Consumer Law Associates v. Stork

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No. 106,115

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

CONSUMER LAW ASSOCIATES, LLC; PERSELS & ASSOCIATES, LLC;
DAVID E. HERRON, II; STANLEY GOODWIN; and LAURA SIMPSON-REDMOND,
Appellants,

v.

THE HONORABLE JUDI STORK, ACTING COMMISSIONER OF THE OFFICE OF
KANSAS STATE BANK COMMISSIONER,
Appellee.


SYLLABUS BY THE COURT


1.
Whether a party is required to, or has failed to, exhaust its administrative remedies
is a question of law over which an appellate court's review is unlimited.

2.
The Kansas Judicial Review Act is the exclusive remedy for review of agency
actions unless the Act specifically exempts the agency from its authority. The Kansas
Judicial Review Act does not exempt the Office of Kansas State Bank Commissioner.

3.
The Kansas Legislature charged the Office of Kansas State Bank Commissioner
with the statutory duty to regulate any credit service organization or debt management
service doing business in Kansas and to determine whether any person has violated or is
about to violate the Kansas Credit Services Organization Act.



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4.
The Office of Kansas State Bank Commissioner has the authority to conduct
hearings, to issue cease and desist orders, and to impose fines up to $10,000 per violation
of the Kansas Credit Services Organization Act.

5.
The Kansas Credit Services Organization Act does not apply to any person
licensed to practice law in Kansas when the person is acting within the course and scope
of such person's practice as an attorney. K.S.A. 50-1116(b).

6.
Whether a person has violated, or is about to violate, the Kansas Credit Services
Organization Act necessarily requires the interpretation of statutes and the consideration
of evidence.

7.
Whether a person, as defined by K.S.A. 50-1117(f), is exempt from the Kansas
Credit Services Organization Act requires statutory interpretation.

8.
Individuals who are licensed to practice law in Kansas are exempt from regulation
by the Office of Kansas State Bank Commissioner. The statutory exemption under K.S.A.
50-1116(b) does not apply to a limited liability company or any other entity that is not
licensed to practice law by the Kansas Supreme Court.

9.
Before a declaratory judgment action may be brought in district court claiming an
exemption under the Kansas Credit Services Organization Act, the procedural rules in the
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Kansas Administrative Procedures Act and the Kansas Judicial Review Act must be
followed and exhaustion of administrative remedies is required.

Appeal from Shawnee District Court; DAVID E. BRUNS, judge. Opinion filed March 23, 2012.
Affirmed.

Jeffrey A. Befort, of Stinson Morrison Hecker LLP, of Kansas City, Missouri, and Charles W.
Hatfield, of the same firm, of Jefferson City, Missouri, for appellants.

Derenda J. Mitchell, assistant attorney general, for appellee.

Before GREENE, C.J., PIERRON and MARQUARDT, JJ.

MARQUARDT, J.: Consumer Law Associates, LLC; Persels & Associates, LLC;
David E. Herron, II; Stanley Goodwin; and Laura Simpson-Redmond (Petitioners) appeal
the district court's dismissal of their declaratory judgment action and writ of mandamus
petition for failing to exhaust administrative remedies. We affirm the dismissal.

In July 2009, the Office of the Kansas State Bank Commissioner (OSBC)
contacted Consumer Law Associates, LLC (CLA), and Persels & Associates, LLC
(Persels), national law firms which are located in Maryland, because OSBC had received
several complaints from their Kansas customers. Following an investigation, the OSBC
believed that CLA and Persels were possibly engaged in unregistered credit and debt
management services that violated the Kansas Credit Services Organization Act
(KCSOA), K.S.A. 50-1116 et seq., and notified CLA and Persels of the possible
violations.

Before the OSBC had an opportunity to hold a hearing on the possible violations
or to send a cease and desist order under K.S.A. 50-1129, CLA, Persels, and three of their
field attorneys in Kansas, David E. Herron, II, Stanley Goodwin, and Laura Simpson-
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Redmond (Petitioners), filed a verified petition for a declaratory judgment action
(petition) with the Shawnee County District Court. The Petitioners alleged they were
exempt from the OSBC's regulation, which states: "Any person licensed to practice law
in this state acting within the course and scope of such person's practice as an attorney
shall be exempt from the provisions of this act." K.S.A. 50-1116(b). The field attorneys
work for CLA and Persels, and the clients they serve are CLA's and Persel's clients.

The Petitioners claimed that they were not required to exhaust administrative
remedies because (1) the OSBC did not have the authority to regulate attorneys, (2) the
only issues were questions of law, (3) the Kansas Supreme Court alone regulates
attorneys and law firms, and (4) any administrative remedy was inadequate or would
result in irreparable harm. Finally, the Petitioners argued the district court should bar the
OSBC from bringing an administrative action against them because it lacked subject
matter jurisdiction.

The same day the Petitioners filed their petition, they also filed a motion for a writ
of mandamus and temporary injunction (motion) to bar the OSBC from initiating
administrative proceedings and from issuing a cease and desist order. The Petitioners
alleged they would suffer irreparable harm if the OSBC prevented them from rendering
legal services or advice to their more than 1,000 Kansas clients.

The district court held a status conference on September 16, 2010, but apparently
refused to issue a writ of mandamus or a temporary restraining order. Instead, the district
court instructed the OSBC to file its response to Petitioners' declaratory judgment action.
Later that day, the OSBC issued a summary order to cease and desist and pay a fine under
the Kansas Administrative Procedure Act (KAPA), K.S.A. 77-501 et seq., and K.S.A. 50-
1129. The order required CLA, Persels, and their owners, officers, partners, and directors
to immediately cease and desist from engaging in any "credit services organization
business, as defined by K.S.A. 50-1117(c), in the State of Kansas and with Kansas
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residents." The order directed CLA and Persels to pay a fine of $8,400,000 based on
1,671 violations of K.S.A. 50-1118(a), and at least one violation of K.S.A. 50-1121(a),
(b), (d), (f), and (p). The order stated that CLA and Persels could request a hearing under
K.S.A. 77-542 to challenge the order. It is undisputed that this order was directed at CLA,
Persels, and their owners, partners, officers, and directors, along with Neil J. Ruther and
Lisa L. Perillo; furthermore, it did not name or restrict Herron, Goodwin, or Simpson-
Redmond.

On September 24, 2010, the OSBC filed a response to Petitioners' declaratory
judgment petition and indicated its intention to file a motion to dismiss. In its response,
the OSBC argued that administrative procedures were available to CLA and Persels and
the administrative procedures were adequate to resolve the issues CLA and Persels raised
in their petition.

The OSBC filed a motion to dismiss on October 14, 2010, claiming that
Petitioners lacked an actual case or controversy because they filed their petition for
declaratory judgment before the OSBC filed its cease and desist order. Further, the OSBC
alleged the district court lacked subject matter jurisdiction over the declaratory judgment
petition because the Petitioners failed to exhaust administrative remedies or establish that
an administrative remedy would be inadequate.

On April 22, 2011, the district court filed a memorandum decision and order
concluding that the exemption in K.S.A. 50-1116(b) only applies to "those who are
'licensed to practice law' in the State of Kansas and who are 'acting within the course and
scope' of their practice." After analyzing several Kansas Supreme Court Rules, the
district court determined that a limited liability company cannot possibly be "'licensed to
practice law'" in Kansas because

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"a limited liability company cannot obtain an undergraduate or law school degree,
cannot pass a written bar examination and cannot meet the other requirements mandated
by the Kansas Supreme Court to obtain a license to practice law in this state.
Accordingly, the Court concludes that the right to practice law may only be granted to
natural persons and cannot be granted to artificial legal entities such as a corporation or a
limited liability company."

In reaching its conclusion, the district court followed the rationale of the case of
Lexington Law Firm v. S.C. Dept. of Cons. Aff., 382 S.C. 580, 677 S.E. 2d 591 (2009). In
Lexington, the South Carolina Department of Consumer Affairs (Department) learned
that a Utah-based law firm, Lexington Law Firm (Lexington), was providing credit
counseling services to South Carolina citizens. The Department advised Lexington that
the South Carolina Consumer Credit Counseling Act (Act) required credit counseling
organizations to obtain a license. Lexington agreed but argued that the attorney
exemption within the Act exempted it from the Department's regulation.

Lexington filed a declaratory judgment action before the Department could initiate
administrative proceedings and sought a decision that the Act's attorney exemption
applied to Lexington. The Lexington court determined the Department was in the best
position to implement its statutory charge of issuing licenses and the initial determination
of whether a business qualifies for a statutory exemption. 382 S.C. at 586.

Utilizing the reasoning in Lexington, the district court here determined that CLA
and Persels could not, as a matter of law, be licensed to practice law in Kansas and,
therefore, they were not entitled to the exemption under K.S.A. 50-1116(b). Finally, the
district court concluded that the Kansas Legislature specifically charged the OSBC,
through the KCSOA, with the authority to regulate credit service organizations in Kansas,
including the authority to make an initial determination, subject to judicial review,
whether a person violated the KCSOA or whether a person was entitled to an exemption.
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Because the OSBC had the authority to make that initial determination, the district court
held that CLA and Persels failed to exhaust their administrative remedies and dismissed
the declaratory judgment petition. The Petitioners filed a timely appeal.

The Petitioners filed a motion to stay administrative proceedings. The motion was
granted on October 13, 2011, by the Office of Administrative Hearings.

On appeal, the threshold issue is whether the district court erred in finding that the
Petitioners were required to exhaust administrative remedies before proceeding with their
Chapter 60 declaratory judgment action. Whether a party is required to, or has failed to,
exhaust its administrative remedies is a question of law over which an appellate court's
review is unlimited. Miller v. Kansas Dept. of S.R.S., 275 Kan. 349, 353, 64 P.3d 395
(2003).

The Kansas Judicial Review Act (KJRA), K.S.A. 77-601 et seq., is the exclusive
remedy for review of agency actions unless the KJRA specifically exempts the agency
from its purview. See K.S.A. 2011 Supp. 77-603(a); K.S.A. 77-606. The KJRA does not
exempt the OSBC. K.S.A. 2011 Supp. 77-603(c). Further, the KJRA has consistently
been recognized as the exclusive means of review of an agency action. See, e.g.,
Friedman v. Kansas State Bd. of Healing Arts, 287 Kan. 749, 755, 199 P.3d 781 (2009).

The Kansas Legislature charged the OSBC with the statutory duty to regulate any
"credit service organization" or "debt management service" doing business in Kansas and
to determine whether any person has violated or is about to violate the KCSOA. K.S.A.
50-1117(a), (c), (d); K.S.A. 50-1128(b)(3). The OSBC's authority also includes the power
to conduct hearings, to issue cease and desist orders, and to impose fines up to $10,000
per violation of the KCSOA. K.S.A. 50-1129(a). However, the KCSOA does not apply to
"[a]ny person licensed to practice law in this state acting within the course and scope of
such person's practice as an attorney." K.S.A. 50-1116(b).
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Whether a person has violated, or is about to violate, the KCSOA necessarily
requires the interpretation of statutes and the consideration of evidence. See Dean v.
State, 250 Kan. 417, 422, 826 P.2d 1372, cert. denied 504 U.S. 973 (1992) (an agency's
interpretation of a statute was a necessary administrative act in implementing the statute,
even though a court could later construe the statute differently); Farmers Banshares of
Abilene, Inc. v. Graves, 250 Kan. 520, Syl. ¶ 1, 826 P.2d 1363 (1992) ("Interpretation of
a statute is a necessary and inherent function of an agency in its administration or
application of that statute."). Additionally, whether a "person," as defined by K.S.A. 50-
1117(f), is exempt from the KCSOA also requires the interpretation of statute.

Here, the OSBC placed CLA and Persels on notice that they might be violating the
KCSOA. Without first exhausting administrative remedies that could have granted relief
on some ground before going to court, the Petitioners filed a petition for declaratory
judgment in the district court. In the petition, the Petitioners did not attack the exemption
itself; instead, they claimed the OSBC's interpretation of the exemption statute violated
the separation of powers doctrine and infringed on the Kansas Supreme Court's exclusive
authority to regulate the practice of law in Kansas.

We agree with the district court that individuals who are licensed to practice law in
Kansas are exempt from regulation by the OSBC. The OSBC exemption does not apply
to a limited liability company or any other entity that is not licensed to practice law by
the Kansas Supreme Court. See K.S.A. 50-1116(b).

The Petitioners' ultimate goal is to obtain an exemption from the OSBC's
oversight. This is a challenge to the OSBC's interpretation and application of the
exemption statute administered by the OSBC, not a challenge to the constitutionality of
the statute itself. Thus, before the Petitioners can bring a declaratory judgment action,
they must first follow the procedural rules set forth in the KAPA and the KJRA to
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exhaust their available administrative remedies. See Zarda v. State, 250 Kan. 364, 371-
72, 826 P.2d 1365, cert. denied 504 U.S. 973 (1992) (although the Board of Tax Appeals
had no power to resolve constitutional issues, the court upheld the district court's
dismissal for failure to exhaust administrative remedies).

Moreover, the Petitioners' administrative remedies in this case are not inadequate.
See K.S.A. 2011 Supp. 77-612(d). In their declaratory judgment action, the Petitioners
sought a declaration that the OSBC lacked "statutory authority over the legal practices of
the [Petitioners] based on the attorney exemptions stated in K.S.A. [] 50-1116(b)" and an
injunction against the OSBC. Nevertheless, the requested relief was available through the
KJRA when properly invoked through judicial review. See K.S.A. 77-622(b). Because
the relief sought by the Petitioners was available in the KJRA, the Petitioners' exclusive
remedy was through the KJRA. Zarda, 250 Kan. at 371; see Midwest Crane & Rigging,
Inc. v. Kansas Corporation Comm'n, 38 Kan. App. 2d 269, 271-72, 274-75, 163 P.3d
1244 (2007).

Petitioners are required to exhaust their administrative remedies before proceeding
with a Chapter 60 declaratory judgment action. The district court did not err in finding
that the Petitioners failed to exhaust their administrative remedies.

Affirmed.