SC Lawyer, January 2005, #1. More HUD-1 misery.

• Author: By John Freeman

South Carolina Lawyer

Ethics Columns.

SC Lawyer, January 2005, #1.

More HUD-1 misery

South Carolina LawyerJanuary 2005Ethics Watch More HUD-1 miseryBy John FreemanLast issue's Ethics Watch column focused on the disciplinary mess closing lawyers Ray Lathan and Ron Barbare created for themselves by closing loans papered with false HUD-1s. The discussion noted the Supreme Court's obvious concern that residential real estate closings in this state be handled with scrupulous attention to detail and memorialized by completely accurate HUD-1s.

More evidence showing the Court's unwillingness to tolerate slack closing practices comes in the form of two new disciplinary decisions filed on November 8, 2004, Matter of Brown, Op. No. 25895, and Matter of Nevill, Op. No. 25888. Both cases involve misconduct in connection with residential real estate closings.

Lawyer Brown's misconduct fell into two categories that were the subject of separate agreements for discipline and were considered separately by the Court. The first grouping concerned a long-running spree of real estate closing misconduct that occurred after Brown graduated from law school but, for the most part, before he was admitted. This wrongdoing consisted of a pattern of misbehavior featuring acts of unauthorized practice, false witnessing and false notarizations.

Much of the misconduct occurred before Brown became a member of the Bar. Once he was admitted to practice, Brown's pattern of misbehavior did not change.

"[R]espondent ... continued the practices of witnessing and notarizing documents that were executed outside his presence and soliciting witnesses and notary signatures from individuals in the firm not present during execution." Featured in this part of the order was one closing where Respondent Brown performed an unethical trifecta: he forged his supervising lawyer's signature on closing papers and then witnessed and notarized the forgery using his own name.

For these shenanigans, largely occurring in the post-law school, pre-admission time period, Brown received a two-year suspension. That the Rules of Professional Conduct do not expressly reach acts of pre-admission misbehavior aside from fraudulent statements on bar applications was no defense to lawyer discipline. Citing cases from other jurisdictions, the Court held it had inherent authority to discipline lawyers for instances of pre-admission misconduct based on the nature and severity of the misconduct and its proximity in time to the respondent's omission.

The second part of the Brown opinion concerns his involvement in hard core real estate scams involving frauds practiced on lenders falling into three categories. The first involved bogus transactions whereby property sales were made to purchasers who represented they intended to occupy the properties as their primary residences, but actually were merely "borrower/investors [who] were told they needed no down payment and would actually be paid money to purchase homes." This scam led to myriad deceptions being practiced on the lenders, including fraudulent representations about owner occupancy.

As in Lathan and Barbare, the lenders received HUD-1s contrived to conceal crucial facts such as that the buyer-borrowers were contributing no money to the transaction and cash was being kicked back to investment companies ("Kenbill" and "Keystone") functioning as promoters for the fraudulent activity. Brown was faulted for closing his eyes to incriminating facts: "While respondent did not have specific knowledge that the borrowers did not intend to occupy the properties, he was aware of the nature of Kenbill's and Keystone's businesses and he had sufficient facts that should have caused him to question the legitimacy of the transactions."

Reminiscent of the the Lathan and Barbare matters, the second form of major post-admission misconduct in Brown centered on loan or property "flips." Brown's flip practice was more robust than that featured in Lathan and Barbare; Brown was found to have engaged in no fewer than eight of the wrongful transactions. In each case, the HUD-1s failed to disclose to the lender in the second transaction that the property was being transferred in two transactions rather than one, with the loan in the second transaction being used to fund the first conveyance. Brown "certified that he had complied" with the lender's closing instructions when he knew that was not the case.

As time passed, Brown's behavior did reform. The final chapter of Brown's post-admission misbehavior marked his most grave misconduct. This category of wrongs involved Brown's personal participation as a lawyer-investor in a scheme to obtain loans in amounts in excess of the true sales price for properties, with the seller kicking back money to various accomplices, including Brown's business partner who orchestrated the scam, plus various members of Brown's family and Brown's friends, most of whom represented to lenders they would live in the homes being purchased when there was no intention of doing so. Through this course of conduct, Brown managed to generate fraudulent HUD-1s, plus engage in flagrant conflicts of interests vis-a-vis the lenders and other scam participants, including family and friends.

Needless to say, the second series of closing misconduct yielded Brown the ultimate disciplinary sanction, disbarment. The only remaining question is why a federal or state prosecutor has not become interested in adding to Mr. Brown's punishment.

In comparison with Matter of Brown, the facts in Matter of Nevill are mild. Like Brown, Nevill was a closing attorney. Like Brown, Nevill's problems included HUD-1 errors. From there, the cases diverge widely. Unlike the long-running and increasingly flagrant pattern of deception featured in Brown, the Nevill disciplinary proceeding grew out of a single messed-up closing, caused by Nevill's client paying money to the property seller outside of closing. Nevill evidently did not know about the payment, causing him to over-disburse to the seller at closing, generating an incorrect HUD-1 in the process.

The error came to light three weeks later when Nevill's bank called with news his trust account was overdrawn by nearly $28,000. For some unexplained reason, the seller Nevill had overpaid was unwilling to pay back the money. Seeking to cover his trust account deficit, over the next few months Nevill advanced personal funds and waived closing fees payable out of the trust account. Meanwhile, the float from other closings kept his account from being overdrawn. When he realized the impropriety of using the float generated by other clients to cover the trust account deficit caused by his bungled closing, Nevill self-reported his misconduct. His subsequent agreement with Disciplinary Counsel to accept any punishment up to a 30-day suspension yielded a public reprimand.

The Brown and Nevill cases re-emphasize our Supreme Court's determination to protect participants in one of this state's most lucrative industries, the residential real estate business. Through its unauthorized practice decisions, the Court has insisted that closings be administered by lawyers, rather than lay entities anxious to take on the work. The Court's growing body of disciplinary case law shows its insistence that the real estate closing work it has reserved for lawyers must only be handled in a professional manner, or else.