December 23, 2009
REQUIREMENT OF ATTORNEY PRESENCE AT REAL ESTATE CLOSING
By: James Orlando, Legislative Analyst
You asked about states that require attorneys to be present at a real estate closing or a refinance.
States take a variety of approaches to attorney involvement in real estate closings, settlements, and refinancing. Whether an attorney must be present at a closing is typically a question of whether a non-attorney conducting a closing would be engaged in the unauthorized practice of law. While there is no universal definition of what constitutes the practice of law, most states define the practice of law to include giving advice in matters relating to clients' legal rights or responsibilities, drafting legal documents, and representing clients before a court or similar body.
In many states, the courts, rather than the legislature, regulate the unauthorized practice of law. State bar associations also play a role in many states. We found at least two states (Georgia and South Carolina) that require attorneys to be physically present at closings. We found several other states that restrict the extent of non-attorney involvement in closings, such as prohibiting non-attorneys from drafting legal documents for a closing and prohibiting non-attorneys from rendering legal advice in matters arising during the closing. Below are examples of states that either require attorneys to conduct real estate closings or otherwise restrict the activities that non-attorneys may engage in at closings.
We also found a recent Massachusetts federal district court case where the judge declared that interpreting the state's practice of law statutes to require an attorney to perform all the interconnected activities of a real estate conveyance and the issuance of title insurance is unconstitutional.
Attached are a statute and a state bar advisory opinion from two states (Alabama and North Carolina) that restrict the functions that non-attorneys may engage in at closings.
In Alabama, non-attorneys can conduct closings. However, there are restrictions in both the Alabama code and case law on what activities a non-attorney can perform related to the closing. The section of the Alabama Code defining the practice of law permits a non-attorney to prepare title abstracts and issue title insurance, provided that the non-attorney does not prepare deeds or other legal documents (unless the non-attorney has a proprietary interest in the property) (Ala. Code § 34-3-6(c)).
In 1983, the Alabama Supreme Court held that a title company and one of its employees engaged in the unauthorized practice of law when the employee gave legal advice at a real estate closing (Coffee County Abstract & Title Co. v. State, 445 So. 2d 852 (Ala. 1983)). In the case, a title company employee told a purchaser that if one of the purchasers died, his heirs would take his interest in the property. However, the deed actually passed title to the purchasers jointly with a right of survivorship, so that the surviving owner would take full title to the property when one of the purchasers died.
The court held that the employees had committed the unauthorized practice of law by giving a legal opinion regarding the effect of the manner of taking title and by assisting in the preparation of the deed. The defendants argued that attorneys had drafted the deeds, and that the title company had merely filled in the blanks, an act which does not constitute the practice of law. The court noted that:
This argument overlooks the fact that decisions must frequently be made regarding the information to go into the blanks, the appropriateness of particular clauses in form deeds, and, most germane to this case, the choice of which deed form to use. The fact that [the title company employee] gave [the purchasers] title as joint tenants with right of survivorship when they wanted, and he thought he had given them, title as tenants in common, amply illustrates the rationale for limiting the preparation of legal documents to licensed attorneys (Coffee County Abstract & Title Co, 445 So. 2d at 855).
In 2000, the Delaware Supreme Court approved a decision by the state's Board on the Unauthorized Practice of Law that a real estate settlement company and three people associated with the company were engaged in the unauthorized practice of law by conducting real estate settlements in Delaware without the assistance of an attorney (In re Mid-Atlantic Settlement Servs., 755 A.2d 389, 2000 Del. LEXIS 243 (Del. 2000)). The board noted that “no attorney is present during these settlements, and in most instances no Delaware attorney is involved in the loan and settlement process . . . In addition, no Delaware attorney reviews the documents used at the settlement” (Mid-Atlantic, 2000 Del. LEXIS 243, at *3-4).
The board found that the company engaged in the practice of law when (1) determining the proper legal description of the property as set forth on the deed to be included on an exhibit on the mortgage and (2) explaining to the borrower the terms of many legal documents, including the note, mortgage, Planned Unit Development Rider, the Truth-in-Lending Disclosure, and the first payment letter.
The court approved the board's recommendation that required an attorney licensed in Delaware to conduct a closing of a sale of Delaware real property or a refinancing loan secured by Delaware real property.
A Georgia statute defines “the practice of law” to include conveyancing, preparing legal instruments of all kinds “whereby a legal right is secured,” and rendering opinions on the validity of titles to real or personal property (Ga. Code Ann. § 15-19-50).
The statutes do not prohibit a title insurance company from “examining the record of titles to real property . . . preparing and issuing abstracts of title from such examination of records and certifying to the correctness of the same, nor from issuing policies of insurance on titles to real or personal property” (Ga. Code Ann. § 15-19-53).
In 2003, the Georgia Supreme Court approved an advisory opinion by the Georgia State Bar's Standing Committee on the Unlicensed Practice of Law finding that the preparation and execution of a deed of conveyance by a non-attorney represents the unauthorized practice of law (In re UPL Advisory Opinion 2003-2, 588 S.E.2d 741 (Ga. 2003); UPL Advisory Opinion 2003-02 (2003)).
In 2000, the Georgia Supreme Court issued a Formal Advisory Opinion concluding that it was ethically improper for an attorney to participate in a real estate closing from a remote site by telephone (Formal Advisory Op. No. 00-3 (Feb. 11, 2000)). The court concluded that “the lawyer must be in control of the closing process from beginning to end. The supervision of the paralegal [who would be physically present at the closing] must be direct and constant.”
New York law provides that “[n]o natural person shall ask or receive, directly or indirectly, compensation . . . for preparing deeds, mortgages, assignments, discharges, leases or any other instruments affecting real estate . . . unless he has been regularly admitted to practice, as an attorney or counselor, in the courts of record in the state” (N.Y. Jud. Law § 484). New York law also prohibits voluntary associations or corporations from performing these services, although there is a narrow exception for title insurance companies (N.Y. Jud. Law §§ 495 (3, 5)).
In June 2009, a New York Appellate Court censured an attorney for professional misconduct, including aiding non-attorneys in the unauthorized practice of law, after the attorney formed a corporation with a non-attorney to bid on a contract with the United States Department of Housing and Urban Development (HUD) for the provision of closing services on the sale of previously foreclosed properties (Garas v. Grievance Comm. of the Eighth Judicial Dist., 2009 NY Slip Op 4841, 65 A.D.3d 164 (N.Y. App. Div. 4th Dep't 2009)). Non-attorney employees of the company prepared the deeds used at closings. The court noted that “[a]lthough [the attorney] reviewed the prepared deeds and title searches, he had no involvement in the day-to-day operations of [the company], and he exercised no supervisory authority over the nonlawyer member” (Garas, 65 A.D.3d at 165).
Contrary to the attorney's argument that the company's services consisted mainly of clerical functions, the court concluded that “[t]he services at issue here . . . were routinely performed, were of the character usually performed by lawyers, and were performed pursuant to a contract that required an admitted attorney as a necessary presence.”
The North Carolina State Bar has interpreted the state's unauthorized practice of law statutes as prohibiting a non-attorney from handling a residential real estate closing (Authorized Practice Advisory Opinion 2002-1) (APAO 2002-1). However, an attorney need not be physically present at the closing (2002 Formal Ethics Opinion 9 (02 FEO 9)).
The North Carolina State Bar determined that a non-attorney is engaged in unauthorized practice of law if performing various functions related to a residential real estate closing, including, among others: (1) providing an opinion as to title of real property, (2) explaining the legal status of title to real property, (3) giving advice about the parties' rights and responsibilities concerning matters disclosed by a land survey, (4) providing opinions or advice regarding the parties' legal rights and obligations, (5) advising parties with respect to alternative ways for taking title to the property, (6) drafting legal documents, (7) recommending a course of action to a party under circumstances that require the exercise of legal judgment, and (8) attempting to settle a dispute between the parties that will have implications with respect to their legal rights or obligations (APAO 2002-1).
However, a nonlawyer may: (1) present and identify the documents necessary to complete a residential real estate closing, direct the parties where to sign the documents, and ensure that the parties have properly executed the documents and (2) receive and disburse the closing funds. The state bar determined that “performing administrative or ministerial activities in connection with the execution of residential real estate closing documents and the receipt and disbursement of the closing proceeds does not necessarily require the exercise of legal judgment or the giving of legal advice or opinions.”
In another opinion, the North Carolina State Bar reconsidered its earlier position and determined that the physical presence of an attorney was not required at a closing for a residential real estate purchase or refinancing. The state bar concluded that an attorney “may delegate the direction of the execution of the documents and disbursement of the closing proceeds to a non-lawyer who is supervised by the lawyer provided, however, the non-lawyer does not give legal advice to the parties” (02 FEO 9). The state bar also concluded that “the execution of the documents and the disbursement of the proceeds may be accomplished by mail, by e-mail, by other electronic means, or by some other procedure that would not require the lawyer and the parties to be physically present at one place and time.”
The South Carolina Supreme Court has emphasized the primary role that attorneys must play in real estate closings. In 1986, the court held that a commercial title company had engaged in the unauthorized practice of law by conducting closings without the assistance of an attorney (State v. Buyers Service Co., 357 S.E.2d 15 (S.C. 1986)). The court concluded that “real estate and mortgage loan closings should be conducted only under the supervision of attorneys, who have the ability to furnish their clients legal advice should the need arise and fall under the regulatory rules of this court” (Buyers Service Co., 357 S.E.2d at 19).
In 2003, the court held that an attorney violated the state's Rules of Professional Conduct by allowing a paralegal to conduct a closing without the attorney being present (In re Lester, 578 S.E.2d 7 (S.C. 2003)). In the case, the attorney, who represented the purchaser in a real estate transaction, was out of town on the closing date. He prepared and reviewed a HUD-1 settlement statement and several other closing documents prior to leaving town. On the date of the closing, the attorney's paralegal signed the statement without a notation indicating her authority to sign on the attorney's behalf. The paralegal conducted the closing, although the attorney was available by telephone.
In another 2003 case, the court issued a public reprimand to an attorney for assisting a non-attorney in the unauthorized practice of law regarding a real estate closing (In re Pstrak, 591 S.E.2d 623 (S.C. 2003)). The attorney attended two real estate closings in place of another attorney with the mistaken impression that the other attorney had already or would be reviewing the abstract of title and closing documents. The court noted that the attorney was responsible for ensuring that a licensed attorney was involved in all aspects of the closing.
RECENT MASSACHUSETTS FEDERAL COURT RULING
In April 2009, a federal judge in Massachusetts addressed what components of real estate conveyancing should be considered the practice of law under the Massachusetts statutes (Real Estate Bar Ass'n for Mass., Inc. v. Nat'l Real Estate Info. Servs., 609 F. Supp. 2d 135 (D. Mass. 2009)). In the case, the Real Estate Bar Association for Massachusetts, Inc. (REBA) sued the National Real Estate Information Services, Inc. and an affiliated company that provided real estate closing and title insurance services.
The court declined to adopt REBA's reading of the Massachusetts statutes and case law that all steps of a real estate conveyance constitute the practice of law. The court held that, pursuant to state law, the issuance of title insurance need not be directed by an attorney. The court further held that “notary closings” did not constitute the unauthorized practice of law. According to the plaintiff, in a “notary closing,” the attorney attends the closing but does not prepare or record documents, examine the title, or disburse funds to pay off existing mortgages (REBA, 609 F. Supp. 2d at 138). However, the court found that there was no evidence to support the plaintiff's argument that the defendants' attorneys acted as more “signing agents” than “attorneys” at the closings.
Finally, the court held that an interpretation of Massachusetts law in accordance with the plaintiff's view would be unduly burdensome on interstate commerce, and thus would violate the Dormant Commerce Clause. The court held that REBA's interpretation of the practice of law would impose a substantial burden on interstate commerce by “forc[ing] out-of-state vendor services [like the defendants] to employ individuals who possess a Massachusetts legal license or to subcontract their services out to Massachusetts attorneys” (Id. at 146).