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

• Decision Date: 06 February 2013
• Docket Number: Bankruptcy No. 12–00177–NPO.,Adversary No. 12–00099–NPO.
• Citation: 486 B.R. 343
• Parties: In re Mary Alice HUFFMAN, Debtor. Derek A. Henderson, as Chapter 7 Trustee for the Bankruptcy Estate of Mary Alice Huffman, Plaintiff v. Legal Helpers Debt Resolution, L.L.C., Macey, Aleman, Hyslip & Searns, Thomas G. Macey, Jeffrey J. Aleman, Jeffrey Hyslip and Jason Searns, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Mississippi

486 B.R. 343

In re Mary Alice HUFFMAN, Debtor.Derek A. Henderson, as Chapter 7 Trustee for the Bankruptcy Estate of Mary Alice Huffman, Plaintiff

v.Legal Helpers Debt Resolution, L.L.C., Macey, Aleman, Hyslip & Searns, Thomas G. Macey, Jeffrey J. Aleman, Jeffrey Hyslip and Jason Searns, Defendants.

Bankruptcy No. 12–00177–NPO.

Adversary No. 12–00099–NPO.

United States Bankruptcy Court,

S.D. Mississippi.

Feb. 6, 2013.

Michael G. Pond, Pond Law Firm, Jackson, MS, for Debtor.

Jason Graeber, David L. Lord and Associates P.A., Gulfport, MS, for Plaintiff.

Stephanie Gee Beaver, Daniel, Coker, Horton & Bell, PA, Gulfport, MS, Richard W. Epstein, Richard W. Espstein, Evan Brett Klinek, Greenspoon Marder, PA, Fort Lauderdale, FL, for Defendants.

MEMORANDUM OPINION AND ORDER DENYING MOTION TO COMPEL ARBITRATION AND TO STAY ADVERSARY PROCEEDING PENDING ARBITRATION

NEIL P. OLACK, Bankruptcy Judge.

This matter came before the Court for hearing on January 11, 2013 (the “Hearing”), on the Defendants Motion for [sic] To Compel Barry's [sic] ¹ Claims to ArbitrationPursuant to the Federal Arbitration Act and To Stay Pending Arbitration (the “Motion”) (Adv. Dkt. 15), the Brief in Support of Defendant Legal Helpers Debt Resolution, LLC's Motion to Compel Arbitration Pursuant to the Federal Arbitration Act (the “Brief”) (Adv. Dkt. 16), and the Reply Brief in Support of Defendants' Motion to Compel Arbitration Pursuant to the Federal Arbitration Act (the “Reply Brief”) (Adv. Dkt. 35) filed by Legal Helpers Debt Resolution, LLC a/k/a the law firm of Macey, Aleman, Hyslip & Searns (“Legal Helpers”) ² and Thomas G. Macey, Jeffrey J. Aleman, Jeffrey Hyslip, and Jason Searns (collectively, the “Individual Defendants”) ³ in the above-styled adversary proceeding (the “Adversary”). Also before the Court at the Hearing were the Plaintiff's Response to Motion to Compel Arbitration and Stay Proceedings (Dkt. # 15) (Adv. Dkt. 26) and the Plaintiff's Memorandum in Support of his Response to Motion to Compel Arbitration and Stay Proceedings (Dkt. # 15) (Adv. Dkt. 27) filed by Derek A. Henderson, chapter 7 trustee (the “Trustee”). At the Hearing, Jason Graeber represented the Trustee, and Richard W. Epstein represented Legal Helpers and the Individual Defendants. Having considered the pleadings, briefs, and the arguments of counsel, the Court finds for the following reasons that the Motion is not well taken and should be denied.⁴

Jurisdiction

The Court has jurisdiction over the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. Notice of the Motion was proper under the circumstances.

Facts

For purposes of the Motion, the Court accepts all factual allegations in the Complaint as true. After incurring sizeable credit card debt, Mary Alice Huffman (the “Debtor”) began experiencing financial difficulty. On the verge of bankruptcy, she turned to Legal Helpers to review her finances and possibly negotiate lump-sum settlements of her debts. Legal Helpers is a self-described “debt relief agency.” (Agr.¶ I). In general, the U.S. Bankruptcy Code ⁵ defines a “debt relief agency” as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.” 11 U.S.C. § 101(12A). An “assisted person,” in turn, is defined as “any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $175,750.” 11 U.S.C. § 101(3).

Legal Helpers

Legal Helpers is a law firm offering various legal services, including debt settlement services ⁶ and some bankruptcy services. The services advertised by Legal Helpers in its promotional materials include: attorney review, assigning a settlement advisor, compiling an “Account Management Team,” monthly case review, correspondence to creditors, creditor correspondence review, responding to creditor correspondence, debt negotiations, debt settlements, bankruptcy advice, credit counseling, and referral of Fair Debt Collection Practices Act cases. (Compl. ¶¶ 40–48 & Exs. A–C).

Legal Helpers' Debt Settlement Programs

Typically, a client's relationship with Legal Helpers begins with the creation of a dedicated savings account into which the client agrees to make monthly deposits. (Compl.¶¶ 22–23). The size of the monthly deposits is determined by Legal Helpers based on the total amount of debt owed by the client and the amount of its own fees. From the savings account, the client authorizes Legal Helpers to make direct withdrawals electronically. Legal Services pays its own upfront fees before providing any debt relief services. (Compl. ¶ 24).

After a period of time, the client's monthly payments accumulate in the savings account to provide a “lump-sum” amount to fund possible settlements of unsecured debts. (Compl.¶ 25). Legal Helpers then pursues settlement on an individual, debt-by-debt basis. Each client's debt settlement program is unique in that it is based on the amount of the client's unsecured debt and other similar variables.

Debtor's Debt Settlement Program

On March 30, 2010, the Debtor signed a “Retainer Agreement” (the “Agreement”) ⁷ with Legal Helpers. (Agr. at 4). Attached to the Agreement is “Schedule A: Enrolled Creditor List,” which reflects a total debt of $39,265.00 owed by the Debtor to five credit card companies. (Agr. Sch. A). The Agreement, which appears to be a form contract, required the Debtor to pay Legal Helpers a retainer fee in the amount of $500.00, a monthly maintenance fee in the amount of $50.00, and a service fee in the amount of 15% of her total debt (approximately $6,000.00). (Agr. ¶ VIII). Legal Helpers calculated a single monthly payment of $496.00, which was “based on the total amount of debt to be modified, including payment of appropriate fees and costs to [Legal Helpers].” (Compl. ¶ 52; Agr. ¶ VI.e). This payment was electronically drafted from the Debtor's bank account each month. (Agr. ¶ IX).

The Agreement contains several important representations: (1) that Legal Helpers would negotiate and settle the Debtor's debts; (2) that Legal Helpers would assign an “Account Management Team” to review her account once a month and ensure progress; (3) that any debt collectors would be referred to Legal Helpers; (4) that Legal Helpers and other legally trained, licensed personnel would supervise all negotiations and customer support and ensure that the services comply with established procedures; (5) that Legal Helpers would use its best efforts to obtain a satisfactory result for the Debtor by providing basic legal services in connection with debt review and modification for the Debtor on an efficient and cost-effective basis; (6) that Legal Helpers is a full service debt resolution law firm including debt negotiation and restructuring, bankruptcy, and referral to consumer credit counseling agencies, where appropriate; and (7) that Legal Helpers would contact all of the Debtor's unsecured creditors in writing to inform them that she is represented by Legal Helpers.

Bankruptcy Case

After entering into the Agreement, the Debtor was harassed by her creditors and was eventually sued by a creditor for nonpayment. (Compl. ¶ 54). She informed Legal Helpers about the creditors, but to no avail. (Compl. ¶ 58). On January 19, 2012, the Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code without the help of Legal Helpers. (Dkt. 1).

Adversary ProceedingComplaint

On September 28, 2012, the Trustee filed the Complaint (the “Complaint”) (Adv. Dkt. 1) asserting five causes of action against Legal Helpers: Count I: Turnover of Estate Property (Compl. ¶¶ 66–71), Count II: Fraudulent Transfers (Compl. ¶¶ 72–76), Count III: Accounting (Compl. ¶¶ 77–78), Count IV: 11 U.S.C. § 526 (Compl. ¶¶ 79–87), and Count V: Fraud (Compl. ¶¶ 88–109). The gist of the Trustee's allegations in the Complaint is that Legal Helpers' debt settlement program did not actually help the Debtor's precarious financial situation and in fact made it worse. (Compl. ¶ 56).

In the Complaint, the Trustee alleges numerous deceptive and abusive practices by Legal Helpers and the Individual Defendants.⁸ The merits of his allegations are not yet before the Court, though the arbitration issue nevertheless requires the Court to examine the underlying factual basis for his claims. Legal Helpers has not answered the Complaint and is not required to respond until the Court has disposed of the Motion.

The Trustee posits two main allegations in support of his claims in the Complaint. First, he asserts that Legal Helpers promised debt relief services under the guise of “legal representation;” however, these services are largely outsourced to nonattorneys. (Compl. ¶¶ 16, 20). According to the Trustee, Legal Helpers “enter[s] this landscape [of debt-laden consumers] masquerading as attorneys” who provide debt solutions but “in reality, Legal Helpers' program [is] merely a scam in which [Legal Helpers] siphon[s] off thousands of dollars.” (Compl. ¶¶ 28, 38). Second, the Trustee alleges in the Complaint that Legal Helpers advises its clients to stop paying their unsecured creditors. (Compl. ¶ 17). (Presumably, this strategy is based on the theory that it is easier to negotiate reductions in older debts.) According to the Trustee, Legal Helpers does not inform clients that defaulting on debts as part of a “debt management scheme” “(a) will likely increase the amount they owe to creditors due to interest, late fees and penalties on unpaid accounts; (b) will cause creditors to balk at settlement offers or reject them entirely; (c) [will] increase collection activity; and (d) [will] increase tax liability due to debt forgiveness.” (Compl. ¶¶ 21, 26).

The Trustee contends that Legal Helpers engages in the same type of deceptive practices that the Federal Trade Commission (“FTC”) addressed in the 2010 amendment to its Telemarketing Sales Rule,⁹16 C.F.R. § 310.1– 310.9 (Aug. 10, 2010) (Compl. ¶ 30)...