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Beware the meltdown's temptations

By Diane Karpman

Diane Karpman

It would be difficult not to see potential opportunities in the sub-prime mortgage meltdown. Gov. Schwarzenegger's AB 1830 is designed to mandate that lenders wait an additional 90 days before selling a defaulting borrower's home. President-elect Obama has proposed a three-month moratorium on foreclosures. Although some may think this presents boundless business opportunities, wait a minute.

A few months ago, I mentioned a scenario that is spreading throughout the legal community. Lawyers are being solicited by brokers and loan modification agents who want to create "new business models." Remember, lawyers cannot be in business with nonlawyers, regardless of what creative paradigm a broker presents to avoid the historic prohibitions on fee splitting.

On Sept. 16, the Ohio Supreme Court suspended one lawyer, enjoined another from pro hac vice practice in the state, and reprimanded a third for providing perfunctory legal services to customers of a high-volume mortgage foreclosure counseling firm that was engaged in the unauthorized practice of law (Cincinnati Bar Ass'n v. Mullaney, Ohio, No. 2008-0412).

These types of sham companies are proliferating throughout California since we are one of the epicenters for upside down mortgages. The company sells the lawyer "modification services" and charges the client for referring them to the lawyer. Other creative variations exist, but they all present the same problems.

The companies exploit the vulnerability of the clients and advertise their ability to help debtors reinstate or rework their loans. Typically, the lawyers never meet with the clients. The companies negotiate directly with lenders, generally following a predetermined script of stalling with boilerplate correspondence. That cookie-cutter approach may not be the best procedure for all the debtors and demonstrates that the lawyers involved with the companies failed to exercise independent judgment regarding the needs of that particular client.

Conflicts abound in these situations because lawyers will be reluctant to advise the client to sue the referring company, fearful of cutting off future referrals. The problem is that a lawyer's focus must be solely on that particular client's needs and not on other ongoing business relationships. That is the overarching reason lawyers can't share fees with nonlawyers.

Other disciplinary allegations include the possibility that the lawyer is aiding and abetting in the unauthorized practice of law. In People v. Sipper (1943) 61 Cal. App. 2d Supp. 844, a broker advised the clients on what documents to execute, stepping beyond merely being a scrivener or clerical service, and was found to have violated Business and Professions Code §6125.

Clearly, lawyers can employ outside service providers like accountants, investigators and translators, or they can hire in-house loan modification agents so that they can be properly supervised. The cases must be self-generated by the lawyer, because buying clients or paying referral fees has been prohibited for centuries. It doesn't matter what type of newfangled business "model" is employed, it is still capping and running, and can result in significant criminal and disciplinary penalties.

• Diane Karpman can be reached at 310/887-3900 or at

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