By Gary Blankenship
Senior Editor

Florida lawyers are being approached about working with nonlawyers offering foreclosure-related services to consumers, but the proposals present a veritable minefield of ethical problems.

Bar Ethics Counsel Elizabeth Tarbert said the Ethics Hotline has received many calls from attorneys who have been approached by companies or individuals that call themselves foreclosure-related rescue services, experts on loan modifications, or short sales consultants. (See separate Ethics Alert)

“Some of them are offering to set up lawyers in offices; some are offering to open partnerships with lawyers; some are offering to hire lawyers in-house to represent clients,” Tarbert said.

The catch: None of that, or many other proposals by the companies, are allowed by Bar rules.

Some have offered to provide clients in return for part of the fees, but lawyers can’t split fees with nonlawyers, Tarbert said. Some of the mortgage modification companies have told lawyers they will operate as referral services, but Tarbert said they don’t meet Bar rules for referral services.

Lawyers also can’t take clients from the companies because the firms engage in practices that are prohibited for lawyers, including promising results in advertisements and directly soliciting potential clients, she said.

Another warning sign for lawyers, according to Tarbert and Bar Unlicensed Practice of Law Counsel Lori Holcomb, is many of the modification companies are under investigation by various agencies for fraud.

The Florida Office of Financial Regulation got a Broward County judge recently to order closing one operation, Outreach Housing. The Florida Attorney General’s Office also has an action against the company. In some instances, homeowners have paid thousands in fees and received no services, winding up losing their homes to foreclosure.

The Florida Bar’s UPL Circuit Committee 17A also conducted an investigation of Outreach Housing, which has been approved for litigation by the UPL Standing Committee. And a lawyer associated with that company is the subject of a grievance inquiry.

Holcomb said her office investigated 16 companies in 2007-08 for mortgage-related UPL, and so far this year another 10 cases have been opened. The number of cases actually can understate the problem because each company can have dozens of victims, she said.

The Attorney General’s Office reports receiving 108 complaints in a two-week period, and has filed eight suits and launched 48 investigations of mortgage fraud.

The range of UPL actions, Holcomb said, is widespread. In some cases, companies have advised clients on filing federal lawsuits. In others, they have tried to retain lawyers to represent their clients.

“They would get the client and then they would hire the attorney and they would send that attorney a flat fee and then tell the lawyer what to do,” said Holcomb, adding most attorneys turn down such proposals, recognizing it is a violation of Bar rules.

“A corporation can’t practice law and they can’t hire an attorney to practice law for them,” Holcomb said.

She said the companies apparently are approaching attorneys because of the passage last year of F.S. §501.1377, aimed at protecting distressed homeowners from nonlawyers promising help with their mortgages. Another bill has been introduced in this year.

Janet Morgan, counsel in the Bar’s Ft. Lauderdale office, has headed up the UPL investigation of Outreach Housing.

“They had a Web site and a television ad offering legal services of attorneys through a nonattorney entity. . . . A nonlawyer company can’t do that,” Morgan said. “And then when they brought people in the door, they promised to analyze their loan documents and determine whether there were any violations [of truth in lending and closing procedure laws] that occurred during closing.”

Not surprisingly, Morgan said in every case investigated by the Bar, customers reported that the company found an actionable lending “violation,” and the Attorney General found the same in its probe. The company then proceeded to advise clients they had a basis for a federal suit and would arrange an attorney for them.

Clients were also told to send all communications from lenders to the company. The company tried to hire attorneys to work in-house representing clients. When they found that was impermissible, Outreach created a captive in-house law firm, but that too caused problems. So the “law firm” was split off, but it was eventually dissolved, Morgan said.

“Every time they would find there was a problem, they would change the way they did things,” she said. “They recreated themselves over and over. There were actual attorneys signing the lawsuits that were filed in federal court. However, we also found instances where our complainants did not understand a lawsuit was being filed in their name.”

The Attorney General’s investigation found in addition to requesting a direct fee, the company was instructing clients to stop making mortgage payments, and instead send a reduced payment directly to Outreach while the company “negotiated” on their behalf. Clients were told that the money would be held in escrow, but an appointed receiver said there isn’t enough to pay back the customers and other liabilities owed by Outreach.

“After hiring Outreach, they stopped paying their mortgages, and some of these clients had not even been in default when they contacted the company,” Morgan said.