Lawyer may not bid on his own account at a third party's foreclosure sale of property involving substantial equity that has been attached to satisfy his client's judgment, even if client does not bid and consents to bidding by lawyer, unless lawyer agrees in advance to bid an amount sufficient to satisfy client's judgment in full. Lawyer on a contingency may not withdraw from representation before foreclosure sale simply because client cannot afford to bid.
Facts: Lawyer obtained a verdict of $26,000 for a client in a tort action under a fee arrangement providing for a contingent fee of 40 percent and making plaintiff liable for expenses, which currently total $2,000. The judgment has not been paid. The client is close to bankruptcy and defendants have no assets except for a piece of property worth $200,000 that appears to be subject to a mortgage of $85,000. Lawyer has attached this property and now asks whether he may cease further representation because client cannot afford to bid on the property. He also asks whether he may bid on the property himself at a third party's foreclosure sale, and if he does, what his responsibility is to his client if he buys at just above the mortgage and later re-sells at a profit.
Discussion: The first question is whether the lawyer may withdraw from employment because the client cannot afford to bid on the property at a foreclosure sale. DR 2-110(C)(1)(f) allows a lawyer to withdraw from employment when a client "Deliberately disregards an agreement or obligation to the lawyer as to expenses or fees." This does not appear to be such a case. No need to incur substantial additional expenses has been asserted. If we assume that the usual contingent fee agreement is involved, no fee obligation of client would arise until the judgment had been collected, and that has not occurred in this case. Indeed, a crucial moment in the litigation has arrived. If the client is to collect his judgment, it must be from the attached property. No other facts warranting withdrawal have been suggested, and for the lawyer to walk away at such a crucial moment in the litigation would be unjustified.
The second question relates to the permissibility of bidding by the lawyer himself at a foreclosure sale when the client is unable to bid. Although the Disciplinary Rules address quite precisely many situations where a lawyer's personal or other professional interests interact with those of a client, they do not address the problem presented with such precision. Perhaps the rules that come closest are DR 5-101(A), DR 5-103, and DR 7-101(A)(3). DR 5-101(A) states that "Except with consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment ... reasonably may be affected by his own financial ... interests." For that rule to apply in this case the words "accept employment" would have to be read as including "continue employment" and we think they should be so read. DR 5-103 provides, with some qualifications not relevant here, that a "lawyer shall not acquire a proprietary interest in the ... subject matter of litigation he is conducting for a client ... ." Finally, DR 7-101(A)(3) provides that a "lawyer shall not intentionally ... Prejudice or damage his client ... ."
The problem that arises for the lawyer bidding for himself at the foreclosure sale is the apparent conflict between his own personal interest in bidding on the property as cheaply as possible and his duty to aid his client in stimulating maximum interest in bidding in the sale to achieve a high enough bid that the client's lien will be paid off and not cut off. Therefore, the fact that the lawyer is bidding for his own account prima facie appears to violate DR 5-101(A) and DR 5-103 and to create an enormous potential for violating DR 7- l0l(A)(3). The fact that the client himself is unable to bid is relevant but not conclusive, because of the fact that it is so difficult to know when a lawyer has done all he can to make sure that the foreclosure sale has been held under the most favorable conditions for securing a sufficiently high sale price. This consideration seems crucial whether the foreclosure sale is that of the client or of a third party. In the latter circumstance the lawyer also has a responsibility to see that the client's claim, as well as that of the third party, gets paid off.
The next question is whether this is a situation where disclosure to, and consent by, the client may avoid a violation. Some of the prohibition in Canons 5 and 7 are explicitly waivable. DR 5-101(A) contains a consent provision. Others, including DR 5-103 and DR 7-101(A)(3), contain no provision for waiver. The reason would appear to be that these subsections deal with matters where so often it is difficult for consent to be sufficiently informed, and the rules have been drafted to protect clients against the possibility of insufficiently informed consent. The difficulty for a client to be confident that the lawyer will do, or has really done, all he can to stimulate the highest bid justifies application of the rules, as written, to prohibit a lawyer bidding at a foreclosure sale in a situation such as this.
The only time we perceive that consent could avoid the violation of DR 5-103 and DR 7-101(A)(3) in a case with such a substantial equity as this, is when the client is not bidding, as in this case, and the lawyer has agreed in advance to bid an amount sufficient to pay off the client's judgment in full. In that event there would be no conflict between the client's interests and the lawyer's personal interests.
The question then arises whether the lawyer needs the consent of the client if the lawyer is prepared to bid an amount sufficient to satisfy the client's judgment. We believe that the lawyer does need such consent. The lawyer's knowledge of the whole situation that leads him to want it to bid derives from the confidences of the client. Indeed, the client's precarious financial state, which is the reason why the client is not bidding, is either a confidence or a secret. DR 4-101(B)(3), which forbids a lawyer from using "a confidence or secret of his client for the advantage of himself ... unless the client consents after full disclosure," therefore requires the lawyer to obtain the client's consent in this situation.
Permission to publish granted by the Board of Delegates, 1981. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.