Eleventh Circuit says attorney violates BAPCA by encouraging debtor to pay attorney fee by credit card

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, (“Act”) amended federal law to impose new requirements on professionals who assist with the preparation of bankruptcy petitions. The provision at issue in a recent decision from the Eleventh Circuit, Cadwell v. Kaufman, Englett & Lynd, PLLC, 886 F.3d 1153 (11th Cir. Mar. 30, 2018), is 11 U.S.C. § 526(a)(4), which provides in relevant part that a “debt relief agency”—including a law firm that provides bankruptcy-related services—“shall not … advise” a debtor “to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer a fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.” The case addressed whether the debtor’s bankruptcy attorneys violated Section 526(a)(4) by instructing the debtor to pay a portion of the attorney’s fee by credit card.

The district court found that the debtor failed to state a claim because the mere advise to use a credit card does not run afoul of the Act. On appeal, the parties agreed that the statute contains two distinct prohibitions—one about incurring debt in anticipation of bankruptcy filings generally, and the other about incurring debt to pay for bankruptcy-related legal services more specifically. The parties’ central disagreement was over the proper way to parse Section 526(a)(4)’s two prohibitions. The court was presented with three different ways to read the section each locating the “hinge” that divides the two prohibitions in a different place in the text, resulting in three different meanings.

Under the first reading, Section 526(a)(4) prohibits a debt relief agency from “advising an assisted person’ either ‘to incur more debt in contemplation of’ filing for bankruptcy ‘or to pay an attorney or bankruptcy petition preparer fee or charge for services’ performed in preparation for filing.” This was not an unnatural reading of the statute but it would mean that all advice “to pay an attorney” for bankruptcy-related representation is prohibited, which makes little sense.

Under the second reading, adopted by the attorneys, is that the statute prohibits a lawyer from advising his client to incur debt to pay for bankruptcy-related legal services only if that advice was given for an “invalid purpose.” The court found that interpretation was unsound because one, it makes syntactical hash of Section 526(a)(4)’s second prohibition: A lawyer shall not advise his client “to incur more debt in contemplation of … to pay an attorney”? Secondly, if the phrase “in contemplation of” is read to apply to both prohibitions it would render the second prohibition essentially meaningless; the second prohibition becomes a mere subset of the first—it has no independent bite.

Under the third reading, which the court adopted, the hinge comes after the phrase “to incur more debt,” such that the statute prohibits advice “to incur more debt” either (1) “in contemplation of” a bankruptcy filing or (2) “to pay an attorney” for bankruptcy-related legal services. Properly interpreted, Section 526(a)(4)’s second prohibition forbids lawyers from advising their clients “to incur more debt … to pay an attorney … a fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.” The second prohibition is aimed at one specific kind of misconduct—in essence, a bankruptcy lawyer saying to his client, “You should take on additional debt to pay me!” That sort of advice is inherently abusive because it puts the attorney’s financial interest ahead of the debtor-client’s and it puts the lawyer’s own interests ahead of the creditors’ in that, while ensuring the lawyer’s full payment, it leaves a diminished estate on which creditors can draw.

Under this reading, the debtor stated a claim under Section 526(a)(4) and the order of the district court was reversed.

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