Can a law firm form and co-own a title abstract company with one of its real estate clients, and then refer its clients to that company for title work?

Plain-English summary

A law firm with a substantial real estate practice proposed to form a title abstract company as a principal alongside one of its real estate clients, and to refer firm clients to the new company for title work after full disclosure and consent. The committee answered two questions. On forming the company, it held this is not improper in itself, since a lawyer may engage in a business other than law, but identified several constraints. The arrangement may not involve unlawful solicitation (following N.Y. State 576 and 556 on dual practice as a title-insurance representative), and Canon 3 must be strictly observed: DR 3-103(A) bars a partnership with a nonlawyer where any of its activities is the practice of law, DR 3-102(A) bars fee-sharing with a nonlawyer, and DR 3-101(A) bars aiding the unauthorized practice of law. Drawing on ABA Informal Opinion 1482, the committee stressed that the firm must keep clients' confidences from the abstract company and make clear when a person is dealing with the firm as lawyers and when as a business. Because forming the company is a business transaction with a client, DR 5-104(A) requires full disclosure and consent, with the burden on the lawyer to show no overreaching.

On referrals, the committee distinguished two situations by the service the abstract company performs. Where the company performs only the ministerial function of title searching or abstracting, referral is permissible if the firm's clients give advance, informed consent after full disclosure of the company's fee structure and the firm's proprietary interest, and are told of their entitlement to credit for any non-service-related fee (DR 5-101(A); N.Y. State 576; Moll v. U.S. Life Title Insurance). The committee cautioned that if the arrangement is really a business-generating device paying the company a fee unrelated to services performed, the firm may have an impermissible and possibly illegal interest in compensation unrelated to services rendered.

Where the abstract company instead prepares a title report or serves as agent for the title insurer, the committee held a prohibited conflict arises that consent cannot cure. In that posture the firm, as a principal in the company, would prepare a title report showing exceptions and recommending whether to insure, and then negotiate those issues, as counsel for a party, with itself. The committee found the conflict between the company's interest in providing the least service at the highest profit and the client-lender's or client-purchaser's interest in greater protection at a lower price too acute to waive. Importing the DR 5-105(C) "obviousness" and EC 5-2 "reasonable probability" tests into DR 5-101(A) (per N.Y. State 516 and 208), it concluded that neither test would support a finding that the firm could adequately represent clients in transactions where its abstract company is a protagonist, a danger it viewed as going well beyond the simple agency relationship approved in N.Y. State 576. The first question was answered yes subject to the qualifications; the second yes for ministerial searching but no where the company prepares a title report or acts as a title-insurance agent.

Currency note

This opinion was issued in 1988, under New York's former Code of Professional Responsibility, which New York replaced with the Rules of Professional Conduct in 2009 (personal-interest and business conflicts now appear at Rule 1.7 and 1.8(a), and professional independence and nonlawyer association at Rule 5.4). It was later clarified and amplified by N.Y. State 621. 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 law firm co-own a title abstract company with a real estate client?

A: Yes, with safeguards. The committee held forming the company is not improper in itself, but the firm must avoid unlawful solicitation, observe the Canon 3 bars on nonlawyer partnership, fee-sharing, and aiding unauthorized practice, keep client confidences from the company, and satisfy DR 5-104(A) for the business transaction with the client.

Q: Can the firm refer its clients to the company for title searches?

A: Yes, for ministerial work. The committee held referral for purely ministerial title searching or abstracting is permissible with advance informed consent after full disclosure of the fee structure and the firm's ownership interest, plus notice of any fee credit the client is entitled to.

Q: Can the firm refer clients where the company prepares title reports or sells title insurance?

A: No. The committee held that when the company prepares a title report or acts as a title-insurance agent, the firm would in effect negotiate title issues with itself, creating a conflict so significant that client consent cannot cure it.

Q: Why can't the client just consent to that conflict?

A: The committee imported the DR 5-105(C) "obviousness" and EC 5-2 "reasonable probability" standards into DR 5-101(A) and found more than a reasonable probability that the firm's business interest would adversely affect its representation, so consent would be ineffective.

Background and rules framework

The opinion interpreted the New York Code provisions on a lawyer's personal-interest conflicts (DR 5-101(A); EC 5-2), business transactions with a client (DR 5-104(A)), the limits on consent to conflicts (DR 5-105(A), (C)), the Canon 3 bars on nonlawyer partnership and fee-sharing and aiding unauthorized practice (DR 3-103(A), 3-102(A), 3-101(A)), and reasonable fees (DR 2-106(A); EC 2-17). The closest Model Rule analogues are Rule 1.7 (conflicts, including the lawyer's own interests), Rule 1.8(a) (business transactions with a client), and Rule 5.4 (professional independence; association with nonlawyers).

Citations and references

Rules of Professional Conduct:

• MR 1.7 (conflicts of interest, including the lawyer's personal and business interests)
• MR 1.8(a) (business transactions with a client)
• MR 5.4 (professional independence; nonlawyer partnership and fee-sharing)
• NY DR 1-102(A)(2); DR 2-106(A); DR 3-101(A); DR 3-102(A); DR 3-103(A); DR 5-101(A); DR 5-104(A); DR 5-105(A), (C); EC 2-17, 3-5, 5-2

Statutes:

• RESPA, 12 U.S.C. sec. 2601 et seq.: noted as a possible legal constraint the committee did not decide

Cases:

• Moll v. U.S. Life Title Insurance Co. of New York, 654 F. Supp. 1012 (S.D.N.Y. 1987): consumer choice and the duty to disclose title-insurance alternatives

Other opinions cited:

• N.Y. State 576 (1986): dual practice as lawyer and title-insurance agent; the simple agency conflict
• N.Y. State 516 (1980); N.Y. State 208 (1971): importing the obviousness / reasonable-probability tests into DR 5-101(A)
• N.Y. State 621: later clarifies and amplifies this opinion

See also

• NY State Bar Op. 621: Referral to an attorney-owned abstract company
• NY State Bar Op. 611: Representing both the seller and the lender
• NY State Bar Op. 626: Real estate multiple representation and fees

Source

• Landing page: https://nysba.org/opinion-595/