AGENT PAYS FOR ATTORNEY - THE CONTINGENT SHORT SALE ATTORNEY FEE AND CONFLICT OF INTEREST

The beginning of this year brought to mind the recurring problem of attorneys that are hired by the real estate agent to represent the seller.  Unfortunately, too often the advice the attorney gives to the "client" is designed to make the deal happen - at dire cost to the client seller. Realtors, attorneys and sellers should be aware of the "greed side" of our human nature and guard against being put into these unfortunate situations. 

The scenario begins with the selling agent having a short sale listing and providing a "service" to the homeowner to negotiate the short sale and provide "no cost" legal assistance through a lawyer of the selling agent's choosing.  The attorney is introduced to the seller and the seller and attorney enter into a LEGAL RETAINER AGREEMENT to provide legal services to the seller, with the cost of the legal services to be paid for the selling agent.

HE WHO PAYS IS USUALLY THE CLIENT - ONE WAY OR THE OTHER.....

The selling agent has an agreement with the attorney to pay the atrney a legal fee from the real estate commission and /or title fees and any legal fee the attorney can negotiate to have on the settlement statement at closing.  In either event, the selling agent is clearly the referral source for the client and usually the source of the legal fee eventually paid to the attorney.  In addition, the attorney fee is completely contingent on the transaction closing under terms negotiated with the lender.

In several examples this past month it was clear this arrangement did not work to the advantage of seller, but instead only to the selling agent and the attorney.

The story is almost always the same and here is an example -

The seller had a $250,000 first mortgage and $60,000 second mortgage.  The short sale contract was for $160,000.  The first mortgage lender agrees to the short sale and will pay $3,000 toward the second mortgage lien.  The first mortgage lender also wants a $45,000 no interest promissory note payable over 10 years.  The second mortgage, obviously under water, decides to sue only on the promissory note (and not foreclose its worthless mortgage) and quickly obtains a judgment for $60,000.   The second mortgage lender agrees to accept the $3,000 as a payment toward the judgment and to release its worthless lien to clear the title, but the remaining judgment will remain against the borrowers.  The second mortgage judgment holder begins garnishment proceedings against the working wife, effectively reducing the couple's income so that they do not have the ability to service the first lender's $45,000 promissory note. 

The seller goes to "their attorney" provided by the selling agent and the attorney tries to convince the seller that the $45,000 no interest 10 year promissory note is the best deal on earth and they should immediately close on the transaction and not to worry about actually paying on that promissory note.

The problem is that the attorney was met with a material change of circumstance in the client's financial condition because of the judgment of the 2^nd mortgage note and the active garnishment of the wife's income.  Rather than renegotiate with the first lender based on this material decrease of income, the attorney wanted the transaction to immediately close, rewarded with the collection of his legal fee and the good will for causing the referring agent's commission.

RULE OF CONDUCT

It is common sense that the resulting advice from the attorney was not in the best interest of his client but was more appropriately stated as in the best interest of the selling agent and the contingent fee attorney.  There are rules governing the conduct of attorneys in this scenario.  For example in Florida there is a rule that says,

"Compensation by Third Party.  A lawyer shall not accept compensation for representing a client from one other than the client unless:

        (1) the client gives informed consent;
        (2) there is no interference with the lawyer's independence of professional         judgment or with the client-lawyer relationship."

Although there may be "informed consent", I just don't think that the client could have understood or anticipated the subsequent fact scenario stated above and given consent to be treated in such a fashion.  In addition, either of the two instances alone is a reason for a breach by the attorney of the rule.

BEST INTERESTS OF THE CLIENT

 A lawyer is also required to pursue the client's interests with diligence.  A lawyer should pursue a matter on behalf of a client despite opposition, obstruction, or personal inconvenience to the lawyer and take whatever lawful and ethical measures are required to vindicate a client's cause or endeavor. A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client's behalf.

I don't think there was much "zeal" or "advocacy" in the attorney advocating closing under terms that would surely have caused a financial impossibility to the client.  Such diligence also requires the attorney advise the client of the ultimate effect of the decision to close the transaction in the example.  That unbiased advice was never given.

The role of an attorney is to advise the client so the client can make the best decisions under the circumstances and the legal import of the transaction.  The selling broker has a role marketing the property to obtain a contract, of advising its client on the values of the property being sold, and the impact of the contract acquired.  In this example and similar situations, the attorney lost sight of the ultimate client and that client's goals and the unbiased legal advisor pedestal upon which the attorney is expected to be placed.

This is not the first time I have seen this conflict problem and I have written about other attorney misdeeds.  See A-T-T-O-R-N-E-Y Spells T-R-O-U-B-L-E in Short Sale  and No-Conflict Considerations in Short Sale Fees.

If you are a selling broker, think "disclosure today, tomorrow and always".  If you are an attorney in a similar scenario of representation, think about whether you can convince the grievance committee that you were acting solely for the benefit of the client seller.  I have always been leery of contingent legal / negotiation fee representation for a short sale - after all, we are all only human, and as such not perfect.  I would rather not be put into the position and temptation of making the judgment call.

Copyright 2010 Richard P. Zaretsky, Esq. 

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com. 

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