Does a lawyer representing the seller of property have to tell the buyer that a deed of trust on the property contains a due-on-sale clause?

Plain-English summary

The Committee was asked whether an attorney representing the seller of property encumbered by a deed of trust with a due-on-sale clause has an ethical obligation to advise the buyer of that clause's existence and effect. A due-on-sale clause generally lets the deed-of-trust beneficiary, at its option, demand the full remaining balance if the property is conveyed without the beneficiary's written consent. The opinion concluded that the seller's attorney has no such duty to the buyer unless the attorney expressly or impliedly represented that the property is not subject to such a clause, or is aware of such a representation by the seller.

The opinion situated the question in its earlier Ethics Opinion 88-2, which had concluded that a seller's attorney may prepare documents to convey property subject to a due-on-sale clause without the beneficiary's consent (the circumvention not being fraud as between owner and beneficiary), but which did not address disclosure to the buyer. The Committee emphasized that this was not a case where the deed-of-trust terms were known to the seller and the seller's attorney but unavailable to the buyer: the deed of trust is typically a recorded document giving constructive notice, and the assumption documents provide enough information to locate it, so it is reasonable to expect the buyer to inform itself.

Analyzing Rule 4.1(b), which requires disclosure of a material fact to a third person only when necessary to avoid assisting a client's crime or fraud (and not where prohibited by Rule 1.6), the opinion concluded the rule imposed no disclosure duty on these facts. It read the Alaska decisions Carter v. Hoblit, 755 P.2d 1084 (Alaska 1988), and Mogg v. National Bank of Alaska, 846 P.2d 806 (Alaska 1993), as not requiring disclosure, since merely preparing sale documents makes no misleading representation, and assumed the attorney was unaware of any mistaken assumption by the buyer. The Committee stated it was extremely reluctant to create a duty requiring attorneys to advise parties with whom their clients deal, warning that such a duty would create conflict-of-interest problems and effectively make the attorney a guarantor of each transaction, which the rules do not intend.

Currency note

This opinion was issued in 1996, before Alaska's adoption of the 2009 revisions to the Alaska Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Must a seller's lawyer warn the buyer about a due-on-sale clause?

A: The opinion concluded there is no such duty unless the attorney expressly or impliedly represented that the property is not subject to the clause, or is aware of such a representation by the seller.

Q: Why doesn't Rule 4.1 require the disclosure?

A: Per the opinion, Rule 4.1(b) requires disclosing a material fact to a third person only to avoid assisting a client's crime or fraud; merely preparing sale documents makes no misleading representation, so no disclosure duty arose.

Q: Does it matter that the buyer could have found the clause itself?

A: The opinion stressed that the deed of trust is typically recorded and gives constructive notice, so it is reasonable to expect the buyer to inform itself of the terms before closing.

Q: When could a duty to the buyer arise?

A: The opinion indicated a duty could arise if the attorney made or affirmed a misrepresentation, or knew the buyer was operating on a mistaken assumption the attorney failed to correct, as in the Mogg fact pattern.

Background and rules framework

The opinion interpreted Alaska Rule of Professional Conduct 4.1 (truthfulness in statements to others; Model Rule 4.1), including Rule 4.1(b)'s limited disclosure duty, read together with Rule 1.6 (confidentiality; Model Rule 1.6) and the definition of "fraud" in Rule 9.1(e). It applied the Alaska Supreme Court decisions Carter v. Hoblit, 755 P.2d 1084 (Alaska 1988), and Mogg v. National Bank of Alaska, 846 P.2d 806 (Alaska 1993), and built on the Committee's earlier Ethics Opinion 88-2.

Citations and references

Rules of Professional Conduct:

• Alaska RPC 4.1 (truthfulness in statements to others), including Rule 4.1(b)
• Alaska RPC 1.6 (confidentiality); Rule 9.1(e) (definition of fraud)

Cases:

• Carter v. Hoblit, 755 P.2d 1084 (Alaska 1988)
• Mogg v. National Bank of Alaska, 846 P.2d 806 (Alaska 1993)

Other opinions cited:

• Alaska Ethics Opinion 88-2

See also

• NY State Bar Op. 796: No Duty to Alert Estate Creditors
• NY State Bar Op. 817: Grossed-Up Home Sale Price

Source

• Landing page: https://alaskabar.org/ethics-discipline/ethics-opinions/adopted-ethics-opinions-chronological/
• Original PDF: https://alaskabar.org/wp-content/uploads/96-2.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

ALASKA. BAR ASSOCIATION
ETHICS OPINION 96-2
Ethical Obligation o f a n Attorney Representing
a Seller to Third Persons Purchasing Property
Encumbered by a Deed of Trust which Contains a
"Due on Sale" Clause

The Committee has been asked whether a n attorney representing the
seller of property which is encumbered by a deed of trust containing a "due on
sale" clause has an ethical obligation to advise the purchaser of that property
of the existence and effect of the "due on sale" provision. It is the opinion of the
Committee that an attorney representing a seller does not have a n ethical
obligation to advise the buyer of the property of the existence or effect of a due
on sale clause in a deed of trust encumbering the property unless the attorney
has expressly or impliedly represented to the buyer that the property is not
subject to such a provision, or the attorney is aware of such representation by
the seller.
In Ethics Opinion 88-2, the Committee determined that a n attorney
representing a seller who proposed conveying property subject to a due on sale
clause without obtaining the beneficiary's consent, must advise the client of the
consequences of a breach of the provisions in the deed of trust, but was not
ethically prohibited from preparing the sale documents. A s between the owner
and the beneficiary under the deed of trust, the committee determined that
circumventing the contract term was not fraud or fraudulent conduct. Opinion
88-2 did not address the knowledge of, or disclosure to, the buyer of the due om
sale clause, but dealt only with the issue of whether representation of the seller
in the transaction would be fraudulent conduct as to the beneficiary under the
deed of trust.
A "due on sale" clause in a deed of trust generally provides that if an
interest in the property is conveyed or transferred without the written consent
of the deed of trust beneficiary the remaining balance due on the underlying
debt is, at the option of the beneficiary, immediately due and payable. The
beneficiary's decision regarding enforcement of that clause can involve
consideration of prevailing interest rates and a number of other factors.

It is reasonable to expect the buyer to become informed regarding the
terms of the deed of trust to be assumed before the transaction is concluded.

The deed of trust will generally be a recorded document giving the buyer
constructive notice of its terms.
Moreover, the typical document for
assumption, or sale subject to that deed of trust, provides sufficient
information to locate the deed of trust if the document is not otherwise
provided during the negotiations for sale. We are not, therefore, dealing in this
opinion with a situation in which the terms of the deed of trust are known to
the seller and the seller's attorney, but are not available to the buyer.
Because the beneficiary who becomes aware of the sale in breach of the
due on sale clause in the deed of trust can insist on full payment of the balance
due, and initiate foreclosure if the payment is not made, a question has been
raised whether Alaska Rule of Professional Conduct 4.l(b) imposes a duty on
the seller's attorney to disclosure to the buyer the existence and effect of the
due on sale clause. Rule 4.1, relating to "Truthfulness in Statements t o
Others," provides:
In the course of representing a client a lawyer shall not
knowingly:
(a) make a false statement of material fact or law to a third
person; or

(b) fail to disclose a material fact to a third person when
disclosure is necessary to avoid assisting in a criminal or
fraudulent act by a client unless disclosure is prohibited by Rule
1.6.
The COMMENT to that section states in relevant part:
Misrepresentation
A lawyer is required to be truthful when dealing with others
on a client's behalf, but generally has no affirmative duty to inform
an opposing party of relevant facts. A misrepresentation can occur
if the lawyer incorporates or affirms a statement of another person
that the lawyer knows is false. Misrepresentation can occur by
failure to act.

Fraud by Client
Paragraph (b) recognizes that substantive law may require a
lawyer to disclose certain information to avoid being deemed to
have assisted the client's crime or fraud. . . .1
It has been suggested to the Committee that the interpretations of fraud
contained in Carter v. Hoblit, 755 P.2d 1084 (Alaska 1988) and Mogg v.
National Bank of Alaska, 846 P.2d 806, 8 13-815 (Alaska 1993), impose a duty
of disclosure on the seller's attorney which will constitute fraud or assistance of
fraudulent conduct if the duty is breached. Carter held in relevant part that
fraud results when one not in a fiduciary relationship makes truthful
representations to another which the maker knows or believes to be materially
misleading because of a failure to state additional or qualifying matter. Mere
preparation of documents for a seller relating to sale of property in which the
buyer assumes or buys subject to a deed of trust with a due on sale clause
does not result in the making of any representations which would be
fraudulent under Carter. The request to the committee does not contain, and
we will not assume various fact scenarios in which such representations by the
attorney or client could or would occur.
Mogg involved a transaction that was negotiated based on a clearly
expressed understanding that Mogg, as a lender, would be secured by a second
position in collateral.
The bank's attorney, who was present in the
negotiations, knew that Mogg would be in a third position because of the
"dragnet" clause in the first deed of trust. In other words, the fact upon which
everyone else was relying as the basis for their agreement was incorrect and
the bank's attorney, who was aware of the mistaken assumption, did not
disclose that the basic assumption was erroneous. On those apparent facts,
the court found there was adequate evidence to establish a prima facie case of
fraud sufficient to abrogate the attorney-client privilege and permit full
discovery relating to the transaction.:!

lARPC 9.l(e)provides that "fraud" denotes conduct having a purpose to deceive
and not merely negligent misrepresentation or failure to apprise another of relevant
information.
The court made it clear that it was not expressing the view that fraud had
been established by the facts presented.
2

This ethics opinion assumes the attorney preparing documents for a sale
involving property subject to a deed of trust with a due on sale clause is not
aware of any mistaken assumption on the part of the buyer. The attorney is
not, therefore, participating by act or omission in conduct involving a
misrepresentation of the substance or effect of the transaction.
While attorneys have a n ethical obligation to avoid assisting in criminal
or fraudulent misconduct, this Committee is extremely reluctant to create any
duty requiring attorneys to advise parties with whom their clients deal.
Establishment of such additional duties will also create difficult conflict of
interest issues and expose attorneys to claims by parties with whom their
clients deal for failure to adequately advise those third parties regarding the
transaction. In effect the attorney may then become the guarantor of the
fairness and satisfactory result of each transaction for which the attorney
provides services. That clearly is not the intent of the Rules of Professional
Conduct.
Approved by the Alaska Bar Association Ethics Committee on December 14,
1995.
Adopted by the Board of Governors on January 13, 1996.