REAL ESTATE LAW
Attorney Malpractice in Real Estate Transactions
Does the failure of an attorney who represents the purchaser to obtain a title commitment and an owner’s policy of title insurance constitute legal malpractice? Should this depend on whether the attorney has made full disclosure to the purchaser of the risks of not being insured? Should such a duty ever extend to third-party non-clients? In the commercial area, title insurance has been virtually mandatory for many years. But title insurance as an industry standard has not yet reached total acceptance with respect to residential real estate transactions.
Generally, the issue of malpractice arises in the situation where an attorney fails to recommend title insurance to a purchaser of real estate—or even, in some cases, to a non-client third party. For example, in Lefkovich v. Kearns, the plaintiffs alleged that the defendant lawyer “negligently and carelessly failed to notify the plaintiffs of the availability of owner’s title insurance,” and that he was negligent in failing to discover the property’s correct boundary line. The defendant attorney argued that the plaintiffs had not presented any evidence that such a policy existed or that it would have insured the risks covered by the adjoining landowner’s complaint. The defendant lawyer also argued that the statute of limitations had expired. The court ruled in the defendant attorney’s favor on that ground. It also noted that the attorney’s duty with respect to the title search concerning the lot purchased by the plaintiffs related to the records that are legally required to be stored in governmental buildings and made available to the public. The court reasoned that an attorney’s title search is not a guaranty of the accuracy of the recorded land records. The Lefkovich case appears to stand for the proposition that even though a policy of title insurance might have helped the plaintiffs, the attorney’s failure to make the plaintiffs aware of the availability of such insurance was not per se improper.
The argument is sometimes made that an attorney can be liable to a non-client, especially where the non-client reasonably believes that the attorney owes the non-client a duty. Bohn v. Cody is sometimes cited for the proposition that an attorney commits malpractice for failure to recommend title insurance to a non-client. To assess whether a duty is owed to a third party, Bohn applies a multifactor balancing test where the court evaluates “the extent to which the transaction was intended to affect the plaintiff; the foreseeability of harm to the plaintiff; the degree of certainty that the plaintiff suffered injury; the closeness of the connection between the defendant’s conduct and the injury; the policy of preventing future harm; and the extent to which the profession would be unduly burdened by a finding of liability.” The threshold question is whether a plaintiff was an intended beneficiary of the transaction to which the advice pertained.
Malpractice can arise in connection with a transaction where the attorney is negligent in performing a title search. In Namoury v. Tibbets, plaintiff alleged that his attorney failed to perform a title search and obtain an actual credit report of the purchasers, which would have revealed their inability to perform under the purchase-money mortgage plaintiff granted to the defendant purchasers, as well as the existence of tax liens and other judgments against the defendant’s wife at the time of closing. The court noted that “plaintiff claims defendants did not fulfill specific obligations inherent to the representation of a seller of property: a thorough title search and a credit report of the potential buyers.” But the court ruled that the attorney never promised the plaintiff a specific result, nor did the attorney promise that the transaction would be successful, which would be necessary to support a claim of breach of contract.
A remarkable Pennsylvania case, Antonis v. Liberati, held that an attorney may be liable for malpractice merely because of the attorney’s failure to ensure that a recorded mortgage was properly indexed. The attorney was directed by his client, a mortgagee who made a loan to the mortgagor, to see that the mortgage was properly recorded. The attorney assured him that this had occurred but, in fact, the clerk in the recorder’s office accidentally misspelled the mortgagor’s name. As a result, the mortgagor was later able to sell the property to a bona fide purchaser who had searched the record but did not find the mortgage, thereby having no actual or constructive notice of the encumbrance. The mortgagor later died without having paid off the mortgage note. The mortgagee could not collect from the purchasers because the trial court ruled that the bona fide purchase cut off the rights of the mortgagee. The mortgagee sued his attorney, who in turn joined the mortgagor’s estate and the recorder of deeds. The appellate court found, in part, that the mortgagee was responsible for ensuring that the mortgage was properly recorded, and that the mortgagee’s attorney was negligent in performing this task for the mortgagee. It also reasoned that the mortgagor’s conduct was not an intervening cause because it could not have occurred without the attorney’s negligence.
Just because a real estate purchaser has obtained title insurance does not necessarily mean that the purchaser’s attorney can avoid liability. In Breck v. Moore an attorney was directly liable for legal malpractice despite the existence of an owner’s policy of title insurance. In this case, involving an action against a real estate attorney and a title agency for negligent title search and disclosure, the Alaska Supreme Court held that constructive knowledge cannot be used to bar claims arising out of a professional relationship in which the plaintiffs claim that they relied on a professional to impart the knowledge that the professional asserts the plaintiffs should have possessed constructively. The court concluded that the Moores (the purchasers) were responsible only for their own knowledge and lack of diligence and that they “acted reasonably in relying on Breck [their attorney] and the real estate agents to review the documents and identify problems.” Thus, the Moores’ receipt of the final title policy and closing documents eight years earlier did not start the running of the statute of limitations against Breck. Rather, the discovery rule tolled the running of the limitations as to the Moores’ claim against Breck until eight years after the closing, when the plat restrictions were first brought to the Moores’ attention.
An attorney may be liable for failure to disclose a title defect even if it is possible that the defect could have been cured by legal action or the collection of evidence. In Trimboli v. Kinkel, the attorney retained by the purchasers to search title did not tell his clients of a flaw in record title to the property. His clients subsequently entered into a contract to sell the property. The subsequent purchaser, upon discovering the defect, sued the attorney’s clients. The clients then sued their attorney to recover their damages. The trial court ruled in the attorney’s favor, finding that there was marketable title and that the attorney had not been negligent. The appellate court reversed, holding that the attorney knew that the executor’s deed was invalid and that he was chargeable with knowledge of the significance of this fact. The court reasoned that when an attorney is employed to search the title of property and he makes no mention of the defect to his clients, but allows them to complete their purchase on the false assumption that the record title is perfect, he is liable for negligence.
For More Information About the Real Property, Trust And Estate Law Section
- This article is an abridged and edited version of one that originally appeared on page 221 of Real Property, Probate and Trust Journal, Summer 2007 (42:2).
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- Books and Other Recent Publications: From Handshake to Closing: The Role of the Commercial Real Estate Lawyer; Title Insurance: A Comprehensive Overview, 3d ed.; The Insured Stock Purchase Agreement, with sample forms, 2d ed.; An Estate Planner’s Guide to Qualified Retirement Plan Benefits, 4th ed.
John C. Murray is vice president-special counsel, First American Title Insurance Company. He may be reached at email@example.com.