After serving as the substitute trustee in a foreclosure and receiving confidential information from the unrepresented borrower, may a North Carolina lawyer later represent the lender in related litigation?

Plain-English summary

A lawyer's firm served as the substitute trustee in a foreclosure brought by a lender against a borrower (an LLC whose member-manager was inexperienced and unrepresented). While the firm was trustee, the member-manager met with the lawyer, explained the borrower's theory that the lender had not met a clean-and-clear condition, and showed the lawyer supporting pictures and documents. The lawyer did not explain the trustee's role. The foreclosure was later dismissed, litigation followed on the same clean-and-clear issue, and a new substitute trustee was appointed. The question is whether the lawyer may now represent the lender in that lawsuit.

The opinion starts from the general rule that former service as a foreclosure trustee does not, by itself, disqualify a lawyer from later taking a partisan role in the foreclosure or related litigation, citing RPC 90 (a lawyer-trustee may resign after the foreclosure is contested and act as lender's counsel) and RPC 64. But RPC 90 contemplates that the trustee resigns when it becomes apparent the foreclosure will be contested. Here the lawyer continued as trustee after he knew the foreclosure was contested and obtained information from the borrower specifically related to the issue in controversy.

The opinion explains that a lawyer-trustee's responsibilities arise primarily from fiduciary duties as trustee, not from a client-lawyer relationship (RPC 82), and that the trustee must act impartially between the parties. Because the trustee's role may be unclear to an unsophisticated, unrepresented party, the lawyer-trustee must explain to such a party that the trustee's role is to ensure correct procedures are impartially followed, that the trustee represents neither lender nor borrower, and that communications to the trustee will not be held in confidence and may be used or disclosed in later actions. Because the lawyer here failed to explain those limits and the member-manager reasonably assumed his disclosures were confidential, the lawyer may not later represent the lender in a substantially related matter if the borrower's information is material; doing so would be conduct prejudicial to the administration of justice under Rule 8.4(d). The borrower's informed consent confirmed in writing would, however, permit the representation (Rule 1.7(b)).

In practice

Under the North Carolina rules as they stood at the time of the opinion, a lawyer who served as a foreclosure trustee may represent the lender in later related litigation only if he resigned as trustee on recognizing that the foreclosure would be contested and did not receive information that could be used to the borrower's disadvantage. Per the opinion, the operative duty is the lawyer-trustee's obligation to explain his impartial role to an unrepresented, inexperienced party: that the trustee is neutral, represents neither side, and will not keep their communications confidential.

Per the opinion, where the lawyer-trustee failed to give that explanation and received material confidences from the borrower, later representing the lender in a substantially related matter is conduct prejudicial to the administration of justice under Rule 8.4(d), curable only by the borrower's informed consent confirmed in writing under Rule 1.7(b).

Common questions

Q: Can a lawyer who served as the foreclosure trustee later represent the lender in litigation over the same foreclosure?

A: Generally yes, if the lawyer resigned as trustee when the foreclosure became contested and did not receive information usable against the borrower. The opinion cites RPC 90 and RPC 64 that former trustee service does not, by itself, disqualify a lawyer from later taking a partisan role.

Q: What must a lawyer-trustee tell an unrepresented borrower?

A: The opinion states the lawyer-trustee must explain to any unrepresented, inexperienced party that the trustee's role is to ensure correct procedures are impartially followed, that the trustee represents neither lender nor borrower, and that communications to the trustee will not be held in confidence and may be used or disclosed in later actions.

Q: What happens if the lawyer-trustee took the borrower's confidences without that explanation?

A: The opinion concludes the lawyer may not later represent the lender in a substantially related matter if the information received is material; doing so would be conduct prejudicial to the administration of justice under Rule 8.4(d).

Q: Can the borrower consent to let the lawyer represent the lender anyway?

A: Yes. The opinion states the borrower's informed consent, confirmed in writing, would permit the lawyer to proceed, citing Rule 1.7(b).

Background and rules framework

The opinion applies Rule 8.4(d) (conduct prejudicial to the administration of justice) and Rule 1.7(b) (informed written consent to a conflict of interest, the analogue of Model Rule 1.7), against the backdrop of a lawyer's fiduciary duties when serving as a foreclosure trustee. Those fiduciary duties, and the requirement of impartiality between lender and borrower, come from prior North Carolina authority rather than from a client-lawyer relationship.

The opinion relies on RPC 82 (a lawyer-trustee's duty to act impartially), RPC 90 and RPC 64 (a former trustee may take a partisan role after the foreclosure is contested), to frame both the general permission and its limit.

Citations and references

Rules of Professional Conduct:

• MR 8.4 / NC Rule 8.4(d) (conduct prejudicial to the administration of justice)
• MR 1.7 / NC Rule 1.7(b) (informed consent to a conflict, confirmed in writing)

Other opinions cited:

• NC RPC 90: a lawyer-trustee may resign when the foreclosure is contested and then act as lender's counsel.
• NC RPC 64: a lawyer who served as trustee may, after foreclosure, sue the former debtor on a purchaser's behalf.
• NC RPC 82: a lawyer-trustee's duties arise from fiduciary obligations and require impartiality between the parties.

See also

• NC State Bar 2013 FEO 4: Representing a Buyer of Foreclosed Property
• AL Ethics Op. 1989-99: Representing Both Buyer and Seller

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2013-formal-ethics-opinion-5/

Original opinion text

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

Inquiry:

Lender requests that Lawyer’s Firm serve as the substitute trustee under a note and deed of trust to commence foreclosure proceedings based on an alleged event of default. Borrower under the note and deed of trust is a limited liability company. While Firm is acting as substitute trustee, Borrower’s member-manager meets with Lawyer and explains to Lawyer why he believes Borrower is not in default. Borrower is a small business and its member-manager is inexperienced in matters requiring legal representation.

During the meeting with the member-manager, Lawyer did not explain the role of the trustee or the trustee’s relationship to the borrower and lender in a foreclosure. The member-manager informed Lawyer that Borrower’s theory is that the note required the subject property to be cleaned and cleared, and Borrower does not believe this condition was met. Borrower’s member-manager shows Lawyer pictures and other documents supporting Borrower’s theory of the case during this meeting.

The foreclosure proceeding is subsequently dismissed and superior court litigation between Borrower and Lender ensues. A new substitute trustee is appointed under the deed of trust. The primary issue in the lawsuit is the same issue Lawyer and the member-manager of Borrower discussed at their meeting while Firm was substitute trustee, i.e. whether Lender fulfilled its obligations under the note to clean and clear the property.

Now that Firm is no longer the substitute trustee, may Lawyer represent Lender in the lawsuit?

Opinion:

RPC 90 provides that a lawyer who as trustee initiated a foreclosure proceeding may resign as trustee after the foreclosure is contested and act as lender's counsel. The opinion notes that former service as a trustee does not disqualify a lawyer from subsequently assuming a partisan role in regard to foreclosure under a deed of trust or related litigation. See also RPC 64 (lawyer who served as trustee may after foreclosure sue the former debtor on behalf of the purchaser).

The facts of RPC 90 contemplate that the trustee resigns “when it becomes apparent that the foreclosure will be contested.” In the instant matter, it appears that Lawyer continued to participate as trustee in the foreclosure after he knew that it was contested. Lawyer met with the member-manager of Borrower and discussed Borrower’s theory as to the issue of default. Lawyer obtained information from the member-manager specifically related to the issue in controversy.

The responsibilities and limitations of a lawyer acting as trustee on a deed of trust arise primarily from the lawyer's fiduciary duties as trustee as opposed to any client-lawyer relationship. RPC 82. As a fiduciary, a lawyer/trustee has a duty to act impartially as between the parties and to ensure that the foreclosure is prosecuted in accordance with the law and the terms of the deed of trust. See RPC 82. However, the trustee’s role may be unclear to an unsophisticated consumer of legal services who is unrepresented in the foreclosure. This may lead this party to make uncounseled disclosures to the lawyer/trustee on the erroneous assumption that the lawyer represents the party and has a duty of confidentiality to the party. Therefore, it is the lawyer/trustee’s duty to explain the following to any party to a foreclosure that is unrepresented by counsel and inexperienced in the employment of lawyers or the mechanics of a foreclosure proceeding:

• the trustee’s role is to ensure that the correct procedures are impartially followed in the prosecution of the foreclosure proceeding;

• the trustee does not represent either the lender or the borrower; and

• communications made by the lender or the borrower to the trustee will not be held in confidence and may be used or disclosed in subsequent actions between the lender and the borrower.

Lawyer failed to explain these limitations on the trustee’s role to the member-manager of the LLC, which was unrepresented and apparently inexperienced in the mechanics of a foreclosure proceeding. The member-manager reasonably assumed that the disclosures he made to Lawyer would be held in confidence. Because Lawyer, in his fiduciary capacity, encouraged or allowed Borrower to confide in him without explaining the trustee’s role or warning Borrower that the information could be disclosed or used, Lawyer may not subsequently represent Lender in a subsequent substantially related matter if the information Lawyer received from Borrower is material to the matter. Such a practice would constitute conduct that is prejudicial to the administration of justice. See Rule 8.4(d). However, Borrower’s informed consent, confirmed in writing, would permit Lawyer to proceed with the representation. See Rule 1.7(b).

A lawyer/trustee may represent a lender against a borrower in a subsequent proceeding if the lawyer resigns as trustee upon recognizing that the foreclosure will be contested and the lawyer has not received information that may be used to the disadvantage of Borrower in the subsequent matter.