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Attorney Censured for His Use of Non-Lawyers to Practice Law
New York Law Journal
June 18, 2009
An attorney who formed a company that used non-lawyers to provide closing services for the U.S. government's sale of foreclosed properties has been censured by a New York appellate court.
John C. Garas, of Williamsville, N.Y., maintained that the services his law firm provided to the Department of Housing and Urban Development and subcontracted to Resale Closing Services LLC, were clerical in nature and did not amount to the practice of law.
In spite of Garas' "previously unblemished record," however, the state Appellate Division, 4th Department found that the lawyer violated ethical cannons by aiding non-attorneys in the unauthorized practice of law.
Unlike a single transaction that "occurred incident to [an] otherwise authorized business and did not involve the rendering of legal advice," the services at issue "were of the character usually performed by lawyers, and were formed pursuant to a contract that required an admitted attorney as a necessary presence," the panel wrote in Matter of Garas, 04841.
In 2003, Resale Closing, a company formed by Garas, bid on a HUD contract to supply closing agent services on the sale of previously foreclosed properties.
After winning the contract, non-attorney Faith Badhorn, who was paid by Garas to serve as Resale Closing's general manager and who owned a majority share in the company, set up an office in Buffalo, where employees scheduled closings, prepared closing figures and attended HUD closings.
Badhorn shared profits and losses with Garas and was the joint signatory on a non-interest-bearing trust account, used to disburse sale proceeds.
While Garas reviewed deed and title searches conducted by Resale Closing's Buffalo office, "he had no involvement in the day-to day operations of RCS, and he exercised no supervisory authority over [Badhorn], who administered the services provided under the HUD contract," according to the opinion.
In January 2006, the Garas Law Firm won a contract to perform closing services in Rochester and Monroe County.
Garas subcontracted many of his law firm's services to Resale Closing, for which Badhorn performed administrative functions.
For a time, closing documents sent to buyers of HUD properties included offers from Resale Closing to buy title insurance, according to the opinion.
In 2007, after Robert Galbraith of Rochester, N.Y.-based Davidson Fink, whose firm lost a HUD bid to Garas, filed a complaint with the Grievance Committee of the 8th Judicial District, the committee charged Garas with multiple acts of professional misconduct, including aiding non-lawyers in the practice of law.
The panel affirmed the report and factual findings of Judicial Hearing Officer Arnold Ciaccio. It concluded that Garas had violated the Disciplinary Rules of the Code of Professional Conduct, by, among other things, aiding a non-lawyer in the unauthorized practice of law and sharing legal fees with a non-attorney.
Garas argued that the services Resale Closings provided to HUD were "clerical in nature involving not the exercising of legal judgment, but the repetition of a series of routine procedures hundreds and hundreds of times in succession."
The 4th Department disagreed.
Judiciary Law §§484 and 495 bar non-attorneys and voluntary associations or corporations from requesting or receiving compensation for "preparing deeds, mortgage, assignments, discharges, leases or any other instruments affecting real estate," the panel wrote.
While these statutes "make clear that providing closing services … constitute the practice of law, an exception has been recognized for a single transaction that occurred incident to otherwise authorized business and did not involve the rendering of legal advice," the panel wrote.
However, in this case, the panel noted that the services were "routinely performed … of the character usually preformed by lawyers, and performed pursuant to a contract that required an admitted attorney as a necessary presence."
"We thus find that respondent has committed professional misconduct by forming a corporation with a nonlawyer for the provision of those services, failing to exercise oversight of its activities or employees and failing to safeguard sale proceeds in an adequate manner," the panel concluded.
The judges considered a number of mitigating factors, including that the complaint against Garas resulted from an attorney whose firm unsuccessfully bid on a contract awarded to Resale Closing; that Garas claimed he tried to comply with HUD rules by depositing closing proceeds in a non-interest bearing account; that he did not intend to violate disciplinary rules, and ultimately ended his association with the company. Based on those factors, the court opted to censure Garas.
Justices Robert G. Hurlbutt, Nancy E. Smith, John V. Centra, Erin M. Peradotto, and Jerome C. Gorski sat on the panel.
Susan Egan, who handled the case for the grievance committee, declined to comment.
Michael J. Flaherty of Buffalo, who represented Garas, said that he would not appeal the decision.
