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Bankruptcy Law Practice’s Failings Put National Law Firm Model on Trial

This article appeared in the April 2018 edition of the Louisville Bar Association's "Bar Briefs."

Actions from a national bankruptcy law firm will likely cast a gray cloud over the consumer-based national law firm model for some time. On February 12, 2018, a Virginia bankruptcy judge issued a 64-page opinion in the consolidated cases of Robbins v. Delafield et al., Adv. No. 16-07024 (Bankr. W.D. Va.) and Robbins v. Morgan et al., Adv. No. 16-05014 (Bankr. W.D. Va.) sanctioning the practices of a national consumer bankruptcy practice, UpRight Law. In these Virginia cases, as outlined more below, the court found significant evidence of an overarching scam that “preyed upon some of the most vulnerable in our society.”

UpRight Law has been under attack by the U.S. Trustee’s office in several states and though the allegations put forth in the Virginia cases sound more significant in fraud than the lack of oversight alleged in other cases in Louisiana and Tennessee, UpRight is likely to face additional sanctions in the coming months.

 As the U.S. Trustee’s office noted, “[l]awyers who inadequately represent consumer debtors harm not only their clients, but also creditors and the integrity of the bankruptcy system. The damage caused increases exponentially when they operate nationally...”

The failings of UpRight Law certainly extended beyond just those impacted by their cases, and likely put up additional hurdles for those trying to provide better access and cost-effective legal services.

 The national law firm model aimed at consumers fills a need for clients and attorneys.

Access to and the cost of legal services are significant problems in Kentucky and for people around the country. Technology has certainly started minimizing the gaps for the availability of legal information, but the broadening of legal services still lags compared to other professional services. One of the most popular legal podcasts on Legal Talk Network consistently focuses on this topic and introduces every show with the tagline “the practice of law is changing” as it brings on different guest speakers focusing on leveraging technology, marketing and bringing efficiencies to the practice of law. When I first came across UpRight Law, I thought this was a firm that was nailing down that model.

UpRight Law is an Illinois company that markets itself as a national consumer bankruptcy firm. The firm’s website states that it has attorneys in every state and claims to use cutting edge technology to simplify the legal process, making it more accessible and affordable to those experiencing financial difficulty.

UpRight Law has local “partners” around the country. These attorneys generally have their own practices and sign a limited partnership agreement with UpRight which provides no rights in the management of the firm, but they are invited to attend bi-monthly “partners’ meetings” and an annual partnership meeting in Chicago. Local partners have only a marginal, nonvoting interest in UpRight and receive compensation through the national office referrals which is split between the national office and the local partner.

UpRight Law’s national office serves as the marketing and call center for prospective bankruptcy clients. When a prospective client searches the internet for a bankruptcy attorney and comes across UpRight, the client generally reaches out one of two ways: they either call UpRight or request information through an online request form. This reach out, in turn, prompts a call back from a nonattorney “client consultant” whose job it is to take basic information from the potential client and see if the person is really interested in filing for bankruptcy. If there was ability to pay, the national law firm would collect the fee from the client and then, once paid, would connect the client to the local partner who would then review their case and meet with the client—the bankruptcy court noted that many partners meet with their clients via Skype. The national office would generate some of the basic filings based on the information collected from the client.

The local partner would then finalize the bankruptcy petition and review the information with their client, but the partner never had any access to or control of the fees paid by the client to the firm. The national process offered many benefits to its local partners since most clients had already been vetted and had an ability to pay their legal fees.

How the UpRight model failed: the flaw and the fraud

As described by the bankruptcy court, one of the major organizational flaws of UpRight Law was its lack of supervision by nonattorneys. The national office of UpRight incentivized its client-consultants with bonuses which, with little oversight, encouraged high-pressure sales tactics. The court found that client-consultants would pressure clients to enter into agreements to pay over time when the debtors had no means to pay legal fees and court costs necessary to file for bankruptcy. In Virginia, 48 percent of the clients paying over time with UpRight never actually engaged UpRight to file a bankruptcy petition on their behalf, yet most never received a refund from UpRight for their payments.

In 2015, UpRight Law discovered an “opportunity” to address some clients’ ability to pay. UpRight partnered with a repossession professional, Brian Fenner, to offer the “car-custody program” for clients who wanted to surrender a financed vehicle in bankruptcy. In order to be eligible for the program, the vehicle had to be worth over $5,000 and the client could have little or no equity in the vehicle. If a client wished to participate, Fenner would pay all legal and filing fees associated with their bankruptcy.

Before the client spoke with an attorney, the client would turn over their vehicle to Fenner who would then tow the vehicle to one of his storage facilities located in Indiana, Mississippi or Nevada—all states that allow mechanic’s liens to take first priority on vehicles. After Fenner had custody of the car, UpRight gave notice to the financing company of the status of the vehicles in one of Fenner’s impound facilities.

Once the client filed bankruptcy and the finance company attempted to retrieve the client’s vehicle, the towing and storage fees had accumulated to thousands of dollars. In many cases, the finance companies would abandon the vehicles because the cost of paying Fenner’s lien and collecting the vehicle were too significant.

This fraudulent scheme was being offered by a law firm as a way for clients to afford their legal services. As the court descried, “[m]aking this proposal to cash-strapped debtors was essentially offering them a Hobson’s choice—one the debtors had to make without legal advice—all while UpRight was offering its services under the guise of helping them make the proper decisions to reach their ‘financial independence.’”

The U.S. Trustee’s claims against the national practice

After becoming aware of UpRight Law’s practices, the Office of the U.S. Trustee—which is the component of the Justice Department that oversees bankruptcy case administration— began filing complaints in different regions against local partners operating under UpRight. The U.S. Trustee went after UpRight on the fraudulent scam outlined above, but they also included numerous counts in their complaints aimed directly at UpRight’s national business model.

The U.S. Trustee first alleged that UpRight Law failed to properly disclose its fee structure. Section 329 of the Bankruptcy Code provides in part that all compensation to attorneys must be disclosed. However, Bankruptcy Rule 2016(b) further provides that any fee sharing agreements must also be disclosed, but provides that the sharing of the compensation within a law firm is not required to be disclosed. The failure to properly disclose is sanctionable and most courts punish defective disclosure by denying all compensation, even if a disclosure failure was inadvertent.

UpRight Law had disclosed the amount of its fees, but it failed to disclose the sharing agreement between the national firm and the local partner. The U.S. Trustee argued, in this case along with dozens of other cases, that UpRight is not a law firm so the disclosures under Rule 2016(b) were not complete as they did not detail the compensation agreement between the local partner and UpRight. The Virginia bankruptcy court as well as several other courts, including a New York bankruptcy court in Harrington v. Rackiet al., Adv. No. 17-2007 (Bankr. W.D. N.Y. Nov. 3, 2017), have rejected this argument, recognizing that law firms have changed and now exist as multinational structures, and the titles and associations lawyers have with law firms have evolved.

Because the attorneys in these cases were regularly associated with the firm, the court was satisfied that the fee arrangements within the law firm did not need to be disclosed. Nonetheless, the court expressed concerns with the lack of control local partners had with client funds.

The U.S. Trustee also pressed issues with UpRight Law’s organization such as UpRight initially blundered significant steps in getting its operations set up in Virginia, including registering as a Virginia law firm before starting to file cases in Virginia and not properly setting up IOLTA accounts. However, given that many of the issues were rectified by UpRight prior to trial, the bankruptcy court was not concerned with these business failures.

The failings in the national practice can occur in any practice

The bankruptcy court’s concern with Up-Right Law’s business model was focused on the high-pressured sales techniques as well as legal advice provided by the non-lawyer client-consultants. The Virginia cases showed that clients had limited access with their actual attorneys even after a case was referred to the local partner. The court sanctioned one attorney who allowed a non-attorney in his office—who he claimed to have superior knowledge of the law in that area—to review the bankruptcy petition with clients and that attorney never spoke with the clients until after the bankruptcy was filed.

The court clarified that it had “no qualms” about client meetings via Skype, recognizing that technology provided accommodations around meeting one-on-one. Nevertheless, the court did note that simple telephone calls were unacceptable when representing a client filing bankruptcy.

The bankruptcy court sanctioned and enjoined UpRight Law and its local partners in Virginia from practicing in the court for causing “unconscionable” harm to their clients. The bankruptcy court found that UpRight had “serious oversight issues” in failing to adequately supervise its salespeople to prevent their unauthorized practice of law, and that UpRight demonstrated a “focus on cash flow over professional responsibility.”

However, according to the Virginia bankruptcy court’s opinion, UpRight Law set up a business model that could have complied with the bankruptcy rules. Indeed, the problems and the scheme found in the Virginia cases could have occurred in any size practice; but when big firms go bad, their impact tends to be far more wide-sweeping. At least for now, there remains some hope that this model could still be used as an opportunity to provide greater legal services to underserved populations.

Reprinted with permission. LBA Bar Briefs. 2018

  • Associate

    April represents both debtors and creditors in bankruptcy proceedings, workouts, and commercial litigation in federal and state courts in Kentucky and Indiana. Representations have included major corporations, small business ...

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