A REPORT ON FEARS v. VIRGINIA STATE BAR:
CRESPA, UPL OPINION NO. 183 AND
THE "SEPARATION OF POWERS" DOCTRINE

by James M. McCauley *

In October 1996, the Virginia State Bar issued Unauthorized Practice of Law (UPL) Opinion No. 183, which declared that the handling of a real estate settlement involves the practice of law to such an extent that only lawyers may conduct real estate closings in Virginia. While some administrative and clerical tasks do not constitute the practice of law and may therefore be performed by non-lawyers, (1) UPL Opinion No. 183 concluded that the settlement process as a whole requires the application of legal knowledge and skill to particular matters. Although UPL Opinion No. 183 was approved by the Virginia Supreme Court, with an original effective date of January 1, 1997, the Court repeatedly stayed the effective date and, as of this writing, the opinion has yet to be implemented. (2) The delay was occasioned by two pieces of legislation designed to overrule UPL Opinion No. 183 ushered in by the Coalition for Choice, a lobbying group supported by the banking, title insurance and real estate brokerage industries. During the 1997 Session, the General Assembly enacted the Consumer Real Estate Settlement Protection Act (CRESPA), (3) sponsored by Senator Warren E. Barry, a non-lawyer, of Fairfax, Virginia. CRESPA authorized attorneys, title companies, title agents, real estate brokers and financial institutions to close residential real estate loans, provided that the settlement agent registered with the Virginia State Bar. In order to conduct settlements under CRESPA, the settlement agent must meet the Act's requirements including, inter alia, malpractice or errors and omission coverage, surety bond, employee fidelity insurance, separate escrow account, fiduciary recordkeeping and audits. The Virginia State Bar, State Corporation Commission and Real Estate Board are charged with the responsibility of enforcing the Act as it applies to settlement agents subject to their licensing authority. With the passage of CRESPA, the Court delayed implementation of UPL Opinion No. 183. Ultimately, on April 1, 1998, the Court wrote to the Virginia State Bar, inquiring about whether the petition for review and approval of UPL Opinion No. 183 was moot in light of CRESPA, which permits nonlawyers to conduct real estate closings. The UPL Committee and the VSB Council concluded that UPL Opinion No. 183 should not be withdrawn, as suggested by the Court, and instead asked the Court to modify the opinion. Acting on the VSB's petition to modify, the Court approved UPL Opinion No. 183, as modified, (4) stating that the opinion did not apply to non-lawyer settlement agents registered pursuant to CRESPA.

Determined to kill UPL Opinion No. 183, during the 1999 Session, Senator Barry and his allies, the Coalition for Choice, persuaded the legislature to pass Senate Bill 1278, creating the Real Estate Settlement Agent Registration Act (RESARA). (5) Because CRESPA was limited to residential real estate closings, UPL Opinion No. 183 still operated to prohibit lay settlement agents from closing on commercial real estate and any other real estate, i.e., unimproved lot sales, not affected by CRESPA. Unbeknownst to the VSB, Senator Barry contacted the Court directly and persuaded the Court to delay the effective date of UPL Opinion No. 183 while Senate Bill 1278 was pending in the General Assembly. (6) The Court's order, entered December 11, 1998, moved the effective date of the opinion back to July 1, 1999. RESARA became effective July 1, 1999, making it clear that a lay settlement agent, if properly registered and in compliance with CRESPA, may close any real estate transaction in Virginia. After Senate Bill 1278 passed and was signed into law by the Governor, Senator Barry contacted the Court again, on May 18, 1999, asserting that UPL Opinion No. 183 was rendered moot by the adoption of both CRESPA and RESARA, and asked the Court to rescind or vacate the opinion. On May 27, 1999, Chief Justice Carrico wrote to the VSB, requesting that the VSB respond to Senator Barry's position. Again, the VSB stood behind UPL Opinion No. 183, asserting that it correctly applied the Court's rules and decisions on unauthorized practice in the context of real estate closings. The bar recognized, however, that the legislature again had acted, and proposed that the opinion be modified a second time to reflect that the newly enacted RESARA authorized CRESPA registered settlement agents to close any real estate transaction in Virginia. UPL Opinion No. 183, as twice modified, will presumably become effective May 1, 2000. (Editor's Note)


A lawyer and former Virginia Senator from the Eastern Shore, William E. Fears, filed an action in the Circuit Court for the City of Richmond, (7) seeking a declaratory judgment that CRESPA was unconstitutional and an injunction restraining the Virginia State Bar from enforcing CRESPA. (8) As the case developed, the Virginia Real Estate Action League (VaREAL) and the Coalition for Choice were permitted to intervene and file briefs. The Commonwealth of Virginia, represented by the Attorney General of Virginia, filed a Motion for Summary Judgment, (9) and Judge Theodore Markow's memorandum opinion granting summary judgment is the focus of this article.


Fears raised several constitutional challenges to CRESPA in his declaratory judgment suit. He argued that CRESPA: (1) is Special Legislation that is invalid under Article IV, Section 14 of the Virginia Constitution; (2) violates the Due Process clause of the Fifth Amendment to the United States Constitution; (3) violates the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution; and (4) defines the practice of law, thus violating the Separation of Powers Doctrine of the Constitution of Virginia. Judge Markow took less than four pages to dispose of and reject the first three arguments, reserving the remaining twenty pages of his opinion to address the separation of powers issue. A reading of Judge Markow's opinion leaves little doubt that he considers certain aspects of the real estate closing to involve the practice of law. In addition, Judge Markow agreed with Fears that the Virginia Supreme Court's constitutional and inherent powers include the power to regulate the legal profession and define the practice of law separate from and in spite of statutes. Thus, Judge Markow concluded, the Virginia Supreme Court is not necessarily bound by the legislature's definition of the practice of law, where the Court properly reserves to itself the judicial power conferred by the Virginia Constitution and its inherent power at common law to regulate the legal profession and define the practice of law. Finally, it appears that Judge Markow was prepared to rule that CRESPA was too substantial of a preemption or displacement of the Court's judicial power to define and regulate the practice of law, and thus a violation of the separation of powers doctrine under the Virginia Constitution.


Judge Markow concluded that CRESPA was an attempt by the General Assembly to define the practice of law. In determining what activities constitute the practice of law, Judge Markow opined that a court is not bound by the legislature's characterization that "escrow, closing or settlement services" are "administrative and clerical" tasks. Defining and supervising the practice of law, he wrote, is a fundamental and inherent judicial power of the Supreme Court of Virginia. (10) Article VI, Section 1 of the Virginia Constitution states:

The judicial power of the Commonwealth shall be vested in a Supreme Court and in such other courts of original or appellate jurisdiction subordinate to the Supreme Court as the General Assembly may from time to time establish.
The Separation of Powers doctrine is set out in Article I, Section 5 and in Article III, Section 1, the latter of which states:

Departments to be distinct. -- The legislative, executive and judicial departments shall be separate and distinct, so that none exercise the powers properly belonging to the others, nor any person exercise the power of more than one of them at the same time.
Judge Markow looked to Baliles v. Mazur (11) for the appropriate factors to determine whether the separation of powers doctrine has been violated, acknowledging that some overlap between the legislative and judicial branches is constitutionally tolerable:
When we speak . . . of a separation of the three great departments of government, and maintain that that separation is indispensable to public liberty, we are to understand that maxim in a limited sense. It is not meant to affirm that they must be kept wholly and entirely separate and distinct, and have no common link or dependence, the one upon the other, in the slightest degree. The true meaning is that the whole of the power of one of these departments should not be exercised by the same hands which possess the whole power of either of the other departments; and that such exercise of the whole would subvert the principles of a free constitution. (12)


Judge Markow also turned to Richmond Ass'n of Credit Men, Inc. v. The Bar Ass'n of the City of Richmond (13) for his authority regarding the Court's inherent power to define and regulate the practice of law:


While the matter is addressed by rule and statute, this Court has the inherent power, apart from statute or rule, to inquire into the conduct of any person to determine whether that individual is usurping the functions of an officer of the court and illegally engaging in the practice of law and to put an end to such unauthorized practice where found to exist.
167 Va. at 335-36. Thus, Judge Markow made the important observation that the Court and its subordinate tribunals have the inherent power, in the absence of and despite statutes, to exercise the judicial power of the Commonwealth granted by the Constitution. This judicial power, he observed, comes directly from the people through the Constitution and "does not first flow through the General Assembly." As a result, the necessary and essential powers of the Court, i.e., the inherent power, cannot be expanded or contracted by the legislative or executive branches except when permitted by the Constitution. The General Assembly's grant of authority to the Supreme Court, under Va. Code § 54.1-3910, permitting the creation of the Virginia State Bar, and to promulgate rules and regulations governing and defining the practice of law, does not displace the Court's inherent power.


Judge Markow determined that CRESPA attempts to redefine the practice of law. He first turned to the Act's definition of "escrow, closing or settlement services" in Va. Code § 6.1-2.20:

"Escrow, closing or settlement services" means the administrative and clerical services required to carry out the terms of contracts affecting real estate. These services include, but are not limited to, placing orders for title insurance, receiving and issuing receipts for money received from the parties, ordering loan checks and payoffs, ordering surveys and inspections, preparing settlement statements, determining that all closing documents conform to the parties' contract requirements, setting the closing appointment, following up with the parties to ensure that the transaction progresses to closing, ascertaining that the lenders' instructions have been satisfied, conducting a closing conference at which the documents are executed, receiving and disbursing funds, completing form documents and instruments selected by and in accordance with instructions of the parties to the transaction, handling or arranging for the recording of documents, sending recorded documents to the lender, sending the recorded deed and the title policy to the buyer, and reporting federal income tax information for the real estate sale to the Internal Revenue Service. (14)


Reiterating that the statutory definition is not controlling, Judge Markow divided the defined activities into two groups, those which are the practice of law and those which are not. The Supreme Court's definition of the practice of law is the appropriate tool for ferreting out which activities constitute the practice of law:

Generally, the relation of attorney and client exists, and one is deemed to be practicing law whenever he furnishes to another advice or service under circumstances which imply his possession and use of legal knowledge or skill.
Specifically, the relation of attorney and client exists, and one is deemed to be practicing law whenever:
(1) One undertakes for compensation, direct or indirect, to advise another, not his regular employer, in any matter involving the application of legal principles to facts or purposes or desires.
(2) One, other than as a regular employee acting for his employer, undertakes, with or without compensation, to prepare for another legal instruments of any character, other than notices or contracts incident to the regular course of conducting a licensed business.
(3) One undertakes, with or without compensation, to represent the interest of another before any tribunal--judicial, administrative, or executive--otherwise than in the presentation of facts, figures, or factual conclusions, as distinguished from legal conclusions, by an employee regularly and bona fide employed on a salary basis, or by one specially employed as an expert in respect to such facts and figures when such representation by such employee or expert does not involve the examination of witnesses or preparation of pleadings. (15)

Activities which clearly are not the practice of law are placing orders for title insurance, receiving and issuing receipts for money received from the parties, ordering loan checks and payoffs, ordering surveys and inspections, setting the closing appointment, receiving and disbursing funds, sending recording documents to the lender, and sending the recorded documents and title policy to the buyer. These activities do not require the application of law to fact, do not typically involve the giving of legal advice and, at most, may require the creation of documents that are described in Commonwealth v. Jones & Robins, Inc. (16) as "simple and incidental to the regular business of a licensed agent." In addition, Judge Markow concluded that the preparation of a settlement statement does not amount to the practice of law since it does not require special training and does not set the rights of the parties like a legal instrument.


However, Judge Markow concluded that determining that all closing documents conform to the parties' contract requirements necessarily requires the skill to interpret contract language to determine that all documents denoting title, insurance, and other rights are handled in the manner intended by the parties. This skill also requires knowledge of the proper method for the transfer of title, under Virginia law, and the language needed to effectuate the transferee's desired status given the state of title prior to the transfer. Therefore, determining that all closing documents conform to the parties' contract requirements is the practice of law. Ascertaining that the lender's instructions have been satisfied may also require the application of legal skill and knowledge to a particular set of facts. This activity involves knowledge and application of contract, property and other commercial law which, when performed by a settlement agent, is not within the scope of his or her work as a title agent, banker or real estate broker. Ascertaining whether the lender's instructions have been satisfied is the practice of law, according to Judge Markow.


Conducting the settlement conference in which documents are executed, Judge Markow opined, raises a serious concern that legal advice may be given at the settlement conference. Although CRESPA authorizes non-lawyer settlement agents to conduct the settlement conference, the Act does not suggest that they can give legal advice at the settlement conference. Therefore, Judge Markow opined, it cannot be determined that this activity, on its face, is the practice of law. This must be addressed on a case-by-case basis.


Completing "form documents" and instruments selected by and in accordance with the parties to the transaction is another "gray area." Judge Markow looked to Jones & Robins for guidance on this issue. In that case, a licensed real estate broker who "habitually prepared deeds, deeds of trust, mortgages and deeds of release . . . in connection with the sale of real estate" was found to have engaged in the unauthorized practice of law. 186 Va. at 31. The broker's defense was that his instrument preparation was done "incident to the regular course of conducting a licensed business" and, therefore, was not the practice of law as defined by the Court. Id. at 34. The Court observed that the business of real estate brokers is to negotiate sales and purchases of land. Thus, real estate brokers should be permitted to prepare "simple contracts of sale, options, leases, etc," but not legal instruments passing title from one party to another. Id. at 44. The Court found that deeds, deeds of trust, mortgages and deeds of release were more than ordinary contracts incident to the regular course of a real estate broker's business. The Court described such instruments as "muniments of title," the creation of which was the practice of law. Id. at 36, 43. The Court remanded the case to the trial court with directions to enjoin the brokerage firm from creating such documents. Applying these concepts, Judge Markow reasoned that CRESPA's authorization to prepare "form documents" pursuant to the instructions of the parties, at first glance, seems innocuous. However, where the parties express to the agent how they desire to take title, and rely upon the settlement agent for the correct legal language for such transfer, the agent becomes more than a "mere scrivener." In those situations, the completion of such "form documents" becomes the practice of law. Moreover, the creation of other legal documents, to the extent that they are not simple contracts of sale, options, leases or other documents incident to the course of conducting a licensed business, would also be the practice of law. Therefore, Judge Markow concluded that the statutory language in CRESPA was too vague to mount a facial challenge, but recognized that activity seemingly authorized by CRESPA could nevertheless be the practice of law.


Finally, Judge Markow found that the activities of handling or arranging for the recording of documents and the reporting of federal tax information to the IRS do not involve the practice of law. Both activities, he opined, are clerical tasks which do not involve the creation of legal instruments or the giving of legal advice.

Having found that two of the settlement agent activities enumerated under CRESPA on their face are the practice of law, Judge Markow turned to the separation of powers issue. Fears and VaReal argued that the inherent power of the Court to define the practice of law cannot be preempted by the General Assembly by legislative fiat. The Attorney General and the Coalition for Choice argued that the General Assembly had the power to regulate the practice of law as a valid exercise of the legislature's police power in regulating a profession. In regulating professions generally, the legislature validly exercises its police power if the exercise is related to the health, safety, morals or welfare. (17) Concurrently, the judiciary may exercise its inherent power to regulate the legal profession in the interest of maintaining integrity and confidence in the administration of justice. (18) In comparing the powers of the legislature and judiciary, Judge Markow observed:

Relative to the Legislature's broad power to regulate professions, the scope of the power of the Judiciary to regulate professions is extremely limited. However, the Court's power to regulate within that scope must necessarily displace the powers of other branches if the judicial power has meaning at all. Thus, in light of the standard described in Baliles, legislation is invalid where it so intrudes into the sphere of the Judiciary that the enactment preempts the Court's power to define and regulate the practice of law. (19)

Judge Markow described the judiciary's regulatory interest in regulating unauthorized practice as fundamental and important. The final question, then, is whether CRESPA is an "intolerable intrusion" to the extent that the Act abrogates the Court's inherent power to define the practice of law. The answer to this question, according to Judge Markow, lies in UPL Opinion No. 183 itself. The preamble to UPL Opinion No. 183, as modified, states that the opinion does not apply to nonlawyer settlement agents duly qualified and registered under CRESPA. Therefore, Judge Markow explained, the Court has explicitly exempted nonlawyers licensed under CRESPA from the prohibition against unauthorized practice as set forth in UPL Opinion No. 183:

In its qualified approval, the court has exempted nonlawyers who are licensed under CRESPA from an attack under the law as set forth in UPL Opinion No. 183. It follows that where UPL Opinion No. 183 defines certain activities as the practice of law and CRESPA states that nonlawyers may participate in those activities, the Court's exemption shields CRESPA licensed persons from allegations that they are engaging in the unauthorized practice of law when they act under CRESPA authority. As a subordinate tribunal, the court is bound by the Supreme Court's approval of UPL Opinion No. 183 and cannot grant Complainants the relief they seek in this suit. (20)


Judge Markow ordered the Fears declaratory judgment suit dismissed, granting summary judgment in favor of the Commonwealth. An appeal to the Supreme Court of Virginia has been noted. Judge Markow's opinion raises many interesting issues. However, as a representative of one of the parties in the suit, it would be inappropriate for me to critique the opinion while an appeal is pending.

 

Endnotes:

* James M. McCauley is the Ethics Counsel for the Virginia State Bar, and serves as staff counsel to the Standing Committee on Legal Ethics, Standing Committee on the Unauthorized Practice of Law, and the Standing Committee on Lawyer Advertising and Solicitation. Mr. McCauley writes the draft opinions for the Ethics and Unauthorized Practice of Law and Lawyer Advertising Committees and supervises a staff which provides informal advice over the telephone to members of the bar, bench and general public on matters involving legal ethics, lawyer advertising and the unauthorized practice of law. Mr. McCauley frequently lectures and publishes articles on matters relating to legal ethics and the unauthorized practice of law.

1 UPC 6-7. In connection with a real estate closing, a non-lawyer may not give legal advice to another, or prepare for or advise another in the preparation of legal instruments, for compensation, direct or indirect. A non-lawyer may:

  1. Order a survey, but not give an opinion as to the adequacy of such survey or with respect to matters reflected therein.
  2. Obtain copies of leases, easements, restrictions, building codes, zoning ordinances and the like, but not give an opinion as to the legal effects thereof or any party's legal obligation to comply therewith.
  3. Order termite or other inspections, but not give an opinion as to whether the results thereof comply with the terms of the contract.
  4. Ascertain the status of utility services and assist in their transfer, but not give advice as to a party's legal obligation with respect thereto.
  5. Arrange for the issuance of casualty insurance coverage, as requested by a party in interest.
  6. Provide lien payoff figures as asserted by the lienholder, but not give advice as to a party's legal obligation to pay the amount claimed.
  7. Make mathematical computations involving the proration of taxes, insurance, rents, interest and the like in accordance with the terms of the contract or local custom.
  8. Obtain lien waivers from mechanics or materialmen in form acceptable to the party in interest, but not prepare such waiver or give advice as to the legal sufficiency thereof.
  9. Prepare settlement statements.
  10. Receive and disburse settlement funds, and serve as escrow agent, to the extent licensed to do so.
  11. Prepare receipts and certificates of release, but not deeds, deeds of trust, deeds of trust notes, or deeds of release.

2 UPL Opinion No. 183 was amended twice to recognize that the General Assembly had authorized, by statute, lay settlement agents to close real estate transactions. By order of the Court, the opinion will finally become effective May 1, 2000, but will recognize the right of lay settlement agents, pursuant to CRESPA, infra, to close real estate transactions in Virginia.

3 See Va. Code Ann. §§ 6.1-2.19 -- 6.1-2.29 (Michie 1999). CRESPA became effective July 1, 1997.

4 UPL Op. No. 183 was modified to state:
The Committee issued this opinion before the General Assembly enacted the Consumer Real Estate Settlement Protection Act (CRESPA) (Va. Code §§ 6.1-2.19 -- 2.29) authorizing certain qualified nonlawyers (licensed real estate brokers, financial institutions, title insurance companies and title agents) to provide escrow, closing and settlement services in transactions involving the purchase and financing of real estate containing not more than four residential dwelling units. In light of the passage of that legislation this opinion has no application to nonlawyer settlement agents duly qualified and registered under CRESPA conducting closings covered under the Act.

5 See Va. Code Ann. §§ 6.1-2.30 -- 6.1-2.32 (Michie 1999).

6 This unseemly informal ex parte contact with the Court by Senator Barry is confirmed in a letter dated January 7, 1999 from R. Brian Baugh, Esquire, counsel for the Coalition for Choice, to the Honorable Vincent F. Callahan.

Editor's Note The effective date of UPL 183 was postponed to October 1, 2000 by order entered June 28, 2000. See http://www.courts.state.va.us/scv/amendments/upl183_062800.html
(Supplemental note: effective date continues to be postponed. As of July 1, 2001, the UPL is still in the hands of the Supreme Court.) (Final supplemental note: UPL 183 was vacated in 2002. See http://www.courts.state.va.us/scv/amendments/upl_183_062802.html)

7 Fears v. Virginia State Bar, LE-1283-3 (Cir. Ct. City of Richmond, Va.).

8 Ironically, the General Assembly charged the Virginia State Bar with the responsibility of registering lay settlement agents and monitoring their compliance under CRESPA.

9 Some evidence was taken in the case, but the primary issues were purely legal. The Virginia State Bar took a neutral position, leaving it to Fears, the Attorney General, VaReal and the Coalition for Choice to argue the merits of the case.

10 See Va. S. Ct. R., pt. VI, § I (Introduction); Blodinger v. Broker's Title, Inc., 224 Va. 201, 205 (1982); Button v. Day, 204 Va. 547, 553 (1963); Commonwealth v. Jones & Robins, Inc., 186 Va. 30, 33, 36-37 (1947); Richmond Ass'n of Credit Men, Inc. v. The Bar Ass'n of the City of Richmond, 167 Va. 327, 335 (1937); Rahbaran v. Rahbaran, 26 Va. App. 195, 203-04 (1997).

11 224 Va. 462 (1982).

12 Baliles v. Mazur, 224 Va. at 472-73 (citing Winchester & Strasburg R.R. Co. v. Commonwealth, 106 Va. 264, 270 (1906), which quoted S TORY'S C ONST. 393, 395 (5th Ed)) (alteration in original) (emphasis added).

13 167 Va. 327 (1937).

14 Va. Code Ann. § 6.1-2.20 (Michie 1999).

15 Va. S. Ct. R., pt. 6, § I(B).

16 186 Va. 30 (1947). The Court in Jones & Robins observed that laymen are prohibited "from preparing legal instruments of any character other than . . . notices or contracts incident to the regular course of his business." Id. at 35.

17 F.S. Bowen Elec. Co., Inc. v. Foley, 194 Va. 92, 96-97 (1952).

18 Va. S. Ct. R., pt. 6, § I; Davis v. Sexton, 211 Va. 410, 412-13 (1970).

19 Fears, Memorandum Opinion and Order at 25 (Mar. 1, 2000) (emphasis added).

20 Id. at 26.


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