Firm that ignored lawsuit now paying a hefty price

October 23, 2010

The lawsuit that Indianapolis resident Ronald Sandlin filed against JK Harris, the big tax-resolution firm, began harmlessly enough in 2008 in small claims court.

But now it’s a monstrous headache for the South Carolina-based firm, and the company has only its own legal strategy—or rather lack thereof—to blame.

JK Harris—which advertises that it can help individuals settle their IRS tax debts for pennies on the dollar—didn’t step up to defend itself in the small claims case. Even more bewildering, it remained on the sidelines and failed to enlist legal counsel after Sandlin, a disgruntled client, refiled the case as a multimillion-dollar class action in August 2009.

Finally, in February, JK Harris tapped a heavy-hitter, former Marion Superior Judge Gary Miller, to represent it. But by then it was in a deep hole. Marion Superior Judge Thomas Carroll already had certified the class, entered a default judgment against JK Harris, and held the firm in contempt.

Because the company failed to do anything—much less provide information that would help Carroll calculate damages—the judge ordered sheriffs in the six Indiana counties where JK Harris operates to lock down its offices.

That got the company’s attention, and Miller filed an appearance a week later. In his first hearing, on Feb. 22, a perplexed Carroll asked Miller the obvious question: Why hadn’t JK Harris enlisted an attorney to defend itself earlier?

“That’s a darn good question,” Miller told the judge, according to a transcript.

Indeed, no one disputes that the company knew about the case from the outset and that it had received the required legal notifications. Chad Wuertz, an attorney for Sandlin, even had e-mailed documents to the company’s vice president of legal affairs, Heidi Benton (who, curiously, isn’t an attorney), and held settlement discussions with her.

Miller’s only explanation to the judge was that company officials apparently hadn’t understood the gravity of the situation until the court shut down the Indiana offices.

“Up until that point, the non-lawyers who I’ve been dealing with at JK Harris truly, in my opinion, did not understand what was going on in this case,” Miller said.

But as Wuertz pointed out in the hearing, JK Harris was not an unsophisticated defendant. The firm has 325 offices in 43 states. And its executives had every reason to recognize the stakes were high. Three years earlier, the company settled a similar class action covering five states for $6 million.

Appeal pending

Whether Miller now can save the day may rest with the Indiana Court of Appeals.

After Miller began representing JK Harris, Carroll denied his request to set aside the default judgment and class certification, and he refused to compel arbitration—the method of dispute resolution mandated in Sandlin’s client agreement. But Carroll did agree to stay his rulings pending appeal, and in May the Indiana Court of Appeals voted 2-1 to consider the case.

That leaves JK Harris in far better position than it was the day Miller jumped into the fray. Carroll’s stay ended the court-ordered lockdown of the company’s offices, and they’ve been conducting business as usual since.

It probably would have been a hard-fought case no matter what. According to Sandlin’s lawsuit, he paid $4,350 to JK Harris upfront in return for its efforts to drastically reduce his nearly $30,000 in IRS debt. The IRS rejected outright JK Harris’ “offer in compromise,” something Sandlin later learned the government agency nearly always does.

Making matters worse, Sandlin alleged that JK Harris filed his state tax return in the wrong jurisdiction, Virginia, and mailed him personal tax information belonging to someone he didn’t know. When he told JK Harris he’d received someone else’s private tax records, the company threatened him with “potential criminal charges,” including “violations of numerous racketeering statutes,” the lawsuit alleged. Sandlin’s suit accused the company of deception, unjust enrichment, negligence and breach of fiduciary duty.

After that odyssey, Sandlin was ready for battle. But JK Harris surely would not have found itself in such a predicament if the firm had stood up for itself from the start, perhaps even making a successful case for routing the dispute into arbitration.

As Carroll commented at a hearing last December, “I’m just amazed on why they wouldn’t come forward and offer ... some sort of defense.”

“I’m equally baffled, your honor,” Wuertz responded.•


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