NEW YORK STATE BAR ASSOCIATION
Conflict of interest, lawyer as corporate officer, responsibility to third parties
Committee on Professional Ethics
Formal Opinion #847 (12/21/2010)
Topic: Conflicts of interest; lawyer’s responsibilities to third parties; lawyer as corporate officer.
Digest: An attorney may represent the beneficial owner of a mortgage note and mortgage, and may concurrently serve as an officer of the mortgagee of record, for the purposes of executing a mortgage assignment to the beneficial owner and prosecuting a mortgage foreclosure action in the assignee’s name.
Rules: 1.0(f); 1.7(a); 1.7(b).
1. May an attorney represent the beneficial owner of a mortgage note and mortgage, and concurrently serve as an officer of the mortgagee of record, for the purposes of executing a mortgage assignment to the beneficial owner and prosecuting a mortgage foreclosure action in the assignee’s name?
2. In 1993, the real estate mortgage industry created an electronic registration system for mortgages. Mortgage Electronic Registration Systems, Inc. (“MERS”), a Delaware corporation, was established to act as nominee and mortgagee of record for members of the system (the “MERS System”). The purpose of the MERS System was to facilitate the transfer and assignment of mortgages in the secondary mortgage market by bypassing, in favor of instant and inexpensive private electronic registration, the more cumbersome preparation and expensive recording of paper mortgage assignments in the real property records of the nation’s municipal recording authorities. In New York, regardless of how many electronic assignments of the mortgage occurred within the MERS System, MERS would remain the mortgagee of record as reflected by the public records of the county clerks. 3. In 2006, the New York Court of Appeals upheld the continuing utility of the private MERS System by affirming a writ of mandamus and declaring that the Suffolk County Clerk was statutorily required to record and index mortgages, assignments of mortgage, and discharges of mortgage that named MERS as nominee or mortgagee of record. See Merscorp, Inc., v. Romaine, 8 N.Y.3d 90 (2006). 4. In connection with the specific question before us, the inquirer has related the following facts, which we assume to be true. The inquirer is an attorney (“Attorney”) who represents the current mortgagee (“Client”) in a pending residential mortgage foreclosure action. The inquirer does not represent MERS in the foreclosure action, and does not otherwise represent or provide legal services to MERS. The mortgage instrument executed by the mortgagor and the initial lender at the closing in October 2007 provided that MERS would be the mortgagee of record “acting solely as a nominee for Lender and Lender’s successors and assigns.” The initial lender subsequently sold the mortgage loan, and the inquirer’s Client is the current assignee and holder of the note and mortgage, which is duly registered in the MERS System, but not in the real property records of the county clerk. 5. Many residential foreclosure actions brought in the name of MERS, as nominee and mortgagee of record, have foundered on the question of MERS’ standing to sue. See, e.g., LaSalle Bank National Association v. Lamy, 12 Misc.3d 1191(A), 2006 WL 2251721 (N.Y. Sup. Ct. Suffolk Cty. 2006) (citations omitted) (“this court and others have repeatedly held that a nominee of the owner of the note and mortgage, such [as] MERS, may not prosecute a mortgage foreclosure action in its own name as nominee of the original lender because it lacks ownership of the note and mortgage at the time of the prosecution of the action”). To avoid dismissal or delay for lack of standing, some members of the MERS System, including inquirer’s Client here, have elected to prepare and record a paper assignment with the county clerk before commencing the foreclosure action. That way, the plaintiff in the foreclosure action will not be merely the mortgagee of record; rather, the plaintiff will be the real party in interest and the holder of the mortgage note. 6. To accommodate the expeditious preparation and recording of these paper assignments from MERS as assignor to Client, as assignee, a three-party agreement entitled “Agreement for Signing Authority” was entered into between MERS, Client and Attorney in December 2007. This agreement appointed Attorney, plus three non-lawyer members of Attorney’s staff, as assistant secretaries and vice presidents of MERS, and authorized each of them (i) to execute, on MERS behalf, any assignment of any mortgage lien or any release of any mortgage loan registered to Client in the MERS System, and (ii) to execute all documents necessary to foreclose upon real property secured by a mortgage loan registered to Client in the MERS System.
A. Are There Conflicts Under Rule 1.7(a)(2)?
7. Against this background, we are asked whether Attorney’s dual role – officer of MERS (or supervisor of three employee non-lawyer officers of MERS) and counsel for Client – constitutes a conflict of interest. This inquiry is governed by Rule 1.7(a)(2) of the New York Rules of Professional Conduct (the “Rules”), which addresses conflicts between a client and the personal interests of the client’s lawyer. Specifically, Rule 1.7(a)(2) provides: (a) Except as provided in paragraph (b), a lawyer shall not represent a client if a reasonable lawyer would conclude that … (2) there is a significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, business, property or other personal interests. 8. Because Attorney here was selected, engaged and paid by Client, not by MERS, to prosecute the foreclosure proceeding, there is no basis for a “reasonable lawyer” to conclude, under Rule 1.7(a)(2), that there exists a “significant risk that [Attorney’s] professional judgment on behalf of [Client] will be adversely affected by lawyer’s own financial, business, property or other personal interests” arising from Attorney’s limited signing authority on behalf of MERS.
B. Are There Conflicts Under Rule 1.7(a)(1)
? 9. We will also address Rule 1.7(a)(1), which addresses conflicts between or among multiple clients. Rule 1.7(a)(1) provides as follows: (a) Except as provided in paragraph (b), a lawyer shall not represent a client if a reasonable lawyer would conclude that … (1) the representation will involve the lawyer in representing differing interests. 10. Rule 1.7(a)(1) is not at issue because MERS is not a client of Attorney. Rather, Attorney represents only one client, the mortgagee. Nonetheless, for the sake of completeness, we note that there are no “differing interests” between MERS and Client that would create a conflict of interest under Rule 1.7(a)(1). Rule 1.0(f) defines “differing interests” to include “every interest that will adversely affect either the judgment or loyalty of a lawyer to a client, whether it be a conflicting, inconsistent, diverse or other interest.” There are no differing interests between MERS and Client because the mortgage assignment from MERS to Client did not convey any tangible interest in real property. Rather, MERS was merely a nominee mortgagee of record without any economic interest in the outcome of the foreclosure proceeding. Similarly, MERS’s express grant to Attorney of the requisite authority to prosecute the foreclosure action is not adverse to MERS. 11. Moreover, even if a conflict of interest did arise under subparagraphs (a)(1) or (a)(2) of Rule 1.7, the conflict was cured pursuant to Rule 1.7(b). It was cured when Attorney obtained informed consent from the affected Client, confirmed in writing, as reflected in the Agreement for Signing Authority described above. 12. It is conceivable, of course, that in preparing and prosecuting the foreclosure action, Attorney will discover some error or omission on the part of MERS that has created a viable defense to the foreclosure action or that could result in substantial delay to the entry of a mortgage foreclosure judgment in Client’s favor. For example, it is possible that the electronic records of the MERS system are materially incomplete or inconsistent with Client’s putative status as mortgagee. This circumstance, in which Attorney erroneously relied upon the accuracy of the MERS System in exercising the Attorney’s signing authority to create and record a paper assignment in anticipation of a mortgage foreclosure action, might rise to the level of conflicting fiduciary obligations between Attorney as assistant secretary and vice president of MERS, on the one hand, and Attorney as foreclosure counsel for Client, on the other hand. Such a situation would require further analysis under Rule 1.7(a)(2) and (b). However, as far as we have been informed, such a conflict does not exist here. 13. We do not opine on the application of the Real Property Law, or other State or federal statutes, to the execution of the mortgage assignment or any other documents submitted in the foreclosure action. That is beyond our jurisdiction as an ethics committee.
14. Based on the facts presented, and subject to the qualifications stated, we answer the inquiry in the affirmative. An attorney may represent the beneficial owner of a mortgage note and mortgage, and concurrently serve as an officer of the mortgagee of record, for the purposes of executing a mortgage assignment to the beneficial owner and prosecuting a mortgage foreclosure action in the assignee’s name. (45-10)