State Bar of Arizona Ethics Opinions

06-08: Ancillary Services; Conflict of Interest; Mortgage/Refinancing Services; Imputed Conflicts
9/2006

A lawyer may provide mortgage/refinancing services separate from the lawyer’s law firm so long as the proper disclosures are made, including that the lawyer is not providing legal services and the customers do not have the protections of the lawyer-client relationship. Referrals of clients must meet the “heavy burden” of compliance with ERs 1.7 and 1.8(a). Lawyers from separate law firms may participate as loan officers in the separate mortgage/refinancing company without imputed conflicts of interests for their law firms’ clients. However, these lawyers must not only make proper disclosures, but each lawyer also must determine whether the lawyer’s personal interests materially limit the lawyer’s professional judgment and whether any information known by the lawyer from these professional and business relationships creates any conflict of interest such that the lawyer may not proceed in any particular circumstance. Confidentiality requirements for clients and former clients also must be strictly followed.

FACTS

The inquiring attorney would like to provide mortgage/refinancing services through an entity separate from his law firm. This separate entity (“Company”) would be owned 50 percent by the attorney and 50 percent by a licensed mortgage broker who is not a lawyer.

The inquiring attorney would provide written disclosures/consents (intended to comply with the ERs) to clients, non-clients, and former clients of his law firm who are interested in the mortgage services.

For purposes of this opinion, we assume that the Company’s terms and fees will be fair and reasonable and well within industry standards. In addition, the Arizona Department of Financial Institutions will regulate the Company’s services. Oversight will include audits of the Company, reviews of the loan officers’ qualifications and reviews of the contract terms offered by the Company.

The inquiring attorney also would like to hire other lawyers to serve as loan officers in the Company. The other lawyers would not have equity interests in the Company, but would receive compensation as loan officers. The other lawyers would be required to use the same ERs 5.7/1.8(a) disclosure forms for clients, non-clients, and former clients referred to the Company. The employee lawyers would maintain their own separate law firms, which would neither be part of the Company nor part of the inquiring attorney’s law firm.

The participating lawyers will execute a statement regarding the lack of any imputed conflicts of interest through the Company. The statement will explain that because the participating lawyers are not practicing law together and will not share attorney-client information among the lawyers while serving as loan officers, there will not be any imputed conflict of interests among the participating lawyers and their firms.

QUESTION PRESENTED

May a practicing lawyer own a separate business for mortgage/refinancing services and employ other lawyers to participate in the separate business as loan officers if those lawyers practice law in separate firms?

RELEVANT ETHICAL RULES

ER 1.0  Terminology

. . . .

(c)  "Firm" or "law firm" denotes a lawyer or lawyers in a law partnership, professional corporation, sole proprietorship or other association; or lawyers employed in a legal services organization or the legal department of a corporation or other organization.  Whether government lawyers should be treated as a firm depends on the particular Rule involved and the specific facts of the situation.

. . . .

ER 1.6  Confidentiality of Information

(a)  A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted or required by paragraphs (b), (c) or (d), or ER 3.3(a)(3).

(b)  A lawyer shall reveal such information to the extent the lawyer reasonably believes necessary to prevent the client from committing a criminal act that the lawyer believes is likely to result in death or substantial bodily harm.

(c)  A lawyer may reveal the intention of the lawyer's client to commit a crime and the information necessary to prevent the crime.

(d)  A lawyer may reveal such information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1)  to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;
(2)  to mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;
(3)  to secure legal advice about the lawyer's compliance with these Rules;
(4)  to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client; or
(5)  to comply with other law or a final order of a court or tribunal of competent jurisdiction directing the lawyer to disclose such information.

ER 1.7  Conflict of Interest:  Current Clients

(a)  Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.  A concurrent conflict of interest exists if:

. . . .

(2)  there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b)  Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if each affected client gives informed consent, confirmed in writing, and:

(1)  the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2)  the representation is not prohibited by law; and
(3)  the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.

ER 1.8  Conflict of Interest:  Current Clients:  Specific Rules

(a)  A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a 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 in a manner that can be reasonably understood by the client;
(2)  the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and 
(3)  the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.  

. . . .

(k)  While lawyers are associated in a firm, a prohibition in the foregoing paragraphs (a) through (i) that applies to any one of them shall apply to all of them.

. . . .

ER 1.9  Duties to Former Clients

(a)  A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

(b)  A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client:

(1)  whose interests are materially adverse to that person; and
(2)  about whom the lawyer had acquired information protected by ERs 1.6 and 1.9(c) that is material to the matter;

unless the former client gives informed consent, confirmed in writing.

(c)  A lawyer who has formerly represented a client in a matter shall not thereafter:

(1)  use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or
(2)  reveal information relating to the representation except as these Rules would permit or require with respect to a client.

ER 1.10  Imputation of Conflicts of Interest:  General Rule

(a)  While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by ERs 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.

(b)  When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless:

(1)  the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and
(2)  any lawyer remaining in the firm has information protected by ERs 1.6 and 1.9(c) that is material to the matter.

(c)  A disqualification prescribed by this Rule may be waived by the affected client under the conditions stated in ER 1.7.

(d)  When a lawyer becomes associated with a firm, no lawyer associated in the firm shall knowingly represent a person in a matter in which that lawyer is disqualified under ER 1.9 unless:

(1)  the matter does not involve a proceeding before a tribunal in which the personally disqualified lawyer had a substantial role;
(2)  the personally disqualified lawyer is timely screened from any participation in the matter and is apportioned no part of the fee therefrom; and
(3)  written notice is promptly given to any affected former client to enable it to ascertain compliance with the provisions of this Rule.

. . . .

ER 5.7  Responsibilities Regarding Law Related Services

(a)  A lawyer may provide, to clients and to others, law related services, as defined in paragraph (b), either:

(1)  by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients; or
(2)  by a separate entity which is controlled by the lawyer individually or with others.

Where the law related services are provided by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients, the lawyer shall be subject to the provisions of the Rules of Professional Conduct in the course of providing such services.  In circumstances in which law related services are provided by a separate entity controlled by the lawyer individually or with others, the lawyer shall not be subject to the Rules of Professional Conduct, in the course of providing such services, only if the lawyer takes reasonable measures to assure that a person obtaining the law related services knows that the services of the separate entity are not legal services and that the protections of the client lawyer relationship do not apply.

(b)  The term law related services denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.

RELEVANT ARIZONA ETHICS OPINIONS

Ariz. Ethics Ops. 88-05, 97-08, 97-09, 99-09, 05-01

OTHER RELEVANT ETHICS OPINIONS

American Bar Association Op. 328 (June 1972)
Tex. Comm. on Prof. Ethics Op. 465 (1991)

OPINION

Ariz. Ethics Ops. 05-01 (lawyer/investment advisor), 99-09 (lawyer/insurance and securities services) and 97-08 (lawyer/accountant) concluded that a lawyer may provide certain ancillary services separate from any law firm as long as the lawyer fully complies with the disclosure requirements of ER 1.8(a) (for clients) as well as ER 5.7; the lawyer decides he or she does not have a conflict of interest under ER 1.7(a) by providing both legal services and ancillary services; and the lawyer adheres to confidentiality and other obligations to clients (ERs 1.6 and 1.9). Comment 9 to ER 5.7 includes examples of ancillary services. Neither the list in the comment nor the services addressed in the previous opinions comprise an exhaustive list of ancillary services a lawyer may provide.

An American Bar Association opinion that predated the addition of ABA Model Rule 5.7 includes “mortgage brokers” in a long list of law-related services that lawyers might provide through separate entities. ABA Op. 328 (June 1972).[1] In Tex. Comm. on Prof. Ethics Op. 465 (1991), the Texas ethics committee held that a lawyer may have an ownership interest in a loan company that provides money to clients for litigation costs so long as full disclosures are made.

Mortgage/refinancing services are services covered by ER 5.7. A bankruptcy attorney providing mortgage/refinancing services, for example, is analogous to an estate-planning attorney providing investment services.  See Ariz. Ethics Op. 99-09. A lawyer may engage in a separate business of mortgage/refinancing services; the disclosures and requirements are outlined for such a business in Ariz. Ethics Op. 05-01.

Disclosures to non-clients and to clients must meet different standards.  For non-clients, ER 5.7 requires that the lawyer take reasonable steps to assure that such customers know that they are not receiving legal services and that the protections of the lawyer-client relationship do not apply.

Importantly, written disclosures may not be enough.

[T]he inquiring attorney would be acting prudently in providing written disclosure to customers that the [mortgage/refinancing] services are not legal services and the protections of a client-lawyer relationship do not apply. Written disclosure may not, however, be sufficient in all circumstances, as the attorney must explain these facts in a manner sufficient to assure that the particular customer involved understands their significance.

Ariz. Ethics Op. 05-01.

When the customers are former clients, there is the additional burden of complying with ER 1.9, including that the lawyer may not reveal information to the Company relating to the previous representation. The lawyer also may not use any information relating to the representation to the disadvantage of the former client except where the information has become generally known. Ariz. Ethics Op. 05-01. This includes information about the former client's creditworthiness.

For clients, the lawyer must meet the requirements of ERs 1.6, 1.8(a), and 1.7 in addition to the other requirements above. “Where a lawyer contemplates business dealings with an existing client, the Rules impose a ‘heavy burden’ on the lawyer to show compliance with ‘stringent disclosure and consent requirements.’  These requirements may, as a practical matter, be difficult to meet.” Ariz. Ethics Op. 05-01.

Again, written disclosures may not be adequate disclosure. “The transaction must also be fully disclosed to the client in a manner the client can reasonably understand. Such disclosure must include all of the facts relating the lawyer's relationship to any particular investment advisory firm whose products he might sell, including the amount and manner in which the lawyer will receive commissions or fees.” Ariz. Ethics Op. 05-01.

Disclosure does not end with the lawyer's relationship with the ancillary services firm.

The lawyer also must disclose whether comparable products or services are available from other sources and their relative costs and all the reasonably foreseeable adverse consequences of the transaction . . . . ER 1.8 also requires the lawyer to advise the client in writing of the desirability of seeking the advice of independent legal counsel in the transaction, and the client must have a reasonable opportunity to seek such advice. Thus, a lawyer who contemplates providing investment advisory services to existing clients must affirmatively encourage them to obtain the advice of independent counsel and not merely casually suggest that they consult with another lawyer.

Ariz. Ethics Op. 05-01.

Insofar as the imputed conflicts of interests or lack thereof for the participating lawyers and their clients, the participating lawyers will not be giving legal advice or serving as lawyers when they perform loan officer services.  Thus, the Company does not meet the definition of a law firm, and conflicts of interest should not be imputed between the participating lawyers' firms. See ER 1.0(c); ER 1.10 (under ER 1.10, cmt 2, even lawyers who office share generally are not deemed to be a "firm" unless they hold themselves out to be one firm). Further, because the participating lawyers will not have access to other participating lawyer’s law firm client information, the proposed arrangement is consistent with Ariz. Ethics Op. 97-09, which held that imputed conflicts could be avoided when hiring contract lawyers to work in a law firm (as opposed to a separate ancillary business as here) if the access to client information was limited. Therefore, as example, if the lawyer owner in his law firm represents a client who is adverse to a client of an employee lawyer, the fact that the owner attorney and the employee attorney are both loan officers in the Company will not, alone, disqualify either lawyer from the legal matter because neither lawyer has access to any information or communications from the other’s law firm.

Of course, all of the lawyers still must determine whether their own personal interests materially limit their independent professional judgment, requiring that they withdraw from a matter. ER 1.7. Each of the lawyers must further determine whether these professional and business relationships create conflicts of interests such that the lawyer may not proceed in any particular circumstance. Id. Each lawyer also must strictly adhere to the confidentiality requirements of ER 1.6, being mindful that the employees of the Company are not the lawyer's law firm employees.

Further, for all of the participating lawyers, the caution in Ariz. Ethics Op. 05-01 is equally applicable here:

This Opinion, we emphasize, does not address what disclosure obligations or other legal requirements may apply to the lawyer's activities independent of the Rules of Professional Conduct (e.g. any obligations that may exist under state or federal securities laws or consumer protection laws). Instead, the Opinion presumes that the lawyer complies with applicable legal requirements governing the investment activities. Moreover, even though a lawyer may not be subject to the Rules "in the course of providing" law related services in circumstances identified in ER 5.7, the lawyer remains "subject to those Rules that apply generally to lawyer conduct, regardless of whether the conduct involves the provision of legal services." ER 5.7, cmt.  2 (citing ER 8.4.). For example, even if a lawyer were not otherwise subject to the Rules in providing investment services to non clients, it could be professional misconduct under ER 8.4 for a lawyer to engage in fraud or deceit with regard to such services.

Finally, the Company must indeed be separate from any law firm and affirmative steps must be taken to avoid confusion between the provisions of non-legal versus legal services. See Ariz. Ethics Ops. 05-01, 97-08, 88-05.

CONCLUSION

Mortgage/refinancing services are services governed by ER 5.7. A lawyer together with a non-lawyer may establish a separate company for mortgage/refinancing services. This separate company can employ lawyers who practice law at separate law firms without imputing conflicts of interests between clients of the law firms. However, each client referral and customer interaction must meet the requirements of the Rules of Professional Conduct as outlined in this opinion.

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 proceedings. © State Bar of Arizona 2006

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[1]In 1994, the ABA House of Delegates approved MR 5.7, a revised version of which Arizona adopted in 2003.