87 N.J.L.J. 705
November 5, 1964
Conflict of Interests
Advertising and Solicitation
In October 1963 our Supreme Court handed down its decision in
the case of In re Kamp, 40 N.J. 588. The opinion was concerned with
ethical problems arising from the conduct of an attorney representing the owner of a real estate tract being developed for residential housing. Since then this Committee has several times considered related problems. See N.J. Advisory Committee on Professional Ethics, Opinions 13, 87 N.J.L.J. 1 (1964); 27, 87 N.J.L.J. 97 (1964); 40, 87 N.J.L.J. 281 (1964). Our earlier Opinion 7, 86 N.J.L.J. 405 (1963), quoted in Kamp, did likewise. We are now presented with a number of further inquiries of like nature posing issues thought not to have been reached in Kamp or touched upon in our earlier opinions.
It may be helpful briefly to restate the factual situation which commonly gives rise to this type of problem. In a typical instance of this sort a developer will retain an attorney to act for him who, among other things, will search the title to the tract, take steps to remove any cloud upon the title, represent the developer in presenting the proposed subdivision to the local planning board and do the legal work involved in connection with preparing for the construction of roads, the introduction of utilities and the like. Additionally, in such a typical situation, the attorney, either alone or in company with the developer, will make arrangements with a financial institution to supply the developer with funds needed to improve his tract and construct homes upon it. The lending institution, it is said, as a prerequisite to supplying construction money, will insist that the arrangement be such as to result in permanent mortgage loans upon the individual homes being placed with the institution. The lending of construction funds is apparently only attractive when coupled with an assurance that eventually the institution will be able to add a number of permanent mortgage loans to its investment portfolio. The arrangements with the lending institutions will also generally include an understanding that the developer's attorney will represent the lender in connection with the placing of all individual mortgage loans on the tract. The most important question in the field of professional ethics that then arises is as to whether and under what circumstances the same attorney, now representing both seller and lender, may also represent an individual purchaser of a home. That he may do so in disregard of various canons of professional ethics was made clear in the Kamp case. It was, however, there noted that it is not per se objectionable for an attorney to represent both a buyer and seller in the purchase and sale of a piece of real estate, provided that full disclosure of the dual representation and of all pertinent facts is made to both parties, each of whom unequivocally approves the arrangement. 40 N.J. 588, 595. We believe, however, that certain important factors are present in the representation of a real estate developer as described above which do not exist when an attorney is handling the simple case of a sale and purchase of a single piece of property.
The first of these arises from the fact that the attorney, either consciously or unconsciously, will be influenced by a desire to maintain his economically profitable relationship with the seller. The developer has more homes to sell, hence more profitable professional employment for the attorney. The desire to maintain this relationship will make it difficult in any given case for the attorney to devote himself to the interests of a buyer with the same degree of vigor and undivided loyalty which would be the case were such desire not present. This motivation may very probably cause the attorney's representation of the buyer to be less searching, less demanding and in general less effective than would be the case were the attorney not reluctant to risk the loss of what for him has become a profitable monopoly.
A second point, interrelated with the first, stems from the fact that the attorney acquires a very extensive and intimate knowledge of the developer and of the tract in question as the result of the work he carries out for the owner. If the developer will not be able or willing to construct roads as rapidly as is represented, if a subcontractor is not doing his work well, if drainage problems exist and have not been solved, if there is a question as to when and how all utilities will be introduced, if, as an example only, the masonry foundations of various homes have proven defective, the attorney in each case will perforce possess this knowledge. These are only a few of the possibilities. Anyone who has had direct contact with projects of this sort will be able to add other examples from his own experience. Undertaking a dual representation, the attorney will find himself in an impossibly equivocal position. As representing the seller, he must use all reasonable and proper means to see that the proposed sale of his client's property is consummated; as representing the buyer, he has an obligation to reveal any information which would be of genuine interest or help to the buyer in determining whether to make the purchase and in protecting his rights after the contract has been signed. It is apparent that this twofold obligation cannot be met in circumstances where the attorney's knowledge embraces any fact, known to him as the result of his relationship with the seller, which, if known to the buyer, might influence him to reject the purchase or to insist upon terms or conditions less favorable to the seller.
As mentioned above, there is a very definite interrelationship between these two factors the existence of which we have sought to emphasize. In general they will not be present in the ordinary isolated transaction where an attorney represents both buyer and seller. On the other hand they would seem to be endemic in the kind of situation we are considering. Accordingly, it seems clear that unless in any given case these factors for some reason fail to exist or unless their influence can be minimized to the point of complete insignificance, they constitute an insurmountable impediment to the kind of dual representation here being considered.
In addition to the conflict of interests as between buyer and seller, a word is in order as to the possible conflict between the buyer's interests and those of the lending institution, where they are represented by the same attorney. Justice Proctor's comments in the Kamp case are pertinent.
A similar situation [one of a conflict of interest] may occur, for example, when the buyer of real estate utilizes the services of the attorney who represents a party financing the transaction. To the extent that both parties seek a marketable title, there would appear to be no conflict between their interests. Nevertheless, a possible conflict may arise concerning the terms of the financing, and therefore at the time of the retainer the attorney should make clear to the buyer the potential area of conflict. In addition, if the buyer's interests are protected only to the extent that they coincide with those of the party financing the transaction, the attorney should explain the limited scope of this protection so that the buyer may act intelligently with full knowledge of the facts. 40 N.J., at page 596.
Again we believe the situation here to be significantly different from the case where an attorney represents both the purchaser of a home and the local lending institution that supplies the mortgage funds. That is very common practice and in general quite unobjectionable. In the case we are considering, however, the desire to continue to represent the lender as more homes are sold in the future will naturally abate the ardor with which the attorney will strive to secure the best terms for the purchaser. The wish to maintain existing relationships both with the seller and the lender will cause the attorney to shy away from the alternative of seeking to induce all parties to permit the financing to be placed elsewhere upon more favorable terms, should this be possible. Only after a very full disclosure to the client of these possible disabling factors should an attorney already representing the lender, under circumstances such as these, agree to accept a retainer from the buyer.
Before turning to specific inquiries relating to this general subject matter, it will be helpful first to consider a question which lies close to the heart of ethical problems arising in this area. Is it objectionable or not for a developer to urge or insist that mortgages upon individual dwellings shall, at the time of closing title, be placed with a particular lending institution? Despite the instinctive distaste that many feel for this newly emerging commercial practice which seeks to deprive the buyer of his hitherto unfettered right to choose his own method of financing, we do not feel that it is legally objectionable per se. Nor do we feel that an attorney's participation in effecting and carrying out such an arrangement is unethical. It is now a well recognized fact that a developer, in the course of constructing new dwelling units, generates a substantial amount of long-term investment in the form of individual mortgages placed upon the homes constructed. This long-term investment is a valuable by- product of his effort. If preserved and channeled to a selected lending institution, the developer will receive as an economic quid pro quo improved terms with respect to his construction financing. Indeed it has been asserted, as mentioned above, that unless the developer can assure the lending institution that it will receive all or most of the permanent mortgages, the developer may be unable satisfactorily to finance his construction. There would seem to be no legitimate reason why a developer should not profitably exploit this long-term investment which his efforts have created. We pause to note, however, that to compel a purchaser to accept the mortgage proposed by the seller will often and perhaps in most cases result in the buyer's losing the benefit of independent representation. Although we cannot condemn this practice, we do not mean to encourage it. Wherever feasible or practicable it is believed the professional should exert such legitimate influence as may be available to the end that buyers may continue, as they have done in the past, to make their own mortgage arrangements and so in most cases come to have the protection of independent counsel. With these thoughts in mind we turn to a series of collateral but related questions that have been posed.
1. A mortgage broker, mortgage company or real estate broker submits an application for a mortgage loan to a bank and requests that in the event the loan is granted, a particular attorney, on the bank's list of approved attorneys, be designated to close the loan. Is the attorney's participation in a transaction of this nature ethical?
Where the attorney in question has taken no step to secure his own recommendation, his participation is not objectionable. Where, however, the attorney solicits his own recommendation, the practice is unethical.
A seller who solicits buyers to employ an attorney is touting for the attorney. Canon 27 prohibits an attorney from soliciting employment through touters. ... In re Kamp, supra, at page 598.
2. May an attorney represent a developer who makes financing arrangements with a lending institution which will result in prospective buyers' being required to secure their mortgage loans from this institution?
This question has already been answered in the affirmative. If the developer and the lending institution so agree, then this arrangement may be followed. In negotiating such an arrangement the attorney is doing nothing unethical; provided, of course, that neither he nor the developer does anything to solicit the attorney's employment by the lending institution in connection with future individual mortgage loans. Such employment would not in and of itself be unethical but its solicitation, directly or indirectly, would constitute a violation of Canons 27 and 35.
3. May the lending institution designate the developer's attorney as the only attorney permitted to represent it in the closing of permanent mortgage loans on the tract in question?
Any lending institution is entirely at liberty to select any attorney it chooses to represent it. There is nothing unethical in an attorney's representing the developer and at the same time representing the lending institution with respect to the placing of individual permanent mortgage loans. Again, as set forth above, we must assume the designation comes about in such a way as not to infringe the letter or spirit of Canons 27 or 35.
4. May the purchaser through his own counsel insist that he be permitted to procure a permanent mortgage from a lending institution other than that designated by the developer? Failing in this, may the purchaser's attorney insist that the lending institution in question permit him to represent it in closing the permanent mortgage loan with his client?
The purchaser may insist with whatever strength and to whatever length he pleases that he be allowed to finance his home elsewhere. Whether he is successful will depend upon his persuasive efforts. This query involves no ethical problem. As to the second question, it should go without saying that the purchaser's attorney may not insist nor may he even suggest that the lending institution permit him to represent it. This is a flagrant violation of Canon 27. Attorneys are not ethically at liberty to solicit employment. Drinker, Legal Ethics, 210 et seq.
5. If the developer and the purchaser agree that the latter may obtain a permanent mortgage loan from a different lending institution, may the developer require the purchaser to recompense him for a proportionate amount of what he may have paid his attorney for handling the construction financing?
As so expressed, there is no ethical question involved. The seller is at liberty to fix the price at which the property is to be sold and in so doing to take into account such elements of cost as he deems proper.
The converse of this question has also been asked, namely, whether an arrangement between the developer and his attorney, whereby the latter makes minimal charges or no charges to the developer for services rendered in preparing the tract for development, is ethical. In answering this question we must assume that the reason for the attorney's modest charge is that he hopes to be recompensed later as he comes to represent various interests at the time homes are actually sold. This practice violate Canon 35 and is squarely condemned by the Kamp case. At page 598 Justice Proctor said:
...The respondent permitted Staben to use him as a tool in the competitive process by offering the buyer a lower price in return for his consent to employ respondent.This commercial exploitation of the professional services of an attorney mars the essential dignity of the profession.
6. A developer advertises that "Closing costs are included
in the purchase price." His contract states that:
The cost and disbursements of procuring and placing the mortgage including the fees of mortgagee's attorneys for the preparation of necessary documents, the mortgagee's title search and insurance, credit information and survey, shall be paid by the Seller. It is understood, however, that the Seller agrees to assume the cost of passing of title only if the mortgage originates with the ... Association [naming the institution]. It is recommended that the Purchasers retain counsel to represent their interests at the time of the passing of title.