UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 02-16
L is a lawyer and is also a part-owner, along with a builder, of a corporation that builds townhouses. When the builder corporation sells a townhouse, it pays the closing costs of the buyer. The corporation pays a lawyer (other than L) to “sign off” as closing attorney and to perform tasks such as reviewing title work, supervising disbursements of closing funds, and auditing files. L, however, explains the closing documents to buyers and escrows the closing funds in L’s trust account. L tells each buyer that L is not serving as his or her lawyer and is only explaining the documents to them.
Question
Does the practice described violate any rules of professional conduct?
Summary
A lawyer who explains real estate closing documents to a buyer and escrows closing funds in the lawyer’s trust account may create an attorney-client relationship with the buyer. If the lawyer is also the part-owner of a corporation that is the seller in the same real estate transaction, the creation of an attorney-client relationship with the buyer gives rise to a conflict of interest under Rules 1.7 and 1.8, and the lawyer can proceed only after obtaining adequate consents. Furthermore, the involvement of the seller’s owner as counsel for the buyer at closing could subject the corporation to claims of unauthorized practice of law.
Opinion
Conflict of Interest
As one of two owners of a corporation that builds and sells homes, Lawyer L is doing business with those buyers who purchase homes from the corporation. Lawyer L is also explaining legal documents to the buyers in connection with the real estate closing and serving as escrow agent for closing funds. The question, therefore, is whether the latter activities of Lawyer L are sufficient to create an attorney-client relationship between Lawyer L and the buyers. If so, then, as a lawyer doing business with a client, Lawyer L must comply with the conflict of interest rules of both Rule 1.7 and Rule 1.8.
A lawyer’s involvement in a real estate closing on behalf of a seller does not necessarily mean that the lawyer also is representing the buyer. In S.C. Bar Ethics Adv. Op. # 00-17, this Committee indicated that it is possible for a lawyer to represent only one party at a real estate closing without representing all parties. The opinion stressed, however, that a lawyer must be careful in that situation not to engage in any conduct that could cause other parties in the transaction to reasonably believe that the lawyer represented them as well. “A lawyer may handle a real estate closing in which the lawyer represents only one of the parties, such as the developer or lender, provided the lawyer fully discloses to unrepresented parties the identity of the lawyer’s client and does not purport to give legal advice to the unrepresented parties.” Id.
In this case, Lawyer L meets the first of the conditions set forth in Opinion #00-17, but does not appear to satisfy the second condition. L informs buyers that L is not representing them. L, however, then explains to the buyers the legal documents that they are about to sign and handles escrow disbursements. The existence of an attorney-client relationship is a matter of law beyond the purview of this Committee. Therefore, we offer no ultimate opinion on that issue. However, because of the importance of the issue in determining Lawyer L’s ethical obligations of the lawyer in this case, Lawyer L must be aware of the potential that an attorney-client relationship would be recognized.
A lawyer may create an attorney-client relationship when the lawyer “volunteer[s] to provide a legal explanation of the various documents involved in settlement of” a loan and “affirmatively respond[s] to questions” of the client. Nelson v. Nationwide Mortgage Corp., 659 F. Supp. 611, 618 (D.D.C. 1987). In determining whether an attorney-client relationship is created, the key consideration is whether, under the circumstances, a prospective client would reasonably have relied upon the lawyer for legal advice. A lawyer’s subjective belief that no attorney-client relationship is created does not preclude the finding that such a relationship exists. For example, in In re Pyatt, 312 S.E.2d 553 (S.C. 1984), the South Carolina Supreme Court disciplined a lawyer whose relatives had bought land from two individuals after the individuals had contacted the lawyer regarding the land’s imminent foreclosure. When the sellers later complained that the lawyer had benefitted inappropriately from the transaction, in violation of his ethical duties to them as clients, the lawyer denied that an attorney-client relationship had existed with the sellers. The court rejected the lawyer’s position, finding that the sellers of the land “were looking to the respondent to represent their legal interests. Regardless of how the respondent regarded the relationship, he failed to exercise proper care and judgment in explaining to the [sellers] that he did not represent their legal interests.” Id. at 554.
An express disclaimer of an attorney-client relationship, such as L routinely provides, may be an important factor in proving that a person’s subsequent reliance on the lawyer was not reasonable. However, the clarity provided by the disclaimer is diminished when the lawyer’s subsequent conduct is ambiguous. By explaining closing documents to buyers and handling the escrow, Lawyer L creates the possibility, if not likelihood, that the buyers reasonably will rely on Lawyer L’s services to protect their legal rights.
If Lawyer L is found to have created an attorney-client relationship with the buyer of a townhouse being sold by the L’s corporation, then L must comply with the disclosure and consent requirements of Rule 1.8 (a). We do not believe that Lawyer L would be insulated from compliance from Rule 1.8 (a) simply because he is doing business with the client through a closely held corporation, rather than individually. The transaction must be fair to the buyer, and its terms must be fully disclosed in writing to the buyer in a manner that can be reasonably understood by the buyer. Also, the buyer must be given a reasonable opportunity to seek the advice of independent counsel and must consent in writing to the terms of the transaction.
In addition, if Lawyer L represents the buyer, there is a risk that the lawyer’s representation of the buyer may be materially limited by his responsibilities to the builder corporation that L partially owns. Rule 1.7(b) is, therefore, also applicable, and Lawyer L may advise the buyer only if it is reasonable to believe that the representation of buyer will not be adversely affected by Lawyer L’s duties to the builder corporation and the buyer consents after consultation.
Unauthorized Practice of Law
In addition to the conflict of interest issues raised if Lawyer L is found to represent buyer, Lawyer L’s role in explaining the closing documents to buyer suggests that the independent closing attorney is not providing all of the services normally associated with the representation of a buyer in a real estate transaction. Part of those services are being provided to the buyer by Lawyer L, an owner of the seller corporation. While the Committee does not issue opinions on the unauthorized practice of law, in the recent case of Doe v. Condon, 568 S.E.2d 356 (S.C. 2002), the South Carolina Supreme Court suggested that such conduct may involve the unauthorized practice of law.