior to marriage if decedent passes within three years of the wedding. A typical situation would occur when a widower conveyed property to his children subject to a reserved life estate, subsequently married and died within three years of the gift. Under the revised statute, the elective share would include such real property counted in the total net assets and the children might have to provide recovery if they could not pay. This result was probably not intended but it could present real problems if the bill is passed without modification. At this time Representative Baddour is working to modify the bill to exclude gifts made prior to marriage. Hats off to Paul Welch for pointing out the problem.