There are two proposed Formal Ethics Opinions that would have an impact on real property practice if adopted and which we feel merit an article that may promote due consideration and discussion among practitioners. They are proposed FEO 2007-9 and FEO 2006-3. Proposed FEO 2007-9 attempts to address the issues arising for a closing attorney when the seller’s conditions concerning deed delivery conflict with the instructions of the buyer. The facts posited by the inquiry occur often enough that we will benefit from having the questions addressed as long as the answers are clear and cover the most likely situations. The proposed opinion seems to address the issues in a fashion that will promote greater certainty for practitioners when these conflicts arise.

In the first inquiry, the settlement conference has occurred and the attorney has updated the title, recorded the deed, deposited the check into the trust account but not disbursed when the buyer changes its mind and demands return of the proceeds. The proposed response recognizes that as title has passed and all conditions have been met that the attorney has a fiduciary obligation to the seller to deliver the funds even though not representing the seller. This response rejects the erroneous perception of an attorney as a ‘hired gun’ that will do the client’s bidding right or wrong. The opinion would also logically prohibit a subsequent representation of the buyer by the attorney in an action for rescission.

If the buyer’s demand precedes the recording of the deed it does not change the opinion. The seller delivered the deed conditioned upon the sale proceeds being disbursed when all other conditions were met. “If all other conditions on the sale were satisfied and in the absence of fraud by the seller, the lawyer must fulfill the condition on the delivery of the deed by disbursing the proceeds. A deed becomes effective as a transfer of title between the parties upon its execution and delivery. Newell v. Edwards, 7 N.C. App. 650, 173 S.E.2d 504 (1970). The fact that the deed was not recorded does not affect the equities between the parties or Attorney’s obligation to the parties.” The opinion also addresses the reverse situation where the attorney represents the seller and the seller seeks to withdraw after the conditions are met, but prior to recording. The outcome is the same and for the same reasons.

It should be observed that the committee addressing this opinion was inconsistent in its use of the term “closing” that may point out an issue of current relevance to the real property Bar. There is currently a significant amount of conversation among real property practitioners as to ‘when’ closing has occurred. The opinion assumes at one point that closing constitutes the settlement conference only, but distinguishes it at another point.  Many practitioners use the term in this fashion, but many more also feel that closing has not occurred until title has been updated, the documents recorded and funds disbursed. It would be helpful if the term had a more consistent application.

The full text of the proposed FEO 2007-9 follows.

Lawyer’s Obligation to Disburse Closing Funds

Proposed opinion rules that a closing lawyer must comply with the conditions placed upon the delivery of a deed by the seller, including recording the deed and disbursing proceeds, despite receiving contrary instructions from the buyer.

Editor’s Note: This opinion expands upon 99 Formal Ethics Opinion 9. To the extent that this opinion differs from 99 FEO 9, that opinion is overruled.

Inquiry #1:

Attorney represented Small Corporation on the purchase of a lot from Development Company. After the closing, Attorney deposited the check for the purchase price in his trust account and recorded the deed at the register of deeds. When he returned from the courthouse, he received a telephone call from an official with Small Corporation who stated that Small Corporation did not want to purchase the lot anymore because company officials had just learned that a house with a basement could not be built on the lot. The corporate official instructed Attorney not to disburse any of the closing funds although the deed was already recorded and title vested in Small Corporation. Development Company, the seller, demanded the sale proceeds. What should Attorney do?

Opinion #1:

Normally, a client’s decision not to proceed with a transaction must be honored by the lawyer and, if necessary, the lawyer must restore the status quo ante by returning documents, property, or funds to the appropriate parties to the transaction. Comment [1] to Rule 1.2 of the Revised Rules of Professional Conduct states, “[t]he client has ultimate authority to determine the purposes to be served by legal representation within the limits imposed by law and the lawyer’s professional obligations.” However, a closing lawyer must also comply with the conditions placed upon the delivery of the deed by the seller absent fraud. If the seller delivered the executed deed to the lawyer upon the condition that the deed would only be recorded if the purchase price was paid, the lawyer has fiduciary responsibilities to the seller even if the seller is not the lawyer’s client. See, e.g., RPC 44 (conditional delivery of loan proceeds). Because title has passed to the buyer, the lawyer must satisfy the conditions of the transfer of the property by disbursing the sale proceeds. The lawyer must notify the buyer and the buyer can then take appropriate legal action to seek to have the sale rescinded.

Inquiry #2:

May Attorney represent Small Corporation in the subsequent action for rescission?

Opinion #2:

No. Rule 3.7(a) prohibits a lawyer from serving as a witness and an advocate in a trial proceeding. Moreover, Attorney’s testimony may be detrimental to the interests of Small Corporation. If so, Attorney is also be barred from the representation because of the conflict of interest. Rule 3.7(b).

Inquiry #3:

Would the answer to Inquiry #1 be different if the buyer had instructed the lawyer not to disburse the sales proceeds after the closing conference, but before the deed had been recorded?

Opinion #3:

No. The seller delivered the deed upon the condition that the sale proceeds would be disbursed if all other conditions on the sale were satisfied. In this regard, the lawyer is a fiduciary for the seller. If all other conditions on the sale were satisfied and in the absence of fraud by the seller, the lawyer must fulfill the condition on the delivery of the deed by disbursing the proceeds. A deed becomes effective as a transfer of title between the parties upon its execution and delivery. Newell v. Edwards, 7 N.C. App. 650, 173 S.E.2d 504 (1970). The fact that the deed was not recorded does not affect the equities between the parties or Attorney’s obligation to the parties. See N.C. Gen. Stat. A7 47-18.

Inquiry #4:

Assume that Attorney represents Development Company, the seller of the property. After the closing conference, but prior to recording the deed, Attorney received a telephone call from the seller asking the lawyer not to record the deed. What should attorney do?

Opinion #4

The buyer delivered the purchase money to the closing lawyer upon the condition that the deed would be recorded, and, in that regard, the lawyer is a fiduciary for the buyer and must fulfill the condition on the delivery of the funds absent fraud by the buyer. Because title has passed to the buyer, the lawyer must satisfy the conditions of the transfer of the property by recording the deed and disbursing the sale proceeds.

Proposed 2006 Formal Ethics Opinion 3

This inquiry has been under consideration and discussion since January 19, 2006. It attempts to provide guidance where lenders selling foreclosed properties, want to have the foreclosing attorneys close the sale to subsequent buyers and these attorneys wish to either represent both parties or limit their representation to that of the lender. Under the facts presented, the contract signed by the buyer would provide that; the seller/lender will select the title and closing agent; the seller will pay the title examination fee and title insurance premium; and that the closing will be held at the title/closing agent’s office. It would provide that the buyer will pay the “customary closing fee” to the title/closing agent selected by the seller and that the buyer is entitled to legal representation “at the buyer’s own expense”.

The proposed opinion provides detailed guidance concerning the attorney’s requirements for providing informed consent, avoiding misplaced loyalty and avoiding prohibited acts. It is fairly straightforward and easy to follow the logical analysis. Of significant import to those attorneys involved in representing lenders disposing of foreclosed properties and writing in these representation provisions should be Inquiry # 5. The Bar maintains that clients are entitled to legal counsel of their choice. The lender’s attorney is permitted to be the designated closing agent under the terms of the purchase contract. However, if the buyers choose to hire a lawyer to represent their interests by examining and giving an opinion on title and participating in the closing on their behalf, “the other lawyer may not interfere with this representation.” The attorney must also comply with the ethical prohibition on direct communications with a represented party without the consent of that party’s lawyer.

Certain aspects of the proposed opinion were deemed to be legal questions outside of the purview of the State Bar and we have deleted them due to space considerations. The edited version follows and the full version can be found online at:  

http://www.ncbar.com/ethics/propeth.asp

Representation in Purchase of Foreclosed Property

(This opinion is being studied by a subcommittee for another quarter.)

Proposed opinion examines the circumstances in which a lawyer who regularly represents a lender may close the sale of foreclosed property owned by the lender and limit his representation to the lender.

Inquiry #1:

Client X entered into a contract with Lender to buy a property that was repossessed via foreclosure. The Attorney A regularly handles foreclosure proceedings for Lender and subsequently represents Lender on the sale of the foreclosed properties. Lender names Attorney A as the “title/closing agent” for the sale to Client X. May Attorney A represent both Client X and Lender on the closing of the transaction, including examining title and giving an opinion as to title to Client X?

Opinion #1:

Attorney A may represent both parties to the transaction but only if he reasonably believes that the common representation will not be adverse to the interests of either client, there is full disclosure of Attorney A’s prior representation and relationship with Lender, and Client X consents to the representation. Rule 1.7; 97 FEO 8. As stated in 97 FEO 8,1.

Where a lawyer has a long-standing professional relationship with a seller and a financial interest in continuing to represent the seller, the lawyer must carefully and thoughtfully evaluate whether he or she will be able to act impartially in closing the transaction. The lawyer may proceed with the common representation only if the lawyer reasonably believes that his or her loyalty to the seller will not interfere with the lawyer’s responsibilities to the buyer. Rule 2.2(a)(3). Also, the lawyer may not proceed with the common representation unless he or she reasonably believes that there is little likelihood that an actual conflict will arise out of the common representation and, should a conflict arise, the potential prejudice to the parties will be minimal. RPC 210 and Rule 2.2(a)(2).

If the lawyer reasonably believes the common representation can be managed, the lawyer must make full disclosure of the advantages and risks of common representation and obtain the consent of both parties before proceeding with the representation. Rule 2.2(a)(1). This disclosure should include informing the seller that, in closing the transaction, the lawyer has equal responsibility to the buyer and, regardless of the prior representation of the seller, the lawyer cannot prefer the interests of the seller over the interests of the buyer. With regard to the buyer, the lawyer must fully disclose the lawyer’s prior and existing professional relationship with the seller. This disclosure should include a general explanation of the extent of the lawyer’s prior and current representation of the seller and a specific explanation of the lawyer’s legal work, if any, on the property that is the subject of the transaction...

Full disclosure to the seller and to the buyer must also include an explanation of the scope of the lawyer’s representation. See RPC 210. In addition, the lawyer should explain that if a conflict develops between the seller and the buyer, the lawyer must withdraw from the representation of all parties and may not continue to represent any of the clients in the transaction. RPC 210 and Rule 2.2(c)…Areas of potential conflict should be outlined for both parties prior to obtaining their separate consents to the common representation...

If common representation is permitted under the conditions outlined above, Attorney may perform legal services for both parties as necessary to close the transaction including offering an opinion as to title to the buyer. Either party may be charged for the lawyer’s services as appropriate. See Rule 1.5.

Inquiry #2:

Attorney A intends to represent only the interests of Lender and does not intend to represent Client X in closing the transaction. May Attorney A limit his representation in this manner?

Opinion #2:

Yes, provided there is full disclosure to Client X that Lender is his sole client, that he does not represent the interests of Client X, that the closing documents will be prepared consistent with the specifications in the contract to purchase and, that in the absence of such specifications, he will prepare the documents in a manner that will protect the interests of his client, Lender, and, therefore, Client X may wish to obtain his own lawyer. See, e.g., RPC 40 (disclosure must be far enough in advance of the closing that the buyer can procure his own counsel), RPC 210, 04 FEO 10, and Rule 4.3(a).

Inquiry #3:

If Attorney A limits his representation to Lender, but closes the transaction, does he have any duty to disclose or discuss any of the following with Client X: defects of title; the difference between insurable title and marketable title; the exceptions contained in the title policy and the need for exception documents at closing; and the terms of the sales contract?

Opinion #3:

If Attorney A explicitly limits his representation to Lender, he should not give any legal advice to Client X except the advice to secure counsel. Rule 4.3(a).

Inquiry #5:

Client X believes that Attorney A has a conflict of interest because he regularly represents Lender and he asks Attorney Y to represent him on the closing of the purchase of the property. Client X wants Attorney Y to examine the title to the property, give his opinion as to title, and act as Client X’s agent at the closing.

Attorney A insists that the contract requires Client X to accept him as the closing agent for the transaction. May Attorney A refuse to allow Attorney Y to participate in the closing as Client X’s lawyer?

Opinion #5:

No. Clients are entitled to legal counsel of their choice. See, e.g., RPC 48. Attorney A may, by the terms of the purchase agreement, be the designated closing agent for the sale. However, if Client X hires a lawyer to represent his interests by examining and giving him an opinion on title and participating in the closing on his behalf, the other lawyer may not interfere with this representation. See, e.g., Rule 4.2. In addition, Attorney A must comply with the prohibition in Rule 4.2(a) on direct communications with a represented person without the consent of the lawyer for the represented person.

Inquiry #6:

Attorney A agrees that Attorney Y will represent Client X’s interests at the closing. However, Attorney A claims that he is still entitled to a fee from Client X because the terms of the contract.

May Attorney A charge a fee to Client X?

Opinion #6:

Whether the contract to purchase the property requires Client X to pay Attorney A’s fee is a legal question outside the purview of the Ethics Committee. However, a lawyer may be paid by a third party, including an opposing party, provided the lawyer complies with Rule 1.8(f) and the fee is not illegal or clearly excessive in violation of Rule 1.5(a). See RPC 196. Attorney A’s time and labor relative to the closing may be reduced because of the legal services performed by Attorney Y on behalf of Client X. If so, this factor should be taken into account in determining whether the “customary fee” is excessive. Rule 1.5(a).