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Rules, Procedure, Comments

All opinions of the Ethics Committee are predicated upon the North Carolina Rules of Professional Conduct. Any interested person or group may submit a written comment – including comments in support of or against the proposed opinion – or request to be heard concerning a proposed opinion. The Ethics Committee welcomes and encourages the submission of comments, and all comments are considered by the committee at the next quarterly meeting. Any comment or request should be directed to the Ethics Committee at ethicscomments@ncbar.gov no later than March 26, 2021.

Council Actions

At its meeting on January 15, 2021, the State Bar Council adopted the ethics opinions summarized below:

2020 Formal Ethics Opinion 2
Advancing Client Portion of Settlement

Opinion rules that a lawyer may not advance a client’s portion of settlement proceeds while a matter is pending or litigation is contemplated, but may advance a client’s portion of settlement proceeds under other circumstances if the lawyer complies with Rule 1.8(a).

2020 Formal Ethics Opinion 5
A Lawyer’s Responsibility in Avoiding Fraudulent Attempts to Obtain Entrusted Client Funds

Opinion discusses a lawyer’s professional responsibility to inform clients about relevant, potential fraudulent attempts improperly to acquire client funds during a real property transaction.

Ethics Committee Actions

At its January 14, 2021, meeting, the Ethics Committee received reports from two subcommittees studying proposed amendments to the Rules of Professional Conduct. One subcommittee is studying the adoption of anti-discrimination language to the Preamble and the text of the Rules of Professional Conduct. The other subcommittee is studying the addition of language in the comment to Rule 1.1 (Competency) recognizing a lawyer’s responsibility to be aware of how implicit bias and cultural differences can impact the representation of a client. Both proposals remain in subcommittee for continued study.

The Ethics Committee considered a total of 14 ethics inquiries, including the two opinions adopted by the council referenced above. Ten inquiries were sent or returned to subcommittee for further study, including inquiries addressing the following: a lawyer’s professional responsibility when asked by a client to take possession of evidence constituting contraband; a lawyer’s duty to recognize and avoid counterfeit check scams; and a lawyer’s professional responsibility in utilizing machine learning/artificial intelligence in a law practice. The committee also reconsidered the following three proposed formal ethics opinions after receiving adverse comment: Proposed 2019 Formal Ethics Opinion 4, concerning a lawyer’s professional responsibility when communicating with members of the judiciary; Proposed 2020 Formal Ethics Opinion 1, concerning a lawyer’s professional responsibility in responding to negative online reviews; and Proposed 2020 Formal Ethics Opinion 6, concerning the confidentiality of information contained in the public record. The three opinions were returned to subcommittees for further study. The committee approved the publication of one proposed opinion, which appears below.

Proposed 2021 Formal Ethics Opinion 1

Contemporaneous Residential Real Estate Closings
January 14, 2021

Proposed opinion addresses conflicts of interest, communication, funding issues, and accountings in contemporaneous closings for residential real property.

Facts:

Residential real property is owned by record owner A. The property is to be conveyed from record owner A to B and from B to end buyer C on the same day. The sales price for the A to B transaction is $80,000. The sales price for the B to C transaction is $100,000. The money provided by C would be utilized by B to make B’s purchase from A; B would provide no independent funding. One lawyer, Lawyer, would close both the A to B and B to C transactions. Lawyer would represent B and C; Lawyer would not represent A. Lawyer would be the settlement agent for the closings.

Inquiry #1:

Can Lawyer represent B and C in these transactions?

Opinion #1:

This scenario presents a concurrent conflict of interest under Rule 1.7(a). Lawyer’s representation of C may be materially limited by Lawyer’s responsibilities to B, and vice versa. See Rule 1.7(a)(2); 2013 FEO 4; 97 FEO 8; RPC 210.

Rule 1.7(b) articulates the circumstances under which a lawyer may represent a client notwithstanding the existence of a concurrent conflict of interest. One requirement is that the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client. Rule 1.7(b)(1).

In assessing whether a representation burdened by a concurrent conflict of interest might be permissible, the lawyer “must consider ‘whether there is any obstacle to the loyal representation of both parties.’” 97 FEO 8, quoting RPC 210. As discussed in 2013 FEO 4 in the context of joint representation of a buyer and a seller in a residential real estate transaction:

[T]he lawyer has a duty to ensure that he can comply with Rule 1.7 prior to accepting joint representation of the buyer and seller. When contemplating joint representation, a lawyer must consider whether the interests of the parties will be adequately protected if they are permitted to give their informed consent to the representation, and whether an independent lawyer would advise the parties to consent to the conflict of interest. Representation is prohibited if the lawyer cannot reasonably conclude that he will be able to provide competent and diligent representation to all clients. See Rule 1.7, cmt. [15].

To provide competent and diligent representation to C, Lawyer would need to disclose to C all material facts known to Lawyer about the transactions and advise C with respect to all of the facts and circumstances concerning the transactions. See 97 FEO 8, Opinions #4 and #5.

Matters about which Lawyer would need to communicate with C include:

1. That B does not own the property and whether the contract entered into between B and C for the sale of the property is valid;

2. That C’s money will be used by B to purchase the property from A, for which C’s informed consent would need to be given (see Opinion #4 below); and

3. The price at which B is purchasing the property from A, which is a fact that may not otherwise be known by C and might bear upon the true market value of the property and/or whether C would consider it in C’s best interest to proceed. See, e.g., 97 FEO 8 and Opinion #4 below.

Certain of these facts will be confidential information known to Lawyer from his representation of B and protected from disclosure under Rule 1.6. Certain of these facts may be matters B does not want disclosed to C or may involve information the disclosure of which would harm B’s interests, which Lawyer must consider in determining whether Lawyer can provide competent and diligent representation to both B and C.

Lawyer cannot represent C unless B consents to the disclosure to C of all facts regarding the A to B transaction and the conditions of Rule 1.7(b) are otherwise met. See 2013 FEO 4; 97 FEO 8, Opinions #4 and #5.

Another of the requirements under Rule 1.7(b) for a lawyer to represent a client notwithstanding a concurrent conflict of interest is that the lawyer obtain any affected client’s informed consent to the representation and confirm that consent in writing. Informed consent is defined in Rule 1.0 as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation appropriate to the circumstances.” Comment [6] to Rule 1.0 states that, to obtain informed consent, a lawyer

must make reasonable efforts to ensure that the client or other person possesses information reasonably adequate to make an informed decision. Ordinarily this will require communication that includes a disclosure of the facts and circumstances giving rise to the situation, any explanation reasonably necessary to inform the client or other person of the material advantages and disadvantages of the proposed course of conduct and a discussion of the client’s or other person’s options and alternatives.

Lawyer would need to obtain informed consent from both B and C. To obtain informed consent from B and C, Lawyer must explain to B and C how the interests of B and C may be in conflict, including disclosure of all facts and circumstances giving rise to potential conflicts in their interests.

With respect to C, the facts and circumstances Lawyer would need to disclose to C to obtain informed consent from C include but are not limited to all of the matters discussed above for required communications to C. In order to obtain informed consent from C, Lawyer must also discuss with C the advantages and disadvantages of the proposed transactions for C and C’s options and alternatives, including C retaining independent counsel. If Lawyer cannot discuss all of these matters with C for any reason—including but not limited to B not wanting certain information disclosed to C or disclosure to C being adverse to B’s interests—then Lawyer cannot obtain C’s informed consent and cannot represent C in these transactions.

Inquiry #2:

Is the answer to Inquiry #1 different if Lawyer clarifies that Lawyer only represents B in the A to B transaction and C in the B to C transaction?

Opinion #2:

No. A concurrent conflict of interest under Rule 1.7(a)(2) exists if a lawyer’s representation of a client may be materially limited by the lawyer’s responsibilities to another client, a former client, a third person, or by a personal interest of the lawyer. The above-identified conflicts would still exist even if Lawyer only represented B with respect to the A to B transaction and C with respect to the B to C transaction. See Opinion #1.

Inquiry #3:

If Lawyer concludes that Lawyer cannot represent C, can Lawyer proceed with the closings representing only B?

Opinion #3:

It depends. To the extent C consulted with Lawyer or provided Lawyer with information to close the B to C transaction but no attorney-client relationship was formed between Lawyer and C, C would be a prospective client under Rule 1.18(a). If an attorney-client relationship was formed between Lawyer and C but was terminated by Lawyer due to the conflict of interest, then C is a former client under Rule 1.9.

Under Rule 1.18(b) and Rule 1.9(c), as applicable, Lawyer would be prohibited from revealing any information learned from C and from using such information to the disadvantage of C. If this prohibition would materially limit Lawyer’s representation of B, then Lawyer cannot represent B under Rule 1.7(a). This is a nonconsentable conflict of interest if Lawyer would not be able to provide competent and diligent representation to B as required under Rule 1.7(b) with the representation materially limited by the prohibition against revealing or using confidential information from C.

Additionally, under Rule 1.18(c) and Rule 1.9(b), Lawyer would not be able to represent a client with interests materially adverse to C in the same or substantially related matter if Lawyer received information from C that could be either significantly harmful to C in that matter under Rule 1.18(c) (C as prospective client), or that is material to the matter under Rule 1.9(b) (C as former client). Exceptions are provided under Rule 1.9 and Rule 1.18, including if C gives informed consent confirmed in writing. However, certain disclosures need to be made to C to obtain informed consent, as discussed above and in the comments to Rule 1.0, and if Lawyer is not able to make those disclosures to obtain C’s informed consent, Lawyer will not be able to represent B under Rule 1.9 (C as former client), and would not be able to represent B under Rule 1.18 (C as prospective client) unless another exception under Rule 1.18(d) applied.

Inquiry #4:

Can Lawyer use the funds provided by C for C’s purchase from B to fund B’s purchase from A?

Opinion #4:

No, not without C’s knowledge and informed consent and some appropriate legal arrangement (e.g. promissory note). Without C’s knowledge and informed consent and an appropriate arrangement, use of C’s money for the benefit of B is misappropriation of C’s funds violating Rule 1.15-2(n) and Rule 8.4(b) and (c), as detailed below.

Lawyer cannot disburse funds from a residential real estate transaction until the deed is recorded. See Johnson v. Schultz, 195 N.C. App 161, 166-7 (2009), aff’d, 364 N.C. 90 (2010), citing and quoting N.C. Gen. Stat. §§ 45A-2, -4. Accordingly, B is not entitled to possession or use of any of C’s funds from the B to C transaction until the B to C deed is recorded. Id.; Rule 1.15-2(n).

The B to C deed cannot be recorded until after the A to B deed is recorded. However, the A to B deed from A—which is entrusted property as defined in Rule 1.15-1(f)—cannot be recorded by Lawyer unless and until Lawyer has possession of funds, the possession and use of which B is then currently entitled, to pay the sales price due to A under the A to B contract. See N.C. Gen. Stat. §§ 45A-3, -4; Rule 1.15-2(a), (d), (k), (n); 2009 FEO 7, Opinion #1; 99 FEO 9, Opinion #1.

Inquiry #5:

Can Lawyer represent B and C in developing an arrangement under which B would become entitled to the possession and use of C’s funds prior to recordation of the B to C deed and can Lawyer draft the necessary documentation for such arrangement?

Opinion #5:

No. Such joint representation involves a nonconsentable conflict of interest under Rule 1.7.
The making of an appropriate arrangement between B and C under which B would gain entitlement to the possession and use of C’s funds prior to the recording of the B to C deed, and the drafting of appropriate documentation of such arrangement, presents another conflict of interest under Rule 1.7(a). Because the terms of this arrangement would need to be negotiated between B and C—similar to what transpires in a commercial real estate transaction—Lawyer cannot represent B and C in the making of this arrangement and cannot draft the documents for this arrangement. See 2013 FEO 14 (nonconsentable conflict of interest barring joint representation in commercial real estate transaction unless the conditions listed therein are satisfied, including that contract terms have been finally negotiated prior to commencement of the representation and that there are no material contingencies to be resolved). See also 2013 FEO 4 (joint representation may be permissible in a residential real estate transaction because the contract to purchase is entered into prior to commencement of the representation and the lawyer has no obligation to bargain for either party).

See Opinion #3 above with respect to whether Lawyer could represent only B or only C.

Inquiry #6:

If all conflicts, communication, and funding issues are properly resolved, can Lawyer proceed with closing these transactions?

Opinion #6:

It depends. There may be other issues Lawyer will have to consider before determining whether Lawyer can proceed.

Such issues may include, but are not limited to, the following:

1. Whether Lawyer would be assisting any other person in engaging in a criminal offense or would be engaging in conduct constituting a criminal offense, implicating Rules 1.2(d), 8.4(a), and 8.4(b). See, e.g., N.C. Gen. Stat. §§ 14-118.12, -118.15; N.C. Gen. Stat. §§ 93A-1, -8; 18 U.S.C. §§ 1001, 1014, and 1344.

2. Whether Lawyer would be engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation, implicating Rule 8.4(c), such as in the identification of the owner in the preliminary opinion of title for the B to C transaction or in any other aspect. All documentation prepared by Lawyer must be accurate, including identifying the record owner (A) in any preliminary opinion of title for a search period during which A is the record owner.

Inquiry #7:

If all conflicts, communication, and funding issues are properly resolved, if the transactions are permitted by law, and if no other issues exist that would preclude Lawyer from proceeding with closing these transactions, what accountings must Lawyer do for these closings and to whom must they be provided under Rule 1.15-3(e) and Rule 1.15-3(f)?

Opinion #7:

Accountings are due to A, B, and C pursuant to Rule 1.15-3(e) and (f).

There must be a trust account client ledger and there must be a written accounting of receipts and disbursements (typically in the form of a settlement statement) for the funds provided by B or to which B becomes entitled to possess and use (e.g. under a promissory note) pursuant to Rule 1.15-3(b)(5) and Rule 1.15-3(e) and (f). The written accounting must be provided to B pursuant to Rule 1.15-3(e) and (f). The client ledger and the written accounting must show the receipt of the funds from or on behalf of B, including identification of funds provided for B’s use by C, and the disbursements of those funds. See Rule 1.15-3(b)(5), (e) and (f). See also N.C. Gen. Stat. § 45A-8.

There must be a trust account client ledger and there must be a written accounting of receipts and disbursements (typically in the form of a settlement statement) for the funds provided by C or on behalf of C. The written accounting must be provided to C pursuant to Rule 1.15-3(e) and (f). The ledger and written accounting must show the receipt of the funds from or on behalf of C and the disbursements of those funds, including any provision of some portion of C’s funds to B for B’s use in the A to B transaction. See Rule 1.15-3(b)(5), (e), and (f). See also N.C. Gen. Stat. § 45A-8.

There must be a written accounting of the sales proceeds to which the seller is the beneficial owner upon the recording of the applicable deed provided to each seller under Rule 1.15-3(f). This accounting must show all disbursements made from the seller’s proceeds, including all costs and fees deducted from the sales price due to the seller under the applicable contract. See Rule 1.15-3(f). See also N.C. Gen. Stat. § 45A-8.

Opinion #7 is limited to applying Rule 1.15-3(b)(5), Rule 1.15-3(e), and Rule 1.15-3(f); other authorities and obligations may require documents to be provided to other parties.

Inquiry #8:

Instead of being structured as A to B and B to C transactions, B enters into a contract to purchase with A and assigns his rights under that contract to C. B made the initial contact with Lawyer for representation and expects that Lawyer will also represent C. B does not want A and/or C to know all information about the transaction. The assignment documentation does not disclose all information about the transaction, such as the purchase price in the A to B purchase contract and/or the amount of the assignment fee going to B. B wants the settlement statements prepared in a manner that does not disclose all information to A and/or C. Can Lawyer represent B and C and close this transaction?

Opinion #8:

This scenario presents many of the same issues and considerations discussed above. Lawyer must be able to disclose all information about the transaction to client C and cannot close the transaction if he or she cannot do so. Lawyer must be able to be forthright with all parties and must be able to disclose to all parties any information required by law. All documents, closing statements, and deeds prepared by Lawyer must be accurate in all respects. Lawyer must be able to provide accurate accountings to A and C. See Opinions #1, #3, #6, and #7.

Inquiry #9:

Could Lawyer represent A, B, and C in these transactions?

Opinion #9:

The same issues and considerations discussed above would apply if Lawyer wished to engage in joint representation of A, B, and C. See Opinions #1 through #8.

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