If a client tells a North Carolina closing lawyer to stop the deal after the deed is recorded, must the lawyer still disburse the closing funds?

Plain-English summary

The lead inquiry involves a buyer-client that recorded the deed and deposited the purchase price, then told its lawyer to stop the deal because the lot could not support a house with a basement, while the seller demanded the sale proceed. The opinion concludes that although a client ordinarily has authority to decide not to proceed with a transaction (Comment [1] to Rule 1.2), a closing lawyer must also honor the conditions the seller placed on delivery of the deed, absent fraud. Where the seller delivered an executed deed on the condition that it be recorded only if the price is paid, the lawyer has fiduciary responsibilities to the seller even though the seller is not the lawyer's client, citing RPC 44 on the conditional delivery of loan proceeds. Because title has already passed to the buyer, the lawyer must disburse the proceeds, then notify the buyer, who can take legal action to seek rescission. The opinion limits this holding to closings on property used or developed for residential purposes.

The result differs if the instruction to stop comes before recording. Unless the real estate contract or the parties provide otherwise, closing is presumed complete at the date and time of recording. If closing is not complete, on the buyer's instruction not to close the lawyer should return the loan funds to the lender and buyer, return the deed to the seller, retain the other closing documents in the file, and hold any escrowed earnest money the lawyer received (or, if the lawyer did not initially hold the deposit, return it to the escrow account of whoever first received it). The opinion gives the same answer where, in Inquiry #4, the seller-client tells the lawyer not to record the deed after the closing conference but before recording.

On the representation question, the opinion concludes the lawyer may not represent the buyer-client in the later rescission action. Rule 3.7(a) bars a lawyer from serving as both witness and advocate at a trial proceeding, and the lawyer's testimony about the closing may be detrimental to the buyer, creating a conflict of interest addressed by Rule 3.7(b).

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which a closing lawyer withholds recorded-transaction proceeds at the buyer-client's instruction, after title has passed, is not permitted; the opinion holds the lawyer must disburse to meet the seller's delivery conditions and then notify the buyer to pursue rescission on its own. Per the opinion, the analysis turns on whether closing is complete, which it presumes occurs at recording absent a contrary agreement: before recording the lawyer unwinds the transaction by returning the funds and the deed; after recording the lawyer must complete disbursement.

The opinion also concludes that a lawyer who would be a necessary witness about the closing cannot serve as advocate for the buyer in the rescission suit, applying Rule 3.7(a) and the conflict provision of Rule 3.7(b).

Common questions

Q: Can a North Carolina closing lawyer stop disbursing funds if the buyer changes its mind after the deed is recorded?

A: No. Opinion #1 holds that once title has passed by recording, the lawyer must disburse the sale proceeds to satisfy the seller's conditions on delivery of the deed; the lawyer then notifies the buyer, who may seek rescission.

Q: What if the buyer says stop before the deed is recorded?

A: Opinion #3 says the lawyer should return the loan funds to the lender and buyer, return the deed to the seller, retain the remaining closing documents, and hold the escrowed earnest money (or return it to whoever first received it), because closing is presumed complete only at recording unless the parties agreed otherwise.

Q: Does the closing lawyer owe duties to the seller even though the seller is not the lawyer's client?

A: Yes. Opinion #1 says that when a seller delivers an executed deed on the condition that it be recorded only if the price is paid, the lawyer has fiduciary responsibilities to the seller absent fraud, citing RPC 44 on the conditional delivery of loan proceeds.

Q: Can the lawyer represent the buyer in a later lawsuit to rescind the sale?

A: No. Opinion #2 concludes that Rule 3.7(a) bars the lawyer from acting as both witness and advocate at trial, and that the lawyer's testimony may be detrimental to the buyer, creating a conflict under Rule 3.7(b).

Background and rules framework

The opinion applies North Carolina Rule 1.2 (scope of representation, the analogue of Model Rule 1.2), whose Comment [1] gives the client ultimate authority to determine the purposes of the representation within the limits imposed by law and the lawyer's professional obligations. It balances that authority against the lawyer's fiduciary duty to a non-client seller who delivers a deed on conditions, drawing on RPC 44's treatment of the conditional delivery of loan proceeds.

For the representation question it applies Rule 3.7 (lawyer as witness, the analogue of Model Rule 3.7), under which a lawyer who is likely to be a necessary witness generally may not act as advocate at a trial proceeding (Rule 3.7(a)) and may be barred where the dual role creates a conflict of interest (Rule 3.7(b)).

Citations and references

Rules of Professional Conduct:

• MR 1.2 / NC Rule 1.2 (scope of representation; Comment [1], client's authority over the objectives)
• MR 3.7 / NC Rule 3.7 (lawyer as witness; Rule 3.7(a), Rule 3.7(b))

Other opinions cited:

• NC RPC 44: conditional delivery of loan proceeds.
• NC 99 Formal Ethics Opinion 9: this opinion expands upon it and overrules it to the extent the two differ.

See also

• Georgia Bar Op. 04-1: Real Estate Closing Proceeds and IOLTA Accounts
• Georgia Bar Op. 13-1: Witness-Only Real Estate Closings
• Alabama Bar Op. 1989-99: Representing Buyer and Seller in a Closing

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2008-formal-ethics-opinion-7/

Original opinion text

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

Editor's note: This opinion expands upon 99 Formal Ethics Opinion 9. To the extent that this opinion differs from 99 FEO 9, that opinion is overruled.

Inquiry #1:

Attorney represented Small Corporation on the purchase of a residential lot from Development Company. After the closing conference, Attorney deposited the check for the purchase price in his trust account and recorded the deed at the register of deeds. When he returned from the courthouse, he received a telephone call from an official with Small Corporation who stated that Small Corporation did not want to purchase the lot anymore because company officials had just learned that a house with a basement could not be built on the lot. The corporate official instructed Attorney not to disburse any of the closing funds although the deed was already recorded and title vested in Small Corporation. Development Company, the seller, demanded the sale proceed. What should Attorney do?

Opinion #1:

Normally, a client's decision not to proceed with a transaction must be honored by the lawyer and, if necessary, the lawyer must restore the status quo ante by returning documents, property, or funds to the appropriate parties to the transaction. Comment [1] to Rule 1.2 of the Rules of Professional Conduct states, "[t]he client has ultimate authority to determine the purposes to be served by legal representation within the limits imposed by law and the lawyer's professional obligations." However, a closing lawyer must also comply with the conditions placed upon the delivery of the deed by the seller absent fraud. If the seller delivered the executed deed to the lawyer upon the condition that the deed would only be recorded if the purchase price was paid, the lawyer has fiduciary responsibilities to the seller even if the seller is not the lawyer's client. See, e.g., RPC 44 (conditional delivery of loan proceeds). Because title has passed to the buyer, the lawyer must satisfy the conditions of the transfer of the property by disbursing the sale proceeds. The lawyer must notify the buyer and the buyer can then take appropriate legal action to seek to have the sale rescinded. This opinion is applicable to closings on property used or developed for residential purposes.

Inquiry #2:

May Attorney represent Small Corporation in the subsequent action for rescission?

Opinion #2:

No. Rule 3.7(a) prohibits a lawyer from serving as a witness and an advocate in a trial proceeding. Moreover, Attorney's testimony may be detrimental to the interests of Small Corporation. If so, Attorney is also be barred from the representation because of the conflict of interest. Rule 3.7(b).

Inquiry #3:

Would the answer to Inquiry #1 be different if the buyer had instructed the lawyer not to disburse the sales proceeds after the closing conference, but before the deed was recorded?

Opinion #3:

Yes. Unless the real estate contract provides otherwise, or it is otherwise agreed between the parties, closing is presumed to be complete at the date and time of recording. If closing is not complete, upon receiving the buyer's instruction not to close, the lawyer should return the funds to lender and buyer, return the deed to seller, and retain the other closing documents in his file. The lawyer should hold any escrowed funds he received representing the earnest money deposit made at the time of the offer to purchase. If the earnest money was not initially deposited with the lawyer at the time of the offer to purchase, the lawyer shall have the right to return the deposit to the escrow account of the person, firm, or company that initially received the deposit.

Inquiry #4:

Assume that Attorney represents Development Company, the seller of the property. After the closing conference, but prior to recording the deed, Attorney received a telephone call from the seller asking the lawyer not to record the deed. What should attorney do?

Opinion #4

See Opinion # 3.