BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS
Opinion No. 2007-01
(Inquiry No. 745 )
Conflict of interest of attorney in real estate transaction simultaneously acting as broker for seller and attorney for third-party lender (Bank’s attorney) prohibited.
Attorney retained as realty broker for seller and asserting right to broker’s commission may not also serve as attorney for third-party lender (Bank’s attorney) in real estate transaction. The attorney’s financial stake in the transaction creates a potential conflict of interest between himself and his legal client, the third-party lender. In addition any dispute that might arise between seller and third-party lender in the transaction would put the attorney in a conflicted position between two clients – one legal and one non-legal – to whom he both owes a duty of undivided loyalty.
Inquiring attorney reports that he is employed with a law firm and has been assigned to represent the third-party lender at the closing of a real estate transaction. However, the attorney served as a real estate broker for the seller in the same transaction and is asserting the right to a sales commission for procuring the purchaser for the property. The attorney wishes to know if he can serve as the bank’s attorney at the closing in light of his role as the seller’s real estate broker.
An attorney retained as a real estate broker for a seller and asserting a right to a broker’s commission may not also serve as the attorney for the lender at the closing of the transaction. The attorney’s right to a broker’s commission gives the attorney a financial stake in the transaction and creates a potential conflict of interest between himself and his legal client under DR 5-101. In addition, absent an appropriate waiver under DR 1-106(A), an attorney providing nonlegal services to a client – in this case broker’s services to the seller – is bound to the same professional obligations that the attorney owes to his legal client, here the bank. He owes to each an undivided duty of loyalty and independent professional judgment. Therefore, any dispute that might arise between the seller and the bank during the course of the transaction could potentially put the attorney in a conflicted position between them.
DR 5-101(A) provides:
Conflict of Interest – Lawyer’s Own Interests
A. A lawyer shall not accept or continue employment if the exercise of professional judgment on behalf of the client will be or reasonably may be effected by the lawyer’s own financial, business, property, or personal interest, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents to the representation after full disclosure of the implications of the lawyer’s interest.
Here, the attorney has a financial interest in the real estate transaction. This interest could potentially conflict with the lender’s interest in aborting the transaction if any financial irregularities should arise or any of the usual securities that the lender requires are not realized. The lender may not be agreeable to certain terms, placing the lawyer in a position of choosing whether to negotiate the terms for the client-lender or to allow the transaction to close in order to receive his commission. Moreover, even if the lender is agreeable to all of the terms, the lawyer’s financial interest may blind him to problems that might cause a disinterested lawyer to advise the lender not to close on the transaction or may cause the lawyer not to bring those problems to the attention of the lender. Because of this potentiality, the Committee believes that a disinterested lawyer would conclude that the representation would be adversely affected even if the client were to consent to the continued representation after full disclosure.
In addition, the plaintiff’s dual role as the seller’s broker and the attorney for the lender creates a potential for a conflict of interest among these clients even though the attorney is not strictly providing legal representation to the seller. DR 1-106 provides that, absent an express waiver, an attorney owes the same duties of professional responsibility to clients to whom he provides nonlegal services. The rule provides in pertinent part:
Responsibilities Regarding Nonlegal Services
A. With respect to lawyers or law firms providing nonlegal services to clients or other persons:
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2. A lawyer or law firm that provides nonlegal services to a person that are distinct from legal services being provided to that person by the lawyer or law firm is subject to these disciplinary rules with respect to the nonlegal services if the person receiving the services could reasonably believe that the nonlegal services are the subject of an attorney-client relationship.
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4. For the purposes of DR 1-106(A)(2) … it will be presumed that the person receiving nonlegal services believes the services to be the subject of an attorney-client relationship unless the lawyer or law firm has advised the person receiving the services in writing that the services are not legal services and that the protection of the attorney-client relationship does not exist with respect to the nonlegal services, or if the interest of the lawyer or law firm in the entity providing nonlegal services is de minimis.
DR 1-106(A) contemplates that lawyers may provide nonlegal services to members of the general public. However, when a lawyer provides nonlegal services to a client there exists the potential for confusion as to whether and to what extent the attorney’s professional obligations, including the attorney-client privilege, would inure to the benefit of the nonlegal client. DR 1-106(A)(4) creates a presumption in the client’s expectation that the attorney-client relationship exists in full unless the attorney expressly disclaims such a relationship in writing. The inquiry, as posed, suggests that no such written disclaimer has been given by the attorney in his capacity as real estate broker for the seller. Thus, under these circumstances the potential exists for a conflict of interest among the attorney’s two clients in the course of the transaction.
DR 5-105(A) addresses an attorney’s ethical obligation in addressing conflicts of interest that may arise in the course of simultaneous representation of clients within the same transaction. The rule provides:
Conflict of Interest: Simultaneous Representation
A. A lawyer shall decline proffered employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).
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C. In the situations covered by DR 5-105(A)…a lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.
The Committee concludes that circumstances could potentially arise at the closing of the transaction that might pit the seller against the third-party lender. For example, the seller may have a right to close the transaction on a date certain against the wishes of the lender, or might otherwise wish to force the closing notwithstanding the bank’s refusal to close for reasons of financial security. The dispute is further compounded by the attorney’s own financial interest in completing the transaction in order to secure his brokerage commission. Given the totality of the competing interests, the Committee believes that a disinterested lawyer would conclude that the attorney cannot competently represent the interests of each, even with both clients’ consent after full disclosure of the advantages and risks involved.
Our opinion is consistent with N.Y. State Bar Op. 752 (2002), as well as other opinions pre-dating DR 1-106(A), which conclude that an attorney’s business interest in a real estate transaction prevent the attorney from representing the legal interests of a party to the transaction. (See, N.Y. State Bar Op. 753 (2002)). A lawyer’s compliance with the requirements of DR 1-106(A) with respect to a non-legal client will not necessarily justify the simultaneous rendition of legal services to legal client under circumstances that would otherwise suggest a dual representation. Even if the services rendered to the non-legal client are “distinct from” the services provided to a legal client and the non-legal client is informed in writing that the protections of the attorney-client relationship do not apply, there are circumstances in which DR 5-101(A) will still prevent the lawyer from offering legal services to a client, because the lawyer’s non-legal business interests are inconsistent with a competent representation of the legal client. The Committee believes that this inquiry presents such a situation.
[Approved by the Full Committee on February 15, 2007]