Can the lawyer who handled a foreclosure also represent both the buyer and the bank when the bank resells the property?

Plain-English summary

The opinion addresses a recurring real estate situation: a bank forecloses and acquires property, then resells it, and the lawyer who handled the foreclosure (as trustee or trustee's counsel) is asked to close the resale. Across ten inquiries it works out when that lawyer may also represent the buyer.

When the bank lets the buyer choose the lawyer, the foreclosure lawyer may represent both the buyer and the seller if there is full disclosure and the buyer gives informed consent. Rule 1.7 permits common representation despite a concurrent conflict if the lawyer reasonably believes he can provide competent and diligent representation to each client and the clients consent in writing. The opinion (citing RPC 210 and 97 FEO 8) requires the lawyer to disclose the special risks of buying foreclosed property, the difference between marketable and insurable title and between warranty and non-warranty deeds, potential HOA liability, and, most importantly, the lawyer's own prior role in the foreclosure and the fact that he would be certifying title based partly on his own work. If the lawyer's financial interest in preserving the bank relationship would impair his independent judgment or his objectivity in making those disclosures, he may not seek the buyer's consent or represent the buyer at all.

The answer changes when the bank names the lawyer as the contract "title/closing agent." The opinion concludes that arrangement signals a close business relationship that makes it in the lawyer's financial interest to protect the bank, impairing the independence the buyer of foreclosed property requires; the conflict is non-consentable, so the lawyer may not represent the buyer (Opinion #2, and Opinion #7 by reference). A different lawyer at the same firm who did not handle the foreclosure may represent both sides on the usual Rule 1.7 conditions (Opinion #3).

The opinion also addresses limited representation and the buyer's right to counsel. The foreclosure lawyer may limit his representation to the seller, but must then disclose clearly that he represents only the seller, will draft documents to protect the seller, and that the buyer may want his own lawyer, far enough in advance that the buyer can obtain counsel (Rule 4.3(a); RPC 40); he may give the unrepresented buyer no legal advice except to get a lawyer (Opinions #4-#5). A lawyer may not draft or honor a contract provision that chills the buyer's right to independent counsel; if the buyer hires his own lawyer, the closing-agent lawyer may not interfere, must observe Rule 4.2's bar on contacting a represented person, and holds the buyer's funds in a fiduciary capacity under Rule 1.15-2(a) (Opinion #8). A lawyer representing the seller may be paid by the buyer only consistent with Rule 1.8(f) and a fee that is not excessive under Rule 1.5(a), and may not charge the buyer for representing the buyer when the buyer has his own counsel (Opinion #9). The committee declined several questions as outside its purview, including malpractice liability (Opinion #6) and whether a real estate agent's contract drafting is unauthorized practice (Opinion #10).

In practice

Under the North Carolina rules as they stood at the time of the opinion, whether the foreclosure lawyer may also represent the buyer turns on the strength of the lawyer's tie to the bank. Per the opinion, when the buyer freely chooses the lawyer, common representation is allowed with full disclosure (including the lawyer's foreclosure role) and informed written consent under Rule 1.7; when the bank designates the lawyer as the contract closing agent, the conflict is treated as non-consentable and the lawyer may not represent the buyer.

Per the opinion, a lawyer who limits representation to the seller must disclose that clearly and early, may advise an unrepresented buyer only to obtain counsel (Rule 4.3(a)), and may not participate in any contract term that chills the buyer's right to independent counsel; if the buyer retains a lawyer, the seller's lawyer may not interfere and must observe Rule 4.2.

Common questions

Q: Can the lawyer who foreclosed on a property close its later sale for both the bank and the buyer?

A: Yes, if the buyer chose the lawyer and consents. The opinion concludes common representation is permitted under Rule 1.7 with full disclosure of the risks and the lawyer's prior foreclosure role, plus the buyer's informed written consent, provided the lawyer's bank relationship does not impair independent judgment.

Q: What if the bank names the foreclosure lawyer as the closing agent in the contract?

A: Then the lawyer cannot represent the buyer. The opinion concludes that designation reflects a close business relationship giving the lawyer a financial interest in protecting the bank, which makes the conflict non-consentable, so the lawyer may not seek the buyer's consent.

Q: Can a different lawyer in the same firm handle the closing for both sides?

A: Yes, on the usual conditions. The opinion concludes a firm lawyer who neither acted as trustee nor handled the foreclosure may represent both buyer and seller subject to the Rule 1.7 conditions described in Opinion #1.

Q: If the lawyer represents only the seller, what must he tell the buyer?

A: That the buyer is not his client. The opinion concludes the lawyer must disclose, early enough for the buyer to get counsel, that he represents only the seller and will protect the seller's interests, and may give the unrepresented buyer no legal advice except to obtain a lawyer (Rule 4.3(a)).

Q: Can a contract force the buyer to use the seller's closing agent and bar the buyer's own lawyer?

A: No. The opinion concludes a lawyer may not draft or honor a provision that chills the buyer's right to independent counsel; if the buyer hires a lawyer, the closing-agent lawyer may not interfere and must comply with Rule 4.2.

Background and rules framework

The opinion applies North Carolina Rule 1.7 (concurrent conflicts and the conditions for consentable common representation), Rule 4.3(a) (dealing with an unrepresented person), Rule 4.2 (communication with a represented person), Rule 1.8(f) (payment of a lawyer's fee by a third party), Rule 1.5(a) (fees that are not clearly excessive), and Rule 1.15-2(a) (handling entrusted funds in a fiduciary capacity). These track Model Rules 1.7, 4.3, 4.2, 1.8, 1.5, and the safekeeping rules. The recurring theme is that a buyer of foreclosed property faces special risks and needs representation unimpaired by the lawyer's financial interest in the foreclosing bank.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NC Rule 1.7 (concurrent conflict of interest; informed consent confirmed in writing)
• MR 4.3 / NC Rule 4.3(a) (dealing with an unrepresented person)
• MR 4.2 / NC Rule 4.2 (communication with a represented person)
• MR 1.8 / NC Rule 1.8(f) (third-party payment of fees)
• MR 1.5 / NC Rule 1.5(a) (fee not clearly excessive)
• MR 1.15 / NC Rule 1.15-2(a) (entrusted funds held in a fiduciary capacity)

Statutes:

• N.C.G.S. 97-2 (referenced in related context; the Good Funds Settlement Act referenced as to disbursement)

Other opinions cited:

• NC RPC 210 and 97 FEO 8: common representation of parties to a residential real estate closing with informed consent.
• NC 04 FEO 10, RPC 40, RPC 48, RPC 191, RPC 196: disclosure timing, client's right to counsel of choice, closing duties, and third-party fee payment.

See also

• ABA Formal Op. 497: Conflicts Involving Materially Adverse Interests
• ABA Formal Op. 05-436: Informed Consent to Future Conflicts
• GA Ethics Op. 00-3: Real Estate Closings by Telephone

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2006-formal-ethics-opinion-3/

Original opinion text

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

Inquiry #1:

Seller (a financial institution) acquires property as a result of the foreclosure by execution of the power of sale contained in a deed of trust securing its own note or a note that it was servicing. Buyer entered into a contract with Seller to buy the property that was repossessed via foreclosure.

Attorney A regularly handles foreclosure proceedings for Seller either serving as the trustee or as the lawyer for the trustee (both roles are referred to herein as the "foreclosure lawyer"). In the current proceeding Attorney A served as the foreclosure lawyer.

Buyer would like Attorney A to close the sale. May Attorney A represent both Buyer and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Buyer or on behalf of Buyer?

Opinion #1:

Yes, provided there is full disclosure to Buyer of all potential risks and Buyer gives informed consent. Multiple representation of parties to a real estate closing is allowed in RPC 210 and in 97 FEO 8. The latter opinion holds that a lawyer who regularly represents a real estate developer may represent the buyer and the developer in the closing of residential real estate. Rule 1.7 permits multiple representation notwithstanding the existence of a concurrent conflict of interest if the lawyer concludes that he or she can provide competent and diligent representation to each affected client and the clients give informed consent which is confirmed in writing.

If Attorney A's relationship with Seller is such that Attorney A's personal financial interests in preserving and protecting his relationship with Seller impairs his independent professional judgment, ability to provide competent and diligent representation to Buyer, and/or his ability to be objective and impartial when making disclosures necessary to obtain informed consent, then Attorney A may not seek the informed consent of Buyer and may not represent Buyer in the closing.

If Attorney A concludes that, under the circumstances, he can still exercise independent professional judgment on behalf of all of the parties to the closing, he may seek the informed consent of Buyer. Obtaining the informed consent of the buyer in this situation means that the buyer must be advised of the potential risks to a purchaser of property that was previously foreclosed including the distinctions between marketable and insurable title and between a non-warranty and a warranty deed. The buyer must also be advised of his potential liability for homeowners' association dues. Most importantly, the lawyer must disclose his prior participation in the foreclosure and explain that the lawyer must examine his own work on the foreclosure to certify title to the property.

Attorney A may represent all of the parties to the closing even if Buyer procures financing to purchase the property (including financing provided by Seller). Attorney A must be able fully to explain, without objection from the lender/seller the loan documents, setting forth the terms of repayment (and potentially including a balloon payment and/or prepayment penalty), and the status of title including any material exceptions between the lender's and owner's title insurance policies.

If Buyer consents to the representation, Attorney A may proceed unless and until it becomes apparent that he cannot manage the potential conflict between the interests of the lender/seller and the buyer. If the lawyer determines that he can no longer exercise his independent professional judgment on behalf of both clients, he must withdraw from the representation of both clients.

Inquiry #2:

Under the facts of Inquiry #1, the contract signed by Buyer provides that Seller will select the title and closing agent. However, the contract specifies that the buyer is also entitled to legal representation at the buyer's own expense. Seller names Attorney A as the "title/closing agent" for the sale to Buyer. While serving in the capacity of "title/closing agent", Attorney A proposes to provide legal representation to both Buyer and Seller with the consent of both parties. May Attorney A represent both Buyer and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Buyer?

Opinion #2:

No. Although 97 FEO 8 allows a lawyer to represent both the developer and the buyer of a house in a subdivision with the informed consent of the buyer, the purchase of foreclosed property presents special risks to a purchaser that are not present in the purchase of a subdivision property. The purchaser of foreclosed property requires legal representation that is completely unimpaired by even the potential of a conflict of interest. The fact that Attorney is named in the contract as the title/closing agent indicates that there is a close business and professional relationship between Attorney A and Seller. It is apparent that, under these circumstances, it is in Attorney A's personal financial interest to preserve and protect his relationship with Seller. This self-interest will impair Attorney A's independent professional judgment and his ability to be objective and impartial when making the disclosures necessary to obtain informed consent from Buyer. Therefore, Attorney A may not seek the informed consent of Buyer and may not represent Buyer in the closing.

Inquiry #3:

Under the facts of Inquiry #2, Attorney B regularly represents Seller on various matters but did not represent the trustee on the foreclosure of the subject property and did not act as trustee. May Attorney B represent both Buyer and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Buyer?

Opinion #3:

Yes, subject to fulfilling the conditions on common representation set forth in opinion #1.

Inquiry #4:

Under the facts of Inquiry #2, Attorney A intends to represent only the interests of Seller and does not intend to represent Buyer in closing the transaction. May Attorney A limit his representation in this manner?

Opinion #4:

Yes, Attorney A may limit his representation to Seller. However, if he does so, in light of the provisions of the purchase contract, it is possible that Buyer will be misled about Attorney A's role. Therefore, Attorney A must fully disclose to Buyer that Seller is his sole client, he does not represent the interests of Buyer, the closing documents will be prepared consistent with the specifications in the contract to purchase and, in the absence of such specifications, he will prepare the documents in a manner that will protect the interests of his client, Seller, and, therefore, Buyer may wish to obtain his own lawyer. See, e.g., RPC 40 (disclosure must be far enough in advance of the closing that the buyer can procure his own counsel), RPC 210, 04 FEO 10, and Rule 4.3(a). Because of the strong potential for Buyer to be misled, the disclosure must be thorough and robust.

Inquiry #5:

Under the facts of Inquiry #4, if Attorney A limits his representation to Seller, but closes the transaction, does he have any duty to disclose or discuss any of the following with Buyer: defects of title; the difference between insurable title and marketable title; the exceptions contained in the title policy and the need for exception documents at closing; and the terms of the sales contract?

Opinion #5:

If Attorney A explicitly limits his representation to Seller, he cannot give any legal advice to Buyer except the advice to secure counsel. Rule 4.3(a). In light of the significant issues involved for Buyer, Attorney A should advise Buyer to obtain his own lawyer.

Inquiry #6:

Under the facts of Inquiry #4, Attorney A closes the transaction. The contract required the buyer to pay the closing agent's "customary closing fee," therefore, Buyer pays a fee to Attorney A as the title/closing agent. Subsequently, a defect of title caused by Seller is discovered. May Attorney A be held liable to Buyer for malpractice?

Opinion #6:

This is a legal question that is outside the purview of the Ethics Committee.

Inquiry #7:

Under the facts of Inquiry #1, the contract to buy the property signed by Buyer contains the following conditions: Seller will select the title and closing agent; Seller will pay the title examination fee and the premium for the owner's title insurance policy; Buyer will pay the title/closing agent's "customary closing fee"; and all closing transactions will be held at the title/closing agent's office. The contract specifies that the buyer is entitled to legal representation at the buyer's own expense. Seller names Attorney A as the "title/closing agent" for the sale to Buyer.

May Attorney A represent both Buyer and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Buyer?

Inquiry #7:

No, see Opinion #2 above.

Inquiry # 8:

Under the facts of Inquiries #2, 3 and 4, Buyer asks Attorney Y to represent him on the closing of the purchase of the property. Buyer wants Attorney Y to examine the title to the property, give his opinion as to title, and act as Buyer's agent at the closing.

Attorney A insists that the contract requires Buyer to accept him as the closing agent for the transaction even if he only represents Seller. May Attorney A refuse to allow Attorney Y to participate in the closing as Buyer's lawyer?

Opinion #8:

No. Clients are entitled to legal counsel of their choice. See, e.g., RPC 48. A lawyer may not participate in any scheme or contract that states or implies that a party to the transaction does not have the right to obtain independent legal counsel to represent his interests. Drafting such a provision for a client or agreeing to provide representation pursuant to such a provision is unethical because the provision will chill the buyer's right to independent legal counsel even if the enforceability of the provision is doubtful.

Attorney A may, by the terms of the purchase agreement, be the designated closing agent for the sale. However, if Buyer hires a lawyer to represent his interests by examining and giving him an opinion on title and participating in the closing on his behalf, the other lawyer may not interfere with this representation. See, e.g., Rule 4.2. In addition, Attorney A must comply with the prohibition in Rule 4.2(a) on direct communications with a represented person without the consent of the lawyer for the represented person. Any funds that are delivered by Buyer to Attorney A are held by Attorney A in a fiduciary capacity for Buyer and must be disbursed in accordance with and upon fulfillment of the conditions of the contract. See Rule 1.15-2(a). If Buyer chooses to obtain his own lawyer, Attorney A may not interfere with Buyer's representation by his chosen lawyer or needlessly complicate the ability of that lawyer to represent Buyer. Both lawyers shall endeavor to insure that closing responsibilities are completed expeditiously and in compliance with RPC 191 and the Good Funds Settlement Act (if applicable). Specifically, both lawyers shall endeavor expeditiously to provide and review draft documents, to resolve title issues subject to the terms of the contract, to deliver the executed documents, to update title, and to disburse the closing funds.

Inquiry #9:

Under the facts of Inquiries #2, 3, and 4, Attorney A agrees that Attorney Y will represent Buyer's interests at the closing. However, Attorney A claims that he is still entitled to a fee from Buyer because the terms of the contract.

May the legal fee for Attorney A's representation of Seller be charged to Buyer?

Opinion #9:

Whether the contract to purchase the property requires Buyer to pay Attorney A's fee for representation of Seller is a legal question outside the purview of the Ethics Committee. However, 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). See RPC 196. Attorney A's time and labor relative to the closing may be reduced because of the legal services performed by Attorney Y on behalf of Buyer. If so, this fact should be taken into account in determining whether the "customary fee" for closing the transaction is excessive and an appropriate reduction in the fee should be made. Rule 1.5(a). Because Buyer is represented by Attorney Y, Attorney A may not charge or collect any money for representing Buyer.

Inquiry #10:

A real estate agent prepared the purchase contract. It alters the usual closing arrangements, waives many "normal" rights of a buyer, and favors the seller by allowing the seller to terminate the contract for any reason and return the deposit without further liability. Is the real estate agent engaged in the unauthorized practice of law when preparing the contract? Does it matter whether the real estate agent is a buyer's agent, a seller's agent, or a dual agent? Does it matter whether the seller and the buyer have different real estate agents? Is consumer protection legislation needed?

Opinion #10:

These questions do not relate to the professional responsibilities of lawyers and cannot be answered by the Ethics Committee.