South Carolina Lawyers Weekly
Fearing that attorneys are being used as a “rubber stamp” in residential real estate transactions, the South Carolina Supreme Court has issued an opinion that requires lawyers to play a larger role in ensuring loan proceeds are disbursed properly.
Under the new rules, attorneys may no longer delegate oversight of loan disbursements and must ensure they maintain control of the process. At a minimum, the court said, attorneys involved in real estate transactions must obtain detailed verification that the disbursement was made correctly.
The Supreme Court’s 3-2 ruling issued a public reprimand to Greenville real estate attorney Robert Breckenridge, who was hit with a disciplinary action in 2013 after he allegedly failed to provide sufficient oversight of a loan disbursement and to make necessary disclosures to his clients.
Acting Justice Jean Toal, who authored the majority’s April 20 opinion, said Breckenridge’s case gave the court an opportunity to clarify requirements laid out in an earlier case. The court’s 2006 ruling in Doe v. Richardson held that attorneys need to supervise real estate transactions. But that decision did not specify what form that supervision must take. Now, lawyers are on notice that they bear full responsibility for anything that goes wrong with a transaction—even if they rely on a third-party company to make loan disbursements.
William DesChamps of the DesChamps Law Firm in Myrtle Beach said the new rules will likely have little impact on firms that make it a practice to handle nearly all aspects of a transaction in-house. But he said the Supreme Court is issuing a warning to attorneys that they need to be doing more than just signing off on closings as they come in.
“I still think it’s best for everything to be handled by an attorney, with the attorney disbursing loans out of their trust accounts,” DesChamps said. “Why even have an attorney involved if they aren’t going to be acting as a lawyer and doing what lawyers are supposed to do?”
Volume business
The underlying matter involving Breckenridge stems from work he did on a real estate closing in 2012.
John and Dorothea Francis were looking to refinance their home, so they contracted with Vantage Point Title to handle the process.
Vantage Point is a Florida-based company that produces title insurance policies, disburses funds and prepares the title commitments for closings. The non-lawyer company refers closings to Carolina Attorney Network, which in turn, assigns them to its contract attorneys. Breckenridge was one of the attorneys who frequently receives referrals from Carolina Attorney Network. Vantage Point pays Carolina Attorney Network $250 for each closing it refers. Carolina Attorney Network then pays its contract attorneys $150 to review each case.
So when Carolina Attorney Network sent him the Francis closing, it was just another day at the office for Breckenridge. In fact, he later testified that he did not have any recollection of their closing because it was one of at least 5,000 transactions he has handled for the company over the past five years.
However, based on how the “pretty repetitive” process normally goes, Breckenridge testified that he would have received the title search results for the Francises’ closing and verified that a South Carolina attorney completed the title opinion. He also would have approved the couple’s HUD-1 statement and obtained their signature on a dual representation disclosure form.
The Supreme Court’s April 20 opinion said Breckenridge did not tell the Francises that he was splitting the attorney’s fees with Carolina Attorney Network, nor did he disclose to them the details of how the disbursement would work, including the fact that Vantage Point would be distributing the funds.
When zero isn’t zero
After Breckenridge returned the Francises’ closing documents to Vantage Point, he received and reviewed the disbursement log to ensure it showed a zero balance. That’s when the problem arose.
While Vantage Point’s disbursement log showed a zero balance, the receipts and disbursements did not actually “zero out,” according to court records. The disbursement log allegedly showed a credit of $104,907 and total debits of just $801.30. So despite the log showing a balance of $0, the actual balance was $104,105.30.
Apparently, what happened was that the Francises’ loan had been “net funded,” meaning that because the same lender held the original mortgage and the refinancing, the lender transferred the funds in-house to pay off the original mortgage rather than wiring the money elsewhere when the refinancing came through.
But at the time of the closing, Breckenridge allegedly did not know the loan had been net funded. He also allegedly did not verify that any of the checks involved in the transaction had cleared their respective banks. As a result, two checks involved with the Francises’ closing resulted in insufficient funds in Vantage Point’s trust account.
Ultimately, all the checks cleared, and the Francises’ closing went through without any harm.
By that time, however, the South Carolina Office of Disciplinary Counsel had launched an investigation into Breckenridge’s handling of the transaction.
Findings and penalties
The ODC filed formal charges against Breckenridge on Oct. 21, 2013, alleging he violated the Rules of Professional Conduct by failing to supervise the disbursement of funds in the Francises’ closing and failing to maintain proper records of the Vantage Point account where his client’s closing funds were deposited.
During an Aug. 26, 2014, hearing, Breckenridge said he may have been “negligent” in reviewing the disbursement log, but he maintained his conduct did not run afoul of professional rules. He also argued that he was not required to maintain his own trust account for the funds in residential real estate transactions.
Breckenridge’s arguments failed to convince the disciplinary panel, which found “clear and convincing” evidence that he had engaged in four instances of professional misconduct. Specifically, the panel found that he failed to ensure his clients’ loan proceeds were properly distributed, that he should have disclosed he was sharing his legal fees with non-lawyer third parties, that he did not ensure the representations in the HUD-1 statement matched the actual disbursements and that he did not maintain accurate financial records related to the Francis closing.
The panel also noted Breckenridge had a prior disciplinary history, including a 30-day suspension in 2008 for failing to maintain his trust account and safeguard his clients’ property, which resulted in several insufficient-fund notices.
The panel recommended that Breckenridge receive a public reprimand and that he pay the costs of the proceedings. The panel also recommended that Breckenridge undergo ethics training.
‘Rubber stamp’
When the case went before the Supreme Court, Breckenridge argued that the panel got it wrong and included factual misstatements in its report and recommendation of penalties. The Supreme Court rejected Breckenridge’s defenses and issued the panel’s recommended punishment.
“In essence, Respondent was used as a rubber stamp for a non-lawyer, out of-state organization with no office in South Carolina, whose involvement was not disclosed to Respondent’s clients,” Toal said in the opinion. “Respondent’s method of handling his client’s business provided no real protection to his clients and no attorney record of the transaction by which to verify the details of the closing if problems developed after closing.”
Toal went on to offer additional guidance “for the benefit of the Bar” on how attorneys should approach real estate transactions going forward. In addition to maintaining control of loan disbursements or receiving detailed verification that they had been made properly, Toal said attorneys may find it easier to use their own trust accounts to make disbursements. But she left in place the finding in Richardson that attorneys are not required to use their trust accounts.
“Therefore, we also find an attorney’s verification of proper disbursement, via sufficient documentation or information received from the appropriate banking institution—in addition to the disbursement log itself—to be acceptable in fulfilling his duty to oversee the disbursement of funds,” Toal said.
Toal was joined by Justice John Kittredge and acting Justice James Moore.
But in dissent, Chief Justice Costa Pleicones said the majority’s decision to publicly reprimand Breckenridge was incorrect because it was based on a single instance where he had not explained the nature of a net funding transaction to clients who suffered no harm in the end.
“In my opinion, these facts do not warrant a public reprimand,” Pleicones said. “Moreover, nothing in this single instance justifies the modification of our holding in Richardson.”
Breckenridge, who represented himself throughout the disciplinary proceeding, did not return calls seeking comment.
DesChamps said he thinks the Supreme Court’s decision in Breckenridge’s case shows that the court is trying to account for changes in how real estate transactions are handled these days.
But he said there is a reason attorneys are involved in the process. When they’re making the loan disbursements, both the buyer and the title company know who to go to if something comes up. Any number of things can derail a closing, he said, and it’s the lawyer’s responsibility to make sure there aren’t any liens, easements or other liabilities the buyer should know about. If there are, then it’s the lawyer’s job to keep the closing from happening.
“Letting other people handle the loan disbursement just rubs me the wrong way,” DesChamps said. “It’s a huge liability. At the end of the day, the lawyer is responsible for the closing. If it’s a $300,000 loan and your signature is on the closing, then you’re responsible. Why would you want to turn that over to someone else?”
The 15-page opinion is In re Breckenridge (Lawyers Weekly No. 010-030-16). An opinion digest is available online at sclawyersweekly.com.
Follow Jeff Jeffrey on Twitter at @SCLWJeffrey.
