Attorney Liability

8/6/2019 Attorney Liability

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N i n e

Traps

O n eS l a p :

9

1

and

Attorney Liability underthe New Bankruptcy Law

Catherine E. Vance and Corinne Cooper


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Nine Traps and One Slap:

Attorney Liability under the

New Bankruptcy Law

by

Catherine E. Vanceand

Corinne Cooper*

A scene from Oliver Stones Platoon:

A Viet Cong bunker is discovered and must be searched.Two soldiers carefully enter, with weapons drawn. No en-

emy soldiers are present, so the soldiers look around and dis-cover a small box. Wary of a booby trap, one soldier opensthe lid very, very slowly. Its not rigged. Relieved, the sol-dier sorts through the boxs contents. These are importantpapers, he says to his buddy and as they prepare to leavethe bunker, the soldier picks up the box to take it with him.Then it explodes.

Like the box, the misnamed Bankruptcy Abuse Prevention and ConsumerProtection Act1 is waiting to take you down.2

Copyright 2005 Corinne Cooper and Catherine Vance. All Rights Reserved.

*Catherine E. Vance is Vice President of Research and Policy at Development Specialists, Inc., resi-

dent in the firms Columbus, Ohio, office. Ms. Vance has written extensively on bankruptcy and insol-

vency matters and, prior to joining DSI, served as the Commercial Law League of Americas legal writer

and analyst, acquiring a thorough understanding of bankruptcy legislation as eventually enacted in 2005.

Ms. Vance received her Bachelors Degree, magna cum laude, from the Ohio State University and is a

graduate of the Ohio State University College of Law.

Corinne Cooper is a professor emerita of law who taught contracts and UCC for almost 20 years. She is

moderator of the attorney liability listserv. She is editor of THE PORTABLE UCC (4th ed. 2004) and NEW

ARTICLE 9 (2nd ed. 1999) and of the book, A TTORNEY LIABILITY IN BANKRUPTCY, (forthcoming 2006).

She is the principal of Professional Presence, a communication consulting company,

www.ProfessionalPresence.com. She is a member of the American Law Institute. All outrageous or offen-

sive opinions in this article are Professor Coopers, not her co-authors.1Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat.

23. The Act is euphemistically titled, Bankruptcy Abuse Prevention and Consumer Protection Act of

2005. Some opponents of the law refer to it as the Bankruptcy Act Reform Fiasco, or BARF. The

editors of this publication have asked that we use BAPCPA to be consistent with the usage in otherarticles included in this issue. Each reference hereafter to a section of BAPCPA will include the provision

to be codified. All references to the Code mean the Bankruptcy Code, which is codified at Title 11 of the

283


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284 AMERICAN BANKRUPTCY LAW JOURNAL (Vol. 79

Weve known it for eight years. Its a behemoth of bad policy, an illiter-acy of ill-conceived provisions, an underbelly of unintended consequences.The problems we know about are bad enough. The problems we havent yet

discovered are likely to be worse.This article cannot hope to alert lawyers to all the landmines of liability.

We point out just enough to terrify you so that you will peruse its provisionswith the intensity of a soldier in a minefield.3

We present you here with nine traps: provisions of the Act that do terri-ble things to bankruptcy attorneys (and not just debtors attorneys), some ofthem almost certainly unintentional. We could have found more, but wewere on a tight deadline. Our final section is a slap in the face: a directassault by Congress on consumer debtors attorneys and the clients to whomthey are dedicated that is even more egregiousand overtthan the traps inthe Act.

Handy Dandy BAPCPA Reference Table

As we go to print, BAPCPA is enacted but most of its provisions are not yet effective.To avoid confusion, we use different language to refer to the Act and the Code.Citations to the Act read, BAPCPA Section ###Citations to the Code read, Code ###

This chart will help you keep track of the relevant Code sections amended by the Act.

Act Code Provision

Section 102 707(b) Dismissal or Conversion of Chapter 7 CaseSection 203 524 Reaffirmation AgreementsSection 226 101 DefinitionsSection 227 526 Restrictions on Debt Relief AgenciesSection228 527 DisclosuresSection 229 528 Requirements for Debt Relief Agencies

I. BUT FIRST, A LITTLE HISTORY

Before being enacted in the 109th Congress, BAPCPA was introducedfour times, and its genesis traces back nearly a decade to the work of theNational Bankruptcy Review Commission. Space considerations prevent usfrom detailing BAPCPAs long and storied history here.4 Yet there are in-

United States Code. One suggestion to our readers: as you read this article, having available a copy of the

Banrkuptcy Code redlined to show BAPCPA amendments will probably prove useful.2The authors mean no disrespect. But as the text will make clear, Congress has declared war on

bankruptcy attorneys in this Act, not only those who represent consumer debtors, but those representing

trustees and consumer creditors as well.3When you do, we hope you will e-mail us at [email protected] with your newly-discovered liability

traps, so we can include them in our forthcoming book, ATTORNEY LIABILITY IN BANKRUPTCY (Corinne

Cooper ed. forthcoming 2006) with proper attribution, of course!4See id. for our complete discussion of BAPCPAs history.


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2005) NINE TRAPS 285

sights to be found in the history.

Like much of BAPCPA, the philosophical underpinnings of the attorneyliability provisions are rooted in the minority report issued by Commissionmembers. In its final Report,5 the Commission noted that there is evidenceof questionable use of the bankruptcy process by both debtors and credi-tors,6 and it made recommendations to remedy problems on both sides.

A minority of Commission members focused exclusively on debtors andtheir attorneys, portraying debtors attorneys as willing participants in legal-ized theft by their clients who must be forced to submit honest pleadings onpenalty of personal liability. Diabolically, they are also unethical scoundrelswho take their initial fee and run off, leaving their poor clients without ade-quate representation, or worse, provide the necessary representation andthen have the audacity to expect payment for it prior to the pre-existingcreditors of the debtor.7

The minority dismissed the Commission recommendations on false claimsand other abuses by creditors,8 stating bluntly, There is no need for redun-dant rules to deter false claims.9

Beginning in the 105th Congress, when BAPCPA was first introduced,nearly every version of the bill reflected the views of the Commissions mi-nority. Although the language has changed slightly over time, BAPCPA con-sistently represented the view that debtors attorneys were simultaneously inleague with, and a threat to, their clients, with no similar distrust of creditorsor their lawyers. The version of BAPCPA that was enacted is no exception.

51 Natl Bankr. Review Commn, Final Report: Bankruptcy: The Next Twenty Years (1997) [hereinaf-

ter Commission Report].6Id. at 81.7See generally Hon. Edith H. Jones & James I. Shephard, Recommendations for Reform of Consumer

Bankruptcy Law by Four Dissenting Commissioners, Commission Report, id. at chapter 5 [hereinafter

Minority Report]. Commissioners John A. Gose and Jeffrey J. Hartley concurred with many of the

substantive proposals in the Minority Report but did not write separately. Id.8According to the Commission Report:

Some creditors also have found ways to take advantage of the system. Abusive

post-bankruptcy debt collection, documented in the courts and reported widely in

the news media, led the Commission to recommend banning the reaffirmation of

unsecured debt and providing more supervision for the reaffirmation of secured

debt. The 1970 Commission recommended similar restrictions that might have

avoided many of the current problems. Some creditors reportedly threaten to bring

unfounded non-dischargeability actions that debtors cannot afford to defend as an-

other way to collect dischargeable debt through reaffirmations. They would lose

this option with the Commissions recommendation to set clear dischargeabilityrules for credit card debt.

Commission Report, supra note 5, at 81.9Minority Report, supra note 7, at 8.


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II. A SHORT OVERVIEW OF ATTORNEY LIABILITY UNDERBAPCPA

This is an overview of the attorney liability provisions enacted as part ofBAPCPA. This is not intended to be a comprehensive discussion of them,but merely an introduction; well discuss several provisions in the 9 Trapsbelow.

A. CERTIFICATION AND SANCTIONS IN ABUSIVE CONSUMERBANKRUPTCY CASES

Section 102 is BAPCPAs most prominent feature because of its much-discussed means test for consumers filing for relief under Chapter 7. Sec-tion 102 also contains some nasty provisions directed at attorneys who re-present consumer debtors in Chapter 7 cases.10 These provisions:

alter, for consumer debtors attorneys, the certifications made by virtueof their signatures on bankruptcy documents, and permit the imposition of unprecedented sanctions against these

attorneys.11

Under Rule 9011 of the Federal Rules of Bankruptcy Procedure (largelythe same as Rule 11 of the Federal Rules of Civil Procedure), all attorneysmake certain assurances by signing any document submitted to the court. 12

These rules are designed to prevent frivolous or bad faith filings; they requireattorneys to conduct reasonable inquiries into the facts and law in their fil-ings, and to file them only for a proper purpose.13

Under BAPCPA, the signature of the debtors attorney takes on greatersignificance through two distinct provisions:

The signature of an attorney on a petition, pleading, or writ-ten motion shall constitute a certification that the attorneyhas(i) performed a reasonable investigation into the circum-

stances that gave rise to the petition, pleading, or writ-ten motion; and

(ii) determined that the petition, pleading, or writtenmotion(I) is well grounded in fact; and

(II) is warranted by existing law or a good faith argu-ment for the extension, modification, or reversal of

10Theres also a little-noticed provision dealing with creditors in Section 102. See Trap #6 infra.11See BAPCPA Section 102(a)(2)(C) adding 11 U.S.C. 707(b)(4) (2005).12FED. R. BANKR. P. 9011; FED. R. CIV. P. 11.13Id.


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existing law and does not constitute an abuse underparagraph (1).14

The reference to paragraph (1) means that the filing is not an abuse asdefined by the means test and good faith requirement in Section 102. Thisprovision creates an entirely new potential for attorney liability: representinga losing debtor!15

The second certification says:

The signature of an attorney on the petition shall constitutea certification that the attorney has no knowledge after aninquiry that the information in the schedules filed with suchpetition is incorrect.16

The schedules contain information about the debtors assets and liabili-ties, some of which, like checking account balances, is in a constant state of

flux. Verifying that information is sure to be costly and, in some cases,impossible.

The courts will set the standards of conduct that apply to these twoprovisions, including defining what it means to conduct a reasonable investi-gation or when an attorney has knowledge of incorrect information afteran inquiry. Still, its crystal clear that BAPCPA creates a significant risk ofliability for consumer bankruptcy attorneys faced by no other attorney.17

Section 102 also has a generalized provision allowing the court to assess acivil penalty if it finds the attorney violated Rule 9011.18 The goal of this

14BAPCPA Section 102(a)(2)(C), amending Code 707(b) by adding paragraph (4)(C). See generally,

Catherine E. Vance, Attorneys and the Bankruptcy Reform Act of 2001: Understanding the Imposition of

Sanctions Against Debtors Counsel, 106 COM. L.J. 241 (2001).15See BAPCPA Section 102(a)(2)(C) adding Code 707 (b)(4). As Ms. Vance noted in her 2001

article on the attorney liability provisions:

Neither Rule 9011 nor Rule 11 has been interpreted to penalize an unsuccessful

litigant, or his attorney, for the lack of success alone. Even the probability of losing

is not enough. As the court in Taylor v. United States stated, although sanctions

are clearly appropriate whenever a reasonable inquiry has or would have indicated

that the legal or factual basis of the claim is untenable, when such inquiry merely

reveals a likelihood of losing, a lawyer does not violate Rule 11 by maintaining the

claim. Indeed, courts have been mindful to avoid using the wisdom of hindsight,

testing the signors conduct by examining what was reasonable for counsel to be-

lieve at the time the document was presented. Zealous advocacy should not be

unduly chilled, and there should be a healthy respect for the resultant contribution

to the continued evolution of the law. All doubt should be resolved in favor of the

signor.

Vance, supra note 14, at 265.16BAPCPA Section 102(a)(2)(C), amending Code 707(b) by adding paragraph (4)(D).17To make matters worse, the attorney probably cant bill time spent litigating the sanctions issues

because, by referring specifically and only to the attorney, BAPCPA takes the client out of the fight.18BAPCPA Section 102(a)(2)(C), amending Code 707(b) by adding paragraph (4)(B).


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provision is far from clear, given that a violation of Rule 9011 already pro-vides a basis for imposing sanctions. Its worth mentioning that this provi-sion once mandated sanctions against the attorney; if theres any good news,

its the change to a discretionary standard.19

Sanctions may also be imposed when the trustee has successfully prose-cuted a motion to dismiss the debtors case based on abuse, as defined in theremainder of BAPCPA Section 102.20 Specifically, if the court finds that thebankruptcy filing constituted:

abuse on the part of the debtor, and a violation of Rule 9011 on the part of the attorney

the court may order the attorney to reimburse the trustee all reasonable costsand fees associated with the motion to dismiss. At its heart, this provision islittle more than a fee-shifting statute, but with a remarkable distinctionthefees are shifted not to the debtor, but to the attorney alone. This provisionwas also mandatory in earlier versions of BAPCPA.

B. REGULATING CONSUMER DEBTORS ATTORNEYS AS DEBT RELIEFAGENCIES

BAPCPA redefines debtors attorneys as debt relief agencies and dra-matically regulates an attorneys practice, from advertising to representation,mandating what the attorney must do and what the attorney is forbiddenfrom doing with no regard for the best interests of the client. To accomplishits mission, BAPCPA creates three important definitions:

Assisted Person [AP] is any person whose debts con-sist primarily of consumer debts, and whose non-exemptassets are worth less than $150,000.21

Bankruptcy Assistance includes any goods or services

19This change was the result of intense lobbying by the American Bar Association. Its only one word,

from shall to may, but an important one.20See BAPCPA Section 102(a)(2)(C), amending Code 707(b) by adding paragraph (4)(A). Code

707(b) already permits dismissal of a consumer bankruptcy case that is a substantial abuse. Section

102 of BAPCPA recasts abuse from a concept that looks at the debtors conduct and purpose in filing for

Chapter 7 relief into one premised on need, which is elaborately set forth in BAPCPAs means test.21BAPCPA Section 226(a)(1), amending Code 101 to add Subsection (3). It is beyond the purview

of this article, but nonetheless interesting, to note in passing that the definition of assisted person ap-

pears to be a failed attempt to identify small consumer bankruptcies, thus limiting the reach of these

provisions to lawyers who represent poorer debtors. In fact, substantial wealth can still be shielded

through state exemptions (even with BAPCPAs homestead exemption cap) and asset protection trust

statutes. Even with the changes to the unlimited homestead, some wealthy debtors (who have not moved

or committed fraud, or whose assets are in an asset protection trust) will fall into the scope of the DRAprovisions. Of course, some of those cases will fall outside of the provision if the debts are not primarily

consumer debts (for example, if they consist of personal guaranties of business obligations), but some will

undoubtedly remain. One can only assume that the attorney who represented Bowie Kuhn does not

advertise.


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sold or otherwise provided22 to an assisted person, such aslegal advice or representation, document preparation or fil-ing, or attendance at a creditors meeting or the like, in

connection with a case or proceeding under the Bank-ruptcy Code.23

Debt Relief Agency is any person who provides bank-ruptcy assistance to an AP in return for the payment ofmoney or other valuable consideration, or who is a bank-ruptcy petition preparer under Section 110 of the Code.24

Some folks are expressly (and inexplicably, in some cases) excluded fromBAPCPAs definition of debt relief agency. Trap #1 below discusses thecounterintuitive and even dangerous results these definitions and their excep-tions produce when determining who is and isnt a debt relief agency.

For debtors attorneys, these definitions bring into play a hideous array ofnew restrictions that apply in three main areas. The first is advertising. Thesecond and third are flip sides of the communication coin: attorneys are pro-hibited from making some statements and forced to make others.

1. Attorney Advertising

Any attorney who fits the definition of a debt relief agency underBAPCPA must comply with its regulation of advertisements. If the attor-neys advertisement is directed to the general public and

includes a description of bankruptcy assistance,25 or

uses language that could lead a reasonable consumer to be-

lieve that debt counseling is being offered when in fact theservices are directed to providing bankruptcy assistance,or

offers assistance with credit defaults, mortgage foreclo-sures, or eviction, excessive debt, debt collection pressure,or an inability to pay any consumer debt,

then the attorney is required to disclose that the services relate to bank-ruptcy and to include this statement clearly and conspicuously in theadvertisement:

22That otherwise provided language is ripe to cause trouble. See Trap #1 infra.23See BAPCPA Section 226(a)(2), amending Code 101 to add subsection (4A).24BAPCPA Section 226(a)(3), amending Code 101 to add subsection (12A).25This includes assistance in connection with a Chapter 13 plan, whether or not Chapter 13 is specifi-

cally mentioned. BAPCPA Section 229(a) adding Code 528(b)(1).


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We are a debt relief agency. We help people file for bank-ruptcy relief under the Bankruptcy Code.26

This provision is not only offensive, its confusing. It may seem simple onits face, but there is plenty more to say about it. Its discussed at length inTrap #2 below.

2. Required Disclosures

No fewer than five disclosures are required by the attorney to the cli-entassisted person in the new bankruptcy parlanceunder BAPCPA.

The first notice must provide descriptions of the relief available under thedifferent chapters of the Bankruptcy Code, and must also include languagedesigned to scare the debtor about criminal liability and Attorney Generalinvestigations.27

The second notice, which we discuss more in Trap #5 below, sets outspecific advice the attorney must give, some of which is actually inconsis-tent with the law. As in the first notice, the debtors potential criminal lia-bility must be mentioned.28

Third, the attorney must provide the client with a written contract,which every lawyer should do anyway.29

Fourth, BAPCPA also mandates a disclosure statement that is very muchlike those required under federal consumer protection statutes.30

Finally, the attorney must provide reasonably sufficient informationthat, like the second notice, is inconsistent with what the law actually re-quires. Here, the attorney is also required to advise the client how to per-form taskssuch as valuation of assetsthat have perplexed attorneys andcourts alike for some time.31

If the attorney fails to provide any of these five disclosures, or makesprohibited statements (discussed below), statutory penalties include both theability of the client to avoid the contractbut enforce it against the attor-neyand the power of state Attorneys General to take action againstattorneys.32

26BAPCPA Section 229(a) adding Code 528, subsections (a)(3)-(4) and (b). See Trap #2 infra for a

discussion of this provision.27See BAPCPA Section 228(a) adding Code 527(a)(1) and BAPCPA Section 315(b) adding Code

521(a)(1)(B)(iii). The content of the notice is governed by Code 342(b) as amended by BAPCPA

Section 104.28See BAPCPA Section 228(a) adding Code 527(a)(2), which, under subparagraph (D), requires the

following disclosure: information that an assisted person provides during their case may be audited pursu-

ant to this title, and that failure to provide such information may result in dismissal of the case under this

title or other sanction, including a criminal sanction.29BAPCPA Section 229(a) adding Code 528(a)(1) and (2).30See BAPCPA Section 228(a) adding Code 527(b).31See BAPCPA Section 228(a) adding Code 527(c). See Trap #5 infra.32See BAPCPA Section 227(a) adding Code 526(b) and (c).


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3. Prohibited Statements

The flip side of the required statements is BAPCPAs prohibition on

what an attorney can say or do. In some respects, these prohibitions areunnecessary reiterations of ethics and disciplinary rules. For example,BAPCPA says an attorney cant advise a debtor to make false statements inthe bankruptcy papers,33 which an attorney isnt allowed to do under anycircumstances.

But some prohibitions are also foolhardyand dangerous. They reachprospective assisted persons in addition to actual clients, preclude whatcould be the best legal advice for a particular client, and create thresholds forliability that are frightfully low. The attorney cant even tell the client,whose financial distress has become so dire that he sought out the attorneyshelp, that its okay to borrow the money needed to pay the legal expenses ofthe bankruptcy.34

C. REQUIRING ATTORNEYS TO CERTIFY THE DEBTORS ABILITY TOPAY IN A REAFFIRMATION AGREEMENT

Among the substantial changes BAPCPA makes to reaffirmation agree-ments is a bizarre requirement for debtors attorneys. In addition to the certi-fication that has long been required in every reaffirmation agreement, if theagreement triggers the statutory presumption of hardship,35 the attorney hasto go further, and give assurance that the client can perform the promise topay the debt.36 BAPCPA provides:

If a presumption of undue hardship has been establishedwith respect to [a reaffirmation] agreement, such certifica-

tion shall state that in the opinion of the attorney, thedebtor is able to make the payment.37

Obviously, this creates a serious problem for the attorney.38 If the clientwants to reaffirm a debt, that is the clients decision, even if doing so flies inthe face of the attorneys sound legal advice. After all, attorneys cantforcetheir clients to do anything. But BAPCPA disregards this reality and goes astep further by requiring the attorney to certify that the debtorwho has a

33BAPCPA Section 227(a) adding Code 526(a)(1).34See BAPCPA Section 227(a) adding Code 526(a)(2). See Trap #4 infra.35See BAPCPA Section 203(a), amending Code 524 by adding subsection (k)(6)(A).36BAPCPA Section 203(a), amending Code 524 by adding subsection (k)(5). This assurance does

not apply to a reaffirmation agreement entered into with a credit union. See id.

37BAPCPA Section 203(a)(2), amending Code 524 by adding subsection (k)(5)(B).38This is a policy problem and a source of potential liability, but not precisely a trap because theres

nothing hidden in the language of the statute. However, it does require the attorneyin the same docu-

mentto certify that the reaffirmation does not impose an undue hardship on the debtor, and to acknowl-

edge that there is a presumption of undue hardship under the statute.


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demonstrated inability to pay a reaffirmed debtis somehow able to pay it.And the penalty for being wrong could be severe: liability to the creditor forwhat the debtor owes.

III. LETS TACKLE THE TRAPS.

TRAP #1: POOF! YOURE A DEBT RELIEF AGENCY (BUTAMERIDEBT ISNT)

The first question is: Who is a debt relief agency? That simple questionproduces some surprising results. The answer lies in three definitions pro-vided in Code 101:

Assisted person means any person whose debts consistprimarily of consumer debts and the value of whose non-exempt property is less than $150,000.39

Bankruptcy assistance means any goods or services soldor otherwise provided to an assisted person with the ex-press or implied purpose of providing information, advice,counsel, document preparation, or filing, or attendance at acreditors meeting or appearing in a case or proceeding onbehalf of another or providing legal representation withrespect to a case or proceeding under this title.40

Debt relief agency means any person who provides anybankruptcy assistance to an assisted person in return forthe payment of money or other valuable consideration, orwho is a bankruptcy petition preparer under section

110 . . .41

Whats missing from all these definitions? Any reference to a bankruptcydebtor! Common sense would suggest that these provisions apply only toattorneys and others who assist consumers who are in debt and looking atbankruptcy as an option to get out. Everyone who has followed this lawknows these provisions were intended to apply to debtors counsel, and topetition preparers. But the language of the statute contains no such limita-tion. The plain language defies common senseand common understand-ingbut unfortunately, in a battle like this, plain language usually prevails.

1. Whos Out?

The statute provides some guidance. The definition of debt relief

agency [DRA] specifically excludes:39BAPCPA Section 226(a), amending Code 101(3).40BAPCPA Section 226(a)(2) adding Code 101(4A).41BAPCPA Section 226(a)(3) adding Code 101(12A).


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officers, directors, employees, or agents of persons (includ-ing petition preparers) providing assistance

501(c)(3) organizations a creditor of an assisted person, if the creditor is assisting

in the restructuring of that creditors debt

a depository institution or credit union

an author, publisher, or seller of works subject to copy-right protection (thank goodness!)42

One unanswered question is whether creditors attorneys are excluded. Ifthey are acting in their traditional, adversarial role on behalf of a bank, creditcard issuer, or other institutional creditor, they will certainly be excludedbecause they are providing assistance to the creditor, not the debtor, andinstitutional creditors cannot be assisted persons. Attorneys representing

any creditor, institutional or not, would be excluded if the creditor is work-ing with the debtor to get that creditors debt restructured, because of thespecific exception for that situation.43

Another specific exception is that those entities that we normally thinkof as debt relief agenciesthat is, credit counselors and other organizationsthat purport to help people deal with their creditors and restructure theirdebtsare likely to be excluded by the exception for non-profits.44 Ameri-Debt, for example, once one of the nations largest credit counselors, would beexempt due to its non-profit status.45

2. Whos in?

Youre a DRA if you:

are a person who provides bankruptcy assistance to an assisted person for money or other consideration.46

42Id.43BAPCPA Section 226(a) adding Code 101(12A)(C).44See BAPCPA Section 226(a) adding Code 101(12A)(B). This raises an interesting question: can

debtors attorneys opt out of the DRA provisions by creating non-profits that pay them big salaries?

Courts arent likely to condone a deliberate attempt to evade the impact of the law. Are clinics set up to

help debtors who cannot find counsel also exempt from this provision? The answer for legitimate clinics is

complex. If they dont charge, theres no problem. Suppose they operate within a law school, but not as an

independent legal entity? If they have a sliding scale for clients, as many clinics do, this may trigger DRA

coverage. If they were operating as non-profits before BAPCPA was enacted, its hard to argue that theyare trying to evade the statute. Bankruptcy clinics that charge anything for their assistance should clarify

their status as non-profit entities before the statute goes into effect.45See our discussion of this outrageous result in the Slap Section infra.46BAPCPA Section 226(a) adding Code 101(12A).


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If any of the four elements dont apply to you, you are not a debt reliefagency and you are relieved of the many obligations and restrictions placedon these entities. For example, bankruptcy clinics that provide free advice to

debtors are not included in this provision, because they dont receive a fee.47

Its safe to assume debtors attorneys are included and petition preparersunquestionably are included.48 Who else may be swept up in its terms?

Imagine a woman goes to an attorney and says, My ex-husband has justfiled for bankruptcy. How will this affect me? Like most folks, this wo-mans own debts are primarily consumer obligations, and her non-exempt as-sets are worth less than $150,000. Now, suppose the attorney:

Looks over the property and debt allocation in the divorcedecree and tells the woman which items might be ex-cepted from the ex-husbands discharge.

Attends the ex-husbands 341 meeting of creditors.

Files a complaint to determine the dischargeability of anyof the divorce debts.

Under the plain language of the definitions, the woman is an assisted personand the attorney has rendered bankruptcy assistance. This attorney is adebt relief agency and must comply with all the mandates of Code 526-528.

Suppose all the attorney says to the woman is, Let me look over thepapers and Ill get back to you. That might be enough to become a DRA;the definition of bankruptcy assistance includes services sold or otherwiseprovided . . . with the express or implied purpose of providing information,advice, [or] counsel.49

Suppose instead of the debtors ex-wife, its the debtors mother whoshows up at the attorneys office because the trustee served her with a com-plaint to recover her Mothers Day gift as a preference or a fraudulent trans-fer. The debt relief agency definition would apply, so long as Moms debtsand assets meet the assisted person standard. Informing, advising, or coun-seling Mom about the complaint is bankruptcy assistance, as is representingher against the trustee.

47But they are bound by other provisions of the Act, including the certification and reaffirmation

provisions. See Trap #7 infra on pro bono practice.48See BAPCPA Section 226(a)(3) adding Code 101(12A).49BAPCPA Section 226(a) adding Code 101(4A). This situation gets surprisingly complex. No

money changes hands yet, so maybe the DRA definition hasnt kicked in. If the attorney realizes theproblem and declines to represent her, no consideration has been paid. But isnt the client a prospective

assisted person? Here and elsewhere, to the extent that BAPCPA attempts to regulate an attorney-client

relationship where no bankruptcy has been filed, and where there may never be one, Congress may have

exceeded its constitutional authority.


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Lawyers who do no more than fill out a proof of claim form on behalf oftheir consumer clients could get swept into the torture chamber Congresshas created. Document preparation, without more, appears to be enough to

constitute bankruptcy assistance.Just to drive home the point, imagine one last scenario: the pharmaceuti-

cal giant Merck goes into bankruptcy. What becomes of counsel in the indi-vidual and class action suits over Vioxx? What about counsel for thecreditors committee, whose constituents include those individual and classaction plaintiffs? Again, the definition of bankruptcy assistance is broadenough to apply and the matter comes down to the nature of the claimantsdebts and the value of the claimants non-exempt assets.

We are not trying to argue that this is the right result. This is all pa-tently ridiculous. But thats the problem with the poorly-written language ofthe statute. It doesnt clearly identify its intended victims and, having failed

to name them, it could trap lots of unintended victims. Lets hope that thecourts can apply the magic descriptor absurd to results like these and freethemselves from the constraints of a plain language regime that elevateswords over practicalities, common sense, and good law.

3. In or Out Who Knows?

Between the margins of whos in and whos out of the debt relief agencydefinition there is a lot of gray. To show how complicated this new area oflaw could become, lets take a look at a company called We The People.

We The People (WTP) calls itself the national leader in legal docu-ment preparation services. WTP claims to provide document preparationservices and offers its business as a franchise opportunity. One such

franchise, WTP Mid-Atlantic, describes its operation as follows (as you readthrough it, look for DRA application triggers):

We The People provides a broad range of services that offeran economically attractive alternative to anyone who has aneed to handle a legal action that does not require the adviceof an attorney. We are best in support of customers whohave a need for uncontested legal actions. These range fromactivities as simple as preparing a bill of sale for an automo-bile to a divorce to that of a complex bankruptcy.

Our process generally involves certain simple steps to ac-complish the end result which is the preparation, and where

appropriate, the filing of a legal action:1. Decide The Customer comes to a We The People of-

fice and tells us the action he/she has decided to take.

2. Purchase Once the decision is made to proceed with


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our help, the customer purchases the service commitmentfor the action and we provide a workbook to be com-pleted by the customer. This workbook simply docu-

ments all of the relevant facts and detailed decisions thatthe you (sic) must provide us so that we can prepare theappropriate forms and documents required to accomplishyour desired goal.

3. Questions In the event that you have questions aboutthe legal issues with respect to the action your are (sic)taking, you will be given access to our supervising attor-ney. Our supervising attorney will answer simple andgeneral questions you may have with respect to the ac-tions. He will not give you advice about your specificaction; simply answer questions about the law. This levelof service is provided free to all our customers as a part ofthe forms and document preparation fee paid. If you needmore legal advice, you will need to hire an attorney.

4. Advice from an Attorney if Required Shouldyou need more complex legal advice and counsel and orlegal support during your action our supervising attorneycould conclude that you need the representation of an at-torney. In that case you are free to either consult withanother attorney or to engage our supervising attorney.

5. Workbook Completion Once we have received thecompleted workbook, we check it for completeness andthen the workbook is sent to our paralegal department

and they begin the process of preparing the forms anddocuments.

6. Completed Documents Within a few days, we willnotify you of the completion of the documents and re-quest that you make an appointment to return to the of-fice to review the documents for accuracy.

7. Sign Documents & File When you are satisfiedwith the accuracy, you will sign the documents and, if afiling is required with the courts, we will handle that partof the process for you.

8. At Your Service In some instances, there are follow-up actions required that may cause you to use our ser-

vices again, or it might cause you to need further workfrom an attorney.

9. Services not Listed Please also recognize that, even ifyou do not find the specific action you need to take, we


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probably can still help you. We have offices through thecountry and many lawyers on our staff. They are allavailable to find a way to help us help you.50

To make the whole matter more interesting, on May 4, 2005, WTP an-nounced in a press release the publication of We The Peoples Guide toBankruptcy, written by WTPs co-founders.51 Noting that BAPCPAwould be effective in just six months, the press release states:

In essence, theres only a six-month window for averageAmericans to get out of debt and re-chart their financialdestiny through the protection of bankruptcy, says [co-au-thor] Ira Distenfield. Right now, for perhaps the last timein our history, Americans have the power to easily file forbankruptcy on their own, without an attorney, and gain the

benefits of debt relief. Thats what We The Peoples Guideto Bankruptcy is all about. It provides a step-by-step, easy-to-read guide for filing for bankruptcy, without an attorney,and gaining a fresh financial start in life.52

Just two months before the WTP book was announced, a different pressrelease was issued, informing the world that WTP had been acquired byDollar Financial, a self-described leading international financial services com-pany offering a range of consumer financial products to our customers, manyof whom receive income on an irregular basis or from multiple employers.53

Those financial products include check cashing, short-term consumer loans,money orders and money transfers.54

Now look at the definitions of assisted person, bankruptcy assistanceand debt relief agency. Heres what we think would happen:

WTP as a document services company IS a debt reliefagency. This one is a no-brainer because WTPs servicesmake it a bankruptcy petition preparer, which is expresslyincluded in the DRA definition.

The WTP supervising attorney IS NOTa debt reliefagency because he is an employee or agent of a bankruptcy

50http://www.wethepeoplema.com/services.asp.51Press Release, We the People, New Do-It-Yourself Bankruptcy Book Helps Consumers File for

Bankruptcy Before Recently Enacted Federal Law Closes the Door Forever, (May 4, 2005), available at

http://news.findlaw.com/prnewswire/20050504/04may2005094701.html.52Id.53http://www.dfg.com.54Id.


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petition preparer and fits into one of the specificexceptions.

The authors of the bookARE NOTdebt relief agenciesbecause they fit into the exception for authors of copy-righted works.55

Suppose the WTP supervising attorney is engaged by thecustomer after its determined, presumably with the assis-tance of the supervising attorney, that the customer reallydoes need a lawyer to handle the bankruptcy. If the su-pervising attorney takes on the engagement, but remainsan employee or agent of WTP, then the DRA provisionsstill DO NOTapply. If the attorney takes the case inde-pendently of his WTP agency, the attorney IS a debt re-lief agency.

What about WTPs new owner, Dollar Financial? The answer here is trickyand will be affected by the companys corporate structure and how WTP istreated within it, although we note that theres no exception in the DRAdefinition for corporate relatives. But its possible that Dollar Financial is adebt relief agency because it is, through WTP, providing bankruptcy assis-tance to assisted persons. The creditor exception doesnt apply because Dol-lar Financial isnt working out an arrangement with respect to its own debt,but the debtors obligations to all of her creditors.

If you caught all these liability triggers, congratulations (and if you caughtsome we missed, tell us)! Our point here is to demonstrate that application ofthe DRA provisions is going to be far from easy; the possibilities for compli-

cated arrangements like that of WTP are limited only by the human imagina-tion, combined with a desire to make money.56

TRAP #2: DROP THE YELLOW PAGES AND PUT YOUR HANDSIN THE AIR!

Attorneys experienced in consumer bankruptcy cases may be shocked tolearn that liability problems loom before a client walks in your office. Youcannot even advertise your services without BAPCPA governing your be-havior. Under BAPCPA, debtors attorneys are required by law to makeseveral disclosures beginning with their advertisements.57

Any attorney who fits the definition of a debt relief agency under

55The authors wonder, what about the author of the website?56One last thought: If you found your sense of decency rattled by the WTP scenarios, be sure to read

the Slap Section infra, which is the concluding section of this Article.57See text accompanying notes 27-31 supra for a complete list of the required disclosures.


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BAPCPA must comply with its regulation of advertisements of bankruptcyservices.58 There are two separate, though similar, provisions on advertis-ing.59 These provisions are among the most confusing and convoluted in

BAPCPA. Code 528(a) says that a debt relief agency shall:

(3) clearly and conspicuously disclose in any advertisementof bankruptcy assistance services or of the benefits ofbankruptcy directed to the general public (whether ingeneral media, seminars or specific mailings, telephonic orelectronic messages, or otherwise) that the services orbenefits are with respect to bankruptcy relief under thistitle; and

(4) clearly and conspicuously use the following statement insuch advertisement: We are a debt relief agency. Wehelp people file for bankruptcy relief under the Bank-

ruptcy Code. or a substantially similar statement.60

Code 528(b) states:

(1) An advertisement of bankruptcy assistance services or ofthe benefits of bankruptcy directed to the general publicincludes

(A) descriptions of bankruptcy assistance in connectionwith a chapter 13 plan whether or not chapter 13 isspecifically mentioned in such advertisement; and

(B) statements such as federally supervised repaymentplan or Federal debt restructuring help or othersimilar statements that could lead a reasonable con-

sumer to believe that debt counseling was being of-fered when in fact the services were directed toproviding bankruptcy assistance with a chapter 13plan or other form of bankruptcy relief under thistitle.

(2) An advertisement, directed to the general public, indi-cating that the debt relief agency provides assistancewith respect to credit defaults, mortgage foreclosures,eviction proceedings, excessive debt, debt collectionpressure, or inability to pay any consumer debt shall

(A) disclose clearly and conspicuously in such advertise-

58This includes assistance in connection with a Chapter 13 plan, whether or not Chapter 13 is specifi-

cally mentioned. BAPCPA Section 229(a) adding 11 U.S.C. 528(b)(1)(A).59Both are found in BAPCPA Section 229 adding Code 528.60BAPCPA Section 229(a) adding Code 528(a)(3)-(4) and (b).


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ment that the assistance may involve bankruptcyrelief under this title; and

(B) include the following statement: We are a debt re-lief agency. We help people file for bankruptcy re-lief under the Bankruptcy Code. or a substantially

similar statement.61

This whole provision reminds us of The Scarlet Letter. According toCongress, sinful bankruptcy attorneys must be branded in order to warn soci-

ety of their wicked ways.

Theres a lot of substance to complain about as well. First, we are notconstitutional scholars by any stretch, but you dont have to be one to won-der about First Amendment issues.62 Expect constitutional challenges of this(and other) provision mandating or prohibiting attorney speech.63

Second, we confess that we are not precisely clear how the two subsec-tions interact. We have developed a 6-color, 4-column side-by-side compari-son chart, highlighting the similar language in the two provisions, and we stillcant make sense of it. Here is the chart (sans color) for your perusal:

61See id.62There will be a chapter by Professor Barbara Glesner Fines in our forthcoming book on this issue.

See note 3 supra. In the interim, heres what she says about this issue:

One obvious question emerges from this discussion of the attorney liability provi-

sions. Can the Congress regulate, to this degree, the attorney-client relationship, a

field historically left to the states? And specifically, are these proposals constitu-

tional under the First Amendment? This section attempts to analyze just one part

of that question, specifically, whether the advertising provisions violate the First

Amendment.

. . .

[R]estrictions on consumer bankruptcy advertising would be constitutional only if

the restrictions:

are justified by a government interest in preventing the significant possibility of

consumer deception;

advance that interest; and

are narrowly tailored. . . .

Without some demonstration that there is a significant risk of deception of consum-

ers by attorneys in this field, the regulations imposed by the [BAPCPA] are over-

broad and a court is likely to find that they represent unjustified restrictions on the

First Amendment expression by attorneys.

CORINNE COOPER, CATHERINE E. VANCE & BARBARA GLESNER FINES, ATTORNEY LIABILITY IN BANK-

RUPTCY 9 (program materials from Bankruptcy Update, ABA Annual Meeting (2003)) (citationsomitted).

63See note 49 supra. Here and elsewhere, to the extent that BAPCPA attempts to regulate attorney

conduct where no bankruptcy has been filed, and where the assisted person is not the debtor, Congress

may have exceeded its constitutional authority.


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Cite Provision Cite Provision

528(a)(3) CLEARLY AND CONSPICU- 528(b)(1) AN ADVERTISEMENT OF BANK-OUSLY RUPTCY ASSISTANCE SERVICES OR OFdisclose in AN Y A DVER TI SEMEN T OF T HE BE NE FI TS OF B AN KRUP TC YBANKRUPTCY ASSISTANCE SERVICES DIRECTED TO THE GENERAL PUBLIC

OR OF THE BENEFITS OF BANK- includesRUPTCY DIRECTED TO THE GENERAL (A) descriptions of bankruptcy assis-PUBLIC (whether in general media, tance in connection with a chapterseminars or specific mailings, tel- 13 plan whether or not chapterephonic or electronic messages, or 13 is specifically mentioned in suchotherwise) that the services or advertisement; andbenefits are with respect to (B) statements such as federallybankruptcy relief under this supervised repayment plan ortitle Federal debt restructuring help

or other similar statements thatcould lead a reasonable consumer tobelieve that debt counseling wasbeing offered when in fact the ser-vices were directed to providingbankruptcy assistance with achapter 13 plan or other form ofbankruptcy relief under thistitle.

528(a)(4) CLEARLY AND CONSPICU- 528(b)(2) (2) AN ADVERTISEMENT, DIRECTEDOUSLY use the following statement TO THE GENERAL PUBLIC, indicatingin such advertisement: that the debt relief agency providesWe are a debt relief agency. We assistance with respect to credithelp people file for bankruptcy defaults, mortgage foreclosures,relief under the Bankruptcy eviction proceedings, excessiveCode. or a substantially similar debt, debt collection pressure, orstatement. inability to pay any consumer

debt shall(A) discloseCLEARLY AND CONSPICU-OUSLY in such advertisement thatthe assistance may involvebankruptcy relief under this

title; and(B) include the following statement:We are a debt relief agency. Wehelp people file for bankruptcyrelief under the BankruptcyCode. or a substantially similarstatement.

Key: Language in italics is definitional.

SMALL CAPS identify the defined term.

CAPITALIZED language describes how the disclosure must appear.

Language in bold is the required disclosure.

As you can see, there is a lot of duplication in the language of the twoprovisions. Whether (a) and (b) are to be read together, or whether each is

intended to address only the advertisements specifically described within it isa mystery.

Lets start with subsection (a)(3), which describes what we call an ex-plicit bankruptcy ad. It requires that:


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any ad of bankruptcy assistance services or of the benefits ofbankruptcy directed to the general public clearly and con-spicuously disclose that the services or benefits are with re-

spect to bankruptcy relief.

Subsection (a)(4) requires that ads described in (a)(3) clearly and conspic-uously include the Scarlet Letter disclosure:

We are a debt relief agency. We help people file for bank-ruptcy relief under the Bankruptcy Code.

Subsection (b)(2)(A) describes another kind of ad, which we call a creditassistance ad. It requires that:

any ad indicating that the DRA provides assistance with re-spect to

credit defaults,

mortgage forclosures, eviction proceedings,

excessive debt,

debt collection pressure or

inability to pay any consumer debt

directed to the general public clearly and conspicuously dis-close that the assistance may involve bankruptcy relief.

Subsection (b)(2)(B) requires that credit assistance ads include the ScarletLetter disclosure.

As you can see, the difference between Code 528(a) and 528(b)(2) isonly in the description of the ads. In both cases, the mandated disclosures are

the same: you must mention bankruptcy relief under Title 11, and includethe Scarlet Letter statement.

Disclosure must be clear and conspicuous (although what clear mighthave meant to this anonymous drafter is anyones guess.)64 Although 528(b)(2)(B) doesnt require it to be disclosed clearly and conspicuously,you wouldnt want to do otherwise.

Subsection (a)(3) includes examples of what directed to the general pub-lic means. But it is unclear whether these examples also apply to the phraseas used in subsection (b).

Subsection 528(b)(1), although awkwardly constructed, is apparently anattempt to define advertisement of bankruptcy assistance services. Subpar-agraph (A) brings in Chapter 13 ads, whether they mention Chapter 13 ornot. Subparagraph (B) includes ads that could lead a reasonable consumer to

64There is plenty of law on what conspicuous means. For example, it is a defined term under the

Uniform Commercial Code. See U.C.C. 1-201(b)(10) (2001).


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believe that debt counseling was being offered, which we call debt counsel-ing ads.

It is not clear whether this definition applies only within 528(b), orwhether it also applies to the phrase as used in subsection (a)(3).65

With these definitions, there are four different descriptions of the coveredadvertisements:

Explicit bankruptcy ads 528(a)(3): an advertisement of bank-ruptcy assistance or of the benefits of bankruptcy.

Chapter 13 ads 528(b)(1)(A): an advertisement of bankruptcyassistance services or of the benefits of bankruptcy includes Chap-ter 13, whether it is mentioned or not.

Debt counseling ads 528(b)(1)(B): an advertisement of a feder-ally supervised repayment plan or similar statement that couldlead a reasonable consumer to believe that debt counseling is being

offered when in fact the services are directed to providing bank-ruptcy assistance, either under Chapter 13 or otherwise.

Credit assistance ads 528(b)(2): an advertisement indicating thatthe DRA provides assistance with credit defaults, mortgage fore-closures, eviction, excessive debt, debt collection pressure or inabil-ity to pay consumer debts.

Setting aside all the terrible drafting, if an ad by a DRA falls within oneof these four descriptions, two clear and conspicuous disclosures are required:

the Scarlet Letter statement must be included, and

the ad must disclose that the assistance may involve bank-ruptcy relief.

What happens if you make a mistake? BAPCPA provides several meansof enforcement.66 First, the debtor can avoid any obligation to the attorney,based solely on a non-complying advertisement.67 Code 526(c)(1) provides:

Any contract for bankruptcy assistance between a debt re-lief agency and an assisted person that does not comply withthe material requirements of . . . section 528 shall be void

65See BAPCPA Section 229(a) adding Code 528(b)(1). The phrase defined, An advertisement of

bankruptcy assistance services or of the benefits of bankruptcy directed to the general public appears in

528(a)(3); in 528(b)(2), the phrase used is An advertisement, directed to the general public. But

given the structure of the provisions, and the duplication, its impossible to tell with certainty what this

definition defines!66Both BAPCPA Sections 227(a) and 229(a) are entitled Enforcement, but Section 229(a) doesnt

contain any enforcement provisions.67The statute says void but means voidable. A void contract is a nullity; it cant be enforced by

either party, but this provision permits the debtor to enforce it, at her option.


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and may not be enforced by any Federal or State court byany other person, other than such assisted person.68

This provision allows a debtor who received competent and effective repre-sentation to walk away from any liability to the attorney because the attor-neys ad failed to include the required disclosures. There is no expressrequirement that reliance be shown, nor even that the client prove she sawthe ad.

Second, Code 526(c)(2) gives the client several affirmative remedies forany violation of the advertising requirements. The debtor may recover:

all fees and charges that the attorney received, actual damages, and attorneys fees and costs

if the client has been harmed by the attorneys intentional or negligent viola-

tion.69

Unlike the enforcement bar in subsection (c)(1), this section appearsto require a causal relationship between the advertisement and the harm.70

Injunctions and other remedies are available to state officials on behalf oftheir citizens.71

Heres the real booby trap: As discussed below in Trap #4, BAPCPAprohibits the attorney from advising the debtor to incur debt in contempla-tion of filing, including incurring debt to pay the attorneys fee. (Even beforeBAPCPA, attorneys who let their clients pay them after filing found them-selves holding nothing but a dischargeable debt.72)

So what does this provision accomplish by declaring the debtors obliga-tion voidable? Since payment has to be made before filing, what other obliga-tion does the debtor have to the attorney after the petition is filed?73

Although only a few consumer cases see any action beyond the 341 meet-ing and reaffirmation negotiations, this language will be important in thosecases that do. In jurisdictions where the courts do not permit the attorney to

68BAPCPA Section 227(a) adding Code 526(c)(1).69Theres also a provision applicable to a dismissed or converted case, but that applies to failure to file,

not ads. BAPCPA Section 227(a) adding Code 526(c)(2)(B).70BAPCPA Section 227(a) adding Code 526(c)(2)(A). Its not clear from this provision if intention-

ally or negligently failed to comply modifies only the award of attorneys fees and costs, or all the mea-

sures of damages. We believe it applies to all the measures, although a careful drafter would have placed a

comma after costs since there are commas after each of the other two categories of damages.71BAPCPA Section 227(a) adding Code 526(c)(3).72See e.g., Rittenhouse v. Eisen, 404 F.3d 395, 395-96 (6th Cir. 2005).73Actually, we thought of one: Careful attorneys should be delineating in their engagement contracts

exactly what documentation and cooperation the debtor is required to provide. This will be essential forthe attorneys protection, since she cannot fail to provide promised services. See Trap #3 infra. So theoret-

ically, if the attorney has failed to comply with the advertising provision, this obligation of the debtor is

discharged. But were not sure that a court can enforce this obligation, and protect the attorney from

liability for failure to file a promised document, even if theres no voidability issue.


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withdraw for nonpayment in post-petition proceedings, this provision is notan issue. The attorney remains in the case and the debtor has no paymentobligation. But in jurisdictions where the courts permit the attorney to with-

draw if a post-petition fee is not paid, this provision becomes critical. Thisprovision prevents the attorney from enforcing that payment obligationagainst the debtor.

Indeed, if the advertising rules have been violated, this provision appearsto give the debtoror trusteea claim against the attorney for return of allfeespre- and post-petitionand any other actual damages, including theattorneys fees and costs expended to recover it. After all, if the contract isvoidable (or according to the statute, void at the option of the debtor), isntthe next step to demand the money be returned? The attorney cant get hiswork back, but it looks like the debtor can get her fee back. And if thedebtor doesnt ask for it, the trustee will. The advertising violation occursbefore the bankruptcy is filed, so the debtors cause of action against theattorney is property of the estate.

Finally, if the trustee can enforce the debtors cause of action for viola-tions of the advertising provisions, then this is also the case for all violationsof Code 526, 527, and 528!74

This is obviously a bad result, and one the attorney will want to avoid.So debtors attorneys are going to do their best to comply. Despite the messylanguage, compliance with the advertising provisions seems easy enough: saythe services relate to bankruptcy and include the Scarlet Letter language.

Yet think about the nature of advertising. What do you do if the statutegoes into effect before your ad in the Yellow Pages renews? What if someoneretains an old firm brochure? And what if you advertise in another language?

The statute does not require (or permit) translation.We dont have answers for these questions, but we bet your local bank-

ruptcy judges will use their good sense.This advice wont help the domestic relations attorney or class action

lawyer whose legal advice brands him a DRA. He wont be thinking aboutbankruptcy at all when he places his ads and wont have time to complybefore his advice comes out of his mouth! In our opinion thats a good reasonto exclude him from the heavy burdens imposed on DRAs.

TRAP #3: SHHHH! BE CAREFUL WHAT YOU SAY

Consumer bankruptcy attorneys75 have always been required to performaccording to their retainer agreements, by both contract law and ethics rules.

74See BAPCPA Section 227(a) adding Code 526(c)(2)(A).75Just to make the reading easier, were going to assume away all the problems raised in Trap #1 and

focus on attorneys as DRAs here.


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BAPCPA turns a natural and normal part of the attorney-client relation-shipYou pay, I performinto a draconian series of duties and penaltiesdestined (and surely intended) to snag debtors attorneys.

Section 526 is the sadistic provision of BAPCPA. It will tie you up inknots and then punish you for any failure to perform exactly as instructed.Section 526 addresses restrictions on debt relief agencies:

(a) A debt relief agency shall not

(1) fail to perform any service that such agency informedan assisted person or prospective assisted person itwould provide in connection with a case or proceed-ing under this title;76

. . . .

(3) misrepresent to any assisted person or prospectiveassisted person, directly or indirectly, affirmatively

or by material omission, with respect to(A) the services that such agency will provide to

such person; or(B) the benefits and risks that may result if such per-

son becomes a debtor in a case under this title;. . . .

(b) Any waiver by any assisted person of any protection orright provided under this section shall not be enforceableagainst the debtor by any Federal or State court or anyother person, but may be enforced against a debt reliefagency.77

Lets break this provision down into its component parts.First, this section applies to debtors attorneys, since they are the attor-

neys intended to be included in the definition of debt relief agency underCode 101(12A).78

Second, the subsection says that DRAs shall not fail to perform any ser-vice that they informed a prospective/actual assisted person [PAAP]they would provide in connection with a case or proceeding under title 11. 79

Note that the DRA does not have to promise or contract or other-wise be legally or even morally obligated to perform the service in order to bestung by this provisions lash. You merely have to inform a PAAP that youwill provide it. No casual statement appears to be excluded. Yellow Pages

76Well deal with subsection (2) on false or misleading statements, and subsection (4) on incurring debtand/or asking for payment in Traps # 3 and 4 infra.

77BAPCPA Section 227(a) adding Code 526(a) and (b).78See Trap #1 supra.79BAPCPA Section 227(a) adding Code 526(a)(1).


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ads would seem to fall within its scope. Absence of consideration or relianceoffers no apparent defense because prospective clients are included. And fi-nally, failure to cooperate with the attorney does not seem to be an excuse.

So, for example, if you say, Ill pick you up on my way to court and yourcar breaks down, you could be in violation of this provision!

Third, as a DRA, you violate subsection (3) if you:

misrepresent to a PAAP

directly or indirectly

affirmatively or by material omission

the services you will provide, or

the benefits and risks that may result by filingbankruptcy.80

This requirement is in addition to the obligation in subsection (1) to per-

form all the services you say you will. Here, you are liable for misrepresen-tation, a term not defined by the statute.81 The misrepresentation does notneed to be material; material modifies only the omission provision.82

You could run afoul of this provision if your prospective client dissolvesin a pool of tears and you say to the sobbing debtor, everything will be okaywhen you know that everything is a mess and might continue to be evenafter filing.83 This statement is made by a DRA to a PAAP and directly andaffirmatively misrepresents the benefits that may result by filing. It also indi-rectly and materially omits certain disclosures, like the loss of non-exemptproperty or the possibility of being hounded into the grave by creditors if youfail to make payments in your Chapter 13.

You could even be found to have violated the language of this provision ifyou understate the services that you will provide. Suppose your client pulleda disappearing act and a deadline is fast approaching. To protect your client,you call the trustee to arrange an extension and prepare and file an agreedorder to that effect. Youve upheld your duty as an attorney, but failed as aDRA if you didnt tell your client youd perform such a service. We hope thecourts would find the statement is not a misrepresentation or, perhaps, anomission that isnt material.

The language of paragraphs (1) and (3) does not seem to admit the possi-bility of correction based upon new facts, as in:

80See BAPCPA Section 227(a) adding Code 526(a)(3).81

There is, however, a large body of case law on misrepresentation including from the Code itselfunder Code 523(a)(2).

82See BAPCPA Section 227(a) adding Code 526(a)(3).83Plenty of debtors go into bankruptcy knowing that some battles lie ahead, such as dischargeability

litigation.


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I told you we would file a Chapter 7 but that was beforeI discovered that your wife earned $25,000 last year as ateachers aide, putting you over the median income. I

know she lost her job in a school cutback but when wemet, you described her as unemployed, which is correctbut not for this purpose.

Yes, I told you that we would represent you in bank-ruptcy but before we filed, your check for our retainerbounced.

Yes, we agreed that we would file your petition and yourschedules for you but the information you provided hasturned out to be, after inquiry, totally fraudulent and youwont give us the real figures.84

Although a court may properly find that these statements do not consti-tute misrepresentations under paragraph (3), they fall clearly under the lan-guage of paragraph (1) as services a DRA informed a PAAP would beprovided.

Now that the provision has snagged you, what is the penalty? At aminimum:

As in Trap #2, a contract for bankruptcy assistance between the DRAand the assisted person that doesnt comply with the material requirementsof Code 526, 527 or 528 is unenforceable by the DRA but may be en-forced against the DRA.85 The debtor can make you perform and you cantmake the debtor pay.

What happens? The DRA is liable to the AP for:

Any fees or charges received by the DRA from the AP forproviding bankruptcy assistance

Actual damages, and Reasonable attorneys fees and costs.86

As we mentioned in Trap #2, these damages may become a claim of theestate if they arose from conduct (or omission) prior to filing.

The news isnt all bad. Even though BAPCPA regulates a lawyers rela-tionship with a prospective assisted person, that same person is left high and

84This scenario is made more plausible because of the certification requirement for the schedules under

Code 707(b)(4)(D). Theres a double whammy if the failure to file the schedules results in dismissal, an

express condition for DRA liability.

85See BAPCPA Section 227(a) adding Code 526(c)(1). Technically, the contract is both void andunilaterally enforceable. This is another drafting mistake: under contract law, a contract that is void is a

nullity, incapable of enforcement at all. The proper term would have been voidable at the option of the

AP.86See BAPCPA Section 227(a) adding Code. 526(c)(2)(A). See note 70 supra.


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dry when it comes to enforcement. When Code 526 gets to the debt reliefagencys actual liability, only the assisted person gets mentioned, meaningtheprospective assisted person has no remedy. Why scoop all these potential

clients into the statutes grasp and give them no remedy? Its another exam-ple of the sloppy drafting that is the hallmark of this legislation.87

TRAP #4: WE TAKE CHICKENS BUT NOT VISA.

Code 526 sets out specific activities and conduct that are forbidden ifyou are a debt relief agency. Among them is this mandate:

A debt relief agency shall not advise an assisted person orprospective assisted person to incur more debt in contempla-tion of such person filing a case under this title or to pay anattorney or bankruptcy petition preparer fee or charge forservices performed as part of preparing for or representing adebtor in a case under this title. 88

Four different interpretations of this language are possible, each present-ing a different description of what the DRA is prohibited from doing. Tounderstand these interpretations, we need to break down the statutory lan-guage, and understand the use of or.89

Here are the statutory building blocks we are working with:

INTERPRETATION 1

A debt relief agency shall not advise an assisted person or prospectiveassisted person

to incur more debt in contemplation of such person filing a caseor

to pay an attorney fee or charge for services performed as part ofpreparing for or representing a debtor in a case under this title.

Translation: A debt relief agency shall not:

1. Advise an assisted person or prospective assisted person[collectively, PAAP] to incur more debt in contempla-tion of filing a case; or

2. Advise a PAAP to incur more debt to pay an attorney

87We restate our concern, outlined in note 63 supra, that Congress may have exceeded its authoritywhen it attempted in BAPCPA to control an attorneys conduct with a prospective client for whom no

bankruptcy is ever filed.88Code 526(a)(4).89This section has more ors than the Olympic rowing team!


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fee or charge for services performed as part of preparingfor or representing a debtor in a case.

INTERPRETATION 2

A debt relief agency shall not advise a PAAP

to incur more debt in contemplation of such person filing a case

or

to pay an attorney fee or charge for services performed as part ofpreparing for or representing a debtor in a case under this title.


1. Advise a PAAP to incur more debt in contemplation of

filing a case; or2. Advise a PAAP to pay an attorney fee or charge for ser-

vices performed as part of preparing for or representing adebtor in a case.

INTERPRETATION 3

A debt relief agency shall not

advise a PAAP

to incur more debt in contemplation of such person filing a case

or

to pay an attorney fee

or

charge for services performed as part of preparing for or representinga debtor in a case under this title.


1. Advise a PAAP to incur more debt in contemplation offiling a case; or

2. Advise a PAAP to pay an attorney fee; or

3. Charge for services performed as part of preparing for orrepresenting a debtor in a case.


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INTERPRETATION 4

A debt relief agency shall not

advise a PAAP to incur more debt

in contemplation of such person filing a case

or

to pay an attorney fee

or

charge for services performed as part of preparing for orrepresenting a debtor in a case under this title.


1. Advise a PAAP to incur more debt in contemplation of

filing a case; or2. Advise a PAAP to incur more debt to pay an attorney

fee; or

3. Charge for services performed as part of preparing for orrepresenting a debtor in a case.

The correct interpretation is the first one: Congress doesnt want debtorsborrowing when they know theyre going to file bankruptcy, not even to paythe attorney. Lets forget for a moment how unlikely it is that the attorneywill get paid otherwise. (Thats a policy disaster, not a drafting one.)

What this means is that debtors attorneys can no longer do four things:

1. They can no longer take credit cards.90 (They can take debit cards, but

as with a check, they cannot file the petition until they are sure the amounthas arrived in their account.)

2. They cant suggest that the debtor borrow the money from a familymember or friend.

3. They cannot answer if the debtor asks whether borrowing money topay the attorneys fee is an option.

4. They cant accept money that the debtor insists was a gift from familyor friends, unless the intent to make a gift is clearly documented.

Weve established that the likely intent of the statute is not to denydebtors attorneys all payment, nor to prohibit them from charging for theirservices but only to prohibit payment obtained by incurring debt. Whatmore does this mean for debtors attorneys? Can they acquire unencumbered

assets of the debtor to pay their fees (however unlikely it is that the debtor

90For an article on small firms accepting credit cards, see Dan Hudson, Accepting Credit Card Pay-

ments: A Primer, GPSOLO, Apr./May 2005, at 10.


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has unencumbered assets)? Probably yes, so you can drain the debtors bankaccount or take his chickens, but not his promise to pay.

Under this prohibition, can attorneys barter for future goods or services

from the debtorsay, eggs, or labor? Probably not, as this contractual obli-gation would not only be dischargeable in bankruptcy, it would create animpermissible debt.

The bottom line of this trap is that attorneys representing debtors willhave to document carefully how their fees are paid or risk falling afowl ofthis prohibition.

Its also important to remember that the debt prohibition doesnt justapply to the attorneys fee. Under this provision, counsel cant advise thedebtor to incur additional debt for any purpose, even if its in the best inter-est of the client to do so.91

Suppose you properly instruct your client in your first meeting not to useher credit card or incur any other debt. Between the initial consultation andthe filing of the petition, your client calls and says, My son is sick and he hasto go to the doctor. I dont have insurance or any money to pay for thedoctor or for my sons medicine. Can I put it on my Visa?

What is the attorney to do? The attorney has given the required adviceat the initial meeting, and the client has scrupulously followed it. Because abankruptcy is in the works for this client, the Visa charge would be a debtincurred in contemplation of filing, so Code 526(a)(4) prevents the attorneyfrom saying You can use your Visa. This is true even though nothing elsein the law makes this type of debt improper; its certainly not enough towarrant a dischargeability complaint for fraud, and the client isnt gaming thesystem in an effort to take advantage of her creditors.92

The attorney can avoid this conundrum by following the lead of genera-tions of criminal lawyers. At the initial meeting, the attorney can give therequired advice (I cannot advise you to use your credit cards any more) andfollow up later with a warning (Dont tell me if you did it.) This protectsthe lawyer from giving the prohibited advice, and it will protect the right ofthe client to incur additional debt in emergency situations. Of course, itsterrible lawyering, but its the only real option for the attorney.

91BAPCPA Section 227(a) adding Code 526(a)(4). Its also important to remember that this is not a

prohibition on the debtor incurring debt but a prohibition against the attorney advising the debtor to do

so.92Theres another trap lurking in the shall not advise prohibition: If the attorney complies with Code

526 and tells the client she cant incur the debt, it is reasonably foreseeable that she will forego the

doctors visit for her son because she cant pay for it and he will become sicker, making an emergency roomvisit necessary. The public policy consequences here are obvious, but whats more relevant for the attor-

ney is that he might face tort liability if his advice is the proximate cause of the childs worsened

condition. Can it be a tort (or malpractice) to do what a bad statute requires you to do? We sincerely hope

not.


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TRAP #5: I CANT TELL YOU THAT WHAT IM TELLINGYOU IS WRONG.

Code 527 is benignly entitled, Disclosures, but lets look at some ofthe information DRAs must provide under pain of sanctions.

Code 527(a)(2)(B) requires the DRA, via written disclosure, to advisethe assisted person that:

all assets and all liabilities are required to be completely andaccurately disclosed in the documents filed to commence thecase, and the replacement value of each asset as defined insection 506 must be stated in those documents where re-quested after reasonable inquiry to establish such value.93

Hear the snap of a trap closing? In Code 527(c), we learn that theDRA must provide the assisted person with reasonably sufficient informa-

tion on, among other things, how to value assets at replacement value andhow to value exempt property at replacement value as defined in section506.94

The problem here actually comes from amended Code 506, which de-fines replacement value as the price a retail merchant would charge forproperty of that kind considering the age and condition of the property at thetime the value is determined.95

The trouble is that this definition only applies to personal property thatsecures a consumer debt.96 Code 527, then, requires the attorney to givethe AP advice that isnt an accurate statement of the law. Whats worse isthat the debtor, acting on the attorneys advice, could attempt to ascertainthe replacement value of all her property, which would lead to incorrectinformation being included in the schedules.

Plenty of retail outlets sell used household goods, but the price theycharge for those goods is not the same as what theyd pay the debtor to buythem. Between these two measures of value, its the latter that better re-flects what the debtors property is worth, especially since most debtors planto keep, not replace, their property.

For the debtor, this means the property will be overvalued in the sched-ules. It could also mean that property that would be exempt if valued prop-erly is worth more than the available exemption. For the attorney, it couldmean trouble under the new Code 707(b)(4)(D) certification standard: theschedules are incorrect and the attorney knows it.

93BAPCPA Section 228(a) adding Code 527(a)(2)(B).94BAPCPA Section 228(a) adding Code 527(c)(1), (3).95BAPCPA Section 327 adding Code 506(a)(2).96Id.


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TRAP #6: SURPRISE! THE JOKE MAY BE ON YOU

Attention creditors attorneys: Did you know that you now have to cer-

tify that what is in your clients motion isnt true?

Okay, maybe were being a bit dramatic, but the fact is that, while sanc-tions provisions against debtors attorneys are a well-known part of the newbankruptcy law, creditors and their attorneys arent completely off the hook.Buried deep under Code 707(b)s layers of expense allowances and incomereductions is a little-noticed provision that would allow courts to punishcreditors and their lawyers who abuse the abuse provisions of 707(b).Here it is, in full:

(A) Except as provided in subparagraph (B) and subject toparagraph (6), the court, on its own initiative or on themotion of a party in interest, in accordance with the

procedures described in rule 9011 of the Federal Rulesof Bankruptcy Procedure, may award a debtor all rea-sonable costs (including reasonable attorneys fees) incontesting a motion filed by a party in interest (otherthan a trustee or United States trustee (or bankruptcyadministrator, if any)) under this subsection if

(i) the court does not grant the motion; and

(ii) the court finds that

(I) the position of the party that filed the motionviolated rule 9011 of the Federal Rules ofBankruptcy Procedure; or

(II) the attorney (if any) who filed the motion didnot comply with the requirements of clauses (i)and (ii) of paragraph (4)(C), and the motionwas made solely for the purpose of coercing adebtor into waiving a right guaranteed to thedebtor under this title.97

Lets take the statute one provision at a time.

97BAPCPA Section 102(a)(2)(C) adding Code 707(b)(5)(A). We want to keep attention focused on

the application and interplay of clauses (i) and (ii) of this new Code section, but its exceptions deserve

some explanation. The subparagraph (B) reference in subparagraph (A) creates an exception from sanc-tions for small business creditors, defined by reference to the number of people the creditor employs full-

time and a claim aggregating less than $1,000. Attorneys for these creditors will still have their conduct

scrutinized. Paragraph (6), also mentioned in subparagraph (A), generally prohibits most parties in inter-

est from moving to dismiss or convert a case where the debtors income is below the statutory threshold.


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1. Did the court grant the motion?

2. Does the position of the party violate Rule 9011?

3. Did the attorney comply with the requirements of 707(b)(4)(C)(ii)by performing a reasonable investigation into the circumstancesthat gave rise to the motion?

4. Did the attorney comply with the requirements of 707(b)(4)(C)(i)by determining that the motion is:

(I) well grounded in factAND (II) warranted by existing law or a good-faith argument for

a change in the lawAND does not constitute an abuse under (b)(1)?

5. Was the motion made solely for the purpose ofcoercing the debtor into waiving a guarnateed right?

There is liability for costsand attorneys fees.

There is no liability forcosts or attorneys fees.

YES

NO

YES NO

YES

YES

YES

NO

NO

NO

YES

1. The court does not grant the motion

Neither the creditor nor its attorney will be liable to the debtor if the

motion to dismiss or convert the case as an abuse is successful. That much isobvious from the language of the section.

The case that gets litigated all the way to a decision on the merits, how-ever, is the exception, so the phrase the court does not grant the motiontakes on a shade of ambiguity. Does it mean that the debtor must prevail onthe merits in order to recover or that sanctions are precluded only when thecourt actually orders dismissal (or, with the debtors consent, conversion) ofthe case?

We dont think this ambiguity will cause much problem. The main pointof Code 707(b)(5) is to punish misconduct. Faced with a creditor thatsettles a motion that should never have been made, courts arent likely tofocus on the debtors lack of success on the merits but on enforcing the re-mainder of the section, to which we now turn.

2. The position of the party that filed the motion violated Rule 9011

This language seems to state the obvious because sanctions are allowed


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any time a motion violates Rule 9011. But if you compare this language withother sections of the Code directed at misbehaving creditors, we think theresan argument that the language makes sense and is not redundant. Its just

another check on creditor behavior, which are common in the Code: If a creditor alleges fraud in a dischargeability complaint, its position must

be substantially justified.98

Damage awards for violations of the automatic stay require willfulness.99

Involuntary petitions have to be in bad faith if the debtor wants actualand punitive damages.100

Viewed in context, the position of the party violated Rule 9011 require-ment is simply the standard Congress chose to limit abusive filings by credi-tors. Rule 9011 remains in full force and effect.

There could be an important difference, however, between Rule 9011 asa standard in 707(b)(5) and the Rule itself. The Rule is tied to documentsfiled with the court, which would be the motion to dismiss. The position ofthe party language goes beyond the document, looking instead to the partysoverall conduct, including what it did (or should have done) before makingany filing with the court.

3. The attorney who filed the motion did not comply with therequirements of clauses (i) and (ii) of paragraph (4)(C)

The phrase the requirements of clauses (i) and (ii) of paragraph (4)(C)means that when you sign your creditor clients motion to dismiss thedebtors case as an abuse, you are certifying that you have:

(i) performed a reasonable investigation into the circum-stances that gave rise to the petition, pleading, or writ-

ten motion; and(ii) determined that the petition, pleading, or written mo-

tion(I) is well grounded in fact; and

(II) is warranted by existing law or a good faith argu-ment for the extension, modification, or reversal ofexisting law and does not constitute an abuse underparagraph (1).101

The reasonable investigation the attorney is required to conduct isntproblematic. The gave rise to language suggests causation, meaning the at-torney must look at the reasons underlying the motion, which is in keeping

98See Code 523(d).99See Code 362(k) (Code 362(h) prior to BAPCPA).100Code 303(i)(2).101BAPCPA Section 102(a)(2)(C) adding Code 707(b)(4)(C)(i) and (ii).


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with the general tenor of Code 707(b)(5) to allow sanctions for impropermotions. Unlike Code 707(b)(4), where the circumstances that gave riseto the petition makes little sense in relation to the rigid means test for con-

sumer debtors, the phrase reasonable investigation actually makes sensehere.102 The real problem is in the last phrase of the section: the motiondoes not constitute an abuse under paragraph (1).

Paragraph (1) of course was the rallying point of BAPCPA for support-ers and opponents alike; it commands the dismissal or conversion of abusivechapter 7 consumer cases, with the means test and a good faith provisiondefining just what constitutes abuse.103

But what could it possibly mean to say that a motio

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