• Delaware Supreme Court: Lawyers Must Directly Supervise Disbursement of Funds in Real Estate Transactions
  • November 2, 2006 | Author: Richard P. Eckman
  • Law Firm: Pepper Hamilton LLP - Wilmington Office
  • On September 22, 2006, the Supreme Court of Delaware approved the report and recommendations of the Delaware Board on Professional Responsibility finding that attorneys must directly supervise the disbursement of funds from real estate transactions pursuant to Rule 1.15(A) trust accounts. Attorneys allowing title companies or other third parties to disburse settlement funds are assisting in the unauthorized practice of law, according to the report, and could face sanctions.

    The report concludes that by allowing a title company to disburse settlement funds in real estate financing transactions, attorneys cannot properly supervise the disbursement of funds and comply with the requirements, accountability and oversight envisioned by Rule 1.15 and Rule 1.15(A) of the Delaware Lawyers Rules of Professional Conduct. The report said that that the receipt and disbursement of settlement funds by a non-licensed party (the title company) constituted assisting in the unauthorized practice of law in violation of Rule 5.5.

    The board based its findings on Mid-Atlantic Settlement Services, Inc., et al., in which the Court found that real estate settlements constitute the practice of law and, as such, require that settlements be conducted by a Delaware attorney. Mid-Atlantic held that the disbursement of funds was an aspect of a real estate transaction that specifically constituted the practice of law. While Mid-Atlantic did not clearly articulate the role of the lawyer in the disbursement of real estate settlement funds, it was clear that the Court was concerned about the protection that would be afforded to clients for funds involved in real estate settlements.

    That concern manifested itself in Rule 1.15 and Rule 1.15(A) of the Delaware Lawyers Rules of Professional Conduct. These two rules require an attorney to keep funds separate from his or her own property, to maintain funds in a separate trust or escrow account, to reconcile the amount monthly, and to allow those accounts to be subject to examination by the auditor for the Lawyers Fund for Client Protection. In addition, these rules address trust account overdraft notification and require the Office of Disciplinary Counsel to be notified if a trust or escrow account has insufficient funds.

    The report found that the protections afforded by the ruling in Mid-Atlantic, and subsequently in Rule 1.15 and 1.15(A), would be “inconsequential” if Delaware attorneys could avoid responsibility in real estate transactions by allowing non-licensed persons and entities to control and monitor the disbursement of settlement funds. An attorney who permits this third-party action has violated the responsibilities regarding non-lawyer assistants under Rule 5.3 and has assisted in the unauthorized practice of law in violation of Rule 5.5(a), the report said.

    The approval by the Court of the report makes no distinction between settlements involving residential real estate closings and commercial real estate closings. Therefore, unless the Court clarifies its position, the rule adopted by the Court applies to all settlements in Delaware involving real estate.