SC Lawyer, May 2004, #2. Ethics Watch May 2004 The conflicted real estate closing - practicing with eyes wide shut.

• Author: By John Freeman

South Carolina Lawyer

2004.

SC Lawyer, May 2004, #2.

Ethics Watch May 2004 The conflicted real estate closing - practicing with eyes wide shut

South Carolina LawyerMay 2004Ethics Watch May 2004 The conflicted real estate closing - practicing with eyes wide shutBy John FreemanA lawyer serving clients who have potentially conflicting interests is not necessarily acting unethically, but danger is never far away. Among the most common factual scenarios in law practice where conflicted representation is quite common is the residential real estate closing.

Unscientific sampling of lawyers whose practices emphasize real estate matters convinces me that somewhere around 10 percent of all residential real estate closings are beset with some sort of glitch or discord that takes special time and energy to straighten out. Often the problem(s) can be resolved quickly.

Unfortunately, some problems are harder, and sometimes the end result is a lawsuit. This is what happened some years ago in New Jersey when Elizabeth Greene sold her home to James and Joan Connolly. The problems boiled over into two legal proceedings, one between the buyer and seller, and the second involving discipline for the closing lawyer. The resulting ethics case, Matter of Lanza, 65 N.J. 347, 322 A.2d 445 (1974), presents an abject lesson on why conflicted real estate closings are dangerous.

The basic facts: Elizabeth Greene wanted to sell her house and consulted real estate lawyer, Guy Lanza. Subsequently, a real estate sales contract that evidently was prepared by Ms. Greene's real estate broker was executed by her and the buyers, James and Joan Connolly. Lanza played no role in negotiating the contract's terms, which called for a July 1971 closing date. The parties signed the contract in lawyer Lanza's office.

Prior to the signing, Lanza had agreed to represent the Connollys together with Ms. Greene. He claimed he told this to Ms. Greene; her testimony was that she was not aware he represented the Connollys in the transaction until she found out later from Mrs. Connolly. Re- marked the court, "In any event it is quite clear that respondent agreed to act for the purchasers before discussing the question of such additional representation with Ms. Greene." Id. at 347, 322 A.2d at 447.

Ethics lesson: If you're going to represent potentially conflicting parties, make sure your first client knows of your intentions and assents by signing a written waiver from the start. By failing to have a written waiver agreement, Lanza opened himself up to a swearing contest with his client, a contest that is very hard for a lawyer to win.

In the subsequent disciplinary proceeding, the New Jersey Supreme Court sided with the client, finding that Lanza had agreed to represent the Connollys without consulting Ms. Greene. By seemingly signing up a new client who had interests that potentially conflict with his existing client, Lanza allowed himself to be portrayed as both greedy and a sneak. Lawyers owe a duty to give information to their clients under both Rule 1.4 of the Rule of Professional Conduct and Restate-ment (Second) of Agency § 381 (1957). For an existing client, word that his or her lawyer is contemplating taking on new, potentially conflicting representation is a highly material piece of information. It must be conveyed to the client, and the potential ramifications need to be fully disclosed. For the lawyer's protection, the disclosure needs to be made in writing. Otherwise, as in Lanza, the quality, or even the fact of disclosure will be a disputed issue, which is something good lawyers know to avoid.

Additional facts: After the contract was signed, Ms. Greene sought to delay the closing until September, and the Connollys agreed. So far, so good. But then, due to a change in circumstances, Ms. Greene asked to go ahead and close in July. The Connollys were agreeable with this but said they would lack $1,000 of the purchase price due to the date change. They offered to give a post-dated check, and Ms. Greene agreed after checking with Lanza. At the closing in late July, Ms. Greene received the check dated August 31, 1971, which bounced when she deposited it shortly after that date.

When Ms. Greene called Mr. Connolly, he explained that they had found water in the basement of their new home, a condition that supposedly would cost $1,000 to rectify. Mr. Connolly claimed the water in his basement was contrary to an explicit factual representation made by Ms. Greene prior to the sale. She denied making the representation and called lawyer Lanza, who did nothing to help her resolve the problem. Ms. Greene hired new counsel and sued the Connollys.

Ethics lesson: In blasting lawyer Lanza, the court gave a good "how to" conflicts lecture that every real estate closing lawyer should study with care:

Mr. Lanza first undertook to act for the seller, Ms. Greene. This immediately placed upon him an obligation to represent her with undivided fidelity. . . . He should not have undertaken to represent the purchasers until he had initially conferred with Ms. Greene. He should have first explained to her all the facts and indicated in specific detail all the areas of potential conflict that foreseeably might arise. He should also have made her aware that if indeed any of these contingencies should thereafter eventuate and not prove susceptible of ready solution in a manner fair and agreeable to all concerned, it would then become his professional duty immediately to cease acting for all parties. Only after such a conference with his client, and following her informed consent, would he have been at liberty to consider representing the purchasers. They, too, were entitled to the same explanation as is set forth above, as well as being told of respondent's existing attorney-client relationship with the seller.

The second instance of misconduct arose after respondent learned that the purchasers would not be able to pay the full purchase price in cash at the time of closing title. At that point adequate representation of the seller required that her attorney first strongly insist on her behalf that cash be forthcoming. Failing this, and if the seller persisted in her wish to close upon the earlier date, her attorney should have vigorously urged the execution and delivery to her of a mortgage from the purchasers in the amount of $1,000, or of other adequate security, in order to protect her interest pending receipt of the full cash payment. . . . Had the purchasers persisted in their unwillingness to pay the full amount in cash at the time of closing and had they also refused to execute and deliver a mortgage or other security, respondent should have immediately withdrawn from the matter, advising both parties to secure independent counsel of their respective choosing. At that point in time, it would have clearly been impossible for any single attorney adequately and fairly to represent both sides.

Matter of Lanza, 65 N.J. at 350-52, 322 A.2d 447-48.

The Court's stern disapproval of lawyer Lanza's behavior was too tame for Judge Pashman, who wrote in his concurring opinion:

It is virtually impossible for one attorney in any manner and under any circumstances to faithfully and with undivided allegiance represent both a buyer and seller. This concurrence, therefore, stands for the position of the majority and further holds that dual representation in a buyer-seller situation should be totally forbidden. The reasons for this seem to me fairly obvious. In this type of transaction, it is most certainly in the public interest to safeguard and protect both parties from any abuses, whether they be ill-advised or inadvertent. The potential conflict in home buying or selling may never come to fruition. However, when it does surface, both sides explode in anger and accusations. The attorney will then withdraw, leaving the situation no better than when it occurred and, for that matter, probably a bit worse. This is not fair to either party.

Id. at 357, 322 A.2d at 451.

Like the conventional, conflicted real estate closing, Lanza case initially presented simple, benign facts. A little bit of water in the seller's basement, together with perhaps a little bit of greed on the buyer's part, combined to produce a public reprimand for the closing lawyer. Lanza teaches that even the most simple form of representation gets complicated when it gets conflicted. Oral understandings, like lawyer indifference or indecision, have no place in settings where a lawyer's clients are actually or potentially at loggerheads.

Copyright (c) 2004 by the South Carolina Bar. All rights reserved. No part of this publication may be reproduced without written permission.