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Monday, April 6, 2020

COVID-19 and Related Practice Concerns for Real Property Closings and Notarization of Documents

March 27, 2020

As more government and private offices seek to limit opportunities for in-person contact in response to the growing public health concerns surrounding COVID-19 (including but not limited to reduced hours, reduced staff availability, and/or temporary closure), the State Bar has received a number of inquiries concerning 1) a lawyer’s professional responsibility when navigating notarial requirements for certain documents, and 2) recordation delays while serving as a closing attorney for a real property transaction. Both issues raise questions of law that are beyond the scope of the Rules of Professional Conduct, and the State Bar takes no position as to whether any change in the law should or should not occur—whether temporarily or permanently—given the current public health crisis. That being said, the State Bar offers the following ethics advisory addressing both of the aforementioned issues via the following hypotheticals:

Inquiry #1:

Client A retained Lawyer to execute certain estate documents, including a power of attorney and a will. As a result of the public health concerns surrounding COVID-19, Client A and Lawyer are limiting their in-person interaction. Client A and Lawyer have reviewed Lawyer’s proposed documents remotely and have agreed upon the contents of the documents. Client A must now execute the documents, including having his signature notarized by a licensed notary. Client A does not want to leave his house or otherwise meet with anyone in-person to execute the documents and has asked to execute the documents remotely.

Do the Rules of Professional Conduct permit Lawyer to notarize or direct another person to notarize Client A’s signature on the estate documents via remote conference?

Opinion #1:

Whether a notary can notarize a person’s signature via remote conference is a question of law that is beyond the scope of the Rules of Professional Conduct. Lawyers should consult Chapter 10B of the North Carolina General Statutes for the legal requirements of notarial acts; further guidance may be available through the Secretary of State, which is the executive office tasked with enforcing the notary statutes.

Lawyers should note that a violation of the requirements for notarial acts may constitute a criminal act. See generally N.C. Gen. Stat. § 10B-60. The Rules of Professional Conduct prohibit a lawyer from committing a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects; and prohibit a lawyer from engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation that reflects adversely on the lawyer’s fitness as a lawyer. See Rules 8.4(b) and (c). Lawyers are also responsible for the conduct of individuals over whom they have direct supervisory authority in connection with their law practices, and lawyers may not knowingly assist or induce another person to violate the Rules of Professional Conduct. See Rules 5.1, 5.3, and 8.4(a). A lawyer should not participate in or direct another to perform a notarial act unless the lawyer is satisfied that the method of completing the notarial act is permitted by law.

Inquiry #2:

Buyer and Seller have retained Attorney to serve as the closing attorney for a residential real property transaction. Buyer is financing her purchase of the property through a loan from Bank. In response to the growing public health concerns surrounding COVID-19, the register of deeds office in the county where the property is located has reduced office hours that substantially delay recordation of closing documents, be it through in-person recording or e-recording. Due to the indefinite delay for recording, Buyer, Seller, and Bank would like Attorney to disburse the funds collected in connection with the closing upon execution of the closing documents and prior to recordation. In support of the parties’ desires for prompt disbursement, Buyer’s title insurance policy has been amended to cover any loss incurred during the time between execution of closing and recordation of the closing documents. Attorney, however, is aware of the statutory requirements of the Good Funds Settlement Act, particularly N.C. Gen. Stat. § 45A-4(a) which states, “A settlement agent may disburse funds from the settlement agent's trust or escrow account...as necessary to record any deeds, deeds of trust, and any other documents required to be filed in connection with the closing... but the settlement agent may not disburse any other funds from its trust or escrow account until the deeds, deeds of trust, and other required loan documents have been recorded in the office of the register of deeds.”

Do the Rules of Professional Conduct permit Attorney to disburse funds in connection with a residential real property transaction prior to recording or prior to confirming recordation?

Opinion #2:

Attorneys must comply with applicable legal authorities pertaining to the disbursement of entrusted funds. The interpretation of such legal requirements is a question of law that is beyond the scope of the Rules of Professional Conduct. Similarly, whether the parties to such a transaction may waive the relevant legal requirements, including those imposed by the Good Funds Settlement Act, is a question of law that, too, is beyond the scope of the Rules of Professional Conduct. If an attorney disburses entrusted funds in a manner that does not comply with applicable legal authorities in effect at the time of the disbursement, this may constitute a violation of Rule 1.15-2, including Rule 1.15-2(a) and (n).

Prior ethics opinions referencing the Good Funds Settlement Act are based upon the status of the law at the time of the opinion. Should the requirements of the Good Funds Settlement Act or other relevant law be temporarily suspended or amended to accommodate the current public health circumstances, the State Bar’s prior ethics opinions should not be read to preclude attorneys from conducting closings in accordance with the current state of the law.

However, if the legal requirements for disbursing funds in connection with a closing were amended to permit disbursement without prior recordation, prior to proceeding attorneys must thoughtfully consider the variety of ethical issues implicated by such a change in closing procedures to ensure their actions comply with their professional responsibility and sufficiently protect their clients’ interests. Primarily, a closing attorney must research and identify all risks and implications of disbursing proceeds prior to recordation in order to competently and diligently represent her client in accordance with Rules 1.1 and 1.3 (including but not limited to issues such as property tax liability, homeowner insurance/property damage liability, and the risk of recordation of a competing document prior to the deed and deed of trust from the transaction). The closing attorney must carefully consider her ability to provide diligent representation to the various parties to the transaction since the interests of the seller, the buyer, and the lender may not align as they normally would, particularly as the length of time between disbursement and recordation increases. Accordingly, the attorney must contemplate issues such as who the attorney can represent under Rule 1.7, whether any potential conflicts in this circumstance are non-waivable, preparation of an adequate and thorough written informed consent to any waivable conflict under Rule 1.7(b), and the communication required to the parties the attorney cannot represent. The attorney must inform all clients—the buyer, the seller, and/or the lender, as applicable—of the identified risks and implications of proceeding with disbursement and transfer of possession prior to recordation to enable the clients to make an informed decision about proceeding in this manner as required by Rules 1.4(a)(2) and 1.4(b). The attorney must comply with the client’s decision whether to proceed and/or disburse funds in accordance with Rules 1.2(a) and 1.15-2(n); but, if there is a conflict between the decisions of the buyer and the lender, the attorney cannot disburse funds from the lender contrary to the instructions of the lender regardless of the desires of the buyer pursuant to Rule 1.15-2(n). See RPC 44. The attorney must also be aware of her own personal interests impacting her advice to proceed. If closing under these circumstances is not in her clients’ best interests, but the attorney advises her clients to proceed with closing to sustain the attorney’s business during tough financial times, the attorney has engaged in a personal interest conflict prohibited by Rule 1.7(a).

This list of potential ethical implications and risks associated with closing a real property transaction as described in this inquiry is not meant to be a complete statement of potential issues that an attorney must consider. It is the attorney’s responsibility to evaluate each transaction, including the parties and circumstances associated with the transaction, before determining whether the attorney can ethically participate in the transaction and what must be done to satisfy the attorney’s professional responsibility. Given the substantial risks involved in such a course of action, along with the potential for confusion amongst the parties, attorneys should outline the various considerations in a written statement for the clients’ review and obtain their clients’ informed consent confirmed in writing to proceeding with closing under such circumstances. An attorney would also be wise to speak with her malpractice insurance carrier for any additional input on the appropriate standard of care to be applied in such a situation.

In sum, while the question presented in this inquiry primarily involves a legal question that is beyond the scope of the Rules of Professional Conduct, an attorney may proceed with a closing in accordance with applicable law provided that the attorney satisfies the requirements imposed by the Rules of Professional Conduct, including making all necessary adjustments to comply with the Rules following a change in the applicable law.

The advice contained in this letter was reviewed and approved by David Allen, the chair of the Ethics Committee, on March 27, 2020. Accordingly, you may rely on the advice contained in this letter. Should you have further questions, you may contact me by email at boten@ncbar.gov or by telephone at (919) 719-9226.

Sincerely yours,

Brian P.D. Oten
Director for Ethics and Special Programs

Filed Under: General News

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