Must a Georgia lawyer who supervises a real estate closing hold the closing proceeds in an IOLTA or interest-bearing trust account?

Plain-English summary

The opinion answers whether a lawyer may participate in a nonlawyer entity the lawyer created to conduct residential real estate closings where the closing proceeds are deposited in a non-IOLTA interest-bearing bank trust account rather than an IOLTA account. The Board, and the Supreme Court of Georgia on discretionary review, conclude that a lawyer who directs a closing holds money belonging to another as an incident of the practice of law and must handle those funds under Rule 1.15(II).

The opinion starts from the premise that closing a real estate transaction in Georgia constitutes the practice of law, so a nonlawyer entity conducting closings without lawyer supervision engages in the unauthorized practice of law. If a lawyer supervises the closing, the lawyer is a fiduciary as to the proceeds. If the lawyer participates but does not supervise, the nonlawyer entity is engaged in the unauthorized practice of law and the lawyer assists it in violation of Rule 5.5.

On the handling of funds, the opinion applies Rule 1.15(II): a lawyer holding client funds must first decide whether they are IOLTA-eligible. Closing proceeds that are nominal in amount or held for only a short period (funds that cannot generate net earnings for the client) must go into an IOLTA account. Funds that are not nominal, or that are held for more than a short period, are ineligible for IOLTA and must go into an interest-bearing account with the net interest paid to the client. Under no circumstances may closing proceeds be commingled with the lawyer's or law office's funds.

The Supreme Court adopted the opinion as modified, clarifying the line between IOLTA-eligible and non-IOLTA interest-bearing accounts. The Court characterized the lawyer involved in a closing as having a strict fiduciary duty to deposit the client's proceeds in a separate IOLTA or non-IOLTA interest-bearing trust account.

In practice

The opinion holds that, under Georgia Rule 1.15(II) as it stood at the time of the opinion, a lawyer who supervises a real estate closing must treat the closing proceeds as fiduciary funds: nominal or short-term proceeds go into an IOLTA account, and proceeds that are more than nominal or held for more than a short period go into an interest-bearing account with interest payable to the client. The opinion states the proceeds may never be commingled with the lawyer's or law office's funds.

The opinion also holds that a lawyer who participates in a nonlawyer closing entity without supervising the closings assists the unauthorized practice of law in violation of Rule 5.5, and notes the Board's view that adequate supervision requires the lawyer to be present at the closing.

Common questions

Q: Where must a Georgia lawyer deposit real estate closing proceeds?

A: The opinion holds the lawyer must place nominal or short-term proceeds in an IOLTA account, and proceeds that are not nominal or are held for more than a short period in an interest-bearing account with the interest paid to the client. Closing proceeds may not be commingled with the lawyer's or office's funds.

Q: Can a lawyer set up a nonlawyer company to run closings and keep the funds out of an IOLTA account?

A: No. The opinion concludes that a lawyer who supervises the closing remains a fiduciary subject to Rule 1.15(II), so the proceeds must be handled under that rule regardless of the entity used.

Q: What happens if the lawyer participates in the entity but does not supervise the closings?

A: The opinion holds that the nonlawyer entity is then engaged in the unauthorized practice of law, because closing a real estate transaction is the practice of law, and the lawyer assists that unauthorized practice in violation of Rule 5.5.

Q: Does the lawyer have to be present at the closing?

A: A footnote to the opinion states that adequate supervision would require the lawyer to be present at the closing, citing the Board's earlier formal advisory opinions.

Background and rules framework

The opinion interprets Georgia Rule of Professional Conduct 1.15(II) (safekeeping property and IOLTA; Model Rule 1.15) and Rule 5.5 (unauthorized practice of law; Model Rule 5.5). It builds on the premise, drawn from In re UPL Advisory Opinion 2003-2, 277 Ga. 472 (2003), O.C.G.A. 15-19-50, and Formal Advisory Opinions 86-5 and 00-3, that closing a real estate transaction in Georgia is the practice of law. The Supreme Court's order also cites Brown v. Legal Foundation of Washington, 538 U.S. 216 (2003), on the constitutionality of IOLTA programs.

Citations and references

Rules of Professional Conduct:

• Georgia RPC 1.15(II) (safekeeping property; IOLTA) / Model Rule 1.15
• Georgia RPC 5.5 (unauthorized practice of law) / Model Rule 5.5

Statutes:

• O.C.G.A. 15-19-50 (defining the practice of law)

Cases:

• In re UPL Advisory Opinion 2003-2, 277 Ga. 472, 588 S.E.2d 741 (2003), real estate closing as the practice of law
• Brown v. Legal Foundation of Washington, 538 U.S. 216 (2003), IOLTA programs

Other opinions cited:

• Formal Advisory Opinion 86-5: nonlawyer involvement in closings and unauthorized practice
• Formal Advisory Opinion 00-3: lawyer's presence and control at real estate closings

See also

• GA Ethics Op. 23-1: Real Estate Closings by Video
• ABA Formal Op. 475: Safeguarding Funds Subject to a Fee Division

Source

• Landing page: https://www.gabar.org/handbook?rule=rule448

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

FORMAL ADVISORY OPINION NO. 04-1
Approved And Issued On February 13, 2006 Pursuant To Bar Rule 4-403
By Order Of The Supreme Court Of Georgia With Comments
Supreme Court Docket No. S05U1720

COMPLETE TEXT FROM THE ORDER OF THE SUPREME COURT OF GEORGIA

We grant a petition for discretionary review brought by the State Bar of Georgia to consider the proposed opinion of the Formal Advisory Board 1 (hereinafter "Board ") that, if an attorney supervises the closing of a real estate transaction conducted by a non-lawyer entity, the attorney is a fiduciary with respect to the closing proceeds and the closing proceeds must be handled in accordance with the trust account and IOLTA provisions of Rule 1.15(II) of Bar Rule 4-102(d) of the Georgia Rules of Professional Conduct. Formal Advisory Opinion No. 04-1 (August 6, 2004). See State Bar Rule 4-403(d) (authorizing this Court to grant a petition for discretionary review). 2 For the reasons set forth below, we agree with the Board that a lawyer directing the closing of a real estate transaction holds money which belongs to another (either a client or a third-party) as an incident to that practice, and must keep that money in an IOLTA account. We further add that if the proceeds are not subject to the rules of IOLTA subsection (c)(2), then the funds must be deposited in an interest-bearing account for the client's benefit. Rule 1.15(II)(c)(1). Under no circumstances may the closing proceeds be commingled with funds belonging to the lawyer, the law office, or any entity other than as explicitly provided in the Rule.

The matter came before the Board pursuant to a request for an advisory opinion on the following question:

May a lawyer participate in a non-lawyer entity created by the lawyer for the purpose of conducting residential real estate closings where the closing proceeds received by the entity are deposited in a non-IOLTA interest bearing bank trust account rather than an IOLTA account?

The opinion first appeared in the June 2004 issue of the Georgia Bar Journal. In response, the Board received comments both in support of and in opposition to the opinion. The modified opinion appeared in the October 2004 Georgia Bar Journal, and the State Bar thereafter sought discretionary review.

The closing of a real estate transaction in this State constitutes the practice of law, and, if performed by someone other than a duly-licensed Georgia attorney, results in the prohibited unlicensed practice of law. In re UPL Advisory Opinion 2003-2, 277 Ga. 472 (588 SE2d 741) (2003). The attorney participating in the closing is a fiduciary with respect to the closing proceeds, which must be handled in accordance with the trust account and IOLTA provisions in Rule 1.15(II). 3 Specifically, when a lawyer holds client funds in trust, the lawyer must make an initial determination whether the funds are eligible for the IOLTA program. Closing proceeds from a real estate transaction which are nominal in amount or are to be held for a short period of time (i.e., funds that cannot otherwise generate net earnings for the client) must be deposited into an Interest on Lawyer's Trust Account (IOLTA Account). Funds that are not nominal in amount or funds, no matter what amount, that are not to be held for a short period of time, are ineligible for placement in an IOLTA account and must be placed in an interest-bearing account, with the net interest generated paid to the client. Rule 1.15(II)(c). See also Brown v. Legal Foundation of Washington, 538 U.S. 216 (155 LE2d 376, 123 SC 1406) (2003). Under either circumstance, Rule 1.15(II) instructs that a lawyer involved in a closing has a strict fiduciary duty to deposit a client's real estate closing proceeds in a separate IOLTA or non-IOLTA interest bearing trust account.

The Board's recognition that, under all circumstances, the interest generated on the client's closing funds is governed by Rule 1.15(II), ensures full compliance where real estate closings are involved. Accordingly, we adopt Formal Advisory Opinion 04-1 to the extent it is in accord with the rule that attorneys must place client closing proceeds that are nominal or held for a short period of time in an IOLTA account. We clarify that closing proceeds that are more than nominal in amount or that will be deposited for more than a short period of time must be placed in a non-IOLTA interest bearing account with interest payable to the client. Rule 1.15(II)(c)(1).

Formal Advisory Opinion approved, as modified. All the Justices concur.

1. State Bar Rule 4-403(a) authorizes the Formal Advisory Opinion Board to draft proposed Formal Advisory Opinions concerning the proper interpretation of the Rules of Professional Conduct.

2. Formal Advisory Opinion Board opinions, which are approved or modified by this Court, are "binding on all members of the State Bar."State Bar Rule 4-403(e).

3. The sole issue addressed in the proposed opinion is whether an attorney may participate in a non-lawyer entity which the attorney created for the purpose of conducting residential real estate closings without depositing the closing proceeds in an IOLTA account.

FORMAL ADVISORY OPINION NO. 04-1

Question Presented:

May a lawyer participate in a non-lawyer entity created by the lawyer for the purpose of conducting residential real estate closings where the closing proceeds received by the entity are deposited in a non-IOLTA interest bearing bank trust account rather than an IOLTA account?

Summary Answer:

The closing of a real estate transaction constitutes the practice of law. If an attorney supervises the closing conducted by the non-lawyer entity, then the attorney is a fiduciary with respect to the closing proceeds and closing proceeds must be handled in accordance with Rule 1.15 (II). If the attorney does not supervise the closings, then, under the facts set forth above, the lawyer is assisting a non-lawyer in the unauthorized practice of law.

Opinion:

The closing of a real estate transaction in the state of Georgia constitutes the practice of law. See, In re UPL Advisory Opinion 2003-2 , 277 Ga. 472, 588 S.E. 2d 741 (Nov. 10, 2003), O.C.G.A. §15-19-50 and Formal Advisory Opinions Nos. 86-5 and 00-3. Thus, to the extent that a non-lawyer entity is conducting residential real estate closings not under the supervision of a lawyer, the non-lawyer entity is engaged in the practice of law. If an attorney supervises the residential closing [1] , then that attorney is a fiduciary with respects to the closing proceeds. If the attorney participates in but does not supervise the closings, then the non-lawyer entity is engaged in the unauthorized practice of law. In such event, the attorney assisting the non-lawyer entity would be doing so in violation of Rule 5.5 of the Georgia Rules of Professional Conduct [2]

When a lawyer is supervising a real estate closing, the lawyer is professionally responsible for such closings. Any closing funds received by the lawyer or by persons or entities supervised by the lawyer are held by the lawyer as a fiduciary. The lawyer's responsibility with regard to such funds is addressed by Rule 1.15 (II) of the Georgia Rules of Professional Conduct which states in relevant part:

SAFEKEEPING PROPERTY - GENERAL

(a) Every lawyer who practices law in Georgia, whether said lawyer practices as a sole practitioner, or as a member of a firm, association, or professional corporation, and who receives money or property on behalf of a client or in any other fiduciary capacity, shall maintain or have available a trust account as required by these Rules. All funds held by a lawyer for a client and all funds held by a lawyer in any other fiduciary capacity shall be deposited in and administered from such account.

(c) All client's funds shall be placed in either an interest-bearing account with the interest being paid to the client or an interest-bearing (IOLTA) account with the interest being paid to the Georgia Bar Foundation as hereinafter provided.

(1) With respect to funds which are not nominal in amount, or are not to be held for a short period of time, a lawyer shall, with notice to the clients, create and maintain an interest-bearing trust account in an approved institution as defined by Rule 1.15(III)(c)(1), with the interest to be paid to the client. No earnings from such an account shall be made available to a lawyer or law firm.

(2) With respect to funds which are nominal in amount or are to be held for a short period of time, a lawyer shall, with or without notice to the client, create and maintain an interest-bearing, government insured trust account (IOLTA) in compliance with the following provisions:

As set out in Subsection (c)(2) above, this Rule applies to all client funds which are nominal or are to be held for a short period of time. As closing proceeds are not nominal in amount, but are to be held for only a short period of time, they are subject to the IOLTA provisions. Therefore, the funds received in connection with the real estate closing conducted by the lawyer or the non-lawyer entity in the circumstances described above must be deposited into an IOLTA compliant account.

1. Adequate supervision would require the lawyer to be present at the closing. See FAO . . . .etc.

2. Rule 5.5 states in relevant part that:

UNAUTHORIZED PRACTICE OF LAW
A lawyer shall not:

(b) assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law.

The maximum penalty for a violation of this Rule is disbarment.