Q&A: A Conflict of Interest

Q “Is it legal for a lawyer that represents a condo to buy a foreclosed unit and then flip it?”

—Ethical Board Member

A “When an issue arises concerning the ethical conduct of an attorney, the precise facts are very important,” says J. David Ramsey, an attorney partner with the Woodbridge, New Jersey-based Greenbaum, Rowe, Smith & Davis LLP.

“Here we have the barest facts—an association's attorney purchased a foreclosed unit and then resold it, presumably for a profit. There are a myriad of factors that might play into the answer to this question. For instance, was the attorney also handling a collection against this owner? As a result of handling the collection was the attorney privy to information concerning the sale of the unit that wouldn't be known to the board or other owners in the association? Did the attorney disclose his interest in participating in the foreclosure sale to the board and obtain its consent to do so? Did the attorney advise the board that the association might be in a position to realize a significant gain if it purchased the unit at foreclosure? Did the attorney's purchase of the unit result in any delinquency in maintenance fees due the association? Was there competitive bidding at the foreclosure sale?

“Let me say from the outset that an attorney representing a client who participates in the purchase of a foreclosed unit is treading on very dangerous ground. While under a particular fact pattern such conduct might not cross the strict lines established by the Rules of Professional Conduct, the possibility that a conflict may be alleged is so significant that most attorneys would avoid such conduct to simply avoid negatively impacting his or her relationship with the client.

“The answer to this simple question might be affected by the answers to the questions set forth above. For the sake of providing some direction, we will assume the following. The attorney regularly represented the association and was knowledgeable about the foreclosure and the facts surrounding the foreclosure due to the attorney's role on behalf of the association. We will also assume that the attorney properly advised the board that there might be an advantage to be gained by the association participating in the foreclosure sale, but was advised that theboard was opposed to participating. Following that the attorney advised the board that he or she was interested in bidding at the foreclosure sale, and obtained the board's informed, writtenconsentpriorto doing so. That consent was granted ina meeting of the board open to the membership (we do not believe that theclient's consent tothe attorney's conflict of interest wouldcome under the four categories that allows boards to take action in closed session).

“The activities of the attorney in this case come under the Rules of Professional Conduct that govern conflicts of interest. Those rules prohibit two types of conflict, those where the representation of a client involves a matter adverse to another client of the attorney or firm, and those that involve the attorney's responsibilities to a former client, to a third party,or where the attorney has a personal interest. This matter involves the latter.

“The general rule in this instance is that an attorney may not advise a client on a matter where the representation is 'materially limited by the attorney's own interests, unless the affected client consents after full disclosure.' While there are no opinions of the Ethics Advisory Committee orreported case law on thefactual scenario you present, there are opinions and cases that bear on related matters.Given the fact that the attorney's personal participation came towards the end of the matter it may be that there was little personal interest involved while he or she was involved in giving the board advice about the collection action against the delinquent owner. There have been situations where it has been held that no matter how much disclosure there has been, the attorney's personal interests so override the attorney's duty to the client that it cannot be permitted, even if the client consents. For instance, where an attorney had an interest in a partnership that was purchasing property, he could not represent both the buyer and seller, even with the clients' consents. His personal interest was so significant it disqualified him from representation. Similarly, where an attorney might earn a fee or commission from an ancillary business entity, such as a title company, it has been determined that the attorney's objectivitymay beso compromised by his or her financial interest that the attorney cannot both represent a buyer in a real estate transactionandhave an interest in a title agency that earns a premium from the real estate transaction.

“Given the foregoing, while no firm conclusion can be drawn with absolute certainty, it would appear thatif the hypothetical facts recited abovewere present, the attorney, with full disclosure and the informedconsent of the client, could likely participate in purchasing the foreclosed property at the foreclosure sale. Despite that,were our opinion soughtby the attorney considering this, we would discourage it.”

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