Can a lawyer close a short sale where the buyer pays a short-sale negotiator's fee and lowers the offer by the same amount without telling the bank?

Plain-English summary

A lawyer represented a buyer who offered $310,000 for a home in a short sale (a sale for less than the seller's outstanding mortgage, so the bank must approve). The seller's agent refused to submit the offer unless the buyer both signed up with a third-party "short sale negotiator" for a $10,000 fee and submitted a reduced offer of $300,000. The bank in a short sale customarily requires the submitted offer to be the "highest and best." The HUD-1 form would show the buyer paying the $10,000 fee, but would not show that the original offer of $310,000 had been reduced to $300,000 to cover it (¶ 1).

The committee applied Rule 8.4(c), which bars conduct involving dishonesty, fraud, deceit, or misrepresentation. Drawing on N.Y. State 817 (2007) and N.Y. State 882 (2011), which addressed a "seller's concession" paired with an undisclosed gross-up of the price, the committee explained that a statement may be literally true yet still mislead if it omits a material fact, and that a failure to disclose can be as much a misrepresentation as a false affirmative statement (¶¶ 3, quoting N.Y. State 882).

Applying that principle, the committee found that telling the bank the buyer offered $300,000 and is paying a $10,000 negotiator fee, without disclosing that the original offer was $310,000, would be misleading, particularly if the bank's short-sale program does not treat third-party negotiator fees as an authorized expense payable from sale proceeds. The committee concluded that the lawyer may not proceed unless the bank is given notice that the original offer was $310,000 and was reduced by an amount equal to the negotiator's fee. Disclosure on the HUD-1 form that the seller is paying the negotiator's fee is, by itself, insufficient to put the bank on notice that there was a higher offer (¶¶ 4-6).

In practice

Under the New York rules as they stood at the time of the opinion, the opinion holds that the buyer's lawyer may not participate in this short sale unless the bank is informed that the offer price was reduced by the cost of the short-sale negotiator. Per the opinion, disclosing the negotiator's fee while omitting the matching reduction in the offer is a half-truth and therefore conduct involving misrepresentation under Rule 8.4(c). The committee treated disclosure on the HUD-1 form that the seller pays the fee as insufficient by itself to put the bank on notice that the original offer was higher.

Common questions

Q: What makes the arrangement a misrepresentation?

A: The half-truth. The committee explained that telling the bank about the reduced offer and the negotiator fee, without disclosing the original higher offer, omits a material fact and is misleading under Rule 8.4(c) (¶ 4).

Q: Is showing the fee on the HUD-1 form enough?

A: No. The committee held that HUD-1 disclosure that the seller pays the negotiator's fee is, by itself, insufficient to put the bank on notice that the offer was originally higher (¶ 5).

Q: Can the lawyer ever proceed with this transaction?

A: Yes, if the bank is given notice that the original offer was $310,000 and was reduced by an amount equal to the negotiator's fee (¶ 6).

Background and rules framework

The opinion interprets New York Rule 8.4(c) (conduct involving dishonesty, fraud, deceit, or misrepresentation), corresponding to ABA Model Rule 8.4(c). The analysis applies the committee's "half-truth" line of real-estate opinions, under which omitting a material fact (here, the reduction of the offer to cover the negotiator's fee) is itself a misrepresentation.

Citations and references

Rules of Professional Conduct:

• MR 8.4 / NY RPC 8.4(c) (dishonesty, fraud, deceit, or misrepresentation)

Cases:

• U.S. Express, Inc. v. Intercargo Ins. Co., 841 F. Supp. 1328 (E.D.N.Y. 1994), failure to disclose as a misrepresentation

Other opinions cited:

• N.Y. State 817 (2007); N.Y. State 882 (2011): undisclosed gross-up paired with a seller's concession is a misrepresentation

See also

• NY State Bar Op. 1089: A retired lawyer's use of "Esq."
• NY State Bar Op. 1097: A lawyer working as a debt collector disclosing status
• NY State Bar Op. 1123: False statement of net worth and remedial measures

Source

• Landing page: https://nysba.org/ethics-opinion-1033/