Disclosure of Confidential Information to Lawyer Serving as Foreclosure Trustee [2013 Formal Ethics Opinion 5]

In the absence of disclosure, an attorney may not later represent another party in a “substantially related matter” if the information the attorney received while previously acting as trustee is “material to the matter.”

View formal ethics opinion in full here

According to the facts of the inquiry, Lender has approached Lawyer’s Firm to serve as substitute trustee in relation to foreclosure proceedings against Borrower due to Borrower’s default.  Borrower is a limited liability company, and the member-manager of the company meets with Lawyer once Lawyer’s Firm is acting as the substitute trustee.  The member-manager is an unsophisticated consumer of legal services.  During the meeting with Lawyer, the member-manager discusses Borrower’s theory of the case, including reasons why Borrower believes it is not in default.

At no point in the course of the meeting did Lawyer explain to the member-manager his role as trustee or his relationship to Borrower or Lender.  Some time after the meeting, the foreclosure proceeding is dismissed.  At this point, litigation begins in superior court between Borrower and Lender, and a new substitute trustee is appointed.  The primary issue in the litigation is the same issue that was discussed in the meeting between Lawyer and Borrower’s member-manager (a meeting that occurred at a time when Lawyer’s Firm was still serving as substitute trustee).

Previously, the North Carolina State Bar adopted RPC 90, which ruled that “a lawyer who has as trustee initiated a foreclosure proceeding may resign as trustee after the foreclosure is contested and act as lender’s counsel.”  However, the instant opinion is distinguishable, as the attorney here apparently continued as trustee even after it was evident that the foreclosure would be contested.

While serving as trustee, “[t]hat fiduciary relationship demands that the trustee be impartial to both the trustor and the beneficiary and, therefore, the trustee may not act as advocate for either against the other.”

However, there may be certain situations where the trustee’s role may be unclear.  Specifically, the drafters of 2013 Formal Ethics Opinion 5 were concerned with the vantage point of an unsophisticated, unrepresented party to a foreclosure.  Thus, this opinion rules that an attorney serving as trustee has a duty to explain the nature of the trustee’s relationship to both parties, including that:

(1) the trustee’s role is to ensure that the correct procedures are impartially followed in the prosecution of the foreclosure proceeding;
(2) the trustee does not represent either the lender or the borrower; and
(3) communications made by the lender or the borrower to the trustee will not be held in confidence and may be used or disclosed in subsequent actions between the lender and the borrower.

In the absence of such disclosures, an attorney may not later represent another party in a “substantially related matter” if the information the attorney received while previously acting as trustee is “material to the matter.”  “Such a practice would constitute conduct that is prejudicial to the administration of justice,” and thus violates Rule 8.4(d) of the North Carolina Rules of Professional Conduct.

However, an attorney may nevertheless represent another party, even in the absence of the disclosures required above, if the attorney obtains informed consent, confirmed in writing, from the affected party.

If you wish to respond or otherwise offer a guest contribution discussing this formal ethics opinion, please contact the ethics editor at cu***********@em***.edu.

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About Tripp Huffstetler, Senior Staff Writer (57 Articles)
Tripp Huffstetler served as the Senior Ethics Staff Writer for the Campbell Law Observer. He is originally from Cherryville, North Carolina. In 2011, Tripp graduated from the University of North Carolina at Chapel Hill with a bachelor’s degree in Philosophy as well as Political Science. During his undergraduate studies, Tripp spent summers assisting at a practice in his hometown of Cherryville. During law school he interned with the Hon. Kris Bailey, District Court Judge; Judge Paige Phillips, Wake County Magistrate; the Hon. Paul C. Ridgeway, Superior Court Judge; and the Wake County District Attorney's Office. He also assisted a local attorney in drafting a guide to interlocutory appeals, which will be published by the North Carolina Bar Association. Tripp graduated from Campbell Law School in May 2014.
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