The State of Real Property Practice - An Editorial Comment
Chris Burti, Vice President and Legal Counsel

There is a general perception that real property practice in North Carolina is approaching a crossroads. Large state lenders are becoming title insurance agents. With numerous offices across the state they are ideally positioned to undertake title abstracting and closing services, if a future change in the law permits, while presently utilizing controlled business aspects to supplant the attorneys traditional role of providing an independent, experienced and knowledgeable recommendation of which insurer meets the clients needs. Out of state lenders and title companies are reportedly utilizing independent non-attorney abstractors to establish title for loan collateral. Many are realistically concerned as to whether the practice as we know it will continue to exist in the foreseeable future or whether we will join the majority of states where attorney participation in the real estate transaction is nominal at best.

What are the factors that are driving Real Estate practice in the direction it is currently heading ? First, lenders are centralizing mortgage loan processing in order to reduce cost, improve efficiency and increase speed. Competitive pressures, created by consumer and investor demand, to speed up and simplify the loan process are behind the shift toward "one size fits all" loan origination procedures. As standardization increases the loan process requires less skilled personnel to turn more paperwork in ever shortening time periods. Additionally as investor demand for standardization increases there has been a tremendous corresponding increase in the required loan documentation. Second, as housing prices spiral upward and personal savings decrease it becomes increasingly difficult for home buyers to qualify for conventional loans. This economic reality causes lenders and realtors to strive to reduce outside closing costs of the borrowers in order to qualify them for the most home possible.

This has resulted in attorney’s fees, in most areas of the state, being either reduced or fixed and not increasing with inflation. Most attorneys today are charging the same or less for a typical residential closing as was charged fifteen years ago. This is an economic fact; not just a general perception. The Residential Real Estate Task Force of the Real Property Section of the North Carolina Bar Association in its Final Report delivered this year reveals that North Carolina stands next to last in the nation in combined attorney’s fee and title insurance premium for a typical residential real estate transaction. As a further reflection of this trend, East Carolina School of Business reports that the mean starting salary for its 1996 MBA graduates is $39,700.00 while The North Carolina Bar Association 1996 Economic Survey reflects that figure to be approximately $33,500.00 for 1996 Law graduates.

North Carolina also enjoys one of the lowest title insurance claims rates in the nation. The logical and probably correct inference is that this is due to the fact that attorneys are responsible for the title examination, closing and disbursement of the transaction and the title insurance function is kept separate by statute. While at first glance it would appear that this situation places the consumer in an enviable position now, such may not continue to be the case.

The economic pressures cited above are forcing many attorneys to undertake ever increasing numbers of closings in order to generate increased revenue under tighter time constraints. Simultaneously they are forced to increase efficiency in order to slow the rate of increase in overhead costs. Again this would appear to be beneficial, and it is, unless carried too far. Some of the methods that are being implemented to improve efficiency involve the increased use of paraprofessionals, computers, telefacsimiles and curtailment of traditional title examination procedures. The benefits of technology have been well established and further discussion here would not be productive.

Paraprofessionals are now recognized as essential in the high volume real estate practice. But well trained, properly supervised legal assistants are increasingly being used to improve the efficiency of more traditional offices as well. When an office’s volume increases to the point that supervision and training begin to become inadequate, not only are ethical obligations not being met but the rate of errors increases. Some evidence of this occurring is reflected in the fact that Lawyers Mutual Liability Insurance Company of North Carolina reports that Real Estate produced the second highest rate of claims in 1993, Lawyers Mutual presents Practical Risk Management (1995). Increasingly these claims are resulting from improper supervision of paralegals. Real estate is arguably one of the most complex areas of law. The real property attorney must have a capable knowledge of not only Real Property law but Bankruptcy, Estate Administration, Domestic, Corporation, Partnership, Wills, Environmental, Land Use Regulation and Tax law (to name a few) in order to render a competent opinion on title. The paraprofessional cannot be expected to have this knowledge without intensive training and extensive experience. When too much responsibility is turned over to the legal assistant, without this training and experience, title problems go undiscovered and errors in judgment occur giving rise to claims.

Traditionally title examinations covered a period of fifty to sixty years, today forty years is generally considered the norm. Title insures are now being requested to accept thirty year searches. While this may be sufficient in well developed metropolitan areas (because most title problems have probably been discovered and corrected after repeated searches) it probably increases exposure elsewhere. It should be noted that the vast majority of road and rural cooperative utility easements were procured and recorded during the Depression of the 1930’s and there was another surge of utility expansion during the early 1950’s. Additionally the post World War II building boom witnessed the creation of a multitude of subdivisions with their ever present restrictive covenants (often containing easements). A forty year title examination simply will not reveal these encumbrances unless they are specifically referenced in an instrument within the search period. Due to competitive pressures and as a result of risk analysis, title insurers are providing survey coverage to lenders without a current survey. As a result many transactions are now being closed without a survey (and leaving the owner unprotected) merely to save money. Often a current survey will provide the title examiner with important clues as to the existence of a title problem otherwise unrevealed by the records in the courthouse. These trends give rise to the potential for an explosion in claims for unreported title defects.

In summary, attorneys are assuming more responsibility and more work for less money and less time to accomplish it. Economic, market and competitive pressures are beginning to erode the traditional professional standards. This has occurred in other states and has resulted in non-attorneys undertaking parts or even all of the process reserved to attorneys here. A possible explanation for the increased costs associated with real estate closings in those states lies in the economic necessity of covering the cost of increased claims arising presumably from the reduced involvement of experienced, highly educated and knowledgeable professionals in one of the most complex areas of law. As a result it would appear that the consumer is being forced to pay more for an inferior service. It would seem that inappropriate reaction to economic pressures may be leading us down the same road in North Carolina. What then can be done to avoid a wring turning at the crossroads ? First, attorneys must become more proactive in informing the public (especially legislators) of the benefits to the consumer inherent in the present system and the risks and costs associated in the process in non lawyer systems. Second, attorneys must insure the economic viability of their practices. It should be observed that lenders have been charging one percent or more of the loan as an origination fee for decades in order to help cover operating costs associated with the loan as well as charging interest to cover risk and profit. Currently are added various processing and service fees. Realtors have likewise been charging six percent commission on almost all sales. These practices are almost rigidly consistent in both industries. The 1972 eighth printing of the North Carolina Bar Association Advisory Handbook on Office Management & Fees provides that "[i]n fixing fees it should never be forgotten that the legal profession is a branch of the administration of justice and not a mere money-getting trade.

Nevertheless, fees are the life-blood of every law office and the thoughtful and conscientious lawyer must recognize position of [the lawyer’s] importance in a complex society and must be business-like enough to obtain sufficient income from [the lawyer’s] services to maintain [the lawyer’s] position and to provide [the lawyer] with the tools necessary for the performance of [the lawyer’s] services in an efficient and competent manner. ...Among a lawyer’s best assets are: (1) the respect of [the lawyer’s] clients and the public. (2) The good opinion of the Courts. (3) The good opinion of [the lawyer’s] fellow lawyers. These are all diminished if it is known that the lawyer does not consider [the lawyer’s] own services worth as much as those of other lawyers. The lay public expects the lawyer to be able to fairly judge the worth of [the lawyer’s] services. The respect, good opinion and confidence of the public and of the Bar are lessened or destroyed when it becomes known that a particular lawyer is lowering or endangering the standards of the profession by evading or violating the considered principles of established Fee Schedules.

Cutting fees usually results in the lawyer: (1) Incurring the temptation to slight [the lawyer’s] work and thus fail to discharge [the lawyer’s] duty to [the lawyer’s] client, thus injuring [the lawyer’s] own reputation and bringing the profession into disrepute. (2) Inviting danger, and perhaps disaster, to [the lawyer] and the profession by encouraging the bargain hunting type of client whose primary consideration is price but who, having obtained the price, will then expect and demand the utmost in time, effort, quality, performance and results as well; all of which the client has a right to expect and demand regardless of price. The prudent and conscientious lawyer will, therefore, guard [the lawyer] and the profession against entanglements with this type of client and will not become involved unless the compensation agreed upon is fair, reasonable and equitable to both client and lawyer."

We recognize the mandatory fee schedules have been determined by the courts to be illegal price fixing. To the extent that the quoted principles address charging less than a reasonable fee, as defined by the Rules of Professional Conduct, they are as valid today as they were when they were first promulgated. It is questionable as to whether, in a state as progressive and prosperous as North Carolina, attorneys can take pride in being on the last rungs of the national fee ladder. Attorneys in some areas of the State still charge the one percent fee that was prevalent decades ago. This type of fee structure recognizes that as housing costs go up so do attorney’s overhead costs and that as the size of the transaction increases so does the attorneys responsibility and risk. These are some of the reasons that lenders and realtors structure their fees in the manner in which they do and are no less applicable to attorneys. If Attorneys would consistently charge a reasonable fee for their services, they would be required to undertake fewer matters in order to maintain profitability and would therefore be able to devote the time and attention to those matters that would ensure that North Carolina will continue to protect the consumer in the future as in the present and past.

Raise Equitable Defenses to Foreclosure in Superior Court
Alex Kenny, Legal Counsel

Meehan v. Cable, 489 SE2nd 440 (N.C.App. 1997), is a recent North Carolina Court of Appeals case which addresses equitable defenses in a foreclosure case. In Meehan, the court held that the property place to raise equitable defenses to enjoin a foreclosure is in Superior Court, not in the foreclosure hearing itself. The court’s reasoning is that the clerk of court can only consider four issues at a foreclosure hearing: (1) whether there is a valid debt; (2) whether there is default; (3) whether the trustee has the right to foreclose; and (4) whether sufficient notice was provided to record owners.

In Meehan, John Thomas Meehan, the plaintiff, purchased a tract of land from Dorothy Ann Cable, the defendant. Meehan secured the unpaid portion of the purchase price with a purchase money mortgage and a deed f trust which provided for monthly payments. Meehan made inconsistent payments for approximately eight years until Cable filed a foreclosure petition. Meehan alleged Cable demanded payments in excess of what was owed and filed a separate action seeking to enjoin the foreclosure and requesting a proper accounting. Meehan then filed amended complaints in which he claimed that he was not in default, that the defendant was barred by waiver and estoppel from claiming default or accelerating payments and that Cable had anticipatorily breached the terms of the note. Meehan also alleged that the defendant’s actions violated the Federal Fair Debt Practices Act (15 U.S.C.A. § 1692).

The trial court dismissed Meehan’s claims based on lack of jurisdiction, res judicata and collateral estoppel. The Court of Appeals relied on N.C.G.S. § 45-21.34 to reverse and remand the trial court’s dismissal on lack of jurisdiction. N.C.G.S. § 45-21.34 provides that anyone with a legal or equitable interest in real estate can apply to the Superior Court to enjoin a foreclosure sale before any of the parties’ rights become fixed. Therefore, Superior Court is the proper place to raise equitable defenses to a foreclosure sale.

The trial court also dismissed Meehan’s allegations that Cable was barred by waiver and estoppel from claiming default or accelerating payments and that defendants has anticipatorily breached the terms of the note based on res judicata and collateral estoppel. The Court of Appeals reversed this ruling and noted that the issue was one of collateral estoppel (where the same parties have different claims), not res judicata (where the same parties and the same claims as a prior action are involved). Because the Clerk of Court is limited to addressing only four issues at the foreclosure hearing (the existence of: a valid debt, default, the trustee’s right to foreclose, and sufficient notice), Meehan could not have raised his equitable defenses at the foreclosure hearing or at an appeal based on that hearing. Any equitable defenses to enjoin foreclosure must be raised under N.C.G.S. § 45-21.34 (Enjoining Mortgage Sales on Equitable Grounds).

The Court of Appeals did affirm the trial court’s dismissal of Meehan’s claims under the Federal Fair Debt Collection Practices Act because damages under that act are limited to $1,000.00 per proceeding, while Superior Courts are to hear controversies which exceed $10,000.00.

In summary, in Meehan v. Cable the Court of Appeals held that equitable defenses to a foreclosure are properly raised in an action to enjoin the sale, that Superior Courts have jurisdiction to hear such claims and collateral estoppel is not a bar to hearing equitable defenses because such defenses cannot be raised in the Clerk’s foreclosure hearing under N.C.G.S. § 45-21.16.