This сase involves an attorney who purchased his clients’ home at a foreclosure sale, notwithstanding that the attorney had been engaged to represent the clients in connection with protecting their house from foreclosure and restructuring their debt, including outstanding tax liens. The attorney also drafted a purchase and sale agreement to buy the clients’ house,
After the foreclosure purchase of his clients’ house, the attorney entered into a financial arrangement with the clients in which the clients would be allowed to live in the house for one year by making rental payments equal to the attorney’s monthly mortgage expenses. When the clients fell behind in these payments, the attorney filed a summary process action in the Housing Court to evict them. A judge of that court declined to impose a constructive trust as prayed for in the clients’ counterclaims. We conclude that the attorney acted wrongfully, with clear and deep conflicts of interest, and in breach of his fiduciary obligations to his clients. For these wrongdoings, a constructive trust should have been imposed. We reverse.
Factual background. The judge’s decision, undisputed trial evidence, and the cаse record disclose the following facts. Joseph Gonsalves and his wife, Dorothy, resided in a house in North Attleborough, which they had purchased in 1991. Joseph also owned a business, Jade Machine & Engineering; Dorothy worked as a bookkeeper and office manager there. In or about 2000, the business suffered financial reversals. Federal and Statе tax liens, which totaled more than $100,000, were filed against the Gonsalveses’ home. Michael J. Duggan was engaged by the Gonsalveses to negotiate with the government to resolve those hens.
Given their financial straits, the Gonsalveses also fell behind in mortgage payments to Plymouth Savings Bank. Duggan’s engagement encompassed representing the Gonsalveses to attempt to avoid foreclosure by the bank. At one point, Duggan advised the Gonsalveses not to make any further mortgage payments “because it would be throwing money away when we refinanced.”
The strategy that Duggan devised to avert foreclosure involved negotiations with the bank;, and the filing of bankruptcy petitions to forestall foreclosure by virtue of the automatic stay
In addition to the strategy of blocking foreclosure through bankruptcy filings, Duggan also gave legal advice to his clients vis-á-vis a potential sale of the house versus refinancing. Duggan advised the Gonsalveses that they could not sell the house because of the outstanding tax liens. However, Duggan stated that he would pursue refinancing through an individual he then knew in the mortgage industry. A potential sale or refinancing, it appears, would, theoretically at least, have drawn on any equity realizable on account of an increase in the house’s valuation.
In summary, the Gоnsalveses assumed that Duggan’s legal representation of them was proceeding on a range of fronts: to refinance their home; to settle their tax liabilities; and to stop a foreclosure. Duggan, however, did not keep his clients informed concerning what was transpiring, or the prospects, or lack of prospects, of succеss from whatever workout efforts in which he was engaged. Seeking such information, a tax specialist working for the Gonsalveses tried to contact Duggan. Duggan did not return his calls. The Gonsalveses, accordingly, were not fully apprised by their lawyer that their financial solution was bleak, that whatever efforts Duggan had undertaken had been unavailing, and that their home was at great risk.
The bleakness of the financial picture became fully apparent in the fall of 2001. The Federal and State tax liens remained outstanding; settlement negotiations of whatever measure undertaken by Duggan were not availing; the refinancing Duggan suggested had not materialized; and the foreclosure was looming on the horizon, thе bankruptcy stay having been lifted and whatever proposals that had been presented to the bank having failed.
Duggan, however, had a new “strategy.” He proposed to buy the Gonsalveses’ house himself, and presented to his clients a
As the foreclosure date beсame imminent, Duggan withdrew from the agreement to buy the house. About a week or two prior to the scheduled foreclosure sale, Duggan canceled the deal, citing as the reason therefor that he could not achieve a desirable result with the taxing authorities.
It was also just before the foreclosure auction scheduled for November 7, 2001, that Duggan informed the Gonsalveses that he intended to bid on their house. Duggan told his clients that if he were the successful foreclosure bidder, he would enter into a financial arrangement with his clients, whereby the Gonsalveses would be allowed to stay in their home for a year. The terms of this attorney-client financial transaction were that the Gonsalvеses were to pay rent sufficient to cover Duggan’s monthly mortgage expenses.
To continue the saga: Duggan was, in fact, the successful bidder at the November 7, 2001, foreclosure sale. Duggan’s bid was $210,000. (Approximately four months later, Duggan advertised the house for sale at $345,000.)
The day following the foreclosure sale, Duggan told the Gonsalveses that “it was all set.” The Gonsalveses understood that, following Duggan’s purchase, they would receive any “leftover” monies from the foreclosure sale in about a month or two.
Ultimately, Duggan commenced a summary process action in the Housing Court against the Gonsalveses for possession and rental arrearages. The Gonsalveses filed a counterclaim, alleging breaches of fiduciary duty by Duggan arising out of conflicts in Duggan’s representation and ethical violations; breaches of the implied duties of good faith and fair dealing; misrepresentation; and a violation of G. L. c. 93A. The counterclaim sought equitable relief, including imposition of a constructive trust covering the house or any profits realized by Duggan on account of his transactions relative to the property.
The Housing Court judge bifurcated the case and limited the initial issue to be tried — the principal issue presented in this appeal — solely to whether a constructive trust should be imposed. The judge concluded there was no fraud or undue influence by Duggan, nor any mistake, and that a transferortransferee relationship did not exist between the Gonsalveses and Duggan. On these bases, the judge сoncluded that a constructive trust was not legally warranted.
Analysis. An attorney is held to a high standard of fair dealing when he or she engages in a commercial transaction with a client. Pollock v. Marshall,
The Supreme Judicial Court has “set aside transactions between attorneys and clients where that lоyalty [of attorney to client] has been violated.” Pollock v. Marshall,
“It is a well settled rule in equity, applicable to all transactions between attorney and client by way of purchases, sales or gifts, that the attorney who bargains with his client in a matter of advantage to himself must show, if the trаnsaction afterwards is called in question, that it was in all respects fairly and equitably conducted; that he fully and faithfully discharged all his duties to his client, not only by refraining from any misrepresentation or concealment of any material fact, but by active diligence to see that his client was fully informed of the nature and effect of the transaction рroposed and of his own rights and interests in the subject matter involved, and by seeing to it that his client either has independent advice in the matter or else receives from the attorney such advice as the latter would have been expected to give had the transaction been one between his client and a stranger.”
Accord Graves v. Hutchinson,
Furthermore, contrary to the ethical rules that codify a lawyer’s fiduciary obligation and duty of fidelity throughout his financial transactions with his clients, Duggan did not disclose to the clients the rampant conflicts of interest surrounding his actions and did nothing to suggest that the Gonsalveses ought to consult with an independent lawyer. Thus, Duggan’s transactions with his clients were not probed by the neutral and detached eyes of independent counsel. See Israel v. Summer,
In declining to impose a construсtive trust, the Housing Court judge’s legal analysis was too restrictive and was legally erroneous. “Under Massachusetts law, a court will declare a party a constructive trustee of property for the benefit of another if he acquired the property through fraud, mistake, breach of duty, or in other circumstances indicating that he would be unjustly enriched.” Foster v. Hurley,
Duggan acted in conflict with his clients’ interests and his wrongful conduct played a major role in his acquisition of the property. “Where a fiduciary, in violation of his duty to the beneficiary, causes property to be transferred to a third person, the third person, if he had notice of the violation of duty, holds the property upon a constructive trust for the beneficiary.” Demonios v. Demoulas,
The judgments are vacated. Further proceedings are necessary to formulate a constructive trust to be imposed in favor of the Gonsalveses. To unwind the financial morass that attorney Duggan made infinitely more murky, to determine the respective amounts to which the Gonsalveses are entitled, and to order whatever actions are best undertaken to secure the constructive tmst, the case is remanded for an accounting in conformity with this opinion. The court on remand, in its discretion, may appoint a master to conduct this accounting.
So ordered.
Notes
The trial court judge found that the attorney “began to represent the [clients] in or about Octobеr 2000” and that the representation “continued until at least February 2002.”
On February 12, 2001, Duggan filed a petition in Joseph’s name under Chapter 13 of the United States Bankruptcy Code; in May, 2001, this petition was converted to a Chapter 7 liquidation proceeding. See 11 U.S.C. §§ 701 et seq., 1301 et seq. In June, 2001, Duggan also filed a Chapter 7 petition on behalf of Dorothy.
The Gonsalveses believed — and, it appears, Duggan did not advise them otherwise — that after the foreclosure sale, the liability for the tax liens would be satisfied. This may account for the Gonsalveses’ calculation that approximately $100,000 to $132,000 would revert to them following the foreclosure auction. We need not address the accuracy of these numbers and calculation. The significant point is that Duggan, their attorney, did not fully advise his clients as to the effects of his self-interested purchase at the foreclosure sale.
There was evidence that Duggan had prepared an affidavit for Dorothy to sign, requesting that the Wareham District Court release monies from the foreclosure sale, and thаt the affidavit falsely recited that Dorothy had never worked for Jade Machine & Engineering. Joseph told Duggan his wife would not sign the affidavit. According to the Gonsalveses, Duggan replied that in that case, the Gonsalveses would not get the funds. Eventually, however, Dorothy did receive funds.
The jurisdiction of the Housing Court extends over “civil actions arising . . . under the provisions of common law and of equity . . . concerned directly or indirectly with ... the possession, condition, or use of any particular housing accommodations.” G. L. c. 185C, § 3, as appearing in St. 1987, c. 755, § 3. See Worcester Heritage Soc., Inc. v. Trussell,
Subsequently, the same judge, acting on Duggan’s summary process complaint, ordered the same dismissed for his failure to bring before the court a notice to quit. At a later proceeding, the judge ruled that Duggan had satisfied his burden to prove a right of possession of the property; Duggan was also awarded damages of $6,400 for the arreаrage in rent.
On appeal, the Gonsalveses do not contest the denial of their G. L. c. 93A claim. Accordingly, that claim is deemed waived.
The ethical rule governing attorney conflicts in respect to business transactions with a client, Mass.R.Prof.C. 1.8,
“RULE 1.8 CONFLICT OF INTEREST: PROHIBITED TRANSACTIONS
“(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possеssory, security, or other pecuniary interest adverse to a client unless:
“(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
“(2) the client is given a reasonable opрortunity to seek the advice of independent counsel in the transaction; and
“(3) the client consents in writing thereto.”
The rule of professional conduct quoted above is consistent with the “old” disciplinary rule. See S.J.C. Rule 3:07, Canon 5, DR 5-104(A), as appearing in
The ethical rule governing attorney conflicts vis-á-vis a client’s interests, Mass.R.Prof.C. 1.7,
“RULE 1.7 CONFLICT OF INTEREST: GENERAL RULE
“(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to*256 another client or to a third person, or by the lawyer’s own interests, unless:
“(1) the lawyer reasonably believes the representation will not be adversely affected; and
“(2) the client consents after consultation. . . .” (Emphasis supplied.)