Can a lawyer serve as a foreclosure trustee while the lawyer's firm keeps representing the lender on unrelated matters?

Plain-English summary

A lawyer (Attorney A) at a firm that routinely represents bank clients, including Bank Z, is asked to serve as substitute trustee for the foreclosure of a deed of trust securing a loan from Bank Z, while he and the firm continue representing Bank Z on matters unrelated to the loan. The opinion works through eight inquiries about when that is permitted and how disqualification is imputed within the firm.

Attorney A may serve as trustee and continue representing the bank on unrelated matters, even when the foreclosure is contested, because his impartiality as trustee is unlikely to be impaired by his loyalty to the bank in those unrelated matters. Prior opinions (RPC 3, RPC 64, RPC 82, RPC 90, 04 FEO 3) and N.C. Gen. Stat. 45-21.16(c)(7)b establish that a trustee is a neutral who may not advocate for either the lender or the grantor in a contested foreclosure, but none addressed whether unrelated representation of the lender disqualifies the lawyer from serving as trustee. The opinion clarifies that a foreclosure is "contested" when the grantor or another party with standing seeks to enjoin it or contests jurisdiction, service, the debt, default, notice, the power of sale, or (for residential mortgages) the subprime certification; a borrower's request to continue or postpone the sale does not make it contested. If the foreclosure is contested, Attorney A keeps his impartiality only if the bank represents itself or hires separate counsel for the foreclosure. If Attorney A concludes he cannot both protect the bank's interests in the unrelated matters and stay impartial where a substantial interest of the bank is at stake, he has a conflict under Rule 1.7(a)(1) and must choose between the unrelated representation and the trustee role.

On imputation, if Attorney A withdraws from representing Bank Z on unrelated matters to preserve his impartiality, the other firm lawyers need not withdraw, because that disqualification rests on a personal interest that does not present a significant risk of materially limiting the firm's other work and does not raise questions of client loyalty or confidentiality (Rule 1.10(a) and Comment [3]; the trustee represents neither party). But Attorney A's disqualification from advocating for the bank in a contested foreclosure or any loan-related matter is imputed to the firm, so another firm lawyer (Attorney B) may not represent Bank Z in the contested foreclosure or related matters while Attorney A is trustee. A firm lawyer may represent Attorney A in his capacity as trustee and continue unrelated work for the bank, and the same analysis applies if the firm uses a separate entity (Firmco) it controls as trustee: a firm lawyer may represent Firmco as trustee and do unrelated bank work, but may not simultaneously represent Firmco and advocate for the lender in a contested foreclosure. Because the trustee's role resembles that of an arbitrator or mediator, Rule 2.4(b) requires the trustee to explain his role to a borrower who may not understand it, and the borrower should be told that the firm continues to represent the bank on unrelated matters. Attorney A need not withdraw merely because the borrower informally objects, only if a court so orders, and none of these answers change if Bank Z is not one of the firm's largest clients.

In practice

Under the North Carolina rules as they stood at the time of the opinion, a lawyer may serve as a foreclosure trustee while continuing to represent the beneficiary bank on unrelated matters, because the trustee role is unlikely to impair impartiality (RPC 3 and related opinions). Per the opinion, in a contested foreclosure the lawyer keeps that impartiality only if the bank uses separate counsel for the foreclosure; if the lawyer cannot reconcile the bank's interests in the unrelated matters with the duty of impartiality where a substantial bank interest is at stake, he has a Rule 1.7(a)(1) conflict and must give up one role.

Per the opinion, the imputation analysis splits two ways under Rule 1.10(a): a personal disqualification taken to preserve impartiality is not imputed, so other firm lawyers may keep doing unrelated bank work, but the disqualification from advocating for the bank in a contested foreclosure or loan-related matter is imputed, so no firm lawyer may represent the bank there while a firm lawyer (or a firm-controlled entity) serves as trustee. The opinion also directs the trustee to explain the trustee role to the borrower under Rule 2.4(b) and to disclose that the firm continues to represent the bank on unrelated matters.

Common questions

Q: Can I be the foreclosure trustee for a loan made by a bank my firm represents on other matters?

A: Yes. The opinion concludes a lawyer may serve as trustee and continue representing the bank on unrelated matters, even in a contested foreclosure, because his impartiality as trustee is unlikely to be impaired by that unrelated work.

Q: When does a foreclosure become "contested" for this purpose?

A: The opinion defines it as when the grantor or another party with standing seeks to enjoin the proceeding or contests jurisdiction, service of process, the debt, default, notice, the power of sale, or (for residential mortgages) the subprime certification. A request to continue or postpone the sale does not make it contested.

Q: If I withdraw from the bank's unrelated matters to stay impartial, must my partners withdraw too?

A: No. The opinion concludes that disqualification rests on a personal interest and is not imputed under Rule 1.10(a), because the trustee represents neither party, so it raises no question of client loyalty or confidentiality.

Q: Can another lawyer in my firm represent the bank in the contested foreclosure while I am trustee?

A: No. The opinion concludes that to preserve the trustee's impartiality, the disqualification from advocating for the bank in a contested foreclosure or any loan-related matter is imputed to the firm under Rule 1.10(a).

Q: Do I have to explain my role to the borrower?

A: Yes. The opinion concludes that because the trustee's role resembles an arbitrator's or mediator's, Rule 2.4(b) requires explaining the difference between the trustee role and representing a client, and the borrower should be told the firm continues to represent the bank on unrelated matters.

Background and rules framework

The opinion applies North Carolina Rule 1.7(a)(1) (a concurrent conflict exists if a representation may be materially limited by the lawyer's responsibilities to a third person), Rule 1.10(a) and Comment [3] (imputation of disqualification, and the exception for personal-interest disqualifications), and Rule 2.4(b) (a lawyer serving as a third-party neutral must explain the role to a party who may misunderstand it). These are the North Carolina analogues of Model Rules 1.7, 1.10, and 2.4. It builds on a line of North Carolina trustee opinions and the foreclosure statute's neutrality requirement.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NC Rule 1.7(a)(1) (concurrent conflict: material limitation by responsibilities to a third person)
• MR 1.10 / NC Rule 1.10(a), Comment [3] (imputation; personal-interest exception)
• MR 2.4 / NC Rule 2.4(b) (lawyer as third-party neutral; duty to explain the role)

Statutes:

• N.C. Gen. Stat. 45-21.16(c)(7)b (notice that the trustee is a neutral party who may not advocate for either side in the foreclosure).
• N.C. Gen. Stat. 45-105, 45-103 (Commissioner of Banks review of subprime-loan foreclosures).

Other opinions cited:

• NC RPC 3, RPC 64, RPC 82, RPC 90, 04 FEO 3: a trustee in a contested foreclosure may not also act as advocate for the beneficiary or the grantor.

See also

• NC State Bar 2011 FEO 5: Foreclosure Trustee Conflict
• NC State Bar 2012 FEO 2: Lawyer-Mediator Conflicts
• DC Ethics Op. 276: Mediator Conflict Checks

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2008-formal-ethics-opinion-11/

Original opinion text

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

Inquiry #1:

Attorney A is employed by Law Firm. The lawyers of the firm routinely represent various bank clients including Bank Z. Bank Z is one of the firm's largest clients and all of the lawyers in the firm perform some work for the bank.

Attorney A has been asked to serve as the substitute trustee for the foreclosure of a deed of trust securing a loan (the Loan) made by Bank Z to the grantor (the Borrower) of the deed of trust. Bank Z is the named beneficiary of the deed of trust. The lawyers at the firm did not represent Bank Z on the negotiation or securitization of the Loan. The lawyers have not previously represented the Borrower.

Attorney A and the other lawyers in Law Firm want to continue to represent Bank Z on unrelated legal matters throughout the course of the foreclosure proceeding. Bank Z does not object. Borrower has not been notified that Attorney A and the other lawyers of the firm represent Bank Z on other unrelated matters.

May Attorney A continue to represent Bank Z on matters unrelated to the Loan and serve as substitute trustee for the foreclosure?

Opinion #1:

Attorney A may serve as trustee and continue to represent the bank on other matters because it is unlikely that his impartiality as trustee will be impaired by his duty of loyalty to and advocacy for the bank on other unrelated matters. Even when the proceeding is contested, Attorney A may serve as trustee and continue to represent the bank on other matters.

There are a number of ethics opinions that hold that a lawyer serving as trustee in a contested foreclosure proceeding may not act as the advocate for the beneficiary or the grantor in an adversarial proceeding arising from or connected with the deed of trust because the trustee is a fiduciary and, when exercising his discretion in the foreclosure, must play an impartial role relative to both parties. RPC 3, RPC 64, RPC 82, RPC 90, 04 Formal Ethics Opinion 3. See also N.C. Gen. Stat. A745-21.16(c)(7)b (notice to the debtor must contain a statement that a trustee is "a neutral party and, while holding that position in the foreclosure proceeding, may not advocate for the secured creditor or for the debtor in the foreclosure proceeding"). None of the ethics opinions, however, consider whether a lawyer is disqualified from serving as trustee if he continues to represent the lender on unrelated legal matters.

RPC 3, which rules that a lawyer may serve as a foreclosure trustee after representing the beneficiary of the deed of trust in the negotiation of the loan, explains the basis for prohibiting the lawyer from acting as an advocate in a contested foreclosure proceeding in the following passage:

[T]he Trustee owes a duty of impartiality to both parties which is inconsistent with representing one of the parties in a contested proceeding...Generally, when an attorney is required to withdraw from representation or from a fiduciary role, it is either because of concerns [for the] confidences of the client under Rule 4 [now Rule 1.6] and its predecessors or because of conflicts of interest under Rule 5.1 [now Rule 1.7] or its predecessors where the attorney would be put in the position of inconsistent roles or obligations at the same time or in the same proceeding. Since neither of those circumstances exist, and the rules do not appear to be directly relevant by their terms or with regard to their purposes, Attorney A is not ethically prohibited from continuing to serve as Trustee in a contested foreclosure matter, despite his prior representation of [beneficiary of the deed of trust], where he does not currently represent [beneficiary] in the foreclosure or related proceedings.

To clarify these earlier opinions, a foreclosure proceeding is contested when the grantor, or anyone else with standing, seeks to enjoin the proceeding or contests any of the following issues at the foreclosure hearing: jurisdiction, service of process debt, default, notice, power of sale, and, in the case of residential mortgages, certification regarding subprime loans.1 A borrower's motion to continue the proceeding or request to postpone the sale does not render the foreclosure contested. As with the trustee's own motion for a continuance or decision to postpone, these are procedural matters to which the trustee may respond within his or her discretion without impairing his or her ability to foreclose on the property consistent with the statutory requirements and the deed of trust.

If Attorney A represents Bank Z in other matters and the foreclosure is contested, Attorney A can maintain his impartiality as trustee if the bank represents itself or hires a lawyer to represent it in the foreclosure proceeding. Nevertheless, if Attorney A determines that he cannot protect and advance the interests of the bank in the unrelated matters while remaining impartial in a contested foreclosure proceeding where a substantial interest of the bank is at stake, Attorney A would have a conflict of interest requiring him to decide whether to continue to represent the bank on the unrelated matters and relinquish the trustee role to someone who will not be similarly compromised or to fulfill the role of trustee by withdrawing from the representation of the bank in all other matters. See also Rule 1.7(a)(1)(concurrent conflict of interest exists if representation of one or more clients may be materially limited by the lawyer's responsibilities to a third person).

Inquiry #2:

Perceiving that he has a personal conflict of interest, Attorney A withdraws from the representation of Bank Z on all unrelated matters in order to continue to serve as trustee. Are the other lawyers in Law Firm required to withdraw from the representation of Bank Z on matters unrelated to the Loan if Attorney A serves as the substitute trustee for the contested foreclosure?

Opinion #2:

No, the other lawyers in the firm may continue to represent Bank Z on unrelated matters.

Rule 1.10(a) provides that a disqualification based upon a personal interest of a lawyer that does not present a significant risk of materially limiting the representation of a client by the remaining lawyers in a firm is not imputed to the remaining lawyers in the firm. Comment [3] to Rule 1.10 specifies that "[t]he rule in paragraph (a) does not prohibit representation where neither questions of client loyalty nor protection of confidential information are presented." Serving in the role of trustee does not raise questions of client loyalty or protection of confidential information because the lawyer/trustee does not represent either party in the foreclosure. Therefore, Attorney A's disqualification from the representation of Bank Z to maintain his impartiality is not imputed to the other lawyers in the firm who are representing the bank on matters unrelated to the Loan and the foreclosure.

Inquiry #3:

Attorney B, another lawyer in Law Firm, intends to act as the lawyer for Bank Z in connection with the Loan including representation in the foreclosure proceeding. May Attorney B represent Bank Z on all matters related to the Loan, including the foreclosure, if another lawyer in his firm is serving as the trustee?

Opinion #3:

No, if the foreclosure is contested, Attorney B may not represent Bank Z at the foreclosure proceeding or on any matter related to the Loan. Attorney A's impartiality may be impaired if another lawyer from his firm appears in the foreclosure or related matters on behalf of the bank. To preserve the integrity of the process and the impartiality of the trustee, Attorney A's disqualification from serving as an advocate for one of the parties to a contested foreclosure in any matter related to the Loan is imputed to the other lawyers in the firm. See Rule 1.10(a).

Inquiry #4:

May another lawyer in the firm represent Attorney A in his capacity as trustee for the foreclosure?

Opinion #4:

Yes, and the lawyer may continue to do unrelated legal work for the bank while representing Attorney A as trustee. See Opinion #1 above. However, if Attorney A determines that he has a conflict of interest in serving as the trustee while continuing to represent the bank on unrelated matters and withdraws from the representation of the bank on unrelated matters to continue to serve as trustee, a lawyer representing Attorney A as trustee would be similarly disqualified. See Rule 1.10(a).

Inquiry #5:

Law Firm has set up a separate entity, Firmco, to serve as trustee on deeds of trust. Law Firm or its lawyers have a controlling ownership interest in Firmco. Firmco is substituted as trustee on the deed of trust securing the Loan made by Bank Z. May a lawyer in the firm represent Firmco in its capacity as trustee for the foreclosure? May the lawyer continue to do unrelated legal work for the bank?

Opinion #5:

Yes, the lawyer may represent Firmco as trustee and the lawyer representing Firmco may continue to do unrelated legal work for the bank. See Opinion #4. However, a lawyer for the firm may not simultaneously provide representation to Firmco and advocate for the lender in a contested foreclosure proceeding. See Opinion #1.

Inquiry #6:

Should the Borrower be informed that Attorney A and the other lawyers in Law Firm will continue to represent Bank Z on matters unrelated to the foreclosure?

Opinion #6:

Yes. The role of the trustee in a foreclosure proceeding is similar to the roles of arbitrator or mediator which are addressed in Rule 2.4. Rule 2.4(b) provides that when a lawyer serving as a third-party neutral knows or reasonably should know that a party does not understand the lawyer's role in the matter, the lawyer shall explain the difference between the lawyer's role as a third party neutral and a lawyer's role as one who represents a client. Similarly, explaining the role of the trustee and the role of the other lawyers in the firm (who continue to represent the bank) to a borrower in a foreclosure proceeding will help to avoid confusion and will allow the borrower to pursue his legal remedies to remove the trustee if he objects.

Inquiry #7:

If Borrower informally objects to Attorney A serving as the trustee because Attorney A and the other lawyers in the firm represent Bank Z on unrelated matters, is Attorney A required to withdraw from service as trustee?

Opinion #7:

No, Attorney A is not required to withdraw unless ordered to do so by a court.

Inquiry #8:

Do the responses to any of the preceding inquiries change if Bank Z is not one of the largest clients of Law Firm?

Opinion #8:

No.

End Notes

• G.S. A745-105 allows the Commissioner of Banks (COB) to delay the time within which a lender can file a foreclosure proceeding on a subprime loan for a period of up to 30 days and to suspend a foreclosure on a subprime loan based upon its review of loan information that the lender must file with the Administrative Office of the Courts pursuant to G.S. A745-103. The clerk of court must find that the loan is not subprime or, if subprime, that the COB has not delayed the time for filing the foreclosure proceeding or suspended the foreclosure based its review of the loan information.