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Cadwel v. Kaufman, Englett & Lynd, PLLC

United States Court of Appeals, Eleventh Circuit

March 30, 2018

LOYD P. CADWELL, Individually and on behalf of All Others Similarly Situated, Plaintiff - Appellant,
v.
KAUFMAN, ENGLETT & LYND, PLLC, Defendant-Appellee.

          Appeal from the United States District Court for the Middle District of Florida D.C. Docket No. 6:16-cv-00662-PGB-KRS

          Before ED CARNES, Chief Judge, NEWSOM, and SILER, [*] Circuit Judges.

          NEWSOM, CIRCUIT JUDGE.

         This case arises under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which, among other things, amended federal law to impose new requirements and prohibitions on professionals who assist with the preparation of bankruptcy petitions. The provision specifically at issue here, 11 U.S.C. § 526(a)(4), provides in relevant part that a "debt relief agency"- including a law firm that provides bankruptcy-related services-"shall not … advise" a debtor "to incur more debt in contemplation of such person filing a case under this title 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." In Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (2010), the Supreme Court unanimously concluded that Section 526(a)(4)'s first prohibition-on advice to incur additional debt "in contemplation of" a bankruptcy filing-requires proof that the advice was given for an invalid purpose designed to manipulate the bankruptcy process. This case presents the question whether the statute's second prohibition-on advice to incur debt to pay for a lawyer's bankruptcy-related representation-likewise entails an invalid-purpose requirement. We hold that it does not and that, as relevant here, an attorney violates Section 526(a)(4) if he instructs a client to pay his bankruptcy-related legal fees using a credit card.

         I

         Loyd Cadwell consulted with the law firm of Kaufman, Englett & Lynd ("KEL") about the possibility of filing a Chapter 7 bankruptcy petition.[1]Following the initial meeting, Cadwell entered into an agreement that obligated him to pay $1700 in attorneys' fees "for representation in [his] Chapter 7 Bankruptcy case." The agreement contained an addendum establishing a schedule that required immediate payment of a $250 retainer, a second $250 installment shortly thereafter, and then, after that, four monthly installments of $300 apiece. According to Cadwell's complaint, "KEL instructed [him] to pay the initial retainer and all subsequent payments by credit card." As directed, Cadwell paid the initial retainer and the next three installments using two different credit cards.

         After terminating his relationship with KEL, Cadwell filed this action under 11 U.S.C. § 526(a)(4), which, as already explained, states that a law firm "shall not … advise" a client "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. KEL moved to dismiss Cadwell's complaint, arguing (1) that he hadn't stated a claim on which relief could be granted and (2) that even if he had, Section 526(a)(4) is unconstitutional because it improperly restricts KEL's attorney-client communications. The district court granted KEL's motion. "[W]ithout more, " the court held, "the mere advice to use credit cards to pay for legal fees does not violate" Section 526(a)(4). Rather, based on its reading of the Supreme Court's decision in Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (2010), the district court concluded that Section 526(a)(4) only "prohibits a debt relief agency from advising a debtor to incur additional debt for an invalid purpose." Because Cadwell had "alleg[ed] no facts that would" support an inference "that KEL acted with an improper purpose or with an intent to manipulate the bankruptcy system, " the district court held that he had failed to state a viable claim under the statute. Having done so, the district court found it unnecessary to address KEL's First Amendment challenge.

         On appeal, Cadwell contends that the district court erred in faulting him for failing to allege that KEL acted with an "invalid" (or "improper") purpose. At least as it pertains to a lawyer's advice to his client to incur debt to pay legal fees, Cadwell insists, Section 526(a)(4)'s text admits of no such requirement. KEL responds that the district court correctly interpreted the statute to impose an invalid-purpose element, but that even if Cadwell had stated a claim, the statute violates the First Amendment. Our review is de novo. See Batchelor-Robjohns v. United States, 788 F.3d 1280, 1284 (11th Cir. 2015).

         II

         As its name suggests, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted "to correct perceived abuses of the bankruptcy system." Milavetz, 559 U.S. at 231-32. The Act added to the Bankruptcy Code a number of provisions directed at the conduct of bankruptcy professionals. Id. Among those provisions is 11 U.S.C. § 526(a), which "establishes several rules of professional conduct for persons qualifying as debt relief agencies, " including lawyers. Id. at 233. At issue here is subsection (a)(4), which provides as follows:

A debt relief agency shall not … 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 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.

11 U.S.C. § 526(a)(4).

         The parties here agree that KEL-as a law firm that provides bankruptcy-related advice-qualifies as a "debt relief agency" within the meaning of Section 526(a)(4). See Br. of Appellant at 3, 7; Br. of Appellee at 5; see also Milavetz, 559 U.S. at 239. The parties also agree that for purposes of this appeal, Cadwell is an "assisted person or prospective assisted person" under the statute. See Br. of Appellant at 7; Br. of Appellee at 5. Finally, and importantly, the parties agree that the statute contains two distinct prohibitions-one about incurring debt in anticipation of bankruptcy filings generally, and the other about incurring debt to pay for bankruptcy-related legal services more specifically. From there, the parties' positions diverge.

         A

         The parties' central disagreement is over the proper way to parse Section 526(a)(4)'s two prohibitions. For example, where does each prohibition begin and end, and more to the point, does the phrase "in contemplation of"-which the Supreme Court in Milavetz construed to require proof that the advice to incur debt was given for an invalid purpose-apply to both prohibitions, or only the first? Unfortunately, the statute contains no punctuation that might help us determine where to place the "hinge" that divides the two prohibitions-which, as it turns out, really matters. We are presented here with three different ways of reading Section 526(a)(4)-one (sort of) suggested by the Supreme Court in Milavetz, another proposed by KEL and adopted by ...


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