April 01, 2016 Feature

A Muddy Morass: Malpractice in Real Property Matters

Todd C. Scott

You may not be aware that in the business of insuring and defending lawyer professional liability, malpractice claims come and go, but claim trends involving attorneys generally stay the same. Yes, there are times when changes in a law will open the door to a new cause of action against lawyers. Additionally, certain economic influences such as a long and sustained recession will contribute to a surge of claims in a practice area affected by the downturn in the economy. But in general, there is typically little change involving the area of law category when looking at the lawyers on the receiving end of malpractice claims.

For more than 30 years, the American Bar Association (ABA) Standing Committee on Lawyers’ Professional Liability has been at the forefront of collecting malpractice data from insurance companies. Every four years the ABA committee collects the data, compiles it for analysis, and then publishes a quadrennial study that provides lawyers and insurers a snapshot of the legal malpractice claims environment. The most recent study that is available was published in 2012 with data involving claims reported by attorneys from 2008 to 2011. (The committee’s next study is scheduled to be released sometime in 2016.)

 

Malpractice trends have generally stayed the same since the first claim study was published in 1985, so the attendees of the ABA’s National Legal Malpractice Conference at the Swissôtel Chicago on September 6, 2012, were probably not expecting anything out of the ordinary when the latest study was released. But soon after the start of the opening plenary session titled “The Latest Off the Presses—Legal Malpractice Claims Profile: 2008–2011,” data from the most recent study was splashed across the ballroom screen, generating an audible gasp from those in attendance. Insurance and legal professionals were seeing for the first time that there was a new top dog claiming the title of riskiest practice area: real estate.

Prior to the 2012 study, lawyers practicing in the area of “Personal Injury—Plaintiff” have consistently reported the most malpractice claims going all the way back to the first ABA claim study in 1985. The 2012 study changed all that. Not only did claims involving real estate practitioners surpass the number of claims reported by personal injury lawyers, they surpassed them by a lot. According to the 2012 report, real estate practitioners were the subject of 20.33 percent of all claims during the period of the study, while personal injury lawyers represented just 15.59 percent of the claims reported to insurers participating in the ABA study. In hard numbers, the real estate attorneys reported 10,772 claims, compared to the 8,260 claims reported by personal injury lawyers during that same period of study.

Looking Back: The Mortgage Crisis and Inventing New Types of Malpractice

Although it was remarkable to see that real property lawyers were officially reporting the most malpractice claims, the change at the top should not have been surprising. During the period of study for the 2012 Profile of Legal Malpractice Claims publication, lawyers in all practice areas were struggling to survive in one of the most tumultuous economic climates in the United States since the Great Depression. With a mortgage crisis in full swing, preceded by a sharp uptick in real estate transactions, attorneys in real estate practice were hit especially hard when the housing market went bust and they saw deals fall through, often involving anxious sellers holding onto property much longer than they anticipated—or could afford.

Which brings us to another truism in the area of professional liability: When deals go bad and there is an attorney involved, the parties on the losing side will often blame the lawyer. And nobody saw more deals go bad from 2008 to 2011 than attorneys in real estate practice. It is difficult to estimate how many lawyers were involved in losing real estate transactions in the post-decline economy of the Great Recession, but defaults in the housing market alone climbed to a record rate, leading to more than 3.1 million foreclosure filings in 2008—an increase of 225 percent in a 24-month period. The spiraling effect of defaulted mortgage loans, record foreclosures, a glut of bank-owned homes, and further declining home prices created a muddy bog of real estate morass like no living lawyer had ever seen.

Adding further to the real estate misery was fraud in the home selling market, which occasionally involved unwitting or unconcerned attorneys who were looking to catch a ride on the fast-moving, pre-crash real estate bandwagon. Newer lawyers were especially vulnerable during this time to “opportunities” proposed to them by unscrupulous deal makers, opportunities that, under the harsh light of reality, turned out to be nothing more than real estate schemes involving foreclosure rescue, mortgage elimination, equity skimming, strawman schemes, and lots of predatory lending. In these matters, attorneys involved in the transaction may have played zero role in the attempt to defraud the homeowner, but when the lawsuits commenced against scammers who left fraudulent conveyances, bankruptcy, and damaged credit reports and credit ratings in their wake, any attorney involved in the transaction was likely a party to the fraud settlement.

You might think that the hordes of real estate practitioners who suddenly saw demand for their professional services in a freefall would find a soft landing in the booming world of bankruptcy services. But it never really worked out that way. Bankruptcy lawyers took offense at the notion that that their work was so easy that any newcomer who knew an abstract from a quit-claim deed could do it, and so they stepped up, expanding their systems and absorbing the demand for new bankruptcy filings. Also, any real estate lawyers in 2008 looking to retool their law practice and become a bankruptcy attorney found out that the bankruptcy ship had already sailed as bankruptcies in the United States peaked in 2005 with 2.08 million federal filings. By the time the real estate market was in a full tailspin in 2008, personal bankruptcies had returned to 1995, pre-crisis levels.

As the great R&B singer Barry White once intoned, when it’s time for change, nothing stays the same. Such was true for many lawyers who worked for lenders, suddenly drowning in the overwhelming demand for judicial foreclosures—a process where the lenders must demonstrate through an affidavit that the homeowner defaulted on the mortgage, the lender owns the mortgage, and the lawyer representing the lender has personally reviewed the loan paperwork. When it became apparent that no single human (even one with a law degree) could ever personally review the staggering amount of default paperwork on a daily basis to which many of them had attested to, the term “robo-signer” was coined, and lawyers for the lenders found themselves collecting their own unique brand of recession-era law suits.

Hope for real property attorneys loomed on the horizon as the years 2009 through 2011 saw steady declines in reported malpractice claims in this area. In 2011, real estate claim totals were noticeably less at 17.56 percent. The mortgage crisis had ended, the perfect storm of defaults and foreclosures had blown through, and the real estate market had slowed to a crawl. Beleaguered real estate attorneys in 2012 were left to reassess their field of choice and when, if ever, the next new client might walk in the door.

Back to Normal: Missed Liens and Deed Description Errors

Daniel M. Zureich, president and CEO of Lawyers Mutual Insurance Company, which has provided professional liability coverage for more than 7,500 North Carolina lawyers since 1977, describes how unique circumstances in a troubled economy can compound malpractice claims involving lawyers: “With foreclosure activity up significantly and so many home owners underwater, lenders weren’t able to be made whole. If a lawyer missed a lien—in the past it may have not mattered. But lenders were more willing to pursue claims against lawyers.”

With home purchases down, currently there are not as many claims against lawyers as there were in 2007. Fewer deals being made usually means fewer opportunities for lawyers to make mistakes. But, according to Zureich, the types of claims being reported by real property lawyers generally are the same: “Failure to do a proper title search and missing a lien is one of the most frequently reported errors. The problem tends to be that the person doing the search just misses a lien, for a number of reasons. Even if the lawyer didn’t do the search, the lawyer is on the hook. It is still our biggest source of claims.”

For insurers, malpractice claims like missed liens are primarily a frequency issue—meaning carriers may receive a high number of claims with this type of error—but when comparing them to other types of claims, they aren’t as expensive to resolve. But, as Zureich points out, if a developer is involved, claim activity like missing liens can prove to be very expensive when attempting to reach a final resolution.

“Malpractice claims involving commercial property are much less frequent,” Zureich says, “but the error can be compounded, and they tend to be much more severe.”

Sometimes it is the little things that can cause the most headaches for real property lawyers. A mistake in the legal description in a recorded deed is an example of an error that is all too common for real property lawyers. An error in the legal description of the property being conveyed causes the recorded deed to be defective, impacting the chain of title. When these types of errors are reported to malpractice carriers, they tend to show up as a wrong call in the metes and bounds legal description of the property conveyed, an incorrect lot number in a platted legal description, or an incorrect plat book reference.

Repairing a defective deed does not always mean just re-recording the deed with a new, correct legal description attached to it. The remedy may involve having the corrective deed re-executed by the original grantor and then recording the newly executed document. The key to restoring proper title after an error is made is to take corrective action soon after the error is discovered. That’s why many professional liability carriers will encourage policyholders to report claim matters early so that the insurer can implement claim repair activities. Claim repair is a concept that most insurers adhere to; that is, it is better to spend a little bit of money early on to fix a problem quickly and avoid a worse, more expensive problem down the line.

Zureich has some advice for lawyers using third-party companies to search title: Make sure they are insured. Because searching proper title is a non-delegable duty that the lawyer is required to oversee, the lawyer is usually still on the hook when an error is discovered. But it can help in the overall cost of fixing the claim if the third-party title company is also insured for errors and omissions. Additionally, one indicator that the company you’re working with might be prone to mistakes is if they have a history of lawsuits involving title errors.

The Unspoken Menace: Not Knowing Your Client

Andrea Geraghty, a shareholder at the Pittsburgh, Pennsylvania, firm of Meyer, Unkovic & Scott LLP, has practiced law for more than 30 years, advising clients through land acquisition, development, construction, and management of a variety of real estate ventures. She also has a significant real estate litigation practice in eminent domain, property tax assessment and exemption, broker’s commissions, and title and leasing disputes. Geraghty is troubled by claims she has seen involving real property lawyers where the attorney has an inherent conflict of interest.

“In a relatively small, $2 million to $5 million transaction, each of the parties frequently agree to hire one lawyer to do the work,” Geraghty says. “When one of the clients calls the lawyer about a problem with another party to the transaction, that’s not the best time to start explaining where your loyalties lie and the potential for conflicts of interest.”

As Geraghty points out, some deals may not be big enough for the parties involved to justify hiring individual attorneys, which can be the starting point for miscommunication and misunderstandings between the lawyer and the parties down the line.

Geraghty believes that in order for matters to start out on the right foot, a lawyer representing multiple parties to a transaction should immediately identify whom he or she is working for and disclose to all parties what work the lawyer has been hired to do and the scope of the attorney’s involvement.

“A lawyer can represent one of the parties and disclose to the others what they are doing,” Geraghty says. “Write a detailed letter explaining who you represent, identify the potential conflicts of interest, and advise the parties that they may want to seek advice from their own counsel. The letter should also include a statement that if a dispute arises, you may not be able to represent any of the parties to the dispute.”

Geraghty feels it is essential for lawyers involved in multi-party real property transactions to draft conflict waivers for all involved, identifying the potential conflicts of interest that may arise. It’s not always easy to do, and many lawyers don’t attempt it, but having signed conflict waivers on hand can go a long way to preserving what was discussed when disputes happen and the parties to the transaction “misremember” the activities at the outset of the matter.

Sloppy lawyering that results in missed liens and defective deeds is usually the exclusive crisis of an attorney who cuts corners and pays no attention to detail. But Geraghty and Zureich have both seen multiple instances in real property matters where even the best lawyers run into trouble because of a conflict of interest. A lawyer handling matters for a corporation may discover that there is a lien on corporate property because of a business loan to a partner whom the attorney also represents. Firms that represent both developers and architects may also sometimes find they have dual loyalties when a dispute occurs.

Conflicts involving dual representation almost always come as a surprise to the attorney involved, and they are made worse when lawyers begin to talk themselves out of the problem. What works against lawyers who discover a loyalty conflict in their practice is the natural desire to keep all their clients happy. No lawyer wants to see good clients go away, so proposals to resolve a conflict of interest can be inherently lacking if they don’t acknowledge the possibility that one or both of the clients should consider seeking other counsel.

Conflicts of interest in real property matters are likely to happen. But if the lawyer takes steps at the outset of the representation to identify the client, locate where potential conflicts may arise, and report to the parties what the attorney has been hired to do, such activities can go a long way to successfully resolving difficult and painful disputes when matters that question the attorney’s loyalty arise.

Todd C. Scott

Todd C. Scott is V.P. of Risk Management at Minnesota Lawyers Mutual Insurance Company, a Minneapolis-based professional liability company exclusively for lawyers. For questions involving professional liability and real property attorneys, or any other matter, he can be reached at tscott@mlmins.com.