Henderson v. Legal Helpers Debt Resolution, L.L.C. (In re Huffman)

[505 B.R. 731]

Jason Graeber, Biloxi, MS, Matthew S. Lott, Lott Law Firm, Pascagoula, MS, for Plaintiff.

Stephanie Gee Beaver, Daniel, Coker, Horton & Bell, P.A., Gulfport, MS, Richard C. Bradley, III, Daniel Coker Horton and Bell, Jackson, MS, Timothy D. Elliott, Derek M. Johnson, Rathje & Woodward, LLC, Wheaton, IL, Nathan L. Schrantz, Daniel Coker Horton & Bell, Gulfport, MS, for Defendant.

This matter came before the Court for trial on November 20 and 22, 2013 (the “Trial”) on the Complaint (the “Complaint”) (Adv. Dkt. 1) ¹ filed by Derek A. Henderson, the chapter 7 trustee (the “Trustee”), and Legal Helpers Debt Resolution, LLC and Macey, Aleman, Hyslip & Searns's Answer, Defenses, and Affirmative Defenses to Complaint (Adv. Dkt. 39) filed by Legal Helpers Debt Resolution, LLC (“Legal Helpers” or “LHDR”) in the above-referenced adversary proceeding (the “Adversary”). At Trial, the Trustee was represented by Jason Graeber and Matthew S. Lott; Legal Helpers was represented by Timothy D. Elliott, Derek M. Johnson, and Terry R. Levy. On the first day of Trial, the Plaintiff's Proposed Findings of Facts and Conclusions of Law (Adv. Dkt. 150), and the Legal Helpers Debt Resolution, LLC's Proposed Findings

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of Fact and Conclusions of Law (Adv. Dkt. 151) were submitted to the Court.

At the close of Trial, the Court left the record open for fourteen (14) days for the parties to submit into evidence the video deposition testimony of Jeffrey Aleman (“Aleman”). In anticipation of Aleman's deposition testimony, Legal Helpers objected at Trial to the admission of two (2) exhibits, marked for identification purposes as “Trustee Exhibit 1” and “Trustee Exhibit 11.” The Court reserved the evidentiary issues raised by Legal Helpers for decision in this Opinion. Also, in lieu of closing arguments, the parties agreed to file simultaneous post-trial briefs within seven (7) days after the submission of Aleman's video deposition.

The Court received the video deposition on December 9, 2013. At the request of Legal Helpers, the Court granted both parties an extension of time to file post-trial briefs. On December 19, 2013, the Trustee submitted the Plaintiff's Closing Argument (the “Trustee Brief”) (Adv. Dkt. 157), and the next day, Legal Helpers submitted Legal Helpers Debt Resolution LLC's Closing Argument (the “LHDR Brief”) (Adv. Dkt. 158). After considering the exhibits, testimony of the witnesses, and other evidence at Trial, the Court hereby makes the following findings of fact and conclusions of law.²

[505 B.R. 733]

The Court has jurisdiction over the parties to and the subject matter of this case pursuant to 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (H) and (O).³

[505 B.R. 734]

Notice of the Trial was proper under the circumstances.

The Debtor, Mary Alice Huffman (“Huffman”), is 84 years old and retired. She is college educated with degrees in nursing and housekeeping. Until 1996, she worked as a certified housekeeper at Hardy Wilson Memorial Hospital in Hazlehurst, Mississippi. After her retirement, Huffman's income consisted mostly of Social Security benefits. From time to time, she supplemented that income with wages earned at various jobs.

After her adult son became seriously ill, Huffman incurred unsecured credit card debt of $39,265.00 on five (5) credit cards. (Jt. Ex. 1).⁴ Although she was current on her credit card payments, she was struggling to make the minimum monthly payments to her creditors. On the brink of filing bankruptcy, she received in the mail an unsolicited flyer offering debt settlement services from Legal Helpers.

Thomas G. Macey (“Macey”) and Aleman are consumer bankruptcy attorneys licensed to practice law in Illinois. They are the named partners of Macey & Aleman, the largest consumer bankruptcy law firm in the country.⁵ In early 2009, Macey, Aleman, and Jason Searns (“Searns”) established Legal Helpers as a debt resolution law firm at the same address as Macey & Aleman in Chicago. They are full equity partners, or “Class A” Members, of Legal Helpers.⁶ Legal Helpers is the trade name of their Chicago law firm Macey, Aleman, Hyslip & Searns, organized as a limited liability company under the laws of Nevada. Searns is general counsel for Legal Helpers on regulatory matters and is licensed to practice law in Colorado. Jeffrey Hyslip (“Hyslip”), an Ohio-licensed attorney, is a former non-equity partner or a “Class B” Member. None of these attorneys is licensed to practice law in Mississippi or admitted to practice in Mississippi state or federal courts.

In almost every state, Legal Helpers retained at least one (1) local attorney, a “State Class B” Member, to manage its client files. In Mississippi, the “State Class B” Member during the relevant time was John Windsor (“Windsor”). Windsor was the contact attorney for Legal Helpers' Mississippi clients, but he did not consider them his own clients. He communicated by email with Hyslip, who was the conduit between Legal Helpers and Windsor, as well as all other “State Class B” Members.

Macey approached Searns about the ongoing debate in the debt settlement industry

[505 B.R. 735]

as to whether nonlawyers who provide debt settlement services engage in the unauthorized practice of law. To circumvent this issue, Macey asked Searns to establish a law firm dedicated to providing debt settlement services, the result of which was Legal Helpers. Searns created the business model for Legal Helpers' debt settlement program and drafted all of the documents used by Legal Helpers and others in the program.

Searns embraced the idea of a law firm operating within the debt settlement industry for another reason. The amendments to the U.S. Bankruptcy Code ⁷ enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), Pub.L. No. 109–8, 119 Stat. 23 (2005), “introduced ‘means testing’ to restrict debtors who can repay at least a portion of their debts from obtaining a complete discharge under Chapter 7.” Hersh v. United States ex rel. Mukasey, 553 F.3d 743, 761 (5th Cir.2008); see11 U.S.C. § 707(b)(2). Searns viewed chapter 13, which generally requires debtors to repay their creditors for three (3) to five (5) years, as a poor alternative to bankruptcy relief under chapter 7. According to Searns, Legal Helpers' mission was to provide a consumer the means for resolving debts without resorting to bankruptcy, either because that consumer was ineligible for relief under chapter 7 in the light of the new “means test” enacted by BAPCPA or because the consumer wanted to avoid the stigma of having filed a bankruptcy case.

As to the program itself, Searns remembered that his colleagues who specialized in bankruptcy law rarely filed bankruptcy petitions on behalf of their business clients but instead negotiated settlements with their creditors. Searns thought the model used for business clients would work just as well for consumer clients.

Also, most state laws regulating the business of consumer debt settlement exempt attorneys from complying with those regulations, including those that limit the amount of fees charged for such debt settlement services. But see Smith v. Legal Helpers Debt Resolution LLC, No. 11–5054, 2011 WL 5166494 (W.D.Wash. Oct. 31, 2011) (holding that exclusion for attorneys under Washington law did not apply to Legal Helpers because its primary business was debt adjustment services). The attorney exemption was considered a distinct advantage for Legal Helpers.

Finally, Searns also thought that Legal Helpers could distinguish itself from other debt relief companies by advertising itself as a law firm on the national landscape. Searns also testified, however, that Legal Helpers was not a bankruptcy law firm and did not provide legal services, despite its name.

Macey and Searns believed that the most economical means for providing debt relief services to its clients was by outsourcing those services to nonlawyers. Rather than using “in-house” paralegals and support staff, Legal Helpers decided to outsource the advertisement, sale, and servicing of its debt settlement program to other nonlawyer debt settlement companies.

In creating the business model for Legal Helpers, Searns researched whether aligning Legal Helpers' attorneys with nonlawyers to provide nationwide debt settlement

[505 B.R. 736]

services would violate any of the ethical standards that attorneys must maintain. Searns was most concerned with the American Bar Association's Model Rules of Professional Conduct (the “ABA Model Rules”), which provide guidance to lawyers and a structure for regulating the conduct of lawyers through disciplinary agencies. Searns was convinced that the program he created would not violate Rule 5.3 (Nonlawyer Assistants), Rule 5.5 (Assisting Others Engaged in Unauthorized Practice of Law), Rule 5.7 (Law–Related Services), or Rule 7.2 (Advertising) of the ABA Model Rules.

Searns retained Steven C. Krane (“Krane”), now deceased, former chairman of the American Bar Association's standing committee on ethics and professional responsibility and a partner with Proskauer Rose, to vet his proposed debt settlement business model. According to Searns, Krane approved the business model with respect to the outsourcing of debt settlement services to nonlawyers on the condition that lawyers at Legal Helpers directly supervise their work.

Searns...