For some time now there has been an open action by the Illinois Attorney Registion and Disciplinary Commissions against Macey and Aleman of Legal Helpers Debt Resolution. Well the final report is out and it surprised me.
Well, I wasn’t shocked that Macey and Aleman were recommended for a two year suspension as lawyers. But I was surprised how much they appear to have tried to make sure they were in the right and conducting business as a compliant enterprise, but failed.
This seems to be a story about the failure of relying on outside advice than I ever imagined it would be. Oh yes, and as the Commission said, “Respondents placed more importance on their own success and financial gain than they did on their clients’ interests. The Panel heard no expressions of remorse for the harm their clients suffered. Additionally, in the opinion of this Panel, Respondents did not sufficiently contemplate the ethical problems that LHDR’s model and operations caused and ultimately did not acknowledge the gravity of these problems.”
The information below comes from the Commission report.
Summary of Report
The Administrator alleged Respondents formed a debt settlement law firm, Legal Helpers Debt Resolution, LLC (LHDR) and contracted with nonattorney debt settlement companies to enroll LHDR clients and perform much of the work on client matters. The Administrator charged Respondents with failing to consult with clients about the means by which the objectives of the representation are to be pursued, failing to explain matters to the extent reasonably necessary to allow clients to make informed decisions about the representation, collecting unreasonable fees, failing to supervise the nonattorney employees of the debt settlement companies and assisting nonattorneys in the unauthorized practice of law.
The Hearing Board found Respondents engaged in most of the charged misconduct and recommended that both Respondents be suspended for two years. The recommendation took into consideration the scope of the misconduct, the substantial harm to vulnerable and unsophisticated clients, Respondents’ significant financial gain and their failure to appreciate the actual harm they caused. – Source
Details of Report
Respondent Macey was licensed in Illinois in 1993 and was 45 years of age at the time of the hearing. He resides in Florida with his wife and daughter. (Tr. 1423). Respondent Aleman was licensed in Illinois in 1997. He was 42 years of age at the time of the hearing. (Tr. 1332).
In addition to their partnership in LHDR, Respondents are partners in Macey Bankruptcy Law, P.C. (Macey Bankruptcy Law) which, according to Respondents, is the largest bankruptcy law firm in the country. Macey Bankruptcy Law has a nationwide practice that handles 15,000 cases per year. (Tr. 1433-34). Respondent Macey is an equity partner of Macey Bankruptcy Law and LHDR. Respondent Aleman is a profit-sharing partner of Macey Bankruptcy Law and an equity partner of LHDR. (Tr. 1238).
LHDR Structure and Operations
In 2008, Respondents were approached by Thomas Lynch, a nonattorney who owned a debt settlement company, about getting involved in the debt settlement business. (Tr. 619-22). The laws regulating the debt settlement industry had become more restrictive, such that nonattorneys engaged in debt settlement could no longer collect upfront fees from clients. However, an exemption existed for attorneys representing clients in debt settlement negotiations. (Tr. 1378). If the attorney exemption applied, the attorney and an affiliated debt settlement company could take upfront fees from clients.
Respondents consulted with Jason Searns, a Colorado attorney who later became general counsel to LHDR, about creating a business model for a national debt settlement law firm in which Respondents would enter into contractual agreements with existing debt settlement companies as strategic alliance partners. (Tr. 835-36; Adm. Ex. 3). Pursuant to the model, the debt settlement companies would market the law firm’s services and refer clients to the law firm. After the law firm approved a client, it would refer the client back to the debt settlement company for “law-related services,” which included managing the client’s file and negotiating the client’s debts with creditors. (Resp. Ex. 26).
In April 2009, Respondents implemented their business model and formed LHDR, which also did business as Macey, Aleman, Hyslip & Searns. (Adm. Ex. 1). Respondents and Searns were “Class A” equity partners of LHDR. Jeffrey Hyslip, who is licensed in Ohio and several federal jurisdictions, was a “Class B” non-equity partner and was also a member of Macey Bankruptcy Law. (Tr. 614-16, 703).
After LHDR was formed, it entered into reciprocal referral strategic alliance agreements with nine debt settlement companies. (Adm. Ex. 3). Four of the strategic alliance partners handled the “vast majority” of files. (Tr. 1010). The strategic alliance agreements stated that the debt settlement companies would provide, under LHDR’s supervision, “promotional and marketing services,” “development of lists of qualified leads,” and “administrative non-legal services, including, but not limited to, client enrollment, compliance, customer support, analysis and advice on collection activities and debt restructuring, and engaging collectors on behalf of LHDR clients in an effort to modify and settle unsecured debts.” (Adm. Ex. 3 at 3). The persons who performed these services were nonattorney employees of the strategic alliance partners. (Tr. 840, 845, 854-55, 884). The strategic alliance agreements allowed the debt settlement companies to subcontract their services to other entities. At least two strategic alliance partners entered into subcontract agreements, in August and September 2009. (Adm. Exs. 4, 5).
In August 2009, Searns consulted New York attorneys Stephen Krane and David Lewis and Colorado attorney Alexander Rothrock about LHDR’s business model. Searns considered these attorneys experts in legal ethics. (Tr. 982-83, 1451; Resp. Exs. 24-26). None of the attorneys Searns consulted advised him to change the LHDR business model. (Tr. 1036). Respondents were told the model complied with Illinois rules. (Tr. 1567). LHDR spent over $200,000 on outside counsel fees. (Tr. 1454-55; Resp. Exs. 1-23).
LHDR began taking clients referred from the strategic alliance partners in late 2009. (Tr. 631). In addition to the strategic alliance partners and subcontractors, LHDR’s operations also included LHDR staff in its Chicago office and “Class B” attorneys located throughout the country. LHDR had 300 to 400 Class B members of the law firm. (Tr. 654). Many of the Class B attorneys also worked for Macey Bankruptcy Law. (Tr. 1237).
LHDR’s program required clients to stop paying their creditors and instead enroll in LHDR’s monthly payment program. Respondent Aleman testified it was essential that clients stop paying their creditors in order for the program to be successful. LHDR could not settle clients’ debts unless they were behind on their payments. (Tr. 865).
LHDR represented it would negotiate a minimum 35% reduction of the original face value of clients’ debts. In order to accumulate funds to pay the settlements, clients authorized monthly electronic payments from their bank accounts to special purpose accounts with Global Client Solutions (Global). (Tr. 893). Global then paid LHDR and the strategic alliance partners their fees into accounts set up at Global. (Tr. 894). LHDR did not make payments to creditors or begin negotiations until a client had accumulated enough funds in the Global account to settle a particular debt. (Resp. Ex. 27 at 10).
Prior to October 27, 2010, LHDR charged each client a $500 retainer fee. This fee was deducted from clients’ Global accounts during the first three months of enrollment. The strategic alliance partners also took service fees up front, which totaled 15% of the total amount of each client’s debt. In addition, LHDR usually charged a $50 monthly maintenance fee for the duration of the client’s enrollment. In many instances, most of clients’ monthly payments for approximately the first year of enrollment went toward retainer and service fees.
It was frequently the case that no payments were made to client creditors during that time. (Tr. 892).
Nonattorney employees of the strategic alliance partners (nonattorneys) performed client intake and file set-up tasks, managed client files and negotiated debts. Witnesses sometimes referred to the nonattorneys as legal assistants or paralegals, but they did not have any paralegal training. (Tr. 689).
When a prospective client called to inquire about the program, the call was answered by a nonattorney who described the program and gathered financial information. If the prospective client wanted to proceed, the nonattorney went over documents, including a retainer agreement between the client and LHDR and a power of attorney authorizing LHDR to negotiate with creditors on the client’s behalf. (Tr. 839, 855, 1214-15).
If a prospective client decided to join the program, a nonattorney conducted a compliance call to make sure he or she understood the program and the retainer agreement. (Tr. 713, 1214-15). If the prospective client gave appropriate responses in the compliance call, he or she would then receive documents including the retainer agreement, power of attorney form, budget information and payout sheet. (Tr. 1217). Prospective clients were told they were not LHDR clients until they signed the retainer agreement and made the first payment. (Tr. 724).
Jason Searns prepared the LHDR retainer agreement with the assistance of Chicago attorney Mark Guidabaldi. (Tr. 986). Prior to October 27, 2010, the retainer agreement included provisions that LHDR would delegate to a nonattorney company the implementation and management of a debt resolution plan; no attorney-client relationship existed between the client and the nonattorney company; any communications between the client and nonattorney company were not protected by attorney-client privilege; LHDR would not handle litigation defense for the client if the client’s creditor filed suit; and the client agreed to binding arbitration in the event of a dispute with LHDR.
The retainer agreement also contained a “Disclosure and Election of Services” which purported to explain debt resolution options including bankruptcy and credit counseling. Clients were required to sign the disclosure, indicating their understanding of the options and agreement to proceed with debt settlement. Searns considered the presentation of the retainer agreement to be part of the setup of the file, which was a law-related service and not a legal service. (Tr. 1106-1107).
After a prospective client completed the intake and file set-up procedures, the file was sent to LHDR for three levels of review, consisting of a compliance review by Jason Searns and his staff, a feasibility review by Jeffrey Hyslip and his staff, and review by a Class B attorney, in which the Class B attorney considered the applicability of any state laws to a client’s particular circumstances. (Tr. 1213-14). There were occasions when a Class B attorney would advise LHDR of a defense a client might have with respect to a particular debt, such as a statute of limitations defense. (Tr. 669-70).
Searns described his file review as due diligence regarding whether a client was an appropriate candidate to execute a retainer. Hyslip and his team looked at whether a client was likely to succeed in the program, based on the payment schedule and the client’s finances. Many of the file reviews were performed by legal assistants on Searns’ and Hyslip’s staffs. Neither Searns nor Hyslip considered their reviews to be legal services. (Tr. 735, 1086-87).
Respondent Aleman estimated that the Class B attorneys recommended that ten to fifteen percent of clients qualified for bankruptcy and were given that option. (Tr. 1229). If the Class B attorney had a question for a client, rejected a client or recommended that the client consult with bankruptcy counsel, Hyslip or his team communicated that information to the client, generally by phone. (Tr. 1221, 1234). Respondent Aleman believed there was a protocol in place instructing the nonattorney case managers to tell clients the name of the Class B attorneys who approved their files but could not point to any documentation of this protocol. (Tr. 1254-55).
After a file cleared the three-step review process, it went back to a strategic alliance partner for client servicing and support. (Tr. 1246). The nonattorney case managers, who talked frequently with clients about the status of their cases, reported to nonattorney supervisors. (Tr. 1115). The nonattorneys used a software system to communicate with certain banks about whether they would agree to settle debts for a certain amount. (Tr. 1120). Nonattorney negotiators performed client settlement negotiations unless the creditor insisted on speaking with an attorney. (Tr. 759). Jason Searns characterized the majority of negotiations as “routine based on the software.” (Tr. 1121). Attorneys became involved 25-30 percent of the time. (Tr. 1121). The nonattorney negotiators communicated with clients if they received a settlement offer and would ask for client approval. (Tr. 1124).
If a creditor insisted on speaking with an attorney, Jeffrey Hyslip would act as “a conduit” between the creditor and a local Class B attorney to get involved in the negotiation. (Tr. 659). If a creditor filed suit against a client, the strategic alliance partner would send the file back to LHDR. Prior to October 27, 2010, if a client got sued, LHDR would “triage the file” and be in constant communication with the client. (Tr. 1251).
Other than Jason Searns’ review of advertising materials, there was no attorney involvement with clients before a file entered the three-step review process. (Tr. 651). It was rare that an attorney spoke with a client during the three-step review process. (Tr. 656). There was no requirement in place for attorneys to periodically review a file after it was accepted into the program or to supervise the negotiations between the nonattorneys and the creditors. (Tr. 657-58). No attorney signed off on settlements if the settlements were within LHDR’s accepted parameters. (Tr. 1284).
The parties entered into a “Stipulation Related to Activity Logs,” which states that the client activity logs for 32 of the 36 clients identified in the Complaint “contain no entries of identifiable work or communications by a Legal Helpers attorney.” The exceptions are the activity logs of Diana Fanning, Imelda Hanson, Ronald Messmore and Donna Seger, which indicate telephone calls to LHDR attorney Kelly Sibert and one call to an unnamed Illinois attorney, all of which related to the clients’ receipt of summonses in collection lawsuits.
Respondents testified that if a client asked to speak with an attorney, the client was able to do so. Jeffrey Hyslip would schedule such phone calls. (Tr. 685). Hyslip could not testify as to whether LHDR’ policies were followed in every case. (Tr. 687).
When asked how LHDR consulted with clients about the means by which the objectives of the representation were to be pursued, Respondent Aleman stated that nonattorneys specifically described to clients over the phone how they would get out of debt. (Tr. 1349). To make sure matters were explained to the extent necessary to permit clients to make informed decisions, nonattorneys used scripts drafted by Jason Searns, made quality control calls and welcome calls, and provided documents to the clients. (Tr. 1354-55).
Respondent Aleman acknowledged that in his bankruptcy practice he had consulted with about 10,000 clients and talked with them about bankruptcy. (Tr. 1367). He agreed that attorneys usually did not consult with LHDR clients because Jason Searns, Stephen Krane and Alexander Rothrock said that was not a requirement. (Tr. 1368). In Respondents’ bankruptcy practice, legal assistants do not go over retention agreements with clients. (Tr. 1490). Respondent Aleman viewed the LHDR business model as similar to his bankruptcy practice in that nonattorneys performed intake and scheduled appointments for attorneys. The difference was that LHDR intake personnel were not LHDR employees. (Tr. 1348).
When asked what he did to make sure nonattorneys consulted with clients about the means by which the objectives of the representation were to be pursued, Jason Searns answered he created the scripts and outlined and reviewed the software and procedures that were used for the financial calculations. He also trained the nonattorneys who gathered information. (Tr. 1059).
When asked what he did to make sure the nonattorneys explained matters to the client to the extent reasonably necessary to allow the client to make informed decisions regarding the representation, Searns answered that before October 2010 he made sure the scripts were being followed, the recorded compliance calls occurred and the three-step attorney review process occurred. (Tr. 1060).
Searns testified his understanding of Rule 1.4 “is that an attorney per se does not have to specifically talk with a client if they supervise the protocols and work of the paralegal.” (Tr. 1069). He did not specifically discuss Rule 1.4 with the ethics consultants he retained, or with Respondents. (Tr. 1070). Searns did not agree that in any attorney-client relationship the attorney must have a direct personal relationship that includes talking with the client. (Tr. 1079-80).
LHDR Policies and Procedures after October 27, 2010
LHDR made changes to some procedures and its retainer agreement in October 2010, because of an amendment to the Federal Trade Commission telemarketing sales rule that went into effect. The 2010 amendment provided that if debt relief services were discussed with a consumer in person before the agreement was signed, the telemarketing sales rule, which prohibited advance fees and required other disclosures, would not apply. (Tr. 231). Consequently, LHDR instituted a policy that every new client was to have a face-to-face meeting with a paralegal or attorney prior to enrolling in the program. Also, LHDR began providing litigation defense for all of its clients and, as a result, raised its retainer fee to $900 per client. (Tr. 1462). The Class B attorneys provided the litigation defense on behalf of LHDR. (Tr. 1025). LHDR defended clients in over one thousand cases. (Tr. 1026).
The paralegals who conducted face-to-face meetings were trained independent contractors in a paralegal network, paid and supervised by LHDR. (Tr. 718, 722-23; Adm. Ex. 115). When a paralegal handled a face-to-face meeting, he or she played a video of Jason Searns for the client. (Tr. 674; Adm. Ex. 116). There were “multiple layers of repetitive conversations” to make sure the clients understood the program. (Tr. 1464). At times, a paralegal called Jeffrey Hyslip during a client meeting because a client had a question. (Tr. 727). Respondent Aleman did not believe it was correct that paralegals who conducted the face-to-face meetings received compensation only if the client signed the retainer agreement, but acknowledged that the instructions to the paralegals indicated otherwise. (Tr. 859-63; Adm. Ex. 115).
Jason Searns consulted with attorney Linda Jean Noonan in late summer or early fall of 2010. (Tr. 921). Noonan worked for the Bureau of Consumer Protection for nine years. She is licensed in Maryland and practices in Washington D.C. with Hudson Cook law firm. (Tr. 914-917). Noonan met with Searns, who expressed he wanted to be sure LHDR was in complete compliance with state and federal law, and particularly with the amendment to the telemarketing sales rule about to go into effect. (Tr. 929-30).
Noonan arranged for Respondent Macey and Searns to meet with Federal Trade Commission (FTC) staff to tell them how LHDR operated. (Tr. 930). Noonan explained to the FTC why she believed LHDR was not covered by the telemarketing sales rule. (Tr. 932). She provided the FTC with the LHDR’s advertising materials, contracts with its strategic alliance partners and documents provided to LHDR clients. (Tr. 936). The FTC did not take any action against LHDR. (Tr. 937).
Noonan did not provide LHDR with an opinion regarding compliance with the Illinois Rules of Professional Conduct. (Tr. 939). Her understanding was that LHDR “used employees who were nonattorney employees and sometimes third party strategic partners” to accomplish some of the services to their clients. (Tr. 943). Noonan believes LHDR provided adequate supervision to ensure they fulfilled their responsibilities under the retainer agreement. (Tr. 944).
Attorney Rusty Reinoehl was a Class B attorney for LHDR who is licensed in Illinois and Missouri. (Tr. 182). In December 2010, Reinoehl began performing LHDR client signings. He met with 25-30 potential LHDR clients, reviewed the retainer agreement with them, answered any questions, and reviewed other options such as bankruptcy and debt consolidation. (Tr. 184). The client signings lasted 30-45 minutes, with 15-20 minutes of that time focused on going over the retainer agreement. (Tr. 207-208). Thirteen of the potential clients signed up with LHDR. (Tr. 186). Several of the clients thought the fees were too high or their debts would not be settled. Reinoehl recommended bankruptcy for some clients. (Tr. 186). He stopped conducting client signings in June 2011, because he was planning to move and had some hesitation as to whether the program was viable for most of the clients he was seeing. (Tr. 187). He continued to work for LHDR, defending LHDR clients in collection lawsuits. (Tr. 187-88).
Reinoehl did not know when or how LHDR contacted creditors prior to litigation. (Tr. 195). He did not see a standard letter to a creditor. (Tr. 211). He was hired by a third-party firm from California to handle LHDR litigation. (Tr. 201-202). Reinoehl’s contact person was an attorney from the California law firm. (Tr. 208). He was not aware of any other Illinois attorneys who worked on LHDR matters. (Tr. 210).
Attorney General Action
Rebecca Pruitt is the Assistant Bureau Chief in the Consumer Fraud Bureau of the Illinois Attorney General’s office. (Tr. 222). She helped draft the Illinois Debt Settlement Consumer Protection Act (Act), which went into effect on August 3, 2010. (Tr. 223). The Act prohibits advance fees for debt settlement and caps fees at 15 percent of the savings of the original amount of the debt. (Tr. 228). Illinois attorneys who are engaged in the practice of law are exempt from the Act. (Tr. 229).
The Illinois Attorney General’s office filed an enforcement action against LHDR in March 2011. (Tr. 233). The parties settled the case on July 2, 2012. LHDR agreed to cease soliciting and enrolling consumers in Illinois and to stop collecting additional fees from existing Illinois clients. LHDR paid $2.1 million in partial restitution to Illinois consumers and $150,000 to the State of Illinois. (Tr. 235-36). The Attorney General had discretion to distribute the settlement funds to LHDR clients. (Tr. 1472).
LHDR Clients Called by Administrator
- Diana and Keith Fanning
Diana and Keith Fanning live in Chatham, Illinois. Diana works for the Illinois Secretary of State, and Keith is an insurance analyst for the Illinois Department of Insurance. (Tr. 104). The Fannings received an advertisement in the mail from LHDR in June 2010. (Tr. 53). The mailing did not identify LHDR by name but talked about legal debt solutions. (Tr. 56). Keith believed the mailing referred to the “credit card financial responsibility act,” which “seemed like a legal thing and maybe there was an act that was passed that we didn’t know about.” (Tr. 105-106). The mailing also described the program as an “attorney-managed debt mediation program.” (Tr. 54, Adm. Ex. 12). It was important to the Fannings that LHDR represented itself to be a group of attorneys. (Tr. 54-55). Diana believed LHDR would consolidate the Fannings’ debt and maybe negotiate a lower interest rate.
At the time the Fannings contacted LHDR, they were current on their credit card and mortgage payments but were concerned they could not continue to make their credit card payments. (Tr. 55-56). Diana called and spoke to a person named Michael, who said he worked for LHDR, and to Michael’s supervisor. She believed Michael was an employee of LHDR. (Tr. 85).
Based on their conversations with Michael, the Fannings believed LHDR had knowledge of or access to a federal fund to help consumers with credit card debt. Either Michael or his supervisor described the LHDR program as “like the bank bailout with Obama,” and “it was some kind of fund that was set up.” (Tr. 92). Michael and his supervisor convinced the Fannings to include their $20,000 home equity line of credit in the debt they enrolled with LHDR. (Tr. 57).
After talking with the nonattorneys and asking questions, Keith agreed to sign the retainer agreement. (Adm. Ex. 14). He asked what the “worst case scenario” would be if he signed up with LHDR and was told he might get a few harassing phone calls and may not be eligible for a bank loan while in the program. (Tr. 108). The nonattorneys with whom he spoke did not tell him he could be sued and have to hire an attorney or that his wages could be garnished. (Tr. 111). Keith acknowledged the retainer agreement stated that LHDR would not represent him, but said that was not what he was told over the phone. (Tr. 114).
The Fannings electronically signed a retainer agreement with LHDR after several conversations with Michael and his supervisor. (Tr. 58; Adm. Ex. 14, 15). They did not have the retainer agreement in their possession when they talked with Michael. (Tr. 92). Diana did not receive a quality control call to go over the retainer agreement. (Tr. 83).
Diana did not understand that LHDR would take its fees first, before applying the Fannings’ funds toward negotiating their debts. (Tr. 65, 74). Similarly, Keith did not understand he would have to pay into the program for 11 or 12 months before LHDR would begin negotiating with his creditors. (Tr. 118). Keith believed LHDR attorneys would be working on his behalf with the creditors, and they would have more leverage with the credit card companies than a “normal” credit person. (Tr. 124). Keith believed he was on the phone with an attorney when he finalized the retainer agreement. (Tr. 126, 129).
The Fannings stopped paying their creditors after signing up with LHDR. When their creditors began calling Keith at work, they contacted LHDR, who asked the Fannings to give them information about when the creditors called. The creditors told the Fannings they would not work with LHDR. (Tr. 59-60).
The Fannings terminated their contract with LHDR after one creditor sued them. Diana testified she was told LHDR would represent the Fannings if they were sued. (Tr. 61, 63-64). Diana called LHDR on many occasions after she received the summons but no one returned her calls. (Tr. 61; Adm. Ex. 15). Eventually, she spoke with Michael again, who instructed her to call customer service. (Tr. 62). Diana then spoke with Alyssa in LHDR customer service, who told her the creditor’s lawsuit could result in a lien on her home or garnishment of her wages. (Tr. 96-7; Adm. Ex. 15).
The customer service department connected Diana with attorney Kelly Sibert. (Tr. 62; Adm. Ex. 15). Sibert told Diana she had to pay the court filing fee and go to court herself. Diana asked how she could get out of her agreement with LHDR. Sibert told her she could deposit $2,000 in her account and LHDR would ask her creditors to accept a partial payment. (Tr. 63; Adm. Ex. 15).
LHDR later refunded $5,300 of the $7,000 the Fannings paid to LHDR. (Tr. 65). The Fannings also received about $3,000 from the Attorney General’s settlement with LHDR. The Fannings sold their house so they could pay their debts but did not realize they would not be able to get another loan because of their poor credit rating. They had to move in with Diana’s mother for a year before their credit score was high enough to get a loan. (Tr. 66).
- Patricia Daniel
Patricia Daniel signed a retainer agreement with LHDR in July 2010. (Tr. 137; Adm. Ex. 10). She had approximately $16,000 in debt and was current on her payments when she enrolled. (Tr. 138). Daniel never spoke with an attorney in her dealings with LHDR. (Tr. 139). She stopped paying her creditors because LHDR told her to do so and “said they were going to take care of that.” Daniel believed LHDR was going to “consolidate and pay something on each card.” (Tr. 140).
After Daniel began getting calls from her creditors, she contacted American Express. She owed only $278 to American Express, so she asked LHDR why it had not paid that bill. Travis, the representative she spoke to, said he could not pay the bill because Daniel had to finish paying the attorney fees. Daniel testified she was not told the attorney fees were taken up front.
She would not have signed the retainer agreement had she understood her creditors would not get paid for one year. (Tr. 141, 151). Daniel ended her relationship with LHDR the following month because none of her bills were being paid. (Tr. 142; Adm. Ex. 11).
- Erica Gonzalez
Erica Gonzalez contacted LHDR after receiving an advertisement in the mail. (Tr. 162). She spoke with a person named Frank. Frank told her he worked for a law firm but Gonzalez knew he was not a lawyer. (Tr. 178). Gonzalez did not want to file bankruptcy. She was current on her mortgage and credit card payments when she enrolled with LHDR in August 2010. (Tr. 165, Adm. Ex. 21).
Gonzalez believed that when she signed up with LHDR a lawyer would be reviewing her case. (Tr. 162). Frank told her all of her documents would be reviewed by an attorney. (Tr. 179). Gonzalez skimmed through the retainer agreement but did not read all of it. (Tr. 172). She never spoke with a lawyer while she was enrolled with LHDR. (Tr. 164).
After six months of receiving collection letters from her creditors, Gonzalez tried to call Frank but his number was disconnected. (Tr. 166). LHDR did not make payments to any of her creditors, so Gonzalez went to the bank and stopped her monthly payments to LHDR. She later filed for bankruptcy and engaged LHDR to represent her. Gonzalez testified she was told the only way to get back the money she had already paid was to use LHDR to handle her bankruptcy. She had to pay out of her pocket for the bankruptcy, however, and then fought with LHDR to get her money back. (Tr. 167-68).
Gonzalez received approximately $3,000 of the $3,700 she paid to LHDR after arguing with them and filing a complaint. She later received an additional $1,800 from the Attorney General. (Tr. 173-74).
- Charles E. Powell
Charles E. Powell contacted LHDR in 2010 after receiving an advertisement in the mail. (Tr. 243). He had about $150,000 of debt. (Tr. 262). He spoke with Carol Heredia and enrolled with LHDR in April 2010. (Adm. Ex. 103). He does not know whether Heredia was an attorney. (Tr. 244). Powell was not provided a copy of the retainer agreement before he authorized his electronic signature. (Tr. 251-52). He signed the retainer agreement without seeing it because “from their advertising that it was all attorneys and it was something to do with the Federal Government, I did trust them.” (Tr. 286).
Pursuant to Heredia’s instructions, Powell stopped paying his creditors. This ruined his credit rating. (Tr. 246). Powell made about ten monthly payments to LHDR, in the amount of $2,100 per month. He believed his monthly payments would go toward paying LHDR’s service fee and his creditors. (Tr. 255). Powell thought LHDR would start paying his creditors after 90 days. (Tr. 256). None of Powell’s credit card debt was paid after he paid $21,000 to LHDR. (Tr. 257). Powell emailed LHDR, asking for a summary of how his money was being spent and received no reply. He then requested his contract be terminated. (Tr. 257; Adm. Ex. 25).
Powell requested a full refund. He spoke with LHDR attorneys Rick Kruse, Byron Lev, and possibly Jason Searns about his refund. (Tr. 258; Adm. Ex. 105). He accepted a 60% refund, which amounted to $9,800. (Tr. 260).
Powell had to hire an attorney and pay $10,000 to defend his creditors’ lawsuits against him. (Tr. 261). Powell wrote a letter to Administrator’s Counsel stating that he cancelled his LHDR contract after he learned the program was a scam. (Resp. Ex. 28).
- Mary Jo Jordine
Mary Jo Jordine and her husband, Herbert Jordine, contacted LHDR after receiving a mailing. Herbert called to inquire about the program. Mary Jo believed the person Herbert spoke to was an attorney. (Tr. 330). The Jordines enrolled with LHDR in August 2010. (Adm. Ex. 25).
Mary Jo spoke with a representative named David after they enrolled because they continued receiving calls from creditors. (Tr. 336-37). Mary Jo believed LHDR would contact her creditors but they did not do so. (Tr. 342).
Counsel for Respondents played a recorded compliance call between Herbert and an individual named Maurice. Maurice stated the purpose of the call was to make sure Herbert understood the program. Maurice asked Herbert whether he understood various components of the program, including the payment schedule. He also asked whether Herbert understood that creditors could take legal action and LHDR would not represent him in court. Herbert indicated he understood. (Tr. 345-48).
Maurice told Herbert that, “[e]xcluding the right of rescission,” Herbert could not cancel or alter the contract within the first 90 days of enrollment. (Tr. 349). Maurice further instructed Herbert not to attempt to negotiate with his creditors and that “[a]ny direct negotiation with your creditors could breach the Attorney Retainer Agreement.” Maurice instructed Herbert to contact the LHDR client services department, located in Florida, to answer any questions about the program. (Tr. 362-64).
Mary Jo testified she received a refund from LHDR or the Attorney General of about half of what she paid into the program. (Tr. 366-67).
- Diana Wohlers
Diana Wohlers enrolled with LHDR in August 2010. (Adm. Ex. 91). Wohlers is a machine operator and lives in Westville, Illinois. (Tr. 427-28). She had $12,000 of credit card debt. She searched online for debt resolution assistance and found LHDR. It “stuck out a little bit more than the others” because it provided attorneys to represent people. (Tr. 429-30). Wohlers called LHDR and decided to enroll the same day. (Tr. 432). The person she spoke with briefly discussed fees and sent Wohlers a packet of information by email. Wohlers electronically signed the retainer agreement without being aware of all of the conditions in the agreement. She signed it because she was comfortable knowing attorneys would be handling her matter. Wohlers believed the person she spoke with when she called was a legal assistant or paralegal. (Tr. 435-36).
At the time Wohlers enrolled, no one explained to her that LHDR would not provide credit counseling or bankruptcy representation. (Tr. 439). No one explained what the power of attorney meant that Wohlers electronically signed. (Tr. 440). No one explained how much of the monthly fee Wohlers paid would go toward paying her credit card debt. (Tr. 444).
Wohlers communicated with LHDR primarily by email because no one would return her phone calls. (Tr. 444). She did not receive a welcome packet from LHDR until after she made her first payment. (Tr. 447).
At the end of September 2010, Wohlers received and signed a document setting forth her monthly payments. (Tr. 451). She then contacted LHDR because the amounts on the payment schedule were different from the amounts originally described. A representative explained the numbers but Wohlers did not feel they added up. (Tr. 454; Adm. Ex. 93).
One of Wohlers’ creditors, Capital One, advised her it did not receive a representation letter from LHDR. (Tr. 485). Wohlers tried to terminate her contract with LHDR two or three times. Eventually, she closed her checking account so LHDR could not access it. (Tr. 458; Adm. Ex. 93). Wohlers sent LHDR a letter by registered mail asking for a refund. She later received a refund of $1,200 of the approximately $1,600 she paid LHDR. (Tr. 462). After Wohlers terminated her contract with LHDR, she filed for bankruptcy. (Tr. 466).
- Margaret Dalbke
Margaret Dalbke enrolled with LHDR in February 2011. She had never been behind on her credit card payments and wanted to consolidate her debts. (Tr. 490). Dalbke initially spoke by phone with an LHDR representative. Renee Stokes, a paralegal, came to Dalbke’s home to execute the retainer agreement. (Tr. 495; Adm. Ex. 29). Stokes did not tell Dalbke much about the retainer agreement. Dalbke’s sister was present and wanted to read the agreement. Stokes said to “just sign the agreement and read it later.” (Tr. 496). Dalbke signed the agreement because she thought her debts would be consolidated. (Tr. 497; Adm. Ex. 31). She did not understand that she was hiring a law firm. (Tr. 498).
Dalbke canceled the agreement with LHDR after two months because LHDR was not paying her creditors. (Adm. Ex. 31) She would not have hired LHDR had she understood her bills would not be consolidated. (Tr. 500). After terminating the agreement, Dalbke went back to making monthly payments on her credit cards. She incurred late fees because LHDR did not make payments. (Tr. 503). Dalbke received refund checks from LHDR in the amounts of $229 and $495.
- Leonard May
Leonard May had $109,000 in debt when he enrolled with LHDR in February 2010. (Tr. 519; Adm. Ex. 88). When he called to inquire about the program, he spoke with Sherry Roser. May thought Roser was an attorney “because that firm has nothing but attorneys and accountants working there, and the list on the letterhead was so long.” (Tr. 517-18).
When May electronically signed his retainer agreement, he did not really look it over. The LHDR representative directed him to pages and told him where to sign. (Tr. 565). Someone from LHDR called May after he electronically signed the agreement to go over it with him. (Tr. 523).
May thought that, under his agreement with LHDR , he would “give them this money and they would make this thing go away.” (Tr. 559). He knew he had an obligation to pay LHDR $1,300 per month until his debts were paid but did not know how LHDR was going to pay his creditors. (Tr. 559-60). May believed the agreement was that LHDR would negotiate with his creditors for a reduced payment “and then they would cover it.” (Tr. 560).
After May read the portion of the agreement stating that LHDR would not provide an attorney, May called Roser and said he was not aware that provision was in the agreement. Roser told him LHDR would provide an attorney if he received a summons. (Tr. 531). After enrolling, May continued to receive calls from his creditors. One of his creditors, Chase Bank, said it did not do business with LHDR. (Tr. 533).
May later spoke with Carolina Heredia. May assumed Heredia was an attorney from the way she spoke. (Tr. 537; Adm. Ex. 90). In July 2010, May received a summons from one of his creditors, which he emailed to Heredia. He did not get a response from Heredia right away. After May contacted Heredia again, she said she would have a lawyer contact May the next day.
No one contacted May, so he called Heredia again. (Tr. 538; Adm. Ex. 90). She gave May the phone number of someone named Rick, whom May assumed was a lawyer. Rick told May he had not accrued enough funds in his account to provide him with an attorney. (Tr. 540). After May argued with Rick, Rick connected May with John Hollis. (Tr. 540). Hollis said May could put $800 of his accrued funds toward an attorney or, if wanted to file for bankruptcy, 60 percent of his accrued funds would apply toward a bankruptcy attorney. If May wanted a refund, he would receive $600 or $700 back out of the $6,500 he had paid LHDR. (Tr. 543).
May terminated his contract with LHDR. (Tr. 547; Adm. Ex. 90). He did not receive a refund at that time, but later received a refund of approximately $700 from the Attorney General’s office and $1,300 from LHDR. May ended up filing Chapter 7 bankruptcy and had to pay his bankruptcy attorney $1,600. (Tr. 549).
- Jennifer Green
Jennifer Green signed a retainer agreement with LHDR on July 18, 2010. (Adm. Ex. 32). She had $60,000 to $80,000 in debt at the time. (Tr. 581-82). When she contacted LHDR, she first spoke with someone named Alicia. Green emphasized to Alicia that she wanted to make sure her creditors were paid on time because she wanted to maintain her good credit rating. (Tr. 584). Green asked about debt consolidation, but Alicia did not explain that consolidation was not a service LHDR offered. (Tr. 587). Green electronically signed the retainer agreement based on the representations made to her over the phone. (Tr. 585). She did not really review the agreement because she thought she was hiring a lawyer. (Tr. 586).
Green made payments to LHDR for nine months. (Tr. 589). When Green’s creditors began calling, Green called LHDR and asked why there was not a payment plan in place. She was told LHDR would take care of it. Green asked repeatedly to speak to a lawyer from LHDR but was never put in touch with one. (Tr. 590; Adm. Ex. 34).
Green hired attorney Stuart Morganstern after she received a summons. She terminated her agreement with LHDR, and she and Morganstern worked out payment plans or settlements with her creditors. (Tr. 591-92). LHDR settled one of Green’s debts of $4,160 for $1,321.594. Green asked LHDR for a full refund but received about $4,000 and $2,980 from the Attorney General’s office. She is still owed $5,220. (Tr. 594).
LHDR Clients called by Respondents
- Samuel Beatty
Samuel Beatty lives in Springfield, Missouri and works for an exercise equipment manufacturer. (Tr. 773). He had $30,000 of debt when he contacted LHDR. (Tr. 774). Beatty was able to resolve his debts with LHDR over a two and a half year period. (Tr. 780). They were settled for 50-60 percent of the original amount. (Tr. 778). He was very pleased with LHDR. (Tr. 780-81).
- Linda Hanson
Linda Hanson of Aurora, Colorado enrolled with LHDR in June 2011. (Tr. 783). She met with a Colorado lawyer before she enrolled. (Tr. 783). She did not have any more contact with the attorney after she enrolled. (Tr. 788). She did not object to any of the fees and felt LHDR kept in touch with her. (Tr. 785). She was pleased with LHDR and felt they explained matters to her. (Tr. 786).
- Carl L. Zaar, Jr.
Carl L. Zaar, Jr. of Franklin, Wisconsin contacted LHDR in December 2009. He had about $40,000 of credit card debt. (Tr. 790). Zaar felt the he understood “totally” the information LHDR gave him. (Tr. 791). He understood he was communicating with paralegals or legal assistants. (Tr. 795). He would recommend LHDR to others. (Tr. 796).
Zaar’s understanding was that lawyers were involved in and made the decisions regarding his settlement negotiations. (Tr. 797). He was told lawyers were involved in his negotiations and he had documentation that a law firm was handling his case. (Tr. 798).
- Redela Drakeford
Redela Drakeford had $13,000 of debt when she enrolled with LHDR in July 2011. (Tr. 808). When she enrolled, she met with an attorney and a paralegal at the LHDR office in Chicago. (Tr. 802). The attorney and paralegal explained what would happen with her debts and she understood. (Tr. 804). She understood that her initial payments would go toward fees and she would later accumulate money to settle her debts. (Tr. 805). She has not completed all of her payments yet. She feels LHDR keeps her informed and consults with her. (Tr. 806). She has recommended LHDR to others. (Tr. 807).
- Armando Leone
Armando Leone of Hanover Park enrolled with LHDR in September 2011. (Tr. 817). He had $30,000 of debt. (Tr. 813). He had a face-to-face meeting but does not recall whether the person he met with was an attorney or a paralegal. (Tr. 821-22).
LHDR consulted with him about negotiating his settlements and obtained good results. (Tr. 814-15). He was very satisfied with LHDR. (Tr. 816).
Analysis and Conclusions
Respondents are charged with violating 1990 Rule 1.2(a) and 2010 Rules 1.4(a)(2) and 1.4(b), which provide as follows in relevant part:
A lawyer shall abide by a client’s decisions concerning the objectives of representation, subject to paragraphs (c), (d) and (e), and shall consult with the client as to the means by which they are to be pursued.
(a) A lawyer shall:
(2) reasonably consult with the client about the means by which the client’s objectives are to be accomplished;
(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.
Comment  to Rule 1.4 explains that “[r]easonable communication between the lawyer and the client is necessary for the client effectively to participate in the representation.”
Respondents do not dispute that very little or no direct communication between an LHDR attorney and LHDR clients occurred, either about the means by which the objectives of the representation were to be pursued or to explain the scope of the representation to the extent necessary for clients to make informed decisions. Instead, Respondents rely on the scripted presentations nonattorneys made to LHDR clients, the written materials provided to clients and the advice Respondents received from ethics experts to refute the charges they violated Rules 1.2(a) and 1.4(a)(2) and (b).
We find the Administrator proved by clear and convincing evidence Respondents failed to consult with clients about the means by which the objectives of the representation were to be accomplished. The language of Rules 1.2(a) and 1.4(a)(2) pertaining to consultation is specifically directed to “a lawyer.” We interpret “consult” to require two-way communication between lawyer and client and find no support in the language of the Rules or the case law that allows a lawyer to delegate all or virtually all client communications to a nonattorney. There are times when a nonattorney may relay information from a lawyer to a client or vice versa but we cannot envision a scenario in which it would be acceptable for a nonattorney to take over the lawyer’s duties of communication with a client. This is especially true in this case, when the nonattorneys responsible for communicating with clients were not Respondents’ employees and were not under Respondents’ direct control.
Our interpretation of “consult” finds support in Illinois case law. In In re Marriage of Talmadge, 179 Ill. App. 3d 806, 534 N.E.2d 1356 (1989), the Appellate Court interpreted “consult” as it was used in a dissolution agreement that required the custodial parent to consult with the other parent regarding their children’s medical treatment. The Appellate Court held that the term “requires a dialogue between the parties because such a dialogue would be more likely to benefit the children.” Talmadge, 179 Ill. App. 3d at 814. The Appellate Court further defined “consult” as giving one party the opportunity to respond to information from the other party, again indicating two-way communication. Id. at 814, citing People v. Stewart, 121 Ill. 2d 93, 103 (1988). We determine a similar definition of “consult” should apply when interpreting the Rules at issue in this matter. Given that the goal of the Rules is to promote effective communication and client participation in the representation, dialogue between an attorney and client is clearly more beneficial to the client than a one-sided presentation or dialogue between a nonattorney and client.
Accordingly, we find LHDR’s DVD presentations, documents provided to clients and scripted instructions from nonattorneys failed to satisfy the requirements of Rules 1.2(a) and 1.4(a)(2). Each client’s situation is unique, and it is impossible for written materials and scripted presentations to address every client question or concern. This should have been foreseeable to Respondents. For these reasons, we find Respondents violated 1990 Rule 1.2(a) and 2010 Rule 1.4(a)(2) by failing to reasonably consult with clients about the means by which their objectives were to be accomplished.
We further find proof by clear and convincing evidence that Respondents failed to explain matters to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. It is undisputed that Respondents relied on nonattorneys to explain the terms of the representation to clients. The duty to explain matters is an affirmative duty upon a lawyer. In re Casson, 06 SH 23 at 25-26, reprimand administered (June 29, 2007). Consequently, we reject the assertion that conversations with nonattorneys, documents and scripted presentations satisfy the requirements of Rule 1.4(b).
There was ample evidence LHDR clients did not understand the scope and terms of the representation. Some clients did not understand they were speaking to nonattorneys over the phone or that, as a rule, nonattorneys negotiated their debts. Even one of Respondents’ witnesses, Carl Zaar, Jr., believed an attorney handled his negotiations. Numerous clients did not understand that LHDR would make no payments to their creditors for significant lengths of time. At least two clients, Keith Fanning and Leonard May, were under the mistaken impression that LHDR had access to a source of funds that would go toward paying their debts.
Additionally, the evidence showed numerous clients were not aware of the risk that their creditors would sue them when they did not receive payments for several months. Many clients who enrolled prior to October 27, 2010, did not understand that LHDR would not defend them if their creditors filed suit. The evidence further demonstrated occasions when the nonattorney intake personnel did not understand or ignored clients’ objectives. Both Margaret Dalbke and Jennifer Green testified they wanted to consolidate their debts but were not informed prior to enrolling that debt consolidation was not a service LHDR offered.
Many clients testified they would not have enrolled in the LHDR program had they understood it. The evidence in this matter provides textbook examples of why attorney communication with clients is so important. Allowing nonattorneys to control the flow of information, some of which involved legal concepts, led to widespread misunderstanding, misinformation and financial harm to many LHDR clients.
Respondents’ reliance on the expert advice they received is of no avail. The experts were not Illinois attorneys and were not retained to give advice on compliance with the Illinois Rules of Professional Conduct. Moreover, “[e]very lawyer is responsible for observance of the Rules of Professional Conduct.” Preamble to Rules of Professional Conduct 2010, at para. . The evidence showed Respondents were aware of the need for attorneys to consult with their bankruptcy clients, so it is unclear why they would think it acceptable to delegate their duties of communication as to their debt settlement clients. Accordingly, we find the Administrator proved Respondents failed to explain matters to the extent reasonably necessary to permit the client to make informed decisions about the representation, in violation of Rule 1.4(b) (2010 Rules).
II. Respondents are charged with collecting an unreasonable fee, in violation of Rule 1.5(a) (1990 Rules and 2010 Rules).
A. Evidence Considered
In addition to the evidence set forth in Section I, we also consider the following evidence.
LHDR collected $500 flat fee retainers from clients who enrolled prior to October 27, 2010. After that date, LHDR charged clients a $900 flat fee retainer, which included defending clients who were sued by creditors.
The parties stipulated that the “activity logs” for 32 of the 36 clients identified in the Complaint “contain no entries of identifiable work or communications by a Legal Helpers attorney.” (Stipulation Related to “Activity Logs” at par. 2).
Jason Searns testified that the vast majority of files that came through his office were reviewed by legal assistants, not by attorneys. (Tr. 1151-53). Searns could not say whether an attorney saw every file that went through Hyslip’s office. (Tr. 1154). Searns could review a file in ten minutes. (Tr. 1155). The Class B attorneys’ file review was not lengthy. Respondent Aleman testified the Class B attorneys, Searns’ department and Hyslip’s department spent 2-3 hours on each client file. (Tr. 1395).
B. Analysis and Conclusions
For the following reasons, we find the Administrator did not meet his burden of proving by clear and convincing evidence that Respondents collected an unreasonable fee. Rule 1.5(a) provides that a lawyer shall not collect an unreasonable fee and lists eight factors to consider in determining the reasonableness of a fee.
We are mindful of the parties’ stipulation that there was no identifiable attorney activity in the activity logs for 32 clients identified in the Complaint. However, looking at all of the evidence, we cannot say clients received no legal services whatsoever in exchange for the retainer fees. There was evidence that, at a minimum, client files were reviewed by a local Class B attorney, clients were provided power of attorney forms to execute, and creditors were notified by letter of LHDR’s representation in connection with client debts. These services were minimal, but the $500 retainer fee was also minimal. The Administrator did not put on evidence of the fees customarily charged in the locality for similar services, one of the factors under Rule 1.5, so we are unable to find Respondents’ fees were excessive in comparison to fees charged by other attorneys for similar services.
Similarly, we find the Administrator did not prove LHDR’s $900 fee, which included the services noted above plus litigation defense, was unreasonable. It is difficult to imagine providing litigation defense for $900 or less, and, again, the Administrator put on no evidence of fees customarily charged for similar services. Accordingly, the Administrator did not prove that Respondents violated Rule 1.5(a) (1990 and 2010 Rules).
III. Respondents are charged with failing to supervise and make reasonable efforts to ensure that the conduct of nonlawyers employed by or associated with LHDR was compatible with the professional obligations of Respondents, in violation of Rules 5.3(a) and (b) (1990 and 2010 Rules).
A. Evidence Considered
We consider the following evidence, as well as the evidence set forth in Section I.
LHDR had over 30,000 clients during its three-year existence. At any given time, there were thousands of LHDR clients nationwide. (Tr. 1194).
Neither Respondent directly supervised employees of the strategic alliance partners on a daily basis. Respondent Macey described his role within LHDR as the CEO, who was responsible for approving the business model and making sure it was implemented. (Tr. 1478). He was not aware of the qualifications or job descriptions for the nonattorney case managers and negotiators who handled client files. (Tr. 1570).
Respondent Aleman was more likely to deal with daily operations and spent approximately 20 hours per week on LHDR operations. He spent a similar amount of time on his duties for Macey Bankruptcy Law. (Tr. 1163, 1279-1283). Respondent Aleman worked directly with Jason Searns and Jeffrey Hyslip and often times was in contact with Class B attorneys. (Tr. 1142).
As a rule, the nonattorney case managers and negotiators had contact with their nonattorney supervisors, not with attorneys. Respondent Aleman testified that LHDR’s supervision of the nonattorney supervisors came from Jason Searns’ quarterly visits to the strategic alliance partners and daily communications between the supervisors and Searns, Hyslip and occasionally Respondent Aleman. (Tr. 1275-76).
Respondent Aleman testified that four of the strategic alliance partners had an attorney who worked in-house and was a Class B member of LHDR. The in-house attorneys performed some supervision of the nonattorneys. (Tr. 1392).
Jeffrey Hyslip did not supervise the nonattorney strategic alliance partner employees. He visited the strategic alliance partners to provide training focused on spotting and enforcing violations of the Fair Debt Collection Practices Act. Jason Searns was the person who supervised the strategic alliance partners. (Tr. 625, 683). Hyslip and Respondent Aleman trained Class B attorneys via webinar, phone or power point on who was a good candidate for debt resolution and what LHDR files, powers of attorney and retainer agreements looked like. (Tr. 627). Hyslip described his supervision of the Class B attorneys as being available by phone if they had questions during their face-to-face meetings with potential clients. (Tr. 628).
Jason Searns established all the protocols and procedures LHDR followed in rendering services to clients, including guidelines regarding how a client came into the firm, how the firm disclosed the services to be provided, and what the daily supervision would entail. (Tr. 995). These policies and procedures applied to LHDR’s primary office in Chicago, the local Class B attorneys, and the strategic alliance partners under LHDR’s supervision. (Tr. 996).
Searns visited the strategic alliance partners every three months to train, review procedures and audit files. (Tr. 997; Resp. Ex. 24). His visits were a two-day process. The first day was spent training staff on protocols and procedures and the second day was spent auditing files. (Tr. 1064-65). Respondent Aleman visited one strategic partner two or three times and made one visit to three other strategic partners. (Tr. 1323). When Respondent Aleman made his visits, he usually met with the attorney who was on staff, the owner, and the heads of the departments. (Tr. 1322).
Searns required each strategic alliance partner to designate a “gatekeeper” and a “supervising paralegal” to stay in touch with him and his staff. The gatekeeper worked with Searns’ paralegal in regard to particular files. The supervising paralegal would contact Searns “pretty much daily” to go through protocols and issues that arose. (Tr. 1011).
Searns described his daily activities as reviewing state laws and rules, discussing with local or outside counsel whether changes to policies and procedures were needed, assessing creditors’ strategies and procedures, interacting with the Chicago office and working with the strategic alliance partners on supervision and protocols. (Tr. 1028-29).
Searns engaged “mystery shoppers” who posed as potential clients to make sure the strategic partners were following LHDR policies and procedures. (Tr. 1030-31). If a nonattorney did not perform appropriately during a mystery call, Searns would talk to the people involved. (Tr. 1066). Searns never asked a strategic alliance partner to fire an employee as a result of poor performance. He indicated that on a couple of occasions remedial training was necessary. (Tr. 1159).
When asked what he did to make reasonable efforts to ensure the conduct of nonattorneys employed by or associated with LHDR was compatible with the professional obligations of Respondents, Searns answered that he performed the quarterly visits and had daily conversations with the gatekeepers and supervisory paralegals. Searns brought client concerns to Respondent Aleman’s attention. (Tr. 1060-61).
When asked for examples of how Respondents supervised the nonattorney strategic alliance employees, Searns answered that they had vetted the system that Searns had set up and consulted with him regarding policies, procedures and due diligence issues. (Tr. 1130). Searns testified that Respondent Aleman worked with local attorneys and staff “on all kinds of matters.”
Respondent Macey was not actively involved with client files but talked with Searns about client complaints and supervised Searns and Respondent Aleman to make sure they were doing their jobs. (Tr. 1141-42).
Respondent Aleman testified that LHDR’s actions to supervise and make reasonable efforts to ensure the conduct of the nonattorney strategic alliance employees was compatible with Respondents’ professional obligations consisted of obtaining expert advice on the structure of LHDR, putting scripts in place that needed to be adhered to, giving clients documents to review and providing client information to a local attorney for review and approval. In addition, Jason Searns conducted his training, review, and audits, which according to Respondent Aleman “demonstrated a significant amount of supervisory control over the non-attorneys.” (Tr. 1357-59).
B. Analysis and Conclusions
The Administrator charged Respondents with violating Rules 5.3(a) and (b) of the 1990 and 2010 Rules, which provide as follows:
With respect to a nonlawyer employed or retained by or associated with a lawyer:
A partner, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person’s conduct is compatible with the professional obligations of the lawyer; and
A lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure the person’s conduct is compatible with the professional obligations of the lawyer.
We begin by finding the Administrator did not establish sufficient facts to trigger the application of Rule 5.3(b). The evidence did not show Respondents had direct supervisory authority over the nonattorneys at issue. The nonattorneys were employees of the strategic alliance partners, not LHDR. Respondents were not in the same geographic location as the nonattorneys and did not have the ability to hire or fire them or supervise their daily work. Accordingly, we find insufficient proof of a violation of Rule 5.3(b) (1990 and 2010 Rules).
We, however, do find clear and convincing evidence that Respondents violated Rule 5.3(a). As equity partners of LHDR, Respondents had managerial authority that required them to make reasonable efforts to ensure LHDR had measures in place giving reasonable assurance that the conduct of the nonattorneys associated with LHDR was compatible with Respondents’ professional obligations. For the following reasons, LHDR’s measures for monitoring the nonattorneys did not provide the necessary reasonable assurance that they were acting consistently with Respondents’ professional obligations. Nor were Respondents’ efforts in this regard reasonable.
Respondents delegated the task of supervising the strategic alliance partners to Jason Searns. Searns did not directly supervise the nonattorney case managers and negotiators who handled LHDR client files. Rather, they reported to nonattorney supervisors within the strategic alliance partners. Searns’ supervisory efforts consisted of providing the nonattorneys with scripts, policies, and procedures and conducting quarterly compliance reviews.
The nonattorneys were responsible for virtually all communications with clients, yet neither Searns nor any LHDR attorney had direct knowledge of the nonattorneys’ communications or other important aspects of the nonattorneys’ daily activities. Scripts and lists of policies and procedures provide some helpful information to nonattorneys but they are not a substitution for an attorney’s actual observation and communication. LHDR attorneys had very minimal if not zero knowledge whether the nonattorneys adhered to LHDR’s scripts and procedures. Nor did they have the ability to enforce adherence given the vast numbers of clients and Searns’ very limited review of actual files. The evidence showed nonattorneys, in fact, did stray from the scripts and policies without the knowledge of LHDR’s attorneys.
Searns’ quarterly reviews gave him, at best, a generalized overview of the nonattorneys’ performance. Likewise, the evidence that Respondent Aleman, Hyslip and Searns spoke with “the gatekeepers” and other employees of the strategic alliance partners regarding particular client issues on an as-needed basis cannot adequately mitigate the overall absence of meaningful monitoring of the nonattorneys by an attorney. Although Respondent Aleman testified that the in-house attorneys at four of the strategic partner offices performed some supervision of the nonattorneys, we did not hear testimony from any of the in-house attorneys, nor do the activity logs reflect any entries by the in-house attorneys. In the absence of any evidentiary support otherwise, besides Respondent Aleman’s assertions, we cannot find that the in-house attorneys performed any meaningful supervision of nonattorneys. Rather, the evidence consistently shows that the default posture of LHDR was one of minimal direct supervision of nonattorney strategic alliance employees by LHDR attorneys.
Respondents were aware of and approved the structure of LHDR and Searns’ supervisory procedures. Respondents were also aware that a large number of nonattorney employees of the strategic alliance partners were handling thousands of client files at any given time. It was not reasonable for Respondents to conclude that Searns could provide meaningful supervision to so many nonattorneys by himself. It was also unreasonable for Respondents to approve a system so devoid of direct supervision of the nonattorneys by an attorney. Accordingly, we find that the Administrator proved by clear and convincing evidence that Respondents violated Rule 5.3(a).
IV. Respondents are charged with assisting a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law, in violation of Rule 5.5(a) (1990 and 2010 Rules).
A. Evidence Considered
We consider the evidence set forth in Sections I and III above.
B. Analysis and Conclusions
Rule 5.5(a) provides that a lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction, or assist another in doing so. We find the Administrator proved by clear and convincing evidence that Respondents assisted nonattorneys in the unauthorized practice of law. The issue is not whether a nonattorney may negotiate a debt. It is undisputed that a nonattorney may do so. Rather, the issue is whether, as a matter of LHDR policy and procedure, the systematic delegation to nonattorneys of tasks such as the execution of retainer agreements and powers of attorney facilitated the unauthorized practice of law.
The Court has instructed, “[t]he definition of the term practice of law defies mechanistic formulation ? It is the character of the acts themselves that determines the issue.” In re Discipio, 163 Ill. 2d 515, 523, 645 N.E.2d 906 (1994). The practice of law includes “the giving of any advice or rendering of any service requiring the use of legal knowledge.” In re Howard, 188 Ill. 2d 423, 438, 721 N.E.2d 1126 (1999).
It is undisputed that nonattorneys collected LHDR clients’ financial information and oversaw the execution of powers of attorney and retainer agreements. LHDR’s retainer agreements evolved over time, but all versions of the retainer agreement described the legal services LHDR would and would not provide, addressed the lack of attorney-client relationship and attorney-client privilege between clients and the strategic alliance partners, informed clients they could be sued by creditors, provided information about the right to cancel the retainer agreement and contained a binding arbitration provision. In addition, clients were required to sign a disclosure form stating they reviewed all debt resolution options including bankruptcy and credit counseling and elected to proceed with debt negotiation with LHDR. The power of attorney authorized LHDR “and/or its designees” to represent clients in negotiating their debts and to receive clients’ confidential credit and account information.
Prior to October 27, 2010, no LHDR attorney reviewed the retainer agreement, debt resolution options or power of attorney with the client before the client executed those documents. After October 27, 2010, attorneys reviewed these documents with clients, but only sometimes. Paralegals also presented these documents to clients. LHDR considered the review and execution of the retainer agreements and powers of attorney to be a law-related service, not a legal service.
The Court has held that an attorney representation agreement is “without question a document of significant legal import.” Discipio, 163 Ill. 2d at 525. In Discipio, the Court considered whether Discipio assisted in the unauthorized practice of law when he entered into an agreement with a disbarred attorney, Ruther, whereby Ruther gathered information about worker’s compensation clients, completed medical authorization forms and attorney representation agreements and forwarded the information and forms to Discipio in exchange for a referral fee. The Court determined that Ruther’s actions constituted the unauthorized practice of law.
Here, all versions of the retainer agreements were complicated multi-page documents containing multiple provisions of significant legal import. The power of attorney form also gave significant legal authority to LHDR and its designees. It was not reasonable for Respondents, or any attorney who reviewed these documents, to conclude that a nonattorney could present and explain them to clients without engaging in the unauthorized practice of law. Accordingly, we find the nonattorney employees of the strategic alliance partners, as well as the paralegals who conducted face-to-face meetings, engaged in the unauthorized practice of law in presenting and facilitating the execution of the retainer agreements and powers of attorney.
We also heard evidence of nonattorneys making unauthorized statements to clients that constituted not only legal advice, but incorrect legal advice. In the recorded compliance call with client Herbert Jordine, the nonattorney, Maurice, told Herbert that, “[e]xcluding the right of rescission,” Herbert could not cancel or alter the retainer agreement within the first 90 days of enrollment. This advice was contrary to Paragraph XIV of the retainer agreement, stating that ?both parties may sever the relationship at any time” and was also contrary to well-established Illinois law that a client may discharge an attorney at any time for any reason. See In re Smith, 168 Ill. 2d 269, 294, 659 N.E.2d 896 (1995). Maurice further instructed Herbert that “[a]ny direct negotiation with your creditors could breach the Attorney Retainer Agreement.” The retainer agreement contained no such provision. Maurice’s statements clearly constituted advice regarding Herbert’s legal rights under the retainer agreement and, therefore, constituted the unauthorized practice of law.
Respondents assisted in the unauthorized practice of law described above. They, along with Jason Searns, created and approved the business model that delegated to the nonattorneys all responsibility for explaining the debt resolution program and the terms of legal representation. Despite Searns’ scripts and protocols, it was inevitable that legal questions would arise, given the complexity of the LHDR documents and the nature of the clients’ financial situations. Regardless of Searns’ claim of responsibility for LHDR’s business model, Respondents themselves are accountable for complying with the Illinois Rules of Professional Conduct. A cursory review of Illinois case law would have alerted them that LHDR’s practices constituted the unauthorized practice of law. Accordingly, we find Respondents violated Rule 5.5(a) (1990 and 2010 Rules).
EVIDENCE IN MITIGATION AND AGGRAVATION
- Character Witnesses
Attorney Jason Rubens worked at Macey Bankruptcy Law for three months and now has his own firm, Rubens & Kress. Rubens testified Respondents have excellent reputations for honesty, integrity, truth and veracity. (Tr. 377-79). They occasionally refer personal injury and worker’s compensation matters to Rubens. (Tr. 380).
David Scherer runs a real estate investment fund, Origin Capital. (Tr. 381). He has known Respondent Macey since 2002. Respondent Macey served on the board of the Illinois Education Foundation, now known as One Million Degrees. In addition to serving on the board, Respondent Macey has donated to the organization. (Tr. 385-86). He is well-regarded among people Scherer knows. (Tr. 387).
William Russell is a senior vice president for the CIN Group, which provides services to consumer law practices. (Tr. 389-90). He has done quite a bit of business with Respondents since 2005. As far as he knows, Respondents have a good reputation for honesty and integrity. (Tr. 392-94).
John Scully is a managing director of the Reporting and Receivables Division at Bank of America. He has known Respondent Aleman socially for about six years. Respondent Aleman donates to and attends charitable events for the Rehabilitation Institute of Chicago, where Scully is on the board of directors. Scully believes Respondent Aleman has great integrity and considers him a trusted advisor. (Tr. 397).
Adam Kelly is a registered patent attorney and a partner at Loeb & Loeb. (Tr. 401-402). He has known Respondent Aleman for about ten years and has known Respondent Macey for two years. (Tr. 402). Both Respondents have high reputations for honesty, integrity, truth and veracity. (Tr. 403).
Raymond Sullivan, Jr. is a certified public accountant. He has been Respondent Macey’s accountant since 1996. (Tr. 405-406). He knows Respondent Aleman more casually, through his relationship with Respondent Macey and his business. Respondent Macey has a reputation for being very honest and of the highest integrity. Respondent Aleman’s reputation is the same. (Tr. 407-408).
Michael Karczewski owns a financial services firm. He and Respondent Macey have been friends since fifth grade. (Tr. 410-11). Karczewski testified Respondent Macey is generous with his family and is well-regarded in their childhood neighborhood. The reputations of both Respondents are beyond reproach. (Tr. 412-13).
Attorney James Lessmeister has known Respondent Macey since 1996 or 1997. Lessmeister was previously employed by Respondents’ counsel, George Collins, and worked on a business litigation matter for Respondent Macey. (Tr. 417). Lessmeister is now a social friend of Respondent Macey’s. He knows many lawyers and other professionals who know Respondent Macey and believes he has an outstanding reputation and is a charitable person. Respondent Aleman’s reputation is also outstanding. (Tr. 418).
- Respondent Aleman
Respondent Aleman acknowledged giving sworn statement testimony that his 2010 income from LHDR was between $800,000 and $900,000. (Tr. 871-72). LHDR had at least 2,200 Illinois clients and received at least $6.9 million in fees from those clients. (Tr. 238-39). It had over 30,000 clients nationwide. (Tr. 896).
The firm policy was to “refund liberally if a client of ours was not satisfied with the service.” (Tr. 1408). Hundreds of clients received refunds totaling hundreds of thousands of dollars. (Tr. 1411). In Illinois, the majority of the refunds occurred pursuant to the Attorney General’s involvement with LHDR. (Tr. 1413). Only about ten percent of the refunds took place prior to the Attorney General’s involvement. (Tr. 1413). LHDR entered into agreements with attorneys general in six other states. (Tr. 1414).
- Respondent Macey
At the time of the hearing, LHDR had 300 clients who were still in the program. (Tr. 1476). Respondents remain involved in debt settlement law firms in other states, including Cornerstone Financial, Pioneer and Credit Advocates Debt Settlement Company. (Tr. 1485-86). At Cornerstone, a debt settlement law firm for which Respondent Macey is a consultant, all settlements are approved by an attorney. (Tr. 1577). Also, all clients meet or speak with an attorney before entering the program. (Tr. 1578). A strategic alliance partner performs the intake, but a Cornerstone employee performs the negotiation. (Tr. 1579).
The Administrator requested that Respondents be suspended for at least three years. When considering our sanction recommendation, we consider the seriousness of the misconduct and any aggravating and mitigating circumstances. In re Witt, 145 Ill. 2d 380, 583 N.E.2d 526 (1991). We seek to recommend a sanction consistent with sanctions imposed for similar misconduct. In re Chandler, 161 Ill. 2d 459, 472, 641 N.E.2d 473 (1994). The purpose of the attorney disciplinary system is not to punish an attorney, but to protect the public, maintain the integrity of the legal profession and protect the administration of justice from reproach. In re Winthrop, 219 Ill. 2d 526, 559, 848 N.E.2d 961 (2006).
Having found misconduct, we must determine the appropriate sanction to recommend. There are significant aggravating factors that impact our recommendation. Respondents’ misconduct affected 2,200 clients in Illinois and thousands more in other states. Respondents exposed clients to unreasonable risks of harm and caused actual harm to many clients. See In re Lewis, 118 Ill. 2d 357, 515 N.E.2d 96 (1987). Clients came to LHDR because they were under financial pressures. In many instances, their involvement with LHDR caused them to experience even greater financial problems as well as emotional distress. After ending their relationships with LHDR, many clients had to file for bankruptcy and incur additional attorney fees. Respondents’ misconduct is further aggravated by the fact it was focused on clients who were vulnerable and, in many instances, unsophisticated. See Lewis, 118 Ill. 2d 357.
Respondents placed more importance on their own success and financial gain than they did on their clients’ interests. The Panel heard no expressions of remorse for the harm their clients suffered. Additionally, in the opinion of this Panel, Respondents did not sufficiently contemplate the ethical problems that LHDR’s model and operations caused and ultimately did not acknowledge the gravity of these problems.
In mitigation, we consider Respondents’ cooperation in these proceedings and lack of prior discipline. We also consider the evidence of Respondents’ good character, including good reputations for truth and veracity and involvement in charitable activities. However, the mitigating evidence pales in comparison to the scope of the misconduct. LHDR made restitution to Illinois clients, but that occurred primarily as a result of the Attorney General’s action against LHDR. Moreover, some clients, such as Jennifer Green and Charles E. Powell, did not receive restitution of the full amount they paid to LHDR.
In support of his sanction request, the Administrator cited In re Bartoli, 96 CH 739, M.R. 18021 (May 24, 2002); In re Stambulis, 98 CH 100, M.R. 17528 (June 29, 2001); In re Struthers, 179 Ariz. 216, 877 P.2d 789 (1994); and Cleveland Bar Association v. Nosan, 108 Ohio St. 3d 99, 840 N.E.2d 1073 (2006). Respondents cite to In re Tagler, 04 CH 69 (Review Bd.) (June 6, 2006) (complaint dismissed), in which the Hearing Board found no misconduct by a lawyer who was affiliated with a nonattorney’s business purporting to assist homeowners facing foreclosure. Unlike in Tagler, we have found misconduct in this case so Tagler does not offer any assistance in addressing our sanction recommendation.
In Nosan, an Ohio case, the attorney was affiliated with FSMC, a debt consolidation and debt relief service incorporated in Nevada. A nonattorney intake assistant referred clients to Nosan for establishing a repayment plan or consulting about bankruptcy. Nosan rarely had any personal contact with the clients. He shared his legal fees with FSMC. He was found to have “abandoned his professional responsibility to oversee and safeguard his clients’ individual interests by fronting for a business that profited from the sale of debt-management services to consumers.” Nosan, 840 N.E.2d at 1076. Nosan did not act dishonestly, but he did not understand that he had acted unethically. He had nearly stopped practicing law at the time of his hearing. He was suspended for six months with the suspension stayed conditioned upon payment of restitution. Nosan, 108 Ohio St. 3d 99.
The Arizona Supreme Court suspended the attorney in Struthers for numerous ethical violations associated with his affiliation with a debt collection agency, Child Support Collections. He had approximately 750 clients. Struthers “abandoned responsibility for running his office” to untrustworthy nonattorneys, entered into improper fee agreements and mishandled client funds, shared legal fees with a nonattorney, failed to keep clients reasonably informed about the status of their matters, and refused to give a client access to her file after she terminated the representation. In disbarring Struthers, the Arizona Supreme Court found he had a premeditated scheme designed to prey on those most in need of help and was a danger to the public. Struthers, 877 P.2d at 799.
The attorney in Bartoli was disbarred for his involvement with a company that sold ineffective living trust systems. Bartoli misrepresented the benefits of the living trusts and engaged in misconduct for a period of seven years. He was found to have assisted and engaged in the unauthorized practice of law, engaged in conflicts of interest, shared legal fees with nonattorneys, made false statements about his services, made misrepresentations, and engaged in conduct that was prejudicial to the administration of justice. Bartoli, 96 CH 739.
The attorney in Stambulis was also affiliated with a company that sold estate planning services and living trusts. Over a six-year period, Stambulis reviewed at least 3,000 applications for living trusts and approved almost all of the applications without meeting with the clients or discussing their circumstances. Like Respondents, he was charged with failing to properly explain matters to clients, failing to make reasonable efforts to ensure there were measures in place to assure nonattorneys’ conduct was compatible with his professional obligations, and assisting in the unauthorized practice of law. Stambulis was also charged with acting dishonestly, sharing fees with nonattorneys, engaging in a conflict of interest, and failing to provide competent representation. He was suspended for two years on consent. Stambulis, 98 CH 100.
We find Struthers and Bartoli distinguishable from the matter before us because there were findings of dishonesty or a predatory scheme. There were no such allegations in this case. We consider Nosan to be less egregious than this matter because, unlike Nosan, Respondents were the creators of the debt settlement company. We find the scope of the misconduct in Stambulis somewhat similar, but LHDR had a significantly higher volume of clients in more states than did Stambulis.
The following cases provide additional guidance. The attorney in In re Lock, 2010PR00164, M.R. 26328 (Jan. 17, 2014), owned and operated Credit Collections Defense Network (CCDN), which advised customers it would restore their credit history, eliminate their debt, and provide attorney representation if necessary. Lock used nonattorney lead generators to obtain clients for CCDN. The lead generators enrolled clients, obtained fees, and sold the product to the clients. The lead generators kept fees for themselves and remitted some of the fees to Lock or CCDN. Despite collecting thousands of dollars in fees from each client, CCDN did not reduce its clients’ debts. The hearing panel in that case found that Lock shared legal fees with a nonattorney, gave something of value to a person for recommending the attorney’s services, and improperly solicited clients. Although CCDN stopped doing business and Lock reported fraudulent lead generators to the authorities, Lock did not express remorse or recognize his misconduct. The Review Board further noted that Lock took large fees from vulnerable, financially stressed clients and was motivated by his need for money more than any true concern for his clients. The Court adopted the Review Board’s recommendation that Lock be suspended for one year and until further order of the court.
Similarly, the attorney in In re Fleck, 2011PR 00054, M.R. 26684 (May 16, 2014), was suspended for one year and until further order of the court for misconduct related to his operation of a loan modification company, Loan Litigators International LLC (LLI), with nonattorneys. Fleck and Joseph Aldeguer, a nonattorney, formed LLI and advertised that it could complete loan modifications within a short time with no risks to the consumer. Like LHDR, LLI charged clients an upfront fee. LLI enrolled 300 clients during a four-month period from January 2009 until April 2009, which generated $315,000 in fees. Many clients did not receive loan modifications as promised and did not receive a refund of their fees. Fleck was found to have engaged in an improper partnership and shared fees with a nonattorney, engaged in a conflict of interest, aided in the unauthorized practice of law, failed to supervise nonattorney assistants and ratified their improper behavior. In addition, in connection with his departure from LLI, Fleck was found to have neglected client matters, failed to keep his clients reasonably informed about the status of the matters and to comply with requests for information, failed to properly withdraw from employment, failed to refund unearned fees and acted dishonestly.
Fleck was involved in an operation that often took advantage of vulnerable consumers. His misconduct caused financial harm to “dozens if not hundreds of clients.” However, unlike Respondents in this case, the Hearing Board found Fleck to be unsophisticated, inexperienced, and easily duped by his business partner, Joseph Aldeguer. Fleck was suspended for one year and until further order of court despite his lack of prior discipline and involvement in charitable activities.
In In re Komar, 125 Ill. 2d 427, 532 N.E.2d 801 (1988), the Court suspended a lawyer for three years for misconduct related to his involvement and ownership interest in a business, Midland Equities, Inc. (Midland) that offered services to clients facing foreclosure. Komar did not inform clients he had an interest in the corporation. Although Midland advertised it would perform legal services for clients and Komar received fees for legal services, in most cases the customer received only a legal review of his case and a referral to a bankruptcy attorney. Midland had more than 1000 clients. Komar was found to have committed multiple ethical violations, including deceptive solicitation, aiding in the unauthorized practice of law, engaging in a conflict of interest, sharing legal fees with nonattorneys and failing to return unearned fees. The Court determined that substantial discipline was warranted because Komar’s misconduct was directed at unsophisticated and vulnerable persons. Komar, 125 Ill. 2d at 428-29.
Considering the guidance and precedent from Lock, Fleck and Komar, we conclude Respondents’ misconduct also warrants substantial discipline given the scope of the misconduct, the substantial harm to vulnerable and unsophisticated clients, Respondents’ significant financial gain and lack of understanding of their misconduct and failure to appreciate the actual harm they caused. In light of all the circumstances and relevant case law, we believe a two-year suspension for each Respondent is appropriate and will send the correct message that should prevent other attorneys from engaging in similar misconduct. In addition, this recommendation will adequately protect the public, maintain the integrity of the legal profession and protect the administration of justice from reproach.
Accordingly, we recommend Respondents Thomas George Macey and Jeffrey John Aleman be suspended from the practice of law for two years.
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