Back in the day, law offices actually employed their own staff to do the office work in foreclosures. But in the past half decade, several high-volume foreclosure law firms (called by some "foreclosure mills") have taken a new tactic: spinning off their back-office work into a separate entity, selling the entity to a private equity firm for millions of dollars, and then leasing back these same employees to process their foreclosure paperwork.
Ethical complications arise when a law firm partners with a non-law firm in practicing law. The law firm will take the position that the private equity entity is doing non-legal work, but the line is not clear. There are also ethical issues of splitting fees in foreclosure and bankruptcy caswes between lawyers and non-lawyers, an illegal practice.
As stated later in this blog, this strategy started when a huge back office foreclosure service was spun out of an Atlanta law firm in 2006, with private equity firms financing the privatization of the service. As an independent company, that group continued to provide the back-office support to the old law firm, while also buying and taking over similar services in three other major law firms.
The concept, I guess, is that privately held "non-legal" foreclosure support services can be provided more efficiently (that is, more economically) by a private entity, with the economy of scale and cutting edge private sector technology and management techniques. Personally I think the concept is infected by the economic gobbly-gook of exotic modern financial financial transactions, such as the mind-bogglingly complicated securitized mortgage instruments that these same foreclosure law firms are now enforcing. Hang around these former high flying financial geniuses, with their cool-sounding buzz-speak, and even old school attorneys might start thinking that all this drivel actually makes sence, and why not get in the action and trade their staff for cash?
Unfortunately, real estate foreclosure law has not necessarily evolved to accommodate the latest concepts in securitizing everything, including people. And the pressure for profits by a highly leveraged (i.e. in debt up to their eyeballs) private equity firm might tempt the non-attorneys in their employ to cut corners and cross lines. Anyway, attorneys for property owners facing mortgage foreclosures are now contending that this whole process of privatizing law office processes can violate the law.
The New York Times ran a story October 21 (by Barry Meier) concerning the relationship between the huge Buffalo-base foreclosure law firm, Steven J. Baum PC, and a New York City private equity firm. Baum's office is one of the most active foreclosure law firms in New York, having filed over 12,000 of the 50,000 foreclosures in New York in 2009.
In 2007, Baum set up a separate legal entity, Pillar Processing LLC, to carry out much of the paperwork associated with legal foreclosures. According to the records of the Delaware Secretary of State, Pillar Processing, LLC was incorporated in that state June 1, 2007. Pillar was registered with the New York Secretary of State as a foreign (Non-New York) LLC June 8, 2007, with principal offices at 220 Northpointe Parkway, Amherst NY, the address of the Baum firm.
According to the Times October 20 article, a private equity firm in Manhattan, Tailwind Capital, bought Pillar Processing, LLC, in 2007. The Times stated that Ares Capital of Los Angeles financed the purchase of Pillar by Tailwind.
The web page of attorney Frederick F. Eisenbiegler, a partner at Bingham McCutchen LLP, states that he
"Represented Ares Capital Corporation as administrative agent, collateral agent, lead arranger and bookrunner under (i) a $60 million senior secured "unitranche" credit facility for Pillar Processing LLC that closed in November, 2007 and financed the acquisition by Tailwind Capital Partners of the non-legal processing services of a leading New York law firm providing foreclosure related services and (ii) a $12.5 million senior subordinated add-on acquisition term loan that closed in July, 2008; also represented Ares as private equity co-investor in each debt financing."
I am not quite sure what a unitranche credit facility is (even after researching the term here
and here), but it sounds to me like Baum's office sold a part of their foreclosure operation for $60 million dollars.
The web site for Pillar Processing LLC is fairly sparse. "Pillar Processing LLC is a leading provider of business process outsourcing services to the default management sector of the residential mortgage industry." The site lists their address, a series of donations to not-for-profits, and little else.
According to Linkedin, the Chief Operating officer is Eric Kagen. Mr. Kagen previously worked as a high executive at eFunds Corporation, and before that as COO of RSA Solutions, a mortgage and home equity broker servicing company.
What does Pillar Processing LLC do? A glimpse into its operation can be found in an internet job posting ("SimplyHire") for a Title Paralegal at the company. The job description: "Review of title search to include the following: Determination of defendants to be named and their capacities. Determination of correct Plaintiff in the foreclosure Review of recorded documents and legal descriptions to verify accuracy and completeness. Identify any potential title issues and determining whether they can be resolved or title claim is needed. Dictation of lis pendens, summons, complaint and debt validation letters on foreclosure files. Determination of course of action if we find that defendant is deceased either before or after first legal is filed."
If Pillar Processing LLC is practicing law, there maybe ethical difficulties involved. Canon 3 of the New York Lawyers Code of Professional Responsibility states that "A Lawyer Should Assist in Preventing the Unauthorized Practice of Law." Ethical Consideration 3-8 states "Since a lawyer should not aid or encourage a non-lawyer to practice law, the lawyer should not practice law in association with a non-lawyer or otherwise share legal fees with a non-lawyer." Disciplinary Rule 3-102, states "A lawyer or law firm shall not share legal fees with a non-lawyer. . ." with exceptions not relevant here.
Is Pillar Processing practicing law? In one bankruptcy case in Poughkeepsie, In re Schuessler (SDNY Bk 07-35608; decision Judge Cecelia Morris April 10, 2008, attached below), a letter attempting to withdraw a mortgage lift stay motion by Chase Home Finance was filed with the Court by a legal assistant at Piller Processing LLC (see decision, at page 11.) The court stated, at page 36, that "the letter was not filed by either Chase Home Finance's attorney of record or its local counsel, and Pillar Processing, LLC is not a law firm. Instead, Pillar Processing appears to be a separate affiliate of Steven J. Baum, P.C., the law firm that filed the Lift-Stay Motion on behalf of Chase Home Finance. It appears that the Steven J. Baum firm, emulating its client, has created its own 'servicer' in order to distance itself from dealing directly with this Court and other attorneys and parties when it suits the Steven J. Baum firm to do so. The Court has questioned the legal and ethical propriety of this practice."
Apparently Pillar Processing had appeared in at least five previous bankruptcy cases before Judge Morris (See decision February 7, 2008 in In Re McCourt et al, SDNY Bk 05-38803 et al, attached below). "In each of the above-captioned cases, a motion for relief from the automatic stay pursuant to 11 U.S.C. § 362 was filed on behalf of a secured creditor by Steven J. Baum, P.C. as attorneys for the secured creditor. Subsequently, in each case, Steven J. Baum, P.C. appears to have attempted a delegation of its representation of the secured creditor to "Pillar Processing, LLC," a Limited Liability Corporation that does not appear to be a law firm. Pillar Processing, LLC appears to share the same street address and telephone number as Steven J. Baum, P.C. In eight point type at the top of the letterhead, it is indicated that: 'Pillar Processing provides mortgage default services on behalf of Steven J. Baum, P.C.' " Judge Morris in that February 7 decision ordered that lift stay motions would be denied in all future cases if pleadings are submitted by a non-attorney such as Pillar Processing.
But the story is far more complicated than just the relationship between Pillar Processing, LLC and the Law Office of Steven J. Baum, PC. Baum's office also has a relationship with another entity, Pillar Holdings, LLC, which does back-office foreclosure services for a large Connecticut firm. Pillar Holdings is also controlled by the investors of Pillar Processing: Tailwind Capital and Ares Capital. And Ares is also a minor holder of an entirely different back-office foreclosure entity, the huge Promiss Solutions LLC. And Promiss is facing significant challenges of its own.
According to a filing in the New York Secretary of State office (dated November 5, 2007), the business address of Pillar Holdings, LLC is the same as the Baum office in Amherst. Pillar Holding, LLC is a Delaware entity formed in Delaware October 30, 2007, according to the Delaware Secretary of State.
According to Thomson Financial Mergers and Acquisitions, Pillar Holdings, a subsidiary of Tailwind Capital Partners, acquired the "foreclosure Processing Assets" of the Connecticut law firm Hunt Leibert Jacobson, PC. on August 1, 2008. The October 21 article in the Times, above, also referenced this acquisition. n 2007, Hunt Leibert and another law firm filed two-thirds of all Connecticut foreclosures, according to the Hartford Courant (Article June 22, 2008 by Matthew Kauffman and Dave Altimari). As also stated in the Courant article, and verified at the Ares website, Ares Capital holds both a senior lien and an equity position in Pillar Holdings, LLC.
Not complicated enough? Ares Capital, the investor in Pillar Holdings, LLC, is also holds a junior lien and equity position in Prommis Solutions, LLC, a foreclosure support entity. Based in Georgia, Promiss Solutions LLC has 1,500 employees, operating through the Southeast, Texas, and the West Coast.
Promiss Solutions LLC operates the 'non-legal' foreclosure operations of four major law firms: McCalla Raymer of Atlanta, Johnson & Freedman of Ft. Lauderdale, Morris|Hardwick|Schneider, a multi-office firm, and Pite Duncan, of San Diego. The principals of Promiss Solutions created the business within the McCalla law firm, starting in 1992. In 2006, Great Hill partners and the principals of the business bought it out from McCalla, and, starting in 2007, Promiss solutions acquired the back-office operations of three other law firms.
The Great Hills Partners (GHP) website describes the creation of Promiss Solutions this way: In 2005, GHP was looking for a way to invest in the expected downturn in residential housing when Chairman and former CEO Dan Phelan was contacted. Phelan, a lawyer by training, had built a large processing business providing foreclosure and bankruptcy technology for the residential real estate market. Interestingly, the operations were co-mingled inside a working law firm. In order to provide founder liquidity and prepare for a national business expansion, Phelan interviewed several private equity firms to lead a transaction. GHP worked with Phelan to create a stand-alone commercial enterprise in a novel "spinout" from the law firm. Importantly, GHP was able to introduce a CFO and CIO from a prior successful portfolio investment to work with Phelan on the project. In 2006, with debt financing from GHP relationship lenders and our equity sponsorship, Prommis Solutions, Inc. was founded. In Phelan's words, "This was a complicated deal. The spinout of our business from the law firm created financing and operating challenges. I really appreciated GHP's ability to bring in talented managers to assist us and who are now on our team. GHP is a very persistent group."
But, as mentioned in the October 20 Times article, referenced above, Primiss has its problems. On September 30, 2010, a class action lawsuit (adversary proceeding) was filed in the United States Bankruptcy Court for Northern District of Mississippi (In re Thorne, Bk 09-11763; AP 10-01172). The defendants include Great Hills Partners and Promiss Solutions, as well as industry giant Lender Processing Services, and charge illegal fee-splitting between a law firm and non-attorneys. Plaintiff's attorney in the Thorne case is the Wooden law firm of Auburn, Alabama. According to the Wall Street Journal (Article October 15, 2010, by Carrick Mollenkamp and Dionne Searcey), the bankruptcy trustee in the Mississippi case has joined the debtors in the lawsuit.
(As an aside, the Wooden law firm is also of counsel on another class action lawsuit filed October 4, 2010 in State Court in Kentucky. That lawsuit is against industry giant Lender Processing Services, not Promiss Solutions.)
The potential difficulties that an entity like Promiss Solutions - or Pillar Holdings or Pillar Processing - is summarized in a filing with the Securities and Exchange Commission filed June 21, 2010, Promiss Solutions Holding Corporation outlined the risk factors of its business. One of its risk factors, on page 12 of the filing, was possible liability for illegal fee-splitting arrangements with attorneys (bold emphasis in the original):
"Regulation of the legal profession may constrain the operations of our business, and could impair our ability to provide services to our customers and adversely affect our revenue and results of operations.
"Each state has adopted laws, regulations and codes of ethics that grant attorneys licensed by the state the exclusive right to practice law. The practice of law other than by a licensed attorney is referred to as the unauthorized practice of law. What constitutes or defines the boundaries of the "practice of law," however, is not necessarily clearly established, varies from state to state and depends on authorities such as state law, bar associations, ethics committees and constitutional law formulated by the U.S. Supreme Court. Many states define the practice of law to include the giving of advice and opinions regarding another person's legal rights, the preparation of legal documents or the preparation of court documents for another person. In addition, all states and the American Bar Association prohibit attorneys from sharing fees for legal services with non-attorneys.
"Pursuant to services agreements between us and our law firm customers, we provide mortgage default processing services, including foreclosure- and bankruptcy-related processing services, to law firms, and in trustee states we provide foreclosure processing services directly to mortgage lenders and loan servicers through our trustee subsidiary, Cal-Western. Current laws, regulations and codes of ethics related to the practice of law pose the following principal risks:
" • state or local bar associations, state or local prosecutors or other persons may challenge the services provided by us as constituting the unauthorized practice of law. Any allegation regarding the unauthorized practice of law could have a disruptive effect upon the operations of our business, including the diversion of significant time and attention of our senior management. We may also incur significant expenses in connection with a claim regarding the unauthorized practice of law, including substantial fees for attorneys and other professional advisors. If this type of claim were successful, we may need to materially modify our operations in a manner that could adversely affect our revenue and profitability and we could be subject to a range of penalties that could damage our reputation in the markets we serve. In addition, any similar challenge to the operations of our law firm customers could adversely impact their mortgage default business, which would in turn adversely affect our revenue and results of operations;
" • the services agreements to which we are a party with our law firm customers could be deemed to be unenforceable if a court were to determine that our agreements constituted an impermissible fee sharing arrangement between the law firm and us; and
" • applicable laws, regulations and codes of ethics, including their interpretation and enforcement by courts and state bar associations, could change in a manner that restricts our operations.
"Any changes in these laws, policies or practices or adverse determinations could increase our cost of doing business or adversely affect our revenue and results of operations."