FEE ATTORNEYS FIDUCIARY DUTIES & CONFLICTS OF INTEREST BRADFORD W. IRELAN

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1 FEE ATTORNEYS FIDUCIARY DUTIES & CONFLICTS OF INTEREST BRADFORD W. IRELAN OF IRELAN McDANIEL, P.L.L.C. ATTORNEYS AT LAW 440 LOUISIANA STREET, SUITE 1800 HOUSTON, TEXAS Tel: (713) Fax: (713) State Bar of Texas 24 TH ANNUAL ROBERT C. SNEED TEXAS LAND TITLE INSTITUTE December 4-5, 2014 San Antonio, Texas Special thanks go to Debra Hovnatanian, an associate at Irelan McDaniel, PLLC, who contributed extensively to this paper.

2 BRADFORD W. IRELAN Irelan McDaniel, PLLC 440 Louisiana, Suite 1800 Houston, Texas (713) FAX: (713) PROFESSIONAL HIGHLIGHTS o , Mr. Irelan has been recognized as a SuperLawyer by Texas Lawyer o , Mr. Irelan was voted a Top Attorney in Texas Civil Litigation Defense o AV Peer Review Rating with Martindale-Hubbell (highest rating for ethics and ability) o Texas Department of Insurance certified continuing education provider BOARD CERTIFICATIONS (Texas Board of Legal Specialization) o Civil Trial Law o Residential Real Estate Law EDUCATION o JD, 1986, George Washington University Law School o BA, 1983, Magna Cum Laude, University of Tennessee BAR ADMISSIONS MEMBER o All Texas State Courts o U.S. District Court for the Southern District of Texas o U.S. District Court for the Northern District of Texas o U.S. District Court for the Western District of Texas o U.S. District Court for the Eastern District of Texas o U.S. Fifth Circuit Court of Appeals o United States Supreme Court o State Bar of Texas (since November 7, 1986) o Houston Bar Association, Member, Litigation and Real Estate Sections o Houston Bar Foundation, Life Fellow o Texas Land Title Association, Member Judiciary Committee, Texas Land Title Association ( , 2011, Chairman) Legal Issues Committee, Texas Land Title Association ( ) Institute Committee, Texas Land Title Association ( , 2014) o American Land Title Association, Member OTHER PROFESSIONAL DISTINCTIONS George Washington School of Law Alumni Board of Directors Executive Committee, 2010 President-Elect, 2011 President, President Emeritus, 2014

3 I. HISTORY OF THE FEE ATTORNEY Title insurance has existed for only a little more than a century. Jacobus & Ellis, Texas Title Insurance 2:16 (Thompson Reuters Westlaw ed.). In the days before title insurance, licensed attorneys handled title transfers, and researched and rendered opinions on the status of title. Id. Today, title insurance issues in the vast majority of real estate transactions in Texas. Title insurance underwriters stand behind title policies, and authorize title insurance agents to conduct investigation of title and supervise the closing of transactions. The Texas legislature recognized, however, that in some areas of Texas, there were not enough real estate transactions to justify the operation of an abstract plant by a title company. For that reason, attorneys remain authorized under the Texas Title Insurance Act to participate in real estate closings in a number of ways, including: (1) represent parties to the closing (but not performing the closing), (2) close title transactions on behalf of the title company; and (3) own title companies or agencies that close transactions. In the past, fee attorneys contracted directly with title underwriters, and sometimes they still do. More common now, however, title agents open fee attorney offices in several locations. Further, many title agents with fee attorney offices close transactions for a variety of title insurance companies. This article surveys federal and state laws which impact fee attorneys and discusses a fee attorney s fiduciary duties, contractual and ethical obligations, and practical considerations. II. FEE ATTORNEYS AND FEE OFFICES Today, a fee attorney refers to a lawyer who has entered into a contractual relationship with a title insurance company, or an agent of a title insurance company, to close real estate transactions on its behalf in exchange for a portion of the title premium. See Commonwealth Land Title Co. v. Nelson, 889 S.W.2d 312, 314 n.1 (Tex. App. Houston [14 th Dist.] 1994, writ denied). The Texas Department of Insurance establishes the title insurance premium, and it must be charged as promulgated. Like fee attorneys, escrow officers are individuals who are entitled to close transactions on behalf of title companies. Id., citing Tex. Ins. Code Ann. Art. 9.02(g) (Vernon 1981). Escrow officers countersign title insurance forms, supervise the preparation and the delivery of title insurance forms, sign escrow checks, and close transactions. Id. Escrow officers who are not attorneys must be licensed by TDI. In contrast, attorneys can close transactions without being licensed as an escrow officer. When an attorney is a licensed escrow officer, the attorney may use the name of the title company in his law practice and have employees who are licensed escrow officers. Licensed escrow officers, whether attorney or bona fide employees of attorneys, must be appointed by a title company. With permission of a title insurance agent, a lawyer may close transactions without being an escrow officer and receive a fee from a title agent or direct operation. The payment of lawyers who do not have an escrow officer's license is regulated by Section IV, Procedural Rule P-22. P-22 prohibits payment for closing or title examination to anyone who is not a bona fide employee of a direct operation, agent, or escrow officer, with certain exceptions. Those exceptions include attorneys who perform closing or title examination services. P-22 requires that the fee paid to attorneys be disclosed on form T-00, that the attorney actually perform services, that a schedule of fees be filed with the title company in advance, that all premiums be remitted to the title company, and that the attorney charge no fee for referring business to a title company. When an attorney is a licensed escrow officer and chooses to use the name of a title company in his practice, the operation is known as a fee office. It is not unusual for a fee office to have a number of licensed escrow officers who are not lawyers. In general, fee offices are established with an agreement between a title agent or direct operation and a lawyer or law firm. III. LEGAL AUTHORITY THAT GOVERNS FEE ATTORNEYS Several statutes, codes and disciplinary rules impact fee attorney practice in Texas, including Section of the Texas Insurance Code, its federal counter-part Section 8 of the Real Estate Settlement Procedures Act of 1974 ("RESPA") (12 U.S.C.A. 2607), and Procedural Rule P-22, Procedural Rule P- 56, and Form T-00 of the Basic Manual for the Writing of Title Insurance in the State of Texas, as promulgated by the Texas Department of Insurance (the Manual ). A. Texas Insurance Code Article Nine of the Texas Insurance Code governs the business of title insurance in Texas. With respect to fee attorney practice, relevant sections define what it means for a fee attorney or other individual to close a transaction and what rebates or discounts may be 2014 Texas Land Title Institute - Fee Attorneys Page 1

4 given. 1. "Closing the Transaction" A. Insurance Code Section : (a) For purposes of this title, "closing the transaction" describes the investigation that is made: (1) on behalf of a title insurance company, title insurance agent, or direct operation before the title insurance policy is issued; and (2) to determine proper execution, acknowledgement, and delivery of all conveyances, mortgage papers, and other title instruments necessary to consummate a transaction. (b) Closing the transaction includes a determination that: (1) all delinquent taxes have been paid; (2) in the case of an owner title insurance policy, all current taxes, based on the latest available information, have been properly prorated between the purchaser and seller; (3) the consideration has been passed; (4) all proceeds have been properly disbursed; (5) a final search of the title has been made; and (2) payments for services actually performed by a title insurance company, a title insurance agent, or a direct operation, in connection with closing the transaction, furnishing of title evidence, or title examination. Certainly, the receipt of kickbacks or rebates for which payment may not exceed the percentages of the premium or amounts established by the commissioner for those payments; or (3) payment of bona fide compensation to a bona fide employee principally employed by a title insurance company, direct operation, title insurance agent, or other reasonable payment for goods or facilities actually furnished and received; or (4) payments for services actually performed by an attorney in connection with title examination or closing a transaction, which payment may not exceed a reasonable charge for such services. (5) Nothing in this article shall affect the division of premium between a title insurance company and its subsidiary title insurance agent when the title insurance company directly issues its policy or contract of title insurance pursuant to Article For purposes of this provision, a subsidiary is a company. (6) Legal promotional and educational activities that are not conditioned on the referral of title insurance business. (6) all necessary papers have been filed for record. 2. Section Rebates and Discounts Section provides: A. No commission, rebate, discount, portion of any title insurance premium, or other thing of value shall be directly or indirectly paid, allowed or permitted by any person doing the business of title insurance or received or accepted by any person for doing the business of title insurance or for soliciting or referring the title insurance business. B. This Section may not be construed as prohibiting: (1) a foreign or domestic title insurance company doing business in this state under this Chapter, from appointing as its title insurance agent pursuant to this Chapter a person owning or leasing and operating an abstract plant of such county and making the arrangement for division of premiums with the agent as shall be set by the commissioner; C. A person receiving any form of compensation under Section B(2) of this Article must be licensed as provided for under this Chapter. D. The payment or receipt of a commission, rebate, discount, or other thing of value to or by any person for soliciting or referring title insurance business in violation of this Article is engaging in the unauthorized business of insurance, and in addition to any other penalty, after notice and opportunity for hearing, is subject to a monetary forfeiture not less than the value nor more than three times the value of the commission, rebate, discount, or other thing of value. E. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement or closing in connection with a transaction involving the conveyance or mortgaging of real estate located in the State of Texas other than for services actually performed. (emphasis added) Texas Land Title Institute - Fee Attorneys Page 2

5 B. Real Estate Settlement Procedures Act of 1974 and Regulation X The federal counterpart to Section is Section 8 of the Real Estate Settlement Procedures Act of 1974 ("RESPA") (12 U.S.C.A et seq.), including additional regulations contained in 12 U.S.C.A ("Regulation X.") 1. RESPA Congress enacted RESPA as a response to revelations that settlement charges for the purchase of homes in the United States were inordinately high due to commissions, referral fees, rebates and kickbacks passing among providers of settlement services, including attorneys and title insurers. See 12 U.S.C.A. 2601(a). Under the Act, "settlement services" include (among numerous other things), services provided by an attorney. 12 U.S.C.A. 2602(3). 12 U.S.C.A. section 2607 provides, in part: Prohibition against kickbacks and unearned fees (a) Business referrals No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. (b) Splitting charges No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the tendering of a real estate settlement service in connection with a federally related mortgage loan other than for services actually performed. (c) Fees, salaries, compensation, or other payments Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance. (4) affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred (i) in the case of a face-to-face referral or a referral made in writing or by electronic media, at or before the time of the referral (and compliance with this requirement in such case may be evidenced by a notation in a written, electronic, or similar system of records maintained in the regular course of business); (ii) in the case of a referral made by telephone, within 3 business days after the referral by telephone, (and in such case an abbreviated verbal disclosure of the existence of the arrangement and the fact that a written disclosure will be provided within 3 business days shall be made to the person being referred during the telephone referral);... and any required written receipt of such disclosure (without regard to the manner of the disclosure under clause (i), (ii), or (iii)) may be obtained at the closing or settlement (except that a person make a face-to-face referral who provides the written disclosure at or before the time of the referral shall attempt to obtain any required written receipt of such disclosure at such time...(b) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangements, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship. * * * For purpose of the preceding sentence, the following shall not be considered a violation of clause (4)(B); (i) any arrangement that requires a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender s interest in a real estate transaction, or (ii) any arrangement where an attorney or law firm represents a client in a real estate transaction and issues or arranges for the issuance of a policy of title insurance in the transaction directly as agent or through a separate corporate title insurance agency that may be established by that attorney or law firm and operated as an adjunct to his or its law practice. (d) Penalties for violations; joint and several liability; treble damages; actions for injunction by Secretary and by State officials; costs and attorney fees; construction of State Laws: (1) Any person or persons who violate the provisions of this section shall be fined not more than $10,000 or imprisoned for not more than one year, or both. (2) Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service Texas Land Title Institute - Fee Attorneys Page 3

6 (3) No person or persons shall be liable for a violation of the provisions of subsection (c)(4)(a) of this season if such person or persons proves by a preponderance of the evidence that such violation was not intentional and resulted from a bona fide error. (4) The Secretary, the Attorney General of any State, or the insurance commissioner of any State may bring an action to enjoin violations of this section. (5) In any private action brought pursuant to this subsection, the court may award to the prevailing party the court costs of the action together with reasonable attorney s fees. (6) No provision of State law or regulation that imposes more stringent limitations or affiliated business arrangements shall be construed as being inconsistent with the action. RESPA defines an "affiliated business arrangement" as an arrangement in which (A) a person who is in a position to refer business incident to or a part of the real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership of more than l.% in a provider of settlement services; and (B) either of such persons directly or indirectly refer such business to that provider or affirmatively influences a selection of that provider. 12 U.S.C.A. 2602(7). Associates means one who has one or more of the following relationships with a person in a position to refer settlement business: (A) a spouse, a parent, or child of such person; (B) a corporation or business entity that controls, is controlled by or is under common control with such person; (C) an employer, officer, director, partner, franchiser, or franchisee of such person; or (D) anyone who has an agreement, arrangement, or understanding, with such person, the purpose or substantial effect of which is to enable the person in a position to refer settlement businesses to benefit financially from the referrals of such business. 12 U.S.C.A. 2602(8). 2. Regulation X Congress enacted regulations in addition to what RESPA originally contained, in "Regulation X." Originally found in the CFR, Regulation X is now codified with RESPA. a. Kickbacks prohibited. 12 U.S.C.A. sections (b)-(g), like the RESPA provisions above, also prohibit kickbacks and unearned fees, and limit the circumstances under which a fee may be split: (b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in (g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business. (c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this Part be avoided by creating an arrangement wherein the purchaser of services splits the fee. (d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term "payment'' is used throughout and as synonymous with the giving or receiving any "thing of value'' and does not require transfer of money. (e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the 2014 Texas Land Title Institute - Fee Attorneys Page 4

7 receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business. (f) Referral. (1) A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. (2) A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use (see , "required use'') a particular provider of a settlement service or business incident thereto. (g) Fees, salaries, compensation, or other payments. parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.); (vi) Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or (vii) An employer's payment to its own employees for any referral activities b. Affiliated business arrangements. Regulation X likewise provides additional parameters for affiliated business arrangements and required disclosures. 12 U.S.C.A provides: (1) Section 8 of RESPA permits: (i) A payment to an attorney at law for services actually rendered; (ii) A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance; (iii) A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan; (iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed; (v) A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all (a) General. An affiliated business arrangement is defined in section 3(7) of RESPA (12 U.S.C. 2602(7)). (b) Violation and exemption. An affiliated business arrangement is not a violation of section 8 of RESPA (12 U.S.C. 2607) and of if the conditions set forth in this section are satisfied. Paragraph (b)(1) of this section shall not apply to the extent it is inconsistent with section 8(c)(4)(A) of RESPA (12 U.S.C. 2607(c)(4)(A)). (1) The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement set forth in appendix D of this part, of the nature of the relationship (explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider (which describes the charge using the same terminology, as far as practical, as section L of the HUD-1 settlement statement). The disclosures must be provided on a separate piece of paper no later than the time of each referral or, if the lender requires use of a particular provider, the time of loan application, except that: 2014 Texas Land Title Institute - Fee Attorneys Page 5

8 (i) Where a lender makes the referral to a borrower, the condition contained in paragraph (b)(1) of this section may be satisfied at the time that the good faith estimate or a statement under (d) is provided; and (ii) Whenever an attorney or law firm requires a client to use a particular title insurance agent, the attorney or law firm shall provide the disclosures no later than the time the attorney or law firm is engaged by the client. Failure to comply with the disclosure requirements of this section may be overcome if the person making a referral can prove by a preponderance of the evidence that procedures reasonably adopted to result in compliance with these conditions have been maintained and that any failure to comply with these conditions was unintentional and the result of a bona fide error. An error of legal judgment with respect to a person's obligations under RESPA is not a bona fide error. Administrative and judicial interpretations of section 130(c) of the Truth in Lending Act shall not be binding interpretations of the preceding sentence or section 8(d)(3) of RESPA (12 U.S.C. 2607(d)(3)). (2) No person making a referral has required (as defined in , "required use'') any person to use any particular provider of settlement services or business incident thereto, except if such person is a lender, for requiring a buyer, borrower or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction, or except if such person is an attorney or law firm for arranging for issuance of a title insurance policy for a client, directly as agent or through a separate corporate title insurance agency that may be operated as an adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction. (i) In an affiliated business arrangement: (A) Bona fide dividends, and capital or equity distributions, related to ownership interest or franchise relationship, between entities in an affiliate relationship, are permissible; and (B) Bona fide business loans, advances, and capital or equity contributions between entities in an affiliate relationship (in any direction), are not prohibitedso long as they are for ordinary business purposes and are not fees for the referral of settlement service business or unearned fees. (ii) A return on an ownership interest does not include: (A) Any payment which has as a basis of calculation no apparent business motive other than distinguishing among recipients of payments on the basis of the amount of their actual, estimated or anticipated referrals; (B) Any payment which varies according to the relative amount of referrals by the different recipients of similar payments; or (C) A payment based on an ownership, partnership or joint venture share which has been adjusted on the basis of previous relative referrals by recipients of similar payments. (iii) Neither the mere labelling of a thing of value, nor the fact that it may be calculated pursuant to a corporate or partnership organizational document or a franchise agreement, will determine whether it is a bona fide return on an ownership interest or (3) The only thing of value that is received from the arrangement other than payments listed in (g) is a return on an ownership interest or franchise relationship. franchise relationship. Whether a 2014 Texas Land Title Institute - Fee Attorneys Page 6

9 thing of value is such a return will be determined by analyzing facts and circumstances on a case by case basis. (iv) A return on franchise relationship may be a payment to or from a franchisee but it does not include any payment which is not based on the franchise agreement, nor any payment which varies according to the number or amount of referrals by the franchisor or franchisee or which is based on a franchise agreement which has been adjusted on the basis of a previous number or amount of referrals by the franchiser or franchisees. A franchise agreement may not be constructed to insulate against kickbacks or referral fees. (c) Definitions. As used in this section: (1) Associate is defined in section 3(8) of RESPA (12 U.S.C. 2602(8)). (2) Affiliate relationship means the relationship among business entities where one entity has effective control over the other by virtue of a partnership or other agreement or is under common control with the other by a third entity or where an entity is a corporation related to another corporation as parent to subsidiary by an identity of stock ownership. (3) Beneficial ownership means the effective ownership of an interest in a provider of settlement services or the right to use and control the ownership interest involved even though legal ownership or title may be held in another person's name. (4) Control, as used in the definitions of "associate" and "affiliate relationship," means that a person: (i) Is a general partner, officer, director, or employer of another person; (ii) Directly or indirectly or acting in concert with others, or through one or more subsidiaries, owns, holds with power to vote, or holds proxies representing, more than 20 percent of the voting interests of another person; (iii) Affirmatively influences in any manner the election of a majority of the directors of another person; or (iv) Has contributed more than 20 percent of the capital of the other person. (5) Direct ownership means the holding of legal title to an interest in a provider of settlement service except where title is being held for the beneficial owner. (6) Franchise is defined in 16 CFR 436.2(a). (7) Franchisor is defined in 16 CFR 436.2(c). (8) Franchisee is defined in 16 CFR 436.2(d). (9) Person who is in a position to refer settlement service business means any real estate broker or agent, lender, mortgage broker, builder or developer, attorney, title company, title agent, or other person deriving a significant portion of his or her gross income from providing settlement services. (d) Recordkeeping. Any documents provided pursuant to this section shall be retained for 5 years after the date of execution. The interplay between RESPA and Regulation X, on one hand, and the Insurance Code, on the other, is important. First, Subsection (d)(6) of RESPA above provides that a state law (such as Texas Insurance Code Section ), should not be considered inconsistent with Section 8 in the event that it is more restrictive than federal law. However, RESPA is sometimes more restrictive than state law; for example, RESPA addresses "affiliated business arrangements" which Insurance Code Section does not address. Further, 12 U.S.C.S. section (a) provides that "state law that are inconsistent with RESPA or this part are preempted to the extent of the inconsistency. However, RESPA and these regulations do not annul, alter, affect, or exempt any person subject to their provisions from complying with the laws of any State with respect to settlement practices, except to the extent of the inconsistency. In other words, fee attorneys must take care to comply with Texas and federal law in this area because the state and federal authorities are meant to work together to regulate title insurance and real estate transactions Texas Land Title Institute - Fee Attorneys Page 7

10 C. Texas Procedural Rule P-22 The Manual also contains information relevant to a fee attorney. Procedural Rule 22 (P-22) applies to the payment of a fee for a title examination and/or a closing: P-22. Payment of a Fee for Examination and/or Closing No payment shall be made by a Title Insurance Company, Title Insurance Agent, Escrow Office or any employee or agent of any of them, to any Person who is not its bona-fide employee, for examination of a title and/or closing a transaction unless: (A) Such Person is (i) a Title Insurance Company as defined in Section , Insurance Code, and qualified to do business in the State of Texas, (ii) a Title Insurance Agent as defined in Article 9.02, Insurance Code, and licensed to do business in the State of Texas by the State Board of Insurance, or (iii) an attorney at law duly licensed by the Supreme Court of Texas to practice law in the State of Texas, or (iv) any Person legally authorized to perform such services; and (B) Such Person has performed all of the services described in P-i, paragraph f, that such Person is legally authorized to perform, and/or the examination of the title required for the issuance of a commitment for title insurance prior to the issuance of any such commitment, construction binder, policy or other contract of title insurance, to determine the condition of the title to be insured; and (C) Timely disclosures of such payment have been made as required by Rule P-21 and Section ; and (D) Any payment made must be commensurate with the services actually performed; and (E) The Person rendering the service shall have filed with the Company at least thirty (30) days prior to the rendering of such service a written schedule of charges normally imposed by such Person for such services (Schedule) and such Schedule shall have been agreed to and approved by the Company as being reasonable charges for such services. However, payments to licensed title insurance agents are excluded from the requirements of this paragraph (E); and (F) The Person rendering the service shall have presented to the Company, at or prior to the time of payment of said services, a written itemized statement or invoice which clearly sets forth in detail the actual services rendered and billed for in representing the Company in the respective settlement, closing and/or (C) Timely disclosures have been made as required Section ; and examination, and such Company verifies, in writing, that such services were actually rendered in accordance with form T-00; and (G) In the event of collection of the title insurance premium by such Person, the entirety of such premium shall have been remitted to the Company; and (H) No portion of the charge for services actually rendered shall be attributable to, and no payment shall be made for the solicitation of, or as an inducement for the referral or placement of the title insurance business with the company; and (I) Any portion of any payment inconsistent with the requirements hereof, or any payment of the Company to any Person for the solicitation of, or as an inducement for the referral or placement of title insurance business, is deemed to be a violation of Section ; and (J) The Company shall keep written itemized statements or invoice, and the Schedule, in its official records for a period of five years and shall make such copies thereof available to the State Board of Insurance and its representatives for inspection and duplication upon request. Rule P-22 presents an important question: what constitutes a payment that is commensurate with the services actually performed? Procedural Rule P-2l and Section of the Texas Insurance Code require an attorney to timely disclose through an itemized statement the payments received and the services rendered. However, there is no guidance as to how to determine whether the payment made was reasonable based on services rendered. Rule P-22, Subsection (H) is also significant because it restates the prohibitions contained in Section against payments for soliciting or referring business to a title company. Finally, a title company must maintain for a period of five (5) years the written itemized statements or invoices of the attorneys it paid. This provision is intended to provide a policing mechanism for TDI. D. Procedural Rule P-56 TDI has also prohibited rebates and discounts: 1 For the purposes of this rule the following terms have the following meanings. a "Authorized Person" means a person doing 2014 Texas Land Title Institute - Fee Attorneys Page 8

11 the business of title insurance under the authority of the Texas Title Insurance Act of the Insurance Code. b "Producer" means a real estate broker, real estate agent, lender, mortgage company, mortgage broker, builder, developer, attorney, or architect who is not an Affiliate of an Authorized Person. A Trade Association is not a Producer; however, Paragraphs 2 and 3 of this rule apply to a Trade Association. c "Affiliate" means: i an officer, director, agent or employee of an Authorized Person or a Producer; ii a member of the immediate family of an officer, director, agent, or employee of an Authorized Person or a Producer; iii a Person who owns a Producer or Authorized Person; iv a Person who is owned by a Producer or Authorized Person; or v a Person who is under common ownership with a Producer or Authorized Person. "Business Expense" means a cost to operate or promote a business, including but not limited to costs of furnishings, postage, office supplies, advertising, electronic media, computer hardware, computer software, telephones, telephone charges, printing, copiers, fax machines, office equipment, vehicles, staff, employee compensation, and rent. An expense that a Producer is, in accordance with generally acceptable accounting principles, permitted to deduct for tax purposes is presumed to be a Business Expense. Without limiting this definition, the following constitute the payment of Business Expenses of a Producer by an Authorized Person, subject to the provisions of paragraph 3 herein: 2 1. jointly, with a Producer, advertising real property not owned by the Authorized Person for sale or lease; 2. contributing to a Producer or paying any part of the Producer s costs of any of the following: a b c d e for sale or for lease signs; advertisements, in any media or form, that promote any one property not owned by the Authorized Person for sale or lease; boxes or similar items in which to store advertising media; hosting an open house; prizes, food, beverages, gifts, decorations, entertainment or professional services given at open houses; or f parties or receptions which promote a Producer or the Producer's properties or activities of the Producer. 3 4 "Trade Association" means a membership organization of persons engaging in similar or related lines of commerce, organized to promote and improve business conditions, and not engaged in a business for profit. "Market rate" means the price at which a seller, under no obligation or duress to sell, is willing to accept and a buyer, under no obligation or duress to buy, is willing to pay in an Arms-length transaction. The market rate is determined by comparing the rights or items purchased or sold to similar rights or items that have been recently purchased by others or sold to others, including others not in the title insurance business. a "Arms-length transaction" means a business transaction between two unrelated and unaffiliated parties or a business transaction conducted between affiliated parties as if the parties were unrelated or unaffiliated. 5 Except as provided by this rule, an Authorized Person, directly or through an Affiliate, may a b c not: pay, contribute, share in the cost of or finance any part of the Business Expenses of a Producer; pay, contribute, share in the cost of or finance any part of the expenses of an event or activity of a Trade Association that exists for the primary benefit of Producers and in which a majority of members are Producers; or solicit or engage in a title insurance transaction(s) involving land located in more than one state which includes land located in Texas if: 1. the policy premium charged or solicited to be charged by the Authorized Person or Affiliate for any title insurance policy issued in the transaction(s) covering the land described in the policy outside the state of Texas violates the law of that other jurisdiction where the land is located; or 2. the policy premium for the land in the other jurisdiction is so discounted or reduced from the normal and customary charge as to constitute a thing of value in this state Texas Land Title Institute - Fee Attorneys Page 9

12 6 Notwithstanding Paragraph 2, an Authorized Person or its Affiliates may: a join a Trade Association and voluntarily participate in a Trade Association's activities provided that the level of such participation does not exceed normal participation (not more than two hours per business week) of a volunteer member of a Trade Association and is not activity that would ordinarily be performed by paid staff of a Trade Association; b purchase advertising promoting the title insurance company or the title insurance agent at market rates from any person in any publication, event, or media; c deliver to a party in the transaction or the party's representative legal documents or funds which are directly or indirectly related to a real estate transaction closed by the Authorized Person; and d engage in legal promotional and educational activities that are not conditioned on the referral of title insurance business. 7 Authorized Persons shall maintain auditable records documenting compliance with this rule. 8 In addition to any other sanction or penalty which the Commissioner may impose by law, after notice and opportunity for hearing, any person (including a Producer or Authorized Person) found to have violated this Rule is subject to a civil penalty of not more than $10,000 for each act of violation and for each day of violation, unless a greater penalty is specified by the Insurance Code or another insurance law of Texas. The Escrow Officer, Title Insurance Agent or Direct Operation license or the certificate of authority of any person found in violation of this Rule may be suspended or revoked, after notice and opportunity for hearing. D. Form T-00 In conjunction with the written filing requirements under Rule P-22, an attorney is required to verify under Form T-00 the services he actually renders. The verification form must not only include a detailed description of the services rendered, but it must also include the amount of money or the premium percentage received for such services. Both the fee attorney and the person paying the attorney s fee are required to verify the information contained in the form. E. Rule P-1(f). Rule P-1(f) defines aspects of closing: "Closing the Transaction The investigation made on behalf of a title insurance company, title insurance agent or direct operation before the actual issuance of the title policy to determine proper execution, acknowledgment and delivery of all conveyances, mortgage papers, and other title instruments which may be necessary to the consummation of the transaction and includes the determination that all delinquent taxes are paid, all current taxes, based on the latest available information, have been properly prorated between the purchaser and seller in the case of an Owner Policy, the consideration has been passed, all proceeds have been properly disbursed, a final search of the title has been made, and all necessary papers have been filed for record. The foregoing definition does not prevent voluntary assistance rendered by the Company as a convenience to a party to the transaction, although not necessary to the closing of the transaction and issuance of the policy (such as receiving and disbursing money for the mortgagee, furnishing copies of restrictions, prorating insurance and rents, etc.), so long as the same does not violate the provisions of Article 9.30, Texas Title Insurance Act, 1967, prohibiting rebates, discounts, etc. The Company may specify the requirements necessary for the issuance of title insurance, but it is the responsibility of the applicant for the insurance to meet such requirements. It is not the responsibility of the Company to cure defects of title, nor to perform escrow or other services extraneous to closing the transaction. The premium does not include the cost of legal services performed for the benefit of anyone other than the Company. Legal services, as here referred to, are those constituting the practice of law, and shall, accordingly, be performed only by Attorneys at Law, licensed to practice law in Texas." F. Texas Disciplinary Rules of Professional Conduct Fee attorneys, like all attorneys who practice law, are subject to the disciplinary rules of professional conduct prescribed by the State Bar of Texas and the American Bar Association ("A.B.A"). A lawyer may be disciplined or disbarred if he violates professional rules which prohibit referral fees, fee splitting, and the unauthorized practice of law. Although the State Bar does not regulate title insurance companies, statutes that deal with the authorized practice of law may affect title insurance companies. For that reason, fee attorneys and the title insurance companies alike 2014 Texas Land Title Institute - Fee Attorneys Page 10

13 should be aware of the following disciplinary rules and statutes that impact their services and division of premiums. As several cases cited below illustrate, the fee attorney represents the title company with respect to closing the transaction. To the extent that the attorney provides other legal services or has mixed loyalties that give rise to a conflict of interest, an attorney may breach numerous ethical obligations. Rules 1.04 and 7.03 of the Texas Disciplinary Rules of Professional Conduct restrict things of value received and things of value that attorneys provide. The specific subsections of Rule 1.04 applicable here are: Rule Fees Illegal or Unconscionable Fee (a) A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable. (b) Factors that may be considered in determining the reasonableness of a fee include, but not to the exclusion of other relevant factors, the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly. Division of Fees (f) A division or agreement for division of a fee between lawyers who are not in the same firm shall not be made unless: (1) the division is: (i) in proportion to the professional services performed by each lawyer... (2) the client is advised of; and does not object to, the participation of all the lawyers involved; and (3) the aggregate fee does not violate paragraph (a). In other words, like Article , Rule 1.04 protects the public from unconscionable and disproportionate fees. Rule Safekeeping Property (a) A lawyer shall hold funds and other property belonging in whole or in part to clients or third persons that are in a lawyer s possession in connection with a representation separate from the lawyer s own property. Such funds shall be kept in a separate account, designated as a "Trust" or "escrow" account, maintained in the state where the lawyer s office is situated, or elsewhere with the consent of the client or third person. Other client property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation. (b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property. (c) When in the course of representation a lawyer is in possession of funds or other property in which both the lawyer and other person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interest. All funds in a trust or escrow account shall be disbursed only to those persons entitled to receive them by virtue of the representation or by law. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separated by the lawyer until the dispute is resolved, and the undisputed portion shall be distributed appropriately. Comment to Rule 1.14: 1. A lawyer should hold property of others with the care required of a professional fiduciary. 4. The obligations of a lawyer under this Rule are independent of those arising from activity other than rendering legal service. For example, a lawyer who serves as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction. Rule Prohibited Solicitation and Payments (c) A lawyer shall not pay, give, or offer to pay or give anything of value to a person not licensed to practice law for soliciting prospective clients for, or referring clients or prospective clients to, any lawyer 2014 Texas Land Title Institute - Fee Attorneys Page 11