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                                         159 N.J. L.J. 1050
                                        9 N.J.L. 497
                                        March 13, 2000< br>


Appointed by the Supreme Court of New Jersey


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.