Don’t be used as a “rubber stamp” or “rent” your name and status as an attorney!
In a disciplinary case filed on April 20,* the South Carolina Supreme Court publicly reprimanded an attorney for failing to properly supervise the disbursement aspect of a residential refinance closing. In a three-two decision, the Court pointedly seized the opportunity to warn residential closing lawyers.
The disciplined attorney worked as an independent contractor for Carolina Attorney Network, a management service located in Lexington, that provides its services to, among other entities, Vantage Point Title, Inc. Vantage Point Title was described as a non-lawyer owned title company based in Florida. The attorney testified that 99.9% of his business comes from Carolina Attorney Network and that he had no direct contact with Vantage Point Title.
The attorney had previously been suspended for thirty days by the Court for failing to properly maintain his trust account. He stated in oral arguments in the current case that the suspension caused him to lose his ability to perform closings in the normal manner because he lost his status as an agent for a title insurance company. As a result, he said he was forced to handle closings through the management service.
The attorney testified that he didn’t recall the closing at issue, but he described the process. He said he receives closing documents via e-mail and reviews the title opinions. He verifies that a South Carolina licensed attorney completed the title opinions. He also reviews the closing instructions and the closing statements. He does not review the title commitments nor verify the loan payoff amounts. He conducts the closings and returns the closing packages with authorizations to disburse. Vantage Point disburses the funds, records the documents and issues the title insurance policies. Vantage Point then sends the lawyer disbursement logs showing how closing funds are disbursed. The lawyer reviews the disbursement logs to ensure they have a zero balance. He or an employee of Carolina Attorney Network reviews the online records of the ROD to verify that the mortgages are properly recorded.
The loan at issue had been “net funded” and the disbursement log did not “zero out”. The log showed a credit of approximately $100,000, and a disbursement of approximately $800. The Court stated that the disbursement log was inaccurate, and that the lawyer did not even know at the time of closing that the loan had been net funded.
The HUD-1 Settlement Statement in the closing at issue showed Vantage Point received approximately $800 for “title services and lender’s title insurance”, but attorney’s fees were not reflected. In fact, Vantage Point paid Carolina Attorney Network $250, and Carolina Attorney Network paid the attorney $150.
Vantage Point maintains a national trust account for all fifty states, but at some point, it opened “for unknown reasons”, according to the Court, a SC IOLTA account. Two checks were written on the IOLTA account for the closing at issue. When those two checks were returned for insufficient funds, the investigation by the Office of Disciplinary Counsel was triggered. Ultimately, all checks cleared, and no one sustained harm.
Doe v. Richardson is the controlling case. In this 2006 seminal case, the S.C. Supreme Court held that disbursement of funds in a residential refinance is an integral step in the closing and constitutes the practice of law. Richardson further held that although the attorney must supervise disbursements in residential closings, the funds do not have to pass through the supervising attorney’s trust account.
The Court stated the current case presents a situation where the lawyer conducted his duty to supervise disbursement in name only. He “rented” his name and status as an attorney to attempt to satisfy the attorney supervision requirement. There is no question, according to the Court, that the lawyer’s cursory review of the disbursement log did not satisfy the duty to supervise disbursement. The Court stated in furtherance of its concern that attorneys are being used as “rubber stamps” to satisfy the attorney supervision requirement in low cost real estate closings, and it took the opportunity in this case to expand upon Richardson.
The Court clarified that an attorney’s duty to oversee the disbursement of loan proceeds in residential closings is nondelegable. To fulfil this duty, the attorney must ensure: (a) that he or she has control over the disbursement of loan proceeds; or (b) at a minimum, that he or she receives detailed verification that the disbursement was correct.
The Court stated that, in practice, an attorney may find that utilizing his or her trust account and personally disbursing funds provides the most effective means to fulfil this duty. The Court stood by the Richardson holding, however, that residential closing funds are not required to pass through the supervising attorney’s trust account. It held that the attorney’s verification of proper disbursement, via sufficient documentation or information received from the appropriate banking institution, in addition to the disbursement log, is acceptable to fulfil this duty.
In essence, according to the Court, the lawyer was used as a “rubber stamp” for a non-lawyer, out-of-state organization with no office in South Carolina, whose involvement was not disclosed to the clients. The Court stated that it has insisted on lawyer-directed real estate closings in order to protect the public. The lawyer’s method of handling his client’s business was stated to provide no real protection and was held to be a “gross abandonment” of his supervisory authority.
Former Chief Justice Toal wrote the opinion for the Court. Justices Kittredge and Moore concurred. Current Chief Justice Pleicones dissented in a separate opinion in which Justice Hearn concurred.
The dissent characterized the case as a situation that through an error by a title company, the ODC became aware of a single closing where the attorney failed to explain the nature of a “net funding” transaction to clients who suffered no harm. Nothing in this single instance justifies a public reprimand, according to the dissent, nor justifies a modification of Richardson, adopting a non-delegable duty to oversee loan disbursements through “detailed verification” or through the receipt of “sufficient documentation or information” in addition to the disbursement log.
The dissent said that the majority neither explains what this means nor how more oversight could have prevented the title company from issuing checks drawn on the wrong account. In a footnote, the dissent accused the majority of imposing a “new, vague requirement on residential real estate closings”.
The real question becomes….what in the world will the next case on this topic hold?
*In the Matter of Breckenridge, S.C. Supreme Court Opinion No. 27625, April 20, 2016.
In news that will be well received by South Carolina residential closing attorneys, ALTA reported on April 8 that CFPB Director Richard Cordray stated that lenders may not unilaterally shift liability for errors on TRID mortgage disclosures to third parties.
We have heard from closing attorneys across South Carolina that lenders are taking varying approaches in their attempts to shift or share TRID liability with closing attorneys. We caution closing attorneys to read letters and closing instructions carefully and to negotiate or strike objectionable provisions. Pay particular attention to provisions that would violate attorney ethical obligations. Don’t agree, for example, that client confidences will be revealed to creditors.
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