Playing with Fire
Illustration by Michael Morgenstern
As the recession puts a dent in legal work along with just about every other segment of the economy, many attorneys are being tempted by a business opportunity that shows no signs of slacking off: working with foreclosure consultants.
Foreclosure consultants, also known as loan modification agencies, advertise that they help struggling homeowners stave off foreclosure. They negotiate with lenders in an attempt to get new, more affordable loans for their customers.
With the real estate market in the tank and foreclosure numbers continuing to rise around the United States, these are boom times for businesses that do foreclosure consulting. And many of these companies desperately want to associate themselves with attorneys.
Some of them are looking for outside counsel. Some need in-house counsel. Others want to enter into some sort of joint business enterprise. And they all routinely offer attorneys the possibility of earning fees that reach into six figures.
NATIONWIDE CONCERN
There’s just one catch. attorneys who get involved with foreclosure consultants may be violating legal ethics rules on a number of grounds, including prohibitions against using “runners” (someone who solicits business on behalf of a lawyer), sharing fees with nonlawyers, and failing to exercise independent judgment on behalf of clients.
“This is a huge issue. This is going on all over the nation,” says Diane L. Karpman, an attorney in Beverly Hills, Calif., who represents lawyers in professional conduct matters. She is a member of the ABA Standing Committee on Professionalism.
Foreclosure consultants have a checkered reputation that often is well-deserved, say lawyer ethics regulators who have been watching the growing involvement of lawyers in their operations. Many of these companies are shady operations, charging clients significant upfront fees but providing little in return, regulators say. To burnish their image, many foreclosure consultants seek to work with attorneys, even if doing so doesn’t bring much better results for most of their customers.
“Lawyers add legitimacy,” says Wayne S. Bell, chief counsel for the California Department of Real Estate in Sacramento. “When people hear a lawyer is involved, they think they will get a champion for their cause, someone who will be impartial and really add value to the services provided.”
Many foreclosure consultants also use attorneys in efforts to get around state laws that restrict upfront fees for loan modification services. Florida, for instance, forbids such fees—except when charged by attorneys, according to Lori Holcomb, unlicensed-practice-of-law counsel at the Florida Bar in Tallahassee. California has a similar statute that kicks in once a property enters the foreclosure process, says Bell. (California and Florida have two of the highest foreclosure rates in the country.)
For lawyers, the allure is simple: Foreclosure consultants offer lots of clients—and lots of money. “These companies can do whatever they want in terms of advertising, but lawyers can’t,” says Kenneth L. Marvin, the Florida Bar’s staff counsel for lawyer regulation. “So it is easier for these companies to get business. They are just glorified lawyer referral services, taking a piece of the money.”
Lawyers who get involved with these companies often don’t know they are playing with fire. “The attorneys very rarely have any idea they are in danger,” Karpman says. “They are often a little naive.”
A disciplinary case decided by the Ohio Supreme Court on Sept. 16, 2008, illustrates some of the ethics hazards for lawyers who get involved with foreclosure consulting companies.
TROIKA IN TROUBLE
The court’s decision in Cincinnati Bar Association v. Mullaney (PDF) arose out of a complaint by the bar association that three lawyers from the firm of Brooking, Moeves & Halloran in Fort Wright, Ky., violated several provisions of the Ohio Code of Professional Responsibility in their working arrangement with a company called Foreclosure Solutions.
Under the arrangement, the law firm represented customers of Foreclosure Solutions—first in Kentucky, expanding later to Ohio. The firm used standardized pleadings and other filings to postpone foreclosures on homes owned by customers of Foreclosure Solutions. These filings gave the company extra time to negotiate loan modifications on customers’ behalf.
If a negotiation was unsuccessful—as they often were—the law firm notified the unlucky homeowner of the date of the foreclosure sale and “sent a standardized letter recommending that the client contact a bankruptcy lawyer,” the court stated in its opinion.
The clients were sent to the law firm by Foreclosure Solutions, which paid the firm $125 per case, a fee that later went up to $150 per case. The firm handled some 2,000 of these cases in Ohio during 2005 and 2006—which brought in more than a quarter of a million dollars.
The Ohio Supreme Court upheld a finding by the Board of Commissioners on Grievances and Discipline that the three attorneys had violated at least five of the state’s ethics rules for lawyers, including prohibitions against making unauthorized case referrals, aiding nonlawyers in the unauthorized practice of law, sharing legal fees with nonlawyers, forming partnerships with nonlawyers that involve the practice of law, and handling legal matters without adequate preparation under the circumstances.
The court issued a public reprimand against Darren J. Mullaney and suspended John S. Brooking from practicing in Ohio for a year, with a stay on the order if he committed no further misconduct.
But the supreme court saved its harshest sanction for Patrick F. Moeves because he was “a seasoned practitioner” who played an integral role in setting up the deal with Foreclosure Solutions. The court prohibited Moeves from engaging in pro hac vice practice in Ohio for two years.
While some of the potential dangers of working with foreclosure consultants may not be readily apparent, there are so many obvious ethics concerns that attorneys should be on their guard, say experts in the field.
“Every lawyer who passed the bar exam should be aware of these ethical constraints,” Bell says.
In general, “fee-splitting is clearly prohibited,” says Michael H. Rubin, an attorney with McGlinchey Stafford in Baton Rouge, La., who chairs the Ethics and Professionalism Committee in the ABA Section of Real Property, Trust and Estate Law. “People get disbarred for employing runners. There are lots of cases on that.”
Once attorneys have been working with foreclosure consultants for a time and realize what they’ve gotten themselves into, it’s not always easy to extricate themselves from the arrangements.
“One attorney in northern California got involved with a nationwide group, and she wanted to quit,” says Karpman. “The group said, ‘If you do, we’ll go to the California State Bar and say you encouraged us to engage in the unauthorized practice of law.’ In the end, she hired a civil litigation firm and got an injunction to stop the company using her name.”
Another attorney resigned from an in-house position with a consultant, but the company wouldn’t let go. “They continued to use the attorney’s name for a couple of hundred clients,” Karpman says. “They were taking checks in the attorney’s name. We went to the police and filed charges of identity theft against the company. That’s pretty radical, but we didn’t know how else to get them to stop.”
Experts say it may be possible for lawyers to work safely with foreclosure consultants—but only if business is generated by the lawyer, not the consultant.
The consultant must work for the lawyer in a subordinate capacity, and the consultant’s work must be supervised by the attorney. Finally, the consultant must be paid a salary, not a case-by-case fee. Most consultants would refuse these terms, however, because it would drastically cut their income.
Lawyers don’t really need foreclosure consultants. They already can help clients in their efforts to modify loans and fight off foreclosures. Of course, it’s unlikely they can produce the volume of cases that comes from working with the consultants.
But the money shouldn’t be the primary consideration, says Brian L. Tannebaum, the managing partner at Tannebaum Weiss in Miami. His practice includes representing lawyers in professional conduct and licensing matters.
“I just hope the lawyers getting involved in this practice understand there are a ton of clients out there,” Tannebaum says, “but there’s a way to do business and there’s a way to lose your license.”
