If a settlement lawyer learns the deed was fraudulently assembled to skip recording and taxes, can the lawyer close the deal, and must the lawyer report the other lawyer?

Plain-English summary

The opinion addresses a real estate settlement in which a relocation company buys an employee's home, does not record that deed, then resells the property and has its in-house lawyer (Lawyer B) prepare a deed by attaching a new "page one" naming the new buyer over the signature page of the original seller-to-relocation deed. The relocation company directs the settlement lawyer (Lawyer A) to make the sale proceeds payable to the relocation company rather than the grantor. Lawyer A recognizes that the original deed should have been recorded with fees and taxes paid, and that the seller's warranties ran to the relocation company, not the buyer. The questions are whether Lawyer A may facilitate this and whether he must report Lawyer B.

On the first issue, the committee concludes that Lawyer B knowingly substituted a second front page over the original deed, misrepresenting the actual conveyance, which clearly involves fraud and violates the Rules of Professional Conduct. Under Rule 1.2(c), a lawyer cannot knowingly assist a client in fraudulent conduct. The committee explains that where the client's course of conduct has already begun and is continuing, the lawyer may not reveal the wrongdoing except as Rule 1.6 permits, but must avoid furthering it. It concludes that Lawyer A must counsel the client about the past fraudulent conduct and cannot continue with the closing knowing the offered deed is fraudulently constructed and does not legally reflect the chain of title.

On the second issue, the committee applies the two-prong test of Rule 8.3(a). First, the lawyer must have reliable information that another lawyer violated the rules; because Lawyer B's conduct involved fraud reflecting adversely on his fitness under Rule 8.4(c), that prong is met. Second, the misconduct must raise a substantial question as to the lawyer's fitness in other respects. Following LEO 1522, the committee concludes that Lawyer B's knowing failure to record the first deed and his fraudulent substitution of a second front page raise a substantial question as to his fitness and trigger Lawyer A's duty to report, absent additional mitigating circumstances. The committee cautions that the conduct may also be criminal.

In practice

Under the Virginia rules as they stood when the opinion issued, the committee holds that a settlement lawyer cannot knowingly assist a client's fraud under Rule 1.2(c) and may not complete a closing on a deed he knows is fraudulently assembled to misrepresent the chain of title; the lawyer must counsel the client about the past fraud but may reveal it only as Rule 1.6 permits, while avoiding furthering it. The opinion holds that, applying the two-prong test of Rule 8.3(a), the fabricating lawyer's conduct involves fraud reflecting on fitness under Rule 8.4(c) and raises a substantial question as to fitness, so the settlement lawyer has a duty to report that lawyer to the appropriate professional authority, absent mitigating circumstances. The opinion notes the conduct may also be criminal.

Common questions

Q: Can a settlement lawyer close a deal using a deed he knows was fraudulently assembled?

A: No. The opinion concludes that Rule 1.2(c) bars a lawyer from knowingly assisting a client's fraud, so the lawyer cannot continue with a closing on a deed he knows misrepresents the chain of title, and must counsel the client about the past fraudulent conduct.

Q: Can the lawyer reveal the client's fraud to the buyer or authorities?

A: Only as Rule 1.6 permits. The opinion concludes that where the client's conduct has begun and is continuing, the lawyer may not reveal the wrongdoing except where Rule 1.6 allows, but must avoid furthering it, for example by suggesting how to conceal it.

Q: Does the lawyer have to report the other lawyer who created the fraudulent deed?

A: Yes, on these facts. The opinion concludes the two-prong test of Rule 8.3(a) is met: the fabricating lawyer's conduct involves fraud reflecting on fitness under Rule 8.4(c), and it raises a substantial question as to fitness, triggering a duty to report absent mitigating circumstances.

Background and rules framework

The opinion interprets Rule 1.2(c) of the Virginia Rules of Professional Conduct (Model Rule 1.2(d)), barring a lawyer from counseling or assisting a client in conduct the lawyer knows is criminal or fraudulent; Rule 8.3(a) (Model Rule 8.3) on the duty to report another lawyer's misconduct that raises a substantial question as to honesty, trustworthiness, or fitness; and Rule 8.4(c) (Model Rule 8.4) on dishonesty, fraud, deceit, or misrepresentation reflecting adversely on fitness. It applies prior opinion LEO 1522 on false statements in deeds.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.2 / Va. Rule 1.2(c) (no assisting client crime or fraud)
• Model Rule 8.3 / Va. Rule 8.3(a) (duty to report misconduct raising a substantial fitness question)
• Model Rule 8.4 / Va. Rule 8.4(c) (dishonesty, fraud, deceit, or misrepresentation reflecting on fitness)

Other opinions cited:

• Va. LEO 1522: false statement of consideration in a deed; duty to report

See also

• ABA Formal Op. 92-366: Noisy Withdrawal to Avoid Assisting Fraud
• ABA Formal Op. 04-433: Reporting Misconduct of a Non-Practicing Lawyer

Source

• Landing page: https://vsb.org/Site/about/rules-regulations/leo-opinions.aspx
• Original PDF: https://www.vsb.org/common/Uploaded%20files/LEOs/1840.pdf

Original opinion text

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

Committee Opinion
September 25, 2007
LEGAL ETHICS OPINION 1840

CAN A LAWYER REPRESENTING A
SETTLEMENT COMPANY FACILITATE
THAT COMPANY’S PRACTICE OF REDEEDING PROPERTY THROUGH A
RELOCATION INTERMEDIARY
WITHOUT PROPER RECORDATION?

In this hypothetical real estate Lawyer A has been asked to handle a real estate settlement of property, involving Relocation Company’s (“Relocation”) sale of property to purchaser. Relocation routinely purchases real estate on behalf of some of their client’s employees who have been transferred and as a benefit of employment the company, through Relocation, agrees to purchase the employee’s real estate. Relocation purchases the real estate from Seller and Seller executes a deed to Relocation. Relocation does not record this original deed and then enters into a contract and sells the same real estate to Buyer. Lawyer B for Relocation drafts a deed for this transaction by preparing a new “page one” that contains the name of Buyer but uses the signature page of the original deed between Seller and Relocation. This is routine practice for Relocation and Lawyer B as it relates to these types of transactions for their client’s employees. Relocation advises Lawyer A that the proceeds of the sale are to be payable to Relocation (not the grantor of the deed). Lawyer A recognizes that Relocation should have recorded the original deed and paid all applicable recording fees and taxes and that seller’s warranties under the original deed were made to Relocation, not the buyer. The question posed involves whether or not this is unethical for Lawyer A to facilitate Relocation’s practice of not recording the first deed and preparing legal documentation that does not accurately reflect the true chain of title to the real estate. What are Lawyer A’s ethical obligations as to the chain of title and is Lawyer A obligated to report Lawyer B’s conduct? There are two principal issues involved with these facts. The first issue involves the failure of Relocation to properly record the chain of title of said property and pay all applicable recording fees and taxes. The facts you provide indicate that Lawyer B clearly knew that he was substituting a second front page over the original deed thereby misrepresenting the actual conveyance of the property. The committee believes that this conduct clearly involves fraud and is a violation of the Rules of Professional Conduct. A lawyer cannot knowingly assist a client in committing fraud. Rule 1.2 (c) 1

1

RULE 1.2

Scope of Representation

(c) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning, or application of the law.

Committee Opinion
September 25, 2007

When the client’s course of conduct has already begun and is continuing, the lawyer’s responsibility is especially delicate. The lawyer is not permitted to reveal the client’s wrongdoing, except where permitted by Rule 1.6. However, the lawyer is required to avoid furthering the purpose, for example, by suggesting how it might be concealed. Rule 1.2 Comment [10]. In this scenario Lawyer A must counsel the client as to any past fraudulent conduct and cannot continue with this closing knowing that Lawyer B and Relocation’s offered deed is fraudulently constructed and does not legally reflect the chain of title and deeds in this conveyance. The second issue involves the misconduct of Lawyer B, who is employed by Relocation and has advised Relocation in this course of conduct and misrepresentation. Whether Lawyer A has a duty to report Lawyer B under Rule 8.3 (a) 2 is based upon a two-prong test: first, a lawyer must have information indicating that another lawyer has committed a violation of the Rules of Professional Conduct. Rule 8.4(c) prohibits a lawyer from engaging in conduct involving dishonesty, fraud, deceit or misrepresentation which reflects adversely on that lawyer’s fitness to practice law. Rule 8.4(c). 3 Since the committee has opined above that Lawyer B’s conduct involved fraud the committee believes that the first prong of the test has been met. Second, the lawyer in possession of information regarding the conduct of another lawyer must determine whether the misconduct “raises a substantial question as to that lawyer’s fitness to practice law in other respects.” Following the analysis used in LEO 1522 4, the committee is of the opinion that Lawyer B’s knowing failure to record the first deed and thereby fraudulently substituting a second front page on the deed does raise a

2

RULE 8.3

Reporting Misconduct

(a) A lawyer having reliable information that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer's honesty, trustworthiness or fitness to practice law shall inform the appropriate professional authority. 3

RULE 8.4

Misconduct

It is professional misconduct for a lawyer to:
(c) engage in conduct involving dishonest, fraud, deceit or misrepresentation which reflects adversely on the lawyer’s fitness to practice law; 4

LEO 1522 involved a similar fact pattern in that a lawyer knowingly stated an incorrect consideration on a deed for the purpose of avoiding the payment of the grantor’s tax on a higher amount and the committee found that lawyer to have made a false statement of fact in violation of DR 7-102(A)(5) and DR 1102(A)(4), which trigged the requestor’s duty to report under DR 1-103(A). LEO 1522 analysis was based upon DRs 1-102(A)(4), 1-103(A) and 7-102(A)(5) which are substantially the same as Rule 8.4, 8.3 and 3.3(a)(1).

Committee Opinion
September 25, 2007
substantial question as to the lawyer’s fitness to practice law in other respects and thereby triggers Lawyer A’s duty to report, unless there are additional mitigating circumstances. 5 This opinion is advisory only, based only upon the facts presented and not binding on any court or tribunal.

5

The Committee cautions that this conduct may involve criminal conduct in altering a document that was attested to and notarized, however that involves a legal analysis.