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October 15, 2012
Who should be able to audit trust accounts?

By Gary Blankenship
Senior Editor

Would allowing title insurance companies to audit attorney trust accounts —including those transactions the companies are not insuring — be a breach of confidentiality for clients with funds in those accounts or an extra protection?

During its September 21 meeting, the Professional Ethics Committee looked at that question stemming from a new state law requiring law firms to allow title insurance companies to audit trust accounts, which contain funds for real estate transactions.

The question was brought to the PEC’s attention from an attorney who inquired whether such audit would violate confidentiality provisions of Bar rules because the auditing companies companies would have access to information about clients and transactions the companies were not insuring.

The committee looked at a subcommittee draft opinion which said client information would impermissibly be revealed and heard from representatives of the Real Property, Probate and Trust Law Section and title insurance companies which said there would be little, if any, harm to clients. The committee ultimately deferred action after the subcommittee chair stated the panel needed to reconsider its draft in light of some late submissions from the section and title companies.

However, Loretta O’Keeffe, the subcommittee chair, said any changes would not likely alter the final conclusion that the audits cause ethical problems.

At issue is new subsection (8) to F.S. §626.8473, which requires attorneys acting as title or real estate settlement agents to keep funds for those transactions in a separate trust account to which title insurance companies insuring those deals would have access “unless maintaining funds in the separate account for a particular client would violate applicable rules of The Florida Bar.” The provision, part of an overhaul of title insurance laws, became effective July 1.

The subcommittee, O’Keeffe said, looked at this question: “Is the attorney permitted to allow the title insurance company to audit the firm’s special trust account . . . without the informed consent of the client who has no involvement with the title insurance company?

“The special subcommittee said the answer is ‘no,’” O’Keeffe added, “if the special trust account holds funds for client transactions that are unrelated to the title insurer requesting the audit, unless the client gives informed consent.”

The subcommittee based its answer on Bar Rule 4-1.6(a), which prohibits an attorney from revealing information about the representation of a client without the consent of that client or unless certain conditions apply. The only one of those conditions that might apply, O’Keeffe said, is if the disclosure might be in the client’s best interest.

“We found it did not [serve the client’s interest] because of the fact you have this overriding duty of confidentiality and the fact you were permitting a title insurer to be exposed to funds they are not insuring,” she said.

Lawyers could ethically comply with the law, O’Keeffe said, by having a separate trust account for each title insurance company they deal with, having one trust account but getting informed consent from each client with funds in the account, or getting a pledge from title insurance companies that they will look at only transactions they are insuring when they audit the trust account.

While RPPTL and title companies provided input to the subcommittee before its opinion was drafted, O’Keeffe said they submitted further comments after the draft was finished and the subcommittee wanted more time to consider those observations.

“I do not believe that our proposed advisory opinion would change, but we would have to consider some of the recommendations and comments,” she said.

The PEC agreed to take the issue up again at its next meeting in January or February.

Three visitors at the meeting spoke against the draft proposed opinion. Michael Gelfand from RPPTL said audits strengthen confidence in title insurance and real estate transactions.

“Audits are a critical and necessary tool in the proper function of trust accounts,” he said. “It detects bad practices. Auditing is also critical to allow us to go back and see what happens and recover funds and prosecute those who have taken funds.”

Ted Conner, general counsel of title insurer The Fund, said title work isn’t as neat as envisioned in the draft proposed opinion. “Transactions come in from many sources; some come in from builders, lenders, mortgage brokers . . . . There’s often not an engagement letter as such,” he said, which can complicate getting consent.

Conner added that if a client doesn’t give consent, “I think at that point the attorney would be required to tell the client, ‘Oh, by the way, you’re not getting the benefit of all these audits.’”

Jim Russick, of Old Republic Title Insurance Company, contended the consent isn’t required under the rules.

“The rules that do not require informed consent, if it’s in the best interest of the client, are being met by what we do [audits],” he said. “They are keeping the individual practitioner in the game because the companies are responsible for any loss of funds.”

Russick said that requiring an informed consent waiver for audits would just add to the already abundant paperwork that accompanies a real estate transaction.

He questioned how much confidential information a title company could discover, because most of the information — such as the source of the money, the purchase price, the size of the mortgage — will be part of the public record after the transaction closes.

[Revised: 03-08-2017]