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February 15, 2013
Debate over who may audit trust accounts continues

By Gary Blankenship
Senior Editor

The question of whether attorneys handling real estate transactions can allow title companies to audit their trust accounts, which have deposits from clients not using that title company, has stymied — for the moment — the Bar’s Professional Ethics Committee.

At issue is a state law passed last year that would allow title insurance companies to audit trust accounts, assuming no Bar rules would be violated. The question posed to the committee was whether such an audit might violate Bar rules if the trust fund contained monies from clients who are not using the auditing title company and if the company might be able to learn confidential information about those clients through the audit, unless the affected clients gave their informed consent to the lawyer providing the information to the title insurance company.

At its January 25 meeting, the committee first rejected a proposed advisory opinion, by an 11-13 vote, that said such audits would not be allowed without client consent. A follow-up motion to decline to issue an advisory opinion failed 7-14. Another motion to return the proposed advisory opinion back to its drafting subcommittee failed to get a second, as did a motion to instruct the subcommittee to redraft the opinion to say that audits would be allowed as long as there was a separate trust account for each title insurer used by the law firm.

The committee did vote that it would answer the question from the inquiring attorney but then deferred the matter — after more than two hours of discussion — to address other matters on its agenda. The committee next meets at the Bar’s June Annual Convention.

“This is a difficult inquiry, and it’s important that the committee gives its full consideration to this,” said Loretta O’Keefe, chair of the subcommittee that drafted the proposed advisory opinion. “Continued discussion on this topic is good. It’s important for our profession and for people who do real estate transactional work.”

She said the proposed advisory opinion was based on strong Bar rules protecting the confidentiality of client information.

“Without discussing it with the client, you’re allowing trust account information, which is considered confidential, to be reviewed by a title insurance company that is not a party to the transaction,” O’Keefe said. “The Bar rules on confidentiality state that all information relating to the representation is confidential. Therefore, you have to worry about a third-party title insurer seeing information that would normally be considered confidential and whether there could be any dissemination of that information.”

She acknowledged that there are laws requiring title companies to protect information, but said those are not as all encompassing as Bar rules.

Committee member Lynwood Arnold served on the drafting subcommittee but opposed the proposed opinion, saying it failed to deal with the complexities of real estate transactions. For example, he said a lawyer may be hired by the seller to handle a closing but the money in his trust account is a payment from the buyer to the seller, pending the closing.

“I know lawyers involved in closing pass closing statements out to people who are not clients. In a closing, you’ve got a lot of different stakeholders who require information,” he said. “For example, you have to give information to the lender; you have to give information to the title insurer; you have to give information to insurance agents, to real estate agents. That’s part of the implied or understood part of the scope of your representation.”

Also, if attorneys and law firms set up multiple trust accounts for multiple title companies and multiple clients, title companies will have worries that defalcating attorneys will be able to avoid detection by switching money between audited and unaudited funds, he said.

“It’s in the best interest of the client to have a viable title insurance system, and the audit can uncover problems,” Arnold said.

The issue came to the ethics panel following a legislative change to F.S. §626.8473, effective July 1, 2012. It requires attorneys handling real estate transactions in which they act as a title of settlement agent to deposit all funds relating to those transactions into trust accounts reserved for those real estate dealings. The attorney must “permit the account to be audited by its title insurers, unless maintaining funds in the separate account for a particular client would violate applicable rules of The Florida Bar.”

The inquiring attorney noted he works in a firm where several attorneys handle such real estate transactions, working with a number of title insurance companies. He asked if the firm could ethically allow a title insurance company to audit a trust account that included funds from clients who have no dealings with that title company, without consent from those clients.

The proposed opinion from the subcommittee — rejected by the full committee — answered that question with a “no.”

“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 proposed opinion said. “That would not serve those clients’ interests and would be tantamount to permitting the insurer to audit a general trust account in violation of the prohibition expressed in [Ethics] Opinion 93-5. The inquirer’s affirmative duties to inform and explain under [Bar] Rules 4-1.4 and 4-1.6 (a) would be triggered under such circumstances. Disclosure to title insurers without a client’s informed consent would be prohibited by Rule 4-1.6 (a) and the exception under Rule 4-1.6 (c) (1) [which allows a disclosure if it benefits the client] would be inapplicable.”

The attorney could allow the audit of “a single trust account used exclusively for client transactions insured by the title insurer requesting the audit.”

The inquiring attorney also asked if the lawyers would be exempt from the law because it violates Bar ethics rules. The proposed opinion answered by noting that was a question of law, which is beyond the committee’s purview.

But it also went on to note, “Lawyers . . . 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.”

O’Keeffe said the committee was discussing that section of the proposed opinion when it ran out of time.

The issue generated considerable debate. The Real Property, Probate and Trust Law Section’s Executive Committee submitted a letter advising that it thinks the audits are allowable as they protect clients and that there is no need to maintain a separate trust account for each title insurance company or for each client.

The section, in a letter from Chair Wm. Fletcher Belcher, asserted: “In most real estate transactions, all parties, opposing counsel, and real estate brokers are privy to the closing statement and receive a copy of it. As a result, neither the information on a closing statement, nor the receipts and disbursements from a special trust account in accordance with a closing statement, are confidential. In such cases, permitting an audit to confirm that disbursements were made in accordance with the approved closing statement does not violate the duty of confidentiality. . . .”

Likewise, W. Theodore Conner, senior vice president and general counsel for Attorneys’ Title Fund Services, wrote to the committee that several federal laws and state administrative procedures already provide privacy protections, and that consumers would benefit from the audits. He also argued the audit is little different from attorneys engaging third-party bookkeepers and accountants to handle their trust accounts.

“[T]here are immediate benefits to clients to have an independent audit conducted,” Conner said. “At a minimum, it should be left to each attorney to establish whether to maintain one common real estate transaction account or one for each title insurer’s transactions. It cannot be said that the clients are never benefitted by audits by title insurers irrespective of whether a particular transaction was insured by the auditing insurer.”

[Revised: 09-25-2014]