On April 16, 1998 The North Carolina State Bar issued a proposed ethics opinion which was recently published in the North Carolina State Bar Journal (Summer, 1998). The opinion is set forth in its entirety as follows:

"Proposed opinion rules that a lawyer may not participate in a closing or sign a preliminary title opinion if, after reasonable inquiry, the lawyer believes that the title abstract or opinion was prepared by a non-lawyer without supervision by a licensed North Carolina lawyer.

Inquiry #1:

Lender is located in another state but provides home loans to North Carolina residents. Lender asks Attorney, a licensed North Carolina lawyer, to close a loan for certain borrowers. Lender indicates that the following services will be required from Attorney: (1) oversight of the execution of the loan documents;

(2) acknowledgment by an appropriate witness of the signatures of the borrowers on the documents; (3) recordation of Lender’s deed of trust; (4) copying the loan documents without review; and (5) disbursement of the loan proceeds. Lender procures title insurance from an out-of-state title insurance company which issues title insurance binders in reliance upon the notes of a title abstractor. Attorney suspects that the title search was done by a non-lawyer who was not supervised by a North Carolina lawyer.

This type of closing is sometimes called a "witness closing." May Attorney participate in the closing?

Opinion #1:

No. Rule 5.5(b) provides, "[a] lawyer shall not assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law." N.C. Gen. Stat. Sec.84-2.1 defines "practice [of] law" as, among other things, "abstracting or passing upon titles." Attorney must make a reasonable inquiry concerning the preparation of the title search and/or the title opinion. If Attorney believes, after making this reasonable inquiry, that a non-lawyer abstracted the title and/or gave a title opinion on the property without the proper supervision of a licensed North Carolina attorney and this unauthorized practice will be furthered by Attorney’s participation in the closing under the conditions prescribed by Lender, she may not participate in the closing. However, Attorney may participate in the closing if Attorney’s reasonable inquiry indicates that the statute was not violated.

Inquiry #2:

What duty does Attorney have to the borrowers?

Opinion #2:

If Attorney’s representation is not prohibited by Rule 5.5(b), Attorney’s duty to the borrowers is to ensure that her limited role in the closing is well understood and the borrowers agree to this limited role. See Rule 1.2(c). If she represents the borrowers, as well as Lender, she must competently represent their interests even if the objectives of her representation are limited. See Rule 1.1. Competent representation may include disclosure of any concerns that she may have about the preparation of the title opinion and the risks of relying upon the opinion. If Attorney does not represent the borrowers, they must be so advised and told that they should obtain separate legal counsel. See RPC 210. Attorney may represent the borrowers and Lender if she can do so impartially and without compromising the interests of any client. Id.

Inquiry #3:

What duty does Attorney have to Lender?

Opinion #3:

If Attorney’s representation is not prohibited by Rule 5.5(b), Attorney must competently represent the interest of Lender. See Rule 1.1. Competent representation may include disclosure of any concerns that she may have about the preparation of the title opinion and the risks of relying upon the opinion.

Inquiry #4:

Title Insurance Company is located in another state but wants to write policies in North Carolina. Title Insurance Company contracts with a paralegal who is an independent contractor to search titles in North Carolina. Title Insurance Company asks Attorney to sign a preliminary opinion based upon the paralegal’s abstract of title and/or preliminary opinion. Attorney has not reviewed the paralegal’s title notes and did not supervise the paralegal’s title research. May Attorney sign the preliminary opinion?

Opinion #4:

No, a lawyer has a duty to supervise any non-lawyer who assists her regardless of whether the non-lawyer is an employee of the lawyer, an independent contractor or employed by another. Rule 5.3 and RPC 216. Execution of a preliminary title opinion that was prepared by an unsupervised non-lawyer is assisting the unauthorized practice of law in violation of Rule 5.5(b)."

It would seem that this opinion, if adopted, would be welcome among real property practitioners. In the current refinance market many title examiners are finding serious errors in recent transactions that affect the owner’s title. Upon inquiry they are finding that these transactions were completed without the benefit of legal counsel, and the property owners have no effective recourse for correction. Attorneys who find themselves being requested to participate in a suspected improper transaction should report the company to the North Carolina State Bar, which is very active in investigating and prosecuting the unauthorized practice of law.

Assisting in the unauthorized practice of law is not the only problem for the North Carolina practitioner. § 58-26-1 of the North Carolina General Statutes (a) provides that "Companies may be formed in the manner provided in this Article for the purpose of furnishing information in relation to titles to real estate and of insuring owners and others interested therein against loss by reason of encumbrances and defective title; provided, however, that no such information shall be so furnished nor shall such insurance be so issued as to North Carolina real property unless and until the title insurance company has obtained the opinion of an attorney, licensed to practice law in North Carolina and not an employee or agent of the company, who has conducted or caused to be conducted under the attorney's direct supervision a reasonable examination of the title… (Emphasis added)."

It is interesting to note that the proposed opinion does not address another pitfall for the practitioner working under the facts set forth in the queries. § 58-28-5 prohibits out-of-state insurance companies from issuing policies on North Carolina property without being authorized to do business. The statute contains some limited exceptions that do not seem to apply to the stated facts. If such is the case, then it would seem that it would also be improper for an attorney to deal with a company not authorized to do business in North Carolina when the attorney believes a policy of title insurance will be issued.

Both of these provisions involve what appears to be illegal activity on the part of the out-of-state Title Company. If, as the inquiries state, the closing attorney is aware or believes such, then participation in such activity should be avoided.

Practitioners who are familiar with Statewide Title, Inc.’s StateNet™ network of referral attorneys know that witness closings are sometimes involved. It is Statewide Title, Inc.’s firm policy that such closings have title certification by a North Carolina attorney, and if title insurance is required, it will be insured by a company properly authorized to do business in North Carolina. Occasionally the attorney examining the title will be unavailable for closing, or the office location will be inconvenient for the customer, in which case another StateNet™ attorney may be requested to close the transaction. If there is a question, the name of the examining attorney can be provided. Statewide Title, Inc. is committed to actively working to preserve the current North Carolina system of title practice instead of just paying lip service to this consumer oriented goal.

The following article was taken from the Section 1031 Like-Kind Exchange section of the 1998 Statewide Title Real Property Series. It was provided by Skip Sacks of Asset Preservation, guest speaker in this series.

I. CASE NAME: DAVID A. and MARILYN P. KNIGHT, v.  COMMISSIONER OF INTERNAL REVENUE T.C. Memo 1998-107 Tax Ct. Dkt. No. 16522-96

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  • SUMMARY: Tax Court Judge Julian I. Jacobs has held that a couple failed to receive replacement property within the time limit specified under section 1031, disagreeing with the couple that section 1031 requires only a "good faith" attempt to meet its timing requirements. David and Marilyn Knight argued that they were unable to timely close on the purchase of replacement property because a seller canceled the sale one day before closing. Although Judge Jacobs "sympathized" with the Knights, he pointed out that the court lacks jurisdiction to "rewrite" a more equitable result for them.

II. CASE NAME: TERRY D. SMITH,

v.

INTERNAL REVENUE SERVICE

Cite: 80 AFTR2d Par. 97-5577

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  • SUMMARY: The Fourth Circuit, in an unpublished opinion, has affirmed a Tax Court decision which held that an accountant can not defer the gain he realized on the sale of two pieces of property because he failed to identify replacement property within 45 days of the sale. The appeals court found no error in the lower court’s finding that Terry Smith’s own tax return indicated that he did not decide on the replacement property until 55 days after the sale.

III. CASE NAME: DAVID DOBRICH and NAOMI DOBRICH,

v.

COMMISSIONER OF INTERNAL REVENUE

Tax Ct. Dkt. No. 3832-95

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  • SUMMARY: The Tax Court has held that a couple did not timely identify replacement property for purposes of utilizing section 1031, and that the couple was liable for fraud penalties with respect to backdated documents they submitted to the IRS to support their use of section 1031.

IV. LETTER RULING NO.: 9748006

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  • SUMMARY: The Service has ruled that an individual is not entitled to non recognition under section 1031 for a multiparty property exchange that involved the individual’s mother (a related party), an unrelated party, and a qualified intermediary.

    The individual owned a one-third interest in unimproved investment property and his mother owned a two-thirds interest in the same property. An unrelated third party wanted to acquire the unimproved land, and the individual and his mother agreed to sell. The mother then purchased a residence for her own use. After he entered into the sale agreement, the individual decided he wanted to do a like-kind exchange. After determining that obtaining replacement property from an unrelated party was unfeasible, he entered into a purchase agreement with his mother to acquire the residence. Ultimately, the following series of steps occurred.

    First, the individual transferred his interest in the unimproved property and his obligations under the sale agreement to a qualified intermediary. Second, the individual assigned his obligation to acquire the residence to the qualified intermediary. Third, the intermediary sold the interest in the unimproved property to the unrelated purchaser. Fourth, the intermediary paid the proceeds from the sale of the individual’s unimproved property to the mother, and the individual paid an additional amount directly to his mother, for the residence. Fifth, the mother transferred the residence through the intermediary to the individual. Separate from the exchange but at the same time, the unrelated purchaser paid the mother for her interest in the unimproved property.

    The Service reasoned that the economic result of the series of transactions was the same as what would have occurred in a direct exchange of the individual’s interest in the unimproved property for the residence owned by the mother. Further, said the IRS, the mere interposition of a qualified intermediary will not correct a transaction that would otherwise run afoul of the restriction on like-kind treatment for exchanges with related parties. The Service concluded that the individual did not demonstrate that the use of the qualified intermediary was not to avoid the purpose of the related party rules of section 1031(f), and that the exchange with the qualified intermediary is not eligible for nonrecognition treatment under section 1031(a).