Ethics Advisory Opinion

We have our second Ethics Advisory Opinion of 2021

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It answers two specific trust account disbursement questions

Ethics Advisory Opinion 21-02 deals with two questions posed by a lawyer concerning a trust account disbursement issue.

The lawyer received settlement funds in a significant amount subject to a valid lien, but the exact amount of the lien has not yet been determined. The parties agreed that the funds will not be disbursed until the lien amount is determined. It is expected that the funds will be held for more than a year. The fee agreement provides that the attorney will receive a contingency fee of a specific percentage plus costs. The client wishes to earn interest of the funds.

The questions presented to the Ethics Advisory Opinion are: (1) Is the lawyer permitted to open a separate account for the funds; and (2) Should the entire amount be held in trust or the entire amount minus the attorney’s fees and costs?

The Committee begins with an examination of South Carolina Appellate Court Rule 412 (a)(3) which requires an IOLTA account for “pooled nominal or short-term funds of clients or third persons.” The opinion states that there is no requirement for a long-term trust account to be an IOLTA account.

Rule 412 (d)(1) says a lawyer must exercise good faith judgment in determining whether funds are nominal or short-term. The rule then states that client or third person funds shall be deposited into an IOLTA account unless funds can earn income for the client more than the costs incurred to secure such income. If the funds can be invested in an interest-bearing account for the benefit of the client at an expense less than the costs of securing that income, then a separate account is permitted.

The Committee opined that a separate account is permitted in this case because the funds in question are not nominal, and they are not short-term because they are expected to be tied up for more than a year. The Committee advised that since the attorney has the duty of keeping client funds secure, it would be the best practice to invest the funds in a government insured account. The Committee then reminded the attorney that all normal trust account recordkeeping rules will apply to the separate account.

Finally, the Committee opined that the attorney is free to disburse attorney’s fees and costs immediately. Since those amounts are not subject to the lien, leaving those funds in the account would amount to improper commingling in violation of Rule 1.15(a).

EAO 21-01 says it’s ethical to pay $249 to be on lender’s closing attorney list

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The first Ethics Advisory Opinion of the year is noteworthy for South Carolina real estate practitioners.

Here is a brief summary of the facts:  In a residential refinance, the lender’s loan estimate package provided the name of a specific South Carolina licensed attorney that the bank “identified” as one who could close the loan. The package expressly said the borrower could “shop for (the borrower’s) own providers” for legal and other services.

The borrower informed the bank that a different lawyer had been selected, but the bank’s second set of loan estimate documents again identified a different lawyer and again said the borrower could chose its own provider.

When the borrower asked why another lawyer’s name was identified, the bank responded that the borrower’s chosen lawyer could sign with a third-party company that the bank had contracted with to produce loan forms for an annual fee of $249 to be included on the list.

The borrower’s lawyer did not enroll in the program but did close the loan.

The question to the Ethics Advisory Committee was whether a lawyer may participate in a service provider network for an annual fee of $249 to be listed as an “identified” service provider without violating S.C. Rule of Professional Conduct 7.2(c)?

Rule 7.2 (c) generally provides that a lawyer shall not give anything of value to a person for recommending the lawyer’s services. One exception to the rule is that a lawyer may pay the reasonable costs of advertisements or communications permitted by the Rule.

The Committee pointed to Comment 7 which states that a communication contains a recommendation if it endorses or vouches for a lawyer’s credentials, abilities, competence, character, or other professional qualities. The bank’s form in this case only provides contact information for participating lawyers and indicates the lawyers on the list have been identified. And the borrower is told in each instance that he or she can choose a different lawyer.

The Committee said these limited statements hardly match up the verbs and nouns used to describe a “recommendation” in the comment because the language in the forms says nothing substantive about the credentials, abilities, competence, character, or professional quality of the listed lawyers.

The Opinion further stated that participation in the network appears to be open to any real estate attorney and that the fee appears to be reasonable considering the enrollment, onboarding, and maintenance charges for including attorneys in the network.

The short answer to the question was “yes”, a lawyer may pay the fee and participate in the network of legal service providers and be “identified” as a possible service provider.

It is interesting that the facts included this statement: “The package and disclosures are assumed to be compliant with federal and state requirements for loan applications and attorney-preference notices.” The Committee answered the very specific question put to it and clearly has no authority to address federal law.

Are RON closings now allowed in South Carolina?

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After a tease from our Supreme Court on Friday, the answer is still “no”

For about 15 minutes on Friday afternoon, May 1, those of us involved in real estate transactions in South Carolina got excited. An Order* from the South Carolina Supreme Court hit our in-boxes. The order was entitled “RE: Participation in Closings of Real Estate Transactions”. We collectively thought South Carolina may have moved into the 21st Century with an authorization for Remote Online Notarization (RON) closings.

Then we read the order.

You can read it here.

By way of preamble, the Court said, “we find that the public health emergency created by COVID-19 requires changes in the usual operation of the Rules of Professional Conduct in terms of the normal functioning of real estate transactions.”

Then the order stated that until August 1, lawyers may “participate in and supervise the closing of a real estate transaction by way of a video conference.”

Fair enough, but I think most South Carolina transactional lawyers believed they could already ethically handle closings via video conference.

Most lawyers definitely believed they can ethically handle “mail away closings.” Were we wrong? Ethics Advisory Opinion 05-16 states that an attorney may ethically conduct real estate closings by mail as long as it is done in a way that: (1) ensures that the attorney is providing competent representation to the client; (2) all aspects of the closing remain under the supervision of an attorney; and (3) the attorney complies with the duty to communicate with the client so as to maintain the attorney-client relationship and be in a position to explain and answer any questions about the documents sent to the client for signature.

To meet this test, according to the EAO, clients must have reasonable means to be in contact with the attorney, by telephone, facsimile, or electronic transmission. The EAO further states that there is no legal requirement that a client attend the closing, but that it must be the client’s decision not to attend the closing.

Ethics Advisory Opinions are, of course, not binding on the South Carolina Supreme Court. But if we rely on the EAO and handle mail-away closings, why can we not also handle closings via video conference, as long as we comply with all of our ethical obligations to properly represent our clients? Technology has changed since 2005!

Setting that issue aside, let’s look at the real problem. The primary obstacle to any closing that is not conducted strictly in the presence of the lawyer is the proper notarization of the recordable documents. According to South Carolina Code §26-1-5, the notary must be in the physical presence of the signatory. For this reason, clients and their lawyers must employ notaries in the client’s location when the client and the lawyer are not in the same location.

Did the May 1 Supreme Court order fix the notary problem at least temporarily? Lawyers who have spent the last four days debating this question via listserv and Facebook have decided that it does not. But did the Court try to help? Maybe.

The Order goes on to say, “necessary persons to a real estate transaction may, under the direction of the supervising attorney, similarly participate in the real estate closing by way of a video conference, provided any necessary person so consents; further, the supervising attorney shall ensure that the attestation of a recordable instrument is accomplished, which may be satisfied by use of real-time audio-visual communication technology, provided the identity of the necessary person is confirmed and a notary attests the signature of any necessary person.” (Emphasis added.)

Giving the Court the benefit of the doubt, perhaps the Justices did not attempt to fix the notary problem but, instead, believed they must address the professional responsibility aspects of the closing process to allow the legislature and governor address the statutory notary issue.

I think I am going to go with that interpretation. Otherwise the Order is useless.

And, I have another concern. Anyone of us who has read and struggled with the facts in the notorious Quicken** case knows that the Court by implication blessed dividing the various aspects of the closing that must be handled by an attorney among many attorneys. But the final sentence of this Order reads, “This order does not suspend any other provisions of the Rules of Professional Conduct, and nothing in this order is intended to relieve an attorney of his or her obligation to assume the full professional and direct responsibility for the entire transaction.” (Emphasis added.)

I am so confused!

 

*Order 2020-05-01-01, South Carolina Supreme Court.

**Boone v. Quicken Loans, Inc., 420 S.C. 452, 803 S.E.2d707 (2017).

Representing a subcontractor and a homeowner against the contractor. Is it ethical?

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Please take a look at South Carolina Bar Ethics Advisory Opinion 19-05 here. This blog rarely touches litigation, primarily because the litigation knowledge of this blogger would fit easily on the head of a pin. But this EAO does affect real estate, and I can envision dirt lawyers getting themselves into this ethical conundrum, so here goes.

The facts are simple:  The attorney represents a subcontractor against a contractor regarding payment for work performed on a new home. The time for filing a mechanics’ lien has run, and the contractor has been paid in full. The homeowners want to retain the attorney to represent them to sue the contractor for breach of contract and negligently performed construction work. The homeowners’ claims do not appear to involve the work of the subcontractor.

The attorney is concerned that the contractor may not have sufficient assets to satisfy judgments of both parties.

So, the question becomes whether the attorney may ethically represent both parties.

The Ethics Advisory Committee provides the framework for consideration, but leaves the difficult analysis to the attorney.

The short answer is: The attorney may represent both parties provided the attorney analyses the prospective representation under Rule 1.7, SCRPC, and then considers whether the “material limitation” conflicts section in section (a)(2) may apply.

The attorney must also evaluate the risk of future availability of assets and should engage in a course of ongoing assessment for conflicts, particularly those that may arise if the claims are reduced to judgments and the clients dispute their recovery amounts relative to each other.

Rule 1.7 provides:

  • Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a current conflict of interest. A current conflict of interest exists if:
  • The representation of one client will be directly adverse to another client; or (2) there is significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third party or by a personal interest of the lawyer.
  • Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
  • the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
  • the representation is not prohibited by law;
  • the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
  • each affected client gives informed consent, confirmed in writing.

 

 

(I added the emphasis.)

The material limitation of (a)(2) is the primary concern. Given the attorney’s concern about the sufficiency of the assets of the contractor to satisfy judgments, the attorney must evaluate whether that potential risk may materially limit his ability to represent either party.

The Committee eliminated (b)(2) and (b)(3) from consideration based on comments to the rule.

The analysis boils down to (b)(1) and (b)(4): the attorney’s assessment of whether he can provide competent and diligent representation to both parties and whether they consent to the representation after being informed of the benefits and risks of joint representation, particularly of the possibility of inadequate assets and the possibility of needing new counsel should they dispute recovery between themselves.

What do you think? Would you do it?

Donut Fridays

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Ethics Opinion gives them a thumbs up!


donutsSavvy residential dirt lawyers continue to explore innovative marketing methods. A recent Ethics Advisory Opinion (15-02) issued by the Ethics Advisory Committee of the South Carolina Bar blessed the following scenario, with a few caveats:

“Law Firm would like to pursue a practice referred to as “Donut Friday,” where an employee of Law Firm visits the Firm’s existing vendors (e.g., banks, real estate agencies, etc.) and delivers a box of donuts to these vendors. Included with the box of donuts are a dozen koozies bearing the name of Law Firm, as well as a fee sheet, a pamphlet containing information about Law Firm and its staff, and a coupon for $50.00 off Law Firm’s fee for a consultation or real estate closing. None of the marketing materials is addressed or directed to any one person, nor does the material request that existing vendors refer business to Law Firm, although the intent is to receive referrals.”

The Committee stated as a preliminary matter that the mere delivery of gifts or other marketing materials to a business generally without delivery to specific individuals does not constitute solicitation. For that reason, Rule 7.3 of the Rules of Professional Responsibility does not apply. Enclosing law firm materials in a donut box does constitute lawyer advertising, making the remainder of the advertising and communication rules (7.1, 7.2, 7.4 and 7.5) apply.

Because the donut box recipients are existing law firm vendors who refer closing business to the firm, the specific rule at play, according to the Committee, is Rule 7.2(c), which prohibits giving “anything of value to a person for recommending the lawyer’s services.”  The Committee specified that as long as the weekly donut boxes are delivered regardless of whether the lender or real estate agency had referred clients to the law firm that week, and regardless of how many, then the requisite quid pro quo for a Rule 7.2 (c) violation does not exist. The rule would be violated, however, if the delivery of donuts was contingent on the referral of business.

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The Committee said that only the donuts, koozies and coupons (not the fee sheets or pamphlets) would be considered things “of value” under Rule 7.2 because the rule contemplates value to the recipient and not cost to the sender. Finally, the Committee stated that although the Rules of Professional Conduct are “rules of reason”, the prohibition on giving “anything” of value contains no explicit de minimis exception.

Kudos to the law firm that devised this marketing ploy and received the blessing of the Ethics Advisory Committee!