October 23, 1992
A lawyer may not accept a referral fee, calculated as a percentage of a real estate broker's sales commission, for sales generated by referring the lawyer's clients to the real estate broker, due to conflict of interest considerations.
References: MRPC 1.7(b).
PLEASE NOTE THAT THIS OPINION HAS BEEN SUPERSEDED BY ETHICS OPINION RI-339.
A lawyer in private practice has been approached by a real estate brokerage company which offers to pay the lawyer a referral fee of 20% of the broker's commission received on the sale of any properties where the sale is attributable to a referral by the lawyer. The 20% referral fee is generally based on a broker's commission of 3.5%, to be paid upon the closing of the sale.
The lawyer initially inquires whether, as a licensed lawyer but not a licensed realtor, acceptance of payment of such a referral fee would be legal. In this regard, §2512(1)(f) of the Occupations Code, MCL 339.2512(1)(f), prohibits a licensed realtor from "paying a commission or valuable consideration to a person not licensed under this article." The application of that statute to the facts related in this inquiry is a question of law which is beyond the authority of the committee to answer.
Second, the lawyer inquires whether the proposed arrangement would in any way violate ethics rules. The scenario posed is plainly fraught with danger of conflicts of interest. The lawyer clearly has a financial incentive to refer clients to the commissioning realtor, irrespective of the interests of the client. MRPC 1.7(b) states:
"(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to 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. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved."
Here, the lawyer is being asked by the realtor to take advantage of the lawyer's fiduciary and confidential relationship to the client, and to exploit the trust reposed in the lawyer by the client for the lawyer's direct gain. Of course, lawyers are generally compensated for the services rendered their clients; the compensation, however, is irrespective of final results, intended to be a reflection of the effort to advance the client's interests, and so in this sense the lawyer's compensation is indirectly the fruit of pursuing the client's best interests. In the situation posed by this inquiry, however, the lawyer's financial interest is direct and the client's interest is either secondary, indirect, or perhaps even nonexistent. The Comment to MRPC 1.7 underlines the point:
"If the probity of a lawyer's own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice. A lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed interest."
Even if the lawyer first, as required by MRPC 1.7(b)(2), preliminarily informed the client of the lawyer's arrangement with the realtor, and the client consented after consultation, the lawyer could not "reasonably believe the representation will not be adversely affected." Such abuse of the lawyer's position of trust for the lawyer's own benefit cannot be countenanced. See In re Isaacs, 147 App Div 2d 1; 541 NYS 2d 60 (1989), in which a lawyer was censured for influencing a client to designate the lawyer as executor and the lawyer's brother as alternate executor of the client's will.
Additionally, in situations in which the client seeks the lawyer's advice as to the best way to market real property in the normal scheme of things, the lawyer would be called upon to consider both legal problems and other factors. MRPC 2.1. If the lawyer concluded that a broker's services could be utilized to the client's advantage, the lawyer would be obliged to investigate the competence, integrity, reputation, and results achieved by realtors in the community before making a recommendation to the client. In this scenario, however, the lawyer's independent professional judgment would be colored by knowledge that by recommending the commissioning broker, the lawyer could obtain extra financial benefit if the client selected that broker from among all others offering similar services in the market area. In this respect, MRPC 1.7(b) carries forward the concept earlier enunciated in Canon 11 of the American Bar Association's Model Canons of Professional Ethics which stated, "[T]he lawyer should refrain from any action whereby for his personal benefit or gain he abuses or takes advantage of the confidence reposed in him by his client."
We note that MRPC 1.5(e) specifically allows a lawyer to receive a referral fee from a lawyer not in the same firm if the client is advised and does not object to the participation of the lawyers and the total fee is reasonable. This provision for acceptance of a referral fee is narrow and specifically drawn, and does not provide for a referral fee from nonlawyers for nonlaw business.
Accordingly, irrespective of the statutory legality of the broker's conduct and irrespective of client consent, a lawyer is prohibited from accepting a fee from a nonlawyer for recommending the nonlawyer's services to the client.