May a South Carolina lawyer report a lender client's intention to keep conducting illegal 'witness only' real estate closings, and is the lawyer required to?

Plain-English summary

A South Carolina attorney whose practice was primarily residential real estate closings had lender clients, some based out of state, who decided to stop retaining the attorney and instead conduct "witness only" closings. The opinion treats those closings as not conforming to State v. Buyers Service Co. and therefore the unauthorized practice of law. The attorney had explained the illegality and tried, without success, to dissuade the lenders. The attorney asked whether reporting the lenders would violate client confidentiality, whether there was an obligation to report, and whether further inquiry was required.

The committee concluded the attorney may disclose the lenders' expressed intention to the appropriate authorities under Rule 1.6(b)(1), which permits a lawyer to reveal confidential information to the extent reasonably necessary to prevent the client from committing a criminal act. It quoted the Comment to Rule 1.6 on how that discretion should be exercised (the nature of the relationship, the lawyer's own involvement, seeking to persuade the client, and limiting any disclosure to what is necessary), and noted the Comment's statement that a decision not to take preventive action does not violate the rule. The committee also read the Comment to mean the exception continues to apply after the attorney-client relationship has ended, at least for information obtained during the relationship.

On the third question, the committee held that whether further inquiry is appropriate depends on facts not in the record. Because disclosure is permissive, a lawyer who chooses not to disclose need not inquire at all. A lawyer who is considering disclosure should resolve any doubts about whether the lender actually intends to act illegally before accusing a former client of criminal behavior.

In practice

Under this opinion, on the facts presented, a lawyer faced with a client's stated intention to keep conducting illegal closings may report that intention to the authorities, but the committee grounded the permission in the discretionary text of Rule 1.6(b)(1) and the Comment, not in any duty to report. The committee tied the decision to the lawyer's own discretion "in view of all relevant facts and circumstances," and held that a lawyer who declines to disclose need make no further inquiry, while a lawyer leaning toward disclosure should first resolve doubts about the client's actual intent.

Common questions

Q: Can I report a client who tells me they intend to keep breaking the law?

A: The opinion concludes you may, under Rule 1.6(b)(1), disclose to the appropriate authorities a client's expressed intention to conduct closings in violation of South Carolina law.

Q: Am I required to report it?

A: No. The committee held that, as the text of Rule 1.6 makes plain, the lawyer is not obligated to disclose; the decision is left to the lawyer's discretion.

Q: Does this still apply after the client relationship ends?

A: The committee read the Comment to Rule 1.6 to mean the confidentiality exception continues after the relationship ends, at least for information obtained while it was ongoing.

Q: Do I have to investigate before deciding?

A: Only if you are considering disclosure. The opinion says a lawyer who chooses not to disclose need not inquire, but one who is leaning toward disclosing should resolve doubts about the client's actual intent first.

Background and rules framework

The opinion applies South Carolina's version of Model Rule 1.6 (confidentiality of information), and specifically the Rule 1.6(b)(1) exception permitting disclosure to prevent a client's criminal act, with its accompanying Comment. The factual backdrop is South Carolina's treatment of "witness only" closings as the unauthorized practice of law under State v. Buyers Service Co. and S.C. Code § 40-5-320, though the committee noted it does not opine on questions of law.

Citations and references

Rules of Professional Conduct:

• MR 1.6 / SC Rule 1.6(b)(1) (confidentiality; exception to prevent a client's criminal act), and Comment to Rule 1.6

Statutes:

• S.C. Code § 40-5-320 (unauthorized practice of law)

Cases:

• State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (S.C. 1987), real estate closing tasks are the practice of law
• Doe v. Condon, 351 S.C. 158, 568 S.E.2d 356 (S.C. 2002), unauthorized practice of law
• Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (S.C. 2003), unauthorized practice of law

See also

• SC Bar Ethics Op. 04-01: Closing for the lender with another attorney's documents
• ABA Formal Op. 491: Avoiding counseling or assisting a crime or fraud
• ABA Formal Op. 92-366: Noisy withdrawal to avoid assisting fraud

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-04-02/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 04-02

Facts
The practice of a South Carolina attorney (Attorney) consists primarily of conducting residential real estate closings. A large part of such closings are referrals by lenders on refinance transactions in which the borrower has no prior preference as to the closing attorney. Accordingly, the lender gives the borrower a list of approved attorneys from which to select an attorney. In this case, the borrower selects Attorney to handle the closing.

Some of Attorney’s lender clients who have made referrals to Attorney are lenders whose bases of operations are outside of the State of South Carolina, although the real properties being refinanced are located in South Carolina. Attorney has advised client that such closings must be conducted in accordance with the holdings in State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987) (herein “Buyers Service”), Doe v. Condon, 351 S.C. 158, 568 S.E.2d 356 (2002), and Doe v. McMaster 355 S.C. 306, 585 S.E.2d 773 (2003), relative to the unauthorized practice of law. Lenders, in an attempt to expedite closings and/or save money, have elected to discontinue retaining Attorney to handle the closings in the State of South Carolina and now conduct “witness only” closings, which do not conform to the requirements of Buyers Service and are considered the unauthorized practice of law in South Carolina. Attorney has advised lenders that such closings do not conform to South Carolina law and that such practice should be discontinued, irrespective of whether lenders continue to have Attorney represent them or have another attorney represent them. Nevertheless, lenders have elected to continue with “witness only” closings, which are not in compliance with the requirements of Buyers Service.

Questions
Is it an ethical violation relating to the disclosure of confidential information of a client for Attorney to make such report or disclosure to appropriate regulatory authorities?
Does Attorney have an obligation to report lenders to anyone in the State of South Carolina (i.e. the Attorney General or other regulatory authority) regarding Attorney’s knowledge of lenders’ unauthorized practice of law in the State of South Carolina relative to conducting “witness only” closings?
Does Attorney have any ethical obligations to make further inquiries of lenders’ activities regarding such activity?

Summary
Attorney may disclose to the appropriate authorities Lender's expressed intention to conduct closings in violation of South Carolina law. However, Attorney is not ethically required to do so. Under the facts presented, it is not clear whether a further inquiry would be appropriate. If Attorney chooses not to make any disclosure, no inquiry would be necessary. However, to the extent that Attorney harbors any doubts as to whether Lender actually will conduct closings in an illegal manner, it is incumbent on Attorney to resolve such doubts prior to making any disclosure.

Opinion
Rule 1.6 sets forth the exceptions to the obligation of an attorney to protect client confidentiality. Of relevance here is Rule 1.6(b)(1), which provides that a lawyer may reveal confidential information to the extent the lawyer reasonably believes necessary "to prevent the client from committing a criminal act." Observing that the Rule permits a lawyer discretion as to whether to disclose information in order to prevent a criminal act, the Comment to Rule 1.6 provides some guidance as to how such discretion should be exercised:

The lawyer's exercise of discretion requires consideration of such factors as the nature of the lawyer's relationship with the client and with those who might be injured by the client, the lawyer's own involvement in the transaction, and factors that may extenuate the conduct in question. Where practical, the lawyer should seek to persuade the client to take suitable action. In any case, a disclosure adverse to the client's interest should be no greater than the lawyer reasonably believes necessary to the purpose. A lawyer's decision not to take preventive action permitted by paragraph (b)(1) does not violate this Rule. Comment to Rule 1.6.

While the Rule is silent as to whether this exception to the confidentiality requirement applies in the same manner subsequent to the termination of the attorney-client relationship, the Comment suggests that because the confidentiality requirement survives the termination of the relationship, the exceptions continue to apply as well. See Comment to Rule 1.6 ("[a]fter withdrawal the lawyer is required to refrain from making disclosure of the client's confidences, except as otherwise provided in Rule 1.6"). Thus, at least with respect to information obtained while the attorney-client relationship was ongoing, it appears that the exception set forth in Rule 1.6(b)(1) permits disclosure to the same extent after the relationship has ended as during the relationship.

The facts provided by the inquirer reflect that Lender has plainly stated its intention to violate the law as a matter of routine in conducting closings. While this Committee does not provide opinions on issues of law, the legal standards reflected in S.C. Code § 40-5-320 and State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987), appear to compel the conclusion that "witness only" closings expose participants to criminal sanctions. The facts set forth above suggest that Attorney has explained the illegality of Lender's proposed course of action and has tried and failed to dissuade Lender from proceeding.

Under these circumstances, it appears to the Committee that Attorney may disclose to the relevant authorities that Lender intends to conduct closings in a manner that violates S.C. Code § 40-5-320. However, as the text of Rule 1.6 makes plain, Attorney is not obligated to do so. Instead, Attorney should exercise his or her discretion subject to the guidelines provided above and in view of all relevant facts and circumstances.

The question whether Attorney should make further inquiries before acting is one that will likely depend upon factual details not set forth in this inquiry. In exercising his or her discretion, Attorney may well arrive at the conclusion that the information available is too ambiguous to warrant taking the serious step of accusing a former client of criminal behavior. Certainly, that portion of the Comment discussing the exercise of discretion implies that an attorney should exercise diligence to avoid making a disclosure based upon an erroneous belief that the client intends to commit a crime. Attorney may wish to make further inquiries depending on his or her view of the accuracy of the information available, although the Committee is not in a position to speculate as to what might constitute an appropriate inquiry under any given set of facts. However, the permissive nature of Rule 1.6(b)(1) makes clear that Attorney may–without any further inquiry–simply decline to disclose any information. In other words, if Attorney wishes to disclose the information, further inquiry may be appropriate depending on the circumstances, but if Attorney chooses not to disclose, further inquiry is not necessary.