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Parks v. Persels & Associates, LLC

United States District Court, District of Kansas

March 18, 2014

Linda S. Parks, Plaintiff,
v.
Persels & Associates, LLC, et al. Defendants. Kansas Attorney General Derek Schmidt, Intervenor,

MEMORANDUM AND ORDER

J. THOMAS MARTEN, JUDGE

Even though he was heavily in debt, Levi Kinderknecht wished to avoid bankruptcy. By the internet, he found and contacted a company, CareOne Services, Inc., which promised help. CareOne referred Kinderknecht to defendant Persels and Associates, LLC, a law firm incorporated in Maryland. Kinderknecht and Persels contracted for debt settlement services, some of which were to be provided by a Kansas attorney, Stan Goodwin, working as an independent contractor for Persels. After many months of paying on a debt settlement plan which largely paid the legal fees of Persels and Goodwin, and almost nothing to pay down his debt, one of Kinderknecht’s creditors brought suit and he filed for bankruptcy. Trustee Linda S. Parks then brought the present adversarial action against Persels and Goodwin for violation of the Kansas Credit Services Organization Act (KCSOA), K.S.A. 50-1118, the Kansas Consumer Protection Act (KCPA), K.S.A. 50-626, fraudulent transfer, disgorgement of fees, legal malpractice, and breach of fiduciary duty

The bankruptcy court granted the defendants’ Motion for Summary Judgment as to some of the alleged deceptive practices Parks claimed violated the KCPA. However, the court found that three representations by the defendants, as well as the defendants failure to register under the KCSOA, could constitute deceptive practices under the KCPA. In addition, the court denied defendants’ summary judgment as to the remaining claims.

In the wake of Sterns v. Marshall, 131 S.Ct. 2594 (2011), the bankruptcy court’s opinion was presented to this court as a Report and Recommendation. (Dkt. 2, at 19). As they did before the bankruptcy court, the defendants contend that application of the KCSOA and the KCPA to their provision of legal services violates the separation of powers and is impermissibly vague.

Parks and Kansas Attorney General Derek Schmidt (who has intervened to support the bankruptcy court’s statutory and constitutional findings) filed Responses to the defendants’ Objections. In the light of the defendants’ constitutional challenge to the application of the KCSOA and KCPA, this court certified two questions to the Kansas Supreme Court in a separate proceeding also grounded in the similar activities by debt services agencies.

The supreme court recently answered those questions, Hays v. Ruther, Kan., 313 P.3d 782 (2013). In light of this ruling, the court hereby adopts the Report and Recommendation of the bankruptcy court. The court grants in part and denies in part the defendants’ summary judgment motion in the same manner as provided in that court’s ruling, and the defendants’ Objections are hereby overruled.

The bankruptcy court sets forth the procedural and factual background of the case in careful detail (Dkt. 2, at 5-16). With some exceptions (discussed in the argument portion of their Objections), the defendants do not challenge those findings, which are adopted and incorporated herein. Further, as discussed later, the court finds that the defendants’ specific objections to the bankruptcy court’s factual findings are without merit, given the standard for reviewing summary judgment motions.

Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all evidence in a light most favorable to the opposing party. McKenzie v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir. 1988). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir. 1985). The moving party need not disprove plaintiff's claim; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir. 1987).

In resisting a motion for summary judgment, the opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving party must come forward with specific facts showing the presence of a genuine issue of material fact for trial and significant probative evidence supporting the allegation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and the rule should be interpreted in a way that allows it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

Constitutional and Statutory Application

The supreme court’s opinion in Hays v. Ruther confirms the bankruptcy court’s rejection of the separation of powers argument advanced by the defendants.

Many of the remedies under the KCPA provide for economic sanctions. In this respect, they are little different from common-law malpractice claims or statutory allocation of attorney fees. Certain sanctions, however, such as restraints on the scope of an attorney's practice, could cross into the area of regulating the practice of law that is reserved for this court.
When the answer to a certified question depends on factual circumstances, this court will not provide a definite response. See American Family Mut. Ins. Co. v. Wilkins, 285 Kan. 1054, 1067, 179 P.3d 1104 (2008). We hold that attorneys are not inherently exempt from the reach of the KCPA by virtue of the doctrine of separation of powers, but certain statutory remedies may be unconstitutional if they encroach on the traditional exclusive powers of the court, especially the powers relating to issuing and regulating the license to practice law.

313 P.3d at 789.

The court finds nothing in the factual circumstances of the case which would indicate that application of the KCPA to Persels and Goodwin would violate any constitutional norm. Here, the defendants object to the bankruptcy court’s conclusion by asserting that “the consensus of courts addressing the constitutional issue” supports their position. (Dkt. 4, at 19). In support of this assertion, the defendants attach a footnote with a string citation of fifteen cases from other jurisdictions.[1] But the court finds nothing in that putative consensus, or in Hays, which would support the conclusion that the legislature may not seek to regulate lawyers who are not in fact regulated by the Kansas Supreme Court.

The bankruptcy court rejected Persels’ separation of powers argument for two reasons. First, it was not so much that Persels is a law firm, but that it is “[a]n out-of-state law firm, ” one which “has not identified a single Persels attorney that dealt with Kinderknecht and is licensed to practice law in the state of Kansas or admitted to practice before the Kansas courts.” (Dkt. 2, at 49) (emphasis added). Second, even if Persels were allowed to premise its exemption claim upon Goodwin (its independent contractor in Kansas), factual issues precluded summary judgment. That is, Goodwin’s apparent abandonment of the ordinary requirements of legal representation was so comprehensive that a rational fact finder could conclude that he was not actually engaged in the practice of law at all. The court finds no basis for altering this conclusion.

The bankruptcy court correctly rejected defendants’ argument that application of the KCSOA or KCPA imperilled the separation of powers. As the court pointed out, attorneys who are not licensed to practice law in Kansas are not subject to the regulatory powers of the Kansas Supreme Court. Application of either the KCPA or the KCSOA cannot undermine regulatory authority that does not exist. (Id., at 48-49) (finding additionally that “the structure of the KCSOA actually respects the separation of powers by excluding attorneys ”licensed in Kansas and act[ing] within the scope of their practice as an attorney”).

The court finds no conflict between the constitutional power of the Kansas courts, on the one hand, and the application of the KCSOA and KCPA under the facts of this case, on the other. The KCPA, which seeks to protect the public, both “is consistent with the Kansas Rules of Professional Conduct, ” and “harmonizes with the goals of this court when it regulates the practice of law.” 313 P.3d at 788. The private cause of action established by the KCPA “supplements the regulatory power of this court.” (Id.) In light of the constitutional ruling in Hays, the court finds no basis for departing from the well-reasoned opinion of the bankruptcy court as to the constitutional application of the KCPA to Persels’ conduct.[2]

In addition to the constitutionality of the KCPA, the Hays court also addressed the breadth of the attorney exemption to the KCSOA, holding that the Act exempts both an attorney and the attorney’s law firm. At the same time, the court stressed that “[w]e are not asked to define a law firm, and we take no position on whether the defendant Consumer Law Associates, LLC, is an exempt law firm under the KCSOA.” 313 P.3d at 787.

At the time of the events giving rise to the present action, the KCSOA exempted from its application “[a]ny 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.” K.S.A. 50-1116(b). Under K.S.A. 50-1117(f), a person is “any individual, corporation, partnership, association, unincorporated organization or other form of entity, however organized, including a nonprofit entity." Hays noted the potential conflict from these two provisions, since “[b]usiness organizations cannot be licensed to practice law.” 313 P.3d at 786.

The court reached its conclusion that law firms are eligible for the KCSOA attorney exemption on two grounds. First, it noted the “absurd results” which would arise if law firms were automatically subject to KCSOA liability, since this would mean that the KCSOA exemption would protect lawyers but not their law firms.

To exempt attorneys from statutory requirements and penalties while subjecting their support staff to such requirements and penalties would at the very least vastly complicate the practice of law and in many instances could render it impractical. Furthermore, attorneys frequently set up their practices as business organizations. Attorneys who elect to form limited liability companies would find themselves in the peculiar situation of being exempt as ...

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