NEIL P. OLACK, Bankruptcy Judge.
This matter came before the Court for trial on November 20 and 22, 2013 (the "Trial") on the Complaint (the "Complaint") (Adv. Dkt. 1)
At the close of Trial, the Court left the record open for fourteen (14) days for the parties to submit into evidence the video deposition testimony of Jeffrey Aleman ("Aleman"). In anticipation of Aleman's deposition testimony, Legal Helpers objected at Trial to the admission of two (2) exhibits, marked for identification purposes as "Trustee Exhibit 1" and "Trustee Exhibit 11." The Court reserved the evidentiary issues raised by Legal Helpers for decision in this Opinion. Also, in lieu of closing arguments, the parties agreed to file simultaneous post-trial briefs within seven (7) days after the submission of Aleman's video deposition.
The Court received the video deposition on December 9, 2013. At the request of Legal Helpers, the Court granted both parties an extension of time to file post-trial briefs. On December 19, 2013, the Trustee submitted the Plaintiff's Closing Argument (the "Trustee Brief") (Adv. Dkt. 157), and the next day, Legal Helpers submitted Legal Helpers Debt Resolution LLC's Closing Argument (the "LHDR Brief") (Adv. Dkt. 158). After considering the exhibits, testimony of the witnesses, and other evidence at Trial, the Court hereby makes the following findings of fact and conclusions of law.
TABLE OF CONTENTS
JURISDICTION............,.................................................................733
FACTS.....................................................................................734
A. Legal Helpers.........................................................................734
B. Business Model........................................................................734
C. Debt Settlement Program...............................................................735
1. Creation & Vetting of Debt Settlement Business Model..............................735
2. Eclipse's Role .,.................................................................736
a. Retainer Agreement............................................................737
b. Savings Account ..............................................................738
c. Welcome Packet................................................................738
d. Settlement of Debts...........................................................739
3. Fees for Debt Settlement Services ................................................739
4. Enrollment Review Process.........................................................739
D. Huffman's Enrollment............................................... ..................740
1. Review of Huffman's Enrollment....................................................741
2. Proposed Payment Schedule.........................................................741
3. Proposed Fees for Services..........."............................................742
4. Proposed Deposits into the Savings Account........................................743
5. Initial Program Payments & Initial Debt Settlement Services ......................744
6. Cancellation of Program ..........................................................744
7. Refunds to Huffman................................................................746
E. Others' Enrollments in the Debt Settlement Program....................................747
PROCEDURAL HISTORY........................................................................747
A. Bankruptcy Case.......................................................................747
B. Adversary Proceeding..................................................................748
1. Complaint.........................................................................748
2. Prior Motions.....................................................................748
a. Motion to Compel Arbitration..................................................748
b. Motion for Judgment on the Pleadings..........................................748 c. Amended Discovery Motion......................................................749 d. Summary Judgment Motions......................................................749 3. Adversary Trial...................................................................749 DISCUSSION................................................................................750 A. Evidentiary Objections................................................................750 1. Trustee Exhibit 1: Aleman's Emails................................................750 2. Trustee Exhibit 11: Answer to Illinois ARDC Complaint.............................751 3. Rule 402-Admissibility............................................................751 4. Rule 401-Relevancy................................................................752 a. Trustee Exhibit 1: Aleman's Emails............................................752 b. Trustee Exhibit 11: Answer to Illinois ARDC Complaint.........................752 5. Rule 403-Prejudice................................................................752 B. Count 1: Turnover of Estate Property..................................................753 C. Count II: Fraudulent Transfer.........................................................753 1. Less Than Reasonably Equivalent Value.............................................754 2. Insolvency........................................................................757 D. Count III: Accounting.................................................................757 E. Count IV: Violations of § 526 & § 527.................................................758 1. Did Legal Helpers provide bankruptcy assistance?..................................759 2. Did Legal Helpers violate § 526 & § 527?..........................................763 a. Failing to Perform Services...................................................763 b. Misrepresentations............................................................763 c. Disclosures & Notice..........................................................764 3. Is Huffman entitled to damages?...................................................764 4. Did Legal Helpers act intentionally to violate § 526 or engage in a clear and consistent pattern of violating § 526?......................................765 F. Count V: Fraud........................................................................766 G. Damages, Attorneys' Fees & Costs......................................................768 1. Fraudulent Transfers..............................................................768 2. § 526.............................................................................768 3. Fraud.............................................................................769 CONCLUSION................................................................................769 TABLE OF CHARTS A. Huffman's Creditors...................................................................740 B. Huffman's Proposed Payment Schedule...................................................742 C. Proposed Allocation of Program Payments between Fees for Services & Savings Account.....................................................................743 D. Huffman's Actual Program Payments.....................................................745 E. Net Fees Paid by Huffman..............................................................746
The Court has jurisdiction over the parties to and the subject matter of this case pursuant to 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (H) and (O).
The Debtor, Mary Alice Huffman ("Huffman"), is 84 years old and retired. She is college educated with degrees in nursing and housekeeping. Until 1996, she worked as a certified housekeeper at Hardy Wilson Memorial Hospital in Hazlehurst, Mississippi. After her retirement, Huffman's income consisted mostly of Social Security benefits. From time to time, she supplemented that income with wages earned at various jobs.
After her adult son became seriously ill, Huffman incurred unsecured credit card debt of $39,265.00 on five (5) credit cards. (Jt. Ex. 1).
Thomas G. Macey ("Macey") and Aleman are consumer bankruptcy attorneys licensed to practice law in Illinois. They are the named partners of Macey & Aleman, the largest consumer bankruptcy law firm in the country.
In almost every state, Legal Helpers retained at least one (1) local attorney, a "State Class B" Member, to manage its client files. In Mississippi, the "State Class B" Member during the relevant time was John Windsor ("Windsor"). Windsor was the contact attorney for Legal Helpers' Mississippi clients, but he did not consider them his own clients. He communicated by email with Hyslip, who was the conduit between Legal Helpers and Windsor, as well as all other "State Class B" Members.
Macey approached Searns about the ongoing debate in the debt settlement industry
Searns embraced the idea of a law firm operating within the debt settlement industry for another reason. The amendments to the U.S. Bankruptcy Code
As to the program itself, Searns remembered that his colleagues who specialized in bankruptcy law rarely filed bankruptcy petitions on behalf of their business clients but instead negotiated settlements with their creditors. Searns thought the model used for business clients would work just as well for consumer clients.
Also, most state laws regulating the business of consumer debt settlement exempt attorneys from complying with those regulations, including those that limit the amount of fees charged for such debt settlement services. But see Smith v. Legal Helpers Debt Resolution LLC, No. 11-5054, 2011 WL 5166494 (W.D.Wash. Oct. 31, 2011) (holding that exclusion for attorneys under Washington law did not apply to Legal Helpers because its primary business was debt adjustment services). The attorney exemption was considered a distinct advantage for Legal Helpers.
Finally, Searns also thought that Legal Helpers could distinguish itself from other debt relief companies by advertising itself as a law firm on the national landscape. Searns also testified, however, that Legal Helpers was not a bankruptcy law firm and did not provide legal services, despite its name.
Macey and Searns believed that the most economical means for providing debt relief services to its clients was by outsourcing those services to nonlawyers. Rather than using "in-house" paralegals and support staff, Legal Helpers decided to outsource the advertisement, sale, and servicing of its debt settlement program to other nonlawyer debt settlement companies.
In creating the business model for Legal Helpers, Searns researched whether aligning Legal Helpers' attorneys with nonlawyers to provide nationwide debt settlement
Searns retained Steven C. Krane ("Krane"), now deceased, former chairman of the American Bar Association's standing committee on ethics and professional responsibility and a partner with Proskauer Rose, to vet his proposed debt settlement business model. According to Searns, Krane approved the business model with respect to the outsourcing of debt settlement services to nonlawyers on the condition that lawyers at Legal Helpers directly supervise their work.
Searns believed that the business model he created provided adequate supervision of its outsourced services. For example, Searns audited Legal Helpers' contractors every three (3) months to ensure that they were following his protocols. He set up a color-coding system for the files, which is discussed in detail later in this Opinion. He created a "call compliance log" and a questionnaire for contractors to use during intake interviews. He purchased "Customer Relationship Management" software to help market the program, manage client information, and provide customer support. Searns believed that the forms he drafted and the procedures he implemented ensured adequate supervision over the contractors who worked in locations remote from Legal Helpers' office in Chicago. Searns was confident that the services outsourced to nonlawyers under its business model would not lead to a finding that Legal Helpers assisted nonlawyers in the unauthorized practice of law in violation of the ABA Model Rules.
Notwithstanding his efforts to create a program in compliance with state laws, Searns testified that Legal Helpers has been sued in seven (7) states in various regulatory actions and by ten (10) or more of its former clients.
The nonlawyer company that Legal Helpers retained to administer most of its debt settlement program in Mississippi was Eclipse Financial, Inc. ("Eclipse").
After a consumer agreed to enroll in the program, Eclipse created a debt settlement program based upon the client's debts and his or her ability to make monthly payments to Legal Helpers. Eclipse then sent the prospective client numerous standardized enrollment documents. One of these documents was an eight (8)-page retainer agreement "for legal services ... entered into ... between [Legal Helpers] and [the client]." (Jt. Ex. 1 at 1). The scope of services provided by Legal Helpers was set forth in detail and included the following:
In the retainer agreement, Legal Helpers informed the client that a third party would perform some of the above tasks although Legal Helpers "and other legally trained licensed personnel" would supervise their work (Jt. Ex. 1, ¶ V). In a separate paragraph entitled, "Debt Resolution
In exchange for its debt settlement services, the client agreed to a schedule of monthly payments. (Jt. Ex. 1, ¶ VI(e)). The client also agreed to "forward [Legal Helpers] all correspondence from creditors, including collection letters, demands and complaints" and "not engage in debt resolution discussions." (Jt. Ex. 1, ¶ VI(a)-(b)).
The prospective client typically signed the retainer agreement without speaking to a Legal Helpers' lawyer. Shortly after signing the retainer agreement, the client participated in a "compliance call" conducted by Eclipse, allegedly for the purpose of making sure the client understood the program. (LHDR Ex. 1).
A key feature of the program was the "special purpose account" (the "Savings Account"). Included in the enrollment documents was a "Special Purpose Account Application," which Eclipse asked the client to sign and return to establish the Savings Account. The Special Purpose Account Application authorized Eclipse, through Global Solutions, Inc. ("Global"),
In the Special Purpose Account Application, there was a "Schedule of Fees & Charges" notifying the client that Global charged a $25.00 fee for any "Dishonored/returned deposit items." Global structured the Savings Account to allow Legal Helpers and Eclipse to view the balances and transactions histories of clients in the program. Although Searns drafted the paperwork that established the Savings Account, he testified that Global was a contractor of Eclipse, not of Legal Helpers.
Shortly after the client enrolled in the program, Eclipse mailed the client a "welcome packet" that included a sheet entitled, "Our Pledge to Our Clients" (the "Pledge Sheet") (Jt. Ex. 2). In a highlighted box on the Pledge Sheet, Legal Helpers informed its new client, "You will never be without a viable alternative. This is our commitment and our pledge to our clients." (Id.). Most of the Pledge Sheet consists of the following three-step pledge: (1) "like a security blanket, we will take control of your debt resolution issues"; (2) "we will analyze which debt resolution alternative makes the most sense for you"; and (3) "if your circumstances change or a particular debt resolution plan does not meet your needs, we will be prepared to discuss additional alternatives, including the discharge of your debt." (Id.). At the bottom of the Pledge Sheet, in small print, appears the following statement: "Legal Helpers Debt Resolution, LLC is a debt relief agency. We help people with their debt resolution, including
According to Aleman, the process of settling a client's debts could take three (3) or more years depending upon the length of time it might take a client to accumulate enough money in the Savings Account. Typically, Eclipse settled at least one enrolled debt every six (6) months.
Eclipse instructed clients to stop paying their credit card bills during their enrollment in the program for two reasons. First, Legal Helpers thought that credit card companies were almost always less inclined to negotiate settlements with current accounts. Second, as Hyslip explained, Legal Helpers did not want its clients paying their creditors money that could be paid into the program.
The client signed a "Power of Attorney" appointing Legal Helpers as its agent "to represent me/us in negotiating the modification, reduction, settlement, and payment on any and all debts allegedly due and owing in my/our name." (LHDR Ex. 1). Using this Power of Attorney, Eclipse mailed standardized form letters to each creditor addressed "To Whom It May Concern." They were typed on Legal Helpers letterhead and signed by Hyslip, identified as Legal Helpers' managing attorney.
In the letters, Hyslip advised creditors, "Our law firm represents the above client(s) in regard to payment of the outstanding balance of the account held by your institution." (LHDR Ex. 1). Hyslip also wrote that Legal Helpers intended to "work directly with your institution regarding resolution of this account." (Id.). As contact information, Hyslip gave the telephone number and address of Eclipse's administrative offices in Tampa, Florida, though he did not identify Eclipse by name, and, as previously mentioned, Legal Helpers' letterhead appeared above Hyslip's name. Aleman described the form letters as an "invitation" to engage in negotiations. (Aleman Dep. at 40).
Legal Helpers touted its program, administered by Eclipse, as being "high quality" and "immensely successful." (LHDR Br. at 2, 4; Aleman Dep. at 11). Legal Helpers claimed at Trial that it had saved clients $40 million by way of out-of-court settlements. (Id.).
The monthly payments due under the program were apportioned between Legal Helpers' fees and money set aside in the Savings Account for settlements of debts. There were three components of Legal Helpers' fees: (1) an initial flat retainer fee of $500.00; (2) a monthly maintenance fee of $50.00 lasting the length of the program; and (3) a service fee of fifteen percent (15%) of the total enrolled debt. Legal Helpers received these fees regardless of whether it settled any debts and paid some portion of the fees to Eclipse and Global, although the precise allocation among the three (3) of them is unknown.
After a client enrolled into Legal Helpers' debt settlement program, his or her file underwent a three (3)-step review process. The file
To keep track of the status of its clients' files, Searns implemented a color-coding system. A new file was color-coded white. After Eclipse finished setting up a client's
Hyslip and his staff in Chicago reviewed the files after they were color-coded yellow. Hyslip referred to this second layer of review as a "feasibility study." If Hyslip approved the new client, he signed the retainer agreement in the file. Hyslip was the only attorney at Legal Helpers who was authorized to sign the retainer agreements. After he signed the retainer agreement, the file was ready for the local attorney's final review.
The task of the local attorney or "State Class B" Member, was to determine whether any of the enrolled debts was a secured debt, a domestic support obligation, or a tax debt. Such debts would be difficult to settle and would render the client ineligible for the program. (Jt. Ex. 17). Windsor, the "State Class B" Member in Mississippi, testified that this final review usually took no more than twenty (20) minutes.
After the local attorney's approval, the new file was color-coded green and remained green until the client completed the program with two (2) exceptions: A file color-coded green changed to red if the client's financial situation worsened due to the loss of employment or divorce, or the file changed to black if a creditor sued the client. A file color-coded black was given greater attention than others, a procedure referred to by Searns as "triage."
A few days after receiving the solicitation in the mail from Eclipse about Legal Helpers' debt settlement program, Huffman called the number in the flyer.
CHART A: HUFFMAN'S CREDITORS
Creditor Amount Owed Months Late
Bank of America $21,514.00 18015
Chase $7,062.00 0
CitiFinancial $3,850.00 0
Sears/Citibank $5,870.00 0
Wells Fargo $969.00 0
__________
TOTAL $39,265.00
(Jt. Ex. 5; Pretrial Order at 9). Because Huffman did not have access to a computer
Included in the paperwork that Huffman signed on March 30, 2010 was the Special Purpose Account Application (Jt. Ex. 15), which Eclipse received and forwarded to Global. Also included was an authorization for Legal Helpers to withdraw funds automatically from her personal checking account (the "Copiah Account") maintained at Copiah Bank. (Jt. Exs. 3 & 15). A few days later, Huffman had second thoughts about her enrollment and attempted to terminate the Retainer Agreement but was unable to reach anyone.
After Huffman enrolled her five (5) credit card debts in the program, her file underwent Legal Helpers' three (3)-step review process. Searns, Hyslip, and Windsor all reviewed and approved her enrollment in the program. All concluded that Huffman could afford the program and that none of her enrolled debts would be difficult to settle.
As to the issue of affordability, Eclipse calculated Huffman's monthly expenses at $1,467.48, which consisted of a program payment of $707.48, a mortgage of $588.00, water/sewer/trash/HOA dues of $42.00, a cable payment of $80.00, and automobile insurance of $50.00. (Jt. Ex. 17). Eclipse did not include in its calculation any monthly expenses for groceries or electricity. In a note on the intake form, the Eclipse Rep indicated that Huffman's adult son paid these bills. Hyslip testified that he approved Huffman's enrollment because the program payments would decrease in three (3) months, Huffman's son paid some of her necessary expenses, and the $80.00 cable bill, in his opinion, was not a necessary expense.
Given a net monthly income of $1,550.00, Huffman had surplus income of only $82.52
Attached to the Retainer Agreement is "Schedule B Payment Schedule & Fee Table" (the "Payment Schedule") (Jt. Ex. 8) prepared by Legal Helpers. According to the Payment Schedule, Legal Helpers proposed a payment plan that required Huffman to contribute $24,495.75 over a period
CHART B: HUFFMAN'S PROPOSED PAYMENT SCHEDULE
Monthly Monthly Monthly
Payment Date Payment Payment Date Payment Payment Date Payment
4-5-2010 $707.48 8-5-2011 $497.19 12-5-2012 $497.19
5-5-2010 $707.48 9-5-2011 $497.19 1-5-2013 $497.19
6-5-2010 $707.48 10-5-2011 $497.19 2-5-2013 $497.19
7-5-2010 $497.19 11-5-2011 $497.19 3-5-2013 $497.19
8-5-2010 $497.19 12-5-2011 $497.19 4-5-2013 $497.19
9-5-2010 $497.19 1-5-2012 $497.19 5-5-2013 $497.19
10-5-2010 $497.19 2-5-2012 $497.19 6-5-2013 $497.19
11-5-2010 $497.19 3-5-2012 $497.19 7-5-2013 $497.19
12-5-2010 $497.19 4-5-2012 $497.19 8-5-2013 $497.19
1-5-2011 $497.19 5-5-2012 $497.19 9-5-2013 $497.19
2-5-2011 $497.19 6-5-2012 $497.19 10-5-2013 $497.19
3-5-2011 $497.19 7-5-2012 $497.19 11-5-2013 $497.19
4-5-2011 $497.19 8-5-2012 $497.19 12-5-2013 $497.19
5-5-2011 $497.19 9-5-2012 $497.19 1-5-2014 $497.19
6-5-2011 $497.19 10-5-2012 $497.19 2-5-2014 $497.19
7-5-2011 $497.19 11-5-2012 $497.19 3-5-2014 $496.95
__________
TOTAL $24,495.75
(Jt. Ex. 8).
From the total contribution of $24,495.75, the Payment Schedule shows that $15,706.00 would be deposited into the Savings Account and $8,789.75 would be paid Legal Helpers for its debt settlement services. The amount allocated to the Savings Account ($15,706.00) was based on Legal Helpers' estimate of the cost to settle Huffman's credit card debt of $39,265.00, that is, forty percent (40%) of the debt owed ($15,706.00 = 40% × $39,265.00).
The portion of the total contribution allocated to Legal Helpers ($8,789.75) consisted of: (1) an initial flat retainer of $500.00; (2) $2,400.00 in maintenance fees; and (3) a service fee of $5,889.75, representing fifteen percent (15%) of her enrolled debts ($5,889.75 = $39,265.00 × 15%).
Her monthly payments were supposed to be $497.19, except for the first three months and the last month of the forty-eight (48)-month program. For the first three (3) months, from April 5, 2010 through June 5, 2010, Huffman was expected to pay $707.48 per month; then, for the next forty-four (44) months, from July 5, 2010 through February 5, 2014, she was scheduled to pay $497.19 per month; and on March 5, 2014, she would make a final payment of $496.95. (Jt. Ex. 1 at 6).
For the first few months, Huffman's Payment Schedule allocates almost all payments to Legal Helpers' fees before any attempts were made to settle any of Huffman's enrolled debts. Specifically, the retainer fee of $500.00 is scheduled to be paid in installments during the first three (3) months of the debt settlement program from April 5, 2010 through June 5, 2010. The service fee of $5,889.75 is paid during the first fifteen (15) months from April 5,
From July 5, 2010 through May 5, 2011, $79.08 of the total monthly contribution of $497.19 was scheduled to fund the Savings Account. On June 5, 2011, the allocation to the Savings Account was increased by one (1) penny to $79.09. By July 5, 2011, Huffman would have paid all initial fees due Legal Helpers, and only the $50.00 monthly maintenance fee would remain. Accordingly, from July 5, 2011 until February 5, 2014, the allocation to the Savings Account would increase to $447.19 (which is $50.00 less than the amount of her full contribution), according to the Payment Schedule. From the final payment of $496.95 on March 5, 2014, all but $50.00 ($446.95) would be allocated to the Savings Account. Chart C below shows the proposed allocation of Huffman's payments between the Savings Account and Legal Helpers' fees:
CHART C: PROPOSED ALLOCATION OF PROGRAM PAYMENTS BETWEEN FEES
FOR SERVICES & SAVINGS ACCOUNT
Legal Legal
Helpers Savings Helpers' Savings
Payment Date Fees Account Payment Date Fees Account
4-5-2010 $707.48 $0.00 4-5-2012 $50.00 $447.19
5-5-2010 $707.48 $0.00 5-5-2012 $50.00 $447.19
6-5-2010 $707.48 $0.00 6-5-2012 $50.00 $447.19
7-5-2010 $418.11 $79.08 7-5-2012 $50.00 $447.19
8-5-2010 $418.11 $79.08 8-5-2012 $50.00 $447.19
9-5-2010 $418.11 $79.08 9-5-2012 $50.00 $447.19
10-5-2010 $418.11 $79.08 10-5-2012 $50.00 $447.19
11-5-2010 $418.11 $79.08 11-5-2012 $50.00 $447.19
12-5-2010 $418.11 $79.08 12-5-2012 $50.00 $447.19
1-5-2011 $418.11 $79.08 1-5-2013 $50.00 $447.19
2-5-2011 $418.11 $79.08 2-5-2013 $50.00 $447.19
3-5-2011 $418.11 $79.08 3-5-2013 $50.00 $447.19
4-5-2011 $418.11 $79.08 4-5-2013 $50.00 $447.19
5-5-2011 $418.11 $79.08 5-5-2013 $50.00 $447.19
6-5-2011 $418.10 $79.09 6-5-2013 $50.00 $447.19
7-5-2011 $50.00 $447.19 7-5-2013 $50.00 $447.19
8-5-2011 $50.00 $447.19 8-5-2013 $50.00 $447.19
9-5-2011 $50.00 $447.19 9-5-2013 $50.00 $447.19
10-5-2011 $50.00 $447.19 10-5-2013 $50.00 $447.19
11-5-2011 $50.00 $447.19 11-5-2013 $50.00 $447.19
12-5-2011 $50.00 $447.19 12-5-2013 $50.00 $447.19
1-5-2012 $50.00 $447.19 1-5-2014 $50.00 $447.19
2-5-2012 $50.00 $447.19 2-5-2014 $50.00 $447.19
3-5-2012 $50.00 $447.19 3-5-2014 $50.00 $446.95
________ __________
TOTALS $8,789.75 $15,706.00
On April 8, 2010, Eclipse called Huffman to discuss charges for insufficient funds ("NSF Fees") incurred when Copiah Bank dishonored and returned drafts that Global attempted to debit from the Copiah Account. Apparently, the Special Purpose Account Application signed by Huffman on March 30, 2010 contained the wrong number to her Copiah Account. (Jt. Ex. 15). Huffman signed a second Special Purpose Account Application on April 13, 2010 that also contained the wrong account number, and a third one on May 15, 2010 that had the correct account number. A withdrawal of $732.48 was drafted automatically from her checking account on April 13, 2010 and again on May 11, 2010. (Jt. Ex. 3). Each of these payments included an additional $25.00 charge to cover Global's NSF fee. Global withdrew the NSF Fees even though Huffman's Copiah Account had sufficient funds to pay the drafts.
On April 23, 2010, Eclipse sent letters addressed "To Whom It May Concern" to Huffman's five (5) creditors notifying them that "[o]ur law firm represents the above client(s)" and "[w]e are reviewing our client's financial circumstance in order to determine all feasible legal remedies." (LHDR Ex. 1 C; Pretrial Order at 10). Eclipse sent the same letters again on or about November 10, 2010. (Id.).
Huffman began receiving past due notices, dunning letters,
The account balances on her credit cards increased when Huffman stopped making her monthly payments to creditors because of late charges and increases in interest rates. In a letter to Legal Helpers dated January 18, 2011 and mailed to an address in Irvine, California (the "Settlement Letter"), Citibank (South Dakota) ("Citibank"), acting on behalf of Sears Gold Mastercard, offered to settle Huffman's $6,902.53 credit card debt for $3,796.39. Notably, the Settlement Letter was mailed to Irvine, California, not to the Tampa, Florida address given in the form letters. Then, on May 17, 2011, Citibank served Huffman with a summons and Complaint (the "Citibank Complaint") filed against her in the Circuit Court of Copiah County, Mississippi, in Civil Action 2011-0133, for nonpayment of credit card debt. (Jt. Ex. 18). Attached to the Citibank Complaint was a copy of the Settlement Letter.
Sometime in June 2011, Huffman informed Eclipse that Citibank had sued her. According to Huffman, the Eclipse Rep "didn't seem to care" and offered no ideas about what she should do next. When Huffman inquired about whether she should file bankruptcy, the Eclipse Rep responded, "just give [us] a few more months." When Huffman asked to speak to a Legal Helpers' attorney, the Eclipse Rep made excuses why no attorney was available. Later, Citibank obtained a Judgment by Default (Jt. Ex. 18) against Huffman of $9,203.37, which included not only the balance owed of $6,902.53 but also attorneys' fees of $2,300.84.
As noted previously, Legal Helpers' protocol when a client was sued was to change the color code of the file from green to black and "triage" the file. For unknown reasons, Legal Helpers did not follow this protocol with respect to Huffman's file. Searns testified that Huffman must not have asked to speak to an attorney because the compliance call log (the "Call Log") (LHDR Ex. 1B) in Huffman's file does not show that she had asked for a referral.
Sometime in June 2011, Huffman informed Legal Helpers that she was canceling the debt settlement program, and she stopped the automatic drafts of funds from her Copiah Account.
CHART D: HUFFMAN'S ACTUAL PROGRAM PAYMENTS
Payment Date Monthly Payment Legal Helpers Fees Savings Account
4-13-2010 $732.48 $732.48 $0.00
5-11-2010 $732.48 $732.48 $0.00
6-7-2010 $707.48 $707.48 $0.00
7-6-2010 $497.19 $418.11 $79.08
8-5-2010 $497.19 $418.11 $79.08
9-7-2010 $497.19 $418.11 $79.08
10-5-2010 $497.19 $418.11 $79.08
11-5-2010 $497.19 $418.11 $79.08
12-6-2010 $497.19 $418.11 $79.08
1-5-2011 $497.19 $418.11 $79.08
2-7-2011 $497.19 $418.11 $79.08
3-7-2011 $497.19 $418.11 $79.08
4-5-2011 $497.19 $418.11 $79.08
5-5-2011 $497.19 $418.11 $79.08
6-6-2011 $497.19 $418.10 $79.09 7-5-2011 $497.19 22 $0.00 $0.00 _________ _________ _______TOTALS $8,635.91 $7,189.75 $948.97
(Jt. Exs. 3 & 16; Pretrial Order at 10-11). Chart D shows that the first two drafts of $732.48 are $25.00 more than the scheduled payments of $707.48. The additional charges were incurred because Huffman's first payments into the program were returned twice by Copiah Bank for the reasons previously discussed.
Legal Helpers did not settle any of the debts Huffman had enrolled in the program. During the fifteen (15) months she was enrolled in the program, Huffman never spoke to Windsor or any other attorney associated with Legal Helpers.
In July 2011, Legal Helpers refunded Huffman a total of $1,371.16 in two (2) transactions. First, Legal Helpers refunded $497.19, the amount Eclipse automatically drafted from her checking account after she had cancelled her enrollment in the program. Legal Helpers attributes this final draft to Huffman's failure to notify Global of her cancellation of the program.
Second, Legal Helpers refunded $873.97 by check (Jt. Exs. 10 & 16) from her Savings Account. At that time, the balance in her Savings Account was $948.97. Legal Helpers refunded that amount, less $75.00.
Once the monies refunded by Legal Helpers are subtracted from the total amount she paid into the program, Huffman paid net fees for Legal Helpers' services of $7,264.75, as shown in Chart E, as follows:
CHART E: NET FEES PAID BY HUFFMAN
Legal Helpers'
Payment Date Monthly Payment Fees Savings Account Refund
4-13-2010 $732.48 $732.48 $0.00
5-11-2010 $732.48 $732.48 $0.00
6-7-2010 $707.48 $707.48 $0.00
7-6-2010 $497.19 $418.11 $79.08 8-5-2010 $497.19 $418.11 $79.08 9-7-2010 $497.19 $418.11 $79.08 10-5-2010 $497.19 $418.11 $79.08 11-5-2010 $497.19 $418.11 $79.08 12-6-2010 $497.19 $418.11 $79.08 1-5-2011 $497.19 $418.11 $79.08 2-7-2011 $497.19 $418.11 $79.08 3-7-2011 $497.19 $418.11 $79.08 4-5-2011 $497.19 $418.11 $79.08 5-5-2011 $497.19 $418.11 $79.08 6-6-2011 $497.19 $418.10 $79.09 7-5-2011 $497.19 $497.19 ($873.97) $873.97 NSF FEES $75.00 ($75.00) _________ _________ _____ _________TOTALS $8,635.91 $7,264.75 $0.00 $1,371.16
(Jt. Exs. 3, 10, & 16).
At the time of Trial, Legal Helpers had enrolled 442 clients in Mississippi in its debt settlement program. In addition to Huffman, two (2) other former clients, George H. Huber ("Huber") and Melanie Barry ("Barry"), have filed petitions for bankruptcy relief and adversary proceedings against Legal Helpers after cancelling their debt settlement programs. See Henderson v. Legal Helpers Debt Resolution, L.L.C. (In re Barry), Adv. Proc. No. 12-05036-KMS; Huber v. Legal Helpers Debt Resolution, L.L.C. (In re Huber), Adv. Proc. No. 13-05030-KMS.
The Trustee presented Huber's testimony to support his claim that Huffman's experience was not atypical but was shared by other clients of Legal Helpers. Huber testified that from 2009 until May 2011, he was enrolled in Legal Helpers' debt settlement program in Mississippi. He signed a retainer agreement much like the one signed by Huffman (Adv. Proc. No. 13-05030-KMS, Adv. Dkt. 1A). During his enrollment, his creditors called him multiple times daily. Without Legal Helpers' help and contrary to the retainer agreement, Huber negotiated the settlement of two (2) debts, which he paid from his disposable income. Huber ended his enrollment after Citibank and Visa had filed collection lawsuits against him. See Huber, Case No. 11-51188-KMS & Adv. Proc. No. 13-05030-KMS. When Huber informed Legal Helpers about these lawsuits, Hyslip sent him an email informing him that Legal Helpers would not represent him in these lawsuits. (Trustee Ex. 15). Hyslip also told Huber that Legal Helpers "can arrange for you a free consultation with [Legal Helpers] regarding how a Chapter 7 bankruptcy would likely discharge your debt." (Id.). Huber filed a chapter 13 bankruptcy case without any assistance from Legal Helpers.
Huffman retained the services of a Mississippi bankruptcy attorney, Michael G. Pond ("Pond"). With Pond's legal assistance, Huffman filed a voluntary petition for relief (the "Petition") (Bankr. Dkt. 1) on January 19, 2012 under chapter 7 (the "Bankruptcy Case"), the very contingency
When she filed her Petition, Huffman's debts exceeded her assets (Jt. Ex. 4 at 1). Her only secured debt was the mortgage on her home (Id. at 8). She listed in her bankruptcy schedules all of the unsecured debts that she had enrolled in the debt settlement program. (Id. at 10).
On September 28, 2012, the Trustee filed the Complaint asserting five (5) causes of action on Huffman's behalf against Macey, Aleman, Hyslip, and Searns (collectively, the "Members") and Legal Helpers: Count I: Turnover of Estate Property under § 542 (Compl. ¶¶ 66-71); Count II: Fraudulent Transfers under § 548 (Compl. ¶¶ 72-76); Count III: Accounting (Compl. ¶¶ 77-78); Count IV: Violations of § 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. Monies that she could have used to pay her creditors were paid instead to Legal Helpers. The Trustee alleges numerous deceptive and abusive practices by Legal Helpers in the Complaint and seeks to recover all assets taken by Legal Helpers for the benefit of the bankruptcy estate.
On November 14, 2012, Legal Helpers filed the Defendants [sic] Motion for [sic] to Compel Barry's [sic] Claims to Arbitration Pursuant to the Federal Arbitration Act and to Stay Pending Arbitration (Adv. Dkt. 15). The Court denied its request to compel arbitration on February 6, 2013, in the Memorandum Opinion and Order Denying Motion to Compel Arbitration and to Stay Adversary Proceeding Pending Arbitration (Adv. Dkt. 37).
On February 20, 2013, Legal Helpers and the Members filed a Notice of Appeal of the denial of their request for arbitration (Adv. Dkt. 44) and contemporaneously filed separate answers to the Complaint. (Adv. Dkts. 39-43). Thereafter, Legal Helpers and the Members filed a stipulation of dismissal of the appeal. On March 18, 2013, the Court entered an order dismissing the appeal pursuant to Rule 8001(c) of the Federal Rules of Bankruptcy Procedure. (Adv. Dkt. 60).
On April 10, 2013, Legal Helpers filed the Motion for Judgment on the Pleadings (Adv. Dkt. 64), in which Legal Helpers and the Members asked the Court to dismiss all of the Trustee's alter ego claims against the Members and most of his claims against Legal Helpers. As to his claims against Legal Helpers, they sought dismissal of the turnover claim, the accounting claim, and the fraud claim. They did not seek dismissal of the Trustee's claims against Legal Helpers for fraudulent transfer or for relief under § 526. On June 10, 2013, the Court entered the Memorandum Opinion and Order on Motion for Judgment on the Pleadings (the "Rule 12(c) Opinion") (Adv. Dkt. 75) in which it granted the Motion for Judgment on the Pleadings in part on the ground that the Trustee had failed to allege sufficient facts in the Complaint supporting an alter ego claim against the Members or a turnover claim with respect to the fees and expenses
The Trustee filed an Amended Motion to Compel Discovery ("Amended Discovery Motion") (Adv. Dkt. 88) seeking an order compelling Legal Helpers to produce documents regarding the amount and method of compensation they charged and received from Huffman and a list of their Mississippi clients (the "Client List"). Legal Helpers filed a response (Adv. Dkt. 93). In the Order ("Discovery Order") (Adv. Dkt. 97) that granted in part and denied in part the Amended Discovery Motion, the Court instructed Legal Helpers to produce the Client List to the Trustee. Later, the parties entered into a Stipulated Protective Order (the "Protective Order") (Adv. Dkt. 114) that, inter alia, limited the use of the Client List.
Legal Helpers filed the Legal Helpers Debt Resolution, LLC's Motion for Summary Judgment (the "LHDR Summary Judgment Motion") (Adv. Dkt. 98) on September 4, 2013. Legal Helpers requested summary judgment on the following claims for the reasons indicated: (1) the Trustee's turnover claim (Count I) because the Discovery Order requiring Legal Helpers to produce a list of its Mississippi clients has rendered the claim moot; (2) the Trustee's fraudulent transfer claim (Count II) because Legal Helpers provided a "reasonably equivalent value" in the services it provided Huffman; (3) the Trustee's accounting claim (Count III) because the bank statements in the Trustee's possession provide all the information necessary to determine the total amount of money Huffman paid Legal Helpers; (4) the Trustee's claim under § 526 (Count IV) because Legal Helpers did not provide any "bankruptcy assistance" to Huffman; and (5) the Trustee's fraud claim (Count V) because (a) it consists of alleged misrepresentations that Huffman could not have reasonably relied upon, (b) it consists of alleged misrepresentations to act in the future, and (c) there is no evidence that the remaining misrepresentations were actually made. (LHDR S.J. Mot. ¶ 7).
The Trustee filed the Plaintiff's Motion for Partial Summary Judgment (the "Trustee Summary Judgment Motion") (Adv. Dkt. 104). The Trustee requested summary judgment on his claims under § 526 (Count IV). The Trustee asserted that the undisputed facts established as a matter of law that Legal Helpers violated § 526(a)(1) by failing to perform promised services and also violated § 526(a)(3) by misrepresenting the services it would provide. (Adv. Dkt. 105 at 3).
In the Memorandum Opinion and Order Denying Legal Helpers Debt Resolution, LLC's Motion for Summary Judgment and the Plaintiff's Motion for Partial Summary Judgment (Adv. Dkt. 118), the Court, exercising its discretion under Rule 7056(a) of the Federal Rules of Bankruptcy Procedure, denied both the LHDR Summary Judgment Motion and the Trustee Summary Judgment Motion in order to allow a fuller development of the record at Trial. In the alternative, the Court concluded that there were genuine issues of disputed fact and the parties failed to show that they were entitled to judgment as a matter of law.
The pretrial order (the "Pretrial Order") (Adv. Dkt. 127) was entered on November 8, 2013. The Trial took place on November
In the Adversary, the Trustee seeks the turnover of records and documents related to Legal Helpers' debt settlement program in Mississippi. The Trustee also seeks to recover the fees Huffman paid legal Helpers for its services between April 2010 and June 2011 as fraudulent transfers under § 548. The Trustee asks the Court to require Legal Helpers to provide an accounting of the flow of monies from Huffman to Legal Helpers, Eclipse, and Global. Moreover, he contends that Legal Helpers is a debt relief agency that failed to perform promised debt settlement services and misrepresented those services to Huffman in violation of § 526. For this reason, he alleges that he is entitled to a remittal of fees Huffman paid Legal Helpers, actual damages, attorneys' fees and costs, and a civil penalty of $221,000.00. Finally, he asserts that Legal Helpers committed fraud by misrepresenting the services it intended to provide Huffman.
During Trial, the Trustee moved to introduce into evidence two (2) sets of documents: (1) email communications from Aleman ("Aleman's Emails" or "Trustee Exhibit 1") and (2) Aleman's Answer to a Complaint ("Answer to Illinois ARDC Complaint" or "Trustee Exhibit 11"). Trustee Exhibit 11 was filed in an action against Aleman and Macey by the Illinois Registration and Disciplinary Commission (the "Illinois ARDC").
At Trial, Legal Helpers objected to the admission of these exhibits on grounds of relevancy under Rule 402 of the Federal Rules of Evidence ("Rule 402") and on the ground their prejudicial harm substantially outweighed their probative value under Rule 403 of the Federal Rules of Evidence ("Rule 403"). At Trial, the Court deferred ruling on Legal Helpers' objections to allow more evidence to be developed during Aleman's video deposition. At Aleman's video deposition, taken after the conclusion of Trial, the parties set forth their respective positions on the record. The Court, having had the benefit of viewing the parties' arguments in their proper context, begins its analysis by considering in greater detail the contents of the challenged exhibits.
Trustee Exhibit 1 is ten (10) pages of emails to and from Aleman. (Trustee Ex. 1). The earliest email is dated June 30, 2009 and is between Aleman and Pond, the same attorney who later represented Huffman in her bankruptcy case. In the first email, Aleman mentions a potential partnership between Legal Helpers, P.C. and Pond. (Id.). Pond responds by summarizing a prospective client's recent experience with a debt settlement entity other than Legal Helpers. The prospective client had enrolled $8,000.00 in credit card debt plus $2,950.00 in other debt (for a total debt of $10,950.00) in a debt settlement program similar to Legal Helpers'. (Id.). The debt settlement entity deducted a total of $5,000.00 from her checking account over twenty-five (25) months. (Id.). She was then sued by the credit card creditor for over $23,000.00. (Id.). Pond wrote that he did not "wish to be associated with any such business" and that "[a]ny lawyer who participated in or was associated with that transaction is guilty of malpractice." (Id.).
In Aleman's next email, Aleman asked Pond to reconsider his position. (Trustee
The Trustee asked Aleman why Huffman's situation differed from the scenario he described for Pond in their email exchanges. Aleman explained, "Miss Huffman's situation ... was unique in that we did not or were unable to settle ... debts within the normal time frame.... [M]y understanding of that is a one-off. Normally that does not happen. We typically settle debts, you know, every 6 to 8 months. Again, that's historic precedent." (Aleman Dep. at 23-24).
The Trustee moved to admit Trustee Exhibit 1 into evidence on the ground that Aleman's statements constituted an "admission by a party opponent." (Id.). Legal Helpers then renewed its objection "on grounds of relevance and [Rule] 403." (Id.). Legal Helpers maintained that the emails were exchanged in 2009 and did not relate specifically to Huffman, who was not a client at that time. (Id.).
Trustee Exhibit 11 consists of a fifteen (15)-page Answer to Illinois ARDC Complaint that was jointly filed by Aleman and Macey in response to a complaint filed against them by the Hearing Board of the Illinois ARDC (the "Illinois ARDC Board"). (Trustee Ex. 11). (Both Aleman and Macey hold a license to practice law in Illinois.) In general, the Illinois ARDC Board questioned Legal Helpers' business model, which, according to Aleman, was the same business model adopted by Legal Helpers in Mississippi. (Aleman Dep. at 32).
The Trustee moved to admit Aleman's denial to the following allegation by the Illinois ARDC Board: "[A]t no time before the initiation of the attorney-client relationship did [Aleman or Macey] or an attorney from [Legal Helpers] personally confer with and advise the clients about... the availability, risks and benefits of other courses of action to resolve the clients' indebtedness, such as Chapter 7 or Chapter 13 bankruptcy proceedings, under each client's particular circumstances." (Trustee Ex. 11, ¶ 17). In the Answer to Illinois ARDC Complaint, Aleman maintained "that substantially all of the prospective clients were advised of the bankruptcy remedies available under Chapters 7 and 13, either by an attorney or under an attorney's direction, by a non-attorney." (Id.). Legal Helpers opposes the admission of Trustee Exhibit 11 on the ground that Aleman's response was limited to clients of Legal Helpers in Illinois.
Rule 402 renders all relevant evidence admissible, with certain exceptions, and all irrelevant evidence inadmissible. Rule 403 confers limited discretion on the Court to exclude relevant evidence if its probative worth is substantially outweighed by any
Evidence is relevant if it makes a proposition more probable than it would be without the evidence. 22 CHARLES ALAN WRIGHT & KENNETH W. GRAHAM, JR., FEDERAL PRACTICE AND PROCEDURE § 5165, at 128 (2d ed. 2012). The burden of showing the relevance of Trustee Exhibits 1 and 11 rests on the Trustee. See United States v. Kelly, 556 F.2d 257, 265 (5th Cir.1977).
Trustee Exhibit 1 relates to Aleman's efforts during Legal Helpers' formative year to recruit a local attorney in Mississippi to join Legal Helpers. Aleman's emails were sent about eight (8) months before Huffman enrolled in Legal Helpers' debt settlement program. Even so, the Court finds that Trustee Exhibit 1 is relevant. Searns testified at length about his vetting of the business model that Legal Helpers adopted nationally. His testimony opened the door for the Trustee to rebut Searns' description of the program.
Legal Helpers' objection imposes a higher standard on relevancy then Rule 401 requires. Rule 401 makes evidence relevant if it has "any" probative value. The Court rejects the argument by Legal Helpers that the emails are so remote in time to Huffman's enrollment as to affect their probative value.
Trustee Exhibit 11 relates to the issue of whether Legal Helpers is a "debt relief agency" and, specifically, whether Legal Helpers provided "bankruptcy assistance" to Huffman within the meaning of § 526. The Court finds Trustee Exhibit 11 relevant in that it contains inconsistent statements by Aleman regarding the advice that all prospective clients received from Legal Helpers with respect to the remedies available to them under chapters 7 and 13 of the Code. Aleman's response to paragraph 17 casts doubt on Legal Helpers' position that it never provided bankruptcy assistance to any of its clients. See United States v. Lopez, 979 F.2d 1024, 1034-35 (5th Cir.1992) (holding that extrinsic evidence is admissible to contradict specific testimony). Legal Helpers argues that Aleman's response is irrelevant because it pertained to clients in Illinois only. Searns and Aleman, however, testified that Legal Helpers operated the same legal debt settlement program nationwide.
Turning to the second ground raised by Legal Helpers for excluding Trustee Exhibit 1 and 11, the Court rejects Legal Helpers' argument that these exhibits should be excluded under Rule 403 because of their unfair prejudice. Although the Court has discretion to exclude relevant evidence if its probative value is substantially outweighed by the problems that admission of such evidence may cause, the Court's discretion is limited. The Fifth Circuit has cautioned courts to use Rule 403 "sparingly." Herrington v. Hiller, 883 F.2d 411, 414 (5th Cir.1989).
Under § 542, the Court "may order an attorney ... or other person that holds recorded information, including books, documents, records and papers, relating to the debtor's property or financial affairs, to turn over or disclose such recorded information to the trustee." 11 U.S.C. § 542(e). "Documents which are not property of the estate may still be subject to turnover under Section 542(e) if they relate to the debtor's property or financial affairs, subject to any claim of privilege." In re Crescent Res., LLC, 457 B.R. 506, 513 (Bankr.W.D.Tex.2011) (citation omitted).
In Count I of the Complaint, the Trustee seeks the turnover of all records related to Legal Helpers' debt settlement program in Mississippi, including records related to clients other than Huffman (Compl. ¶ 71). The Trustee bears the burden of showing that the requested documents relate to the debtor's property or financial affairs. Crescent, 457 B.R. at 513.
At Trial, counsel for the Trustee stated that he had received a list of all Mississippi clients pursuant to the Court's Discovery Order. Also, in the Trustee Brief, the Trustee asks only that the Court "consider the need for ... turnover." (Trustee Br. at 4). After considering the evidence at Trial, the Court finds that the Trustee's turnover claim under § 542 in Count I should be denied as moot.
In Count II, the Trustee seeks to recover the funds Huffman paid Legal Helpers for debt settlement services as fraudulent transfers under § 548
Section 548(a)(1)(B) provides, in relevant part:
11 U.S.C. § 548(a)(1)(B)(i)-(ii). In sum, to prevail on his claim for fraudulent transfer under § 548(a)(1)(B), the Trustee must show that (1) transfers were made of Huffman's property, (2) the transfers were made within two (2) years of the date of the filing of the Petition on January 19, 2012, (3) Huffman received less than reasonably equivalent value for such transfers, and (4) Huffman was insolvent at the time of such transfers or became insolvent as a result of such transfers. (Id.); see Gaudet v. Babin (In re Zedda), 103 F.3d 1195, 1203-06 (5th Cir.1997). The first and second elements of § 548(a)(1)(B) are undisputed by the parties. The third element requires the Court to engage in a fact-intensive review of the evidence to determine whether the services provided by Legal Helpers were "reasonably equivalent" to the $7,264.75
The Bankruptcy Code does not define "reasonably equivalent value," but courts usually base the determination on factual findings "regarding the value of the property transferred and the `value' received in exchange." Besing v. Hawthorne (In re Besing), 981 F.2d 1488, 1495 (5th Cir.1993) (footnote omitted) (citation omitted); see also Tex. Truck Ins. Agency, Inc. v. Cure (In re Dunham), 110 F.3d 286, 289 (5th Cir.1997) (holding that issue of "reasonably equivalent value" is generally a question of fact). A finding of reasonably equivalent value does not require evidence of a dollar-for-dollar exchange. On the other hand, there is no lower limit on reasonably equivalent value. Instead, the finding depends on the "totality of the circumstances." Besing, 981 F.2d at 1495 n. 14. Here, the Trustee has the burden of proving by a preponderance of the evidence that the debt settlement services were not for "reasonably equivalent value" given the "totality of the circumstances."
The Trustee maintains that Huffman did not receive "reasonably equivalent value" because Legal Helpers and/or Eclipse failed to perform the promises made in the Retainer Agreement. (Trustee Br. at 6). The Trustee contends that: Eclipse scarcely made any effort at all to negotiate settlements with Huffman's creditors, as shown in the Call Log and by Huffman's testimony at Trial; Eclipse failed to respond timely to Huffman's inquiries; Eclipse failed to inform Huffman of the settlement offer made by Citibank; Eclipse failed to discuss with Huffman her legal options when Citibank sued her; and Eclipse generally failed to use its "best efforts" to obtain a satisfactory result for Huffman. The telephone conversations with the Eclipse Rep and the form letters sent to Huffman's creditors in April and November 2010 were of no help to Huffman. They did not curtail the collection calls or dunning letters and did not lead to the settlement of any debts.
Legal Helpers contends that the $7,189.75
Legal Helpers relies extensively upon the language of the Retainer Agreement warning Huffman that Legal Helpers made no guarantee that it would reach any settlements. (Jt. Ex. 1, ¶¶ X(a), VII & VIII; Jt. Ex. 8). Because of this no-guarantee language, according to Legal Helpers, it is inappropriate for the Trustee to critique the debt settlement program in hindsight, that is, to view it with the present knowledge that Legal Helpers would not succeed in settling any of Huffman's debts and that Huffman would file bankruptcy in the end.
Legal Helpers describes the Retainer Agreement as an "arms-length" transaction where there was at least some legitimate chance that Eclipse might have been able to settle some of Huffman's debts, if only she had remained in the program for two (2) more years. Her decision to cancel the program early, according to Legal Helpers, is what prevented its success. Because there was only $948.97 in the Savings Account when she cancelled the program, Legal Helpers claims that it was impossible for Eclipse to settle Huffman's debts of $39,265.00, which would have amounted to a debt reduction of about ninety-seven percent (97%). (Aleman Dep. at 56-58).
It is undisputed that during the fifteen (15) months Huffman participated in the program, Legal Helpers did not negotiate the settlement of a single debt enrolled in the program. The Trustee places great weight on this fact. Legal Helpers' assertion that the Trustee's claim is really about a "bad deal," however, misses the mark. Huffman testified at Trial, "They did not do nothing they told me they would do!... I tried to and I did pay every month until it looked like I was getting deeper' in the hole."
If the Eclipse Rep had followed Searns' protocol when Huffman was sued, she would have referred Huffman to Windsor, but she did not. The Eclipse Rep was the only individual who had any personal interaction with Huffman. No attorney at Legal Helpers ever spoke with her, including Windsor, and no one at Eclipse ever met with her face to face.
Based upon the experience of Huffman and despite Aleman's description of her failed program as an "anomaly," the Court is skeptical that the program provided sufficient supervision over Eclipse. Moreover, as to her initial enrollment in the program, the Court doubts that the three-step review performed by Searns, Hyslip, and Windsor was of any benefit to her.
Legal Helpers places blame upon Huffman for ending the program with only $948.97 in the Savings Account and, thus, making it impossible for the program to succeed. Even Aleman testified, however, that Eclipse should have settled her $969.00 debt to Wells Fargo. (LHDR Ex. 1B). Indeed, applying a debt reduction of thirty-five percent (35%) (the "Debt Resolution Minimum Standards of Representation" in the Retainer Agreement), Legal Helpers should have settled the Wells Fargo debt for no more than $629.85, which Huffman had accumulated in the Savings Account by February 7, 2011. Aleman attempted to explain the failure of Eclipse to settle this debt as a "one off" and an "anomaly." (Aleman Dep. at 58). He speculated that Eclipse might have decided deliberately not to settle the Wells Fargo debt because it was such a small amount.
Legal Helpers' placement of the blame on Huffman's early termination ignores the likelihood that the amount of upfront fees Legal Helpers charged her doomed the program from its inception. As proposed, no funds would reach the Savings Account until three (3) months into the program and, thereafter, only about $80.00 per month during all of the following year.
For her part, Huffman did not miss a single payment to Legal Helpers during her enrollment in the program.
The Court is not persuaded differently by Kaler v. Able Debt Settlement, Inc. (In re Kendall), 440 B.R. 526 (8th Cir. BAP 2010), a case cited by Legal Helpers as directly on point. (LHDR Br. at 15). There, the bankruptcy court ruled that payments by debtors of $1,708.37 for debt settlement services were not fraudulent transfers under § 548(a)(1)(B). Id. at 533-34. Considering the transaction as a whole, the bankruptcy court found that the value of the debt settlement services was reasonably equivalent to the funds paid by the debtors into the program. In reaching this finding, the bankruptcy court rejected the trustee's contention that there was no possibility from the outset that the debtors could avoid bankruptcy by participating in the program.
The Court finds that Kaler is factually distinguishable. The nature and extent of the services provided to the debtors in Kaler differed significantly from those provided
The fourth and final element of a fraudulent transfer claim under § 548(a)(1)(B) is whether Huffman was insolvent when she paid the program fees or became insolvent as a result of paying those fees. Under the Code, an individual is "insolvent" when "the sum of such [person's] debts is greater than all of such [person's] property, at a fair valuation," exclusive of property fraudulently transferred or property claimed as exempt under state or federal law. 11 U.S.C. § 101(32); see also 11 U.S.C. § 101(15) (defining entity as including a person).
According to the Trustee, Huffman's insolvency during the time she was enrolled in the program is evidenced by her bankruptcy schedules. (Bankr. Dkt. 3). As mentioned previously, Huffman enrolled credit card debt of $39,265.00 in the program on March 30, 2010. Huffman testified that her assets did not change much from the date of her enrollment to the time she commenced her bankruptcy case on January 19, 2012. (Bankr. Dkt. 1). The value of her assets, according to her bankruptcy schedules, was $30,450.00, including her exempt property.
Having found that the Trustee may avoid the fraudulent transfers that Huffman paid Legal Helpers for its services, the Court also finds that the Trustee may recover these transfers for the benefit of Huffman's bankruptcy estate under § 550, which sets forth the liability of a transferee in the event of an avoided transfer. 11 U.S.C. § 550.
As to Count III, the basis for the Trustee's accounting claim is unclear. Legal Helpers treats the Trustee's accounting claim as a request for relief under Mississippi law.
Legal Helpers contends that the Trustee has in his possession all of the
The Trustee, in contrast, asserts that an accounting of Huffman's payments is necessary because the substantial role of Eclipse and Global in Huffman's debt settlement program suggests they received a share of the fees paid to Legal Helpers and because the drafts reflected in Huffman's bank statements differ from the Payment Schedule. For example, in processing Huffman's payments, Global charged Huffman $50.00 for NSF Fees in April and May 2010 and $75.00 in July 2011, a total of $125.00 in NSF fees. The evidence at Trial, however, showed that Copiah Bank returned only three (3) items to Global and that the NSF Fee for each item was only $25.00, for a total of $75.00, less than $125.00.
Despite these discrepancies and the computation errors in the LHDR Brief,
The Trustee asserts that Legal Helpers is a debt relief agency that failed to perform promised services in violation of § 526(a)(1) and misrepresented the services to be provided in violation of § 526(a)(3). The Trustee also contends that Legal Helpers failed to provide the disclosures set forth in § 527 or the notice under § 342(b)(1).
Section 526, "Restrictions on Debt Relief Agencies," was enacted in 2005 as part of BAPCPA "to correct perceived abuses of the bankruptcy system." Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 231-32, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010); Hersh, 553 F.3d at 746 ("BAPCPA is a `comprehensive package of reform measures' designed to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy stem and ensure that the system is fair for both debtors and creditors"). As relevant here, § 526 and § 527 regulate the conduct of a "debt relief agency," and § 526(c) and § 528 provide sanctions and remedies when a debt relief agency "intentionally or negligently" fails to comply with those regulations or engages in a clear and consistent pattern or practice of violating those regulations. Legal Helpers disputes that it is a debt relief agency subject to § 526 and § 527.
Assuming that Legal Helpers provided bankruptcy assistance, the Court finds that Huffman is an "assisted person" and/or "prospective assisted person" under § 526(a). Her debts consisted primarily of consumer debts,
According to Legal Helpers, in order to constitute "bankruptcy assistance," the information or advice must relate specifically to a pending bankruptcy case or to the anticipated filing of a bankruptcy petition (LHDR Br. at 19). There do not appear to be any published cases that have addressed this precise issue.
Legal Helpers contends that it did not counsel Huffman regarding her pending bankruptcy case, which was commenced well after she had cancelled the program, and that it did not counsel Huffman in anticipation of the filing of her bankruptcy case. In support of its position, Legal Helpers makes five (5) assertions. First, Legal Helpers insists that in accordance with its business model (and, ironically, despite its name), it provides no legal services to its clients, only debt settlement services.
Legal Helpers' second assertion is that it never discussed bankruptcy with Huffman. Legal Helpers contends that the Call Log reflects no conversations between Eclipse and Huffman about bankruptcy. Legal Helpers admits that Huffman asked the Eclipse Rep if she should just file bankruptcy, and the Eclipse Rep urged her not to, but insists that this advice was not "bankruptcy assistance." (Id. at 20). Huffman testified at Trial that the Eclipse Rep also said that she had certain documents that would tell her "what bankruptcy would do," but Huffman did not identify those documents. Legal Helpers describes Huffman's testimony about these conversations as "vague and unreliable" and urges the Court to disregard them altogether.
As to its third assertion, Legal Helpers maintains that it did not agree in the Retainer Agreement to give Huffman bankruptcy advice. Rather, Legal Helpers agreed to provide bankruptcy advice only if it was "appropriate" to do so when, for example, her circumstances changed, or she requested a consultation. (Jt.Ex.1, ¶¶ III(c), XVII). The "appropriate circumstances," according to Legal Helpers, was the loss of a job or divorce, neither of which had happened to Huffman.
The fourth assertion by Legal Helpers is that the information contained in the Retainer Agreement about bankruptcy law was not provided to Huffman in connection with the Petition that Pond filed on her behalf. Indeed, Huffman testified that she retained Legal Helpers to avoid bankruptcy. As to the information in the Retainer Agreement regarding bankruptcy law and procedures, Legal Helpers embraces Windsor's description of it at Trial that it was generic information that could be found on the Internet using a search engine such as "Google."
The fifth and last assertion by Legal Helpers is the lapse of time between Huffman's cancellation of the debt settlement program in June 2011 and her filing of the Petition on January 19, 2012. This lapse of time, according to Legal Helpers, removes any connection between the bankruptcy information in the Retainer Agreement and her bankruptcy case. As may be recalled, the sequence of events is: Huffman signed the Retainer Agreement on March 30, 2010, terminated the Retainer Agreement in June 2011, retained Pond in January 2012, and filed her Petition on January 19, 2012.
The Trustee insists that because Legal Helpers admitted that it is a debt relief agency in the Retainer Agreement and in other materials in its welcome packet there is no need for the Court to consider whether Legal Helpers provided Huffman "bankruptcy assistance." (Jt. Ex. 2). Even if the Court applied the definition of "bankruptcy assistance," however, the Trustee contends that the Retainer Agreement itself is replete with actual bankruptcy advice. According to the Trustee, this advice appears, for example, in the following paragraph:
(the "Disclosure") (Jt. Ex. 1). The Trustee divides the bankruptcy advice provided Huffman in the above Disclosure and in other materials into three (3) broad categories: (1) the dischargeability of consumer debts in bankruptcy, (2) the debtor's retention of secured real and personal property, and (3) general bankruptcy procedures. See 11 U.S.C. § 110(e)(2)(B) (defining "legal advice" that only attorneys may provide).
The Trustee points to four (4) other provisions in the Retainer Agreement that show that Legal Helpers promised to provide Huffman "bankruptcy assistance": (1) "[Legal Helpers] will discuss specific debt related issues with Client and, if appropriate, offer additional legal services in regard to bankruptcy or other debt resolution services for Client's consideration" (Jt.Ex.1, ¶ III); (2) "[Legal Helpers] will discuss with the Client other legal remedies in the event of such circumstances including Chapter 7 or Chapter 13 bankruptcy" (Id. ¶ XII(e)); (3) "Client understands that there are other remedies available in regard to their goal of debt resolution including consumer credit counseling and bankruptcy" (Id. ¶ XV II); and (4) "Consumer Credit Counseling may impact less on the Client's credit rating and reduce interest rates on current debt, but generally will require payment of the majority of the Client's existing debt. Bankruptcy may discharge the majority of the client's debts, however Client has requested [Legal Helpers] to pursue other alternatives at this time to avoid bankruptcy. [Legal Helpers] will discuss and advise Client as to the bankruptcy option, including fees and costs, at any time that Client's circumstances change or Client requests such consultation. There are no additional fees or costs required from Client for such consultation and advice regarding bankruptcy." (Id. ¶ XVII).
Aside from the Retainer Agreement, the Trustee relies upon Huffman's testimony. Huffman testified that she spoke with the Eclipse Rep about filing a bankruptcy case in light of her deteriorating financial condition, and the Eclipse Rep discouraged her from pursuing bankruptcy relief. The Eclipse Rep gave Huffman this advice while she was contemplating filing a bankruptcy case.
Based on the above evidence, the Court agrees with the Trustee that Legal Helpers provided and/or promised to provide bankruptcy assistance to Huffman, and thus, is a debt relief agency within the meaning of § 526. The Court reaches this finding although it rejects the Trustee's argument that Legal Helper's self-proclaimed status as a "debt relief agency" resolves the issue without the need for any further inquiry.
None of the self-descriptions used by Legal Helpers cites § 526. A finding of a "debt relief agency" for purposes of § 526, however, focuses upon the provision of bankruptcy assistance to an assisted person or a prospective assisted person, and not on the name an entity calls itself. Otherwise, the entities that § 526 was intended to cover could determine for themselves whether the statute applies by selecting a name that would either opt them in or out. This is not to say, however, that the representations that Legal Helpers made to Huffman and the public at large
Similarly, the Court finds relevant the presence of language in the enrollment documents suggesting that Legal Helpers partially incorporated some of the disclosure requirements of debt relief agencies in §§ 526-528 into its practices. For example, in small print at the bottom of the Pledge Sheet appears this statement: "Legal Helpers Debt Resolution, LLC is a debt relief agency. We help people with their debt resolution, including filing for protection under bankruptcy laws." (Jt. Ex. 2). This statement is substantially similar to the one that debt relief agencies must include in their advertisements under § 528(a): "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." 11 U.S.C. § 528(a)(4).
The Trustee points out the numerous instances where Legal Helpers gave bankruptcy advice to Huffman in the Retainer Agreement. Indeed, the word "bankruptcy" appears seventeen (17) times in the Retainer Agreement. Searns and others testified that there is a distinct difference between "specific" and "general" bankruptcy information and that the bankruptcy information in the Retainer Agreement was too general to constitute "bankruptcy assistance." Legal Helpers' argument overlooks the bankruptcy advice that the Eclipse Rep gave Huffman (that she should forego filing a bankruptcy case), which was specific to Huffman and made while Huffman was in contemplation of filing her own bankruptcy case.
Legal Helpers attacks Huffman's credibility and maintains that this conversation never took place.
As evidence that the conversation did not take place, Legal Helpers relies on the absence of the word "bankruptcy" in the Call Log. The Court does not give much weight to the Call Log because it is clearly not a transcript of everything that Huffman and the Eclipse Rep said. Moreover, the Call Log contains abbreviations making it difficult for the Court to decipher and rendering its relevance questionable. Significantly, there is an entry dated April 5, 2011 that is consistent with the gist of the conversation that Huffman described with respect to the frustration she felt with the program and Legal Helpers. The notes from that entry indicate the Eclipse Rep focused her efforts on persuading Huffman to stay in the program.
Legal Helpers argues next that it never provided bankruptcy services to any of its Mississippi clients, but Windsor contradicted that testimony at Trial. Windsor recalled filing a petition for bankruptcy relief on behalf of at least one of them.
Having concluded that Legal Helpers is a debt relief agency, the Court next considers whether Legal Helpers complied with § 526.
When asked if Legal Helpers reduced any of her debts, Huffman testified, "I thought they would help me.... They did not answer my calls or let me know what was going on."
Legal Helpers' misrepresentations, according to the Trustee, arise out of the Retainer Agreement. The Trustee relies on the promise by Legal Helpers to provide "legal services" that relate "to advice, counseling, analysis and negotiations services." (Jt. Ex. 1). Huffman, as previously stated, never spoke to an attorney at Legal Helpers.
The Court agrees with the Trustee that Legal Helpers misrepresented the services that Huffman would receive upon enrollment
Section 527 mandates that debt relief agencies provide disclosures to assisted persons that, among other things, (1) briefly describe the general purpose, benefits, and costs of proceedings under chapters 7, 11, 12, and 13 of the Code and the types of services available from credit counseling agencies; (2) inform them that they must make truthful and accurate disclosures of income and assets; and (3) generally explain that litigation may be an outcome of filing for bankruptcy. 11 U.S.C. § 527. The Retainer Agreement and documents provided in the welcome packet contain some of this information but do not fully comply with § 527. For example, the documents do not include the § 342(b)(1) disclosure required by § 527(a)(1), which explains the general characteristics of the different bankruptcy chapters. The Court, however, does not need to determine whether Legal Helpers failed to comply with the "material requirements" of disclosures and notification to warrant relief because the Trustee has already established such violations of § 526.
There are statutory remedies under § 526(c) for a debt relief agency's violations of § 526. The remedies relevant to the Adversary include:
11 U.S.C. § 526(c)(1)-(2), (5). Simply put, a debt relief agency may be liable for remittal of fees, actual damages, and reasonable attorney's fees and costs. For an intentional abuse or a pattern or practice of abuse, the Court may impose an appropriate civil penalty.
Having found that Legal Helpers intentionally violated § 526(a)(1) and § 526(a)(3)(A), the Court finds that the Retainer Agreement is void and that the Trustee is entitled to recover all fees paid by Huffman into the program, as well as actual damages, reasonable attorneys' fees, and costs. The amount of fees, damages, and costs is discussed later in this Opinion. The Court next considers the issue of a civil penalty.
The Trustee asks the Court to impose a civil penalty of $221,000.00 against Legal Helpers under § 526(c)(5)(B) on the ground that Legal Helpers intentionally violated § 526 and/or "engaged in a clear and consistent pattern of violating" § 526. In support of a civil penalty, the Trustee relies upon the testimony of Huber, whose experience with Legal Helpers' debt resolution program was similar to Huffman's experience. The Trustee also relies upon the Cease and Desist Order issued in Illinois, and the testimony of Aleman and Hyslip regarding the regulatory actions pending against Legal Helpers and/or its Members.
The Court agrees that the evidence supports a civil penalty under both prongs of § 526(c)(5)(B). Huffman's failed program was clearly the result of Legal Helpers' flawed business model and not an "anomaly." Legal Helpers' nationwide adoption of this program establishes a consistent pattern justifying a civil penalty.
With regard to the Cease and Desist Order and other pending regulatory proceedings against Legal Helpers, however, the Court does not give much weight to such evidence. The issue here focuses upon the promises and misrepresentations made by Legal Helpers to Huffman, whereas the issue in those regulatory actions involved the purported unauthorized practice of law by Legal Helpers and its support groups.
Turning to the issue of the amount of the civil penalty, it appears that the Trustee calculates the penalty he requests, $221,000.00, on an amount required to pay $500.00 in compensation to every Mississippi client of Legal Helpers.
As a threshold matter, the Court rejects the Trustee's method for calculating the amount of the civil penalty. The Court does not have authority to award relief to other debtors in other cases. Wells Fargo Bank, N.A. v. Stewart (In re Stewart), 647 F.3d 553, 558 (5th Cir.2011) (holding that bankruptcy court lacked jurisdiction to order creditor to audit and, if necessary, to amend all proofs of claim filed in all pending cases). Moreover, the statutory basis for the civil penalty is not to compensate victims for their actual damages because § 526 provides for the recovery of "actual
There is no amount or range prescribed in § 526(c)(5)(B) for determining the amount of a civil penalty. In the absence of explicit statutory factors, the Court finds guidance in provisions in other federal laws relating to the discretionary imposition of civil penalties. See, e.g., United States v. Gulf Park Water Co., 14 F.Supp.2d 854, 858 (S.D.Miss. 1998) (surveying methodology used by courts in assessing amount of discretionary civil penalties under environmental laws). It appears that civil penalties are largely motivated by factors of deterrence and the culpability of the parties.
Here, Congress enacted §§ 526-528 as a reform measure to regulate the conduct of debt relief agencies and curtail perceived abuses in the bankruptcy system. Milavetz, 559 U.S. at 231-32, 130 S.Ct. 1324. The evidence established that the conduct of Legal Helpers was both intentional and constituted a consistent pattern of abuse in violation of § 526. The presence of both supports a heavier penalty against Legal Helpers. Given the amount of the fee that Legal Helpers charged Huffman ($7,264.75), the Court finds that $28,000.00, a penalty of approximately four (4) times that amount is reasonable and appropriate in light of the facts and circumstances. This civil penalty is not so burdensome as to be punitive but sufficient enough to serve as a deterrent against future noncompliance by Legal Helpers. See, e.g., Hills v. McDermott (In re Wicker), No. 11-12373, 2012 WL 580481, at *3 (E.D.Mich. Feb. 22, 2012) (upholding $5,000.00 civil penalty imposed by bankruptcy court under § 526 for clear pattern of violations).
The Trustee alleges that Legal Helpers misrepresented its services. These misrepresentations, according to the Trustee, were that Legal Helpers could settle Huffman's debts for forty percent (40%) to sixty percent (60%) of the balance owed, that it would timely respond to Huffman's inquires, and that it would keep her informed.
The elements of a fraudulent or intentional misrepresentation are: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon and in the manner reasonable contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his intent to rely thereon; and (9) his consequent and proximate injury. Levens v. Campbell, 733 So.2d 753, 761-62 (Miss.1999). A misrepresentation must be a statement of fact; statements of opinions are not actionable. Thompson v. Nationwide Mut. Ins. Co., 971 F.Supp. 242, 243 (N.D.Miss.1997). Moreover, a fraud claim cannot be based upon representations as to matters in the future or promises to do acts in the future because the person to whom such statements were made has no right to rely on them. S. Mortg. Co. v. O'Dom, 699 F.Supp. 1223, 1226 (S.D.Miss.1987). There is an exception when a promise to perform a future act is made with the present intent of not performing. Bank of Shaw v. Posey, 573 So.2d 1355, 1360 (Miss. 1990). Finally, one may not reasonably rely on an oral representation, even if fraudulently made, that contradicts the plain language of the parties' written contract. Ballard v. Comm. Bank of DeKalb, 991 So.2d 1201, 1207 (Miss.2008); Wells v. Shelter Gen. Ins. Co., 217 F.Supp.2d 744, 753 (S.D.Miss.2002). A person has a legal obligation to read a contract before signing it and may not complain about an oral misrepresentation that would have been
Notwithstanding Searns' purported rigorous efforts to create and vet Legal Helpers' debt-settlement business model, the "model" did not help Huffman at all. If anything, his testimony showed that Legal Helpers was more concerned about defending itself against potential regulatory actions than creating a program that would help debt-ridden consumers outside of bankruptcy court.
Legal Helpers contends that the Trustee cannot prove his fraudulent misrepresentation claim because: (a) Legal Helpers performed the services it promised to perform and by prematurely terminating the Retainer Agreement, Huffman denied Legal Helpers the opportunity to perform fully all of its promises; (b) Huffman had no right to rely on any alleged misrepresentation that contradicted the plain language of the Retainer Agreement; and (c) the alleged misrepresentations were promises to act in the future. See Ballard, 991 So.2d at 1207 (holding that as a matter of law, one may not reasonably rely on oral representations that contradict loan documents); O'Dom, 699 F.Supp. at 1226 (recognizing that under Mississippi law, a fraud claim cannot be predicated upon future promises).
According to Aleman, under Legal Helpers' business model, no one other than Eclipse would have contacted any of Huffman's creditors. The Call Log, however, does not indicate that Legal Helpers ever engaged in negotiations with any of Huffman's creditors. Indeed, the Call Log shows that after her initial enrollment, Huffman initiated most of the telephone calls with Eclipse. As to the form letters mailed by Eclipse, the Court does not consider them as offers of settlement because they did not offer any settlement amount and were addressed to "Whom It May Concern." It is not reasonable to assume that a creditor would read these letters as a sincere offer of settlement. In short, the effort Legal Helpers made to settle Huffman's debts was very different from the "security blanket" promised in the Pledge Sheet.
Legal Helpers held themselves out as law firm in order to lend credence to the debt settlement services. Although Legal Helpers maintains that it provided Huffman "high quality" legal services, it does not appear that they provided her much assistance at all. The only legal advice she received, other than from the documents provided her, came from the Eclipse Rep, a nonlawyer, not from Windsor, Searns, Hyslip, or Aleman.
The Court finds the testimony about Legal Helpers' "success rate" in saving clients $40 million dubious. Legal Helpers was unable to produce any evidence establishing the percentage of the total enrolled debt settled by Legal Helpers, the percentage of the settled debt balance of the total enrolled debt, the percentage of clients who graduated from the program (that is, for whom Legal Helpers settled most of their enrolled debts), or the percentage of clients who, like Huffman, cancelled the program. (See Aleman Dep. at 43-44). According to the debt settlement industry's own statistics, the cancellation rate is almost sixty percent (60%) and a majority of those consumers leave the program without a single debt having been settled. Telemarketing Sales Rule, 75 Fed.Reg. 48,458, 48,472-73 (Aug. 10, 2010) (codified at 16 C.F.R. pt. 310). Indeed, Windsor testified at Trial that he was unaware of a single Mississippi client of Legal Helpers who had successfully completed the program.
Finally, Legal Helpers' characterization of the alleged misrepresentation as promises of future conduct is incorrect. See Redecop v. Gerber, 265 Fed.Appx. 321, 323 (5th Cir.2008) (unpublished) (holding that first element of fraud claim under Mississippi law is the misrepresentation of a past or present fact). For example, there are numerous statements of existing fact in the Retainer Agreement regarding the debt settlement program. (Jt. Ex. 1). Because the program itself was fundamentally flawed, there was little chance that the services listed in the Retainer Agreement would benefit Huffman or that the program would succeed. These are misrepresentations of existing fact.
The Court has already found that the Trustee has proved the elements of the following claims against Legal Helpers: (1) fraudulent transfer, (2) violations of § 526, and (3) fraudulent misrepresentation. The Court next considers the issue of damages, attorneys' fees, and costs as to each of these claims.
Under § 550, the Trustee may recover, for the benefit of the estate, the value of the property fraudulently transferred. The Court has the discretion to restore the bankruptcy estate to the position it would have been in had the assets never been transferred fraudulently out of the estate. The evidence at Trial showed that Huffman paid Legal Helpers $8,635.91. Of that amount, Legal Helpers refunded $1,371.16. Huffman is entitled to a refund of the remainder of the fees of $7,264.75.
The remedy for noncompliance with the material requirements of § 526 is contract voidance and possible fee disgorgement. As noted in the above section, the net amount of fees paid Legal Helpers was $7,264.75. Huffman is entitled to recover that amount under § 526.
As additional damages under § 526, the Trustee seeks $39,265.00, the amount of credit card debt Huffman enrolled in the program, and $1,000.00, the amount Huffman paid Pond in attorney's fees for filing the Petition. (Pretrial Order at 5). The Court finds that there was no evidence at Trial that Legal Helpers was responsible for causing Huffman to incur the enrolled credit card debts.
The Trustee also seeks reimbursement of his attorneys' fees and costs pursuant to § 526. As of November 2, 2013, he had incurred a total of $48,131.40 in attorneys' fees for the services rendered by Graeber and Lott. (Pretrial Order at 5-6). In costs, the Trustee seeks $1,220.00, representing $293.00 in filing fees, $297.00 in witness fees for Windsor, $80.00 in process server fees, $50.00 in postage, and $500.00 in attorney mileage. (Id.) The Court finds that the Trustee is entitled to reasonable attorneys' fees and costs in an amount to be determined at a future hearing.
In Mississippi, compensatory damages include damages that will return the plaintiff to the same position as he would have been absent the wrong or injury, Lee v. S. Home Sites Corp., 429 F.2d 290, 293 (5th Cir.1970), and the plaintiff has the burden of proving those damages with reasonable certainty. Adams v. U.S. Homecrafters, Inc., 744 So.2d 736, 740 (Miss.1999). Applying this standard, the Court finds that the Trustee has carried his burden of proving damages against Legal Helpers of $7,264.75.
As to the Trustee's request for attorney's fees in connection with his fraud claim, Mississippi follows the American Rule and does not normally assess attorney's fees against the losing party in the absence of statutory authority. Huggins v. Wright, 774 So.2d 408, 412 (Miss.2000). His reasonable attorney's fees and costs, however, are recoverable as part of his § 526 claim, as noted previously.
The evidence at Trial showed that Legal Helpers invested considerable time and money ensuring its debt settlement program would pass muster with state regulatory agencies. There was little evidence at Trial, however, regarding whether the business model would actually benefit consumers like Huffman.
Through Searns' testimony, Legal Helpers attempted to persuade the Court that the motive of the "Class A" Members in creating the program was based largely on a desire to help consumers affected by the introduction of "means testing" to the Code in 2005. Although Searns' testimony fell short of persuading the Court that the Members formed Legal Helpers for that purpose, it did demonstrate to the Court that the Members had specialized knowledge of consumer bankruptcy law. It is thus inconceivable to the Court that Legal Helpers could be unaware of the fundamental flaw in its program, that is, the dubious assumption that creditors would be willing to wait the length of time required to settle their debts under the program. Requiring clients to pay Legal Helpers' fees in advance exacerbates the problem by increasing the length of time that creditors must wait. Under bankruptcy law, creditors are subject to an automatic stay under § 362 that provides debtors with breathing room necessary for a repayment plan to succeed. That protection is unavailable to clients enrolled in Legal Helpers' program.
At Trial, Legal Helpers presented the Court with a series of paradoxes: (1) Legal
The Court finds that the Trustee has proved by a preponderance of the evidence that Legal Helpers received fraudulent transfers during the two-year period prior to Huffman's bankruptcy under § 548 and that the Trustee is entitled to recover the transfers under § 550; that Legal Helpers is a debt relief agency that failed to provide the services promised Huffman and misrepresented the services it would provide her in violation of § 526. Accordingly, the Court concludes that the Trustee is entitled to a judgment against Legal Helpers in the amount of $7,264.75 in damages, $28,000.00 in a civil penalty, and reasonable attorney's fees and costs in an amount to be determined at a future hearing. The Court also finds that all other relief requested by the Trustee should be denied.
A separate order will be entered consistent with this Opinion. A final judgment, however, will not be entered until the final disposition of the Adversary. By separate notice, the Court will set a status conference to schedule a date and time for a trial on the issue of attorneys' fees and costs.
11 U.S.C. § 526(a).
