Subject to certain conditions, it is impermissible for an attorney who has rendered legal services to a trustee to bid on trust property that was the subject of services rendered.
A title company is the trustee on several deeds of trust which are in trustee sale status. As a practical matter, the inquiring attorney (hereinafter “L”) handles all of the relevant paperwork for the trustee in each sale for the same fee that the title company would receive for so acting. (In other words, no attorney's fees are charged in excess of the standard title company fees.)
A parcel of land involved in a trustee sale is described in paperwork which has crossed L's desk, the parcel being of specific interest to him. In the normal course of his duties for the title company, L has (as he usually does in such matters) accomplished all necessary paperwork with respect to the trustee sale. Both the beneficiary and the trustor know of L's role for the trustee in this transaction, and they both further realize that L is, in fact, an attorney. Nevertheless, all trustee's notices are in the name of the trustee, are signed by the trustee, and the actual public sale will be handled by the trustee.
Would it be ethically permissible for L to bid on the parcel of land in question at the upcoming trustee sale?
ETHICAL RULES INVOLVED
ER 1.7(b). Conflict of Interest: General Rule
ER 1.8(a). Conflict of Interest: Prohibited Transactions
Specific statutory duties of a trustee with respect to deeds of trust in Arizona have been set forth in A.R.S. § 33-801 et seq. Some of these duties have apparently been delegated by the trustee to L. Although we cannot presume that L's personal desire to purchase trust property will cause him to neglect his duties on behalf of his client ( the trustee), the potential consequences to the trustee of allowing L to bid at the trustee sale cause us great concern.
Assuming (hypothetically) that L innocently failed to carry out appropriately some of his duties to the trustee in the course of preparing the required paperwork for the upcoming trustee sale, and assuming that L thereafter purchased the trust property by being the high bidder at the time of sale, the end result could be a flaw in the sale of the trust property. Should this error be discovered after the sale and result in litigation being brought by the trustor or beneficiary against the trustee, the trustee might find itself in the unfortunate position of defending L's actions prior to the sale as to a parcel of trust property of which L is now claiming rightful ownership.
Even if L does not err in the performance of his duties to the trustee, this fact will not eliminate the possibility of the trustee later being accused of self-dealing. We are mindful of the fact that A.R.S. §33-810(A) states that "any person, including the trustee or beneficiary”, may bid at the sale. Nevertheless, there is also case law in Arizona which states that when a trustee wears “two hats”, it cannot escape its fiduciary duties by claiming that it was acting in its non-trustee capacity. Seven G Ranching Co. v. Stewart Title, 128 Ariz. 590, 592, 627 P.2d 1088 (App. 1981). Here, L was acting as attorney for the trustee, and his obvious access to information regarding the trust property contained in the trustee's file may very well subject the trustee to the accusation that it had breached its fiduciary duties to the trustor or beneficiary.
Under the present facts, L is obviously seeking to bid upon the trust property in pursuit of his own economic interests. ER 1.7(b) prohibits a lawyer from representing a client if the representation of that client may be materially limited by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation.***
Should L be allowed to bid on the trust property, and should it turn out that he is the high bidder at the sale, the trustee would then be obligated to sell and deed the property to L. ER 1.8(a) prohibits an attorney from entering into such a transaction with his client, unless:
"(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto."
The facts of the present inquiry fall within the parameters of ER 1.7(b ) and ER 1.8(a). We cannot stress enough the importance of the “consultation" requirement of ER 1.7(b) (2), and the “full disclosure” requirement of ER 1.8(a) (1). We interpret these clauses to require L to consult with the trustee and to disclose all possible adverse legal ramifications that may arise out of this potential transaction. Without full disclosure by L, it is possible that the trustee could simply provide its consent without seeking the advice of independent counsel.
We accordingly conclude that it is ethically impermissible for L, who has rendered legal services to a trustee in the course of the trustee' s preparation for an upcoming trustee sale, to bid on trust property that is the subject of the trustee sale, unless L fully satisfies all requirements of ER 1.7(b) and ER 1.8(a), which include, but are not limited to, the requirements that L must consult with the trustee and fully disclose all adverse legal ramifications of his intention to bid on the trust property.
Formal opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceeding. This opinion is based on the Ethical Rules in effect on the date the opinion was published. If the rules change, a different conclusion may be appropriate.
© State Bar of Arizona 1987
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