A federal bankruptcy court judge ruled in favor of Prommis Solutions Holdings Corp. and its subsidiary in a highly publicized lawsuit that had alleged the default outsourcing company engaged in illegal fee-splitting and the unauthorized practice of law.
The suit involved Mississippi homeowners Jonathan and Darlene Thorne, who had filed for bankruptcy in April of 2009. The couple alleged in October 2010 that Prommis and the Atlanta-based law firm of Johnson & Freedman were illegally splitting fees and were engaged in the unauthorized practice of law. The case sought class-action status and received national press when Locke Barkley, a federal bankruptcy trustee, chose to join the case as a plaintiff.
Under various agreements between Prommis and J&F, J&F outsources its paralegal and support services to Prommis. Prommis acquired the firm's nonlegal assets, via a predecessor firm, for $26.3 million plus the issuance of 8,333 shares of Prommis Holdings preferred stock in 2007.
In the summary judgment ruling, federal judge David Houston, of the U.S. Bankruptcy Court of the Northern District of Mississippi, ruled that the services provided to J&F by Prommis were "identical" to the same services that would have otherwise been performed by in-house paralegal staff.
"The J&F/Prommis Solutions relationship is a unique, although not exclusive, business model which is an innovative departure from the traditional practice of utilizing 'in house' employees for these tasks," Houston wrote in his opinion. The fact that the nonlegal services were outsourced has no relevance to the case, the judge ruled.
Prommis prepares bankruptcy and foreclosure documentation and filings "for attorney review," according to its S-1 registration statement with the Securities and Exchange Commission. Prommis notes in its S-1 filing that "certain authorities may challenge services as constituting the unauthorized practice of law" and that its service agreements with a select number of law firms "could be deemed unenforceable if a court were to determine that the agreements constituted an impermissible fee-sharing agreement."
Lender Processing Services (LPS) and its default unit was previously dismissed from the suit, and a separate summary judgment was issued involving defendant Great Hill Partners.
The issue of alleged fee splitting in outsourcing arrangements in default servicing isn't new. It has arisen before, including in a 2008 Houston bankruptcy case involving Ernest and Mattie Harris. In that case, the couple claimed its loan servicer at the time, Saxon Mortgage Services, never told the court it had hired Fidelity National Information Services as its agent. (LPS was spun off from Fidelity in 2008.)
The borrowers claimed that Fidelity's involvement resulted in higher legal fees. Fidelity prevailed in that case.