86-F-108 - Attorney as substitute Trustee purchasing foreclosed property

 

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 86-F-108


Inquiry is made concerning the propriety of an attorney who acted as a substitute trustee for a lender at a non-judicial foreclosure sale, and having sold the property to the lender, now making an offer to purchase the property from the lender.

ABA Informal Opinion 804 (1964) citing In re Goldstein, 85 A2d 361 (Del. 1951) states:

A lawyer is not permitted to traffic in his client's affairs for his own profit in disregard of the undivided loyalty commanded by his professional duties.

The professional duties of the lawyer in such instances are prescribed in the Code of Professional Responsibility as follows:

DR 5-101 Refusing Employment When the Interests of the Lawyer May Impair his Independent Professional Judgment.
(A) Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests.

DR 5-104 Limiting Business Relations with A Client.
(A) A lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure.

ABA Informal Opinion 804 cites other authorities as follows:

In Stockton v. Ford, 52 U.S. 232, 247 (1850) Justice Nelson said:

"There are few of the business relations of life involving a higher trust and confidence than that of attorney and client, or, generally speaking one more honorably and faithfully discharged; few more anxiously guarded by the law, or governed by sterner principles of morality and justice; and it is the duty of the court to administer them in a corresponding spirit, and to be watchful and industrious, to see that confidences thus reposed shall not be used to the detriment or prejudice of the rights of the party bestowing it."

In Equity Jurisprudence, 14th 3d, 1918, Vol. 1, Sec. 433, Story says:

"The situation of an attorney or solicitor puts it in his power to avail himself not only of the necessity of his client, but of his good nature, liberality and credulity to obtain undue advantages, bargains and gratuities ... by establishing the principle that while the relation of client and attorney subsists in its full vigor the latter shall derive no benefit to himself from the contracts, or bounty, or other negotiations of the former, it (the law) supersedes the necessity of an inquiry into the particular means, extent and exertion of influence in a given case, a task often difficult, and illsupported by evidence which can be drawn from any satisfactory sources. This doctrine is not necessarily limited to cases where the contract or other transaction respects the rights or property in controversy, in the particular suit in respect to which the attorney or solicitor is advising or acting for his client; but it may extend to other contracts and transactions disconnected therefrom, or at least where from the attendant circumstance there is reason to presume that the attorney and solicitor possessed some marked influence, ascendancy, or other advantage over his client in respect to them.

In Thomas v. Turner's Adm'r et al 87 Va. 1, 12 (1890) Judge Lewis said:

"...all dealings between attorney and client for the benefit of the former are not only regarded with jealousy and closely scrutinized but they are presumptively invalid, on the ground of constructive fraud; and the presumption can be overcome only by the clearest and most satisfactory evidence. The rule is founded on public policy and operates independently of any ingredient of actual fraud, or of the age or capacity of the client, being intended as a protection to the client against the strong influence to which the confidential relation naturally gives rise."

In Galbraith v. Elder, 8 Watts (Pa.) 81, 94 (1830) Judge Kennedy said:

"The profession of a lawyer, when regulated by principles of sound morality and high mindedness, as it ever ought to be, has at all times been regarded as one of great honour and usefulness; but to render such profession either honourable or useful, it is very obvious that a most scripulous fidelity must be forever observed on the part of the lawyer towards his client, so that he shall never betray or take advantage, either in word or deed, or anything that has come to his knowledge by means of any communication from his client or from papers or documents of the latter put into his hand.

"In order that the interests of the client may, in this respect, be protected and made secure, good policy would seem to require, as well as every principle of honour and fair dealing, that the counsel or attorney should not be permitted to do anything that would tend to prejudice the interest of his client, or occasions a loss to him in reference to anything upon which he was consulted.

"With a view, therefore, to remove all temptation, and to prevent everything of the kind from being done, principles or expediency, as well as those of justice, require that the counsel or attorney shall derive no advantage whatever from such acts, when done by him, as may operate to the prejudice of, or occasion a loss to the client; and that all the advantage which otherwise would have arisen therefrom to the counsel shall enure to the benefit of the client."

In Young v. Murphy 120 Wisconsin 49, 51 (1903), Judge Winslow said:

"Attorneys are ministers of justice as well as courts, and justice will not be contented with half-hearted service on the part of her ministers, nor will she tolerate a bargain counter within her temple. If an attorney purchases his client's property, concerning which his advice is sought, the transaction is always viewed with suspicion and the attorney assumes the heavy burden of proving not only that there was no overreaching of the client, but that the client acted upon the fullest information and advice as to his rights. In other words, the attorney must prove uberrima fides, or the transaction will be set aside by the court of equity.

In the case of McFail v. Braden, 19 Ill. 2d 108, 166 N.E. 2d 46 (1960) the court held that an attorney is not prohibited from dealing with his client or buying his property, and such contracts, if open, fair and honest, when deliberately made, are as valid as contracts between other parties. The court stated that important factors in determining whether a transaction is fair include a showing by the fiduciary (1) that he made a full and frank disclosure of all the relevant information that he had; (2) that the consideration was adequate; and (3) that the principal had independent advice before completing the transaction.

It appears that if all of the above caveats are considered and followed by the substitute trustee in this instance there is no impropriety in now making an offer to purchase the property he sold to the lender at a non-judicial foreclosure sale.

This 26th day of September, 1986.

ETHICS COMMITTEE:

Jerry C. Colley
William R. Willis
Cecil D. Branstetter

APPROVED AND ADOPTED BY THE BOARD