Ethically Speaking: The ethics of mortgage foreclosure proceedings

Many lawyers in our community accept appointments as referees in mortgage foreclosure proceedings. These appointments are generally quite straightforward, but as is the case whenever an attorney handles any type of matter, potential conflicts of interest may arise which may pose ethical barriers barring the attorney’s involvement.

That very situation was addressed in a recent opinion decided by the New York State Bar Association’s Committee on Professional Ethics. At issue in Opinion 924 (May 21) was whether it was permissible for an attorney to act as a referee in a foreclosure proceeding where one of the attorney’s clients, a credit union, held a judgment on the property being foreclosed upon, but was not a holder of the mortgage.

At the outset, the committee noted that at least two different issues were triggered by the inquirer’s proposed service as a referee. First, whether accepting the appointment would result in a violation of attorney-client confidences. And second, whether conflict-of-interest rules would bar the appointment.

The committee first addressed the confidentiality issues and explained that even though the inquiring attorney undoubtedly possessed confidential information relating to the representation of the credit union client, it was nevertheless permissible to accept the appointment unless “the inquirer determined that possessing such information and complying with the resulting restrictions would make it impossible to perform the duties of a referee fully and faithfully.”

In that case, then, the inquiring attorney would have to decline the appointment in the absence of consent from the credit union.

Having answered that question, the committee turned to the more complicated conflict-of-interest issues. First, the committee explained that as a referee, the inquiring attorney would be performing duties on behalf of the appointing court, not a client. Therefore, the judicial ethics rules relating to conflict-of-interest issues were relevant to this situation.

The committee noted that 22 NYCRR 100.3(E)(1) applied and required the disqualification of the inquiring attorney if his impartiality might reasonably be questioned.

The committee then explained the factors to be considered when reaching this determination: “(T)he inquirer will need to consider the scope of the appointment. For example, there may be some discretion for a referee to compute amounts, but less discretion for the referee in conducting a sale, and there may be more reason to question impartiality where there is discretion … Thus the inquirer should consider whether there is any dispute as to the amount of the mortgage debt that will be incorporated into the judgment of foreclosure and whether the referee will have any role in resolving that dispute.”

Finally, the committee cautioned that the even where the inquiring attorney believed there was no legitimate basis for disqualification, he should nevertheless take care to offer the necessary disclosures regarding his unrelated representation of the credit union, should he decide that the parties might consider it to be relevant to the question of disqualification.

So, in this case, despite the potential conflict, acceptance of the appointment was permissible, so long as the inquiring attorney carefully addressed the various ethical issues presented. While not an open and shut case, this determination leaves open the possibility that lawyers may accept these types of appointments even where one of their current clients may have an interest in the proceedings.

The Hon. John E. Bernacki is a Pittsford Town Court Justice. His law firm, John E. Bernacki Jr. PC, is located in Pittsford. He can be reached at www.johnbernackilaw.com.