1.      Do you “reply to all” on emails? Should you?

With the ease of email communications, thought needs to be given before you respond to an email and hit “reply to all.”  With traditional correspondence by mail to opposing counsel, there is no question – you would never (ever) “cc” the adverse party client.  However, the water has become muddy with email correspondence. 

In real estate transactions, especially commercial, it is not uncommon to see multiple parties copied on an email.  For example, if Buyer’s counsel is sending an email concerning a commercial closing, you may see the following parties copied on the email:

• Seller’s counsel;
• Seller’s broker;
• Buyer’s broker;
• Lender’s counsel;
• Tenant’s counsel;
• And, of course, the Buyer-client (possibly multiple client representatives, including  Buyer’s in house counsel).

As an aside, the broker’s role is, in part, as a facilitator for the transaction. Brokers are not subject to the same rules regarding communications and you will frequently see emails between brokers copied to all parties (including Seller and Buyer and counsel for both)– making the “reply to all” even murkier.

The issue regarding “reply to all” emails concerns the potential violation of Rule 4.2 of the Rules of Professional conduct (called the “no contact rule”), which provides:

(a) During the representation of a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.  

Many issues arise in the context of “reply to all” emails:

• What if the email communication is strictly non-substantive (such as an inquiry to set up an “all hands” conference call?
• What if the email communication is strictly substantive (such as issues concerning environmental contamination of the site)?
• What if the email is mixed (substantive and non-substantive)?
• What if the response contains a derogatory comment concerning the opposing party or the opposing party’s counsel?
• What if the original email included a “cc” to the sender’s client (in the example above, the original email is from Buyer’s counsel and assume there is a “cc” by Buyer’s counsel to Buyer)?
• What if the original email did not include a “cc” to the sender’s client (in the example above, the original email is from Buyer’s counsel and assume there is no “cc” by Buyer’s counsel to Buyer)?
• What if the recipient, in the “reply to all” email adds the adverse party to the response (in the example above, the original email is from Buyer’s counsel and there was no “cc” to Buyer, but Seller’s counsel, in the reply, affirmatively adds Buyer to the “reply to all” email)?
• What does it take for an express waiver? (an example from a recent commercial closing was a line of text, in red and all caps, saying: “PLEASE REPLY TO ALL WHEN REPLYING TO THIS EMAIL”)(of course, this waiver only applies to that sender’s client and not to other “clients” in the email)
• What does it take for an implied waiver?
• Is an express or implied waiver consent for all future emails on that transaction? on other transactions between the same parties?

The North Carolina State Bar Ethics Committee has wrestled with this issue since at least July 2012 when the original Proposed 2012 FEO 7 was issued, which can be located in the Fall 2012 issue of The North Carolina State Bar Journal (page 51).  At the October 2012 meeting, the Ethics Committee voted to send Proposed 2012 FEO 7 to a subcommittee for further study.  In December of 2012, a meeting of the subcommittee failed to reach consensus, resulting in majority and minority drafts of the revised opinion.  On January 25, 2013, the Ethics Committee voted to publish a revised Proposed 2012 FE0 7 (not yet available as of the date of this manuscript).  The revised Proposed 2012 FE0 7 adopts a strict interpretation of Rule 4.2 and requires express consent (no exceptions/no implied consent) prior to sending a “reply to all” email which includes a represented party.

TIP:   email opposing counsel for express consent to “reply to all”

TIP:   if you have strong feelings on this topic, send your comments to the Ethics Committee before the revised proposed opinion is final (c/o Suzanne S. Lever, Esq., Assistant Ethics Counsel, The North Carolina State Bar, SLever@NCBar.gov)

2.      Networking for lawyers – what is required to participate as a “network lawyer”?

    A “network lawyer” in this context refers to a lawyer participating as a “network lawyer” in a third party network for referrals – akin to an internet referral source.   2012 FEO 10 is entitled “Participation as a ‘Network’ Lawyer for Company Providing Litigation or Administrative Support Services.

The inquiry is fact specific and loaded with conditions, covering:

• Unauthorized practice of law issues (if the network is a corporation providing legal services);
• Existing lawyer referral service limitations;
• Exercise of independent professional judgment issues;
• Communications with clients;
• Competent representation;
• Confidential information;
• Prohibition of fee sharing with non-lawyers; and
• Advertising and solicitation limitations.

A written agreement is recommended but not required.

    The opinion includes many “rejected” inquiries:

• Inquiry 2 – if exclusive territory, the network is “essentially” a for-profit referral service;
• Inquiry 3 – if higher fees are charged for other lawyers to join the network;
• Inquiry 4 – if confidential information of the client becomes the property of the network;
• Inquiry 5 – if restrictions are placed on the practice of law; and
• Inquiry 6 – if the attorney is to provide a client list.

The last inquiry, Inquiry 7, refers to the infamous “robo signing” in the context of network employees signing foreclosure affidavits without proper review of the file.  The opinion includes an obvious admonition to lawyers not to use documents provided by a third party unless the attorney is in a position to verify that the documents are reliable.

    At its January 25, 2013 meeting, the State Bar adopted 2012 FEO 10.

3.      Referrals with title companies – what is allowed and what isn’t?

2011 FEO 4 concerns obligatory referral arrangements between an attorney and a title agency.  The facts are not specific, but suggest that a “referring party,” who has “some affiliation” with a title agency, is the one in a position to make referrals.  At some point, the “referring party” requires that the attorney procure title insurance from the particular title agency with which the “referring party” has the affiliation.

In response to the inquiry concerning this arrangement, 2011 FEO 4 (emphasis added) provides:

No.  The ethical duties set forth in the Rules of Professional Conduct prohibit a lawyer from entering into an exclusive reciprocal referral agreement with any service provider.  Such an arrangement impairs the lawyer’s ability to provide independent professional judgment…. In addition, the arrangement amounts to improper compensation for referrals…. Finally, such an arrangement creates a nonconsentable conflict of interest between the lawyer and the client ....

In most real estate transactions, the client delegates the choice of title insurer to the lawyer, who is charged with acting in the best interest of the client.  In determining what is in the best interests of the client, it is appropriate for the lawyer to consider among other things the fees charged for title insurance, the financial stability of the insurer and/or title insurance underwriter, the willingness of the title insurer to provide coverage regarding title matters, and the ability of the insurer to meet the needs of the client with regard to the transaction.

The lawyer may also consider the lawyer’s working relationship with a specific title insurer, particularly where the relationship may prove beneficial to the client.  This is true even where the client has been referred to the lawyer by someone affiliated with the specific title insurer.  The lawyer may, and should, strive to cultivate the types of business relationships and provide the quality of legal services that will encourage clients and other professionals to recommend the lawyer’s services.  What a lawyer cannot do, however, is permit a person who recommends the lawyer’s services to direct or regulate the lawyer’s professional judgment in rendering the legal services….

If the client indicates a preference as to a particular title insurance company that the lawyer does not believe is the best selection for the client, the lawyer’s role is to counsel the client so that the client may make an informed decision.  Ultimately, the choice of the title insurer in a real estate transaction is in the province of the client acting in consultation with the lawyer.

The remainder of the opinion deals with the duty of an attorney concerning an apparent violation of this opinion.

4.      Disavowing client relationship – is that “best practices”?

This issue is a variation of prior issues concerning dual representation and arose in the context of an inquiry by Root Edmonson with the North Carolina State Bar presented at the October 25, 2012 meeting of the Ethics Committee (copy of the Inquiry attached hereto as Exhibit A). 

The background facts: 

There are many issues which arise in this Inquiry:

• Is it permissible for the Seller’s Law Firm to charge Buyer a fee if Buyer retains its own counsel?
• May the contract require the Buyer to pay the Seller’s attorney fees?
• May Seller’s Law Firm provide an opinion on title to obtain a title policy for Buyer? Is providing a title opinion/obtaining a title policy tantamount to providing legal services to Buyer?
• Depending upon the above, may  Seller’s Law Firm “disavow” an attorney-client relationship with Buyer?
• Philosophically,

o   Is the disclosure from Seller’s Law Firm to Buyer in this context meaningful?

o   As a general rule, is it in a Buyer’s best interest to have his/her own independent counsel? what role does Seller’s Law Firm have in whether or not Buyer ultimately engages independent counsel?

In considering the issues, recall two limitations on title insurance:

• a Lender cannot require a borrow to use a particular title insurance company (NCGS Section 75-17); and
• a Seller cannot require a Buyer (in the context of a federally related mortgage) to use a particular title insurance company (RESPA, 12 USC Section 2608)

This opinion has generated many comments and some amount of controversy.  As of January 25, 2013, the Inquiry is still in subcommittee for study.

TIP:  it is not too late for you to voice your opinion on this Inquiry by contacting the Ethics Committee.      

5.       Social media – violating confidentiality?

      The State Bar rules for protecting client confidentiality are well known and little changed.  The only new issue is whether an attorney is carefully considering client confidentiality in the context of emerging social media.

      Rule 1.6 of the Rules of Professional Conduct provides:

(a) A Lawyer shall not reveal information acquired during the professional relationship with a client unless the client gives informed consent….

In the context of social media, this rule remains in full force and effect.  Areas of concern:

• Content on law firm web page;
• Content on Facebook ®;
• Content on Twitter ®;
• Content on LinkedIn ®;
• Content on Real Property listserv (now rp@listmanager.ncbar.org);
• Content  on “DIRT” (listserv);
• Content on blogs.

The duty to protect client confidentiality means that a “thinly disguised” fact scenario will not satisfy your duty.

6.      Social media – what are the recent developments for marketing?

A.  2012 FEO 8

2012 FEO 8 is entitled “Lawyer’s Acceptance of Recommendations on Professional Networking Website.”  This opinion expressly references “LinkedIn” and contains the requirements for “on line” recommendations and covers both the advertising restrictions and the confidentiality restrictions.

B.  2011 FEO 8

2011 FEO 8 is entitled “Utilizing Live Chat Support Service on Law Firm Website.”  This opinion sets forth the requirements for utilizing a “live chat” format for obtaining information from a prospective client.  The opinion cites an opinion from the Philadelphia Bar Association as persuasive authority:

The [Philadelphia Bar Association] opinion states that Rule 7.3 does not bar the use of social media for solicitation where a prospective client to whom the lawyer’s communication is directed has the ability “to ‘turn off’ the soliciting lawyer and respond or not as he or she sees fit.”  The Philadelphia Bar Association opined that “with the increasing sophistication and ubiquity of social media, it has become readily apparent to everyone that they need not respond instantaneously to electronic overtures, and that everyone realizes that – like targeted mail – emails, blogs, and chat room comments can be readily ignored, or not, as the recipient wishes.”

The opinion contains several admonitions:

• Be careful to disclose that the live chat is not with a lawyer;
• Be careful that no legal advice is given;
• Be wary of inadvertently creating a lawyer-client relationship;
• Be careful concerning the receipt of confidential information;
• Be aware that information disclosed may have the unintended consequence of creating a conflict of interest for the law firm.

C. 2011 FEO 10

2011 FEO 10 is entitled “Lawyer Advertising on Deal of the Day or Group Coupon Website.”

As with the other opinions on social media, the opinion permits this form of advertising with certain disclosures and conditions,  described in detail in the opinion.

A footnote to the opinion states that “[i]n light of the many uncertainties of a legal representation arranged in the manner proposed, a lawyer may not condition the offer of discounted services upon the purchaser’s agreement that the money paid will be a flat fee or a minimum fee that is earned by the lawyer upon payment.  See 2008 FEO 10.”   

7.      Internet banking – any impact?

A.  2011 FEO 7

This opinion, 2011 FEO 7, is entitled “Using Online Banking to Manage a Trust Account.”  Using online banking is another permissible internet use for law firms, subject to certain requirements to protect client funds.

    A summary of requirements is as follows:

• Exercise reasonable care to minimize risk of loss or theft;
• Regular education of the firm’s managing lawyers on the changing security risks;
• Comply with trust account rules regarding preservation of bank records;
• Law firm must provide “multiple layers of security”;
• Strong passwords; and
• Use of encryption.

B.  2011 FEO 6

2011 FEO 6 is entitled “Subscribing to Software as a Service While Fulfilling the Duties of Confidentiality and Preservation of Client Property.”  This opinion, regarding software as a service (“SAAS”), is cited as authority for online banking.  As with all of the internet opinions, there are conditions set forth in detail in the opinion.

8.      Since when do brokers have a lien?

New in 2011 was the creation of a lien for commercial real estate brokers.  The Act applies only to written brokerage agreements signed on or after October 1, 2011.

While a full review of the Act is outside the scope of this paper, it is included to make attorneys aware of this new lien.  A summary of key provisions follows:

• Only a licensed broker may file a lien;
• Lien rights are only for commercial real estate;
• Lien rights are only pursuant to a written agreement (signed by the owner or authorized agent)(meaning probably only a listing broker can file a lien);
• the broker must have performed;
• the broker’s duties must be set forth in the agreement;
• the agreement must set forth the conditions for, and the amount of, the compensation due; and
• the lien only applies to the commercial real estate which is the subject of the written agreement.

For a thorough article on the new Act, see “A Summary of the Commercial Real Estate Broker Lien Act,” by Garth K. Dunklin, published in Volume 34, No. 1, of Real Property, by the Real Property Section of the North Carolina Bar Association (September 2012).

9.      Attorney fees – what  “real property” contracts are “business contracts”?

The right to collect attorney fees in a real estate transaction was historically tied to an “evidence of indebtedness” under NCGS Section 6-21.2.  What constituted an “evidence of indebtedness” was subject to debate.

Effective October 1, 2011, a new statute permits recovery of attorney fees pursuant to certain “business” contracts.  NCGS Section 6-21.6, entitled “Reciprocal attorneys’ fees provisions in business contracts,” provides a safe harbor for “certain” business contracts, which would then include certain real estate contracts.

Section 6-21.6 is not the answer to all prayers for real estate practitioners drafting contracts.  Excluded from the statute are:

• Consumer contracts;
• Employment contracts; and
• Contracts with the North Carolina government or governmental agencies

Additional limitations of the new Act are:

• the contract must be a written contract signed by all parties (“by hand”);
• the attorneys fee provision must be reciprocal;
• the award of attorney fees cannot exceed the money damages sought;
• the statute lists 13 factors to be considered in determining the attorney fees to be awarded; and
• the award of attorney fees will not be governed by any statutory presumption or the amount recovered in other cases.

TIP: A sample insert used by the author is attached as Exhibit B.

10.  Consideration – when is it “illusory”?

The case of McLamb v. T.P., Inc., 173 N.C. App. 586, 619 SE2nd 577 (2005)(cert. den.) is a modern day view of “illusory” consideration of old. 

In McLamb, the key facts were:

• Plaintiffs desired to purchase lots at a subdivision to be developed by defendant;
• Plaintiffs executed “Reservation Agreements” which the court interpreted as option contracts;
• Plaintiffs paid a deposit of $500 per lot “as consideration”;
• The deposit was fully refundable if plaintiff requested a cancellation or the deposit was transferred to the purchase contract as a credit toward the purchase price at closing;
• Defendant later informed plaintiffs it was unable to obtain necessary permits to develop the project and terminated the reservation/option contracts;
• Plaintiffs sued for specific performance; and
• Although a sample reservation/option contract was not reprinted in the opinion, the court concluded “nothing in the reservations actually required (the developer) to develop the property upon which plaintiffs’ lots were to be located or to convey such lots to plaintiffs.”

The court’s first conclusion was that the reservation/option contracts did not actually constitute offers to sell. Thus, there could be no breach.

Instead of ending the opinion there, the court proceeded to analyze the nature of the consideration.  The court attempted to distinguish an option contract from a purchase agreement by explaining that an option is “a contract by which the owner agrees to give another the exclusive right to buy property at a fixed price within a specified time.” 

[Editorial Note:  In my practice, there is no practical distinction between an “option” and a commercial purchase contract as the typical commercial deal is to have a purchase contract with a free “look-see” period in which the earnest money is fully refundable if the buyer terminates prior to the end of the negotiated due diligence period.] 

The court was vexed by the fact that the $500 deposit was fully refundable and, if the closing occurred, the $500 was to be applied as a credit to the purchase price. 

[Editorial Note:  In my practice, the first question after “how much” to pay for the land is “how much” earnest money deposit will be required and is it refundable/applicable?  The earnest money deposit is considered “funny money” because the buyer usually gets it (all) back if the buyer walks.  A different story emerges if the buyer needs to extend the original due diligence period – then you see negotiated penalties for longer due diligence periods which are frequently non-refundable but still applicable.]

In plaintiffs’ support:

• $500 cited “as consideration”;
• $500 actually paid; and
• “Plaintiffs … lost the benefit of the use of that money during the interim time period … [and] Defendant received the benefit of the use of this money to enable it to … both receive and/or qualify for financing and to earn interest …”

The court does not explain how options are different than purchase agreements or other contracts; likewise, the court does not address the practice of reciting “in consideration of $10.00 and other valuable consideration” as adequate consideration.  In a stinging rebuke of contracts with fully refundable deposits, the court cited a case which held that “consideration which may be withdrawn on a whim is illusory consideration which is insufficient to support a contract.”    The supporting authorities were two covenants not to compete cases.  The court distinguished money paid as a deposit toward the purchase price and money paid for the option itself.  The court cited many N.C. authorities for this proposition.  The court did not indicate if it would have ruled differently if the option had recited “$10.00 and other valuable consideration.”

In many contracts, earnest money is fully refundable and, in other cases, the earnest money may even be waived.  In such cases, is the consideration “illusory” as with the option contract in McLamb?

TIP:  To avoid the McLamb issue, consider inserting into your draft a provision for non-refundable earnest money in a nominal amount.  A sample is attached hereto as Exhibit C.

11.   At least mitigation of damages will always be around – or will it?

The case of Sylva Shops Limited Partnership v. Hibbard, 175 N.C. App. 423, 623 SE2nd 785 (2006) surprised many leasing lawyers.  See also Kotis Properties, Inc. v. Casey’s Inc., 183 N.C. App. 617, 645 SE2nd 138 (2007) (following Sylva Shops).

Prior to Sylva Shops, the established common law was that a landlord had a duty to mitigate damages.   See, e.g., Isbey v. Crews, 55 N.C. App. 47, 284 S.E.2d 534 (1981).  In Sylva Shops, the lease expressly provided to the contrary:

[Landlord] shall have no obligations to mitigate Tenant’s damages by reletting the Demised Premises.

The court had no difficulty finding that a shrewd landlord, who thinks to add this provision to the boiler plate in a commercial lease is entitled to enforce it.  The court noted that a different result might occur if the waiver of a right was accomplished through “inequality of bargaining power.”

This case provides two lessons for a transactional lawyer:

• Whether or not there will be a duty imposed on the landlord to mitigate damages is up for negotiation between the parties;
• No “historical” duties are sacred, if knowingly waived.

The court provided some insight to its rationale:

• “[c]ourts will rarely inquire into the soundness of the bargain itself…. ‘Liberty to contract carries with it the right to exercise poor judgment as well as good judgment….’”
• the court noted that the defendant did not argue that the lease provision was obtained as a result of inequality of bargaining power.
• the tenant testified that “[n]obody was holding a gun to [our] head” to sign the Lease….

NOTE:  The opinion was expressly limited to “commercial” leases.

TIP:  If you represent a tenant and the shopping center landlord seeks to negotiate out the duty to mitigate, a compromise position is to acknowledge that the shopping center landlord is faced with other locations to lease and that it has no greater duty to lease the vacated premises than it does to lease out its other locations:

Landlord agrees to make equal efforts to market the Demised Premises together with its other vacant properties in an effort to mitigate Tenant’s damages.  Landlord shall neither favor nor disfavor the Demised Premises in the marketing of the space to potential tenants.  Further, Landlord shall not be required to enter into a lease for the Demised Premises at a rate below fair market rent or with a tenant that does not meet Landlord’s standards for economic viability which shall be judged in a commercially reasonable standard.

12.  What date was that closing anyway? Does it matter?

Ever since Beaman v. Head (In re: Head Grading Co., Inc.), Bankruptcy Case No. 05-02729-8 RDD, Adversary Proceeding No. D-05-00316-8-AP, nervous transactional lawyers have stayed awake at night worrying about whether “every” Note and “every” Deed of Trust ever prepared had matching dates.

In Beaman, the Note was dated July 29, 1998, and the Deed of Trust was dated July 28, 1998.  The Deed of Trust provided that it was given as security for a “Promissory Note of even date herewith.”  The bankruptcy court granted the Trustee’s Motion for Summary Judgment and held that the Deed of Trust was unenforceable.  The logic? That “North Carolina law requires deeds of trust to specifically identify the debt referred to therein.”

Without belaboring the rationale cited in the Beaman opinion, the impact was felt across the state.  The ruling was just plain harsh.  Two cases just handed down in 2013 are more forgiving. 

In January of 2013, the bankruptcy court handed down the case The Willows II, LLC v. BB&T (In re: Willows II, LLC), Bankruptcy Case No. 12-02876-8-SWH (2013 WL 139319).  While technically “distinguishing” Beaman instead of “over-ruling” Beaman, the net effect is to restore a more balanced view of a technical drafting error.  In Willows II, the court held that the Deed of Trust contained “sufficient information that specifically and uniquely [identified] the Note as the obligation secured”, notwithstanding a Note dated September 8, 2005 and a Deed of Trust dated September 7, 2005.   See also Hutson v. BB&T (In re: Wilson), Bankruptcy Case No. 10-81481C-13D, Adversary Proceeding No. 12-9025 (2/8/13) (Deed of Trust enforceable notwithstanding Note erroneously dated April 4, 2002 instead of April 4, 2003).

TIP:  Always, always, always make sure the Note and Deed of Trust are dated the same date.

TIP:  When issuing an opinion letter on loan documents always include an “assumption” that the loan documents will be dated the same date.

Attachments

Exhibit A – Root Edmonson Inquiry (dual representation)

Exhibit B – Sample contract provision for reciprocal attorney fees under NCGS § 6-21.6

Exhibit C – Sample “Consideration” language (including “independent consideration”)