Legal Ethics Opinion 1494

Conflict of Interest: Representing Lender and Trustee While
Lender and Borrower are Engaged in Adversary Proceeding 

You have presented a hypothetical situation in which Law Firm A
represents a noteholder at closing on a property of Borrower [B]. 
One year later, Borrower files for bankruptcy. Law firm A
represents the noteholder in B's bankruptcy and brings a
successful lift stay motion to permit foreclosure on B's property
secured by the note.  Law Firm A also undertakes representation
of Trustee under the Deed of Trust note without B's knowledge or

B files an action in Circuit Court seeking to avoid foreclosure. 
One of the issues before the Circuit Court is whether Trustee
should sell a portion of the property separately to obtain a
better price by taking advantage of a favorable zoning variance,
obtained by B, which would be lost if the property were sold at
auction.  Noteholder opposes the partial sale. 

You have asked the committee to opine whether, under the facts of
the inquiry, Law Firm A may ethically represent both the Trustee
and the noteholder in the Circuit Court action.

The appropriate and controlling Disciplinary Rules related to
your inquiry are DR 5-105(B) and (C) which state that a lawyer
shall not continue multiple employment if the exercise of his
independent professional judgment in behalf of a client will be
or is likely to be adversely affected by his representation of
another client, except if it is obvious that he can adequately
represent the interest of each and if each consents after full
disclosure of the possible effect of the representation on the
exercise of his independent professional judgment on behalf of

The committee is of the view that there is an actual conflict
between the firm's two clients, the noteholder and the trustee,
since the noteholder opposes the partial sale.  The committee
recognizes that the trustee, however, has a fiduciary duty toward
both the noteholder and the notemaker (Borrower).  Since the
facts indicate y be obtained by partial sale rather than by sale
of the entire property at auction it appears that a partial sale
may be in the best interests of the borrower.

The committee believes that the firm's representation of both the
trustee and the noteholder is violative of DRs 5-105(B) and (C)
since the interests of the clients have already matured into
actual adverse interests and since it is not obvious that the law
firm can adequately represent the interest of each.  Thus, since
the threshhold test of obvious adequate representation cannot be
crossed, disclosure and consent to the representation will not be
sufficient to cure the impropriety and, therefore, Law Firm A
must withdraw from representation of both the trustee and the
noteholder.  See LEO #l428.

Committee Opinion
December 14, 1992