One who engages in the business of advising clients, in a representative capacity, as to their rights under the law or while so engaged, performs any act or acts either in court or outside of court for that purpose, is engaged in the practice of law.[i]
The giving of advice prior to collection of a claim and the advising of legal propositions in discussions with the person from whom collection is attempted does involve the practice of law and may be performed only by lawyers, who possess the required skill.[ii] In Midland Credit Adjustment Co. v. Donnelley, 219 Ill. App. 271 (Ill. App. Ct. 1920), the court held that the operation of a collection agency, with or without legal proceedings, constitutes the practice of law.
Some practices by the collection agencies that amount to practice of law include:
- Threatening debtors with legal proceedings;
- Preparation of wills, contracts, and other legal instruments as a business or profession;
- Provide legal advice or the employment of an attorney to give legal advice to the agency’s clients;
- Preparation of legal papers and the general management of lawsuits
- Splitting of legal fees with attorneys.
However, a layman who is agent of a creditor has a right to present a claim to a debtor for payment and to receive the payment for the creditor, and he is not engaged in the practice of law.[iii] Further, the collection of claims without resort to courts of law does not constitute the practice of law.[iv]
A non-lawyer debt collector who undertakes for pay to bring lawsuits on the claims of third persons and to perform the necessary legal services incident to such lawsuit, such as preparing and filing complaints, affidavits and other legal documents, and appearing in court, is engaged in the unauthorized practice of law.[v]
A corporation which engages in the solicitation and execution of contracts whereby owners of delinquent debts purportedly sell such obligations to the corporation, under an arrangement whereby the creditors receive payment only if collection is made from the debtors, is engaging in the unauthorized practice of law in using legal processes to effect collection since such contracts do not constitute an actual purchase of the obligations.[vi]
In State ex rel. Frieson v. Isner, 168 W. Va. 758 (W. Va. 1981), the court held that where a person, association or corporation which collects debts as a regular business attempts to enforce the claims of others by resort to legal proceedings, the debt collector is extending his or its business to include legal representation of creditors. The collection agency, when holding itself out not only as an entity which will collect amounts owed to creditors but also as an agent which will render legal services in order to recover debts and sells its services as a representative in legal actions as part and parcel of its debt collection business, can be viewed only as the unauthorized practice of law.
Further, a collection agency cannot remove itself from the sphere of unauthorized practice of law by employing an attorney to appear in court and prepare legal documents incident to a suit brought by the agency as a representative of its clients.
The courts have the inherent power, apart from statute, to inquire into the conduct of any person, whether an individual, a lay agency, or a corporation, to determine whether he/she or it is usurping the functions of an officer of the court and illegally engaging in the practice of law and to put an end to such unauthorized practice.[vii] In State ex rel. State Bar of Wisconsin v. Bonded Collections, Inc., 36 Wis. 2d 643 (Wis. 1967), the court held that the legislature has the authority to place additional penalties upon those who engage in the unauthorized practice of law.
In Depew v. Wichita Retail Credit Ass’n, 141 Kan. 481 (Kan. 1935), the court held that an injunction is a proper remedy to restrain a corporation from the unlawful practice of law and that attorneys as officers of the court suing on behalf of themselves and other practicing attorneys of their vicinity are proper party plaintiffs in such an action to enjoin a corporation from the unlawful practice of law. A state court may forbid a collection agency from engaging in the unlawful practice of law in connection with the handling of collections in bankruptcy cases.[viii]
When there is no statutory prohibition against the solicitation, purchase, or assignment of claims, a collection agency may take a valid assignment of a claim and bring an action thereon in its own name. Further, there must be a valid assignment between a creditor and a collection agency in order for the collection agency to sue on the debt in its own name.[ix] In Wash. State Bar Ass’n v. Merchants’ Rating & Adjusting Co., 183 Wash. 611 (Wash. 1935), the court held that it is lawful for a creditor to assign an account for collection and for the assignee to sue in his own name.
In Alco Collections v. Poirier, 680 So. 2d 735 (La.App. 1 Cir. Sept. 27, 1996), the court observed that the term debt collector or the term collection agency does not mean nor include:
- Any officer or employee of a creditor while, in the name of the creditor, is collecting debts for such creditor, or a person collecting or attempting to collect claims that are owed to that person or to an affiliated person, whether directly as an originating creditor or indirectly as a result of purchase, transfer of ownership, or subrogation of rights.
- Any person while acting as a debt collector for another person, both of whom are related by common ownership or affiliated by corporate control, if the person acting as debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts.
- Any officer or employee of the state of Louisiana or the United States to the extent that collecting or attempting to collect any debt is in the performance of his official duties.
In situations where it has been held that the collection agency, as assignee, is the owner of the claim and may bring suit in its own name, the collection agency will be permitted to retain an attorney to prosecute the claim on its behalf.[x] The employment of an attorney by an association to represent its member in cases that involve the interest of the membership as a whole, or of a substantial part, is not objectionable as an unauthorized practice of law.[xi]
[i] State ex rel. McKittrick v. C. S. Dudley & Co., 340 Mo. 852 (Mo. 1937)
[ii] American Auto. Ass’n v. Merrick, 117 F.2d 23 (D.C. Cir. 1940)
[iii] State ex rel. McKittrick v. C. S. Dudley & Co., 340 Mo. 852 (Mo. 1937)
[iv] Public Service Traffic Bureau, Inc. v. Haworth Marble Co., 40 Ohio App. 255 (Ohio Ct. App., Cuyahoga County 1931)
[v] State ex rel. Frieson v. Isner, 168 W. Va. 758 (W. Va. 1981)
[vi] In re Inc. Consultants, 6 Ohio Misc. 143 (Ohio C.P. 1965)
[vii] Richmond Ass’n of Credit Men v. The Bar Ass’n, 167 Va. 327 (Va. 1937)
[viii] Depew v. Wichita Ass’n of Credit Men, 142 Kan. 403 (Kan. 1935)
[ix] Alco Collections v. Poirier, 680 So. 2d 735 (La.App. 1 Cir. Sept. 27, 1996)
[xi] American Auto. Ass’n v. Merrick, 117 F.2d 23 (D.C. Cir. 1940)