Can a lawyer in a mortgage foreclosure bid on the property at the commissioner's sale when the sale won't cover the client's secured debt in full?

Plain-English summary

The committee considered whether an attorney in a mortgage foreclosure could, with the client's consent, bid on the mortgaged property at the commissioner's sale where the property's fair market value was less than the amount needed to pay the debts secured by the mortgage and all superior claims. It answered no.

The committee restated the conditions from KBA Informal Opinion 27 under which the lawyer for the party holding the mortgage may bid: the lawyer must have the client's consent to bid, and the bid must be high enough to pay the debt secured by the mortgage in full after court costs and any claims senior to the client's mortgage. In the situation presented, where the client held a second mortgage and the fair market value was not enough to pay more than the first mortgage and part of the second, those two conditions were not met. The committee reasoned that the client's interest is to see the debt paid in full if possible, and the attorney would act in conflict with that interest by paying less than was needed to satisfy all of the client's debt. While recognizing that full payment is not always possible, the committee concluded that a lawyer must avoid all appearance of impropriety.

Currency note

This opinion was issued in 1977 under Kentucky's former Code of Professional Responsibility (in effect 1971 to 1990), before the Kentucky Bar Association's 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer ever bid on the property at a foreclosure sale?

A: Under the conditions of KBA Informal Opinion 27 the committee restated, yes, but only with the client's consent and a bid high enough to pay the client's secured debt in full after costs and senior claims.

Q: Why was bidding improper here?

A: Because the fair market value would not pay the client's mortgage debt in full, so the required conditions were not met and bidding would put the lawyer in conflict with the client's interest in full payment.

Citations and references

Rules of Professional Conduct:

• Canon 9 (appearance of impropriety); EC 5-3 (lawyer's personal interest in subject of representation); modern analog Model Rule 1.8 (conflicts; business transactions with a client)

Other opinions cited:

• KBA Informal Opinion 27

See also

• KBA Ethics Op. E-168: Contingent Fee in a Divorce

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-173.pdf

Original opinion text

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

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-173
Issued: November 1977

This opinion was decided under the Code of Professional Responsibility, which was in effect from 1971 to 1990. Lawyers should consult the current version of the Rules of Professional Conduct and Comments, SCR 3.130 (available at http://www.kybar.org), before relying on this opinion.

Question:

In a mortgagor’s action to foreclose a mortgage, may the mortgagor’s attorney, with the mortgagor’s consent, bid on the mortgaged property at the commissioner’s sale where the fair market value of the property is less than the amount needed to pay the debts secured by the mortgage and all superior claims?

Answer:

No.

References:

Canon 9; EC 5-3; KBA Informal Opinion 27

OPINION

The conditions set forth in KBA Informal Opinion 27 for such an action were that the mortgagee’s lawyer must:
(1) Have the mortgagee’s consent to bid; and
(2) The bid must be high enough to pay the debt secured by the mortgage in full after payment of court costs and any other claims on the proceeds of sale which may be senior to the client’s mortgage.
In a case where the client holds a second mortgage and the fair market value is not enough to pay more than the first mortgage and a part of the debt secured by the second mortgage, these two conditions are not met. The mortgagor’s interest is to see that the debt is paid in full, if possible, and the attorney would act in conflict with that interest if he paid less than was needed to pay off all debt to client. While undoubtedly there are circumstances where this is not possible, a lawyer must avoid all appearance of impropriety.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor rule). The Rule provides that formal opinions are advisory only.