No Safe Harbor For “Company Of Non-Lawyers”

A recent decision of the Colorado Supreme Court is summarized in the court’s headnote

The supreme court examines the legal services exemption in the Uniform Debt-Management Services Act, §§ 12-14.5-201 to -242, C.R.S. (2014) (“DMSA”), to determine whether the original version of the exemption applies to Morgan Drexen, Inc., a company of nonlawyers. The court also analyzes whether the amended version of the exemption violates the separation of powers doctrine in the Colorado Constitution and the Commerce Clause and Privileges and Immunities Clause in the United States Constitution because certain out-of-state attorneys may be subject to regulation under the DMSA. The supreme court reverses the trial court’s order and remands for further proceedings consistent with this opinion. The supreme court holds that the trial court erred by concluding that Morgan Drexen’s services fall within the scope of the legal services exemption in the original DMSA, section § 12-14.5-202(10)(A), C.R.S. (2008). The original exemption encompasses nonlawyer assistants, but Morgan Drexen’s activity here does not fall within the scope of that exemption because it performs substantive debt-management services without meaningful instruction and supervision by an attorney. The supreme court also holds that the amended DMSA does not violate the separation of powers doctrine in article III of the Colorado Constitution or the Commerce and Privileges and Immunities Clauses of the United States Constitution.

The plaintiff

Walter Ledda is the founder, Chief Executive Officer, and majority shareholder of Morgan Drexen. He describes Morgan Drexen as a “legal software and legal software development company” that is owned and operated by nonlawyers but provides paraprofessional and administrative support to attorneys and performs “routine tasks.” Although Morgan Drexen alternates between calling itself a California and a Nevada corporation, its principal place of business is in California. Morgan Drexen employs what it terms “nonlawyer assistants” and provides debt-management services nationwide in conjunction with contracting attorneys known as “engagement counsel” or “engagement law firms,” some of whom then engage local counsel. Engagement counsel or local counsel enter into attorney–client fee agreements with debtors. Those fee agreements state that counsel may use the services of outside companies such as Morgan Drexen; however, Morgan Drexen is not a party to the agreements. 

Morgan Drexen refers to engagement counsel as its “clients” and pays them a minimal fee that passes through the law firms’ trust accounts, sometimes as low as two dollars per month per debtor–client. Two of those attorneys are parties to this lawsuit: Donald Drew Moore and Lawrence Williamson, Jr. Moore is a Colorado-licensed attorney who acts as both engagement counsel and local counsel. Williamson is a Kansas attorney who acts as engagement counsel and represents Colorado clients through association with Moore.

Holding

We hold that the trial court erred by concluding that Morgan Drexen’s services fall within the scope of the legal services exemption in the original DMSA. The original exemption encompasses nonlawyer assistants, but Morgan Drexen’s activity here does not fall within the scope of that exemption. Morgan Drexen finds no safe harbor under Colo. RPC 5.3, given that it performs substantive debt-management services without meaningful instruction and supervision by an attorney. We also conclude the amended DMSA does not violate the separation of powers doctrine in article III of the Colorado Constitution or the Commerce and Privileges and Immunities Clauses of the United States Constitution. Consequently, we reverse the trial court’s order and remand for further proceedings consistent with this opinion.

(Mike Frisch)