Ethics Opinion

Opinion No. 97-5

May 1997

Summary: A lawyer had represented a bank-lender in a real estate closing. The owners were financing the buyers and guaranteeing their loan from the bank. At the owners' request, the lawyer had also drawn the deed from the owners to the buyers and a note and second mortgage from the buyers to the owners. In those circumstances, the lawyer ought not represent the bank in its suit against the owners on their guarantee without the informed consent of the owners.

Facts: Lawyer represented Bank in connection with its mortgage loan to Owners in connection with their purchase of a piece of property. Thereafter Buyers, who are the children of Owners, purchased the property from Owners. Buyers borrowed most of the purchase price from Bank, giving it a new mortgage, and Owners guaranteed the loan. Lawyer represented Bank in connection with the new mortgage loan, making a title search, issuing title insurance, and conducting the closing. At Owners' request, Lawyer also prepared the deed of transfer and a note and second mortgage from Buyers to Owners for the difference between Bank's loan and purchase price.
Bank has foreclosed the mortgage. Owners were represented in those proceedings by other counsel. Bank now wants Lawyer to proceed against Buyers and Owners for the mortgage deficiency. Bank is Lawyer's regular client; Lawyer has not represented Owners since the preparation of the deed, note, and second mortgage.
Discussion: The gist of Lawyer's inquiry concerns his ability to bring suit against Owners, who are former clients. For many years, the Committee has employed the generally used "substantial relationship" test in this situation, although the Supreme Judicial Court in Masiello v. Perini Corp., 394 Mass. 842, 848 n.5 (1985), stated that it had not yet decided whether it would follow that test. However, recommended Rule 1.9 of the Supreme Judicial Court's Committee on the Rules of Professional Conduct, contained in its report submitted May 13, 1996, adopts the substantial relationship test. The test forbids representation of a new client if the new matter is substantially related to the subject matter of the prior representation. The test presumes that the lawyer has confidential information from the former representation that is relevant to the subsequent representation and is based on the danger that the attorney could intentionally or inadvertently misuse the confidences and secrets of the former client. The test is also based on the notion that a lawyer owes loyalty to a former client with respect to the subject matter of the representation.
The total transaction involved a loan by Bank to Buyers, which was guaranteed by Owners, and a loan by Owners to Buyers. Lawyer's representation of Owners was limited to the second part of the transaction. Owners were not represented by anyone in connection with their involvement in the first part of the transaction, namely, the giving of their guarantee. In any event, Lawyer's representation of Bank was adverse to that of Owners, who were giving Bank a guarantee. While Lawyer's representation of Owners with respect to their dealings with Buyers may have been secondary and may have been done as a courtesy to expedite the transaction, nevertheless Lawyer owes Owners a duty of loyalty with respect to the transaction. In the Committee's opinion, Lawyer's representation of Owners in financing Buyers is close enough to Lawyer's representation of Bank in financing Buyers and obtaining a guarantee from Owners that Lawyer ought not to represent Bank in litigation against Owners' informed consent. We do not believe that one can segment what is essentially one transaction into component parts to avoid the substantially related test.

Permission to publish granted by the Board of Delegates on February 6, 1997. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official government status.