Representation in Purchase of Foreclosed Property [2013 Formal Ethics Opinion 4]
Ethical duties of a lawyer representing both the buyer and the seller in the purchase of a foreclosure property, and of a lawyer when the representation is limited to the seller.
View formal ethics opinion in full here.
Ethical duties of a lawyer representing both the buyer and the seller in the purchase of a foreclosure property
Under the facts of the first inquiry, Bank A has foreclosed on its deed of trust and was the highest bidder at the sale. Bank A then proceeds to enter into a contract to sell the property. For the closing, the bank selects Law Firm X, the firm that typically handles such closings for the bank. Law Firm X then proposes to send the purchaser of the property a letter advising the purchaser that the firm will be handling the matter and representing both parties. Pursuant to the agreement between the purchaser and Bank A, the purchaser will be responsible for paying closing costs, other than those costs clearly allocated to Bank A.
For situations such as the one described above, this opinion imposes a duty on the attorney to ensure compliance with Rule 1.7 of the North Carolina Rules of Professional Conduct, which relates to conflicts of interest for current clients. Under the rule, “[r]epresentation is prohibited if the lawyer cannot reasonably conclude that he will be able to provide competent and diligent representation to all clients.”
The Ethics Committee previously authorized an attorney’s joint representation of the borrower, lender, and seller in a typical residential real estate transaction (see both CPR 100 and RPC 210). The primary justification for allowing such joint representation is that the parties typically worked out the contract for purchase prior to engaging the attorney. CPR 100, however, carves out a special obligation for attorneys having a continuing professional relationship with any party to the transaction. In such an instance, the attorney must be particularly cognizant of whether there exists any impediment to his loyal representation of other parties to the transaction. If any such impediment exists, the attorney should not represent the other party (absent receipt of informed consent, in writing, pursuant to Rule 1.7).
In this case, Law Firm X has a continuing professional relationship with Bank A. The opinion makes clear that, in order to proceed with the common representation, Law Firm X must obtain written informed consent from the purchaser. Specifically, Law Firm X must:
(1) explain the proposed scope of the lawyer’s representation;
(2) disclose [Law Firm X]’s prior relationship with [Bank A];
(3) explain the advantages and risks of common representation; and
(4) discuss the options/alternatives [the purchaser] has under the Contract, such as hiring his own lawyer at his own expense.
Additionally, if the attorney determines from the beginning that common representation will be adverse to the interests of either party, or that the attorney’s judgment will be impaired by loyalty to one party, then common representation is prohibited.
Ethical duties of a lawyer when the representation is limited to the seller
Under Inquiry #2, the purchaser has informed Law Firm X of its desire to have its own representation at the closing. Law Firm X, however, continues to provide services necessary and incidental to the transaction, including preparation of a title opinion for the buyer’s policy.
According to the opinion, the attorney at Law Firm X must determine whether the purchaser intends to have its own representation in conjunction with representation by Law Firm X. If so, then the attorney at Law Firm X may continue advising the buyer, and no fee adjustment is required. If not, then the attorney may limit her representation to the seller (in this case, Bank A).
In the event that the attorney does limit representation to the seller, the attorney has a duty to clarify her role to the buyer. Included within this duty is an obligation to make “robust and thorough disclosures to the buyer” that the seller is the attorney’s sole client and that the attorney does not represent the interests of the buyer.
The effect of limiting his representation to the seller is that the lawyer may not perform any legal services for the buyer. Based on the facts of this opinion, “[w]hether the contract to purchase property requires Buyer to pay Lawyer’s fee for representation of Seller is a legal question outside the purview of the Ethics Committee” (emphasis original). The opinion also notes, however, that “a lawyer may be paid by a third party, including an opposing party, provided the lawyer complies with Rule 1.8(f) and the fee is not illegal or clearly excessive in violation of Rule 1.5(a).”
Inquiry #3 clarifies that the lawyer, in representing only the seller, nevertheless is permitted to provide a title opinion to the title insurance company for the buyer’s title insurance policy.
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