Bankruptcy Attys. Sued for Telling Client to Pay Legal Fees With Credit Card

The U.S. Court of Appeals for the Eleventh Circuit ruled that it’s a violation of federal law for an attorney to “advise a client to incur additional debt to pay for bankruptcy-related legal representation.”

The ruling reversed a lower court ruling, and reinstated a potential class action that a former client filed against Kaufman, Englett & Lynd, PLLC, of Orlando, FL.

The law firm dissolved in April 2016, after the suit was filed, as reported by The Orlando Sentinel, and two new firms were formed by the former partners.

Underlying Case

The dispute began when Loyd Cadwell contacted Kaufman, Englett & Lynd (KEL) in January 2016, about filing a bankruptcy petition.

He signed a retainer agreement that called for payment of $1,700 in attorney fees: a $250 retainer payable immediately, a $250 installment payable shortly thereafter, and four monthly installments of $300 each.

Cadwell alleges that KEL “instructed [him] to pay the initial retainer and all subsequent payments by credit card.” He charged the initial retainer and the next three installments on two credit cards.

Malpractice Claim

In 2016, Cadwell sued KEL in the US District Court for the Middle District of Florida, alleging that it violated the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which amended the federal Bankruptcy Code to impose new requirements and prohibitions on professionals who prepare bankruptcy petitions.

Cadwell cited 11 U.S.C. § 526(a)(4) of BAPCPA, which states 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.”

Cadwell’s complaint states that he charged the installment payments on two credit cards “for the express purpose of paying the fees and charges” related to the bankruptcy, causing him “to incur more debt in contemplation of filing the Chapter 7 case.”

He also alleged that KEL used “standardized procedures when attempting to collect attorneys’ fees by charging credit cards prior [to] filing Chapter 7 bankruptcy”, and thus sought class-action certification, claiming that the proposed class “exceeds several hundred Florida consumers.”

Law Firm’s Response

KEL filed a motion to dismiss, arguing that the “mere advice to use a credit card to pay fees, without any accompanying improper motivation, does not create a cause of action.”

It cited the U.S. Supreme Court’s ruling in Milavetz Gallop & Millavetz vs. United States, 559 U.S. 229, (2010), which “only precluded an attorney from advice where the purpose was to incur more debt in order to discharge the debt.”

KEL also argued that BAPCA violates the First Amendment, because it “discriminates against the content of the attorney’s dialogue by precluding the attorney from advising the client to make payment by credit card for retainer fees, regardless of the reasoning”.

Ruling

U.S. District Judge Paul G. Byron granted the firm’s motion in 2017, ruling that the case should be dismissed, because Section 526(a)(4) of BAPCPA only prohibits advising a debtor to incur additional debt for an invalid purpose.

“It is customary for bankruptcy attorneys to expect compensation for legal services provided to debtors in contemplation of bankruptcy. Thus, without more, the mere advice to use credit cards to pay for legal fees does not violate the BAPCPA.” As a result, Cadwell’s complaint failed to state a viable cause of action.

The judge didn’t address KEL’s First Amendment claims, and denied Cadwell’s motion to certify the class as moot.

Appeal

On appeal, Cadwell contended that the district court erred in ruling that to prevail, he had to show that KEL had an invalid purpose for advising him to incur additional debt.

KEL responded that the district court correctly interpreted the statute, and further, the statute violates the First Amendment.

Ruling

The appellate court ruled that the district court misinterpreted the law, finding that an attorney who advises his client to “incur more debt” by charging his legal fees on a credit card does violate the BAPCPA.

It also rejected the law firm’s claim that Section 526(a)(4) violates the First Amendment, because it restricts attorney-client communication.

The Court wrote:
the correct interpretation of Section 526(a)(4) is that it “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.

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 in at least two respects. First, it puts the attorney’s financial interest—getting paid in full—ahead of the debtor-client’s…Second, 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.”

Thus, the district court “erred in concluding that Cadwell was required to allege that (KEL‘s) advice was given for some additional, invalid purpose.”

The panel also rejected KEL’s argument that “prohibiting advice to clients to pay a fee” violates its First Amendment rights: “Cadwell hasn’t asserted—and we don’t hold—that the statute flatly prevents a lawyer from advising a client to pay legal fees. Rather, it merely prohibits lawyers “from giving their clients “affirmative advice” to incur more debt in order to pay for bankruptcy-related representation.” The court concluded “We therefore reject any First Amendment argument based on that overbroad reading of the statute.”

The court remanded the case back to the U.S. District Court.

Plaintiff’s Response

The law partner of plaintiff’s counsel told Daily Report that the decision shouldn’t impact most bankruptcy attorneys, but “if the Eleventh Circuit had ruled the other way, it would have resulted in a vast amount of problems. Imagine this scenario: A person comes in and wants to file for bankruptcy, and the lawyer says, ‘Alright, just pay with your credit card. I’ll take $2,500.’”

“That person would be committing fraud, and so would the attorney, because they’re making a charge knowing they never intend to pay that credit card.”

FURTHER READING

Changes in the Law Under BAPCPA

 

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