Can a real estate broker file an interpleader for disputed earnest money in general sessions court without a lawyer?

Subject

Opinion No. 14-08, Interpleader Actions by Real Estate Brokers as Unauthorized Practice of Law, January 14, 2014

Plain-English summary

When earnest money is in dispute between a buyer and seller, a real estate broker holding the funds is stuck. Distributing the money to either party risks a lawsuit. The traditional fix is an interpleader: the broker deposits the disputed money with the court and lets the judge sort it out. Tennessee Code Ann. § 16-15-731 lets brokers do this in general sessions court when the amount is within the court's $25,000 jurisdictional limit. The Tennessee Real Estate Commission has even promulgated a standard interpleader form (Tenn. Comp. R. & Regs. 1260-02-.34).

But filing court documents typically requires a lawyer. Tenn. Code Ann. § 23-3-103(a) makes it illegal to practice law without an active license. The exception in § 23-1-109 lets "[a]ny person... conduct and manage the person's own case in any court of this state." So the question is: when a non-lawyer broker files an interpleader, are they conducting their own case, or are they practicing law on someone else's behalf?

Senator Ken Yager asked the AG to distinguish two scenarios.

Scenario 1: Sole proprietor broker. A sole proprietorship has no legal existence separate from the proprietor. Hitt v. Hitt, 1994 WL 618608; Duke v. Replogle Enterprises, 891 S.W.2d 205 (Tenn. 1994). When a sole-proprietor broker holds disputed earnest money, the money is the broker's own (held in a fiduciary capacity), and the broker is the only legal entity at stake. The broker therefore qualifies as a "person" under § 23-1-109 and can file the interpleader pro se without engaging in the unauthorized practice of law.

Scenario 2: Broker acting for a firm. When the broker works for a separate legal entity (LLC, corporation, partnership), the firm is a distinct juridical person. Tennessee courts have consistently held that artificial entities cannot proceed pro se through a non-lawyer employee, even if the employee is an officer or shareholder. Old Hickory Eng'g & Mach. Co. v. Henry, 937 S.W.2d 782, 786 (Tenn. 1996) (corporation); Investors Grp v. Knoxville Cmty. Dev. Corp., 2001 WL 839837 (partnership); Collier v. Greenbrier Developers, 358 S.W.3d 195 (Tenn. Ct. App. 2009) (LLC). So the § 23-1-109 exception doesn't apply.

That kicks the analysis to whether filing the interpleader on the firm's behalf is the "practice of law" under § 23-3-101 (which defines "practice of law" and "law business"). The Tennessee Supreme Court held in In re Petition of Burson, 909 S.W.2d 768, 776 (Tenn. 1995), that something counts as the practice of law only when it requires the "professional judgment of a lawyer." Courts look at (a) the nature of the task and (b) the formality of the proceeding triggered.

The AG concluded that filing an interpleader pleading on a firm's behalf "could be construed to require the exercise of legal judgment." Filing court pleadings has been held to be the practice of law (Fifteenth Judicial Dist. Unified Bar Ass'n v. Glasgow, 1999 WL 1128847; Old Hickory, 937 S.W.2d at 786). Using a TREC form does not necessarily change the analysis: Glasgow aligned Tennessee with the majority of jurisdictions holding that "the drafting of pleadings and legal documents or the selection and completion of form documents constitutes the practice of law."

The AG declined to give a definitive answer because the inquiry is "heavily fact-dependent." A broker should proceed cautiously and, in close cases, retain counsel. The opinion contrasts the broker scenario with the simpler debt-claim filing in Estate of Green v. Carthage General Hospital, 246 S.W.3d 582 (Tenn. Ct. App. 2007), where a non-lawyer employee could file a creditor's claim because the underlying process was informal and did not require legal judgment. An interpleader is more formal and demands judgment about (1) which money to interplead, (2) which parties to name, and (3) whether to request dismissal from the resulting action.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The interpleader procedure. Tenn. Code Ann. § 16-15-731(a) allows interpleader actions in general sessions court when the money in question does not exceed the court's jurisdictional limit ($25,000 under § 16-15-501(d)(1)). When the broker holds earnest money or similar disputed funds in a fiduciary capacity, "[a]ny such action involving money in the custody or possession of a person acting in the capacity of a real estate broker may be filed on forms prescribed by the Tennessee real estate commission." Tenn. Code Ann. § 16-15-731. The TREC form is at Tenn. Comp. R. & Regs. 1260-02-.34.

The UPL statute. § 23-3-103(a): only duly licensed persons with an active law license may practice law or do law business. § 23-1-109 carves out pro se representation: "Any person may conduct and manage the person's own case in any court of this state."

Definitions in § 23-3-101.

• "Practice of law" (§ 23-3-101(3)): "the appearance as an advocate in a representative capacity or the drawing of papers, pleadings or documents or the performance of any act in such capacity in connection with proceedings pending or prospective before any court, commissioner, referee or any body, board, committee or commission constituted by law or having authority to settle controversies, or the soliciting of clients directly or indirectly to provide such services."
• "Law business" (§ 23-3-101(1)): advising or counseling for valuable consideration on any secular law; drawing or procuring papers for valuable consideration; any act in a representative capacity for consideration relating to secular rights or property.

The Burson test. In re Petition of Burson, 909 S.W.2d 768, 773, 776 (Tenn. 1995): the listed acts in § 23-3-101 constitute the unauthorized practice of law only if they require the "professional judgment of a lawyer." Adopted from Tenn. Sup. Ct. R. 8, EC 3-5: "Functionally the practice of law relates to the rendition of services for others that call for the professional judgment of a lawyer."

Sole proprietorship doctrine. No Tennessee statute defines or creates the sole proprietorship. Courts use Black's Law Dictionary: "a form of business in which one person owns all assets of a business in contrast to a partnership and corporation. The sole proprietor is solely liable for all the debts of the business." Hitt v. Hitt, 1994 WL 618608. A sole proprietorship has no legal identity separate from the proprietor. NLRB v. Consol. Food Servs., Inc., 81 F. App'x 13, 14 n.1 (6th Cir. 2003); Bellis v. United States, 417 U.S. 85, 87-88 (1974) (privilege against self-incrimination extends to sole proprietorships).

The firm-as-separate-entity doctrine.

• Corporation: "separate and distinct existence from its officers and shareholders." Old Hickory, 937 S.W.2d at 786.
• LLC: "an existence separate from its members and managers." Acacia Dermatology (quoting Collier).
• Partnership: same. Investors Grp v. Knoxville Cmty. Dev. Corp., 2001 WL 839837.

None of these can proceed pro se through a non-lawyer.

The fact-specific inquiry. Burson and Glasgow both emphasize that UPL analysis turns on what the non-lawyer actually did and whether the proceeding required legal judgment. Compare Carthage General Hospital (a hospital employee filing a creditor's debt claim against an estate is not UPL because the process is informal) with Glasgow (a non-lawyer drafting form legal documents for clients is UPL because she was selecting and customizing forms requiring legal knowledge).

The interpleader is closer to Glasgow. Filing an interpleader requires (a) deciding which funds to deposit, (b) deciding which parties to name, and (c) asking the court to release the broker from further involvement. Each of these is a legal judgment about the consequences of the broker's filing on the broker's exposure. The TREC form does not eliminate that judgment.

Common questions

Why is a sole proprietor okay but a firm employee isn't?

Because a sole proprietor has no separate legal existence from the proprietor. They are the same "person" for § 23-1-109 purposes. A firm has a separate legal existence; representing the firm is representing someone else.

What if the broker is a corporate officer or LLC member?

The Tennessee Supreme Court has been clear in Old Hickory that the right to proceed pro se is not applicable to corporations even when the person acting for the corporation is an officer or shareholder. The same logic applies to LLC members and partnership partners. They need a lawyer.

Does the TREC form change anything?

No. Glasgow held that completing form documents constitutes the practice of law when the choices require legal knowledge. The TREC form is statutorily approved as the right document, but choosing what to put in it, who to name, and how to characterize the dispute still requires legal judgment.

Could a broker pay an attorney once to set up a standard process and then file routinely without one?

The opinion does not address that scenario. Generally, a non-lawyer relying on a process designed by a lawyer still has to make case-specific judgments at filing time. Broker attorneys often draft templates and review filings; the line between proper template use and UPL turns on how much case-specific judgment the broker is exercising at the moment of filing.

Does the opinion say what happens if a firm-agent broker files anyway?

Not in any detail. The opinion notes that the Tennessee Supreme Court has "inherent supervisory power to regulate the practice of law," that no Tennessee court has yet ruled on the broker-interpleader question, and that the analysis is fact-specific. Because of that, the AG declined to give a definite answer and said a broker who is not a licensed attorney "should proceed cautiously." It does not catalog specific penalties.

What does the opinion suggest a firm-agent broker do?

It does not give instructions beyond proceeding cautiously, given that the § 23-1-109 pro se exception does not cover a separate firm and filing the interpleader on the firm's behalf "could be construed to require the exercise of legal judgment."

Citations

Statutory: Tenn. Code Ann. § 16-15-501(d)(1); § 16-15-731; § 16-15-731(a); § 23-1-109; § 23-3-101; § 23-3-101(1); § 23-3-101(3); § 23-3-103(a); § 30-2-307; § 50-6-102; § 62-11-111; § 62-18-207; § 67-6-223. Rules: Tenn. Comp. R. & Regs. 1260-02-.34; Tenn. Sup. Ct. R. 8, EC 3-5. Cases as listed in cases_cited above. References: Black's Law Dictionary 1248 (5th ed. 1979); 1392 (6th ed. 1994); 18 C.J.S. Corporations § 4 (2013); Mitchell F. Crusto, Unconscious Classism: Entity Equality for Sole Proprietorships, 11 U. Pa. J. Const. L. 215, 219 & n.4 (2009); David Flitcroft, Interpleader Q & A, Tenn. Real Est. News-J., Fall 2008.

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2014/op14-008.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL

January 14, 2014

Opinion No. 14-08

Interpleader Actions by Real Estate Brokers as Unauthorized Practice of Law

QUESTIONS

1. May a real estate broker who is not a licensed attorney, acting in his or her capacity as sole proprietor, personally interplead disputed funds in the general sessions court without engaging in the unauthorized practice of law in Tennessee?

2. May a real estate broker who is not a licensed attorney, acting as agent for a brokerage firm, personally interplead disputed funds in the general sessions court without engaging in the unauthorized practice of law in Tennessee?

OPINIONS

1. Yes.

2. A real estate broker who is not a licensed attorney, acting as an agent for a brokerage firm, would engage in the unauthorized practice of law by interpleading disputed funds in the general sessions court when interpleading such funds requires the exercise of legal training, skill, or judgment. Such an inquiry is highly fact-specific and therefore beyond the scope of this opinion.

ANALYSIS

"The remedy by bill of interpleader," according to the Tennessee Supreme Court, "is designed to protect a stakeholder against the vexation of proceedings by two or more doubtful claimants when the whole matter may be settled in a single suit." Woodard v. Metropolitan Life Ins. Co., 24 S.W.2d 888, 889 (Tenn. 1930). Guidance material distributed by the Tennessee Real Estate Commission (TREC) describes the nature of the interpleader action in the context of real estate brokers as a "process [that] allows a company holding contested earnest money to deposit the funds with the Court resulting in the Judge making the decision as to who receives the funds." David Flitcroft, Interpleader Q & A, Tenn. Real Est. News-J., Fall 2008, at 4.

Tennessee law allows "actions in the nature of interpleader, in which the value of the money that is the subject of the action does not exceed the jurisdictional limit of the general sessions court" to be filed in general sessions court. Tenn. Code Ann. § 16-15-731(a). "Any such action involving money in the custody or possession of a person acting in the capacity of a real estate broker may be filed on forms prescribed by the Tennessee real estate commission . . . ." Id.

Pursuant to Tenn. Code Ann. § 16-15-731, the TREC has promulgated an "Interpleader Form" as part of its "Rules of Conduct" for real estate brokers. Tenn. Comp. R. & Regs. 1260-02-.34. The rule containing the interpleader form states that the form "may be used, as appropriate, alone, or in conjunction with the forms currently used by the General Sessions Court in which the action is to be filed." Neither the rule nor the statute on which it is based specifies whether the person who prepares and files the form in the general sessions court must be licensed to practice law.

The jurisdiction of general sessions court extends to $25,000 in all civil cases. Tenn. Code Ann. § 16-15-501(d)(1). If the amount of money in dispute exceeds the jurisdiction limit of the general session courts, then the interpleader action would be filed in circuit or chancery court.

1. Broker as sole proprietor. In Tennessee, only duly licensed persons with an active law license may "practice law or do law business, or both." Tenn. Code Ann. § 23-3-103(a). However, "[a]ny person may conduct and manage the person's own case in any court of this state," notwithstanding the prohibition against engaging in the unauthorized practice of law. Tenn. Code Ann. § 23-1-109 (emphasis added). If a broker, as sole proprietor, qualifies as a "person" under Tenn. Code Ann. § 23-1-109, the broker would have authority to conduct and manage an interpleader action, including the initiation of the action, even if such conduct constituted the practice of law.

There is no Tennessee statute that creates or defines a sole proprietorship. Though sole proprietorships are referred to throughout the Code, they are nowhere specifically defined or created. Lacking a statutory definition, Tennessee courts have adopted the definition of sole proprietorship found in Black's Law Dictionary. "A sole proprietorship is defined as '[a] form of business in which one person owns all assets of a business in contrast to a partnership and corporation. The sole proprietor is solely liable for all the debts of the business.'" Hitt v. Hitt, No. 02A01-9310-CV-00218, 1994 WL 618608, at *2 (Tenn. Ct. App. Nov. 9, 1994) (quoting Black's Law Dictionary 1248 (5th ed. 1979)); see also In re Heil, 289 B.R. 897, 909 & n.10 (Bankr. E.D. Tenn. 2003); State v. Pendergrass, 13 S.W.3d 389, 395 (Tenn. Ct. Crim. App. 1999).

It is generally held that a sole proprietorship has no legal existence or identity separate or apart from the sole proprietor. See, e.g., NLRB v. Consol. Food Servs., Inc., 81 F. App'x 13, 14 n.1 (6th Cir. 2003); Wilson v. Acacia Dermatology PLLC, No. 1:11-cv-00069, 2011 WL 3651779, at 1 (M.D. Tenn. 2011); In re Christenberry, 336 B.R. 353, 356 (Bankr. E.D. Tenn. 2005); 18 C.J.S. Corporations § 4 (2013); see also Bellis v. United States, 417 U.S. 85, 87-88 (1974); Duke v. Replogle Enterprises, 891 S.W.2d 205, 205 (Tenn. 1994); Pendergrass, 13 S.W.3d at 395. As sole proprietorships have no legal existence of their own, the individual owner may "represent" a sole proprietorship in a pro se capacity. See, e.g., Consol. Food Servs., Inc., 81 F. App'x at 14 n.1; Acacia Dermatology, 2011 WL 3651779, at 1.

In light of the foregoing, it is reasonable to conclude that a sole proprietor is a "person" for purposes of Tenn. Code Ann. § 23-1-109. Therefore, a real estate broker who is not a licensed attorney, acting in his or her own capacity as a sole proprietor, does not engage in the unauthorized practice of law by interpleading disputed funds in the general sessions court.

2. Broker as agent for a firm. When a real estate broker serves as an agent for a firm, as opposed to representing himself or herself as a sole proprietor, then the provisions of Tenn. Code Ann. § 23-1-109 do not apply. In these circumstances, it is necessary to determine whether and when the initiation and management of an interpleader action would constitute the practice of law or law business.

"Firm" is used here to mean any business enterprise that is not a sole proprietorship and therefore has a separate legal existence from the individual. See, e.g., Acacia Dermatology, 2011 WL 3651779, at 1 (quoting Collier v. Greenbrier Developers, LLC, 358 S.W.3d 195, 200 (Tenn. Ct. App. 2009)); Old Hickory Eng'g & Mach. Co. v. Henry, 937 S.W.2d 782, 786 (Tenn. 1996); Investors Grp, I, Ltd. v. Knoxville Cmty. Dev. Corp., No. E1999-00395-COA-R3-CV, 2001 WL 839837, at 2 (Tenn. Ct. App. 2001).

The term "practice of law":

means the appearance as an advocate in a representative capacity or the drawing of papers, pleadings or documents or the performance of any act in such capacity in connection with proceedings pending or prospective before any court, commissioner, referee or any body, board, committee or commission constituted by law or having authority to settle controversies, or the soliciting of clients directly or indirectly to provide such services.

Tenn. Code Ann. § 23-3-101(3). The term "law business":

means the advising or counseling for valuable consideration of any person as to any secular law, the drawing or the procuring of or assisting in the drawing for valuable consideration of any paper, document or instrument affecting or relating to secular rights, the doing of any act for valuable consideration in a representative capacity, obtaining or tending to secure for any person any property or property rights whatsoever, or the soliciting of clients directly or indirectly to provide such services[.]

Tenn. Code Ann. § 23-3-101(1).

The Tennessee Supreme Court, in holding that it has "inherent supervisory power to regulate the practice of law," has concluded that the definitions contained in Tenn. Code Ann. § 23-3-101 should be read in conjunction with the rules of that Court and that the enumerated acts constitute the practice of law or law business only if they require the "professional judgment of a lawyer." In re Petition of Burson, 909 S.W.2d 768, 773, 776 (Tenn. 1995). The Court further warned against taking a formalistic approach to defining the practice of law:

It is neither necessary nor desirable to attempt the formulation of a single specific definition of what constitutes the practice of law. Functionally the practice of law relates to the rendition of services for others that call for the professional judgment of a lawyer. The essence of the professional judgment of the lawyer is his educated ability to relate the general body and philosophy of law to a specific legal problem of a client . . . . Where this professional judgment is not involved, non-lawyers, such as court clerks, police officers, abstracters, and many governmental employees, may engage in occupations that require a special knowledge of law in certain areas. But the services of a lawyer are essential in the public interest whenever the exercise of professional legal judgment is required.

Id. at 775 (quoting Tenn. Sup. Ct. R. 8, EC 3-5); see also Fifteenth Judicial Dist. Unified Bar Ass'n v. Glasgow, No. M1996-00020-COA-R3-CV, 1999 WL 1128847, at *3 (Tenn. Ct. App. 1999) ("Thus the acts included in Tenn. Code Ann. § 23-3-101 constitute the unauthorized practice of law if performed by a non-lawyer only when performing those acts requires the professional judgment of a lawyer." (citing Burson, 909 S.W.2d at 776)).

Courts in Tennessee have held that the "drafting of pleadings and legal documents or the selection and completion of form documents constitute the practice of law" because those activities require the professional judgment of a lawyer. See Glasgow, 1999 WL 1128847, at *4 (citing Old Hickory Eng'g & Mach. Co. v. Henry, 937 S.W.2d 782, 786 (Tenn. 1996)). Conversely, it has been held that preparing and filing a claim for a debt against an estate of a decedent pursuant to Tenn. Code Ann. § 30-2-307 does not require the professional judgment of a lawyer. Estate of Green v. Carthage Gen. Hosp., Inc., 246 S.W.3d 582, 586 (Tenn. Ct. App. 2007). The courts' conclusions hinge partially on an exploration of the nature of the underlying legal process. In Old Hickory, the underlying process was a complaint for a claim of negligence and "Rule 11 [of] the Tennessee Rules of Civil Procedure . . . makes the signing of a pleading by an attorney of record or the party an essential condition to the validity of a pleading." 937 S.W.2d at 785. In Carthage, the claim against the estate was "essentially a demand for payment," 246 S.W.3d at 584, and such claims have "never been considered a pleading governed by the Rules of Civil Procedure," the underlying process being "described as an 'informal statement of the cause of action.'" Id. (quoting Wilson v. Hafley, 226 S.W.2d 308, 311 (Tenn. 1949)).

When determining whether an initial filing requires the professional judgment of a lawyer, the courts also analyze the formality of the proceedings triggered by the submission. See Tenn. Envtl. Council v. Tenn. Water Quality Control Bd., 254 S.W.3d 396, 404-09 (Tenn. Ct. App. 2007) (Tosh Farms). If the proceeding is "informal," for instance focusing on "information gathering," without adhering to the rules of evidence or involving direct or cross examination of witnesses, the representation may not require the professional judgment of a lawyer. Id. See also Burson, 909 S.W.2d at 771 ("Hearings before the [Assessment Appeals Commission] are informal."). If the proceeding is a formal, adversarial hearing, the professional judgment of a lawyer is required, and thus representation by a non-lawyer at such a proceeding is the practice of law. Tosh Farms, 254 S.W.3d at 409.

Indeed, Tennessee courts have found that "[c]ases involving the unauthorized practice of law are heavily fact-dependent. They require the courts to focus specifically on the conduct of the person alleged to be practicing law without a license." See Glasgow, 1999 WL 1128847, at 3; see also Tosh Farms, 254 S.W.3d at 404; Tenn. Envtl. Council v. Tenn. Water Quality Control Bd., No. M2005-02425-COA-R3-CV, 2007 WL 2827470, at 6 (Tenn. Ct. App. 2007) (Cumberland Yacht Harbor). Most decisions containing a detailed discussion of whether certain actions constitute the unauthorized practice of law in Tennessee include a fact-specific inquiry into exactly what actions the non-lawyer took, followed (at least after Burson) by an analysis of whether such actions require the professional judgment of an attorney. The Tennessee Court of Appeals has found, after a detailed analysis of the proceeding at issue in two interrelated cases, that even though a statute authorized non-attorneys to participate in proceedings before the Water Quality Control Board, the particular proceeding at issue in both cases was so complex that the professional judgment of an attorney was required. See Tosh Farms, 254 S.W.3d at 409-10; Cumberland Yacht Harbor, 2007 WL 2827470, at *8. Thus, determining whether an activity constitutes the unauthorized practice of law requires a fact-intensive inquiry into whether the service rendered by the non-lawyer requires the professional judgment of an attorney.

From a broker's perspective, an interpleader action allows the broker to deposit contested funds with the court and have no further involvement as a party to the legal proceedings. In such circumstances, a broker might reasonably argue that such action is ministerial or clerical and does not require legal judgment. However, based on the authorities cited above, a broker who is not licensed to practice law should proceed cautiously in such a case. Unlike the situation in Estate of Green, in which the plaintiff hospital was simply filing a claim as part of the administration of a decedent's estate, a broker would be initiating a formal legal proceeding by filing a "petition to interplead funds" with the general sessions court. The decision to file such a pleading and to request that the petitioner be dismissed from the resulting action, as stated in the TREC form, could be construed to require the exercise of legal judgment in evaluating the amount of funds to interplead and the validity of the various claims to the funds. Nor would the fact that the broker is using a form to prepare the petition necessarily be a defense. See Fifteenth Judicial District Unified Bar Association, 1999 WL 1128847 at *4 (Tennessee is aligned "with the majority of jurisdictions holding that the drafting of pleadings and legal documents or the selection and completion of form documents constitutes the practice of law").

As previously noted, Tennessee courts possess inherent supervisory power to regulate the practice of law. No Tennessee court has yet ruled on whether a broker filing an interpleader petition with a general sessions court on behalf of a firm constitutes the unauthorized practice of law. As also noted, such an inquiry requires a detailed, fact-specific inquiry into the actions taken. Accordingly, this Office cannot provide a definite opinion on how a court would rule on this issue.

ROBERT E. COOPER, JR.
Attorney General and Reporter

GORDON W. SMITH
Associate Solicitor General

JESSICA MYERS
Assistant Attorney General

Requested by:

The Honorable Ken Yager
State Senator
G19 War Memorial Building
Nashville, Tennessee 37243-0212