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Real Estate Law FLASHPOINTS July 2020

July 15, 2020Print This Post Print This Post

Mike Rooney | 312-401-3454 | E-mail Mike Rooney

Cautionary Tale: How One Residential Real Estate Lawyer Got Disbarred

I have said this in many CLE program presentations: “No lawyer I know wakes up early one morning and decides that today is the perfect day for me to get disbarred, throwing away three years of law school and however many years of legal practice.” And yet the 2019 annual report of the Attorney Registration and Disciplinary Commission (its most recent full-year report available on the ARDC website) shows that 29 lawyers were disbarred by the Illinois Supreme Court that year as the ultimate outcome of disciplinary proceedings. This article concerns a 2020 disbarment that offers concrete examples of what not to do when representing clients in a real estate transaction and during the disciplinary process. It also raises some questions about the wisdom of what some lawyers think of as routine parts of the real estate transaction.

Elena Gallo was disbarred by the Illinois Supreme Court on March 13, 2020 (M.R. 30139), after having been suspended on an interim basis during the pendency of disciplinary proceedings on October 12, 2018. She was originally the subject of a nine-count complaint by the ARDC, and a hearing board recommended she be disbarred in its report of January 9, 2019. In re Gallo, Commission No. 2017PR00101 (ARDC Hr’g Bd. Apr. 16, 2018). Ms. Gallo did not appear at the hearing, although she was represented by counsel and she filed exceptions to the hearing board findings of misconduct and recommended sanction. The review board affirmed all the findings of misconduct. Two members of the review board recommended a three-year suspension rather than disbarment, and one member agreed with the findings of misconduct and with the recommended sanction of disbarment.

The nine-count complaint alleged the lawyer charged excessive fees, misappropriated funds, engaged in a conflict of interest, and engaged in dishonest conduct in connection with handling real estate transactions for multiple clients. Without reciting all of the facts concerning each client or transaction, there are some recommendations to be gleaned from reading between the lines of the report and recommendation of the review board.

First, and most important, no lawyer helps herself or himself by ignoring the ARDC and any disciplinary proceeding. The review board says the hearing board found that the most serious aggravating factor was Gallo’s conduct in relation to the disciplinary proceedings, especially her failure to appear at her own hearing. Such conduct showed a lack of respect for the disciplinary process and the authority of the Illinois Supreme Court. If the ARDC sends a letter, the lawyer must respond. If the ARDC calls, the lawyer should pick up the phone. If the ARDC asks for files, the lawyer must provide them. Yes, the lawyer can and should engage counsel to provide advice and support during the proceedings. Ignoring such proceedings, however, is a very bad idea.

Second, and almost as striking as the preceding paragraph, neither of the hearing board or review board reports and recommendations mentions an engagement letter between the lawyer and any of her clients. The lawyer was accused of charging excessive fees. With at least one client, there may have been some misunderstanding about whether a quoted fee applied to each of two transactions or was supposed to include both transactions for the stated amount. Such problems can be drastically reduced, if not totally eliminated, with a well-drafted engagement letter. The letter should specify what services the lawyer will provide for the quoted fee and, obviously, whether the quoted fee applies to each transaction or to all transactions in the case of multiple transaction representation. Yes, many initial inquiries and consultations will be received and discussed over the telephone. All such instances should be followed with a written engagement letter spelling out all matters discussed during the initial communication.

Clearly, a lawyer and a client can create the client-lawyer relationship verbally. The principle is equally clear, though, that the better practice is to prepare a thorough engagement letter setting forth the terms in writing. In at least one of the transactions, the lawyer said the amount of the fee needed to change due to a change in the work required. Whether the client was ever so advised cannot be in dispute if the engagement letter specifies the services to be provided for the fee quoted and clearly spells out that if the amount or nature of the services required from the lawyer changes, so will the amount of the fee.

Third, the lawyer was charged with a conflict of interest for agreeing to represent both the buyer and the seller of real estate in the same transaction in violation of Rule 1.7 of the Illinois Rules of Professional Conduct of 2010. Moreover, when she agreed to do so, she advised her law firm that she was going to represent both the buyer and the seller and was told by the firm that such representation was not permitted due to the conflict of interest between the parties. The hearing and review boards each emphasized that the conflict of interest rules are designed to prevent the divergence of interests later on rather than being based on the convergence of interests at the outset (both parties want the transaction consummated quickly and efficiently). And yet, each year there seem to be one or more disciplinary matters in which lawyers have represented both the seller and the buyer in the same real estate transaction. Just don’t do it.

Fourth, the lawyer was charged with dishonesty in dealing with several of the transactions. She told several title companies that closed transactions to include on the settlement statement additional charges that were not agreed to by her clients to be paid to her or the law firm. Aside from the question why the title companies agreed to accede to her instructions, there is another wrinkle here that all lawyers should think about when it comes to dealing with clients. In several transactions, the lawyer had clients sign powers of attorney so she could sign the clients’ names at closing. Many of these clients said they were discouraged from attending the closings and did not find out about the allegedly improper overcharging until they received copies of settlement statements after closing.

I understand it is not unusual for the attorney representing a party to sign settlement statements on behalf of the client under a power of attorney. Many lawyers do so because they are trying to be service-oriented and save their clients the time and expense of attending the closing in person simply to sign relatively unimportant documents if deeds, notes, and mortgages have been signed in advance. But the lawyer puts his or her law license on the line if he or she does not require the client to review the final settlement statement and give the client’s consent before the lawyer signs it on behalf of the client. In the case of Ms. Gallo, it is clear that some clients thought she had them execute the power of attorney and told them they did not need to attend the closing purposely to defraud the clients. But even if that were not true and the lawyer’s motives were as pure as the driven snow, any surprise on the settlement statement may give the client reason to accuse the lawyer of improper conduct. Thus, it makes sense to have the client be available to review the settlement statement itself during the closing, if not before, and give the client’s assent to the lawyer signing the statement on behalf of the client.

Fifth, the lawyer was charged with misappropriating client funds because some deposits she received on behalf of clients were placed into her own accounts and other funds, placed in the lawyer’s trust account, disappeared when the account balance dipped to zero (and below) without the lawyer having made authorized disbursements on behalf of the clients. Careful management of the lawyer’s trust account is absolutely required. Period. In addition, the lawyer altered the designated payee on certain checks from closings in order to divert the funds from the law firm to her own accounts. Lawyers should not alter the payee line on a check from any closing. Period.

Finally, one client complained that the original estimate of net proceeds given by the lawyer was larger than the amount actually received and the client accused the lawyer of charging improper fees. Receiving no satisfaction from the lawyer, the client also complained to the firm. The lawyer asked the client what the lawyer could do to solve the problem and the client said she wanted the excess funds repaid to her. The lawyer did so in cash and told the client not to contact the firm. Of course, the client told the firm what happened, and when the firm questioned the lawyer, she denied knowing what happened, but then she confessed she repaid the funds in cash with her own money in order to preserve her relationship with the firm. Needless to say, the lawyer’s relationships with both the client and the firm were irretrievably broken by the lawyer’s dishonesty. If you mess up, ‘fess up. Yes, retain counsel and present all factors in mitigation, but avoid the urge to attempt a cover-up.

The real estate transactions that gave rise to this disciplinary saga of woe were routine and were not complicated. The practices of the lawyer were responsible for her predicament. The obvious bromides are (1) not to spend the client’s money without consent and (2) to tell the truth. For real estate transactional attorneys, it is always a good idea periodically to review the lawyer’s engagement letter to ensure its suitability for both the client and the lawyer and to review what may seem to be innocuous practices like routinely obtaining a power of attorney from the client to sign settlement statements at closings. If the power of attorney is obtained, be sure to document that the client sees and assents to the closing figures prior to the lawyer signing for the client. Be careful out there, folks!

For more information about real estate, see TITLE INSURANCE: LAW AND PRACTICE (IICLE®, 2019). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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