Bankruptcy Abuse Prevention Takes Aim at Attorneys

by Jillian McClelland November 1 2005, 00:18

"I don't think you can make a lawyer honest by an act of legislature. You've got to work on his conscience. And his lack of conscience is what makes him a lawyer." [1]

While the lawyer joke is an art form dating back centuries, it is not actually the case that firms throughout the country are staffed with snakes, shysters, and snollygosters. Nor is there much evidence that attorneys who counsel clients through bankruptcy proceedings are a particularly shady lot. So it has come as a surprise to many attorneys that Congress has enacted strict requirements, backed by monetary and criminal sanctions, for attorneys practicing in consumer bankruptcy. The burden of personal liability raises fundamental questions about the role of the attorney and the sanctity of the attorney-client relationship under the new bankruptcy law.

As a whole, the Bankruptcy Code as currently in effect reflects an underlying disapproval of bankruptcy filings and a concern that too many Americans are taking advantage of a "forgiving" bankruptcy regime to the detriment of the economy. Even the Act's title, Bankruptcy Abuse Prevention and Consumer Protection Act, suggests that its intent is to stamp out filings that are not made as a last resort.  The Act "replaces the presumption in favor of granting the relief sought by the debtor with a presumption that abuse exists" unless the debtor is able to prove, through extensive documentation, that he should be allowed a fresh start. [2] Section 102(a)(2)(B)(i)(III) of the Act lowers the standard for finding that an abuse of the bankruptcy system exists, which in turn raises the standard to rebut the presumption to allow a debtor to clear all debt obligations under Chapter 7. [3]

The Act's distrust in a debtor's motive for declaring bankruptcy has been translated into attorneys now taking on the role of "gatekeepers", with enhanced responsibilities for monitoring and verifying filings and penalties for noncompliance. The debtor's attorney must police the behavior of his client at the risk of personal liability, which has many debtors' attorneys re-evaluating whether it is worthwhile to continue practicing in consumer bankruptcy. In response, the American Bar Association has issued a stinging statement of opposition to the administrative and liability burdens of the Act, arguing that the "harmful liability provisions" will be "highly detrimental to the nation's bankruptcy system". [4]

Is Increased Congressional Regulation of Attorney Conduct Necessary and Appropriate?

Attorney sanctions are not a new feature of bankruptcy law. The existing Federal Rules of Bankruptcy Procedure give lawyers clear practical and ethical instructions for professional conduct, with consequences under Rule 9011 for failure to meet those standards. [5] However, the new bankruptcy law dramatically increases the attorney's affirmative duties, restricts pre-petition advice, and characterizes attorneys as "debt relief agencies" subject to enhanced scrutiny and regulation.

First, Section 102 imposes an affirmative duty for attorneys to conduct a "reasonable inquiry" into the accuracy of all petition statements and documents submitted by a debtor as part of the filing. [6] Many debtor's attorneys have protested that the more stringent document requirements under the new bankruptcy law will generally increase the time and work required to file a petition and that personal verification of documents will only further drive up the cost. The ABA argues that "Section 102 will force the attorney to hire private investigators and appraisers to verify this information, adding thousands of dollars to the cost of representing a debtor in bankruptcy." [7]

Since there is no existing precedent to give lawyers any indication what standard the court will use to determine what constitutes a "reasonable inquiry", practitioners are taking a "better safe than sorry" approach. A somewhat ruefully titled new search engine, Bankruptcy CYA.com, allows attorneys to meet their obligations under the new law by cross-checking stated assets with current replacement values, investigating IRS returns, and obtaining credit reports. [8]

Section 203 amends the reaffirmation provisions in 11 U.S.C. 524 to further require the debtor's attorney to certify that the debtor will be able to pay any reaffirmed debt. [9] This provision places the debtor's attorney in the unfavorable position of having to certify to the court, under penalty of sanction, that "a person with proven inability to pay debt can cover a reaffirmed debt. If the attorney guesses wrong, he or she could be forced to pay the creditor whatever the debtor owes." [10]

Section 226 characterizes debtors' attorneys as "debt relief agencies" under the Act, [11] which subjects them to the restrictive provisions (in Sections 227 through 229) on the conduct of such agencies, many of which substantially interfere with the attorney-client relationship. Howard Ehrenberg, a member of the Chapter 7 Bankruptcy Panel of Trustees points out the contradiction between a lawyer's ethical duties to be an effective advocate and compliance with the Act. For example, attorneys can no longer "advise your clients to incur additional debt, but paying a lawyer will result in more debt. You have violated the Code if you have encouraged them to incur and additional debt... even if that is the best advice you can offer." [12] As noted above, the audits and appraisals that will be necessary to verify assets and liabilities in the bankruptcy petition will likewise contribute to the debt load of the filer. It is not yet known how attorneys will reconcile these conflicting requirements.

The Costs of Personal Attorney Liability will Outweigh Benefits

The Congressional record for the Act [13] indicates that Congress was motivated by a 2002 report by the United States Trustee Program that suggested that abuse by debtors, attorneys, professionals, and petition preparers was "more widespread than many would have estimated." and that "[s]loppy, poor lawyering needs to be addressed". [14] However, the Trustee's report goes on to note that it is only "relatively few lawyers who do not know or play by the rules." [15]

The immediate practical consequence of the new bankruptcy law for debtors' attorneys is a substantial increase in fees owing to the extensive document requirements combined with verification. Even more troubling is the potential that malpractice insurance will not cover omissions under 11 U.S.C. Section 707 (as amended by Section 102 of the Act) because they are not negligence-based, which will drive up fees even further. [16] Indeed, some attorneys estimate that the rates they will charge as of October 17 will double. The cost increases attributable to the administrative and liability burdens of the new law will likely prevent most Chapter 7 petitioners from being able to hire an attorney to represent them and discourage firms from offering pro bono consumer bankruptcies to those most in need of assistance. The threat of personal liability for the negligence, fraud, or ignorance of a client is a burden too great to impose on bankruptcy attorneys and their clients.

Sources

[1] Will Rogers, Mar. 15, 1927. Lawyer Jokes Etcetera, What Oft Was Thought But Ne'er So Well Expressed, http://members.aol.com/twh427/quotations.htm (last visited Oct. 30, 2005)

[2] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8 (2005), Bill Summary & Status for the 109th Congress, available at http://thomas.loc.gov/cgi-bin/bdquery/z?d109:SN00256:@@@L&summ2=m& (last visited Oct. 30, 2005)

[3] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8 (2005) Sec 102, 119 Stat 27, available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ008.109 (last visited Oct. 30, 2005).

[4] American Bar Association Fact Sheet: Bankruptcy Attorney Liability Legislation, http://www.abanet.org/poladv/priorities/bankruptcy/brattyliability_facts.pdf (last visited Apr. 25, 2007).

[5] R. 9011(c), F. R. Bankr. P. (2005), available at http://www.law.cornell.edu/rules/frbp/rules.htm#Rule9011 (last visited Oct. 30, 2005).

[6] Bankruptcy Abuse Prevention and Consumer Protection Act, Sec 102(b)(4)(C), 119 Stat 30.

[7] ABA Fact Sheet, supra note 4.

[8] See www.bankruptcycya.com.

[9] Bankruptcy Abuse Prevention and Consumer Protection Act, Sec 203(a)(5), 119 Stat 47.

[10] John Caher, New Law Raises Stakes for Debtors' Attorneys, LAW.COM (Oct. 17, 2005) http://www.law.com/jsp/article.jsp?id=1129280709784.

[11] Bankruptcy Abuse Prevention and Consumer Protection Act, Sec 226(a)(3), 119 Stat 67.

[12] Amy Crane, Understanding the New Bankruptcy Law (Sept. 28, 2005) http://biz.yahoo.com/brn/050928/17494.html?.v=1.

[13] H.R. Rep. No. 109-31 (2005), available at http://thomas.loc.gov/cgi-bin/cpquery/?&item=&&sid=cp109a7blf&&db_id=cp109&&r_n=hr031p1.109&&sid=cp109a7blf&&sel=TOC_11302& (last visited Oct. 30, 2005).

[14] J. Christopher Marshall, Civil Enforcement: An Early Report, J. Nat. Assoc. Bankr. Trustees 39 (Fall 2002) available at http://www.usdoj.gov/ust/press/articles/nabtalkfall2002.htm.

[15] Id.

[16] See, e.g., Jay S. Fleischman, Primer on the New Bankruptcy Law: Attorney Liability (Mar. 1, 2005), http://drlcny.blogspot.com/2005_03_01_drlcny_archive.html.

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