Can a New York lawyer who represents lenders in foreclosure pass leads on those properties to a real estate company the lawyer plans to join?
NY State Bar Ethics Opinion 991: Confidential foreclosure information and a lawyer's own real estate venture
Short answer: A lawyer who represents lenders in foreclosure may not give a real estate LLC the lawyer would join leads on those properties unless the lender client gives informed consent, and the lawyer may never delay the foreclosure to create a buying opportunity for the venture.
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.
Plain-English summary
An associate at a firm that represents lenders in foreclosure actions wanted to join a real estate LLC formed by college friends. The LLC would buy foreclosure properties as rental investments, and the associate would supply leads on which properties looked like sound buys, drawing on what he learned representing the lenders. The associate did not propose to perform legal work for the LLC. The opinion sorts the problem into three issues: confidentiality, conflict of interest, and improper delay of litigation.
On confidentiality, the opinion concludes that information identifying promising foreclosure properties is "confidential information" under Rule 1.6(a) when it is gained during or relates to the representation. The opinion rejects the idea that information loses protection just because foreclosure filings are public: it points to the 2011 revision of Comment [4A], which states that information is not "generally known" simply because it sits in a public file. Because hundreds or thousands of homes are in foreclosure in any locale, the identity of particular sound investments is not generally known. Rule 1.8(b) reaches even further, barring use of any information relating to the representation to the client's disadvantage, privileged or not. Rule 1.9(c) carries the same duty to former clients, so moving to a different firm in a different practice area would not change the answer.
On conflicts, the opinion applies Rule 1.7(a)(2): a reasonable lawyer would see a significant risk that the associate's financial and business interest in the LLC, and his interest in keeping friends happy, would adversely affect his judgment for the lender. The lender must negotiate loan modifications in good faith and wants to avoid sanctions and costs, while the LLC's only interest is buying cheaply; the opinion notes courts have sanctioned lenders for dragging out mediation. Because the lender's many interests diverge from the LLC's, the opinion treats the conflict as likely non-consentable, and any consent would have to be obtained separately for each property and confirmed in writing under Rule 1.7(b).
On delay, the opinion applies Rules 3.1 and 3.2: the associate may not use litigation tactics, such as stalling the transmission of loan-modification applications, whose only substantial purpose is to delay or prolong the proceeding. The opinion quotes Comment [1] to Rule 3.2 that seeking financial benefit from improper delay is not a legitimate client interest, and reasons that seeking such a benefit for the lawyer himself is even less legitimate.
In practice
The opinion holds that, under the New York rules as they stood at the time, a lawyer representing lenders in foreclosure could not supply foreclosure-property leads to a real estate venture in which the lawyer had a stake without the lender's informed consent, because the property information is confidential under Rule 1.6(a) and its use is separately barred by Rule 1.8(b). Per the opinion, the personal-interest conflict under Rule 1.7(a)(2) would in most cases be non-consentable given how the lender's interests diverge from the buyer's, and any valid consent would have to be confirmed in writing and obtained property by property. The opinion is explicit that even with consent on confidentiality and the conflict, the diligence and anti-delay duties in Rules 3.1 and 3.2 still bar tactics aimed only at slowing the case to benefit the venture.
Common questions
Q: Is information about foreclosure properties confidential if foreclosure filings are public record?
A: Yes. The opinion concludes that information is not "generally known" simply because it is in a public file, relying on the 2011 revision of Comment [4A] to Rule 1.6, and reasons that the identity of particular sound investments among the many properties in foreclosure is not generally known.
Q: Does it help to wait until the lawyer leaves the firm before sharing leads?
A: No. The opinion explains that Rule 1.9(c) carries the duty of confidentiality over to former clients with full force, so a move to a different firm, even in a different practice area, would not let the lawyer use or reveal the same information.
Q: Could the lender consent to the lawyer's involvement in the buying venture?
A: Possibly, but the opinion treats the conflict as likely non-consentable because the lender's interests (good-faith modification, avoiding sanctions, controlling cost) diverge sharply from the LLC's interest in buying cheaply. Any consent would have to satisfy Rule 1.7(b), be confirmed in writing, and be obtained separately for each property.
Q: Even with consent, can the lawyer slow down a foreclosure to help the venture buy at a short sale?
A: No. The opinion applies Rules 3.1 and 3.2 to bar tactics whose only substantial purpose is delay, and quotes Comment [1] to Rule 3.2 that seeking financial benefit from improper delay is not a legitimate interest.
Background and rules framework
The opinion interprets New York Rule 1.6(a) (confidentiality of information, the analog of Model Rule 1.6), Rule 1.8(b) (use of information to a client's disadvantage, Model Rule 1.8(b)), Rule 1.9(c) (duties to former clients, Model Rule 1.9(c)), Rule 1.7(a) and (b) (concurrent conflicts and consent, Model Rule 1.7), and Rules 3.1 and 3.2 (non-meritorious contentions and delay of litigation, Model Rules 3.1 and 3.2). The confidentiality analysis turns on Comment [4A] to Rule 1.6 and its 2011 amendment, which the opinion treats as resolving that public-file information can still be confidential.
Citations and references
Rules of Professional Conduct:
- MR 1.6 / NY Rule 1.6(a) (confidential information; Comment [4A] on "generally known")
- MR 1.8(b) / NY Rule 1.8(b) (use of information to client's disadvantage)
- MR 1.9(c) / NY Rule 1.9(c) (duties to former clients)
- MR 1.7 / NY Rule 1.7(a)(2) and (b) (personal-interest conflict and consent)
- MR 3.1 / NY Rule 3.1 (non-meritorious claims and contentions)
- MR 3.2 / NY Rule 3.2 (delay of litigation; Comment [1])
Cases:
- U.S. Bank v. Shinaba, No. 381917/09 (Bronx Sup. Ct., July 31, 2013), sanctions for dilatory conduct dragging out foreclosure settlement conferences
- Citibank, N.A. v. Barclay, No. 381649/09 (Bronx Sup. Ct., June 21, 2013), same
Other opinions cited:
- N.Y. State 866 (2011): information "gained during" or "relating to" the representation
See also
- NY State Bar Op. 998: disclosing client fraud after a short-sale closing
- NY State Bar Op. 990: representing both lender and borrower clients in a loan
- NY State Bar Op. 1013: lawyer-broker representing an owner in foreclosure
- NY State Bar Op. 1117: lawyer as broker and attorney in the same deal
Source
- Landing page: https://nysba.org/ethics-opinion-991/