Please ensure Javascript is enabled for purposes of website accessibility
Home / News Stories / ‘Pandora’s Box’

‘Pandora’s Box’

Bankruptcy practice model under fire

pandora_mainA recently launched net­work of bankruptcy law­yers billed as a “nation­wide online law firm” is under fire in a Virginia court.

A regional U.S. Bankruptcy Trustee is suing a network of entities operating as “UpRight Law,” including two of the Vir­ginia lawyers who signed up to handle UpRight’s consumer bankruptcy cases.

UpRight launched in 2013 and, ac­cording to a 2016 article in a Chicago business publication, they had engaged 350 lawyers around the country and em­ployed a staff of about 150 people at its Chicago headquarters.

Through national marketing, includ­ing YouTube videos, UpRight solicits clients seeking a “path to financial free­dom.”

Organizers boasted of UpRight’s digi­tal platform and modern workflow soft­ware, allowing lawyers to serve clients through a computer interface rather than through face-to-face office meet­ings.

Experts on legal ethics and econom­ics have submitted conflicting opinions about the practice model in the lawsuit in Roanoke’s U.S. Bankruptcy Court.

The case involves what one judge re­cently termed a “Pandora’s Box of ethical issues” involved in regulating the “na­tional law firm” model for bankruptcy practice.

Judicial scrutiny already has brought penalties for some attorneys. Lawyers in both Virginia and North Carolina have been temporarily banned from bank­ruptcy courts and ordered to repay client fees in cases involving nationwide mar­keting schemes.

Battle of experts

The latest showdown over a national marketing model is headed for trial next month.

U.S. Bankruptcy Judge Paul M. Black is presiding over a challenge to the Up­Right Law practice model, including a related program billed as a way to pay attorneys’ fees through disposal of cli­ents’ newly financed cars.

The Region Four U.S. Bankruptcy Trustee filed two complaints in Virginia last year alleging that Roanoke lawyer Darren Delafield and Warrenton law yer John C. Morgan Jr. – among other de­fendants – should be forced to repay client fees and fined for failing to properly disclose fee-sharing agreements. The cases were con­solidated with a four-day trial scheduled to start Sept. 25.

The lawsuits describe a business that markets consumer bankruptcy services on a national scale and then refers the recruit­ed clients to affiliated lawyers around the country who file and handle the cases. The national organization collects client fees, paying a portion of each fee to the lawyer who actually appears in court.

Black, along with a North Carolina judge, sharply questioned similar arrangements last year, pointing to concerns about fee splitting rules and oversight of the legal work. In several debtors’ cases involving “national law firms,” the judges found signif­icant lapses in attorney work product.

UpRight Law is mounting a defense of its practice model, offering two experts who say that the local lawyers should be considered as being part of the overall national firm for purposes of sharing fees. The national firm, its Virginia affiliate and participating Vir­ginia lawyers “act as one firm,” said Bernard J. DiMuro of Alexandria in an expert report.

“The relationship is sufficiently close, reg­ular and continuing to identify the limited partners as members of the [national] firm, entitled to share fees in whatever way they agree,” DiMuro wrote in May. Collection of client fees by the national firm does not vio­late any Virginia law or ethics rule, DiMuro continued.

Another UpRight expert, Illinois lawyer Mary Robinson, opined that there is no eth­ical bar to using out-of-state employees and agents to collaborate on client representa­tion under the direction of locally licensed lawyers, such as Morgan and Delafield.

The trustee’s experts disagreed, contend­ing the UpRight business model is unable to meet ethical concerns.

Problems include “handcuffing” of part­ners in fulfilling basic ethical duties, lack of consistent conflicts checks and unautho­rized law practice inherent in the business model, according to Richmond attorney Paul D. Georgiadis.

“Stripped to its essence, UpRight lacks the robust frame of ethical structure needed and required for a true law firm,” Georgiadis wrote in a July statement.

Under the partner arrangements, Geor­giadis said, the local lawyers have no control over a significant portion of the legal work done by the national office.

University of Virginia law professor George M. Cohen offered a 28-page report, concluding that an economic and legal anal­ysis of the UpRight structure supports the conclusion that the business cannot be con­sidered a cohesive “law firm.”

‘New car custody’

A separate accusation involves what Up­Right calls its “New Car Custody Program.” The trustee alleges that clients are persuad­ed to allow an UpRight affiliate to tow away their debt-encumbered cars in exchange for immediate payment of the client’s fees.

According to the lawsuits, the affiliated towing company – known as Sperro – hauls the cars to Indiana where, through delays in notice to lenders, storage fees mount and the law allows filing of warehousemen liens.

“The delay strategy sought to guarantee that even if the lienholder received notice of the sale, the lienholder would either pay Sperro’s artificially inflated fees or abandon the vehicle thereby allowing Sperro to sell it. Under either scenario, [the national firm] and Sperro profited from the scheme,” the trustee wrote.

A spokesperson for the U.S. Trustee’s of­fice said the office would have no comment on the UpRight claims beyond its plead­ings. Christopher W. Stevens of Roanoke, a member of the legal team representing the UpRight Law defendants, also declined comment.

Prince Law case

The UpRight case is not the first brush with the national law firm model for the bankruptcy judge.

In a matter involving the now-defunct Florida firm known as “Prince Law,” Black declared that its second-tier partnership shares for local attorneys had no purpose “other than to hide the ball on who was ac­tually doing the work, where it was being done, and how the fees were shared.”

That firm’s so-called “Class B” shares were “sham transactions” to skirt fee-sharing dis­closure obligations, Black said. Black fined Lynchburg lawyer Brent Barbour $5,000 and permanently disbarred him from the Western District Bankruptcy Court for fail­ure to comply with court orders in connec­tion with the Prince Law matters.

In a November opinion, In re: Futreal (VLW 017-4-001), Black prophetically noted that bankruptcy courts may have to “police such matters for the near future.”

“If nothing else, these cases reflect the Pandora’s Box of ethical issues opened by multi-jurisdictional practice” through the national law firm model, Black wrote.

“These local counsel retentions are often nothing more than disguised independent contractor arrangements designed to in­crease revenue streams by attempting to evade the fee-splitting prohibitions” of bank­ruptcy statutes and rules, Black said.

“These cases raise several questions as to who, if anybody, has oversight authority over these arrangements,” Black wrote.

North Carolina case

A bankruptcy judge in North Carolina also questioned a national law firm model in the case of In re: Banner, No. 15-31761, W.D.N.C. Bank. 2016.

A New York lawyer appeared to have designed the business plan “with the sole purpose of making money while taking no responsibility for the firm’s clients and at­tempting to isolate the firm from any liabili­ty related to client representation by associ­ating a local ‘partner,’” wrote Judge Laura T. Beyer last year.

Beyer said the Volks Anwalt firm’s failure to meet a deadline to avoid a client’s foreclo­sure was “outrageous and unconscionable.”

Beyer ordered all attorneys associated with the firm barred from practice in North Carolina’s Western District for five years.

VLW 017-4-001

Fulltext Opinions