§ 17.3 - Conflicts of Interest in Real Estate Transactions

• Jurisdiction: Washington

§17.3 CONFLICTS OF INTEREST IN REAL ESTATE TRANSACTIONS

Conflicts of interest often arise for the lawyer involved in real estate transactions. At the time a lawyer becomes involved in a real estate transaction, frequently the terms of the deal are still in flux, and in fact the parties themselves may not yet be firmly identified. Further, the parties may not view themselves as adversaries, as would the parties to litigation. Indeed, the parties may have a prior relationship and may consider themselves to be more allies than opponents. (The Rules of Professional Conduct for the most part seem to contemplate only those situations in which the parties are polarized and have few or no common interests or goals.)

All of these factors make it relatively easy for the lawyer to find himself or herself in a conflict of interest. This section will examine the Rules of Professional Conduct that deal directly with conflicts of interest, as well as case law and demonstrative hypothetical situations, in an attempt to provide the real estate practitioner with guidance in avoiding conflicts of interest.

(1) Conflicts of interest and the Rules of Professional Conduct

The rules that deal explicitly with conflicts of interest are the following:

• Rule 1.7, Conflict of Interest: Current Clients;
• Rule 1.8, Conflict of Interest: Current Clients: Specific Rules;
• Rule 1.9, Duties to Former Clients;
• Rule 1.10, Imputation of Conflicts of Interest: General Rule and
• Rule 1.18, Duties to Prospective Clients

(a) Identifying the client

Conflicts of interest arise when a lawyer is unable to fulfill the duties of undivided loyalty, independent judgment, and confidentiality to the client. As discussed in §17.2(1), it is often necessary to examine and clearly define in writing who the lawyer represents. Under Bohn v. Cody, 119 Wn.2d 357, 832 P.2d 71 (1992), if a party to a real estate transaction has reasonable grounds to believe that he or she was the lawyer's client, and does so believe, an attorney-client relationship exists. See §17.2(1).

(b) Identifying conflicts of interest

After identifying the clients, it is possible to determine if any conflicts of interest exist. Most conflicts of interest fall under either RPC 1.7 or RPC 1.9. Under RPC 1.7, a conflict of interest arises if the representation of a client will be "directly adverse to another client," RPC 1.7(a)(1), or if there is a significant risk that representation of a client "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," RPC 1.7(a)(2). Under RPC 1.9, a conflict of interest arises when a lawyer has represented one client in a matter and thereafter attempts to "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." RPC 1.9(a).

When analyzing a given situation using these rules, there are four possible results: (1) no conflict exists; (2) a conflict exists, but there is no direct adversity, material limitation, or material adversity as a result of the representation; (3) a conflict exists and there is direct adversity, material limitation, or material adversity, but the lawyer reasonably believes the representation and the relationship with the other client will not be adversely affected, and it would therefore be permissible to seek the clients' consent to the representation; or (4) a conflict exists, and there is direct adversity, material limitation, or material adversity, and the lawyer reasonably believes that the representation or the relationship with the other client will be adversely affected, and it is therefore impermissible to seek the clients' consent to the representation, so the attorney must decline the representation. The practitioner is urged to take great care in evaluating his or her "reasonable belief" that the representation of and relationships with the two clients will not be adversely affected. The previous comments to the Model Rule required that this evaluation be done from the viewpoint of the disinterested lawyer, and that is still a good practice to follow. Actually soliciting the opinion of a disinterested lawyer would be an even better practice.

(c) Defining the terms used by the rules

It is fortunate that Washington has now adopted the comments to the ABA Model Rules of Professional Conduct, because the RPC themselves do not define the key terms of RPC 1.7 and RPC 1.9 (although RPC 1.0 does provide some definitions). Washington has little case law to augment the comments to the Model Rules, and no recent decisions relating to real estate transactions.

(i) RPC 1.7(a)(1), directly adverse interest

RPC 1.7(a)(1) states that a conflict of interest exists when representation of one client is "directly adverse" to the representation of another client. The comments to RPC 1.7 shed some light on the meaning of this term.

[6] Loyalty to a current client prohibits undertaking representation directly adverse to that client without that client's informed consent. Thus, absent consent, a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated. The client as to whom the representation is directly adverse is likely to feel betrayed, and the resulting damage to the client-lawyer relationship is likely to impair the lawyer's ability to represent the client effectively. In addition, the client on whose behalf the adverse representation is undertaken reasonably may fear that the lawyer will pursue that client's case less effectively out of deference to the other client, i.e., that the representation may be materially limited by the lawyer's interest in retaining the current client. Similarly, a directly adverse conflict may arise when a lawyer is required to cross-examine a client who appears as a witness in a lawsuit involving another client, as when the testimony will be damaging to the client who is represented in the lawsuit. On the other hand, simultaneous representation in unrelated matters of clients whose interests are only economically adverse, such as representation of competing economic enterprises in unrelated litigation, does not ordinarily constitute a conflict of interest and thus may not require consent of the respective clients.

RPC 1.7 cmt. [6]. The rationale behind RPC 1.7 is also described in Comment [6].

Although there is no Washington case law interpreting RPC 1.7(a)(1) in the context of a real estate transaction, it is not difficult to imagine situations in which the rule would come into play—RPC 1.7 cmt. [7] provides an example:

[7] Directly adverse conflicts can also arise in transactional matters. For example, if a lawyer is asked to represent the seller of a business in negotiations with a buyer represented by the lawyer, not in the same transaction but in another, unrelated matter, the lawyer could not undertake the representation without the informed consent of each client.

At the outset of a new matter, the lawyer should look to the reasonably foreseeable future to determine if any other client's interests are now, or are likely to become, adverse. The idea is to avoid undertaking representation that later will have to be abandoned, potentially along with the representation of the other client.

Following is analysis of three Washington decisions either citing RPC 1.7(a)(1) or citing RPC 1.7(a) generally and applying it to facts clearly involving direct conflicts of interest between existing clients.

In State v. Tracer, 173 Wn.2d 708, 272 P.3d 199 (2012), the court held an attorney appointed by the court to serve as a special deputy prosecutor was not qualified to serve due to a conflict of interest. Because of many missed hearings by a deputy prosecuting attorney in Tracer, the judge appointed attorney Noah Harrison, a local defense attorney present in court for an unrelated matter, as special deputy prosecuting attorney to represent the state in the case. Harrison objected to the court on the basis that there was a conflict. Two and a half hours later, with Harrison representing the defendant, the defendant pled guilty to a lesser charge. Shortly thereafter, the prosecuting attorney found out about the matter and moved to vacate the judgment and sentence. The Washington Supreme Court, in determining whether, under RCW 36.27.030, the trial court could appoint a special deputy prosecuting attorney, and whether Harrison was qualified to serve as a special deputy prosecuting attorney, held that Harrison was not qualified due to a conflict of interest. Id. at 714. The court stated that the statute authorizes a court to "'appoint some qualified person' ... and [w]hile the statute does not define 'qualified,' it [was] beyond dispute that a qualified attorney must not be ethically prohibited by the Rules of Professional Conduct (RPC) from discharging the prosecuting attorney's duties." Id. at 718-19. The court cited RPC 1.7(a)(1) and said that "[a] concurrent conflict exists 'if the representation of one client will be directly adverse to another client.'" Id. at 719. The court stated that the RPC Committee's comment to the rule, RPC 1.7 cmt. [6], explains, "absent consent, a lawyer may not act as an advocate in one matter against a person the lawyer represents on some other matter, even when the matters are wholly unrelated." Id. (emphasis in original). The court also said "the RPCs prohibit a lawyer from representing a client if a concurrent conflict of interest exists unless a strict exception that requires both clients' informed, written consent is met." Id. The court cited to an earlier Court of Appeals case and a Washington State Bar Association Advisory Opinion, WSBA Adv. Op. 1766 (1997), both of which indicate that a conflict of interest exists when...