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September 15, 2013
Guidelines established for allowing title insurers to audit trust accounts

By Gary Blankenship
Senior Editor

Attorneys must decide that it is in their clients’ best interests — and the clients must have not prohibited it — before allowing title insurers to audit trust accounts containing funds from clients who are not using that insurer.

After grappling with the implications of a new state law for more than a year, the Bar’s Professional Ethics Committee has approved Proposed Advisory Opinion 12-4 that reaches that conclusion. Now the committee is seeking input from Bar members.

The opinion came from a Bar member inquiry stemming from F.S. §626.8473(8), which became effective July 2, 2012. The law requires attorneys acting as title agents or real estate settlement agents to deposit client funds for those transactions in a special trust account and allow title insurers to audit that account “unless maintaining funds in the separate account for a particular client would violate applicable rules of The Florida Bar.”

PEC Chair Loretta O’Keeffe, who chaired the subcommittee that drafted and redrafted the PAO, said the committee had to strike a balance between the law, Bar rules, and a previous ethics opinion, 93-5.

“The attorney is the only person who can make the decision on what is in his or her client’s best interests. That’s the bottom line,” O’Keeffe said. “The Florida Bar cannot make a wide, sweeping opinion that it’s in the client’s best interest [to allow the audit by an uninvolved company]. The lawyer needs to make that decision.”

The inquiring attorney noted that his firm employed several lawyers handling real estate transactions with multiple title insurers and that some transactions were done without title insurance. That system means the special trust account holding funds for those transactions would have funds from several clients not involved with a title insurer conducting an audit of that account.

The attorney asked the committee two questions: If the firm could allow such an audit which would hold funds from clients not using the auditing title company; and, if the answer to the first question is no, how the firm could comply with the law.

The opinion began its answer by citing Bar Rule 4-1.6, which prohibits an attorney from revealing any information about the representation of a client without the client’s informed consent. The rule comment further explains the prohibition applies not just to confidential information “but also to all information relating to the representation, whatever its source.”

The only applicable exception to that rule, the opinion said, is Rule 4-1.6(c)(1), which allows the attorney to divulge information if the attorney deems it is in the client’s interest, “unless the client has specifically instructed otherwise.”

The opinion noted Ethics Opinion 93-5, which said in the case of a single title company auditing a trust fund that contained only funds from transactions it was insuring, the attorney could allow the audit unless the client had specifically requested that the information not be divulged, because the audit would be in the client’s best interest.

“[Ethics Opinion] 93-5 does address some of the reasons why an audit would be in the client’s best interest,” O’Keeffe said, including that the audit would ensure the safety of the funds and that they are properly used.

The question for the committee was whether that rationale applied to audits by title companies, which weren’t insuring all of the funds and whether that would divulge information about the client that is protected by Bar rules, O’Keeffe said.

The PEC concluded, “If the firm permits each title insurer to audit the separate trust account without clients’ informed consent, each insurer will obtain information relating to the firm’s representation of clients who are not involved in any transaction with that particular title insurer. The inquirer’s affirmative duties to inform and explain under Rules 4-1.4 and 4-1.6 (a) would be triggered under such circumstances, unless the lawyer reasonably concludes that allowing all title insurers to audit the trust account is reasonably necessary to serve each affected client’s interests or the affected clients have specifically prohibited the lawyer from disclosing the information.”

The committee advised that the lawyer could not allow the audit of funds for clients who were not using the auditing title company’s services unless the client consented “or the lawyer reasonably concludes that the audits are reasonably necessary to serve the affected client’s interests and the affected clients have not prohibited the disclosure.”

“Every attorney needs to make that decision for his or her clients,” O’Keeffe said. “There is always going to be a special case where the client directs the attorney not to permit the audit or they don’t want information about the transaction revealed.”

The second question on complying with the state law, the opinion noted that the committee addresses only ethics matters, not questions of law. But it did offer some advice.

There would be no problem, the opinion added, if the trust account contained only funds related to real estate and title transactions from the auditing title insurer, because under the rules that would be construed to serve the clients’ interests.

The opinion continues, “If the lawyer concludes that permitting the audits by multiple title insurers is not necessary to serve affected clients’ interests or if affected clients have instructed the lawyer not to disclose the information, the lawyer should consider maintaining: 1) a separate trust account for each different title insurer used by that lawyer or law firm, or 2) one separate trust account and obtain each client’s informed consent to disclose information regarding their transactions to multiple title insurers for their audits, or 3) one separate trust account and obtain consent from the various title insurers to audit only the information related to transactions that the title insurer is underwriting. With respect to number 2 in the preceding sentence, the lawyer may obtain the client’s informed consent in the sales contract or in a separate document executed by the client prior to or at the closing.”

The complete text of Proposed Advisory Opinion 12-4 was in an official notice in the September 1 Bar News.Comments should be postmarked by October 1 and sent to Elizabeth Clark Tarbert, Ethics Counsel, The Florida Bar, 651 E. Jefferson St., Tallahassee, 32399-2300.

[Revised: 10-16-2014]