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In Re Opinion 710 of the Advisory Committee on Professional Ethics

193 N.J. 419, 939 A.2d 794 (2008)

ATTORNEYS; CONTRACTS — New Jersey Supreme Court Advisory Committee on Professional Ethics Opinion 710 does not suggest that disclosed seller’s concessions are, in and of themselves, fraudulent or unethical, and does not bar attorneys from representing clients in transactions where legitimate seller’s concessions are involved.

The New Jersey Supreme Court Advisory Committee on Professional Ethics (ACPE) “received an inquiry seeking an advisory opinion on the ethical propriety of a real estate transaction that the inquirer posited ‘is a fraudulent practice perpetrated on the ultimate investor.’” In the ACPE’s Opinion 710, it reported the “factual scenario provided by the inquirer” as follows: “(a) contract for the sale of residential property has been prepared by a realtor [sic] and signed by both seller and buyer for a set purchase price with a mortgage contingency. Either during the attorney review or thereafter the lawyers for the seller and the buyer are requested to amend the contract by increasing the purchase price and the mortgage contingency amount in like amounts. In addition, the attorneys are asked to amend the contract to provide that the seller give a credit to the purchaser at closing in the same amount, calling it a ‘seller’s concession’ or ‘seller’s payment of purchaser’s closing costs.’”

The inquirer also posited “that the amendments to the contract [were] intended to ‘increase the size of the purchaser’s mortgage loan,’ with the understanding that ‘the originating lender or the secondary investors may be deceived as to the true market price of the house.’” The ACPE, in rendering its opinion, “assumed that the seller’s concession in that scenario did not involve legitimate or actual costs ‘payable by the buyer.’” As a consequence, according to the New Jersey Supreme Court, the “ACPE therefore reviewed a factual supposition in which a lawyer actively participated in a real estate transaction likely to perpetrate a fraud on the ultimate investor, namely the mortgage lender, a purchaser of the mortgage on a secondary market, or a buyer of mortgage-backed securities.”

In the words of the Court, it was unsurprising that “the ACPE concluded that such a practice would violate Rules of Professional Conduct 1.2(d)” which say that “[a] lawyer shall not counsel or assist a client in conduct that the lawyer knows is illegal, criminal or fraudulent… .” It also would violate section 4.1(a) which bars an attorney, in representing a client, from making “a false statement or material fact or law to a third person; or (2) fail[ing] disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client.” Further, the ACPE pointed to section 8.4 which makes it “professional misconduct for a lawyer to ... engage in conduct involving dishonesty, fraud, deceit or misrepresentation… .”

Subsequent to issuing its Opinion 710, the ACPE issued a clarification “in response to numerous inquiries concerning the propriety of seller’s concessions.” The clarification was that Opinion 710 was based on the particular facts submitted by the inquirer which facts were not premised “on a legitimate charge against the seller on account of any actual costs assumed by it and otherwise payable by the buyer.”

The New Jersey State Bar Association (NJSBA), in response to Opinion 710, as clarified, asked the New Jersey Supreme Court to either set aside Opinion 710 or to further clarify the Opinion. The Court refused to do either, holding that Opinion 710, as clarified, stood for no more than “the unremarkable proposition that fraudulent transactions by attorneys in connection with real estate closings will run afoul of the Rules of Professional Conduct.” It held that “the ACPE was asked a very simple question – whether the Rules of Professional Conduct are violated when a seller and a buyer engage in a seller’s concession for the purpose of perpetrating a fraud on the ultimate investor.” In rejecting the NJSBA’s request, it flatly stated that “[w]e are confident that attorneys in this state know that they cannot participate in deceptive transactions. ... [Opinion 710] does not suggest that disclosed seller’s concessions are, in and of themselves, fraudulent or unethical. With that in mind, lawyers versed in their ethical responsibilities have nothing to fear from ACPE Opinion 710.”

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