HUD HITS ATTORNEYS REFERRAL PAY

Thirteen Settle Civil Complaint Alleging They Took Improper Fees from Title Firm
By Molly McDonough © 2003 The American Bar Association. All rights reserved.

The federal government sent a message to real estate lawyers this month when it announced it had settled a $200,000 civil complaint against 13 New York attorneys.

The complaint accused the lawyers of improperly steering business to the title company where they were principal shareholders. U.S. prosecutors from the Eastern District of New York alleged the group violated the Real Estate Settlement Procedures Act by earning payments on the volume of clients referred to the New York-based Covenant Abstract Co. Inc.

The lawyers were specifically targeted for violating Section 8 of RESPA, which prohibits kickbacks and referral fees that may artificially drive up the cost of a home. The section also prohibits anyone from charging or receiving a charge for services not performed.

It is common for attorneys to have an interest in title companies. But RESPA requires that any party in a real estate deal who provides a referral must disclose any affiliation he or she may have with the referred firm. In addition, the client cannot be required to do business with the affiliated firm. The referrer must receive no pay for the referral except what is collected in dividends based on ownership interest in the affiliate. The New York complaint had alleged the attorneys violated the requirement barring pay for referrals.

The government hopes pursuing the case sends a "continuing message to the industry that basing your compensation on the referral of business violates RESPA," says Brian Sullivan, a spokesman for the U.S. Department of Housing and Urban Development.

Chicago real estate litigator Aurora Abella-Austriaco, of Peck, Bloom, Austriaco & Mitchell, says she is pleased to see HUD is focusing on enforcement and sending this type of message to intentional and unintentional RESPA violators. How effective the message will be remains to be seen says Abella-Austriaco, who chairs the single-family residence committee for the ABA Section of Real Property, Probate and Trust Law.

"It is a step in the right direction that HUD is enforcing its rules," she says. "There needs to be a lot more." As part of their consent decree, the lawyers agreed to pay $200,000 to settle and then divest themselves of any interest in the company for three years, according to HUD. Signing on to the consent decree were lawyers Brian Bass, S. Charles Buschemi, Michael M. Capasso, Thomas A. Capasso, Ronald Davies, Ronald Farr, Michael Grundfast, Irwin Izen, William J. Porter, Eric Sackstein, Barry Segal, Gary Smith and Alan Wolinsky.

Manhattan lawyer Eugene Licker, who represents the 13 defendants and Covenant, characterizes his clients’ actions as a technical violation of Section 8 of RESPA. Once informed that their profit distribution violated RESPA, he says his clients immediately ceased the questioned conduct and agreed to settle.

"Significantly, the government has never even alleged that the technical infraction injured anyone, that a single Covenant customer was harmed in any way or that the infractions either increased costs to consumers or compromised the quality of service Covenant provided to its customers," according to Licker, of Kirkpatrick & Lockhart.

HUD brought a similar case last year in Austin, Texas, against seven title companies found to have provided free virtual Internet tours of homes for real estate agents who sent business their way. The settlement agreement in that case required the companies to pay $130,000 and give up the freebie tours.

The idea of these prosecutions and public announcements by HUD is to get word out that RESPA violators will be targeted, Sullivan says. The recent complaints are part of a stepped-up effort by the federal housing agency, which in the past year has tripled its RESPA enforcement staff from 10 to 30. The RESPA enforcement unit also recently paid $1.5 million to an outside contractor to supplement enforcement efforts.

The adoption of N.C.G.S. Section 161-131 had created a serious problem for closing attorneys in the counties specified in the statute. As originally adopted, it required payment of all delinquent taxes prior to recording. Ethics opinions and the Good Funds Settlement Act mandated that funds be advanced since disbursements of closing proceeds can not be made prior to recording. Representative Paul Stam sponsored, and was instrumental in its successful adoption, House Bill 393 that adds a new subsection (a1), which provides an exemption for closing attorneys.

In order to utilize the exemption, the deed must contain the following recitation; "'This instrument prepared by: ___________, a licensed North Carolina attorney. Delinquent taxes, if any, to be paid by the closing attorney to the county tax collector upon disbursement of closing proceeds." This will not increase the responsibility of an attorney that is disbursing proceeds and will not apply when the attorney is not disbursing. The Bill was signed into law on May 20, 2003, Hyde County was added to the list and the new text follows.

SECTION 1. G.S. 161-31 reads as rewritten:

"(a1) Exception to Tax Certification. - If a board of county commissioners adopts a resolution pursuant to subsection (a) of this section, notwithstanding the resolution, the register of deeds shall accept without certification a deed submitted for registration under the supervision of a closing attorney and containing this statement on the deed: 'This instrument prepared by: ___________, a licensed North Carolina attorney. Delinquent taxes, if any, to be paid by the closing attorney to the county tax collector upon disbursement of closing proceeds.'

SECTION 2. This act is effective when it becomes law. In the General Assembly read three times and ratified this the 12th day of May, 2003.

Session Law 2003-59 House Bill 636 is an act intended to modernize the laws regarding docketing and indexing of judgments in order to give effect to electronic judgment dockets and reestablish the effective date of civil judgment liens and the date from which interest accrues on judgments. It changes the concept of docketing to one of indexing and recording and clarifies the terminology regarding entry of judgment by eliminating the use of that word with reference to the process of docketing. The amendment eliminates simultaneous priority of judgments rendered in the same session of court. Judgment liens will be effective against third parties from the time of indexing. This act becomes effective, and applies to all judgments entered, indexed, and docketed on or after September 1, 2003. The edited (editing in italics) text of the amended statute follows.

The General Assembly of North Carolina enacts:

SECTION 1. G.S. 1-232 reads as rewritten:

"§ 1-232. Judgment roll. Unless the party or his attorney furnishes a judgment roll or the documents referred to in this section are already on file, the clerk, immediately after entering the judgment, shall attach together and file the following papers which constitute the judgment roll:

1. (no changes)
2. (no changes)"

SECTION 2. G.S. 1-233 reads as rewritten:

"§ 1-233. Docketed and indexed. Every judgment of the superior or district court, affecting title to real property, or requiring in whole or in part the payment of money, shall be indexed and recorded by the clerk of said superior court on the judgment docket of the court. The docket entry must contain the file number for the case in which the judgment was entered, the names of the parties, the address, if known, of each party and against whom judgment is rendered, the relief granted, the date, hour, and minute of the entry of judgment under G.S. 1A-1, Rule 58, and the date, hour, and minute of the indexing of the judgment. The clerk shall keep a cross-index of the whole, with the dates and file numbers thereof; however, error or omission in the entry of the address or addresses shall in no way affect the validity, finality or priority of the judgment docketed."

SECTION 3. G.S. 1-234 reads as rewritten:

"§ 1-234. Where and how docketed; lien. Upon the entry of a judgment under G.S. 1A-1, Rule 58, affecting the title of real property, or directing in whole or in part the payment of money, the clerk of superior court shall index and record the judgment on the judgment docket of the court of the county where the judgment was entered. The judgment may be docketed on the judgment docket of the court of any other county upon the filing with the clerk thereof of a transcript of the original docket. The judgment lien is effective as against third parties from and after the indexing of the judgment as provided in G.S. 1-233. The judgment is a lien on the real property in the county where the same is docketed of every person against whom any such judgment is rendered, and which he has at the time of the docketing thereof in the county in which such real property is situated, or which he acquires at any time thereafter, for 10 years from the date of the entry of the judgment under G.S. 1A-1, Rule 58, in the county where the judgment was originally entered. (tolling provisions remain unchanged). A judgment docketed pursuant to G.S. 15A-1340.38 shall constitute a lien against the property of a defendant as provided for under this section."

SECTION 4. G.S. 24-5 reads as rewritten:

"§ 24-5. Interest on judgments. (The text of this section is essentially unchanged except for provisions dealing with entry of judgment - changed text) - "after judgment" means after the date of entry of judgment under G.S. 1A-1, Rule 58. "

SECTION 5. This act becomes effective September 1, 2003, and applies to all judgments entered, indexed, and docketed on or after that date. In the General Assembly read three times and ratified this the 15th day of May, 2003.

The North Carolina Court of Appeals has penned another incomprehensible real property decision in Gifford v. Linnell, NO. COA02-521, filed 6 May 2003. It creates serious uncertainty in its ramifications as it applies to determining title to land in North Carolina. The decision holds that a deed to a trustee for a nonexistent trust is void. This part of the decision is clearly correct. The Court then holds that the three-year statute of limitation applies to an action to remove the cloud on title. This is a major change in doctrine for which we know of no support in North Carolina law.

The essential facts are as follows:
The plaintiff executed a deed for North Carolina property on 13 January 1992 to the defendant as "Trustee of Droffig Family Trust. On 16 January 1992, plaintiff executed a trust agreement entitled "Indenture of Trust[,] Droffig Family Trust" that appointed defendants as trustees of the Droffig Family Trust. The deed and the trust agreement for the North Carolina property remained with the attorney and were recorded approximately eighteen months after their execution.

Following the conveyance, plaintiff learned that the trust was purportedly irrevocable and that the trust did not actually exist until three days after the deed was executed. The plaintiff subsequently filed a complaint alleging that:

"7. Contrary to her understanding and as a result of misrepresentation and fraud, the plaintiff executed a document entitled "Droffig Family Trust" which was signed by the plaintiff on the 16th day of January, 1992."

"8. At the time that the plaintiff executed the deed . . . the Droffig FamilyTrust did not exist and, therefore, the grantee of said deed was not a legal entity and the deed, therefore, could not operate to convey title to the defendants either individually or as trustees."

"11. Since the deed above referenced conveyed property to a trust which did not exist at the time of said conveyance, the deed . . . is void ab initio."

The defendants raised the defenses of estoppel and the statute of limitations. The trial court granted plaintiff's motion for summary judgment after concluding there was "an unlawful cloud on Plaintiff's title and . . . void ab initio[.]" The defendants argued that the trial court erred in granting summary judgment because there were genuine issues of material fact as to whether the deed was delivered to them, via the attorney, and executed on the condition that the Droffig Family Trust would be executed thereafter.

The Court analyzed the law regarding the requirements of a proper grantee for a valid deed and regarding conditional delivery, concluding that, "the deed was void for lack of a grantee on the date of the conveyance." Had the Court stopped there and affirmed the trial court, we would have little cause for complaint.

However, the Court of Appeals then determined that it "need only address defendants' statute of limitations argument." It noted that the "plaintiff has also failed to cite, and this Court has not found, any case law or statutory authority that clearly precludes the statute of limitations from being applicable in a situation where a deed is deemed void for failure to identify a valid grantee on the date of conveyance." We find little surprise in this discovery. We respectfully suggest that the Court should have looked to the North Carolina Supreme Court’s holding in Winstead V. Woolard, 223 N.C. 814, where it says that "a deed of gift, not registered, is good during the two years after the making of it, but upon failure to register it within such time, it becomes void ab initio and title vests in the grantors" for guidance. In Pearce v. Pearce,226 N.C. 307, (1946) the Supreme Court states that " the asserted written agreement of separation is void ab initio. G. S., 52-12, 52-13; Daughtry v. Daughtry, 225 N. C., 358; Pearce v. Pearce, 225 N. C., 571. In law it does not exist."

The key concept here is that when a deed is void, it has no legal existence, title does not vest in the grantee but remains in the grantor. As such, it does not rely on an order of any court and no limitation period is relevant other than twenty years in the case of actual adverse possession. It is only when instruments are voidable do shorter limitation periods become relevant.

When the Court of Appeals concludes that "a three-year statute of limitations applies to plaintiff's claims for misrepresentation and fraud which results in her action being barred. To hold otherwise would result in there being no applicable statute of limitations to address the issue presented by the facts in this case", it completely ignores that the essential cause of action is one to remove a cloud on title, not one of fraud and misrepresentation. As a result title examiners will not know the status of deeds that are patently void. Is the Court really saying that a void deed ripens into good title after three years? It seems to be the inescapable conclusion if this opinion stands, since no one claiming title through the grantor by virtue of a void deed could prevail against a statute of limitation defense.

We do not know if the facts in the record were so compelling that the Court found it necessary to overturn the trial court. If such were the reason motivating this decision, this outcome could have been reached without dramatically altering existing doctrine. It would be far less disturbing if the Court had held that where a deed and a trust agreement are recorded together, it creates a rebuttable presumption that the deed executed prior to the trust agreement was conditioned upon the execution of the agreement. Our North Carolina Supreme Court has stated that "So long as a deed is within the control and subject to the authority of the grantor there is no delivery, without which there can be no deed." Fortune v. Hunt, 149 N.C. 358, 361, 63 S.E. 82 (1908). Such a determination would have actually added certainty to title transactions, since the facts regarding the timing of the execution of the instruments is not all that uncommon