Proposed Opinions

Council Actions

At a meeting on April 24, 2009, the State Bar Council adopted the opinions summarized below upon the recommendation of the Ethics Committee (to view or search all adopted opinions, click here):

2008 Formal Ethics Opinion 12
Initiating Foreclosure Proceedings Against Client
Opinion rules that a lawyer may not initiate foreclosure on a deed of trust on a client's property while still representing the client.

2009 Formal Ethics Opinion 2
Responding to Unauthorized Practice of Law in Preparation of a Deed
Opinion rules that a closing lawyer who reasonably believes that a title company engaged in the unauthorized practice of law when preparing a deed must report the lawyer who assisted the title company, but may close the transaction if the client consents and doing so is in the client's interest.

2009 Formal Ethics Opinion 4
Credit Card Account that Avoids Commingling
Opinion rules that a law firm may establish a credit card account that avoids commingling by depositing unearned fees into the law firm's trust account and earned fees into the law firm's operating account provided the problem of chargebacks is addressed.

2009 Formal Ethics Opinion 5
Reporting Opposing Party's Citizenship Status to ICE
Opinion rules that a lawyer may serve the opposing party with discovery requests that require the party to reveal her citizenship status, but the lawyer may not report the status to ICE unless required to do so by federal or state law.

Ethics Committee Actions

At its meeting on April 23, 2009, the Ethics Committee voted to send the following proposed opinions to subcommittees for further study: Proposed 2008 FEO 11, Representation of Beneficiary on Other Matters While Serving as Foreclosure Trustee, and Proposed 2009 FEO 3, Non-Lawyer Employee Contacting Clients of Former Employer. Proposed 2008 FEO 16, Advising a Client About Litigation Funding Agreement, was tabled pending a decision by the North Carolina Supreme Court in a relevant case. Proposed 2009 FEO 1, Review and Use of Metadata, was returned to the staff for editorial revision. One proposed opinion, previously published in the Journal, was revised and appears below. Two new proposed opinions are also published for comment.

The comments of readers are welcomed. Any comment or request should be directed to the Ethics Committee at PO Box 25908, Raleigh, NC 27611, or comments@ncbar.gov, by June 30, 2009.

For the complete text of opinions that have been sent to subcommittee, click here.

Proposed 2008 Formal Ethics Opinion 13
Audit of Real Estate Trust Account by Title Insurer
April 23, 2009

Proposed opinion rules that, unless affected clients expressly consent to the disclosure of their confidential information, a lawyer may allow a title insurer to audit the lawyer's real estate trust account and reconciliation reports only if certain written assurances to protect client confidences are obtained from the title insurer, the audited account is only used for real estate closings, and the audit is limited to certain records and to real estate transactions insured by the title insurer.

Inquiry #1:

Under North Carolina law, title insurance policies are issued upon receipt of title certification from a licensed North Carolina lawyer. A title insurer will only issue title assurances to approved lawyers as provided by N.C. Gen. Stat. A758-26.1. In the vast majority of real estate closings, the lender delivers the proceeds of the new loan (for the purchase or refinancing of the real estate) to the approved lawyer to be disbursed from the approved lawyer's trust account upon the closing of the transaction. Lenders and buyers/borrowers in real estate transactions frequently request title insurance coverage in the form of a closing protection letter in which the title insurer agrees to reimburse the lender and/or the buyer/borrower for, among other things, actual loss on account of the fraud or dishonesty of the approved lawyer in handling the lender's funds. Closing protection letters are necessary to facilitate real estate transactions in North Carolina as lenders are unwilling to risk their funds without these assurances from title insurers.

Title insurers are experiencing increasing liability for lawyer defalcations pursuant to closing protection letters and title insurance policies issued in connection with real estate transactions. In addition, parties to real estate transactions who are not covered by title insurance are suffering losses related to the misuse of funds deposited in real estate trust accounts.

To provide the assurances required by lenders and buyer/borrowers, title insurers need a way to assess whether funds from real estate trust accounts are being disbursed and accounted for properly. Real estate lawyers may use outside reconciliation services to reconcile their trust accounts. Title insurers would like to request either an audit of an approved lawyer's trust account and/or review of the lawyer's trust account reconciliation reports to ensure the safety of the funds and protect the interests of those whose funds are placed in the trust account and rely upon the appropriate disbursement of those funds.

Lawyer A is an approved lawyer with Title Insurer. Title Insurer has issued at least one closing protection letter for Lawyer A. May Lawyer A voluntarily permit Title Insurer to audit his trust account?

Opinion #1:

Yes, Lawyer A may voluntarily permit Title Insurer to audit any trust account used solely for real estate closings provided the audit is limited to transactions insured by Title Insurer and, further provided, Lawyer A obtains certain assurances from Title Insurer.

Rule 1.6 requires a lawyer to protect from disclosure all information acquired during the professional relationship including information about a client contained in the lawyer's trust account records. Nevertheless, confidential information may be revealed when the client gives informed consent, disclosure is impliedly authorized to carry out the representation, or a specific exception allowing disclosure set forth in paragraph (b) of Rule 1.6 applies. Although the specific exceptions are not applicable here, the general exception that permits disclosure to carry out the representation is applicable. A self-evident objective of both the lender and the buyer/borrower, the clients in a real estate transaction, is that the loan proceeds will be used for the purpose for which they were intended and not misused or misappropriated by the closing lawyer. Therefore, there is implied consent by real estate clients to disclose such information as may be necessary to prevent defalcations including information necessary for a title insurer to perform an audit of the lawyer's trust account.

It cannot be assumed that non-real estate clients impliedly authorize the disclosure of confidential information about their deposits to a lawyer's general trust account to a title insurance company. Moreover, it cannot be assumed that a real estate client's implied consent extends to title companies that did not insure the client's transaction. Absent the express consent of those clients whose confidential information may be disclosed, a lawyer may only allow an audit that is limited to certain financial records related to a trust account used solely for real estate closings and to certain financial records related to real estate transactions insured by the title insurer. Specifically, the audit must be limited to review of the following records on the trust account: bank statements and deposit tickets for three months (not including copies of checks); reconciliation reports for three months (confidential client information redacted); and the general ledger for six months (names of payees redacted). The audit shall also be limited to the following records of real estate transactions insured by the title insurer: copies of cancelled checks; copies of deposited checks; cash receipts (if any); disbursement receipts; closing instructions; settlement statements (all drafts and final versions); pay-off statements; wiring instructions and wire confirmations; all recorded documents; the client-specific ledger; and the bank statement from any open interest-bearing account used for the transaction.

This opinion can be distinguished from 98 FEO 10 which holds that an insurance defense lawyer may not disclose confidential information about an insured's representation in bills submitted to an independent audit company at the insurance carrier's request unless the insured consents. That opinion provides that a lawyer should not ask for the consent of the insured "[w]hen the insured could be prejudiced by agreeing and gains nothing" such that "a disinterested lawyer would not conclude that the insured should agree in the absence of some special circumstance." 98 FEO 10 presumes that the interests of the insured and the insurance carrier relative to the payment of legal fees are in conflict because the insured wants the best defense money can buy and the insurance carrier wants to limit its expenditures on legal fees. This is not the case with regard to audits of real estate trust accounts where a title insurer's interest in preventing the theft of closing funds by a lawyer can be presumed to be the same as that of the buyer and the seller of the property. Another distinction resides in the type of information that would be obtained in an audit of a bill for legal services and in the audit of trust account records for a real estate closing. The legal bill often contains detailed information about the representation which is clearly confidential and may also be privileged under the law of evidence. Although the limited client information gained in an audit of a real estate trust account is confidential, it is probably not privileged.1 Therefore, the risk that the privilege will be waived as a consequence of the audit is remote.

To further protect confidential client information during the audit process, prior to an audit, Lawyer A must obtain written assurances from the title insurer of the following: (1) the information disclosed will be used for no other purposes than to confirm the proper use of funds and the lawyer's compliance with the trust accounting requirements in Rule 1.15; (2) the information will not be used by the title insurer for marketing or business purposes other than risk management; (3) access to the information will be limited to those employees of the title insurer who need the information to make risk management decisions; and (4) the disclosed information will not be shared with any third party except the State Bar and, in the event a defalcation is discovered, the information will be disclosed to the State Bar or other appropriate authorities. See Rule 1.15. Regardless of the title insurer's duty to report evidence of a defalcation to the State Bar, any North Carolina lawyer who has such knowledge is also required to report to the State Bar pursuant to Rule 8.3(a).

Although Lawyer A must obtain title insurer's written assurances relative to protecting confidential client information, he is not prohibited from allowing the title insurer's conclusions as a result of the audit to be released to a third party such as another title insurer.

Inquiry #2:

May Lawyer A voluntarily permit Title Insurer to examine and review Lawyer A's reconciliation reports whether generated by Lawyer A and his staff, or generated by an outside reconciliation service employed by Lawyer A?

Opinion #2:

Yes, provided the reconciliation reports are for a trust account that is used solely for real estate closings and the required written assurances from the title insurer set forth in opinion #1 are obtained. See opinion #1 above.

Inquiry #3:

Title Insurer conditions designation as an approved lawyer on the lawyer's agreement that Title Insurer may audit the lawyer's trust account and review the lawyer's reconciliation reports upon request. May a lawyer seek designation as an approved lawyer for Title Insurer?

Opinion #3:

Yes, provided the audit is limited to trust accounts, or the reconciliation reports therefore, that are used solely for real estate closings and the required written assurances from the auditor and the title insurer set forth in opinion #1 are obtained. See opinion #1 above.

Inquiry #4:

Would the responses to any of the preceding inquiries be different if multiple lawyers in the same firm use the same real estate trust account?

Opinion #4:

No.

Inquiry #5:

As noted above, many real estate lawyers use outside reconciliation services to reconcile their trust accounts. Is this practice permitted under the Rules of Professional Conduct?

Opinion #5:

Yes, a lawyer may delegate reconciliation to a company or to a non-lawyer who is not employed in the lawyer's firm provided the lawyer makes reasonable efforts to ensure that the person(s) providing the reconciliation services understands the lawyer's professional duties with regard to the management of the trust account under Rule 1.15 and also with regard to the protection of client confidences under Rule 1.6. The lawyer remains professionally responsible for the proper management and reconciliation of the account. See Rule 5.3.

Endnote

1. A privilege exists if (1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose although litigation need not be contemplated, and (5) the client has not waived the privilege. It is, however, a qualified privilege subject to the general supervisory powers of the trial court. State v. McIntosh, 336 NC 517, 444 S.E.2d 438 (1994).

Proposed 2009 Formal Ethics Opinion 6
Including Information on Verdicts and Settlements on a Website
April 23, 2009

Proposed opinion rules that a website may include a "case summary" section if there is sufficient information about each case included on the webpage to comply with Rule 7.1(a).

Inquiry:

Is it possible for a law firm to include on its firm website a section showcasing successful verdicts and settlements without violating Rule 7.1(a)(2)?

Opinion:

Yes. Rule 7.1 provides that a lawyer "shall not make a false or misleading communication about the lawyer or the lawyer's services." The rule further provides that a communication is false or misleading if it "is likely to create an unjustified expectation about results the lawyer can achieve." Rule 7.1(a)(2).

The issue is whether a law firm can provide information on its past successes without creating unjustified expectations. Comment [3] to Rule 7.1 provides that an advertisement that truthfully reports a lawyer's achievements may be misleading "if presented so as to lead a reasonable person to form an unjustified expectation that the same results could be obtained for other clients in similar matters without reference to the specific factual and legal circumstances of each client's case."

2000 FEO 1 provides that statements about a lawyer's or a law firm's record in obtaining favorable verdicts is permissible if the information is provided in context. According to the opinion, the context would have to include the following:

disclosure of the lawyer's or firm's history of obtaining unfavorable, as well as favorable, verdicts and settlements; the lawyer's or firm's success in actually collecting favorable verdicts; the types of cases handled and their complexity; whether liability and/or damages were contested; and whether the opposing party or parties were represented by legal counsel. In addition, the verdict record must disclose the period of time examined. Finally, the communication must include a statement that the outcome of a particular case cannot be predicated upon a lawyer's or a law firm's past results.

2000 FEO 1.

In 2000 FEO 1, the Ethics Committee found that subjective statements about a law firm's successes were misleading. The committee further concluded that the webpage in question did not provide enough explanation of the law firm's record to avoid misleading a visitor to the website and that it was necessary for the law firm to provide a complete record on the website or by mail upon request, disclosing the information set forth in the above quote, to bring the webpage into compliance with the requirements of the Rules of Professional Conduct. The webpage in 2000 FEO 1 did not contain summaries of successful cases, but rather a paragraph generally describing the firm's achievements. The paragraph also did not make reference to the specific factual and legal circumstances of each client's case.

The consumer of legal services benefits from the dissemination of accurate information in choosing legal representation. See D.C. Legal Ethics Comm., Op. 335 (2006). Lawyers also benefit from the dissemination of accurate information when seeking to enlist the aid of co-counsel in a particular matter. A consumer researching law firms on the internet expects a law firm's website to include information about the firm's past successes, and many firm websites currently include a "verdict and settlements" section. The law firm's duty is to provide that information to the consumer without creating an unjustified expectation about the results the lawyer can achieve. However, the requirements set out in 2000 FEO 1 may be so burdensome that they discourage lawyers from providing any information about verdicts and settlements and thereby effectively prevent consumers from getting helpful information.

Therefore, a website may include a "case summary" section if there is sufficient information about each case included on the webpage to comply with Rule 7.1(a). Some of the required disclosures set out in 2000 FEO 1 should be included in the case summary section of the website. The summary should reference the complexity of the matter; whether liability and/or damages were contested; whether the opposing party was represented by legal counsel; and, if applicable, the firm's success in actually collecting the judgment. Providing specific information about the factual and legal circumstances of the cases reported, in conjunction with the inclusion of an appropriate disclaimer, precludes a finding that the webpage is likely to create unjustified expectations or otherwise mislead a prospective client.
2000 FEO 1 is overruled to the extent it is inconsistent with this opinion.

Proposed 2009 Formal Ethics Opinion 7
Interviewing a Child Witness
April 23, 2009

Proposed opinion rules that a prosecutor or a criminal defense lawyer may interview a child who is the victim of or witness to a crime provided the lawyer complies with Rule 4.3, reasonably determines that the child is sufficiently mature to understand the lawyer's role and purpose, and avoids any conduct designed to coerce or intimidate the child.

Inquiry #1:

Attorney A represents a criminal defendant on a charge of taking indecent liberties with a child. To prepare for trial, Attorney A would like to interview the child who is the victim of the alleged crime. The child is not a party to the criminal action. She does not have a lawyer and a guardian ad litem has not been appointed to represent her interests. May Attorney A interview the child without the consent of the child's parent or legal guardian?

Opinion #1:

Yes, provided Attorney A respects the rights of the child and there is no legal requirement that the consent of the parent or legal guardian be obtained. See RPC 61 (defense lawyer may interview child victim of molestation without knowledge or consent of district attorney).

It is Attorney A's professional duty to prepare competently and diligently to defend the client; a priori, in most cases, this includes interviewing the victim of the alleged crime if the victim will consent to the interview. Nevertheless, a child may not have the emotional or intellectual maturity to make an informed decision about whether to consent to the interview, or the emotional or intellectual maturity to understand the role of the lawyer or the purpose of the interview.

Rule 4.3(b) states that, when dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not

state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.

As noted in comment [1] to Rule 4.3, "[a]n unrepresented person, particularly one not experienced in dealing with legal matters, might assume that a lawyer is disinterested in loyalties or is a disinterested authority on the law even when the lawyer represents a client."

Many children are inexperienced in legal matters and will not understand the role of a criminal defense lawyer who seeks an interview. Many children will naively defer to the defense lawyer because he or she is an adult. Many children will be easily mislead or subject to the undue influence of an authority figure such as a lawyer. For these reasons, a criminal defense lawyer who seeks to interview the child victim of a crime must make a reasonable determination of whether the child is sufficiently mature to understand, when disclosed by the lawyer, (1) the role of the lawyer, (2) who the lawyer represents, (3) the purpose of the interview, and (4) that the child is at liberty to refuse to be interviewed. If the lawyer cannot reasonably conclude that the child is sufficiently mature, both emotionally and intellectually, to understand these four things, the lawyer may not interview the child unless a legal guardian or parent consents. If the conduct of the legal guardian or the parent toward the child is at issue in the criminal case, consent must be obtained from a guardian ad litem, a court, or other appropriate person or entity with authority to give consent. See opinion #3.

Rule 3.4(b) prohibits a lawyer from counseling or assisting a witness to testify falsely. This includes making improper suggestions or offering inducements that might lead a naEFve and vulnerable child to change or alter her or her testimony. Although a lawyer may reasonably conclude that a child is sufficiently mature to consent to the interview, the lawyer may not engage in emotional manipulation or other forms of undue influence, coercion, or intimidation that may inhibit or alter the witness's testimony.

Although a communication without the consent or knowledge of the child's parent or guardian may be allowed under this opinion, a lawyer should err on the side of giving notice to the parent or guardian—and preferably obtaining the consent of the parent or guardian—unless circumstances are such that the lawyer has a good faith belief that the child's candor may be affected by the knowledge of the parent.

Inquiry #2:

May the prosecutor interview the child who is the alleged victim of the crime?

Opinion #2:

Yes, subject to the same constraints set forth in opinion #1.

Inquiry #3:

The defendant is the child's parent or legal guardian and is accused of conduct that, if proven, would constitute abuse or neglect of the child. May the defendant's criminal defense lawyer interview the child subject to the constraints set forth in opinion #1?

Opinion #3:

In most instances of alleged child abuse or neglect, a guardian ad litem (GAL) and an attorney advocate are appointed to represent the child. RPC 249 prohibits a lawyer from communicating with a child who is represented by a GAL and an attorney advocate unless the lawyer obtains the consent of the attorney advocate. If a GAL has not been appointed for the child, the lawyer may interview the child subject to the constraints set forth in opinion #1.

Inquiry #4:

Attorney B is defending a child in a delinquency proceeding. She would like to interview another child who witnessed the events giving rise to the delinquency charge. However, it would be detrimental to the child witness for his parents to know that he was present when and where the events occurred. May Attorney B interview the child witness without the consent of the child's parents or legal guardian?

Opinion #4:

Yes, subject to the constraints set forth in opinion #1.

If not otherwise clear from the context, the conditions and limitations imposed by this opinion apply equally to prosecutors.

Proposed Opinions Sent to Subcommittee

Proposed 2008 Formal Ethics Opinion 11
Representation of Beneficiary on Other Matters While Serving as Foreclosure Trustee
January 22, 2009

Proposed opinion rules that a lawyer may not serve as the trustee in a contested foreclosure proceeding while simultaneously representing the beneficiary of the deed of trust on unrelated matters; however, the remaining lawyers in the firm may continue to represent the beneficiary on unrelated matters.

Inquiry #1:

Attorney A is employed by Law Firm. The lawyers of the firm routinely represent various bank clients including Bank Z. Bank Z is one of the firm's largest clients and all of the lawyers in the firm perform some work for the bank.

Attorney A has been asked to serve as the substitute trustee for the foreclosure of a deed of trust securing a loan (the Loan) made by Bank Z to the grantor (the Borrower) of the deed of trust. Bank Z is the named beneficiary of the deed of trust. The lawyers at the firm did not represent Bank Z on the negotiation or securitization of the Loan. The lawyers have not previously represented the Borrower.

Attorney A and the other lawyers in Law Firm want to continue to represent Bank Z on unrelated legal matters throughout the course of the foreclosure proceeding. Bank Z does not object. Borrower has not been notified that Attorney A and the other lawyers of the firm represent Bank Z on other unrelated matters.

May Attorney A continue to represent Bank Z on matters unrelated to the Loan and serve as substitute trustee for the foreclosure?

Opinion #1:

If the proceeding is contested, Attorney A may not serve as trustee and continue to represent the bank on other matters because his impartiality as trustee will be impaired by his duty of loyalty to and advocacy for the bank on the other matters. If the proceeding is not contested, however, Attorney A may serve as trustee and continue to represent the bank on other matters.

A foreclosure proceeding is contested when the grantor seeks to enjoin the proceeding or contests any of the following issues at the foreclosure hearing: jurisdiction, service of process, debt, default, notice, power of sale, and, in the case of residential mortgages, certification regarding subprime loans.1 A borrower's motion to continue the proceeding or request to postpone the sale does not render the foreclosure contested. As with the trustee's own motion for a continuance or decision to postpone, these are procedural matters to which the trustee may respond within his or her discretion without impairing his or her ability to foreclose on the property consistent with the statutory requirements and the deed of trust.

There are a number of ethics opinions that hold that a lawyer serving as trustee in a contested foreclosure proceeding may not act as the advocate for the beneficiary or the grantor in an adversarial proceeding arising from or connected with the deed of trust because the trustee is a fiduciary and, when exercising his discretion in the foreclosure, must play an impartial role relative to both parties. RPC 3, RPC 64, RPC 82, RPC 90, 04 Formal Ethics Opinion 3. None of the ethics opinions, however, consider whether a lawyer is disqualified from serving as trustee if he continues to represent the lender on unrelated legal matters.

RPC 3, which rules that a lawyer may serve as a foreclosure trustee after representing the beneficiary of the deed of trust in the negotiation of the loan, explains the basis for prohibiting the lawyer from acting as an advocate in a contested foreclosure proceeding in the following passage:

[T]he Trustee owes a duty of impartiality to both parties which is inconsistent with representing one of the parties in a contested proceeding85.Generally, when an attorney is required to withdraw from representation or from a fiduciary role, it is either because of concerns [for the] confidences of the client under Rule 4 [now Rule 1.6] and its predecessors or because of conflicts of interest under Rule 5.1 [now Rule 1.7] or its predecessors where the attorney would be put in the position of inconsistent roles or obligations at the same time or in the same proceeding. Since neither of those circumstances exist, and the rules do not appear to be directly relevant by their terms or with regard to their purposes, Attorney A is not ethically prohibited from continuing to serve as Trustee in a contested foreclosure matter, despite his prior representation of [beneficiary of the deed of trust], where he does not currently represent [beneficiary] in the foreclosure or related proceedings.

If Attorney A represents Bank Z in other matters and the foreclosure is contested, Attorney A's roles and obligations will be inconsistent. On the one hand, Attorney A is required to protect and advance the interests of the bank and, on the other hand, he has a duty to be impartial in a contested proceeding where a substantial interest of the bank is at stake. Attorney A must decide whether to continue to represent the bank on unrelated matters and relinquish the trustee role to someone who will not be similarly compromised or to fulfill the role of trustee by withdrawing from the representation of the bank in all other matters. See also Rule 1.7(a)(1)(concurrent conflict of interest exists if representation of one or more clients may be materially limited by the lawyer's responsibilities to a third person).

Inquiry #2:

Attorney A withdraws from the representation of Bank Z on all matters. Are the other lawyers in Law Firm required to withdraw from the representation of Bank Z on matters unrelated to the Loan if Attorney A serves as the substitute trustee for the contested foreclosure?

Opinion #2:

No, the other lawyers in the firm may continue to represent Bank Z on unrelated matters.

Rule 1.10(a) provides that a disqualification based upon a personal interest of a lawyer that does not present a significant risk of materially limiting the representation of a client by the remaining lawyers in a firm is not imputed to the remaining lawyers in the firm. Comment [3] to Rule 1.10 specifies that "[t]he rule in paragraph (a) does not prohibit representation where neither questions of client loyalty nor protection of confidential information are presented." Serving in the role of trustee does not raise questions of client loyalty or protection of confidential information because the lawyer/trustee does not represent either party in the foreclosure. Therefore, Attorney A's disqualification from the representation of Bank Z to maintain his impartiality is not imputed to the other lawyers in the firm who are representing the bank on matters unrelated to the Loan and the foreclosure.

Inquiry #3:

Attorney B, another lawyer in Law Firm, intends to act as the lawyer for Bank Z in connection with the Loan including representation in the foreclosure proceeding. May Attorney B represent Bank Z on all matters related to the Loan, including the foreclosure, if another lawyer in his firm is serving as the trustee?

Opinion #3:

No, if the foreclosure is contested, Attorney B may not represent Bank Z at the foreclosure proceeding or on any matter related to the Loan. Attorney A's impartiality may be impaired if another lawyer from his firm appears in the foreclosure or related matters on behalf of the bank. To preserve the integrity of the process and the impartiality of the trustee, Attorney A's disqualification from serving as an advocate for one of the parties to a contested foreclosure in any matter related to the Loan is imputed to the other lawyers in the firm. See Rule 1.10(a).

Inquiry #4:

May another lawyer in the firm represent Attorney A in his capacity as trustee for the foreclosure?

Opinion #4:

Yes. However, if the foreclosure is contested, the lawyer may not continue to do unrelated legal work for the bank while representing Attorney A as trustee. If the lawyer serving as trustee must avoid the appearance of bias by foregoing representation of the bank in unrelated matters, his or her lawyer must do the same. See Rule 1.10(a).

Inquiry #5:

Law Firm has set up a separate company, Firmco, LLC, to serve as trustee on deeds of trust. Firmco is substituted as trustee on the deed of trust securing the Loan made by Bank Z. May a lawyer in the firm represent Firmco in its capacity as trustee for the foreclosure?

Opinion #5:

Yes. However, if the foreclosure is contested, the lawyer representing Firmco may not continue to do unrelated legal work for the bank. See opinion #4.

Inquiry #6:

Should the Borrower be informed that the other lawyers in Law Firm will continue to represent Bank Z on matters unrelated to the foreclosure?

Opinion #6:

Yes. The role of the trustee in a foreclosure proceeding is similar to the roles of arbitrator or mediator which are addressed in Rule 2.4. Rule 2.4(b) provides that when a lawyer serving as a third-party neutral knows or reasonably should know that a party does not understand the lawyer's role in the matter, the lawyer shall explain the difference between the lawyer's role as a third party neutral and a lawyer's role as one who represents a client. Similarly, explaining the role of the trustee and the role of the other lawyers in the firm (who continue to represent the bank) to a borrower in a foreclosure proceeding will help to avoid confusion and will allow the borrower to pursue his legal remedies to remove the trustee if he objects.

Inquiry #7:

If Borrower informally objects to Attorney A serving as the trustee because the other lawyers in the firm represent Bank Z on unrelated matters, is Attorney A required to withdraw from service as trustee?

Opinion #7:

No, Attorney A is not required to withdraw unless ordered to do so by a court. See Opinion #2 above.

Inquiry #8:

Do the responses to any of the preceding inquiries change if Bank Z is not one of the largest clients of Law Firm?

Opinion #8:

No.

Endnote

1. G.S. A745-105 allows the Commissioner of Banks (COB) to delay the time within which a lender can file a foreclosure proceeding on a subprime loan for a period of up to 30 days and to suspend a foreclosure on a subprime loan based upon its review of loan information that the lender must file with the Administrative Office of the Courts pursuant to G.S. A745-103. The clerk of court must find that the loan is not subprime or, if subprime, that the COB has not delayed the time for filing the foreclosure proceeding or suspended the foreclosure based its review of the loan information.

Proposed 2008 Formal Ethics Opinion 16
Advising Client About Litigation Funding Agreements
October 23, 2008

Proposed opinion rules that a lawyer who represents a personal injury claimant who received a cash advance from a litigation funding company whose contracts may be usurious and illegal pursuant to Odell v. Legal Bucks, LLC, should provide legal advice to the client as to her rights under the contract or refer the client to a lawyer who is competent to give advice in this area of law.

Inquiry #1:

Law Firm handles a wide range of personal injury claims. Increasingly, Law Firm's clients approach their lawyers requesting information about, or facilitation of, cash advances from third party entities. One such company is Legal Bucks, LLC. Legal Bucks, and other similar companies, advance money to borrowers who are expecting to recover in pending tort claims, but who need money for personal expenses before their claims go to trial or settle.

Clients who use Legal Bucks's services are requested to have their lawyer execute a document entitled "Attorney's Acknowledgement of Transfer and Conveyance of Proceeds." Clients sign a separate document entitled "Transfer and Conveyance of Proceeds and Security Agreement."

On September 2, 2008, the North Carolina Court of Appeals issued Odell v. Legal Bucks, LLC, 2008 N.C. App. Lexis 1619. In the opinion, the court ruled that the "Transfer and Conveyance of Proceeds and Security Agreement" used by Legal Bucks is invalid and unenforceable. The decision held that the company, which charged an interest rate in excess of 16%, had violated the state's usury laws as well as the state's consumer finance and unfair and deceptive trade practices laws.

What duty does a lawyer who works for Law Firm have to facilitate repayment of funds advanced to a client by litigation funding companies such as Legal Bucks in light of the opinion issued in Odell v. Legal Bucks, LLC?

Opinion #1:

2000 FEO 4 allows a lawyer to sign a statement acknowledging a finance company's interest in a client's recovery provided, however, if the lawyer subsequently determines that the finance company's assignment of recovery proceeds does not create a valid lien on the recovery proceeds, the lawyer must disburse the recovery funds as instructed by the client. Similarly, if the client disputes that the debt is owed (or disputes the amount of the debt), the lawyer must hold the disputed funds in his trust account until the dispute is resolved, a court orders the release of the funds, or the lawyer interpleads the funds. See Rule 1.15-3, cmt. [14]; 2000 FEO 4.

Odell v. Legal Bucks casts doubt on the validity of the financing company's security interest in the client's recovery. Therefore, the lawyer's duty is to advise the client as to her legal rights under the changed circumstances and, in particular, the legal effect of the opinion on the client's duty to honor the contract with the financing company. If the lawyer does not feel that he is competent to advise the client on contract law, usury, and other legal issues relevant to the enforceability of the agreement, he should refer the client to a lawyer competent and experienced in such law. Advice to the client may include advice on whether to file an action against the financing company or to renegotiate the amount owed under the financing agreement. At a minimum, the lawyer should not transfer the funds to the financing company, but should hold the funds in his trust account until the issue of the validity of a Legal Bucks contract with the particular client is resolved.

In addition, the lawyer must determine whether he has an independent contractual duty to pay the funding company under the "Attorney's Acknowledgement" document and, if so, whether this personal interest may impair or affect his ability to give unbiased advice to the client. See Rule 1.7(b). If the lawyer determines that it will not impair his advice or judgment, he should inform the client of the conflict, obtain the client's informed consent, confirmed in writing, and proceed with giving the client advice about her options. If the lawyer determines that his personal interest is in conflict with the interest of his client or may otherwise impair his judgment, he must refer the client to another, independent lawyer competent to give advice about the relevant contractual issues.

Inquiry #2:

Should the lawyer advise his client to repay the principal amount advanced by the litigation funding company plus a lawful rate of interest? If so, what amount of interest should be offered to the litigation funding company?

Opinion #2:

A lawyer should advise his client of the legal effect of the Legal Bucks opinion on the client's duty to honor the contract with the funding company and discuss possible resolutions with the client, including repaying the loan amount at a lower interest rate, or the lawyer should refer the client to a lawyer who is competent to do so. The amount of interest that may be lawfully offered on such a financing agreement is a legal question that is outside the purview of the Ethics Committee.

Inquiry #3:

May a lawyer advise a client to make any payment under a contract that has been adjudicated by a state appellate court to be "invalid and unenforceable"?

Opinion #3:

See Opinions #1 and #2.

Inquiry #4:

Lawyer is aware that the lawyers for the plaintiffs in Legal Bucks may bring a class action against the company. What duty does Lawyer have to advise his client of the pendency of a class action when the client may be eligible to join the class?

Opinion #4:

Lawyer has a duty to inform the client of any known information regarding a class action when the client may be eligible to join the class. Competent representation dictates that the lawyer provide the client with legal advice as to the client's potential participation in a class action against the financing company or to refer the client to appropriate legal counsel for legal guidance on the issue. See Rule 1.4, Rule 1.1.

Inquiry # 5

What duty does Law Firm have to inform past clients about the pendency of a request for class action certification or about a subsequent certification of a class, when the former clients are likely to have an interest in the subject matter of the litigation?

Opinion #5:

Law Firm does not have a duty to inform former clients about potential participation in a class action, although the clients may have an interest in the subject matter of the litigation. However, there is nothing that prohibits Law Firm from contacting former clients to provide them with this information. If Law Firm intends to bring the class action itself and would like to solicit former clients to join the class, the firm may do so without violating the prohibition on in-person solicitation in Rule 7.3(a) because of the pre-existing professional relationship between the lawyers in the firm and the clients.

Inquiry # 6:

Until the litigation is finalized, may a lawyer ethically participate in a litigation funding advance at the request of a client and with the consent of the client to the extent of executing the "Attorney's Acknowledgement" or a similar document purporting to bind the client to payments now deemed usurious?

Opinion # 6:

2000 FEO 4 provides that a lawyer who receives notice of an assignment of the proceeds of a personal injury claim should "take care to examine the applicable law to determine if the assignment is valid and enforceable. If the assignment appears to be illegal or otherwise unenforceable, the lawyer may not acknowledge or honor the assignment." If the law is unclear, the lawyer may only sign the acknowledgment of the assignment subject to the conditions set out in 2000 FEO 4.

Proposed 2009 Formal Ethics Opinion 1
Review and Use of Metadata
January 22, 2009

Proposed opinion rules that a lawyer must use reasonable care to prevent the disclosure of confidential client information hidden in metadata when transmitting an electronic communication and a lawyer who receives an electronic communication from another party or another party's lawyer must refrain from searching for and using confidential information found in the metadata embedded in the document.

Background:

In the representation of clients in all types of legal matters, lawyers routinely send e-mails and electronic documents, spreadsheets, and PowerPoint presentations to a lawyer for another party (or to the party if not represented by counsel). The e-mail and the electronic documents contain metadata1 or embedded information about the document describing the document's history, tracking, and management2 such as the date and time that the document was created, the computer on which the document was created, the last date and time that a document was saved, "redlined" changes identifying what was changed or deleted in the document, and comments included in the document during the editing process. Pennsylvania Bar Ass'n. Comm. on Legal Ethics and Professional Responsibility, Formal Opinion 2007-500, notes that, although most metadata contains "seemingly harmless information," it may also contain "privileged and/or confidential information, such as previously deleted text, notes, and tracked changes which may provide information about, e.g., legal issues, legal theories, and other information that was not intended to be disclosed to opposing counsel." This embedded information may be readily revealed by a "right click" with a computer mouse, by clicking on a software icon, or by using software designed to discover and disclose the metadata.3 The sender of the document may be unaware that there is metadata embedded in the document or mistakenly believe that the metadata was deleted from the document prior to transmission. The Ethics Committee is issuing this opinion sua sponte in light of the importance of the ethical issues raised by metadata.

Inquiry #1:

What is the ethical duty of a lawyer who sends an electronic communication to prevent the disclosure of a client's confidential information found in metadata?

Opinion #1:

Rule 1.6(a) of the Rules of Professional Conduct prohibits a lawyer from revealing information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized to carry out the representation, or disclosure is permitted by one of the exceptions to confidentiality set forth in paragraph (b) of the rule. As noted in comment [20] to the rule, "[w]hen transmitting a communication that includes information acquired during the representation of a client, the lawyer must take reasonable precautions to prevent the information from coming into the hands of unintended recipients." Therefore, a lawyer who sends an electronic communication must take reasonable precautions to prevent the disclosure of confidential information, including information in metadata, to unintended recipients.4

RPC 215 addressed the preservation of confidential client information when using modern forms of communication including cellular phones and e-mail. The opinion states that the professional obligation to use reasonable care to protect and preserve confidential information extends to the use of communications technology; "[h]owever, this obligation does not require that a lawyer use only infallibly secure methods of communication." Nevertheless, "a lawyer must take steps to minimize the risks that confidential information may be disclosed in a communication."

What is reasonable depends upon the circumstances including, for example, the sensitivity of the confidential information that may be disclosed, the potential adverse consequences from disclosure, any special instructions or expectations of a client, and the steps that the lawyer takes to prevent the disclosure of metadata.5 Of course, when electronic communications are produced in response to a subpoena or a formal discovery request in civil litigation, the responding lawyer may not remove or restrict access to the metadata in the communications if doing so would violate any disclosure duties under law, the Rules of Civil Procedure, or court order.

Inquiry #2:

May a lawyer who receives an electronic communication from another party or the party's lawyer search for and use metadata embedded in the communication without the consent of the other party or lawyer?

Opinion #2:

No. The information revealed, whether trivial or significant, is confidential information of another party. By actively searching for such information, a lawyer interferes with the client-lawyer relationship of another lawyer and undermines the confidentiality that is the bedrock of the relationship. Rule 1.6. Moreover, because the sending lawyer (or the other party if unrepresented) trusts the receiving lawyer to read only the information that is readily visible on the document, a lawyer who takes steps to reveal embedded information is engaged in dishonest conduct in violation of Rule 8.4(c) and (d) which prohibit conduct "involving dishonesty, fraud, deceit, or misrepresentation" and that is "prejudicial to the administration of justice."

The New York State Bar was the first to adopt this position which was followed by the state bars of Alabama, Arizona, Florida, and Maine.6 New York Ethics Opinion 749 holds that:

in light of the strong public policy in favor of preserving confidentiality as the foundation of the lawyer-client relationship, use of technology to surreptitiously obtain information that may be protected by the attorney-client privilege, the work product doctrine, or that may otherwise constitute a "secret" of another lawyer's client would violate the letter and spirit of [the New York] Disciplinary Rules.

Agreeing with the position of the New York State Bar, the Alabama State Bar Disciplinary Commission in Opinion 2007-02 finds that, "[t]he mining of metadata constitutes a knowing and deliberate attempt by the recipient attorney to acquire confidential and privileged information in order to obtain an unfair advantage against an opposing party." Although the ABA Standing Committee on Ethics and Professional Responsibility, in Formal Opinion 06-442 (2006),7 takes the position that the Model Rules of Professional Conduct do not prohibit a lawyer from reviewing and using metadata, this position was subsequently rejected by the State Bar of Arizona among others. Arizona Opinion 07-03 observes that under the ABA opinion, which puts "the sending lawyer85at the mercy of the recipient lawyer85, the sending lawyer might conclude that the only ethically safe course of action is to forego the use of electronic document transmission entirely85[this is not] realistic or necessary." The North Carolina State Bar Ethics Committee agrees.

Rule 4.4(b) concerns the receipt of a writing that was never intended for the receiving lawyer and it does not, therefore, address the ethical issues raised by the search for and use of metadata. Rule 4.4(b) requires a lawyer who receives a writing relating to the representation of a client that the lawyer knows, or reasonably should know, was inadvertently sent, to promptly notify the sender. However, the rule does not prohibit the receiving lawyer from reading the document and, as noted in the comment to the rule, "[w]hether the lawyer who receives the writing is required to take additional steps, such as returning the original writing, is a matter of law beyond the scope of these rules85.Whether a lawyer is required [to return a writing unread] is [also] a matter of law." A lawyer who receives an inadvertently sent document must read the document to determine its purpose and character and cannot know that the document was inadvertently sent without doing so. The lawyer is a passive recipient of the document and is not actively attempting to unveil the other party's confidences. Conversely, a lawyer who receives an electronic communication knows that the sender intends to disclose only the information visible on the face of the communication unless the lawyer has an agreement to the contrary with the sender. Therefore, a lawyer who purposefully searches for and uses the information contained in metadata in a communication received from another lawyer or party is engaged in dishonest and unethical conduct that betrays the trust of the other lawyer or party and undermines that lawyer's confidential relationship with his or her client.
In conclusion, a lawyer may not search for and use metadata in an electronic communication sent to him or her by another lawyer or party unless the lawyer is authorized to do so by law, rule, court order or procedure, or the consent of the other lawyer or party. If a lawyer unintentionally views metadata, the lawyer must notify the sender and may not subsequently use the information revealed without the consent of the other lawyer or party.

Endnotes
1. Metadata is explained in Pennsylvania Bar Ass'n. Comm. on Legal Ethics and Professional Responsibility, Formal Op. 2007-500 (2007), as follows: "Metadata, which means 'information about data,' is data contained within electronic materials that is not ordinarily visible to those viewing the information. Although most commonly found in documents created in Microsoft Word, metadata is also present in a variety of other formats, including spreadsheets, PowerPoint presentations, and Corel WordPerfect documents."
2. Arizona State Bar Comm. on the Rules of Professional Conduct, Op. 07-03 (2007).
3. Pennsylvania Formal Op. 2007-500 (2007).
4. This is the consensus position of the jurisdictions that have considered the issue as well as the ABA Standing Committee on Ethics and Professional Responsibility. Alabama State Bar Disciplinary Comm'n, Op. 2007-02 (2007); Arizona State Bar Comm. on the Rules of Professional Conduct, Op. 07-03 (2007); Colorado Bar Ass'n. Ethics Comm., Op. 119 (2008); District of Columbia Legal Ethics Comm., Op. 341 (2007); Florida Professional Ethics Comm., Ethics Op. 06-2 (2006); Maine Bd. of Bar Overseers Professional Ethics Comm'n., Op. 196 (2008); Maryland State Bar Ass'n. Comm. on Ethics, Op. 2007-09 (2006); New York State Ethics Op. 782 (2004); Pennsylvania Formal Op. 2007-500 (2007); ABA Standing Comm. on Ethics and Professional Responsibility, Formal Op. 06-442 (Aug. 5, 2006).
5. Steps to minimize the risk of disclosure of metadata include the following:

Avoiding the use of the redlining function of a word processing program.
Not embedding comments in a document.
Not using template documents that may include embedded information about clients for whom a lawyer previously used the template.
Using computer programs to "scrub" the document of embedded information before sending.
Sending a version of the document that does not include embedded information such as a hard copy, a scanned image, or a fax.
Negotiating a confidentiality agreement or protective order that will allow embedded information to be kept out of evidence.

See opinions listed in footnote 4 supra.
6. Alabama Ethics Op. 2007-02 (2007); Arizona Op. 07-03 (2007); Florida Ethics Op. 06-2 (2006); Maine Op. 196 (Oct. 21, 2008), and New York Ethics Op. 749 (2001). Pennsylvania Formal Op. 2007-500 (2007) holds that a lawyer must determine for himself or herself whether to utilize metadata based upon the lawyer's judgment and the particular factual situation. District of Columbia Legal Ethics Comm., Op. 341 (2007) holds that a lawyer may not view metadata if the lawyer has actual knowledge that it was provided inadvertently.
7. ABA Formal Op. 06-442 (2006) concludes that the Model Rules of Professional Conduct permit a lawyer to review and use metadata contained in e-mail and other electronic documents. The Colorado Bar Association and the Maryland State Bar Association agree with the position expressed in the ABA opinion. Colorado Op. 119 (2008); Maryland Op. 2007-09 (2006).

Proposed 2009 Formal Ethics Opinion 3
Nonlawyer Employee Contacting Clients of Former Employer
January 22, 2009

Proposed opinion rules that a nonlawyer employee of a firm may write to clients of the nonlawyer's former employer provided the communications comply with Rule 7.3.

Inquiry:

May a nonlawyer employee of a law firm, who recently changed law firms, write to clients of his/her former employer with whom the nonlawyer had established relationships to inform the clients that the nonlawyer is employed with a new law firm and that the new law firm handles the same type of cases?

Opinion:

Yes. First, it should be noted that the Rules of Professional Conduct govern the actions of lawyers, rather than nonlawyers. However, a supervising lawyer may be responsible for conduct of a nonlawyer that would be a violation of the Rules of Professional Conduct if engaged in by a lawyer. See Rule 5.3(c).

The lawyer who currently supervises the nonlawyer would not be prohibited under the Rules of Professional Conduct from writing to the clients of another law firm, so long as the written communication complies with the advertising rules, Rules 7.1 to 7.5. Rule 7.3(c) requires the inclusion of an "advertising notice" when the written communication is for the purpose of soliciting the business of a potential client known to be in need of legal services in a particular matter. Rule 4.2, which addresses communications with persons represented by counsel, is not applicable to the current scenario because Rule 4.2 applies only when the lawyer communicating with the represented person also represents a client in the particular matter. See Rule 4.2, cmt. [2].

Therefore, the lawyer who employs/supervises the nonlawyer is not in violation of the Rules of Professional Conduct if he/she permits the nonlawyer to write to clients of the nonlawyer's former employer provided the advertising notice is included in any letter to a client of the former firm known to be in need of legal services in a particular matter. In addition, the lawyer may not share legal fees with a nonlawyer and, therefore, may not compensate the nonlawyer for bringing clients to the lawyer's law firm. See Rule 5.4. The employing lawyer must also insure that the nonlawyer preserves the confidentiality of information of her former employer's clients. See RPC 176 and Rules 1.6, 1.9.

No opinion is expressed on the legal question of whether a communication with a client of the nonlawyer's former employer constitutes interference with a contract.