Can a lawyer form a title insurance company, sell an interest to someone tied to a mortgage company, and share title-policy profits in exchange for the mortgage company channeling closings to the lawyer?

Plain-English summary

The Committee was asked about an arrangement in which attorney A forms a title insurance company and sells an ownership interest to B, who is a mortgage company or its employee or shareholder. In return, B channels real estate closings from that mortgage company to A. The buyer-mortgagor pays for mortgage title insurance protecting the mortgagee, A collects the premium and pays it to the title company, and the title company then distributes the profits to both A and B. The requestors asked whether this is ethical and whether disclosures cure it.

The opinion answered "No," with one exception: there is no ethical problem with the requirement that the buyer-mortgagor pay the cost of mortgage title insurance for the mortgagee's protection. As to the rest, the opinion explained that both the Code and the new Rules provide a lawyer "shall not give anything of value to a person for recommending the lawyer's service," apart from paying the reasonable cost of permitted advertising and the usual charges of a not-for-profit referral or legal service organization (Rule 7.2 and DR 2-103(B)). The Committee concluded the arrangement "appears to be little more than a plan pursuant to which the lawyer buys legal work," and that there is no way to reconcile it with the Professional Code, "whether it be direct, by 'of counsel,' or any other contrivance or device."

Currency note

This opinion was issued in 1990, before the substantial 2009 revisions to Kentucky's Rules of Professional Conduct (SCR 3.130) and before later amendments to the advertising rules. The opinion's editorial header notes, for example, that Rule 7.2 was later revised and renumbered as Rule 7.20. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer share title-company profits with someone who refers closings to the lawyer?

A: No. The opinion concluded that sharing title-insurance-company profits with a mortgage-company insider in exchange for channeled closings is, in substance, the lawyer paying for legal work, which the rules prohibit.

Q: Do disclosures or an "of counsel" label fix the arrangement?

A: No. The opinion stated there is no way to reconcile the method with the Professional Code, "whether it be direct, by 'of counsel,' or any other contrivance or device."

Q: Was any part of the arrangement acceptable?

A: Yes. The opinion found no ethical problem with the requirement that the buyer-mortgagor pay the cost of mortgage title insurance for the mortgagee's protection.

Background and rules framework

The opinion interprets the rule against giving anything of value to a person for recommending the lawyer's services, expressed in both the former Code (DR 2-103(B)) and the Rules of Professional Conduct (Rule 7.2, Model Rule 7.2). The header notes Rule 7.2 was later renumbered Rule 7.20. The opinion also references RESPA in connection with the title-insurance payment.

Citations and references

Rules of Professional Conduct:

• MR 7.2 / KRPC 7.2 (later Rule 7.20; payment for recommending a lawyer's services)
• DR 2-103(B) (former Code; same prohibition)

Statutes:

• RESPA (Real Estate Settlement Procedures Act)

See also

• KBA Ethics Op. E-344: Cooperative Advertising & For-Profit Referral
• KBA Ethics Op. E-334: Talking Yellow Pages
• AL Ethics Op. 1995-08: LRS Percentage-Fee Programs

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-337.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-337
Issued: September 1990

Since the adoption of the Rules of Professional Conduct in 1990, the Kentucky Supreme
Court has made substantial revisions to rules governing the advertisement of legal
services. For example, this opinion refers to Rule 7.2, which was revised and
renumbered as Rule 7.20. Lawyers should consult the current version of the rules and
comments, SCR 3.130 (available at http://www.kybar.org) and the Attorneys'
Advertising Commission Regulations, before relying on this opinion.

Question:

Attorney ("A") forms a title insurance company ("Title Company") and then sells
an ownership interest in Title Company to B. B is either a mortgage company, an
employee of a mortgage company, or a shareholder of a mortgage company. In
return, B channels business in the form of real estate closings from the mortgage
company B is associated with to attorney A. One of the requirements of the
mortgage company is that the buyer-mortgagor pay for mortgage title insurance
for the protection of the mortgagee (the mortgage company with which B is
associated). Attorney A collects the title insurance premium and pays it to Title
Company. Title Company issues the title policy and distributes the "profits" to
attorney A and to B. The requestors ask (l) if this is ethical (2) if disclosures are
made.

Answer:

No, except that there is not any ethical problem with the requirement that the
buyer-mortgagor pay the cost of mortgage title insurance for the protection of the
mortgagee.

References:

DR 2-103(B), Rule 7.2 (c), and RESPA.
OPINION

We have the following concerns about the above arrangement, as it relates to the
Professional Code.
Both the Code and the new Rules provide that a lawyer "shall not give anything of value to
a person for recommending the lawyer's service (except that a lawyer may pay the reasonable cost
of advertising or written communications permitted by this Rule and may pay the usual charges of
a not-for-profit lawyer referral service or other legal service organization." ) Rule 7.2 and DR
2-103(B). The arrangement described in the question appears to be little more than a plan pursuant
to which the lawyer buys legal work. There is no way to reconcile this method of operation with
the Professional Code, whether it be direct, by "of counsel," or any other contrivance or device.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky
Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor
rule). The Rule provides that formal opinions are advisory only.