Can a bank charge borrowers a fee for its in-house lawyer's closing work, and can that lawyer also be an officer, director, or shareholder of the bank?

Plain-English summary

A lawyer who served a mortgage bank as an independent contractor was considering becoming its in-house counsel and possibly an officer, director, or shareholder. As in-house counsel the lawyer would run a loan-closing department staffed by the lawyer, paralegals, and a secretary, and the bank would charge each borrower a disclosed flat fee for the closing services. The lawyer's salary would be fixed and unrelated to the number of closings or the fees the bank collected. The committee addressed two questions: whether the lawyer could work in-house under that fee arrangement, and whether the lawyer could hold corporate roles.

On the fee, the committee confirmed that a lending institution may require a borrower to pay the bank's reasonable legal fees, including overhead, but drew a firm limit: a bank may not profit from the fee charged for in-house counsel's services. Charging more than the actual cost (the allocable portion of the lawyer's salary plus the closing department's reasonable overhead) would constitute sharing a legal fee with a layperson under DR 3-102(A), aiding the unauthorized practice of law under DR 3-101(A), and a misrepresentation under DR 1-102(A)(4) to label as "attorneys' fees" an amount untethered to the lawyers' compensation. The committee required appropriate disclosure to each borrower of the nature and calculation of the fee, and expressly declined to opine on whether the arrangement constituted the unauthorized practice of law under Judiciary Law section 495, a question of law, noting only that if it did, DR 3-101(A) would bar the lawyer from assisting.

On the corporate roles, the committee found no per se bar to a corporation's lawyer owning stock in or serving as an officer or director of the client, whether in-house or outside counsel. But counsel owes allegiance to the entity and must exercise independent judgment for its benefit alone (EC 5-1, EC 5-18, DR 5-109). Under DR 5-101(A), absent client consent after full disclosure, the lawyer may not accept or continue employment where the lawyer's own financial or business interests may affect professional judgment, which could bar a lawyer-director from advising the corporation when both are named defendants. Even without an actual conflict, the lawyer must disclose the adverse consequences of multiple roles, including that communications later attributed to the director or officer role rather than the counsel role may not be protected by the attorney-client privilege. Subject to those caveats, the committee answered both questions in the affirmative.

Currency note

This opinion was issued in 1994, before New York replaced the Code of Professional Responsibility (the Disciplinary Rules cited here) with the New York Rules of Professional Conduct, effective April 1, 2009. Sharing fees with nonlawyers is now addressed by Rule 5.4, the unauthorized practice by Rule 5.5, and conflicts arising from a lawyer's own interests by Rules 1.7 and 1.8. 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 bank bill borrowers for its in-house lawyer's closing work?

A: The committee concluded a bank may charge a fixed fee, but only up to the actual cost of the services (the allocable salary and reasonable overhead); the bank may not profit from the fee.

Q: Why can't the bank make a profit on the legal fee?

A: The committee concluded that a profit would be improper sharing of a legal fee with a layperson under DR 3-102(A), would aid the unauthorized practice under DR 3-101(A), and would misrepresent the fee under DR 1-102(A)(4).

Q: Can a lawyer also be an officer, director, or shareholder of a corporate client?

A: The committee concluded there is no per se bar, whether the lawyer is in-house or outside counsel, subject to the conflict and disclosure duties.

Q: What must the lawyer disclose about wearing two hats?

A: The committee concluded the lawyer must disclose the adverse consequences of the multiple roles, including the risk that communications attributed to the officer or director role may lose attorney-client privilege protection.

Background and rules framework

The opinion applied New York Code DR 3-102(A) (sharing legal fees with a nonlawyer), DR 3-101(A) (aiding the unauthorized practice), DR 1-102(A)(4) (misrepresentation), DR 7-102(A)(7) (assisting fraudulent conduct), DR 5-101(A) (conflicts from the lawyer's own interests), and DR 5-109 (a lawyer for an organization), with EC 5-1 and EC 5-18 (allegiance to the entity) and EC 4-2 and EC 4-4 (preserving confidences and privilege). The analysis corresponds to ABA Model Rule 5.4 (professional independence; fee-sharing), Model Rule 5.5 (unauthorized practice), and Model Rule 1.7 (conflicts of interest).

Citations and references

Rules of Professional Conduct:

• New York Code DR 1-102(A)(4), DR 3-101(A), DR 3-102(A), DR 5-101(A), DR 5-109, DR 7-102(A)(7); EC 4-2, EC 4-4, EC 5-1, EC 5-18 (applied in the opinion)
• MR 5.4 (professional independence; sharing fees); MR 1.7 (conflicts of interest)

Statutes:

• New York Judiciary Law section 495 (unauthorized practice by corporations; the committee declined to opine on its application)

Cases:

• SEC v. Gulf & Western Industries, 518 F. Supp. 675 (D.D.C. 1981), privilege risk for a lawyer also serving as officer or director
• Thompson v. Chemical Bank, 84 Misc. 2d 721 (Civ. Ct. N.Y. Co. 1975), bank fees and the unauthorized practice question

Other opinions cited:

• N.Y. State 618 (1991); N.Y. County 670 (1989); ABA Informal Op. 1451 (1980): in-house counsel fees limited to actual cost
• N.Y. State 589 (1987): lawyer serving as corporate officer or director

See also

• NYC Bar Formal Op. 1994-1: In-House Lawyer's Discrimination Suit Against a Former Employer
• No sibling opinions yet indexed.

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-1994-6-in-house-attorney-fees-to-third-parties-multiple-roles/