Representation of Lender in Contested Foreclosure When Corporate Trustee Is Owned by Spouse and Paralegal
Opinion rules that a lawyer may not represent the beneficiary of the deed of trust in a contested foreclosure if the lawyer’s spouse and paralegal own an interest in the closely-held corporate trustee.
Attorney A forms Corporation X in order that the corporation might be appointed substitute trustee on a deed of trust when a lender asks Attorney A to handle the foreclosure. Attorney A’s wife and paralegal each own stock in Corporation X.
If Attorney A’s wife and paralegal own any interest in Corporation X, may Attorney A represent the beneficiary/lender in a contested foreclosure proceeding if Corporation X is appointed substitute trustee?
No. As noted in N.C. Gen. Stat. §45-21.16(c), a trustee on a deed of trust is “a neutral party and, while holding that position in the foreclosure proceeding, may not advocate for the secured creditor or for the debtor in the foreclosure proceeding.” Because of the conflict between the neutral, fiduciary role of trustee and the role of advocate, a number of ethics opinions also hold that a lawyer serving as a trustee in a contested foreclosure proceeding may not represent the beneficiary or the grantor in the proceeding. 2008 FEO 11 (listing opinions). Attorney A’s indirect financial interest in Corporation X creates the appearance, if not the reality, that the corporation is the alter ego of Attorney A. Therefore, if Corporation X is appointed substitute trustee in a contested foreclosure, the neutrality of the trustee will be improperly impaired unless Attorney A is prohibited from representing the beneficiary or the lender in the proceeding.
If the corporate trustee is a publicly traded corporation in which Attorney A’s wife and paralegal own non-controlling interests, the perceived neutrality of the corporate trustee is not impaired and Attorney A may represent the lender in a contested foreclosure proceeding. See, e.g., RPC 83 and RPC 185.