In New Jersey, can a lawyer who represents an estate's executor (or who is the executor) list the estate's real estate with a brokerage that employs the lawyer's spouse, if the spouse earns no commission on the sale?

Plain-English summary

Opinion 696 addresses whether an attorney for the executor of a decedent's estate, or an attorney who is the executor, may list the estate's real estate with an agency that employs the attorney's spouse, where the spouse receives no financial benefit from the sale. The Committee notes that several of its pre-1984 opinions (issued before New Jersey first adopted the Rules of Professional Conduct) had found no conflict in such referrals so long as the realtor spouse took no commission, salary, or other benefit from the transaction.

The Committee holds that the adoption of the RPCs materially changed that analysis. Under RPC 1.8(a), a lawyer may not knowingly acquire a pecuniary interest adverse to a client unless the transaction is fair and reasonable and fully disclosed in writing, the client is advised in writing to seek independent counsel and given a reasonable opportunity to do so, and the client gives signed informed consent. Quoting its Opinion 657, the Committee explains that referring a client to a business in which the lawyer has an interest introduces an extraneous and potentially conflicting motive, and that the client's ability to evaluate the referral is presumptively impaired, making the situation inherently coercive.

The Committee concludes that the earlier distinction based on whether the spouse is paid does not determine whether the lawyer has an interest in the business; it goes only to whether the particular transaction is fair and reasonable under RPC 1.8(a)(1). Where the lawyer or the lawyer's spouse has a business interest in a real-estate agency, the Committee says it must be assumed that referrals benefit the attorney even where a specific referral produces no direct compensation. To the extent Opinion 341 indicated a contrary result, the Committee overrules it.

On consent, a referral to the spouse's agency is permissible (whether or not the spouse is compensated) if there is strict compliance with RPC 1.8(a), including the executor's written consent. Where the attorney is also an executor, the attorney/executor's own consent is meaningless: with multiple executors, the consent of the independent executors can satisfy the rule; where the attorney is the sole executor, nothing short of the consent of all beneficiaries with an interest in the real estate or its proceeds will suffice. Engaging separate counsel for the sale does not cure the problem, because that counsel remains subject to the attorney/executor's instructions.

In practice

The opinion holds that, under New Jersey's RPC 1.8(a) as it stood at the time (the rule the opinion quotes was amended in 2004), a lawyer's referral of estate real estate to an agency in which the lawyer's spouse works is a transaction in which the lawyer has a pecuniary interest, so it is permitted only on the written disclosure, independent-counsel advice, and signed informed consent RPC 1.8(a) requires. Per the opinion, the absence of a commission to the spouse does not remove the conflict; it bears only on whether the transaction is fair and reasonable. The opinion treats the consent question as turning on who can validly consent: the executor where the lawyer merely represents the executor, the independent co-executors where the lawyer is one of several executors, and all interested beneficiaries where the lawyer is the sole executor. Because this opinion is more than five years old, verify the current text of RPC 1.8(a) before relying on the specific language it describes.

Common questions

Q: Does it matter that my spouse won't earn a commission on the estate's sale?

A: Not for whether a conflict exists. The opinion holds that where the lawyer or spouse has a business interest in the agency, referrals are assumed to benefit the lawyer; the absence of a commission goes only to whether the transaction is fair and reasonable under RPC 1.8(a)(1).

Q: What does RPC 1.8(a) require before I can make the referral?

A: Per the opinion, the transaction must be fair and reasonable and fully disclosed in writing, the client must be advised in writing to seek independent counsel and given a reasonable opportunity to do so, and the client must give signed informed consent.

Q: Who consents when the lawyer is also the executor?

A: The opinion states that the attorney/executor's own consent is meaningless. With multiple executors, the independent executors can consent; where the attorney is the sole executor, all beneficiaries with an interest in the real estate or its proceeds must consent.

Q: Can I cure the conflict by hiring a separate lawyer to handle the sale?

A: No. The opinion concludes that a separately engaged attorney would still be subject to the instructions of the attorney/executor, who remains the client, so it does not cure the RPC 1.8(a) problem.

Background and rules framework

The opinion interprets RPC 1.8(a) (Model Rule 1.8(a)), New Jersey's rule on business transactions with, and pecuniary interests adverse to, a client. The Committee reads RPC 1.8(a) to reach referrals to a business in which the lawyer (or the lawyer's spouse) has an interest, applying its earlier Opinion 657. The analysis turns on distinguishing whether the lawyer has an interest in the business (which triggers the rule) from whether the particular transaction is fair and reasonable (one of the rule's conditions). The opinion expressly overrules Opinion 341 to the extent it held otherwise.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / NJ RPC 1.8(a), 1.8(a)(1)-(3) (business transactions with, and pecuniary interests adverse to, a client; the rule quoted as amended in 2004)

Statutes:

• N.J.S.A. 3B:14-36 (fiduciary conflict-of-interest provisions; cited as additional to the RPC obligations)

Other opinions cited:

• ACPE Opinion 657, 130 N.J.L.J. 656 (1992): RPC 1.8(a) applies to referrals to a business in which the lawyer (or the lawyer's spouse) has an interest
• ACPE Opinion 518, 111 N.J.L.J. 513 (1983): the interest of the realtor spouse is in effect an interest of the attorney spouse
• ACPE Opinion 312, 98 N.J.L.J. 646 (1975); Opinion 341, 99 N.J.L.J. 610 (1976): earlier pre-RPC opinions, with Opinion 341 overruled to the extent inconsistent

See also

• ABA Formal Op. 02-426: Lawyer Serving as Fiduciary for an Estate or Trust
• ABA Formal Op. 00-416: Purchase of Accounts Receivable From a Client
• NJ ACPE Op. 699: Collaborative Law

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2005/acp696-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. Minor spacing artifacts from the mirror's text extraction have been normalized; the linked official source controls.

180 N.J.L.J. 486

May 9, 2005

14 N.J.L. 991

May 16, 2005

Advisory Committee on Professional Ethics

Appointed by the New Jersey Supreme Court

Opinion 696

Overrules Opinion 341

Conflict of Interest

Attorney for an Executor of a decedent's estate listing decedent's real estate for sale with an agency employing the attorney's wife

The Advisory Committee on Professional Ethics has been asked under what circumstances an attorney for an executor of a decedent's estate, or as the executor of a decedent's estate, may list the decedent's real estate for sale with an agency which employs the attorney's wife, where the wife is not to receive any financial benefit from the sale. A number of opinions of this Committee which predate the first adoption in September of 1984 of the Rules of Professional Conduct (the RPCs) address this question, generally finding that a referral to the spouse's agency does not result in a conflict of interest for the attorney where the realtor spouse, although employed by the listing or selling agency, does not receive any financial benefit from the transaction by way of commission, salary or otherwise. Opinion 312, 98 N.J.L.J. 646 (1975); Opinion 341, 99 N.J.L.J. 610 (1976); and cf Opinion 518, 111 N.J.L.J. 513 (1983). These opinions also find where there is a conflict by reason of a pecuniary interest in the spouse, consent of the client is not available to cure the attorney's conflict.

The introduction of the RPCs materially changed the approach to the problem inherent in referrals of clients to businesses in which the referring attorney has an interest. RPC 1.8(a) provides:

A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms in which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be understood by the client;

(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel of the client's choice concerning the transaction; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.

We have previously found that this Rule is applicable to referrals to businesses in which the attorney has an interest (Opinion 657, 130 N.J.L.J. 656, 1 N.J.L. 129 (1992)), and that the rule applies equally to referrals to a business of the attorney's spouse. (Ibid., and see Opinion 518, supra (the interest of the realtor spouse is in effect an interest of the attorney spouse).) As we said in Opinion 657:

It is clear that a client has a special trust in, and is frequently dependent upon, the independent judgment of the lawyer, which is always to be exercised in the client's best interests, free from any outside influences. The possibility of referral of legal clients to another business of the lawyer introduces an extraneous and potentially conflicting motive, which can threaten or interfere with the lawyer's independence of judgment. At the same time, because of the trust and dependence that the client must place on the lawyer, a client's ability to independently evaluate the desirability or necessity of following through on such a referral is presumptively impaired. The situation is inherently coercive rendering even the standard approach of full disclosure and informed consent suspect.

Without barring the possibility of such a referral entirely, we conclude that a lawyer may only refer a legal client to a business the lawyer owns, operates, controls, or will profit from, if the lawyer has (1) disclosed to the client in writing, acknowledged by the client, the precise interest of the lawyer in the business, and that the same services may be obtained from other providers, and (2) advised the client, orally and in writing, of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent counsel of the client's choice as to whether utilization of the business in question is in the client's interest.

These conditions form a part of RPC 1.8(a) as amended in 2004, and quoted above. We find in the instant case that a lawyer's duty to protect the interests of the client/seller may well be different from the interests of the realtor in seeing that a closing takes place, thus invoking the Rule.

We now also find that the distinctions made in our earlier pre-RPC opinions based upon whether a lawyer or a lawyer's spouse will obtain a financial benefit from the specific referral do not go to the question of whether lawyer has an interest in the business, but rather to whether the particular transaction is fair and reasonable to the client within the meaning of RPC 1.8(a)(1). And even then, the client must consent in writing after full disclosure pursuant to the terms of the rule. In short, where an attorney, or the attorney's spouse has a business interest in a real estate agency it must be assumed that referrals to that real estate agency benefit the attorney even where a specific referral may not give rise to direct financial compensation to the spouse. To the extent that Opinion 341 indicates a contrary result, we overrule it.

In the present inquiry, where the attorney represents an executor of an estate, a referral of a proposed real estate sale to the spouse's real estate agency is permissible whether or not the spouse receives a share of the commissions or is otherwise compensated, provided there is strict compliance with RPC 1.8(a), including the written consent of the executor to the referral. The matter of consent is more complicated where the attorney is also the executor or one of several executors of the estate. Clearly the consent of the attorney/executor is meaningless. In the case of multiple executors RPC 1.8(a) may be satisfied by the required consent of the independent executors. Where the attorney is the sole executor, nothing short of the consent of all of the beneficiaries of the estate who have an interest in the real estate or the proceeds of its sale will satisfy rule RPC 1.8(a). The Committee takes no position with respect to substantive law dealing with conflicts of interest of fiduciaries, all of which are in addition to and not in limitation of the obligations of an attorney under the RPCs. See, for example, N.J.S.A. 3B:14-36.

Finally, the inquirer in this matter has asked whether a violation of RPC 1.8(a) would be cured by the attorney/executor engaging separate counsel to deal with the real estate sale transaction. It clearly would not be since the separately engaged attorney would still be subject to the instructions of the attorney/executor who is the client.