By: Mark S. Shipman
The role of the lawyer in a Commercial Real Estate Transaction is generally clear. It is the representation of the client to the best of the lawyer’s ability without committing or permitting an ethical breach. Acting ethically is not just adhering to the letter of the Code of Professional Ethics (the “Code” or “Rules”). There is an obligation to act in a morally appropriate manner. With the representation of any client, a common sense understanding of what is right and wrong is as much an ethical guide as the Code. A lawyer not only has an obligation to his/her client, but also to other parties to the transaction, the other lawyers involved and the community. The Preamble to the Code states the lawyer’s responsibilities and obligations, much more eloquently.
Many of a lawyer’s professional responsibilities are prescribed in the Rules of Professional Conduct, as well as substantive and procedural law. However, a lawyer is also guided by personal conscience and the approbation of professional peers. A lawyer should strive to attain the highest level of skill, to improve the law and the legal profession and to exemplify the legal profession’s ideals of public service.
A lawyer’s responsibilities as a representative of clients, an officer of the legal system and a public citizen are usually harmonious. Thus, when an opposing party is well represented, a lawyer can be a zealous advocate on behalf of a client and at the same time assume that justice is being done. So also, a lawyer can be sure that preserving client confidences ordinarily serves the public interest because people are more likely to seek legal advice, and thereby heed their legal obligations, when they know their communications will be private.
In the nature of law practice, however, conflicting responsibilities are encountered. Virtually all difficult ethical problems arise from conflict between a lawyer’s responsibilities to clients, to the legal system and to the lawyer’s own interest in remaining an ethical person while earning a satisfactory living. The Rules of Professional Conduct often prescribe terms for resolving such conflicts. Within the framework of these Rules, however, many difficult issues of professional discretion can arise. Such issues must be resolved through the exercise of sensitive professional and moral judgment guided by the basic principles underlying the Rules. These principles include the lawyer’s obligation zealously to protect and pursue a client’s legitimate interests, within the bounds of the law, while maintaining a professional, courteous and civil attitude toward all persons involved in the legal system.
With this in mind, we can discuss the specific areas of concern in Commercial Real Estate Transactions. There are a number of cases and Opinions dealing with the Code. Most relate to litigation issues. Those involving real estate are usually related to residential real estate. This is quite logical. Most of the litigation matters involve the representation of individuals. They are often family matters or missed statutes of limitations. Similarly, the residential real estate practice involves the representation of individuals; unlike the commercial real estate practice where, for the most part, lawyers are dealing with sophisticated buyers, sellers, landlords and tenants. Although sometimes a tenant in a commercial building may not be as sophisticated as the landlord (i.e. strip centers and small office buildings).
- STATE BAR CODE OF ETHICS
The Code, basically mirrors the ABA Model Rules of Professional Conduct. While the language of the Code is, generally, clear, it is often necessary to look at the Comments to see what the drafters intended by the language.
- DISCLOSURE REQUIREMENTS
Rule 1.6 advises as to when a lawyer should and shouldn’t disclose client information.
(a) A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by subsection (b), (c), or (d).
(b) A lawyer shall reveal such information to the extent the lawyer reasonably believes necessary to prevent the client from committing a criminal or fraudulent act that the lawyer believes is likely to result in death or substantial bodily harm.
(c) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary to:
(1) Prevent the client from committing a criminal or fraudulent act that the lawyer believes is likely to result in substantial injury to the financial interest or property of another;
(2) Prevent, mitigate or rectify the consequence of a client’s criminal or fraudulent act in the commission of which the lawyer’s services had been used;
(3) Secure legal advice about the lawyer’s compliance with these Rules;
(4) Comply with other law or a court order.
(d) A lawyer may reveal such information to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer’s representation of the client.
Subsections (b) and (c) are examples of when the lawyer’s duty is to the community, the courts and the bar, as well as to the other side of the transaction. These are in the nature of obligatory disclosures. The lawyer should be sure that the threshold requirements mandating disclosure are clear and apparent.
Subsection (a) is both permissive and mandatory. The confidential information cannot be disclosed, except with informed client consent. These are situations where a disclosure of, otherwise confidential information, is permitted by the client. The Rule requires that the client give “informed consent” to the disclosure. Rule 1.0 (f) defines informed consent as “denot(ing) the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct….”. The key is “communicated adequate information”. This is one of the areas where there is no black and white. The lawyer must have made the situation clear, taking into consideration both the circumstances and the sophistication of the client.
The problem with Rule 1.6(b) is that it is very subjective and requires an attorney to have a very strong belief that, but for his/her disclosure, a fraudulent act will occur or substantial harm will be done to a third party. As you can see from my underlining, there are substantial subjective hurdles to jump through before disclosure is required. This puts the lawyer, who is otherwise bound to keep his client’s information confidential, in an ethical bind. The client may be harmed by the disclosure. That harm may result in a claim against the lawyer. The key words are “reasonably believes” and “substantial”. Unfortunately, there is little to guide the attorney besides his/her own moral compass, and good sense.
Section (c) discusses when an attorney “may” disclose confidential information. It is speaking permissively and not mandatorily. Harking back to the Preamble which states that “… a lawyer can be sure that preserving client confidences ordinarily serves the public interest because people are more likely to seek legal advice, and thereby heed their legal obligations, when they know their communications will be private”. That appears to make it the lawyer’s responsibility to counsel the client on what the client must disclose; but not require the lawyer to breach a client’s confidence, except in the most extreme circumstances. However, the Preamble later states: “…issues must be resolved through the exercise of sensitive professional and moral judgment guided by the basic principles underlying the Rules….” Inconsistent? Not really. Following a common sense rule, if a lawyer believes that his client is doing something that creates a serious ethical problem for him or her, the best course is, probably, not to breach the confidentiality, but rather to decline to continue to represent the client who will not follow his/her advice and who the lawyer believes may be committing, or about to commit a fraud, a crime or cause financial harm to another party. That keeps the lawyer’s ethics and moral responsibility intact, while not disclosing the client’s confidences.
However, there have been situations where the courts have held that the failure of a lawyer to disclose, fell within the crime/fraud obligation under, Rule 1.6(c)(2). (See Bersani v. Bersani, 41 Conn.Supp. 252 (1989))
DEALING WITH UNREPRESENTED PARTIES
While common in residential real estate transactions, it is relatively uncommon that a party to a commercial transaction is unrepresented. The likely exception being a tenant in a strip center or small commercial building. In those situations, Rule 4.3 provides the following guidance.
In dealing on behalf of a client with a person who is not represented by counsel, in whole or in part, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.
The Official Commentary gives additional information for those transactions where the lawyer in a commercial transaction may be dealing with an unrepresented person.
The Rule distinguishes between situations involving unrepresented persons whose interests may be adverse to those of the lawyer’s client and those in which the person’s interests are not in conflict with the client’s. In the former situation, the possibility that the lawyer will compromise the unrepresented person’s interests is so great that the Rule prohibits the giving of any advice, apart from the advice to obtain counsel. Whether a lawyer is giving impermissible advice may depend on the experience and sophistication of the unrepresented person, as well as the setting in which the behavior and comments occur. This Rule does not prohibit a lawyer from negotiating the terms of a transaction or settling a dispute with an unrepresented person. So long as the lawyer has explained that the lawyer represents an adverse party and is not representing the person, the lawyer may inform the person of the terms on which the lawyer’s client will enter into an agreement or settle a matter, prepare documents that require the person’s signature and explain the lawyer’s own view of the meaning of the document or the lawyer’s view of the underlying legal obligations.
One situation which may create an “unrepresented party”, is where the lawyer is a partner or investor with the client. “(The) Prohibition against business transactions between lawyers and clients is not absolute; rather, such transactions, are prohibited only when lawyer and client have differing interests in transaction and client is expecting lawyer to exercise professional judgment in transaction for protection of client, and even then the rule is not violated if client consents after full disclosure. Code of Prof. Resp., DR 5-104(A)”. Weiss v. Statewide Grievance Committee, 227 Conn. 802 (1993). There are numerous situations where a lawyer’s interests, his client’s and the interests of an entity they are both owners of, may be different. These situations require a disclosure of the possible conflicts and what the lawyer sees as his/her duty and to whom. It also requires the attorney to indicate what will happen in the event of a dispute. After explaining all of that, then the lawyer can seek informed consent to continue with the representation. In many situations, the proper action is to retain separate counsel for potentially adverse interests (see Frank v. Frank, infra).
As with all ethical situations, the Rules are really the embodiment of common sense and good judgment. A lawyer needs to make sure the non-client, or the potentially unrepresented partner, knows to whom the lawyer owes a duty and what that duty is. A reasonably good standard in these situations, is if it feels wrong, it probably is.
III. MULTIPLE REPRESENTATIONS DURING TRANSACTIONS
The representation of multiple clients is more problematic and involves multiple Rules. Rule 1.7 addresses the conflicts of interest component which is the most obvious. It provides as follows.
CONFLICTS OF INTEREST
(a) Except as provided in subsection (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 subsection (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) 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 the same proceeding before any tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
As with many of the rules of Professional conduct, lawyers often argue that they are meant to, and generally do, apply to litigation situations. That is not a safe harbor. In a case where the lawyer made that argument in a situation involving the representation of a partnership where there was evidence that he had represented the general partner, the court stated:
“The plaintiff is correct in commenting that Rule 1.7(a) forbids representation of opposing parties in litigation. This court is not persuaded, however, that it represents the exclusive situation covered by the Rule. There are various conceivable circumstances in which the interests of clients would be directly adverse to one another outside the parameters of litigation. Conflicts of interest in contexts other than litigation sometimes may be difficult to assess. Relevant factors in determining whether there is potential for adverse effect include the duration and intimacy of the lawyer’s relationship with the client or clients involved, the functions being performed by the lawyer, the likelihood that actual conflict will arise and the likely prejudice to the client from the conflict if it does arise. The question is often one of proximity and degree Rule 1.7, Official Commentary”. Braunstein v. Statewide Grievance Committee, 2001 WL 219921, 7 (Conn.Super.) (2001). (Internal quotes omitted).
Since there is a significant chance of conflict in any multiple representation, the attorney needs to fully disclose more than the fact that he is undertaking to represent more than one client. He/she needs to clearly and carefully explain to the client, in detail, all of the possible risks that may arise in order to make sure that the client understands why it may be desirable for him or her to have independent counsel, Acheson v. White, 195 Conn. 211, 215 fn. 5, (1985).
One of the issues in the Braunstein case, supra, involved the representation of a single client in dual capacities. While not as common an occurrence as representing multiple, adversarial clients, it can arise in the representation of partners and partnerships; and corporations and officers; In a Probate matter, it was found that the representation of an executrix in an appeal of a Probate Order awarding fees, and the representation of the estate, were a conflict, Frank v. Frank, Superior Court, Judicial District of Middlesex, Docket No. 66226, 1992 WL 394682 (Walsh, J., Dec. 22, 1992) (8 Conn. L. Rptr. 118).
There are other common occurrences in Commercial Real Estate Transactions. For instance, in Bank Brussels Lambert v. Fiddler Gonzalez & Rodriquez, 305 F. 3d 120, 125 (2d Cir. 2002), the Court, Sotomayor, J. noted that “. . . a conflict may arise where, in the course of successive or simultaneous representations of clients, the adequate representation of a subsequent or simultaneous client may require disclosure of the other client’s confidences . . . . Upon discovering such a conflict, the attorney must withdraw from representation without divulging any confidential communication.” (Internal quotations omitted).
It is not uncommon in Commercial Real Estate Transactions for an attorney to represent a purchaser and act as the agent for a title insurance company. In Westport Bank and Trust Company v. Corcoran, Mallin and Aresco, 221 Conn. 490, 605 A. 2d 862 ( 1992), the court held that a lender may hold its attorney liable for a negligent title search and subsequent issuance of an erroneous title opinion letter to the lender when that attorney also represents the borrower. While this is different from an attorney acting as the agent for a title company, there are red flags. A Title Insurance Company is interested in the maximum protection from possible encumbrances and an interpretation of title issues that creates the maximum number of exceptions. A purchaser is interested on the maximum protection and the fewest exceptions. The title company’s objective is to limit liability as much as possible in the event of a claim. The purchaser is interested in having the smallest risk of adversity possible. Those two things can present a possible conflict.
The courts have, consistently, held that claims against an attorney require privity (citations omitted). While the fact that the attorney acts as an agent for the title company may bring the situation into one of the exceptions, i.e., whether the primary or direct purpose of the transaction at issue is to benefit the third-party, First American Title Insurance Company v. Martucci, 2011 WL 6976571 (Conn.Super); the more likely risk is a suit by the title company against its agent, in contract, as opposed to malpractice.
The situation involving title insurance could also fall within Rule 1.8 which provides:
Lawyers are frequently asked to represent a client under circumstances in which a third person will compensate the lawyer, in whole or in part. The third person might be a relative or friend, an indemnitor (such as a liability insurance company) or a co-client (such as a corporation sued along with one or more of its employees). Because third-party payers frequently have interests that differ from those of the client, including interests in minimizing the amount spent on the representation and in learning how the representation is progressing, lawyers are prohibited from accepting or continuing such representations unless the lawyer determines that there will be no interference with the lawyer’s independent professional judgment and there is informed consent from the client. See also Rule 5.4 (c) (prohibiting interference with a lawyer’s professional judgment by one who recommends, employs or pays the lawyer to render legal services for another).
Sometimes, it will be sufficient for the lawyer to obtain the client’s informed consent regarding the fact of the payment and the identity of the third-party payer. If, however, the fee arrangement creates a conflict of interest for the lawyer, then the lawyer must comply with Rule. 1.7. The lawyer must also conform to the requirements of Rule 1.6 concerning confidentiality. Under Rule 1.7 (a), a conflict of interest exists if there is significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s own interest in the fee arrangement or by the lawyer’s responsibilities to the third-party payer (for example, when the third-party payer is a co-client). Under Rule 1.7 (b), the lawyer may accept or continue the representation with the informed consent of each affected client, unless the conflict is nonconsentable under that subsection. Under Rule 1.7 (b), the informed consent must be confirmed in writing.
Rule 1.8, while ostensibly directed to litigation matters, would seem to require a full disclosure to the client that the lawyer is receiving a commission from a title company; and also require that the client consent to the arrangement. Many attorneys have taken the safe road and advised the client of the amount of the commission and encompassed it in the fee arrangement by virtue of a credit. The rule of informed consent would require the lawyer to advise what the fee would be without the commission and with the commission, reflecting it as a credit. The commission is not a fee and the fee credit is not a sharing of the fee or a sharing of the commission. It merely takes the commission into account when calculating the hourly fee or the transaction fee. Both should be clearly quoted in advance as part of the informed consent.
The Connecticut Bar Association has “sanctioned the practice of a single attorney representing multiple parties, including a mortgage lender and borrower, in a real estate transaction where there is no actual conflict of interest and where there has been full disclosure and consent of the parties with respect to representation by the single attorney. Informal Opinion 1–74 (1974); See CBA Formal Opinion No. 30 (1978) for a discussion of the issues involved.” Connecticut Bar Association Committee on Professional Ethics, Informal Opinion 83–25 (1983). This ruling has been relied upon for more than 40 years. In today’s commercial real estate practice, a single attorney almost never represents bank and borrower. However, the case restates the tests and considerations that must be made when determining whether the attorney may represent more than one client in a transaction. It is common sense. It embodies the imprimatur of Rules 1.6, 1.7 and 1.8.
In matters of multiple client representation, the lawyer should not only exercise caution, but should obtain waivers from all parties, making sure that those waivers include clear language evidencing informed consent.
- CONFLICTS OF INTEREST
Prior sections have dealt with many of the Conflict of Interest material. Rules 1.7, 1.8 and 4.3 are all applicable to the issues, as is the discussion concerning each of those Rules. In addition, Rule 1.9 adds further clarification.
(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.
(b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client
(1) whose interests are materially adverse to that person; and
(2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9 (c) that is material to the matter; unless the former client gives informed consent, confirmed in writing.
(c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter:
(1) use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or
(2) reveal information relating to the representation except as these Rules would permit or require with respect to a client
This Rule comes into play very often. The modern trend of lawyer mobility has created many situations where lawyers migrate with their clients to firms that have previously represented adversarial interest. Also, the new firm may be handling matters for clients involved in current matters against clients of the new attorney’s former firm. Section (a) is not complicated. If the lawyer has represented the now adverse party, he/she must make a determination that there is nothing materially adverse to the old client in the new representation. More importantly, the lawyer must get “informed consent” from BOTH parties to the representation. The common practice is to obtain a waiver from the old client. As with multiple representations, the waiver should have language evidencing the basis for an informed consent.
The Rule also provides that where representation does occur, there is a strict prohibition against revealing or utilizing information concerning the old client. For instance, if the attorney is aware of a title or environmental issue that is not discovered by the new firm it can’t be disclosed. If the attorney did not feel the information required disclosure under Rule 1.6 in a prior transaction for the old client, then it can’t be disclosed for the new client or to the new firm. However, it may be appropriate for the lawyer to decliner representation of the new client. Otherwise, that client may be poorly represented and may have a claim against the lawyer and the new firm.
Rule 1.9 mandates that firms circularize the new matters they take on and include the principals of the adverse parties. It also means that lawyers changing firms should become fully acquainted with the new firm’s matters and with the new firm’s clients. It becomes problematic for the new lawyer to disclose much information about the old firm’s clients, except for those who migrate with the lawyer, unless a situation arises where he/she must disclose the fact of a conflict.
One area in the commercial real estate matter is the potential for a conflict that is not easily identified. Multiple lawyer firms, both large and small have areas of specialty. At some point, two lawyers may represent different clients, commercially adverse to each other. For instance both may be interested in leasing the same space in a major center. The interest is not discovered in the normal firm conflict check or is discovered after the intake and after discussions with the attorney. The firm and the lawyers are in a quandary. This topic has been discussed in a number of forums. The consensus is that both lawyers and the firm should recuse themselves. Neither lawyer may disclose to their client the other client’s interest or proposal.
While this Rule may cost firms important clients, it should be a consideration when lateral hires are made and, like all of the others requires good, judgment, common sense and full disclosure.
In addition to Rule 1.9 which deals with clients, Rule 1.18 mandates similar conflict and non-disclosure requirements with prospective clients.
(a) A person who consults with a lawyer concerning the possibility of forming a client-lawyer relationship with respect to a matter is a prospective client.
(b) Even when no client-lawyer relationship ensues, a lawyer who has learned information from a prospective client shall not use or reveal that information, except as Rule 1.9 would permit with respect to information of a former client.
(c) A lawyer subject to subsection (b) shall not represent a client with interests materially adverse to those of a prospective client in the same or a substantially related matter if the lawyer received information from the prospective client that could be significantly harmful to that person in the matter, except as provided in subsection (d). If a lawyer is disqualified from representation under this paragraph, no lawyer in a firm with which that lawyer is associated may knowingly undertake or continue representation in such a matter, except as provided in subsection (d).
(d) When the lawyer has received disqualifying information as defined in subsection (c), representation is permissible if:
(1) both the affected client and the prospective client have given informed consent, confirmed in writing, or
(2) the lawyer who received the information took reasonable measures to avoid exposure to more disqualifying information than was reasonably necessary to determine whether to represent the prospective client; and
(i) the disqualified lawyer is timely screened from any participation in the matter; and
(2) the lawyer who received the information took reasonable measures to avoid exposure to more disqualifying information than was reasonably necessary to determine whether to represent the prospective client; and
(i) the disqualified lawyer is timely screened from any participation in the matter; and
(ii) written notice is promptly given to the prospective client.
In dealing with the intake of new matters, it is wise to acquire only such information as would indicate the potential for a conflict, before getting more detailed information about the case. This rule is more likely to apply in litigation matters, but can arise in dealing with national tenants or major developers.
For specifics with regard to when a prospective client becomes is entitled to the protections afforded a client, see the Official Commentary to Rule 1.18 and the discussion concerning the Rule in 1 CTPRAC R 1.18. There is also an obligation on senior or managing lawyers, to manage and supervise associates and junior lawyers, (see Rule 5.1), (and see also Grievance Committee v. Rottner, 152 Conn. 59 (1964) which is prior to the codification of the requirement in 2007).
There are other issues involving ethical conduct that arise in commercial real estate transactions which were not part of the prescribed outline, Many cases arise from the attorney’s mishandling of clients’ funds. This is an area that often deals with honesty. However, sometimes, in their zeal to make clients happy, lawyers release funds in violation of an escrow agreement or in the belief that everything that needs to occur will occur. In either case, it’s wrong. There is no instance where clients’ funds should be managed other than to insure that funds are protected until the appropriate time for release.
In this, as in all of the other Rules, previously discussed, common sense and a sound moral compass are the guide.