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                                         95 N.J.L.J. 1145
                                        November 9, 1972


Appointed by the New Jersey Supreme Court


Conflict of Interest
Representing Mortgagor and
Mortgagee Representing Vendor and Vendee

    An attorney asks this Committee what would constitute full disclosure of potential conflict of interest positions in which he might find himself if he represents, for example, the lender and borrower in a mortgage transaction or the purchaser and seller in a real estate transaction. The attorney has proposed forms of letters, of disclosure which might be written prior to embarking upon such representation, in an endeavor to apprise the prospective clients of the possible conflicts which might arise. Twelve possible conflict situations are suggested by the inquirer in a proposed form of letter. One might conceive of other possible situations. However, we believe that any such form letters would prove more confusing than helpful to an uninformed layman.
    In considering the problem, the bar has for guidance the Supreme Court's opinion in In re Kamp, 40 N.J. 588 (1963), in which, the Court cited the Canon of Professional Ethics, Canon 6 then part of our court rules, and pointed out that an attorney who primarily represented a vendor of realty as, well as the purchaser, without disclosing such fact to the purchaser, violated the canon. The Court stated that the fact that there had existed in that transaction no situation which cast doubt upon the advisability of the purchaser accepting title did not exculpate the attorney. At page 596, the Court pointed out that, where the same attorney represents the purchaser of real estate and also the party financing the transaction (such as a bank or savings and loan association), to the extent that both parties seek a marketable title there is no conflict of interest, but that a conflict might
arise concerning the terms of financing and, therefore, it was, the duty of the attorney to make clear to the purchaser the potential area of conflict.
    Canon 6 is now superseded by the Disciplinary Rules of the Code of Professional Responsibility adopted by our Supreme Court and now part of the Rules Governing the Courts of the State of New Jersey. DR 5-105(C) provides that a lawyer may represent multiple clients if he believes that he can adequately represent the interests of each and if each consents to the representation after full disclosure of the facts and of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.
    It seems clear that there is a greater potential danger in the representation by an attorney of a buyer and a seller in a real estate transaction than there is in his representing a lender and a borrower. In the latter transaction, as noted in In re Kamp, supra, each side seeks a clear and marketable title and, therefore, there can be no conflict on that score. The attorney representing the lending institution is concerned that there be no possible cloud on the title and, hence, he is equally protecting both parties.
    With respect to the terms of the financing arrangement between the lending institution and the borrower - the inquirer concerns himself principally with this type of representation, although obviously the same situation might arise between a private lender and a borrower - the attorney rarely enters the picture until these are resolved and they generally are specifically set forth in a letter sent to the borrower by the lending institution. In re Kamp,
supra. The borrower is asked to sign a copy of the letter approving the terms and return it to the lending institution. The provisions of the mortgage and the note or bond will be in accordance with the commitment for the loan originally sent to the borrower.
    It is true that at this stage of the proceedings, where the borrower is represented by the lender's counsel, the latter, in drawing the mortgage and note or bonds could depart from the terms of the commitment to the detriment of the borrower, but this is an unlikely situation. Mortgagors are now given protection by statute against such things as being improperly charged without their consent for obtaining a loan, improper prepayment provisions, changes in interest rate, etc. N.J.S.A. 46:10A and 46:lOB. These statutes contain penal provisions. See, also, Federal Reserve Regulation Z, where, under certain circumstances, copies of mortgages, notes and other incitements evidencing indebtedness are required to be given to the borrower.

    While we believe that the better practice would be to have the borrower separately represented practical consideration must be given to the cost of one attorney for the borrower, rather than two, and the fact that in protecting the lender the attorney will also protect the borrower. The possible conflict of interest situation weighed in that frame of reference is so minimal as not to require us to find it unethical. An attorney for a lending institution may represent both the institution and the borrower, providing, of course, that he makes it plain to the borrower that he is representing the lender also and that, if an unforeseen conflict does arise, he will advise the borrower so that the latter can then obtain his own attorney.
    As DR 5-105(C) states, the attorney in each case first must decide that he can properly exercise his independent professional judgment on behalf of both sides of the transaction. DR 5-105(A), in referring to when a lawyer should decline employment, says that he must do so if his independent professional judgment "will be or is likely to be adversely affected." Paragraph (C) of that rule uses the language that the lawyer may represent multiple clients "if he believes that he can adequately represent the interests of each." Therefore, it is a judgment to be made by each attorney as the situation arises, and any attempt by this Committee to promulgate guidelines would be presumptuous and raise the inference that lawyers could not be trusted to make proper decisions under DR 5-105. Lawyers have been put on notice by the Kamp case and by decisions of this Committee that they cannot with impunity represent obviously conflicting positions.
    It seems to us that this Committee should not suggest or approve any form of letter from attorney to client but that it should be left to each individual attorney to make clear to the client that he is representing both parties.
    The inquirer also asks whether the situation would be different if the attorney for the lending institution were also one of its directors. We think not. While as a director he might pass
upon the loan and its terms, his responsibilities as an attorney are entirely different. See our Opinion 229, 95 N.J.L.J. 81 (1972).
    We do conclude, however, that one attorney should not represent both parties in connection with the preparation and execution of a contract of sale. Generally, it is at this stage of negotiations for the sale of property that a buyer and a seller have their greatest difficulties. Their interests are in conflict if for no other reason than the buyer wishes to obtain the property as cheaply as possible and the seller wishes to get the highest price. At this juncture, also, there can and frequently do arise disputes concerning fixtures to be left in the premises, assumption
of mortgages, mortgage contingencies, and other matters in which there can be serious disagreements, in all of which the interests of the buyer and seller will be diametrically opposed.
    There are many reported cases which illustrate these problems and we cite but two, Winter v. Toldt, 32 N.J. Super. 443 (App. Div.
l954), and Clark v. Jelsma, 40 N.J. Super. 58 (App. Div. 1955). While these are both suits by real estate brokers, they provide examples of disputes between parties as to the provisions of a contract of sale.
    Further difficulties are presented if the same attorney tries to represent both parties at the closing, where there may be disputes about the changed condition of the property between the date of the contract of sale and the closing, adjustments of taxes and assessments, and escrow funds. Other matters might be mentioned, but these suffice to point up the danger involved. In such situations, the attorney cannot exercise his independent professional judgment in behalf of one client without adversely affecting the other. DR 5-105(A).
    We, therefore, conclude that, assuming full disclosure and consent, the practice of one attorney representing both the borrower and the lender may present problems in some instances, but is not unethical and is not precluded by decisional law and should be approached with great caution. However, the representation of a buyer and a seller in connection with the preparation and execution of a contract of sale of real property is so fraught with obvious situations where a conflict may arise that one attorney shall not undertake to represent both parties in such a situation.

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