Lawyers Can’t Advise Debtor to Incur Debt Before Bankruptcy

By Diane Davis

A law firm can’t instruct a client to pay his bankruptcy-related legal fees using a credit card prior to filing bankruptcy, the U.S. Court of Appeals for the Eleventh Circuit held.

A debt-relief agency, including a law firm, violates Bankruptcy Code Section 526(a)(4) by advising a client to incur additional debt to pay for bankruptcy-related legal representation, Judge Kevin C. Newsom wrote March 30, reversing and remanding the case.

The district court incorrectly concluded that Loyd P. Cadwell had to allege that Kaufman, Englett & Lynd, PLLC’s advice was given for some additional, invalid purpose, the court said. That is that the firm intended to improperly manipulate the bankruptcy system.

Cadwell consulted with Kaufman, Englett & Lynd about filing Chapter 7, and later entered into an agreement to pay the law firm $1,700 in attorneys’ fees. As instructed, Cadwell paid the initial retainer and next three installments using credit cards.

Under Section 526(a)(4), debt-relief agencies aren’t permitted to advise an “assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney” for bankruptcy-related legal services.

The statute requires only that Cadwell allege he was advised to incur more debt to pay an attorney for bankruptcy-related legal services, the court said, despite a U.S. Supreme Court decision the firm and the lower court said favored the “invalid purpose” reading.

Chief Judge Edward Earl Carnes and Judge Eugene E. Siler, Jr., of the U.S Court of Appeals for the Sixth Circuit, sitting by designation, joined the opinion.

Law Offices of Mickler & Mickler, LLP, Jacksonville, Fla., represented Cadwell; Marshall Dennehey Warner et al Law Office, Philadelphia, and Marshall Dennehey Warner Coleman & Goggin, Orlando, Fla., represented Kaufman, Englett & Lynd, PLLC.

The case is Cadwell v. Kaufman, Englett & Lynd, PLLC , 2018 BL 112743, 11th Cir., No. 17-10810, 3/30/18 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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