(Inquiry No. 681 )
Placement of clients’ applications for title Insurance with own title abstract company.
Mayan attorney with an ownership interest in a title abstract company place title insurance applications for real estate clients with the attorney’s own title abstract company in transactions in which the attorney represents those clients if the attorney disclosures his or her interest in the title abstract company to the client and obtains the client’s consent after full disclosure?
An attorney that represents a client in a real estate transaction is prohibited from referring clients for the purpose of placing insurance in that same transaction to a title abstract company or a title insurance company in which the attorney holds an ownership interest, regardless of whether the client’s consent is obtained.
The inquiring attorney advises that the form of title insurance policy purchased for clients, and the premiums charged, are regulated by the New York State Commissioner of Insurance, and, therefore, are standard from one title company to the next. The attorney has an ownership interest in a title abstract company that places title insurance applications for its clients. The attorney would like to refer his real estate clients to the title abstract company in which the attorney has an ownership interest for the purpose of placing insurance in the same real estate transactions in which he represents those clients. The attorney further states that there would be full disclosure of the attorney’s interest in the abstract company and the client’s informed consent to the referral would be obtained.
A lawyer with an ownership interest in a title abstract company is prohibited from referring clients that he or she represents in the same real estate transaction to that title abstract company, regardless of whether the lawyer obtains the client’s consent. The referral would present a non-consentable conflict of interest because the lawyer’s professional judgment on behalf of the client will be or may be affected by the lawyer’s own financial and business interest, causing an inherent and irreconcilable conflict that may not be waived under the “disinterested lawyer” standard.
Canon 5 of the New York Code of Professional Responsibility, entitled “A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client,” is expressly designed to ensure that all transactions between clients and lawyers are both fair and reasonable to the client. As Ethical Consideration 5-2 makes clear:
“A lawyer should not accept proffered employment if the lawyer’s personal interests or desires will, or there is a reasonable probability that they will, affect adversely the advice to be given or services to be rendered the prospective client. After accepting employment, a lawyer carefully should refrain from acquiring a property right or assuming a position that would tend to make his or her judgment less protective of the interests of the client.” (Emphasis supplied).
In addition to the Ethical Consideration, DR 5-101(A), which serves as one of the most important and pivotal of the conflict rules, mandates that:
“A lawyer shall not accept or continue employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property, or personal interests, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents to the representation after full disclosure of the implications of the lawyer’s interest.”
As described in the Commentaries, the essence of this Rule is that a lawyer is prohibited from not only accepting employment, but from continuing with the employment, in any matter where his or her judgment will or may be affected, unless two conditions are first met: (i) a disinterested lawyer must believe that the lawyer’s interests will not adversely affect the representation of the client; and (ii) the client must consent to the actual or potential conflict after full disclosure of the implications of the lawyer’s interest. See, e.g., Roy Simon, Simon’s New York Code of Professional Responsibility Annotated at 454 (2003 Edition).
Furthermore, the suggestion of placing title insurance applications by a lawyer for his or her client with a title abstract company owned by the lawyer, of necessity, implicates DR 5-104 (A) Transactions Between Lawyer and Client, which provides:
A. A lawyer shall not enter into a business transaction with a client if they have differing interests herein and if the client expects the lawyer to exercise professional judgment therein for the protection of the 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 manner that can be reasonably understood by the client;
(2) The lawyer advises the client to seek the advice of independent counsel in the transaction; and
(3) The client consents in wntmg, after full disclosure, to the terms of the transaction and to the lawyer’s inherent conflict of interest in the transaction.
We note that DR 5-104 (A) does not contain the trigger of the disinterested lawyer standard that enables the exception for the lawyer’s representation under DR 5-101(A). However, as Professor Roy Simon explains, business transactions with clients present “inherent” conflicts, such that analysis under both 5-104(A) and 5-101(A) is required. Roy Simon, Simon’s New York Code of Professional Responsibility Annotated at 511 (2003 Edition). See also N.Y. State Bar Op. 687 (1997) (“DR 5-101(A) is designed to ensure that the lawyer’s professional judgment will not be impaired by the lawyer’s own interests. DR 5-104(A) is designed to ensure that in a business transaction with a client, the lawyer will not take unfair advantage of the client.”).
With these Disciplinary Rules and Ethical Considerations in mind, in a 1990 New York State Bar Opinion, which addressed a query arising under the conflict of interests provisions of the Disciplinary Rules, the State Bar Committee found that there is an incurable conflict of interest when an attorney, who also serves as the principal in an abstract company, arranges for the company to provide his client title insurance. “In short,” wrote the State Bar Committee, “the danger of the attorney using his or her fiduciary leverage over the real estate client to dictate the choice of title insurer, coupled with the ultimate risk that the client may not get the right kind of title insurance,” presents a conflict of interest which disclosure and the client’s informed consent will not cure. N.Y. State Bar Op. 621, at 5 (1990).
In a later Opinion, that State Bar Committee endorsed the position it took in its 1990 Opinion, and reiterated that a “disinterested lawyer” could only conclude that playing the dual roles of attorney and insurance agent would adversely affect the representation of the real estate client. Indeed, the dual roles would “impermissibly require a law firm, which as a principal in the abstract company, prepares a title report showing exceptions in title and recommending whether a title insurance policy will be issued, to negotiate these issues, as counsel for a party in the underlying transaction, with itself.” N. Y. State Bar Op. 738 (2001) (answering in the negative the query of whether a lawyer may refer real estate clients to a title abstract company in which the attorney’s spouse has an ownership interest). See also N.Y. State Bar Op. 619 (1991) (opining that both DR 5-101(A) and DR 5-104(A) prohibit a lawyer engaged in estate planning from recommending life insurance products to the lawyer’s clients if the lawyer has a financial interest in the sale; N.Y. State Bar Op. 711 (1999) (prohibiting a lawyer from recommending life insurance products to estate planning clients because the lawyer had a financial interest in the sales and would avoid considering threshold questions, such as which insurance products are the most “appropriate or economical way to satisfy the client’s needs”). 1
In the midst of the national debate over multidisciplinary practice, DR 1-106 was implemented by the Appellate Divisions, effective November 1, 2001, to address the responsibilities of attorneys that provide nonlegal services2 to clients or other persons, and even those businesses that are distinct from the legal services. DR 1-106, in relevant part, provides:
DR 1-106 Responsibilities Regarding Nonlegal Services
A. With respect to lawyers or law firms providing nonlegal services to clients or other persons:
1. A lawyer or law firm that provides nonlegal services to a person that are not distinct from legal services being provided to that person by the lawyer of law firm is subject to these Disciplinary Rules with respect to the provision of both legal and nonlegal services.
2. A lawyer or law firm that provides nonlegal services to a person that are distinct from legal services being provided to that person by the lawyer or law firm is subject to these Disciplinary Rules with respect to the nonlegal services if the person receiving the services could reasonably believe that the nonlegal services are the subject of an attorney-client relationship.
3. A lawyer or law firm that is an owner, controlling party or agent of, or that is otherwise affiliated with, an entity that the lawyer or law firm knows to be providing nonlegal services to a person is subject to these Disciplinary Rules with respect to the nonlegal services if the person receiving the services could reasonably believe that the nonlegal services are the subject of an attorney-client relationship.
4. For purposes of DR 1-106(A)(2) and (A)(3), it will be presumed that the person receiving nonlegal services believes the services to be the subject of an attorney-client relationship unless the lawyer or law firm has advised the person receiving the services in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services, or if the interest of the lawyer or law firm in the entity providing nonlegal services is de minimis.
B. Notwithstanding the provisions of DRl-106(A), a lawyer or law firm that is an owner, controlling party, agent, or is otherwise affiliated with an entity that the lawyer or law firm knows is providing nonlegal services to a person shall not permit any non lawyer providing such services or affiliated with that entity to direct or regulate the professional judgment of the lawyer or law firm in rendering legal services to any person, or to cause the lawyer or law firm to compromise its duty under DR 4-101 (B) and (D) with respect to confidences and secrets of a client receiving legal services.
In the wake of this Disciplinary Rule, and concerned with the effect on the exercise of professional judgment by the lawyer, the New York State Bar Association adhered to its earlier opinions and concluded that the lawyer who owned or operated an ancillary business, particularly in real estate transactions, was still barred from acting in a dual role by providing both legal and nonlegal services in the same transaction. N.Y. State Bar Op. 752 (2002). In fact, when presented with an inquiry almost identical to the one here – whether a lawyer couldrepresent the buyer in a real estate transaction and act as the abstract company for the transaction – the State bar determined that the lawyer could not refer real estate clients to a title abstract company in which the lawyer had an ownership interest where the services of the title abstract company were to be more than ministerial.. N.Y. State Bar. Op. 753 (2002). Again, the concern was that the abstract company that is hired to examine title and make recommendations on insurability or exceptions, would have an irreconcilable conflict with the lawyer’s duty to provide independent advice and negotiate necessary title problems, so that DR 5-101 precluded the lawyer’s representation.
Based on the aspirational values of the Ethical Considerations, the mandates of DR 1-106, DR 5-101(A) and DR 5-104(A), and the opinions cited above interpreting those provisions, it is clear to this Committee that a lawyer with an ownership interest in a title abstract company is prohibited from referring clients that he or she represents in the same real estate transaction3 to that title abstract company, regardless of whether the lawyer obtains the client’s consent. The referral would present a non-consentable conflict of interest because the lawyer’s professional judgment on behalf of the client will be or may be affected by the lawyer’s own financial and business interest, causing an inherent and irreconcilable conflict that may not be waived under the “disinterested lawyer” standard.
[Approved by the Executive Committee on 1114/03; approved by the Full Committee, subject to Executive Committee editing on 1122/03; Edited and approved by the Executive Committee on March 11,2003]
1 Although substantive law is outside the scope of this Opinion, attorneys should also be cognizant of the Real Estate Settlement Procedures Act of 1974, 12 U.S.C. § 2601 (2001), which contains a general prohibition against kickbacks and unearned fees between attorneys and title companies when said parties are involved in federally related mortgage loans.
2 Nonlegal services are defined in DR 1-106(C) as “those services that lawyers may lawfully provide and that are not prohibited as an unauthorized practice oflaw when provided by a nonlawyer.”
3 Again, while it is beyond the specific inquiry made, to the extent the attorney does not represent the client in the same real estate transaction for which the title insurance is to be placed, we are in agreement with the State Bar that the attorney may refer the client to the title abstract company in which the attorney has an ownership interest, provided the attorney complies with the requirements of DR 5-101(A) and the responsibilities set forth in DR 1-106. N.Y. State Bar Op. 755 (2002) (“A lawyer owning or operating a separately incorporated or distinct non-legal business who adequately informs the client that the non-legal business is not subject to the protections of the attorney-client relationship under DR 1-1 06(A)(2) and (3) may refer clients to the non-legal business without complying with the specific terms of DR 5-1 04(A). Under DR 5-101 (A), however, the lawyer must ensure that the client is fully informed of the lawyer’s interest in the non-legal business and the availability of alternatives. “).
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