Bankruptcy Abuse Prevention Takes Aim at Attorneys

"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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