Court defines role of lawyers in real estate closings

For the first time in recent history, the Massachusetts Supreme Judicial Court has addressed what constitutes the practice of law in connection with real estate transfers. And while the highly anticipated decision leaves several questions unanswered, it clearly reaffirms the significant level of involvement attorneys must have in residential closings.

The ruling is important to the real estate bar because settlement services companies that do business with national mortgage lenders have argued for years that lawyers could serve a peripheral role in closings by simply showing up and acting as witnesses.

Many members of the bar viewed that as a step toward pushing attorneys out of the process altogether.

To support their argument, settlement services companies often would assert that appellate-level caselaw was murky at best when it came to defining the responsibilities of attorneys at closings, said Boston real estate lawyer Gregory D. Peterson of Tarlow, Breed, Hart & Rodgers.

“Well, it’s clear now,” Peterson said of the SJC’s 40-page decision in The Real Estate Bar Association for Massachusetts v. National Real Estate Information Services.

Give and take

Real estate attorneys are hailing the decision as a victory not only for the bar but also for consumers.

Nevertheless, REBA President Edward M. Bloom said he was disappointed when he first reviewed the landmark opinion.

“As you read the decision, the court would look at the discrete aspects of what [defendant] NREIS was doing, and they would say that that’s not the practice of law, or the record is insufficient to make a determination,” he said. “But it’s a very complex and layered opinion.”

The SJC essentially rejects REBA’s claim that Pennsylvania-based NREIS was engaged in the unauthorized practice of law when it prepared title reports and certain documents needed at closings, issued title insurance commitments and policies to lenders and borrowers, and helped lenders disburse mortgage proceeds.

“I think there was a certain level of disappointment by the conveyancing bar,” said Martin W. Healy, chief operating officer of the Massachusetts Bar Association. “But the case itself, from [the] perspective of … the legal profession, is very helpful in that it affirms that attorneys must play a vital role in the closing process.”

Because of an insufficient record from the 1st U.S. Circuit Court of Appeals, the SJC could not determine whether NREIS committed unauthorized practice by contracting state-licensed attorneys to represent its lender clients and attend closings.

Justice Margot G. Botsford, who wrote the decision, said that, based on the record, it “does not appear that NREIS is itself actively directing and managing the establishment of legal rights of others in a manner that would constitute the unauthorized practice of law.”

But REBA’s lead attorney, Douglas W. Salvesen of Yurko, Salvesen & Remz in Boston, said the SJC’s holding that attorneys must have meaningful involvement in the process essentially undercuts its finding that NREIS was not practicing law or that the record was insufficient to answer the question.

Prior to the decision, he said, closing attorneys were not required to review titles for marketability. Now they are. That development is expected to force NREIS and other similar companies to tweak their business model so that attorneys are actively involved in closings.

Salvesen also interprets the decision as mandating a direct relationship between attorney and lender, rather than attorney, settlement services company and lender.

“There seems to be a wall between the attorney and the bank, and now that wall has been removed,” Salvesen said. “Attorneys must have substantial involvement in the process, and I think that’s a win for people who buy homes in Massachusetts.”

Botsford noted in the decision that a third party such as NREIS could serve as an intermediary between attorney and client as long as there is a legitimate attorney-client relationship and the middleman is not controlling the attorney’s actions.

NREIS’s attorney, Michael D. Ricciuti of K&L Gates in Boston, did not return messages seeking comment.

More liability?

Real estate attorneys may be exposed to increased liability in the wake of the SJC’s decision, according to several attorneys familiar with the case.

“In a way, this opinion puts a much greater burden on Massachusetts attorneys by saying that we have to play a substantial role in the closing and that we have certain obligations to ensure that the process goes smoothly,” said Joshua M. Bowman of Boston’s Sherin & Lodgen.

Bowman, who supports the ruling, predicted that closing attorneys will cut their caseload and increase their fees because the decision gives them leverage over settlement services companies and lenders, and because they have to spend more time on each conveyance.

“My hope,” he said, “is that attorneys will be able to charge a little bit more and really be zealous advocates for their clients, not just churn out these closings one after another.”

Mark L. Murphy, a real estate lawyer in Lexington, Mass., warned that attorneys who continue to appear solely as witnesses during closings could face malpractice claims and possibly be disbarred.

“These companies have only been using attorneys as props and nothing else,” he said. “For attorneys who agree to do this work, this decision opens you up to increased problems and liability.”

But Leo J. Cushing, founding partner of Cushing & Dolan in Waltham, Mass., disagrees that the decision expands liability. When a title flaw has gone unnoticed or something else has gone wrong during or after the closing, the buck has typically stopped with the closing attorney, he said.

“There was already a ton of exposure with conveyancing,” he said.

Cushing, who has conducted about 19,000 closings in the last 25 years, also dismisses the notion that attorneys will be able to command higher fees because of the decision, saying the mortgage industry still has a tight grip on the market.

“I know a lawyer who is doing closings for $250 to $375, and that’s after this decision,” he said. “The pricing is crazy to the point where, even before this decision, we were trying to determine whether it was feasible to stay in this pure residential conveyancing business.”

Not over

Unless a settlement is reached or the parties enter into mediation, the case will be returned later this month to U.S. District Court in Boston, where it was previously heard.

The federal court previously ruled in favor of NREIS, finding that its business practices did not constitute the unauthorized practice of law. The court also found that REBA’s complaint violated NREIS’s constitutional rights and awarded the company more than $900,000 in attorneys’ fees and costs.

On appeal, the 1st Circuit reversed the award under First Amendment grounds and certified the unauthorized-practice question to the SJC.

If the case goes back to federal court, NREIS could renew its constitutional argument in light of the SJC’s decision and try to recover the award, which has the potential to bankrupt REBA.

“The ball is in NREIS’s court,” Salvesen said.