N.C. Gen. Stat (2005). Pursuant to N.C.G.S , the definition of what constitutes the "practice of law" in North Carolina includes:

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1 UNAUTHORIZED PRACTICE OF LAW IN NORTH CAROLINA AND THE CREATION OF A NEW CONSUMER PROTECTION TRADE ASSOCIATION TO ADVOCATE FOR THE INTERESTS OF NORTH CAROLINA CITIZENS I. What is the Unauthorized Practice of Law? North Carolina, like most states, has an unauthorized practice of law statute, which provides: [I]t shall be unlawful for any person or association of persons, except active members of the Bar of the State of North Carolina admitted and licensed to practice as attorneys-atlaw, to appear as attorney or counselor at law in any action or proceeding before any judicial body, including the North Carolina Industrial Commission, or the Utilities Commission;... to maintain, conduct or defend the same,... or, by word, sign, letter or advertisement, to hold out himself, or themselves, as competent or qualified to give legal advice or counsel, or to prepare legal documents, or as being engaged in advising or counseling in law or acting as attorney or counselor-at-law, or in furnishing the services of a lawyer or lawyers and it shall be unlawful [for any such unlicensed person] to give legal advice or counsel, perform for or furnish to another legal services, or to prepare directly or through another person, firm or corporation any will or testamentary disposition, or instrument of trust, or to organize any corporations or prepare for another person, firm or corporation, any other legal document. N.C. Gen. Stat (2005). Pursuant to N.C.G.S , the definition of what constitutes the "practice of law" in North Carolina includes: 1. The preparation or aiding the preparation of deeds, mortgages, wills, trust instruments, legal documents, and contracts by which legal rights are secured; 2. Preparing or aiding the preparation of any petitions or orders in any probate or court proceeding; 3. Abstracting or passing on titles, 4. The preparation and filing of petitions for use in any court, including administrative tribunals and other judicial and quasi-judicial bodies; or 5. By assisting by advice, counsel or otherwise in any legal work. N.C.G.S N.C.G.S Further, the North Carolina Supreme Court has also outlined the extent and definition of what constitutes the practice of law as follows:

2 In recent years the courts have been frequently called upon to determine what constitutes practicing law. Probably the definition more often quoted with approval is found in In re Duncan, 83 S.C. 186, 65 S.E. 210, as follows: "According to the generally understood definition of the practice of law in this country, it embraces... conveyancing, the preparation of legal instruments of all kinds, and, in general, all advice to clients, and all action taken for them in matters connected with the law." Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 184 S.E. 540 (1936). The term conveyancing is generally defined by Black s law dictionary as the transfer of title of property from one person to another, or the granting of an encumbrance such as a mortgage or a lien. Black's Law Dictionary (7th ed. 1999). In general, one who is handling or managing the process of closing the sale and purchase of real estate in North Carolina is engaged in conveyancing, which according to the North Carolina Supreme Court is the practice of law reserved to licensed attorneys under Chapter 84. See Id. The purpose of UPL statutes in North Carolina is for the protection of the general welfare of the public against incompetence and dishonesty. See Pledger, 257 N.C. 257 at 636, 127 S.E.2d at 339. These laws help to protect the public from severe economic and emotional consequences which may flow from erroneous advice given by persons untrained in the law. See Joyce Palomar, The War Between Attorney and Lay Conveyancers-- Empirical Evidence Says Cease Fire!, 31 Conn. L. Rev. 423, (1999) (discussing the disputes involving UPL and lay real estate settlement service providers). In North Carolina, the power to police UPL has been statutorily granted to the judiciary with investigation and inquiry powers granted to the North Carolina State Bar. N.C. Gen. Stat. 84-4, 84-7, 84-8 and 84-37; see also Gardener v. N.C. State Bar, 316 N.C. 285, 288, 341 S.E.2d 517, 519 (1986). To constitute the unauthorized practice of law it is necessary that the person charged with such a violation of the law shall have, at a minimum, held himself out to the public as a lawyer. State v. Bryan, 98 N.C. 644, 4 S.E. 522 (1887). Of course, there are limited circumstances where persons not licensed by the North Carolina State Bar may perform legal services and thus practice law on behalf of a third party. There are two specific exceptions allowing persons or entities other than licensed attorneys and law firms to provide legal services, including 1. A non-profit corporation organized under Chapter 55A for the sole purpose of rendering indigent legal services provided such services are rendered through North Carolina licensed attorneys; and 2. A law school conducting a legal clinic and receiving as clientage only those persons unable to afford legal advice or services rendered. North Carolina General Statute 84-5 and the holding in Lexis-Nexis v. Travishan Corp., generally prohibits a corporation from practicing law or appearing as an attorney. Lexis-Nexis v. Travishan Corp., 155 N.C. App. 205, 573 S.E.2d 547 (2002). Lawyers employed by a corporation are also not permitted to appear on the corporation s behalf in court, except for the limited purpose of avoiding default or prosecuting a claim in small claims court. Duke Power 2

3 Co. v. Daniels, 86 N.C. App. 469 (1987). A corporation may also not be represented pro se by its CEO, a member of its board of directors, or shareholders. See Lexis-Nexis v. Travishan Corp., 155 N.C. App. 205, 573 S.E.2d 547 (2002). Obviously, corporations specifically authorized to practice law (i.e., law firms) under Chapter 55B of the General Statutes are exempted from the prohibition set forth in N.C.G.S North Carolina courts on several occasions have addressed the issue of what specific actions constitute the unauthorized practice of law under the state's UPL statutes. In Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 184 S.E. 540 (1936), the North Carolina Supreme Court decided whether a motor club's operation of a claims and adjustment department constituted the unauthorized practice of law. Id. at 630, 184 S.E. at 543. In Seawell, the claim and adjustment services of Carolina Motor Club were performed by lay employees and agents of the club, and by attorneys employed, retained, and paid by the Motor Club. Id. at 629, 184 S.E. at 542. As stated by the Court in Seawell, North Carolina's UPL statutes were not enacted for the purpose of giving the legal profession a monopoly in the preparation of legal documents, but rather to provide "security of the people against incompetency and dishonesty in an area of activity affecting general welfare." State v. Pledger, 257 N.C. 634, 637, 127 S.E.2d 337,339 (1962). Nevertheless, the Seawell court concluded that the offering of legal services by the Motor Club for compensation violated the ban on unauthorized practice by corporations. Id. at 632, 184 S.E. at 545. The court reasoned that "[a] corporation cannot lawfully practice law and that it is a personal right of the individual... [that] cannot be delegated or assigned... Id. at 631, 184 S.E. at 544. Since a corporation cannot practice law directly, it cannot do so indirectly by employing lawyers to practice for it. As noted briefly above, the Seawell case is noteworthy as it addresses what is included within the term practice of law and specifically notes real estate conveyancing as being embraced within the definition of the quoted phrase which is set forth in N.C. Gen. Stat Thus, the North Carolina Supreme Court has recognized that conveyancing or closing real estate purchase and sale transactions has been considered by our highest Court to be the practice of law since In Gardner v. North Carolina State Bar, 316 N.C. 285, 341 S.E.2d 517 (1986), the North Carolina Supreme Court upheld an ethics opinion of the North Carolina State Bar finding a UPL violation. The North Carolina State Bar had determined that an attorney who was also a fulltime salaried employee of an insurance company could not represent an insured as counsel of record. Id. at 288, 341 S.E.2d at 519. The North Carolina Supreme Court found that representation by the attorney would constitute the unauthorized practice of law. Id. The court affirmed the Bar's reasoning that allowing attorney-employees to represent insureds would "violate the ban on the practice of law by corporations" and that "the proposed practice would result in an increased risk of conflicts of interest that the Bar considered unacceptable." Id.; see also Lexis-Nexis v. Travishan Corp., 155 N.C. App. 205, 573 S.E.2d 547 (2002). II. Who Prosecutes UPL and How? Who has the Statutory Authority to Investigate UPL? The legal authority to investigate UPL is vested in the North Carolina State Bar Council or any of its committees appointed by it 3

4 for that purpose (i.e. the AP Committee), including the power to investigate charges or complaints of: 1. unauthorized or unlawful practice of law; or 2. the use of the designations, North Carolina Certified Paralegal, North Carolina State Bar Certified Paralegal, or Paralegal Certified by the North Carolina State Bar Board of Paralegal Certification. N.C.G.S (a); 27 North Carolina Administrative Code (NCAC).0206(1). District attorneys also have inherent power to investigate UPL arising from the fact that any person found violating the provisions of N.C.G.S to 84-8 (prohibiting the practice of law by persons unlicensed to practice in this State) may be found guilty of a Class 1 criminal misdemeanor. The North Carolina State Bar established the AP Committee to investigate allegations of UPL and to protect the public from being unlawfully advised and represented in legal matters by unqualified persons. 27 NCAC District bars are not permitted to conduct separate proceedings into UPL matters and are required by State Bar regulations to assist and cooperate with the State Bar in reporting and investigating matters of alleged UPL. 27 NCAC.0202(b). Thus, in terms of the profession policing UPL, the power to investigate and enjoin UPL is statutorily vested in the North Carolina State Bar. There are several layers of responsibility within the State Bar for addressing the issue of UPL. The State Bar Council supervises the administration of the AP Committee and appoints a counsel who serves at the pleasure of the council. 27 NCAC The Chair of the AP Committee has general power to supervise counsel, to recommend to the AP Committee an investigation be initiated, that a complaint be dismissed, to direct that a letter of notice to an accused person be sent, to notify an accused if a complaint is dismissed, to call meeting of the AP Committee, to issue subpoenas, to administer oaths, and to file and verify complaints. 27 NCAC.0205(a). The AP Committee s powers in connection with the unauthorized practice of law include: 1. to direct counsel to investigate alleged UPL; 27 NCAC.0206(1); 2. to hold preliminary hearings, find probable cause, and recommend to the Executive Committee of the State Bar that a complaint for injunction be filed against a respondent; 27 NCAC.0206(2); 3. to dismiss allegations of UPL upon a finding of no probable cause 27 NCAC.0206(3); 4. to issue letters of caution, which may include a demand to cease and desist, to respondents in cases where the Committee concludes that a) there is probable cause to believe that a respondent has engaged in UPL, but 4

5 i. the respondent has agreed to refrain from engaging in the conduct in the future; ii. respondent is unlikely to engage in the conduct again; or iii. either referral to a district attorney or complaint for injunction is not warranted under the circumstances. b) there is no probable cause established that respondent has engaged in UPL, but i. the respondent s conduct may be improper and may become the basis for injunctive relief if continued; ii. the Committee otherwise finds it appropriate to caution the respondent; 5. to direct counsel to stop an investigation and take no action; 27 NCAC.0206(5); 6. to refer a matter to another agency, including the district attorney for criminal prosecution and to other committees of the North Carolina State Bar; 27 NCAC.0206(6) 7. to issue advisory opinions as to whether contemplated conduct of nonlawyers would constitute UPL in North Carolina; 27 NCAC.0206(7). The AP Committee and its Chair rely heavily on the work performed by its counsel. The AP Committee counsel is likely the person that the public has the most contact with on a day to day basis in connection with alleged UPL matters and on-going investigations by the State Bar. The counsel serving the AP Committee has the power and duty 1. to initiate an investigation when authorized by the Chair; 27 NCAC.0207(1); 2. to direct a letter of notice to a respondent when authorized by the Chair; 27 NCAC.0207(2); 3. to investigate matters of alleged UPL whether initiated by filing of a complaint or otherwise 27 NCAC.0207(3); 4. to recommend to the Chair a matter be dismissed if the complaint is frivolous or falls outside the Council s jurisdiction; that a letter of notice be issued; or that a matter be considered by the AP Committee; 27 NCAC.0207(4); 5. to prosecute all UPL matters before the AP Committee and the courts; 27 NCAC.0207(5); 6. to represent the State Bar in any trial or proceeding regarding alleged UPL; 27 NCAC.0207(6); 5

6 7. to employ assistant counsel, investigators, and other administrative personnel as the Council may authorize; 27 NCAC.0207(7); 8. to maintain permanent records of all matters and the disposition of same; 27 NCAC.0207(8); and 9. to perform such other duties the council may from time to time direct; 27 NCAC.0207(9); The Council of the North Carolina State Bar, through the AP Committee and its counsel, may also bring or cause to be brought and maintained in the name of the North Carolina State Bar an action or actions, against any person or entity that engages in rendering any legal service, holds himself or herself out as a North Carolina certified paralegal by use of the designations set forth above, or makes it a practice or business to render legal services that are unauthorized or prohibited by law. Id. Upon receiving a recommendation from the AP Committee that a complaint seeking injunctive relief be filed, the State Bar Executive Committee reviews the matter and determines whether injunctive relief is necessary to protect the public interest and ought to be prosecuted. 27 NCAC.0208(a). Upon deciding a matter ought to be pursued, the State Bar Executive Committee directs counsel to prepare the necessary pleadings as soon as practical for signature by the chairperson and filing with the appropriate tribunal. 27 NCAC.0208(2). If the State Bar Executive Committee decides not to follow the AP Committee s recommendation, the matter then goes before then full State Bar Council at the same quarterly meeting to determine whether the recommended action is necessary to protect the public interest and ought to be prosecuted. 27 NCAC.0208(c). If the Council decides not to follow the AP Committee s recommendation, the matter is referred back to the AP Committee for alternative disposition. 27 NCAC.0208(d). If probable cause exists to believe a respondent is engaged in UPL and immediate action is needed to protect the public interest before the next quarterly meeting of the AP Committee, the chairperson, with the approval of the president of the Council, may file and verify a complaint or petition in the name of the North Carolina State Bar. 27 NCAC.0208(e). Thus, in addition to its explicit authority to investigate UPL under N.C.G.S , the State Bar is also vested with the authority to go to court to secure an order to enjoin such unlawful conduct. In any action brought to restrain or enjoin UPL or other conduct prohibited by N.C.G.S , any final judgment in favor of the North Carolina State Bar perpetually restrains the defendant or defendants from the commission or continuance of the unauthorized or unlawful act or acts. N.C.G.S (b). Further, a temporary injunction to restrain the commission or continuance of the act or acts complained of may be granted upon proof or by affidavit that the defendant or defendants have violated any of the laws applicable to the unauthorized or unlawful practice of law or any designation implying certification by the North Carolina State Bar. Id. Venue for actions brought to enjoin conduct prohibited by Chapter 84 is in the superior court of any county in which the relevant acts are alleged to have been committed or in which there appear reasonable grounds that they will be committed in the county where the defendants in the action reside, or in Wake County. N.C.G.S (c). In actions brought under Chapter 84, the North Carolina State Bar has the power to examine the adverse party and witnesses before filing 6

7 a complaint and before trial in the same manner as in civil actions and as permitted by law. N.C.G.S (d). The North Carolina State Bar or its duly appointed committee may also issue advisory opinions in response to inquiries from members of the public regarding whether contemplated conduct would constitute UPL. N.C.G.S (f). The AP Committee has issued two advisory opinions of note involving lay closers in residential real estate transactions and whether a non-attorney can represent a third party in a quasi-judicial variance or special use hearing which are discussed in more detail below. Who is responsible for enforcing Chapter 84 prohibitions against UPL? While the State Bar does have the authority to enjoin UPL under N.C.G.S , District attorneys across the State also have a statutory duty to enforce that laws prohibiting UPL. Specifically, the district attorney of any of the superior courts shall, upon the application of any member of the Bar, or of any bar association, of the State of North Carolina, bring such action in the name of the State as may be proper to enjoin any person, corporation or association of persons who are alleged to have violated the prohibitions against UPL set forth in N.C.G.S to N.C.G.S It is also the stated duty of the district attorneys of this State to indict any person, corporation, or association of persons upon the receipt of information of the violation of the provisions of N.C.G.S to Persons found to have violated the provisions of N.C.G.S to 84-8 shall be guilty of a Class 1 misdemeanor. In Baars v. Campbell University, Inc., 148 N.C. App. 408, 558 S.E.2d 871 (2002), the Court of Appeals found that a private individual could not recover from a corporation for alleged UPL under N.C.G.S because that statute does not provide a private cause of action. Though not specifically decided by this opinion or in any other North Carolina case reviewed by this author, and in light of the holding in Baars, it is likely a court could similarly find that there exists no private cause of action for an individual s violation of the prohibition in N.C.G.S against UPL. If that is the case, the only options for direct enforcement of Chapter 84 prohibitions against UPL as to persons or companies engaged in UPL is through injunction proceedings initiated and prosecuted by the North Carolina State Bar or a local district attorney, or by prosecution of an offender by a district attorney for the criminal offense of unauthorized practice of law which is a Class 1 misdemeanor under N.C.G.S III. Real Estate UPL in North Carolina Background of How We Got to Where We Are. As many attorneys across the State can recall, the issue of non-lawyers or lay closers conducting and closing residential real estate loans was hotly debated by the North Carolina State Bar from 1999 to Initially, a State Bar Formal Ethics Opinions in 1999 held that an attorney must be present and readily available to answer questions at a residential real estate closing (99 Formal Ethics Opinion 13), and two Formal Ethics Opinions in 2001 confirmed and clarified the requirement that an attorney be 7

8 physically present at the closing table (2001 FEO 8 and 2001 FEO 4). These actions by the Ethics Committee caused the Department of Justice and the Federal Trade Commission to intervene and write a letter dated December 14, 2001 to the North Carolina State Bar Ethics Committee objecting to mandatory attorney presence at residential real estate closings. The grounds laid out by the DOJ/FTC as to their objections to 2001 FEO 8 and 2001 FEO 4 included that requiring attorneys to be physically present at closing would: 1. force consumers preferring to forego attorney presence at the closing to hire an attorney; 2. raise the cost of closings and refinancing; 3. reduce competition from out-of-state lending companies; and 4. result in harmful delays in the closing process. See Letter from the Federal Trade Commission and the Department of Justice to the Ethics Committee, North Carolina State Bar (December 14, 2001). A copy of this letter may be obtained by pointing your web browser to /hdocs/docs/doj/usdojncbar121401ltr.pdf. In the jointly issued letter, the FTC and DOJ warned the North Carolina State Bar that prohibiting laypersons from conducting residential real estate closings under the guise of constituting UPL may create monopoly conditions and therefore violate federal antitrust laws and Constitutional prohibitions against restraining interstate commerce among the states. Id. On receiving the objections of the FTC and DOJ, the State Bar initiated a further inquiry into the legality and justifications surrounding 2001 FEO 8 and 2001 FEO 4. The State Bar formed a Special Committee on Real Estate Closings which issued 2002 Formal Ethics Opinion 9 and 2002 Advisory Opinion 1. After receiving comment from various stakeholders and reviewing and revising draft opinions, the State Bar adopted these opinions on January 24, The 2002 Authorized Practice Advisory Opinion 1 ( 2002 APAO 1 ) addressed two main questions. First, may a non-lawyer handle or represent any party in a residential real estate closing. As to this question and issue, and after explaining the primary phases and functions performed in the typical real estate closing, the State Bar answered quite definitively in the negative. The State Bar listed eight specific activities that, if performed by a non-attorney, would constitute UPL: 1) performing abstracts or providing an opinion as to the title of real property; 2) explaining the legal status of a real estate title, the legal impact of anything found in the chain of title, or the legal effect of any title insurance commitment exception, unless a licensed title insurer, agency, or agent explains an underwriting decision to the insured or prospective insured; 3) explaining or giving advice regarding the rights or responsibilities of parties concerning the land survey to the extent such explanations affect the parties' legal rights or obligations; 8

9 4) providing legal opinions or advice at the request of any party; 5) advising or instructing a party to the transaction regarding alternate means of taking title to the property or the legal consequences of acquiring property in a particular manner; 6) drafting legal documents for a party to the transaction or assisting a party in the completion of a legal document or aiding a transaction party in choosing the appropriate legal document form from among several forms; 7) explaining or recommending a course of action which requires legal judgment or will affect a party's legal rights or obligation; 8) attempting to resolve or settle a dispute between the parties that will affect their legal rights or obligations. It is the State Bar s answer to the second question raised in 2002 APAO 1 that apparently created conditions that caused lay closing companies to believe they had won a victory and a presumed right to begin new businesses closing real estate loans in North Carolina. The second question raised by the State Bar in 2002 APAO 1 asked: May a non-lawyer who is not acting under the supervision of a lawyer licensed in North Carolina (1) present and identify the documents necessary to complete a North Carolina residential real estate closing, direct the parties where to sign the documents, and ensure that the parties have properly executed the documents; and (2) receive and disburse the closing funds? As to these two specific questions, the State Bar answered in the affirmative ruling that a non-lawyer may oversee a closing as long as he does not participate in any of the eight functions outlined by the State Bar which constitute the practice of law. After interpreting a green light from the State Bar, several homegrown and out-of-state lay closing companies continued at a faster pace to set up shop and market their services for closing real estate loans despite the State Bar s specific ruling that only attorneys could handle a residential real estate transaction. The primary business model adopted by the lay closers involved a company that marketed services to real estate agents, lenders, mortgage brokers, banks, etc., that they could close real estate loans as a single source closing provider. Some closing companies even offered discounts to real estate professionals offering 10% off your buyer s closing costs. The goal of the closing companies was to secure as many buyer clients as possible from other real estate professionals and lenders and provide settlement or closing services in connection with residential real estate transaction. Typically, these companies have been operated by persons with real estate backgrounds. Based on interviews and correspondence, the companies hire paralegals to conduct, manage, and oversee the closing process. They directly contract with abstractors who perform title searches, oftentimes in far and distant locations from the attorneys which are then contracted to review and certify title which was searched by the non-lawyer paralegal or abstractor. The lay closing 9

10 company sometimes even provided a title report to a licensed attorney who, for documented fees as small as $7.50, would review the title documents secured by the closing company s abstractor and certify same back to a title company for issuance of the required title insurance policies. The lay closing shop would then get the attorney to review and approve deed drafted by employees of the lay settlement shop, or have the attorney prepare it for a relatively small fee (usually $50) and forward to the closing company for execution at a closing conducted at the lay closing shop by its non-lawyer employee. Prior to closing, the lender will have provided the loan documents to the closing company along with closing instructions. The closing company normally prepared the HUD-1 settlement statement as well and is listed thereon as the settlement agent. At this point, all the elements necessary to close a real estate loan would be in place and no attorney would have ever had occasion to establish a lawyer-client relationship with the prospective buyer-borrower or exercise any independent professional judgment on behalf of the borrower. Rather, the client relationship was between the closing company and the buyer-borrower, and the closing company quarterbacks the entire closing process including contracting out the two functions that were specifically defined by statute as practicing law under N.C.G.S These closing practices effectively eliminate the traditional interface between lawyer and borrower/client, and the transaction is largely if not completely handled by the lay closing shop on behalf of the borrower/client. After numerous UPL complaints to the Bar Association s Consumer Protection Committee and to the State Bar Authorized Practice Committee, the State Bar began to take action and find that the business model of several of the more aggressive closing companies was illegal and ordered them to cease and desist their illegal business practices. Unfortunately for the closing companies, it appears they miscalculated the intent and breadth of the State Bar s ruling 2002 APAO 1 by interpreting its limitations overly narrow and viewing its permitted conduct overly broad to authorize lay closing shops in North Carolina to conduct real estate closings. The primary problem for the State Bar was that the closing companies had turned 2002 APAO 1 on its head. In that advisory opinion, its was clear that the State Bar was of the opinion that non-lawyers are not authorized by North Carolina law to handle a residential real estate transaction. Yet, by their actions, many closing companies supplanted the attorney role in the closing process entirely and the attorneys were transformed into, in essence, a mere contractor for the closing companies who otherwise managed and controlled the entire closing process. As a result, the relationship with the borrower-buyer client was primarily with the closing company, and not with the attorney that by law is supposed to be tasked with handling the real estate closing. One of the recent illustrative cases of UPL by a closing company using such a business model involved a company located in Charlotte that operated under the name The Settlement Source ( TSS ). This company was found by the State Bar on at least two separate occasions to have engaged in business practices in violation of Chapter 84 and issued two separate letters of caution to cease and desist. Evidence was revealed that a lawyer working for the company was certifying title and preparing deeds for closings, which violates the prohibition in N.C.G.S

11 against corporations practicing law. TSS then began to send title work and deed preparation to a Florida licensed attorney who had failed the North Carolina Bar Exam at the time and was unlicensed to practice law. This Florida licensed attorney shared an office suite with TSS as well. After it was brought to the Florida attorney s attention that her conduct violated Chapter 84 prohibitions against UPL, she established through filing with the State Bar a registered interstate law firm. To do so, the Florida attorney hired a North Carolina attorney that supervised the title work and deed preparation at the interstate law firm. After several complaints that initiated an investigation and hearings before the Authorized Practice Committee, the chair of the committee issued a July 30, 2007 Cease and Desist Letter to TSS that restated the thrust of 2002 APAO 1 and its prohibition against nonlawyers handling residential real estate closings. To access and review a copy of the July 30, 2007 Cease and Desist Letter from Anthony Di Santi, Chair of the AP Committee, to counsel for The Settlement Source click on the following weblink: The Settlement Source Cease and Desist Letter specifically found that the business model created by TSS, which is described in general terms above, was illegal. Among the facts which led the AP Committee to conclude the company was engaging in illegal UPL include: i. offering to provide residential real estate closing services, ii. marketing the company s services to real estate agents, homebuilders, and lenders, iii. holding out as able to provide the full panoply of real estate closing services, iv. advertising title services and the services of a paralegal who will prepare documents and bring intimate knowledge about the process... to the closing table, v. advertising that as part of the company s services they review every document and look for errors, uncover hidden pitfalls, anticipate needs, and troubleshoot potential problems, vi. making arrangements with attorneys to provide title opinions and legal documents for or on behalf of the buyer and the lender for closings conducted by Settlement Co., vii. employing paralegals to provide title abstracts to attorneys that Settlement Co. engages to provide the legal, closing services, viii. preparation of deeds, and ix. intermingling resources (including domain names) with at least one attorney making it appear that the attorney was part of Settlement Co. 11

12 The July 30, 2007 Cease and Desist letter also concluded that TSS marketing of its real estate closing services to real estate agents, homebuilders and lenders is illegal and must cease immediately as such marketing stated or implied the company can provide all the necessary services for a closing so as to convince these parties to influence the buyer s decision to use TSS closing services. Re-emphasizing that 2002 APAO 1 prohibits non-lawyers from handling residential real estate closings, it follows that non-lawyers are also prohibited from holding themselves out and advertising their business as a one-stop loan closing solution. In addition, the Florida licensed attorney which assisted TSS through a registered interstate law firm was also issued a Cease and Desist letter for UPL in connection with her actions closing residential real estate loans as counsel for TSS and for circumventing North Carolina laws against UPL in forming the separate registered interstate law firm with no substantial presence out-of-state and hiring North Carolina attorneys to oversee her work closing real estate loans in this state. See Cease and Desist Letter dated July 30, 2007 to Tracy Cabanis-Robinson, which can be viewed at the following weblink: Another illustrative case resulting in an action by the State Bar involved a company called Accurate Title Group. A copy of the Cease and Desist Letter issued to Accurate Title Group can be accessed and reviewed by clicking on the following weblink: Though the State Bar stood firm in issuing the July 30, 2007 Cease and Desist Letter to TSS and Accurate Title Group, other lay closers continue to close loans across North Carolina in a variety of business models, some legal and others in violation of Chapter 84. Those companies that restrict their services and marketing to only services of (a) identifying documents and telling borrower-buyers where to sign, and (b) receiving and disbursing closing funds, have not in the past run afoul of the State Bar and its ruling in 2002 APAO 1. It is doubtful that a lay closing shop can survive by providing these limited services in a market where attorneys generally include such services in their closing fee. However, those companies that perform services other than the two stated loan closing functions set out by the State Bar, or advertise their business and hold themselves out as able to provide other loan closing services which constitute the practice of law as defined and delineated by North Carolina law and 2002 APAO 1, may be at risk of engaging in illegal UPL. In the summer of 2009, after the FBI was contacted in connection with the failure by TSS to disburse closing proceeds in numerous transactions, the company was shut down and closed by its owners. Subsequently, it was revealed that the owners of TSS had taken over $2.6 million dollars of client funds which has not been repaid. At least one of the owners of TSS was sentenced to active prison time. The title insurance company insuring the closings that were affected was on the hook for some or all of the $2.6 million. The only persons harmed by the unlawful business practices of TSS and others like them are consumers. Individual consumers lose money, pay exorbitant fees, and receive legal services performed by persons not trained in the law or duly licensed to provide legal services to the public. Consumers as a whole end up paying increased title insurance premiums to cover the losses title insurance companies pay out in cases such as the TSS matter (and in cases of attorney defalcation as well). Indeed, the newest title insurance rate structure approved in 2010 by the 12

13 North Carolina Department of Insurance increased the rate for title insurance in North Carolina from $2.00 per $1, of purchase price to $2.05 per $1, of purchase price between $100,000 and $500,000. Though a 2.5% rate hike seems small, given the total amount of coverage provided in North Carolina real estate transactions on an annual basis, the increased cost to North Carolina consumers as a whole is quite substantial in terms of increased costs. IV. Massachusetts Real Estate Closing Industry at Stake and Potential Ramifications for North Carolina The Real Estate Bar Association of Massachusetts, Inc. (REBA) is 501(c)(6) trade association comprised of over 4,000 real estate attorney members throughout the Commonwealth of Massachusetts. For over 150 years, REBA s mission has been to advance the practice of real estate law by creating and sponsoring professional standards, actively participating in the legislative process, protecting the rights and interests of consumers, seeking redress in courts where needed, creating educational programs and materials, and demonstrating and promoting fair dealing and good fellowship among members of the real estate bar across the State of Massachusetts. National Real Estate Information Services, Inc. (NREIS) is Pittsburgh-based national real estate closing firm which provides both conveyancing and title services to residential lender clients for real estate transactions across the United States, including Massachusetts and North Carolina. In November 2007, the Real Estate Bar Association of Massachusetts ( REBA ) filed an action in Massachusetts state court against National Real Estate Information Services ( NREIS ) seeking to enjoin NREIS from the unauthorized practice of law. A copy of the complaint can be viewed at NREIS removed the action to federal court and filed a counterclaim asserting that any restriction on its business practices was a violation of its federal constitutional rights under the dormant commerce clause. Subsequently, the parties filed cross-motions for summary judgment. In April 2009, the District Court granted NREIS s Motion for Summary Judgment and denied REBA s cross motion. An article discussing the District Court s ruling can be viewed at the following weblink: REBA appealed the District Court s decision and requested certification of questions of state law to the First Circuit Court of Appeals. Following a hearing the First Circuit held that there was no constitutional violation and vacated the District Court s judgment. The First Circuit Court s opinion ultimately found that there was no controlling precedent which address whether NREIS s activities constitute the unauthorized practice of law and certified two questions to the Massachusetts Supreme Judicial Court. The issues litigated in Massachusetts during the last several years in REBA v. NREIS have been watched very closely in the industry. Indeed, the issues presented in Massachusetts are almost identical to ones faced here in North Carolina with the influx of out-of-state, on-line, 13

14 non-traditional lenders, and lay settlement shops seeking to take advantage of a strong and emerging market for real estate sales. These settlement shops and lenders, including some of the largest banking names in the market, are seeking to expand services with in-house or affiliated companies and vendors seeking to provide a host of closing related services from closing and settlement services, loan brokerage, title insurance, appraisals, and others. In the process, the traditional role of the attorney in quarterbacking a real estate transaction and working with the lender and it s borrower to coordinate the closing process and legal relationships that result is being supplanted by non-attorney vendors seeking closing business within Massachusetts, North Carolina, and all across the United States. When these affiliated companies and vendors are involved, it is observed that their primary concern is more often to please the lender who feeds them a continuing stream of closing referrals, and thus, these non-attorney closers are prone to answer and cater almost exclusively to the whims and desires of lenders (often the to the detriment of consumers). In the process, the welfare of consumers or real estate settlement and closing services has been and is being sacrificed. In a huge victory for Massachusetts real estate closing attorneys, the unanimous First Circuit federal appeals court overturned the controversial lower District Court ruling in REBA v. NREIS which had potentially opened the door for non-attorneys to conduct controversial witness or notary real estate closings in Massachusetts. The lower court ruling had threatened to overturn long-standing statewide practice under which attorneys conduct real estate closings which would have opened the door for the influx of notary or witness closings where buyers and sellers receive no legal guidance during the closing. A copy of the First Circuit court s opinion can be viewed at the following weblink: (hereinafter 1st Circuit Opinion ). First Circuit Holds that Massachusetts Courts to Have the Final Say Regarding UPL The First Circuit ruled in REBA v. NREIS that the Massachusetts state Supreme Judicial Court has the final say on whether attorneys in that state must conduct real estate closings under rules governing the unauthorized practice of law. The case and two questions referred to the SJC, included: 1. Whether NREIS's activities, either in whole or in part, based on the record in this case and as described in the parties' filings, constitute the unauthorized practice of law in violation of Massachusetts laws prohibiting the unauthorized practice of law. 2. Whether NREIS's activities, in contracting with Massachusetts attorneys to attend closings, violate Massachusetts laws prohibiting the unauthorized practice of law. It goes without saying that the real estate bar in Massachusetts is hopeful that its Supreme Judicial Court will be more hospitable to the real estate attorneys position and rule in favor of their position that NREIS s business constitutes the unauthorized practice of law. Also pleasing 14

15 to REBA, the federal appeals court vacated the $900,000 attorney fee award by the District Court. Argument by REBA before the Massachusetts Supreme Judicial Court After the Court of Appeals certification of these two issues, and on November 2, 2010, the Massachusetts Supreme Judicial Court heard arguments in the closely watched case of REBA v. NREIS. The case now before the Massachusetts Supreme Judicial Court pits Massachusetts real estate closing attorneys versus out of state non-attorney settlement service providers which are attempting to perform witness or notary closings in Massachusetts. At stake is nothing less than the multi-billion dollar Massachusetts real estate closing industry. The long standing practice in Massachusetts has been for licensed attorneys to oversee and conduct the residential real estate closing process. However, NREIS s business model is designed to supplant the attorney s central role in the closing process, disaggregate the various functions or tasks associated with a real estate closing, and then outsource the vast majority of those functions to back office workers who aren t trained attorneys. REBA argues that this practice violates Massachusetts common law and consumer protection statutes requiring that attorneys perform the most vital functions of a real estate closing transaction, such as certifying and analyzing title, preparing the deed, handling the transfer of good funds, where necessary, and conducting the closing. The NREIS s Business Model Violates Massachusetts Law Prohibiting UPL REBA argues in their brief before the SJC that NREIS is providing conveyancing services to residential mortgage lender clients for real estate transactions (sales and refinancing) within Massachusetts in violation of statutory prohibitions against the unauthorized practice of law. See REBA Brief to the Massachusetts Supreme Judicial Court at (hereinafter REBA Brief ) The more fundamental argument by REBA is that the real estate closing is a process (the practice of conveyancing) that cannot be split up and delegated by an out-of-state corporation such as NREIS to non-attorney vendors each of which has little or no understanding or control over the closing process as a whole. It is important to bear in mind that NREIS does not provide these conveyancing or closing services itself. Rather, NREIS subcontracts limited portions of the work necessary to convey real estate to attorneys and others whom NREIS manages during the course of any particular real estate closing. In essence, NREIS is the center of the wheel surrounded by other supporting spokes or vendors which enable NREIS to accomplish the necessary tasks required for the company to handle a residential real estate closing from beginning to end and thereby handle the conveyance of real property from one party to another. According to REBA s 15

16 arguments, this constitutes conveyancing and handling or managing the real estate closing process, which is the unauthorized practice law. Conveyancing is the Practice of Law. According to established Massachusetts law, the practice of conveyancing is one which lends itself particularly to formulation through decisional law and commentary as to what are appropriate procedures. Falls River Sav. Bank v. Callahan, 18 Mass. App. Ct. 76, 83 (1984). In brief, the appropriate procedures consist of evaluating the title to real estate being purchased or mortgaged and undertaking the various further steps required to transfer the legal interests in that property. Since 1935, the Massachusetts Supreme Judicial Court has recognized that conveyancing is the practice of law to be conducted by attorneys. Opinion of Justices, 289 Mass. 607, 613 (1935) (practice of law includes conveyancing). Generally, all state courts agree that conveyancing in fact constitutes the practice of law. See Note, The Model Rules of Professional Conduct and the Unauthorized Practice of Law, 37 Suffolk U. L. Rev. 169, 176 (2004). See also Formal Advisory Opinion No. 04-1, 280 Ga. 227, 626 S.E.2d 480 (2006) ( The closing of a real estate transaction in this State constitutes the practice of law ); Bump v. District Court of Polk County, 232 Iowa 623, 637, 5 N.W.2d 914 (1942) ( practice of law... includes conveyancing ); Howton v. Morrow, 269 Ky. 1, 3, 106 S.W.2d 81 (1937) (same); People v. Allani, 227 N.Y. 334, , 125 N.E. 671 (1919) (same); Dayton Supply & Tool Co. v. Montgomery Cty. Bd. Of Revision, 111 Ohio St.3d 367, 369, 856 N.E.2d 926 (2006) (same); R.I. Bar Ass n v. Auto Serv. Ass n, 55 R.I. 122, 134, 179 A. 139 (1935 (same); S.C. Medical Malpractice Joint Underwriting Ass n v. Frolich, 297 S.C. 400, 377 S.E.2d 306 (1989) (same); In re Duncan, 83 S.C. 186, 65 S.E. 210 (1935); 7 Am. Jur. 2d Attorneys at Law, 119 ( The practice of law is not limited to the conduct of cases or litigation in court; it embraces... conveyancing ); Seawell v. Carolina Motor Club, 209 N.C. 624, 631, 184 S.E. 540, 544 (1936) (same). NREIS Engages in Conveyancing in Massachusetts. The first step in conveyancing is, according to the contract to purchase, to evaluate and determine whether a seller actually has good and clear record and marketable title that he can transfer to the seller, and that there are no defects or clouds in title. This is the due diligence portion of the conveyancing process which is comprised in large part by the title search, examination, and certification. According to REBA, NREIS has contracted with a non-attorney in Massachusetts, Connelly Title, to perform this core conveyancing function and as a result engaged in UPL. A subsequent step in the conveyancing process is the preparation of legal documents that transfer various interests in the real property being transferred by seller to buyer, and in the case of a mortgage from mortgagor to mortgagee. REBA presented documentation and proof that NREIS provided deeds and other legal documents to the parties to a transaction upon request. NREIS did not prepare the deed itself, but rather contracted with a non-attorney corporation located in Las Vegas, which prepares the deeds for its transactions. Again, according to REBA, these actions by NREIS constitute illegal UPL. After the title examination and document preparation, the next step in the conveyancing process is the settlement meeting or closing of the transaction at which the parties meet, execute the necessary legal documents to effect the conveyance, and exchange contractual consideration. NREIS s lender clients require NREIS to ensure that a Massachusetts attorney is engaged for 16

17 the purpose of conduction the closing. To do so, NREIS maintains a network of 70 Massachusetts attorneys for this purpose. Based on the date and place of the settlement, NREIS chooses one of these attorneys to attend and conduct the settlement meeting. NREIS provides the attorney selected the time and place of the meeting and provides the attorneys with contact information for the parties expected to attend. NREIS also informs the attorney how he or she will receive the documents prepared the lender (mail, fax or ). According to REBA these conveyancing functions performed by NREIS also constitute illegal UPL. In sum and substance, NREIS controls, handles, and manages the closing process and directs and oversees the conveyancing functions. For any NREIS closing, the attorney involved in the limited role of attending the settlement meeting has no contact with the lender and has very limited interface with the consumer-borrower. The attorney is not involved in (i) the preparation or review of documents to be executed by the parties at the settlement meeting, (ii) the examination or review of title to the property, (iii) the recording of title documents, or (iv) the disbursement of funds. Following the settlement meeting, where the contracted attorney acts merely as a notary witnessing the signatures of the parties to closing documents and is prohibited from providing any legal counsel to any of the parties as to the state of title or the legal import of the closing documents, the attorney merely collects the documents and sends them to NREIS. The manipulation of the attorney in this portion of the conveyancing process raises several ethical issues for attorneys including (i) ensuring they provide competent legal services to their clients, (ii) preserving and protecting the attorney s duty of loyalty to their client rather catering to a vendor management company such as NREIS whose incidental interest in the transaction is limited to a $450 settlement fee and a pipeline of continuous closing work desired by the kept attorney, (iii) avoiding illegal fee sharing with non-lawyers, and (iv) not allowing a non-lawyer to interfere with the professional independent legal judgment the attorney owes to his or her clients. Following the settlement meeting and after it receives the documents from the attorney notary closer, NREIS reviews them to ensure they are properly completed, just as any attorney closing a real estate transaction would do. Following this review, NREIS ensures that the title documents are properly recorded. Lender instructions to NREIS require NREIS to ensure that the mortgage to the lender creates a valid lien on the property. Other instructions require NREIS to make certain judgments as to applicable state law. According to REBA, these business practices by NREIS also constitute UPL in violation of Massachusetts law. The process for properly recording legal instruments with the register of deeds requires specialized legal knowledge. In Massachusetts each registry of deeds has within it two independent systems of land record-keeping. One is a Torrens-type system and the second is an unregistered land system managed by local registers of deeds. There are a set of 63 guidelines published by the Massachusetts land court to assist registry personnel in determining the suitability of documents presented for recording. These guidelines consist of 136 pages and refer to over 80 different statutes. North Carolina registers of deeds have similar recording guidelines and recording practices can differ significantly across the 100 separate registers of deeds operating land registry systems within North Carolina. 17