Can a North Carolina lawyer represent the lender in a contested foreclosure when his spouse and paralegal own the corporation appointed as substitute trustee?

Plain-English summary

Attorney A formed Corporation X so it could be appointed substitute trustee on a deed of trust when a lender asked Attorney A to handle a foreclosure. Attorney A's wife and paralegal each own stock in Corporation X. The inquiry asks whether, given that ownership, Attorney A may represent the beneficiary/lender in a contested foreclosure where Corporation X is the substitute trustee.

The opinion answers no. Citing N.C. Gen. Stat. 45-21.16(c), it explains that a trustee on a deed of trust is a neutral party who, while holding that position in the foreclosure, may not advocate for the secured creditor or the debtor. Because of the conflict between the trustee's neutral, fiduciary role and the role of advocate, the opinion notes that several prior ethics opinions hold a lawyer serving as a trustee in a contested foreclosure may not represent the beneficiary or the grantor (citing 2008 FEO 11). Attorney A's indirect financial interest in Corporation X creates the appearance, if not the reality, that the corporation is his alter ego, so the trustee's neutrality would be improperly impaired unless Attorney A is barred from representing the lender in the proceeding. The opinion adds that, per 2008 FEO 11, a lawyer may represent a corporation partially owned by the firm in its capacity as trustee, but may not advocate for the lender in a contested foreclosure.

The opinion then distinguishes a different ownership structure: if the corporate trustee is a publicly traded corporation in which Attorney A's wife and paralegal own only non-controlling interests, the perceived neutrality of the trustee is not impaired and Attorney A may represent the lender in a contested foreclosure (citing RPC 83 and RPC 185).

In practice

Under the North Carolina rules as they stood at the time of the opinion, a lawyer may not advocate for the lender in a contested foreclosure where the lawyer holds an indirect financial interest, through a spouse and paralegal who own stock, in the corporation appointed substitute trustee, because that interest makes the corporation appear to be the lawyer's alter ego and impairs the trustee's statutorily required neutrality.

Per the opinion, the result turns on the ownership structure: where the corporate trustee is instead a publicly traded company in which those persons hold only non-controlling interests, the perceived neutrality is not impaired and the lawyer may represent the lender. The opinion also notes that, separate from advocacy, a lawyer may represent a corporation partially owned by the firm in its trustee capacity.

Common questions

Q: Can a lawyer represent the lender in a contested foreclosure if his spouse and paralegal own the substitute-trustee corporation?

A: No. The opinion concludes the lawyer's indirect financial interest makes the corporation appear to be his alter ego, which would improperly impair the trustee's neutrality, so he may not advocate for the lender in the proceeding.

Q: Why must the trustee stay neutral?

A: Per N.C. Gen. Stat. 45-21.16(c), the opinion explains that a deed-of-trust trustee is a neutral party who, while serving in the foreclosure, may not advocate for the secured creditor or the debtor.

Q: Is there a version of this arrangement that is permissible?

A: Yes. The opinion concludes that if the corporate trustee is a publicly traded corporation in which the wife and paralegal own only non-controlling interests, the perceived neutrality is not impaired and the lawyer may represent the lender (citing RPC 83 and RPC 185).

Q: Can the lawyer's firm be involved with the trustee corporation at all?

A: Per the opinion's reading of 2008 FEO 11, a lawyer may represent a corporation partially owned by the firm in its capacity as trustee, but may not advocate for the lender in a contested foreclosure.

Background and rules framework

The opinion does not turn on a numbered Rule of Professional Conduct; it grounds the analysis in the substitute trustee's statutory duty of neutrality under N.C. Gen. Stat. 45-21.16(c) and in prior North Carolina ethics opinions addressing the conflict between serving as a deed-of-trust trustee and advocating for a party. It treats the lawyer's indirect ownership interest as impairing the appearance and reality of that neutrality in a contested foreclosure.

Citations and references

Statutes:

• N.C. Gen. Stat. 45-21.16(c) (a deed-of-trust trustee is a neutral party and may not advocate for the secured creditor or debtor in the foreclosure)

Other opinions cited:

• NC 2008 FEO 11: a lawyer serving as trustee in a contested foreclosure may not represent the beneficiary or grantor; a lawyer may represent a corporation partially owned by the firm in its trustee capacity but may not advocate for the lender.
• NC RPC 83 and NC RPC 185: where a corporate trustee is publicly traded and the interested persons hold only non-controlling interests, the trustee's neutrality is not impaired.

See also

• ABA Formal Op. 02-426: Lawyer as Estate Fiduciary
• ABA Formal Op. 94-380: Counseling a Fiduciary

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2011-formal-ethics-opinion-5/

Original opinion text

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

Inquiry:

Attorney A forms Corporation X in order that the corporation might be appointed substitute trustee on a deed of trust when a lender asks Attorney A to handle the foreclosure. Attorney A’s wife and paralegal each own stock in Corporation X.

If Attorney A’s wife and paralegal own any interest in Corporation X, may Attorney A represent the beneficiary/lender in a contested foreclosure proceeding if Corporation X is appointed substitute trustee?

Opinion:

No. As noted in N.C. Gen. Stat. §45-21.16(c), a trustee on a deed of trust 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.” Because of the conflict between the neutral, fiduciary role of trustee and the role of advocate, a number of ethics opinions also hold that a lawyer serving as a trustee in a contested foreclosure proceeding may not represent the beneficiary or the grantor in the proceeding. 2008 FEO 11 (listing opinions). Attorney A’s indirect financial interest in Corporation X creates the appearance, if not the reality, that the corporation is the alter ego of Attorney A. Therefore, if Corporation X is appointed substitute trustee in a contested foreclosure, the neutrality of the trustee will be improperly impaired unless Attorney A is prohibited from representing the beneficiary or the lender in the proceeding. Id. (Lawyer may represent corporation partially owned by firm in its capacity as trustee but may not advocate for lender in contested foreclosure.) For an explanation of a contested foreclosure proceeding, see 2008 FEO 11.

If the corporate trustee is a publicly traded corporation in which Attorney A’s wife and paralegal own non-controlling interests, the perceived neutrality of the corporate trustee is not impaired and Attorney A may represent the lender in a contested foreclosure proceeding. See, e.g., RPC 83 and RPC 185.