Opinion No. 06-04

November 22, 2006

Topic: Judge as shareholder of a corporation which purchases real estate at foreclosure sales.

Digest: A judge may be a shareholder of a corporation organized for the purpose of purchasing real estate at foreclosure sales so long as (1) the judge does not assume an active role in management or serve as an officer, director, or employee of the corporation; (2) the judge’s business involvement does not adversely reflect upon the judge’s impartiality, interfere with the performance of judicial duties, or exploit the judicial office; and (3) corporate activities do not involve the judge in frequent transactions with individuals likely to come before the judge.

References: Illinois Supreme Court Rule 65B and C; Ohio State Bar Association v. Reid, 708 N.E.2d 193 (Ohio 1998); Illinois Judicial Ethics Committee (IJEC) Opinion No. 97-13; and Kansas Judicial Ethics Advisory Opinion JE-135 (2005).

FACTS

A judge assigned to juvenile court has incorporated a business for the purpose of purchasing, rehabilitating, and reselling mortgage foreclosure properties. The judge, judge’s spouse, and a niece of the judge, who is a lawyer, are the shareholders of the corporation. The judge does not serve as an officer, director, or employee of the corporation and plays no role in the management of the business. The judge’s niece manages the day-to-day affairs of the business and handles all corporate legal matters. The corporation purchases property in the circuit in which the judge sits and in neighboring counties.

QUESTION

May the judge own stock in a corporation organized for the purpose of purchasing, rehabilitating, and reselling mortgage foreclosure properties?

OPINION

Illinois Supreme Court Rule 65C severely limits a judge’s financial endeavors. Rule 65C(1) directs that a judge must avoid financial and business dealings that (1) tend to reflect adversely on judicial impartiality; (2) interfere with the proper performance of judicial duties; (3) exploit the judicial position; or (4) involve the judge in frequent transactions with lawyers and others likely to come before the court on which the judge serves. Specifically addressing investment opportunities, Rule 65C(2) permits a judge to hold and manage real estate and other investments, but prohibits a judge from assuming an active role in the management of a business, or serving as an officer, director, or employee of a business.

Applying the limitations set forth in Rule 65C(1) and (2) to the facts presented, it is clear that the judge does not serve as an officer, director, or employee, or otherwise actively engage in the management of the business. Likewise, there is no indication that the judge’s passive investment interferes with the judge’s daily judicial duties or adversely reflects upon the judge’s impartiality.

The primary issues raised are whether the judge’s corporate involvement (1) exploits the judicial position or (2) involves the judge in frequent transactions with persons likely to appear before the judge.

The fact that the judge’s colleagues preside over foreclosure proceedings involving property later purchased by the judge’s corporation does not require the conclusion that the judge is, or appears to be, exploiting the judicial office for personal gain. See Kansas Judicial Ethics Advisory Opinion JE-135 (2005) (magistrate may bid on property at foreclosure sale where magistrate not involved with the foreclosure action). Indeed, at least one court has held that a judge may purchase property that was previously the subject of litigation before the judge. See Ohio State Bar Association v. Reid, 708 N.E.2d 193 (Ohio 1998) (no rule prohibits judges from acquiring an interest in property formerly involved in suits before them.).

However, if the judge presides over mortgage foreclosure actions and the corporation continues to purchase foreclosure properties within the judge’s jurisdiction, it is difficult to avoid the perception that the judge is exploiting the judicial office. This is true even if the judge only occasionally or infrequently hears foreclosure matters. In presiding over foreclosure actions a judge necessarily decides factual and legal issues that determine the availability of properties for possible future purchase by the corporation. As a result, the public could reasonably conclude that a judge with both a public judicial interest and private business interest in foreclosed properties might review cases with one eye toward judicial responsibilities and one eye towards identifying properties that could enhance the corporation’s portfolio. See Rule 65C(5) (information acquired in the judicial capacity should not be used in personal financial dealings). The danger of a real or apparent exploitation of the judicial office is eliminated if the corporation discontinues purchasing property in the judge’s circuit during the time a judge hears foreclosure cases.

Whether the judge’s corporate involvement results in frequent transactions with individuals likely to appear before the judge is difficult to assess in the absence of specific information regarding the nature and extent of the corporation’s real estate holdings. There is a possibility that the corporation will deal with local attorneys, mortgage lenders, and other business people who appear before the judge. But the risk of "frequent" contact is reduced by the nature of the judge’s current judicial assignment. It is further reduced by the fact that only one attorney, the judge’s niece, provides legal services to the corporation and the judge is disqualified from hearing his niece’s cases even in the absence of their business relationship. See Rule 63C(1)(e). In this context is it also important to note that, "neither occasional contact on behalf of the corporation with persons who are likely to come before the judge, nor frequent contact with persons who are unlikely to come before the judge, are prohibited." IJEC Opinion No. 97-13.

CONCLUSION

Under the facts presented, and subject to the judge’s continuing obligation to evaluate the applicability of the business restrictions found in Rule 65C to the developing nature of the corporation’s activities, the Committee believes the judge may hold stock in the corporation. However, presiding over foreclosure cases, even on an occasional or infrequent basis, would result in the apparent exploitation of judicial office if the corporation continues to purchase foreclosure properties in the judge’s jurisdiction.