Henderson v. Legal Helpers Debt Resolution, L.L.C. (In re Huffman)
| Decision Date | 10 June 2013 |
| Docket Number | CASE NO. 12-00177-NPO,ADV. PROC. NO. 12-00099-NPO |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Mississippi |
| 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 |
This matter came before the Court for hearing on May 14, 2013 (the "Hearing"), on the Motion for Judgment on the Pleadings (the "Motion") (Adv. Dkt. 64)1 filed by Legal Helpers Debt Resolution, LLC a/k/a the law firm of Macey, Aleman, Hyslip & Searns ("Legal Helpers") and Thomas G. Macey, Jeffrey J. Aleman, Jeffrey Hyslip, and Jason Searns (collectively, the "Members") in the above-styled adversary proceeding (the "Adversary"). The Members2 are the named partners of Macey, Aleman, Hyslip & Searns, and Legal Helpers is the trade name of the law firm. Also before the Court at the Hearing were the Plaintiff's Response to Motion for Judgment on the Pleadings (DKT #64) (Adv. Dkt. 67) and the Plaintiff's Memorandum inSupport of his Response to Motion for Judgment on the Pleadings (the "Trustee Brief") (Adv. Dkt. 68) filed by Derek A. Henderson, chapter 7 trustee (the "Trustee"). At the Hearing, Jason Graeber represented the Trustee, and Terry Levy represented Legal Helpers and the Members. The Court, having considered the pleadings, brief, and the arguments of counsel, finds for the following reasons that the Motion should be granted in part and denied in part.
The Court has jurisdiction over the parties to and the subject matter of this case pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (H) & (O).3 Notice of the Motion was proper under the circumstances.
The facts below are taken from the allegations in the Complaint (the "Complaint") (Adv. Dkt. 1). For purposes of the Motion, these facts are accepted as true and are viewed in the light most favorable to the Trustee.
After incurring sizeable credit card debt, Mary Alice Huffman ("Huffman") began "experiencing financial difficulty" and became "desperate for solutions" to resolve her financial debt. (Compl. ¶¶ 34, 36). On the verge of bankruptcy, she retained Legal Helpers to review her finances and possibly negotiate lump-sum settlements of her debts.
Huffman turned to Legal Helpers because it is a "debt relief agency." (Compl. Ex. D. ¶ I). The U.S. Bankruptcy Code4 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 in the Code 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 and its Members offer various legal services, including debt settlement services5 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).
Typically, a client's debt settlement program begins when she signs a retainer agreement and creates a savings account into which she agrees to make monthly deposits. (Compl. ¶¶ 22-23). The size of the monthly deposit is determined by Legal Helpers based on the total amount of debt owed by the client and the amount of its own fees. The client then authorizes Legal Helpers to make direct withdrawals electronically from the savings account. Significantly, LegalServices withdraws funds from the savings account to pay its own upfront fees before distributing any portion to creditors. (Compl. ¶ 24).
After a period of time, the client's monthly payments accumulate in the savings account to provide "lump-sum" amounts to negotiate possible settlements of her debts. (Compl. ¶ 25). Legal Helpers then pursues settlement on a debt-by-debt basis. Each client's debt settlement program is somewhat unique in that it is based on the amount of the client's unsecured debt and other similar variables.
On March 30, 2010, Huffman entered into a "Retainer Agreement" (the "Agreement")6 with Legal Helpers. (Compl. Ex. D at 4). The Agreement, which appears to be a form contract, required Huffman to pay Legal Helpers a retainer fee of $500.00, a monthly maintenance fee of $50.00, and a service fee of 15 percent of her total debt. (Compl. Ex. D ¶ VIII). To fund her settlement program, monthly payments of $496.00 were electronically drafted from Huffman's bank account by Legal Helpers. (Compl. ¶ 52).
The Agreement contains several important representations as to the services provided by Legal Helpers: (1) that Legal Helpers would negotiate and settle Huffman'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 Huffman by providing basiclegal services in connection with debt review and modification for Huffman 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 Huffman's unsecured creditors in writing to inform them that she is represented by Legal Helpers. (Compl. ¶¶ 42-48).
Despite entering into the Agreement, Huffman continued to be harassed by her creditors and was eventually sued for nonpayment of a debt. (Compl. ¶ 54). She informed Legal Helpers about the harassment, but to no avail. (Compl. ¶ 58). Finally, Huffman ended her debt settlement program and on January 19, 2012, filed a petition for relief under chapter 7 of the Bankruptcy Code without any legal assistance or other help from Legal Helpers. (Bankr. Dkt. 1).
On September 28, 2012, the Trustee filed the Complaint asserting five causes of action on Huffman's behalf against Legal Helpers and the Members: 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 the debt settlement program did not actually help Huffman's precarious financial situation but in fact made it much worse. (Compl. ¶ 56). The Trustee alleges numerous deceptive and abusive practices by Legal Helpers and further alleges that the Members are jointly liable for these same practices "throughthe principals [sic] of alter ego, piercing the corporate veil, agency, joint venture, or respondeat superior." (Compl. ¶ 64).
The Trustee posits two main allegations in support of his claims. First, he asserts that Legal Helpers promised to provide Huffman with debt relief services under the guise of "legal representation;" however, Legal Helpers outsourced these services to nonattorneys. (Compl. ¶ 16, 20). 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 contends that Legal Helpers advised its clients to stop paying their unsecured creditors.7 (Compl. ¶ 17). 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,8 16 C.F.R. § 310.1-310.9 (Aug. 10, 2010) (Compl. ¶ 30). In the amendments, the FTC prohibits debt relief providers, who use telemarketing to solicit potential clients, from collecting fees until after they have actually provided the debt relief services, except for certain fees charged on a proportional basis, and from making misrepresentations aboutmaterial aspects of their debt relief services, including their success rates. The FTC also requires debt relief providers to disclose certain material information about their services. The Trustee contends that the Government Accountability Office likewise has issued a report on the dangers posed by entities like Legal Helpers, especially given that fewer than 10% of consumers ever successfully complete debt settlement programs.9 (Compl. ¶ 31).
Legal Helpers and the Members filed a motion asking the Court to compel the Trustee to arbitrate his claims. (Adv. Dkt. 15). The Court denied their request for...
To continue reading
Request your trial