Source: https://askalawyer.com/debt-collections-case-law-state-ex-rel-state-bar-of-wisconsin-v-bonded-collections-inc-supreme-court-of-wisconsin/
Timestamp: 2019-04-20 19:17:15+00:00

Document:
BONDED COLLECTIONS, INC., and another, Appellants.
For the appellants there were briefs by Murphy, Huiskamp, Stolper, Brewster & Desmond of Madison, and oral argument by Robert B. L. Murphy.
For the respondent the cause was argued by Warren H. Resh of Madison of counsel, with whom on the brief were Bronson C. La Follette, attorney general, and Charles A. Bleck, assistant attorney general, attorneys, and John B. McCarthy of Madison, also of counsel.
Briefs amici curiae were filed by Geisler & Kay and Robert J. Kay, all of Madison, for the Wisconsin Collectors Association, Inc., and by Francis J. Wilcox of Eau Claire, for the Eau Claire County Bar Association.
Inasmuch as the plaintiffs have demurred to the answer and affirmative defenses of the defendants, we, for the purposes of this appeal, take the allegations of the defendants, together with those allegations of the plaintiff’s complaint that are uncontroverted, as verities.
It appears that Bonded is a licensed collection agency which solicits accounts for collection from the public. Bonded at its initial contact with a creditor makes no arrangements to proceed with a lawsuit or to advance costs.
Only after nonlitigative attempts at collection have failed does Bonded advise a creditor that the account cannot be collected except by starting a lawsuit. At that juncture Bonded and the creditor proceed to institute legal actions, either by assigning the account or by entering into an agency agreement.
If after notifying the creditor that the account is uncollectible except by suit, the assignment procedure is used, Bonded advises the creditor that it will accept the assignment of the account for collection and agrees with the creditor that, if a lawsuit is begun, the proceeds of the suit will first be charged with the court costs and the proceeds remaining will be divided between the creditor and Bonded according to a fixed percentage. Bonded acknowledges that on some assigned claims it hires attorneys who bring suit in the name of Bonded, and that such attorneys make court appearances and prepare and file whatever legal documents are appropriate. It is acknowledged that, where an assignment is taken, no attorney-client relationship is established between the creditor and the attorney.
In some instances, by means that are not clear from the pleadings, Bonded is appointed as agent of the creditor for purposes of prosecuting a lawsuit in the name of the creditor. Under these circumstances, the attorney, although appearing in the name of and on behalf of the creditor, acts under the immediate instruction of Bonded.
The State Bar alleges that during the period from May, 1962 to July 21, 1965, over 1,000 legal actions were instituted by Bonded in various courts on accounts and claims, and during the period from July 1, 1964, to July 21, 1965, over 630 actions were instituted in the small claims court of Eau Claire county, and that those actions constituted 65 percent of all actions filed in that court during the period alleged. While Bonded admits that a number of actions were started by Bonded or its attorney during the period stated, it denies any knowledge of the exact number brought or the percentage that such actions constituted of the claims filed in the Eau Claire court.
All court appearances, however, are made by licensed attorneys.
Effect of legislative action or administrative rules on right of defendants to carry on particular collection practices.
In Drugsvold v. Small Claims Court (1961), 13 Wis. 2d 228, 108 N. W. 2d 648, this court reiterated its concern for the problem of unauthorized practice of law by collection agencies, making it clear that it was the court’s conclusion that the determination of whether collection practices used by certain agencies was unauthorized practice of law was a matter for the judicial branch of government.
We conclude that neither the legislature, nor any of its creatures, in contravention of the exclusive power of the judiciary, may authorize the performance of legal services by nonlawyers either directly or indirectly, nor may it authorize a lay agency, though acting through the media of licensed lawyers, to carry on a course of conduct that this court defines as legal work or the practice of law.
Does a course of conduct whereby a collection agency takes assignments of accounts for collection, furnishes an attorney, brings suit in its own name, and then pursuant to a prior agreement deducts from the proceeds, costs, and a fixed percentage as its fee and remits the balance to the creditor, constitute the unauthorized practice of law.
One of the techniques regularly used by Bonded in acquiring standing to sue is to secure an assignment from the creditor. The pleadings of the defendants reveal that, after dunning efforts have proved unsuccessful, they advise the creditor that the account cannot be collected except by starting a lawsuit. The creditor is then advised that the collection agency will accept an assignment of the account for collection. An assignment for collection is taken and an agreement is reached that proceeds of the lawsuit will be charged first with the costs of the action, and the remainder then divided between the creditor and the agency in accordance with an agreed percentage. Bonded commences actions in its own name, using duly licensed attorneys to prosecute the action. The attorney hired by Bonded prepares all legal documents and files all necessary papers in court. Appearances are made only through attorneys. The attorney general takes the position this constitutes the unauthorized practice of law.
The purpose of the real-party-in-interest statute is to prevent a multiplicity of suits, to make sure that a defendant can assert his defenses when sued upon an assigned claim, to assure that a judgment will completely settle the claim, and to make it possible to discharge the debt by paying the assignee with no vestigial right of action remaining in the assignor.
To test whether a party is the real party in interest, it is necessary to look to the effect of litigation in which the person claiming to be the real party in interest appears.
“In ascertaining whether the plaintiff is the real party in interest, the primary and fundamental test to be applied is whether the prosecution of the action will save the defendant from further harassment or vexation at the hands of other claimants to the same demand. If the defendant is not cut off from any just defense, offset, or counterclaim against the demand and a judgment in behalf of the party suing will fully protect him when discharged, then is his concern at an end.” 2 Bancroft, Code Practice and Remedies, p. 1094, sec. 749.
An assignee for collection meets that test.
It is apparent that the principal motivation for the conclusion that the assignee for collection is the real party in interest was concern for the procedural reform of our court system to avoid endless lawsuits. It is also apparent that the drafters of the code sought to protect debtors from endless harassment.
For procedural purposes an assignee of a claim for collection is, indeed, the real party in interest, but his interest is a limited one. The assignment confers upon him only a naked legal title, but the beneficial or equitable interest remains in the assignor. 6 C. J. S., Assignments, p. 1151, sec. 94. Thus, the beneficial owner of the chose in action is not the collection agency but the creditor. It is most inappropriate for the defendants to gain procedural standing to sue by complying with the what is somewhat inappropriately in this context known as the real-party-in-interest statute and then assert that because the assignee is the real party in interest in the procedural sense it stands in all respects in the shoes of the creditor. This is not the fact. The true client, the party whose right of action is at stake in the lawsuit, remains the creditor.
The defendants admit, when they acknowledge the proceed-splitting arrangement, that the creditor retains an interest in the subject matter of the lawsuit. The fact is that it retains the entire interest in the amount due subject to the percentage of the amount collected that the collection agency claims as its costs and fees. It is sheer hypocrisy to conclude that the percentage retained by the collection agency represents its equity or ownership share of the claim. It is its fee or charge for professional services rendered. Under these circumstances the property right of the creditor is directly affected and his recovery is dependent upon the litigation undertaken. There is no doubt that the client whose interests must be served and represented in the suit for collection under a normal and lawful lawyer-client relationship is the creditor.
Thus we have a situation where the defendants, La Belle, the individual, and Bonded Collections, Inc., the corporation, advise the creditor when to start a lawsuit. Upon taking a limited assignment the defendants hire an attorney who, at their direction, commences suit. The direction of lawsuit, defendants admit, is vested in them not in the creditor who is the true client. If the suit is successful, the collection agency pockets a fee for services rendered. We conclude that habitual conduct of this nature for a fee constitutes the practice of law.
It is apparent that Bonded and its officers intervene between the true client and usurp his position in the management of the suit, and usurp the position of the lawyer in advising the client that suit is appropriate. By so doing, the collection agent sells the creditor the services of a lawyer, whom it controls and directs. Though the cause asserted is in fact the creditor’s, there is privity only between the lawyer and the collection agency. The collection agency by going into court representing itself as the client perpetrates a fraud on the court. The vice of this procedure is that the collection agent, ostensibly as the client when he is not, directs the services of a lawyer. Moreover, the duty and allegiance of the lawyer is thus diverted and owed, as a result of this arrangement, not to the true client, the creditor, but to the intervening corporation to whom he owes his employment fee. When one who is not the actual client, but on the strength of an assignment for collection purports to act as such, advises the true creditor of the necessity for suit and also directs an attorney in the initiation, conduct, and termination of a lawsuit he is practicing law. He is offering in the market the services of an attorney to the creditor and he is furnishing legal services when he is not authorized by law to do so. When this is done in the usual and habitual course of business, as it is concededly done by the defendants La Belle and Bonded Collections, Inc., it constitutes the unauthorized practice of law. Bump v. District Court (1942), 232 Iowa 623, 5 N. W. 2d 914; Bump v. Barnett (1944), 235 Iowa 308, 16 N. W. 2d 579; and Bay Bar Asso. v. Finance System, Inc. (1956), 345 Mich. 434, 76 N. W. 2d 23.
The following well-reasoned paragraph from Nelson v. Smith (1944), 107 Utah 382, 394, 154 Pac. 2d 634, 157 A. L. R. 512, makes it clear that our concern in this case is not with the conduct of an attorney who may be hired but is with the unauthorized practice of law by La Belle and the corporation.
Admittedly the parties to this litigation are correct when they advert to the ethical considerations that are raised by these practices. Those considerations, however, are peripheral to the issues in the case before the court.
Does the collection agency engage in the unauthorized practice of law when it acts as the agent of the creditor in hiring a lawyer.
Respondent also concedes that there is a difference between assigned claims upon which suit is brought by the defendants’ attorneys and claims which are forwarded by the agency to an attorney with the consent and direction of the creditor.
We conclude that a transaction which results in a true lawyer-client relationship between an attorney and the creditor following the selection of the lawyer obviates the unauthorized-practice problem.
However, the rationale set forth in the discussion of assigned claims above is equally pertinent here. Thus, it must be clear to the lawyer that his client is the creditor, not the agency that appointed him, and that if he requires any direction or guidance in the handling of the suit it can come only from the client with whom he is free to communicate. Moreover, the lay agent that appointed him cannot assume the direction of either the policy or the details of the litigation—to do so is to usurp a prerogative reserved to the client alone. Nor is the attorney to look to the agency for his fees. This is the responsibility of the client.
The latter allegation nullifies an indispensable requisite of the lawyer-client relationship—that no person other than the client direct the attorney in the management of the lawsuit. Such direction of litigation, though as an agent for client, constitutes the unauthorized practice of law if such an agency agreement is not casual, but is done as a regular and usual procedure in the business of collecting claims for others. Admittedly, this is the case here, and the defendants are engaged in the unauthorized practice of law in so doing.
Are the activities of the defendants in hiring or appointing counsel to conduct litigation for creditors constitutionally protected.
There remains the constitutional question raised by Brotherhood of Railroad Trainmen v. Virginia ex rel. Virginia State Bar (1964), 377 U. S. 1, 84 Sup. Ct. 1113, 12 L. Ed. 2d 89, rehearing denied 377 U. S. 960, 84 Sup. Ct. 1625, 12 L. Ed. 2d 505. It is defendants’ position that the first and fourteenth amendments, as interpreted in Brotherhood, preclude the State Bar and this court from constitutionally controlling the activities of defendants.
“In the present case the State again has failed to show any appreciable public interest in preventing the Brotherhood from carrying out its plan to recommend the lawyers it selects to represent injured workers. The Brotherhood’s activities fall just as clearly within the protection of the First Amendment. And the Constitution protects the associational rights of the members of the union precisely as it does those of the NAACP.
Moreover, in Brotherhood it was apparent that a direct attorney-client relationship existed between the lawyer and the client. Brotherhood acted only as a referral agent, having no control over the litigation. In the instant case the collection agency controls the litigation.
Appellants’ claim that Button and Brotherhood afford a constitutional shield to their mercenary activities is without merit.
By the Court.—The order sustaining the respondent’s demurrer to the answer and affirmative defense is affirmed, and the cause is remanded to the trial court for further proceedings consistent with this opinion.
HANSEN, J., took no part.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v.