Lenders are sometimes asked to sign a conflict waiver. In this article, we will discuss what constitutes a conflict, why a waiver is important, and what is required for an informed waiver. Underlying any discussion of a conflict waiver is the ethical rule that a lawyer is a fiduciary and owes each and every client a duty of utmost loyalty. Sometimes when a lawyer is asked to represent someone, an actual or potential conflict of interest with an existing or former client can arise.
What is a conflict?
As stated in the Massachusetts Rules of Professional Conduct, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.”
What is a conflict waiver?
A conflict waiver is a written acknowledgment that a client has given informed consent for a lawyer to handle a legal matter despite the possibility of a conflict of interest. A conflict of interest can be waived if:
- the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
- the representation is not prohibited by law;
- the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
- each affected client gives informed consent, confirmed in writing.
Non-Waivable Conflicts
Some conflicts cannot be waived. If the conflict prevents the lawyer from diligently representing one or both clients (for example, where the lawyer is aware of confidential/privileged information of one client and such knowledge is used to benefit a different client to the detriment of the holder of the rights to confidentiality), or if the representation is prohibited by law, or if the clients are adverse parties in the same proceeding, then the conflict is not waivable. In these situations, the representation is prohibited regardless of whether the two clients sign a waiver. One obvious example of this would be a lawyer who documented a loan for a lender and who later attempts to represent the borrower in regard to that very same loan. A shorthand way of thinking about this concept is that a lawyer is prohibited from “changing sides” in a matter, whether it is a transaction or litigation.
Waivable Conflicts
Assuming that an absolute prohibition is not present, a conflict of interest can be waived only if “each affected client gives informed consent, confirmed in writing.” What constitutes “informed consent?” Informed consent requires full and fair disclosure of all pertinent facts regarding the proposed representation and the nature of the potential conflict. Ideally, the lender has dedicated officers or a legal department which are able to understand the conflict and approve or deny the requested waiver in a knowing and informed way. A client can also ask an independent attorney to review any requested conflict waiver.
An example of a conflict that may be waived is where a lawyer represents a lender in some transactions but represents a borrower in an unrelated loan with the lender. In this scenario, the lawyer cannot undertake the representation without the informed consent of both the lender and the borrower. A similar waivable conflict would exist where the loan for the original lender has overlapping guaranties of a loan to a different entity on behalf of another lender.
Sometimes two or more clients will ask a lawyer to represent them simultaneously. This happens in a number of situations. For example, property owners who are fighting a developer may want to engage one lawyer to represent all of them in order to minimize the legal fees. If their interests are perfectly aligned and there do not appear to be any possible claims between the prospective clients, a simultaneous representation of them may be appropriate and advisable. That situation would require all clients to sign a conflict waiver, even though a conflict of interest is not anticipated.
Even where the clients’ interests are not directly adverse, a conflict of interest exists if there is a significant risk that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client would be materially limited by the lawyer’s loyalties to the other client. For example, a lawyer who is asked to represent several creditors against the same defaulted obligor is very likely to be materially limited in his or her ability to recommend or advocate all possible collection efforts that each might take because of the lawyer’s duty of loyalty to the others.
Even if a conflict is waivable and a conflict waiver is signed by all clients, if circumstances change and the situation devolves into a more adversarial posture, the lawyer may be barred from further representing either client in litigation or other proceedings. For example, if a lawyer has represented two different lenders with loans having overlapping guarantors, upon the occurrence of a default, the lawyer may be barred from pursuing remedies on behalf of either lender. If there is a “race to the courthouse” to obtain real estate attachments or other prejudgment relief against the common guarantors, on whose behalf would the lawyer proceed and, if the lawyer did represent just one of the lenders, did the lawyer have information from the other lender that might benefit the recovery efforts? Could the lawyer advise one lender of the default on the other lender’s loans without breaching confidentiality? The answer is that a lawyer must advise both parties to secure other counsel under such circumstances.
The conflict rules also apply to a lawyer’s former client relationships. “A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.”
There are numerous other scenarios in which a conflict waiver may be requested. Every request for a conflict waiver must be analyzed in the particular context involved. A client is under no obligation to agree to a conflict waiver simply because a lawyer has asked and, in many instances, it may be more beneficial for a client not to assent to the proposed new representation. If you are presented with a request for a conflict waiver by another law firm, we are available to assist in analyzing and responding as appropriate.
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.
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