1.17 Closings

• Library: Real Estate Transactions in Virginia (Virginia CLE) (2019 Ed.)

1.17 CLOSINGS

1.1701 Who Is the Client: Lender, Borrower, or Seller?

A. In General. Commonly, the purchaser-borrower's attorney impliedly (if not expressly) acts also as attorney for the lender (or vice-versa), but it is misconduct for the attorney to do so without complying with the disclosure and consent requirements described in paragraphs 1.701 through 1.705 of this chapter. However, even an attorney who intends to represent only one party and successfully avoids unintentionally creating an implied attorney-client relationship with any other party is still likely to be subject to certain fiduciary duties and warranties to other parties. ¹⁹⁶

B. Loan Closing Instructions from Lender or Title Insurer. Failure of the borrower's lawyer to comply with the lender's or the title insurer's loan-closing instructions may subject the lawyer to liability to the lender or the insurer. ¹⁹⁷

C. Insured Closings. The fact that a title insurance company may issue to a lender or borrower "insured closing" coverage under which the company insures compliance with closing and settlement requirements by an "approved attorney" does not relieve the attorney of the duty to disburse the

[Page 36]

settlement proceeds in accordance with the fiduciary standards described in paragraph 1.1705 of this chapter. ¹⁹⁸

1.1702 Deeds.

A. Preparation of Deed for "Nonclient" Seller. Absent clear agreement to the contrary, the mere preparation of a deed for a seller impliedly establishes an attorney-client relationship with the seller even when the lawyer intended to act exclusively as the attorney for the purchaser, borrower, or lender. ¹⁹⁹ The implied representation of the seller imposes strict fiduciary duties and warranties to the seller as well as to each person whom the lawyer intended to represent as a client. ²⁰⁰

B. Accepting Custody of Deed from Nonclient. Unless otherwise agreed, by accepting custody of a seller's deed, a lawyer impliedly undertakes a fiduciary duty to the seller to (i) refrain from recording the deed unless and until the lawyer has direct, unqualified control over sufficient funds to satisfy all encumbrances payable at settlement and (ii) disburse all remaining proceeds properly. ²⁰¹

C. Recordation. A lawyer must not record a deed until the preconditions have been satisfied, and after recording, the lawyer must promptly comply with strict disbursement duties. ²⁰²

D. Purchase Price. It is misconduct for a lawyer when recording a deed to knowingly list an incorrect amount as the purchase price identified in the contract even if the client-purchaser in a commercial real-estate transaction were to contend that most of the price identified in the contract really represented "consulting fees" paid by the purchaser to the seller. ²⁰³

[Page 37]

1.1703 Deeds of Trust.

A. Subordinating Deed of Trust Contrary to Contract Terms. Recording a deed of trust in a manner that subordinates it to another instrument contrary to the terms of the contract renders the lawyer liable for damages. ²⁰⁴

B. Failure to Discover and Report Deeds of Trust. Negligently failing to discover or report properly indexed deeds of trust is sufficient to support imposition of disciplinary sanctions. ²⁰⁵ However, an attorney is not liable for failing to discover a misindexed deed of trust. ²⁰⁶

C. Violating Existing Deed of Trust. The lawyer for the maker on an existing first deed of trust note does not have a duty to inform the lender, who is not the lawyer's client, that a subsequent transaction being handled by the lawyer for the maker is contrary to the terms of the first deed of trust. ²⁰⁷

D. Trustees. Lawyers for one or more of the parties often undertake to serve also as trustees on deeds of trust. Undertaking these dual roles may create ethical dilemmas. ²⁰⁸

1.1704 Recordation.

A. Lawyers' Implied Warranties upon Recording Deed or Deed of Trust. Unless otherwise agreed, recordation of the seller's deed impliedly warrants to the seller, even when the seller is not the lawyer's client, that the recording lawyer has direct, unqualified control over sufficient funds to satisfy all encumbrances and other disbursements payable at settlement and imposes fiduciary duties on the lawyer to (i) satisfy promptly all such encumbrances; (ii) disburse all remaining funds properly; and (iii) procure and record promptly evidence of the satisfaction or release of all such encumbrances. ²⁰⁹ By recordation, the attorney also impliedly warrants that

[Page 38]

there are at least good-faith factual and legal grounds for believing that the deed or deed of trust represents a valid interest affecting real property. ²¹⁰

B. Other Recordation Issues. Subordination of a deed of trust contrary to the contract terms can be grounds for civil liability. ²¹¹ Unreasonable delay in recording a deed or deed of trust is sufficient grounds for imposition of disciplinary sanctions. ²¹² It is misconduct for a lawyer to knowingly list an incorrect amount as the purchase price when recording a deed. ²¹³

1.1705 Disbursements.

A. Statutory Requirements. Before enactment of the chapter formerly known as the Wet Settlement Act ²¹⁴ and absent agreement of the parties to the contrary, an attorney was not ethically permitted to record the instruments of title unless and until he or she had unqualified control over sufficient liquid funds to be able to disburse the proceeds promptly after recordation. Moreover, the attorney could not ethically disburse until after recordation and after sufficient prior deposits identifiable to the disbursements had become "irrevocably" credited to the attorney's trust account by the bank as "collected" funds. ²¹⁵ The statutory requirement that a settlement attorney disburse all proceeds within a specified time after "disbursement of loan funds" to the attorney makes it ethically permissible for a settlement attorney to disburse after recordation against deposits received in the form of negotiable instruments specifically identified in the statute, even when the lender fails to furnish the funds in a form sufficient to become promptly "collected...