ETHICS DOCKET NO. 1988-84

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 1988-84

Trust Funds: Can Attorney Create Title Agency That Retains Interest on Trust Account?

You state that some title agencies keep the interest earned on down payments, loan proceeds, and other deposits prior to disbursement and designate the interest earned as an additional fee for services on the settlement sheet. You then inquire whether an attorney may own a title company that operates in this manner without violating the Rules of Professional Conduct.

In Ethics Docket 86-23, the Committee discussed at length the responsibilities of lawyers who engage in dual occupations. The Committee identified two principal concerns regarding lawyers engaged in multiple occupations: (1) that the lawyer would use the second occupation to feed the lawyer's law practice; and (2) that the lawyer's involvement in a second occupation might impair the exercise of the lawyer's independent judgment on behalf of a client. The Committee believed that these problems were more likely to arise if the second occupation were law-related. Accordingly, the Committee determined that a lawyer engaged in a law-related second occupation would be bound by the standards of the legal profession while engaging in that second occupation.

Lawyers who own title companies certainly are involved in a second occupation which is law related and therefore, must observe the Rules of Professional Conduct in their operation of those companies. As you note in your letter, three rules are implicated: Rule 1.5 regarding fees and Rules 1.7 and 1.8 regarding conflicts of interest.

Rule 1.5(a) requires that a lawyer's fee be reasonable. Rule 1.5(b) requires the lawyer to communicate the basis for calculating the fee to the client before or within a reasonable time after commencing representation. In Ethics Docket 81-44, the Committee determined that it was unethical for an attorney to put a client's money in an interest-bearing account and request the client to waive the interest unless the earned interest were credited directly against a specific fee already earned by the attorney. In reaching that conclusion, the Committee noted ""that the passive act of holding a client's money while it earns interest does not justify the charging of a fee. . . . It follows . . . that any fee charged for such passive conduct by the attorney is ""clearly excessive."" (Emphasis in original.)

Furthermore, Article 10, section 44 of the Maryland Annotated Code limits the circumstances in which an attorney may place a client's money in an interest-bearing account without crediting the interest to the client. An attorney has the discretion to determine the type of account in which the lawyer deposits client funds. If the moneys received from a client ""are too small in amount or are reasonably expected to be held for too short a period of time to generate at least $50 of interest or such larger amount of interest as in the judgment of the attorney may be equivalent to the cost of administering an account for the benefit of the client or beneficial owner,"" the attorney may choose to pool such funds in an interest-bearing account and have the interest paid to the Maryland Legal Services Corporation (""MLSC""). Md. Ann. Cod art. 10, § 44 (2) (1987). Clearly, then, section 44 requires interest on client funds held by an attorney to be paid either to the client or to the MLSC. Payment to a title company owned by a lawyer would violate the statute. Of course, an attorney's ""conduct should conform to the requirements of the law."" Preamble, Maryland Rules of Professional Conduct.

Rule 1.7(b) provides that ""[a] lawyer shall not represent a client if the representation of that client may be materially limited . . . by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation."" As you note in your letter, an attorney who owns a title company that keeps the interest on deposits prior to disbursement would have conflicting interests: The independent exercise of professional judgment may require the lawyer to recommend the establishment of an account earning interest for the client while the lawyer as owner of the title company would benefit if the title company retained the interest earned on any money deposited in its account. In such circumstances, the representation of the client could be adversely affected by the lawyer's own interests.

Rule 1.8(a) prohibits financial transactions between clients and attorneys ""unless: (1) the transaction is fair and equitable to the client; and (2) the client is advised to seek the advice of independent counsel in the transaction and is given a reasonable opportunity to do so."" As discussed above, an attorney may not keep the interest earned on client's funds held by the attorney. Thus, an arrangement in which the attorney's title company kept such interest would not be, by definition, fair to the client. For all these reasons, an attorney ethically cannot allow the lawyer's wholly owned title company to keep the interest earned on clients' down payments, loan proceeds, and other deposits prior to disbursement.