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Opinion Summary

Proposed opinion rules that a lawyer may not refer a client in a closing transaction to a title agency in which the lawyer’s law partner has a financial interest.

Background:

Attorney A is a real estate lawyer and a partner with Law Firm X. Attorney B is also a real estate lawyer and a partner with Law Firm X. Attorney B owns a financial interest in Title Company.

Inquiry #1:

May Attorney B own a financial interest in Title Company?

Opinion #1:

Yes.

Nothing in the Rules of Professional Conduct prohibits a lawyer from owning a financial interest in Title Company. See RPC 185 (“This opinion does not prohibit a lawyer from owning stock in a publicly traded title insurance company.”). Whether Attorney B is legally permitted to own a financial interest in Title Company is a question outside the scope of this inquiry.

Inquiry #2:

Client Smith retained Attorney B to serve as closing attorney for a real property transaction. May Attorney B recommend Title Company to Client Smith and prepare a title opinion for obtaining title insurance through Title Company?

Opinion #2:

No.

Lawyers are prohibited from engaging in concurrent conflicts of interest. Rule 1.7. “A concurrent conflict of interest exists if...the representation of one or more clients may be materially limited...by a personal interest of the lawyer.” Rule 1.7(a)(2). The Ethics Committee has long concluded that it is a conflict of interest for a lawyer to serve as a closing attorney in a real property transaction while also serving as the title agent for the purpose of obtaining title insurance based upon the lawyer’s personal interest in both roles, and that this conflict of interest cannot be waived. See, e.g., RPC 185; 2009 FEO 14. RPC 185 states:

Even an insubstantial interest in a title insurance agency, however, could materially impair the judgment of a closing lawyer. RPC 49 addresses a closing lawyer’s duty to his or her client when the lawyer owns shares in a realty firm that will realize a commission upon the closing of the transaction. RPC 49 states that the conflict of interest is too great to be allowed even if the client wishes to consent. This conflict is also present when a title agency, and, therefore, indirectly the closing lawyer who owns an interest in the title agency, will receive compensation from the client as a result of the closing of the transaction. The lawyer’s personal interest in having the title insurance agency receive its compensation could conflict with the lawyer’s duty to close the transaction only if it is in the client’s best interest.

In 2009 FEO 14, the Ethics Committee concluded that the personal interest conflict identified in this scenario is also present when the lawyer’s spouse has the ownership interest in the title company:

The lawyer’s personal interest in having his spouse’s title insurance agency receive its compensation may conflict with the lawyer’s duty to close the transaction only if it is in the client’s best interest. In addition, the lawyer’s personal relationship with the owner of the title insurance company will influence the lawyer’s choice of the spouse’s company as the insurer, as well as the vigorousness of the lawyer’s negotiations with the title company on his client’s behalf. Issues of title insurance coverage may have to be negotiated between the closing lawyer and the insurer. The lawyer’s client and the insurer will necessarily have competing interests as to the extent of the coverage and the amount of the premium.

2009 FEO 14. The opinion goes on to conclude that

[t]he conflict of interest is too great to be allowed, even with the client’s informed consent. A closing lawyer must be able to make an independent recommendation of a title insurance company to his client, unbiased by any personal interest. In addition, a lawyer opining on title to property should be independent from the title insurance agency issuing the title insurance in reliance upon that opinion. This is consistent with the emphasis that the North Carolina legislature has placed on the professional and financial independence of the closing lawyer from the title insurance agency. See, e.g. N.C.G.S. § 58-26-1(a) (title insurance company may not issue insurance as to North Carolina real property unless the company has obtained the opinion of a North Carolina licensed attorney who is not an employee or agent of the company) and N.C.G.S. § 58-27-5(a) (lawyer who performs legal services incident to a real estate sale may not receive any payment, directly or indirectly, in connection with the issuance of title insurance for any real property which is a part of such sale).

Id.

The Ethics Committee agrees with these prior opinions and concludes again that it is a non-waivable conflict of interest for Attorney B to serve as closing attorney while also recommending Title Company—in which Attorney B has a financial interest—to Client Smith and preparing a title opinion for obtaining title insurance through Title Company.

Inquiry #3:

Client Smith retained Attorney A for a real property closing transaction. May Attorney A recommend Title Company to Client Smith and prepare a title opinion for obtaining title insurance through Title Company while Attorney B remains a partner at Law Firm X and retains a financial interest in Title Company?

Opinion #3:

No.

A conflict of interest pursuant to Rules 1.7 and 1.9 experienced by one attorney at a law firm is imputed to the other members of the law firm. Rule 1.10(a). Generally, however, a conflict of interest based upon a personal interest of the prohibited lawyer is not imputed to the other members of a law firm so long as “the prohibition does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.” Id. The comment to Rule 1.10 provides the following example of such a scenario:

[I]f an opposing party in a case were owned by a lawyer in the law firm, and others in the firm would be materially limited in pursuing the matter because of loyalty to that lawyer, the personal disqualification of the lawyer would be imputed to all others in the firm.

Rule 1.10, cmt. [3].

Title insurance, while not required in all real property transactions, is frequently a required and critical component that must be obtained to carry out the goals of the representation (to wit: to successfully complete the closing in the client’s best interests). Here, Attorney B has a personal interest conflict that prohibits him from representing Client Smith in the underlying transaction based upon Attorney B’s financial interest in Title Company. Although personal interest conflicts are generally not imputed to the rest of the firm, the combination of Attorney B’s financial interest in Title Company, Attorney B’s relationship with Law Firm X, and the important (if not required) role of title insurance in completing the representation “present[s] a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm” such that the personal interest conflict is imputed to the other members of Law Firm X, including Attorney A. Similar to the example from the comment to Rule 1.10, other members of Law Firm X may be materially limited by their loyalty to Attorney B when exercising their independence during closing in selecting a title insurance company and negotiating the terms of title insurance. Accordingly, Attorney B’s conflict of interest in the underlying matter pursuant to Rule 1.7 (see Opinion #2) is imputed to the other members of Law Firm X, including Attorney A, and Attorney A may not refer Client Smith to Title Company. Additionally, this conflict cannot be waived. See Opinion #2.

Notably, this opinion and the described imputation of a personal interest conflict under these circumstances is limited to the issue of title insurance due to the important and often necessary role title insurance plays in carrying out the goals of the representation. This opinion does not address a lawyer’s ability to refer a client to other ancillary services—in which a lawyer may have a financial interest—that are related to the legal services provided but the absence of which does not impact the lawyer’s ability to carry out the goals of the representation. A lawyer may continue to make referrals to such services provided the referral is permissible under the Rules; this opinion does not overrule any prior ethics opinion addressing those different circumstances.

Inquiry #4:

Does the answer to Inquiry #3 change if Attorney A is an associate with Law Firm X rather than a partner?

Opinion #4:

No. Attorney A’s subordinate status to Attorney B in this scenario creates a greater material limitation on Attorney A’s representation of Client Smith given Attorney A’s personal and professional interest in maintaining a positive, productive, and personally beneficial relationship with a law firm partner. See Opinion #3.