UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 00-08
Barbara Widow wants to borrow money to fix up her house following her husband's death. The house does not have a current mortgage. Barbara has sufficient income through a part-time job and retirement income to qualify for a conventional loan at a rate of 8% with an origination fee of 1% to 2%. She contacted a mortgage broker through the telephone directory, who has arranged an 11% loan with an out-of-state lending institution. The mortgage broker is receiving a 9% origination fee. Barbara asks a lawyer who has previously represented her to close the loan.
Questions:
1. If the lawyer represents both the borrower and lender, does the lawyer have an obligation to inquire into the borrower's creditworthiness and income in order to determine whether she can obtain a more favorable interest rate?
2. If the lawyer does obtain information suggesting that the borrower could obtain a better rate elsewhere, does the lawyer have a duty to so inform the borrower?
3. If the lawyer does tell the borrower that a better interest rate could be obtained elsewhere, is the lawyer breaching any duty to the lender?
4. Does the lawyer have a duty to inform the borrower if the lawyer believes the broker's fee is too high?
5. If the mortgage broker had referred the borrower to the lawyer, would the lawyer owe any duty to the broker?
Opinion:
A lawyer generally owes no duty to inquire into the business affairs of a client for the purpose of advising the client on the relative merits of a business transaction. The Comment to Rule 2.1 states that a "lawyer ordinarily has no duty to initiate investigation of a client's affairs." While a lawyer may offer advice in areas other than those which are purely legal in nature, Rule 2.1 does not impose an obligation upon the lawyer to do so.
Nor does the receipt of information about a client's financial position necessarily impose upon the lawyer a duty to advise the client that a particular commercial transaction may be unfavorable to the client. Lawyers who provide legal services in connection with a transaction are not insurers of the fairness of the transaction. However, under the circumstances of a particular representation, a client might reasonably believe that the lawyer is advising the client on business as well as legal issues. In that situation, the lawyer should ensure that the client understands clearly the scope of the lawyer's representation. For example, the borrower in this situation had a previous professional relationship with the lawyer. If the lawyer had previously advised the borrower on business matters, the client might reasonably rely upon the lawyer to provide similar advice here.
If the lawyer undertakes to advise the borrower on the fairness of the commercial transaction, conflict of interest problems arise when the lawyer also represents the lender. At the outset of any such dual representation of borrower and lender, the lawyer must identify potential conflicts between the clients and obtain the informed consent of both parties to the representation. See Rule 1.7. If an actual conflict later arises, the lawyer may be unable to represent either party in connection with the transaction. In this case, an initial review of the proposed deal apparently revealed to the lawyer that a conflict exists between the lender and the best commercial interests of the client. In that case, the lawyer should decline to represent both sides to the transaction. If the lawyer has undertaken a joint representation, the lawyer may not now advise the borrower in a manner that is adverse to the interests of the lender. If the lawyer believes that, in the continued representation of the borrower, it would be appropriate to advise the borrower as to the perceived unfairness of the transaction, the lawyer should withdraw from the representation of both parties.
Finally, no professional duties are owed by a lawyer to a broker simply because the broker referred the client to the lawyer. However, other contact, including a prior professional relationship between the broker and lawyer, might give rise to a reasonable belief on the part of the broker that the lawyer is representing the broker's interests. In that case, a duty to the broker could arise from the particular circumstances.