The Trusted Adviser July 2009 | Volume 2 - Number 5

In re Rukavina and the Duty to Disclose

The Attorney Registration and Disciplinary Commission's (ARDC) report In re Andrew Joseph Rukavina, No 07 CH 96 (Nov 21 2008), serves as an important reminder of a lawyer's duty to disclose the lawyer's interests when also acting as a title agent.

In re Rukavina

InIn re Rukavina, attorney Andrew Rukavina was brought before the ARDC board panel for alleged violations of the Illinois Rules of Professional Conduct (IRPC). Particularly, Rukavina was alleged to have violated the following rules: conflict of interest and disclosure rules, under IRPC 1.7(b) and IRPC 1.8(a); rules concerning communication with clients, under IRPC 1.4; rules concerning advertising, under IRPC 7.1; and general misconduct rules, under IRPC 8.4(a)(4)-(5).

Andrew Rukavina advertised by mail in the Chicago metropolitan area, promising low, flat rates for attorney services at real estate closings. These advertisements claimed that Rukavina would handle all services related to the closing, including the purchase of title insurance and surveys. The fee quoted, however, represented only the attorney's fees for the legal services; the advertisement did not state that additional fees would be incurred for the additional services. Rukavina, as owner of Title Fees, LLC, also acted as a title agent for the Metropolitan Title Company, and further had financial interest in We Survey, LLC, a company that provides land surveys. Rukavina did not disclose his interest in Title Fees or We Survey to several real estate clients prior to closing despite using both Title Fees and We Survey's services while procuring title insurance and surveys for these clients. In the case of all four clients, Rukavina had the client purchase title insurance from Title Fees and, for three of the four, had the client pay for a survey from We Survey without proper disclosure. Furthermore, at least one client found that what Rukavina had charged him for the survey was in fact much higher than the prevailing market rates. Rukavina also failed to warn the clients that additional fees beyond legal costs would be incurred for the title services and surveys.

As required by the Illinois Title Insurance Act, Rukavina procured disclosure forms, called "Controlled Business Agreements," from several clients. In one case, he admitted to signing the Controlled Business Agreement himself at the closing using power of attorney granted by his absent client. Another client testified to the ARDC hearing board that he felt pressured to sign the disclosure form after being presented with the form at closing, for fear of delaying or preventing a successful closing. The hearing board panel agreed that this was inappropriate, declaring that closing was not a proper time for Rukavina to disclose his financial interests in either company or to seek consent under IRPC 1.8(a). Though Rukavina testified that he had made proper disclosure to the fourth complaining client, the client denied having knowledge of his attorney's interests in the companies and the board found in favor of the facts as represented by the client.

On all four counts, the panel found Rukavina guilty of breaching the fiduciary duty owed to his clients by failing to disclose his conflicts of interest and by failing to avoid placing his interests above those of his clients.

Rukavina was also found to have violated IRPC rules 1.4(b), 1.7(b) and 1.8(a) for having failed to properly disclose his interests in the title and survey companies. The panel found that information regarding his interests was reasonably necessary for the clients to make informed decisions and that, therefore, Rukavina failed to explain matters to the extent required by 1.4(b). Furthermore, because Rukavina had a stake in the transactions beyond his clients' interests, the panel found that his ability to represent his clients was materially limited and that failing to disclose as such was a violation of 1.7(b). Finally, the panel found that Rukavina had engaged in business transactions with his clients through We Survey, LLC, and Title Fees, LLC, and failed to disclose his interests and properly obtain client consent prior to the closing, a violation of 1.8(a).

Because his conduct diminished his clients' opinion of lawyers, Rukavina was also found guilty of violating Supreme Court Rule 770. In addition, he was found guilty of violations of Rule 1.4(a) for ignoring his clients' complaints and requests for clarification regarding the fees they incurred due to the closing.

The panel did not find that Rukavina exerted undue influence over his clients or overreached the attorney-client relationship in any of the four counts. The panel concluded that the clients were sufficiently educated and sophisticated to make decisions and that they showed proper understanding and awareness of the client-attorney relationship so as to find Rukavina not guilty of these two offenses on all counts.

The panel further found that Rukavina's advertisements did not constitute misleading communications under Rule 7.1. Rukavina's advertisements claimed that the attorney would handle surveys and title insurance, and advertised only a single low fee; this fee proved to represent only Rukavina's legal fee and did not include title or survey fees. The panel concluded that while the ad's explanation of the fees one would incur by employing Rukavina in a real estate closing was confusing, the ad was not materially misleading under the rules.

Finally, the panel further found that the ARDC administrator failed to show convincing proof that Rukavina engaged in dishonest or deceitful conduct under rule 8.4(a)(4). It found no evidence that Rukavina purposely attempted to deceive his clients by not disclosing his financial interests. It was also found that Rukavina's conduct was not so egregious as to be prejudicial to the administration of justice under rule 8.4(a)(5).

Rule 8.4(a)(4), however, only requires "engage[ing] in conduct involving dishonesty, fraud, deceit, or misrepresentation." IRPC 8.4 (2009). It does not state an intent requirement and only requires that the client be deceived by the attorney's conduct. Given that Rukavina charged at least one client twice the prevailing rates for a survey, the panel could have chosen to consider whether this client had been deceived and possibly found this to be a violation of 8.4(a)(4), however the panel did not address this issue in its report.

The panel also asserted Rukavina violated Section 18(b) of the Title Insurance Act, ILCS 155/18(b) by having failed to disclose to his clients that he would receive financial benefits from their dealings with Title Fees, LLC.

The panel concluded by recommending censure as the proper punishment for Rukavina. In support of this lesser punishment the panel cited the fact that several attorneys spoke on his behalf regarding his good reputation for honesty and the fact that he made restitution to the clients.

Ultimately, Rukavina failed to disclose per the Illinois Rules of Professional Conduct because he did not inform his clients of his financial stake in the title and surveying businesses prior to closing. The panel was clear that closing is not an appropriate time for disclosures. He was further found guilty of breaching fiduciary duty for promoting his financial interests above those of clients' in those transactions. Finally, he was guilty of violating communication rules for ignoring his clients' questions regarding the unexpected fees.

The Duty to Disclose

There are three — and in some cases four — possible disclosures that the Illinois Rules of Professional Conduct require of a lawyer/title agent to serve as both lawyer and title insurance agent: IRPC 2.3(a); 1.7(b); 1.8 and possibly 1.7(a). Michael J. Rooney,Ethics and the Attorney/Title Agent, 96 Ill Bar J 132, 132 (Mar 2008).

Under IRPC 2.3 (a), lawyers must disclose when persons other than the lawyer's client, including the other party, will rely on an evaluation performed by the lawyer. Because title insurance and title services generally include evaluations of the chain of title for use by both seller and buyer, the work of the lawyer as title agent comes under this rule.Id.at 133.

IRPC 1.7(b) requires the disclosure of conflicts that cause the representation to be limited due to the interests of other clients or of the lawyers themselves. Because title insurance agents have responsibilities toward the title insurance company and a financial interest in doing the title work, those possible conflicts must be disclosed to clients under 1.7(b).Id.at 134.

Rule 1.8 of the IRPC requires that clients must specifically consent, after disclosure, to enter in a business transaction with their lawyer. While the sale of title insurance seems less than a "business transaction" to those providing such services, the hearing panel considered it to be. That being the case, in order to enter into a transaction for title insurance, lawyers must disclose their interests in the transaction for the client's consent.Id.at 135.

Finally, a potential fourth disclosure arises under IRPC 1.7(a) when lawyers serve not only as agents but also as counsel for the title company. In such a case, having both the title company and one of the principals to the transaction as clients creates a conflict where interests are "directly adverse," which requires disclosure under IRPC 1.7(a).Id.at 133.

Under the current Rules of Professional Conduct, written disclosures and consents are not required. However, it is important to note that, as was seen inIn re Rukavina, this leaves the lawyer little protection and little proof of there having been disclosure. Furthermore, the Rules do not currently make clear the level of disclosure that is necessary regarding financial interests such as these. It is unclear whether it is sufficient to indicate only that an interest exists or whether one must explain the nature of that interest — such as how much of the title insurance fee the lawyer expects to collect.Id.at 135. But the ARDC did not take the opportunity to define the extent of disclosure necessary of lawyers/title agents within their reportIn re Rukavina.

Impact of the New Rules of Professional Conduct

Since the Hearing Panel's recommendation in Rukavina, the Illinois Supreme Court promulgated new Rules of Professional Conduct that go into effect January 1, 2010.

Old Rule 1.7(b), which was in effect during theRukavinamatter, prohibits representation of a client "if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interest, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents after disclosure."

New Rule 1.7 is constructed differently, but covers much of the same ground. It looks to whether there is a "concurrent conflict of interest" and provides:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;... and

(4) each affected client gives informed consent.

Under both the old and the new rules, potential concerns which may arise as a result of a lawyers' activities as a title agent on behalf of a client, can be reconciled through disclosure and informed consent of the client.

During the rule-making process, another rule, Rule 5.7 was introduced, which sought to define and regulate "Law Related Services" provided by lawyers. While the Rule was primarily intended to regulate investment and other more grandiose services more in tune with a Wall Street practice, its broad sweep threatened to bring title services provided by attorneys under its umbrella. That proposal would have created myriad problems related to malpractice coverage and Unauthorized Practice of Law issues. ATG represented by Hank Shulruff along with a distinguished group of real estate lawyers including John O'Brien, Mike Rooney and Ralph Schumann appeared before the Supreme Court Rules Committee to challenge Rule 5.7. To great relief, Rule 5.7 was dropped from the final Rules adopted by the Supreme Court.

However, the comment section of the adopted Rule 1.8 still presents some challenges as it rather ambiguously equates the provision of title services to entering into a "business transaction" with a client.

The Rule provides:

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is informed in writing that the client may seek the advice of independent legal counsel on the transaction, and is given a reasonable opportunity to do so; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.

At first blush, the examination of public records, the determination of insurability and the issuance of a title policy in a client's transaction seems outside the scope of what we generally think of as a business transaction, which normally implies an ongoing business or financial relationship with a client. However, the Comments to the Rule refer to "the sale of title insurance" as a business transaction within the meaning of Rule 1.8. Comment [1] states:

A lawyer's legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client, for example, a loan or sales transaction or a lawyer investment on behalf of a client. The requirements of paragraph (a) must be met even when the transaction is not closely related to the subject matter of the representation, as when a lawyer drafting a will for a client learns that the client needs money for unrelated expenses and offers to make a loan to the client. The Rule applies to lawyers engaged in the sale of goods or services related to the practice of law, for example, the sale of title insurance or investment services to existing clients of the lawyer's legal practice.

This rule may make some sense in those situations where a lawyer representing a developer owns an interest in a title agency from whom the developer will be purchasing multiple title policies.

It is unlikely that the Committee meant this rule to apply to single transactions in which the lawyer is acting as the title agent. If it applied, it would require that the client must be given notice that he or she may want to seek outside counsel to analyze the fairness of the transaction. This is obviously impractical in almost every circumstance. That protection, in a more logical framework, already exists under the disclosure form mandated by the Illinois Title Insurance Act. The Title Act requires "producers of title insurance" (lawyers, Realtors, and lenders) to disclose their estimated title charges at the commencement of the transaction so the consumer has the option of comparison shopping with other title providers.

With that said, we do believe it is a best practice to provide the client with the required Title Insurance Act disclosure and disclosures required by Rule 1.8.

It should be noted that the hearing panel inRukavinafound that his actions in providing title and other services in addition to legal representation amounted to entering into a business transaction with a client under the current Rule 1.8. So, the new Rule may not actually be that different than its predecessor.

Closing Remarks

The outcome ofRukavina, and an initial review of the new Rules of Professional Conduct, underscore the importance for lawyers/title agents, as well as for all other lawyers providing similar services, to make written disclosure of their financial interest to the client at the commencement of representation and obtain signed waivers from the client.
 

 

 

THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 7-27-09]