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The Unauthorized Practice of Law

Article Date: Friday, May 13, 2011

Written By: Maria M. Lynch

In North Carolina the unauthorized practice of law is defined in Section 84-2.1 of the General Statutes as

performing any legal service for any other person, firm or corporation, with or without compensation, specifically including the preparation of deeds, mortgages, wills, trust instruments, inventories, accounts or reports of guardians, trustees, administrators or executors, or preparing or aiding in the preparation of any petitions or orders in any probate or court proceeding; abstracting or passing upon titles, the preparation and filing of petitions for use in any court, including administrative tribunals and other judicial or quasi-judicial bodies, or assisting by advice, counsel, or otherwise in any legal work; and to advise or give opinion upon the legal rights of any person, firm or corporation . . . .

Section 84-2.1 goes on to state that the reference to particular acts which are included within the definition of the practice of law does not limit the general definition of the term. The specifically included acts are within the definition of the practice of law, but all other acts within the general definition also constitute the practice of law. Section 84-2.1 defines the practice of law and section 84-4 prohibits the practice of law (except as otherwise permitted by law) by anyone who is not a member of the North Carolina State Bar although self representation is specifically permitted. This section prohibits any person who is not an active member of the Bar from preparing Wills and trusts but contains the unusual exception authorizing anyone to “draw a will for another in an emergency wherein the imminence of death leaves insufficient time to have the same drawn and its execution supervised by a licensed attorney at law.”

Perhaps the most important case in the area is State v. Pledger, 257 N.C. 634, 127 S.E.2d 337 (1962), which addressed the question whether actions that clearly constituted the practice of law were authorized. In Pledger an employee of a corporation prepared deeds of trust. The beneficiary of some of the deeds of trust was the employer. The court noted that a deed of trust is a legal document and the practice of law includes the preparation of documents by which legal rights are secured, but the statute is not intended to prohibit all activities by nonlawyers that come within the definition of the practice of law. An adult may prepare his own Will or represent himself in court. “A person, firm or corporation having a primary interest, not merely an incidental interest, in a transaction, may prepare legal documents necessary to the furtherance and completion of the transaction without violating G.S. 84-4. The statute was not enacted for the purpose of conferring upon the legal profession an absolute monopoly in the preparation of legal documents; its purpose is for the better security of the people against incompetency and dishonesty in an area of activity affecting general welfare.” Id. at 638, 127 S.E.2d at 339.

Pledger is a criminal case. The employee was indicted for engaging in the unauthorized practice of law and was convicted on a number of the counts. He was sentenced to two-year terms for each conviction, but the terms were suspended on certain conditions. The employee in Pledger used a printed form to prepare deeds of trust. A deed of trust clearly is a legal document and the practice of law, as noted by the court, includes the preparation of legal documents and contracts by which legal rights are secured. The question is whether the documents were prepared “for another person, firm or corporation” within the intent and meaning of the statute. As is noted above, the opinion determines that any person, firm or corporation having a primary interest, not merely an incidental interest, in a transaction, may prepare legal documents necessary to the furtherance and completion of the transaction without violating the statute. Automobile, furniture and appliance dealers are permitted to prepare conditional sales contracts for sales from their inventory. The opinion notes that banks may prepare promissory notes, drafts and letters of credit. Lenders can prepare deeds of trust and owner-sellers and purchasers may prepare deeds. Most business concerns prepare contracts in one form or another and these activities are not in violation of the statute as long as the preparer has a primary interest in the transaction. The Pledger opinion determines that the grantor or the beneficiary in a deed of trust may prepare the instrument with impunity if the grantor has received credit from the beneficiary. The trustee may not prepare the deed of trust, unless, of course, the trustee is an attorney, because the trustee’s interest is only incidental. The opinion goes on to note that because a corporation can only act through agents, a person who prepares legal documents in the course of his employment by a corporation and is connected with a business transaction in which his corporate employer has a primary interest does not violate the statute because the act is the act of the corporation furthering its own business which it is authorized to transact.

The problem with the exception is determining who has a primary interest in the transaction. In the context of Pledger the borrower and the lender both have a primary interest in the deed of trust transaction, and either may prepare the deed of trust. The named trustee has only an incidental interest and may not prepare the document without violating the statute. Because a corporation can only act through its officers, agents and employees, a corporate employee who prepares a legal document in connection with a business transaction in which the corporate employer has a primary interest does not violate the statute. The defendant in Pledger prepared deeds of trust for his employer and for another entity. With respect to the deeds of trust for his employer, his act was the act of the corporation, the corporation as the lender had a primary interest in the transaction, and the statute was not violated. With respect to deeds of trust prepared for another entity, the defendant did violate the statute.
Practice by Corporations
The practice of law by corporations is prohibited by section 84-5. This section prohibits corporations from organizing corporations, drawing agreements or other legal documents, drawing wills or practicing law or giving advice or holding itself out in any manner as being entitled to do any of these acts.
The statute expressly provides that it does not prohibit a banking corporation which is authorized to act as a fiduciary from performing clerical, accounting, financial or business acts required in the performance of its duties as a fiduciary. The statute does not prohibit a corporate fiduciary from performing ministerial and clerical acts in preparing and filing tax returns or from discussing business and financial aspects of fiduciary relationships. Section 84-5 goes on to state that with respect to corporations authorized to act as fiduciaries, the corporation may not draw wills or trusts although an employee of the institution can cooperate and confer with an attorney who is not a salaried employee of the corporation at the attorney’s request in connection with the attorney’s performance of services for a client who wants to appoint the corporation in a fiduciary capacity.

Corporations acting as fiduciaries are also prohibited from giving legal advice to any person who is considering renouncing the right to qualify as an executor or who is considering resigning from the office of guardian or trustee. Section 84-5 goes on to state that, when a corporation is serving in a fiduciary capacity, certain activities must be performed by an attorney who is not a salaried employee of the corporation. Those acts include: offering wills for probate, preparing and publishing the notice to creditors and handling court proceedings; giving advice and drafting documents in connection with the spouse’s rights to an elective share; resolving questions of domicile and residence; handling proceedings involving year’s allowances; drafting notes, deeds, deeds of trust, leases, options and other contracts; drafting releases of deeds of trust; drafting assignments of rent; and drafting any legal document used in discharging the corporate fiduciary’s duty. In addition, attorneys who are not employees of the corporate fiduciary must prepare and file protests or claims for refund in matters involving estate and inheritance tax, gift tax and federal and state income tax except requests for refund based on mathematical or clerical errors. Conferring with the tax authorities is also to be handled by outside counsel as is handling petitions to the tax court, although the corporate fiduciary can confer with tax authorities regarding protests and claims for refund if they are based on mathematical or clerical errors.

The corporate fiduciary cannot perform legal services in insolvency proceedings or in bankruptcy court and is prohibited from applying for letters testamentary or abstracting or passing upon title to real property, handling litigation related to claims by or against an estate or trust or handling foreclosure proceedings. In addition, the statute states that the initial opening and inventorying of safe deposit boxes in estate administrations for which the corporation is executor shall be handled by or with the advice of outside counsel. Furnishing a beneficiary with applicable portions of the will must be handled by outside counsel if the document is accompanied by legal advice or opinion. Corporate fiduciaries are prohibited from executing waivers of statute of limitations in tax matters without the advice of outside counsel. The statute goes on to state that the outside attorney must be furnished copies of inventory and accounts proposed for filing and any estate and inheritance tax returns and, upon request, copies of proposed income tax returns and “shall be afforded an opportunity to advise and counsel the corporate fiduciary concerning them prior to filing.”

Violating the statute is a misdemeanor, and enforcement power is granted to the district attorneys of the state for criminal prosecution or injunction, and to the North Carolina State Bar, which has the power to investigate and seek injunctive relief in appropriate matters. N.C.G.S. §§ 84-7, -8, -37. The consumer protection division of the Office of the Attorney General has also taken action when the unauthorized practice was likely to produce harm to consumers. The State Bar lists on its web site the most recent injunctions it has obtained. For example, injunctions were obtained against a title company and against a company engaging in foreclosures, a company offering immigration services and a company offering closing services. The website also lists an injunction obtained against individuals offering to represent or representing debtors in judicial proceedings and entities related to the entity that advertised as “We the People” offering various legal services at discount prices.
Occasionally the enforcement entities join forces. In 2006 the State Bar and the Consumer Protection Division of the Attorney General’s office together sought an injunction against American Family Prepaid Legal Corporation. In that case the trial court found that a preliminary injunction was warranted because the Attorney General’s office and the North Carolina State Bar had made a sufficient showing that the defendant had engaged in the continuing pattern of unfair and deceptive trade practices, including the unauthorized practice of law, in the marketing and sale to the elderly of revocable living trusts and some ancillary legal documents and annuities.

The preliminary injunction ordered the defendant to stop selling or offering to sell estate planning documents and to stop advising consumers about the advisability of using particular estate planning techniques and answering legal questions about the appropriateness of using a living trust or other estate planning documents. There were allegations in the case that the sales agents described themselves as paralegals and that insurance agents used titles of estate planner or asset protection specialist. The defendant was enjoined from misrepresenting to consumers the length or cost of probate or the need for an attorney in probate, from representing that any attorney providing services was an “expert” or a “specialist” unless the attorney was board certified by the North Carolina Board of Legal Specialization, and from participating in the execution of legal documents by North Carolina consumers. There were a number of other activities which were enjoined.

The injunction includes a listing of a number of activities which are defined as providing legal advice. Those items include any advice regarding the advisability of using any particular estate planning technique, including a living trust, as related to the individual’s particular factual circumstances. Advising an individual what type of trust or other documents are most appropriate for the individual constitutes the practice of law. General advice may be given, but specific advice tailored to the factual circumstances of an individual constitutes the practice of law.     

Legal Software
North Carolina, like most jurisdictions, takes the position that selling forms or giving general seminars does not constitute the practice of law. Assisting the consumer in completing the documents, or giving advice specific to an individual does constitute the unauthorized practice of law.

Legal software presents a more difficult problem because it “responds” to information from the consumer which makes it closer to particularized advice, but in this jurisdiction software has been viewed in the same category as a how-to book or a do it yourself kit.

There have been a number of complaints about the activities of LegalZoom. In May, 2008, the Authorized Practice Committee of the North Carolina State Bar issued a letter of caution to cease and desist. The committee had investigated the activities of LegalZoom in North Carolina and had determined that LegalZoom was engaging in the unauthorized practice of law in part because it filed articles of incorporation on behalf of consumers. LegalZoom argued that it was not giving any legal advice and was merely acting as a scrivener. The committee disagreed. Because LegalZoom was preparing a legal document it was necessarily engaging in the practice of law and was not acting merely as a scrivener. Some parts of LegalZoom’s business model have been modified and it appears that attorneys are being utilized. This raises other issues which are discussed below.

Lawyers and the Unauthorized Practice of Law
Rule 5.5(a) provides that a lawyer shall not practice law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction. There are certain activities that a lawyer who is not admitted in a jurisdiction can nevertheless engage in without violating the prohibition on the unauthorized practice of law, but a lawyer may regularly practice law only in a jurisdiction in which the lawyer is admitted to practice. Practicing law in a manner that violates the licensing standards in another jurisdiction constitutes the unauthorized practice of law and is a violation of the Model Rules of Professional Conduct applicable to lawyers. Rule 5.5(d) provides that a lawyer shall not assist another person in the unauthorized practice of law. This rule has been implicated in the estate planning area when lawyers rubber stamp documents prepared by non-lawyers. The lawyer is assisting non-lawyers to engage in the unauthorized practice of law and may be subject to disciplinary action by the State Bar. With respect to the lawyer’s own employees, Rule 5.3 establishes the responsibilities a lawyer has regarding non-lawyer assistants.

Wrapped up in the idea that a lawyer may not assist in the unauthorized practice of law is the admonition of Rule 5.4 that a lawyer must exercise independent professional judgment. A lawyer may not permit a person who recommends, engages or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering services.    

Under Rules 1.1 and 1.4 the lawyer also has an obligation to provide competent representation and to communicate with the client to the extent necessary to provide competent representation.
While a third party can record intake information, which happens frequently with a variety of nonlawyers involved in estate planning, the lawyer has to be able to talk to the client to ensure that adequate information is obtained. If the third party is deciding what services need to be provided, the lawyer has violated Rule 5.4, and it is the lawyer’s duty to determine that he or she has sufficient information to allow the client to be competently represented.

In 2008 FEO 6 was whether a lawyer could hire a non-lawyer or independent contractor to organize and speak at educational seminars at which the non-lawyer will present general information on trusts and estates. The answer to the first question is yes. A non-lawyer may provide educational information about the law to members of the public as long as the non-lawyer does not exercise independent legal judgment, does not give legal advice or counsel to attendees as to their legal rights or responsibilities or the legal rights or responsibilities of others.

To avoid assisting in the unauthorized practice of law, the lawyer must exercise appropriate supervision to ensure that the non-lawyer is not giving legal advice. The opinion goes on to note that it is difficult to understand how a lawyer could discharge this duty without being present at the seminar. If the non-lawyer conducts unsupervised educational seminars, the lawyer assumes the risk that he may assist in the unauthorized practice of law. The second question was whether the non-lawyer could respond to questions from members of the audience, and the answer is no unless the question can be answered with general information.

The third question was whether the non-lawyer could meet individually with attendees who requested a meeting and inform them about the services the lawyer provides that are relevant to the attendee’s situation. Again the answer is no because the determination of what services an individual might need requires the exercise of independent legal judgment and is therefore the practice of law.

In 2009 FEO 2 the State Bar addressed the question of the responsibility of a lawyer who reasonably believes that a title company has engaged in the unauthorized practice of law in preparing a deed. Prior to the closing of a real estate transaction, a deed was sent to the buyer’s lawyer by a title company, but the deed stated that it had been prepared by the title company under the supervision of John Doe, Attorney. The attorney was not an employee of the title company. John Doe does not employ the person who prepared the deed, nor is that person an independent contractor hired by a lawyer. Rule 8.3(a) requires a lawyer who knows that another lawyer has committed a violation of the rules that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer to inform the State Bar. The rule only requires that a lawyer report violations of another lawyer. There is no requirement that a lawyer report unauthorized practice of law by a non-lawyer. The lawyer is prohibited from assisting in the unauthorized practice of law. If the buyer’s lawyer believes that John Doe is assisting the title company in the unauthorized practice of law, the State Bar advised the buyer’s attorney to communicate his concerns to John Doe and advise John Doe to ask the State Bar for an ethics opinion. If the other lawyer continues to knowingly assist the title company in an unauthorized practice of law, the buyer’s lawyer must report John Doe to the State Bar. The buyer’s lawyer also asked whether he could proceed with the closing. Buyer could proceed with the closing under this fact pattern, and as long as the deed appears to convey good title and the client decides to proceed after being advised by the lawyer of the unauthorized practice and any harm that might be caused by the unauthorized practice.

Protecting the Public or Protecting Our Turf
In recent years many states have mounted efforts to halt the sales of living trusts by nonlawyers. Some of these so called “trust mills” try to maintain a relationship with a local lawyer to avoid the unauthorized practice of law, but in many cases the role of the local lawyer is superficial.
There have been a number of instances of real harm to consumers from the tactics used by nonlawyers hawking living trusts. For example an employee of an “estate planning service” convinced a Colorado couple that the cost to their children to settle the estate through probate would be $65,000. He sold them a trust for $1,595. A local lawyer reviewed the trust for a fee of $125, which also entitled them to a thirty minute consultation. The couple complained to the Colorado Attorney General. A disciplinary proceeding against the attorney performing the review resulted, and the attorney received a public censure. People v. Laden, 893 P.2d 771 (Colo. 1995). The Colorado court determined that the attorney aided the nonlawyer in the unauthorized practice of law by accepting referrals from the nonlawyer who was engaged in the unauthorized practice of law.

In 1998 Jeff Modisett, who was then the Attorney General of Indiana published an article entitled, “Living Trusts: A Consumer Protection Perspective,” 42 Res Gestae 19 (Sept. 1998). The article focused on aggressive marketing by sellers of living trusts. The sellers made various approaches to consumers with the goal of having the consumer attend a seminar or a meeting with a salesperson where high pressure tactics were used. Consumers complained that the salespeople exaggerated the cost of probate; took advantage of the consumers’ dislike or distrust of lawyers; urged consumers that lawyers charge too much; frightened them that their savings would be lost through the costs of probate and taxes; and misrepresented the time probate requires.

In addition to the misrepresentations which all estate planners have had to counter with clients, the Attorney General noted that the seminars occasionally involved actual con artists who gathered financial information about the clients and attempted to steal from them. Most estate planners have reviewed documents from trust mills that were inferior and overpriced. Arguably, proceeding against the nonlawyers who market these schemes and any lawyers who participate in them may protect the consumer, but is the consumer actually protected by inclusion of all of the acts in the definition of practicing law in Chapter 84?

In a provocative article published in the Fordham Law Review, Derek Denckla, a legal aid lawyer, argued that most unauthorized practice statutes have the effect of harming people of limited means. D. Denckla, “Nonlawyers and the Unauthorized Practice of Law: An Overview of the Legal and Ethical Parameters,” 67 Fordham L. Rev. 2581 (1999). Historically, the unauthorized practice rules were used to control activity in court, but outside of the courtroom nonlawyers could engage in many activities that would be proscribed today. When the various state bars began to organize, they sought to curtail activities that were being engaged in by title companies and trust companies. Denckla argues that most restrictions on the unauthorized practice of law stem from a desire to eliminate competition rather than from a desire to protect the public interest.

Because the needs of many clients are not being served under the current system in part because of the cost of a lawyer’s services, many lay organizations, including the American Association of Retired Persons, have lobbied to end unauthorized practice restrictions because the organization’s members believe they are not being served effectively by lawyers and they want a choice in representation. The public does not support the existing restrictions on the practice of law and, when given the opportunity, has rejected the expansion of restrictions.

Maria M. Lynch is a partner in the Raleigh firm of Lynch & Eatman, L.L.P.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.