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 Virginia and suggests New Attorney call them and verify that this can be done. New Attorney does this and in fact is told this kind of thing is common in commercial transactions. New Attorney disburses the purchase funds to the developer and goes home for the weekend.
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 Virginia has been filed of record first that morning. The attorney tries contacting the developer, only to learn he has gone back to Virginia. He called the title company to see about getting one of those GAP endorsements that he had been told he could get to protect him and was told they were not issued in North Carolina.
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 North Carolina. In this state the Connor Recording Act makes North Carolina one of two “Pure Race States”, meaning that the first to record obtains priority. There is no “gap” in North Carolina; thus, there is no gap protection available, although there may be such coverage available in other states. Second, the attorney needs to be familiar with the kinds of endorsements that are generally available for the type of real estate he is practicing. If he had not run across a “gap” endorsement before, he should have called his title company to inquire about them rather than calling an out of state company the seller used.
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.