Legislature attacks unauthorized practice of law

It isn’t every day a new cause of action comes along, but June 16 was one of them.

That was the day both chambers of the North Carolina Legislature voted unanimously to pass Senate Bill 349, which provides a private cause of action to consumers who can show they were harmed by the unauthorized practice of law.

As of press time, the bill had not been signed into law by Gov. Bev Perdue, but a spokesperson for the governor said it is one of several bills the governor is considering.

Some attorneys say the legislation provides an opportunity for attorneys to prosecute claims on behalf of aggrieved clients, particularly those involved in real estate transactions.

Fayetteville real estate attorney Holden Reaves said the legislation could provide a means for lawyers to combat “the rampant unauthorized practice of law that we’ve seen in this state, especially in the area of residential real estate closings.”

But the language of the bill encompasses far more than residential real estate, Reaves said.

“It is much broader,” he said. “Companies like LegalZoom who, in my opinion, are engaged in the unauthorized practice of law by preparing wills and setting up corporations for citizens in this state, may be subject to actions based on this new law.”

And those actions could be prosecuted on a class-action scale, Reaves said.

“Definitely any time a new law creates a private cause of action, there is an opportunity for litigation attorneys,” Reaves said.

But LegalZoom vice president and general counsel Chas Rampenthal told Lawyers Weekly that LegalZoom “does not practice law and has never been found to be engaged in the practice of law in any jurisdiction, including North Carolina.”

Reaves emphasized that the intent of the law was to protect consumers harmed by the unauthorized practice of law.

In the past, only district attorneys could prosecute persons or entities that engaged in the unauthorized practice of law. Now anyone damaged by UPL can bring a cause of action against an unauthorized practitioner.

But, Rampenthal said, “If the law is used to limit a North Carolina consumer’s choice to use online legal software and other affordable self-help methods to create their own legal documents, then it will harm far more than it will benefit.”

He said if LegalZoom is targeted “in an anti-competitive manner, we will use all available resources to vigorously defend the right of North Carolina consumers to access legal software and create their legal documents. Legal documents should be more than just a privilege for the wealthy.”

Clarification stripped

In its original form, the bill would have clarified that attorneys were the only people allowed to handle real estate closings. (See “Lawyers’ bill would wrest control of closings” in April 25 edition of Lawyers Weekly). That language, however, was stripped from the bill as a concession to the North Carolina Bankers Association. The Bankers Association wanted to ensure that its members — banks and lending institutions — preserved the ability to close their own loans in limited circumstances.

Bankers Association Executive Vice President and Counsel Paul Stock said the law was already clear that only attorneys could close real estate transactions, and clarifying that may have had the unintended consequence of affecting the ability of banks and lenders to close loans.

“I’ve learned in my experience that when you clarify something, it often turns out that different parties have different opinions about what was clarified,” Stock told Lawyers Weekly.

“The problem is if there is a difference of opinion as to what needs to be clarified, then whatever is clarified is seen as changing existing law,” Stock said.

In the end, proponents of the bill made a decision not to clarify the law regarding who can conduct real property closings and instead focused on putting teeth into the enforcement of the unauthorized practice of law, Stock said.

“There is no question that there are scofflaws out there who are not doing what they are supposed to be doing,” Stock said. “We had no problem getting out of the way once we determined that the legislation was not going to be a burden for our members.”

The Senate bill was ratified June 17 and presented to the governor on June 20.

Filling a void

Raleigh attorney Benjamin R. Kuhn said the new law fills a void. “Before this, there was no way for a consumer to make a claim based on the unauthorized practice of law for damages and attorney fees.”

But attorneys themselves are not immune from potential actions under the new law.

“Anybody who aids or abets someone in the commission of the unauthorized practice of law is subject to a private cause of action,” Kuhn said.

That means if an attorney aids a non-lawyer in the unauthorized practice of law, the attorney could face potential liability.

Kuhn said the provision allowing attorneys who handle UPL claims on behalf of consumers to collect attorneys’ fees may encourage litigators to represent consumers in cases with otherwise limited damages potential.

“This is a sea change in that it allows effective remedies for consumers who are harmed by illegal UPL services,” Kuhn said.

But even consumers who are not harmed have a right under the new law to be repaid for services provided by an unauthorized practitioner.

“Unauthorized practitioners are prohibited from earning a fee while engaging in conduct prohibited by Chapter 84 (of the General Statutes),” Kuhn said. “If someone earns fees while committing UPL, that person has to give the fees back to the consumer.”

Kuhn also noted that the law requires settlement agents who handle closing funds to pay interest generated from escrow accounts to IOLTA, a non-profit program administered by the State Bar “for the purpose of funding grants to providers of civil legal services for the indigent and to programs that further the administration of justice,” according to the program’s website.

Attorneys are required by rule to remit all interest earned on client trust accounts to IOLTA.

“Now any non-attorney who handles closings and earns interest on a trust account has to give the interest to IOLTA,” Kuhn said. That takes away the temptation to skim money from trust accounts, he said.

Attorneys need to add value

Wilmington attorney J. Keith Calder told Lawyers Weekly he hasn’t put the new private cause of action arrow in his quiver, “But I intend to do so.”

He said he continues to be dismayed and disheartened by the degradation of the real property practice in North Carolina “not only by laypeople but by attorneys who choose to take shortcuts and do not necessarily add value at the closing table or are even at the closing table.”

Calder said the practice could be improved by attacking the unauthorized practice of law — by going after non-attorneys who are engaging in UPL and attorneys who are aiding and abetting UPL — but he also said that attorneys need to encourage and plead with their peers “to strive to add value at the closing table.”

Mentorship of younger, less experienced attorneys is just as important as litigating against those who are seen as degrading the real property practice, Calder said.

“Old school attorneys need to continue to reach out and mentor younger attorneys who may not have had an opportunity to be mentored or who have chosen a path that maybe they thought was the right path, but who may have been misinformed,” Calder said. “Local attorneys I’ve mentored have given more back to me than I could ever have given them, and that’s the reward every teacher gets.”

Not far enough

Kannapolis attorney Clinton Forbis, who regrets the weakening of the bill’s original intent to clarify that only attorneys can conduct real estate closings, said the bill does not go far enough to protect consumers.

“That would have put settlement shops out of business,” Forbis said (See “Lawyers left out: Settlement shops drive dirt lawyers out, costs and claims for consumers up” in June 14, 2010 edition of Lawyers Weekly). “We ended up getting a much watered down version, but this is a good first step.”

So-called settlement shops are real estate title and closing agencies that attorneys say skirt North Carolina law regarding the involvement of attorneys in real property closings. 

Forbis said he thinks settlement shops are going to continue to find end runs around the law and continue to do business in some fashion, whether by flouting the law entirely or employing an attorney to sign off on title abstracts and reports.

If the legislation was the first step, “I think the second step would be a lawsuit that we can get before the Court of Appeals or Supreme Court that gives the appellate court the basis to finally rule in unequivocal language that a closing is the practice of law, and there are no ‘ifs,’ ‘ands’ or ‘buts’ about the fact that closings have to be done by attorneys.”