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RE: Advisory
Opinion 98-01
ARKANSAS
BAR ASSOCIATION
DATE: June
8, 1998
SUBJECT:
Ownership of Land Title Company
Facts: Several
attorneys in different firms and one non-lawyer propose
to set up and own a Title Insurance Plant, Escrow
and Closing Company. Pursuant to a written agreement,
the owners will have an interest in the fixed assets
and will be compensated based on the business referred
to the company. The proposed company will maintain
a computer base of property records, compile title
histories and provide loan closing services. In addition,
as an agent of a national title insurance company,
the proposed company will issue title insurance policies.
The proposed company will not issue title opinions
or titlecertificates to lenders or other interested
parties. The issues presented to this committee are:
1.
Whether a lawyer in private practice may own a land
title research
and escrow company;
2.
Whether lawyers in different firms may jointly own
such a company;
3.
Whether the presence of a non-lawyer as a part owner
bars or restricts
the participation of attorneys;
4.
What restrictions, if any, are placed on the attorneys.
The
Rules: The applicable rules are: Rule 1.7(b) of
the Arkansas Rules of Professional Conduct:
"(b)
A lawyer shall not represent a client if the representation
of that client may be materially limited by the lawyer's
responsibilities to another client or to a third person,
or by the lawyer's own interests, unless:
(1)
the lawyer reasonably believes the representation
will not be adversely affected; and
(2)
the client consents after consultation. When representation
of multiple clients in a single matter is undertaken,
the consultation shall include explanation of the
implications of the common representation and the
advantages and risks involved."
Also relevant
is Comment 6:
"The lawyer's
own interests should not be permitted to have adverse
effect on representation of a client. For example,
a lawyer's need for income should not lead the lawyer
to undertake matters that cannot be handled competently
and at a reasonable fee. See Rules 1.1 and 1.5. If
the probity of a lawyer's own conduct in a transaction
is in serious question, it may be difficult or impossible
for the lawyer to give a client detached advice. A
lawyer may not allow related business interests to
affect representation, for example, by referring clients
to an enterprise in which the lawyer has an undisclosed
interest."
Rule
1.8(a) governs business relations between attorneys
and clients:
"(a)
A lawyer shall not enter into a business transaction
with a client or knowingly acquire an ownership, possessory,
security or other pecuniary interest adverse to a
client unless:
(1)
the transaction and terms on which the lawyer acquires
the interest are fair
and reasonable to the client and are fully disclosed
and transmitted in writing
to the client in a matter which can be reasonably
understood by the client;
(2)
the client is given a reasonable opportunity to seek
the advice of independent
counsel in the transaction; and
(3)
the client consents in writing thereto."
Comment
1 provides:
"As
a general principle, all transactions between client
and lawyer should be fair and reasonable to the client.
In such transactions a review by independent counsel
on behalf of the client is often advisable. Furthermore,
a lawyer may not exploit information relating to the
representation to the client's disadvantage. For example,
a lawyer who has learned that the client is investing
in specific real estate may not, without the client's
consent, seek to acquire nearby property where doing
so would adversely affect the client's plan for investment.
Paragraph (a) does not, however, apply to standard
commercial transactions between the lawyer and the
client for products or services that the client generally
markets to others, for
example, banking or brokerage services, medical services,
products manufactured or distributed by the client,
and utilities services. In such transactions, the
lawyer has no advantage in dealing with the client,
and the restrictions in paragraph (a) are unnecessary
and impracticable."
Discussion:
1) The protection of a client's title to land has
historically been the practice of law and has been
accomplished through a title opinion. American Bar
Association Formal Opinion 331 (1972). However, the
development and growth of title insurance companies
and similar entities have raised questions as to the
attorney's participation in them.
A
minority of jurisdictions have concluded that the
conflict between an attorney representing a client
and simultaneously having a financial interest in
a participating title insurance company is so great
that the conflict cannot be waived. (In re Qginion
682 of the Advisory Committee on Professional Ethics,
687 A.2d 1000 (New Jersey 1997)) ("The purchaser
of title insurance seeks the maximum possible protection,
while the title company strives to limit liability
in the event of a claim under the policy. Where exceptions
are negotiable, consent, no matter how well informed,
will not remedy the conflict of interest.")
However,
the consensus has been that an attorney, while still
protecting the interests of a clients, may be an agent
for a title company and be compensated in connection
with the insurance of a policy. The opinions are clear
that an attorney may not receive a fee or commission
(delayed or not) for recommending or selling title
insurance without fully disclosing to the client the
attorney's financial interest in the transaction.
American Bar Association Formal Opinion 331 (December
15, 1972) ; American Bar Association Formal Opinion
304 (February 16, 1962) . The potential conflict of
interest arising from the attorney's financial interest
and the resulting effect on the independent professional
judgment of the attorney mandates disclosure to, and
consent from the client. Ark. R. Prof. Conduct 1.7
(b).
2)
No rule of professional conduct bars attorneys in
different finns from owning and operating a separate
business. Whether it be a restaurant or a title insurance
company, these attorneys are pennitted to jointly
enter into such an enterprise.
3)
Attorney and non-lawyers are pennitted to engage in
commercial enterprises, provided the business does
not engage in the practice of law. Ark. R. Prof. Conduct
5.4(b) . A corporation cannot practice law, cannot
furnish legal services or advice, and cannot render
legal services of any kind. Ark. Code Ann. §
16-22-211(a) . But subsection (d) does permit a corporation
to engage in the "examination and insuring of
titles to real property."
The
issuance of title opinions by non-lawyers has long
been held to be the unauthorized practice of law.
Beach Abstract & Guarantee Co. V. Ark. Bar
Assn., 230 Ark. 494, 326 S.W. 2d 900, (1959) .
No advisory opinions from the Supreme Court Committee
on the Unauthorized Practice of Law have varied from
the rule in Beach Abstract. Unlike a title opinion,
which is all inclusive and gives an opinion as to
the status of the land going back to the original
patent, the title certificate covers the land, but
does not certify title to the severable aspects of
the land (mineral, timber, oil and gas rights) and
the certificate only goes back a prescribed number
of years. This company does not intend to issue either
title opinions or title certificates.
4)
(A) Disclosure by Attorney
Rule
1.8(a) governs business transactions with clients.
A client has a special trust in, and is frequently
dependent upon, the independent judgment of the lawyer,
which is to be exercised in the client's best interest.
The possibility of referral of legal clients to another
business of the lawyer introduces an extraneous and
potentially conflicting motive, which can threaten
or interfere with the lawyer's independence of judgment.
The dual relationship
of an attorney representing a client and also having
an interest in the title insurance company that will
issue title insurance is a closer relationship and
a relationship with more risks to the client than
the standard commercial transaction envisioned by
the Comment to Rule 1.8. See generally, Howard W.
Brill, "Business Transactions with Clients: Ethical
or Ill-Advised?", Arkansas Lawyer (Winter
1995) 28. It is difficult, if not impossible, for
an attorney to maintain the degree of independence
and objectivity necessary to serve an individual client,
when the attorney is also an owner and perhaps an
employee of a land title company that is involved
in the transaction for the individual client.
The
client is entitled to know that the lawyer has an
ownership interest in a title company, and that the
title company will be making a charge for the services
provided. Therefore, the committee concludes that
an attorney may refer a client to a title insurance
company owned in part by the attorney, only if the
attorney has disclosed in writing that the attorney
has an ownership interest in the business, and that
the same services may be obtained from other providers,
and only after the client has acknowledged the same
in writing. See New Jersey Supreme Court Advisory
Committee on Professional Ethics, Opinion 657.
If
the attorney who is providing services for a client
also provides services for the company in regard to
the same transaction, the potential conflict must
be analyzed by the attorney in light of Ark. R. Prof.
Cond. 1.7(b) . Only after successfully navigating
the requirements of that rule can the attorney represent
both the client and the company.
(B)
Disclosure by Company
Rule
5.7 of the Model Rules of Professional Conduct, as
adopted by the American Bar Association in February
1994, covers "the responsibilities regarding
law related services. " The proposed land title
research and escrow company falls within the definition
of such services. Although the rule has not been adopted
in Arkansas, it is consistent with the existing rules
and interpretations. If the lawyer individually or
with others has control of the operations of a law
related entity, the Rule requires the lawyer to take
"reasonable measures to assure that a person
obtaining the law-related services knows that the
services provided by the separate entity are not legal
services and that the Rules of Professional Conduct
that relate to the clientlawyer relationship do not
apply." This committee adopts that mandate. The
burden is on the attorney, through the company, to
communicate that information to the recipient of the
law related services prior to an agreement for such
services. The
information should be communicated in a reasonable
way, in light of the services and in light of the
nature of the client.
(C) Litigation
Of
further concern are situations where the attorneys
which have an ownership interest in the title company
oppose each other on behalf of clients. At least three
primary scenarios present themselves. First the litigation
is related to the land and to the services provided
by the company, as for example, in a dispute over
warranties of title. Second, the litigation involves
the land, but not any services provided by the company,
as for example, in a dispute over trespass upon the
tract. Third, the litigation is unrelated to the land,
as in a personal injury case.
In
all three situations, because the possibility of conflict
exists, the attorney must evaluate the situations
by the three party test of Rule 1.7(b) : whether a
reasonable attorney would undertake the representation,
whether the client has received complete disclosure
of the role of both attorneys in the company, and
whether the client has knowingly consented. In the
first two situations, it is difficult to see an attorney,
pursuant to the reasonableness standard of Rule 1.7(b)
, concluding that such representation would be permissible.
In
the third situation, the possibility of a conflict
exists between the opposing attorneys, not with the
land or with the clients. Although unlikely, it is
conceivable that the attorney may not be as zealous
because his business partner is the
opposing attorney. Therefore Rule 1.7(b) requires
that, after having concluded that representation is
pennissible by the standards of a reasonable attorney,
the attorney must make full disclosure of the corporate
involvement with the opposing attorney and seek the
consent of the client before proceeding with the representation.
The client is entitled to knowledge of the personal
ties that may pull at the loyalty of the attorney.
Such
disclosure and consent is necessary to avoid the "appearance
of impropriety." The Supreme Court has described
the appearance of impropriety concept as "a rock
upon which are built the rules guiding lawyers in
their moral and ethical conduct", and likewise
it should guide this committee in interpreting the
rules of professional conduct. Burnett v. Morgan,
303 Ark. 150, 156, 794 S.W. 2d 145, 148 (1990) .
Conclusion:
At
least four restrictions are applicable to the attorneys
entring into the proposed company.
1)
Clients who will be referred to the company or will
be customers of the company must be infonned in writing
that the attorney has a financial interest in the
company, and their written consent to the transaction
obtained.
2)
Likewise, individuals who deal with the company must
be reasonably informed that the company is not practicing
law or rendering legal services, and the protections
of the profession are not applicable.
3)
The attorney-owner cannot engage in an adversarial
relationship with the company or with other owners
of the company in regard to related property disputes.
4) The attorney-owner
can engage in an adversarial relationship with other
owners on non-property related disputes, only upon
proper notice to and consent by all affected parties.
NOTICE
"This
is an opinion only of the Arkansas Bar Association
which is a voluntary association of attorneys licensed
to practice in the State of Arkansas, and reliance
thereon is voluntary and relieves any Association
member from liability for the content hereof. This
opinion is intended to be the Association's best interpretation
of the Model Rules of Professional Conduct as promulgated
by the Supreme Court of Arkansas as that code applies
to the written facts presented to the Committee."
ARKANSAS
BAR ASSOCIATION
By: ___________________________
Howard W. Brill
Reporter for Professional
Ethics
and Grievances
Committee
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