Law Firm Does Not Qualify for Attorney Exemption in the Kansas Credit Services Organizations Act

By:  Lisa Fresolone

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

A law firm did not qualify for protection under the attorney “safe harbor” provisions of the Kansas Credit Services Organization Act (the “KCSOA”) in In re Kinderknecht, because none of the firm’s attorneys were licensed to practice in Kansas, and they were not acting in the course and scope of practicing law.[1]  In February 2009, Levi Kinderknecht (the “Debtor”), enrolled in a debt settlement program offered by the defendant, Persels & Associates, LLC (the “Law Firm”).[2]  The Law Firm assigned the case to a “field attorney,” Stan Goodwin (“Goodwin”),[3] who was an independent contractor working for the Law Firm.[4]  Goodwin called the Debtor for a “welcome call”[5] and did not speak to him again until he was sued by one of his creditors—five months later.[6]  At that time, the Debtor contacted Goodwin who advised him that he could represent himself pro se and prepared form pleadings for him.[7]  Goodwin told the Debtor that he would try to persuade the creditor to drop its lawsuit, but he never contacted the creditor.[8]  The Debtor filed for bankruptcy, and the trustee brought a lawsuit against both the Law Firm and Goodwin[9] alleging various violations of the KCSOA and the Kansas Consumer Protection Act (“KCPA”), as well as several common law claims.[10]

The court determined that the Law Firm did not qualify for protection under the attorney safe harbor provisions of the KCSOA,[11]  because the statute only exempts attorneys licensed to practice within the state who are acting in the course and scope of the practice of law.[12]  Neither the Law Firm as an entity nor any employee of the Law Firm was registered to practice law in Kansas.[13]  Although Goodwin was licensed to practice law in Kansas, the court held that the Law Firm’s relationship with Goodwin was insufficient to entitle the Law Firm to qualify for the attorney exemption under the KCSOA.[14]  Since the Law Firm was not exempt,[15] the court denied summary judgment on all KCSOA claims.[16]

The court reached a similar result with regard to defendant Goodwin, but for a different reason.  The court denied Goodwin’s summary judgment motion because Goodwin had not conclusively demonstrated that he had “practiced law” with respect to the services he provided to the Debtor.  As such, a genuine question of material fact remained as to whether Goodwin was entitled to take advantage of the attorney safe harbor provision in the KSCSOA.  Therefore, the court allowed the case to proceed to trial.[17]

In re Kinderknecht is not entirely unique in its holding.[18]  In re Kinderknecht and similar cases[19] are consistent with the legislative intent underlying the KCSOA.  The KCSOA is intended to protect Kansas consumers from misconduct by unregulated debt management service providers working in Kansas.[20]  Because attorneys not licensed in Kansas or acting within the scope of their practice of law are unregulated by the Kansas Supreme Court, [21] they are exactly the kind of credit organizations that the KCSOA is designed to reach.  However, out-of-state attorneys, or those who are not offering “legal” services, may still operate in Kansas as long as they comply with state statutes regarding, among other things, registration requirements,[22] counseling requirements,[23] and fee regulations.[24]  Such attorneys should be aware that they are not exempt under the KCSOA, and must comply with all of its provisions, or else risk liability that might result from noncompliance.


[1]In re Kinderknecht, 470 B.R. 149 (Bankr. D. Kan. 2012).
[2] Id. at 162.
[3]Id.
[4]Id. at 168.
[5]Id. at 163.
[6]Id. at 164.
[7]Id.
[8]Id.
[9]Id.
[10]Id. at 165.
[11]See Kan. Stat. Ann. §50-1116(b) (2005) (“Any person licensed to practice law in this state acting within the course and scope of such person’s practice as an attorney, shall be exempt from the provisions of this act”) (amended 2012). The statute was amended one month after In re Kinderknecht was decided, possibly in response to In re Kinderknecht, but the new language does not affect the applicability of the statute to the Law Firm or Goodwin.  The amendment clarifies the statute by changing the word “person” to “individual,” and specifically providing that where such individual is exempt his or her law firm is also exempt. See Kansas Credit Services Organization Act, ch. 161, 2012 Kan. Sess. Laws 1552.
[12]In re Kinderknecht, 470 B.R. at 167–68.
[13]Id. at 168.
[14]“Holding otherwise would allow Persels to insulate itself from any liability resulting from Goodwin’s conduct because he is an independent contractor while availing itself of the KCSOA safe harbor on the strength of Goodwin’s Kansas license. Persels can’t have it both ways.” Id. at 169.
 
     In addition to the statute, the court relied on the Kansas Court of Appeals’ decision in Consumer Law Assoc. v. Stork, 276 P.3d. 226, 231 (2012) (holding that the attorney exemption does not apply to a company or entity that is not licensed to practice law by the Kansas Supreme Court).  The Law Firm was also a party to the Stork case and was therefore aware of that decision. Kinderknecht, 470 B.R. at 168.
[15]The court determined that it was unnecessary to decide whether the Law Firm met the “within the scope of such person’s practice” prong of the § 1116(b) attorney exemption. However, it noted, without deciding, that if the Law Firm’s debt settlement services constituted the practice of law, it would be subject to the Kansas Rules of Professional Conduct regulating the unauthorized practice of law (KRPC 5.5(a)), or “law related services” (KRPC 5.7). Id. at 169.
[16]In re Kinderknecht, 470 B.R. at 169.
[17]Id. at 167–68. The court described Goodwin’s alleged practice of law:
 
Goodwin gave Kinderknecht no specific legal advice about entering into the debt settlement plan. Kinderknecht had already retained Persels and enrolled in the plan before he was assigned to Goodwin. Goodwin did no negotiating with any creditors. Indeed, he testified that he would not have advised Kinderknecht to proceed with debt settlement with respect to Bank of America or Citi. Only when Kinderknecht was sued did Goodwin confer with him about how to proceed and Goodwin’s only contribution then was to “ghost” some pleadings and forward them to Kinderknecht for Kinderknecht to sign. Despite his telling Kinderknecht that he would try to dissuade Citi’s counsel from pursuing the action, he never did so. If this is the extent of what Goodwin does for his “clients,” whether he is “practicing law” as that term is commonly understood is questionable.
Id.
[18]See Consumer Law Assoc., 276 P.3d. at 231 (holding that the attorney exemption does not apply to a company or entity that is not licensed to practice law by the Kansas Supreme Court).
 
     Two out-of-state cases have reached similar results when construing statutes similar to the KCSOA in circumstances similar to In re Kinderknecht. See, e.g., Lexington Law Firm v. S.C. Dep’t of Consumer Affairs, 677 S.E.2d 591, 594–95 (S.C. 2009) (holding law firm was not exempt from registration requirements under the South Carolina Consumer Credit Counseling Act where none of firm’s attorneys were licensed to practice in South Carolina, or firm was not acting in the regular course of practice; firm was either engaged in the unauthorized practice of law in violation of state statute, or else it was not in the regular course of practice of law); see also Rannis v. Fair Credit Lawyers, Inc. 489 F. Supp.2d 1110, 1115–16 (C.D. Cal. 2007) (holding law firm was not exempt from the federal Credit Services Repair Act; a law firm could also be a credit services organization, and state exemption did not apply to federal statute).
[19] See, e.g., Consumer Law Assoc., 276 P. 3d at 231; Lexington Law Firm, 677 S.E.2d at 594–95; Rannis, 489 F. Supp.2d at 1115–16.
[20]In re Kinderknecht, 470 B.R. at 182–83.
[21]Id. at 184.
[22]See, e.g. Kan. Stat. Ann. § 50-1118.
[23]See, e.g. Kan. Stat. Ann. § 50-1120.                                                    

[24]See, e.g. Kan. Stat. Ann. § 50-1126.                                            

 

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