Ethics Opinion 247
Whether Settlement Lawyer Selected by Real Estate Purchaser Has a Sufficient Lawyer-Client Relationship With Seller to Warrant Disqualification; Conflict of Interest if Adverse Party Formerly Was Represented by a Firm to Whom Lawyer Is “Of Counsel”
When a lawyer who performed some services for both seller and purchaser in a residential real estate transaction did not notify the seller that he represented only the purchaser and did not specify his relationship to the seller, the lawyer should not represent the purchaser against the seller in a subsequent dispute concerning the sale. This disqualification is imputed to a lawyer who listed himself as “of counsel” to the real estate lawyer at the time of the transaction.
- Rule 1.7 (Conflict of Interest: General Rule)
- Rule 1.9 (Conflict of Interest: Former Client)
- Rule 1.10 (Conflict of Interest: Imputed Disqualification: General Rule)
- Rule 2.2 (Lawyer as Intermediary)
- Rule 4.3 (Dealing With Unrepresented Persons)
The Inquirer’s firm shares office space with Lawyer A and Inquirer is listed on Lawyer A’s letterhead as “of counsel” to Lawyer A’s firm. The Inquirer has been asked to represent the purchaser of a house in a potential lawsuit against the seller. Lawyer A conducted the settlement of the house in question in 1983.
The standard form real estate contract used in the transaction gave purchasers the opportunity to select the real estate lawyer. At settlement, the sellers paid $100 of Lawyer A’s “closing fee” and the purchasers paid $125. The purchasers also paid $100 to Lawyer A for a title examination. The sellers paid $90 to Lawyer A for notes and deeds of trust drafted for two $9000 trusts taken back on the property. The purchasers also paid $75 for the title abstract to the title insurance company. Lawyer A was the only lawyer involved in the transaction.
The “of counsel” designation and shared space arrangements between Lawyer A and the Inquirer have been in place from prior to 1983 through the time of the Inquiry. The Inquirer says that his relationship with Lawyer A always has been to render occasional advice on matters outside real estate practice and that he had no knowledge of the 1983 real estate transaction in question.
Lawyer A employs the receptionist in the office suite, and the Inquirer contributes a percentage of her salary. The single receptionist greets guests to the office and directs Inquirer’s clients to him or to his secretary. She takes phone messages for the Inquirer and his partners in the secretary’s absence. She answers Inquirer’s phone number with the name of Inquirer’s firm. She answers Lawyer A’s separate phone lines as “Law Offices.” She sorts mail and leaves it unopened for the Inquirer’s secretary. The receptionist is the only employee of Lawyer A who does any work for the Inquirer or his firm. (In 1983, the receptionist was employed by the Inquirer’s firm with a salary contribution from Lawyer A, but the office procedure was the same.)
Files are kept completely separate. The two firms are on different computer systems that are not compatible. The firms have different phone numbers but share a common fax machine. No fees are shared between the firms. The two firms have had tenant and subtenant arrangements on the lease as well as being joint tenants on the current sublease. The relationship has been solely legal advice on cases when useful and case referrals. At the beginning of the relationship, Lawyer A was a solo practitioner, and the three partners in Inquirer’s firm were all “of counsel” to him. Today, Lawyer A has four associated lawyers, and Inquirer’s firm has two lawyers after one’s retirement.
In 1993, the purchasers in the 1983 transaction retained the Inquirer in a claim for damages against the sellers in the 1983 transaction alleging latent defects in the property. Lawyer A had referred them to the Inquirer on a zoning matter a couple of years after the 1983 closing. Inquirer had done a couple of hours work for the purchasers then. When the current dispute arose, Lawyer A again suggested that purchasers consult the Inquirer.
Inquirer’s letter is accompanied by a letter from Lawyer A that recounts the following additional information. Before the purchasers retained the Inquirer, one of the sellers called Lawyer A and asked some questions. After some conversation, Lawyer A asked whom the transaction involved. When he was told, Lawyer A said that he remembered settling the property and still knew the purchasers. He said he would not discuss the matter further in any detail with the seller in that there was a dispute between the parties. He said that he assured the seller that he would not discuss his comments with the purchasers and would not represent them. He says he took this position because he preferred to err on the side of caution although he was not sure that he was disqualified from representing the purchasers based on the conversation or the past representation.
Lawyer A says that, in his opinion, he did not enter into a lawyer-client relationship with the Sellers that would have disqualified him from representing the purchasers. He characterizes his relationship to the sellers as “the fiduciary relationship to properly record documents of record and to disburse funds from escrow exactly as indicated in the contract and on the agreed-upon Settlement Statement.” In a subsequent conversation, Lawyer A says that, as a settlement lawyer, he considers himself to represent the purchaser up through closing. Up to that time, he will act for the purchaser in a manner that might be adverse to the interests of other parties, e.g., advising them on how to break the contract. He says that he informs the purchaser that, once the point of closing is reached, he undertakes a fiduciary obligation to the other parties as well which requires him to prepare and record documents and other things necessary to properly effect the agreements. He says his relationship to purchasers never involves asking them for information or other-wise acquiring confidential information nor the provision of legal advice. He does not use informed consent waivers with real estate settlement clients nor distribute any type of written notice on his role and relationship to the parties.
The seller has challenged the Inquirer’s representation. Inquirer asks if his “of counsel” relationship is sufficient to impute disqualification to the Inquirer from representing the purchasers in the 1983 transaction. In the alternative, he asks whether Lawyer A’s relationship to the 1983 sellers was sufficient to create a disqualification of Lawyer A that could be so imputed.
The inquiry raises four possible issues:
- Does Lawyer A’s relationship with the sellers in the 1983 real estate closing create a conflict such that he would be barred from representing the purchasers in the subsequent dispute over latent defects in the property?
- If such a conflict exists for Lawyer A, should this conflict be imputed to the Inquirer who is listed as “of counsel” to Lawyer A’s firm and shares space with Lawyer A?
- Even if Lawyer A were not barred from representing the purchasers under the previous analysis, would he be barred because of the seller’s 1993 phone call to Lawyer A?
- If Lawyer A were barred because of the phone call, would this bar be imputed to the Inquirer?
Numerous bar associations have opined on representation of multiple interests (buyer, seller, mortgagor, title insurance company) in real estate transactions, but our Committee has not commented previously. Some of these opinions from other jurisdictions also address representation if a subsequent dispute arises among the parties to the transaction.1
Representation in real estate transactions also has been discussed in cases concerning whether real estate closings conducted by settlement companies or other non-lawyers are the unauthorized practice of law. See In re First Escrow, Inc., In re Best Escrow, Inc., __ Mo. __, 840 S.W.2d 839 (1992), reviewing case law in multiple jurisdictions. In addition to reviewing these two lines of authority, the Committee heard from several lawyers experienced in residential real estate closings as part of its deliberation.
There is debate about how the role of a single lawyer at closing should be characterized. 1. The lawyer is performing activities that are not the practice of law since the functions are also performed by non-lawyers. 2. The lawyer represents multiple clients (buyer, seller, and lender) with potentially differing interests. 3. The lawyer represents only one party (usually the buyer who has the contractual option to elect counsel) with fiduciary obligations that arise to the other parties at closing. These fiduciary obligations require that certain actions be taken, e.g., recording of documents, distribution of funds, but do not constitute a lawyer-client relationship with those other parties. 4. The lawyer functions as an intermediary between clients.
Lawyer A uses the third characterization to describe the 1983 representation. The seller disagrees and would choose the second characterization to describe the representation.
This inquiry does not ask for guidance on how lawyers in residential real estate closing should deal with the multiple parties involved. The Committee does not think it wise to address that question in an inquiry in which the matter comes up only indirectly. We do not reach a conclusion on which characterization(s) of the lawyer role in a residential closing are permissible and which should apply to the 1983 transaction involved here.
Without choosing among competing characterizations, we direct attention to provisions of Rules 2.2 (lawyer as intermediary for common clients) and 4.3 (lawyer who deals with an unrepresented person on behalf of a client). Both rules emphasize the importance of making the lawyer’s role, duties, and non-duties clear when those matters could be misunderstood by multiple participants in a matter.
In this case, we understand that Lawyer A gave no oral or written notice that explicitly stated to the seller the lawyer’s view that he represented the purchasers, not the sellers, and only had fiduciary obligations for completing the transaction to the seller. Lawyer A points out that the seller who has questioned the representation also is a lawyer. Lawyer A says that, when the second trust was needed, he asked the seller whether he wished to draft the trust himself, use another lawyer, or have Lawyer A produce one (for which he used a standard form from the federal insurer).
We do not speculate what the seller understood or should have understood about this matter, given his legal training. This opinion considers the relationship of the attorney to the parties in the 1983 transaction solely to determine whether under Rule 1.9 Lawyer A may represent the purchasers against the sellers in a substantially related matter. On that issue, we hold that, in the absence of a clear contemporaneous statement that Lawyer A represented only the purchasers and not the sellers, Lawyer A may not represent the purchasers against the sellers in a subsequent substantially related matter. Whether such an omission would be sufficient to impose duties on Lawyer A to the sellers in the 1983 transaction under other Rules will depend on the policies underlying those Rules. We express no opinion on such issues that may arise in future inquiries.
The Committee’s consultation with residential real estate lawyers suggested that some lawyers routinely provide a written notice to parties explaining the lawyer’s scope of representation, obligations, non-obligations, and course that will be followed if a dispute arises among the parties. This seems wise no matter which characterization of the relationship to multiple parties a lawyer assumes or which characterization a court might find to exist as a matter of law.
Having decided that Lawyer A should not represent the 1983 purchaser against the seller in a substantially related matter, we reach the question of whether the Inquirer who is “of counsel” to Lawyer A also is disqualified.
Rule 1.10 says that
[w]hile lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7, 1.8(b), 1.9, or 2.2.
In the previous section, we declined to decide whether a single lawyer in a residential real estate closing should be characterized as representing multiple clients with potentially different interests governed by Rule 1.7, an intermediary among clients governed by Rule 2.2, or two other possibilities. We held that the lack of notice clarifying the lawyer’s role with respect to the seller allowed sufficient ambiguity that Lawyer A should not later take on an adverse representation in a substantially related matter over the seller’s objection. The relationship between lawyer and seller was sufficient to result in a disqualification under Rule 1.9. Since the relationship to the seller, absent clarifying notice, was sufficient to trigger a disqualification of Lawyer A, it is also sufficient to disqualify a lawyer “associated in a firm” under Rule 1.10.
We now turn to whether Lawyer A and the Inquirer should be considered “associated in a firm” within the meaning of Rule 1.10(a). Until now, Opinion 151 on fee splitting was our only statement on the implications of the term “of counsel.” Opinion 151 held an of counsel relationship could be sufficiently like that of a partner or associate to permit fee splitting limited to “partners” and “associates” under the language of DR 2-107(A).
Here we consider whether lawyers who hold themselves out to the public as “of counsel” could be found to have a sufficiently distant relationship to avoid imputed disqualification under Rule 1.10(a). As Opinion 151 mentions, the imputed disqualification rule then in effect (DR 5-105(D)) explicitly extended imputed disqualification beyond partners and associates to “any other lawyer affiliated with him or his firm.” Rule 1.10(a) hinges disqualification on whether lawyers are “associated in a firm.”
Opinion 192 considers whether members of “associated” or “correspondent” firms should be disqualified for conflicts on this basis. The Committee held that these terms foster an impression of an “ongoing and regular relationship” and create the “reasonable impression attorneys in the firms will not represent conflicting interests.”
ABA Opinion 90-357 reasons likewise that the term “of counsel” holds out to the public a “close, regular, personal relationship” among the lawyers that is a “general and continuing” one. It holds that there “can be no doubt” that an of counsel lawyer or firm is “associated” for purposes of imputed disqualification under Model Rule 1.10 (as well as 1.11 (a) and 1.12 (c)).
Comment 1 to Rule 1.10 says that two practitioners who share space and occasionally consult will be regarded as a firm for disqualification if they hold themselves out to the public in a manner that suggests they are a firm. The previously cited sections of Opinion 192 and ABA Opinion 90-357 are consistent with our holding that an “of counsel” designation gives a public impression of a sufficiently close relationship among lawyers that they should be treated as if they were in the same firm for imputed disqualification analysis under Rule 1.10(a).2
Issues 3 and 4
Having reached the previous conclusions on Issues #1 and #2, we do not reach Issue #3. As to Issue #4, if Lawyer A were disqualified on Issue #3 (the 1993 phone call with seller), the Inquirer would have been disqualified on the same reasoning on the “of counsel” designation discussed in Issue #2.
Inquiry No. 93-11-31
Adopted: May 24, 1994
1. See Ala. Op. 86-106 (11/6/86); Ill. Op. 86-15 (5/13/87) and Op. 90-3 (11/6/90); Mass. Op. 1990-3 (undated); N.H. Op. 1989-90/1 (6/21/90); New York City Op. 1990-1 (undated); N.Y. State Op. 576 (6/5/86) and Op. 611 (6/20/90); Pa. Op. 88-95 (undated); Philadelphia Op. 86-46 (4/10/86) and Op. 89-16 (6/16/89); S.C. Op. 86-9 (undated); Suffolk County, New York Op. 88-6 (undated); Tex. Op. 448 (9/11/87); Va. Op. 824 (10/9/86), Op. 1000 (11/12/87), Op. 1089 (6/8/88), and Op. 1149 (12/19/88); W.Va., Op 89-1 (undated).
2. This opinion imputes disqualification to attorneys sharing space because of their representations to the public. ABA Formal Op. 90-357 disapproves the use of the term “of counsel” for relationships involving an individual case, a forwarder or receiver of legal business, occasional collaborative efforts among otherwise unrelated lawyers or firms, or the relationship of an outside consultant. It lists four other situations where it deems the term to be properly applied. It does not discuss lawyers who call themselves of counsel on the basis of sharing space alone, but the implication is that would be considered ethically impermissible.
D.C. Op. 151 refers to the definition of “of counsel” as an “evolving concept.” It cites, as one possibility, an of counsel lawyer who merely shares office space and other facilities. We do not reach whether Op. 151’s approval of the term “of counsel” to describe an arrangement to share space should be reconsidered.