NYSBA 2014-11-07

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?

Short answer: No. Disclosing only that the buyer pays a negotiator's fee, while hiding that the offer was reduced by the same amount to cover it, is a misleading half-truth. Under Rule 8.4(c) the buyer's lawyer may not proceed unless the bank is told the offer was reduced by the negotiator's fee; disclosure on the HUD-1 form alone is not enough.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NY State Bar Ethics Opinion 1033: Short-sale negotiator fee and misrepresentation to the bank

Short answer: When a buyer is asked both to pay a short-sale negotiator's fee and to reduce the offer by the same amount, the buyer's lawyer may not participate in the transaction unless the bank is told the offer was reduced by the fee, because disclosing the fee without disclosing the offset is a misleading half-truth under Rule 8.4(c).

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

View original opinion

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

Source

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