What is the practice of law? Is it like pornography: You know it when you see it?
The answer is important in the bankruptcy arena where the use of nonlawyers is critical in keeping down the cost of legal representation so dead broke consumers can afford to go bankrupt.
The Seventh Circuit gave us a definition in an opinion on July 23. The opinion has a cautionary aspect: If review by a lawyer is brief and perfunctory, a finder of fact might decide that a nonlawyer was practicing law without a license.
The Mortgage Assistance Firms
The appeal in the Seventh Circuit did not involve bankruptcy. Rather, it dealt with a business portraying itself as a nationwide law firm providing “for-profit mortgage-assistance services.” According to the opinion by Circuit Judge Diane P. Wood, the business was designed to obtain mortgage modifications to stave off home foreclosures.
The appeal focused on the ability of the Consumer Financial Protection Bureau to regulate the business and sanction it for violations. The statute prohibits the CFPB from exercising any supervisory or enforcement authority “with respect to an activity engaged in by an attorney as part of the practice of law under the laws of the State in which the attorney is licensed to practice law.”
The regulatory action in district court in Wisconsin did not end well for the defendants. After finding that the business was not practicing law, the district court ordered restitution of $21.7 million and permanently barred three of the principals from providing “debt relief services.” The injunction was a stinging defeat because the three individuals were bankruptcy lawyers by trade.
The Structure of the Business
For our purposes, the primary question on appeal was whether the business was practicing law and was therefore immune from supervision by the CFPB. To grasp why Judge Wood decided there was no practice of law taking place, it’s important to understand how the business functioned.
The business had four or five lawyers at headquarters and associated with local attorneys in the states where they offered services. Most of the work was performed by 30 to 40 “intake specialists” operating out of a call center and reading off a script. If a caller wanted mortgage relief, the intake specialist plugged in one of the inhouse lawyers, also working off a script.
If the prospective customer gave the right answer to several questions not calling for legal advice, the lawyer sent the call back to the intake specialist who would persuade the customer to sign a retainer agreement.
Next, the nonlawyers at headquarters interviewed the customer, obtained relevant information and prepared a mortgage modification agreement. An attorney at headquarters then reviewed the application and sent it to a local attorney for further review.
Judge Wood said that the review by the local attorneys was “perfunctory,” consuming five or 10 minutes. Next, the application went to the mortgage loan servicer.
The Definition of ‘Practicing Law’
Before applying the fact to the law, Judge Wood was required to define the “practice of law.” If the business was a true nationwide law firm practicing law, the CFPB had no right to supervise or sanction.
In bankruptcy, of course, lawyers often practice across state lines by participating in cases in states where they are not licensed. Judge Wood provided a useful summary of legitimate multistate practice “under the legal-practice rules of every state.”
In a legitimate national law firm, Judge Wood said that lawyers “licensed in and operating out of one state . . . are entitled to advise clients in other states in which they are not licensed, so long as they affiliate themselves with local counsel.”
Next, Judge Wood needed a definition of “practicing law.”
The district court analyzed the practice-of-law definitions in the 39 states where the defendants serviced clients. Guided by the American Bar Association’s Model Rule for Professional Conduct 5.5, the district court decided that someone is practicing law when the attorney’s conduct involves “[t]he application of legal principles and judgment to a particular set of facts.” Neither side objected to the definition.
Law Wasn’t Being Practiced
The business could have been practicing law, but the actual conduct of the business fell sort.
Judge Wood quoted the district court as having found as a fact that “‘local counsel’s involvement consisted primarily, and in most cases exclusively, of pro forma document review’ and that ‘the role of the local attorney was by design almost always perfunctory, rather than substantive.’ As a result, the [district] court concluded that the firms’ local attorneys did not apply ‘legal principles and judgment to a particular set of facts’ and so were not engaged in the ‘legitimate practice of law.’” [Emphasis in original.]
Judge Wood saw no clear error in the fact finding.
What about the inhouse lawyers? Were they practicing law? If they were practicing law, the business was beyond the purview of the CFPB.
Judge Wood summarized the district court as having found that that “involvement [of inhouse counsel] with any given customer was limited to two things: (1) performing a brief, redundant review of financial documents (just as the local attorneys were doing), and (2) reading through an enrollment script with ‘prepared consumer statements about the program and fees’ when a customer first signed up.”
“Under the common definition of practice of law that the court employed in this case,” Judge Wood said that “these activities do not amount to legal practice.”
Although Judge Wood found that the business was subject to CFPB supervision and regulation, she remanded the case for a redetermination and limitation of the sanctions. She held that restitution should have been based on net profits, not net income. She vacated the award based on recklessness and directed the district court to apply penalties based on strict liability.
Judge Wood reduced the sanctions because the business had obtained an opinion of counsel saying that it was practicing law and was not subject to regulation by the CFPB.
Regarding the injunction prohibiting the individuals from offering debt-relief services, Judge Wood said their actions were not reckless and related to mortgage-relief, not the broader category of debt relief. Further, she said, the business was “not a complete scam.” She therefore told the district judge that the “injunction needs some tailoring.”
Observations
Prof. Nancy Rapoport told ABI that “the definition works pretty well, because any time someone takes legal concepts and uses them to analyze a client’s issues, it is the practice of law, in my book.” She went on to say, “it cuts through all of the minor variations and makes the basic rule clear, though the application of that rule in all situations is still tricky.”
Prof. Rapoport said there should not be “one rule for Big Law and another for consumer firms.”
Prof. Rapoport is the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law. She is an expert on ethics and is often appointed as fee examiner in major chapter 11 reorganizations.
What is the practice of law? Is it like pornography: You know it when you see it?
The answer is important in the bankruptcy arena where the use of nonlawyers is critical in keeping down the cost of legal representation so dead broke consumers can afford to go bankrupt.
The Seventh Circuit gave us a definition in an opinion on July 23. The opinion has a cautionary aspect: If review by a lawyer is brief and perfunctory, a finder of fact might decide that a nonlawyer was practicing law without a license.
The Mortgage Assistance Firms
The appeal in the Seventh Circuit did not involve bankruptcy. Rather, it dealt with a business portraying itself as a nationwide law firm providing “for-profit mortgage-assistance services.” According to the opinion by Circuit Judge Diane P. Wood, the business was designed to obtain mortgage modifications to stave off home foreclosures.