A so-called nationwide law firm serving consumer bankrupts and its local partners must ensure punctilious compliance with the Bankruptcy Code and Rules to avoid sanctions such as those imposed by Bankruptcy Judge Paul M. Black of Roanoke, Va.
In his 62-page opinion on February 12, Judge Black said that the “pursuit of the next dollar of compensation was the primary consideration” in the creation and structuring of the firm while the “integrity of the bankruptcy process was a distant thought in these cases.” He said that the firm and its marketing program “preyed upon some of the most vulnerable in our society . . . while they were under great stress.”
Based on “hard sell tactics” employed by non-lawyer intake workers, the lack of supervision, transcripts of recordings of phone calls with the firm’s clients, “the focus on cash flow over professional responsibility,” and participation in a questionable program to surrender automobiles, Judge Black concluded that the firm “acted in bad faith” and failed to comply with the fee disclosure requirements in Bankruptcy Rule 2016.
Given the findings of fact he made after a four-day trial, Judge Black sanctioned the nationwide firm and its principals by revoking their right to practice in the Western District of Virginia for five years. He also imposed $300,000 in fines on the nationwide firm and its principals.
The local “partners” did not emerge unscathed. Judge Black revoked their right to practice in the district for one year as to one lawyer and 18 months as to the other. He imposed $5,000 in sanctions on both.
The firm had already repaid the fees to the two clients whose bankruptcies constituted the test cases before Judge Black.
The Nationwide Firm
Judge Black said the case presented “yet another collision between traditional methods of providing . . . legal services to consumers for bankruptcy matters and attempts by attorneys and creative online marketers to tap into that market.”
Without regurgitating Judge Black’s detailed summary of the business model, suffice it to say that the firm advertised itself as operating nationwide by attracting clients through the internet. When a potential client contacted the firm, a non-lawyer would handle the call. According to the judge, the non-lawyers would employ “hard sell” tactics designed to have the clients agree to sign up and pay fees, either immediately or in installments. The fees evidently amounted to somewhat less than $2,000 in Virginia for a chapter 7 case.
Although the intake workers were told not to give legal advice, Judge Black found several instances where they did. The judge cited cases in which the advice given by non-lawyers was incorrect or might have resulted in the denial of discharge.
Judge Black said that the “Court is deeply disturbed by the lack of effective oversight of its sales people and methods used by [the nationwide firm] to sell its product.”
Once a client signed up, the matter would be assigned to a local lawyer, referred to as a “partner.” Judge Black ultimately concluded that the local partners were functionally “regular associates” or “counsel” to the nationwide firm, thus not barring fee-sharing between the nationwide firm and the local attorneys.
The Auto Repossession Program
In the adversary proceeding and ensuing trial, the U.S. Trustee focused on arrangements the firm made with at least 219 clients nationwide who pursued bankruptcy to surrender autos they could not afford. The firm allied itself with a company that would pick up the autos and haul them to the company’s storage facility in either Indiana or two other states where the law allows possessory liens to have priority over financing liens.
The company would notify the lenders about having possession of the cars and demand payment of storage and towing fees that the lenders sometimes would not pay. After the time specified in state law, the company would sell the cars at auction if the lender did not pay the fees. In cases where the lenders did not pay the fees, the company evidently would pocket the auction proceeds, thus depriving the lenders of their collateral.
Why would the debtors sign up for the surrender program? Because the company would pay the debtors’ attorneys’ fees owing to the firm. Judge Black said that the firm received about $333,500 in fees from the program in two years before it was terminated.
Judge Black characterized the program as “a scam from the start.”
Legal Issues
The vehicle-surrender program entailed an ethical problem, because the source of the fees was not properly disclosed as required by Section 329 and Rule 2016. In addition, Judge Black found that the clients did not sign retainer agreements within five days as required by Section 528(a)(1), thus rendering the agreements void. He also said the retention agreements “contained misrepresentations and were also unclear and inaccurate.”
The opinion contains discussion of a legal issue of note. The firm argued that the suit was moot because the firm had already repaid the two clients’ fees, the services were fully performed, and the debtors had received their discharges.
Judge Black decided that the case was not constitutionally moot under the “voluntary cessation doctrine,” because the firm continues filing bankruptcies in the district “under the existing business model.”
Judge Black cited the Fourth Circuit and the Supreme Court for saying that the “voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.”
“To say that the Court cannot review their practices because in the two instances currently before the Court they paid the attorneys’ fees back to the debtors before the Court had a chance to rule on the adequacy of their disclosures would gut the ‘voluntary cessation’ rule.”