Short Sales, Debt Adjustment and Unauthorized Practice of

Law

ByBenjamin R. Kuhn

The Kuhn Law Firm, PLLCRaleigh, NC

Debt Adjustment and Short Sales

• As we just talked about short sales involve the sale of real estate for less that what the bank is owed on the note.

• As a result, there is a certain amount of debt adjustment likely to occur for any short sale

So What is Debt Adjustment

• Debt Adjustment is regulated by Chapter 14 (Criminal Law) Section 56 of the NCGS. See Exhibit 1.

• With the enactment of Session Law 2005-408 the statutory definition of debt adjustment also includes “foreclosure assistance”.

Debt Adjustment Defined

Debt Adjustment

• NCGS § 14-423(a)(2) provides the definition for debt adjustment

• See highlighted portions of Exhibit 1.

Debt Adjuster Defined

Debt Adjuster

• NCGS § 14-423(a)(1) defines debt adjuster as one “who engages in, attempts to engage in, or offers to engage in the practice or business of debt adjusting”

Am I a Debt Adjuster?!?

• No.

• NCGS § 14-426 exempts certain transactions and individuals from being deemed debt adjusters

The 2 major exemptions under NCGS § 14-426

• An attorney‑at‑law licensed to practice in this State who is not employed by a debt adjuster

• An organization that provides credit counseling without receipt of a fee which is accredited by an organization approved by the Commissioner of Banks

OK So What?

• Remember debt adjustment is regulated by Chapter 14 – Criminal Law or the NCGS

• Any person “engage in, or offer to or attempt to, engage in” debt adjusting, or if any person shall “act, offer to act, or attempt to act” as a debt adjuster, he shall be guilty of a Class 2 misdemeanor

Then Who is a Debt Adjuster?

Google search for “NC mortgage relief”

And …

Voila!!!

• If not, then Bank/lender can not perform any legal services (other than notary and receipt/disbursement of funds) necessary to close a residential real estate transaction

• Yes, so long as the Bank has a primary interest in the transaction. State v. Pledger, Source Materials, Ex. 6

These guys are

Are Illegal Debt Adjusters Engaging in UPL?

• Most likely. By definition debt adjustment requires some level of legal services.

• Given the nature of debt adjustment the UPL is likely to be the drafting and negotiating loan terms.

Question to Ponder

• What if another attorney closes a short sale negotiated by an illegal debt adjuster?

• Has the attorney aided and abetted UPL?

More Questions• Is an attorney ethically obligated to

report UPL by a debt adjuster to the State Bar?

• What about the conduct of the other attorney closing short sales negotiated by an illegal debt adjuster?

• What are the respective attorneys’ ethical obligations?

So What is the Attorney’s Ethical Obligations re UPL?

• RPC 5.5 and 8.3(a). Exhibit 3.

• While there are no FEOs directly concerning short sales and UPL, 2009 FEO 2 provides guidance. Exhibit 4.

Attys Ethical Obligations re UPL

• No ethical obligation for attorneys to report UPL by a non-attorney

• Not Assist UPL. Rule 5.5(d). Exhibit 3.

• Per Rule 8.3(a), and with knowledge, report another attorney to the State Bar who is violating Rule 5.5(d). Exhibit 3.

Attys Ethical Obligations re UPL

• Correspond with other attorney and raise ethical issue and concern

• Request other attorney call the State Bar for further guidance

• If other attorney does not call and continues to assist, the ethical obligation to report under Rule 8.3(a) arises

So What Should Attorneys Do?

• Report to the State Bar, if Needed, Other Attorneys Who Assist UPL

• If Attorneys don’t assist UPL the illegal debt adjuster’s ability to perform transactions fraught with consumer risk will diminish

Who Enforces UPL Laws?

• The State Bar Council or any of its committees appointed by it for that purpose (i.e. the AP Committee), including the power to investigate charges or complaints of

unauthorized or unlawful practice of law • District attorneys also have power to

investigate UPL and any person may be found guilty of a Class 1 criminal misdemeanor.

Atty Discipline for Assisting UPL

• Mainly Reprimands and Censures, See http://www.ncbar.gov/discipline/

• Based on research no disbarments for assisting UPL

Practice Pointers For Attorneys

• Attorneys should make a concerted effort to provide consumers with “plain English” information they can use to protect themselves; and

• Attorneys should take additional care to document their obligations and the obligations of others to forestall difficulties at a later date.

Why North Carolina Regulates UPL?

The primary purpose for regulating the practice of law is to protect the public from harm that may result from the activities of dishonest, unethical and incompetent providers of legal services, and to ensure that certain ethical duties to the client, the courts and the public, are adhered to . . .

UPL Enforcement Action

• State Bar: Letter of Caution. 27 NCAC 01D .0206(4)

• State Bar: Cease and Desist Letter. 27 NCAC 01D .0206(4)

• State Bar: Injunction. NCGS § 84-37

UPL Enforcement Action

• DA: Injunction. NCGS § 84-7

• DA: Class 1 Misdemeanor – jail. NCGS § 84-8

• But, no private right of action. Baars v. Campbell University, Inc., 148 N.C. App. 408, 558 S.E.2d 871 (N.C. Ct.

App. 2002)

WHAT SHOULD WE DO?

• Educate Consumers

• Empower real estate practitioners through professionalism and ethical practice

• Engage illegal debt adjusters and those that enable them to discuss the ramifications of their actions and legal consequences

Why We Should Do It

• Clients appreciate - and most likely remember - when you keep them out of a jam

• Client’s never forget when you miss something or put them in a jam

• Professional and Ethical business practices are the most powerful client development skills you have

The End