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In re Opinion 710 of the Advisory Committee on Professional Ethics and Its Subsequent Clarification

SUPREME COURT OF NEW JERSEY


February 6, 2008

IN RE OPINION 710 OF THE ADVISORY COMMITTEE ON PROFESSIONAL ETHICS AND ITS SUBSEQUENT CLARIFICATION

On petition for review of an opinion of the New Jersey Supreme Court Advisory Committee on Professional Ethics.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The 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 believed was a fraudulent practice perpetrated on the ultimate investor. The inquirer provided the ACPE with the factual scenario underlying his inquiry. A contract for sale of residential property has been prepared by a realtor and signed by both the seller and buyer for a set price with a mortgage contingency. Either during attorney review or sometime 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 for the same amount, calling it a "seller's concession" or "seller's payment of purchaser's closing costs."

In that scenario provided to the ACPE, the inquirer further declared that the amendments to the contract are intended to "increase the size of the purchaser's mortgage loan," with the understanding that "the originating lender or secondary investor may be deceived as to the true market price of the house." The ACPE assumed that the seller's concession in that scenario did not involve legitimate or actual costs "payable to the buyer." Therefore, the ACPE 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 Opinion 710, the ACPE concluded that the practice referred to by the inquirer would violate Rules of Professional Conduct (RPC) 1.2(d) ("A lawyer shall not counsel or assist a client in conduct that the lawyer knows is illegal, criminal or fraudulent."), 4.1(a) ("In representing a client, a lawyer shall not knowingly: (1) make a false statement of material fact or law to a third person; or (2) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client."), and 8.4 ("It is professional misconduct for a lawyer to.(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation.").

The ACPE issued a clarification to Opinion 710 in response to numerous inquiries in respect of the propriety of seller's concessions. In its clarification, the ACPE explained that Opinion 710 was based on the particular facts submitted by the inquirer and clarified that a prohibited transaction is one that is not premised on "a legitimate charge against the seller on account of any actual costs assumed by it and otherwise payable to the buyer." The ACPE noted that Opinion 710 does not implicate a contract of sale that explicitly states that the seller shall provide the buyer with a credit against legal and legitimate costs of expenses related to the sale, which would otherwise be absorbed by the buyer, such as actual closing costs.

The New Jersey State Bar Association (NJSBA) petitioned the court to review Opinion 710 of the Advisory Committee on Professional Ethics and Its Subsequent Clarification.

HELD: ACPE Opinion 710 provides that fraudulent transactions by attorneys in connection with real estate closings will violate the Rules of Professional Conduct. The opinion does not suggest that disclosed seller's concessions are, in and of themselves, fraudulent or unethical.

1. The ACPE was asked whether the RPCs 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. The Court is 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 and unethical. Rather, Opinion 710 stands for the unremarkable proposition that fraudulent transactions by attorneys in connection with real estate closings will run afoul of the RPCs. With that in mind, lawyers versed in their ethical responsibilities have nothing to fear from Opinion 710. (Pp. 3-4)

ACPE Opinion 710 is AFFIRMED as clarified.

Per curiam.

Argued January 8, 2008

CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, RIVERASOTO and HOENS join in this PER CURIAM opinion.

We granted the New Jersey State Bar Association's (NJSBA) petition to review Advisory Committee on Professional Ethics (ACPE) Opinion 710, entitled Misrepresenting Purchase Price or Other Material Fact Regarding a Real Estate Transaction, 186 N.J.L.J. 1198 (2006). In re Opinion 710 of the Advisory Comm. On Prof'l Ethics & Its Subsequent Clarification, 191 N.J. 310 (2007). The 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.'" Opinion 710, supra, 186 N.J.L.J. at 1198. In the factual scenario provided by the inquirer,

[a] contract for the sale of residential property has been prepared by a realtor and signed by both seller and buyer for a set purchase price with a mortgage contingency.

Either during 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." [Ibid.]

In that scenario given to the ACPE, the inquirer further declared that the amendments to the contract are 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." Ibid. The ACPE assumed that the seller's concession in that scenario did not involve legitimate or actual costs "payable by the buyer." Ibid. 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. Ibid. Unsurprisingly, the ACPE concluded that such a practice would violate Rules of Professional Conduct 1.2(d) ("A lawyer shall not counsel or assist a client in conduct that the lawyer knows is illegal, criminal or fraudulent . . . ."), 4.1(a) ("In representing a client a lawyer shall not knowingly: (1) make a false statement of material fact or law to a third person; or (2) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client."), and 8.4 ("It is professional misconduct for a lawyer to . . . (c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation . . . ."). Opinion 710, supra, 186 N.J.L.J. at 1198.

The ACPE issued a clarification to Opinion 710 in response to numerous inquiries concerning the propriety of seller's concessions. In its clarification, the ACPE explained that the opinion, which was based on the particular facts submitted by the inquirer, addresses fictional and deceptive increases in purchase prices unrelated to the actual circumstances or costs of closing, and contrary to the expectations of the lender or the ultimate holder of the mortgage. As stated in the Opinion, a prohibited transaction is one that is not premised on "a legitimate charge against the seller on account of any actual costs assumed by it and otherwise payable by the buyer."

Accordingly, the Opinion does not implicate a contract of sale that explicitly states that the seller shall provide the buyer with a credit against legal and legitimate costs or expenses related to the sale, which would otherwise be absorbed by the buyer, such as actual closing costs. [Clarification of Advisory Comm. on Prof'l Ethics Opinion 710, 187 N.J.L.J. 2, 2 (2007).]

Essentially, 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. We are confident that attorneys in this state know that they cannot participate in deceptive transactions. Opinion 710 stands for the unremarkable proposition that fraudulent transactions by attorneys in connection with real estate closings will run afoul of the Rules of Professional Conduct. It 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.

For those reasons, we affirm ACPE Opinion 710 as clarified. CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, RIVERA-SOTO, and HOENS join in this opinion.

Chief Justice Rabner PRESIDING

20080206

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