Can one North Carolina lawyer represent both the borrower and the lender in a commercial real estate loan closing?

Plain-English summary

The inquiry arises from a bank policy requiring that its commercial loans be closed by bank-authorized "Bank's Counsel" who handle the entire closing, including title work and holding and disbursing funds. On Inquiry #1, the opinion concludes that in most instances a lawyer may not represent both the borrower and the lender for a commercial loan closing, even with consent. Rule 1.7(a) defines a concurrent conflict, and a commercial loan closing is an arm's length transaction with large sums, complex documents, and many chances to negotiate for each party. Citing Comment [8] to Rule 1.7, the opinion explains that a lawyer's ability to advocate all positions for one client is materially limited by the duty of loyalty to the other. Under Rule 1.7(b) the lawyer may proceed only if the conflict is consentable, which it is not where the lawyer's independent professional judgment for any client would be compromised.

The opinion contrasts residential closings, where RPC 210 permits common representation of seller, borrower/buyer, and lender once the basic terms are set and the lawyer's role is limited to title, memorializing the deal, and disbursing proceeds. A commercial loan closing differs because impartiality is rarely possible and an actual conflict, if it arises, would cause substantial prejudice. The opinion cites the Restatement (Third) of the Law Governing Lawyers, §122, and Baldasarre v. Butler (N.J.), which adopted a bright-line rule against dual representation in complex commercial real estate transactions, and Florida Bar Opinion 97-2. It then lists eight conditions under which common representation is the rare permissible exception, including that the contractual terms are finally negotiated before the representation begins, no material contingencies remain, the lawyer reasonably believes it can give competent and diligent representation and act impartially in a role limited to closing tasks, the lawyer explains that limited role and the duty to withdraw if a conflict arises, and both parties give informed consent confirmed in writing. Even then, consent may never be sought to also represent a seller who is providing secondary financing and taking a secondary deed of trust.

On Inquiry #2, the opinion concludes a lawyer may serve as the lead closing lawyer while representing only one party, either the lender or the borrower. Because title and due-diligence work benefit the lender, the lender's lawyer may perform them, citing 2004 FEO 10 and 2006 FEO 3. If the lender's lawyer is the closing lawyer, the borrower must be told that the lawyer does not represent the borrower's interests and will interpret the loan documents in the light most favorable to the lender, must be given a reasonable opportunity to retain its own counsel and not be misled about that right (RPC 40, RPC 210, Rule 4.3(a)), and the borrower's lawyer must be allowed to observe and participate as needed. If closing funds are deposited to and disbursed from the lender's lawyer's trust account in compliance with Rule 1.15, the funds should not be at risk.

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which one lawyer represents both the borrower and the lender in a commercial loan closing is, in most instances, a nonconsentable conflict that the lawyer may not undertake even with consent. Per the opinion, the analysis turns on how much negotiation and risk the deal carries: the opinion allows common representation only as a narrow exception when all eight listed conditions are met, chiefly that the terms are final, no material contingencies remain, and the lawyer can act impartially in a closing-only role with full disclosure and written consent.

The opinion holds that the alternative is single-party representation: the lender's lawyer may run the entire closing for the lender alone, provided the borrower is clearly told the lawyer does not represent it and that documents will be read in the lender's favor, is given a genuine chance to retain its own counsel under Rule 4.3(a), and the closing funds are handled through a trust account under Rule 1.15. The opinion notes it cannot eliminate every risk the borrower faces, and that the borrower's own lawyer should analyze and address remaining risks.

Common questions

Q: Can one lawyer represent both the borrower and the lender in a commercial loan closing in North Carolina?

A: Usually not. Opinion #1 holds that dual representation in a commercial loan closing is, in most instances, a nonconsentable conflict under Rule 1.7, because the negotiation and the sums involved make impartiality and curative consent unrealistic.

Q: Is there any exception that allows dual representation?

A: Only a narrow one. Opinion #1 lists eight conditions, including that the contractual terms are finally negotiated before the representation, no material contingencies remain, the lawyer can act impartially in a role limited to closing tasks, the lawyer discloses the duty to withdraw if a conflict arises, and both parties give informed consent confirmed in writing.

Q: Can the lender's lawyer handle the whole closing if the lender is the only client?

A: Yes. Opinion #2 permits the lender's lawyer to serve as the closing lawyer for the lender alone, performing title and due-diligence work, if the borrower is told the lawyer does not represent it, is given a reasonable opportunity to retain its own counsel, and is not misled about that right under Rule 4.3(a).

Q: How must the closing funds be handled if the lender's lawyer holds them?

A: Opinion #2 says that if the funds are deposited to and disbursed from the lender's lawyer's trust account in compliance with Rule 1.15, the funds should not be at risk.

Q: Can the lawyer also represent a seller who is providing secondary financing?

A: No. Opinion #1 states that consent may never be sought to represent the lender, the borrower, and a seller who will provide secondary financing and take a secondary deed of trust, because the risks to the seller are too great.

Background and rules framework

The opinion applies North Carolina Rule 1.7 (conflict of interest: current clients, the analogue of Model Rule 1.7), using Rule 1.7(a) to define the concurrent conflict and Rule 1.7(b) and Comments [2], [8], [14], and [15] to assess consentability. It contrasts the residential-closing rule of RPC 210 and draws on the Restatement (Third) of the Law Governing Lawyers, §122, and case law including Baldasarre v. Butler for the principle that some categories of dual representation are barred as a matter of law.

For single-party representation, the opinion applies Rule 4.3 (dealing with an unrepresented person, the analogue of Model Rule 4.3), specifically Rule 4.3(a), to require robust disclosure to the borrower, and Rule 1.15 (safekeeping property, the analogue of Model Rule 1.15) to govern the handling of closing funds. It relies on 2004 FEO 10, 2006 FEO 3, and RPC 40 for the closing-lawyer disclosure framework.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NC Rule 1.7 (conflict of interest: current clients; Rule 1.7(a), 1.7(b); Comments [2], [8], [14], [15])
• MR 4.3 / NC Rule 4.3(a) (dealing with an unrepresented person)
• MR 1.15 / NC Rule 1.15 (safekeeping property; trust account)

Cases:

• Baldasarre v. Butler, 625 A.2d 458 (N.J. 1993), bright-line rule against dual representation in complex commercial real estate transactions.

Other opinions cited:

• Fla. Bar Prof'l Ethics Comm., Op. 97-2 (1997): a lawyer may not represent both buyer and seller where material terms are unresolved.
• NC RPC 210: common representation in a residential real estate closing with informed consent.
• NC RPC 40, 2004 FEO 10, 2006 FEO 3: disclosure required when one lawyer serves as closing lawyer for a single party.

See also

• NY State Bar Op. 611: Representing Both Seller and Lender
• Virginia Bar Op. 1436: Lender's Attorney Advising an Unrepresented Borrower
• Alabama Bar Op. 1989-99: Representing Buyer and Seller in a Real Estate Transaction

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2013-formal-ethics-opinion-14/

Original opinion text

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

Background:

In the standard closing of a commercial loan secured by real property (a “commercial loan closing”), the borrower and the lender have separate legal counsel. The borrower’s lawyer traditionally handles most aspects of the closing including the preparation of the settlement statement as well as the collection of funds, the payoffs, and the disbursements. The borrower understands that its lawyer represents its interests alone. Unlike a residential real estate closing in which the lender’s documents can rarely be modified once entered into by the borrower/buyer, it is common in a commercial loan closing for the borrower’s lawyer to be actively involved in negotiating provisions of the commitment letter that establishes the basic terms of the mortgage, and to also negotiate specific revisions to the loan documents to address material matters such as default, disbursement of insurance proceeds, permitted transfers, and indemnification.

A large regional bank recently changed its commercial loan closing policies to require all lawyers who close commercial loans with the bank to be employed by law firms that are “authorized” by the bank to close its loans. These lawyers are designated as “Bank’s Counsel.” Bank’s Counsel is asked by the bank to handle the entire closing including the title search, title certification, and the holding and disbursing of the closing funds.

Lawyers who traditionally represent the borrower in a commercial loan closing are concerned about this policy for a number of reasons including the following:

• Having closing funds delivered to the lender’s lawyer instead of the borrower’s lawyer subjects the borrower to responsibility for the funds without the benefit of its own legal counsel’s guidance, protection, and assistance;

• Once the loan funds are committed to the borrower by the lender, they become the responsibility of the borrower. When there is separate, independent representation of the borrower, the protections of malpractice insurance and the closing protection letter are available to the borrower.

• The borrower’s recourses may be limited if closing funds are mishandled and the borrower suffers a loss in connection with Bank’s Counsel’s preparation of the closing statement and disbursement of the loan proceeds. However, when the borrower's lawyer performs the escrow and closing functions, the lender gets an insured closing letter and a legal opinion relative to authority and enforceability from the borrower's lawyer and has protection.

• Having the lender’s lawyer perform the property and business due diligence functions may result in the disclosure of confidential information relative to the borrower’s property or its business interests that would not be disclosed if the borrower’s lawyer performed these functions.

• Unless the borrower is sophisticated and instructs its lawyer to be actively involved, the borrower’s lawyer may be placed in the role of “outsider” or passive observer, which may limit the quality and scope of the representation that the borrower receives. It will also invite, notwithstanding disclosure, the perception that the lender's lawyer is looking out for the interests of all of the parties.

Inquiry #1:

May a lawyer represent both the borrower and the lender for the closing of a commercial loan secured by real property? If so, is informed consent of both the borrower and the lender required, and what information must be disclosed to obtain informed consent?

Opinion #1:

In most instances, a lawyer may not represent both the borrower and the lender for the closing of a commercial loan even with consent.

Rule 1.7 prohibits the representation of a client if the representation involves a concurrent conflict of interest unless certain conditions are met. A concurrent conflict of interest exists if the representation of one client will be directly adverse to another client or the representation of one client may be materially limited by the lawyer’s responsibilities to another client. Rule 1.7(a). The closing of a commercial loan secured by real estate is an “arm’s length” business transaction in which large sums of money are at stake, the documentation is complex, and the opportunities to negotiate on behalf of each party are numerous. As observed in the comment to Rule 1.7:

Even where there is no direct adverseness, a conflict of interest exists if a lawyer's ability to consider, recommend, or carry out an appropriate course of action for the client may be materially limited as a result of the lawyer's other responsibilities or interests. For example, a lawyer asked to represent a seller of commercial real estate, a real estate developer, and a commercial lender is likely to be materially limited in the lawyer's ability to recommend or advocate all possible positions that each might take because of the lawyer's duty of loyalty to the others. The conflict in effect forecloses alternatives that would otherwise be available to the client. The mere possibility of subsequent harm does not itself preclude the representation or require disclosure and consent. The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.

Rule 1.7, cmt. [8].

Rule 1.7(b) allows a lawyer to proceed with a representation burdened with a concurrent conflict of interest, but only if the lawyer determines that the representation of all of the affected clients will be competent and diligent and each affected client gives informed consent. In other words, the lawyer must decide whether the conflict is “consentable.” Rule 1.7, cmt. [2]. If the lawyer’s exercise of independent professional judgment on behalf of any client will be compromised, the conflict is not consentable. As noted in the comment to Rule 1.7:

[S]ome conflicts are nonconsentable, meaning that the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent...Consentability is typically determined by considering whether the interests of the clients will be adequately protected if the clients are permitted to give their informed consent to representation burdened by a conflict of interest...[R]epresentation is prohibited if in the circumstances the lawyer cannot reasonably conclude that the lawyer will be able to provide competent and diligent representation.

Rule 1.7, cmt.[14]-[15]. Although deleted from the comment to Rule 1.7 when the Rules of Professional Conduct were comprehensively revised in 2003, the following is an excellent test for determining whether a conflict is “consentable”: “when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent.” Rule 1.7, cmt. [5] (2002).

In RPC 210, the Ethics Committee held that a lawyer may represent the seller, borrower/buyer, and lender in a residential real estate closing with the informed consent of all of the parties. Even so, the opinion includes the following cautionary language:

A lawyer may reasonably believe that the common representation of multiple parties to a residential real estate closing will not be adverse to the interests of any one client if the parties have already agreed to the basic terms of the transaction and the lawyer's role is limited to rendering an opinion on title, memorializing the transaction, and disbursing the proceeds. Before reaching this conclusion, however, the lawyer must determine whether there is any obstacle to the loyal representation of both parties. The lawyer should proceed with the common representation only if the lawyer is able to reach the following conclusions: he or she will be able to act impartially; there is little likelihood that an actual conflict will arise out of the common representation; and, should a conflict arise, the potential prejudice to the parties will be minimal.

A commercial loan closing is substantially different from a residential closing in which there is little opportunity to negotiate on behalf of the borrower/buyer once the purchase contract and loan commitment letter are signed. In a commercial loan closing, there are numerous opportunities for a lawyer to negotiate on behalf of the parties, so impartiality is rarely possible. There are also numerous opportunities for an actual conflict to arise between the borrower and the lender and, if a conflict does arise, the prejudice to the parties would be substantial. Therefore, common representation in a commercial loan closing is, in most instances, a “nonconsentable” conflict, meaning that a lawyer may not ask the borrower and the lender to consent to common representation. Restatement (Third) of The Law Governing Lawyers, §122, Comment g(iv), cites decisions in which the court denied the possibility of client consent as a matter of law in certain categories of cases. These decisions include Baldasarre v. Butler, 625 A. 2d 458 (N.J. 1993), in which the Supreme Court of New Jersey observed:

This case graphically demonstrates the conflicts that arise when an attorney, even with both clients’ consent, undertakes the representation of the buyer and the seller in a complex commercial real estate transaction. The disastrous consequences of [the lawyer’s] dual representation convinces us that a new bright-line rule prohibiting dual representation is necessary in commercial real estate transactions where large sums of money are at stake, where contracts contain complex contingencies, or where options are numerous. The potential for conflict in that type of complex real estate transaction is too great to permit even consensual dual representation of buyer and seller. Therefore, we hold that an attorney may not represent both the buyer and seller in a complex commercial real estate transaction even if both give their informed consent.

635 A. 2d at 467. See also Fla. Bar. Prof’l Ethics Comm., Op. 97-2 (1997)(lawyer may not represent both buyer and seller in closing of sale of business where material terms of contract have not been agreed to or discussed by parties).

In summary, dual representation of the borrower and the lender for the closing of a commercial real estate loan is a nonconsentable conflict of interest unless the following conditions can be satisfied: (1) the contractual terms have been finally negotiated prior to the commencement of the representation; (2) there are no material contingencies to be resolved; (3) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (4) it is unlikely that a difference in interests will eventuate and, if it does, it will not materially interfere with the lawyer’s independent professional judgment in considering alternatives or foreclose courses of action that should be pursued on behalf of a client; (5) the lawyer reasonably concludes that he will be able to act impartially in the representation of both parties; (6) the lawyer explains to both parties that his role is limited to executing the tasks necessary to close the loan and that this limitation prohibits him from advocating for the specific interests of either party; (7) the lawyer discloses that he must withdraw from the representation of both parties if a conflict arises; and (8) after the foregoing full disclosure, both parties give informed consent confirmed in writing.

Regardless of the above conditions allowing common representation of the borrower and lender, consent may never be sought to represent the lender, the borrower, and the seller of real property if the seller will provide secondary financing for the transaction and accept a secondary deed of trust. In this situation, the risks to the interests of the seller are too great to permit a lawyer to seek consent to common representation.

Inquiry #2:

The bank intends for Bank’s Counsel to represent only the bank (lender) but to handle all aspects of the closing.

May a lawyer represent only the lender but handle all aspects of a commercial loan closing including the title search, title certification, marshalling the necessary documents, and holding and disbursing of the closing funds? If so, what information must be disclosed by Bank’s Counsel to the borrower relative to the role of Bank’s Counsel?

Opinion #2:

Yes, a lawyer may be the lead lawyer for the closing (“the closing lawyer”) provided the lawyer represents only one party—either the lender or the borrower. Because the title work and other due diligence are for the benefit of the lender, there is no prohibition on the lender’s lawyer performing these tasks. See 2004 FEO 10 (because buyer is the intended beneficiary of the deed although not a signatory, buyer’s lawyer may prepare deed without creating a lawyer-client relationship with seller). However, if the closing lawyer represents the lender, certain conditions must be satisfied.

In 2006 FEO 3, the Ethics Committee considered whether a lawyer may represent a lender on the closing of the sale to a third party of property acquired by the lender as result of foreclosure by execution of the power of sale in the deed of trust on the property. The opinion holds (among other things) that a lawyer may serve as the closing lawyer and limit his representation to the lender/seller if there is disclosure to the buyer:

Attorney A must fully disclose to Buyer that [the lender/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, [the lender/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.

Consistent with the holding in 2006 FEO 3, in a commercial loan closing, the lender’s lawyer may serve as the closing lawyer provided the borrower is informed that the closing lawyer will not represent its interests and will interpret loan documents in the light that is most favorable to the lender; the borrower is given a reasonable opportunity to retain its own counsel and is not mislead as to its right to do so; the lawyers for both parties advise their clients about the risks and benefits of a having the lender’s lawyer serve as the closing lawyer; and the borrower’s lawyer is allowed to observe and participate in the transaction to the extent necessary to protect the borrower’s interests.

This opinion cannot address all of the concerns expressed in the Background section above relative to the additional risks to the borrower if the lawyer for the closing is the lender’s lawyer. However, if the closing funds are deposited to and disbursed from the trust account of the lender’s lawyer in accordance with the requirements of the trust accounting rule, Rule 1.15, the funds should not be at risk. To the extent that there are other risks to the interests of the borrower, the borrower’s lawyer must analyze those risks and advise the borrower about steps that may be taken to minimize the risks including negotiating with the lender’s lawyer for aspects of the closing to be handled by the borrower’s lawyer.