Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Lewis, Rice & Fingersh
Kansas City, Missouri
I. ABA ANCILLARY BUSINESS RULES:
Lawyers who are thinking along these lines ought to be aware first of the ethical obstacle presented by the current ABA position on "ancillary businesses." In August, the ABA Conference of Delegates adopted the Report of the Litigation Section to the Board of Governors. The ABA likely will take the issue up again at the 1992 Annual Meeting, but the current ABA position is that the provision of "non-legal services which are ancillary to the practice of law" is unethical except when provided to clients "in connection with and concurrent to" legal services provided to those clients. The policy also requires "appropriate disclosures" (which it does not define) and places other restrictions on the practice of providing ancillary services through the use of separate businesses and non-lawyer personnel. The prohibition on ancillary services to clients does not apply to sole practitioners, but the ancillary service disclosure requirements do.
II. STATE LICENSING REQUIREMENTS:
The ABA restriction is only the tip of the iceberg with respect to regulatory restrictions on lawyer/brokers. Most states have statutes and administrative regulations controlling the conduct of brokers and requiring licenses. Lawyers who have provided brokering services have relied in the past on a variety of common "loopholes" that appear in such provisions. The loopholes, however, are closing, and perhaps never were as broad as they appeared. See, generally, M. Bickley, Compensation for an Attorney Engaged in a Real Estate Transaction, 9 J. Legal Prof. 151 (1984).
II. A. Statutory Exemptions from Licensing Requirements for Broker/Lawyers:
Many state licensing statutes have specific language stating that the broker licensing requirements do not apply to licensed attorneys. In Matter of Roth, 577 A.2d 290 (N.J. 1990), the New Jersey Supreme Court pointed out that such a provision in the New Jersey statute exempts lawyers from licensing requirements only when the "broker-like" services performed are carried out in the context of ongoing legal representation of the client. This, of course, makes sense, as lawyers commonly negotiate sales agreements and perform other tasks that are also performed by brokers. But, in New Jersey at least, the lawyer cannot function as a broker in circumstances in which the lawyer is not performing legal services. Further, if the lawyer attempts to take a fee as a broker as well as a legal fee, this goes beyond the permitted relationship. Id.; Lovett v. Estate of Lovett, 593 A.2d 382 (N.J. Super 1991).
Other cases have held that an attorney may perform brokerage-like services if they are part of an ongoing representation of a client, but differentiate the situation of an attorney undertaking representation of a new client and performing the same services, when they are not ancillary to more traditional legal representation. Compare Queen of Angels Hospital v. Younger, 66 Cal. Rptr. 36 (1977) with Haas v. Greenwald, 237 P. 38, (aff'd per curiam, 275 U.S. 490 (1927).
The interpretation of the attorney's exemption in still other states is more generous, premised on the notion that an attorney's skills and training warrant exemption from broker licensing requirements in every case. See, e.g., Atlantic Richfield Co. v. Sybert, 456 A.2d. 10 (Md. 1983); Elin v. Neal, 720 S.W.2d 224 (Tex. App. 1986); See, generally, Anno., 8 A.L.R. 3d 523 (1966).
II.B. "Finder's" Exemption:
There is some case law suggesting that the brokerage licensing provisions do not apply to mere "finders" - parties who take a fee to introduce participants to a transaction, but who otherwise do not participate in developing or carrying out the transaction. Bottomley v. Coffin, 399 A.2d 485 (R.I. Sup. Ct. 1979); White v. Merriam Realty Co., 547 S.W.2d 284 (Mo. App. 1977). Anno, 24 A.L.R.3d 1160 Sec. 6(b). But see George Nangen & Co. v. Kenosha Auto Transport Corp., 238 F.S. 157 (D. Wis. 1965); West v. Touchstone, 620 S.W.2d 687 (Tex App. 1981) ("mere middleman" is nevertheless an agent with fiduciary responsibilities).
When a lawyer deals with existing clients or friends, of course, it would be difficult for a lawyer to contain the services provided to that of a mere finder. A number of lawyer/finders do attempt to do so, however, and place in their engagement letter self-serving language making it clear that the parties are not to expect services beyond the "finding." This language is probably ineffective if the lawyer does go beyond the simple introduction of the parties and participates in the negotiation or closing.
Another recent case involving New Jersey law concludes that the New Jersey statute, with wording that is similar to many others around the country, does require that "finders" be licensed. Cooney v. Ritter, 939 F.2d 81 (3rd Cir. 1991), involved business brokerage services, not simply real estate brokerage, but the analysis would be the same in either case. In another recent case, an attorney was denied a finders fee for finding land for a shopping center site. Shinberg v. Bruk, 875 F.2d 973 (1st Cir. 1989). See, also, Diversified General Corp. v. White Barn Golf Course, Inc., 584 P.2d 848 (Utah 1978); Brakhage v. Georgetown Assoc., Inc., 523 P.2d 145 (Colo. App. 1974); Augustine and Faxx, Finder's Fees in Security and Real Estate Tranactions, 35 Bus. Law. 485 (1980); Comment, Recovery of Commissions by Unlicensed Real Estate Brokers, 80 Dick L. Rev. 500 (1976).
II.C. Business Brokers:
As some of the above cases point out, parties who otherwise should obtain a real estate broker's license are rarely able to escape the requirement by arguing that they are promoting the sale of a business of which the real estate is only a part. See Burke, Law of Real Estate Brokers Sec. 5.5.1 (Supp. 1991) (Professor Burke's excellent text is a useful source on all the issues discussed here.) But see, Bottomley v. Coffin, 389 A.2d 485 (R.I. 1979) (business brokerage does not require a real estate license.)
II.D. "Single Transaction" Exemption:
Some jurisdictions have "single transaction" exemptions from brokerage licensing requirements that might be useful for lawyers who are not licensed as brokers. See, e.g., Walter v. Moore, 700 P.2d 1219 (Wyo. 1985), but see, contra, Bickley v. Van Antwerp Realty Corp. Inc., 122 So. 2d 275 (Ala. 1959). Qualifying under such exemptions might be difficult for lawyers, however, as they characteristically are engaged regularly in brokerage-like activities, even though they only occasionally indulge in such activities when not related to their legal representation of clients. Thus, it might be difficult to conclude that they are engaging only in a single transaction involving brokerage services. Cf., Ledford v. Faulkner, 661 S.W.2d 475 (Ky. 1983).
III. CAN LAWYERS PERFORM THE BROKER'S FUNCTION?
III.A. Ethical Conflicts of Lawyer/Brokers:
Many lawyers deal with the problem of licensing by the simple expedient of obtaining a broker's license. The mere fact that one has a license to practice law does not compel the granting of a real estate license (Spirito v. New Jersey Real Estate Comm'n, 434 A.2d 623 (N.J. Super. 1981), but such licenses often are not difficult for lawyers to obtain. This practice carries problems of its own, however.
Brokers have ethical responsibilities that are somewhat different than those of attorneys, especially with regard to the brokers' duty to inform parties other than their client. Under recent decisions, a broker may have a duty to discover and disclose details concerning the transaction that might be relevant to involved parties, even parties who are not the broker's client, and even when the client might not have such a duty. Attorneys, so far at least, have no such duty of discovery, and in any event would only very rarely have an obligation to divulge to the other side information damaging to the client. Such a disclosure normally would violate the attorney's duty of loyalty to the client. (On occasion an attorney would be obligated to resign if the attorney knew that the client was misrepresenting the facts). The State Bar of California has ruled that an attorney may function as an attorney and licensed broker in the same transaction, but must conform to the ethical standards of both professions. State Bar of California, Formal Op. 1982-69. The Bar opinion states that the attorney's ethical standards paramount in the event of a conflict, but this would not necessarily preclude a party from suing the attorney/broker from breaching reasonable expectations that the attorney/broker would function as a broker. See, generally, Mortland, Attorneys as Real Estate Brokers: Ethical Considerations, 25 ABA Real Prop., Prob. & Tr. Journ. 753 (1992).
In some cases, the attorney/broker can obtain waivers of the conflicts that arise from the dual roles. But there may be a number of parties to a transaction from whom it will be difficult to obtain waivers, but to whom the a broker would owe extensive duties. Further, there is considerable doubt as to the validity of waiver obtained by an attorney from a party who is not represented by independent counsel. The expense of retaining independent counsel to advise with respect to the waiver is a cost that parties to a typical real estate transaction are unlikely to accept. Thus, in many cases, the waiver will be executed without independent legal advice, and may be challenged as an unknowing waiver.
Another problem arises in the "fee sharing" situation, where both lawyer's and broker's ethical responsibilities cause difficulties. See, M. Bickley, supra, 9 Journ. Leg. Prof. at 154.
III.B. Competency Standards for Lawyer/Brokers:
Also, there is the straightforward issue of competency. Because lawyers often see brokers wrestling with legal matters that are beyond their competence, lawyers may conclude that most brokers do not function at a high level of competency, and that a trained lawyer could easily perform the broker's job as well. This can be a tragic misunderstanding. Real estate brokers are professional sales representatives, and in that capacity often have considerably more knowledge, experience and, yes, competency than most lawyers. This may be particularly true as to knowledge and understanding of market factors affecting value. Lawyers who venture to provide services as brokers may be held to a standard that they are not prepared to meet.
Consider, finally, the recent decision in Barry v. Raskov, 283 Cal. Rptr. 463 (Cal. App. 1991), where a mortgage broker was held liable to a mortgage purchaser for negligence on the part of an independent appraiser who contracted to supply services through the broker. The court predicated liability on the broker's statutory duty to supply an appraisal, which it held to be non delegable, and on the overall fiduciary responsibilities of the broker. There was a stinging dissent on the latter point, which may have an impact on lawyers as well as brokers. In either case, the message is still clear: even if the fishing is bad in your pond, it still may not be time to venture into uncharted waters.