Can one law firm represent both the substitute trustee under a deed of trust and the lender in a bankruptcy adversary proceeding seeking relief from the automatic stay?

Plain-English summary

A savings and loan held a note from B Company secured by a deed of trust; the loan was in default when B Company filed under Chapter 11. The S&L's general counsel, firm LMN, had one of its lawyers substituted as trustee under the deed of trust, then brought an adversary proceeding in the names of that substitute trustee and the S&L against B Company, seeking only relief from the automatic stay. The question was whether firm LMN could represent both the trustee and the lender in that proceeding.

The opinion concluded no. Building on CPR 166, it restated that the trustee/attorney cannot represent either the lender or the borrower in an advocacy role at any stage of a foreclosure, because the trustee is charged with preserving the interests of both and in that sense represents both; to advocate for one in an adversary capacity would violate the fiduciary duty owed to the other. The opinion noted that earlier opinions (such as CPR 264) extended that principle to related actions. Because the stay-relief proceeding is adversarial and the interests of lender and debtor may differ, the firm's representation of both the lender and the substitute trustee would breach the trustee's duty to preserve both sides' interests.

Currency note

This opinion was issued in 1981 under North Carolina's former Code of Professional Responsibility (the DR/EC framework), before the State Bar replaced the Code with the Rules of Professional Conduct (adopted 1985) and before the 2003 revisions to those Rules. The conflict-of-interest principles it applied correspond to today's Model Rule 1.7. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm act for both the trustee and the lender in a bankruptcy stay-relief motion?

A: No. The opinion concluded that doing so would violate the trustee's fiduciary duty to preserve the interests of both lender and borrower, since the lender and debtor are adversaries whose interests may differ.

Q: Does moving the dispute from a foreclosure to bankruptcy court change the result?

A: No. The opinion applied the same trustee-neutrality rule from CPR 166 to the related bankruptcy adversary proceeding, citing the extension made in CPR 264.

Q: Whose interests must the substitute trustee protect?

A: Both. Per the opinion, the substitute trustee must represent the interests of lender and borrower equally in the adversary proceeding.

Background and rules framework

The opinion applied the conflict-of-interest principles of the former Code of Professional Responsibility, which correspond to today's Model Rule 1.7, extending the foreclosure-trustee neutrality rule of CPR 166 to a bankruptcy adversary proceeding. The analysis turned on the trustee's dual fiduciary duty and the adverse posture of lender and debtor in a contested stay-relief matter.

Citations and references

Rules of Professional Conduct:

• North Carolina Code of Professional Responsibility (conflicting interests; trustee impartiality)
• MR 1.7 (conflicts of interest)

Other opinions cited:

• North Carolina CPR 166 and CPR 264 (trustee may not advocate for either side; principle extended to related actions)

See also

• NC Ethics Op. CPR 166: foreclosure trustee must remain neutral
• NC Ethics Op. CPR 94: lawyer-trustee representing the bank in a contested foreclosure
• NC Ethics Op. CPR 297: deed-of-trust trustee representing a party in a partition

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/cpr-305/

Original opinion text

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

Inquiry:

B Company executed a note secured by deed of trust to T for S & L, a savings and loan association. T was and is executive vice president of S & L. While the loan was in default, but before any notice of acceleration had been sent to the debtor, B filed a proceeding under Chapter 11 of the Bankruptcy Code. At that point, law firm LMN, as general counsel for S & L, undertook to represent S & L in the bankruptcy proceeding. S & L had lawyer L of law firm LMN substituted as trustee under the deed of trust and then brought an adversary proceeding in the Bankruptcy Court in the name of lawyer L, substituted trustee under the deed of trust, and S & L versus B Company. The sole remedy sought in this adversary proceeding is relief from the automatic stay under the Bankruptcy Act. B Company filed a motion to dismiss for insufficiency of service. No other proceedings have occurred in the adversary proceeding to date, and the debtor has not indicated whether the matter will be contested on the merits. Can law firm LMN ethically represent both the trustee and S & L, the lender, for the purpose of seeking relief from the automatic stay.

Opinion:

No. CPR 166 set out the rule that the trustee/attorney cannot ethically represent either the lender or the borrower in a role of advocacy at any stage of a foreclosure proceeding. The trustee is charged with preserving interests of both lender and borrower and in that sense represents both. To represent either lender or borrower in an adversary capacity would violate his fiduciary duty to the other. Other opinions have extended this principle to related actions in which the substitute trustee or original trustee has the obligation of representing the interests of both lender and borrower. E.g., CPR 264. Thus, lawyer L, as substitute trustee, must represent the interests of both lender and borrower equally in the adversary proceeding in the Bankruptcy Court. For law firm LMN to represent the lender and the trustee would constitute a violation of the trustee's fiduciary duty to preserve the interests of both lender and borrower or debtor since this is an adversary proceeding in which the interests of lender and debtor may differ.