- Kentucky Supreme Court Permits Limited-Representation Agreements by Debt Settlement Companies
- June 2, 2016 | Author: James T. Hart
- Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cincinnati Office
When negotiating resolutions for debtors, most creditors’ attorneys have dealt with debt settlement companies at some point. The number of debt "adjusting," "relief" or "assistance" companies have proliferated in recent years. Many companies have expanded their services to include not just negotiation, but also active assistance in the legal process.
While debt settlement companies use a variety of models, one of the more popular is the "attorney model," in which the company provides the debtor an attorney as part of its services. The company advises the debtor that this attorney is licensed in the state in which their case is pending and will help with legal pleadings and arguments to settle the debt.
Attorney models have varying degrees of attorney involvement. Attorneys may or may not actually appear formally in the case. Some have no contact with the debtor, have no input in the case and are not licensed in the state where the case is pending. Even more concerning, the "attorney" may not be an attorney at all. Some merely provide boilerplate pleadings and general advice, which can be questionable at best - if not an unauthorized practice of law. This type of attorney model was used by World Law Group, which has since ceased operations due to multiple state and federal injunctions.1
On the other hand, there are attorney models that do involve properly licensed attorneys who assist the debtor in preparing pleadings and negotiating the settlement without actually appearing in the case2. This type of model was at issue in Persels & Associates, LLC, et al. v. Capital One Bank (USA), NA, et al., Docket No. 2014-SC-00013-DG, 2016 Ky. LEXIS 4 (Ky. February 18, 2016), wherein the Kentucky Supreme Court allowed debt settlement companies to use limited-representation agreements in the Commonwealth under certain circumstances.
Limited representation: attorneys who don't show up
Persels & Associates, LLC (“Persels”) is a fairly well-known debt settlement company that has represented individuals in collection cases throughout Kentucky.
In 2011, two routine collection actions were filed by creditors in the Daviess Circuit Court in Owensboro, Kentucky3. The trial judge became concerned with Persels' involvement on behalf of the defendants, particularly that a Persels attorney was preparing but not actually signing the pleadings nor appearing personally in the case.
After a hearing, the trial court concluded that the conduct of the attorneys hired by Persels violated Rule 11 of the Kentucky Rules of Civil Procedure (“CR”)4. Persels and the attorneys were imposed a nominal fine of $1, which was probated on the condition that they no longer violate CR 11. Persels appealed to the Kentucky Court of Appeals, which affirmed the trial court's findings that the plain meaning of CR 11 requires an attorney to sign the pleadings that he or she prepares. Upon application by Persels and its attorneys, the Supreme Court granted discretionary review.
Why the Kentucky Supreme Court allows limited representation
The Supreme Court conducted a somewhat lengthy analysis of:
- The nature and character of limited-representation agreements
- Their applicability and use within the context of the Rules of Professional Conduct
- Kentucky Bar Association and American Bar Association opinions relating to such agreements
The court even expanded its analysis beyond collection matters, commenting that limited-representation agreements also can be of use in domestic relations cases where there is a substantial amount of pro se litigants.
As for CR 11, the Supreme Court stated that it did not apply in this case:
Contrary to the Court of Appeals' determination, however, CR 11 does not require that the pleadings be signed by the drafter. CR 11 only requires that all pleadings, motions, and other papers be signed by at least one attorney of record. Pro se litigants are also required to sign documents presented to the court. Attorneys Gillispie and Bradley [the Persels attorneys] had not entered an appearance in this case and were, therefore, not counsel of record. Here, the pro se litigants personally appeared before the trial court in support of their own defense.
Id. at *7 - 8.
Essentially, as long as the attorney does not formally appear in the case, he or she can still prepare and provide pleadings to a pro se litigant and avoid CR 11 sanctions. As the actual signer of the pleadings, only the pro se litigant is subject to the rule.
The court did acknowledge that limited representation presents some concerns and that these agreements "may be abused to the detriment of the litigants and the court." Id. at *10.5 Particularly, the court referenced ghostwriting and unbundled legal services - which many creditors and creditors' attorneys regularly confront with debt settlement companies. The court did not take a position on these concerns, but simply acknowledged them.
In any event, the court was clear that Kentucky will "authorize agreements that limit the scope of legal assistance or that limit representation to discrete legal tasks, so long as they are reasonable under the circumstances and the client gives informed consent." Id. at *11. Of course, the "reasonable under the circumstances" language is key, and as any lawyer knows, "reasonableness" is highly subjective, fact intensive and unique to each case.
Kentucky's rules for limited-representation agreements
The court did give some parameters for limited-representation agreements, specifically:
- The agreement must be in writing and include the informed consent of the client/debtor in accordance with Kentucky civil rules and rules of professional conduct.
- While the attorney drafting the initial pleadings does not have to sign them, documents should indicate that they were "prepared by or with the assistance of counsel."
- If there is more than one attorney of record, at least one must sign the document submitted to the court in accordance with CR 11. If the litigant is pro se, then only the litigant must sign the document.
- "Active assistance" by the drafting attorney in a limited-representation situation must be disclosed to the trial court and any opposing parties.6
- The drafting attorney must still "adequately investigate the facts to ensure the pleadings and other documents drafted in furtherance of litigation are tendered in good faith." Id. at *14.
- The attorney cannot "deceptively engage in a more complete role" than what is set forth in the limited-representation agreement and provided in notice to the court and opposing party.7 Id.
- Proof of indigence is not required.8
The Supreme Court’s decision in this case was eagerly anticipated by creditors' attorneys in Kentucky. Dealing with debt settlement companies can be a source of frustration for creditors and their counsel, especially when ghostwritten, boilerplate pleadings are used to unnecessarily delay cases and cause further expense.
What is clear from Persels is that the court's consideration of limited-representation agreements was broader than the debt collection realm. Of course, it seems reasonable that the court should preserve any and all types of legal service arrangements that can benefit both the public and attorneys seeking to provide services. Certainly, there are situations where limited representation can be useful to someone of limited means who needs the help of an attorney but not necessarily a "traditional" attorney/client relationship. As the Supreme Court noted, lawyers are encouraged to take on cases that serve the less fortunate and the legal profession as a whole so that the legal process is open to everyone no matter their financial means.
However, as the court acknowledged - and as we see regularly in this industry - abuse of limited-representation agreements is possible and regulation or oversight is likely necessary. The all-too-common reality is that many debt settlement companies circumvent the "attorney" altogether, using it only as an advertising ploy, with non-lawyers providing pleadings to unsuspecting pro se litigants. They then require the litigant to sign and file these pleadings without any understanding of the contents, including substantive defenses or claims. This unfortunately leaves the debtor with the difficult task of defending or articulating the work of the drafting attorney, which they probably are not able to do.
Frankly, allowing an attorney to practice the case from afar, without the threat of CR 11, will likely lead to more abuse. The Persels decision may embolden attorneys (or non-attorneys) who believe they can ghostwrite pleadings and avoid the reach of the tribunal.
One of the main purposes of CR 11 is to assist parties and trial courts in combatting sham pleadings designed to delay cases.9 The Supreme Court's decision in Persels not only shields a drafting attorney from CR 11, but places the burden of the rule on the pro se litigant, who probably has no earthly idea what the rule is, much less what they are required to do to avoid sanctions.
The solution is that most pro se litigants should avoid limited-representation arrangements with debt settlement companies. Unfortunately, many debtors are drawn to the promise of an attorney for a fraction of the cost.
Living out the court's decision
To be clear, the sky is not falling. Far from it. Persels does give a creditor, its attorney and the court ammunition in the fight against the nefarious attorney model. However, it's unclear if the creditor or its counsel will be able to bring such issues to light before a trial court.10
The attorney providing services must adequately investigate the facts and ensure that the pleadings are tendered in good faith. This would seemingly provide a catch-all for the trial court to sue to address a situation where a drafting attorney was simply preparing pleadings without respect to the actual claims and defenses presented in the case.
The problem, however, is that pro se litigants often do not have enough information or legal aptitude to know if they are receiving adequate service. Plus, it’s obvious that Persels provides the drafting attorney with at least some insulation from the powers of the trial court.
Another issue that the court did not resolve is how limited-representation agreements can be permitted under the attorney model when juxtaposed with the Rules of Professional Conduct. Debt settlement companies advertise and solicit services in a manner generally prohibited for attorneys. The companies then refer debtors to a drafting attorney, who is hired implicitly as an inclusive service. Prohibitions on attorney solicitation and partnering with a non-lawyer are palpable concerns. Any attorney drafting pleadings under this model should be aware of and give serious thought to such ethical entanglements.
Finally, it must be noted that the Persels case considered a somewhat atypical attorney model. Unlike more questionable debt settlement companies, Persels actually does have a licensed Kentucky attorney that does appear to have contact with pro se debtors. Further, Persels does indeed indicate on their pleadings that the documents were prepared by or with the assistance of a Kentucky licensed attorney.
Even so, the court remanded the case back to the trial court to conduct a hearing to review the "reasonableness" of Persels' limited-representation agreement.
Now that the Supreme Court has spoken, there is at least a roadmap for all parties when dealing with debt settlement companies and limited-representation agreements. We can only assume that because the Supreme Court has endorsed these agreements, creditors who file suits in Kentucky will see more of these attorney models. Only time will tell if the services provided by drafting attorneys will hold up to the standards set by the Kentucky Supreme Court.
1Authorities for the states of Illinois, North Carolina, Oregon, Connecticut, Colorado and Texas successfully prohibited World Law Group and its principals and subsidiaries from operating any further in their respective states. The Consumer Financial Protection Bureau also has taken action against World Law and obtained a preliminary injunction. See CFPB v. Orion Processing, LLC, et al., U.S. District Court for the Southern District of Florida, Docket/Case No. 15-23070-Civ-COOKE/TORRES.
2There are also some attorney models that do employ attorneys who do formally enter their appearance in the case, but those were not at issue in Persels. Nonetheless, such arrangements still raise valid questions concerning potential ethical violations such as the partnership and fee-sharing with a non-lawyer, aiding a non-lawyer in the unauthorized practice of law and diligence in handling a legal matter with adequate preparation. See e.g. Cincinnati Bar Assn. v. Mullaney, (2008) 119 Ohio St.3d 412, 894 N.E.2d 1210; Columbus Bar Assn. v. Flanagan (1997), 77 Ohio St.3d 381, 674 N.E.2d 681
3There were actually two cases, one involving Capital One Bank (USA), NA as a creditor and the other involving Citibank (South Dakota), NA. They were subsequently consolidated by the Daviess Circuit Court as they each involved limited-representation agreements engaging Persels to represent the particular debtor defendants.
4Civil Rule 11 of the Kentucky Rules of Civil Procedure is substantially similar to the federal rule.
5See footnote 3 of the court’s opinion which references two materials discussing abuses of these sorts of agreements: Michael W. Loudenslager, Giving up the Ghost: A Proposal for Dealing With Attorney “Ghostwriting” of Pro Se Litigants' Court Documents Through Explicit Rules Requiring Disclosure And Allowing Limited Appearances For Such Attorneys, 92 Marq. L. Rev. 103 (2008) and Salman Bhojani, Attorney Ghostwriting for Pro Se Litigants-Practical and Bright-Line Solution to Resolve the Split of Authority Among Federal Circuits and State Bar Associations, 65 SMU L. Rev. 653, 684 (2012).
6The Supreme Court defined “active assistance” as “drafting documents and furtherance of litigation that extend beyond initial pleadings.” Id. at *13. The court went on to provide that this notice must include the name, address and telephone number of the attorney and the nature of the limited-representation agreement at issue. As long as this notice was provided, the drafting attorney need not appear formally in the case, nor be compelled by the court to appear in actual court proceedings, unless the court or surrounding circumstances were to make it necessary.
7The court specifically referenced Rule 8.4 of the Kentucky Rules of Professional Conduct, which defines attorney misconduct.
8The court clarified some earlier remarks in its opinion and provided that a limited-representation agreement does not require proof of indigence by the pro se litigant. On one hand, the court stated that such agreements are generally necessary where indigence was an issue, but stopped short of requiring actual proof of indigence to substantiate the need. The court did state that the financial means of a litigant may be considered by a court when reviewing the overall reasonableness of a limited-representation agreement, but it does not determine whether or not the agreement complies with Kentucky law. In fact, deference should be provided to any litigant using limited representation.
9“The spirit and philosophy of the Civil Rules, and the whole trend of modern pleading, is to eliminate sham and reduce the controversy to actual issues.” Commonwealth v. Cardinal Hill Nursery, Inc., 343 S.W.2d 842, 845 (Ky. 1961); Clark Equipment Co. v. Bowman, 762 S.W.2d 417, 420 (Ky. App. 1988) (CR 11 “is a procedural rule designed to curb abusive conduct in the litigation process.”)
10Given that the relationship is between the pro se debtor and the drafting attorney, a creditor and its attorney may not have standing to contest the manner in which that relationship is formed or carried out. Clearly, if a pro se debtor has concerns with their representation, they may terminate the relationship and bring a complaint before the bar or even the trial court. Yet, the creditor and its attorney’s avenue for review of a limited-representation scenario is surely fraught with more complications. The consequence may be that the judiciary will need to take a more active role in flushing out these arrangements to be sure they are “reasonable” and meet the requirements of Persels.