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The Attorney as “Debt Relief Agency”: A
Bridge Too Far? The United States District Court for the District
of Minnesota in Milavetz, Gallop
& Milavetz P.A. v. United States, 355 B.R. 758 (D. Minn. 2006)
joined a handful of other federal courts in finding that BAPCPA’s
restrictions on the activities of DRAs do not
apply to licensed attorneys. In a subsequent decision rendered against
the government in the same case, the court ruled that “attorneys are
relieved of any duties relating to BAPCPA-defined debt-relief agencies
imposed by that statute.”1 The district court’s decisions in Milavetz
have been appealed by the government to the United States Court of
Appeals for the 8th Circuit, which heard oral argument on March 11,
2008. The 8th Circuit will be required to resolve the issue of whether
“attorneys” are “debt relief agencies” and may be the first circuit
court in the country to weigh in on the issue. The decision will hinge
on the statutory language and may be guided by legislative history
of the BAPCPA. “Debt Relief Agency” Sections 526, 527 and 528 of the Bankruptcy
Code impose significant new restrictions and requirements on “debt
relief agencies.”2 These statutes, among other things, require DRAs
to enter into written contracts with “assisted persons,” disclose
the extent of services provided and fees charged, satisfy specified
performance and disclosure requirements, and maintain records for
a period of time. DRAs are prohibited from advising assisted persons
to incur additional debt in contemplation of bankruptcy and are required
to clearly and conspicuously state in all advertising that their services
contemplate bankruptcy. “The law therefore now contains provisions
regulating the manner in which a ‘debt relief agency’ provides services
to both potential and actual clients.”3 Failure to satisfy the extensive
requirements imposed by the BAPCPA may subject DRAs to damages, fees,
injunctive relief and other penalties. Section 526 of the Bankruptcy Code sets forth
limited safe harbors from strict compliance (or even compliance) with
the statutes governing DRAs. The statute provides that Section 526
and related sections do not annul, alter, affect or exempt any DRA
from complying with the requirements of state law, except to the extent
that the law is inconsistent with the DRA provisions of the Bankruptcy
Code.4 Section 526 also provides that the DRA provisions do not limit
or curtail the authority or the ability of a state to determine and
enforce the “qualifications for the practice of law” in that state
or the authority or the ability of a federal court to determine and
enforce the “qualifications for the practice of law” before that court.5 Legislative History The legislative history to the BAPCPA reveals
that the applicability of the DRA provisions to attorneys was certainly
considered and debated during the pendency of the bankruptcy reform
legislation. Senator Feingold (D-WI) in fact proposed an amendment
to the bill, supported by the American Bar Association and the Federal
Bar Association, which would have excluded attorneys from the definition
of “debt relief agency.”8 Senator Feingold argued that requiring attorneys
and their firms to label themselves as “debt relief agencies” would
confuse the public more than protect it. In addition, Senator Feingold
contended that subjecting attorneys to the DRA requirements would
add very little to already existing laws that regulate attorneys and
would impose a number of unnecessary burdens on the profession. However,
the Senate did not adopt the amendment, further implying that Congress
intended to include attorneys in the category of parties subject to
the DRA provisions of the new legislation. The House report’s discussion of the bill’s
“Background and the Need for the Legislation” states that the goal
of the BAPCPA includes “strengthening professionalism standards for
attorneys and others who assist consumer debtors with their bankruptcy
cases.”9 This clear statement certainly indicates that one of Congress’
articulated objectives in the BAPCPA was to improve not only the standards
of professionals who generally provide assistance to consumer debtors
in the field of bankruptcy, but more specifically to improve the standards
of professional conduct of attorneys. Attorney Accountability As part of the comprehensive bankruptcy reform
package enacted in 2005, Congress established new standards of professional
conduct for consumer bankruptcy lawyers. Section 707 of the Bankruptcy
Code, which embodies the “means test” and other provisions that have
changed the dynamic of consumer bankruptcy, imposes new and specific
requirements on debtor’s counsel. Consumer bankruptcy attorneys have
affirmative statutory obligations (under penalty of sanction) that
are new. The signature of an attorney on the bankruptcy petition constitutes
a “certification” that the attorney has performed a “reasonable investigation”
into the circumstances of the bankruptcy petition and, among other
things, “determined” that the petition does not constitute an abuse
of Chapter 7.10 Similarly, the attorney’s signature also constitutes
a certification that the attorney “has no knowledge after an inquiry”
that any of the information in the bankruptcy schedules is incorrect.11
An amendment to Rule 9011 of the Federal Rules of Bankruptcy Procedure
also emerged from BAPCPA’s enactment to charge consumer bankruptcy
lawyers with the responsibility of making a “reasonable inquiry to
verify that the information contained” in the bankruptcy schedules
is “well grounded in fact” and warranted by law.12 The certification and related requirements imposed
by Congress on consumer bankruptcy lawyers are intended to increase
attorney accountability as part of a comprehensive
reform initiative designed to curb perceived abuse by debtors and
their professionals. It is not at all a stretch to conclude that the
DRA provisions of the BAPCPA, which subject those “providing legal
representation” to debtors to new requirements, are meant to apply
to debtor’s counsel. Courts Disagree Several federal court decisions since the enactment
of the new bankruptcy laws address the uncertain role of attorneys
as “debt relief agencies” under the BAPCPA. The United States Bankruptcy
Court for the Southern District of Georgia in In
re Attorneys at Law and Debt
Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005), acting sua sponte at 9:35 a.m. on the date that BAPCPA became effective,
was the first court to rule that attorneys admitted to the bar or
admitted pro hac vice are not “debt relief agencies.”
As such, they “are excused from compliance with any of those requirements
or provisions so long as their activities fall within the scope of
the practice of law.”13 Ironically, an appeal of the decision by the
United States Trustee was ultimately dismissed by the district court
because the opinion was issued when there was no “case or controversy”
as would be required by Article III of the United States Constitution
in order to afford standing for the appeal. The bankruptcy court’s decision in In re Attorneys became precedent for the
courts’ decisions in Milavetz,
Gallop & Milavetz P.A. v. United States, 355 B.R. 758 (D.
Minn. 2006) and in In re Reyes, 361 B.R. 276 (Bankr. S.D.
Fla. 2007). While these courts acknowledged that the language used
in the definition of “debt relief agency” is extremely broad, they
noted the text of the operative statutes makes no direct reference
to either “attorney” or “lawyer.” It does, however, specifically include
the term “bankruptcy petition preparer” which, by definition, expressly
excludes attorneys and their staffs. Additionally, all judges said
they believed that Congress could not have intended the scope of the
DRA statutes to encompass attorneys, as that would be inconsistent
with the historical role occupied by states in regulating the practice
of law and would be an unwarranted expansion of federal power.14 As
noted by the court in Milavetz,
“[i]f BAPCPA’s debt relief agency sections apply to attorneys, it
means Congress has taken upon itself the authority to determine the
advice attorneys can give their clients and what attorney advertisements
must say, thereby infringing on the state’s traditional role of regulating
attorneys.”15 The court in Milavetz noted that while the definitions that must be parsed to determine
who is a “debt relief agency” might “at first glance” include attorneys,
the DRA provisions themselves expressly leave it to the states “‘to
determine and enforce qualifications for the practice of law.’”16
If attorneys are placed within the ambit of the definition, a conflict
in the statutes would exist since, on the one hand, the states’ role
in regulating the practice of law is reserved in the BAPCPA and, on
the other hand, that role would be curtailed by superimposed federal
regulation. In addition, the court in Milavetz, following the doctrine of constitutional
avoidance (i.e., a construction
in the context of statutory ambiguity that avoids constitutional questions),
found that a number of the provisions of the BAPCPA applicable to
DRAs would be unconstitutional if applied to attorneys—viz., provisions that restrict speech, such as the advertising disclosure
requirements and limitations on the advice that can be provided to
clients or prospective clients with respect to incurring additional
debt in contemplation of bankruptcy.17 Despite the rulings of the courts in Milavetz, In re Attorneys, and Reyes a majority of the courts addressing
the issue to date have concluded that compensated debtor’s counsel
fall within the definition of “debt relief agency.”18 The district
courts in Hersh v. United States, 347 B.R. 19 (N.D.
Tex. 2006) and Olsen v. Gonzales, 350 B.R. 906 (D. Or.
2006) found certain DRA
provisions overbroad and unconstitutional under the 1st Amendment
as applied to attorneys, but nonetheless concluded that a reading
of the text of the statute for its plain meaning indicates that the
term “debt relief agency” includes consumer bankruptcy attorneys.
The courts in Hersh and
Olsen also concluded that
BAPCPA’s legislative history provides a very strong indication that
Congress had attorneys specifically in mind as the House report on
the legislation mentions “attorney” 164 times. A number of other courts
have similarly found, or assumed, that BAPCPA’s provisions regulating
DRAs apply to attorneys.19 Deconstructing Definitions The term “debt relief agency” is defined in
the Bankruptcy Code as “any person
who provides any bankruptcy
assistance to an assisted
person in return for the payment of money or other valuable consideration,
or who is a bankruptcy petition preparer.”20 The plain and ordinary
language of the definitions used by Congress inescapably encompasses
compensated consumer bankruptcy attorneys and their law firms.21 Congress
specified in the statute a fairly lengthy list of persons that are
not considered to be “debt
relief agencies.” Among the list of statutorily exempted parties are:
any person who is an officer, director, employee or agent of a bankruptcy
petition preparer or of any other person who provides bankruptcy assistance;
a nonprofit organization exempt from taxation; a creditor of an assisted
person to the extent involved in restructuring of any debt owed by
the debtor to that creditor; a depositary institution; or an author,
publisher, distributor, or seller of works subject to copyright protection
under federal law when acting in that capacity.22 If Congress did
not consider attorneys “debt relief agencies,” it would have been
a simple matter to specifically exclude them in the list of parties
exempt from the statue’s application—particularly in light of the
articulated purposes of the reform legislation. The Bankruptcy Code defines the terms “bankruptcy
assistance” and “assisted person.” An “assisted person” is defined
as “any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than
$164,250.”23 The term “bankruptcy assistance” is broadly defined as
“any goods or services sold or otherwise provided to an assisted person
with the express or implied purpose of providing information, advice,
counsel, document preparation, or filing, or attendance at a creditors’
meeting or appearing in a case or proceeding on behalf of another
or providing legal representation
with respect to a case or proceeding” under the Bankruptcy Code.24
The breadth of the statute and the import of the specific inclusion
of “legal representation” within the definition is unmistakable. Only
attorneys, of course, can lawfully provide “legal representation." Focus on Language The courts in In re Attorneys and Milavetz
acknowledged that the statute’s reference to “providing legal representation”
suggests a result that would include attorneys as DRAs. The In re Attorneys court nevertheless justified
a departure from this plain language with the explanation that the
phrase refers not to law practice by attorneys but, rather, the unauthorized
practice of law by nonlawyers who provide legal advice, often to less
educated and more vulnerable debtors.25 The notion that “providing
legal representation” refers only to the unauthorized
practice of law is simply not supportable by any common sense reading
of the statute. Nor is such an interpretation compelled by traditional
canons of statutory construction. The court in Milavetz found what it perceived to be a “clear ambiguity” in the
statutes in order to reach its conclusion since the DRA provisions
of the BAPCPA preserve for the states the right and authority “to
determine and enforce the qualifications for the practice of law.”
The opposite is true. The fact that Congress provided for a preemption
savings clause such that the DRA provisions of the BAPCPA do not limit
or curtail the states’ authority to regulate the “qualifications”
for the practice of law in fact supports the position that the DRA
provisions apply to attorneys. It would hardly seem necessary for
Congress to include any statutory reservation of state authority in
the area of legal practice if the DRA provisions did not apply to
attorneys in the first instance. Moreover, the codified limitations in the statute
that reserve for the states the authority to regulate the “qualifications”
for legal practice are not inconsistent with the literal application
of the statutory language. The court in In re Attorneys even acknowledged that the DRA provisions of the Bankruptcy
Code “may in fact mirror the type of ‘best practices’ that attorneys
should follow and may be consistent with attorneys’ pre-existing professional
standards.”26 Conclusion The rulings of the courts in Milavetz, In re Attorneys, and Reyes seem to be based more upon dissatisfaction
with the perceived federal intrusion into areas that traditionally
have been regulated by the states, rather than on literal construction
of the text of the statute and appropriate consideration of the reform
envisioned by Congress when it enacted the BAPCPA. To be sure, the
additional burdens placed upon attorneys under the DRA provisions
of the Bankruptcy Code are, if applicable, substantial. That result
is, however, dictated by the language of the law Congress enacted
and supported by its legislative history. The United States Court of Appeals for the 8th
Circuit in Milavetz will
provide much needed appellate review of the issue of whether an attorney
is a “debt relief agency.” The decision, regardless of the outcome,
is important as it will undoubtedly impact the legal profession and
the continued debate over the BAPCPA. Notes 2
See 11 U.S.C. §§526-28. 3
George H. Singer, “The Year in Review: Case Law Developments under
the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,”
29 Cal. Bankr.
J. 37 (2007). 4
11 U.S.C. §526(d)(1). 5
Id. §526(d)(2). 6
See H.R.
Rep. No. 109-31,
pt. 1, at 2, reprinted in
2005 U.S.C.C.A.N. 88, 89 (indicating that Congress desired to “improve
bankruptcy law and practice by restoring ... integrity in the bankruptcy
system”). 7
H.R. Rep. No. 109-31,
reprinted in 2005 U.S.C.C.A.N. 88, 92 (emphasis
added). 8
See Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, 151 Cong.
Rec. S2306, S2316 (03/09/05). See
also Letter from Robart D. Evans, Director, American Bar Association
Governmental Affairs Office, to Members of the Senate (03/01/05),
available at http://www.abanet.org/poladv/letters/109th/bankrupt/bankrupt030105.pdf. 9
See H.R. Rep. No. 109-31, pt. 1, at 5 &
17, reprinted in 2005 U.S.C.C.A.N.
88, 103. 10
11 U.S.C. §707(b)(4)(C). 11
Id. §707(b)(4)(D). Congress also imposed
an additional certification requirement on consumer bankruptcy lawyers
that represent debtors in connection with reaffirmation agreements.
See id. §524(k)(5). 12
Fed. R. Bankr. P. 9011. 13
In re
Attorneys at Law and Debt Relief Agencies, 332 B.R. 66, 71 (Bankr.
S.D. Ga. 2005). 14
See Milavetz,
Gallop & Milavetz P.A. v. United States, 255 B.R. 758, 768
(D. Minn. 2006) (appeal pending); In
re Reyes, 361 B.R. 276, 279 (Bankr. S.D. Fla.
2007); In re Attorneys at Law
and Debt Relief Agencies, 332 B.R. 66, 71 (Bankr. S.D. Ga. 2005).
15
Milavetz, 255 B.R. at 768. 16
Id. (quoting 11 U.S.C. §526(d)(2)(A)). 17
Id. 18
In re Irons, 379 B.R. 680, 685 (Bankr.
S.D. Tex. 2007). 19
See, e.g., Zelotes v. Adams, 363 B.R. 660 (D. Conn. 2007); Zelotes v. Martini, 252 B.R. 17 (D. Conn.
2006); In re Irons, 379
B.R. 680 (Bankr. S.D. Tex. 2007); In
re Robinson, 368 B.R. 492 (E.D. Va. 2007); In
re Norman, 2006 WL 3053309 (Bankr. E.D. Va. 2006); In re Gutierrez, 356 B.R. 496 (Bankr. N.D. Cal. 2006); In re Mendoza, 347 B.R. 34 (Bankr. W.D.
Tex. 2006). 20
See 11 U.S.C. §101(12A) (emphasis added). 21
Since the term “person” is defined in the Bankruptcy Code as an individual,
partnership or corporation, see
11 U.S.C. §101(41), consumer bankruptcy law firms should also be considered
“debt relief agencies” within the meaning of the legislation. 22
See 11 U.S.C. §101(12A) (A)-(E) (emphasis
added). 23 Id. §101(3) (emphasis added). Cf. id.
§104(a)(adjustment of dollar amounts). 24
See id. §101(4A). 25
In re Attorneys at Law and Debt Relief Agencies,
332 B.R. 66, 69 (Bankr. S.D. Ga. 2005). 26
Id. at 71 n.5. GEORGE
H. SINGER is a partner in the Minneapolis office of Lindquist & Vennum
PLLP and practices in the areas of corporate and commercial law, including
bankruptcy. He formerly served as an attorney on staff with the National
Bankruptcy Review Commission.
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