Fwd: Occasional DD 4/28/05 Illinois weighs in on unauthorized practice/conveyancing debate.

>Occasional Daily Development for Thursday, April 28, 2005
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Blackwell Sanders Peper Martin
>Kansas City, Missouri
>dirt@umkc.edu
>
>This is another Jack Murray contribution.
>
>ATTORNEY/CLIENT; “PRACTICE OF LAW;” CONVEYANCING: Where  mortgage lenders' employees prepare loan documents and charge a fee for such preparation they do not engage in the unauthorized practice of law because of the pro se exception.

>
>King v. First Capital Fin. Servs. Corp., 2005 Ill. LEXIS 623 (April 21, 2005)
>
>This case, a case of first impression in Illinois,  involved consolidated class-action claims by numerous borrowers, in connection with document-preparation fees charged by the defendant lenders for the preparation of notes, mortgages, and other loan documents in connection with the plaintiffs' mortgage loan transactions. Because the Illinois Supreme Court ruled for the defendant lenders on the basis that a mortgage lender that uses nonlawyer employees to prepare loan documents for the lender's loans does not engage in the unauthorized practice of law when the lender charges a borrower a fee for the preparation of the documents, the court declared that it was therefore unnecessary to address the other issues raised by the plaintiff borrowers, i.e., whether a private right of action to recover money damages exists under the Illinois Attorney Act; whether the plaintiffs' complaints stated a cause of action under the State's Consumer Fraud Act; whether there was a valid cause of act

ion for money had and received and whether the "voluntary payment doctrine" barred plaintiffs from seeking restitution; and whether federal law preempts the plaintiffs claims against those defendants that are either a national bank or a federal savings and loan association. (Interestingly, the court does, later in the opinion, in fact discuss and rule on the issues of the applicability of the Illinois Attorney Act and the applicability of the "voluntary payment doctrine").

>
>The Illinois Supreme Court noted that there was no question that the defendants' preparation of the notes and mortgages constituted the practice of law, but recognized a pro se exception in Illinois law to what would otherwise be the unauthorized practice of law. According to the court, this exception "applies to the preparation of documents in situations where the party preparing the legal documents does so for his or her own benefit in a transaction to which the preparer is a party." The court ruled that the charging of a fee was "irrelevant because it is solely the character of the acts themselves that is relevant, and "the unlicensed practice of law is unlawful even if it is pro bono." Id. The court distinguished cases cited to it by the plaintiffs from other jurisdictions holding that the charging of a fee might turn  otherwise lawful conduct into the unauthorized practice of law, stating that, "[i]nsofar as plaintiffs' cited cases do not discuss why receipt of compensation

is prohibited, they are of marginal assistance."
>
>The court noted that the fees charged by the plaintiffs had been fully disclosed and were clearly designated as document preparation fees; that the plaintiffs had not alleged that they had suffered any harm; and that there was no allegation that the plaintiffs believed the defendants were acting as their attorneys or advising them on legal matters, i.e., the documents were prepared for the benefit of the defendant lenders. According to the court, "the charging of a fee, without more, for the preparation of the loan documents by the lender's employees did not transform their conduct into the unauthorized practice of law."

>
>The court did note, however, that with respect to two of the defendant lenders, the document-preparation fees were paid to Docu-Tech, an independent third-party document-preparation service. With respect to these defendants, the court found that, "[a] different situation is presented  . . .  where a person or entity that is not a licensed attorney and not a party to the transaction prepares the loan documents. In such a case, the pro bono exception is not available and the preparation of the documents constitutes the unauthorized practice of law."  But the court ruled that it need not decide, in these particular cases, whether the lenders could be held vicariously liable for the unauthorized practice of law engaged in by Docu-Tech "because we hold that no private cause of action for damages exists under the Attorney Act for the unauthorized practice of law." 

>
>The court agreed with the defendant lenders' argument that no private cause of action for damages existed under the Illinois Attorney Act for the unauthorized practice of law (under which the sole remedy is a contempt sanction and an injunction against the unauthorized acts). The court also rejected the plaintiffs' argument that they were entitled to "restitution," because under the "voluntary payment doctrine" in Illinois the plaintiffs had waived any such claim by voluntarily paying the disputed amounts to the plaintiff lenders with full knowledge of the facts, which waiver would be effective and binding even if the plaintiffs had no legal right to such amounts. The court noted that the lenders fully disclosed that the document-preparation fees were separate from any attorney's fees, and that therefore the plaintiffs "could not have mistakenly believed that the loan documents were prepared by attorneys."  The court also found that the plaintiffs had not alleged that they were c

ompelled to either pay the fees or forego their loan transactions, or that all lenders charged such fees. The court further noted that this was not a case where there was any misrepresentation by the plaintiff lenders or where they were seeking to enforce void contracts.

>
>Reporter’s Comment 1: The Illinois Supreme Court allowed the motions of the following amici to file briefs in this case: Illinois State Bar Association (ISBA); Halt, Inc.; Illinois Bankers Association/American Bankers Association; Office of the Comptroller of the Currency; and Office of Thrift Supervision, Department of the Treasury.

>
>Reporter’s Comment 2: For a similar ruling, see Dressel v. Ameribank, 468 Mich. 557 (2003), in which the Michigan Supreme Court held that a mortgage lender did not violate Michigan's statute against the unauthorized practice of law when its employees completed standard mortgage documents, for which the lender charged a fee. The court found that the preparation of "ordinary" mortgages by the bank was done in the normal course of the bank's business, and involved only the completion of a standard form document that the federal government compiled and that is readily available to the public. The court dismissed as "immaterial" the fact that the bank charged a fee for document preparation. In conclusion, the court held that "a person engages in the practice of law when he counsels or assists another in matters that require the use of legal discretion and profound legal knowledge."

>
>(But I submit that Judge Pound may have been correct when he stated, in his concurring opinion in a 1919 New York appellate court decision, People v. Title Guaranty & Trust, 227 N.Y. 366, 379 (1919) -- when real estate closings were much less complicated: "I am unable to rest any satisfactory test on the distinction between simple and complex instruments. The most complex are simple to the skilled and the simplest often trouble the inexperienced.")

>
>Reporter’s Comment 3:  The past few years have seen a flurry of case law regarding the issue of what constitutes the unauthorized practice of law in connection with real estate transactions. The courts (and applicable regulatory authorities and agencies) have not been uniform in their rulings and pronouncements, which can differ greatly depending on which state is involved.  Some states are very jealous of guarding the legal profession -- and ostensibly, the public -- against what they perceive as the encroachment of other professions and businesses (such as brokers, realtors and banks) into the business of providing legal services and advice. Other states are willing to accept "economic reality" and permit nonlawyers to perform what they believe are routine and ministerial "quasi-legal" tasks, such as conducting residential real estate closings and completing (and in some cases, charging for) standardized form deeds, mortgages, and leases, which tasks they believe benefit consum

ers by reducing the cost of the transaction, increasing competition, and minimizing delays.
>
>Reporter’s Comment 4:  As evidenced by the above discussion and case summaries, the determination of what actions constitute the unauthorized practice of law in real estate transactions is not settled or consistent. But the "battle lines" are clearly drawn. On the one hand, the organized real estate bar in many states argues forcefully that: licensed attorneys are an indispensable part of any real estate transaction (including the closing); there is in reality no such thing as a simple "point and sign" closing; "one size fits all" standard conveyancing documents do no such thing and require the use of legal discretion and knowledge; public policy requires that only licensed attorneys prepare legally binding documents and pass judgment on their suitability and enforceability; and attorneys are more accountable to consumers than nonlawyers because they are subject to professional disciplinary actions and malpractice claims. On the other hand, nonlawyer groups typically involved in

real estate transactions (such as banks, title companies and agents, real estate brokers, and governmental agencies) argue just as forcefully otherwise.  They point out that  lay closing persons are competent to perform residential closings; the vast majority of closings involve only ministerial or administrative duties and functions and virtually all legal issues have been resolved before the closing; lay persons conducting closings are trained not to answer legal questions and to halt the closing when such questions arise and advise the parties to seek legal advice; closing documents are standardized and seldom if ever negotiated or modified; title insurers and agencies carry errors and omissions policies, are monitored and regulated, and are subject to penalties (both civil and criminal) for any misdeeds, negligence, or wrongdoing; owner's title insurance is available and offered to residential buyers; and public policy is promoted and consumers benefited because closing servic

es performed by laypersons provide needed competition and greatly reduce legal and other costs of the transaction.
>
>It is unlikely that this philosophical (and practical) debate will subside in the foreseeable future, and the issue will continue to be dealt with by individual states, whether by means of applicable case law, statute, or regulatory or administrative rulings. For additional commentary in this area, see Michael C. Ksiazek, Note: The Model Rules of Professional Conduct and the Unauthorized Practice of Law: Justification for Restricting Conveyancing to Attorneys, 37 Suffolk U. L. Rev. 169 (2004); Marjorie A. Shields, Unauthorized Practice of Law -- Real Estate Closings,  119 A.L.R. 5th 191, sec. 5.

>
>Editor’s Comment: The argument that lay closers “are trained not to answer legal questions and to halt the closing when such questions arise and advise the parties to seek legal advice” is naive, unworkable and largely untrue.  The editor has attended many closings with non-lawyer closers.  By the time the closing date has arrived, there is enormous momentum propelling the closing foreward, and it is absurd to suggest that anyone involved will feel comfortable stopping the proceedings while the parties “lawyer up” by seeking out lawyers who are familiar with residential closings.  First, the other side won’t stand for it; and, second no such lawyers exist in those jurisdictions in which lawyers aren’t regularly involved in closings. 

>
>As the editor has pointed out before, someone has to take responsibility for clarifying the rules.  If those providing closing services are unable to do it, then some element of the industry must step in.  It probably should be lawyers - perhaps a bar related service, provided on a fee basis - that insures enough business so that a lawyer can develop the necessary expertise to be useful as a mediator or advisor when disputes or questions arise.  Who pays that fee is another question.  The editor believes that a good argument can be made that the service should paid by the closing industry, since it needs to be there all the time, and parties should be encouraged to take advantage of it early and often.  The editor has sought to get the NAR and ALTA interested in pursuing such a plan, or at least talking about it - but has been met with silence - a silence in which consumer interests continue to freeze in the dark.

>
>The Reporter for this item was Jack Murray of First American Title Insurance Company, Chicago office.
>
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