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 98-17
Attorney A's wife is a major shareholder in a close corporation which is licensed as a South Carolina Mortgage Broker. Attorney A represents the brokerage corporation in matters such as compliance with state or federal regulation and contractual agreements between the corporation and lenders. Neither the attorney nor his wife are officers of the corporation, nor do they have any contact with prospective borrowers or members of the general public concerning the brokering of loans.
Attorney A's name appears on a list of possible attorneys presented to prospective borrowers in connection with the borrower's choice of an attorney to close loans brokered by the corporation. Such a list and the borrower's choice of attorney is in compliance with all applicable statutory requirements concerning attorney preference. The borrower is free to choose any attorney from the list or any other attorney and is not limited to those on the list presented to the borrower.
QUESTIONS:
1. May an attorney in the factual situation set forth above act as closing attorney for the borrower?
2. Is the attorney required to disclose to the borrower the interest of his wife as shareholder in the corporation?
3. Is there an ethics problem if an attorney is an officer and/or shareholder of a corporation engaged in the business of brokering loans as a licensed South Carolina mortgage brokerage corporation if the attorney does not close loans for borrowers on loans originated by the corporation?
SUMMARY:
Provided the attorney is careful to monitor any conflicting interests or possible breaches confidentiality between the brokerage corporation and the borrower under Rule 1.6, 1.7 and 1.8, the attorney may serve in a dual capacity for both. The referral listing of the attorney is not a violation of Rule 7.2 or 7.3 as long as the attorney has no direct contact with the potential clients and does not provide anything of value in exchange for the referral. The attorney must disclose his wife's financial interest in order to allow the client to make an informed consent to representation. Certainly, the lawyer can serve as an officer or a shareholder of a corporation where he does not close loans for borrowers.
OPINION:
The present questions build upon answers and issues raised in SC Bar Ethics Op. 96-04. The Advisory Committee held that an attorney, who is the sole shareholder of a mortgage broker corporation, could serve as both broker and attorney for the borrower in the loan closing, provided the attorney does not violate Rule 7.3 by directly soliciting a business customer for legal representation. The borrower must seek legal representation without the attorney's solicitation. The current fact scenario raises concerns about confidentiality, duty to disclose, and conflicts of interest as well as possible improper solicitation.
Question 1
A. Confidentiality and Conflicts of Interest Between Multiple Clients The attorney in the present situation must be cautious not to violate Rules 1.6 and 1.7 of the current Rules of Professional Conduct (codified at SCACR 407). Specifically, the attorney must consider whether serving as both legal counsel for the brokerage corporation and closing attorney for the borrower would violate his duty of confidentiality to either client or whether the dual representation creates a conflict of interest. In addition to the provisions of Rule 1.6(a) for maintaining client confidentiality, Rule 1.7(b) prohibits a lawyer from representing a client if the representation of that client may be materially limited by the attorney's responsibilities to another client, unless the attorney reasonably believes representation will not be affected adversely and the client consents after consultation.
In this instance, the attorney apparently only provides legal representation in matters concerning lenders, not borrowers. Yet conflicts of interest may arise between the presumable duty to the borrower to ensure the best terms of sale and a knowledge of confidential information concerning the corporation's relationships with other lenders. See SC Bar Ethics Op. 95-03 (concluding that it is doubtful an attorney could reasonably believe that representation of the buyer would not be adversely affected by serving as agent for the broker). If the attorney owes any sort of duty to the lender or to the corporation concerning terms of lending agreements then there are potentially adverse interests to the representation of the borrower. Although there is no per se conflict between the interests of the parties, the attorney must evaluate his obligations to both clients and determine "...the likelihood that a conflict will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgement...." in representation of the client. Rule 1.7 comment. "Loyalty to a Client."; See generally SC Bar Ethics Op. 92-03 (discussion of Rule 1.7(b) and conflict of both the attorney's and multiple clients' interests).
Additionally, by serving in dual capacity, the attorney must consider his ability to exercise independent professional judgement and render candid advice to both clients as required by Rule 2.1.
B. Solicitation Rule 7.3 governs an attorney's direct contact with prospective clients. Because the attorney's name is only submitted on a list to the borrower, the attorney is not in violation of Rule 7.3(a) which prohibits in-person solicitation cautioned against by the Advisory Committee in SC Bar Ethics Op. 96-04. Forming relationships with customers through the brokerage corporation for the purpose of making direct solicitation for legal representation would violate Rule 7.3. Id. Though the attorney here does not directly solicit potential clients, there are certain factors concerning referral which he must evaluate.
In submitting a list of attorneys from which the borrower may choose and allowing the borrower to look to any other attorney not listed, the brokerage corporation actually performs services akin to a legal services referral organization. Rule 7.3(f) prohibits the attorney from participating in such a referral organization if the attorney has created the organization or exercises direct or indirect control over the organization. Rule 7.3 comment. Though it appears doubtful, the attorney must be certain that the position of his wife as shareholder does not constitute direct or indirect control over the choice to refer certain attorneys to potential borrowers.
Furthermore, Rule 7.2(c) prohibits an attorney from providing "...anything of value to a person for recommending the lawyer's services." Presumably the attorney's payment for legal services rendered in the representation of the corporation is completely separate from any recommendations made to borrowers. However, if the attorney gives anything of value in order to be on the referral list, such as discounted fees or extra time, the attorney violates Rule 7.2(c). See SC Bar Ethics Op. 93-04 (holding that attorney's involvement with the creation of the organization and its maintenance constituted value). The attorney must also consider the effect of the recommendation on the choice of the borrower. In SC Bar Ethics Op. 90-36 the Committee found that a highway patrol officer's attorney recommendations violated Rule 7.1(b) because it may create "an unjustified expectation about results the lawyer can achieve since the [officer's] opinion may be highly regarded." Likewise a borrower in this instance may be influenced by both the corporation's recommendation and the knowledge that the attorney serves the corporation in other capacities.
Question 2
Because the Committee cannot consider a proposed disclosure, the question regarding the disclosure of the wife's interest is answered generally. There is a possible conflict of interest under Rule 1.8 because the attorney's wife may gain financially from the closing of loans performed by the attorney. The attorney has a duty to make sure that all transactions are fair and reasonable to his client. The Advisory Committee held, given sufficient disclosure, the conflict of interest when the attorney is sole shareholder may be waived with knowledgeable client consent. The same would be true when the wife is the shareholder. SC Bar Ethics Op. 96-04. However, there is a duty to disclose this financial interest and obtain consent from the client. See SC Bar Ethics Op. 83-13 (holding that an attorney who is also a shareholder must disclose that interest to the client).
Rule 1.8(I) governs the possible conflict of interest arising from marital relationships of the attorney and requires the consent of the client when the spouse personally represents a party with directly adverse interests. By the use of the term "personally," the rule excludes the wife in the present situation because she does not personally represent the brokerage corporation. However, full disclosure is still advisable "...in any situation where a client or potential client might question the loyalty of the lawyer representing him, [and] the situation should be fully explained to the client and the question of acceptance or continuance of employment left to the client for decision." SC Bar Ethics Op. 93-18 (quoting ABA Formal Opinion 340).
Regarding the scope of disclosure, Rule 1.7(b) and Rule 1.8(c) both require consultation with and the consent of the client when there is a possibility that an interest may adversely affect the representation of the client. Complete and effective disclosure requires "disclosure of all material, relevant facts and circumstances which, in the judgement of a lawyer of ordinary skill and capacity, are necessary to enable his client to give informed consent." Bankers Trust of South Carolina v. Bruce, 323 S.E.2d 523, 530 (S.C.App. 1984).
Question 3
If an attorney can serve as closing counsel for a borrower where she or he is the sole officer or shareholder of a mortgage brokerage by complying with the procedure set forth in Ethics Op. 96-04, then there is obviously no ethics problem with an attorney being an officer or shareholder of such a corporation when he does not close loans for borrowers. No compliance with the holding in Ethics Op. 96-04 is necessary. There is no ethics problem per se in an attorney being an officer or shareholder of a corporation.