Freivogel on Conflicts
 
 
 

 

Commercial Negotiations

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Lawyer has represented A and A's company ("ACo.") for several years.  Lawyer has also represented B, an entrepreneur, for several years.  Although they are acquainted, A and B had no business dealings with one another until recently.  At a golf outing A mentioned to B that he wanted to sell ACo., and B said he was interested in buying it.  They knew they had the same lawyer, and they asked Lawyer to meet with them.  Can Lawyer represent both A and B in the transaction?

        The short answer is "maybe."  The lawyer must be diligent about explaining to the clients about potential conflicts and about dealing with confidences.  The lawyer must also take a realistic view about the application of Model Rule 1.7; that is, the lawyer must "realistically believe" that "the representation will not be adversely affected," and the client must consent "after consultation."  If the lawyer does all those things, and is honest, the chances for professional discipline are slight.

        The materials at the article entitled "Joint/Multiple Representation" assume that the lawyer has answered affirmatively the threshold question in the above paragraph.  Most joint representation situations involve clients who are basically on the same side of things - multiple purchasers, for example.  Some guidance exists on joint representation where the parties are across the table from each other - buyer vs. seller - lender vs. borrower.

        Comments [26]-[33] to Model Rule 1.7, which purport to deal with these issues, and many of which were adopted by the ABA House of Delegates in February 2002, are not particularly helpful. 

        Restatement.  Go to § 122, cmt. g(iv).  Two illustrations, 10 and 11, provide situations where handling both sides of a deal would be inappropriate.  The first (10) involves a complex real estate transaction where the parties are in sharp disagreement over several important terms.  The second (11) involves that same transaction, except that there are no such disagreements.  However, the deal is of a sort that will require much counseling on a variety of issues such as security interests, guarantees, and other rights of the parties against each other.

        N.Y. City Op. 2001-2 (2001) concludes that no hard and fast rule is appropriate.  Whether a lawyer or law firm can represent both sides of a transaction depends on the circumstances.  But, in In re Peter G. Ford, 732 N.Y.S.2d 115 (N.Y. App. 2001), the court said simply that the lawyer should be disciplined for representing both the buyer and seller in real estate transactions.  The court did not discuss whether the lawyer obtained conflict waivers or whether the conflict could be waived.  Nor, did the court discuss Op. 2001-2.  Opinion 2001-2 refers to several older ethics opinions that suggest that representing both sides of a real estate sale is permissible in some situations.  N.Y. Op. 611 (1990); N.Y. Op. 162 (1970); N.Y. County Op. 615 (1973).

        Lender/borrower in real estate sale.  Mass. Op. 90-3 (1990) offers guidance when a lawyer wants to represent a lender and borrower in the same real estate transaction.  The opinion says that a lawyer cannot do that, even with consent, unless the transaction involves a single-family residence where the essential terms have already been agreed to.  The opinion further provides that the lawyer must explain that if the lawyer learns something from one party that would be relevant to the other, the lawyer will make the disclosure.  The following opinions approve of representing both, provided adequate disclosure and consents are given: Ill. Op. 90-31 (1991); N.Y. State Bar Op. 611 (1990); N.C. Op. 97-8 (1998); N.C. Op. 210 (1997); Tex. Op. 525 (1998); Vt. Op. 2001-02 (undated); Vt. Op. 2011-2 (undated).

        In re Katz, 2009 Del. LEXIS 497 (Del. Sept. 24, 2009).  Representing both the lender and borrower in a residential mortgage transaction without obtaining an informed waiver results in three-month suspension for lawyer.

        Representing Lender and Borrower in Residential Mortgage Transaction.  Garrett v. Fleet Finance, Inc., 252 Ga. App. 47 (Ga. App. 2001).  The issue in this case did not involve a conflict of interest, but the court did say that representing both the lender and borrower in a residential mortgage transaction violated Georgia's prior Code of Professional Responsibility.  It does not address whether the conflict can be waived; presumably not.  Credit Union Central Falls v. Groff, 2009 R.I. LEXIS 34 (R.I. Mr. 27, 2009), spoke approvingly of the practice, citing Mass. Op. 3 (1990), among other authorities.

        Representing Lender and Borrower.  State Employees' Credit Union v. Hendryx, 2009 N.C. App. LEXIS 2350 (N.C. App. Dec. 22, 2009).  Lawyer acted as "closing attorney" in a series of refinancings of residential properties owned by one borrower.  Borrower defaulted, and the lender sued Lawyer for malpractice.  The trial court granted Lawyer a summary judgment.  In this opinion the appellate court affirmed.  Neither side appears to have questioned the propriety of Lawyer representing both the lender and the borrower; the lender's expert conceded the point.  However, given disparities in the loan amounts and the selling prices of the properties, the lender, and lender's expert, claimed Lawyer had a conflict and should have withdrawn.  The appellate court more or less avoided that issue, finding that lender's sophistication and possession of appraisals (not shown to Lawyer) constituted contributory negligence as a matter of law.

        Can Represent Lender and Borrower with Consent.  Doe v. McMaster, 585 S.E.2d 773 (S.C. 2003).  The principal issue in this case was the unauthorized practice of law in a real estate mortgage transaction.  In it, however, the court ruled that it is permissible for a lawyer to represent both the lender and the borrower, provided adequate disclosures are given and waivers obtained.

        Representing Lender and Borrower in Commercial Real Estate Transaction. In N.C. Op. 2013-14 (Jan. 2015), the committee held that the same lawyer may almost never represent the lender and borrower in a commercial real estate transaction. The committee did lay out some narrow circumstances where a lawyer may do this with extensive disclosures and consent. In N.C. State Bar v. Merrell, 2015 WL 5795667 (N.C. App. Oct. 6, 2015), the court upheld the suspension of a lawyer for representing the lenders and borrower in a commercial real estate closing. The court found guidance in the opinion N.C. Op. 2013-14 (Jan. 2015) ("2015 FEO 14") and noted the opinion's mention of Baldasarre v. Butler, 625 A.2d 458 (N.J. 1993) (see below).

        Conn. Informal Op. 97-32. Conservator should not represent buyer of real estate from the conservator's estate.

        Lender/Borrower; Canada.  West Fork Ranch Ltd. v. Marcotte, 2009 BCCA 542 (CanLII) (Ct. App. B.C. Dec. 2, 2009).  Lenders brought a malpractice action against Lawyer, claiming Lawyer represented them as well as the borrower.  The loan went south, and the borrower and guarantors were found to be insolvent.  The trial court found that Lenders were not clients of Lawyer in the loan transaction.  In this opinion the appellate court disagreed.  It also found that Lawyer should not have represented Lenders in the transaction.  It further found that had Lenders been represented by their own lawyer, that lawyer would have recommended that the credit of the guarantors be verified.  Had that been done, the loan might not have gone forward.  The appellate court ordered a new trial.

        Representing Lender and Borrower; Canada. Mandozai v. Igbinosun, 2015 ONSC 2288 (CanLII) (Ont. Superior Ct. April 13, 2015). Lawyer represented Lender and Borrower. In this case Lender sued Lawyer for malpractice. In this opinion the court found for Lender. First, the court held that Lawyer did not make adequate disclosure to Lender regarding Lawyer’s violation of Ontario Rule 2.04(11). Second, Lawyer failed to advise Lender that Lawyer was representing Borrower in an insolvency proceeding and that there was a danger that Borrower would not repay the loan. The court noted that violation of an ethics rule is not a per se ground for liability, but the violation does inform whether Lawyer violated the standard of care.

        Representing Seller and Buyer of Real Estate.  Authorities that approve the practice under various circumstances: Mont. Op. 981216; N.C. Op. 99-8 (1999); W.Va. Op. 89-1.  Authorities that do not approve: Fla. Op. 97-2 (1997); Nassau County, N.Y. Op. 98-10; N.Y. State Bar Op. 694 (1997); Iowa Supreme Court Bd. of Prof. Ethics & Conduct v. Wagner, 599 N.W.2d 322 (Ia. 1999); Homa v. Friendly Mobile Manor Inc., 612 A.2d 322 (Md. App. 1992); and B & Y Holdings Ltd. v. Best, 2008 NLTD 78 (CanLII) (S. Ct. Newfoundland & Labrador April 29, 2008). Not so in Iowa Supreme Court Att'y Disc. Bd. v. Qualley, 828 N.W.2d 282 (Iowa 2013).

        RFT Mgm't Co., L.L.C. v. Tinsley & Adams L.L.P., 2012 S.C. LEXIS 162 (S.C. Aug. 15, 2012) Law Firm represented the seller and purchaser involving two real estate properties.  The purchasers signed a retention agreement stating that Law Firm's sole functions were "to close the transaction, prepare a deed of conveyance and perform the ministerial act[s] associated with real estate closings."  In this opinion the court held that representing the purchaser and seller under these circumstances was not, per se, an actionable wrong.

         Sale of tavern. In Van Kirk v. Miller, 869 N.E.2d 534 (Ind. App. 2007), the court held that, with waivers, a lawyer could represent both the seller and purchaser of a tavern.

        Both Sides of Motel Sale.  In re Rogoff, 818 N.Y.S.2d 366 (N.Y. App. 2006).  The court ruled the lawyer should be disciplined for representing the buyer and seller of a motel.  But because the court also held that the lawyer had failed to make adequate disclosures about the conflict to the parties, it is not clear whether the court would have found the representations with disclosures would be permissible. 

        Note especially, Baldasarre v. Butler, 625 A.2d 458 (N.J. 1993) (cannot represent both sides of "complex" real estate sale, even with consent).  Baldasarre is about a lawyer who had done that very thing.  One of the parties sued the lawyer and his law firm and was awarded a judgment of almost $2 million.  That whole sad story is told at the appellate court's opinion, Baldasarre v. Butler, 604 A.2d 112 (N.J. Super. 1993).  In Horn v. Horn, 2010 N.J. Super. Unpub. LEXIS 935 (N.J. App. April 28, 2010), the court held that where the lender and borrower were “equally innocent” of the lawyer’s violation of the “Baldasarre Rule,” the underlying note and mortgage remained enforceable.  At Salvemini v. Spector, 2013 N.J. Super. Unpub. LEXIS 2942 (N.J. App. Div. Dec. 13, 2013), the court, after distinguishing Baldasarre, held that the supreme court's admonition did not apply to property transfers that were part of an estate plan. For issues raised by the representation of both the owners and tenant of commercial real estate, see Boswell v. Price Meese Schulman & D’Arminio, P.C., 2016 WL 4395773 (N.J. App. Div. Aug. 18, 2016).

        In re Herriott, 2014 N.Y. Misc. LEXIS 119 (N.Y. Surr. Ct. Jan. 17, 2014).  The lawyer for a decedent’s estate handled the sale of estate real estate by the estate to a co-executor.  The lawyer did not obtain written consent from his clients.  That was one of the reasons the court in this opinion ordered the sale “void and cancelled.”

       Representing Seller and Buyer of Farmland.  Meyer v. Maus, 2001 N.D. 87 (2001).  Lawyer malpractice proceeding.  A lawyer represented both the seller and buyer of farmland and evidently neglected to recommend that the attorney-in-fact for the seller seek other counsel.  The court held that the jury was justified in finding that the lawyer's conduct "constituted legal malpractice, a conflict of interest, and a breach of a fiduciary duty."  However, the court affirmed the trial judge's finding that the plaintiff had not shown that the conflict was the proximate cause of any damages to the plaintiff.

         Liability for Representing Both Sides of Asset Sale.  Sitar v. Sitar, 2008 N.Y. App. Div. LEXIS 2964 (N.Y. App. April 1, 2008).  Lawyer represented both sides in asset sale.  Sued for not informing one client about other client's information.  Granting of motion to dismiss reversed.

        Confidences.  For an expanded discussion of dealing with client confidences in multiple representations, see Part A of the section entitled "Joint/Multiple Representation."

        Law Firm Representing both Lender and Borrower Could Later Represent Lender against Borrower.  Volo Logistics LLC v. Varig Logistica S.A., 2008 N.Y. App. Div. LEXIS 4340 (May 22, 2008).  Law Firm represented lenders and borrowers in the same loan transaction.  In this action by the lenders against the borrowers for breach of the loan agreement Law Firm is representing lenders.  While the procedural aspects of this ruling are not clear (to us), the Appellate Division held that Law Firm should not be disqualified because the borrowers should not have had an expectation of confidentiality as to the loan transaction.  The court also noted that borrowers had not shown what confidential information they had given to Law Firm.

        Caution!  Discipline is only part of the story.  The author's experience at ALAS, as well as his post-ALAS experience, is that whenever a lawyer represents more than one party in a transaction, that lawyer is in substantial danger of a malpractice claim.  No matter how careful and diligent the lawyer has been, a disadvantaged client will have a potent claim for a jury.  You will not usually read about these situations in cases; they are almost always settled because they are so dangerous.

        No Liability for Lack of Causation.  Elmo v. Callahan, 2012 U.S. Dist. LEXIS 120142 (D.N.H. Aug. 24, 2012).  Lawyer represented both the purchasers and sellers in the sale of a manufacturer and distributor of fire-fighting, and related, equipment.  The sellers took notes from the resulting company as a substantial part of the compensation.  The resulting company failed almost immediately, and the notes became worthless.  In this case the sellers sued Lawyer.  In this opinion the court granted summary judgment to Lawyer, finding that sellers had not shown that Lawyer's "conduct was the legal and proximate cause" of their loss.

        Malpractice Liability; Representing Lender and Substitute Trustee.   Laws v. Priority Trustees Services of N.C., LLC, 2010 U.S. App. LEXIS 8815 (4th Cir. April 28, 2010).  Law Firm represented the lender in this foreclosure action.  Law Firm also created and represented the substitute trustee, the appointment of which was authorized by the deed in trust.  At the foreclosure sale, the property was sold leaving $19,000 owing on the note.  The owners filed this action against Law Firm and the substitute trustee.  The trial court granted a motion to dismiss.  In this opinion the appellate court affirmed, holding that the relationship among Law Firm, the lender, and the substitute trustee, did not, without more, give rise to a cause of action.

        No “Meeting of the Minds” in Lease Contract Just Because Both Sides Had Same Lawyer.  Hawley Ave. Assocs., LLC v. Russo, 2011 Conn. App. LEXIS 443 (Conn. App. Aug. 23 [official release], 2011).  Lessor sued Lessee for rent.  Lessee defended on the ground that there was no meeting of the minds as to important provisions in the lease.  The trial court found for Lessee.  In this opinion the appellate court affirmed.  One of Lessor's arguments was that because Lessor and Lessee had the same lawyer on the lease transaction, there had to be a meeting of the minds.  The appellate court noted that Lessor had no authority for that proposition.

        Law Review.  Ze’-ev Eiger & Brandy Rutan, Conflicts of Interest: Attorneys Representing Parties with Adverse Interests in the Same Commercial Transaction, 14 Geo. J. Legal Ethics 945 (2001) .

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