The Foundation of Ethics in Real Estate Transactions

Transcription

1 The Foundation of Ethics in Real Estate Transactions PRESENTED BY MICHAEL RESKO, ESQ. (800)

2 MICHAEL RESKO, ESQ. Michael Resko earned his JD from New York University School of Law in After working for several years at a New York City law firm, in 1996 he opened his own practice, specializing in real estate transactions and litigation, business transactions and litigation, and estate planning and asset protection. There are several ideals on which the practice is founded: 1. be accessible and responsive to our clients; 2. offer practical solutions to our client s problems; 3. upfront and fair pricing of our services including written fee agreements in ALL matters; and 4. bringing all of our attention, experience and expertise to bear for every one of our clients. Michael was recently honored for 15 years of service as an Adjunct Professor at New York Law School, where he teaches courses in Real Estate Law and Contracts. He has also taught continuing legal education courses to other attorneys on the subject of New York real estate transactions. Michael is admitted to practice before the state and federal courts of New York and New Jersey and the United States Court of Appeals for the Second Circuit. Michael Resko can be contacted at: Michael Resko, Esq. 60 East 42nd Street, 46th Floor New York, NY (212) mikeresko@reskolawoffice.com 2

3 Outline Part I: Conflicts of Interest i. The Rule ii. Hypotheticals Part II: The Attorney as Escrow Agent i. Multiple uses of Escrow in real estate transactions a. Contract down-payment b. Post-closing issues ii. Disputes and Conflicts of Interest iii. Record-Keeping Exhibits 1) TOPIC: IMPUTATION OF CONFLICTS OF INTEREST; DUAL REPRESENTATION OF BUYER AND SELLER OF REAL ESTATE 2) TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; CONFLICT OF INTEREST 3) TOPIC: LAWYER/REAL ESTATE BROKER SHARING HER BROKERAGE COMMISSION WITH LAWYERS WHO REFER BUYERS OR SELLERS 4) TOPIC: LAWYER S PROVISION OF FREE LEGAL SERVICES WHEN LAWYER IS ALSO BROKER IN A REAL ESTATE TRANSACTION 5) TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; MORTGAGE BROKERAGE; TITLE ABSTRACT COMPANY; CONFLICT OF INTEREST 6) LAWYER AS ESCROW AGENT 7) Residential Contract 3

4 Part I: Conflicts of Interest (i) The Rule Rule 1.7: (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. (b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) each affected client gives informed consent, confirmed in writing, after full disclosure and consultation, provided, however, that a public entity cannot consent to any such representation. When the lawyer represents multiple clients in a single matter, the consultation shall include an explanation of the common representation and the advantages and risks involved; (2) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (3) the representation is not prohibited by law; and 4

5 (4) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal. (ii) Hypotheticals: (a) Can the Attorney represent the Buyer and Seller in a real estate transaction? The disinterested lawyer test: [I]n unusual and very limited circumstances one lawyer might properly undertake dual representation of both parties to a real estate transaction. [A] lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved. See, New York State Bar Association Committee on Professional Ethics, Opinion Number 807, January 29, 2007, Imputation of Conflicts of Interest; Dual Representation of Buyer and Seller of Real Estate, NY Eth. Op. 807, 2007 WL (b) Can the Attorney act as both the real estate broker and represent either party in a real estate transaction? In a word, no. As noted in N.Y. State 752, however, we have opined on a number of occasions over an extended period of time that, because of the strong financial interest of a lawyer who serves as a broker in the outcome of the brokerage effort, the roles of broker and lawyer in the same transaction are 5

6 incompatible and not subject to consent by the client. N.Y. State 752 and Opinions cited therein. That a lawyer s or law firm s participation in a separate brokerage business is limited largely or wholly to that of investor, with little or no management or operational activity, does not alter that result. It is the personal financial interest arising from the investment that creates the personal interest conflict that is the subject of Rule 1.7. See, New York State Bar Association Committee on Professional Ethics, Opinion Number 886, November 15, 2011, Ancillary Business Organizations; Conflict of Interest, NY Eth. Op. 886, 2011 WL What about referral fees? See, New York State Bar Association Committee on Professional Ethics, Opinion Number 845, October 14, 2010, Lawyer/Real Estate Broker Sharing Her Brokerage Commission with Lawyers Who Refer Buyers or Sellers, NY Eth. Op. 845, 2010 WL Or pro bono? See, New York State Bar Association Committee on Professional Ethics, Opinion Number 916, March 27, 2012, Lawyer s Provision of Free Legal Services When Lawyer is also Broker in a Real Estate Transaction, NY Eth. Op. 916, 2012 WL (c) Can the Attorney act as both the title company and represent either party in a real estate transaction? With respect to abstract title companies, in N.Y. State 595 (1988), N.Y. State 621 (1991), and N.Y. State 738 (2001), we held that a lawyer could, with consent after disclosure, refer real estate clients to a title abstract company in which the lawyer or his or her spouse had an ownership interest for purely ministerial abstract work, but not where the abstract company provided the additional service of preparing a title report or serving as an agent for the title underwriter. The central rationale was that if the abstract company prepared a report showing exceptions in title and recommending whether a title insurance policy should be issued, the law firm for the party would be required to negotiate these issues... with itself. N.Y. State 738 (2001). See also N.Y. State 731 (2000) (lawyer cannot pay employees to refer clients to lawyer-owned title company for non- 6

7 ministerial tasks). (d) Can the Attorney represent a mortgage lender and the Buyer in a real estate transaction? Taking the second question first, the proposal to represent both the buying client and the lender in the same transaction creates the potential for a clear conflict. The role of the lender s attorney can be, in part, to protect the interests of the bank in negotiating the loan agreement with the borrower and obtaining the necessary security on the borrower s property. The role of the buyer s attorney can be, in part, to protect the borrower s interests in those same matters. In situations in which the lawyer for the buyer could be called upon to negotiate with the lawyer for the lender, it would not be possible for one lawyer to play both roles, even with consent, because that would put the lawyer in the position of negotiating with him or herself. The lawyer could not zealously represent both parties. See DR 5-105(C); N.Y. City ( Situations in which a lawyer or members of a single law firm would be required to negotiate directly with herself or each other on behalf of multiple clients in a transaction... will rarely be consentable ). This committee has recognized, however, that in some circumstances there is no negotiation or assertion of rights between the lender and buyer in which a lawyer has any role. As long as full disclosure of the risks of dual representation has been made and knowing consent obtained, we have held such dual representation can be permissible. N.Y. State 8 (1965); N.Y. State 199 (1971); N.Y. State 438 (1976); N.Y. State 694 (1997); see also ABA Inf. 643 (1963) (same); ABA Inf. 837 (1965) (same). But see Nassau County (lawyer may not represent buyer and lender in same residential purchase and mortgage transaction). See, New York State Bar Association Committee on Professional Ethics, Opinion Number 753, February 26, 2002, Ancillary Business Organizations; Mortgage Brokerage; Title Abstract Company; Conflict of Interest, NY Eth. Op. 753, 2002 WL Part II: The Attorney as Escrow Agent 7

8 An escrow agent is a custodian or stakeholder of funds designated for a special purpose, usually pursuant to a written agreement. The escrow agent has contractual and fiduciary duties to all parties to the escrow arrangement and may dispose of the escrowed funds only in accordance with the terms of the escrow agreement or with the consent of all parties. The duties of an escrow agent are thus principally matters of contract and fiduciary law, rather than of ethics, and to that extent are beyond the jurisdiction of this Committee. A lawyer serving as escrow agent has fiduciary duties and obligations, not only to his client, but to all parties to the escrow agreement. In addition, a lawyer s conduct with respect to escrow arrangements is governed by the Code of Professional Responsibility. As discussed more fully below, the requirements of Canon 9 pertaining to the preservation, safekeeping and use of client funds and trust property are applicable to escrowed funds held by a lawyer, although such funds are not literally funds of clients. N.Y. City 82 8; N.Y. City (1980); N.Y.State 532 (1981); In Re Hollendonner, No. D 1 (N.J.Sup.Ct., Oct. 17, 1985). See, New York State Bar Association Committee on Professional Ethics, Formal Opinion Number , July 14, 1986, Lawyer as Escrow Agent, NY Eth. Op , 1986 WL (i) Multiple uses of Escrow in real estate transactions (a) Contract down-payment (b) Post-closing issues (ii) Disputes and Conflicts of Interest (iii) Record-keeping 8

9 NY Eth. Op. 807 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2007 WL New York State Bar Association Committee on Professional Ethics TOPIC: IMPUTATION OF CONFLICTS OF INTEREST; DUAL REPRESENTATION OF BUYER AND SELLER OF REAL ESTATE Opinion Number 807 January 29, 2007 DIGEST: A part-time associate of a law firm is associated with the law firm for the purpose of imputation of conflicts of interest. The buyer and seller of residential real estate may not engage separate attorneys in the same firm to advance each side s interests against the other, even if the clients give informed consent to the conflict of interest. *1 Code: DR 5-105(C), (D) QUESTION 1. A law firm employs a part-time associate who works for the firm two days per week. When not working at this law firm, the part-time associate operates her own separate private practice of law, at a separate location, where she works as a sole practitioner and handles her own clients, maintains her own files and has her own trust account. A client approached the sole practitioner at her separate practice and asked her to represent the client in buying some residential real estate. The seller approached a partner in the law firm that employs the sole practitioner part-time and asked the partner to represent him as the seller in the same transaction. May the law firm, with full disclosure and consent, represent the seller in a residential real estate transaction while its part-time associate, operating out of her separate practice, represents the buyer in the same transaction? Designation of part-time lawyer as an associate OPINION 2. A threshold question is whether it is proper to refer to the part-time lawyer as an associate of the law firm. The New York City Bar ethics committee has opined that a lawyer who works for a law firm on a continuing basis and spends hours per week on firm matters, but does not work exclusively for that law firm, cannot be referred to by the law firm as an associate. N.Y. City The New York City Bar opinion cites numerous authorities for the proposition that an associate means a salaried lawyeremployee and concludes that to call a per diem lawyer who is paid to work only on specific matters and who does not work exclusively for the firm an associate would be misleading. We agree that it would be misleading to clients and the public to call a lawyer 9

10 an associate where that lawyer is called in from time to time to work only on specific matters and is paid on a per diem basis We do not believe, however, that a part-time lawyer must work for only one firm in order to be properly called an associate. Where the part-time lawyer is regularly available to consult with the firm and its clients on a variety of matters, albeit during limited hours, the term associate can be proper even though the lawyer does not work exclusively for that firm. In this connection we note that a single lawyer can be a partner in two different law firms. Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384 (2d Cir. 1976). We see no reason that a lawyer cannot be an associate in two law firms where the lawyer has a part-time relationship with each firm, if the relationship with each otherwise bears the typical hallmarks of a firm-associate relationship as it is generally understood. Imputation of conflicts to a part-time associate *2 4. Disciplinary Rule 5-105(D) provides that [w]hile lawyers are associated in a law firm, none of them shall knowingly accept or continue employment when any one of them practicing alone would be prohibited from doing so under DR 5-101(A), DR 5-105(A) or (B), DR 5-108(A) or (B), or DR 9-101(B) except as otherwise provided therein. 5. A lawyer who is held out to the public as an associate is plainly associated with the firm for purposes of DR 5-105(D). The clear implication of calling a lawyer an associate of the law firm is that the lawyer is available to the firm for consultation and advice on a regular and continuing basis. N.Y. State 262 (1972) (term of counsel may only be used where there is a continuing relationship). See also N.Y. State 794 (2006); N.Y. State 793 (2006); N.Y. State 773 (2004); ABA (1990). A law firm may not denominate a lawyer as an associate and then take the position that the lawyer is not an associate for the purpose of imputation of conflicts of interest. 6. While properly calling a lawyer an associate means that he or she is associated with the law firm for the purposes of imputation of conflicts of interest, calling the same lawyer something else does not by itself mean that conflicts are not imputed. The label is not dispositive. A lawyer who has another title, such as contract lawyer, will be deemed to be associated with the law firm in the circumstances set forth in our opinion N.Y. State 715 (1999). Associated lawyers representing buyer and seller in real estate transactions 1 Cf. N.Y. State 715 (1999) ( If the Contract Lawyer has general access to the files of all clients of the firm and regularly participates in discussions of their affairs, then he or she should be deemed associated with the firm. However, if the firm has adopted procedures to ensure that the Contract Lawyer is privy only to information about clients he or she actually serves, then, in most cases, the Contract Lawyer should not be deemed to be associated with the firm for purposes of vicarious disqualification. ). 10

11 7. The buyer and the seller of real estate will ordinarily have differing interests in the transaction. Such differences, which would require the exercise of independent legal judgment by the lawyers for each party, include such things as the nature of the deed to be given; customs to be followed in making adjustments; points in the title report which may or may not be disregarded; and what title company to use. N.Y. State 38 (1966). 8. We recognized in N.Y. State 38 (1966) and N.Y. State 611 (1990) that in unusual and very limited circumstances one lawyer might properly undertake dual representation of both parties to a real estate transaction. Our conclusion was based on former Canon 6 and later on Disciplinary Rule 5-105(C), which provides: In the situations covered by DR 5-105(A) and (B) a lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved. 9. We concluded in N.Y. State 162 (1970) that a single lawyer could represent both parties to a real estate transaction where the interests of buyer and seller are not actually or potentially differing or would vary only slightly. In N.Y. State 611 (1990), we opined that a single lawyer could represent the seller and the lender in a real estate transaction where the parties have reached a complete accord on the business terms of the transaction, no points of importance remain for negotiations, and a title policy is to be obtained. See also N.Y. County 615 (1973) (lawyer may represent in a real estate transaction, with their consent, both buyer and seller who had already agreed upon the purchase price, time and manner of payment, and other terms and conditions of the sale). *3 10. Where such dual representation by a single lawyer might be permissible, we have cautioned that the lawyer should not routinely assume that dual representation of these parties will be ethically permissible in every transaction. N.Y. State 611. A lawyer undertaking to represent both buyer and seller of real estate should heed the admonition of N.Y. State 38 (1966), repeated in N.Y. State 162: Dual representation should be practiced sparingly and only when it is clear that neither party will suffer any disadvantage from it. It is difficult to justify, except in unusual and very limited circumstances Under DR 5-105(D), these limitations on a single lawyer representing two parties in a real estate transaction apply as well to representation by a single law firm. The opinions discussed above, in which we concluded that a single lawyer may, in unusual and very limited circumstances, undertake dual representation of both parties to a real estate transaction,-involve cases where there is little or no actual adversity between the two parties and they have both sought out a single lawyer (or law firm) to represent them 11

12 jointly. This might occur, for example in a family transaction or where two clients of a lawyer or law firm have agreed on substantially all of the terms of the transaction and together ask the lawyer or law firm to document the transaction for them both The situation under consideration in this opinion is quite different: Here a buyer and a seller of residential real estate each determined at the outset of the negotiations to be represented by separate lawyers in separate firms, and the two clients separately approached lawyers in different firms to negotiate the terms of the transaction between them. The parties decision at the outset that they should be represented by two different lawyers in two different firms reflects an actual adversity and conflict of interest between them that would require the two lawyers to negotiate or bargain against each other as adversaries. 13. A conflict like the one here is not consentable under DR 5-105(C). In such a situation, a disinterested lawyer would not conclude that the two lawyers could competently represent the interests of each. See N.Y. City ( If the dual representations require lawyers to directly negotiate the substantive business terms with each other, the direct adversity could preclude such concurrent representation even with consent. ). 3 CONCLUSION 14. The question is answered in the negative. NY Eth. Op. 807 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2007 WL End of Document 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 Even in this situation, if potential adversity between the clients became actual, the single lawyer or law firm would usually have to withdraw from representing both of the parties unless the clients have consented to have the lawyer continue for only one of them. DR 5-108(A) (a lawyer may not, without consent, represent a client adverse to a former client in the same or a substantially related matter); EC This conclusion is much the same as that which would be reached if two lawyers in the same firm sought consent for one to represent plaintiff and the other defendant in contested litigation. 12

13 NY Eth. Op. 886 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2011 WL New York State Bar Association Committee on Professional Ethics TOPIC: ANCILLARY BUSINESS ORGANIZATIONS; CONFLICT OF INTEREST Opinion Number 886 November 15, 2011 DIGEST: A lawyer with a substantial investment in a closely held real estate brokerage firm is precluded from representing a party to a real estate transaction in which the brokerage firm is acting as broker *1 Rules 1.7, 5.7 QUESTION 1. May an attorney with a substantial passive investment in a closely held nonlegal business entity that offers real estate brokerage, asset management and property management services represent a buyer, seller or lender in a transaction in which that nonlegal entity is serving as a broker? OPINION 2. The inquirer seeks to establish a closely held nonlegal entity to provide brokerage, asset management and property management services to investors with a focus largely on multi-family apartment assets. The inquirer contemplates a substantial and significant investment in the nonlegal entity but does not contemplate taking an active role in the management or operation of the entity. Inquirer intends to offer legal services to clients of the entity, and particularly services in purchase, sale and lease transactions in which the affiliated nonlegal entity is serving as a broker. The inquirer s firm would be one of several law firms from which clients of the nonlegal entity would be free to choose. The legal services would be offered only after full written disclosure of the inquirer s interest in the nonlegal entity. 3. A lawyer or a law firm may provide nonlegal services, themselves or through a separate entity, to clients or other persons. New York Rules of Professional Conduct (the Rules ) 5.7; see N.Y. State 752 (2002), N.Y. State 753 (2002) and N.Y. State 755 (2002). Whether the nonlegal services provided by the lawyer or law firm, or a separate entity in which they have an interest, are subject to the Rules depends upon whether such services are separate and distinct from any legal services that the lawyer or law firm may provide and, if so, whether the client could [not] reasonably believe that such nonlegal services are the subject of a client-lawyer relationship. Id.. The client will be presumed to believe that such nonlegal services are the subject of a client-lawyer relationship unless (i) the lawyer or law firm has advised the client in writing that such 13

14 services are not legal services and that the protections associated with a client-attorney relationship do not obtain or (ii) the lawyer s or law firm s interest in the separate entity providing such services is de minimis. Id.. 4. In all instances, however, the lawyer s services qua lawyer are subject to the Rules. In N.Y. State 752, we opined specifically that the application of the personal interest conflict rule found in DR 5-101(A), a precursor of Rule 1.7, to a lawyer seeking to serve in the dual roles of lawyer and broker, inter alia, survived the adoption of DR 1-106, the direct predecessor of Rule 5.7. We here reaffirm our opinion in N.Y. State 752 and hold further that, in our opinion, Rule 1.7 applies with undiminished force in circumstances where a lawyer s conflicting personal interest arises from a separate, nonlegal business or activity permitted by Rule 5.7. *2 5. Thus, absent informed consent, a lawyer may not provide legal representation to a person or entity if a substantial risk exists that the lawyer s personal interests arising from a permitted separate, nonlegal activity will affect the lawyer s professional judgment on behalf of that person or entity. Rule 1.7. Informed consent is dependent upon, inter alia, the lawyer s reasonable belief that the lawyer will be able to provide competent and diligent representation. Id. 6. As noted in N.Y. State 752, however, we have opined on a number of occasions over an extended period of time that, because of the strong financial interest of a lawyer who serves as a broker in the outcome of the brokerage effort, the roles of broker and lawyer in the same transaction are incompatible and not subject to consent by the client. N.Y. State 752 and Opinions cited therein. That a lawyer s or law firm s participation in a separate brokerage business is limited largely or wholly to that of investor, with little or no management or operational activity, does not alter that result. It is the personal financial interest arising from the investment that creates the personal interest conflict that is the subject of Rule 1.7. CONCLUSION 7. For the reasons stated, a lawyer with a substantial passive investment in a separate, closely held nonlegal entity that offers real estate brokerage, asset management and property management services may not represent a buyer, seller or lender in a transaction in which such separate nonlegal entity is serving as a broker. (40-10) NY Eth. Op. 886 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2011 WL End of Document 2016 Thomson Reuters. No claim to original U.S. Government Works. 14

15 NY Eth. Op. 845 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2010 WL New York State Bar Association Committee on Professional Ethics TOPIC: LAWYER/REAL ESTATE BROKER SHARING HER BROKERAGE COMMISSION WITH LAWYERS WHO REFER BUYERS OR SELLERS Opinion Number 845 October 14, 2010 DIGEST: A lawyer who is also a real estate broker may ethically offer to share her broker s commission with attorneys who refer buyers or sellers to her if either (a) the referring lawyer is not representing the buyer or seller in the real estate transaction, or (b) the referring lawyer is representing the buyer or seller in the real estate transaction but remits or credits the referral fee to the client and obtains the client s informed consent to the potential conflict arising from the referral fee. *1 Rules: 1.0(a) 1.7, 1.8(f), 8.4(a). FACTS 1. An attorney has recently decided to work as a real estate broker, but has not given up her New York law license. She desires to advertise that she will pay a percentage of her broker s commission to attorneys who refer buyers or sellers to her. In the past, she has received similar letters from other attorneys, but she is unsure if it such offers are ethically acceptable. QUESTION 2. May a licensed lawyer who is also a real estate broker (but is acting solely as a broker in any real estate transaction) ethically advertise that she will share her broker s commission with attorneys who refer buyers or sellers to her? OPINION 3. The Committee assumes for purposes of this analysis that (a) the inquiring attorney is functioning solely as a real estate broker, not as a lawyer, in the real estate transactions in question, and (b) if the inquiring attorney offers any legal services in other matters, they will be distinct from the non-legal services which she renders as a real estate broker, and (c) the attorney will comply with Rule 5.7 of the New York Rules of Professional Conduct (the Rules ), effective April 1, 2009, if it is applicable. A. Communications to Other Lawyers Are Not advertisements 15

16 4. As a preliminary matter, an advertisement that an attorney places solely in her capacity as a real estate broker, with no intention of attracting legal business, is not an advertisement within the meaning of Rule 1.0(a) of the New York Rules of Professional Conduct. Rule 1.0(a) provides as follows: Advertisement means any public or private communication made by or on behalf of a lawyer or law firm about that lawyer or law firm s services, the primary purpose of which is for the retention of the lawyer or law firm. It does not include communications to existing clients or other lawyers. 5. Here, since the purpose of the inquiring attorney s communications offering to share her brokerage commissions is not the retention of the lawyer as a lawyer, the broker s communication lacks an essential element of an advertisement under Rule 1.0(a). Also, the attorney proposes to direct her referral fee offer to other lawyers, and Rule 1.0(a) s definition of advertisement expressly excludes communications to... other lawyers. B. Referral fees to lawyers who represent the buyers or sellers in the transaction *2 6. The Committee s jurisdiction is limited to interpreting and applying the Rules. The Committee does not render opinions on questions of law, and thus does not opine on whether the proposed arrangement violates any statute or regulation. If the proposed arrangement violates any state or federal law or regulation, it perforce would be unethical. N.Y. State 667 (1994); N.Y. State 595 (1988); N.Y. State 576 (1986). For purposes of this opinion, however, the Committee assumes, with respect to substantive law outside the Rules of Professional Conduct, that an attorney lawfully may accept a share of a real estate brokerage commission, that a real estate broker may lawfully pay a share of her commission to a lawyer as a referral fee, and that the proposed arrangement otherwise is legal. 7. Rule 8.4(a) provides that a lawyer shall not violate or attempt to violate the Rules of Professional Conduct, [or] knowingly assist or induce another to do so... We therefore focus our analysis on whether another attorney s receipt of the referral fees that the inquiring attorney proposes to pay would violate the Rules of Professional Conduct. If so, then the inquiring attorney s payment of such fees would assist or induce another (the receiving lawyer) to do so. 8. This Committee has often opined that a lawyer cannot act as a lawyer in the same transaction in which a lawyer acts a real estate broker because of the possible conflict between the client s interest and the lawyer s own personal interest. See, e.g., N.Y. State 752 (2002); N.Y. State 493 (1978); N.Y. State 340 (1974); N.Y. State 291 (1973); N.Y. State 208 (1971). The rationale is that the broker s interest in closing the transaction interferes with the lawyer s ability to render independent advice with respect to the transaction. 16

17 N.Y. State 752 (2002). Thus, acting as both a lawyer and broker in a real estate transaction was a nonconsentable conflict under DR (A) of New York s former Code of Professional Responsibility, which prohibited a lawyer from accepting or continuing employment if the exercise of professional judgment on behalf of a client will be or reasonably may be affected by the lawyer s own financial, business, property, or personal interests, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents The successor to DR 5-101(A) is Rule 1.7(a)(2), which prohibits representation if a reasonable lawyer would conclude that there is a significant risk that the lawyer s professional judgment on behalf of a client will be adversely affected by the lawyer s own financial, business, property or other personal interests. This prohibition applies in the circumstances before us unless, per Rule 1.7(b)(1) and (b)(4), the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client and the client gives informed consent, confirmed in writing. *3 10. In this Committee s opinion, under Rule 1.7 it remains a nonconsentable conflict for an attorney to act as both a lawyer and broker in the same transaction. That leads to the question whether a lawyer who could not act as counsel in a real estate transaction may nevertheless receive a share of the broker s commission in that transaction. 11. This Committee opined in N.Y. State 745 (2001) that a lawyer who is disqualified from a matter on nonconsentable conflict of interest grounds may not receive a referral fee for referring that matter. Cf., Nassau County (N.Y.L.J., Dec. 4, 1989, at 7, col. 1) (mortgage broker prohibited from paying a commission to an attorney, whom the broker would denominate as an associate broker, if the associate broker would also represent the client in the real estate transaction). 12. Rule 8.4(a) says that a lawyer shall not knowingly assist or induce another to violate the Rules of Professional Conduct, so an attorney functioning as a real estate broker is prohibited from paying a referral fee or partial commission to a referring attorney if the attorney-broker knows that the referring attorney s acceptance of the payment would breach these Rules. See, e.g., Nassau County 93-3 (N.Y.L.J., March 28, 1994, at 8, col. 4) (an attorney has an affirmative duty to report the misconduct of another lawyer who has undertaken to act as a lawyer and real estate broker on the same transaction). 13. Accordingly, under Rule 8.4(a), if the inquiring lawyer/broker knows that the referring attorney will simultaneously represent the buyer or seller in the real estate transaction and keep a share of the real estate brokerage commission, the inquiring attorney may not share her brokerage commission with the referring attorney. C. Referral fees to lawyers who represent buyers or sellers in the transaction but remit or credit the referral fee to the client 17

18 14. The next question is whether a lawyer/broker may properly pay referral fees where the attorney receiving the referral fee is (or will be) acting as a lawyer for the referred brokerage client in the same real estate transaction but the receiving attorney agrees to remit or credit the referral fee to the client. 15. In N.Y. State 753 (2002), we explained the rationale for the ban on an attorney serving as both a real estate broker and a lawyer in the same real estate transaction: a lawyer should not have a personal stake in the advice rendered, and the broker who is paid if the transaction closes cannot be fully independent in advising the client as a lawyer. If the lawyer receiving the referral fee will remit or credit the full amount to the client, that will largely remove the receiving attorney s personal stake but it will not entirely negate the potential for conflict. Even if the lawyer remits or credits the referral fee to the client, the attorney will still have an incentive to refer real estate clients to a broker who pays a referral fee (i.e., shares her commission) because the referral fee (in effect a reduced real estate brokerage commission) will enable the attorney to offer potential clients a reduced brokerage fee (or an equivalent cash payment or credit) for utilizing the attorney s services, thus attracting more business to the attorney. *4 16. In N.Y. State 682 (1996), we noted that our prior opinions have allowed an attorney to receive a referral fee from providers of non-legal services or products for referring clients if (a) the client consents after full disclosure, (b) the legal fee and the referral fee together do not constitute an excessive fee for legal services, and (c) the attorney remits the referral fee to the client if the client so requests. In these opinions, the referral concerned a product or service that was fairly uniform among providers and either was (1) required in an objectively determinable quantity incident to the legal services performed by the attorney (e.g., a mortgage and title insurance in connection with a real estate transaction), or (2) was unconnected with any particular legal services (e.g. certificates of deposit). These conflicts were consentable because the fungible nature of the products or services and the objectively determinable amount at issue insulate the client from any ill effects from the attorney s conflicting interest. 17. On the other hand, N.Y. State 682 also noted two prior opinions stating that the attorney s receipt of a referral fee or other financial interest in a transaction with the client was absolutely forbidden where the interests of the attorney and client were in such direct conflict that a client could not give meaningful consent to the conflict transaction. The conflict in those opinions was that the attorney s remuneration varied according to the quantity of the product or service... purchased by the client, which was itself based upon the attorney s legal advice... See N.Y. State 682 (1994) (investment advice); N.Y. State 671 (1994) (life insurance); N.Y. State 619 (1991) (life insurance). The prospect of a commission might tempt the attorney to give the client different (and inferior) legal estate planning advice due to the attorney s financial interest. Thus, N.Y. State 682 explained and extended the analysis in N.Y. State 671 as follows: 18

19 [N]o meaningful consent is available to permit an attorney to retain life insurance referral fees. The services of an investment advisor, similar to life insurance carriers, vary substantially among different providers. Also like life insurance, the amount of the product or services required - i.e., the amount of money entrusted to the investment advisor - is not objectively determined by the transaction, presenting the potential that the attorney might increase the referral fee by recommending that more of the client s funds be entrusted to the advisor without appropriate regard to the client s interests.... Accordingly, disclosure and consent would not cure the direct and substantial conflict between the client s and lawyer s interests inherent in accepting a referral fee from the investment advisor, even where the client is offered the choice to claim the referral fee and the attorney purports to exercise independent judgment in framing his or her initial recommendation to consult an investment advisor. Clients view recommendations of other professionals as part of their representation by their lawyers, and expect that lawyers will act as trusted fiduciaries in such matters. *5 18. We think the present situation real estate brokerage falls somewhere in between fairly uniform products and services like title insurance and certificates of deposit (where receiving a referral fee in connection with client work is routinely consentable as long as the referral fee is remitted to the client), on the one hand, and highly variable products and services like life insurance and investment advice (where receiving a referral fee is nonconsentable even if the referral fee is remitted to the client), on the other hand. While the quality of real estate brokerage services varies among providers, the services are required in an objectively determinable quantity incident to the legal services performed by the attorney because a client typically employs only one broker per transaction, commissions are relatively standard, and the size of the broker s commission depends on the price of the home the client purchases. Moreover, although a referral fee gives the lawyer a financial incentive to refer a client to that particular broker even if the fee is passed on to the client, clients are generally aware that they have many real estate brokers to choose from, and clients are generally capable of evaluating different brokers. 19. Therefore, this Committee believes that a real estate lawyer may ethically accept a referral fee with the client s informed consent, including a reminder that the client is free to choose a real estate broker other than the one her lawyer recommends. ( Informed consent is defined in Rule 1.0(j) to include the lawyer s communication of information adequate for the person to make an informed decision, including the material risks of the proposed course of conduct and reasonably available alternatives. ) As a corollary, a lawyer/broker may pay a share of her commission to a lawyer who refers a buyer or seller if the referring lawyer obtains her own client s informed consent and remits or credits the commission to that client. 19

20 20. There is one more step. The lawyer/broker (the inquirer here) must confirm that the referring attorney will remit or credit the fee or commission to the client. This should be readily ascertainable and does not threaten privileged communications between the referring lawyer and her client. However, because of practical difficulties and the danger of intruding on the attorney-client relationship, the lawyer/broker need not confirm the referring attorney s compliance with the disclosure and consent requirements, (This point is further explained below in the last paragraph before our conclusion.) D. Referral fees to lawyers who do not represent the referred clients in the transaction 21. The final question is whether a lawyer/broker may properly pay referral fees to an attorney who refers clients on real estate transactions in which the referring attorney will not be representing the client. We are not aware of any New York ethics opinion addressing this precise issue, but several other jurisdictions have considered whether a lawyer may generally accept a referral fee from a person providing a non-legal product or service to a referred client. The results have been inconsistent. Many of the conflicting authorities were collected in Pennsylvania Opinion , 2000 WL , which concluded as follows: *6 [T]he Rules permit a lawyer to accept a referral fee from a service provider, provided that the lawyer is scrupulous in determining under the particular circumstances that payment of the referral fee will not impact the lawyer-client relationship or the lawyer s exercise of independent professional judgment and that the client consents to the arrangement on the basis of full disclosure and consultation. 22. In N.Y. State 764 (2003), this Committee approved an attorney s acceptance of an earnings credit against bank charges based upon balances held in the attorney s IOLA account as long as the attorney made full disclosure to the client and obtained the client s informed consent, even though the earnings credit may well influence the attorney s decision as to where client s trust funds should be deposited, and that decision would have a direct and adverse financial impact upon the client if an IOLA account is chosen. The Committee s conclusion was based on the language of former DR 5-107(A)(2) and EC That language is now contained, with little change, in Rule 1.8(f), which provides, in relevant part, as follows: A lawyer shall not accept... anything of value related to the lawyer s representation of the client, from one other than the client, unless: (1) the client gives informed consent; (2) there is no interference with the lawyer s independent professional judgment or with the client-lawyer relationship; and 20

21 (3) the client s confidential information is protected as required by Rule We believe that N.Y. State 764 remains applicable under Rule 1.8(f). Thus, assuming that the requisites set forth in Rule 1.8(f) are met, a lawyer attorney may ethically accept referral fees or commissions from non-legal service providers in matters where the lawyer is not representing the client. 24. As a real estate broker, an attorney generally is not ethically obligated to affirmatively monitor the details of compliance of the attorneys from whom the lawyer/ broker receives referrals. In particular, the lawyer/broker is not expected to monitor whether referring attorneys make full disclosure to, and obtain informed consent from, their clients. Ordinarily, therefore, it would not be a violation of Rule 8.4(a) for the inquiring attorney to offer and pay referral fees to attorneys for client referrals if the referring attorneys will not actually be representing the clients in the real estate transactions at issue. 25. However, an attorney cannot ignore obvious violations, see, Rule 1.0(k) ( knowledge may be inferred from circumstances ), so if the inquiring attorney knows that a referring attorney has not obtained informed consent from that client regarding the referral to the lawyer/broker, then the lawyer/broker should (a) withhold the referral fee until the referring attorney cures the violation, or (b) refuse the referral, or (c) take other appropriate remedial steps so that she does not assist another lawyer in violating the Rules of Professional Conduct. CONCLUSION *7 26. Because the inquiring attorney is still a licensed attorney, Rule 8.4(a) prohibits her from assisting another lawyer in conduct that would violate the Rules of Professional Conduct. Accordingly, whether the inquiring attorney may share her real estate commissions with referring attorneys depends on whether the referring lawyer would be violating the Rules by accepting the referral fee. 27. An attorney is prohibited from simultaneously representing a client in a real estate transaction and receiving a portion of the brokerage commission (i.e., a referral fee) from a real estate broker to whom the attorney refers a client, unless the attorney remits or credits the referral fee to that client. An attorney functioning as a real estate broker (such as the inquiring attorney) is therefore prohibited from knowingly paying a referral fee or sharing a commission without confirming that the commission will be remitted, or equivalent credit given, to the referring attorney s client. 28. However, an attorney functioning as a real estate broker is not prohibited from paying a referral fee or sharing her real estate commission with an attorney who refers 21

22 her clients to the lawyer/broker if the referring attorney will not be representing the client in the real estate transaction at issue. NY Eth. Op. 845 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2010 WL End of Document 2016 Thomson Reuters. No claim to original U.S. Government Works. 22

23 NY Eth. Op. 916 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2012 WL New York State Bar Association Committee on Professional Ethics TOPIC: LAWYER S PROVISION OF FREE LEGAL SERVICES WHEN LAWYER IS ALSO BROKER IN A REAL ESTATE TRANSACTION Opinion Number 916 March 27, 2012 DIGEST: A lawyer may not offer free legal services as an add-on bonus to a party to a real estate transaction in which the lawyer is acting as broker, even if the lawyer advises the party that the party may retain separate counsel. *1 Rules: 1.7(a) QUESTION 1. The inquiring lawyer asks whether a lawyer may serve as a real estate broker in a transaction, and be paid for that service, while also offering free legal services on contract and other legal matters in the same transaction with the disclosure that the client is free, if the client so chooses, to retain a separate attorney to represent the client in the transaction. For the reasons set forth below, our answer is no. OPINION 2. In N.Y. State 752 (2003), we wrote: In a number of opinions that this committee has issued over the years, we have opined that in certain circumstances a lawyer also engaged in a nonlegal business cannot provide both legal and nonlegal services in the same transaction even with the consent of the client. Brokerage businesses are a salient example. We held in N.Y. State 208 (1971), N.Y. State 291 (1973), N.Y. State 340 (1974), and N.Y. State 493 (1978), that a lawyer could not act as a lawyer in the same transaction in which the lawyer or his or her spouse acted as a real estate broker because of the possible conflict between his client s and his own personal interest. N.Y. State 208 (1971). Accord N.Y. County 685 (1991); see also N.Y. State 694 (1997) (impermissible to participate in broker-run home buyer s program because of resulting strong interest in broker s success). 3. The rationale of these opinions is that the broker s personal and financial interest in closing the transaction interferes with the lawyer s ability to render independent advice with respect to the transaction consistent with the principles now embodied in Rule of Professional Conduct 1.7(a). Otherwise put, the problem primarily stems not from the fee the lawyer receives from rendering purely legal advice, but from the separate and independent financial interest of the lawyer/broker arising from compensation for the 23

24 non-legal services. In our judgment, that financial interest would create an influence that informed consent cannot relieve. We have reached similar conclusions with respect to insurance brokers and securities brokers. N.Y. State 536 (1981); N.Y. State 619 (1991). See also N.Y. State 595 (1988); N.Y. State 621 (1991); N.Y. State 738 (2001) (dual role of lawyer for real estate client and abstract title examiner impermissible because of possible need to negotiate exceptions to title). 4. Accordingly, an offer of free legal services on top of the non-legal services a lawyer proposes to render does not remedy the ill at the heart of our prior opinions. A client s natural attraction to the cost-saving involved in the lawyer s proposal only fortifies our concern. A lawyer rendering free legal services, whether pro bono publico or as an appendage to non-legal services the lawyer is also providing, owes the client a duty of rendering independent professional judgment. That duty does not allow the lawyer to represent the client when a reasonable lawyer would find a significant risk that the lawyer s professional judgment would be adversely affected by the lawyer s personal financial interests. The more likely a client is to want or need legal services free of charge, the more important is the protection of assuring the exercise of independent professional judgment unburdened by conflicting personal interests. Advising the client that the client could hire another lawyer the functional equivalent of an effort at consent that we have found wanting in these circumstances does not eliminate the problem animating our opinions. CONCLUSION *2 5. A lawyer may not offer to provide free legal services in a real estate transaction in which the lawyer is acting and being paid as the broker, even if the lawyer/broker advises that the client has the option to retain separate counsel. (58-11) NY Eth. Op. 916 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 2012 WL End of Document 2016 Thomson Reuters. No claim to original U.S. Government Works. 24