1.7 Fiduciary Standard of Care

• Library: Real Estate Transactions in Virginia (Virginia CLE) (2019 Ed.)

1.7 FIDUCIARY STANDARD OF CARE

1.701 Undiluted-Loyalty Duties and Warranties. Upon express or implied ⁶⁰ creation of an attorney-client relationship, the law implies that the lawyer owes a duty to exercise his or her professional judgment exclusively for the benefit of the client and that the lawyer continuously warrants ⁶¹ that:

[Page 11]

1.	He or she has disclosed all material information pertaining to every interest of the lawyer, of each law partner and associate, and of every other current or former client creating a "possibility" of adversely influencing such judgment;
2.	The lawyer reasonably believes, despite such interests, that he or she can adequately represent the client;
3.	The lawyer will be continuously vigilant and will timely disclose any material change in any such interest; and
4.	The lawyer will timely withdraw whenever any such change invalidates the prior conclusions upon which the client has relied in consenting to the lawyer's representation. 62

1.702 Disclosure Duties and Nondisclosures. Disclosure of an interest of the type described in paragraph 1.701 merely warrants that the lawyer reasonably believes that such interest would not adversely affect the lawyer's ability to advance or protect the client's best interests, but nondisclosure warrants that such interest does not exist. ⁶³ A dissatisfied client's proof of the existence of any such interest establishes prima facie evidence of a breach of the lawyer's fiduciary duties and shifts to the lawyer the burden to prove that:

1.	He or she had disclosed its existence to the client;
2.	It reasonably appeared that such interest would not adversely affect the lawyer's independent judgment;
3.	The client understood the "possibility" of such adverse influence and the possibility of it becoming necessary for the lawyer to withdraw from the representation; and
4.	The client consented to the lawyer's representation despite such possibilities. 64

[Page 12]

A breach of the duty to act with undivided loyalty usually results in disciplinary sanctions. ⁶⁵

To minimize the inherent risks of unintentionally breaching these disclosure duties, a lawyer must routinely apply a worst-case analysis in evaluating the possibilities that any such interest could be construed—after the fact—by a dissatisfied client as an interest that diluted the lawyer's loyalty to the client's best interests. ⁶⁶

1.703 Per Se Disqualifying Interests. The following are some types of interests that disqualify a lawyer from handling a matter:

1.	Legal Ethics Opinion (LEO) No. 1564 prohibits an attorney who is the licensed title agent for his or her attorney-owned agency to allow clients (buyers and borrowers) to use the attorney's title agency; and
2.	If a client chooses to make a gratuitous conveyance of realty to a lawyer or to a relative of the lawyer, the lawyer (and the lawyer's firm) is per se disqualified from handling the transaction (unless the grantor is a relative of the grantee). 67

1.704 Interests of Lawyer, Colleague, Relative, or Spouse. Some types of interests do not disqualify the lawyer from handling a matter as long as the lawyer fully complies with the disclosure and consent requirements described in paragraph 1.701. The following are examples of potentially disqualifying nonclient interests or relationships:

A. Proprietary Interest in Title Company. When a lawyer or a member of a lawyer's firm owns an interest in a title insurance agency from which the lawyer's client (the buyer) intends to buy title insurance commitments or policies, a conflict may exist under Rule 1.7. A lawyer with a proprietary interest in a title insurance company or agency must not represent a client in obtaining insurance from the company or agency unless the lawyer can establish that the insurance is, at a minimum, comparable to

[Page 13]

that of other insurers with respect to title insurance premiums, binder or commitment fees, and scope of coverage. The lawyer may continue representing the client only if he or she obtains a consent from the client that acknowledges the "conflict" upon full disclosure of such information. ⁶⁸

B. Proprietary Interest in Real Estate Firm. A lawyer with a proprietary interest in a real estate firm must not represent a client in a transaction involving the firm unless the lawyer can establish that it is obvious that he or she can do so with complete fairness to the client and the client consents upon full disclosure by the lawyer. ⁶⁹ A lawyer who is "employed in a non-lawyer capacity by a real estate firm" but who also maintains a law practice in a separately identified portion of the same office building may recommend the lawyer's, or the real estate firm's, real estate sales services to a law practice client as long as he or she furnishes adequate disclosure of the non-lawyer capacity in which the lawyer, or the agency, will provide services to the client. ⁷⁰

C. Proprietary Interest in Settlement Company. A lawyer who has (or whose firm has) a proprietary interest in a nonprofessional corporation furnishing "settlement services" may not represent a client who is using the services of the company in a real estate transaction unless the lawyer reasonably believes that such proprietary interest would not adversely affect the lawyer's professional judgment and the client consents to the representation after full and adequate disclosure by the lawyer. However, the settlement corporation may not receive interest on funds held in trust for real estate closings unless the parties whose funds are being held are not clients of the lawyer having a proprietary interest in the corporation. ⁷¹

D. Lawyer as Compensated Agent for Title Insurance Company. Being a compensated agent for a title insurance company or agency does not disqualify a lawyer from procuring title insurance from the company or agency on behalf of a client, provided the lawyer complies with LEO No. 1564. ⁷²

[Page 14]

E. Lawyer's Spouse. A lawyer may not represent a purchaser or seller in a real estate transaction in which the lawyer's spouse is the real estate agent unless the spouse's interest would not adversely affect the lawyer's exercise of independent judgment for the benefit of the clients and the clients consent to the representation after full and adequate disclosure of the spouse's interest. ⁷³

F. Lawyer as Director or Stockholder of Bank. Regardless of whether the amount of funds in a real estate transaction being handled by a lawyer who is a stockholder or director of a bank exceeds the applicable limit on federal insurance for bank deposits, unless the lawyer has reason to know that the "financial condition of the bank is precarious," it is not improper for the lawyer to deposit the funds into a single trust account in that bank as long as the interests of the bank do not adversely affect the lawyer's exercise of independent judgment for the clients and the clients have consented after full and adequate disclosure. ⁷⁴

G. Proprietary Interest in Mechanics' Lien Agent. A lawyer with a proprietary interest in the mechanics' lien agent (a title insurance agency or company) for a transaction may serve as the builder-seller's attorney in the transaction as long as the proprietary interest would not affect the lawyer's judgment, the builder-seller consents after full and adequate disclosure, and the possibility that an employee of the agent may need to testify as a witness does not disqualify the lawyer from handling the transaction for the builder-seller. ⁷⁵

1.705 Interests of Other or Former Clients.

A. In General. Under the standards described in paragraph 1.701, a lawyer must not handle a matter whenever the interests of another client or a former client create a "possibility" of adversely influencing the lawyer's ability to protect adequately or advance the best interests of each current or former client unless the lawyer reasonably believes he or she can do so and each affected current or former client, upon full disclosure, consents to the lawyer handling the matter. ⁷⁶

[Page 15]

The Virginia State Bar Ethics Committee considered such a situation in which a lawyer had represented three clients 19 years previously in a real estate purchase. ⁷⁷ The lawyer presently practices with a partner who represents a client in litigation involving the real estate adverse to the other partner's three former clients, who are now acting as trustees. The Committee explained that (i) there is no "statute of limitations" for adversity to former clients, and the mere lapse of time or a lawyer's lack of memory about previous work does not relieve the lawyer from determining whether there may be adversity to former clients; (ii) the Committee's previous guidance under the former Code of Professional Responsibility about the meaning of the "substantial relationship" test governing adversity to former clients applies under the new Rules; ⁷⁸ (iii) the fact that the former clients now own the land as trustees is irrelevant, because they are the same people regardless of the role they are playing; (iv) the fact that the two lawyers were not practicing together 19 years ago does not matter, because any lawyer's individual disqualification caused by the current adversity is imputed to all members of the firm; (v) the lawyer's lack of "familiarity with the file" or memory about the old representation is irrelevant; (vi) the absence of any response from the trustees to the law firm's request for consent does not allow the firm to proceed, because a former client whose consent is necessary must provide "actual" consent after full disclosure—there is no "constructive consent" based on the client's silence; (vii) the lawyer's receipt of any "confidential information" during the earlier representation might itself cause an imputed disqualification of the firm if the information "would be pertinent" in the current...