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

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
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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
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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.
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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