Texas has long had a unique system of real estate closing. This article discusses that system, and what the professional liability risks are for lawyers engaged in real estate closing practices.
Lawyer Involvement with Title Insurance
Lawyers can be involved in real estate closings in a number of ways. Lawyers may represent parties to the closing, yet not perform the closing. Lawyers are permitted to close transactions on behalf of a title company, subject to particular regulations. Lawyers may own title companies that close transactions. It is not unusual to find some combination of these methods of involvement.
Title insurance is utilized in the vast majority of real estate transactions in Texas. The Title Insurance Basic Manual (“the Manual”) promulgated by the Texas Department of Insurance (TDI), available online at http://www.tdi.state.tx.us/company/titlemm4.html, describes the structure of the title insurance industry. Title Insurance Companies stand behind title insurance policies, and usually have authorized Title Insurance Agents who conduct investigation of title and supervise the closing of transactions. Some Title Insurance Companies have direct operations conducted without the use of a distinct entity as agent. Agents and direct operations companies will be referred to in this article collectively as “title companies.”
Escrow officers are individuals who are entitled to close transactions on behalf of title companies. Escrow officers countersign title insurance forms, supervise the preparation and the delivery of title insurance forms, sign escrow checks, and close transactions. Escrow officers who are not attorneys must be licensed by TDI, but attorneys can close transactions without being licensed as an escrow officer. When an attorney is a licensed escrow officer, the attorney may use the name of the title company in their law practice and have employees who are licensed escrow officers. Licensed escrow officers, whether attorneys or bonafide employees of attorneys, must be appointed by a title company.
With permission of a title insurance agent, a lawyer may close transactions without being an escrow officer and receive a fee from a title agent or direct operation. The payment of lawyers who do not have an escrow officer’s license is regulated by Section IV, Procedural Rule P-22. P-22 prohibits payment for closing or title examination to anyone who is not a bonafide employee of a direct operation, agent or escrow officer with certain exceptions. Those exceptions include attorneys who perform closing or title examination services. P-22 requires that the fee paid to attorneys be disclosed on form T-00, that the attorney actually perform services, that a schedule of fees be filed with the title company in advance, all premiums must be remitted to the title company, and no charge by the attorney can be a fee for referring business to a title company.
When an attorney is a licensed escrow officer and chooses to use the name of a title company in his practice, such an operation is known as a fee office. It is not unusual for such operations to have a number of licensed escrow officers who are not lawyers. In general, fee offices are established with an agreement between a title agent or direct operation and a lawyer or law firm. Most fee office agreements now require some level of errors and omissions insurance. TLIE can insure some of these operations, so long as the fee office has adequate supervision of any non-attorney licensed escrow officers who perform closings. TLIE evaluates the ratio of lawyers to escrow officers in the underwriting process. TLIE also looks at the experience of the attorneys involved in such operations. One recent set of claims at TLIE arose when an inexperienced attorney closed a series of real estate transactions in what was alleged to be an improper manner.
Recent actions by TDI have made it almost impossible for P-22 lawyers to perform closings without some type of errors and omissions insurance. Most national lenders now require Insured Closing Letters (ICLs) for every closing. In the past, only large transactions had ICLs. An insured closing letter means that the title insurance company, and not just the local agent, is responsible for fraud in the course of a real estate closing. Commissioner’s Bulletin #B-0017-07 issued on April 18, 2007, online at http://www.tdi.state.tx.us/bulletins/2007/cc14.html, has indicated that ICLs cannot be issued for transactions closed by P-22 attorneys through their own trust accounts. They must use title agent escrow accounts, and thus must have an escrow officer’s license if an ICL is to be issued. Title companies frequently require that all escrow officers they designate have errors and omissions insurance. One effect of this bulletin has been that more attorneys are applying for or increasing malpractice insurance limits so that they can become licensed escrow officers for title agents.
Attorneys who work with title companies need to be aware of professional liability insurance issues that affect them. Some policies have title insurance agent riders, some specifically cover lawyer activities on behalf of a title insurance agent, and some specifically exclude such work. TLIE’s policy provides coverage for lawyers providing legal services while acting as an escrow agent. Many policies exclude coverage for legal services related to businesses owned by insureds. When a lawyer owns a title company, such exclusions may apply to any legal work provided to parties to closings at the lawyer’s title company.
Ethical and Malpractice Risks in Closing Transactions
Documenting who is and is not the client is a critical step for lawyers involved in closings. “Closing” the transaction is a title company function, so a closing attorney represents the title agent or direct operation, as noted in Texas Ethics Opinion 408, online at http://www.txethics.org/reference_opinions.asp?opinionnum=408. Whenever there are unrepresented parties to the closing, which is the case in most closings, a document clarifying that the lawyer closer represents only the title company is critical. Lawyers do not “represent the situation” when closing transactions.
Ancillary legal services are often provided by lawyers beyond the scope of the closing function. The most common of these is drafting of legal documents related to a closing, such as contracts, deeds and mortgage instruments. On occasion, clients ask that lawyers perform the closing for a portion of title insurance premium and discount or eliminate their fee for other legal services provided in connection with a real estate transaction. Providing ancillary legal services creates ethical risks that lawyers must evaluate fully.
When lawyers own title agents and provide legal documents for closings, there is often a danger that lay persons are becoming involved in unauthorized practice of law. In Amarillo Abstract and Title vs. Unauthorized Practice Committee, 332 S.W.2d 349 (Tex. Civ. App.—Amarillo 1960), the court determined that if the lawyer adequately separated his law practice from title operations then no unauthorized practice was likely to occur. The lawyer in that case disclosed his relationship to the title agent to his clients, did not channel legal work to his legal practice from the title business and specifically instructed his title employees not to do so, maintained separate books for the title company and the law practice, did not share fees from the law practice with title employees, and typed his own documents. Keeping title and legal operations separate avoids claims of unauthorized practice.
Both lawyer owned title agents and fee offices face other ethical risks when providing documents for real estate transactions. The title company is probably not authorized to provide legal documents drafted by its lawyer since that would be corporate practice of law. See Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S. W.2d 946(Tex. 1944)(title company cannot practice law by rendering legal services to third parties). The title company is thus probably not the client with respect to drafting of legal documents.
When legal documents and ancillary services are provided by any lawyer closing a transaction on behalf of a title company, the situation should be analyzed as a multiple representation of clients. If a closing lawyer is providing documents to one or more parties to the closing, then the lawyer must “reasonably believe… the representation of each client will not be materially affected” by the multiple representation. Texas Disciplinary Rules of Professional Conduct Rule 1.06(c)(1). If this threshold is met, then the lawyer must obtain consent from the potential clients to the multiple representation and disclose the possible adverse consequences and advantages of the representation. Texas Disciplinary Rules of Professional Conduct Rule 1.06(c)(2).
The nature of the potential adverse consequences from multiple representation in closings can vary widely. In the vast majority of transactions commercial lenders will have their attorneys draft deeds and mortgage documents, eliminating any potential conflict for the closing attorney. In less routine transactions, however, it is common for closing lawyers to be called upon to draft notes, deeds, deeds of trust and curative documents. Escrow agents have fiduciary duties to multiple parties in the transaction. One of the risks is that the lawyer will discover something in the course of closing that aids or affects only one party to the transaction. If it is not disclosed to appropriate parties, the lawyer may violate the duties owed by the title company.
Another potential conflict arises from how the lawyer is paid in closings. Generally, lawyers and fee offices are paid a portion of the premium charged by the title company. The lawyer only gets paid if the transaction is completed. When the lawyer represents a party to the transaction, it may appear to be in his or her best interest to make sure the deal is completed rather than raising issues that might stop the transaction. Since the title company also is paid only if the transaction is completed, the potential for conflict is significant.
Lawyers who operate fee offices have the same obligations to supervise staff as other lawyers. Lawyers must instruct their non-lawyer staff, including escrow officers, about the ethical aspects of their jobs and must supervise their work. In some cases, it appears that lawyers with little experience in the title business hire an escrow officer and let them run a title operation with little supervision.