Closings and Consumer Protection
Sarah Friede, Legal Counsel and Senior Underwriter

The Statewide newsletter on most occasions is devoted to recent developments in relevant case law and legislation, and sometimes new IRS guidance on tax-deferred exchanges. This month, however, we are taking the opportunity to address a recent development of a different sort, one that could affect the practice of real property law in North Carolina more than virtually any other change. This issue will be dedicated to the effects of settlement shops in our state and the question of the unauthorized practice of law.  Many of you who have attended our seminars have heard us discuss ethics and professionalism in the practice of law. The ambiguity of whether settlement shops in our state follow these principles is well worth discussing.

Except for those who may have just passed the bar and begun practicing, most attorneys by now have no doubt heard at least one person say that “the new law in North Carolina says that attorneys don’t have to close loans anymore.”  In some locations, that sentiment seems to be rampant.  None of the people who are of this opinion can point to the source of this (mis)information, but they seem to hold firm nonetheless.  Statewide Title has received solicitations from people out-of-state interested in conducting business in North Carolina, or in-state, but grossly misinformed people, who want us to do the title search and handle the closing.  Once we explain the approved-attorney system and offer to provide referrals, oftentimes the person receives the information politely, and takes down the names and numbers we give them.  There are just as many instances, however, in which we find ourselves arguing with people who insist we must be wrong. 

Recently, the Real Property Section Council of the North Carolina Bar Association decided it was time to re-examine the issue of lay closers and the State Bar ethics opinions that opened the door for settlement shops.  The Council created a survey for its members, in which it asked for input and opinions on what activities in a closing constitute the practice of law, and what harm (if any) to consumers ensues from closings handled by persons who are not licensed to practice law in North Carolina.  The Council is going to discuss Authorized Practice Advisory Opinion 2002-1 the text of which can be viewed on the Statewide Title website or on the State Bar website) at its November meeting.

The Authorized Practice Committee of the State Bar voted at its October meeting to issue three Cease & Desist letters to settlement shops that were committing the unauthorized practice of law. This is perhaps the first glint of hope that the State Bar is going to take seriously the complaints it has been getting about settlement shops.  It was common for the prior decision-makers of the State Bar to think that if there was evidence that the legal advice provided by the non-attorney at closing was good, that there was not sufficient reason to take action based on UPL issues alone; there had to be proof of harm stemming from bad legal advice provided by a non-lawyer.  Based on the recent decisions, however, it would seem the tide is turning.

It is our deeply-held belief at Statewide Title, Inc. that the approved-attorney system is the best in the nation for consumers.  A 1996 study regarding the costs of title insurance, gathered data in one of the few (if not the only) true “apples to apples “ comparison we’ve seen in the industry, demonstrating that North Carolina had the second-lowest closing costs in the nation.

We all know that cost is not the only factor in determining that something is the best, and frequently it is not an important factor.  In this case, however, the fact that the highest quality services are provided for the second lowest cost is astounding.  In no other state can consumers get an attorney – a member of one of the most highly regulated, highly trained professions – to represent them at a fraction of the cost of a non-attorney.  Because attorneys certify title, the risk of error is lower than it would be otherwise, and title insurance premiums are lower.  The consumer benefits from the approved-attorney system on two fees, not just one.

Just as important as our belief in the approved-attorney system is our belief that a reading of the plain language of APAO 2002-1 defies the interpretation that many have given to it.   To read it the way many would have us believe it reads, would be to pull it so far out of context it would get stretched like taffy.  Those who say “the law changed” display a frightening ignorance of the difference between ethical rules imposed on attorneys and statutes.  The North Carolina General Assembly was not involved with issuing APAO 2002-1 and the General Statutes were not revised; the statutory (non-exhaustive) laundry list of activities that constitutes the practice of law was not changed.  It also defies logic to read APAO 2002-1 in such a way as would permit any closing activities to take place without a supervising, competent attorney.  The opinion spells out that both training and supervision are necessary if staff members will be handling any part of the closing process.  Nowhere does it indicate that a closing can be handled by someone not under the supervision of an attorney.

It is true that some settlement shops in North Carolina have made efforts to comply with the law, by retaining an attorney to provide a title opinion so that title insurance for the transaction can be secured.  (Note that the filed Insured Closing Protection letter cannot be issued in the name of a settlement company, so neither consumers nor lenders are entitled to this additional protection if the closing is performed at a settlement shop.)  In most instances, the attorney actually works for a firm and is not a direct employee of the settlement shop.  This attorney is oftentimes located in another town and is not available for any consultation should a question arise in  closing.   The corporation cannot practice law, of course, so if the attorney were to be an employee of the settlement shop, he or she could not also represent any of the parties at a closing.  So the settlement shop provides non-attorneys to handle all aspects of the closing.

Yet even if an attorney provides a title opinion and a commitment is issued (by either a complicit or an unsuspecting title company), there is no guarantee that someone at the settlement shop will understand the implications of what the title search revealed, what the binder requires, or what the policy will except to.  Who but an attorney understands the interplay between estate administration, bankruptcies, foreclosures, and separation agreements – all in the same chain of title?  (All resolved for $500!)

We have yet to see a HUD-1 Settlement Statement that showed a settlement shop charging less than a licensed attorney.  Attorneys are under an ethical obligation to charge a reasonable fee, and attorneys in North Carolina adhere so tightly to this obligation that they have not raised their fees for 20 years.   Settlement shops are completely unregulated and their fees can be as high as the market will bear.  There are no requirements for minimum or continuing education, no requirement to adhere to an ethical code of conduct, no oversight of escrow or trust funds.  Lay closers are not under any ethical obligation to avoid conflicts of interest or even define who the actual client is.  There is no requirement that supervisors be trained, much less that they train new employees.   Who wants to find out the hard way how much knowledge about North Carolina law that person with lots of experience in Virginia has?

Statewide Title, Inc. is concerned, like you, on the impact of these closing options to the consumer.  We want to know what you think.  Take a few minutes to complete our on-line survey.  We encourage you to read the full text of APAO 2002-1, which you can access through the survey.  We have paper copies of the survey and the opinion available as well.  We hope that by compiling data from the survey, we can represent your interests at the Real Property Section Council as it attempts to readdress this issue.

We would also like to encourage you to read the sample letter to the State Bar on our website.  It addresses the unauthorized practice issue and the serious harm that could result from allowing lay closings to continue.   We designed it to be easily downloaded, put on your firm letterhead, and sent to your local State Bar Councilor.  We also have included a “cc” on the bottom, to remind you to send a copy to the new State Bar President.  It’s time to let the State Bar know that this issue needs to be taken seriously, and it needs to be addressed before more settlement shops are opened and more consumers may be negatively impacted.

Please log onto the survey at: Survey Closed

Contracts Perilous Ground for Practitioners
Chris Burti, Vice President and Legal Counsel

At times, it has been sarcastically cautioned that attorneys drafting installment land sales contracts should regularly review their errors and omissions coverage. The primary reasons for using this form of financing is to either, avoid the cost and expense of foreclosure upon default or to avoid a due on sale clause in the seller's existing financing. The reason for the hyperbole is that there is little, if any, likelihood of achieving either objective. The cases in North Carolina are so consistent and clear that these transactions both, trigger a due on sale clause and create an equity of redemption that must be extinguished, that many experienced real estate attorneys simply refuse to draft installment land sales contracts as a matter of policy.

 Watson v. Defendant Miller Creek Lumber Co., Inc., COA05-1537, filed on July 18, 2006 is a unanimous decision of the North Carolina Court of Appeals that may serve to reinforce such policies. In this case the plaintiffs sought to enforce their rights in a 1991 contract after the defendant seller deeded the property to the other defendant. The trial court entered an order of summary judgment in favor of the defendant buyer and the plaintiffs appealed.

In 1991, the plaintiffs agreed to purchase a five-acre tract of land in Caldwell County from the defendant seller. The plaintiffs and the defendant seller entered into a written installment land contract wherein the plaintiffs agreed to pay the balance of the purchase price plus interest over a three-year period. Upon payment in full of the purchase price, defendant seller agreed to deed the property to the purchasers. The contract was captioned as a "Bond for Title" and recorded in the Caldwell County Registry. The plaintiffs fully performed the contract, but the defendant seller never delivered a deed to the plaintiffs. In 2003, the defendant seller conveyed the land to defendant buyer who recorded his deed in the Caldwell County Registry. In 2004, the plaintiffs filed a complaint alleging and after numerous filings, the trial court denied the plaintiffs' motion for summary judgment, granted the defendant buyer's motion for summary judgment, and dismissed the action against him. The plaintiffs contended that the trial court erred in granting the defendant's motion for summary judgment because the contract they entered with defendant seller and registered is entitled to the protection of the Connor Act, N.C.G.S. 47-18 as against a subsequent purchaser for value. With appropriate citations the Court of Appeals notes that when both parties file motions for summary judgment, there is implicit agreement that there are no issues of material fact on appeal, that the Court of Appeals' review of the grant of a summary judgment motion is de novo.

The court recites a conventional analysis of the purpose, requirements and effect of the Connor Act, N.C. Gen. Stat. § 47-18 (2005). Citing Chandler v. Cameron, 229 N.C. 62, 66, 47 S.E.2d 528, 530 (1948), the Court observes that "the act requires recordation of all ... contracts to convey ... affecting the title to real property."   The opinion cites that the North Carolina Supreme Court has determined "[o]ne who has a contractual right to compel another to convey is, upon the recordation of the contract, accorded the same protection as a grantee in a recorded deed." Quinn v. Thigpen, 266 N.C. 720, 723, 147 S.E.2d 191, 193 (1966) (emphasis added). The Court's conclusions are brief and cogent, therefore we present them in their entirety in lieu of discussion. " The case sub judice is similar to Clark v. Butts, 240 N.C. 709, 83 S.E.2d 885 (1954). In Clark, plaintiff Annie Clark ("Clark") and defendant Jonas Askew ("Askew") signed a contract whereby Clark agreed to care for Askew, whose health was in decline, and in return, Askew agreed to grant Clark a life estate in his house and lot. Clark, 240 N.C. at 710, 83 S.E.2d at 886. Clark registered the contract in the Camden County Register of Deeds on 16 June 1942. Id. 240 N.C. at 711, 83 S.E.2d at 887. Three years later, Askew conveyed his house and lot to Johnnie Butts ("Butts"). Id. Butts recorded his deed in the Camden County Register of Deeds on 19 May 1945. Id. Clark filed a complaint against Butts asking the trial court to declare her the owner of Askew's house and lot. Id. The trial court declared Clark the owner and our Supreme Court agreed stating "the contract ... was registered nearly three years before the deed from Askew to[Butts] was executed. The registration of [the contract] was constructive notice to [Butts]." Id. 240 N.C. at 715, 83 S.E.2d at 889. Further, our Supreme Court concluded "whatever rights [Butts] acquired by the deed from Askew ... were subservient to the rights of [Clark] under her prior registered contract[.] "Id." "In the instant case, the plaintiffs' contract with the defendant seller entitled them to "a good and sufficient deed" effective "[u]pon ... payment in full of said purchase price." It is uncontested that plaintiffs paid the purchase price in full in November 1994. Further, plaintiffs contend and the defendant seller admits after receiving the final payment the deed was never delivered to plaintiffs. All parties stipulated that the contract was recorded in the Caldwell County Register of Deeds on 8 November 1991. The parties also stipulated that defendant seller conveyed the disputed property to defendant Counts by deed eleven years later and defendant Counts recorded the deed in the Caldwell County Register of Deeds on 3 January 2003. Pursuant to Clark, supra, plaintiffs possessed superior rights to the land since their contract was recorded prior to recordation by defendant Counts." "Furthermore, pursuant to Rule 36 of the North Carolina Rules of Civil Procedure, defendant Counts is deemed, by virtue of his failure to respond to plaintiffs' request for admissions, to have admitted he not only had both actual and constructive knowledge of plaintiffs' recorded "Bond for Title," but also took title to the land subject to plaintiffs' recorded "‘Bond for Title.'"

 "Consequently, plaintiffs possess superior title to the land. Therefore, the trial court's grant of summary judgment to defendant Counts is reversed." The legal implications of the decision should be straightforward, as the conclusions of the Court seem to be clearly compelled by the language of the Act and should come as no surprise. The facts of the case will likely lead to more significant implications for title examiners. This litigation arose approximately thirteen years after the recording of the contract and almost a decade after its scheduled completion. It is absolutely clear that title examiners discovering an installment land sales contract in the chain of title of the locus in quo that has been recorded, but not extinguished, can ignore it only at great peril. One can not assume that it terminated due to default on the part of the buyer and one can not rely on the bare assertions of the seller. It must be terminated or satisfactory evidence of default and disavowance by the buyer must exist in order to convey marketable title in the first instance or insurable title in the latter. Note that our courts have consistently held that these contracts are essentially mortgages and the buyer holds an equity of redemption that must be extinguished. This doctrine imposes a burden upon the seller to take affirmative action to clear the title problem created by the recording of one of these contracts.

Statewide Title fully complies with North Carolina law in requiring an opinion of title from an independent licensed attorney before issuing a commitment or policy of title insurance.
Relevant Statutes: 58-7-15(18) 84-2.1 58-26-1 84-4 84-8
Report Violations to: NC State Bar NCDOI