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159 N.J.
L.J. 1050
9 N.J.L. 497
March 13, 2000<
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ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the Supreme Court of New Jersey
OPINION 688
Attorney-owned Title Abstract
Company Providing Title Reports
for Foreclosure Purposes
The Advisory Committee on Professional Ethics has been asked
whether the principals of a law firm may establish a separate title
abstract company, in the form of a limited liability company, to
provide title reports for their law firm's foreclosure clients.
Under the facts presented, we find that they may not.
The proposed new entity would not be involved in obtaining
title insurance, but rather would be limited in its business to
securing necessary searches from independent contractors, reviewing
the materials received and preparing title reports.See footnote 11 The reports
would be submitted to the law firm for its use in prosecuting the
foreclosure actions for its clients. The title abstract company
office would be located in the same general space as the law firm
but would have a separate office with separate signage. For each
report submitted, the abstract company would bill the law firm
which in turn would bill the client as a pass through expense. The
title abstract company's liability for each report would be
expressly limited to $1,000.
The inquirer correctly points out that the opinions of this
Committee which prohibit lawyers who own controlling interests in
title companies, or title abstract companies which act as agents
for title companies, from referring clients to those companies, are
grounded in the premise that there is an inherent conflict between
the title insurer and the real estate purchaser. On the one hand,
the title insurer seeks to limit its liability, while on the other,
the purchaser would want to expand it. (See, e.g., Opinion 495, 109
N.J.L.J. 329 (1982); Opinion 513, 111 N.J.L.J. 392 (1983); Opinion
639, 125 N.J.L.J. 874 (1990); and, most recently, Opinion 682, 143
N.J.L.J. 454, 5 N.J.L.J. 258 (1996), aff'd, In re Opinion 682, 147
N.J. 360 (1997). Since the present intent of the inquirer in the
instant circumstances does not include the purchase of title
insurance, this rationale is not applicable.See footnote 22
However, the concern of the Committee is broader than this.
RPC 1.8(a) provides:
A lawyer shall not enter into a business
transaction with a client or knowingly acquire an
ownership, possessory, security or other pecuniary
interest adverse to a client unless (1) the
transaction and terms in which the lawyer acquires
the interest are fair and reasonable to the client
and are fully disclosed and transmitted in writing
to the client in manner and terms that should have
reasonably been understood by the client, (2) the
client is advised of the desirability of seeking
and is given a reasonable opportunity to seek the
advice of independent counsel of the client's
choice on the transaction, and (3) the client
consents in writing thereto.
In Opinion 657, 130 N.J.L.J. 656, 1 N.J.L. 129 (1992), which
involved a personal injury attorney's participation in a medical-
legal consulting business and a matrimonial attorney's
participation in a divorce mediation service company, we said:
Where, as here, the subject matter of the
legal representation and the services to be
provided by the business entity are related,
special precautions must be provided beyond
those detailed in the rule. Absent the
safeguards to be discussed below, lawyers
should not be able to freely refer a client in
need of a service related to the legal
representation or its subject matter to any
business enterprise in which they maintain an
ownership or controlling interest, or from
which they drive income or profit.
It is clear that a client has a special
trust in, and is frequently dependent upon,
the independent judgment of the lawyer, which
is always to be exercised in the client's best
interests, free from any outside influences.
The possibility of referral of legal clients
to another business of the lawyer introduces
an extraneous and potentially conflicting
motive, which can threaten or interfere with
the lawyer's independence of judgement. At the
same time, because of the trust and dependence
that the client must place on the lawyer, a
client's ability to independently evaluate the
desirability or necessity of following through
on such a referral is presumptively impaired.
The situation is inherently coercive,
rendering even the standard approach of full
disclosure and informed consent suspect.
Without barring the possibility of such a
referral entirely, we conclude that a lawyer
may only refer a legal client to a business
the lawyer owns, operates, controls, or will
profit from, if the lawyer has (1) disclosed
to the client in writing, acknowledged by the
client, the precise interest of the lawyer in
the business, and that the same services may
be obtained from other providers, and (2)
advised the client, orally and in writing, of
the desirability of seeking and is given a
reasonable opportunity to seek the advice of
independent counsel of the client's choice as
to whether utilization of the business in
question is in the client's interest.
We also reaffirm the conclusions reached
in Opinion 532, 113 N.J.L.J. 544 (1984) and
Opinion 540, 114 N.J.L.J. 387 (1984) that
lawyers must keep their law practices entirely
separate from their business enterprises.
Consequently, lawyers must operate their
practices and businesses in physically
distinct locations, refrain from joint
advertising or marketing of the two, and avoid
any other demonstration of a relationship
between them.
In the present inquiry, the proposed title abstract company
would have office space within the law firm's offices, although it
would have a separate sign to identify it. Even if it meets all of
the other requirements of RPC 1.8(a) and Opinion 657, supra, 130
N.J.L.J. 656, 1 N.J.L. 129, We have serious doubt that the proposal
satisfies the requirement of a physically distinct location.
Of more serious concern to the Committee, however, is the fact
that the proposed title abstract company intends to limit its
liability to $1,000 for each abstract report. The Committee
recognizes that this is a common practice among abstract companies,
but generally any serious gaps in the title report would be covered
by title insurance. In this case there will be no title insurance.
Accordingly, the law firm's clients have very limited protection
against a possible serious omission, such as an undetected
intervening lien.
RPC 1.8(h) provides:
A lawyer shall not make an agreement
prospectively limiting the lawyer's liability
to a client for malpractice....
In this case, by interposing a separate entity and expressed
disclaimer, the attorney swill have facially limited the liability
they might have otherwise had to their clients, if they had
performed the same services as part of their law practice.See footnote 33
The Committee concludes that the parallel ownership of the law
firm and the title abstract company together with the similarity of
the services performed and proximity of their offices would create
confusion in the minds of their clients as to when the attorneys
were acting in their capacity as lawyers. The Committee further
concludes that the limitation of liability by the attorney owned
abstract company would improperly deprive their law firm clients of
the benefit of RPC 1.8(h).
***
Footnote: 1 1
Historically, the proposed functions of the title abstract company
were routinely undertaken by real estate lawyers themselves as part
of their practice.
Footnote: 2 2
In answer to an inquiry by the Committee, the law firm stated that
standing relationships with title companies by the title abstract
company were not contemplated “at this time.” The Committee has
assumed that if such relationships were to be developed in the
future, the law firm would not utilize those relationships for its
own clients. Opinion 682, supra, 143 N.J.L.J. 454.
Footnote: 3 3
In the ongoing debate regarding the practice of law in
interdisciplinary firms, one of the concerns voiced by those who
are opposed to the provision of ancillary services by law firms is
the confusion of clients as to the ethical obligations owed to them
by the ancillary services' businesses.