Can a lawyer who regularly represents a lender represent a debtor in a Chapter 13 bankruptcy where that lender is a creditor?

Plain-English summary

A lawyer regularly represents a lender in various matters, though not on the lender's loan to a particular borrower. The lender holds first-priority deeds of trust on the borrower's residence and commercial building and a first-priority lien on his vehicle. The borrower asks the lawyer to represent him in an individual Chapter 13 bankruptcy in which the lawyer would have to review whether the lender's and other creditors' security interests are valid and enforceable. The question is whether the lawyer may take the bankruptcy representation if both the lender and the borrower consent.

The opinion answers that the lawyer may proceed only if he reasonably believes he can provide competent and diligent representation to the borrower in the bankruptcy while adequately protecting the lender's interests in the matters where he represents the lender, and only with both clients' informed consent confirmed in writing. Because the lawyer currently represents the lender, he has a concurrent conflict of interest under Rule 1.7(a): Comment [6] provides that absent consent a lawyer may not act as an advocate in one matter against a person the lawyer represents in another matter, even wholly unrelated, because the client opposed may feel betrayed and the client on whose behalf the adverse representation is undertaken may fear the lawyer will pursue the case less effectively out of deference to the other client.

For consent to cure the conflict, the lawyer must have a reasonable basis to believe he can provide competent and diligent representation to both clients. The opinion notes the limits in Rule 1.7's comments: it is improper to represent one client asserting a claim against another in the same litigation even with consent (Comment [17]), and consent is irrelevant where a rule, statute, or decision forbids the dual representation (Comment [16]). Here the lender's and debtor's interests are adverse on the validity of the security interests, but the lawyer would represent the debtor only in the bankruptcy; if he concludes he can adequately protect both, he may seek the clients' informed consent, and if he cannot, he must decline (Rule 1.7(b)). The opinion explains, under Rule 1.0(f), that informed consent requires communicating adequate information appropriate to the circumstances, conveyed in a manner suited to each client's sophistication, with more disclosure required for an unsophisticated individual client; the client's mere knowledge of the other representation is not sufficient disclosure. The opinion adds that the lawyer may also represent the debtor in negotiating an extension of the loan's maturity date and in seeking bankruptcy court approval of a refinancing agreement, on the same Rule 1.7 analysis.

In practice

Under the North Carolina rule as it stood at the time of the opinion, a lawyer who currently represents a lender faces a concurrent conflict under Rule 1.7(a) when asked to represent a debtor against that lender, even on an unrelated matter (Comment [6]). Per the opinion, the lawyer may take the bankruptcy representation only if he reasonably believes he can competently and diligently represent the debtor while adequately protecting the lender's interests, and only with both clients' informed consent confirmed in writing; if he cannot reasonably so conclude, he must decline (Rule 1.7(b)).

Per the opinion, informed consent under Rule 1.0(f) requires conveying enough information for each client to make an informed decision (why the interests are adverse, how the representation may be affected, the risks, and the alternatives), tailored to each client's level of sophistication; mere knowledge that the lawyer also represents the other party is not enough. The same analysis governs representing the debtor in negotiating or seeking court approval of a loan-maturity extension.

Common questions

Q: Can I represent a bankruptcy debtor when one of the creditors is a client of mine?

A: Only with both clients' informed consent confirmed in writing, and only if you reasonably believe you can competently and diligently represent the debtor while adequately protecting the lender's interests. The opinion treats this as a concurrent conflict under Rule 1.7(a).

Q: Why is it a conflict if I do not represent the lender on this particular loan?

A: Per Comment [6] to Rule 1.7, the opinion explains that absent consent a lawyer may not act as an advocate against a current client even in a wholly unrelated matter, because of the risk of perceived betrayal and divided loyalty.

Q: Is the client's knowledge that I also represent the lender enough?

A: No. The opinion concludes that under Rule 1.0(f) informed consent requires adequate information and explanation appropriate to the circumstances, and that the client's mere knowledge of the other representation is not sufficient disclosure.

Q: When must I decline the bankruptcy representation outright?

A: When you cannot reasonably conclude that both clients' interests would be adequately protected if you represent the debtor; the opinion holds the representation must then be declined (Rule 1.7(b)). Consent also cannot cure representing one client asserting a claim against another in the same litigation (Comment [17]).

Background and rules framework

The opinion applies North Carolina Rule 1.7 (concurrent conflicts of interest), including Comments [6], [16], and [17], and Rule 1.0(f) (definition of informed consent). These are the North Carolina analogues of Model Rules 1.7 and 1.0. The analysis turns on whether the lawyer can satisfy the Rule 1.7(b) conditions for a consentable conflict: a reasonable belief in competent and diligent representation of each affected client and informed consent confirmed in writing.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NC Rule 1.7(a), (b), Comments [6], [16], [17] (concurrent conflicts; advocacy against a current client; conditions for a consentable conflict)
• MR 1.0 / NC Rule 1.0(f) (definition of informed consent)

See also

• ABA Formal Op. 05-436: Advance Waiver of Conflicts
• NC State Bar 2011 FEO 5: Foreclosure Trustee Conflict
• NC State Bar 2012 FEO 4: Screening a Lateral Hire

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2009-formal-ethics-opinion-11/

Original opinion text

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

Inquiry #1:

Lawyer regularly represents Lender in various matters. Lawyer is approached by Client to represent Client in an individual Chapter 13 bankruptcy. Lender has made a loan to Client. To secure the repayment of the loan, Lender holds a first priority deed of trust on Client's residence, a first priority deed of trust on Client's commercial building, and a first priority lien on Client's vehicle. Lawyer currently represents Lender in other matters, but not with regard to the indebtedness of Client to Lender.

As the lawyer for Client in the Chapter 13 bankruptcy, Lawyer will be responsible for reviewing documentation to determine whether Lender and other secured creditors have valid and enforceable security interests in or liens on Client's property. May Lawyer undertake the representation of Client in the Chapter 13 bankruptcy if Lender and Client consent?

Opinion #1:

Lawyer may undertake the representation of Client if Lawyer reasonably believes that he will be able to provide competent and diligent representation to Client in the bankruptcy action, while adequately protecting Lender's interests in those actions or matters where Lawyer represents Lender. Both Client and Lender must give their informed consent to the representation, confirmed in writing.

Because Lawyer currently represents Lender, Lawyer has a concurrent conflict of interest in representing Client in a bankruptcy action in which Lender is a creditor. See Rule 1.7(a). Comment [6] to Rule 1.7 provides that "absent consent, a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated." Consent is necessary because the client as to whom the representation is adverse may feel betrayed, and the resulting damage to the client-lawyer relationship could impair the lawyer's ability to represent the client effectively. On the other hand, the client on whose behalf the adverse representation is undertaken may fear that the lawyer will pursue that client's case less effectively out of deference to the other client.

For client consent to cure the conflict, the lawyer must have a reasonable basis for believing that he will be able to provide competent and diligent representation to both clients. It is improper to represent one client asserting a claim against another in the same litigation, even with informed consent. See Rule 1.7, cmt. [17]. Also, if a specific rule, statute, or decision forbids dual representation in the particular context, client consent is irrelevant. See Rule 1.7, cmt. [16]. Outside these situations, the lawyer must evaluate objectively whether he will be able to provide competent representation to both clients. The lawyer should consider whether a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances.

In the instant scenario, the interests of the lender and the debtor are adverse. Lender would benefit if Lawyer determines that Lender's deeds of trust and liens are valid and enforceable. Conversely, Debtor would benefit from an opposite finding. However, Lawyer would only be representing the debtor in this particular action. If Lawyer concludes that he would be able to provide competent and diligent representation to Client in the bankruptcy action, while adequately protecting Lender's interests in those actions or matters where Lawyer represents Lender, Lawyer may seek the clients' informed consent to the bankruptcy representation. If Lawyer cannot reasonably conclude that the interests of both clients would be adequately protected if he represents Client in the bankruptcy action, Lawyer must decline the representation. See Rule 1.7(b).

Pursuant to Rule 1.0(f), "informed consent" denotes the "agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation appropriate to the circumstances." A lawyer must provide enough information for his client to make an informed decision, such as why the interests are adverse, how the representation may be affected, what risks are involved, and what other options are available. The information should be conveyed to each client in a manner consistent with the clients' level of sophistication. When a lawyer is seeking consent from an unsophisticated individual client, more disclosure and explanation will be required. The client's mere knowledge of the existence of the lawyer's other representation will not constitute sufficient disclosure.

Inquiry #2:

Lawyer regularly represents Lender in various matters. Lender has made a loan to Client. To secure the repayment of the loan, Lender holds a first priority deed of trust on Client's residence, a first priority deed of trust on Client's commercial building, and a first priority lien on Client's vehicle. Lawyer currently represents Lender in other matters, but not with regard to the indebtedness of Client to Lender.

Lawyer is approached by Client to represent Client in an individual Chapter 13 bankruptcy. The loan from Lender to Client has matured and Client wants to extend the maturity date of the loan. May Lawyer represent Client in negotiations with Lender?

Opinion #2:

Yes. See Opinion #1.

Inquiry #3:

May Lawyer represent Client as to the extension of the maturity date of the loan if Client and Lender reach an agreement for an extension without Lawyer's involvement? If so, may Lawyer file a motion seeking bankruptcy court approval of a refinancing agreement between Client and Lender in order to extend the maturity date of the loan, and then represent Client at the hearing on the motion?

Opinion #3:

Yes. See Opinion #1.