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Ethical concerns for attorneys involved in debt settlement

By Douglas A. Crowder, Esq.

Copyright © 2007. All Rights Reserved

(Summary of a Presentation delivered to the United States Organization of Bankruptcy Alternatives on November 7, 2007)

    1. Scope of Presentation
      • Touch on some of the more important rules that attorneys involved in debt settlement must comply with.
      • No intention to cover all the rules
      • Not a substitute for doing one’s own state specific research.
    1. What is “debt settlement”?
      • FTC Definition: holding a debtor’s money for payment to the debtor’s creditors, or acting as an intermediary between a debtor and his creditors. [http://www.ftc.gov/os/caselist/0423140/041115tro0423140.pdf]
      • State Definitions: (examples)
        • Iowa: The planning and management of the financial affairs of a debtor and the receiving from the debtor money for the purpose of distributing the same to the debtor’s creditors. [Iowa Code Sec. 533A.1]
        • Kansas: Receiving funds from a debtor for the purpose of distributing among creditors, or negotiating or offering to negotiate to defer or reduce a consumer’s debts. [Kansas Statutes Sec. 50-1117(d)]
    1. What is the “attorney exemption?”
      • State Statutes: (examples)
        • Iowa: “The following persons, including employees of such persons, shall not be required to be licensed when engaged in the regular course of their respective businesses and professions: a. Attorneys at law.” [Iowa Code Sec. 533A.2]
        • Kansas: “Any person licensed to practice law in this state acting within the course and scope of such person’s practice as an attorney shall be exempt from the provisions of this act. [Kansas Statutes Sec. 50-1116(b)]
      • What does regular course or scope of law practice mean? No definition or case law found. Author’s opinion: it is safer for a law firm to offer other services as well as debt settlement.
    1. Why are attorneys exempt?
      • Attorneys are regulated by bar associations and by statutes.
      • Debt settlement, by its strict definition, covers almost every aspect of law — Personal injury or malpractice defense, business litigation, real estate disputes, criminal defense, family law, bankruptcy.
    1. No attorney exemption in state law:
      • North Carolina. [North Carolina General Statutes, Sec. 14-426].
      • b. Wisconsin. [Wisconsin Statutes Sec. 218.02. But see JK Harris Financial Recovery Systems, LLC v. Department of Financial Institutions, 2006 WI App 107, 293 Wis. 2d 753, 718 N.W.2d 739]
    1. How to use the “attorney exemption.”
      • Become an attorney.
      • Can’t simply hire an attorney to put his or her name on the letterhead.
      • There can be types of arrangements between attorneys and non-attorneys that are legal.
    1. Sources of Rules Attorneys must comply with.
      • Ethical Codes
        • ABA Model Rules of Professional Conduct. [http://www.abanet.org/cpr/mrpc/model_rules.html] Has been adopted by all states except for California, NY and Maine.
        • California Code of Professional Responsibility. [http://www.calbar.ca.gov]
        • New York Lawyers Code of Professional Responsibility. [http://www.law.cornell.edu/ethics/ny/code/NY_CODE.HTM]
      • Statutes
      • Case Law (court decisions)
      • Miscellaneous Bar Association rules and customs.
    1. Formation of the law firm
      • Name
        • Under California and ABA rules, can use a trade name or fictitious name, so long as it is not misleading. [ABA Rule 7.5] [California Rule 1-400(A)(1)]
        • In New York, cannot use a trade name or firm name including name of an attorney not with, or retired from the firm [NY LCPR, DR 2-102(B)]
      • Ownership. Can only be owned by an attorney.
        • No partnership with non-attorney [California RPC Rule 1-310] [ABA Rule 5.4(b)] [NY Rule DR 3-103]
      • Arrangement with non-attorneys.
        • No control by non-attorneys [ABA Rule 5.4(d)]
        • No fee sharing [ABA Rule 5.4(a)] [CA Rule 1-320] [New York Rule DR3-102]
        • Profit sharing allowed. [ABA Rule 5.4(a)(3)]
      • Where take clients?
        • Attorney can only practice in state where attorney is licensed, or where debt settlement is not deemed the practice of law. [ABA Rule 5.5] [California Rule 1-300(B)]
      • An agreement cannot limit an attorney’s right to practice. [ABA Rule 5.6] [California Rule 1-500] [NY Rule DR 2-106]
    1. Client Acquisition
      • Advertising
        • Must not be misleading [ABA Rule 7.1(a)] [California Rule 1-400(4)(d)]
        • Must keep a copy of all advertising for two years. [California Rule 1-400(f)]
      • No “solicitation” (direct contact between attorney and potential client in person, by phone, unless the person is a former client). [ABA Rule 7.3] [NY DR 2-103A] [California Rule 1-400(C)]
      • Cannot pay someone for sending clients, or pay a referral fee. [ABA Rule 7.2-(b)] [California Rule 1-320] [NY DR 2-103A]
      • Advertising must include name and address of at least one lawyer responsible for the advertising and its content. [ABA Rule 7.2(c)]
    1. Client Agreement.
      • Must be in writing. [California Business & Professions Code §6148]
      • Fees must be reasonable [ABA Rule 1.5] [California Rule 4-200] [NY Rule DR 2-106]
      • Cannot limit lawyer’s liability for malpractice. [California Rule 3-400] [NY Rule DR 6-102]
    1. Handling the Client’s case.
      • Must keep client informed of case status, comply with reasonable requests for information, and explain matters so that client can make informed decisions. [ABA Rule 1.4]
      • Must communicate any written settlement offer. [California Rule 3-510]
      • Must provide competent representation. [ABA Rule 1.1][California Rule 3-110]
        • Competence includes the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation [ABA Rule 1.1], and also diligence and the mental, emotional, and physical ability reasonably necessary for the performance of such service. [California Rule 3-110]
        • What is required for competent representation in debt settlement? In the author’s opinion, this includes:
          • Enough knowledge to be able to advise a client concerning:
            • The alternatives, including doing nothing, bankruptcy, debt settlement and debt management.
            • The Fair Debt Collection Practices Act.
            • The procedure of collection litigation, including how creditors can collect upon judgments, and
          • The ability and willingness to negotiate debts.
      • Supervision of Non-Attorney Staff.
        • Managing and supervising attorneys must ensure that the conduct of non-attorneys working for the firm is is compatible with the professional obligations of the lawyer, and the lawyer is responsible for the conduct of non-attorneys under his supervision. [ABA Rule 5.3]
        • There must be sufficient supervision so that non-attorney staff are not engaging in unauthorized practice of law. [See appendix E: Avoiding Unauthorized Practice Of Law: How Much Attorney Supervision Of Paralegals Is Required?]
    1. Holding Client funds. There are complicated rules. Ensure that you comply with the rules of whatever state you take clients from. [ABA Rule 1-15] [California Rule 4-100]
    1. Dealing with creditors.
      • Must be truthful. [ABA Rule 4.1] [NY Rule DR 7-102] (Amazingly, there is no similar provision in the California rules)
      • Caution when dealing with a creditor represented by an attorney. [California Rule 2-100]
      • Caution on secret recording phone conversations. The ABA and the majority of states hold that this is unethical conduct. [See Opinion # 168 of the Maine Bar Ethics Commission, 1999, for a discussion of which states have adopted this rule]
  1. Suggestions
    • Err on the side of caution. If an activity is not allowed in one state, don’t do it in other states.
    • Get employees to sign a pledge.
    • Have attorneys and other staff go through checklists to show the supervision they are doing.