Interpreting one of the 2005 amendments to the Bankruptcy Code, the Eleventh Circuit held that Section 526(a)(4) prohibits an attorney from advising “a client to incur additional debt to pay for bankruptcy-related legal representation, without respect to whether the advice was given for some independently ‘invalid purpose.’”
In contemplation of a chapter 7 filing, a client signed an engagement agreement calling for the client to pay $1,700 in installments. According to the client, the lawyer instructed the client to pay by credit card.
After the client ended his relationship with the lawyer, he filed a class action suit against the lawyer, alleging a violation of Section 526(a)(4). That section prohibits a “debt relief agency,” which includes lawyers, from advising a client or prospective client “to incur more debt in contemplation of [filing bankruptcy] 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.”
Ruling that the section prohibited advice to pay a fee by incurring more debt only if the advice was given for an improper purpose, the district court dismissed the suit because the complaint did not allege an invalid purpose. The district court extrapolated from Milavetz, Gallop & Milavetz PA v. U.S., 559 U.S. 229 (2010), where the Supreme Court held that a lawyer is prohibited from advising a client to incur more debt in contemplation of bankruptcy only when the debt is being incurred for an improper purpose. In other words, a lawyer can advise a client to refinance a mortgage at a lower interest rate without running afoul of the statute.
On appeal, the Eleventh Circuit reversed in a March 30 opinion by Circuit Judge Kevin Newsom. He said that the second part of Section 526(a)(4), pertaining to the payment of fees, has three possible meanings.
The first interpretation, he said was “(sort of) suggested by the Supreme Court in Milavetz.” [Parenthetical in original.] Recasting the statute, Judge Newsom said the first interpretation “would separately prohibit advice (1) ‘to incur more debt in contemplation of’ filing for bankruptcy and (2) ‘to pay an attorney’ for bankruptcy-related representation.”
Although “not an unnatural reading of the statute, at least in a grammatical matter,” Judge Newsom said it “does have a pretty big wart — namely, it would flatly prohibit all advice to pay an attorney for bankruptcy-related representation. That makes little sense . . . .” [Emphasis in original.]
Proposed by the defendant-lawyer, the second interpretation would prohibit advice to incur debt to pay a fee only if the advice was given for an “invalid purpose,” following Milavetz.
Judge Newsom rejected “the view that Milavetz’s invalid-purpose gloss applies here.” The Supreme Court, he said only addressed the first prohibition in Section 526(a)(4) but “said nothing about the second.”
Judge Newsom adopted the third reading, where the statute can be recast to prohibit “advice ‘to incur debt’ either (1) ‘in contemplation of’ a bankruptcy filing or (2) ‘to pay an attorney’ for bankruptcy-related services.” The third interpretation, he said, “doesn’t produce goofy results, defy the usual rules of syntax, or render a phrase meaningless.”
Properly interpreted, he said the second prohibition in Section 526(a)(4) “forbids lawyers from advising 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.’” It entails “no invalid-purpose requirement.”
Advising a client to incur debt to pay a fee is “inherently abusive,” Judge Newsom said.
The lawyer also attacked the section as an unconstitutional restriction on attorney/client communication. Judge Newsom said that Milavetz rejected a similar argument.
Section 526(a)(4) does not prohibit lawyers from discussing clients’ options. It merely prohibits lawyers “from giving their clients ‘affirmative advice’ to incur more debt in order to pay for bankruptcy related representation.”
Judge Newsom’s March 30 opinion is his second bankruptcy decision since his appointment to the circuit bench in August 2017. Without regard to the substance of his opinions, he is showing himself to be an adept writer, perhaps eventually in league with Circuit Judges Frank Easterbrook and Guido Calabresi, retired Circuit Judge Richard A. Posner, and Supreme Court Justice Neil M. Gorsuch.
Judge Newsom’s first bankruptcy opinion was Title Max v. Wilber (In re Wilber), 876 F.3d 1302 (11th Cir. Dec. 11, 2017), rehearing en banc denied Feb. 14, 2018. Writing for the majority in Wilber, he held, over a strident dissent, that a creditor need not object to confirmation of a chapter 13 plan and is not bound by the confirmation order if the issue was raised in some other pleading before confirmation.