Can a Maine lawyer run real estate closings through a title company the lawyer owns and keep the interest, without following the IOLTA rules?

Plain-English summary

A lawyer asked whether structuring and closing real estate transactions so that escrowed funds are received in the name of a title company the lawyer owns, with the lawyer keeping the net interest and not following the IOLTA provisions, would violate the Maine Bar Rules. The Commission concluded such a title company is a "law-related service" as defined in Bar Rule 3.2(h)(2). Under Rule 3.2(h)(1), a lawyer providing law-related services is exempt from the Code of Professional Responsibility only if the lawyer sufficiently distinguishes the legal practice from the law-related services, by complying with either Rule 3.2(h)(1)(i) (services provided in circumstances distinct from the lawyer's legal services) or (ii) (services provided by a separate entity the lawyer controls, with reasonable measures to make clear the services are not legal services).

On IOLTA, the Commission read Rule 3.6(e) to apply by its terms only to "funds of clients paid to a lawyer or law firm." If the funds are separately paid to and held by the title company rather than the attorney or firm, and Rule 3.2(h) is complied with, there is no violation of the IOLTA rule.

The Commission then gave compliance guidance. It thought it would be very difficult for a lawyer to provide title services "distinct from the lawyer's provision of legal services" without establishing a separate entity. For a separate entity under Rule 3.2(h)(1)(ii), the Commission identified minimum "reasonable measures": the recipient of the title services cannot also be a client of the lawyer or firm in the title transaction, and the lawyer or firm cannot also provide legal services in that transaction to the recipient, because title services are by nature closely entwined with any legal service in the matter. Quoting the ABA comment to Model Rule 5.7, the Commission noted that where legal and law-related services are so closely entwined that they cannot be distinguished, the disclosure-and-consultation requirement cannot be met. The lawyer must give meaningful, preferably written, notice that the lawyer or firm is not acting as an attorney, is not providing legal services, and that the client-lawyer privilege does not exist; the burden is on the lawyer to make the notice understandable to the recipient. The Commission expressly limited the opinion to title insurance law-related services.

In practice

Under the Maine Bar Rules as the opinion read them (Rule 3.2(h) corresponds to ABA Model Rule 5.7 on law-related services, and the IOLTA duty to Model Rule 1.15), the opinion holds that a lawyer-owned title company can operate outside the Code, including the IOLTA requirements, only by satisfying the separation conditions of Rule 3.2(h). The opinion makes the analysis turn on whether the title services are kept genuinely distinct from the lawyer's legal services: the funds must be held by the title company, not the lawyer or firm; the same person cannot be both the lawyer's legal client and the title-service recipient in that transaction; and the recipient must receive clear notice that no attorney-client relationship or privilege applies. The opinion holds that absent those measures, the title company's activities, and its handling of client funds, are subject to the Code. Opinion #182 later refines how this applies when a lawyer refers a client to the title company.

Common questions

Q: Is a lawyer-owned title company subject to the ethics rules?

A: Only if not properly separated. The opinion holds the title company is a law-related service that is exempt from the Code when the lawyer complies with Rule 3.2(h), but subject to the Code (including IOLTA) when the lawyer does not sufficiently distinguish it from the legal practice.

Q: Do the IOLTA rules apply to escrow held by the title company?

A: Not if the company holds the funds and Rule 3.2(h) is met. The opinion reads Rule 3.6(e) to apply only to client funds paid to a lawyer or law firm, so funds separately paid to and held by a compliant title company are not subject to IOLTA.

Q: Can the lawyer both represent a client and provide title services in the same deal?

A: No, if the company is to stay outside the Code. The opinion holds that, for a separate entity under Rule 3.2(h)(1)(ii), the title-service recipient cannot also be the lawyer's or firm's legal client in that transaction, because title services are closely entwined with the legal services.

Q: What notice must the title-service recipient receive?

A: Clear, preferably written, notice. The opinion requires the lawyer to inform the recipient that the lawyer or firm is not acting as their attorney, is not providing legal services, and that the client-lawyer privilege does not exist, with the burden on the lawyer to make it understandable.

Background and rules framework

The opinion interprets Maine Bar Rule 3.2(h) (law-related services and the conditions under which the Code does or does not apply, in subsections (h)(1)(i), (h)(1)(ii), and (h)(2)) and Rule 3.6(e) (IOLTA and handling of client funds). These correspond to ABA Model Rule 5.7 (responsibilities regarding law-related services), from which the Maine rule was adapted, and Model Rule 1.15 (safekeeping of client funds). The Commission relied on the Advisory Committee Note to the 1997 amendment to Rule 3.2(h) and the ABA comment to Model Rule 5.7.

Citations and references

Rules of Professional Conduct:

• Model Rules 5.7, 1.15
• Maine Bar Rules 3.2(h)(1)(i) and (ii), 3.2(h)(2), 3.6(e)

See also

• Maine Ethics Op. 182: Attorney-Owned Title Insurance Companies
• NY State Bar Op. 753: Lawyer-Owned Mortgage and Title Company
• NYSBA Op. 1289: Law-Related Entity Owned by Attorneys

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=89469

Original opinion text

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

Issued by the Professional Ethics Commission

Date Issued: July 18, 2002

Question

Does an attorney violate Maine Bar Rule 3.6(e)(1)(4),(5) or any other Bar Rule, by structuring and closing real estate transactions to receive escrowed funds in the name of a title company ? which the attorney owns or has a proprietary interest in ? with that attorney retaining the net interest so generated and not following the IOLTA provisions of that Rule?

Opinion

A title company in the situation described in the question falls within the definition of a law-related service as provided for in Maine Bar Rule 3.2(h)(2). See Advisory Committee Note on February 15, 1997 Amendment to Rule 3.2(h), 1 Maine Manual On Professional Responsibility (2002) at 3-53. A lawyer who provides law-related services is exempt from the Code of Professional Responsibility, only if the lawyer takes steps sufficiently to distinguish the lawyer?s legal practice from his or her provision of law-related services. Although Rule 3.2(h)(1) is written so as to subject the lawyer to the Code of Professional Responsibility if the lawyer fails to take certain steps to sufficiently distinguish his or her practice from the provision of law-related services, by inverse implication, Rule 3.2(h)(1) offers an exclusion from the requirements of the Code of Professional Responsibility for a lawyer?s activities in connection with the ownership and operation of a title company as a law-related service if the title company is constituted and operated in accordance, and the lawyer complies, with Rule 3.2(h)(1)(i) or (ii).[1]

Maine Bar Rule 3.2(h) provides as follows:

A lawyer shall be subject to the Code of Professional Responsibility with respect to the provisions of law-related services, as defined in paragraph (2), if the law-related services are provided:

i) by the lawyer in circumstances that are not distinct from the lawyer?s provision of legal services to clients; or

ii) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.

(2) The term ?law-related services? denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as the unauthorized practice of law when provided by a non-lawyer.

The IOLTA provisions of Rule 3.6(e), by their express terms, apply only to ?funds of clients paid to a lawyer or law firm?? Under the question presented, provided that the funds are separately paid to and held by the title company and not the attorney or law firm, and provided that the provisions of Rule 3.2(h) are complied with, there would be no violation of Rule 3.6(e).

Having noted that when a title company is constituted and operated in accordance with, and the lawyer complies with, the provisions of Rule 3.2(h) the Code of Professional Responsibility provisions of the Bar Rules do not apply, we think it appropriate to give some guidance concerning compliance with Rule 3.2(h).

We note at the outset that we believe it would be very difficult for an attorney to provide title company services in a setting that is ?distinct from the lawyer?s provision of legal services,? Bar Rule 3.2(h)(1)(i), without establishing a separate entity. Although we do not by our opinion today indicate that such a practice automatically would subject a lawyer to the Code of Professional Responsibility, it does not seem likely to us that a lawyer could have such an arrangement, which would be sufficiently distinct so as to prevent the confusion the Rule seeks to avoid.

In the event a lawyer establishes a separate entity pursuant to section (ii) of Rule 3.2(h)(1), there are several minimum requirements we think a lawyer must observe in order to meet the ?reasonable measures? standard set forth in the Rule and thus comply with the provisions of this section. First, the recipient of the law-related services cannot also be a client of the lawyer or the law firm the lawyer is associated with in the title transaction at issue. Similarly, the lawyer or the law firm cannot also provide legal services in the transaction to any recipient of the law-related services. We reach this conclusion because of the nature of the law-related services at issue ? title insurance company services ? that by their nature are closely entwined with any legal service in the matter the lawyer might also provide to the recipient.

The ABA comment to Model Rule 5.7 from which the Maine Rule was adapted discusses this very issue:

Regardless of the sophistication of potential recipients of law-related services, a lawyer should take special care to keep separate the provision of law-related and legal services in order to minimize the risk that the recipient will assume that the law-related services are legal services. This risk of such confusion is especially acute when the lawyer renders both types of services with respect to the same matter. Under some circumstances the legal and law-related services may be so closely entwined that they cannot be distinguished from each other, and the requirement of disclosure and consultation imposed by?the Rule cannot be met. In such a case a lawyer will be responsible for assuring that both the lawyer?s conduct and, to the extent required by Rule 5.3, that of nonlawyer employees in the distinct entity which the lawyer controls complies in all respects with the Rules of Professional Conduct.

Further, we believe that a meaningful notice must be given to inform the recipient of the title insurance service that the lawyer or firm is not acting as an attorney for them, is not providing legal services, and the protections of the client-lawyer privilege do not exist in connection with this service. In these circumstances, the burden is upon the lawyer to give a notice that is understandable to the recipient so as to be informed.

The ABA comment to Model Rule 5.7 provides further guidance on taking reasonable measures. It states:

In taking the reasonable measures?to assure that a person using law-related services understands the practical effect or significance of the inapplicability of the Rules of Professional Conduct, the lawyer should communicate to the person receiving the law-related services, in a manner sufficient to assure that the person understands the significance of the fact, that the relationship of the person to the business entity will not be a client-lawyer relationship. The communication should be made before entering into an agreement for provision of or providing law-related services, and preferably should be in writing.

The burden is upon the lawyer to show that the lawyer has taken reasonable measures under the circumstances to communicate the desired understanding. For instance, a sophisticated user of law-related services, such as a publicly held corporation, may require a lesser explanation than someone unaccustomed to making distinctions between legal services and law-related services, such as an individual seeking tax advice from a lawyer-accountant or investigative services in connection with a lawsuit.

In conclusion, we opine that, if a lawyer in a title insurance law-related service circumstance complies with the foregoing standards then the Code of Professional Responsibility provisions of the Maine Bar Rules, including the IOLTA provisions, do not apply. We specifically limit our opinion to title insurance law-related services, and decline to expand this analysis to other law-related services at this time preferring rather to address those circumstances as the need arises.

Footnote

[1] We note that the Code of Professional Responsibility is only a portion of the Maine Bar Rules and accordingly, the remaining provisions of the Bar Rules apply to the lawyer regardless of compliance with Rule 3.2(h).