When a lender hires a lawyer to examine title and the borrower pays the fee, whom does the lawyer represent if the title turns out defective?

Plain-English summary

A borrower ("A") was required to pay a title-examination fee to a building and loan before borrowing on his property. After closing, he discovered a title defect; when he asked the examining lawyer, he was told the lawyer had represented only the association, not him. The committee was asked whether the lawyer violated Canon 6 by representing one party while collecting a fee from another, and whether he let his services be exploited by a lay agency in violation of Canon 35. It answered that the lawyer was primarily responsible to the association and that he violated neither Canon.

The committee reasoned that it had to consider the nature of the legal service. It assumed the lawyer rendered a report to the association that the title was good and marketable as of the examination date, possibly noting exceptions; some exceptions (for example, a utility easement or restrictive covenants) might not seriously affect the loan security, and the loan might be made without disclosing them to the borrower. The title report was given to satisfy the lender that the property gave sufficient security. A borrower who later discovered such exceptions might claim they clouded his title, but that was not the purpose of the examination, nor the responsibility of the examining lawyer.

Drawing on the First Federal decision, which observed that a title examination is made primarily for the borrower's benefit so he can meet a clear-title condition, the committee concluded that to the extent the report failed to disclose a material defect, the attorney was responsible primarily to the association to whom the report was rendered and secondarily to the borrower, but only insofar as the mortgage security and thus the loan security was affected. Because both lender and borrower knew the lawyer examined title at the lender's specific direction and with the borrower's acquiescence, there was no violation of Canon 6 and no violation of Canon 35.

Currency note

This opinion was issued in 1965 under the former Canons of Professional Ethics (in effect in Kentucky from 1946 to 1971) and predates both the 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. Subsequent rule amendments and later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific point mentioned here.

Common questions

Q: When a lender hires a title lawyer the borrower pays for, whom does the lawyer represent?

A: Under this opinion, the lender. The committee held the lawyer was responsible primarily to the association that hired him, and secondarily to the borrower only to the extent the loan security was affected.

Q: Is it a conflict of interest for the lawyer to be paid by the borrower while representing the lender?

A: No, on these facts. Because both parties knew the lawyer examined title at the lender's direction and with the borrower's acquiescence, the committee found no violation of Canon 6.

Q: Is the lawyer responsible to the borrower for a defect that does not affect the loan?

A: The committee said the examination's purpose was to satisfy the lender's security; the lawyer's responsibility ran to the borrower only insofar as the defect affected the mortgage and loan security.

Background and rules framework

The opinion applied Canon 6 (conflicts of interest in representing parties with adverse interests) and Canon 35 (a lawyer permitting his services to be exploited by a lay intermediary). The modern analogs are Model Rule 1.7 (concurrent conflicts and the identity of the client) and Model Rule 5.4 (professional independence when a third party pays the fee), with Kentucky's counterparts at SCR 3.130(1.7) and SCR 3.130(5.4).

Citations and references

Rules of Professional Conduct:

• Canons 6, 35 (conflicts of interest; exploitation by a lay intermediary); modern analogs Model Rules 1.7 and 5.4

Cases:

• Kentucky State Bar Ass'n v. First Federal Savings and Loan Ass'n, 342 S.W.2d 397 (Ky.), a title examination is made primarily for the borrower's benefit so he can meet a clear-title loan condition

See also

• KBA Ethics Op. E-21: Lender's Choice of Title Lawyer
• KBA Ethics Op. E-22: Borrower Paying the Lender's Lawyer
• KBA Ethics Op. E-24: Title Insurer's Lawyer Examining Title

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-023.pdf

Original opinion text

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

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-23
Issued: January 1965

Question 1:

When an attorney represents a building and loan association and prepares a defective title which was paid for by an applicant at the request of the association, is the attorney responsible primarily to the association

Answer:

Yes.

Question 2:

Is the attorney in violation of Canons 6 and 35?

Answer:

No.

References:

Canon 6, 35
OPINION

“A” has been required to pay a title examination fee to a building and loan before he would be permitted to borrow on his property. After the transaction is closed “A” discovers a defect in his title. When “A” inquires of the lawyer who examined the title he is told by the lawyer that he does not and has not represented him, that he has been representing only the building and loan association. 1. Since the attorney is representing one party and collecting a fee for his services from another is he guilty of violating the Canons of Professional Ethics, particularly Canon 6? 2. Is the attorney permitting his services to be exploited by an intervening lay agency contrary to Canon 35? This question assumes a defect in the title of a borrower, discovered after the loan transaction has been made. The type of defect is not stated, but the attorney who examined the title for the association who made the loan, denies responsibility to the borrower. It is necessary to first consider the nature of the legal service rendered. We must assume that the attorney in question has rendered his report and opinion to the association to the effect that the title to the property in question is good and marketable as of a certain date, being the date of his examination of the records. We may also assume, as customary in the business, that this report may contain certain exceptions concerning the title which the attorney may refer to in his report. It is possible under such circumstances that the exceptions may be of

such a nature as to not seriously affect the mortgage loan security (for example: a utility easement or restrictive covenants) and that the loan will be made with no disclosure or discussion of such matters with the borrower. The title report is given and required solely to satisfy the lender that the property when managed will give sufficient security to the lender to make the loan requested. The borrower may when he discovers these exceptions, claim that they are a cloud upon his title, and they may be, but this was not the purpose of the examination nor would this be a responsibility of the attorney who rendered the opinion. We are advised that in most such cases as we are considering in this opinion that the title report and opinion is rendered to the lender and that the borrower is not named in the report nor furnished with a copy thereof. The report is given to and is the property of the lender. The Court of Appeals, however, in the Kentucky State Bar v First Federal case, supra, states that: It is apparent that the title examination is not made exclusively for the benefit of respondent. A clear title is one of the conditions upon which it will make a loan. The examination is made primarily for the benefit of the borrower so that he can comply with this essential condition. The fact that a charge is made to the borrower for this service, if such a charge is made, simply confirms the fact that the legal service is being rendered for him. It would appear from this quoted language that to the extent the report rendered by the attorney fails to disclose a material defect in the title, that the attorney is responsible primarily to the association to whom the report was rendered and secondarily to the borrower, but only to the extent that the mortgage security is affected and thereby affects the loan security. Under these conditions as set forth above, we are of the opinion that since both the lender and the borrower knew that the attorney in question was examining title to the subject property at the specific direction of the lender and with the acquiescence of the borrower, that there is no violation of Canon 6 and further that the attorney is not violating Canon 35.
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Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor rule). The Rule provides that formal opinions are advisory only.