Can a law firm represent both the foreclosure trustee and the secured creditor in a contested foreclosure?

Plain-English summary

A law firm contracted with an independent corporation to serve as substitute trustee in any foreclosure the firm initiates, and no firm member has any affiliation with or financial interest in that corporation. The question is whether the firm may represent the corporate trustee in a contested foreclosure while also representing the secured creditor in the same proceeding. The opinion concludes it may not. Under N.C. Gen. Stat. §45-21.16(c), a trustee on a deed of trust is a neutral party who, while holding that position in the foreclosure, may not advocate for the secured creditor or the debtor. Because of the conflict between the trustee's neutral, fiduciary role and an advocate's role for one party, ethics opinions hold that a lawyer serving as trustee in a contested foreclosure may not represent the secured creditor or the debtor in the proceeding.

The opinion extends that principle: a lawyer representing the trustee in a contested foreclosure is also prohibited from representing the secured creditor or the debtor, because the lawyer must advise the trustee to maintain neutrality, and that representation would be materially limited by the advocacy required for the creditor or debtor. It notes that 2008 FEO 11, Opinion #5, specifically bars the simultaneous representation in a contested foreclosure of the secured creditor and a corporate trustee created by the lawyer's firm to serve in that capacity.

The opinion recognizes a limited exception drawn from 2004 FEO 3. There, a borrower sued the secured creditor and the trustee for unfair debt collection, naming the trustee as a party-defendant to enjoin the foreclosure. The opinion holds that a lawyer may represent both the secured creditor and the trustee as codefendants in that separate, tangential lawsuit if the lawyer determines the representation will not be impaired and both clients give informed consent, applying a Rule 1.7 conflict analysis.

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which one firm represents both the foreclosure trustee and the secured creditor in a contested foreclosure is not permitted; the opinion holds the trustee's statutory neutrality cannot coexist with advocacy for a party, and that the firm's duty to advise the trustee to stay neutral would be materially limited by representing the creditor. Per the opinion, the analysis turns on the trustee's neutral fiduciary role under N.C. Gen. Stat. §45-21.16(c) and the resulting material limitation under Rule 1.7.

The opinion marks the boundary of the exception: joint representation of the trustee and creditor is permissible only in a separate, tangential action the borrower brings against them as codefendants, where the lawyer concludes the representation will not be impaired and both clients give informed consent.

Common questions

Q: Can a firm represent both the foreclosure trustee and the secured creditor in a contested foreclosure?

A: No. The opinion concludes that because the trustee must remain neutral under N.C. Gen. Stat. §45-21.16(c), the firm representing the trustee cannot also represent the secured creditor or the debtor in the proceeding, as the trustee representation would be materially limited by the advocacy.

Q: Does it matter that the firm created the corporate trustee?

A: The opinion says the prohibition still applies. It cites 2008 FEO 11, Opinion #5, which specifically bars representing both the secured creditor and a corporate trustee created by the lawyer's firm in a contested foreclosure.

Q: Is there any situation where the firm may represent both?

A: Yes, a narrow one. Following 2004 FEO 3, the opinion permits representing the trustee and the secured creditor as codefendants in a separate lawsuit the borrower files against them, if the representation will not be impaired and both clients give informed consent under Rule 1.7.

Q: Can the firm represent the trustee and the debtor instead?

A: No. The opinion applies the same bar to the debtor: the lawyer representing the neutral trustee may not represent either party, the secured creditor or the debtor, in the contested foreclosure.

Background and rules framework

The opinion applies North Carolina Rule 1.7 (conflict of interest: current clients, the analogue of Model Rule 1.7), treating the firm's duty to advise the trustee to remain neutral as a representation that would be materially limited by advocacy for the secured creditor or debtor. The substantive backdrop is N.C. Gen. Stat. §45-21.16(c), which makes the foreclosure trustee a neutral party barred from advocating for either side.

The opinion builds on prior North Carolina opinions, principally 2008 FEO 11 (and its Opinion #5 on firm-created corporate trustees) and 2004 FEO 3 (the tangential-litigation exception), rather than introducing a new rule.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NC Rule 1.7 (conflict of interest: current clients; material limitation)

Statutes:

• N.C. Gen. Stat. §45-21.16(c) (foreclosure trustee is a neutral party who may not advocate for the secured creditor or debtor)

Other opinions cited:

• NC 2008 FEO 11 (Opinion #5): a firm may not represent both the secured creditor and a firm-created corporate trustee in a contested foreclosure.
• NC 2004 FEO 3: a lawyer may represent the trustee and the secured creditor as codefendants in a separate borrower-initiated action with informed consent.

See also

• NC State Bar 2013 FEO 14: Representing Parties to a Commercial Loan Closing
• NY State Bar Op. 952: Representing Both Lender and Buyer in a Closing
• Alabama Bar Op. 1989-99: Representing Buyer and Seller in a Real Estate Transaction

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2014-formal-ethics-opinion-2/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

A law firm has entered into a contract with an independent corporation to serve as substitute trustee in any foreclosure proceeding initiated by the law firm. No member of the law firm, or anyone related to any member of the law firm, has any affiliation with or financial interest in the corporation.

May the law firm represent the corporation serving as the trustee in a contested foreclosure proceeding, while also representing the secured creditor in the proceeding?

Opinion:

No. As noted in NC Gen. Stat. §45-21.16(c), a trustee on a deed of trust is “a neutral party and, while holding that position in the foreclosure proceeding, may not advocate for the secured creditor or for the debtor in the foreclosure proceeding.” Because of the conflict between the neutral, fiduciary role of trustee and the role of an advocate for one of the parties to a contested foreclosure, a number of ethics opinions hold that a lawyer serving as a trustee in a contested foreclosure proceeding may not represent the secured creditor or the debtor in the proceeding. 2008 FEO 11 (listing opinions).

By extension, a lawyer representing the trustee in a contested foreclosure proceeding is also prohibited from representing the secured creditor or the debtor in the proceeding. This is because the lawyer must advise the trustee on maintaining a neutral role, and this representation would be materially limited by the advocacy required to represent either the secured creditor or the debtor. In fact, 2008 FEO 11 specifically prohibits the simultaneous representation in a contested foreclosure proceeding of the secured creditor and a corporate trustee specifically created by the lawyer’s firm to serve in this capacity. 2008 FEO 11, Opinion #5.

The Ethics Committee has recognized a limited exception to the prohibition on representation of the secured creditor by a lawyer for the trustee in a contested foreclosure proceeding. This exception permits joint representation of both the trustee and the secured creditor, but not in the contested foreclosure itself. In 2004 FEO 3, a lawyer proposed to represent both the secured creditor and the trustee in an unfair debt collection action filed by the borrower against the secured creditor and the trustee. To enjoin the pending foreclosure proceeding, the trustee was named as a party-defendant in the action. The opinion holds that the lawyer may represent both the secured creditor and the trustee as codefendants in this separate, tangential lawsuit brought by the borrower if the lawyer determines that his representation will not be impaired, and both the secured creditor and the trustee give informed consent. 2004 FEO 3 (applying a conflict of interest analysis under Rule 1.7).