LEO: Dual Practice - Misconduct - Real Estate  LE Op. 1170

 

Dual Practice - Misconduct - Real Estate Transaction - Trust

Account: Attorneys Referring Clients to Their Own

Settlement Service Company and Retaining the

Interest on the Trust Accounts.

 

January 30, 1989

 

You have advised that two separate law firms have set up separate

corporations, the purpose of which will be to provide real estate

settlement services for the law firms' clients. You have also stated that

the corporation is owned and managed by the attorneys and staffed by their

secretaries who perform the settlement services. Recently, you learned

that the funds of the law firms' clients were being placed in interest-

bearing accounts; the interest was being retained and not accounted for to

the client; and at settlement the client was required to sign an

authorization disclosing the fact that the funds would be kept in an

interest account credited to the corporation. Neither the disclosure nor

the authorization stated that the client has a right to choose not to

place his funds in an interest-bearing account, that he has the right to a

pro rata share of the earned interest, or that the company will retain the

funds to its own credit.

 

You wish to know whether the arrangement described is violative of the

Virginia Code of Professional Responsibility. If it is, you further

inquire if a purported disclosure and consent will cure those ethical

violations.

 

The Committee is of the opinion that the controlling disciplinary rules

relevant to your inquiry are DR:9-102(D), (E) and (F); DR:1-102(A)(2);

and DR:5-104(A). The provisions under DR:9-102 describe the options

available to an attorney who wishes to deposit and maintain clients' funds

in interest-bearing accounts; DR:1-102(A)(2) prohibits a lawyer from

circumventing a disciplinary rule through actions of another; and DR:5-

104(A) instructs a lawyer as to the limitations imposed when the lawyer

wishes to enter into a business transaction with a client wherein they

have differing interests.

 

The Committee previously opined that it is improper for a lawyer or law

firm to earn interest or receive any dividends for the lawyer's or firm's

benefit on clients' funds held in an attorney trust or escrow account. (

See LE Op. 392 and LE Op. 831) It is the view of the Committee,

therefore, that when an attorney or a law firm steers a present client to

the separate lay corporation which is owned by the attorney or law firm

for the purpose of doing something which the attorney may not do directly,

i.e., earn interest on clients' funds, DR:1-102(A)(2) is violated. No

such violation would occur when individuals who utilize the services of

the settlement corporation are not clients of the owning attorney in his

capacity as attorney. Similarly, the violation would be obviated if the

attorney provided the client with referrals to other such corporations in

addition to that one in which he has an ownership interest

 

Even where the attorney or law firm is not steering a present client to

the separate corporation for purposes of circumventing the disciplinary

rule prohibiting the earning of interest on clients' funds, the Committee

finds the provisions of DR:5-104(A) applicable since, in the settlement

services corporation setting, the attorney and the client have differing

interests in the purchase of those services. Thus, the attorney must

obtain the client's consent after full and adequate disclosure of the

attorney's differing interest. Furthermore, even with such disclosure and

consent, the business transaction may still not be permissible if it is

unconscionable, unfair or inequitable.

 

Committee Opinion January 30, 1989