RISK MANAGEMENT ALERT
March 2020
COVID-19 and the Good Funds Settlement Act
By now, I assume most attorneys are both annoyed by constant vendor/agent/underwriter/governmental agency updates on COVID-19 and at the same time frustrated by the lack of useful information contained in the posts. Most local Shutdown and Shelter in Place orders currently exempt real estate attorneys, though the reprieve is subject to change and could later be pre-empted by state or federal action.
 
There is little doubt a complete shutdown of the real estate industry would be devastating to the economy and a wide and powerful consortium of industry leaders is doing everything it can to keep the Register of Deeds offices open and have alternate plans should recordings not be possible. To be clear, the purpose of this article is not to discuss whether allowing attorneys to continue to close transactions and disburse loans is a wise and healthy decision - attorney opinions on both sides are very strong and compelling. However, given the coalition pushing for continued operations includes heavy-hitters advocating on behalf of realtors, homebuilders, mortgage bankers, and others, I suspect a state-wide industry stoppage will not happen.
 
However, the ability of attorneys to adequately update title and timely record following closing will almost certainly be impacted, especially in localities where e-Recording is not available. The Title Insurance industry is committed to allowing closings to continue in this circumstance. Every major underwriter in North Carolina, to my knowledge, is willing to insure a gap from disbursement to recording, even though the gap period may be indefinite. The underwriters do have specific requirements to extend coverage, including mandating the execution of an indemnity agreement at closing by any Seller or Refinancing Party.
 
While title insurance underwriters are willing to accept the risk, an attorney disbursing in this scenario should be aware of the NC Good Funds Settlement Act, which reads as follows:     
 
ยง 45A-4. Duty of settlement agent.
(a) The settlement agent shall cause recordation of the deed, if any, the deed of trust or mortgage, or other loan documents required to be recorded at settlement. The settlement agent shall not disburse any of the closing funds prior to verification that the closing funds used to fund disbursement are deposited in the settlement agent's trust or escrow account in one or more forms prescribed by this Chapter. A settlement agent may disburse funds from the settlement agent's trust or escrow account (to either the applicable register of deeds or directly to a private company authorized to electronically record documents with the office of the register of deeds) as necessary to record any deeds, deeds of trust, and any other documents required to be filed in connection with the closing, including excise tax (revenue stamps) and recording fees, but the settlement agent may not disburse any other funds from its trust or escrow account until the deeds, deeds of trust, and other required loan documents have been recorded in the office of the register of deeds. Unless otherwise provided in this Chapter, a settlement agent shall not cause a disbursement of settlement proceeds unless those settlement proceeds are collected funds. (emphasis added)
 
Multiple industry participants have advanced the argument that the above-bolded provisions of the Act may be knowingly waived by an informed party. However, this is not a settled area of law and there is no case law directly on point. It is questionable whether the Governor can intervene due to the declared State of Emergency. Ideally, there will be clarifying legislation; however, the logistics and practicality of having State House and Senate members gathering in the middle of a pandemic is challenging, to say the least.
 
Regardless of which method is pursued, attorneys must be aware of the risk and make individual decisions on how to best proceed. Both Lawyers Mutual and LM Title are working to make sure attorneys are protected, to the extent possible. Attorneys electing to disburse in compliance with the title insurance directives are encouraged to make sure all parties in the transaction are informed of risks - both of disbursing prior to updating and recording and of waiting until normal recording and disbursing procedures are practical. To that end, Lawyers Mutual prepared a Notice and Directive form and encourages its insureds to send such document to the all borrowers, buyers, and sellers in upcoming transactions.
 
Lastly, another consideration is the ethical consequences of immediately disbursing should it not be possible to timely record. As of today, the State Bar is in the process of drafting an advisory opinion to address ethical issues a closing lawyer should consider before conducting a closing under these circumstances. Ethics Advisory Opinions are typically directed only to the lawyer requesting the advice, so once the opinion has been completed, you will need to contact the State Bar to request a copy at ethicsadvice@ncbar.gov