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In Re Opinion 710 of Advisory Committee on Professional Ethics

Supreme Court of New Jersey
2008 N.J. LEXIS 21, 939 A.2d 794, 193 N.J. 419 (2008)
ELI5:

Rule of Law:

An attorney violates the Rules of Professional Conduct by participating in a real estate transaction where the purchase price and a corresponding "seller's concession" are artificially inflated for the purpose of deceiving a lender about the property's true market value. However, legitimate and disclosed seller's concessions that cover a buyer's actual closing costs are ethically permissible.


Facts:

  • A realtor prepares a contract for the sale of a residential property, which is signed by both a buyer and a seller for a set purchase price.
  • The contract contains a mortgage contingency clause.
  • Subsequently, the buyer and seller request that their attorneys amend the contract.
  • The proposed amendment increases the stated purchase price and the mortgage contingency amount by an identical sum.
  • The amendment also adds a provision requiring the seller to give the buyer a credit at closing, labeled a "seller's concession," for the exact amount of the price increase.
  • The stated purpose of these contractual changes is to increase the size of the purchaser's mortgage loan.
  • The transaction is structured in a way that may deceive the mortgage lender or subsequent investors as to the true market price of the property.
  • The "seller's concession" in this scenario does not represent any legitimate or actual costs of the sale that would otherwise be payable by the buyer.

Procedural Posture:

  • An anonymous inquirer submitted a hypothetical scenario to the Advisory Committee on Professional Ethics (ACPE) seeking an advisory opinion.
  • The ACPE issued Opinion 710, concluding that an attorney's participation in the described transaction would violate the Rules of Professional Conduct.
  • Following numerous inquiries, the ACPE issued a clarification to Opinion 710, specifying that it only applied to fraudulent transactions, not legitimate seller's concessions for actual costs.
  • The New Jersey State Bar Association (NJSBA) filed a petition with the Supreme Court of New Jersey (the state's highest court) to review ACPE Opinion 710.
  • The Supreme Court of New Jersey granted the NJSBA's petition for review.

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Issue:

Does an attorney violate the Rules of Professional Conduct by participating in a real estate transaction where the contract is amended to artificially inflate the purchase price and include an equivalent 'seller's concession' for the purpose of deceiving the mortgage lender?


Opinions:

Majority - Per Curiam

Yes. An attorney's participation in a real estate transaction structured to perpetrate a fraud on a third party, such as a mortgage lender, violates the Rules of Professional Conduct. The court affirmed that such conduct violates rules against assisting a client in fraudulent acts (RPC 1.2(d)), making false statements of material fact to a third person (RPC 4.1(a)), and engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation (RPC 8.4(c)). The court clarified that its holding is limited to transactions involving fictional and deceptive price increases. The opinion does not prohibit legitimate, disclosed seller's concessions where the seller agrees to provide the buyer with a credit for actual, legal costs related to the sale, such as closing costs, which the buyer would otherwise have to pay.



Analysis:

This decision reinforces an attorney's duty of candor to third parties, clarifying that this duty can supersede the objective of assisting a client in a transaction. It draws a critical ethical line for real estate practitioners regarding the use of seller's concessions, distinguishing between legitimate financial arrangements and fraudulent schemes designed to manipulate lending decisions. The ruling obligates attorneys to scrutinize the substance of a transaction for potential fraud, rather than merely formalizing the client's wishes. This precedent serves as a clear warning that lawyers can be held ethically responsible for facilitating mortgage fraud, even if they are just amending a contract at the parties' request.

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