In back-to-back A-to-B and B-to-C residential closings handled by one North Carolina lawyer, can the lawyer represent both B and C, and can the lawyer use C's funds to fund B's purchase?

Plain-English summary

The opinion addresses a "flip" closing: record owner A sells to B for $80,000 and B sells to end buyer C for $100,000 on the same day, with C's money funding B's purchase from A and B providing no independent funds. One lawyer would close both transactions, representing B and C but not A, and serving as settlement agent. The opinion analyzes nine inquiries about whether the lawyer may take on these representations and how the funds may move.

On the conflict, the opinion concludes the scenario presents a concurrent conflict under Rule 1.7(a): the lawyer's representation of C may be materially limited by responsibilities to B, and vice versa. To represent C competently and diligently, the lawyer would have to disclose all material facts about the transactions, including that B does not own the property, that C's money will fund B's purchase from A, and the lower price at which B is buying from A (which bears on market value). Some of those facts are B's confidential information protected by Rule 1.6, and B may not want them disclosed. So the lawyer cannot represent C unless B consents to full disclosure to C and the other Rule 1.7(b) conditions are met, including each affected client's informed consent confirmed in writing. The answer does not change if the lawyer claims to represent only B in the A-to-B leg and only C in the B-to-C leg; the conflict still exists (Inquiry #2). If the lawyer cannot represent C, whether the lawyer may proceed for B alone depends on whether C is a prospective client (Rule 1.18) or former client (Rule 1.9) and whether the duty not to use or reveal C's information materially limits the representation of B (Inquiry #3).

On the funds, the opinion concludes the lawyer may not use C's funds to fund B's purchase from A without C's knowledge, informed consent, and an appropriate legal arrangement (such as a promissory note); doing otherwise is a misappropriation of C's funds violating Rule 1.15-2(n) and Rule 8.4(b) and (c). The lawyer cannot disburse closing funds until the deed is recorded (Johnson v. Schultz; N.C. Gen. Stat. §§ 45A-2, -4), and the recording sequence means B is not entitled to C's funds until the B-to-C deed is recorded, which cannot occur before the A-to-B deed (Inquiry #4). The lawyer also may not jointly represent B and C to create or document an arrangement giving B early entitlement to C's funds, because negotiating that arrangement is a nonconsentable conflict under Rule 1.7 (Inquiry #5). The opinion flags additional concerns, including possible assistance with a criminal offense or dishonesty in the title opinion or settlement statements (Rules 1.2(d), 8.4(a)-(c); various state and federal statutes) (Inquiry #6), and details the accountings owed to A, B, and C under Rule 1.15-3(e) and (f) (Inquiry #7). The assignment variation in Inquiry #8 and the three-party representation in Inquiry #9 raise the same issues: the lawyer must be able to disclose all material information to C and be forthright and accurate with all parties.

In practice

Under this opinion, a North Carolina lawyer handling contemporaneous A-to-B and B-to-C residential closings faces a concurrent conflict under Rule 1.7(a), and may represent both B and C only if B consents to disclosing to C all facts about the A-to-B transaction and the Rule 1.7(b) conditions (including written informed consent) are met; if the lawyer cannot make those disclosures because of confidentiality owed to B, the lawyer cannot obtain C's informed consent and cannot represent C. Splitting the representation by leg does not cure the conflict. The lawyer may not use C's funds to fund B's purchase before the B-to-C deed is recorded without C's informed consent and an appropriate legal arrangement, because premature use is a misappropriation under Rule 1.15-2(n) and Rule 8.4(b) and (c). The lawyer may not jointly represent B and C to negotiate or draft an arrangement advancing C's funds to B (a nonconsentable Rule 1.7 conflict), must ensure all title work and settlement statements are accurate, and must provide the accountings owed to A, B, and C under Rule 1.15-3(e) and (f).

Common questions

Q: Can one North Carolina lawyer represent both the middle buyer (B) and the end buyer (C) in a same-day flip closing?

A: Only with full disclosure and consent. Opinion #1 concludes this is a Rule 1.7(a) conflict; the lawyer may represent both only if B consents to disclosing to C all facts about the A-to-B transaction (including that B does not yet own the property and the price B paid) and the Rule 1.7(b) conditions, including written informed consent, are met.

Q: Does it help if the lawyer says he represents B only on the first deal and C only on the second?

A: No. Opinion #2 concludes the concurrent conflict under Rule 1.7(a)(2) still exists even if the lawyer purports to represent B only in the A-to-B transaction and C only in the B-to-C transaction.

Q: Can the lawyer use the end buyer's money to fund the middle buyer's purchase?

A: Not without consent and an arrangement. Opinion #4 concludes that using C's funds for B's benefit without C's knowledge, informed consent, and an appropriate legal arrangement (such as a promissory note) is a misappropriation of C's funds under Rule 1.15-2(n) and Rule 8.4(b) and (c), and the lawyer cannot disburse until the applicable deed is recorded.

Q: If the lawyer can't represent C, can he just represent B?

A: It depends. Opinion #3 concludes that C may be a prospective client (Rule 1.18) or former client (Rule 1.9); the lawyer may not reveal or use C's information against C, and if that prohibition materially limits the representation of B, the lawyer cannot represent B under Rule 1.7 unless an exception or C's written informed consent applies.

Q: What accountings does the lawyer owe?

A: Per Opinion #7, accountings are due to A, B, and C under Rule 1.15-3(e) and (f), including client ledgers and written settlement statements showing receipt and disbursement of funds (including C's funds used in the A-to-B transaction) and each seller's proceeds.

Background and rules framework

The opinion interprets North Carolina Rule 1.7 (concurrent conflicts; 1.7(a) and the 1.7(b) conditions for consentable conflicts, including written informed consent), Rule 1.0 (defining informed consent), Rule 1.6 (confidentiality of B's information), Rule 1.18 (duties to a prospective client) and Rule 1.9 (duties to a former client), Rule 1.15-2 and Rule 1.15-3 (handling and accounting for entrusted funds; misappropriation), and Rules 1.2(d) and 8.4(b)-(c) (assisting crime; dishonesty). These correspond to ABA Model Rules 1.7, 1.0, 1.6, 1.18, 1.9, 1.15, 1.2, and 8.4. The opinion relies on prior NC opinions 2013 FEO 4 and 2013 FEO 14 (joint representation in real estate transactions), 97 FEO 8, RPC 210, 2009 FEO 7, and 99 FEO 9. It applies the good-funds and recording statutes N.C. Gen. Stat. §§ 45A-2, -3, -4, -8, the case Johnson v. Schultz, and several criminal statutes (N.C. Gen. Stat. §§ 14-118.12, -118.15; 93A-1, -8; 18 U.S.C. §§ 1001, 1014, 1344).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.7 / NC Rule 1.7(a), (b) (concurrent conflicts; conditions for consent)
• Model Rule 1.0 / NC Rule 1.0 (informed consent; Comment [6])
• Model Rule 1.6 / NC Rule 1.6 (confidentiality)
• Model Rule 1.18 / NC Rule 1.18 and Model Rule 1.9 / NC Rule 1.9 (prospective and former clients)
• Model Rule 1.15 / NC Rule 1.15-2, 1.15-3 (handling and accounting for entrusted property; misappropriation)
• Model Rule 8.4 / NC Rule 8.4(b), (c) and Rule 1.2(d) (assisting crime; dishonesty)

Statutes and cases:

• N.C. Gen. Stat. §§ 45A-2, -3, -4, -8 (good-funds settlement; disbursement; accounting)
• N.C. Gen. Stat. §§ 14-118.12, -118.15; 93A-1, -8; 18 U.S.C. §§ 1001, 1014, 1344 (fraud-related statutes)
• Johnson v. Schultz, 195 N.C. App. 161 (2009), aff'd, 364 N.C. 90 (2010) (no disbursement before recording)

Other opinions cited:

• 2013 FEO 4; 2013 FEO 14 (joint representation in real estate transactions)
• 97 FEO 8; RPC 210 (concurrent conflicts; obstacle to loyal representation)
• 2009 FEO 7; 99 FEO 9 (disbursement and entrusted-funds handling)

See also

• Alabama Ethics Op. 1989-99: Representing Buyer and Seller in a Real Estate Transaction
• FL Bar Op. 97-2: Attorney as Closing Agent for Both Buyer and Seller

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2021-formal-ethics-opinion-1/

Original opinion text

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

Facts:

Residential real property is owned by record owner A. The property is to be conveyed from record owner A to B and from B to end buyer C on the same day. The sales price for the A to B transaction is $80,000. The sales price for the B to C transaction is $100,000. The money provided by C would be utilized by B to make B’s purchase from A; B would provide no independent funding. One lawyer, Lawyer, would close both the A to B and B to C transactions. Lawyer would represent B and C; Lawyer would not represent A. Lawyer would be the settlement agent for the closings.

Inquiry #1:

Can Lawyer represent B and C in these transactions?

Opinion #1:

This scenario presents a concurrent conflict of interest under Rule 1.7(a). Lawyer’s representation of C may be materially limited by Lawyer’s responsibilities to B, and vice versa. See Rule 1.7(a)(2); 2013 FEO 4; 97 FEO 8; RPC 210.

Rule 1.7(b) articulates the circumstances under which a lawyer may represent a client notwithstanding the existence of a concurrent conflict of interest. One requirement is that the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client. Rule 1.7(b)(1).

In assessing whether a representation burdened by a concurrent conflict of interest might be permissible, the lawyer “must consider ‘whether there is any obstacle to the loyal representation of both parties.’” 97 FEO 8, quoting RPC 210. As discussed in 2013 FEO 4 in the context of joint representation of a buyer and a seller in a residential real estate transaction:

[T]he lawyer has a duty to ensure that he can comply with Rule 1.7 prior to accepting joint representation of the buyer and seller. When contemplating joint representation, a lawyer must consider whether the interests of the parties will be adequately protected if they are permitted to give their informed consent to the representation, and whether an independent lawyer would advise the parties to consent to the conflict of interest. Representation is prohibited if the lawyer cannot reasonably conclude that he will be able to provide competent and diligent representation to all clients. See Rule 1.7, cmt. [15].

To provide competent and diligent representation to C, Lawyer would need to disclose to C all material facts known to Lawyer about the transactions and advise C with respect to all of the facts and circumstances concerning the transactions. See 97 FEO 8, Opinions #4 and #5.

Matters about which Lawyer would need to communicate with C include:

1. That B does not own the property and whether the contract entered into between B and C for the sale of the property is valid;

2. That C’s money will be used by B to purchase the property from A, for which C’s informed consent would need to be given (see Opinion #4 below); and

3. The price at which B is purchasing the property from A, which is a fact that may not otherwise be known by C and might bear upon the true market value of the property and/or whether C would consider it in C’s best interest to proceed. See, e.g., 97 FEO 8 and Opinion #4.

Certain of these facts will be confidential information known to Lawyer from his representation of B and protected from disclosure under Rule 1.6. Certain of these facts may be matters B does not want disclosed to C or may involve information the disclosure of which would harm B’s interests, which Lawyer must consider in determining whether Lawyer can provide competent and diligent representation to both B and C.

Lawyer cannot represent C unless B consents to the disclosure to C of all facts regarding the A to B transaction and the conditions of Rule 1.7(b) are otherwise met. See 2013 FEO 4; 97 FEO 8, Opinions #4 and #5.

Another of the conditions in Rule 1.7(b) on representation notwithstanding a concurrent conflict of interest is that the lawyer obtain any affected client’s informed consent to the representation confirmed in writing. Informed consent is defined in Rule 1.0 as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation appropriate to the circumstances.” Comment [6] to Rule 1.0 states that, to obtain informed consent, a lawyer

must make reasonable efforts to ensure that the client or other person possesses information reasonably adequate to make an informed decision. Ordinarily this will require communication that includes a disclosure of the facts and circumstances giving rise to the situation, any explanation reasonably necessary to inform the client or other person of the material advantages and disadvantages of the proposed course of conduct and a discussion of the client’s or other person’s options and alternatives.

Lawyer would need to obtain informed consent from both B and C. To obtain informed consent from B and C, Lawyer must explain to B and C how the interests of B and C may be in conflict, including disclosure of all facts and circumstances giving rise to potential conflicts in their interests.

With respect to C, the facts and circumstances Lawyer would need to disclose to C to obtain informed consent from C include but are not limited to all of the matters discussed above for required communications to C. To obtain informed consent from C, Lawyer must also discuss with C the advantages and disadvantages of the proposed transactions for C and C’s options and alternatives, including C retaining independent counsel. If Lawyer cannot discuss all of these matters with C for any reason – including B not wanting certain information disclosed to C or disclosure to C being adverse to B’s interests – then Lawyer cannot obtain C’s informed consent and cannot represent C in these transactions.

Inquiry #2:

Is the answer to Inquiry #1 different if Lawyer maintains that Lawyer only represents B in the A to B transaction and only represents C in the B to C transaction.

Opinion #2:

No. A concurrent conflict of interest under Rule 1.7(a)(2) exists if a lawyer’s representation of a client may be materially limited by the lawyer’s responsibilities to another client, a former client, a third person, or by a personal interest of the lawyer. The above-identified conflicts would still exist even if Lawyer only represented B with respect to the A to B transaction and C with respect to the B to C transaction. See Opinion #1.

Inquiry #3:

If Lawyer concludes that Lawyer cannot represent C, can Lawyer proceed with the closings representing only B?

Opinion #3:

It depends. To the extent C consulted with Lawyer or provided Lawyer with information to close the B to C transaction but no attorney-client relationship was formed between Lawyer and C, C would be a prospective client under Rule 1.18(a). If an attorney-client relationship was formed between Lawyer and C but was terminated by Lawyer due to the conflict of interest, then C is a former client under Rule 1.9.

Under Rule 1.18(b) and Rule 1.9(c), Lawyer is prohibited from revealing any information learned from C and from using such information to the disadvantage of C. If this prohibition materially limits Lawyer’s representation of B, then Lawyer cannot represent B under Rule 1.7(a). Moreover, this is a nonconsentable conflict of interest if Lawyer would not be able to provide competent and diligent representation to B as required under Rule 1.7(b) with the representation materially limited by the prohibition against revealing or using confidential information from C.

Additionally, under Rule 1.18(c) and Rule 1.9(b), Lawyer may not represent a client with interests materially adverse to C in the same or substantially related matter if Lawyer received information from C that could be either significantly harmful to C in that matter under Rule 1.18(c) (C as prospective client), or that is material to the matter under Rule 1.9(b) (C as former client). Exceptions are provided under Rule 1.9 and Rule 1.18, including if C gives informed consent confirmed in writing. However, certain disclosures need to be made to C to obtain informed consent, as discussed above. If Lawyer is prohibited from making those disclosures to obtain C’s informed consent, Lawyer is prohibited from representing B under both Rule 1.9, and Rule 1.18 unless another exception under Rule 1.18(d) applies.

Inquiry #4:

Can Lawyer use the funds provided by C for C’s purchase from B to fund B’s purchase from A?

Opinion #4:

No, not without C’s knowledge and informed consent and some appropriate legal arrangement (e.g. promissory note). Without C’s knowledge and informed consent and an appropriate legal arrangement, use of C’s money for the benefit of B is a misappropriation of C’s funds in violation of Rule 1.15-2(n) and Rule 8.4(b) and (c), as detailed below.

Lawyer cannot disburse funds from a residential real estate transaction until the deed is recorded. See Johnson v. Schultz, 195 N.C. App 161, 166-7 (2009), aff’d, 364 N.C. 90 (2010), citing and quoting N.C. Gen. Stat. §§ 45A-2, -4. Accordingly, B is not entitled to possession or use of any of C’s funds held by Lawyer until the B to C deed is recorded. Id.; Rule 1.15-2(n).

The B to C deed cannot be recorded before the A to B deed is recorded. However, the A to B deed – which is entrusted property as defined in Rule 1.15-1(f) – cannot be recorded by Lawyer until Lawyer is in possession of funds the possession and use of which B is then currently entitled as discussed above, to pay the sales price due to A. See N.C. Gen. Stat. §§ 45A-3, -4; Rule 1.15-2(a), (d), (k), (n); 2009 FEO 7, Opinion #1; 99 FEO 9, Opinion #1.

Inquiry #5:

Can Lawyer represent B and C in developing a legal arrangement under which B would become entitled to the possession and use of C’s funds prior to recordation of the B to C deed and can Lawyer draft the necessary documentation for that arrangement?

Opinion #5:

No. Such joint representation involves a nonconsentable conflict of interest under Rule 1.7.

The making of an appropriate arrangement between B and C under which B would gain entitlement to the possession and use of C’s funds prior to the recording of the B to C deed, and the drafting of appropriate documentation of that arrangement, presents another conflict of interest under Rule 1.7(a). Because the terms of this arrangement must be negotiated between B and C, Lawyer cannot jointly represent B and C and cannot draft the documents for the arrangement. See, e.g., 2013 FEO 14 (nonconsentable conflict of interest barring joint representation in commercial real estate transaction unless the conditions listed therein are satisfied, including that contract terms have been finally negotiated prior to commencement of the representation and that there are no material contingencies to be resolved). See also 2013 FEO 4 (joint representation may be permissible in a residential real estate transaction because the contract to purchase is entered into prior to commencement of the representation and the lawyer has no obligation to bargain for either party).

See Opinion #3 above with respect to whether Lawyer could represent only B or only C.

Inquiry #6:

Are there other concerns about Lawyer’s participation in the closing of these transactions?

Opinion #6:

Yes, there are other issues Lawyer will have to consider before determining whether Lawyer can proceed.

Such issues may include the following:

1. Whether Lawyer would be assisting any other person in engaging in a criminal offense or would be engaging in conduct constituting a criminal offense, implicating Rules 1.2(d), 8.4(a), and 8.4(b). See, e.g., N.C. Gen. Stat. §§ 14-118.12, -118.15; N.C. Gen. Stat. §§ 93A-1, -8; 18 U.S.C. §§ 1001, 1014, and 1344.

2. Whether Lawyer would be engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation, implicating Rule 8.4(c), such as in the identification of the owner in the preliminary opinion of title for the B to C transaction or in any other aspect. All documentation prepared by Lawyer must be accurate, including identifying the record owner in any preliminary opinion of title for a search period during which A is the record owner.

Inquiry #7:

If all conflicts, confidentiality, and funding issues are properly resolved, the transactions are permitted by law, and no other issues exist that would preclude Lawyer from proceeding with closing these transactions, what accountings must Lawyer do for these closings and to whom must the accountings be provided under Rule 1.15-3(e) and Rule 1.15-3(f)?

Opinion #7:

Accountings are due to A, B, and C pursuant to Rule 1.15-3(e) and (f).

For the A to B transaction, there must be a trust account client ledger and there must be a written accounting of receipts and disbursements (typically in the form of a settlement statement) for the funds provided by B or to which B becomes entitled to possess and use (e.g. under a promissory note) pursuant to Rule 1.15-3(b)(5) and Rule 1.15-3(e) and (f). The written accounting must be provided to B pursuant to Rule 1.15-3(e) and (f). The client ledger and the written accounting must show the receipt of the funds from or on behalf of B, including identification of funds provided for B’s use by C, and the disbursements of those funds. See Rule 1.15-3(b)(5), (e) and (f). See also N.C. Gen. Stat. § 45A-8.

For the B to C transaction, there must be a trust account client ledger and there must be a written accounting of receipts and disbursements (typically in the form of a settlement statement) for the funds provided by C or on behalf of C. The written accounting must be provided to C pursuant to Rule 1.15-3(e) and (f). The ledger and written accounting must show the receipt of the funds from or on behalf of C and the disbursements of those funds, including any conveyance of some portion of C’s funds to B for B’s use in the A to B transaction. See Rule 1.15-3(b)(5), (e) and (f). See also N.C. Gen. Stat. § 45A-8.

For both transactions, each seller must receive a written accounting of the sales proceeds to which the seller becomes the beneficial owner upon the recording of the applicable deed. Rule 1.15-3(f). This accounting must show all disbursements made from the seller’s proceeds, including all costs and fees deducted from the sales price due to the seller under the applicable contract. See Rule 1.15-3(f). See also N.C. Gen. Stat. § 45A-8.

Opinion #7 is limited to applying Rule 1.15-3(b)(5), Rule 1.15-3(e), and Rule 1.15-3(f); other authorities and obligations may require documents to be provided to other parties.

Inquiry #8:

Instead of being structured as A to B and B to C transactions, B enters into a contract to purchase with A and assigns his rights under that contract to C. B initially engages Lawyer for representation to close the sale from A to C and expects that Lawyer will also represent C. B does not want A or C to know certain information about the transaction. The assignment documentation does not disclose all information about the transaction such as the purchase price in the A to B purchase contract or the amount of the assignment fee to be paid to B. B wants the settlement statements prepared in a manner that does not disclose all information to A or C. Can Lawyer represent B and C and close this transaction?

Opinion #8:

This scenario presents many of the same issues and considerations discussed above. Lawyer must be able to disclose all information about the transaction to client C and cannot close the transaction if unable to disclose because of a duty of confidentiality to B. In addition, Lawyer must be able to be forthright with all parties and must be able to disclose to all parties any information as required by law. All documents, closing statements, and deeds prepared by Lawyer must be accurate in all respects. Lawyer must also provide accurate accountings to A and C. See Opinions #1, #3, #6, and #7.

Inquiry #9:

Could Lawyer represent A, B, and C in these transactions?

Opinion #9:

The same issues and considerations discussed above would apply if Lawyer wished to engage in the multiple representation of A, B, and C. See Opinions #1 through #8.