Can a closing attorney disburse loan proceeds before recording when the realtor and seller demand it, even though the lender's instructions require recording first?

Plain-English summary

A closing attorney handled residential real estate closings and, after documents were signed but before recording, was giving the real estate agent the commission check and the sellers' proceeds, then recording. The lender's closing instructions required recording before disbursement, and the attorney had signed a statement to the lender agreeing to follow them; he was also on title insurers' approved-attorney lists under insured closing letters guaranteeing compliance with the lender's instructions, so a title defect found after disbursement could expose the title insurer and his own malpractice carrier. The realtor and seller demanded immediate disbursement, the realtor warning he would lose business because immediate disbursement was the community's prevailing practice. The inquiry asked whether the attorney could ethically ignore the lender's instruction and his commitment to follow it.

The opinion answered no. Under CPR 100, an attorney closing an ordinary residential transaction represents both the borrower and the lender absent clear notice otherwise. Rule 10.2(E) requires a lawyer holding client funds in trust to deliver them to third persons as the client directs, so the attorney, having received funds in trust from his client the lender, was obliged to disburse consistent with the lender's instructions. The opinion added that a lawyer who receives client funds with present knowledge that he does not intend to comply with the instructions for handling them would violate Rule 1.2(c) by engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation. It also noted that disbursing before updating title and recording could prejudice the lender-client and others to whom the lawyer may owe fiduciary duties (the title insurer and his own carrier), and, as to the client, could be viewed as prejudicial conduct violating Rule 7.1(a)(3).

Currency note

This opinion was issued in 1988, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. The provisions it applies (Rule 10.2(E) on disbursing entrusted funds, Rule 1.2(c) on dishonesty, and Rule 7.1(a)(3) on prejudice to the client) have since been renumbered and revised (the corresponding Model Rules include 1.15, 8.4, and 1.3). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a closing attorney disburse before recording at the realtor's and seller's demand?

A: No. The opinion concluded the attorney may not ignore the lender's instruction that recording precede disbursement.

Q: Why is the lender's instruction binding on the closing attorney?

A: The opinion concluded that the lender is the attorney's client and Rule 10.2(E) requires disbursing entrusted funds as the client directs.

Q: What rule does taking the funds intending not to comply implicate?

A: The opinion concluded it would violate Rule 1.2(c) as conduct involving dishonesty, fraud, deceit, or misrepresentation, and could be prejudicial to the client under Rule 7.1(a)(3).

Background and rules framework

The opinion applied North Carolina Rule 10.2(E), requiring disbursement of entrusted funds as the client directs (corresponding to Model Rule 1.15); Rule 1.2(c), barring dishonesty, fraud, deceit, or misrepresentation (corresponding to Model Rule 8.4); and Rule 7.1(a)(3), addressing prejudice to the client (corresponding to Model Rule 1.3). CPR 100 supplied the premise that the closing attorney represents both borrower and lender.

Citations and references

Rules of Professional Conduct:

• North Carolina Rule 10.2(E) (disbursing entrusted funds as the client directs)
• North Carolina Rule 1.2(c) (dishonesty, fraud, deceit, or misrepresentation)
• North Carolina Rule 7.1(a)(3) (prejudice to the client)
• MR 1.15 (safekeeping property); MR 8.4 (misconduct); MR 1.3 (diligence)

Other opinions cited:

• CPR 100 (North Carolina): the closing attorney represents both borrower and lender absent clear notice otherwise

See also

• NC Ethics Op. RPC 66: disposition of escrowed funds
• NC Ethics Op. RPC 127: conditional delivery of settlement proceeds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-44/

Original opinion text

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

Inquiry:

Attorney closes loans for a number of real estate clients. After all documents are signed, but before recording, Attorney gives the real estate agent the commission check and the check for the sellers' proceeds. Attorney then records the necessary documents.

Attorney has been given closing instructions from the lender which require recording before disbursement. Attorney has actually signed a statement to the lender that he will follow the lender's instructions. Attorney is on the approved attorneys' list for a number of title insurance companies who have issued insured closing letters to lenders whose loans attorney closes. The insured closing letter ensures that the attorney will comply with the lender's closing instructions. If a defect in title is discovered by attorney in his title update after disbursement, then the title insurance is liable for that defect. That, in turn, puts attorney's professional liability policy at risk.

Both the realtor and seller have demanded that he disburse funds immediately rather than waiting until later in the day after going to the courthouse to update the title record. The realtor has further stated that the attorney would lose his business unless the funds are disbursed immediately because such is the prevailing practice in the community.

May attorney ethically ignore the lender's closing instruction as well as his commitment to the lender to follow those instructions? Has attorney violated any ethical requirements in disregarding the potential liability that would be imposed upon the title insurance company and/or his professional liability carrier if a defect is discovered after disbursement?

Opinion:

No. The attorney may not ethically ignore the lender's instruction that recordation must precede disbursement. CPR 100 made it clear that any attorney involved in the closing of an ordinary residential real property transaction represents both the borrower and the lender in the absence of clear notice to all concerned that such is not the case. Rule 10.2(E) requires a lawyer holding client funds in trust to deliver those funds to interested third persons as directed by the client. In the situation described in the inquiry, it is clear that the attorney, having received funds in trust from his client, the lender, is obliged to disburse those funds at a time which is consistent with the lender's instructions. Moreover, it is fair to say that any lawyer receiving client funds with the present knowledge that he or she does not intend to comply with the instructions for the handling of those funds, would violate Rule 1.2(c) by engaging in conduct involving dishonesty, fraud, deceit or misrepresentation.

It should also be noted that the disbursement of loan proceeds before the title is updated and the Deed and Deed of Trust are recorded could be prejudicial, not only to the lender as a client of the attorney, but also to other interested parties in the transaction to whom the lawyer may owe fiduciary duties, such as the title insurer and his own liability insurance carrier. Such conduct, at least insofar as the client is concerned, could be viewed as prejudicial to the client and thus a violation of Rule 7.1(a)(3).