Liability Minute: Illinois Attorney General Providing Debt Settlement Services

These statutes aim to address the allegation that many of these companies do not provide actual relief to debtors but rather worsen their situation through undeserved and excessive fees (while making fraudulent or misleading claims in the process). Among other restrictions and requirements, the statutes limit fees, including the taking of "up front" fees. See, 765 ILCS 940/50(1); 225 ILCS 429/125(a) and (b).³ The IAG's office is aggressively pursuing actions based on two laws.

However, in both the MRFA and the DSCPA there are exclusions for attorneys. The Acts apply to statutorily defined "distressed property consultants" or "debt settlement services", respectively. The MRFA excludes "attorneys licensed in Illinois who are engaged in the practice of law". The DSCPA excludes "attorneys licensed, or otherwise authorized, to practice in Illinois who are engaged in the practice of law." 765 ILCS 940/5; and 225 ILCS 429/10.

The purpose of both of these exclusions is to allow attorneys who provide bankruptcy or other traditional legal services to debtors to continue taking retainers. However, some attorneys saw this as a loophole that would allow them to provide mortgage relief or debt settlement services and still take an up-front fee, contrary to either statute's otherwise clear prohibition.

The danger that attorneys will be caught in the cross-fire in this war between the IAG and debtor assistance companies was highlighted in this space with regard to the MFRA. There, we advised:

… the only prudent course of action is to steer clear of any activity which may be deemed a violation of the MFRA—the attorney exemption notwithstanding. This means not taking a retainer or up-front unless the mortgage relief occurs within the broader context of providing legal services.⁴

In March 2011, these concerns were realized when the IAG, along with the Illinois Department of Financial and Professional Regulation (IDFPR) filed an action for injunctive relief against Legal Helpers, LLC ("Legal Helpers")-- also known as the law firm of Macey, Aleman, Hyslip & Searns ("MAH&S") in the Sangamon County Circuit Court, Case. No. 2011 CH 286. MAH&S is, "owned and operated by attorneys in nearly every state" and operates under that name in states nationwide and by the trade name of Legal Helpers Debt Resolution, LLC where permitted."⁵

That suit noted the passage of the DSCPA and stated:

Since these consumer protections have taken effect, State Attorneys General are receiving numerous complaint about debt relief services purportedly being performed by an attorney, when in fact all debt relief services are provided by third parties. In their complaints, consumers report being charged advanced fees, having little or no contact with an attorney, and not having their debt settled.⁶

Specifically, the First Amended Complaint alleged that:

• Legal Helpers "contracts virtually all debt relief services to a third party operated and staffed by non-lawyers";
• Legal Helpers "charge advanced fees which are unfair and in violation of the Act (a $500 retainer and $50 monthly charge);
• Legal Helpers "is not licensed as a debt settlement provider" as required by the Act;
• As of September 2011, the IAG received 252 consumer complaints against Legal Helpers.

In addition to violations of the DSCPA, the First Amended Complaint also enumerates fourteen courses of conduct that violate the Consumer Fraud and Deceptive Business Practices Act ("CFDBPA"), and two which violate the Uniform Deceptive Trade Practices Act ("UDTPA"). These counts stem primarily from alleged representations made to consumers regarding the efficacy of the debt settlement program and the provision of legal services which the IAG asserts are false.

The following August, IDFPR issued a cease and desist order and laid a $314,000 fine on that firm (314 agreements @ $1000 per) for every agreement signed by a particular named partner of Legal Helpers who was not licensed in Illinois. The IDFPR reasoned that an unlicensed attorney cannot possibly fit under the Act's attorney exemption (and certainly could not be engaged in the practice of law, a further element of the exemption).

Apparently believing that the best defense is a good offense, Legal Helpers struck back. In November 2011, it filed an action for injunctive and declaratory relief against the IAG and Brent Adams of the IDFPR individually. In addition to lengthy recitations about the IAG's "ad hominem" attacks on it, Legal Helpers alleged that the IAG and IDFPR director acted under color of state law to deny it equal protection and due process. It further noted that no other law firm engaged in similar conduct was sued or subject to a C&D order, and that they are being discriminated against for being a nationwide firm. Invoking the Commerce Clause, "impairment of contracts", and various Federal statutes, Legal Helpers seeks a declaratory judgment that the IAG's conduct violated the U.S. Constitution; a permanent injunction prohibiting from further violations; monetary damages; costs and fees.

The federal docket in Legal Helper's action shows that the action is stayed while the parties are negotiating a resolution to both the state and the federal action pending settlement. We hope that the terms of the settlement will be disclosed so as to provide instruction in what to expect for other attorneys engaged in similar conduct.

In any case, Legal Helpers is a cautionary tale of how attorneys can be drawn into the consumer protection campaigns by elected officials and subjected to lawsuits and fines. It does not require explanation to understand that violating either statute may not only result in civil liability but also disciplinary action by the ARDC and a threat to one's license to practice law in Illinois. Consequently, we dare repeat our earlier warning:

… The ONLY prudent course of action is to steer clear of any activity which may be deemed a violation of the MFRA or the DSCPA—the attorney exemption notwithstanding. This means not taking a retainer or up-front unless the mortgage or the debt settlement relief occur within the broader context of providing legal services(!!!)

These messages are a service to ISBA Mutual policyholders prepared by Joe Marconi.

[1] The IAG office's priorities are indicated by its website page for press releases, spotlighting a rogue's gallery of IAG targets: child pornographers, drug dealers/ manufacturers, and debt relief companies -- though not necessarily in that order.

[2] Joe is a shareholder of Johnson & Bell, Ltd., and the chairman of the business litigation/transaction group and co-chair of the employment group. He appreciates the assistance of Johnson & Bell paralegal, Mike Castellaneta, J.D., for his assistance in the drafting of this article.

[3] "It is a violation…to…"demand, charge, collect, or receive any compensation until after the distressed property consultant has fully performed each service…"; "(b) a debt settlement provider shall not charge or receive from any consumer any enrollment fee, set up fee, up front fee of any kind…except for a one-time enrollment fee of $50."

[4] Marconi, J., "The Frying Pan and the Fire: Attorneys Exploiting the Attorney Exemption in the MRFA Might Get Burned", ISBAMIC Liability Minute, October 15, 2010.

[5] See, Complaint, Legal Helpers Debt Resolution LLC v. Lisa Madigan, et al., U.S. District Court, Northern District of Illinois, Case No. 11 CV 7938, at Pars. 15, 18.

[6] First Amended Complaint, People of the State of Illinois, et al. v. Legal Helpers Debt Resolution, LLC, Sangamon County Circuit Court, No. 2011 CH 286, at Par. 17.