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Ethics Advisory Opinion 06-11

April 13, 2006

South Carolina Bar Ethics Advisory Opinion 06-11

SC Rules of Professional Conduct 1.7, 4.3, 5.5(a)

Date:   October 20, 2006

Facts:
Lawyer, a member of the South Carolina and “State A” Bars, practices in a law firm located in State A.  He represents a homebuilder (“Homebuilder-Client” or “Seller”) that sells several homes each week in South Carolina.  Homebuilder-Client is a foreign corporation (i.e., it is not incorporated in South Carolina). Consistent with Ethics Advisory Opinions (EAOs) 00-01 and 00-17, Homebuilder-Client has requested that Lawyer represent only it in the closings Lawyer conducts.  The sales contract executed by the prospective home buyer (Buyer) indicates that Lawyer will conduct the closing and only represent Seller at the closing.

Under this representation arrangement—in which Lawyer undertakes representation of Seller only —Lawyer has been asked by certain home purchasers to conduct their closing in a mail-away fashion. Although Lawyer recognizes that EAO 05-16 allows mail-away closings to occur provided numerous conditions are met, Lawyer is uncertain whether EAO 05-16 applies only to situations in which the closing attorney represents the buyer rather than the seller.

Questions:
Is it proper for Lawyer to conduct a closing by mail of property located in South Carolina if he only represents Seller and Buyer is unrepresented in the transaction?

  1. Does the answer change if Buyer resides in a state other than South Carolina?
  2. Does the answer to this question change if the closing involves Buyer obtaining a mortgage loan?
  3. Does the answer change if Buyer and Seller waive any conflict of interest between the parties and request dual representation by the closing attorney by signing a document to this effect prior to or at closing?

Summary of Opinion:
Nothing in the Rules of Professional Conduct appears to prohibit Lawyer from representing Seller in a mail-away closing provided the proper conditions as outlined in EAO 05-16 are met;  however, the issue of who lawyers represent in a residential real estate closing has not been clearly resolved in South Carolina and caution should be taken.

  1. Nothing in the Rules of Professional Conduct suggests that Lawyer’s obligations are different for clients or unrepresented parties who reside out of state.
  2. Yes, the answer does change if the closing involves Buyer obtaining a mortgage loan.
  3. Having Buyer and Seller (and Lender if applicable) consent to multiple representation and sign an agreement to that effect may be a more prudent way of handling the situation rather than attempting to represent Seller exclusively.

Opinion:
CAUTION: The issue of who lawyers represent in a residential real estate closing has not been clearly resolved in South Carolina at this time and caution should be taken.

Nothing in the Rules of Professional Conduct appears to prohibit the proposed arrangement, in which Lawyer will represent only Seller in the context of a mail-away closing, provided proper conditions are met.

In EAO 00-17, the Committee found that:

A lawyer may ethically represent only the seller at closing provided the lawyer complies with the requirements of Rule 4.3 (Dealing with Unrepresented Person). The rule states: In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.

Furthermore, in EAO 05-16, the Committee addressed the mail-away closing:

An attorney may conduct a real estate closing by mail so 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 stated in Rule 1.4, 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.

The Committee concludes that the proposed arrangement is technically permissible, but several cautions are in order. First, while EAO 00-17 concluded Lawyer may represent only Seller in the transaction, the Committee, citing Rule 4.3, emphasized that Lawyer:

must disclose to the buyer that the attorney represents only the seller, not the buyer, and that the buyer should retain separate counsel for advice about legal aspects of the transaction. In closing the transaction the attorney may prepare on behalf of the seller documents necessary to close the transaction and may present the documents to buyer for the buyer's signature, but the attorney may not advise the buyer regarding these documents. (emphasis added).


It would be prudent for Lawyer to provide this disclosure in writing as soon as possible after Lawyer is retained for the particular closing to provide Buyer with reasonable time to retain other counsel, if Buyer chooses.

In EAO 00-17 the Committee also noted that “[d]uring the course of a lawyer’s representation of a client, the lawyer should not give advice to an unrepresented person other than the advice to obtain counsel.”

The Committee also cautioned in EAO 00-17 that the proposed arrangement where Lawyer only represents Seller is “very risky”:

Case law and prior opinions of this Committee have found that whether an attorney-client relationship is created is a question of fact.  In Ethics Advisory Opinion 91-03, we stated that A) [i]n determining whether an attorney-client relationship existed . . . , the focus must be on the subjective expectations of the would-be clients, ‘such that their individual belief and reliance are safeguarded.’ Glover v. Lieberman, 578 F. Supp 748 (N.D. Ga. 1983). B) An attorney-client relationship does not depend on the existence of a formal agreement or the payment of a legal fee. Whether an attorney-client relationship exists in a particular situation is a question of fact. Chavez v. State, 604 P. 2d 1341 (Wyo. 1980).

In the context of a mail-away closing, the situation is further complicated because Buyer does not attend the closing, and the potential for misunderstandings and miscommunication may thus be augmented.  The sales contract between Buyer and Seller does not necessarily define the nature of the attorney’s relationship between the parties.  An attorney-client relationship may be deemed to have arisen, even if the lawyer has advised the buyer to the contrary.

Third, Lawyer should still take care to follow the suggestions of EAO 05-16.  In particular, Lawyer must be certain that “all aspects of the transaction remain under the supervision of an attorney.”  In the context of mail-away closings in which the buyer is purportedly unrepresented, buyers may be more likely to consult non-attorneys, such as notaries public or title companies, to assist in explanation and execution of the documents.

In such cases, Lawyer may unwittingly assist in the unauthorized practice of law, in violation of Rule 5.5(a).  Rule 5.5(a) states: “A lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction or assist another in doing so.”  In certain cases attorneys have been disciplined for participating in closings without ensuring all phases are appropriately supervised by attorneys.  See, e.g., In the Matter of Pstrak, 357 S.C. 1, 591 S.E.2d 623 (2003); In the Matter of Arsi, 357 S.C. 8, 591 S.E.2d 627 (2004).  It may therefore be prudent for lawyer to get written assurance from Buyer that Buyer has not consulted non-attorneys for those aspects of the transaction requiring attorney involvement, such as review and explanation of closing documents.  Should the Buyer have questions regarding South Carolina law on attorney involvement in real estate transactions, EAO 00-17 and Rule 4.3 suggest that Lawyer could only advise Buyer to obtain counsel.  By undertaking to explain the law to Buyer, Lawyer may in fact be creating an attorney-client relationship with Buyer.

(a) Out-of-State Residents

Does the answer change if Buyer resides in a state other than South Carolina?
No, the answer does not change if Buyer resides in a state other than South Carolina.  Nothing in the Rules of Conduct suggests that Lawyer’s obligations are different for clients or unrepresented parties who reside out-of-state.

(b) Buyer Obtaining a Loan

Does the answer to this question change if the closing involves Buyer obtaining a mortgage loan?

Yes, the answer does change if Buyer is purchasing the property with financing.  The actions taken by a lawyer in closing a mortgage loan transaction are different from those in a cash sale transaction, and additional consumer protection laws are involved in the former, including RESPA, Regulation X, and the South Carolina Attorney Preference Statute.  That is not to say, as a matter of law, that a closing lawyer must always establish an attorney-client relationship with borrowers in residential loan closings.  Such a pronouncement can only come from the Supreme Court of South Carolina, and the existence of an attorney-client relationship should be determined on a case-by-case basis; however, closing a mortgage loan transaction necessarily includes actions that have been declared the practice of law by the Supreme Court and directly affect the buyer, and possibly have no connection to or affect on the seller. 

In the Committee’s view, such actions may be incompatible with a purported limitation of the attorney-client relationship solely to the seller; therefore any attempt to disclaim an attorney-client relationship with the buyer and establish one solely with the seller is less likely to withstand a factual inquiry into the actual conduct of the closing, even in a relatively simple mortgage loan transaction, despite that the disclaimer may not itself violate the Rules of Professional Conduct. But see Rule 1.8(h), RPC, Rule 407 SCACR.  An attorney-client relationship neither lives nor dies by the agreement of the parties alone, but also by their actions and beliefs.  See, e.g.,  In re Morgan, 288 S.C. 401, 404, 343 S.E.2d 29, 31 (1986) (finding attorney-client relationships with two parties based on the lawyer’s having taken legal action on both their behalves and having taken instructions from one of them).  If Lawyer performs tasks in a mortgage loan closing that directly affect the buyer and that do not involve the seller, it may not be reasonable for Lawyer to claim they are performed solely as the seller’s attorney.  In addition to the apparent incongruity of such a disclaimer, attempting to do so risks violating the Rule 5.4(c) prohibition against allowing a “person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.”  In summary, in a mortgage loan closing, whatever lines may be theoretically drawn to keep the buyer at arm’s length from the closing lawyer are less likely to withstand a buyer’s later claim that an attorney-client relationship existed, whether such claim arises in a malpractice case or in a disciplinary grievance.

(c) Multiple Representation of Parties

Does the answer change if Buyer and Seller waive any conflict of interest between the parties and request dual representation by the closing attorney by signing a document to this effect prior to or at closing?

Yes, the answer does change if the parties agree to multiple representation.  Assuming that multiple representation is appropriate under Rule 1.7, by complying with the disclosure and informed consent requirements of Rule 1.7 from the beginning, Lawyer may avoid the potential pitfall of creating a de facto attorney-client relationship with Buyer without complying with Rule 1.7.  This would also reduce the likelihood of violations of Rule 4.3 (regarding dealing with an unrepresented person) and may simplify the Lawyer’s duty under State v. Buyer’s Service, 292 S.C. 426, 357 S.E.2d 15 (1987)to supervise all aspects of the transaction.  See also EAO 05-16.

CAUTION
The mere disclaimer of an attorney-client relationship with the Buyer does not absolve the lawyer of all obligations under the Rules of Professional Conduct toward the Buyer. 

The members of the Ethics Advisory Committee again suggest to South Carolina practitioners that the law of residential real estate closings, in particular who the closing attorney represents, remains unsettled. Closings in which there is a single closing attorney who purports to limit representation only to the seller, especially in the context of so-called “mail-away” closings, are fraught with risk. Absent a clear determination that the buyer is independently represented, a South Carolina attorney must exercise extreme caution to ensure that all requirements of the Buyer’s Service line of cases are met and that accidental representation is not created.print