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Ethics Advisory Opinion 04-02

April 13, 2004

February 20, 2004

Facts
The practice of a South Carolina attorney (Attorney) consists primarily of conducting residential real estate closings. A large part of such closings are referrals by lenders on refinance transactions in which the borrower has no prior preference as to the closing attorney. Accordingly, the lender gives the borrower a list of approved attorneys from which to select an attorney. In this case, the borrower selects Attorney to handle the closing.

Some of Attorney’s lender clients who have made referrals to Attorney are lenders whose bases of operations are outside of the State of South Carolina, although the real properties being refinanced are located in South Carolina. Attorney has advised client that such closings must be conducted in accordance with the holdings in State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987) (herein “Buyers Service”), Doe v. Condon, 351 S.C. 158, 568 S.E.2d 356 (2002), and Doe v. McMaster 355 S.C. 306, 585 S.E.2d 773 (2003), relative to the unauthorized practice of law. Lenders, in an attempt to expedite closings and/or save money, have elected to discontinue retaining Attorney to handle the closings in the State of South Carolina and now conduct “witness only” closings, which do not conform to the requirements of Buyers Service and are considered the unauthorized practice of law in South Carolina. Attorney has advised lenders that such closings do not conform to South Carolina law and that such practice should be discontinued, irrespective of whether lenders continue to have Attorney represent them or have another attorney represent them. Nevertheless, lenders have elected to continue with “witness only” closings, which are not in compliance with the requirements of Buyers Service.

Questions

  1. Is it an ethical violation relating to the disclosure of confidential information of a client for Attorney to make such report or disclosure to appropriate regulatory authorities?
  2. Does Attorney have an obligation to report lenders to anyone in the State of South Carolina (i.e. the Attorney General or other regulatory authority) regarding Attorney’s knowledge of lenders’ unauthorized practice of law in the State of South Carolina relative to conducting “witness only” closings?
  3. Does Attorney have any ethical obligations to make further inquiries of lenders’ activities regarding such activity?

Summary
Attorney may disclose to the appropriate authorities Lender's expressed intention to conduct closings in violation of South Carolina law. However, Attorney is not ethically required to do so. Under the facts presented, it is not clear whether a further inquiry would be appropriate. If Attorney chooses not to make any disclosure, no inquiry would be necessary. However, to the extent that Attorney harbors any doubts as to whether Lender actually will conduct closings in an illegal manner, it is incumbent on Attorney to resolve such doubts prior to making any disclosure.

Opinion
Rule 1.6 sets forth the exceptions to the obligation of an attorney to protect client confidentiality. Of relevance here is Rule 1.6(b)(1), which provides that a lawyer may reveal confidential information to the extent the lawyer reasonably believes necessary "to prevent the client from committing a criminal act." Observing that the Rule permits a lawyer discretion as to whether to disclose information in order to prevent a criminal act, the Comment to Rule 1.6 provides some guidance as to how such discretion should be exercised:

The lawyer's exercise of discretion requires consideration of such factors as the nature of the lawyer's relationship with the client and with those who might be injured by the client, the lawyer's own involvement in the transaction, and factors that may extenuate the conduct in question. Where practical, the lawyer should seek to persuade the client to take suitable action. In any case, a disclosure adverse to the client's interest should be no greater than the lawyer reasonably believes necessary to the purpose. A lawyer's decision not to take preventive action permitted by paragraph (b)(1) does not violate this Rule. Comment to Rule 1.6.

While the Rule is silent as to whether this exception to the confidentiality requirement applies in the same manner subsequent to the termination of the attorney-client relationship, the Comment suggests that because the confidentiality requirement survives the termination of the relationship, the exceptions continue to apply as well. See Comment to Rule 1.6 ("[a]fter withdrawal the lawyer is required to refrain from making disclosure of the client's confidences, except as otherwise provided in Rule 1.6"). Thus, at least with respect to information obtained while the attorney-client relationship was ongoing, it appears that the exception set forth in Rule 1.6(b)(1) permits disclosure to the same extent after the relationship has ended as during the relationship.

The facts provided by the inquirer reflect that Lender has plainly stated its intention to violate the law as a matter of routine in conducting closings. While this Committee does not provide opinions on issues of law, the legal standards reflected in S.C. Code § 40-5-320 and State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987), appear to compel the conclusion that "witness only" closings expose participants to criminal sanctions. The facts set forth above suggest that Attorney has explained the illegality of Lender's proposed course of action and has tried and failed to dissuade Lender from proceeding.

Under these circumstances, it appears to the Committee that Attorney may disclose to the relevant authorities that Lender intends to conduct closings in a manner that violates S.C. Code § 40-5-320. However, as the text of Rule 1.6 makes plain, Attorney is not obligated to do so. Instead, Attorney should exercise his or her discretion subject to the guidelines provided above and in view of all relevant facts and circumstances.

The question whether Attorney should make further inquiries before acting is one that will likely depend upon factual details not set forth in this inquiry. In exercising his or her discretion, Attorney may well arrive at the conclusion that the information available is too ambiguous to warrant taking the serious step of accusing a former client of criminal behavior. Certainly, that portion of the Comment discussing the exercise of discretion implies that an attorney should exercise diligence to avoid making a disclosure based upon an erroneous belief that the client intends to commit a crime. Attorney may wish to make further inquiries depending on his or her view of the accuracy of the information available, although the Committee is not in a position to speculate as to what might constitute an appropriate inquiry under any given set of facts. However, the permissive nature of Rule 1.6(b)(1) makes clear that Attorney may–without any further inquiry–simply decline to disclose any information. In other words, if Attorney wishes to disclose the information, further inquiry may be appropriate depending on the circumstances, but if Attorney chooses not to disclose, further inquiry is not necessary.
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