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The Trusted Adviser

December 2009 | Volume 2 - Number 10

Update from ATG Administration

 

Peter J. Birnbaum ATG President and CEO

The title of this article is certainly lofty. No, I have not listened to too many Deepak Chopra CDs. But, I do need to speak from the heart and tell you about a concern I have had for many years. And to tell you why I believe ISBA Opinion 10-02 is the first step toward allowing lawyers to practice real estate law in a more rational, fulfilling, and profitable manner. First, the concern: I would like to think that I have genuine empathy for the practicing lawyer. While it is true that I have spent literally my entire career in the relatively secure environment of a successful corporation, I nevertheless recognize and appreciate that ATG members own the company and that I work for the members.

The lawyers at ATG do not actively practice law, but we are duty bound to understand your practices.

In my twenty-nine years at ATG, I have learned that the average practicing lawyer is:

 

 

 

1. Bright

 

2. Hard-working

 

3. Devoted

 

4. Ethical

 

5. Charitable

At the same time, I have also learned that lawyers are:

 

 

 

 

1. Underpaid

 

2. Overworked

 

3. Stressed out

 

4. Not adept at the traditional business disciplines of marketing, accounting, and management.

It is in these latter that I have observed the lawyer to be at greatest risk. Here is an example: Many real estate lawyers market their real estate practices almost exclusively to brokers. In turn, the law firm is economically dependent on brokers for referrals.

That dependence, in my estimation, has resulted in brokers assuming a position of control in the relationship with the lawyer. The broker feels free to dictate the fee that the lawyer may charge. In some circumstances, the broker is so emboldened to even dictate the lawyer's conduct.

It is fair to say that the average fee for a "simple" residential real estate closing in the Chicago Metropolitan area is under $500.00. It is evident that without the fees that may be garnered by providing title and other services, the legal fee that lawyers charge in this essential area of their practice is not adequate to sustain their business. It is this "loss leader" business model that puts the lawyer at risk.

For many years, ATG owned an interest in the Minnesota Fund. At that time, the rural Minnesota lawyers still enjoyed a significant role in the real estate transaction. In Minneapolis, the lawyers were sometimes in the deal, sometimes not.

In Minnesota, brokers began setting up captive title companies in the early 1980s. By the end of the decade, broker-owned and -controlled title companies were the primary delivery system of title services in the Minneapolis market and the lawyers were gone.

Several ATG Directors and I sat on the Board of the Minnesota Fund. We were very concerned about a similar proliferation of broker-controlled business in the Chicago area. We found comfort, however, in the fact that in Chicago, unlike Minneapolis, our culture was such that buyers and sellers routinely used lawyers to represent their interests at closing. We surmised that this fact would likely discourage brokers from drawing a line in the sand with the lawyers who were so firmly entrenched.

But we were wrong.

The first shot across the bow came in February 2000 when Koenig & Strey dispatched its infamous memo entitled, "Closing Myth #1": That memo asserted the proposition that you did not need a lawyer to conduct a real estate closing. The motive behind the memo was surmised to be a desire to get the lawyer out of the way to ensure Koenig could capture the title work. That memo resulted in a law suit by the Illinois Real Estate Lawyers Association (IRELA) that was quickly and decisively settled in favor of IRELA. Thus began John O'Brien's path to the ISBA Presidency.

But the stakes changed beginning in 2002 when some brokers who coveted the idea of forming a captive title company concluded that, to succeed in capturing that business, they would have to convince the lawyer to get out of the way using more subtle tactics than Koenig & Strey. Two business models evolved. Both operated under the proposition that the broker controlled the referral of legal business and that legal business would only be referred to lawyers who were willing to allow the broker to control the title insurance. In one, lawyers were not title agents at all; in those cases, the lawyer simply deferred to the broker's captive title company. In the other, brokers set up title ventures wherein the lawyer would act as an agent for the title entity owned by the broker.

Over the past five years, we have received dozens of complaints from lawyers. The typical phone call is:

 

 

 

 

"I used to receive twenty-five referrals a year from Blackacre Real Estate Company. They recently came to me and demanded that I use their captive title company. When I refused, I was blacklisted."

Or:

 

 

 

 

"I was recently approached by Greenacre Real Estate Company to become their agent. I was told that in order to continue to receive referrals from Greenacre, I would need to become a title agent for their captive company. When I refused, I was blacklisted."

Or, sadly, it would be:

 

 

 

 

"Sorry. I caved. My eldest is starting college and our baby needs braces. What can I do?"

How could this be? Lawyers found themselves in a position where the brokers were dictating the conduct of the lawyer to the point where they were completely abrogating not only their ability to practice law, but to survive in their practices. What a horrible irony it had become that these brokers who dictated an irrationally low legal fee were now taking away the only source of business that made it profitable?

In October 2009, the Illinois State Bar Association (ISBA) issued an ethical opinion that represented a major step in the right direction.

The digest of ISBA Opinion 10-02 is that "a lawyer may not enter into a referral arrangement with a real estate company that would require the lawyer to use the real estate companies affiliated title insurer for the lawyer's clients as a condition of receiving referrals from the real estate company." In other words, a broker cannot dictate your conduct. They cannot tell you that you must use their captive company or be an agent of their captive company in order to receive future referrals of business.

We hope that this will clear the path toward eradicating these terrible practices.

The opinion, while helpful, is only the beginning. It is a wake-up call to the profession that the practice of law should not be strictly dependent on those we perceive to be potential sources of business. In order to achieve that, it is critical for lawyers to implement these changes:

 

 

1. Develop better business skills.
   
   1. Marketing Training
   2. Accounting
   3. Management Practices
2. Some years ago, we conducted CLE programs, low-cost and free CLE programs, on how to market your law practice. We were stunned at the lack of interest on this topic. While I understand why the topic is not of interest to the lawyers, I submit that it should be a vital interest.

 

3. Charge reasonable fees for the services you provide.

 

4. Improve our public profile so consumers go directly to lawyers and we are not dependent on others for referrals.

These are daunting times for the real estate lawyer. A depressed housing market has resulted in unprecedented government regulation, which makes the practice more complex and difficult. All the more reason to take a step back and re-examine our practices. ATG stands ready to help you achieve your goal of maintaining a rewarding and profitable practice. Look for us to continue to provide you with the tools you need to succeed in the years ahead. As I write this, we are building collaborations that will serve your practice in the months and years ahead.

 

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: 12-15-09]