MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 1990-18
Delinquent loan is referred to your firm by the note holder
Your letter poses the following questions in the context of foreclosure proceedings under Deeds of Trust secured by a Maryland property:
1. When a delinquent loan is referred to your firm by the note holder, is it ethically permissible --
a) For one of your attorneys to act as Substitute Trustee under the Deed of Trust and as attorney of record for the note holder in the foreclosure proceeding?
b) For one of your attorneys to act as Substitute Trustee and another one of your attorneys to act as attorney of record for the note holder in the foreclosure proceeding?
c) If the answer to 3. (a) or 1 (b) is "yes" may your firm also act as attorney of record for the Substitute Trustee in either i) foreclosure proceeding or ii) a related federal bankruptcy proceeding?
d) Would your answer to 1 (c) be different if the Substitute Trustee was not an attorney or an employee of your law firm?
2. If the Substitute Trustee is filing, an attorney or an employee of your law firm, is it ethically permissible for your law firm to enter into an agreement which provides for a portion of the allowable ('allowable' being defined as authorized under the terms and provisions of the Deed of Trust being foreclosed) trustee's commission to be paid to your law firm as a contribution by the Substitute Trustee to your law firm's unallocated overhead attributable to its foreclosure practice?
3. If the agreement described in paragraph 2 is ethically permissible, does your law firm have an ethical duty to disclose the existence of its private agreement with the Substitute Trustee to interested parties other than its client (i.e., the note holder), such as -
a) the mortgagor?
b) the owner of the property, if different from the mortgagor?
c) junior lien holders?
d) the court Auditor?
The role of the Substitute Trustee in a foreclosure action is governed by statutory law, case law, the Maryland rules and local rules. While we do not render legal opinions in response to questions regarding the Rules of Professional Conduct, we note that there is authority that a Trustee bringing a foreclosure action is acting as an agent for the Court. The Trustee's role is to bring the property into the market in such a manner as to obtain a fair market price through a public sale. While the Substitute Trustee is normally retained by the note holder to bring the foreclosure action, the Substitute Trustee owes his duty to obtain the best available price for the property to all of the parties affected by the foreclosure. The same is true in the case of a mortgage where the party bringing the foreclosure is normally an assignee under the mortgage. Given the strict rules of procedure governing foreclosure sales we see no ethical problem with the Substitute Trustee acting on behalf of the note holder in a Deed of Trust foreclosure proceeding. Nor do we see any problem with the Substitute Trustee, who is also a lawyer, representing the note holder or in a related Federal Bankruptcy proceeding.
We believe that the response to your second question is also governed by statutory law, case law, the Maryland rules and local rules and not by the Rules of Professional Conduct. The Commissions provided for a Trustee in a foreclosure are to compensate the Trustee for the responsibilities that he or she assumes in connection with the foreclosure action. Normally, a Deed of Trust or mortgage contains a provision for attorney's fees and if the Substitute Trustee were to retain the services of an attorney, that attorney could be paid from that fund. The reasonableness of the commissions and/or attorney's fees is supervised by the Court.
In connection with question three we believe that the rules governing foreclosures will require the disclosure of any agreement for legal fees with the Substitute Trustee. Those rules require that the Court approve any request for commissions and attorneys' fees. The request for commissions and attorneys fees is made a public filing with notice to the parties and such a request should adequately disclose who is to receive those commissions and/or fees.
In summary, we feel that there is no ethical reason to have an independent Substitute Trustee in a foreclosure proceeding. If there is an independent Substitute Trustee we see no reason the Substitute Trustee cannot hire a lawyer to perform the legal services required in a foreclosure action. But, if the lawyer is to be paid from the trustee's commissions it should be disclosed in the trustee's request for approval of commissions filed with the Court.